FERTILISERS AND CHEMICALS TRAVANCORE LIMITED INVENTORY MANAGEMENT

THE FERTILISERS AND CHEMICALS TRAVANCORE LIMITED
1.1 INTRODUCTION
Financial Management is concerned with the duties of the financial

manager in the business firm. Financial managers actively manage the
financial affairs of any type of business, namely financial and non-financial,
private and public, large and small, profit seeking and non-profit.
They perform such varied task, as budgeting, financial forecasting, cash

management, credit administration, investment analysis, funds management
and inventory management.
A term inventory refers to the stock file of the products a firm is offering
for sale and the components that make up the product. In other words,
inventory is composed of assets that will be showed in future in the normal
course of the business operations. The assets which firms store as inventory in
anticipation of need are:
 Raw materials
 Work-in progress
 Finished goods
The raw material inventory contains item that are purchased by the firm
from other and are converted into finished goods through the manufacturing
(production) process. They are an important input of the final product. The
working-in-process inventory consists of items currently being used in the
production process.
They are normally semi-finished goods that are at various stages of

production in a multi stage production process. A finished goods represented
final or completed products which are available for sale .The inventory of such
goods consists of items that have been produced but are yet be sold.
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GURUVAYURAPPAN INSTITUTE OF MANAGEMENT
Inventory, as a current asset, differs from other current assets because only
financial managers are not involved. Rather all the functional areas, finance,
marketing, production, and purchasing are involved. The views concerning the
appropriate level of inventory would differ among the different functional
areas.
The job of the financial manager is to reconcile the conflicting view
points of the various functional areas regarding the maximizing the owners
wealth. Thus, inventory management, like the management of other current
assets, should be related to the overall objective of the firm. It is in this context
that the present chapter is devoted to the main elements of inventory
management from the view point of financial management.
The objective of inventory management is explained in some
detail sections. Section two is concerned with inventory management
techniques. Attention is given here to basic concepts relevant to the
management and control of inventory.
The aspects covered are:

 Determination of the type of control required.
 The basic economic order quantity
 The reorder point
As a matter of fact, the inventory management techniques are a part of

production management.
1.1.1 NEED TO HOLD INVENTORIES
Martin and miller identified three general motives for holding inventories
1.1.1.1 TRANSACTION MOTIVE:

This refers to the need of maintaining inventory to facilitate smooth
production and sales operations.
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1.1.1.2 PRECAUTIONARY MOTIVE:

Precautionary motive for holding inventory is to provide a safeguard when
then actual level of activity is differ than anticipated. This inventory serves
when there is a unpredictable changes in the demand and supply forces.
1.1.1.3 SPECULATIVE MOTIVE:

This motive influences the decision to increase or decrease the levels of
inventory to take the advantage of price fluctuations.
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1.2 INDUSTRY PROFILE
1.2.1 INDUSTRY PROFILE
Fertilizer is generally defined as “any material organic or inorganic, natural or

synthetic which supplies one or more”.
The most necessary requirements of human being are food. The accelerated
growth in a nation needs remarkable expansion of food production from time
to time. Agriculture must rely upon a primary source for increase in food
production.
The fertilizer industry has played a significant role in the development of

agriculture in India. Majority of the rural population in India still depend on
agriculture for their livelihood and allied activities contribute about 30% of
GDP in India. Growth and development of agriculture in India derives a
significant stimulus in fertilizer industry. Development and growth of this vital
industry is crucial for their sustainable growth of agriculture and to ensure
food security of the nation. The main issue confronting the fertilizer industry
in India is the volatility in the process of food stock or raw material coupled
with the limited availability and uncertain policy environment.
In India, there has been a surge in the demand for fertilizers in the past few
years. However the robust growth in consumption propensity has not been met
with the required surge in the fertilizer production. This has widened the gap
between demand and supply of fertilizers. Therefore India has depended on
import of large quantity of fertilizer to meet domestic demand.
India is the third largest producer and consumer of chemical fertilizers in the
world and account for about 12% of world fertilizers’ consumption. The
country produces several straight nitrogenous fertilizers such as Urea,
Ammonia, Sulphate, Calcium, Ammonium, Nitrate etc. As well as fertilizers
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such as DAP and several NPK complexes. Urea and DAP are the main
fertilizers produced in India.
Agriculture is the backbone of Indian economy still holds its relative

importance for more than a billion people. The government of India from time
to time has taken considerable steps for the upliftment of agriculture sector.
Here we have analyzed the performance of fertilizer industry being one of the
vital parts in agriculture production and government policy initiatives for the
same.
Six industries in India have been identified as energy intensive industry.

Aluminum, Cement, Fertilizer, Iron & Steel, Glass and Paper together they
account for 16.8% of manufacturing value of output (V0) and consume 38.8%
of all fuels consumed in the manufacturing sector. The fertilizer sector holds a
considerable share within these energy intensive industries. In 1993, it
accounted for 23% of value of output within the six industries and for 3.8% in
the manufacturing sector.
The Indian fertilizer industry has succeeded in meeting almost fully the
demand of all chemical fertilizers except for MOP. The industry had a very
humble beginning in 1906, when the first manufacturing unit of Single Super
Phosphate (SSP) was set up in Ran pat here Chennai with an annual capacity
of 6000 MT. Fertilizers And Chemicals Travancore of India Limited (FACT)
at Cochin in Kerala and the Fertilizers Corporation of India(FCI) in Sandra in
Bihar were the first large sized fertilizers plants set up in the forties and fifties
with a view to establish an industrial base to achieve self- sufficiency in food
grains. Subsequently, green revolution in the late sixties gave an impetus to
the growth of fertilizer industry in India. In seventies and eighties they
witnessed a significant addition to the fertilizer production capacity.
The installed capacity as on 30-01-2013 has reached level of 121.10 lakh MT

of nitrogen (inclusive of installed capacity of 2008.42 lakh MT of Urea after
reassessment of capacity) and 53.60 lakh MT of Phosphate Nutrient, making
India the third largest fertilizer producer in the world rapid build-up of
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fertilizer production capacity in the country has been achieved as a result of a

favorable policy environment facilitating large investment in the public, co-
operative and private sectors. Recently, there are 57 large sized fertilizers
plant in the country manufacturing a wide range of nitrogenous, phosphate and
complex fertilizers. Out of these, 29 unit produce Urea, 20 unit produce DAP
and complex fertilizers, 13 plants manufacture Ammonium Sulphate (AS),
Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous
fertilizers. Besides, there are about 64 medium and small-scale units in
producing SSP.
1.2.1.1 Investment in Fertilizer Industry
Fertilizer production is capital intensive and presently the cost of production

of indigenous material is high and returns on investment are low. The Indian
fertilizer industry, which achieved phenomenal growth in eighties, witnessed
decline in the growth rate during the nineties. In the recent past, the fertilizer
industry has not attracted any significant investment. No multinational has
invested in fertilizer sector in India.
Due to sufficient indigenous capacity and low international prices of Urea, the
government of India in February 2000 decided that no new grassroots project
will be allowed during the next 3 years in public, private or co-operative
sector. So even if the government reviews its decision the earliest a project
could start would be by 2004-05.
Government is also considering dis-investment of its equity of public sector

fertilizer units up to 51% or even more. This handover the management
control of the company to a strategic buyer. The dis-investment in National
Fertilizer Limited (NFL), a major Urea producer in the country is underway.
Lack of availability of natural gas in the country had prompted investors to
collaborate for joint ventures abroad for urea production. Gulf countries due to
abundant availability of gas, nearness to Indian shores and investment friendly
environment, are becoming the first choice for joint ventures.
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Among the Public Sector Units, the Fertilizer Corporation of India Limited
(FCI), Hindustan Fertilizer Corporation Limited (HFC), Projects
&Development India Limited (PDIL), and Pyrites, Phosphates & Chemicals
Limited (PPCL) were declared sick. They are under consideration of Bureau
of Industrial and Financial Restructure (BIFR).
As India does not have potential rock phosphate reserve, it is completely

dependent on import of either rock phosphate or phos acid or DAP. There has
been new capacity addition by way of importing rock phosphate and
converting it into phos acid and then to DAP/NPK or conversion of phos acid
at rock phosphate mines abroad in JV and importing phosphoric acid for
further conversion to DAP/NPK. It is heartening to know that apart from the
operating joint venture plants for phosphoric acid in Senegal, Jordan and
Morocco some more projects and expansions are being contemplated by the
Indian companies.
1.2.1.2 INTERNATIONAL SCENARIO
When there are large area of unused frontier land in the world, it was often
more economical for farmers to move on to new unfarmed land then to invest
additional money in fertilizers for the land they were then farming, a practice
continued in second half of the 20th century in some underdeveloped areas of
the world. The use of manure and composites are probably as old as
agriculture itself and many other material such as ground bones, wood ash
from burning the fallen trees, dried blood and fish were employed long before
the chemistry of soil and crops was understood. The disappearance of
fertilizers combined with improvements in the technology of fertilizers
manufacture and more effective transportation lead to a growing role of
fertilizers for producing the needed food.
1.2.1.3 NATIONAL SCENARIO
India is one of the world’s largest producers and consumer of fertilizers, both
Phosphorescent and Nitrogenous. The fertilizer industry in the country is also
among the fast growing sector in the world. There are around 25 chemical
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fertilizers used in the country at present. They fall under four broad categories
namely Nitrogenous, Phosphate and Potassium and Complex fertilizers.
71% of the total fertilizer consumption during 1994-1995 was of the

Nitrogenous variety whereas the Phosphorescent and fertilizers accounted for
22% and 7% in the same order. While Urea, Calcium and Ammonium
Phosphate are the major Nitrogenous fertilizers, Single Super Phosphate falls
under the Phosphate category. Ammonium Phosphate is the main Complex
fertilizer.
There are nine public sector under takings and two co-operative societies
under the administrative control of the Department of Fertilizers. At present,
there are 63 large size fertilizer units in the country, manufacturing a wide
range of nitrogenous and Prophetic/complex fertilizers. Of these, 38units
produce urea whereas 9 units produce Ammonium Sulphate as a by-product.
Besides, there are about 79 small and medium scale units producing single
superphosphate.
1.2.1.4 STATE SCENARIO
Kerala has a high degree of the land and cropping industry. The state’s
agricultural productivity is decreasing year by year. The production and
cultivation of rice is decreasing and the farmers are attached to the cultivation
of commercial crops like rubber etc. due to the decrease in the cultivation of
rice, the consumption of Nitrate and Potash has come down. Kerala is one of
the low ranking states in the consumption of fertilizers.
The state has good fertile land and suitable climate for agriculture. Even
though the state’s agricultural productivity is decreasing year by year.
Especially production and cultivation of commercial crops like rubber shows
declining trend in production. Industry’s production had shown increasing
trend during past few years. Industry leaders sought Governance’s support in
reducing the time period for mandatory environmental.
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1.3 COMPANY PROFILE

1.3.1 INTRODUCTION
FACT a Government of India Enterprise has business interests in

manufacturing and marketing of fertilizers, caprolactam, engineering
consultancy and fabrication of equipment’s. Units of FACT include the two
manufacturing divisions Udyogamandal Complex-UC and Cochin Division-
CD, the consultancy unit FACT Engineering and Design Organization-FEDO,
the fabrication division FACT Engineering Works-FEW and the Marketing
Division. The Company has also interests in petrochemicals, hydrometallurgy,
chemicals and pharmaceuticals.
1.3.2 COMPANY HISTORY
Agriculture has always been the mainstay of our people and we have been
tilling the land and reaping the harvests for hundreds of years. This naturally
found us in a situation where the land was becoming les and les bountiful. The
yield was getting lower and lower and in the early half of 20th century we
found we had to depend on imports to meet out minimum food grain
requirement. The simple truth that land had been losing its fertility through
long years of repeated cultivation dawned on us much too late. What we were
putting back in the form of organic manure was hardly adequate to replenish
the soil or to correct the imbalance on the fertility status of the land under
cultivation. Advanced countries elsewhere has discovered the answer to this
problem in chemical fertilizers and some of the large scale farming
entrepreneurs like foreign owned plantations in India also were importing
chemical fertilizers for their own use.
The Second World War which cut off traditional sources of import of food
grains aggravated our problem and the famine conditions that prevailed in
some parts of the country made us sit up and think. Chemical fertilizer was the
answer, but we did not have the technical know-how, raw materials or the
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resources for setting up fertilizer plants. It was then that a daring and
farsighted administrator of Travancore (Kerala), Dr. C.P. Ramaswamy Iyer,
had overcome the obstacles and paved the way for setting up a chemical
fertilizer factory, in a till then unheard village in Kerala with what little
resource that was available then and adopting technology and raw materials
that could be mustered up. The immediate objective was to grow more food
using the wonder replenishes, chemical fertilizers. This was how FACT came
to be founded in what is now known as Udyogamandal, on the banks of river
Periyar in 1944. It was then the first large scale fertilizer factory in the entire
country.
FACT has since then grown, expanded and branched out in a fantastic manner
so that today it is not merely one of the biggest fertilizer enterprise in the
country, but also a legend of the modern times and a triumph of the public
sector, FACT’s annual sales turnover is around RS.2937 crores during 2011-
2012.
1.3.3 INDUSTRY STRUCTURE AND DEVELOPMENT
FACT, India's first large scale fertilizer unit was set up in 1943. In 1947,
FACT Udyogamandal started production of Ammonium Sulphate with an
installed capacity of 10,000 MT Nitrogen. FACT became a Kerala State
Public Sector Enterprise on 15th August 1960 and 21st November 1962, the
Government of India became the major shareholder.
The 2nd stage of expansion of FACT was completed in 1962. The 3rd stage of
expansion of FACT was completed in 1965 with setting up of a new
Ammonium,Sulphateplant.
FACT Engineering and Design Organization was set up on 24th July 1965 to
meet the emerging need for indigenous capabilities in vital areas of
Engineering, Design and Consultancy for establishing large and modern
fertilizer plants. FEDO has since then diversified into Chemicals,
Petrochemicals, Hydrometallurgy, Pharmaceutical and other areas. FEDO
offers services from project identification and evaluation stage to plant design,
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procurement, project management, site supervision and commissioning of new

plants as well as revamping and modernization of old plants.
FACT Engineering Works was established on 13th April 1966 as a unit to

fabricate and install equipment’s for fertilizer plants. Over the years FEW
developed capabilities in the fabrication of pressure vessels and heat
exchangers. The Cochin Division of FACT, the 2nd production Unit was set
up at Ambalamedu and the 1st phase was commissioned in 1973. The 2nd
phase of FACT Cochin Division was commissioned in 1976.
As a diversification plans from the traditional field of Fertilizers and
Chemicals, 50000 TPA Caprolactam Plant at Udyogamandal was
commissioned in 1990.
FACT set up 900 TPD Ammonia Plant at Udyogamandal at a cost of 638

Crores following an order of the High Court of Kerala in February 1994 on a
Public Interest Litigation, to decommission the existing imported Ammonia
storage and handling facility at Willington Island (Cochin Port). The
Ammonia plant was commissioned in 1998.
The company's main business is manufacture and marketing of (a) Fertilizers
(b) Caprolactam and Engineering Consultancy and Fabrication of Equipment.
1.3.4 COMPANY VISION & MISSION
1.3.4.1 MISSION
To function as a dependable and globally competitive
producer of fertilizer and other allied products and to develop self-reliance in
the field of engineering and technology, especially in the field of fertilizers,
chemicals, petro chemicals, oil & gas industries.
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1.3.4.2 VISION
To emerge as a leading company in the business of providing quality
agriculture and industrial inputs and providing engineering services for
industrial and infrastructural facilities.
1.3.4.3 CORPORATE OBJECTIVES

 The corporate objectives is to be of service to the nation and to contribute
effectively to its economic wellbeing and growth through production and
marketing of fertilizers and chemical and through the acquisition
/development and dissemination of engineering technology know-how and
skills.
 To sustain and improve its pioneering role in the development of indigenous
engineering and technology through research and development.
 To improve productivity and maintain high standards of quality and adopt
effective measures for controlling cost and minimizing dependence on
imports.
 To ensure for its customers the availability of its products and service on
reasonable terms, for its shareholders.
1.3.5 DIVISIONS OF FACT
1.3.5.1 UDYOGAMANDAL COMPLEX
 FERTILIZER PLANTS
FACT Udyogamandal Plant, the oldest of FACT, which started production of

Ammonium Sulphate in 1947 using the firewood gasification process, has
during the last few decades undergone several stages of expansion and
diversification, giving up old and obsolete technology and installing new and
sophisticated plants making use of naphtha as raw material. Today, the
Udyogamandal Plants has an installed capacity of 76,050 tonnes of N and
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29700 tonnes of P2O5. Apart from fertilisers like Ammonium Sulphate and
Ammonium Phosphate Sulphate (FACTAMFOS 20:20:0:13) FACT
Udyogamandal Plants also manufactures chemicals as intermediate products
like Sulphuric Acid, Anhydrous Ammonia, Phosphoric Acid, Sulphur Dioxide,
Oleum, etc.
Ammonium Sulphate liquor obtained as a byproduct from the Caprolactam
Plant is converted as a useful fertilizer product in a New Ammonium Sulphate
Plant, 2, 25,000 TPA capacity put up in October 1990, at a cost of Rs.35 crore.
As a replacement to the existing high energy consuming old Ammonia plants

at Udyogamandal, a new 900 TPD capacity Ammonia Plant at a cost of
Rs.642 crore was put up in March 1998. FACT Udyogamandal plants
received ISO 14001 certification in March 2000 for conforming to the
Environmental Management System standard.
 PETROCHEMICAL PLANTS:
FACT manufactures Caprolactam, the raw material for Nylon-6 which is

extensively used for the production of tyre-cord, textile filament yarn and
engineering plastics.
FACT, one of the only two manufactures of this product in India, has the
capacity to produce 50,000 tonnes of Caprolactam in a year. FACT's
Caprolactam exported to various countries including in USA, not only earns
precious foreign exchange, but also appreciation on account of its excellent
quality.
The Caprolactam Plant also produces 2, 25,000 tonnes of Ammonium

Sulphate per year as co-product and small quantities of Soda Ash and Nitric
Acid as by products.
The plant has been certified ISO 9001:2002 since April 1996 by RWTUV,
Germany and ISO-14001 since December 1999 by DNV, Netherlands.
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1.3.5.2 COCHIN DIVISION

FACT Cochin Division has set up in the 1970's at Ambalamedu 30 km from
Udyogamandal and adjacent to the Cochin Refineries. The factory site is well
connected by rail, road and waterways which facilitate easy movement of raw
materials and products. The present production facility includes manufacture
of 4,85,000 TPA of Complex Fertiliser (FACTAMFOS 20:20:0:13), 3,30,000
TPA of Sulphuric Acid and 1,15,200 TPA Phosphoric Acid. The Complex
has a well-designed effluent treatment and waste water recycle system. There
is facility to import and store raw materials required for FACT at Willingdon
Island installation. The facility includes ship unloading system and storage for
raw materials like Sulphur, Rock Phosphate and Ammonia.
Cochin Division is an ISO 14001:2004 certified company for Environment

Management System by M/s DNV and ISO 9001:2008 certified organization
for manufacture of complex fertilizer by M/s TUV.
1.3.5.3 FACT ENGINEERING AND DESIGN

ORGANIZATION (FEDO)
Established in 1965, FEDO has been evolved into an Engineering power

house with capability that encompasses every facet of Project Engineering and
Management. Maintaining international standards in design practices, exposed
to state-of –the art professional values, safety and environmental protection
,FEDO ‘s expertise ranges from pre-project surveys, project implementation
leading to project commissioning and plant operation ,in diversified field of
operation.
FEDO has, over the years, acquired the technological edge for the production
of Ammonia, Sulphuric Acid, Phosphoric Acid, Hydrogen, Fertilisers like
Urea, Ammonium Sulphate, Single Super Phosphate, Ammonium Chloride,
Complex Fertilisers, etc. The expertise in the field of Petrochemical industry
has been proven internationally by successful commissioning of complex
projects like Caprolactam, Methanol, etc. In the Refinery sector also FEDO in
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not a name to be bypassed like the oil industry players of the Country and in
Gulf.
FEDO has been in technical association with world-renowned consultants and

technology suppliers like Haldor Topsoe (Denmark), Kellog Brown Root
(USA), Stamicarbon (Netherland), BASF (GermanY), Lurgi/Monsanto
(France), Toyo Engineering Corporation (Japan) Outokumpu (Finland),
Coppee Lavalin (Belgium), Technimont (Italy), etc.
In June 1995, FEDO became the first Engineering Consultancy Organization

in India to be awarded ISO 9001:1994 certification for quality standards of our
systems relating to the various aspects of engineering and execution of
projects. The above certification comes from Det Norske Veritas Quality
Assurance Ltd, United Kingdom.
1.3.5.4 MARKETING DIVISION
FACT has been a pacesetter in fertilizer marketing. The marketing network of

FACT is spread over the southern states of Kerala, Tamilnadu, Pondichery,
Karnataka and Andhra Pradesh. The distribution network consists of 100
Agro Service Centres, 50 field storage points and over 7900 retail selling
points in these states, and serves the farmers by supply of fertilizers and
agronomy advice. Through innovative farmer education and fertilizer
promotion programmes, FACT has created awareness about scientific
cultivation and fertilizer use.
1.3.5.5 FACT ENGINEERING WORKS
FACT Engineering Works (FEW), the Fabrication and Engineering Division

of FACT was established in the year 1986. FEW is one of the leading
contracting firms in the country offering service through the manufacturing
wing with modern fabrication and testing facilities and the project wing
undertaking project construction works. To expand its shop activities, FEW
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acquired in the assets of M/S. Giovanola Binny at Palluruthy, Cochin and is

operating at Palluruthy from February 1989 onwards.
Present range of equipment fabricated by FEW include items like class 1

Pressure Vessels, Heat Exchangers in Carbon Steel, Alloy Steel and Stainless
Steel, Chemical Process Equipments, Penstock Pipes, Columns, Towers etc.
Since 2006 FEW has also been producing ship building components such has
hatch covers, bulk storage tanks, spud pipes, crane posts, hull blocks etc.
Prject wing of FEW undertakes design engineering fabrication and erection of

plant piping &off-site piping for process industries: design, fabrication
&erection of hydraulic gates, split way shutters, penstock pipes, coloumn,
towers,stacks etc. FEW can also handle the design, fabrication &erection of
large size storage tanks including ammonia storage tanks, vessels and other
items for process industries; laying of corss country pipeline for water supply
shemes/oil terminals on turnkey basis.
The quality system of manufacturing wing as well as project wing has been
certified to ISO 9001 since 1998.
1.3.6 PRODUCT AND PRODUCT MIX
FACT manufacturing straight fertilizers, complex fertilizers, fertilizer

mixtures, and chemicals.
 STRAIGHT FERTILIZERS
AMMONIUM SULPHATE: Ammonium Sulphate is a nitrogenous fertilizer
containing 20.6% nitrogen, entirely in ammonical form. It has excellent
physical properties; non-hygroscopic, crystalline and free flowing. It is ideal
as a straight nitrogenous fertilizer and also as an ingredient in fertiliser
mixtures. It is the most widely preferred nitrogenous fertiliser for top dressing
on all crops. Another unique advantage is that it contains 24% sulphur, an
important secondary nutrient.
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 COMPLEX FERTILIZERS
FACTAMFOS (AMMONIUM PHOSPHATE SULPHATE): FACTAMFOS
20:20:0:13 is a chemical blend of 40 parts of ammonium phosphate and 60
parts of ammonium sulphate. It contains 20% N and 20% P2O5. The entire N
is in ammonical form and P is completely water soluble. In addition,
FACTAMFOS contains 13% sulphur, a secondary plant nutrient which is now
attaining great importance in the agricultural scene.FACTAMFOS 20:20:0:13,
with the granular form and non-hydroscopic and free flowing nature, have
excellent physical properties. It is ideal for application on all soils and all
crops. FACTAMFOS 20:20:0:13 can also be used for foliar application.
 FERTILIZER MIX
It consists of 5 types
 NPK MIXTURES;FACT prepares on a very large scale all the standard NPK
mixtures under the brand name 'FACTMIX' for different crops for Kerala as
stipulated by the Department of Agriculture. In addition, FACT prepares
special tailor made fertilizer mixtures of any required grade for plantation
crops like coffee, tea, rubber, etc. FACT mixtures are superior in quality with
the presence of ammoniacal nitrogen, water soluble phosphorus, and other
major nutrients like sulphur, calcium, etc.
 ROSE MIX; FACT Rose mixture is one tailor made for roses. It is a blend of
N,P together with secondary and trace element is the required form and correct
quantity specially made for roses. They are marketed in 500 gm packet. It is a
fertilizer for roses.
 VEGETABLE MIXTURE; they are marketed in 1 kg packets and this is a
special blend exclusively prepared for use of vegetables.
 GARDEN MIXTURES; they are sold in 1 kg packets and are specially
prepared for garden, both flowers and foliage types. It is a special nutrient
combination for both flowering and foliage ornamental plants. It is an
imported traded product.
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 CHEMICALS
 ANHYDROUS AMMONIA – Ammonia is one of the basis product in the

manufacture of fertilizers. FACT produces Ammonia over 99.96% purity used
mainly for the manufacture of ammonium sulphate and ammonium phosphate
.Besides it also finds use in rubber and explosive industry and refineres. It also
finds useful in pharmaceutical industry.
 SULPHURIC ACID -FACT has one of the largest plants in Asia producing
Sulphuric acid.
 CAPROLACTUM-It is the raw material for Nylon-6. The product quality of

FACT Caprolactam is among the best available in the world. Small quantities
of Nitric Acid and Soda Ash are obtained from Caprolactam Plant as by-
product.
1.4 STATEMENT OF PROBLEM

Inventory management or simply the management of stock is the focus
of the study. Better inventory management and distribution is one key business
area of any company. The company should know what to be produced and at
which warehouse the available stocks should be stored. Factors influencing
inventory demand and interaction between production planning and control
are considered as the key parameters of measuring the efficiency of
manufacturing organization. Low investment in inventory leads to stock out
situation and high investment will result in high interest burden. So the topic is
focusing to understand the different tools and techniques of inventory
management that are practicing in Fertilizers And Chemicals Travancore
Limited to measure the effectiveness and efficiency of the company.
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1.5 NEED FOR THE STUDY

The study is conducted to analyze the inventory control system of the
Fertilizers And Chemicals Travancore Limited, Udyogamandal. The
Fertilizers And Chemicals Travancore Limited, Udyogamandal is a
Government of India Enterprise has business interests in manufacturing and
marketing of fertilizers, caprolactum, engineering consultancy and fabrication
of equipment. Now a days the importance of fertilizer industry is increasing
day by day. Hence, the study becomes significant to understand the
profitability and material handling operations of the Fertilizers And Chemicals
Travancore Limited during the study period.
1.6 OBJECTIVES OF THE STUDY

The objectives of the study are given below;
Primary:
 To study and analyse the Inventory Management and control in Fertilizers

And Chemicals Travancore Limited.
Secondary:
 To understand the Inventory control measures adopted by Fertilizers And

Chemicals Travancore Limited.
 To study the trend of different types of Inventory with regard to sales using
ratios.
 To analyse the trend of Inventory, Working Capital and Sales using Trend
Analysis.
 To study the relationship of variables like sales, inventory and current assets
using correlation.
 To calculate the Economic Order Quantity
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1.7 SCOPE OF THE STUDY
 This study makes an attempt to understand the fertilizer industry in general

and the Fertilizers And Chemicals Travancore Limited, Udyogamandal in
particular.
 It helps to understand the significance of fertilizer sector and its requirements.
 The study helps to understand the inventory management of the Fertilizers
And Chemicals Travancore Limited.
 It also provides suggestions for improvement and development of fertilizer
industry in general.
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2.1 THEORETICAL FRAMEWORK

2.1.1 INVENTORY MANAGEMENT
Management of inventory assumes importance due to the fact that

investment in inventory constitutes one of the major investments in current
assets.
The term inventory refers to the stockpile of the products a firm is
offering for sale and the components that make up the product. The assets
which firms store as inventory in anticipation of need are:
(i) Raw Materials:
These represent inputs purchased and store to be converted into
finished products in future by making certain manufacturing process on the
same.
(ii) Work in Process:
These represent semi-manufactured products which need further
processing before they can be treated as finished products.
(iii) Finished Goods:
These represent the finished products ready for sale in the market.
(iv) Stores and Supplies:
These represent that part of the inventory, which does not become a
part of final product but are required for production process. They may be in
the form of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc.
Normally, they form a very minor part of total inventory and do not involve
significant investment.
Let us have a look on Different Inventory Management Views. Means
emphasis role of Inventory Management in different Sectors.
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2.1.2 INVENTORY MANAGEMENT
As the cost of logistics increases the manufacturers are looking to

inventory management as a way to control costs. Inventory is a term used to
describe unsold goods held for sale or raw materials awaiting manufacture.
These items may be on the shelves of a store, in the backroom or in a
warehouse mile away from the point of sale. In the case of manufacturing,
they are typically kept at the factory. Any goods needed to keep things running
beyond the next few hours are considered inventory.
"Inventory" to many small business owners is one of the more

visible and tangible aspects of doing business. Raw materials, goods in
process and finished goods all represent various forms of inventory. Each type
represents money tied up until the inventory leaves the company as purchased
products. Likewise, merchandise stocks in a retail store contribute to profits
only when their sale puts money into the cash register.
In a literal sense, inventory refers to stocks of anything necessary

to do business. These stocks represent a large portion of the business
investment and must be well managed in order to maximize profits. In fact,
many small businesses cannot absorb the types of losses arising from poor
inventory management. Unless inventories are controlled, they are unreliable,
inefficient and costly.
Inventory management simply means the methods you use to

organize, store and replace inventory, to keep an adequate supply of goods
while minimizing costs. Each location where goods are kept will require
different methods of inventory management. Keeping an inventory, or stock of
goods, is a necessity in retail. Customers often prefer to physically touch what
they are considering purchasing, so you must have items on hand. In addition,
most customers prefer to have it now, rather than wait for something to be
ordered from a distributor. Every minute that is spent down because the supply
of raw materials was interrupted costs the company unplanned expenses.
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2.1.3 DEFINITIONS OF INVENTORY MANAGEMENT
1. Policies, procedure and techniques employed in maintaining the optimum

number or amount of each inventory item.
2. Systems and processes that identify inventory requirements, set targets,

provide replenishment techniques and report actual and projected inventory
status.
3. Handles all functions related to the tracking and management of material. This
would include the monitoring of material moved into and out of stockroom
locations and the reconciling of the inventory balances. Also may include
ABC analysis, lot tracking, cycle counting support etc.
2.1.4 DEFINITIONS OF INVENTORY
1. Inventory”: goods that businesses intend to sell to their customers or raw

materials or in process items that will be converted into salable goods
2. “Inventory is the stock of idle resources which has economic value and is
maintained to fulfill the present and future needs of an organization”
3. In Manufacturing Organization: Inventory can be as raw materials, spare parts,

components and finished goods etc.…
4. In Service Organization: Inventory of any Bank can be broachers, forms,

pamphlets and also can be currency notes and coins. Hospitals can have
inventory as syringes, glucose bottles, medicines etc.
2.1.5 IMPORTANCE OF INVENTORY
Inventory represents one of the most important assets that most

businesses possess, because the turnover of inventory represents one of the
primary sources of revenue generation and subsequent earnings for the
company's shareholders/owners.
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The word 'inventory' can refer to both the total amount of goods
and the act of counting them. Many companies take an inventory of their
supplies on a regular basis in order to avoid running out of popular items.
Others take an inventory to insure the number of items ordered matches the
actual number of items counted physically. Shortages or overages after an
inventory can indicate a problem with theft or inaccurate accounting practices.
Possessing a high amount of inventory for long periods of time is

not usually good for a business because of inventory storage, obsolescence and
spoilage costs. However, possessing too little inventory isn't good either,
because the business runs the risk of losing out on potential sales and potential
market share as well.
2.1.6 OBJECTIVES OF INVENTORY MANAGEMENT
The basic managerial objectives of inventory control are two-fold;

first, the avoidance over-investment or under-investment in inventories; and
second, to provide the right quantity of standard raw material to the production
department at the right time. In brief, the objectives of inventory control may
be summarized as follows:
A. Operating Objectives:
(1) Ensuring Availability of Materials: There should be a continuous

availability of all types of raw materials in the factory so that the
production may not be help up wants of any material. A minimum
quantity of each material should be held in store to permit production to
move on schedule.
(2) Avoidance of Abnormal Wastage: There should be minimum possible

wastage of materials while these are being stored in the godowns or
used in the factory by the workers. Wastage should be allowed up to a
certain level known as normal wastage. To avoid any abnormal
wastage, strict control over
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(3) the inventory should be exercised. Leakage, theft, embezzlements of raw

material and spoilage of material due to rust, bust should be avoided.
(4) Promotion of Manufacturing Efficiency: If the right type of raw material

is available to the manufacturing departments at the right time, their
manufacturing efficiency is also increased.
Their motivation level rises and morale is improved.
(5) Avoidance of Out of Stock Danger: Information about availability of

materials should be made continuously available to the management so
that they can do planning for procurement of raw material. It maintains
the inventories at the optimum level keeping in view the operational
requirements. It also avoids the out of stock danger.
(6) Better Service to Customers: Sufficient stock of finished goods must be

maintained to match reasonable demand of the customers for prompt
execution of their orders. (6)Highlighting slow moving and obsolete
items of materials.
(7) Designing poorer organization for inventory management: Clear cut

accountability should be fixed at various levels of organization.
B. Financial Objectives:
(1) Economy in purchasing: A proper inventory control brings certain

advantages and economies in purchasing also. Every attempt has to make
to effect economy in purchasing through quantity and taking advantage
to favorable markets.
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(2) Reasonable Price: While purchasing materials, it is to be seen that right

quality of material is purchased at reasonably low price. Quality is not to
be sacrificed at the cost of lower price.
The material purchased should be of the quality alone which is needed.
(3) Optimum Investing and Efficient Use of capital: The basic aim of
inventory control from the financial point of view is the optimum level
of investment in inventories. There should be no excessive investment in
stock, etc. Investment in inventories must not tie up funds that could be
used in other activities. The determination of maximum and minimum
level of stock attempt in this direction.
2.1.7 IMPORTANCE OF INVENTORY MANAGEMENT
1. COUNTING CURRENT STOCK
All businesses must know what they have on hand and evaluate stock levels
with respect to current and forecasted demands. You must know what you
have in stock to ensure you can meet the demands of customers and
production and to be sure you are ordering enough stock in the future.
Counting is also important because it is the only way you will know if there is
a problem with theft occurring at some point in the supply chain. When you
become aware of such problems you can take steps to eliminate them.
2. CONTROLLING SUPPLY AND DEMAND
Whenever possible, obtain a commitment from a customer for a purchase. In

this way, you ensure that the items you order will not take space in your
inventory for long. When this is not possible, you may be able to share
responsibility for the cost of carrying goods with the salesperson, to ensure
that an order placed actually results in a sale. You can also keep a list of goods
that can easily be sold to another party, should a customer cancel. Such goods
can be ordered without prior approval. Approval procedures should be
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arranged around several factors. You should set minimum and maximum
quantities which your buyers can order without prior approval. This ensures
that you are maximizing any volume discounts available through your vendors
and preventing over ordering of stock. It is also important to require pre-
approval on goods with a high carrying cost.
3. KEEPING ACCURATE RECORDS
Any time items arrive at or leave a warehouse, accurate paperwork should be

kept, itemizing the goods. When inventory arrives, this is when you will find
breakage or loss on the goods you ordered. Inventory leaving your warehouse
must be counted to prevent loss between the warehouse and the point of sale.
Even samples should be recorded, making the salesperson responsible for the
goods until they are returned to the storage facility. Records should be
processed quickly, at least in the same day that the withdrawal of stock
occurred.
4. MANAGING EMPLOYEES
Buyers are the employees who make stock purchases for your company.
Reward systems should be set in place that encourage high levels of customer
service and return on investment for the product lines the buyer manages.
Warehouse employees should be educated on the costs of improper inventory

management. Be sure they understand that the lower your profit margin, the
more sales must be generated to make up for the lost goods. Incentive
programs can help employees keep this in perspective. When they see a
difference in their paychecks from poor inventory management, they are more
likely to take precautions to prevent shrinkage.
Each stock item in your warehouse or back room should have its own
procedures for replenishing the supply. Find the best suppliers and storage
location for each and record this information in official procedures that can
easily be accessed by your employees.
Inventory management should be a part of your overall strategic business plan.

As the business climate evolves towards a green economy, businesses are
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looking for ways to leverage this trend as part of the “big picture”. This can
mean re-evaluating your supply chain and choosing products that are
environmentally sound. It can also mean putting in place recycling procedures
for packaging or other materials.
In this way, inventory management is more than a means to control costs;

it becomes a way to promote your business.
2.1.8 SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory

with the benefits of inventory. Many small business owners fail to appreciate
fully the true costs of carrying inventory, which include not only direct costs
of storage, insurance and taxes, but also the cost of money tied up in
inventory. This fine line between keeping too much inventory and not enough
is not the manager's only concern. Others include:
• Maintaining a wide assortment of stock -- but not spreading the rapidly

moving ones too thin;
• Increasing inventory turnover -- but not sacrificing the service level;
• Keeping stock low -- but not sacrificing service or performance.
• Obtaining lower prices by making volume purchases -- but not ending up with
slow-moving inventory; and
• Having an adequate inventory on hand -- but not getting caught with obsolete
items.
• The degree of success in addressing these concerns is easier to gauge for some
than for others. For example, computing
2.1.9 ABOUT INVENTORY CONTROL

Inventory consists of the goods and materials that a retail business
holds for sale or a manufacturer keeps in raw materials for production.
Inventory control is a means for maintaining the right level of supply and
reducing loss to goods or materials before they become a finished product or
are sold to the consumer.
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Inventory control is one of the greatest factors in a company’s success or

failure. This part of the supply chain has a great impact on the company’s
ability to manufacture goods for sale or to deliver customer satisfaction on
orders of finished products. Proper inventory control will balance the
customer’s need to secure products quickly with the business need to control
warehousing costs. To manage inventory effectively, a business must have a
firm understanding of demand, and cost of inventory.
2.1.10 ADVANTAGES OF INVENTORY CONTROL:
(1) Reduction in investment in inventory.
(2) Proper and efficient use of raw materials.
(3) No bottleneck in production.
(4) Improvement in production and sales.
(5) Efficient and optimum use of physical as well as financial resources.
(6) Ordering cost can be reduced if a firm places a few large orders in place of
numerous small orders
(7) Maintenance of adequate inventories reduces the set-up cost associated with
each production Run.
INVENTORY COSTS
There are three main types of cost in inventory. There are the costs
to carry standard inventories and safety stock. Ordering and setup costs come
into play as well. Finally, there are shortfall costs. A good inventory control
system will balance carrying costs against shortfall costs.
SAFETY STOCK
Safety stock is comprised of the goods needed to be kept on hand to satisfy

consumer demand. Because demand is constantly in flux, optimizing the
Safety Stock levels is a challenge. However, demand fluctuations do not
wholly dictate a company’s ability to keep the right supply on hand most of
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the time. Companies can use statistical calculations to determine probabilities

in demand.
ORDERING COSTS
Ordering costs have to do with placing orders, receiving and

stowage. Transportation and invoice processing are also included. Information
technology has proven itself useful in reducing these costs in many industries.
If the business is in manufacturing, then to production setup costs are
considered instead.
THE COST OF SHORTFALLS
Stock out or shortfall costs represent lost sales due to lack of supply for
consumers. Sales departments prefer these numbers be kept low so that an
ample stock will always be kept.
Logistics managers prefer to err on the side of caution to reduce warehousing

costs. Shortfall costs are avoided by keeping an ample safety stock on hand.
This practice also increases customer satisfaction. However, this must be
balanced with the cost to carry goods. The best way to manage stockout is to
determine the acceptable level of customer service for the business. One can
then balance the need for high satisfaction with the need to reduce inventory
costs. Customer satisfaction must always be considered ahead of storage costs.
CYCLICAL COUNTING
Many companies prefer to count inventory on a cyclical basis to avoid the

need for shutting down operations while stock is counted. This means that a
particular section of the warehouse or plant is counted physically at particular
times, rather than counting all inventory at once. While this method may be
less accurate than counting the whole, it is much more cost effective.
Cyclical counting is preferred because it allows for operations to continue

while inventory is taken. If not for this practice, a business would have to shut
down while counts were taken, often requiring the hire of a third party or use
of overtime employees. Cyclical counting usually utilizes the ABC rule, but
there are other variations of this method that can be used. The ABC rule
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specifies that tracking 20 percent of inventory will control 80 percent of the

cost to store the goods. Therefore, businesses concentrate more on the top 20
percent and counter other goods less frequently. Items are categorized based
on three levels:
• A Category: Top valued 20 percent of goods, whether by economic or

demand value
• B Category: Midrange value items
• C Category: Cheaper items, rarely in demand
Warehouse staff can now schedule counting of inventories based on these

categories. The “A” category is counted on a regular basis while “B” and “C”
categories are counted only once a month or once a quarter.
COMMON INVENTORY VALUATION METHODS
The methods a company uses to value the costs of inventory have a direct
effect on the business balance sheets, income statements and cash flows. Three
methods are widely used to value such costs. They are First-In, First-Out
(FIFO), Last-In First-Out (LIFO) and Average Cost. Inventory can be
calculated based on the lesser of cost or market value. It can be applied to each
item, each category or on a total basis.
FIFO
FIFO operates under the assumption that the first product that is put into
inventory is also the first sold. An example of this in action can be made when
we assume that a widget seller acquires 200 units on Monday for Rs.1.00 per
unit. The next day, he spots a good deal and gets 500 more for Rs.75 per unit.
When valuing inventory under the FIFO method, the sale of 300 units on
Wednesday would create a cost of goods sold of Rs.275. That is, 200 units at
Rs1.00 each and 100 units at Rs.75 each. In this way, the first 200 units on the
income statement were valued higher. The remaining 400 widgets would be
valued at Rs.75 each on the balance sheet in ending inventory.
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LIFO
LIFO assumes instead that the last unit to reach inventory is the first sold.
Using the same example, the income statement and balance sheet would
instead show a cost of goods sold of Rs.225 for the 300 units sold. The ending
inventory on the balance sheet would be valued at Rs.350 in assets. When this
method is used on older inventories, the company’s balance sheet can be
greatly skewed. Consider the company that carries a large quantity of
merchandise over a period of 10 years. This accounting method is now using
10-year-old information to value its assets.
WEIGHTED AVERAGE
Average Cost works out a weighted average for the cost of goods sold. It takes
an average cost for all units available for sale during the accounting period and
uses that as a basis for the cost of goods sold. To site our example again, we
would calculate the cost of goods sold at [(200 x Rs.1) + (500 x Rs.75)]/700,
or Rs.821 each. The remaining 400 units would also be valued at this rate on
the balance sheet in ending inventory.
SPECIFIC IDENTIFICATION
A less commonly used, but important method to valuation is called specific

identification. This method is used for high-end items that are more easily
tracked. In some cases, this method can be used for more common items, but
less value is realized from this accounting method is such cases. This is
because powerful and detailed tracking software is required to employ specific
identification on large numbers of goods.
INFLATIONARY EFFECTS ON VALUATION
No matter how you look at it, you are still coming up with 700 widgets that
cost you a total of Rs.575. This would all be well and good if the value of
money remained static. However, market conditions change causing
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inflationary changes. When this happens, your accounting method can have a
strong impact on how healthy the business looks on income statements and
balance sheets. The affects cash flow when businesses seek credit to pay for
ongoing operations.
RISING PRICES
When prices are rising, using FIFO will show a greater value on the balance
sheet, thereby increasing tax liabilities but also improving credit scores and the
ability to borrow cash for ongoing operations. Older inventory is being used to
determine the cost of goods sold and newer inventory is being used to report
assets. LIFO decreases the value on the income statement, but can reduce the
level of depreciation you are able to take on assets. This is good for taxes but
bad for borrowing. Industries most likely to adopt LIFO are department stores
and food retailers. The method is rarely used in defenses.
2.1.10 INVENTORY MANAGEMENT TECHNIQUES

In managing inventories, the firm’s objective should be in consonance
with the wealth maximization principle. To achieve this, the firm should
determine the optimum level of investment in inventory. To deal with the
problems of inventory management effectively, it becomes necessary to be
conversant with the different techniques of inventory control. Although the
concepts involved in inventory management are production-oriented and are
not strictly financial it is important that the financial manager understand them
since they have certain built-in financial costs. The different techniques of
inventory control may be summarized as follows:
(1) Inventory level Technique
The main objective of stock control is to determine and maintain the optimum
level of stock so that there is neither shortage of any material nor unnecessary
investment in inventory. For this purpose, determination of maximum and
minimum limits of inventory and ordering level is necessary.
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(2) Maximum stock Limit: This represents the quantity of inventory above
which it should not be allowed to be kept. The main object of fixing this limit
is to ensure that unnecessary working capital is not blocked in stores. The
quantity is fixed keeping in view the disadvantages of overstocking.
RE-ORDERING LEVEL (ORDERING LEVEL)
It is the point at which if the stock of the material in stores reaches, the
storekeeper should initiate the purchase requisition for fresh supply of
material. This level is fixed somewhere between maximum and minimum
level is such a way that the difference of quantity of the material between the
reordering level and the minimum level will be sufficient to meet requirements
of production up to the time of fresh supply of the material. It is fixed after
taking into consideration the following factors:
ECONOMIC ORDER QUANTITY TECHNIQUE
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 lost in which it has to be purchased 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 type of costs: (a) ordering costs and (b)
carrying costs: The economic order quantity is that inventory level that
minimize the total of ordering and carrying costs.
EOQ = √2(annual usage in unit)(order cost)

Annual carrying cost per unit
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JUST-IN-TIME (JIT) SYSTEM:
Japanese firms popularized the just-in-time (JIT) system in the world. In a

JIT system material or the manufactured components and part 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 and other related costs of manufacturer.
The system requires perfect understanding and coordination between the

manufacturer and supplier in terms of the timing of delivery and quality of the
material. Poor quality material or complements 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 system and procedures to satisfactory meet the needs of
manufacturers
INVENTORY TURNOVER RATIO: (ITR)
In accounting, the Inventory turnover is an equation that measures the number

of times inventory is sold or used over in a period such as a year. The equation
equals the cost of goods sold divided by the average inventory. Inventory
turnover is also known as inventory turns, stock turn, stock turns, turns, and
stock turnover.
ITR = Cost of goods sold
Average inventory
 ABC ANALYSIS: (PARETO ANALYSIS)

ABC Analysis is a basic analytical management tool which enables top
management to place the effort where the result will be greatest. This
technique, popularly known as always better control or the alphabetical
approach, has universal applications in many areas of managing the inventory.
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The technique tries to analyze the distribution of any characteristic by money

value of importance in order to determine its priority.
The annual consumption analysis of any organization would indicate that a
handful of top high value items less than 10% of total number will account for
a substantial portion of about 75% of the total consumption value and these
few vital item are called A class items which need careful attention of the
materials manager. Similarly a large number of bottom items over 70% of
total number called the trival many account only for about 10% of the
consumption value and are known as the ‘C’ class. The items that lie between
the top and bottom are called the ‘B’ category item.
The following facts need to be noted with regard to ABC Analysis:
1. Through usually the inventory items are classified into three categories vise
A B and C only, but nothing prohibits a firm to undertake the analysis on the
basis of a larger categorization.
2. It is necessary for an effective ABC analysis that all the items should be
included for the Classification.
3. Through according to ABC Analysis category C gets only a simple

attention, the management should nevertheless have to be vigilant in its
approach. For example an items may be of small value but may be critical in
the sense that its non-availability hampers the production process and its
supply is irregular. The management has to be extra careful about its
inventory, even though the items figures in the category C. Thus the ABC
analysis not the ultimate exercise in inventory management, it needs
supplementing with detailed knowledge and monitoring.
4. Price of the items and their physical quantities shouldn’t be made the basis
of ABC analysis. It is rather the usage value of the items which must be used
for the purpose of classification.
 VED ANALYSIS:
The VED analysis is used generally for spare parts. The requirement and
urgency of spare parts is different from that of materials. A-B-C analysis may
not be properly used for spare parts. The demand for spares depends upon the
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performance of the plant and machinery. Spare parts are classified as: Vital
(V), Essential (E) and Desirable (D). The vital spares are a must for running
the concern smoothly and these must be stored adequately. The non-
availability of vital spares will cause havoc in the concern. The E types of
spares are also necessary but their stocks may be kept at low figures. The
stocking of D types of spares may be avoided at times. If the lead time of these
spares is less, then stocking of these spares can be avoided.
The classification of spares under three categories is an important decision. A

wrong classification of any spare will create difficulties for production
department. The classification of spares should be left to the technical staff
because they know the need, urgency and use of these spares.
 XYZ ANALYSIS:
This classification is based on the value of inventory of materials
actually held in stores at a given time. The XYZ classification is done in the
same way as ABC analysis, the difference being the actual inventory value of
items in stores instead of their estimated annual consumption value.
 FSN ANALYSIS:
It stands for Fast moving, Slow moving and Nonmoving items. The
classification is based on past consumption pattern. FSN analysis is useful to
control obsolescence of raw materials, components, tools and spare parts.
 SDE ANALYSIS:
This stands for Scarce items, Difficult to procure items and Easy to
procure items. A scarce items is one which is not easily available in the market
and reliable source may have to be developed. For example, imported items
may have to be stocked because it is difficult to procure and takes a long lead
time.
 SOS ANALYSIS:
S stands for Seasonal items and OS stands for Off Seasonal items. It
may be advantageous to buy seasonal items at low prices and keep inventory
or buy at high price during off seasons. Based on the fluctuation in price and
availability, suitable decision has to be taken regarding how much to purchase
and at what prices.
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 HML ANALYSIS:
This stands for High value, Medium value and Low value items based
on unit price of the item. For instance, a firm may decide to categories items
having unit price more than Rs. 5000 as H items. From Rs. 1000 to 5000 as M
items and below Rs. 1000 as L items. On the basis, materials management
may delegate authority to various levels of purchase officers/ managers to
authorize and sign purchase orders. Also high value items, alternative sources
of suppliers are developed.
 GOLF ANALYSIS:
This stands for Government, Open market, Local and Foreign source of
supply. For many items, import are canalized through government agencies
such as State Trading Corporations, Metals Trading Corporation, Indian Drugs
and Pharmaceuticals etc.
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2.2 LITERATURE REVIEW

Literature review is an account of what has been published on a topic
in the past. Its purpose is to inform the reader what has been established about
a topic and what the strengths and weakness are. A literature review must be
defined by a guiding concept and should not be a list of all the material that
you can find.
Inventories are the assets of the business or an organization. Generally

inventories form about 20% to 30% of the total assets of a manufacturing
enterprise. Inventories or stock require investment of funds. If the inventories
are kept in excess in an organization, it becomes a strain for the organization
and also on the other resources in the organization. If the inventory maintained
in the organization is scarce or too little, the organization or the firm is likely
to miss out on the sales.
2.2.1 ANAKHA BABY (2015): “A STUDY ON INVENTORY

MANAGEMENT”
In this review Miss. ANAKHA BABY, who has done the project about
Inventories at KSE Lt, it is constitute the most significant part of the current
assets of a large majority of companies in India. Raw materials, goods in
process and finished goods all represent various forms of inventory. Each type
represents money tied up until the inventory leaves the company as purchased
products. Because of the large size of the inventories maintained by firms, a
considerable amount of funds is required to be committed to them. It is
therefore absolutely imperative to manage inventories efficiently and
effectively in order to avoid unnecessary investments. One of the most critical
and time-consuming aspects of manufacturing is managing the tasks of
maintaining sufficient amounts of materials on hand at all times. One of the
main areas of the project is the analysis part where the data obtained from the
existing study is been utilized. For the analysis part, ABC analysis was carried
out. The norms were fixed for each of the inventory part taken into account for
39
the project. There by the inventory to be kept for the production of each model
was also arrived at.
2.2.2 MR VIJAYARAMAN. R (2013): “A REPORT ON

INVENTORY MANAGEMENT”
In this review Mr. VIJAYARAMAN .R, who has done the project
about a report Inventory at WOIL, an Inventory Management System is an
essential element in an organization. It is comprised of a series of processes
which provide an assessment of the organization’s inventory. The Inventory
Management System also aids the organization in achieving its goals and
objectives with the primary focus on adding value for the customers. The
management of inventory adds value for customers (quality, speed, flexibility,
and cost), and this is the primary consideration of the Operations Management
System. Inventory management is possibly one of the richest areas of
operations management, with many tools and techniques available to help
managers run their processes as effectively as possible.
In this project he made an analysis for Export Oriented Units (EOU)

and fixing norms for Coffee Maker, Coffee Grinder, and Grind Mill & Micro
Oven. After finishing analysis he compares between the Suggested norms and
Existing norms. He also made an analysis of Washing Machine and their
norms for different classification of Washers at WOIL. Finally he used
correlation with Statistical Tools. He also classified EOU’s & Washers
products with ABC Classification.
2.2.3 MR IRSHAD I (2010): “A STUDY ON INVETORY

MANAGEMNT OF KERALA MINERALS AND METAL
LTD KOLLAM”
He did his project at Kerala Minerals and Metal Ltd Kollam. The
objective of the study is to analyze the indigenous and imported level of stores
and spares, raw materials and chemicals, to analyze the inventory ratio and
study the conversion period, to classify the inventory items into ABC, VED,
40
and FSN. The main financial tools used in this project are ABC analysis, VED
analysis and FSN analysis. Through this project they find that the percentage
of raw materials consumption other items the highest consumed and silica
sand is the least consumed in the year 2004-05.
2.2.4 NIMISHA V K (2009): “A STUDY ON

EFFECTIVENESS OF INVENTORY MANAGEMENT IN
KELTRON COMPONENT COMPLEX LTD, KANNUR”
In this study MS NIMISHA explains that by managing the inventory it
becomes easier for the organization to meet the profit goals, shorter the cash
cycle, avoid inventory shortage, avoid excessive carrying costs for unused
inventory, and improve profitability by decreasing cash conversion and adopt
JIT system. According to this study companies need to get smart about
inventory.
Boosting financial performance is another benefit that comes from
better inventory management. Infect large number of manufacturers enjoy
savings and better performance by choosing the approach of inventory
reduction. For this company needs to maximize the cash flow and profitability
and this includes keeping a watchful discerning eye on charge in supply and
demand.
2.2.5 ASFAQUE AHMED (OCTOBER 12, 2004)

(Article from master requirement planning and master production
scheduling)
He said that most of the manufacturing company vendors have
planning and scheduling product which assume either infinite production
capacity for calculating quantities of row material and work in progress (WIP)
requirements or infinite quantities of raw material and WIP materials for
calculating production capacity. There are many problems with this approach
and how to avoid these by making sure that the product you are
41
buying indeed takes into account finite quantities of required materials as well
as finite capacities of work centers in your manufacturing facilities.
2.2.6 SILVER, EDWARD A (DEC 22, 2002) (ARTICLE

FROM PRODUCTION AND INVENTORY MANAGEMENT
JOURNAL)
This article considers the context of a population of items for which the
assumption underlying the EOQ derivation holds reasonably well. However as
is frequently the cash in practices there is an aggregate constraint that applies
to the population as a whole. Two common forms of constraints are:
1) The existence of budget to be allocated among the stocks of the items and
2) A purchasing production facility having the capability to process at most a
certain number of replenishment per year. Because of the constraint the
individual replenishment quantities cannot be selected independently.
42
3.1 RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN
Descriptive Research includes survey and fact finding enquiries of
different kinds. The major purpose of DR is the description of the state of
affairs as it exists at present. The main characteristics of this type of research
are that the researcher has no control over the variables.
Analytical research means entire research is carried out with the help
of financial data’s and with the help of statistical and financial tools, the
analysis has been done. Moreover, the researcher touched upon only
fundamental analysis part only and didn’t touch technical aspect.
3.2 DATA COLLECTION

The researcher had studied the existing system through data collection.
The data has been collected through primary sources and secondary sources.
The secondary data, are those which have already been collected by someone
else and which have already been passed through the statistical process.
Secondary data was collected from balancesheet and annual reports of the
company, journals and other books, inventory records, websites, etc.…
The primary data was collected from the discussion with the store
manager, officers of finance, account section and computer service section of
the The Fertilizers And Chemicals Travancore Limited. Direct personnel
interview method was adopted to collect information from them.
3.3 PERIOD OF STUDY

The study has been conducted for a period of five years from 2011 to
2015.
43
3.4 TOOLS AND TECHNIQUE

 Economic Order Quantity
 ABC analysis
 XYZ analysis
 Trend Analysis
 Correlation Analysis
 Ratio Analysis
 Fixed asset turnover ratio
 Current asset ratio
 Working Capital ratio
 Inventory turnover ratio
 Raw materials turnover ratio
 Finished goods turnover ratio
3.5 LIMITATIONS OF THE STUDY
 Historical data may not represent the true picture of the future.
 The limitations of the secondary sources hold for this project.
 The study had been taken only from the published information and hence
analysis can be done only on a micro basis.
 Since the complete Inventory data is not available only a few Inventory
control tools could be used.
 The limitations of the tools used for the analysis also apply.
44
4.0 ANALYSIS AND INTERPRETATION
The term “Analysis and Interpretation” means methodical

classification of data given in the financial statements and explaining the
meaning and significance of the data so classified. Following are the methods
used for analyzing efficiency and effectiveness of company’s inventory
management system:
I. Turnover ratios
II. Computation of EOQ
III. ABC Analysis
IV. XYZ Analysis
V. Trend Analysis
VI. Correlation Analysis
4.1 TURNOVER RATIOS
4.1.1 Inventory turnover Ratio:

The inventory turnover ratio indicates the number of times the
inventories are replenished or number of times a company sells its inventory
during the year. The higher the ratio, the better it is, since it indicates that the
stock is selling quickly.
Inventory Turnover Ratio = Cost of goods sold
Average inventory
Cost of goods sold = (Opening stock + Purchases) – Closing stock
Average Inventory = (Opening stock + Closing stock) /2
45
Table no 4.1.1 showing Inventory turnover Ratio
Average Inventory
Net Sales Inventory Turnover
Year (in lakh) (in lakh) Ratio
2010-11 139348 61374 2.27
2011-12 174535 75755 2.30
2012-13 152776 67445 2.26
2013-14 143993 62087 2.31
2014-15 136743 55132 2.48
Source: Annual report of FACT Ltd
46
Figure no 4.1.1 showing Inventory Turnover Ratio
INVENTORY TURNOVER RATIO

2.5
2.45
2.4
2.35
2.3
2.25
2.2
2.15
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: The inventory turnover ratio is fluctuating over years. In

the year 2014-15, the ratio is highest. The higher ratio indicates the smooth
movement of stock from the company to the market. In the year 2011-12 also
the graph showed the inventory management of the firm is good. In the
financial year 2010-11 inventory management of the firm was bad as it have
the lowest ratio.
47
4.1.2 Inventory Conversion Period:
It shows the number of days in a year is required for a firm to convert its
stocks into sales. It is calculated by dividing the number of days by inventory
turnover.
Inventory Conversion Period = Days in a year / Inventory turnover Ratio
Table no 4.1.2 showing Inventory Conversion Period
Inventory
Days in a Inventory conversion
Year year Turnover Ratio period
2010-11 365 2.27 160.75
2011-12 365 2.30 158.42
2012-13 365 2.26 161.13
2013-14 365 2.31 157.38
2014-15 365 2.48 147.16
48
Figure no 4.1.2 showing Inventory Conversion Period
Inventory conversion period(in days)

165
160
155
150
145
140
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: In the year 2010-11 the inventory conversion period is very

high. But in the year 2011-12 it is low. This shows that the inventories are
difficult to convert into sales within the shortest period. In the last year it
showed a better conversion period.
49
4.1.3 Raw Materials Turnover Ratio:
The ratio reflects the rate of utilization of raw material. However a very high
ratio is not good for the organization as it may lead to bottleneck in production
due to stock out of raw material. On the other hand a low turnover of raw
material is an indication of accumulation of inventory.
Raw materials Turnover Ratio = Raw materials Consumed during the year /
Average Raw
materials held
Table no 4.1.3 showing Raw Materials Turnover Ratio
Raw
Raw materials materials
consumed during Average Raw materials Turnover
Year the year (in lakh) held (in lakh) Ratio
2010-11 142879 13648 10.46
2011-12 174918 11158 15.67
2012-13 142464 20066 7.09
2013-14 152490 11670 13.06
2014-15 139440 7243 19.25
50
Figure no 4.1.3 showing Raw Materials Turnover Ratio
Raw materials Turnover Ratio

25
20
15
10
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: This ratio shows a fluctuating trend. In the year 2011-12 it

showed the highest ratio. But a very high ratio is not good for the organization
as it may interrupt the production due to stock out of raw materials. Therefore
in 2010-11 and 2012-12 the firm had a better inventory control. Also the 2014-
15 ratio of 19.25 indicates that the stock of raw materials held is very less than
the raw materials consumed. Hence the company has to increase the stock of
Raw materials to avoid the interruption of production process.
51
4.1.4 Raw Materials Holding Period:
The holding period must not be too high or too low. A high holding period
leads to accumulation of Raw material causing high carrying cost. Whereas
too low holding period leads to high ordering cost and there may be
interruption in the production process.
Raw materials holding period = Days in a year/Raw materials Turnover Ratio
Table no 4.1.4 showing Raw Materials Holding Period
Raw material
Days in a Raw material holding
Year year Turnover Ratio period(in days)
2010-11 365 10.46 34.86
2011-12 365 15.67 23.28
2012-13 365 7.09 51.41
2013-14 365 13.06 27.93
2014-15 365 19.25 18.95
52
Figure no 4.1.4 showing Raw Materials Holding Period
Raw material holding period(in days)

60
50
40
30
20
10
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: Raw materials holding period is inversely proportional to

the raw material turnover ratio. In 2014-15 raw materials holding period is
minimum and in 2012-13 the ratio is maximum. As too low or too high
holding period is not good for the company, the better holding period are
during 2010-11, 2011-12 and 2013-14.
53
4.1.5 Finished Goods Turnover Ratio:
The ratio reflects the rate of conversion of finished goods into sales.
Finished goods turnover ratio = Net sales / Average stock of Finished Goods
Table no 4.1.5 showing Finished Goods Turnover Ratio
Average
stock of Finished
Finished goods
Net Sales Goods Turnover
Year (in lakh) (in lakh) Ratio
2010-11 139348 37743 3.69
2011-12 174535 32798 5.32
2012-13 152776 38127 4.00
2013-14 143993 27189 5.29
2014-15 136743 31246 4.37
54
Figure no 4.1.5 showing Finished Goods Turnover Ratio
Finished goods Turnover Ratio

6
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: Finished goods turnover ratio is higher in the year 2011-

12 because of low average finished goods. The table shows that the ratio the
ratio is fluctuating. The lowest ratio in the year 2010-11. Therefore in this year
the average finished goods are higher which leads to blocking up of finished
products results in the interruption of production.
55
4.1.6 Finished Goods Holding Period:
A high holding period is not good from the organizations point of view as the
same leads to higher working capital.
Finished goods holding Period = Days in a year / Finished goods turnover

ratio
Table no 4.1.6 showing Finished Goods Holding Period
Finished
goods
Days in a Finished goods holding
Year year turnover ratio Period
2010-11 365 3.69 98.86
2011-12 365 5.32 68.58
2012-13 365 4.00 91.08
2013-14 365 5.29 68.91
2014-15 365 4.37 83.40
56
Figure no 4.1.6 showing Finished Goods Holding Period
Finished goods holding Period

120
100
80
60
40
20
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: This ratio shows a fluctuating trend. Difference in the

value of the finished goods holding period is due to difference in the value of
finished goods turnover ratio. Among 5 years finished goods holding period is
maximum in the year 2010-11 and minimum in 2011-12. The period is
showing a reducing tread which is a good sign for the company.
57
4.1.7 Inventory to Current Asset Ratio
Inventory to Current Asset Ratio reveals how much the contribution of

inventory to the current asset in the organization. This helps to decide in
advance the amount required to be invested in the inventory.
Inventory to Current Asset = (Inventory / Current Asset)*100
Table no 4.1.7 showing Inventory to Current Asset Ratio
Inventory (in Current Asset (in

Years Ratio in %
lakh) lakh)
2010-11 61374 142722 43.00
2011-12 75755 157751 48.02
2012-13 67445 136313 49.47
2013-14 62087 154205 40.26
2014-15 55132 131832 41.81
58
Figure no 4.1.7 showing Inventory to Current Asset Ratio
Inventory to Current Asset Ratio in %

60
50
40
30
20
10
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: The inventory to current asset ratio shows increasing trend

till 2012-13. But in the year 2013-14 it decreased to 40.26%. Although the
ratio showing a decreasing trend the percentage of inventory to current asset is
in a higher side i.e., almost 40%.
59
4.1.8 Inventory to Working Capital
A firm is financially sound if its amount of inventory does not exceed the
amount of working capital. This ratio is calculated to know whether there is
any overstock in the firm. It is wise to reduce the level of asset tied up in
working capital since each dollar freed is a dollar that can be used to pay down
long-term debt, repurchase share etc.
Inventory to working capital = Inventory/Working Capital
Table no 4.1.8 showing Inventory to Working Capital Ratio
Average Working
Inventory Capital (in Ratio in
Year (in lakh) lakh) %
2010-11 61374 18565 3.30
2011-12 75755 25132 3.01
2012-13 67445 -12274 -5.49
2013-14 62087 -41168 -1.50
2014-15 55132 -79563 -0.69
60
Figure no 4.1.8 showing Inventory to Working Capital Ratio
Inventory to Working Capital Ratio in %

4
3
2
1
0
2010-11 2011-12 2012-13 2013-14 2014-15
-1
-2
-3
-4
-5
-6
Interpretation: Inventory to working capital ratio analysis shows the

proportion of inventory is more when compared to working capital. The
proportions are high in the year 2010-2011 and lower in the year 2012-2013
and in 2013-2014. The working capital has become negative during 2012-13,
2013-14 and 2014-15. It can be said that either the current asset has to be
increased or current liability has to be decreased in order to make the working
capital positive. Since inventory from a major position of Current Asset, the
company has to take steps to reduce the Inventory component of the Current
Asset.
61
4.2 Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is the order size at which the total
cost, comprising order cost and carrying cost, is the least.
EOQ = √2CO/I
Where, C= Annual consumption of Material
O= Cost of placing one order
I= Annual carrying cost of one unit
4.2.1 EOQ of Naphtha
Table no 4.2.1 showing EOQ of Naphtha
Annual Ordering EOQ

Consumption Cost (per CarryingCost (metric
Year (metric ton) ton) (per ton) ton)
355.
2010-11 7039.27 1350 150 95
359.
2011-12 8147.54 1350 170 72
439.
2012-13 11023.13 1750 200 2
335.
2013-14 6492.58 1300 150 46
62
Figure no 4.2.1 showing EOQ of Naphtha
EOQ of Naphtha
450
400
350
300
250
200
150
100
50
0
2010-11 2011-12 2012-13 2013-14
Interpretation: The EOQ of naphtha showed a varying trend. In the year

2013-14 it showed comparatively a better position as the ordering cost (1300)
and carrying cost (150) are minimum and the EOQ is 335.46.
63
4.2.2 EOQ of Sulphur
Table no 4.2.2 showing EOQ of Sulphur
Annual
Consumption Ordering Cost Carrying Cost EOQ (metric
Year (metric ton) (per ton) (per ton) ton)
2010-11 15673.482 2350 120 783.49
2011-12 17275.246 2350 135 775.52
2012-13 19541.713 2300 120 865.5
2013-14 14032.144 2300 120 733.42
64
Figure no 4.2.2 showing EOQ of Sulphur
EOQ of Sulphur
880
860
840
820
800
780
760
740
720
700
680
660
2010-11 2011-12 2012-13 2013-14
Interpretation: The EOQ of Aluminium Sulphate also showed a

fluctuating trend. In the year 2012-13 the graph shows a better EOQ. Because
the ordering cost (2300) and carrying cost (120) are the lowest and EOQ is the
maximum (865.50).
65
4.2.3 EOQ of Ammonia
Table no 4.2.3 showing EOQ of Ammonia
Annual
Consumption Ordering Cost Carrying Cost EOQ
Year (metric ton) (per ton) (per ton) (metric ton)
2010-11 1521.691 1350 85 219.85
2011-12 1204.561 1300 75 204.35
2012-13 1179.771 1300 75 202.24
2013-14 5746.763 1400 125 358.78
66
Figure no 4.2.3 showing EOQ of Ammonia
EOQ of Ammonia
400
350
300
250
200
150
100
50
0
2010-11 2011-12 2012-13 2013-14
Interpretation: The carrying cost Ammonia in the 2012-13 is minimum.

But the corresponding EOQ is not the maximum in the year 2012-13. The
carrying cost and the corresponding EOQ is maximum in the year 2013-14.
This shows that inventory control system can be made better for the item
Ammonia.
67
4.2.4 EOQ of Sulphuric Acid
Table no 4.2.4 showing EOQ of Sulphuric Acid
Annual
Consumption Ordering Cost Carrying EOQ
Year (metric ton) (per ton) Cost (per ton) (metric ton)
2010-11 519.752 1300 130 98.25
2011-12 574.642 1350 130 109.24
2012-13 418.256 1300 120 95.19
2013-14 735.331 1350 150 115.04
68
Figure no 4.2.4 showing EOQ of Sulphuric Acid
EOQ of Sulphuric Acid
120
100
80
60
40
20
0
2010-11 2011-12 2012-13 2013-14
Interpretation: Carrying cost of Sulphuric Acid is minimum in the year

2012-13. Carrying cost is maximum (1350) in the year 2013-14. So that
corresponding EOQ (115.04) is also maximum.
69
4.2.5 EOQ of Rock Phosphate
Table no 4.2.5 showing EOQ of Rock Phosphate
Annual Ordering
Consumption Cost (per Carrying Cost EOQ
Year (metric ton) ton) (per ton) (metric ton)
2010-11 17994.562 1250 75 774.47
2011-12 19002.874 1350 90 755.04
2012-13 20795.326 1400 100 763.06
2013-14 18450.434 1300 90 730.07
70
Figure no 4.2.5 showing EOQ of Rock Phosphate
EOQ of Rock Phosphate
780
770
760
750
740
730
720
710
700
2010-11 2011-12 2012-13 2013-14
Interpretation: In the year 2010-11 the carrying cost (75) & ordering cost
(1250) are minimum and the EOQ (774.47) is maximum. Therefore in the year
2010-11 Rock Phosphate have the better EOQ.
71
4.3 Inventory Control Techniques
4.3.1 ABC Analysis

One of the widely used techniques for control of inventories is the ABC
(Always Better Control) analysis. The objective of ABC control is to vary the
expenses associated with maintaining appropriate control according to the potential
savings associated with a proper level of such control.
The ABC analysis uses this principle to divide inventories in 3 classes according to
funds usage;
‘A’ items; which represent about 10% of the total inventory range and
account for almost 70% of the usage value, call for a light control system. Order
quantities and order points are carefully determined. Close attention is paid to record
accurately and variables can be reviewed periodically.
‘B’ items which constitute about 20% of the total inventory ranges and
account for 20% of the annual usage value, requires normal controls. Variables can be
reviewed periodically.
‘C’ items are the remaining 70% of the inventory which involve only about
10% of the usage value relatively loose controls and less frequent reviews sufficient
in their case.
72
Table no 4.3.1 showing ABC Analysis
Category No.of items Percentage of items

A 207 7.885714286
B 370 14.0952381
C 2048 78.01904762
Total 2625 100
Interpretation: Here 78.01% of inventory belongs to group C, 14.09% of

inventory belongs to group B and 7.88% of inventory belongs to group A.
73
4.3.2 XYZ Analysis

This classification is based on the value of inventory of materials
actually held in stores at a given time. The XYZ classification is done in the
same way as ABC analysis, the difference being the actual inventory value of
items in stores instead of their estimated annual consumption value.
Table no 4.3.2 showing XYZ Analysis
Percentage of
Category No.of items items
X 1369 8.857974765
Y 1942 12.56551278
Z 12135 78.51827887
Total 15455 100
Interpretation: Here 78.51% of inventory belongs to group Z, 12.56% of

inventory belongs to group Y and 8.85% of inventory belongs to group X.
74
4.4 TREND ANALYSIS
The financial statement may be analyzed by computing trends by series of

increase. This method determines the direction upwards or downwards and involves
the computation of the percentage relationship that each statement item bears to the
same item in base year. One year is taken as the base year. Usually, the first year is
taken as the base year.
Trend Analysis is the practice of collecting information and attempting to

spot a pattern, or trend, in the information. Although trend analysis is often used to
predict future events, it could be used to estimate uncertain events in the past.
Trend percentage = current year amount/ Base year amount*100
4.4.1 TREND ANALYSIS FOR INVENTORY
Table no 4.4.1 showing Trend Analysis for Inventory
Average Inventory Trend

Year (in lakh) Percentage
2010-11 61374 100
2011-12 75755 123.43
2012-13 67445 89.03
2013-14 62087 92.05
2014-15 55132 88.79
75
Figure no 4.4.1 showing Trend Analysis for Inventory
Trend Percentage for Inventory

140
120
100
80
60
40
20
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: The analysis shows that there is an increase in inventory

from 2010-2011 then there is decrease in working capital till 2014-15.
76
4.4.2 TREND ANALYSIS FOR SALES
Table no 4.4.2 showing Trend Analysis for Sales
Trend
Year Net Sales (in lakh) Percentage
2010-11 139348 100
2011-12 174535 125.25
2012-13 152776 87.53
2013-14 143993 94.25
2014-15 136743 94.96
Figure no 4.4.2 Showing Trend Analysis for Sales
Trend Percentage for Sales

140
120
100
80
60
40
20
0
2010-11 2011-12 2012-13 2013-14 2014-15
Interpretation: The analysis shows that there is a fluctuating effect on the

amount of net sales. It is highest in the year 2011-2012.
77
4.4.3 TREND ANALYSIS FOR WORKING CAPITAL
Table no 4.4.3 showing Trend Analysis for Working Capital
Working Capital (in Trend

Year lakh) Percentage
2010-11 18565 100
2011-12 25132 135.37
2012-13 -12274 -48.83
2013-14 -41168 -335.40
2014-15 -79563 -193.26
Figure no 4.4.3 showing Trend Analysis for Working Capital
Trend Percentage for Working Capital

400
350
300
250
200
150
100
50
0
2010-11 2011-12 2012-13 2013-14 2014-15
-50
-100
Interpretation: The trend analysis of working capital shows a vast decrease

in the year 2012-2013. The trend percentage on working capital has a huge
increase on the year 2013-14 and then decreases rapidly.
78
4.5 CORRELATION ANALYSIS

Correlation refers to the relationship between any two or more
variables. The correlation expresses the relationship or interdependence of two
set of variables upon each other in such a way that the change in value of one
variable are in sympathy with the change in another variable. Correlation co-
efficient is a numerical measurement showing degree of correlation between
two variables.
Correlation analysis helps to indicate the degree of relationship
between two variables. There are so many methods used for measuring
correlation.
Degree of correlation
Correlation exists in various degrees:
 Perfect positive correlation
If it is perfect correlation, an increase in one variable is always
followed by a corresponding and proportional increase.
 Perfect negative correlation
It is negative perfect correlation, if a decrease in one variable is always
followed by a corresponding and proportional increase.
Correlation for the concern

The present section aims at analyzing the correlation co-efficient under
the following combination of variables to study the relationship existing
between them.
1. Relationship between sales and inventory.

2. Relationship between inventory and working capital.
3. Relationship between working capital and sales.
79
4.5.1 RELATIONSHIP BETWEEN SALES AND

INVENTORY
Table no 4.5.1 showing Relationship between Sales and

Inventory
Average
Year Net Sales Inventory
2010-11 139348 61374
2011-12 174535 75755
2012-13 152776 67445
2013-14 143993 62087
2014-15 136743 55132
TESTING OF HYPOTHESIS
Null Hypothesis (H0): There exists no relationship between Sales and

Inventory.
Alternative Hypothesis (Ha): There exists a relationship between Sales and

Inventory.
Correlations
Inv
ent Sal
ory es
Inv Pearson .96

1
ent Correlation 6**
ory Sig. (2-tailed) .00
7
N 5 5
Sal Pearson .96
1
es Correlation 6**
Sig. (2-tailed) .00

7
N 5 5
**. Correlation is significant at the 0.01 level (2-tailed).
80
Interpretation: The table shows the relationship between inventory and

sales, which means a strong correlation between these two variables is .966.
This indicates that these two variables have positive correlation. That is
inventory and sales changes in the same direction.
Thus, reject Null Hypothesis (H0)
81
4.5.2 RELATIONSHIP BETWEEN WORKING CAPITAL

AND SALES
Table no 4.5.2 showing Relationship between Working Capital

and Sales
Working
Year Net Sales Capital
2010-11 139348 18565
2011-12 174535 25132
2012-13 152776 -12274
2013-14 143993 -41168
2014-15 136743 -79563
Null Hypothesis (H0): There exists no relationship between Working Capital

and Sales.
Alternative Hypothesis (Ha): There exists a relationship between Working

Capital and Sales.
Correlation
Sales1 WC1
Sales1 Pearson .61

1
Correlation 8
Sig. (2-tailed) .26

7
N 5 5
WC1 Pearson .61
1
Correlation 8
Sig. (2-tailed) .26

7
N 5 5
82
Interpretation: The table shows the relationship between working capital

and sales, which means the correlation between these two variables is .618.
This indicates that these two variables have positive correlation. That is
inventory and sales changes in the same direction.
83
4.5.3 RELATIONSHIP BETWEEN INVENTORY AND

WORKING CAPITAL
Table no 4.5.3 showing Relationship between Inventory and

Working Capital
Average Working
Year Inventory Capital
2010-11 61374 18565
2011-12 75755 25132
2012-13 67445 -12274
2013-14 62087 -41168
2014-15 55132 -79563
Null Hypothesis (H0): There exists no relationship between Inventory and

Working Capital.
Alternative Hypothesis (Ha): There exists a relationship between Inventory

and Working Capital.
Correlations
Inventory1 WC
Inventory1 Pearson .76

1
Correlation 0
Sig. (2-tailed) .13

6
N 5 5
WC Pearson
.760 1
Correlation
Sig. (2-tailed) .136
N 5 5
84
Interpretation: The table shows the relationship between inventory and

working capital, which means a strong correlation between these two variables
is .760. This indicates that these two variables have positive correlation. That
is inventory and working capital are changed in the same direction.
85
5.1 FINDINGS, SUGGESTIONS AND CONCLUSION

5.1.1 FINDINGS
 There are four types of investors in operating divisions: General stores
(indicating and imports), spares (indigenous and imports), packing materials
and raw materials. The inventory control policies given here pertain mainly to
generate stores and spares.
 The company follows only two inventory techniques named ABC and XYZ
analysis. The company is planning to do FSN analysis for coming years.
 Stock verification is done by Physical Stock Verification Team (PSVT)
attached to finance department. ‘A’ and ‘B’ items are verified once in a year
and ‘C’ items are verified once in every two years. For those items which are
not covered by ABC analysis, is based on XYZ analysis and in this ‘X’ and
‘Y’ items are verified once in a year and ‘Z’ items are once in every two years.
 From the classification A classes are those whose unit value is more than Rs
1,00,000 and constitutes 8% of the total value. B class are those whose unit value is
between Rs 20,000-1,00,000 constitutes 14% of the total value and C classes are
those whose unit value is less than Rs 20,000 constitutes 78% of the total value.
 From the classification X class items represents 9% of the stock value, Y class
items fall between 10% and 80% of the annual stock and Z class with the
remaining 79%.
 Spares which do not undergo sufficient wear and tear requiring replacement
during the normal working of the equipment but which are required to be
stocked to safeguard the high downtime cost are classified as insurance spares.
The list of insurance is reviewed once in 2 years and approved by Division
Head.
 The inventory turnover ratio is fluctuating over years. The higher ratio
indicates the smooth movement of stock from the company to market. In the
year 2014-15, the ratio is highest.
86
 In the year 2010-11 the inventory conversion period is very high. But in the
year 2011-12 it is low. This shows that the inventories are easily converted into
sales within the shortest period. In the last year it showed a better conversion
period.
 This ratio shows a fluctuating trend. In the year 2011-12 it showed the highest
ratio. But a very high ratio is not good for the organization as it may interrupt
the production due to stock out of raw materials. Hence the company has to
increase the stock of Raw materials to avoid the interruption of production
process.
 The inventory to current asset ratio shows increasing trend till 2012-13. But in
the year 2013-14 it decreased to 40.26%. Although the ratio showing a
decreasing trend the percentage of inventory to current asset is in a higher side
i.e., almost 40%.
 Inventory to working capital ratio analysis shows the proportion of inventory is
more when compared to working capital. It can be said that either the current
asset has to be increased or current liability has to be decreased in order to
make the working capital positive. Since inventory from a major position of
Current Asset, the company has to take steps to reduce the Inventory
component of the Current Asset.
 The EOQ of Naphtha and Aluminium Sulphate showed a fluctuating trend.
EOQ of Ammonia and Sulphuric Acid shows an increasing trend. At the same
time EOQ of Rock Phosphate decreasing year by year.
 Trend Analysis of inventory and sales showed an increasing trend in 2010-11
then the percentage become decreased. But the trend analysis of working
capital shows a vast decrease in the year 2012-13. The trend percentage on
working capital has a huge increase on the year 2013-14 and then decreases
rapidly.
 Correlation between sales and inventory, inventory and working capital &
working capital and sales indicates positive correlation. That means the
variables are changed in the same direction.
87
5.1.1.1 OBSERVATION AND RECOMMENDATIONS

PERTAINING TO UDYOGAMANDAL STORES
■ General lighting is to be improved. The tracks area is dark and so taking

materials from the track is very difficult.
■ The store is generally clean and has adequate space in the racks.
■ The racks also need shot blasting and painting.
■ The store building roof is leaking and need maintenance. The items kept on
the floor needs rearrangements with proper demarcation and panting.
■ The store have no basic space problem at present. Scientific rearrangement
and better preservation is needed and must follow the storage and preservation
system very strictly as given in the manual.
■ In the store there is only very little material handling equipment. This needs
considerable improvement.
■ The store facing lack of space in the open yard is a problem. The receiving
section also has space problem.
■ Inadequate human resource for store keeping can be overawed with recruiting
adequate manpower.
88
5.1.2 SUGGESTIONS
 The inventory turnover ratio is fluctuating over years. The higher ratio
indicates the smooth movement of stock from the company to market. So it is
better to maintain the same.
 Inventory conversion period is very high. This shows that the inventories are
difficult to convert into sales within the shortest period. So the company
should reduce the inventory conversion period.
 The company is only following ABC and XYZ inventory techniques. But if
they follow FSN also the inventory can be still controlled better.
 Inventory to working capital ratio analysis shows the proportion of inventory is more
when compared to working capital. It can be said that either the current asset has to
be increased or current liability has to be decreased in order to make the working
Capital positive. Since inventory form a major portion of Current Asset, the company
has to take steps to reduce the Inventory component of the Current Asset.
 The EOQ of Naphtha and Aluminium Sulphate shows a fluctuating trend. EOQ
of Ammonia and Sulphuric Acid shows an increasing trend. At the same time
EOQ of Rock Phosphate decreasing year by year. This indicates the
fluctuations in carrying and ordering costs. The company had to place orders
for these items based on the need considering the EOQ.
 Trend Analysis of inventory and sales shows an increasing trend in 2010-11
then the percentage decreased. But the trend analysis of working capital shows
a vast decrease in the year 2012-13. The trend percentage on working capital
has a huge increase on the year 2013-14 and then decreases rapidly. It is
because of the lack of working capital.
 Correlation between sales and inventory, inventory and working capital &
working capital and sales indicates positive correlation. That means the
variables are changed in the same direction. Hence the company has to take
more efforts on Inventory control since it has a direct impact on sales and
working capital.
 Once equipment is scrapped on account of the expiry of its life/technological
change or other reasons, the entire spares pertaining to that equipment be
disposed of along with the equipment without any delay.
89
 The shortage/damage as well as their obsolescence due to various shall be

noted in stock taking sheets and the quarterly report submitted to the
management for necessary action.
 Bearing/PVC/rubber items etc. have shelf life and will lose their quality if
stores for a long period without use.
 FACT being a producer of chemicals, many items kept in stores including
the storage racks are excessively rusted in spite of precautionary measures
taken by the company from time to time.
 Since there is lack of sufficient space in UD for bulky items, additional
godowns are recommended.
 Items in the stores can be rearranged. After the disposal of obsolete items,
the items lying in the open yard can be moved inside the store.
 There is deficiency in manpower for efficiently managing receiving,
holding and disposing. Hence more manpower should be recruited by the
company.
90
5.1.3 CONCLUSION
A better inventory management will be helpful in solving the problems
that the company is facing with respect to inventory and will pave way for
reducing the huge investment or blocking of money in inventory. From the
analysis we can conclude that the company can follow the economic order
quantity (EOQ) for optimum purchase and it can maintain safety stock for its
components in order to avoid stock-out conditions & help in continuous
production flow. This would reduce the cost and enhance the profit. Also there
should be tight control exercised on stock levels based on ABC and XYZ
analysis. The company is not following FSN analysis as such. If they could
properly implement and follow the norms and techniques of inventory
management, they can enhance the profit with minimum cost.
91
BIBLIOGRAPHY
BOOKS
1. Inventory Management, K. Shridhar Bhat, Himalaya Publishing House.
2. Financial Management, Prassana Chandra, Tata McGraw Hill Publications.
3. Materials Management, P. Gopalakrishnan
4. Financial Management, Khan and Jain, Tata McGraw Hill Publications.
REPORTS
1. Annual Report of the FACT Ltd, Udyogamandal.

2. Financial Statements (FY 2010-11, 2011-12, 2012-13, 2013-14, 2014-15)
WEBSITES
 WWW.WIP.COM
 WWW.Wikipedia.com
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FERTILISERS AND CHEMICALS TRAVANCORE LIMITED INVENTORY MANAGEMENT

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THE FERTILISERS AND CHEMICALS TRAVANCORE LIMITED

Financial Management is concerned with the duties of the financial

They perform such varied task, as budgeting, financial forecasting, cash

They are normally semi-finished goods that are at various stages of

The aspects covered are:

As a matter of fact, the inventory management techniques are a part of

1.1.1 NEED TO HOLD INVENTORIES

1.1.1.1 TRANSACTION MOTIVE:

1.1.1.2 PRECAUTIONARY MOTIVE:

1.1.1.3 SPECULATIVE MOTIVE:

1.2 INDUSTRY PROFILE

1.2.1 INDUSTRY PROFILE

Fertilizer is generally defined as “any material organic or inorganic, natural or

The fertilizer industry has played a significant role in the development of

Agriculture is the backbone of Indian economy still holds its relative

Six industries in India have been identified as energy intensive industry.

The installed capacity as on 30-01-2013 has reached level of 121.10 lakh MT

fertilizer production capacity in the country has been achieved as a result of a

1.2.1.1 Investment in Fertilizer Industry

Fertilizer production is capital intensive and presently the cost of production

Government is also considering dis-investment of its equity of public sector

As India does not have potential rock phosphate reserve, it is completely

1.2.1.2 INTERNATIONAL SCENARIO

1.2.1.3 NATIONAL SCENARIO

71% of the total fertilizer consumption during 1994-1995 was of the

1.2.1.4 STATE SCENARIO

1.3 COMPANY PROFILE

FACT a Government of India Enterprise has business interests in

1.3.2 COMPANY HISTORY

procurement, project management, site supervision and commissioning of new

FACT Engineering Works was established on 13th April 1966 as a unit to

FACT set up 900 TPD Ammonia Plant at Udyogamandal at a cost of 638

1.3.4 COMPANY VISION & MISSION

1.3.4.3 CORPORATE OBJECTIVES

1.3.5 DIVISIONS OF FACT

1.3.5.1 UDYOGAMANDAL COMPLEX

FACT Udyogamandal Plant, the oldest of FACT, which started production of

As a replacement to the existing high energy consuming old Ammonia plants

FACT manufactures Caprolactam, the raw material for Nylon-6 which is

The Caprolactam Plant also produces 2, 25,000 tonnes of Ammonium

1.3.5.2 COCHIN DIVISION

Cochin Division is an ISO 14001:2004 certified company for Environment

1.3.5.3 FACT ENGINEERING AND DESIGN

Established in 1965, FEDO has been evolved into an Engineering power

FEDO has been in technical association with world-renowned consultants and

In June 1995, FEDO became the first Engineering Consultancy Organization

1.3.5.4 MARKETING DIVISION

FACT has been a pacesetter in fertilizer marketing. The marketing network of

1.3.5.5 FACT ENGINEERING WORKS

FACT Engineering Works (FEW), the Fabrication and Engineering Division

acquired in the assets of M/S. Giovanola Binny at Palluruthy, Cochin and is

Present range of equipment fabricated by FEW include items like class 1

Prject wing of FEW undertakes design engineering fabrication and erection of

1.3.6 PRODUCT AND PRODUCT MIX

FACT manufacturing straight fertilizers, complex fertilizers, fertilizer

 ANHYDROUS AMMONIA – Ammonia is one of the basis product in the

 CAPROLACTUM-It is the raw material for Nylon-6. The product quality of

1.4 STATEMENT OF PROBLEM

1.5 NEED FOR THE STUDY

1.6 OBJECTIVES OF THE STUDY

 To study and analyse the Inventory Management and control in Fertilizers

 To understand the Inventory control measures adopted by Fertilizers And

1.7 SCOPE OF THE STUDY