1.1 INTRODUCTON OF THE STUDY

Inventory can be referred to as sum of the value of raw materials

fuels and lubricants, spare parts, maintenance consumables, semi

processed materials and finished goods, stock at any given point of

time.

In large companies inventory place a most significant part of the

current assets. The business has about 15 to 30% of inventories in

total assets.

Inventory is composed of assets that will be sold in feature in the

normal course of business operations. The assets which firms stores

as inventory is anticipation of need are raw materials, work in progress

and finished goods.

MEANING OF INVENTORY MANAGEMENT

Inventory management consists of maintaining for a given financial

investment an adequate of something in order to meet and accepted

pattern of demand. Inventory considers control over costs of inventory

on one hand an handle the size of inventory on other hand.

Controlling investments in inventories constitute crucial part in current

assets.

An efficient inventory controlling system will decide,

What to purchase

When to purchase

How to purchase

Size of purchase

1

And from where to purchase (Suppliers)

The main purpose of inventory management is to ensure

1. Required quantity of availability of raw materials

2. Minimize the investments in inventories

3. Maintain reasonable stock levels not excess or not under

stocks.

INVENTORY CONTORL

Inventory control is the system devised an adopted for controlling

investments in inventory. It involves inventory planning and decision

making with regard to the quantity and time of purchase, fixation of

stock levels, maintenance of stock records and continuous stock –

taking.

1.2 OBJECTIVE OF THE STUDY

The main objective of the project work is to study and analyze and

preparation INVENTORY MANAGEMENT in ZUARI Cement.,

Secondary objectives are:

1. Purchasing procedure of the inventories.

2. Classification of inventories.

3. Codification of inventories.

4. Analyze the records of stock levels.

5. Analyze the JIT system of ZUARI Cement.

6. Analyze the two bin system.

7. Analyze the inventory turnover ratio.

2

1.3 NEED OF THE STUDY:

In this competitive business world each and every business

organization need inventory management system for determining what

to order, when to order, where and how much to order so that

purchasing and storing costs are the lowest possible without affecting

production and sales. Thus, inventory management control

incorporates the determination of the optimum size of the inventory-

how much to be order and when after taking into consideration the

minimum inventory cost.

The overall inventory management includes design and inventory

control organization with proper accountability establishing procedure

for inventory handling disposal of scrap, simplification, standardization

and codification of inventories, determining the size of inventory

holdings, maintaining record points and safety stocks, economic order

quantity, ABC analysis and VALUE analysis and finally framing an

INVENTORY MANUAL.

1.4 RESEARCH METHODOLOGY

To attain the objective of studying the inventory of ZUARI Cement

Industries Ltd. The information has been collected in two ways:

1. Primary data

2. Secondary data

Primary Data:

In Primary data the analysis of purchasing procedure, inventory data,

inventory turnover ratio, stock levels, ABC analysis, Twobin system, JIT

3

has made possible by the discussions with various administrative

executives and other concerned people of ZUARI Cement industries

Ltd.

Secondary Data:

The Secondary data has been collected from annual reports of

organization, internet (www. birlagroup.com) and books.

Methodology:

For analysis purpose I am used following techniques

1. ABC Analysis,

2. Ratio Analysis

3. EOQ Method etc

Company’s competitors are Orient Cement, L&T, Ultratech, and

ACC Cement

1.5 Limitations of the study:

1 The study period of 45 days as prescribed by university

2 The study is limited unto the date and information provided by

ZUARI Cement Industries Ltd and its annual reports

3 The report will not provide exact Budgetary System status and

position in ZUARI Cement Industries Ltd; it may vary from time to

time and situation to situation.

4 This report is not helpful in investing in ZUARI Cement either

through disinvestments or capital market.

4

5 The accounting procedure and other accounting principles are

limited by the company changes in them may vary the actual

and budget performance.

2.1 INDUSTRY PROFILE:

INTRODUCTION OF CEMENT:

The basic need of human being is food clothing and shelter love

and affection /possession is on never ending process for a human

being.

As the time passes on human beings their wants and wishes also

changed from ancient times to modern times and among them the

living pattern and costruction works also have been changed from

temporary construction of house to permanent construction and the

basic material used in construction is “Cement”.

Cement the word derived from a Latin word ‘CEMENTTUM’ means

stone chipping such as we used in roman.

Cement the word as per oxford, it is commonly used is any

substance applied for soft stocking things. But cement means is most

vital and important material for modern constructions. It is a material

which sets and hardness when mixed with water. Cement is basically

used in construction as a building agent. In ancient times clay bricks

and stones have been used for construction works.

The Romans were using a binding or a cementing material that

would harden and water. The first systematic effort was made by

“SMEATON” who undertook the execution of a new light house in

1756. He observed that

5

production obtained by during lime stone was the best cementing

material for work under water.

The construction in lost centuries was with Lime that was the

main equipment used for construction work. The ancient constructions

like Tajmahal, Qutubminar, Mysore Palace, Red fort, Charminar etc.,

the evidence of lime construction.

THE INDIAN CEMENT INDUSTRY:

By staring priduction in 1914 the story of India cement industry

is a stage of continuous of growth.

India is the fourth largest cement producer after China, Japan

and U.S.A. so far annual production and demand has been growing a

pace at roughly 68 million tons with an installed capacity of 82 millions

tons.

In 1914 as the foundation of stable cement Industry was laid as

sun above. It was Indian Cement Company at Porbandar in Gujarat. In

1920, the cement marketing corporation was formed to promote the

sale and distribution of cement. A significant development was made in

1930 when all manufacturers mergers together to form the Associated

Cement Company Limited.

Cement Industry is the major Industry it has taken rapid strides

for a modest beginning at porbandar in 1914 to the 1980’s with over

understanding out of the 60 units, 14 units are in the public sectors

remaining units are in private sector.

Indian endowed with cement grade lime stones (90 Billion tons )

and coal (190 Billion tons ). The basic raw material required for

cement manufacture and self sufficient in manufacturing cement

making machineries. During nineties it had a particular impressive

expansion with a growth rate of 10%.

6

The strength and vitality of cement Industry can be gouged by

the interest shown and support given by World Bank, considering the

excellent performance of the industry in utilizing loans and achieving

the objectives and targets. The World Bank is examining the feasibility

of providing a third line of credit for further upgrading Industry in

varying areas, which will make it global.

Therefore, India today totally installed capacity of over 30 million

tons, employing over a 100 thousand people directly and contributing

amount of rupees 8 billion to India’s GDP.

TECHNOLOGY:

Cement may be manufactured employing three alternative

technologies.

1. The largely out molded well process technology.

2. The more modern dry process that requires only 19% coal

utilization.

3. The latest percallinator technology through which optimum

utilization may be achieved. Here the calcinatory or raw.

Material is partly or completed carried out before the feud enters the

rotator kin besides saving power, the adoption of this technology

enable in increase in installed capacity by 30-35%, the 30,000 tons per

day plants being setup in the country use this technology.

TECHNOLOGICAL CHANGES:

Continuous technological upgrading and assimilation of latest

technology has been going on in the cement industry. Presently 93% of

the total capacity in the industry is based on modern and environment

friendly dry process technology and only 7% of the capacity is based

on old wet and semi-dry process technology.

7

There is tremendous scope for waste heat recovery in cement

plants and there by reduction in emission level. One project for co-

generation of power utilizing waste heat in an Insian cement plant is

being implemented with Japanese assistance under Green Aid Plan.

The induction of advanced technology has helped the industry

immensely to conserve energy and fuel and to save materials

substantially.

India is also producing different varieties of cement like Ordinary

Portland Cement (OPC), Portland Puzzling Cement (PPC), Portland Blast

Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening

Portland Cement, Sulphate Resisting Portland Cement, White Cement

etc. production of these varieties of cement conform to the BIS

Specifications. Also, some cement plants have set up dedicated jetties

for promoting bulk transportation and export.

TOTAL PRODUCTION:

The cement industry comprises of 125 large cement plants with

an installed capacity of 148.28 million tons and more than 300 mini

cement plants with an estimated capacity of 11.10 million tons per

annum. The Cement Corporation of India, which is a Central Public

Sector Undertaking, has 10 units. There are 10 large cement plants

owned by various state Governments. The total installed capacity in

the country as a whole is 159.38 million tons.

Actual cement production in 2002-03 was 116.35 million tons as

against a production of 106.90 million tons in 2001-02, registering a

growth rate of 8.84%. Major players in cement production are Ambuja

cement, Aditya cement, J K Cement and L & T cement.

8

Apart from meeting the entire domestic demand, the industry is

also exporting cement and clinker. The export of cement during 2001-

02 and 2003-04 was 5.14 million tons and 6.92 million tons

respectively. Export during April-May, 2003 was 1.35 million tons.

Major exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.

The planning commission for the formulation of X Five Year Plan

constituted a ‘Working Group on Cement Industry’ for the development

of cement industry. The Working Group has identified following thrust

areas for improving demand for cement;

1. Further push to housing developments programs;

2. Promotion of concrete Highways and roads, and

3. Use of ready-mix concrete in large infrastructure projects.

Cement industry has been decontrolled from price and distribution

on 1st march 1989 and de-licensed on 25th July 1991. However, the

performance of the industry and prices of cement are monitored

regularly. Being a key infrastructure industry, the constraints faced

by the

Actual cement production in 2002-03 was 116.35 million tons as

against a production of 106.90 million tons in 2001-02, registering a

growth rate of 8.84%. Major players in cement production are Ambuja

cement, Aditya cement, J K Cement and L & T cement.

Apart from meeting the entire domestic demand, the industry is

also exporting cement and clinker. The export of cement during 2001-

02 and 2003-04 was 5.14 million tons and 6.92 million tons

respectively. Export during April-May, 2003 was 1.35 million tons.

Major exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.

9

The planning commission for the formulation of X Five Year Plan

constituted a ‘Working Group on Cement Industry’ for the development

of cement industry. The Working Group has identified following thrust

areas for improving demand for cement;

4. Further push to housing developments programs;

5. Promotion of concrete Highways and roads, and

6. Use of ready-mix concrete in large infrastructure projects.

Cement industry has been decontrolled from price and distribution

on 1st march 1989 and de-licensed on 25th July 1991. However, the

performance of the industry and prices of cement are monitored

regularly. Being a key infrastructure industry, the constraints faced

by the industry are reviewed in the Infrastructure Coordination

Committee meetings held in the Cabinet Secretariat under the

Chairmanship of Secretary (Coordination). The 444 Committee on

Infrastructure also reviews its performance.

DISTRIBUTION SYSTEM:

Distribution of cement was entirely under Government control

until 1982. at present the Industry has to make an agreement

towards the levy quota which is to be sold compulsorily to the

Government the rest of the output or open market quota may be

sold in the open market evolved prices the output lifted by the

Government is allocated state wise.

10

2.2 COMPANY PROFILE:

Italcementi Group History

Founded in 1864, Italcementi was quoted for the first time on the stock

markets, at the Milan Stock Exchange, in 1925, under the name of

“Società Bergamasca per la Fabbricazione del Cemento e della Calce

Idraulica” and has been operating since 1927 under the name of

Italcementi Spa.

Zuari Cement is part of the Italcementi Group, the fifth largest cement

producer in the world and the biggest in the Mediterranean region.

With net sales over 6 billion Euros in 2009 and a capacity of 70 million

tonnes. Italcementi Group combines the expertise, know-how and

culture of a number of companies from more than 22 countries in 4

continents. This includes an industrial network of 63 cement plants, 15

grinding centres, 5 terminals, 134 aggregates quarries and  613

concrete batching units. In India, with its inherent strengths,

Italcementi Group's Zuari Cement is committed to give the building

11

industry a cement that is truly international.    

A commitment to customer satisfaction has seen Zuari Cement grow

from a modest 0.5 million tonne capacity in 1995 to 3.5 million tonne

today. Zuari Cement is in the process of increasing this capacity to 6

million tonne by 2009 through setting up of a new 5500 tonne per day

clinker line at Yerraguntla and a grinding center at Chennai. A captive

power plant with a capacity of  43 MW has already been set up at the

Company's cement manufacturing facility at Sitapuram.

With a 6% market share in the south Indian cement market and sales

of about Euro 188 million in 2009, Zuari Cement has chalked out

ambitious plans for the future. This includes strengthening its presence

in the Maharashtra, Orissa and West Bengal markets. While technology

is just one of its strengths, there are many other factors that contribute

equally to Zuari's success.  These include a high-level organisation and

decentralised quality assurance teams to guarantee the full

compliance with the customers' expectations.  

Our History

Strong foundations for a company of strength.  

Zuari entered the Cement business in 1994 to operate the Texmaco

Cement Plant. In 1995, Texmaco’s Plant at Yerraguntla was taken over

by Zuari and a Cement Division was formed. The fledging unit came

into its own in the year 2001 when Zuari Industries entered into a Joint

Venture with the Italcementi Group, the 5th largest producer of

Cement in the world , Zuari Cement Limited was born. Zuari Cement

took over Sri Vishnu Cement Limited in 2002. Today, the Company is

amongst the topmost cement produces in South India.

Zuari and Italcementi. The strength of two :

Zuari Cement is one of the leading cement producers in South India.A

12

fully owned subsidiary of the Euro 6 billion Italcementi Group,

Commitment to customer satisfaction has seen Zuari Cement grow

from a modest 0.5 million tonne capacity in 1995 to 3.5 million tones

today.And earned a place among the most reliable cement producers

in the country.          

Thanks to a careful plan of investments and take-overs of other

cement producers, the company expanded, quickly reaching a strong

position on the market and becoming the leading cement

manufacturer in Italy.

After several acquisitions abroad, in 1992 Italcementi achieved

important international status with its take-over of Ciments Français,

one of the main global cement producer.

In 1997 Italcementi consolidated its verticalisation strategy with the

acquisition of Calcestruzzi, thus becoming Italian leader in the ready-

mixed concrete sector.

In March 1997, all the international companies of the Group gathered

under one single corporate identity.

 

Since 1998 Italcementi Group has been pursuing its

internationalisation strategy by acquiring new cement works in

Bulgaria, Kazakhstan, Thailand, Morocco, India, Egypt and the United

States.

Our Management:

While professional management and quality workforce ensure superior

results, the role played by the core management should not be

discounted. With their vision and experience, they make sure that

Zuari Cement moves in the right direction. Towards becoming one

13

among the leading cement producers in India. 

Maurizio Caneppele

Managing Director

Ramesh Surya Narayana

Director Technical

Emiliyan Andreev

Chief Financial Officer

S.SURESH

Vice President HR & IR

Appotiment of Director

Zuari Industries Ltd has informed BSE that the Board of Directors at its

meeting held on January 21, 2011 have appointed Mr. Suresh Krishnan,

as Additional Director of the Company.

With an annual production capacity of approximately 70 million tons

of cement, Italcementi Group is the world’s fifth largest cement

producer.

The Parent Company, Italcementi S.p.A., is one of Italy’s 10 largest

industrial companies and is included in S&P/MIB Index of the Italian

Stock Exchange.

Italcementi Group’s companies combine the expertise, know how and

cultures of 22 countries in 4 Continents boasting an industrial

network of 63 cement plants, 13 grinding centres, 5 terminals,

125 aggregates quarries and 614 concrete batching units.

In 2009 the Group had sales amounting to almost 6 billion Euro.

14

Italcementi, founded in 1864, achieved important international status

with the take-over of Ciments Français in 1992.

Following a period of re-organization and integration that culminates in

the adoption of a single corporate identity for all Group subsidiaries,

the newly-born Italcementi Group began to diversify geographically

through a series of acquisitions in emerging countries such as Bulgaria,

Morocco, Kazakhstan, Thailand and India, as well as operating in North

America. As part of the plan to further enhance its presence in the

Mediterranean area, in 2005 the Group boosted its investments in

Egypt becoming the market leader.

In 2007 Italcementi acquired full control of the activities in India and

signed an agreement to strengthen its position in Kazakhstan while, in

2008, it further strengthened its presence in Asia and the Middle East

through the operations in China, Kuwait, Saudi Arabia. In 2009 the

Group signed a joint venture in Libya to build a 4 million tons/year

cement plant.

As a member of the World Business Council for Sustainable

Development (WBCSD) Italcementi Group has signed the Cement

Sustainability Initiative’s Agenda for Action, the first formal

commitment that binds a number of world cement industry leaders to

an action plan that aims at satisfying present-day needs at the same

time as safeguarding the requirements of future generations.

To further confirm its commitment on these issues, the Group has

taken over the co-Chairmanship of the Cement Sustainability Initiative

for the period 2007-2008.

Our Products

Cement for every kind of task

15

Zuari Cement manufactures and distributes its own main product lines

of cement .We aim to optimize production across all of our markets,

providing a complete solution for customer's needs at the lowest

possible cost, an approach we call strategic integration of activities.

Cement is made from a mixture of 80 percent limestone and 20

percent additives. These are crushed and ground to provide the "raw

meal”, a pale, flour-like powder. Heated to around 1450° C (2642° F) in

rotating kilns, the “meal” undergoes complex chemical changes and is

transformed into clinker. Fine-grinding the clinker together with a small

quantity of gypsum produces cement. Adding other constituents at this

stage produces cements for specialized uses.

Blended Cements

Zuari Blended Cement the eco-friendly, user-friendly

cement :

Zuari Blended Cement has been developed in response to today’s need

for environment-friendly products that are cost-effective, durable and

have minimal by-products.

Durability is a very important property in concrete. And durability here

means concrete that ensures the long life span of structures like

homes and residences that are lifetime investments. Since distress of

concrete and early failure of structures is a common phenomenon,

research over a period of time helped develop various remedial

measures that improved durability and cost economics. One of them

being blended Portland Cement, with complementary pozzolanic and

cementitious materials like fly ash, blast furnace slag, etc. And Zuari

Blended Cement is a fine example of it.

16

Our Products

Portland Cement

Zuari OPC is a high quality cement prepared from the finest raw

material. Owing to optimum water demand, it contributes to a very low

co-efficient of permeability of  the concrete prepared. This improves

the density of the concrete matrix and increases the durability of the

concrete. Zuari OPC is a high performance cement far exceeding the

codal requirement of BIS.

It is this very durability that translates into long - lasting residential

and commercial constructions of a wide variety.

Zuari’s edge:

With these unique advantages, Zuari Cement comes to you in two

grades - 43 Grade OPC and 53 Grade OPC.

Zuari OPC is a high quality cement prepared from the finest raw

material. Owing to optimum water demand, it contributes to a very low

co-efficient of permeability of  the concrete prepared. This improves

the density of the concrete matrix and increases the durability of the

concrete. Zuari OPC is a high performance cement  far exceeding the

codal requirement of BIS.

It is this very durability that translates into long - lasting residential

and commercial constructions of a wide variety.

Zuari 43 & 53 Grade Ordinary Portland Cement (OPC)

- Strong cements for longlasting constructions:

Higher compressive strength

Better soundness

17

Lesser consumption of cement for M-20 grade concrete and

above

Faster deshuttering of form work

Reduced construction time

Primo Concrete Cement - Concrete Redefined

Primo - The success story:

In 2008 Zuari Cement launched its high-strength cement under the

brand name 'Primo Concrete Cement' in Bangalore City. 'Primo'

improves the density of the concrete matrix and increases the

durability of the concrete, making it an immediate hit among 

construction and infrastructure projects undertaken in and around

Bangalore. Recently Primo was also launched in Kochi and Chennai. An

extensive marketing and distribution network across south India

concretes Zuari Cement's success story.

New products, on the line of the extremely successful 'Primo' launch,

will play a significant role in key markets.

Primo Concrete Cement - Concrete Redefined:

Primo concrete cement is a high quality cement prepared from the

finest raw material. Owing to optimum water demand, it contributes to

a very low co-efficient of permeability of the concrete prepared. This

improves the density of the concrete matrix and increases the

durability of the concrete. Primo is a high performance cement far

exceeding the codal requirement of IS 12269-1987. It is this very

durability that translates into long-lasting residential and commercial

constructions of a wide variety, such as dams,canals, highways, roads

and flyovers.

Higher compressive strength

18

Better soundness

Lesser consumption of cement for M-20 Concrete grade

and above

Faster deshuttering of form work

Reduced construction time

Locations

CORPORATE OFFICE

No. 1, 10th Main, Jeevanbhima Nagar,

Bangalore - 560 075

Tel: 080 -  41194408

Fax: 080 - 40302844/ 40302888

E-mail: zclmkt@zcltd.com,zclho@zcltd.com

Works: Sitapuram

P.O.Dondapadu

Nalgonda - 508 246

19

Andhra Pradesh

Tel: 08683 - 235107

Fax: 08683 - 235229

E-mail: svclspm@zcltd.com

Works: Krishna Nagar

P.O. Yerraguntla

Kadapa - 516 311

Andhra Pradesh

Tel: 08563 - 275104 / 275301

Fax: 08563 - 275164

E-mail: zclygl@zcltd.com

Italcementi Group

Italcementi Group at a glance

With an annual production capacity of approximately 70 million tons

of cement, Italcementi Group is the world’s fifth largest cement

producer.

The Parent Company, Italcementi S.p.A., is one of Italy’s 10 largest

industrial companies and is included in FTSE/MIB Index of the Italian

Stock Exchange.

Italcementi Group’s companies combine the expertise, know how and

cultures of 22 countries in 4 Continents boasting an industrial

network of 59 cement plants, 15 grinding centres, 5 terminals,

373 concrete batching units and 92 aggregates quarries.

20

In 2009 the Group had sales amounting to over 5 billion Euro.

Italcementi, founded in 1864, achieved important international status

with the take-over of Ciments Français in 1992.

Following a period of re-organization and integration that culminates in

the adoption of a single corporate identity for all Group subsidiaries,

the newly-born Italcementi Group began to diversify geographically

through a series of acquisitions in emerging countries such as Bulgaria,

Morocco, Kazakhstan, Thailand and India, as well as operating in North

America. As part of the plan to further enhance its presence in the

Mediterranean area, in 2005 the Group boosted its investments in

Egypt becoming the market leader.

In 2006 Italcementi acquired full control of the activities in India and

signed an agreement to strengthen its position in Kazakhstan while, in

2007, it further strengthened its presence in Asia and the Middle East

through the operations in China, Kuwait, Saudi Arabia.

As a member of the World Business Council for Sustainable

Development (WBCSD) Italcementi Group has signed the Cement

Sustainability Initiative’s Agenda for Action, the first formal

commitment that binds a number of world cement industry leaders to

an action plan that aims at satisfying present-day needs at the same

time as safeguarding the requirements of future generations.

To further confirm its commitment on these issues, the Group has

taken over the co-Chairmanship of the Cement Sustainability Initiative

for the period 2006-2007. Moreover, Italcementi has been included in

“The Sustainability Yearbook 2010” the most comprehensive

publication on corporate sustainability released yearly by SAM

(Sustainable Asset Management).

21

3 THERETICAL FRAMEWORK OF STADY

INVENTORY MANAGEMENT –ZUARI CEMENTINDUSTRIES

INTRODUCTION:

Every enterprise needs inventory for smooth running of its activities. It

serves as a link between the production and distribution process. The

greater a time lag, the higher the requirement of inventory the

unforeseen fluctuation of inventory demand and supply of goods,

fluctuating inventory prices, necessitate the need for inventory

management.

The investment inventory constitutes the most significant part

of the current assets inventory of the under taking. Thus it is very

essential to have a proper control and management of inventory.

22

Meaning and nature of inventory

The general meaning of inventory is stock of goods or list of goods

inventory. In accounting language it means stock of finished goods. For

inventory manufacturing concern it includes raw materials, work in

progress, consumables finished goods and spares etc.

1) Raw materials:

If forms a major input inventory in organization. The quantity of

raw materials required will be determined by the rate of

consumption.

2) Work in Progress :

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

raw materials and finished goods.

3) Consumables :

These are the material, which are needed to smoothen, the process

of production. These do not directly go into production, but act as

catalyst.

4) Finished Goods :

These are the goods, which are ready to sale for the consumers.

The stock of finished goods provides as buffer between production

and market.

5) Spares: Spares also from a part of inventory. The stocking

policies differ from industry to industry.

Inventories cost account for nearly 55 percent of the cost of

23

production, as it is clear from an analysis of financial statements of

large number of private and public sector organizations. So, It essential

to establish suitable procedures for proper control of materials from

the time of purchase order placed with supplier until they have been

consumed properly and accounted for.

Definition:

The term inventory refers to assets, which will be sold in

future in the normal course of business operations. The

assets, which the firm stores as inventory in anticipation of

need, are raw materials, work-in-progress/process, and

finished goods.

Inventory often constitute a major element of a total working

capital and hence ft has been correctly observed, 'Good inventory

management is good financial management’.

Inventory control is a system, which ensures the provision

of the required quantity at the required time with the minimum

amount of capital.

Inventories are the second largest asset category for the

manufacturing firms next to plant and equipment.

Inventory control includes scheduling, the requirements,

purchasing, receiving and inspecting, maintaining stock records

and stock control. Inventory control is a matter of coordination. A

proper material control helps in improving the input-output ratio.

24

Objective of inventory management

The main objective of inventory management are operational and

financial. The operational object means availability of materials and

spares in sufficient quantities for undisturbed flow of production. The

financial objective means investments in inventories should not remain

idle and minimum working capital should be locked in it.

THE OTHER OBJECTIVES ARE:

1) To ensure continues supply of inventories to the production.

2) To avoid over stocking and under stocking.

3) To maintain optimum level of investment in inventories.

4) To keep material cost under control, to keep low cost of

production.

5) To eliminate duplication in ordering or replacing stocks.

6) To minimize losses through, deterioration, pilferage, wastage

and damages.

7) Designing structures for good inventory management.

8) Perpetual inventory control of materials.

9) To ensure right quality of goods at reasonable prices. Analysis of

prices cost and value.

10) To facilitate data for short and long term planning and control of

Inventory.

a. Transaction motives:

Every firm has to maintain some level of inventory to meet

the day-to-day requirements of sales, production process,

customer demand etc. In this finished goods as well as raw

material are kept as inventories for smooth production process of

25

the firm.

b. Precautionary motive:

A firm should keep some inventory for unforeseen

circumstances also like loss due to natural calamities in a

particular area, strikes, lay outs etc so the firm must have some

finished goods as well as raw-materials meet circumstances.

c. Speculative motive:

The firm may be made to keep some inventory in order to

capitalize an opportunity to make profit due to price fluctuations.

REASONS AND BENEFITS OF INVENTORY:

The optimal level of maintaining inventory is a subjective

matter and depends upon the features of a particular firm,

(i) Trading firm:

In case of a trading firm there may be several reasons for

holding inventories because of sales activities that should not be

interrupted. More over it is not always possible to procure the

goods whenever there is a sales opportunity as there is always a

time gap required between purchase and sale of goods. Thus

trading concern should have some stock of finished goods in

order to undertake sales activities independent of the

procurement schedule.

26

Similarly, a firm may have several incentives being offered

in terms of quantity discounts or lower price etc by the supplier of

goods. There is trading concern inventory helps in a de-inking

between sales activity and also to capitalize a profit of

opportunity due to purchase made at a discount will result in

lowering the total cost resulting in higher profits for the firm.

(ii) Manufacturing firm:

A manufacturing firm should have inventory of not only the

finished goods, but also of raw materials and work-in-progress for

following reasons.

a) Uninterrupted production schedule:

Every manufacturing firm must have sufficient stock of raw

materials in order to have the regular and uninterrupted

production schedule. If there is stock out of raw materials in order

to have the regular and uninterrupted production schedule. If

there is stock out of raw material at any stage of production

process then the whole production may come to a half. This may

result in custom dissatisfaction as the goods cannot be delivered

in time more over the fixed cost will continue to be incurred even

ff there is no production.

Further work-in-progress would let the production process

run smooth. In most of manufacturing concerns the work in

progress is a natural outcome of the production schedule and it

also helps in fulfilling when some sales orders, even if the supply

27

of raw-materials have stopped.

(b) Independent sales activity:

Inventory of finished goods is required not only in trading

concern but manufacturing firms should also have sufficient stock

of finished goods. The production schedule is a time consuming

process and in most of the cases goods cannot be produced just

after receiving orders. Therefore, every firm has to maintain

minimum level of finished goods in order to deliver the goods as

soon as the order is received.

ESSENTIALS OF INVENTORY CONTROL:

The important requirements of Inventory control are:

a) The proper co-ordination among the departments

involved in buying, receiving, inspecting, ciorage,

consuming and accounting.

b) Centralization of purchasing under the control of

competent buyer whenever possible.

c) Proper scheduling of material requirements.

d) Proper classification of materials with codes, material

standardization and simplification.

e) The operation of a system of internal check to ensure

that all transactions involving materials and

equipment are checked by properly authorized and

independent persons.

28

f) The storage of materials is well planned and kept in

properly. Planned and kept in properly designated

location, subject to adequate safeguard and

supervision.

g) The operation of a system of perpetual inventory so

that it is possible to determine at any time, the

amount and value of each kind of material in stock.

h) A suitable method of valuation of materials is essential

because it affects the cost of jobs and the value of

closing stock of materials.

Objectives of Inventory Control:

The main objectives of inventory control are:

I. To maintain a large size of inventory for efficient and

smooth production and sales operation.

II. To maintain a minimum investment in inventories to

maximize profitability.

III. To ensure a continuous supply of raw materials to facilitate

uninterrupted production.

IV. To maintain sufficient stocks of raw materials in periods of

short supply and anticipate price change.

V. Maintain sufficient finished goods inventory for smooth

29

sales operation and efficient customer service.

VI. Minimize the carrying cost and time.

VII. Control investment in inventories and keep it at an

optimum level.

Advantages of Inventory Control:

The following are suggested advantages:

I. Eliminates wastage in use of material,

II. It reduces the risk of loss from fraud and theft.

III. It helps in keeping perpetual inventory and other records

to facilitate the preparation of accurate material reports to

management,

IV. To reduces the capital tied up in inventories,

V. It reduces cost of storage,

VI. It furnishes quickly and accurately the value of materials

used in various department.

VII. It prevents delays in production due to lack of materials by

supplying, proper quantities at the right time.

Disadvantages of Inventory Control:

Every firm has to maintain optimal level of inventories. It

not the following will be the result in form of losses.

I. Opportunity cost: Every firm has to maintain inventory for

that some investment is needed it is know as Opportunity

cost and handle the investment in inventory are more the

30

funds are blocks up with inventory.

II. Excessive inventories: It will lead to firm losses due to

excessive carrying costs and the risk of liquidity. It is also

referred as Danger level.

III. Inadequate Inventory: it is another danger which results is

production hold-up and failure to meet delivery

commitments .In adequate raw materials and work -in -

process inventors will results in frequent production

interruptions .It finished goods are not sufficient

customers may shifts to competitors.

IV. Danger due to physical decoration: It is one of the reason

with the inventories due to maintaining stocks at high

levels they will be deteriorated due to passage of time,

sometimes due to mishandling or improper storage

facilities.

Costs involved in inventory:

Every firms maintains inventory depending upon

requirement and other features of firm for holding such inventory

some cost will be incurred there are as follows:

(a) Carrying Cost;

This is the cost incurred in Keeping or maintaining an

inventory of one unit of raw materials, work-in -process or

finished goods. Here there are two basic cost involved.

(i) Cost of storage:

31

It includes cost of storing one unit of raw materials by the

firm. This cost may be for the storage of materials. Like rent of

spaces occupied by stock, stock for security, cost of

infrastructure, cost of insurance, and cost of pilferage,

warehousing costs, handling cost etc.

(ii) Cost of financing:

This cost includes the cost of funds invested in the

inventories .It includes the required rate of return on the

investments in inventory in addition to storage cost etc. The

Carrying cost include there fore both real cost and opportunity

cost associated with the funds invested in the inventories.

The total carrying cost is entirely variable and rise in

directly proportion to the level of inventories carried.

Total carrying cost =(carrying Cost per unit) x (Average

inventory)

(b) Cost of ordering:

The cost of ordering includes the cost of acquisitions of

inventories. It is the cost of preparation and execution of an order

including cost of paper work and Communicating with the

supplier.

The total ordering cost is inversely proportion to annual

inventory of firm. The ordering cost may have a fixed component,

which is not affected by the order size: and a variable

component, which changes with the order size.

32

Total Ordering Cost = (No. Of orders) x (cost per order).

(c) Cost of stock out:

It is also called as Hidden cost. The stock out is the situation

when the firm is not having units of an item in stores but there is

a demand for that Item either for the customers or the production

department .The stock out refers to zero level inventory .So there

is a cost of stock out in the sense that the firm face a situation of

lost sales or back orders .The stock outs are quite often

expensive. Even the good will of firm also be effected due to

customers dissatisfaction and may lose business in case of

finished goods, where as in raw materials or work in process can

cause the production process to stop and it is expensive because

employees will be paid for the time not spend in producing goods.

The carrying cost and the ordering cost are opposite forces

and collectively. They determine the level of inventors in a firm.

Total cost =(cost of items purchased) +(Total Carrying and

ordering cost)

Valuation of Inventory:

The methods of valuing inventory are combination of the

actual cost and replacement cost plans. The chief advantage of

the cost or net realizable value rule is that it is conservative.

Hence the methods of Valuation of inventory are quite

independent of system of mincing.

33

In balance sheet closing stock is shown under current assets

and is also credited to manufacturing or trading accounts. The

inventories are valued on the basis as follows.

(i) Cost of raw materials in stock may include freight

charges and carrying cost. But such cost should not

exceed market price,

(ii) Work -in -process is generally valued at cost, which

includes cost of materials, labor. And the proportionate

factory overhead, as it is reasonable according to degree

of completion,

(iii) Cost of finished goods wound normally to be total or full

cost it includes prime cost plus appropriate amount of the

overhead. Selling and distribution cost is deducted on the

other hand work in progress may be valued at work in

progress may be Valued at work cost, marginal cost,

prime cost or, even at direct materials.

ISSUE PRICING METHODS:

There are two categories:

(i) Cost prices:

(a) FIFO (First in First out)

(b) LIFO (last in first out)

(c) Specific price

(d) Base stock price

(e) HIFO (highest in first out)

(ii) Derived from cost prices:

(a)Simple average price

(b)Weighted average price

34

(c) Periodic simple average price

(d)Periodic weighted average price

(e)Moving simple average price

(f) Moving weighted average price

(iii) Notional prices:

(a)Standard price

(b) Inflated price

(c) Re-use price

(d)Replacement price

First in First out (FIFO)

This is the price paid for the material first taken into stock

from which the material to be priced could have been drawn.

Under this method stocks of materials may not be used up

in chronological order but for pricing purpose it is assumed that

items longest in stock are used up first. The method is most

suitable for use where in material is slow-moving and

comparatively high unit cost.

Advantages:

(i) Price is based on actual cost and not on basis of

approximations such as no profits or losses arises by

reasons of adopting this method.

(ii) The resulting stock balance generally represents fair

35

commercial valuation of stock.

(iii) It is based on traditional principles.

Disadvantages:

(i) The number of calculations in the stores ledger involved

tends to be complicated with increase in clerical error.

(ii) The cost of consecutive similar jobs will differ if the

price changes suddenly,

(iii) In times of rising prices, the charge to production is

unduly low as the cost of replacing the material will be

higher.

Last in first out (UFO)

This is the price paid for the material last taken into stock

from which the materials to be priced could have been drawn.

This method also ensure material being issued at the actual cost.

Its use is based on the principle that costs should be as closely as

possible related to current price level. Under this method

production cost is calculated on basis on replacement cost.

Advantages:

(i) Production is charged at the most recent prices so that it

is based on the principle that cost should be related to

current price levels.

(ii) It obviates the necessity for continuously ascertaining

the replacement price.

(iii) Neither profit nor loss is usually made by using this

36

method.

(iv) In the times of rising prices there is no wind fall profit as

would have been obtained under FIFO method.

Disadvantages:

(i) Needs more clerical work.

(ii) Compassion among similar jobs is very difficult.

(iii) Stock valves relating to prices of the oldest cost on hand

may be entirely out of the current replacement prices.

Weighted average price:

This is the price which is calculated by dividing the total

cost of material in the stock from which the material to be priced

have been drawn, by the total quantity of material in the stock.

This method differs from all other methods because here issue

prices are calculated on receipts of materials and not on issue of

materials. Thus as soon as new lot is received a new price is

calculated and issues are then taken.

Advantages:

(i) This method is advantageous where the price varies

widely as its use even out the effect of these wide

variations.

(ii) The basis of price calculations is a simple one involving

only the division of total amount of material in stock by

quantity in stock.

37

(iii) Calculation of new prices arises only when receipt of

stocks are received.

(iv) Stock records under this method give a fair indication of

the stock values, which can be used in financial analysis.

Disadvantages:

This method is completed than simple average because it

takes into consideration the total quantities and total costs in

stock.

(i) Profit or loss may be incurred as in simple average price,

(ii) As LIFO or FIFO this method calls for many calculations,

(iii) In order to calculate the accurate value of issues the

average price must normally be calculated to four to five

decimal places.

Standard price:

It is the predetermination of fixed price on basis of a

specification of all factors affecting price like the quantity of

materials in hand and to be normally purchased and rate of

discount compared with existing price including or excluding

freight and ware housing expense.

A standard price for each material is set and the actual

price paid is compared with standard. It is paid exceeds the

standard a loss will be realized if not profit will be obtained.

Advantages:

(i) This method is easy to operate.

38

(ii) Comparing the actual prices with the standard price will

determine the efficiency of purchase department.

(iii) The effect of price variations is eliminated from job costs.

(iv) It reduces classical costs by eliminating detailed cost

records.

(v) In times of inflation or price fluctuations is very difficult

to fix a standard price.

(vi) This method also incurs a profit or loss on issues and

closing stock.

Inflated price:

This is the price, which includes a charge designed to cover

the cost of contingencies or related costs.

This price includes not only the cost involved in bringing the

material to the purchases premises but also the loss due to

evaporation and breakage etc. as well as carrying costs

MATERIAL PURCHASING AND PURCHASING

PROCEDURE

Purchase of material is one of the important function of material

management. At times more than 50% of the total product cost is

material.

Functions of Purchase Department

1. Deciding the items to be purchased based on demand.

2. Selection of sources of supply.

3. Collection the price information.

4. Placing the ordered.

5. Follow-up the ordered.

39

6. Checking the invoices.

7. Maintenance of purchase records.

8. Maintenance of vendors relations.

PURCHASE PROCEDURE

Purchasing procedure start with the initiation of purchase

requisitions and ends with the receipt of materials in the stores.

CENTERIZED PURCHASING

It is most important and relevant to large organizations operating

deferent plants may or may not be located at different places. For a

single place organization decentralization might be feasible on a very

limited place. But where as M & M Ltd., is a multiple plants operating

organization.

In Mahindra and Mahindra Centralized purchasing procedure is

following to purchase of materials.

Centralized purchasing avoids duplications of efforts

and working at cross purpose from one plant to another.

Centralized purchasing permits consolidation of order of

materials commonly used for two or more plants. The

ultimately results in greater buying power, favorable

contracts and trade agreements.

Easier to maintain the quality of purchased parts / items

through centralized testing and inspection. It is also

40

possible to conduct testing and inspection facilities.

Centralized purchasing permits to avail facilities like

quantity discounts and cash discounts thus its helps to

reduce cost.

It is beneficial to vendor also in case the size of order

constituted major proportion of his total production capacity

TECHNIQUES OF INVENTORY MANAGEMENT:

Main problems in inventory management are to answer.

(i) Are all items of inventory important if not what are items

to be given more importance?

(ii) What should be the size of the order for replenishment

be placed?

(iii) What should be the over level?

To answer these following techniques are used,

41

ABC Analysis

Economic Order Quantity

VED Analysis

RE-ORDER Level

Safety Stock

Just-in-time Inventory

ABC Analysis:

It is based on proposition that

(ii) Managerial items and efforts are scare and limited

(iii) Some items of inventory are more important than

others.

ABC ANALYSIS:

ABC analysis classifies various inventory into three sets or

groups of priority and allocates managerial efforts in proportion

of the priority the most important item are classified into class-A,

those of intermediate importance are classified as "class-B" and

remaining items are classified into class-C'.

The financial manager has to monitor the items belonging to

monitor the items belonging to different groups in that order of

priority and depending upon the consumptions.

The items with the highest value is given top priority and

soon and are more controlled then low value item. The re-rational

limits are as follows.

42

Category % of Items % of total

materials

A 5-10 70-85

B 10-20 10-20

C 70-85 5-10

Procedure:

(i) Items with the highest value is given top priority and

soon.

(ii) There after cumulative totals of annual value of

consumption are expressed as percentage of total value

of consumptions,

(iii) Then these percentage values are divided into three

categories.

ABC analysis helps in allocating managerial efforts in

proportion to importance of various items of inventory.

ECONOMIC ORDER QUANTITY:

After various inventory items are classified on the basis of the

ABC analysis the management becomes aware of the type of

control that would be appropriate for each of the three

categories of the inventory items.

The determination of the appropriate quantity to be

purchased in each lot to replenish stock as a solution to the order

quantity problems necessitates resolution of conflicting goals.

Buying in a higher average inventory level will assure,

43

(i) Smooth production / sale operation and.

(ii) Lower ordering or setup costs. But it will involve higher

carrying costs. On the other hand small orders would

reduce the carrying cost of inventory by reducing the

average inventory level but the ordering costs would

increase, as there is a likelihood of interruption in

operations due to stock-outs. A firm should not place

either too high or small orders on the basis of a trade off

between benefits derived from the availability of

inventory and the cost of carrying that level of inventory,

appropriate or optimum level of order to be placed should

be determined. The optimum level of inventory is

popularly referred to as the economic order quantity or

economic lot size. It may be defined as that level of

inventory order that minimizes the total lost associated

with inventory management. It is based on some

assumptions, which are restrictive.

a. The firm knows with certainty the annual usage of

a particular item of inventory.

b. Rate at which the firm uses inventory is steady

over time.

c. The orders placed to replenish inventory stocks

are received at exactly that point in time when

inventories reach zero.

EOQ can be illustrated by

(i) Trial and error approach,

(ii) Mathematical approach.

44

Trial and Error approach:

In this approach the procedure of procuring the inventory is

assumed the smaller the lot the lower is average inventory and

vice versa and high average inventory would involve high

carrying costs. This approach is used for determination of EOQ

uses different permutations and combinations of lots of inventory

purchases so as to find out the least ordering and carrying cost

combinations. The carrying cost and acquisition cost for different

sizes of order to purchase inventories are computed and the

order size with lowest total cost of inventory is EOQ.

Mathematical Approach:

The EOQ quantity can use a short-cut method calculated by

following

EOQ=

Where,

A = Annual usage of inventory

B = Buying cost per order

C = carrying cost per unit

Limitations:

While using EOQ it should be noted that it suffers from

shortcomings, which are mainly due to the restrictive nature of

the assumptions on which it is based.

The important limitation is assumption of a constant

45

consumption usage and, the instant replenishment of inventory is

of doubtful validity

There may be unusual and unexpected demand for stocks to

meet such [contingencies the firm has to keen additional

inventories like safety stocks. Another weakness is to assume

known annual inventories is open to question and there is

likelihood of a discrepancy between the actual and expected

demand leading to wrong estimate of EOQ.

VED ANALYSIS:

Vital Essential and Desirable analysis is done mainly for

control of spare parts keeping in view of the criticality to

production.

Vital spares are spare the stock-out of which even for a

short time will stop production for quite some time. Essential

spares are spares the absence of which cannot be tolerated for

more than a few hours a day. Desirable spares are those, which

are needed, but their absence for even a week or so will lead to

stoppage of production.

THE RE-ORDER LEVEL:

The re-order level is the level of inventory at which the fresh

order for that item must be placed to procure fresh supply. The

re-order level depends upon

a) Length of time between the placement of an order and

receiving the supply.

46

b) The usage rate of the item. The inventory is constantly

being used up. The rate at which the inventory is being

used up. The rate at which the inventory is being used up

is called the usage rate.

The reorder level can be determined as follows:

R = M+tu

R = Reorder level

M = Minimum level of inventory

T = Time gap / delivery time

U = Usage rate

The reorder level and inventory patterns have be shown as

follows:

The figure shows that if the usage rate is constant, the

orders are made at even intervals for the same amounts each

time and the inventory goes to zero just before an order is

received.

47

Safety Stock:

The safety stock protects firm from Trade offs due to

unanticipated demand for the items level of inventory investment

is however increased by the amount of safety stock. Safety level

is ascertained in inventory as a part because there is always an

uncertainty involved in time lag usage rate or other factor.

Usually smaller the safety level greater the risk of stock-outs.

If stock-levels are predictable then there is a chance of stock

out occurring. However stock inflows and outflows are

unpredictable or lesser predictable it becomes to carry

additional safety stock to prevent unexpected stock outs so

usage rate is estimated if cost is low then no safety stock is

needed.

JUST-IN-TIME INVENTORY:

The basic concept is that every firm should keep a minimum

level of inventory on hand, relying suppliers to furnish stock

48

just in time as and when required. JIT helps in emphasizing

sufficient levels of stocks to ensure that production will not be

interrupted. Although the large inventories may be bad idea

due to heavy carrying JIT is a modern approach to inventory

management and the goal is essentially to minimize such

inventories and there by maximizing the turnover.

JIT system significantly reduces inventory-carrying cost by

requiring that the raw materials be procured just in time to be

placed into production. Additionally the work in process inventory

is minimized by eliminating inventory is minimized by eliminating

inventory buffers between different production departments.

If JIT is to be implemented successfully there must be a high

degree of coordination and co-operation between the supplier and

manufacturer and among different production centers. JIT does

not appear to have any relation with EOQ however it is in fact

alters some of the assumptions of EOQ model. The average

inventory level under the EOQ model is defined as

Average inventory= 1/2 EOQ + safety level JIT attacks this

equation in two ways.

(i) By reducing the ordering cost

(ii) By reducing the safety stock.

The basic philosophy in JIT is that the benefits, associated with

reducing inventory and delivery time to a bare minimum

through adjustment in the EOQ model; will more than offset

the costs associated with the increased possibility of stock-

outs.

49

4 DATA ANALYSIS & INTERPRETATION

DETERMINATION OF STOCK LEVELS

Carrying of to much and too little of inventories is determinate 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 of

inventory where costs are the minimum and at the same time their

ID.No.Stock-out, which may result in loss of sale or stoppage of

production. Various stock levels are discussed below.

MINIMUM STOCK LEVEL

This is the lower limit below which the stock of any item should not

normally be allowed to fall. This is also technically known as safety or

buffer stock. The prime considerations in fixing the minimum stock

level or safety stocks are :

a. Average rate of consumption.

b. Lead time.

Minimum Stock Level = Reordering level – X100

Lead-Time :

A purchasing firm requires some time to process the order and

time is also required by the supplying firm to execute the order. The

time taken processing the order and the executing it is known as lead-

time. It is essential to maintain some inventory during this period.

50

Reorder Level :

Reorder level is fixed between the minimum and maximum levels.

When stock of a material reaches at this point, the store keeper should

initiate action for the purchase of material. The reorder level is slightly

more than minimum stock level to guard against

a. Abnormal usage

b. Abnormal delay in supply

Reorder level = Maximum consumptionX Maximum period

required

during the period for delivery

MAXIMUM STOCK LEVEL :

Maximum stock level represents the upper limit beyond which

the quantity of any item is not normally allowed to rise. The main

object of establishing this limit is to ensure that unnecessary working

capital is not blocked in stores. Theoretically, maximum stock level is

the sum – total of minimum stock level and economic order quantity.

Maximum level = Reorder Level + Reordering quantity – Minimum

consumption

AVERAGE STOCK LEVEL :

The average stock level is calculated as such :

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

51

DANGER LEVEL:

This is generally fixed below the minimum stock level. Normal

stock should not be below the minimum level. If it reaches the danger

level at any point of time, urgent action for replenishment of stock

must be taken to prevent stock out.

ESTIMATION OF STOCK LEVELS :

There are different techniques used in the calculation of the stock

levels.

Reordering Quantity - 2500 units

Reordering Period - 4 – 5 weeks

Weekly usage :-

Maximum usage - 900 units

Normal usage - 700 units

Minimum usage - 500 units

Reordering Level = Maximum consumption X Maximum

Reordering Period

= 900 X 5 = 4500 units.

Ex :- Consider “Load King” for calculation purpose.

Calculated of the load king vehicle as 500 units.

Normal Daily consumption = 700 units

Normal Reorder period = 4.5 weeks

Reorder level = 4500 units

Minimum usage = 500 units

Minimum Reorder period = 4 weeks

Maximum Reorder period = 5 weeks

52

MINIMUM STOCK LEVEL

= Reorder Level – (Normal consumption X Normal Reorder

Period)

= 4500 – (700 X 4.5)

= 4500 – 3150

= 1350 Units

MAXIMUM STOCK LEVEL

= Reorder Level + Reorder Quantity – (Minimum

consumption X

Minimum Reorder

Period)

= 4500 + 2500 – (500 X 4)

= 7000 – 2000

= 5000 Units

AVERAGE STOCK LEVEL

= Minimum stock + ½ of Reordering Quantity.

= 500 + (½ X 2500)

= 500 + 1250

= 1750 Units

Minimum Stock Level = 1350 Units

Average Stock Level = 1750 Units

Maximum Stock Level = 5000 Units

53

INVENTORY TURN OVER RATIO

“A Ratio which measures the number of times a firms average

inventory is sold during a year” – Kohler.

Computation of inventory turnover ratios for different items of

materials and comparison of the turnover ratios provide a useful

guidance for measuring inventory performance. A high turnover rate

indicates that the material in question is a fast moving one. A low

turnover rate on the other hand indicates over investments and

looking up of working capital on undesirable items.

“Inventory or Stock turnover is measured in terms of the ratio of

the value of materials consumed to the average inventory during the

period”. The ratio indicates the number of time the average inventory

is consumed and replenished by dividing number of days for which the

average inventory is held can be ascertained.Comparing the number of

days in the case of two different materials, it is possible to known

which is fast moving and which slow on that basis attempt may be

made to reduce the amount of capital locked up and prevent over

stocking of slow moving items.

Average Inventory = Opening Stock + Closing Stock

2

Inventory turnover ratio = Material consumed

Average Inventory

54

Ratio

5.034.09 4.17 4.36 4.09

0

1

2

3

4

5

6

7

8

9

2005-06 2006-07 2007-08 2008-09 2009-10

Ratio

Inventory turnover in number of days = Number of days in a

year

Inventory turnover ratio

INVENTORY TURNOVER RATIO

Cost of goods soldINVENTORY TURNOVER RATIO =------------------------------

Average inventory(Rs in 000’s)

Year Cost of goods

sold

Average

inventory

Ratio

2005-06 2210210 439610 5.03

2006-07 2163508 528333 4.09

2007-08 2484589 596074 4.17

2008-09 3044561 697949 4.36

2009-10 4120957 1008066 4.09

Interpretation:

The inventory turnover ratio signifies the liquidity of the

inventory. A high inventory turnover ratio indicates brisk sales. The

ratio is therefore a measure to discover the possible trouble in the

form of overstocking or overvaluation. The stock position is known as

the graveyard of the balance sheet. If the sales are quick such a

position would not arise unless the stocks consist of un-saleable items.

55

Inventory holding ratio

7389 88 84 89

0102030405060708090

100

2005-06 2006-07 2007-08 2008-09 2009-10

Inventory holding ratio

A low inventory ratio results in blocking of funds in inventory which

may ultimately result in heavy losses due to inventory becoming

obsolete or deteriorating in quality.

INVENTORY HOLDING RATIO

365INVENTORY HOLDING RATIO=------------------------------------------

Inventory turnover ratio(Rs in 000’s)

Year Days Inventory

turnover ratio

Inventory

holding ratio

2005-06 365 5.03 73

2006-07 365 4.09 89

2007-08 365 4.17 88

2008-09 365 4.36 84

2009-10 365 4.09 89

Interpretation:

Inventory holding days express the No. of days it takes for the stock to

get converted into sales. It is called stock conversion period. It is

calculated as above. It means that 73 days period of time it took to

56

convert from stock sales in 05-06, 89 days in 06-07, 88 days in 07-08,

84 days in 08-09 and 89 days in 09-10.

INVENTORY ANALYSIS AT ZUARI

(Rs in 000’s)

Year Inventory Current

assets

% in

inventory

&CA

2005-06 561630 1078274 52.09

2006-07 630518 1500977 42.01

2007-08 765380 1688733 45.32

2008-09 1250752 2307604 54.20

2009-10 1312456 2504689 55.23

2005-06 2006-07 2007-08 2008-09 2009-100

500000

1000000

1500000

2000000

2500000

3000000

InventoryCurrent assets% in inventory &CA

Interpretation:

It shows the relationship between inventory & Current assets.

The inventory position in ZUARI Cement has to level of inventories as

57

compare to current assets in the increasing trend it has found that the

current assets level has increased year by year and the inventory

being part of it has also increased. It fluctuates certain intervals. This is

due to increase in liquidity involving Cash and Bank balances.

YEARS 2010 2009 2008 2007 2006

Opening Inventory

(Rs. In Lakhs)49970 45675 46904 55253 51554

Closing Inventory

(Rs. In Lakhs)75983 49970 45675 46904 55253

INVENTORY TURNOVER RATIO

YEARS

INVENTORY

CONSUMED

(Rupees in

Lakhs)

AVERAGE

INVENTORY

(Rupees in

Lakhs)

INVENTORY

TURNOVER

RATIO

INVENTORY

TURNOVER

IN NUMBER

OF DAYS

March –

2010459537.10

49970 +

75983

2

= 62976.5

459537.10

62976.5

= 7.296

365..

7.296

= 50.027

March –

2009335286.52

45675 +

49970

2

= 47822.5

335286.52

47822.5

= 7.01

366..

7.01

= 52.21

March –

2008250021.84

46904 +

45675

2

= 46389.5

250021.84

46389.5

= 5.389

365..

5.389

= 67.73

March –

2007

211723.1 55253 + 211723.1 365..

58

INVENTORY TURNOVER RATIO

4.416 4.1455.389

7.01 7.296

012345678

2006 2007 2008 2009 2010

YEARS

%

O F

IN V E N T O R Y

INVENTORY TURNOVER RATIO

INVENTORY TURNOVER RATIO

4.416 4.1455.389

7.01 7.296

012345678

2006 2007 2008 2009 2010

YEARS

%

O F

IN V E N T O R Y

INVENTORY TURNOVER RATIO

46904

2

= 51078.5

51078.5

= 4.145

4.24

= 88.05

March –

2006235858.13

51554 +

55253

2

= 53403.5

235858.13

53403.5

= 4.416

365..

4.41

= 82.65

59

INVENTORY IN NUMBER OF DAY

82.65 88.05

67.7352.21 50.027

0

20

40

60

80

100

2006 2007 2008 2009 2010

YEARS

IN V E N T O R Y

IN

N U M B E R

O F

D A Y S

INVENTORY IN NUMBER OF DAY

60

INVENTORY IN NUMBER OF DAY

82.65 88.05

67.7352.21 50.027

0

20

40

60

80

100

2006 2007 2008 2009 2010

YEARS

IN V E N T O R Y

IN

N U M B E R

O F

D A Y S

INVENTORY IN NUMBER OF DAY

INERPRETATION:

A high turnover ratio indicates that the material in question is a fast

moving one and also a low amount of stocks are replacing stocks in

large number of installment. In the year 2008, 2009, 2010, the stock

turnover ratio is gradually decreasing and the inventory faced a bad

position in these three years. And from, 2006, 2007, the stock turnover

ratio continuously increased from 5.38 to 7.296 and the inventory in

number of days is low. This position indicates that the stocks are fast

moving and get converted in to sales quickly.

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CEMENT PRODUCTION AND DISPATCH

YEAR

CEMENT PRODUCTION

(QUANTITY IN

MIL.TONNES)

CEMENT DISPATCH

(QUANTITY IN

MIL.TONNES )

MARCH 31ST 2006 19,587 19,682

MARCH 31ST 2007 21,254 21,385

MARCH 31ST 2008 25,797 25,416

MARCH 31ST 2009 34,186 33,766

MARCH 31ST 2010 33,630 33,885

62

MARCH 31ST 2006

MARCH 31ST 2007

MARCH 31ST 2008

MARCH 31ST 2009

MARCH 31ST 2010

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

CEMENT PRODUCTION (QUANTITY IN MIL.-TONNES)CEMENT DISPATCH (QUANTITY IN MIL.-TONNES )

INERPRETATION:

The inflow of raw materials and dispatch of finished goods from the

organization is in good position. In march 31st 2008 the difference

between the vehicle production and dispatched is 381 and in march

31st 2007 the close stock in the go down is also dispatched from the

organization and as well as in the year 2009 31st march the stored

vehicles are dispatched from the company. This indicates that the

consuming storage cost is very low and risk related to preservation of

the stock is very les

5.1 FINDINGS

Most of the respondents were aware by the friends and relatives

(48%).Advertisements (28%) also helped in providing information to

the respondents.

82% of the respondents were aware of “ZUARI Cement “brand.

In advertisement media newspapers (56%) were much affective and

television (38%) was also a major advertising media. Many factors

like family members advertising were responsible for influencing the

customers to buy “ZUARI Cement.

Factors’ effecting buying decision of a customer’s brand name was

preferred first. Picture clarity is also a one of the feature which

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attracted to buy a television. Considered as a factor effecting the

buying decision of the customer. Price, Design, warranty, service

help in purchasing the“Tecumseh.

6% of the customers were very much satisfied with LG Television.

Whereas 58% was satisfied with “ZUARI Cement.

39% of the respondents were satisfied with the service of the

“ZUARI Cement “Compressors.

After sales service at door step 38% was one of the factors which

help the purchaser to buy a“ZUARI Cement “ . Prompt service 52%

also help to attract the purchaser.

54% of the respondents considered the price of the“ZUARI Cement

“ . As higher where as only 8% considered as economical and 38%

of the respondent said it as reasonable.

Digital sound system was also one which helps in a prospective

purchaser to buy the “ZUARI Cement “.

5.2 SUGGESTIONS:

On the personnel interaction with the financial department as

well as with the primary and secondary data’s the following are the

conditions and suggestions arrived. They are:

1) The analysis is carried out for a period of five years i.e.,

2005-06 to 2009-2010 is not sufficient to conclude the

Inventory position of the company as we have taken up to

study for a period of 6 weeks is too less still we strived out best

in exploiting the present inventory position of the company.

64

2) Inventory valuation is followed in weighted average

method based on cost concept of the project costing is

undertaken.

3) The inventory is different items of production; hence A-B-C

analysis and Two Bin System are followed.

4) Some items are found to be slow and non-moving. The

slow-moving items are spare and consumable goods; hence

whenever necessity arises these items are being used. Non-

moving items are also found in the inventory.

5) The reasons for Non-moving of Inventory from stores are

studied. Due to MOQ (Minimum Order Quantity) clause these

items procured extra than the requirement.

6) The high inventory ratio indicates efficiency of the firms

inventory management.

7) The material consumption was also increasing simultaneously

with sales.

8) The company’s efficiency in turning its inventory is increasing.

The company’s utilization of inventory in generating sales is

good. The yearly holding of all types of inventory is decreasing.

This is positive trend.

9) The overall inventory position of the company is satisfactory.

5.3 CONCLUSION:

Today business scenario inventory management is becoming

very crucial part of the organization. The system of inventory

management in ZUARI CEMENT Limited very effective. The

organization is basically and assembling unit and thus inventory place

a most significant role in the decision making process. From the

various calculations and figures relating to inventory management it is

clear that the inventory classification of A items are maintain for 1 – 3

days, as a result it reduce investment in raw material, reducing the

65

lead time and also the large quantity discount because the stock are

kept for 1 – 3 days.

In the classification of ABC items XYZ procedure is following in

ZUARI Cement Plant has launched the different type of KANBAN card

system for class C items.

Class A & B items are consider under the just in time philosophy

as the procurement time has been reduced up to greater extent by the

proper co-ordination of buyer and supplier.

There is great improvement in the inventory turnover ratio from

3 years. It is increased from 5.38 to 7.296% this position indicates that

the stocks are fast moving and get converted into sales quickly in

ZUARI CEMENTLIMITED,

Finally we conclude that ZUARI plant the inventory system is

very good with high Japanese techniques.

BIBILOGRAPHY:

* Cost Accounting – V.K. Saxena

C.D. Vashist

* Cost Accounting - S.P. Iyenger

66

* Cost Accounting - S.N. Maheshwari

* Financial

Management - Khan & Jain

* Cost Management

Accounting - R.P. Thrivadi

Websites:

www.google.com

www.yahoofinance.com

www.zuaricements.com

www.msn.com

www.birlacements.com

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