A PROJECT REPORT

“INVENTORY MANAGEMENT”

AT

“HERO MOTOCORP LTD.”

MASTER OF BUSINESS ADMINISTRATION

Submitted by:

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ACKNOWLEDGEMENT

“Accomplishment of a task with desired success calls for dedication

towards work and prompting guidance, co-operation and deliberation from seniors.”

This report is the outcome of the project that I did in Hero Motocorp Ltd. It gives me

immense pleasure to acknowledge my deep sense of gratitude and sincere thanks to

Mr. M. S. Arora (Manager, Store) and to Mr. Rajender Pal (Executive Store) for

agreeing for the project and providing me necessary information for completion of

project.

I am extremely grateful to Mr. _____________________ for his valuable guidance

and glorious teaching.

In last, I express my profound gratefulness and indebtedness to the esteemed

organization for granting me the grand privilege of working on a project under team

of experts and professionals in the field of inventory.

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PREFACE

MBA program is one of the most reputed professional courses in the field of

management. This course includes both theory and its applications as its content of

curriculum. The project is an integral part of the curriculum and its purpose is to

provide the practical exposure of business world in the changing scenario. In this way

it helps the student in development of practical skills and analytical thinking process.

It helps in moldings the students according to the requirement of the market. Each

student is required to complete the project in his or her field of interest

The purpose of the project is to expose the students on practical and research front of

his or her area of interest. The project gives a unique experience to aspirants who can

visualize things what they have been taught in classroom. I was fortunate enough to

have the opportunity to do a project on inventory management at Hero Motocorp Ltd.

I have tried my best and have applied all my efforts, knowledge and sources available,

in this project. Throughout the project the focus has been on presenting information

and comments in easy and intelligible manner.

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TABLE OF CONTENT

Chapter

No.

Content Page No.

Executive Summary

1 Theoretical Framework of Inventory

Management

Introduction

Meaning and Nature of Inventory

Purpose/Benefits of holding inventory

Risk and Cost of holding inventory

Inventory Control

Importance of inventory Control

Essential of good Inventory Control

Techniques of Inventory Control

2 Objective and Research Methodology

Objective of the Study

Research Methodology

Sources of Data Collection

Limitations

3 Company Profile

Introduction

Vision

Mission

Strategy

Manufacturing

4

Distribution

Product portfolio

Process Flow chart

4 Inventory Management at Hero Motocorp

Ltd.

Material Management Cycle

Functional Strategies/ Objectives of

inventory management at Hero

Motocorp

Purchase Control

Purchase Procedure

Process of Receipt of Material

Storage control

Objective of stores

Divisions of Store

Accounting Control

Valuation of material issue

Classification of inventory

Tools and Techniques of Inventory

Management

Estimation of different cost of holding

inventory

Estimation of Stock Levels of super

splendor

Inventory ratios

5 Findings

6 Suggestions

5

7 Bibliography

EXECUTIVE SUMMARY

To be successful in today's fast-paced, highly-competitive environment, organizations

need to have the necessary parts in stock or have reliable suppliers to meet customer

demands at a moment's notice. Either way, organizations must have a practical,

efficient method for managing inventory in order to stay in business and satisfy their

customers.

Effective Inventory Management enables an organization to meet or exceed

customers' expectations of product availability while maximizing net profits or

minimizing costs.

The three primary functions that characterize the occupation are management,

coordination, and control of inventory and systems of inventory management.

Management of inventory records and relevant details is an important area of concern

for every organization, whether it is large or small. And also calls for efficient

planning and maintenance. No matter the viewpoint, effective inventory management

is essential to supply chain competitiveness.

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Inventory is a list for goods and materials, or those goods and materials themselves,

held available in stock by a business. Inventory are held in order to manage and hide

from the customer the fact that manufacture/supply delay is longer than delivery

delay, and also to ease the effect of imperfections in the manufacturing process that

lower production efficiencies if production capacity stands idle for lack of materials.

Inventory management, or inventory control, is an attempt to balance inventory needs

and requirements with the need to minimize costs resulting from obtaining and

holding inventory. It deals with the maintenance of equipments. It is a discipline that

encompasses the principles, concepts and techniques for determining what to order,

when to order and how much to order. The right amount of inventory involves the

balance between what is required to service customers and what is financially

practical.

Precise control and safeguarding of inventory is an essential task for a successful,

well-organized company. Businesses require timely and accurate information on

inventory location, movement, and valuation. Inaccurate inventory counts can cost

you sales and delay shipments past the promise date. Out-of stock items as well as

overstocked items in inventory can be devastating to business. Additionally, an

overstated or understated inventory valuation can result in incorrectly reported assets

within financial statements. Properly used, the Inventory Management module can

help bring about the formulation of new or improved purchasing policies, sales

policies, pricing methods, and even enhanced customer service.

This project is about inventory management system of Hero Motocorp Ltd. Project

starts with theoretical framework of inventory management, its benefits, inventory

management techniques and valuation of inventory. Second chapter deals with

objective and research methodology. Third chapter is about company profile, its

products, mission, vision etc. Forth chapter is about the inventory management at

Hero Motocorp. How company manages its inventory and what are the inventory

control techniques used by the company were studies in this chapter. Suggestions

were made to improve efficiency of the inventory management. I have used both

primary as well as secondary data.

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CHAPTER -1

THEORETICAL FRAMEWORK OF INVENTORY

MANAGEMENT

INTRODUCTION

Every enterprise needs inventory for smooth running of activities. It serves, as

a link between production and distribution. For every process there is, generally, a

time lag between the recognition of a need and its fulfillment. The greater the time

lag, the higher the requirement for inventory. The unforeseen fluctuations in demand

and supply of goods also necessitate the need for inventory. It provides a cushion for

future price fluctuations.

The investment in inventories constitutes the most significant part of current

assets/working capital in most of the undertakings. Thus, it is very essential to have

proper control and management of inventories. The purpose of inventory management

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is to ensure availability of materials in sufficient quantity as and when required and

also to minimize investment in inventories.

The investment in inventory is very high in most of the undertakings engaged

in manufacturing, wholesale and retail trade. In India, a study of 29 major industries

has revealed that the average cost of materials is 65paise and the cost of labor is

10paise and overheads is 15paise of a rupee, 10%is profit. It is necessary for every

management to give proper attention to inventory management. A proper planning of

purchasing, handling, storing and accounting should form a part of inventory

management.

An efficient system of inventory will determine,

What to purchase

How to purchase

From where to purchase

Where to store etc.,

There are conflicting interests of different departmental heads over the issue of

inventory. The finance manager will try to invest less in inventory because to him it is

an idle investment, where as production manager will emphasis to acquire more

inventory as he does not want any interruption in production due to shortage of

inventory. The purpose of inventory management is to keep the stocks in such a

neither way that there is over-stocking nor under-stocking. The over-stocking will

mean a reduction of liquidity and starving of other production processes whereas

under-stocking, on other hand, will result in stoppage of work. The investments in

inventory should be kept in reasonable limits.

MEANING AND NATURE OF INVENTORY

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There are different meanings of inventory in different languages. In

accounting language it may mean stocks of finished goods only. In a manufacturing

concern, it may include raw materials; work in process and stores, etc., to understand

the exact meaning of the work “inventory”

Inventory may include the following things:

1. RAW MATERIALS:

Raw materials form a major input into the organization. They are required to

carry out production activities uninterruptedly. The quantity of raw materials required

will be determined by the rate of consumption and the time required for replacing the

supplies. The factors like the availability of raw materials and government

regulations, etc., too affect the stock of raw materials.

2. WORK-IN-PROGRESS:

The work-in-progress is that stage of stocks, which are in between raw

materials and finished goods. The raw materials enter the process of manufacturing

but they are yet to attain a final shape of finished goods. The quantum of work-in-

progress depends upon the time taken in the manufacturing process. The greater the

time taken in manufacturing, the more will be the amount of work-in-progress.

3. CONSUMABLES:

These are the materials, which are needed to smoothen the process of

production. These materials do not enter directly into production but they act as

catalysts. Consumables may be classified according to their consumption and

criticality. Generally, consumables stores do not create any supply problem and form

a small part of production cost. There can be instances where these materials may

account for much value than the raw materials. The fuel oil may form a substantial

part of the cost.

4. FINISHED GOODS:

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These are goods, which are ready for the consumers. The stock of finished

goods provides a buffer between production and market. The purpose of maintaining

inventory is to ensure proper supply of goods to the customers. In some concerns the

production is under taken on order basis. In these concerns there will not be a need for

finished goods inventory. The need for finished goods inventory will be more when

production is undertaken in general without waiting for specific orders.

5. SPARES:

Spares also form a part of inventory. The consumption pattern of raw

materials, consumables, finished goods are different from that of spares. The stocking

policies of spares are different from industry to industry. Some industries like

transport will require more spares than the other concerns. The costly spare parts like

engines, maintenance spares etc., are not discarded after use. Rather they are kept in

ready positions for further use. All decisions about spares are based on the financial

cost of inventory on such spares and the cost that may arise due to their non-

availability

PURPOSE/BENEFITS OF HOLDING INVENTORY

Another important element in the determination of optimum inventory level, relates to

the benefits of holding inventories. Inventories perform certain basic functions which

are of very much importance in firm’s production and marketing strategies. According

to JOHNSON R.W. (Financial management) the basic function of inventories to act as

a buffer to decouple or uncouple the various activities of a firm so that all do not have

to be pursued at exactly the same rate. The term uncoupling means that the key

activities of a firm viz., purchasing, producing and selling, which are closely

interrelated, can be carried on independently. If inventories are not held, purchasing

and production would be completely controlled by the sales schedule. If sales

increase, the need for purchase and production will increase and vice versa. But, if

inventories are held, each activity can be carried out independently and efficiently.

The following are the benefits of holding inventory.

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1. Benefits in purchasing:

If the purchasing is carried on independently i.e. without up to production or sales, the

firm can purchase large quantities than is warranted by usage in production or the

sales levels. This will enable the firm to get certain advantages.

Firstly, the bulk purchasing enables the firm to get trade discounts. Secondly, ordering

costs can be minimized by placing fewer orders for a large amount. Thirdly, large

inventory serves as a hedge against increasing prices. Fourthly, bulk purchasing also

provides a hedge against labour trouble.

2. Benefits in production:

The basic objective of holding finished goods inventory is to separate production and

sales activities. This enables the firm to undertake production at a rate different and

sales at different rate. If the firms demand is seasonal in nature, management has to

courses open. First it can produce production when sales are high and reduce

production when sales or low. Second, it may produce continuously throughout the

year and build up inventory which will be sold during the period of seasonal demand.

The former involves discontinuity in production while the latter ensure stabilized

production. Many advantages acquire from stabilized production.

a) Improved worker morale and possibly greater efficiency.

b) Reduced peak-load production and fewer overtime charges.

c) Reduction of certain costs which result from idle equipment.

d) Certain economies made possible through the purchase of raw materials.

3. Benefits in sales:

The maintenance of inventories enables the firm to enhance its sales efforts. If

the firm has no inventory of finished goods, its level of sales will depend upon its

current production level. The firm may not be able to meet the demand

instantaneously had the customers may switch to other firms who can supply at short

notice.

Thus, the objective of inventory management relate to the minimization of

inventory on the one hand and the need to ensure sufficient inventory to assure

continuity of production and sales operations. Thus, both the objectives of inventory

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management conflict with each other. The optimum level of inventory should be

determined in terms of trade off between costs and benefits associated with inventory

management.

RISK AND COSTS OF HOLDING INVENTORIES

The holding of inventories involves blocking of firm’s funds and incurrence of

capital and other costs. It also exposes the firm to certain risks. The various costs and

risks involved in holding inventories are as below:

1. CAPITAL COSTS:

Maintaining of inventories results in blocking of the firm’s financial resources. The

firms have, therefore, to arrange for additional funds to meet the costs of inventories.

The funds may be arranged from, own resources or from outsiders. But, in both cases,

the firm incurs a cost. In the former case, there is opportunity cost of investment while

in the later case, the firm has to pay interest to the outsiders.

2. STORAGE AND HANDLING COSTS:

Holding of inventories also involves cost on storage as well as handling of materials.

The storage costs include the rental of the go down, insurance charges, etc.

RISK OF PRICE DECLINE:

There is always a risk of reduction in the prices of inventories by the suppliers in

holding inventories. This may be due to increased market supplies, competition or

general depression in the market.

RISK OF OBSOLESCENCE:

The inventories may become obsolete due to improved technology, changes in

requirements, change in customer’s tastes etc.

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◈ Inventory control:

A firm needs an inventory control system to effectively manage its inventory. There

are several inventory control systems in vogue in practice. They range from simple

systems to very complicated systems. The nature of business and the size dictate the

choice of an inventory control system .For example; a small firm may operate a two-

bin-system. Under this system, the company maintains two bins. Once inventory in

one bin is used, an order is placed, and means while the firm uses inventory in the

second bin .For a larger departmental store that sells hundreds of items, this system is

quite unsatisfactory. The departmental store will have to maintain a self-operating,

automatic computer system for tracking the inventory position of various items and

placing order.

The main objective of inventory control is to achieve maximum efficiently in

production and sales with the minimum investment in inventory.

◈ Importance of inventory control :

The importance or necessity of inventory control is well explained in terms of the

objects of inventory control which are obtained through it. A proper inventory control

lowers down the cost of production and improves the profitability of the enterprise.

Here are certain specific advantages of inventory control:

1) Reduction in Investment in Inventory.

2) Proper and efficient use of raw material.

3) No bottleneck in production.

4) Improvement in Production and Sales.

5) Efficient and optimum use of physical as well as Financial Resources.

ESSENTIAL OF GOOD INVENTORY CONTROL SYSTEM:

1) Classification and codification of inventories by allotting proper code number to

each item and group and regroup on some basis.

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2) Standardization and simplification of inventories in order to maintain quality

and reduce the number of items.

3) Adequate storage facility.

4) Setting different levels and reorder point for each item of inventories.

5) Fixing Economic Order Quantity.

6) Experienced personnel for handling inventories properly.

7) Intelligent and experienced Personnel.

8) Co-ordination.

9) Budgeting.

10) Internal Check.

The inventory includes stock of raw materials, semi-finished goods,

finished goods and components etc. of several descriptions. In order facilitate

prompt recording, locating and dealing, each item of inventory should be assigned a

particular code for proper identification and must be divided in groups on basis of

location, nature of item, plant etc.

Techniques of inventory control

Effective inventory management requires an effective control system of inventories.

A proper inventory control not only helps in solving the acute problem of liquidity

but also increases profits and causes substantial reduction in the working capital of

the concern. The following are the important techniques of inventory control.

1. Setting of various stocks levels.

2. ABC analysis.

3. Two bin system.

4. Establishment of system of budgets.

5. Use of perpetual inventory records and continuous stock verification.

6. Determination of Economic Order Quantity (E.O.Q).

7. Review of slow and non-moving items.

8. Use of control ratios.

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1. Setting of various stocks level:

Carrying of too much little of inventories is determined to the firm, if the

inventory level is too little the firm will face frequent stock outs involving heavy

ordering cost and if the inventory level is too high it will be unnecessary tie up to

capital. Therefore, an efficient inventory management requires that a firm should

maintain an optimum level of inventory costs are the minimum and at a same time there

is not stock out which may result in loss of sale or stoppage production of various stock

levels are discussed as such.

Re-ordering level:

It is the point at which if stock of a particular material in store approaches,

the storekeeper should initiate the purchase requisition for fresh supplies of that

material.

This level is fixed somewhere between the maximum and minimum levels

in such a way that the difference of quantity of the material between the re-ordering

level and the minimum level will be sufficient to meet the requirements of production

up to the time the fresh supply of the material is received.

Re-ordering level can be calculated by applying the following formula.

Re-ordering level =Maximum Consumption x Maximum re-order period.

Or

Re-ordering level = Safety stock + [Average daily consumption X Average delivery

period]

Where:

Safety stock= Annual Demand X [Maximum lead time –– Normal lead time]

365

Minimum level:

It indicates the lowest figure of inventory balance, which must be maintained in hand

at all times, so that there is no stoppage of production due to non-availability of

inventory.

The main consideration for the fixation of minimum level of inventory is as follows:

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1) Information about maximum consumption and maximum delivery period in respect

of each item to determine its re-order level.

2) Average rate of consumption for each inventory item.

3) Average delivery period for each item. This period can be calculated by averaging

the maximum and minimum period.

The formula used for its calculation is as follows:

Minimum Level of inventory =

Re-order level – [Normal consumption X normal re-order period ]

Maximum level:

It represents the maximum quantity of an item of material which can be held

in stock at any time. Stock should not exceed this quantity. The quantity is fixed so

that there may be no overstocking.

The maximum stock level is fixed by taking into account the following factors.

Amount of capital available for maintaining stores.

Godown space available.

Maximum requirement of the stores for production purposes at any point of

time.

Rate of consumption of the material during the lead time.

The time lag between indenting and receiving of the material.

Possibility of loss in stores by deterioration, evaporation etc.

Cost of maintaining stores.

Likely fluctuation in prices.

The seasonal nature of supply of material. Certain materials are available only

during specific periods of the year, so these have to be stocked heavily during

these periods.

Restrictions imposed by the government or local authority in regard to

material in which there are inherent risks e.g. fire and explosion.

Possibility of change in fashion and habit which will necessitate change in

requirement of materials.

Maximum level of inventory=

Reorder level + Reorder quantity –– [Minimum consumption X minimum re-

ordering period]

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Average stock level:

The average stock level is calculated by the following formula:

Average stock level = Minimum stock level + [1/2 of re-order quantity]

Danger level:

When the stock level falls below the minimum level, it reaches the danger level, when

immediate action is to be taken for replenishment of stock.

Danger level=

Average consumption X lead time for emergency purposes.

2. Stock control through ABC analysis:

Manufacturing organization find it useful to divide materials into three categories

for the purposes of exercising selective control on materials.

An analysis of the material costs will show that a smaller percentage of items of

materials in the stores may contribute to a large percentage of the value of

consumption and, on the other hand, a large percentage of times may represent a

smaller percentage of the value of items consumed.

Items falling in the first category are treated as “A” items, of the second category

as “B” items and items of the third category are taken as “C” items. Such an analysis

of material is known as ABC analysis. This technique of stock control is also known

as stock control according to value method or always better control method or

proportional parts value analysis method .Thus, under this technique of material

control, materials are listed in ‘A’, ‘B’and ‘C’ categories in descending order based

on money value of consumption. ABC analysis measures the cost significant of each

item of material. It concentrates on important items. So it is also known as “control

by Importance and Exception” (C.I.E).

The report of the INDIAN productivity Team on “Stores & Inventory control in

U.S.A, JAPAN and WEST GERMANY” gives the following example of ABC

analysis:

Category % of Items % of Value

A 15 80

B 35 15

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C 50 5

Total 100 100

ABC analysis of inventory items

The significant of this analysis is that a very close control is exercised over the

items of ‘A’ group which account for a high percentage of costs while less stringent

control is adequate for category ‘B’ and very little control would suffice for category

‘C items.

Advantages:

A strict control is exercised on the item which represents a high percentage of the

material costs. Managerial time is spent on ‘A’ items whereas ‘C’ items and

sometimes ‘B’ items can be handled by clerical staff with least managerial

supervision.

1) Investment in inventory is reduced to the minimum possible level because

a responsible quantity of ‘A’ items representing a significantly portion of

the material costs is purchased. To reduce investment in materials, close

control ‘A’ items contributes much more than close control of ‘C’ items.

2) Storage a cost is reduced as a reasonable quantity of materials, which

account for high percentage of value of consumption will be maintained

in the stores.

3. Two bin system:

Under this system each bin is divided into two parts– one, smaller part, should

stock the quantity equal to the minimum stock or even the re-ordering level, and the

other to keep the remaining quantity. Issues are made out of the large part; but as soon

as it becomes necessary to use quantity out of the smaller part of the bin, fresh order is

placed. “Two bin systems” is supplemental to the record of respective quantities on

the bin card and the stores ledger card.

4. Establishment of system of budgets:

To control investment in the inventories, it is necessary to know in advance about the

inventories requirement during a specific period usually a year. The exact quantity of

various types of inventories and the time when they would be required can be known

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by studying carefully production plans and production schedules. Based on this,

inventories requirement budget can be prepared. Such a budget will discourage the

unnecessary investment inventories.

5. Use of perpetual inventory records and continuous stock verification:

Perpetual inventory system:

Under this system a continuous record of receipt and issue of materials is

maintained by the stores department and the information about the stock of material is

always available.

CIMA defines perpetual inventory system as “the recording as they occur of receipts,

issues and the resulting balances of individual items of stock in either quantity or

quantity and value.”

In this system the entries are made in bin cards and stores ledger as and when the

receipts and issues of materials take place and ascertaining the balance after every

receipt or issue of materials. The stocks as per the dual records namely bin card and

stores ledger are reconciled on a continuous basis.

Advantages:

This system avoids the disruptions to production or trading caused by the

periodic stock taking.

This system facilitates production planning and inventory control.

Perpetual inventory system is efficiently maintained with continuous stock

taking.

The perpetual inventory system avoids the necessity of stock taking by actual

at the end of financial period.

Stock can be taken for the purpose preparation of profit and loss account and

balance sheet.

It helps in having a detailed and more reliable check on the stocks.

The stocks records are more reliable and stock discrepancies are investigated

and appropriate actions are taken immediately.

Periodic stock taking system:

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Under this system the stock levels are reviewed at fixed intervals e.g. at the

end of every month or three months. All the items of stocks in the store are reviewed

periodically.

CIMA defines periodic stock taking as “a process whereby all stock items are

physically counted and then valued.” The aim of periodic stock taking is to find is to

find out the physical quantities of materials of all types are physically counted at a

given date.

A team of stock checkers should be allocated to count all stock in one area, to

ensure that all stock is counted once, and that no omission or duplications

occur.

In the office, the completed stock sheets should be collated and totaled, and

the quantities checked against the stock records.

Senior staff or auditors should perform sample checks on a number of items.

All staff involved should be issued with stock taking instructions well before

the date of the actual count. Often non-stores staff ill be involved in the count.

Any stocks showing discrepancies should be recounted, and if still not

resolved should be reported to management.

Stock checkers should enter amounts counted on preprinted stock sheets.

A ‘cut-off’ time should be set, after which no movement of stock is allowed

until the count has been completed.

6. Determination of Economic Order Quantity (E.O.Q):

The total costs of a material usually consist of:

Total acquisition cost + Total ordering cost + Total carrying cost.

Total acquisition cost through buying is usually unaffected irrespective of the quantity

of material ordered at one time unless quantity discounts are available.

The quantity of materials to be ordered at one time is known as economic ordering

quantity. This quantity is fixed in such a manner as to minimize the cost of ordering

and carrying the stock.

Carrying costs:

It is the cost of holding the materials in the store and includes:

Cost of storage space which could have been utilized for some other purpose.

Cost of bins and racks that have to be provided for the storage of materials.

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Cost of maintaining the materials to avoid deterioration.

Amount of interest payable on the money locked up in the materials.

Cost of spoilage in stores and handling.

Transportation costs in relation to stock.

Cost of obsolescence on account of some of the materials becoming obsolete

after some time of storage either due to change in the process or product.

Insurance cost.

Clerical cost etc.

Ordering cost:

It is the cost of placing orders for the purchase of materials and includes:

1) Cost of staff posted in the purchasing department, inspection section and

payment department.

2) Cost of stationery, postage and telephone charges.

E.O.Q = 2 U O

C

Where

EOQ = economic order quantity.

U = consumption of the material concerned in units during a year.

O = Cost of placing one order including the cost of receiving the

Goods i.e. cost of getting an item into the firm’s inventory.

C = holding costs of inventory O.U per year

Assumptions:

1) There are dynamic conditions of the supply which enable a firm to ace as

many orders as it needs.

2) Prices of the item remain stable which keep carrying cost constant.

3) The quantity of the item to be consumed during a particular period is totally

known i.e. quantity to be consumed is certain.

7. Review of slow and non-moving items:

Sometimes, due to high value of slow moving and non-moving raw materials, it

appears that the concern has blocked huge sum of money unnecessarily in raw materials. To

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overcome this problem, it is necessary to dispose –off as early as possible, the non-moving

items or make arrangements for their exchange with the inventories required by the

concern. Besides this no new requisition should be made for the purchase of slow moving

items, till the existing stock is exhausted. Computation of inventory turnover ratio may help

in identifying slow moving items.

8. VED Analysis:

VED–– vital, essential and desirable–– analysis is used primarily for control of

spare parts. The spare parts can be divided into three categories–– vital, essential or

desirable keeping in view the criticality of production.

The spares, the stock-out of which even for a short time will stop production for quite

some time and where the cost of stock out is very high, are known as vital spares, the

spares, the absence of which cannot be tolerated for more than a few hours or a day

and the cost of lost production is high and which are essential for the production to

continue, are known as essential spares. The desirable spares are those spares which a

are needed but their absence for even week or so will lead to stoppage of production.

Some spares, though negligible in monetary value, may be vital for the production to

continue and require constant attention. Such spares may not receive the attention

they deserve if they are maintained according to ABC analysis because their value of

consumption is small. So, in their cases, VED analysis is made to get the effective

result.

9. Input – Output Ratio:

Input-Output ratio is used in material control, which indicates the relation between the

quantity of material used in the production and the quantity of final output. For

example, if 500 units of material is introduced into the process or operation and the

yield of final product is 400 units, the Input-output ratio is calculated as follows:

Input – Output Ratio = Input Units / Output x100

Advantage:

The advantage of analysis of input-output ratios is given below:

It helps in material planning by estimation of output and its raw material

requirement.

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The standard input-output ratio act as guide in control of materials used in the

process by minimization of waste, scrap, spoilage and defectives.

It acts as a performance indicator of particular production cost centers.

It helps the management in investigation and analysis of any variation is

material usage by establishing relation between input and output.

The cost-benefit analysis of use of different substitutes of raw material is

possible by comparing each of the input-output ratios.

10. Stock turnover ratio:

The stock turnover ratio indicates the movement of average stock holding of each

item of material in relation to its consumption during the accounting period. The stock

turnover ratio is calculated by applying the following formula.

Cost of materials used during the period

Average stock of materials used during the period

By comparing the number of days in the case of two different materials, it is

possible to know which is fast moving and which is slow moving. On this attempt

should be made to reduce the amount of capital locked up, and prevent over-stocking

of the slow moving items.

CHAPTER -2

OBJECTIVE AND RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY

To study inventory management system of Hero Motocorp Ltd.

24

To analyze the stock levels like reordering level, minimum stock level, maximum

stock level, and inventory control method.

To analyze the various costs involved in the inventory management.

To evaluate the process of supply chain management.

To analyze whether JIT (just in time) system can be implemented or not.

To understand the problems faced by company in handling

inventory.

To give suggestions relating to efficient utilization of inventories in Hero

Motocorp Ltd.

RESEARCH METHODOLOGY

Any of the above systematic and scientific research lies in its methodology giving a

clear idea of the forms of study and procedure adopted in conducting it and stating the

purpose become essential parts of every study.

Here, In this Project research design used is Exploratory type.

SOURCES OF DATA COLLECTION

Primary data will be collected through interview of official staff. At the

same time other departments will also be visited. They are as follows:-

Main Cash Department

Billing and Operation Department

Excise Department.

Sales Department

Secondary data will be collected through

25

Annual Reports

Inventory Reports

Cash Report

Raw Materials Report

Production Reports

Sales Reports

Financial Year Book.

Magazines, Books and Website of the company.

LIMITATIONS:

1) This project is restricted to study purpose only and can be used

keeping in view the object that is made for.

2) The respondent in the project may not reveal important /

confidential information pertaining to the company policy and for this

the project should be used keeping in view the said limitation.

3) Finding of the study will be based on the assumptions that

respondents have given correct information.

26

CHAPTER -3

COMPANY PROFILE

Introduction

Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest

manufacturer of two - wheelers, based in India.

In 2001, the company achieved the coveted position of being the largest two-wheeler

manufacturing company in India and also, the 'World No.1' two-wheeler company in

terms of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to

maintain this position till date.

VISION

The story of Hero Honda began with a simple vision - the vision of a mobile and an

empowered India, powered by its two wheelers. Hero MotoCorp Ltd., company's new

identity, reflects its commitment towards providing world class mobility solutions

with renewed focus on expanding company's footprint in the global arena.

MISSION

Hero MotoCorp’s mission is to become a global enterprise fulfilling its customers'

needs and aspirations for mobility, setting benchmarks in technology, styling and

quality so that it converts its customers into its brand advocates.

The company will provide an engaging environment for its people to perform to their

true potential. It will continue its focus on value creation and enduring relationships

with its partners.

STRATEGY

Hero MotoCorp’s key strategies are to build a robust product portfolio across

categories, explore growth opportunities globally, continuously improve its

27

operational efficiency, aggressively expand its reach to customers, continue to invest

in brand building activities and ensure customer and shareholder delight.

MANUFACTURING

Hero MotoCorp two wheelers are manufactured across 3 globally benchmarked

manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are

located in the state of Haryana in northern India. The third and the latest

manufacturing plant is based at Haridwar, in the hill state of Uttrakhand.

DISTRIBUTION

The Company's growth in the two wheeler market in India is the result of an intrinsic

ability to increase reach in new geographies and growth markets. Hero MotoCorp’s

extensive sales and service network now spans over to 6000 customer touch points.

These comprise a mix of authorized dealerships, service & spare parts outlets, and

dealer-appointed outlets across the country.

Product portfolio

1. Karizma ZMR

K A R I Z M A Z M R

2. Karizma

28

K A R I Z M A

3. Impulse

I M P U L S E

4. Xtreme

X T R E E

5. Hunk

29

6. Ignitor

I G N I T O R

7. Maestro

8. Pleasure

P L E A S U R E

9. Super Splendor

S U P E R - S P L E N D O R

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10. Splender Pro

11. Splender Plus

S P L E N D O R - P L U S

12. Splender -NXG

S P L E N D O R - N X G

13. Passion XPRO

P A S S I O N - X P R O

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14. Passion Pro

P A S S I O N - P R O

15. HF-Deluxe

H F - D E L U X E

16. HF-Dawn

H F - D

17. Glamour Programmed Fi

G L A M O U R P R O G

32

18. Achiever

A C H I E V E R

19. Glamour

Process Flow Chart:

Process flow chart for are existing to meet the production planning.

33

CHAPTER – 4

INVENTORY MANAGEMENT AT HERO MOTOCORP LTD.

Logistics /Materials Management is considered one of the vital service functions that

helps in bringing down the working capital requirement and hence, the cost of

production through reduction of interest burden. Also, it would help to make

available capital for alternate productive purposes.

◈ Materials Management Cycle :

Broadly, the Inventory Management System comprises of

Material Planning

Purchasing

Formulating delivery schedules

Receipts and inspection

Storage & issues

Re-allocation of available stocks among various stores/users

Identification of Obsolete and unusable inventory

Disposal of used items / scrap

It is needless to say that judicious Planning, Organizing, scheduling and

monitoring of various activities is essential at every stage to ensure that inventories

are maintained at optimal level and avoid stock out situations.

In real time, the subject becomes complex, as it has got inter-relationship with

the production system, which is dynamic due to both internal and external factors.

Thus, integration of Materials Management System with the production system and

supply chain management is essential to achieve the desired results.

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Functional Strategies/ Objectives of inventory management at

Hero Motocorp:

a) Evolve and implement a scientific inventory control system to achieve

optimization of inventory levels.

b) Standardize and improve equipment design.

c) Create and sustain computer culture.

d) Bring more common items under centralized procurement system to get

better control.

e) Preservation of materials to avoid damages/ deterioration during storage.

f) Improvement in purchase procedure for reduction in procurement lead-

time.

Inventory management at Hero Honda was divided into three broad areas

1. PURCHASE CONTROL

2. STORAGE CONTROL

3. ACCOUNTING CONTROL

1. PURCHASE CONTROL

● The Purchase procedure

1. Requisition to purchase

The indenters from various departments will raise requisition called the Material

Purchase Request for purchase. It should be insured that the requisition for purchase

should be completed in all respects with regard to,

Each item of purchase shall have a precise, complete and unambiguous

identification. Indenting department is responsible for identification of items in

its indents. Identification shall include the generic name of the material as

35

recognized commercially and physical dimensions (weight, size, volume,

capacity and other technical specifications) and code number as relevant.

Required date of delivery

Estimated value and approved budget head

Whether the item is a stock item/non-stock item/capital item

The stores section will raise the requisition for purchase of materials, which have

been declared as stock item, after the quantity in stock has reached the ‘reorder

level’ as determined for the respective items. Such requisition amongst other

particulars should also indicate the ‘maximum’, ’minimum’ and ‘re-order’ level, the

date on which last supply was received and the average consumption per month

since last purchase.

The requisition for purchase non-stock items will be invariably routed through the

stores section that will endorse on the requisition the availability/ non-availability.

In case the item is available, the quantity thereof is indicated on the purchase

requisition so that the quantity to be purchased can be adjusted by the head of the

purchase dept. in consultation with the indenters.

The finance & Account dept. would ensure that the purchase requisition must

indicate:

a) The budget provision

b) The amount utilized / committed up to the previous requisition

c) The estimated value of the present requisition (by departmental head), and

d) The balance available under the budget head after booking the present

requisition.

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2. Quotation from different vendor

On receipt of the requisition from the various indenting departments, enquiries shall

be issued by the purchase dept. to find out different vendors for particular material.

Quotation from different vendor is invited. Normally, the lowest Quotation, which

conforms, to the specifications will be accepted. However, where the lowest bid even

though it conforms to the specifications is not accepted, full justification for accepting

other than the lowest bid shall be recorded in writing and approval of the competent

authority will be obtained.

3. Confirmation of Purchase Order:

Purchase order is given to the lowest quotation on agreed terms and condition.

Lead Time:

The purchase time indicates the lead-time i.e. time taken to physically receive the

material from the date of its indent.

Current lead time of the company is 15 days.

PROCESS OF RECEIPT OF MATERIALS

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Goods are receivedBy the security

personnel

Entry is made in theGate Inward Register

(‘GI’)

Stores informs QC aboutthe receipt of goods and samples

are collected for testingPhysical verification is conducted

by contractual labour andSupervised by Stores

Stores Executive preparesthe GRN against

the PO created in SAP

GI Register is manually reconciled with the GRN prepared by Stores to ensure that all goods are recorded in

SAP

Daily

Monthly Process

STORAGE CONTROL:

The procurement action of stock items is initiated by store. Normally working hours

of store is general shift hours. However, in case of shut down, emergency service of

stores is made available as requested by user department.

OBJECTIVE OF STORES

To render materials, services to the organization by receiving, issuing the spare parts,

preserving the spares in custody, disposing the scrap/ surplus materials. The objective

is achieved through following function. Stores function is basically a service function.

The main functions of the stores are:

1) To receive all types (Stock and Non-Stock) materials, to arrange

inspection of materials.

2) To keep materials safe custody, issue of materials to service and

maintenance department.

3) To initiate action for procurement of stock items, to keep in custody and

issue to service department.

4) Disposal of Non-moving item, surplus item, and scraps item.

5) Implement stores related policies and functions.

6) Coordinating with other departments for stores related activities.

7) To maintain records/ files of all stores activities, issue vouchers, stores

receipt vouchers (SRV), stock adjustment vouchers (SAV), material

exception reports (MER), claims/ dispatch advice etc.

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DIVISONS OF STORE:

Store department is also divided into three sections:

RECEIPT SECTION

CUSTODY SECTION

DISPOSAL SECTION

RECEIPT SECTION

Main Functions of receipt section;

To arrange copies of purchase order/work order and amendments thereof

for ready reference.

Receiving of materials – checking and arranging for inspection.

Documentation – SRV (Store Receipt Voucher)

Handling over of accepted materials to custody section

Accounting / segregation of rejected material.

Follow up with handling contractor and transporter

Processing bills for services availed.

CUSTODY SECTION

Main function of section;

1. Codifying all the items with 9+1 digit code structure.

2. Receiving & posting of “accepted materials” against SRV and storing at proper

location

3. Preservation of material during storage period.

4. ‘Stock Verification’ reconciliation of stock with management approval.

5. Issue of material to the service and maintenance department as and when required.

6. Maintenance of records and accounting for each transaction.

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7. Verification of “Material statement” for the material issued against various ‘work

orders’

9. Preparation of MPRs for ‘stock controlled’ items.

11. Review and fixing of ‘stock level’ for “stock control items”.

12. Housekeeping of the entire covered area under stores

STORES FLOW DIMAGRAM

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Receipt Section

Receiving of materials

from Hero Honda Ltd.

Return of rejected materials

to Hero Honda Ltd.

Return of material

through ISRV-Inspection of material.

-SRV

-Accepted material.

Custody Section

MPR for stock

item to purchase

Issue of material to

User Dept.

The preservation

of material

Handing over surplus

material for disposal

to Disposal sec.

Disposal section

PROCEDURE FOR RECEIVING THE ACCEPTED MATERIAL

IN CUSTODY SECTION

A) The materials are received in custody section through two sources mainly.

From receipt section through SRV and;

From user dep’t through ISRV (Material once drawn from stores

and not consumed can be returned to custody till it is further

required for consumption).

1) If the material is received through SRV,

i) SRV for receipt of accepted material will be checked for special remarks

for storage condition (if any) & taken into custody.

ii) The appropriate location for the material will be selected/arranged.

iii) The material will be shifted to the selected place of its storage.

iv) The material will be “stock charged” i.e. taken into account by posting in

computer.

2) If material is received through ISRV,

i) SIV reference no. & date (when this material was drawn).

ii) Reasons of return.

iii) % Value of material indicated by user or not.

iv) If it is repaired & returned to stores.

v) Condition of material.

B) Quantity mentioned in ISRV is checked with quantity received by stores.

PROCEDURE FOR RECONCILIATION OF INVENTORY

STATUS

It is a system for identifying the unwanted inventory and the deviation in physical

stocks for reconciliation of the stock and maintaining the accuracy in “management

reporting system” for inventory status.

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All items in stocks are to be physically verified once in a year so that

necessary adjustments can be made in stocks after obtaining necessary approvals from

competent authority.

PROCEDURE

Every item will be verified under perpetual type of “inventory verification

system” once in a year.

The finance department will prepare the group wise list of the items.

On hand quantity against the individual item will be noted with their

respective location.

The physical stock is then verified with the representative of stores dep’t.

The deviation will be checked, scrutinized and sorted out.

The final list of unsettled item with deviation in quantity will be prepared.

Management approval for write-off / write on the stock is obtained.

Stock is adjusted through a voucher- SAV

PROCEDURE FOR MATERIAL ISSUE

Materials are issued within the specified time period i.e. 9.00 AM to

12.00 noon. In case of emergency, materials can be issued depending

upon the merit of the case.

Materials are issued against SIV format signed by authorized persons.

SIV will be checked.

Indication for type of transaction will be checked on SIV

Quantity on hand and location of the item will be noted on the SIV for

respective item.

Quantity to be issued is decided based on type of material required.

If required materials is “stock item”, then quantity issued is

depending on stock available.

If required material is “non-stock” item, it can be issued full (i.e.

equal to demanded quantity).

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If required material is material is from “reserved material

category”, then it can be issued to maximum quantity kept

reserved for that particular dep’t.

Material will be issued for the decided quantity-obtaining signature &

name of the drawer for its physical receipt.

Quantity issued for the item will be posted to update the stock position.

DISPOSAL SECTION

The various function of disposal section;

To receive surplus material, scrap, unserviceable stores.

It is ensured that scrap materials are properly located / stored for fetching

good price.

Coordinating activities of declaring items as surplus / obsolete, fixing of

reserve price for their disposal and obtaining management approval for

their final disposal.

Accounting Control

Inventories are the assets of a company and such as their valuation get reflected in the

balance sheet and profit and loss account. These can be valued at actual, at the last

price paid, on the basis of an average price, current market price, and so on. A

company may adopt a particular method of inventory valuation, but it is obligatory to

follow it for a minimum period of three years. Any changeover to a new method

requires the approval of the board.

Inventories measured by money value usually constitute the major element in the

working capital of manufacturing companies. Only proper stores accounting

procedure can successfully achieve control of inventory.

A good system of stores accounting is found to be necessary for certain other

purposes like:

a) Preparation of accurate cost accounts

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b) Evaluation of purchase performance

c) Working out important management ratio like sales to inventory, consumption

to inventory, purchase to inventory, inventory turnover etc.

d) Preparation of materials budget

When a material is purchased, received, inspected, and placed in the stores, an

entry is made about the purchase through a Goods Receipt Voucher. The entry for

the quantity received is simple, but the entry for the value of a purchase is a vexed

problem because the value is the sum of a number of items like:

a) Invoice price

b) Sales tax/ octroi

c) Excise duty/ custom duty

d) Insurance

e) Freight, carriage, handling charges etc.

The goods receipt voucher is priced from the appropriate invoice and the material

account is debited in the stores ledger.

Valuation of the Material Issue

The method of valuation followed in Hero Motocorp Ltd. is the weighted average

pricing mechanism. In this method the total quantities and total costs are considered,

unlike simple average method where only total costs are considered. This pricing

mechanism is quite advantageous as the price is fixed for a particular period say for

one month and the system takes care of price fluctuations.

Preparation of Bin Cards

Bin card is a quantitative stock ledger. It shows the on-line stock position. Whatever

any basic document relating to movement of stores (SIV, SRV, SAV etc) is punched

into system, automatic-posting goes into Bin-Card

.

Pricing of Receipts (SRV)

The custody section sends SRV to finance for purpose of pricing. Finance prices the

SRV on the basis of terms and conditions of the purchase order and bill of vendor.

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SRV for which bills are not received from the vendor are valued provisionally at the

month end. Preparing a SR amendment voucher does adjustments for variation in

value.

Pricing of Issues (SIV)

Issues are valued on monthly weighted average basis. The issue of material or spare

will be valued at monthly weighted average method.

Preparation of Price Store Ledger (PSL)

The PSL is an item wise stores ledger. It shows both quantity and value.

CLASSIFICATION OF INVENTORIES: -

The materials are classified into 2 they are

1. ABC analysis

2. XYZ analysis

1) ABC ANALYSIS:-

For ‘A’ class items Hero motocorp use direct online (DOL).

A class parts are purchased daily

They purchase ‘A’ items from local vendors.

Some of the A class items includes Chasis, Aluminum, Ferro, liners, back spares, etc.

B class parts are purchased up to 4 days.

B class items are spring, stickers, rubber components, plastics etc

C class parts are purchased up to 7 days or 10 days.

C class items are wires, nut bolts etc.

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ABC classification for the year 2012-13 is tabulated below:

ABC Class Criteria No. of material Cumulative

consumption value ( in

lac)

A 70% of

consumption

value

219 75.25

B 20% of

consumption

value

937 21.54

C 10% of

consumption

value

9080 10.76

10236 107.56

A class item having criteria 70% consumption value has 219 items and value of 75.25

lacs.

These items are required to be ordered frequently to reduce capital locked up in

inventory. They should also have low safety stock and strict control. These items

should be handled by senior staff.

B class item having criteria 20% consumption value has 937 items and value of 21.54

lacs. These items require only periodic follow up and have moderate safety stock.

They need moderate control.

C class item having criteria 10% consumption value has 9080 items and value of

10.76 lacs. These items require exceptional follow up and high safety stock and

require lose control.

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TOOLS AND TECHINIQUES OF INVENTORY

MANAGEMENT, WHICH COMPANY IS ADOPTING: -

KAN BAN

JIT

MILK RUN CONCEPT

TWO BIN SYSTEM

1) KANBAN:-

A kanban is a card containing all the information required to be done on

product at each stage long its path to completion and which parts are needed at

subsequent process. These cards are used to control work-in-process (W.I.P),

production, and inventory flow. A KANBAN system allows a company to use just-in-

time (J.I.T) production and ordering systems which allow them to minimize their

inventories while still satisfying customer demands.

In Hero Motocorp, they used Kanban system for ‘c’ class items.

2) JUST IN TIME INVENTORY CONTROL:-

the just-in-time inventory control system, originally developed by taichi okno

of happen, simply implies that the firm should maintain a minimum level of inventory

and rely on suppliers to provide parts and components just in time to meet its

assembly requirements. This may be contrasted with the traditional inventory

management system, which calls for maintaining a healthy level of safety stock to

provide a reasonable protection against uncertainties of consumption and supply the

traditional system may be referred to as a “just-in-case” system.

47

The just in time inventory system, while conceptually very appealing, is difficult to

implement because it involves a significant change in the total production and

management system. It requires inter alias

(i) A strong and dependable relationship with suppliers who are

geographically not very remote from the manufacturing facility.

(ii) A reliable transportation system and

(iii) As easy physical access in the form of enough doors and conveniently

located docks and storage areas to dovetail incoming supplies.

.

under the just in time inventory system a concentrated effort is made to lower the

ordering cost (F in the above equation) and also the safety stock by forging stronger

long-term relationship with the supplier. As a result both the components on the right

hand side of the above equation declaim and this means that the average inventory

level as lower.

3) MILK RUN CONCEPT:-

The concept of the milk run is day to day purchasing. Here the buyer will

purchase the material according to the production, which is for the next one day.

The buyer will first know the safety and control stock and then he tells to the supplier

the estimated trigger value. In milk run concept only quality-certified stock will be

delivered. The purchaser should estimate the lead-time and it is compulsory so as to

have the control over lead-time. It is direct on-line system. There will be no inspection

so as to save time.

Advantages: -

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Economical transportable lot(minimum transportation cost per piece)

No inventory carrying cost at plant and at warehouse.

It is direct online system

Quality certified stock will be delivered and so no inspection is required.

Estimation of different costs of holding Inventory: -

In the calculation of the ordering cost and also for other calculation purpose or

analyzing purpose, ‘I have considered ALL CLASSES ITEMS AND TO ALL

MODELS’, To calculate the various costs which are involved in the analysis of

inventory management as explained earlier.

TRANSPORTATION COST:-

These are the cost, which are incurred when the spare parts/materials are

procured from different places in Hero Motocorp ltd, the spare parts are procured

from the places like Delhi, noida, Mumbai, pune, nashik and banglore etc. and the

cost is incurred by procuring the spare parts form vendor’s place to the company i.e.

manufacturing unit.

There are different slab for the transportation cost procured from different places.

Two main important factors are considered in calculating transportation cost.

Distance between the company and vendors place.

Depending upon the weight of the spare part to be transported.

Transportation cost is taken as maximum 2.5% of the basic price of the spare parts on

an average.

CARRYING COST: -

These are the costs for holding the inventories. These costs will be depending

up on their classes. These costs will not be incurred if inventories are not carried.

49

Usually 4 days inventory are kept in stock for any ‘A’ category items. Hence the

carrying cost includes various costs and those are capital locked in the inventories,

storage cost, maintenance cost etc.

ESTIMATION OF STOCK LEVELS FOR Super Splendor:

NOTE:- HERE IAM CONSIDERING ONLY SUPER SPLENDOR

There are different models used in the calculations of the stock levels. As

mentioned earlier the formula for the calculations of the stock levels, economic order

quantity, number of purchase orders placed in the month for different spare parts.

Reordering quantity - 2000units.

Reordering period – 2 to 3 weeks.

Weekly usage: -

Maximum – 600 units.

Normal – 480 units.

Minimum – 390 units.

RE-ORDERING QUANTITY:

The quantity to order is called re-order quantity. There are many factors to be

considered to place an order for certain level at certain time. It depends upon the

present demand, future, and the coordination between the buyer and vendor etc.

The re-ordering quantity, which is generally followed, is that of ordering the

bin quantity. In Hero Motocorp ltd., a system is followed in ordering and that is like

2-bin system. After the consumption of 1-bin order is placed with the vendor for the

procurement of spares.

Hence reordering quantity is taken as the 1-bin quantity. This process of

ordering is not exact as per the schedule of the production is concerned because it

keeps on changing

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Reordering quantity is 2000 units

Reordering period is 2-3weeks.

Reordering level = maximum consumption X maximum re-order period

600 x 3 = 1800 units.

MINIMUM STOCK LEVEL: -

NOTE: - For the calculated of the champion vehicles as 480. Hence the weekly

consumption of the parts id constants

Ex: - consider “SUPER SPLENDER” for calculation purpose.

Normal daily consumption = 480units.

Normal reorder period = 2.5weeks.

Reorder level = 1800 units.

Minimum stock level reorders level- (normal consumption x normal reorder

period)

1800-(480 x 2.5)

= 600 units.

The engine stocks should not go below 600 units. Otherwise there will be shortage in

stocks of engine and the company can come across losses due to the storage.

MAXIMUM STOCK LEVEL:-

It is the level at which it is risk of storing the inventory and thus it is loss to the

company, if it exceeds this level.

It is calculated as:

Re-order level=1800 units.

Re-order quantity =2000 units.

Minimum consumption=390 units.

Minimum re-order period = 2 weeks.

Maximum stock level = re-order level + re-order quantity –(minimum

consumption X minimum re-order period).

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=1800 + 2000 – (390 x 2)

=3020 units.

From this it is clear that the stock level of the engine should not exceed above 3020

units. It will be economical to maintain stock below 3020 units. Above this level the

company incurs relating sort the maintenance of stock, loss due to storage, storage

cost, insurance cost, etc.

AVERAGE STOCK LEVEL: -

It is the company should maintain in order to reduce the various cost of inventory

management. At this level it is very economical for the company to maintain the

stocks at this level

It is calculated as:

Minimum stock level = 600units

Re-ordering quantity = 2000 units.

Average stock level = minimum stock level + ½ of re-ordering quantity.

=600 + (1/2 x 2000)

=1600 units.

INVENTORY RATIOS:

1. Inventory turnover ratio

Inventory turnover ratios are calculated to indicate whether inventories have

been used efficiently or not.

Year Sales Average Inventory Inventory turnover ratio

2011 5,30,67,62,000 44,34,50,000 11.97

2012 5,31,16,92,000 56,39,00,000 9.48

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2013 5,92,32,04,000 61,14,44,000 9.69

Interpretation

This ratio shows how rapidly the inventory is turning into receivable through sales.

The inventory turnover ratio is 11.97 in 2011. It is decreased up to 9.48 in 2012 and it

is 9.69 in 2013. The above analysis shows that the inventory management is very

efficient throughout the period of study. Compared to 2011, ITR shows decreasing

trend. But still it didn’t decrease to great extent. Hence we can say company’s having

tight inventory control system.

2. Inventory holding period

Year Days Inventory turnover ratio

Inventory turnover ratio ( in days )

2011 365 11.97 30

2012 365 9.48 39

2013 365 9.69 38

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3. Raw material turnover ratio

Year Annual Consumption of raw material

Average raw material inventory

Raw material turnover ratio

2011 3,30,12,19,000 25,07,20,000 13.17

2012 3,56,19,13,000 33,91,15,000 10.50

2013 3,89,52,11,000 32,12,74,000 12.12

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4. Finished goods inventory turnover ratio

Year Cost of goods sold

Average Inventoryof finished goods

Finished goods turnover ratio

2011 5,30,67,62,000 6, 99, 32,000 75.88

2012 5,31,16,92,000 11, 49, 46,000 46.21

2013 5,92,32,04,000 13, 77, 54,000.5 42.99

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CHAPTER – 5 FINDINGS

For all the models assembled in Hero Motocorp Ltd. the reordering

quantity is followed by two bin system i.e. after the consumption of

one bin only the second bin order is placed.

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The minimum stock level that Hero Motocorp Ltd. will store for

champion model is 600 units by calculation.

There is a risk and loss to the company if it exceeds a maximum

stock more than 3020units for champion model.

From the study i found that for champion auto the average stock

level is 1600 units on the basis of minimum stock and reordering

quantity.

From the past two years there is a tremendous increase of

production and dispatches which in turn gave rise to growth of all

models of Hero Motocorp Ltd.

Management concentrates much while taking decisions in supply

chain as there is a problem in transportation due to location

disadvantage.

JIT system is being implemented in Hero Motocorp Ltd. as

consumption of materials for all models are procured for a definite

period of time.

While purchasing materials a definite codification is given to each

and every spare parts of vehicle for all models and it is maintained

with that particular code only.

CHAPTER - 6

SUGGESTIONS

57

The process two bin system of reordering quantity must be taken exactly as

per the schedule of production as there may be changes due to increase in

demand and unforeseen conditions.

The minimum and maximum stock level should be accordingly to the

calculated units, otherwise there will be a risk of shortage of inventory and

thus it is a loss to the company.

The company should maintain the average stock level accordingly in order

to reduce the various costs of inventory management.

Investment of finance will be less if the stock is brought day-to-day. So the full

inventory has to be made direct online system on basis of milk run concept.

To keep materials cost under control so that they contribute in reducing

cost of production and overall costs.

Proper codification leads to maximum cost control.

Finally I suggest that Hero Motocorp Ltd. should continue in using the high

Japanese technology .

CHAPTER -7

BIBILIOGRAPHY

FINANCIAL MANAGEMENT - PRASANNA CHANDRA

COST ACCOUNTING - S. N. MAHESHWARI

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COST ACCOUNTING - VARSHINI & SAXENA

INVENTORY MANAGEMENT - Bhagirath Singh.

Websites:

www.heromotocorp.com

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