CHAPTER-I

OVERVIEW OF INVENTORY MANAGEMENT
INTRODUCTION: Management must be concerned with all aspects of the firm’s operations including production of goods and delivery of services, sales and marketing activities, and supporting functions, such as personal training and data processing to handle these responsibilities, most firms make extensive use of financial data and reports. As businesses become larger and more complex, finance assumed the responsibility of dealing with problems and decisions associated with managing the firm’s assets. Inventories constitute the major element in the working capital of many business enterprises. For instance, inventories on an average constitute 60 percent of current assets in public limited companies in INDIA. It is, therefore, necessary to manage inventories efficiently and effectively to avoid unnecessary investments in them .Inventories have a direct Impact on the profits of the firm. Profit is affected by inventories in several ways. Firstly, too much, or too little inventory affects the firm’s rate of return on investment. Secondly, the rate at

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which the inventories move through the production on distribution process also affects the cost of doing business.

It is therefore, necessary to formulate and initiate inventory policies which will serve as guides in determining the correct level of inventory to maintain and the correct amount of working capital to invest in inventory. To develop adequate inventory plan, it is necessary to have thorough knowledge of the objectives of inventory management and inventory management techniques.

A firm neglecting the management of inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a company to reduce its levels of inventories to a considerable degree e.g., 10 to 20 percent, without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in excessive inventories carries a favorable impact on company profitability.

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CHAPTER-II
DEFINITION AND CLASSIFICATION OF INVENTORIES:
The American institute of Accountants has set forth a definition of inventories which has been accepted both by accountants and finance executives. The definition is as follows: The term inventory designate the aggregate of those items of tangible personal property which (1) are held for sale in the course of business,(2) are in the process of production for sale, or (3) are to be currently consumed in the production of goods or services to be available for sale. The definition implies that there are four types of inventories; finished goods, work in progress, raw material, and supplies which are consumed in the creation and distribution goods and services. Raw materials are those basic inputs that are converted into finished product through the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions. Work-in-progress inventories are semi-manufactured products. They represent products that need more work before they become finished products for sale.

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But investment in large inventories St Mary’s School of Management Studies 4 . b) Minimize the firm’s investment in inventory to maximize profitability. Stocks of raw materials and work-in-progress facilitate production while stock of finished goods is required for smooth marketing operations . a) Maintenance of large size inventory to assure continuity of operation in the most efficient manner. Both over investment and under investment in inventories are undesirable.Thus.Finished goods inventories are those completely manufactured products which are ready for sale. OBJECTIVES OF INVENTORY MANAGEMNET: The inventory management consists of achieving two conflicting objectives. inventories serve as a link between the production and consumption of goods. because costs and benefits are associated with the levels of inventory. If the firm minimizes the investment in inventories the cost can be reduced. Smaller the inventory. lower the cost to the firms. The final category includes materials and supplies other than raw materials which are necessary to the normal operation.

Larger the inventory. the higher are such costs. COST OF HOLDING INVENTORY: The operating objective of inventory management is to minimize costs associated with the inventory. ORDERING COSTS: These costs are related to ordering of inventory.provides efficient and smooth production and sales operations. book-keeping. better it is from the point of view of continuity of operations. St Mary’s School of Management Studies 5 . Ordering costs are payments for secretarial services. Thus there is a necessity to aim at a level of inventory which will reconcile these conflicting elements. The objective of inventory management should be to determine an optimum level of investment in inventories on the basis of trade off between cost and benefits associated with the levels of inventory. These costs are very important in deciding the optimum level of inventory. Costs relating can be divided under two heads: ordering costs and carrying costs. Thus ordering costs consists of clerical and stationary costs. The larger the number of order placed. They are generally fixed per order placed regardless of the number of units. written and other forms of communication. The ordering costs can be minimized by placing fewer orders for a larger amount. These costs are also called as set up costs. But purchase of larger quantity of inventory would increase the carrying cost.

e. can be carried on St Mary’s School of Management Studies 6 . (Financial management) the basic function of inventories to act as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be pursued at exactly the same rate.. extra heat. According to JOHNSON R. Thus the total cost of inventory i. handling of materials. relates to the benefits of holding inventories. ordering and carrying costs should be compared with the benefits arising from holding of inventory to determine the optimum level of inventory. interest on investment in inventory. This is the opportunity cost of funds. purchasing. BENEFITS OF HOLDING INVENTORIES: Another important element in the determination pf optimum inventory level. Large inventories cause diversion of funds from other profitable ventures. The term uncoupling means that the key activities of a firm viz. the carrying costs also increase and vice versa.W. light. insurance and property tax.CARRYING COSTS: Carrying costs are related to maintenance of inventory carrying costs include expenditure for storage. Carrying costs also include the opportunity cost of funds i. which are closely interrelated. Carrying costs are nearly proportionate to the value of inventory. Inventories perform certain basic functions which are of very much importance in firm’s production and marketing strategies.e. If the level of inventory increases. producing and selling.

BENEFITS IN PRODUCTION: The basic objective of holding finished goods inventory is to separate production and sales activities. bulk purchasing also provides a hedge against labour trouble. BENEFITS IN PURCHASING: If the purchasing is carried on independently i. This will enable the firm to get certain advantages. Secondly. ordering costs can be minimized by placing fewer orders for a large amount. Thirdly. Firstly. St Mary’s School of Management Studies 7 . purchasing and production would be completely controlled by the sales schedule. But. without up to production or sales. if inventories are held. Fourthly. the firm can purchase large quantities than is warranted by usage in production or the sales levels. If inventories are not held. the bulk purchasing enables the firm to get trade discounts. large inventory serves as a hedge against increasing prices. This enables the firm to undertake production at a rate different and sales that of sales. each activity can be carried out independently and efficiently. If sales increase.e. the need for purchase and production will increase and vice versa. The following are the benefits of holding inventory.independently. If the firms demand is seasonal in nature.

management has to courses open. both the objectives of inventory management conflict with each other. BENEFITS IN SALES: The maintenance of inventories enables the firm to enhance its sales efforts. Many advantages acquire from stabilized production. Second. The optimum level of inventory St Mary’s School of Management Studies 8 . b) Reduced peak-load production and fewer overtime charges. First it can produce production when sales are high and reduce production when sales or low. Thus. The former involves discontinuity in production while the latter ensure stabilized production. d) Certain economies made possible through the purchase of raw materials. the objective of inventory management relate to the minimization of inventory on the one hand and the need to ensure sufficient inventory to assure continuity of production and sales operations. c) Reduction of certain costs which result from idle equipment. it may produce continuously throughout the year and build up inventory which will be sold during the period of seasonal demand. If the firm has no inventory of finished goods. The firm may not be able to meet the demand instantaneously had the customers may switch to other firms who can supply at short notice. its level of sales will depend upon its current production level. a) Improved worker morale and possibly greater efficiency. Thus.

5) Efficient and optimum use of physical as well as Financial Resources.should be determined in terms of trade off between costs and benefits associated with inventory management. <<<0>>> St Mary’s School of Management Studies 9 . 3) No bottleneck in production. A proper inventory control lowers down the cost of production and improves the profitability of the enterprise. IMPORTANCE OF INVENTORY CONTROL: The importance or necessity of inventory control is well explained in terms of the objects of inventory control which are obtained through it. 4) Improvement in Production and Sales. 2) Proper and efficient use of raw material. Here are certain specific advantages of inventory control: 1) Reduction in Investment in Inventory.

the benefit could not accrue to the company due to carry over inventory at higher cost. Considering the growing urbanization in the country and shortage of adequate water infrastructure. Superiority of DI pipes lies in its ability to provide trouble free service against increasing traffic load and much longer life compared to other types of pipes. St Mary’s School of Management Studies 10 . sewerage and transmission applications. which is produced mainly out of iron ore and LAM coke with other raw materials viz. the level of competition from the domestic and overseas manufactures particularly from CHINA is gradually increasing.INDUSTRY PROFILE DI pipes are generally preferred for water supply. However. Although there was a reduction in the international prices of coke. dolomite etc. which is a priority for the country. limestone. the demand scenario for DI pipes is positive.. BUSINESS Raw materials: Raw materials accounted for 58% of the company’s turnover for the year 200506. The principal raw material for the production of pipes is molten pig iron.

The production of pig iron/ molten metal from MBF was also higher at1. St Mary’s School of Management Studies 11 .Operations: The production of DI pipes increased to 76. an increased of 23%.454 Mt during 2005-06 as against 88. backward integration. OUTLOOK: The company is continuously moving forward to achieve operational excellence and value addition for the stakeholders through operational synergy. cost reduction and continual improvement in shop floor operations. higher capacity utilization. The commissioning of coke oven plant and captive power plant will further strengthen the value addition chain of the company. OPPORTUINTIES AND THREATS: Emerging domestic and international competition and rising prices of the pig iron ore and coke represent a threat to the company.887 MT in 2004-05. Capacity expansion for both pig iron and DI pipes. technological improvements in manufacturing process and setting up of coke oven plant and captive power plant will enable the company to protect margins on its end product and successfully overcome the threats. The growth in demand for DI pipes offers positive outlook for the company in the coming years.655 MT in 2005-06 compared to 62375 MT in the previous year. 11.

The company is in the consolidation phase and embarking on adding balancing facilities to expand the capacity of DI pipes from 90.000 TPA during 2006-07.20. St Mary’s School of Management Studies 12 .000 to 1.

LIL floated an another company named LANCO Kalahasthi Castings Limited (LKCL) on 4TH March 1997 to manufacturer iron castings and spun pipes in the same campus of the company with an annual capacity of 40. 1991 by LANCO Group of companies to manufacture pig iron using Korf (GERMAN) technology and cement. Accordingly LIL had an arrangement with LKCL for supply of molten iron and pig iron to LKCL. Due to the poor demand and other reasons. As a measure of forward integration project for adding value to the pig iron manufactured by the company. being a value added product. The installed capacity of pig iron was 90.700 TPA respectively.COMPANY PROFILE: LANCO INDUSTRIES LIMITED (LIL) was incorporated on 1ST November. the operation of the cement unit of the company was suspended and the unit was reengineered for producing a different product mix having potential south India.000 TPA and 35. 90. The unit is located at Rachagunneri village on Tirupathi. as such iron pipes manufactured by LKCL offered better returns.000 TPA for cement. St Mary’s School of Management Studies 13 .000 TPA and with similar capacity. SriKalahasthi road which is about 30 kms from Tirupathi and 10 kms from SriKalahasthi.

However.000 TPA. after the merger. the share capital of LIL. the capacity of pig iron was increased from 90. After takeover. a financial re-engineering and re-structuring of LIL was undertaken by ECL by implementing the following: Immediately after take over an amount of Rs. During the same time M/s Electro steel Castings Limited. Lanco Industries Limited entered into a strategic alliance partnership during December 2002. competition and the technical & financial assistance. increase additional capacity in the industry. Considering synergies involved. with M/sElectrosteel Castings Limited (ECL). 2003 LKCL was merged with the company to take advantage of the close synergy in the business of the two companies. the operations of both LIL and LKCL were affected and the company was exploring financial and technical strategic alliance with Indian / Foreign partner. was also looking for additional capacities for producing spun pipes. 2200 lakhs was infused as share capital of the company by M/s ECL to strengthen the equity base of the company. This was win-win situation for both LIL and ECL. Kolkatta a leading manufacturer of CI Pipes and DI pipes. due to falling pig iron prices.  With effect from 1ST April. since a large part of Molten iron / pig iron is consumed by LKCL for manufacture of DI pipes.  During 2002. the paid St Mary’s School of Management Studies 14 .000 TPA to 150.

.  During 2005. balancing equipment and facilities for production of higher diameter DI pipes etc.up share value of Rs. St Mary’s School of Management Studies 15 . 2004 and 2005and a dividend of 10% was declared for the years ended 31ST March 2004 and 2005 to the shareholders.  An additional amount of Rs.10/.25 crores is being spent on other capital works like revamping of bitumen coating machine.000 TPA by 2006-07. 10/.  During 2004. the company started up of a captive power plant of 12 M/V by using the waste heat recovered from the coke plant which is expected to be Commissioned by March 2006. The above has resulted in the company witnessing a profitable years a gap of 8 years during the years ended 31ST March.  During 2003.000 TPA to 120.000 TPA coke oven plant in the same complex.each fully paid up in LIL was issued to all the existing shareholders for every 4 shares held by them.2. which was commissioned in June 2005.50 per share and accordingly one share of Rs..was reduced to Rs.2003. the company took the step of backward integration by setting up 150. the capacity of the DI pipes was increased to 90. to increase the capacity of DI pipes from the present 90.000 TPA.

Step by Step Company’s growth: 1991 Incorporation of Lanco. 2005 Setting up of captive power plant of 12 M/V by using the waste heat recovered from the coke oven plant.000 TPA castings and 35. 2003 Merger of LKCL with LIL for synergy.000 TPA.000 TPA capacities.000 TPA to 150.2200 lakhs to the equity and financial restructuring. 1995 Setting up a 250 TPD Mini cement plant. 2002 Infusion of Rs.700 TPA DI pipes. St Mary’s School of Management Studies 16 . 2003 Capacity of pig iron was increased to 90. 2002 Strategic Alliance with Electro steel Casting Limited.000 TPA coke oven plant.000 TPA. 2005 Commissioning of 150. 1994 Setting up of Mini Blast furnace with 90. 2004 Capacity of DI pipes was increased to 90. 1997 Setting up of LKCL for manufacture of 40.

FUNCTIONS: As mentioned earlier. Once inventory in one bin is used. and means while the firm uses inventory in the second bin . an order is placed. The departmental store will have to maintain a self-operating. a small firm may operate a two-bin-system. automatic computer system for tracking the inventory position of various items and placing order.For example. Under this system. the company maintains two bins. Necessary because it aims at absorbing the uncertainties of demand and supply by ‘decoupling’ the demand St Mary’s School of Management Studies 17 . inventory is a necessary evil. this system is quite unsatisfactory. They range from simple systems to very complicated systems. There are several inventory control systems in vogue in practice.For a larger departmental store that sells hundreds of items. The main objective of inventory control is to achieve maximum efficiently in production and sales with the minimum investment in inventory. The nature of business and the size dictate the choice of an inventory control system .CHAPTER-III RESEARCH METHODOLOGY INVENTORY CONTROL: A firm needs an inventory control system to effectively manage its inventory.

the larger Will have to be the amount of buffer stocks to be carried for a Service level. Technology requirement of batch processing also build up cycle stock. b) Time long in deliveries also necessitates building of inventories. prescribed St Mary’s School of Management Studies 18 . Thus an organization may be carrying inventory for the following reasons. a) Demand and lead-time uncertainties building of safety stock (buffer stocks) so as to enable various sub-systems to operate somewhat in a Decoupled manner. It is obvious that the larger the uncertainty of demand and supply. if the Replenishment lead times are positive then stocks are needed for system Operation. c) Cycle stocks may be maintained to get the economies of scale so that total system cost due to ordering carrying inventory and back logging are minimized. This includes materials actually being worked or moving between work centers. e) When the demand seasonal may become economical to build inventory during periods of low demand to case the strain of peak period of demand.and supply sub-systems. d) Stocks may build up as pipeline inventory or work-in-progress inventory due to finiteness of production and transportation rates.

3) Adequate storage facility. 8) Co-ordination. 2) Standardization and simplification of inventories in order to maintain Quality and reduce the number of items. St Mary’s School of Management Studies 19 . plant etc. The inventory includes stock of raw materials. nature of item. finished goods and components etc. each item of inventory should be assigned a particular code for proper identification and must be divided in groups on basis of location. In order facilitate prompt recording. locating and dealing. 7) Intelligent and experienced Personnel. ESSENTIAL OF GOOD INVENTORY CONTROL SYSTEM: 1) Classification and codification of inventories by allotting proper code Number to each item and group and regroup on some basis. 10) Internal Check. 4) Setting different levels and reorder point for each item of inventories. semi-finished goods. 5) Fixing Economic Order Quantity. discount sales anticipated increase in material price possibility of future non-availability etc.f) Inventory may also be build up for other reasons such as quantity discounts being offered by suppliers. of several descriptions. 9) Budgeting. 6) Experienced personnel for handling inventories properly.

Therefore. ♦ Use of perpetual inventory records and continuous stock verification. The following are the important techniques of inventory control. ♦ Setting of various stocks levels.TECHNIQUES OF INVENTORY CONTROL: Effective inventory management requires an effective control system of inventories. ♦ ABC analysis. if the inventory level is too little the firm will face frequent stock outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie up to capital.O. ♦ Determination of Economic Order Quantity (E. SETTING OF VARIOUS STOCKS LEVEL: Carrying of too much little of inventories is determined to the firm. an efficient inventory management requires that a firm should maintain an optimum level of inventory costs are the minimum and at a same time there is not stock out which may result in loss of sale or stoppage production of various stock levels are discussed as such. ♦ Two bin system. ♦ Establishment of system of budgets.Q). St Mary’s School of Management Studies 20 . ♦ Use of control ratios. A proper inventory control not only helps in solving the acute problem of liquidity but also increases profits and causes substantial reduction in the working capital of the concern. ♦ Review of slow and non-moving items.

Re-ordering level: It is the point at which if stock of a particular material in store approaches. the storekeeper should initiate the purchase requisition for fresh supplies of that material. Re-ordering level can be calculated by applying the following formula. Re-ordering level =Maximum Consumption x Maximum re-order period. This level is fixed somewhere between the maximum and minimum levels in such a way that the difference of quantity of the material between the reordering level and the minimum level will be sufficient to meet the requirements of production up to the time the fresh supply of the material is received. Or Re-ordering level = Safety stock + Average daily consumption X Average delivery period [ ] Where: Safety stock= Annual Demand X [Maximum lead time –– Normal lead time ] 365 St Mary’s School of Management Studies 21 .

The maximum stock level is fixed by taking into account the following factors. The quantity is fixed so that there may be no overstocking. The formula used for its calculation is as follows: Minimum Level of inventory = Re-order level – [Normal consumption X normal re-order period ] Maximum level: It represents the maximum quantity of an item of material which can be held in stock at any time. This period can be calculated by averaging the maximum and minimum period. St Mary’s School of Management Studies 22 . 2) Average rate of consumption for each inventory item. Stock should not exceed this quantity.Minimum level: It indicates the lowest figure of inventory balance. so that there is no stoppage of production due to nonavailability of inventory. The main consideration for the fixation of minimum level of inventory is as follows: 1) Information about maximum consumption and maximum delivery period in respect of each item to determine its re-order level. 3) Average delivery period for each item. which must be maintained in hand at all times.

♦ Godown space available. ♦ Rate of consumption of the material during the lead time. ♦ Cost of maintaining stores. ♦ Maximum requirement of the stores for production purposes at any point of time. so these have to be stocked heavily during these periods. ♦ Likely fluctuation in prices. ♦ The seasonal nature of supply of material. ♦ Restrictions imposed by the government or local authority in regard to material in which there are inherent risks e. evaporation etc.g. ♦ Possibility of change in fashion and habit which will necessitate change in requirement of materials. Certain materials are available only during specific periods of the year.♦ Amount of capital available for maintaining stores. Maximum level of inventory= Reorder level + Reorder quantity –– [Minimum consumption X minimum re-ordering period] St Mary’s School of Management Studies 23 . fire and explosion. ♦ The time lag between indenting and receiving of the material. ♦ Possibility of loss in stores by deterioration.

Danger level= Average consumption X lead time for emergency purposes. STOCK CONTROL THROUGH ABC ANALYSIS: Manufacturing organization find it useful to divide materials into three categories for the purposes of exercising selective control on materials. of the second category as “B” items and items of the third category are taken as “C” St Mary’s School of Management Studies 24 . on the other hand. Between equal to their value of consumption. it reaches the danger level. when immediate action is to be taken for replenishment of stock.Average stock level: The average stock level is calculated by the following formula: Average stock level = Minimum stock level + [1/2 of re-order quantity] Danger level: When the stock level falls below the minimum level. An analysis of the material costs will show that a smaller percentage of items of materials in the stores may contribute to a large percentage of the value of consumption and. Items falling in the first category are treated as “A” items. a large percentage of times may represent a smaller percentage of the value of items consumed.

under this technique of material control. materials are listed in ‘A’. So it is also known as “control by Importance and Exception” (C. It concentrates on important items.Thus.items.’B’and ‘c’ categories in descending order based on money value of consumption. Such an analysis of material is known as ABC analysis.S. ABC analysis is measures the cost significant of each item of material.I.A. JAPAN and WEST GERMANY” gives the following example of ABC analysis: Category A B C Total % of Items 15 35 50 100 ABC analysis of inventory items % of Value 80 15 5 100 The significant of this analysis is that a very close control is exercised over he items of ‘A’ group which account for a high percentage of costs while less stringent control is adequate for category ‘B’ and very little control would suffice for category ‘C items. St Mary’s School of Management Studies 25 . This technique of stock control is also know as stock control according to value method or always better control method or proportional parts value analysis method .E). The report of the INDIAN productivity Team on “Stores & Inventory control in U.

100% 95%

Class A 0 15%

Class B 50%

Class C 100%

% of number of items ABC analysis of INVENTORY ITEMS

Advantages: A strict control is exercised on the item which represents a high percentage of the material costs. Managerial time is spent on ‘A’ items whereas ‘C’ items and

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sometimes ‘B’ items can be handled by clerical staff with least managerial supervision. 1) Investment in inventory is reduced to the minimum possible level because a responsible quantity of ‘A’ items representing a significantly portion of the material costs is purchased. To reduce investment in materials, close control ‘A’ items contributes much more than close control of ‘C’ items. 2) Storage a cost is reduced as a reasonable quantity of materials, which account for high percentage of value of consumption will be maintained in the stores. Two bin system: Under this system each bin is divided into two parts– one, smaller part, should stock the quantity equal to the minimum stock or even the re-ordering level, and the other to keep the remaining quantity. Issues are made out of the large part; but as soon as it becomes necessary to use quantity out of the smaller part of the bin, fresh order is placed. “Two bin systems” is supplemental to the record of respective quantities on the bin card and the stores ledger card. Establishment of system of budgets: To control investment in the inventories. It is necessary to know in advance about the inventories requirement during a specific period usually a year.

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The exact quantity of various types of inventories and the time when they would be required can be known by studying carefully production plans and production schedules. Based on this, inventories requirement budget can be prepared. Such a budget will discourage the unnecessary investment inventories.

Use of perpetual inventory records and continuous stock verification: Perpetual inventory system: Under this system a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of material is always available. CIMA defines perpetual inventory system as “the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value.” In this system the entries are made in bin cards and stores ledger as and when the receipts and issues of materials take place and ascertaining the balance after every receipt or issue of materials. The stocks as per the dual records namely bin card and stores ledger are reconciled on a continuous basis. Advantages: ♦ This system avoids the disruptions to production or trading caused by the periodic stock taking.

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All the items of stocks in the store are reviewed periodically. CIMA defines periodic stock taking as “a process whereby all stock items are physically counted and then valued. ♦ It helps in having a detailed and more reliable check on the stocks.g.♦ This system facilitates production planning and inventory control. ♦ Perpetual inventory system is efficiently maintained with continuous stock taking. ♦ The stocks records are more reliable and stock discrepancies are investigated and appropriate actions are taken immediately. Periodic stock taking system: Under this system the stock levels are reviewed at fixed intervals e.” The aim of periodic stock taking is to find is to find out the physical quantities of materials of all types are physically counted at a given date. ♦ Stock can be taken for the purpose preparation of profit and loss account and balance sheet. ♦ The perpetual inventory system avoids the necessity of stock taking by actual at the end of financial period. St Mary’s School of Management Studies 29 . at the end of every month or three months.

O. after which no movement of stock is allowed until the count has been completed. and if still not resolved should be reported to management. ♦ In the office. and the quantities checked against the stock records. and that no omission or duplications occur.Q): The total costs of a material usually consist of: St Mary’s School of Management Studies 30 . ♦ Any stocks showing discrepancies should be recounted. Determination of Economic Order Quantity (E. ♦ All staff involved should be issued with stock taking instructions well before the date of the actual count. the completed stock sheets should be collated and totaled. ♦ Senior staff or auditors should perform sample checks on a number of items. to ensure that all stock is counted once. Often non-stores staff ill be involved in the count. ♦ Stock checkers should enter amounts counted on preprinted stock sheets.♦ A team of stock checkers should be allocated to count all stock in one area. ♦ A ‘cut-off’ time should be set.

St Mary’s School of Management Studies 31 . ♦ Cost of spoilage in stores and handling. ♦ Clerical cost etc. ♦ Insurance cost.Total acquisition cost + Total ordering cost + Total carrying cost. Carrying costs: It is the cost of holding the materials in the store and includes: ♦ Cost of storage space which could have been utilized for some other purpose. ♦ Cost of obsolescence on account of some of the materials becoming obsolete after some time of storage either due to change in the process or product. ♦ Cost of bins and racks that have to be provided for the storage of materials. ♦ Transportation costs in relation to stock. ♦ Amount of interest payable on the money locked up in the materials. The quantity of materials to be ordered at one time is known as economic ordering quantity. Total acquisition cost through buying is usually unaffected irrespective of the quantity of material ordered at one time unless quantity discounts are available. ♦ Cost of maintaining the materials to avoid deterioration. This quantity is fixed in such a manner as to minimize the cost of ordering and carrying the stock.

If huge quantity is ordered at one time.e. C = holding costs of inventory O.O.U per year Y From the above diagram it is clear that carrying costs and ordering costs behave in opposite ways. U = consumption of the material concerned in units during a year. ordering costs St Mary’s School of Management Studies 32 . inspection section and payment department. 2) Cost of stationery. O = Cost of placing one order including the cost of receiving the Goods i. postage and telephone charges.Q = 2UO C Where EOQ = economic order quantity. cost of getting an item into the firm’s inventory.Ordering cost: It is the cost of placing orders for the purchase of materials and includes: 1) Cost of staff posted in the purchasing department. E.

Computation of inventory turnover ratio may help in identifying slow moving items. Besides this no new requisition should be made for the purchase of slow moving items. it is necessary to dispose –off as early as possible. The Pareto distribution: St Mary’s School of Management Studies 33 . it appears that the concern has blocked huge sum of money unnecessarily in raw materials. till the existing stock is exhausted. To overcome this problem. the non-moving items or make arrangements for their exchange with the inventories required by the concern.will be low and carrying costs will be high and vice versa if low quantity is ordered at one time. 2) Prices of the item remain stable which keep carrying cost constant. Assumptions: 1) There are dynamic conditions of the supply which enable a firm to ace as many orders as it needs. 3) The quantity of the item to be consumed during a particular period is totally known i. quantity to be consumed is certain. due to high value of slow moving and non-moving raw materials. Review of slow and non-moving items: Sometimes.e.

The remaining 80% of items do not require such rigorous control methods applied to them because the cost and effort might not be justified by the saving obtainable. VED Analysis: VED–– vital. Its name is derived from an economist. who suggested that 805 of a nations wealth is held by 20% of its population and so the remaining 80% of the population hold only 20% of its net wealth. the stock-out of which even for a short time will stop production for quite some time and where the cost of stock out is very high. are known as essential spares.The Pareto (80/20) distribution is similar in concept to ABC method of stock control. the absence of which cannot be tolerated for more than a few hours or a day and the cost of lost production is high and which are essential for the production to continue. The spares. essential or desirable keeping in view the criticality of production. The spare parts can be divided into three categories–– vital. essential and desirable–– analysis is used primarily for control of spare parts. the spares. vilfredo Pareto. This indicates that rigorous stock control methods should be applied to these 20% of items in order to derive maximum benefits from stock control. This 80/20 analysis has been applied to stocks that 20% of stores items account for 80% of the value of stocks in hand. are known as vital spares. The desirable spares St Mary’s School of Management Studies 34 .

which indicates the relation between the quantity of material used in the production and the quantity of final output. the Input-output ratio is calculated as follows: Input – Output Ratio = Input Units / Output x100 St Mary’s School of Management Studies 35 . if 500 units of material is introduced into the process or operation and the yield of final product is 400 units. Input – Output Ratio: Input-Output ratio is used in material control. VED analysis is made to get the effective result. in their cases. For example. So. Some spares. Such spares may not receive the attention they deserve if they are maintained according to ABC analysis because their value of consumption is small.are those spares which a are needed but their absence for even week or so will lead to stoppage of production. though negligible in monetary value. may be vital for the production to continue and require constant attention.

spoilage and defectives. ♦ It acts as a performance indicator of particular production cost centers. ♦ The standard input-output ratio act as guide in control of materials used in the process by minimization of waste. St Mary’s School of Management Studies 36 .Advantage Analysis : The advantage of analysis of input-output ratios is given below: ♦ It helps in material planning by estimation of output and its raw material requirement. ♦ It helps the management in investigation and analysis of any variation is material usage by establishing relation between input and output. scrap. ♦ The cost-benefit analysis of use of different substitutes of raw material is possible by comparing each of the input-output ratios.

it is possible to know which is fast moving and which is slow moving. <<<O>>> St Mary’s School of Management Studies 37 . The stock turnover ratio is calculated by applying the following formula. Cost of materials used during the period Average stock of materials used during the period By comparing the number of days in the case of two different materials. and prevent over-stocking of the slow moving items. On this attempt should be made to reduce the amount of capital locked up.Stock turnover ratio: The stock turnover ratio indicates the movement of average stock holding of each item of material in relation to its consumption during the accounting period.

which goes in the production process. Fixed assets constitute capital already suck and the only scope for improving the R.O. But holding costs are involved in inventory control tool guide in formulating an inventory policy for various raw materials. The important of the inventory management lies in the fact that in significant contribution made in reducing material cost through proper control will go a long way in improving the profitability and R.SCOPE AND METHODOLOGY Scope: Raw materials contribute a single largest expenditure item. The study has been conducted to know the most suitable and economies maintenance of inventory for LANCO INDUSTRIES LIMITED.I. which account for nearly 70% of the total value. lies in the efficient management of materials. It also acts as lubricant and spring for production. St Mary’s School of Management Studies 38 . So the inventory control assumes greater importance. distribution system.O.I. Holding inventory is inevitable for keeping the production wheels running.

 To present analysis of Inventory Ratios.  To calculate the stock control levels of Inventory.  To estimate the EOQ for the Lanco Industries. St Mary’s School of Management Studies 39 .Methodology: Objectives of the study.  To analyze the stock control in Lanco Industries by adopting ABC Technique.  To suggest necessary measures for an effective Inventory Management System for the Lanco Industries. Generally the objective of the present case study to analyze the inventory Management Analysis in particular this analysis aims at.

EOQ Model and Control Levels. Tools of Analysis: The analysis of the case study is primarily descriptive in nature. Besides the Financial Manager was also interviewed personally to collect some of the data which are not available in the reports. Besides the description is also presented through graphical representations for easy understanding. The analysis is made by adopting ABC technique.. from 2000-06 keeping the objectives in view the data has been collected .e. from the Lanco Industries and it reports on Financial results for the above period. St Mary’s School of Management Studies 40 .DATA BASE: The present case study is based on secondary data sources of data collected from Lanco Industries for six years i.

The firm should receive the most effort in controlling. ♦ EOQ ♦ Control levels.Chapter IV DATA ANALYSIS AND ITERPRETATION DATA ANALYSIS: Analysis the inventory handling using the following techniques. Control Mechanism: Usually the firm has to maintain several types of inventories. It is not desirable to keep same degree of control on all items the firm should play maximum attention to these whose is the highest value. St Mary’s School of Management Studies 41 . ♦ ABC analysis (control mechanism). The firm should be selective in it approach to control inventory handling in various types of inventories.

In this. St Mary’s School of Management Studies 42 . In this. the items are classified in the importance of their relative value. Rules of implementing ABC techniques: ♦ Classify the item of inventories. ♦ Find the total cost of each item. This is also known as proportional value analysis (PVA) or annual usage value analysis. ♦ Determine the price per unit of each item. “C items” represents relatively least value and would be under simple control. ABC Analysis: ABC analysis or classification which is said to be “always better control”. “B items” fall in between these two categories and require reasonable alteration of management. Thus ABC analysis firstly organized in the “General Electric Company” of USA. the higher value items are classified as “A items” and would be under the highest control. and tends to measure the significance of each item ate inventories in terms of its value. (AUV).This analytical approach is called the ABC analysis.

g. Determination of optimum ordering quantity: Determination of the quantity for which order should be placed is one of the important problems concerned with efficient inventory management. “B” items having low consumption value (e. ♦ Calculate the percentage of Total cost of each item to total cost of all items.e. ♦ Find out the total number of items and calculate the percentage of each item. It is fixed mainly after taking into account the following costs: St Mary’s School of Management Studies 43 .g. “C” items having moderate consumption value (e. “A” items having high consumption value (e. Economic order quantity refers to the size of the order which gives maximum economy in purchasing any item of raw materials of finished product. ♦ Combine items on the basis of their relative value to form three categories A. – 30%).–15%). arrange in descending order). C. allotting first rank to the item with highest total cost and so on (i. – 55%). B.♦ Rank the items in accordance with total costs.g.

Inventory carrying cost: It is the cost of holding the materials in the store and includes: ♦ Cost of storage space which could have been utilized for some other purpose. ♦ Amount of interest payable on the money locked up in the materials. ♦ Cost of obsolescence on account of some of the materials becoming obsolete after some time of storage either due to change in the process or product. ♦ Clerical cost etc. ♦ Transportation costs in relation to stock. 2) Cost of stationery. inspection section and payment department. Ordering cost: It is the cost of placing orders for the purchase of materials and includes: 1) Cost of staff posted in the purchasing department. ♦ Cost of maintaining the materials to avoid deterioration. ♦ Cost of spoilage in stores and handling. St Mary’s School of Management Studies 44 . ♦ Cost of bins and racks that have to be provided for the storage of materials. ♦ Insurance cost. postage and telephone charges.

♦ Lead time does not fluctuate and is instantaneous.U per year Q = …………….? (In units) Calculation of Economic Order Quantity (EOQ) for the following items: Assumptions: ♦ Demand does not vary.Derivation of economic order quantity (EOQ): Given E. St Mary’s School of Management Studies 45 .O.Q = 2UO C Where: EOQ = economic order quantity. O = Cost of placing one order including the cost of receiving the goods i. U = consumption of the material concerned in units during a year.. ♦ The rate at which the inventories or makes sales is constant throughout the year.e. cost of getting an item into the firm’s inventory C = holding costs of inventory O.

00 1. On account of these reasons. Economic Order Quantity (EOQ) for the raw materials which is used in LANCO S.No.The above assumptions may also be called as limitations of EOQ model.00 2. There is very likelihood of a discrepancy between actual and estimated demand for a particular item of inventory. EOQ may sometimes give wrong estimate about Economic ordering quantity.00 3. 1 Items Graphite Economic order Quantity 580 St Mary’s School of Management Studies 46 .00 1. the assumptions as to constant usage or sale of inventories and instantaneous replenishment of inventories are also of doubtful validity.00 0.00 3.No.00 5. 1 2 3 4 5 6 7 8 9 10 Items Graphite Quickset-510 Quickset-520 Sieved sand Silica sand HSD LDO Raw material Ino pipe Scrap Order Cost 10 59 29 29 32 20 25 20 10 60 Carrying Cost 1. Similarly.00 Monthly Consumption 29 nos 549 kgs 583 kgs 1014 mt 230 mt 86 ltr 310 ltr 4 mt 29 mt 935 mt INDUSTRIES LIMITED S.70 1.30 0.

information is required about two things. the order is placed at this level.2 3 4 5 6 7 8 9 10 Quickset-510 Quickset-520 Sieved sand Silica sand HSD LDO Raw linseed oil Ino pipe Scrap 32391 33814 1835 4907 11467 22143 160 870 22940 Determination of stock levels Reorder level: re-order level is the level of inventory at which the firm should place an order to replenish the inventory. In order to determine reorder level. (a) The lead time and (b) the usage rate. The term lead time refers to the time normally taken in receiving the delivery of inventory after the order has been placed in case there is no St Mary’s School of Management Studies 47 . In case. the new goods will arrive before the runs out of goods to sell.

If the quantity exceeds maximum level limit then it will be over-stocking. Safety stock = Average usage X period of safety stock. Maximum inventory = Economic Order Quantity + safety stock. In order to guard against such a contingency the firm maintains a safety stock the minimum buffer stock as a cushion against possible increase in usage or delay in delivery time. the order level can be determined by simply applying the formula. St Mary’s School of Management Studies 48 . Overstocking will mean blocking of more working capital. Re-order level = Average usage X lead time + safety stock. Safety stock level: The actual usage as well as the lead time may be different from the normal usage or the normal lead time. A firm should avoid over-stocking because it will result in high material costs. Maximum inventory: It is the quantity of materials beyond which a firm should not exceed its stocks. and more chances of losses from obsolescence. more space for storing the materials. This can be calculated by using the following formula. more wastage of materials. The level of safety stock can be calculated by applying the following formula.uncertainty about the usage rate and the lead time.

Safety stock = Average usage X period of safety. For other raw materials. Safety stock = Average usage X period of safety. S.Calculated the re-order level. usage is 6000 lbs and period of safety is 1 week. For example: Graphite avg.NO 1 2 3 4 5 6 7 8 Graphite Quickset-510 Quickset-520 Sieved sand Silica sand HSD LDO Raw materials Items Safety stock 870 549 583 1014 230 344 1240 60 St Mary’s School of Management Studies 49 . = 29 X 30 days. 1) Calculation of safety stock level of inventories. safety stock level and maximum inventory for the following raw materials. = 870.

NO 1 2 3 4 5 6 7 8 9 10 Items Graphite Quickset-510 Quickset-520 Sieved sand Silica sand HSD LDO Raw linseed oil Ino pipe Scarp Re-order level 1740 1098 1166 2028 460 688 2480 120 2538 1870 3) Calculation of maximum inventory: Maximum inventory = Economic Order Quantity + safety stock.9 10 Inopipe Scarp 29 935 Calculation of re-order level of inventories: Re-order level = average usage X lead time + safety stock For example for aluminum alloy. = 29 X 30 days + 29 =1740. For other items: S. = 1121 +5500 St Mary’s School of Management Studies 50 . For example: calculation of maximum inventory for shell sand When EOQ = 1121 kgs and safety stock 5500 kgs/ weeks. Maximum inventory = EOQ + safety stock.

St Mary’s School of Management Studies 51 . B-class. Items Graphite Quickset-510 Quickset-520 Sieved sand Silica sand HSD LDO Raw linseed oil Ino pipe Scrap ABC plan: EOQ 580 32391 33814 1835 4907 11467 22143 160 870 22940 Safety stock 870 549 583 1014 230 344 1240 60 29 935 Maximum inventory 1450 32940 34397 2849 5137 11811 23383 220 899 23875 ABC analysis is the important method used for selecting inventory control. Statement–– I indicates the result of treating all items alike. C-class items. In this case four orders are placed for A-class.items. ABC analysis is a versatile tool use as a cost reduction Technique. Statement–– II indicates how more attentive is paid for A-class item.= 6621. less attention paid for B-class item and annual orders are placed for C-class . The result is without increasing ordering cost the average inventory can be reduced by 40% and the inventory carrying cost by 40%.

which is possible. where the curvature change drop a perpendicular line. by relaxing control on class B items. % of item and cumulative % of an item. cumulative % of cost. and annual orders placed for C-class items. draw the plan of ABC selective control for LANCO INDUSTRIES LIMITED. By this method the production manager can effectively control inventory management through Method or Exception (MOE). St Mary’s School of Management Studies 52 . From the following details. Similarly next portion of the curve. This is done by findings out % of cost.Thus a production Manger while focusing his attention on A-class item. to get the curve. can effectively bring to the inventory carrying cost as well as reducing the inventory from the working capital for effective control of inventory. By joining all the points. where there is curvature change drop a perpendicular to cut in the X-axis. Normally fixed order quantity system that is the cure system is use for ordering A-class item Replenishment system or the system is used for ordering B-class items and annual orders are placed for C-class item. Then ABC is segregated. How to do ABC–– analysis? ABC–– Analysis is drawn with the 0% of items on X axis.

For example. however. the item may be very important to the production process because of its scarcity.NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Items Graphite segment Quickset-510 Quickset-520 Raw linseed oil Sieved sand Silica sand Black paint for production Black paint (pipe) H. The system analysis the items according to their values and not according to their importance in the production process. Such as items as a matter of fact requires the almost attention of the management though it is not admissible to do as per the system of ABC analysis. St Mary’s School of Management Studies 53 . an item of inventory may not be very costly and hence it may have been put in category C.Red & Brown paint Ino pipe HSD LDO Furnace oil (lv) Furnace oil SCRAP Units 29 549 583 4 1014 230 11549 13577 518 29 86 310 136 27 935 Unit cost 7701 65 185 49762 310 350 72 49 88 66212 30805 30988 23295 19116 16900 The system of ABC analysis suffers from a serious limitation. the system of ABC analysis should not be followed blindly. Hence.S.B.

NOTES: 1. The quantity based on monthly requirement. For the ABC analysis. The cost/unit is taken as on the basis of current market price. 2. the major 20 items used in the LANCO INDUSTRIES LIMITED are taken into consideration. 3. St Mary’s School of Management Studies 54 .

69 7 14 5 4 2 3 8 1 St Mary’s School of Management Studies 55 .43 43.12 5.10 15 3 Quickset-520 583 185 107855 0.62 10 2 Quickset -510 549 65 35685 0.55 11 5 Sieved sand 1014 310 314340 0.30 12 4 Raw linseed oil 4 49762 199048 0. Items Units Cost Cost king 1 Graphite segment 29 7701 223329 0.33 26.Red & brown paint Ino pipe HSD LDO Furnace oil (lv) Furnace oil Scrap 13577 518 29 86 310 136 27 935 49 88 66212 30805 30988 23295 19116 16900 665273 45584 1920148 2649230 9606280 3168120 516132 15801500 1.76 1.87 9 6 Silica sand 230 350 80500 0.30 6 8 9 10 11 12 13 14 15 production Black paint (PIPE) H.57 8.B.No.83 0.3 7.22 13 7 Black paint for 11549 72 831528 2.Ranking of Items according to their usage value % of Unit Total Total Cost RanS.

23 98.40 2.667 26.667 20.667 60.22 0.77 86.669 6.57 80% 8.87 15% 1.667 66.335 6.62 Cumulative % of cost 44.88 .69 26.92 7.30 5% 0.87 78.93 95.667 13.23 91.667 46.Ran.73 % of Cumulative Item % of item 6.333 6.666 6.62 0.40 2.88 0.46 5.Item % of King Nos Total items 1 2 3 15% 3 4 5 6 5 35% 7 8 9 10 11 12 7 50% 13 14 15 15 100 Value (in Rs) 15801500 9606280 3168120 2649230 1920148 831528 665273 516132 314340 223329 199048 107855 80500 45584 35685 36164552 Cumulative Value 15801500 25407780 28575900 31225130 33145278 33976806 34642079 35158211 35472551 35695880 35894928 36002783 36083283 36128867 36164552 ABC Plan Cumula % of tive Total % Value 43.51 25.336 6.34 1.51 69.670 St Mary’s School of Management Studies 56 .667 6.001 6.45 .63 93.12 0.667 53.10 100 Category A B C The following conclusions are drawn from ABC Analysis: S.87 1.34 1.003 6.46 5.667 40.92 7.56 0.NO 1 2 3 4 5 6 7 8 9 10 Consumption value 15801500 9606280 3168120 2649230 1920148 831528 665273 516132 314340 223329 % of Cost 44.37 8.78 97.11 98.002 6.45 .667 6.667 33.

00 73.338 100.667 6.667 6.11 12 13 14 15 199048 107855 80500 45584 35685 36164552 0.10 100.28 99.56 .337 80.80 99.00 99.667 100.30 . 2) 35% of items account for 15% of total value 40 St Mary’s School of Management Studies 57 .22 0.12 0.00 6.667 6.00 45 Conclusions: 1) 15% of items account for 80% of total value.90 100.667 6.671 93.004 86.58 99.

it automatically effects the production. remaining all the items fall into category. adequate raw materials are to be kept as buffer stock to smooth running of organization. and furnace oil accounts for 35% of total cost where as 15% in terms of total items. The result is without increasing ordering cost the average inventory can be reduced by 40% and the inventory carrying cost by 40%. So. it amounts to huge savings and there by increase its profitability. more attention should be paid for these two items. Due to strong negotiations with the vendors. 2) The raw material HSD. If we reduce the price of these raw materials up to some extent. by relaxing control on class St Mary’s School of Management Studies 58 . some attention should be paid for these three items. 1) The basic raw materials scrap. Inopipe.Thus a production Manger while focusing his attention on A-class item. So. it automatically effects the production. black paint. black paint (production). These items are also important for production. If there is any delay in getting the raw materials. 3) Except A and B categories. the percentage of total value should only account for only 5% where as 50% in terms of percentage of total items. So. Here. If there is any delay in getting the raw materials. LDO and furnace (LVF) account for 80% of total cost where as only 15% in terms.3) 50% of items account for 5% of total value.

The technique is based in this assumption that a firm should not exercise the same degree of control on items which are more costly as compared to those items which are less costly. Classification of items according to ABC. since the items are classified in importance of their relative value. B and C analysis concentrates on important items and exception (CIE). while category B may consist of less costly items and category C of the least costly items. VED categories: ABC analysis is the technique of exercising selective control over inventory items.B items. Thus A.–– A. This approach is also known as “proportional value analysis (PVA). and annual orders placed for C-class items. St Mary’s School of Management Studies 59 . B and C. the inventory items are divided into three categories. Category A may include more costly items. According to this approach. can effectively bring lower the inventory carrying cost as well as reducing the inventory from the working capital for effective utilization of inventory.

The requirements and urgency of spare parts is different from that of materials. The E types of spares are also necessary but their stocks may be kept at low figures. The demand for spares depends upon performance of the plant and machinery. Essential (E) and desirable (D). no definite procedure can be laid down for classifying the inventories in A. specific requirements of the business etc. The stocking of D type of spares may be avoided at times. Spare parts are classified as Vital (V). then stocking of these spares can be avoided. A-B-C analysis may not be properly used for space parts. The non-availability if vital spares will cause havoc in the concern. urgency and use of these spares. The vital spares are must for running the concern smoothly and these must be stored adequately. B and C categories as nature and varieties of items. a wrong classification of any spare will create difficulties for production department. if the lead time of these spare is less. The classification of spares should be left to the technical staff because they know the need. S. The classification of spares under three categories is an important decision. VED analysis is used generally for space parts.NO 1 2 3 4 5 6 Items Graphite segment Quickset-510 Quickset-520 Raw linseed oil Sieved sand Silica sand VED V V V V V V ABC A A A B B B St Mary’s School of Management Studies 60 .Though.

use of ratios in horizontal analysis indicates whether the financial condition of the corporation is improving or deteriorating and whether the profitability or efficiency is showing an upward or downward trend. First. In fact analysis of ratio involves two types of comparison. a comparison of present ratio with past and expected future ratios for the same corporation.B. Like wise.Red & brown paint Ino pipe HSD LDO Furnace oil (LV) Furnace oil Scrap D D D E E E E E E B B C C C C C A C ANALYSIS OF INVENTORY RATIOS: Ratios are significant both in vertical and horizontal analysis in vertical analysis ratio analysis are important to form a judgment whether performance of the corporation at a time is good. Financial ratios become meaningful to judge financial condition and profitability performance of the corporation only when the is comparison. The analyst can determine the composition of change and determine whether there has been an improvement or deterioration in the financial position of the St Mary’s School of Management Studies 61 . questionable or poor.7 8 9 10 11 12 13 14 15 Black paint for production Black paint (pipe) H.

2) Inventory to current assets ratio. The purpose is to ensure the blocking of turnover ratio also know as stock velocity ratio. St Mary’s School of Management Studies 62 . 3) Inventory to working capital ratio. The ratios which related to inventory are: 1) Inventory turnover ratio. It is normally calculated as sales/ average inventory or cost of goods sold/ average inventory cost. The second method of comparison involves comparing the ratios of the company or with industry averages at the same point of time. Inventory turnover ratio= Cost of goods sold Average inventory at cost.corporation over the period of time. 1) Inventory turnover Ratio: Inventory turnover ratios are calculated to indicate inventories have been used efficiently or not. Such a comparison would provide considerable insight into the relative financial condition and performance of the company. Inventory conversion period may also be calculated to find the average time taken for clearing the stocks.

Or = Net sales Average inventory.8 66031920 1367190755 cost of goods sold Average inventory at cost For the years Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 St Mary’s School of Management Studies 63 . Particulars of the inventory turnover ratio Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Cost of goods sold 66031920 11006393 10781700 648180 1365000 27609000 Opening Stock 140792572 132645579 139643054 96856628 58408917 180942000 Closing Average stock Stock 132645579 1367190755 139643054 1316443165 96856628 118249841 58408917 776327725 180942000 1196754585 91179000 136060500 Inventory turnover ratio: = For 2000-01= = 4.

Inventory Turnover Ratio 4.29 Inventory turnover ratio 25 20 values 15 Inventory turnover ratio 10 5 0 years Conclusion: It is seen from the graph that Inventory Turnover Ratio did not show any particular trend during the years 2003-04 to 2008-09. St Mary’s School of Management Studies 64 .34 0.11 20.12 8. ITR is found highest during the year 2008-09 and lowest during the years 2003-04 and 2007-08.8 0.83 9.

31 2007-08 0.48 374211066/ 701438780 = 0.53 2008-09 0.51 2005-06 0.39 2006-07 0. Inventories 374211066 391778580 275255565 119325831 529405000 707518000 St Mary’s School of Management Studies 65 .53.2) Inventory to current assets: In it closing stock figure is divided by the current assets depicts the proportion of current assets represented by the inventories.53 2004-05 0. Inventory to current assets = inventory Current assets Particulars of inventory to current assets ratio: Year Current assets 2003-04 701438780 2004-05 762313599 2005-06 704243441 2006-07 383396159 2007-08 984020000 2008-09 1452079000 Inventory to current assets = Inventory Current assets For 2000-01 = For the years Year Current assets ratio 2003-04 0.

Current assets to invemntory ratio 0.6 0. Later during 2007-08 it has increased and again declined during 2008-09.1 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 years Current assets ratio Conclusion: From the above graphical analysis it can be concluded that the ratio of inventories to the total current assets has decreased during 2003-04 to 2006-07.2 0.5 0.4 0.3 0. St Mary’s School of Management Studies values 66 .

19 2005-06 0.10 Working Capital 374211066 349927421 1.3)Inventory to working capital: In it the closing stock figure is divided by the working capital which depicts the proportion of working capital represented by the inventories. Particulars of inventory to working capital Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Inventory 374211066 391778580 275255565 119325831 529405000 707518000 Working capital 349927421 329537680 350578744 100538999 478763000 643034000 Inventory For 2000-01.11 2008-09 1.78 2006-07 1. Year values 2003-04 1.19 2007-08 1.07. inventory to working capital ratio= = = For the years. St Mary’s School of Management Studies 67 . working capital = current asset –– current liabilities. Inventory to working capital = inventory Working capital Where.07 2004-05 1.

6 0.19 during 2006-07.78 during 2005-06.2 values 1 values 0. St Mary’s School of Management Studies 68 .8 0.10 during the years 200708 and 2008-09 respectively. Though the ratio has increased to 1.4 1.11 and further to 1.07 during 2003-04 to 0. again it has declined to 1.inventory to working capital 1.4 0.2 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 years Conclusion: The above graphical representation reveals that Inventoryworking capital ratio has declined from 1.

SUGGESTIONS AND CONCLUSIONS FINDINGS ♦ First three items constituted 15% of items and accounted for 80% of total value of items. ♦ The calculations of Inventory Ratios show that: St Mary’s School of Management Studies 69 . ♦ The remaining items constituted 50% of items accounted for the 5% of total value of items. ♦ The estimation of EOQ indicates a proper balance between the ordering cost and carrying cost. This ensures that production has been continuously made without any shortage of raw material.CHAPTER-V SUMMARY OF FINDINGS. ♦ It is observed that Lanco has maintaining a fair level of safety stock. ♦ 4 to 8 items constituted 35% of total items accounted for 15% of total value of items.

♦ Inventory to current Assets Ratio shows that there is no proper ratio between these two.♦ Inventory Turnover Ratio for Lanco Industries has been fluctuating widely during the period of study. ♦ Inventory to Working Capital the same trend is found with Inventory Turnover Ratio. St Mary’s School of Management Studies 70 .

♦ The Inventory to current Assets ratio must be properly maintained. ♦ The inventory turnover ratio must be improved. ♦ The ratio of Inventory to Working Capital is found good for Lanco Industries. ♦ Financial Manager has to design proper Inventory policy keeping the A items in view. St Mary’s School of Management Studies 71 . ♦ Though EOQ is well for the company some more attention much be paid on to have a good balance between the ordering cost and carrying cost.SUGGESTIONS ♦ The Financial Manager should keep on eye on the Management of A items. So that fluctuations may not occur. The variations and the ratio must be kept in a proper way.

Pradeep kumar Elements of Financial Management. 8th edition. St Mary’s School of Management Studies 72 .Problems & cases.. 4th edition TATA MC grawhill Publishing CO. Tata Mc Graw. Vikas publishing (pvt) ltd.ltd New Delhi. Financial Management.Y..I.hill publishing Company Ltd. khan & P. Prassanna Chandra Financial Management Theory and Practice 6th edition. Kedar nath ram nath & co Meerut.K. M. jain Financial Management text . New Delhi.M. New Delhi.BIBLIOGRAPHY PANDEY.

St Mary’s School of Management Studies 73 .

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