A PROJECT SYNOPSIS ON

A STUDY ON INVENTORY MANAGEMENT

IN

SRINIVASA BRICKS COMPANY

BY

L.BHARATH

1189-21-684-033

BACHELOR OF BUSINESS ADMINISTARTION

(FINANCE)

2021-2024

UNDER THE GUIDANCE OF

MRS.HARPREET KAUR

ASSOCIATE PROFESSOR

DEPARTMENT OF BUSINESS MANAGEMENT

SADAR PATEL COLLEGE
(Affiliated to Osmania university)
PADMARAO NAGAR SECUNDRABAD-500025
TELANGANA
CHAPTER-1
 INTRODUCTION OF THE STUDY
Inventories represent the second largest assets category for manufacturing companies next only
to plant and equipment. The main goal of managing stocks is to identify the quantity and location
of delivered goods. Stock management is repeated across several locations inside an office or
across multiple sections of an inventory or systems to ensure a steady and organized production
path against the unpredictable and unpleasant impact of running out of items or resources.

The scope of inventory management also includes the minute variations in lead times for
recharging, conveying stock costs, resource management, inventory measuring, physical
inventory, physically accessible space for inventory, which consists quality control, returns and
subpar products, as well as request and estimation. The term "stock credit" refers to using shares
as a guarantee in order to raise money.

When stock credit can be essential, it may be the only way to get around financing restrictions.
This is not a new concept; archaeological proof suggests that it was refined in ancient Rome.
Securing funds against an extensive variety of different objects stored in a secure warehouse is
commonplace in many parts of the world.

Stock credit is widely used on the basis of putting away agricultural creation a number of Latin
American nations as well as a few Asian countries, stock credit is frequently utilized on the basis
of stored agricultural goods.

The following is a quick overview of inventory management /control terminology and theory.

Maintaining inventory is done for a variety of purposes. Inventory smoothes out supply chain
issues and serves as a buffer among changes in supply and demand. Unless you achieve certain
economies of scale in manufacturing, transportation, and purchasing, the more efficiently your
supply chain runs and the more reliable the forecasting is, the less inventories you need to
maintain. Since an organisation generally plans to advertise its finished products within a short
period of time, usually a year, inventories reflects a current asset.

Since an organisation generally plans to advertise its finished products within a short period of
time, usually a year, inventories reflects a current asset. Before inventory can be included on a
balance sheet, it must first be manually counted or measured. The majority of companies keep
advanced systems for inventory control that can track inventory levels in real time. In smaller
companies, instead of passing through a receiving location, the goods could travel directly to the
inventory area compared to bigger companies with more space. The products may be finished
rather than composed of raw materials if the company is a wholesale distributor. After that,
unfinished goods are taken out of the storage areas and transported to the production sites, where
they are transformed into finished goods. The final products can either be dispatched straight to
the customer or returned to the inventory areas where they are kept before getting shipped.
PROBLEM STATEMENT:
After examining the inventory management systems that are now in use, we have a clear idea
about the project that has to be produced. Before beginning construction, the application team
faced numerous difficulties. The problem faced by the company is they do not have any
systematic system to record and keep their inventory data. It is difficult for the admin to record
the inventory data quickly and safely because they only keep it in the logbook and not properly
organized.

NEED OF THE STUDY:

The company's issue is that they lack an organised system for maintaining track of and recording
inventory data. Because the admin only keeps the inventory data in the logbook and is not well
organised, it can be difficult for them to quickly and safely record the data.

 Businesses can better determine which products are more valuable in terms of sales and
profit by using inventory management.

 The location of the inventory and all of its details are provided by inventory management.

 Stockouts may cause delivery to be delayed and consumers to become irate. Inventory
management delivers stockout alerts in advance by taking into account all conceivable
variables and changes.

 A well-organized warehouse or store is the result of effective inventory management.

OBJECTIVES OF THE STUDY:

Inventory management may be analysed in relation to operational and financial goals. The
financial objective is to reduce excessive inventory and the costs associated with it, while the
operational goal is to maintain a sufficient amount of inventory to meet customer demand.

 Making sure that all kinds of materials are available whenever the production department
needs them is the main objective of inventory management.

 You need to have the necessary goods available at the right time in order to fulfil
requests. If not, you can find yourself in a confused position.

 Inventory control works incredibly well to reduce losses. It is quite common for an item
to be misplaced or wasted when there is no monitoring system in place.

 Since the demands are known ahead of time, there is no chance of having excess
inventory, which means unnecessary storage costs are avoided.
SCOPE OF THE STUDY:
The study's scope is restricted to gathering financial information from the company's yearly
reports in accordance with the aforementioned goals and analysing the information in order to
provide workable solutions for the different inventory control management-related issues.

This specific topic was chosen because inventory control management has been the focus of a
research in recent years to assess how well the business is performing in this area. The project's
goal is to investigate how to create efficient inventory control management.

REASEARCH METHODOLOGY:
 PRIMARY DATA:
 The Srinivasa Bricks Company's annual reports served as the primary and secondary
source of data for the study.

 The data is gathered through conversations with the concerned executives of Srinivasa
Bricks Company's various departments as well as its finance executives.

 SECONDARY DATA:
Secondary data is the data which is already exist.This data is collected by some other
person than the user.

Secondary data is collected from various sources such as:

 Inventory reports,

 Text books,

 Other websites,

 Other books. Biblography is attached to the end.

IMPORTANCE OF THE STUDY:
Those that operate in product-based sectors may find it imperative to comprehend the
significance of inventory management, since it is usually a key component of corporate
operations. It frequently necessitates that people have a deep comprehension of the market, the
clientele of a business, and its material and financial resources. Negative effects on a company's
earnings and reputation might result from having too little or too much inventory. Customers are
inclined to turn elsewhere if, for example, a particular item they desire is out of stock, especially
if the business is having trouble obtaining it.

 Maintaining a sufficient stock level and providing a diverse array of products at the
customer's request might enhance the likelihood of repeat business.

 A company's reputation usually rises when clients can rely on it to regularly provide what
they need.

 Consumers who regularly receive what they anticipate from a business or brand tend to form
relationships with it.

 It can be simpler for customers to return or exchange things without having to wait if there is
enough inventory on hand. Businesses with a large variety of goods are usually better able to
satisfy the demands of their clients.

LIMITATION OF THE STUDY:

 The study is carried out in the designated Srinivasa Bricks Company location in

Hyderabad .
 Since the study was completed in less than 45 days, it might not fully satisfy all the

requirements of an in-depth review .

 With the data at hand, the study was carried out, and the analysis was done appropriately.
CHAPTER-2
LITERATURE REVIEW:
INTRODUCTION -The present paper focuses on the review of existing literature in the field
of Inventory Management which helps in capturing both conceptual and research based studies.
A Number of studies have been conducted to find the determinants of investment in inventories
and the process is still going on. The present study is the summary of critical points of a
particular topic consisting of essential findings as well as theoretical and methodological
contributions. My paper shall discuss conceptual studies of both Indian and other nationals.

Abramovitz and Modigliani (1957) They highlighted the relationship between capacity
utilization and inventory investment. Existing stock of inventories was expected to adjust to the
desired levels. Thus the variable, existing stock of inventories, was essential to be negatively
related with the desired stock. The result was that there is positive relation among the ratio of
inventory to sales and inventory investment. High ratio of stocks to sales in the past suggests
requirement of high levels of inventories in the past and promising high investment in
inventories in the current period also.

Krishna Murthy (1964) Study was aggregative and dealt with inventories in the private
sector of Indian economy as a whole for the period 1948-61. This study used sales to represent
demand for the product and suggested the importance of accelerator. Shortterm rate of interest
had also been found to be significant.

R.S. Chadda (1964) Study had been made on inventory management practices of Indian
companies. The analysis suggested application of modern scientific inventory control techniques
like operations research. These modern scientific techniques furnish opportunities for the
companies, Companies can minimize their investment in inventory but there is continuous flow
of production. He argued that industrially advanced countries, like, USA, were engaged in
developing highly sophisticated mathematical models and techniques for modernizing and
redefining the existing tools of inventory investment.

National Council of Applied Economic Research (NCAER) (1966)

Conducted a study in 1966 regarding working capital management of three industries namely
cement, fertilizer and sugar. This study mainly devoted to ratio analysis of composition,
utilization and financing of working capital for the period of 1959 to 1963. The study reveals that
inventory constituted a major portion of working capital i.e. 74.06 per cent in the sugar industry
followed by cement industry (63.1%) and fertilizer industry (59.58%). It was observed that
inventory had not managed properly. So far as the utilization of working capital was concerned,
cement and fertilizer industry had better implementation of working capital. The sugar industry
had huge accumulation of stocks so there was inefficient utilization of working capital heavily.
George (1972) It was the study on cross section analysis of balance sheet data of 52
public limited companies for the period of 1967- 70. Accelerator, internal and external
finance variables were considered in the formulation of equations for raw materials
including goods-in-process inventories. However, equations for finished goods
inventories conceive only output variable. Deliberation was given on accelerator and
external finance variables.

Mishra (1975) It is the study of six major public sector enterprises. He concluded
that (i) inventory constitutes the most important component of working capital of public
enterprises (ii) efficiency of working capital funds employed in receivables is terribly low
in the selected enterprises and (iii) In all units both the current assets and the quick ratios
are greater than their standards. Enterprises need proper control on receivables.

Lambrix and Singhvi (1979) Adopted working capital cycle approach in working
capital management, also suggested that investment in working capital can be optimized
and cash flows can be improved by reducing the time frame of physical flow starting
from the receipt of raw material to the shipment of finished goods, i.e. inventory
management, and by improving the terms and conditions on which firm sells goods as
well as receipt of cash.

Lal (1981) He studied Modi Steels Limited as a case study, his study focused on
inventory management. He originated a model which involve price variable in inventory
management; earlier price variable in inventory was not considered in that company. The
analysis recommended solid policies, which would look after internal and external
factors, ultimately it would help in bringing in efficient working capital management.

Farzaneh (1997) Presented a mathematical model, to assist the companies in their

decision to switch from EOQ to JIT purchasing policy. He defines JIT as “to produce and
deliver finished goods just in time to be sold, sub-assemblies just in time to be assembled
in goods and purchased material just in time to be transformed into fabricated parts”. He
highlights that the EOQ model focuses on minimizing the inventory costs rather than
minimizing the inventory. Under the ideal condition where all the conditions meet, it is
economically better off to choose the JIT over the EOQ because it results in purchase
price, ordering cost.

Rich Lavely (1998) Asserts that inventory means “Piles of Money” on the shelf and
the profit for the firm. However, he notices that 30% of the inventory of most retail shops
is dead. Therefore, he argues that the inventory control is facilitate the shop operations by
reducing rack time and thus increases profit. He also elaborates the two types of
inventory calculations that determine the inventory level required for profitability. The
two calculations are “cost to order” and “cost to keep”.
Dave Piasecki (2001) He focused on inventory model for calculating the optimal
order quantity that used the Economic Order Quantity method. He points out that many
companies are not using EOQ model because of poor results resulted from inaccurate
data input. He says that EOQ is an accounting formula that determines the point at which
the combination of order costs and inventory costs are the least. He highlights that EOQ
method would not conflict with the JIT approach. He further elaborates the EOQ formula
that includes the parameters such as annual usage in unit, order cost and carrying cost.
Finally, he proposes several steps to follow in implementing the EOQ model. The
limitation of this literature is that it does not elaborate further relationship between EOQ
and JIT. It does not associate the inventory turns with the EOQ formula and fails to
mention the profit gain with the quantity is calculated.

Gaur, Fisher and Raman (2005) In their study examined firm-level inventory
behaviour among retailing companies. They took a sample of 311 public-listed retail
firms for the years 1987–2000 to examine the relationship of inventory turnover with
gross margin, capital intensity and sales surprise. They observed that inventory turnover
for retailing firms was positively related to capital intensity and sales surprise while
inversely associated with gross margins

S. Singh (2006) Analysed the inventory control practices of single fertilizer

company named IFFCO. He statistically examined the inventory system with
consumption, sales and other variables along with growth of these variables and
inventory patterns. He concluded that an increase in components of inventory lead to an
increase in the proportion of inventory in current assets. A special focus was made on
stores and spares in order to calculate excess purchases resulting in loss of profit.

Pradeep singh (2008) In his study made an attempt to examine the inventory and
working capital management of Indian Farmers Fertilizer Cooperative Limited (IFFCO)
and National Fertilizer Limited (NFL). He concluded that the overall position of the
working capital of IFFCO and NFL is satisfactory. But there is a need for improvement in
inventory in case of IFFCO.

Capkun, Hameri and Weiss (2009) Statistically analysed the relationship

between inventory performance and financial performance in manufacturing companies
using the financial information of a large sample of US-based manufacturing firms over a
26-year period, that is, 1980 to 2005. They inferred that a significant relationship existed
between inventory performance along with the performance of its components and
profitability. Raw material inventory performance was highly correlated to gross profit
and operating profit. Work in progress inventory was highly correlated to gross profit
measures while finished goods inventory performance was more correlated with
operating profit measures.
THEORECTICAL PERSPECTIVE
Inventory management helps companies identify which and how much
stock to order at what time. It tracks inventory from purchase to the sale of goods. The
practice identifies and responds to trends to ensure there’s always enough stock to fulfill
customer orders and proper warning of a shortage.

Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an
asset on the balance sheet) ties up cash. Therefore, too much stock costs money and
reduces cash flow.

One measurement of good inventory management is inventory turnover. An accounting

measurement, inventory turnover reflects how often stock is sold in a period. A business
does not want more stock than sales. Poor inventory turnover can lead to deadstock, or
unsold stock.

Inventory Definition Inventory is materials, parts provided, and materials in

the process that are contained in the company for the production process and finished
goods or products provided to meet demands from consumers or customers every time
they are stored and maintained. It is considered a specific rule in the Inventory so that it is
always ready to use and recorded in the form of company books.

Types of Inventory Management

The right types of inventory management for a particular business depend on the type of
inventory and the company’s needs. The following is a breakdown of each system,
including when to use them and the advantages and disadvantages.

1. Barcode Tracking
Barcode inventory management systems are used to allocate a number to each product
sold by a business. Multiple data points can be associated with the barcode number, such
as the supplier and the product dimensions and weight. The barcodes can also track
mutable data, such as how much of the product is in stock.

All major retailers use barcodes in their inventory management systems. When a barcode
has been read in the retail environment, the information on inventory sales is read
immediately in a more sophisticated database that maintains the use of statistics. It uses
sales data to make buying decisions based on sales and inventory levels.

2. Radio Frequency Identification (RFID)

RFID stands for radio frequency identification. RFID inventory management wirelessly
keeps track of products with unique serial numbers assigned to each. The number is used
to track items and hold comprehensive product data. A warehouse management system
that uses RFID can raise inventory visibility and efficiency and guarantee faster
self-recording of receiving and delivery. Companies that employ RFID often transport
hundreds of thousands of products and services through their offices and stores. RFID
uses tags that are integrated circuits with a microchip connected to an antenna to transmit
and collect data. RFID uses active and passive technology.

Active RFID Technology

Active RFID tags have an internal power source with a battery life of three to five years.
Active RFID technology comes in two types: beacons and transponders, which are more
battery efficient. Besides the power source, active RFID technology has three main parts:
an interrogator, an antenna, and a tag.

Passive RFID Technology

An RFID without an internal power source is called passive. Electromagnetic energy
from the reader powers these tags. Passive RFID tags are economical to use in supply
chain management (SCM) for access control and file tracking. The tags come in two
forms: hard tags and inlays.

3. Just-in-Time Inventory Management

Just-in-time (JIT) inventory management saves significant money and reduces waste by
keeping only the inventory needed to produce and sell products. This type of inventory
management relies on suppliers delivering goods as and when needed. JIT decreases
storage and insurance costs while discarding surplus inventory. However, it can be a risk
if demand unexpectedly increases and stock cannot be quickly sourced. It is ideal for
businesses with a high volume of orders or companies that require a continuous supply of
raw materials. The advantages of JIT are that it reduces the amount of space required for
inventory storage, minimizes inventory holding costs, and reduces the risk of
overstocking or stockouts. The disadvantages are that it requires a high degree of
coordination with suppliers, which can be challenging. Suppliers may not consistently
deliver goods on time, leading to delays or disruptions in production.

4. ABC Analysis
ABC analysis is also called “always better control” inventory management. This type of
inventory management divides various items into three categories based on pricing and is
separated into groups A, B, or C, ranked by demand, cost, and risk data. Categorizing
inventory allows business owners to realize which products or services are most critical
to their financial success.Based on sales volume or profitability, the stock keeping units
(SKUs) judged most important are “Class A” items. Class B is the next-most important,
and the least significant is Class C. This method can also be used with more than three
groups.

Some of the advantages of ABC analysis are inventory optimization by identifying which
products are in demand, improved inventory forecasting, and strategic resource
allocation. The main disadvantages of this type of inventory management are the
emphasis on the dollar value of inventory and the lengthy amount of time and effort
needed to apply this method to the supply chain.

5. Dropshipping
Dropshipping is when the supplier ships products directly to the customer. For example,
when a customer buys something from a store, instead of picking the item from the
store’s inventory, it is bought from a third party and shipped to the consumer via the
supplier. The advantages of dropshipping include no startup investment, no excess
inventory, no overhead and factory costs, and scalability. The disadvantages of this
inventory management model are the lack of control over product quality and stock and
potentially unpredictable shipping times.

6. Cross-Docking
Cross-docking involves transferring products directly from inbound vehicles to outbound
vehicles with little to no storage time in between. This strategy is used to reduce handling
costs, shorten lead times, and improve overall efficiency in the supply chain. This type of
inventory management is typically used when there is a high demand for products that are
already pre-packaged and labeled for delivery. It is often used in industries such as retail,
grocery, and distribution centers for fast-moving consumer goods. Cross-docking is
useful for companies with a high volume of goods flowing in and out of their facilities,
such as large retailers or e-commerce businesses. The advantages of cross-docking
include reduced inventory holding costs and improved supply chain efficiency. Some of
the disadvantages are dependence on transportation schedules, higher labor costs, and
increased error risk. Since cross-docking involves multiple transfers and handling of
goods, there is an increased risk of damaged products, mislabeled shipments, and other
mistakes.

7. Bulk Shipment
Bulk shipments are a cost-efficient way of shipping in which businesses palletize
inventory to ship in sizeable volumes. Large quantities of goods are transported in a
single shipment, typically using specialized equipment such as tankers, hopper cars, or
containers. This inventory management type is used to reduce transportation costs,
minimize handling, and improve efficiency in the supply chain. Bulk shipping is typically
used when the inventory types are similar and require no additional packaging or
processing before delivery. It is commonly used in agriculture, mining, chemical
manufacturing, and petroleum refining, where large quantities of raw materials or
finished products must be transported over long distances. Bulk shipment is most
commonly used by major companies that require large quantities of raw materials or
produce large volumes of finished goods. The disadvantages of bulk shipment inventory
management include higher upfront costs, limited flexibility, and a higher risk of product
damage.

8. Perpetual Inventory System

Perpetual inventory management continuously tracks inventory levels in real-time,
making it ideal for companies with high volume or fast-moving goods. This inventory
control system automatically updates inventory counts using a point-of-sale (POS)
system. In addition, perpetual inventory systems are ideal for retail businesses selling
goods with short shelf life, such as food, fashion, or electronics. The advantages of
perpetual inventory management are that it provides accurate inventory counts, and
allows for real-time tracking of stock levels. The disadvantages are that it requires
significant setup and ongoing costs to maintain and may not be suitable for small
businesses with low sales volumes or limited resources. Large retail companies like
Walmart or Amazon use the perpetual inventory management method of inventory
control.

9. Periodic Inventory System

A periodic inventory system requires physical counts of inventory at regular intervals.
This system is more suitable for smaller businesses with lower sales volumes or
companies with limited products. This method typically involves taking a physical
inventory count at the end of each accounting period and then adjusting the inventory
balance in the accounting system. Periodic inventory systems’ advantages are that it’s
simple and inexpensive. However, the disadvantages are that it’s slow, labor intensive,
and can lead to more inaccuracies.

Material Requirements Planning System

A material requirements planning (MRP) system helps businesses to manage their
manufacturing processes by calculating the materials needed to produce a certain number
of products. This type of inventory management is ideal for companies with complex
manufacturing processes. The advantages of MRP systems are that they allow for
planning and scheduling production efficiently, ensuring raw materials move through the
work order quickly and helping to fulfill orders on time and meet customer demand. In
addition, they are integrated across a business to replace manual processes. MRP
inventory management software helps workers comprehend all the steps that go into
assembling products and how long it takes to complete each step so that delays in the
production cycle are prevented and production yield is increased. However, it can be
expensive to implement MRP inventory management software, it is not as capable as an
enterprise resource planning (ERP) system, and there’s less room for flexibility in the
schedule.

Inventory Management Process

Inventory Management requires a number of steps that work together to guarantee
successful and efficient inventory management. The Inventory Management Process
includes the following steps:

1. Demand Forecasting
Predicting demand is the first stage in inventory management. Based on historical data
and present purchasing trends, companies can calculate how much inventory will be
required in the future. By anticipating demand, firms can minimize stockouts and
overstocking.

2. Establishing Reorder Points

Based on historical data, the company can decide the minimum stock levels to be
maintained at all times to satisfy customer demands. This is called the reorder point.
Establishing the reorder point guarantees prompt inventory replenishment, preventing
stockouts.

3. Inventory Tracking
This entails keeping an eye on stock levels in real-time using barcoding, RFID, or manual
tracking techniques. Businesses need accurate tracking to have a clear picture of their
inventory levels and be able to decide when to place new orders.

4. Reorder and Restocking

As inventory levels hit the reorder point, businesses must place new orders and replenish
their inventories. Orders must be placed with suppliers, and delivery or pickup
arrangements must be made. The key to ensuring that inventory is refilled on schedule is
through effective contact with suppliers.
5. Quality Control
Inventory must go through quality control inspections before being put in storage or made
available for purchase. By doing this, it is made sure that the inventory satisfies quality
requirements and is damage and defect-free.

6. Storage of Inventory
Following receipt and inspection, inventory is kept in a specific location. Proper planning must
go into inventory storage to make sure that inventory is accessible, arranged, and stored in a way
that minimizes damage.

Benefits and Importance of Inventory Management

The importance of inventory management cannot be stressed enough especially for eCommerce
and online retail brands. Accurate inventory tracking allows brands to fulfil orders timely and
accurately. Inventory management in businesses must grow as the company expands. With a
strategic plan in place that optimizes the process of overseeing and managing inventory,
including real-time data of inventory conditions and levels, companies can achieve inventory
management benefits that include:

Accurate Order Fulfilment

With an effective inventory management software, you can easily track the stock in the
warehouse. Bid goodbye to overstocking, stocking of obsolete items, understocking and start
focusing on making your brand become one of the key players in the market space. Develop a
robust plan with the help of an efficient accounting software and avoid inaccurately filled orders,
high return volumes and a loss of customer base.

Better Inventory Planning and Ordering

Striking a balance between the demand and supply is extremely crucial for businesses, thus,
inventory management provides aid in better planning and ordering of stock items. Imagine
having a huge demand for a particular product but not having enough material to supply the
same. Sounds like your worst nightmare, right? A detailed inventory management mitigates these
issues, allowing warehouse managers to refresh inventory only when needed. It’s both space and
cost-effective.

Increased Customer Satisfaction

Since a systematic and robust inventory tracking system will give you a comprehensive view of
your stock at-hand, it yields in an increased customer satisfaction. In retail sector, customers
resent late deliveries or “out of stock” notifications and eventually never return to the website to
fulfil their shopping needs. However, good inventory management leads to orders being fulfilled
more quickly and shipped out to customers faster. The enhanced processes can help eCommerce
and online retail brands build a strong repertoire with consumers – and keep them coming back
for more.

Organised Warehouse
A good inventory management strategy leads to an organized fulfilment centre. An organized
warehouse results in more efficient present and future fulfilment plans. This also includes
cost-savings and improved product fulfilment for businesses utilizing the warehouse for
managing inventory.

Minimise the Blockage of Financial Resources

The importance of inventory control is to minimise the blockage of financial resources. It
reduces the unnecessary tying up of capital in excess inventories and also improves the liquidity
position of the firm. With proper inventory tracking module, business owners can take quicker
decisions about the stock lying in the warehouse more wisely.

INVENTORY MANAGEMENT TECHNIQUES:

One of the vital objectives of a firm is to manage inventories efficiently in accordance with the
shareholders. Optimum utilization of the inventories aids to achieve that objective, as well as
reap profit. The inventories which are controlled efficiently make the firm flexible and avoid
disasters like running out of stock and pilling up of unnecessary stock which increases the level
of investment and does not bring the firm profit. The following questions help to manage the
inventories properly.

How much should be ordered? (economic order quantity)

When should it be ordered? (re-order point )

ECONOMIC ORDER QUANTITY

Economic order quantity deals with problems like the amount of stock to be furnished on the
depletion of stock, the planning of production. So the firm has established the economic lot size.
This involves two types of costs:

Ordering costs: it includes the cost of the following:

 Purchase

 Requisition
  Ordering

 Receiving

 Transporting

 Inspecting

 Storing

Ordering cost differ according to the orders placed. The clerical and the staff costs remain the
same as long as they are committed costs. On the other hand if the quantity of the order
increases, the clerical and staff costs may increase. If the quantity is reduced the clerical and the
staff force can be used in other departments hence the cost can be included to the ordering cost.
As the ordering costs is proportionate with the number of orders placed a large inventory helps in
reducing the order cost as the number of orders reduce.

Carrying cost: it includes the cost of the following:

 Storage

 Insurance

 Taxes

 Deterioration

 Adolescence and to maintain the level of inventory.

 The storage costs include warehousing cost, stores handling cost and administrative cost.
Carrying costs differ with inventory size and is in contrast with that of ordering cost
which reduces with the increase in inventory level.

 Re-order point: it means the point at which the firm should restock its inventory. In order
to be certain of the time of restock, the firm should know the following:

 Lead time (normal replenishing time i.e. reorder= lead*avg. usage)

 Average use

 Economic order quantity

Safety stock: the actual delivery time might differ from the normal lead time. If there is an
increase in actual usage or delay in delivery of stock it may prove to be expensive for the firm so
in order to protect themselves from such mishaps they can maintain a safety or back-up stock
JUST IN TIME:
Just in time became famous because of the Japanese firm. It means that the materials arrive in
time for production and hence maintenance of inventories is not needed but then the delivery and
production have to be well co-ordinated. It also has its drawbacks like if the quality of the
material is poor it will be a hindrance for production. The success of just in time depends on
quality management and the relationship with the supplier.

OUT SOURCING:
As times are changing so are the practices of companies. Nowadays companies tend to
outsource. That is buying components from some other firms.

COMPUTERIZED INVENTORY CONTROL SYSTEM:

Technology is made controlling of inventories easier by computerized inventory control that is
everything from tracking, revising, counting. It also restocks the inventory by reordering when
necessary that is possible because of the information system which is linked between the buyer
and supplier. However it is not practical for large retail stores.

BASIC REASONS TO KEEPING AN INVENTORY: There are three

basic reasons for keeping an inventory:

1.TIME: The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amount of inventory to use in this “lead time”.

2. UNCERTAINTY: Inventories are maintained as buffers to meet uncertainties in

demand, supply and movement of goods.

3.ECONOMIES OF SCALE: Ideal condition of “one unit at a time at a place where

user needs it, when he needs it “principle tends to incur lots of costs in terms of logistics. So bulk
buying, movement and storing bring.

REASONS AND BENFITS OF INVENTORY:  The optimal level to maintaining

inventory is subjective matter and depends upon the features of a particular firm.

Trading firm - In case of a trading firm there may be several reasons for holding inventories
because of sales activities that should not be interrupted more over it not always possible to
procure the good whenever there is a sales opportunity there is always a time gap required
between purchase and sale of goods. Thus trading concern should have some stock of finished
goods in order to undertake sales activities independent of the procurement schedule. Similarly, a
firm may have several incentives being offered in terms of quantity discounts or lower price etc.
by the supplier of goods. There is trading concern inventory helps in a de-inking between sales
activity and 40 also to capitalize a profit of opportunity due to purchase make at a discount will
result in lowering the total cast resulting in higher profits for the firm.

Manufacturing firm - A manufacturing firm should have inventory or not only the finished
goods, but also of raw materials and work -in-progress for following reasons.

Uninterrupted production schedule - Every manufacturing firm must have sufficient

stock of raw materials in order to have the regular and uninterrupted production schedule. If
there is stock out of raw materials in order to have the regular and uninterrupted production
schedule. If there is stock out of raw material at any stage of production process then the whole
production may come to a half. This may result in custom dissatisfaction as the goods cannot be
delivered in time more over the fixed cost will continue to be incurred even if there is no
production. Further work-in-progress would let the production process run smooth. In most of
manufacturing concerns the work in progress is a natural outcome of the production schedule and
it also helps in fulfilling when some sales orders, even if the supply of raw-materials have
stopped.

Costs involved in Inventory Every firms maintains inventory depending upon

requirement and other features of firm for holding such inventory some cost will be incurred
there are as follows.

Carrying Cost -This is the cost incurred in keeping or maintaining an inventory of one unit
of raw materials, work-in-process or finished goods. Here there are two basic cost involved.

Cost of Storage- It includes cost of storing one unit or raw materials by the firm. This cost
may be for the storage of materials. Like rent of spaces occupies by stock, stock for security, cost
of infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc

Cost of Financing- This cost includes the cost of funds invested in the inventories. It
includes the required rate of return on the investments in inventory in addition to storage cost etc.
The carrying cost include therefore both real cost and opportunity cost associated with the funds
invested in the inventories. The total carrying cost is entirely variable and rise in directly
proportion to the level of inventories carried. Total carrying cost = (carrying cost per unit) X
(Average inventory).

Cost of Ordering -The cost of ordering includes the cost of acquisition if inventories. It
is the cost of preparation and execution of an order including cost of paper work and
communicating with the supplier. The total ordering cost is inversely proportion to annual
inventory of firm. The ordering cost may have a fixed component, which is not affected by the
order size: and a variable component, which changes with the order size. 43 Total Ordering
Cost = (No of orders) X (cost per order).

Cost of Stock out -It is also called as hidden cost. The stock out is the situation when the
firm is not having units of an item is stores but there is a demand for that item either for the
customers or the production department. The stock out refers to zero level inventories. So, there
is a cost of stock out in the sense that the firm faces a situation of lost sales or back orders. The
stock outs are quite often expensive. Even the good will of firm also be affected due to customers
dissatisfaction and may lose business in case of finished goods, where as in raw materials or
work in process can cause the Production process to stop and it is expensive because employees
will be paid for the time not spine in producing goods. The carrying cost and the ordering cost
are opposite forces and collectively. They determine the level of inventors in a firm.  Total
Cost = (Cost of items purchased) + (Total Carrying and ordering cost).

Valuation of Inventory -The methods of valuing inventory are combination of the

actual cost and replacement cost plans. The chief advantage of the cost or net realizable value
rule is that it is conservative. Hence the methods of valuation of inventory are quite independent
of system of mincing.  In balance sheet closing stock is shown under current assets and it also
credited to manufacturing or trading accounts. The inventories are valued on the basis as follows:

Cost of raw materials in stock may include freight charges and carrying cost. But such cost
should not exceed market price.

Work - in - process is generally valued at cost, which includes cost of materials, labor. And
the proportionate factory overhead, as it is reasonable according to degrees of completion.

Cost of finished goods wound normally to the total or full cost it includes prime cost-plus
appropriate amount of the overhead. Selling and distribution cost is deducted on the other hand
work in progress may be valued at work in progress may be valued at work cost, marginal cost,
prime cost or, even at direct materials.
CHAPTER-4