A PROJECT REPORT

ON
“A STUDY ON INVENTORY
MANAGEMENT SYSTEM IN
COMPANY"

Submitted By:
Sumit Soni
Roll No. 1405004198
Master of Business Administration
Sikkim Manipal University

UNDER THE GUIDANCE OF:

Dr. Prashant Sharma

Centre Code- 03487
(Vans InfoTech)
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 DECLARATION

I Sumit Soni, student of Sikkim Manipal University, hereby declare that the
project work titled “A STUDY ON INVENTORY MANAGEMENT IN
COMPANY” which is submitted to Sikkim Manipal University in partial
fulfillment of the requirements for the degree of Master of Business
Administration, is a record of original research work done by me under the
guidance of, Dr. Prashant Sharma of Vans InfoTech, that this is genuine and
has not been submitted elsewhere for any other degree or diploma.

PLACE: Aligarh Sumit

Soni
DATE: ROLL NO: 1405004198

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 ACKNOWLEDGEMENT
I have prepared this study paper for the “A Study on Inventory Management
System in Company have derived the contents and approach of this study
paper through discussions with my Colleagues, friends and internet as well as
with the help of various Books, Magazines and Newspapers etc.
I would like to give my sincere thanks to my guide Dr. Prashant Sharma,
friends who, through their guidance, enthusiasm and counseling helped me
enormously as I think there will be always need for improvement. Apart from
this, I hope this study would stimulate the need of thinking and discussion on
the topics like this one.

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INDEX

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 Sr. No. Topic Page No.
1 INTRODUCTION TO THE STUDY 5
2 OBJECTIVE OF THE STUDY 6
3 NEED FOR THE STUDY 7
4 SCOPE OF THE STUDY 7
5 MANAGEMENT OF INVENTORY 8
6 CONCEPT OF INVENTORY MANAGEMENT 8
7 OBJECTIVES OF INVENTORY MANAGEMENT 9
8 TYPES OF INVENTORY 11
9 NEED TO HOLDING INVENTORIES 12
10 FACTORS INFLUENCING INVENTORY 13
11 ADVANTAGES OF INVENTORY CONTROL 14
12 RISK AND COST ASSOCIATED WITH INVENTORIES 14
13 ESSENTIAL OF INVENTORY CONTROL SYSTEM 15
14 FACTORS AFFECTING STOCK INVESTMENT LEVEL 17
15 INVENTORY CONTROL TECHNIQUES 19
16 REVIEW OF LITERATURE 32
17 RESEARCH METHODOLOGY 37
18 OBJECTIVES OF INVENTORY CONTROL IN 39
ORGANIZATION
19 FINANCIAL MANAGER’S ROLE IN INVENTORY 71
MANAGEMENT
20 VALUATION OF INVENTORIES 72
21 DEFINITIONS 73
22 CONCLUSION 81
23 BIBLIOGRAPHY 82

INTRODUCTION TO THE STUDY

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Inventory is the business largest asset .It is stock of item used in business.
Inventory represent one of most important asset that most businesses posses,
because the turnover of the inventory represents one of the primary sources
of revenue generation and subsequent earnings for the company’s
shareholder and owners. Inventory is very vital to every company that is
without inventory no company would survive. Inventory is meant for
‘protection’ and for ‘economy’ in cost.
Keeping inventory of sufficient stock will help to face lead time component,
demand and supply fluctuation and any unforeseen circumstance in the
procurement of materials. Though to have inventory is must, inventory is such
a thing that will pile up and creep into the area of profits to turn them as
losses and can put the company in red. It is therefore, necessary to have
Control over inventory to save the company from piling up inventories and to
avoid losses. Better said than done, is the word that suits inventory Control.
The management of inventory is a key concern of all business. If a company's
inventory level is too low, it risks delays in fulfilling its customer’s orders. If
the inventory is too high, it is tying up dollars that can be better used in other
areas. It also risks obsolescence and spoilage. Successful businesses keep their
inventory turns high, but also keep their service level at or above the industry
standard.
Inventory is a stock of goods required by an organization for its successful
operation. Inventory refers to materials procured, stored and used for day to
day functioning of the whole organization. Inventory is directly related to
production and marketing department, still the finance department has to
play a vital role in the management of inventory. The purpose of inventory

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management is to keep stock in such a way that there is no overstocking or
under stocking.
Inventory is one of the most expensive assets of many companies
representing as much as 50% of total invested capital. Inventory Control
relates to a set of policies and procedure by which an industry determines
which materials it will hold in stock and the quality of each that it will carry in
stock.
Inventory is the largest item in the current assets category and must be
accurately counted and valued at the end of each accounting period to
determine a company’s profit or loss. So the management of inventory is
important. Inventory management is the process of efficiently overseeing the
constant flow of units into and out of an existing inventory.
Inventory management is a very important function that determines the
health of the supply chain as well as the impacts the financial health of balance
sheet. Every organization constantly strives to maintain optimum inventory to
meet its requirements and avoid over or under inventory that can impact the
financial figures.

OBJECTIVE OF THE STUDY

Inventories constitute the principal item in the working capital of the majority
of trading and industrial companies. In inventory, we include raw materials,
finished goods, work in progress, supplies and other accessories. To maintain
the continuity in the operations of business enterprise, a minimum stock of
inventory required.
However, the physical control of inventory is the operating responsibility of
stores superintendent and financial personnel have nothing to do about it but

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the financial control of these inventories in all lines of activity in which they
comprise a substantial part of the current assets is a frequent problem in the
management of working capital. Management of inventory is designed to
regulate the volume of investment in goods on hand, the types of goods
carried in stock to meet the needs of production and sales while at the same
time, the investment in them is to kept at a reasonable level.

NEED FOR THE STUDY

Inventories perform certain basic functions which are of crucial importance in
the firm’s production and marketing strategies. Effective Control over the
utilization of materials has much bearing on profit and here is an attempt to
study the management of materials. This study helps the company to detect
and evaluate its own strength and weakness and also give recommendation
for the better inventory management.
Without inventory management it would be difficult for any company to
maintain Control and be able to handle the needs of customers. Inventories
are necessary for a firm to operate efficiently and almost all business
transactions involve the delivery of a product or services in exchange of
currency.

SCOPE OF THE STUDY

Inventory is the major element in the working capital of any trading and
manufacturing concern. The scope of the present study extends to ensure
proper inventory management and cost Control. It provides a guideline for the

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management of the materials of the company and helps to introduce
necessary changes as and where required.
The scope of inventory management concerns the fine line between
replenishment lead time, carrying cost of inventory, asset management,
inventory forecasting, quality management, replenishment, returns and
defective goods and demand forecasting. Balancing these competing
requirements lead to optimal inventory levels, which is an ongoing process as
the business need shift and react to the wider environment

MANAGEMENT OF INVENTORY
Inventories constitute the principal item in the working capital of the majority of
trading and industrial companies. In inventory, we include raw materials,
finished goods, work-in-progress, supplies and other accessories. To maintain
the continuity in the operations of business enterprise, a minimum stock of
inventory required. However, the physical control of inventory is the operating
responsibility of stores superintendent and financial personnel have nothing to
do about it but the financial control of these inventories in all lines of activity in
which they comprise a substantial part of the current assets is a frequent
problem in the management of working capital. Management of inventory is
designed to regulate the volume of investment in goods on hand, the types of
goods carried in stock to meet the needs of production.

CONCEPT OF INVENTORY MANAGEMENT

The term inventory management is used in two ways- unit control and value
control. Production and purchase officials use this word in term unit control
whereas in accounting this word is used in term of value control. As investment
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in inventory represents in many cases, one of the largest asset items of business
enterprises particularly those engaged in manufacturing, wholesale trade and
retail trade. Sometimes the cost of material used in production surpasses the
wages and production overheads. Hence, the proper management and control of
capital invested in the inventory should be the prime responsibility of accounting
department because resources invested in inventory are not earning a return for
the company. Rather, on the other hand, they are costing the firm money both in
terms of capital costs being incurred and loss of opportunity income that is being
foregone.

OBJECTIVES OF INVENTORY MANAGEMENT

The basic managerial objectives of inventory control are two-fold; first, the
avoidance over-investment or under-investment in inventories; and second,
to provide the right quantity of standard raw material to the production
department at the right time. In brief, the objectives of inventory control may
be summarized as follows:
A. Operating Objectives:

(1) Ensuring Availability of Materials: There should be a continuous

availability of all types of raw materials in the factory so that the
production may not be help up wants of any material. A minimum
quantity of each material should be held in store to permit production
to move on schedule.
(2) Avoidance of Abnormal Wastage: There should be minimum possible
wastage of materials while these are being stored in the godowns or
used in the factory by the workers. Wastage should be allowed up to a
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 certain level known as normal wastage. To avoid any abnormal wastage,
strict control over the inventory should be exercised. Leakage, theft,
embezzlements of raw material and spoilage of material due to rust,
bust should be avoided.
(3) Promotion of Manufacturing Efficiency: If the right type of raw
material is available to the manufacturing departments at the right time,
their manufacturing efficiency is also increased. Their motivation level
rises and morale is improved.
(4) Avoidance of Out of Stock Danger: Information about availability of
materials should be made continuously available to the management so
that they can do planning for procurement of raw material. It maintains
the inventories at the optimum level keeping in view the operational
requirements. It also avoids the out of stock danger.
(5) Better Service to Customers: Sufficient stock of finished goods must
be maintained to match reasonable demand of the customers for
prompt execution of their orders.
(6) Designing poorer organization for inventory management: Clear
cut accountability should be fixed at various levels of organization.

B. Financial Objectives:

(1) Economy in purchasing: A proper inventory control brings certain

advantages and economies in purchasing also. Every attempt has to
make to effect economy in purchasing through quantity and taking
advantage to favorable markets.

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(2) Reasonable Price: While purchasing materials, it is to be seen that
right quality of material is purchased at reasonably low price. Quality is
not to be sacrificed at the cost of lower price. The material purchased
should be of the quality alone which is needed.
(3) Optimum Investing and Efficient Use of capital: The basic aim of
inventory control from the financial point of view is the optimum level
of investment in inventories. There should be no excessive investment
in stock, etc. Investment in inventories must not tie up funds that could
be used in other activities. The determination of maximum and
minimum level of stock attempt in this direction.

TYPES OF INVENTORY
 Movement inventories
Movement inventories also called as transit or pipeline inventory. Pipeline
inventory exist because material cannot be transported instantaneously
between point of supply and point of demand.
 Buffer inventories
Buffer inventory also called as safety inventory. Its purpose is to
compensate for unexpected fluctuations in supply and demand as well as
unpredictable events such as poor delivery reliability or poor quality of
supplier’s products. Generally higher the level of buffer inventory, the
better the firm’s customer service.

 Cycle inventory

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 It is held for the reason that one or more stages in the process cannot
supply all the items it produces simultaneously. This type of inventory
result from the need to produce products in batches and amount of it
depends on volume decisions.
 Decoupling inventory
Inventory is used to allow work centers or processes to operate relatively
independently. When such inventory are held even if a machine breaks
down the work would not stop
 Anticipation inventory
This type of inventory is accumulated to cope up with expected future
demand or interruption in supply. It is a way for manufacturers to maintain
consistent operations when the demand for the product is low.

NEED TO HOLDING INVENTORIES

Maintaining inventories involves tying up of the company’s funds and
incurrence of storage and handling cost. If it is expensive to maintain
inventories, why do companies hold inventories? There are those general
motives for holding inventories;

 Transaction motive
According to this s motive, an enterprise maintains inventories to avoid
bottlenecks in its production and sales. By maintaining inventories, the
business ensures that production is not interrupted for want of raw
materials, on the other hand and sales also are not affected on account of
non-availability of finished goods, on the other.

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 Precautionary motive
Inventories are also held with a motive to have a cushion against
unpredicted business. There may be sudden and unexpected spurt in
demand for finished goods at times. Similarly, there may be unforeseen
slump in the supply of raw materials at a time. In both cases, a prudent
business world surely likes to have some cushion to guard against the risk
for such unpredictable changes.
 Speculative motive
An enterprise may also hold inventories to take the advantage of price
fluctuation. Suppose, if the prices of raw materials are to increase rather
steeply the enterprise would like to hold more inventories than required at
lower prices.

FACTORS INFLUENCING INVENTORY

The inventory management of an organization has an impact on the whole
system.
“How much to buy at onetime” and “when to by this quantity”. This two
fundamental things on which inventory Control depends. Many factors govern
these fundamental things. The prime factors that govern these two
fundamental things are;
 Requirements
 Quality in stock or on stock
 Lead time
 Obsolesce

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ADVANTAGES OF INVENTORY CONTROL
Here are the following advantages of inventory control-
 Reduction in investment in inventory.
 Proper and efficient use of raw materials.
 No bottleneck in production.
 Improvement in production and sales.
 Efficient and optimum use of physical as well as financial resources.
 Ordering cost can be reduced if a firm places a few large orders in place of
numerous small orders.
 Maintenance of adequate inventories reduces the set-up cost associated
with each production run.

RISK AND COST ASSOCIATED WITH INVENTORIES

Holding of Inventories expose the firm to a number of risks and costs.
Major risks are as follows-
(a) Price decline: They may be due to increase in market supply of the
product, introduction of a new competitive product, price-cut by the
competitors etc.
(b) Product deterioration: This may due to holding a product for too long a
period or improper storage conditions.
(c) Obsolescence: This may due to change in customer’s taste, new
production technique, improvements in product design, specifications
etc.

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The Costs of holding inventories are as follows-
(a) Material Cost: This include the cost of purchasing the goods,
transportation and handling charges less any discount allowed by the
supplier of goods.
(b) Ordering Cost: This includes the variables cost associated with placing
an order for the goods. The fewer the orders, the lower will be the
ordering costs for the firm.
(c) Carrying Cost: This includes the expenses for storing and handling the
goods. It comprises storage costs, insurance costs, spoilage costs, cost of
funds tied up in inventories etc.

ESSENTIAL OF INVENTORY CONTROL SYSTEM

For an efficient and successful inventory control there are certain important
conditions that are as follows:
(1) Classification and Identification of inventories: The
usual inventory of manufacturing firm includes raw-material,
stores, work-in-progress and component etc. To facilitate prompt
recording the dealing, each item of the inventory must be assigned a
particular code number and it must be classified in suitable group or
sub-divisions. ABC analysis of material is very helpful in this context.
(2) Standardization and simplification of inventories: In
order to facilitate inventory control, the inventory line should be
simplified. It refers to the elimination of excess types and sizes of items.
Simplification leads to reduction in classification of inventories and its
carrying costs. Standardization, on the other hand, refers to the fixation

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 of standards of raw material to be purchased and specification of the
components and tools to be used.
(3) Setting the Maximum and Minimum limits for each
part of inventory: The third step in this process is to set the maximum
and minimum limits of each item of the inventory. It avoids the chances
of over-investment as well as running a short of any item during the
cost of producing. Reordering point should also be fixed beforehand.
(4) Economic Order Quantity: It is also a basic inventory
problem to determine the quantity as how much to order at a time. In
determining the EOQ, the problem is one to set a balance between two
opposite costs, namely, ordering costs and carrying costs. This quantity
should be fixed beforehand.
(5) Adequate storage Facilities: To make the system of
inventory control successful and efficient one, it is also essential to
provide the adequate storage facilities. Sufficient storage area and
proper handling facilities should be organized.
(6) Adequate Reports and Records: Inventory control
requires the maintenance of adequate inventory record and reports.
Various inventory records must contain information to meet the needs
of purchasing, production, sales and financial staff. The typical
information required about any class of inventory may be relating to
quantity on hand, location, quantities in transit, unit cost, code for each
item of inventory, reorder point, safety level etc. Statements forms and
inventory records should be so designed that the clerical cost of
maintaining these records must be kept a minimum.

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(7) Intelligent and Experienced Personnel: An important
requirement of successful inventory control system is the appointment
of qualified and experienced staff in purchase and stores department.
Mere establishment of procedures and the maintenance of records
would not give the desired results as there is no substitute for sincere
and devoted as well as experienced hands. Hence, the whole inventory
control structure should be manned with trained, qualified, experienced
and devoted employees.
(8) Coordination: There must be proper coordination of all
departments involved in the process of inventory control, such as
purchase, finance, receiving, approving, storage and accounting
departments. These all departments have different outlook and objects
in inventory management but financial manager has to coordinate them
all.
(9) Budgeting: An efficient budgeting system is also
required. Preparation of budgets concerning materials, supplies and
equipment to ensure economy in purchasing and use of material is also
necessary.
(10) Internal Check: Operating of a system of internal check
is also vital in inventory management so that all transactions involving
material supplies and equipment purchase are properly approved and
automatically checked.

FACTORS AFFECTING STOCK INVESTMENT LEVEL

These factors can be put in two categories: General and Specific.

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General Factors: These factors include those factors, which affect directly or
indirectly level of investment in any asset. These are as follows:

(1) Nature of Business

(2) Size and scale of Business
(3) Expected Sales Volumes
(4) Price Level Changes
(5) Availability of Funds
(6) Management view Point

Specific Factors: These factors are directly related with investment in stock.
Following are the main factors:
(1) Seasonal Character of Raw Materials: If supply of raw material used
in the firm is seasonal, the firm will require more funds for the purchase
of raw material during season. Usually, raw materials are available at
cheaper rates during its production season.
(2) Length and Technical Nature of the production process: If
production process is lengthy and of technical nature, higher investment
is required in raw material. In the technical nature production process,
quality control of raw material is given more emphasis.
(3) Terms of Purchase: If some concessions or discount in price or facilities
of credit are provided by suppliers on purchase of raw materials in huge
quantity then the firm is inspired for excessive purchase of goods and
hence comparatively more investment is required in inventory.
(4) Nature of End Product: Nature of end product also influences
investment in inventory. If the end product is a durable good, high

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 investment will be required because durable goods can be stored for a
long period. On the other hand, perishable goods cannot be stored for a
long period. Hence, investment in inventory of such products is low.
(5) Supply Conditions: If the supply of raw material is regular and there is
no possibility of interruption in future, high investment in inventories is
not required.
(6) Time Factor: The lead time of raw material time token in production
process and sale of product also influence investment in inventories.
Longer the period, higher will be the investment in inventories.
(7) Loan Facilities: If raw materials are purchased on credit or loan from the
bank or other financial institution can be obtained on the security of raw
material, lesser investment would be required. In the absence of such
loan facility, higher investment would be required.
(8) Price Level Fluctuations: If there are expectations of price rise in future
then raw materials may be store in high quantity and so more
investment would be required. On the contrary, if the prices of raw
materials are expected to go down in future, then comparatively lesser
investment would be required.

INVENTORY CONTROL TECHNIQUES

Inventory is being maintained as a cushion in supply of materials for
continuous production without causing stock out situation. This cushion
should not be suicidal to any organization. The following scientific techniques
and methods are being used in control of inventory.
1. Inventory Management Techniques
2. Standardization

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3. Selective Inventory Control
4. Just In Time
5. Perpetual Inventory System
6. Inventory Turnover Ratio

1. INVENTORY MANAGEMENT TECHNIQUES

I. ECONOMIC ORDER QUANTITY:-

If the firm is buying raw materials, it has to decide lots in which it has to
be purchased on replenishment. If the firm is planning a production run,
the issue is how much production to schedule. These problems are
called order quantity problems and the task of the firm is to determine
the optimum or economic order quantity.
(a) Ordering cost
The term ordering cost is used in case of raw materials and includes the
entire cost of acquiring raw materials.
(b) Carrying cost :
Cost incurred for maintaining a given level of inventory is called
carrying cost.
Economic Order Quantity is given by the formula:
EOQ = √ 2 AO /C
And the cost of inventory is given by formula:
Total cost of inventory = (A x P) + (A x Q)/EOQ + (EOQ x C)/ 2
Where, A= Annual Consumption (in units)
O= Ordering cost per order (in Rs)
C= Carrying cost per unit (in Rs)

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P= Price per unit (in Rs)

II. Reorder Point

The reorder point is that inventory level at which an order should be
placed to replenish the inventory .To determine reorder point:
(a) Lead time is the time normally taken in replenishing inventory after the
order has been placed.
(b) Average usage
(c) Economic order quantity

III. Safety stock

The demand for material may fluctuate from day to day. The actual delivery
time may be different from the normal lead time. If the actual usage increases
or the delivery of inventory is delayed the firm can face problem of stock out,
which can be costly. So, in order to guard against the stock out the firm may
maintain a safety Stock.

2. STANDARDIZATION :
Standardization is very essential to control the inventory, as by
standardization reduction in variety of materials is possible. And because of
the reduction in variety the advantages are low cost, low inventory, less
storage stocks, conservation of materials, variety reduction, less paper work,
easily follow up with suppliers, less number of orders.
The importance of this field has been recognized since the days of F.W.
Taylor , who first drew attention to this fundamental need in any

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 organization .Just as work study is necessary preliminary to work
simplification , and a basic technique for production control, quality control,
materials handling , estimated cost control, etc. Standardization is preliminary
necessity to design a basic technique on build control and standardization
procedure.

3. SELECTIVE INVENTORY CONTROL MANAGEMENT

Any manufacturing organization consumes few thousand items of stores. A
high degree of control of inventories of each item would, therefore neither be
practical considering the work involved, nor worthwhile since all items are
not of equal importance. Hence it is desirable to classify or group items to
control commensurate with importance. This is the principle of selective
control as applied to inventories and the technique of grouping is termed as
selective technique.
Selective inventory means variation in the methods of inventory control from
item to item and this differentiation should be on selective basis by
classification. A company has to stock thousands of items of raw materials,
standard parts, stores and spares, sub contract items, tools, stationary etc. To
have better control over the inventory/ stock on hand, selective inventory
control technique should be used in isolation/ or in conjunction.
Thus, selective control means selecting the area of control so that required
objective is achieved as early as possible without any lost of time due to taking
care of full area—
 Minimum loss of energy and efforts.
 At maximum cost without loss of time.
There are following selective control techniques:

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 ABC Analysis
 FSN Analysis
 XYZ Analysis
 VED Analysis
 HML Analysis

a) ABC ANALYSIS
ABC Analysis is a selective control technique which is required to be applied
when we want to control value of consumption of the items in Rupees
obviously when we want to control value of the consumption of the material
we must select those materials where consumption is very high.
In any company manufacturing, there are number of items which are
consumed or traded it may run into thousands. It is found after number of
studies for different companies that—
Value of consumption of No. of items Grade
items (value in Rs )
70% of consumption 10% of no. of items A
20% of consumption 15% of no. of items B
10% of consumption 75% of no. of items C

A items these are those items which are found hardly 5% 10% but their
consumption may amount 70% 75% of the total money spend on materials.
B items these are those items which are generally 10% 15% of the total items
and their consumption amounts to 10% 15% of the money spend on the
materials.

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C items these are larger number of items which are cheap and inexpensive
and hence insignificant. They are large in number of running into hardly 5%
10% of the total money spends on the materials.
‘A’ Class Items ‘B’ Class Items ‘C’ Class Items
(High consumption (Moderate (Low consumption
value) consumption value) Value)
Very strict control Moderate control Lose control
No safety stocks or very Low Safety stocks High safety stocks
low safety stocks
Maximum follow up and Periodic follow up Follow up and
expediting expediting in
exceptional cases
Rigorous value analysis 1) Moderate value analysis Minimum value analysis
Must be handled by Can be handled by Can be fully delegated
senior officers management

b) FSN ANALYSIS
This type of analysis is more concerned from the point of view of movement of
the item or issue of the item under this type of analysis.

‘F’ items are those items, which are fast moving i.e.in a given period of time,
say a month or a year they have been issued up till number of items. Although
fast moving does not necessarily mean that these items are consumed in large
items.

‘S’ items are those items which are slow moving in the sense that in the given
period of time they have been issued in a very limited number of time.

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‘N’ non moving items are those, which are not at all issued for a considerable
period of time.
Thus, stores department who’s concerned with the moving of items would like
to know and classify that the items are storing in the categories FSN. So that
they can manage operate and plan stores activity accordingly.
For example, for efficient operations it would be necessary that fast moving
items as far as possible should be stored as near as possible to the point of
issue. So that it can be issued with minimum of handling. Also such items must
be stored at the floor level avoiding storing them at high heights.
Similarly, if the items are slow moving or issued once in a while in a given
period of time they can be stored in the interior of the stores and even at the
higher heights because handling of these items becomes very rare.
Further it is necessary for stores in charge to know about non moving items
for various reasons:-
1. They mean unnecessary blockage of money and affecting the rate of
returns of the company.
2. Further they also occupy valuable space in the stores without any
usefulness and therefore it becomes necessary to identify these items and
go into details and find reasons for their none moving and if justified to
recommend to top management for their speedy disposal so that company
operations are performed efficiently.
Also inventory control to some extent can also be exercised on the basis of
FSN analysis.
For example, fast moving items can be controlled more severely, particularly
when their value is also very high. Similarly, slow moving items may not be

26
controlled and reviewed vey frequently since their consumption may not be
frequent and their value may not be high.

c) XYZ ANALYSIS
This type of analysis is carried out from the point of view of value of balance
stocks lying in the stores from time to time and classifies all the items as given
below.
‘X’ items are those items whose value of balance stocks lying in the stock is
very high.
‘Y’ items are those items whose value of balance stock is moderate.
‘Z’ items are those items whose value of balance stock lying in the stocks is
very low.
After knowing this type of classification and their items can be taken to
control the situation as shown below:
o From security point of view high value items must be stored and kept
under lock and key or if not possible they should be kept in such a way that
is always under supervision. Similarly arrangement can be made for y and
z items accordingly.
o From inventory control point of view we must know why there is high
inventory for ‘X’ items. We should review inventory control procedure for
each and every high item because stock should be maintained to take care
of lead time consumption and also to provide safety stocks. For high value
items lying in stores we should review the reasons for long lead time as
well as demand variations and see whether lead time consumption and
safety stocks can be reduced. Thus proper inventory control procedures
can be developed on the basis of XYZ analysis.

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Thus proper selective control methods should be selected to control the
materials and prevent from facing loss, taking advantage and knowing what
exactly is to be done.

d) VED ANALYSIS
VED analysis is carried out to control situation, which are critical. When
applied to material in VED analysis we try to identify material according to
their criticality to the production, which means the material, without which
the production will come to stop and so on from this point of view material
classified in three categories:-
V- Vital
E- Essential
D- Desirable
Vital categories of the items are those items for the want of which the
production will come to stop. For example: - Power in the Factory
Essential group of items are those items because of non availability of which
the stock out cost is very high.
Desirable group of items are those items because of non availability of which
there is no immediate loss of production and stock cost is very less and it may
cause minor disruption in the production for a short time.

e) HML ANALYSIS
This analysis, analysis the material according to their prices and then
classifies them as H item or M item or L items.
H stands for high price,
M stands for medium price and

28
L stands for low price.
Since price is more concerned of purchase department mostly purchase
department people analyses the material according to HML analysis.
HML analysis must be carried out from any one of the following objectives or
some of the objective as the case may be —
 When it is desire that purchasing responsibility should be delegated to
right level of people.
 When it is desired to evolve purchasing policies then also HML analysis is
carried out i.e. whether to purchase in exact quantities as required or to
purchase in EOQ or purchase only when absolutely necessary.
 When the objective is to keep control over consumption at the department
level then authorization to draw materials from the stores will be given to
high level H item, low level for L items and medium level for M items.
 When it is desired to decide frequency of stock taking then very frequently
H category, very rarely L category and averagely M category.
 When it is desired to arrange security arrangements for the items, then H
items under lock and key, L items keep open on the shop floor and under
supervision for M items.

4. JUST IN TIME INVENTORY SYSTEM

Keeping in view the enormous carrying cost of inventory in the stores and go
downs, manufactures and merchandisers are asking for more frequent
deliveries with shorter purchase order lead times from their suppliers. Today
organizations are becoming more and more interested in getting potential
gains from making smaller and more frequent purchase orders. In other
words, they are becoming interested in just in time purchasing system. Just in

29
time purchasing (JIT) is the purchasing of material or goods in such a way that
delivery of purchased items is assured before their use or demand.
Just in time purchasing recognizes too much carrying costs associated with
holding high inventory levels. Therefore, it advocates developing good
relations with suppliers and making timely purchases from proven suppliers
who can make ready delivery of goods available as and when need arises. EOQ
model assumes a constant order quantity whereas JIT purchasing policy
advocates a different quantity for each order if demand fluctuates.EOQ lays
emphasis on ordering costs to include purchase costs quality costs and stock
out. Just in time purchasing takes into consideration all these costs and move
– outside the assumptions of the EOQ model.

Advantages of JIT purchasing

1. Investment in inventory is reduced because more frequent purchase
orders of small quantities are made.
2. Carrying cost is reduced as a result of low investment in inventory.
3. A reduction in the number of suppliers to be dealt with is possible. Only
proven suppliers who can give quick delivery of quality goods are given
purchase orders. As a result of this reduction in negotiation time is
possible. The use of long – run contracts with some suppliers with minimal
paper work involved is possible.
4. Quality costs such as inspection cost of incoming materials or goods, scraps
and rework costs are reduced because JIT purchasing assures quick and
frequent delivers of small size orders which results in low level of
inventories causing minimum possible wastage. Therefore, JIT purchasing
is frequently applied by organizations dealing in perishable goods.

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5. PERPETUAL INVENTORY SYSTEM
The Chartered Institute of Management Accountants, London, defines the
perpetual inventory as “a system of records maintained by the controlling
department, which reflects the physical movements of stocks and their
current balance”. Bind cards and the stores ledger help the movements of the
stock on the receipts and in maintaining this system as they make a record of
to physical movements of the stock on the receipts and issues of the materials
and also reflect the balance in the stores. Thus, it is a system of ascertaining
balance after every receipt and issue of every material through stock record to
facilitate regular checking and to avoid closing down the firm for stocktaking.
To ensure the accuracy of perpetual inventory records (i.e. Bind card and
stores ledger), physical verification of the stores is made by Bind cards and
store ledger may differ from the actual balance of stock as ascertained by
physical verification. It may be done to the following avoidable and
unavoidable causes.

6. INVENTORY TURNOVER RATE TECHNIQUE

One important technique of inventory control is to use inventory turnover
ratios. These ratios are calculated to assess the efficiency in use of inventories.
Following control ratios can be computed for inventory analysis:
(i) Inventory Turnover Ratio = Cost of goods sold/ Average Inventory

Where Average Inventory = (Opening Inventory + Closing Inventory)/2

Inventory Turnover Ratios can be calculated separately for raw materials
and finished goods.

31
(A) Raw Material Turnover Ratio = Raw Material Consumed/ Average
stock of Raw material.

(B) Finished Goods Turnover Ratio = Cost of Goods Sold/ Average

Stock of Finished Goods
Average Age of inventory of inventory Turnover in Days = Days during the
period/ Inventory Turnover Ratio

(i) Average inventory to total cost of production = (Average

Inventory/ total cost of production) x 100

(ii) Slow Moving Stores to Total Inventory = Average Cost of Slow

Moving Stores/Average Inventory

(iii) Inventory Performance Index = (Actual Material Turnover Ratio/

Standard Material Turnover Ratio) x 100

These ratios provide a broad framework for the control and provide the
basis for future decisions regarding inventory control. The ratios provide a
tough indication of when Inventory levels are going to be high. Even if it
appears from the ratio that the levels are too high there might be a
perfectly good reason why the level of Inventory is being maintained. The
ratios also indicate the situation and trend. However, the limitation of
ratios should be kept in mind. They are not an end themselves, but only
tools of sound Inventory Management.

32
REVIEW OF LITERATURE
Survey of the available literature relating to his field of study is a must for the
researcher so that he can keep himself updated in his field and related areas.
Without this it will not be possible for a researcher to make a worthwhile
contribution. Review of literature in this study deals with the importance and
necessity for inventory management in an organization.
Inventory management can help business to be more profitable by lowering
their cost of goods sold and by increasing sales. Inventory management is
required at different locations of a supply network to protect the regular and
planned course of production against the random disturbance of running out
of materials or goods.. Following paragraphs review the available literature:
 Mansi Aggarwal (2006) in his article An Introduction to Inventory
Management said that the primary and foremost step in inventory
management is acquiring accurate information for inbound operations. The
information so gained in advance can be a crucial factor in improving the
inbound productivity. Setting up of an advanced inbound strategy and
execution framework can be done without too much of re-engineering
effort for the supply chain. The perfect way to commence is to make the
best use of information available and establish a set of rules and
regulations to harness the information efficiently.
 Steven Ronsworth (2005) mentioned in his article Inventory
Management Review that, “when having inventory, a company does not
ever want to have too much of a product, nor does it want to have not
enough of that product to meet demand. Inventory management helps to
ensure that a proper inventory is maintained at all times.” Steven also says
that a proper inventory management has many benefits for companies.

33
 Inventory management can help make it so that a company has the exact
inventory needed. No more, no less. Inventory management is also an
effective way to keep track of exactly what products a company has.

 Philip Slater (2007) in his article (Inventory Management – One Size

Does Not Fit All) says that “if there is one great myth in inventory
management it is that one single technique will solve all inventory
problems. Not that people believe that one technique will solve all
problems in all situations but that in any given company one approach is all
that is required to manage all inventory.” He also pointed out that, there is
a wide range of techniques and approaches that people use to manage
inventory. These include JIT, ABC and FSN, VED analysis, Risk Management,
safety stock and EOQ’s. Sometimes they are used on a standalone basis and
sometimes in conjunction with each other. All are worthwhile techniques
when used appropriately.
 Charles Atkinson, in his publication Point of sale, Inventory Control,
Retail and Money Management (October 25, 2005) indicates that there
are three types of inventory that require management: raw materials,
finished goods and work- in- progress. Raw materials can be cut down in a
number of different ways, most notably by ordering smaller batches with
more frequency from suppliers (JIT). Finished goods inventories can be cut
down in multiple ways as well, most notably by either producing only
when you actually have an order (JIT) or by achieving more accurate
demand projections.
 Experts argue that inventory levels should decline markedly as a result of
the implementation of improved inventory management systems such as

34
 JIT. A paper by Rajagopalan and Malhotra “Have Inventories Declined:
An Empirical Study” (2001) indicates that while it appears that the
general level of inventories has decreased across all industries since the
1960’s, it does not appear that the trend accelerated in the 1980’s or
thereafter, as JIT’s proponents might suggest.
 A more recent study by Chen, Frank, and Wu, Optimal Control and
Equilibrium Behavior of Production-Inventory System (2003)
indicates that, when studying inventories on a firm level instead of on an
industry level, there appears to be a significant decrease in inventories
since 1980. However, Chen, Frank and Wu focus on the economy as a
whole. They do not focus on a particular industry, nor do they focus on
distribution, as opposed to production systems.
 Apart from the tools and techniques, Mike Schramm (2009) in his Five
Tips to Inventory Management has suggested certain tips to have a
successful inventory management. They are.
 Sell the junk (even if you think it’s not junk).
 Get a bank alt, and use it for everything
 Gear up right.
 Organize.
 Regular maintenance is better than emergency cleaning.
 Adam. J Fein in his article Building a Lean Supply Chain,(2006) said that
“there is a widely held, but inaccurate, perception that new technologies
have led directly to declines in the inventory-to-sales ratio, an important
indicator of “buffer inventory” in the supply chain . in theory, information
technology-based supply chain practices such as just-in-time(JIT)
inventory management, warehouse automation, and the introduction of

35
 bar codes should have allowed companies to improve their management of
orders and stockpiles of materials.
 Bruce D. Caldwell (2009) has mentioned some benefits of ABC Analysis in
his article The Benefits of ABC Analysis for Inventory Reduction. Using
the”ABC” concept to analyze Control inventory investment and turns is the
simplest and most efficient method. Most inventories are made up of
hundreds and possibly thousands of individual items necessary to
manufacture a company’s products.
 Ashwathappa, Productions and Operations Management (2008) has
stated that inventory management involves the development and
administration of policies , systems and procedures which will minimize
total costs relative to inventory decision and related functions such as
customer service requirements, production scheduling, purchasing and
traffic.
 Lucey, Quantitative techniques for Management (2002) defined
inventory management as the recording and monitoring of stock level,
forecasting future demand and deciding when and how to order.
 Juhi Gonzales in his article Inventory Control (1999) says inventory
management is making sure that items are available when customers call
for it, but not too much stock , so that inventory turnover goals are met.
 Bardia in Accounting And Finance For Managers (1988) opines that for
a firm to be successful, the proportion of inventory to current asset should
be kept at the minimum. Also a high inventory turnover ratio which
indicates faster movement of materials is advantageous to the firms. He
also points out that the proportion of finished / semi-finished inventory
should be kept at minimum.

36
 Khadalwal (1985) on his book Inventory Management And Stock
Evaluation revealed that the selected units were found to have recorded
slower and declining rates of transmutation of working capital. The main
reason responsible for this situation is the high share of inventories in
current assets which ranged between 40% and 70% with an increasing
trend during the period of study.
 Jain in his book The Working of Stock Exchanges in India (1988) has
highlighted various facts of working capital management in the state of
Rajasthan. He opined that the cash position of working capital should be
improved by reducing inventories and efficient collection of debts.
 Rao (1990) in Equivalence of Inventory Control Models evaluates the
management of working capital and degree of efficiency of managing
inventories in the manufacturing undertakings of Andhra Pradesh public
sector. The analysis of the structure of inventory reveals that there was
overstocking with regards to each and every component overstocking with
regards to each and every component of inventory in the undertakings
selected for study.
 Mohan Reddy in Management of Working Capital (1991) considered
inventory formed the major chunk of current assets of the sample private
sector enterprises studied. Bigger enterprises in the private sector carried
the larger inventories as compared to the smaller ones. Inventory turnover
ratios have shown that name of the private sector units carried on
inventory unduly in the aggregate.
 Kurian Jose Aerthail in (1999) conducted a study to Analyze the
Efficiency of Inventory Management System in KEL, mamala unit. The

37
 study revealed that due to improved inventory management, the unit
enables proper arrival of goods, reducing lead-time
 Arifa T. Mohammed in his book Stores and Inventory Management
(2004) conducted study on working capital management, the suggestion
made by her was that the unnecessary inventories should be avoided as it
may cause loss to the concern.
 Renju Mohan P.T (2008) conducted study on stores inventory
management at Carborundum Universal Limited. There should be strict
Control over the A class items as well as the vital items. Highly trained
inventory managers and high-quality software will help make inventory
management a success. The ROI of inventory management will be seen in
the forms of increased revenue and profits, positive employee atmosphere,
and an overall increase of customer satisfaction.
 M.Z Babai and Y .Dallery IESM, (May 2005), the literature dealing with
inventory management policies is very rich and has grown fast during the
last year; they classify these policies into 2 approaches according to the
type of demand information. In the first approach the policies suppose that
there is no advance demand information and the decisions are made in real
time using the inventory depletion.

RESEARCH METHODOLOGY
INTRODUCTION
Research is a systematized effort to gain new knowledge. Research is an art of
scientific investigation. According to Clifford woody, Research comprises,
defining and redefining problems, formulation hypothesis of suggestion

38
solution, collecting, organizing and evaluating to determine whether they fit
the formulation hypothesis.
A research is the systematic investigation into and study of materials and
sources in order to establish facts and reach new conclusion.

RESEARCH DESIGN
The research design used as analysis in nature of analytical. A research design
is the determination and statement of general research approach or strategy
adopted for a particular project.
It is the heart of planning. The research design adopted for the study is
analytical in nature. It is the specification of methods and procedures for
acquiring the information needed. The research design used in the study is
descriptive research.

DATA COLLECTION
The source which are used mainly on secondary sources of data which is
collected from the audited books of accounts of organization, annual reports
and financial statements prepared and published by the concern Journals ,
books and websites have been referred to have an overview about the
company.

TOOLS USED
o Financial ratio
o Correlation
o Trend analysis
o Inventory Techniques

39
LIMITATIONS OF THE STUDY
 The study is limited for a limited period. Hence result obtained can be
applied for the selected period.
 The study is mainly done with the secondary data and figures drawn
from accounting records, this has some limitations and it affects the
study also.
 The financial ratios imply only the monitory aspects of the functions of
the firm. The ratios cannot be directly regarded as indicator of good or
bad performance of management.
 Accuracy and correctness of tools like ratio analysis is depends upon
the accuracy of published accounts.
 The time available for the study was another constraining factor.
 The inventory management of organization is limited to the extent of
information made available through published documents and
personnel discussion.

OBJECTIVES OF INVENTORY CONTROL IN ORGANIZATION

The main objectives of Inventory control are:
 To reduce capital locked up.
 To ensure that production does not suffer
 To ensure that sale of finished goods is not affected
 To avoid wide fluctuations in production.

40
To study the Inventory Management the several of interview techniques
depending on the situations were followed. Discussions were carried out with
various personnel of the company to study the following 3 broad areas.

A. PURCHASE CONTROL
B. STORAGE CONTROL
C. WAREHOUSE SYSTEM & PROCEDURE
To study the above a relationship and link was sought between theory and
practice. An evaluation was done to each stage and suggestions were also
made to improve the existing Inventory control system.

A. PURCHASE CONTROL
I. Purchase Department-
The prime responsibility of Purchase Department is to arrange supply of
various raw materials, consumables, spare parts etc. to the plant for the
production purpose and to the other departments for maintenance and
operation purpose. The materials should be procured at the right prices from
right source of supply.

II. Purchase Procedure-

The following are some of the essential steps in this regard.

(a) Responsibility for Purchases - Functions

All purchase functions shall be the responsibility of the Materials Manager
posted in the plant. The purchase functions in other offices shall be handled
by one single office nominated/designated for the purpose. The indenters
from various departments should refrain from issuing inquiries, inviting bids
41
entering into correspondence or negotiation with vendors/contractors. All
requisitions for purchase duly processed in accordance with the procedure
laid down, hereinafter should be forwarded to Materials Manager/Designated
officer for necessary action.

(b) Registration of Vendors

The purchase department is responsible for developing a list of approved
vendors for various types of materials, services. An advertisement is issued in
all the leading newspapers inviting applications in the prescribed Performa
for registration of suppliers and contracts listing out various types of
purchases and services that are likely to be made during the next three to five
years. The applications received is scrutinized by a Committee consisting of a
representative from Technical, Finance and Purchase Department (nominated
by the General Manager) and to ascertain the resources, capacity and quality
of workmanship of vendor. The Committee can also call the vendor and
contractors for personal discussions and seek clarifications on the
applications and obtain such other information as may be considered
necessary by the Committee.
The list of approved vendors and contractors should be updated at least every
specified time by issuing a press advertisement.

(c) Requisition to Purchase/Work

The indenters from the various departments will raise a requisition called the
“Material Purchase Requisition” for purchase in the prescribed Performa. It
should be ensured that the requisition for purchase should be completed in all
respects with regard to:

42
  Description of the material/equipment/scope of work.
 Material of construction/specification
 Temperature/Pressure/Standard if anywhere applicable.
 Quantity and unit of measurement.
 Date when delivery of material/services is required.
 Name of vendor in case of the item is of proprietary nature.
 Estimated value and budget head.
 Whether item is a stock item/non-stock item.
The requisition for purchase of materials which have been declared as “stock-
item” will be raised by the stores Department after the quantity in stock has
reached the “Re-order level” as determined for the respective items.
Such requisition amongst other particulars should also indicate the
“minimum”, “maximum” and “re-order level” the date on which last supply
was received and the average consumption per month since last purchase.
The requisition for purchase of “non-stock” items will be invariably rooted
through the Store’s Department which will endorse on the requisition, the
availability/non-availability. In case the item is available, the quantity there of
be indicated on the purchase requisition so that the quantity to be purchased
can be adjusted by the Materials Manager in consultation with the indenter.
The requisition for purchase of capital items award of Civil Work, erection
contracts, contracts for repairs to plant and machinery and equipment
handling and transportation of materials, repair/servicing of equipment
hiring of casual labors. Selection of contractors for repair/maintenance of
township and plant buildings, mechanical, electrical, isolation, provision of
other services and painting jobs on schedule of rate valid for one year will be

43
sent directly to the Materials Manager after the same are approved by the
competent authority.
All requisitions for purchase of materials or for award of work as described
above will be raised by the respective departments. The Department Manager
would ensure that the purchase requisitions must indicate:
 The budget provision. (This will be checked by F&A)
 The amount utilized up to the previous requisition.
 The estimated value of the present requisition and
 The balance available under the budget head after booking the present
requisition.

(d) Record and Numbering of Requisitions

All purchase requisitions received in the purchase department shall be
entered department wise in a register maintained for the purpose. The
Indenting department shall allot a number to each requisition and endorse the
same on all copies of the requisition. The numbering procedure should be
such that the requisition can be identified department-wise. The Purchase
Department will issue a report by the 15th of the following month listing out
the requisitions received during the previous month and their current status
and mail the same to the respective Indenting Departments. A copy of these
reports will be put to the General Manager for his information. The Indenting
Departments will review the report from the Purchase Department and shall
ensure that the missing requisitions are traced and are handed over to the
Purchase Department promptly.

(e) Enquiries/Invitation to Bid

44
On receipt of the requisitions from the various departments, enquiries are
issued by the Purchase Department as per the procedure detailed below:
 Enquiries to be issued in the prescribed Performa.
 Enquiry document is suitably modified to conform to the
material/services proposed to be procured.
 Enquiry document describes in detail the description of the
material/services the technical specifications etc.
 The delivery time and the various general and special terms and
conditions governing the purchase/work.
The idea in prescribing the minimum number of vendors to whom enquiries
to be issued and bids to be obtained is to create a healthy competition
amongst the bidders, so that society is able to procure materials and services
at the most economical price.
Open tenders are invited for selecting contractors for performing
maintenance work, relating to civil, mechanical electrical and instrumentation
work against a rate contract (SOR) which will be renewable every year. Press
tenders for selecting such contractors will be advertised in one of local English
and another in local language paper which has a good circulation: where
fabrication of equipment or major repairs to plant and machinery are
involved, the enquiry floated to all the major fabrication/repair shops for
determining the number and/or mode of enquiry to be issued the requisition
is evaluated on the basis of last purchase order or the present estimated
market value of the material/equipment whichever is more.
Notwithstanding the forgoing, invitation of bids by press tender will not be
necessary in respect of:
1) Purchase of proprietary items

45
2) Items, the prices of which are fixed by the Government.
3) Items, the import of purchase of which is canalized through a
Government Department or public sector undertaking and
4) Items, standardized for particular brand/make.
5) However, all purchases of proprietary items and such other items the
prices of which are fixed by the Government will require prior approval
of the Managing Director/Executive Committee/Board of Director if the
value of such purchase exceeds the delegated authority of the General
Manager/Group Manager.
The competent authority, if he is satisfied may waive the advertisement of
tenders for such purchases, the value of which does not exceed the power
delegated to him for making purchases. The General Manager/Group
Managers will obtain prior approval of E.D./Managing Director for waiving
advertisement of tenders where the purchase exceeds his delegated authority.
The General Manager/Group Managers may however waive advertisement of
tenders in excess of their delegated authority of the purchase is required to be
made to meet an emergency in the plant. In such cases post facto approval of
the Managing Director may be obtained later. Normally, such waivers may be
resorted to in the case of purchase of proprietary items or to cater to an
emergency in the plant whenever the competent authority waives
advertisement in the press for inviting bids, reasons are recorded in writing. A
monthly report on such waivers is submitted to the Managing Director for his
information by 15th of the following month. NIL report should also be
submitted in case there was no waiver during the preceding month.

46
If the tender proposal to be advertised is for a work which involves design and
engineering amongst other things. It would be preferable if the bids are
invited in two parts viz. (a) Technical and commercial unpriced bid and (b)
Priced bid. The date of opening the priced bid is fixed later than unpriced bid.

(f) Time Allowed for Submission of Bids

Normally 2-3 weeks time is given to the vendors for submitting their bids. In
case of enquiries for engineering civil and fabrication works where calculation
is involve and it is not feasible to obtain the bids early. The time limit for
submission of bids may be increased to four weeks.
Bidders are advice to indicate on the envelopes containing the bid, the enquiry
number, the date and time of opening the bid. The bids shall be addressed to
Materials Manager or such other officer nominated to perform purchase
functions.
Extension in due date may be done in consultation with indenting department,
if inadequate/no response to enquiry.
(g) Validity of Bids
Generally the bidders are advice to submit bids valid for 45 to 60 days. It is
ensures by the Purchase Department that the orders are placed on the
successful bidder within the validity period of the bid. If after opening of the
bids, it is inevitable to charge the specification of material/work, the revised
specifications are circulated to all the bidders who responded against the
original enquiry and bids will be obtained a fresh from all the bidders.
However occasions for changing specifications and asking bidders to quote a
fresh are rare and in all such cases prior approval of the General
Manager/Group Manager must be obtained.

47
The enquiry document stipulates that no bidder would be allowed to
revise/alter his bid after opening of the bids and within the validity period. In
case any bidder revises/alters his bid, the same shall be rejected even through
the revise bid may conform to specification and be the lowest.

(h) Opening of Bids

The bids received against the open tender are opened on the date and the time
stipulated in the tender document as under:
 All advertised bids to be opened publicly.
 Bids not advertised (published) but where estimated value is more than
Rs.5 lakh bids should also be opened publicly.
 For bids where value is less than Rs.5 lakh, public opening is not a must
but if representative of some bidders, who wish to be present may be
allowed..
All bids received are opened by the Purchase Department in the presence of
the representatives from the Indenting Department and Finance Department.
The bids opened are initiated and dated on all pages by all the persons who
attend the bid opening. In case there is any cutting or alterations in the rates
quoted or to the prescribed terms and conditions, the same will also be
attested by all the persons attending the bid opening.
All the persons including the bidders should sign against their name in token
of having attended the bid opening. Bids opened are read out to the vendors
who attend the bid opening. `Enquiry Response Sheet’ may also be filled
giving details of tender enquiry Number, Date, Due date, Opening date,
Number of bids received etc. and is signed by organization’s representative.

48
Where and priced bids have been invited in two parts, i.e. unpriced and priced
bids, the unpriced bids is opened first. Any clarifications/additional
information required by Tender Committee are sought in writing from the
bidders. The bidders will have all option to revise the price in the commercial
bid before the same is opened. In case any bidder wants to revise/alter the
bid, he can do so and submit the changes in the price in a closed envelope
before the due date. The commercial bid along with any revision is opened on
the appointed day and time in the presence of bidders who wish to be present.

(i) Late, Invalid and Unsolicited Bids

All bids received after the opening of bids are treated as `Late-bids’ and will be
ignored. All late bids are returned to bidders un-opened. Bids which are not
accompanied by the prescribed earnest money deposit will be treated as
`Invalid Bids’ and will be endorsed as such. The tender documents stipulate
that earnest money can be deposited either in cash or by a Bank Draft or in
form of Bank Guarantee in the prescribed Performa attached to the tender
document. `Unsolicited Bids’ are not considered not be opened and even
though they may be the lowest will not be entertained.

(j) Quotation Comparison Statement (QCS)

After the tenders are opened a Quotation comparison statement (QCS) is
prepared by the Purchase Department. All the bids received are listed in the
QCS. In-valid bids are listed in a separate statement and attached to the QCS.
The QCS is checked by an official of the Purchase Department (not below
grade `N’) and both the persons who prepared and checked the QCS will sign
the same.

49
The bids conforming to the specifications and lowest in value will be rated in
the QCS, as lowest (L1). Second lowest (L2), third lowest (L3). After the QCS
has been checked and rated the Purchase Department In charge forwards the
same along with bids in original to the Indenting Department for the review of
the bids and making recommendations for Purchase.
The review of QCS and selection of successful bidder is done through a Tender
Committee. The General Manager/Group Manager nominates a Tender
Committee consisting of a representative from Indenter’s Department,
Purchase Department and Finance Department, Purchase Department will
forward the relevant papers/file prior to the meeting to the members of the
Tender Committee is so required by them for review. The Tender Committee
keeps a return record of their discussion on the QCS as and when they meet.
The Tender Committee may obtain any clarifications from the bidders as may
be necessary. All clarifications are sought through Purchase Department only.
The Indenting Department shall not enter into direct correspondence with the
bidders. All proposal for purchases detailed below shall be referred to the
Tender Committee (As may be appointed by General Manager/Group
Manager) for review and making necessary recommendations.

(k) Selection of Successful Bidders

Normally the lowest bid which conforms to the specifications is accepted.
However, while the lowest bid even though conform to the specifications is
not accepted. Full justification for accepting other than lowest bid shall be
recorded in writing and approval of the competent authority will be obtained.

50
(l) Single Tender
Where in response to enquiry only one bid is received and the purchase order
is proposed to be finalized on a single tender, approval of the competent
authority is obtained as per the delegation of powers, while according such
approval the competent authority records the justification for making the
purchase on single tenders.

(m) Negotiation
Where the lowest acceptable bid received against the enquiry is considered
high or where there is scope for reduction in price in the opinion of the
Tender Committee (which may be recorded) and negotiations are considered
necessary.

Negotiation is conducted commencing with the technically acceptable lowest

four bidders. In conducting negotiations the parties are called one after
another starting with the lowest bidder. The original lowest bidder can be
given second change to offer further reduction if the other bidders revises his
price lower than the original bid of the lowest bidder. The scope of negotiation
can be enlarged beyond the lowest four bidders in the following
circumstances:
1) If the work to be awarded is intended to be split and awarded to more
than one contractor.
2) If a ring is suspected and the negotiation with the initial four lowest
bidders do not yield satisfactory results.
3) If higher bids are in very close proximity of the two lowest bids and any
change in quantities can change the rating of the bidders.

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If a single bid is received against the open enquiry. The same can be accepted
if the rates are considered reasonable. Otherwise, negotiations are held with
the bidder and a decision taken either to accept the single bid or to resort to
re-tender.
If a single bid is received against a limited enquiry normally it is rejected and
re-tendering resorted to. However, the competent authority, if he is satisfied
that it would be in the interest of Organization, to accept the single bid
received. He may do so and record reason in writing.. Such bid is accepted on
the recommendations of the Tender Committee and concurrence of the
Finance Department.

(n) Guarantors
The Purchase Department obtains from the vendors/contractors Bank
guarantees in the Performa prescribed.
 Advance payment
 Performance Bond
 Free issue materials
The Bank Guarantee in respect of free issue materials may be waived by the
competent authority in such cases where he is satisfied that the material
issued to the vendor contractor will not be moved out of the factory’s/housing
colony’s secured work site.

(o) Amendment to Purchase Order

Any change/amendment to the purchase order/work order shall be issued in
writing after the same has been approved by the competent authority. The
amendment to purchase order shall be issued in the prescribed Performa and

52
shall be numbered serially. All change orders where the terms and conditions
are altered and/or which have financial implications will be routed through
finance department for concurrence before the same is approved by the
competent authority. The amendments to the purchase orders will also be
raised in the same number and will be distributed in the same manner as the
original purchase order.

(p) Repeat Orders

Repeat orders without calling for fresh bids may be placed against previous
orders within one year from the date of issue of original order. No repeat
order shall however; be placed against a purchase order which was placed at
higher prices in the interest of early delivery. The quantity and value of the
repeat order should not exceed the quantity and value stipulated in the
original order and should not be resorted to more than once in any case.
While placing the repeat order, it should be ensured that there has been no
down-ward trend in prices since the original order was placed. Repeat orders
shall be placed with the concurrence of the finance department and approval
of the competent authority. The authority competent to approve repeat orders
will be the same which approved the original order.

(q) Follow-Up of Purchase Orders

The Purchase Department shall receive all the mail from the vendors and shall
reply to them in consultation with other departments whenever necessary.
The purchase department shall keep Indenting Department informed of the
status through periodical/monthly reports.

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The Purchase Department shall be responsible for following up of the
purchase order/contract with vendors and transporters until the material is
received and accepted at the plant/stores.

(r) Inspection of Material

The Purchase Department shall Co-ordinate with other departments and
arranges inspection of materials at vendor’s shops prior to dispatch wherever
stipulated in the purchase order.
Inspection of materials in other cases shall be carried out on receipt of
materials at plant site/stores only those materials cleared by the inspection as
conforming to purchase order specifications will only be taken on charge in
stores. The person inspecting the material will sign on the `Stores Receipt
Voucher’ in taken of having inspected and accepted the material.

(s) Damaged/Short/Rejected Materials

The Stores Department shall be responsible for sending suitable intimations
to the:
 Vendor for materials rejected if the same do not conform to the
specifications mentioned in the purchase order.
 Vendor and Insurance Company for material received short or damaged.
 Where the delivery offered by the vendor was ex-works the intimation
for damaged/short receipt of materials will be sent only to the
Insurance Company. The intimation to vendor and the Insurance
company for material received short or damaged or rejected should sent
as early as possible after the material is inspected but in any case not

54
 later than a week from the date of their receipt at plant/site. A copy of
the intimation issued by the Store Department will be endorsed to:
 Finance and Accounts Departments for lodging the Insurance claim or
making suitable recovery from the vendor.
 Purchase Department for following up, the replacement supplies or
obtaining the non-delivered quantity.

The Purchase Department shall be responsible for following up with the

vendor, the replacement of materials rejected or short supplied by him. The
Purchase Department shall evolve a suitable system so that suitable
communication is issued to the vendor until the replacement supply is
received or quantity short delivered is made good by him.

(t) Insurance Claim

The Accounts Department on receipt of a copy of the letter issued by Stores
Department make and entry in a register maintained for the purpose and shall
lodge suitable insurance claims. The Accounts Department shall co-ordinate
with other departments wherever necessary and collects the details of
materials and other costs as may be required for preferring a claim.

(u) Cash Purchase

Cash purchases or materials should be avoided as far as possible. Cash
purchases should be resorted to only meet the plant’s emergencies or where it
would not be economical to call for quotations owing to the small value of
purchases.

55
The General Manager/Group Manager may, however, consider keeping a
suitable amount as Imperest fund with the Purchase Department,
Maintenance Department and Administration Department to enable them to
make cash purchase of items to meet the urgent day-to-day needs of the plant.

(v) Bank Guarantees

The Finance and Accounts Department is responsible for safe custody of Bank
Guarantees received from vendors/contractors. The Finance and Accounts
Department maintains a separate register for keeping records in the Performa
enclosed for Bank Guarantee obtained against:
 Advance payment
 Performance guarantee
 Free issue of materials
The Bank Guarantee register is reviewed every month to ensure that all the
guarantees obtained are valid. Such of the bank guarantees which are found to
be maturing /expiring will be reviewed with the respective department to
ascertain if any further revalidation would be required to conform to the dates
of completion of work/delivery of material.
Normally the validity of Bank Guarantee should be as under:
 Bank Guarantee for: From the date of payment until the advance is
liquidated.
 Performance guarantee: From the date of payment of advance or
commencement of work whichever is earlier until expiry of
maintenance period.

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  Free issued material: From the date of issue of material until settlement
of quantitative account of material issued or delivery of fabricated
equipment whichever is later.
The Finance and Accounts Department is responsible for issuing instructions
to the vendor/contractor for obtaining the extension of the existing Bank
Guarantees before expiry of the claim period. A suitable system should be
introduced by the Finance and Accounts Department to ensure that a regular
follow-up is done with the respective vendors/contractors until the extension
to Bank Guarantees are received. Finance and Accounts Department also
ensures that until extension to bank guarantees are received from
vendors/contractors on equipment amount is with held from running/final
payment due to the vendors/contractors. The Bank Guarantee shall
discharged in consultation with the respective department after receiving the
conformable from them that the maintenance period under the purchase
order/work contract has been completed and that there is no claim against a
vendor/contractor. The Bank Guarantee for advance payment can be
discharged by the Finance and Accounts Department after ensuring that the
advance paid have been liquidated/recovered from running final payment
where the vendor/contractor does not communication issued for extending
the validity of the bank Finance and Accounts Department will invoke the
bank guarantee before expiry of the claim period after consulting the
respective department and obtaining the approval of the General
Manager/Group Manager.

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(w) Evaluation of existing purchasing system
A study in any organization should carried out taking into consideration the
concept of total material control, which significant that efficiency of any
organization is contingent upon having the right material of right quality or
right place in the right quantity at the right time and place.

Right
time

Right Right
Quantity (5Right) Quality
Purchase
Control

Right
Right Sources
Price
Supply

 5 R for better Purchase (Material) Control-

The existing purchase procedure gives fair chances of competition to all the
vendors. It leaves no room for malpractices or favoritism of employees i.e.
nobody oblige any one out of way. It is not very rigid. In time of urgency of
requirement, necessary deviations are approved by competent authority so as
to avoid stoppage of work. The procedure is based on democratic way of
working. Good suggestions to improve efficiency are always considered.
Various annual rate contract running contracts are entered for regular
consumable items, like oil and lubricants, stationery, chemicals, medicines,
printing job etc. This is reducing the repetitive job times and money of
company.

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But there are shortcomings also, which are evaluated taking into
consideration the five essentials of purchase functions are as follows:
 Purchase time
 Purchase quantity
 Purchase quality
 Purchase price and
 Source of supply
(i) Purchase time
The purchase time indicates the lead-time i.e. time taken to physically receive
the material from the date of its indent.
To find out the lead time five cases different items have been studied
randomly, and analyzed its fact which indicates that by following the existing
procedure, the administrative lead time is long 6 to7 months (in some cases
only), while suppliers lead time is also about normally 2 to 3 months.

(ii) Purchase quality and quantity

It has been observed that the quantity of material is being purchased
considering 6 to 12 months consumption that means no economic order
quantity has been fixed for different types of material. Due to the existing
system:
Company is incurring cost of carrying Inventory interest of capital rent etc.
Company is also incurring losses due to the depreciation in quantity,
depreciation in quality and obsolesce of materials during storage.
Company is also incurring avoidable expenditure such as holding up keep of
surplus material, financial losses due to fall in the price of materials, extra
expenditure on excess of materials required.

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It is suggested that before taking final decision economic order quantity
should be determined for each item and order should be placed accordingly.
The determination of economic order quantity techniques has been discussed
on succeeding pages.

(ii) Purchase Price

The price of each item is being compared with supplier’s quotations
considering the quality of material to be supplied.
Although, purchase department should keep itself informed of the price
trends, with the help of market reports, trade papers and journals, report by
purchase against and sales representative of the suppliers, published
catalogue and price list.

(iii) Source of supply

The selection of a particular supplier is made after inviting tenders from
possible source of supply. There are four types of tenders commonly used,
which are-
 Single tender
 Limited tender
 Open tender
 Global tender
The tender received are opened on the date and time stipulated and compared
to select a final vendors, considering quality, delivery after sales services etc.
which indicates that right source is selected, only thing taken in to
consideration is to maintain cordial relations with suppliers.

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B. STORAGE CONTROL
Meaning of Store: “Place for all & all are at their places”
Here in above sentence “all” is mean as “Material-Inventory-Stock”

Store Department-
In a manufacturing unit or in any organization, stores are constructed
according to the needs of the organization and materials to be stored in the
stores.
1. Receipt Section
Receipt store usually function as part of the stores and it is manned depending
upon size of the industry and complexity of the materials to be handled.

 Receipt Procedures
All incoming goods must be received in receipt section and after making
necessary documentation and paper work goods should be delivered for its
custody or other destination. During that period same shall be identified and
kept in separate specified place to prevent any misplacement/pilferge or mix
up.
 Verification of Quantity
Packed materials are opened and verified with challan or bills accompanied
with the lost and the same is matched with P.O. and also P.O is progressed
simultaneously.

 Daily Receipt Report

A report indicating `SRV’ reference of all the individual consignments on daily
basis are being circulated to the purchase section/indenter/user for

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management information of its arrival and arranging inspection of the same
thereof.
 Inspection and Discrepancy Report
In order to ensure quality for all the incoming material with the help of skill,
personnel’s, material is offered for inspection. The normal methods used are
by visual, by touch, by smell, by comparison, by actual testing, Laboratory
methods - ISI test etc. This is to determine the acceptability of the article
received. Item rejected in inspection and observation regarding any deviation
in quantity/condition is recorded separately in a register called “MATERIALS
EXCEPTION REGISTER”, all this information’s also simultaneously sent to the
purchase indenter and the supplier through a report. It is called “MATERIAL
EXCEPTION REPORT”. The custody of rejected items remains with receipt
section till it is disposed of as per the instruction of purchaser, indenter and
looking to its status of payment respectively. The action for disposal may be
one out of the details as under:
a) Items to be returned to the supplier/Insurance company.
b) Items accepted later with some deviation and or reduction in price with
or without rectification.
c) Item is scraped and or destroyed.

 Claim for Loss/damage to the Material in Transit

The losses are liable for recovery either from the insurance company or from
the vendor or from the carrier and to materialize of the same claim is lodged
on the carrier/vendor, whosoever handled/brought or dispatched the
material with the supporting documents. In our case “Open Marine Policy”
they’re with insurance company.

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 Legal Action
Whenever organization’s claims are pending i.e. on the event of
carrier/vendor not settling the claim under stipulated or reasonable time
period, a suit against them may be filed in consultation with legal advisor and
with the management’s consent.

2. Custody Section

After the material is accepted it is sent to the custody section where the
material is again check for the quantity according to the P.O. and for the
condition.
Here the material is handled and preserved at proper and definite locations as
decided. Thus the main function of custody section is physical checking.
Location and preservation of material received from the receipt section.
The material preserved here is issued to the user department through SIV
(Store Issue Voucher). Here MPR (Material Purchase Requisition) is prepared
only for stock items which are then sent to the Purchase Department through
Stores Department for the stock items MPR is made keeping the Re-order
level while proceeding.

Lead Time
In all organization there is a time gap between the demands (indenting) and
the fulfillment i.e. supply of materials. This finite time interval between the
cycle of indenting and actual procurement of material is called lead time or

63
lead period. Lead-time has direct impact on inventory levels. Longer the lead
times higher the inventories.

Safety Stock
If the lead-time and the consumption during the lead time are known with
certainty. There would be no need of providing any buffer stock or safety
stock. In practice, however, there are variations in both lead-time as well as
lead time consumption and hence it is usual to provide for buffer stock. The
safety stock is calculated based on an analysis of the variation in Lead-time
consumption.
Stores are like a bank which holds materials which are valuable assets and it
should, therefore, be planned properly. Its location should be decided at the
time of original plant lay-out. Raw materials, packing materials, imported
components, etc. exclusively required by the plant are to be stored in the
vicinity.

3. Disposal Section
The word meaning of disposal is, disposing of, getting rid of, sell etc. Etc. In
our daily life, we are disposing of household goods for various reasons and
well aware of the terminology. In industry, the disposal is of mainly following
types:
 Surplus
 Scrap/waste

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 Surplus
Surplus is usually defined as “excess of firm’s operational requirements”. The
industrial surpluses are due to mistakes in over procurement. Wasteful
production process and inefficiency in general.
The surpluses also result from the inefficient use of production machinery,
carelessness and poor purchasing. The least costly method of controlling
surplus is its elimination at the source. This is why effective value analysis
programmes which eliminate surpluses before they occur are so profitable.

Identifications
The identification of surplus stocks can be done by making age and
consumption analysis. This is a simple statement showing of stock held and
issues made during the last few years i.e. 3 to 5 years if no issue has been
made at all of the items for the past say 3 years, it is a case non-moving items.
If 2000 pieces are in stock, and in last five years only 6, 14, 30, 35 Nos. Have
been issued it will reveal a case of surplus stocking or slow moving. Such an
analysis will throw up cases of slow moving and non-moving items from
which surplus and obsolete stocks can be identified /codified from such
analysis one can also know the time from which the material has been in
storage.
It will also be desirable to find out what recent changes which have taken
place in production or operation and what charges are imminent from this
information it can be determined what major items, spares are likely to
become obsolete and surplus. These can also be considered while reviewing
along with slow moving and non-moving items.

65
After sorting of items, find list should be made showing particulars of all items
to be disposed off and finally written off. In public sector organizations a
Committee consisting of representative each from technical, finance, stores,
purchase is set up to make final list which is approved by chief executive or a
senior member of the management.

The following information usually appears:

* Code Number of each item
* Description
* Quantity in stock
* Quantity to be retained
* Quantity to be disposed off
* Original book value of quantity in stock
* Recommended Book value of Quantity to be retained
* Recommended Book value of Quantity to be disposed off, amount to be
Written off.

 Scrap/Waste
This terms applies to unusable material whose value is only in terms of its
materials content, be it metal, paper or cloth. The scrap industry is a very big
industry in India. Merely because all scrap can be re-cycled to produce
materials of utility and greater value. Waste papers are used to produce
cardboards and other packing paper. Steel scrap is melted and re-rolled.
Waste oil are purified and converted to engine oil with original specifications.
It is impossible to eliminate scrap/waste from industry but can be minimized
by intelligent planning and controls.

66
When material has been declared surplus and reserve price fixed. Usually the
following methods of disposal are followed:

 Circulation within the company

 Return to suppliers
 Selling to other firms
 Selling to dealers and bookers
 Selling to employees
 Selling by auction
 Disposal through presses tender
 Disposal through limited tender inquiry.

C. WAREHOUSE SYSTEM AND PROCEDURE

The control of materials while in storage is affected through what is known as

the perpetual Inventory. Thus two main functions of the perpetual Inventory
system have been studied which are:

 Receipt and issue system

 Maintenance of store records

The Scope-

The procedure comes in to operation immediately on receipt of dispatched

documents or dispatched intimation in the stores and covers on the activities,
i.e. clearance, delivery, inspection, stock charging and preservation, issue and
return of materials by the user (Indenter) and ends after striking out balance

67
from the stock card and delivery of documents VIZ. SRV.SIV., to the account
department.

RECEIPT SYSTEM

The system for receipt starts even before the time when the material actually
reached the plant, when purchase order is planned a copy is sent to the stores
indicating quantity and approximate delivery date. These are arranged in
chronological order so that any time the volume of receipt can be estimated.
This also helps in planning labor contracts when unloading activities exceed a
particular limit. This is the first step in the store system.

Suppliers, once they dispatch the goods, normally send and advice note,
dispatch note to the stores. This provides information on the date of dispatch,
carrier details, description consignment and value. This is sent in advance so
that quick and easy clearance may be done. On receipt of consignments, the
store personnel check the consignment and tally the material with supplier’s
delivery note / challans along with relevant documents, the material is
visually checked for any apparent damage or discrepancy. Appropriate
remarks / endorsement is made accordingly on the delivery notes / challans
in case of discrepancies on deviation being found in the suppliers received.
Material received against the delivery notes / challans will be checked with
the relevant purchase orders details mentioned in the challans / delivery
notes and packing notes received with the consignment. Store receipt voucher
is prepared in seven copies for item found in an order. The material is than
paid up for inspection, items finally accepted is physically handed over to the

68
custody stores or project departments and their acknowledgement obtained
in the appropriate columns of the receipt notes.

INSPECTION

In exercising control on the quality of incoming materials inspection plays an

important role. Materials purchased in India and abroad are inspected
according specifications, prescribed tests, drawings, approved samples etc as
stipulated in the purchase order. To inspect different types of materials
following inspection methods are used.

Inspection by third party:

Such agencies are EIL cloyed register, IBR; etc. acceptance of material is based
on the certificates and reports of these agencies.

Inspection by indenting departments:

At vendors premises during manufacture of materials or before dispatch of

the same the concerned officers of indenters carry out such inspection.

Materials test certificates:

The material may be inspected and accepted based on the manufactures test
certificates. Materials are inspected and accepted by carrying out chemical,
electrical or mechanical test either of the project site or through the
recognized lab as stipulated in the purchase order. Some materials like shop,
cotton, waste, phenol etc are accepted by visual inspection. Proprietary nature
69
of materials are accepted by either visual inspection or carrying necessary
tests whenever required. Materials are also accepted after ascertaining the
quality as per samples on stipulated in the order.

ISSUE SYSTEM:

The issue system relates to function of issue card and Inventory control
section of stores. It covers all material stocked by the KRIBHCO stores and all
bulk and raw materials directly stored by the users. It begins with the
preparation of issue voucher and ends with their submission to accounts
departments.

GENERAL AUTHORITY AND RESPONSIBILITY:

The authority for receipt and storage of all the materials is centralized in the
store department accepts medicines and stationary. Issue will be made only
on receipt or presentation of authorized requisition.

Stores department is responsible to provide material (through stores issue

voucher) to the authorized requisition on demand, all material declared as
stock items and contained in the store catalogue as the desired and the
quantities requested for immediate use by them.

QUANTITY OF ISSUE:

In respect of consumable stores and such other materials as are required

frequent or at odd hours, the issue is made in large quantities to reduce
electrical work and to ensure ready availability of materials at sight place

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when required. The quantity issued is for 15 days consumption. The entire
issued quantity is charred in full to the requisition cost center though all of its
not actually used or consumed immediately. In case an item stocked as a set it
is issued as a set not in parts.

PERPETUAL INVENTORY SYSTEM:

Generally organizations have the following perpetual Inventory system, which

comprises:

 Cardex system
 Stores ledger and
 Physical stock verification

Because of Computerization (MIS) Cardex & Stores Ledger systems are not used now.

 CARDEX SYSTEM
To maintain the quantitative records of receipt and issues and closing
balances of items of stock a cardex system is followed. Stores department is
doing all the quantitative accounting of materials.

 STORES LEDGER
For the all quantitative accounting of materials stores department is
responsible. Whereas for monitory accounts of materials accounts
department is responsible. One set of each document for receipt issue and
return of materials is sent to price store ledger section in the accounts

71
department. Based on these documents priced stores ledgers are prepared for
each item of the stores. The price store ledger provides the volume of each
receipt issue and return along with the quantity accounts.

 PHYSICAL VERIFICATION OF STOCK

The physical verification of stock is contemplated with a view to ensuring that
stores and materials held in stock tally with the quantity and specification
shown in the cardex. The actual balances agree with the balances recorded in
the cardex and discrepancies noticed if any are investigated and adjusted for
accounting purpose.

It has been observed that time gap of verification is six months, which should
be reduced to be three months for non-stock items, and for stock items
verification should be done at the time of placing orders. So that the
determine Inventory level can be maintained even of spoilage, damages and
obsolescence takes place.

FINANCIAL MANAGER’S ROLE IN INVENTORY MANAGEMENT

Inventory represents a large investment by manufacturing concern: therefore,
great emphasis must be placed on its efficient management. Though, the
operative responsibility for Inventory management lies with the inventory
manager, the financial manager must also be concerned with all types of
inventories- raw materials, work-in-progress and finished goods. He must
monitor Inventory levels and see that only an optimum amount is invested in
Inventory. He should be familiar with the Inventory control techniques and
ensure that Inventory is managed well.

72
He should try to resolve the conflicting view points of all the departments in
order to have efficient inventory management. He has to act as a careful
inspector levels. He should introduce the policies which reduce the lead time,
regulate usage and thus, minimize safety stock. All these techniques of
Inventory management lead to the goal of wealth maximization.

VALUATION OF INVENTORIES

OBJECTIVE-
A primary issue in accounting for inventories is the determination of the value
at which inventories are carried in the financial statements until the related
revenues are recognized. This statement deals with the determination of such
value, including the ascertainment of cost of inventories and any write-down
thereof to net realizable value.

1. This statement should be applied in accounting for inventories other than:

(r) Work-in-progress arising under construction contacts, including

directly related service contracts.
(s) Work-in-progress arising in the ordinary course of business of service
providers.
(t) Shares, debentures and other financial instruments held as stock-in-
trade.
(u) Producer’s inventories of livestock, agricultural and forest products and
mineral oils, ores and gases to the extent that they are measured at net

73
 realizable value in accordance with well established practices in those
industries.
2. The inventories referred are measured at net realizable value at certain
stages of production. This occurs, for example, when agricultural crops
have been harvested or mineral oils, ores and gases have been extracted
and sale is assured under a forward contract or a government guarantee or
when a homogenous market exists and there is a negligible risk of failure to
sell. These Inventories are excluded from the scope of this statement.

DEFINITIONS
The following terms are used in this statement with the meanings specified:
Inventories are assets:
(a) Held for sale in the ordinary course of business.
(b) In the process of production for such sale, or
(c) In the form of materials or supplies to be consumed in the production
process or in the rendering of services.

1. Inventories encompass goods purchased and held for resale, for example,
merchandise purchased by a retailer and held for resale, computer
software held for resale, or land and other property held for resale.
Inventories also encompass finished goods produced, or work-in-progress
being produced, by the enterprise and include materials, maintenance
supplies, consumables and loose tools awaiting use in the production
process. Inventories do not include machinery spares which can be used
only in connection with an item of fixed asset and whose use is expected to

74
 be irregular; such machinery spares are accounted for in accordance with
Accounting Standard (AS) 10, Accounting for Fixed Assets.

2. Inventories should be valued at lower of cost net realizable value.

3. Cost of Inventories
The cost of inventories should comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition.

4. Costs of Purchase
The costs of purchase consist of the purchase price including duties and taxes
(other than those subsequently recoverable by the enterprise from the taxing
authorities), freight, inwards and other expenditure directly attributable to
the acquisition. Trade discounts, rebates, duty drawbacks and other similar
items are deducted in determining the costs of purchase.

5. Costs of Conversion
The costs of conversion of inventories include costs directly related to the
units of production, such as direct labor. They also include a systematic
allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods. Fixed production overheads are
those indirect costs of production that remain relatively constant regardless
of the volume of production, such as depreciation and maintenance of factory
buildings and the cost of factory management and administration. Variable
production overheads are those indirect costs of production that vary directly,

75
or nearly with the volume of production such as indirect materials and
indirect labor.

7. The allocation of fixed production overheads for purpose of their inclusion

in the costs of conversion is on based on the normal capacity of the production
facilities. Normal capacity is the production expected to be achieved on an
average over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance.
The actual level of production may be used if it approximates normal capacity.
The amount of fixed production overheads allocated to each unit of
production is not increased as a consequence of low production or idle plant.
Unallocated overheads are recognized as an expense in the period in which
they are incurred. In periods of abnormally high production, the amount of
fixed production overheads allocated to each unit of production is decreased
so that inventories are not measured above cost. Variable production
overheads are assigned to each unit of production on the basis of the actual
use of the production facilities.

8. A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are
produced or when there is a main product and a by- product. When the costs
of conversion of each product are not separately identifiable, they are
allocated between the products on a rational and consistent basis. The
allocation may be based, for example, on the relative sales value of each
product either at the stage in the production process when the products
become separately identifiable, or at the completion of production. Most by-

76
products as well as scrap or waste materials, by their nature, are immaterial.
When this is the case, they are often measured at net realizable value and this
value is deducted from the cost of the main product. As a result, the carrying
amount of the main product is not materially different from its cost.

9. Other costs are included in the costs of inventories only to the extent that
they are incurred in bringing the inventories to their present location and
condition. For example, it may be appropriate to include overheads other than
production overheads or the costs of designing product for specific customers
in the cost of inventories.

10. Interest and other borrowing costs are usually considered as not relating
to bringing the inventories to their present location and condition and are,
therefore, usually not included in the cost of inventories.

11. Exclusions from the cost of Inventories

In determining the cost of inventories in accordance with paragraph 3. It is
appropriate to exclude certain costs and recognize them as expenses in the
period in which they are incurred. Examples of such costs are;
a. Abnormal amounts of wasted materials, labor, or other production costs.
b. Storage costs, unless those costs are necessary in the production process
prior to a further production stage.
c. Administrative overheads that do not contribute to bringing the
inventories to their present location and condition, and
d. Selling and distribution costs.

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12. The cost of inventories of items that are not ordinarily interchangeable
and goods or services produced and segregated for specific projects should be
assigned by specific identification of their individual costs.

13. Specific identification of cost means that specific costs are attributed to
identify items of inventory. This is an appropriate treatment for items that are
segregated for a specific project, regardless of whether they have been
purchased or produced. However, when there are large numbers of items of
inventory which are ordinarily interchangeable, specific identification of costs
is inappropriate since, in such circumstances, an enterprise could obtain
predetermined effects on the net profit or loss for the period by selecting a
particular method of ascertaining the items that remain in inventories.

14. The cost of inventories, other than those dealt with in paragraph 11,
should be assigned by using the first-in, first-out (FIFO), or weighted average
cost formula. The formula used should reflect the fairest possible
approximation to the cost incurred in bringing the items of inventory to their
present location and condition.

15. A variety of cost formulas is used to determine the cost of inventories

other than those for which specific identification of individual costs is
appropriate. The formula used in determining the cost of an item of inventory
needs to be selected with a view to providing the fairest possible
approximation to the cost incurred in bringing the item to its present location
and condition.
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The FIFO formula assumes that the items of inventory which were purchased
or produced first are consumed or sold first, and consequently the items
remaining in inventory at the end of the period are those most recently
purchased or produced. Under the weighted average costs formula, the cost of
each item is determined from the weighted average of the cost of similar items
at the beginning of a period and the cost of similar items purchased or
produced during the period. The average may be calculated on a periodic
basis or as each additional shipment is received, depending upon the
circumstances of the enterprise.

16. Techniques for the measurement of the cost of inventories, such as the
standard cost method or the retail method, may be used for convenience if the
results approximate the actual cost. Standard costs take into account normal
levels of consumption of materials and supplies, labor, efficiency and capacity
utilization. They are regularly reviewed and if necessary, revised in the light of
current conditions.

17. The retail method is often used in the retail trade for measuring
inventories of large numbers of rapidly changing items that have similar
margins and for which is impracticable to use other costing methods. The cost
of the inventory is determined by reducing from the sales value of the
inventory the appropriate percentage gross margin. The percentage used
takes into consideration inventory which has been marked down to below its
original selling price. An average percentage for each retail department is
often used.

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18. The cost of inventories may not be recoverable if those inventories are
damaged, if they have become wholly or partially obsolete, or if their selling
prices have declined. The cost of inventories may also not be recoverable if
the estimated costs of completion or the estimated costs necessary to make
the sale have increased.
The practice of writing down inventories below cost to net realizable value is
consistent with the view that assets should not be carried in excess of a
amounts expected to be realized from their sale or use.

19. Inventories are usually written down to net realizable value on an item-
by-item basis. In some circumstances, however, it may be appropriate to
group similar or related items. This may be the case with items of inventory
relating to the same product line that have similar purposes or end uses and
are produced and marketed in the same geographical area and cannot be
practicably evaluated separately from other items in that product line. It is not
appropriate to write down inventories based on a classification of inventory,
for example, finished goods, or all the inventories in a particular business
segment.

20. Estimates of net realizable value are based on the most reliable evidence
available at the time the estimates are made as to the amount the inventories
are expected to realize. These estimates take into consideration fluctuations of
price or cost directly relating to events occurring after the balance sheet date
to the extent that such events confirm the conditions existing at the balance
sheet date.

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21. Estimates or net realizable value also take into consideration the purpose
for which the inventory is held. For example, the net realizable value of the
quantity of inventory held to satisfy firm sales or service contracts is based on
the contract price. If the sales contracts are for less than the inventory
quantities held, the net realizable value of the excess inventory is based on
general selling prices.
Contingent losses on firm sales contracts in excess of inventory quantities
held and contingent losses on firm purchase contracts are dealt with in
accordance with the principles enunciated in Accounting Standard (A.S) 4,
contingencies and events occurring after the balance sheet date.

22. Materials and other supplies held for use in the production of inventories
are not written down below cost if the finished products in which they will be
incorporated are expected to be sold at or above cost. However, when there
has been a decline in the price of materials and it is estimated that the cost of
the finished products will exceed net realizable value, the materials are
written down to net realizable value. In such circumstances, the replacement
cost of the materials may be the net available measure of their net realizable
value. An assessment is made of net realizable value as at each balance sheet
date.
23. Disclosure.
The financial statements should disclose:
The accounting policies adopted in measuring inventories, including the cost
formula used, and The total carrying amount of inventories and its
classification appropriate to the enterprise.
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24. Information about the carrying amounts held in different classifications of
inventories and the extent of the changes in these assets is useful to financial
statement users. Common classifications of inventories are raw materials and
components, work in progress, finished goods, stores, spares and loose tools.

CONCLUSION

This project on “The study on inventory management” gave me an

opportunity to understand the level of inventory management in the
organization. This research will help the organization to make necessary
measure to the inventories. This will certainly bring down the causes of
inventory problems and help the management of inventories. The high
turnover ratio indicates efficient management of inventory because more
frequently the stock sold. So the organization should try to improve the
inventory turnover ratio.

The current study helped me to understand the current inventory control

measures practiced in any organization. The cordial and corporate
relationship between management and employees is the secret behind the
success every organization.

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BIBILIOGRAPHY

BOOKS

 Khan M.I and Jain PK, Basic financial management, The McGraw-Hill
publishing company limited, New Delhi.,2000.
 Aswathappa & K. Shridhara Bhat, productions and 0perations
Management, Himalaya Publishing House, Second edition,2008
 Shashi. K. Gupta and R. K. Sharma, Management Accounting, Kalayani
publishers,11th edition,2007
 Dr. S. N. Maheswari, Financial Management, Sultan Chand & sons,9th
edition,2004
 D. Chandra Bose, Inventory Management, Prentice hall of India Private
Limited, New Delhi.

WEBSITES

 www.iplgt.in
 www.wikipedia.com
 www.google.com

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