A PROJECT REPORT ON “ INVENTORY MANAGEMENT SYSTAM IN”

A SYNOPSIS SUBMITTED TO CHAUDHARY CHRAN SINGH UNIVERSITY MEERUT AWAR OF DEGREE

OF BACHELOR OF BUSINESS ADMINISTRATION

(2013-2014)

SUBMITTED TO: SUBMITTED BY

BBA DEPARTMENT DEEPANKAR SINGH

ROLL NO: 9945524

3rd SEM BBA

1

Bhagwant institute of technology

2

DECLARATION

I am DEEPANKAR SINGH student of

BHAGWANT INSTITUTE OF TECHNOLOGY

MUZAFFARNAGAR here by solemnly declare that the project titled “INVENTORY MANAGEMENT

SYSTAM IN COCA COLA ” is the outcome of my own efforts & research is conducted

by me and finally report has been Submitted to:- Mr. ……………….. Faculty of

BHAGWANT INSTITUTE OF TECHNOLOGY MUZAFFARNAGAR drawn

by my own creativity and skills only and the same has not submitted to any other

organization, institution or university in order to get any other degree.

DATE…….. Mr.DEEPANKAR SINGH

MBA 3rd Sem PLACE….. Roll No.: 9945524

3

ACKNOWLEDGEMENT

Presenting a project of this type is an arduous task, demanding a lot of time. I cannot

in full measure appreciate and acknowledgement the kindness shown and help

extended by various persons in this endeavor. I will remember all of them with

gratitude.

My sincere thanks are also due to Mr…………………. Faculty of BHAGWANT

INSTITUTE OF TECHNOLOGY MUZAFFARNAGAR for their significant

help extended for the successful completion of the project. I highly the help I got

from them in providing me and lot of information regarding the functioning of this

organization.

I am always beholden to my God, for always being with me and showing me the

right ways, my family, for always doing favors to me and my friends and colleagues

consistently helped with encouragement and criticism throughout the project work,

for always lifting my sights to higher vision, raising my personality beyond normal

limitation and for realizing me my strengths and potential, as I did not always

welcome her exhortation, “try again; you can do better.” But this project owes a great

deal to it – and so do I.

Mr.DEEPANKAR SINGH

MBA 3rd Sem Roll No.: 9945524

4

PREFACE

No professional curriculum is considered complete without work experience. Every

individual who is doing management studies has to go this phase of practical study

before he/she considers himself/herself fully qualified as potential managers.

I got an opportunity to do training with a Financial company I undertake the

training to study “ INVENTORY MANAGEMENT SYSTAM IN COCA COLA"

This study discusses on the various aspects of Study human relationship

management and its importance in retailing. The study is based on questionnaire

survey results of Company The study concentrates on the concept of Finance

management it is correct to my knowledge.

5

CONTENTS

Executive summary

Objective of the study

Company profile

Company objective

Product range

Inventory management

Research methodology

Findings

Data analysis

Limitations

Conclusions

Appendix- questionnaire

Bibliography

6

EXECUTIVE SUMMARY

With the ongoing revolution in electronic and communication where Innovations are

taking at the blink of eye; it is impossible to keep the pace with the emerging trends.

Excellence is an attitude that that whole of human race is born with. It is the

environment that makes sure that whether the result of this attitude is visible or

otherwise. A Well planned, properly executed and evaluated Industrial training helps

a lot in inculcating a professional attitude. It provides a linkage between the

student and industry to develop an awareness of industrial approach to problem

solving, based on a broad understanding of process and mode of Inventory of

organization.

During this period, the student gets the real experience for working in the actual

Industry environment. Most of the theoretical knowledge that has been gained during

the course of their studies is put to test here. Apart from this the student gets an

opportunity to learn the latest technology , which is immensely helps in them in

building their career .

I had the opportunity to have a real experience on many ventures, which increased

my sphere of knowledge to great extent. I got a chance to learn many new

technologies and was also interfaced to many instruments. And all this credit

goes to organization.

7

OBJECTIVES OF THE STUDY

To assess the significance of the inventory management.

To know the level of inventory to be kept.

To know the amount of investment in inventory.

8

9

MISSION AND VISION OF COMPANY

Mission

To refresh the world… In mind, body and spirit. To inspire moments

of optimism… through our brands and our actions. To creat value

and make difference… everywhere we engage.

Vision

“To create a world class selling organization and a culture of

operating excellence to continually improve consumer experience,

customer satisfaction, employee capability and company

profitability”

The Coca Cola Company is the world leading manufacturer and distributor of non alcoholic beverage concentrates and syrups, with world head quarters in Atlanta, Georgia. The company and its subsidiaries in nearly 200 countries around the world manufacture and over 230 other company soft drink brands.

By contract with the Coca Cola Company and its local subsidiaries, which employs nearly 34,000 people around the world? Local business is authorized to bottle and sell company soft drinks with in the local boundaries and under condition that ensure the highest standards of quality and uniformity.

10

COMPANY’s OBJECTIVE

Company’s mission must be turned in to special objectives for each level of management in a system known as management by objectives the most common objective are:

1. Profitability 2. Sales growth 3. Increase market share4. Improvement at every time5. Risk diversification6. Innovation satisfy the customer7. Employ’s satisfaction

HISTORY OF SOFT DRINK

The history of soft drinks began with the end of the last century. Its history dates back to civil war in 91 SA in 1960. At that time people were suffering from many diseases.

Problem at that time was how to cure all these disease, since no remedy was present at that time; it was a big question for American people. So in 1885 Mr. John Paimwarlion who lives in Antonica made a drink and registered it as TRENCH WINE

11

COLA. In the beginning this drink was made with mixture of cocaine and alcohol but later on it is named as Coco Cola, a new brand named Pepsi Cola in the year 1887.

HISTORY OF COCA COLA COMPANY

Indian History:

Around 1948 the first branded soft drink in the Indian market. This soft drink was named as Gold Spot. Before Coco Cola entered the country to dominate the scene in 1950, Parle Exports Pvt. Ltd. was the first Indian company to

introduce a lemon soft drink this drink was known as Limka and it was introduce a lemon soft drink this drink was known as Limca and it was introduced in 1970. However before this they had introduced Cola pepine which was withdraw in face of tough competition from Coca Cola.

In the year 1977 Coca Cola left Indian market and this brought in an opportunity for various Indian companies to show their caliber. At this time a new soft drink was introduced by Parle products and this was color. This drink was introduce with a mighty saying “happy days are here again” as if happy days went away with Coca Cola. There was another company named pure drink, which introduced the soft drink named Campa Cola along with arrange and Lemon flavors.

Just after this many more companies entered the soft drink market. A soft drink name double, I had been introduced by a company Morden Bakers. Another company Mohan meakins also came up with a soft drink named Mary & Puch up, Mc Dowell came with thrill… Push and Sprint.

Previously there was no competition in the India soft market but with all companies coming in the Indian market a huge competition was place with college advertisement. But in the year 1988 Pepsi was given permission to sell drinks in the Indian market by the Government of India. Coca Cola also come back in the year 1993.

12

Coca Cola in India:

The coca cola company entered India in early 1950. It setup four bottling plants at Bombay, Calcutta, Kanpur and Delhi.

In 1950, as were negligible companies in the India market therefore Coca Cola did not faced much competition and they were accepted in Indian market more easily. The brand was accepted by all age

Group. The full credit must go to Coca Cola for making soft drinks

popular in Indian by end 1977. Coca Cola had captured more than 45 percent of market share in India then Coca Cola left Indian following public regulations the company was required to indianite or operation come to an end in July 1977.

Coca Cola come back in the year 1933 after liberalization and was launched at Agra with the slogan “Old wave have come to Indian again”. At the time Parle was the leader in the soft drink market and had more than 60 percent of the total shore in soft drink. Coca Cola joined hands with Parle and to enter India after 17 years by striking a 40 million deal with Parle. Cock almost made a clear sweep and made its good as “To become all time all occasion drink not a special treat beverage”

In the year of 1990, over one hundred years after the soft drink was invested, the Coca Cola Company opened up a museum like building which was Breton, designed to be tribute to its famous soft drink product. It is also said to be a tribute to the countless number of consumers who drink Coca Cola. The

World of Coca Cola, as it is called is location in Atlanta, Georgia right amidst the tourist district. Its tribute to the drink is because it is so popular that it is now served daily in nearly two hundred countries.

Having the museum location in Atlanta is fitting because long before any one had ever heard of coca cola, a doctor by the name of Johan Stythe Pem, who was a druggist in Atlanta, mixed up his own concoction of medicinal system in May in the year of 1886, Dr. Pemberton used Afrika.

13

Kola Nut extracts and Cola leaves, which are both strong stimulation in his potion. The result was Q thick caramel colored syrup. The purpose of the potion was to be an effective tonic which would help a person’s brain and naves function better.

Dr. Pemberton’s Partner, a book keeper by the name of Fram M. Robinson, came up with the name of Coca Cola for the syrup from the names of its two basic ingredients. Dr. Pemberton poured some of the Coca Cola syrup in to a jug and took it to Jacobs.

Pharmacy in town, the pharmacy made Q fountain drink which mixed some of the Coca Cola syrup with plain water. The drink sold to customer for a nickel a glass. True or not, it has been said that a customer came in to the pharmacy one day complaining or a headache. He asked for a glass of Coca Cola to be made with carbonate water instead of plain water and the carbonate version of soft drink was the born.

The first year in 1886, Dr. Pemberton sold twenty five gallons of his syrup which earned him total revenue of just fifty dollars. By the nest year, because of his poor health condition, he began to sell of his company. Five years latter, man by the name of Asa G. Candlar, had acquired total control of the Coca Cola became a patented product in the United Stats.

Coca Cola popularly would not stay with in the United States for long, though because in the year of 1906. Coca Cola was bottled in Cuba and in Panama.

Bottling operations were soon started in Hawall the next year, then in the Philipines, France, Belgium, Bermunda, Colombia, The Honduras, Italy, Mexico, Haiti and Burma in later years. The year of 1940, the famous soft drink was bottled in forty countries.

14

COMPANY GOALS

15

The company goals are:

To earn the maximum profit.

To satisfy the consumer needs through better quality of product.

To satisfy the consumers needs through better quality of product.

To maintain quality of product best distribution system.

To continuously increase their own share of percentage in soft drinks.

16

INTRODUCTION OF PRODUCTBrand Profile:

The company has six brand and all them are manufacture at the BRINDAVAN BOTTLERS. Each of the brands has its own flavors and contents. Having many profiles the customers vary the different segment of customer prefer different flavor. The brands of Coca Cola are named as following

17

1. COCA COLA2. THUMS UP 3. SPRITE4. LIMCA5. FANTA6. FANTA APPLE7. DIET COKE8. MINUTE MAID PREMIUN ORANGE(MMPO)9. MAAZA

10. WATER- KINLEY & BONAQUA

These are bottled at Hindustan Coca Cola Beverage Pvt Ltd, Dasna Ghaziabad.

POPULAR PUNCHLINES OF COCA COLA PRODUCTS

Coca Cola Thanda mutlab coca cola.

Jo chahe ho jaye coca cola enjoy

18

Thums Up I want my thunder,

Thums Up taste the thunder

Fanta Kuch bhi ho sakta hai,

Masti ka apna taste

Limca Take it easy,

Lime n’ lemoni limka

Maaza Bottle me aam maaza hai naam,

Yaari dosti, taaza maaza

Sprit Dikhawe pe mat jao apni akal lagao,

Sprite bujhaye only pyaas, baki all

bakwas 19

TYPES OF INVENTORY

Raw materials: The purchased items or extracted materials that are transformed into

components or products.

Components: Parts or subassemblies used in building the final product.

20

Work-in-process (WIP): Any item that is in some stage of completion in the

manufacturing process.

Finished goods: Completed products that will be delivered to customers.

Distribution inventory: Finished goods and spare parts that are at various points in

the distribution system.

Maintenance, repair, and operational Inventory (MRO) inventory (often called

supplies): Items that are used in manufacturing but do not become part of the finished

product.

21

INDEPENDENT VS. DEPENDENT DEMAND INVENTORY

Some inventory items can be classified as independent demand items, and some can

be classified as dependent demand items. While we need to make the timing and

sizing decisions for all inventory items, we must be careful in the manner in which

we make those decisions for these two types of items.

Independent demand inventory item: Inventory item whose demand is not related to

(or dependent upon) some higher level item. Demand for such items is usually

thought of as forecasted demand. Independent demand inventory items are usually

thought of as finished products.

Dependent demand inventory item: Inventory item whose demand is related to (or

dependent upon) some higher level item. Demand for such items is usually thought

of as derived demand. Dependent demand inventory items are usually thought of as

the materials, parts, components, and assemblies that make up the finished product.

22

REASONS FOR MAINTAINING INVENTORY

Anticipation Inventory or Seasonal Inventory: Inventory are often built in

anticipation of future demand, planned promotional programs, seasonal demand

fluctuations, plant shutdowns, vacations, etc.

Fluctuation Inventory or Safety Stock: Inventory is sometimes carried to protect

against unpredictable or unexpected variations in demand.

Lot-Size Inventory or Cycle Stock: Inventory is frequently bought or produced in

excess of what is immediately needed in order to take advantage of lower unit costs

or quantity discounts.

Transportation or Pipeline Inventory: Inventory is used to fill the pipeline as products

are in transit in the distribution network.

Speculative or Hedge Inventory: Inventory can be carried to protect against some

future event, such as a scarcity in supply, price increase, disruption in supply, strike,

etc.

Maintenance, Repair, and Operating (MRO) Inventory: Inventories of some items

(such as maintenance supplies, spare parts, lubricants, cleaning compounds, and

office supplies) are used to support general operations Inventory and maintenance.

23

OBJECTIVES OF INVENTORY MANAGEMENT

There are three main objectives of inventory management, as follows:

Provide the desired level of customer service. Customer service refers to a

company’s ability to satisfy the needs of its customers. There are several ways to

measure the level of customer service, such as: (1) percentage of orders that are

shipped on schedule, (2) the percentage of line items that are shipped on schedule,

(3) the percentage of dollar volume that is shipped on schedule, and (4) idle time due

to material and component shortage. The first three measures focus on service to

external customers, while the fourth applies to internal customer service.

Achieve cost-efficient operations Inventory. Inventories can facility cost-efficient

operations Inventory in several ways. Inventories can provide a buffer between

operations Inventory so that each phase of the transformation process can continue to

operate even when output rates differ. Inventories also allow a company to maintain

a level workforce throughout the year even when there is seasonal demand for the

company’s output. By building large production lots of items, companies are able to

spread some fixed costs over a larger number of units, thereby decreasing the unit

cost of each item. Finally, large purchases of inventory might qualify for quantity

discounts, which will also reduce the unit cost of each item.

Minimize inventory investment. As a company achieves lower amounts of money

tied up in inventory, that company’s overall cost structure will improve, as will its

profitability. A common measure used to determine how well a company is

managing its inventory investment (i.e., how quickly it is getting its inventories out

of the system and into the hands of the customers) is inventory turnover Inventory,

which is a Inventory of the annual cost of goods sold to the average inventory level

in dollars.

24

BASIC INVENTORY DECISIONS

There are two basic decisions that must be made for every item that is maintained in

inventory. These decisions have to do with the timing of orders for the item and the

size of orders for the item.

Basic Inventory Decisions

How much? When?

Lot sizing decision

Determination of the

quantity to be ordered.

Lot timing decision

Determination of the

timing for the orders.

25

RELEVANT INVENTORY COSTS

Relevant Inventory Costs

Item Costs Holding CostsOrdering

Costs

Shortage

Costs

Direct cost for

getting an

item. Purchase

cost for

outside orders,

Costs

associated

with carrying

items in

inventory.

Fixed costs

associated

with placing

an order

(either a

Costs

associated

with not

having enough

inventory to

26

BEHAVIOR OF COSTS FOR DIFFERENT INVENTORY DECISIONS

When assessing the cost effectiveness of an inventory policy, it is helpful to measure

the total inventory costs that will be incurred during some reference period of time.

Most frequently, that time interval used for comparing costs is one year. Over that

span of time, there will be a certain need, or demand, or requirement for each

inventory item. In that context, the following describes how the annual costs in each

of the four categories will vary with changes in the inventory lot sizing decision.

Item costs: How the per unit item cost is measured depends upon whether the item is

one that is obtained from an external source of supply, or is one that is manufactured

internally. For items that are ordered from external sources, the per unit item cost is

predominantly the purchase price paid for the item. On some occasions this cost may

also include some additional charges, like inbound transportation cost, duties, or

insurance. For items that are obtained from internal sources, the per unit item cost is

composed of the labor and material costs that went into its production, and any

factory overhead that might be allocated to the item. In many instances the item cost

is a constant, and is not affected by the lot sizing decision. In those cases, the total

annual item cost will be unaffected by the order size. Regardless of the order size

(which impacts how many times we choose to order that item over the course of the

year), our total annual acquisitions will equal the total annual need. Acquiring that

total number of units at the constant cost per unit will yield the same total annual

cost. (This situation would be somewhat different if we introduced the possibility of

quantity discounts. We will consider that later.)

Holding costs (also called carrying costs): Any items that are held in inventory will

incur a cost for their storage. This cost will be comprised of a variety of components.

One obvious cost would be the cost of the storage facility (warehouse space charges

and utility charges, cost of material handlers and material handling equipment in the

warehouse). In addition to that, there are some other, more subtle expenses that add

27

to the holding cost. These include such things as insurance on the held inventory;

taxes on the held inventory; damage to, theft of, Inventory of, or obsolescence of the

held items. The order size decision impacts the average level of inventory that must

be carried. If smaller quantities are ordered, on average there will be fewer units

being held in inventory, resulting in lower annual inventory holding costs. If larger

quantities are ordered, on average there will be more units being held in inventory,

resulting in higher annual inventory holding costs.

Ordering costs: Any time inventory items are ordered, there is a fixed cost

associated with placing that order. When items are ordered from an outside source of

supply, that cost reflects the cost of the clerical work to prepare, release, monitor, and

receive the order. This cost is considered to be constant regardless of the size of the

order. When items are to be manufactured internally, the order cost reflects the setup

costs necessary to prepare the equipment for the manufacture of that order. Once

again, this cost is constant regardless of how many items are eventually

manufactured in the batch. If one increases the size of the orders for a particular

inventory item, fewer of those orders will have to be placed during the course of the

year, hence the total annual cost of placing orders will decline.

Shortage costs: Companies incur shortage costs whenever demand for an item

exceeds the available inventory. These shortage costs can manifest themselves in the

form of lost sales, loss of good will, customer irritation, backorder and expediting

charges, etc. Companies are less likely to experience shortages if they have high

levels of inventory, and are more likely to experience shortages if they have low

levels of inventory. The order size decision directly impacts the average level of

inventory. Larger orders mean more inventory is being acquired than is immediately

needed, so the excess will go into inventory. Hence, smaller order quantities lead to

lower levels of inventory, and correspondingly a higher likelihood of shortages and

their associated shortage costs. Larger order quantities lead to higher levels of

28

inventory, and correspondingly a lower likelihood of shortages and their associated

costs. The bottom line is this: larger order sizes will lead to lower annual shortage

costs.

29

CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

The EOQ model is a technique for determining the best answers to the how much

and when questions. It is based on the premise that there is an optimal order size that

will yield the lowest possible value of the total inventory cost. There are several

assumptions regarding the behavior of the inventory item that are central to the

development of the model

EOQ assumptions:

1. Demand for the item is known and constant.

2. Lead time is known and constant. (Lead time is the amount of time that elapses

between when the order is placed and when it is received.)

3. The cost of all units ordered is the same, regardless of the quantity ordered (no

quantity discounts).

4. Ordering costs are known and constant (the cost to place an order is always the

same, regardless of the quantity ordered).

5. When an order is received, all the items ordered arrive at once (instantaneous

replenishment).

6. Since there is certainty with respect to the demand rate and the lead time,

orders can be timed to arrive just when we would have run out. Consequently

the model assumes that there will be no shortages.

Based on the above assumptions, there are only two costs that will vary with

changes in the order quantity, (1) the total annual ordering cost and (2) the total

annual holding cost. Shortage cost can be ignored because of assumption 6.

Furthermore, since the cost per unit of all items ordered is the same, the total

annual item cost will be a constant and will not be affected by the order quantity.

30

EOQ symbols:

D = annual demand (units per year)

S = cost per order (dollars per order)

H = holding cost per unit per year (dollars to carry one unit in inventory for one year)

Q = order quantity

31

CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

We saw on the previous page that the only costs that need to be considered for the

EOQ model are the total annual ordering costs and the total annual holding costs.

These can be quantified as follows:

Annual Ordering Cost

The annual cost of ordering is simply the number of orders placed per year times the

cost of placing an order. The number of orders placed per year is a function of the

order size. Bigger orders means fewer orders per year, while smaller orders means

more orders per year. In general, the number of orders placed per year will be the

total annual demand divided by the size of the orders. In short,

Total Annual Ordering Cost = (D/Q)S

Annual Holding Cost

The annual cost of holding inventory is a bit trickier. If there was a constant level of

inventory in the warehouse throughout the year, we could simply multiply that

constant inventory level by the cost to carry a unit in inventory for a year.

Unfortunately the inventory level is not constant throughout the year, but is instead

constantly changing. It is at its maximum value (which is the order quantity, Q) when

a new batch arrives, then steadily declines to zero. Just when that inventory is

depleted, a new order is received, thereby immediately sending the inventory level

back to its maximum value (Q). This pattern continues throughout, with the

inventory level fluctuating between Q and zero. To get a handle on the holding cost

we are incurring, we can use the average inventory level throughout the year (which

is Q/2). The cost of carrying those fluctuating inventory levels is equivalent to the

cost that would be incurred if we had maintained that average inventory level

continuously and steadily throughout the year. That cost would have been equal to

32

the average inventory level times the cost to carry a unit in inventory for a year. In

short,

Total Annual Holding Cost = (Q/2) H

Total Annual Cost

The total annual relevant inventory cost would be the sum of the annual ordering cost

and annual holding cost, or

TC = (D/Q)S + (Q/2)H

This is the annual inventory cost associated with any order size, Q.

33

CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

At this point we are not interested in any old Q value. We want to find the optimal Q

(the EOQ, which is the order size that results in the lowest annual cost). This can be

found using a little calculus (take a derivative of the total cost equation with respect

to Q, set this equal to zero, then solve for Q). For those whose calculus is a little

rusty, there is another option. The unique characteristics of the ordering cost line and

the holding cost line on a graph are such that the optimal order size will occur where

the annual ordering cost is equal to the annual holding cost.

EOQ occurs when:

(D/Q)S = (Q/2)H

a little algebra clean-up on this equation yields the following:

Q2 = (2DS)/H

And finally

Q = √2DS/H

(This optimal value for Q is what we call the EOQ)

34

E.O.Q ILLUSTIRATION IVENTORY

Annual demand (D) = 10,000 units per year

Ordering cost (S) = $75 per order

Holding cost (H) = $6 per unit per year

Lead time = 5 days

The company operates 250 days per year (hence, daily demand = 10,000/250 = 40

units per day)

Results of computations:

EOQ = 500 units

Number of orders placed per year = 20

Average inventory level = 250 units

Annual ordering cost = $1500

Annual holding cost = $1500

Total annual inventory cost = $3000

Time between the placement of orders = 12.5 days

SOME OBSERVATIONS ABOUT OUR EOQ ILLUSTINVENTORYN

Given data

Annual demand (D) = 10,000 units per year

Ordering cost (S) = $75 per order

35

Holding cost (H) = $6 per unit per year

Lead time = 5 days

The company operates 250 days per year (hence, daily demand = 10,000/250 = 40

units per day)

Results of computations

EOQ = 500 units

Number of orders placed per year = 20

Average inventory level = 250 units

Annual ordering cost = $1500

Annual holding cost = $1500

Total annual inventory cost = $3000

Time between the placement of orders = 12.5 days

36

Observation #1

The total annual inventory cost of $3000 includes only the annual ordering cost and

the annual holding cost. We were able to ignore the shortage cost because all of the

certainty in our assumptions led to a "no shortage" situation. We also ignored the

total annual item cost, since it was a horizontal line that had no impact on the optimal

size of our orders. However, we will still have to pay for those 10,000 items that

were ordered over the course of the year, so that annual purchase cost will contribute

to the total of our inventory related costs (ordering + holding + item cost). Let's

assume for dement ration Inventory purposes that the item purchase price is $ 1.00

per unit. This would make the total annual purchase cost $1.00 per unit x 10,000

units = $10,000.

Our total annual inventory cost would then be $1500 + $1500 + $10,000 = $13,000.

SOME OBSERVATIONS ABOUT OUR EOQ ILLUSTINVENTORYN

Observation #2

We discovered that our order quantity of 500 units would lead to replenishment

every 12.5 days. We projected that we would run out on days 12.5, 25, 37.5, 50, 62.5,

75, etc. With a 5 day lead time, we were smart enough to order 5 days in advance of

when we would run out, which had us placing orders on days 7.5, 20, 32.5, 45, 57.5,

70, etc. We only have to watch the calendar to keep track of when those order

instants arise so that we can place the orders.

An alternative to watching the calendar would be to watch the inventory levels.

Recall that the average daily demand for this item is 40 units per day. This means

that at the moment we place an order, we have just enough inventory to cover the

demand that will occur during the 5 day lead time. The demand during the 5 day lead

time is 5 days x 40 units per day = 200 units. So, all we have to do is keep our eyes

37

on our inventory level, and when it reaches 200 units, that is the signal that it is time

to reorder. This level of inventory that triggers a reorder is called the reorder point

(R).

38

200R

Inventory Level

Time

INVENTORY MONITORING APPROACHES

Continuous review system: This approach maintains a constant order size, but

allows the time between the placements of orders to vary. This method of monitoring

inventory is sometimes referred to as a perpetual review method, a fixed quantity

system, and a two-bin system. When the inventory is depleted to the reorder point, a

replenishment order is placed. The size of that order is the economic order quantity

for that item. This type of system provides closer control over inventory items since

the inventory levels are under perpetual scrutiny.

Periodic review system: This approach maintains a constant time between the

placements of orders, but allows the order size to vary. This method of monitoring

inventory is sometimes referred to as a fixed interval system or fixed period system.

It only requires that inventory levels be checked at fixed periods of time. The amount

that is ordered at a particular time point is the difference between the current

inventory level and a predetermined target inventory level (also called an order up to

level). If demand has been low during the prior time interval, inventory levels will be

relatively high, and the amount to be ordered will be relatively low. If demand has

been high during the prior time interval, inventory levels will have been depleted to

low levels, and the amount to be ordered will be higher.

Min-max system: This approach allows both the order size and the time between the

placements of orders to vary. This method of monitoring inventory is sometimes

referred to as an optional replenishment system. It is a hybrid system that combines

elements of both the continuous review system and the periodic review system. It is

similar to the periodic review system in that it only checks inventory levels at fixed

intervals of time, and it has a target inventory level. However, when one of those

review periods arises the system does not automatically place an order. An order is

only placed if the size of the order would be sufficient to warrant placing the order.

This determination is made by incorporating the reorder point concept from the 39

continuous review system. At the review period the inventory level on hand is

compared to a reorder point for the item. If inventory has not fallen below the reorder

point, no order is placed. However, if the inventory level has dropped below the

reorder point, an order is placed. The size of the order is the difference between the

inventory on hand and the target inventory level.

40

INVENTORY OF SAFETY STOCK DETERMINATION

Data:

Average daily demand = 50 units per day

Operating year contains 300 days of operation Inventory (D = 15,000 units per year)

Ordering cost S = $3 per order

Holding cost H = $1 per unit per year

Lead time = 1 day

Computations:

EOQ (from EOQ formula) = 300 units per order

Resulting number of orders per year = 50 orders per year

Reorder point = 50 units (the average number of units demanded during the 1 day

lead time)

Additional Data

Demand is not always a constant 50 units per day. There is variability in daily

demand according to the following table of demands and probabilities:

Daily Demand 10 20 30 40 50 60 70 80 90

Probability .01 .04 .05 .2 .4 .2 .05 .04 .01

Which suggests that if you waited until you had 50 units left in inventory before

placing an order for 300 more units, you would be O.K. if the demand during the 1

day lead time was 10, 20, 30, 40, or 50? However, if the demand during the 1 day

41

lead time was 60, 70, 80, or 90 you would have had a shortage. The size of the

shortage would depend upon how many units were demanded during the lead time,

but the maximum possible shortage would have been 40 units (if demand was the

largest possible value of 90).

You can prevent shortages by providing safety stock when there is uncertainty in

demand. (Safety stock can be viewed as a cushion placed at the bottom of the saw

tooth graph of inventory fluctuations over time.) If you wanted to guarantee that you

would never have a shortage in this situation, you would need 40 units of safety stock

at the bottom of the graph to "dip into" if demand spiked to higher than average

values. But, adding 40 units of safety stock really mean that you have elevated your

reorder point. You are not waiting until there are only 50 units in inventory to place

your order. You are ordering when there are 90 units in inventory. (And, of course,

90 units is sufficient to cover the worst case scenario for this problem.)

42

HOW MUCH SAFETY STOCK IS APPROPRIATE?

Service level: The probability that demand during lead time will not exceed the

inventory on hand when the order is placed.

In the previous illustration Inventory, it was suggested that you might provide 40

units of safety stock. If you had done so, you would never experience a shortage.

You would have achieved a service level of 100%. This might not be a desirable

solution for this problem. We are carrying a relatively high amount of safety stock,

and there is a very low probability that lead time demand will actually go as high as

90 units (only a 1% chance).

If you had chosen to carry only 30 units of safety stock (order when inventory drops

to 80 units), you will be fine if lead time demand is anything up to and including 80

units. If lead time demand turns out to be 90 (there is a 1% chance of that), you will

come up 10 units short. But, since you had enough inventories to cover 99% of the

demands that might have occurred, you achieved a 99% service level. Many people

might opt for this policy, for it will reduce the average annual level of inventory

carried (i.e., reduce holding costs) and run only a slight risk of incurring a shortage

cost.

Others might be even more aggressive, and opt for an even lower service level. We

could have achieved a 95% service level with a reorder point of 70 (only 20 units of

safety stock). We've lowered our inventory holding costs even further, but exposed

ourselves to even more shortage cost risk.

While the service level concept is a widely used measure of protection against

shortages, it can be a bit misleading, as the next illustration of Inventory will show.

43

INVENTORY OF SHORTAGES WITH A GIVEN SERVICE LEVEL

Continuing with the previous illustration of Inventory, assume that management has

made a policy decision that the company will achieve a 90% service level (reorder

point = 60 units). Some incorrectly assume that this means 10% of demand will be

unsatisfied. Things aren't really that bad. The 90% service level really means that on

90% of the order cycles we will have enough to satisfy demand, but on 10% we will

come up short. Let's look at the expected shortage on any given order cycle:

Inventory Policy: Service level = 90%, Reorder point = 60 units

Lead time demand # of units short Probability Expected value of shortage

10 0 .01 0

20 0 .04 0

30 0 .05 0

40 0 .2 0

50 0 .4 0

60 0 .2 0

70 10 .05 .5

80 20 .04 .8

90 30 .01 .3

Total expected value of shortage per order cycle 1.6

44

This means that the average shortage per order cycle will be 1.6 units. (Of course, we

will never be short 1.6 units on any order cycle. For any order cycle, we will be short

either 0 units, 10 units, 20 units, or 30 units. The 1.6 reflects the long run average per

cycle).

Go back a few pages and refresh yourselves on the calculations for the data of this

problem. Order size (the calculated EOQ) is 300 units. This order size, coupled with

the annual demand of 15,000 units, will have us ordering 50 times per year. On each

of those 50 order cycles we have an expected shortage of 1.6 units. This means the

total expected shortage for the full year will be 50 x 1.6, or 80 units of demand per

year that we cannot satisfy. This is 80 units out of a total annual demand of 15,000

units, which is 80/15000 or .0053 of our demand that goes unsatisfied. This converts

to a percentage of only .53% (a little more than 1/2 a percent of our annual demand

goes unfilled). Another way to look at this is 99.47% of our annual demand is met.

This is a lot better sounding than the 90% service level might have led us to believe.

45

HOW MUCH CONTROL? ABC ANALYSIS

Inventory

Item Number

Annual

Usage

Value

Per Unit

Annual

Dollar Usage

1 25,000 $3 75,000

2 5,000 $4 20,000

3 1,000 $10 10,000

4 10,000 $2 20,000

5 4,000 $5 20,000

6 70,000 $10 700,000

7 25,000 $5 125,000

8 5,000 $1 5,000

9 3,000 $5 15,000

10 2,000 $5 10,000

Item Annual % of Cumulative % of Cumulative ABC

46

Number $ Usage Items % of Items Value

% of Value

Class*

6 $700,000 10% 10% 70 70 A

7 $125,000 10% 20% 12.5 82.5 A

1 $75,000 10% 30% 7.5 90 B

2 $20,000 10% 40% 2 92 C

4 $20,000 10% 50% 2 94 C

5 $20,000 10% 60% 2 96 C

9 $15,000 10% 70% 1.5 97.5 C

3 $10,000 10% 80% 1 98.5 C

10 $10,000 10% 90% 1 99.5 C

8 $5,000 10% 100% .5 100 C

Total $1,000,000

*When classifying the items as A, B, or C items, it can be somewhat subjective as to

where the lines are drawn. With the unrealistically small Inventory above, the first

20% of the inventory items constitute 82.5% of the inventory value, so these items

(Items 6 and 7) will be designated as A items. On the other extreme, 70% of the

items constitute only 10% of the inventory value, so these items (Items 2, 4, 5, 9, 3,

10, and 8) will be designated as C items. Finally, 10% of the items constitute 7.5 %

of the inventory value, so this item (Item 1) will be designated as a B item.

47

The purpose of the ABC classification was to separate the "important few" from the

"trivial many" so that the appropriate level of control can be assigned to each item. A

items need the tightest degree of control, while C items do not need very close

scrutiny.

48

ABC CLASSIFICATION OF ITEMS

49

Cumulative % of Items 100%

Cumulative % of Value

100%

INVENTORY MANAGEMENT

Introduction

Inventories constitute most significant part of current assets, in most of the

companies in India. To maintain a large size of inventory, a considerable amount of

fund is required. It is, therefore, absolutely imperative to manage inventories

efficiently and effectively in order to avoid unnecessary investment. A firm

neglecting the management of inventories will be jeopardizing its long-run

profitability and may fail ultimately. It is possible for a company to reduce its levels

of inventories to a considerable degree, e.g.10% to 20%, without any adverse effect

on production and sales, by using inventory planning and control techniques. The

reduction in ‘excessive’ inventories carries a favorable impact on a company’s

profitability.

There are at least three motives for holding inventories:

1-To facilitates smooth production and sales operation Inventory (transaction

motive).

2-To guards against the risk of unpredictable changes in usage rate and delivery time

(precautionary motive).

3- To make advantage of price fluctuations (speculative motive).

50

The evolving discipline of marketing:

The marketing discipline had its origins in the early 20th century as an offspring of economics.

Economic science had neglected the role of middlemen and the role of functions other than price in the

determination of demand levels and characteristics. Early marketing economists examined

agricultural and industrial markets and described them in greater detail than the classical economists.

This examination resulted in the development of three approaches to the analysis of marketing

activity: the commodity, the institution, and the function. Commodity analysis studies the ways in

which a product or product group is brought to market. A commodity analysis of milk, for example,

traces the ways in which milk is collected at individual dairy farms, transported to and processed at

local dairy cooperatives, and shipped to grocers and supermarkets for consumer purchase.

For example, any marketing effort must ensure that the product is transported from the supplier to the

customer. In some industries, a truck, while in others it may be done by mail, facsimile, television signal, or

airline may handle this transportation function. All these institutions perform the same function.

As the study of marketing became more prevalent throughout the 20th century, large companies—

particularly mass consumer manufacturers—began to recognize the importance of market research, better

product design, effective distribution, and sustained communication with consumers in the success of their

brands. Marketing concepts and techniques later moved into the industrial-goods sector and subsequently

into the services sector. It soon became apparent that organizations and individuals market not only goods

and services but also ideas (social marketing), places (location marketing), personalities (celebrity

marketing), events (event marketing), and even the organizations themselves (public relations).

51

Role of marketing:

As marketing developed, it took a variety of forms. It was noted above that marketing can be viewed as a

set of functions in the sense that certain activities are traditionally associated with the exchange process. A

common but incorrect view is that selling and advertising are the only marketing activities. Yet, in addition

to promotion, marketing includes a much broader set of functions, including product development,

packaging, pricing, distribution, and customer service.

Many organizations and businesses assign responsibility for these marketing functions to a specific group

of individuals within the organization. In this respect, marketing is a unique and separate entity. Those who

make up the marketing department may include brand and product managers, marketing researchers,

sales representatives, advertising and promotion managers, pricing specialists, and customer service

personnel. As a managerial process, marketing is the way in which an organization determines its best

opportunities in the marketplace, given its objectives and resources. The marketing process is divided into

a strategic and a tactical phase. The strategic phase has three components—segmentation, targeting, and

positioning (STP). The organization must distinguish among different groups of customers in the market

(segmentation), choose which group(s) it can serve effectively (targeting), and communicate the central

benefit it offers to that group (positioning). The marketing process includes designing and implementing

various tactics, commonly referred to as the “marketing mix,” or the “4 Ps”: - Product, Price, Place and

promotion. Evaluating, controlling, and revising the marketing Process to achieve the organization’s

objectives follow the marketing mix

It is the process by which a society organizes and distributes its resources to meet the material needs of its

citizens. However, marketing activity is more pronounced under conditions of goods surpluses than goods

shortages. When goods are in short supply, consumers are usually so desirous of goods that the exchange

process does not require significant promotion or facilitation. In contrast, when there are more goods and

services than consumers need or want, companies must work harder to convince customers to exchange

with them.

52

The marketing process:

The marketing process consists of four elements: strategic marketing analysis, marketing-mix planning,

marketing implementation, and marketing control.

“Strategic marketing analysis”

Market segments:

The aim of marketing in profit-oriented organizations is to meet needs profitably. Companies must

therefore first define which needs—and whose needs—they can satisfy. For example, the personal

transportation market consists of people who put different values on an automobile's cost, speed, safety,

status, and styling. No single automobile can satisfy all these needs in a superior fashion; compromises

have to be made. Furthermore, some individuals may wish to meet their personal transportation needs

with something other than an automobile, such as a motorcycle, a bicycle, or a bus or other form of public

transportation. Because of such variables, an automobile company must identify the different preference

groups, or segments, of customers and decide which group(s) they can target profitably.

Market niches:

Segments can be divided into even smaller groups, called sub segments or niches. A niche is defined as a

small target group that has special requirements. For example, a bank may specialize in serving the

investment needs of not only senior citizens but also senior citizens with high incomes and perhaps even

those with particular investment preferences. It is more likely that larger organizations will serve the larger

market segments (mass marketing) and ignores niches. As a result, smaller companies typically emerge

that are intimately familiar with a particular niche and specialize in serving its needs.

53

Marketing to individuals:

A growing number of companies are now trying to serve “segments of one.” They attempt to adapt their

offer and communication to each individual customer. This is understandable, for instance, with large

industrial companies that have only a few major customers. For example, The Boeing Company (United

States) designs its 747 planes differently for each major customer, such as United Airlines, Inc., or American

Airlines, Inc. Serving individual customers is increasingly possible with the advent of database marketing,

through which individual customer characteristics and purchase histories are retained in company

information systems. Even mass marketing companies, particularly large retailers and catalog houses,

compile comprehensive data on individual customers and are able to customize their offerings and

communications.

Positioning:

A key step in marketing strategy, known as positioning, involves creating and communicating a message

that clearly establishes the company or brand in relation to competitors. Thus, Volvo Aktiebolaget

(Sweden) has positioned its automobile as the “safest,” and Daimler-Benz AG (Germany), manufacturer of

Mercedes-Benz vehicles, has positioned its car as the best “engineered.” Some products may be positioned

as “outstanding” in two or more ways. However, claiming superiority along several dimensions may hurt

company’s credibility because consumers will not believe that any one offering can excel in all dimensions.

Furthermore, although the company may communicate a particular position, customers may perceive a

different image of the company as a result of their actual experiences with the company's product or

through word of mouth.

Marketing-mix planning:

Having developed a strategy, a company must then decide which tactics will be most effective in achieving

strategy goals. Tactical marketing involves creating a marketing mix of four components product, price, and

place, promotion—that fulfills the strategy for the targeted set of customer needs.

1. Product: -

54

Product development:

The first marketing-mix element is the product, which refers to the Offering or group of offerings that will

be made available to customers. In the case of a physical product, such as a car, a company will gather

information about the features and benefits desired by a target market. Before assembling a product, the

marketer's role is to communicate customer desires to the engineers who design the product or service.

This is in contrast to past practice, when engineers designed a product based on their own preferences,

interests, or expertise and then expected marketers to find as many customers as possible to buy this

product. Contemporary thinking calls for products to be designed based on customer input and not solely

on engineers' ideas. In traditional economies, the goods produced and consumed often remain the same

from one generation to the next—including food, clothing, and housing. As economies develop, the range

of products available tends to expand, and the products themselves change. In contemporary

industrialized societies, products, like people, go through life cycles: birth, growth, maturity, and decline.

This constant replacement of existing products with new or altered products has significant consequences

for professional marketers. The development of new products involves all aspects of a business—

production, finance, research and development, and even personnel administration and public relations.

Packaging and branding:

Packaging and branding are also substantial components in the marketing of a product.

Packaging in some instances may be as simple as customers in France carrying long loaves of

unwrapped bread or small produce dealers in Italy wrapping vegetables in newspapers or

placing them in customers' string bags. In most industrialized countries, however, the

packaging of merchandise has become a major part of the selling effort, as marketers now

specify exactly the types of packaging that will be most appealing to prospective customers.

55

Marketing a service product:

The same general marketing approach about the product applies to the development of service offerings

as well. For example, a health maintenance organization (HMO) must design a contract for its members

that describes which medical procedures will be covered, how much physician choice will be available, how

out-of-town medical costs will be handled, and so forth. In creating a successful service mix, the HMO must

choose features that are preferred and expected by target customers, or the service will not be valued in

the marketplace.

2. Price

The second marketing-mix element is price. Ordinarily companies determine a price by gauging the quality

or performance level of the offer and then selecting a price that reflects how the market values its level of

quality. However, marketers also are aware that price can send a message to a customer about the

product's presumed quality level. A Mercedes-Benz vehicle is generally considered to be a high-quality

automobile, and it therefore can command a high price in the marketplace. But, even if the manufacturer

could price its cars competitively with economy cars, it might not do so, knowing that the lower price might

communicate lower quality. On the other hand, in order to gain market share, some companies have

moved to “more for the same” or “the same for less” pricing, which means offering prices that are

consistently lower than those of their competitors. This kind of discount pricing has caused firms in such

industries as airlines and pharmaceuticals (which used to charge a price premium based on their past

brand strength and reputation) to significantly reevaluate their marketing strategies.

56

3. Place: -

Place, or where the product is made available, is the third element of the marketing mix and is most

commonly referred to as distribution. When a product moves along its path from producer to

consumer, it is said to be following a channel of distribution. For example, the channel of distribution

for many food products includes food-processing plants, warehouses, wholesalers, and supermarkets.

By using this channel, a food manufacturer makes its products easily accessible by ensuring that they

are in stores that are frequented by those in the target market. In another example, a mutual funds

organization makes its investment products available by enlisting the assistance of brokerage houses

and banks, which in turn establish relationships with particular customers.

4. Promotion: -

Promotion, the fourth marketing-mix element, consists of several methods of communicating with and

influencing customers. The major tools are sales force, advertising, sales promotion, and public relations.

Sales force:

Sales representatives are the most expensive means of promotion, because they require income, expenses,

and supplementary benefits. Their ability to personalize the promotion process makes salespeople most

effective at selling complex goods, big-ticket items, and highly personal goods—for example, those related

to religion or insurance. Salespeople are trained to make presentations, answer objections, gain

commitments to purchase, and manage account growth. Some companies have successfully reduced their

sales-force costs by replacing certain functions (for example, finding new customers) with less expensive

methods (such as direct mail and telemarketing).

Advertising:

Advertising includes all forms of paid, no personal communication and promotion of products, services, or

ideas by a specified sponsor. Advertising appears in such media as print (newspapers, magazines,

billboards, flyers) or broadcast (radio, television). Advertisements typically consist of a picture, a headline,

information about the product, and occasionally a response coupon. Broadcast advertisements consist of

57

an audio or video narrative that can range from short 15-second spots to longer segments known as

infomercials, which generally last 30 or 60 minutes.

Sales promotion:

While advertising presents a reason to buy a product, sales promotion offers a short-term incentive to

purchase. Sales promotions often attract brand switchers (those who are not loyal to a specific brand) who

are looking primarily for low price and good value. Thus, especially in markets where brands are highly

similar, sales promotions can cause a short-term increase in sales but little permanent gain in market

share. Alternatively, in markets where brands are quite dissimilar, sales promotions can alter market shares

more permanently. The use of promotions has risen considerably during the late 20th century. This is due

to a number of factors within companies, including an increased sophistication in sales promotion

techniques and greater pressure to increase sales. Several market factors also have fostered this increase,

including a rise in the number of brands (especially similar ones) and a decrease in the efficiency of

traditional advertising due to increasingly fractionated consumer markets.

Public relations:

Public relations, in contrast to advertising and sales promotion, generally involve less

commercialized modes of communication. Its primary purpose is to disseminate information

and opinion to groups and individuals who have an actual or potential impact on a company's

ability to achieve its objectives. In addition, public relations specialists are responsible for

monitoring these individuals and groups and for maintaining good relationships with them.

One of their key activities is to work with news and information media to ensure appropriate

coverage of the company's activities and products. Public relations specialists create publicity

by arranging press conferences, contests, meetings, and other events that will draw attention

to a company's products or services. Another public relations responsibility is crisis

management—that is, handling situations in which public awareness of a particular issue

may dramatically and negatively impact the company's ability to achieve its goals. For

example, when it was discovered that a harmful chemical, Source Perrier, might have tainted

some bottles of Perrier sparkling water SA's public relations team had to ensure that the

58

general consuming public did not thereafter automatically associate Perrier with tainted

water.

Marketing implementation:

Companies have typically hired different agencies to help in the development of advertising,

sales promotion, and publicity ideas. However, this often results in a lack of coordination

between elements of the promotion mix. When components of the mix are not all in harmony,

a confusing message may be sent to consumers. For example, a print advertisement for an

automobile may emphasize the car's exclusivity and luxury, while a television advertisement

may stress rebates and sales, clashing with this image of exclusivity. Alternatively, by

integrating the marketing elements, a company can more efficiently utilize its resources.

Instead of individually managing four or five different promotion processes, the company

manages only one. In addition, promotion expenditures are likely to be better allocated,

because differences among promotion tools become more explicit.

59

Need to Push Full Throttle Ahead:

Increasing knowledge among societies is forcing the banks to adopt international best practices to

remain in business. Important dimensions of change are market, customers, competition, technology &

society. Banks should focus beyond technologies and geographies to accelerate growth. Indian banking

sector has adopted many dynamic innovations but still some more are needed like risk management, e-

commerce etc. The new game requires new strategies with an accent on innovational transformation.

Two roads diverged in a wood, and I

Took the one less traveled by,

And that has made all the difference.

- Robert Frost

It is Customary to describe the unfolding world as of unprecedented change, of a whirlwind of ideas, of

explosive growth of since-based technology. Prospects for continued escalation of change are awesome:

the world’s knowledge based now doubles every eight years, but by 2020, the doubling time is estimated

to be slashed to 76 days. A strong momentum and apparent inevitability of globalization strongly suggest

an accentuation of the pace of development. Such contextual changes recd. An impetus through increasing

integration of the productive process, rapid technological advances, splashing of legal & institutional

barriers to global trade & a smother flow of global capital.

Discontinuity – The New Disequilibria:

Everything in business is always in flux & flow. Engel’s stressed, “equilibrium is inseparable from motion &

all equilibrium is relative & temporary”. The quickening of change (Table 1), however, caused discontinuity

& ripples of concern on the boardrooms. But it is necessary to realize, as powerfully argued by Gary Hamel,

“We stand on the threshold of a new age – the age of revolution.

60

TABLE 1: DIMESIONS OF CHANGES

Change

Impact on Business

MarketsLocal to Global - Investments in

Identifying

& Servicing New

markets

Customers Acceptance to delight - Listening to

Consumers.

- Knowing

&Understanding

their needs.

- Fulfilling Customer’s

Requirements.

Competition- Increased Competition

- Shortage to surplus

Economy

- Squeeze in margins

leading

to cost cuttings.

- Consolidating &

Convergence.

TechnologyGradual change to

quantum Change

- Innovational

Shareholders

Transparency.

61

Society Demanding Rights - Corporate Governance

- Concern for social

Obligations.

Change

Impact on Business

MarketsLocal to Global - Investments in

Identifying

& Servicing New

markets

Customers Acceptance to delight - Listening to

Consumers.

- Knowing

&Understanding

their needs.

- Fulfilling Customer’s

Requirements.

Competition- Increased Competition

- Shortage to surplus

Economy

- Squeeze in margins

leading

to cost cuttings.

- Consolidating &

62

Convergence.

TechnologyGradual change to

quantum Change

- Innovational

Shareholders

Transparency.

Society Demanding Rights - Corporate Governance

- Concern for social

Obligations.

Historically, Changes in society have always been preceded by the flow of ideas, which provide the cutting

Edge of development. In contemplating the challenges, the approaches of those enterprise, which

successfully weathered the challenges of this volatile era, shows that innovation is not only power but also

the key to sustained economic success. While the debate over innovation in the world of business has

raged for long, innovation has now rapidly emerged as a critical lament of the growth strategy.

Despite the multi-layered any multi-dimensional aspect of ubiquitous change, most organization still

disconcertingly confine themselves to incremental improvement & innovation without trying to alter the

rules of the game, bring about breakthrough innovation. What is prognostically alarming is that most

companies in the given industry or market tend to follow the same unwritten rules for conducting business

with limited deviations from de facto strategies. This is reflected by the fact that though agglomeration &

the location of innovative activities are closely related, important sectoral clusters like textiles (Triupur),

diamond-cutting (Surat), hosiery (Ludhiana), call centers (Gurgoan), auto-companies & automobiles

(Chennai), with the notable exception of banglore (IT) are largely confined to incremental innovations.

63

Further the blistering pace of change quickly renders existing strategies obsolete necessitating frequent

course corrections. An urgent policy appraisal is, therefore, impulses in banks by radical and discontinuous

innovative measures for enhanced performance in this turbulent era.

64

‘The Innovation Imperative – Accelerating Growth beyond Technologies and Geographies:’

Traditionally, innovation has been defined with focus on traditional concepts of industry research &

development & the commercialization of new products and/or process technologies. But the definition of

innovation as “acceptance of & readiness to change across the organization, dedication to continuous

improvement processes, willingness to experiment and explore novel ways, building new relationship &

alliance, establishing new approaches to markets, channels, customers, pricing strategies & new & varied

approaches to organization, measurement and performance measurement” is generally a acceptable.

The history of the growth of financial development, as indeed of all other development, is intertwined with

the growth of innovation. Compelling & incontrovertible cross-country evidence prove that successful

innovation is crucial to the competitive edge of all businesses. But innovation is particularly important for

banking & finance companies. Innovation, which transcends invention, represents the point of

convergence of invention & insight. Organizational ethos needs to stress innovation as a key driver of

growth that surprises & delights the customer with new, differentiated & relevant benefits. This is not a

cliché but defining characteristics of the modern cooperate saga.

65

“SURVIVAL IS THE MOTHER OF INNIVATION”

“Banks can provide innovation products and services to their corporate and retail customers only when

creative people are in place along with latest technology. Such people might provide innovative ideas to

customers and banks. By converting there acceptable ideas into reality, banks can get an edge to compete

effectively in the global village. Indian banking is also changing its shape rapidly by adopting innovative

technology, products and services.”

Innovation is the key to success for any activity. Innovation banking is therefore not an exception.

Innovation banking is possible only when we have innovative people in banking. Moreover, innovative

ideas of such people have to be heard at the right time by the right people. Only then the needed

encouragement and support is given to convert such innovative ideas in reality.

In the past, a generation gap is considered to be with a span of at least 10 years. Whereas with the

improvement in the technology followed by integration of people and places across the world on

account of revolutionary changes in information and communication. The entire world has become

virtually a small global village. Since all organizations and people use technologies, we find that a new

generation of techno savvy people emerging in a very short span of 5 years in every sphere of activity

infusing dynamism and creativity leading to several innovations.

Globally, usage of technology is very extensive in the financial sector of which banking sector is an

integral part. Indian financial sector has made rapid strides in late 1980s and early 1990s picking up

momentum with the advent of 21st century. Liberalization of the Indian economy has provided scope

to the banking sector to reorient its focus by shifting from developmental role obligated mostly by

socio-political considerations into professional financial agencies keen on preserving their bottom

lines. The direction in which the Indian banking is moving presently indicates that the prevailing

competition will lead to consolidation and convergence. Small players will either have to forge a

merger to become big players or else they will be either extinguished or swallowed by larger players in

the years to come. The pressure will equally be more on the existing large players to retain their lead

over others. This emerging scenario warrants innovative approach by banks to keep themselves

sailing in the sea of competition.

No wonder we find a very interesting trend in the recent past in the Indian banking. The trend is the

major shift from routine banking functions to a very aggressive financial marketing organization. We

find most of the routines banking jobs are out source, thanks to automation made possible by 66

technology. Direct selling agents are actively engaged by most of the foreign and new generation

private sector banks for marketing all the banking products with specified targets. Therefore, the real

core people who will be retained by these banks in the long run under there direct pay roles will only

be experts at senior levels in marketing, corporate and retail banking specialists along with risk

management professionals who will be required in view of the impending implementation of the Basle-

II norms which attaches significant to assessment and management of risk factors in banking activity.

ATMs of the larger banks are either fully out sourced by the individual banks or handed over to an

autonomous agency by most of the banks collectively. Small players in ATMs are also trying to be a

part of this shared network with regard to clearing operations, Reserve Bank of India has already

initiated the required steps to gradually dispense with the physical presentation of chques and replace

the same with electronic clearing in major cities. Similarly the audit and inspection of the

computerized branches is now being done in many cases by transfer of data files to the supervisory

and inspecting authorities. Qualitative inspection and supervision of the banks by Reserve Bank of

India is made possible by the technology, leaving the routine audit work to the concerned internal

audit departments of the individual banks.

With the automation of the routine work process and rapid technological developments, a host of

customer friendly banking products with flexibility are now available to one and all. Few departments

of the government (e.g. customs, income tax, central excise, commercial taxes and sales tax) have

already initiated the process of EDI (Electronic Data Interface) there by reducing the manual tasks in

the preparation of documentation and enhancing the levels of automation. This also facilitates

standardization in documentation with uniformity. This will also ensure submission of such standard

data in electronic form and scanning the physical documents where required. In the long run, this

enables e-commerce to gain momentum. Therefore, banks can also equally look forward to submission

of commercial documents by the trade industry through EDI in the near future. Once this is done, the

need for the business segment to personally visit the bank branches to submit the documents will be

eliminated. When ATMs on one side have reduce the depends of individuals customers on the bank

branches to conduct their routine banking operations, the EDI when gains momentum will reduce the

dependence of corporate customers on the bank branches in a similar fashion. These developments

taking place mainly on account of automation will reduce the differentiation in the service delivery

systems, as they are mostly standardized. Therefore, banks have to be innovative to maintain their

brand values.

67

Few banks have already started marketing aggressively for retail business loans by tying up with a

select-reputed builders and conducting road shows in India and abroad to lure the salaried people and

professionals. This role is intermediation of the banker between the builders and salaried people and

professionals can be further extended to cover other areas as well. For example banks can connect the

manufacturers of goods and services with the ultimate buyers. The process is very simple. Banks are

required to have a common agency with which the entire database of all the banks should be shared.

This data should be analyzed and classified into various segments say- according to activity, age,

place, income, education, etc., of the organizations and people who constitute this data. When this

process is done on all India bases, a wealth of information will be available, which can be used as a

marketing tool. Few relaxations in the existing banking laws are required for this purpose.

68

‘INNOVATION IN CUSTOMER SERVICE IN BANKS’

Satisfied customers are the best guarantee for the stability and growth. Customers will be satisfied only

when the banks provide the customized and innovative products and services at responsible cost. This article

focuses on the kind of services provided by developed countries and level of innovative services provided by

Indian banks. Many innovative services are currently available from Indian banks like E-Banking, ATMs,

Anywhere Banking etc., but there is a wast6 scope of improvement. Globalization, the buzzword, which

engulfed all the nations of the world since the beginning of the last decade of the past millennium, did

not leave the banking industry untouched. The opening of the world trade has brought out several

changes in the global banking map.

The continuing evolution of the banking and financial market has created opportunities both for

providers and for users of financial products and this evolution have proven beneficial to the

economy. However, innovations in financial products also have given rise to some new challenges for

market participants and their supervisors in the areas of corporate governance and compliance. The

changes that are taken place in the last decade demonstrate again the technical weakness and weak

corporate governance at a few firms can dramatically change the cost of capital and impose additional

regulatory burden on even well managed organizations.

Technology is rapidly transforming the banking industry- and expanding its ability to reach the

unbanked. Employers in the developed countries are turning increasingly to electronic payroll cards

as a cost-effective way to reduce the burden of writing and processing checks. Consumers are using

their payroll cards and other versions of prepaid debit card- also know as stored value cards- as a

substitute for cash and checking accounts. Monitoring this trend, the American Bankers Association

reported last December that in 2003, for the first time, electronic payments surpassed cash and chques

as consume in store purchases- an “evolution of payment behavior,” the ABA noted, “driven by the

increasing popularity of debit cards.rs preferred payment method for in store purchases- an

“evolution of payment behavior,” the ABA noted, “driven by the increasing popularity of debit cards.

Coming across through the performance of Banking Institutions of the west and seeing their

performance in the use of innovative methods to make themselves more customer-friendly we would

have no doubts about their strong banking mail-order company L.L. Bean, know for its superb order-

taking and service delivery systems, as its model for change. A major result of this functional

benchmarking was the establishment of a 24-hour customer service center that can not only respond

to queries and complaints but also promote and sell the bank’s products and services. The center even

allows customers to open a checking account anytime or negotiate an overdraft at 2 am. The ATM

69

was also reconfigured from mere cash dispenser to a versatile and tireless account executive. The

machine can even buy and sell mutual funds. Inspired by LL Bean, Banks published a 50-page

catalogue to help customers appreciate and select from its more than 160 financial services.

Other banks in the west have, sledded their conversation “finance and control” images, have likewise

adopted innovative service strategies and practices. Many Banks have established an information

center or “encyclopedia” in the waiting lounge. Here customers can browse through various bits and

pieces of important service information like the average time to finish a transaction and the

company’s products and services. Information about the busiest day or days in the branch is

displayed so that the customers who want to avoid these periods may do so. Phone lines dedicated to

customer service have been installed. Many Indian banks have also adopted some of these systems.

Any customer can pick up this phone and relay his or her complains, questions, or difficulties.

70

Constraints:

The constraints that need to be removed to make our banking sector progressive are:

1. To remove inflexibility like lack of users friendly front and environment for bank officials;

2. Use of a very technical and proprietary back and software, which cannot be customized easily.

3. Users in banks as we know are not IT professionals and though they are trained in various aspects,

it really makes impractical for them to covers themselves suddenly to new upcoming systems.

Concluding Remarks:

We feel that first of all, innovation is required in banks to render better and efficient

customer services. Electronic banking enables new products and services to be geared for

specific customers. We have variety of customers today and the need of each customer is

different and varied. Looking to other economies like France and United States our banking

system has also adopted credit cards, debit cards, electronic checks, smart cards, e-cash or

cyber cash, automated teller machines, which are being extensively practiced in these

countries.

Internet banking is in vogue nowadays. It is the one of the latest example of IT in banking

sector. We can perform all the banking operations, just on the click of a button by sitting at

our homes.

Finally, watchword is share information; money and resources (human, physical, and

technological) to improve our banking sector, for better tomorrow.

71

“BANKING SCENE: INDIA”

‘Mid Term Appraisal of the 10 th Plan Targets’

The Mid Term Appraisal of The 10th Plan conducted by the National Development Council (NDC) noted that

in some areas of the economy is doing well and these gains need to be consolidated, but there are also

important weaknesses, which if not corrected could undermine even the performance of the economy and

problems of the economy are assumed as follows:

GDP growth has averaged 6.5% in the first three years, which is below the 10 th plan target of 8.1%. Positive

factor include:

A) Improvement in private corporate sector investments,

B) Positive international perceptions on India

C) Tolerant inflation level

D) Comfortable external payment position with substantial inflow from abroad lending to comfortable

foreign exchange position.

Industrial sector also showed signs of improvement. The ultimate aim should be to consolidate the

gains in these developments and to overcome the weaknesses in the economy. Key weaknesses are

identified as follows:

1. Aggregate Growth

Though the plan fixed a target of 8.1%, it is difficulty to achieve the target and the likely growth

rate expected to below 7% during the plan period. An important reason for the lower growth is

that investment did not increase in line with available investible resources.

72

2. Agricultural Growth:

Agriculture Growth is very poor over the last two decades. Agriculture Growth has decelerated

sharply from 3.2% to 1.9% between 1980-81 and 1995-96. There is a need to revamp the entire

strategy ad more action is called for to improve the performance in agriculture sector.

3. Infrastructure Problems:

Inadequate infrastructures in both rural and urban areas are a major factor constraining on

India’s growth. The quality of infrastructure impacts on our ability to compete globally and also

to attract Foreign Direct Investment.

4. International Development:

Owing to high oil prices, our import outgo is quite high. Since we have ample foreign exchange

reserves at the moment, the impacts of the oil prices are not passed on to the users. But if the

oil prices remain high, its impact need to be passed on to the consumer, which will lead to

inflation or fiscal deficit in the country. Another cause of concern is that the downturn in the

world economy, which will affect our export growth considerably. It s estimated that every 1

percentage point reduction in our export growth rate will reduce the growth rate of GDP by

0.2% points.

5. Social Developments:

Our social indicators are not only lower then the levels in East Asian countries, but they are

lower even in comparison with the levels achieved by these countries twenty-five years ago.

The social indicators are also show wide disparity in the gender gaps, large rural and urban

differences and wide variation across states.

73

6. Employment:

This is another area of grave concern. Studies based on data collected from organized and

unorganized sectors state that while employment may be increasing in the unorganized sector

in response to growth, there is actually a contraction in employment in the organized sector,

which is the preferred sector for employment by new entrants to the labour force.

7. Inequality and Poverty:

Though the poverty has declined the decline was less then targeted. The moderate

improvement in education ad health indicators implies that access to more productive

employment remains limited, especially in backward regions and amongst disadvantaged

groups.

8. Balance Regional Development:

Regional imbalance in the development of different states presents a picture, which requires a

focused attention. Some states were able to reap the benefits of the economic reforms, but

some others were not able to do so. Even district backwardness in a well performing state also

presents a grim picture.

9. Resources in the Public Sector:

The availability of resources in the public sector to meet targeted levels of plan expenditure is

an area, which deserves attention. Neither the center nor the state have been able to mobelize

the resources needed to keep outlays in line with 10 th plan projections and this has led to

significant under funding in many sectors. The consolidated public debt of the Center and

74

States taken together is about 80% of the GDP, which is among the highest in emerging market

economies.

10. Declaration of Dividend:

The RBI has decided to grant general permission to banks to declare dividends, provided they

comply with the following conditions:

Eligibility Criteria

1. Only those banks, which comply with the following minimum prudential requirements, would be

eligible to declare dividends without the Reserve Banks prior approval:

a) Capital to risk-weighted assets ratio (CRAR) of at least 9% for preceding two

completed years and the accounting year for which it proposes to declare

dividends

b) Net Non-performing Assets (NPAs) of less then 7%.

In case any bank does not meet the above CRAR norm, but is having a CRAR of at

least 9% for the accounting year for which it proposes to declare dividend. It would

be eligible to declare dividend provided, its net NPA ratio is less then 5%.

2. The bank should comply with the provisions of section 15 and 17 of the Banking Regulations Act, 1949.

75

3. The bank should comply with the Reserve Bank’s prevailing regulations/guidelines, including creating

adequate provisions for impairment of assets and staff retirement benefits, transfer of profits to

statutory reserves, etc.

4. The proposed dividend should be payable out of the current year’s profit.

5. The Reserve Bank of India should not have placed any explicit restrictions on the bank for declaration

of dividends.

Regarding the quantum of dividend, the RBI made the following stipulations.

Banks, which fulfill the eligibility criteria, may declare and pay dividends, provided-

a) The divined payout ratio does not exceed 40 per cent. (Divined pay out ratio should be calculated

as a percentage of “dividend payable in a year” (excluding dividend tax) to “net profit during the

year”.

b) In case the profit for relevant period includes any extraordinary profits/income, the payout ratio

should be computed after excluding such extraordinary items for reckoning compliance with the

prudential pay out ratio.

c) The financial statements pertaining to the financial year to which the dividend is declared, should

be free of any qualification by the statuary auditors, which have an adverse bearing on the profit

during that year. In case of any qualification to that effect, the net profit should be suitably

adjusted while computing the dividend pay out ratio.

The reserve bank will not entertain any application for a higher dividend payout ratio than the one for

which the banks qualify.

76

Door-Step Banking:

The reserve bank has advised all scheduled commercial banks to formulate a scheme for

providing services at the premises of a customer within the framework section 23 of the

banking regulation Act, 1949.

According, the banks have to formulate the scheme with the approval of their respective bank

boards and send the same for RBI approval. In the instruments, etc., from the premises of

central and state governments departments.

77

“ENTRY OF LIC INTO BANKING: A WISE DECISION”

LIC is a long-term player with long-term resources garnered at a low cost. It has chosen Corporation Bank and Oriental Bank of Commerce, for

investments in their equity shares. These two public sector banks have the distinction of turning out superlative performance. The business per

employee and intermediation costs for these two banks are the lowest in the industry. So are there Non Performing Assets. Corporation bank

incidentally, is the only public sector bank, where the recent voluntary retirement schemes has not been implemented, as it does not have any

excess staff to be sent out.

In the Mangalore based Corporation bank are perhaps the biggest gambles over undertaken by the two

giants. That, despite the state banks status as one of the best-managed bank in the country. Competition is

intense in both domence at last count there were 19 public sectors, 34 private sectors, and 45 foreign

banks operating in the country, and at the time of going to press, 6 companies have secured license from

the IRDA to start operations (four of these already had).

The State Bank of India’s decision may have something to do with the state of the banking business. Indian

banks have seen there interest speared- the difference between the rate at which they lend money and the

rate at which they borrow it squeezed over the last 5 years. From a healthy 4% in 1996, this has come

down to around 2.7% now.

The Life Insurance Corporations belated attempt to leverage its consideration financial and distribution

muscle could have stemmed from a desire to become more ten a insurance company. It is highly likely that

the immediate motivation was the entry of aggressive private sector player into its home-turf, insurance.

Bajpai believes the Corporation Bank deal is a win-win one. “ The proposed synergy between the two

efficient public sector organizations will be mutually rewarding and help LIC in marketing, servicing, and

cash flow management.”

Ads Ashwin Parekh, the managing partner at consulting major author Andersen,” The ongoing convergence

in (Indian) financial markets will result in the emergence of three or four large universal banks. Both LIC

and SBI WANT to be serious contenders for the post”.

78

It is logical for the two companies to want to be universal banks.” The marriage of banking and insurance”,

explains Ravi Trivedi, an Executive director with consulting firm PricewaterhouseCoopers,”will provide

banks with a source of long-term funds to manage their short-term liabilities.” That both companies are

serious about their universal-banking ambitions is evident. Says Bajapai: “We have put in a place a very

wide array of products and today we are truly financial supermarket”.

Today 65 per cent of SBI’s revenues come from banking, and almost all of LIC’s revenues come form insurance. Both are seeking to reduce this

proportion over the next five years. Only, SBI is seeking to become a universal bank through organic means, while LIC has started its campaign with

the acquisition of a significant stake in corporation bank.

The Same Ends:

The Life Insurance Corporation’s acquisition of a 27 percent stake in corporation bank for rs.470.40 crore

does make great business sense: Corporation Bank is among the better banks in the country; and a green-

filed banking entity will find it difficult to establish itself in these trying times. Bajpai has already articulated

his desire to up LIC’s stake in the banks once the government amends the banking companies Act, allowing

private holdings in nationalized banks to exceed 49 per cent.

Thanks to the acquisition of this stake, India’s largest insurance company now benefit from Corporation

Bank’s expertise in money management. LIC boasts an annual cash flow of around rs.85000 crore. The bank

can help it manage this money. Managing a sum of this magnitude will not only enable Corporation Bank

earn a large management fee, it will also help it acquire a significant clout in the money market.

By acquiring a 33% stake in corpbank securities, LIC acquires an almost in house fund manager for all the

Rs.25, 000 crore it needs to invest in government securities. And by gradually increasing its stake in the

profit making Oriental Bank of Commerce (2001 deposits, Rs. 24,680 crore; net profit, Rs.202.8 crore) to

11%, LIC has made its intent clear; to restructure itself into what Bajpa terms “a transnational competitive

financial conglomerate of significance to societies”.

79

Who’s Better?

Discounting the overlap that must exist between the two, both companies on their existing customer base

to help them make the transformation to universal bank. SBI, for instance, can sell a clutch of offering to its

account-holders; LIC, to its policyholders. Then there are operational efficiencies to be gained.

Despite SBI’s strong brand, sizeable network, and huge customer base, it does look second best (to LIC) in

the first lap of what must certainly be a long-distance race.

One reason is its decision to link the fortunes of its insurance subsidiaries, SBI-life, to the ability of its

banking-branches to sell insurance policies-the classic BANCASSURANCE model. The decision is a result of

its desire to augment its fee-based income through commission from the sale of policies.

The strategy has imposed several limitations on SBI. Its progress in the insurance business has been slow

simply because the parliament has yet to clear a bill allowing banks to sale insurance.

80

OBJECTIVE: -

Inventories represent investment of a firm’s funds. The objective of the inventory

management should be the maximization of the value of the firm. The firm should

therefore consider:

(a) costs,

(b) return, and

(c) Risk factors in establishing its inventory policy.

Two types of costs are involved in the inventory maintenance:

1-Ordering costs: - Requisition, placing of order, transportation, and staff services.

Ordering costs are fixed per order size increases.

2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance and

taxes. Carrying cost increases.

The firm should minimize the total cost (ordering cost + carrying cost). The

economic order quantity (EOQ) of inventory will occur at a point where the total cost

is minimum. The following formula can be used to determine EOQ:

EOQ=(2AO/C)^1/2

Where,

A= Annual requirement.

O= Per order cost.

C= Per unit carrying cost.

81

INVENTORY WHEN SHOULD THE FIRM PLACE AN ORDER TO

REPLENISH ?

The inventory level at which the firm places order to replenish inventory is called

reorder point. It depends on (a) the lead time and (b) the usage rate.

Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead

time0, the reorder point will be equal to:

Lead-time *Usage rate +Safety stock.

The firm should strike a trade-off between the marginal rate of return and marginal

cost of funds to determine the level of safety stock.

A firm, which carries a number of items in inventory, which differ in value, can

follow a selective control system. A selective control system, such as the A-B-C

analysis, classifies inventories in to three categories according to the value of item:

A-Category consists of highest value items,

B- Category consists of high value items,

C-Category consists of lowest value items.

More categories of inventories can also be created. Tight control may be applied for

high-value items and relatively loose control for low-value items.

82

FUNCTION OF INVENTORY CONTROL

Functions to be performed in the field of Inventory Control are:

1 Setting up norms for carrying Inventory.

2 Determining what items to be stocked.

3 Setting rules for Inventory replenishments.

4 Receiving, storing and issuing inventory items as needed.

5 Maintaining records of inventory quantities and values.

6 Identifying and deposing of slow moving, non-moving, obsolete or damage

inventories.

7 Furnishing summary information on inventory position for control purposes.

Locations of position responsible for performing each of these functions in

organization structure greatly vary from company to company.

In New Holland Fiat India determination of product material or direct work order

material (what?) to be carried in Inventory is more or less automatic result of product

design formulation and is given in material forecast for a work order. Indirect

materials consumed in manufacturing process such as electrodes, brazing alloys,

tooling etc. are usually given by process engineering or at times by design

departments.

Balance great bulk of indirect materials is made up of repair parts and general

supplies. Responsibility for specific (what?) items to be carried in inventory rests

with Works Engineering.

With respect to raw materials and purchased parts, responsibility for determining

(when?) and how much to buy is a sign to relevant product manufacturing i.e.

production planning and material planning groups. However a strict budgetary

control and allocation to specific work order control on high value items is exercised

by Inventory control department organized separately under Material Management.

83

Purchase department attached to manufacturing department determines (where?) to

buy.

Determination of indirect material (when?) and how much to buy and (where?), is

done by central group under Material Management by consolidating requirements of

all sections and while looking at consumption trends over a No. Years.

Again a strict budgetary control and control on high value items for their allocation is

exercised by Inventory control group.

Receiving and storing is done by Central Stores CSX under Material Management

Department.

Issuing Inventory is done by CSX on demand from manufacturing and is controlled

by Material Planning. Again some on

Line checks are proposed to be introduced at raising of Store Issue voucher stage

itself, for high value items so that induction is controlled strictly as per requirement

of production schedule based on lead time for manufacture to keep WIP inventory

under control.

Records of Inventory are maintained on a main frame computer centrally arranged

having shared access from all functions for their specific use.

84

The Internet in E-commerce: Inventory planning and order management

Most of the time the job of forecasting demand and replenishing inventory to suit the

demand is not accomplished in a manner that is useful. We'll tell you how to

collaborate over the Internet on order management, inventory management, and

demand forecasting, production scheduling and transportation. We'll describe how

through collaborative planning on the Internet, consumer behavior can be

communicated throughout the organization.

Scenarios: What happens when a customer contacts you and asks for a product that

he wants immediately and you discover that your warehouse doesn't stock it at that

moment? And if this happens after the item has been logged in as a confirmed order?

Are you able to respond in a timeframe that's suitable to your customer?

What happens if the customer contacts you through telesales, or through online sales

on the web? Is your staff able to respond accurately to the customer's query? In the

process are you really making money in these deals? What do you need to ensure that

you are not in a situation where you are in the dark about orders and inventories, and

maybe even customers?

We know that customer orders drive a supply chain. A primary requisite for any e-

commerce business is that it employs systems that manage orders and inventory

levels efficiently.

85

When customers demand service through multiple channels, order promising,

tracking and fulfillment become more complex and intensive. Multiple channels

could mean customers calling in through the web; phone, fax or email and usually

different people attend to these calls in an organization.

Disparate order processing can lead to serious gaps in demand and fulfillment. If

order commitments are not honored throughout the enterprise a consolidated order

status at any point of time can be difficult to view and this difficulty may in turn to

be communicated to the customer.

Consolidating orders into a single interface for submission, tracking, routing,

fulfillment, and order status queries, can help all employees access vital information

from a common interface thus ensuring visibility in the entire process. And if this

visibility is in turn communicated to the customer, it means that the customer has a

complete picture of the status of his order until the final delivery. Customer order

history implies viewing and managing pending orders by status, accessing order

numbers by invoice numbers, tracking number or customer.

Order management services:

Order management services are a critical component of customer service - enabling

internal communications within an organization and facilitating collaboration among

86

trading partners to ensure that all customer orders are fulfilled and delivered when

promised.

Profitable order management features can afford the following:

Consolidated order management that lowers costs in turn.

Advanced order commitment and tracking that can in turn help improve

customer service.

Allocation of inventory and products in a profitable manner.

Automation of workflows through order management processes· Order

visibility (order tracking)·

Optimized price lists and customer quotes to maximize margins ·

Consolidation of order data to support enterprise forecasting and

replenishment initiatives·

Significant increase in the visibility of demand and future requirements·

Elimination of repetitive tasks and physical paper handling ·

Addition of the value of availability to a product·

Reduced lead times, reduced administrative workloads and the use of multi

databases·

Optimization of catalog price lists for profitability. 87

Inventory management:

One of the largest costs to any business is that of inventory or stock at hand. Whether

a manufacturer, retailer or distributor, the amount of inventory held directly impacts

your bottom line in more number of ways than you can imagine. Having too much

cash tied up by not stocking up on items that customers need, can have a major

impact on your business.

A product that is in excessive demand is usually extremely difficult to manage.

Supplying the right amount of products implies that an accurate demand forecast is

essential. This impacts the entire supply chain. A similar situation exists at the

warehouse level and even the manufacturer end.

Continuous replenishment in a warehouse can become a mammoth task if consumer

response is not studied accurately. To facilitate efficient consumer response based on

consumer demands, warehouse data, sales forecasts, and inventory planning, it

becomes imperative that such companies consider inventory management seriously.

Making accurate demand and supply predictions is an ideal situation that anyone in

the supply chain management arena could dream off.

Inventory management can remove barriers between manufacturer and retailers and

establish a closer relationship between them. Ideally inventory management should

be easy as the main aim is to reduce inventories. If items wanted are not at hand or

88

even if merchandize wanted is reordered often, sales will be lost to competitors.

Precise control of inventory is an essential ingredient for a successful company.

The 3 main aims in inventory management are:

1. Improved customer service

2. Reduced inventory investment

3. Increased productivity

Benefits of inventory management:

Complete control of inventory.

Complete information about the value of the inventory·

Complete visibility on Quantities on hand, Quantities committed and

Quantities sold·

Response time to demand changes reduced·

Increased sales

Knowledge of the exact size of merchandizing inventory·

Frequent analysis of purchases, sales and inventory records.

Removal of unnecessary use of warehouse space used by unneeded part of

inventory.

89

Reduction in excess merchandize stock.

Taxes and insurance premiums paid on excess merchandize inventory avoided.

By providing timely accurate information pertaining to inventory location, movement

and valuation, receipt of goods, sale and return of goods and profits you can make

sure that your inventory is visible throughout a network.

With inventory management you can set your product catalog to hide products that

are not in stock, or change prices based on the amount of products available in the

warehouse. The quantity available can be displayed to the shopper and this can

prevent unnecessary confusion when the shopper adds items not available to a

shopping cart. The store buyer can be automatically notified about low inventory

levels.

IT is a key enabler in the transformation of purchasing into a strategic business

function. The challenge is to find a way to put these technologies to use and create

value and competitive advantage.

Contact us for innovative ideas and solutions in creating and building online stores

with advanced features like Order management and Inventory management. Check

out our e-store packages.

90

Inventory Management in e-business (An EOQ Approach with Compensation

Policy)

In the past several years, we have seen very rapid growth in e-commerce. Even

though online retailing was still less than 1% of retail economy in 1999, online

retailing is forecasted to be more than $204 billion in 2004 [5]. There are several

similarities and differences between online and traditional retailing. One of the

significant differences is that there are many online retailers who do not carry any

inventory. Obviously, the stockless policy can reduce holding cost, and online

retailers can have competitive advantages from the policy.

However, it is obvious that stockouts will hinder consumers' decision making for

buying a product. There are many marketing papers studying the relationship

between stockouts and consumer response. Fitzsimons argues that when consumers

face stockouts, consumers react substantially and negatively to the stockout-they

report lower satisfaction with the decision process and show a higher likelihood of

switching stores on subsequent shopping trips [3]. Therefore, there exists trade-off

between cost savings and lost sales in the stockless policy.

Currently, many traditional retailers keep positive stock on hand except some special

cases (e.g., car dealers). However, in e-business, there are many online retailers who

are doing business without carrying any stock. They are just accepting backorders.

The inventory policies between online and traditional retailers are almost opposite.

91

Then, basic and fundamental questions to ask are "can the stockless policy be an

optimal inventory policy?" and "if it can be an optimal inventory policy, what are the

sufficient conditions for the optimality?"

It is well known that, under the EOQ model with backorders, accepting only

backorders cannot be an optimal solution unless backorder cost is equal to 0 [1, 4].

There are many papers about lost sales cases and partial lost sales cases. However,

the stockless policy has not been researched fully yet. This paper's main purpose is to

find the stockless policy's sufficient conditions for the optimality and to generate

some insights from the sufficient conditions.

To analyze and answer the above basic questions, we introduce a new inventory

policy, Compensation policy. In this policy, the only difference from the other

inventory policy occurs when we do not have any stock on hand. That means, if we

do not have any stock on hand, we will offer a compensation, R, to keep or increase

demand rate.

Therefore, we compensate consumer's waiting time with compensation due to stock-

outs. From customer's point of view, stock-outs will give a negative effect.

Therefore, some customers may postpone the final purchase or stop by the other

stores when they notice that they cannot buy what they want immediately. However,

with the compensation policy, the customers may still want to buy the product

because of the compensation. Furthermore, it is possible that the compensation

policy may have higher demand rate compare to the demand rate with stock. From

92

retailer's point of view, as long as they can make profits, they want to increase

demand rate. Therefore, this inventory policy is beneficial for both customers and

retailers as long as they can get benefits from the policy.

To implementing this policy is not difficult. In traditional retailing, if a store will post

its compensation rate with waiting time, it may be attractive some customers who are

not interested in purchasing the product at that time. In e-business retailing, the

policy can be implemented more easy way. Due to the advanced web-technology, we

can change our products price very easily. Therefore, a store will announce the

compensation immediately when its inventory is out of stock.

Under this compensation policy, there is also trade-off. Because we will have an

additional compensation cost, our total cost will be also increased. However, due to

the policy, if the demand rate with stock-outs will be increased, our total profit will

be increased also. Furthermore, we may have different optimal inventory policy (e.g.,

stockless policy) under certain conditions.

In this paper, we consider two types of compensation. One is flat rate and the other is

time dependent compensation. Under the flat rate compensation policy, we will offer

a fixed compensation regardless of waiting time. Therefore, during the stock-outs

period, all customers who placed backorders get same fixed compensation. On the

other hand, under the time dependent compensation policy, customers will be

compensated according to waiting time.

To investigate and find sufficient conditions for each inventory policies, we

93

formulate Compensation models based on the EOQ model with backorders.

However, there are several differences. First, we generalize the assumption about

demand rate. Under the EOQ model with backorders, the demand rate is always

same. However, in our model, we can have different demand rates between with

stock and with stock-outs. Second, if the demand rates are not same, just minimizing

average inventory cost will not give us the solution that will maximize profit.

Therefore, there are two ways to solve this problem. One is maximizing profit

function, and the other is minimizing average inventory cost including the effect of

different demand rate. In this paper, we introduce new cost, opportunity cost. This

cost represents and takes into account changes of profit due to the difference of

demand rate. Therefore, in our model, minimizing the average inventory cost

guarantee that the solution from our model is also maximizing the profit function.

Our major findings from our inventory policy and models are as followings. First, the

EOQ model with backorders and its solution are special case of our model. This

result is obvious. When we will not offer any compensation and have same demand

rates between with stock and with stock-outs, our model is exactly same as the EOQ

model with backorders. Second, our model also generalizes the EOQ model with

backorders in case of partial lost sales. This is also our model's special case when we

will not offer any compensation and have partial lost sales. Third, we found that,

without any compensation, the stockless policy cannot be an optimal inventory

94

policy unless backorder cost is zero.

Therefore, with no compensation, we can have only positive stock on hand or

mixture inventory policy according to our cost structure and demand rates. Fourth,

the stockless policy can be an optimal solution only with positive compensation

under certain conditions. Fifth, we derive sufficient conditions for the three optimal

inventory policies, which are positive stock on hand, mixture inventory, and

stockless inventory policy. These sufficient conditions are simple and easy to

understand. Finally, we show the optimal solutions for each case. Therefore, given

cost structure and demand rates for a product, we can tell what is the optimal

inventory policy and what is the exact solution to minimize the average inventory

cost which is equivalent to maximizing profit function. Throughout the rest of this

paper, we will review the traditional EOQ model with backorders, formulate

Compensation models, analyze these Compensation models, find insights from our

research, and discuss further research issues. To our knowledge, except the

traditional EOQ with backorders, all models are new and also the optimal solutions

are new.

95

RESERACH METHODOLOGY

It is the arrangement of the conditions for collection and analysis of data in a

manner that aims to combine relevance to the New Holland Fiat India purpose with

economy in procedure.

The New Holland Fiat India is explanatory in the beginning as the secondary data is

collected mostly from the higher management and some from middle management.

This information is able to give knowledge about the company and its share in the

market.

SOURCES OF DATA

Both primary and secondary data were collected to meet the objective; the data is

collected for the last three years from the annual reports of the new holland fiat

india. Due to non-availability of the accounts of sepaInventoryn units. I measure the

performance on the base of all aggregate units.

Data is taken as per the requirements of the study of the inventory management.

Secondary data is used for it. Primary data is collected for the purpose of the

theoretical part.

96

CONCLUSION

1. By studying last two years performance of the company, we say that the

working capital of the company is increasing.

2. The operational Inventory performances of the company are continuously

rising because of the increase in the sales of the companies’ products.

3. The Debt Equity Inventory of the company is increasing as company is now

paying its debt due to which the company Liquidity Inventory is falling.

97

FINDINGS Formation of specific group in each area to identify the wastage elements and

seek participation of all.

Identification of wastage.

Formulation of action plan to eliminate/minimize wastage.

Review of status.

Identification of corrective actions and their implementation.

Highlighting the gains.

98

LIMITATION

The study is limited to two month only.

Price level changes are not considered.

Time is short for deep research.

Separate records of the all units are not available.

No comparison made with other firm’s Inventory while during the study

period and making conclusion time.

The readjusted and regroup figure slightly affects the Inventory figures.

Study is limited with the one unit of New Holland Fiat India Industries

limited.

The data is used in the project have been taken from annual report only.

Hence, grouping and sub grouping and annuliasation of data may slightly

affect the results.

99

SUGGESTIONSD

Although new holland fiat india, has satisfied the Inventory. The following are the

suggestion being made out by me as observed during study of the performance

through Inventory Management:

Company should increase its sales of all the production units with increase

in the sales of the company that can be able to increase its financial

position.

Company should decrease the operating expenses to increase its operating

profit.

Maximize the production capacity.

Maintain the amount of current sales level and try to increase it.

Maximize the utilization of fixed assets and working capital.

All other management, personal and administrative suggestion to be

incorporated.

To follow the strict credit collection policy.

Reduce the current assets and quick assets Inventory to maintain the

standard Inventory.

Cash Inventory performance is poor. So make policies to improve it.

Return on investment is in satisfactory position and they try to maintain it

in future.

Try to start those companies, which are closed due to non-availability of

funds.

Try to best utilization of the available resources.

Try to maintain the standard Inventory in the financial Inventory.

100

BIBLIOGRAPHY

Books

Manuals and Files of New Holland Fiat India.

Deep & Deep Publication Pvt. Ltd. Year -2005.

Principles and Techniques of Personnel Management –Udai Pareek Himalya

Publishing House Delhi

Year -1997

WEB. Sites

www.google.com /

 

101

APPENDIX

 

 

If Coca-Cola were to open its own chain of coffee shops such as Starbucks, do you think they should connect it to their company name? If no please answer number 4, if yes please skip question 4 and go to 5.

Yes      No

 

102

QUESTIONS

How often do you purchase Coca-Cola products? *

  Regularly, very often   Frequently   Occasionally   Rarely   Never

Would the addition of the name of Coca-Cola influence you in any manner?

I would have health concerns

It would be too expensive

I don't want to associate my coffee shop with such a large company

I would be confident buying their products as it is a popular brand

Other

 

What is your opinion of the entrance of Coca-Cola into the coffee industry? *

It is an excellent idea

Coca-Cola should stick so sodas and juices

Definitely not

 

How frequently do you purchase a product from a coffee shop? *

  Regularly, very often   Frequently   Occasionally   Rarely   Never

 

103

How much do you spend on each visit? *

$2-4

$4-6

$6-8

$8-10

$10 or above

 

How often do you purchase a product from Stabucks? *

  Regularly, very often   Frequently   Occasionally   Rarely   Never

 

Are you aware that Starbucks is affiliated to Pepsi CO? If yes go to the next question, if no skip it.

Yes      No

 

If so, has this influenced your decisions on whether to purchase a Starbucks product, why?

Yes, it has influenced me to buy their products

Yes, it has influenced me not to buy their products

It doesn't make a difference to me

No, it has not affected my decisions at all

104

 

How do you feel Starbucks products are priced? *

  Extremely overpriced

  Slightly overpriced

  Appropriately priced

  Low priced

 

Do you feel you are getting what you paid for in regard to quality as well as quantity?Please check the two options that apply- *

Yes in term of quality

No in terms of quality

Yes in terms of quantity

No in terms of quantity

 

How do you rate customer service at Starbucks? *

  Excellent   Good   Satisfactory   Below satisfactory   Bad

 

Do you feel Starbucks has a wide product range? How would you rate their product range? *

105

  Excellent   Good   Satisfactory   Below satisfactory   Bad

 

 

Other than coffee, what products would you like to have made available at coffee shops? (consumers write down what products they'd like to have made available) *

 

 

What method of advertising do you think would be the most effective for Coca-Cola's coffee shops?*

Billboards

Television ads

Magazine/Newspaper ads

Flyers

Radio

Through other Coca-Cola products ( on bottles, cans, etc...)

Through the promotion of other Coca-Cola products

 

With regard to the ambience, what qualities appeal to you about coffee shops?*

106

Small and cozy

Upper scale and fancy

Casual place where you can spend time with friends

Very social

Quiet atmosphere where you can work, read, etc...

European style (outdoor seating, etc...)

Other

 

Would you like for there to be entertainment at the coffee shop?If yes answer the following question, if no please skip to question 20

Yes      No

 

What sort of entertainment would you like to have? *

Live music (jazz nights, live bands, etc...)

Jukeboxes

Television

Reading nights

In store library (selection of books made available to read on location)

Comedy nights (stand up comedians, etc...)

107

Other

 

Do you think Coca-Cola should make its other beverages available at the coffee shop?

Yes      No

 

For what reasons do you visit coffee shops? *

Personal/alone time

To be with close friends

Before or after work/school

business meetings

with the family

to socialize

Other

 

108

In what locations do you think a coffee shop would be convenient? *

In Common popular areas (malls, outlets etc...)

Near work or school

Near home

Near the park

In less crowded locations

Other

 

How important are each of the following when choosing a coffee shop? Please rank the options from 1 being the least important to 9 being the most. *

Taste   

Customer service   

Health   

Convenience   

Speed   

Location   

Atmosphere   

Variety   

Price   Rank values must be between 1 and 9

 

109

How likely are you to purchase products from Coca-Cola's coffee shops? *

  Extremely likely   Pretty likely   Pretty unlikely   Definitely not

 

What products are you most likely to purchase at coffee shops? *

Coffee/Lattes/Cappuccinos

Tea

Hot chocolate

Confectionary items (cake, cookies, etc...)

Other

 

Do you believe that Coca-Cola coffee shops should market their own merchandise, such as Starbuck's cups and coffee?

Yes      No

 

Are you: *

  Male   Female

 110

How old are you? *

16 and under

17-20

20-30

30-40

40 and over

 

111