Study on inventory management conducted at reid&taylor(india)ltd

Inventory Management

Chapter 1 introduction

1.1. Introduction

Inventory is a list of goods and materials, or those goods and materials themselves, held
available in stock by a business.

Inventory management is primarily about specifying the size and placement of stocked goods.
Inventory management is required at different locations within a facility or within multiple locations of a
supply network to protect the regular and planned course of production against the random disturbance of
running out of materials or goods. The scope of inventory management also concerns the fine lines between
replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space
for inventory, quality management, replenishment, returns and defective goods and demand forecasting.

Management of the inventories, with the primary objective of determining, controlling stock
levels within the physical distribution function to balance the need for product availability against the need for
minimizing stock holding and handling costs.

The objectives of materials management are primarily focused at achieving efficiency in sales
and production by minimizing the investment in inventory without sacrificing quality and continuity of supply
of materials obtained at lowest possible price.

Most manufacturing organizations usually divide their "goods for sale" inventory into

• Raw materials - materials and components scheduled for use in making a product.
• Work in process, WIP - materials and components that have begun their transformation to finished
goods.
• Finished goods - goods ready for sale to customers.
• Goods for resale - returned goods that are saleable.
• Spare parts

Haranahalli Ramaswamy Institute of Higher Education, Hassan 1


Inventory management is a sub-system of an organisation which in turn has a number of sub-
systems. The inter related nature of inventory management function and other organizational functions such
as finance function, production function, maintenance function etc. will have to be well appreciated. While
defining the inventory management function, the objective was stated as one of providing the pre-determined
service to customers at a minimum total cost.

1.2. Problem statement

Inventory management study conducted in Reid &Taylor (India) Ltd.

1.3. Objectives

• To study work flow of stores department in Reid & Taylor (India) Ltd .

• To study how effectively inventories are maintained in Reid and Taylor.

• To know the relationship between raw materials and sales.

• To study the selective inventory control system adopted in the organisation.

1.4. Scope of the study

Inventory management is a very simple concept - don't have too much stock and don't have too
little. Since there can be substantial costs involved in straying above and below the optimal range, careful
inventory management can make a huge difference in the profitability of a business. Although the concept is
simple, the process of getting the right balance can be quite a complex and time consuming task without the
right technology.

Inventory Management is very important for Reid and Taylor. It enables the business to meet or
exceed expectations of the customer by making the product readily available.



If managed properly, it can help the organization reduce its costs, achieve economies of scale
and prepares the organization for uncertainty.

The importance of proper management of materials need hardly be emphasised in a
developing country like India considering the fact that crores together worth of materials and components
enter into production process each year. In any manufacturing industry, nearly 60-70% of the total funds
employed are tied up in current assets, of which inventory is the most significant component. In the cost
structure of most of the products materials constitute 40-60% of the total cost again pointing to the need for
proper budgeting and control of materials expenses.

In a competitive environment, no customer will be willing to pay the enhanced price and the
manufacturer may well end up with losing his existing business. Company has its own limitation. Firstly
marketing may find it difficult to improve sales due to stiff competition. Secondly production needs to be
raised which in turn needs additional resources by way of capital man power etc. since capital is scarce, this is
also not a practical solution to improve profits.

That leaves only cost effective techniques such as

1) Reduction in material cost by using superior design which needs less material or saves on labour

2) Inventory reduction and control by stopping wastage or leakage by

3) Enforce strict consumption control

4) Eliminating all wastages at all places where they occur

5) Disposal of scrap as it arises.

1.5. Data collection methods

• Primary data

Primary data has been collected from observation and discussion with guide, other officials.



• Secondary data

• Secondary data collected from past records.

• Secondary data collected from company annual report.

• Secondary data collected from company website.

1.6. Techniques for data analysis

Data has been analyzed by using

• Regression analysis

• Graphs

1.7. Limitations of the study

As this is a study under taken to full fill the academic requirement it is bound to have certain
limitation.

• Study was bounded for only stores department.

• Detail study about all the materials was not possible because of time limit.

• Some of the information were kept confidential



Chapter2 literature review

2.1. Introduction to inventory management

Inventories constitute the most significant part of current assets of a large majority of
companies in India. On an average, inventories are approximately 60 percent of current assets in public
limited companies in India. Because of the large size of inventories maintained by firms, a considerable
amount of funds is required to be committed to them. It is, therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the
management of inventories will be jeopardising its long-run profitability and may fail ultimately. It is possible
for a company to reduce its level of inventories to a considerable degree e.g., 10 to 20 per cent, without any
adverse effect on production and sales, by using simple inventory planning and control techniques. The
reduction in ‘excessive’ inventories carries a favourable impact on a company’s profitability.

2.2. Definition and meaning

Inventories are consumed are unsold goods purchased or manufactured according to the
accounting standard: 2 (Revised), inventories are asset:

a) Held for sale in the ordinary course of business.

b) In the process of production for such sale or.

c) In the form of materials or supplies to be consumed in the production process or in the rendering of
service.

Thus, that term inventory includes stock of

• Raw materials and components:- Raw materials are those basic inputs that are converted into
finished product through the manufacturing process. Raw materials inventories are those units which
have been purchased and stored for future productions.

• Work in process:- work in process inventories are semi-manufactured products. They represent
products that need more work before they become finished products for sale.



• Finished goods:- Finished goods inventories are those completely manufactured products which are
ready for sale. Stocks of raw materials and work-in-process facilitate production, while stock of
finished goods is required for smooth marketing operations. Thus, inventories serve as a link between
the production and consumption of goods.

The levels of three kinds of inventories for a firm depend on the nature of its business. A
manufacturing firm will have substantially high level of all three kinds of inventories, while a retail or
wholesale firm will have a very high level of finished goods inventories and no raw material and work-in-
process inventories. Within manufacturing firms, there will be differences. Large heavy engineering
companies produce long production cycle products; therefore, they carry large inventories. On the other hand,
inventories of a consumer product company will not be large because of short production cycle and fast
turnover.

Firm also maintain a fourth kind of inventory, supplies or stores and spares. Supplies include
office and plant cleaning materials like soap, brooms, oil, fuel, light bulbs etc. These materials do not directly
enter production, but are necessary for production process. Usually, these supplies are small part of the total
inventory and do not involve significant investment. Therefore, a sophisticated system of inventory control
may not be maintained for them.

2.3. Need to hold inventories

The question of managing inventories arises only when the company holds inventories.
Maintaining inventories involves tying up of the company’s fund and incurrence of storage and handling
costs. If it is expensive to maintain inventories, why do companies hold inventories? There are three general
motives for holding inventories.

• Transaction motive emphasises the need to maintain inventories to facilitate smooth production and
sales operations.

• Precautionary motive necessitates holding of inventories to guard against the risk of unpredictable
changes in demand and supply forces and other factors.

• Speculative motive influences the decision to increase or reduce inventory level to take advantage of
price fluctuations.

.


The procurement of materials may be delayed because of such factors as strike, transport disruption or
short supply. Therefore, the firm should maintain sufficient stock of raw materials at a given time to
streamline production.

Work-in-process inventory builds up because of the production cycle. Production cycle is the
time span between introduction of raw material into production and emergence of finished product at the
completion of production cycle. Till production cycle completes, stock of work-in-process has to be
maintained. Efficient firms constantly try to make production cycle smaller by improving their production
techniques.

Stock of finished goods has to be held because production and sales are not instantaneous. A
firm cannot produce immediately when consumers demand goods. Therefore, to supply finished goods on a
regular basis, their stock has to be maintained. Stock of finished goods has also to be maintained for sudden
demand from customers. The level of finished goods inventories would depend upon the coordination
between sales and production as well as on production time.

2.4. Objective of inventory management

In the context of inventory management, the firm is faced with the problem of meeting two conflicting
needs:

• To maintain a large size of inventories of raw material and work- in-process for efficient and smooth
production and of finished goods for uninterrupted sales operations.

• To maintain a minimum investment in inventories to maximise profitability.

Both excessive and inadequate inventories are not desirable. These are two danger points within
which the firm should avoid. The objective of inventory management should be to determine and maintain
optimum level of inventory investment. The optimum level of inventory will lie between the two danger
points of excessive and inadequate inventories.

The firm should always avoid a situation of over investment or under-investment in
inventories. The major dangers of over investment are;

a) Unnecessary tie-up of the firm’s fund and loss of profit,



b) Excessive carrying costs, and

c) Risk of liquidity.

The excessive level of inventories consumes funds of the firm, which cannot be used for any
other purpose, and thus, it involves an opportunity cost. The carrying costs, such as the costs of storage,
handling, insurance, recording and inspection, also increase in proportion to the volume of inventory. These
costs will impair the firm’s profitability further. Excessive inventories carried for long-period increase
chances of loss of liquidity. It may not be possible to sell inventories in time and at full value. Raw materials
are generally difficult to sell as the holding period increases. There are exceptional circumstances where it
may pay to the company to hold stock of raw materials.

Maintaining an inadequate level of inventories is also dangerous. The consequences of
under-investment in inventories are:

a) Production hold-ups and

b) Failure to meet delivery commitments.

Inadequate raw materials and work-in-process inventories will result in frequent production
interruptions. Similarly, if finished goods inventories are not sufficient to meet the demand of customers
regularly, they may shift to competitors, which will amount to a permanent loss to the firm.

The aim of inventory management, thus, should be to avoid excessive and inadequate levels of
inventories and to maintain sufficient inventory for the smooth production and sales operations. Efforts should
be made to place an order at the right time with the right source to acquire the right quantity at the right price
and quality. An effective inventory management should

• Ensure a continuous supply of raw materials to facilitate uninterrupted production,

• Maintain sufficient stocks of raw materials in period of short supply and anticipate price changes.

• Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer
service.

• Minimise the carrying cost and time, and

• Control investment in inventories and keep it at an optimum level.



2.5. INVENTORY SYSTEMS.

Records pertaining to quantity and value of inventory – in- hand can be maintained according to
any of the following two systems:

1) Periodic Inventory system.

2) Perpetual Inventory system.

Periodic inventory system

In case of periodic inventory system the quantity and the value of inventory is found out only
at the end of the accounting period after having a physical verification of the units in hand. The system does
not provide the information regarding the quantity and value of material in hand on a continuous basis .the
cost of material used is obtained by adding the total value of goods purchased during the period to the value of
inventory in hand in the beginning of the of the period and subtracting the value of inventory at the end of the
period.

However review period is fixed in this inventory system. This inventory is also known as fixed
period or replenishment inventory system or P-system.

In the periodic review system, the inventory is being reviewed at periodic intervals and
therefore there is no flexibility in the order period. Hence the fluctuation in the demand is taken care of by the
safety stock. The periodic inventory system requires more inventory on hand, for a given frequency of
shortage, as compared to perpetual inventory system.

Perpetual inventory system

It is also known as Automatic inventory system. According to the Charted Institute of
Management Accountants London, it is “A system of records maintained by controlling department, which
reflects the physical movements of stocks and their current balance.”



The definition given by Wheldon is more exhaustive and explanatory. According to him, it is
“A method of recording inventory balances after every receipt and issue to facilitate regular checking and to
obviate closing down for stocktaking.”

In case of this system the stores ledger gives balance of raw materials, work-in-progress and
finished goods on a continuing basis. The basic objective of this system is to make available details about the
quantity and value of stock of each item at all times. The system, thus, provides a rigid control over stock of
materials, as physical stock can regularly be verified with the stock records kept in the stores and the cost
office.

Since the perpetual inventory system requires perpetual auditing of the system, the cost of
operating the system is higher. However, because of the computer facilities, cost advantage of periodic review
system is withering away and many companies are resorting to the perpetual inventory system.

2.6. Methods of valuation of inventories

According to International Accounting standard:2 (IAS:2), the inventories should be valued
at the lowest of “historical cost” and “ net realizable value”.
Historical price
Historical cost of inventories is the aggregate of cost of purchase, cost of conversion, and
other costs incurred in bringing the inventories to their present location and condition.

Thus, cost includes not only the price paid for acquisition of inventories but also all costs
incurred for bringing and making them fit for use in production or for sale, e.g., transportation costs, duties
paid, insurance, manufacturing expenses, wages or manufacturing expenses incurred for converting raw
materials into finished products, etc. selling expenses such as advertisement expenses or storage costs should
not be included.
A major objective of accounting for inventories is the proper determination of income
through the process of matching appropriate costs against revenues. It requires assigning of proper costs to
inventory as well as goods sold.
However, it should be needed that assigning of such costs need not conform to the physical
flow of goods.
1) First In First Out



Under this method, it is assumed that the materials/goods first received are the first to be issued/
sold. Thus, according to this method, the inventory on a particular date is presumed to be composed of the
items which have been acquired most recently. This method of pricing issued material is based on the theory
that material is first issued from the earliest lot on hand and should be priced at the cost at which the lot was
placed in stock. It is assumed that the materials purchased are issued in strict chronological order that it is
materials are issued from the oldest supply in stock and that units issued are priced at the oldest cost price
listed on the stock ledger sheets, that materials on hand at all times being the most recent purchases, when a
requisition for a certain type of material is presented to the store keeper, he uses the cost price of the first lot
of materials received which is still on hand. If the quantity required is greater than the units remaining the first
lot, he uses the cost price of the second lot, than of the third and fourth until enough material is obtained to fill
the requisition

Advantages:-
The FIFO method has the following advantages:
a) It values stock nearer to current market prices since stock is presumed to be consisting of the most
recent prices.
b) It is based on cost and, therefore, no unrealised profit enters into the financial accounts of the
company.
c) The method is realistic since it takes into account the normal processor for utilizing slash selling those
materials/goods which have been longest in stock.

Disadvantages:
The method suffers from the following disadvantages:
a) It involves complicated calculation and hence increases the possibility of clerical errors.
b) Comparison between different jobs using the same type of materials becomes sometimes difficult.
c) A job commenced a few minutes after another jobs may have to bear an entirely different charges of
materials because the first job completely exhausted the supply of materials of particular lot.
The FIFO method of valuation of inventories is particularly suitable in the following circumstances.
a) The materials / goods are of a perishable nature.
b) The frequency of purchases is not large.
c) There on only moderate fluctuations in the prices of materials or goods purchased.
d) Materials are easily identifiable as belonging to a particular purchase lot.



2) Last in last out method
This method is based on the assumption that last item of material/goods purchased are the first
to be issued/sold. Thus, according to this method, inventory consists of items purchased at the earliest cost.
Under this method, which assumes that most current prices should be charged for the cost of
materials which enter into the goods manufactured and sold, which stands for ‘Last in first out’ flow of costs
assumptions produce a lower income during rising prices since stated materials costs are higher than under
FIFO method. When prices are falling, it shows a higher income and thus tends to washout paper profits that
results from a closing inventory and opening inventory stated at different prices. LIFO method of inventory
accounting can, however, in periods of inflation help approximate contemporary income and loss.

LIFO method charges materials account with current replacement cost of inventory. For profit and
loss account, it gives clear insight, the underlying purpose of which is to match current cost with current
revenues. It, however, can result in an unrealistic inventory valuation for purpose of the balance sheet,
sometimes distorting the current ratio and current assets relationship.

But the choice between the FIFO and LIFO methods is still a choice between methods of
accounting practice of historical costs and neither of the two methods meets the need for a valuation of
materials and inventories at current market prices.

The method is most suitable for materials which are of a bulky and non-perishable type.

Advantages

The method has the following advantages:
1) It takes into account the current market conditions while valuing the materials issued to different jobs
or calculating the cost of goods sold.
2) The method is based on cost and, therefore, no unrealised profit or loss is made on account of use of
this method.
2.7. SELECTIVE INVENTORY CONTROL

2.7.1. INTRODUCTION:

The inventory of any industrial firm generally comprises thousands of times with
diversified prices, usage and lead-time, as well as procurement and / or technical problems. Thus, in the case,
the best approach to solve any problem is to tackle the important aspects more rigorously. Selective inventory
control is one such basic analytical tool, which enables management to place efforts where the results will be


greatest. It is a known fact that the manager’s time is limited and he can’t spend his time on all aspects. He has
to devote his time such that it rewards him. This technique is a cost and time saving technique, which
concentrates more on few materials which are expensive or more vital to a organisation, where the control to
the maximum, brings in more benefit through cost reduction and effective utilization.

The motive behind any selective control is that an equally critical analysis of all items will
be very expensive. This being the case, few need more analysis than the other. The importance of the material
can be due to its costs, it’s criticality, it’s availability and its consumption.

Selective inventory control becomes the spotlight of attention to be given in respect of the
following areas:

• Loss

• Wastage

• Scrap

• Quantity

• Price variance

• Usage variance

• Inventory turnovers

There are different methods of classifying the item for inventory control purposes,

ABC Analysis (Always better control) Here annual values of consumption

Of items are considered and are

Classified as A, B and C class items.

HML Classification (High- medium-Low Here unit price of the materials are

Price) Considered.


FSN Classification Based on the materials issue from

(Fast, Slow, and Non- moving) The stores, this analysis is carried Out.

2.7.2 FSN ANALYSIS

This classification is based on the consumption pattern of the materials. i.e. movement
analysis forms the basis. Here the items are classified into Fast moving, slow moving, and non- moving on the
basis of frequency of transaction.

FSN analysis is especially useful to combat obsolete items whether spare parts are raw
materials or components. It helps in arrangement of stocks in stores and their distribution and handling
methods. The main aim of this analysis is to control obsolescence of the inventories. If there is a rapid change
in technology then this classification will have to be updated more often.

FSN analysis is stock turnover ratio based analysis. Stock turnover ratio is defined as the
ratio of annual consumption of a material divided by its average inventory i. e.

The items can be classified into three categories viz

FAST MOVING (F) Those items whose stock turnover ratio is greater than 3.

SLOW MOVING(S) Those items whose stock turnover ratio is between 1 and 3.

NON- MOVING (N) Those items whose stock turnover ratio is below 1.

2.7.3. VED ANALYSIS

VED Analysis can be defined as the analysis of maintenance spares in to

V Items – Items of vital importance,



E Items – Items of essential importance,

D Items – Items of desirable importance.

• Vital importance in the way of indicating the fact that machine can’t run without ‘V’ Item.
• Essential importance in the sense impart that machine can run but without parameters as such
efficiency, noise reduction etc.
• Desirable importance in the way denotes machine can run but factor of safety, industrial formalities
can’t be satisfied.
• Vital (V) spares are those whose non availability results in very high loss due to production down and
a very high cost due to emergency purchases.

Essential (E) spares are those non availability is expected to cause moderate production down time loss.
Desirable (D) spares are those whose non availability does not result into any significant production down
loss.

2.7.4. ABC Classification / Analysis of Inventory

ABC analysis is a popular inventory control technique, which is an adaptation of Pareto’s law.
This is the well- known method called ABC approach or Always Better Control. ABC is also known as
Alphabetical Approach offers a basic analytical tool to concentrate the efforts where the results will be the
greatest.

This technique aims at keeping the investment low and also avoids stock out of critical items. It
tries to analyze the distribution of inventory items annual consumption value so as to determine relative
priority. This method is based on annual consumption value, which is obtained by the multiplication on unit
price by the annual consumption quantity.

The ABC classification process is an analysis of a range of objects, such as finished products,
items lying in inventory or customers into three categories. It's a system of categorization, with similarities to
Pareto analysis, and the method usually categorizes inventory into three classes with each class having a
different management control associated:



A - Outstandingly important; B - of average importance; C - relatively unimportant as a
basis for a control scheme. Each category can and sometimes should be handled in a different way, with more
attention being devoted to category A, less to B, and still less to C.

Thus, applied in the context of inventory, it's a determination of the relative ratios between
the number of items and the currency value of the items purchased / consumed on a repetitive basis:

• 10-20% of the items ('A' class) account for 70-80% of the consumption
• the next 15-25% ('B' class) account for 10-20% of the consumption and
• the balance 65-75% ('C' class) account for 5-10% of the consumption

• High value (A), Low value (C) , intermediary value (B)
A,B & C , all have a purchasing / storage policy - "A", most critically reviewed , "B" little
less while "C" still less with greater results.
Inventory Control Application: The ABC classification system is to grouping items according to
annual issue value, (in terms of money), in an attempt to identify the small number of items that will
account for most of the issue value and that are the most important ones to control for effective
inventory management. The emphasis is on putting effort where it will have the most effect.

All the items of inventories are put in three categories, as below:

A Items : These Items are seen to be of high Rupee consumption volume. "A" items usually include 10-20%
of all inventory items, and account for 50-60% of the total Rupee consumption volume.
B Items : "B" items are those that are 30-40% of all inventory items, and account for 30-40% of the total
Rupee consumption volume of the inventory. These are important, but not critical, and don't pose sourcing
difficulties.
C Items : "C" items account for 40-50% of all inventory items, but only 5-10% of the total Rupee
consumption volume

Table 2.1 . Table showing the suggested policy guidelines for A , B & C classes of items

A items (High cons. Val) B items (Moderate cons.Val) C item (Low cons. Val)

Very strict cons. control Moderate control Loose control

No or very low safety stock Low safety stock High safety stock


Phased delivery (Weekly) Once in three months Once in 6 months

Weekly control report Monthly control report Quarterly report

Maximum follow up Periodic follow up Exceptional

As many sources as possible Two or more reliable Two reliable

Accurate forecasts Estimates on past data Rough estimate

Central purchasing /storage Combination purchasing Decentralised

Max.efforts to control LT Moderate Min.clerical efforts

To be handled by Sr.officers Middle level Can be delegated

OBJECTIVE OF ABC ANALYSIS

The ABC analysis enables the materials manager to exercise selective control when he is
confronted with a large number of items. Tighter and accurate procedures are essential for ‘A’ value items
relating to materials planning, forecasts, ordering, review, records, postings, revisions, lead time analysis,
safety stock, materials consumption control, purchase budget, delivery schedule, Value analysis, follow- up,
clerical efforts, physical stock verification, receipts, issues, stores accounting and inspection. The degree of
control should rigorous for ‘A’ items and should be minimum for ‘C’ items.

ABC analysis is also helpful to rationalize the number of orders and reduce the overall inventory.
All in all, the objectives of ABC analysis can be summarized as follows:

• To restrict the control to and appreciable level.

• To concentrate on maximum degree of coverage of inventory value.

LIMITATIONS OF ABC ANALYSIS

ABC analysis, in order to be fully effective, should be carried out with standardization and
codification. ABC analysis is based on grading the items according to the importance of performance of an
item that is by V.E.D- Vital, essential and desirable analysis. Some items, though negligible in monetary
value, may be vital for running the plant, and constant attention is needed. If the inventory position is analysed



according to the value, commonly known as XYZ analysis, then results of ABC and XYZ analysis will be
different, depending upon the nature of obsolete items. The results of ABC analysis have to be reviewed
periodically and updated. However, ABC analysis is a powerful approach in the direction of cost reduction as
it helps to control items with a selective approach.

2.7.5. HML ANALYSIS

Since the annual usage is considered in case of ABC analysis, we may come across a few
items which fall ‘B’ category, although the unit cost i.e. (cost per piece or unit) is quite high. If controls are
exercised on the basis of ABC only, the importance of these items will be much less then ‘A’ or ‘B’ items
even though the inventory transaction of one unit of these items will mean quite a lot money. Therefore, it is
necessary that unit cost is also considered in order to find out the importance of the items on the basis of unit
costs. This method resembles ABC classification except for the difference in the consumption value and unit
value. Here the materials are classified according to their unit price as high cost items (H), medium cost items
(M), and low cost items (L). This being similar to ABC analysis, usually, they are combined to arrive at a very
effective satisfactory analysis. This is mainly used for controlling the purchase prices.

HML analysis is the price bond analysis. This analysis is generally used for control of space.
The criteria used are:

• HIGH(H)- Those items, which have unit price (say above rs.1000)

• MEDIUM (M) – Those item that have moderate unit price (say between rs.100 and rs.1000).

• LOW(L)- Those items that have low unit price (say below rs.100)

2.8. Spare parts management

Spare parts represent a major part of maintenance expenses in a plant- ranging from 50 % in
low technology to as high as 80% in high technology and process industries. The investment in spare parts
range between 5% to 15%of the value of plant and machinery in a factory-and most of this inventory is idle or
non-moving. Yet, despite the enormous range and value of inventory there is shortage of some critical spare
parts or other, which often has a crippling effect on production. This situation is mainly due to the
unpredictable nature of failures which creates the need for spare parts. All these matters make management of
spare parts a hazardous and frustrating experience. The main problem with spares required for day-to-day


repair maintenance of plant and machinery is that there never seem to be enough of them when required and
too many in stock of spare which are not required.

This is only the symptom of illness. The main causes are:

1) The usage rates of spares are very low as compared to raw materials or as general stores. This
causes their requirement to be highly fluctuating from period to period.

2) The range of spare rates is very large and their individual values, relatively small. Thus rise the
problem of the level of control. Unfortunately, most spare parts inventory management is done
at the lowest organisational level.

3) The usage rate itself is difficult to establish from past records- especially for the slow movers
which form the bulk of the spare parts inventory. Little usage history is available and the
material variability of usage causes over estimates of requirement.

Categories of spares

Spares can basically be classified into four categories:

1) Consumable spares

2) Replacement spares

3) Rotable spares

4) Insurance spares

Consumable spares are those which due to normal wear and tear have considerably short
life and are required regularly either as replacement of parts which wear out, or as replacement of part after
specified period of service..

Replacement spares are those parts or assemblies which are ordered on the basis of prior
inspection against planned overhaul schedules.

Rotable spares are those which are repaired after use and kept in stock to be used again.



Insurance spares also called capital spares or emergency spares are those which do not wear
and tear during the working life of the equipment yet they are stocked to safeguard high down time cost in the
event of their breakdown.

2.9. Inventory management techniques

In managing inventories, the firm’s objective should be in consonance with the shareholder
wealth maximisation principle. To achieve this, the firm should determine the optimum level of inventory.
Efficiently controlled inventories make the firm flexible. In efficient inventory control results in unbalanced
inventory and inflexibility –the firm may sometimes run out of stock and sometimes may pile up unnecessary
stocks. This increases the level of investment and makes the firm unprofitable.

To manage inventories efficiency, answers should be sought to the following to questions:

• How much should be ordered?

• When should it be ordered?

The first question, how much to order, relates to the problem of determining economic order
quantity (EOQ), and is answered with an analysis of cost of maintaining certain level of inventories. The
second question, when to order, arises because of uncertainty and is a problem of determining the re-order
point.

ECONOMIC ORDER QUANTITY (EOQ)

One of the major inventory management problems to be resolved is how much inventory
should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in
which it has to be purchased on replenishment. If the firm is planning a production run, the issue is how much
production to schedule (or how much to make). These problems are called order quantity problems, and the
task of the firm is to determine the optimum or economic order quantity (or economic lot size). Determining
an optimum inventory level involves two types of costs:

a) Ordering costs and



b) Carrying costs.

The economic order quantity is the inventory level that minimises the total of ordering and
carrying costs.

Ordering costs

The term ordering costs is used in case of raw materials (or supplies) and includes the
entire costs of acquiring raw materials. They include cost incurred in the following activities: requisitioning,
purchase ordering, transporting, receiving, inspecting and storing (store placement). Ordering costs increase in
proportion to the number of orders placed. The clerical and staff costs, however, do not have to vary in
proportion to the number of orders placed, and one view is that so long as they are committed costs, they need
not be reckoned in computing ordering cost. Alternatively, it may be argued that as the number of orders
increases, the clerical and staff costs tend to increase. If the number of orders are drastically reduced, the
clerical and staff force released now can be used in other departments. Thus, these costs may be included in
the ordering costs. It is more appropriate to include clerical and staff costs on a pro rata basis.

Ordering cost increase with the number of orders, thus the more frequently inventory is
acquired, the higher the firm’s ordering costs. On the other hand, if the firm maintains large inventory levels,
there will be few orders placed and ordering costs will be relatively small. Thus, ordering costs decrease with
increasing size of inventory.

Carrying costs

Costs incurred for maintaining given level of inventory are called carrying costs. They
include storage, insurance, taxes, deterioration and obsolescence. The storage costs comprise cost of storage
space (warehousing cost), stores handling costs and clerical and staff service costs (administrative costs)
incurred in recording and providing special facilities such as fencing, lines, racks etc.

EOQ is calculated by using the following formula

EOQ = 2AO
c

Where,



EOQ = Economic Order Quantity

A = Annual consumption or annual requirement

O = Ordering cost

C = Carrying cost

Reorder Point

The problem, how much to order, is solved by determining the economic order quantity, yet
the answer should be sought to the second problem, when to order. This is a problem of determining the
reorder point. The reorder point is that inventory level at which an order should be placed to replenish the
inventory.

To determine the reorder point in certainty, we should know:

a) Lead time

b) Average usage, and

c) Economic order quantity.

Lead time is the time normally taken in replenishing inventory after order has been placed.
By certainty we mean that usage and lead time do not fluctuate. Under such a situation, reorder point is simply
that inventory level which will be maintained for consumption during the lead time. That is:

Reorder point = Lead × Average usage

Safety stock

The reorder point was computed under the assumption of certainty. It is difficult to predict
usage and lead time accurately. The demand for material may fluctuate from day-to-day or from week-to-
week. Similarly, the actual delivery time may be different from the normal lead time. If the actual usage
increases or the delivery of inventory is delayed, the firm can face a problem of stock-out which can prove to
be costly for the firm. Therefore, in order to guard against the stock-out, the firm may maintain a safety-stock
—some minimum or buffer inventory as cushion against expected increased usage and/or delay in delivery
time.

2.10. Ratio Analysis


Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the indicated
quotient of two mathematical expressions” and as “ the relationship between two or more things”. In financial
analysis, a ratio is used as a benchmark for evaluating the financial position and performance of a firm.

Activity ratios

Funds of creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the large amount of sales. Activity ratios are employed to
evaluate the efficiency with which the firm manages and utilises its assets. These ratios are also called
turnover ratios because they indicate the speed with which assets are being converted or turned over into sales.

Inventory turnover

Inventory turnover indicates the efficiency of the firm in producing and selling its product. It is
calculated by dividing the cost of goods sold by the average inventory:

Inventory turnover = cost of goods sold
Average inventory

The average inventory is average of opening and closing balances of inventory. In a
manufacturing company inventory of finished goods is used to calculate inventory turnover.

Debtor’s turnover

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of
companies. When the firm extends credits to its customers, debtors are created in the firm’s accounts. Debtors
are convertible into cash over a short period and, therefore, are included in current assets. The liquidity
position of the firm depends on the quality of the debtors to a great extent.

Financial analysts apply three ratios to judge the quality or liquidity of debtors:

a) Debtors turnover,

b) Collection period,


c) Aging schedule of debtors.

Debtors turnover = Credit sales
Average debtors

Collection period = 360 days
Debtors turnover ratio

Creditors Turnover Ratio

It is also known as Accounts Payable Ratio. This ratio gives the average credit period enjoyed from
the creditor. A low ratio indicates that creditors are not period in time while a high ratio gives an idea that
business is not taking full advantages of credit period allowed by the creditor.

Creditors Turnover Ratio = Credit Purchase
Average creditors

Chapter 3 company analysis

3.1. Profile of the industry

3.1.1Meaning

The textile industry is a term used for industries primarily concerned with the design or
manufacture of clothing as well as the distribution and use of textiles.

The history of development in World Textile industry was started in Britain as the spinning and
weaving machines were invented in that country. High production of wool, cotton and silk over the world has
boosted the industry in recent years. Though the industry was started in UK, still in 19th Century the textile
production passed to Europe and North America after mechanization process in those areas. From time to time
Japan, China and India took part in industrializing their economies and concentrated more in that sector.



Japan, India, Hong Kong and China became leading producers due to their cheap labour supply,
which is an important factor for the industry.

3.1.2.Global Textile Scenario

According to statistics, the global textile market possesses a worth of more than $400 billion presently.
In a more globalize environment, the industry has faced high competition as well as opportunities. It is
predicted that Global textile production will grow by 25 percent between 2002 and 2010 and Asian region will
largely contribute in this regard.

The World Trade Organization (WTO) has taken so many steps for uplifting this sector. In the year
1995, WTO had renewed its MFA and adopted Agreement on Textiles and Clothing (ATC), which states that
all quotas on textile and clothing will be removed among WTO member countries.

However the level of exports in textiles from developing countries is increasing even if in the
presence of high tariffs and quantitative restrictions by economically developed countries.

New innovations in clothing production, manufacture and design came during the
Industrial Revolution - these new wheels, looms, and spinning processes changed clothing manufacture
forever.

The ‘rag trade’, as it is referred to in the UK and Australia is the manufacture, trade and
distribution of textiles.

There were various stages - from a historical perspective - where the textile industry evolved
from being a domestic small-scale industry, to the status of supremacy it currently holds. The ‘cottage stage’
was the first stage in its history where textiles were produced on a domestic basis.

During the Industrial Revolution, new machines such as spinning wheels and handlooms came into
the picture. Making clothing material quickly became an organized industry - as compared to the domesticated
activity it had been associated with before. A number of new innovations led to the industrialization of the
textile industry in Great Britain



3.1.3.Textile Industry in India

India Textile Industry is one of the leading textile industries in the world. Though was predominantly
unorganized industry even a few years back, but the scenario started changing after the economic
liberalization of Indian economy in 1991. The opening up of economy gave the much-needed thrust to the
Indian textile industry, which has now successfully become one of the largest in the world.

India textile industry largely depends upon the textile manufacturing and export. It also plays a major
role in the economy of the country. India earns about 27% of its total foreign exchange through textile
exports. Further, the textile industry of India also contributes nearly 14% of the total industrial production of
the country. It also contributes around 3% to the GDP of the country. India textile industry is also the largest
in the country in terms of employment generation. It not only generates jobs in its own industry, but also
opens up scopes for the other ancillary sectors. India textile industry currently generates employment to more
than 35 million people. It is also estimated that, the industry will generate 12 million new jobs by the year
2010.

Indian textile industry can be divided into several segments, some of which can be listed as below:

• Cotton Textiles
• Silk Textiles
• Woollen Textiles
• Readymade Garments
• Hand-crafted Textiles
• Jute and Coir

3.2.S.Kumars Nationwide Limited

S.Kumars’ group was founded in 1948 by two brothers Mr.Abhayakumar S.Kasliwal and
Mr.Shambhukumar S.Kasliwal . The group consist of a conglomeration of several manufacturing,trading,



marketing and service companies. Each of which is decentralised and run as an independent operating unit by
well qualified personnel.

S.Kumars’ under the dynamic leadership of Mr.Nithin Kasliwal, not only continues to grow in
its existing line of synthetic fabrics but has also firmly committed itself to major investments in cotton,
synthetic and woollen fibre groups.

The sprawling 40 acres of Reid & Taylor plant for worsted suiting in Mysore in south India
is a living testimony of the S.Kumars’ firm resolve to emerge as one of the most important and diversified
textile group in India.

3.2.1. Four Pillars of S.Kumars Nationwide Limited

SKNL's success is based on its four pillars of strength - Manufacturing, Distribution, Brands
and Human Capital. These four pillars have made the company stand apart and succeed in a highly
competitive market scenario.

Manufacturing

Maintaining world-class quality has been a corner stone in SKNL's business strategy. The
company has invested extensively in manufacturing facilities to maintain high quality standards. Four state of
art manufacturing units based in Mysore (Karnataka) and Dewas (Madhya Pradesh) collectively produce over
2,00,000 meters of high-quality fabrics each day.

Luxury Textile fabrics are manufactured at a world-class integrated facility situated near Mysore
(Karnataka). Its high quality fabrics are well received in the domestic as well as international market. In fact,
Reid & Taylor - Scotland, sources its fabrics from this mill as well for its international markets.

SKNL is the only manufacturer of fine count Damask in India. Its Chamunda Standard Mills
and Amana Manufacturing Unit in the outskirts of Dewas (Madhya Pradesh) manufactures this fine fabric to
cater to Indian & European markets.

Distribution

The company’s wide network reaches both domestic as well as overseas market. SKNL
caters to the entire socio-economic segments of the Indian market across 30,000 outlets through 300 dealers.


Today, SKNL is the largest institutional supplier in India in the organized sector. The
company plans to establish high impact presence through multi-brand outlets, large format chain stores and
exclusive stores for all its brands.

Brands

Ability to build brands, across the socio-economic segments has been one of the key factors
in SKNL's success. A keen understanding of the dynamic market trends, while keeping abreast with the
changing usage patterns, attitudes and preferences of the consumers has been the foundation of creating
successful brands.

Reid & Taylor caters to the premium and upper-middle strata of the Indian suiting market.
Since its national launch in 1999, the brand has accelerated to the second position in a highly competitive
market. The brand's growth has been hailed by marketing professionals and is a case study for launching
international brands in India. No surprise that Superbrands Council, the world’s leading authority on
marketing and advertising; has awarded it a ‘Superbrand’ status, second time running.

Belmonte offers a wide range of polyester and viscose blend fabrics for office, leisure and
evening wear catering to the mid-premium consumer. It is available across top 100 cities in India. ‘Uniformity
by Belmonte’ is the sub-brand which offers a wide range of uniform fabrics for professional work-wear across
industries.

Carmichael House is a new entrant in the Home Textile category. This mass premium
brand offers a wide range of home textile solutions for the entire abode in a variety of fabrics and weaves.
Since its launch, Carmichael House, has received fast recognition among its consumers.

Human Capital


SKNL has developed highly effective management capabilities due to a unique fusion of
entrepreneurship with professional expertise. The Board of Directors includes eminent people from industry,
law, banking, finance and economic sectors.

The business at SKNL is divided into product-wise Strategic Business Units viz, Consumer
Textiles (work wear, mid premium and daily wear), Home Textiles (THE), Premium cotton fabric (HVFC)
and Ready to Wear (Total Wardrobe Solutions),Luxury Textiles. Each SBU operates as an independent profit
center and is lead by a seasoned professional. Service functions like Human Resources, Corporate Finance,
Corporate Planning, Research, Marketing & Communications and Legal are centralized.

3.3. REID AND TAYLOR (INDIA) LTD

Reid & Taylor (India) Ltd., is a subsidiary of SKNL. Synonymous with British tradition,
Reid & Taylor has been styling the world's elite for over 170 years. It all began in the 1830's with Alexander
Reid, an enterprising Scottish gentleman, embarking on a journey to make his vision a reality. Using locally
available Cheviot wool he created Cheviot cloth that soon caught on the fancy of the landed gentry. As the
clientele and reputation grew, he was joined by financer Joseph Taylor. Thus, began the enduring partnership
of creating finest cloths in the world, which today is better known as Reid & Taylor. Reid & Taylor continues
the journey to create the finest fabric passionately and has thus carved out a distinguished name for itself in
the industry.

Reid & Taylor was launched by SKNL in India in 15th December 1998 with the
inauguration of a state-of-the-art fabric plant at Mysore in 40 acres of land . The discerning consumers in
India now can experience international-quality garments in their own cities and towns. Today, Reid & Taylor
has emerged as a leading brand in the worsted suiting segment with sales turnover of Rs. 2200 Million and a
market share of 18 %, propelling the brand to grow at a rapid rate of 25% p.a.

The manufacturing facilities for Reid & Taylor includes; 13600 state-of-the-art worsted
spindles, complete and comprehensive facilities for dyeing of wool tops, yarn and fabrics , the latest Dornier
Rapier looms , well-equipped finishing department with the ultra modern fabric processing gadgets. All these
have churned out over 600 designs in the first year of operation.

Reid & Taylor is the first brand in India to offer both fabrics and apparel under one
label. The fine quality of garments and sharp styling has created a space for itself in the customer’s mind.



After an initial flush of success the brand once again faced the grim future of stagnation.
Research by ACNielsen concluded that it needed to reach a wider audience in metros without losing the
premium values associated with the brand .The challenge required a brand ambassador who was a style icon
for Indians, was equally popular with both the masses as well as the elite. Also, his personality had to jell with
the brand platform. Amitabh Bachchan clearly fitted this role. The association has helped the brand
consolidate its positioning of ‘Bond with the Best’. This is because Bachchan stands head and shoulders
above his peers, defining the outstanding values that always accompany style, grooming and professional
excellence.

Reid & Taylor manufactures suit lengths in superfine merino fleece and superfine polyester
executive wear in wool and polyester and other popular blends. The composition, too, is more adventurous.
Linen Kraft is a unique combination of linen with 10% polyester for an unruffled look. Specially developed
for ceremonial wear is Silk Ovation – a 100% silk fabric with a clear understanding of major user segments
and usage environments, the product offering has been created to exceed customer expectations. Rewriting the
rules with dynamic colours, attractive selvedge and competitive pricing, Reid & Taylor has made its mark
across all segments in the market.
The plant has 12960 spindles and 56 looms and has a captive power generating capacity
of 70MW.All the machinery is imported from Germany, France, Italy, Switzerland and England. The range of
the products varies from medium to higher range. The 25% of its production are exported to foreign countries
like U.K, Middle east, Japan and UAE etc. The plant having technical collaboration with Reid &Taylor
Scotland .

The company has provided direct employment to 1200 workers including staff and indirect
employees. The workmen are employed as company apprentice on training period of two years and over 95%
of the workmen are recruited from in and around Nanjangud and adjoining villages.

3.3.1.Mission Statements

• To ensure the consumer remains the focal point of all our activities by offering him high value for
money.

• To pursue our goals in a just and ethical manner.



• To provide every opportunity to our business associates and employees to realise their potential to the
fullest extent.

• To blend modern technology with traditional values in our endeavour to be a world class, Indian
company globally.

3.3.2.Objectives

• To be India’s leading textile group and a world class entity.

• To continue and expand the leadership position in uniforms/ workday materials.

• To consolidate and expand in the household material sector.

• To reinforce and expand the position in shirting and prints.

• To enter made-ups and value added products.

• To expand exports to 20% of group activity.

• To enter retailing of apparel and soft goods country-wide in a big way.

• To become a global player in textiles.

3.3.3. Quality policy

We are committed to be a world class company by consistently designed and manufacturing
suiting to the highest standards and customer expectations.

We shall operate in a just and ethical manner providing opportunity to employees and associates
to realise their potential to the fullest extent.

We are committed to comply with ISO 9001 and for continual improvement of the quality
management system .



3.3.5.Products and services

Fabrics

Reid & Taylor manufactures a wide range of Worsted and Premium suitings including:

• All Wool Superfine
• Polywool Blends
• Wool Cashmere Blends
• Wool Linen & Wool Silk Polyester Blends
• Polyester Viscose Blends
• Polyester Viscose – worsted
• Value added Polyester Viscose blends
• Wrinkle resistant suitings
• ECOFRESH suitings

Apparel
In the ready to wear segment, Reid & Taylor has launched

• Suits
• Jackets
• Trousers
• Shirts
• T-Shirts
• golfing



3.3.7.SWOT Analysis

Strengths

• Outstanding brand equity.

• 30,000 strong retailer networks all over the country.

• Professional management with entrepreneurial outlook.

• Excellent track record in business administration.


• Broad market coverage.

• Good materials management systems.

• Human resource competencies.

• Appropriate organizational structure.

• Management support.

• Work union support.

• R&D skills.

• Technology used.

• 25 retail shops.

Weakness

• Depend on single supplier for some materials.

• High cost for procurement of wool.

• High cost for procurement of polyester.

Opportunities

• Expand core business(es).

• Widen product range.

• Expand into foreign markets.

• Seek fast market growth.

• Government support.



• Support from banks and financial institutions.

• Investors.

• Overcome barriers to entry.

• Enlarge corporate portfolio.

• Technical collaboration with Reid & Taylor Scotland.

Threats

• Increases in domestic competition.

• Increase in foreign competition.

• Changes in economic factors.

• Downturn in economy.

• Strong competition from Raymond.

Chapter 4 analysis

4.1. Stores procedure

Chart4.1. Chart showing Stores procedure

Material receiving


Supplier
Receiving stores
Inspection Rejection bay


If
?

Not Ok

Ok
Holding stores

STORES PROCEDURE

To ensure 100% uptime of all manufacturing activity as related to stores function.

4.1.1 MATERIALS RECEIVING



 Stores receive materials from various vendors through RPP/LR/RR/BANK/Representative collection
along with dc/invoice copies in duplicate.

 check for purchase order on dc/invoice

 Unpack the material, check for quantity, specification, correctness of the material and acknowledge.

 If found damaged/excess supplied/short supplied, generate discrepancy note and send a copy to
purchase department for information and further action.

 Prepared goods received note (GRN) and send it to the concerned department head for inspection.

 If quality accepted, take concerned head of Department signature and store the material in pre-
determined location.

 If rejected based on concerned H.O.D’s remark prepare rejection report and arrange to send the
material back to the supplier through non-returnable gate pass and inform purchase department and
accounts for further action.

 In case of materials unloaded at shop, stores put the tag “materials for inspection”/can have
demarcated physical area for materials under inspection. And same procedure may be followed for
regularization.

4.1.2 INSPECTION

 Receiving inspection checks the material with respect to purchase order for specification and quality.

 If found ok, accepted sticker will be put on the material, prepare final stores document. Stores lift the
material and storage will be made in predetermined area.

 If found not ok, a rejected sticker will be put on the material. Stores lift the material and keep it in
rejected stores.

 A copy of rejection report will be given to purchase for further action.

 Inspection report may be prepared for vendor rating analysis

4.1.3 PURCHASE ORDER

 Purchase department prepares purchase orders for the required materials and will be sent to the vendor.



 Procurement of material is against purchase order only.

 Purchase order should have all the details like

 Terms of purchase

 Mode of transport

 Modvat details – In case of excisable goods

 Delivery schedules

 Lead time

 Packaging and freight details

4.1.4 ISSUE PROCEDURE

 Receive indents/material request note from users

 Check for authorization, stock availability etc. ,

 Issue slips creation, take printout and issue the right material.

 File a copy of issue slip duly signed as acknowledgement.

4.1.5 STORAGE

 Codification of materials.

 Put identification tags on material.

 Allot a particular area for storage of items and update the location in the system for easy traceability.

 Separate stores should be made for “shelf life items”, paints, resin and hardeners, chemicals etc.,

 Shelf life items should be periodically checked for its validity.

 Electronic/Electro static devises should be stored in specific recommended ESD area only-can be
stored in electronic lab.

 Storage racks, storage shelves/bins should be properly identified.



 Ensure proper handling and storing of materials in a dust free area. Maintain good housekeeping.

4.1.6 OLD/DAMAGED PARTS ACCOUNTING

 Get old/unusable/damaged materials during process from users.

 Classify the materials as usable or not usable.

 Further classify the materials as PVC/rubber /metallic etc. ,

 If material can be rectified and reused, inform purchase to send the material for repair /follow up-
prepare RGP, have a track of it.

 If material cannot be used, call for tender from scrap vendors and arrange for auction or generate
scrap note for scraping the material.

 Take a care of excise related items while sending out of repair / scraping(duty reversal)

 Same procedure may be followed even for capital equipments.

4.1.7 PASSING

 Receive inspection report

 If material is ok, check for identification tag, accepted sticker and quantity and move the material to
holding stores.

 If material is rejected, check for rejected sticker, rejection report, and quantity. Put rejected tag giving
all the details like PO NO., date, quantity, and reason for rejection. Lift and store the material in
rejected stores.

 Purchase takes the responsibility of sending back the rejected material in coordination with stores for
preparation of RGP/NRGP etc.,

 Clear invoice/bill and pass it to accounts/ finance.

 Rejected materials can be replaced on one-one basis and can be regularised on the same invoice /bill.

 In case of excise duty related materials, excise duty gate pass should be handed over to the concerned
to avail the Modvat facility.



4.1.8 GATE PASSES

Returnable gate pass (RGP) and non returnable gate pass (NRGP) may be maintained as
applicable to send the material out of the company. Stores should have control over gate passes.

4.1.9 REPORTS

Stores must be able to generate all inventory-related reports as required by the management.
Stores should ensure availability of right material in right place as per stock ledger during inventory checking
by the statutory auditors.

4.2.STORES RECORDS

Delayed documentation of all the transactions is one of the major functions of the Materials
management Department. Any ignorance or negligence in this process would lead to dire consequences at the
later point of time wherein without the essential records, certain transactions that need verification cannot be
subject to the same. Thus, these stores records are valuable pieces of information that form the base for further
reference. Some of the stores records are as follows:

4.2.1 .BINCARD

This is a card, which is attached to each bin, rack, shelf, or other container for stores. A record
of all materials entering or leaving the bin and balance of materials in hand is kept in this card. The
storekeeper enters these cards and only the quantities are recorded. These should tally with the quantities of
materials as shown in the relevant account in the stores ledger. This will enable the storekeeper ascertain the
quantity of materials in stock and remind him to send requisition of fresh stock, when the minimum stock has
been reached. In some factories duplicate bin cards are being used. In such cases one card is attached to the
bin and the storekeeper on his table for ready reference keeps the duplicate. The inspectors check bin cards
from time to time and they put their initials and take down their discrepancies.

4.2.2.STORES LEDGER

It is a detailed record of the receipt and issue of material with respect to rate of item, issues,
transactions, opening and closing balance and value of all items kept in the store. A separate sheet or card is
maintained for each article. It contains the name, description, bin number etc. It records the receipts, issues,
and balance in hand of each and every article. At the time of physical verification, verifying officer, after
inspection of records gives his recommendations in remarks column.


4.2.3. MATERIAL ISSUE REQUISITION

An important rule, which should be strictly followed, does not allow any material to
pass from stores department into the works except upon the authority of written requisitions. These indents on
stores are demands upon the store the storekeeper signed by authorized persons, issued to the bearer, to be
charged to a particular job or department specified therein. Such indents are made out in triplicate from bound
books and are supplied to each department. As it is in triplicate, the original copy is sent to the cost
department for costing, duplicate retained by the storekeeper and the triplicate in the bound book by way of
indent or by way of permanent record.

4.2.4.MATERIAL RETURNED NOTE

Material issued for department use are sometimes not required and returned to
storekeeper. They must be properly recorder and their value may be duly entered in the store records and these
values may be credited to the accounts of the departments concern by the cost department. For this purpose
material returned notes are written out in triplicate. Two copies being sent to the storekeeper along with the
returned material. One of these is returned to the foreman with the storekeeper’s acknowledgement. The copy
retained by the storekeeper is entered by him on the bin cards and then passed to stores account and to be
priced and entered in the relative stores card.

4.2.5. GOODS RECEIVED NOTES (GRN)

To the existing goods received note, three additional columns for entering details about the
quantity entered, quantity received and quantity rejected has been provided for appendix. Another column is
provided for entering material codes. On receipt of the goods, physical verification of the goods is done in
presence of one person each from the security; stores, purchase department and the supplier. If found correct,
by comparing the consignment with that of the order placed, the GRN is prepared and the concerned
department is asked to check the quality of the items. If the items need to be tested on t he machine, the item
is taken to the department, along with the GRN and sent to the stores, along with the payment card. One copy
of the GRN is retained with the department. At this, the goods are taken in to the stock and the purchase order
is transferred from “order pending file” to the “orders completed file”.

4.2.6. GATE PASS

Returnable gate pass (RGP) and Non Returnable Gate Pass (NRGP) may be maintained
as applicable to send the material out of the company. Stores should have control over gate passes.



4.3. Study on sales and raw material consumption

Table 4.1. Table showing the raw material consumed and the sales for 5 years.

SL NO YEAR RAWMATERIAL SALES
1 2004-05 254.14 344.53
2 2005-06 640.71 889.73
3 2006-07 886.84 1229.54
4 2007-08 1112.32 1748.65
5 2008-09 1541.61 2260.36

Chart 4.2. Chart showing the sales and raw materials consumed for 5 years

Analysis

Study on raw material consumption and sales has be carried out from 2004 to 2009.

Intepretation


Percentage of raw materials on sales for 5 years are as follows

Year Percentage

2004-05 73.76

2005-06 72.01

2006-07 72.13

2007-08 63.61

2008-09 68.2

From this we can findout that the percentage of raw materials consumption increases in the
year 2006-07 and again in 2008-09. It shows that in these years cost has increased in the organization.

Table 4.2. Table showing the regression analysis taking two variables they are rawmaterials and
sales.

RAWMATERIAL dx=x- dy=Y-
SALES (x) (y) A(1229.54) dx2 A(886.84)
344.53 254.14 -885.01 783242.7001 -632.7
889.73 640.71 -339.81 115470.8361 -246.13
1229.54 886.84 0 0 0
1748.65 1112.32 519.11 269475.1921 225.48
2260.36 1541.61 1030.82 1062589.872 654.77

∑X=6472.81 ∑Y=4435.62 ∑dx=325.11 ∑dx2=2230778.6003 ∑dy=1.42

dy2 dxdy
400309.29 559945.827
60579.9769 83637.4353
0 0
50841.2304 117048.9228
428723.7529 674950.0114
2
∑dy =940454.2502 ∑dxdy=1435582.14



= 5(1435582.14)-(325.11)(1.42)
√5(2230778.6003)-(105696.5121) × √5(940454.2502)-(2.0164)

= 7177449.044
√5(2125082.0882)×√5(940452.2338)

= 7177449.044
√10625410.441 × √4702261.169

= 7177449.044
3259.6642 × 2168.4697

= 7177449.044
7068483.04987

= 1.0154
r = n∑dxdy-∑dx*∑dy
√n∑dx2-(∑dx)2 √n∑dy2(∑dy)2 Analysis

Regression analysis has been carried out taking sales and raw material consumption into consideration
for 5 years.

Interpretation

Regression analysis is a powerful statistical tool used to know the relationship between two variables
in any field. From this analysis regression of 1.0154 shows the positive relationship between sales and raw



materials. From this it shows that there is proper relationship between cost and income of the organization. It
shows that company consuming good proportion of raw materials every year.

4.4. Calculation of debtors and creditors turnover ratio.

Table 4.3. Table showing average debtors and sales for last 5years

SL NO YEAR Average debtors SALES
1 2004-05 391.14 344.53
2 2005-06 448.855 889.73
3 2006-07 549.765 1229.54
4 2007-08 705.05 1748.65
5 2008-09 1002.93 2260.36

Calculation of Debtors Turnover Ratio and Debt Holding Period

Debtors Turnover Ratio = Net sales
Average debtors

DTR For 2004-05 = 344.53
391.14
= 0.880835506 Times

DTR For 2005-06 = 889.73
448.855

= 1.98222143 Times

DTR For 2006-07 = 1229.54
549.765

= 2.23648286 Times

DTR For 2007-08 = 1748.65
705.05



= 2.480178711 Times

DTR For 2008-09 = 2260.36
1002.93

= 2.253756493 Times

Calculation of Debt Holding Period

Debt Holding Period = 360 Days
Debtors Turnover Ratio

DHP For 2004-05 = 360 Days
0.880835506

= 414.3792993 days

DHP For 2005-06 = 360 Days
1.98222143

= 184.1368449 Days

DHP For 2006-07 = 360 Days
2.23648286

= 163.2026816 Days

DHP For 2007-08 = 360 Days
2.480178711

= 147.1668144 Days

DHP For 2008-09 = 360 Days
2.253756493

= 161.9518351 Days

Analysis



Debtors turnover ratio and debt holding period has been calculated for 5 years from 2004-05 to
2008-09.

Interpretation

Debtors turnover ratios is very low in the company. It shows the inefficient management of debtors.
Debt holding period is high in the years and it indicates on an average that credit sales are pending uncollected
by the concern.

Table 4.4. Table showing average creditors and purchases for 5years:

SL NO YEAR Purchases Average creditors
1 2004-05 254.14 103.995
2 2005-06 640.71 108.045
3 2006-07 886.84 127.515
4 2007-08 1112.32 147.815
5 2008-09 1541.61 191.17

Calculation of Creditors Turnover Ration And Credit Payment Period

Creditors Turnover Ratio = Net Purchases
Average creditors

CTR For 2004-05 = 254.14
103.995

= 2.443771335 Times



CTR For 2005-06 = 640.71
108.045

= 5.930029155 Times

CTR For 2006-07 = 886.84
127.515

= 6.954789633 Times

CTR For 2007-08 = 1112.32
147.815

= 7.525082028 Times

CTR For 2008-09 = 1541.61
191.17

= 8.064079092 Times

Calculation of Credit Payment Period

Credit Payment Period = 360 Days
Creditors Turnover Ratio

CPP For 2004-05 = 360 Days
2.443771335

= 149.3593098 Days

CPP For 2005-06 = 360 Days
5.930029155

= 61.55113078 Days

CPP For 2006-07 = 360 Days
6.954789633

= 52.48181746 Days



CPP For 2007-08 = 360 Days
7.525082028

= 48.50445465 Days

CPP For 2008-09 = 360 Days
8.064079092

= 45.26245289 Days

Analysis

Creditors turnover ratio and credit payment period has been calculated for 5 years from 2004-05 to
2008-09.

Interpretation

From the study we can say that company’s creditor’s turnover ratio is neither low nor high. It taking
advantages of credit and its average credit payment period is 45 to 50 days.

4.5. Calculation of EOQ, Safety Stock and Reorder Point

1. Material - Foron Yellow Brown RD-2RSI polyester dye

Annual requirement of Foron Yellow Brown RD-2RSI polyester dye is 525.92 kgs, at
the rate of RS.363.29. Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days.

EOQ = 2AO = √ 2×525.92×125 = 43 units
c 363.29×20 %

Safety stock = Average consumption per day × Lead Time

= 1.461 × 10 = 14.61 Kgs

Reorder level = Average consumption during lead time + Safety stock

= 14.61 + 14.61 = 29.22 Kgs

Maximum level = EOQ + Safety stock

= 43 + 14.6 = 57.6 Kgs



Chart 4.3. Chart showing the different levels of inventory, Material - Foron Yellow
Brown RD-2RSI polyester dye

Maximum level 57.6

Reorder point 29.2

EOQ
Safety Stock 14.6

5 10 15 20 25 30
Days

2.Material - Foron Navy Blue RD-GFLI Polyester dye

Annual requirement of Foron NavyRD-GFLI polyester dye is 241.72 kgs, at the rate of RS. 356.38.
Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days.

EOQ = 2AO = √ 2 × 241.72 ×125 = 29 Kgs
c 356.38×20%

Safety Stock = Average consumption per day × Lead Time

= 0.7 × 10 = 7 Kgs


= 7+7 = 14 Kgs




= 29 +7 = 36 Kgs

Chart4.4. Chart showing the different levels of inventory, Material - Foron Navy Blue RD-GFLI
Polyester dye

Maximum level 36

Reorder point 14

EOQ
Safety Stock 7

5 10 15 20 25 30

Days
3. Material - Foron Scarlet RD-RLSI Polyester dye

Annual requirement of Foron Scarlet RD-RLSI polyester dye is 127.12 kgs, at the rate of RS.
341.54. Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days.

EOQ = 2AO = √ 2 × 127.12 ×125 = 22 Kgs
c 341.54 ×20%


= 0.35 × 10 = 3.5 Kgs



= 3.5 + 3.5 = 7 Kgs


= 22 +3.5 = 25.5 Kgs

Chart 4.5. Chart showing the different levels of inventory, Material - Foron Scarlet RD-RLSI
Polyester dye

Maximum level 25.5

Reorder point 7
EOQ

Safety Stock 3.5

5 10 15 20 25 30
Days

4. Material - Foron Blue RD-GLF Polyester dye

Annual requirement of Foron Blue RD-GLF Polyester dye is 60.68 kgs, at the rate of RS.
1435.34.Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days

EOQ = 2AO = √ 2 × 60.68 ×125 = 7 Kgs
c 1435.34 ×20%


= 0.167 × 10 = 1.67 Kgs




= 1.67 + 1.67 = 3.34 Kgs


= 7 +1.67 = 8.67 Kgs

Chart4.6. Chart showing the different levels of inventory, Material - Foron Blue RD-GLF Polyester
dye

Maximum level 8.67

Reorder point 3.34
EOQ

Safety Stock 1.67

5 10 15 20 25 30
Days

5. Material - Foron Yellow RD-4GRLI Polyester dye

Annual requirement of Foron Yellow RD-4GLFI Polyester dye is 76.76 kgs, at the rate of RS.
742.45. Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days.

EOQ = 2AO = √ 2 × 76.76 ×125 = 11 Kg
c 742.45 ×20%




= 0.213 × 10 = 2.13 Kgs


= 2.13 + 2.13 = 4.26 Kgs


= 11 +2.13 = 13.13 Kgs

Chart 4.7. Chart showing the different levels of inventory, Material - Foron Yellow RD-4GRLI
Polyester dye

Maximum level 13.13

Reorder point 4.26
EOQ

Safety Stock 2.13

5 10 15 20 25 30
Days

6. Material - Foron DK Blue RD -2REN Polyester dye

Annual requirement of Foron DK Blue RD-2REN Polyester dye is 220 kgs, at the rate of RS.
1223.55. Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days


EOQ = 2AO = √ 2 × 220×125 = 15 Kgs
c 1223.55 ×20%


= 0.61 × 10 = 6.11 Kgs


= 6.11 + 6.11 =12.22 Kgs


= 15 +6.11 = 21.11 Kgs

Chart 4.8. Chart showing the different levels of inventory, Material - Foron DK Blue RD -2REN
Polyester dye

Maximum level 21.11

Reorder point 12.22
EOQ

Safety Stock 6.11

5 10 15 20 25 30
Days

7. Material - Foron Rubine S2GFLI Polyester dye


Annual requirement of Foron Rubine S2GFLI polyester dye is 75.52 kgs, at the rate of RS 267.24.
Acquisition costs are Rs 125 and carrying cost is 20% of cost. And lead time is 10 days

EOQ = 2AO = √ 2 × 75.52×125 = 19
c 267.24×20%


= 0.209 × 10 = 2.09 Kgs


= 2.09 + 2.09 = 4.18 Kgs


= 19 + 2.09= 21.09 Kgs

Chart 4.9. Chart showing the different levels of inventory, Material - - Foron Rubine S2GFLI
Polyester dye

Maximum level 21.09

Reorder point 4.18
EOQ

Safety Stock 2.09

5 10 15 20 25 30


Study on inventory management conducted at reid&taylor(india)ltd

Study on inventory management conducted at reid&taylor(india)ltd

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