A PROJECT REPORT ON

INVENTORY MANAGEMENT SYSTEM A STUDY OF JOHNSON & JOHNSON LTD.

Submitted By: Padam Nabh
Roll No.9929 Master of Management (Batch 2009-11) UNDER THE GUIDANCE OF: Dr. Bimal Anjum, H.O.D.Business Administration.

RIMT-IET, MANDI GOBINDGARH

ACKNOWLEDGEMENT
I have prepared this study paper for the “Inventory

Management System – A Study of Johnson & Johnson Ltd”. I have derived the contents and approach of this study paper through discussions with company executives and internet as well as with the help of various Books, Magazines and Newspapers etc. I would like to give my sincere thanks to a host of Company Executive, friends and the teachers 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.

II * Data Collection * Financial Statements * Data Analysis and Interpretation * Problems and Suggestions * Conclusions * Bibliography .Contents PART.I *Objective of the Study *Introduction of Company * Company Profile * History * Board of Directors * Awards * Products * Guiding Principles of Company * Structure of the Company * Research Methodology * Introduction of the Topic PART.

we include raw materials. Management of inventory is designed to regulate the volume of investment in goods on hand. In inventory. To maintain the continuity in the operations of business enterprise. the types of goods carried in stock to meet the needs of production and sales while at the same time. finished goods.OBJECTIVE OF THE STUDY Inventories constitute the principal item in the working capital of the majority of trading and industrial companies. the investment in them is to kept at a reasonable level. a minimum stock of inventory required. supplies and other accessories. 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. . However. work in progress.

. J&J had worldwide pharmaceutical sales of $24.S. . with some exceptions. Johnson & Johnson is known for its corporate reputation.6 billion for the full-year 2008. consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's most respected company by Barron's Magazine. Johnson & Johnson is known for its corporate reputation. Johnson &Johnson is a holding company. Its products are sold in over 175 countries. This Committee oversees and coordinates the activities of the Consumer. which has more than 250 operating companies conducting business in virtually all countries of the world. State Department for its funding of international education programs. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. managed by citizens of the country where it is located. United States. The corporation includes some 250 subsidiary companies with operations in over 57 countries. consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's most respected company by Barron's Magazine. Johnson & Johnson’s primary focus has been on products related to human health and wellbeing.S. The Company’s structure is based on the principle of decentralized management. Pharmaceutical and Medical Devices and Diagnostics business segments.Company Profile Johnson & Johnson and its subsidiaries have approximately 115. Each subsidiary within the business segments is. and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U. State Department for its funding of international education programs The corporation's headquarters is located in New Brunswick.500 employees worldwide engaged in the research and development. New Jersey. Johnson & Johnson was incorporated in the State of New Jersey in 1887. Its consumer division is located in Skillman. New Jersey. and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U. manufacture and sale of a broad range of products in the health care field.

RoC. ZYRTEC allergy products. Key products in the Pharmaceutical segment include: REMICADE (infliximab). The Baby Care franchise includes the JOHNSON’S Baby line of products. a long-acting inject able for the treatment of schizophrenia. oral care. LEVAQUIN (levofloxacin) in the anti-infective field. skin care.Segments of Business Johnson & Johnson’s operating companies are organized into three business segments: Consumer. a biotechnology-derived product that stimulates red blood cell production. and wellness and prevention platforms. hematology.S. a biologic approved for the treatment of a number of immune mediated inflammatory diseases. and PEPCID AC Acid Controller from Johnson & Johnson • Merck Consumer Pharmaceuticals Co. neurology. SUDAFED cold. MOTRIN IB ibuprofen products. urology and virology. wound care and women’s health care fields. flu and allergy products. Consumer The Consumer segment includes a broad range of products used in the baby care. RISPERDAL CONSTA (risperidone). and Vania Expansion products. The Wound Care franchise includes BAND-AID brand adhesive bandages and PURELL instant hand sanitizer products. These products are distributed directly to retailers. and Vendôme product lines. immunology. The Oral Care franchise includes the LISTERINE and REACH oral care lines of products. CLEAN & CLEAR. PROCRIT (Epoetin Alfa. JOHNSON’S Adult. the broad family of TYLENOL acetaminophen products. gastrointestinal. STAYFREE sanitary protection products. NEUTROGENA. No Calorie Sweetener. cardiovascular. dermatology. contraceptive. Pharmaceutical and Medical Devices and Diagnostics. oncology. Dabao. wholesalers and health care professionals for prescription use. . The nutritional and over-the-counter lines include SPLENDA . Pharmaceutical The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective. pain management. sold outside the U. Major brands in the Skin Care franchise include the AVEENO. antipsychotic. Major brands in the Women’s Health franchise are the CAREFREE Pantiliners. as well as nutritional and over-the-counter pharmaceutical products. LUBRIDERM. as EPREX). These products are marketed to the general public and sold both to retail outlets and distributors throughout the world.

Ethicon’s surgical care. Ethicon EndoSurgery’s minimally invasive surgical products. VELCADE (bortezomib). and Vistakon’s disposable contact lenses. The products made and sold in the international business include many of those described above under “— Segments of Business — Consumer.” However. . aesthetics and women’s health products.CONCERTA (methylphenidate HCl). The products sold in international business include not only those developed in the United States. DURAGESIC /Fentanyl Transdermal (fentanyl transdermal system. a once-daily atypical antipsychotic.”“— Pharmaceutical” and “— Medical Devices and Diagnostics. but also those developed by subsidiaries abroad. the principal markets.S. activities because the investment and commercial climate is influenced by restrictive economic policies and political uncertainties. therapists. PREZISTA (darunavir) for the treatment of HIV/AIDS patients. Ortho-Clinical Diagnostics’ professional diagnostic products. spinal care and sports medicine products. a proton pump inhibitor co-marketed with Eisai Inc.DePuy’s orthopaedic joint reconstruction. LifeScan’sblood glucose monitoring and insulin delivery products. and INVEGA (paliperidone). a treatment for chronic pain that offers a novel delivery system. These products include Cordis’ circulatory disease management products. a product for the treatment of attention deficit hyperactivity disorder. Geographic Areas The international business of Johnson & Johnson is conducted by subsidiaries located in 59 countries outside the United States. used principally in the professional fields by physicians. products and methods of distribution in the international business vary with the country and the culture. which are selling products in virtually all countries throughout the world. ACIPHEX /PARIET . Distribution to these health care professional markets is done both directly and through surgical supply and other dealers. Investments and activities in some countries outside the United States are subject to higher risks than comparable U. Medical Devices and Diagnostics The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers. a product for the treatment for multiple myeloma. as DUROGESIC ). nurses.. hospitals and retailers. sold outside the U. hospitals. diagnostic laboratories and clinics.S.

the patents related to this product are believed to be material to Johnson & Johnson. These trademarks are protected by registration in the United States and other countries where such products are marketed. They own or are licensed under a number of patents relating to their products and manufacturing processes.7% and 37. Sales of the Company’s largest product. Food and Drug Administration (“FDA”). RISPERDAL ® (risperidone) oral and TOPAMAX ® (topiramate) lost basic patent protection and market exclusivity and became subject to generic competition in the United States and international markets. accounted for approximately 7% of Johnson & Johnson’s total revenues for fiscal 2009.Raw Materials Raw materials essential to Johnson & Johnson’s operating companies’ businesses are generally readily available from multiple sources. TOPAMAX ® lost market exclusivity in March 2009 and sales declined by 57. REMICADE ® (infliximab). Patents and Trademarks Johnson & Johnson and its subsidiaries have made a practice of obtaining patent rotection on their products and processes where possible. Accordingly. and both local and global.8% in 2009 and 2008. located throughout the world. Johnson & Johnson’s operating companies have made a practice of selling their products under trademarks and of obtaining protection for these trademarks by all available means. Johnson & Johnson’s operating companies compete with companies both large and small. involving the development and the improvement of new and existing products and processes. Johnson & Johnson considers these trademarks in the aggregate to be of material importance in the operation of its businesses.9% as compared to 2008. Competition in research.5% of the Company’s 2009 sales. The next significant patent scheduled to expire on December 20. The development of new and innovative products is important to Johnson & Johnson’s success in all areas of its business. A pediatric extension for LEVAQUIN ® was granted by the U. The competitive environment requires substantial investments in continuing research and in . which extends market exclusivity in the United States through June 20. Competition In all of their product lines. RISPERDAL ® oral sales declined by 57. 2011. This also includes protecting the Company’s portfolio of intellectual property. During 2007 through 2009. which in the aggregate are believed to be of material importance to Johnson & Johnson in the operation of its businesses. respectively. 2010 is for LEVAQUIN ® (levofloxacin).S. Competition exists in all product lines without regard to the number and size of the competing companies involved. which accounted for 2. is particularly significant.

Johnson & Johnson’s compliance with these requirements did not during the past year. amounted to $7. earnings or competitive position. respectively. diagnostics and cosmetic industries have long been subject to regulation by various federal and state agencies. Regulation Most of Johnson & Johnson’s businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted. In the United States. Singapore and the United Kingdom. Canada. improvement of existing products. and the general trend is toward increasingly stringent regulation. These costs are harged directly to expense. India.maintaining sales forces. or directly against income. labeling and safety reporting. China.7 billion for fiscal years 2009. have a material effect upon its capital expenditures. The exercise of broad regulatory powers by the FDA continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction.S. in the year in which incurred. the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion. cash flows. Environment Johnson & Johnson’s operating companies are subject to a variety of U. Similar trends are also evident in major markets outside of the United States. and international environmental protection measures. Johnson & Johnson believes that its operations comply in all material respects with applicable environmental laws and regulations. efficacy. the drug. The costs of human health care have been and continue to be a subject of study. but also in Belgium. technical support of products and compliance with governmental regulations for the protection of consumers and patients (excluding purchased in-process research and development charges for fiscal 2008 and 2007).0 billion. 2008 and 2007. France. primarily as to product safety. Brazil. Japan. Germany. Research and Development Research activities represent a significant part of Johnson & Johnson’s subsidiaries’ businesses. Major research facilities are located not only in the United States. $7.6 billion and $7. and is not expected to. Israel. device. The costs of worldwide Company sponsored research activities relating to the development of new products. investigation and regulation by governmental agencies and . manufacturing. In addition. advertising. the Netherlands.

4 million square feet of floor space.369 8. appropriate drug and medical device utilization and the quality and costs of health care.445 Within the United States.legislative bodies around the world. In addition. seizure of products and other civil and criminal sanctions. recalls. use or purchase particular medical devices. by government agencies and state attorneys general. 7 facilities are used by the Consumer segment. The manufacturing facilities are used by the industry segments of Johnson & Johnson’s business approximately as follows: Available Information Square Feet (in Segment thousands) Consumer Pharmaceutical Medical Devices and Diagnostics Worldwide Total 6. attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend. The regulatory agencies under whose purview Johnson & Johnson’s operating companies operate have administrative powers that may subject those companies to such actions as product withdrawals. Johnson & Johnson’s operating companies may deem it advisable to initiate product recalls.825 6. 12 by the Pharmaceutical segment and 37 by the Medical Devices and Diagnostics segment. In the United States. and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties. PROPERTIES Johnson & Johnson and its subsidiaries operate 143 manufacturing facilities occupying approximately 21. business practices in the health care industry have come under increased scrutiny. In some cases. Payers have become a more potent force in the market place and increased attention is being paid to drug and medical device pricing. particularly in the United States. Johnson & Johnson’s manufacturing operations outside the United States are often conducted in facilities that serve more than one business segment.251 21. .

At the annual meeting of the Board of Directors.445 EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the executive officers of Johnson & Johnson as of February 8. Asia and Pacific 33 Worldwide Total 143 (Square Feet in thousands) 7. Information with regard to the directors of the Company.489 7. or until earlier resignation or removal.372 3. and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.S.The locations of the manufacturing facilities by major geographic areas of the world are as follows: Geographic Area Number of Facilities United States 56 Europe 38 Western Hemisphere. has been an employee of the Company or its affiliates and held the position indicated during the past five years.336 3. . is incorporated herein by reference to the material captioned “Election of Directors” in the Proxy Statement. including those of the following executive officers who are directors. 16 Africa. the executive officers are elected by the Board to hold office for one year and until their respective successors are elected and qualified. unless otherwise indicated below.248 21. 2010. each of whom. There are no family relationships between any of the executive officers. excluding U.

Medical Devices and Diagnostics Group (d) Sherilyn S. Vice President. Board of Directors. Chief Executive Officer History Robert Wood Johnson. The company produced its first products in 1886 and incorporated in 1887. RWJ's granddaughter.Name & Position Dominic J. inspired by a speech by antisepsis advocate Joseph Lister. Human Resources and General Counsel (b) Colleen A. Worldwide Chairman. made a documentary called Born Rich about the experience of growing up as the heir to one of the world's greatest fortunes. Worldwide Chairman. Goggins Member. Worldwide Chairman. Mary Lea Johnson Richards. Chairman. Robert Wood Johnson II. was the first baby to appear on a J&J baby powder label. joined brothers James Wood Johnson and Edward Mead Johnson to create a line of ready-to-use surgical dressings in 1885. Finance. Deyo Member. Executive Committee. New Jersey. Executive Committee. Executive Committee. Executive Committee. Upon his death in 1910. and lent his name to a hospital in New Brunswick. He worked to improve sanitation practices in the nineteenth century. and then by his son. Executive Committee. Robert Wood Johnson served as the first president of the company. Caruso Member. . Jamie Johnson. Weldon Chairman. Executive Committee. McCoy Member. he was succeeded in the presidency by his brother James Wood Johnson until 1932. Consumer Group(c) Alex Gorsky Member. Vice President. Pharmaceuticals Group (e) William C. Chief Financial Officer (a) Russell C. His great-grandson.

Inc. general surgery. innovation. and a commitment to improving the quality of patients’ lives. Almost a century later. Along with Gatorade. and Janssen Pharmaceutical.recognized the opportunity for limitless innovation. Johnson & Johnson is one of the founding sponsors of the National Athletic Trainers' Association. pioneered our sutures to enhance the work of surgeons and the lives of patients . women’s health. Johnson & Johnson has purchased Pfizer's Consumer Healthcare department. biosurgery. vision. and Internet publishing.Since the 1900s. Cilag. It added consumer products in the 1920s and created a separate division for surgical products in 1941 which became Ethicon. We have continuously introduced innovations in all areas where we focus our expertise including: wound closure. Johnson & Johnson has been consistently named one of the 100 Best Companies for Working Mothers by Working Mother. orthopedic devices. In recent years. the company has pursued steady diversification. who thought about healing in a new way . Johnson & Johnson has expanded into such diverse areas as biopharmaceuticals. and aesthetic medicine. Recently. 2006. one thing has not: Ethicon remains committed to developing the best surgical solutions to help doctors heal both the wounds you can see and the ones . While a lot has changed in healthcare. Ethicon produces much more than sutures. It expanded into pharmaceuticals with the purchase of McNeil Laboratories.. The first group of Ethicon scientists and researchers.and in doing so. About Ethicon (Brand Name) Our company was founded 80 years ago on the pillars of research. The transition from Pfizer to Johnson and Johnson was completed December 18. and into women's sanitary products and toiletries in the 1970s and 1980s.

Our commitment to fulfilling the needs of surgeons and their patients. Our 119. we’re guided by Our Credo: company values that empower all of our employees to consider first the needs of our customers and patients we serve and to improve the health. Ethicon has a legacy all its own. Innovations that Restore Bodies.you can’t. one person at a time… inspires and unites the people of Johnson & Johnson. education. products and services to advance the health and wellbeing of people. throughout the world. How do we do it? How do we stay on the cutting edge of science? By way of our greatest asset: the talented. highly educated. Suture Manufacturing Plants in India ..8. Caring for the world. of helping patients heal faster and more safely is never ending. experienced group of professionals who work at ETHICON . As a member of the Johnson & Johnson Family of Companies.and Lives. too. innovate.bringing innovative ideas. too.. And so our work must be. But we’re part of a broader heritage. and respond to their customers’ needs.500 gifted professionals around the world come together every day to advance. and quality of life in the communities where we work and live. of transforming surgery.400 employees at more than 250 Johnson & Johnson companies work with partners in healthcare to touch the lives of over a billion people every day. We embrace research and science .

Baddi Aurangabad Growth & Expansion Of Johnson & Johnson .

Since our founding in 1886. and the community. • In 1944 we became a publicly traded company. and Brazil. • We introduced MODESS sanitary napkins and JOHNSON’S Baby Oil and Baby Lotion.S. outlining our responsibilities to doctors. our founders – Robert Wood Johnson. which helped save the lives of patients. Ireland. • Our disaster relief program began in 1906 when. in 1931. Switzerland. employees. patients. Belgium. Argentina. James Wood Johnson and Edward Mead Johnson – started a small medical products company in New Brunswick. 1926 – 1946: Growth of Product Lines and Expansion Overseas Help Johnson & Johnson Go Public In 1943 our chairman Robert Wood Johnson wrote Our Credo. sanitary napkins for women. ORTHO GYNOL Gel. . within hours of the San Francisco earthquake and fire. Australia. we have grown to meet the health care needs of people worldwide. and BAND-AID Brand Adhesive Bandages. JOHNSON’S Baby Powder. Through mergers. 1886 – 1926: Johnson & Johnson Founded With Surgical and Wound Care Products In 1886. nurses. We also launched the first U. acquisitions and the formation of new companies. France. They made the first-ever commercial sterile surgical dressings. consumers. • We introduced dental floss. prescription birth control product. During this period we also continued our overseas growth and began to broaden our efforts in pharmaceuticals and medical products. the first Aid kits. we have become the world’s largest and most broadly based health care company. Here are some highlights of our historical growth. • Our international expansion began with Canada in 1919 and England in 1924. New Jersey. South Africa. we sent trainloads of our products to the city to help survivors. 1946 – 1966: Continued Product Growth and Our Credo Position Johnson & Johnson as Responsible Industry Leader. sterile sutures. • We expanded into Mexico.

the Netherlands. • VICRYL Synthetic absorbable sutures.• • • • • • • We steadily continued our growth during these decades. In 1963 Ortho Pharmaceutical began marketing its first birth control pill.G. (medical and surgical instruments). • MONISTAT (miconazole nitrate) Cream. the pioneer in disposable contact lenses. We introduced a wide range of groundbreaking products during these decades including: • RhoGAM a life saving treatment for hemolytic disease in newborns. India.. the Philippines. • HALDOL (haloperidol). a new way to close surgical incisions without sutures. . the first therapeutic monoclonal antibody to treat the rejection of transplanted organs. Inc. and Janssen Pharmaceutical. Personal Products Company (products related to women’s health). We expanded to Zimbabwe. an important new tool for surgeons. Inc. (bringing us TYLENOL acetaminophen). McNeil Laboratories. Sweden. Colombia. European pharmaceutical companies Cilag Chemie. Scotland. Zambia. Puerto Rico. A. and Codman & Shurtleff. 1966 – 1986: Medical Advances Create Groundbreaking Products Our operating companies pioneered several important medical advances during this period. the gold standard for treating schizophrenia for over 25 years. Italy. ORTHO-NOVUM 10 mg. • The PROXIMATE Linear Stapler. Austria. Malaysia and Portugal. Venezuela. • ORTHOCLONE OKT3. New companies formed or acquired included: ETHICON. a milestone product for women’s health. The acquisition of Frontier Contact Lenses would grow into our vision care business. Pakistan. Inc. In 1985 we expanded to China.

Inc. Inc. in the years to come. • The acquisition of DePuy. • We formed Ortho Biotech Products. We are arguably . the first coronary stent and the first drug eluting stent. Our people come to work each day inspired by their personal knowledge that their caring transforms people's lives. Our whole history has been based on their passion for making a difference in this world and we aspire. Neutrogena Corporation. • Through our operating companies. (minimally invasive surgery) out of internal businesses. (blood glucose monitors for diabetics). and skin care brands such as CLEAN & CLEAR.1986 – 2008: Industry Leadership Enhanced by Acquisitions and Internal Development From the 1980s to the present. • Prescription medications we introduced during this period include: • PROCRIT/EPREX (Epoetin Alfa) • RISPERDAL (risperidone) • RAZADYNE (galantamine hydro bromide) • PREZISTA (darunavir) • INVEGA (paliperidone) Extended Release Tablets • INTELENCE (etravirine) Looking to the Future Johnson & Johnson is dedicated to advancing the health and well-being of people around the world. to take human health and well-being to new levels. • We merged with Centocor. we introduced the first mass market disposable contact lenses. we continue to grow through acquisitions and internally developed businesses that give us leadership positions in a number of areas. • We acquired Life Scan. LP (a biotechnology pioneer) and Ethicon Endo-Surgery. which brought us REMICADE (infliximab). Inc. RoC and AVEENO. made us a world leader in orthopedics. Inc.

IT department 7. financial strength and collaborative nature. 1948. R&D Department 8. HR/ Personnel department 2. Purchase departments 4. Store department 5. Accounts departments 3. The company has well defined structure .It have the following departments: 1. STRUCTRE OF THE COMPANY Johnson & Johnson Ltd.the best-positioned company to do this because of our breadth. act upon the rules & regulations of the Companies Act. Sales & Excise department . Quality Assurance & Quality Control 6.

Analyzing of inventory. In this manner. J&J invests about 60%of total assets inventory should be analyzed their records. minimum & maximum levels of inventory. Objective of research study is Analysis of inventory of Johnson & Johnson Ltd. The data collection of inventory for analysis by the . Working hypothesis of the objective is that inventories are the stock piles of goods . we should analyze the annual investment in inventories.The all organization on their inventories. Finished goods inventory & 4. Supplies inventory. we calculate reorder point.RESEARCH METHODOGY Research methodology is the way to systematically solve the research problem. safety stock levels. Raw materials inventory. The analysis of inventory according to their data available in the company. Work in progress inventory. 2. we determining following inventories-1. In this section of inventories. Valuation of inventory after closing balance of items in inventory. 3.

INTRODUCTION OF THE TOPIC INTRODUCTION: Inventories constitute the most significant part of current assets of a large majority of companies in India. without any adverse effect on production and sales. inventories are approximately 60% of current assets in public limited companies in India. a considerable amount of feuds is required to be committed to them. We went to the all inventories as raw material. absolutely imperative to ménage inventories efficiently and efficiently in order to avoid unnecessary investment. work in progress inventory. We should record primary and secondary data by the helps of assistants ledger books M R N etc. by using simple . Because of the large size of inventories maintained by firms. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. It is possible for fore a company to reduce its levels of inventories to a considerable degree e.g. It is therefore. finished goods inventory by the proper observation of data’s of the company. 10 to 20 percent.direct store department. On an average.

work-in-progress and stores etc.inventory planning and control techniques. The reduction in excessive inventory carries a favorable impact on a company’s profitability. In accounting language it may mean stock of finished goods only. In a manufacturing concern. NATURE OF INVENTORIES:Inventories are stock of the product a company is manufacturing for sale and components that make up the product. MEANING OF INVENTORY:Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In the form of materials or supplies to be consumed in the production process or in the rendering of services. RAW MATERIALS:- . it may include raw materials. In brief. work in progress and finished goods. The various forms in which inventory exist in a manufacturing company are raw materials. Inventory is unconsumed or unsold goods purchased or manufactured.

therefore they carry large inventories. On the other hand. Thus. Within manufacturing firms. inventories of a consumer product company will not be large. While stock of finished goods is required for smooth marketing operation. inventories serve as a link between the production and consumption of goods. while a retail or wholesale firm will have a very high and no raw material and work in progress inventories.Raw materials are those inputs that are converted into finished product though the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions. WORK IN PROGRESS:These inventories are semi manufactured products. because of short production cycle and . They represent products that need more work before they become finished products for sales. FINISHED GOODS:Finished goods inventories are those completely manufactured products which are ready for sale. The levels of three kinds of inventories for a firm depend on the nature of its business. Large heavy engineering companies produce long production cycle products. there will be differences. A manufacturing firm will have substantially high levels of all three kinds of inventories. Stock of raw materials and work in progress facilitate production.

These materials do not directly enter production. a sophisticated system of inventory control may not be maintained for them. bulbs etc. light. but are necessary for production process. fuel.fast turn over. Usually. In brief. first. to provide the right quantity of standard raw material to the production department at the right time. SUPPLIES: It includes office and plant cleaning materials like soap. and second. the avoidance over-investment or under-investment in inventories. the objectives of inventory control may be summarized as follows: A. oil. Firms also maintain a fourth kind of inventory.Operating Objectives: . brooms. supplies or stores and spares. OBJECTIVES MANAGEMENT OF INVENTORY The basic managerial objectives of inventory control are twofold. Therefore. these supplies are small part of the total inventory and do not involve significant investment.

(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. theft. Leakage. (4) to Avoidance of Out of Stock Danger: Information about the management so that they can do planning for availability of materials should be made continuously available procurement of raw material. To avoid any abnormal wastage. bust should be avoided.(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. Wastage should be allowed up to a certain level known as normal wastage. (3) type Promotion of Manufacturing Efficiency: If the right of raw material is available to the manufacturing departments at the right time. their manufacturing efficiency is also increased. embezzlements of raw material and spoilage of material due to rust. Their motivation level rises and morale is improved. A minimum quantity of each material should be held in store to permit production to move on schedule. strict control over the inventory should be exercised. It maintains the inventories at the .

(7) Designing poorer organization for inventory slow moving and obsolete items of management: Clear cut accountability should be fixed at various levels of organization.optimum level keeping in view the operational requirements. Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets. (6)Highlighting materials. Financial Objectives: (1) Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. . It also avoids the out of stock danger. B. (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.

TYPES OF INVENTORY 1. it is to be seen that right quality of material is purchased at reasonably low price. There should be no excessive investment in stock. Investment in inventories must not tie up funds that could be used in other activities. (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.(2) Reasonable Price: While purchasing materials. . The determination of maximum and minimum level of stock attempt in this direction. Quality is not to be sacrificed at the cost of lower price. The material purchased should be of the quality alone which is needed. etc. Their existence owes to the fact that transportation time is involved in transferring substantial amount of resources. Movement Inventories: Movement inventories are also called transit or pipeline inventories.

Production of specialized times like crackers well before dewily. Net order Quantity issue tenders receive tender quotation evaluations Inventory cycle 3. issue store inspect receive supplier Supplies Demand Inventory in Hand place Orders Purchase dep’t. An organization generally knows the average demand for various items that it needs.2. Buffer inventories: -In Buffer inventories are held to protect against the uncertainties of demand and supply. or the piling up of . Anticipation inventories are held for the reason that future demand for the product is anticipated.deptt. umbrellas and raincoats before taints set in. fans while summers are approaching. Prod. Anticipation Inventories.

4. and obsolescence. is illustrated with reference to the purchase and issues procedures. 5. deterioration. as an element of cost of production. Purchases of materials will be made at most favorable prices. IMPORTANCE CONTROL: OF INVENTORY . and 7. 6. as the responsibility of some individual. Materials will be protected against loss by proper physical control. spoilage. inventory systems. Vouchers for the payments of materials purchased will be approved only if the materials have been received in good condition. Materials will be purchased only when a need exists and in economical qualities. Materials of the desired quantity will be available when needed. Issue of materials will be properly authorized and accounted for. are all examples of anticipation inventories. All materials.inventory stocks when a strike is on the anvil. The control of materials. will be charged. but also to minimize waste and misuse from causes such as excessive inventories. over issue. at all times. 2. There are certain prerequisites to an effective control system for materials: 1. 3. CONTROL OF MATERIALS: Rigid control over materials are necessary not only to guard against theft. and inventory control techniques.

(5) Efficient and optimum use of physical as well as financial resources. A proper inventory control lowers down the cost of production and improves profitability of enterprise. ADVANTAGES OF INVENTORY CONTROL: (1) Reduction in investment in inventory. (4) Improvement in production and sales. (6) Ordering cost can be reduced if a firm places a few large orders in place of numerous small orders. (2) Proper and efficient use of raw materials. (7) Maintenance of adequate inventories reduces the set-up cost associated with each production run.The importance or necessity of inventory control is well explained in the terms of the objects of inventory control. which are obtained through it. . (3) No bottleneck in production.

introduction of a new competitive product. new production technique. (b) Ordering Cost: This includes the variables cost associated with placing an order for the goods. improvements in product design. the lower will be the ordering costs for the firm. specifications etc. (b) Product deterioration: This may due to holding a product for too long a period or improper storage conditions. transportation and handling charges less any discount allowed by the supplier of goods.Risk and cost Associated with Inventories: Holding of Inventories expose the firm to a number of risks and costs. Major risks are: (a) Price decline: They may be due to increase in market supply of the product. (c) Obsolescence: This may due to change in customer’s taste. . price-cut by the competitors etc. The fewer the orders. The Costs of holding inventories are as follows: (a) Material Cost: This include the cost of purchasing the goods.

(c) Carrying Cost: This includes the expenses for storing and handling the goods. (2) Standardization and simplification of inventories: In order to facilitate inventory control. To facilitate prompt recording the dealing. ABC analysis of material is very helpful in this context. stores. It refers to the elimination of excess types and sizes of items. on the other hand. work-in-progress and component etc. refers to the fixation of standards of raw material to be purchased and specification of the components and tools to be used. Standardization. . spoilage costs. 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 rawmaterial. Simplification leads to reduction in classification of inventories and its carrying costs. the inventory line should be simplified. insurance costs. It comprises storage costs. each item of the inventory must be assigned a particular code number and it must be classified in suitable group or sub-divisions. cost of funds tied up in inventories etc.

(6)Adequate Reports and Records: Inventory control requires the maintenance of adequate inventory record and reports. sales and .(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. Various inventory records must contain information to meet the needs of purchasing. it is also essential to provide the adequate storage facilities. (4) Economic Order Quantity: It is also a basic inventory problem to determine the quantity as how much to order at a time. namely. the problem is one to set a balance between two opposite costs. In determining the EOQ. Reordering point should also be fixed beforehand. (5)Adequate storage Facilities: To make the system of inventory control successful and efficient one. This quantity should be fixed beforehand. It avoids the chances of over-investment as well as running a short of any item during the cost of producing. production. ordering costs and carrying costs. Sufficient storage area and proper handling facilities should be organized.

qualified. such as purchase. These all departments have different outlook and objects in inventory management but financial manager has to coordinate them all. Statements forms and inventory records should be so designed that the clerical cost of maintaining these records must be kept a minimum. (8)Coordination: There must be proper coordination of all departments involved in the process of inventory control. receiving. location. code for each item of inventory. finance. the whole inventory control structure should be manned with trained. safety level etc. unit cost.financial staff. quantities in transit. experienced and devoted employees. (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. reorder point. storage and accounting departments. 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. . approving. The typical information required about any class of inventory may be relating to quantity on hand. Hence.

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 . (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.(9)Budgeting: An efficient budgeting system is also required. FACTORS AFFECTING STOCK INVESTMENT LEVEL These factors can be put in two categories: General and Specific. Preparation of budgets concerning materials. General Factors: These factors include those factors. which affect directly or indirectly level of investment in any asset. supplies and equipment to ensure economy in purchasing and use of material is also necessary.

On the other hand. . Following are the main factors: (1) Seasonal Character of Raw Materials: If supply of raw material used in the firm is seasonal.(6) Management view Point Specific Factors: These factors are directly related with investment in stock. If the end product is a durable good. perishable goods cannot be stored for a long period. Usually. (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. raw materials are available at cheaper rates during its production season. high investment will be required because durable goods can be stored for a long period. higher investment is required in raw material. quality control of raw material is given more emphasis. (2) Length and Technical Nature of the production process: If production process is lengthy and of technical nature. (4) Nature of End Product: Nature of end product also influences investment in inventory. investment in inventory of such products is low. Hence. In the technical nature production process. the firm will require more funds for the purchase of raw material during season.

(5) Supply Conditions: If the supply of raw material is regular and there is no possibility of interruption in future. higher investment would be required. TECHNIQUES OF INVENTORY CONTROL In managing inventories. In the absence of such loan facility. if the prices of raw materials are expected to go down in future. To achieve . then comparatively lesser investment would be required. high investment in inventories is not required. the firm’s objective should be in consonance with the wealth maximization principle. (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. (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. Longer the period. higher will be the investment in inventories. lesser investment would be required. (6) Time Factor: The lead time of raw material time token in production process and sale of product also influence investment in inventories. On the contrary.

The quantity is fixed keeping in view the disadvantages of overstocking.this. . For this purpose. determination of maximum and minimum limits of inventory and ordering level is necessary. (2) Maximum stock Limit: This represents the quantity of inventory above which it should not be allowed to be kept. To deal with the problems of inventory management effectively. the firm should determine the optimum level of investment in inventory. The main object of fixing this limit is to ensure that unnecessary working capital is not blocked in stores. The disadvantages of overstocking are: 1. Capital is blocked up unnecessarily in stores so there will be loss of interest. Although the concepts involved in inventory management are productionoriented and are not strictly financial it is important that the financial manager understand them since they have certain built-in financial costs. it becomes necessary to be conversant with the different techniques of inventory control. The different techniques of inventory control may be summarized as follows: (1) Inventory level Technique The main objective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor unnecessary investment in inventory.

2. There are chances of deterioration in quality because large stocks will require more time for use is the factory. . evaporation etc. 5. (6) Possibility of loss in stores by deterioration. 3. The maximum stock level is fixed by taking into account the following factors: (1) Amount of capital available for maintaining stores. which deteriorate in quality if they are stored for longer period. (2) Godown space available. There are certain stores. (4) The time lag between indenting and receiving of the material. (5) Length and technical nature of the production process. (3) Rate of consumption of the material. 4. More godown space is needed so more rent will have to be paid. There is danger of depreciation in market values. There is the possibility of loss due to obsolescence.

So these have to be stocked heavily during these periods.. (11)Risk of obsolescence.e. fire and explosion. e.(7) Cost of maintaining stores.g. (9) The seasonal nature of supply of material. stocks are kept at a much reduced level. possibility of change in fashion and habit which will necessitate change in requirements of materials. For instance. (8) Likely fluctuation in prices. if there is the possibility of decrease in price in the near future. (10)Restrictions imposed by the government or local authority in regard to materials which there are inherent risks. i. if there is a possibility of a substantial increase in prices in the coming period. On the other hand. Certain materials are available only during specific periods of year. a comparatively large maximum stock level will be fixed. The following formula may be applied to calculate the maximum stock: .

e. This level is fixed for all items of stores and following factors are taken into account for the fixation of this level: (a) Lead time i. It is maintained to save from the situation of stock out in the event of abnormal increase in material usage rate and/or delivery period. In fact determination of this quantity is significant because of uncertainty in respect to material usage rate and delivery period.(1) Maximum Stock = Minimum Inventory + Lot size (2) Maximum Stock = Reorder Level .Minimum consumption during Minimum lead time + Lot size Minimum Stock Limit (Safety or Buffer stock) This represents the quantity below which stock should not be allowed to fall. (b) Rate of consumption of the material during the lead time. (c) Re-order Level . The main purpose of this level is to ensure that production is not held up due to shortage of any material. time lag between intending and receiving the material.

It is fixed after taking into consideration the following factors: (a) Rate of material usage: Generally this rate is found out as usage rate per day. Re-ordering Level (Ordering Level) It is the point at which if the stock of the material in stores reaches.The following formula is applied to calculate Minimum Stock: Minimum Stock = Re-order Level . the storekeeper should initiate the purchase requisition for fresh supply of material. pre week or per month. The quantity of production fluctuates according to demand of the product which results in variation in usage rate. This level is fixed somewhere between maximum and minimum level is such a way that the difference of quantity of the material between the reordering level and the minimum level will be sufficient to meet requirements of production up to the time of fresh supply of the material. .Normal usage during Normal Lead time But if normal usage and normal lead time is not known then average usage will be treated as normal usage and average reorder will be treated as normal re-order period.

(ii) Minimum usage rate: It implies quantity of material required at capacity production in most unfavorable business conditions. after that only he places the order. . © Delivery. the following three factors: (i) Maximum usage rate: It implies quantity of material required at maximum capacity production. Lead or Procurement Time: The time taken from the date of placing the order to the date of delivery by the suppliers is called procurement time.Hence. (b) Ordering Period: The time taken in preparing the order for purchase of material is called ordering period. In some concerns this period may be significant but in large concerns this period is significant because before placing the order the purchase manager has to trace out the best suppliers. (iii) Normal or average Usage Rate: It implies quantity of material required at capacity production under normal business conditions. minimum and average procurement time should also be determined. The maximum.

For this purpose. the following formula is applied: Situation1: When rate of usage and lead time are known with certainty. Calculation of Re-order Point: After taking into account the above facts re-order quantity is ascertained. Re-order point = Rate of usage x lead time. Re-order point = Minimum Inventory + Average usage during lead time. Re-order point = Maximum Usage rate . Situation3: When rate of usage and lead time is known but variable and lead time is known with certainty: (i) (ii) x Lead time.(D) Minimum Stock Level: This is the level of stock below which stocks should normally not be allowed to fall. (ii) Re-order point = Rate of usage x Maximum Lead Time. Situation2: When rate of usage is known with certainty and lead time is also known but is variable: (i) Re-order point = Minimum Inventory + Average usage during Normal lead Time.

The purchase officer will make special arrangements to procure the materials reaching at their danger levels so that the production may not stop due to shortage of materials. Danger Level This means a level at which normal issues of the material are stopped and issues made only under specific instructions. It is determined as follows: Danger level = Average Consumption x Maximum Reorder period for Emergency Purchase . (i) Re-order point = Minimum Inventory + Average usage during lead period.Situation4: When the rate of usage and lead time are known and are variable. (ii) Re-order point = Maximum Usage rate x Maximum Lead time.

it has to decide lost in which it has to be purchased on replenishment. the issue is how much production to schedule (or how much to make). Ordering costs: the term ordering costs is used in case of raw materials (or supplies) and includes the entire costs of acquiring . and the task of the firm is to determine the optimum or economic order quantity (or economic lot size). If the firm is planning a production run.ECONOMIC ORDER QUANTITY TECHNIQUE One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials. Determining an optimum inventory level involves two type of costs: (a) ordering costs and (b) carrying costs: The economic order quantity is that inventory level that minimize the total of ordering and carrying costs. These problems are called order quantity problems.

taxes. the higher the firm’s ordering costs. transporting. Ordering costs increase with the number of order. Ordering costs increase in proportion to the number of order placed. stores handing costs and clerical and staff service costs (administrative costs). deterioration and obsolescence. The storage costs comprise cost of storage space (warehousing cost). thus the more frequently inventory is acquired. inventory are called carrying costs. receiving. Carrying costs: Costs incurred for maintaining a given level of They include storage. They include costs incurred in the following activities: requisitioning. inspecting and storing (store placement). purchase ordering. Ordering costs decrease with increasing size of inventory. insurance. Table: Ordering and Carrying Costs Ordering Costs (1)Requisitioning (2)Order placing (3) Transportation Carrying Costs (1) Warehousing (2) Handling (3) Clerical and staff (4) Receiving inspecting and storing (4) Insurance (5) Clerical and staff (5) Deterioration .raw materials.

Trail and Error Approach: The trail and error. Let us assume the following data for a firm.) 50 37.50 . We can follow three approaches-the trial and error approach.Carrying costs vary with inventory size. It is that order size at which annual total costs of ordering and holding are the minimum. Ordering and Carrying Costs trade-off: The optimum inventory size is commonly referred to as economic order quantity. The economic size of inventory would thus depend on trade-off between carrying costs and ordering costs. three month requirements. approach to resolve the order quantity problem can be illustrated with the help of a simple example. the formula approach and the graphic approach-to determine the economic order quantity (EOQ). Estimated 1. A Purchasing cost (per order). (Rs) Ordering cost (per order).200 Dz. (Rs. or analytical.

(Re) 1 Average inventory .000 (600*Rs50) If we choose the multiple order than we order 100units on monthly basis Average inventory .150 * Rs 50 = 7. 1200 1000 800 Q/2 600 Stock 400 200 . 500 Many other possibilities can be worked out in the same manner.(400+0)/2 = 150units) Average value .Carrying cost per unit.(1200 + 0)/2 = 600 units Average value .Rs 30.

The total order costs will be number of orders during by ordering cost per order. approach is somewhat tedious to calculate us illustrate this approach.50 0 2 4 6 Time Inventory level over time 8 10 15 Order. or analytical. the number of orders will be Total ordering cost = (Annual requirement * Per order cost) Order size . O.formula approach: The trial error. An easy way to determine EOQ is to use the order-formula approach. Let Suppose the ordering cost per order. the EOQ. If a requirements and Q the order A/Q and total order costs will be: the year multiplied total annual represents size. is fixed.

c. the average inventory will be. Average inventory = order size = Q 2 2 And total carrying costs will be: Total carrying cost = Average inventory * Per unit carrying cost TCC = Qc 2 . If Q is the order size and usage is assumed to be steady.TOC = AO/ Q Let us further assume the carrying cost per unit. is constant The total carrying costs will be the product of the average inventory units and the carrying cost per unit.

Thus. Equation (4) is differentiated with respect to Q and setting the derivative equal to zero. To obtain the formula for EOQ. the carrying costs will be lower and ordering cost will be higher with the order quantity. the carrying cost will increase. but the ordering costs will decrease. is the sum of total carrying and ordering costs: Total cost = Total carrying cost + Total order cost TC = Qc + AO 2 Q Equation (4) reveals that for a large order quantity. On the other hand. the total cost function represents a trade-off between the carrying costs and ordering costs for determining the EOQ. Q. we obtain: Economic order quantity = 2* quantity required * ordering cost Carrying cost EOQ = 2AO .The total inventory cost. then.

Thus. The economic order quantity occurs at the point Q* where the total cost is minimum.C Graphic approach: The economic order quantity can also be found out graphically. In the figure. because. costs-carrying. ordering and total. and ordering costs decline with increase in order size means less number of orders. Minimum total Cost Carrying cost . The behaviors of total costs line is noticeable since it is a sum of two types of cost which behave differently with order size. on an average. but they start rising when the decrease in average ordering cost is more than offset by the increase in carrying costs.are plotted on vertical axis and horizontal axis is used to represent the order size. Figure illustrates the EOQ function. We note that total carrying costs increase as the order size increasers. the firm’s operating profit is maximized at point Q*. a larger inventory level will be maintained. The total costs decline in the first instance.

Set-up costs include costs on the following activities: preparing and processing the stock orders. tooling machines set-up. Two costs involved are set-up costs and carrying costs. Production runs but carrying costs will increase as large stocks of manufactured inventories will be held. preparing drawings and specifications. handling machines. over time etc. how much to order. tools. when to order. The economic production size will be the one where the total of set-up and carrying costs is minimum. Reorder Point: The problem. equipment and materials. is solved by determining the economic order quantity.Costs ordering cost Q* order size (Q) Economic order quantity Optimum productions run: The use of the EOQ approach can be extended to production runs to determine the optimum size of manufacture. This is a problem of determining . yet answer should be sought to be second problem.

The effect of increased usage and/or slower delivery would be shortage of inventory. and (c) economic order quantity. Lead time is the normally taken is replenishing inventory after the order has been placed. a discrepancy between the assumed (anticipated/expected) and the actual usage rate of inventory is likely to occur in practice. the firm would disrupt production schedule and alienate the customers. To determine the reorder point under certainty. The firm would. The reorder point is that inventory level at which an order should be placed to replenish the inventory. therefore. That is: Reorder point = Lead * Average usage Safety stock: The demand for inventory is likely to fluctuate from time to time. In particular. In other words. By certainty we mean that usage and lead time do not fluctuate. reorder point is simply that inventory level which will be maintained for consumption during the lead time.the reorder point. at certain points of time the demand may exceed the anticipated level. we should known: (a) lead time (b) average usage. Under such a situation. That is. be will advised to keep a sufficient safety margin by having .

Such stocks are called safety stocks. Conversely. the larger the safety stock. Since the firm is required to maintain additional inventory. This would act as a buffer/cushion against a possible shortage of inventory. The stock-out and carrying costs are counterbalancing. the smaller the stock-out costs. thus. Safety stock may. be defined as minimum additional inventory to serve as safety margin/buffer/cushion to meet unanticipated increase in usage resulting from unusually high demand and/or uncontrollable late receipt of incoming inventory. Inventory Average usage EOQ . the larger the carrying costs and vice versa. Max. The carrying costs are the costs associated with the maintenance of inventory.additional inventory to guard against stock-out situation. The larger the safety stock. in excess of the normal usage. additional carrying costs are involved.

The non-availability of vital spares will cause havoc in the concern.Avg. Essential (E) and Desirable (D). A-B-C analysis may not be properly used for spare parts. The vital spares are a must for running the concern smoothly and these must be stored adequately.usage Safety stock ------------------------------------------------------- Weeks lead time Re-order point under safety stock VED Analysis: The VED analysis is used generally for spare parts. The E types of spares are also necessary but their stocks may be kept at low figures. Spare parts are classified as: Vital (V). The stocking of D types of . The demand for spares depends upon the performance of the plant and machinery. inventory---------------------------------------------------Re-order point----------------------------------------------------max. The requirement and urgency of spare parts is different from that of materials.

it is assumed that: (i) (ii) (iii) Total demand is known with certainty. The usage rate of material is steady. then stocking of these spares can be avoided. The classification of spares under three categories is an important decision. EOQ and Total Inventory Cost: At EOQ level total inventory cost is minimum. Total inventory cost is the sum of material purchase cost. urgency and use of these spares. If the lead time of these spares is less. A wrong classification of any spare will create difficulties for production department. Orders for replenishment on inventory are placed exactly inventories reach ordering level. when (iv) The ordering cost per order and holding cost per unit are constant.spares may be avoided at times. Assumptions: In applying EOQ formula. ordering cost and carrying cost As per the formula: Total Inventory Cost (TIC) = Material Purchase Cost + Total Ordering Cost + Total Carrying Cost . The classification of spares should be left to the technical staff because they know the need.

It may be defined as “a method of recording stores balances after every receipt and issue to facilitate regular checking and to obviate closing down for socktaking”. . Then we should calculate TIC of each alternative offer. The basic object of this system is to make available details about the quantity and value of stock of each item at all times. In such a situation. PERPETUAL INVENTORY CONTROL TECHNIQUE Perpetual inventory system implies maintenance of up-todate stock records and in its broad sense it covers both continuous stock taking as well as up-to-date recording stores books.= (R x P) + (R/Po x Cp) + (Qo/2 x Ch) Discount Offer and Economic Order Quantity: Sometimes supplier offers different discounts on orders of large quantity. According to Weldon. That quantity will be EOQ at TIC is the lowest. at first we should calculate EOQ and find out TIC without considering discount offer. The system thus provides a rigid control over stock of each item of store can regularly be verified with the stock records in the bin cards kept in the stores and stores ledger maintained in cost office.

Verification of Errors: Errors are easily located and rectified.Advantages of Perpetual Inventory system: 1. This gives an opportunity for preventing a recurrence in many cases. Optimum size of material: Overstocking and under stocking can be avoided because perpetual inventory system covers verification of stock with regards to maximum. Double control: Due to separate records in Bin card and stores ledger. 2. double control is maintained. 6. Lack of misuse of Material: Under this system. thus misuse of material can be avoided. 5. Arrangement of proper verification: In this system a detailed and more reliable checking of the store is exercised because of the continuous and random checking. effective control on issue of material is possible. interim and final financial accounts can be prepared with greater convenience. Saving in time: The long and costly work of stocktaking is avoided. 4. minimum and other levels. 3. Hence. .

C category items. 8. . Category A will include more expensive items (in cost of product) with high investment and it will require more intensive control. Loss of stock due to obsolescence: It is detected at an early stage and so timely action can be taken to THE SELECTIVE INVENTORY CONTROL OR ABC SYSTEM OF CONTROL Most manufacturing firms find themselves confronted with virtually thousands of different inventory items. this system serves as a moral check on dishonesty. while other items are quite expensive and account for a large portion of the firm’s investment. the stores staff. turnover slowly and therefore. Some inventory items. they require a high average investment.B. The firm should classify them into A. prevent recurrence. Moral Check on Stores staff: Due to They are discouraged from committing continuous checking.7. although not expensive. Most of these items are relatively inexpensive.

The ‘B’ group will consist of the items accounting for the next largest investment. The ‘C’ items can receive the minimum attention: they will probably be ordered in large quantities in order to obtain them at the lowest price. The ‘A’ items require intensive inventory control and most sophisticated inventory control techniques should be applied to these items. The ‘B’ items can be controlled using less sophisticated technique. they may require special attention. Certain items of inventory may be inexpensive but may be critical to the product in process and cannot be easily obtained. The ‘C’ group will consist of a large number of items of inventory accounting for small investment. Though the ABC technique is a good technique but it cannot be universally applied. . and their level can be viewed less frequently than ‘A’ items. Therefore.

semi-finished and finished items and then classifying as A. using the broad framework. B or C instead of taking item as spare. (3) Where items can be substituted for each other. There can be more then three classes and the period of consumption need not necessarily be one year . they should be preferably treated as More emphasis should be given to the value of consumption and not to price per unit of the All the items consumed by an organization should be considered together for classifying as A. not perfect. The following points should be kept in mind for ABC analysis: (1) one item. they would be “B” or “C” class items. raw materials.These types of items must be treated as “A” class items even though. B and C. (2) item. the ABC system is an excellent method for determining the degree of inventory control efforts required to expand each item of inventory. Although.

Value analysis. Determination of safety Stock records. (2) strategy. (5) stock items.Application of ABC Analysis: ABC analysis can be effectively used in Material Management. In a JIT system material or the . (3) (4) items. The various stages where it can be applied are: (1) require higher degree of control. Priority treatment to different To evolve useful re-ordering Information of items which Just-in-time (JIT) System: Japanese firms popularized the justin-time (JIT) system in the world. (6) (7) Stores layout.

System Systems of Accounting for Material Issued/Inventory Either the periodic inventory system or the perpetual inventory system may be used to account for materials issued to production and ending materials inventory. saves carrying and other related costs of manufacturer. Poor quality material or complements could halt the production. They will have to develop adequate system and procedures to satisfactory meet the needs of manufacturers. The success of the system depends on how well a company manages its suppliers. . The delivery of material is synchronized with the manufacturing cycle and speed. JIT system eliminates the necessity of carrying large inventories. and thus. The system puts tremendous pressure on suppliers. The JIT inventory system complements the total quality management (TQM). The system requires perfect understanding and coordination between the manufacturer and supplier in terms of the timing of delivery and quality of the material.manufactured components and part arrive to the manufacturing sites or stores just few hours before they are put to use.

if any.Opening Account. is recorded in a separate Materials Inventory.Periodic Inventory System Under the periodic inventory system. the purchase of materials is recorded in Purchase of Raw Materials Account. The materials available for use during a period equal purchases plus opening inventory.Materials inventory-closing (based on physical count) = Cost of materials issued . The cost of materials for the period is determined as shown in Exhibit: Cost of Materials Issued Materials inventory-opening + Purchases = Materials available for use . The opening/beginning inventory. A physical count is made of the materials on hands at the end of the period to arrive at the closing/ending materials inventory.

These ratios are calculated to assess the efficiency in use of inventories. and they can be discovered only at the end. This method provides for the recording of the purchases on a daily basis but does not provide for a continuous inventory-taking. It is assumed that goods not on hand at the end of the period have been sold. nor the value of the inventory in determined by using an appropriate pricing method and attaching costs to units counted. INVENTORY TURNOVER RATE TECHNIQUE One important technique of inventory control is to use inventory turnover ratios. Neither a physical count is made of the quantity of goods on hand. 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 . There is no system and accounting period. This physical inventory is usually taken near the end of the accounting year/period.The entire book inventory is verified at a given date by an actual count of materials on hand.

(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 (ii) Average inventory to total cost of production = (Average Inventory/ total cost of production) x 100 (iii) Slow Moving Stores to Total Inventory = Average Cost of Slow Moving Stores/Average Inventory (iv) 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.Inventory Turnover Ratios ca be calculated separately for raw materials and finished goods. (A) Raw Material Turnover Ratio = Raw Material Consumed/ Average stock of Raw material. 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.raw materials. great emphasis must be placed on its efficient management. The ratios also indicate the situation and trend. the operative responsibility for Inventory management lies with the inventory manager. He should be familiar with the Inventory control techniques and ensure that Inventory is managed well. However. the financial manager must also be concerned with all types of inventories. regulate usage and . He has to act as a careful inspector levels. Though. but only tools of sound Inventory Management. They are not an end themselves. He must monitor Inventory levels and see that only an optimum amount is invested in Inventory. He should try to resolve the conflicting view points of all the departments in order to have efficient inventory management. He should introduce the policies which reduce the lead time. FINANCIAL MANAGEMENT MANAGER’S ROLE IN INVENTORY Inventory represents a large investment by manufacturing concern: therefore. work-in-progress and finished goods. the limitation of ratios should be kept in mind.

thus. All these techniques of Inventory management lead to the goal of wealth maximization. This statement should be applied in accounting for inventories other than: (a) Work-in-progress arising under construction contacts. including the ascertainment of cost of inventories and any write-down thereof to net realizable value. VALUATION OF INVENTORIES OBJECTIVE: A the primary financial issue in accounting until the for inventories is the are determination of the value at which inventories are carried in statements related revenues recognized. including directly related service contracts. (b) Work-in-progress arising in the ordinary course of business of service providers. 1. debentures and other financial instruments held as stock-in-trade. minimize safety stock. This statement deals with the determination of such value. (c) Shares. .

ores and gases to the extent that they are measured at net realizable value in accordance with well established practices in those industries.(d) Producer’s inventories of livestock. 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. or . when agricultural crops have been harvested or mineral oils. The inventories referred are measured at net realizable value at certain stages of production. 2. DEFINITIONS The following terms are used in this statement with the meanings specified: Inventories are assets: (a) (b) Held for sale in the ordinary course of business. This occurs. for example. agricultural and forest products and mineral oils. These Inventories are excluded from the scope of this statement. In the process of production for such sale.

or work-in-progress being produced. computer software held for resale. merchandise purchased by a retailer and held for resale. costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Accounting for Fixed Assets. for example. maintenance supplies. 1.(c) In the form of materials or supplies to be consumed in the production process or in the rendering of services. such machinery spares are accounted for in accordance with Accounting Standard (AS) 10. Cost of Inventories The cost of inventories should comprise all costs of purchase. by the enterprise and include materials. Inventories encompass goods purchased and held for resale. or land and other property held for resale. . 2. Inventories should be valued at lower of cost net realizable value. Inventories also encompass finished goods produced. 3. 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 be irregular. consumables and loose tools awaiting use in the production process.

4. Trade discounts. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. such as depreciation and maintenance of factory buildings and the cost of factory management and administration. 5. 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). such as direct labour. Variable production overheads are those indirect costs of production that vary . freight. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production. duty drawbacks and other similar items are deducted in determining the costs of purchase. inwards and other expenditure directly attributable to the acquisition. rebates. Costs of Conversion The costs of conversion of inventories include costs directly related to the units of production.

Unallocated overheads are recognized as an expense in the period in which they are incurred. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances. or nearly with the volume of production such as indirect materials and indirect labour. 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. when joint products are produced or when there is a main .directly. The actual level of production may be used if it approximates normal capacity. for example. 6. This is the case. taking into account the loss of capacity resulting from planned maintenance. A production process may result in more than one product being produced simultaneously. the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost. In periods of abnormally high production. 7. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant.

for example. or at the completion of production. The allocation may be based.products as well as scrap or waste materials. As a result. on the relative sales value of each product either at the stage in the production process when the products become separately identifiable. they are often measured at net realizable value and this value is deducted from the cost of the main product. 9. the carrying amount of the main product is not materially different from its cost. When the costs of conversion of each product are not separately identifiable. When this is the case. 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.product. For example. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location . by their nature. Most by.product and a by. they are allocated between the products on a rational and consistent basis. are immaterial. 8. 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.

and condition and are. 3. therefore. and 4. Administrative overheads that do not contribute to bringing the inventories to their present location and condition. labour. Selling and distribution costs. Exclusions from the cost of Inventories In determining the cost of inventories in accordance with paragraph 3. 10. Examples of such costs are. 1. unless those costs are necessary in the production process prior to a further production stage. usually not included in the cost of inventories. It is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred. Abnormal amounts of wasted materials. or other production costs. . Storage costs. 2.

The cost of inventories. in such circumstances.Specific identification of cost means that specific costs are attributed to identify items of inventory. when there are large numbers of items of inventory which are ordinarily interchangeable.11. 13.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. regardless of whether they have been purchased or produced. first-out (FIFO). This is an appropriate treatment for items that are segregated for a specific project. should be assigned by using the first-in. or weighted average cost formula. 12. specific identification of costs is inappropriate since. 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. 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. . other than those dealt with in paragraph 11. However.

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. such as the standard cost method or the retail method. labour. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first. depending upon the circumstances of the enterprise. 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. Under the weighted average costs formula.14. 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. and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. efficiency and . 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. Techniques for the measurement of the cost of inventories. 15.

17. or if their selling prices have declined.capacity utilization. The cost of the inventory is determined by reducing from the sales value of the inventory the appropriate percentage gross margin. if they have become wholly or partially obsolete. 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. 16. revised in the light of current conditions. The practice of writing down inventories below cost to net realizable value is consistent with the view that assets should . 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.The cost of inventories may not be recoverable if those inventories are damaged. They are regularly reviewed and if necessary. 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.

Estimates or net realizable value also take into consideration the purpose for which the inventory is held. 19. 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. It is not appropriate to write down inventories based on a classification of inventory. 18. For example. the net .Inventories are usually written down to net realizable value on an item-by-item basis. 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. In some circumstances. however. 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. finished goods.not be carried in excess of a amounts expected to be realized from their sale or use. for example. or all the inventories in a particular business segment. 20.

contingencies and events occurring after the balance sheet date. the net realizable value of the excess inventory is based on general selling prices. If the sales contracts are for less than the inventory quantities held. Disclosure. . 22. 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.S) 4.realizable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. An assessment is made of net realizable value as at each balance sheet date. the replacement cost of the materials may be the net available measure of their net realizable value. the materials are written down to net realizable value. In such circumstances. 21. However. 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. 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.

The financial statements should disclose: The accounting policies adopted in measuring inventories. stores. We collect the data by the different sources. and The total carrying amount of inventories and its classification appropriate to the enterprise. We collect the primary and secondary data. 24. work in progress. spares and loose tools. Common classifications of inventories are raw materials and components. 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. including the cost formula used. finished goods. DATA COLLECTION In analysis of inventory of J&J. SECONDARY DATA – The secondary data are those data the already in presence for specific purpose we use the secondary .

PRIMARY DATA – Primary data are those data that are originated very first time or fresh data . In the analysis of inventory the secondary data are not sufficient . 2010.then We collect primary data.with the help of primary data formulated the research objectives. 2008 and December 30.data about inventory to looks old records of the company .For the daily information about the items We show the MRN. 2007 (Dollars in Millions) 2009 Balance Accruals Payments / Balance at Other at End of Beginni Period ng of Period Accrued Rebates $1808 6584 (6. 1. 4. Primary data are the accurate attainable reliable and useful data. Inventory control techniques used by the company 2. 3. Stock levels etc.753 ) 1639 (1) . Inventory systems as perpetual and periodic systems. Companies website JOHNSON & JOHNSON AND SUBSIDIARIES SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Fiscal Years Ended January 3. ledger register and daily issue slip of materials the purchase register and other documentary evidence used for the findings. December 28.

$710 million at January 3. (1 MEDICAL DEVICES AND DIAGNOSTICS SEGMENT The Medical Devices and Diagnostics segment achieved sales of $23.S.3%. December 28.Accrued Returns Accrued Promotions Subtotal Reserve for doubtful accounts Reserve for cash discounts Total 2008 $794 $356 $2958 $267 $79 $3304 Balance at Beginni ng of Period $1802 $648 $578 $3028 $193 $71 $3292 355 2446 9385 110 $1163 $10658 Accruals (460 ) (2. $721 million. 2008 and December 30.373 ) (9. 2010.6 billion in 2009. 2007.0 billion.9% over the Prior year. (2) Includes $171 million adjustment related to previously estimate accrued sales reserve. representing an increase of 1.141 ) (10. U.586 ) (44 ) (1.2% and a negative currency impact of 2. an increase of . sales were $11. respectively.771 ) Payments / Other 689 429 2757 333 101 3191 Balance at End of Period 1808 794 356 2958 267 79 3304 Accrued Rebates (1) Accrued Returns Accrued Promotions Subtotal Reserve for doubtful accounts Reserve for cash discounts Total $5578 $402 $2991 $8971 $101 $905 $9977 (5572) (256) (3213) (9041) (927) (897) (9965) ) Includes reserve for customer rebates of $729 million. with operational growth of 4.

4.5% over the prior year. International sales were $12.6 billion, a decrease of 0.2%, with growth of 4.0% from operations and a decrease of 4.2% resulting from the negative impact of currency fluctuations. The DePuy franchise achieved sales of $5.4 billion in 2009, a 4.6% increase over the prior year. This was primarily due to growth in the spine, hip and knee product lines. Additionally, new product launches in the Mitek sports medicine product line contributed to the growth. The Ethicon Endo-Surgery franchise achieved sales of $4.5 billion in 2009, a 4.8% increase over the prior year. This was attributable to growth in the endoscopy, HARMONIC ® , ENSEAL ® and Advanced Sterilization product lines. The Ethicon franchise achieved sales of $4.1 billion in 2009, a 7.3% increase over the prior year. This was attributable to growth in the sutures, biosurgical and mesh product lines in addition to sales of newly acquired products from the acquisitions of Omrix Biopharmaceuticals, Inc. and Mentor Corporation. The growth was partially offset by the divestiture of the Professional Wound Care business of Ethicon, Inc. in the fiscal fourth quarter of 2008. Sales in the Cordis franchise were $2.7 billion, a decline of 10.3% versus the prior year. The decline reflects lower sales of the CYPHER ® Sirolimuseluting Coronary Stent due to increased global competition. The decline was partially offset by growth of the Biosense Webster business. The Vision Care franchise achieved sales of $2.5 billion in 2009, a 0.2% increase over prior year primarily related to growth in the Astigmatic contact lens product line offset by the negative impact of currency. Sales in the Diabetes Care franchise were $2.4 billion in 2009, a decline of 3.7% versus the prior year. Declines in the LifeScan product line were partially offset by growth of the Animas insulin delivery business resulting from new product launches and continued development in international markets. The Ortho-Clinical Diagnostics franchise achieved sales of $2.0 billion in 2009, a 6.6% increase over the prior year primarily attributable to the recent launch of the VITROS ® 3600 and 5600 analyzers. The Medical Devices and Diagnostics segment achieved sales of $23.1 billion in 2008, representing an increase of 6.4% over the prior year, with operational growth of 3.5% and 2.9% due to a positive impact from currency fluctuations. U.S. sales were $10.5 billion, an increase of 1.0%. International sales were $12.6 billion, an increase of 11.3%, with 5.8% from operations and a positive currency impact of 5.5%. Analysis of Consolidated Earnings Before Provision for Taxes on Income Consolidated earnings before provision for taxes on income decreased by $1.1 billion to $15.8 billion in 2009 as compared to the $16.9 billion earned in 2008, a decrease of 6.9%. The decrease was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of $1.2 billion. This was partially offset by lower

selling, marketing and administrative expenses due to cost containment efforts across all the businesses. 2008 included purchased in-process research and development (IPR&D) charges of $0.2 billion and increased investment spending in selling, marketing and administrative expenses utilized from the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. The increase in 2008 of 27.4% over the $13.3 billion in 2007 was primarily due to lower IPR&D charges of $0.6 billion, gains from divestitures of $0.5 billion and higher litigation gains of $0.5 billion versus restructuring charges of $0.7 billion and the write-down of the NATRECOR ® intangible asset of $0.7 billion recorded in 2007. As a percent to sales, consolidated Major Medical Devices and Diagnostics Franchise Sales*: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 29 % Change (Dollars in Millions) 2009 2008 2007 ’09 vs. ’08 ’08 vs. ’07 DEPUY ® $ 5,372 5,136 4,698 4.6 % 9.3 ETHICON ENDO-SURGERY ® 4,492 4,286 3,834 4.8 11.8 ETHICON ® 4,122 3,840 3,603 7.3 6.6 CORDIS ® 2,679 2,988 3,314 (10.3 ) (9.8 ) Vision Care 2,506 2,500 2,209 0.2 13.2 Diabetes Care 2,440 2,535 2,373 (3.7 ) 6.8 ORTHO-CLINICAL DIAGNOSTICS ® 1,963 1,841 1,705 6.6 8.0 Total $ 23,574 23,126 21,736 1.9 % 6.4 OPERATING PROFIT BY SEGMENT Operating profits by segment of business were as follows: Percent of Segment Sales (Dollars in Millions) 2008 2009 2008 2009

Consumer $ 2,475 2,674 15.7 % 16.7 Pharmaceutical 6,413 7, 605 28.5 % 31.0 Med Devices and Diagnostics 7,694 7,223 32.6% 31.2 Total (1) 16,582 17,502 26.8% 27.4 Less: Expenses not allocated to segments (2) 827 573 Earnings before provision for taxes on income $ 15,755 16,929 25.4 % 26.5

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0 billion January 3. 2. plant and equipment at cost and accumulated depreciation were: The Company capitalizes interest expense as part of the cost of construction of facilities and equipment.490 Corporate debt securities 426 — 426 627 1 628 Money market funds 1.890 — 1.517 — 2. Cash. respectively.663 million. Property. Plant and Equipment At the end of 2009 and 2008.517 3. $2. 2010 December 28.371 7. corporate debt securities and time deposits. 2008 Amortized Unrealized Estimated Amortized Unrealized Estimated (Dollars in Millions) Cost Gains/(Losses) Fair Value Cost Gains/ (Losses) Fair Value Current Investments Cash $ 2.426 12. property. was $2. respectively.370 1 13. Depreciation expense.276 Government securities and obligations 13. current marketable securities consist of $1. 2010. cash equivalents and current marketable securities $ 19. 2008 and 2007 was $101 million. Inventories At the end of 2009 and 2008.276 — 3. current marketable securities consist of $3. As of December 28. The Company has a policy of making investments only with commercial institutions that have at least an A (or equivalent) credit rating.425 1 19. as was the case in 2009 and will be the case again in 2014.890 813 — 813 Time deposits 1. 2008. $342 million and $36 million of government securities and obligations.222 607 — 607 Total cash. RECLASSIFICATION Certain prior period amounts have been reclassified to conform to current year presentation.Normally each fiscal year consists of 52 weeks.222 — 1. 2008 and 2007. The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. including the amortization of capitalized interest in 2009. Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices in active markets. but every five or six years the fiscal year consists of 53 weeks.434 million and $181 million of government securities and obligations and corporate debt securities.486 4 7. inventories were comprised of: 4.814 (Dollars in Millions) 2009 2008 . Cash Equivalents and Current Marketable Securities As of January 3. $147 million and $130 million.809 5 12.1 billion. Interest expense capitalized in 2009. respectively. 3.

376 Less accumulated amortization 2.128 4.144 839 Goods in process 1.177 1.808 7.648 8.Raw materials and supplies $ 1.052(Dollars in Millions) 2009 2008 Land and land improvements $ 714 886 Buildings and building equipment 8. respectively. 5.242 Intangible assets with indefinite lives: Trademarks $ 5.392 Less accumulated depreciation 14. the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts.680 2.938 5. The difference.841 $ 5.759 14.820 Patents and trademarks — net $ 3.495 Less accumulated amortization 4. respectively. Intangible Assets and Goodwill At the end of 2009 and 2008.365 and $1.521 3.641 2.492 13.027 $ 14. Upon retirement or other disposal of property.505 12. the gross and net amounts of intangible assets were: 43 (Dollars in Millions) 2009 2008 Intangible assets with definite lives: Patents and trademarks — gross $ 5.153 15.251 27.675 5. plant and equipment.720 Machinery and equipment 17.9 billion.372 Finished goods 2.323 13.234 Construction in progress 2.943 Total intangible assets with definite lives — gross $ 13.253 Total intangible assets with definite lives — net $ 8. between the net asset value and the proceeds are recorded in earnings.734 Purchased in-process research and development* 1.697 5. if any.299 Other intangibles — gross $ 7.119 Less accumulated amortization 2.737 — Total intangible assets with indefinite lives $ 7.520 3.976 .857 4.395 1.552 29.863 7.180 5.433 Other intangibles — net $ 5.734 Total intangible assets — net $ 16.

71 J&J used Rs. Then inventory turnover ratio = 720/126 = 5.26 million . sales Sales = 6 million * 5.71 = 34. 6 million worth inventory for operation. It could generates additional sales.DATA ANALYSIS AND INTERPRETATION INVENTORY TURN OVER RATIO- Total sales Inventory turn over ratio = Average inventory The sale of J&J in year 2007 is 720 million & its investment on inventory is 126 million.

63 Inventory turn ratio in year 2006 Total sales in 2006 = 615 million Investment on inventories = 100 million Turnover ratio = 615 / 100 = 6. then company increases their sales.67 Inventory turnover in year 2007Total sales in 2007 = 620 million Investment on inventories = 110 million Turnover ratio = 620/ 110 = 5. Inventory turn in year 2008 Total sales in 2008 = 670 million Investment on inventories = 118 million Turnover ratio = = 670/118 5.If J&J increases investment more on their inventories.15 .

Every year.Investment of inventories & sales on wards 2006- year Investment on inventories in million 100 110 118 126 total sales in million 615 620 670 720 2006 2007 2008 2009 Johnson & Johnson Ltd.1 0 420 0 90 00 10 00 2.3 1 231 0 2. Date Q t y Co st Valu e Qt y Co st Valu e Qt y Co st Valu e Jan 1 10 00 0 1 0 0 0 2. increases investment on their inventories.1 0 210 00 232 10 9 12 27 - 190 10 213 20 . then total sales increases year by year.2 1 221 0 11 00 0 20 00 2.

0 4 408 0 @ 934 0 60 00 0 10 00 0 276 00 18 - 182 60 223 40 23 - May .0 Feb 10 16 2 0 0 0 2.4 1 482 0 10 00 0 40 00 4 0 0 0 2.1 0 840 0 60 00 10 00 0 225 60 17 29 - 141 60 233 20 Apr 4 2 0 0 0 2.4 1 482 0 40 00 2.2 9 916 0 2.1 4 428 0 12 00 0 40 00 2 0 0 0 2.1 0 840 0 60 00 80 00 129 20 177 40 March 3 2 0 0 0 2.

10.41 - 2210 2310 4820 9340 Interpretation - The FIFO method of valuation of inventory is based on the assumption that the inventory consumed in chronological order. From the table with an opening inventory of 10000 units at rs 2.4 0 240 0 90 00 12 00 0 - 199 40 259 40 Jun 10 10 00 2 0 0 0 1 9 0 0 0 2.4 0 240 0 11 00 0 13 00 0 16 00 0 351 40 235 40 275 80 30 - Total 2.0 0 600 0 10 00 2.31 2.1 9 417 00 Where @ is 1000 1000 2000 Total 4000 2.21 2. the first 10000 units issued are charged to the cost of goods sold at these opening inventory .12 24 3 0 0 0 2. That is received first are issued / consumed first and value fixed accordingly.0 2 404 0 2.

50 9 A 9350 2700 Q - Issues R 7 8.41. April 4 and 23. Therefore the cost of the 13000 inventory on June 30 is composed of the received of March29.50 9 A 700 - Balance Q 200 100 1200 A 1400 700 10050 8350 4950 7650 240 0 700 6080 100 200 400 300 300 1100 300 - 1700 1000 3400 600 900 2550 300 2700 - 31Jan 400 9. 2000 units at rs 2.50 8. The 1000 each issued on May 12 and June 10 are cosseted on the basis of the 2000 units received on March 3.50 8. The value of inventory under perpetual system is more than periodic system .rate rs 2. May 24 and June 30 and the value is the sum of the cost of these receipts. Valuation under perpetual inventory system- Date Q 1Jan 6Jan 8Jan 9Jan 15Jan 25Jan 27Jan - Receipts R 8. January 9.31.21. The April 18 issue or consignment of 4000 units is cosseted on the basis of first received of the year. and February 16.10.20 3680 - The value of inventory after 31 January is 6080 /rs Interpretation:The value of inventory under periodic & perpetual inventory system is different. January 27 1000 units at rs 2. 1000 units at rs 2.

DETERMINATION OF STOCK LEVELS Data of concentrate at J&J is as follows – Maximum consumption Minimum consumption Normal consumption Re-order period Re-order quantity Normal re-order period = 5000Dz per day = 55 units per day = 59 units per day = 10-15 days = 878 units = 12 days Re-order level = Maximum consumption * Maximum Re-order period Data of concentrate at J&J is as follows – Maximum consumption Minimum consumption Normal consumption Re-order period Re-order quantity Normal re-order period = 65 units per day = 55 units per day = 59 units per day = 10-15 days = 878 units = 12 days .

(59 units * 12 days) 267 units Maximum stock level - = (re-order level + re-order quantity ) ( min.Re-order level = = 65 units * 15 days 975 units Minimum stock level = re-order level – (normal consumption * Normal re-order period) = = 975 . consumption – order period) = ( 975 units + 878 units ) .(55 units * 15 days) = 1028 units Average stock level = minimum stock level + ½ of Re-ordering Quantity = 267 units + ½ * 878 units = 267 units + 439 units .

4. 3. The maximum stock level of J&J is 1028 units. After calculation the re-order level of J&J is 975 units but the actual reThe minimum stock level of J&J is 267 units.= 706 units Interpretation of result : - 1. cost SOC cost (40/unit) out 500 400 250 0 100 250 0 4000 10000 0 0. 2. Of stock expected total stock out expt. Calculation of expected stock out cost – Safety stock Stock Level out (units) stock out prob. order quantity is 878 units.01 0.01 0 40 100 0 40 . The average stock level must be 706 units.

Faces the problem of competition.02 0.01 0.03 0.03 0. PROBLEMS AND SUGGESTIONS PROBLEMS FACED BY THE ORGANITION J&J faces the following problems1 Johnson & Johnson Ltd.02 0.01 240 180 180 280 240 80 160 580 780 0 500 400 250 100 50 20000 16000 1000 4000 2000 0.04 0.150 6000 0.03 0.10 200 320 300 160 200 1180 Expected stock out cost == stock out cost * probability of stock out .01 0.02 120 220 100 300 150 50 450 350 200 50 400 16000 12000 6000 18000 14000 8000 2000 0.04 0. .02 0.

2. The manufacturing companies hold inventories in the form of raw materials. It is good for the company. 2. Inventories facilitate smooth production and sales operation (transaction motive). 4. to guard against the risk of . In store department items should placed their proper sequence & acknowledgement. In organization store assistants have no proper knowledge about engineering goods & raw materials. work in progress and finished goods. There is no proper sequence &acknowledgement board for certain items in store department . Store manager give the proper knowledge about engineering & raw materials. 3. SUGGESTIONS TO THE ORGANISATION: The organizations give proper knowledge & employees about their work. 4. Inventories constitute about 60% of current assets of companies in India. 5.It is not good when external auditing held in company. It is not good for operating profit of the company. 1. CONCLUSION The goal of the wealth maximization is affected by the efficiency with which inventory is managed. training for unskilled There should be proper record of wastage. Organization has no record of wastage items. Organization facing the problem of proper skilled employees in the production department.

unpredictable changes in usage rate and delivery time (precautionary motive), & to take advantage of price fluctuations (speculative motive). Inventories represent investment of a firm’s funds. The objectives of the inventory management should be the maximization of the value of the firm. Therefore the firm should consider:

1. Cost

2. Return

3. Risk factors

In inventory maintenance two types of costs are involved carrying cost & ordering cost .the firm should minimize the total cost (carrying plus ordering cost).The firm follows inventory control techniques as A-B-C technique EOQ & JIT techniques for better holding inventories.

PRIMARY DATA ANALYSIS (Bio – Profile of the Respondents):1 30 percent of the officials belong to the age group of 35 and 50

2 58 percent of the officials belong to the age group of 25 to 34 3 12percent of the officials belong to the age group of above 50 4 69 percent are male officials 5 31 percent are female officials 6 72 percent are graduates and above 7 12 percent are those who are having technical and professional qualifications 8 16 percent are undergraduates. 9 55 percent are those who are associated with the field 10 25 percent are those who are in the managerial and administrative posts. 11 20 percent belongs to the others category

DATA ANALYSIS 1 Are you aware about Inventory Management System?
  

Yes ------------------------------------------ 75 per cent No ------------------------------------------- 17 per cent Do not know/ Can not say ---------------- 08 per cent

Interpretation:The awareness level among the company officials regarding the existence, functioning and applicability of inventory management system is high that is 75 per cent, as per the result of the study.

08 per cent 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No Do not know/Can Not say 72% 20% 8% Yes No Do not know/Can Not say Interpretation: The company officials are aware about their company having an inventory management system. 72 per cent of the respondents do have this awareness as against 20 per .72 per cent  No -----------------------------------------------.2 Do you know that your company has an inventory management system?  Yes ---------------------------------------------.20 per cent  Do not know/ Cannot say -------------------.

cent+08 per cent of the respondents who are either not aware or not able to provide any information in this regard. 3 Do you agree that there should be an inventory management system in place in any organization / company?  Agree -----------------------------------------------.12 per cent  Do not know/ Cannot say ------------------------.68 per cent  Disagree --------------------------------------------.20 per cent .

27 per cent  To save time ---------------------------------------------------.15 per cent  Do not know/ Cannot say -----------------------------------.Interpretation:According to the response to the above question.06 per cent . 4 For what reasons do you feel that there should be an inventory management system?  To smoothen operational requirement --------------------. it appears that every company/organization should have a system or mechanism in place for managing their inventory.22 per cent  To maintain accountability and transparency ----------------30 per cent  Other reasons --------------------------------------------------.

Interpretatio n: To everyone’s surprise. This is followed by the need for saving time and the requirement of operational smoothness. 5 Do you agree that the inventory management system in your company has fulfilled the needs for which it was evolved? . 30 per cent of the respondents feel that it is for accountability and transparency purpose that inventory records are maintained and hence the need for an inventory management system.

15 per cent  Strongly Disagree ------------------------------------. it appears that the inventory management system has more or less achieved its objectives for which it was in place.47 per cent  Disagree ----------------------------------------------.11 per cent Interpretatio n: From the above response.20 per cent  Agree ------------------------------------------------. Strongly Agree -------------------------------------. This is evident from the 67 per cent of the respondents’ opinion who have either agreed or strongly agreed in .07 per cent  Do not know/ Cannot say ---------------------------.

However the response of 22 per cent of the respondents who think otherwise also speaks something. 6 What according to you is the major benefit of going for an inventory management system by your company?  It has made storage and retrieval of material easier --------.37 per cent  Improved Sales Effectiveness ---------------------------------.09 per cent .26 per cent  Reduced Operational Cost ----------------------------------.18 per cent  Other Benefits -------------------------------------------------.favor of this proposition.10 per cent  Do not know/ Cannot say -----------------------------------.

This is followed by increasing sales effectiveness and reduction in operational cost. the respondents are of the opinion that the major benefit lies in relaxation in terms of storage and retrieval of material. However. . all these benefits are interlinked and the spearing between them is more analytical than anything else.Interpretatio n: As regards the benefits of having an inventory management system by the company.

particularly in chemicals and .22 per cent 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Yes No Do not know/Can Not say 48% 30% 22% Yes No Do not know/Can Not say Interpretatio n: Recruitment of skilled professionals well vesed with latest inventory management technology.30 per cent Do not know/ Cannot say ---------------------.7 Do you have skilled professionals in your company for inventory management?    Yes ----------------------------------------------.48 per cent No ------------------------------------------------.

20 per cent Non skilled and non trained professionals --------.25 per cent Others --------------------------------------------------.paint industry is a concern for the company as it appears that it lacks in this domain.16 per cent Non skilled but trained professionals -------------.07 per cent 35% 30% 25% 20% Skilled and trained 15% 10% 5% 0% Skilled and trained Only skilled but not trained Non skilled but trained professionals Non skilled and non trained professionals Others 32% 16% 20% 25% 7% Only skilled but not trained Non skilled but trained professionals Non skilled and non trained professionals Others .32 per cent Only skilled but not trained ----------------------. What category of professionals is managing your company inventory?      Skilled and trained --------------------------------.

Interpretation: As already stated above in the earlier question.07 per cent Do not know/ Can not say ---------------------------.Do you agree that your company gives more emphasis on software than skilled manpower with regard to inventory management?      Strongly Agree -------------------------------------. 8.18 per cent Agree ------------------------------------------------.08 per cent .52 per cent Disagree ----------------------------------------------. availability of trained and skilled professionals for inventory management needs serious attention of the company.15 per cent Strongly Disagree ------------------------------------.

Interpretation: The above response gives an impression that the company puts greater emphasis on software than skilled manpower for inventory details management.10 per cent .86 per cent  No ---------------------------------------------------.Do you think that the software used by your company is according to the design and needs of the system?  Yes -------------------------------------------------. 9.

 Do not know/ Cannot say ------------------------. What is the prime challenge before Yor Company with reheard to inventory management? . 10.04 per cent Interpretation: The company appears to be using the software according to the system requirement and design and according to the customers’ needs.

04 per cent Interpretatio n: .21 per cent  Changing requirements of customers ------------------------. Lack of trained professionals ------------------------------.27 per cent  Other problems -------------------------------------------------.42 per cent  Maintenance cost --------------------------------------------.06 per cent  Do not know/ Cannot say ------------------------------------.

12 per cent .43 per cent  May change according to time ----------------------------------. 12. What is the future of inventory management system in your company?  Will continue as a successful mechanism --------------------.Lack of availability of trained professionals coupled with maintenance cost and changing needs of the customers are perceived to be the inventory challenges before the company.33 per cent  Shall collapse ------------------------------------------------------.12 per cent  Do not know/ Cannot say ----------------------------------------.

appear to pretty good. going by the response of our study .Interpretation: The future of inventory management system at Johnson & Johnson Ltd.

75 per cent  No ------------------------------------------.08 per cent 3 Do you agree that there should be an inventory management system in place in any organisation / company?  Agree -----------------------------------------------.17 per cent  Do not know/ Can not say ---------------.08 per cent 2 Do you know that your company has an inventory management system?  Yes ---------------------------------------------.20 per cent .20 per cent  Do not know/ Can not say -------------------.ANNEXURER QUESTIONNAIRE 1 Are you aware about Inventory Management System?  Yes -----------------------------------------.12 per cent  Do not know/ Can not say ------------------------.72 per cent  No -----------------------------------------------.68 per cent  Disagree --------------------------------------------.

06 per cent 5 Do you agree that the inventory management system in your company has fulfilled the needs for which it was evolved?  Strongly Agree -------------------------------------.11 per cent 6 What according to you is the major benefiit of going for an inventory management system by your company?  It has made storage and retrieval of material easier --------.15 per cent  Do not know/ Can not say -----------------------------------.37 per cent  Improved Sales Effectiveness ---------------------------------.47 per cent  Disagree ----------------------------------------------.10 per cent  Do not know/ Can not say -----------------------------------.26 per cent  Reduced Operational Cost ----------------------------------.27 per cent  To save time ---------------------------------------------------.18 per cent  Other Benifits -------------------------------------------------.07 per cent  Do not know/ Can not say ---------------------------.15 per cent  Strongly Disagree ------------------------------------.09 per cent .22 per cent  To maintain accountability and transparency ----------------30 per cent  Other reasons --------------------------------------------------.20 per cent  Agree ------------------------------------------------.4 For what reasons do you feel that there should be an inventory management system?  To smoothen operational requirement --------------------.

16 per cent  Non skilled but trained professionals -------------.22 per cent 8.52 per cent  Disagree ----------------------------------------------.18 per cent  Agree ------------------------------------------------.07 per cent .25 per cent  Others --------------------------------------------------. 7 Do you have skiled professionals in your company for inventory management?  Yes ----------------------------------------------. What category of professionls are managing your company inventory?  Skilled and trained --------------------------------. Do you agree that your company gives more emphasis on software than skilled manpower with regard to inventory management?  Strongly Agree -------------------------------------.32 per cent  Only skilled but not trained ----------------------.15 per cent  Strongly Disagree ------------------------------------.07 per cent 9.20 per cent  Non skilled and non trained professionals --------.48 per cent  No ------------------------------------------------.30 per cent  Do not know/ Can not say ---------------------.

What is the prime challenge before yor company with rehard to inventory management?  Lack of trained professionls ------------------------------.04 per cent 12.27 per cent  Other problems -------------------------------------------------.08 per cent 10.86 per cent  No ---------------------------------------------------.21 per cent  Changing requirements of customers ------------------------.10 per cent  Do not know/ Can not say ------------------------.06 per cent  Do not know/ Can not say ------------------------------------.04 per cent 11.43 per cent . Do you think that the software used by your company is according to the design and needs of the system?  Yes -------------------------------------------------. What is the future of inventory management system in your company?  Will continue as a successful mechanism --------------------.42 per cent  Maintenance cost --------------------------------------------. Do not know/ Can not say ---------------------------.

12 per cent Bibliography • Advanced Accountancy Ninth Edition S N Maheshwari. S K Maheshwari Vikas Publishing House Pvt. May change accoeding to time ----------------------------------.33 per cent  Shall collapse ------------------------------------------------------. P K Jain Tata Mc-Graw Hill Publishing Company Ltd . • Financial Management Ninth Edition I M Pandey Vikas Publishing House Pvt.12 per cent  Do not know/ Can not say ----------------------------------------. Ltd • Management Accounting Third Edition M Y Khan. Ltd.

Sales Boucher & Other Documents of the Company Johnson & Johnson Ltd. .• Purchase .

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