INVENTORY MANAGEMENT

Introduction:

Inventory means a list compiled for some formal purpose, such as the

details of an estate going to probate, or the contents of a house let furnished. This

remains the prime meaning in British English. In accounting, inventory or stock is

considered an asset.

Inventory management is primarily about specifying the shape and

percentage of stocked goods. It is required at different locations within a facility or

within many locations of a supply network to precede the regular and planned course of

production and stock of materials.

The scope of inventory management concerns the fine lines between

replenishment lead time, carrying costs of inventory, asset management, inventory

forecasting, inventory valuation, inventory visibility, future inventory price forecasting,

physical inventory, available physical space for inventory, quality management,

replenishment, returns and defective goods and demand forecasting. Balancing these

competing requirements leads to optimal inventory levels, which is an on-going process

as the business needs shift and react to the wider environment.

Inventory management involves a retailer seeking to acquire and maintain a

proper merchandise assortment while ordering, shipping, handling, and related costs are

kept in check. It also involves systems and processes that identify inventory

requirements, set targets, provide replenishment techniques, report actual and projected

inventory status and handle 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. Management of the

inventories, with the primary objective of determining/controlling stock levels within

the physical distribution function to balance the need for product availability against the

need for minimizing stock holding and handling costs.

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Design of the study:

Inventory management plays a vital role in an organisation, especially for

the organisations such as VST as it deals with rendering of goods & services to the end

user. It is designed so as to see that there is a continuous production process and the

materials are available whenever required.

Objectives:

Objectives of the study are as follows

To study the importance of inventory management in VST industries.

To know existing system of inventory management in VST industries with reference to receiving, storing & issuing.

To find out methods they were following in the passage for the moment.

To learn the concepts of ordering and issuing.

To suggest and recommend a better way if any for improving the management of inventory.

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Scope of the study:

The present study will reveal the storage system maintained by the

company with help of inventory management which is analyzed with the specimen’s

provided by company and the SAP system used by the company.

Need of the study:

Inventory is a necessary evil that every organisation would have to maintain

for various purposes. Optimum inventory management is the goal of every inventor

planner. Over inventory or under inventory both cause financial impact and health of

the business as well as effect business opportunities.

Inventory holding is resorted to by organisations as hedge against various

external and internal factors, as prediction, as opportunity, as a need and for speculative

purposes.

Most of organisations have raw materials inventory warehouses attached to

the production facilities where raw materials are stored and issue for production on JIT

basis. The reasons for holding inventories can vary from case to case basis. The main

need for study of inventory management is to meet variation in production demand,

cater to cyclical and seasonal demand, economies of scale in procurement, take

advantage of price increase and quantity discount, reduce transit cost and transit times,

long lead and high demand items need to be held in inventory.

Thus it is important to study about inventory management since the

production process depends upon the goods maintained in ware house. If the study on

inventory is not made then over stocking or under stocking leads to various problems

due to which the organisation may face loss.

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Limitations of the study:

Study is based on inventory management information. So all

limitations of inventory management apply to this study.

The formats were kept blank, further data was not given in that

because they did not want to reveal the official information.

The study was done in a limited period of 45 days.

Data was not provided during the month of April due to financial

year ending.

The company is limited to Hyderabad.

Period of study:

The period of study was for 45 days that is from March to May. During this

period data related to inventory management was collected both theoretical as well as

practical. Production process, warehouses have been viewed to get further idea about

utilisation of materials and placing of materials.

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Methodology:

This is a case study of VST industries ltd. Personal discussions were held

with executive and senior officers for the collection of the data. Books related to the

inventory management were used for analysis of data. Data related to company was

taken front there itself. The guidance and support was given very much in collection of

the data.

Review of literature:

Finance is the science of funds management. The general areas of finance

are business finance, personal finance (private finance), and public finance. Finance

includes saving money and often includes lending money. The field of finance deals

with the concepts of time, money, risk and how they are interrelated. It also deals with

how money is spent and budgeted.

One facet of finance is through individuals and business organizations,

which deposit money in a bank. The bank then lends the money out to other individuals

or corporations for consumption or investment and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the

loan (debt) from a bank or directly from a corporation. Bonds are debt instruments sold

to investors for organizations such as companies, governments or charities. The investor

can then hold the debt and collect the interest or sell the debt on a secondary market.

Banks are the main facilitators of funding through the provision of credit,

although private equity, mutual funds, hedge funds, and other organizations have

become important as they invest in various forms of debt. Financial assets, known as

investments, are financially managed with careful attention to financial risk

management to control financial risk. Financial instruments allow many forms

of securitized assets to be traded on securities exchanges such as stock exchanges,

including debt such as bonds as well as equity in publicly traded corporations.

Central banks, such as the Federal Reserve System banks in the United States and Bank

of England in the United Kingdom, are strong players in public finance, acting

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as lenders of last resort as well as strong influences on monetary and credit conditions

in the economy.

Review of techniques and sectors of the financial industry:

An entity whose income exceeds its expenditure can lend or invest the

excess income. On the other hand, an entity whose income is less than its expenditure

can raise capital by borrowing or selling equity claims, decreasing its expenses, or

increasing its income. The lender can find a borrower, a financial intermediary such as

a bank, or buy notes or bonds in the bond market. The lender receives interest, the

borrower pays a higher interest than the lender receives, and the financial intermediary

earns the difference for arranging the loan.

A bank aggregates the activities of many borrowers and lenders. A bank

accepts deposits from lenders, on which it pays interest. The bank then lends these

deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to

coordinate their activity.

Finance is used by individuals (personal finance), by governments (public

finance), by businesses (corporate finance) and by a wide variety of other

organizations, including schools and non-profit organizations. In general, the goals of

each of the above activities are achieved through the use of appropriate financial

instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management and includes

decisions related to the use and acquisition of funds for the enterprise.

In corporate finance, a company's capital structure is the total mix of

financing methods it uses to raise funds. One method is debt financing, which includes

bank loans and bond sales. Another method is equity financing - the sale of stock by a

company to investors. Possession of stock gives the investor ownership in the company

in proportion to the number of shares the investor owns. In return for the stock, the

company receives cash, which it may use to expand its business or to reduce its

debt. Investors, in both bonds and stock, may be institutional investors - financial

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institutions such as investment banks and pension funds - or private individuals,

called private investors or retail investors.

Meaning of Financial Management

Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of funds of the

enterprise. It means applying general management principles to financial resources of

the enterprise.

Scope/Elements

Investment decisions includes investment in fixed assets (called as capital

budgeting).Investment in current assets are also a part of investment decisions called as

working capital decisions.

Financial decisions - They relate to the raising of finance from various

resources which will depend upon decision on type of source, period of financing, cost

of financing and the returns thereby.

Dividend decision - The finance manager has to take decision with regards

to the net profit distribution. Net profits are generally divided into two:

Dividend for shareholders- Dividend and the rate of it has to be decided.

Retained profits- Amount of retained profits has to be finalized which will depend

upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and

control of financial resources of a concern. The objectives can be-

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To ensure regular and adequate supply of funds to the concern.

To ensure adequate returns to the shareholders this will depend upon the earning

capacity, market price of the share, expectations of the shareholders.

To ensure optimum funds utilization. Once the funds are procured, they should

be utilized in maximum possible way at least cost.

To ensure safety on investment, i.e., funds should be invested in safe ventures

so that adequate rate of return can be achieved.

To plan a sound capital structure-There should be sound and fair composition of

capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

Estimation of capital requirements: A finance manager has to make

estimation with regards to capital requirements of the company. This will

depend upon expected costs and profits and future programmes and policies of a

concern. Estimations have to be made in an adequate manner which increases

earning capacity of enterprise.

Determination of capital composition: Once the estimation has been made,

the capital structure have to be decided. This involves short- term and long-

term debt equity analysis. This will depend upon the proportion of equity capital

a company is possessing and additional funds which have to be raised from

outside parties.

Choice of sources of funds: For additional funds to be procured, a company

has many choices like-

-Issue of shares and debentures

-Loans to be taken from banks and financial institutions

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-Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each

source and period of financing.

Investment of funds: The finance manager has to decide to allocate funds into

profitable ventures so that there is safety on investment and regular returns is

possible.

Disposal of surplus: The net profits decision has to be made by the finance

manager. This can be done in two ways:

Dividend declaration - It includes identifying the rate of dividends and other

benefits like bonus.

Retained profits - The volume has to be decided which will depend upon

expansion, innovation, diversification plans of the company.

Management of cash: Finance manager has to make decisions with regards to

cash management. Cash is required for many purposes like payment of wages

and salaries, payment of electricity and water bills, payment to creditors,

meeting current liabilities, maintenance of enough stock, purchase of raw

materials, etc.

Financial controls: The finance manager has not only to plan, procure and

utilize the funds but he also has to exercise control over finances. This can be

done through many techniques like ratio analysis, financial forecasting, cost and

profit control, etc.

Business inventory

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

Time - The time lags present in the supply chain, from supplier to user at every

stage, requires that you maintain certain amounts of inventory to use in this

"lead time."

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Uncertainty - Inventories are maintained as buffers to meet uncertainties in

demand, supply and movements of goods.

Economies of scale - Ideal condition of "one unit at a time at a place where a

user needs it, when he needs it" principle tends to incur lots of costs in terms of

logistics. So bulk buying, movement and storing brings in economies of scale,

thus inventory.

All these stock reasons can apply to any owner or product stage.

Principle of inventory proportionality

Purpose

Inventory proportionality is the goal of demand-driven inventory

management. The primary optimal outcome is to have the same number of days' (or

hours', etc.) worth of inventory on hand across all products so that the time of run out of

all products would be simultaneous. In such a case, there is no "excess inventory," that

is, inventory that would be left over of another product when the first product runs out.

Excess inventory is sub-optimal because the money spent to obtain it could have been

utilized better elsewhere, i.e. to the product that just ran out.

The secondary goal of inventory proportionality is inventory minimization.

By integrating accurate demand forecasting with inventory management, replenishment

inventories can be scheduled to arrive just in time to replenish the product destined to

run out first, while at the same time balancing out the inventory supply of all products

to make their inventories more proportional, and thereby closer to achieving the

primary goal. Accurate demand forecasting also allows the desired inventory

proportions to be dynamic by determining expected sales out into the future; this allows

for inventory to be in proportion to expected short-term sales or consumption rather

than to past averages, a much more accurate and optimal outcome.

Integrating demand forecasting into inventory management in this way also

allows for the prediction of the "can fit" point when inventory storage is limited on a

per-product basis.

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Applications

The technique of inventory proportionality is most appropriate for

inventories that remain unseen by the consumer. As opposed to "keep full" systems

where a retail consumer would like to see full shelves of the product they are buying so

as not to think they are buying something old, unwanted or stale; and differentiated

from the "trigger point" systems where product is reordered when it hits a certain level;

inventory proportionality is used effectively by just-in-time manufacturing processes

and retail applications where the product is hidden from view.

High-level inventory management

It seems that around 1880 there was a change in manufacturing practice

from companies with relatively homogeneous lines of products to vertically integrated

companies with unprecedented diversity in processes and products. Those companies

(especially in metalworking) attempted to achieve success through economies of scope

- the gains of jointly producing two or more products in one facility. The managers now

needed information on the effect of product-mix decisions on overall profits and

therefore needed accurate product-cost information. A variety of attempts to achieve

this were unsuccessful due to the huge overhead of the information processing of the

time.

However, the burgeoning need for financial reporting after 1900 created

unavoidable pressure for financial accounting of stock and the management need to

cost manage products became overshadowed. In particular, it was the need for audited

accounts that sealed the fate of managerial cost accounting. The dominance of financial

reporting accounting over management accounting remains to this day with few

exceptions, and the financial reporting definitions of 'cost' have distorted effective

management 'cost' accounting since that time. This is particularly true of inventory.

Hence, high-level financial inventory has these two basic formulas, which relate to the

accounting period:

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Cost of Beginning Inventory at the start of the period +

inventory purchases within the period + cost of production within the period =

cost of goods available

Cost of goods available − cost of ending inventory at the end of the period

= cost of goods sold

The benefit of these formulae is that the first absorbs all overheads of

production and raw material costs into a value of inventory for reporting. The second

formula then creates the new start point for the next period and gives a figure to be

subtracted from the sales price to determine some form of sales-margin figure.

Manufacturing management is more interested in inventory turnover ratio or average

days to sell inventory since it tells them something about relative inventory levels.

Inventory turnover ratio (also known as inventory turns) = cost of

goods sold / Average Inventory = Cost of Goods Sold / ((Beginning

Inventory + Ending Inventory) / 2)

And it’s inverse

Average Days to Sell Inventory = Number of Days a Year /

Inventory Turnover Ratio = 365 days a year / Inventory Turnover

Ratio

This ratio estimates how many times the inventory turns over a year. This

number tells how much cash/goods are tied up waiting for the process and is a critical

measure of process reliability and effectiveness. So a factory with two inventory turns

has six months stock on hand, which is generally not a good figure (depending upon the

industry), whereas a factory that moves from six turns to twelve turns has probably

improved effectiveness by 100%. This improvement will have some negative results in

the financial reporting, since the 'value' now stored in the factory as inventory is

reduced.

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Financial accounting

An organization's inventory can appear a mixed blessing, since it counts as

an asset on the balance sheet, but it also ties up money that could serve for other

purposes and requires additional expense for its protection. Inventory may also cause

significant tax expenses, depending on particular countries' laws regarding depreciation

of inventory.

Inventory appears as a current asset on an organization's balance sheet

because the organization can, in principle, turn it into cash by selling it. Some

organizations hold larger inventories than their operations require in order inflating

their apparent asset value and their perceived profitability.

In addition to the money tied up by acquiring inventory, inventory also

brings associated costs for warehouse space, for utilities, and for insurance to cover

staff to handle and protect it from fire and other disasters, obsolescence, shrinkage

(theft and errors), and others. Such holding costs can mount up: between a third and a

half of its acquisition value per year.

Businesses that stock too little inventory cannot take advantage of large

orders from customers if they cannot deliver. The conflicting objectives of cost control

and customer service often pit an organization's financial and operating managers

against its sales and marketing departments. Salespeople, in particular, often receive

sales-commission payments, so unavailable goods may reduce their potential personal

income. This conflict can be minimised by reducing production time to being near or

less than customers' expected delivery time. This effort, known as "Lean production"

will significantly reduce working capital tied up in inventory and reduce manufacturing

costs.

Role of inventory accounting

By helping the organization to make better decisions, the accountants can

help the public sector to change in a very positive way that delivers increased value for

the taxpayer’s investment. It can also help to incentives progress and to ensure that

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reforms are sustainable and effective in the long term, by ensuring that success is

appropriately recognized in both the formal and informal reward systems of the

organization.

To say that they have a key role to play is an understatement. Finance is

connected to most, if not all, of the key business processes within the organization. It

should be steering the stewardship and accountability systems that ensure that the

organization is conducting its business in an appropriate, ethical manner. It is critical

that these foundations are firmly laid. So often they are the litmus test by which public

confidence in the institution is either won or lost.

Finance should also be providing the information, analysis and advice to

enable the organizations’ service managers to operate effectively. This goes beyond the

traditional preoccupation with budgets – how much have we spent so far, how much do

we have left to spend? It is about helping the organization to better understand its own

performance. That means making the connections and understanding the relationships

between given inputs – the resources brought to bear – and the outputs and outcomes

that they achieve. It is also about understanding and actively managing risks within the

organization and its activities.

Inventory credit

Inventory credit refers to the use of stock, or inventory, as collateral to raise

finance. Where banks may be reluctant to accept traditional collateral, for example

in developing countries where land title may be lacking, inventory credit is a potentially

important way of overcoming financing constraints. Obtaining finance against stocks

of a wide range of products held in a bonded warehouse is common in much of the

world. A precondition for such credit is that banks must be confident that the stored

product will be available if they need to call on the collateral; this implies the existence

of a reliable network of certified warehouses. Banks also face problems in valuing the

inventory. The possibility of sudden falls in commodity prices means that they are

usually reluctant to lend more than about 60% of the value of the inventory at the time

of the loan.

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Inventory Management History

The constant "beep, beep, beep" of bar codes being scanned at a check-out

lane represents a pillar of modern inventory management systems: stock tracking.

In the earliest days of shop keeping, merchants wrote down purchases, or they looked at

how many units were gone at the day's end and then did their best to forecast future

needs. Experience and intuition were key skills, but it remained an inexact method,

even when applied to operations that were quite small by today's standards.

After the Industrial Revolution, efficiency and mass production became the

main goals of businesses, along with an improved customer experience at the point of

sale. A team at Harvard University designed the first modern check-out system in the

early 1930s. It used punch cards that corresponded with catalog items. A computer

would read the punch cards and pass the information to the storeroom, which would

then bring the item up front to the waiting customer. Because of the automated system,

the machines could also generate billing records and manage inventory. The system

proved to be too expensive to use, but a version of it is in use today in some stores,

where merchants place cards with product information on the aisle for customers to

select and bring to the checkout line. This usually applies to items that are expensive or

large and to controlled items, such as medicines.

Merchants knew they needed a better system, and researchers created the

forerunner of the modern bar-coding system in the late 1940s and early 1950s. It used

ultraviolet light-sensitive ink and a reader to mark items for sale. Again, the system was

too cumbersome and lacked the computing power needed to make it work. Technology

had yet to catch up with their ideas.

The development of affordable laser technology in the 1960s revived the

concept. Lasers allowed smaller, faster and cheaper readers or scanners. The modern

bar code, or the Universal Product Code (UPC), was born and caught on just before the

1970s. As computing power became better, the power of UPC codes to help track and

manage inventory improved exponentially.

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During the mid to late 1990s, retailers began implementing modern

inventory management systems, made possible in large part by advances in computer

and software technology. The systems work in a circular process, from purchase

tracking to inventory monitoring to re-ordering and back around again.

In recent years, another promising technology for tracking inventory has

also has made its way into stores, warehouses and factories. Radio frequency

identification, or RFID, uses a microchip to transmit product information -- such as

type, manufacturer and serial number -- to a scanner or other data collection device. It's

superior to bar codes in several ways. For instance, a scanner reads the information

from an RFID from several yards away, making it ideal for tracking items stacked on

high shelves in warehouses. It also can encode more data than a bar code and in some

systems tell merchants if an item is out of place in the store, providing excellent anti-

theft characteristics.

Another popular means of automated inventory control is vendor-managed

inventory. In this arrangement, the vendor is responsible for keeping its products

stocked on a store's shelf. The vendor and retailer work closely together and share

proprietary information.

This system also has many advantages for vendors. It allows them to ensure

their products are properly displayed and available, and it also puts them in close

contact with the retailer and its sales data. The feedback the vendor receives can play an

important role in its marketing, research and development.

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Industry profile

CIGARETTE INDUSTRY

The cigarette industry is one of the oldest industries in India. It is an important agro

based industry. It is highly labour intensive & provides livelihood to about 5 million

people directly and indirectly.

Cigarette is an item falling under the First Schedule to the Industries (Development &

Regulation) Act, 1951 and requires an industrial license.

 

Capacity and Production

 

At present, there are 19 units in the organized sector engaged in the manufacture of

cigarettes with a total installed capacity of about 147.38 billion pieces per annum. The

production of cigarettes during 2003-2004 was 49269 million sticks. During the current

year i.e. 2004-05, the production (upto November) has been 33145.13 million sticks.

Cigarette sales may actually rise

Chewing tobacco has been a tradition in India for centuries. Of the total amount of

tobacco produced in the country, around 48% is in the form of chewing tobacco, 38%

as bidis, and only 14% as cigarettes. Thus, bidis, snuff and chewing tobacco (such as

gutka, khaini and zarda) form the bulk (86%) of India's total tobacco production. In the

rest of the world, production of cigarettes is 90% of total production of tobacco related

products.

The per capita consumption of cigarettes in India is merely a tenth of the world

average. This unique tobacco consumption pattern is a combination of tradition and

more importantly the tax imposed on cigarettes over the last 2 decades. Cigarette

smokers pay almost 85% of the total tax revenues generated from tobacco.

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BUDGET MEASURES

The specific rate of excise duty on cigarettes is increased by 5 %.

Similarly, excise duty (excluding cess) on bidis, which was last fixed in 2001,

will be raised from Rs 7 to Rs 11 per 1,000 for non-machine made bidis and

from Rs 17 to Rs 24 per 1,000 for machine made bidis. However, there is an

exemption from excise duty for unbranded bidis up to 2 m bidis in a year

subject to fulfillment of the condition of declaration with the Department of

Central Excise and regular monitoring

Pan Masala containing tobacco will continue to bear an excise duty of 66%.

Also the exemption for pan Masala containing tobacco and other tobacco

products that is now given to units in the North Eastern States has been

withdrawn.

1% higher cess to be charged

Dividend distribution tax rate increased from 12.5% to 15%.

The dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds increased to 25 % for all investors.

BUDGET IMPACT

Finance minister's strong support to the campaign "say no to tobacco" has

created a negative impact on the tobacco sector. Excise increase on cigarettes

will hit the sales of the cigarettes.

Increase in tariff on bidis will aid cigarette volumes

As most companies have huge investments in the liquid funds, the higher tax on

dividend distribution will reduce their other income.

The impact of higher tax (cess) on the industry is likely to lower net margins,

albeit marginally.

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SECTOR OUTLOOK

India is the second largest producer of tobacco. Out of the total tobacco produced in

India, only one-third is flue-cured tobacco suitable for cigarette manufacturing.

Most of the tobacco produce is suitable for the manufacture of chewing tobacco,

bidis and other cheap tobacco products, which have no demand outside the country.

Every year, the industry faces hike in excise duties, which then are passed on to

consumers.

The companies continue to face tougher times due to government intervention.

Going forward, this is likely to rise. However, considering that as per capita income

increases and there is a change in the demographic profile of the populace, there is

still some scope for growth for the industry.

INDUSTRY WISH LIST:

Industry chambers favour that the specific excise duty structure based on the

length of cigarettes should be maintained

Additional excise duty (AED) to be replaced /reduced if VAT is implemented. It

would be illogical to charge both the AED and VAT. AED was implemented to

collect tax on behalf of states. Since states would anyway collect VAT directly,

there is no reason to charge AED.

Specific policies should be announced to discourage smuggling of contraband

cigarettes.

The tax rebates on investments in tobacco plantations in backward areas should be

continued

Custom duties to be maintained at 30.6%.

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Budget 2004-05

Increase in excise duty on matches made in the mechanised/semi-mechanised

sector from 8% without Cenvat credit to 16% with Cenvat credit

Budget 2005-06

Specific rates on cigarettes raised by 10%

Surcharge of 10% imposed on ad valorem duties on other tobacco products

including gutka, chewing tobacco, snuff and pan Masala

Excise on matches made by mechanized or semi-mechanized sectors reduced

from 16% to 12%. However, no excise on hand made matches.

Budget 2006-07

Excise duty on cigarettes increased by 5%

Excise on unbranded other smoking tobacco and unmanufactured tobacco and

tobacco substitutes at 16%.

Tariff rate of excise duty on bidis increased.

Excise exemption to small-scale smoking tobacco and tobacco substitute

manufacturers restricted to Rs 1 m

Excise duty on all types of pan masala rationalized at 66%.

Key Positives

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Habitual industry: Despite high government intervention and campaigns

against smoking along with high tax rates, the industry continues to thrive. Also,

ban on smoking in public places and restrictive advertising has not stopped this

industry from growing.

Excise an easy pass on: Since it is a habit industry, companies find it

comparatively easy to pass on excise duty hikes. Last year, the government

increased excise by 10%, but it was easily passed on to consumers, without

demand being affected.

Per capita consumption ridiculously low: The per capita consumption of

cigarettes in India is merely a tenth of the world average. Thus, as disposable

incomes increase, people might shift from bidis to cigarettes and hence there

lies a huge potential to convert. Being the No. 1 player in the segment, ITC is

likely to be a big beneficiary of this change.

Key Negatives

Heavily penalized through punitive taxation policies:  Cigarette companies

pay roughly 50% of their revenues as excise. As a result, the share of cigarettes

in total tobacco consumption has declined from 21% in 1981-82 to a mere 14%

in 2004.

Domestic cigarette companies suffer a double whammy:  On the one hand,

they are barred from sponsoring sports and cultural events and on the other

hand, contraband cigarette volumes continue to thrive. Net result, volume

growth is sluggish. In the last 20 years, tobacco consumption in non-cigarette

varieties has increased especially in the chewing format by 68 m Kgs, and

reduced in the cigarette format by 21 m Kg

Production by Country

(Figures are in thousands of tonnes.)(2000)

COUNTRY PRODUCTION

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China 2,298.8

India 595.4

Brazil 520.7

United States 408.2

European Union 314.5

Zimbabwe 204.9

Turkey 193.9

Indonesia 166.6

Former Soviet Union 116.8

Malawi 108.0

Company profile

History

The Vazir Sultan Tobacco Company Limited was incorporated on 10th November, 1930, under the Hyderabad Companies Act No. IV of 1320 Fasli and now governed under the Companies Act, 1956. The name of the Company was subsequently changed to VST Industries Limited on 30th April, 1983. The Company has its Registered Office at Azamabad, Hyderabad.

BOARD OF DIRECTORS

ChairmanABHIJIT BASU

Managing DirectorRAYMOND S. NORONHA

Deputy Managing Director & SecretaryN. SAI SANKAR

DirectorsPETER G. HENRIQUES (Appointed w.e.f. 15th April, 2010)JAYAMPATHI DIVALE BANDARANAYAKE (Resigned w.e.f. 15th April, 2010)AIR CHIEF MARSHAL IDRIS HASAN LATIF, P.V.S.M. (Retd.) (Resigned w.e.f. 16th April, 2010)T. LAKSHMANANMILIND ANNA KHARATR.V.K.M. SURYARAUS. THIRUMALAI

Auditors

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Lovelock & LewesChartered AccountantsHyderabad - 500 034Andhra Pradesh

Registered Office1-7-1063/1065, AzamabadHyderabad - 500 020Andhra Pradesh

Registrars & Share Transfer AgentsSathguru Management Consultants Private LimitedPlot No.15, Hindi Nagar, PunjaguttaHyderabad - 500 034Phone: +91 40 2335 0586, 2335 6507, 2335 6975Fax: +91 40 4004 0554E-mail: sta@sathguru.com

COMPANY PROFILE:

VST was incorporated on 10th November, 1930 at Hyderabad, Andhra Pradesh (AP). It has a manufacturing facility at Secundrabad, (AP) and its principal activities are manufacturing and marketing of cigarettes. It is the second largest cigarette-maker in India with 12 brands in its portfolio. The company is an affiliate of British American Tobacco (BAT), UK, which holds a 32.16% stake in the company. Some of the major brands of the company are Charminar, Charminar filter, charms etc.The Group's principal activities are to manufacture and market cigarettes. The Group also exports cut and unmanufactured tobacco and cigarettes. The Group's major brand names are Charms, Charminar Special Filter, Charminar Plain and Charminar Standard.

According to sources, British American Tobacco (BAT) currently holds around 32 per cent stake in VST, the, Bright Star 14.97 per cent, while the balance is held by financial institutions and the public.

VST Industries Ltd., the third largest cigarette company with an annual turnover of around

Rs.1000 crore is situated in Hyderabad; capital of A.P. the factory was established in November

1930 & over the years. It has grown into a major industry. Charminar & Charms Cigarette are

the key brands of the several brands produced by this industry the company exports cut tobacco

& cigarettes to different countries.

VST is an associate company of British American Tobacco Industries. UK the

company adopts best international practices in the lines of business & considers social

responsibility as a prime consideration in its business principles, pioneering efforts in agricultural

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extension activities, brand marketing & advertising, technological experience as well as service

to its customers. The company has excellent relations with the State & Central Government,

Banks & Financial Institutions, Trade Unions, farmers, trade & distribution channels &

consumers.

The factory is situates in Azamabad in 12.14 cares of land, housing its registered office,

manufacturing blocks. The company has strength of 1075 employees with 281 management

Staff to 794 men & gives indirect employment to persons by way of contractual works, farming

and leaf growing. The company pays Rs.700 crores approx. annually by way of excise duty to

the government.

Primary manufacturing department (PMD) and secondary manufacturing (SMD) are two

making cigarettes respectively. The modernized plant produces 45 tones high quality cut

tobacco daily. It is well laid out ensuring ventilation and illumination. State of the art techniques

are employed in nerve machines with PLC controls and variable frequency drives for

conservation of energy. Equipments are provided with class 3 & 4 guarding systems to ensure

maximum safety to the operating personnel. Dust recovery filters unit and incerators are

provided as part of pollution control measure to control dust and odour respectively in secondary

manufacturing department. In this department cigarettes are manufactured, packed and wrapped

packets are bundled / parcelled and thereafter filled in the final container.

MISSION:

Providing superior sensory and psychosocial satisfaction through tobacco and allied value products, to an expanding global market through high customer orientation and competitive advantages.

VST SLOGAN: -----------“QUALITY FIRST”

OBJECTIVES

Company has established special tobaccos for nice markets. Which are being produced

by the large farmer’s base of the company? This has helped in optimizing the turnover and profit

and also helped in economic enlistment of the backward regions.

Company’s farmers continue to group tobacco with lowest pesticides residue levels and

well within international standards.

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VST considers tobacco and related products as the primary segment for reporting

geographical segments considered for disclosure mainly consist of sales within India and

sales outside India. The entire activity pertaining to sales outside India is carried out

from India.

MOMENTS AND CHARMS VIRGINIA FILTER was two branches which stood out

improving the volume base. Company is also working on launches of several values for

money branch in piece segments that offer opportunities.

Development plans are drawn up for key managers to shoulder higher responsibilities as

well as to increase their job effectiveness.

VST remains committed on improving the effectiveness of internal control

environment which provides assurance on the efficiency of the operations and

security of its assets.

VST Business operations provides :-

Reliable financial & operational information.

Effectiveness and efficiency of operations.

Safeguarding assets from unauthorized use or losses.

Compliance with systems applicable laws and regulations.

Review of Information technology and other business process systems.

VST Future Plan of Action:-

Development of new blends and branch as per domestic and export market requirements.

Inputs to technical staff and workmen for further improvement of product, Quality,

Environment, Health and Safety (EHS) rating and utilization of Tobacco and non tobacco

materials.

Develop new blends as per domestic and export requirements. Develop new brands in various

segments as per market requirements/general consumer survey feed backs.

Work closely with international suppliers of tobacco flavour and develop new flavour for new

blends.

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Train all workmen and give inputs with respect to technical skins developments product quality

awareness evaluation and improvement.

The focus of VST will continue to remain on cigarettes with greater trust on improving market

share in both existing as well as new geographies would continue and with the success achieved

this year efforts to increase the speed would continue company’s human resource management

system aim is to have on a continuous basis a talent pool ready to meet challenges in the in the

highly competitive market and deliver results.

Company is also committed to improving the export turnover of unmanufactured tobacco with

trust on new crop varieties.

Other Activities:

As a social responsible and to conserve greenery VST is continuing social forestry

through afforestation. & trees for life programme.

It is also actively discouraging child labour involvement and in tobacco growing processing. It has initiated the installation of water purifiers in major tobacco growing villages to improve the health of the rural community

Rating:

CRISIL have reconfirmed the rating of your company as “FAA+” for Deposit Schemes and “AA” for long term Non-convertible Debentures.

“FAA+” (F double AA):

Adequate Safety: indicates the degree of safety regarding timely payment of interest and principle is satisfactory. Changes in circumstances can affect. “AA” : Loans carrying this rating are judged to of high quality by all standards. They are also classified as high investment grade. They are rated lower than CARE ‘AAA” because of somewhat lower margins of protection. Changes in assumptions may have a greater impact or the long term risks may be somewhat larger. Overall, the difference with CARE AAA rated loans is marginal.

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Product Description:

Finished Product:

Product Name Installed CapacityCigarettes : 20592 UnitsTobbacco-Unmanufactured : N.A.Tobacco-Cut : N.A.Paper Conversion Products : 3456 Units   VST Industries said that the equity shares of the company have been delisted from the Hyderabad Stock Exchange (HSE) with effect from Oct. 31, 2006VST, incorporated in 1930, is a Hyderabad-based company engaged in manufacturing of cigarettes. The company own around 12 brands of cigarettes, some of them include Charminar, Charms Mini Kings and Charms Virginia Filter.VST Industries Ltd has informed the Indian stock exchanges that at the Meeting of the Board of Directors of the company held on April 18, 2007, it was resolved to recommend a Dividend of 200% which works out to be Rs.20 per share of face value Rs.10

Company History - VST IndustriesYEAR EVENTS

1930 - The company was incorporated at Hyderabad. The Company Manufactures and distributes cigarettes. The products are sold under the trade names `Charminar Specials', `Shah-I-Deccan', `Qila', `High Court', `Vazir' and `Ambassador'.

1951 - 1, 25,000 bonus shares issued in the prop. 1:3. 1952 - 5, 00,000 bonus shares issued in the prop. 1:1.

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1954 - Capital converted from O.S. currency to I.G. Currency (Difference of Rs 1.67 per share capitalised from Reserves). 1956 - 30,000 pref. shares issued for cash. 1966 - 1, 00,000 bonus equity shares issued in the prop. 1:1. 1973 - 29,543 Pref. shares were redeemed at the close of business on 31st March. 1975 - In April, 17, 70,000 shares issued to Indian nationals (prem. Rs.6 per share): 1, 71,940 shares

as rights, 50,000 shares to employee and directors and 15, 48,060 shares to the Public. 1977 - 22, 62,000 bonus shares issued in the prop. 3:5. 1979 - Hallmark Tobacco Company, Ltd. was promoted and converted into A subsidiary of the

Company. This subsidiary has manufacturing And selling agreements with the Company. 1981 - Hallmark Investments, Ltd., Tobacco Leaf Investments Ltd., Vaziar Investments, Ltd., VST Investments Ltd., VST Distribution, Storages & Leasing Co.,

Ltd., and Tobacco Diversification Investments, Ltd., became wholly owned subsidiaries of the Company. Hallmark Tobacco Company Ltd. is also a subsidiary of The Company.

1983 - With the extension of the Central Excise's & Salt Act, 1994 to the State of Sikkim the

collaboration arrangements came to an End. 1984 - With effect from 10th August, the name of the Company was changed from The Vazir Sultan

Tobacco Co., Ltd. to VST Industries Ltd. 1987 - With the introduction of a lower excise duty slab for cigarettes upon 60mm length in the non-

filter segment, the Company launched `Vijay Virginia' and `Vijay Gold Flake' to take full advantage of The lower tax.

1988 - The Company embarked upon a major modernisation programme designed to improve its

competitive ability in domestic and International markets. 1989 - The Company received an import licence for two sophisticated high-speed precision Logo Max

cigarette making groups Manufactured in France. - The Company undertook to upgrade its existing laboratory facility Into a well equipped R&D

Centre. - The Company issued 3,25,000-14% secured redeemable non-convertible debentures of Rs 100

each on private placement to UTI, LIC and Army Group Insurance Fund. These debentures are redeemable at premium of 5% in 5 equal annual instalments from The 6th September, 1994.

- 36, 19,200 bonus shares issued in the prop. 3:5.

1990 - The Company launched Kingston Mini Kings Cigarettes in the United Arab Emirates. To

increase its exports further, the Company developed fire cured, light soil Burley and other

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Non-traditional varieties of tobacco. 1991 - A new brand by name Kingston Dual Filter was launched into the premium king-size cigarette

segment, at Hyderabad, Mumbai and Pune and it was well received. - Loga machines were installed. Loga machine No. 1 was commissioned In 1992.

- 57, 90,720 bonus shares issued in the prop. 3:5. 1994 - During the year, the Company successfully marketed `Vijay Deluxe' And `Charminar Standard'

non-filter cigarettes. The Company also Launched the modern Sasib 20's pack of cigarettes. - During the year, `VST Natural Products Ltd.' a new Company was incorporated in order to

continue field trials for selected high value horticultural corporation. 1995 - The programmable logic control on makers and packers were commissioned.

- The Company agreed to collaborate with Rayong Industries Pvt. Ltd., Sikkim, for the manufacture of cigarettes in Sikkim. The Company supplied the necessary technical expertise for setting up a cigarette making factory at Rangpo, Sikkim.

1997 - The Company launched a extremely distinctive and high quality cigarette called Charms blues

line both in the premium king size segment and also in the regular size filter segment. - The company has launched a voluntary retirement scheme to reduce at least 10 per cent of its

manpower. - VST is getting all the help from its parent company BAT Industries which is helping in its

restructuring through its own tested methods. The objective is to make VST most cost effective and efficient organisation in the industry.

- BAT holds 31.6 per cent equity in VST while 24.51 per cent stake is held by institutions such

as LIC and GIC. The public holds the largest share in the company to the tune of 34.76 per cent while the rest is with other corporate bodies and NRIs.

- It has been decided to relaunch the Charminar brand which has been one of the most popular

low-priced cigarettes in the Indian market. Smokers often found Charminar cigarette product very dry and unsuitable to the palate, especially in areas where humidity was low.

- FIs hold 32.47 per cent of the company's equity, the foreign investors, BAT, holds a 33.27 per

cent stake and the remaining 4.71 per cent is held by the domestic corporate. - VST has an installed capacity to manufacture 33,007 million Sticks of cigarettes per annum. - VST runs neck to neck with Godfrey Phillips for the second spot accounting for approximately

15.5% of the domestic cigarette. - VST has popular brands like Charminar and Charminar Standard in its mini and micro

segments. In the filter segment, the company has brands like Charms, Charminar Special

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Filter and Gold Premium. - VST had set up the 100 per cent export-oriented unit (EOU) in technical collaboration with

High Value Horticulture PLC of the United Kingdom and Asia Ventures International of Israel with a pickling line to handle production of bottled, canned and pickled vegetables and an oleoresin plant.

- VST Natural Products, in the meantime, has entered into a strategic technology and marketing

tie-up with Green Bay Foods, a division of the .8 billion United States-based food and pickle giant Dena Speciality Products Incorporated.

- Having set up the modern VSTNPL, the company is entered into techno-marketing agreements

with global players in the field. 1998 - VST Ltd has shut down the primary manufacturing division (PMD) at its Azamabad factory

following official flat regarding environment pollution. The Hyderabad district administration VST Ltd to shut down its Azamabad cigarette factory as it is causing intense air pollution in the state capital.

- VST commissioned its first primary manufacturing facility for tobacco processing in 1990. It has since, continuously modernised and upgraded its primary & secondary tobacco processing and cigarette manufacturing facilities to meet international standards.

- VST has installed the best pollution control equipment in the factory premises. 1999 - Additionally the company had launched `Blues Kings' a premium variant of its `Charms' brand

in November 1997. The new product however did not live up to the expectations of the company.

- The company has appointed Rabo India Finance, a part of Rabo-bank International, to find a

strategic partner for VST Natural Products, which is engaged in agri-product processing business.

2000 - In a move to improve the profitability and reduce labour costs, tobacco major VST Industries

Ltd. has introduced a voluntary retirement scheme for its 1,600 strong work force. - Fitch Ratings India has assigned an Ind D1+ rating to the Rs 10-crore commercial paper

programme of the company. 2001 - British tobacco giant BAT Plc to increase shareholding in VST Industries. 2003 - Recovers the losses it’s had witnessed on the food and financial services business. - Andhra Pradesh Government calls upon British based BAT; ITC along with the stock broker

Damani- controlled Bright Star Investments to Divest its holdings in the company. - AP calls for bids for disinvestment of the company. - Russell Credit Ltd acquires 723499 shares which is 4.69% of VST Industries Ltd.

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- Bright Star Investments Ltd acquires 3, 10,442 shares amounting to 2.01% of the company. - Delisted from Madras Stock Exchanges 2004 - Vst Industries Ltd. has informed that the equity shares of the Company have been delisted

from The Stock Exchange – Ahmedabad effective January 21, 2004. - Delists shares from Delhi Stock Exchange 2006 - VST Industries Ltd Delists the equity shares from Hyderabad Stock exchange Ltd effective

October 31, 2006

Theoretical information

Introduction to Inventory

Every enterprise need inventory for smooth running of its activities. It serves as a link between production and distribution processes. There is, generally, a time lag between the recognition of a need and its fulfilment. The greater the time lag, the higher the requirements of inventory. The unforeseen fluctuations in demand and supply of goods also necessitate the need for the inventory. It also provides a cushion for future price fluctuations.

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 minimize investment in inventories.

Inventory management is the active control program which allows the management of sales, purchases and payments.

Inventory management software helps create invoices, purchase orders, receiving lists, payment receipts and can print bar coded labels. An inventory management software system configured to warehouse, retail or product line will help to create revenue for any company. The inventory management will control operating costs and provide better understanding. A complete inventory management control system contains the following components:

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Inventory management definition

Inventory management terms

Inventory management purposes

Definition and objectives for inventory management

Organizational hierarchy of inventory management

Inventory management planning

Inventory management controls for inventory

Determining inventory management stock levels

In any business or organization, all functions are interlinked and connected to each other and are often overlapping. Some key aspects like supply chain management, logistics and inventory form the backbone of the business delivery function. Therefore these functions are extremely important to marketing managers as well as finance controllers.

Inventory management is a very important function that determines the health of the supply chain as well as the impacts the financial health of the balance sheet. Every organisation constantly strives to maintain optimum inventory to be able to meet its requirements and avoid over or under inventory that can impact the financial figures.

Inventory is always dynamic. Inventory management requires constant and careful evaluation of external and internal factors and control through planning and review. Most of the organisations have a separate department or job function called inventory planners who continuously monitor, control and review inventory and interface with production, procurement and finance departments.

Definition of inventory

The dictionary meaning of inventory is ‘stock of goods, list of goods’. In accounting language inventory means stock of finished goods. In manufacturing concern, it may include raw materials, work in process and stores, etc.

Inventory includes the following things:

(a) Raw materials: Raw materials form a major input into the organisation. They are required to carry out production activities uninterruptedly. The quantity of raw materials required will be determined by the rate of consumption and the time required for

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replenishing the supplies. The factors like the availability of raw materials and government regulations etc, too affect the stock of raw materials.

(b) Work- in- progress: The work- in- progress is that stage of stocks which are in between raw materials and finished goods. The raw materials enter the process of manufacture but they are yet to attain a final shape of finished goods. The quantum of work- in- progress depends upon the time taken in the manufacturing process. The greater the time taken in manufacturing, the more will be the amount of work in progress.

(c) Consumables: These are the raw materials which are needed to smoothen the process of production. These materials do not directly enter production but they act as catalysts, etc. consumables may be classified according to their consumption and criticality. Generally, consumable store do not create any supply problem and form a small part of production cost. There can be instances where these materials may account for much value than the raw materials. The fuel oil may form a substantial part of cost.

(d) Finished goods: These are the goods which are ready for the consumers. The stock of finished goods provides a buffer between production and market. The purpose of maintaining inventory is to ensure proper supply of goods to customers. In some concerns the production is undertaken on order basis, in these concerns there will not be a need for finished goods. The need for finished goods inventory will be more when production is undertaken in general without waiting for specific orders.

(e) Spares: Spares also form a part of inventory. The consumption pattern of raw materials, consumables, finished goods are different from that of spares. The stocking policies of spares are different from industry to industry. Some industries like transport will require more spares than the other concerns. The costly spare parts like engines, maintenance spares etc. are not discarded after use, rather they are kept in ready position for further use. All decisions about spares are based on the financial cost of inventory on such spares and the costs that may arise due to their non-availability.

PURPOSE/BENEFITS OF HOLDING INVENTORIES

Although holding inventories involves blocking of a firm’s funds and the costs of storage and handling, every business enterprise has to maintain a certain level of inventories to facilitate uninterrupted production and smooth running of business. In the absence of inventories a firm will have to make purchases as soon as it receives orders. It will mean loss of time and delays in execution of orders which sometimes may cause loss of customers and business. A firm also needs to maintain inventories to reduce ordering costs and avail quantity discounts, etc. generally speaking; there are three main purposes or motives of holding inventories:

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(1) The transaction motive which facilitates continuous production and timely execution of sales orders.

(2) The precautionary motive which necessitates the holding of inventories for meeting the unpredictable changes in demand and supplies of materials.

(3) The speculative motive which induces to keep inventories for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts, etc.

RISK AND COSTS OF HOLDING INVENTORIES

The holding of inventories involves blocking of a firm’s funds and incurrence of capital and other costs. It also exposes the firm to certain risks. The various costs and risks involved in holding inventories are as below:

(1) Capital costs: Maintaining of inventories results in blocking of the firm’s financial resources. The firm has, therefore, to arrange for additional funds to meet the cost of inventories. The funds may be arranged from own resources or from outsiders. But in both the cases, the firm incurs a cost. In the former case, there is an opportunity cost of investment while in the later case; the firm has to pay interest to the outsiders.

(2) Storage and handling costs: Holding of inventories also involves costs on storage as well as handling of materials. The storage costs include the rental of the go down, insurance charges etc.

(3) Risk of price decline: There is always a risk of reduction in the prices of inventories by the suppliers in holding inventories. This may be due to increased market supplies, competition or general depression in market.

(4) Risk of obsolescence: The inventories may become obsolete due to improved technology, changes in requirements, change in customer’s taste, etc.

(5) Risk deterioration in quality: The quality of materials may also deteriorate while the inventories are kept in stores.

INVENTORY MANAGEMENT

The investment in inventory is very high in most of the undertakings engaged in manufacturing, whole sale and retail trade. The amount of investment is sometimes more in inventory than in other assets. In India, a study of 29 major industries has revealed that the average cost of materials is 64 paisa and the cost of labour and overheads is 36 paisa in a rupee. In industries like sugar, the raw materials are as high as 68.75 percent of total cost. About 90 percent part of working capital is invested in inventories. It is necessary for every management to give proper attention to inventory management. A proper planning of purchasing, handling,

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storing and accounting should form a part of inventory management. An efficient system of inventory management will determine

(a) what to purchase

(b) how much to purchase

(c) from where to purchase

(d) Where to store, etc.

There are conflicting interests of different departmental heads over the issue of inventory. The purpose of inventory management is to keep the stock in such a way that neither there is over stocking nor under stocking. The over stocking will mean a reduction of liquidity and starving of other production processes; under stocking, on the other hand, will result in stoppage of work. The investments in inventory should be kept in reasonable limits.

OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of inventory management are operational and financial. The operational objectives mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain idle and minimum working capital should be locked in it. The following are objectives of inventory management:

To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met.

To avoid both over-stocking and under-stocking of inventory.

To maintain investments in inventories at the optimum level as required by the operational and sales activities.

To keep material cost under control so that they contribute in reducing cost of production and overall costs.

To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralising purchases.

To minimise losses through deterioration, pilferage, wastages and damages.

To design proper organisation for inventory management. Clear cut accountability should be fixed at various levels of the organisation.

To ensure perpetual inventory control so that materials shown in ledgers should be actually lying in the stores.

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To ensure right quality goods at reasonable prices. Suitable quality standards will ensure proper quality of stocks. The price analysis, the cost analysis and value analysis will ensure payment of proper prices.

To facilitate furnishing of data for short term and long term planning and control of inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

Effective inventory management requires an effective control system for inventories. A proper inventory control not only helps in solving the acute problem of liquidity but also increase profits and causes substantial reduction in the working capital of the concern. The following are the important tools and techniques of inventory management and control:

Determination of Stock Levels.

Determination of Safety Stocks.

Selecting a proper system of Ordering for Inventory.

Determination of Economic Order Quantity.

A. B. C. analysis

V E D analysis

Inventory turnover ratios

Aging schedule of inventories

Classification and codification of inventories

Preparation of inventory reports

Lead time

Perpetual inventory system

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JIT control system

Double bin system

Input-output ratio

FNSD analysis

Material cost reports

Determination of stock levels Carrying of too much and too little of inventories is detrimental to the firm. If the inventory level is too little, the firm will face frequent stock outs involving heavy ordering costs and if the inventory level is too high it will be unnecessary tie-up of capital. Therefore, an efficient inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock-out which may result in loss of sale or stoppage of production. Various stock levels are discussed as such:

(a) Minimum level: this represents the quantity which must be maintained in hand at all the times. If stocks are less than the minimum level then the work will stop due to shortage of materials. Following factors are taken into account while fixing minimum stock level:

Lead time: a purchasing firm requires some time to process the order and time is also required by the supplying firm to execute the order. The time taken in processing the order and then executing is known as lead time. It is essential to maintain some inventory during this period.

Rate of consumption: it is the average consumption of materials in the factory. The rate of consumption will be decided on the basis of past experience and production plans.

Nature of material: the nature of material also affects the minimum level. If a material is required only against special orders of the customer then minimum stock will not be required for such materials.

Minimum stock can be calculated with the help of following formula

Minimum stock level= re-ordering level- (normal consumption * normal re-order level)

(b) Re-ordering level: when the quantity of materials reaches at a certain figure then fresh order is sent to get materials again. The order is sent before the materials reach minimum stock level. Re-ordering level or ordering level is fixed between minimum level and maximum level. The rate of consumption, number of days required replenishing the stocks, and maximum quantity of

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materials required on any day are taken into account while fixing re-ordering levels. Re-ordering level is fixed with the following formula:

Re-ordering level= maximum consumption * maximum re-order period

(c) Maximum level: it is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds maximum level limit then it will be overstocking. A firm should avoid overstocking because it will result in high material costs. Overstocking will mean blocking of more working capital, more space for storing the materials, more wastage of materials and more chances of losses from obsolescence. Maximum stock level will depend upon the following factors:

The availability of capital for purchase of materials. The maximum requirements of materials at any point of time. The availability of space for storing the materials. The rate of consumption of materials during lead time. The cost of maintaining the stores. The possibility of fluctuations in prices. The nature of materials. If the materials are perishable in nature,

then they cannot be stored for long. Availability of materials. If the materials are available only

during seasons then they will have to be stored for the rest of the period.

Restrictions imposed by the government. Sometimes, government fixes the maximum quantity of materials which a concern can store. The limit fixed by government will become the limiting factor and maximum level cannot be fixed more than this limit.

The possibility of change in fashions will also affect the maximum level.

The following formula may be used for calculating maximum stock level:

Maximum stock level= re-ordering level + re-ordering quantity-(minimum consumption * minimum re-ordering period)

(d) Danger level: it is the level beyond which materials should not fall in any case. If danger level arises then immediate steps should be taken to replenish the stocks even if more cost is incurred in arranging the materials. If materials are not arranged immediately there is a possibility of stoppage of work. Danger level id determined with the following formula:

Danger level= average consumption * maximum re-order period for emergency purchases.

(e) Average stock level: the average stock level is calculated as such:

Average stock level= minimum stock level + ½ of re-order quantity

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Determination of safety stocks

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out. The stock-out can prove costly by affecting the smooth working of the concern. In order to protect against the stock-out arising out of usage fluctuations, firms usually maintain some margin of safety or safety stocks. The basic problem is to determine the level of quantity of safety stocks. Two costs are involved in the determination of this stock i.e. opportunity cost of stock-outs and the carrying costs. The stock-outs of raw materials cause production disruption resulting into higher cost of production. Similarly, the stock-outs of finished goods result into the failure of the firm in competition as the firm cannot provide proper customer service. If a firm maintains low level of safety frequent stock-outs will occur resulting into the larger opportunity costs. On the other hand, the larger the quantity of safety stocks involves higher carrying costs.

Ordering systems of inventory

The basic problem of inventory is to decide the re-order point. This point indicates when an order should be placed. The re-order point id determined with the help of these things:

(a) Average consumption rate

(b) Duration of lead time

(c) Economic order quantity

When the inventory is depleted to lead time consumption, the order should be placed. There are three prevalent systems of ordering and a concern can choose any one of these:

(a) Fixed order quantity system generally known as economic order quantity system;

(b) Fixed period order system or periodic re-ordering system or periodic review system;

(c) Single order and scheduled part delivery system.

Economic Order Quantity

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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 costs and carrying costs.

(A) Ordering costs: these are the costs which are associated with the purchasing or ordering of materials. These costs include:

1) Costs of staff posted for ordering of goods. A purchase order is processed and then placed with suppliers. The labour spent on this process is included in ordering costs.

2) Expenses incurred on transportation of goods purchased.3) Inspection costs of incoming materials.4) Cost of stationery, typing, postage, telephone charges, etc.

These costs are known as buying costs and will arise only when some purchases are made.When materials are manufactured in the concern then these costs will be known as set-up costs. These costs will include costs of setting up machinery for manufacturing materials, time taken up in setting, cost of tools, etc. The ordering costs are totalled up for the year and then divided by the number of orders placed each year. The planning commission of India has estimated these costs between rs. 10 to rs. 20 per order.

(B) Carrying costs: these are the costs for holding the inventories. These costs will not be incurred if inventories are not carried. These costs include:

1) The cost of capital invested in inventories. An interest will be paid on the amount of capital locked-up in inventories.

2) Cost of storage which could have been used for other purposes.

3) The loss of materials due to deterioration and obsolescence. The materials may deteriorate with passage of time. The loss of obsolescence arises when the materials in stock are not usable because of change in process or product.

4) Insurance cost5) Cost of spoilage in handling of materials.

The planning commission of India had estimated these costs between 15 percent and 20 percent of total costs. The longer the materials kept in stocks, the costlier it becomes by 20 percent every year. The ordering and carrying costs have a reverse relationship. The ordering cost goes up with the increase in number of orders placed. On the other hand, carrying costs go down per unit with the increase in number of units, purchased and stored. It can be shown in the diagram:

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The ordering and carrying costs of materials being high, an effort should be made to minimize these costs. The quantity to be ordered should be large so that economy may be made in transport costs and discounts may also be earned. On the other hand, storing facilities, capital to be locked up, insurance costs should also be taken into account.

While calculating EOQ the following assumptions are made:

(1) The supply of goods is satisfactory. The goods can be purchased whenever these are needed.(2) The quantity to be purchased by the concern is certain.(3) The prices of goods are stable. It results to stabilise carrying costs.

When above-mentioned conditions are satisfied, economic order quantity can be calculated with help of the following formula:

EOQ= √2AS/IWhere A= Annual consumption in rupees S= Cost of placing an order I= Inventory carrying costs of one unit.

A-B-C Analysis

The materials are divided into a number of categories for adopting a selective approach for material control. It is generally seen that in manufacturing concern, a small percentage of items contribute a large percentage of value of consumption and a large percentage of items of materials contribute a small percentage of value. In between these two limits there are some items which have

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CostInRupee

No. of orders

Total cost

Ordering cost

Inventory carrying cost

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almost equal percentage of value of materials. Under A-B-C analysis, the materials are divided into three categories viz., A, B and C. past experience has shown that almost 10 percent of the items contribute to 70percent of value of consumption and this category is called ‘A’ category. About 20percent of the items contribute about 20 percent of value of consumption and this is known as category ‘B’ materials. Category ‘C’ covers about 70percent of items of materials which contribute only 10 percent of value of consumption. There may be some variation in different organisations and an adjustment can be made in these percentages.

The information is shown in the following diagram:

Class No. of items Value of items % %

A 10 70 B 20 20 C 70 10

A-B-C analysis helps to concentrate more efforts on category A since greatest monetary advantage will come by controlling these items. An attention should be paid in estimating requirements, purchasing, maintaining safety stocks and properly storing of ‘A’ category materials. These items are kept under a constant review so that a substantial material cost may be controlled. The control of ‘C’ items may be relaxed and these stocks may be purchased for the year. A little more attention should be given towards ‘B’ category items and their purchase should be undertaken at quarterly or half-yearly intervals.

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A

B C

No. of items

ValueOfItems

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Advantages

A strict control is exercised on the items which represent a high percentage of the material costs. Managerial time is spent on ‘A’ items where as ‘C’ items and sometimes ‘B’ items can be handled by clerical staff with least managerial supervision. Equal attention to all the items of stores is not desirable because it is expensive. Concentrating on all the items of stores is likely to have a defused effect on all the items, irrespective of the value of consumption. Therefore, ABC analysis should be followed to give due attention to the items which they deserve keeping in view their value of consumption.

Investment in inventory is reduced to the minimum possible level because a reasonable quantity of ‘A’ items representing a significant portion of the material costs is purchased. To reduce investment in materials, close control of ‘A’ items contributes much more than close control ‘C’ items.

Storage cost is reduced as a reasonable quantity of materials, which account for high percentage of value of consumption, will be maintained in the stores.

With the introduction of the ABC analysis, management time is saved because attention is required to be paid only to some of the items rather than on all the items.

VED Analysis

The VED analysis is used generally for spare parts. The requirements 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 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 type of spares is also necessary but their stocks may be kept at low figures. The stocking of D type 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.

Inventory Turnover Ratios

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Inventory turn over ratios is calculated to indicate whether inventories have been used efficiently or not. The purpose is to ensure the blocking of only required minimum funds in inventory. The inventory turn over ratio is also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/average inventory cost. Inventory conversation period may also be calculated to find the average time taken for clearing the stocks. Symbolically,

Inventory turnover ratio= cost of goods sold/average inventory at cost

Or

= net sales/ (average) inventory

And

Inventory conversation period= days in year/ inventory turnover ratio.

Aging schedule of inventories

Classification of inventories according to the period (age) of their holding also helps in identifying slow moving inventories thereby helping in effective control and management of inventories.

Classification and codification of inventories

The invention of a manufacturing concern may consist of raw materials, work in progress, finished goods, spares, consumable stocks, etc. all these categories may have their sub-divisions. The raw materials used may be of 3-4 types, finished goods may also be of mare than one type, spares may be of a number of types and so on. For a proper recording and control of inventory, a proper classification of various types of items is essential. The inventories should first be classified and then code numbers should be assigned for their identification. The identification of short names is useful for inventory management not only for large concerns but also for small concerns. Lack of proper classification may also lead to reduction in production.

The inventories may be classified either according to their nature or according to their use. Generally, materials are classified according to their nature such as construction materials, consumable stocks, spares, lubricants, etc. after classification; the materials are given code numbers. The coding may be done alphabetically or numerically. The latter method is generally used for coding. The class of materials is assigned two digits and then two or three digits are assigned to the category of materials in that class. The third distinction is needed for the quality of goods and decimals are used to note this factor. For example, a concern has two categories of items divided into 15 groups. Two numbers will be used for main

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category and two in the sub-groups and then decimals will be used to the quality etc. if mobile is to be coded, two digits will be used in the category, i.e., lubricant oils say 12, two digits will be used for mobile oil, say 56 an done digit may be used from the quality of mobile oil, say 1. The code of mobile oil will be 1256.1

The classification and coding of inventories enables the introduction of mechanised accounting. It also helps in maintaining secrecy of description. It also helps the prompt issue of stores.

Inventory reports

From effective inventory control, the management should be kept informed with the latest stock position of different items. This is usually done by preparing periodical inventory reports. These reports should contain all information necessary for managerial action. On the basis of these reports management takes corrective action wherever necessary. The more frequently these reports are prepared the less will be the chances of lapse in the administration of inventories.

Lead time

Lead time is the period that elapses between the recognition of a need and its fulfilment. There is a direct relationship between lead time and inventories. The level of inventory of an item depends upon the length of its lead time. Suppose, lead time is one month, any action taken now will have an effect only one month later. So inventory for the current month must be in hand. During lead time there will be no delivery of materials and consuming departments will have to be served from the inventories held.

Lead time has two components: lead time for company (administrative lead time) from initiation of procurement action until the placing of an order, and the lead time for the producer, known as delivery lead time from the placing of an order until the delivery of the ordered material. Administrative lead time also follows after the delivery is taken. The functions of inspection, material handling, and transportation in the factory also take some time. Administrative lead time is in the hands of those who are dealing with material procurement. Delivery lead time has to be negotiated at the time of preparing purchase contract.

Administrative lead time producer’s lead time

Lead time

It is often seen that bulk of the lead time is taken up by the administrative lead time. This is the time over which company has control but still too much time is taken up in receiving and dispecting of goods. A businessman may find to his frustration that the goods which he has persuaded a supplier to deliver in an extremely short time have been lying in his own goods inwards department after delivery. Stock control

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or purchase section of the organisation should maintain lead time schedules for all groups of materials.

Perpetual inventory system

The stock taking may either be done annually or continuously. In the latter method, the stock taking continues throughout the year. A schedule is prepared for stock taking of various bins (store rooms). One bin is selected at random and the goods are checked as per shown in the bin card. Then some other bin is selected at random and so on. The personnel associated with store-keeping are not told of stock taking programme because store rooms are chosen at random. The institute of cost and management accountants, London defines perpetual inventory system as “a system of records maintained by the controlling department, which reflects the physical movements of stocks and their current balance.” The stores ledger and bin cards are helpful in this system because these records help in knowing the movement of stores. This facilitates regular checking of stores without closing down the plant.

Procedure of perpetual inventory system

The following procedure is followed for perpetual inventory system:

The upto date position in stores ledger and bin cards should be made to know the current balance of stores

The stores are selected in rotation for checking the items physically. Some items are taken up every day for verification. The program is planned in such a way that in a year every item is checked 3-4 times.

The stores which have not been inspected as yet should not be mixed with other stores because no entries are made for such items.

There is a surprise checking every time. The store-keeper is informed of stock taking only on the day of checking. This promotes store-keepers to keep their records upto date.

The physical stock available in the store after counting, weighing, etc. is recorded on sheets provided for this purpose.

Advantages of perpetual inventory system

Quick calculation of closing stock: under perpetual inventory system, the stock is checked regularly throughout the year. It becomes easy to value stores at the end of financial year. It helps in preparing profit and loss a/c and balance sheet without loss of time.

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Helpful in formulating purchase policies: this system of stock taking is also helpful in formulating purchase policies. The store-keeper is in known of the requirements of various departments.

Check on stores personnel: the system of continuous stock taking acts as a check on personnel in charge of stores. They are not told of checking programme in advance. Every store in charge will keep his stores properly because stock verification can be done anytime. This system also prevents pilferage of stores.

Helpful in production planning: production planning can be done according to the availability of materials in stores because management is constantly kept informed of stores position.

Investments under check: this system helps in keeping investments in stock under check. There are minimum and maximum stock levels within which stock limits are maintained. This system helps in avoiding under stocking and over stocking of stores and investments in inventory are kept under check.

Errors and shortages easily detected: the regular checking of stocks helps in detecting errors and shortages in stores. There may be a wrong entry in either stores ledger or in bin card. Such mistakes will be detected while stocks are checked. Similarly the physical verification of stocks with entries in stores ledger will help in detecting shortage of stores.

Increasing efficiency of organisation: this system will help in maintaining proper stocks in stores. The regular supply of stocks at proper time will enhance the efficiency of the whole organisation.

Just in time (JIT) inventory control system

Just in time philosophy, which aims at eliminating waste from every aspect of manufacturing and its related activities, was first developed in Japan. Toyota introduced this technique in 1950’s in Japan. The term JIT refers to a management tool that helps to produce only the needed quantities at the needed time.

According to the official terminology of C.I.M.A., JIT, is a “technique for the organisation of workflows, to allow rapid, high quality, flexible production whilst minimizing manufacturing work and stock level.” There are broadly two aspects of JIT (1) just in time production and (2) just in time purchasing. Schonberger defines, JIT as, “to produce and deliver finished goods just in time to be sold, sub-assembles just in time to be assembled into finished goods, fabricates parts just in time to go into sub-assembles and purchased materials just in time to be transformed into fabricated parts. Just in time inventory control system involves the purchase of materials in such a way that delivery of purchased material is assured just before their use or demand. The philosophy of JIT control system implies that the firm should maintain

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a minimum of inventory and rely on suppliers to provide materials just in time to meet the requirements. The traditional inventory control system, on the other hand, requires maintaining a healthy level of safety stock to provide protection against uncertainties of production and supplies.

Objectives of JIT

The ultimate goal of JIT is to reduce wastage and enhance productivity. The important objectives of JIT include:

Minimum/zero inventory and its associated costs.

Elimination of non value added activities and all wastes.

Minimum batch/lot size.

Zero breakdowns and continuous flow of production.

Ensure timely delivery schedules both inside and outside the firm.

Manufacturing the right product at right time.

Features of JIT

The main features of JIT inventory control system are as follows:

It emphasis that firms following traditional inventory control system overestimate ordering cost and underestimate carrying costs associated with holding of inventories.

It advocates maintaining good relations with suppliers so as to enable purchases of right quantity of materials at right time.

It involves frequent production/ order runs because of smaller batch/lot sizes.

It requires reduction in set up time as well as processing time.

The major focus of JIT approach is to purchase or produce in response to need rather than as per the plans and forecasts.

Advantages of JIT inventory control system

The following are the major advantages of JIT system:

The right quantities of materials are purchased or produced at the right time.

Investment in inventory is reduced.

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Wastes are eliminated.

Carrying or holding cost of inventory is also reduced because of reduced inventory.

Reduction in costs of quality such as inspection, costs of delayed delivery, early delivery, processing documents etc. resulting into overall reduction in cost.

Double bin system

This system is followed in small organisations which cannot afford expensive techniques of stores control. The method is also suitable for materials of comparatively less value. The materials are stored in bins which are divided into two compartments. Materials are issued for production from the first compartment and the materials from the second compartment are not touched in regular course. When the materials in the first compartment are fully consumed, an order is placed. The second compartment of materials takes care of the consumption requirement during the time required to get fresh delivery. The store-keeper has to divide the materials in the two bins in such a manner that production does not hamper for the want of material. This system has practical usage and is simple to understand and operate.

Input-output ratio

This ratio is used to judge the efficiency in the usage of material. The ratio indicates the relation between the units of material put in for production and the units of finished product.

Input-output ratio= units of input/units of output * 100

For example, if 1080 units are introduced into a process and final output is 900 units, then input-output ratio is:

1080/900*100=120%

This input-output ratio is compared with standard input-output ratio. If the actual ratio is higher than standard ratio, then there is inefficiency in the manufacturing process and vice-versa.

FNSD analysis

FNSD analysis divides the items of stores into four categories in the descending order of importance of their usage rate. ‘F’ stands for fast moving items that are consumed in a short span of time. ‘N’ stands for normal moving items which are

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exhausted over a period of a year or so. ‘S’ indicates slow moving items which are not issued at frequent intervals and are expected to be exhausted over a period of two years or more. ‘D’ means dead items and the consumption of such items is almost nil. D items can also be taken as obsolete items which have become outmoded and have no further use for the purpose they were purchased. Stocks of fast moving items should be taken care of continuously and replenishment orders should be placed in time to avoid stock-out of such items. Normal moving items should be reviewed at a regular span of time and orders for their replenishment should be given at a regular period of time. Stock of slow moving items of stores should be reviewed very carefully before any replenishment orders are placed to avoid over stocking of such items. Alternative uses should be found for dead stock items. Otherwise, they should be disposed of as early as possible so that their value may not deteriorate further.

Material (or inventory) cost reports

The objective of material cost reporting is to help the management in exercising effective material control and taking appropriate decisions. Material cost reports serve as means of communications usually in the written form of facts relating to materials which should be brought to the attention of the various levels of management who can use them to take suitable action for the purpose of material control. ‘Material control’ is divided into three aspects, viz. purchase control. Stores control and consumption control. Purchase control is to ensure the efficiency of the purchasing department; stores control, the efficiency of the stores department and consumption control, the efficiency of the departmental foremen. Proper design of material cost reports is essential to achieve these purposes of material control. It is difficult to give the design of materials reports which will be suitable for all organisations. The design should be according to the individual requirements of the organisation.

VALUATION OF INVENTORIES

The value of materials has a direct bearing on the income of a concern, so it is necessary that a method of pricing materials should be such that it gives a realistic value of stocks. The traditional method of valuing materials ‘cost price or market price whichever is less’ is no longer the only method. Different methods of pricing materials give different values of closing materials and it leaves a scope for window dressing. If management is interested to show more profits then it can choose such a method which will show more stock or vice-versa. To safeguard public interest the Government of India has instituted statutory controls to prevent frequent change of material valuation methods. A concern will have to use a particular valuation method for at least three years and any changes there from must be approved by the board.

The following methods for pricing material issues are generally used:

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First in first out method (FIFO)

Last in first out method (LIFO)

Average price method- simple average price method- weighted average price method

Base stock method

Standard price method

Market price method

First in first out method (FIFO):

In first in first out method the materials received first are issued first. The materials are issued in chronological order. The recently received materials remain in stock. Whenever a requisition for material issue is presented to the store-keeper he will use the price of the first lot and then of the second and third lot, etc. when the quantity of the first, second lot is exhausted. When prices are fluctuating then the cost of different batches of production will be different because issue prices of various lots will be different. This method is suitable when prices are falling because material issues will be priced at earlier figures while costs of replacements will be low. On the other hand, when prices are rising then materials will be issued at lower prices and replacement costs will be higher. This method is useful for materials which are subject to obsolescence or deterioration.

Last in first out (LIFO):

In last in first out method the last received materials are issued first and ending inventory consists of earlier acquired materials. This method is also known as replacement cost method because the latest purchased goods will correspond to the current market prices except that goods were not purchased much earlier. The inventories will be valued at oldest lots on hand and these values will be quite different from current invoice prices.

Last in first out method is suitable during rising prices because goods will be issued from the latest received lots at prices which are closely related to current market prices. The current costs will also be matched to current income. This method is able to show lower profits because of increased charge to production and closing stock figures will also be low as they will be valued at earlier prices. The taxable liability will also be low thus enabling the concern to retain more money in the business.

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A comparison between two jobs will not be possible if these jobs were started at the same time but materials to the second job were issued from a different lot, the earlier lot having been exhausted. The materials may be priced at two or more prices even in the same invoice.

Average cost method:

In average cost method of pricing all materials in stock are so mixed that a price based on all lots is formed. Average cost may be of two types: (a) simple average cost and (b) weighted average cost.

(a) Simple average cost: in this method the prices of all lots in stock are averaged and the materials are issued on that average price, for example, three lots of materials are in stock and the prices per unit of these lots are Rs. 2, Rs. 3 and Rs. 4 of first, second and third lots respectively; then the average price will be

(2+3+4)/3= Rs. 3.

Though this is simple method of pricing materials but particularly this method does not give good results. The total cost of materials is not observed in this method.

(b) Weighted average method: in this method the total cost of all the materials is divided by the total number of items in stock. The price calculated in this way will be used for issue of materials upto the time a fresh purchase has not been made. After a fresh purchase, the quantity will be added to the earlier balance quantity and material cost will be added to the earlier cost. A fresh price is calculated by dividing the changed total cost by the number of units in stock after the purchase. A new price is calculated where even a fresh purchase is made.

The weighted average price method recovers the whole cost of materials. This method is suitable when price fluctuations are frequent because it smoothes out fluctuations by taking into account total cost and total quantity of materials.

Base stock method:

In this method some quantity of materials is assumed to be necessary for keeping the concern going. The quantity is not issued unless otherwise there is an emergency. This material which is not issued as is kept in stock is known as a base stock. The earlier materials received are kept as a base and are valued at the price on which they were acquired.

This method is not an independent method. It is used along with some other methods such as FIFO, LIFO, average price method, etc. after maintaining the

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base quantity in stock; the issues are priced at one of the methods mentioned above. The purpose of this method is to issue materials at current prices. This aim will be achieved only when LIFO method of pricing the materials is used.

Standard price method:

The issue price of materials is predetermined or estimated in this method. The standard price is based on market conditions, usage rate, handling facilities, storage facilities, etc. the materials are priced at standard price irrespective of price paid fro various purchases. For example, the standard price of the raw materials is fixed at Rs. 5 per unit. Two lots of materials of 10000 units and 12000 units were purchased at Rs. 4.90 and Rs. 5.25 per unit. Every issue of materials will be priced at Rs. 5 per unit, without taking into consideration the prices at which these were purchased. There will be a difference between the cost of materials and price charged to production. The difference between these two prices will be transferred to ‘purchase price variance account’. The profit or loss incurred from issue of materials will depend upon whether actual price paid is less or more than the standard price charged.

Market price method:

In this method the prices charged to production are not costs incurred on the materials but latest market prices. The market prices may either be replacement prices or realisable prices. The replacement prices are used for the materials which are kept in stock for use in production and realisable prices are used for the goods kept for resale. The price of issue for materials is always the replacement prices. The actual prices paid for acquiring the materials are not considered at the time of issue of materials. Every issue is made at the replacement price of that day. It reflects the latest price charged to production. This method is a check on the efficiency of the purchasing department. If prices paid are more than the market prices, it shows inefficiency and if actual prices paid are lower than the market prices, it will show efficiently.

Market price method is not generally used because of a number of difficulties. It becomes difficult to select the market price because different prices prevail in different markets. This method brings in human bias in the selection of market price. The charging of more or less prices than the price actually paid will bring in the elements of profit or loss which is unnecessary.

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Objectives of stores/ materials management in VST :

To provide just in time availability of spares critical to the support of production requirements.

To manage procurement of spares efficiently through reliable/ competitive sourcing.

To set & maintain quality standards of engineering & misc spares/ procured items.

To minimize inventory holding & cost of providing service to technical function.

To ensure avoidance of stock loss/ damage & large inventory write-offs because of obsolescence.

To adhere to systems & procedures for maintenance of effective control systems.

Limitations   of Inventory

1.  Efficient inventory control methods can reduce but cannot eliminate

business risk.

2.  The objectives of better sales through improved service to

customer, reduction in inventories to reduce size of inventory and

reducing cost of production by smoother production operations are

conflicting with each other.

3.  The control of inventories is complex because of the many functions it

performs. It should be viewed as a shared responsibility.

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Practical information

INVENTORY:

Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near a business’s location so that the firm may meet demand and fulfil its reason for existence. If the firm is a retail establishment, a customer may look elsewhere to have his or her needs satisfied if the firm does not have the required item in stock when the customer arrives. If the firm is the manufacturer, it must maintain some inventory of raw materials and work in progress in order to keep the factory running. In addition, it must maintain some supply of finished goods in order to meet demand.

Sometimes, a firm may keep larger inventory than is necessary to meet demand and keep factory running under current conditions of demand. If the firm exist in a volatile environment where demand is dynamic (i.e., rises and falls quickly), an on-hand inventory could be maintained as a buffer against unexpected changes in demand. This buffer inventory also can serve to protect the firm if the supplier fails to deliver at the required time, or if the supplier’s quality is found to be standard upon inspection, either of which would otherwise leave the firm with out the necessary raw materials. Other reasons for maintaining an unnecessarily large inventory include buying to take advantage of an impending price increase.

Generally, inventory types can be grouped into four classifications: Raw materials Work in process Finished goods and MRO goods.

RAW MATERIALS:

Raw materials are inventory items that are used in the manufactures conversion process to produce components, subassemblies, or finished goods. These inventory items may be commodities or extracted materials that the firm or its subsidiary has produced or extracted. They also may be objects or elements that the firm has produced from outside the organization. Even if the item is partially assembled or is considered a finished good to the supplier, the purchaser may classify it as a raw material if his or her firm had no input into its production. Typically, raw materials are commodities such as ore, grain, minerals, chemicals, paper, steel, and food items. However, items such as nuts and bolts, ball bearings, key stock, casters, seats, wheels, and even engines may be regarded as raw materials if they are purchased from outside the firm.

The bill of materials file in a material requirements planning system or a manufacturing resource planning system utilizes a tool know as product structure tree to clarify the relationship among its inventory items and provide a basis for filling out , or “exploding,” the master production schedule. Consider an example

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of rolling cart. This cart consist of a top that is pressed from a sheet of steel, a frame form four steel bars, and a leg assembly consisting of four legs, rolled from sheet shield each with a caster attached

Generally, raw materials are used in the manufacture of components. These components are then incorporated into the final products or become the part of a subassembly. Subassemblies are then used to manufacture or assemble the final product

WORK-IN –PROCESS

WIP is made up of all the materials, parts, assemblies, and subassemblies that are been processed or are waiting to be processed within the system. This generally includes all material-from raw material that has been released for initial processing up to material that has been completely processed and is awaiting final inspection and acceptance before inclusion in finished goods.

Any item that has a parent but is not a raw material is considered to be work in process. A glance at a rolling cart product structure tree example reveals that work in processing this situation consist of tops, leg assemblies, frames, legs and casters.

FINISHED GOODS:

A finished good is a completed part that is ready for a customer order. Therefore, finished goods inventory is the stock of completed products. These goods have been inspected and have passed final inspection requirements so that they can be transferred out of work in process and into finished goods inventory. From this point, finished can be sold directly to the final users, sold to retailers, sold to wholesalers, sent to distribution centres, or held in anticipation of a customer order. Any item that does not have a parent can be classified as a finished good. By looking at all rolling cart product structure tree example one can determine that the finished good in this case is a cart.

Inventories can be further classified according to the purpose they serve. These types include transit inventory, decoupling inventory, cycle inventory, and MRO goods inventory. Some of these are also known by other names, such as speculative inventory, safety inventory, and seasonal inventory. We already have briefly discussed some of the implications of a few of these inventory types, but will now discuss each in more detail.

TRANSIT INVNETORY:

Transit inventories result from the need to transport items or material from one location to another, and from the fact that there is some transportation time involved in getting from one location to another. Some times this is referred to as pipeline inventory. Merchandise shipped by truck or rail can sometimes take days or even weeks to go from a regional warehouse to a retail facility. Some large firms such as automobile manufacturers employ freight consolidators to pool their transit

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

BUFFER INVNETORY:

As previously stated, inventory is sometimes used to protect against the uncertainties of supply and demand as well as unpredictable events such as poor delivery reliability or poor quality of a suppliers product. These inventory cushions are often referred to as safety stock. Safety stock or buffer inventory is an amount held on hand that is over and above that currently needed to meet demand, generally the higher level of buffer inventory, the better the firms customer service these occurs because these firms suffers fever” stock outs” and has less need to back order the item, make the customer wait until the next order cycle, or even worse, cause the customer to leave empty handed to find another supplier obviously, the better the customer service the greater the likelihood of customer satisfaction.

ANTICIPATION INVNETORY:

Oftentimes, firms will purchase a whole inventory that is in excess of their current need in anticipation of a possible feature event. Such events may include a price increase, a seasonal increase in demand, or even an impending labour strike. This tactic is commonly used by retailers, how routinely build up inventory months before the demand for their products will be unusually high. For manufacturers anticipation inventory allows them to build up inventory when demand is low so that when demand picks up the increased inventory will be slowly depleted and the firm does not have to react by increasing production time. Therefore, the firm has avoided both excessive over due to increased due to increased demand and hiring cost due to increased demand. It also has avoided layoff cost associated with production cut backs, or worse, the idling or shutting down of facilities this process is some times called “something” because it smoothes the peaks and valleys in demand, allowing the firms to maintain a constant level of output and a stable work force.

DECOUPLING INVNETORY:

Very rarely, if ever, will one see a production facility where every machine in the process produces at exactly same rate. In fact one machine mat process parts several times faster than the machines in front of or behind it. Yet, if one walks through the plant it may seem That all machines are running smoothly at the same time. It also could be possible that while passing through the plant one notices several machines are under repair or are undergoing some form of preventive maintenance. Even so, this does not seem to interrupt the flow of work in process through the system. The reason for this is the existence of an inventory of parts between machines, a decoupling inventory that serves as a shock absorber, cushiononing the system against production irregularities. As such it decouples or disengages the plants dependence upon the sequential requirements of the system.

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The more inventories a firm carries as a decoupling inventory between the various stages in its manufacturing system, the less coordination is needed to keep the system running smoothly. Naturally, logic would dictate that a infinite amount of decoupling inventory would not keep the system running in peak form. A balance can be reach that will allow the plant to run relatively smoothly with out maintaining and absurd level of inventory. The cost of efficiency must be weighed against the cost of carrying excess inventory so that there is an optimum balance between inventory level and coordination with in the system.

CYCLE INVENTORY:

Those who are familiar with the concept of economic ordered quantity now that the EOQ is an attempt to balance inventory holding or carrying cost incurring from ordering or setting up machinery. When large quantities are ordered or produced, inventory holding costs are increased, but ordering/set up cost decrease. Conversely, when lot sizes decrease, inventory holding/carrying cost decreases, but the cost of ordering/set up increases since more orders/setup’s are required to meet demand. When the two costs are equal the total cost is minimized. Cycle inventories, sometimes called lot-size inventories result from this process usually excess material is ordered and, consequently, held in inventory in an effort to reach this minimization point. Hence, cycle inventory results from ordering in batches or lot sizes rather than ordering material strictly as needed.

MRO GOODS INVENTORY:

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to support and maintain the production process and its infrastructure. These goods are usually consumed as a result of production process but are not directly a part of the finished product. Examples of MRO goods include oil, lubricants, coolants, janitorial supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and key stock. Even office supplies such as staples, pens and pencils, copier paper, and toner are considered part of MRO goods inventory.

THEORITICAL INVENTORY:

In their book managing business process flows: Principles of operation management, Anupindi, Chopra, Deshmukh, van mieghem, and zemal discuss a final type of inventory Known as theoretical inventory. They describe theoretical inventory as the average inventory for a given throughput assuming that no WIP item had to wait in a buffer. This would obviously be an ideal situation where inflow, processing, and outflow rates were all equal at any point in time? Unless one has a single process system, there always will be some inventory within the system. Theoretical inventory is a measure of this inventory . The authors formally define it as the minimum amount of inventory necessary to maintain a process throughput of R, expressed as:

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Theoretical inventory = Throughput *Theoretical flow timeI Th =R * T Th

In this equation, theoretical flow time equals the sum of all activity times required to process flow time equals theoretical flow time.

Inventory exists in various categories as a result of its position in the production process and according to function it serves within the system. As such, the purpose of each seems to be that of maintaining a high level of customer service or part of an attempt to minimize overall costs.

PURPOSE OF INVENTORY MANAGEMENT:

Inventory management must tie together the following objectives, to ensure that there is continuity between functions:

Company ‘s strategic goals Sales forecasting Sales & operations planning Production &materials requirement planning

Inventory Management must be designing to meet the dictates of market place and support the company‘s strategic plan. The many changes in the market demand, new opportunities due to worldwide marketing, globing sourcing of material and new manufacturing technology means many companies need to change their Inventory management approach and change the process for Inventory control.

Inventory management system provides information to efficiently manage the flow of materials efficiently utilize people and equipment, coordination internals activities and communicate with customers, inventory management does not make decision or manage operation, they provide the information to managers who make more accurate and timely decisions to manage their operations.

INVENTORY is defined as the blocked working capital of an organization in the forms of material .as this is the blocked working capital of organization, ideally it should be zero. But we are maintaining inventory. This inventory is maintained to take care of fluctuation in demand and lead time. In some cases it is maintained to take care of increasing prices tendency of commodities or rebate in bulk buying.

Traditional supply chain solutions such as materials requirement planning, inventory control, typically focuses on implementing more raid and efficient system to reduce the cost of communicating information between and across the inventory links in the SCM, COM focuses in optimizing the total investment of material costs and workload for every inventory item throughout the chain from procurement of meet the demand at a minimum total cost, inventory

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level and workload to meet customers services goal for each items in the links of inventory chains.

It is strategic in the sense that top management sets goals. These include deployments strategies, controls policies, the determination of the optimal levels of order quantities and reorder points and settings safety stock levels. These levels are critical, since they are primary determination of customer services levels.

Keeping in view all concern, the latest concepts of vender managed inventory is used to optimize the inventory. We are entering into vendor managed inventory, annual rate contracts with manufacturers or their authorized dealers, who maintains inventory on our behalf and supply the items as and when required.VMI reduces stock-outs and optimize inventory in supply chain. Some features of VMI include:

Shortening of supply chain

Centralized forecasting

Frequent communication of inventory, stock-outs planned promotions

Trucks are filled in a prioritized order, eg .items that are expected to stock out have top priority then items that are furthest below targeted stock level then advance shipments of promotional items.

Despite the many changes that companies go through, the basics principle of inventory management and inventory control remain the same. Some of the new approaches and techniques are wrapped in new terminology, but the underlying principle for accomplishing good inventory management and inventory activities have not changed.

The inventory management system and the inventory control process provides information to efficiency manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. Inventory management and the activities of inventory control do not make decision or manage operation; they provide the information to managers who make more accurate and timely decision to manage their operation.

The basic building blocks for the inventory management system and inventory control activities are:

Sales forecasting or demand management

Sales and operations planning

Production planning

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Material requirement planning

Inventory reduction

The emphases on each area will vary depending on the company and how it operates, and what requirements are placed on it due market demands. Each o the areas above will need to be addressed in some form or another to have a successful program of inventory management and inventory control.

Inventory is usually a distributor s largest asset. But many distributors aren’t satisfied with the contribution inventory makes towards the overall the success of their business:

The wrong quantities of the wrong items are often found on warehouse shelves.

Even though there may be a lot of surplus inventory and dead stock in their warehouse(s), backorders and customer lost sales are common. The material a distributor has committed to stock isn’t available when customers request it.

Computer inventory records are not accurate. Inventory balance information in the distributor’s expensive computer system does not accurately reflect what is available for sale in the warehouse.

The return on investments is not satisfactory. The company’s profits, considering its substantial investment in inventory, are far less than what could be earned if the money were invested elsewhere.

Ordering systems

System sequence Control document

A. Ordering stock items

1. Issue transaction for the day will be the starting point.

2. Ordering decision will be based on-

a. Maximum, minimum & re-ordering point of transacted item.

b. Last year’s consumption patterns

c. Department maintenance plan

3. Supplier/ rate fixation will be depend upon-

Transaction screen on SAP screen

Item code details on screen

Consumption analysis print-out

Maintenance plan document

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a. Approved rate & panel of reliable suppliers for regular transaction items.

b. Comparative statement of quotations for new items

4. Generate purchase order through computer system & despatch to supplier.

5. Follow up daily on pending orders as per delivery-schedule.

Updation/ cancellation will take place according to supplier’s track-record & fresh ordering will follow, if necessary.

6. For stock-out items ordering will be through manual indent/ order generation.

B. Ordering- Direct issue items

1. Departments will send the memo with item description, quantity & expense code.

2. Engineering stores will allocate the code on the memo for item required.

3. Obtaining competitive quotations, preparation of comparative statement, order generation & follow-up same procedure, as followed for stock items.

4. Inform indenting department on receipt/ inspection & obtain requisition for issue.

Approved lists

Comparative statements

Purchase order copy

Pending order lists on screen

Purchase indent

HF-72 C

HF-72 C

-

Inspection report Indent requisition

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Inspection system

System sequence Control document

1. system to cover-

a. All spares against approved drawings.

b. Selected bought out items, e.g., bearings, oil seals, etc.

c. Direct issue items All supplies will be accompanied by 3 copies of delivery challans with inward security stamps.

2. For accepted items -

a. Enter details in inward inspection register for reference.

b. Hand over accepted spares/ items to receipt clerk with challans

4. For rejected items-

a. Enter details in inward inspection register with reasons

b. Return rejected spares/ items to supplier & explain reasons for rejection.

c. Maintain ex-department sample register for samples given to supplier

Engineering drawings

Standard specifications

Delivery challansPurchase orders

Inward inspection register delivery challans

Sample register

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Receipt system

System sequence Control document

1. Generate receipt report for occupied items with copies for-

a. Bills section

b. Finance department

c. Stores records

Item code quantities will be updated on receipt through system.

2. Prepare summary sheets of all receipts for day

3. Put the accepted spares/ items in proper location.

Computer generated receipt screen Inspection screen

Receipt report

Inward register

Summary sheet

Issue system

System sequence Control document

1. On receipt of the requisition from indenting department, the issue clerk will check the corrective ness of details on MIR through issue screen.

2. Check availability & issue with entries on MIR.

3. Issue summaries will be collated by finance department for processing.

Materials indent requisition (MIR)

MIR

Issue printout summary

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Bill passing system

System sequence Control document

1. On receipt of bills from suppliers, bills clerk will tally details with receipt report.

2. If little details are ok, entries will be made on SAP system. If not ok, the bills will be returned to supplier for necessary correction.

3. Payment voucher generated through the system will be checked by bills clerk & then passed by stores I/c.

4. Payment voucher & bills will be sent to finance department for cheque preparation & despatch.

Bills receipt report.

Bills receipt report

Payment voucher

System for write-off’s

System sequence Control document

1. Categorise spares which have not moved for 3, 4 & 5 years or more finance department will make provisions for the items not moved for 3-yers or more.

2. CEC note will be put up seeking write-off sanction clearly stating reasons against each group of items.

Age-analysis print-out item MIS twice a year.

CEC note twice a year.

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Perpetual verification of inventory

1. Physical verification of engineering stores stock-items will take place on a continuous basis by an external audit agency.

2. Categorisation & verification frequency will be based on unit value of the spare/ item. Each store-stock item will be covered at least once in a year.

Category Basis frequency of (Unit price in Rs.) Verification

A 10,000/- & more Quarterly

B Between 3000 to 9999 Half-yearly

C 3000 & below Yearly

3. The discrepancy statement will be submitted by the auditors monthly. Follow-up actions will be completed by the next month and vice-president (finance) & vice-president (tech) will be informed through a note by the stores I/c.

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EMSINSPECTION REPORT

SI.NO.

Date

Name of the customer location

Part name Part No.

PO No PO Qty

Dispatch Qty DC No.

Material specification

Method of inspection Visual/Metallurgical/Dimension Quantum of inspection

SI.No. Parameters Specifications

Observations

DepositionQty inspected Qty accepted

Remarks

Prepared Verified Approved

Purchase Requisition

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SI. No. * Item code * Qty Unit Description Job/ Expense

*To be filled in by stores

I/C. Dept.

VST: 005 VST INDUSTRIES LIMITED No. ****Card code: 14 STORES/ SPARES ISSUE REQUISITION

Department Date

Description Material codeUnit No.s/

KG/M/L/Ton

Quantity Indented

Drawn forExpense code

Capex No.Machine

No.S (C) I

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H. F. 72-C No. ****

FROM: Department: To: Engg. Stores

(Enter Dept. code & Name) Items required by

Please arrange to procure the following items

Date

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REMARKS RAISED BY AUTHORISED BY ISSUED BY RECEIVED BY

GOODS RECEIVED NOTE IN SAP

GOODS RECIEPT SETTINGS SYSTEM HELP

Goods Receipt Purchase Order- SAP Hide overview hold check

posthelp

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My documents

Purchase orders 4500010506 4500010505 4500010504 4500010503 4500010501 4500010497

Orders Blank

Reservations Blank

Material documents 4900076222 4900027654 5000006743 5000008753

Goods receipt Purchase order GR Goods receipt

CODE NO. BIN CARD

PART NO. ENGG. STORES

DESCRIPTION

LIMITS

MAX

MIN

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General Vendor Global trade

Material Quantity Where Global trade

Document Date Delivery NotePosting Date Bill of Lading Header Text

line Material short text ok Qty in UnE E. Stor loc batch valuation

Delete contents

INVENTORY MANAGEMENT

Date BalanceReceipts Issues

Date BalanceReceipts Issues

OrderNo. Qty M/C

NO.Issues

Issues for month

OrderNo. Qty

M/CNo.

Issues

Issues for month

PURCHASE ORDER

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Date

Please supply and forward goods to m/s VST industries ltd.

Item code

Item description Qty unit Rate (Rs.) Discount (%)

Amount(Rs.)

TaxExpected delivery schedule

Lot Date Quantity

Total amount Rs.

Purchase requisition

Purchase requisition is a form submitted to purchase department by various other departments to purchase the items which are required by the indent department to

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carry out the business efficiently. All the process in VST industries are being made in SAP system. All entries are made in system itself. Purchase requisition form includes the details such as quantity, units, description, item code etc., which is to be filled by the indent department who requires the materials. They fill the form by filling in the details of what materials they require and the quantity or number of units etc.

Then this form will be sent to purchase department which in turn observes the need have that indent department and based on that will go to further process of getting materials. Ordering will be the main important step in the industry to gain the materials so that the production process cannot be stopped.

Quotation by suppliers

Once the purchase requisition is being made, the suppliers are selected based on rate fixation i.e., approved rate for regular transaction items, or by comparing statement of quotations for new items.

Based on various factors the suppliers are allowed to quote the prices for the items that are required by the company. Once all quotations are being sent through various ways such as mail or telephone or fax, the manager or head of the department of purchasing department will select the supplier based on the trust and the price quoted.

Purchase order

Once the supplier is chose then the purchase order will be made. Purchase order is generated through the system and will be sent to the supplier. A copy of it will be saved by the company. Purchase order is the form by which the supplier understands what items to be produced to the company.

Purchase order is an important form through which the buyers i.e., company and suppliers come into contact of supplying materials.

In purchase order form the material required and quantity will be mentioned. The order number is very important which will be saved by the company to know when the order is placed and upon what material the order is placed.

Company will follow up the pending orders as per delivery schedule. Updation or cancellation takes place according to supplier’s track-record & fresh-ordering will follow, if necessary. For stock-out items ordering will be through manual order generation.

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Receiving and inspecting materials

Supplier will supply the materials along with the bill. This bill will be checked near gate by the security person. He will put the inward stamp on it before allowing them inside. Then the material will be collected and placed at inspection cell.

Later the stock/ material will be checked whether the quantity sent is according to purchase order or not.

The materials will be inspected and if accepted will be sent to the indent department otherwise if they are rejected then they will be sent back to the suppliers and new order will be placed. While rejecting the materials the reason for rejection will also be mentioned so that suppliers can change or replace the materials.

Goods receipt note (GRN)

Once the goods are received, inspected and accepted then the entries will be made in the system. GRN is prepared in SAP system in vst industries. Item code will be updated on receipt through system.

Goods receipt note is an important screen where the details of all goods that are received are entered along with quantity, description and date. Payments for suppliers are made only when the goods are collected, inspected and accepted and after entering into GRN system.

Bin card

Bin card is a form which includes receipts and issues. Whenever material is received and stored in issues department then the data will be entered into receipts along with quantity and their serial number.

If any material is issued from the issue department then it is immediately noted in bin card in the column of issues along with quantity and serial number.

Thus bin card helps to know how many products are available and how many materials are issued. VST industries follow SAP system in which all these data is entered. The entries in bin card are maintained day wise so that materials issued or collected can be easily found out. Thus materials cannot be misplaced.

Write-off sanction

Write-off sanction is a letter written to managing director to inform about the obsolete stock. The stocks will become obsolete due to various reasons. Technology

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change is one such reason. Few spares are brought and stored for future purpose meanwhile the technological changes may take place making those spares obsolete.

These stocks will not be moved as days pass on and they occupy lot of space and so new materials will not get enough space. For this purpose these materials needed to be removed and destroyed. This is why write-off sanction is prepared. CEC note will be put up seeking write-off sanction clearly stating reasons against each group of items.

Physical verification

Physical verification of stock items will take place on a continuous basis by an external audit agency. Categorisation and verification will be based on unit value of spare.

Various companies will check the audit in the stores department. They check the SAP system i.e., whether the information regarding the availability of stock and they check with physical materials. Sanction to be taken for the discrepancies in the books of account.

Material requisition

The storekeeper should always issue the material on proper authority to avoid the misappropriation of material. This authority is usually given by the foreman of the production department on a form known as a material requisition.

The store keeper serially numbers the requisition received so that no requisition may be left out in accounting. Besides the serial number written by the store keeper, department placing may put its own serial number.

The details relating to quantity issued and number of the stores requisition are entered in system i.e. bin card in SAP. Material requisition serves the purpose of an authority to the storekeeper to issue the materials, so only the person authorized to do so, so that there may be no wrong drawl of materials, signs it.

Bill of materials

A bill of materials gives a complete list of all materials required with quantities for particular job, order or process. Thus, all materials required for a particular job, order or the production department on a single document lists process.

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This bill serves the purpose of material requisition and all materials listed on the bill are sent to the production department. A bill of materials should be prepared if the job of non-standardized nature so at reasonable estimate of all materials required may be made by the production department before the job is started.

Raw materials acceptance

This is that form in which the material is Okayed by the concerned department and this takes place when the material comes into the company premises.

Rejection of materials

This is that part in which the materials were not bought according to the ordered or else the quantity of the material is not Okayed by the concerned department then it is rejected and returned to the vendor.

Returnable gate pass book

Returnable gate pass book (RGP) is written by the respective staff of department to send any material off with the purpose of repair.

This particular material sent out as three leaves

For the vendor who takes

For the gate copy to be handed over at gate at the time of leaving premises.

Book copy from where the tracing of material is gone. It is entered in the register. The originated stores in charge and the head of the department or plant manager sign this document.

When the material is brought back the first copy as to be brought along with the material which is re entered at the back of first copy.

Thus a track of material movement is kept in the record as in register as well as computers.

Reconciliation of returnable gate passes every month in stores. This is used for one way remainder for the company associates and gets the material immediately and makes the documentation in time. Every month making an excel statement for non-moving and slow moving items. They make the report of the non-moving items to the finance and there he informs to the other companies that there is so part, which they want to sell, they put in internet and make an advertisement for the sale of the parts. If the above part is having no use any more then they request the authorisation for destroying if necessary.

Non returnable gate pass

It also has three leaves

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The originated staff should sign it and secondly the department head signs followed by plant manager. In this case the material will not come back. Hence this is also entered in non-returnable gate pass register and also at computers.

Non-returnable gate pass with mediate items are always covered with invoices made by central excised and ware house in case of scrap material sold out to a vendor the staff prepares the cash memo and payment for the material is done at account’s section. Then non-returnable gate pass is made with reference to cash memo for the material to be sent out with proper signature of stores in charge, finance concerned and the plant manager authorisation.

Materials

Consumer is the main person. Based upon the needs & wants of consumers various products are developed. Salesmen are the person who transfers the information from consumer to the company.

Marketing department will calculate how much to order for materials based upon the material available in the go down. Marketing department will place order materials or raw materials to run the production process continuously.

Marketing department will give master production schedule at last week of every month. These schedules are circulated to the department of materials. Materials are ordered to suppliers based on their commitment and price. There will be various suppliers for one variety of material. Once the order is placed to supplier, he will send the material within specific time and as required. Sometimes stock may not be received on time due to various reasons such as transportation problems, social turbulence, floods, natural calamities etc., due to this some stocks are stored and such stock is called buffer stock.

Materials department will order material that can be used within 7 to 9 days. They do not store material for more than 9 days. So while the order is made it is vary carefully calculated so that materials will not be over loaded or under loaded.

Process of getting material:

Noting requirements, noting opening stocks and arriving at short fall quantities.

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Releasing order on supplies for short fall quantities and scheduling when to receive

After receiving checking whether material is arrived with full quality or not.

If material is accepted then they are stored in godown date wise & material wise

If the material is being rejected then immediately placing other order & sending back the rejected material.

Raw materials used

The basic raw materials that are used to prepare cigarette are as follows:

Tobacco Cigarette paper Foil Inner board Filter Over wrapper Parcelling wrap

Materials department will store papers, plastics, adhesives & all the material required for production process. These materials are stored in bulk quantities in godowns by the order of date received. Code number along with date will be attached to these materials.

Materials are issued based on FIFO method i.e., the materials which comes first will be issued to the production department first. That is why the date is attached to the materials.

In production process the materials will be received based upon the need. The materials collected will be noted down so that misuse of material does not take place. In this production process the process starts with collection of tobacco leaves. These leaves are ordered from Guntur and they are piled up in leaf reception room. These leaves are stored in boxes called as bails. Then these bails are put into bail turning unit then they are sent to slicer. Under slicer machine, leaf and stem part will be separated. Then these leaf and stem parts will go under various production process and will be finally combined together with which the primary manufacturing process will be completed.

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Then under secondary production process these final material which has been prepared under primary process will be sent to various machines depending upon the different brands. Different brands need different quantity of materials to produce the cigarette. Each machine will have capacity of making 420 packets per minute approximately. There are seven different brands of cigarettes produced by VST industries.

The packing capacity varies for different product. For example

- micro’s consist of 10 sticks

- micro filler consist of 10 sticks

- regular filler consist of 10 to 20 sticks

- King size filter consist of 10 to 20 sticks.

Finally machine called robot will separate each brand and place at the specific position. Then they are transferred to godown from where they are finally sent to the market.

Findings:

Suggestions:

Conclusion:

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Over all the company’s production process is well maintained due to continuous supply of required materials.

Methods used by them in maintaining the raw materials and other products suits the company i.e., if other methods are used then there would be loss in utilisation of products and there would be wastage of time as well as products.

Records were maintained well. All the issues, receipts were noted as and when required. There was no under stocking or over stocking. Orders are made for the materials which are not available. VST industries is using SAP system due to which all the data are automatically updated in system such as number of products available, their quantity etc.,

Materials were utilised very well so that no wastage can take place and the security system is advanced. Finally over all performance was satisfactory and that is the reason which makes the company stand in top position.

BIBILOGRAPHY:

Books referred:

Fundamentals of financial management

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- Chandra, D. Chandra Bose

Cost and management accounting - S. P Jain, K. L. Narang

Financial accounting - Pearson

Website:

www.google.com

www.wikipedia.com

www.vst industries.com

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