An Operations Management

report on
A STUDY ON INVENTORY
MANAGEMENT WITH
REFERENCE TO LEADING
AUTOMOBILE INDUSTRY
by NANDINI
RAVICHANDRAN.
BEST: International Journal of
Management, Information
Technology and Engineering
(BEST: IJMITE)ISSN 2348-0513Vol.
2, Issue 5, May 2014, 15-28 BEST
Journals

Submitted by:
Aman Pachisia (UEMF16003)
Bindhya Basini Mishra (UEMF16008)
1. Introduction
Inventory is one of the largest and most important assets a manufacturing
business possesses, and the turnover of inventory is one of the principal sources
of revenue generation for a company. Inventory decisions directly affect the
value of cost of goods sold and consequently play a pivotal role in determining
the reported earnings of a company. As a result, a thorough analysis of inventory
valuation and related accounts can provide a basis for assessing the financial
position of a firm .
2. Case Abstract
Here the author has analyzed the inventory management of Ashok Leyland Ltd.
It includes the complete study to conduct Ratio Analysis, ABC and VED Analysis
for inventory. This deals about the entire activities of purchase and stores
department to suggest the suitable technique to the company to have improved
control over the inventory.
3. Research Variables
To find out the cost involved in the entire inventory management process
To ensure that the supply of raw material & finished goods will remain
continuous so that production process is not halted and demands of
customers are duly met.
To minimize carrying cost of inventory.
To keep investment in inventory at optimum level.
To reduce the losses of theft, obsolescence & wastage etc.
To make arrangement for sale of slow moving items.
To minimize inventory ordering costs.
4. Limitations of the Research

The information, which was needed, could not be made public by the
organization.
The study is related to the only one leading Automobile Industry only.
The finding and suggestion cannot be generalized.
Inventory management is the continuous process & it may study over a year.
But field work for 60 days only, and it is a vast topic also, so study and
analysis on this topic within this limited period was not sufficient.
All the processed are going through the SAP System so there are the
limitations regarding the analysis of the data without user of that company
only.
Maximum data used for research is secondary data is used.

5. Research Methodology
Primary data- The primary data is collected by personal interviews
with officials.
Secondary data- Files, annual reports, periodicals, manuals and text
book. Which have already been passed through the statistical
process are the secondary data used.

6. Data Analysis & Research Findings.

During the first four years i.e. in Financial Year 2008-09 to 2011-12. During
the above four years the inventory level increased from 133001 lakhs to
223063 lakhs. It indicates a positive growth rate of 67.71%. But in the
Financial Year 2012-13 inventory level decreased to 189602 lakhs which was
about 17.64% of the inventory value as maintained in the Financial Year 201112. The analysis suggests that the company invested more funds in
inventories during the first four years of study period but in the previous year
it has invested less i.e. in year 2012-13.
Year

March13

March12

March11

March10

March09

Sales

1329856

1372081

1215300

787260

666664

Inventory

189602

223063

220890

163824

133001

 The Inventory Turnover Ratio increased from 5.22 to 6.45 with an average of
5.89 this is considered as unsatisfactory position.
Year

Net Sales

Average
Inventory

Stock
Turnover
Ratio

March13

1329856

206332.5

6.45

March12

1372081

221976.5

6.18

March11

1215300

192357

6.32

March10

787260

148412.5

5.30

March09

666664

127696

5.22

 There has been an increasing trend holding days from 2009- 2011 after
which it has again declined and started increasing from the year 2012.
The Raw Material Turnover based on Cost ranges from 1.11 to 0.9. The days
of Raw Material Inventory Holding Period gives the time period of holding
inventory. It implies high carrying cost. But in the year 2012-2013 the
company has tried to reduce the holding days and it indicates the reduction of
carrying cost which proves the effectiveness of a system of inventory
management.
The Work in Progress Inventory turnover and of inventory holding. We can
observe that the firms average WIP turnover ranges from 0.45 to 0.82. The
company has to work more on the work in progress as the holding days are
more.
The firms Stores and Spares Turnover ranges to 0.97 and also the holding
days indicate management has to reduce the holding days to a huge extent.
Inventory to Sales Ratio: The percentage of inventories the company
currently has on hand to support the current amount of sales. A decreasing
Inventory to Sales ratio in the Financial Year 2013 indicates a positive sign.
Cash Conversion Cycle Analysis: The firm needs to get goods 57 days before
it will actually sell the resulting goods. The first 57 days of that time, it will not
yet have paid its suppliers. But that leaves 0 days (57-57) that it will have to
hold inventory that has already been paid for but that has not yet been sold.
Then, after making the sale it will have to wait for another 39 days before it
can collect the cash from its own customers. The total is 39 days that the
company must be able to operate without the cash its operations will
eventually generate.

 ABC Analysis: This firm also has a D Category items apart from AB & C
items. It has to buy more of C Category items rather than AB and D but at the
same time it has to keep a close watch on Focused goods that is high valued
goods as it is kept in low volume but a close assistance is given since value of
these goods is high.
7. Criticism & Suggestions:
The study was restricted only to one company. Better analysis could be done if
the companys figures were compared to other companies of the same sector.
Firms may have different incentives that influence their inventory decisions.
Management may benefit from reaching a certain earnings estimate, or may
have pressure to show steady growth in income and consistent inventory levels.
Other important Metrics like (COGS/inventory), inventory period (365/inventory
turnover), return on assets (net income/total assets), return on sales (net
income/sales), total asset turnover (sales/assets), return on equity (net
income/shareholders equity), gross margin percentage (gross margin/sales),
accounts receivable/sales, and inventory/sales could have been used.
If a firm with a relatively low inventory turnover starts making its inventory
leaner over time, and this change corresponds to a steady increase in return on
equity, we can make the assertion that as the firm has gotten leaner over time,
it has become more efficient and profitable for its stakeholders.
Another disadvantage of using ratio and trend analysis are that ratios are only
indicators and they cannot be taken to solely determine the financial position of
the business. In other words, ratios can be misleading and financial data is open
to manipulation through accounting techniques and discretionary decisions by
management.
Finally, the statistical methods that were used are very simple and do not
describe how correlated the data is, or show how certain measures vary in
relation to other measures. Having limited knowledge of other statistical
methods of analysis, this study takes more of an observational trend analysis
than an empirical one.

8. Conclusion

Inventory is constantly changing as quantities are sold and replenished. Since the
Inventory Turnover Ratio shows the increasing trend, there will be more demand for
the products in the future periods. If they could properly implement and follow the
norms and techniques of inventory management, they can enhance the profit with
minimum cost.
From the study it is predicted that future sales have to be achieved and inventory
level have to be maintained. The company has to periodically review the inventory
to avoid production loss. Hence it can be understood that efficient inventory
management can take the company to new heights and inefficient inventory
management can ruin the company.
Based on the trend and ratio analysis performed in this study, I conclude that firms
that have lean inventories in the automotive manufacturing industry, including both
large manufacturing companies and suppliers of parts for the manufacturers, are
better positioned to withstand economic pressures than non-lean firms. While firms
have become more efficient over time and inventories have become a smaller part
of their total assets on the balance sheets, inventory turnover is still a key indicator
of their operational efficiency. Therefore, their inventory leanness seems to be
associated with lower costs, and allows them to remain efficient even when
economic pressures drive demand and sales down. On the other hand, some firms
like Ford Motors may be operationally efficient and have very lean inventories, but
have comparatively low returns for their stakeholders. Such firms may simply have
a poor or unpopular product which does not generate high returns, despite the
operational efficiency within the firm. Indeed, while having lean inventories does by
no means guarantee firm success over time, it allows successful firms to continue to
perform well and endure economic crises.