1 Objectives of the Study
The main objective of this study is to evaluate the efficiency of Inventory management in Balasore Alloys Limited (BAL) over a period of 5 years (20042005 to 2007-2008). The specific objectives of the study are as under: 1) To find out the trend of inventory investment in Balasore Alloys Limited. 2) To examine the management pattern of inventory. 3) To analyze closing stock position 4) To establish a relationship between total asset and inventory 5) To establish a relationship between current asset and inventory 6) To establish a relationship between total asset and current asset 7) To know standard consumption of raw material 8) To suggest some measures for improvement of inventory management practices.


ORGANISATION STUDY 2.1INTRODUCTION Balasore Alloys Limited(BAL), Balgopalpur, Balasore formerly Ispat Alloys Limited, is a member of ISPAT group of companies owned by the Mr. P.K Mittal. It was incorporated in 1984 and started its commercial production in 1987. 2.2GENERAL PROFILE OF BALASORE ALLOY LTD 2.2.1MISSION The mission of Balasore Alloys Limited in short BAL is as follows;  Managing our business with integrity and highest ethical standard  Acting in a socially responsible manner with particular emphasis on the wellbeing of all stack holder and communities we serve.  Adopting new technology, initiative, continuous learning and innovation for productive use of all resources.  Maintaining and developing a team of highly motivated trained professionals.  Providing total customer support through continuing pursuit of technical excellence, understanding of product quality, reliability and services.  Striving constantly self reliance and self-sufficiency in all operation. 2.2.2VISION To be globally trusted supplier of Ferro-alloy as well as to create sustained value addition for all stakeholders.


 To be among top fifteen manufacturer of Ferro-chrome in world

by 2011.  To achieve 10000 MT per month production level by may 2009.  To be most competitive Ferro-alloys producer by 2011 with reasonable profitability.  To achieve TPM special award by2010.  To achieve zero customer complaint.


2.2.4 SWOT ANALYSIS Strength
 Positive work culture, skilled and motivated workforce and employee participation.  Healthy IR, Union Recognition, Public Utility Service Status  Balance Score Card and Online PMS system  Focus on Training and Development.  Well Laid down policies and procedures ( Policy Manual/ SOPs)  Monthly Open House Meeting ( Trust/ Transparency)  Review of HR Policies by HRC on Monthly basis and corrective action plan.  Finds a place in top ten quality supplier of Ferro Chrome in the world  Won the most prestigious CII award continuously during last two years.  Strong customer relation ship both in Domestic and abroad.  Strongly competes in the market because of low cost of production.  Financial Management of the company touches the benchmark level.  Provides a very good platform for career growth of employees

 Long term contracts WEAKNESS  Quality variation in RM(Dolomite) Discussion is going on with TISCO for increasing quality.  Non available of lumpy ore. (planned for procuring from Pakistan and Turkey)  Space constraints for storage of material.


 Deterioration and wastage of material. OPPORTUNITY  Global souring of raw material  Acquiring mines  SAP implementation  Using Dhamara port for raw material transportation  Development of premises railway siding for bulk cheap and easy transportation  Using RFCD system(planed with it dept) THREAT  Change in import and export policy  Volatility of coke and coal price hike  Unfavourable changes in taxation and duties  Highly unstable global petroleum prices and monopolistic behaviour of OPEC.


2.2.5 BORD OF DIRECTOR Balasore alloy is managed by board which comprises of directors with significant experience. A team of qualified and experienced personals assist the board in carrying out day to day operations effectively. The list of present board of directors of the company is as per the table given bellow. a) Mr. Promod Mittal, chairman b) Er. R.K Jena, managing director c) Mr.V.K mittal, director d) Mr. R.N Pandey, independent director e) Mr. S Mohapatra, independent director f) Mr. S.K Pal, independent director g) Dr. A.k Bhatachaya, independent director 2.2.6 AWARD AND RECOGNITION The company receives the recognition in different field as follows:  India manufacturing excellence award -2007 (platinum award – 1st runner up).  The company has owned the first position in productivity award for sustained level of high overall productivity by CII(ER)  The company has been conferred with a special inertia award 2007 for energy efficiency.  ISO 14000 certification from bureau of Indian standards.  Company’s chrome mines division accredited with ISO 9001:2000 certification by DNV


2.2.7 HISTORY OF BALASORE ALLOY YEAR EVENTS 1984 - The company was incorporated on 1st May in Orissa. It was promoted by Ispat Group headed by M.L. Mittal. The main objective of the company is to manufacture calcium silicide ferro silicon calcium carbide and all other ferrous and non-ferrous metal based alloys. 1987 - Due to erratic power situation production of calcium silicide could not be taken up. Unstable power situation once again stalled the commencement of calcium slicide production. - The company installed a second furnace and a captive power plant with a total outlay of Rs 22.60 crores. - The company along with an Indonesian firm set up a joint venture project for manufacture of Silicon Ferro Silicon and Ferro Chrome. - 100 shares subscribed for by the signatories to the Memorandum of Association. 31 49 900 shares then issued at par of which the following shares reserved and allotted: - (i) 6 09 900 shares to Indian promoters directors etc. - (ii) 4 50 000 shares to NRI promoters on repatriation basis and - (iii) 3 00 000 shares to IPICOL Out of the remaining 17 90 000 shares the following shares were reserved for preferential allotment: - (i) 89 500 shares to employees including Indian working directors and - (ii) 35 800 shares to business associates of the Company. Out of (i) and (ii) only 36 600 shares taken up.


- The balance 16 64 700 shares along with the unsubscribed portion of 88 700 shares out of the preferential quota were offered to the public during Sept. 1986. - Additional 4 47 500 shares allotted to the public to retain oversubscription. 1989 - The company received a letter of intent for the setting up a third furnace at the existing site at Balgopalpur for the implementation of charge chrome/ferro chrome with a licensed capacity of 15 000 TPA. - The company issued 45 45 454-14% secured fully convertible debentures of Rs. 220 each of which (i) 18 00 000 debentures were reserved for preferential allotment to the existing equity shareholders of the company in the ratio of 50 debentures for every 100 equity shares (only 17 58 345 debentures were taken up); - (ii) 1 36 000 debentures allotted to NRI (all were taken up); - (iii) 13 63 636 debentures reserved for preferential allotment to the equity shareholders of Nippon Denro Ispat Ltd. and Ispat Profiles India Ltd. (all were taken up); - (iv) 2 27 000 debentures reserved for UTI ICICI Insurance companies and Mutual Funds (all were taken up); and - (v) 2 27 273 debentures offered to the employees (including Indian working directors) of the Company (only 185 debentures were taken up). - The balance of 7 91 545 debentures along with the 2 68 743 debentures not taken up by employees and equity shareholders were offered to the Indian public (all were taken up). Additional 2 04 544 debentures and 4 47 274 debentures were allotted to the shareholders of Nippon Denro Ispat Ltd. Ispat Profiles India Ltd. and Indian public respectively to retain oversubscription. - Part-A of Rs. 60 has been converted into two equity shares of the face value of Rs. 10 at a premium of Rs. 20 per share at the end of


6 months from the date of allotment. Part-B of Rs. 160 will be converted into appropriate number of equity shares of the face value of Rs. 10 at such premium as may be decided by the CCI between a period of 18 months to 24 months from the date of allotment. 1990 - With the Government of India extending the scheme of broad-banding to bulk ferro-alloys industry since January the company hoped to have a diversified product mix within the existing licensed capacities. - 1 00 00 544 No. of equity shares allotted due to the conversion of Part-A convertible debentures. 1991 - The project was at an advanced stage of implementation and it was expected to be commissioned in March/April. - Another letter of intent was received for the setting up of an 100% Export Oriented Unit (EOU) at Dhenkanal in Orissa for the manufacture of charge chrome/high carbon ferro-chrome with a licensed capacity of 75 000 TPA. 1992 - Profitability also improved due to optimum utilisation of company's resources and adoption of various cost control measures. - 352 82 219 shares allotted on conversion of pref. `B' of debentures. - The said furnaces are set up as Domestic unit in place of 100% EOU origin with in build facility to produce other ferro alloys in addition to charge/ferro chrome to enable the company to market internationally 2 Nos. of imported DG sets of 5 MW each were commissioned. 1993 - The company successfully implemented the commissioning of two new furnaces of 7.5 MVA capacity each at Balgopulpur. 1994 - The company undertook steps to increase captive power generation capacity from 19 MW to 40 MW by installing two new imported D.G. Sets of 10.5 MW each at Balgopalpur Orissa.


1996 - The Company has been conferred with various awards during the period under review such as Regional Top Exporter Shield for 1994-95 from Engineering Export Promotion council (Eastern Region) HRD First Prize for 1994 from CII. (Eastern Region) and Best Exporter Award for 1994 from Directorate of Export Promotion Council Orissa. - The Company has also received prestigious IS 14002/ISO 9002 accreditation from the Bureau of Indian Standards. - The Company has successfully used PLCs for economic use of Resources like Power and Raw Materials. 1997 - IAL is a leading manufacturer of silicon metal and ferrosilicon. Its products are manufactured under technical collaboration with global leaders like Nippon Denro Japan Danieli Italy Elkem Norway and Outokumpo Finland IAL has aggressively added capacities and diversified within the realms of the ferrous industry. - IAL have suffered a similar fate of delayed project implementation for as long as a decade. 1998 - Power generation capacity was increased by installing two new imported D G sets of 10.5 MW each from MAN B & W Germany at its works at Balgopalpur Orissa. - The management of Ispat Alloys Ltd has declared an indefinite lockout following violent incidents at the Balgopalpur factory premises in Balasore district of Orissa. - Ispat Alloys Ltd a subsidiary of the Mittals-promoted Ispat Industries Ltd. 1999 - Two leading manganese alloy producers -- Ispat Alloys and Maharashtra Elektrosmelt -- have made losses during first quarter April/June. 2007 -Balasore Alloys Ltd has informed that Mr. Rabindra Kumar Jena Executive Director of the Company has been elevated to and appointed as Joint Managing Director of the Company w.e.f. January 31 2007.


-Balasore Alloys Ltd has appointed Mr. Debadatta Sengupta as Director of the Company w.e.f. January 31 2007.

2.2.8 MODERN MANAGEMENT The company continuous to actively pursue its modern management initiatives in the area of  Six sigma  Total productive maintenance (TPM)  Activity based cost management  Total quality management  Performance management system  Just in time (JIT) in order to maximize performance efficiency and nature of burning desire to excel in each of this faculty. These initiatives have efficiently assisted the company in rationalizing its work force and in giving it enough experience to manage the operation efficiently thus enhancing the company’s global competitiveness and recognition eventually catapulting the company into the higher echelons of modern management, in the process giving it a strong leadership position in the market.




2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 D 1 2 3 4 5

6 7 8





• According to production, production department decide, how much quantity of raw material required fulfilling the production target. • Purchase department analyse in respect of stock at yard, minimum stock level and requirement, how much quantity of raw material should be procure. • After deciding the procurement quantity purchase department or procurement committee decide from which supplier how much of raw material and which item should be procure. • Issue of purchase order, transportation order accordingly. • Purchase order should is audited by internal auditor. • When material reaches in the yard, it is tested in the lab to decide the supplied material is accepted or rejected. STORE ITEM Those item which is not directly use in production work, these are store item. MEASURE STORE ITEM STORE PURCHASE ITEM NAME PLACE JAMSEDPUR, 1 DA FULL CYLINDER JAGPUR 2 LANCING PIPS KOLKATA JAMSEDPUR, 3 OXIGEN GAS JAGPUR 4 M.S ROUND ROURKELA 5 SODIUM SILICATE KOLKATA 6 HR SHEET JAMSEDPUR 7 LIQUID OXIGEN GAS KOLKATA 8 HIGH SPEED DISEL HALDIA 9 WELLDING ROD ANUGUL 10 GUNY BAG BHADRAK


11 12 13



PURCHASE SYSTEM For purchasing of store item Balasore Alloy Company follow ICIS (integrated computerised information system) system. Through this system company search, where are needed item found, through internet. They follow some roll in purchase of store item. These are describing bellow.  User department send an indent to purchase department, that what item they required.  Then purchase committee make verification and give approval if it is purchase or not.  It is initialise by commercial department.  Purchase department make an enquiry through internet where this item is found.  Vender sent there quotation to purchase department.  Purchase department make a comparison and decide where to purchase.  Purchase department then negotiate with the vender.
 Then company place order.


2.3BUSINESS PROFILE Balasore Alloy Ltd. a measure player in the international Ferrochrome market, has notched up an impressive growth of 435.59% in its net profit at RS. 3329.11 lakes for the 15 months period ended 31st march, 2008, as compared with Rs.621.58 lacks recorded during the corresponding 15 months period ended 31st December, 2006. Turnover for the 15 month period ended 31st march 2008 increased by 55.53% to Rs.53085.62 lakes as against Rs.34132.59 lakes during the corresponding 15 months period ended 31st December 2006. Export turnover for the 15 month period ended 31st March 2008 increased by100%to Rs.40514.75 lakes as against Rs.20296.66 lakes during the corresponding previous financial period. PBT for the 15 month period ended 31st march 2008 registered a heavy growth of 352.97% at Rs.5116.83 lakes as against Rs.1129.61 lakes registered in the corresponding previous financial years. EPS jumped by 366.09% at Rs.5.36 per share for the 15 months period ended 31st march 2008 as compared to Rs.1.15 per share for the previous financial period. (Face value per share =Rs.5/-) The company has been able to sustain the momentum of its accelerated growth chiefly on account of judicious product mix, improved capacity utilisation better realization and improved cost efficiencies, despite rising input cost and appreciating rupee.


INDIA  Mukand  Jewels seamless limited  Chandan  Rathi ispat  Bhusan  Vardhman special CHINA  Sino-trust corporation  Sindchem corporation  Magotteaux  Tsingshan  Kovintrade LATIN AMERICA  Pimasa  London metal company international MEASURE CUSTOMER JAPAN & KOREA  Mitsui  Toyota corporation tsusho

 Kinso corporation  Stemcor  Glencore EUROPIAN UNION  Indo-german  Stemcore  Traxys  Arcelor mittal  CMM(consider metal marketing)




RAW MATERIAL SUPPLY Balasore alloy utilise chrome ore from captive mines. All raw materials transported up to the plant through road and rail. MAN POWER Balasore alloy enjoys an excellent blend of Techno-Commercial man power of 450 personnel coupled with cordial labour relationship. FINISHED PRODUCT MOVEMENT Packed in bags and transported by trucks up to port and debagged at port at the time of shipment to avoid contamination, fines generation, spillage and shortage of material.


Stringent Quality Assurance procedures are in place to ensure proper Raw Material feeding, Process Control as well as quality of Finished Products. Sophisticated Analytical equipment is used by experienced Chemists to ensure that the desired quality standards of the customers are fulfilled.


Chemical: Balasore alloy has a well equipped laboratory with the modern facilities for analysing the raw materials and the finished goods. It carries out the analysis of chromium and silicon by wet method as per is 1559-1961. Balasore alloys test method are standardised by analyzing the standard sample like Japanese, euro & bsc. It uses leco-cs-300 for determination of carbon and sulphur by calibrating with standard sample .it determines phosphorous by wet method partially and by uv/vis spectrometer with colour developing (phosphomolybdate complex) by comparing standard sample. Balasore alloy uses aas-3110 for determining rare elements. it has hollow cathode lamps for specific element. The instrument is is celebrated by using standard sample. Physical: At the time of handling the material to required size – both undersize and oversize are tested using suitable screen and weighing scale. Further at the time of packing size fractions are tested at random. Mining: Balasore alloy acquired about 100 hectares of chrome ore mines in Sukinda valley in the state of Orissa. Mining operations have resulted in company’s self sufficiency in meeting entire chrome ore requirement to produce Ferro chrome on sustained basis. FINANCE AND ACCOUNTING SECTION Finance and accounting both play an important role in any business organisational setup. The main function of any finance and accounting of an organisation are funds management, cost monitoring, cost reduction and financial appraisal. Money is a very scarce resource & is the most sought after commodity because all of the transaction of the human society is settled in term of money. Money & finance are of not one & the same things.


Money store in vaults, or kept in shape of gold bars, or an ornament is not finance. Money is a static value expressed in currency of the country, where as, finance is an expression of dynamic function of money. Depending upon the requirements and close monitoring of expenditure Balasore alloy has formed the following section for smooth running of the finance and accounts department and to maintain the liability position of the company. a) Bills payable section b) Payroll section c) Provident fund section d) Cash office section e) Finance section f) Material section g) Costing section h) Bills receivable section i) Book-keeping section

This study is based on both secondary and primary data. While secondary data was collected from the company annual reports, websites and various journals available through library work.


These are as follows websites are as follows
1. www.balasorealloy.com 2. www.outokumpu.com

3. D:\alloy\inventory\Inventory Accuracy article - white paper.mht 4. D:\alloy\inventory\The Aisle Width Decision Wide Aisles, Narrow Aisles (NA), and Very Narrow Aisles (VNA).mht 5. D:\alloy\inventory\How effective is your Lift Truck Safety program.mht LIST OF BOOKS 1. Inventory management (s. Chandra) 2. Production and operation management (S.N CHARY) TATA


HOUSE PVT.LTD 4. MANAGEMENT ACCOUNTING (Shashi K. Gupta & R.K. Sharma) KALYANI PUBLISHERS The primary data was collected by taking personal interviews as well as discussions with senior and middle level executives. The researcher had also visited the factory to collect information through personal observations.


3.2 Methodology and Data Base
After making a review the available literature and setting objectives in the preceding paragraphs, an attempt is made to crystallize the whole work by way of making a blue-print of the study. As such the research structure is designed as follows: The present piece of research work is analytical and explorative in nature. The purpose of this research is to contribute towards a very important aspect of financial management known as inventory management with reference to Balasore Alloys Limited operating in the Ferro alloys sector.

3. 3Period of the study
The study covers a four-year period starting from 2004-05 to 2007-08. The period of study was restricted due to paucity of time

3.4Data Set
This study is based on both secondary and primary data. While secondary data was collected from the company annual reports, websites and various journals available through library work; the primary data was collected by taking personal interviews as well as discussions with senior and middle level executives. The researcher had also visited the factory to collect information through personal observations. 3.5Tools of Analysis


The collected data being tabulated was analyzed and interpreted with the help of different financial ratios, percentage, average, trend analysis, and correlation.

4. VIEW TO INVENTORY MANAGEMENT 4.1 INTRODUCTION Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60% of current asset in public limited companies in India. Because of the large size of the inventories maintained by firm, a considerable amount of funds is required to be committed for them. It is, therefore, absolutely imperative to manage inventory efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardising its long run profitability and may fail ultimately. It is possible for the company to reduce its level of inventories to a considerable degree, e.g., 10 to 20


percent, without any adverse effect on production and sales, by using any simple inventory planning and control techniques. The reduction of excessive inventories carries a favourable impact on a company’s profitability. 4.2 What is inventory? Inventories are resources of any kind having an economic value. An inventory consists of raw material, finished goods, work-in-progress, consumable and stores. Thus inventory control is all about planning and devising procedures to maintain an optimal level of these resources. 4.3What is inventory management? Inventory management is primarily about specifying the size and placement of the stocked goods. Inventory management is required at different locations within a facility or within multiple 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. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.

4.4Definition of inventory management

Involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory


balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining. Controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs.

In business management, inventory consists of a list of goods and materials held available in stock. 4.5 Need for inventory  Primarily inventory is held for transaction purpose.  In the field of production, an enterprise cannot ensure uninterrupted production unless it maintains an adequate inventory for materials.  Inventory is also held as a precaution against a contingency for any increase in lead time or consumption rate.  It largely guards against apprehensions of changes in price 4.6 Benefits: 4.6.1• Help reduce purchasing and inventory costs. Connect inventory control, purchasing, and sales order processing with demand planning and help reduce costs, improve cash flow, and help ensure that you have the right stock available when you need it. 4.6.2• Gain visibility into inventory processes. Effectively balance availability with demand and track items and their possible expiration dates throughout the supply chain to help minimize on-hand inventory, optimize replenishment, and increase warehouse efficiency. 4.6.3• Improve customer satisfaction. Make more accurate order promises and intelligent last-minute exceptions with access to up-to-date inventory information. Respond quickly and knowledgably to customer queries for improved customer service. 4.6.4• Reduce time to market. With integrated order, inventory, and distribution processes, as well as item tracking capabilities, your business can reduce manual data entry and get your goods to market fast.


4.7 FEATURES: 4.7.1 Inventory costingUnderstand item costs throughout your warehouse and production processes, including inventory, work-inprocess (WIP), and cost of goods sold (COGS), to help efficiently manage sales and purchase prices and line discounts with customers and vendors. Break down costs according to categories such as materials, capacity, subcontracting, and overhead. 4.7.2 Automated Data Collection System (ADCS) Help increase the accuracy and efficiency of your warehouse management—picking and putting away of items, physical inventory counts, and moving items from bin to bin—with ADCS. 4.7.3 Radio frequency identification (RFID) enablement Comply more easily with customer or supply chain mandates for RFID. 4.7.4 Order processing Provide customers with accurate item availability and deliver on time with support for available-to-promise (ATP) and capable-to-promise (CTP) insight. 4.7.5 Returns management Process returned inventory and account for additional costs. Automatically organize credit memos, replacement goods, returns to vendors, and partial or combined return of shipments or receipts. Exact cost reversal helps increase inventory accuracy. 4.7.6 Item tracking Trace lot or serial numbers to quickly determine where items were purchased, processed, or sold. Help eliminate waste due to expiration of goods with support for first expired/first out (FEFO) handling. 4.7.7 Item substitution Offer customers alternative items when those they want are out of stock, or if the alternatives can be provided less expensively with a higher profit margin. 4.7.8 Item cross-references Identify what your customers want by crossreferencing any customer code, internal code, or vendor code. 4.7.9 Internal pick/put-away Pick or put away items and debit or credit inventory records independently of purchase receipts, sales, or other source documents to help maintain accurate inventory records even when


you access items for testing, display purposes, or other internal or operational needs. 4.7.10 Multiple locations and responsibility centres Provide customers who request non-stock items with immediate quotes. Automatically create non-stock items and process them in the same way you process stock items. 4.7.11 Location transfers Manage items individually per location. By grouping items into stock keeping units, items can be described and managed individually per location—including replenishment methods, safety stock, and costs. 4.7.12 Stock keeping units Handle inventory across multiple locations from one database to gain a complete, real-time business overview and create manageable cost and profit centres. 4.7.13 Warehouse management system Help reduce costs through effective warehouse processes such as directed pick and put-away and automatic bin replenishment. 4.7.14 Cycle counting Determine the counting frequency per item or stock keeping unit to help increase inventory accuracy and meet shipping deadlines. 4.7.15 Business notifications Generate e-mail messages to alert your people, suppliers, or partners to changes in critical inventory levels, order status, or replenishment needs. Purpose of Inventory Management 4.8 Inventory control Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in inventory control decision making process are:
• • •

The cost of holding the stock (e.g., based on the interest rate). The cost of placing an order (e.g., for raw material stocks) or the set-up cost of production. The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.


The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay. 4.8.1The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management. 4.8.2 Reorder Point: The inventory level R in which an order is placed where R = D.L, D = demand rate (demand rate period (day, week, etc), and L = lead time. 4.8.3 Safety Stock: Remaining inventory between the times that an order is placed and when new stock is received. If there are not enough inventories then a shortage may occur. Safety stock is a hedge against running out of inventory. It is an extra inventory to take care on unexpected events. It is often called buffer stock. The absence of inventory is called a shortage.  Select quantity with the lowest Total Cost, including the cost of the items purchased. 4.9 Some concepts About Inventories Inventories considerably influence the profitability and liquidity of the industrial units. It is therefore essential to have a clear-cut idea about the various aspects of inventories, which are as follows: 1. 2. 3.

Inventory – a major cost component Material – a fertile area for more research Material – a limiting factor Lead time influences on inventories Productivity of inventories



4.9.1 INVENTORY – A MAJOR COST COMPONENT An analysis of sales of some industrial undertakings during 2000-2001 gave the following information: Direct materials Labour Overheads and profit Total 60% 15% 25% 100%

The above data shows that direct materials and indirect materials forming part of the overhead cost, constituting inventories, account for a large percentage of the total cost. Inventories, therefore, offer the most important and fruitful area of cost reduction and increased profits. The inventory problem is therefore one of balancing various costs so that the total cost is minimized. These costs are: (a) (b)

Cost of ordering Cost of holding or carrying inventory Under stocking cost Overstocking cost


The cost of ordering opposes the cost of carrying while the under stocking cost opposes the overstocking cost. If these costs operate in the same direction, instead of behaving in opposition, there will be no inventory problem. The cost of ordering and the cost of carrying enable us to optimize on the number of orders and the quantity of inventory to be ordered. The under stocking and overstocking costs help an industrial unit to determine the service level that has to be maintained by the inventory.


4.9.1.a. Cost of Ordering An organization can meet its need for materials only after fulfilling certain activities. These activities consume executive and non-executive time, stationery and communication charges, thus giving rise to the ordering cost. The cost of an imported order is much higher than that of a cash purchase from the market. This is on account of the variation in the level of activities for different ranges of items. The ordering cost consists of several costs attributable to the following factors. 1. Stationery, typing and dispatching of orders and issuance of reminders 2. Advertisements, tender forms, tender opening formalities, etc. 3. Follow-up costs. These constitute the travel costs, telephone and postal bills. 4. Costs incurred by the goods received bay, inspection and handling 5. Rent and depreciation on the space and the equipment utilized by the concerned purchasing personnel 6. Salaries and all statutory payments to the purchasing personnel 7. Cost of source developments 8. Cost of entertaining suppliers Thus the average ordering cost is: Total costs incurred on all these heads during a year Number of orders in that year


4.9.1.b. Cost of Holding or Carrying Inventory One of the motivating factors to control inventory arises on account of its carrying cost. It comes to around 30 per cent of the total inventory cost in most of the industrial undertakings, i.e. if the annual average inventory is valued at Rs 100 lakh, then it will cost the company Rs 30 lakh to carry it. Inventory carrying cost is usually expressed as a percentage of the average investment in inventory. Capital cost, cost of storage and handling and deterioration and obsolescence costs are its main components. 4.9.1.c.Under stocking Cost It is penalty that an undertaking has to pay on account of its inability to meet the demand in time. The quantum of penalty depends on the nature of the demand. In the cases where the demand is from a customer of the retail establishment, the shortage condition may result in a cost relatively small compared with the item cost. If, on the contrary, the demand arises in a manufacturing activity, the penalty cost for shortage may be extremely high relative to the cost of the item. This is because the entire manufacturing activity would necessarily have to wait for the item which is out of stock. 4.9.1.d. Overstocking cost The overstocking cost arises on account of the opportunity lost when disinvestment in inventories is postponed for a longer period than is necessary. In the case of items which will ultimately be used, this cost be equated with the carrying cost. For items which cannot be used after a


certain period, this cost will be the difference between the cost of the item and its salvage value. As far as an organization is concerned, the situation of both overstocking and under stocking is not at all desirable. Both shortages and surpluses prove costly and need to be balanced – one against the other. Arriving at the happy medium between too much and too little is the essence of inventory management.

4.10 Tools and Techniques of Inventory Management
4.10.1 INTRODUCTION The basic problem of inventory management is to strike a balance between the operating efficiency and the cost of investment and other costs associated with large inventories, with the object of keeping the basic conflicts at the minimum while optimizing the inventory holding. The decisions as to which item to manufacture and when to keep inventories in balance, require the application of a wide range of techniques ranging from simple graphical methods to more sophisticated and complex quantitative techniques. Many of these techniques employ concepts and tools of mathematics and statistics and make use of various


control theories from engineering and other fields. They are primarily aimed at helping to make better decisions and following a sound policy.

4.10.2INVENTORY MANAGEMENT TECHNIQUES The various techniques applied for inventory management are as follows: 1. Selective inventory control 2. Setting of various stock levels 3. Systems of inventory control 4. Economic ordering quantity (EOQ) 5. Re-order point and safety stock 6. Application of computers to inventory management 7. Just-in-time inventory management 8. Materials requirement planning (MRP) 9. Inventory audit.


Selective Inventory Control Effective inventory management requires the understanding and knowledge of the nature of inventories and to gain this under standing the following analysis and classification techniques are available. 1. 2. 3. 4. 5. 6. 7. 8. ABC analysis HML analysis XYZ analysis VED analysis FSN analysis SDE analysis GOLF analysis SOS analysis

The motive behind these analyses and their classifications is to tackle the important aspects more rigorously. Moreover, and equally critical analysis of all items will be very expensive and will have a diffused effect regardless of priorities. Table 5.1 shows the available classifications, their bases and their uses. TABLE 5.1 Classifications of inventories Technique Basis Main use ABC Value of (Always Better Conception Control) HML (High, Medium, Low) XYZ VED (Vital, Essential, Desirable) To control raw material, components and work-in – progress inventories in the normal course of business Unit price of the Mainly to control purchases material Value of the items in storage Criticality of the component To review the inventories and their uses at scheduled intervals To determine the stocking levels of spare parts


Consumption FSN pattern of the To control obsolescence (Fast moving, components Slow moving Non-moving) SDE Problems faced in Lead time analysis and (Scarce, procurement purchasing strategies Difficult, Easy to obtain) TABLE Classification of inventories (Contd.) Basis Technique GOLF (Government Source of Ordinary, Local, material Foreign source) SOS (Seasonal, Off- Nature Seasonal) supplies Main use the Procurement strategies

of Procurement/holding strategies for seasonal items like agricultural products.

ABC analysis The method of ABC classification for managing inventories has been currently adopted in most of the industrial units. Inventories of undertakings are classified into various categories on the basis of their importance, namely their value and frequency of replenishment during a period. One category called group ‘A’ items, consists of only a small percentage of the total items handled but has a combined value that constitutes a major or large portion of a total stock holding of the concern. The second category consisting of group ‘B’ items is relatively less important. The third category consisting of ‘C’ items is of least importance, i.e. the group consists of very large number of items, the value of which is not very high.


The ABC analysis is a rational approach for determining the degree of control that should be exercised on each item in inventories. Obviously, the ‘A’ class items should be subjected to a strict management control under either continuous review or periodic review with short review cycles. The ‘C’ class items require little attention and can be relegated down the line for periodic review say, just once a year. The control over ’B’ class items should be somewhere in between. The ABC analysis follows the general principles of pare to (Wilfredo Pareto, Italy, 1896) that “in any series of elements to be controlled, a selected small fraction in terms of the number of elements would always account for a large fraction in terms of effect”. HML analysis
While the ABC classification is based on the annual consumption value of an item, the basic criterion for HML classification is the unit value of an item. In this respect the HML classification is district from the ABC classification. On the basis of the unit value of an item, the materials arte further classified as high-value materials, mediumvalue materials and low – value materials. In HML analysis, the items should be listed out in descending order of unit value and the management may fix limits for determining the three categories. .

XYZ analysis The XYZ analysis is based on the value of the inventory stored. The X items are those whose values are high while the Z is those whose inventory values are low. And the Y items are those which have moderate inventory stocks. This analysis, therefore, helps to identify those few items which account for the large amount of money locked up in stock and take steps for their liquidation/reduction. Usually the XYZ analysis is made in conjunction with ABC analysis or HML analysis. The XYZ analysis can be combined with the ABC analysis as given below. Class of items A B C



Efforts to be made for reducing stocks to the Z category.

Efforts to be made for converting stocks to the Y category.

Steps to be taken for disposing of the surplus stocks. Control may be further tightened.

Y Efforts to be made -for converting stocks to the Z category Z -Stock levels may be reviewed twice a year --

VED analysis The VED analysis popularly known as Vital, Essential and Desirable analysis is used primarily for the control of spare parts. On the basis of the critical nature or relative importance, spare parts may be classified into three categories, namely vital (V), ESSENTIAL (e) and desirable (D). The vital items have extreme criticality, the desirable items are not critical and the essential items fall somewhere in between the vital and desirable categories. FSN analysis When analysis is carried out on the basis of the rate of movement of materials in the stores or on the basis of consumption pattern of components, it is known as the FSN analysis. The three letters stand for fast-moving, slow –moving and non-moving. This classification comes in very handy when it is necessary to control obsolescence. The demand for fast-moving items is generally high. Thus special care should be taken in respect of these items, otherwise the production may be interrupted due to the shortage of such materials. Inventories which have only a low turnover are brought under the category of slow moving items. These items are not issued at frequent intervals.


SDE analysis The SED analysis is generally done on the basis of the problems faced in procurement of an item. These letters stand for Scarce items, those which are Difficult to obtain and those which are fairly Easy to obtain. GOLF analysis The GOLF analysis is carried out mainly on the basis of the source of material. GOLF stands for Government, Ordinary, Local, and Foreign. There are many imported items which are channelized through the State Trading Corporation, Metals Trading Corporation, etc. SOS analysis The SOS analysis is making on the basis of the nature of supplies. As such it classifies the items into two groups S (Seasonal) and OS (Off Seasonal). The analysis identifies items into (i) seasonal, but available only for a limited period, (ii) seasonal, but available throughout the year; and (iii) off-seasonal items whose quantity is determined on different considerations. 4.10.3 Systems of Inventory Control are: (a) Perpetual inventory (Automatic inventory) system (b) Double bin system .1Perpetual inventory system The control of inventories while in storage is affected through what is known as the perpetual inventory. Thus the two main functions of the perpetual inventory are recording store receipts and issues so as to determine at any time the stock in hand, in terms of quantity or value, or both, without the need for a physical count of the stock. Continuous verification of the physical stock with reference to the balance recorded in the stores records, at any frequency, as convenient to the management.


The perpetual inventory system consists of: (i) Bin cards (ii) Stores ledger (iii) Continuous stock taking 1.1Bin cards Bin cards are printed cards used for accounting the stock of material, in stores. For every item of materials, separate bin cards are kept. The details regarding the material such as the name of the material, the part number, the date of receipt ad issue, the reference number, the name of the supplier, the quantity received and issued, the value of the material,, the rate the balance quantity, etc. are recorder in the bin cards. The bin cards are kept in the bin serially according to part number of the component. At the end of the financial year the balance quantity in the bin cards is taken as the closing stock, and it is valued at the rates noted in the bin cards. Stores ledger- Like bin cards, a store ledger is maintained to record all the receipts and issues in respect of materials with the difference that along with the quantities, the values are entered in the receipt, issue and balance columns. Additional information as noted in the bin cards regarding the quantity on order and the quantity reserved, together with their values may also be recorded in the stores ledger. Continuous stock taking- The perpetual inventory system is not complete without a systematic procedure for physical verification of the stores. The bin cards and the stores ledger record the balances, by but their correctness can be verified by means of physical verification only. There is a proper procedure for the physical verification of the stocks in most of the industrial units. The excesses/shortages found in the verification are reported for action so as to reconcile the differences in stock.

Double bin system
The double bin system is a recently developed technique in certain industries in respect of low consumption value items, i.e. items belonging to class ‘C’ in ABC analysis. This system separates the stock of each item into two bins, one to store the quantity equal to the minimum quantity and the other to store the remaining quantity. There are instructions not to use the quantity in the smaller portion as long as there is stock in the other portion. As soon as it becomes necessary to use the quantity marked as


minimum, it is a signal to place new orders. When the fresh order is received, the minimum quantity is segregated again. The double bin system is ideal for items for which demand and lead time are fairly regular and established. It also avoids the necessity of taking physical inventories as in the case of the perpetual inventory system. Since the storekeeper k knows automatically when to initiate the replenishment action, this being the time when he is forced to dip his hand into the minimum stock bin. In the fixed order quantity or the double bin system, there is a built-in safety provision in that the replenishment interval between two successive orders varies and hence adequate arrangements are required to take care of variations in the rate of demand. If the usage rate rises, the re-order level is reached earlier than expected and hence the replenishment interval is shortened. On the other hand, if the rate of usage goes down, the replenishment interval is lengthened. In either case the safety stock has to provide protection against variations in demand and lead time. 4.10.5 Economic Ordering Quantity (EOQ) In the fixed order quantity system, the reorder quantity is the economic order quantity which is fixed in such a manner as would minimize the total variable cost of managing the inventory. The various components of this cost are as follows: (a) Procurement cost (this includes administrative and provisioning costs) (b) Storage cost (this includes carrying and handling costs, etc.) (c) Stock out cost (this may be laid down by the management according to its policy)


The appropriate term for economic order quantity appears to be 'economic lot size', meaning thereby the quantity that should be accepted per occasion so as to make the inventory procurement cost equal to the inventory carrying cost. A company is said to be on a point of minimum cost wl1en its ordering cost is just equal to the carrying cost. In other words, a company should neither store excess quantity of material nor should it frequently place too many orders for the same material. When the unit price is same regardless of the quantity purchased, the following formula is used. Then it is found that the order quantity varies in proportion to the square root of the demand. There are indices given on scientific basis to help calculate the order quantity, keeping in view the position cost of inventories, namely the set-up costs, the ordering costs and the carrying costs. This is known as Economic Order Quantity (EOQ) or Square Root Formula, developed by.R.B. Wilson around the 1930s, which may be modified according to the individual requirement.


Where Q=annual requirement in units A=unit cost of pacing an order C = annual carrying cost D=optimum lot quantity or batch size.The formula for EOQ can be verified with reference to the following assumptions: Suppose the cost of each article is one rupee. The annual demand is 40,000 units. The cost of carrying inventory is 20 percent. The cost per order is Rs 10. Using the given formula, we have

=2000 units Here the economic order quantity is 2000 units. Both the ordering cost and the average inventory carrying cost are the same, i.e. Rs 200 each as shown in Table 5.4 when the economic order quantity is 2000 units. Moreover when both the ordering cost and the inventory carrying cost are the same, the number of orders to be placed in a year is 20. thus the total cost becomes Rs 400 (i.e. ordering cost Rs 200 + carrying cost Rs 200), which is the minimum (see Table 5.4). The graphical presentation of the behavior f carrying and ordering costs is shown in Figure 5.4 in the figure, EOQ units and costs have been plotted along x-axis and y-axis respectively. The inventory carrying cost line intersects the ordering cost line at a point P where both the carrying cost and the ordering cost are equal to Rs 200. thus the economic order quantity (EOQ) is 2000 units as shown at the point Q in Figure 5.4. Re-order Point and safety Stock The computation of the re-order point is expressed in terms of the number of units used per day., multiplied by the lead time in days with adjustments to provide safety stock as will. Thus the formula to be followed is: Re-order point = Average daily usage x Lead time in days + Safety stock


The various problems identified to be tackled in most of the industrial units in India for the implementation of JIT are: (a) Reduction of set-up times (b) Kanban system (c) Delivery (from vendor) of exact quantity as per exact schedule (d) Preventive maintenance (e) Group technology. All these problems can be tackled only with a very serious planned effort. Workers' motivation and literacy need to be enhanced. These are important for reducing the set-up time and introducing the Kanban systems. Moreover, the involvement and commitment of top management are needed to bring a drastic change in the working environment and change of attitude in people. These changes are difficult but possible. As there are wide differences in the operating environments of Japanese and Indian industries, the work environments in the industrial units in India need to be improved before the implementation of JIT.


Materials Requirement Planning (MRP) Most of the blue chip companies in India faced an acute cash crunch situation during some periods of 1990s. Indian companies were, therefore, compelled to bring efficiency in working capital management, which in turn resulted in better receivables and inventory management. Table 5.6 shows the capital sensitivity vis-a-vis profitability of some leading Indian companies, related to a period in 1990s. The American industries have been successful, simply because of the implementation of new management systems like MRP and JIT. The efficiency attained by the various American industries after the successful introduction of MRP is clear from Table 5.7. The post-MRP achievements by the American firms are really worth emulating. In fact, the US and other industrially developed countries have set a way for the rest of the world to follow. The changes taking place on the Indian business scene are also forcing the Indian industries to make full use of the MRP and other cost effective systems.

The MRP system Materials requirement planning is a special technique used to plan the requirements of materials for production. In other words, it is a TABLE 5.6 Working capital sensitivity Company 10% of working Increase in profits due to capital reduction of 10% in (Rs in crore) working capital (Rs in crore) Reliance 39 78 ACC 42 8.4 Grasim MLM 163 32.6 Telco 76.8 15.4 Tisco 160.4 32.1 Bajaj Auto 209.3 41.9 BBLIL 105.2 21.1 HLL 30.2 6.1 ITC 40.3 8.1 L&T 115.1 23.1


Ashok Leyland Century Textile GSFC Nalco Videcon Int BSES

143.1 117.3 74.2 63.0 60.3 84.1 52.0

28.6 23.5 14.8 12.6 12.1 16.8 10.4

Source: The Economic Times, Tuesday, 15 March, 1997, P.14. TABLE 5.7A VERAGE OPERATING PERFORMANCE OF MRP (300 companies) in the USA Operation Inventory turnover ratio Meeting delivery promises(%) Inventory costs (%) Number of expeditors Delivery lead times (days) Pre-MRP 4.5 73.9 52.3 10.8 55.6 Post-MRP 15.2 88.6 44.0 5.1 41.7 Future estimate 22.0 99.6 39.2 2.1 31.8

Source: “Japanese Manufacturing Lessons for India” ASCI Journal of Management, Vol. 19, No. 2 (March 19900), p. 117. System of planning and scheduling the time-phased material requirements for production operations. It is geared towards meeting the end-item inputs and it updates the material requirements on a regular basis. The MRP system combines inventory control with production planning and works backwards from planned quantities (Master Production Schedule) for determining the material requirements. Thus the unique feature of the system is its continuous adjustment of material requirements with the changes in production schedule.


The MRP system is not based on the averaging process as the EOQ model is, it actually determines how much is needed and when needed on the basis of a master production schedule. MRP and EOQ Models Material requirement planning is a simple system of calculating (arithmetically) the requirement of the inputs at different points of time based on the plan or schedule for the production of the finished goods, Firms usually deal with bunched requirement of materials when they formulate plans to make assemblies out of various components. Thus the requirement of raw materials depends on the requirement of production of the finished product. However, it would be better if the firms know the production plan/schedule for the assembly of the finished product so as to arrange all the raw materials that go into the finished products. This is precisely what the materials requirement planning (MRP) attempts to do.Under the MRP system, the material requirements of inputs are derived on the basis of requirements or plan for production of the final products, It means that there are no probabilities involved anywhere. Such a system will work well for materials that have no direct demand of their own, but have only a derived demand. These materials are called dependent demand items. On the contrary, as the finished assembly has a direct demand of its own, it is known as an independent demand item. Let us review the economic order quantity (EOQ) models. All of them assume a uniform (or more or less uniform) pattern of consumption of materials, The EOQ model answers the questions such as 'how much' and 'when' for optimal cost consideration on the basis of average consumption. HovJever, some basic difficulty arises in some peculiar production situations on account of the averaging of the consumption of materials. When a company deals with five different varieties of soaps, five varieties of shampoos, another five of cleaning powders, the requirement for many raw materials over time for these formulations does not fall in the smooth average consumption pattern. Figure 5.6 shows that in case the material is stocked in accordance with EOQ a firm may have excess material in inventory during the months of March, May- and September when


The firm does not need the material at all. Moreover, thefirm falls terribly short of the required material during the months of FEBRUARY, April and August. In all respects, the EOQ model tries to answer the questions of ‘how much?’ and ‘when to stock’. But this model fails miserably when encountered with an erratic requirement pattern for the material. Thus in many industries such erratic requirement patterns are common, especially for dependent items. CONCLUSION Most of the industrial units in India have adopted certain efficient techniques like ABC analysis, and perpetual inventory for controlling their inventories. But with the advent of electronic data processing, better selective inventory control measures are available, the adoption of which will lead to better control of inventory at a reduced amount of investment. The just –in-time inventory control technique can be implemented only after improving the work environment. The industrial units do not strictly adhere to the control measures such as EOQ and fixing of material stock levels. So it results in high inventory costs.


4.11 INVENTORY RATIO The impact of various inventory management techniques such as ABC analysis, perpetual inventory, etc adopted in most of the industrial undertakings is not very clear. An analysis of inventory ratio will clarify this point. These ratios provide guidelines for planning and controlling of inventories of industrial units. They also provide relative or comparative information about the performance of the inventory function. The manufacturing firms generally have four kinds of inventories. a) Stores and spars b) Raw materials c) Work-in-progress d) Finished goods Thus ratios useful to inventory management are: 1. inventory turnover ratio 2. store and spares inventory holding period 3. conversion period of work in progress 4. inventory as per percentage of current asset 5. inventory as percentage of total asset 6. inventory in term of months of production 7. number in days stock in hand ratio 8. return per rupee invested ratio 4.11.1 INVENTORY TURNOVER RATIO (ITR) It is an important parameter used to evaluate the performance of the inventory function, and expressed as:

Here the average stock indicates the yearly average (average of opening and closing inventory), where the numerator of the ratio, i.e. the cost of sales means sale minus gross profit. Since inventories are valued in term of their cost, the cost of sales rather then sales has been used in computing the turnover ratio. The inventory turn over shows how quickly the inventory is turning into receivable/cash through sale. This ratio indicates the number of times the stock is turned over on the average and must inventories is reflected in the number of time the firm’s average inventory is turned over during the year.


Inventory turnover has a direct relationship with the profit-earning capacity of the firm. Generally, the higher the rate of inventory turnover, the larger the amount of profit, the smaller the amount of work-in-capital tied up with inventory, and the more current the stock of merchandise. Each turn over adds to the volume of profit. A low inventory turnover implies excessive inventory levels compared to those warranted by production and sales activities, or a slow moving, or obsolete inventory. A high level of sluggish inventory amount to unnecessary tie-up of funds is impairment of profits and increased cost. If the obsolete inventories have to be written off, this will adversely affect the working capital. And liquidity position of the firm. Thus a higher turnover is better then a lower turnover. Ideally, the inventory should be 12 and 20 percent of the sales value. As such, inventory turnover ratio should be within the range of 5.0-8.3, while it is also opined that the same could be 9 as well. It is, therefore, recommended that the inventory turnover ratio should be between 5 and 9. Against the above background the inventory turnover ratio of the firm in India is an average of 1.0only. This situation suggests that inventory is most slow moving component of current asset. Thus, most of the firm in India keep excessive stock of inventory. Excessive stocks are usually unproductive and represent an investment with a low or zero rate of return. Table 6.1 gives an insight into an average inventory turnover ratio of Japanese, American and Indian industries in order to highlight the potential available for cost reduction in Indian industries on account of inventories. A low inventory turnover ratio implies excessive inventory levels compared to those warranted by production and sales activities or indicates slow-moving inventories. A high level of sluggish inventories amounts to unnecessary tie-up of funds which in turn result in more cost and finally, less profitability. An inventory turnover ratio of 45.5 by Japanese companies is commendable by any standard. It means that the Japanese industries carry an average Inventory for 8 days at any point of time while the Indian industries carry an average inventory for 48 days. The American industries have also been able to reduce investment in inventories to a large extent. TABLE inventory turn over ratio of Japanese, U.S and India automobile industries


J year apan U.S India 1950 3 3 1 1960 8 10.5 2 1975 21 10.5 3.7 1985 38 12 4.2 1990 44 20.3 7.5 1992 45.5 21 7.5 Source: consolidated from the data given in Chartered Finance Analyst (Hydrabad) ASCI Journal of management and management accountant (1993), kolkata. Of course, the inventory turnover ratio alone should not serve as the sole determinant of the liquidity of a firm’s inventories. More in-dept analysis, involving a thorough item-by-item check on existing inventories, is necessary to fully assess the liquidity of the inventory. 4.11.2 STORES AND SPARES INVENTORY HOLDING PERIOD Stores and spares is a term which commonly covers all kinds of supplies necessary to keep the production equipments operating in order to turn out production to the desired quantity and quality at the desire time. The lack of spares is often the one of the most serious bottlenecks in on interrupted production. Stores and spares inventory constitute a large number of items, some of them are most important and require longer period of time to procure while most of them are not that important and require shorter periods of time to procure. In discriminate stocking of each and every item of stores and spares is not wise because a huge amount of funds may unnecessarily get locked up in the component of stores and spares. Thus the stock of components of stores and spares should be kept to a reasonable level. Stores and spares inventory is the slowest moving among the four components of inventory. A close watch on the movement of this component of inventory and its affective control can pay rich dividends to a firm. In most of the firms, the stores and spares inventory occupies, on an average, about two-third of the total inventory. Such huge amount of investment in the stores and spares .inventory affects both liquidity and profitability of firms.


Stores and spares inventory turnover

The suggested norm for the stores and spares inventory holding period should be between three and six months. But in most of the firms, the stores and spares holding period is above the suggested norms. Thus the inference that can be drawn is that there is an over investment in stores and spares on account of poor inventory management. Long lead time’s procedural delays in procurement and uncertainty about availability, particularly of imported items are the main reasons which compel the firm to have more stocks of stores and spares. Moreover, heavy initial purchases at the time of procurement of new machineries and subsequent purchases without proper assignment of the requirement are also responsible for such huge investment in stores and spares. 4.11.3 CONVERSION PERIOD OF WORK-IN-PROGRESS (WIP) Work-in-progress inventories represent product that need more work before they become finished product for sale. They are semi manufactured products. The longer the production cycles, the grater the volume of work-in-progress and vice-versa. It is calculated by dividing the WPI inventory by the cost of production and then multiplying the result by 365. The suggested norm is that the work-in-progress conversion period should be less then 15 days. But this period is abnormally high in most of the firms. This situation is the result of week inventory management and hence is liable to affect the profitability of the firms. 4.11.4 Inventory as a percentage of current asset The share of inventory in the current assets indicates how much liability of a firm is locked up in inventory. Inventory is generally ness liquid then other current asset. As such the inventory is the most nonliquid current asset. Inventory as a percentage of current asset

The quality and liquidity of current asset are largely dependent on the composition of current asset. The lower the percentage of inventory to the current assets is the greater the liquidity of current assets and viceversa. Thus a low ratio is greater then high ratio asset


In the most of the firm in India, inventory on an average, occupies about 50% of the total current assets. Such a high ratio reveals that the quality and liquidity of current asset are very low in various firms. 4.11.5Inventory as a percentage of total assets Inventory is an important element in the asset structure of an industrial under taking. As such, its share in the asset structure and the proportion if the funds invested in inventory for operational activities of the undertaking should be examined.

Inventory to total asset Studies have suggested that the ratio of inventory to total asset should be concentrated in the 16 to 30 percentage range. As against this norm, the average ratio in India is 54.4 percentages. Thus, inventory alone occupies more then half of the total assets in most of the firms. 4.11.6 INVENTORY IN TERM OF MONTHS’ COST OF PRODUCTION The main yardstick used to measure the accuracy of the inventory is the month’s value of the usage. For the purpose, the aggregate inventory is converted in to month’s value of production, the stores and spares inventory to their month’s consumption and the worked-inprogress is assessed in term month’s cost of production. Investment in inventory in term of months’ value of production is ascertain as follows

Depreciation is excluded from the cost of production as depreciation does not involve case outflows. The Tariff commission of India has suggested that the inventory in public sector enterprises should not exceed 4 to 6 months’ value of production. Against this background, it is found that most of the firms maintain a large quantity of inventory and thus a considerable overstocking exist therein. Overstocking is due to huge investment in store and spares. The management of most of the firms fear that it may not get spares in time for repair and upkeep of machineries, which situation is likely to disturb the production schedule. All these are the main reason for heavy accumulation of inventories. NUMBER OF DAYS STOCK-IN-HAND RATIO


Number of days in stock-in-hand

ratio =

The ratio measures the efficiency in selling the goods. The smaller the number of day’s stock-in-hand, the higher the efficiency in inventory management. 4.11.7RETURN PER RUPEE INVESTED RATIO Return per rupee invested ratio is by The ratio shows efficiency in management of inventory in term of profitability. The higher this ratio is the better the management. CONCLUSION The inventory turnover ratio is an important parameter used to evaluate the performance of inventory management techniques. It has a direct relationship with the profit-earning capacity of a firm. Inventory as a percentage of current asset, inventory as a percent of total asset and inventory in term of months’ value of production, are all important parameter that reflect the adequacy or otherwise of the inventory holdings. given



YEAR 2005-06 2006-07 2007-08

CURRENTASSET PERCENTAGE 1122682462 1445536182 2148380616 22.15% 27.85% 35.97%

According to this table from 2005 to 2006 total asset is 5068566335 and current asset is 1122682462 which are 22.15% of total asset. From 2006 to 2007 total asset position is 5190874943 and current asset is 1445536182 which are 27.85% of total asset. From 2005 to 2006 and from 2006 to 2007 current asset increases 5.7%. From 2007 to 2008 total asset is 5971879681 and current asset is 2148380616 which are 35.97% of total asset. If we compare 2006 to 2007 b/s and 2007 to 2008 b/s current asset increase 8.12%. From this above table we can know that current asset is very lower from total asset. Every year when total asset is increases current asset also increases.


9000000000 8000000000 7000000000 6000000000 5000000000 4000000000 3000000000 2000000000 1000000000 0 05 TO 06 06TO 07 07 TO 08









TOTAL YEAR ASSET INVENTORY PERCENTAGE 625717065 2005-06 5068566335 12.35% 759536657 2006-07 5190874943 14.63% 2007-08 5971879681 19.56% 1168153161 Total asset is divided into two parts, Such as fixed asset and current asset. Inventory is a part of current asset and total asset. In Balasore alloy from 05 to 06 total assets is 5068566335 out of that inventory is 625717065 which is 12.35% of total asset. From 06 to 07 total assets is 5190874943 out of that inventory is 759536657 which is 14.63% of total asset. From 07to 08 total assets is 5971879681 out of that inventory is 1168153161 which is 19.56% of total asset. In Balasore alloy total asset is always in increasing mode. As well as inventory is always in an increasing mode.


8000000000 7000000000 6000000000 AMOUNT 5000000000 4000000000 3000000000 2000000000 1000000000 0 05 TO 06 06TO 07 YEAR 07 TO 08 INVENTORY TOTAL ASSET

5.3COMPARISON INVENTORY YEAR 2005-06 2006-07 2007-08





CURRENTASSET INVENTORY PERCENTAGE 1122682462 1445536182 2148380616 625717065 759536657 1168153161 55.73% 52.54% 54.37%

Inventory is a part of current asset. In Balasore alloy from 05 to 06 current assets is 1122682462 out of that inventory is 625717065 which is 55.73% of current asset. From 06 to 07 current assets is 1445536182 out of that inventory is 759536656 which is 52.54% of current asset. From 07to 08 current assets is 2148380616 out of that inventory is 1168153161 which is 54.37% of current asset.


The current asset portion of Balasore alloy is always in increasing way. Similarly inventory is also in increase in an increasing mode. Inventory is above 50% of current asset.

2500000000 2000000000 AMOUNT 1500000000 1000000000 500000000 0 05 TO 06 06TO 07 07 TO 08 YEAR


5.4 Current Ratio The current ratio is used to evaluate the liquidity, or ability to meet short term debts. High current ratios are needed for companies that have difficulty borrowing on short term notice. The generally acceptable current ratio is 2:1 and the minimum acceptable ratio is 1:1 Table 5.6 Current Ratio Particulars Total Assets Current 2004 3415.69 2005 6024.35 8029.35

2006 8818.80 10824.8 0.81

2007 12955.91 14962.91 0.87

2008 16983.90 18991.90 0.89

Total Current 5419.69 Liabilities Current Ratio 0.63


Current Ratio
0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00



3 Year



Analysis The table above gives an overall picture of ability of Balasore Alloys Limited to meet its short tem obligations. It is found that out of five years of our study, the company is unable to meet the standard current ratio.


However, the overall liquidity position is improving from 0.63 in the year 2004 to 0.89 in the year 2008 gradually. Interpretation As the company is unable to maintain the minimum acceptable norm (1:1) of current ratio over the period of study, it can be said that the liquidity position is unsatisfactory in Balasore Alloys Ltd.

5.5 Quick Ratio

Sometimes a company could be carrying heavy inventory as part of its current assets, which might be obsolete or slow moving. Thus eliminating inventory from current assets and then doing the liquidity test is measured by this ratio. The ratio is regarded as an acid test of liquidity for a company. It expresses the true 'working capital' relationship of its cash, accounts receivables, prepaids and notes receivables available to meet the company's current obligations. Table 5.7 Quick Ratio Particulars Quick Assets Total Liabilities 2004 1794.4 1 Current 5419.6 9 2005 2449.6 7 8029.3 5 2006 4003.41 10824.8 0 2007 6127.23 14962.9 1 2008 7837.49 18991.90


Quick Ratio






Qu ick Ra io t

00 .5 00 .4 00 .3 00 .2 00 .1 00 .0






From the table it is clear that though the quick ratio position is developing from 0.33 to 0.41 over the period of our study, but it is far from satisfactory. None of the year reaches normal standard of 1:1.


5.6 Inventory turnover ratio
The inventory turnover ratio measures the number of times a company sells its inventory during the year. A high inventory turnover ratio indicated that the product is selling well and vice-versa. It is calculated as follows: The table shows that in the year 2004 the company’s Inventory turnover Ratio was 6.75, but gradually it deteriorated and reached at 2.46 in the year 2008. This adverse trend of ITR may be attributed to the accumulation of inventory and slow sale of products due to global recessionary movement.


Table 5.9: Inventory Turnover Ratio Particulars Cost of Goods Consumed Opening stock Closing stock Average Stock Inventory Ratio ITR in Days Turnover 2004 5740.6 1 574.6 1125.4 1 850.01 6.75 54.05 2005 9591.0 9 1125.4 1 2588.6 7 1857.0 4 5.16 70.67 2006 10287.9 6 2588.67 4065.63 3327.15 3.09 118.04 2007 12045.3 0 4065.63 6128.58 5097.11 2.36 154.45 2008 17248.54 6128.58 7886.56 7007.57 2.46 148.29


MONTH NOV' 08 DEC' 08 JAN' 09 FEB' 09 MAR' 09 APR' 09

PRODUCTION QTY 7370.66 7197.46 7036.16 6722.72 6372.38 6021.18

In this above table it is clear that from November 08 to April 09 the production quantity of Balasore alloy LTD is decreases. It can be shown by a graph as follows


PRODUCTION QTY quantity in mt 8000 6000 4000 2000 0
'0 8 JA N '0 9 FE B '0 9 M A R' 09 A PR '0 9 O V' EC 08







PRODUCTION In this above table it is clear that raw material is more then half of other item of cost of production. It is defined bellow by a pie chart.


32 1 7 2 14



INVENTORY ANALYSIS FOR LAST SIX MONTHS NAME OF MATERIAL NOV'08 DEC'08 JAN'09 FEB'09 MAR'09 APR'09 QTY (MT) QTY QTY QTY QTY QTY 3034 QUARTZ 2245 2036 1954 1863 1854 5831 L A M COKE 5542 4346 3491 3345 3117 279 C I L COKE 186 174 115 112 98 172 E.C.PASTE 154 147 134 123 112 4333 DOLOMITE 3412 2768 2215 1920 1426 2216 ANTHR.COAL 1938 1557 945 815 719 23 MILL SCALE 14 12 8 5 2 23 BAUXITE 19 19 14 11 7 230 MAGNASITE 187 165 115 83 74 MANGANESE ORE 110 DUMP 110 110 110 110 110



10 203139 2841 11899 234140

10 195893 2364 9584 221658

10 126868 1956 8645 148813

10 118572 1526 7325 136534

10 98503 912 6254 114066

10 78183 803 5412 91929

From this above table we know that closing stock of raw material of Balasore alloy is not constant except manganese ore dump and high MNO slag. The total raw material position of Balasore Alloy LTD is always in a decreasing mode shown by a diagram bellow:
TOTAL 250000 200000 150000 TOTAL 100000 50000 0 NOV'08 DEC'08 JAN'09 FEB'09 MAR'09 APR'09

From is above diagram X axis stands for month and Y axis stands for unit in metric tone.

Analysis From the above diagram it is clear that Balasore Alloy Ltd. in November 08 to April 09 closing stock position is always in a decreasing mode. The raw material position is sloping down ward.


QUARTZ From this above table in November 08 closing stock of quartz is 3034 MT after that it decreases in a decreasing mode. It can be shown through a diagram:
QUARTZ QUARTZ QUANTITY MT 4000 3000 2000 1000 0 QUARTZ NOV'08 3034 DEC'08 2245 JAN'09 2036 FEB'09 1954 MAR'09 1863 APR'09 1854 3034 2245 2036 1954 1863 1854


From is above diagram X axis stands for month and Y axis stands for unit in metric tone. Analysis


When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

L A M COKE From this above table in November 08 closing stock of lam cock is 3034 MT after that it decreases in a decreasing mode. . It can be shown through a diagram.
L A M COKE 7000 6000 QUANTITY IN MT 5000 4000 3000 2000 1000 0 L A M COKE NOV'08 5831 DEC'08 5542 JAN'09 4346 FEB'09 3491 MAR'09 3345 APR'09 3117 4346 3491 3345 3117 5831 5542 NOV'08 DEC'08 JAN'09 FEB'09 MAR'09 APR'09


From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

C I L COKE From this above table in November 08 closing stock of cil cock is 3034 MT after that it decreases in a decreasing mode. It can be shown through a diagram.

C I L COKE 300 QUANTITY in MT 250 200 150 100 50 0 C I L COKE NOV'08 279 DEC'08 186 JAN'09 174 FEB'09 115 MAR'09 112 APR'09 98 186 174 115 112 98




From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

E.C.PASTE From this above table in November 08 closing stock of e.c paste is 3034 MT after that it decreases in a decreasing mode. It can be shown through a diagram.
E.C.PASTE 200 172 QUANTITY in MT 150 100 50 0 E.C.PASTE 154 147 134 123



NOV'08 172

DEC'08 154

JAN'09 147

FEB'09 134

MAR'09 123

APR'09 112


From is above diagram X axis stands for month and Y axis stands for unit in metric tone. Analysis


When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

DOLOMITE From this above table in November 08 closing stock of DOLOMITE is 3034 MT after that it decreases in a decreasing mode. It can be shown through a diagram.
DOLOMITE 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 NOV'08

4333 3412 2768 2215 1920 1426 DOLOMITE








From is above diagram X axis stands for month and Y axis stands for unit in metric tone. Analysis


When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

ANTHR COAL From this above table in November 08 closing stock of anthra coal is 2216 MT after that it decreases in a decreasing mode. It can be shown through a diagram.
ANTHR.COAL 2500 2216 2000 QUANTITY 1500 1000 500 0 NOV'08 DEC'08 JAN'09 FEB'09 MAR'09 APR'09 MONTH 1938 1557 ANTHR.COAL 945 815 719

From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

MILL SCALE From this above table in November 08 closing stock of mill scale is 23 MT after that it decreases in a decreasing mode.
MILL SCALE 25 20 quantity 15 10 5 0 MILL SCALE 14 23

12 8 5 2


NOV'08 DEC'08 JAN'09 FEB'09 MAR'09 APR'09 23 14 12 month 8 5 2

From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

BAUXITE From this above table in November 08 closing stock of bauxite is 23 MT after that it decreases in a decreasing mode. It can be shown through a diagram.

BAUXITE 25 20 quantity 15 10 5 0 BAUXITE NOV'08 23 DEC'08 19 JAN'09 19 month FEB'09 14 MAR'09 11

23 19 19 14 11 7 BAUXITE

APR'09 7


From is above diagram X axis stands for month and Y axis stands for unit in metric tone. Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

MAGNASITE From this above table in November 08 closing stock of magnesite is 230 MT after that it decreases in a decreasing mode. It can be shown through a diagram:
MAGNASITE 250 200 quantity 150 100 50 0 MAGNASITE NOV'08 DEC'08 230 187 JAN'09 165 FEB'09 MAR'09 APR'09 115 83 74 230 187 165 115 83 74 MAGNASITE


From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

MANGANESE ORE DUMP From this above table we can know that MANGANESE ORE DUMP closing stock is same for all month. It can be shown through a diagram:
MANGANESE ORE DUMP 120 100 quantity 80 60 40 20 0 NOV' DEC'0 JAN'0 FEB'0 MAR' APR' 08 8 9 9 09 09 110 110 110 110 110 110 MANGANESE ORE DUMP 110 110 110 110 110 110



From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis MANGANESE ORE DUMP use in Balasore alloy LTD is not continuously. From November to December they don’t use manganese ore dump. So its closing stock is constant.

HIGH MNO SLAG From this above table we can know that HIGH MNO SLAG closing stock is same for all month. It can be shown through a diagram
HIGH MNO SLAG 12 10 quantity 8 6 4 2 0 NOV'08 DEC'08 JAN'09 FEB'09 MAR'09 APR'09 HIGH MNO SLAG 10 10 10 10 10 10 HIGH MNO SLAG 10 10 10 10 10 10


From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis HIGH MNO SLAG use in Balasore alloy LTD is not continuously. From November to December they don’t use HIGH MNO SLAG. So its closing stock is constant.

ISPAT CHROME FINES From this above table in November 08 closing stock of ISPAT CHROME FINES is 203139 MT after that it decreases in a decreasing mode. It can be shown through a diagram:
ISPAT CHROME FINES 250000 200000 quantity 150000 100000 50000 0 203139 195893 126868 118572 98503 ISPAT CHROME FINES 78183

NOV'0 MAR'0 DEC'08 JAN'09 FEB'09 APR'09 8 9 78183

203139 195893 126868 118572 98503 ISPAT CHROME FINES month

From is above diagram X axis stands for month and Y axis stands for unit in metric tone.


Analysis When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases. .

CHROME ORE LUMPS From this above table in November 08 closing stock of CHROME ore lumps is 203139 MT after that it decreases in a decreasing mode. It can be shown through a diagram:
CHROME ORE LUMPS 3000 2500 quantity 2000 1500 1000 500 0 2841 2364 1956 1526 912 803 CHROME ORE LUMPS

NOV'0 DEC'0 JAN'0 FEB'0 MAR'0 APR'0 8 8 9 9 9 9 2364 1956 1526 912 803



From is above diagram X axis stands for month and Y axis stands for unit in metric tone. Analysis


When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases.

ISPAT CHROME BRQT From this above table in November 08 closing stock of ISPAT CHROME brqt is 11899MT after that it decreases in a decreasing mode. It can be shown through a diagram
ISPAT CHROME BRQT 15000 11899 quantity 10000 5000 0 9584 8645 7325 6254 ISPAT CHROME BRQT 5412

NOV'0 MAR'0 DEC'08 JAN'09 FEB'09 APR'09 8 9 9584 8645 7325 6254 5412



From is above diagram X axis stands for month and Y axis stands for unit in metric tone. Analysis


When production is decreases automatically consumption of goods is decreases. And purchase of material is decrease. So closing stock is decreases. CONCLUSION From this above analysis it is clear that in Balasore alloy they follow just-in-time inventory management system. They have no ordering level, minimum stock level etc. for which the closing stock of raw material changes every month. Due to rescission period the production of BAL decreases from November 08 to April 09, for which inventory of BAL decreases.

ITEM S LAM C ANTHRACIT E CIL COKE EC PASTE 1849 126 1311 156 834 101 1385 157 2060 139 2070 169 2585 2482 3613 3046 2379 5546 DEC JAN FEB MAR APR MAY

Quartz Dolomite Magnetite Chrome Ore Lump IAL BRQT IAL CHIPS/FINES CHROME ORE LUMPY

120 2775 2325 157 0
16445 2030

120 2775 2325 224 0
16646 1990

120 2775 2325 225 0
16299 2223

120 2288 2177 225 0
16416 1884

120 2288 1877 225 237
16613 1588

145 2288 1877 225 246
16317 1792







From this above table we know that in every month for standard production the raw material quantity is changed. The standard production capacity of Balasore alloy is 7500. In December LAMC is 2585, jan 2482, feb 3613, mar 3046, apr 2379 and in may 5546. Like LAMC, anthracite, cil coke, EC paste,


quartz, dolomite, magnetite, chrome ore lump, IAL brqt, ial chips/fines, s.mineral, saranga are also changed. It can see by a graph bellow:

In this diagram X axis stands for month and Y axis stands for quantity in month.

Interpretation: In this above graph it is clear that every month the standard consumption of raw material changes. This change is made in every month. Cause Balasore alloy LTD produces 4 quality products. These are FeCr-58.5% P 0.04, FeCr-56% P 0.03, and FeCr-60% P 0.04. For every quality of production of finished goods are changes according to customers demand. So every month the raw material consumption position is changes.



6.1SUGGESTION  Balasore alloy LTD should maintain same level of closing stock for every month.  They should maintain minimum stock level there fore the production can’t stop in any situation.


From the above research I know that the inventory management system Of Balasore alloy LTD is very good.
 They always follow just-in-time Purchase technique.  According to market situation they purchase materials and

Produce their finished product.
 Their purchase technique of raw material, store and Spare are

very nice.
 After proper verification of everything they purchase their

materials.  They maintain their store very carefully


 Their inventory investment is good. Every month they maintain

inventory more then 50% of current asset.


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