Final Project on Inventory Management in Johnson & Johnson
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Transcript of Final Project on Inventory Management in Johnson & Johnson
A PROJECT REPORT
ON
INVENTORY MANAGEMENT SYSTEM
A STUDY OF JOHNSON & JOHNSON LTD.
Submitted By:
Pawan Thakar
Master of Management (Batch 2009-11)
UNDER THE GUIDANCE OF:Dr. Bimal Anjum, H.O.D.Business
Administration.
RIMT-IET, MANDI GOBINDGARH
ACKNOWLEDGEMENT
I have prepared this study paper for the “Inventory
Management System – A Study of Johnson & Johnson Ltd”. I
have derived the contents and approach of this study paper
through discussions with company executives and internet as well
as with the help of various Books, Magazines and Newspapers
etc.
I would like to give my sincere thanks to a host of Company
Executive, friends and the teachers who, through their guidance,
enthusiasm and counseling helped me enormously as I think there
will be always need for improvement. Apart from this, I hope this
study would stimulate the need of thinking and discussion on the
topics like this one.
Contents PART- I
*Objective of the Study
*Introduction of Company
* Company Profile
* History
* Board of Directors
* Awards
* Products
* Guiding Principles of Company
* Structure of the Company
* Research Methodology
* Introduction of the Topic
PART- II
* Data Collection
* Financial Statements
* Data Analysis and Interpretation
* Problems and Suggestions
* Conclusions
* Bibliography
OBJECTIVE OF THE STUDY
Inventories constitute the principal item in the working capital
of the majority of trading and industrial companies. In
inventory, we include raw materials, finished goods, work in
progress, supplies and other accessories. To maintain the
continuity in the operations of business enterprise, a minimum
stock of inventory required.
However, the physical control of inventory is the operating
responsibility of stores superintendent and financial personnel
have nothing to do about it but the financial control of these
inventories in all lines of activity in which they comprise a
substantial part of the current assets is a frequent problem in
the management of working capital. Management of inventory
is designed to regulate the volume of investment in goods on
hand, the types of goods carried in stock to meet the needs of
production and sales while at the same time, the investment in
them is to kept at a reasonable level.
Company ProfileJohnson & Johnson and its subsidiaries have approximately 115,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. Johnson &Johnson is a holding company, which has more than 250 operating companies conducting business in virtually all countries of the world. Johnson & Johnson’s primary focus has been on products related to human health and wellbeing.Johnson & Johnson was incorporated in the State of New Jersey in 1887.The Company’s structure is based on the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments. Each subsidiary within the business segments is, with some exceptions, managed by citizens of the country where it is located. . Johnson & Johnson is known for its corporate reputation, consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's most respected company by Barron's Magazine, and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U.S. State Department for its funding of international education programs. Johnson & Johnson is known for its corporate reputation, consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's most respected company by Barron's Magazine, and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U.S. State Department for its funding of international education programs
The corporation's headquarters is located in New Brunswick, New Jersey, United States. Its consumer division is located in Skillman, New Jersey. The corporation includes some 250 subsidiary companies with operations in over 57 countries. Its products are sold in over 175 countries. J&J had worldwide pharmaceutical sales of $24.6 billion for the full-year 2008.
Segments of BusinessJohnson & Johnson’s operating companies are organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics.
ConsumerThe Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products, and wellness and prevention platforms. The Baby Care franchise includes the JOHNSON’S Baby line of products. Major brands in the Skin Care franchise include the AVEENO; CLEAN & CLEAR; JOHNSON’S Adult; NEUTROGENA; RoC; LUBRIDERM; Dabao; and Vendôme product lines. The Oral Care franchise includes the LISTERINE and REACH oral care lines of products. The Wound Care franchise includes BAND-AID brand adhesive bandages and PURELL instant hand sanitizer products. Major brands in the Women’s Health franchise are the CAREFREE Pantiliners; STAYFREE sanitary protection products; and Vania Expansion products. The nutritional and over-the-counter lines include SPLENDA , No Calorie Sweetener; the broad family of TYLENOL acetaminophen products; SUDAFED cold, flu and allergy products; ZYRTEC allergy products; MOTRIN IB ibuprofen products; and PEPCID AC Acid Controller from Johnson & Johnson • Merck Consumer Pharmaceuticals Co. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world.
PharmaceuticalThe Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. Key products in the Pharmaceutical segment include: REMICADE (infliximab), a biologic approved for the treatment of a number of immune mediated inflammatory diseases; PROCRIT (Epoetin
Alfa, sold outside the U.S. as EPREX), a biotechnology-derived product that stimulates red blood cell production;LEVAQUIN (levofloxacin) in the anti-infective field; RISPERDAL CONSTA (risperidone), a long-acting inject able for the treatment of schizophrenia; CONCERTA (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder; ACIPHEX /PARIET , a proton pump inhibitor co-marketed with EisaiInc.; DURAGESIC /Fentanyl Transdermal (fentanyl transdermal system, sold outside the U.S. as DUROGESIC ), a treatment for chronic pain that offers a novel delivery system; VELCADE (bortezomib), a product for the treatment for multiple myeloma; PREZISTA (darunavir) for the treatment of HIV/AIDS patients; and INVEGA (paliperidone), a once-daily atypical antipsychotic.
Medical Devices and DiagnosticsThe Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Cordis’ circulatory disease management products;DePuy’s orthopaedic joint reconstruction, spinal care and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products; LifeScan’sblood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products; and Vistakon’s disposable contact lenses. Distribution to these health care professional markets is done both directly and through surgical supply and other dealers.
Geographic AreasThe international business of Johnson & Johnson is conducted by subsidiaries located in 59 countries outside the United States, which are selling products in virtually all countries throughout the world. The products made and sold in the international business include many of those described above under “— Segments of Business — Consumer,”“— Pharmaceutical” and “— Medical Devices and Diagnostics.” However, the principal markets, products and methods of distribution in the international business vary with the country and the culture. The products sold in international business include not only those developed in the United States, but also those developed by subsidiaries abroad.
Investments and activities in some countries outside the United States are subject to higher risks than comparable U.S. activities because the investment and commercial climate is influenced by restrictive economic policies and political uncertainties.
Raw MaterialsRaw materials essential to Johnson & Johnson’s operating companies’ businesses are generally readily available from multiple sources.
Patents and TrademarksJohnson & Johnson and its subsidiaries have made a practice of obtaining patent rotection on their products and processes where possible. They own or are licensed under a number of patents relating to their products and manufacturing processes, which in the aggregate are believed to be of material importance to Johnson & Johnson in the operation of its businesses. Sales of the Company’s largest product, REMICADE ® (infliximab), accounted for approximately 7% of Johnson & Johnson’s total revenues for fiscal 2009. Accordingly, the patents related to this product are believed to be material to Johnson & Johnson. During 2007 through 2009, RISPERDAL ® (risperidone) oral and TOPAMAX ® (topiramate) lost basic patent protection and market exclusivity and became subject to generic competition in the United States and international markets. RISPERDAL ® oral sales declined by 57.7% and 37.8% in 2009 and 2008, respectively. TOPAMAX ® lost market exclusivity in March 2009 and sales declined by 57.9% as compared to 2008. The next significant patent scheduled to expire on December 20, 2010 is for LEVAQUIN ® (levofloxacin), which accounted for 2.5% of the Company’s 2009 sales. A pediatric extension for LEVAQUIN ® was granted by the U.S. Food and DrugAdministration (“FDA”), which extends market exclusivity in the United States through June 20, 2011. Johnson & Johnson’s operating companies have made a practice of selling their products under trademarks and of obtaining protection for these trademarks by all available means. These trademarks are protected by registration in the United States and other countries where such products are marketed. Johnson & Johnson considers these trademarks in the aggregate to be of material importance in the operation of its businesses.
CompetitionIn all of their product lines, Johnson & Johnson’s operating companies compete with companies both large and small, and both local and global, located throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies
involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to Johnson & Johnson’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and in maintaining sales forces. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion.
Research and DevelopmentResearch activities represent a significant part of Johnson & Johnson’s subsidiaries’ businesses. Major research facilities are located not only in the United States, but also in Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore and the United Kingdom. The costs of worldwide Company sponsored research activities relating to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients (excluding purchased in-process research and development charges for fiscal 2008 and 2007), amounted to $7.0 billion, $7.6 billion and $7.7 billion for fiscal years 2009, 2008 and 2007, respectively. These costs are harged directly to expense, or directly against income, in the year in which incurred.
EnvironmentJohnson & Johnson’s operating companies are subject to a variety of U.S. and international environmental protection measures. Johnson & Johnson believes that its operations comply in all material respects with applicable environmental laws and regulations. Johnson & Johnson’s compliance with these requirements did not during the past year, and is not expected to, have a material effect upon its capital expenditures, cash flows, earnings or competitive position.
RegulationMost of Johnson & Johnson’s businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward increasingly stringent regulation. In the United States, the drug, device, diagnostics and cosmetic industries have long been subject to regulation by various federal and state agencies, primarily as to product safety, efficacy, manufacturing,
advertising, labeling and safety reporting. The exercise of broad regulatory powers by the FDA continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends are also evident in major markets outside of the United States. The costs of human health care have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world. In the United States, attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend, use or purchase particular medical devices. Payers have become a more potent force in the market place and increased attention is being paid to drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of health care. The regulatory agencies under whose purview Johnson & Johnson’s operating companies operate have administrative powers that may subject those companies to such actions as product withdrawals, recalls, seizure of products and other civil and criminal sanctions. In some cases, Johnson & Johnson’s operating companies may deem it advisable to initiate product recalls. In addition, business practices in the health care industry have come under increased scrutiny, particularly in the United States, by government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.
PROPERTIESJohnson & Johnson and its subsidiaries operate 143 manufacturing facilities occupying approximately 21.4 million square feet of floor space. The manufacturing facilities are used by the industry segments of Johnson & Johnson’s business approximately as follows:
Available Information Square Feet (in Segment thousands)Consumer 6,825Pharmaceutical 6,369Medical Devices and Diagnostics 8,251
Worldwide Total 21,445
Within the United States, 7 facilities are used by the Consumer segment, 12 by the Pharmaceutical segment and 37 by the Medical Devices and Diagnostics segment. Johnson & Johnson’s manufacturing operations outside the United States are often conducted in facilities that serve more than one business segment. The locations of the manufacturing facilities by major geographic areas of the world are as follows:
Geographic Area Number of Facilities (Square Feet in thousands)United States 56 7,489Europe 38 7,336Western Hemisphere, excluding U.S. 16 3,372Africa, Asia and Pacific 33 3,248Worldwide Total 143 21,445
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of Johnson & Johnson as of February 8, 2010, each of whom, unless otherwise indicated below, has been an employee of the Company or its affiliates and held the position indicated during the past five years. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of the Board of Directors, the executive officers are elected by the
Board to hold office for one year and until their respective successors are elected and qualified, or until earlier resignation or removal.Information with regard to the directors of the Company, including those of the following executive officers who are directors, is incorporated herein by reference to the material captioned “Election of Directors” in the Proxy Statement.
Name & PositionDominic J. CarusoMember, Executive Committee; Vice President, Finance; ChiefFinancial Officer (a)
Russell C. DeyoMember, Executive Committee; Vice President, HumanResources and General Counsel (b)Colleen A. Goggins
Member, Executive Committee; Worldwide Chairman,Consumer Group(c)
Alex GorskyMember, Executive Committee; Worldwide Chairman, MedicalDevices and Diagnostics Group (d)
Sherilyn S. McCoyMember, Executive Committee; Worldwide Chairman,Pharmaceuticals Group (e)
William C. WeldonChairman, Board of Directors; Chairman, ExecutiveCommittee; Chief Executive Officer
HistoryRobert Wood Johnson, inspired by a speech by antisepsis advocate
Joseph Lister, joined brothers James Wood Johnson and Edward Mead Johnson to create a line of ready-to-use surgical dressings in 1885. The company produced its first products in 1886 and incorporated in 1887.
Robert Wood Johnson served as the first president of the company. He worked to improve sanitation practices in the nineteenth century, and lent his name to a hospital in New Brunswick, New Jersey. Upon his death in
1910, he was succeeded in the presidency by his brother James Wood Johnson until 1932, and then by his son, Robert Wood Johnson II.
RWJ's granddaughter, Mary Lea Johnson Richards, was the first baby to appear on a J&J baby powder label. His great-grandson, Jamie Johnson, made a documentary called Born Rich about the experience of growing up as the heir to one of the world's greatest fortunes.
Since the 1900s, the company has pursued steady diversification. It added consumer products in the 1920s and created a separate division for surgical products in 1941 which became Ethicon. It expanded into pharmaceuticals with the purchase of McNeil Laboratories, Inc., Cilag, and Janssen Pharmaceutical, and into women's sanitary products and toiletries in the 1970s and 1980s. In recent years, Johnson & Johnson has expanded into such diverse areas as biopharmaceuticals, orthopedic devices, and Internet publishing. Recently, Johnson & Johnson has purchased Pfizer's Consumer Healthcare department. The transition from Pfizer to Johnson and Johnson was completed December 18, 2006.
Johnson & Johnson has been consistently named one of the 100 Best Companies for Working Mothers by Working Mother.
Along with Gatorade, Johnson & Johnson is one of the founding sponsors of the National Athletic Trainers' Association.
About Ethicon (Brand Name)Our company was founded 80 years ago on the pillars of research,
vision, innovation, and a commitment to improving the quality of patients’ lives. The first group of Ethicon scientists and researchers, who thought about healing in a new way - and in doing so, pioneered our sutures to
enhance the work of surgeons and the lives of patients - recognized the opportunity for limitless innovation.
Almost a century later, Ethicon produces much more than sutures. We have continuously introduced innovations in all areas where we focus our expertise including: wound closure; general surgery; biosurgery; women’s health, and aesthetic medicine. While a lot has changed in healthcare, one thing has not: Ethicon remains committed to developing the best surgical solutions to help doctors heal both the wounds you can see and the ones you can’t. Innovations that Restore Bodies...and Lives. How do we do it? How do we stay on the cutting edge of science? By way of our greatest asset: the talented, highly educated, experienced group of professionals who work at ETHICON - 8,500 gifted professionals around the world come together every day to advance, innovate, and respond to their customers’ needs. Our commitment to fulfilling the needs of surgeons and their patients, of transforming surgery, of helping patients heal faster and more safely is never ending. And so our work must be, too. Ethicon has a legacy all its own. But we’re part of a broader heritage, too. As a member of the Johnson & Johnson Family of Companies, we’re guided by Our Credo: company values that empower all of our employees to consider first the needs of our customers and patients we serve and to improve the health, education, and quality of life in the communities where we work and live.
Caring for the world, one person at a time… inspires and unites the people of Johnson & Johnson. We embrace research and science - bringing innovative ideas, products and services to advance the health and well-being of people. Our 119,400 employees at more than 250 Johnson & Johnson companies work with partners in healthcare to touch the lives of over a billion people every day, throughout the world.
Suture Manufacturing Plants in India
Baddi
Aurangabad
Growth & Expansion Of
Johnson & JohnsonSince our founding in 1886, we have grown to meet the health care needs of people worldwide. Through mergers, acquisitions and the formation of new companies, we have become the world’s largest and most broadly based health care company. Here are some highlights of our historical growth.
1886 – 1926: Johnson & Johnson Founded With Surgical and Wound Care Products
In 1886, our founders – Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson – started a small medical products company in New Brunswick, New Jersey. They made the first-ever commercial sterile surgical dressings, which helped save the lives of patients. We introduced dental floss, the first Aid kits, sanitary napkins for
women, sterile sutures, JOHNSON’S Baby Powder, and BAND-AID Brand Adhesive Bandages.
Our international expansion began with Canada in 1919 and England in 1924.
Our disaster relief program began in 1906 when, within hours of the San Francisco earthquake and fire, we sent trainloads of our products to the city to help survivors.
1926 – 1946: Growth of Product Lines and Expansion Overseas Help Johnson & Johnson Go Public
In 1943 our chairman Robert Wood Johnson wrote Our Credo, outlining our responsibilities to doctors, nurses, patients, consumers, employees, and the community. During this period we also continued our overseas growth and began to broaden our efforts in pharmaceuticals and medical products. We expanded into Mexico, South Africa, Australia, France,
Belgium, Ireland, Switzerland, Argentina, and Brazil.
We introduced MODESS sanitary napkins and JOHNSON’S Baby Oil and Baby Lotion. We also launched the first U.S. prescription birth control product, ORTHO GYNOL Gel, in 1931.
In 1944 we became a publicly traded company.
1946 – 1966: Continued Product Growth and Our Credo Position Johnson & Johnson as Responsible Industry Leader.
We steadily continued our growth during these decades.
We expanded to Zimbabwe, Austria, Sweden, the Philippines, Colombia, Puerto Rico, the Netherlands, India, Scotland, Pakistan, Zambia, Venezuela, Italy, Malaysia and Portugal.
New companies formed or acquired included: ETHICON, Inc., Personal Products Company (products
related to women’s health); McNeil Laboratories, Inc. (bringing us TYLENOL
acetaminophen); European pharmaceutical companies Cilag Chemie, A.G. and
Janssen Pharmaceutical, and Codman & Shurtleff, Inc. (medical and surgical instruments).
In 1963 Ortho Pharmaceutical began marketing its first birth control pill, ORTHO-NOVUM 10 mg.
1966 – 1986: Medical Advances Create Groundbreaking Products
Our operating companies pioneered several important medical advances during this period. The acquisition of Frontier Contact Lenses would grow into our vision care business, the pioneer in disposable contact lenses. In 1985 we expanded to China. We introduced a wide range of groundbreaking products during these decades including:
RhoGAM a life saving treatment for hemolytic disease in newborns.
HALDOL (haloperidol), the gold standard for treating schizophrenia for over 25 years.
MONISTAT (miconazole nitrate) Cream, a milestone product for women’s health.
VICRYL Synthetic absorbable sutures, an important new tool for surgeons.
The PROXIMATE Linear Stapler, a new way to close surgical incisions without sutures.
ORTHOCLONE OKT3, the first therapeutic monoclonal antibody to treat the rejection of transplanted organs.
1986 – 2008: Industry Leadership Enhanced by Acquisitions and Internal Development
From the 1980s to the present, we continue to grow through acquisitions and internally developed businesses that give us leadership positions in a number of areas. We acquired Life Scan, Inc. (blood glucose monitors for
diabetics), Neutrogena Corporation, and skin care brands such as CLEAN & CLEAR, RoC and AVEENO.
The acquisition of DePuy, Inc. made us a world leader in orthopedics.
We formed Ortho Biotech Products, LP (a biotechnology pioneer) and Ethicon Endo-Surgery, Inc. (minimally invasive surgery) out of internal businesses.
We merged with Centocor, Inc. which brought us REMICADE (infliximab).
Through our operating companies, we introduced the first mass market disposable contact lenses, the first coronary stent and the first drug eluting stent.
Prescription medications we introduced during this period include:
PROCRIT/EPREX (Epoetin Alfa) RISPERDAL (risperidone) RAZADYNE (galantamine hydro bromide) PREZISTA (darunavir) INVEGA (paliperidone) Extended Release Tablets INTELENCE (etravirine)
Looking to the Future
Johnson & Johnson is dedicated to advancing the health and well-being of people around the world. Our people come to work each day inspired by their personal knowledge that their caring transforms people's lives. Our whole history has been based on their passion for making a difference in this world and we aspire, in the years to come, to take human health and well-being to new levels. We are arguably the best-positioned company to do this because of our breadth, financial strength and collaborative nature.
STRUCTRE OF THE COMPANY
Johnson & Johnson Ltd. act upon the rules & regulations of the
Companies Act, 1948. The company has well defined
structure .It have the following departments:
1. HR/ Personnel department
2. Accounts departments
3. Purchase departments
4. Store department
5. Quality Assurance & Quality Control
6. IT department
7. R&D Department
8. Sales & Excise department
RESEARCH METHODOGY
Research methodology is the way to systematically solve
the research problem. Objective of research study is Analysis of
inventory of Johnson & Johnson Ltd. Analyzing of inventory, we
determining following inventories-1. Raw materials inventory.
2. Work in progress inventory.
3. Finished goods inventory &
4. Supplies inventory.
In this section of inventories, we should analyze the annual
investment in inventories, Valuation of inventory after closing
balance of items in inventory. In this manner, we calculate
reorder point, safety stock levels, minimum & maximum levels
of inventory.
Working hypothesis of the objective is that inventories are the
stock piles of goods .The all organization on their inventories.
J&J invests about 60%of total assets inventory should be
analyzed their records.
The analysis of inventory according to their data available in
the company. The data collection of inventory for analysis by the
direct store department. We should record primary and
secondary data by the helps of assistants ledger books M R N
etc. We went to the all inventories as raw material, work in
progress inventory, finished goods inventory by the proper
observation of data’s of the company.
INTRODUCTION OF THE TOPIC
INTRODUCTION:
Inventories constitute the most significant part of current
assets of a large majority of companies in India. On an
average, inventories are approximately 60% of current assets
in public limited companies in India. Because of the large
size of inventories maintained by firms, a considerable
amount of feuds is required to be committed to them. It is
therefore, absolutely imperative to ménage inventories
efficiently and efficiently in order to avoid unnecessary
investment. A firm neglecting the management of inventories
will be jeopardizing its long run profitability and may fail
ultimately. It is possible for fore a company to reduce its
levels of inventories to a considerable degree e.g. 10 to 20
percent, without any adverse effect on production and sales,
by using simple inventory planning and control techniques.
The reduction in excessive inventory carries a favorable
impact on a company’s profitability.
MEANING OF INVENTORY:-
Inventory is the physical stoke of goods maintained in an
organization for its smooth sunning. In accounting language it
may mean stock of finished goods only. In a manufacturing
concern, it may include raw materials, work-in-progress and
stores etc. In the form of materials or supplies to be consumed in
the production process or in the rendering of services. In brief,
Inventory is unconsumed or unsold goods purchased or
manufactured.
NATURE OF INVENTORIES:-
Inventories are stock of the
product a company is manufacturing for sale and components
that make up the product. The various forms in which inventory
exist in a manufacturing company are raw materials, work in
progress and finished goods.
RAW MATERIALS:-
Raw materials are those inputs that are converted
into finished product though the manufacturing process. Raw
materials inventories are those units which have been purchased
and stored for future productions.
WORK IN PROGRESS:-
These inventories are semi manufactured products.
They represent products that need more work before they
become finished products for sales.
FINISHED GOODS:-
Finished goods inventories are those completely
manufactured products which are ready for sale. Stock of raw
materials and work in progress facilitate production. While stock
of finished goods is required for smooth marketing operation.
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 levels of all three kinds of inventories, while a
retail or wholesale firm will have a very high and no raw material
and work in progress 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 turn over. Firms also maintain a fourth kind of
inventory, supplies or stores and spares.
SUPPLIES:
It includes 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.
MANAGEMENT OF INVENTORYInventories constitute the principal item in the working capital of the
majority of trading and industrial companies. In inventory, we include raw
materials, finished goods, work-in-progress, supplies and other accessories.
To maintain the continuity in the operations of business enterprise, a
minimum stock of inventory required. However, the physical control of
inventory is the operating responsibility of stores superintendent and
financial personnel have nothing to do about it but the financial control of
these inventories in all lines of activity in which they comprise a substantial
part of the current assets is a frequent problem in the management of
working capital. Management of inventory is designed to regulate the volume
of investment in goods on hand, the types of goods carried in stock to meet
the needs of production, and sales while at the same time, the investment in
them is to be kept at a reasonable level.
CONCEPT OF INVENTORY MANAGEMENT
The term inventory management is used in two ways- unit control and value
control. Production and purchase officials use this word in term unit control
whereas in accounting this word is used in term of value control. As
investment in inventory represents in many cases, one of the largest asset
items of business enterprises particularly those engaged in manufacturing,
wholesale trade and retail trade. Sometimes the cost of material used in
production surpasses the wages and production overheads. Hence, the proper
management and control of capital invested in the inventory should be the
prime responsibility of accounting department because resources invested in
inventory are not earning a return for the company. Rather, on the other
hand, they are costing the firm money both in terms of capital costs
being incurred and loss of opportunity income that is being
foregone.
OBJECTIVES OF INVENTORY
MANAGEMENT
The basic managerial objectives of inventory control are two-
fold; first, the avoidance over-investment or under-investment
in inventories; and second, to provide the right quantity of
standard raw material to the production department at the
right time. In brief, the objectives of inventory control may be
summarized as follows:
A. Operating Objectives:
(1) Ensuring Availability of Materials: There should be a
continuous availability of all types of raw materials in the
factory so that the production may not be help up wants of any
material. A minimum quantity of each material should be held
in store to permit production to move on schedule.
(2) Avoidance of Abnormal Wastage: There should be
minimum possible wastage of materials while these are being
stored in the godowns or used in the factory by the workers.
Wastage should be allowed up to a certain level known as
normal wastage. To avoid any abnormal wastage, strict control
over the inventory should be exercised. Leakage, theft,
embezzlements of raw material and spoilage of material due to
rust, bust should be avoided.
(3) Promotion of Manufacturing Efficiency: If the right type
of raw material is available to the manufacturing departments
at the right time, their manufacturing efficiency is also
increased. Their motivation level rises and morale is improved.
(4) Avoidance of Out of Stock Danger: Information about
availability of materials should be made continuously available
to the management so that they can do planning for
procurement of raw material. It maintains the inventories at
the optimum level keeping in view the operational
requirements. It also avoids the out of stock danger.
(5) Better Service to Customers: Sufficient stock of finished
goods must be maintained to match reasonable demand of the
customers for prompt execution of their orders.
(6)Highlighting slow moving and obsolete items of
materials.
(7) Designing poorer organization for inventory
management: Clear cut accountability should be fixed at
various levels of organization.
B. Financial Objectives:
(1) Economy in purchasing: A proper inventory control
brings certain advantages and economies in purchasing also.
Every attempt has to make to effect economy in purchasing
through quantity and taking advantage to favorable markets.
(2) Reasonable Price: While purchasing materials, it is to be
seen that right quality of material is purchased at reasonably
low price. Quality is not to be sacrificed at the cost of lower
price. The material purchased should be of the quality alone
which is needed.
(3) Optimum Investing and Efficient Use of capital: The
basic aim of inventory control from the financial point of view is
the optimum level of investment in inventories. There should be
no excessive investment in stock, etc. Investment in inventories
must not tie up funds that could be used in other activities. The
determination of maximum and minimum level of stock attempt
in this direction.
TYPES OF INVENTORY
1. Movement Inventories : - Movement inventories are also called
transit or pipeline inventories. Their existence owes to the fact that
transportation time is involved in transferring substantial amount of
resources.
2. Buffer inventories: -In Buffer inventories are held to protect against
the uncertainties of demand and supply. An organization generally knows
the average demand for various items that it needs. Prod.deptt. issue store
inspect receive supplier
Supplies
Demand
Inventory in
Hand place
Orders
Purchase
dep’t.
Net order issue receive tender
Quantity tenders quotation evaluations
Inventory cycle
3. Anticipation Inventories. Anticipation inventories are held for the
reason that future demand for the product is anticipated. Production of
specialized times like crackers well before dewily, umbrellas and raincoats
before taints set in, fans while summers are approaching; or the piling up
of inventory stocks when a strike is on the anvil, are all examples of
anticipation inventories.
CONTROL OF MATERIALS:
Rigid control over materials are necessary not only to guard against theft,
but also to minimize waste and misuse from causes such as excessive
inventories, over issue, deterioration, spoilage, and obsolescence. There
are certain prerequisites to an effective control system for materials:
1. Materials of the desired quantity will be available when needed;
2. Materials will be purchased only when a need exists and in economical
qualities;
3. Purchases of materials will be made at most favorable prices;
4. Vouchers for the payments of materials purchased will be approved only
if the materials have been received in good condition;
5. Materials will be protected against loss by proper physical control;
6. Issue of materials will be properly authorized and accounted for; and
7. All materials, at all times, will be charged, as the responsibility of some
individual.
The control of materials, as an element of cost of production, is illustrated
with reference to the purchase and issues procedures, inventory systems,
and inventory control techniques.
IMPORTANCE OF INVENTORY
CONTROL:
The importance or necessity of inventory control is well
explained in the terms of the objects of inventory control, which
are obtained through it. A proper inventory control lowers
down the cost of production and improves profitability of
enterprise.
ADVANTAGES OF INVENTORY CONTROL:
(1) Reduction in investment in inventory.
(2) Proper and efficient use of raw materials.
(3) No bottleneck in production.
(4) Improvement in production and sales.
(5) Efficient and optimum use of physical as well as financial
resources.
(6) Ordering cost can be reduced if a firm places a few large
orders in place of numerous small orders.
(7) Maintenance of adequate inventories reduces the set-up cost
associated with each production run.
Risk and cost Associated with
Inventories:Holding of Inventories expose the firm to a number of risks and
costs.
Major risks are:
(a) Price decline: They may be due to increase in market supply
of the product, introduction of a new competitive product,
price-cut by the competitors etc.
(b) Product deterioration: This may due to holding a product for
too long a period or improper storage conditions.
(c) Obsolescence: This may due to change in customer’s taste,
new production technique, improvements in product design,
specifications etc.
The Costs of holding inventories are as follows:
(a) Material Cost: This include the cost of purchasing the goods,
transportation and handling charges less any discount allowed
by the supplier of goods.
(b) Ordering Cost: This includes the variables cost associated
with placing an order for the goods. The fewer the orders, the
lower will be the ordering costs for the firm.
(c) Carrying Cost: This includes the expenses for storing and
handling the goods. It comprises storage costs, insurance costs,
spoilage costs, cost of funds tied up in inventories etc.
ESSENTIAL OF INVENTORY
CONTROL SYSTEMFor an efficient and successful inventory control there are
certain important conditions that are as follows:
(1) Classification and Identification of inventories: The
usual inventory of manufacturing firm includes raw-
material, stores, work-in-progress and component etc. To
facilitate prompt recording the dealing, each item of the
inventory must be assigned a particular code number and it
must be classified in suitable group or sub-divisions. ABC
analysis of material is very helpful in this context.
(2) Standardization and simplification of inventories:
In order to facilitate inventory control, the inventory line should
be simplified. It refers to the elimination of excess types and
sizes of items. Simplification leads to reduction in classification
of inventories and its carrying costs. Standardization, on the
other hand, refers to the fixation of standards of raw material
to be purchased and specification of the components and tools
to be used.
(3) Setting the Maximum and Minimum limits for
each part of inventory: The third step in this process is to set
the maximum and minimum limits of each item of the
inventory. It avoids the chances of over-investment as well as
running a short of any item during the cost of producing.
Reordering point should also be fixed beforehand.
(4) Economic Order Quantity: It is also a basic
inventory problem to determine the quantity as how much
to order at a time. In determining the EOQ, the problem is
one to set a balance between two opposite costs, namely,
ordering costs and carrying costs. This quantity should be
fixed beforehand.
(5)Adequate storage Facilities: To make the system of
inventory control successful and efficient one, it is also
essential to provide the adequate storage facilities.
Sufficient storage area and proper handling facilities should
be organized.
(6)Adequate Reports and Records: Inventory control
requires the maintenance of adequate inventory record and
reports. Various inventory records must contain information
to meet the needs of purchasing, production, sales and
financial staff. The typical information required about any
class of inventory may be relating to quantity on hand,
location, quantities in transit, unit cost, code for each item of
inventory, reorder point, safety level etc. Statements forms
and inventory records should be so designed that the clerical
cost of maintaining these records must be kept a minimum.
(7)Intelligent and Experienced Personnel: An important
requirement of successful inventory control system is the
appointment of qualified and experienced staff in purchase
and stores department. Mere establishment of procedures
and the maintenance of records would not give the desired
results as there is no substitute for sincere and devoted as
well as experienced hands. Hence, the whole inventory
control structure should be manned with trained, qualified,
experienced and devoted employees.
(8)Coordination: There must be proper coordination of all
departments involved in the process of inventory control,
such as purchase, finance, receiving, approving, storage and
accounting departments. These all departments have
different outlook and objects in inventory management but
financial manager has to coordinate them all.
(9)Budgeting: An efficient budgeting system is also required.
Preparation of budgets concerning materials, supplies and
equipment to ensure economy in purchasing and use of
material is also necessary.
(10)Internal Check: Operating of a system of internal check
is also vital in inventory management so that all transactions
involving material supplies and equipment purchase are
properly approved and automatically checked.
FACTORS AFFECTING STOCK INVESTMENT
LEVEL
These factors can be put in two categories: General and
Specific.
General Factors: These factors include those factors, which
affect directly or indirectly level of investment in any asset.
These are as follows:
(1) Nature of Business
(2) Size and scale of Business
(3) Expected Sales Volumes
(4) Price Level Changes
(5) Availability of Funds
(6) Management view Point
Specific Factors: These factors are directly related with
investment in stock. Following are the main factors:
(1) Seasonal Character of Raw Materials: If supply of
raw material used in the firm is seasonal, the firm will require
more funds for the purchase of raw material during season.
Usually, raw materials are available at cheaper rates during its
production season.
(2) Length and Technical Nature of the production process:
If production process is lengthy and of technical nature, higher
investment is required in raw material. In the technical nature
production process, quality control of raw material is given
more emphasis.
(3) Terms of Purchase: If some concessions or discount in price
or facilities of credit are provided by suppliers on purchase of
raw materials in huge quantity then the firm is inspired for
excessive purchase of goods and hence comparatively more
investment is required in inventory.
(4) Nature of End Product: Nature of end product also
influences investment in inventory. If the end product is a
durable good, high investment will be required because durable
goods can be stored for a long period. On the other hand,
perishable goods cannot be stored for a long period. Hence,
investment in inventory of such products is low.
(5) Supply Conditions: If the supply of raw material is regular
and there is no possibility of interruption in future, high
investment in inventories is not required.
(6) Time Factor: The lead time of raw material time token in
production process and sale of product also influence
investment in inventories. Longer the period, higher will be the
investment in inventories.
(7) Loan Facilities: If raw materials are purchased on credit or
loan from the bank or other financial institution can be
obtained on the security of raw material, lesser investment
would be required. In the absence of such loan facility, higher
investment would be required.
(8) Price Level Fluctuations: If there are expectations of price
rise in future then raw materials may be store in high quantity
and so more investment would be required. On the contrary, if
the prices of raw materials are expected to go down in future,
then comparatively lesser investment would be required.
TECHNIQUES OF INVENTORY
CONTROL
In managing inventories, the firm’s objective should be in
consonance with the wealth maximization principle. To achieve
this, the firm should determine the optimum level of investment
in inventory. To deal with the problems of inventory
management effectively, it becomes necessary to be conversant
with the different techniques of inventory control. Although the
concepts involved in inventory management are production-
oriented and are not strictly financial it is important that the
financial manager understand them since they have certain
built-in financial costs. The different techniques of inventory
control may be summarized as follows:
(1) Inventory level Technique
The main objective of stock control is to determine and
maintain the optimum level of stock so that there is neither
shortage of any material nor unnecessary investment in
inventory. For this purpose, determination of maximum and
minimum limits of inventory and ordering level is necessary.
(2) Maximum stock Limit: This represents the quantity of
inventory above which it should not be allowed to be kept. The
main object of fixing this limit is to ensure that unnecessary
working capital is not blocked in stores. The quantity is fixed
keeping in view the disadvantages of overstocking.
The disadvantages of overstocking are:
1. Capital is blocked up unnecessarily in stores so there will be
loss of interest.
2. More godown space is needed so more rent will have to be
paid.
3. There are chances of deterioration in quality because large
stocks will require more time for use is the factory.
4. There is the possibility of loss due to obsolescence.
5. There is danger of depreciation in market values.
The maximum stock level is fixed by taking into account
the following factors:
(1) Amount of capital available for maintaining stores.
(2) Godown space available.
(3) Rate of consumption of the material.
(4) The time lag between indenting and receiving of the
material.
(5) Length and technical nature of the production process.
(6) Possibility of loss in stores by deterioration, evaporation etc.
There are certain stores, which deteriorate in quality if they
are stored for longer period.
(7) Cost of maintaining stores.
(8) Likely fluctuation in prices. For instance, if there is a
possibility of a substantial increase in prices in the coming
period, a comparatively large maximum stock level will be
fixed. On the other hand, if there is the possibility of decrease
in price in the near future, stocks are kept at a much reduced
level.
(9) The seasonal nature of supply of material. Certain materials
are available only during specific periods of year. So these have
to be stocked heavily during these periods.
(10)Restrictions imposed by the government or local authority
in regard to materials which there are inherent risks, e.g. fire
and explosion.
(11)Risk of obsolescence, i.e., possibility of change in fashion
and habit which will necessitate change in requirements of
materials.
The following formula may be applied to calculate the
maximum stock:
(1) Maximum Stock = Minimum Inventory + Lot size
(2) Maximum Stock = Reorder Level - Minimum consumption
during Minimum lead time + Lot size
Minimum Stock Limit (Safety or Buffer stock)
This represents the quantity below which stock should not
be allowed to fall. It is maintained to save from the situation of
stock out in the event of abnormal increase in material usage
rate and/or delivery period. In fact determination of this
quantity is significant because of uncertainty in respect to
material usage rate and delivery period. The main purpose of
this level is to ensure that production is not held up due to
shortage of any material. This level is fixed for all items of
stores and following factors are taken into account for the
fixation of this level:
(a) Lead time i.e. time lag between intending and receiving the
material.
(b) Rate of consumption of the material during the lead time.
(c) Re-order Level
The following formula is applied to calculate Minimum
Stock:
Minimum Stock = Re-order Level - Normal usage during
Normal Lead time
But if normal usage and normal lead time is not known then
average usage will be treated as normal usage and average re-
order will be treated as normal re-order period.
Re-ordering Level (Ordering Level)
It is the point at which if the stock of the material in stores
reaches, the storekeeper should initiate the purchase
requisition for fresh supply of material. This level is fixed
somewhere between maximum and minimum level is such a
way that the difference of quantity of the material between the
reordering level and the minimum level will be sufficient to
meet requirements of production up to the time of fresh supply
of the material. It is fixed after taking into consideration the
following factors:
(a) Rate of material usage: Generally this rate is found out as
usage rate per day, pre week or per month. The quantity of
production fluctuates according to demand of the product
which results in variation in usage rate.
Hence, the following three factors:
(i) Maximum usage rate: It implies quantity of material required
at maximum capacity production.
(ii) Minimum usage rate: It implies quantity of material required
at capacity production in most unfavorable business conditions.
(iii) Normal or average Usage Rate: It implies quantity of
material required at capacity production under normal business
conditions.
(b) Ordering Period: The time taken in preparing the order for
purchase of material is called ordering period. In some
concerns this period may be significant but in large concerns
this period is significant because before placing the order the
purchase manager has to trace out the best suppliers, after that
only he places the order.
© Delivery, Lead or Procurement Time: The time taken
from the date of placing the order to the date of delivery by the
suppliers is called procurement time. The maximum, minimum
and average procurement time should also be determined.
(D) Minimum Stock Level: This is the level of stock below
which stocks should normally not be allowed to fall.
Calculation of Re-order Point:
After taking into account the above facts re-order quantity is
ascertained. For this purpose, the following formula is applied:
Situation1:
When rate of usage and lead time are known with certainty;
Re-order point = Rate of usage x lead time.
Situation2:
When rate of usage is known with certainty and lead time is
also known but is variable:
(i) Re-order point = Minimum Inventory + Average usage during
Normal lead Time.
(ii) Re-order point = Rate of usage x Maximum Lead Time.
Situation3:
When rate of usage and lead time is known but variable and
lead time is known with certainty:
(i) Re-order point = Minimum Inventory
+ Average usage during lead time.
(ii) Re-order point = Maximum Usage rate
x Lead time.
Situation4:
When the rate of usage and lead time are known and are
variable;
(i) Re-order point = Minimum Inventory + Average usage during
lead period.
(ii) Re-order point = Maximum Usage rate x Maximum Lead time.
Danger Level
This means a level at which normal issues of the material are
stopped and issues made only under specific instructions. The
purchase officer will make special arrangements to procure the
materials reaching at their danger levels so that the production
may not stop due to shortage of materials. It is determined as
follows:
Danger level = Average Consumption x Maximum Re-
order period for Emergency Purchase
ECONOMIC ORDER QUANTITY
TECHNIQUE
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
lost 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
type of costs: (a) ordering costs and (b) carrying costs: The
economic order quantity is that inventory level that minimize 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 costs incurred in the following
activities: requisitioning, purchase ordering, transporting,
receiving, inspecting and storing (store placement). Ordering
costs increase in proportion to the number of order placed.
Ordering costs increase with the number of order; thus the more
frequently inventory is acquired, the higher the firm’s ordering
costs. Ordering costs decrease with increasing size of inventory.
Carrying costs: Costs incurred for maintaining a 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
handing costs and clerical and staff service costs (administrative
costs).
Table: Ordering and Carrying Costs
Ordering Costs Carrying Costs
(1)Requisitioning (1) Warehousing
(2)Order placing (2) Handling
(3) Transportation (3) Clerical and staff
(4) Receiving inspecting and storing (4) Insurance
(5) Clerical and staff (5) Deterioration
Carrying costs vary with inventory size. The economic size of
inventory would thus depend on trade-off between carrying costs
and ordering costs.
Ordering and Carrying Costs trade-off: The optimum
inventory size is commonly referred to as economic order
quantity. It is that order size at which annual total costs of
ordering and holding are the minimum. We can follow three
approaches-the trial and error approach, the formula approach
and the graphic approach-to determine the economic order
quantity (EOQ).
Trail and Error Approach: The trail and error, or analytical,
approach to resolve the order quantity problem can be illustrated
with the help of a simple example. Let us assume the following
data for a firm.
Estimated three month requirements, A
1,200 Dz.
Purchasing cost (per order), (Rs) 50
Ordering cost (per order), (Rs.) 37.50
Carrying cost per unit, (Re) 1
Average inventory - (1200 + 0)/2 = 600 units
Average value - Rs 30,000 (600*Rs50)
If we choose the multiple order than we order 100units on
monthly basis
Average inventory - (400+0)/2 = 150units)
Average value - 150 * Rs 50 = 7, 500
Many other possibilities can be worked out in the same manner.
1200
1000
800
Q/2
600
Stock 400
200
50
0 2 4 6 8 10 15
Time
Inventory level over time
Order- formula approach: The trial error, or analytical,
approach is somewhat tedious to calculate the EOQ. An easy
way to determine EOQ is to use the order-formula approach. Let
us illustrate this approach.
Suppose the ordering cost per order, O, is fixed. The total
order costs will be number of orders during the year multiplied
by ordering cost per order. If a represents total annual
requirements and Q the order size, the number of orders will be
A/Q and total order costs will be:
Total ordering cost = (Annual requirement * Per order cost)
Order size
TOC = AO/ Q
Let us further assume the carrying cost per unit, c, is constant
The total carrying costs will be the product of the average
inventory units and the carrying cost per unit.
If Q is the order size and usage is assumed to be steady, the
average inventory will be.
Average inventory = order size = Q
2 2
And total carrying costs will be:
Total carrying cost = Average inventory
* Per unit carrying cost
TCC = Qc
2
The total inventory cost, then, is the sum of total carrying
and ordering costs:
Total cost = Total carrying cost + Total order cost
TC = Qc + AO
2 Q
Equation (4) reveals that for a large order quantity, Q, the
carrying cost will increase, but the ordering costs will
decrease. On the other hand, the carrying costs will be lower and
ordering cost will be higher with the order quantity. Thus, the
total cost function represents a trade-off between the carrying
costs and ordering costs for determining the EOQ.
To obtain the formula for EOQ, Equation (4) is differentiated with
respect to Q and setting the derivative equal to zero, we obtain:
Economic order quantity = 2* quantity required * ordering cost
Carrying cost
EOQ = 2AO
C
Graphic approach:
The economic order quantity can also be found out graphically.
Figure illustrates the EOQ function. In the figure, costs-carrying,
ordering and total- are plotted on vertical axis and horizontal axis
is used to represent the order size. We note that total carrying
costs increase as the order size increasers, because, on an
average, a larger inventory level will be maintained, and ordering
costs decline with increase in order size means less number of
orders. The behaviors of total costs line is noticeable since it is a
sum of two types of cost which behave differently with order size.
The total costs decline in the first instance, but they start rising
when the decrease in average ordering cost is more than offset by
the increase in carrying costs. The economic order quantity
occurs at the point Q* where the total cost is minimum. Thus, the
firm’s operating profit is maximized at point Q*.
Minimum total
Cost
Carrying cost
Costs ordering cost
Q* order size (Q)
Economic order quantity
Optimum productions run:
The use of the EOQ approach can be extended to production
runs to determine the optimum size of manufacture. Two costs
involved are set-up costs and carrying costs. Set-up costs include
costs on the following activities: preparing and processing the
stock orders, preparing drawings and specifications, tooling
machines set-up, handling machines, tools, equipment and
materials, over time etc. Production runs but carrying costs will
increase as large stocks of manufactured inventories will be held.
The economic production size will be the one where the total of
set-up and carrying costs is minimum.
Reorder Point:
The problem, how much to order, is solved by determining the
economic order quantity, yet answer should be sought to be
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 under certainty, we should known:
(a) lead time (b) average usage, and (c) economic order quantity.
Lead time is the normally taken is replenishing inventory after
the 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 demand for inventory is likely to fluctuate from time to
time. In particular, at certain points of time the demand may
exceed the anticipated level. In other words, a discrepancy
between the assumed (anticipated/expected) and the actual usage
rate of inventory is likely to occur in practice.
The effect of increased usage and/or slower delivery would be
shortage of inventory. That is, the firm would disrupt production
schedule and alienate the customers. The firm would, therefore,
be will advised to keep a sufficient safety margin by having
additional inventory to guard against stock-out situation. Such
stocks are called safety stocks. This would act as a buffer/cushion
against a possible shortage of inventory. Safety stock may,
thus, be defined as minimum additional inventory to serve as
safety margin/buffer/cushion to meet unanticipated increase in
usage resulting from unusually high demand and/or
uncontrollable late receipt of incoming inventory.
The carrying costs are the costs associated with the maintenance
of inventory. Since the firm is required to maintain additional
inventory, in excess of the normal usage, additional carrying costs
are involved.
The stock-out and carrying costs are counterbalancing. The larger
the safety stock, the larger the carrying costs and vice versa.
Conversely, the larger the safety stock, the smaller the stock-out
costs.
Max. Inventory
Average usage
EOQ
Avg. inventory----------------------------------------------------
Re-order point-----------------------------------------------------
max.usage
Safety stock -------------------------------------------------------
Weeks lead time
Re-order point under safety stock
VED Analysis: The VED analysis is used generally for spare
parts. The requirement and urgency of spare parts is different
from that of materials. A-B-C analysis may not be properly used
for spare parts. The demand for spares depends upon the
performance of the plant and machinery. Spare parts are
classified as: Vital (V), Essential (E) and Desirable (D). The vital
spares are a must for running the concern smoothly and these
must be stored adequately. The non-availability of vital spares will
cause havoc in the concern. The E types of spares are also
necessary but their stocks may be kept at low figures. The
stocking of D types of spares may be avoided at times. If the lead
time of these spares is less, then stocking of these spares can be
avoided.
The classification of spares under three categories is an
important decision. A wrong classification of any spare will create
difficulties for production department. The classification of spares
should be left to the technical staff because they know the need,
urgency and use of these spares.
Assumptions: In applying EOQ formula, it is assumed that:
(i) Total demand is known with certainty.
(ii) The usage rate of material is steady.
(iii) Orders for replenishment on inventory are placed exactly
when inventories reach ordering level.
(iv) The ordering cost per order and holding cost per unit are
constant.
EOQ and Total Inventory Cost: At EOQ level total inventory
cost is minimum. Total inventory cost is the sum of material
purchase cost, ordering cost and carrying cost
As per the formula:
Total Inventory Cost (TIC) = Material Purchase Cost + Total
Ordering Cost + Total Carrying Cost
= (R x P) + (R/Po x Cp) + (Qo/2 x Ch)
Discount Offer and Economic Order Quantity:
Sometimes supplier offers different discounts on orders of large
quantity. In such a situation, at first we should calculate EOQ
and find out TIC without considering discount offer. Then we
should calculate TIC of each alternative offer. That quantity will
be EOQ at TIC is the lowest.
PERPETUAL INVENTORY CONTROL TECHNIQUE
Perpetual inventory system implies maintenance of up-to-
date stock records and in its broad sense it covers both
continuous stock taking as well as up-to-date recording stores
books. According to Weldon, It may be defined as “a method of
recording stores balances after every receipt and issue to
facilitate regular checking and to obviate closing down for
sock-taking”. The basic object 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 each item of store can regularly be verified with the
stock records in the bin cards kept in the stores and stores
ledger maintained in cost office.
Advantages of Perpetual Inventory system:
1. Saving in time: The long and costly work
of stocktaking is avoided. Hence, interim and final financial
accounts can be prepared with greater convenience.
2. Arrangement of proper verification: In
this system a detailed and more reliable checking of the store is
exercised because of the continuous and random checking.
3. Verification of Errors: Errors are easily
located and rectified. This gives an opportunity for preventing a
recurrence in many cases.
4. Double control: Due to separate records
in Bin card and stores ledger, double control is maintained.
5. Optimum size of material:
Overstocking and under stocking can be avoided because
perpetual inventory system covers verification of stock with
regards to maximum, minimum and other levels.
6. Lack of misuse of Material: Under this
system, effective control on issue of material is possible, thus
misuse of material can be avoided.
7. Moral Check on Stores staff: Due to
continuous checking, this system serves as a moral check on
the stores staff. They are discouraged from committing
dishonesty.
8. Loss of stock due to obsolescence: It is
detected at an early stage and so timely action can be taken to
prevent recurrence.
THE SELECTIVE INVENTORY
CONTROL OR ABC SYSTEM OF
CONTROL
Most manufacturing firms find themselves confronted with
virtually thousands of different inventory items. Most of these
items are relatively inexpensive, while other items are quite
expensive and account for a large portion of the firm’s
investment. Some inventory items, although not expensive,
turnover slowly and therefore, they require a high average
investment. The firm should classify them into A.B.C category
items. Category A will include more expensive items (in cost of
product) with high investment and it will require more
intensive control.
The ‘B’ group will consist of the items accounting for the next
largest investment.
The ‘C’ group will consist of a large number of items of
inventory accounting for small investment.
The ‘A’ items require intensive inventory control and most
sophisticated inventory control techniques should be applied to
these items.
The ‘B’ items can be controlled using less sophisticated
technique, and their level can be viewed less frequently than
‘A’ items.
The ‘C’ items can receive the minimum attention: they will
probably be ordered in large quantities in order to obtain them
at the lowest price.
Though the ABC technique is a good technique but it cannot be
universally applied. Certain items of inventory may be
inexpensive but may be critical to the product in process and
cannot be easily obtained. Therefore, they may require special
attention.
These types of items must be treated as “A” class items even
though, using the broad framework, they would be “B” or “C”
class items.
Although, not perfect, the ABC system is an excellent method
for determining the degree of inventory control efforts required
to expand each item of inventory.
The following points should be kept in mind for ABC
analysis:
(1) Where items can be
substituted for each other, they should be preferably treated as
one item.
(2) More emphasis should be
given to the value of consumption and not to price per unit of the
item.
(3) All the items consumed by
an organization should be considered together for classifying as
A, B or C instead of taking item as spare, raw materials, semi-
finished and finished items and then classifying as A, B and C.
There can be more then three classes and the period of
consumption need not necessarily be one year
Application of ABC Analysis:
ABC analysis can be effectively
used in Material Management. The various stages where it can be
applied are:
(1) Information of items which
require higher degree of control.
(2) To evolve useful re-ordering
strategy.
(3) Stock records.
(4) Priority treatment to
different items.
(5) Determination of safety
stock items.
(6) Stores layout.
(7) Value analysis.
Just-in-time (JIT) System:
Japanese firms popularized the
just-in-time (JIT) system in the world. In a JIT system material
or the manufactured components and part arrive to the
manufacturing sites or stores just few hours before they are put
to use. The delivery of material is synchronized with the
manufacturing cycle and speed. JIT system eliminates the
necessity of carrying large inventories, and thus, saves carrying
and other related costs of manufacturer. The system requires
perfect understanding and coordination between the
manufacturer and supplier in terms of the timing of delivery and
quality of the material. Poor quality material or complements
could halt the production. The JIT inventory system complements
the total quality management (TQM). The success of the
system depends on how well a company manages its suppliers.
The system puts tremendous pressure on suppliers. They will
have to develop adequate system and procedures to satisfactory
meet the needs of manufacturers.
System of Accounting for Material Issued/Inventory
Systems
Either the periodic inventory system or the perpetual inventory
system may be used to account for materials issued to production
and ending materials inventory.
Periodic Inventory System
Under the periodic inventory
system, the purchase of materials is recorded in Purchase of
Raw Materials Account. The opening/beginning inventory, if
any, is recorded in a separate Materials Inventory- Opening
Account. The materials available for use during a period equal
purchases plus opening inventory. A physical count is made of the
materials on hands at the end of the period to arrive at the
closing/ending materials inventory. The cost of materials for the
period is determined as shown in Exhibit:
Cost of Materials Issued
Materials inventory-opening
+ Purchases
= Materials available for use
- Materials inventory-closing (based on physical count)
= Cost of materials issued
The entire book inventory is verified at a given date by an actual
count of materials on hand. This physical inventory is usually
taken near the end of the accounting year/period. This method
provides for the recording of the purchases on a daily basis but
does not provide for a continuous inventory-taking. Neither a
physical count is made of the quantity of goods on hand, nor the
value of the inventory in determined by using an appropriate
pricing method and attaching costs to units counted. It is
assumed that goods not on hand at the end of the period have
been sold. There is no system and accounting period, and they
can be discovered only at the end.
INVENTORY TURNOVER RATE TECHNIQUE
One important technique of inventory control is to use
inventory turnover ratios. These ratios are calculated to assess
the efficiency in use of inventories. Following control ratios can
be computed for inventory analysis:
(i) Inventory Turnover Ratio = Cost of goods sold/ Average
Inventory
Where Average Inventory = (Opening Inventory + Closing
Inventory)/2
Inventory Turnover Ratios ca be calculated separately for raw
materials and finished goods.
(A) Raw Material Turnover Ratio = Raw Material
Consumed/ Average stock of Raw material.
(B) Finished Goods Turnover Ratio = Cost of Goods Sold/
Average Stock of Finished Goods
Average Age of inventory of inventory Turnover in Days = Days
during the period/ Inventory Turnover Ratio
(ii) Average inventory to total cost of production =
(Average Inventory/ total cost of production) x 100
(iii) Slow Moving Stores to Total Inventory = Average Cost
of Slow Moving Stores/Average Inventory
(iv) Inventory Performance Index = (Actual Material
Turnover Ratio/ Standard Material Turnover Ratio) x 100
These ratios provide a broad framework for the control and
provide the basis for future decisions regarding inventory
control. The ratios provide a tough indication of when Inventory
levels are going to be high. Even if it appears from the ratio
that the levels are too high there might be a perfectly good
reason why the level of Inventory is being maintained. The
ratios also indicate the situation and trend. However, the
limitation of ratios should be kept in mind. They are not an end
themselves, but only tools of sound Inventory Management.
FINANCIAL MANAGER’S ROLE IN INVENTORY
MANAGEMENT
Inventory represents a large investment by manufacturing
concern: therefore, great emphasis must be placed on its
efficient management. Though, the operative responsibility for
Inventory management lies with the inventory manager, the
financial manager must also be concerned with all types of
inventories- raw materials, work-in-progress and finished
goods. He must monitor Inventory levels and see that only an
optimum amount is invested in Inventory. He should be familiar
with the Inventory control techniques and ensure that
Inventory is managed well.
He should try to resolve the conflicting view points of all the
departments in order to have efficient inventory management.
He has to act as a careful inspector levels. He should introduce
the policies which reduce the lead time, regulate usage and
thus, minimize safety stock. All these techniques of Inventory
management lead to the goal of wealth maximization.
VALUATION OF INVENTORIES
OBJECTIVE:
A primary issue in accounting for inventories is the
determination of the value at which inventories are carried in
the financial statements until the related revenues are
recognized. This statement deals with the determination of
such value, including the ascertainment of cost of inventories
and any write-down thereof to net realizable value.
1. This statement should be applied in accounting for
inventories other than:
(a) Work-in-progress arising under construction contacts,
including directly related service contracts.
(b) Work-in-progress arising in the ordinary course of business of
service providers.
(c) Shares, debentures and other financial instruments held as
stock-in-trade.
(d) Producer’s inventories of livestock, agricultural and forest
products and mineral oils, ores and gases to the extent that
they are measured at net realizable value in accordance with
well established practices in those industries.
2. The inventories referred are measured at net realizable
value at certain stages of production. This occurs, for example,
when agricultural crops have been harvested or mineral oils,
ores and gases have been extracted and sale is assured under a
forward contract or a government guarantee or when a
homogenous market exists and there is a negligible risk of
failure to sell. These Inventories are excluded from the scope of
this statement.
DEFINITIONS
The following terms are used in this statement with the
meanings specified:
Inventories are assets:
(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 services.
1. Inventories encompass goods purchased and held for resale,
for example, merchandise purchased by a retailer and held for
resale, computer software held for resale, or land and other
property held for resale. Inventories also encompass finished
goods produced, or work-in-progress being produced, by the
enterprise and include materials, maintenance supplies,
consumables and loose tools awaiting use in the production
process. Inventories do not include machinery spares which can
be used only in connection with an item of fixed asset and
whose use is expected to be irregular; such machinery spares
are accounted for in accordance with Accounting Standard
(AS) 10, Accounting for Fixed Assets.
2. Inventories should be valued at lower of cost net realizable
value.
3. Cost of Inventories
The cost of inventories should comprise all costs of purchase,
costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
4. Costs of Purchase
The costs of purchase consist of the purchase price including
duties and taxes (other than those subsequently recoverable by
the enterprise from the taxing authorities), freight, inwards and
other expenditure directly attributable to the acquisition. Trade
discounts, rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase.
5. Costs of Conversion
The costs of conversion of inventories include costs
directly related to the units of production, such as direct
labour. They also include a systematic allocation of fixed and
variable production overheads that are incurred in converting
materials into finished goods. Fixed production overheads are
those indirect costs of production that remain relatively
constant regardless of the volume of production, such as
depreciation and maintenance of factory buildings and the cost
of factory management and administration. Variable production
overheads are those indirect costs of production that vary
directly, or nearly with the volume of production such as
indirect materials and indirect labour.
6. The allocation of fixed production overheads for purpose of
their inclusion in the costs of conversion is on based on the
normal capacity of the production facilities. Normal capacity is
the production expected to be achieved on an average over a
number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned
maintenance. The actual level of production may be used if it
approximates normal capacity. The amount of fixed production
overheads allocated to each unit of production is not increased
as a consequence of low production or idle plant. Unallocated
overheads are recognized as an expense in the period in which
they are incurred. In periods of abnormally high production,
the amount of fixed production overheads allocated to each unit
of production is decreased so that inventories are not measured
above cost. Variable production overheads are assigned to each
unit of production on the basis of the actual use of the
production facilities.
7. A production process may result in more than one product
being produced simultaneously. This is the case, for example,
when joint products are produced or when there is a main
product and a by- product. When the costs of conversion of
each product are not separately identifiable, they are allocated
between the products on a rational and consistent basis. The
allocation may be based, for example, on the relative sales
value of each product either at the stage in the production
process when the products become separately identifiable, or
at the completion of production. Most by- products as well as
scrap or waste materials, by their nature, are immaterial. When
this is the case, they are often measured at net realizable value
and this value is deducted from the cost of the main product. As
a result, the carrying amount of the main product is not
materially different from its cost.
8. Other costs are included in the costs of inventories only to
the extent that they are incurred in bringing the inventories to
their present location and condition. For example, it may be
appropriate to include overheads other than production
overheads or the costs of designing product for specific
customers in the cost of inventories.
9. Interest and other borrowing costs are usually considered as
not relating to bringing the inventories to their present location
and condition and are, therefore, usually not included in the
cost of inventories.
10. Exclusions from the cost of Inventories
In determining the cost of inventories in accordance with
paragraph 3. It is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are
incurred. Examples of such costs are;
1. Abnormal amounts of wasted materials, labour, or other
production costs.
2. Storage costs, unless those costs are necessary in the
production process prior to a further production stage.
3. Administrative overheads that do not contribute to bringing
the inventories to their present location and condition, and
4. Selling and distribution costs.
11.The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and
segregated for specific projects should be assigned by specific
identification of their individual costs.
12.Specific identification of cost means that specific costs are
attributed to identify items of inventory. This is an appropriate
treatment for items that are segregated for a specific project,
regardless of whether they have been purchased or produced.
However, when there are large numbers of items of inventory
which are ordinarily interchangeable, specific identification of
costs is inappropriate since, in such circumstances, an
enterprise could obtain predetermined effects on the net profit
or loss for the period by selecting a particular method of
ascertaining the items that remain in inventories.
13. The cost of inventories, other than those dealt with in
paragraph 11, should be assigned by using the first-in, first-out
(FIFO), or weighted average cost formula. The formula used
should reflect the fairest possible approximation to the cost
incurred in bringing the items of inventory to their present
location and condition.
14. A variety of cost formulas is used to determine the cost
of inventories other than those for which specific identification
of individual costs is appropriate. The formula used in
determining the cost of an item of inventory needs to be
selected with a view to providing the fairest possible
approximation to the cost incurred in bringing the item to its
present location and condition.
The FIFO formula assumes that the items of inventory which
were purchased or produced first are consumed or sold first,
and consequently the items remaining in inventory at the end
of the period are those most recently purchased or produced.
Under the weighted average costs formula, the cost of each
item is determined from the weighted average of the cost of
similar items at the beginning of a period and the cost of
similar items purchased or produced during the period. The
average may be calculated on a periodic basis or as each
additional shipment is received, depending upon the
circumstances of the enterprise.
15. Techniques for the measurement of the cost of
inventories, such as the standard cost method or the retail
method, may be used for convenience if the results
approximate the actual cost. Standard costs take into account
normal levels of consumption of materials and supplies, labour,
efficiency and capacity utilization. They are regularly reviewed
and if necessary, revised in the light of current conditions.
16. The retail method is often used in the retail trade for
measuring inventories of large numbers of rapidly changing
items that have similar margins and for which is impracticable
to use other costing methods. The cost of the inventory is
determined by reducing from the sales value of the inventory
the appropriate percentage gross margin. The percentage used
takes into consideration inventory which has been marked
down to below its original selling price. An average percentage
for each retail department is often used.
17.The cost of inventories may not be recoverable if those
inventories are damaged, if they have become wholly or
partially obsolete, or if their selling prices have declined. The
cost of inventories may also not be recoverable if the estimated
costs of completion or the estimated costs necessary to make
the sale have increased.
The practice of writing down inventories below cost to net
realizable value is consistent with the view that assets should
not be carried in excess of a amounts expected to be realized
from their sale or use.
18.Inventories are usually written down to net realizable value
on an item-by-item basis. In some circumstances, however, it
may be appropriate to group similar or related items. This may
be the case with items of inventory relating to the same
product line that have similar purposes or end uses and are
produced and marketed in the same geographical area and
cannot be practicably evaluated separately from other items in
that product line. It is not appropriate to write down
inventories based on a classification of inventory, for example,
finished goods, or all the inventories in a particular business
segment.
19. Estimates of net realizable value are based on the most
reliable evidence available at the time the estimates are made
as to the amount the inventories are expected to realize. These
estimates take into consideration fluctuations of price or cost
directly relating to events occurring after the balance sheet
date to the extent that such events confirm the conditions
existing at the balance sheet date.
20.Estimates or net realizable value also take into consideration
the purpose for which the inventory is held. For example, the
net realizable value of the quantity of inventory held to satisfy
firm sales or service contracts is based on the contract price. If
the sales contracts are for less than the inventory quantities
held, the net realizable value of the excess inventory is based
on general selling prices.
Contingent losses on firm sales contracts in excess of inventory
quantities held and contingent losses on firm purchase
contracts are dealt with in accordance with the principles
enunciated in Accounting Standard (A.S) 4, contingencies and
events occurring after the balance sheet date.
21. Materials and other supplies held for use in the production of
inventories are not written down below cost if the finished
products in which they will be incorporated are expected to be
sold at or above cost. However, when there has been a decline
in the price of materials and it is estimated that the cost of the
finished products will exceed net realizable value, the materials
are written down to net realizable value. In such
circumstances, the replacement cost of the materials may be
the net available measure of their net realizable value.
An assessment is made of net realizable value as at each
balance sheet date.
22. Disclosure.
The financial statements should disclose:
The accounting policies adopted in measuring inventories,
including the cost formula used, and The total carrying amount
of inventories and its classification appropriate to the
enterprise.
24. Information about the carrying amounts held in different
classifications of inventories and the extent of the changes in
these assets is useful to financial statement users. Common
classifications of inventories are raw materials and
components, work in progress, finished goods, stores, spares
and loose tools.
DATA COLLECTION
In analysis of inventory of J&J, We collect the data by the
different sources. We collect the primary and secondary data.
SECONDARY DATA – The secondary data are those data the
already in presence for specific purpose we use the secondary
data about inventory to looks old records of the company .For
the daily information about the items We show the MRN, ledger
register and daily issue slip of materials the purchase register
and other documentary evidence used for the findings.
In the analysis of inventory the secondary data are not
sufficient .then We collect primary data.
PRIMARY DATA –
Primary data are those data that are
originated very first time or fresh data .with the help of primary
data formulated the research objectives. Primary data are the
accurate attainable reliable and useful data.
1. Inventory control techniques used by the company
2. Inventory systems as perpetual and periodic systems.
3.Stock levels etc.
4. Companies website
JOHNSON & JOHNSON AND SUBSIDIARIESSCHEDULE II — VALUATION AND QUALIFYING ACCOUNTSFiscal Years Ended January 3, 2010, December 28, 2008 and
December 30, 2007(Dollars in Millions)
2009 Balance at Beginning of Period
Accruals Payments / Other
Balance at End of Period
Accrued Rebates (1)
$1808 6584 (6,753 ) 1639
Accrued Returns $794 355 (460 ) 689Accrued Promotions
$356 2446 (2,373 ) 429
Subtotal $2958 9385 (9,586 ) 2757Reserve for doubtful accounts
$267 110 (44 ) 333
Reserve for cash discounts
$79 $1163 (1,141 ) 101
Total $3304 $10658 (10,771 ) 31912008 Balance
at Beginning of Period
Accruals Payments / Other
Balance at End of Period
Accrued Rebates (1)
$1802 $5578 (5572) 1808
Accrued Returns $648 $402 (256) 794Accrued Promotions
$578 $2991 (3213) 356
Subtotal $3028 $8971 (9041) 2958Reserve for doubtful accounts
$193 $101 (927) 267
Reserve for cash discounts
$71 $905 (897) 79
Total $3292 $9977 (9965) 3304
(1) Includes reserve for customer rebates of $729 million, $721 million, $710 million at January 3, 2010,December 28, 2008 and December 30, 2007, respectively.(2) Includes $171 million adjustment related to previously estimate accrued sales reserve.
MEDICAL DEVICES AND DIAGNOSTICS SEGMENTThe Medical Devices and Diagnostics segment achieved sales of $23.6 billion in 2009, representing an increase of 1.9% over the Prior year, with operational growth of 4.2% and a negative currency impact of 2.3%. U.S. sales were $11.0 billion, an increase of4.5% over the prior year. International sales were $12.6 billion, a decrease of 0.2%, with growth of 4.0% from operations and a decrease of 4.2% resulting from the negative impact of currency fluctuations. The DePuy franchise achieved sales of $5.4 billion in 2009, a 4.6% increase over the prior year. This was primarily due to growth in the spine, hip and knee product lines. Additionally, new product launches in the Mitek sports medicine product line contributed to the growth.The Ethicon Endo-Surgery franchise achieved sales of $4.5 billion in 2009, a 4.8% increase over the prior year. This was attributable to growth in the endoscopy, HARMONIC ® , ENSEAL ® and Advanced Sterilization product lines. The Ethicon franchise achieved sales of $4.1 billion in 2009, a 7.3% increase over the prior year. This was attributable to growth in the sutures, biosurgical and mesh product lines in addition to sales of newly acquired products from the acquisitions of Omrix Biopharmaceuticals, Inc. and Mentor Corporation. The growth was partially offset by the divestiture of the Professional Wound Care business of Ethicon, Inc. in the fiscal fourth quarter of 2008.Sales in the Cordis franchise were $2.7 billion, a decline of 10.3% versus the prior year. The decline reflects lower sales of the CYPHER ® Sirolimus-eluting Coronary Stent due to increased global competition. The decline was partially offset by growth of the Biosense Webster business. The Vision Care franchise achieved sales of $2.5 billion in 2009, a 0.2% increase over prior year primarily related to growth in the Astigmatic contact lens
product line offset by the negative impact of currency. Sales in the Diabetes Care franchise were $2.4 billion in 2009, a decline of 3.7% versus the prior year. Declines in the LifeScan product line were partially offset by growth of the Animas insulin delivery business resulting from new product launches and continued development in international markets. The Ortho-Clinical Diagnostics franchise achieved sales of $2.0 billion in 2009, a 6.6% increase over the prior year primarily attributable to the recent launch of the VITROS ® 3600 and 5600 analyzers.The Medical Devices and Diagnostics segment achieved sales of $23.1 billion in 2008, representing an increase of 6.4% over the prior year, with operational growth of 3.5% and 2.9% due to a positive impact from currency fluctuations. U.S. sales were $10.5 billion, an increase of 1.0%. International sales were $12.6 billion, an increase of 11.3%, with 5.8% from operations and a positive currency impact of 5.5%. Analysis of Consolidated Earnings Before Provision for Taxes on Income Consolidated earnings before provision for taxes on income decreased by $1.1 billion to $15.8 billion in 2009 as compared to the $16.9 billion earned in 2008, a decrease of 6.9%. The decrease was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of $1.2 billion. This was partially offset by lower selling, marketing and administrative expenses due to cost containment efforts across all the businesses. 2008 included purchased in-process research and development (IPR&D) charges of $0.2 billion and increased investment spending in selling, marketing and administrative expenses utilized from the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. The increase in 2008 of 27.4% over the $13.3 billion in 2007 was primarily due to lowerIPR&D charges of $0.6 billion, gains from divestitures of $0.5 billion and higher litigation gains of $0.5 billion versus restructuring charges of $0.7 billion and the write-down of the NATRECOR ® intangible asset of $0.7 billion recorded in 2007. As a percent to sales, consolidated Major Medical Devices and Diagnostics Franchise Sales*:MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 29 % Change(Dollars in Millions) 2009 2008 2007 ’09 vs. ’08 ’08 vs. ’07DEPUY ® $ 5,372 5,136 4,698 4.6 % 9.3ETHICON ENDO-SURGERY ® 4,492 4,286 3,834 4.8 11.8ETHICON ® 4,122 3,840 3,603 7.3 6.6CORDIS ® 2,679 2,988 3,314 (10.3 ) (9.8 )Vision Care 2,506 2,500 2,209 0.2 13.2Diabetes Care 2,440 2,535 2,373 (3.7 ) 6.8ORTHO-CLINICAL DIAGNOSTICS ® 1,963 1,841 1,705 6.6 8.0Total $ 23,574 23,126 21,736 1.9 % 6.4
OPERATING PROFIT BY SEGMENTOperating profits by segment of business were as follows:
Percent of Segment Sales (Dollars in Millions) 2009 2008 2009 2008
Consumer $ 2,475 2,674 15.7 % 16.7Pharmaceutical 6,413 7, 605 28.5 % 31.0Med Devices and Diagnostics 7,694 7,223 32.6% 31.2Total (1) 16,582 17,502 26.8% 27.4Less: Expenses not allocated to segments (2) 827 573Earnings before provision for taxes on income $ 15,755 16,929 25.4 % 26.5
Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, as was the case in2009 and will be the case again in 2014.RECLASSIFICATIONCertain prior period amounts have been reclassified to conform to current year presentation.2. Cash, Cash Equivalents and Current Marketable SecuritiesAs of January 3, 2010, current marketable securities consist of $3,434 million and $181 million of government securities and obligations and corporate debt securities, respectively.As of December 28, 2008, current marketable securities consist of $1,663 million, $342 million and $36 million of government securities and obligations, corporate debt securities and time deposits, respectively.Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices in active markets.The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an A (or equivalent) credit rating.3. InventoriesAt the end of 2009 and 2008, inventories were comprised of:4. Property, Plant and EquipmentAt the end of 2009 and 2008, property, plant and equipment at cost and accumulated depreciation were:The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2009, 2008 and 2007 was $101 million, $147 million and $130 million, respectively.Depreciation expense, including the amortization of capitalized interest in 2009, 2008 and 2007, was $2.1 billion, $2.0 billionJanuary 3, 2010 December 28, 2008Amortized Unrealized Estimated Amortized Unrealized Estimated(Dollars in Millions) Cost Gains/(Losses) Fair Value Cost Gains/(Losses) Fair ValueCurrent InvestmentsCash $ 2,517 — 2,517 3,276 — 3,276Government securities and obligations 13,370 1 13,371 7,486 4 7,490Corporate debt securities 426 — 426 627 1 628Money market funds 1,890 — 1,890 813 — 813Time deposits 1,222 — 1,222 607 — 607Total cash, cash equivalents and current marketable securities $ 19,425 1 19,426 12,809 5 12,814
(Dollars in Millions) 2009 2008Raw materials and supplies $ 1,144 839Goods in process 1,395 1,372Finished goods 2,641 2,841 $ 5,180 5,052(Dollars in Millions) 2009 2008Land and land improvements $ 714 886Buildings and building equipment 8,863 7,720Machinery and equipment 17,153 15,234Construction in progress 2,521 3,55229,251 27,392Less accumulated depreciation 14,492 13,027 $ 14,759 14,365 and $1.9 billion, respectively. Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings.5. Intangible Assets and GoodwillAt the end of 2009 and 2008, the gross and net amounts of intangible assets were:43(Dollars in Millions) 2009 2008Intangible assets with definite lives:Patents and trademarks — gross $ 5,697 5,119Less accumulated amortization 2,177 1,820Patents and trademarks — net $ 3,520 3,299Other intangibles — gross $ 7,808 7,376Less accumulated amortization 2,680 2,433Other intangibles — net $ 5,128 4,943Total intangible assets with definite lives — gross $ 13,505 12,495Less accumulated amortization 4,857 4,253Total intangible assets with definite lives — net $ 8,648 8,242Intangible assets with indefinite lives:Trademarks $ 5,938 5,734Purchased in-process research and development* 1,737 —Total intangible assets with indefinite lives $ 7,675 5,734Total intangible assets — net $ 16,323 13,976
DATA ANALYSIS AND INTERPRETATION
INVENTORY TURN OVER RATIO-
Total sales
Inventory turn over ratio =
Average inventory
The sale of J&J in year 2007 is 720 million & its investment on inventory is 126 million.
Then inventory turnover ratio = 720/126
= 5.71
J&J used Rs. 6 million worth inventory for operation. It could generates additional sales, sales
Sales = 6 million * 5.71
= 34.26 million
If J&J increases investment more on their inventories, then company increases their sales.
Inventory turn in year 2006
Total sales in 2006 = 670 million
Investment on inventories = 118 million
Turnover ratio = 670/118
= 5.67
Inventory turnover in year 2005-
Total sales in 2005 = 620 million
Investment on inventories = 110 million
Turnover ratio = 620/ 110
= 5.63
Inventory turn ratio in year 2004
Total sales in 2004 = 615 million
Investment on inventories = 100 million
Turnover ratio = 615 / 100
= 6.15
Investment of inventories & sales on wards 2004-
year Investment on inventories in million
total sales in million
2007 100 615
2008 110 620
2009 118 670
2010 126 720
Johnson & Johnson Ltd. increases investment on their inventories.
Every year, then total sales increases year by year.
Date Qty
Cost
Value
Qty
Cost
Value
Qty
Cost
Value
Jan
1 10000
2.10
21000
9 1000
2.21
2210
11000
- 23210
12 2000
2.10
4200
9000
- 19010
27 2.31
2310
10000
- 21320
Feb
10 4000
2.10
8400
6000
- 12920
16 2000
2.41
4820
8000
- 17740
March
3 2000
2.41
4820
10000
- 22560
17 4000
2.10
8400
6000
- 14160
29 4000
2.29
9160
10000
- 23320
Apr
4 2000
2.14
4280
12000
- 27600
18 4000
@ 9340
60000
- 18260
23 200
2.04
4080
10000
- 22340
0
May
12 1000
2.40
2400
9000
- 19940
24 3000
2.00
6000
12000
- 25940
Jun
10 1000
2.40
2400
11000
- 23540
30 2000
2.02
4040
13000
- 27580
Total 19000
2.19
41700
16000
- 35140
Where @ is 1000 2.21 2210
1000 2.31 2310
2000 2.41 4820
Total 4000 - 9340
Interpretation -
The FIFO method of valuation of inventory is based on the assumption that the inventory consumed in chronological order. That is received first are issued / consumed first and value fixed accordingly. From the
table with an opening inventory of 10000 units at rs 2.10, the first 10000 units issued are charged to the cost of goods sold at these opening inventory rate rs 2.10. The April 18 issue or consignment of 4000 units is cosseted on the basis of first received of the year. January 9, 1000 units at rs 2.21, January 27 1000 units at rs 2.31, and February 16, 2000 units at rs 2.41. The 1000 each issued on May 12 and June 10 are cosseted on the basis of the 2000 units received on March 3. Therefore the cost of the 13000 inventory on June 30 is composed of the received of March29, April 4 and 23, May 24 and June 30 and the value is the sum of the cost of these receipts.
Valuation under perpetual inventory system-
Date Receipts Issues Balance
Q R A Q R A Q A
1Jan - - - - - - 200 1400
6Jan - - - 100 7 700 100 700
8Jan 1100 8.50 9350 - - - 1200 10050
9Jan - - - 200 8.50 1700 1000 8350
15Jan - - - 400 8.50 3400 600 4950
25Jan 300 9 2700 - - - 900 7650
27Jan - - - 300 8.50 2550 300 240
300 9 2700 0
31Jan 400 9.20 3680 - - - 700 6080
The value of inventory after 31 January is 6080 /rs
Interpretation:-
The value of inventory under periodic & perpetual inventory system is different. The value of inventory under perpetual system is more than periodic system
DETERMINATION OF STOCK LEVELS
Data of concentrate at J&J is as follows –
Maximum consumption = 5000Dz per day
Minimum consumption = units per day
Normal consumption = 59 units per day
Re-order period = 10-15 days
Re-order quantity = 878 units
Normal re-order period = 12 days
Re-order level = Maximum consumption * Maximum
Re-order period
Data of concentrate at J&J is as follows –
Maximum consumption = 65 units per day
Minimum consumption = 55 units per day
Normal consumption = 59 units per day
Re-order period = 10-15 days
Re-order quantity = 878 units
Normal re-order period = 12 days
Re-order level = 65 units * 15 days
= 975 units
Minimum stock level = re-order level – (normal consumption *
Normal re-order period)
= 975 - (59 units * 12 days)
= 267 units
Maximum stock level = (re-order level + re-order quantity )
- ( min. consumption – order period)
= ( 975 units + 878 units ) - (55 units * 15 days)
= 1028 units
Average stock level = minimum stock level + ½ of Re-ordering
Quantity
= 267 units + ½ * 878 units
= 267 units + 439 units
= 706 units
Interpretation of result : -
1. After calculation the re-order level of J&J is 975 units but the actual
re-order quantity is 878 units.
2. The minimum stock level of J&J is 267 units.
3. The maximum stock level of J&J is 1028 units.
4. The average stock level must be 706 units.
Calculation of expected stock out cost –
Safety stock stock prob. Of expected total
Stock out (units) out stock stock out expt.
Level cost (40/unit) out cost SOC
500 0 0 0 0 0
400 100 4000 0.01 40 40
250 250 10000 0.01 100
150 6000 0.02 120 220
100 400 16000 0.01 160
300 12000 0.02 240 580
150 6000 0.03 180
50 450 18000 0.01 180
350 14000 0.02 280
200 8000 0.03 240 780
50 2000 0.04 80
0 500 20000 0.01 200
400 16000 0.02 320
250 1000 0.03 300 1180
100 4000 0.04 160
50 2000 0.10 200
Expected stock out cost == stock out cost * probability of stock out .
PROBLEMS AND SUGGESTIONS
PROBLEMS FACED BY THE ORGANITION
J&J faces the following problems-
1 Johnson & Johnson Ltd. Faces the problem of competition.
2. Organization facing the problem of proper skilled employees in the
production department.
3. There is no proper sequence &acknowledgement board for certain
items in store department .It is not good when external auditing held in
company.
4. Organization has no record of wastage items. It is not good for
operating profit of the company.
5. In organization store assistants have no proper knowledge about
engineering goods & raw materials.
SUGGESTIONS TO THE ORGANISATION:
The organizations give proper knowledge & training for unskilled
employees about their work.
1. In store department items should placed their proper sequence &
acknowledgement.
2. There should be proper record of wastage. It is good for the company.
4. Store manager give the proper knowledge about engineering & raw
materials.
CONCLUSIONThe goal of the wealth maximization is affected by the efficiency with
which inventory is managed. Inventories constitute about 60% of
current assets of companies in India. The manufacturing companies
hold inventories in the form of raw materials, work in progress and
finished goods. Inventories facilitate smooth production and sales
operation (transaction motive), to guard against the risk of
unpredictable changes in usage rate and delivery time (precautionary
motive), & to take advantage of price fluctuations (speculative
motive).
Inventories represent investment of a
firm’s funds. The objectives of the inventory management
should be the maximization of the value of the firm.
Therefore the firm should consider:
1. Cost 2. Return 3. Risk factors
In inventory maintenance two types of costs are involved
carrying cost & ordering cost .the firm should minimize the
total cost (carrying plus ordering cost).The firm follows
inventory control techniques as A-B-C technique EOQ & JIT
techniques for better holding inventories.
PRIMARY DATA ANALYSIS (Bio – Profile of the Respondents):-
1 30 percent of the officials belong to the age group of 35 and 50
2 58 percent of the officials belong to the age group of 25 to 34
3 12percent of the officials belong to the age group of above 50
4 69 percent are male officials
5 31 percent are female officials
6 72 percent are graduates and above
7 12 percent are those who are having technical and professional qualifications
8 16 percent are undergraduates.
9 55 percent are those who are associated with the field
1025 percent are those who are in the managerial and administrative posts.
1120 percent belongs to the others category
DATA ANALYSIS
1 Are you aware about Inventory Management System?
Yes ------------------------------------------ 75 per cent
No ------------------------------------------- 17 per cent
Do not know/ Can not say ---------------- 08 per cent
Interpretation:
The awareness level among the company officials regarding the existence,
functioning and applicability of inventory management system is high that is 75
per cent, as per the result of the study.
2 Do you know that your company has an inventory management system?
Yes ---------------------------------------------- 72 per cent
No ------------------------------------------------ 20 per cent
Do not know/ Cannot say -------------------- 08 per cent
Interpretation:
The company officials are aware about their company having an inventory
management system. 72 per cent of the respondents do have this awareness as
against 20 per cent+08 per cent of the respondents who are either not aware or
not able to provide any information in this regard.
3 Do you agree that there should be an inventory management system in place
in any organization / company?
Agree ------------------------------------------------ 68 per cent
Disagree --------------------------------------------- 12 per cent
Do not know/ Cannot say ------------------------- 20 per cent
Interpretation:
According to the response to the above question, it appears that every
company/organization should have a system or mechanism in place for managing
their inventory.
4 For what reasons do you feel that there should be an inventory management
system?
To smoothen operational requirement --------------------- 27 per cent
To save time ---------------------------------------------------- 22 per cent
To maintain accountability and transparency ----------------30 per cent
Other reasons --------------------------------------------------- 15 per cent
Do not know/ Cannot say ------------------------------------ 06 per cent
Interpretation:
To everyone’s surprise, 30 per cent of the respondents feel that it is for
accountability and transparency purpose that inventory records are maintained
and hence the need for an inventory management system. This is followed by the
need for saving time and the requirement of operational smoothness.
5 Do you agree that the inventory management system in your company has
fulfilled the needs for which it was evolved?
Strongly Agree -------------------------------------- 20 per cent
Agree ------------------------------------------------- 47 per cent
Disagree ----------------------------------------------- 15 per cent
Strongly Disagree ------------------------------------- 07 per cent
Do not know/ Cannot say ---------------------------- 11 per cent
Interpretation:
From the above response, it appears that the inventory management system has
more or less achieved its objectives for which it was in place. This is evident from
the 67 per cent of the respondents’ opinion who have either agreed or strongly
agreed in favor of this proposition. However the response of 22 per cent of the
respondents who think otherwise also speaks something.
6 What according to you is the major benefit of going for an inventory
management system by your company?
It has made storage and retrieval of material easier --------- 37 per cent
Improved Sales Effectiveness ---------------------------------- 26 per cent
Reduced Operational Cost ----------------------------------- 18 per cent
Other Benefits -------------------------------------------------- 10 per cent
Do not know/ Cannot say ------------------------------------ 09 per cent
Interpretation:
As regards the benefits of having an inventory management system by the
company, the respondents are of the opinion that the major benefit lies in
relaxation in terms of storage and retrieval of material. This is followed by
increasing sales effectiveness and reduction in operational cost. However, all these
benefits are interlinked and the spearing between them is more analytical than
anything else.
7 Do you have skilled professionals in your company for inventory
management?
Yes ----------------------------------------------- 48 per cent
No ------------------------------------------------- 30 per cent
Do not know/ Cannot say ---------------------- 22 per cent
Interpretation:
Recruitment of skilled professionals well vesed with latest inventory management
technology, particularly in chemicals and paint industry is a concern for the
company as it appears that it lacks in this domain.
What category of professionals is managing your company inventory?
Skilled and trained --------------------------------- 32 per cent
Only skilled but not trained ----------------------- 16 per cent
Non skilled but trained professionals -------------- 20 per cent
Non skilled and non trained professionals --------- 25 per cent
Others --------------------------------------------------- 07 per cent
Interpretation:
As already stated above in the earlier question, availability of trained and skilled
professionals for inventory management needs serious attention of the company.
8. Do you agree that your company gives more emphasis on software than
skilled manpower with regard to inventory management?
Strongly Agree -------------------------------------- 18 per cent
Agree ------------------------------------------------- 52 per cent
Disagree ----------------------------------------------- 15 per cent
Strongly Disagree ------------------------------------- 07 per cent
Do not know/ Can not say ---------------------------- 08 per cent
Interpretation:
The above response gives an impression that the company puts greater emphasis
on software than skilled manpower for inventory details management.
9. Do you think that the software used by your company is according to the
design and needs of the system?
Yes -------------------------------------------------- 86 per cent
No ---------------------------------------------------- 10 per cent
Do not know/ Cannot say ------------------------- 04 per cent
Interpretation:
The company appears to be using the software according to the system
requirement and design and according to the customers’ needs.
10. What is the prime challenge before Yor Company with reheard to inventory
management?
Lack of trained professionals ------------------------------- 42 per cent
Maintenance cost --------------------------------------------- 21 per cent
Changing requirements of customers ------------------------- 27 per cent
Other problems -------------------------------------------------- 06 per cent
Do not know/ Cannot say ------------------------------------- 04 per cent
Interpretation:
Lack of availability of trained professionals coupled with maintenance cost and
changing needs of the customers are perceived to be the inventory challenges
before the company.
12. What is the future of inventory management system in your company?
Will continue as a successful mechanism --------------------- 43 per cent
May change according to time ----------------------------------- 33 per cent
Shall collapse ------------------------------------------------------- 12 per cent
Do not know/ Cannot say ----------------------------------------- 12 per cent
Interpretation:
The future of inventory management system at Johnson & Johnson Ltd. appear
to pretty good, going by the response of our study
Bibliography
Advanced Accountancy
Ninth Edition
S N Maheshwari, S K Maheshwari
Vikas Publishing House Pvt. Ltd.
Financial Management
Ninth Edition
I M Pandey
Vikas Publishing House Pvt. Ltd
Management Accounting
Third Edition
M Y Khan, P K Jain
Tata Mc-Graw Hill Publishing Company Ltd
Purchase , Sales Boucher & Other Documents of the
Company
Johnson & Johnson Ltd.