 INVENTORY MANAGEMENT

Introduction:

Being a chemical processing industry, the inventory pattern in KRIBHCO is

very vast and varied. It is therefore, the purpose to lay down the best

practices methods and strategies that are necessary to enable the

materials department to carry out established policies uniformly which will

not only help in reducing the material costs and working capital but also

increase the productivity of the corporation.

Inventory Management in KRIBHCO:

Objectives:

a) Evolve and implement a scientific inventory control system to achieve

optimization of inventory levels.

b) Standardize and improve equipment design.

c) Create and sustain computer culture.

d) Bring more common items under centralized procurement system to

get better control.

e) Develop alternate source of supply of materials.

f) Identification and development of vendors.

g) Annual rate contract with the approved vendors for regular supply of

material to reduce the inventory levels of such consumables.

h) Preservation of materials to avoid damages/ deterioration during

storage.
 METHODS OF EVALUATION:

There are three inventory-costing methods that are widely used by both

public and private companies:

a) First-In First-Out (FIFO) :

This method assumes that the first unit making its way into inventory is

the first sold.

b) Last-In First-Out (LIFO) :

This method assumes that the last unit making its way into inventory is

sold first. The older inventory, therefore, is left over at the end of the

accounting period.

c) Weighted Average Cost :

This method is quite straight forward; it takes the weighted average of all

units available for sale during the accounting period and then uses that

average cost to determine the value of COGS and ending inventory.

 KRIBHCO is using Weighted Average Cost method for stock

Evaluation.
 OPERATING CYCLE CONCEPT

The operating cycle can be said to be at heart of the need for working

capital.

“The continuing flow from cash to suppliers, to inventory, to

account receivable and back into cash is called the operating

cycle”.

In other words the term cash cycle refers to the length of time necessary

to complete the following cycle of events:

 Raw material & storage stage

 Work in process stage

 Finished goods inventory stage

 Debtor’s collection stage

The firm is required to invest in current assets for a smooth and

uninterrupted functioning and to maintain liquidity to purchased raw

material and pay expenses.

Cash inflows and outflows do not match, firms have to necessarily keep

cash or invest in short-term liquid securities so that they will be in a

position to meet obligations when they become due. Similarly, firms must

have adequate inventory to guard against the possibility of not being able

to meet demand for their products.

 The operating cycle is diagrammatically represented as under:

Operating Cycle

Finished Work In
Goods Progress

Factory, Office,
Administrative,
Sales Selling & Distribution
overheads

Debtors Cash Raw Material

The operating cycle consist of three phases:

In phase 1, cash gets converted into inventory. This includes purchase of

raw materials, conversion of raw materials into work-in-progress, finished

goods and finally the transfer of goods to stock at the end of the end of the

manufacturing process.
In phase 2 of the cycle, the inventory is converted into receivable into

receivables as credit sales are made to customers.

The last phase, phase 3, represents the stage when receivables are

collected. This phase completes the operating cycles. This is the firms has

receivables are collected. This phase completes the operating cycles. This

the firm has moved from cash to inventory, to receivables and to cash

again.
FORMULA FOR OPERATING CYCLE:

GROSS OPERATING CYCLE PERIOD (GOCP) =

Raw Materials storage Period

+ Period for Conversion of raw Materials in to finished goods

+ Finished Goods storage period

+ Average Collection period of Sales

NET OPERATING CYCLE PERIOD (NOCP) =

GOCP - Average Payment Period