Annexure- A

Summer Internship Project Report

On
“How Can Inventory Control With Minimum
Plan Requirements”

ESCORTS KUBOTA INDIA PRIVATE

LIMITED

Submitted in partial fulfilment of the requirements for the Two Year Full
Time Post Graduate Diploma in Management
Session (2021-2023)
Under the Guidance of
Dr. Parul Agarwal

Industry Mentor’s Name: - Mr. Deepak Kumar Faculty Mentor’s Name: - Dr. Parul Agarwal
Designation: - Executive Manager Designation: - Associate Professor

Submitted By
Student’s Name: - NARESH KUMAR
Roll Number: - BM-021113

Institute of Management Studies, Ghaziabad

2
 Annexure- A

Summer Internship Project Report

On
“How Can Inventory Control With Minimum
Plan Requirements”

ESCORTS KUBOTA INDIA PRIVATE

LIMITED

Submitted in partial fulfilment of the requirements for the Two Year Full
Time Post Graduate Diploma in Management
Session (2021-2023)
Under the Guidance of
Dr. Parul Agarwal

Industry Mentor’s Name: - Mr. Deepak Kumar Faculty Mentor’s Name: - Dr. Parul Agarwal
Designation: - Executive Manager Designation: - Associate Professor

Submitted By
Student’s Name: - NARESH KUMAR
Roll Number: - BM-021113

Institute of Management Studies, Ghaziabad

3
 Annexure B-1
(Originality Certificate)

I hereby declare that this Summer Internship Project is my own work and that, to the best of
my knowledge and belief, it reproduces no material previously published or written that has
been accepted for the award of any other degree of diploma, except where due
acknowledgement has been made in the text.
(Student Name)
Enrollment No.
Date:

4
 Annexure-B-2
(Plagiarism Certificate)

5
 Annexure- C
(Industry Certificate)

Date: ………….

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr. /Ms……………………. of IMS Ghaziabad, PGDM Batch 2020-22
has successfully completed his/ her summer internship under the guidance of Mr./
Ms………………………(Industry Mentor’s Name) for a duration of
…………………..weeks, from…….to………….

During his/her tenure with us, we found him/her ………………………..

We wish him/ her all the very best for future endeavours.

Signature
Name
Designation
Organization seal

6
 Annexure- D
(Faculty Mentor’s Certificate)

This is to certify that Mr. / Ms. ……………………….. PGDM (Batch 2020-22) a student of
IMS Ghaziabad, has undertaken the project on “Project Title”. To the best of my knowledge,
the survey, data collection, & analysis work for preparing the project has been carried out by
the student in partial fulfilment of the requirements for the award of PGDM, under my guidance
and supervision.

I am satisfied with the work of Mr. /Ms. …………………………..

Date:

Faculty Mentor’s Name: …………

(Signature)

7
 Table of Contents

Originality Certificate
 Annexure - B-1 ( Certificate of Originality )
 Annexure - B-2 ( Plagiarism Certificate )
Industry Certificate
 Annexure- C

Faculty Mentor’s Certificate

 Annexure- D

Acknowledgement

Executive Summary

1. Introduction ………………………………………………………. 16-19

2. Company Profile …………………………………………………. 20-40

3. Literature Review ………………………………………………..... 41-47

4. Research Methodology...…………………………………………….. 48-62

5. Analysis and Findings …………………………………………............. 63

6. Conclusions and Recommendations ……………………………… 64-65

7. Learning and Outcomes ………………………………………….. 66-71

8. References …………………………………………………………… 72

9. Appendices …………………………………………………………. 73-76

10. Questionnaire ……………………………………………………… 77-78

8
 List of Tables

Table 1. (a) Results updates- Q3 FY18 …………………………………………. 23

Table 1. (b) Break up of Expenditure ……………………………………... 23

Table 1. (c) Balance Sheet as of March 31, 2016 -2019E ………………… 26

Table 1. (d) Annual Profit & Loss Statement ……………………………... 27

Table 2. (a) Ratio Analysis ………………………………………………... 28

Table 3. (a) Raw Material (At Closing Stock) ……………………………. 50

Table 3. (b) Stock in Process (At Closing Stock) …………………………. 50

Table 3. (c) Finished Goods (At Closing Stock) …………………………... 51

Table 4. (a) Stores, Spares and Consumables (Closing Stock) ……………. 52

Table 4. (b) Raw Material Consumed ……………………………………… 52

Table 4. (c) Economic Order Quantity ……………………………………... 53

Table 5. (a) Economic Order Quantity during 2012-2013 …………………. 54

Table 5. (b) Economic Order Quantity during 2013-2014 …………………. 55

Table 5. (c) VED Analysis …………………………………………………. 56

Table 6. (a) Cost of Goods Sold /Average Value of Inventory ……………. 58

9
 List of Figures

Figure 1. (a) Production of raw material into finished goods …….... 17

Figure 1. (b) The Production/Operations Management Cycle ……………… 38

Figure 1. (c) Functions of Production Planning & Control department ……... 38

Figure 2. (a) Literature Survey ……………………………………………… 42

Figure 2. (b) Raw Material (At Closing Stock) ……………………………… 51

Figure 2. (c) Stock in Process (At Closing Stock) …………………………... 52

Figure 3. (a) Finished Goods (At Closing Stock) …………………………… 52

Figure 3. (b) Stores, Spares and Consumables (Closing Stock) …………...... 53

Figure 3. (c) Raw Material Consumed ……………………………………… 54

Figure 4. (a) Inventory Turnover Ratio …………………………………….. 60

List of Charts / Graphs

Graph 1. (a) 1 Year Comparative Graph Escorts Limited …………………… 19

Graph 1. (b) Segment Revenue ………………………………………………. 25

Graph 1. (c) Break of Expenditure ………………………………………….... 25

Graph 2. (a) Net Sales and PAT ……………………………………………… 30

Graph 2. (b) P/BV ……………………………………………………………. 30

10
 Acknowledgement

First of all I would like to take this opportunity to thank the Institute of Management Studies,
Ghaziabad for having project as a part of the MBA Curriculum.

I would like to take this opportunity to express my sincere thanks to Dr. Urvashi Makkar for
providing me helpful environment in complexity this project and for giving me the fine
opportunity to do this project in the esteemed organization.

I gratefully acknowledge to Mr. Deepak Kumar who has given me the opportunity to learn at
deep level to prepare this report and supported me throughout this project with utmost
cooperation and patience.

I express my profound sense of gratitude and sincere thanks to the Management of Escorts
Kubota India Private Limited for offering me this project and training in this organization.
I also extend my gratitude to my Project Guide Dr. Parul Agarwal who assisted me in
compiling the project.

An acknowledgement would not be complete without a word of thanks to all our friends for
their valuable suggestions.

Place: STUDENT NAME

Date: ROLL NO.

11
 Executive Summary
What is Inventory Management?
Inventory management — a crucial component of supply chain management — is the process
of tracking stock levels and the movement of goods, whether it be delivering raw materials
to manufacturers or fulfilling orders for finished products.

Inventory management is the fundamental building block to longevity, helping businesses to

minimize costs, improve cash flow and boost profitability.

When your inventory is properly organized, the rest of your supply chain will fall into place.
Without it, you risk a litany of mistakes like mis-shipments, shortages, out-of-stocks, spoilage
(when dealing with perishable stock items), overstocks, and mis-picks and soon.

Nonetheless, 43% of small businesses still don’t track their inventory, and, on average, U.S.
retail operations have a supply chain accuracy of only 63% — which means many retailers
aren’t taking advantage of the inventory management software available.

Unlike an enterprise resource planning (ERP) system, an inventory management system

focuses on one supply chain process. They often come with the ability to integrate with other
software systems — POS (point of sale), sales channel management, shipping — so you can
build a personalized integration stack to meet the unique needs of your business.

Process of Inventory Management

Before building an inventory management plan, you’ll need to have a solid understanding of
each step in the inventory management process. This is crucial to minimizing error and
choosing the most effective inventory management software for your business.

1. Goods are delivered to your facility. This is when raw materials and subcomponents for
manufacturers or finished goods for consumers first enter your warehouse.
2. Inspect, sort and store goods. Whether you use drop shipping, cross-docking or a
different warehouse management system, this when inventory is reviewed, sorted and
stored in their respective stock areas.
3. Monitor inventory levels. This may be through physical inventory counts, perpetual
inventory software or cycle counts and helps minimize the chance of error.
4. Stock orders are placed. Customers place orders either on your website or in-store.
5. Stock orders are approved. This is when you pass the order to your supplier, or it may
be automated through your POS system.
6. Take goods from stock. The necessary goods are found by SKU number, taken from
stock and shipped to the manufacturer or customer.
7. Update inventory levels. Using a perpetual inventory system, you can automatically
update inventory levels and share with necessary stakeholders.
8. Low stock levels trigger purchasing/reordering. Restock inventory as needed.

To better visualize these eight steps, try creating an inventory process map like the one below.
Track and review each step of the process in order to minimize out-of-stock and overstocked
inventory.

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Inventory Management Techniques
 Especially for larger apps with lots of moving parts, inventory management can become
complex, encompassing several techniques and strategies. Let’s take a look at
some inventory control techniques you may choose to utilize in your own warehouse.

Economic order quantity.

 Economic order quantity (EOQ) is a formula for how much inventory a company should
purchase with a set of variables like total costs of production, demand rate and other
factors. The formula identifies the greatest number of units in order to minimize buying,
holding and other costs.

Minimum order quantity.

 Minimum order quantity (MOQ) is the smallest amount of inventory a retail business
will purchase in order to keep costs low. However, keep in mind that inventory items
that cost more to produce typically have a smaller MOQ, as opposed to cheaper items
that are easier and more cost effective to make.

ABC analysis.
 This technique splits goods into three categories to identify items that have a heavy
impact on overall inventory cost.

 Category A is your most valuable products that contribute the most to overall profit.
 Category B is the products that fall in between the most and least valuable.
 Category C is for small transactions that are vital for overall profit but don’t matter
much individually.

Just-in-time inventory management.

 Just-in-time (JIT) inventory management is a technique in which companies receive
inventory on an as-needed basis instead of ordering too much and risking dead stock
(inventory that was never sold or used by customers before being removed from sale
status).

Safety Stock Inventory.

 Safety stock inventory management is extra inventory that is ordered and set aside in
case the company doesn’t have enough for replenishment. This helps prevent stock-
outs typically caused by incorrect forecasting or unforeseen changes in customer
demand.

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FIFO and LIFO.
 LIFO and FIFO are methods to determine the cost of goods. FIFO, or first-in, first-out,
assumes the older inventory is sold first in order to keep inventory fresh. LIFO, or last-
in, first-out, assumes the newer inventory is typically sold first to prevent inventory
from going bad.

Reorder Point Formula.

 The reorder point formula calculates the minimum amount of stock a business should
have before reordering. A reorder point is usually higher than a safety stock number to
factor in lead time.

Batch Tracking.
 Batch tracking is a quality control technique wherein users can group and monitor
similar goods to track inventory expiration or trace defective items back to their original
batch.

Consignment Inventory.
 If you’re thinking about your local consignment store here, you’re exactly
right. Consignment inventory is when a consigner (vendor or wholesaler) agrees to give
a consignee (retailer) their goods without the consignee paying for the inventory
upfront. The consigner offering the inventory still owns the goods, and the consignee
pays for them only when they sell.

Perpetual Inventory Management.

 Perpetual inventory management is simply counting inventory as soon as it arrives to
deliver real-time insights. It’s the most basic type of inventory management system and
can be recorded manually on pen and paper or an Excel spreadsheet. Or, by using
handheld devices that scan product barcodes and RFID tags, you may use an inventory
system that automates inventory balances as soon as stock is moved, sold, used or
discarded.

Drop shipping.
 Drop shipping is an order fulfilment method in which the supplier ships products
directly to the customer. When a store makes a sale, instead of picking the item from
their own inventory, they purchase the item from a third party and have it shipped to
the consumer.
Lean Manufacturing.
 Lean manufacturing is a broad set of management practices that can be applied to any
business practice. Its goal is to improve efficiency by eliminating waste and any non-
value-adding activities from daily business.
Six Sigma.
 Six Sigma is a method that gives companies tools to improve the performance of their
business (increase profits) and decrease excess inventory.

14
Lean Six Sigma.
 Lean Six Sigma enhances the tools of Six Sigma, but instead focuses more on increasing
word standardization and the flow of business.

Demand forecasting.
 Demand forecasting is based on historical sales data to forecast customer demand.
Essentially, it’s an estimate of the goods and services a company expects customers to
purchase in the future.

Cross-docking.
 Cross-docking is a technique whereby a supplier truck unloads materials directly into
outbound trucks to create a JIT shipping process. This essentially eliminates
warehousing, and there is little to no storage in between deliveries.

Bulk shipments.
 Bulk shipments is a cost efficient method of shipping in which a business palletizes
inventory to ship more at once. To see some examples of effective inventory
management in action, check out our Big Commerce Case Studies page, where you can
find success stories from both B2C and B2B merchants.

Conclusion
 Inventory is money sitting around in another form. You paid money for your inventory,
and you will get that money back when you sell it. Until you sell them, you need to
hold and manage inventories. Gone are those days where managing inventory was a
nightmare.

 This is because the businesses have started using inventory management software
which comes with in-built and automated inventory control techniques.

 Basis the consumption of the inventories, the inventory management software is smart
enough to know the net stock, shortfall, and quantity of stock to be ordered.

 More importantly, information is available readily at a click which allows the

businesses to take timely decisions.

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 Introduction

 Inventory control is an activity of checking a shop’s stock and to maintain the inventory
at desired levels, keeping in view the best economic interest of an organization. In
simple words, inventory control is a process of ensuring that a business maintains the
adequate quantity of stock to meet the forecasted demand with minimum holding cost.

 Relationship Inventory management is a challenging problem area in supply chain

management. Companies need to have inventories in warehouses in order to fulfil
customer demand, meanwhile these inventories have holding costs and this is frozen
fund that can be lost. Therefore, the task of inventory management is to find the quantity
of inventories that will fulfil the demand, avoiding overstocks.

 This paper presents a case study for the steel manufacturing industry (Small Scale
Industry) on inventory management. The relationship between the inventory
management and company performance was determined based on inventory days and
return on asset (ROA) analysis.

 The research found that company X had a few inventory problems such as unorganized
inventory arrangement, large amount of inventory days / no cycle counting and no
accurate records balance due to unskilled workers. The study also proved that there was
a significant between return on asset (ROA) and inventory days. This paper also
provides recommendation to the company and for further research.

 Inventory is the supply of raw materials, partially finished goods called work-in-
progress and finished goods, an organization maintains to meet its operational needs. It
represents a sizeable investment and a potential source of waste that needs to be
carefully controlled.

 Inventory is defined as a stock of goods that is maintained by a business in anticipation

of some future demand. The quantity to which inventory must fall in order to signal that
an order must be placed to replenish an item.

 Using an extension of a standard inventory-dependent demand model provide a

convenient characterization of products that require early replenishment. The optimal
cycle time is largely governed by the conventional trade-off between ordering and
holding costs, whereas the reorder point relates to a promotions-oriented cost-benefit
perspective.

 The optimal policy yields significantly higher profits than cost-based inventory
policies, underscoring the importance of profit-driven inventory management. To work
towards perfect order metrics, there has to be aggressive inventory management,
restructuring supply chain operations, and updating standards to the perfect standard.

 When updating the metrics, this would include the cases shipped vs. the orders on-time
delivery, data synchronization, damages and unusable products, days in supply, the
ordering time cycle, and shelf level of service.

16
  Inventory problems of too great or too small quantities on hand can cause business
failures. If an organization experiences stock-out of a critical inventory item, production
halts could result. Inventory management indicates the broad frame work of managing
inventory.

 The inventory management technique is more useful in determine the optimum level of
inventory and finding answers to problem of safety stock and lead time. Inventory
management has become highly developed to meet the rising challenges in most
Corporate entities and this is in response to the fact that inventory is an asset of distinct
feature.

Figure 1. (a) Showing production of raw material into finished goods

Importance of inventory control:-

 Managing adequate stock is key for managing inventory successfully. Overstocking

will lead to cash flow blockage and the additional cost for managing excess stock. On
the other hand, understocking leads to loss of sale due to non-availability of stock at the
right time.

 As a result, a business needs to implement inventory control so that the right product at
the right place and the right time is available.

 Inventory control helps the business in knowing the shortfall and quantities to be
ordered considering the net stock available. Thus, it ensures that enough stocks are
maintained to meet customer needs, at any point in time.

Objectives of inventory control:-

Inventory control has two key objectives:

Customer service level
 Why do you produce goods? The answer is simple it is to sell the goods at a good price.
In an open market, there are so many manufactures who may produce the same goods
as you may. Then how could you be different and attract customers to your product?
The answer here is plain, it’s only through proper customer service.

17
  Customer service means having the right goods available in the right quantity in the
right place at the right time. This can only be achieved if you have proper inventory
control measures followed up in your organization.

Cost of holding inventories

 Another objective of inventory control is to optimize the cost of ordering and carrying
inventories. As we know that the overall objective of inventory control is to achieve
satisfactory levels of customer service by keeping the inventory costs within reasonable
bounds. Therefore, the cost of ordering inventories and carrying those inventories
throughout the production is also important to keep the overall cost of selling as low as
possible.

Advantages of inventory control

 Maintaining an optimum level of inventories

 Helps in laying the procurement process considering the wait-time, lead-time etc.
 Periodical inspection of inventories
 Guides us on storing and issuance of inventories from go downs.
 A systematic record of movement of materials.
 It helps to lay out plans for physical verification of inventories.

Steps involved in inventory control

Step 1: Deciding on the minimum levels of inventories

 A production department is incomplete if it does not have a good relationship with the
sales and marketing department. It is because the demand or need for the product you
produce can only be assessed by people who are close to customers such as sales and
marketing.

 Thereby deciding on the levels of inventory i.e. maximum-minimum limits of inventory

is important because as a manufacturer you would not like the raw materials to go
obsolete even before the production has begun or to stock up raw materials that have
very limited use in the production of a finished product.

Step 2: To decide on the re-order level

 The demand for anything is uncertain in this world. Especially with customers taste and
preferences. A product manufactured by you may be selling high and you must be ready
to decide as how much to produce adhering to customers demand.

 For which you have to decide as to when you will be re-stocking the raw materials
which will be used in the production of the final product. If the restocking time passes
beyond the committed time of the finished product to the customer, then you will not
be able to deliver a complete product to the customer.

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Step 3: Choosing a sound inventory control method

 There are several types of inventory control method available and you can choose the
one which suits your business. No matter which method you choose, it is important that
the techniques should assist knowing the minimum quantity of stock, point in time at
which the stock should be re-ordered and right quantity that should be ordered.

Inventory Control Methods

 The following are the different types of inventory control methods used by the
business.

ABC analysis
 Here, the stock is divided into three sections namely A, B and C. A section consist of
inventories that are high in value with low sales frequency or consumption. This
category of stocks requires to be controlled closely. Category B consists of stocks that
are of moderate value and with decent sales frequency. In category C, you have
inventories with low value having high sales frequency requiring minimum inventory
control.

Just in time (JIT)

 Here, the company maintains an inventory level that is required during production.
Under this method, you will not be having any excess inventory beyond the production
requirements and it helps you get rid of the cost involved in storing excess stock. Here,
the order of stock is placed when old stock is close to zero and this puts production in
risk, even if there are small delays.

Economic order quantity (EOQ)

 In this method, the company will get to know how much quantity of inventory should
the company order at any point of time and when should they place the order
considering the minimum level of inventory.

Fast, slow, and non-moving (FSN)

 Here, the inventories are classified based on the movement. All the inventories are
categorized as fast-moving, slow-moving, and non-moving. Basis the movement across
the categories, the order is placed.

1 Year Comparative Graph Escorts Limited:-

Graph. 1(a)

EGGGS ESCGORTS LTD

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 Company Profile
 Escorts Ltd is one of India's leading engineering conglomerates with over six decades
of experience. It has helped Escorts Ltd is one of India’s leading engineering
conglomerates with over six decades of experience. It has helped accelerate India’s
socio-economic development through its presence across the high growth sectors of
Agri-machinery, construction and material handling equipment and railway
equipment’s. The company has diversified in to three different segments.

 Escorts Agri Machinery (EAM), Escorts Construction Equipment (ECE) and Railway
Equipment Division (RED). The company is committed to excellence in engineering,
innovation in products, development of market – relevant technologies and the highest
of cost efficiencies in order to create value for its customers and shareholders.

 Escorts Ltd was incorporated in the year October 17th 1944 as Escorts Agents Ltd in
Lahore. The company has diversified business in three different segments viz. Agri
Machinery Material Handling & Construction Equipment and Railway Equipment. The
Company has nearly 1200 sales & service outlets.

 In the year 1951 Escorts established India's first private Institute of Farm Mechanisation
at Delhi and in the year 1953 Escorts (Agents) Ltd and Escorts (Agriculture and
Machines) Ltd merged to form Escorts Agents Pvt. Ltd.

 The company was converted into a public limited company in December 1959 and
subsequently the name was changed to Escorts Ltd in January 1960.In the year 1961
the company set up a manufacturing base at Faridabad for manufactures of tractors in
collaboration with URSUS of Poland and launched Escort brand of tractors. Also they
made collaboration with CEKOP of Poland for manufacture of motorcycles and
scooters.

 The first Rajdoot motorcycle rolls off the assembly line. In the year 1969 Escorts
Tractors Ltd made a technical and financial joint venture with the global giant Ford
Motor Company USA for manufacturing Ford tractors in India. And in February 1 1971
the first tractor FORD 3000 rolled out of the factory.

 In the year 1977 the company set up their first independent R&D Centre namely Escorts
Scientific Research Centre at Faridabad. Also they set up their second plant at
Bangalore for manufacturing piston assemblies. In the year 1979 they made
collaboration with JCB Excavators Ltd. UK for manufacture of excavators. In the year
1980 the company forayed into healthcare and set up Escorts Hospital and Research
Centre in Faridabad. In the year 1984 the company signed an agreement with the
Japanese bike giant Yamaha to manufacture motorcycles with Yamaha technology.

 Also they made collaboration with Jeumont Schneider of France and Dynapac of
Sweden to manufacture EPABX systems and vibratory road compactors respectively.
In the year 1997 the company made a joint venture agreement with New Holland and
launched Farmtrac Tractor. Also the made a joint venture with First Pacific Company
of Hong Kong and formed Escotel Mobile Communications.

20
 In the year 1998 the company launched Powertrac tractors. They signed a MoU with
Long Manufacturing Company of USA for setting up a Joint Venture in USA.In the
year 1999 the company signed a MoU with a Polish Company POL-MOT for
assembling manufacturing and marketing of Farm Machinery. In September 1999 they
set up a subsidiary namely Escosoft Technologies Ltd in the Information Technology
Sector. During the year 2001-02 the company sold their 26% shareholding in Yamaha
Motors Escorts Ltd.

 They entered into an agreement with Claas KgaA Germany their joint venture partner
in Escorts Claas Ltd for sale of their 60% equity in the joint venture for a consideration
of Euro 13.2 million. During the year Escorts Heart and Super Speciality Institute Ltd
Escorts Heart Centre Ltd Automatrix India Pvt Ltd and Escorts Research and
Development Ltd became the subsidiary companies.

 During the year 2003-04 Escorts Heart Institute and Research Centre Ltd a subsidiary
company acquired 100% paid up equity capital of Escorts Hospital and Research Centre
Ltd which had multi-speciality hospital in Faridabad. In January 2004 the company
entered into an agreement with Idea Cellular Ltd to divest their share in Escorts
Telecommunication Ltd. During the year 2004-05 the Escotoonz Entertainment Pvt Ltd
a wholly owned subsidiary company completed the Project 'King-II' which was
applauded in MIPCOM in France.

 In September 2005 the company entered into an agreement with Fortis Healthcare Ltd
to divest their shares in Escorts Heart Institute & Research Centre Ltd for a
consideration of Rs 520 crore.During the year 2005-06 the company set up a new
manufacturing facility in Rudrapur Uttarakhand for manufacture of new range of
railway equipment. The company sold their stake in the software companies and also
divested 49% stake in the joint venture Carraro India Ltd in which the company is
getting out of all the unrelated business and to remain focused on the three core
businesses.

 During the year 2006-07 the company embarked on entering into the manufacturing of
shock absorbers for commercial vehicles. In 2010 Escorts became the first Indian
company to indigenously design Backhoe Loaders. In 2011 Escorts launched India's
first inverter tractor FT45.In 2012 Escorts developed the most fuel-efficient tractors
Powertrac 425. During the year the company indigenously developed Bogie Mounted
Brake Systems for Indian Railways.

 In 2013 Escorts launched Ferrari tractors - the world's best in specialty tractors - in
collaboration with the Italian tractor brand. In 2014 Escorts launched Farmtrac 4X4
introducing high-end car technology for Indian tractors. In 2015 Escorts launched Anti-
Lift Tractor - India's first lift-resistant tractors for commercial haulage operations.

 During the year the company entered into Joint Venture with Amul Group for
manufacturing of speciality tractors Steeltrac. During the year the company partnered
with Cognizant Technology Solutions to digitally transform businesses and deliver
superior customer experience. In 2016 Escorts launched Farmtrac 6090 - a global
tractor made in India. During the year the company also launched Jungli - the high-
power backhoe loader with brute force for tough operations.

21
 During the year Escorts Skill Development Centre was established to develop technical
skills and make people more employable.

 On 11 August 2016 Escorts announced the divestment of its OEM & Export business
of Auto Product division to Badve Engineering Ltd. Pune in an all cash deal as a part
of the planned strategic reorientation of the business to focus on core verticals in the
Agri-Machinery Construction equipment and Railway equipment.

 The Auto Products business comprises an extensive product basket catering to OEMs
and replacement market in India and overseas markets for all vehicle categories
including motorcycles scooters passenger cars commercial vehicles and multi-utility
vehicles. On 6 September 2017 Escorts launched India's first Electric & Hydrostatic
concept tractor and an expanded global portfolio of tractors for the export and domestic
market in 22HP to 90 HP range under flagship brands Farmtrac and Powertrac
compliant with tier 4 emission norms of Europe and America amidst 43 International
distributors.

 This includes the flagship New Escorts Tractor Series (NETS) with higher horse power
(70 to 90 HP) Compact tractors in 22 to 30 HP range Crossover tractors for both paddy
and haulage applications tractors with cabin options for driving comfort along with tier
4 emission norms compliant CRDi engines which will cater to customer demands from
the United States Europe Latin America Africa and ASEAN countries apart from new
generation farmers in India.

 On 13 November 2017 Escorts introduced indigenously engineered Electric Tractor at

Agritechnica 2017 Hanover Germany. On 5 February 2018 Escorts' Construction
Equipment Division (Escorts Construction Equipment) announced entering into an
exclusive distribution agreement with Doosan Infracore Co. Limited South Korea
(Doosan) for exclusive distributorship for sale and service of Doosan products for the
entire Indian market.

 Doosan is a global leader in manufacturing and marketing of Crawler Excavators Mini

Excavators and Wheel Loaders. The product range offered by Doosan complements the
current product offering of Escorts Construction Equipment.

 With this association with Doosan Escorts Construction Equipment will be able to
double its addressed market in Indian Construction Equipment (ICE) Industry from
existing 40% to more than 80% by value. On 2 April 2018 Escorts announced that the
company has increased its shareholding in its subsidiary company i.e. Escorts Securities
Limited to 78% from 49% by way of acquisition of additional 35 lakh shares.

 On the same day Escorts announced that the company has sold its entire shareholding
of 30% in its subsidiary company viz. Escorts Asset Management Limited (now name
changed to Quant Money Managers Limited).During FY March 31 2019 the Company
has infused additional equity capital in Escorts Crop Solutions Limited subsidiary of
the Company.

22
 The Company has also entered into two Joint Ventures with Japanese companies during
the year 2019 i.e. with Tadano Limited and Kubota Corporation. The Company has also
made an investment of Rs 29.40 crores being 49% stake in the Equity Capital of Tadano
Escorts India Private Limited being the Joint Venture of the Company with Tadano
Limited Japan and Rs 60 crores being 40% stake in the Equity Capital of Escorts Kubota
India Private Limited being the Joint Venture of the Company with Kubota Corporation
Japan.

 The company achieved a turnover of Rs. 12050.33 MN for Q3 FY18 as against Rs.
10929.31 MN in the corresponding quarter of the previous year, an increase of 10.26%.
During the quarter, net profit increased by 305.00% to Rs. 919.77 MN from Rs. 227.10
MN in the corresponding quarter ending of previous year. During the quarter, EBIDTA
stood at Rs. 1532.28 MN as against Rs. 973.26 MN in the corresponding period of the
previous year, up by 57.44%. EPS of the company stood at Rs. 7.50 in Q3 FY18 against
Rs. 1.85 in the corresponding quarter of the previous year

 Escorts Ltd Agri Machinery Segment (EAM) in January 2018 sold 5316 tractors up by
45.4 percent as against 3652 tractors in January 2017. The company Developed three
new tractors during the third quarter named: NETS (70-90 HP) (New Escorts Tractor
Series), Atom Series and Farmtrac 6050 (50 HP) - 4WD.

 The Revenue of the company increased by 14.6% at Rs. 35798.71 MN in 9M FY 18 as

compared to Rs. 31236.76 MN in the corresponding previous year 9M of FY 17. During
9M FY18 the PAT of the company rose by 129.98% at Rs. 2321.81 MN as compared
to Rs. 1009.55 MN in the corresponding previous year same period. Net Sales and PAT
of the company are expected to grow at a CAGR of 18% and 56% over 2016 to 2019E,
respectively.

23
 Industry profile

 The company achieved a turnover of Rs. 12050.33 million for the 3rd quarter of the
FY2017-18 as against Rs. 10929.31 million in the corresponding quarter of the previous
year, an increase of 10.26%. During the quarter, net profit increased by 305% to Rs.
919.77 million from Rs. 227.10 million in the corresponding quarter ending of previous
year. Reported earnings per share of the company stood at Rs. 7.50 in Q3 FY18 as
against Rs. 1.85 in the corresponding quarter of the previous year. Profit before interest,
depreciation and tax stood at Rs. 1532.28 million as against Rs. 973.26 million in the
corresponding period of the previous year, up by 57.44%.

QUARTERLY HIGHLIGHTS (PARENT BASIS)

Results updates- Q3 FY18:- Table. 1 (a)

(Rs. in Million) Dec-17 Dec-16 % Change

Revenue
12050.33 10929.31 10.26%

PAT 919.77 227.10 305.00%

EPS 7.50 1.85 305.00%

PBIDT 1532.28 973.26 57.44%

Break up of Expenditure: - Table. 1 (b)

Value in Rs. Million

Break up of
Expenditure
% Change
Q3 FY18 Q3 FY17

Cost of Material 6788.79

6491.28 -4%
Consumed
Purchase of Stock inTrade
568.50 602.70 -6%

Excise Duty Paid onSales

0.00 186.26 --

Employee BenefitExpenses
1048.58 984.71 6%

Depreciation & Amortization

179.44 167.13 7%
Expenses

Other Expenditure 1532.92 1457.00 5%

24
Segment Revenue

Graph. 1 (b) Graph. 1 (c)

9M Highlights:
 The Revenue of the company increased by 14.6% at Rs. 35798.71 MN in 9M FY 18 as
compared to Rs. 31236.76 MN in the corresponding previous year 9 months of FY 17.
During 9M FY 18 the PAT of the company rose by 129.98% at Rs. 2321.81 MN as
compared to Rs. 1009.55 MN in the corresponding previous year 9 months. EBITDA
of the company registered an increase of 53.8% at Rs. 3835 MN in the 9M FY 2018.

January Sales Performance:

 Escorts Ltd Agri Machinery Segment (EAM) in January 2018 sold 5316 tractors up by
45.4 percent as against 3652 tractors in January 2017. Domestic Sales for the month of
January 2018 at 5160 up by 47.1 percent as against 3507 tractors in January 2017.
Exports Sales in January 2018 at 156 tractors up by 7.6% as against 145 tractors in
January 2017.

Segment Wise Performance Highlights:

Escorts Agri Machinery:
 Tractor sales were up by 1 1.6% at 18,930 tractors during the third quarter of the current
fiscal as against 16,963 tractors in the corresponding previous quarter. This was
accompanied by significant improvement in EBIT margins which was up 421 bps at
14.6% as compared to 10.4% in the corresponding period. For 9M FY 18 the Tractors
sales were increased by 16.5% by 56,849 tractors from which the company got a
revenue of Rs. 28638 MN which is increased by 12.6%.

25
Escorts Construction Equipment:
 Sales of construction equipment went up by 33.4% at 1,087 units during third quarter
of current fiscal as against 815 units in the corresponding quarter. EBIT margin turn
positive at 2.2% as against negative 2 .4% in last year same quarter.

 For the 9M period of FY 18 the company sold 2945 units which are increased by 29.3%
from which the company gained an income of Rs. 5143 MN, up by 21.7% in the
corresponding previous year 9 months.

Railway Products Division:

 Revenue for the second quarter up by 24.2% at Rs. 720 MN as against Rs. 580 MN in
the corresponding quarter EBIT margin up by 202 bps at 13.0% as that of 1 1.0% in
last year same quarter.

 Order book at end of December’17 is around 330 crore and will be executed by next
fiscal. The Company’s sales for 9M FY 18 increased by Rs. 2106 MN which is up by
19.7% from proceeding year 9 months period.

Recent Developments:
The company developed three new tractors during the third quarter named:

 NETS (70-90 HP) (New Escorts Tractor Series) will be competitor for Global portfolio
of tractors for the export market with CRDi engine.

 Atom Series is developed for Domestic Market with capacity of 21-30 HP could be
helpful for Orchard and Vineyard. Farmtrac 6050 (50 HP) - 4WD having 8+8 Constant
Mesh Transmission.

26
Balance Sheet as of March 31, 2016 -2019E:- Table. 1 (c)
FINANCIAL HIGHLIGHT (PARENT BASIS) (A*- Actual, E* -Estimations & Rs. In Millions)
FY16A FY17A FY18E FY19E
ASSETS

Non-Current Assets
a) Property, plant and equipment 15202.14 15104.92 15558.07 16335.97
b) Capital Work in Progress 213.63 265.62 318.74 376.11
c) Investment Property 238.79 233.80 226.78 222.25

d) Intangible Assets 152.12 438.89 548.61 669.30

e) Intangible Assets Under Development 368.28 81.42 73.27 69.61
f) Financial Assets
i) Investments 4108.96 4186.57 4395.90 4571.74
ii) Loans 41.74 41.70 43.78 45.53
g) Deferred Tax Assets (Net) 408.77 470.42 526.87 579.56
h) Income Tax Assets (Net) 158.96 0.00 0.00 0.00
i) Other Non-Current Assets 112.46 133.55 153.58 172.01
1) Sub - Total Non- Current assets 21005.83 20956.88 21845.61 23042.09
2) Non-Current Assets Classified as held for Sale 90.00 148.61 0.00 0.00
Current Assets
a) Inventories 3969.76 4294.84 4552.53 4780.15
b) Financial assets
i) Investments 46.23 1688.07 2110.09 2574.31
ii) Trade receivables 3900.64 4580.16 5267.19 5951.92
iii) Cash and Cash equivalents 312.56 545.06 681.32 817.58
iv) Bank Balances Other Than Cash 2183.62 1738.93 1565.03 1486.78
v) Loans 41.21 45.01 48.16 50.57
vi) Others 109.23 110.70 116.23 119.72
c) Other Current Assets 1023.68 1023.28 1074.44 1117.42
3) Sub - Total current assets 11586.94 14026.04 15414.99 16898.46
Total Assets (1+2+3) 32682.78 35131.52 37260.60 39940.54
EQUITY AND LIABILITIES
EQUITY
a) Equity Share Capital 1225.77 1225.77 1225.77 1225.77
b) Other Equity 17150.96 18685.79 21856.86 25661.97
1) Total Equity 18376.73 19911.56 23082.63 26887.74
Non-Current Liabilities
a) Financial Liabilities
i) Borrowings 874.60 562.48 421.86 337.49
ii) Other Financial Liabilities 120.19 129.21 136.96 143.81
b) Provisions 266.55 193.62 164.57 151.41
c) Other Non-Current Liabilities 168.91 169.14 160.68 155.86
2) Sub - Total Non-Current liabilities 1430.25 1054.44 884.07 788.56
Current Liabilities
a)Financial liabilities
i) Borrowings 2201.95 1590.20 1272.16 1081.34
ii) Trade and Other Payables 7377.22 8937.85 8096.89 6996.32
iii) Other financial liabilities 1098.32 1120.23 1153.84 1176.92
b) Provisions 1326.68 1314.56 1275.12 1249.62
c) Current Tax Liabilities 0.00 37.31 39.18 41.14
d) Other Current Liabilities 871.64 1165.37 1456.71 1718.92
3) Sub - Total current liabilities 12875.80 14165.52 13293.90 12264.25
Total Equity and Liabilities (1+2+3) 32682.78 35131.52 37260.60 39940.55

27
 Annual Profit & Loss Statement for the period of 2016 to 2019E:-

Table. 1 (d)

Value(Rs.in.mn) FY16A FY17A FY18E FY19E

Description 12m 12m 12m 12m

Net Sales 34386.70 41675.80 47367.03 55893.09

Other Income 558.23 434.59 462.76 509.03

Total Income 34944.94 42110.38 47829.79 56402.13

Expenditure -32619.43 -38438.69 -42158.11 -49884.59

Operating Profit 2325.51 3671.69 5671.68 6517.54

Interest -495.39 -311.14 -291.01 -302.65

Gross profit 1830.12 3360.55 5380.67 6214.89

Depreciation -574.98 -630.69 -724.85 -797.33

Exceptional Items -122.88 37.64 -67.59 -50.69

Profit Before Tax 1132.26 2767.51 4588.23 5366.87

Tax -124.96 -756.06 -1417.16 -1561.76

Profit After Tax 1007.29 2011.44 3171.07 3805.11

Net Profit/(Loss) from -169.78 -407.71 0.00 0.00

Discontinued Operations
Net Profit 837.52 1603.73 3171.07 3805.11

Equity capital 1225.77 1225.77 1225.77 1225.77

Reserves 17150.96 18685.79 21856.86 25661.97

Face value 10.00 10.00 10.00 10.00

EPS 6.83 13.08 25.87 31.04

28
Quarterly Profit & Loss Statement for the period of 30th June, 2017 to 31st Mar, 2018E
Value(Rs.in.mn) 30-Jun-17 30-Sep-17 31-Dec-17 31-Mar-18E

Description 3m 3m 3m 3m

Net sales 11631.53 12116.85 12050.33 11568.32

Other income 204.97 81.49 82.00 94.30

Total Income 11836.50 12198.34 12132.33 11662.62

Expenditure -10656.12 -10707.94 -10600.05 -10194.00

Operating profit 1180.38 1490.40 1532.28 1468.62

Interest -79.50 -84.02 -59.30 -68.19

Gross profit 1100.88 1406.38 1472.98 1400.42

Depreciation -177.92 -179.09 -179.44 -188.41

Exceptional items 0.00 -68.75 1.16 0.00

Profit Before Tax 922.97 1158.55 1294.71 1212.02

Tax -296.52 -382.95 -374.94 -362.76

Net Profit 626.44 775.60 919.77 849.26

Equity capital 1225.77 1225.77 1225.77 1225.77

Face value 10.00 10.00 10.00 10.00

EPS 5.11 6.33 7.50 6.93

Ratio Analysis: - Table. 2 (a)

Particulars FY16A FY17A FY18E FY19E

EPS (Rs.) 6.83 13.08 25.87 31.04

EBITDA Margin (%) 6.76% 8.81% 11.97% 11.66%

PBT Margin (%) 3.29% 6.64% 9.69% 9.60%

PAT Margin (%) 2.93% 4.83% 6.69% 6.81%

P/E Ratio (x) 125.67 65.63 33.19 27.66

ROE (%) 5.48% 10.10% 13.74% 14.15%

ROCE (%) 8.16% 13.78% 19.97% 20.21%

Debt Equity Ratio 0.17 0.11 0.07 0.05

EV/EBITDA (x) 45.49 28.17 18.09 15.62

Book Value (Rs.) 149.92 162.44 188.31 219.35

P/BV 5.73 5.29 4.56 3.91

29
Figures and Graphs:-

Graph. 2 (a)

Graph. 2 (b)
OUTLOOK AND CONCLUSION
 At the current market price of Rs. 858.65, the stock P/E ratio is at 33.19 x FY18E and
27.66 x FY19E respectively. Earnings per share (EPS) of the company for the earnings
for FY18E and FY19E is seen at Rs. 25.87 and Rs. 31.04 respectively.

 Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 56%
over 2016 to 2019E respectively.

30
  On the basis of EV/EBITDA, the stock trades at 18.09 x for FY18E and 15.62 x for
FY19E.Price to Book Value of the stock is expected to be at 4.56 x and 3.91 x for
FY18E and FY19E respectively.

 Hence, we say that, we are Overweight in this particular scrip for Medium to Long term
investment.

INDUSTRY OVERVIEW

INDIAN TRACTOR INDUSTRY:

 The Indian tractor industry grew by 15.7% to 6.61 lacs tractors in FY 2016- 17 as
against 5.71 lacs tractors in the previous fiscal. Despite demonetization, the domestic
tractor industry volumes went up by 18% to 5.81 lacs tractors as compared to 4.93 lacs
tractors in the previous fiscal owing to average monsoons in rural markets.

 Demonetization had a short-term impact on the overall industry growth; from April to
October 2017, the industry witnessed 25% growth but post-demonetization, a cash-
crunch led to growth of just 5.2% from November 2016 to March 2017.

Tractor Segmental Break-up:

 The 31-50 HP Segment that constitutes more than 80% of the domestic tractor industry
has grown by 19.3% to 4.86 lacs tractors in FY 2016-17 as against 4.07 Lacs tractors
in the previous fiscal. The 41-50 HP segment dominated domestic tractor industry with
a 46% share in FY 2016-17.

Export Industry in Tractors:

 Tractor exports from India grew by 2.2% in FY17 to 80.2K tractors as against 78.4K
tractors in the previous fiscal.

Outlook:
 The growing domestic demand for food grains and Agri-products promise a good future
for India’s tractor industry. India’s tractor industry is expected to grow steadily, aided
by government policies announced in the Union Budget.

 With the roll out of Goods & Service Tax (GST) in the current year and normal
monsoons predicted for FY 2017-18,the Domestic tractor industry is expected to grow
between 10~12%, extending beyond its peak of FY 2013-14 An above- normal
monsoon is being forecasted for the upcoming season by Government agencies.

 The impact of the various factors like rainfall, crop prices, % of sown area, the central
Government’s stand towards the Land Bill and the associated farmer compensation for
the acquired land would improve industry sentiment.

31
Infrastructure:
 The infrastructure sector is a key driver of the Indian economy. The sector is highly
responsible for propelling India’s overall development and enjoys intense focus from
the Government for initiating policies that ensure time-bound creation of world class
infrastructure. The infrastructure sector includes power, bridges, dams, roads and urban
infrastructure development. In 2016, India jumped 19 places in World Bank’s Logistics
Performance Index (LPI) 2016 to rank 35th amongst 160 countries.

Construction Equipment Industry:

 The construction industry in India is growing rapidly with a major contribution from
infrastructure development. It is expected that various projects in transportation
infrastructure, power, urban infrastructure and real estate will drive the market.

 The development aided by a stable Government and improved macro-economic

environment could lead to further growth. The total construction equipment Industry
grew 30% in FY17. All major segments like Earth Moving, Material Handling and
Road Construction reported a positive movement.

Outlook:
 The construction equipment industry in India is expected to reach USD 5 billion by
FY20 from USD 3 billion in FY16, in value terms. The volume sale of construction
equipment is expected to grow to 80,000 units by 2018 from 52,000 units in FY16.

 NITI Aayog estimates total infrastructure spending to be about 9% of GDP by 2017, up

from 7.2% during the 11th Five Year Plan (2007–12). Increasing investment in
infrastructure development will lead to the growth in the construction equipment
market.

 The construction industry in India is growing rapidly with a major contribution from
infrastructure development.

 It is expected that various projects in the transportation infrastructure, power, urban

infrastructure and real estate segment will drive the market. The development aided by
a stable Government and improved macroeconomic environment could lead to further
growth.

 The Government took a number of initiatives in the Union Budget for the infrastructure
sector. Measures announced for physical infrastructure such as roads, ports, aviation
and rural infrastructure are aimed at improving the connectivity and modernizing the
various key elements of this sector.

 Further, forming policies for strengthening ties with private players will help in
overcoming roadblocks

32
 Department Profile

 Production planning and control is concerned with directing production along the lines
set by the planning department. Production planning and control may be defined as the
planning, direction, and coordination of the firm’s material and physical facilities
towards the attainment of predetermined production objectives in the most economical
manner.

 Production planning and control is a pre-determined process which includes the use of
human resource, raw materials, machines etc. PPC is the technique to plan each and
every step in a long series of separate operation. It helps to take the right decision at the
right time and at the right place to achieve maximum efficiency.

Stages in Production Planning and Control (PPC)

1. Planning
2. Operations
3. Control

Scope or Classification of Production Planning and Control Functions

1. Materials
2. Methods
3. Machines and Equipment
4. Routing
5. Estimating
6. Loading and Scheduling
7. Dispatching
8. Progressing
9. Inspection
10. Evaluating or controlling
11. Cost Control

Production Planning
 Preparation of a proper production plan is key within production planning and control.
Orchestrating a plan allows production to have a schedule to follow, which can further
improve the entire the process.

A production plan can determine:

 What is Going to be Produced
 Where it is Going to be Produced
 How it is Going to be Produced
 By Who it is Going to be Produced
 It involves the organisation of an overall manufacturing system to produce a product.

33
  The objective of production planning is to provide a physical system together with a set
of operating guidelines for efficient conversion of raw materials, human skills, and
other inputs into finished products.

 The production plan is conducted through information about quantity and quality of
raw materials, customer orders, and the overall budget. This is how the plan is able to
generate multiple schedules and quickly translate them into labour requirements for
machines, workers, or any materials. Overall, the production plan is the foundation for
the entire manufacturing process and production planning and control software makes
it much simpler.

Factors determining the production planning procedure

1. Volume of production
2. Nature of production processes
3. Nature of Operations

Production Control

Importance of Control Function

1. Provide for the production of parts, assemblies, and products of required quality and
quantity at the required time.
2. Provide for optimum utilisation of all resources.
3. Co-ordinate, monitor and feedback to manufacturing management.
4. Achieve the broad objectives of low-cost production and reliable customer service.

Benefits of Production Control

1. Improvements in profits through the reduction in indirect costs, set up costs, reduction
in scrap, inventory costs.
2. Competitive advantage reliable delivery to customers, lower production costs and
greater pricing flexibility.

Elements of Production Control

1. Control of Planning
2. Control of Materials
3. Control of Tooling
4. Control of Manufacturing Capacity
5. Control of Activities
6. Control of quantity
7. Control of Material handling
8. Control of Information

34
Factors determining Production Control Procedures

1. Nature of production
2. Complexity of Operations
3. Magnitude of Operations

Objectives of Production Planning and Control

1. To ensure safe and economical production process

2. To deliver quality goods in required quantities
3. To ensure production of quality products
4. To maximize efficiency by proper coordination in production process
5. To ensure maximum utilisation of all resources
6. To place the right man for the right job, at right time for right wages.
7. To maintain optimum inventory levels.
8. To maintain flexibility in manufacturing operations
9. To ensure effective cost reduction and cost control
10. To plan for plant capacities for future requirements.
11. To effectively utilise plant to maximize productivity
12. To minimise labour turnover
13. To reduce the waiting time
14. To ensure proper delivery of goods

Main elements of Production Planning and Control

The following are main elements of Production Planning and Control:

1. Routing
2. Loading
3. Scheduling
4. Dispatching
5. Follow up
6. Inspection
7. Corrective

35
Routing:

 Once production plans are generated and ready to be executed, routing comes into play.
It is about selection of path or route through which raw materials pass in order to make
it into a finished product.

 The points to be noted while routing process are – full capacity of machines, economical
and short route and availability of alternate routing. Setting up time for the process for
each stage of route is to be fixed. Once overall sequence are fixed, then the standard
time of operations are noted using work measurement technique.

Loading and scheduling:

 The next step within production planning and control is scheduling. Loading and
Scheduling are concerned with preparation of workloads and fixing of starting and
completing date of each operation.

 On the basis of the performance of each machine, loading and scheduling tasks are
completed. This is when the production plan is almost completed and ready to be
enacted. Scheduling differs from planning by diving into the details of the production
process.

Dispatching:

 Dispatching is the step in which all of the work on paper is then turned into production.
Dispatching is the routine of setting productive activities in motion through the release
of orders and instructions, in accordance with previously planned time and sequence,
embodied in route sheet and schedule charts. It is here that the orders are released.

 Dispatching requires coordination among all the departments concerned. This is

obtained through varied degrees of centralised control. Under centralised control,
dispatch clerks, centrally located, release all orders including the movement of
materials and tools necessary for the operations.

Expediting / Follow-up:

 Once dispatching is applied, expediting is the final step within the production control
process. It is a control tool which brings an idea on breaking up, delay, rectifying error
etc., during the progress of work.

 This feature conducts analysis on production and keeps track of any inefficiencies and
waste that is created and attempts to locate ways to further improve the process. As this
process is completed, the entire cycle restarts and production comes closer and closer
to reaching maximum efficiency.

36
Inspection:

 Inspection is done to find out the quality of executed work processes.

Corrective:

 At evaluation process, a thorough analysis is done and corrective measures are taken in
the weaker spots. Corrective action is needed to make effective system of production
planning and control. By resorting to corrective measures, the production manager
maintains full control over the production activities.

 For instance, routing may be defective and the schedules may be unrealistic and rigid.
The production manager should try to rectify the routes and lay down realistic and
flexible schedules.

 Workload of machines and workers should also be determined scientifically.If

schedules are not being met, the causes should be fully investigated.

Stages of Production Planning & Control

Production Planning & Control is done in three stages namely;

1. Pre-planning
2. Planning
3. Control.

Stage 1: Pre-Planning

 Under this phase of production planning, basic ground work on the product design,
layout design and work flow are prepared. The operations relating to the availability
scope and capacity of men, money materials, machines, time are estimated.

Stage 2: Planning

 This is a phase where a complete analysis on routing, estimating and scheduling is done.
It also tries to find out the areas of concern for short time and long-time so that
prominent planning can be prepared.

Stage 3: Control

 Under this phase, the functions included are dispatching, follow up, inspection and
evaluation. It tries to analyse the expedition of work in progress. This is one of the
important phases of the Production Planning and Control.

37
The Production/Operations Management Cycle

Figures. 1 (b)
Functions of Production Planning & Control department

Figures. 1 (c)

Limitations of Production Planning Control (PPC)

1. Based on assumptions
2. Employees may resist changes
3. Time-consuming process
4. Difficult due to change in environmental factors

38
Production Planning and Control (PPC) in different production systems
PPC in Job Production:-
 It involves the manufacture of products to meet specific customer requirements of
special orders. The quantity order is usually small.

Examples are:- Credit and debit cards, Smart cards, boilers, steam engines, processing
equipment, material handling equipment’s etc.

Types of Job production

1. A small number of products produced only once

2. A small number of products produced intermittently when the need arises
3. A small number of products produced periodically at known interval of time.

PPC is difficult in job production due to following reasons:

1. Every job order is of a different nature

2. Specific job orders are assigned to different workstations
3. Scheduling is dependent on the assessment of production times and estimating is
based on judgments.

PPC in Batch Production

 Batch production is the manufacture of a number of identical articles either to meet a
specific order or to satisfy continuous demand.

Types of Batch Production

1. A batch produced only once

2. A batch produced repeatedly at irregular intervals when the need arises.
3. A batch produced periodically at known intervals, to satisfy continuous demand.

PPC in Continuous Production

 Continuous production is normally associated with large quantities of production and
with a high rate of demand.

Types of Continuous Production

1. Mass production
2. Flow production

PPC in Process Industry

 The main task of PPC in the process industry is to maintain a continuous and uniform
flow of work at the predetermined rate in order to utilise the plant and equipment’s fully
and to complete the production in time.

39
Requirements of effective PPC System:-

1. Sound organisation structure

2. Information feedback system
3. Standardisation of materials, tools, equipment’s, labour, quality, workmanship etc.
4. Trained personnel
5. Flexibility
6. Appropriate management policies
7. Accurate assessment of manufacturing lead time and procurements lead time.
8. Plant capacity should be adequate to meet the demand.

 Production planning and control is a costly device as its implementation requires

separate persons to perform the functions of planning, dispatching, executing, etc.
Small firms cannot afford to use the services of specialists for the effective performance
of these functions.

 Production planning and control offers capabilities that can aid your manufacturing
facility by improving overall production efficiency while also minimising waste,
ultimately allowing your facility to utilize resources to its fullest. The process of
production planning and control is a continuous one since control starts where planning
ends and planning starts where control ends.

40
 Literature Review

 The study intends to review the available literature in order to gain an understanding of
the inventory control processes followed by the different companies, as well as the
strategies and factors affecting the success of inventory control.

The study was guided by three theoretical frameworks:

 Stock diffusion theory,

 Application control theory and
 Inventory control in theory and practice.

 The first three sections survey the principal domains: inventory modelling, decision
support systems (DSS), and expert systems (ES). This is followed by a discussion of the
intelligent decision support system (IDSS) which integrates the two fields: DSS and
ES. Section reviews the intelligent (or knowledge-based) inventory systems developed
in recent years. The study concludes with a critique of the published intelligent
inventory management systems.

 The first mathematical inventory model is generally referred to as the Economic Order
Quantity (EOQ) model which was developed by Harris in 1913. The first full length
book attempts to explain how various extensions of EOQ can be used in practice is
Raymond's. Further research works showed that the EOQ model appears to be quite
insensitive to errors in the specification of the appropriate cost parameters and the
estimation of demand. The importance of the EOQ model is not only from the historical
point of view but also because many other models designed to cope with different
situations have been based on this model.

 However, this mathematical modelling technique of inventory management had very

little application at that time. Perhaps this was because the new conceptions always
need a period of maturation during which details can be improved upon and the original
claim about increased productivity and performance can be proven through the test of
time.

CLASSIFICATIONS
o Based on similarities of approaches used by the researchers, various papers reviewed
were grouped in six categories:-

 Models for deterministic optimum inventory policies.

 Lot-size optimisation.
 Optimisation of various specific management objectives.
 Models for optimising highly specialised inventory situations.
 Applications of advanced mathematical theories.
 Models bridging the gap between theory and practice.

41
  The main contribution of Tinarelli's survey to the theory of inventory management is
that the author referred to the publications in a systematic manner by classifying them
into six groups:

o Stochastic models.
o Dynamic demand models.
o Models for perishables.
o Joint-ordering systems.
o Capital and/or volume constraints.
o Inventory control and devaluation.

 To promote the application of the published inventory models, some researchers have
started classifying the inventory systems to help inventory managers to find an
appropriate model from the extensive inventory literature for a given condition.

Figures. 2 (a)

INVENTORY CONTROL SYSTEM

 An inventory lays a very important role in the determination of the profile of the
Business. The management should make a decision to when the quantities to order
according to the requirement & the number of units to be kept in hands. There are three
types of inventories that are raw material, work in process, & finished goods.

ESSENTIALS OF INVENTORY CONTROL SYSTEM:

o Maintenance of proper record with regard to the units and the value of Various Items
of the Inventories.
o To ensure proper control over the receipt and of issue of the materials.
o Materials should be properly identified and proper storage of facilities should be
made.

42
INVENTORY CONTROL TECHNIQUES:-
 Inventory control techniques are employed by the inventory control organization within
the framework of one of the basic inventory models, viz. Fixed order quantity systems
or fixed order period system. Inventory control techniques represent the operational
aspect of inventory management and help realize the objectives inventory management
and control.

The techniques are most commonly used are the following:-

 Always better control (ABC) analysis

 Fast moving, slow moving and Non-moving (FSN) analysis
 Economic Order Quantity (EOQ)
 Maximum - Minimum technique
 Bin card system (KAN – BAN)
 Materials Requirement Planning (MRP)
 Just In time (JIT)
 VED Analysis

ABC Analysis:-
 ABC analysis is based on Pareto principle (80-20 rule) which states that 80% of the
overall consumption value (expense) is based only on 20% of the total items i.e. small
portion of the items may typically represent the bulk of money value, while a relatively
large number of items may form a small part of the money value.

 A‖ items : money value is highest 70%, represent only 10% of items

 B‖ items : money value is medium 20%, represent about 20% of items
 C‖ items : money value is lowest 10%, represent about 70% of items

 A-items should have tight inventory control under more experienced management.
Re-orders should be more frequent.

 B-items require medium attention for control. An important aspect of class B is the
monitoring of potential evolution toward class A or, in the contrary, toward the class C.

 C-items require minimum attention and may be kept under simple observation. Re-
ordering is less frequent.

Advantages of ABC Analysis

 Helps to exercise selective control over such items, which are having a sizable
investment.
 Helps to point out obsolete stocks easily.
 Provides sound basis for allocation of funds & human resources.
 It enables the maintenance of high inventory turnover rate.

43
Disadvantages of ABC Analysis

 Considers only money value of items & neglects the importance of items for the
production process or assembly or functioning.
 It does not categorize the items based on their critical needs, hence sometimes
the purpose of ABC categorization may be defeated.

FSN Analysis (Based On Turnover Ratio)

 In any manufacturing industry, not all items are required with the same frequency.
Some materials are quite regularly required, yet some others are required very
occasionally and some materials may have become obsolete and might not have been
demanded for years together.

 FSN analysis groups them into three categories as Fast-moving, Slow-moving and Non-
moving (dead stock) respectively. Inventory policies and models for the three
categories have to be different. While performing this particular analysis the turnover
ratio of each item has to be calculated because the items are sorted and analyzed
according to the turnover ratio it possesses.

Economic Order Quantity

 Economic order quantity (EOQ) is the order quantity that minimizes the total inventory
holding costs and ordering costs. It is one of the oldest classical production scheduling
models.

 The framework used to determine this order quantity is also known as Wilson EOQ
Model, Wilson Formula or Andler Formula. The model was developed by Ford W.
Harris in 1913, but R. H. Wilson, a consultant who applied it extensively, and K. Andler
are given credit for their in-depth analysis.

Kanban

 Kanban is a scheduling system for lean and just-in-time (JIT) production. Kanban is a
system to control the logistical chain from a production point of view, and is an
inventory control system. Kanban was developed by Taiichi Ohno, an industrial
engineer at Toyota, as a system to improve and maintain a high level of production.
Kanban is one method to achieve JIT.

 Kanban became an effective tool to support running a production system as a whole,

and an excellent way to promote improvement. Problem areas are highlighted by
reducing the number of kanban in circulation. One of the main benefits of kanban is to
establish an upper limit to the work in progress inventory, avoiding overloading of the
manufacturing system.

44
Kanban cards
 Kanban cards are a key component of kanban and they signal the need to move
materials within a production facility or to move materials from an outside supplier
into the production facility. The kanban card is, in effect, a message that signals
depletion of product, parts, or inventory. When received, the kanban triggers
replenishment of that product, part, or inventory. Consumption, therefore, drives
demand for more production, and the kanban card signals demand for more product so
kanban cards help create a demand-driven system.

 It is widely held by proponents of lean production and manufacturing that demand-

driven systems lead to faster turnarounds in production and lower inventory levels,
helping companies implementing such systems be more competitive.

Material Requirements Planning:-

 Material requirements planning (MRP) is a production planning, scheduling, and
inventory control system used to manage manufacturing processes. Most MRP systems
are software-based, while it is possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:

 Ensure materials are available for production and products are available for delivery
to customers.
 Maintain the lowest possible material and product levels in store Plan manufacturing
activities, delivery schedules and purchasing activities.
The basic functions of an MRP system include: inventory control, bill of material
processing, and elementary scheduling. MRP helps organizations to maintain low
inventory levels. It is used to plan manufacturing, purchasing and delivering
activities.
A few examples are given below:
 If a company purchases insufficient quantity of an item used in manufacturing (or
the wrong item) it may be unable to meet contract obligations to supply products on
time.
 If a company purchases excessive quantities of an item, money is wasted - the excess
quantity ties up cash while it remains as stock and may never even be used at all.
 Beginning production of an order at the wrong time can cause customer
deadlines to be missed. MRP is a tool to deal with these problems. It
provides answers for several questions:
 What items are required?
 How many are required?
 When are they required?

45
  MRP can be applied both to items that are purchased from outside suppliers and to Sub-
assemblies, produced internally, that are components of more complex items.

Just-In-Time Manufacturing

 Just-in-time (JIT) manufacturing, also known as just-in-time production or the Toyota

production system (TPS) is a methodology aimed primarily at reducing flow times
within production as well as response times from suppliers and to customers. Following
its origin and development in Japan, largely in the 1960s and 1970s and particularly at
Toyota, JIT migrated to Western industry in the 1980s, where its features were put into
effect in many manufacturing companies—as is attested to in several books and
compendia of case studies and articles from the 1980s.

 But the wide use of the term JIT manufacturing throughout the 1980s faded fast in the
1990s, as the new term lean manufacturing became established as "a more recent name
for JIT." As just one testament to the commonality of the two terms, Toyota production
system (TPS) has been and is widely used as a synonym for both JIT and lean
manufacturing.

VED Analysis

 VED analysis is an inventory management technique that classifies inventory based on

its functional importance. It categorizes stock under three heads based on its importance
and necessity for an organization for production or any of its other activities. VED
analysis stands for Vital, Essential, and Desirable.

Vital (V):

 As the name suggests, the category “Vital” includes inventory, which is necessary for
production or any other process in an organization. The shortage of items under this
category can severely hamper or disrupt the proper functioning of operations. Hence,
continuous checking, evaluation, and replenishment happen for such stocks.

 If any of such inventories are unavailable, the entire production chain may stop. Also,
a missing essential component may be of need at the time of a breakdown. Therefore,
the order for such inventory should be beforehand. Proper checks should be put in place
by the management to ensure the continuous availability of items under the “vital”
category.

Essential (E):

 The essential category includes inventory, which is next to being vital. These, too, are
very important for any organization because they may lead to a stoppage of production
or hamper some other process. But the loss due to their unavailability may be
temporary, or it might be possible to repair the stock item or part.

46
  The management should also ensure optimum availability and maintenance of
inventory under the “Essential” category. The unavailability of inventory under this
category should not cause any stoppage or delays.

Desirable (D):

 The desirable category of inventory is the least important among the three, and their
unavailability may result in minor stoppages in production or other processes.
Moreover, the easy replenishment of such shortages is possible in a short duration of
time

47
 Research Methodology

 The study is based on primary data collected by finance executive of the Company and
secondary data which are collected from the books, journals articles annual reports of
the company & websites. The techniques used in the study are ABC Analysis, EOQ,
Inventory turnover ratios & Safety Stock.

a. Research Design

o R1. The data has been collected through interface and discussions with the Executive
Manager working with the division.
o R2. Some important information taken through unstructured and structures interviews
of the executive.
o R3. Magazines and annual reports also used for the collection of necessary information.
o R4. Research Papers used for the source of secondary data.

Statement of the Problem

b. Sample Design

I. Sample Unit
 Inventory costs have lot of impact on the profitability of the firm and its success.
Inventory management and its optimized decisions are depending on the identification
of key success factors and right decisions at right moment. In a dynamic market
environment, it is necessary to focus on the decision making and the factors influencing
decision making in order to optimize the results of inventory function 240 Tractors
production every days.

II. Sample Size

 The survey approach can bring a light on the variables and these have lot of biased
information. Testing of the factors influence on inventory decisions by using scientific
methods can help to improve the reliability of the factors taken as key variables in
decision making.

III. Sampling Technique

 Sampling helps a lot in research. It is one of the most important factors which
determines the accuracy of your research/survey result.
 If anything goes wrong with your sample then it will be directly reflected in the final
result.
 Bulk shipments, ABC inventory management, Backordering, Just in Time (JIT)
Consignment, Drop shipping and cross-docking, Inventory Cycle counting.

48
 IV. Sampling Area

 Sampling involves randomly inspecting items from a lot. Acceptance sampling, the
third branch of statistical quality control, refers to the process of randomly inspecting a
certain number of items from a lot or batch in order to decide whether to accept or reject
the entire batch.

 Hence, the present research is focused on the dimensions namely identification of

Factors influencing inventory optimization among SMEs in steel sector through a
structured and unstructured questionnaire and grouping them into two sets as internal
variables and external variables and optimization by grouping the information for
appropriate decision.

Data collection

I. Sources

 The present study uses both primary and secondary data. Primary data is collected from
the steel industry (Small scale industry) units in the sample area through a structured
and unstructured questionnaire.

 In few cases to understand the depth of the issue and the sensitivity of the variables in
the study, the scholar personally met experts in the industry having professional
experience and had a personal interview using both structured and unstructured
interview schedule.

II. Tools

 This helps in understanding the issue at broad prospective and to analyse the same in
the research point of view.

 The secondary data is collected from both print and electronic media. The print media
includes reports, magazines, journals, published research papers, thesis works,
unpublished industry reports, newspaper reports and the other text books.

 The electronic media sources includes digital data bases, web portals, indexed journals
in open access portals, industry association reports etc.

49
Data Analysis

I. Statistical Tools/ Techniques

a. Technique of Inventory Management:
b. Main problems in inventory management are to answer:
 What are Indus problems in managing inventories?
 Which inventory policy optimum for Indus? Why? Show calculations.
 What should be the over level?
c. To answer these following techniques are used:
 ABC analysis
 Economic Order Quantity
 VED Analysis
 Re-Order Level
 Safety stock
 Inventory Turnover Ratio
d. ABC Analysis
 It is based on proposition that
 Managerial items and efforts are scare and limited.
 Some items of inventory are some important than others.
e. ABC Analysis

II. Inferences

 ABC analysis classifies various inventory into three sets or groups of priority the
allocates managerial efforts in proportion of the priority the most important item are
classified into “class – A”, those of intermediate importance are classified as “class –
B” And remaining items are classified into “class – C”.

 The financial manager has to monitor the items belonging to monitor the items
belonging to different groups in that order of priority and depending upon the
consumptions. The items with the highest values is given priority and soon and are
more controlled then low value item. The re- rational limits are as follows.
Category % of items % of total cost of
materials
A 5-15 60-75
B 15-25 15-25
C 60-75 5-15

f. Procedure
I. Items with the highest value is given top priority and soon.
II. There after cumulative totals of annual value consumption are expressed as percentage
of total value of consumption.
III. Then these percentage values are divided into three categories.

 ABC analysis helps in allocating managerial efforts in proportion to importance of

various items of inventory.

50
ABC Analysis
a. Raw Material (At Closing Stock)
Table. 3 (a)
YEAR AMOUNT OF RAW MATERIALS
2011 130.35
2012 95.65
2013 102.37
2014 30.22

Figures. 2 (b)

b. Interpretation:
 The above graph shows the amount of raw materials at cost. In 2011 the cost of material
is 130.35Rs decreased in this year and in 2012.It is decreased to 95.65Rs and in 2013
it is increased to Rs102.37and in 2014 it is decreased to 30.22.

Stock in Process (At Closing Stock):-

Table. 3 (b)
YEAR AMOUNT OF STOCK IN PROCESS
2011 167
2012 110.07
2013 76.08
2014 25

Figures 2 (c)

51
Interpretation:
 The above graph shows the amount of raw materials at cost. In 2011 the cost of material
is 167Rs increased in this year and in 2012.It is decreased to 110.07Rs and in 2013 it
is decreased to Rs76.08 and in 2014 it is 25.
Finished Goods (at Closing Stock):-

Table. 3 (c)
YEAR AMOUNT OF FINISHED GOODS

2011 157.67

2012 194

2013 190

2014 80

Figures. 3 (a)

Interpretation:
 The above graph shows the amount of raw materials at cost. In 2011 the cost of material
is 157.67Rs decreased in this year and in 2012.It is increased to 194Rs and in 2013 it is
decreased to Rs190 and in 2014 it is decreased to Rs80.

Stores, Spares & Consumables (Closing Stock):-

Table. 4 (a)
YEAR AMOUNT OF COST OF STORES AND SPARES
2011 157.74
2012 160
2013 137.11
2014 85

52
 Figures. 3 (b)

Interpretation:
 The above graph shows the amount of raw materials at cost. In 2011 the cost of material
is 157.74Rs decreased in this year and in 2012.It is increased to 160Rs and in 2013 it is
decreased to Rs137.11 and in 2014 it is decreased to Rs85.

Raw Material Consumed:-

Table. 4 (b)
YEAR AMOUNT

2011 75.45

2012 99.7

2013 50.70

2014 16.36

Figures. 3 (c)

Interpretation:
 The above graph shows consumption of raw materials .The consumption of raw
material in the year 2011 is Rs 75.45 the consumption of raw material increased in the
year 2012 in the Rs 99.7. And it is decreased to Rs 50.70 in the year 2013 and it
decreased to Rs 50.70 in the year 2014 it is decreased to 16.36 Rs.

53
Economic Order Quantity
During 2011-2012:
 The firm requires below given units of material for manufacturing of steel. The
following are the details of their operation during 2011-2012.

Table. 4 (c)
PARTICULARS
Billets/Blooms 2,889 (MT)
Ordering cost per Order Rs. 2500
Carrying cost 12%
Purchase price per unit 500

Calculation of EOQ:-

Total units required (A) =2889

The ordering cost per order (O) = Rs.2500
Carrying cost per unit (C) = 12%
(i.e.) 12% of Rs.500 =Rs.60 EOQ =√2AO/C
=√ (2×2889× 2500)/60
=Rs.490.66

Number of orders for the year = A/EOQ

=2889/490.66
=5.89~6 orders
Total annual cost = carrying cost + ordering cost
= 116162+ 15000
= Rs.131162

Order size = A/no of orders

=2889/6
= 481.5~482

Average inventory = order size/2

Average inventory =482/2
= Rs.241

Carrying cost = order size × average inventory

Carrying cost = 482×S241
= Rs.116162

Ordering cost = cost per order × no of orders

= 2500×6
=Rs.15000

54
EOQ During 2012-2013
 The firm requires below given units of material for manufacturing of steel. The
following are the details of their operation during 2012-2013.
Table. 5 (a)
PARTICULARS

Billets/Blooms 3,596Qty (Mt)

Ordering cost per order 2700

Carrying cost 12%

Purchase price per unit 520

Calculation of EOQ:-
Total units required (A) =3596mt
The ordering cost per order (O) = Rs.2700 Carrying cost per unit (C) = 12%
(i.e.) 12% of Rs.520 =Rs.63.4
EOQ = √2AO/C
= √ (2×3596×2700)/ 63.4
= Rs.553.429

Number of orders for the year = A/EOQ

= 3596/553.429
= 6.479
Total annual cost = carrying cost + ordering cost
= 154012.5+ 17493.3
= Rs.171505.8

Carrying cost = order size × average inventory order size = A/no of orders
= 3596/6.479
= 555

Average inventory = order size/2

= 555/2
= Rs.277.5
Carrying cost = 555×277.5
= Rs.154012.5

Ordering cost = cost per order no of orders

= 2700 ×6.479

55
 = Rs.17493.3

EOQ During 2013-2014

 The firm requires below given units of material for manufacturing of steel. The
following are the details of their operation during 2013-2014.
Table. 5 (b)
PARTICULARS
Billets/Blooms 2,066,Qty (Mt)

Ordering cost per order Rs 2800

Carrying cost 14%

Purchase price per unit 540

Calculation of EOQ:-

Total units required (A) =2066mt

The ordering cost per order (O) = Rs.2800 Carrying cost per unit (C) = 14%
(i.e.) 14% of Rs. 540 =Rs.75.6

EOQ =√2AO/C

=√2 ×2066× 2800/75.6

=Rs.391.199~392

Number of orders for the year = A/EOQ

=2066/391.1991
=5.28~6orders

Total annual cost = carrying cost + ordering cost

= 5.493154+ 76800
= Rs.5569954
a. Carrying cost = order size ×average inventory
b. Order size = A/no of orders
= 2066/6
= 344.33
c. Average inventory = order size/2
= 344.33/2
= Rs.172.16

56
 d. Carrying cost = 344.33×172.16
= Rs.59282.148
e. Ordering cost = cost per order × no of orders
= 2800×6
= Rs.16800

VED Analysis
 Vital Essential and Desirable analysis is done mainly for control of spare parts keeping
in view of the criticality to production.
 Vital spares are spare the stock – out of which even for a short time will stop production
for quite some time.
 Essential spares are spares the absence of which cannot be tolerated for more than a few
hours a day. Desirable spare are those, which are needed, but their absence for even a
week or so will lead to stoppage of production.

Table. 5 (c)
MATERIAL CLASS VALUE PRIORITY MATERIAL
10% “A” 70% V 10% 70%
E 20% 10%
D 70% 10%

20% “B” 20% V 10% 70%

E 20% 20%
D 70% 10%
70% “C” 10% V 10% 70%
E 20% 20%
D 70% 10%

The Re-Order Level

 The re-order level is the level of inventory at which the fresh order for that item must
be placed to procure fresh supply. The re-order level depends upon.
 Length of time between the placement of an order and receiving the supply.
 The usage rate of the item. The inventory is constantly being used up. The rate at which
the inventory is being used up. The rate at which the inventory is being used up is called
the usage rate.

The Reorder Level can be determined as Follows:-

R= M+TU
R=Reorder level
M=Minimum level of inventory T=time gap/delivery time U=Usage Rate
The reorder level and inventory patterns have be shown as follows:

57
  The figure shows that if the usage rate is constant, the order are made at even intervals
for the same amounts each time and the inventory goes to zero just before an order is
received.

Safety Stock:
 The safety stock protects firm from trade-offs due to unanticipated demand for the items
level of inventory investments is however increased by the amount of safety stock.

 Safety level is ascertained in inventory as a part because there is always an uncertainly

involved in time lag usage rate or other factors. Usually smaller the safety level greater
the risk of stock – outs. If stock levels are predictable then there is a chance of stock
out occurring.

 However stock inflows and outflows are unpredictable or lesser predictable it becomes
to carry additional safety to prevent unexpected stock outs so usage rate is estimated if
cost is low then no safety stock is needed.

Just - In -Time Inventory:

 The Basic concept is that every firm should keep a minimum level of inventory on hand,
relying suppliers to furnish just in time as and when required. JIT helps in emphasizing
sufficient level of stock to ensure that production will not be interrupted. Although the
large inventories may be had idea due to heavy carrying JIT is a modern approach to
inventory management and the goal is essentially to minimize such inventories and
there by maximizing turnover.

 JIT system significantly reduces inventory carrying cost be requiring that the raw
material be procured just in time to be placed into production. Additionally the work in
process inventory is minimized by eliminating inventory buffers between different
production departments. If JIT is to be implemented successfully there must be a high
degree of coordination and cooperation between the supplier and manufacturer and
among different production centres.

 JIT does not appear to have any relation with EOQ however it is in fact alters some of
the assumptions of EOQ model. The average inventory level under the EOQ model is
defined as

 Average inventory =1/2EOQ+safety level JIT attacks this equation in two ways.

 By reducing the order cost.

By reducing the safety stock.

 The basic philosophy in JIT is that benefits, associated with reducing inventory and
delivery time to a bare minimum through adjustment EOQ model, will more than offset
the costs associated with the increased possibility of stock – outs.

58
Inventory Turnover Ratio
What it is
 This ratio is often a firm’s inventory turns over during the course of the year. Because
inventories are the least liquid form of assets, a high inventory turnover ratio is
generally positive. On the other hand, and usually high ratio compared to the average
for the industry could mean a business is losing sales because of inadequate stock on
hand. When to Use it if a firm’s business has significant assets tied up in inventory,
tracking its turnover is critical to successful planning. If inventory is turning too slowly,
it could indicate that is may be hampering the firm’s cash flow. Because this ratio
judge’s annual inventory turns, it is usually conducted once a year.

The formula: Cost of Goods Sold/Average Value of Inventory

Table. 6 (a)
YEAR COST OF GOODS SOLD AVG VALUE OF INVENTORY
INVENTORY TURN OVER
RATIO
2011 3340.56 454.24 7.35
2012 4350.35 673.37 6.46
2013 3230.81 607.65 5.32
2014 2347.86 396.53 5.92

COST OF GOODS SOLD AVG VALUE OF INVENTORY INVENTORY TURN OVER RATIO

5000

4500 4350.35

4000

3500 3340.56
3230.81

3000

2500 2347.86

2000

1500

1000
673.37 607.65
454.24 396.53
500
7.35 6.46 5.32 5.92
0

2011 2012 2013 2014

Figures. 4 (a)

59
Stock Levels
During 2011-2012
 The company requires 2889 units of billets/blooms to manufacture of steel for the year
2011-12.EOQ is 490.66~ 490 units. The company makes safety stock equal to 30 day
requirement and the normal lead time is 10-20 days. The company works for 300days
in a year.

Reorder level = lead time*Average usage+ safety stock

= (10*9.63) + 288.9
= 385.2

Safety stock = usage * period of safety stock/ total working days in a year

= 2889*30/300
= 288.9

Average usage = usage/total working days in a year

= 2889/300
= 9.63

Minimum stock level = re-order level – (Average usage * Average lead time)

= 385.2– (9.63* 10+20/2)

= 240.8

Maximum stock level = re-order level + re-

ordering quantity-(Minimum usage *
minimum lead time)

= 385.2+490-(9.63*10)
= 875.2-96.3
= 778.9

Danger level = Average usage * Maximum re-order period for emergency purchases

= 9.63*20
= 192.6

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

= 240.8+778.9/2
= 509.85

60
Stock Levels
During 2012-2013
 The company requires 3596 units of billets/blooms to manufacture of steel for the year
2012-13.EOQ is 553.429~554 units. The company makes safety stock equal to 30 day
requirement and the normal lead time is 10-20 days. The company works for 300days
in a year.

Reorder level = lead time*Average usage+ safety stock

= (10*12) + 359.6
= 478.6~480

Safety stock = usage * period of safety stock/ total working days in a year

= 3596*30/300
= 359.6~360

Average usage = usage/total working days in a year

= 3596/300

= 11.9~12

Minimum stock level = re-order level – (Average usage * Average lead time)

= 480 – (12* 10+20/2)

= 300

Maximum stock level = re-order level + re-

ordering quantity-(Minimum usage *
minimum lead time)

= 480+554-(12*10)
= 914

Danger level = Average usage * Maximum re-order period for emergency purchases

= 12*20
= 240

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

= 300+914/2
= 607

61
Stock Levels
During 2013-2014
 The company requires 2066 units of billets/blooms to manufacture of steel for the year
2013-14.EOQ is 392 units. The company makes safety stock equal to 30 day
requirement and the normal lead time is 10-20 days. The company works for 300days
in a year.

i. Reorder level = lead time*Average usage+ safety stock

= (10*7) + 206.6
= 276.6
ii. Safety stock = usage * period of safety stock/ total working days in a year
= 2066*30/300
= 206.6

iii. Average usage = usage/total working days in a year

= 2066/300
= 6.88~7
iv. Minimum stock level = re-order level – (Average usage * Average lead time)
= 276.6– (7* 10+20/2)
= 171.6
v. Maximum stock level = re-
order level + re-ordering quantity-
(Minimum usage * minimum lead
time)
= 276.6+392-(7*10)
= 598.6
vi. Danger level = Average usage * Maximum re-order period for emergency
purchases
= 7*20
= 140
vii. Average stock level = ½(Minimum stock level + Maximum stock level)
= 171.6+598.6/2
= 385.1~385

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 Analysis and Findings

Problem Statement:-

 A SWOT up of inventory management is undertaken in command to identify the

inventory performance and position of the company and to recognize the potency and
flaw and to assess the profitability of the company. Inventories constitute most
important part of resources of large mainstream of the companies in India. Inventory a
double edged sword is usually an asset of an organization, if not worn correctly it will
become liability.

 It is therefore absolutely very important to handle inventories resourcefully and

efficiently in order to overcome unnecessary investment. And to identify the
trouble/challenges concerned in the Inventory Management Process.

1. The company is having good sales for their products during all the early years of the
study.

2. The inventory turnover ratio is on a declining trend year after year in the period of the
study.

3. It indicates inefficiency of management in turning of their inventory into sales.

4. The company should adopt sophisticated techniques to manage its inventory in a better
manner.

5. The EOQ calculated is suggesting that the company should obtain its inventory
requirements by placing orders frequently to its suppliers rather than one time
replenishment.

6. Company should take measures for maintenance of proper stores and spares so as
to avoid the frequent breakdown of the machinery.

7. There is a need to develop good communication system between various

departments like marketing, planning, procurement, and production and distributions
functions.

8. The company should follows Just-in-Time technique, their buy it can do away with
waiting time for a receipt of materials.

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 Conclusion and Recommendations

Objectives:-

 To study the tools and techniques of inventory management adopted to study the
inventory control measures in inventory management.

 To Study the demand forecast of inventory Management.

 To study how ABC Analysis and aging schedule is implemented in inventory

Management

 To determine the stock level in in inventory management.

 To identify problems related to inventory management and to find out suitable measures
to overcome them.

 To study methods of valuation of inventory.

 To study the inventory management procedure.

 To make a comparative study of inventory management in last 5 years using radio

analysis technique.

 Inventory management has to do with keeping precise records of finished goods that are
ready for shipment.

 This often means posting the production of newly completed goods to the inventory
totals as well as subtracting the most recent shipments of finished goods to buyers.

 When the company has a return policy in place, there is usually a sub-category
contained in the finished goods inventory to account for any returned goods that are
reclassified or second grade quality.

 Accurately maintaining figures on the finished goods inventory makes it possible to

quickly convey information to sales personnel as to what is available and ready for
shipment at any given time.

 The ROI of Inventory management will be seen in the forms of increased revenue and
profits, positive employee atmosphere, and on overall increase of customer satisfaction.

 The next step of the present research will be the application of achieved results of
demand forecasts, safety stock and reorder points into simulation software in order to
achieve more accurate results.

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Importance of Inventory Management:-

 The consequence or connotation of inventory management could be specified as

below:
 Inventory management helps in maintaining an exchange between transport costs
and ordering costs which results into minimizing the total cost of inventory.
 Inventory management facilitates maintaining adequate inventory for smooth
production and sales operations.
 Inventory management avoids the stock-out difficulty that a firm otherwise would
face in the lack of proper inventory management.
 Inventory management suggests the proper inventory control system to be applied
by a firm to avoid losses, damages and misuses.

Conclusion:-

 In any business, make it big or small, we must understand that taking good care of our
inventory is very important. If we as managers do not understand the concept of good
inventory management, we must learn to be familiar with it and its applications. One of
the reasons for the failure of a business is its inventory management.

 There are many ways to fight failure, and we can start from here. There are new
technology that can help us maintain and supervise our inventory. What we can do is
learn, implement and evaluate our business. And you can start with your
INVENTORY!!!

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 Learning and Outcomes

Effective Inventory Management Techniques:-

 Just-In-Time. One of the most popular methods for inventory management is known as
Just-in-Time (JIT) inventory control.

 Downloading Inventory Software, Stock Control, Reduce Carrying Costs, ABC

inventory analysis, Drop shipping, Bulk shipments, Consignment, Cross-docking,
Cycle counting.

What Is Inventory Control?

 Inventory control, also called stock control, is the process of ensuring the right amount
of supply is available in an organization. With the appropriate internal and production
controls, the practice ensures the company can meet customer demand and delivers
financial elasticity.

Why Is Inventory Control Important?

 Inventory is one of the biggest costs of capital of any product-based business. If you
look at the balance sheet of this type of company, you’re likely to find that inventory
makes up a large portion of current assets and uses up a lot of working capital.

 Inventory control helps avoid the many costs related with buying too much inventory
and the strains of going without the needed inventory. While some companies using
just-in-time ordering may carry extremely small inventories, nearly any business
requires some form of inventory, which is best managed through inventory control
systems.

Types of Inventory Control Systems:-

Figures. 4 (b)

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The Periodic Inventory System:-

 Most small businesses still use periodic inventory management because it does not
require sophisticated software or inventory scanning. A periodic inventory system
relies upon occasional or regular physical counts of the inventory. You decide
accounting periods based on the business needs, but you don’t track inventory daily or
continuously. You can calculate the cost of ending inventory using either FIFO (first
in, first out) or LIFO (last in, first out).

The most effective inventory control methodology:-

 Choose a Management Improvement Methodology, Optimize Purchasing Procedures,

Manage Supplier Relationships, Create Automated Reports, Conduct a Risk
Assessment, Regularly Audit, Selective Inventory Control (Forecasting)

Management Methodologies Used in Inventory Control:-

 Lean Manufacturing.
 Six Sigma.
 Lean Six Sigma.

8 Ways to Control Stock:-

 JIT Inventory.
 FIFO and LIFO.
 Min-Max Inventory Control.
 Two- or Three-Bin System.
 Fixed Order Quantity.
 Fixed Period Ordering.
 Vendor-Managed Inventory (VMI)
 Set Par Levels.

What is Just-in-Time (JIT)?

 Just-in-time, or JIT, is an inventory management method in which goods are received

from suppliers only as they are needed. The main objective of this method is to reduce
inventory holding costs and increase inventory turnover.

Importance of just-in-time:-

 Just in time requires carefully planning the entire supply chain and usage of superior
software in order to carry out the entire process till delivery, which increases efficiency
and eliminates the scope for error as each process is monitored. Here are some of the
important effects of a just-in-time inventory management system:-
 Reduces inventory waste, Decreases warehouse holding cost, Gives the manufacturer
more control, Local sourcing, Smaller investments.

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How a just-in-time model works?

 First, a customer places an order with the manufacturer. When the manufacturer
receives the order, they place an order with their suppliers. The suppliers receive the
order and then supply the manufacturer with the materials needed to meet the
customer’s order. The raw materials are then received by the manufacturer, assembled,
and sold to the customer.

Drawbacks of just-in-time:-
 Even though the just-in-time model saves a lot of costs for businesses that use it, it also
has a few drawbacks: - Just-in-time makes it very difficult to rework orders, as the
inventory is kept to a bare minimum and only based on the customers’ original orders.

 The model is dependent on suppliers’ performance and timeliness, which are hard to
ensure. Additionally, the manufacturer needs to be able to cover any sudden increases
in the price of raw materials, since they cannot wait to order during better pricing. Since
the JIT model requires a lot of shipping back and forth between the supplier,
manufacturer, and customer, it can have detrimental effects on the environment due to
over consumption of fossil fuels and packaging.

 In case of disruptions, a JIT model can have a major impact on the business. Since there
is no excess stock to fall back on, sales may come to a halt. A just-in-time system needs
to be carefully tracked and organized, which will be hard if you are doing it manually.
Software’s should be adopted as it makes the whole process more manageable.

 Even though a good software help you it can be a bit tricky and/or expensive to adopt
a new software system and train your personnel accordingly to use the same. Therefore,
just in time saves you a lot of costs which would otherwise be tied up as inventory
holding cost. At the same time just in time should be executed carefully so that your
business does not face loss in times of unpredictable events.

Introduction
 Material control is a system, which ensures the availability of the right quantity of
material, of the right quality, at the right time which the minimum amount of capital by
purchasing them at the right price from the right source.

Objectives of an Effective Inventory Control System

 Maintaining adequate inventory so as to avoid production stoppages. Avoiding excess
inventory holding thereby reducing the material holding cost chances of obsolescence,
storage loss, pilferage, etc. Fixation, of Economic Order Quantity, maximum level,
minimum level Reordering level, safety stock level, etc.
 Avoiding slow-moving and non- moving dormant surplus and obsolete stock, etc.
Avoiding the blocking of the Capital amount i.e. minimum investment in the inventory.

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System Requirement of Material Control

 Material control is a matter of coordination among the various departments concerned

viz purchases, production, maintenance, inspection, stores, accounts & cost accounting
departments. Classification, codification, standardization, rationalization, and
simplification of materials. Use of standard forms and documents in all the stages.
Centralization of purchasing under an efficient purchase department. Perpetual
inventory system and continuous physical stock verification

A, B, C classification and fixation of inventory norms:-

1. Unit Cost/ Value:-
 A higher cost items involves high investment and hence high interest/ opportunity cost.
The inventory should be minimized for these components to decrease the inventory
cost.

2. Minimum Batch/ Lot size:-

 This is in consideration of the supplier that he may not be willing to supply a batch
smaller than the minimum batch size. Transportation cost would correspondingly get
inflated it batch size is decrees or a large number of batches are procured. It is possible
to schedule the arrival of batches resulting in low inventory holding.

3. Transportation cost:-

 The higher transportation costs, minimizing the number of trans-shipments and

truckloads decrease the overhead incurred.

4. Unit Volume: -
 This is important because a large volume implies a large storage space and hence higher
rental cost. This could also be looked at as storage space last in keeping one unit in
storage.

5. The proximity of the Vendor:-

 The large the distance of the source, the higher will be the external effects (Road
conditions, truck break-downs, transportation losses/damages, etc.) a variation of
transport items.

 Hence higher inventory is required for smooth operations. Similarly, inventory for
vendors who are in the vicinity of MUL can be reduced to one day and so by procuring
material on a daily basis.

69
6. Number of Sources:-
 It is possible to distribute the risk of procuring from a source, when more sources are present,
by shifting from one vendor to another if one fails. It is also possible to create competition
among them for better performance and quality. However, this is not a single source item.
Therefore, the inventory system provides for higher inventory for a single source, items as
compared to multiple source items.

7. Machine Process:-

 Certain components like break-drums, which are machined, suffer from altogether
different drawbacks. These components like break-drums, which are machined, suffer
from altogether different drawbacks. In those components, a whole lot gets rejected
because the machine toolset gets disturbed.

 This result is the wrong dimension. These incidents occur very infrequently. Thus, in
spite of good vendor performance, a higher inventory is required to meet this inherent
uncertainty, which a component suffers from.

8. Production Capacity of Vendor:-

 The production capacity of the supplier forms a constraint on the procurement of
components. A component having just sufficient production capacity runs a higher risk
of going stock out than a component having high-production capacity.

 This is because in case of rejection/bad quality, procuring the component is difficult if

there is no other supplier. Thus, a component with low just sufficient capacity should
be held at higher inventory than others.

9. Lead Time:-
 Lead times in India are considerably larger than those in industrially advanced
countries. Lead times may vary from item to item and from time to time for the same
items. Therefore, lead time should be taken into account while going by A, B, C
classification or fixation of inventory norms.

10. New/ Old Vendor:-

 A new vendor who is stabilizing the operations is likely to suffer from quality and
rejection problems as compared to a well-established one. Hence inventory norms
should be suitably adjusted by taking this factor into consideration.

11. Previous Performance:-

 The previous performance in terms of rejection rate and delivery schedule should be
used to adjust inventory norms. A poor performance would entail higher inventory.

70
12. Substitutes:-
 Products which have close substitute like nuts, bolts, tires, tubes, etc. should be
maintained at a consolidated inventory figure. The substitutes for such components can
be used as they are similar in almost all respects. The cumulative inventory figure
should be used for deficiency inventory norms and not individual figures.

13.Complimentary Products:-
 Complimentary products like tyres and tubes should have similar inventory norms,
though they need to be adjusted to their corresponding rejection rate.

14.The criticality of Components:-

 Products, which become critical frequently should have higher inventory than others.

15.Shelf Life:-

 A fragile component whose rejection depends upon intermediate handling should be

maintained at a minimum possible level to minimize the breakages

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References:-

(1). P.K. Ghosh and G.S. Gupta, Fundaments of Management Accounting, (New Delhi:
National Publishing House, 1979).

(2). R.S. Chadda for guideline to selective control (Chadda R.S.: Inventory Management in
India).

(3). P. Hopal Parison L.M. Sundersan, Material Management –An Integrated Approach, (New
Delhi): Prentice Hall and India 1984.

(4). Harris, Ford W., How Many Parts To Make At Once Factory, The magazine of
Management, 10(2), pp135- 136, 1913.

(5). D.C.U. Cadavid, C.C. Zuluaga, “A framework for decision support system in inventory
management area,” Ninth LACCEI Latin American and Caribbean Conf., LACCEI’2011, Aug.
3–5, 2011, Medellin, Colombia.

(6). L. Ling, Supply chain management: concepts, techniques and practices enhancing the value
through collaboration. NJ: World Scientific, 2007. 372 p.

(7). M. Leseure, Key Concepts in Operations Management, 2010.

(8). D. Plinere, L. Aleksejeva, “Agent system application as a tool for inventory management
improvement,” in 8th Int. Conf. on Soft Computing, Computing with Words and Perceptions
in System Analysis, Decision and Control, 3–4 Sep., 2015. Antalya, Turkey, pp. 157–166.

(9). D.S. Plinere, A.N. Borisov, L. Ya. Aleksejeva, “Interaction of Software Agents in the
Problem of Coordinating Orders,” Automatic Control and Computer Sciences, 2015, vol. 49,
no. 5, pp. 268–276. http://dx.doi.org/10.3103/S0146411615050089.

(10). D. Dhoka, Y.L. Chaudhary “ABC Classification for Inventory Optimization,” IOSR
Journal of Business and Management, vol. 15, Issue 1, Nov. – Dec. 2013, pp. 38–41.
http://dx.doi.org/10.9790/487X- 1513841.

(11). Life cycle engineering [Online] Available: http://www.lce.com/pdf/ abcclassification.pdf

[Accessed: Sept. 25, 2015]

(12). ABC analysis (Inventory) By Joffrey Collignon, Joannes Vermorel, and Feb. 2012
[Online] Available: http://www.lokad.com/abc-analysis- (inventory)-definition [Accessed:
Sept. 25, 2015]

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 Appendices

Explanation of model
 Only some of the more complex parts of the model are elaborated here.

Produce product (Prd-2-1)

 Various production strategies optimise different characteristics of the plant. The
common characteristics sought are maximised production volume or minimised
transitional inventory. Five production strategies (A to E) are identified and described
in the model. These are continuous, base stock, CONWIP, and kanban production, as
well as hybrid strategies (Figures Prd-2-1 A to E). The generic activities, which are
involved to various extents in each strategies, are setting a production schedule (4), a
supplier providing precursor product (3), manufacture of parts for stock (5), production
of intermediate product (2), assembly (1), and release of product to customer (7).

Continuous production (Prd-2-1) A

 Continuous production is a strategy that drives the entire production from a production
schedule that anticipates demand before it actually occurs. See Figure Prd-2-1A for
flow of information, control and material through such a plant. The strategy seeks to
maximise volume of production and therefore involves continuous production of parts,
the intermediate storage of those parts, and their subsequent delivery to the assembly
line. This ensures that the plant robustly operates at maximum production volume. It
also maximises usage of capital equipment, and availability of product to customers.
High customer service rates are thus possible, or low wait times. It is better in this
regard than the other strategies. It is efficient at maximising the use of capital
equipment. It is the historically conventional way for producing large volumes of
product.

 However this approach does have detriments, as listed in the figure. Prime among these
are the risk of high wastage of defective parts, obsolete stock, low quality product, and
poorly motivated staff. In the short term these detriments may have little effect on the
financial viability of the organisation. However, they can be major impediments to long
term viability, especially as this production strategy tends to also result in the inability
to respond to new developments in the market (lack of flexibility of plant).

Base stock production (Prd-2-1) B

 With base stock the production is controlled by the withdrawal of finished product by
the customer, see Figure Prd-2-1B. As soon as withdrawal occurs, work orders are
transmitted simultaneously to all production stages. This strategy is highly effective in
minimising the amount of inventory in each output buffer, and thus it is a particularly
lean strategy. It also results in smooth workflow throughout the plant.

73
  It is not particularly robust when there are line failures, since inventory accumulates
(potentially unlimited) upstream of the line blockage. The strategy provides central
control of production. However, with this comes the detriment of requiring a large number of
work orders to administer centrally, although this is not necessarily a problem with an
automated plant.

Conwip production (Prd-2-1) C

 The constant-work-in-progress (conwip) strategy permits new raw material to enter
production only when a finished product is removed, see Figure Prd-2-1C. The first
machine in the process only starts work on a new part when a completed product has
been removed from the store of finished goods. Thus conwip is also a JIT system. Work
in progress is completed as soon as possible and passed downstream. Intermediate
machines continue to work on parts when received, and do not need further
authorisation. Consequently, the idle state of the plant has zero parts in intermediate
buffers and a full store of finished System model of production inventory control 31
goods (Bonvik, Couch, & Gershwin, 1997; Bonvik & Gershwin, 1996). Thus there can
be even less inventory than in a kanban system (Bendell, 2006), so conwip also qualifies
as a lean manufacturing approach. Conwip is an effective control strategy if the demand
is unknown before it occurs (variable and unpredictable), whereas kanban is most
effective if the demand is known beforehand.

 When demand is consistently high then internal buffers are all full and kanban and
conwip show similar results. Final service rate to the customer is good for conwip. The
system has better characteristics than base stock when there are line disturbances. When
the line fails downstream then the output buffer will fill to the set global maximum, and
inventory will accumulate upstream of the blockage but only to a limit. However, the
detriment of conwip is that all the points of entry of raw material have to be notified
when a finished product is released to the customer, and this imposes an administrative
cost.

Kanban production (Prd-2-1) D

 Kanban control, see Figure Prd-2-1D, ensures that parts are only produced when
specifically requested by a downstream process, hence >just-in-time= (JIT). This
strategy limits internal transitional inventory, hence is considered lean. An assembly
schedule (4) (configuration, quantity, timing) is provided to the assembly line, and the
workers then build the associated products. A variety of product configurations may
be built in a day. One of the most common implementations is to use a physical card
(hence the Japanese word >kanban=). The kanban specifies the number of parts,
subassemblies or products to be produced. Production only occurs on receipt of the
kanban, and even then only of the specified quantity. The parts and the kanban are then
passed to the downstream process, and it only releases the kanban when the parts are
consumed.

 Importantly, the number of kanbans in circulation is limited, and so this has the effect
of limiting the amount of work in progress and thus transitory inventory. When a
machine has completed its kanban assignment, then it and its operator may be diverted
to another production task. At the simplest level of implementation the kanban system

74
  Only applies to the assembly line, and the production of parts and ordering from
suppliers is done by a production schedule that produces parts for stock. This is called
a single kanban system as there is only one kanban, the move kanban, (alternatively
termed transportation, conveyance, or withdrawal kanban) that authorises the resupply
of parts to the assembly line. A more comprehensive implementation extends kanbans
to part production and material supply. Thus parts may be manufactured just-in-time
(2), in which case the machines upstream of assembly only make parts when
specifically instructed to do so, i.e. they do not make parts for stock, but only on receipt
of a make kanban (alternatively production kanban). Similarly, vendors (3) may be
required to supply batches of parts or raw materials only on receipt of a vendor kanban,
rather than according to a set schedule. Delivery from suppliers can be simple (to
warehouse) or integrated (direct to production line).

 An alternative to the above kanban based system is the >two-bin= system, which has
two containers of parts, so that one is always full. This provides a paperless control
system. The kanban system has the attractive feature of being simple and effective. It
does not require extensive monitoring and reporting as do some other methods. It
devolves short-term control of the production process to workers, hence improving
empowerment and motivation. Potentially benefits are increased productivity, product
quality, and incremental innovation. Thus it integrates well with many other quality
mechanisms (such as quality circles and kaizen) which are likewise devolved to
workers. Kanban control requires known customer buying patterns and market demand
(pull), and abhors the manufacture of product for stock (push). Kanban attempts to
keep the output buffer full at each System model of production inventory control 32
machine.

 Therefore, when a station fails the outputs will fill to set local maxima upstream of the
line blockage. The tendency to have full output buffers means that kanban is not the
leanest production strategy possible. Conwip is leaner as regards transitional inventory.
Kanban does however have the advantage of low inventory of finished product,
although this may be a disadvantage with some distribution systems, especially if the
demand is unknown. There are detriments to kanban, such as the need for consistent
demand (it is at risk when the schedule fluctuates). It may be cumbersome and
inefficient if there is an extensive assembly tree. It amplifies upstream inventory
variability, i.e. the upstream workflow is not as smooth as other strategies.

Hybrid production strategies (Prd-2-1) E

 Each of the above control strategies has merits and disadvantages, and a pure
implementation may not always be practical. For example, pure kanban or conwip
control systems respond sub-optimally to plant stoppage (e.g. machine unreliability).
Some machines may be inefficient to start and stop (e.g. plastic injection moulders), or
take considerable set up time (e.g. sheet metal presses), or the raw material is supplied
in large fixed quantities (e.g. whole sheets of steel). Thus many real production plants
also deploy a strategy of manufacture of certain parts for stock.

 This is done on receipt of a schedule from a central planning department or on receipt

of an instruction from a downstream machine. Likewise, many manufacturers have a
central store of some parts, which is also contrary to the pure JIT philosophies.

75
  The manufacture and storage of parts for subsequent consumption is readily integrated
with other strategies, including kanban (Bonvik & Gershwin, 1996). A model of this is
shown in Figure Prd-2-1E.

Produce intermediate product (Prd-2-1-2)

 The process for manufacturing intermediate products with kanban control is shown
here. The perspective is that of one station in the line. The process starts when a move
kanban arrives, resulting in parts being dispatched from the machine output buffer (4).
Parts are never released without a move kanban. The parts are taken away with the
move kanban, and this releases the make kanban that was formerly attached to the parts.
This unfulfilled make kanban then initiates Activation of the production station (1), in
which the machine is readied for the operation, the labour is assigned, and the raw
materials or precursor part are requested from the upstream station (7) using a move
kanban. When everything is available the parts are manufactured (2). These are then
checked (3), preferably immediately to minimise the production of defective parts.

 For its success, the kanban system requires that machines only make parts when a free
kanban appears, and that the machine only makes as many parts as the kanban states.
Once made, the parts (inspected) are placed in their container along with the make
kanban. The set is temporarily stored at the output buffer of the machine, waiting for
the next move kanban to arrive from a downstream stations. Since the manufacturing
activity stops when the mandated number of parts is made, the production worker is
redeployed to a new task (5), as is the machine (6). This requires flexible machines and
suitable layout, a mix of similar products, rapid changeover of tooling, and staff with
flexible skills. Job rotation within a manufacturing cell is commonly used to develop
staff flexibility.

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Questionnaire

1. Who owns the inventory until it’s sold?

2. What WMS (warehouse management system) and OMS (order management

system) does the provider use?

3. What type of reporting is available to you about your inventory? Is it real-

time?

4. Who manages vendor/manufacturer relationships? Can the provider work with

your other vendors on your behalf?

5. How does the replenishment process work?

6. Is your warehouse footprint configured to facilitate efficient picking (i.e.,

fastest-moving SKUs located in the easiest accessible areas)?

7. How is loss prevention handled: internal staff, a third party, or not at all?

8. What security systems exist to protect your inventory? Are there access-

controlled or caged areas for high-value items?

9. How are peak seasons handled? When does the preparation start?

10. Who will have ownership over the relationship within your organization and

your provider? What communication methods work best (phone, email, in-

person visits)?

11. To ensure adequate supply of products to customer and avoid shortages as far

as possible.

12. To make sure that the financial investment in inventories is minimum (i.e., to

see that the working capital is blocked to the minimum possible extent).

13. To maintain timely record of inventories of all the items and to maintain the

stock within the desired limits.

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14. To ensure timely action for replenishment.

15. To provide a reserve stock for variations in lead times of delivery of materials.

16. To provide a scientific base for both short-term and long-term planning of

materials.

17. Improvement in customer’s relationship because of the timely delivery of

goods and service.

18. Smooth and uninterrupted production and, hence, no stock out.

19. Efficient utilization of working capital. Helps in minimizing loss due to

deterioration, obsolescence damage and pilferage.

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