inventory management

Chapter - I

INTRODUCTION

1.1 Introduction

Inventory Management or control refers to maintaining an adequate supply of material to

meet an expected demand pattern. It thus deals with determination of optimal policies and

procedures for procurement. Management of inventory is a risk return trade-off exercise by

mangers. Inventory is expressed in terms of both quantity and monetary value. In terms of

quantity, it can be expressed as the number of units of an item in stock where as in monetary

terms it is the sum total of the monetary value of all its items of inventory..

Inventory refers to those idle resources which have economic value and thus it may be

defined as usable but idle resources that have economic value. Inventory is a stock of direct or

indirect material, from raw material to finished goods stocked in order to meet an unexpected

future demand. In other words inventory is a physical stock of goods kept for the future

purposes. Though Inventory is a blocked capital, in the sense that it is not being used in the

present, it plays a distinct role in the life of any organization for a smooth and efficient running

of business.

Thus the functions of inventory are to:

Protect against unpredictable fluctuations in demand and supply

Take the advantage of price discounts through bulk purchases

Take the advantage of batches and longer production run

Provide flexibility to allow changes in production plans in view of changes in demands

etc.

Facilitate uninterrupted production

The basic function of inventory is thus to insulate the production process from changes in the

external factors not in control of management.. It decouples various interlinked functions and

thus enables each function to conduct itself independently like Purchasing, Production, and

Marketing etc

1

1.2 OBJECTIVES

The main objective of the present study is to evaluate the performance of “Nile ltd” in respect

of inventory management. The specific sub-objectives of the study are given below.

1. Categorizing the inventory in ABC for analysis in Nile ltd and to assess the manage4ial

level control on the vital items, in the inventory holding.

2. To study the method of major raw material controls being used in the Nile ltd.

3. To study the inventory management process in Nile ltd.

4. To evaluate the economic order quantity and lead time consumption of Nile ltd.

5. To evaluate reorder level, maximum stock level of Nile ltd.

6. To study which item is having the high percentage of usage in the processing of finished

goods.

7. To access the performance of inventory management of Nile ltd by selected accounting

ratios.

2

1.3 LIMITATIONS

1. Financial policies of the organization are sensitive in nature; the same could not be

acquired easily.

2. Time constraint is another limitation to make the study more qualitative.

3. Another limitation of the study is collecting of data from finance department and

warehouse superiors. It is very difficult; as they are they are too busy in discharging their

own duties.

4. The study is limited to the Glass lining division of Nile Ltd.

3

1.4 Present Study

For the purpose of the study data has been selected covering from 2007-2008 to 2010-2011.

Most of the data is based on the secondary data, personal discussions were held with employees

of stores department and finance department of Nile ltd.

The secondary data is the annual reports, other inventory valuation and quantity reports. The

data collected from the secondary source is processed and analyzed for drawing inferences by

applying simple statistical methods like percentage, average, etc.,. The technical analysis like

economic order quantity and ABC analysis have been studies.

Finally conclusions are drawn based on the study and suitable suggestions are made for

improving the performance of Nile ltd.

4

Chapter – II

RESEARCH METHODOLOGY

For the purpose of the study data has been selected covering from 2007-2008 to 2010-2011.

Most of the data is based on the secondary data, personal discussions were held with

employees of stores department and finance department of Nile ltd.

The secondary data is the annual reports, other inventory valuation and quantity reports.

The data collected from the secondary source is processed and analyzed for drawing inferences

by applying simple statistical methods like percentage, average, etc.,. The technical analysis like

economic order quantity and ABC analysis have been studies.

Finally conclusions are drawn based on the study and suitable suggestions are made for

improving the performance of Nile ltd.

5

Chapter – III

THEORITICAL FRAMEWORK

3.1 Inventory Management in Nile Ltd

Materials constitute the most significant part of the current assets of a large majority of

companies in India. On an average, materials are approximately 60 percent of current assets in

public limited companies in India. Because of large size of materials maintained by firms, a

considerable amount of funds is required to be committed to them. It is, therefore, absolutely

imperative to manage all aspects of material efficiently and effectively in order to avoid

unnecessary investment. A firm neglecting the management of material will be jeopardizing its

long-run profitability and many fail ultimately. It is possible for a company to reduce its level of

material to a considerable degree, e.g., 10 to 20 percent, without any adverse effect production

and sales, by using simple material planning and control techniques. The reduction in

‘excessive’ stocking material carries a favorable impact on a company’s profitability.

Inventory is a list for goods and materials, or those goods and materials themselves, held

available in stock by a business. In accounting inventory is considered an asset.

In business management, inventory consists of a list of goods and materials held available in

stock.

Inventory management is primarily about specifying the size and placement of stocked goods.

Inventory management is required at different locations within a facility or within multiple

locations of a supply network to protect the regular and planned course of production against the

random disturbance of running out of materials or goods. The scope of inventory management

also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset

management, inventory forecasting, inventory valuation, inventory visibility, future inventory

price forecasting, physical inventory, available physical space for inventory, quality

management, replenishment, returns and defective goods and demand forecasting. 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

6

Systems and processes that identify inventory requirements, set targets, provide replenishment

techniques and report actual and projected inventory status.

Handles all functions related to the tracking and management of material. This would include the

monitoring of material moved into and out of stockroom locations and the reconciling of the

inventory balances. Also may include ABC Analysis, lot tracking, cycle counting support etc.

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.

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

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

requires that you maintain certain amount of inventory to use in this "lead time".

2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand,

supply and movements of goods.

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

3.2 Classification of Inventory

Inventory is idle resources that have future economic value. It indicates that it may be available

in different forms depending upon the production cycle stage it is in. Classification of inventory

is done on this basis and thus the different classifications of inventory are as follows

Raw materials - Raw materials are input goods intended for combination and/or conversion

through the manufacturing process into semi-finished or finished goods. They change their form

and become part of the finished product.

7

Components and Parts - Just as raw materials are converted to finished goods in a manufacturing

operation, components and parts are assembled into finished goods in an assembly operation.

Maintenance, repair and operating Inventories (MRO) - These include parts, supplies, and

materials used in or consumed by routine maintenance and repair of operating equipment, or in

support of operations.

In-process goods - These are goods in the process of manufacturing and only partially

completed. They are usually measured for accounting purposes in between significant conversion

phases. In-process inventories provide the flexibility necessary to deal with variations in demand

between different phases of manufacturing.

Finished goods - These represent the completed conversion of raw materials into the final

product. They are goods ready for sale and shipment.

Resale goods - These are goods acquired for resale. Such goods may be purchased by a

wholesaler for resale to distributors, or by distributors for resale to consumers, etc.

Capital goods - These are items (such as equipment) that are not used up or consumed during a

single operating period, but have extended useful lives and must be expensed over multiple

operating periods. Tax laws require that such an item be capitalized, and a predetermined

percentage of its cost be recognized as an expense each operating period, over a predetermined

time frame, according to equipment classes.

Construction materials - These are raw materials and components for construction projects such

as a building, bridge, etc.

8

Hard goods/soft goods - What one identifies as hard goods and soft goods will vary depending

on the industry involved. For example, in data processing, hard goods include apparatus such as

computers and terminals, while soft goods include software, data storage media, and the like.

3.3 Inventory Control Systems

Inventory control is concerned with minimizing the total cost of inventory. The three main

factors in inventory control decision making process are:

The cost of holding the stock (e.g., based on the interest rate).

The cost of placing an order (e.g., for row material stocks) or the set-up cost of

production.

The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.

The third element is the most difficult to measure and is often handled by establishing a "service

level" policy, e. g, certain percentage of demand will be met from stock without delay.

3.4 Nature of Material

Materials are stock of the products a company is manufacturing for sale and components that

make up the products. Most manufacturing organizations usually divide their "goods for sale"

inventory into:

Raw Materials- materials and components scheduled for use in making a product.

Work in process, WIP - materials and components that have begun their transformation to

finished goods.

Finished goods - goods which are ready for sale to customers.

Goods for resale - returned goods that are saleable.

3.5 Raw Materials9

Raw materials are those basic inputs that are converted into finished products through the

manufacturing process. Raw materials are those units which have been purchased and stored for

future production. They are required to carry out production activities uninterruptedly. The

quantity of raw materials required will be determined by the rate of the consumption and the time

required for replacing the supplies. The factors like the availability of raw materials and

government regulations, etc., too affect the stock of raw materials.

Raw material turnover ratio indicates the number of time materials is replaced during the year.

To judge whether the ratio of a firm is satisfactory or not, it should be compared over a period of

time of the basis or trend analysis.

In general, a high material turnover is better than a low ratio. Yet a very high ratio calls for a

careful analysis. It indicates of under investment in very low level of inventory has serious

implications. It is also likely that the firm may be following a policy of replenishing it stock in

too many small sizes.

Similarly, a very low material turnover ratio is dangerous. It signified excessive material or over

investment. Carrying excessive inventory involves the cost in terms of interest of funds of

rentals space and so on. Thus a firm should have neither too high nor low material turnover.

To avoid “stock out list” associated with a high ratio and the cost of carrying the excessive

material; there should be reasonable level for mixed ratio. The firm would well advise to

maintain a close watch on the trend of ratio.

Inventory turnover ratio can be calculated as follows:

Inventory Turnover Ratio = Cost of Goods sold or Turnover

Average Inventory

3.6 Work in Process10

Work in process is called as stock in process. It refers to goods in the intermediate stage of

production. These are semi finished product for sale. They represent products that need more

work before they become finished product for sale. The work in process is that stage of stock

which is in between raw materials and finished goods. The raw materials enter the process of

manufacturing but they are yet to attain the final shape of finished goods. The quantum of work

in process depends up on the time taken in manufacturing; the more will be the amount of work

in process.

3.7 Finished Goods

The finished goods materials are those completely manufactured products which are ready for

sale. Stocks of raw materials and work in process facility production, while stock of finished

goods is required for smooth marketing operations. These are goods, which are ready for

consumers. The stocks of finished goods provide buffer between the production and market.

The purpose of maintaining material is to ensured proper supply of goods to the customers. In

some concerns the production is undertaking on order basis.

In these concerns there will not be a need for finished goods inventory. The need for finished

goods stock will be more when production is under taken in general without waiting for specific

orders. Those, inventory serve as the link between the production and consumption of goods.

The levels of three kinds of inventories for a firm depend on the nature of its business. A

manufacturing firm will have substantially high levels of three kinds of materials, while retail or

wholesale firms will have a very high level of finished goods in material and work in process

stock. With in manufacturing firms there will be differences. Large heavy engineering

companies produce long production cycles products; therefore, they carry large materials. On

the other hand, materials of consumer Product Company will not be large because of short

production cycle and fast turnover.

A fourth kind of materials, supplies is also maintained by firms. These materials do not directly

enter production, but are necessary for production process.

11

Usually these supplies are small part of total material and do not involve significant investment.

Therefore, a sophisticated system of inventory control may not be maintained for them.

3.8 Spares

The stock policies of spares differ from industry to industry. Some industries like transport will

require more spares than the other concerns. The costly spares 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

cost that may arise due to their non-availability

3.9 Need to Hold Materials

The question of managing materials arises only when the company holds the material. for

manufacturing end products for sale. Stocking of Materials involves blocking up the company’s

resources in currency, storage and handling costs. If it is expensive to maintain materials, why

do companies holds materials? There are three resources which generally motivate for holding

materials.

TRANSACTION MOTIVE:

Every firm tends to maintain some level of inventory to meet the day to day

requirements of sales, production process and customers demand etc. in this; raw materials are

stored for smooth production process of the firm.

PRECAUTIONARY MOTIVE:

A firm should keep some inventory for unforeseen circumstances also like loss

due to natural calamities in a particular area, strikes, layouts etc. So the firm must have some

finished goods as well as raw-materials to meet circumstances.

SPECULATIVE MOTIVE:

12

Influences the decision to increase or reduce material level to take advantage of

price fluctuation.

A company should maintain adequate stock of materials for a continuous supply to the factory

for an uninterrupted production. It is not possible for a company to procure raw materials

whenever it needed. A time lag exists between demand and supply. Also, there exists

uncertainly in procuring raw materials in time on many occasions. The procurement of materials

may be delayed because of such factors as strike, transport disruption or short supply. Therefore,

the firm should maintain sufficient stock of raw materials at a given time to streamline

production. Other factors which may necessitate purchasing and holding of raw material

inventories are quantities of raw materials than needed for the desired production and sales level

to obtain quantity discounts of bulk purchasing. At time, the firm would like to accumulate raw

materials in anticipation of price rise.

Work in process material builds up because of the production cycle. Production cycle is time

span between introduction of raw material into production and emergence of finished product at

the completion of production cycle. Till production cycle completes, stock of work in process

has to be maintained. Efficient firm constantly try to make production cycle smaller by

improving their production techniques.

Stock of finished goods has to be held because production sales are not instantaneous. A firm

cannot produce immediately when goods are demanded by customers. Therefore, to supply

finished goods on a regular basis, their stock has to be maintained. Stock of finished goods has

also to be maintained for sudden demands from customers. In case the firm’s sales are seasonal

in nature, substantial finished goods material should be kept to meet the peak demand. Failure to

supply products to customers, when demanded, would mean loss of the firm’s sales to

competitors. The level of finished goods materials would depends upon coordination between

sales and production as well as on production time.

3.10 Costs

13

The holding of inventories exposes the firm to certain risks. The various costs and risk involved

in holding are given below.

Capital Cost: The holding of inventories includes cost. So, the firm has to arrange for

additional funds in order to meet the cost of inventories. These funds may be arranged

from the firm’s sources or from outsiders. In both cases, the firm has to incur a cost.

Storage and Handling Cost: Holding inventories also involves costs on storage. For

holding inventories in advance, for sufficient stock, for uninterrupted production, the

business has to pay for storage costs. The storage costs include the rent of the warehouse,

insurance charges etc.

The costs of holding inventories are as follows:

Material Costs: This is the cost of purchase of goods, transportation, handling charges.

Ordering Costs: This is a variable cost associated with placing an order. Few orders

mean less cost and more orders mean more cost.

Carrying Costs: This basically includes expenses of storage of goods. The costs are

storage cost, insurance cost, spoilage cost, cost of funds tied up in inventory etc.

3.11 Lead Time

It is the time taken by the supplier to supply the materials. Technically it is the period which

lapses between the recognition of need and its fulfillment. There is a direct relationship between

lead time and inventory. As lead time increases, inventories also increase. The lead time can be

divided into administrative lead time, manufacturing lead time, transportation lead time,

inspection lead time etc.

3.12 Re-Order Point

14

It indicates when an order should be placed; it depends upon consumption ratio and lead time.

RE-ORDER POINT = (LEAD TIME* AVERAGE USAGE)

3.13 Safety Stock

Using the above formula, it is difficult to predict usage and lead time accurately. The demand

for material may fluctuate from the normal lead time. If the actual usage increases or the

delivery of the material is delayed the firm can face a problem of stock-out. Therefore, in order

to guard against the stock-out, the firm may maintain a safety stock i.e., some minimum or buffer

material as cushion against expected increased usage and/or delay in delivery in time.

Thus the formula to determine the re-order point when the safety stock is maintained is as

follows:

RE-ORDER POINT= (LEAD TIME*AVERAGE USAGE) + SAFETY

STOCK

3.14 Order Cycle

The time period between placements of two successive orders is referred to as an order cycle.

There are two inventory management system based on which the orders may be placed. They

are as follows:

Q-system: (Fixed order quantity system or re-order point system).

P-system: (Fixed periodic review system).

3.15 Reorder Level

15

The inventory level at which a new or fresh order is placed with the suppliers for obtaining

additional items is known as reorder level. This point is fixed between the maximum stock and

minimum stock levels. This depends on two factors:

The lead time between order placement and actual receipt, and

The demand during the lead time.

This is the quantity of the replacement order. In certain types of inventory control system, the

reorder quantity is the economic order quantity.

3.16 Maximum Stock Level

A stock level selected as the maximum desirable or allowable is referred to as maximum stock.

This is used as an indicator to show when stock levels have risen too high. The maximum level is

the largest quantity of a particular material, which should be kept in store at any one time. The

fixation of maximum level is necessary to avoid unnecessary blocking of capital in materials,

losses on account of deterioration and obsolescence of materials, extra overheads and temptation

to thefts.

The maximum level of materials should be decided after considering the following:

Storage space

Availability of working capital

Cost of storage, insurance, interest on capital invested in stock.

Rules framed by government for import or procurement.

3.17 Minimum Stock Level16

It is also known as buffer stock or safety stock. This is the additional stock needed to allow for

delay in delivery or for any unexpected demand that may arise during the lead time.

3.18 Importance of Inventory Management to a Business

Inventory Management is the planning, control, organizing and leading the goods and materials

required by the business.

Inventory Management is very important for the business. It enables the business to meet or

exceed expectations of the customer by making the product readily available.

If managed properly, it can help the organization reduce its costs, achieve economies of scale

and prepares the organization for uncertainty.

3.19 Objectives of Inventory Management

To maintain a optimum size of material for efficient and smooth production and sale

operations.

To maintain a minimum investment in material to maximize profitability.

Both excessive and inadequate materials are not desirable. These are two danger points within

which the firm should operate. The objective of material management should be to determine

and maintain optimum level material investment. The optimum level material will lie between

the two danger points of excessive and inadequate inventories. The firm should always avoid a

situation of over investment or under investment in materials.

17

The following are the main objectives of inventory management

To ensure continuous supply of materials to facilitate uninterrupted production.

Maintain sufficient stocks of raw materials against slack period supplies and benefit from

price changes.

Maintain sufficient finished goods inventory for smooth sales operation and customer

service.

Reduce the cost of production carrying cost and time.

To minimize losses through wastages and damages.

To ensure quality goods at reasonable prices.

It controls investment in inventories and keeps it at an optimum level.

To ensure uninterrupted production.

To facilities furnishing of data for short-term planning and control of inventory

3.20 Techniques of Inventory Management

ECONOMIC ORDER QUANTITY:

There are two questions relating to material management:

1. What should be the size of the Order?

2. At what level should the order placed?

To answer the first question the basic economic order quantity model is helpful. If the firm is

buying raw material, it has to be purchased on each replenishment. This problem is called order

quantity problem and the task of the firm is to determine the optimum or EOQ.

18

The determination of the appropriate quantity to be purchased in each lot to replenish stock as a

solution to the order quantity problem necessitate resolution of conflicting goals buying in large

quantities implies a higher inventory level which will assure.

Smooth production/sales operations.

Lower ordering or set up costs.

But it will involve higher carrying costs. On the other hand small orders will reduce the carrying

costs would increase as there is a likelihood of interruption the operations due to stock outs.

A firm should place neither too large nor too small orders on the basis of trade off between the

benefits from the availability of inventory and the cost of carrying.

To take enough care to avail the concession available in purchasing materials.

Ensuring that the materials of requisite specifications and quality have been received in

good condition.

EOQ = √ (2AO/I)

Where, A = Annual Total Requirement,

O = Ordering Costs,

I = Inventory Carrying Costs.

3.21 ABC Analysis

19

ABC analysis is a technique of exercising selective control also known as management

by exception; over inventory items. The technique is based on the assumption that a firm should

not exercise the same degree of control on items which are more costly as composed to those

items which are less costly. According to this approach the inventory items are divided into

three categories i.e., A, B and C.

Category ‘A’ may include more costly items, while category ‘B’ may consists of less costly

items and category ‘C’ of the least costly items. Therefore, ABC analysis concentrates on

important items hence also known as Control by Importance and Exception (CIE). This

approach is also known as Proportional Value Analysis (PVA). There is no definite procedure

for classifying the inventories as A, B and C categories. The method usually adopted is,

1. The quantity of each material expected to be used is estimated.

2. The value of each of the above material is found out by multiplying quantity with price.

3. The items are arranged in the descending order of their value irrespective of their

quantities and give the ranks.

4. Express the value for each item as a percentage of the aggregate usage value and obtain

the cumulative percentage of annual usage values.

5. Obtain the percentage value for each of the items. For n items, each item shall represent

100/n percent. Also obtain the cumulative values of the percentages.

6. Plot the curve using the cumulative computed in step 4 and step 5 on x and y axes

respectively.

7. Determine appropriate divisions for the A, B and C categories.

In general, normal inventory item possess the following distribution pattern.

A: 5- 10% of the total number of items account for about 70% of the total consumption value.

B: 10-20% of the items account for 20% of total consumption value.

20

C: The remaining large number of items account for the balance 10% of the consumption value.

Chapter –IV

PROFILE OF NILE LTD.

21

4.1 Introduction to NILE LTD

Nile Limited was originally incorporated as a private limited company with the name

Navabharat Industrial Linings and Equipment Private Limited on May 18, 1984 and was later

converted to a public limited company with the name Navabharat Industrial Linings and

Equipment Limited. The name of the Company was changed to its present name of NILE ltd.

vide a fresh certificate of incorporation dated September 16, 1994.

Nile is a Public limited company and its shares are listed on the Bombay Stock Exchange (BSE).

Nile has emerged as a leader in glass lining by achieving customer satisfaction by delivering

quality products, with a fervent desire to convert every customer relationship into a prospective

partnership. Nile's Glass Lining and pressure vessel division is located at Industrial estate,

Nacharam, Hyderabad with a covered area of 8700 sq.m. The totally integrated fabrication,

machining and glass lining facilities ensure timely delivery of quality products.

Nile's two Non-Ferrous plants are located One near Hyderabad, and another near Tirupati.

The combined capacity of these two plants is 32000 tons per annum. Nile’s 2 MW Wind Farm is

located at Ramagiri, Ananthapur district.

The state-of-the-art CAD facilities and experienced engineers not only automate the day-to-day

engineering drawing requirements, but also innovate and improve the versatility of the product.

In addition to standard equipment, Nile designs and manufactures equipment for specific

customer applications or process performance improvement.

A Company with a difference - setting benchmarks:

Nile is an ISO 9001 certified Company manufacturing world class Glass Lined Equipment,

Pressure Vessels, Lead and Lead Alloys.

22

Product range of the company includes:

Reactors

Reactors with Conical bottom

Reactor with Insulation

Receivers (Jacketed &Unjacketed)/ Storage Tanks

Conical Dryer

Agitated Nutsche Filters

Heat Exchangers /Condensers

Columns

Lead products

Pure Lead 99.97% purity

Lead Antimonial alloys

Lead Selenium alloys

Lead Calcium alloys

Lead Tin alloys

Chapter –V

DATA ANALYSIS23

5.1 ABC ANALYSIS

ABC ANALYSIS FOR THE YEAR 2010-11

In the year 2010-2011 the total annual value of material is Rs. 201278053. The materials are

divided into A category, B category and C category according to annual consumption.

The ABC Analysis table is as follows

no. material description

annual consumption

cost per unit

annual value

1 steel plates(12,14,18,20,25)mm 1002 44334 44444448

2 steel plates(8,16,22,32)mm 702 44319 31111113

3 steel plates(6,10,36,40,45,50,63,65)mm 301 44296 13333334

4 rods(80,100,122)dia 233 49496 11515178

5 Chemicals 59770 119 7087018

6 mechanical seal(60,80,100)mm 240 27116 6584928

7 rods(50,180,240,250)dia 127 49456 6281006

8 gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 5600280

9 motors(3,7,5,10)hp 251 21376 5365376

10 accuators and variable frequency drive 98 49773 4877724

11 mildsteel seemless pipes 3680 955 3514400

12 electrodes(E7018) 10716 320 3429120

13 forgings(flanges) 102 31756 3239112

14 Rods 63 49397 3112011

15 packaging material 10738 286 3071068

24

16 standguard and stand drive 85 33474 2845339

17 mechanical seal(50,125)mm 80 34296 2743680

18 Hardware 121943 20 2438862

19 paints 17043 137 2334891

20 gearbox(AS-80,90F) 34 67388 2291192

21 motors(5,15,20)hp 81 27577 2233737

22 forgings(nozzles) 752 2892 2174784

23 teflon items(gaskets) 1529 1200 1834803

24 electrodes(E7018-1) 4286 400 1714418

25 mechanical seal(40mm) 108 15125 1633500

26 others in boughtout(sight and light glasses,hoses) 270985 6 1625908

27 abbressive material(grit) 36 43000 1548000

28 imported general stores(ceramic crucibles) 29 53364 1547556

29 teflon items(dippipes/sparges) 240 6354 1524960

30 castings(valve bodies) 425 3570 1517250

31others from general stores(oils, greases, hotmill jars, handgloves,nosemasks, glasses,cap) 97289 15 1459335

32 gearbox(RR310DNC,510DNC) 90 15581 1402345

33 motors 25hp 28 46704 1307712

34 stainless steel seemless pipes 768 1525 1171200

35 castings(rods and plates) 3392 322 1092224

36 electrodes(E316,316L,6013) 385 1500 1027500

37 Tantalum 27 37516 1012932

38 teflon items(bushes/nozzles) 950 1040 988000

25

39 electrical items 5414 176 952864

40 imported chemicals 1515 610 924150

41 oxygen gas 6644 123 817212

42 flux wires 7620 90 685800

43 castings(nozzles) 885 770 681450

44 teflon items(gasket sheets) 500 1350 675000

45 Diesel 13606 37 503422

46 imported tantalum 12 38560 462720

47 job bearing 812 500 406000

48 castings(sleeves) 40 9500 380000

49 Bearings 1166 250 291500

50 LPG 131 2221 290951

51 teflon items(spray ball) 17 16256 276352

52 Shafts 20 10412 208240

53 teflon items(spacers/seperators) 3072 56 172032

54 teflon items(tapes/'o' rings) 7702 22 169444

55 screws and rods 42 3718 156156

56 material handling 347 435 150945

57 grinding machines 12 10115 121380

58 abbressive material(sand) 30 4000 120000

59 grinding wheels 48 2284 109632

60 other in maintence(low value spares, lubricants) 1056 98 103488

61 hoses and pipes 159 523 83157

62 indegnous grind wheels and belts 1981 42 83202

63 blasting accessories 52 1502 78104

26

64 elements seperators 6 12147 72882

65 tool bit 33 2025 66825

66 argon gas 61 950 57950

67 imported boughtout(gear box) 1 41764 41764

68 measuring tapesand scales 103 365 37595

69 wind mill spares 4 4637 18548

70 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 26972

71 cutting accessories 28 574 16072

‘A’ – Occupies 70% of Annual consumption, i.e., 70% of 201078053 = 140894637.

‘B’- Occupies 20% of Annual consumption, i.e., 20% of 201078053 = 40255610.

‘C’- Occupies 10% of Annual consumption, i.e., 10% of 201078053 = 20107805

ABC GRAPH FOR THE YEAR 2010-11

27

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

50000000

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69

annual value

no.

The following table shows the A items


annual consumption

cost per unit

annual value

1 steel plates(12,14,18,20,25)mm 1002 44334 44444448

2 steel plates(8,16,22,32)mm 702 44319 31111113

3steel plates(6,10,36,40,45,50,63,65)mm 301 44296 13333334

4 rods(80,100,122)dia 233 49496 11515178

5 Chemicals 59770 119 7087018

6 mechanical seal(60,80,100)mm 240 27116 6584928

7 rods(50,180,240,250)dia 127 49456 6281006

8gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 5600280

9 motors(3,7,5,10)hp 251 21376 5365376

28

10accuators and variable frequency drive 98 49773 4877724

11 mildsteel seemless pipes 3680 955 3514400

139714805

The following table shows the B items


annual consumption

cost per unit

annual value

1 electrodes(E7018) 10716 320 3429120

2 forgings(flanges) 102 31756 3239112

3 Rods 63 49397 3112011

4 packaging material 10738 286 3071068

5 standguard and stand drive 85 33474 2845339

6 mechanical seal(50,125)mm 80 34296 2743680

7 Hardware 121943 20 2438862

8 paints 17043 137 2334891

9 gearbox(AS-80,90F) 34 67388 2291192

10 motors(5,15,20)hp 81 27577 2233737

11 forgings(nozzles) 752 2892 2174784

12 teflon items(gaskets) 1529 1200 1834803

13 electrodes(E7018-1) 4286 400 1714418

14 mechanical seal(40mm) 108 15125 1633500

15 others in boughtout(sight and light 270985 6 1625908

29

glasses,hoses)

16 abbressive material(grit) 36 43000 1548000

17imported general stores(ceramic crucibles) 29 53364 1547556

18 teflon items(dippipes/sparges) 240 6354 1524960

41342941

The following table shows the C items


annual consumption

cost per unit

annual value

1 castings(valve bodies) 425 3570 1517250

2others from general stores(oils, greases, hotmill jars, handgloves,nosemasks, glasses,cap) 97289 15 1459335

3 gearbox(RR310DNC,510DNC) 901558

1 1402345

4 motors 25hp 284670

4 1307712

5 stainless steel seemless pipes 768 1525 1171200

6 castings(rods and plates) 3392 322 1092224

7 electrodes(E316,316L,6013) 385 1500 1027500

8 Tantalum 273751

6 1012932

9 teflon items(bushes/nozzles) 950 1040 988000

10 electrical items 5414 176 952864

11 imported chemicals 1515 610 924150

12 oxygen gas 6644 123 817212

30

13 flux wires 7620 90 685800

14 castings(nozzles) 885 770 681450

15 teflon items(gasket sheets) 500 1350 675000

16 Diesel 13606 37 503422

17 imported tantalum 123856

0 462720

18 job bearing 812 500 406000

19 castings(sleeves) 40 9500 380000

20 Bearings 1166 250 291500

21 LPG 131 2221 290951

22 teflon items(spray ball) 171625

6 276352

23 Shafts 201041

2 208240

24 teflon items(spacers/seperators) 3072 56 172032

25 teflon items(tapes/'o' rings) 7702 22 169444

26 screws and rods 42 3718 156156

27 material handling 347 435 150945

28 grinding machines 121011

5 121380

29 abbressive material(sand) 30 4000 120000

30 grinding wheels 48 2284 109632

31 other in maintence(low value spares, lubricants) 1056 98 103488

32 hoses and pipes 159 523 83157

33 indegnous grind wheels and belts 1981 42 83202

31

34 blasting accessories 52 1502 78104

35 elements seperators 61214

7 72882

36 tool bit 33 2025 66825

37 argon gas 61 950 57950

38 imported boughtout(gear box) 14176

4 41764

39 measuring tapesand scales 103 365 37595

40 wind mill spares 4 4637 18548

41 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 26972

42 cutting accessories 28 574 16072

A

B

C

32

5.2 Inventory Turnover Ratio

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not.

The inventory turnover ratios also known as stock velocity is normally calculated as sales

/ average inventory of cost of goods sold/average inventory.

Inventory conversion period may also be calculated to find the average time taken for

clearing the stocks. Symbolically.

Cost of goods sold

Inventory turnover ratio = -------------------------------

Average inventory at cost

Or

Net sales

= --------------------------

Average inventory

Days/Months in a year

And, inventory conversion period = -------------------------------------

Inventory turnover rati

5.3 Statement Showing Inventory Turnover Ratio33

Particulars 2008-09 2009-10 2010-11

Turnover 425042979 398484821 321558291

Average Inventory 260035731 270449527 293925381

Inventory Turnover Ratio

1.63 1.47 1.09

Interpretation

In 2008-09 stocks are converted into cash/accounts receivable faster when compared to the years

2009-10 and 2010-11. The turnover ratios is 1.63 in the year 2008-09 was gradually decreased to

1.09 by the year 2010-11. This means the stock has not been sold fast and stayed on the shelf for

a longer period. This ratio is decreased because of decrease in the sales and increase in average

inventory. An efficient management of inventory lies in higher inventory turnover ratio.

Inventory Holding

Period

Particulars 2008-09 2009-10 2010-11

34

Turnover 425042979 398484821 321558291

Average Inventory 260035731 270449527 293925381

Inventory Holding

Period( In days)

221 225 331

Interpretation:

In 2008-09 the inventory holding period is less when compared to the years 2008-09 and 2010-

11 respectively. In the year 2008-09 the inventory holding period was 221 days and it was

increased to 225 days by the year 2008-09 and further it is increased to 331 days by the year

2010-11. These mainly because of the sales are gradually decreasing from year to year. The ratio

is gradually increasing from year to year.

5.4 Inventory to Current Assets Ratio

35

Inventory

Inventory to current asset ratio = ------------------------ *100

Current Assets

Year Inventory Current Assets Inventory to Current

Assets Ratio

2007-08 267797121 328534407 81.51%

2008-09 252274341 308149728 81.86%

2009-10 288624713 344537428 83.77%

2010-11 299226049 336657938 88.88%

Interpretation:

In the year 2007-08, it was 81.51% and it was increased to 88.88% by the year 2010-11. These

means that the inventory is increasing from year to year but all the remaining current assets are

not increasing. These means the quick assets are decreasing from year to year as inventory is

excluded from the preview of quick assets.

36

5.5 Inventory to Total Assets

Inventory

Inventory to total assets = ----------------- * 100

Total Assets

Year Inventory Total Assets Inventory to Total Assets Ratio

2007-08 267797121 447862056 59.79%

2008-09 252274341 421558838 59.84%

2009-10 288624713 458845760 62.90%

2010-11 299226049 441873054 67.72%

Interpretation

In year 2007-08 it was 59.79% and it is gradually increased to 59.84% by the year 2008-09 and

further it is increased to 62.90% & 67.72% by the years 2009-10 and 2009-10 respectively. The

Inventory is increasing from year to year but the other assets are not increasing as the inventory.

37

5.6 Raw Materials to Sales Ratio

Raw Materials

Raw materials to sales ratio = --------------------------- * 100

Sales

Year Sales Raw Materials

Consumed

Raw Materials to

Sales Ratio

2007-08 387724451 196580737 50.70%

2008-09 425042979 193155579 45.44%

2009-10 398484821 207481444 52.07%

2010-11 321558291 165648066 51.51%

Interpretation

In year 2007-08 the ratio is 50.70% and it is decreased to 45.44% in the year 2008-09 and then it

is increased in the year 2009-10 to 52.07% and in the coming year it is slightly decreased to

51.51%. The raw materials consumption is fluctuating year to year by seeing these ratios we

conclude the raw materials are blocked in the work in progress.

38

5.7 Closing Stock to Sales Ratio

Closing Stock

Closing stock to sales ratio = ------------------------- * 100

Sales

Year Inventory Sales Closing Stock to

Sales Ratio

2007-08 267797121 387724451 69.07%

2008-09 252274341 425042979 59.35%

2009-10 288624713 398484821 72.43%

2010-11 299226049 321558291 93.05%

Interpretation

39

In the year 2007-08 the ratio is 69.07% and in the year 2008-09 it was decreased to 59.35%., in

2009-10 it was increased to 72.43% and in the year 2010-11 it is increased to 93.05%. The

inventory is increasing but sales are decreasing. The company should increase the sales or else

decrease the closing stock.

Closing Stock to Sales Ratio

Years

5.8 Economic Order Quantity

Suppose the ordering cost per order ‘0’ is fixed. The order costs will be number of orders

during the year multiply by ordering cost per order. If ‘A’ represents the annual requirements

and ‘Q’ the order size, the number of orders will be ‘A/Q’ and the total orders costs will be

AO

40

Total Ordering Cost = ---------------- -------------------------- (1)

Q

Where A = Annual requirement,

O = Ordering costs,

Q = Order size,

C = Carrying costs per unit.

Let us further assume that the carrying costs per unit ‘C’ are constant. The total carrying costs

will be the product of the average materials units and the carrying costs per unit. If ‘Q’ is the

order size and the usage is to be steady, the average material will be.

Q

Average Material = ----------------- --------------------------------- (2)

2

QC

Average Material = -------------------- ---------------------------------- (3)

2

The Total material costs, then are the sum of total carrying and ordering costs:

QC AO

Total Cost = ------------ + ------------ ---------------------- (4)

2 Q

41

Calculate (4) reveals that a large quantity, ‘Q’ the carrying costs will increase, but the ordering

costs will decrease. On the other hand the carrying cost will be lower and the ordering cost will

be higher with the lower order quantity. Thus the total cost function represents a trade-off

between the carrying cost and the ordering cost for determining the economic order quantity.

To obtain formula for economic order quantity (EOQ), equation (4) is differentiated with respect

to ‘Q’ and setting the derivative equal to zero.

QC AO

Total Cost (TC) = ---------- + ---------- -------------------------- (a)

2 Q

Differentiating Equation (a) with respect to Q

D (TC) C AO

------------------ + ------------------- - ----------- ---------------- (b)

DA 2 Q

Setting Equation (b) to zeros:

C AO

-------- - ----------- = 0

2 Q2

CO2 = 2AO

EOQ = SQRT (2AO/C) -------------------------------- (5)

42

Table 1

CALCULATION OF EOQ USING THIS INFORMATION

Sl. No. Code Material Description Annual

Consumption(Qty)

Price value

(Rs)

1 RNST Steel Plates (tons) 2004,929.00 88,888,897

2 RNBO Bought Outs(No’s) 344,594.00 40,647,703

3 RNRO Rods (tons) 423,114.00 20,936,688

4 GNOT General Items(No’s) 116,625.00 14,593,351

5 RNCA Chemicals(kgs) 59,770.00 7,087,018

6 RNTI Teflon Items (No’s) 14,010.00 5,648,844

7 RNFI Forgings (No’s) 855.00 5,437,192

8 RNSP Pipes and Fittings

( Mts)

5,066.00 4,686,741

9 RNCA Castings (No’s) 5,107.00 4,544,214

10 GNWP Packing Material

(Set)

10,738.00 3,073,419

11 GMOT Imported General

Stores(No’s)

57.00 2,212,421

12 GNM Maintenance(No’s) 2,848.00 1,041,281

Ordering Cost -- 4%

43

Inventory Carrying Cost -- 12.5%

EOQ = SQRT (2AO/C)

Calculation of EOQ using the above information

1. RNST Steel Plates:

Annual consumption = Rs.2004, 929.00

Ordering Cost = Rs.355, 556

Inventory carrying cost = Rs.11, 111,112.13

EOQ = √ ((2) (2004929) (355556)/11,111,112)

= √ 128,315.606

= 358.21 tons

= 358 tons.

2. RNBO Bought Outs:

Annual consumption = 344,594.00

Ordering Cost = Rs.185, 908.

Carrying Cost = Rs.5, 080,963.

EOQ = √ ((2) (344,594.00) (185908)/5080963)

= √25216.79

= 158.78 No’s

= 159 No’s.

44

3. RNRO Rods:

Annual consumption = 423114

Ordering Cost = Rs. 837468

Carrying Cost = Rs. 2617086

EOQ = √ ((2) (423114)(837468)/2617086) = 520 tons.

4. GNOT General Stores:

Annual Consumption = 116625

Ordering Cost = Rs. 583734

Carrying Cost = Rs. 1824169

EOQ = √ ((2) (116625) (583734)/1824169) = 273 No’s.

5. RNCA Chemicals:


Ordering Cost = Rs.283481

Carrying Cost = Rs.885877

EOQ = √((2)( 59770)(283481)/885877) = 195 Kgs.

6. RNTI Teflon Items:




45

EOQ = √ ((2)( 14010)(225954)/706106) = 94 No’s.

7. RNFI Forgings:




EOQ = SQRT ((2)( 855)(217488)/679649)

= 23 No’

8. RNSP Pipes & Fittings:




EOQ = SQRT ((2) (5066) (187470)/585843)

= 57 Mts.

9. RNCA Castings:




EOQ = √ ((2)( 5107)(181769)/568027) = 57 No’s.

46

10. GNWP Packing Material:




EOQ = √ ((2)( 10738)(122937)/384177) = 83 Sets.

11. GMOT Imported General Stores:




EOQ = √ (2)( 57)(88497)/276553) = 6 No’s.

12. GNM Maintenance:




EOQ = √ ((2)( 2848)(41651)/130160) = 43 No’s

47

TABLE-2

STATEMENT SHOWING EOQ

SL. NO CODE MATERIAL

DESCRIPTION

ANNUAL

CONSUMPTION

ORDERING

COST

CARRYING

COST

EOQ

UNITS

1 RNST Steel Plates 2004929 355556 1111112 358 Tons

2 RNBO Bought Outs 344594 185908 5080963 158 No’s

3 RNRO Rods 423114 837468 2617086 520 Tons

4 GNOT General Stores 116625 583734 1824169 273 No’s

5 RNCA Chemicals 59770 283481 885877 195 Kgs

6 RNTI Teflon Items 14010 225954 706106 94 No’s

7 RNFI Forgings 855 217488 679649 23 No’s

8 RNSP Pipes & Fittings 5066 187470 585843 57 Mts

9 RNCA Castings 5107 181769 568027 57 No’s

10 GNWP Packing Material 10738 122937 384177 83 Sets

11 GMOT Imported

General Stores

57 88497 276553 6 No’s

12 GNM Maintenance 2848 41651 130160 43 No’s

INTERPRETATION: The Company will do well to follow the E O Q as far as possible to

improve the inventory turnover ratio.

48

TABLE-3

STATEMENT SHOWING LEAD TIME CONSUMPTION

Average Consumption = Annual Consumption/365.

Lead time consumption = Lead time * Average consumption per day.

SL. NO CODE MATERIAL

DESCRIPTION

LEAD

TIME

AVG. CONSUMPTION

PER DAY

LEAD TIME

CONSUMPTION

1 RMCH Imported Chemicals 90 days 1515/365=4.15 373.50

2 GMOT Imported General

Stores

90 days 57/365=0.16 14.40

3 RMBO Imported Bought

outs

90 days 1/365=0.003 0.27

4 RNST Steel Plates 90 days 2004929/365=5492.96 494366.40

5 RNBO Bought Outs 75 days 344594/365=944.09 70806.75

6 RNCA Castings 60 days 5107/365=13.99 839.40

7 RNCH Chemicals 45 days 59770/365=163.75 7368.75

8 RNFI Forgings 60 days 855/365=2.34 140.40

9 RNSP Pipes & Fittings 30 days 5066/365=13.88 416.40

10 RNRO Rods 45 days 423114/365=1159.22 52164.90

11 RNTI Teflon Items 15 days 14010/365=38.38 575.70

12 GNWP Packing Materials 8 days 10738/365=29.42 235.36

49

TABLE-4

STATEMENT SHOWING RE-ORDER LEVEL

Re-order level = (Lead time * Average Usage) + Safety stock

SL NO. CODE MATERIAL

DESCRIPTION

LEAD TIME

CONSUMPTION

SAFETY

STOCK

RE-ORDER

LEVEL

1 RMCH Imported

Chemicals

373.50 390.00 763.50

2 GMOT Imported

General Stores

14.40 21.00 35.40

3 RMBO Imported Bought

outs

0.27 1.00 1.27

4 RNST Steel Plates 494366.40 497400.00 991766.40

5 RNBO Bought Outs 70806.75 70900.00 141706.75

6 RNCA Castings 839.40 843.00 1682.40

7 RNCH Chemicals 7368.75 7370.00 14738.75

8 RNFI Forgings 140.40 142.00 282.40

9 RNSP Pipes & Fittings 416.40 420.00 836.40

10 RNRO Rods 52164.90 52170.00 104334.90

11 RNTI Teflon Items 575.70 610.00 1185.70

12 GNWP Packing

Materials

235.36 247.00 482.36

50

TABLE-5

STATEMENT SHOWING MAXIMUM STOCK LEVEL

MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + EOQ

SL

NO.

CODE MATERIAL

DESCRIPTION

EOQ RE-ORDER

LEVEL

MAX. STOCK

LEVEL

1 RMCH Imported Chemicals 31 763.50 794.50

2 GMOT Imported General Stores 6 35.40 41.40

3 RMBO Imported Bought outs 1 1.27 2.27

4 RNST Steel Plates 358 991766.40 992124.40

5 RNBO Bought Outs 158 141706.75 141864.75

6 RNCA Castings 57 1682.40 1739.40

7 RNCH Chemicals 195 14738.75 14933.75

8 RNFI Forgings 23 282.40 305.40

9 RNSP Pipes & Fittings 57 836.40 893.40

10 RNRO Rods 520 104334.90 10485.90

11 RNTI Teflon Items 94 1185.70 1279.70

12 GNWP Packing Materials 83 482.36 565.36

51

Chapter -VI

CONCLUSIONS AND SUGGESTIONS

6.1 Findings and Conclusions

Over all the inventory of Nile Limited - glass lining division is maintained at optimal

levels in the present market conditions, but a higher inventory turnover ratio above 1.63

times should be targeted to improve the profitability.

Sales are decreasing according to the study; revenue of the company is decreased during

the period 2008 to 2011. This impact severely on the profitability and liquidity position

of the organization. An improvement n the inventory turnover ratio may improve the

profitability

During the study period, the inventory to current assets ratio is gradually increasing,

which indicates proportion of inventory in current assets is expanding. The requirement

for production/sales should be re assessed and an Endeavour to reduce the inventory may

improve the prospects of profitability.

The inventory turnover ratio is gradually decreasing from year to year. It is not healthy to

the company as more than required inventory leads to blocking of capital. The firm

should maintain reasonable stocks with the help of inventory control.

52

The inventory conversion period is also increasing from year to year. Huge inventory

holding leads to blocking of cash, obsolescence, or deficiencies in the product line or

marketing effort. Over production or early production of goods even before the customer

requires them lead to poor inventory holding period.

According to the ABC Analysis throughout this period, A-items i.e. top 20 per cent of

items constituted around 90 per cent total annual consumption in value.

In the last year the closing stock is almost equal to the sales which require correction.

53

SUGGESTIONS

1. Always keep optimum stocks to keep production process continues without

interruption keeping in view costs of over stocking vis-à-vis the benefits of more than

required stock.

2. The company’s production should be re-scheduled dynamically according to the

marketing forecast to avoid overstocking of finished goods.

3. The company should closely monitor the inventories for optimum utilization, so

that idle inventories can be minimized.

4. Priority in managing the purchase and utilization should be given to materials

classified as “A” which constitutes Steel Plates, Bought outs and Rods. Strict control

is to be ensured for materials classified as “B”.

5. Search for alternate suppliers and materials to be used in production to decrease

the cost of holding huge inventory and lead time for procurement of materials.

6. The investment in raw materials should be made with close monitoring and

optimum utilization.

7. Investment in slow moving items may block up the funds therefore the company

may consider using F N S D analysis. (Fast normal slow moving and dead items.).

8. The raw material should be procured from right source at right quantity and at

right cost.

54

BIBLIOGRAPHY

S.no. Title Author

1. Financial Accounting I.M.PANDEY

2. Cost and Management Accounting S.P.JAIN & K.L.NARANG

3. Cost Accounting R.P.TRIVEDI

4. Internet websites www.nileltd.com

www.google.com

55

http://www.google.com/

http://www.nileltd.com/

Documents

inventory management