CHAPTER: 1

INTRODUCTION

1.1 Background of the study

Inventory management is the supervision of non-capitalized (inventory) and stock items. A
component of supply chain management, inventory management supervises the flow of goods
from manufacturers to Warehouses and from these facilities to point of sale. A key function
of inventory management is to keep described record of each new or returned product as it
enters or leaves a warehouse or point of sale. Inventories make possible the smooth and
efficient operation of manufacturing organizations by decoupling individual segments of the
total operation. Purchased parts inventory permits activities of the purchasing and supply
department personnel to be planned, Controlled and concluded somewhat independently of
shop-product operations. These inventories allow additional flexibility for supplies in
planning, producing and delivering in order for a given product's part.

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 1.2 Conceptual Framework of the Study

Inventory control is vitally important to almost every type of business, whether product or
service oriented. Inventory control touches almost every facets if operations. A proper
balance must be struck to maintain proper inventory with the minimum financial impact on
the customer. Inventory control is the activities that maintain stock keeping items at desired
levels. In manufacturing since the focus is on physical product, inventory control focus on
material control.

“Inventory” means physical stock of goods, which is kept in hands for smooth and efficient
running of future affairs of an organization at the minimum cost of funds blocked in
inventories. The fundamental reason for carrying inventory is that it is physically impossible
and economically impractical for each stock item to arrive exactly where it is needed, exactly
when it is needed. Inventory management is the integrated functioning of an organization
dealing with supply of materials and allied activities in order to achieve the maximum co-
ordination and optimum expenditure on materials.

Inventory control is the most important function of inventory management and it forms
the nerve center in any inventory management organization. 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.

Management is very critical about any shortage of inventory items required for production.
Any increase in the redundancy of machinery or operations due to shortage of inventory may
lead to production loss and its associated costs.

Inventory management is the integrated functioning of an organization dealing with supply of

materials and allied activities in order to achieve the maximum co-ordination and optimum
expenditure on materials. Inventory control is the most important function of inventory
management and it forms the nerve center in any inventory management organization. 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.

2
TYPES OF INVENTORIES
A manufacturing firm generally carries the following types of inventories:
1) Raw Materials.
2) Bought out parts.
3) Work-in-process inventory (WIP).
4) Finished goods inventories.
5) Maintenance, repair and operating stores.
6) Tools inventory.
7) Miscellaneous inventory.
8) Goods in transit.
9) Goods for resale.
10) Scrap Material.

COSTS ASSOCIATED WITH INVENTORY

1) Carrying cost
2) Shortage cost
3) Cost of financing
4) Cost of ordering
5) Cost of stock out
6) Production cost
7) Capital cost

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 1.3 COMPANY PROFILE

COMPANY OVERVIEW

Incorporated in the year 1987, Allengers Medical Systems Ltd. is headquartered at

Chandigarh, India, and is one of the leading manufacturers and exporters of a wide range of
medical diagnostic equipment comprising X-ray systems, DR systems, DSA systems, C-
arms, Cathlabs, Remote controlled RF table, Mammography, Lithotripters, OPG, MPM,
ECG, EEG, EMG, PSG, etc.

Known for functionally superior and cost-effective nature, all the products offered by us are
manufactured using finest-quality raw material. By virtue of our quality, system and safety
standards we have certifications like CE, ISO 9001:2008, ISO 13485:2012, AERB and BIS
for our largest product range which caters to various medical applications like: Radiology,
Cardiology, Orthopaedics, Gastroenterology, Urology, Neurology, Software, etc.

At Allengers, product development is a constant process and we are India’s only company
to introduce the nation’s first Mobile Digital Radiography system. What drives our team of
skilled professionals to put in relentless efforts is their quest to serve the healthcare sector
with excellence. On account of their dexterity to deliver better than the best of
services/solutions, we have been successfully catering to the needs of our global clientele.
Our team of experts is committed to work within a fixed time frame using the brand’s modern
manufacturing and testing facilities, spread over an area of 45,000 sqm.

True success is not achieved by individual glory but by virtue of the faith that our
customers have had in us, which encouraged us to continuously strive to bring accolades in
various realms, viz. Quality, Outstanding performances, Export excellence, Customer
satisfaction, Leadership, etc. These accolades were given by various National and
International bodies like the Ministry of MSME, PHD Chamber, Export Council, etc. But all
this would not have been possible without the continuous encouragement, feedbacks and
support we kept on having from the medical fraternity, which allowed us to reach the desired
outcome of being recognized as a brand committed to quality.

4
 The brand has been enjoying almost 36.5% share in the Indian market and has been
reporting Compounded Annual Growth Rate of 27% for past five years. Over the past 10
years, its market credibility has helped it build a network of exporting to over 70 countries
across the globe and 43 sales and service centers in India, which further aided in delivering
after-sales services in an efficient manner.
By virtue of the customers’ trust, Allengers has entered into the 27th year of its
journey to excellence, which has enabled it to catapult to the topmost position in India and
truly making it into “An Indian MNC”.

Certifications and Accreditations

By virtue of our quality, system and safety standards, we have certifications like CE,
ISO 9001:2008, ISO 13485:2012, AERB and BIS for our largest product range, which caters
to various medical applications like Radiology, Cardiology, Orthopaedics, Gastroenterology,
Urology, Neurology, Software, etc.

CE: CE marking signifies that the product conforms to all EC directives that apply to it, such
as safety, health, and environmental protection, and has had them examined by a notified
conformity assessment body.
ISO: With regards to medical devices, there is no standard that better represents the
requirements for a comprehensive management system than an ISO that complies with the
Medical Device Directives.
AERB: All our X-ray based models adhere to AERB radiation safety norms in design,
installation and operation of X-ray equipment made for medical diagnostic purposes.
BIS: Through the BIS (Bureau of Indian Standards- A National Standards Body of India), we
adhere to their quality, safety and product reliability norms.

Achievements & Strengths

We take pride in sharing some of the achievements that we have achieved so far from which
we frequently draw our strengths!

5
 The Only Indian medical equipment manufacturing company bestowed with
“National Award for Quality Products”• from The Prime Minister of India on 1st
March 2014.
 The Only Indian medical equipment manufacturing company bestowed with
“National Award for Outstanding Entrepreneurship” from The President of India in
2010.
 Recipient of “Distinguished Entrepreneurship Award 2013″• from PHD Chamber
of Commerce and Industry (PHD CCI).
 Recognized as “Star Export House” by Ministry of Commerce and Industry, Govt.of
India.
 CRISIL assigns “A” category rating with a ‘stable’ outlook to Allengers and
adjudged it amongst 150 top companies in India under this Category.
 The only Indian manufacturer having largest manufacturing set up in India, spread
over an area of 45,000 sq.mtrs.
 More than 25,000 installations base across the globe, speaks volumes about our
customers’ trust in the brand “Allengers”•.
 As per world renowned research organization, Allengers is the only Indian company
that enjoys a market share of around 36.5% in the Indian market and has a CAGR of
27% per annum for the last 5 years.
 The only Indian company that launched India’s first mobile digital radiography
system in the year 2011.
 The only Indian company that launched India’s first indigenous range of Cathlabs in
the year 2004.
 The only Indian manufacturer having battery powered mobile X-Ray machines (15
KW/30 KW).
 The only Indian manufacturer having the largest rang of high frequency X-ray
machines (3.5 KW to 80 KW).
 Awarded with EEPC awards for the years 2009-10 & 2010-11.
 The only Indian company that exports to more than 70 countries in the continents of
Africa, Asia, South America, Europe, Middle East Countries and Commonwealth
Independent States (CIS).

6
NATIONAL AWARD – 2012

Hon’ble Prime Minister of India Dr. Manmohan Singh honoured Sh. Suresh Sharma,
Chairman, Allengers Group of Companies with “National Award (1st Prize) for
manufacturing Quality Products (Electro medical Instruments / Equipments)” on 1st March,
2014 at Vigyan Bhawan, New Delhi.

NATIONAL AWARD – 2010

In the realm of “Outstanding Performance in Entrepreneurship”-MSME engaged in
manufacturing.

7
Production Facilities

Allengers has an in-house R&D , Q.C setups and labs equipped with testing equipment to
keep check on raw materials in order to maintain quality of their product range at their
biggest manufacturing facilities near Chandigarh ( India ). Allengers has always been
encouraging Quality Technology Tools (QTT) to maintain and sustain their quality. The
enterprise has a team of skilled and experienced professionals and provides regular trainings
to their staff for quality assurance at all the 3 production facilities.
 2 Nos manufacturing units at Derabassi, Punjab (India)
Allengers Medical Systems Ltd was established in 1987. The company is located on
Bhankarpur Mubarakpur Road Derabassi, District Mohali (Punjab)
Since 1987 Allengers Medical Systems Ltd. is providing high quality medical technology,
service and productivity solutions in shape of X-Ray Machine, Mammography and Mobile
Cath Lab.
Our new product introductions, growing services offerings and information technology
comprise our foundation for the next century.
Allengers has a market share of approximate 35% in Indian market and has maintained
consistent growth of 20-25% per annum for the last three years.
Products:-
1. Line frequency X-Rays
2. High frequency X-Ray Machine mobile
3. Line frequency C-Arm
4. High frequency C-Arm
5. Lithotripter
6. Mammography
7. Digital Subtraction Angiography System
8. Mobile Cath Lab
9. Digital Radiography
Company motto and goal:
 To be a best enterprise in its class.
 To be creative and to continuously improve in all areas to achieve total customer
satisfactions
 To achieve 100ppm

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 CHAPTER:2

RESEARCH METHODOLOGY

2.2 NEED OF THE STUDY

Every organization needs inventory for smooth running of its activities. It serves as a link
between production and distribution processes. The investment in inventories constitutes the
most significant part of current assets/working capital in most of the undertakings. Thus, it is
very essential to have proper control and management of inventories. The purpose of
inventory management is to ensure availability of materials in sufficient quantity as and when
required and also to minimise investment in inventories. So, in order to understand the nature
of inventory management of the organization, I took this Inventory Management as a topic
for my project, to give findings and suggestions by adopting and analyzing different
inventory control techniques.

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 2.3 SCOPE OF THE STUDY

 To give plan to the company what to order, when to order and how much to order.

 It is useful for deciding operating policy & volume of inventory.

 It helps to develop the policies for the executives in inventory.

 It helps the company what items goods are categorized.

 Project helps to deal with forecasting in inventory.

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 2.4 OBJECTIVES OF THE STUDY

1. To study the tools and techniques of inventory management adopted at AMSL.

2. To determine the stock level in inventory management at AMSL.

3. To study the methods of valuation of inventory on AMSL.

4. To study the inventory management procedure.

5. To minimize the investment in inventories.

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 2.5 DATA COLLECTION
Research is a process in which the researcher wishes to find out the end result for a given
problem and thus the solution helps in future course of action. The research has been defined
as “A careful investigation or enquiry especially through search for new facts in branch of
knowledge”

 Primary data

The primary data is collected by personal interviews with officials.

 Secondary data

Files, annual reports, periodicals, manual and text book. Which have already been
passed through the statistical process are the secondary data used. Data are collected from the
company’s website. Books and journals pertaining to the topic.

 Field work
This was under taken individually to collect various information regarding the study
by visiting following sections.

 Stores department
Information regarding stocking of materials receipts and issues to workshops.
Inventory control procedures in various wards inside the department were obtained.
 Accounts department
Remaining all the information was obtained from accounts department through
personal interviews with section officials.
 Plan of analysis

The analysis and interpretation was collected from finance department thus processed and
tabulated is in the form of tables and graphs. The table thus obtained by calculating average,
percentage, turnover ratio, graphs and diagram in respect of the stock of raw materials sales
& inventory control procedures and thus to draw conclusion from the analysis done.

PERIOD OF STUDY
The period of the study at Allengers Medical Systems Limited, Baddi.

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 2.6 TOOLS USED FOR ANALYSIS OF DATA

Inventory generally refers to the materials in stock. It is also called the idle resource
of a company. Inventories represent those items which are either stocked for sale or they are
in the process of manufacturing or they are in the form of materials which are yet to be
utilized.
INVENTORY CONTROL

The main objective of inventory control is to achieve maximum efficiency in production &
sales with minimum investment in inventory.
Inventory control is a planned approach of determining what to order, when to order
and how much to order and how much to stock, so that costs associated with buying and
storing are optimal without interrupting production and sales.

BENEFITS OF INVENTORY CONTROL

The benefits of inventory control are:

1. Improvement in customers’ relationship because of the timely delivery of goods and

services.
2. Smooth and uninterrupted production and hence, no stock out.
3. Efficient utilization of working capital.
4. Economy in purchasing.
5. Eliminating the possibility of duplicate ordering.

PRINCIPLES OF INVENTORY CONTROL

1) Inventory is only created by spending money for materials and the labour and
overhead to process the materials.
2) Inventory is reduced through sales and scrapping.
3) Accurate sales & production schedule forecasts are essential for efficient purchasing,
handing & investment in inventory.
4) Management policies which are designed to effectively balance size and variety of
inventory with cost of carrying that inventory are the greatest factor in determining
inventory investment.

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 5) Forecasts help determine when to order materials. Controlling inventory is
accomplished through scheduling production.
6) Records do not produce control.
7) Control is comparative & relative, not absolute. It is exercised through people with
varying experiences and judgment rules & procedures establish a base from which the
individuals can make evaluation and decision.
8) With the consistent practices being followed, inventory control can become
predictable and properly related to production and sales activity.

OBJECTIVES OF INVENTORY CONTROL

Inventory control is a highly significant function because it consist substantial portion

of total current asset of a firm.
To minimize the investment in inventories: The main objective of a system of inventory
control is minimizing the capital blocked in the inventories.
The capital required to carry inventories costs money and holding asset in the form of
inventories results in decreased liquidity.
To ensure that the value of material consumed to minimum: To ensure this objective
there should be proper control of materials from the placing of orders with supplies fill the
materials have been efficiently utilized in production. Efficient purchasing, storage,
consumption and accounting for materials are an important objective of inventory control.
To provide scientific control: To provide scientific base for short term and long term
planning of inventory requirements.
To protect from losses: The inventories storage from pilferage, theft, wastage, damage and
unauthorized use.
To reduce surplus stock: reducing of surplus stock is one of the essential requirements of
effective inventory control. Inventory controls critically examines excessive stock and take
appropriate measures to bring down stock to a reasonable level and then by reduce
investment. Inventory control takes timely action for replenishment. It also provides a safe
guard for variations in raw material delivery time or lead time.

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ISSUE PRICING METHODS:

There are two categories:

(i) Cost prices:

a. FIFO (First in First out)

b. LIFO (last in first out)
c. Specific price
d. Base stock price
e. HIFO (highest in first out)
(ii) Derived from cost prices:
a. Simple average price
b. Weighted average price
c. Periodic simple average price
d. Periodic weighted average price
e. Moving simple average price
f. Moving weighted average price
(iii) Notional prices:
a. Standard price
b. Inflated price
c. Re-use price
d. Replacement price

First in First out (FIFO)

This is the price paid for the material first taken into stock from which the material to be
priced could have been drawn.
Under this method stocks of materials may not be used up in chronological order but
for pricing purpose it is assumed that items longest in stock are used up first. The method is
most suitable for use where in material is slow-moving and comparatively high unit cost.

Last in first out (LIFO)

This is the price paid for the material last taken into stock from which the materials to
be priced could have been drawn. This method also ensure material being issued at the actual
cost. Its use is based on the principle that costs should be as closely as possible related to

15
current price level. Under this method production cost is calculated on basis on replacement
cost.

Weighted average price:

This is the price which is calculated by dividing the total cost of material in the stock
from which the material to be priced have been drawn, by the total quantity of material in the
stock. This method differs from all other methods because here issue prices are calculated on
receipts of materials and not on issue of materials. Thus as soon as new lot is received a new
price is calculated and issues are then taken.

Standard price:

It is the predetermination of fixed price on basis of a specification of all factors

affecting price like the quantity of materials in hand and to be normally purchased and rate of
discount compared with existing price including or excluding freight and ware housing
expense.

A standard price for each material is set and the actual price paid is compared with
standard. It is paid exceeds the standard a loss will be realized if not profit will be obtained.

Inflated price:
This is the price, which includes a charge designed to cover the cost of contingencies or
related costs. This price includes not only the cost involved in bringing the material to the
purchases premises but also the loss due to evaporation and breakage etc. as well as carrying
costs.

ECONOMIC ORDER QUANTITY

A decision about how much to order has great significance in inventory management.
The quantity to be purchased should neither be small nor big because costs of buying and
carrying materials are very high. Economic order quantity is the size of the lot to be
purchased which is economically viable. This is the quantity of materials which can be
purchased at minimum costs. Generally economic order quantity is the point at which
inventory carrying costs are equal to order costs. In determining economic order quantity it is
assumed that cost of managing inventory is made up solely of two parts i.e., ordering cost and
carrying cost. The cost relationships are shown in below figure.

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FORMULA FOR CALCULATING ECONOMIC ORDER QUANTITY (EOQ)

Economic Order Quantity

Costs Annual Total Cost

Annual Inventory Carrying Cost

Annual Ordering Cost

Q* Economic Order Quantity

SAFETY STOCK
The economic order quantity formula is developed based on assumption that the
demand is known and certain and that the lead time is constant and does not vary. In actual
practical situations, there is an uncertainty with respect to the both demand as well as lead
time. The total forecasted demand may be more or less than actual demand and the lead time
may vary from estimated time. In order to minimize the effect of uncertainty due to demand
and the lead time, a firm maintains safety stock, reserve stocks or buffer stocks.
The safety stock is defined as “the additional stock of material to be maintained in order to
meet the unanticipated increase in demand arising out of uncontrollable factors”.
In simple it is tells about which is used to protect against uncertainties. Because it is difficult
to predict the exact amount of safety stock to be maintained, by using statistical methods and
simulation, it is possible to determine the level of safety stock to be maintained.

17
DETERMINATION OF SAFETY STOCK
If the level of safety stock is maintained is high, it locks up the capital and there is a
possibility of risk of obsolescence. On the other hand, if it is low, there is a risk of stock out
because of which there may be stoppage of production. When the variation in lead time is
predominant, the safety stock can be computed as:

Safety Stock = (Maximum Lead time- Normal Lead time) * Demand

SAFETY STOCK

The service level of inventory thus depends upon the level safety stocks. Large the safety
stocks, there is a lesser risk of stock out and, hence, higher service level. Sometimes higher
service levels are not desirable as they result in increase in costs, thus, fixing up a safety
stock level is critical. Using past date regarding the demand and lead time data, reliability of
suppliers and service level desired by management, safety stock can be determined with
accuracy.

18
ABC ANALYSIS

MEANING

The inventory of an organization generally consists of thousands of items with

varying prices, usage rate and lead time. It is neither desirable nor possible to pay equal
attention of all items.
ABC analysis is a basic analytical tool which enables management to concentrate its
efforts where results will be greater. The concept applied to inventory is called as ABC
analysis.
Statistics reveal that just a few items account for bulk of the annual consumption of
the materials. These few items are called A class items which hold the key to business. The
other items known as B & C which are numerous in number but their contribution is less
significant. ABC analysis thus tends to segregate the items into three categories A,B & C on
the basis of their values. The categorization is made to pay right attention and control
demanded by items.

FEATURES OF ABC ANALYSIS

A Class (High Value) B Class (Moderate Value) C Class (Low Value)

1. Tight control on Moderate control Less control

stock levels
2. Low safety stock
3. Ordered frequently Medium Large
4. Individual posting in
stores Less frequently Bulk ordering
5. Weekly control
Individual Collective posting
reports
6. Continuous effort to
reduce lead time
Monthly control Quarterly control

Moderate efforts Minimum efforts

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ADVANTAGES

 This approach helps the manager to exercise selective control & focus his attention only on a
few items.
 By exercising strict control on A class items, the materials manager is able to show the results
within a short period of time.
 It results in reducer clerical costs, saves time and effort and results in better planning and
control and increased inventory turnover.
 ABC analysis, thus, tries to focus and direct the effort based on the merit of the items and,
thus, becomes an effective management control tool.

Limitations of ABC Analysis

i) Low value purchases frequently require more items and there by reduce the time available for value
analysis, vendor investigation.
ii) Classifications of items should be reviewed and updated periodically otherwise the very approach
of control may be defected.

FSN ANALYSIS

All the items in the inventory are not required at the same frequency. Some are
required regularly, some occasionally and some very rarely. FSN analysis classifies
items into fast moving, slow moving, non moving items.

INVENTORY TURNOVER RATIO

Kohler defines inventory turnover as “a ratio which measures the number of times a
firm’s average inventory is sold during a year”.
A higher turnover rate indicates that the material in question is a fast moving one. A
low turnover rate, on the other hand, indicates over-investment and locking up of working
capital on undesirable items.
Inventory turnover ratio may be calculated in different ways by changing the
numerator, but keeping the same denominator. For instance, the numerator may be materials

20
consumed, cost of goods sold or net sales. Based on any one of these, the ratio differs from
industry to industry.
Stock turnover is measured in terms of the ratio of the value of materials consumed to
the average inventory during the period. the ratio indicates the number of times the average
inventory is consumed and replenished. By diving no. of days in a yeat by turnover ratio, the
number of days for which the average inventory is held, can be ascertained.
Comparing the no. days in the case of two different materials, it is possible to know
which is fast moving & which is slow moving. On that basis, attempt may be made to reduce
the amount of capital locked up, and prevent over-stocking of slow moving items.
Net sales
Inventory turnover ratio =
Avg. inventory

No. of days in a year

Inventory velocity =
Inventory turnover ratio

VED ANALYSIS:

Vital Essential and Desirable analysis is done mainly for control of spare parts
keeping in view of the criticality to production.

Vital spares are spare the stock-out of which even for a short time will stop
production for quite some time. Essential spares are spares the absence of which cannot be
tolerated for more than a few hours a day. Desirable spares are those, which are needed, but
their absence for even a week or so will lead to stoppage of production.

THE RE-ORDER LEVEL:

The re-order level is the level of inventory at which the fresh order for that item must be
placed to procure fresh supply. The re-order level depends upon

a) Length of time between the placement of an order and receiving the supply.
b) The usage rate of the item. The inventory is constantly being used up. The rate at
which the inventory is being used up. The rate at which the inventory is being used up
is called the usage rate.

21
The reorder level can be determined as follows:
R = M+tu
R = Reorder level
M = Minimum level of inventory
T = Time gap / delivery time
U = Usage rate
The reorder level and inventory patterns have be shown as follows:

The figure shows that if the usage rate is constant, the orders are made at even intervals for the
same amounts each time and the inventory goes to zero just before an order is received.

JUST-IN-TIME INVENTORY:

The basic concept is that every firm should keep a minimum level of inventory on
hand, relying suppliers to furnish stock just in time as and when required. JIT helps in
emphasizing sufficient levels of stocks to ensure that production will not be interrupted.
Although the large inventories may be bad idea due to heavy carrying JIT is a modern
approach to inventory management and the goal is essentially to minimize such inventories
and there by maximizing the turnover.

JIT system significantly reduces inventory-carrying cost by requiring that the raw
materials be procured just in time to be placed into production. Additionally the work in
process inventory is minimized by eliminating inventory is minimized by eliminating
inventory buffers between different production departments.
If JIT is to be implemented successfully there must be a high degree of coordination
and co-operation between the supplier and manufacturer and among different production
centers. JIT does not appear to have any relation with EOQ however it is in fact alters some
22
of the assumptions of EOQ model. The average inventory level under the EOQ model is
defined as
Average inventory= 1/2 EOQ + safety level JIT attacks this equation in two ways.
(i) By reducing the ordering cost
(ii) By reducing the safety stock.

The basic philosophy in JIT is that the benefits, associated with reducing inventory and
delivery time to a bare minimum through adjustment in the EOQ model; will more than offset
the costs associated with the increased possibility of stock-outs.

SELECTIVE INVENTORY CONTROL MANAGEMENT

A manufacturing (or) industrial firm generally comprises thousands of items with diverse
prices, usage and lead-time, procurement and technical problems. The industry should not
exercise same degree of control over all those items. The industry should pay more attention
and care to those items whose usage value us high and less attention to those whose
consumption value is low. The industry should select an approach to control its inventory and
these by cutting investment unnecessarily blocking in various types of inventories. The
selective approach is known as ‘selective inventory control’ system, this method takes the
following into consideration.
i) Different Inventory Level
ii) Order quantity
iii) Monetary value of material
iv) Extent and closeness of the control desired.

Techniques of selective inventory control

1) ABC analysis (Always Better Control): This analysis is based on values of consumption.
2) HML analysis (High, Medium, and Low): this analysis is based on volume.
3) FSND analysis (fast moving, slow moving, non-moving, dead): this base on
consumption pattern of the component.
4) SDE analysis (scarce, difficult, and easy): this based on problems faced in procurement.
5) VED analysis (vital, essential, and desirable): this based on critically of the component

23
6) XYZ analysis: this based on value of item in storage.

CODIFICATION OF MATERIALS
Identification or codification of material is essential for every material manager. This may be
helpful to stores personnel in carrying out their operation speedily & effectively.

Merits of codification
In order to avoid multiplication of item, to facilitate easy location a proper
codification is to be evolved so as to obtain they following benefits.
1) To avoid long and unwieldy description
2) To present duplication
3) To standardize ht items
4) To reduce varieties
5) To have efficient purchasing dept

24
 2.7 LIMITATION OF THE STUDY

 The study takes into account only the quantitative data and the qualitative aspects were
not taken into account.

 The assumption made in the EOQ and Safety stock formulas restrict the use of the
formula. In practice, unit cost, lead time, requirements of inventory items are not
accurately predictable. Rate of consumption varies in many cases. As such application of
the formula often becomes a difficult and complicated matter.

 ABC analysis is not one time exercise and items are to be reviewed and recategorised
periodically.

25
 CHAPTER:3

DATA ANALYSIS AND INTERPRETATION

ANALYSIS OF THE ECONOMIC ORDER QUANTITY

Economic order quantity is the size of the order representing standard quality of the
material and it is the one for which the aggregate of the costs of procuring the inventory and
the costs of holding the inventory is minimum.

APPROACH TO EOQ
1) Tabular approach
This approach is one of the simple methods to find economic order quantity. The
methods of calculating tabular approach as follows
a) Select a number of possible lot sizes to purchase
b) Determine the total costs for each lot size chosen
c) Select the ordering quantity that minimizes the total costs.
But, this approach is tedious to calculate economic order quantity. So this approach is not
followed by many of the companies.
2) Graphical approach

26
 Chart No. 3.1 Economic Order Quantity Curve

Total cost

Carrying cost

Relevent Cost

Ordering cost

Quantity per Order

The above picture represents the graphical approach of economic order quantity. The
economic order quantity occurs at the point Q where the total cost is minimum. Here the ordering cost
decreases with more number of orders. On the contrary the cost of carrying the inventory is increasing
with the increased number of orders. Thus the firms operating profit is maximized at point Q. It may
be noted that if the total cost do not change very significantly, the firm can change EOQ within the
range without any loss.
3) Formula approach

The simplest and accurate method to find EOQ is formula approach. This approach can be
derived as follows.

Derivation of EOQ

Let the ordering cost per order O, is fixed. The total order cost will be number of orders
during the year multiplied by ordering cost per order. If A represent total annual requirements and Q
the order size, the number of order will be A/Q and total order cost will be:

27
Total ordering cost = (Annual requirement X Per order cost) / Order size

TOC = AO (2.1)
Q
Let us further assume that carrying cost per unit c, j instant. The total carrying cost

will be a product of the average inventory units and the carrying cost per unit. If Q is the

order size and usage is assumed to be steady, the average inventory will be:

Average inventory = order size = Q (2.2)

2 2
And total carrying costs will be:

Total carrying cost = average inventory X per unit carrying cost

TCC = QC (2.3)
2
The total inventory costs then, are the sum of total carrying and order costs:
Total cost = total carrying cost + total order cost
TC = QC + AO (2.4)
2 Q
Equation (2.4) reveals that for a large order quantity Q, the carrying cost will increase,

but the ordering costs will decrease. On the other hand, the carrying costs will be lower

and ordering cost will be higher with lower order quantity. Thus the total cost function

represents a trade – off between the carrying costs and ordering costs for determining the

economic order quantity.

To obtain the formula for economic order quantity, equation (2.4) is differentiated with
respect to Q and setting the derivative equal to zero.

EOQ = √2AO/C
The formula may be derived from equation (2.4) as follows

TC = QC + AO (2.4)
2 Q
Differentiating equation (2.4) with respect to Q

dTC = c - AO (2.5)
dQ 2 Q^2
Setting equation (2.5) to 0
C __ AO = 0
28
 2 Q^2
CQ^2 = 2AO
Q = √2AO/C
Note: the formula approach is tedious to calculate and the graphical approach is not possible for each
item of inventory. So, the easy way to determine EOQ is to use the order-formula approach. Hence,
IPPL’S EOQ is analyzed on the basis of formula method

EOQ – Uses

1) EOQ is useful to decide how many inventories should be added when inventory is
replenished.
2) It is useful in deciding lot sizes, which will reduce both ordering and carrying costs.
3) By using EOQ the optimum inventory level can be maintained, which will reduce the
investment in inventories.

ECONOMIC ORDER QUANTITY FOR CONSUMABLES

1) Name of the item – Bearing 30206 ZZ

Item code - 4939
Annual usage - 924 (A)
Ordering cost per unit - 20 (O)
Carrying cost - - (C)
Unit price - 31
Q = √2AO / C

= √2 X 924 X 20 / 31

EOQ = 34
No of order per year = A/EOQ
= 924 /34 = 27
Total value per order = EOQ*Unit Price =
= 34 * 27 = 918

2) Name of the item – INDICATOR RED LMRD 12V DC

Item code - 16074
Annual usage - 888 (A)

29
Ordering cost per order - 20(O)
Carrying cost - -(C)
Unit price - 65
Q = √2AO / C
= √2 X 888 X 20 / 65
EOQ = 23
No of order per year = A/EOQ = 888/23 = 38
Total value per order = 1495

3) Name of the item – CHANNEL ALUMIUM

Item code - 172
Annual usage - 1224 (A)
Ordering cost per order – 150 (O)
Carrying cost - -(C)
Unit price - 410
Q = √2AO / C
= √2 X 1224 X 150 / 410
EOQ = 29
No of order per year = A/EOQ = 1224/29 = 42
Total value per order = 11890

4) Name of the item – HAND GRIP PLASTIC

Item code - 2143
Annual usage - 480 (A)
Ordering cost per order – 50 (O)
Carrying cost - -(C)
Unit price - 42
Q = √ 2AO / C
= √2 X 480X50 / 42
EOQ = 33
No of order per year = A/EOQ = 480/33= 14
Total value per order = 1386

5) Name of the item – RING PLASTIC FOR ROUND PIPE

Item code - 2447
Annual usage - 816 (A)
Ordering cost per order – 20 (O)

30
Carrying cost - -(C)
Unit price - 26
Q = √2AO / C

= √2 X 816 X 20 / 26

EOQ = 35

No of order per year = 816/35= 23

Total value per order = EOQ*Unit Price

= 35*26= 910

Table No. 3.1 ECONOMIC ORDER QUANTITY

Item Item Description Item EOQ No. of order Value of the

No. Code per year order

1 BEARING 30206 ZZ 4939 34 24 918

2 INDICATOR RED LMRD 16074 23 38 1495

12V DC
3 CHANNEL ALUMIUM 172 29 42 11890

4 HAND GRIP PLASTIC 2143 33 14 1386

5 RING PLASTIC FOR 2447 35 23 910

ROUND PIPE

ANALYSIS & INTERPRETATION

In the above table the EOQ & the no. of orders purchased per year for various components
are calculated. The calculated EOQ is compared with the no. of units of each component purchased
in the organization. It is found that, there is a variation in the EOQ & no. of unit purchased. It is
understood that the company is not following EOQ for purchasing the materials & therefore the
inventory management is not satisfactory.ption Itc

31
SAFTY STOCK & REORDER LEVEL
MEANING
Safety stocks are the minimum additional inventory which serves as a safety margin to meet
an unanticipated increase in usage resulting from an unusually high demand and an uncontrollable
late receipt of incoming inventory.

Reorder level
Reorder level is that inventory level at which an order should be placed to replenish the
inventory. the term re-order point may be defined as same as above that level of inventory when
fresh order should be placed with the suppliers for producing additional inventory equal to the EOQ.
The re-order level would be established at appoint such that the stock in hand would be just
sufficient to meet the demand during the lead line. To determine the re-order point with certainty
we should know:

(a) Lead time

(b) Usage

(c) EOQ

Lead time analysis in inventory problems

The time between ordering a replenishment of an item and actually receiving the item
in to inventory is referred to as lead time. If lead time is zero then no need for placing the
order in advance. If the lead time exists and also demands known, then it is required to place
an order in advance by an amount of time equal to the lead time. If the lead time is low, then
a small stock is required. But if lead safety time is significant then the company will have to
maintain higher safety stock level to avoid stock out. Thus the capital tied up in inventory
will be high.
Normally lead time will be shorter for local suppliers and greater in case of made to order
supply. it may be noted that lead time of imported of goods will be considerably high when
compared to local supply . Reason is that the material has to go several formalities so there
replenishment quantity should be planned by taken this variable lead time for imported items.
Average usage is the important used in reordering level. Average usage is consumption of
materials is utilization of the resource to its maximum extent during a particular period say
week, month, or year. Average consumption is arrived by dividing consumption during a

32
particular period into the period taken for study. Economic order quantity is otherwise called
as optimum order quantity. Economic order quantity is the one for which the aggregate of the
costs of ordering the inventory and the costs of carrying the inventory is at minimum.
Reorder point under certainty and uncertainty
Reorder level may be certain or uncertain in certainty condition lead time usage does
not fluctuate. This situation can be explained by the following illustration.
ILLUSTRATION
Economic order quantity of an item is 600 units, the average usage is 60 units per day
the lead time is 3 days.
Reorder point = lead time X average consumption / day
= 3 X 60 = 180 units

Chart No.3.2 Reorder point under certainty

EOQ
600 units

Average

Inventory 300

Reorder point

180 units

1 2 3 4 5 6 7 8 9 10

Lead time

The above figure indicates when the firm should give order. i.e. The period of placing new
order . The new order should be placed at the end of seventh day, when there are 180 units
left to consume during the lead time. As soon as lead time ends and inventory level reaches

33
zero, the new stock of 600 units will arrive. Thus the reorder point is lead time X average
usage per day. That is 3 days X 60 units = 180 days

ILLUSTRATION
EOQ = 600 units
Lead time = 3 weeks
Average usage = 60 units per day
Safety stock = 30 units per day
This illustration explains the reorder level uncertainty. Under uncertainty situation the lead
time and usage is not same. Fluctuation may cause stock outs which will be costly to the firm.
So to meet the demand during fluctuation the safety stocks are maintained.
Reorder point = lead time X average consumption / day + safety stock
= 3 X 60 + (30 X 3) = 270 units
Chart No. 3.3 Reorder point under uncertainty

Maximum inventory
Average usage
690

Average inventory 345

Reorder point 270

Maximum
Usage

Safety stock 90
1 2 3 4 5 6 7 8 9 10

Lead time

The above figure explains the firm should maintain a safety stock of 90 units. Thus the
reorder point will be 180 + 90 = 270 units. The maximum inventory will be equal to the
economic order quantity plus the safety stock. i.e. 600 + 90 = 690 units.

34
Safety stock
Safety stocks are maintained to minimize the effect of unascertained in demand on
lead time. The safety stock may be defined as the minimum additional inventory to secure as
a safety margin or cushion to meet on unanticipated increase in usage resulting from various
uncontrollable factors. In case of imported items the safety stock component of the inventory
is likely to be large.

Chart No.3.4 Safety Stock

Inventory in hand

Stock out is avoided

Safety stock

0
Time

Determining the optimum level of safety stock

If the safety stock is maintained is inadequate the stock out will be frequently faced.
as against this if the safety stock maintained is high the cost would be high , hence it is
necessary to strike a balance between stock out costs and inventory costs to arrive at an
optimal safety stock.

35
Impact of non maintenance of safety stock level
If there is no safety stock, stock outs would arise. If safety stock is provided in an
unscientific way and the result is that some item are stocked excessively others continue to
face shortage.

ANALYSIS OF SAFETY STOCK AND REORDER LEVEL FOR RAW MATERIAL

Table No.3.2 STOCK OF RAW MATERIAL

S.NO. Item Name Item Monthly Lead time in

Code consumption days

1 WHEEL 77*32 SWIVEL 6822 52 30

TYPE CASTOR HAVY
DUTY

2 PANEL KBD FOR C- ARM 15017-1 68 45

LCD LOW

3 GRID CIRCULAR 9" 8:1 1437 76 30

103 L FD-32"-40" FO-90
CM

4 HANDLE FOR AL. C 3248 145 25

5 SMPS POWER SUPPLY 6946 30 30

nit

Safety stock = Monthly consumption X LT

30
LT = Lead time in days
A = Monthly consumption

36
 Table No.3.3 Determining the safety stock for raw material

S.NO. Item Name Calculation Safety stock

1 WHEEL 77*32 SWIVEL TYPE 52/30 x 30 52

CASTOR HAVY DUTY

2 PANEL KBD FOR C- ARM 68/30 x 45 102

LCD LOW

3 GRID CIRCULAR 9" 8:1 103 76/30 x 25 63

L FD-32"-40" FO-90 CM

4 HANDLE FOR AL. C 145/30 x 20 96

5 SMPS POWER SUPPLY 30/30 x 45 45

Inference
1) Heavy safety stock should be maintained in the case of Panel KBD for c-arm
2) 96 pieces of handle for AL. C should be maintained as safety stock
3) 45 number can be maintained as the safety stock for the SMPS power supply

Fixing reorder level for consumables

ROL = 1.5 * Safety stock
ROL = reorder level
LT = lead time

37
 Table no.3.4 Reorder level for raw material

S.NO. Item Name Calculation ROL

1 WHEEL 77*32 SWIVEL TYPE 1.5 X 52 78

CASTOR HAVY DUTY

2 PANEL KBD FOR C- ARM 1.5 X 102 153

LCD LOW

3 GRID CIRCULAR 9" 8:1 103 1.5 X 63 94

L FD-32"-40" FO-90 CM

4 HANDLE FOR AL. C 1.5 X 96 144

5 SMPS POWER SUPPLY 1.5 X 45 67

Inference

1) From the table it can be explained that the company should fix its reorder level as per the
calculated level
2) Item Panel KBD for C-ARM and Handle for AL. C needs close control with regards to
replenishing and its lead time is longer and quantity required is more per month
3) It can be understood clearly that the reorder quantity increase with the corresponding
increase in lead time.

ABC ANALYSIS

MEANING
The ABC system is a widely used classification technique to identify various items of
inventory for purposes of inventory control. On the basis of unit cost involved, the various
items are classified into 3 categories:
(1) A, consisting of items with the large investment,
(2) C, with relatively small investments but fairly large number of items and
(3) B, which stands mid-way between category A & C.

Category A needs the most rigorous control, C requires minimum attention and B deserves
less attention than A but more than C.

38
 A CLASS (HIGH VALUE)
1 MEMORY XC-VAM-LAN [ 100 ] ( X-RAY CONTROLLER )

2 C ALUMINIUM FOR C-ARM

3 I.I. 9" TOSHIBA MODEL E-5764-SD

4 I.I. 9" THALES MODELTH-9403

5 FLAT PANEL PAXSCAN 4343R

6 X-RAY TUBE E-7239-X

7 MONITOR LCD 19" MONOCHROME

8 DIGITAL IMAGE PROCESSOR IQ +

9 C ALUMINIUM DIA 1220 MM

10 CAMERA CCD SONY B/W WITH CONNECTOR [XC-ES50CE ]

11 HORIZONTAL CARRIAGE COMPLETE ASSEMBLY [ 50 PCS SET ]

12 ACTUATOR

13 MONITOR LCD 19" MONOCHROME WITH METAL CASTING

14 CAMERA CCD WATEC B/W WITH CONNECTOR [WAT-902B]

15 LINEAR RAIL SYSTEM [ HARD CHROME PLATED ]

16 APRON LEAD DOUBLE SIDE SLEEVES MEDIUM [110*60CM ] WITH LONG

SLEEVES
17 SCREEN LEAD PROTECTION THREE PANEL WITH LEAD GLASS

18 SERVO STABILIZER 100 KVA 3 PHSAE WITHOUT COUPLER

B CLASS (MODERATE VALUE)

1 MONITOR LED 17" SQUARE ( BANQ ) MODEL : BL702A

2 SERVO STABILISER 2 KVA [ NEW MODEL ]

3 LBD GEARED FOR 300\500 \ HF X-RAY ASSEMBLED

4 C-CARRIAGE ASSEMBLY [ 6 PCS SET ]

5 APRON LEAD SINGLE SIDED LIGHT WEIGHT THICK 0.50 MM

6 LASER CROSS HAIR MODULE TYPE

39
7 CABLE H.V 6 MTR W/O SILICON WASHER

8 CABLE H.V 8 MTR [ LOCOFLEX-10405 ] XTRAFLEX

9 SCREEN LEAD PROTECTION SINGLE WITH WHEEL & GLASS WINDOW

SIZE 8"*10"
10 CARRIAGE FOR AL. C DIA 1220 MM [ 1 SET =6 PCS ]

11 PUMP MAGNETIC DRIVE[ MODEL:-PMP-30]

12 CARRIAGE HORIZONTAL ASSY.FOR ALLENEGRS C 65 [ 1 SET = 43 PCS. ]

13 ATTACHMENT ASSEMBLY [ EN-8 ] [4 PCS SET] WITH ZINC PLATING PARTS
14 COLUMN FC DOMESTIC / EXPORT WITHOUT VERTICAL CARRIAGE

CLASS (LOW VALUE)

1 RELAY RELAY 3 NO/NC 5 A 12 V DC [ 3CO-MCC-12D ]

2 RING HORZONTAL CARRIAGE

3 CLAMP 3 NUMBER L TYPE

4 BEARING 6000

5 BUSH ROUND PIPE

6 PANEL KBD

7 INDICATOR RED LDRD

8 CHANNEL ALUMINIUM

40
Table no.3.5 ABC Analysis

Categories Total No. Items in Classes Percentage

A 18 45

B 14 35

C 8 20

Total 40 100

ANALYSIS & INTERPRETATION:

The above table shows the classification of various components as A, B & C classes using ABC
analysis techniques based on unit value. From the classification A classes are those whose unit value
is more than Rs.100 and constitutes 45% of total components. B classes are those whose unit value
is between Rs.25-100 constitutes 35% of total components and C classes are those whose unit value
is less than Rs.25 constitutes 30% of total components. It is good that the company maintains its
inventories based on its value using controlling techniques.

41
Chart no.3.5 ABC Analysis

50

45

40

35

30

25
45
20
35
15

10 20

0
A B C

FSN ANALYSIS
MEANING
All the items in the inventory are not required at the same frequency. Some are required
regularly, some occasionally and some very rarely.

FSN classifies items into Fast moving, Slow moving and Non-moving.

FAST MOVING ITEMS

S.NO ITEMS DETAIL

1 MEMORY XC-VAM-LAN [ 100 ] ( X-RAY CONTROLLER )

2 SERVO STABILISER 2 KVA [ NEW MODEL ]

3 MOTOR 1/2 HP 1440 RPM 1 PHASE 4.1 A 230V NF 114

4 HOLDER FOR BEARING SS 202 NON MAG. 'C' CARRIAGE

42
5 SWITCH 1 P 12 W 24° WITH ADVANC CONTACT

6 SWITCH 6 P 4 WAY 30° [ A 27553 J2 ]

7 SWITCH MICRO MTCRS 26 D 15 A

8 BEARING 6202 ZZ

9 BEARING 6201 ZZ

10 HOLDER FOR BEARING 6202 ZZ

11 BEARING 6000 ZZ

12 FAN 80 MM 12 V DC [ 08A-12M/80-12N/KD-1208/

13 SWITCH EMERGENCY 01 NOS -RCB2-BS-54 ,2 NOS -RB2-BE-102 ( 3 PCS SET )

14 INDICATOR RED LMRD 12 V DC

15 LBD MANUAL ASSEMBLED FOR 60\100\300\500 WITH ALLITE BULB TYPE

16 DUST COVER FOR CONTROL C-ARM HF WHITE

17 SMPS 15 V 3.4 AMP

SLOW MOVING ITEMS

S.NO. MATERIAL DETAIL

1 SWITCH SPST ON/OFF/ON 6 AMP [ MODEL : TS 603 ]

2 WIRE PVC 6 SQ. MM BLACK [ 1 ROLL = 100 MTR ]

3 SNAP CLOUSER 1/2" [ KP-194A ] ( PKT OF 100 NOS )

4 APRON LEAD KIRAN 100*60 CM ( 0.35 MM PB )

5 CBM PULLY ROD P2

6 COPPER WIRE ENAMELED 22 SWG

7 LED 10 MM ROUND RED

8 LOCKING PINS MODEL NO CR-MSTB

9 M.C.B. 63 AMP 3 POLE 415 V "C" CURVE 10 KA (L&T MODEL:-BB30630C)

10 SPRIAL WRAPING TUBE 1/8" [ KP-165A ]

11 PLATE M.S FOR INSPECTION WINDO DOUBLE TANK

43
12 RELAY 2 NO/NC 5 A 12 VDC [G2R-2] PCB MOUNTED [ STD PKG = 100 NOS ]

13 SHEET FIBER 1 MM BROWN COLOUR

14 TANK S.S 9 LTR WITH LIDS S.S.

15 COVER FOR POWER SUPPLY TOSHIBA P7 I.I 9"

16 PIN FOR CASSETTE LOCK

17 BEARING 6205 ZZ

18 CONNECTOR 7 PIN FRA-MSTB 2.5/7-ST-5.08 [1757064 ]

19 DIODE IN 4148 (PKG:DO-35)

20 PLUG RCA MALE CONNECTOR S.D [ C.P ] [ MODEL- MX 157 ]

21 RES 10 K 1/4 W 1% MFR

22 STICKER [ 4 PCS SET ] FOR SBM HF 6 KW/6R

23 CIRCLIP E-TYPE 4 MM S.S

Table no. 3.6 FSN ANALYSIS

Categories Total No. items in Classes Percentage

F 17 43

S 23 57

N 0 0

Total 40 100

ANALYSIS & INTERPRETATION:

In the above table shows the classification of various components as FSN items using
FSN analysis techniques based on movements. From the classification F items are those
which moves fastly and constitutes 43% of total components. S items are those which moves

44
slowly constitutes 57% of total components and N items are those which doesn’t move (Non-
moving items). According to data given, there is no Non-moving items. It is not good as the
company maintains low percentage in moving items.

Chart no. 3.6 FSN Analysis

60

50

40

30

20

10

0
F S N

TREND ANALYSIS
MEANING
Regression means dependence and involves estimating the values of a dependent
variable Y, from an independent variable X.
Y = a + bx
__
Where a= y – b x; b = Σxy – n x y
Σx2- nx 2

45
 Table no.3.7 CALCULATION OF INVENTORY TREND

YEAR Inventories (Rs.) X

(X) Y X=x-2015 X2 XY (RS)

2013 123856590 -2 4 -407713180

2014 172683828 -1 1 -252683828

2015 327573631 0 0 0

2016 385817539 1 1 585817539

2017 368161111 2 4 1076322222

Total( Σ ) 1378092699 0 10 1061742753

x = Σx/n = 0/5 = 0

y = Σy/n = 1378092699/5 = 275618539.8

b = Σxy – n x y = 1061742753- 5 * 0 * 1378092699 =106174275.3

Σx2- nx 2 10-5*0

a = y – b x = 275618539.8 – 1066174275.3 * 0 = 275618539.8

y = a + bx
= 275618539.8 + 106174275.3 x
The forecast of inventory for the year 2017 is computed by substituting x = 2017 in the above
equation.
= 275618539.8 + 106174275.3 x
= 275618539.8+ 106174275.3 (x-2012)
= 275618539.8+ 106174275.3 (2015-2012)
= 275618539.8+ 106174275.3 (3)
= 275618539.8+318522825.9
= 594141365.7

Therefore inventory for the year 2017 will be approximately Rs.594141365.7

Table no. 3.8 INVENTORIES PERCENTAGE

Years Inventories Percentage

2012 12,38,56,590 6.28

46
2013 17,26,83,828 8.76

2014 32,75,73,631 16.6

2015 38,58,17,539 19.56

2016 36,81,61,111 18.67

2017 59,41,41,365.7 30.13

ANALYSIS & INTERPRETATION:

In the above table shows the percentage of inventories increases from 6.28 to 18.67 in the
year 2012-2016, the inventory for the year 2017 is expected to be 30.13 which is again in the
increasing trend. This infers that the inventory requirement is increasing in the future period also. It
shows satisfactory position of inventories as it implies increasing production & demand for the
product.

Chart no. 3.7 Trend of Inventory

25

20

15

10

0
2012 2013 2014 2015 2016 2017

47
INVENTORIES TURNOVER RATIO

MEANING
This ratio is calculated to consider the adequacy of the quantum of capital and its
justification for investing in inventory. A firm must have reasonable stock in comparison to sales. It is
the ratio of net sales and the average inventory. This ratio helps the financial manager to evaluate
inventory policy. This ratio reveals the number of times finished stock is turned over during a given a
accounting period.

The formula for the ratio is : Net sales

Avg. Inventory

Table no.3.9 Inventories Turnover Ratio

Net Sales Avg. Inventory Ratio

Year (Rs.) (Rs.)

2013 16,25,50,895 11,45,26,872 1.41

2014 32,65,85,284 17,95,28,545 1.81

2015 29,12,15,361 26,54,24,872 1.09

2016 1,12,74,52,617 39,12,61,765 2.88

2017 1,58,51,80,656 36,72,82,972 4.31

ANALYSIS & INTERPRETATION

In the above table shows inventory turnover ratio for the past years. The ratio is showing
increasing trend from1.41 to 4.31 in the year 2013 to 2017, except in the year 2015 which shows only
1.09 times.

48
 CHAPTER:4

FINDINGS:

1) Company is incurring more expenditure on inventory because of holding high level of

stock.

2) Safety stock for end grinding belt should be maintained at high level.

3) The company is giving part of its raw material to sub-contractors for conversion.

4) Existence of communication gap among various functional departments.

5) Lead time for import tools having long lead time. So the proper safety stock should be
maintained.

49
 CONCLUSION:

A better inventory management will surely be helpful in solving the problems 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 analysis & maintain high percentage in
fast moving items in inventories as per on FSN analysis for efficient running of the inventory.
Since the inventory Turnover ratio shows the increasing trend, there will be more demand for
the products in the future periods. If they could properly implement and follow the norms and
techniques of inventory management, they can enhance the profit with minimum cost.

50
 RECOMMENDATIONS:

1) It may suggest that proper reorder level for consumables and cutting tools may be
maintained so that, the company can prevents the over stock or stock out level.

2) To reduce the inventory cost such as carrying cost, ordering cost it is suggested that
the company can apply EOQ model to all the materials, consumables and tools to the extent
possible.

3) In global competition, the company may follow the new technique like just in time
(JIT) by adopting flexible manufacturing system (FMS) to control inventories
efficiently in future.

4) In order to reduce the expenditure and to maintain inventories at optimum level, it is

necessary to implement proper planning, budgeting and coordination among all
functional departments.

5) The review can be made to all the material available in the store to avoid the
unnecessary dumping of materials, so the company can save the storage cost and
space.

51
 BIBLIOGRAPHY:
 REFERENCES BOOKS
 M Y Khan P K Jain “Financial Management” 4th edition Tata McGraw Hill.
 R.S.N. Pillai V. Bagavathi “Management Accounting” S Chand & Co.
 Martand Telsang “Industrial Engineering & Production Management” S Chand &
Co.
 B.M. Lall Nigam I.C. Jain “Cost Accounting” Prentice hall Of India Private Ltd.
 S.P. Iyengar “Cost & Management Accounting” Sultan Chand & Sons.
 WEB SITES
 www.inventorymanagementreview.org/2005/06/safety_stock
 www.inventorymanagementreview.org/inventory_basics/index
 www.inventorymanagementreview.org/justintime/index
 www.inventorymanagementreview.org/inventory_control/index

52