Inventory Management

INVENTORY MANAGEMENT
“INVENTORY MANAGEMENT”
STATEMENT OF THE PROBLEM

“Inventory management and its effects on working capital”
MANAGEMENT PROBLEM
Management is feeling that their huge amount of working capital is held up, so the
management wants to know whether they can reduce it through inventory management.
RESEARCH PROBLEM
As the above stated management problem, the study was carried to know how inventory
management 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 a void
coverage often calls for the managerial attention. In the modern times inventory management has
become the integral part of the all companies.
So all firms give special importance for inventory management. The major objective of the study
is to examine the effectiveness of inventory management system adopted by Vijay steels the
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study mainly focuses on the techniques used by the company to control the inventory. The study
also covers other areas like the financial ratios for the period of 2016 to 2018.
SUB OBJECTIVE
 To study the different accepts of Inventory Management.
METHODOLOGY
Primary Data:
1. Interaction with personnel of the company
2. Direct Observation in Inventory
Secondary Data:
1. Balance Sheet
2. Turnover Statements
3. Monthly Inventory Statements
4. Company Records
5. Internet
Tools Used:
MS-Excel has been used for calculations.
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CHAPTER 1
INTRODUCTION TO INVENTORY MANAGEMENT
Management of inventory assumes importance due to the fact that investment in inventory
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 and the
components that make up the product. The assets which firms store as inventory in anticipation
of need are:
(i) Raw Materials:

These represent inputs purchased and store to be converted into finished products in
future by making certain manufacturing process on the same.
(ii) Work in Process:

These represent semi-manufactured products which need further processing before they
can be treated as finished products.
(iii) Finished Goods:
These represent the finished products ready for sale in the market.
(iv) Stores and Supplies:

These represent that part of the inventory, which does not become a 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.
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Let us have a look on Different Inventory Management Views. Means emphasis role of
Inventory Management in different Sectors.
INVENTORYMANAGEMENT
V
I
E
W
S Logistic Inventory
Physical Inventory
Management Management
Financial Inventory
Management
Inventory Management is consisting of 3 hands. The first hand as shown in the diagram is that
Physical Inventory Management, second one is Financial Inventory Management and the last one
(third one) is Logistic Inventory Management.
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The reason behind of dividing these views is: to gather the information very easily and for easy
to understanding of each view thoroughly. Let us see the Meanings of each view one by one.
Meaning & Types of Inventory

Inventory is an asset that is owned by a business that has the express purpose of being sold to a
customer. Inventory refers to the stock pile of the product a firm is offering for sale and the
components that make up the product. In other words, the inventory is used to represent the
aggregate of those items of tangible assets which are:
 Held for sale in ordinary course of the business.

 In process of production for such sale.
 To be currently consumed in the production of goods or services to be available for sale.
The inventory may be classified into three categories:

 Raw material and supplies:
It refers to the unfinished items which go in the production process.
 Work in Progress:
It refers to the semi-finished goods which are not 100% complete but some work has been done
on them.
 Finished goods:
It refers to the goods on which 100% work has been done and which are ready for sale.
Meaning of Inventory Management

Inventory management is the practice overseeing and controlling of the ordering, storage and use
of components that a company uses in the production of the items it sells. A component of supply
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chain management, inventory management supervises the flow of goods from manufacturers to
warehouses and from these facilities to point of sale.
Inventory control means efficient management of capital invested in raw materials and supplies,
work- in – progress and finished goods.
Significance of holding inventory

Inventory is considered to be one of the most important assets of a business. Its management
needs to be proactive, accurate and efficient. Inventory is essential for every organization to
ensure smooth running of the production process, to reduce the ordering cost of inventory, to
take advantage of quantity discount, avoid opportunity loss on sales, to utilize and optimize the
plant capacity and to reduce the overall price. Thus, it can be said that inventory is inevitable and
has to be maintained in appropriate quantity. However, the concept of Just In Time (JIT) is
becoming popular which is an inventory strategy companies employ to increase efficiency and
decrease waste by receiving goods only as they are needed in the production process, thereby
reducing inventory costs. This method requires producers to forecast demand accurately.
Objectives of Inventory Management

The objective of inventory management is to maintain inventory at an appropriate level to avoid
excess or shortage of inventory. Inventory management systems reduce the cost of carrying
inventory and ensure that the supply of raw material and finished goods remains continuous
throughout the business operations. The objectives specifically may be divided into two
categories mentioned below:
A. Operating objectives: They are related to the operating activities of the business like
purchase, production, sales etc.
a. To ensure continuous supply of materials.

b. To ensure uninterrupted production process.
c. To minimize the risks and losses incurred due to shortage of inventory.
d. To ensure better customer services.
e. Avoiding of stock out danger.
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B. Financial Objectives:
a. To minimize the capital investment in the inventory.
b. To minimize inventory costs.
c. Economy in purchase.
Apart from the above objectives, inventory management also emphasize to bring down the
adverse impacts of holding excess inventory. Holding excess inventory lead to the following
consequences:
 Unnecessary investment of funds and reduction in profit.
 Increase in holding costs.
 Loss of liquidity.
 Deterioration in inventory.
Factors affecting the level of inventory

The level of inventory should be appropriate. The appropriateness of the amount of inventory
depends upon a number of factors. Some significant factors affecting the level of inventory are
explained as follows:
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1. Nature of business: The level of inventory will depend upon the nature of business whether it
is a retail business, wholesale business, manufacturing business or trading business.
2. Inventory turnover: Inventory turnover refers to the amount of inventory which gets sold and
the frequency of its sale. It has a direct impact on the amount of inventory held by a business
concern.
3. Nature of type of product: The product sold by the business may be a perishable product or a
durable product. Accordingly, the inventory has to be maintained.
4. Economies of production: The scale on which the production is done also affects the amount
of inventory held. A business may work on large scale in order to get the economies of
production.
5. Inventory costs: More the amount of inventory is held by the business, more will be the
operating cost of holding inventory. There has to be a trade-off between the inventory held and
the total cost of inventory which comprises of purchase cost, ordering cost and holding cost.
6. Financial position: Sometimes, the credit terms of the supplier are rigid and credit period is
very short. Then, according the financial situation of the business the inventory has to be held.
7. Period of operating cycle: If the operating cycle period is long, then the money realization
from the sale of inventory will also take a long duration. Thus, the inventory managed should be
in line with the working capital requirement and the period of operating cycle.
8. Attitude of management: The attitude and philosophy of top management may support zero
inventory concept or believe in maintaining huge inventory level. Accordingly, the inventory
policy will be designed for the business.
Techniques of inventory control

Inventory control refers to a process of ensuring that appropriate amount of stock are maintained
by a business, so as to be able to meet customer demand without delay while keeping the costs
associated with holding stock to a minimum. Inventory control signifies a planned approach of
finding when to shift, what to shift, how much to shift and how much to stock so that costs in
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buying and storing are optimally minimum without interrupting production or affecting sales. To
solve these problems of inventory management various techniques are there.
These techniques are divided into two categories modern techniques and traditional techniques.
(1) MODERN TECHNIQUES
(a) Economic Order Quantity (EOQ)
(b) Re-Order Point (ROP)
(c) Fixing Stock Levels
(d) Selective Inventory Control
(i) ABC Analysis
(ii) VED Analysis
(iii) SDE Analysis
(iv) FSN Analysis
(2) TRADITIONAL TECHNIQUES

(a) Inventory Control Ratios
(b) Two Bin System
(c) Perpetual Inventory System
(d) Periodic Order System
PHYSICAL INVENTORY MANAGEMENT

Meaning:
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“Keeping of goods is also a type of management. Whenever requirement comes from the
production department, providing of those required materials in a proper manner & providing
those 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 Sales
Objects of Inventory Management:
Usually, the company is faced with the following conflicting objectives in the area of
inventory management:
1. To carry maximum inventory in order to facilitate efficient and smooth production

and sales operations.
2. To minimize investment in inventory for maximize the profitability.
Both over-investment and under investment in inventories is undesirable as both involve the
consequences.
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.
The under-investment involves the consequences like:

a. If sufficient stock of raw material and work in process is not available, it may result into
frequent interruptions in production.
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b. 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 the investment in
inventory without affecting production or sales operations.
Inventory, as a current asset, differs from the other current assets because only financial
managers 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 various
functional areas regarding the appropriate inventory levels in order to fulfill the overall objective
of maximizing of owner’s wealth.
Two-Bin System
Under this system, the inventory items are grouped into two categories. In one group or
bin, sufficient quantity is kept to meet the current requirements over a designated period of item.
In another group or bin, a safety stock is maintained to meet the requirements of inventory at
times when the stock in the first bin is exhausted and re-ordering occurs.
FINANCIAL INVENTORY MANAGEMENT

Meaning:
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“Recording, maintaining and evaluating of stocks in a value terms is known as Financial

Inventory Management.” In other words valuation of stocks, and controlling of ordering and
holding costs and also maintaining of sufficient valued stocks in Inventory is known as Financial
Inventory Management.”
Financial Inventory Management is again divided into three different categories.
1) Based on Valuation
2) Based on Cost Analysis
3) Based on Financial Statement
1) Based on Valuation
There are number of generally accepted methods of determining the cost of inventories at the
close of the accounting period.
The selection of a suitable method assumes significance in view 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 period of years.
Note:
It may not be out of place to mention that once a method is selected, it must be used consistently.
The discussion here of the methods to value inventory should, therefore be viewed in this
perspective.
First In First Out (FIFO) Method:
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The FIFO method of valuation of inventory is based on the assumption that the inventory
is consumed in chronological order, that is, those received first are issued/consumed first and
value fixed accordingly. The merit of FIFO method is that the physical flow of materials
matches 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 be
determined only after the final lot of the year has been received. This is because of the
assumption underlying the valuation of inventory, according to this method. As the name LIFO
suggests, the use of inventory is valued on the basis of the inverse sequence of receipts. Since
the LIFO method assumes that the latest item in is the first item out, the current cost of materials
are matched with the current selling price/current revenues. This matching of current costs with
current 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 average
cost determined. Materials are charged into cost of sales at this average until another lot is
received, when a new average unit inventory cost is calculated.
Note: There are so many other than these above methods but most wide usefully methods are
these three so here we discussed those three methods only.
2) Based on Cost Analysis
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Cost of Holding Inventory: -
One operating objective of inventory management is to minimize cost. Excluding the cost 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
important element 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 purchase
order or requisition form & (b) receiving, inspecting & reordering goods received to ensure both
quantity & quality. It is also called as setup cost.
2) Carrying Cost:
The second broad category of costs associated with inventory is the carrying costs. They are
involved in maintaining or carrying inventory. The cost of holding inventory may be divided
into two categories.
1. Those that Arise Due to the Storing of Inventory: The main components of this
category of carrying costs are (i) storage cost, that is, depreciation, insurance,
maintenance of the building and utilities; (ii) insurance of inventory against fire and theft;
(iii) deterioration in inventory because of pilferage, fire, technical obsolescence, style
obsolescence and price 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.
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Linking of Costs based and Physical Based Inventory Management:
The carrying costs and the inventory size are positively related and move in the same direction.
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 of inventory.
Economic Order Quantity (EOQ):

How much inventory should be bought in a lot? Should the quantity to be purchased be
large or small? Should the requirements of material during a given period (say 6 months or 1
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 comprising ordering
cost & carrying costs is the minimum
Formulae for calculating Economic Order Quantity:
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EOQ = 2AO
C
Where,
A= Annual Quantity
O= Ordering Cost
C= Carrying Cost
Assumptions:
1. The firm knows with certainty the annual usage (consumption) of a particular item of
inventory.
2. The rate at which the firm uses inventory is steady over time.
3. The orders placed to replenish inventory stocks are received at exactly that point in
time when inventories reach zero.
Reorder Point:
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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 usage
rates are greater than expected.
3) Based on Financial Statement

For having assistance by banks, bankers should first evaluate the followings:
1. Collateral Strength.
2. Inventory Position
3. Some Financial Ratios
4. Payment of all requirements like Income Tax, Wealth Tax, Interests on debt etc.,
5. Agreement papers of all authorized persons like Debenture holders, Shareholders etc.,
6. All required documents.
7. Who is the Buyer and his Country’s relationship etc,
The main requirement for Banker is the Financial Statements of 3 to 5 years. From this
statement it can judge the financial strength of the Company. While analyzing of Financial
Strength of the Company, Inventory is also having its own emphasis role.
Because if company is having less inventory than its requirement then company will get less
finance from Banks and visa-versa. So here high inventory means, high in the sense company
should have sufficient inventory according to its order. Not more than its order.
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Let us have a look on some Inventory related Ratios and also some important financial ratios
those, which are related to Inventory. From evaluating of these Financial Ratios, company can
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 and operations of a
firm. Therefore, much can be learnt about a firm from a careful examination of its financial
statements as invaluable documents/performance reports. The analysis of financial statement is,
thus an important aid to financial analysis.
The analysis of financial statements is a process of evaluating relationship between component

parts of financial statements to obtain a better understanding of the firm’s position and
performance.
INVENTORY VALUATION AND COST FLOWS:

What is the cost of inventory?
One can readily visualize the determination of inventory quantities by physical count or
by use of perpetual inventory records. When this quantity is determined, it must be multiplied by
a unity cost in order to determine the inventory value that is used on financial statements.
Trade and quantity discount are to be excluded from unit cost since these discount exist
for the purpose of defining the true invoice cost of merchandise. Cash discounts, on the other
hand, have been considered as a reward for early payment and as a penalty for late payment. The
“reward” has often been interpreted as a loss rather than as a part of unit cost. Thus it would not
be difficult to find difference of opinion as to whether invoice cost includes or excludes cash
discount.
When the “current replacement cost” of material on hand at the close of a year is less
than the actual cost, the inventory value is reduced to replacement cost (current market price).
Thus the acceptable basis inventory valuation is the “lower of cost or market” or more properly
the “lower of actual cost or replacement cost”.
The determination of inventory values is very important from the point of view of the
balance sheet and the income statement since costs not included in the inventory (the balance
sheet) are considered to be expensive and are thus included in the income statement.
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Valuation of inventories – methods of determination:

Although the prime consideration in the valuation of inventories is cost, there are a
number of generally accepted methods of determining the cost of inventories at the close of an
accounting period. The most commonly used methods are first – in first out (FIFO) average, and
last – in first – out (LIFO). The selection of the method for determining cost for inventory
valuation is important for it has a direct bearing on the cost of goods sold and consequently on
profit. When a method is selected, it must be used consequently and cannot be changed for year
to year in order to secure the most favorable profit for each year.
THE FIFO METHOD (FIRST – IN FIRST – OUT METHOD)

Under this method it is assumed that the materials or goods first received are the first to
be issued or sold. Thus, according to this method, the inventory on a particular date is presumed
to be composed of the items which were acquired most recently.
The value inventory would remain the same even if the “perpetual inventory system” is
followed.
Advantages: The FIFO method has the following advantages.
1) It values stock nearer to current market prices since stock is presumed to be
consisting of
2) The most recent purchases.
3) It is based on cost and, therefore, no unrealized profit enters into the financial
accounts of the company.
4) The method is realistic since it takes into account the normal procedure of utilizing or
selling those materials or goods which have been longer longest in stock.
Disadvantages: The method suffers from the following disadvantages.

1) It involves complicated calculations and hence increases the possibility of clerical
errors.
2) Comparison between different jobs using the same type of material becomes
sometimes difficult. A job commenced a few minutes after another job may have to
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bear an entirely different charge for materials because the first job completely
exhausted the supply of materials of the particular lot.
The FIFO method of valuation of inventories is particularly suitable in
The following circumstances.
I. The materials or goods are of a perishable nature.
II. The frequency of purchases is not large.
III. There are only moderate fluctuations in the prices of materials or goods purchased.
IV. Materials are easily identifiable as belonging to a particular purchase lot.
The LIFO method (Last – in – First – Out method)

This method is based on the assumption that last item of materials or goods purchased are
the first to be issued or sold. Thus, according to this method, inventory consists of items
purchased at the earliest cost.
Advantages: - This method has the following advantages:
1) It takes into account the current market conditions while valuing materials issued to
different jobs or calculating the cost of goods sold.
2) The method is base on cost and, therefore, no unrealized profit or loss is made on
account of use of this method.
The method is most suitable for materials which are of bulky and non –
Perishable type.
Base Stock Method:

This method is based on the contention that each enterprise maintains at all times a
minimum quantity of materials or finished goods in its stock. This quantity is termed as base
stock. The base stock is always valued at this price and it’s carried forward as a fixed asset. Any
quantity over and above the base stock is valued in accordance with any other appropriate
method. As this method aims at matching current costs to current sales, the LIFO method will be
most suitable for valuing stock of materials or finished goods other than the base stock. The base
stock method has advantage of charging out material / goods at actual cost. Its other merits or
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demerits will depend on the method which is used for valuing materials other than the base
stock.
Weighted average price method:

This method is based on the presumption that once the materials are put into a common
bin, they lose their identity. Hence, the inventory consists of no specific batch of goods. The
inventory is thus priced on the basis of average priced on the quantity purchased at each price.
Weighted average price method is very popular on account of its being based on the total
quantity and value of materials purchased besides reducing number of calculations. As a matter
of fact the new average price is to be calculated only when a fresh purchase of materials is made
in place of calculating it every now and then as is the case with FIFO, LIFO methods. However,
in case of this method different prices of materials are charged from production particularly
when the frequency of purchases and issues/sales in quite large and the concern is following
perpetual inventory system.
Valuation of inventories – impact on the flow of costs:

As should be quite evident, the different methods of calculating inventory values will all
have their impact on the flow of costs through the balance sheet into the income statement. The
dollars that are paid to acquire inventory are always divided between the balance sheet
(inventories) and the income statement (cost of goods sold), there is not other place to put them.
Thus if the different methods of calculating inventory produce differing inventory values, they
will also produce differing cost of goods sold figures, and the differing cost of goods sold figures
will naturally produce differing profit figures.
In order show the impact of inventory valuation on cost flows, the preceding exhibits are
summarized. Each method produces a different figure for the transfer of raw materials to work in
process. These differences appear small, but the only reason for this is that the dollar amounts
have been kept small to make the illustration workable.
With the transfer of materials to work in process, the cost flow or transfer with have its
impact on the work in process inventory and the transfer of completed merchandise to finished
gods. Ultimately when goods are sold; the varying methods of valuing inventories will have their
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impact on cost of goods sold and these profits. The effects of the cost flows on cost of gods sold
and profits can be accentuated further it the differing methods of valuing inventories are applies
to work in process and finished goods.
Evaluation of methods – What causes the differences?

The differences in inventory values and flows for each of the method illustrated result
from only one factor, that it, changing purchases prices or unit costs. If purchase prices had
remained stable or unchanged, each method would have produced the same inventory value and
cost flow.
Cost flows and inventory are exactly the some under stable prices. With a falling price
level, the LIFO method produces the highest cost flow and the lowest inventory. With a falling
price level, the LIFO method produces the lowest cost flow and highest inventory. The cost flow
under LIFO follows the price level, LIFO produces larger cost flows when prices are rising and
smaller cost flows when prices are falling. A final item to consider is that the average method
produces results which fall between the extremes of LIFO and FIFO.
Evaluation of methods – can we justify the differences?

The best method of inventory valuation might be “specific identification”, that is, the
units in inventory should be identified with the specific invoices and thus specific unit costs to
which they apply.
Fortunately, the FIFO method constitutes a very useful approximation to the specific
identification method if on can reasonably assume that the actual flow of materials is first-in
first-out. This assumption is not unreasonable and thus we have stated the main argument for the
FIFO inventory scheme, that is, the physical flow of materials would match the flow of costs
under the first – in first – out method.
When the units in inventory are identical, interchangeable and do not follow any specific
pattern of physical flow, the average cost system would seen to appropriate.
The primary difference between the FIFO and average methods is centered on the
physical flow since both methods could involve identical and interchangeable units. The FIFO
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method fits a first-in first-out physical flow. The average method fits a system which has no
specific pattern of physical flow. Finding a situation where there is no specific pattern of physical
flow should be quite difficult because of the fact that most inventory items are subject to
deterioration by instituting a person would attempt to reduce such deterioration and any
reasonable person would attempt to reduce such deterioration by instituting a physical flow
approximating first-in-first-out. The major reason for the use of the average method is something
other than the lack of specific physical flow.
Ordinarily the LIFO method cannot be justified on the basis of the physical flow of materials.
Under conditions of changing prices, the advocate of LIFO says that the only method which
matches costs and revenues is the LIFO method. The LIFO method assumes that the latest item is
the first item out, and thus the current costs of materials are matched with the other hand,
assumes that the first item in is the first item out, and thus the non-current costs of matching
current costs with current revenues is the essence of the argument for the LIFO method.
As can be seen by the above comments, there is no one best method of valuing
inventories. The method chosen should fit the situation. A physical flow pattern comparable to
FIFO would force one to consider the FIFO method. The lack of a discernible physical flow
pattern would force one to consider the average method. Concentration on cost flows, as distinct
from physical flows, would force to consider the LIFO method especially where there appears to
be a discernible trend towards rising prices (or falling prices) as has been the case in our
economy during recent years.
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Inventory Problems
An inventory problem is a problem of making optimal decisions that minimize the total cost of
an inventory system. Thus there is the problem of controlling the costs so that their sum will be
the lowest. Hence, the inventory problem is defined in terms of making optimal decisions with
respect to costs. Decisions are usually made in terms of time and quantity, for example,
1. When should the inventory be replenished?
2. How much should be added to inventory?
The time and the quantity are the variables that are subject to control in an inventory system.
They are also referred to as the controllable variables. The inventory problem is to find the
specific values of the variables that minimize the total cost. Although finding the variables that
give the minimum total cost is the main purpose of the inventory problem.
Analysis of Inventory Systems

An analysis of an inventory system consists of the following steps:
1. Determination of the properties of the system.
2. Formulation of the inventory problem.
3. Development of a model of the system.
Nature of Inventory
Inventories are stock of the company which is manufacturing for sale and components that make
up the product. The various forms in which inventories exist in a manufacturing company are:
Raw Material is those basic inputs that are converts into finished goods through manufacturing
process. Raw Material inventories are those units, which will purchase & stored for future
production. ' Work in progress inventories are semi-manufactured products. They represent
products that need more work before they become finished products for sale.
Finished goods are completely manufactured products which are ready for sale. Stock of raw
materials and work in progress facilitates production while stock of . finished goods is required
for smooth marketing operations.
The importance of Inventory Management to a business

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Inventory management is vital for a business because an inventory very often incurs the biggest
expense, and so it needs to be carefully controlled in order for the business to run effectively.
Having the wrong inventory, or too much inventory can deplete resources to dangerous levels, so
by managing it efficiently, the business will be aware of what stock they need to replenish and
what needs to be shifted.
If inventory management is taken seriously and done properly, a business will probably find that
it can reduce its costs and increase sales. An effective way of achieving this is by having an
inventory management system in place, which will track and maintain inventory so that customer
demand can be met. They can also be linked to the accounting or management departments, so
that all operations can become more effective, minimizing costs and maximizing profit.
Properties of Inventory Systems

For an inventory system to be analyzed, its properties must be established. Four components are
recognized for every system: demands, replenishments, costs, and constraints. Briefly stated,
demands are what is taken out of inventory; replenishments are what is put in; costs are the
pertinent measures associated with positive and negative inventories (Positive inventory is
referred to as overage, surplus, etc.
Negative inventory is also referred to as shortage, stock out, etc.) and with raising the level of
inventories and constraints are various administrative, physical, and other factors that place
limitations (constraints) on demands, replenishments, and costs.
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.
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 of the firm
by properly establishing relationships between the items of the balance sheet and the profit and
loss account. Financial analysis can be under taken by management of the firm, or by parties out
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side the firm, viz., owners, creditors, investors and others. The nature of analysis will differ
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.
Perpetual Inventory System

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Another method of inventory control is the maintenance of inventory control on a continuous

basis. After the material are received into the stores, the storekeeper will arrange for the storing
of each item in the allotted rack, bin, shelf or other receptacles and attach a card to each bin for
the purpose of making entries there-in, relating to the receipts, issues and balance. The bin card
or the locker card, this becomes a perpetual inventory record for each item of stores. If the stores
balance is recorded on continuous basis after every receipt and issue, the record is said to be one
of perpetual inventory and the method of recording is called the perpetual inventory system.
Thus the perpetual inventory is a method of recording store balance after every receipt and issue
to facilitate regular checking and to obviate closing down for stock locking.
As a perpetual inventory record, the bin card records the receipt, issues and the balance of every
item of stores only in physical quantities, and not in value. This feature of the bin card is in
accordance with the accepted principle that the storekeeper true to his designation, should be
responsible for the safe keeping of the items of stores entrusted to him, and his accounting for
stores should always be in physical quantities and not in value. The perpetual inventory system
includes continues stock taking also.
Stocktaking or stock verification is done mainly with a view to finding out whether the book
balances as revealed by the stock records agree with the physical or the ground balance.
Although, therefore, stock verification is one of the tools of inventory control, and is done for
exercising control over the stock of every item, is an integral part of material control for the
purpose of preparing the B/S, the physical verification of stock must be done at the end of year.
Such verification at the end of the year is known as the periodical stock taking as against the
continuous stocktaking, which is done throughout the year.
The periodic stock taking method usually adopted by concerns which cannot maintain perpetual
inventory records due to the nature of the items which are usually stored in open yards and not in
bins and as a such, bin cards cannot be employed for them, or do not want to maintain such
records and employ stock verification staff to do the work of stock checking throughout the year.
Under this method of stocktaking, the verification of the whole of the stock and its valuation are
accomplished only once at the close of the financial year and difference in stock is adjusted only
once. As such, the stock in hand would tend to be accurate for the balance sheet purposes. It is
also possible to find out slow moving items.
Nevertheless, the periodic inventory has its own disadvantage. In the first place, it becomes
necessary to close down the factory on the day of stock taking. Secondly, discrepancies in stock
cannot be corrected by an executive action immediately as and when they occur. Thirdly, since
all the items are checked only once in a particular day, a surprise verification will not be
possible. Lastly, reason for the discrepancies cannot be found out because of the long interval
between two consecutive verifications.
These disadvantages of the periodical inventory system are overcome in the case of the perpetual
inventory system. Under this method of continuous stock verification the purpose of verification
is carried on throughout the year by a specially trained staff. This duty is to verify a few selected
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items in details so that each item is checked up a number of times during the year. The day and
time of checking not being known to the staff, they are taken by a surprise. As such, not only
secrecy of the items to be verified cannot maintained, a manipulation of every type can be
prevented.
Discrepancies are located, reasons are ascertained, the necessary adjustment are made in the
accounting records, and correlative action is taken then and there to prevent their recurrence. The
advantages of a continuous stocktaking where perpetual inventory records are maintained may
thus be summarized as follows:
 The elaborate and costly work involved in periodic stock taking can be avoided.
 The stock verification can be done without the necessity of closing down the factory.
 The preparation of interim financial statement becomes possible.
 Discrepancies are easily located, and corrected immediately.
 It ensure a reliable check on the stores.
 It exercises a moral influence on the stores staff.
 Fast and slow moving items can be distinguished and the fixation of proper stock levels
prevents not only over-stocking, but under-stocking also.
 A perpetual inventory record of the nature of the bin cards enables the storekeeper to
keep an eye on the stock levels, and replenish the stock of every item whenever the limit
falls to the reorder level.
 It provides a reliable information to the management of the number of units, and the
value of every item of stores.
 It ensures secrecy of the items that are verified.
Factors Influences the Level of each Component of Inventory Raw Material

Inventory:
1. The volume of safety stock against material shortages that interrupt production.
2. Considerations of economy in purchase.
3. The outlook for future movements in the price of materials.
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4. Anticipated volume of usage and consumption.

5. The efficiency of procurement and inventory control function.
6. The operating costs of carrying the stocks.
7. The costs and availability of funds for investment in inventory.
8. Storage capacity.
9. Re-component cycle.
10. Indigenous or foreign.
11. The lead-time of supply.
12. Formalities for importing.
Work-in-process Inventory:
1. The length of the complete production process.
2. Management policies affecting length of process time.
3. Length of process in runs.
4. Action that speed up the production process, e.g. adding second or third production shifts.
5. Management’s skills in production scheduling and control.
6. Volume of production.
7. Sales expectations.
8. Level of sales and new orders.
9. Price level of raw materials used, wages and other items that enter production cost and the
value added in production.
10. Customer requirements.
11. Usual period of aging.
Finished Goods Inventory:

1. The policy of the management to gear the production to meet the firm order in hand.
2. The policy to produce for anticipated orders and stock keeping.
3. Goods required or the purpose of minimum and safety stocks.
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4. Sales policies of the firm.

5. Need for maintaining stability in production.
6. Price fluctuations for the product.
7. Durability, spoilage and obsolescence.
8. Distribution system.
9. Ability to fill orders immediately.
10. Availability of raw material on seasonal basis while customer’s demand spread throughout
the year.
11. Storage capacity.
Stores and Spares Inventory:

1. Nature of the product to be manufactured and its leadtime of manufacture.
2. State of technology involved.
3. Consumption’s patterns.
4. Lead time of supply.
5. Indigenous or foreign.
6. Minimum and safety stock and ordering quantities.
7. Capacity utilization.
8. Importing formalities.
Some of the important inventory policies relates to:

1. minimum, maximum and optimum stocks
2. safety stocks, order quantities, order levels and anticipated stocks
3. waste, scrap spoilage and defective
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4. policies relating to alternative use

5. policies relating to order filling
Measure of Effectiveness of Inventory Management

1. Size of Inventory = Total inventory/Total Current assets
2. Size of Raw material Inventory = Raw material inventory/Total inventory
3. Size of Work in Process Inventory = Work in process Inventory/Total Inventory
4. Size of Stores and Spares parts Inventory = Stores and Spares parts inventory/Total Inventory
5. Size of Finished Goods Inventory = Finished goods inventory/Total inventory
6. Overall inventory turn over ratio = Cost of goods sold/average total inventories at cost
7. Raw material inventory turnover ratio = Annual consumption of Raw material / Average Raw
material inventory
8. Work-in-process inventory turnover ratio = Cost of manufacture/average work-in-process
inventory at cost
9. Finished Goods inventory turnover ratio = Cost of goods sold / Average finished stock
10. Stores and spare parts inventory turnover ratio = Stores and Spares consumed/Average stock
of stores and spares
11. Age of Finished Goods inventory = 365/Finished Goods inventory turnover ratio
12. Average age of raw material inventory = 365/Raw material inventory turnover ratio
13. Average age of Work-in-Process inventory = 365/Workin-Process inventory turnover ratio 14.
Age of Stores and spare parts inventory = 365/Stores and spare parts inventory turnover ratio 15.
Inventory holding period = 365/Inventory turn over ratio Control and Review The efficiency of
inventory control affects the flexibility of the firm.
Inventory Classes
Materials flow from suppliers, through a manufacturing organization, to the customers. The
progressive states of a material are classified as raw materials, semi-finished goods, finished
goods, and work-in-process (WIP).
Inventory Management
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 Raw Materials
Purchased items or extracted materials that are converted via the manufacturing process into
components and/or products. Raw materials appear in the bottom level of BOM. They are stored
in the warehouse and are non-phantom items.
 Semi-finished Goods
Semi-finished goods are items that have been stored uncompleted, awaiting final operations that
will adapt them to different uses or customer specifications. Semi-finished goods are made under
the instruction of a shop order, using the components issued by a picking order, and stored in the
warehouse when finished.
They are the items between the top and bottom levels in a management BOM (rather than
engineering BOM) and are non-phantoms. Semi-finished goods are not sold to the customers.
 Finished Goods
A finished good is a product sold as a completed item or repair part, i.e., any item subject to a
customer order or sales forecast. Finished goods are non-phantoms and are stored in the
warehouse before they are shipped.
 Work-In-Process (WIP)
Products in various stages of completion throughout the plant, including all material from raw
material that has been released for initial processing up to completely processed material waiting
for inspection and acceptance as finished goods. WIP inventory is temporarily stored on the shop
floor and appears as a phantom in the BOM.
 Maintenance, Repair, and Operational Supplies (MRO)
Items used in support of general operations and maintenance such as maintenance supplies, spare
parts, and consumables used in the manufacturing process and supporting operations.
Inventory Functions
 Safety Stock
An additional quantity of stock kept in inventory to protect against unexpected fluctuations in

demands and/or supply. If demand is greater than forecast or supply is late, a stock shortage will
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occur. Safety stock is used to protect against these unpredictable events and prevent disruptions
in manufacturing. Safety stock is also called buffer stock.
 Lot-size Inventory
In order to take advantage of quantity price discounts, reduce shipping and setup costs, or
address similar considerations, items are manufactured or purchased in quantities greater than
needed immediately. Since it is more economical to produce or purchase less frequently and in
larger quantity, inventory is established to cover needs in periods when items are not replenished.
Lot-size inventory depletes gradually as customer orders come in and is replenished cyclically
when suppliers’ orders are received.
 De-coupling Stock
Inventory between facilities that process materials at different rates. De-coupling stock de-
couples facilities to prevent the disparity in production rates at different facilities from interfering
with any one facility’s production. This inventory increases the utilization of facilities.
 Pipeline Inventory
Inventory to fill the transportation network and the distribution system including the flow
through intermediate stocking points. This inventory exists because of the time needed to move
goods from one location to another. Time factors involve order transmission, order processing,
shipping, transportation, receiving, stocking, etc.
 Transportation Inventory
Transportation inventory is part of pipeline inventory. It is inventory in transit between locations.

The average amount of inventory in transit is:
I = ( A / 365) * D
Where I is the average annual inventory in transit, A is annual usage, and D is transit time in
days. The transit inventory does not depend upon the shipment size but on the transit time and
the annual usage. The only way to reduce the inventory in transit is to reduce the transit time.
 Anticipation Inventory
Additional inventory above basic pipeline inventory to cover projected trends of increasing sales,
planned sales promotion programs, seasonal fluctuations, plant shut downs, and vacations.
Anticipation inventory differs from safety stock in that it is a predictable amount.
 Hedge Inventory
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Inventory held to protect against future fluctuations due to a dramatic change in prices, strikes,
war, unsettled government, etc. These events are rare, but such occurrences could severely
damage a company’s initiatives. Risk and consequences are usually high, and top management
approval is often required. Hedge inventory is similar to safety stock except that a hedge has a
dimension of timing as well as amount. If the incident does not occur in the predicted time
period, the hedge rolls over to the time period.
RATIO ANALYSIS RELATED TO INVENTORY
Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the indicated
quotient of two mathematical expressions” and as “the relationship between two or more things.”
In financial analysis ratio is used as a benchmark for evaluating the financial position and
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performance of a firm. Ratios help to summarize large quantities of financial data and to make
qualitative judgment about to form a qualitative judgment the focus of financial analysis is on the
key figures in the financial statements and the significant relationships that exist between them.
Types of Ratios:
a. Liquidity Ratios
b. Activity Ratios
c. Profitability Ratios
A. Liquidity Ratios:
Liquidity refers to the ability of the firm to meet its obligations in the Short run, usually
one 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 Current
obligations provide a quick measure of liquidity. A firm should ensure that it does not suffer
from 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 of
liquidity. Following are some of the important liquidity ratios:
1. Current Ratio
2. Quick Ratio
3. Net working Capital Ratio
B. Activity Ratios:
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Activity ratios are concerned with measuring the efficiency in asset management.
Sometimes, these ratios are also called efficiency ratios or asset utilization ratios. The efficiency
with which, assets are converted into sales. The greater the rate of turnover or conversion, is the
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 by relating the assets to sales. An
activity ratio may, therefore, be defined as a test of the relationship between sales and various
assets of a firm. Several activity ratios can be calculated to judge the effectiveness of asset
utilization.
1. Inventory Turnover
2. Assets Turnover
3. Fixed Assets and Current Assets Turnover
ASSET MEASUREMENT FOR DIFFERENT METHODS OF INVENTORY

VALUATION
FIFO Method:
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Under this method, as noted earlier, inventory is valued on the assumption of chronological cost
flow. This implies that the unused/unsold inventory consists of the most recent purchases and,
therefore, can be assumed to be valued at current cost. The vale of inventory 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 the balance sheet
at the Current Cost. It will reflect rather the cost of raw materials purchased in the past year.
Assuming rising prices, the inventory value based on the LIFO method would tend to be
undervalued. For example inventory purchased as early as six years or more. In that situation,
the inventory figure included in the balance sheet would be actually the price paid on the
purchase of inventory six years ago.
In a period of rising prices, this value would naturally be grossly out of line with the currently
prevailing price. This would imply that the balance sheet would not reflect the current worth of
the inventory. That the inventory value will not be correct is another way of saying that the
balance sheet will present a distorted picture of the affairs of the firms.
A possible solution to correct the above distortion in the balance sheet implicit in the under-
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 well as
correct asset measurement. However, this is subject to a qualification, namely, the current year’s
purchase (units) should exceed the current year’s consumption (units). If for reasons such as
strike/lockouts, transportation problems, and so on, the current consumption exceeds the current
purchases, profits will rise.
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The increase will depend upon the extent of liquidation of the previous years’ inventory. This
increase in profit is termed as liquidation profit, which is equal to the difference between the
current cost of inventory and the cost of inventory purchased in the past.
LOGISTICS INVENTORY MANAGEMENT
Meaning of Logistics:
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Logistics is the Organization of Services and Supplies. In other words, logistics is making 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 departments where this department gets
an approval to sell their goods in foreign countries and also their main intention is to maintain all
documents of those that are related to the exporting of their products.
Logistics Inventory Management:
Yes, already we have observed about the meaning of Inventory Management in the Organization.
But in fully export oriented business; Inventory Management is a very important concept.
Because every exporter or importer, they do not know about each other who are staying in other
countries.
So every company, which are exporting or importing of materials, they should communicate
each other through banks only. These banks are listed by Central Bank of that Nation. In our
Country RBI is lists some banks for intermediating purpose and every year RBI declare some
listed Banks as a mediator.
For producing of materials and selling of those materials, every company/business should need a
Working Capital. This Working Capital can also financed by Banks. While in export oriented
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
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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 are
also 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 for financing
the working capital requirements of the companies.
The companies trying to raise the funds by issuing the CP are regulated by Guidelines for issue
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 per these
guidelines, a a company means a company as defined in section 45-I(aa) of Reserve Bank of
India Act, 1934. Section 45-I(aa) of Reserve Bank Act, 1934 defines a company as the company
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 capital
requirement of the organizations. We will consider the bank as a source for financing the
working 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 is required
to estimate the working capital requirement properly. To estimate the requirement of working
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capital requirement properly, the company will be required to estimate its level of current assets
and current liabilities properly, as working capital is the difference between current assets and
current liabilities.
For this, the techniques like ratio analysis, trend analysis etc., can be used by the company. More
accurate the estimation of the level of current assets and current liabilities, more accurate the
estimation of level of current capital.
Then, the company will have to approach the bank along with the necessary supporting data. On
the basis of estimates submitted by the company, the bank may decide the amount of assistance
that can be extended. While extending the working capital assistance, the bank may prescribe
the margin money requirement.
The margin money stipulation is made by the banks in order to ensure that borrowing company’s
own stake in the business and also to provide the cushion against the possible reduction in the
value of security offered to the bank.
The percentage of margin money stipulation may depend upon the credit standing of the
borrowing company, fluctuations in the price of security and the directives of RBI from time to
time. The general principle applicable will be, “more dicey the nature of security, higher of
security, higher will be the margin money stipulations.”
Form of Assistance:
After deciding the amount of overall assistance to be extended to the company, the bank can
disburse the amount in any of the following forms:
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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 of
funds. As such, the funds position of the lending bank remains intact. The Non-Fund Based
Lending can be made by the banks in two forms:
a. Bank Guarantees
b. Letter of Credit
Fund Based Lending:

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 be
made by the banks in following forms:
a. Loan
b. Overdraft
c. Cash Credit
d. Bills Purchased/Discounted
e. Working Capital Term Loans
f. Packing Credit
Security for Assistance:
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The bank may provide the assistance in any of the modes as stated above. But normally no
assistance will be available unless the company offers some security in any of the following
forms.
1) Hypothecation.
2) Pledge
3) Lien
4) Mortgage
Sections in Inventory:
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Inventory is again divided into 5 sections. Each is section handling by only one person, with the
help of 3 to 4 assistants, who helps in maintaining of materials at specific area. Five sections are
as follows:
Sections in Inventory
D201
All bought out items are been stored here and processed to the manufacturing as when required
D202
All consumables and tools and maintenance accessories are been stored in this section
D203
All raw materials like direct, semi-finished goods are stored in this section and processed to the
manufacturing as when required and old stock and rejected items are also stored in this section.
D204
Gas tank and cylinders is stored in this section.
D205
All finished goods are stored in this section.
Purchasing Procedure of Materials
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In Vijay steels they purchase materials at from a multiple Suppliers. There is a reason for
purchase materials from multiple suppliers. The reason is if one supplier delays to fulfill the
supply then there must be alternative supplier for it to fulfill the requirement. So there must me
no stock outs in the production process
Company always purchases at bulk but by schedule wise. In other words they purchase materials
at a time for specific order. They make the agreement of supplying materials only at once. And
they negotiate the price only at once that is before supplying of materials and once their
agreement is over then they provide schedule to supplier to supply the materials at a specific time
and at a specified quantity.
So it reduces the spaces, which occupies in the Godown. So this method is suitable for this type
of steels because of same orders from customers.
Finished Goods
Valuation of Finished Goods in Vijay steels is at 10% less than Selling Price of those
finished goods. 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 own
Finished Goods Godown. In that Godown only they store these Goods. And dispatching of
these products is directly by each unit. They do not consolidate these goods; they dispatch these
finished products directly by each unit.
Vijay steels pvt ltd has only one customer that is Telcon. So they directly supply finished
products to its customers. So it is not necessary to have another Godown for Finished Goods.
Logistics Inventory Management
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There is a department called Logistic Department in Vijay Steels Pvt ltd, which is concerning
about selling of goods and maintaining of all documents related to exporting of products and also
taking the permission from banks to sell specific products in specific countries. So Logistic
Department is one of the important front-office Departments, like Marketing Department.
Marketing Department is one, which takes the orders from its customers. And this is entirely
different from Logistic Department. Logistic Department is one, which sells its products and
maintains all documents. But Marketing Department is comes into picture before production
process starts. And Logistic Department comes into picture only after the production process
completes.
Logistic Department is not only taking the approval for selling its products, but also it will
concern for taking loan for its working capital. Banks will provide these working capital
requirements in two senses: one is on Pre-Shipment Loan and another one is Post-Shipment
Loan.
There are so many ways to get loan for working capital requirement. Vijay get loan for Working
Capital requirement either through Commercial Papers or through Letter of Credit. Vijay is
taking loan for Working Capital Requirements from Axis Bank.
Financial Inventory Management
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Already we saw about Logistic Inventory Management. Let us see how Vijay valuates the 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 in Physical
Inventory Process that, always purchase department purchases 20% more than its order. So
that remained or excess materials are said to be “Buffer Stock”
These old stocks are in the form of Raw Materials then valuate it according to purchasing of
those materials. If these old stocks are after Finishing of production process.
In easy words it can be said that if materials are Raw, then taking as Purchasing value for
valuation purpose. If materials are Finished Goods then taking Selling Price as a value for
valuation of Old Stock in Godown.
Rejected Stocks:
Again these are divides into three parts. Rejection of Raw Materials i.e., before sending to
Production Process. Rejection of Materials during the Production Process and Rejection of
Materials after the Production Process that is, Rejection of Finished Goods.
Rejection of Raw Materials is valuating on Purchase value of those materials.
Holding or Ordering Cost
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These costs are every important in manufacturing companies to minimize the cost. This is not
applicable to Vijay by virtue of its Business activities. Because, let us have a broad view on
statement by following points:
 In Vijay steels, they purchase the materials only from multiple supplier.
 Because to fulfill the requirements in required time limit.
 Vijay steels orders the materials to suppliers only at once and according to the schedule
supplier will supply the materials.
Yes, Depending on Shorter order cycle Vijay steels can hold entire stock well before order starts
and also Vijay can have a full stock at a time before starting process of product of that specific
order.
EOQ
EOQ applicability due to the nature of Business as above said is not possible.
Reorder Point
This is the point is also not having much importance because of nature of Business.
Lead Time
Vijay steels purchases materials from multiple supplier and by on schedule basis to
supply materials. So this is also not applicable in this type of business.
CHAPTER 2
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INDUSTRY PROFILE/COMPANY PROFILE
FABRICATION
When used as an industrial term, applies to the building of machines, structures and other
equipment, by cutting, shaping and assembling components made from raw materials. Small
businesses that specialize in metal are called fab shops.
Steel fabrication shops and machine shops have overlapping capabilities, but fabrication
shops generally concentrate on the metal preparation, welding and assembly aspect while the
machine shop is more concerned with the machining of parts.
METAL FABRICATION
Metal fabrication is a value-added process that involves the construction of machines and
structures from various raw materials. A fab shop will bid on a job, usually based on the
engineering drawings, and if awarded the contract will build the product.
Fabrication shops are employed by contractors, OEM's (Original Equipment

Manufacturers) and VAR's (Value-added Reseller) Typical projects include; loose parts,
structural frames for buildings and heavy equipment, and hand railings and stairs for buildings.
Article I. ENGINEERING
The fabricator may employ or contract out steel detailers to prepare shop drawings, if not
provided by the customer, which the fabricating shop will use for manufacturing. Manufacturing
engineers will program CNC machines as needed.
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Article II. RAW MATERIALS
Standard raw materials used by metal fabricators are;
 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 BURNING
The 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 feed
mechanism for even cutting. Abrasive cut-off saws, also known as chop saws, are similar to
miter saws but with a steel cutting abrasive disk. Cutting torches can cut very large sections of
steel with little effort.
Burn tables are CNC cutting torches, usually natural gas powered. Plasma and laser
cutting tables, and Water jet cutters, are also common. Plate steel is loaded on a table and the
parts 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 different
punches and taps. Fabrication of structural steel by plasma and laser cutting introduces robots to
move the cutting head in three dimensions around the material to be cut.
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4. FORMING
Hydraulic brake presses with v-dies are the most common method of forming metal. The
cut plate is placed in the press and a v-shaped die is pressed a predetermined distance to bend the
plate 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 sections
without kinking them.
Rolling machines are used to form plate steel into a round section.
English Wheel or Wheeling Machines are used to form complex double curvature shapes
using sheet metal.
5. MACHINING
Fab shops will generally have a limited machining capability including; metal lathes,
mills, magnetic based drills along with other portable metal working tools.
6. WELDING
Welding is the main focus of steel fabrication. The formed and machined parts will be
assembled and tack welded into place then re-checked for accuracy. A fixture may be used to
locate 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,
using a stout fixture, covering the weldment in sand during cooling, and straightening operations
after welding.
P a g e 51 | 90
Straightening of warped steel weldments is done with an Oxy-acetylene torch and is

somewhat of an art. Heat is selectively applied to the steel in a slow, linear sweep. The steel will
have a net contraction, upon cooling, in the direction of the sweep. A highly skilled welder can
remove significant warpage using this technique.
Steel weldments are occasionally annealed in a low temperature oven to relieve residual
stresses.
7. FINAL ASSEMBLY
After the weldment has cooled it is generally sand blasted, primed and painted. Any
additional manufacturing specified by the customer is then completed. The finished product is
then inspected and shipped.
COMPANY PROFILE
P a g e 52 | 90
Name of the company : VIJAY STEELS PVT LTD
Address of the Head office : M-1 Phase - 7, Tata Kandra Main Road, Industrial Area
Adityapur, Jamshedpur-832109 India.
Fax: 0657-2200010
Address of the office : No.139/140, 9th Main, 3rd Phase,

Kiadb Industrial Area,
Peenya, Bangalore - 56005
Nature of the organization : Basically this company is heavy fabrication

Company. They are manufacturing back hole
Loader components, excavator components and steels.
Type of organization : Vijay steels limited company is private limited

Company
ABOUT ORGANIZATION
P a g e 53 | 90
Vijay Steels Private Limited ("If you can imagine it, we can fabricate it.")
Vijay Steels Limited is a publicly quoted company with a number of shareholders, both
Indian and Foreign. Promoted by Mr. Atul Taunk in 1995 with a modest capital outlay of Rs. 342
lakhs, Vijay 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 the
construction equipment steels
The raison deter of Vijay is that the emerging scenario in post liberalized India indicated
that 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. Vijay eases the load on them by supporting the steels with precision
engineered sub-assemblies and major assemblies that can go directly into their equipment, such
as revolving frames, main frames, booms, arms, dozers, buckets, and so on.
VISION
To 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.
SWOT Analysis of the Company
P a g e 54 | 90
VIJAY STEELS KEY STRENGTHS
Article III. STRONG PRODUCT DEVELOPMENT
As per the specification from Telcon the new product is been developed
Article IV. By the highly qualified internal engineering department
Article V. STRONG MERCHANDISING TEAM
Technically qualified and high skilled Merchandising department is another asset of the
company, who plays a major role in executing the orders utmost efficiently to the satisfaction of
Buyers.
1. FACTORIES ENGINEERED TO PRODUCT SPECIFIC

All their manufacturing units are engineered to product specific and managed by effective
and efficient internal engineering department.
2. QUALITY CONTROL SYSTEM

There is an independent quality audit team in process control system in all the factories,
which has given quality production consistently.
3. SOURCING OF RAW MATERIALS UNDER VIGILANCE OF QUALITY

AUDIT SYSTEM
They source all their raw materials 100% from within India. However, they have a rigid
control on their quality control system where by they ensure that all the raw materials are
produced as per their quality standard level before it gets dispatched to their factories.
P a g e 55 | 90
4. IN HOUSE LAB
They have a lab situated in the major procurement centers, such as in Bangalore and
Jamshedpur to support their quality control team to carryout the various quality tests at all level
onwards to ensure that the product is produced according to their quality in-house.
5. PRE-SHIPMENT INSPECTION TO MAINTAIN ZERO-CLAIM FROM

BUYERS
A thorough Inspection by In-house Quality Control team and pre-shipment Inspection by
buyer representative for all their products helps company to maintain zero-quality claims
position with all their buyers.
6. CONFIDENCE OF THEIR BUYERS
All the buyers as of today have been working with them since decades and they started with
them on continues basis with enhanced volume.
This has given them huge confidence as the confidence level of their buyers is very high in
their products, quality, timely deliveries and commitment towards work.
P a g e 56 | 90
VIJAY STEELS PVT LTD WEAKNESS

No such entity has been identified so far.
VIJAY STEELS PVT LTD KEY OPPORTUNITIES

Chances to get more products to manufacture form the Buyer i.e. Telcon construction equipment
limited
VIJAY STEELS PVT LTD KEY THREATS

More-qualified competitors
P a g e 57 | 90
ORGANIZATION STRUCTURE
Managing Director
General
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 Operators
Subordinate Workers Helpers

Members
P a g e 58 | 90
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 its
prime concerns. This department looks after the subsidiaries like recruitment selection training
and induction, canteen, community development disciplinary actions etc., welfare, security,
guesthouse, medical facility etc., (As per Indian Factories Act 1948.)
Let’s go through the process of the Recruitment in Vijay Steels Pvt ltd. Recruitment is process of
searching the prospecting candidate, stimulating and encouraging them to apply for the job. The
above meaning says that every organization want skilled workers so Vijay Steels Pvt ltd also
recruit candidates as follows , they firstly check the organization culture which type of
employees needed in organization and they also check employment condition in unit.
They are searching the candidates in two ways one is Advertisement and the other is manual
searching. In advertisement they give firstly the adz’s like Draft Adv, Client review adv and
Place adv, and then they receive the calls then access their CV’s. In manual searching process
they search the employee in plan search, identity search, and contact search, then they check the
candidate interest after that they arrange meeting for selection process.
SELECTION PROCESS
Selection is a process of checking the candidate’s knowledge, behavior, Skills, experience, and
qualifications etc to select and place the candidate their correct position.
P a g e 59 | 90
2. STORES DEPARTMENT
The raw materials are stored separately under material cell in production department; as
per 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 semi
finished goods and Accessories and other needs of the various departments. In order to make the
work efficient it has the system of sub contractors.
So the purchase department does the creation of sub contractors and vendors. This department is
guided by the main motto the plant and other departments working. Let’s have a look on the flow
chart of the purchase of raw materials.
Material indenting
(As per customer
schedule)
Quotations request to one or more

vendors according to requirement
Quotations Comparisons
Best Negotiation
Purchase Order
creation
Purchase Order send to

vendor (supplier)
Follow Up and procure the

material for production
P a g e 60 | 90
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, Loader Bucket,
Narrow Bucket, Back Hoe Main Frame, Boom, Arm, Counter Weight, Heavy Duty Bucket,
Revolving Frame and Track Frame. From our very inception at Jamshedpur in 1996 and at
Bangalore in 1999, our infrastructural facilities have been meticulously planned out with an eye
towards satisfying the exacting standards of world class players in the Earth Moving Steels.
Let’s have a look on the process of manufacturing process in Vijay steels, basically this company
is heavy fabrication company, they are manufacturing back hoe loader component & excavator
components.
P a g e 61 | 90
FLOW CHART OF EXCAVATOR
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 00233/03
CONTINUE
P a g e 62 | 90
CONTINUE
OUT OF FIXTURE
2ND STAGE WELDING
IN FIXTURE
TA 00233/09, TA 00233/10
TA 00233/04
LUG FITTING
TA 00233/14, TA 00233/15,
TA 00233/16, TA 00233/17,
INSPECTION
Total length 3720+/- 4mm Rejection/
Top lug distance WRT Boom Rectification
End Bracket, Bottom lug
distance
ASSEMBLY OUT OF
=
FIXTURE
TA 00233/02
Not Ok
ROBOT WELDING
LEFT OVER WELDING

TA 0233/26
FIT AND WELD
SETTING
OK
P a g e 63 | 90
CONTINU
E
CONTINU
E
Not Ok REJECTION/
INSPECTIO RECTIFICATION
N
MACHINING
OK
REJECTION/
INSPECTIO RECTIFICATION
N
Not Ok
DRESSING
INSPECTIO OK RECTIFICATION
N
UT
TESTING Not Ok
DESPATCH
OK
P a g e 64 | 90
CHAPTER 3
REVIEW OF LITERATURE
Abramovitz and Modigliani (1957) They highlighted the relationship between capacity
utilization and inventory investment. Existing stock of inventories was expected to adjust to the
desired levels.
The result was that there is positive relation among the ratio of inventory to sales and inventory
investment. High ratio of stocks to sales in the past suggests requirement of high levels of
inventories in the past and promising high investment in inventories in the current period also.
Krishna Murthy (1964) Study was aggregative and dealt with inventories in the private sector
of Indian economy as a whole for the period 1948-61. This study used sales to represent demand
for the product and suggested the importance of accelerator. Shortterm rate of interest had also
been found to be significant.
R.S. Chadda (1964) Study had been made on inventory management practices of Indian
companies. The analysis suggested application of modern scientific inventory control techniques
like operations research.
These modern scientific techniques furnish opportunities for the companies, Companies can
minimize their investment in inventory but there is continuous flow of production.
Krishnamurty and Sastry (1970) It is the most comprehensive study on manufacturers’

inventories. They used the CMI data and the consolidated balance sheet data of public limited
companies published by the RBI, in order to analyse each of the major components, like the raw
materials, goods-in-process and finished goods, for 21 industries over the period ranging from
1946-62.
P a g e 65 | 90
The study was a time series one although there were some inter-industry cross-section analyses
that were carried out in the analysis. The Accelerator represented by change in sales, bank
finance and short-term interest rate was found to be an important determinant.
The utilization of productive capacity and price anticipations was also found to be relevant in the
study.
George (1972) It was the study on cross section analysis of balance sheet data of 52 public
limited companies for the period of 1967- 70. Accelerator, internal and external finance variables
were considered in the formulation of equations for raw materials including goods-in-process
inventories. However, equations for finished goods inventories conceive only output variable.
Deliberation was given on accelerator and external finance variables.
Mishra (1975) It is the study of six major public sector enterprises. He concluded that (i)
inventory constitutes the most important component of working capital of public enterprises (ii)
efficiency of working capital funds employed in receivables is terribly low in the selected
enterprises and (iii) In all units both the current assets and the quick ratios are greater than their
standards. Enterprises need proper control on receivables.
Lambrix and Singhvi (1979) Adopted working capital cycle approach in working capital
management, also suggested that investment in working capital can be optimized and cash flows
can be improved by reducing the time frame of physical flow starting from the receipt of raw
material to the shipment of finished goods, i.e. inventory management, and by improving the
terms and conditions on which firm sells goods as well as receipt of cash.
Farzaneh (1997) Presented a mathematical model, to assist the companies in their decision to
switch from EOQ to JIT purchasing policy. He defines JIT as “to produce and deliver finished
goods just in time to be sold, sub-assemblies just in time to be assembled in goods and purchased
material just in time to be transformed into fabricated parts”.
P a g e 66 | 90
He highlights that the EOQ model focuses on minimizing the inventory costs rather than
minimizing the inventory. Under the ideal condition where all the conditions meet, it is
economically better off to choose the JIT over the EOQ because it results in purchase price,
ordering cost.
Rich Lavely (1998) Asserts that inventory means “Piles of Money” on the shelf and the profit
for the firm. However, he notices that 30% of the inventory of most retail shops is dead.
Therefore, he argues that the inventory control is facilitate the shop operations by reducing rack
time and thus increases profit. He also elaborates the two types of inventory calculations that
determine the inventory level required for profitability.
The two calculations are “cost to order” and “cost to keep”. Finally, he proposes seven steps to
inventory control.
Dave Piasecki (2001) He focused on inventory model for calculating the optimal order quantity
that used the Economic Order Quantity method. He points out that many companies are not using
EOQ model because of poor results resulted from inaccurate data input.
He says that EOQ is an accounting formula that determines the point at which the combination of
order costs and inventory costs are the least. He highlights that EOQ method would not conflict
with the JIT approach. He further elaborates the EOQ formula that includes the parameters such
as annual usage in unit, order cost and carrying cost. Finally, he proposes several steps to follow
in implementing the EOQ model.
The limitation of this literature is that it does not elaborate further relationship between EOQ and
JIT. It does not associate the inventory turns with the EOQ formula and fails to mention the
profit gain with the quantity is calculated.
P a g e 67 | 90
CHAPTER 4
DATA ANALYSIS & INTERPRETATION
Financial Ratios related to Inventory

Raw material turnover ratio
Raw material turnover ratio is velocity at which raw material converted into goods ready
for sale. If raw material turnover ratio is high then company is efficiency converting into finished
goods.
Formula: Material consumed / Average raw material
Raw Material Turnover Ratio
Year Raw material consumed (Rs) Avg R.M Ratio
2018 576,484,922 53,608,082 10.75
2017 371,223,873 36,137,266 10.27
2016 230,779,236 132,002,490 1.74
P a g e 68 | 90
Ratio
12
10
8
6 Ratio
4
2
0
2018 2017 2016
Years
Form above graph we come know that raw material turnover ratio is increased rapidly in 2017
from 1.74 in 2016 to 10.27 for 2017. Indicates that company is converting raw material into
finished or semi-finished goods very quickly.
P a g e 69 | 90
Holding period of raw material
It refers to the number of days taken for the production unit to convert raw material to finish
goods.
Formula: 360 /Raw material turnover ratio
Holding period of raw material
Year Total Days Ratio Days
2018 360 10.75 33
2017 360 10.27 35
2016 360 1.74 206
P a g e 70 | 90
Raw material holding Period
250
200
150
RHP
100
D
A
Y
S
50
0
2018 2017 2016
Years
As the raw material turnover ratio is increasing form to 10.27 for 2017 it indicates that firm is
taking less days for conversion as compared to 2016. In 2016 conversion period was 206 days
but in decreased to 35 days for 2017. This is shown in above graph.
Before 2017 there was no production process they were converting semi finished goods into
finished products hence to start their own production process they hold the raw material in 2016
P a g e 71 | 90
Work in Process Turnover ratio

Work in process turnover ratio is velocity at which W.I.P converted into goods ready for sale. 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
2018 849,054,442 36,720,702 23.12
2017 555,094,500 15,010,347 36.98
2016 361,110,197 9,755,839 37.01
P a g e 72 | 90
Work in Process Turnover ratio
40
35
30
25
20 Ratio
15
D
A
Y
S
10
5
0
2018 2017 2016
Years
Form above graph we came to know that Work in process turnover ratio is decreasing from 37.01
in 2016 to 23.12 2018. The ratio was high in 2016 as compared to 2017 and 2018. The ratio was
37.01. Indicates that company is converting semi finished into finished goods quickly
P a g e 73 | 90
Holding period of W.I.P

It refers to the number of days taken for the production unit to convert semi finished goods into
finish goods.
Formula:
360
W.I.P turnover ratio
Holding period of W.I.P
Year Total Days Ratio Days
2018 360 23.12 15.57
2017 360 36.98 9.73

2016 360 37.01 9.72
P a g e 74 | 90
Holding period of W I P
18
16
14
12
10
Ratio
8
6
D
A
Y
S
4
2
0
2018 2017 2016
Years
As the work in process turnover ratio is increasing form 9.72. in 2016 To 15.57 for 2018 it
indicates that firm is taking less days for conversion. Which shown in above graph
P a g e 75 | 90
Finished goods turnover ratio

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
2018 849,054,442 26,243,339 32.35
2017 555,094,500 19,858,482 27.95
2016 361,110,197 10,940,008 33.01
P a g e 76 | 90
Finished Goods Turnover Ratio
34
33
32
31
30
Ratio
29
28
D
A
Y
S
27
26
25
2018 2017 2016
Years
Form above graph we came know that finished goods turnover ratio is decreasing from 33.01 in
2016 to 27.95 for 2017. Indicates that company is selling goods little slowly as compared to 2016
but it is bit fast as compared to 2018. Where the ratio for that particular period was 32.35
decreased to 11.20 for 2018 it is satisfactory. Which shown in above graph.
P a g e 77 | 90
Inventory to capital employed

This ratio indicates the relationship between the total capitals employed and inventories it shows
how much capital utilized to invest in the inventories other than the other assets. The normal
manufacturing firms have low ratio of inventory total capital employed in the organization.
Formula: Inventory / Total capital employed

Total capital
Year Inventory employed Percentage
2018 197,465,069 301,443,215 65.50
2017 121,558,000 145,492,599 83.54
2016 67,994,623 98,333,324 69.14
P a g e 78 | 90
90
80
70
60
50
ICE
40
30
20
10
G
R
C
A
P
E
E
T
0
2018 2017 2016
Years
By observing above graph we can say that the firm investing huge amount in inventories
compared to other assets. It invested 83.54% of its capital in inventory in 2017 where as it
reduced to 65.50% in 2018
P a g e 79 | 90
Inventory to current asset ratio

This ratio indicates the relationship between the inventory and current assets. It shows the
percentage of inventory to current assets, which helps the organizations in deciding the current
assets policy which also affect the liquidity position of the organization.
Formula: Inventory / Current assets
Year Inventory current assets Percentage
2018 197,465,069 331,314,504 59.60
2017 121,558,000 237,687,684 51.14
2016 67,994,623 117,022,625 58.10
P a g e 80 | 90
62
60
58
56
54 Ratio
52
50
48
G
R
C
A
P
E
E
T
46
2018 2017 2016
Years
The inventory to current assets ratio in the year 2016 was 58.10% and it decreased to 51.14% in
the year 2017 but again it increased to 59.60% in 2018. It shows that the firm investing 59.60%
of its investment is for inventory only.
P a g e 81 | 90
Inventory to total assets

This ratio indicates the relationship between the inventory and total assets. The significance of
this ratio is it reflects the portion the inventory as a percentage of the total assets, which helps the
management deciding the utilization remaining resources profitably, since the inventory will lock
up the huge funds and reduces the profitability of the organization.
Formula: Inventory / Total assets
Year Inventory Total assets Percentage
2018 197,465,069 990,329,087 19.93
2017 121,558,000 540,916,088 22.47
2016 67,994,623 414,901,234 16.38
P a g e 82 | 90
25
20
15
Ratio
10
5
G
R
C
A
P
E
E
T
0
2018 2017 2016
Years
During the year 2016 the rate of inventory to total assets was 16.38% it increased to 22.47% in
2017. But again it reduced to 19.93% in 2018. It indicates that firm investing only 19.93% in
inventory out of total assets.
P a g e 83 | 90
Inventory to working capital

This ratio indicates the relationship between inventory to working capital and it also indicates the
amount to inventory tied up in the working capital and it also shows the efficiency of inventory
management.
Formula: Inventory
Working capital
Year Inventory Working capital Percentage
2018 197,465,069 199,345,123 99.05
2017 121,558,000 146,097,210 83.20
2016 67,994,623 46,338,277 146.45
P a g e 84 | 90
160
140
120
100
80 Ratio
60
40
20
G
R
C
A
P
E
E
T
0
2018 2017 2016
Years
In the year the ratio was 146.45% in 2016. It decreased to 83.20% for 2017 but it increased it to
99.05% in 2018. It indicates that firm investing huge amount in inventory
FINDINGS:
P a g e 85 | 90
1. Raw material turnover ratio is increased rapidly in 2017 from 1.74 in 2016 to 10.27 for
2017.
2. As the raw material turnover ratio is increasing form to 10.27 for 2017 it indicates that
firm is taking less days for conversion as compared to 2016.
3.Work in process turnover ratio is decreasing from 37.01 in 2016 to 23.12 2018. The ratio
was high in 2016 as compared to 2017 and 2018.
4.As the work in process turnover ratio is increasing form 9.72. in 2016 To 15.57 for 2018
it indicates that firm is taking less days for conversion
5.Finished goods turnover ratio is decreasing from 33.01 in 2016 to 27.95 for 2017.
Indicates that company is selling goods little slowly as compared to 2016
but it is bit fast as compared to 2018.
6.Company is selling goods little slowly as compared to 2016 but it is bit fast as compared
to 2018. Where the ratio for that particular period was 32.35
7.The inventory to current assets ratio in the year 2017 was 58.10% and it decreased to
51.14% in the year 2018 but again it increased to 59.60% in 2018. It shows that the firm
investing 59.60% of its investment is for inventory only.
8.During the year 2017 the rate of inventory to total assets was 16.38% it icreased to
22.47% in 2018. But again it reduced to 19.93% in 2009. It indicates that firm investing
only 19.93% in inventory out of total assets.
9.In the year the ratio was 146.45% in 2016. It decreased to 83.20% for 2017 but it
increased it to 99.05% in 2018. It indicates that firm investing huge amount in inventory.
P a g e 86 | 90
10.As the finished goods turnover ratio is increasing form 10.87 in 2017 to 12.86 for 2018
it indicates that firm is taking less days for sale. In 2018 conversion period was 12.86 days
but in decreased to 11.20 for 2018 it is satisfactory.
SUGGESTIONS:
P a g e 87 | 90
a) From the findings it is came to know that in the year 2016 the number of days for
holding Raw material is more, it is not good for the company because it eats
unnecessary investment. To avoid this problem the following points will help.
 Purchase Raw Materials at the time when the stock reaches the minimum level.
 The purchases should not cross the Maximum limit otherwise the stock kept in
stores idle.
 Quantity should be ordered as per the demand. We can assume the demand for the
goods from past experience.
 We can have more Raw materials which are imported from other countries but carry
reasonable stocks which are available locally.
b) If we purchase less quantity of materials at a time it will reduce the carrying cost
but increases the ordering cost and vise versa. Therefore optimum ordering quantity
is necessary, which minimizes the cost.
c) The company should maintain a safety level and also reordering point so that they
come to know at what time they should order for the supply of material and need
not to suffer from short fall of required material.
CONCLUSION
P a g e 88 | 90
After the study, we can came to a conclusion that, effectiveness of inventory management should
improve in all the aspects, hence the steels can still strengthen its position by looking into the
following.
 The inventory should be fast moving so that warehouse cost can be reduced.
 The finished goods have to be dispatched in feasible time as soon as manufacturing
is completed.
 Optimum order quantity should be maintained, hence cost can be minimized.
 Proper inventory control techniques are employed by the organization within the
framework.
BIBIIOGRAPHY
P a g e 89 | 90
BOOKS
 Financial Management : I.M.Panday
 Production Management : K. Ashwatappa
WEBSITES
www.google.com
P a g e 90 | 90

Inventory Management

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Inventory Management

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INVENTORY MANAGEMENT

STATEMENT OF THE PROBLEM

OBJECTIVES OF THE STUDY

1. To study the inventory management based on the ratios

SCOPE OF THE STUDY

INTRODUCTION TO INVENTORY MANAGEMENT

(i) Raw Materials:

(ii) Work in Process:

(iv) Stores and Supplies:

Meaning & Types of Inventory

 Held for sale in ordinary course of the business.

The inventory may be classified into three categories:

Meaning of Inventory Management

Significance of holding inventory

Objectives of Inventory Management

a. To ensure continuous supply of materials.

Factors affecting the level of inventory

Techniques of inventory control

(2) TRADITIONAL TECHNIQUES

PHYSICAL INVENTORY MANAGEMENT

Benefits for Holding Inventory:

Objects of Inventory Management:

1. To carry maximum inventory in order to facilitate efficient and smooth production

2. To minimize investment in inventory for maximize the profitability.

The over-investment involves the consequences like:

The under-investment involves the consequences like:

FINANCIAL INVENTORY MANAGEMENT

“Recording, maintaining and evaluating of stocks in a value terms is known as Financial

Financial Inventory Management is again divided into three different categories.

First In First Out (FIFO) Method:

Last in First Out (LIFO) Method:

Average Cost Method:

2) Based on Cost Analysis

Cost of Holding Inventory: -

Linking of Costs based and Physical Based Inventory Management:

Economic Order Quantity (EOQ):

Formulae for calculating Economic Order Quantity:

This is the point at which to order inventory-expressed equation-ally as:

3) Based on Financial Statement

The analysis of financial statements is a process of evaluating relationship between component

INVENTORY VALUATION AND COST FLOWS:

Valuation of inventories – methods of determination:

THE FIFO METHOD (FIRST – IN FIRST – OUT METHOD)

Disadvantages: The method suffers from the following disadvantages.

The LIFO method (Last – in – First – Out method)

Base Stock Method:

Weighted average price method:

Valuation of inventories – impact on the flow of costs:

Evaluation of methods – What causes the differences?

Evaluation of methods – can we justify the differences?

Analysis of Inventory Systems

The importance of Inventory Management to a business

Properties of Inventory Systems

Tasks of Financial analyst is to:

Perpetual Inventory System

Another method of inventory control is the maintenance of inventory control on a continuous

Factors Influences the Level of each Component of Inventory Raw Material

4. Anticipated volume of usage and consumption.

Finished Goods Inventory:

4. Sales policies of the firm.

Stores and Spares Inventory:

Some of the important inventory policies relates to:

4. policies relating to alternative use