Inventory management project report


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Inventory management project report

  1. 1. INVENTORY MANAGEMENT APEX AUTO LTD., EXECUTIVE SUMMARY G C T M Industry in India has traveled are less, now India is one of the main cottonmanufacturing & exporting cotten in the in india. The cotten in India is with major players andgadag co operative mill Ltd is one of largest manufacturer of cotten in India. Inventory is a central process in Manufacturing Unit. This Inventory is concerns to alldepartments i.e., from Planning Department to Selling Department in which it passes thoughProduction Department, HR Department, Logistic Department, Finance Department, CostingDepartment, and Commercial Department etc. So managing of Inventory is having wide Scopein manufacturing Company. “INVENTORY MANAGEMENT”Statement of the problem “Inventory management and its effects on working capital”Management problemBSPATIL Page 1
  2. 2. INVENTORY MANAGEMENT APEX AUTO LTD., Management is feeling that their huge amount of working capital is held up, so themanagement wants to know whether they can reduce it through inventory management.Research problem As above stated management problem the study was carried to know how inventorymanagement helps in proper maintenance of working capital, so the title 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. 4. To suggest the measures for improving the inventory level.Scope of the study Inventory management being a very important concept in all the company’s having avoid coverage often calls for the managerial attention. In the modern times inventorymanagement has become the integral part of the all companies. So all the firm gives specialimportance for inventory management. The major objective of the study is to examine theeffectiveness of inventory management system adopted by Akash industry; the study mainlyfocuses on the techniques used by the company to control the inventory. The study also coversother areas like the financial ratios for the period of 2004 to 2007.SUB OBJECTIVES:1 To study the different accepts of Inventory Management.METHODOLOGYBSPATIL Page 2
  3. 3. INVENTORY MANAGEMENT APEX AUTO LTD.,Primary 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: MS-Excel has been used for calculations. INDUSTRY PROFILEFABRICATIONBSPATIL Page 3
  4. 4. INVENTORY MANAGEMENT APEX AUTO LTD., When used as an industrial term, applies to the building of machines, structures and otherequipment, by cutting, shaping and assembling components made from raw materials. Smallbusinesses that specialize in metal are called fab shops. Steel fabrication shops and machine shops have overlapping capabilities, but fabricationshops generally concentrate on the metal preparation, welding and assembly aspect while themachine shop is more concerned with the machining of parts.METAL FABRICATION Metal fabrication is a value added process that involves the construction of machines andstructures from various raw materials. A fab shop will bid on a job, usually based on theengineering drawings, and if awarded the contract will build the product. Fabrication shops are employed by contractors, OEMs (Original EquipmentManufacturers) and VARs (Value-added Reseller) Typical projects include; loose parts,structural frames for buildings and heavy equipment, and hand railings and stairs for buildings. 1. ENGINEERING The fabricator may employ or contract out steel detailers to prepare shop drawings, if notprovided by the customer, which the fabricating shop will use for manufacturing. Manufacturingengineers will program CNC machines as needed. 2. RAW MATERIALSStandard raw materials used by metal fabricators are;BSPATIL Page 4
  5. 5. INVENTORY MANAGEMENT APEX AUTO LTD., • Plate Metal • Formed And Expanded Metal o Tube stock, CDSM o Square stock 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 a feedmechanism for even cutting. Abrasive cut-off saws, also known as chop saws, are similar tomiter saws but with a steel cutting abrasive disk. Cutting torches can cut very large sections ofsteel with little effort. Burn tables are CNC cutting torches, usually natural gas powered. Plasma and lasercutting tables, and Water jet cutters, are also common. Plate steel is loaded on a table and theparts are cut out as programmed. The support table is made of a grid of bars that can be replaced.Some very expensive burn tables also include CNC punch capability, with a carousel of differentpunches and taps. Fabrication of structural steel by plasma and laser cutting introduces robots tomove the cutting head in three dimensions around the material to be cut.BSPATIL Page 5
  6. 6. INVENTORY MANAGEMENT APEX AUTO LTD., 4. FORMING Hydraulic brake presses with v-dies are the most common method of forming metal. Thecut plate is placed in the press and a v-shaped die is pressed a predetermined distance to bend theplate to the desired angle. Wing brakes and hand powered brakes are sometimes used. Tube bending machines have specially shaped dies and mandrels to bend tubular sectionswithout kinking them. Rolling machines are used to form plate steel into a round section. English Wheel or Wheeling Machines are used to form complex double curvature shapesusing sheet metal. 5. Machining Fab shops will generally have a limited machining capability including; metal lathes,mills, magnetic based drills along with other portable metal working tools. 6. Welding Welding is the main focus of steel fabrication. The formed and machined parts will beassembled and tack welded into place then re-checked for accuracy. A fixture may be used tolocate parts for welding if multiple weldments have been ordered. The welder then completes welding per the engineering drawings, if welding is detailed,or per his own judgment if no welding details are provided. Special precautions may be needed to prevent warping of the weldment due to heat.These may include re-designing the weldment to use less weld, welding in a staggered fashion,BSPATIL Page 6
  7. 7. INVENTORY MANAGEMENT APEX AUTO LTD.,using a stout fixture, covering the weldment in sand during cooling, and straightening operationsafter welding. Straightening of warped steel weldments is done with an Oxy-acetylene torch and issomewhat of an art. Heat is selectively applied to the steel in a slow, linear sweep. The steel willhave a net contraction, upon cooling, in the direction of the sweep. A highly skilled welder canremove significant warpage using this technique. Steel weldments are occasionally annealed in a low temperature oven to relieve residualstresses. 7. FINAL ASSEMBLY After the weldment has cooled it is generally sand blasted, primed and painted. Anyadditional manufacturing specified by the customer is then completed. The finished product isthen inspected and shipped.BSPATIL Page 7
  8. 8. INVENTORY MANAGEMENT APEX AUTO LTD., COMPANY PROFILEName 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 private limited CompanyBSPATIL Page 8
  9. 9. INVENTORY MANAGEMENT APEX AUTO LTD., ABOUT ORGANIZATIONApex Auto Limited ("If you can imagine it, We can fabricate it.") Apex Auto Limited is a publicly quoted company with a number of shareholders, bothIndian and Foreign. Promoted by Mr. Atul Taunk in 1995 with a modest capital outlay of Rs. 342lakhs, Apex today has a capital outlay of Rs. 1200 lakhs. A growth of over 350% per annum.Achieved by producing thousands of dynamically stressed machined components for theconstruction equipment industry The raison deter of Apex is that the emerging scenario in post liberalized India indicatedthat the nation was poised to go in for massive infrastructure building: roads, super highways,ports, power projects, and so on. This would put immense pressure on manufacturers of earth-moving equipment. Apex eases the load on them by supporting the industry with precisionengineered sub-assemblies and major assemblies that can go directly into their equipment, suchas revolving frames, main frames, booms, arms, dozers, buckets, and so on. As a case in point, were proud to have been entrusted with the single share of businessfor all major fabrications that go into the making of TATA Hitachis top selling excavators, theEX-60. Over the last 5 years, we have fabricated more than 10,000 components of this particularmodel alone.VISIONTo be recognized as a premier QUALITY manufacturer and supplier fabricated components,embodying thus the spirit of commitment and humanity.MISSION • 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.BSPATIL Page 9
  10. 10. INVENTORY MANAGEMENT APEX AUTO LTD.,Why Apex?Aristotle - Greek inventor of the Science of Logic - recommends studying the theory of The 4Becauses before making your choice Why Apex for your Machined fabrication ?The 1st because deals with what is it made of ? Apex uses only prime quality steel sheets and plates procured from leading players in theindustry - Tata Steel and SAIL.The 2nd because deals with how is it made ? Apex has state of art Material Processing facilities including Indias largest laser cuttingmachine. And excellent Production Engineering systems set up by a highly experienced andtechnically qualified team of engineers.The 3rd because deals with what is made ? Based on our customers drawings and design, Apex manufactures dynamically stressedmachined fabrications conforming to all the specifications laid down by the customer.The 4th because deals with why is it made thus ? Apex follows the first three precepts so that the end customer gets a world-class productwhich will withstand the ultimate test of time.BSPATIL Page 10
  11. 11. INVENTORY MANAGEMENT APEX AUTO LTD., 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 Technically qualified and high skilled Merchandising department is another asset of thecompany, who plays a major role in executing the orders utmost efficiently to the satisfaction ofBuyers. 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 RathBSPATIL Page 11
  12. 12. INVENTORY MANAGEMENT APEX AUTO LTD., 4. FACTORIES ENGINEERED TO PRODUCT SPECIFIC: All their manufacturing units are engineered to product specific and managed by effectiveand efficient internal engineering department. 5. QUALITY CONTROL SYSTEM: There is an independent quality audit team in process control system in all the 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, they have a rigidcontrol on their quality control system where by they ensure that all the raw materials areproduced as per their quality standard level before it gets dispatched to their factories. 7. IN HOUSE LAB: They have a lab situated in the major procurement centers, such as in Dharwad andJamshedpur to support their quality control team to carryout the various quality tests at all levelonwards to ensure that the product is produced according 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-shipment Inspection bybuyer representative for all their products helps company to maintain zero-quality claimsposition with all their buyers.BSPATIL Page 12
  13. 13. INVENTORY MANAGEMENT APEX AUTO LTD., 9. CONFIDENCE OF THEIR BUYERS: All the buyers as of today have been working with them since decades and they started withthem on continues basis with enhanced volume. This has given them huge confidence as theconfidence level of their buyers is very high in their products, quality, timely deliveries andcommitment towards work. They have been awarded for 3 consecutive years for minimum rejection and for safety inprocess of manufacturing by Telco construction equipment limited APEX AUTO LTD WEAKNESSNo such entity has been identified so far. APEX AUTO LTD KEY OPPORTUNITIESChances to get more products to manufacture form the Buyer i.e. Telcon construction equipmentlimited APEX AUTO LTD KEY THREATSMore-qualified competitorsBSPATIL Page 13
  16. 16. INVENTORY MANAGEMENT APEX AUTO LTD., Managing Director General ORGANIZATION STRUCTURE Manager Production Planning & Finance Manager Control Manager CEO Human Resources Production Assistant General Assistant General Manager Manager Administration Assistant Supply Production Quality Machine Chain Mgmt department Assurance Department Head Head Head Head Store Production Assistant Machine Supervisor Supervisor Q. A OperatorsBSPATIL Page 16 Subordinate Workers Helpers Members
  17. 17. INVENTORY MANAGEMENT APEX AUTO LTD.,1. Personnel Department This department is almost like a human brain, since it is the human beings that operate it.This department is concerned with implementation of the plans, with the welfare of the plant,with the industrial relations and above all safety and security of the plant and the work force is itsprime 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 Act 1948.) Team Apex Professionally managed with a rich blend of experience and enthusiasticyouth, Engineers, Diploma Holders, draft men, ITI welders and fitters, Gas cutters, workers andFabrication 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 andencouraging them to apply for the job. The above meaning says that every organization wantskilled workers so Apex Auto Ltd Unit II also recruit candidates as follows , they firstly checkthe organization culture which type of employees needed in organization and they also checkemployment condition in unit. They are searching the candidates in two ways one is Advertisement and the other ismanual searching. In advertisement they give firstly the adz’s like Draft Adv, Client review advand Place adv, and then they receive the calls then access their CV’s. In manual searchingBSPATIL Page 17
  18. 18. INVENTORY MANAGEMENT APEX AUTO LTD.,process they search the employee in plan search, identity search, and contact search, then theycheck the candidates interest after that they arrange meeting for selection processSelection process Selection is a process of checking the candidate’s knowledge,behavior, Skills, experience, and qualifications etc to select and place the candidate their correctposition.2. Stores Department The raw materials are stored separately under material cell in production department; asper the demand this department does the work of receiving and issuing of materials.3. Purchase Department Against the approved purchase requisition the department purchases of raw material semifinished goods and Accessories and other needs of the various departments. In order to make thework efficient it has the system of sub contractors. So the purchase department does the creationof sub contractors and vendors. This department is guided by the main motto the plant and otherdepartments working. Let’s have a look on the flow chart of the purchase of raw materials in Material indentingApex Unit II (As per customer schedule) Quotations request to one or more vendors according to requirement Quotations Comparisons Best Negotiation Purchase Order creation Purchase Order send toBSPATIL vendor (supplier) Page 18 Follow Up and procure the material for production
  19. 19. INVENTORY MANAGEMENT APEX AUTO LTD.,4. Dispatch Department The dispatch of materials and finished goods is done in a very efficient way.5.Production Department This department entrusted with the task of the production of Dozer Blade, LoaderBucket, Narrow Bucket, Back Hoe Main Frame, Boom, Arm, Counter Weight, Heavy DutyBucket, Revolving Frame and Track Frame. From our very inception at Jamshedpur in 1996 andat Dharwad in 1999, our infrastructural facilities have been meticulously planned out with an eyetowards satisfying the exacting standards of world class players in the Earth Moving Industry. Let’s have a look on the process of manufacturing process in Apex Unit II, basically thiscompany is heavy fabrication company, they are manufacturing BACK HOE LOADERCOMPONENTD & EXCAVATOR COMPONENTS. Following are the components. JHONDEER (JD) Boom, Arm, Loader Arm and EXCAVATORS 70, 110, 120, Boom andEXCAVATORS 70, 110,120 Arm. The below showing is the manufacturing process ofExcavators-70 Boom.BSPATIL Page 19
  20. 20. INVENTORY MANAGEMENT APEX AUTO LTD., 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 1ST STAGE WELDING 2ND STAGE ASSEMBLY TE 20789, TE 20790 TA 00233/03BSPATIL Page 20 CONTINUE
  21. 21. INVENTORY MANAGEMENT APEX AUTO LTD., CONTINUE OUT OF FIXTURE ND 2 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+/- 4mm Rejection/ Top lug distance WRT Boom Rectification End Bracket, Bottom lug ASSEMBLY OUT OF FIXTURE TA 00233/02 ROBOT WELDING LEFT OVER WELDING TA 0233/26 Not Ok FIT AND WELDBSPATIL SETTING Page 21 CONTINU
  23. 23. INVENTORY MANAGEMENT APEX AUTO LTD., Manufacturing process of Ex-70 Boom Manufacturing process of Ex- 70 Boom is having several steps already you knowin the flow chart now below showing manufacturing process in detail1. RAW MATERIALS In every manufacturing process raw materials must required there for APEX AUTOLTD (UNIT II) purchase raw materials from its main branch at JAMSHEDPUR and form ApexAuto Ltd (Unit I). Some materials directly comes to Unit II but some materials firstly comes toUnit I and after some process it is send to Unit II. Then the stores department sends materials toproduction department for production2. BOOM AND BRACKET ASSEMBLY In this process Boom and Bracket assembled or produced. Here firstly they join20mm Bkt Plate (RH) (TC 00558/01) and TA00233/22 according to the diagram. Then they join20mm Bkt Plate (LH) (TC 00558/02) and TA 00233/11. After that back up bars are join at thebottom of both 20mm Bkt plates. Then these two jointed by the plate Back up plate (TA00233/19), then they 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 PLATESBSPATIL Page 23
  24. 24. INVENTORY MANAGEMENT APEX AUTO LTD., Some plates beveled by Unit I and those plates are Top rolling plate(TA 00233/01),Side bend plate LH(TA 00233/07) and side bend plate RH(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) isjoined to Top rolling plate (TA 00233/01) at one side then at the top of the BOSS they join Sidebend plate LH (TA 00233/07). After that inside of the BOSS they join BOSS Back up Plate (TA00233/27). Then in the middle of Top rolling plate and Side bend plate they join Gassetplate(TA00233/05) and near to that Bend Gasset plate is joined with required dimension, afterthat Side bend plate RH(TA 00233/08) is joined according to diagram so this complete Subassembly first stage.5. OUT OF FIXTURE FIRST STAGE WELDING After completion of Sub assembly first stage each part is manually weld in thisprocess.6. SECOND STAGE ASSEMBLY In this process Back up bar (TE20789) 03 Back up bar(TE20790) are attached inthe inside part of Bottom rolling plate (TA00233/03) at the right side with required dimensionaccording to diagram7. OUT OF FIXTURE In this process second stage welding process is done manually.8. IN FIXTURE In this process firstly prepared Boom and Bracket is joined by using plates such asCover plate 6mm (TA00233/09) and Cover plate 8mm (TA00233/10), after that there is someplace which is empty so that place is been filled by plates Taper side Plate(TA00233/04) 2 platesaccording to diagram. So this process finishes boom and bracket assembly.9. LUG FITTINGBSPATIL Page 24
  25. 25. INVENTORY MANAGEMENT APEX AUTO LTD., In this process Lugs are fitted to the prepared component which are Top lug andbottom lugs and Top washers lugs and Bottom washer Lugs. Firstly bottom lugs are joined toeach other and then those lugs are attached to the bottom of the prepared component. Afterjoining the bottom lugs the top lug is joined to the top of prepared component with requireddimension or space so as to complete this process.10. INSPECTION This is an important stage in manufacturing process. In this stage they check totallength of the component. Total length should be 3720mm if there less difference of 4mm thenthere is no problem it must not exceed 4mm, then they also check centre point of the componentand top lug distance to the boom and bracket, and bottom lug distance of the components if thereis any problem found then they go for rectification of the component.11. ASSEMBLY OUT OF FIXTURE In this process they join one Top cover plate (TA00233/02) to the boom or preparedcomponent according to the standard diagram and they also join ‘M’ plate (TA00233/28) attachto the top lugs so this completes the process of assembly.12. ROBOT WELDING Robot is a programmable multiplication, manipulate design to material part, toolsor specialized devices are to carry out specific task. In Robot welding processed components are weld by Robot machine. Firstly theyset the programs to the robot for welding the components. Every component has is its ownwelding program according to the standard drawing of the components, after installation of theEx – 70 program the welding process of EX- 70 boom starts, Mig welding wire is been used bythe robot to weld the component.BSPATIL Page 25
  26. 26. INVENTORY MANAGEMENT APEX AUTO LTD.,13. LEFT OVER WELDING After completion of the Robot welding there are some spaces left which are weldmanually by welders. In this process they also join BOSS Reenforcement plate (TA00233/26) atthe top and bottom side of the BOSS according to the diagram.14. SETTING In this process they maintain required dimension in various parts of the componentsthrough the gas heating which includes Organ and Co15. INSPECTION In this process they measure the components by using measuring scale, try square,Vernier and gauges etc.16. MACHINING Machining process means removing the rough face as per the standard drawing. Inmachining process they have two type of jobs one is milling and the other is boring, in thisprocess they are using two type of machines one SHW that means hidden control machine andthe other is Fanuc control 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 to smooth milling andboring of the component in machining they are having there stages 1. Rough stage 2. Semi finish 3. Finish StageIn Ex- 70 boom components are having mainly four bores boss bore must have the size of 75mmand lug bore must have the size of 55mm and bracket must have 60mm.17. INSPECTION In this process they use the following instruments to check weather the machiningprocess is properly done or notBSPATIL Page 26
  27. 27. INVENTORY MANAGEMENT APEX AUTO LTD., 1. Bore dial gauge 2. Micrometer 3. Vernier 4. Measuring scale etc18. DRESSING Dressing is the very important stage in manufacturing process in this process theyclean the components by using grinding machine and sander machine to remove spatters chipsetc, here they also fit some items to prepare components to according to standard diagram.19. INSPECTION In this process they are checking welding defects in the components by usingUltrasonic Technique (UT) machine, the following are the defects we can find by using UTmachine. 1. Blow Holder area 2. Proper penetration 3. Porsity etc20. DISPATCH After completion of all this processes the quality assurance department checks thequality of the component and after checking they finally dispatch the product so this completethe manufacturing process of EX-70 boom 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 forits efforts, it has been certified by TELCON, and other quality maintaing institutions.BSPATIL Page 27
  28. 28. INVENTORY MANAGEMENT APEX AUTO LTD., INVENTORY MANAGEMENT Management of inventory assumes importance due to the fact that investment ininventory constitutes one of the major investments in current assets. The term inventory refers to the stockpile of the products a firm is offering for sale andthe components that make up the product. The assets which firms store as inventory inanticipation of need are:(i) Raw Materials: These represent inputs purchased and store to be converted into finished products infuture by making certain manufacturing process on the same.(ii) Work in Process: These represent semi-manufactured products which need further processing before theycan be treated as finished products.(iii) Finished Goods: These represent the finished products ready for sale in the market.(iv) Stores and Supplies:BSPATIL Page 28
  29. 29. INVENTORY MANAGEMENT APEX AUTO LTD., These represent that part of the inventory, which does not become a part of final product but are required for production process. They may be in the form of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc. Normally, they form a very minor part of total inventory and do not involve significant investment. Let us have a look on Different Inventory Management Views. Means emphasis role of Inventory Management in different Sectors. INVENTORY MANAGEMENT 3 V I E W SPhysical Inventory Logistic Inventory Management Management Financial Inventory Management BSPATIL Page 29
  30. 30. INVENTORY MANAGEMENT APEX AUTO LTD., Inventory Management is consisting of 3 hands. The first hand as shown in the diagramis that Physical Inventory Management, Second one is Financial Inventory Management and thelast one (third one) is Logistic Inventory Management. The reason behind of dividing these views is: to gather the information very easily andfor easy to understanding of each view thoroughly. Let us see the Meanings of each view one byone. Physical Inventory ManagementMeaning: “Keeping of goods is also a type of management. Whenever requirements comes fromthe production department, providing of those required materials in a proper manner & providingthose at the specified period, is the main motto of Physical Inventory Management.”Benefits for Holding Inventory: Benefits in Purchasing Benefits in Production Benefits in Work-in-Process Benefits in SalesObjects of Inventory Management: Usually, the company is faced with the following conflicting objectives in the area ofinventory management: 1. To carry maximum inventory in order to facilitate efficient and smooth production and sales operations.BSPATIL Page 30
  31. 31. INVENTORY MANAGEMENT APEX AUTO LTD., 2. To minimize investment in inventory for maximize the profitability. Both over-investment and under investment in inventories is undesirable as both involve theconsequences. The over-investment involves the consequences 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 to minimize theinvestment in inventory without affecting production or sales operations. Inventory, as a current asset, differs from the other current assets because only financialmanagers are not involved. Rather, all the functional areas, finance, Marketing, Product &Purchasing are involved. The job of the financial manager is to reconcile the conflicting viewpoints of the variousfunctional areas regarding the appropriate inventory levels in order to fulfill the overall objectiveof maximizing of owner’s wealth.Two-Bin System: Under this system, the inventory items are grouped into two categories. In one group orbin, sufficient quantity is kept to meet the current requirements over a designated period of item.BSPATIL Page 31
  32. 32. INVENTORY MANAGEMENT APEX AUTO LTD.,In another group or bin, a safety stock is maintained to meet the requirements of inventory attimes when the stock in the first bin is exhausted and re-ordering occurs. Financial Inventory ManagementMeaning: “Recording, maintaining and evaluating of stocks in a value terms is known as FinancialInventory Management.” In other words valuation of stocks, and controlling of ordering andholding costs and also maintaining of sufficient valued stocks in Inventory is known as FinancialInventory Management.”Financial Inventory Management is again divided into three different categories.1) Based on Valuation2) Based on Cost Analysis3) Based on Financial Statement1) Based on Valuation There are number of generally accepted methods of determining the cost of inventories atthe close of the accounting period. The selection of a suitable method assumes significance inview of the fact that it has a direct bearing on the cost of goods sold and consequently on profit.Therefore, the method should be selected in the light of probable effects on profits over a periodof years.BSPATIL Page 32
  33. 33. INVENTORY MANAGEMENT APEX AUTO LTD.,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 be viewed in thisperspective.First In First Out (FIFO) Method: The FIFO method of valuation of inventory is based on the assumption that the inventoryis consumed in chronological order, that is, those received first are issued/consumed first andvalue fixed accordingly. The merit of FIFO method is that the physical flow of materialsmatches the flow of cost.Last in First Out (LIFO) Method: Under the LIFO method, the cost of goods sold and the value of closing inventory can bedetermined only after the final lot of the year has been received. This is because of theassumption underlying the valuation of inventory, according to this method. As the name LIFOsuggests, the use of inventory is valued on the basis of the inverse sequence of receipts. Sincethe LIFO method assumes that the latest item in is the first item out, the current cost of materialsare matched with the current selling price/current revenues. This matching of current costs withcurrent revenues is the essence of the argument for the LIFO method.Average Cost Method: According to average cost method, each purchase is added to inventory and an averagecost determined. Materials are charged into cost of sales at this average until another lot isreceived, when a new average unit inventory cost is calculated.BSPATIL Page 33
  34. 34. INVENTORY MANAGEMENT APEX AUTO LTD.,Note: There are so many other than these above methods but most wide usefully methods arethese three so here we discussed those three methods only.2) Based on Cost AnalysisCost of Holding Inventory: - One operating objective of inventory management is to minimize cost. Excluding thecost of merchandise, the costs associated with inventory fall into two basic categories: (i)Ordering or Acquisition or Set-up Costs, and (ii) Carrying Costs. These costs are an importantelement of the optimum level of inventory decisions. 1) Ordering Cost: It is the fixed cost of placing & receiving an inventory order. Like (a) Preparing a purchaseorder or requisition form & (b) receiving, inspecting & reordering goods received to ensure bothquantity & quality. It is also called as setup cost. 2) Carrying Cost:BSPATIL Page 34
  35. 35. INVENTORY MANAGEMENT APEX AUTO LTD., The second broad category of costs associated with inventory is the carrying costs. They areinvolved in maintaining or carrying inventory. The cost of holding inventory may be dividedinto 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 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 move in the samedirection. If the level of inventory increases, the carrying costs also increase and vice-versa.Total Cost: The sum of inventory increases, the carrying costs represent the total cost of inventory.This is compared with the benefits arising out of inventory to determine the optimum level ofinventory.Economic Order Quantity (EOQ): How much inventory should be bought in a lot? Should the quantity to be purchased belarge or small? Should the requirements of material during a given period (say 6 months or 1BSPATIL Page 35
  36. 36. INVENTORY MANAGEMENT APEX AUTO LTD.,year) be acquired in one lot or should it be acquired in installments or in several small lots?Such inventory problems are called Order quantity problems. Therefore EOQ is that level of inventory at which total cost of inventory comprisingordering cost & carrying costs is the minimumFormulae 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.BSPATIL Page 36
  37. 37. INVENTORY MANAGEMENT APEX AUTO LTD., 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.Order 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 with suppliers.Safety Stock: It implies extra inventories that can be drawn down when actual lead-time and/or usagerates 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 RatiosBSPATIL Page 37
  38. 38. INVENTORY MANAGEMENT APEX AUTO LTD., 4. Payment of all requirements like Income Tax, Wealth Tax, Interests on debt etc., 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 thisstatement it can judge the financial strength of the Company. While analyzing of FinancialStrength of the Company, Inventory is also having its own emphasis role. Because if company ishaving less inventory than its requirement then company will get less finance from Banks andvisa-versa. So here 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 some important financialratios those, which are related to Inventory. From evaluating of these Financial Ratios, companycan judge the stocks/goods level in Inventory, so that company can get loan from Banks. The financial statement provides a summarized view of the financial position andoperations of a firm. Therefore, much can be learnt about a firm from a careful examination of itsfinancial statements as invaluable documents/performance reports. The analysis of financialstatement is, thus an important aid to financial analysis. The analysis of financial statements is a process of evaluating relationship betweencomponent parts of financial statements to obtain a better understanding of the firm’s positionand performance.Tasks 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.BSPATIL Page 38
  39. 39. INVENTORY MANAGEMENT APEX AUTO LTD., 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 and weaknesses ofthe firm by properly establishing relationships between the items of the balance sheet and theprofit and loss account. Financial analysis can be under taken by management of the firm, or byparties out side the firm, viz., owners, creditors, investors and others. The nature of analysis willdiffer depending 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. 2.Ratio Analysis related to Inventory Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the indicatedquotient of two mathematical expressions” and as “the relationship between two or more things.”In financial analysis ratio is used as a benchmark for evaluating the financial position andperformance 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 financial analysis is on thekey figures in the financial statements and the significant relationships that exist between them.BSPATIL Page 39
  40. 40. INVENTORY MANAGEMENT APEX AUTO LTD.,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 the Short run, usuallyone year. Liquidity ratios measure the ability of the firm to meet its current obligations.Liquidity ratios by establishing a relationship between cash and other Current assets to Currentobligations provide a quick measure of liquidity. A firm should ensure that it does not sufferfrom lack of liquidity, and also that it does not have excess liquidity. Therefore it is necessary to strike a proper balance between high liquidity and lack ofliquidity. 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 asset management.Sometimes, these ratios are also called efficiency ratios or asset utilization ratios. The efficiencywith which, assets are converted into sales. The greater the rate of turnover or conversion, is theBSPATIL Page 40
  41. 41. INVENTORY MANAGEMENT APEX AUTO LTD.,more efficient the utilization. For this reason, such ratios are also designated as turnover ratios.Turnover is the primary mode for measuring the extent of efficient employment of assets byrelating the assets to sales. An activity ratio may, therefore, be defined as a test of therelationship between sales and various assets of a firm. Several activity ratios can be calculatedto judge the effectiveness of asset utilization. 1. Inventory Turnover 2. Assets Turnover 3. Fixed Assets and Current Assets TurnoverAsset Measurement for different methods of inventory valuation:FIFO Method: Under this method, as noted earlier, inventory is valued on the assumption ofchronological cost flow. This implies that the unused/unsold inventory consists of the mostrecent purchases and, therefore, can be assumed to be valued at current cost. The vale ofinventory as show in the balance sheet would reflect the current cost, if FIFO method were used.LIFO Method: According to this method, obviously, the inventory figure would not appear in thebalance sheet at the Current Cost. It will reflect rather the cost of raw materials purchased in thepast year. Assuming rising prices, the inventory value based on the LIFO method would tend tobe undervalued. For example inventory purchased as early as six years or more. In thatsituation, the inventory figure included in the balance sheet would be actually the price paid onthe purchase of inventory six years ago. In a period of rising prices, this value would naturallyBSPATIL Page 41
  42. 42. INVENTORY MANAGEMENT APEX AUTO LTD.,be grossly out of line with the currently prevailing price. This would imply that the balancesheet would not reflect the current worth of the inventory. That the inventory value will not becorrect is another way of saying that the balance sheet will present a distorted picture of theaffairs of the firms. A possible solution to correct the above distortion in the balance sheet implicit in theunder-valuation of inventory with the LIFO method is a modified/adjusted LIFO method. The modified method will, thus, serve the needs of correct income determination as wellas correct asset measurement. However, this is subject to a qualification, namely, the currentyear’s purchase (units) should exceed the current year’s consumption (units). If for reasons suchas strike/lockouts, transportation problems, and so on, the current consumption exceeds thecurrent purchases, profits will rise. The increase will depend upon the extent of liquidation ofthe previous years’ inventory. This increase in profit is termed as liquidation profit, which isequal to the difference between the current cost of inventory and the cost of inventory purchasedin the past.BSPATIL Page 42
  43. 43. INVENTORY MANAGEMENT APEX AUTO LTD., Logistics Inventory ManagementMeaning of Logistics: Logistics is the Organization of Services and Supplies. In other words, logistics ismaking and taking the permission for sell/exporting the company’s products in foreign countries. In fully export-oriented business this is one of the main department, where thisdepartment gets an approval to sell their goods in foreign countries. And also their mainintention is to maintain all documents of those that are related to the exporting of their products.Logistics Inventory Management: Yes, already we have observed about the meaning of Inventory Management in theOrganization. But in fully export oriented business; Inventory Management is a very importantconcept. Because every exporter or importer, they do not know about each other who are stayingin other countries. So every company, which are exporting or importing of materials, they shouldcommunicate each other through banks only. These banks are listed by Central Bank of thatBSPATIL Page 43
  44. 44. INVENTORY MANAGEMENT APEX AUTO LTD.,Nation. In our Country RBI is lists some banks for intermediating purpose and every year RBIdeclare some listed Banks as a mediator. For producing of materials and selling of those materials, every company/business shouldneed a Working Capital. This Working Capital can also financed by Banks. While in exportoriented business it is slightly different task. Here Banks can acts as financial assistance for Pre-Shipment and for Post Shipment 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 Commercial Papers. Which arealso parts of financing the working capital requirements of the Companies.Commercial Papers (CPs): In the recent past, Commercial Papers (CPs) have become one of the best methods forfinancing the working capital requirements of the companies. The companies trying to raise the funds by issuing the CP are regulated by Guidelines forissue of Commerical Papers (CP), 2000 issued by Reserve Bank of India on October 10, 2000.These guidelines apply to the companies trying to raise the funds by issuing the CPs. As perthese guidelines, a a company means a company as defined in section 45-I(aa) of Reserve BankBSPATIL Page 44
  45. 45. INVENTORY MANAGEMENT APEX AUTO LTD.,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. In the Indian circumstances, banks play a very major role in financing the working capitalrequirement of the organizations. We will consider the bank as a source for financing theworking capital requirement of the organizations under the following heads:Amount of Assistance To obtain the bank credit for financing the working capital requirements, the company isrequired to estimate the working capital requirement properly. To estimate the requirement ofworking capital requirement properly, the company will be required to estimate its level ofcurrent assets and current liabilities properly, as working capital is the difference between currentassets and current liabilities. For this, the techniques like ratio analysis, trend analysis etc., can be used by thecompany. More accurate the estimation of the level of current assets and current liabilities, moreaccurate the estimation of level of current capital. Then, the company will have to approach thebank along with the necessary supporting data. On the basis of estimates submitted by thecompany, the bank may decide the amount of assistance that can be extended. While extendingthe working capital assistance, the bank may prescribe the margin money requirement. Themargin money stipulation is made by the banks in order to ensure that borrowing company’s ownstake in the business and also to provide the cushion against the possible reduction in the valueof security offered to the bank. The percentage of margin money stipulation may depend uponthe credit standing of the borrowing company, fluctuations in the price of security and thedirectives of RBI from time to time. The general principle applicable will be, “more dicey thenature of security, higher of security, higher will be the margin money stipulations.”BSPATIL Page 45
  46. 46. INVENTORY MANAGEMENT APEX AUTO LTD.,Form of Assistance:After deciding the amount of overall assistance to be extended to the company, the bank candisburse 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 any physical outflow offunds. As such, the funds position of the lending bank remains intact. The Non-Fund BasedLending can be made by the banks in two forms: a. Bank Guarantees b. Letter of CreditFund Based Lending:BSPATIL Page 46
  47. 47. INVENTORY MANAGEMENT APEX AUTO LTD.,In case of Non-Fund Based Lending, the lending bank commits the physical outflow of funds.As such, the funds position of the lending does not affected. The Fund Based Lending can bemade 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. But normally noassistance will be available unless the company offers some security in any of the followingforms.1) Hypothecation.2) Pledge3) Lien4) MortgageBSPATIL Page 47
  48. 48. INVENTORY MANAGEMENT APEX AUTO LTD., Process of Physical Inventory Maintenance in Apex Auto Ltd Each unit of Apex auto ltd has its own store department that we can call it as Work-in-process inventory. This inventory process is fully computerized and here paper work is very less. Onlymaintaining of documents, which were sent by suppliers as like challans etc., are only here tomaintain as paper documents. Otherwise it is fully computerized. Through computers only StoreDepartment receives Purchase Order and by computer only they send documents of issuing ofmaterials to manufacturing unit. For easy to communicate and planning of production activity, Apex Auto Ltd Unit II hashaving only one Godown in Procedures involved in receiving and issuing of materials are asfollows:1) Godown will first get Purchase Order No..Purchase Order Number:BSPATIL Page 48
  49. 49. INVENTORY MANAGEMENT APEX AUTO LTD., This PO is comes from Purchase Department. This Purchase Department gives a numberfor the each order made by Purchase Department only. Before placing any order to suppliers they first checks the materials in inventory as toknow about whether materials are available in Inventory or not. If not available in Inventorythen only they will place an order according to the requirement. In Apex Auto Ltd (Unit II), it is very important to note that: purchase department alwaysplaces an order to those materials which have ordered by Customers/buyers of Apex Auto Ltd(Unit II). So, normally it does not have any stocks in its inventory. For every order from customersthey make a fresh Purchase Order for purchasing of materials. It means whatever the materialsare requiring for present orders, those materials are only they kept as stocks in Inventory. In some cases, materials may be in Godown, which they call it as “Buffer Stock”. Ifthese old stock is matches the requirements of product which has ordered now by its customers,then purchase Department will sent a notice to Inventory for issuing of those materials. Theseold stock may be in form of Raw Material or in form of finished goods. Apex Auto Ltd (Unit II)always produces more than its requirements. For example if Telcon has ordered for 20 EX- 70boom then Apex produces 25 EX – 70 i.e., 20% more than its requirements. So the remaining orexcesses material they call it as “Buffer Stock”.2) Receiving of Materials Any materials comes-in or goes-out from the Godown it should be enter in the Gate thatis they call it as “Gate Entry”, which is maintained by security Guard. Guard is not anemployee of an organization. He is a contact-based employee.BSPATIL Page 49
  50. 50. INVENTORY MANAGEMENT APEX AUTO LTD., 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 department put these detailsin manual book, this documentation is called as “Day Book.” This daybook is consisting ofinformation 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 inspection department. In thisinspection department they inspect in-details of materials. After approval by inspectiondepartment, this inventory department makes one document, which is they call it as “GoodsReceived 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, PriorityNo., all Details of Materials and received quantity and actual quantity also enters there. 3. Issuing of MaterialsBSPATIL Page 50
  51. 51. INVENTORY MANAGEMENT APEX AUTO LTD., Merchandising Department will send one card called “Job Card” which it consisting ofall details of materials requires to produce a product. According to that Card Inventorydepartment should send the materials to manufacturing department. After receiving of materials by manufacturing department from inventory departmentthey issue one document about received of materials, quantity, description of materials etc.Manufacturing Department uses these materials for manufacturing purpose. In manufacturingprocess sometimes it may happens like some materials get damages and some are not fullymatches with requirements. Then those materials will be return to inventory. After utilizing of all these materials by manufacturing department they will send onedocument called “Order Completion Report” (OCR). This report consists the information ofPercentage of Utilized Materials for particular order and percentage of wastage of materials.This report will send to inventory and also to Merchandising Department.4. Return Back Materials from Manufacturing Units: Inventory takes those materials, which are return back from manufacturing units becauseof excess or surplus occurs while manufacturing of products. This excess or surplus existsbecause of purchase department, they always orders 20% more than its requirement to meet therequirement of next 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 of Order. Inventoryissues these materials (Buffer Stock) only when it receives instruction from Merchandising andpurchasing Department.5. Rejected Materials:BSPATIL Page 51
  52. 52. INVENTORY MANAGEMENT APEX AUTO LTD., Inspection department make the rejection of materials, when materials are not as perrequirements and not as per the order. These rejected materials are kept in separate section byInventory Department. Inventory department inform to Purchase Department and also notice to Suppliers aboutrejection of materials. That is called “Rejection Card.” In this card it involves Name ofSupplier, Description of Materials, Challan No., Challan Date, Gate Entry No. & Date, No. ofQuantity rejected, Reason for rejection etc., Some times supplier may issue new materials in place of rejected materials. Or he maygive some compensation for wrong supply and that is after paying of full payment of materials.Sections in Inventory: Inventory is again divided into 5 sections. Each is section handling by only one persons,with the help of 3 to 4 assistants, who helps in maintaining of materials at specific area. Fivesections are as follows:Sections in InventoryD201All bought out items are been stored here and processed to the manufacturing as when requiredD202All consumables and tools and maintenance accessories are been stored in this sectionD203All raw materials like direct, semi finished goods are stored in this section and processed to themanufacturing as when required and old stock and rejected items are also stored in this section.D204Gas tank and cylinders is stored in this section.D205BSPATIL Page 52
  53. 53. INVENTORY MANAGEMENT APEX AUTO LTD.,All finished goods are stored in this sectionPurchasing Procedure of Materials In Apex they purchase materials at from a multiple Suppliers. There is a reason forpurchase materials from multiple suppliers. The reason is if one supplier delays to fulfill thesupply then there must be alternative supplier for it to fulfill the requirement. So there must meno stock outs in the production process Apex always purchases at bulk but by schedule wise. In other words they purchasematerials at a time for specific order. They make the agreement of supplying materials only atonce. And they negotiate the price only at once that is before supplying of materials and oncetheir agreement is over then they provide schedule to supplier to supply the materials at aspecific time and at a specified quantity. So it reduces the spaces, which occupies in the Godown. So this method is suitable forthis type of industry because of same orders from customers.BSPATIL Page 53
  54. 54. INVENTORY MANAGEMENT APEX AUTO LTD.,WIP Store Now we come to the WIP Store. As we have already seen that this Apex is having onlyone Godown and every unit is having its own Store Departments. As we know that Work InProcess Store means Semi-finished Goods, here goods are not completed yet and not these are infully raw materials form. So in valuation matter it is having slightly different way. And in Apex it is as follows:Yes, these goods are includes some labour cost, some other costs. So in valuation of WIP theyvaluate at Raw Material Price of that goods PLUS incurred cost to produce till now.Finished Goods Valuation of Finished Goods in Apex is at 10% less than Selling Price of those finishedgoods. Finished Goods are in the sense these goods should be ready to dispatch. There is no separate Godown for Finished Goods/Products. Every unit is having it’s ownFinished Goods Godown. In that Godown only they store these Goods. And dispatching ofthese products is directly by each unit. They do not consolidate these goods; they dispatch thesefinished products directly by each unit. Apex auto ltd (Unit II) has only one customer that is Telcon. So they directly supplyfinished products to its customers. So it is not necessary to have another Godown for FinishedGoods.BSPATIL Page 54
  55. 55. INVENTORY MANAGEMENT APEX AUTO LTD., Logistics Inventory Management There is a department called Logistic Department in Apex Auto Ltd, which is concerningabout selling of goods and maintaining of all documents related to exporting of products and alsotaking the permission from banks to sell specific products in specific countries. So LogisticDepartment is one of the important front-office Departments, like Marketing Department. Marketing Department is one, which takes the orders from its customers. And this isentirely different from Logistic Department. Logistic Department is one, which sells its productsand maintains all documents. But Marketing Department is comes into picture before productionprocess starts. And Logistic Department comes into picture only after the production processcompletes. Logistic Department is not only taking the approval for selling its products, but also itwill concern for taking loan for its working capital. Banks will provide these working capitalBSPATIL Page 55
  56. 56. INVENTORY MANAGEMENT APEX AUTO LTD.,requirements in two senses: one is on Pre-Shipment Loan and another one is Post-ShipmentLoan. There are so many ways to get loan for working capital requirement. Apex get loan forWorking Capital requirement either through Commercial Papers or through Letter of Credit.Apex is taking loan for Working Capital Requirements 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 reduced by intangibleassets like accumulated losses, deferred revenue expenditure etc. Free Reserves include sharepremium and debenture redemption reserve but do not 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 ofdiscount is required to be decided by the issuer and is not regulated. Before the company issues the CPs it is required to obtain satisfactory credit rating froman approved credit rating agency. Presently, following credit rating agencies have beenapproving by RBI for this purpose. a. Credit Rating Information Services of India Ltd., (CRISIL)BSPATIL Page 56
  57. 57. INVENTORY MANAGEMENT APEX AUTO LTD., 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 given by any otheragency, equivalent minimum rating will be required. The rating so obtained by the companyshould be current and should not have fallen due for review.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. 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.BSPATIL Page 57
  58. 58. INVENTORY MANAGEMENT APEX AUTO LTD.,It will not be out of place to mention here that CP is not treated as deposit as per the provisionsof Section 58-A of the Companies Act, 1956.Procedure for issuing the CPs: Every company issuing the CP should appoint a scheduled bank as the Issuing andPaying Agent (IPA). It will satisfy it-self that company has obtained satisfactory credit rating. Itshall also verify the documents submitted by the issuing company and issue a certificate that thedocuments are in order. IPA should also certify that it has valid agreements with the issuingcompany. The issuing company shall arrange to place the CPs on private placement basis with theinventors. The issuing company shall disclose to the potential investor its financial position.After the deal is confirmed, the issuing company shall issue physical certificates to the investor.Investors shall be given a copy of IPA certificate to the effect that the issuing company has avalid agreement with the IPA and documents are in order. Every issue of CP should be reportedto RBI through the IPA within three days from the date of completion of issue. Apex Auto Ltd (Unit II) has setup in Telcon Premises so as we know earlier that ApexUnit II is having only one customer that is Telcon so for short distance there is no need oflogistic department in Apex Unit II it is handled by Purchase department incharge is ParmodSingh.BSPATIL Page 58
  59. 59. INVENTORY MANAGEMENT APEX AUTO LTD., Financial Inventory Management Already we saw about Logistic Inventory Management. Let us see how Apex valuatesthe old and rejected stocks in financial terms and also have a look on the inventory ratios.Valuation method for Old and Rejected Stocks:Old Stock: This old stock means excess of materials from specific order. As already viewed inPhysical Inventory Process that, always purchase department purchases 20% more than itsorder. So that remained or excess materials are said to be “Buffer Stock” These Old stock are in the form of Raw Materials then valuate it according to purchasingof those materials. If these old stock are after Finishing of production process. Then these arevaluating on selling price of same products to the customer.BSPATIL Page 59
  60. 60. INVENTORY MANAGEMENT APEX AUTO LTD., In easy words it can be said that if materials are Raw, then taking as Purchasing value forvaluation purpose. If materials are Finished Goods then taking Selling Price as a value forvaluation of Old Stock in Godown.Rejected Stocks: Again these are divides into three parts. Rejection of Raw Materials i.e., before sendingto Production Process. Rejection of Materials during the Production Process and Rejection ofMaterials after the Production Process that is, Rejection of Finished Goods. Rejection of Raw Materials is valuating on Purchase value of those materials. Rejectionof WIP Materials then valuate as Purchase Value Plus its partly incurred Costs like Labour,Overhead Costs etc., And for Rejection of Finished Goods valuate at Purchase Value and Fullyincurred Costs as said now.Holding or Ordering Cost These costs are every important in manufacturing companies to minimize the cost. Thisis not applicable to Apex by virtue of its Business activities. Because, let us have a broad viewon 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 well before order startsand also Apex can have a full stock at a time before starting process of product of that specificorder.EOQBSPATIL Page 60
  61. 61. INVENTORY MANAGEMENT APEX AUTO LTD., 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 of Business.Lead Time Apex purchases materials from multiple supplier and by on schedule basis to supplymaterials. So this is also not applicable in this type of business.BSPATIL Page 61
  62. 62. INVENTORY MANAGEMENT APEX AUTO LTD., Financial Ratios related to Inventory.Raw material turnover ratio: Raw material turnover ratio is velocity at which raw material converted into goods readyfor sale. If raw material turnover ratio is high then company is efficiency converting into finishedgoods.Formula: Material consumed / Average raw material Raw Material Turnover Ratio Year Raw material consumed (Rs) Avg R.M Ratio 200 8 576,484,922 53,608,082 10.75 200 7 371,223,873 36,137,266 10.27 200 6 230,779,236 132,002,490 1.74BSPATIL Page 62
  63. 63. INVENTORY MANAGEMENT APEX AUTO LTD., Ratio 12 10 8 6 Ratio 4 2 0 2008 2007 2006 YearsForm above graph we come know that raw material turnover ratio is increased rapidly in 2007from 1.74 in 2006 to 10.27 for 2007. Indicates that company is converting raw material intofinished or semi finished goods very quicklyHolding period of raw material: It refers to the number of days taken for the production unit to convert rawmaterial to finish goods.Formula: 360 /Raw material turnover ratio Holding period of raw material Year Total Days Ratio Days 2008 360 10.75 33 2007 360 10.27 35 2006 360 1.74 206BSPATIL Page 63
  64. 64. INVENTORY MANAGEMENT APEX AUTO LTD., Raw material holding Period 250 200 150 RHP 100 D A Y S 50 0 2008 2007 2006 YearsAs the raw material turnover ratio is increasing form to 10.27 for 2007 it indicates that firm istaking less days for conversion as compared to 2006. In 2006 conversion period was 206 daysbut in decreased to 35 days for 2007. This is shown in above graph. Before 2007 there was no production process they were converting semi finished goodsinto finished products hence to start their own production process they hold the raw material in2006Work in Process Turnover ratio: Work in process turnover ratio is velocity at which W.I.P converted into goods ready forsale. If W.I.P turnover ratio is high then company is efficiency converting 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 23.12BSPATIL Page 64
  65. 65. INVENTORY MANAGEMENT APEX AUTO LTD., 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 25 20 Ratio 15 D A Y S 10 5 0 2008 2007 2006 YearsForm above graph we came to know that Work in process turnover ratio is decreasing from37.01 in 2006 to 23.12 2008. The ratio was high in 2006 as compared to 2007 and 2008. Theratio was 37.01. Indicates that company is converting semi finished into finished goods quicklyHolding period of W.I.P: It refers to the number of days taken for the production unit to convert semi finishedgoods into finish goods.Formula: 360 W.I.P turnover ratioBSPATIL Page 65
  66. 66. INVENTORY MANAGEMENT APEX AUTO LTD., 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 10 Ratio 8 6 D A Y S 4 2 0 2008 2007 2006 YearsAs the work in process turnover ratio is increasing form 9.72. in 2006 To 15.57 for 2008 itindicates that firm is taking less days for conversion. Which shown in above graphFinished goods turnover ratio:BSPATIL Page 66
  67. 67. INVENTORY MANAGEMENT APEX AUTO LTD., Finished goods turnover ratio is velocity at which finished goods converted into for sale.If finished goods turnover ratio is high then company is efficient.Formula: Cost of goods sold Average finished goods Finished goods turnover ratio Year cost of goods 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 Finished Goods Turnover Ratio 34 33 32 31 30 Ratio 29 28 D A Y S 27 26 25 2008 2007 2006 YearsForm above graph we came know that finished goods turnover ratio is decreasing from 33.01 in2006 to 27.95 for 2007. Indicates that company is selling goods little slowly as compared to2006 but it is bit fast as compared to 2008. Where the ratio for that particular period was 32.35decreased to 11.20 for 2008 it is satisfactory. Which shown in above graph.Inventory to capital employed:BSPATIL Page 67
  68. 68. INVENTORY MANAGEMENT APEX AUTO LTD., This ratio indicates the relationship between the total capitals employed and inventories itshows how much capital utilized to invest in the inventories other than the other assets. Thenormal manufacturing firms have low ratio of inventory total capital employed in theorganization.Formula: Inventory / Total capital employed Inventory to capital employed Total capital Year Inventory employed Percentage 2008 197,465,069 301,443,215 65.50 2007 121,558,000 145,492,599 83.54 2006 67,994,623 98,333,324 69.14BSPATIL Page 68