Inventory management and its effects on working capital”


Published on

Inventory management and its effects on working capital”

Published in: Economy & Finance, Business
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Inventory management and its effects on working capital”

  1. 1. SAAB MARFIN MBA “Inventory management and its effects on working capital”NVENTORY MANAGEMENT for MBA FINANCE Page 1
  2. 2. SAAB MARFIN MBA EXECUTIVE SUMMARY G C T M Industry in India has traveled are less, now India is one of themain cotton manufacturing & exporting cotten in the in india. The cotten inIndia is with major players and gadag co operative mill Ltd is one of largestmanufacturer of cotten in India. Inventory is a central process in Manufacturing Unit. This Inventory isconcerns to all departments i.e., from Planning Department to SellingDepartment in which it passes though Production Department, HR Department,Logistic Department, Finance Department, Costing Department, andCommercial Department etc. So managing of Inventory is having wide Scope inmanufacturing Company. NVENTORY MANAGEMENT for MBA FINANCE Page 2
  3. 3. SAAB MARFIN MBA “INVENTORY MANAGEMENT”Statement of the problem “Inventory management and its effects on working capital”Management problem Management is feeling that their huge amount of working capital is heldup, so the management wants to know whether they can reduce it throughinventory management.Research problem As above stated management problem the study was carried to know howinventory management helps in proper maintenance of working capital, so thetitle of this study is “ inventory management and its effect on working capital”Objectives of the study 1. To study the inventory management based on the ratios 2. To find out the impact of inventory on working capital. 3. To study the inventory management and its effective control through various techniques. NVENTORY MANAGEMENT for MBA FINANCE Page 3
  4. 4. SAAB MARFIN MBA 4. To suggest the measures for improving the inventory level.Scope of the study Inventory management being a very important concept in all thecompany’s having a void coverage often calls for the managerial attention. Inthe modern times inventory management has become the integral part of theall companies. So all the firm gives special importance for inventorymanagement. The major objective of the study is to examine the effectivenessof inventory management system adopted by Akash industry; the study mainlyfocuses on the techniques used by the company to control the inventory. Thestudy also covers other areas like the financial ratios for the period of 2004 to2007.SUB OBJECTIVES:1 To study the different accepts of Inventory Management.METHODOLOGYPrimary Data:1. Interaction with personnel of the company2. Direct Observation in InventorySecondary Data:1. Balance Sheet2. Turnover Statements3. Monthly Inventory Statements4. Company Records5. InternetTools Used: NVENTORY MANAGEMENT for MBA FINANCE Page 4
  5. 5. SAAB MARFIN MBA MS-Excel has been used for calculations. INDUSTRY PROFILEFABRICATION When used as an industrial term, applies to the building of machines,structures and other equipment, by cutting, shaping and assemblingcomponents made from raw materials. Small businesses that specialize in metalare called fab shops. Steel fabrication shops and machine shops have overlapping capabilities,but fabrication shops generally concentrate on the metal preparation, weldingand assembly aspect while the machine shop is more concerned with themachining of parts. NVENTORY MANAGEMENT for MBA FINANCE Page 5
  6. 6. SAAB MARFIN MBAMETAL FABRICATION Metal fabrication is a value added process that involves the constructionof machines and structures from various raw materials. A fab shop will bid on ajob, usually based on the engineering drawings, and if awarded the contract willbuild the product. Fabrication shops are employed by contractors, OEMs (OriginalEquipment Manufacturers) and VARs (Value-added Reseller) Typical projectsinclude; loose parts, structural frames for buildings and heavy equipment, andhand railings and stairs for buildings. 1. ENGINEERING The fabricator may employ or contract out steel detailers to prepare shopdrawings, if not provided by the customer, which the fabricating shop will usefor manufacturing. Manufacturing engineers will program CNC machines asneeded. 2. RAW MATERIALSStandard raw materials used by metal fabricators are; Plate Metal Formed And Expanded Metal o Tube stock, CDSM o Square stock NVENTORY MANAGEMENT for MBA FINANCE Page 6
  7. 7. SAAB MARFIN MBA o Sectional metals (I beams, W beams, C-channel...) Welding wire Hardware Castings Fittings 3. CUTTING AND BURNINGThe raw material has to be cut to size. This is done with a variety of tools.The most common way to cut material is by Shearing (metalworking); Special band saws designed for cutting metal have hardened blades and afeed mechanism for even cutting. Abrasive cut-off saws, also known as chopsaws, are similar to miter saws but with a steel cutting abrasive disk. Cuttingtorches can cut very large sections of steel with little effort. Burn tables are CNC cutting torches, usually natural gas powered. Plasmaand laser cutting tables, and Water jet cutters, are also common. Plate steel isloaded on a table and the parts are cut out as programmed. The support tableis made of a grid of bars that can be replaced. Some very expensive burn tablesalso include CNC punch capability, with a carousel of different punches andtaps. Fabrication of structural steel by plasma and laser cutting introducesrobots to move the cutting head in three dimensions around the material to becut. 4. FORMING Hydraulic brake presses with v-dies are the most common method offorming metal. The cut plate is placed in the press and a v-shaped die is NVENTORY MANAGEMENT for MBA FINANCE Page 7
  8. 8. SAAB MARFIN MBApressed a predetermined distance to bend the plate to the desired angle. Wingbrakes and hand powered brakes are sometimes used. Tube bending machines have specially shaped dies and mandrels to bendtubular sections without kinking them. Rolling machines are used to form plate steel into a round section. English Wheel or Wheeling Machines are used to form complex doublecurvature shapes using sheet metal. 5. Machining Fab shops will generally have a limited machining capability including;metal lathes, mills, magnetic based drills along with other portable metalworking tools. 6. Welding Welding is the main focus of steel fabrication. The formed and machinedparts will be assembled and tack welded into place then re-checked foraccuracy. A fixture may be used to locate parts for welding if multipleweldments have been ordered. The welder then completes welding per the engineering drawings, ifwelding is detailed, or per his own judgment if no welding details are provided. Special precautions may be needed to prevent warping of the weldmentdue to heat. These may include re-designing the weldment to use less weld,welding in a staggered fashion, using a stout fixture, covering the weldment insand during cooling, and straightening operations after welding. NVENTORY MANAGEMENT for MBA FINANCE Page 8
  9. 9. SAAB MARFIN MBA Straightening of warped steel weldments is done with an Oxy-acetylenetorch and is somewhat of an art. Heat is selectively applied to the steel in a slow,linear sweep. The steel will have a net contraction, upon cooling, in thedirection of the sweep. A highly skilled welder can remove significant warpageusing this technique. Steel weldments are occasionally annealed in a low temperature oven torelieve residual stresses. 7. FINAL ASSEMBLY After the weldment has cooled it is generally sand blasted, primed andpainted. Any additional manufacturing specified by the customer is thencompleted. The finished product is then inspected and shipped. COMPANY PROFILE NVENTORY MANAGEMENT for MBA FINANCE Page 9
  10. 10. SAAB MARFIN MBAName of the company : APEX AUTO LTDAddress of the Head office : M-1 phase- VII, TATA kandra main road, industrial area ADITYAPUR, JAMSHEDPUR-832109 INDIA. Fax: 0657-2200010 Tel: 91-657-2408715, 2409041 & 2381346 E-mail: info@apexautoltd.comAddress of the registered : Nataraj mansion, Bistapur- 831001,Office JAMSHEDPUR, INDIA Fax: 91-657-2424526 WEBSITE: www.apexautoltd.comAddress of the UNIT II : APEX AUTO LTD (UNIT II) Block no: 2Dharwad Telcon premises, K.I.A.D.B, P.B. Road Dharwad- 580007, India Fax: 0836-3293214 Tel: 0836-3293214 E-mail: pip@apexautolimited.comNature of the organization : Basically this company is heavy fabrication Company. They are manufacturing back hoe Loader components and excavator ComponentsType of organization : Apex auto limited company is privatelimited NVENTORY MANAGEMENT for MBA FINANCE Page 10
  11. 11. SAAB MARFIN MBA Company ABOUT ORGANIZATIONApex Auto Limited ("If you can imagine it, We can fabricate it.") Apex Auto Limited is a publicly quoted company with a number ofshareholders, both Indian and Foreign. Promoted by Mr. Atul Taunk in 1995with a modest capital outlay of Rs. 342 lakhs, Apex today has a capital outlay ofRs. 1200 lakhs. A growth of over 350% per annum. Achieved by producingthousands of dynamically stressed machined components for the constructionequipment industry The raison deter of Apex is that the emerging scenario in post liberalizedIndia indicated that the nation was poised to go in for massive infrastructurebuilding: roads, super highways, ports, power projects, and so on. This wouldput immense pressure on manufacturers of earth-moving equipment. Apexeases the load on them by supporting the industry with precision engineeredsub-assemblies and major assemblies that can go directly into their equipment,such as revolving frames, main frames, booms, arms, dozers, buckets, and soon. As a case in point, were proud to have been entrusted with the singleshare of business for all major fabrications that go into the making of TATAHitachis top selling excavators, the EX-60. Over the last 5 years, we havefabricated more than 10,000 components of this particular model alone.VISIONTo be recognized as a premier QUALITY manufacturer and supplier fabricatedcomponents, embodying thus the spirit of commitment and humanity. NVENTORY MANAGEMENT for MBA FINANCE Page 11
  12. 12. SAAB MARFIN MBAM I SSI ON As per customer schedule requirement fulfill it, Deliver on time, every time. An eye on product quality and integrity Highest productivity, thereby offering a cost advantage to all our clients.Why Apex?Aristotle - Greek inventor of the Science of Logic - recommends studying thetheory of The 4 Becauses before making your choice Why Apex for yourMachined fabrication ?The 1st because deals with what is it made of ? Apex uses only prime quality steel sheets and plates procured fromleading players in the industry - Tata Steel and SAIL.The 2nd because deals with how is it made ? Apex has state of art Material Processing facilities including Indias largestlaser cutting machine. And excellent Production Engineering systems set up bya highly experienced and technically qualified team of engineers.The 3rd because deals with what is made ? Based on our customers drawings and design, Apex manufacturesdynamically stressed machined fabrications conforming to all the specificationslaid down by the customer.The 4th because deals with why is it made thus ? NVENTORY MANAGEMENT for MBA FINANCE Page 12
  13. 13. SAAB MARFIN MBA Apex follows the first three precepts so that the end customer gets aworld-class product which will withstand the ultimate test of time. KEY AWARDS WON For safety in manufacturing process awards (less accident in manufacturing process) for continuous 3 years form Telco construction equipment limited For MINIMUM REJECTION award form Telco construction equipment limited SWOT Analysis of the Company APEX AUTO LID KEY STRENGTHS 1. STRONG PRODUCT DEVELOPMENT As per the specification from Telcon the new product is been developed 1. By the highly qualified internal engineering department 2. STRONG MERCHANDISING TEAM NVENTORY MANAGEMENT for MBA FINANCE Page 13
  14. 14. SAAB MARFIN MBA Technically qualified and high skilled Merchandising department isanother asset of the company, who plays a major role in executing the ordersutmost efficiently to the satisfaction of Buyers. 3. PROFESSIONALLY MANAGED:a) Company has two units in Dharwad, one is Apex auto Ltd Unit I and the other is Apex auto Ltd Unit IIb) Unit I is headed by Mr. Arvind Gaur, Unit II is headed by Mr. Pravat Kumar Rath 4. FACTORIES ENGINEERED TO PRODUCT SPECIFIC: All their manufacturing units are engineered to product specific andmanaged by effective and efficient internal engineering department. 5. QUALITY CONTROL SYSTEM: There is an independent quality audit team in process control system in allthe factories, which has given quality production consistently. 6. SOURCING OF RAW MATERIALS UNDER VIGILANCE OF QUALITY AUDIT SYSTEM: They source all their raw materials 100% from within India. However, theyhave a rigid control on their quality control system where by they ensure that allthe raw materials are produced as per their quality standard level before it getsdispatched to their factories. 7. IN HOUSE LAB: They have a lab situated in the major procurement centers, such as inDharwad and Jamshedpur to support their quality control team to carryout the NVENTORY MANAGEMENT for MBA FINANCE Page 14
  15. 15. SAAB MARFIN MBAvarious quality tests at all level onwards to ensure that the product is producedaccording to their quality in-house. 8. PRE-SHIPMENT INSPECTION TO MAINTAIN ZERO-CLAIM FROM BUYERS: A thorough Inspection by In-house Quality Control team and pre-shipmentInspection by buyer representative for all their products helps company tomaintain zero-quality claims position with all their buyers. 9. CONFIDENCE OF THEIR BUYERS: All the buyers as of today have been working with them since decades andthey started with them on continues basis with enhanced volume. This hasgiven them huge confidence as the confidence level of their buyers is very highin their products, quality, timely deliveries and commitment towards work. They have been awarded for 3 consecutive years for minimum rejection andfor safety in process of manufacturing by Telco construction equipment limited APEX AUTO LTD WEAKNESSNo such entity has been identified so far. NVENTORY MANAGEMENT for MBA FINANCE Page 15
  20. 20. SAAB MARFIN MBA Managing Director General Manager Production Planning Finance Manager & Control Manager CEO Human Production Resources Assistant GeneralAssistant General Manager Administration Assistant Supply Productio Quality Machine Chain n Assuranc Departme Mgmt departme e Head nt Head Head nt Store Productio Assistant Machine Superviso n Q. A Operators r Superviso Subordina Workers Helpers te MembersNVENTORY MANAGEMENT for MBA FINANCE Page 20
  21. 21. SAAB MARFIN MBA1. Personnel Department This department is almost like a human brain, since it is the humanbeings that operate it. This department is concerned with implementation ofthe plans, with the welfare of the plant, with the industrial relations and aboveall safety and security of the plant and the work force is its prime concerns.This department looks after the subsidiaries like recruitment selection trainingand induction, canteen, community development disciplinary actions etc.,welfare, security, guesthouse, medical facility etc., (As per Indian Factories Act1948.) Team Apex Professionally managed with a rich blend of experience andenthusiastic youth, Engineers, Diploma Holders, draft men, ITI welders andfitters, Gas cutters, workers and Fabrication Experts.Let’s go through the process of the Recruitment in Apex Auto Ltd Unit II. Recruitment is process of searching the prospecting candidate,stimulating and encouraging them to apply for the job. The above meaning saysthat every organization want skilled workers so Apex Auto Ltd Unit II alsorecruit candidates as follows , they firstly check the organization culture whichtype of employees needed in organization and they also check employmentcondition in unit. They are searching the candidates in two ways one is Advertisement andthe other is manual searching. In advertisement they give firstly the adz’s likeDraft Adv, Client review adv and Place adv, and then they receive the calls thenaccess their CV’s. In manual searching process they search the employee inplan search, identity search, and contact search, then they check the candidatesinterest after that they arrange meeting for selection process NVENTORY MANAGEMENT for MBA FINANCE Page 21
  22. 22. SAAB MARFIN MBASelection process Selection is a process of checking the candidate’sknowledge, behavior, Skills, experience, and qualifications etc to select andplace the candidate their correct position.2. Stores Department The raw materials are stored separately under material cell in productiondepartment; as per the demand this department does the work of receiving andissuing of materials.3. Purchase Department Against the approved purchase requisition the department purchases ofraw material semi finished goods and Accessories and other needs of thevarious departments. In order to make the work efficient it has the system ofsub contractors. So the purchase department does the creation of subcontractors and vendors. This department is guided by the main motto theplant and other departments working. Let’s have a look on the flow chart of thepurchase of raw materials in Apex Unit II Material indenting (As per customer schedule) Quotations request to one or more vendors according to requirement Quotations Best Negotiation Purchase Order NVENTORY MANAGEMENT for MBA FINANCE creation Page 22 Purchase Order send to vendor (supplier)
  23. 23. SAAB MARFIN MBA4. Dispatch Department The dispatch of materials and finished goods is done in a very efficientway.5.Production Department This department entrusted with the task of the production of DozerBlade, Loader Bucket, Narrow Bucket, Back Hoe Main Frame, Boom, Arm,Counter Weight, Heavy Duty Bucket, Revolving Frame and Track Frame. Fromour very inception at Jamshedpur in 1996 and at Dharwad in 1999, ourinfrastructural facilities have been meticulously planned out with an eyetowards satisfying the exacting standards of world class players in the EarthMoving Industry. Let’s have a look on the process of manufacturing process in Apex Unit II,basically this company is heavy fabrication company, they are manufacturingBACK HOE LOADER COMPONENTD & EXCAVATOR COMPONENTS. Following arethe components. JHON DEER (JD) Boom, Arm, Loader Arm and EXCAVATORS 70,110, 120, Boom and EXCAVATORS 70, 110,120 Arm. The below showing is themanufacturing process of Excavators-70 Boom. NVENTORY MANAGEMENT for MBA FINANCE Page 23
  24. 24. SAAB MARFIN MBA Flow chart of Excavator – 70 BOOM END BRACKET ASSEMBLY TC 00558/01(RH), TC 00558/02(LH) BEVELING OF PLATES TA 00233/01, TA22033/07, TA 00233/08 IN FIXTURE SUB ASSEMBLY 1ST STAGE TA 01164/00, TA 00233/27, TA 00233/01, TA00233/08, TA00233/05, TA00233/06 TA00233/07 OUT OF FIXTURE ST 1 STAGE WELDINGNVENTORY MANAGEMENT for MBA FINANCE Page 24 2ND STAGE ASSEMBLY TE 20789, TE 20790 TA 00233/03
  25. 25. SAAB MARFIN MBA CONTINUE OUT OF FIXTURE 2ND STAGE WELDING IN FIXTURE TA 00233/09, TA 00233/10 TA 00233/04 LUG FITTING TA 00233/14, TA 00233/15, TA 00233/16, TA 00233/17, INSPECTION Total length 3720+/- Rejection/ 4mm Top lug distance Rectification WRT Boom End Bracket, Bottom lug distanceNVENTORY MANAGEMENT for MBA FINANCE ASSEMBLY OUT OF Page 25 FIXTURE TA 00233/02
  27. 27. SAAB MARFIN MBA Manufacturing process of Ex-70 Boom Manufacturing process of Ex- 70 Boom is having several stepsalready you know in the flow chart now below showing manufacturing processin detail1. RAW MATERIALS In every manufacturing process raw materials must required therefor APEX AUTO LTD (UNIT II) purchase raw materials from its main branch atJAMSHEDPUR and form Apex Auto Ltd (Unit I). Some materials directly comes toUnit II but some materials firstly comes to Unit I and after some process it issend to Unit II. Then the stores department sends materials to productiondepartment for production2. BOOM AND BRACKET ASSEMBLY In this process Boom and Bracket assembled or produced. Herefirstly they join 20mm Bkt Plate (RH) (TC 00558/01) and TA00233/22 accordingto the diagram. Then they join 20mm Bkt Plate (LH) (TC 00558/02) and TA00233/11. After that back up bars are join at the bottom of both 20mm Bktplates. Then these two jointed by the plate Back up plate (TA 00233/19), then NVENTORY MANAGEMENT for MBA FINANCE Page 27
  28. 28. SAAB MARFIN MBAthey join one square plate for maintaining required dimensions after welding ofall this parts this complete the manufacturing of Boom And Bracket Assembly.3. BEVELING OF PLATES Some plates beveled by Unit I and those plates are Top rollingplate(TA 00233/01), Side bend plate LH(TA 00233/07) and side bend plateRH(TA 00233/08)4. IN FIXTURE SUB ASSEMBLY 1ST STAGE In this process one sub assembly will be done in this stage BOSS(TD01164/00) is joined to Top rolling plate (TA 00233/01) at one side then atthe top of the BOSS they join Side bend plate LH (TA 00233/07). After thatinside of the BOSS they join BOSS Back up Plate (TA 00233/27). Then in themiddle of Top rolling plate and Side bend plate they join Gassetplate(TA00233/05) and near to that Bend Gasset plate is joined with requireddimension, after that Side bend plate RH(TA 00233/08) is joined according todiagram so this complete Sub assembly first stage.5. OUT OF FIXTURE FIRST STAGE WELDING After completion of Sub assembly first stage each part is manuallyweld in this process.6. SECOND STAGE ASSEMBLY In this process Back up bar (TE20789) 03 Back up bar(TE20790) areattached in the inside part of Bottom rolling plate (TA00233/03) at the rightside with required dimension according to diagram7. OUT OF FIXTURE In this process second stage welding process is done manually. NVENTORY MANAGEMENT for MBA FINANCE Page 28
  29. 29. SAAB MARFIN MBA8. IN FIXTURE In this process firstly prepared Boom and Bracket is joined by usingplates such as Cover plate 6mm (TA00233/09) and Cover plate 8mm(TA00233/10), after that there is some place which is empty so that place isbeen filled by plates Taper side Plate(TA00233/04) 2 plates according todiagram. So this process finishes boom and bracket assembly.9. LUG FITTING In this process Lugs are fitted to the prepared component which areTop lug and bottom lugs and Top washers lugs and Bottom washer Lugs. Firstlybottom lugs are joined to each other and then those lugs are attached to thebottom of the prepared component. After joining the bottom lugs the top lug isjoined to the top of prepared component with required dimension or space soas to complete this process.10. INSPECTION This is an important stage in manufacturing process. In this stagethey check total length of the component. Total length should be 3720mm ifthere less difference of 4mm then there is no problem it must not exceed 4mm,then they also check centre point of the component and top lug distance to theboom and bracket, and bottom lug distance of the components if there is anyproblem found then they go for rectification of the component.11. ASSEMBLY OUT OF FIXTURE NVENTORY MANAGEMENT for MBA FINANCE Page 29
  30. 30. SAAB MARFIN MBA In this process they join one Top cover plate (TA00233/02) to theboom or prepared component according to the standard diagram and they alsojoin ‘M’ plate (TA00233/28) attach to the top lugs so this completes theprocess of assembly.12. ROBOT WELDING Robot is a programmable multiplication, manipulate design tomaterial part, tools or specialized devices are to carry out specific task. In Robot welding processed components are weld by Robot machine.Firstly they set the programs to the robot for welding the components. Everycomponent has is its own welding program according to the standard drawingof the components, after installation of the Ex – 70 program the weldingprocess of EX- 70 boom starts, Mig welding wire is been used by the robot toweld the component.13. LEFT OVER WELDING After completion of the Robot welding there are some spaces leftwhich are weld manually by welders. In this process they also join BOSSReenforcement plate (TA00233/26) at the top and bottom side of the BOSSaccording to the diagram.14. SETTING In this process they maintain required dimension in various parts ofthe components through the gas heating which includes Organ and Co15. INSPECTION In this process they measure the components by using measuringscale, try square, Vernier and gauges etc. NVENTORY MANAGEMENT for MBA FINANCE Page 30
  31. 31. SAAB MARFIN MBA16. MACHINING Machining process means removing the rough face as per thestandard drawing. In machining process they have two type of jobs one ismilling and the other is boring, in this process they are using two type ofmachines one SHW that means hidden control machine and the other is Fanuccontrol machine. To reduce heat in the process they are using coolant oilbecause it helps to reduce the heat for insert ware and tear and it helps tosmooth milling and boring of the component in machining they are havingthere stages 1. Rough stage 2. Semi finish 3. Finish StageIn Ex- 70 boom components are having mainly four bores boss bore must havethe size of 75mm and lug bore must have the size of 55mm and bracket musthave 60mm.17. INSPECTION In this process they use the following instruments to check weatherthe machining process is properly done or not 1. Bore dial gauge 2. Micrometer 3. Vernier 4. Measuring scale etc18. DRESSING Dressing is the very important stage in manufacturing process in thisprocess they clean the components by using grinding machine and sandermachine to remove spatters chips etc, here they also fit some items to preparecomponents to according to standard diagram. NVENTORY MANAGEMENT for MBA FINANCE Page 31
  32. 32. SAAB MARFIN MBA19. INSPECTION In this process they are checking welding defects in the componentsby using Ultrasonic Technique (UT) machine, the following are the defects wecan find by using UT machine. 1. Blow Holder area 2. Proper penetration 3. Porsity etc20. DISPATCH After completion of all this processes the quality assurancedepartment checks the quality of the component and after checking they finallydispatch the product so this complete the manufacturing process of EX-70boom model. Apex Auto Limited is in the service of gaints in the field of Excavatormanufacturing Co. TELCON for 6 Years by maintaining a high QUALITY & SKILL.And for its efforts, it has been certified by TELCON, and other quality maintainginstitutions. NVENTORY MANAGEMENT for MBA FINANCE Page 32
  33. 33. SAAB MARFIN MBA INVENTORY MANAGEMENT Management of inventory assumes importance due to the fact thatinvestment in inventory constitutes one of the major investments in currentassets. The term inventory refers to the stockpile of the products a firm isoffering for sale and the components that make up the product. The assetswhich firms store as inventory in anticipation of need are:(i) Raw Materials: These represent inputs purchased and store to be converted into finishedproducts in future by making certain manufacturing process on the same.(ii) Work in Process: These represent semi-manufactured products which need furtherprocessing before they can be treated as finished products.(iii) Finished Goods: These represent the finished products ready for sale in the market.(iv) Stores and Supplies: These represent that part of the inventory, which does not become a partof final product but are required for production process. They may be in theform of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc. NVENTORY MANAGEMENT for MBA FINANCE Page 33
  34. 34. SAAB MARFIN MBANormally, they form a very minor part of total inventory and do not involvesignificant investment. Let us have a look on Different Inventory Management Views. Meansemphasis role of Inventory Management in different Sectors. INVENTORY MANAGEMENT 3 V I E W S Physical Logistic Inventory InventoryManagement Management Financial Inventory Management NVENTORY MANAGEMENT for MBA FINANCE Page 34
  35. 35. SAAB MARFIN MBA Inventory Management is consisting of 3 hands. The first hand as shownin the diagram is that Physical Inventory Management, Second one is FinancialInventory Management and the last one (third one) is Logistic InventoryManagement. The reason behind of dividing these views is: to gather the informationvery easily and for easy to understanding of each view thoroughly. Let us seethe Meanings of each view one by one. Physical Inventory ManagementMeaning: “Keeping of goods is also a type of management. Whenever requirementscomes from the production department, providing of those required materialsin a proper manner & providing those at the specified period, is the main mottoof Physical Inventory Management.”Benefits for Holding Inventory: Benefits in Purchasing Benefits in Production Benefits in Work-in-Process Benefits in SalesObjects of Inventory Management: NVENTORY MANAGEMENT for MBA FINANCE Page 35
  36. 36. SAAB MARFIN MBA Usually, the company is faced with the following conflicting objectives inthe area of inventory management: 1. To carry maximum inventory in order to facilitate efficient and smooth production and sales operations. 2. To minimize investment in inventory for maximize the profitability. Both over-investment and under investment in inventories is undesirable asboth involve the consequences. The over-investment involves theconsequences like:i) Unnecessary blocking of funds in inventory and hence loss of profit.ii) Excessive storage and Insurance Cost. i. Risk of liquidity. The inventories once purchased and stored are normally difficult to dispose off at the same value.The under-investment involves the consequences like: b. If sufficient stock of raw material and work in process is not available, it may result into frequent interruptions in production. c. If sufficient stock of finished goods is not available it may not be possible for the company to serve the customers properly and they may shift to the competitors. Thus, it can be said that the objective of inventory management is tominimize the investment in inventory without affecting production or salesoperations. Inventory, as a current asset, differs from the other current assetsbecause only financial managers are not involved. Rather, all the functionalareas, finance, Marketing, Product & Purchasing are involved. NVENTORY MANAGEMENT for MBA FINANCE Page 36
  37. 37. SAAB MARFIN MBA The job of the financial manager is to reconcile the conflicting viewpointsof the various functional areas regarding the appropriate inventory levels inorder to fulfill the overall objective of maximizing of owner’s wealth.Two-Bin System: Under this system, the inventory items are grouped into two categories.In one group or bin, sufficient quantity is kept to meet the current requirementsover a designated period of item. In another group or bin, a safety stock ismaintained to meet the requirements of inventory at times when the stock inthe first bin is exhausted and re-ordering occurs. Financial Inventory ManagementMeaning: “Recording, maintaining and evaluating of stocks in a value terms isknown as Financial Inventory Management.” In other words valuation of stocks,and controlling of ordering and holding costs and also maintaining of sufficientvalued stocks in Inventory is known as Financial Inventory Management.”Financial Inventory Management is again divided into three different categories. NVENTORY MANAGEMENT for MBA FINANCE Page 37
  38. 38. SAAB MARFIN MBA1) Based on Valuation2) Based on Cost Analysis3) Based on Financial Statement1) Based on Valuation There are number of generally accepted methods of determining the costof inventories at the close of the accounting period. The selection of a suitablemethod assumes significance in view of the fact that it has a direct bearing onthe cost of goods sold and consequently on profit. Therefore, the methodshould be selected in the light of probable effects on profits over a period ofyears.Note: It may not be out of place to mention that once a method is selected, it must be used consistently and cannot be changed from year to year.The discussion here of the methods to value inventory should, therefore beviewed in this perspective.First In First Out (FIFO) Method: The FIFO method of valuation of inventory is based on the assumptionthat the inventory is consumed in chronological order, that is, those receivedfirst are issued/consumed first and value fixed accordingly. The merit of FIFOmethod is that the physical flow of materials matches the flow of cost.Last in First Out (LIFO) Method: NVENTORY MANAGEMENT for MBA FINANCE Page 38
  39. 39. SAAB MARFIN MBA Under the LIFO method, the cost of goods sold and the value of closinginventory can be determined only after the final lot of the year has beenreceived. This is because of the assumption underlying the valuation ofinventory, according to this method. As the name LIFO suggests, the use ofinventory is valued on the basis of the inverse sequence of receipts. Since theLIFO method assumes that the latest item in is the first item out, the currentcost of materials are matched with the current selling price/current revenues.This matching of current costs with current revenues is the essence of theargument for the LIFO method.Average Cost Method: According to average cost method, each purchase is added to inventoryand an average cost determined. Materials are charged into cost of sales at thisaverage until another lot is received, when a new average unit inventory cost iscalculated.Note: There are so many other than these above methods but most wideusefully methods are these three so here we discussed those three methodsonly.2) Based on Cost AnalysisCost of Holding Inventory: - NVENTORY MANAGEMENT for MBA FINANCE Page 39
  40. 40. SAAB MARFIN MBA One operating objective of inventory management is to minimize cost.Excluding the cost of merchandise, the costs associated with inventory fall intotwo basic categories: (i) Ordering or Acquisition or Set-up Costs, and (ii)Carrying Costs. These costs are an important element of the optimum level ofinventory decisions. 1) Ordering Cost: It is the fixed cost of placing & receiving an inventory order. Like (a)Preparing a purchase order or requisition form & (b) receiving, inspecting &reordering goods received to ensure both quantity & quality. It is also called assetup cost. 2) Carrying Cost: The second broad category of costs associated with inventory is the carryingcosts. They are involved in maintaining or carrying inventory. The cost ofholding inventory may be divided into two categories.1. Those that Arise Due to the Storing of Inventory: The main components of this category of carrying costs are (i) storage cost, that is, depreciation, insurance, maintenance of the building and utilities; (ii) insurance of inventory against fire and theft; (iii) deterioration in inventory because of pilferage, fire, technical obsolescence, style obsolescence and price NVENTORY MANAGEMENT for MBA FINANCE Page 40
  41. 41. SAAB MARFIN MBA decline; (iv) serving costs, such as labour for handling inventory, clerical and accounting costs.2. The Opportunity Cost of Funds: This consists of expenses in raising funds (interest on capital) to finance the acquisition of inventory. If funds were not locked up in inventory, they would have earned a return. This is the opportunity cost of funds or the financial cost component of the cost.Linking of Costs based and Physical Based Inventory Management: The carrying costs and the inventory size are positively related and movein the same direction. If the level of inventory increases, the carrying costs alsoincrease and vice-versa.Total Cost: The sum of inventory increases, the carrying costs represent the totalcost of inventory. This is compared with the benefits arising out of inventory todetermine the optimum level of inventory.Economic Order Quantity (EOQ): How much inventory should be bought in a lot? Should the quantity to bepurchased be large or small? Should the requirements of material during agiven period (say 6 months or 1 year) be acquired in one lot or should it beacquired in installments or in several small lots? Such inventory problems arecalled Order quantity problems. Therefore EOQ is that level of inventory at which total cost of inventorycomprising ordering cost & carrying costs is the minimum NVENTORY MANAGEMENT for MBA FINANCE Page 41
  42. 42. SAAB MARFIN MBAFormulae for calculating Economic Order Quantity:EOQ = 2AO CWhere,A= Annual QuantityO= Ordering CostC= Carrying CostAssumptions: 1. The firm knows with certainty the annual usage (consumption) of a particular item of inventory. 2. The rate at which the firm uses inventory is steady over time. 3. The orders placed to replenish inventory stocks are received at exactly that point in time when inventories reach zero. NVENTORY MANAGEMENT for MBA FINANCE Page 42
  43. 43. SAAB MARFIN MBAOrder Point:Reorder Point: This is the point at which to order inventory-expressed equation-ally as: Lead Time in days X daily usage.Lead Time: It is the time normally taken in receiving delivery after placing orders withsuppliers.Safety Stock: It implies extra inventories that can be drawn down when actuallead-time and/or usage rates are greater than expected.3) Based on Financial StatementFor having assistance by banks, bankers should first evaluate the followings: 1. Collateral Strength. 2. Inventory Position 3. Some Financial Ratios 4. Payment of all requirements like Income Tax, Wealth Tax, Interests on debt etc., NVENTORY MANAGEMENT for MBA FINANCE Page 43
  44. 44. SAAB MARFIN MBA 5. Agreement papers of all authorized persons like Debenture holders, Shareholders etc., 6. All required documents. 7. Who is the Buyer and his Country’s relationship etc, The main requirement for Banker is the Financial Statements of 3 to 5 years.From this statement it can judge the financial strength of the Company. Whileanalyzing of Financial Strength of the Company, Inventory is also having its ownemphasis role. Because if company is having less inventory than itsrequirement then company will get less finance from Banks and visa-versa. Sohere high inventory means, high in the sense company should have sufficientinventory according to its order. Not more than its order. Let us have a look on some Inventory related Ratios and also someimportant financial ratios those, which are related to Inventory. Fromevaluating of these Financial Ratios, company can judge the stocks/goods levelin Inventory, so that company can get loan from Banks. The financial statement provides a summarized view of the financialposition and operations of a firm. Therefore, much can be learnt about a firmfrom a careful examination of its financial statements as invaluabledocuments/performance reports. The analysis of financial statement is, thusan important aid to financial analysis. The analysis of financial statements is a process of evaluatingrelationship between component parts of financial statements to obtain a betterunderstanding of the firm’s position and performance. NVENTORY MANAGEMENT for MBA FINANCE Page 44
  45. 45. SAAB MARFIN MBATasks of Financial analyst is to: 1) Select the information relevant to the decision under consideration from the total information contained in financial statement. 2) Arrange the information in way to highlight significant relationships. 3) Interpretation and drawing of inferences and conclusions.In brief, financial analysis is the process of selection, relation and evaluation. Financial analysis is the process of identifying the financial strengths andweaknesses of the firm by properly establishing relationships between theitems of the balance sheet and the profit and loss account. Financial analysiscan be under taken by management of the firm, or by parties out side the firm,viz., owners, creditors, investors and others. The nature of analysis will differdepending on the purpose of the analyst. Management of the firm would be interested in every aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently, and that the firm’s financial condition is sound. Trader creditors are interested in firm’s ability to meet their claims over a very short period of time. Investors, who have invested their money in the firm’s shares, are most concerned about the firm’s earnings. Suppliers of long-terms debt, on the other hand are concerned with the firm’s long-term solvency and survival. They analyze the firm’s profitability over time, its ability to generate cash to be able to pay interest and repay principal and the relationship between various sources of funds. NVENTORY MANAGEMENT for MBA FINANCE Page 45
  46. 46. SAAB MARFIN MBA 2.Ratio Analysis related to Inventory Ratio analysis is a powerful tool of financial analysis. A ratio is defined as“the indicated quotient of two mathematical expressions” and as “therelationship between two or more things.” In financial analysis ratio is used asa benchmark for evaluating the financial position and performance of a firm.Ratios help to summarize large quantities of financial data and to makequalitative judgment about to form a qualitative judgment the focus of financialanalysis is on the key figures in the financial statements and the significantrelationships that exist between them.Types of Ratios: a. Liquidity Ratios b. Activity Ratios c. Profitability RatiosA. Liquidity Ratios: Liquidity refers to the ability of the firm to meet its obligations in theShort run, usually one year. Liquidity ratios measure the ability of the firm tomeet its current obligations. Liquidity ratios by establishing a relationshipbetween cash and other Current assets to Current obligations provide a quickmeasure of liquidity. A firm should ensure that it does not suffer from lack ofliquidity, and also that it does not have excess liquidity. NVENTORY MANAGEMENT for MBA FINANCE Page 46
  47. 47. SAAB MARFIN MBA Therefore it is necessary to strike a proper balance between high liquidityand lack of liquidity. Following are some of the important liquidity ratios: 1. Current Ratio 2. Quick Ratio 3. Net working Capital RatioB. Activity Ratios: Activity ratios are concerned with measuring the efficiency in assetmanagement. Sometimes, these ratios are also called efficiency ratios or assetutilization ratios. The efficiency with which, assets are converted into sales.The greater the rate of turnover or conversion, is the more efficient theutilization. For this reason, such ratios are also designated as turnover ratios.Turnover is the primary mode for measuring the extent of efficient employmentof assets by relating the assets to sales. An activity ratio may, therefore, bedefined as a test of the relationship between sales and various assets of a firm.Several activity ratios can be calculated to judge the effectiveness of assetutilization. 1. Inventory Turnover 2. Assets Turnover 3. Fixed Assets and Current Assets TurnoverAsset Measurement for different methods of inventory valuation:FIFO Method: NVENTORY MANAGEMENT for MBA FINANCE Page 47
  48. 48. SAAB MARFIN MBA Under this method, as noted earlier, inventory is valued on theassumption of chronological cost flow. This implies that the unused/unsoldinventory consists of the most recent purchases and, therefore, can be assumedto be valued at current cost. The vale of inventory as show in the balance sheetwould reflect the current cost , if FIFO method were used.LIFO Method: According to this method, obviously, the inventory figure would notappear in the balance sheet at the Current Cost. It will reflect rather the cost ofraw materials purchased in the past year. Assuming rising prices, the inventoryvalue based on the LIFO method would tend to be undervalued. For exampleinventory purchased as early as six years or more. In that situation, theinventory figure included in the balance sheet would be actually the price paidon the purchase of inventory six years ago. In a period of rising prices, thisvalue would naturally be grossly out of line with the currently prevailing price.This would imply that the balance sheet would not reflect the current worth ofthe inventory. That the inventory value will not be correct is another way ofsaying that the balance sheet will present a distorted picture of the affairs ofthe firms. A possible solution to correct the above distortion in the balance sheetimplicit in the under-valuation of inventory with the LIFO method is amodified/adjusted LIFO method. The modified method will, thus, serve the needs of correct incomedetermination as well as correct asset measurement. However, this is subject NVENTORY MANAGEMENT for MBA FINANCE Page 48
  49. 49. SAAB MARFIN MBAto a qualification, namely, the current year’s purchase (units) should exceed thecurrent year’s consumption (units). If for reasons such as strike/lockouts,transportation problems, and so on, the current consumption exceeds thecurrent purchases, profits will rise. The increase will depend upon the extent ofliquidation of the previous years’ inventory. This increase in profit is termed asliquidation profit, which is equal to the difference between the current cost ofinventory and the cost of inventory purchased in the past. NVENTORY MANAGEMENT for MBA FINANCE Page 49
  50. 50. SAAB MARFIN MBA Logistics Inventory ManagementMeaning of Logistics: Logistics is the Organization of Services and Supplies. In other words,logistics is making and taking the permission for sell/exporting the company’sproducts in foreign countries. In fully export-oriented business this is one of the main department,where this department gets an approval to sell their goods in foreign countries.And also their main intention is to maintain all documents of those that arerelated to the exporting of their products.Logistics Inventory Management: Yes, already we have observed about the meaning of InventoryManagement in the Organization. But in fully export oriented business;Inventory Management is a very important concept. Because every exporter orimporter, they do not know about each other who are staying in other countries. So every company, which are exporting or importing of materials, theyshould communicate each other through banks only. These banks are listed byCentral Bank of that Nation. In our Country RBI is lists some banks forintermediating purpose and every year RBI declare some listed Banks as amediator. For producing of materials and selling of those materials, everycompany/business should need a Working Capital. This Working Capital canalso financed by Banks. While in export oriented business it is slightly different NVENTORY MANAGEMENT for MBA FINANCE Page 50
  51. 51. SAAB MARFIN MBAtask. Here Banks can acts as financial assistance for Pre-Shipment and for PostShipment of Goods.For having an assistance by banks they should first evaluate followings: 1. Collateral Strength. 2. Inventory Position 3. Some Financial Ratios 4. Payment of all requirements like Income Tax, Wealth Tax, Interest etc., 5. Agreement papers of all authorized persons like Debentures, Shareholders etc., 6. All required documents. 7. Who is the Buyer and his Country’s relationship etc,Before going to detail decision on Banks let us have a look on CommercialPapers. Which are also parts of financing the working capital requirements ofthe Companies.Commercial Papers (CPs): In the recent past, Commercial Papers (CPs) have become one of the bestmethods for financing the working capital requirements of the companies. The companies trying to raise the funds by issuing the CP are regulatedby Guidelines for issue of Commerical Papers (CP), 2000 issued by Reserve Bankof India on October 10, 2000. These guidelines apply to the companies tryingto raise the funds by issuing the CPs. As per these guidelines, a a companymeans a company as defined in section 45-I(aa) of Reserve Bank of India Act,1934. Section 45-I(aa) of Reserve Bank Act, 1934 defines a company as thecompany as the company as defined in section 3 of the companies Act, 1956. NVENTORY MANAGEMENT for MBA FINANCE Page 51
  52. 52. SAAB MARFIN MBA In the Indian circumstances, banks play a very major role in financing theworking capital requirement of the organizations. We will consider the bank asa source for financing the working capital requirement of the organizationsunder the following heads:Amount of Assistance To obtain the bank credit for financing the working capital requirements,the company is required to estimate the working capital requirement properly.To estimate the requirement of working capital requirement properly, thecompany will be required to estimate its level of current assets and currentliabilities properly, as working capital is the difference between current assetsand current liabilities. For this, the techniques like ratio analysis, trend analysis etc., can beused by the company. More accurate the estimation of the level of currentassets and current liabilities, more accurate the estimation of level of currentcapital. Then, the company will have to approach the bank along with thenecessary supporting data. On the basis of estimates submitted by thecompany, the bank may decide the amount of assistance that can be extended.While extending the working capital assistance, the bank may prescribe themargin money requirement. The margin money stipulation is made by thebanks in order to ensure that borrowing company’s own stake in the businessand also to provide the cushion against the possible reduction in the value ofsecurity offered to the bank. The percentage of margin money stipulation may NVENTORY MANAGEMENT for MBA FINANCE Page 52
  53. 53. SAAB MARFIN MBAdepend upon the credit standing of the borrowing company, fluctuations in theprice of security and the directives of RBI from time to time. The generalprinciple applicable will be, “more dicey the nature of security, higher ofsecurity, higher will be the margin money stipulations.”Form of Assistance:After deciding the amount of overall assistance to be extended to the company,the bank can disburse the amount in any of the following forms: 1. Non-Fund Based Lending 2. Fund Based Lending.Non Fund Based Lending:In case of Non-Fund Based Lending, the lending bank does not commit anyphysical outflow of funds. As such, the funds position of the lending bankremains intact. The Non-Fund Based Lending can be made by the banks in twoforms: NVENTORY MANAGEMENT for MBA FINANCE Page 53
  54. 54. SAAB MARFIN MBA a. Bank Guarantees b. Letter of CreditFund Based Lending:In case of Non-Fund Based Lending, the lending bank commits the physicaloutflow of funds. As such, the funds position of the lending does not affected.The Fund Based Lending can be made by the banks in following forms: a. Loan b. Overdraft c. Cash Credit d. Bills Purchased/Discounted e. Working Capital Term Loans f. Packing CreditSecurity for Assistance:The bank may provide the assistance in any of the modes as stated above. Butnormally no assistance will be available unless the company offers somesecurity in any of the following forms.1) Hypothecation.2) Pledge3) Lien4) Mortgage NVENTORY MANAGEMENT for MBA FINANCE Page 54
  55. 55. SAAB MARFIN MBA Process of Physical Inventory Maintenance in Apex Auto Ltd Each unit of Apex auto ltd has its own store department that we can call itas Work-in-process inventory. This inventory process is fully computerized and here paper work is veryless. Only maintaining of documents, which were sent by suppliers as likechallans etc., are only here to maintain as paper documents. Otherwise it is fullycomputerized. Through computers only Store Department receives PurchaseOrder and by computer only they send documents of issuing of materials tomanufacturing unit. NVENTORY MANAGEMENT for MBA FINANCE Page 55
  56. 56. SAAB MARFIN MBA For easy to communicate and planning of production activity, Apex AutoLtd Unit II has having only one Godown in Procedures involved in receiving andissuing of materials are as follows:1) Godown will first get Purchase Order No..Purchase Order Number: This PO is comes from Purchase Department. This Purchase Departmentgives a number for the each order made by Purchase Department only. Before placing any order to suppliers they first checks the materials ininventory as to know about whether materials are available in Inventory or not.If not available in Inventory then only they will place an order according to therequirement. In Apex Auto Ltd (Unit II), it is very important to note that: purchasedepartment always places an order to those materials which have ordered byCustomers/buyers of Apex Auto Ltd (Unit II). So, normally it does not have any stocks in its inventory. For every orderfrom customers they make a fresh Purchase Order for purchasing of materials.It means whatever the materials are requiring for present orders, thosematerials are only they kept as stocks in Inventory. In some cases, materials may be in Godown, which they call it as “BufferStock”. If these old stock is matches the requirements of product which hasordered now by its customers, then purchase Department will sent a notice toInventory for issuing of those materials. These old stock may be in form of RawMaterial or in form of finished goods. Apex Auto Ltd (Unit II) always producesmore than its requirements. For example if Telcon has ordered for 20 EX- 70 NVENTORY MANAGEMENT for MBA FINANCE Page 56
  57. 57. SAAB MARFIN MBAboom then Apex produces 25 EX – 70 i.e., 20% more than its requirements. Sothe remaining or excesses material they call it as “Buffer Stock”.2) Receiving of Materials Any materials comes-in or goes-out from the Godown it should be enterin the Gate that is they call it as “Gate Entry”, which is maintained by securityGuard. Guard is not an employee of an organization. He is a contact-basedemployee. When Inventory receives materials it first inspects some samples, so for it,they call up as “Spot Inspection.” Here they inspect the following points:a) Is it our supplier only and is this parcel is for us only? d. Are these received materials according to the Purchase Order? Like i. Quantity ii. Date, etc., e. Is it having all required Challans or Invoices and also does it approved by authorized person? f. Is it having all required documents like Octroi etc., g. Is that Challan consisting the correct information of materials? After approval of materials by sample inspection, inventory departmentput these details in manual book, this documentation is called as “Day Book.”This daybook is consisting of information like Challan No., P.O. No., Style No.,Description of Materials, Supplier’s Name, transporter’s Name, and Quantity. After completing of these processes, materials will send to inspectiondepartment. In this inspection department they inspect in-details of materials. NVENTORY MANAGEMENT for MBA FINANCE Page 57
  58. 58. SAAB MARFIN MBAAfter approval by inspection department, this inventory department makes onedocument, which is they call it as “Goods Received Document”. This Goods Received Document is consisting of GR No., Date, GRN Type(In-store), Mode of Transport, Challan No., Challan Date, Status, Gate Entry No.,Gate Entry Date, Priority No., all Details of Materials and received quantity andactual quantity also enters there. 3. Issuing of Materials Merchandising Department will send one card called “Job Card” which itconsisting of all details of materials requires to produce a product. Accordingto that Card Inventory department should send the materials to manufacturingdepartment. After receiving of materials by manufacturing department from inventorydepartment they issue one document about received of materials, quantity,description of materials etc. Manufacturing Department uses these materialsfor manufacturing purpose. In manufacturing process sometimes it mayhappens like some materials get damages and some are not fully matches withrequirements. Then those materials will be return to inventory. After utilizing of all these materials by manufacturing department theywill send one document called “Order Completion Report” (OCR). This reportconsists the information of Percentage of Utilized Materials for particular orderand percentage of wastage of materials. This report will send to inventory andalso to Merchandising Department.4. Return Back Materials from Manufacturing Units: NVENTORY MANAGEMENT for MBA FINANCE Page 58
  59. 59. SAAB MARFIN MBA Inventory takes those materials, which are return back frommanufacturing units because of excess or surplus occurs while manufacturingof products. This excess or surplus exists because of purchase department,they always orders 20% more than its requirement to meet the requirement ofnext month. So these materials are kept in Inventory as name it as “Bufferstock.” These Buffer Stocks will be utilize when company get the same type ofOrder. Inventory issues these materials (Buffer Stock) only when it receivesinstruction from Merchandising and purchasing Department.5. Rejected Materials: Inspection department make the rejection of materials, when materialsare not as per requirements and not as per the order. These rejected materialsare kept in separate section by Inventory Department. Inventory department inform to Purchase Department and also notice toSuppliers about rejection of materials. That is called “Rejection Card.” In thiscard it involves Name of Supplier, Description of Materials, Challan No., ChallanDate, Gate Entry No. & Date, No. of Quantity rejected, Reason for rejection etc., Some times supplier may issue new materials in place of rejectedmaterials. Or he may give some compensation for wrong supply and that isafter paying of full payment of materials.Sections in Inventory: NVENTORY MANAGEMENT for MBA FINANCE Page 59
  60. 60. SAAB MARFIN MBA Inventory is again divided into 5 sections. Each is section handling byonly one persons, with the help of 3 to 4 assistants, who helps in maintainingof materials at specific area. Five sections are as follows:Sections in InventoryD201All bought out items are been stored here and processed to the manufacturingas when requiredD202All consumables and tools and maintenance accessories are been stored in thissectionD203All raw materials like direct, semi finished goods are stored in this section andprocessed to the manufacturing as when required and old stock and rejecteditems are also stored in this section.D204Gas tank and cylinders is stored in this section.D205All finished goods are stored in this section NVENTORY MANAGEMENT for MBA FINANCE Page 60
  61. 61. SAAB MARFIN MBAPurchasing Procedure of Materials In Apex they purchase materials at from a multiple Suppliers. There is areason for purchase materials from multiple suppliers. The reason is if onesupplier delays to fulfill the supply then there must be alternative supplier for itto fulfill the requirement. So there must me no stock outs in the productionprocess Apex always purchases at bulk but by schedule wise. In other words theypurchase materials at a time for specific order. They make the agreement ofsupplying materials only at once. And they negotiate the price only at once thatis before supplying of materials and once their agreement is over then theyprovide schedule to supplier to supply the materials at a specific time and at aspecified quantity. So it reduces the spaces, which occupies in the Godown. So this methodis suitable for this type of industry because of same orders from customers.WIP Store Now we come to the WIP Store. As we have already seen that this Apex ishaving only one Godown and every unit is having its own Store Departments.As we know that Work In Process Store means Semi-finished Goods, here goodsare not completed yet and not these are in fully raw materials form. NVENTORY MANAGEMENT for MBA FINANCE Page 61
  62. 62. SAAB MARFIN MBA So in valuation matter it is having slightly different way. And in Apex it isas follows: Yes, these goods are includes some labour cost, some other costs.So in valuation of WIP they valuate at Raw Material Price of that goods PLUSincurred cost to produce till now.Finished Goods Valuation of Finished Goods in Apex is at 10% less than Selling Price ofthose finished goods. Finished Goods are in the sense these goods should beready to dispatch. There is no separate Godown for Finished Goods/Products. Every unit ishaving it’s own Finished Goods Godown. In that Godown only they store theseGoods. And dispatching of these products is directly by each unit. They do notconsolidate these goods; they dispatch these finished products directly by eachunit. Apex auto ltd (Unit II) has only one customer that is Telcon. So theydirectly supply finished products to its customers. So it is not necessary tohave another Godown for Finished Goods. NVENTORY MANAGEMENT for MBA FINANCE Page 62
  63. 63. SAAB MARFIN MBA Logistics Inventory Management There is a department called Logistic Department in Apex Auto Ltd, whichis concerning about selling of goods and maintaining of all documents relatedto exporting of products and also taking the permission from banks to sellspecific products in specific countries. So Logistic Department is one of theimportant front-office Departments, like Marketing Department. Marketing Department is one, which takes the orders from its customers.And this is entirely different from Logistic Department. Logistic Department isone, which sells its products and maintains all documents. But MarketingDepartment is comes into picture before production process starts. AndLogistic Department comes into picture only after the production processcompletes. Logistic Department is not only taking the approval for selling itsproducts, but also it will concern for taking loan for its working capital. Bankswill provide these working capital requirements in two senses: one is onPre-Shipment Loan and another one is Post-Shipment Loan. NVENTORY MANAGEMENT for MBA FINANCE Page 63
  64. 64. SAAB MARFIN MBA There are so many ways to get loan for working capital requirement.Apex get loan for Working Capital requirement either through CommercialPapers or through Letter of Credit. Apex is taking loan for Working CapitalRequirements from Axis Bank.Who can issue the CP:A company will be eligible to issue the CP provided: 1. the tangible net worth of the company as per latest audited balance sheet is not less than Rs. 4 Crores.Note: Tangible net worth means share capital plus free reserves duly reducedby intangible assets like accumulated losses, deferred revenue expenditure etc.Free Reserves include share premium and debenture redemption reserve but donot include revaluation reserve. 2. Company has been sanctioned working capital limits by banks. 3. Borrowed amount of company is classified as a standard asset by the bank. Commercial Paper is an unsecured promissory note issued at a discount.The rate of discount is required to be decided by the issuer and is not regulated. Before the company issues the CPs it is required to obtain satisfactorycredit rating from an approved credit rating agency. Presently, following creditrating agencies have been approving by RBI for this purpose. NVENTORY MANAGEMENT for MBA FINANCE Page 64
  65. 65. SAAB MARFIN MBA a. Credit Rating Information Services of India Ltd., (CRISIL) b. Investment Information and Credit Rating Agency of India Ltd., (ICRA) c. Credit Analysis and Research Ltd., (CARE) d. FITCH Rating India (P) Ltd., The minimum credit rating required is P-2 of CRISIL. If the rating is givenby any other agency, equivalent minimum rating will be required. The rating soobtained by the company should be current and should not have fallen due forreview.Who can invest in CP:Following persons can invest in the CP 4. Individuals 5. Banks 6. Corporate Bodies incorporated in India 7. Unincorporated Bodies 8. Non-resident Indians 9. Foreign Institutional InvestorsNature of a CP: h. A CP can be issued for the maturity period of 7 days to one year. NVENTORY MANAGEMENT for MBA FINANCE Page 65
  66. 66. SAAB MARFIN MBA i. A CP has the denomination of Rs. 5 Lakshs and every single investor should invest minimum Rs. 5 Lakhs in CP. j. Every issue of CP, including the renewal, will be considered to be the fresh issue. k. The amount of CP shall be within the overall limit sanctioned by the Board of Directors. It can be issued a “stand alone” product. Banks will be free to adjust the working capital limits after considering the CPs issued by the Company.It will not be out of place to mention here that CP is not treated as deposit asper the provisions of Section 58-A of the Companies Act, 1956.Procedure for issuing the CPs: Every company issuing the CP should appoint a scheduled bank as theIssuing and Paying Agent (IPA). It will satisfy it-self that company has obtainedsatisfactory credit rating. It shall also verify the documents submitted by theissuing company and issue a certificate that the documents are in order. IPAshould also certify that it has valid agreements with the issuing company. The issuing company shall arrange to place the CPs on privateplacement basis with the inventors. The issuing company shall disclose to thepotential investor its financial position. After the deal is confirmed, the issuingcompany shall issue physical certificates to the investor. Investors shall begiven a copy of IPA certificate to the effect that the issuing company has a validagreement with the IPA and documents are in order. Every issue of CP shouldbe reported to RBI through the IPA within three days from the date ofcompletion of issue. NVENTORY MANAGEMENT for MBA FINANCE Page 66
  67. 67. SAAB MARFIN MBA Apex Auto Ltd (Unit II) has setup in Telcon Premises so as we know earlierthat Apex Unit II is having only one customer that is Telcon so for shortdistance there is no need of logistic department in Apex Unit II it is handled byPurchase department incharge is Parmod Singh. Financial Inventory Management Already we saw about Logistic Inventory Management. Let us see howApex valuates the old and rejected stocks in financial terms and also have alook on the inventory ratios. NVENTORY MANAGEMENT for MBA FINANCE Page 67
  68. 68. SAAB MARFIN MBAValuation method for Old and Rejected Stocks:Old Stock: This old stock means excess of materials from specific order. As alreadyviewed in Physical Inventory Process that, always purchase departmentpurchases 20% more than its order. So that remained or excess materials aresaid to be “Buffer Stock” These Old stock are in the form of Raw Materials then valuate it accordingto purchasing of those materials. If these old stock are after Finishing ofproduction process. Then these are valuating on selling price of same productsto the customer. In easy words it can be said that if materials are Raw, then taking asPurchasing value for valuation purpose. If materials are Finished Goods thentaking Selling Price as a value for valuation of Old Stock in Godown.Rejected Stocks: Again these are divides into three parts. Rejection of Raw Materials i.e.,before sending to Production Process. Rejection of Materials during theProduction Process and Rejection of Materials after the Production Process thatis, Rejection of Finished Goods. Rejection of Raw Materials is valuating on Purchase value of thosematerials. Rejection of WIP Materials then valuate as Purchase Value Plus itspartly incurred Costs like Labour, Overhead Costs etc., And for Rejection ofFinished Goods valuate at Purchase Value and Fully incurred Costs as said now.Holding or Ordering Cost NVENTORY MANAGEMENT for MBA FINANCE Page 68
  69. 69. SAAB MARFIN MBA These costs are every important in manufacturing companies to minimizethe cost. This is not applicable to Apex by virtue of its Business activities.Because, let us have a broad view on statement by following points: In Apex, they purchase the materials only from multiple supplier. Because to fulfill the requirements in required time limit. Apex orders the materials to suppliers only at once and according to the schedule supplier will supply the materials. Yes, Depending on Shorter order cycle Apex can hold entire stock wellbefore order starts and also Apex can have a full stock at a time before startingprocess of product of that specific order.EOQ EOQ applicability due to the nature of Business as above said is not possible.Reorder Point: This is the point is also not having much importance because of nature ofBusiness.Lead Time Apex purchases materials from multiple supplier and by on schedulebasis to supply materials. So this is also not applicable in this type of business. NVENTORY MANAGEMENT for MBA FINANCE Page 69
  70. 70. SAAB MARFIN MBA Financial Ratios related to Inventory.Raw material turnover ratio: Raw material turnover ratio is velocity at which raw material convertedinto goods ready for sale. If raw material turnover ratio is high then company isefficiency converting into finished goods.Formula: Material consumed / Average raw material NVENTORY MANAGEMENT for MBA FINANCE Page 70
  71. 71. SAAB MARFIN MBA Raw Material Turnover Ratio Raw material consumed Year (Rs) Avg R.M Ratio 2008 576,484,922 53,608,082 10.75 2007 371,223,873 36,137,266 10.27 2006 230,779,236 132,002,490 1.74 Ratio 12 10 8 6 Ratio 4 2 0 2008 2007 2006 YearsForm above graph we come know that raw material turnover ratio is increasedrapidly in 2007 from 1.74 in 2006 to 10.27 for 2007. Indicates that company isconverting raw material into finished or semi finished goods very quicklyHolding period of raw material: It refers to the number of days taken for the production unit toconvert raw material to finish goods.Formula: 360 /Raw material turnover ratio NVENTORY MANAGEMENT for MBA FINANCE Page 71
  72. 72. SAAB MARFIN MBA Holding period of raw material Year Total Days Ratio Days 2008 360 10.75 33 2007 360 10.27 35 2006 360 1.74 206 Raw material holding Period 250 200 D 150 A RHP Y 100 S 50 0 2008 2007 2006 YearsAs the raw material turnover ratio is increasing form to 10.27 for 2007 itindicates that firm is taking less days for conversion as compared to 2006. In2006 conversion period was 206 days but in decreased to 35 days for 2007.This is shown in above graph. Before 2007 there was no production process they were convertingsemi finished goods into finished products hence to start their own productionprocess they hold the raw material in 2006Work in Process Turnover ratio: NVENTORY MANAGEMENT for MBA FINANCE Page 72
  73. 73. SAAB MARFIN MBA Work in process turnover ratio is velocity at which W.I.P converted intogoods ready for sale. If W.I.P turnover ratio is high then company is efficiencyconverting into finished goods.Formula: Cost of production Average W.I.P W.I.P turnover ratio Year Cost of production Avg W.I.P Ratio 2008 849,054,442 36,720,702 23.12 2007 555,094,500 15,010,347 36.98 2006 361,110,197 9,755,839 37.01 Work in Process Turnover ratio 40 35 30 D 25 A 20 Ratio Y S 15 10 5 0 2008 2007 2006 YearsForm above graph we came to know that Work in process turnover ratio isdecreasing from 37.01 in 2006 to 23.12 2008. The ratio was high in 2006 ascompared to 2007 and 2008. The ratio was 37.01. Indicates that company isconverting semi finished into finished goods quickly NVENTORY MANAGEMENT for MBA FINANCE Page 73
  74. 74. SAAB MARFIN MBAHolding period of W.I.P: It refers to the number of days taken for the production unit to convertsemi finished goods into finish goods.Formula: 360 W.I.P turnover ratio Holding period of W.I.P Year Total Days Ratio Days 2008 360 23.12 15.57 2007 360 36.98 9.73 2006 360 37.01 9.72 Holding period of W I P 18 16 14 12 D 10 A Ratio 8 Y 6 S 4 2 0 2008 2007 2006 Years NVENTORY MANAGEMENT for MBA FINANCE Page 74
  75. 75. SAAB MARFIN MBAAs the work in process turnover ratio is increasing form 9.72. in 2006 To 15.57for 2008 it indicates that firm is taking less days for conversion. Which shownin above graphFinished goods turnover ratio: Finished goods turnover ratio is velocity at which finished goodsconverted into for sale. If finished goods turnover ratio is high then company isefficient.Formula: Cost of goods sold Average finished goods Finished goods turnover ratio cost of goods Year sold Avg F.G Ratio 2008 849,054,442 26,243,339 32.35 2007 555,094,500 19,858,482 27.95 2006 361,110,197 10,940,008 33.01 NVENTORY MANAGEMENT for MBA FINANCE Page 75