Inventory Management

FINANCIAL MANAGEMENT

Section – F2
Group Members:
Aarti Purohit
Arun Koshiya
Jai Shankar Patel
Pushpa Patel
Priyanka Biswas
Reshma Dsouza
Varun Maurya

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1. INVENTORY MANAGEMENT: 3
• Basic about inventory, what do we mean by inventory, Objective etc.

1. WHY KEEP INVENTORY: 5

• Meet Demand
• Keep operations running
• Lead time
• Hedge
• Quantity discount
• Smoothing requirements
• Example of Inventory

1. NATURE OF INVENTORY: 7
• Raw material
• Work in progress
• Finished goods

1. TYPES OF INVENTORY: 9
• Transit Inventory
• Buffer Inventory
• Anticipation Inventory
• Decoupling Inventory
• Cycle Inventory
• MRO Goods Inventory
• Theoretical Inventory

1. VARIOUS COSTS RELATED TO INVENTORY MANAGEMENT 12

2. INTEGRATED INVENTORY MANAGEMENT SYSTEM 14

3. PRICING OF RAW MATERIALS 15

• FIFO
• LIFO
• Weighted average cost method
• Standard price (cost) method

1. INVENTORY MANAGEMENT TECHNIQUES: 17

• EOQ
• Ordering costs
• Carrying costs
• Reorder point
• Lead time
• Safety stock
• The inventory management process by GENERAL STORE

1. INVENTORY CONTROL SYSTEM: 21

• ABC inventory control system.
• Just In Time system.
• Out sourcing.
• Computerized inventory control systems.

1. 25 WAYS TO LOWER INVENTORY COSTS 24

2. THE FUTURE OF INVENTORY MANAGEMENT 28

3. INVENTORY MANAGEMENT IN PRACTISE: 29

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 • Dulux paint
1. INVENTORY MANAGEMENT
Inventory management, or inventory control, is an attempt to balance inventory needs
and requirements with the need to minimize costs resulting from obtaining and holding
inventory.
WHAT IS INVENTORY?
Inventory is a list for goods and materials, or those goods and materials themselves,
held available in stock by a business. It is also used for a list of the contents of a
household and for a list for testamentary purposes of the possessions of someone who
has died. In accounting inventory is considered an asset.
Inventory management is primarily about specifying the size and placement of stocked
goods. Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods. The
scope of inventory management also concerns the fine lines between replenishment
lead time, carrying costs of inventory, asset management, inventory forecasting,
inventory valuation, inventory visibility, future inventory price forecasting, physical
inventory, available physical space for inventory, quality management, replenishment,
returns and defective goods and demand forecasting.

Inventory Management provides:

• Up-to-date information about data processing resources through the creation
and archiving of records in a centralized repository.

• Financial records specific to a single component, or groups of components.

• Component Status Indicators to identify a component as Active (A), Redeployed

(R ), Donated (D), or Terminated (T).

• Component Criticality definition (1-5, with 1 being most critical).

• Service records for all components in the inventory.

• Data used to support configuration diagrams of the hardware and software

components contained within specific locations, or the entire data processing
environment.

• Reports can be generated from the Inventory and Asset Management Systems
that would project the amount of revenue that can be generated through the sale
of surplus equipment, or to define the number of components that have a
criticality rating of ‘1’ so that you can project the costs associated with
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 maintaining duplicates of critical equipment at recovery sites. Combining the two
reports would allow you to reroute equipment being scheduled for termination to
the Recovery Facility and eliminate the additional costs associated with
purchasing duplicate

• Equipment in support of recovery needs.

OBJECTIVES OF INVENTORY MANAGEMENT

There are three main objectives of inventory management, as follows:

Provide the desired level of customer service. Customer service refers to a

company’s ability to satisfy the needs of its customers. There are several ways to
measure the level of customer service, such as: (1) percentage of orders that are
shipped on schedule, (2) the percentage of line items that are shipped on schedule, (3)
the percentage of dollar volume that is shipped on schedule, and (4) idle time due to
material and component shortage. The first three measures focus on service to external
customers, while the fourth applies to internal customer service.

Achieve cost-efficient operations. Inventories can facility cost-efficient operations in

several ways. Inventories can provide a buffer between operations so that each phase
of the transformation process can continue to operate even when output rates differ.
Inventories also allow a company to maintain a level workforce throughout the year
even when there is seasonal demand for the company’s output. By building large
production lots of items, companies are able to spread some fixed costs over a larger
number of units, thereby decreasing the unit cost of each item. Finally, large purchases
of inventory might qualify for quantity discounts, which will also reduce the unit cost of
each item.

Minimize inventory investment. As a company achieves lower amounts of money

tied up in inventory, that company’s overall cost structure will improve, as will its
profitability. A common measure used to determine how well a company is managing its
inventory investment (i.e., how quickly it is getting its inventories out of the system and
into the hands of the customers) is inventory turnover ratio, which is a ratio of the
annual cost of goods sold to the average inventory level in dollars.

1. WHY KEEP INVENTORY?

Why would a firm hold more inventory than is currently necessary to ensure the firm's
operation? The following is a list of reasons for maintaining what would appear to be
"excess" inventory.

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Table 1

January February March April May June

Demand 50 50 0 100 200 200

Produce 100 100 100 100 100 100

Month-end inventory 50 100 200 200 100 0

MEET DEMAND:
In order for a retailer to stay in business, it must have the products that the
customer wants on hand when the customer wants them. If not, the retailer
will have to back-order the product. If the customer can get the good from
some other source, he or she may choose to do so rather than electing to
allow the original retailer to meet demand later (through back-order).
Hence, in many instances, if a good is not in inventory, a sale is lost
forever.
KEEP OPERATIONS RUNNING:
A manufacturer must have certain purchased items (raw materials, components, or
subassemblies) in order to manufacture its product. Running out of only one item can
prevent a manufacturer from completing the production of its finished goods.
Inventory between successive dependent operations also serves to decouple the
dependency of the operations. A machine or work center is often dependent upon the
previous operation to provide it with parts to work on. If work ceases at a work center,
then all subsequent centers will shut down for lack of work. If a supply of work-in-
process inventory is kept between each work center, then each machine can maintain
its operations for a limited time, hopefully until operations resume the original center.

LEAD TIME:
Lead time is the time that elapses between the placing of an order (either a purchase
order or a production order issued to the shop or the factory floor) and actually receiving
the goods ordered.
If a supplier (an external firm or an internal department or plant) cannot supply the
required goods on demand, then the client firm must keep an inventory of the needed
goods. The longer the lead time, the larger the quantity of goods the firm must carry in
inventory.

Example:

A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can

maintain extremely low levels of inventory. Nissan takes delivery on truck seats as
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many as 18 times per day. However, steel mills may have a lead time of up to three
months. That means that a firm that uses steel produced at the mill must place orders at
least three months in advance of their need. In order to keep their operations running in
the meantime, an on-hand inventory of three months’ steel requirement would be
necessary.

HEDGE:
Inventory can also be used as a hedge against price increases and inflation. Salesmen
routinely call purchasing agents shortly before a price increase goes into effect. This
gives the buyer a chance to purchase material, in excess of current need, at a price that
is lower than it would be if the buyer waited until after the price increase occurs.
QUANTITY DISCOUNT:
Often firms are given a price discount when purchasing large quantities of a good. This
also frequently results in inventory in excess of what is currently needed to meet
demand. However, if the discount is sufficient to offset the extra holding cost incurred as
a result of the excess inventory, the decision to buy the large quantity is justified.
SMOOTHING REQUIREMENTS:
Sometimes inventory is used to smooth demand requirements in a market where
demand is somewhat erratic. Consider the demand forecast and production schedule
outlined in Table 1.
Notice how the use of inventory has allowed the firm to maintain a steady rate of output
(thus avoiding the cost of hiring and training new personnel), while building up inventory
in anticipation of an increase in demand. In fact, this is often called anticipation
inventory. In essence, the use of inventory has allowed the firm to move demand
requirements to earlier periods, thus smoothing the demand.
ACHIEVING EFFICIENT PRODUCTION RUNS:
Maintenance of large inventories helps a firm in reducing the set up cost associated
with each production run. For example: if a set up cost is rs.200 and the run produces
200 units, the cost per unit comes toRs.1. In case, the run produce is 2ooo units, the set
up cost will stand reduce to Rs. 0.10 per unit. Thus, inventories assists the firm in
making sufficiently high run resulting in lowering down the set up cost.
Inventory example
While accountants often discuss inventory in terms of goods for sale, organizations
- manufacturers, service-providers and not-for-profits - also have inventories (fixtures,
furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and
wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in
a warehouse or in a shop or store accessible to customers. Inventories not intended for
sale to customers or to clients may be held in any premises an organization uses. Stock
ties up cash and if uncontrolled it will be impossible to know the actual level of stocks
and therefore impossible to control them.
While the reasons for holding stock are covered earlier, most manufacturing
organizations usually divide their "goods for sale" inventory into:
 Raw materials - materials and components scheduled for use in making a product.

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 Work in process, WIP - materials and components that have begun their
transformation to finished goods.
 Finished goods - goods ready for sale to customers.
 Goods for resale - returned goods that are salable.
 Spare parts
1. NATURE OF INVENTORY:
Inventory is defined as a stock or store of goods. These goods are maintained on hand
at or near a business's location so that the firm may meet demand and fulfill its reason
for existence. If the firm is a retail establishment, a customer may look elsewhere to
have his or her needs satisfied if the firm does not have the required item in stock when
the customer arrives. If the firm is a manufacturer, it must maintain some inventory of
raw materials and work-in-process in order to keep the factory running. In addition, it
must maintain some supply of finished goods in order to meet demand.
Sometimes, a firm may keep larger inventory than is necessary to meet demand and
keep the factory running under current conditions of demand. If the firm exists in a
volatile environment where demand is dynamic (i.e., rises and falls quickly), an on-hand
inventory could be maintained as a buffer against unexpected changes in demand. This
buffer inventory also can serve to protect the firm if a supplier fails to deliver at the
required time, or if the supplier's quality is found to be substandard upon inspection,
either of which would otherwise leave the firm without the necessary raw materials.
Other reasons for maintaining an unnecessarily large inventory include buying to take
advantage of quantity discounts (i.e., the firm saves by buying in bulk), or ordering more
in advance of an impending price increase.
Generally, inventory types can be grouped into four classifications: raw material, work-
in-process, finished goods, and MRO goods.
RAW MATERIALS:
Raw materials are inventory items that are used in the manufacturer's conversion
process to produce components, subassemblies, or finished products. These
inventory items may be commodities or extracted materials that the firm or its
subsidiary has produced or extracted. They also may be objects or elements that the
firm has purchased from outside the organization. Even if the item is partially
assembled or is considered a finished good to the supplier, the purchaser may
classify it as a raw material if his or her firm had no input into its production.
Typically, raw materials are commodities such as ore, grain, minerals, petroleum,
chemicals, paper, wood, paint, steel, and food items. However, items such as nuts
and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be
regarded as raw materials if they are purchased from outside the firm.
Generally, raw materials are used in the manufacture of components. These
components are then incorporated into the final product or become part of a
subassembly. Subassemblies are then used to manufacture or assemble the final
product. A part that goes into making another part is known as a component, while the
part it goes into is known as its parent. Any item that does not have a component is
regarded as a raw material or purchased item. From the product structure tree it is
apparent that the rolling cart's raw materials are steel, bars, wheels, ball bearings,
axles, and caster frames.
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 WORK-IN-PROCESS:
Work-in-process (WIP) is made up of all the materials, parts (components), assemblies,
and subassemblies that are being processed or are waiting to be processed within the
system. This generally includes all material—from raw material that has been released
for initial processing up to material that has been completely processed and is awaiting
final inspection and acceptance before inclusion in finished goods.
Any item that has a parent but is not a raw material is considered to be work-in-process.
A glance at the rolling cart product structure tree example reveals that work-in-process
in this situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the
leg assembly and casters are labeled as subassemblies because the leg assembly
consists of legs and casters and the casters are assembled from wheels, ball bearings,
axles, and caster frames.

Case:
Work in process of any company will be depends on the capacity to produce the goods.
At Dulux paint Total time required to manufacture paint varies between 7-24hrs
depending on the type of goods. At one particular time only one size of product is
manufactured. Currently company has 150 kl of goods Work In Progress (WIP).
Company has capacity of 200kl WIP.
FINISHED GOODS:
A finished good is a completed part that is ready for a customer order. Therefore,
finished goods inventory is the stock of completed products. These goods have been
inspected and have passed final inspection requirements so that they can be
transferred out of work-in-process and into finished goods inventory. From this point,
finished goods can be sold directly to their final user, sold to retailers, sold to
wholesalers, sent to distribution centers, or held in anticipation of a customer order.
The levels of the above 3 kinds of inventories differ depending upon the nature of
business. For example: a manufacturer will have high level of all 3 kinds of
inventories. While a retailer or wholesaler will have level of inventories for finished
goods but will have no inventories of raw material or work-in –progress . more over
depending upon the nature of business, inventories may be durable or non-durable,
valuable or inexpensive, perishable or non-perishable etc.
Inventories can be further classified according to the purpose they serve. These types
include transit inventory, buffer inventory, anticipation inventory, decoupling inventory,
cycle inventory, and MRO goods inventory. Some of these also are know by other
names, such as speculative inventory, safety inventory, and seasonal inventory.
1. TYPES OF INVENTORY:
TRANSIT INVENTORY:
Transit inventories result from the need to transport items or material from one location
to another, and from the fact that there is some transportation time involved in getting
from one location to another. Sometimes this is referred to as pipeline inventory.
Merchandise shipped by truck or rail can sometimes take days or even weeks to go
from a regional warehouse to a retail facility. Some large firms, such as automobile
manufacturers, employ freight consolidators to pool their transit inventories coming from

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various locations into one shipping source in order to take advantage of economies of
scale. Of course, this can greatly increase the transit time for these inventories, hence
an increase in the size of the inventory in transit.

Case:
Take the case of HPCL the transports are done from refinery to the customer through
different modes of transport i.e. Pipeline, Roadways (Tankers), Shipping, etc. the time
takes to reach a goods from refinery to the customer are called Transit inventory.
BUFFER INVENTORY:
As previously stated, inventory is sometimes used to protect against the uncertainties of
supply and demand, as well as unpredictable events such as poor delivery reliability or
poor quality of a supplier's products. These inventory cushions are often referred to as
safety stock. Safety stock or buffer inventory is any amount held on hand that is over
and above that currently needed to meet demand. Generally, the higher the level of
buffer inventory, the better the firm's customer service. This occurs because the firm
suffers fewer "stock-outs" (when a customer's order cannot be immediately filled from
existing inventory) and has less need to backorder the item, make the customer wait
until the next order cycle, or even worse, cause the customer to leave empty-handed to
find another supplier. Obviously, the better the customer service the greater the
likelihood of customer satisfaction.
ANTICIPATION INVENTORY:
Oftentimes, firms will purchase and hold inventory that is in excess of their current need
in anticipation of a possible future event. Such events may include a price increase, a
seasonal increase in demand, or even an impending labor strike. This tactic is
commonly used by retailers, who routinely build up inventory months before the
demand for their products will be unusually high (i.e., at Halloween, Christmas, or the
back-to-school season). For manufacturers, anticipation inventory allows them to build
up inventory when demand is low (also keeping workers busy during slack times) so
that when demand picks up the increased inventory will be slowly depleted and the firm
does not have to react by increasing production time (along with the subsequent
increase in hiring, training, and other associated labor costs). Therefore, the firm has
avoided both excessive overtime due to increased demand and hiring costs due to
increased demand. It also has avoided layoff costs associated with production cut-
backs, or worse, the idling or shutting down of facilities. This process is sometimes
called "smoothing" because it smoothes the peaks and valleys in demand, allowing the
firm to maintain a constant level of output and a stable workforce.
Case:
Let’s take a case of Dulux paint, in paint industry there will be a seasonality of
demand. Which means there production will be throughout the year and distribution
will be on pick time i.e. market demand will be more in the month of March to May and
June to Nov. this will be done for smooth distribution.

DECOUPLING INVENTORY:
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Very rarely, if ever, will one see a production facility where every machine in the
process produces at exactly the same rate. In fact, one machine may process parts
several times faster than the machines in front of or behind it. Yet, if one walks through
the plant it may seem that all machines are running smoothly at the same time. It also
could be possible that while passing through the plant, one notices several machines
are under repair or are undergoing some form of preventive maintenance. Even so, this
does not seem to interrupt the flow of work-in-process through the system. The reason
for this is the existence of an inventory of parts between machines, a decoupling
inventory that serves as a shock absorber, cushioning the system against production
irregularities. As such it "decouples" or disengages the plant's dependence upon the
sequential requirements of the system (i.e., one machine feeds parts to the next
machine).
The more inventory a firm carries as a decoupling inventory between the various stages
in its manufacturing system (or even distribution system), the less coordination is
needed to keep the system running smoothly. Naturally, logic would dictate that an
infinite amount of decoupling inventory would not keep the system running in peak form.
A balance can be reached that will allow the plant to run relatively smoothly without
maintaining an absurd level of inventory. The cost of efficiency must be weighed against
the cost of carrying excess inventory so that there is an optimum balance between
inventory level and coordination within the system.
Case:
Take a case of Book making industry. The manager knows that paper making machine
will be not working after two days & production will be stop because of that so they will
be produce in advance the more quantity of papers and when the machine will not
working at that time binding will be done and distribution will not be affected by stopping
the production.
CYCLE INVENTORY:
Those who are familiar with the concept of economic order quantity (EOQ) know that
the EOQ is an attempt to balance inventory holding or carrying costs with the costs
incurred from ordering or setting up machinery. When large quantities are ordered or
produced, inventory holding costs are increased, but ordering/setup costs decrease.
Conversely, when lot sizes decrease, inventory holding/carrying costs decrease, but the
cost of ordering/setup increases since more orders/setups are required to meet
demand. When the two costs are equal (holding/carrying costs and ordering/setup
costs) the total cost (the sum of the two costs) is minimized. Cycle inventories,
sometimes called lot-size inventories, result from this process. Usually, excess material
is ordered and, consequently, held in inventory in an effort to reach this minimization
point. Hence, cycle inventory results from ordering in batches or lot sizes rather than
ordering material strictly as needed.
MRO GOODS INVENTORY:
Maintenance, repair, and operating supplies, or MRO goods, are items that are used to
support and maintain the production process and its infrastructure. These goods are
usually consumed as a result of the production process but are not directly a part of the
finished product.
Examples of MRO goods include oils, lubricants, coolants, janitorial supplies, uniforms,
gloves, packing material, tools, nuts, bolts, screws, shim stock, and key stock. Even
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office supplies such as staples, pens and pencils, copier paper, and toner are
considered part of MRO goods inventory.

1. VARIOUS COSTS RELATED TO INVENTORY

MANAGEMENT:
1) Ordering costs or Costs of Acquisition:

For a large organization, it becomes necessary to have a separate purchase office to

purchase thousands of items. The demands received are technically scrutinized and for
purchasing them, inquiries are issued, tenders are received and evaluated, orders are
progressed, materials are received and inspected and lastly, the payments are
arranged. All these mean additional costs to the organization. All these costs together
constitute what is called cost of ordering or cost of acquisition.
○ In the Railways, we do not have a system of working out these costs. But
it is necessary that for a given stores organization, total number of
purchases are ascertained and average cost per purchase order worked
out. When we work out the costs, we may find that some costs are fixed
while some are variable. We should be interested in knowing the variable
costs.
○ As we are using 3 major systems of purchasing viz., advertised tender,
limited tender and cash purchase systems, it is advisable to work out the
ordering costs for these three different procedures of purchasing.
○ Based on some of the studies made ordering costs may be as follows:
 Cash Purchase Rs.50 to Rs.100 per purchase
 Limited Tender Purchase Rs.300 to Rs.600 "
 Advertised Tender Purchase Rs.1000 to Rs.2000 "
○ These are just approximate and may vary considerably depending upon
various factors. It is repeated that every Railway should establish these
costs from time to time so that they can be used in designing proper
inventory models.

1) Carrying Costs:
The very fact that the items are required to be kept in stock means additional
expenditure to the organization. The different elements of costs involved in holding
inventory are as follows:
(a) Interest on capital / cost of capital / opportunity costs : When materials are kept in
stock money representing the value of materials is blocked. In a developing economy,
capital is extremely scarce and as such, the real value of capital is much higher than the
nominal rate of interest which the organization like Railways may be paying. The
,money which is blocked up is not available to the organization to do more business or

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to use it for alternative productive investment. This opportunity to earn more profits
which we loose can be expressed as opportunity cost.
○ While working out the inventory carrying cost in an organization, the
higher of the three factors viz., interest, cost of capital or opportunity cost
should, be taken into consideration. This may be roughly 20% per annum.
(b) Obsolescence and depreciation : The costs because of obsolescence and
depreciation, are very important even though they are very difficult to assess. This
factor is relatively higher for spare parts inventory as against raw material inventory.
Larger the stock we keep more the risk of obsolescence and as such, the costs are
expressed as the percentage costs to the average inventory holding and can be
between 2 to 5%.
(c) The cost of storage, handling and stock verification : There are additional costs
because of the clerical work involved in handling of materials in the ward, in stock
verification, in preservation of materials as well as the costs because of various
equipments and facilities created for the purpose of materials. A part of this cost is of a
fixed nature. The major portion of the cost including the cost of staff, however, can be
treated as variable costs at least in the long run. This cost can be roughly 3 to 5% of the
inventory holding.
(d) Insurance Costs : Materials in stocks are either insured against theft, fire etc., or we
may have to employ watch & ward organization and also fire fighting organizations.
Cost of this may also be 1 to 2%. The average inventory carrying costs can, therefore,
be as follows:
Interest/costs of capital/opportunity cost 15 to 25%
Obsolescence and depreciation cost 2 to 5%
Storage, handling etc. 3 to 5%
Insurance costs 1 to 2%
Total 21 to 37%
 In the Indian Railways, the reasonable assessment of inventory
carrying costs shall be about 20 to 25% per year of the average
inventory holding. It is again clarified here that these costs are not
normally reflected in our accounting system and as such are
required to be established by individual Railway.
1) Shortage Or Stock Out Costs :
Whenever an item is out of stock and as such cannot be supplied, it means that some
work or the other is delayed and this, in turn, leads to financial loss associated with
such stoppage or delay of work.
○ For example, if a locomotive remains idle for want of spare parts, the
earning capacity of the locomotive is lost for the duration of this period. On
the other hand, the spare parts required will have to be purchased on
emergency basis or have to be specially manufactured resulting in
additional costs.
○ Stock out costs can vary from item to item and from situation to situation
depending upon the emergency action possible. No attempt therefore, is
normally made to evaluate a stock out cost of an item. Nevertheless, it is
important to understand the concept of stock out costs, even though the

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 actual quantification is not possible. We should have a rough grading of
the items depending upon the possible stock out costs.
1) Systems Costs :
These are the costs which are associated with the nature of the control systems
selected. If a very sophisticated model of the relationship between stock out costs,
inventory holding cost and cost of ordering is used and operated with the help of a
computer, it may give the theoretical minimum of the other costs but the cost of such
control system may be sufficiently high to offset the advantages achieved.
○ In most of the situations, however, there is no substantial increase in costs
because of the proposed control system and in such cases, these costs
can be overlooked.

1. INTEGRATED INVENTORY MANAGEMENT SYSTEM

To successfully implement an Inventory Management System, it is necessary to

integrate it within the everyday functions performed by company personnel. That is,
when a user wants to order equipment or software, they would call up the Inventory
Management System screen associated with Acquisition. The same types of processes
should be available for Redeployment and Termination of assets. Should a user
request the acquisition of a specific type of asset, then it could be possible for the
inventory system to determine if the asset is already in surplus, or if it should be
purchased under an existing Volume Purchase Agreement with a vendor.

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Figure 3: Overview of an integrated Inventory Management System
The utilization of Inventory Management Systems to control the purchase and
installation of assets can aid in the control of the business environment, while assisting
in the assignment of personnel to perform asset related work functions. This
methodology will result in a work-flow and asset management system.

2. PRICING OF RAW MATERIALS:

Several methods are used for pricing inventories used in production. The important
ones are :
• First-in first-out(FIFO)method
• Last-in first-out(LIFO)method
• Weighted average cost method
• Standard cost(price)method

FIFO method:
This method assumes that the order in which materials are received in the stores is the
order in which materials are issued from the stores. Hence, the materials which is
issued first is priced on the basis of the cost of material received earliest, so on and so
forth. The advantages of this method seemed to be: 1. The pricing of material is
perhaps consistent with the practice of issuing oldest material first followed in many
manufacturing organization. 2. The value of material in stock is fairly closed to the
current cost. The disadvantages of this method are: 1. Issue of material at different
prices complicates stores accounting. 2. Comparision of job cost becomes difficult
when similar jobs may be charged with different prices for the same material. 3. In this
period of rising prices, the charge to production is low. This tends to inflate reported
profits, increase tax burden & push up dividends-as a consequence, the firm is sapped
financially.
LIFO method:
This method is the opposite of FIFO method: It assumes that the material which is
acquired last is issued first. Hence material issues are priced on the basis of the cost of
most recent material purchases.

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The advantages associated with this method are: 1. The cost of production reflects the
current cost of materials better. 2. In a period of rising prices, reported profits are
depressed, dividends are kept low, & working capital is conserved. The disadvantages
of this method are: 1. Issue of material at different prices complicates stores accounting.
2. The pricing of materials is not consistent with the commonly followed practice of
issuing the oldest material first. 3. Comparison of job cost becomes difficult when
similar jobs may be charged for the same material at different prices.
Weighted Average Cost Method:
Under this method, material issues are priced at a weighted average cost of materials in
stock. To get an up-to-date weighted average cost figure, a new weighted average cost
is calculated each time a delivery is received.
The merits of this method are: (i) It tends to smooth out price fluctuations. (ii) It provides
a fairly acceptable figure for stock values. The limitations of this method may be the
tedium involved in calculating the weighted average cost each time a new delivery is
obtained.
Standard Price (cost) Method:
Under this method a standard price is predetermined. When materials are purchased
the stock amount is debited with the standard price. The difference between the actual
price & standard price is carried to a variance account. Material issued are charged as
per the standard price.
The advantages of this method are: (i) All material issued are priced identically. The
possibility of jobs using the same material being charged with different cost-a problem
with the FIFO or LIFO method does not exist. (ii) Stock accounting is fairly simplified.
There is no need for specific prices attributable to specific issues of materials. The short
comings of this method are: (i) Determining the standard price may be somewhat
difficult, particularly when prices tend to increase somewhat unpredictably or are
characterized by wide fluctuations. (ii) the issue of how variance should be treated may
be thorny.

1. INVENTORY MANAGEMENT TECHNIQUES:

In managing inventories, the firm’s objective should be in consonance with the
shareholders, wealth maximization principle. To achieve this, the firm should determine
the optimum level of inventory. Efficiently controlled inventories make the firm flexible.
Inefficient inventory control results in unbalanced inventory and inflexibility. The firm
may sometimes run out of stock and sometimes may pile up unnecessary stocks. This
increases the level of investment and makes the firm unprofitable. To manage
inventories efficiently, answers should be sought to the following two questions:
➢ How much should be ordered?
➢ When should it be ordered?

The first question, ‘how much to order’ relates to the problem of determining economic
order quantity (EOQ) and answered with an analysis of costs of maintaining certain
15
level of inventories. The second question, when to order, arises because of uncertainty
and is a problem of determining the re‐order point.

Economic Order Quantity (EOQ):

One of the major inventory management problems to be resolved is how much

inventory should be added when inventory is replenished. If the firm is buying raw
materials, it has to decide lots in which it has to be purchase on replenishment. If the
firm is planning a production run, the issue is how much production to schedule (or how
much to make). These problems are called order quantity problems, and the task of the
firm is to determine the optimum or economic order quantity (or economic lot size).
Determining an optimum inventory level involves two types of costs: (a) ordering costs
and (b) carrying costs. The economic order quantity is that inventory level that
minimizes the total of ordering and carrying costs.

1) Ordering Costs:
The term ordering costs is used in case of raw materials (or supplies) and includes the
entire costs incurred in the following activities:
• Requisition
• Purchase
• Ordering
• Transporting
• Receiving
• Inspecting
• Storing (store placement)

Ordering costs increase in proportion to the number of orders placed. The clerical and
staff costs, however, do not have to vary in proportion to the number of orders placed,
and one view is that so long as they are committed costs, they need not be reckoned in
computing ordering cost. Alternatively, it may be argued that as the number of order
increases, the clerical and staff costs tend to increase. If the number of orders are
drastically reduced, the clerical and staff force release now can be used in other
departments. Thus, these costs may be included in the ordering costs. It is more
appropriate to include clerical and staff costs on a pro‐rata basis. Ordering costs
increase with the number of orders, thus the more frequently inventory is acquired, the
higher the firm’s ordering costs. On the other hand, if the firm maintains a large
inventory levels, there will be few orders placed and ordering costs will be relatively
small. Thus, ordering costs decrease with the increasing size of inventory.

1) Carrying Costs:
Costs incurred for maintaining a given level of inventory are called carrying costs. They
include storage, insurance, taxes, deterioration and adolescence. The storage costs
comprise cost of storage space (warehousing cost), stores handling costs and clerical
and staff service costs (administrative costs) incurred in recording and providing special
facilities such as fencing, lines, racks etc. Carrying costs vary with inventory size. This
behavior is contrary to that of ordering costs which decline with increase in inventory

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size. The economic size of inventory would thus depend on trade‐off between carrying
costs and ordering costs.

2) Re‐order point:
The re‐order point is that inventory level at which an order should be placed to replenish
the inventory. To determine the re‐order point under certainty, we should know:
• Lead time
• Average usage
• Economic order quantity

Lead time:
Lead time is the time normally taken in replenishing the inventory after the order has
been placed. By certainty we mean that uses and lead time do not fluctuate. Under
such a situation reorder point is simply that inventory level which will be maintained for
consumption during the lead time .i. e ,
Reorder point = Lead * Average usage.

1) Safety stock:
The demand for material may fluctuate from day‐to‐day or from week‐to‐week.
Similarly, the actual delivery time may be different from the normal lead time. If the
actual usage increases or the delivery of inventory is delayed, the firms can a problem
of stock‐out which can prove to be costly for a firm. Therefore, in order to guard against
the stock out, the firm may maintain a safety stock. It is the minimum or buffer inventory
as cushion against expected increased usage and/or delay in delivery time.

The inventory management process by THE GENERAL

STORE.

When asked, the cashier/owner of the store told that they maintain stocks of FMCG as
well as pharmaceuticals as per the requirement of the locality. The consumption of
FMCG is informed to be very high.
• The store has installation of computerized inventory management system.
• A database of inventories is automatically maintained by the system.
• It keeps track of what comes in and what goes out.
• As soon as the inventory reaches the re‐order point, the system automatically
reminds them to order that particular commodity.
• They, then place the required order using telephonic communication.

Three most selling FMCG goods have been identified and have been studied for the
inventory management:

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 Min. Average Max.
Shampoo
➢ Sunsilk 5 20 25
➢ Garnier 5 35 40
➢ Head and shoulder 5 25 30
➢ Dove 5 30 35

Soap
➢ Lux body wash 10 90 100
➢ Lux 10 90 100
➢ Life boy 10 80 90
➢ Dettol 10 110 120
➢ Dove 10 90 100

Toothpaste
➢ Close-up 5 50 55
➢ Colgate 5 60 65
➢ Pepsodent 5 40 45

EOQ of GENERAL STORE:

There is no exact or rigid EOQ, instead the quantities short of max. units are placed as
an order quantity.

Ordering Costs:
It is nil for this store as the supplier charges no delivery costs to them.

Carrying costs:
Was not disclosed. The store owner looked more haphazard, when asked about it.

Re‐order point:
The Computerized inventory management system automatically reminds to place an
order when the inventory reaches the min. point.

Lead time:
It was informed to be 48 hrs.

Safety stock:
The store does not have any such concept, instead it does have a minimum and a
maximum limit. It just tries to maintain the max. limit of the stock.

1. INVENTORY CONTROL SYSTEM:

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A firm needs a inventory control system to effectively manage its inventory.There are
several inventory control system in practice.They are from simle system to vaery
complicated systems. For eg: a small firm may operate a two –bin system. Under this
system the company maintains two bins. Once inventory in one bin is used an order is
placed , and mean while the firm use inventory in the second bin for a llarge department
store the sells hundreds of items, this system is quite unsatisfactory. The departmental
store will have to maintain a self operating , automatic computer system for tracing the
inventory position of various item and placing order.

ABC inventory Control System:

Large numbers of firms have to maintain several types of inventories. It is not desirable
to keep the same degree of control on all the items. The firm should pay maximum
attention to those items whose value is highest. The firm should, therefore, classify
inventories to identify which item should receive the most effort in controlling. The firm
should be selective in its approach to control investment in various types of inventories.
This analytical approach is called the ABC analysis and tends to measure the
significance of each item of inventories in terms of its value. The high value items are
classified as ‘A items’ and would be under the tightest control. ‘C items’ represent resp.
least value and would be under simple control. ‘B items’ fall in between this two
categories and require reasonable attention of management. The ABC analysis
concentrates on imp items and is known as control by importance and exception (CIE).
As the items are classified in the importance of their relative value, this approach is also
known as proportional value analysis (PVA).
The following steps are involved in implementing the ABC analysis:
• Classify the items of inventories, determining the expected use in units and the
price per unit for each item.
• Determine the total value of each item by multiplying the expected units by its
units price.
• Rank the items in accordance with the total value, giving first rank to the item
with highest total value and so on.
• Compute the ratios (percentage) of nos. of units of each item to total units of all
items and the ratio of total value of each item to total value of all items.
• Combine items on the basis of their relative value to form 3 categories- A, B and
C.
Pareto’s law applied to inventories
The relationship between the percentage of items and the percentage of AUV
(annual usage value) follows a pattern
• A – about 20 % of items account for about 80 % of the AUV
• B - about 30 % of items account for about 15 % of the AUV
• C - about 50 % of items account for about 5 % of the AUV

An example:
A small firm inventories only ten items, but decides to setup an ABC inventory system
With 20 % A items, 30 % B items, and 50 % C items. The company records provide the
information shown below.
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Part 1 2 3 4 5 6 7 8 9 10
No
Unit 1100 600 100 1300 100 10 100 1500 200 500 5510
Usag
e
Unit 20 400 40 10 600 250 20 20 20 10
Cost
AUV 2200 24000 400 1300 6000 250 200 3000 400 500 38250
0 0 0 0 0 0 0 0 0 0 0

Part No. AUV in Cumulative Cumulative Cumulative Class

Descending AUV % AUV % of items

order
2 240000 240000 62.75 10 A
5 60000 300000 78.43 20 A
8 30000 330000 86.27 30 B
1 22000 352000 92.03 40 B
4 13000 365000 95.42 50 B
1 5000 370000 96.73 60 C
3 4000 374000 97.77 70 C
9 4000 378000 98.82 80 C
6 2500 380500 99.48 90 C
7 2000 382500 100 100 C
Table: ABC Analysis

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Just-In-Time(JIT) systems:
Japanese firms popularize the just-in –time (JIT)system in the world. In a JIT system
material or manufactured components and parts arrive to the manufacturing sites or
stores just few hours before they are put to use. The delivery of material is
synchronized with the manufacturing cycle and speed. JIT system eliminates the
necessity of carrying large inventories, and thus , saves carrying other related cost to
the manufacturer. The system requires perfect understanding and co-ordination
between the manufacturer and the suppliers in terms of the timing of delivery and
quality of the material. Poor quality material and components could halt the production.
The JIT inventory system complements the total quality management (TQM). The
success of the system depends on how well a company manages its suppliers. The
system puts tremendous pressure on suppliers. They will have to develop adequate
systems and procedures to satisfactory meet the needs of manufacturers.
Example:
One truck transportation company obtains much of its business by catering to
companies that must deliver parts to other companies “just in time”. The Toyota
Company in Japan has developed a scheduling discipline for internal control of in
process material movement, called kanban, which substantially reduces WIP
Inventories and hence reduces the associated costs.

Outsourcing:
A few years ago there was a tendency on the parts of many companies to manufacture
all components in house. Now more companies are adopting the practice out sourcing.
Out sourcing is a system of buying parts and components from outside rather than
manufacturing them internally. Many companies develop a single source of supply, and

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many others help developing small and middle size suppliers of components that they
require.
Example:
Tata motors has, developed number of ancillaries are able to maintain the high quality
of the manufactured components. The car manufacturing company, Maruti, which is
now controlled by Suzuki of Japan has the similar system of supply.

Computerized inventory Control Systems:

More and more companies, small or large size, are adopting the computerized system
of controlling inventories A computerized inventory control system enables a company
to easily track large items of inventories. It is an automatic system of counting
inventories, recording withdrawals and revising the balance. There is an in-built system
of placing order as the computer notice that the reorder point has become reached.
The computerized inventory system inevitable for large retail stores. Which carry
thousands of items. The computer information system of the buyer and supplier are
linked to each other. As soon as the suppliers computer receive an order from the
buyer’s system, the supply system process is activated.

1. 25 Ways to Lower Inventory Costs:

Inventory policies drive two types of costs-operating expenses and working capital
requirements. The latest "Logistics Cost and Service Report" published by Establish
Inc./Herbert W. Davis and Company, indicates that, while total logistics costs as a
percent of sales are falling and most individual companies have succeeded in reducing
inventory levels; total logistics costs per hundredweight are increasing, and inventory
costs as a percent of total logistics cost are increasing.
In many organizations, however, the opportunities to reduce inventory costs are often
not addressed at all or are not completely exploited. If your organization needs help
taking money out of inventory there are strategies you can employ today that will
provide payoff.
Some of these strategies address having less active inventory, others how you
purchase active inventory, and still others require transferring inventory or relying on
vendors for better inventory management. Regardless of which you choose to explore,
proactive inventory management policies will make a difference in your operations.
Here are some of the most common techniques for lowering inventory levels.
1. Base Cycle Stock on Economics: For purchased products, getting a handle
on your acquisition transaction costs will either reduce average inventory or allow for
reducing purchasing and receiving labor. For manufactured products, if production
equipment changeover costs are in a similar state, getting them in place will either
reduce average inventory through shorter runs or allow for reducing changeover and
receiving labor through longer runs.
2. Control Order Transaction Costs: In the office, use the computer to generate
purchase orders (POs), EDI for PO transmission, advance shipping notices (ASNs) to
reduce expediting, and historical vendor performance to prioritize expediting to lower
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purchasing costs. In the manufacturing plant, pre-planning; pre-staging of needed parts
or materials; use of special tools or equipment; changeover initiation prior to completion
of the previous run; teamwork and work-division; maintaining equipment temperatures;
and minimizing QA / QC work all reduce cycle stock inventory. In the distribution center
(DC), pallet manifest-based receiving processes, counting scales, statistics-based
inspection and checking, bar code scanners for data entry, certifying key vendors to
eliminate receiving functions, and stocking forward storage locations first and reserve
locations second can all reduce purchase transaction costs and cycle stock accordingly.
3. Lower Inventory Holding Costs: Improve space utilization in leased, contract,
or public warehouses (or to minimize or delay expansion of owned facilities) through
narrow aisle handling equipment, mezzanines, layout, or more appropriate storage
modes.
4. Base Safety Stock on Customer Service: Using the appropriate number of
product classes, setting the dividing lines between each class in the best manner,
updating safety stock levels dynamically, and basing the service levels for each class
on the financial goals of the business all serve to either reduce safety stock inventory or
reduce out-of-stock situations and increase revenue.
5. Use Routine Demand Forecasting: Using manually edited arithmetic
forecasting models to reduce forecast error will reduce overstocking, backorders, and
DC returns from stores, holding inventory levels closer to only that required to support
the desired customer service level.
6. Forecast Events: If one-time demand clutters the sales history, or if one-time
demand events are part of the future, then they need to be taken into account in any
forecasting done-both in terms of editing them from history and in terms of incorporating
future events into the routine demand forecast.
7. Think Postponement: For parent products from which multiple SKUs can be
manufactured, only partially completing manufacturing, placing semi-finished product in
inventory, and then completing manufacturing of the final SKUs to order reduces total
inventory. In a similar manner, component products from which final SKUs may be
assembled can be purchased to inventory and then the final SKUs assembled to order,
providing that the time for assembly doesn't exceed the customer lead time.
8. Rationalize SKUs: Removal of inappropriate product from the product line can
be a controversy-ridden process, but may reduce inventory significantly if handled in a
constructive manner, as follows:
• Develop consensus on the objective of maximizing profit
• Develop activity-based costs for each SKU and separate them into three
groups:
○ Those with selling prices that create positive gross margin
○ Those with selling prices that cover their variable cost but do not
completely cover their fixed cost
○ Those with selling prices that do not cover their variable cost
• Quantify the sales volume correlations between SKUs, based on the
analysis of both individual orders and aggregate order patterns by
customer
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 • Identify the combination of SKUs which maximizes profit on a fully-
absorbed basis
9. Reduce Lead Times for Product Acquisition: For either manufactured or
purchased product, any reduction in lead time, whether supplier lead time,
transportation time or receiving cycle time, provides a one-time, permanent reduction in
cycle stock inventory proportional to the throughput level of the SKU and the degree of
lead time reduction. In a similar manner, reducing lead time variability and increasing
inbound unit-, SKU-, or order-fill rates both increase supply reliability and reduce safety
stock inventory for a given customer service level.
10. Implement Common Supplier Joint Procurement for Purchased
Products: Joint procurement of multiple SKUs from a common supplier serves to
effectively reduce unit purchase transaction costs and thereby reduces both cycle stock
inventory and annual purchase transaction expenses. In a similar manner, joint
procurement of multiple SKUs from different suppliers located in close physical
proximity and consolidation of inbound (LTL) volume to form full TLs serves to reduce
the incremental transportation cost portion of purchase transaction costs and reduce
cycle stock inventory.
11. Purchase Minimums: Compare the total cost of ownership for purchased
products as quoted prices with no minimums to reduced prices with minimums to
determine if the reduced prices really provide savings.
12. Implement SKU-specific Purchase Transaction Costs: Purchase
transaction costs aren't normally SKU-specific. However, reflecting any extraordinarily
low receiving costs associated with specific SKUs will serve to reduce inventory for
them. The opposite, of course, is also true.
13. Get Demand Plans from Downstream: Hard information on upcoming
needs from customers reduces demand variability, thus reducing the safety stock
required for a given customer service level.
14. Send Demand Plans Upstream: Sharing demand forecasts with suppliers is
more indirect, however, in the long run it will serve to reduce the supplier's finished
goods inventory and associated costs and, with effective negotiation, perhaps yield
lower prices.
15. Don't Stock It: Manufacturing or purchasing to order when the acquisition and
customer lead time relationships and order quantity relationships allow it is a very direct
way to reduce inventory, providing that the acquisition capacity exceeds the potential
short-term demand rate.
16. Cross-dock Customer Shipments: With effective use of joint
replenishment, the potential increases in inbound transportation costs associated with
purchasing to order can be mitigated. Cross-docking customer shipments can facilitate
purchasing to order even when the order quantity relationship would have otherwise
dictated purchasing to inventory. In a similar manner, aggregating purchase
requirements for multiple DCs into a single order and cross-docking to multiple DCs
effectively reduces purchase transaction costs and reduces cycle stock inventory.
17. Keep In Stock, But Not Everywhere: In multiple DC tier environments,
stocking certain SKUs in fewer/upstream facilities as opposed to more/downstream

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facilities yields obvious benefits. Likewise, within a single tier of DCs, not every SKU
deserves to be stocked in every DC.
18. Extend Payment Terms: When negotiating long- term purchase agreements,
getting the best payment terms at a given unit price is the most direct way to increase
the portion of inventory funded by the vendor. If improving payment terms can be
coupled with increased turnover, then the improvement in working capital effectiveness
is significant.
19. Take Advantage of Price/Quantity Breaks: Taking price/quantity breaks
into account when purchasing for replenishment seems an obvious way to reduce the
inventory investment, but seems to be frequently overlooked. Often this is a result of
either not quantifying breaks at the time of sourcing or negotiation, not having an
effortless way to take them into account, or through lack of understanding of the impact
of purchasing larger quantities at reduced unit cost.
20. Transfer Instead of Purchase: When inventory of an overstock SKU in one
location needs to be purchased to replenish inventory in another location, transfers are
a smart way to reduce inventory. Be careful that additional warehousing and
transportation expenses aren't unnecessarily incurred so the reduction in holding cost
does not exceed the cost to transfer.
21. Consider Liquidation: Although there will always be a short-term price to pay
on the P&L and the balance sheet, when it is absolutely clear that the value to be
gained through liquidation-whether through sale at reduced price, sale as distressed
product, salvage, or charitable donation-is greater than the most optimistic estimate of
future gross margin from conventional product sales, then liquidation is the best
decision.
22. Try Merge-In-Transit: The concept of in-transit product merging-where, for
example, two things are shipped from different locations and then married in transit so
that they reach the customer as a single shipment-can be seen as a technique for
reducing inventory if the need for the customer to simultaneously receive multiple SKUs
is taken as a requirement. If the need for simultaneous receipt is a given, then the
concept eliminates the need for inventorying the individual SKUs together. To some
extent, merge-in-transit represents an extension of postponement beyond the
distribution center walls.
23. Get Help From Friends: Collaborative Planning and Replenishment (CPFR) is
an open set of pre-defined business processes and IT/communications standards
created to facilitate collaboration between supply chain partners. CPFR can reduce
inventories through inventory balance, forecast, demand and other data visibility and
associated collaboration in the planning area.
24. Use Vendor-managed Inventory (VMI): With the appropriate incentives,
allowing suppliers to assume the responsibility for replenishment of your inventory,
because of their visibility into both their own inventory and production schedule and
your demand data, can almost always reduce your inventory.
25. Implement Vendor Stocking Programs (VSP): Used primarily for
maintenance inventories but applicable to all, VSPs require a supplier to commit to an
extremely high service level for delivery of specific SKUs within a fixed time at a pre-

25
defined mark-up over cost. VSPs can reduce or eliminate inventories for slow-moving
products.
There are numerous ways to take better control of inventory and decrease its
associated costs. The key to managing inventory successfully is to continuously
measure your performance and look for new ways to improve. These 25 strategies
should get your organization thinking about what it can do to lower inventory costs.
Many of these strategies may seem challenging to implement. This is when it is wise to
seek outside help for insight on how to put these strategies to work for you.

1. THE FUTURE OF INVENTORY MANAGEMENT

The advent, through altruism or legislation, of environmental management has added a
new dimension to inventory management-reverse supply chain logistics. Environmental
management has expanded the number of inventory types that firms have to
coordinate. In addition to raw materials, work-in-process, finished goods, and MRO
goods, firms now have to deal with post-consumer items such as scrap, returned goods,
reusable or recyclable containers, and any number of items that require repair, reuse,
recycling, or secondary use in another product. Retailers have the same type problems
dealing with inventory that has been returned due to defective material or manufacture,
poor fit, finish, or color, or outright "I changed my mind" responses from customers.
Finally, supply chain management has had a considerable impact on inventory
management. Instead of managing one's inventory to maximize profit and minimize cost
for the individual firm, today's firm has to make inventory decisions that benefit the
entire supply chain.

2. INVENTORY MANAGEMENT IN PRACTISE:

Inventory management in Dulux paints:
Inventory is most important and most critical part of supply chain management.
As we know there are 3 types of inventory via Raw material, work in progress and
finished good. To explain inventory management in detail we visited ICI (Dulux) paints
to study its inventory management. ICI paints India has 5 plants all over India
manufacturing 2 types of paints via water based and solvent based. The company has 1
centralized office which takes decision for all the 5 plants like vendor selection, total
demand forecasting, total output for each plant, etc. Its Koperkhairane plant
manufacture only water based paint which is used to paint our houses. The company
has installed SAP program which helps the management of the company to plan its
production. The plant manufactures base color (i.e.) white color and also manufactures
two more color i.e. Red and Yellow. Various colors what we get in market is done by
dealers. Dealers have tinting machine from which they can come up with various colors.
The water based paints require 150 various types of raw material some in
powder form and some in liquid form. To get all the raw materials in time, company has
maintained a good relationship with 28 vendors. Since the total production planning is
done monthly, it is already decided what will be the daily output. Centre head office
decides the monthly output and the plant divides the total monthly output by 30 to get
daily output. According to daily output plan the optimal raw material is ordered. Special
26
raw material which needs to be imported is ordered in bulk and kept in warehouse
where as other raw materials are ordered regularly or once in 2 days depending on the
requirement. Just in time management is practiced in case of raw material inventory.
Delivery of raw material is done by vendors and vendors cost. Packing is done in plant it
self but packaging material is outsourced. Packaging material is delivered regularly by
the vendors. Safety stock is always maintained by the company so that production
doesn’t stop at any time. After installing SAP and planning strategies to reduce
inventory company has managed to reduce the inventory from 28 days to 13 days.
Total time required to manufacture varies between 7-24hrs depending on the
type of goods. At one particular time only one size of product is manufactured. Currently
company has 150 kl Work In Progress (WIP). Company has capacity of 200kl WIP.
Since demand for paints in Indian market is very seasonal, company has to keep
huge finished goods inventory to satisfy festive season demand at the same time
company has to keep same production level trough out the year. Keeping huge
inventory will increase the cost of final product, therefore company keep all finished
good inventory in its own warehouse. Company has a great distribution channel with
180 Depos all over India. All Depos have storage capacity to maintain supply and
satisfy the demand. On an average thane plant keeps 3 crore finished goods inventory.
Finished goods are transported to depots. Transport is outsourced and paid on per km
per kl basis. 60 days credit period is given to transporters and 21 days credit period is
given to distributors.
At site level company holds 4.35 crore of inventory (both raw material and
finished good) per month. 5.5 Crore inventory per month turnover vise. Globally
company has reported 90 crore inventory till 2007, now it has been reduced to 48 crore.

References:
Financial Management, 9th edition by I.M. Pandey.
http://en.wikipedia.org/wiki/Inventory_control_system
http://en.wikipedia.org/wiki/Inventory
http://rapidlibrary.com

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