An

Interim Dissertation on

“Business Forecasting and Inventory management Using Statistical Tools: A

case study of Integrated Textile Industry”

in partial fulfilment of the requirement for the award of degree

of

Master of Technology

in

Industrial Engineering & Management

By

Gautam Patel
(15MT000560)

under the guidance of

Prof. Niladri Das

(Professor)

Department of Management Studies

Indian Institute of Technology (Indian School of Mines)
Dhanbad – 826004
 CERTIFICATE

This is to certify that the interim dissertation entitled “Business Forecasting and Inventory
management Using Statistical Tools: A case study of Integrated Textile Industry “submitted
by Gautam Patel (15MT000560) of Indian Institute of Technology (Indian School of Mines)
Dhanbad in partial fulfilment of the requirement for the award of the degree of Master of
Technology in Industrial Engineering & Management is a record of bonafide work carried
out by him under my guidance. During the work, he was found sincere, hardworking and
punctual in his approach.

(Prof. Niladri Das)

DMS
IIT(ISM)
Dhanbad- 826004

i
 DECLARATION

I, Gautam Patel, hereby declare that the dissertation entitled, “Business Forecasting and
Inventory management Using Statistical Tools: A case study of Integrated Textile
Industry”, submitted in partial fulfilment of the requirement for the award of the Degree of
Master of Technology in Industrial Engineering and Management is a record of original work
undergone by me, under the supervision and guidance of Prof. Niladri Das, Asst. Professor,
Department of Management Studies, Indian Institute of Technology(Indian School of Mines)-
Dhanbad and it has not been copied from anywhere or formed the basis for award of any other
Degree/Diploma/Fellowship or other similar title to any candidate of any University.

Place: Dhanbad Gautam Patel

Date: 10.11.2016 (15MT000560)

ii
 ABSTRACT

Inventories are the stock of goods or materials available for smooth running of any business. It
constitutes a major component of current assets. . Because of the large size of inventories
maintained by Textile firms, a considerable amount of funds is invested. In textile manufacturing
Industry, estimation of inventory cost is about 40-60 % of total current assets .Inventories in
textile industries includes Raw materials, Work in progress, finished goods, Spare parts,
consumables and goods in transit .In textile composite Unit, Fibres as raw material for yarn
manufacturing is converted into yarn as finished product for spinning industry but serve as raw
materials for fabric manufacturing industry. Similarly Grey fabric is raw material for textile wet
processing industry. Here we are focussing on Raw materials of spinning industry and finished
processed fabric Inventory. Both raw materials and finished processed fabrics possess high
inventory cost. Finished fabric division comprises of 30-40% of total inventory cost. As in recent
past many textile industries which are in profit showing loss in business because of their high
inventories of raw materials and finished goods. Hence, the impact of inventories can’t be
neglected in smooth running of business. It is, therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid unnecessary investment .The basic
objective of Inventory management is to optimize the size of inventory in a firm for providing
products at minimum cost. The recent collapse of business draw the attention of management
towards inventories which constitutes high investments and pausing of funds.

Absence of effective and efficient control system in textile industry regarding inventory
management has evoked the case study. In this case study, my team will unravel the various
loopholes and identify the various areas of inventory management by using various analysis such
as Stock turnover ratio, ABC ,VED,FSN ,XYZ,SDE etc. and Inventory models. Apart from that
our team is also focussing on Business forecasting by using different forecasting techniques like
time series, average method, Trend analysis ,Regression analysis etc. our main focus is to
minimize cost and improve material flow.

Keywords: Inventory cost, Inventory management, stock turnover ratio, Inventory models,
Business Forecasting, Time series, Regression analysis.

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 ACKNOWLEDGEMENT

Firstly, I would like to acknowledge my esteemed guide, Prof. Niladri Das for his immeasurable
guidance, patience and support during the course of this work. Also I would like to express my
gratitude to the faculty members of Department of Management Studies, Indian Institute of
Technology (Indian School of Mines) - Dhanbad for their invaluable suggestions and comments.

I would also like to thank Mr.Harsh Mani Tripathi, Sr. Vice President, Vardhman Fabrics
Limited, Budni, whose guidance and support throughout helped me in completion of this study.
In addition to this, I would like to thank managers, namely, PK Das(Head, PPC),SS Bains (VP,
Processing),S.Gehlot (VP, Weaving),Vinod chourey(HR Manager)for their sharing of knowledge
regarding the study.

During the course of study, I met several professionals, several discussions were held. I would
like to express my genuine thanks to all of them who were helped and involved in completion of
my study directly or indirectly.

Lastly, I would like to thank my family for their valuable support, love and encouraging my
personal development.

I perceive as this opportunity as a milestone in my career and will strive the gained skills and
knowledge in the best way. Hope to continue cooperation with all of you in the future.

Place: Dhanbad Gautam Patel

Date: 07.11.2016 (15MT000560)

iv
 TABLE OF CONTENTS

1. CERTIFICATE…........................................................................................................ i
2. DECLARATION ........................................................................................................ ii
3. ABSTRACT ............................................................................................................... iii
4. ACKNOWLEDGEMENT .......................................................................................... iv
5. TABLE OF CONTENTS ............................................................................................ v
6. LIST OF FIGURE….................................................................................................... vi
7. LIST OF TABLES ...................................................................................................... vii
8. INTRODUCTION ........................................................................................................ 1
1.1 About the existing system: .................................................................................... 1
1.2 About the study: .................................................................................................... 2
1.3 Problem statement: ............................................................................................... 3
1.4 About different statistical tools…………………………………..…….………….3
1.4.1 Definition of Data Analysis….......................................................................... 3
1.4.2. Classification of Inventory ...................................................................... 3
1.4.3. Business Forecasting Techniques.............................................................. 5
1.4.4. Objective of stud…………………............................................................ 6
1.5 Objective of the study: ....................................................................................... 6
1 LITERATURE REVIEW ................................................................................................ 8
2 REFERENCES ............................................................................................................... 10

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 LIST OF FIGURES

Figure 1. Rough Sketch of Plant Layout with various godown and CWH............................... 2
Figure 2. ABC classification Chart........................................................................................... 3
Figure 3.XYZ analysis when combined with ABC analysis......................................................4

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 LIST OF TABLES

No table of figures entries found.

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 1. INTRODUCTION

1.1 About the existing system

Inventory is the stock of goods and materials available at any period of time in a firm. In any
Organisation Inventory are maintained at sufficient level for various aspects of business.
Inventories in textile manufacturing industry constitute fibres in bale forms, Yarn packages,
Grey fabric, and processed fabric. These are Raw materials and finished goods inventories.
Beside these, there are variety of work in progress inventories, Spare parts of machineries,
Utilities inventories, and other consumables. . In textile manufacturing Industry, estimation
of inventory cost are about 40-60 % of total Current assets. Among them, raw materials and
Processed fabric consumes high inventory costs and need to have proper control system to
reduce inventories by 20 to 30 % without affecting the manufacturing process. Also business
forecasting helps us in understanding the demands and supplies of materials to manage
inventory in better way. In present scenario, Vardhman have one and half crore meters of
finished fabric stored in Central Ware House (CWH) managed by automatic MHA using
barcoding system for quicker dispatch and delivery. Beside these there are separate Godown
for grey fabric in both weaving units, Yarn Godown in 4 spinning units, and 19 Godown for
raw materials storage shown in figure 1.
Inventory optimisation is critical in order to keep costs under control within the supply chain.
Hence management wants to maintain buffer inventory in order to

 Minimise production costs.

 Meet the stipulated and unpredictable demands.
 Smooth running of business.
 Availability of funds and finance for business development.
 Reduce the risk of stock out.

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 Figure 1: Rough Sketch of Plant Layout with various Godown & CWH

1.2. About the Study

Project selected is a long pending problem of routine where project team observed that
suggested solutions, in past, were difficult for its sustainability. Plant personnel keep on
storing inventories as part of their routine to meet the urgencies. Many a time the store
inventory is maintained to address the uncertainty of the process. In such situation, the loss is
perceived as costlier than the inventory management cost. But this might not be always true
for all the variety of inventories. So team decided to work on these inventories which are
being maintained invariably in Vardhman Fabrics. The procurement process of these store

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inventories are basically based on advance ordering including unforeseen failure considering
higher lead times for most of the store items. Ultimately such procurement leads to higher
holding time of store items and slow/ non movement of some inventory due to poor forecast
of demand.

Our study comprises of Inventory classification and business forecasting using various
statistical tools. We are doing ABC classification, XYZ classification, Stock turnover ratio,
FSN analysis in inventory management. Further, we choose Time series, Average method,
and regression analysis for Business forecasting.

1.3. Problem statement

The investment in store inventory (Finished goods) range between 30-40% of inventory cost
in the plant. And a large amount of this inventory is slow-moving. Yet, despite the enormous
range and value of inventory, there is always complexity for management what to make in
stock or what will be made on order. This situation is mainly due to the Unpredictable
fluctuation in demand of Product mix.
All these matters make PPC and management team a distracting and challenging experience.

The main problem for high inventory is that there is no proper control system and have only
qualitative idea about stock. They have still not adopted any inventory management
techniques in Fabric division because Non availability of time to managers who always
engaged in production activity. Due to this stock of materials piling up day by day.
In a competitive environment, no customer will be willing to pay the enhanced price due to
increased cost of product due to higher inventory.

1.4. About different statistical tools

1.4.1Definition of Data Analysis
Data Analysis can be defined as:
 Data collection is easy as to be retrieved from ERP but assimilation efforts are higher.
 Quality of Data is quite good as most of the data is relevant to our project title. As
inventory variety and vendors are large in number, item to item analysis is
cumbersome. There are large numbers of items which cost and consumption are very
low and difficult to develop any correlation. During analysis, most frequent/ high cost/
regular consumption items are considered on top priority.

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Inventory optimisation is critical in order to keep costs under control within the supply chain.
Yet, in order to get the most from management efforts, it is efficient to focus on items that
cost most to the business .Data analysis consists of ABC, XYZ, FSN classification, Stock
Turnover ratio, regression analysis, Time series analysis and average method.

1.4.2. Classification of Inventory

ABC classification: ABC (Always Better Control) analysis is an inventory categorization
method based on annual consumption value. Inventory is divided into three categories
a) A - Outstandingly important (High %age of total consumption value);
b) B - Average importance;
c) C - Relatively unimportant (Low %age of total consumption value)
It is based on Pareto analysis in which
10 % of items value around 60-70% of annual consumption value classified in A category.
30% of items value around 20-30% of annual consumption value classified in B category.
60% of items value around 5-10% of annual consumption value classified in C category.

Annual consumption value= Annual demand*Unit cost of item

Figure 2: ABC Classification Chart

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XYZ Classification: XYZ classification deals with the value of Inventory on hand. It is often
used in conjunction with ABC analysis. Here X-items include those stocks on hand which
have high value while Z-items deals with inventory items which are available in low stock
value. Y-items are moderately stock value.

Figure 3: XYZ analysis when combined with ABC Analysis

FSN Classification: FSN classification of Inventory is based on frequency of usage or

consumption pattern of items. FSN analysis is stock turnover ratio based analysis. Stock
turnover ratio is defined as the ratio of annual consumption of a material divided by its
average inventory.

FAST MOVING (F): Those items whose stock turnover ratio is greater than 3
SLOW MOVING(S): Those items whose stock turnover ratio is between 1 and 3.
NON- MOVING (N): Those items whose stock turnover ratio is below 1.

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1.4.3. Business Forecasting Techniques

Forecasting in business has a visible impact in production planning and supply chain.
Business forecasting techniques help the production planner to schedule the production of
materials in advance of meet the demand of customers.
Regression analysis: Regression analysis is generally done by many data analyst to find any
correlation among the output or dependent variables and variety on Inputs or Independent
variables. Some of the reasons for doing regression analysis are
1. Prediction of dependency of outcome on inputs are relatively cheaper than actual
output.
2. Actual output are Expensive to measure.
3. We can control the values of input if we found some link of inputs with output.
Regression analysis may be linear or Non-Linear.
Time series: It is another method of forecasting for the data available for equally spaced
Time period. It includes Moving average Method, Weighted average moving method. Least
square method, Exponential smoothing method etc.
Average Method: This methods help the analyst to minimise the expected error Using MAD,
MSE, MAPE and determining the value of Smoothing constant.

1.4.4. Objective of study

For any industry Inventory is a necessary evil. However textile industry have many critical
inventory. Here, in spinning industry they are following perpetual inventory system to reduce
inventory without affecting the quality of materials. However in process fabric industry there
is no such system. So our objective of study is to sort out different problems in maintaining
sufficient inventory and develop a system for inventory management. Beside these we are
also require to forecast the demand of product mix.
Major points of study includes.
 To achieve efficiency in operations by minimizing the investment in inventory
without sacrificing quality and continuity of supply of materials obtained at lowest
possible price.
 To determine, control stock levels to balance the need for availability against the need
for minimizing holding and handling costs.
 To sustain the benefits for longer period
 Better utilization of monetary resources

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 To forecast the demand of product mix
 To maintain buffer stock to meet customer demands and reduce risk of stock out.

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 LITERATURE REVIEW

Inventory management is an important parts and extremely important function to any

business. According to Richard A. Lancioni & Keith Howard (1978), the inadequacies in
Inventory control can be result in serious problems and it became a big causes of business
loss. If inventories are managed in an inefficient manner, it can be a caused of quality
defects and due to this organization lost their goodwill in business environment and it is also
likely to result in delays in production, dissatisfied customers, or curtailment of working
capital.
The main purpose of inventory management is to control the inventory such as finished
goods, work in process, raw materials and spare parts etc. The main purpose of inventory
management is to determine how much and when order are placed without any delay for
smooth running of the organization or firm. As we know that inventory fulfills many
important functions in an organization. . But as the inventory levels go up to provide these
functions, the cost of storing and holding inventory also increases. Thus a major objective in
controlling inventory is to minimize total inventory costs. Some of the most significant
inventory cost are carrying/holding cost, ordering cost, stockouts and cost of safety stock.

Donald S. Allen-1995, According to his journal inventory management technique is

changed significantly over the past two decades in United States ,by using proper inventory
management and reduced business inventory-to-sales ratio, driven almost entirely by lower
inventories of work-in-process, and materials and supplies rather than finished goods. The
impact of these changes is to increase business cycle ambiguous. Inventory management
being innovations should reduced the probability of unintended accumulation. But as long as
firms/organizations underestimate future demand , inventory cycle will persist. The changes
in inventory management can faster response of production to change in demand.
According to study conducted in Reid & Taylor (India) Ltd. in textiles industries 40
to 60 percent of current assets are invested in to the inventory management and out of them
20 to 30 percentages are invested in to the finished fabric storage, and other assets are
utilized for raw and materials, consumable goods etc. In textiles industries lead time is very
high approximately two to three months and due to this the cost inventory is increased.
According to business standards survey in March 31, 2012 the Indian textiles industries
faces to high inventory cost, annual sheet of Indian textiles profits but due to the miss
management of inventory system they faces dip loss. Proper Inventory management system

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make business decision easy and help to accept the uncertainty in demand. To market
scenario change and the demand of customers are change suddenly, So compete easily to our
global competitor and it is only done by proper inventory management system.
Demand forecasting is the art and science of forecasting customer demand to drive
holistic execution of such demand by corporate supply chain and business management.
Demand forcasting are find out by varios methods such as quantitative methods, such as the
use of historical sales data and statistical techniques or current trend and market survey
from test markets. Demand forecasting may be easily utilized in production planning,
inventory management, and at times in assessing future capacity requirements, or in making
decisions on market trend and customer requirement. Demand forecasting is predicting
future demand for the product. In other words, it refers to the prediction of probable demand
for a product or a service on the basis of the past events and prevailing trends in the present.
Lapide, 2006 – According to study conducted by Lapide, the globalized business market,
the systematic move from push to pull manufacturing, and the rise in consumer oriented
economies, have led to a much more complex forecasting world (Lapide, 2006). Forecasters
are being asked to create plans for expanding geographies, increased numbers of sales
channels, and broader, more diverse, and shorter life cycle product lines. This complexity
means that markets are more dynamic and the business environment is not stable (Lapide,
2006).
Makridakis and Wheelwright, 1989- The main function of forcasting is to finding a great
range of decision making circumstances. Furcating is an important tools for any organizations
in many department and it is essential to mention. In marketing, a great amount of decisions
can be improved significantly by connect them with dependable forecasts of market size and
market characteristics (Makridakis and Wheelwright, 1989). In manufacturing industries it is
important to predict the demand of product in future. This relates with the both prediction of
volumes mix so as the organization can plan its production schedule and organize appropriate
its inventories

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 3. REFERENCES
Armstrong, J.S., 1987. The forecasting audit. In: Makridakis, S., Wheelwright, S.C.
(Eds.).The handbook of forecasting, John Wiley, New York, 584–602.

Brindha, Dr.G. (January 2014), Inventory Management, vol.3 issue 1, IJIRSET,

Chennai.

KalchschmidtMatteo,demand forecasting practices and performance: evidence from

the gmrgdatabase,Italy.

Tom Jose V.AkhileshJayakumar,Sijo MT(March 2013),Analysis of Inventory

Control Techniques;A comparative Study,Vol.3 Issue 3,,IJSRP.

Vaisakh P.S., Dileeplal J., V. Narayanan Unni (January 2013), Inventory management
of Spare Parts by combined FSN and VED (CFSNVED) analysisVol.2 Issue 7,IJEIT.

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