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1. INTRODUCTION OF INVENTARYAn inventory can be defined as a stock of goods which is held for the purpose of
future production or sales. The stock of goods may be kept in the following forms:
Raw Materials
Partly finished goods
Finished goods.
Spare parts etc.
OR
A stock of items held to meet future demand
Inventory is a list for goods and materials, or those goods and materials
themselves, held available in stock by a business.
Variables in an Inventory Problem:
The variables associated with the inventory problems are classified into two
categories.
The Controlled variables
The uncontrolled variables
The variables that may be controlled, separately or in combination are
following:
The quantity acquired – By purchase, production, or some other means. The
decision maker may have a control over the production or purchase level.
The frequency of timing of acquisition – The decision maker may have control over
how often or when the inventory should be replenished.
The stage of completion of stocked items – The decision maker may have a control
over the stage at which the unfinished items be held so that there is no delay in
supplying customers.
The uncontrolled variables – The variable that may not be controlled in an inventory
problem are divisible into cost variables and others.
Inventory management:
Inventory management is the branch of business management concerned with
planning and controlling inventories.
Inventory is stock of items held to meet future demand.
1
It deals with two basic questions:
How much to order
When to order?
Types of Inventory:
Raw Material
Work in progress
Finished Goods
Nature of Inventories
Raw Materials – Basic inputs that are converted into finished product through the
manufacturing process.
Work-in-progress – Semi-manufactured products need some more work before they
become finished goods for sale.
Finished Goods – Completely manufactured products ready for sale.
Supplies – Office and plant cleaning materials not directly enter production but are
necessary for production process and do not involve significant investment.
Reasons To Hold Inventory
Meet variations in customer demand:
Meet unexpected demand
Smooth seasonal or cyclical demand
Pricing related:
Temporary price discounts
Hedge against price increases
Take advantage of quantity discounts
Process & supply surprises
Internal – upsets in parts of or our own processes
External – delays in incoming goods.
2
Objective of Inventory Management
To maintain a optimum size of inventory for efficient and smooth production and
sales operations.
To maintain a minimum investment in inventories to maximize the profitability.
Effort should be made to place an order at the right time with right source to
acquire the right quantity at the right price and right quality.
An effective inventory management should:-
Ensure a continuous supply of raw materials to facilitate uninterrupted production.
Maintain sufficient stocks of raw materials in periods of short supply and
anticipate price changes.
Maintain sufficient finished goods inventory for smooth sales operation, and
efficient customer service.
Minimize the carrying cost and time.
Control investment in inventories and keep it at an optimum level.
An optimum inventory level involves three types of costs:-
Ordering costs:-
Quotation or tendering
Requisitioning
Order placing
Transportation
Receiving, inspecting and storing
Quality control
Clerical and staff
Stock-out cost
Loss of sale
3
Failure to meet delivery commitments
Carrying costs:-
Warehousing or storage
Handling
Clerical and staff
Insurance
Interest
Deterioration,shrinkage,
Taxes
Cost of capital
Dangers of Over investment:-
Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity
cost
Excessive carrying cost
Risk of liquidity- difficult to convert into cash
Physical deterioration of inventories while in storage due to mishandling and
improper storage facilities
Dangers of under-investment:-
Production hold-ups – loss of labor hours
Failure to meet delivery commitments
Customers may shift to competitors which will amount to a permanent loss to
the firm
May affect the goodwill and image of the firm
Functions of Inventory Management:-
Track inventory
4
How much to order
When to order
Basic EOQ Model
Assumption
Seasonal fluctuation in demand are ruled out.
Zero lead time – Time lapsed between purchase order and inventory usage.
Cost of placing an order and receiving are same and independent of the units
ordered.
Annual cost of carrying the inventory is constant.
Total inventory cost = Ordering cost + carrying cost
Inventory management:-
Two system followed
Periodic review
Fix order quantity
In periodic stock position is reviewed periodically rather than continuously. A
new order is always placed at the end of the each review.
In Fixed order quantity system the stock of an item is continuously reviewed. A
reorder level is decided on. Whenever the stock of the item equals the reorder level, a
new order is placed. The time between orders can vary. In this system, the order
quantity ordered is always fixe and is equal to the EOQ. EOQ (Economic Order
Quantity) is calculated by a formula which ensures that the total cost is minimum.
Lead time is the lapsed time between the placement of an order and its actual delivery.
Safety stock level is also known as buffer stock. It is the extra quantity of
merchandise that is stocked to take care of delay in delivery and higher demand
during the lead time.
Lead time is the lapsed time between the placement of an order and its actual
delivery.
5
Safety stock level is also known as buffer stock. It is the extra quantity of
merchandise that is stocked to take care of delay in delivery and higher demand
during the lead time.
Types of Inventory
Movement inventory:-This inventory is known as transit or pipeline inventory
arises due to shipment of inventory items to distribution centres and from various
production centers.
Buffer inventory:- This inventory is maintained to meet uncertainties of demand
and supply. Such buffer inventory which are in excess of those necessary to just
meet the average demand during the lead time.
Anticipation inventory:-This is known as seasonal inventories held because of
future demand which is anticipated.
Decoupling inventory:-This is used to reduce interdependence of various stage of
production systems are known as decoupling inventories.
Lot size inventory:-These are held for the reason that purchases are usually made
in lots rather than for the exact amounts which may be needed at appoint of time.
2. INTRODUCTION TO GLAXO SMITH KLINE
6
Glaxo Smith Kline Consumer Healthcare Ltd. (GSKCH) is an Indian associate of
Glaxo Smith Kline plc, U.K.
GSKCH is one of the largest players in the Health Food Drinks industry in India.
The Company, with its manufacturing plants located in Nabha, Rajahmundry and
Sonepat, has a total workforce of over 2700 people, each driven by a spirit of enterprise.
Its flagship product, Horlicks, is a highly respected brand, which is over 100 years old in
India. The Company also manufactures and markets Boost, Viva, Maltova, Biscuits and
in addition promotes and distributes a number of products in diverse categories, including
prominent brands such as Eno, Crocin and Iodex.
GSKCH has a strong marketing and distribution network in India comprising over
1800 wholesalers and direct coverage of over 4,00,000 retail outlets.
GlaxoSmithKline's Consumer Healthcare business is based on scientific innovation. The
company has dedicated consumer healthcare R&D centers and takes research as seriously
as marketing excellence, offering cutting-edge capability in both.
HISTORICAL BACKGROUND
Glaxo Smith Kline Consumer Healthcare Ltd. is a pharmaceutical and
healthcare company born out of the merger of two leading international organizations
SmithKline Beecham and GlaxoWellcome. GSK Consumer Healthcare Ltd and GSK
Pharmaceuticals Ltd are the two businesses of GSK in India of which former are
headquartered at DLF Gurgaon and the latter at Worli, Mumbai.
Its global mission is“To improve the quality of human life by enabling people to do
more, feel better and live Longer ".
In the Indian market, GSKCH's journey began with Horlicks.
7
Year Description
1955: In the early years, Horlicks, a milk product manufactured by
Horlicks Ltd. Slough, England was being imported, bottled and
sold in India. Due to changes in import policy import stopped.
1956–57: A team from the organization visited to explore the possibilities of
setting up a plant with the support of Maharaja of Nabha, His
highness PRATAP SINGH , and a plant was set up at Nabha.
1958: On May 31, 1958 His highness Pratap Singh laid the foundation
stone of the Company at Nabha and Hindustan Milkfood
Manufacturers Pvt. Ltd., was promoted by Horlicks Ltd.
1960: On 24th March 1960, the factory went into production.
1969 : Horlicks Group disposed off their holding in India and U.K. to "
BEECHAM GROUP OF INDUSTRIES ". Beecham plc acquired
Horlicks Limited and became the majority shareholder in
Hindustan Milkfood Manufacturers Limited. Beecham plc. which
is multinational and owns more than 500 companies in more than
200 countries engaged in manufacturing of Brylcream, Haircream ,
Eno fruit salt , MacLean , Toothpaste , Pure Silvikrin etc.
1979: Beecham India (Pvt.) Ltd. Mumbai merged with Hindustan Milk
food
8
Manufacturers Ltd. and the name was changed to H.M.M. Ltd.
Beecham Group Plc.
1989: Beecham plc, UK and SmithKline, USA merged in 1989 to form
Smith Kline Beecham plc, with its registered office in the UK.
HMM Limited thus became part of SmithKline Beecham
Consumer Brands; one of the three sectors of SmithKline Beecham
and its name was changed to SmithKline Beecham Consumer
Brands Limited.
1994: The name was changed to SmithKline Consumer Healthcare Ltd. to
reassert the company's promise of providing Healthcare to consumers. The
company . Decided to do away with its toiletry products and sold its
brands like Brylcream and Silvikrin to Sara Lee.
2000: The Company acquired MALTOVA and VIVA brands of nutritional from
Jagjit Industries Ltd.
A merger took place between SmithKline Beecham and Glaxo Wellcome and the
new company Glaxo SmithKline (GSK) was formed on 27-12-00.
2002: Change of name took place from 23-04-02
2004: The Bank of Punjab has tied up with the company for facilitating
finance on attractive terms to its milk suppliers.
Our new identity, GSKCH, has been created to reflect our shared values towards
scientific research and improving people's lives.
9
Glaxo
SmithKline Beecham
Merge GlaxoSmithKline
PLANT LOCATIONS IN INDIA
Production Stations
Food Powder : Nabha, Rajahmundry, Sonepat & Hamira
Biscuits : Sahibabad
Eno : Rajahmundry
Crocin : Banglore
Iodex : Banglore
PACKING STATIONS
The company started packing Horlicks in ½ Kg and 1kg pouches. Packing machines
was imported and installed. As the main market for sale of Horlicks was in the South and
East India, need was felt for the sale of Horlicks in small units of the country. Therefore
was opened at different places. At present Horlicks is dispatched from Nabha in bulk
quantity to the following packing stations:
Mangaldoi (Assam)
Kompally
Baddi (Himachal Pradesh)
PRODUCT PROFILE
In line with the increased buoyancy across the FMCG segment, GSK continues to
perform well with sales growth of 15.3% over 2012.
10
1. HORLICKS: -“ THE GREAT FAMILY NOURISHER”
The flagship brand of the company, this product
name is associated with that of the company.
Horlicks, which was restaged the previous year,
following intense market research and product
development activities, with an improved
formulation, which is clinically tested to make
children “Taller, Sharper & Stronger”, continues to
grow strong. India forms almost half the world's
market for Horlicks. Horlicks sales crossing the 1000 crores in 2013.
2. JUNIOR HORLICKS
Chocolate Horlicks and Junior Horlicks were
restaged during the tear keeping in mind the
consumer expectations from the two brands.
Junior Horlicks was launched in 1991 in Karnataka
in an attempt to cater to the specialized needs of
certain age groups. This special nourisher, an
Indian brand was targeted at 1-3 years old as a
delicious tasting Milk food drink based on the
international standards of nutrition
3. BOOST
Boost was launched in 1976 as an energy drink in the
Brown Powder segment. Boost along with Boost
Chocoblast, which was launched in the previous year,
continue to deliver as per expectations. An Indian
Brand, this is manufactured at the Nabha Plant. It is
also exported to , countries in West Asia. Very popular
in the South, Boost has grown an average growth rate of 9% per annum. Sportsmen like
Virender Sehwag and Sachin Tendulkar back it, making it the secret of OUR ENERGY!!
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4. MOTHER HORLICKS
Mother’s Horlicks (launched in November’96), is a special nourisher scientifically
designed to help meet the nutritional needs of pregnant and lactating women, as part of a
healthy diet. It is made with the natural goodness of Horlicks by a unique spray dried
process, which helps make it easy to digest. It is enriched with natural honey, and a
combination of vitamins and minerals that not only gives excellent flavor but also help in
keeping good health during pregnancy and optimal birth weight of the baby It is also
essential for physical and mental development of the growing foetus.
5. BISCUITS
The biscuit division has spread its wings and set flight with a 54% increase in the
turnover. Horlicks biscuits are now a truly national brand. The division has a number of
plans for the future growth with the lot of exciting new variety up its sleeves.
6.ENO
Eno is a 100 years old global brand. It is a part of
‘Gastrointestinal category’ Eno is the only powder antacid
and has shown favorable growth over the years. This has
been strengthened of the lemon variant and the sachet pack.
7. GOPIKA GHEE (BY PRODUCT)The main by-product of this company is Gopika Ghee. Gopika Ghee is packed in the
factory itself, rest of the product are bulk packed in containers, which contain 186 kg of
Horlicks and 124 kg. of Boost. These are sent to 3 packing stations.
GSK MISSION
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Our global quest is to improve the human life by enabling the people
“TO DO MORE, FEEL BETTER, AND LIVE LONGER”.
People at Glaxo Smith Kline Consumer Healthcare limited are dedicated ourselves
to delivering medicines and products that help million of people around the world LIVE
LONGER, HEALTHIER AND HAPPIER LIVES.
CULTURESuccessful companies have developed something special that supersedes corporate
strategy, market presence, or technical advantage- distinctive culture. What it is, whether
it is important or not, what you deal with indirectly. Why? Because culture is an
intangible shadow. Having said all that, it is an important issue GSK’s culture is the set of
norms that create powerful precedents for acceptations around acceptable risk, change
orientation, creative and innovation, group versus individuals effort, customers
orientation, extra efforts and more. Culture is a powerful force and can provide an engine
to achieve market success or an anchor pulling the firm toward failure
FINANCIAL HIGHLIGHTS :The Company has reported 15% sales growth and 28.2% PAT growth for 2013
over the previous year in its Annual Report. The total Reserves as on 31-12-2013 stood at
Rs. 6043 Million representing an increase of 20.7% from last year. The Company has no
Loan outstanding as on December 31, 2012. Following is the Ratio Analysis of its
financial implications:
13
TURNOVER (Rs. CRORES)
TURNOVER (Rs. crores)
Years Turnover Growth Rate
2009 909 4
2010 982 8
2011 1089 11
2012 1210 11
2013 1395 15
PROFITS (Rs. Crores)
Profit Before Tax (Rs. crores)
Profit Before Tax % of sales
2009 100 11
2010 116 12
2011 162 15
2012 191 17
2013 245 18
This graphs shows that profit before tax in 2013 is 245 Millions (approx.) 18% of total
sales, which is more all the figures of previous four years. This shows that company has
reduced its expenses to the optimum level as compared to previous years.
This graphs shows that net profit in 2013 is 2451 Millions (approx.) 12% of total sales,
which is more all the figures of previous four years.
14
RATIO ANALYSIS Ratio analysis is the powerful tool of financial analysis of accounting data, the
relationship of he figures should be meaningful. In financial analysis. Ratio is used as an
index or yardstick for the performance of the firm. To analysis the working capital
position we here by analysis and interpret the following ratios
Current ratio
Absolute liquid ratio
Quick ratio
Current asset turnover ratio
Equity Ratio
Inventory turnover ratio
Debtors turnover ratio
EPS Ratio
Current Ratio: Current Assets / Current Liabilities
(Rs lakhs)
Year 2013 2012
Current Assets 37193.60 29776.50
Current Liabilities 24947.50 20855.10
15
For the year 2013 For the year 2012
37193.60/ 24947.50 29776.50/20855.10
= 1.491 = 1.428
The current Ratio of the company has slightly increased in 2013, reason being the
increase in current Assets like cash & Bank balance, Inventory etc. On the other hand
current liabilities and provisions has also increased that’s why there is only a .07%
increase in current ratio. The current ratio of the company does not meet the rule of
thumb requirement of 2:1.
CURRENT RATIOS: (Rs. CRORES)
Current Ratio
Years Current Assets (in millions)
Current Liabilities
(in millions) RATIO
2009 363.0 177.6 2.04
2010 432.0 178.3 2.42
2011 401.8 182.9 2.20
2012 297.8 208.6 1.43
2013 371.9 249.4 1.49
16
Current Ratio in 2013 is 1.49 which is more than the last year’s Current Ratio which is
1.43 and this increase in current ratio is due to increase in current assets is more than
increase in current liabilities.
Liquid Ratio: Quick or liquid Assets / Current Liabilities
Quick or liquid assets include all the current assets except prepaid expenses & Inventory.
(Rs lakhs)
Year
Year
2013 2012
Liquid assets 17711.20 15219.20
Current liabilities 24947.50 20855.10
17
For the year 2013 For the year 2012
17711.20/24947.50 15219.20/20855.10
= .71 = .73
The liquid ratio of the company has declined in 2013; it reaches to .71 from .73 in the
year 2012. This is mainly due to decrease in liquid assets like loans and advances and
increase in current liabilities. It is also short of the rule of thumb liquid ratio i.e. 1:1.
Absolute Liquid Ratio: Absolute liquid Assets / Current Liabilties
Absolute liquid Ratio include cash & bank balances, Marketable Securities
Year 2013 2012
Absolute liquid assets 9366.60 4791.60
Current liabilities 24947.50 20855.10
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(Rs lakhs) the year 2007 For the year 2005
For year 2013 For year 2012
9366.60/ 24947.50 4791.60/ 20855.10
= .375 = .229 The absolute liquid ratio of the company in 2013 has increased as compared to previous
year. The main reason for this is increase in cash and bank balances, but it is still short of
rule of thumb i.e. 0.5:1
Inventory turnover Ratio: NET SALES / INVENTORY
(Rs lakhs)
Year 2013 2012
Net sales 127782.80 110787.10
Inventory 19482.40 14557.30
19
For the year 2013 For the year 2012
127782.80/19482.40 110787.10/14557.30
=6.56 =7.61
Inventory Turnover Ratio is 6.56 in year 2013 as compared to 7.61 in the year 2012. It
shows that company hasn’t been able to convert their stocks into sales as efficiently as
compared to last year.
Inventory conversion period =365 / ITR
2013 2012
365/6.56 365/7.61
=55.64 days =47.96 days
The inventory conversion period of the company in 2013 is 56 days i.e. the company
convert the inventory into sales within 56 days (app) which has increased from the last
year I which it was 48 days. It shows that the company hasn’t been able to clear its stocks
as effectively as it was in the last year.
Debtors Turnover Ratio: Sales/Debtors (Debtors/R)
( Rs lakhs)
Year 2013 2012
20
Sales 127782.80 110787.10
Debtors 2736.2 2808.5
For the Year 2013 For the Year 2012
127782.80/2736.2 110787.10/2808.5
=46.70 =39.45
Debtors Turnover Ratio has increased in 2013 as compared to 2012 which is good for the
company and shows the efficiency of the management.
Debtors collection period = 365 / DTR
2013 2012
365/46.70 365/39.45
= 7.82 days =9.25 days
The debtor’s collection period of the company in 2012 is 9 days but in 2013 it is decrease
to 8 days only, it shows that the company is adopting strict debtors’ policy.
Equity Ratio: Shareholders Fund / Total Assets
(Rs lakhs)
Year 2013 2012
Shareholders fund 64635 54271.9
Total assets 66360 56680
21
For the year 2013 For the year 2012
64635/66360 54271.9 / 56680
= 0.97 = 0.96
Equity ratio of the company has slightly increased from 0.96 in 2012 to 0.97 in
2013. It shows that the financial position of the company is very strong because app. 97%
of the assets of the company are being funded by the shareholders of the company.
Earning Per Share: Net profit (after interest & tax) / No. of share holders
(Rs lakhs)
Year 2013 2012
22
Net profit 16267.50 12693.40
No. of shareholder 420.55538 420.55538
For the year 2013 For the year 2012
16267.50/ 420.55538 12693.40/ 420.55538
= Rs. 38.68 = Rs. 30.18
The Earning per Share has increased to Rs. 38.68 in 2013 from Rs. 30.18 in 2012 which
is good for the company and the shareholders.
Return on Shareholders Fund: Net profit (after int. &tax) Shareholders fund
( Rs lakhs)
Year 2013 2012
Net profit 16267.50 12693.40
23
Shareholders fund 64635 54271.9
For the year 2013 For the year 2012
16267.50/ 64635* 100 12693.40/54271.9*100
= 25.17% =23.39%
5. ABOUT THE NABHA PLANT
GSK’s Nabha plant is a huge manufacturing unit. Glaxo SmithKline Consumer
Healthcare Ltd. is having three factories, which are at Nabha, Rajahmundry and Sonepat.
24
The factory at Nabha is the mother unit and products manufactured by this company fall
under two categories of consumer healthcare:
The food powder (HORLICKS & BOOST) is manufactured in Nabha. The
requirement of workforce changes with change in production policy. The plant at present
employs a work force varying from 1500 to 2000 out of which approximately 1100 are
permanent. There is a staff and management of about 145 persons. There is a wage
agreement for 3 years. The workers also getting weekly off according to Labors Act.. The
plant runs 365 days a years in 3 shifts daily which work from 5.15 a.m. to 1.15 p.m., 1.15
p.m. to 9.15 p.m. & 9.15 p.m. to 5.15 a.m.. The office opens 6 days a week.
About 7 Milk collection centers were opened at a radius of about 40km around Nabha, to
meet the requirement of 10 tones of Milk per day. The main purpose of opening collection centers
at village level was to get good quality of Milk directly from the producer and pay them good
price, thus, raising their standard of living. Nabha and Sonepat production facility has already
been certified for HACCP ( Hazard Analysis Critical Control Point for Food Safety ).
DEPARTMENTAL OVERVIEW
The various departments in GSK Ltd. Nabha are:
OPERATIONAL
EXCELLENCE
25
Nutritional Health Drinks
Gastrointestinal ENO Fruit Salts
Horlicks and its variants
MANUFACTURING
FINANCE DEPARTMENT
Main Functions of Finance Department Are As Follows: -
Vendor paymentWhen an article arrives at the gate, an entry permit is made and they are sent to the
GOODS INWARD DISPATCH section (GID). A goods inward from (gif) is filled up and
sent to the finance department for payment .the vendor submit the bill to purchase
department .the finance department also receives a hard copy of the corresponding
purchase order (PO). There is online passing and payment system. This contains a
database of all purchase order issued. These are checked against the bills for the GIF, PO
references after which the bill is posted for production of the payment slips.
Disbursement of salaries The HR Department sends a compile list of all employees on the payroll together with
their monthly working records .The salaries are paid mainly through the bank to all the
employee.
Payment to government bodies
26
QUALITYASSURANCE
PROCUREMENT
ENGINEERING
WAREHOUSESUPPLY CHAINMANAGEMENT
HR & A
FINANCE&
I.T.
ENVIORNMENT HEALTH &SAFETY
Excise is paid to all suppliers for goods manufactured. The company takes credit of the
payment of excise from the govt. According to the CENVAT. Excise is however paid for
the finished goods. Property tax, insurance and sales tax are also paid in case of accidents;
breakdowns are called for assessment, when a claim is filed. VAT is paid to Excise and
Taxation Department of Punjab.
Milk accountingEvery milk supplier has a code, the first two digit indicating whether the milk is from
cow, buffalo and the next three digits indicating the supplier. Payments are made after 10
days by cheque/MT/DD.
Cash/bankingThere are separate accounts for raw material excluding milk, stores, services, capital and
packing material. Every department submits its monthly cash requirement and sends it to
finance where it is consolidated.
Payment of servicesThe finance department pays for various services like rent, truck hire etc.
DEPARTMENTAL CHART OF FINANCE & IT
27
28
MANUFACTURING PROCESS
The Manufacturing process for Horlicks is as Follows:
1. The First step in the production process involves the mixing of wheat flour with
Malted Barley.
2. In The Second step water is added to the above mixture and the material is
mashed thoroughly, as a result of which the outer cover of malted barley is moved
and remains after it is called Husk.
3. After mashing the material it becomes thick slurry in which the solid content is
above 50%.
4. The fourth step involves the adding up of water to the above mixture.
5. The next stage is the stage of evaporation in which the material is evaporated and
the result is thick slurry of the material in which the solid content is around 80%.
6. After evaporated comes the step of spreading out of material in plates and keeping
them in the oven for about half an hour.
7. Once the material is completely dried, the plates are taken out from the oven and
the food item is scrapped out, which comes out in the form of thin layers. Then the
vitamins and other essential nutrients are added to the food items which is then
ground and the result is our final product HORLICKS.
29
RESEARCH METHODOLOGY
SCOPE OF STUDY The scope of the study is designed in terms of unit worked, the concept adopted and the
period under focus.
The unit
The study is done in the Finance department & stores department of GlaxoSmithKline
Consumer Healthcare Ltd. at Nabha plant.
The concepts
The concept of various tools and techniques of general inventory control are used and
analysed.
The period
The study is supposed to be relating to the period of last year’s consumption i.e. from
April 2013- March 2013.
Sources of Data:Secondary Data: - The study is based on mainly on the secondary data including Annual
Report, Store Records & for theoretical portion various books.
Primary Data: - The only mode of collecting primary data was the non-structured direct
intersection with the concerned persons of Finance & Stores Department.
LIMITATIONS TO THE STUDY
The main limitations to my study of working capital management in Glaxo Smith
Kline.
Healthcare limited are as follows:
1. Limited data:
They provide us limited data as they said that it is confidential to them. Like in the
estimation of reorder level and reorder quantity we used whole raw data they didn’t told
us how these levels are fixed, on what basis.
2. Less Feedback:
30
Due to workload the concerned authorities are unable to feedback us properly on our
queries related to the topic.
3. Shortage of time:
There was very less time to get the whole analysis of how management of general store
inventory items is done and which techniques are applied on them in GSK
OBJECTIVES OF STUDY
The present study has been undertaken in respect of Glaxo SmithKline at Nabha the main
objectives of study are as follows: -
To know that how a company apply the controlling technique on the inventory.
To know that how the recategorisation of the inventory is done through the ABC
analysis.
To know that how a company actually get the benefit of the controlling technique.
To know that how other techniques can be better applied on the existing
controlling technique.
INVENTORY MANAGEMENT
Every business needs inventory for smooth working of its activities. It serves as a
link between production and distribution activities. Inventory the most significant part of
current assets.
Large size of inventory is maintained by firms, a considerable amount of fund is
required to be committed in them. Therefore, one of the most significant decision areas
concerning finance manager is inventory management. Inventories consisting raw
material, WIP, finished goods, maintenance spare parts a significant preparation of total
assets.
Inventory management means preparing the stock of goods at such I level that neither
the stock should be excessive or inadequate. It is a system, which ensures that right
31
quality of material, is available in the right quantity at right time and right place with the
right amount of investment. Large size of inventory ensures efficient and smooth
production and sales operations, while minimum investment in inventories maximizes
profitability. Both the extreme points are dangerous. An efficient manager always
determines the optimum points in between of the two extremes. Excess installments in the
inventory pees danger like unnecessary the up of firm’s funds and loss of profit excess
carrying cost. Risk of liquidity and risk of physical deterioration of inventories. On the
other hand inadequate investment in inventories seeks to production hold ups failure to
meet delivery commitments. Thus, the aim of inventory management is to balance
between the two and maintain sufficient inventories. According to Curry and Frank:
“Because materials constitute such a significant part of product cost and since this cost is
controllable, proper planning, purchasing, handling and accounting are of great
importance”
DEFINITION OF INVENTORYThe dictionary meaning of Inventory is ‘a list of goods’. In a wider sense, inventory can
be defined as an idle resource, which has an economical value. It is however, commonly
used to indicate various items of stores kept in stock in order to meet future demands.
In any organization, there may be following four types of inventory:
a) Raw materials & parts- These may include all raw materials, components and
assemblies used in the manufacture of a product.
b) Consumables & Spares- These may include materials required for maintenance
and day-to-day operations.
c) Work-in-progress- These are items under various stages of production not yet
converted as finished goods.
d) Finished goods- These are the goods that are not yet sold or put into use.
OBJECTIVES OF INVENTORY MANAGEMENT:
The main objectives of inventory management are operational and financial. The
operational objective means that the materials and spares should be available in sufficient
quantity so that work is not disrupted for want of inventory. The financial objective
32
means that investments should not remain idle and minimum working capital should be
locked in it.
To minimize the idle time caused by shortage of inventory and non- availability of
inventories as per requirements, and
To keep down capital investment in inventories, inventory carrying cost and
obsolesces losses.
To avoid both over- stocking and under-stocking of inventory.
To minimize losses through deterioration, pilferage, wastage and damages.
INVENTORY CYCLE
In inventory cycle first of all raw material is purchased and then it is sent for
manufacturing where work in progress is then converted into finished stock which is
readily available for sale.
Same process is followed in GSK but at Nabha plant only manufacturing of
products is to be done whereas a sale finished product is done through the Head office. In
GSK at Nabha raw material are malted barley, Milk, Wheat Flour, Vitamins, etc. And in
GSK work in progress is not considered for accounting because it is nit calculated, it is
only that part of production which is in pipelines. And in last finished product is produced
which is filled in Drums and send to Head office (Gurgaon) for sale.
33
Raw MaterialsStock
Finished GoodsStock
Manufacturing
PURPOSE/BENEFITS OF HOLDING INVENTORY:
The transaction motive: Which facilitate continuous production and timely execution of
sales orders.
The precautionary motive: Which necessitates the holding of inventories for
meeting unpredictable changes in demand and supplies of materials.
The speculative motive: Which induces to keep inventories for taking advantages of
price fluctuation, saving in re-ordering costs and quantity discounts, etc.
INVENTORY CONTROL
34
Raw Material Arrivals (Restocking)
Sales of Finished Goods(Destocking)
Work in progress Stock
Revenue
Inventory Control is the art and science of maintaining the stock level of a given
group of items, incurring the least total cost, consistent with other relevant targets and
objectives set by the management.
Inventory control refers to “the process whereby the investment in material and parts
carried in stock is regulated within predetermined limits set in accordance with inventory
policy established by the management” (Gorden B. Carson). The activities of Inventory
control, thus, include the following:
Determination of limits of inventories to be held.
Setting out of investment pattern and its regulation as per individual and collective
requirements.
Follow-up to examine the working of the inventory policy and effecting changes
as and when needed.
IMPORTANCE OF INVENTORY CONTROL
The primary objective of inventory control is:
To minimize the idle time caused by shortage of inventory and non- availability of
inventories as per requirements, and
To keep down capital investment in inventories, inventory carrying cost and
obsolesces losses.
Achievement of these objectives will result in more return on capital which is
materially the prime objective of an organization whether commercial or industrial. The
formula given below is helpful in arriving at the return on investment:
RETURN ON CAPITAL = PROFIT
CAPITAL INVESTMENT
In normal circumstances, profit margin depends on external factors like
competition over which the management has little control. Here the question arises how
35
the management control over competitiveness? This is possible through the control over
inventories; the total capital in GSK is invested in fixed assets such as buildings, plant &
machinery and a cut in this cannot be effected. But a reduction in working capital, high
percentage of which is locked up in inventories, is possible and there is definite
increasing profit earning capacity of the organization.
Thus, efficient inventory management may result in more profit margins since it will
reduce the inventory cost resulted in reduction of production cost, more competitive
capacity, heavy turnover and increased profitability.
SCOPE
The scope of inventory management is vast. It encompasses various functions starting
with determination of the requirement of inventory and ending with the supply of finished
products to the users. In widest sense, functions included in the scope of inventory
management can be summarized as:
Determination of inventory requirement and planning its inflow.
Floating tender enquiries.
Identifying suppliers and placing orders for the suppliers.
Inspection of items received
Store keeping and stock control.
Issue, Valuation and Store Accounting.
Warehousing and Distribution.
All these functions are carried out, one after the other, in close sequence. First the
periodic requirement of inventory is determined on the basis of sales forecasts and
production plan. At the same time tender enquiries are floated for identifying the sources
of suppliers. Orders are then placed with the suppliers. When the inventory consignments
are received they are inspected to ascertain that items supplied are as per the
specifications given in the order. Items found in order are then stored in bins, racks and
containers to ensure their safety, security and prevent deterioration in quality. Inventory
items are issued from stores to production and other departments as per their demand.
Proper records are maintained for the receipt and issue of all these items.
36
INVENTORY MANAGEMENT- CONSTRAINTS &
PROBLEMS
CONSTRAINTSConstraints of inventory management vary from organization to organization
depending upon various variables; some of them are as under:-
a) Whether the demand for the goods is one time (static) or of repetitive nature
(dynamic). In GSK all the non-stock items are treated of static nature and
stock items of dynamic nature.
b) In case of demands of dynamic (repetitive) items, whether future
requirements can be assessed with certainty or uncertainty or under risk
(probability). Also, whether the demand is fixed over a time or is variable.
c) Whether the material is manufactured in house or is to be purchased through
outside suppliers.
d) Whether the lead-time during which material can be arranged is fixed or is
variable.
PROBLEMSThree basic problems associated with optimization of stocks are:
1. When to initiate purchase of the materials?
2. How much quantities are to be purchased at a time?
3. What should be the stock levels of the different items?
VARIOUS INVENTORY MANAGEMENT TECHNIQUES
a) Selective Management: - In this technique, various items of stores are classified
in various classifications depending upon their consumption value, unit price,
criticality for the organization, source of supply, purchasing problems, rate of
withdrawals from the stores, seasonality and stores balances on a particular date.
Different approaches of control are being followed for different types of items.
37
Two such classifications ABC & FSN are followed in GSK
b) Management by Exception: - In this technique, items with certain exceptions are
tackled on different points of time. For example, overstock items; surplus items
and inactive items may require more attention.
In GSK management by exception is followed for such goods that are stock outs
for some period.c) Rationalization: - Techniques of standardization and variety reduction are used to
minimize lead-time of the material, and reduce unnecessary inventory carrying
costs.
d) Value Analysis: - Functions performed by the materials are analyzed and
alternative designs/raw materials are suggested to achieve the same function at
minimum cost.
e) Computerization: - Computer outputs can be used for scientific forecast of
demand to solve many inventory models, providing optimum safety and for
controlling funds.
GENERAL STORE INVENTORYGeneral store is a major part of the inventory in all the concerns. It provides the
information regarding how much material we can purchase, and how much material we
can keep in store such as it is helpful to provide the information regarding all levels. The
major part of working capital of all the concern spent in General store inventory.
NATURE OF GENERAL INVENTORY IN GSKInventories are stock of the product a company is manufacturing for sale and components
that make up the product. The various forms in which inventories exist in a
manufacturing company are: raw materials, work in progress, finished goods & stores
and spares.
Raw materials are those basic inputs that are converted into finished product
through the manufacturing process. Raw material inventories are those units, which have
been purchased and stored for future productions.
38
In GSK Malted Barley, Wheat flour, Skim Milk Product (SMP), Fine Crystalline Sugar
(FCS), Roasted Malted Barley, Calcium, Potassium, Sodium, Vitamin Flavors etc., are
main raw materials.
Work-in-process. The work-in-process is that stage which is in between raw
material and finished goods. The raw material enters the process of manufacture but they
are yet to attain a final shape of finished goods. The quantum of work-in-process 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 process.
Consumables. These are the materials, which is needed for smooth process of
production. These materials do not directly enter in the production but they act as
catalysts, etc. consumables may be classified according to their consumption and
criticality. Generally, consumables stores do not create any supply problems and form a
small part of production cost. There can be instance where these materials may account
for much value than the raw materials The fuel oil may form a substantial part of cost.
In GSK Nabha Polythene, Drum Seal, Tape roll, Label, Cleansing Agent, Hand gloves,
Oil, Chemical, Coal, etc. are examples of some consumables.
Finished goods. These are the goods, which are ready for the customers. The s
tock 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 the order basis, in general without waiting for
specific orders.
In GSK main finished goods are Horlicks, Boost, Vanilla Horlicks, Elachi Horlicks,
Boost intermediate, Horlicks high fat, Junior Horlicks DHA, mother Horlicks DHA etc.
are products, which are produced for consumption in India. Mother Horlicks DMI and
Junior Horlicks DMI are products manufactured for export package and send to
Bangladesh.
Spares. Spares also form a part of inventory. The consumption pattern of raw
material, consumables, finished goods are different goods are different form that of
spares. The stocking policies of spares are different from industry to industry. Some
industry like transport will require more spares than other concern. Costly spare parts like
engines, maintenance spares etc. are not discarded after use, rather they are kept in ready
position for further use. All decision about spares is based on the financial cost of
inventory on such spares and the costs that may arise due to their non-availability
In GSK examples of Spares are Barring, V-Bolt etc.
39
GENERAL STORE INVENTORY IN GSKGeneral store is that which the part of the production becomes indirectly. Without such
inventory no production will be there. This store inventory includes: -
Polythene bags
Consumables like diesel etc.
Cleaning material like nitric acid, caustic soda etc.
Floor cleaning towels
Spare parts of the machines
Inventory required under GMP (Good Manufacturing Practices) like uniform,
hand gloves, mouth covers, safety shoes etc.
Under the general store inventory total no. of items are 2517, which have the
ABC classification. Their total consumption value is Rs. 51714106.83. It includes 45
items, some of which don’t have any classification because these items are used as and
when required during the year as such do not fall under any category and some are capital
related spares.
ABC ANALYSIS
ABC analysis is a basic analytical materials management tools. Fundamentally ABC
analysis may be applied to any branch of management eith ease and success. It calls upon
the top management to place its efforts where the result will be greatest. It is selective
approach popularly known Always (A) Better (B) Control (C). The ABC goes by its
name it always the best, then better and lastly the good.
Manufacturing organizations find it useful to divide materials into three categories
for the purpose of exercising selective control on materials. An analysis of the materials
cost will show that a smaller percentage of items of materials in the store may contribute
to large percentage of the value of consumption and, on the other hand, a large
percentage of items may represent a smaller percentage of the value of items consumed.
Between these two extremes will fall those items the percentage number of which is more
or less equal to their value of consumption. Items falling in the first category are treated
as “A” items, of the second category as “B” items and items of third category are taken as
“C” items. Such an analysis of material is known as “ABC ANALYSIS”
40
This technique of stock control is also known as stock control according to value
method or always better control method or proportional parts value analysis method.
Thus under this technique of stock control materials are listed in “A”, “B” and “C”
categories in descending order based on money value of consumption.
The significance of this analysis is that a very close control is exercised over the items
of “A” group which account for a high percentage of costs while less stringent control is
adequate for category “B” and very little control would suffice for “C” items.
All types of materials control i.e., purchase stores and issues are to be strictly applied
in case of the items of “A” group. In case of the “C” items an elaborate material control is
not exercised because these items represent a very small portion of the material costs.
These items can be purchased once a year and various stock levels i.e., minimum level,
ordering level etc. may not be adhered to. All the time, efforts and costs saved on the C
group items by not having an elaborate control can be usefully utilized on the A and B
group items.
A-B-C Analysis: This analysis is based upon PARETO PRINCIPLE, according to
which in many situations, majority of the activity (70 to 80%) is governed by very few
(10 to 20) attributes. Hence if all the stock items are analyzed in terms of their annual
consumption, major part of total consumption value on a GSK (about 70-80%) is of only
few high consumption value items (say 10-20%). These items may be classified as A
category.
15 to 20% of total consumption is represented by another 15 to 20% items that may be
classified as B category.
Remaining 5 to 10% consumption is represented by a large no. of small consumption
value items, which may be classified as C category.
Actually ABC classification depends upon management decision. In GSK it is decided
that-
All high consumption value items, which represent 70% of total issues, will be
classified as A category.
Items, which represent 20% of total issue, will be classified as B category.
All remaining items are of C category.
For the purpose of Inventory Control, A category items are most important. Therefore,
they are closely monitored at highest level at very frequent intervals.
41
Stock physical verification in GSK
For A category items is carried out every six months;
For B category items every year and
Once in two years for C category items.
To achieve better inventory turnover ratio, GSK intend to keep average stocks of 3
months, 6 months and 12 months of A, B and C category items respectively.
RECATEGORISATION
Recategorisation means to re-classify the items, inventory etc. that already have some
classification.
Such recategorisation is done as per the changed scenario.
Under the ABC analysis, recategorisation means to re-classify the particular
inventory, according to the new conditions. Recategorisation helps in knowing the actual
position of inventory. Without recategorisation process the benefit of the applied
technique is nil. But it should be done at the proper time neither too late nor too early,
because with the Recategorisation the applied technique remains effective.
NEED FOR RECATEGORISATION
The process of categorization of inventory in ‘A’,’B’,’C’ category was initiated in
1999. With the change in the inventory over the years and with the change in the unit
value and the consumption value of the inventory, the need arises for the recategorisation
of the inventory after some period of time according to the current norms.
Therefore the need of recategorisation the inventory arises essentially due to:
Introduction of new items during the period in stores inventory
Change in the prices of certain items
Revisiting norms set for the previous categorization
There can be the obsolesce of certain inventory items
There can be implementation of the” Written off” process
There can be change in the value of the existing items
42
METHODOLOGY
This inventory is based on the following criteria in GSK: Category A: - Unit value Rs.5000 & above or Annual Consumption Rs 50000
&above
Category B: - Unit value Rs.1000 & above but less than Rs. 5000 or Annual
Consumption Rs 10000 & above but less than Rs 50000
Category C: - Unit value less than 1000 or Annual Consumption less than Rs10000
RECATEGORISATION PROCESS For doing the recategorisation the whole of the inventory is analyzed on the basis
of the unit value & the consumption value.
REQUIREMENTS: General inventory items.
The Unit value
Their annual consumption.
For calculating the unit value any of the following is required
Closing value and closing quantity
Or
Opening value and opening quantity
Or
Consumption value and consumption quantity
Per Unit Value = Closing value/Opening value/Consumption value
----------------------------------------------------------
Closing qty./Opening qty./Consumption qty.
43
PREPARATION OF PROPOSALS
For preparing the proposals under the different conditions following steps have been
taken: -
Firstly check that according to the unit value in which category the item is
falling.
See that according to the consumption value which category is best suited to
the item.
Then out of the two put the items in the upper category.
For example: -
Item Code Per unit
value
Consumption
value
S13018 878.07 18731.44
Proposed
Category
C B
According to Unit value it should fall in ‘C’ category but according to Consumption value
it should fall in ‘B’ category.
Therefore, it will fall in ‘B’ category.
44
Item code Per unit value Consumption value
S60012 14.4 54735.20
Proposed Category C A
According to Unit value it should fall in ‘C’ category but according to Consumption value
it should fall in ‘A’ category.
Therefore, it will fall in ‘A’ category.
Existing status of inventory as on March 2013
Existing criteria: Per Unit Value Rs. 5000 & Consumption Value Rs.50000
1. According to No. of items
45
Category
Existing No. of
items %
A 288 11.44%
B 603 23.96%
C 1626 64.60%
TOTAL 2517
General Store Items Existing Cat.A,B,C(Numbers)
1626
603
288
11.44%23.96%
64.60%
0
200
400
600
800
1000
1200
1400
1600
1800
A B C
Existing category
No.
of It
ems
2.According to Consumption Value
General Store Items Cat.A,B,C(Values)
6.594.97
39.73
10.53%15.62%
73.85%
051015202530354045
A B CPERCENTAGE
46
Category
Consumption
Value %
A 39731691 76.83%
B 6587403 12.74%
C 4968394 9.61%
TOTAL 51714106
NOTE: Total items include
45 items, which have “No Category” but have consumption value of
Rs.426618.
PROPOSAL 1:CHANGES FROM THE EXISTING CATEGORY
Thus the exercise has lead to movement of 13% of total inventory to “A”
category as against 11% in the existing status with the little difference in the
percentage of items in the said category. Also there is movement of almost 26.5%
& 61% of total inventory to “B” & “C” categories as against 24% & 64.6%
respectively in the existing situation.
Category No. of items (E) % of existing items No. of items (P) % of items
A 288 11.44% 321 12.75%
B 603 23.96% 667 26.5%
C 1626 64.60% 1529 60.75%
TOTAL 2517 2517
47
CLASSIFICATION OF ITEMS INTO CATEGORIES
667
288
603
1626
321
1529
0200400600800
10001200140016001800
A B C
Category
NO
. OF
ITEM
S
ExistingCategory
ProposedCategory
On the same way, as per the proposal consumption value of near about 83% of total
inventory shift to “A” category as against 75% in the existing status with the little
difference in the percentage of items in the said category. Movement in the “B” & “C”
category is almost 12.6% & 4% as against 12.7% & 9.6% respectively in the existing
category.
Category
Existing
Consumption %
Proposed
Consumption %
A 39731691 76.83% 43039352.52 83.23%
B 6587403 12.74% 6512361.25 12.59%
C 4968394 9.61% 2162393.06 4.18%
TOTAL 51714106 51714106
48
Comparison of consumption value
39.73
6.594.976.51
2.16
43.04
05
101520253035404550
A B C
PERCENTAGE
CONS
UMPT
ION
VALU
E(M
ILLI
ONS
)Existingcategory
ProposedCategory
PROPOSAL (1): As per Unit Value Rs. 7000 & Consumption Value Rs. 70000
(ANNEXURE 2)
1. According to No. of items
Criteria 2- General Store items cat.A,B,C(Numbers)
1872
390242
74.89%
15.50%9.61%0
500
1000
1500
2000
A B C
Items (Cat.A,B,C)
No.
of i
tem
s
2. According to Consumption Value
49
Category
No. of
Items %
A 242 9.61%
B 390 15.50%
C 1872 74.89%
TOTAL 2517
Criteria 2-General Stores Proposed Items Cat.A,B,C
41.66
5.46 4.5910.25%12.82%
76.93%
0
10
20
30
40
50
A B C
CATEGORY (A,B,C)
CO
NSU
MPT
ION
VA
LUE(
MIL
LIO
NS)
NOTE: Total items in the Proposed Category include 13 items, which have “No
Category” as these are capital related spares and have no consumption value but there
are also 45 items which are used rarely in the production as such are not considered
under any category in spite of having consumption value.
COMPARISON
Thus the exercise has lead to movement of 9.61% of total inventory to “A” category as
against 11.44% in the existing status with the little difference in the percentage of items in
the said category. Also there is movement of almost 15.5% & 75% of total inventory to
“B” & “C” categories as against 24% & 65% respectively in the existing situation with a
large difference in the percentage of items in the said category.
50
Category
Consumption
Value %
A 41661289 80.54%
B 5461091 10.56%
C 4591726 8.90%
TOTAL 51714106
CATEGORY NO. OF ITEMS(E) % NO. OF ITEMS(P) %
A 288 11.44% 242 9.61%
B 603 23.96% 390 15.50%
C 1626 64.60% 1872 74.89%
TOTAL 2517 2517
Comparison (No.of items)
288
603
1626
242390
1872
0
500
1000
1500
2000
A B C
ITEMS(A,B,C)
NO.O
F IT
EMS
Existing Category
Proposed Category
On the same way, as per the proposal consumption value of near about 81% of total
inventory shift to “A” category as against 77% in the existing status with the little
difference in the percentage of items in the said category. Movement in the “B” & “C”
category is almost 10.5% & 9% as against 13% & 9% respectively in the existing
category.
51
CATEGORY CONSUMPTION VALUE(E) % CONSUMPTION VALUE(P) %
A 39731691 76.83% 41661289 80.54%
B 6587403 12.74% 5461091 10.56%
C 4968394 9.61% 4591726 8.90%
TOTAL 51714106 51714106
Comparison of Consumption Values
4.976.59
39.73
4.595.46
41.66
05
1015202530354045
A B C
CATEGORY (A,B,C)
CONS
UMPT
ION
VALU
E(M
ILLI
ONS
)
Existing Category
Proposed Category
CONCLUSION: The Existing criteria applied in stores is correct as it follows the ‘pareto
principle’ it shows that maximum consumption of minimum no. of items comes under ‘A’
category and minimum consumption value items with maximum no. of items falls under
‘C’ category. But some changes are required in the same as shown above i.e. some items
are required to move between all the three categories.
IMPLEMENTATION OF THE PROROSAL
For actual implementation of the selected proposal again some analysis is carried on.
Physical verification:
52
First of all physical verification of the whole inventory is done. Under this each and every
item of the inventory is verified with the books. For this purpose concerned person goes
to the stores and does the verification.
Current Year’s Consumption:After the physical verification all inventory is again checked with the current year’s
consumption. If in case of any particular item .the current year’s consumption changes
corresponding to the previous year’s consumption then it can be proposed in another
category, then that proposal is acceptable.
For instance:
Item Code: S13018
Consumption in fin. year ending March 2013 Current Category
5498.80 C
Consumption in fin. year ending March 2014 Proposed Category
18731.44 B
In this way all the items are analyzed and a final report is prepared.
ADVANTAGES OF ABC ANALYSIS
A strict control is exercised on the items, which represent a high percentage of the
material costs . Managerial time is spent on ‘A’ items whereas clerical staff with
least managerial supervision can handle ‘C’ items and sometimes ‘B’ items. Equal
attention to all the items of stores is not desirable because it will not be a cost
effective option for the firm. 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.
53
Investment in inventory is reduced to the minimum possible level because a
reasonable quantity of ’A’ items representing a significant portion of the materials
costs is purchased.
To reduce investment in materials, close control of ‘A’ items contributes much
more than close control of ‘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 items
It becomes possible to concentrate all effort in areas, which need genuine efforts.
It is most effective and economical method as it is based on selective approach.
It helps in placing the orders, deciding the quantity of purchase, safety stock, etc.,
thus saving the enterprise from unnecessary stock-cuts or surpluses and their
resultant consequences. This may be well shown by an example where average
inventory is one-half of the order quantity:
Category Annual consumption No. of Orders Average Working
Inventory
A Rs. 3,00,000 4 37500
B Rs. 30,000 4 3750
C Rs. 3,000 4 375
TOTAL Rs. 3,33,000 12 41625
Keeping the same no. of orders per year, viz., 12 inventories, can reduced by 39% merely
by segregating items according to their usage value as shown below:
Category Annual consumption No. of Orders Average Working
Inventory
A Rs. 3,00,000 8 18750
54
B Rs. 30,000 3 5000
C Rs. 3,000 1 1500
TOTAL Rs. 3,33,000 12 25250
FSN CLASSIFICATION
ABC Classification is on the basis of consumption value of an item and does not give any
importance to the criticality of the item and therefore, only ABC Classification is not
adequate. Classification done on the basis on the movement of the items in the storehouse
is known as FSN, where the items are classified as fast moving (F),slow moving(S) and
non-moving(N),items .This classification is done on the basis of consumption pattern of
the items under analysis. This analysis is useful in case of obsolete items. Previous year
issues is a guiding factor for FSN analysis previous two years issues are taken into
consideration for a decision whether the items stocked in storehouse are fast
moving ,slow moving or non moving.
Fast moving:-Items being issued more than 15 times a year may be placed in ‘F’
category. Certainly such analysis and limits of issue vary from one organization to
another organization.
Slow moving:-Items up to a certain limit say 10-15 issues in a year may be classified as
‘S’ items.
Non-moving:-If there is no issues of a particular item during the past few years,
naturally they will be classified as ‘Zero issue items’ and under this method of analysis
these items will be classified as ‘N’ items.
In GSK items, under FSN categorizing is done on the following criteria :-
55
Fast moving :-The items which are very frequently moved in one year are included in the
fast moving category .
Slow moving :-The items which are moved from stores for a period of one and a half
year.
Non-moving:-The items which are not issued from stores for more than three years.
In GSK Inventory’s FSN categorization of items in stores for the month of May 2013 in
which 91 lacs value items are of non moving nature which are not moved within a period
of three years and 43 lacs value are of slow moving which is moved within a period of
one and a half year and 64 lacs are of fast moving nature that are frequently moved.
Category Inventory (Lacs) Percentage (%)
Non Moving Inventory 91 51
Slow Moving Inventory 43 34
Fast Moving Inventory 64 15
Total 198 100
LEVEL SETTING
56
In order to have proper control over inventory various levels are set to avoid wastages and
for optimum utilization of stock. Following levels are set for the said purpose: -
o Re-order Level
o Minimum Level
o Maximum Level
o Danger Level
o Average Stock Level
(A) Re-order Level: - It is the point at which if the stock of a particular material in
store approaches, the storekeeper should initiate the purchases requisition for fresh
supplies of that material. This level is fixed somewhere between the maximum and
minimum levels in such a way that the difference of quantity of material between the re-
ordering level and the minimum level will be sufficient to meet the requirements of
production up to the time the time the fresh supply of materials received.
Re-ordering level can be calculated by applying the following formula:-
Ordering Level = Minimum Level + Consumption during the time required to get the
fresh delivery
Re-ordering level = Maximum Consumption *Maximum lead time
Here, maximum re-order period means the period taken to get the material once it is
initiated, so that the factory may not stop production in any case due to the shortage of
material.
(B) Minimum level: -This represents the minimum quantity of the material, which
must be maintained in hand at all the times. The quantity is fixed so that production may
not be held up due to shortage of material .in fixing this level, the following factors are
taken into consideration: -
Lead-time: - It is the time lag between the indenting and the receiving of material. It is
time required to replenish the supply.
Rate of Consumption of material during the lead-time.
Nature of Material:-Minimum level neither is nor required in case of a special material
which is required against customer specific order.
Minimum stock Level= Re-ordering Level - (Normal Consumption * Normal lead time)
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(C) Maximum Level: - It represents the maximum quantity of an item, which can be
held in stock any time. Stock should not exceed this level is fixed to avoid over stocking.
Maximum Level = Reordering level + Minimum Re-ordering Quantity - (Minimum
Consumption * Minimum Re-ordering Level period)
(D) Danger Level: -This means a level at which normal issue of the material are
stopped and issues are made only under specific instructions. The purchase offer will
make special arrangements to get the material, which reach at their danger levels so that
the production may not stop due to the shortage of materials.
Danger Level = (Average Consumption) * (Maximum re-order period for emergency
purchases)
(E) Average stock Level: -The average stock Level is calculated by the following
formula:-
Average stock Level = Minimum stock level + ½ of re-order quantity
OR
Average stock Level =1/2(Minimum stock level + Maximum stock level)
At GSK all these levels are set by stores department on the basis of the following
requirements:-
First of all consumption of the items by different department or according to
production pattern.
On the basis of lead-time involved on purchase of items.
ECONOMIC ORDER QUANTITY
Depending upon various variables, different inventory models have been
developed. Different models take different costs into accounts. One of the popular models
developed for items of repetitive nature (dynamic), future demands for which can be
projected with certainty is Economic Order Quantity (EOQ) model.
In addition to factors mentioned above, this model assumes that price of the
material remains constant with time and also does not vary with order quantity. This
model can be developed mathematically by differentiating total cost of inventory
(ordering cost + inventory carrying cost) with respect to Quantity.
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The quantity to be ordered should be such which minimize the carrying and
ordering cost. The order for the material to be purchased should be large enough to earn
more trade discount and to take advantage of bulk transport, but at the same time it should
not be too large to incur to heavy a payment on account of interest, storage and insurance
cost. If the price to be paid is stable, the quantity to be ordered each time can be
ascertained by the following formula:-
Economic Order Quantity (EOQ) = √ 2AO/C
Where,
A = Annual Consumption Quantity
O = Cost of placing one order (ordering cost)
C = Annual inventory carrying cost or holding
Every firm, needs due concentration on two basic questions or managing inventories
efficiently,
When to purchase?
How much to purchase?
The total cost of material usually consists of:-
Total acquisition cost (Purchase Value) + Total carrying cost (Holding Cost)
+ Total ordering costAcquisition Cost- Total acquisition cost i.e. total purchase value through is buying is
unaffected irrespective of the quantity of material ordered at one time unless quantity
discounts are available. Thus, when acquisition cost of a material remains the same, the
only costs to be taken care of are ordering costs and carrying cots.
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Holding cost – The very fact that the items are required to be kept in stock means
additional expenditure to the organization. The different elements of costs associated with
keeping stock over time are as follows:
Storage costs
Rent/depreciation
Labour
Overheads (e.g. heating, lighting, security)
Money tied up (loss of interest, opportunity cost)
Obsolescence costs (if left with stock at the end of product life)
Stock deterioration (lose money if product deteriorates whilst held)
Theft/insurance
Ordering costs-In large organizations like GSK, the demands received are technically
scrutinized, inquiries are issued, tenders are received and evaluated, orders are
progressed, materials are received and inspected and lastly, the payments are arranged.
All these constitute an additional costs to the organization and costs associated with
ordering and receiving an order are:
Clerical/labour costs of processing orders
Inspection and return of poor quality products
Transport costs
Holding costs
IN GSK ORDERING COST PER ORDER COMPUTED IS APPROXIMATELY Rs. 28
PER ORDER.
Economic order quantity is determined keeping in view the ordering cost and carrying
cost.
At GSK instead of using EOQ (Economic Order Quantity), ROQ (Re Order Quantity) is
used and this quantity level is calculated by inventory software and it is revised on the
basis of consumption requirements of different departments.
PROPOSAL
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Study and analysis of the inventory of gsk as per the eoq model to know the
difference between the total inventory cost to the organization in comparison to their
actual (roq method) and total savings, if any, can be made from the three different.
REQUIREMENTS:
General inventory items data.
The Unit value
Existing Purchase Orders (PO)
For calculating the unit value any of the following is required:
Closing value and closing quantity
Or
Opening value and opening quantity
Or
Consumption value and consumption quantity
Per Unit Value = Closing value/Opening value/Consumption value
----------------------------------------------------------
Closing qty./Opening qty./Consumption qty.
For calculating existing PO’s following method is adopted:
PO (Existing) = Purchase Qty./ ROQ
For Example: -
ROQ = 10
Opening Qty. = 30 units
Purchase Qty. = 100 units
Closing Qty. = 20 units
So Consumption Qty. = 30+100-20 = 110 units
In the absence of opening and closing qty., purchases & consumption will be the same.
But as there are both opening and closing balances the purchase orders are calculated on
purchase qty.
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PO’s = 100/10
= 10 units.
In this way the whole data is analyzed and current PO’s are taken out.
ECONOMIC ORDER QUANTITY
COMPUTATIONS DONE FOR:
Holding cost (hc)
Ordering cost (oc)
Po’s proposed
Total inventory cost (ic)
In gsk resonable assessment on general inventory showes holding cost to be 15% if the
average inventory & ordering cost is rs. 25 per order.
Existing cost (with ROQ)
TOTAL HOLDING COST (Existing) = Price per Unit/ Unit Value *15%
EOQ = ROUNDUP (SQRT((2*OC*CONSUMPTION QTY.)/HC), 0)
For calculating proposed PO’s following calculation is done:
PO (Existing) = Purchase Qty. / EOQ
Total holding cost & ordering costs are computed separately for “A”, “B”, “C” Category
items. Total inventory costs are also drawn out for the three categories and savings are
find out from their existing inventory costs.
TOTAL HOLDING COST (Existing)
= (ROQ * UNIT VALUE * 15% * LEAD TIME)/30
TOTAL ORDERING COST (Existing)
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= EXISTING PO’s * 28
TOTAL INVENTORY COST (Existing)
= PURCHASE VALUE (ACQUISITION COST)+TOTAL HC+TORAL OC
The above criteria is applied on the whole given data and randomly top 25-35 items are
chosen which gives some considerable amount of savings; to draw out conclusion and
the analysis & interpretation drawn from data shows:
“A” CATEGORY
NO.OF ITEMS TAKEN= 25
TOTAL EXISTING INVENTORY COST= Rs. 14248165
“B” CATEGORY
NO.OF ITEMS TAKEN= 25
TOTAL EXISTING INVENTORY COST= Rs. 459965
“C” CATEGORY
NO.OF ITEMS TAKEN= 35
TOTAL EXISTING INVENTORY COST= Rs. 196069
Proposed (with EOQ)
TOTAL HC (Proposed) = (EOQ * UNIT VALUE * 15% * LEAD TIME)/ 30
TOTAL OC (Proposed) = PROPOSED PO’s * 28
TOTAL INVENTORY COST (Proposed)
= PURCHASE VALUE (ACQUISITION COST)+TOTAL HC+TORAL OC
The above criteria is applied on the whole given data and randomly top 25-35 items are
chosen to draw out conclusion and the analysis & interpretation drawn from data shows:
“A” CATEGORY
NO.OF ITEMS TAKEN= 25
TOTAL PROPOSED INVENTORY COST= Rs. 14253348
“B” CATEGORY
NO.OF ITEMS TAKEN= 25
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TOTAL PROPOSED INVENTORY COST= Rs 449421
“C” CATEGORY
NO.OF ITEMS TAKEN= 35
TOTAL PROPOSED INVENTORY COST= Rs.208213
FINDINGS OF THE PROPOSAL
Category Existing Inventory cost Proposed Inventory cost SAVINGS
A 14248165 14253348 5183
B 459965 449421 (10544)
C 196069 208213 12144
TOTAL 14904199 14910982 6783
Conclusion
The study shows that there are savings of Rs.6783 if EOQ model is used instead of ROQ.
In this study only 25-30 items are taken but the total no of items are in thousands in
GSKCH so if EOQ MODAL is used it will give more savings to the company.
JUST IN TIME INVETORY SYSTYEM
Just in time purchasing is the purchase of material or goods in such a way that
delivery of purchase item is assured before their use or demand. Just in time
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purchase recognizes too much carrying cost associated with holding high inventory
levels. Therefore, it advocates developing good relation with supplier and making
timely purchases from proven suppliers who can make ready delivery of goods
available as and when need arises EOQ (Economic order quantity) model assumes a
constant order quantity where as JIT purchasing policy advocates a different
quantity for each order if demand fluctuates. EOQ lays emphasis on ordering and
carrying cost but inventory management extends beyond carrying and ordering cost
to include purchase cost, quantity cost and stakeout cost .JIT purchasing takes into
consideration all these cost and move outside the assumptions of the EOQ model.
There are 150 JIT items in GSK, Nabha. ADVANTAGES
Investment in inventory is reduced because more frequent purchase order of
small quantities are made
Carrying cost is reduced as a result of investment in inventory.
A reduction in the number of suppliers. Only proven suppliers who can give
quick delivery of quality goods are given purchase order.
Quality costs such as inspection cost of incoming material or goods, scraps
and rework costs are reduced because JIT purchasing assures quick and
frequent deliveries of small size orders which h results in low level of
inventories causing minimum possible wastage .
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FINDINGS AND SUGESSTIONS
After conducting a deep study on the whole process of the ABC Recategorisation & EOQ
Technique, I found certain facts regarding the ABC analysis & EOQ, which are as
follows: -
FINDINGS:
Many items are there in the stores, which although lying in general stores but
don’t have any category in spite of having consumption value.
Some items have no consumption value but their minimum quantity is more than
twice.
Some modern techniques of inventory management like VED etc., which can help
in reducing investment in inventory, is absent.
Items, which are written off in the books, are lying in the stores and in any year if
again their need arises they are written back in the books.
Capital related spares are placed under D99 category. These are those spares the
asset value of which becomes zero but their spares have value.
Only few items are come under JIT.
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SUGESSTIONS:
All the general store inventory items should be recategorized especially those,
which have the consumption value during the year.
Company should have to go for some other controlling techniques like VED, JIT
etc.
The items, which don’t fall under any category, should be treated separately.
The company must treat ROQ & EOQ separately on their individual effects on the
inventory costs.
The ROQ model should be used as it will give more savings .
No. of items under JIT should be increased.
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CONCLUSION
From the thorough assessment of my study on “INVENTORY
MANAGEMENT” I Concluded that Controlling techniques relating to the general
inventory in GSK are developed with the objective of ensuring that the inventory will be
controlled in an effective manner, without having any loss to the inventory.
The study of Recategorisation of the general store inventory of GSK is conducting for
the purpose of knowing the actual status of the inventory in the stores. From this study I
conclude that any technique remains effective only when if it is carried on regularly
means at proper time. This study reveals that through the ABC analysis, effective control
can be exercised on the inventory. Items, which have more importance to the company,
those come under strict control. But all the items should have been categorized specially
those, which have consumption value during the year. No doubt their criteria of
recategorisation is appropriate but still some changes are required in it i.e. some
movements of general stores items are required between three categories. Regarding
EOQ technique, there is need of making effective changes in their present system.
At last I would like to say that there is proper control of inventory in the
organization. Inventory management is done at par. Proper accounts & records are
maintained of each and every item, better techniques are applied. 5S technique is
implemented fully in GSK.
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