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CHAPTER I
1. INTRODUCTION TO THE STUDY
In this study, an attempt is made to analyze the inventory management in Shri Hari
Krishna Papers Pvt Ltd, Udumalpet during the period from 2006-2011.
Inventory is the quantity of goods and materials on hand. A manufacturer's inventory
represents those items that are ready and available for sale. Production includes those activities
involved in conceptualizing, designing, and creating products and services. In recent years there
have been dramatic changes in the way goods are produced.
Inventory Management System deals with the maintenance of equipments. Inventory
management is a discipline that encompasses the principles, concepts and techniques for
determining what to order, when to order and how much to order.
Today, computers help monitor, control, and even perform work. Flexible, high-tech
machines can do in minutes what it used to take people hours to accomplish. Another important
development has been the trend toward just-in-time inventory. The word inventory refers to the
amount of goods a business keeps available for wholesale or retail. In just-in-time inventory, the
firm stocks only what it needs for the next day or two.
Manufacturing and other service organizations have significantly invested in inventory.
Often investment in inventory has a direct bearing on the profitability of the firm. Experiences in
last twenty years suggest that the world class performance of a firm hinges on the firm’s ability
to cut investment in inventory to very low levels. In addition to cutting down cost, reduced
inventory levels help an organisation improve quality, planning systems and supply chain
coordination. They also reduce wastage and obsolescence. Hence inventory planning and control
continues to derive considerable attention of the management in the organizations.
1
NATURE OF RAW MATERIAL
Materials are stock of the product accompany in manufacturing for sale and
components that make up the products. The various forms in which materials exist in
manufacturing company are:
Raw Materials
Working- in- process
Finished Goods
RAW MATERIALS
Raw materials are those basic inputs that are converted in to finished products through
the manufacturing process. Raw materials are those units which have been purchase and stored
for future production. They are required to carry out production activities uninterruptedly. The
quantity of raw materials required will be determined by the rate of the consumption and the time
required for replacing the supplies. The factors like the availability of raw materials and
government regulation, etc affects the stock of raw materials.
WORK- IN- PROCESS
Work in process is called as stock in process. It refers to goods in the intermediate stage
of production. These are semi manufactured products. They represent products that need more
work before they become finished products for sale. The work in process 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 the final shape of finished goods. The quantum of work
in process depends up on the time taken in manufacturing: the more will be the amount of work
in process.
2
FINISHED GOODS
The finished goods materials are those completely manufactured products which are
ready for sale. Stocks of raw- materials and working process facility production, while stocks of
finished goods are required for smooth marketing operations. These are goods, which are ready
for consumers. The stocks of finished goods provide a buffer between production and market.
The purpose of maintaining material is to ensured proper supply of goods to the consumers. In
some concerns the production is undertaking on order basis.
Therefore, efficient inventory management reduces the cost of production and
consequently increases the profitability of the organization by minimizing the different type of
cost associated with holding inventory.
3
1.2 NEED AND IMPORTANCE
Effective inventory management is essential for realizing the full potential of the value
chain and financially, inventory is very important to manufacturing companies because cost of
carrying inventory influence profit. Every business organization is in need of a good inventory
management system which shall take care of all its inventories in the network. Companies spend
lacks of money every year to keep their network monitoring systems updated and to take care of
all their network related issues. No one wants problems like sudden stoppage of work due to
poor inventory and due to sudden needs of repairs and renewals. Companies often face sudden
situations when they realize that their work has stopped because something went terribly wrong
with their inventory. This problem can be solved with the right usage of inventory management
system.
So it is important to do the study on inventory management and cost control due to the
following:
To know about the unstable market conditions of raw materials.
Importance of having adequate materials on hand when needed.
To know about the variations in the profitability by means of inventory and cost
management.
4
1.3 INDUSTRY PROFILE
PAPER INDUSTRY
Paper industry in India is the 15th largest paper industry in the world. It Provides
employment to nearly 1.5 million people and contributes Rs.25 billion to the government. Paper
industry is primarily dependent upon forest-based raw materials. The first paper mill in India was
set up at Sreerampur, West Bengal, in the year 1812. It was based on grasses and jute as raw
material. Large scale mechanized technology of papermaking was introduced in India in early
1905.
Since then the raw material for the paper industry underwent a number of changes and
over a period of time, besides wood and bamboo, other non-conventional raw materials have
been developed for use in the papermaking. The Indian pulp and paper industry at present is very
well developed and established. Now, the paper industry is categorized as forest-based, agro-
based and others (waste paper, secondary fibre, bast fibers and market pulp).
In 1951, there were 17 paper mills, and today there are about 515 units engaged in the
manufacture of paper and paperboards and newsprint in India. The pulp & paper industries in
India have been categorized into large-scale and small-scale. Those paper industries, which have
capacity above 24,000 tonnes per annum, are designated as large-scale paper industries. India is
self-sufficient in manufacture of most varieties of paper and paperboards. Import is confined
only to certain specialty papers.
Indian paper industry has been de-licensed under the Industries (Development &
Regulation) Act, 1951 with effect from 17th July, 1997. The interested entrepreneurs are now
required to file an Industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for
Industrial Assistance (SIA) for setting up a new paper unit or substantial expansion of the
existing unit in permissible locations. Foreign Direct Investment (FDI) up to 100% is allowed on
5
automatic route on all activities except those requiring industrial licenses where prior
governmental approval is required for the paper industry.
The mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse,
wheat straw, rice husk, etc approximately 35% are based on chemical pulp, 44% on recycled
fibre and 21% on agro-residues. The geographical spread of the industry as well as market is
mainly responsible for regional balance of production and consumption.
The added capacity of approximately 0.8 million tons during 2009-2011 the operating
capacity of the industry currently stands at 9.3 million tons. During this fiscal year, domestic
production of paper and paperboard is estimated to be 7.6 million tons.
Demand of paper has been hovering around 8% for some time. During the period 2008-
2011 while newsprint registered a growth of 13%, Writing & Printing, Containerboard, Carton
board and others registered growth of 5%, 11%, 9% and 1% respectively. So far, the growth in
paper industry has mirrored the growth in GDP and has grown on an average 6-7 per cent over
the last few years.
India is the fastest growing market for paper globally and it presents an exciting
scenario; paper consumption is poised for a big leap forward in sync with the economic growth
and is estimated to touch 13.95 million tons by 2015-16. The futuristic view is that growth in
paper consumption would be in multiples of GDP and hence an increase in consumption by one
kg per capita would lead to an increase in demand of 1 million tons.
6
1.4 COMPANY PROFILE
SHRI HARI KRISHNA PAPERS PVT LTD was incorporated in the year 1995 as a
private limited company with installed capacity of 3000 MT per annum of printing and writing
paper. The company commenced its production in the year 1996 with a capacity of 10 MT per
day and at present, the company has the production capacity of 85 Mt per day as follows:
Unit-1 30 MT per day- manufacture of printing & writing papers & news print papers.
Unit- 11 35 MT per day- manufacture of printing & writing papers
Unit -111 20 MT per day- manufacture of special varieties of papers
At present, the annual turnover of the company is around Rs.90 crores. The company
exports around Rs. 10.00 crores/annum and imports around RS. 12.00 crores/annum.
Shri Hari Krishna Papers Pvt Ltd is the sister concern of GVG group. The GVG group
has 2 paper mills and 3 textile mills with a combined turnover of Rs. 275 crores per annum. The
production capacity of 2 paper mills is 200 MT/day and the installed capacity of Textile mills is
65000 spindles.
Shri Hari Krishna Papers Pvt Ltd has put up 10 wind mills supplied by various
manufactures in Attukinathupatti village, Coimbatore & Kongalnagaram. There are 25 wind
mills in group of company. The company also have a back pressure turbine connected to the
FBC Boiler which produces around 224000 units of power per day. The power generated from
wind mills and turbine takes care of more than 50% of our power requirement and even during
power cut imposed by the Tamil Nadu Electricity Board we are able to comfortably maintain our
production without compromising any of our processes.
The company engages itself in lot of social welfare activities and have recently
contributed a sum of Rs.16.00 lakhs from our group towards the construction of a modern
electric crematorium in Udumalpet. The company also has a poly technique institution in the
name of Rudhraveni Muthuswamy Poly Technique which caters to the needs of lot of student in
7
and around our taluk and contributed for the building of a compound wall of a huge play ground
belonging to the Government High School in Udumalpet. Shri Hari Krishna Papers Pvt Ltd also
promotes Cricket by sponsoring a Team to play in district league matches and also sponsors lot
of other games which are being conducted in and around Udumalpet. Apart from this, the
company also do lot of charities for the Temples.
The following are the founders of the company.
Shri M. Soundarajan
Shri M. Veluswamy
Shri M. Amarnath
The following constitute the present Board of Directors of the company.
Managing Director : Shri M. Amarnath
Joint Managing Director : Shri A. Anish
Directors : Shri V. Vivek
8
PRODUCTS
The company produces different types of papers for various purposes. According to the
need and orders of the dealers the paper is produced and distributed. Each type of the paper has
its own and uses. Paper is often characterized by weight. The weight assigned to a paper is the
weight of a ream (500 sheets) of varying “basic sizes”, before the paper is cut into the size it is
sold to end customers.
Density of paper: The density of paper ranges from 250 kg/m3 (16 lb/ft3) for tissue
paper to 1500kg/m3 (94 lb/ft3) for some specialty paper. Printing paper is about 800 kg/m3
(500lb/ft3).
Newsprint
Bond paper
Book paper
Cotton paper
Kraft paper
Coated paper
Writing & Printing paper
Wall paper
Speciality paper
Industrial paper
News Print
News Print is mainly used in the printing of newspapers and magazines. Although used
for printing purposes, newsprint is considered a separate end-use category because of the marked
difference in its production process as compared with other W&P varities of paper. Besides,
newsprint is consumed in very large volumes vis-a-vis other varieties of paper.
9
Bond Paper
Bond paper is a high quality durable writing paper similar to bank paper but having a
weight greater than 50g/m2. It is used for letterheads and other stationery and as paper for
electronic printers. Widely employed for graphic work involving pencil, pen and felt-tip marker.
It is largely made from rag pulp which produces a stronger paper than wood pulp.
Book Paper
The book paper (or publishing paper) is a paper which is designed specifically for the
publication of printed books. Traditionally, book papers are off white or low white papers (easier
to read), are opaque to minimize the show through of text from one side of the page to the other
and are usually made to tighter caliper or thickness specifications, particularly for case bound
books.Typically, book papers are light weight 60-90gsm and often specified by their
caliper/substance ratios (volume basis).
Cotton Paper
Cotton paper is made from 100% cotton fibers. Cotton paper is superior in both strength
and durability to wood pulp-based papers, which may contain high concentrations of acids. May
also be known as cotton rag or ragged paper.
Cotton fiber papers is known to last several hundred years without fading, discoloring, or
deteriorating, so is often used for important documents such as the archival copies of dissertation
or thesis. Legal documents paper typically may contain 25% cotton. Cotton paper is also used in
bank notes.
10
Kraft Paper
Kraft paper is paper produced by the Kraft process from wood pulp. It is strong and
relatively coarse. Kraft paper is usually a brown color but can be bleached to produce white
paper. It is used for paper grocery bags, multiwall sacks, envelopes and other packaging.
Paper Towel
A paper towel is a disposable product made of paper. It servers the same general purpose
as conventional towels, such as drying hand, wiping windows and dusting. Because paper towels
are disposable, they are often chosen to avoid the contamination of germs.
Specialty Paper
This paper includes tissue paper, fine art paper, business card paper, photo paper and
greetings card paper, which find various specific applications. It contributes to a very small
percentage of total paper demand. Consumption of specialty papers is linked to the standard of
living as well the per capita income of the masses due to their high value products.
Writing and Printing Paper
This includes varieties of paper, normally under 120 GSM (grams per square meter), that
are used primarily for writing (stationery) purpose and printing (books, notebooks, share
applications forms, etc). The various varieties of W&P paper starting from the lower end of the
value chain are cream wove, map litho, copier and coated paper. While high-quality paper
segments have been garnering a greater share, low quality segments still account for a major
share of the market due to a higher base.
To a larger extent, growth in demand for paper in this segment depends on population
growth, level of literacy, public and private spending on education, level of business activity and
growth in the printing industry.
11
Industrial Paper
This includes Kraft paper, duplex boards, grey and white board, and MG paper. The
paper is used for various industrial purposes.
12
CHAPTER II
REVIEW OF LITERATURE
Premkumar Asit K. Ghosh in his book production management (1991) has viewed that
inventories are basically stocks of resources held for the purpose of future production or sales.
Inventories may be viewed as an idle resource, which has an economic value. Better
management of inventories would release capital for use elsewhere, productively.
A.K.Datta in his book material management (1994) reviewed as inventories are stock of
materials of any kind stored for future use, mainly in the production process. Inventories are
resources of any kind having some economical value, either awaiting conversion or use in future.
Rathan Lal Guptha in his book (1994) has explained as inventory comprises a significant
portion of the asset of many enterprises and bulk of working capital is locked up in this item. It
generally constitutes the second largest item after foxed assets in the financial statements,
particularly of manufacturing organizations.
Lambert, D.M., J.R. Stock, and L.M. Ellram, 1998 has analyzed the management of the
inventories, with the primary objective of determining, controlling stock levels within the
physical distribution function to balance the need for product availability against the need for
minimizing stock holding and handling costs.
Charles Atkinson says inventory management is about two things: not running out, and not
having too much. The desire is not to run out, along with uncertainties in demand and supplier
lead times are why we have inventory in the first place. Essentially, inventory is a reserve system
to prevent a stock out.
Tony Wild 2005 explains that good management of inventory enables companies to improve
their customer service, cash flow and profitability. 'Best Practice in Inventory Management'
outlines the basic techniques, how and where to apply them, and provides advice to ensure they
work to produce the desired effect in practice.
13
STANFORD, R.E. AND W. MARTIN 2007 Manufacturers invest considerable resources in
planning, analyzing and predicting the optimal timing and quantities to produce the variety of
company goods, and new technological tools enable high-quality data analysis to support these
growing decision-making needs. However, some traditional decision making systems may still
be useful for both high and low budget firms unable to invest in costly tools. These include
inventory classification systems, frequently referred to as ABC analyses, which provide an
important analytical framework for inventory. It is easy to see how purchase order patterns,
restructured based on ABC analysis, can mean considerable savings. ABC analysis thus ensures
significant cost savings, representing an invaluable tool in the management tactical arsenal.
(Towards a normative model for inventory cost management in a generalized ABC classification
system).
P.Periyasamy in his book financial management (2009) explains inventory is a physical stock of
items that a business or production organization keeps in hand for efficient running of affair of
its production. Inventories consists of raw materials, component part supplies and finished
assemblies, which an organization purchases from outside source and parts, assemblies and
finished products, which the company manufactures itself.
14
CHAPTER III
OBJECTIVES OF THE STUDY
To study the inventory ratios of Shri Hari Krishna Papers Pvt Ltd.
To study how ABC analysis is implemented in inventory management.
To study how FSN analysis is implemented in inventory management.
STATEMENT OF THE PROBLEM
A study on inventory management at Shri Hari Krishna Papers Pvt Ltd, Udumalpet is undertaken
in order to know the inventory performance and position of the company and to know the
strength and weakness and to assess the profitability of the company. Inventories constitute most
significant part of assets of large majority of the companies in India. It is therefore absolutely
very important to manage inventories efficiently and effectively in order to overcome
unnecessary investment and to identify the problems or challenges involved in the inventory
management process at Shri Hari Krishna Papers Pvt Ltd, Udumalpet.
15
CHAPTER IV
RESEARCH METHODOLOGY
Scope
The scope of the study is to examine the inventory management in Shri Hari Krishna Papers Pvt
Ltd for the period of study from 2006-11.
Data collection
The study is based on the secondary data collected from the annual reports and inventory manual
of the company.
Data Analysis
In order to examine the various objectives of the study the following tools have been used.
1. Inventory ratios
2. ABC analysis
3. FSN analysis
16
RATIO ANALYSIS
Ratio analysis is one of the techniques of financial analysis to evaluate the financial
condition and performance of a business concern. Ratio analysis determines trends and exposes
strengths or weaknesses of a firm. A tool used by individuals to conduct a quantitative analysis
of information in a company's financial statements. Ratios are calculated from current year
numbers and are then compared to previous years, other companies, the industry, or even the
economy to judge the performance of the company. Ratio analysis is predominately used by
proponents of fundamental analysis.
FSN ANALYSIS
FSN analysis is carried out on the basis of the rate of movement of materials in the stores
or on the basis of consumption pattern of components. Fast and slowing moving classification
helps in arrangement of stocks in the stores and is deciding distribution and handling patterns.
Fast , slow moving or non moving items analysis report brings out the list of dead materials
which have not have been used at all for quit some time and which should removed from stores.
ABC ANALYSIS
In this technique, the items of inventory are classified according to value of usage. The
higher value items have lower safety stocks, because the cost of production is very high in
respect of higher value items. The lower value items carry higher safety stocks. This method
divides inventory into three classes A,B and C. Items in class ‘A’ constitute the most important
class of inventories so far as the proportion (or percentage) in the total values of inventory is
concerned. Items in class B constitute an intermediate position while those in item ‘C’ are quite
negligible.
17
CHAPTER V
LIMITATIONS OF THE STUDY
The study was confined to only 2 years of the inventory manual.
The entire analysis applies only to Shri Hari Krishna Papers Pvt Ltd, Udumalpet and if any
body wants to generalise the results of this study, it has to be done with caution.
18
CHAPTER VI
ANALYSIS AND INTERPRETATION
6.1 INVENTORY RATIOS
6.1.1 INVENTORY TURNOVER RATIO
Inventory Turnover Ratio is also known as stock velocity and normally calculated as
sales by cost of goods sold/ average inventory. It would indicate whether inventory has been
efficiently used or not. The purpose is to see whether only the required minimum funds have
been locked in inventory.
A low inventory turnover ratio indicates an inefficient management of inventory. A low
inventory turnover implies over-investment in inventories, dull business, poor quality of goods,
stock accumulation, accumulation of obsolete and slow moving goods and low profits as
compared to total investment. The inventory turnover ratio is also an index of profitability, where
a high ratio signifies more profit, a low ratio signifies low profit. Sometimes, a high inventory
turnover ratio may not be accompanied by relatively a high profits. Similarly a high turnover
ratio may be due to under-investment in inventories.
Sales
Inventory turnover ratio = ____________________
Average Inventory
19
Table 6.1.1 presents the details of inventory turnover ratio of Shri Hari Krishna Papers Pvt Ltd
during the study period from 2006-11.
TABLE 6.1.1
INVENTORY TURNOVER RATIO
YEAR
SALES
(IN RS)
AVG INVENTORY
(IN RS)
RATIO
(IN TIMES)
2006-2007 539313949 46,817,163 11.5
2007-2008 559157924 61,714,683 9.06
2008-2009 688687570 69,459,534 9.91
2009-2010 657804603 62,635,803 10.5
2010-2011 719953719 65,612,118 10.9
MEAN 10.3
It is evident from the above table that the company’s mean inventory turnover ratio was 10.3
indicating that company is able to turn its inventory into sales about 10 times a year. There is an
increasing trend of the inventory turnover ratio, which indicates the company efficiently utilizes
inventory.
20
CHART 6.1.1
INVENTORY TURNOVER RATIO
21
6.1.2 INVENTORY CONVERSION PERIOD
The ratio expresses the number of days in which the inventory is converted in to
finished goods. The efficiency of the company can be determined from this ratio. Less inventory
conversion period is better because more fastly, we will convert our inventory into sales, there
will be less chance of obsolescence and paying of over-stocking cost. It can be calculated with
the following formula.
365
Inventory conversion period= ____________________
Inventory turnover ratio
Table 6.1.2 presents the details of inventory conversion period during the period from 2006-11
TABLE 6.1.2
INVENTORY CONVERSION PERIOD
YEAR NO OF DAYS
INVENTORY
TURNOVER RATIO
( IN TIMES)
PERIOD
(IN DAYS)
2006-2007 365 11.5 31.7
2007-2008 365 9.06 40.2
2008-2009 365 9.91 36.8
2009-2010 365 10.5 34.7
2010-2011 365 10.9 33.4
MEAN 35.3
22
The mean inventory conversion period during the study period from 2006-11 was 35.3 days
which implies that the inventory has been disposed off or sold on an average in 35 days.
Inventory conversion period started decreasing from 40.2 days in 2007-08 to 33.4 days in 2010-
11, which shows the efficiency of management to convert the inventory into cash.
CHART 6.1.2
INVENTORY CONVERSION PERIOD
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
05
1015202530354045
INVENTORY CONVERSION PERIOD
PERIOD (IN DAYS)
YEAR
RATIO
23
6.1.3 INVENTORY TO CURRENT ASSET
The inventory to current asset represents the proportion of inventory in the total current
asset. It is determined by dividing the inventory to the current asset. This depicts the amount of
investment in inventories from the whole of currents.
Inventory
Inventory to current asset= _____________________
Current asset
Table 6.1.3 presents the details of inventory to current asset during the period from 2006-11
TABLE 6.1.3
INVENTORY TO CURRENT ASSET
YEAR
INVENTORY
( IN RS)
CURRRENT ASSET
( IN RS)
RATIO
(IN TIMES)
2006-2007 42019739 129509376 0.32
2007-2008 81409628 150991573 0.53
2008-2009 57509441 158631792 0.36
2009-2010 67762166 164101815 0.41
2010-2011 63462071 170914438 0.37
MEAN 0.39
24
The mean inventory in current assets ratio during the study period was 0.39 and it has fluctuated
over a period of time.
CHART 6.1.3
INVENTORY TO CURRENT ASSET
25
6.1.4 INVENTORY TO SALES
This indicates the level of inventory to sales of the organization. It reflects the proportion
of stock to that of the sales for the corresponding period. An increasing Inventory to Sales ratio is
generally a negative sign, showing the company may be having trouble keeping inventory down
and/or Net Sales have slowed, and can sometimes indicate larger financial problems the
company may be facing.
A decreasing Inventory to sales ratio is generally a positive sign, showing the company
has been more able to keep inventory down and/or Net Sales have increased. It is determined as
inventory divided by sales.
Inventory
Inventory To Sales = _____________
Sales
Table 6.1.4 presents the details of inventory to sales during the period from 2006-11.
TABLE 6.1.4
INVENTORY TO SALES RATIO
YEAR
INVENTORY
(IN RS)
SALES
(IN RS)
RATIO
(IN TIMES)
2006-2007 42019739 539313949 0.07
2007-2008 81409628 559157924 0.14
2008-2009 57509441 688687570 0.08
2009-2010 67762166 657804603 0.10
2010-2011 63462071 719953719 0.08
MEAN 0.094
26
The mean inventory to sales ratio during the study period was 0.094. The inventory to sales ratio
for the year 2006-07 is 0.07 and it shows an decreasing trend from 0.14 in 2007-08 to 0.08 in
2010-11. It is a positive sign, showing that the company's ability to manage Inventories while
attempting to increase sales.
CHART 6.1.4
INVENTORY TO SALES RATIO
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
INVENTORY TO SALES RATIO
RATIO (IN TIMES)
YEAR
RATI
O
27
6.1.5 INVENTORY TO WORKING CAPITAL RATIO
This ratio provides the relationship between inventory and working capital. If a firm has
to be financially sound then the amount of inventory should not exceed the amount of working
capital. This ratio is calculated to know whether there is any over stock.
A low value of 1 or less of inventory to working capital means that a company has high
liquidity of current asset, while it may also mean insufficient inventories. A high value inventory
to working capital ratio means that a company is carrying too much inventory in stock. It is not
favorable for management because excessive inventories can place a heavy burden on the cash
resources of a company. A key issue for a company to improve its operation efficiency is to
identify the optimum inventory levels and thus minimize the cost tied up in inventories.
Inventory
Inventory to Working Capital Ratio = _____________________
Working Capital
Table 6.1.5 presents the details of inventory to working capital ratio during the period from
2006-11.
TABLE 6.1.5
INVENTORY TO WORKING CAPITAL RATIO
YEAR
INVENTORY
(IN RS)
WORKING CAPITAL
(IN RS)
RATIO
(IN TIMES)
2006-2007 42019739 106,712,883 0.39
2007-2008 81409628 129718649 0.62
2008-2009 57509441 134235629 0.42
2009-2010 67762166 138203184 0.49
2010-2011 63462071 133132995 0.47
MEAN 0.47
28
The mean inventory to working capital ratio was 0.47. Since the ratio was less than 1, it is found
to be satisfactory.
CHART 6.1.5
INVENTORY TO WORKING CAPITAL RATIO
29
6.2 ABC ANALYSIS (ALWAYS BETTER CONTROL)
ABC Analysis helps in the classification of the items on the basis of their consumption
values in a given period. The logic behind this kind of analysis is that the management should
study each item of stock in terms of its usage, lead time, technical or other problems and its
relative money value in the total investment in inventories.
This analysis in inventory can be done for specified financial periods or for a range of
dates as specified by the user. It is possible to do this analysis for a particular warehouse in a
location or for all the warehouses in the location.
The consumption value of the items over the specified period for which analysis is to be
done is calculated on the basis of the Receipts, Returns and Adjustments made during that time.
The consumption value for items are then put in descending order of their values and the
percentage of total consumption value for each item calculated.
Usually the first 70% of the total consumption value in the specified period corresponds
to A Class, the next 20% are of B Class and the last 10% of the value corresponds to the C Class.
ABC analysis also helps in reducing the clerical costs and results in better planning and
improved inventory turnover. ABC analysis has to be resorted to because equal attention to A, B
and C items will not be worthwhile and would be very expensive.
A- Items
1. Tight controls
2. Rigid estimates of requirements
3. Strict and close watch
4. Safety stocks should be low
5. Management of items should be done at top management level.
30
B- Items
1. Moderate control
2. Purchase based on rigid requirements
3. Reasonably strict watch and control
4. Safety stocks moderate
5. Management be done at middle level
C- Items
1. Ordinary control measure
2. Purchase based on usage estimates
3. Controls exercises by store keeper.
4. Safety stocks high
5. Management be done at lower levels.
The following steps are involved in the classification of items into A, B and C categories.
1. Find out the unit cost and the usage of each material over a given period.
2. Multiply the unit cost by the estimated annual usage to obtain the net value.
3. List out all the items and arrange them in the descending value. (Annual Value)
4. Accumulate value and add up number of items and calculate percentage on total inventory in
value and in number.
31
6.2.1 ABC ANALYSIS FOR THE YEAR 2009-10
TABLE 1
RAW MATERIALS QUANTITY UNIT COSTCONSUMPTION VALUE ( IN RS)
% OF CONSUMPTION
VALUECUMULATIV
E % CATEGORYIMPORTED WASTE PAPER
147.88 17,6362608011.68 34.24 34.24 A
TEXT BOOKS 137.845 10,245.74 1412324.03 18.54 52.78 AIMPORTED WOOD PULP
34.7 24,863.81862774.207 11.32 64.1 A
NO II MACHINE CUTTING
87.578 8,939.80782929.8044 10.27 74.37 B
NOTE BOOKS 60.323 12,968.73 782312.6998 10.27 84.64 BWHITE RECORDS 49.388 10,190.88 503307.1814 6.6 91.24 CNO I ITEMS 26.178 13,811.83 361566.0857 4.74 95.98 CCOLOUR RECORDS 16.135 3,975.75 64148.72625 0.84 96.82 CDUPLEX BOARDS 8.31 7,107 59059.17 0.77 97.59 C
LOW GRADE WHITE RECORDS
7.09 6,177.9843801.8782 0.57 98.16 C
OINP (TAMIL) 5.212 8,126.74 42356.56888 0.55 98.71 CIND WOOD PULP 0.859 30,346.91 26067.99569 0.34 99.05 CSPL COLOUR RECORDS
4.37 4,14018091.8 0.23 99.28 C
BOX CRAFT 2.419 6,931.95 16768.38705 0.22 99.5 COINP (ENGLISH) 1.8 7,119 12814.2 0.16 99.66 CMAGAZINES 1.53 6,834 10456.02 0.13 99.79 COINP(MALAYALAM)
1.28 7,454.959542.336 0.12 99.91 C
TOTAL 7616332.771
TABLE 2
CATEGORY
NO OF ITEMS PERCENTAGE
A 3 18B 2 12C 12 71
TOTAL 17
32
It is evident from the table that 3 types of materials namely imported waste paper, text books and
imported wood pulp fall under category A where it accounts for 70% of the money value and 2
types of raw materials namely No 2 machine cuttings and note books fall under the category B
where it accounts for 20% of the money value and remaining 12 types of raw materials fall under
the category C where it accounts for 10% of the money value.
CHART 6.2.1
ABC ANALYSIS FOR THE YEAR 2009-10
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6.2.2 ABC ANALYSIS FOR THE YEAR 2010-11
TABLE 1
RAW MATERIALS QUANTITYUNIT COST
CONSUMPTION VALUE
% OF CONSUMPTION
VALUECUMULATIVE
% CATEGORYWHITE RECORDS 116.63 15,071.65 1757807 27.13 27.13 AIMPORTED WOOD PULP 34.7 24,863.81 862774 13.31 40.44 ATEXT BOOKS 53.425 14,946.84 708535 10.93 51.37 ANOTE BOOKS 40.134 16,940 679870 10.49 61.86 AIMPORTED WASTE PAPER 35.91 17,857.04 641246 7.85 69.71 AOINP (TAMIL) 49.427 10,296.97 508948 7.85 77.56 BMAGAZINES 25.8 10,598.96 273453 4.22 81.78 BNO II MACHINE CUTTING 19.593 11,813.30 231458 3.57 85.35 BNO I ITEMS 9.72 22,664.50 220299 3.4 88.75 BOINP (ENGLISH) 14.515 10,530.29 152847 2.35 91.1 CCOLOUR RECORDS 19.78 5,287.48 104586 1.61 92.71 CIND WOOD PULP 2.61 33,054.75 86273 1.33 94.04 CBOX CRAFT 7.799 10,610 82747 1.27 95.31 CLOW GRADE WHITE RECORDS 7.56 7,276.39 55010 0.84 96.15 COINP(MALAYALAM) 5.09 10,658.05 54249 0.83 96.98 CSPL COLOUR RECORDS 8.88 5,700 50616 0.78 97.76 CDUPLEX BOARDS 0.835 8,859 7397 0.11 97.87 CTOTAL 6478115
TABLE 2
CATEGORY
NO OF ITEMS
PERCENTAGE
A 5 29B 4 24C 8 47
TOTAL 17
34
It is evident from the table that 5 types of materials namely imported waste paper, text books,
note books, white records and imported wood pulp fall under category A where it accounts for
70% of the money value and 4 types of raw materials namely No 2 machine cuttings, No I items,
OINP (Tamil) and magazines fall under the category B where it accounts for 20% of the money
value and remaining 8 types of raw materials fall under the category C where it accounts for 10%
of the money value.
CHART 6.2.2
ABC ANALYSIS FOR THE YEAR 2010-11
35
6.3 FSN ANALYSIS
FSN Analysis aims at classifying items on the basis of their movement from inventory.
Here the items are classified as Fast, Slow and Non moving items taking into consideration both
1) Average stay of the item in Inventory and
2) Consumption rate of the item.
This analysis can be done for a specified financial period or for a range of dates as
specified by the user. It is possible to do this analysis for a particular warehouse in a location or
for all the warehouses in the location.
The higher the average stay (relative) of an item in the warehouse, the slower its
movement from inventory. On the contrary a fast moving item will have a shorter stay in the
warehouse. A very high consumption rate (relative) implies that the item/variant is a fast moving
one and a slow moving item will have a low consumption rate.
36
TABLE 6.3.1
FSN ANALYSIS FOR THE YEAR 2009-10
Step I: Calculation of Average Stay
Average Stay for the item = Cumulative number of inventory holding days / (Total receipt
quantity + Opening Balance)
ITEMSRECEIPT QTY
CLOSING BALANCE
INVENTORY HOLDING DAYS
AVG STAY
CUMULATIVE AVERAGE STAY
% OF CUMULATIVE AVG STAY FSN
OINP(MALAYALAM) 0.1 1.28 393 307 307 46.2 NOINP (ENGLISH) 0 1.8 395 141 448 67.4 NIND WOOD PULP 0 0.859 591 93 541 81.4 SDUPLEX BOARDS 0 8.31 387 46.5 587.5 88.4 SIMPORTED WOOD PULP 0 34.7 590 17 604.5 91 FSPL COLOUR RECORDS 21 4.37 406 13 617.5 93 FBOX CRAFT 0.06 2.419 28 11.57 629.07 94.7 FMAGAZINES 3.4 1.53 407 10 639.07 96.2 FOINP (TAMIL) 32.12 5.212 392 7.84 646.91 97.4 FLOW GRADE WHITE RECORDS 68 7.09 402 5.6 652.51 98.2 FNO II MACHINE CUTTING 9.57 88 490 4.3 656.81 98.9 FIMPORTED WASTE PAPER 148 148 638 3.6 660.41 99.4 FTEXT BOOKS 5.55 138 776 1.8 662.21 99.7 FCOLOUR RECORDS 0.49 16 792 0.8 663.01 99.8 FNO I ITEMS 52 26 26 0.47 663.48 99.9 FWHITE RECORDS 34 49 75 0.36 663.84 99.9 FNOTE BOOKS 302 60 135 0.07 663.91 100 F
37
Step II: Calculation of consumption rate
Consumption Rate = Total Issue Quantity / Total period duration
ITEMSISSUE QTY CONSUMPTION
CUMULATIVE CONS
% OF CUM CONS FSN
NOTE BOOKS 1012 2.77 2.77 43.3 FOINP (ENGLISH) 1 2.73 5.5 86 SWHITE RECORDS 81 0.22 5.72 89.51 SLOW GRADE WHITE RECORDS 63 0.17 5.89 92.1 NOINP (TAMIL) 44 0.12 6.01 94 NMAGAZINES 37 0.1 6.11 95.6 NNO I ITEMS 29 0.07 6.18 96.7 NSPL COLOUR RECORDS 28 0.07 6.25 97.8 NCOLOUR RECORDS 22 0.06 6.31 98.7 NTEXT BOOKS 23 0.06 6.37 99.6 NIMPORTED WASTE PAPER 5.71 0.01 6.38 99.8 NIND WOOD PULP 5.5 0.01 6.39 100 NBOX CRAFT 0 0 6.39 100 NNO II MACHINE CUTTING 0 0 6.39 100 NDUPLEX BOARDS 0 0 6.39 100 NOINP(MALAYALAM) 0 0 6.39 100 NIMPORTED WOOD PULP 0 0 6.39 100 N
Step III: Final FSN classification based on average stay and consumption rate
38
ITEMSCONS RATE AVG STAY FINAL FSN
NOTE BOOKS F F FOINP (ENGLISH) S N NWHITE RECORDS S F SLOW GRADE WHITE RECORDS N F SOINP (TAMIL) N F SMAGAZINES N F SNO I ITEMS N F SSPL COLOUR RECORDS N F SCOLOUR RECORDS N F STEXT BOOKS N F SIMPORTED WASTE PAPER N F SIND WOOD PULP N S NBOX CRAFT N F SNO II MACHINE CUTTING N F SDUPLEX BOARDS N S NOINP(MALAYALAM) N N NIMPORTED WOOD PULP N F S
Step IV: FSN analysis for the year 2009-10
CATEGORYNO OF ITEMS PERCENTAGE
F 1 6S 12 71N 4 24
TOTAL 17
It is evident from the table that only one type of material namely note books fall under fast
moving items where it accounts for 6% of the total items. And 12 types of raw materials namely
39
white records, low grade white records, No 2 machine cuttings, No I items, OINP (Tamil), spl
colour records, colour records, magazines, text books, imported waste paper, box crafts, and
imported wood pulp fall under slow moving items where it accounts for 71% of the total items
and remaining 4 types of raw materials namely OINP (English & Malayalam), duplex boards,
and ind wood pulp fall under non moving items where it accounts for 24% of the total items.
CHART 6.3.1
FSN ANALYSIS FOR THE YEAR 2009-10
TABLE 6.3.2
40
FSN ANALYSIS FOR THE YEAR 2010-11
Step I: Calculation of Average Stay
Average Stay for the item = Cumulative number of inventory holding days / (Total receipt
quantity + Opening Balance)
ITEMSRECEIPT QTY
CLOSING BALANC
E
INVENTORY HOLDING
DAYS
AVG STA
Y
CUMULATIVE AVERAGE
STAY
% OF CUMULATIVE AVG STAY FSN
DUPLEX BOARDS 0 0.835 269 322 322 61.4 NOINP(MALAYALAM) 4 5 274 62.9 384.9 73.4 SIND WOOD PULP 0 3 277 26 410.9 78.4 SSPL COLOUR RECORDS 12 9 286 25.3 436.2 83.2 SOINP (ENGLISH) 3 15 301 23.4 459.6 87.7 SMAGAZINES 19 26 327 14.6 474.2 90.5 FIMPORTED WOOD PULP 0 35 362 13 487.2 92.9 FLOW GRADE WHITE RECORDS 17 8 370 11.1 498.3 95.1 FCOLOUR RECORDS 6 20 390 9.75 508.05 96.9 FNO II MACHINE CUTTING 17 20 410 5.15 513.2 97.9 FOINP (TAMIL) 42 49 459 3.27 516.47 98.5 FTEXT BOOKS 73 53 512 2.38 518.85 99 FBOX CRAFT 6.28 8 520 2.25 521.1 99.4 FIMPORTED WASTE PAPER 0 36 556 2.06 523.16 99.8 FWHITE RECORDS 240 117 673 0.33 523.49 99.9 FNO I ITEMS 33 10 10 0.27 523.76 99.9 FNOTE BOOKS 257 40 50 0.16 523.92 100 F
41
Step II: Calculation of consumption rate
Consumption Rate = Total Issue Quantity / Total period duration
ITEMS ISSUE QTY CONSUMPTIONCUMULATIVE
CONS% OF CUM
CONS FSNWHITE RECORDS 340 0.93 0.93 34.8 FNOTE BOOKS 302 0.82 1.75 65.5 FIMPORTED WASTE PAPER 166 0.45 2.2 82.3 STEXT BOOKS 49 0.13 2.33 87.2 SOINP (TAMIL) 47 0.12 2.45 91.7 NNO II MACHINE CUTTING 32 0.08 2.53 94.7 NNO I ITEMS 26 0.07 2.6 97.3 NLOW GRADE WHITE RECORDS 23 0.06 2.66 99.6 NSPL COLOUR RECORDS 5 0.01 2.67 100 NBOX CRAFT 0 0 2.67 100 NCOLOUR RECORDS 0 0 2.67 100 NDUPLEX BOARDS 0 0 2.67 100 NOINP(MALAYALAM) 0 0 2.67 100 NOINP (ENGLISH) 0 0 2.67 100 NMAGAZINES 0 0 2.67 100 NIMPORTED WOOD PULP 0 0 2.67 100 NIND WOOD PULP 0 0 2.67 100 N
42
Step III: Final FSN classification based on average stay and consumption rate
ITEMSCONS RATE
AVG STAY FINAL FSN
WHITE RECORDS F F FNOTE BOOKS F F FIMPORTED WASTE PAPER S F STEXT BOOKS S F SOINP (TAMIL) N F SNO II MACHINE CUTTING N F SNO I ITEMS N F SLOW GRADE WHITE RECORDS N F SSPL COLOUR RECORDS N S NBOX CRAFT N F SCOLOUR RECORDS N F SDUPLEX BOARDS N N NOINP(MALAYALAM) N S NOINP (ENGLISH) N S NMAGAZINES N F SIMPORTED WOOD PULP N F SIND WOOD PULP N S N
Step IV: FSN analysis for the year 2010-11
CATEGORY
NO OF ITEMS
PERCENTAGE
F 2 12S 10 59N 5 29
TOTAL 17
It is evident from the table that 2 types of material namely note books and white records fall
under fast moving items where it accounts for 12% of the total items. And 10 types of raw
materials namely low grade white records, No 2 machine cuttings, No I items, OINP (Tamil),
43
colour records, magazines, text books, imported waste paper, box crafts, and imported wood pulp
fall under slow moving items where it accounts for 59% of the total items and remaining 5 types
of raw materials namely OINP (English & Malayalam), duplex boards, spl colour records, and
ind wood pulp fall under non moving items where it accounts for 29% of the total items.
CHART 6.3.2
FSN ANALYSIS FOR THE YEAR 2010-11
CHAPTER 7
FINDINGS
44
The inventory turnover ratio shown an increasing trend during the period of the study
which indicates that the company efficiently utilizing its inventory.
The average inventory conversion period was 35.3 days. It means, the inventory has been
disposed off or sold on an average in 35 days, which shows the efficiency of management
to convert the inventory into cash in short period.
The average inventory in current assets during the study period was 0.39 and it has
fluctuated over a period of time.
The average inventory to sales ratio was 0.094, the lesser the ratio it is a positive sign,
showing that the company's ability to manage inventories while attempting to increase
sales.
The average inventory to working capital ratio was 0.47. Since the ratio was less than 1,
it is found to be satisfactory.
Raw materials like imported wood pulp, text books, white records and imported waste
paper fall under A category where it accounts for 70% of the money value and constitutes
29% of total items.
Raw materials like No II machine cuttings, note books, OINP (Tamil), magazines and No
I items fall under B category where it accounts for 20% of the money value and
constitutes 24% of total items.
Raw materials like colour records, low grade white records, OINP (English &
Malayalam), duplex boards and spl colour records fall under C category where it
accounts for 10% of the money value and constitutes 47% of total items.
Raw materials like note books and white records fall under fast moving items where it
accounts for 12% of the total items.
Raw materials like low grade white records, No 2 machine cuttings, No I items, OINP
(Tamil), colour records, magazines, text books, imported waste paper, box crafts, and
imported wood pulp come under slow moving items where it accounts for 59% of the
total items.
45
Raw materials like OINP (English & Malayalam), duplex boards, spl colour records, and
Ind wood pulp come under non moving items where it accounts for 29% of the total
items.
CHAPTER 8
SUGGESTIONS
46
The company should have control over the non-moving items constituting 29% because
there will be unnecessary blocking of working capital.
As per analysis there is increase in inventory turnover ratio from 2006-11. The
management is required to maintain an increasing trend in inventory for the efficient
running of the business.
The percentage of fast moving items was very less when compared to the slow moving
and non-moving items and hence the company should maintain high percentage in fast
moving items.
Laying out formal procedures of inventory management for the effective inventory
management.
Training should be given to the employees on ways of handling and managing inventory
as well as new employees on stock management and handling.
Improvement of storage facilities.
Setting clear inventory controls as well as account for stock on regular periods.
47
CHAPTER 9
CONCLUSION
The overall inventory management followed at Shri Hari Krishna Papers Pvt Ltd seems
to be satisfactory. The company should implement the financial tools like ABC and FSN analysis
based on the consumption value for the better control of inventory. So the demand for scarce raw
materials could be met and at the same in the excess storage and investment in raw material can
be avoided. The control technique helps the management for the delegation of authority and
responsibility to the members in the stores. So the top management could focus attention only on
few items.
If the goal is to make the business more profitable, the organization must increase
efficiency and reduce costs. Inventory is the largest investment that must be carefully planned.
Classification of your inventory, and continuing analysis of those classifications, can play a vital
role in maintaining cost at the efficient levels the organization has established as goals. Inventory
control is a constant requirement of doing business successfully.
The main objective of inventory management is to avoid production bottlenecks by
providing continuous supply of all types of materials, avoidance of wastes, effective economy in
purchasing through economical order quantity and taking advantages of favorable markets,
maintaining optimum level of investment in inventories. So if the organization follows these
inventory can be maintained and cost can be controlled.
48
BIBLIOGRAPHY
Books
Wild, T., “Best Practices in Inventory Management, 1997, (chapter 3): Wiley
publication.
Khan M.Y., Jain P.K., “Financial Management”, Tata Mc Graw – Hill publishing
Company Limited, 2007.
Pandey I.M., “financial management”, Vikas Publishing House ltd,2005
Maheswari S.N., “management accounting”, sultan chand and sons,1995
Journals
Professure Hossein Ashram “views on inventory cost” Journal of Small Business
Management.2005. 8(5) pg 28-35
Berniker, E. and D.E. McNabb, “Applying matrixed Pareto analysis with activity based
costing for operations and cost management”, Journal of Business and Management,
2005. 11(1): p. 73-88.
Stanford, R.E. and W. Martin, “Towards a normative model for inventory cost
management in a generalized ABC classification system”. Journal of the Operational
Research Society, 2007. 58(7): p. 922-928.
Websites
www.inventorymanagementreview.org
www.effectiveinventory.com
en.wikipedia.org/wiki/Pareto principle
www.businessfinanace.com
http://wiki.sdn.sap.com/wiki/display/SI/Inventory+Analysis
http://www.paperex-india.com/paperscene.htm
http://iamsam.hubpages.com/hub/ABC-Analysis-Technique-of-Inventory-Control
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