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COMPANY PROFILE

Jay Kay Knitwears, who believe in quality from the very beginning. J K Knitwears is a
Ludhiana based company founded in 1970 with a aim to serve the Indian Knitting industry
with its value services and products. The current marketing focus is Indian and exports
markets. The company is run by Mr. Jatinder Kumar who are the Director of the company
with in-depth knowledge of knitted fabrics and a large experience in the all types of knitted
fabrics, yarns & Hosiery Garments . The company is also manufacturing gents, ladies and
kids wear.

The company has all technological advantages and have number of sufficient circular knitting
like computerised knitting, embroidery machines, state-of-art sewing lines, CAD/CAM
systems and others machinery requires in manufacturing of knitted fabrics. To make the end
products as per the requirements of its buyers. All machines installed from Europe to ensure
quality and facilitate service.

The company offers packing in 'Roll Form' and offers finishing as per buyers requirements.
The company requires sample lead time at least four days and company can accept order for
any quantity.

All the processes involved in manufacturing of garments are i.e from knitting to despatch are
under one roof except dyeing which is got done from outside sources. However, we have
arrangements with the quality-minded dyeing houses who have employed modern dyeing
techniques.

The company is presently exporting to european countries we are getting good response from
them and company is locking for genuine buyers worldwide

In view of increasing demand from various parts of the world, the factory is being expanded
by increasing the number of machines with latest technology to further enhance productivity,
quality and finish garments.

Infrastructure
Over the years, J K Knitwears has built up its own huge infrastructure right from knitting,
stitching, embroidery and sewing of knitted garments - all under one roof.

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J K Knitwears has installed most modern imported machinery. With our range of imported
machines, we will be able to knit any designs starting from autostrippes, wrappers, fleece,
etc.

The company is having all manufacturing and production facilities to support its operations.
The company is emphasising on Quality Fabric, Yarns, Sewing, Finishing and Ironing etc. To
make the end products as per the requirements of its buyers. with skilled work force to
produce quality Garments in different knitted fabrics like Jersy (single and double),
Interlocks (plain and drop), Ribs Jacquards, Fancy structures in 100% cotton, Melange and
Yarn-Dyed mercerized.

DESIGNING & SAMPLING

One of the major fortes is the quality of exquisite designs developed by team of talented and
creative fashion designers & sample makers. We always prepare for up Coming seasons with
a large range of Garments tailored from latest structured fabrics keeping in mind the trends
and colours of the seasons. We pride ourselves on being a Vertically Integrated Company
Handling all the Stages of Garments Production efficiently.

CUTTING

Centralised Cutting occupies a large section of our Co. flour. Empasis has been duly placed
on this department form which the Garment finally shape. Pattern Making, Fabric inspection,
pre-production sampling, layer Cutting and sorting are carried out by a wel experienced team
professianals.

PRINTING

They have a huge capacity for AZO - Free reactive, Pigment & discharge, all over prints and
on equally large capacity for chest prints in Plastisal, Piqment and foam printing.

STITCHING UNIT

FUNKY CLOTHING believes in offering the best end products. Going with the International
trends on Fashion and Design products are stitched to highest Grade. Having four Stitches

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Unit and every Stitching Unit with all modern stitching Machines is capable in making any
style.

The quality produced is AZO-Free, Dyed in reactive colours with fastness and Shrinkage
controlled by compacting as per buyer requirements.

LATEST MACHINE RANGE

 Single Needles - JUKI & PEGASUS Machines

 Overlock Machines
 Flat Lock (All Latest Imported Machines
 Placket Making Machines
 Special Function Machines

EMBROIDERY

The 6 Colour Computerized Multi headed Embroidery Machine can produce any classiest
design with in a alerting speed

Steam Ironing system using state-of-the-art German Technology, Lends the finished
garments an unusually enduring smoothness.

FINAL CHECKING & PACKING

All Manufactured Garments are Brought to the Centralized packing Departments final
finishing are Carried out. the department is manned by Professionals Who Adhere to
international standards & Buyer requirement

Computerised Flat knitting machines (STOLL) 7gg, 8gg, 10gg, 12gg More than 300 hand
flats , Imported Overlocks, Sweing Machines, hydro machines, thermax boilers ie complete
finishing process inside for sweaters and fabrics ie Tublor also Whatever may be the
machinery installed until and unless there is right- minded workforce good quality machines
can also be ineffective. The most important aspect of our organisation is that we have a
dedicated workforce to monitor each and every process of the garment which is backed by
skilled labour. It is our effort to impart training to our workforce and make them know the
changes taking place in the industry. Thus our emphasis is on quality, competitive pricing,
service and on quick and timely deliveries.

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In view of increasing demand from various parts of the world, the factory is being expanded
by increasing the number of machines with latest technology to further enhance productivity,
quality and finish garments.

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INTRODUCTION TO INVENTORY MANAGEMENT

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Inventory is the physical stock of goods maintained in an organisation for its smooth running.

In ACCOUNTING LANGUAGE ,it means stock of finished goods.

In MANUFACTURING LANGUAGE, it may include raw material, work in progress and

stores etc.

In form of material or supplies to be consumed in the production process or in execution of

services. INVENTORY is UNSOLD OR UNCONSUMED GOODS either purchased or
manufactured.

NATURE OF INVENTORIES

Inventories are stock of the product a company manufactures for sale and components that
make up a product. The various forms in which inventory exists in a manufacturing co. are

 RAW MATERIAL:-Raw materials are those inputs that are converted into
manufacturing process. Raw materials inventories are those units which have been
purchased and stored for future productions.
 WORK IN PROGRESS:-These inventories are semi-finished manufactured
products. They represents products that need more work before they become finished
product for sales.
 FINISHED GOODS:-They are those inventories which are completely manufactured
products and ready for sale. Stock of raw materials and work in progress facilitate
production, while stock of finished goods for smooth marketing operations. Thus ,
inventories serve as link between the production and consumption of goods.
 SUPPLIES:-It includes office and plant cleaning like soaps, brooms, light bulbs etc.
These do not directly enter the production but are necessary for production process.
Usually, supplies are small part of the total inventory and do not involve significant
investment. Therefore, a sophisticated system of inventory control aim not be
maintained for them.

INVENTORY MANAGEMENT

Inventory management is a process which ensures provision of the required quantity of

inventories of requisite quality at appropriate time and at reasonable price. The management
is to see that quantity of inventories is neither too low nor too high to affect production
adversely or block funds unnecessarily respectively.

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Inventory management is used in 2 ways:-

1. UNIT CONTROL-It involves the control over inventories in terms of units.

2. VALUE CONTROL-It entails control over inventories in terms of value

These approaches should be co-ordinated in such a way that the inventory should be
maintained at desired level to keep the investment at minimum level.

MANAGEMENT OF INVENTORY

Inventories constitute the principal item in the working capital of the majority of trading and
industrial companies. To maintain the continuity in the operations of business enterprise
minimum stock of inventory is required .However, the physical control of inventory is
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
compromise a substantial part of the current assets is a frequent problem in management of
working capital .Management of inventory is designed to regulate the volume of investment
in goods on hand, the types of goods carried in stock to meet needs of the production and
sales while at same time ,the investment in them is to be kept at reasonable.

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OBJECTIVES OF INVENTORY MANAGEMENT

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

 OPERATING OBJECTIVES
 Ensuring Availability of Materials:

There should be a continuous availability of all types of raw material in the factory so that
the production may not be held up wants of any material. A minimum quantity of each
material should be held in store to permit production to move on schedule.

 Avoidance of Abnormal Wastage:

There should be minimum possible wastage of materials while these are being stored in
the factory by the workers. Wastage should be allowed up to a certain level known as
normal wastage. To avoid any abnormal wastage. Strict control over the inventory should
be exercised. Leakage, theft, embezzlements of raw material and spoilage of material due
to rust, bust should be avoided.

 Promotion of Manufacturing Efficiency:

If the right type of raw material is available to the manufacturing department at the
right time, their manufacturing efficiency is also increased. Their motivation level
rises and morale is improved.

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  Avoidance of out of Stock Danger:

Information about availability of material should be made continuously available to the

management so that they can do planning for procurement of raw material. It maintains the
inventories at the optimum level keeping in the operational requirements. It also avoids the
out of stock danger.

 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.

 Designing poorer organization for inventory management:

Clear cut accountability should be fixed at various levels of organization.

 FINANCIAL OBJECTIVES
 Economy in purchasing:

A proper inventory control brings certain advantages and economies in purchasing also.
Every attempt has to make to effect economy in purchasing through quantity and taking
advantage to favourable markets.

 Reasonable Price:

While purchasing materials, it is to be that right quality of material is purchased at

reasonably low price. Quality is not to be sacrificed a he cost of lower price. The material
purchased should be of the quality alone which is needed.

 Optimum investing and Efficient use of capital:

The basic aim of inventory control from the financial point of view is the optimum level
of investment in inventories. There should be no excessive Investment in stock etc.
Investment in inventories must not tie up funds that could be used in other activities. The
determination of maximum and minimum level of stock attempt in this direction.

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 TYPES OF INVENTORY

TYPES OF INVENTORIES

DIRECT INVENTORIES INDIRECT INVENTORIES

 RAW MATERIALS  MOVEMENT

 WORK IN INVENTORIES
PROGRESS  BUFFER INVENTORIES
 FINISHED FOODS  LOT SIZE INVENTORIES
 DECOUPLING
INVENTORIES
 SEASONAL INVENTORIES

I.DIRECT INVENTORIES

a) RAW MATERIALS:-Raw materials is the component with which production is

started ,e.g. wood is raw material in making furniture ;cotton is raw material in
making clothes.
Control of raw materials help in following ways:-
i. Planning production
ii. Continous supply of raw materials
iii. Favourable unit prices through volume of bulk buying
iv. More efficient material handling
v. Stability in levels of production
b) WORK IN PROGRESS:-The components which are in process ,neither raw material
nor finished goods but semi-finished goods. In other words, they are semi-finished

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 goods lying in machines or in factory awaiting completion is called work in progress.
It is second stage of production.
The control of WIP helps in following ways:-
i. To maintain uniform production
ii. Flexibility in planning in each operation
iii. It reduces material handling costs
iv. It checks wastages
c) FINISHED GOODS:-The ultimate inventory for the organisation is stock which is
ready for sale. Control of finished goods is very important & essential. It helps in
following ways:-
i. It is economical to have inventory than constantly placing orders.
ii. It is possible to produce instantaneously on demand.
iii. Shortage of store may be unacceptable.
iv. It helps in efficient scheduling of production.
v. Products can be placed for consumers.

II.INDIRECT INVENTORIES

a. TRANSIT or MOVEMENT INVENTORIES:-Such inventories are

provided due to the fact that transportation time is involved .e.g:-when oil is
transported from oil field to industrial town by trains , then the oil in transit
cannot provide any service to the customers for burning or cooking or power
generation.
b. BUFFER INVENTORIES:-Buffer stock is kept to meet the uncertainities of
demand and supply. An organisation generally knows the average demand for
various items that it needs.
c. LOT SIZE INVENTORIES:-These inventories are held for the reason that
purchasing are made in lot rather than for the exact amounts which may be
needed at a point of time. Practically it may be economical to carry amount of
inventory by ordering or producing in large lots to achieve reduced ordering
cost or set up cost or obtain quantity discount.
d. DECOUPLING INVENTORIES:- such an inventory are kept to ensure the
continous flow of production. For example:-a machine be producing half a
output of the machine on which the item being handled is to be processed

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 next. Inventories in between the various machines are held in order to avoid
stoppage processing on these machines.
e. SEASONAL INVENTORIES:-The purpose of these inventories is to meet
the seasonal changes in demand. Production of excessive crackers before
diwali , fan& cooler before summers are examples of seasonal inventories.
f. FLUCTUATION INVENTORIES:-Production time and sales for the
product cannot be predicted accurately. These requires reserve stock.

CONTROL OF MATERIALS

Rigid control over materials are necessary not only to guard against theft, but also
minimise waste and misuse from causes such as excessive inventories, over issue,
deterioration, spoilage and obsolescence.

There are certain pre-requisites to an effective control system for materials:-

1. Materials of the desired quantity will be available when needed

2. Materials will be purchased only when a need exists and in economical quality
3. Purchases of materials will be made at most favourable prices.
4. Vouchers for the payments of materials purchased will be made at most
favourable prices.
5. Vouchers for the payments of materials purchased will be approved only if the
materials have been received in good condition.
6. Materials will be protected against loss by proper physical control.
7. All materials at all times will be charged , as the responsibility of some individual.

The control of materials, as an element of cost of production, is illustrated with reference

to the purchase and issues procedures, inventory control and inventory control techniques.

IMPORTANCE OF INVENTORY CONTROL

The importance of necessity of inventory control is well explained in the terms of the
objects of inventory control , which are obtained through it .A proper inventory control
lowers down the cost of production and improves profitability of enterprise.

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 ADVANTAGES OF INVENTORY CONTROL

 Reduction in investment in inventory

 Proper and efficient use of raw materials.
 No bottleneck in production.
 Improvement in production and sales
 Efficient and optimum use of physical as well as financial resources.
 Ordering cot can be reduced if a firm places a few large orders in place of numerous
small orders.
 Maintainence of adequate inventories reduces the set-up associated with each
production run.

RISK AND COST ASSOCIATED WITH INVENTORIES

Holding of inventories expose the firm to a number of risk and costs.

Major risks are:-

a) PRICE DECLINE:-They may be due to increase in market supply of the product,

introduction of a new competitive product, price-cut by the competitors etc.
b) PRODUCT DETEROIRATION:-This may be due to holding a product for too long
period or improper storage conditions.
c) OBSOLESCENCE:-This may be due to change in customers taste, new production
technique, improvements in product design, specifications etc.

The cost of holding material are as follows:-

a) MATERIAL COST:-This include the cost of purchasing the goods, transportation

cost and handling charges less any discount allowed by the supplier of goods.
b) ORDERING COST:-This includes the variable cost associated with placing an order
for the goods. The fewer the orders ,the lower will be ordering cost for the firm.
c) CARRYING COST:-This includes cost for storing and handling the goods .It
comprises storage costs, insurance costs, cost of fund tied up in inventories etc.

ESSENTIALS OF INVENTORY CONTROL SYSTEM

For an efficient and successful inventory control there are certain important
conditions that are as follows:-

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1) CLASSIFICATION AND IDENTIFICATION OF INVENTORIES

The usual inventory of manufacturing firms includes raw material, stores, work in progress
and components etc. To facilitate prompt recording the dealing , each item of the inventory
must be assigned a particular code no. and it must be classified in suitable group or sub-
divisions.ABC analysis of material is very helpful in this context.

2) STANDARDIZATION AND SIMPLIFICATION OF INVENTORIES

In order to facilitate inventory control, the inventory line should be simplified. It refers to the
elimination of excess types and sizes of items. Simplifiaction leads to reduction in
classification of inventories and its carrying cost. Standardisation on other hand, refers to the
fixation of raw material to be purchased specifications of the components and tools to be
used.

3) SETTING THE MAXIMUM AND MINIMUM LIMITS FOR EACH PART OF

INVENTORY

The third step in this process is to set the maximum and minimum limits of the inventory .It
avoids the chances of over investment as well as running a short item during the cost if
producing. Re -ordering point should also be fixed before hand.

4) ECONOMIC ORDER QUANTITY

It is also a basic inventory problem how much to order at a time. In determining the EOQ, the
problem is one to set a balance between two opposite costs, namely, ordering costs and
carrying costs. This quantity should be fixed before hand.

5) ADEQUATE STORAGE FACILITY

To make the system of inventory control system successful and efficient one ,it is also
essential to provide the adequate storage facilities. Sufficient storage area and proper
facilities should be organised.

6) ADEQAUTE REPORTS AND RECORDS

Inventory control requires the maintainence of adequate inventory record and reports.
Various inventory records must contain information to meet the needs of purchasing,
production, sales and financial staff. The typical information required about any class of

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inventory may be relating to quantity in hand ,location, quantities in transit, unit cost, code
for each item of inventory, reorder point, safety level etc .Statements forms and inventory
records should be so designed that the clerical cost of maintaining these records must be
kept a minimum.

7) INTELLIGENT AND EXPERIENCED PERSONNEL

An important requirement of successful inventory control system is the appointment of

qualified and experienced staff in purchase and stores department. Mere establishment of
procedures and maintainence of records would not give the desired results as there is no
substitute for sincere and devoted as well as experienced hands .Hence .the whole inventory
control structure should be manned with trained ,qualified, experienced and devoted
employees.

8) COORDINATION

There must be proper coordination of all departments involved in the process of inventory ,
such as purchase ,finance ,receiving ,approving, storage and accounting departments. These
all departments have different outlook and objects in inventory management but financial
manager has to coordinate them all.

9) BUDGETING

An efficient budgeting system is also required. Preparation of budgets concerning materials,

supplies and equipment to ensure economy in purchasing and use of material is necessary.

10) INTERNAL CHECK

Operating of a system of internal check is also vital check is also in inventory management so
that all transaction involving materials supplies and equipment purchase are properly
approved and automatically checked.

INVENTORY DECISIONS

In inventory control situation, there are 3 basic questions to be answered.

They are
 HOW MUCH TO ORDER?
 WHEN SHOULD THE ORDER BE PLACED?
 HOW MUCH SAFETY STOCK SHOULD BE KEPT?

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 Random Fluctuations

Conversion process Comparing actual

INPUT INVENTORY
Work in progress material stocks
Inventory (stock points)
with planned level

OUTPUT

Product inventory stock

points

WEAPONS OF INVESTMENT CONTROL

The experts in the field of production, stores and cost management have given following as
the effective means of inventory control in any organization where inventories are part of
their activities.

 ECONOMIC ORDER QUANTITY (E.O.Q.)

 FIXATION OF STOCK LEVEL
 STOCK TURNOVER RATIO
 DOUBLE BIN SYSTEM
 ABC ANALYSIS
 PERPETUAL INVENTORY SYSTEM

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 ECONOMIC ORDER QUANTITY

Economic order quantity is also called as BEST QUANTITY TECHNIQUE or

ECONOMIC LOT SIZE. Economic order quantity is that quantity to be brought at a time
where the over cost is least. It is the technique of determining that quantity where the two
sets of costs are the minimum or equated. These two sets of costs are inventory procurement
costs and inventory carrying costs.

INVENTORY PROCUREMENT COSTS include cost of inventory namely- costs of

materials which include the profit of supplier and the ordering cost. ORDERING COST is
the cost of planning on order. Order cost relate to placing of an order. These are incurred
each time an order is placed. They start with the requisition sent to purchase office, costs of
issuing purchase order and following it up continued by acts of receiving the goods and
placing them into inventory and ends with the buyers firm paying the supplier. The main
components of ordering costs are:

(1) Costs incurred in sending enquiries, receiving quotations, planning an order,

finalizing the order, expediting and follow-up costs of an order.
(2) Transportation and stationery costs.
(3) Rent for the space used by purchasing department.
(4) Salaries and wages of office staff of purchasing department.
(5) Depreciation of equipment and furniture of purchase departments.
(6) Inspection costs and costs of settlement of payment.
(7) Other overheads expended in running purchase department.

INVENTORY CARRYING COSTS relates to those costs which are incurred to hold the
stock. These are unavoidable like procurement costs as inventories are to be held over a
period of certain quantity. The major cost items included in this are:

(1) Rent for the storage space and period.

(2) Salaries and wages of store keeping department.
(3) Loss caused by pilferage and deterioration.
(4) Stationery used by stores.
(5) Cost of obsolescence where the inventories rendered useless.
(6) Interest on capital blocked in inventories.
(7) Taxes on inventories.

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EOQ CAN BE CALCULATED BY:-

GRAPHIC ALGEBRIC TABULATION

METHOD EQUATION METHOD

1. GRAPHIC METHOD:-
EOQ is the best quantity technique it tries to equate both procurement and carrying costs.
It is that quantity where these costs are equal or least both together. If say, there are
options of placing three orders are there maximum and annual quantity is say 18000 tons,
per order one can buy 600 tons. If the purchase office wants to place one order to entire
quantity, he saves on ordering costs but loses on carrying costs, and if he places three
orders his ordering costs are higher but carrying costs are less. Hence, if he plans two
orders then he equates these costs or total costs are least. These can be explained through
following diagram:

y
In the above figure, on OX-axis quantity is taken, on
TC OY- axis cost is taken.
CC
CO is ordering cost curve,
CC is carrying cost curve,
COSTS

TC is to total cost curve.

Economic order quantity is at point Q where ordering costs and carrying costs are equal and
total cost is minimum. CO
O X
QQUANTITY

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 D
CO= ×ordering cost /order
EOQ

EOQ
CC= ×carrying cost /unit
2

D EOQ
×CO+ ×CC
TC = CO+CC or TC = EOQ 2

2 DCO
EOQ=
√ CC

where EOQ is Economic Order Quantity

D is annual demand in quantity

CO is ordering cost per order

CC is carrying cost as a percentage of unit cost.

EXAMPLE:M/s River Valley Ltd. needs 800 units of a components which it buys at $ 30
per unit. The ordering cost works out to be 100. The annual carrying costs are 1/unit and
10% for rent, interest and taxes and annual rate of investment. Calculate EOQ and number of
orders per year.

2 DCO
SOLUTION: EOQ = √ CC

D = 800 units CO = 100,

CC = 1 + (10% of 30) = 1 + 3 = 4

2×800×100
EOQ = √ 4
= √ 4000=200 units

Annual consumption
No. of orders per year = EOQ

800
=4 orders/ year
= 200

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It means that the maximum optimization of costs occurs, when the company places 4 orders
of 20 units – not more or less.

3.TABULATION METHOD:

Using the same date, we can arrive at same answer by tabulation method.

S.NO. PARTICULARS NUMBER OF ORDERS

1. Quantity per order 800 400 200 133
2. Value of purchase 24000 12000 6000 4000
3. Average Value 12000 6000 3000 2000
4. Carrying cost
: Fixed 1 800 400 200 133
: Variable 10% of value 120 60 30 20
5. Total carrying cost 920 460 230 153
6. Ordering cost 100 200 400 600
TOTAL COST 1020 660 630 753

Thus it is shown that if company places 4 orders buying a quantity of 200 units, then there is
optimization of procurement & inventory carrying costs.

FIXATION OF STOCK LEVELS

The storekeeper always have in mind that his organization should not waste valuable finance
by buying any quantity and that production process must move on without any problem.
EOQ has helped the organization in buying that much quantity at a time that minimizes costs
and wastes.

STOCK LEVEL:

Stock level is a level or quantitative limit that doesnot permit to exceed the
limits.

The stock of each item is to be held in such quantities that it is loss to hold
more and lesser than required. Therefore, a stock level is that level which is something
standard.

The experts have identified following levels:

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1. Re-order level
2. Maximum level
3. Minimum level
4. Danger level
5. Average stock level

1.RE-ORDER LEVEL:

Re-order level is that level where the stock level reaches a stage indicating the
replenishment of the over consuming stock because there is always a gap when you
pace an order and when you actually get it. The following diagram makes it more
clear:

Increase in
inventory size

T T
Replenishment
Point of Point of point
Re-order point
re-order Replacement Storage
ORDER PLACED TOO EARLY

ORDER PLACED TOO LATE

If the order is placed too early, then it might result in stock pile up for a longer period and if it
is placed too late then it may lead to stock outs. Both these situations are dangerous.
Therefore, the level of inventory at which an order should be placed is known as re-order
level that lies between maximum and minimum level.

FORMULAE:

(1) Re-order level = Maximum rate of consumption x Maximum delivery period

(2) Re-order level = Minimum stock + (Average consumption x Average delivery
period.

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2.Maximum Level:

Maximum stock level is that level beyond which the firm should not hold the stock of
given material. The idea is to avoid over stocking and efforts of over stocking.
Infact, maximum stock level is the sum of minimum stock level and economic older
quantity.

FORMULA

Maximum Level = Reorder level + Re-order Qty. – (Minimum rate of consumption x

Minimum delivery period).

3.MINIMUM STOCK LEVEL

Minimum stock level is that level below which the stock should not fall. It is the minimum
quantity to be held at all times. The ideas is to keep the organization is safe limits to avoid
stock outs. It speaks of buffer stock to absorb the shocks acting as against reasonable
expected maximum consumption.

FORMULA

Minimum stock level = Reorder level – (Average rate of consumption x Average re-order
period)

4.DANGER LEVEL

The very movement when the stock following below the minimum stock level, we are
in danger. Some experts have given a separate level as danger level. Therefore, it lies
below the minimum stock level.

FORMULAE

(1) Danger level = Minimum rate of consumption x Emergency delivery period.

(2) Danger level = Maximum rate of consumption x Emergency delivery period.

5.AVERAGE STOCK LEVEL

Average stock level is not a specific stock level. It simply means the average of
stocks held as maximum and minimum.

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FORMULAE

(1) Average stock level = ½ (Minimum stock) + Maximum stock level

(2) Average stock level = ½ (Re-ordering Quantity) + Minimum stock

STOCK TURNOVER RATIO

Stock turnover ratio is also known as material turnover ratio. This is another
valuable technique of inventory control. It is also called as INVENTORY TURNOVER
RATIO: ITR indicates the speed at which a particular material is moving i.e. for how many
days an inventory is held.Calculation of stock turnover ratio for each item helps the store
keeper to know which items he should hold more or less to avoid excessive or deficit stocks
for better use of resources.

STR = Costs of material consumed

Average stock

Where cost of material consumed = opening stock + purchases – closing stock

Average stock = Opening stock + closing stock

2

EXAMPLE: M/s ABC Ltd. have furnished following details for year ending 31st Dec.2011.

Opening Stock = Rs.1,00,000

Closing Stock = Rs.1,20,000
Purchases = Rs.6,00,000
Calculate STR.

Solution: STR = Cost of material consumed

Average Stock
Cost of material consumed = opening stock + purchases – closing stock
= 1,00,000 + 6,00,000 – 1,20,000
= Rs.5,80,000
Average Stock= Opening Stock + Closing Stock
2
= 1,00,000 + 1,20,000

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 2
= Rs.1,00,000
STR = 580000 = 5.27 times
110000

No. of days = 365 days

5.27 times

= 69 days

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 DOUBLE BIN SYSTEM

Under this system, two bins or files are maintained for each item of material used. That is
TWO BIN SYSTEM separates the stock of each time into two bins or files. The Bin 1
contains the normal amount used from the order to the delivery date plus safety stock. The
Bin 2. As soon as Bin 2 is empty, the individual is that stock level has reached re-order point
and fresh order is to be planned to replenish the stock. During this lead time the material is
used from Bin 1. Once the material is arrived. Part of the new supply is used to fill Bin 1 and
rest for Bin 2. This can be shown as:

Daily use
Lead Re-order
Time
Safety/ Only used when
Buffer delivery is not nut
Stock Bin 1 Bin 2 Re-order
point

ABC ANALYSIS

ABC Analysis is the technique of inventory on selective basis or it works on principle of

management by exemption. In manufacturing organizations there will be large number of
items ranging between 25000 to 5000 items used by different departments directly or
indirectly committed with manufacturing. It is true that everything is important but not
equally important. That is why all item cannot be given same importance. For control
purpose, to make it effective and economical, these items are classed into three categories as
‘A’, ‘B’ and ‘C’ based on the annual consumption value of each item and not individual price
difference or merely consumption. Weightage is given to both consumption and individual
value and all items are arranged in order of descending order of consumption value. This can
be explained by following data:

Quantity Value
In units %age In Rs. %age
CATEGORY
A 7500 15% 65,00,000 65%
B 10000 20% 20,00,000 20%
C 32500 65% 15,00,000 15%
Total 50000 100% 1,00,00,000 100%
The above table shows that out of 50,000 items hardly 15% command a consumption of
Rs.65,00,000 giving a percentage of 65% of value that need utmost care; next 20% of items

26
command consumption value of Rs.20,00,000 accounting for 20% of value which need
comparatively less care; the balance 65% of the quantity command a value of Rs.15,00,000
account for 15% of the value. It means that these items need least care. Such classification is
based on consumption value categories items as A, B and C. This data can be shown on
following graph.

POLICIES FOR GROUP A ITEMS

(1) These should be ordered more frequently to reduce capital lock up at a time in
inventories as 15% of items cost 65% of total value.
(2) The purchasing department should make the maximum efforts to expedite and
delivery of these items according to actual requirements.
(3) The purchase of these items should be with the top officials to ensure prompt services
from the supplier.
(4) The stock report of ‘A’ items should be sent more frequently, say atleast once in 15
days.
POLICIES FOR GROUP B ITEMS

(1) These account for 20% of total quantity and 20% of total value.
(2) Order quantities, re-order stocks and safety stocks should be fixed and revised
for B items at least once in every 4 to 6 months.
(3) B items should be ordered less frequently than A items.
POLICIES FOR GROUP C ITEMS

27
 (1) These account for 20% of total quantity and 20% of total value.
(2) Order quantities, re-order stocks and safety stocks should be fixed and revised for
B items at least once in every 4 to 6 months.
(3) B items should be ordered less frequently than A items.
POLICIES FOR GROUP C ITEMS

(1) These items account for 65% of total quantity and hardly 15% of value.
(2) Large quantities can be bought at a time as total investment will be least.
(3) Paper work can be reduced considerably if orders are placed once or twice a year.
(4) The source of supply can be one or two based on their reliability.
PERPETUAL INVENTORY SYSTEM

Perpetual Inventory System is a system of records maintained by controlling department

which reflects the physical movement of stock and their current balance. Perpetual inventory
records stores receipts and issues so as to determine at any time the stock on hand-in quantity
and value or both – without the need for physical count of the stock.In other words, the
application of perpetual inventory control system involves:-

(1) attaching bin cards with binds or containers and maintenance of stores ledger that
shows goods received, issued and balance on hand at any time; and

(2) Continuous stock taking to compare that actual stock with the stock shown by Bin
card and stores ledger.

In simple words, if the balance of every item of stores is recorded after every receipt and
issue, the stores records would be called perpetual inventory records and the method of
recording “PERPETUAL INVENTORY SYSTEM”.

If there is differences between the book balance and the physical balance, then they may arise
due to:

(1) Clerical errors in posting and working out balance in Bin card and stores ledger.
(2) Pilferage and Breakages.
(3) Over and under issues of materials.
(4) Variations in weight caused by evaporation are absorption of moisture.
(5) Bulk-breaking
(6) Dusting

28
 (7) Placing materials in wrong bin and the like.
JUST-IN-TIME INVENTORY SYSTEM

Just-in-time (JIT) purchasing is the process in which the purchase of material or goods in
which the purchase of material or goods in such a way that delivery of purchased item is
assured before their use or demand. Just-in-time purchasing recognizes too much carrying
costs associated with holding high inventory levels. Therefore, it advocated developing good
relations with suppliers and making timely purchase from proven suppliers who can make
ready delivery of goods available as and when the need arises. EOQ model assured contant
order quantity whereas JIT purchasing policy advocates at different quantity for each order if
demand fluctuates.

F-S-N ANALYSIS

The items which are issued from the stores more than ten times during a year are classified as
F-Fast moving, those which are issued 1 to 9 times during a year are classified as S-slow
moving and those items which are not issued even a single time during a year are classified as
N-Non-moving. This is arbitrary but main concept in fast moving items are frequently
purchased, slow moving items are less frequently and non-moving are disposed off from the
inventory.

V-E-D ANALYSIS

The item due to non-availability of which complete production operations are stopped are
classified as V-vital and items due to non-availability of which temporary losses are there are
classified as E-Essential and those items due to non-availability of which no losses are there
are classified as D-Desirable. The vital items are provided a very high service level say 95%
to 99%, Essential 80% to 95% and Desirable are provided a low service level.

EVOLUTION OF ERP

Automation was a magic word in the beginning. The focus then shifted to computers and the
trends were to replace the human power with the micro processor power, pink slip the
employee and hopefully the faults and the costs will come down. From then onwards,
automation was considered as panacea for all ills of business. But there was much that was
wrong with this approach. As these automation packages use to come in different forms and

29
in a non-integrated fashion, loading too much information technology on to these in-efficient
processes and packages that leads to double entendre.

Actually confusion was that companies developed separate computer applications to satisfy
the needs of their particular functional segment e.g. accounts, purchase, inventory and
planning. Such systems grew as inconsistent island of information, and hence there
consolidation was not possible which leads to numerous organizational problems and data
inconsistencies are likely to occur. As a result the decision makers were denied of access to
timely information for making urgent business decisions. This gave rise to the need of an
integrated system(ERP) that would address the information requirements of the entire
enterprise.

DEFINE ERP

Enterprise resource planning is a software solution that addresses the enterprise needs taking
the process view of an organization to meet the organizational goals tightly integrating all
functions of an enterprise.

Short for Enterprise resource planning, a business management system that integrate all the
facets of the business, including planning, manufacturing, sales and marketing. As the ERP
methodology has become more popular, software applications have emerged to help business
managers to implement Enterprise resource planning in business activities such as inventory
control, order tracking, customer service, finance and human resources.

Enterprise resource planning has its origin in manufacturing and production planning. In the
mid 90’s it was extended to other back office function such as financial management and
human resource management. More recently these systems have addressed applications
specific to higher education such as student systems and grants management. Enterprise
resource planning software, or ERP, attempt to integrate all the department and function
across the company.

SCOPE OF ERP

The various areas that can be covered under the concept of Enterprise resource
planning(ERP) are discussed below:

 Customers relations
o Sales support

30
 o Delivery
o Billing
o credit
 Logistics
o Procurement
o Production
o Material management
 Human resources
o Payroll
o Organization
o hiring
 Treasury
o Communication
o Investigation
o currencies

31
 REVIEW OF LITERATURE
Introduction
The chapter focuses on the literature of the study. The section was divided into three parts.
Literature was reviewed while basing on the conceptual frame work.

Information sharing and inventory management

Information sharing has been shown to be the key to successful downstream chains (Aviv,
2003).According to Lee and Wang (2000), it provides information regarding inventory levels
and
position, sales data and forecasts, order status, production and delivery schedules and
capacity. It
is considered as the most reliable "real time" tool to decrease uncertainty in the chain which
leads to the bullwhip effect (Lewis, 2003).This refers to variations in demand and supply
which are caused by information uncertainties in the chain (Taylor, 2000). This helps to
reduce safety stock at each stage which leads to a reduction in inventory carrying costs (Yao,
Evers and Dresner, 2000).
Product and delivery lead times are shortened making products available on time to
customers (Tachizawa and Ginemez, 2005).Access to information enables channel members
to plan how much to stock for a given period of time (Fasanghari, Roudsari and Kamal,
2008). In order for information sharing to take place, chain partners should have a
collaborative potential and IT infrastructure (Shore and Venkatachalam, 2003).

Information sharing and Inventory levels

Information sharing plays an important role in inventory management (Sabbath, 2008). This
enables chain partners to plan properly, avoid inventory bottlenecks in the chain and avoid
safety stocks both for all the channel members (Chandra, 2000; Patel, 2001).Normally, when
a buyer needs a product, he places an order to a supplier. With information, chain partners are
able to know when and how much to order and what to put in the inventory plan (Elvander,
Sarpola and Mattson, 2007). In order to share information, a partnership is formed between
the supplier and buyer in which the supplier takes care of the-orders and replenishing (Ahmed
2004).To accomplish this, the supplier (retailer or distributor) gets regularly information on
the inventory level and sales data of the buyer via the web or Electronic Data Interchange
(EDI) (Homburg and Grozdanovic & Klarmann, M, 2007). Thus, when inventory drops

32
below a certain level, orders are generated automatically on behalf of the buyer. In this case,
it is the supplier who creates and manages the inventory plan. Continuous replenishment
(CR) and vendor managed systems are used to share information that is used to manage
inventory levels (Skjoett et al., 2003; Cooke, 1998; Bernstein et al., 2005).

Information sharing and inventory accuracy

According to Fisher (1997), inventory accuracy is the ability to predict the true demand of a
product. Trying to control inventory with bad information is futile (Taylor, 2000). All
replenishment decisions are based on the status of your inventory (Sahay, 2003).Information
sharing enables chain partners to make reliable delivery promises, keep inventory levels low
and .inventory records 98 percent accurate every day. Information systems provide -real time
information which enables chain partners forecast accurately (Cross, 2000).
Use of systems like electronic data interchange, point of sale systems, enterprise resource
planning systems enable inventory accuracy through the provision of accurate information
(Weber and kantamneni, 2002).According to Kang and Gershwin (2005), chain partners
experience inaccurate inventory records as a result of lack of collaboration while Raman et al.
(2001) says that inventory records do not match with physical stock in chain partners' stores
due to lack of collaboration.

Information sharing and Inventory costs

Silver et al. (1998) suggest, a partner's fate depends on how it manages its inventory. Much of
the chain partners' costs are attributed to the amount it invests in inventory and associated
holding, transportation, and management costs (Silver et al, 1998).According to Larry, Mulky
and Harrington (1996), inventory has the biggest cost hidden in most chain partners'
businesses. In addition, Fleisch and Tellkamp (2005) found out that inadequate information
sharing results into inventory inaccuracies which increases the chain partners' holding costs
and increases the out-of stock situations. The significant monetary investment in inventory
only enhances the importance of better inventory management (Brewer and Speke, 2000).
In response, chain partners seek cost improvements by enhancing the efficiency of their
inventory management systems (Verwijmeren, 1996). The use of systems like point of sale
systems and collaboration helps chain partners to acquire information which reduces losses
from obsolescence, damaged inventory, handling costs, stock outs costs, enables proper
demand planning and replenishment (Verwijmeren, 1996; Parks, 1999).Safety stocks are
reduced through vendor managed inventory, just in time and consignment inventory

33
(Simatupang and Sridharan, 2008; Keong, 2005). All those can be operated through the use
of integrated systems like vendor managed systems and just in time systems (Keong, 2005).
The reduction in safety tocks leads to reduced obsolescence and storage (Ahmed et al, 2005).
Stock out costs are reduced has a result of parties in the chain sharing information which
reduces demand variability (Simatupang and Sridharan, 2008).

Information sharing and inventory turns

Inventory turns refer to the number of times inventory is converted into cash (Koumanakos,
2008). Chain partners boost earnings by addressing our stock issues (Corsen and Gruen,
2003). High levels of inventories mean that there are low levels of inventory turns
(Koumanakos, 2008). Non availability of stocks results into losses to all chain partners
because customers may decide to buy another brand, buy items from another store or delay
purchase. This comes as a result of information inefficiencies where the order information
sent up the chain does not reflect the true consumer demand (Corsen and Gruen, 2003). A
lack of inventory record accuracy clearly reduces chain profits due to lost sales and inventory
carrying costs, which may run as high as 10 percent of existing profits (Raman et al., 2001).

According to Rogers et al. (1992), chain partners utilizing information systems get
information which enables them to accommodate selected customer request and provide a
greater number of services to customers which will in turn improve chain members’ profits.
Systems like automatic purchase ordering systems enable chain partners not to evaluate
inventories by moving down the stores and making orders based on intuition and also
improve inventory turns of component stocks, and uniform the deviation between
components (Corsen and Gruen, 2003). Information sharing enables the chain partners to
achieve revenue enhancements (Broersox, 1990; Lee et al., 1997). Information sharing
through collaborative efforts enables chain partners focus on co-managed inventory by
considering different levels of demand uncertainty which enables them to improve fill rate,
increase inventory turnover and enhance sales (Parks, 1999).
They improve fill rates ensuring that all customer orders are delivered on time. This leads to
sales enhancement through repeat purchases and increased number of customers
(Gunasekeran and Tirtiroglu, 200I).It also leads to increased responsiveness to market
demands, customer service and increases market share (Anderson and Lee, 1999; Corbett et
al 1999; Mentzer et al, 2000; Mc Laren et al, 2002).customer service and responsiveness are
increased through increased flexibility. Information sharing enables chain partners to make

34
products or services available to meet individual demand of customers and also making
changes in products or services or deli every dates based on the customer's requirement
(Gunasekeran and Tirtiroglu, 200I).
Market share is increased through chain partners being able to have the best service level
compared to competitors. To be competitive, chain partners must compare their service to
those of their competitors (Gunasekeran and Tirtiroglu, 2001).

Inventory management and customer satisfaction

Better inventory management enables better customer satisfaction (Eckert, 2007). Customers
are satisfied when suppliers fulfill their orders on time (Wilding ,2003).This makes channel
partners keep buffer stocks to fulfill customer orders or enter into long term relationships
which require commitment and trust (Wang,2002).Commitment is the desire to continue a
relation ship and may be defined in three dimensions; inputs to it, its durability and its on
going consistency (Wilson,1995,p.337;Mowen and Minor,1998).Trust is the belief that a
party’s word or promise is reliable and a party will fulfill its obligations in an exchange
relation ship. High levels of trust lead to high levels of customer satisfaction (Andaleeb,
1996).
Trust and commitment can be achieved through the use of vendor managed inventory,
consignment inventory and just in time inventory management (Centikaya and
Lee,2000).these enable channel partners to satisfy their customers’ needs through providing
on time deliveries which result into repeat purchases, positive word of mouth and reduced
inventory carrying costs on the customers’ side (Wang,2000).Malz, Arnold and Elliot (2008)
point out that customer satisfaction is obtained through reducing order cycle time which leads
to on time deliveries to the customer through reducing the manufacturer’s production lead
time. Customers are satisfied when suppliers are flexible and responsive (Verwijmeren,
Vander and Donselaar, 1996).

Inventory management and flexibility

Flexibility is the extent to which the supplier is willing to make changes to accommodate the
customer's changing or unforeseen needs and to making available the products/ services to
meet the individual demand of customers (Humphrey and Tucker, 2003; Gunasekaran, 2001).
It is particularly valued in case of unforeseen problems or short-term changes in the needs of
the customer. Suppliers displaying flexibility will make quick responses to the buying firm's
needs (Tachizawa and Ginemezi, 2005). There is need for willingness to modify inventory

35
policies or procedures when this helps a customer (Cheung and Lee, 2002). Being flexible
allows a supplier to demonstrate a general readiness to respond to customer needs and this is
supported by the use of information technology which enables integration and information
flow within the chain (Romano, 2003).
Such technologies as flexible manufacturing systems (FMS), group technology (GT), and
computer-integrated manufacturing (CIM) (Ndubisi et al, 2005).The flexibility of
downstream chain is crucial in satisfying customers' changing needs in today's competitive
and uncertain environments (Ndubisi et al, 2005).Chain partners keep excess stock in order to
be flexible. They want to meet customer orders immediately the customer releases it, that is
shortens the lead time (Ayad, 2008).These enable them meet the delivery dates and fill
customer orders (Cetinkaya and lee, 2000).Customers may not return after experiencing
many negative experiences and this means many lost sales to chain partners (Gruen and
Corsten, 2006).Firms with advanced technology as their competitive edge can overcome stiff
competition by introducing wide range of products to meet the different market segments and
able to deliver quickly to the hands of customers before any of its competitors can do so
(Ndubisi et al, 2005).

Inventory management and customer loyalty

Chain partners have got to be as efficient as possible (Introna, 1991). Customers have
information concerning all products and services provided by chain partners in the market
(Blather wick, 1996). They can very easily make a decision of taking their business elsewhere
if a retailer, distributor or manufacturer cannot provide first class service in terms of
availability of product (Blatherwick, 1996). Similarly, if retailers, distributors and
manufacturers cannot compete on price, customers will very quickly be aware of this failing
and transfer their loyalty. Customer expectations in terms of service, range, new products and
promotions require chain partners to be flexible indeed (Howgego, 2002).

Inventory management and inventory returns

Having the desired products on hand when the customer wants them is critical to satisfy
customer needs. More and more chain partners are using inventory-management information
to improve their ability to fulfill key customer demand and having the right product at the
right time (Anonymous, 1998).Understanding consumer behaviors and market trends can
help chain partners to satisfy customer needs and to manage inventory information efficiently
(Lee and Kleiner, 200l).Customers will return the product if it does not meet their

36
requirements (Stuart et al, 2005). Products are returned on the sequential consideration of
product condition, obsolescence, back-order status and when products are not
environmentally compliant (Stuart et al, 2005; Blengini, 2008).

Inventory management and quality

Customers are interested in getting defect free products (Davidson et al, 200I). This means
that chain partners have to be flexible and responsive, so that they can be adapted to meet
rapidly changing customer expectations (Davidson et al, 2001).There is need for
commitment, co operation and integration among manufacturer, distributors and retailers to
meet the changing customer expectations (Neave, 1995; Chelsom, 1998). In order to satisfy
customers, it is crucial to meet their moment of value which means delivering the right
product at the right time and in the right place (Haag et aI, 1998). Chain partners ensure
timely delivery of a product that the customer really wants through the use of systems like
just in time systems.

Inventory management and on time delivery

Customers are satisfied when suppliers (retailers, distributors and manufacturers) are able to
deli ever products or services as and when required. Chain partners maintain high levels of
inventories at their stock point (Koumanakos, 2007). These reduce the amount of time it takes
to deliver the product to the consumer (David et al, 2001). However having these high levels
of inventories only works for standardardised products ((David et al, 2001). They would
actually be counter –productive to meeting customers’ needs for non standardized products
(Newman and Sridharan, 1995; Johnson and Mattson, 2003; Vollmann et al, 2005)

Inventory management and repeat purchases

Chain partners are facing a challenge of retaining loyal customers (Agarwal, 2007) .They
have to provide pre and post purchase satisfaction to a customer resulting in repeat purchases.
Pre-purchase satisfaction takes into consideration quality, provision of transport, fair prices
and flexibility while post purchase satisfaction looks at service management activities such as
repair services which depend heavily on reverse logistics operations (Amini et al, 2005;
Howgego, 2002).
Safety stocks are maintained to reduce the fear chain partners have of loosing a customer due
to un availability of a product (Anonymous,1998).Understanding consumer behaviors and
market trends can help chain partners to satisfy customer needs and to manage inventory
information efficiently (Lee and Kleiner,2001).Customers will return the product if it does

37
not meet their requirements (Stuart et al,2005).Products are returned on the sequential
consideration of product condition,obsolelecence,bark order status and when products are not
environmentally compliant (Stuart,2005;Blengini,2008).

38
 OBJECTIVE OF THE STUDY

 To find out efficiency of INVENTORY MANAGEMENT in Ramji Dass Raj Pal.

 To analyze the factors affecting and steps involved in the management of inventory
 To understand the policies followed to manage the inventory.
 To have first hand experience of the functioning of a Garment manufacturing
company.
 To have a practical experience of functioning of the Finance Department of Garments
manufacturing company.
 To study how inventory management practices plays an important role in supporting
other activities of an organisation.
 To gain familiarity with the various methods and techniques followed by Ramji Dass
Raj Pal in maintaining their inventory.
 To judge the success of the management in balancing the production with demand.
 To gain an in-depth knowledge of the tricks of faster conversion of inventories into
cash in Ramji Dass Raj Pal
 To find out difference between the theoretical and practical aspect of inventory
management.
 To study and come out with any solution for improvement of inventory management
in Ramji Dass Raj Pal

39
 RESEARCH METHODOLOGY

Basically project study is usually based on a research, which gives a concrete answer to a
problem. This research may be a problem solving or problem oriented. Both types of research
are usually known as Applied research.

Accounts is a form of Applied research which proceeds with a certain problem, specifies
alternative solutions and the possible outcome of each. It may be further named as
“Decisional Research”.

The accounts research methodology involves a number of interrelated activities, which

overlap and do not rigidly follow a particular sequence. An accounts research involves the
following major steps.

FORMULATING RESEARCH PROBLEM

The first step in research is formilattting research problem. It is the most important stage in
Applied research as it is rightly said “A problem well defined is half solver”.

In this project report i have studied the concept of Inventory management and have carried
the analysis of the same in Duke Fashions (India)Ltd.

DTERMINING THE SOURCE OF DATA

The next step is to determine the source of data to be used. The accounting research may be
based on primary or secondary or on both.

In this report i have used the information gathered through secondary data which include
internal data source mainly the:-

 Sales Reports
 Cash Report
 Raw material Report
 Production Report
 Annual Report
 Inventory Report
 Financial yearbook

40
41
 FINANCIAL ANALYSIS

ANALYSIS OF INVENTORY OF DUKE FASHION INDIA LTD.

Following are figures of inventory in Ram Dass Rajpalfor last 6 years with effect from 2010
to 2015:-

(IN RS.CRORES)

YEAR 2012 2013 2014 2015 2016 2017

INVENTORY 6.74 8.13 8.99 12.92 33.80 24.40
AVERAGE 6.74 7.435 8.56 10.96 23.36 29.1
INVENTORY

40

35

30

25

20
Column1

15

10

0
2012 2013 2014 2015 2016 2017

42
 INVENTORY TURNOVER RATIO

This ratio shows the relationship between net sales during a given period and average stock
carried during the period. Thus, it is obtained by dividing net sales by average inventory.

FORMULA:-

sales
Inventory Turnover ratio=
average stock

FACTORS:-

opening stock+ closing stock

Average stock =
2

SIGNIFICANCE:-This ratio indicates the rate of which stock of finished goods are
converted into sales. It is also a measure of liquidity. It determines how many times stock
over of stock are purchased or replaced during a year.

Higher the ratio, better it us for business since it means that stock is being
sold quickly. Concern with too high ratio may be operating with low margin of profits. Low
turnover of stock may be due to bad buying, obsolete stock and is a danger signal.

YEAR 2012 2013 2014 2015 2016 2017

INVENTORY(RS.CRORES) 48.50 66.89 81.06 107.13 140.26 177.00
AVERAGE 6.74 7.435 8.56 10.96 23.36 29.1
INVENTORY(RS.CRORES)
INVENTORY TURNOVER 7.20 9.00 9.47 9.77 6.00 6.08
RATIO(IN TIMES)

43
 12

10

6
Column1

0
2012 2013 2014 2015 2016 2017

INTERPRTATION:-According to table and graph shown above, it is observed that there is

an increase in inventory turnover ratio in 2013 as compared to 2012. In 2014, it slightly
increased from 9.00 to 9.47 times. Then in next year, it start to rise but in financial year 2015-
16 it fall from 9.77 to 6.00.But in 2016-17, ratio slightly increased. So inventory turnover
ratio of Ramji Dass Raj Pal is satisfactory.

INVENTORY HOLDING RATIO

FORMULA:-

365 days
Inventory Holding Ratio=
Inventory Turnover Ratio

YEAR 2012 2013 2014 2015 2016 2017

INVENTOR 7.20 9.00 9.47 9.77 6.00 6.08
Y
TURNOVER
RATIO(IN
TIMES)
INVENTOR 51 41 39 37 61 60
Y HOLDING
RATIO(IN
DAYS)

44
 70

60

50

40

Column1
30

20

10

0
2010 2011 2012 2013 2014 2015

INTERPRETATION:-The analysis of above table shows that there has been uneven trend
in inventory holding ratio. There has been decreasing trend till 2014-15 after which it
significantly increased in following year 2015-16.Then in year 2016-17. It slightly increased.
The company focus on the reduction of carrying cost which proves the effectiveness of good
system of inventory management. The management of co. needs to continue with change in
policy in future.

TRENDS OF SALES

(RS.CRORES)

YEAR 2012 2013 2014 2015 2016 2017

SALES 48.5 66.89 81.06 107.13 140.26 177.00

45
 200

180

160

140

120

100
Column1
80

60

40

20

0
2012 2013 2014 2015 2016 2017

The sales in all the years are showing increasing trend. The sales are satisfactory in all the
years in Ram Dass Rajpal This implies that the revenue of the company is in increasing trend.

TREND OF DEBTORS

Debtors are the one who owes money to concern. Following is trend of debtors of Ramji Dass
Raj Pal:-

(RS.CRORES)

YEAR 2012 2013 2014 2015 2016 2017

DEBTORS 9.07 10.71 13.13 15.65 16.37 30.00

46
 35

30

25

20

Column2
15

10

0
2012 2013 2014 2015 2016 2017

INTERPRETATION:- There is an increasing trend in debtors which shows that co. is using
liberal credit policy and it may result in trying up of substantial funds of co. in the form of
trade debtors. The liquidity position of a concern to pay its short term obligations in time
depends on quality of its trade debtors.

DEBTOR TURNOVER RATIO

Debtors arises on account of credit sales. Debtor turnover ratio explains relationship between
net sales and average debtors during the year.

FORMULA:-

Net Sales
Debtors turnover ratio(in times)=
average debtors

FACTORS:-

a. Net sales=Gross sales-Sales return

opening debtors+closing debtors
b. Average debtors =
2

47
 SIGNIFICANCE:-

The ratio throws light on credit and collection of the business and is thus related to liquidity.
Higher the ratio, better is, since it means speedier collection and lesser amount blocked up in
debtors and vice-versa.

YEAR 2012 2013 2014 2015 2016 2017

SALES 48.5 66.89 81.06 107.13 140.26 177.00
AVERAG 9.07 10.71 13.13 15.65 16.37 30.00
E
DEBTORS
DEBTOR 5.35 6.25 6.17 6.85 8.57 5.90
TUNOVE
R RATIO
9

5
Column1
4

0
2012 2013 2014 2015 2016 2017

INTERPRETATION:-Debtor turnover ratio indicates the no. of times the debtors are turned
over during the year. The debtor turnover ratio of Ramji Dass Raj Pal satisfactory. It is
increasing which indicates that the debtor management and sales is efficient or debtors are
more liquid.

48
 AVERAGE COLLECTION PERIOD

The average collection period represents the average no. of days for which a firm has to wait
before their receivables are converted into cash.

FORMULA:-

365 days
Average collection period =
debtor turnover ratio

SIGNIFICANCE:-

If average collection period is longer then it indicates some inefficiency in the procedures for
collecting debts.

YEAR 2012 2013 2014 2015 2016 2017

DEBTOR TUNOVER RATIO 5.35 6.25 6.17 6.85 8.57 5.90
AVERAGE COLLECTION PERIOD 68 58 59 53 43 62
80

70

60

50

40
Column1

30

20

10

0
2012 2013 2014 2015 2016 2017

INTERPRETATION:-The average collection period in Ramji Dass Raj Pal is shorter in

each year that means decreasing trend in average collection period. This shows better quality
of debtors which shows quick payment by debtors. But in 2016-17 period increased to 62
days as compared to other years.

MEASUREMENT OF TREND –METHOD OF LEAST SQUARES

49
To avoid stock out position with a high ratio as well as cost of carrying excessive inventory
associated with a low ratio, a firm should have neither too high nor too low inventory
turnover ratio. So to judge the reasonability of this ratio during the study, it is compared on
the basis of trend analysis during the study period. This involves

 Measurement of trend values in case of SALES

 Measurement of trend values in case of INVENTORY

For this purpose,

Let Y=a + BX be equation of the straight with origin at year 2013-14 where,

X is independent variable relating to time period under (X unit is 1 year) &

Y is dependent variable in Rs. to be predicted.

By the method of least squares, the normal equations for finding the values of a and b is:

∑Y=Na + b ∑X........................................... (I)

∑XY=a ∑X +b ∑X 2 .................................... (II)

The above two equations are reduced and we can get,

∑Y ∑ XY
a= and b=
N ∑X2

YEAR SALES(Rs.Cr.) X X2 XY

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 Y
2012 48.50 -3 1 -145.50
2013 66.89 -2 4 -133.78
2014 81.06 -1 1 -81.06
2015 107.13 0 0 0
2016 140.26 1 1 140.26
2017 177.00 2 4 354
TOTAL ∑Y=620.84 ∑X=-3 ∑X 2 =11 ∑XY=133.92

Y=a+Bx

∑Y ∑ XY
a= and b=
N ∑X2

620.84
a= =103..473
6

133.92
b= =12.1745
11

Equation is

Y=103.47+12.17

YEAR X TREND VALUES

2012 -3 103.47+12.17×-3 =66.96
2013 -2 103.47+12.17×-2 =79.13

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 2014 -1 103.47+12.17×-1 =91.30
2015 0 103.47+12.17×0 =103.47
2016 1 103.47+12.17×1 =115.64
2017 2 103.47+12.17×2 =127.81

MEASUREMENT OF TREND VALUES IN CASE OF INVENTORY

Calculation for finding the equation of best fitted straight line in case of INVENTORY is
given below:-

YEAR INVENTORY(Rs.Cr.) X X2 XY

Y
2012 6.74 -2 4 -13.48
2013 8.13 -1 1 -8.13
2014 8.99 0 0 0
2015 12.92 1 1 12.92
2016 33.80 2 4 67.6
2017 24.40 3 9 73.20
2
TOTAL ∑Y=94.98 ∑X=3 ∑X = ∑XY=132.11
=19

Y=a+Bx

∑Y ∑ XY
a= and b=
N ∑X2

94.98
a= =15.83
6

132.11
b= =6.95
19

Equation is:-

15.83+6.95X

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 YEAR X TREND VALUES
2012 -2 15.83+6.95×-2 =1.93
2013 -1 15.83+6.95×-1 =8.88
2014 0 15.83+6.95×-0 =15.83
2015 1 15.83+6.95×1 =22.78
2016 2 15.83+6.95×2 =29.78
2017 3 15.83+6.95×3 =36.68
REGRESSION ANALYSIS OF SALES AND CHI-SQUARE TEST

To assess the association between sales and inventory of the company ,regression equation of
sales on inventory was used in order to test the statistical significance at 5%level between
these two variables, Chi Square was applied. The regression equation of sales(Y) on
inventory(X) is computed below:-

CALCULATION OF REGRESSION EQUATION:-

The Regression equation of sales(Y) on the inventory(X) is computed as per equation

Y-Ῡ=bYX(X-Ẋ̅)

YEAR 2012 2013 2014 2015 2016 2017

INVENTORY(X 6.74 8.13 8.99 12.92 33.80 24.40
)
SALES(Y) 48.50 66.89 81.06 107.13 140.26 177.00

YEAR X Y X⁰ Y2 XY EXPECTED
SALES

6.74 48.50 45.4276 2352.25 326.89 112.78

2012
8.13 66.89 66.0969 4474.2721 543.8457 117.96
2013
8.99 81.06 80.8201 6570.7236 738.7294 121.17
2014
12.92 107.13 166.9264 11476.8369 1384.1196 135.83
2015
33.80 140.26 114.244 19672.8676 4740.788 213.71
2016
24.40 177.00 595.36 31329.00 4318.80 178.65
2017
TOTAL 94.98 620.84 1068.875 75875.9502 12043.1427

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 ̅ ∑ X 94.98
X̅= = =15.83
N 6

∑ Y 620.84
Y̅= = =103.47
N 6

N ∑ XY −∑ X ∑Y 6 ×120431.14−94.98 ×620.84
b YX= = =3.73
N ∑ X 2−( ∑ X ) 2 6 × 2097.071−( 94.98 ×94.98)

Regression equation is Y- Y̅= b YX(x)-X̅

Y-103.47=3.73X-15.83

Y=3.73+87.64

CHI-SQUARE TEST

Let the null hypothesis be Ho such that there is no significant relation between sales and
inventory. Then the alternative HA implies that a significant relation between sales and
inventory exists. The value of chi-square is calculated as follows:-

YEAR Oi=actual Ei=expected (Oi- Ei)2 (O i−E i) 2

sales sales Ei
48.5 112.78 4131.91 36.64
2012
66.89 117.96 26.8.14 22.11
2013
81.06 121.17 1608.81 13.28
2014
107.13 135.83 823.69 6.06
2015
140.26 213.71 5394.90 25.24
2016
177.00 178.65 2.7225 0.01
2017
=103.34
(O i−E i)2
= =103.34
Ei

Degree of freedom=n-1=6-1

=5

For df=5,tabulated value of chi-square at 5%level of significance= 0.05 =11.10

Since calculated value of ˃tabulated value of at 5%level with df=5,null hypothesis

is rejected.

54
Hence, the alternative hypothesis is accepted and a significant relation between sales and
inventory exists. It shows that the performance in respect of inventory management of the
company during period under study is good.

55
 RECOMMENDATIONS

 The inventory turnover ratio may be improved if management take section to

investigate the causes of difference/shortages of stores and spares and thus remove the
losses from the accounts, if any.
 The computation of inventory turnover ratio for individual components of inventories
may help management of Ramji Dass Raj Pal to detect the imbalanced investments in
various inventory components.
 The company needs to have a standard in respect of minimum and maximum level of
inventory. This will help the company in having inventory control and continuos flow
of production.
 Proper storage facilities are recommended to prevent loss of inventory due to the lack
of it or faulty methods of storage.
 The company must look for more buyers of its product to enable quick conversion of
inventory to cash.
 The management of the plant should try to maintain the reduced inventory to total
current assets ratio in future course of production.
 The management should try to find out the causes of difference between actual and
expected sales as shown by chi-square test.
 In store department items should be placed in their proper sequence and with
acknowledgement.
 There should be proper record of wastage. It is good for the company.
 The company is using just-in-time technique; they should also consider the economic
order quantity techniques while ordering the material to the supplier.

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 CONCLUSIONS

 The overall performance in respect to utilisation of inventories is satisfactory during

the study period.
 The Chi-Square test by rejecting null hypothesis reflects a relation between sales and
inventory. In addition it supports the fact that the performance of inventory
management is satisfactory.
 The inventory level may be also reduced to the possible level in order to release idle
funds absorbed in inventories.
 The efficiency of the company in turning the inventories in to cash is fair as reflected
by its inventory turnover ratio.

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 BIBLIOGRAPHY

 Annual reports of Jay Kay Knitwears

 Financial Management by M.Y Khan and P.K Jain
 Financial Management By I.M Pandey
 Mathematics and Statistics By R.S Aggarwal
 www.dukeindia.com

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