I

A Project Report on INVENTORY MANAGEMENT

AT KAKATIYA OVERSEAS PVT LTDA Project report submitted to osmania university HYDERABAD

In partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATIONBy

N.S AMBASA(10908123)

Under the esteemed guidance of(KEERTHI)SRI INDU P.G COLLEGE(Affiliated to osmania University)

HyderabadACKNOWLEDGEMENT

I express my sincere gratitude to (G.Rama Rao) (Director) for allowing to carry out this project in KAKATIYA OVERSEAS PVT LTD.

I am also thankful to the employees of KAKTIYA OVERSEAS PVT.LTD, for their kind cooperation in completion of my project.

I express my sincere thanks to L.Swetha Reddy(Export Executive) for her guidance in completion of my project.

I extend my heart-felt gratitude to Keerthi, sri indu pg college for her valuable guidance in my project and the preparation of report and making this work successful

I would like to thanks Mr SUNDARAM, Head of Department, SRI INDU P.G COLLEGE for his valuable support. DECLARATION

I here by declare that this Project Report titled INVENTORY MANAGEMENT At KAKATIAYA OVERSEAS submitted by me to the Department of Master of BusinessAdministration is a bonafide work done by me and it is not submitted to any University or institution for the award of any Degree or Diploma or published any time before.

N.S AMBASA

H.T.NO: 10908123SRI INDU P.G COLLEGE DATE:

PLACE:

(N.S AMBASA) CERTIFICATION

This is to certify that the Project Report title Inventory Management submitted in partial fulfilment for the award of MBA Programme of Department of Business Management, OU HYD, was carried out by Ms KEERTHI under my guidance. This has not been submitted to any other University or Institution for the award of any degree/diploma/certificate.

Name and address of the Guide

Signature of the Guide

CHAPTERISATION:Chapter 1: Industry profile 1.1 Introduction of industry profileChapter 2: Company and product profile

2.1 Introduction of companyChapter 3: Project details

3.1 Introduction 3.2 Need for study

3.3 Benefits of study

3.4 Methodology & Data base

3.5 ObjectivesChapter4: Introduction to inventory management

4.1 Introduction

4.2 Inventory control & its impact on cost

4.3 Inventory corporate finance 4.4 Risks & costs of holding inventory 4.5 Inventory Accounting 4.6 Objectives of inventory management 4.7 Tools & techniques 4.8 System & overviewChapter 5: Analysis and interpretation 5.0 Making ABC analysis 5.1 calculation of inventoryChapter 6: Suggestions & conclusion

6.1 Findings & suggestion

6.2 Conclusion 6.3 bibliography

INDIAN STONE INDUSTRY PROFILEINTRODUCTIONIndia has major resources of marble, granite, sandstone, Kotahstone, quartzite & slate. Granite resources are largely in South India and Marble deposits are largely in Western India (Rajasthan & Gujarat).

A variety of stone products like all types of marble, tile, granite etc are available in the market. The beauty and opulence of natural stone products have prevailed as the most sought after finish in any building in crafting customized floors, walls, countertops, columns, fireplaces and bathroom.

These stone products are available in polished as well as unpolished state. These stone products come with various price ranges suiting every individual's budget. They are available in different size, shape, type, thickness etc. Some of these stone products are available in block, some in slabs and some in tile. They are imported sometimes and sometimes locally made. Stone products are strong and sturdy and can carry a lot of weight.

Natural stone products are mostly used in making and decorating building, office, industry, organizations etc. These are also custom made as per the requirement and specifications of the customer. They are used in construction industries and in most of the industrial sectors.

The range of natural stones includes slate stone, sand stone, mosaic stone, cobble & pebble, marble, granite, minerals and genuine, natural stones that are not dyed, synthesized, stabilized or enhanced - just genuine cut and polished gemstones, or pure rough gem material for your use.

Granite tile and marble flooring are excellent floor materials. Both marble and granite tile are natural stone products, very durable and stain resistant. Other options for floors include slate and terrazzo. All except for terrazzo are installed like ceramic tile. Marble and granite tile exhibit a wide range of stain resistance. Marble is more porous than granite.

Natural beauty, durability, resistance to heat and a sense of permanence are the hallmarks of a granite tile. Granite is an important structural and ornamental stone, and due to its high compressive strength and durability, it is used for massive structural work. Fine-grained granite is employed for ornamental and monumental work as well as for inscription purposes. It is the hardest of structural natural stones. Granite tiles are quite literally, as old as the earth, perfect for use in residential and commercial flooring applications. Granite slabs are ideal for fabricating granite counter tops, flooring, retaining walls and landscaping around a center fountain/pond.

A marble is a metamorphic rock formed by alteration of limestone or dolomite, often irregularly colored by impurities and used especially in architecture and sculpture. Marble tiles are suitable for bathrooms, entryways and fireplaces, living & dining areas. Marble floor tiles are also used for both interior and exterior flooring applications. Some of the different colors of marble are white, red, black, mottled and banded, gray, pink, and green. Marble flooring adds class to the home and gives it a feel of luxury. The best thing about the marble floors is that, they lend a very soothing cooling touch to the home.

The highest producer of stones

Highest producer of dimensional stones in the world accounting for over 27% of the world stone production.

16.16 million tons of stone production in the year 1997-98 out of a total world production of 61 million tons.

Over 2 million people are employed in stone sector.

Indian Stone Production (In Thousand tons)

1991-921992-931993-941994-951995-961996-971997-98

Marble1966224420862627318637123622

Granite989307336184460455545504950

Sandstone4411443539783304456255015461

Flaggy Limestone6209968231407176017102118

Slate35497118

Total7989107531050911807140701548416159

(Source: State Department of Mines & Geology and All India Granites & Stones Association)

Marching towards global leadership

Export of Stones - US $ 301 million (Rs.13,000 million) in 1997--98

India ranks 3rd in world stone exports with a 10.8% share in 1997 (in terms of tonnage).

India ranks 1st in Raw Siliceous product (Granite & Sandstone) exports.

India ranks 5th in Raw Calcareous product (Marble & Flaggy Limestone) exports.

India ranks 9th in exports of finished stone products

The bulk (90%) of the Indian stone exports is by way rough granite and marble blocks and only about 10% is by way of value added or branded products. Indian stone industry and the Government have set a target of raising this to 50% over the next 5 years.

The bulk of the Indian stones are produced in the Indian states of Rajasthan, Tamilnadu, Karnataka and Andhra Pradesh. Rajasthan accounts for nearly 90% of all the marble produced and the other three states in Southern India produce almost all the granite exported.STATISTICAL OUTLOOK

Major Importers

India possesses enormous deposits of all types of natural dimensional stones with a variety of properties

Marble

Granite

Kotahstone(Flaggylimestone)

Sandstone

Slate

Dimensional blocks

Slabs and tiles

Monuments

Architectural and sculptured pieces

Moulded pieces

Cobbles and pavement stones

StoneHandicrafts/Artifacts

MARBLE INDUSTRY

Indian marble is highly acclaimed in the international market.World famous Taj mahal is testimony of exotic quality snow white marble from Makrana region.

Availability:In districts of Nagaur, Udaipur, Banswara, Jaipur Sirohi, Bhilwara, Ajmer, Bundi, Pali, Dungarpur,Chittorgarh, Jaisalmer and Sikar, Rajsamand, Alwar . Color & Pattern: Snow white, Creamish white, Whitewith grayish/ black bands and Wavy patterns, pink, pinkwith bluish bands, green, yellow, black, multi-color etc.

Export varieties:Snow white - very fine-grained, green and pink. Indian green ishighly priced and is the most desired marble in demand the world over.

Number of mining leases: About 3600

Marble Processing Capacity:Slabs - 1000 million sq.ft. p.a.

Tile - 300 million sq.ft. p.a.

Marble the pride of India

Practically inexhaustible marble deposits -over 1200 million tons

Splendid varieties of white, green, black, grey, pink, yellow

Physical and mechanical properties complying with international standards

Amongst the top 5 countries in marble exports

A Vibrant Industry

Total Investment - over Rs.40,000 million (US $1,000 million)

About 4,000 mining leases

Block production 3.7 million tons in 1996-97

About 1,100 modern gangsaw units and 50 Automatic tiling plants

More than 5,000 trading companies

Employing about 1 million people

Fast developing modern mechanised quarries

Over 300 quarries using diamond wiresaw & chainsaw cutter quarrying technology

Modern & well equipped factories with advanced Italian technology for cutting, processing, polishing and handling

Marble slab & tile production: 1300 million sq. ft per annum

Impressive Marble Export Increase of over 300% from US $ 9 million in 1992-93 to US $ 27 million in 1996-97

Excellent quality export varieties - Green, Onyx, Indo Italian, White and Pink marble

High quality polished marble tiles & slabs and green & white marble blocks correspond to demand in the foreign market

High export demand for marble handicrafts

Key marble export markets - USA, Canada, Japan, Singapore, UAE, EC countries

Major Marble Centres of India Prominent marble quarrying and processing centres in India are:

Rajasthan

Udaipur-Rajsamand -Chittorgarh region

Makrana-Kishangarh region

Banswara - Dungarpur region

Abu region

Andhi (Jaipur) - Jhiri (Alwar) region

Jaisalmer region

Gujarat

Ambaji region

Makrana-Kishangarh region

GRANITE INDUSTRY

Granite Ranks 1st in Raw Siliceous Exports in the world

Exports valued at 244 million dollars in 1997-98

Widespread availability - Karnataka, Andhra Pradesh, Tamilnadu, Orissa, Rajasthan, Utter Pradesh, Bihar, West Bengal

Estimated Geological Reserves - Over 5,000 million cubic metres

Important Quarrying & Processing Centres - Bangalore, Bellary, Hospet, Chamrajnagar, Chennai, Hyderabad, Warangal, Jhansi, Jalore, Pali, Barmer etc.

Magnificent Varieties - Merry Gold, Platinum White, Mokalsar Green, Rosy Pink, Nagina Green, Tiger Skin, Royal Gold, Jhansi Red, Galaxy Black, Kashmir White, Paradiso, Cira Grey, Juparana, Absolute Black, New Imperial Red, Raw Silk etc.

Availability: In districts of Barmer, Jalore,Pali, Sirohi,Alwar,Jaipur Jhunjhunu, Tonk,Ajmer, Bhilwara, Sikar and Udaipur.

Color & Pattern:Pink, Grey, Green, Multi-color, Bluish white,Red,Golden Cream, Paradiso Black, Banded with wavy pattern, white with spots etc.

Export varieties:Rosy Pink, Golden Pearl, Chima Pink, AngloGrey, RoyalCream,Platinum white, Snow white, Tigerblack, Imperial Pink, Mokalsar Green, Nagina Green, Jalore Pink, Kharda Red, Blue Pearl, Paradiso Red, Brownish Green, Jhunjhunu Red, Yellowish & Pink.

Number of mining leases:665

Geological Reserves:1128 million Cu. M.

Quality of Granite:Hardness 6 to 7 on Moh's scale

Granite Processing Capacity:Slabs - 1.5 million sq.m.

Tiles - 5.0 million sq.m.

Sandstone

In India sandstone is extensively used in residential houses, office buildings, commercial complexes, hotels, restaurants and special monuments. Artefacts made of stone - screens, fountains, pedestals, columns, arches, balusters, railings - have become popular. The present trend is to make these stone carvings in the best possible manner with man and machines. The recent example of the use of sandstone screens and columns was the renovation of Leela Palace Goa Resort in Goa, where the American architect decided to remove the existing granite/marble columns and decor and replace it with sandstone. Architects in Bahrain, Saudi Arabia and U.S.A have extensively promoted items made of sandstone. In the entire Middle East - Oman, Bahrain, UAE, Saudi Arabia and Kuwait architects have used sandstone carved materials in residential villas. Even the architects from U.S.A. who are constructing villas in Saudi Arabia have used sandstone carvings. Some architects from Riyadh are very much fascinated with Indian sandstone architecture. In their each and every new creation, some stone carvings are used for their clients. They want century old stone art to be revived today.

Widespread availability - Rajasthan & Madhya Pradesh

Important Quarrying & Processing Centres - Bharatpur, Dholpur, Kota, Sawaimadhopur, Bundi, Chittorgarh, Nimbhahera, Jodhpur, Bikaner, Jhalawar, Pali and Jaisalmer

Impressive Colours & Patterns: Red, Buff, Beige, Pink, Flaggy sandstone.

Splendid Varieties: Rainbow, Teak, Modak, Kher, Budh, Bansi Pink, Mandana, Dholpur Red and Beige etc.

Estimated Geological Reserves: Over 1,000 million tons

Production in 1997-98: Over 5 million tons

Exports in 1997-98: US$ 2.5 million

FLAGGY LIMESTONE

Widespread availability - Rajasthan, Andhra Pradesh

Color & pattern - Greenish Blue, Pale Brown & Black

Important Quarrying & Processing Centres - Ramganjmandi, Modak, Cuddapah

Estimated Geological Reserves - Over 2,000 million tons

Production - Over 2 million tons

Important Export Varieties: Kota blue, Kota Brown Etc.

Occurrence:In districts of Kota, - Chittorgarh & Jhalawar.

Important centres are Ramganj, Mandi, Suket, Chechat, Morak, Manpura

No. of Mining Leases: 130

Export Potential:In Europe, USA, Canada, Japan and Singapore.

SLATE

Occurrence: In districts of Alwar, Ajmer, Bharatpur, Tonk, Sawai Madhopur, Pali, Udaipur, Churu, Chittorgarh. However, slate deposits of Alwar district are of exportable quality.

Color & Pattern: Greyish black, multicolour, Brown, Red etc.

No. of mining leases: 32

Export markets: Holland, Germany, Australia, Japan and Singapore.

FOCUS ON THE MAJOR CITY: RAJASTHAN

Rajasthan is the major producer of Marble in India. Granite is produced in the states of Karnataka, Tamil Nadu, Andhra Pradesh, Rajasthan, Madhya Pradesh, Orissa & Uttar Pradesh.

Rajasthan's share in IndianStone productionMineral% of India's total production

Marble91%

Kotahstone (Flaggy limestone)90%

Sandstone90%

Slate10%

Granite2.2%

COMPANY PROFILE

HISTORY OF THE COMPANY:

Kakatiya Overseas was incorporated in 2002, and was promoted by G.Rama Rao. It is a processors and exporters of natural stones.

ABOUT THE COMPANY:

Kakatiya overseas is one of the reputed Organization in Mining & Processing of Non-metallic minerals..It is a renowned name in the field of Quartz and Natural stones for its finest quality. They have The own rich quarries spread across South-India with Administration Office at Hyderabad. Kakatiyaoverseas having highly skilled manpower working as coordinated units in the state-of-the-art factory equipped with the latest machinery for the eco-friendly processing, produce highest quality products. There are Successful vendors for many buyers across the world especially in South-East Asia, European and American Continents.

Kakatiya Overseas has carved a niche for itself for producing world class natural stones. This company has grown into one of the countrys largest corporate houses to the exporting quality granite in a wide spectrum finish to customers world wide.

PLANT LOCATIONS:

#27, Road No.5

Indraprasthan Industrial Area,

Kota , Rajasthan

Narnaul Road,Kund-123102

Rewari, Haryana.

Plot No. 56, 57 , 58

Industrial Estate ,

Markapur , AP

Plot #247,IDA ,

OFFICE:KAKATIYAOVERSEAS

127BKiranMansion,G-1

VengalaRaoNagar,Hyderabad

AP, IndiaLOCATION:

Kurnool Road,

Betamcherla-518599

Kurnool Dist,

Andra Pradesh,India.

OFFICE:

KAKATIYAOVERSEAS

127BKiranMansion,G-1

VengalaRaoNagar,Hyderabad

AP, IndiaBOARD OF DIRECTORS: G.Rama Rao.

C.VINILBANKERS: HDFC ICICI.COUNTRIES TO WHOM THEY EXPORT:

1. UK

2. BELGIUM

3. ITALY

4. MOROCCO

5. AUSTRALIA

6. ALGERIA7. NETHER LANDS

8.UNITED STATES OF AMERICA.

9.Greece

10.France

11.UAE

OBJECTIVE: Established with a commitment to serve Indias Ornamental Stone IndustriesThat specialize in marbles, sandstones, slates, limestone, quartzite etc.,

All/India Natural Stones and Stone Association (AIGSA) has been serving Indias stoneand Allied Industries with a single track objective of our stone industries i.e. Granites,Marbles, Sandstone, Slates, Limestones and Ornamental Building Stones in anyform and its ancillaries Of Machinery too, Equipment, anything directly related to the stone.

Welfare:

Welfare activities include canteens supplying subsidized meals, transport facilities, to employees.

Quality:

Standards and quality assurance group (SQAG) at kakatiya overseas is a corporate quality assurance service facility. While the individual business groups have their own quality control/quality assurance sections, this corporate facility caters to the common requirements.

Faculty for training personnel in product divisions on ISO awareness and on internal quality audits, helping in developing their quality system documentation, planning, conducting and managing internal quality audits and reporting of audit results.

RECEIPT DOCUMENTS:

CSRV : certified stores receipt voucher, which is issued by the stores personnel to bills section in order to classify the material into Raw materials, stores and spares, consumable tools, packing material, subcontractors services, and other operational expenses, based on the purchased order, the bills section does the provisional valuation by using fixed percentages for freight, insurance and other incidentals and with regard to customs duty the percentages as per tariff are adopted and the following entry proposed.

FLOW OR RECEIPT DOCUMENT (CSV)

Strategies:

Technical up gradation and R&D efforts.

Effective new markets and exports.

Gather delegation of authority and tuning up management information system.

Diversification.

PRODUCT RANGE:

Natural stones being increasingly used by the construction industry is gradually replacing marbles and ceramic products due to its high durability and ability to give excellent garnish. Being a costly construction material , natural stones finds its Market in developing countries like Japan, Europe, and USA. Italy is the major market In this industry.

Indian natural stones is well accepted in the international market mainly because Of its better and uniform texture, grain and availability in variety of colors. Indias Share in the international trade, estimated at about RS.1000 Crores works out 1% And there is considerable potential for increasing the volume of granite exports from India. While the export potential for the slabs are satisfactory, the market for the Monuments is relatively competitive.

The company offers a wide variety of Stone Products to all the customers Quality Stones at Quantity rates. They have a team of experienced professionals working throughout their locations looking after processing, dressing, inspecting and shipment of natural stones.

The usage of stone has been an integral part of human civilization and has played a pivotal role in shaping establishments. Continuing this tradition, The Company, excel as a supplier & exporter of varieties of natural stones. They have earned a respectable position in setting new heights in quality products, customer satisfaction and on-schedule delivery of the products.They supply and export a comprehensive range of high quality natural stones such as sandstone, limestone,slate,granite and other construction and building stones for discerning buyers around the globe.

The major advantages of dealing is, as appreciated by their customers include faster inventory, less capital tied up in inventory & low total life cycle cost. All these result in increased profitability on the part of their customers.

They export of widely-acclaimed quality of different kinds of natural stones, such as:

Slate Stones

Sandstone

Limestone

Granite

PRODUCT EXPORTED:

SAND STONE:

Sandstone is a Sedimentary Stone consisting usually of quartz, silica, iron oxide and calcium carbonate. These stones are durable, weather, acid and thermal resistant and have crushing strength. They come in many colors, shades. Cobbles of Sandstones are also very popular.

Products available in Slabs, Tiles Blocks :

Dholpur Beige, Agra Red, Bansi Pink, Fossil, Panther, Tint Mint, Rainbow, Chanderi Pink, Lalitpur Grey, Lalitpur Yellow (Camel Yellow), Teakwood, Kandla Grey, Modak, Mandana, Raveena, Raj Green, Autumn Brown.

General Sizes available Undersize (In cms):

Undersize :28 x 28, 42x42, 28 x 56, 56x56, 56x84, 56 x 112

Oversize : 30 x 30, 45x45, 30 x 60, 60x60, 60x90, 60 x 120

Thickness:10-20 mm, 20-35 mm

Finish:

Natural Cleft both faces , One side Honed, Both sides Honed, Hand Cut/Machine Cut/Gangsaw Cut, Polished, Mirror Finish, Calibrated, Bullnosed, Rivetted.

LIMESTONE:

It is a sedimentary stone and mainly consists of Calcite. It has a smooth granular surface, does not show much graining or crystalline structure and varies in hardness. Some dense limestones can be polished. There are a number of varieties of lime stone and besides flooring has many other applications.

The common colors are blue, grey, black, brown, and green.

Products Available:

Kota Blue, Kota Brown, Cuddapah Black, Lime pink, Lime Green, Shahbad Yellow.

Sizes available (In cms):30x30, 40x40, 30x60, 40x60, 60x60, 50 x50, 55x55,60x90 Flag stones.

Thickness:10-22mm, 20-30 mm, Calibration in 12 mm.

Finish:

Natural Cleft both faces , One side Honed, Both sides Honed, Hand Cut/Machine Cut/Gangsaw Cut, Polished, Mirror Finish, Calibrated.

Cobbles of limestones are very popular.

SLATE:

Slate is a fine grained metamorphic stone that is formed from clay, sedimentary rock shell, and sometimes quartz. Characteristically the rock may slit into relatively thinner slabs. Slates find application in interiors and exteriors. It is extremely beautiful and more cost effective than most other wall and floor coverings. It renders a very graceful, natural finish to any building or home. The usual colours of slate are copper, gold, multicolor, black, dark grey, greenish grey, copper and purplish grey. Sometimes colour changes do occur due to weathering. The harder varieties of slate are used for flooring. Slate mines are found in North and Southern part of India. They look beautiful when used as a roofing slate.Products Available *North Indian Slates:

Himachal White,Himachal Green, Himachal Black, Kund Peacock, Mau Multy, Khundrot,Jack Multy, Copper, Silver Grey, Zeera Green, Deoli Green, Golden, Oceanic, Silver Shine, Shimla White Mica, Jack Black, Multicolured, etc.

*South Indian Slates:

Sanjani, Indian Autumn, Vijay Gold, M Green , N Green, Taj Rose, Black Rustic, Indian Autumn Rustic, Chocolate, Multi Grey, Multi Pink etc.

Sizes available (In cms):30x30, 40x40, 60x30 due to characteristics of product large sized slabs are not possible

GRANITE:

Granite is an Igneous Stone. It is primarily made of Quartz (35%), Feldspar (45%) and Potassium. Usually has darker colors. Contains very little calcite, if any. Provides a heavy crystalline and granular appearance with mineral grains. It is very hard material and easier to maintain. There are different types of granite depending on the percentage mix of quartz, mica and felspar.

Products Available :

Over 34 different products in Slabs and Tiles . Tiles in Square size, free lengths, odd sizes and foot strips. They can offer you Granite Vanity Tops,Bar Tops,etc., in prefabricated, precut, ready to install. They have CNC (Contouring) machine to do these jobs with perfection, which very few processors have in India.

*Sizes available Slabs :

Min. Size 260x140 cms

Max Size 300x170 cms

Tiles: All sizes are available common being 305x305; 406x406; 457x457; 610x610.

Thickness Slabs :20 mm, 30mm

Tiles:10 mm, 12 mm, 15 mm 20 mm.

COMPANY TURNOVER :( SALES)

YEARSTURNOVER (Lakhs)

20045514

20056980

20066986

200710688

200811580

LIMITATIONS:

1.Longer delivery and payment time frames

2.Exchange rate risk and exchange controls.

3.Limited and costly dispute settlement and legal recourse options.

4.Lack of information.

5.Integrity (the quality of honest ) of Exporter.

6.Abolition of interest rate subsidy.

7.Huge foreign indebtness.

8.Unstable government.

9.Limited time durations.

10. Lack of access with the customers.

11. Limited Availability of information due to security problem.

INVENTORY MANAGEMENT @ PROJECT ANALYSIS IN KAKATIYA OVERSEAS:

Before, an analysis is attempted for assessing for inventory control measures at kakatiya overseas; it is proposed to present a summary on material documentation and procedure. The main objectives of inventory accounting and valuation of inventories are:

1. Accurate and regular recording of all transactions in the books.

2. Proper valuation of material receipts, issues returns and books.

SYSTEMS OVERVIEW:

The following systems are being followed in kakatiya overseas and the main features of the systems are as follows:

1. Receipt vouchers are prepared on receipt of material.

2. Issue vouchers are prepared for all issues of out of stores.

3. All receipts, issue and returns are recorded in priced stores ledger.

4. Stock transfer voucher (STV) are used for recording transfer of raw materials from one division/group to another. Transfers are made at weighted average prices.

5. Finished goods delivery notes (FGDN) are used for transferring finished production in shop floor to finished goods (FG) stores.

6. Physical verification is carried out at 6 regular internals and discrepancies are and reconciled and recorded.

7. Work-In-Progress (WIP) valuation is as per the accounting policy of the company.

8. Finished goods valuation is as per the accounting policy of the company.

MATERIAL DOCUMENTATION AND COST CONTROL:

The material accounting and cost accounting system have been designed within frame work of account codes and accounting policies, which would facilitate identifying direct elements of costs, such as direct material, direct labour and directly allocable expenses (such as expenses of subcontracting)

Which are booked manually to the direct material? The following documentation and system is being followed in kakatiya overseasRECEIPT DOCUMENTS:

In this similar fashion, some other receipt documents and issued documents are operated like:

1. CPRV (Cash purchase receipt voucher) for cash purchases receipt.

2.FGIN(finished goods issue note)the finished products particularly of CG like hybrids , Networks and PCBs are consumed as raw materials in other group for which a credit is given in the expenses of CG and stock of that group is debited.

3. STV (Rs) stock transfer voucher: any stores useful for any group is taken from other group from STV for which only stock accounts of the divisions are operated.

4. MRNs (Material Return Note): The items lying unused at shop floor after production activity is over are returned to stores under this document.

Based on the documentation EDP generates the following printouts for materials viz.

Priced stores ledger is brought out on monthly basis consisting on that months receipts issues, balance stocks available values for raw materials, stores and spares, consumable tools and packing materials.

Inventory is brought out on monthly basis comprising of material codes is seriatim along with material , total value and also cumulative receipts and cumulative consumption are indicated.

which are not moved for more than six months, are reported regularly to the management for identification and necessary action. Further A, B, C, D classified inventory report is also being submitted to group management for their study and controlling purpose.

3.1 INTRODUCTION:

Inventory management is concerned with keeping enough products on hand to avoid running out while at the same time maintaining a small enough inventory balance at allow for a reasonable return on investment, proper inventory management is important to the financial health of the corporation, being out of stock forces customers to turn to competitors or results in a loss of sales excessive level of inventory, however results in large inventory carrying costs, including the cost of the capital tied up in inventory where house fees insurance etc. The objective of the chapter is to examine the impact of inventory on the financial decision making.

Inventories constitute the most significant part of current asserts of a large majorities of companies in INDIA. On an average inventories are approximately 60% of current asserts in public limited companies in INDIA. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them.

The investment in inventory is very high in most of the undertaking engaged in manufacturing wholesale and retail trade. The amount of investment is sometimes more in Inventory rather than in other assets.

In India a study of 29 major industries has revealed that the average cost of materials is 64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About 90% of working capital is invested in inventories. The main reason attributed for loss making is financial indiscipline in managing the resources particularly in inventory management for an organization, the product profitability considering standards and budgets is of paramount importance needless to say that in this context, inventory management assumes lot of significances.

The investment in inventory is very high in most of the undertaking engaged in manufacturing wholesale and retail trade. The amount of investment is sometimes more in Inventory rather than in other assets.

In India a study of 29 major industries has revealed that the average cost of materials is 64 paisa and the cost of labor and overheads is 36 paisa of a rupee. About 90% of working capital is invested in inventories. The main reason attributed for loss making is financial indiscipline in managing the resources particularly in inventory management for an organization, the product profitability considering standards and budgets is of paramount importance needless to say that in this context, inventory management assumes lot of significances.

Hence, the inventory management determines and portrays the following factors like what to purchase, how to purchase, from where to purchase, where to store etc., will be critical factors. Hence forth it becomes a crucial factor to undergo a detailed analysis to find an efficient system of the inventory. As an attempt has been made to study the inventory management with reference to KAKATIYA OVERSEAS.

DEFINITION:

The American production and inventory society defines:

Inventory management as the branch of business management concerned with planning and controlling inventories. The role inventory management is to maintain a desired stock level of specific products or items.

.

Types of study:

RAW MATERIALS:

An inventory of raw materials allows separation of production scheduling from arrival of basic inputs to the production process. Factories affecting the amount the raw materials inventory include proximately to the suppliers relationship with the suppliers, predictability of the production process, lead time required to place on order, and transportability and perishability of raw materials.

WORK IN PROCESS:

An inventory of partially completed units allows the separation of different phases of the production process, the amount of work in process inventory is in past a function of the type of product, the measurement period and the nature of the product process.

FINISHED GOODS:

An inventory of finished allows separation of production from selling , with a stock of finished merchandised on hand a firm can fill order as they are received rather than depend upon the completion of production to satisfy customer demands.

FUNCTIONS OF INVENTORY:

The functions of the firm such as purchase of raw materials ,processing, and having a finished goods available for sales, have a sequential physical dependence maintenance of inventories allows the firm to decouple those functions so that each can be planned, scheduled ,and operated independently. For retail firms inventory provides customers with selection choice and decouple the purchasing functions from the selling functions.

3.2 NEEDS FOR THE STUDY:

To facilitate smooth production and sales operation (Transaction motive).

To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary motive )

To guard against the risk of unpredictable changes in usage rate and delivery time (Precautionary motive )

To take advantages of price fluctuations(Speculative motive)

3.3 BENEFITS OF THE STUDY:

To ensure a continues supply of raw material to facilitate uninterrupted production.

To maintain sufficient stock of raw material in periods of short supply and anticipate price changes.

To maintain sufficient finished goods inventory for smooth sales operations and efficient customer service.

LIMITATIONS:

First there is a cost of information problem in keeping track of the physical inventories of some goods

Second because of number of variables involved it is very difficult to develop on accurate measure of inventory turnover.

The very nature of the organization places limitations on the collection of the data and analysis thereof.

The accounting procedure and other accounting principles are limited by the company changes in them may vary the inventory performance.

The study is limited up to the date and information provided by KAKATIYA OVERSEAS and annual reports.

3.4 METHODOLOGY AND DATABASE:

For this project the collection of data is by various sources. mainly

primary

secondary

PRIMARY DATA:

The information collected directly without any reference in primary data in the study it is mainly through concerned offers or staff member either individually or collectively data includes

Conducting personal interview with officers of the company.

Individual observation inference.

From the people who are directly involved with the transaction of the firm.

SECONDARY DATA:

Study has been taken from secondary sources that is published annual report of the editing, classifying and tabulation of the financial data for their.

PERIOD OF THE STUDY:

This study is confined for the period of approximately Three months that is from January 2, 2009 to March 10, 2009.

REVIEW OF LITERATURE:

For this purpose, previous abstracts on inventory management, periodicals, academic journals. Articles will be reviewed in this section.

STATISTICAL TOOL TO BE APPLIED:

Sampling statistical techniques like percentages, bar graphs, averages, chi-squares, and z-test may be applied based on the data collected for the study.

3.5 OBJECTIVES:

To maintain a large size of inventory of raw material and work in progress for efficient and smooth production and of finished goods for uninterrupted sales operations.

To maintain a minimum investment in inventory to minimize profitability.

Study of maintain optimum level of inventory investment.

The primary goal is to minimize inventory investment while still meeting the functional requirements.

SCOPE OF THE STUDY:

Work in progress arising under construction contracts including directly related service contract.

Work in progress arranging in ordinary course of business of services provides.

INVENTORY MANAGEMENT

4.1. INTRODUCTION:

The investment in inventory is very high in most of the undertakings engaged in manufacturing, whole-sale and retail trade. The amount of investment is sometime more in inventory than in other assets. In India, a study of 29 major industries has revealed that the average cost of materials is 64 paisa and the cost of labour and overheads is 36 paisa in rupee. In Industries like sugar, the raw materials cost is a s high as 68.75 percent of the total of cost. About 90 percent part of working capital is invested in inventories. It is necessary for every management to give proper attention to inventory management. A proper planning of purchasing, handling, storing and accounting should form a part of inventory management. An efficient system of inventory management will determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d) where to store, etc.

There are conflicting interests of different departmental heads over the issue of inventory. The finance manager will try to invest less in inventory because for him it is an idle investment, whereas production manager will emphasize to acquire more and more inventory as he does not want any interruption in production due to shortage of inventory. The purpose of inventory management is to keep the stocks in such a way that neither there is over-stocking nor under-stocking. The over-stocking will mean a reduction of liquidity and staring of other production processes; under-stocking, on the other hand, will result in stoppage of work. The investments in inventory should be kept in reasonable limits.

Every enterprises needs inventory for smooth running its activities. It serves as a link between production and distribution processes. There is, generally, at a time lag between the recognition of a need and its fulfillment. The greater the time-lag, the higher the requirement for inventory, the unforeseen fluctuations in demand and supply of goods also necessitate the need for inventory. It also provides a cushion for future price fluctuations.

The investment in inventories constitutes the most significant part of current assets/working capital in most of the undertakings. Thus it is very essentials to have proper control and management of inventories. The purpose of inventory management is to ensure a variability of materials in confident quantity as and when required and also to minimize Investment in inventories.

Meaning and Nature of Inventory:

Supply of goods or materials on hand. In manufacturing, inventory consists of raw materials, work-in-process, and finished goods. In wholesaling and retailing, inventory is the stock of merchandise on hand. In direct marketing, inventory may refer to direct-mail package components that are available for mailing when needed. In the broadcast and print media industry, inventory is the time or space available for mailing when needed. In the broadcast and print media industry, inventory is the time or space available for sale to advertisers. In magazine publishing, inventory is the number of copies of each issue available for distribution.

An ample inventory ensures that sales will not be lost or deadlines missed but can require a substantial cash investment in both material and storage space. There are also risks associated excessive inventory, such as a change in circumstances that reduces or eliminates demand for an item in inventory or that renders the item obsolete or illegal, or the risk of loss due to theft, fire, aging, and so forth. The costs and risks must be weighed against the cost of lost sales and missed deadlines to determine the optimal inventory level.

4.2 INVENTORY CONTROL AND ITS IMPACT ON COSTS:

Value wise inventory and consumption analysis are brought out on quarterly basis indicating RM; SS, CT, PM are value at cost. A class items which are 70%, B class items which are valuing 20% and C class items which are valuing 10%. Of the total inventory are brought for verification of internal audit. The stores verified C class items and to that extent certificate 4 is issued at the year end regarding the correctness. Physical balances are verified with kardex and the difference is intimated to stores FAW of the group by the internal audit.

FAW of the group verifies and gives the rectification in entries that is shortage items values are charged of to physical inventory variation and the excess quantities are adjusted in the inventory ledger after obtaining the competent authorities approval.

This system enables control on the inventories and at the same time costs on some are checked.

Materials issued to subcontractors are booked to consumptions as and when issued through MIRS. A record is being maintained at subcontracts section, park wise, job wise and description of materials and quantities issued.

Impact of inventory on working capital

Inventories are a component of the firms working capital and, as such, represent a current accounting cycle, which is normally one year.

1. A CURRENT ASSET: It as assumed that inventories will be converted to cash in the current accounting cycle, with is normally one year.

2. LEVEL OF LIQUIDITY: inventories are viewed a source of near all cash. For most products, this description is accurate, at the same time most firms hold some slow moving items that may not be sold for a long time. With economic slows down or changes in the markets for goods the prospects for sale of entire product lines diminished. In these cases, the liquidity aspects of inventories become highly important to the manager of working capital. At the minimum the analyst must recognize that inventories are the least liquid of the current assets.

3. LIQUIDIRY LAGS: inventories are tied to the firms pool of the working capital in a process that involves three specific lags.

Creation lags: It most cases, inventories are purchased on credit, creating an account payable. When the raw materials are processed in the factory, the case to pay production expenses is transferred at future times. Whether manufactured or purchases, the firms will hold inventories for some period before payment is made. This liquidity lag offers a benefit to the firm.

Storage lags: once goods are available for resale, they will not be immediately converted into cash. First the items must be sold. Evenly when sale are moving briskly, affirm will hold inventory as a backup. Thus the firm will usually pay suppliers, workers and overhead expenses before the goods actually sold.

This lag represents a cost to the firm.

Sale lag: once goods have been sold, they normally do not create cash immediately. Most sales occur on credit and become accounts receivable. This lag also represents a cost to the firm.

4. CIRUCLATING ACTIVITY: inventories are in rotating pattern with other current asset. They get converted into receivables which generate cash is invested again in inventory to continue the operate cycle.NEED TO HOLD INVENTORY

Maintaining inventories involves tying up of the companys funds and incurrence of storage and handling costs. There are three are general motives for holding inventories.

1. Transactionary motive: every firm has to maintain some level of inventory to meet the day-to-day requirements of sale, production process, customer demand etc. transact nary motive makes the firm to keep the inventory will provide smoothness to the operation of the firm. A business firm exists for business transaction that requires stock of goods and raw materials.2. Precautionary motive: a firm should keep some inventory for unforeseen circumstances also. The firm must have inventory of raw materials as will as finished goods for meeting any emergencies.

3. Speculative motive: the firm may be empted to keep some inventory in order to capitalize an opportunity to make profit e.g., sufficient level of inventory may help the firm to earn extra profit in case expected shortage in the market.

MAIN PURPOSE OF INVENTORY

The purpose of holding inventories is to allow the firm to operate the processes of purchasing, manufacturing and marking in its primary products. The goal is to achieve efficient in are where costs are involved and to achieve sales at competitive prices in the marking place.

1. Avoiding loss sales: without goods on hand that are ready to be sold most firms would lose business. Some clusters are ready to wait, particularly when an item must be made on order or is not widely available from competitors. Affirm must be prepared to deliver goods on demand. Shelf stock refers to items that are stored by the firm and sold with little or no modification to the customers.

2. Gaining quantity discounts: inurn for making bulk purchases many suppliers will reduce the of supplies and component parts. This discount will reduce cost of goods sold and increase the profits earned.

3. Reducing order cost: each time a firm place an order it incur certain good that arrive must be accepted, inspected and counted. Later an invoice must be processed and payment made. Each of these costs will vary with the order placed. By placing fewer orders the firm will pay less to process each order.

4. Achieving efficient production runs: each time a firm sets up workers and machines produce an item startup cost are incurred. These are the absorbed as production begins. The longer the run the smaller the costs to begin producing the goods.

5. Reducing risk of production shortages: manufacturing firm frequently produce goods with blunders or thousands of components. If any these are missing entire production operation can be halted with heavy expenses. To avoid starting a production run and then discovering the shortage of vital raw material or other component, the firm can maintain larger than inventories. Basically, inventory management is concern of stores management, production management is concerned. In case of raw material, the stores management and production management is concerned. In case of finished goods, production and sales management is concerned.

4.3 INVENTORY-CORPORATE FINANCE:

Value of a firms raw materials, work in process, supplies used in operations, and finished goods. Since inventory value changes with price fluctuations, it is important to know the method of valuation. There are a number of inventory valuation methods; the most widely used are First In, First out (FIFO) and Last In, First out (LIFO). Financial statements normally indicate the basis of inventory valuation, generally the lower figure of either cost price or current market price, which precludes potentially overstated earnings and assets as the result of sharp increases in the price of raw materials.

Personal finance;

List of all assets owned by an individual and the value of each, based on cost, market value, or both. Such inventories are usually required for property insurance purpose and are sometimes required with applications for credit.

Securities:

Net long or short position of a dealer or specialist. Also, securities bought and held by a dealer for later resale.

Inventory:

An inventory is a detailed, itemized list or record of goods and materials in a companys possession. The main components of inventory, wrote Transportation and Distribution contributors David Waller and Barbara Rosenbaum, are cycle stock: the order quantity or lot size received from the plant or vendor; in-transit stock: inventory in shipment from the plant or vendor or between distribution centers; [and] safety stock: each distribution centers inventory buffer against forecast error and lead time variability.

Writing in production and Operations Management, Howard J. Weiss and Mark E. Gershon observed that, historically, there have been two basic inventory systems and the periodic review system. With continuous review systems, the level of a companys inventory is monitored at all times. Under these arrangements, business typically track inventory until it reaches a predetermined point of low holdings, whereupon the company makes an order (also of a generally predetermined level) to push its holdings back up to a desirable level. Since the same amount is ordered on each occasion, continuous review systems are sometimes also referred to as event-triggered systems, fixed order size systems (FOSS), or economic order quantity systems (EOQ) .Periodic review systems, on the other hand, check inventory levels at fixed intervals rather than through continuous monitoring. These periodic reviews (weekly, biweekly, or monthly checks are common) are also known as time triggered systems, fixed order interval systems (FOIS), or economic order interval systems (EOI).

The dictionary meaning of inventory is stock of goods, or a list of goods. The word Inventory is understood differently by various authors. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may include raw material, work in process, etc. to understand the exact meaning of the word, inventory we may study it from usage side or from the side of point entry in the operations. Inventory

includes the following things:

Raw Material:

Unfinished goods used in the manufacture of a product. For example, a steelmaker uses iron ore and other metals in producing steel. A publishing company uses paper and ink to create books, newspapers, and magazines. Raw materials are carried on a companys balance sheet as inventory in the current assets section.

WIP (Work In-Progress):

Three-letter abbreviation with several meanings, as Described below:

Work in Progress- generally signifies a project that will not be settled in one attempt, or even several. Sometimes as WIP List, synonymous with a To-Do list.

WIP as an asset means the portion of work that is complete but not yet billed. WIP is a good or goods in various stages of completion throughout the plant, including all material from raw material that has been released for initial processing up to completely processed material awaiting final inspection and acceptance as finished good inventory.

Finished Goods:

These are the goods which are ready for the consumers. The stock of finished goods provides a buffer between production and market. The propose of maintaining inventory is to ensure proper supply of goods to customers. In some concerns the production is undertaken on order basis, in these concerns there will not be a need for finished goods. The need for finished goods. The need for finished goods inventory will be more when production is undertaken in general without waiting for specific orders.

Spares:

Spares also form a part of inventory. The consumption pattern of raw materials. The stocking policies of spares are different from industry to industry. Some industry like transport will require more spares than the other concerns. The costly spare parts like engines, maintenance spares etc. are not discarded after use, rather they are kept in ready position for furtherer use. All decisions about spares are based on the financial cost of inventory on such spares and the costs that may arise due to their non-availability.

Consumables:

These are the materials, which are needed to smoothen the process of production. These materials do not enter directly into production but they act as catalysts. Consumables may be classified according to their consumption and critically. Generally, consumables stores do not create any supply problem and form a small part of production cost. There can be instances where these materials may account for much value than the materials. The fuel oil may from a substantial part of the cost.

Cycle Inventory:

The portion of total inventory that varies directly with lot size is called inventory. Determining how frequently to order, and in what quantity, is called lot sizing. Two principles apply.

1. The lot size, Q, varies directly with the elapsed time (or cycle)

2. Between orders. If a lot is ordered every five weeks, the average lot size must equal five weeks demand.

3. The longer the time between orders for a given item, the greater the cycle inventory must be at the beginning of the interval, the cycle inventory is at its maximum or Q. At the end of the interval, just before a new lot arrives, cycle inventory drops to its minimum, or 0. The average of these two extremes:

Average cycle inventory = Q + o = Q

2 2

This formula is exact only when the demand rate is constant and uniform. However, it does provide reasonably good estimate even when demand rates are not constant. Factors other than the demand rate (e.g., scrap losses) also may cause estimating errors when this simple formula is used.

Safety Stock Inventory:

To avoid customer service problems and the hidden cost of unavailable components, companies hold safety stock. Safety stock inventory protects against uncertainties in demand, lead time, and supply. Safety stocks are desirable when suppliers fail to deliver the desired quantity on the specified date with acceptable quality or when manufactured items have significant amounts of scrap or rework. Safety stock inventory ensures that operations are not disrupted when such problems occur, allowing subsequent operations to continue.

To create safety stock, a firm places an order foe delivery earlier than when the item is typically needed. The replenishment order therefore arrives ahead of time, giving a cushion against uncertainty.

Purpose and Benefit of Holding Inventory:

Although holding inventories involves blocking of a firms fund and the cost of storage and handling every business enterprises has to maintain a certain level of inventories to facilitate uninterrupted production and smooth running of business. In the absence of inventories a firm will have to make purchases as soon as it receives orders. It will mean loss of time and delay in execution of orders which sometimes may cause loss of customers and business. Firms also need to maintain inventories to reduce ordering cost and avail quantity discount, etc. generally speaking there are three main purpose or motives of holding inventories:I. The transaction motive which facilitates continuous production and timely execution of sales orders.

II. The precautionary Motive which necessitates the holding of inventories for meeting the unpredictable changes in demand and supplies of materials.

III. Speculative motive which induces to keep inventories for taking advantages of price fluctuations, saving in re-ordering costs and quantity discounts, etc.

4.4 RISKS AND COSTS OF HOLDING INVENTORIES:

The holding of inventories involves blocking of a firms funds and incurrence of capital and other costs. It also exposes the firm to certain risks. The various costs and risks involved in holding inventories are as below:

1. Capital costs: Maintaining of inventories results in blocking of the firms financial resources. The firm has, therefore, to arrange for additional funds to meet the cost of inventories. The funds may be arranged from own resources or from outsiders. But in both the arranged from own resources or from outsiders. But in both the cases, the firm incurs a cost. In the former case, there is an opportunity cost of investment while in the later case, the firm has to pay inters tot the outsider.

2. Storage and Handling costs: Holding of inventories also involves costs on storage as well as handling of materials. The storage costs include the rental of the go down, insurance charges, etc.

3. Risk of price decline: There is always a risk of reduction in the prices of inventories by the suppliers in holding inventories. This may be due to increased market supplies, competition or general depression in the market.

4. Risk of Obsolescence: The inventories may become obsolete due to improved technology, changes in requirements, change in customers tastes, etc.

5. Risk Deterioration in Quality: The quality of the materials may also deteriorate while the inventories are kept in stores.

Inventory and the Growing Company:

Most successful small companies find that as their economic fortunes rise, so too do the complexity of inventory logistics. The increase in inventory management is primarily due to two factors: 1) greater volume and variety of product, and 2) increased allocation of company resources (such as physical space and financial capital) to accommodate that growth in inventory The transaction from seat-of the pants ordering policies and little or no record keeping to a formal inventory system that includes specific ordering policies and a formalized inventory record file is a difficult one for most companies to make, stated Weiss and Gershon. It is but one of the many sources of growing pains that emerging companys experience, especially those in the fast-growing industries, such as fast food or high technology. This transition requires the creation of new job functions to identify the costs (holding, shortage) associated with inventory and to implement the inventory analysis.

The inventory record file also must be maintained by someone, and, on a periodic basis, it must be audited by someone. In addition, the transition requires more coordination between different company functions. This transition, they note, often leads into computerization of inventory management. This can be a daunting prospect, particularly for companies lacking employees with appropriate data management backgrounds.

Just In Time Inventory Control System:

Just-in-time production is a simple idea that may be difficult to implement, wrote Gershon and Weiss. The basic concept is that finished goods should be produced just in time for delivery, and raw materials should be delivered just in time for production. When this occurs, materials or goods never sit idle, which means that a minimum amount of money is tied up in raw materials, semi finished goods . The just-in-time approach calls for slashing production and purchase lot sizes and also buffer stocks-bit incrementally, a little at a time, month after month, year after year. The result is sustained productivity and quality improvement with greater flexibility and delivery responsiveness. This production concept, which originated in Japan and became immensely popular in American industries in the early and mid-1990s, continues to be hailed by proponents as a viable alternative for business looking for a competitive edge.

Setting an Inventory Strategy:

No single inventory strategy is equally effective for all businesses. Indeed, there are many different factors that can impact the Usefulness of a given inventory strategy, including positioning of inventory, rationalization, segmentation, and continuous improvement efforts. Moreover, small business in particular often faces financial and logistical limitations when erecting their inventory systems. And of course, different industries have different inventory needs. Consumer goods producers, for instance, need to have well-balance inventories at the point of sale, while producers of industrial and commercial products typically do not have clients that require the same degree of delivery lead time.

When a company is faced with a need to establish or reevaluate its inventory control systems, business experts often counsel their corporate clients to engage in a practice commonly known as inventory segmenting or inventory partitioning. The practice is in essence a breakdown and review of total inventory by classifications, inventory stages (raw materials, intermediate inventories, and finished products) sales and operations groupings, and excess inventories. Proponents of this method of study say that such segmentation break the companys total inventory into much more manageable parts for analysis.

Key Considerations:

According to business experts, perhaps no factor is more important in ensuring successful inventory management than regular analysis of policies, practices, and results. Companies that hope to establish or maintain an effective inventory system should make sure that they do the following on a regular basis:

Regularly review product offerings, including the breadth of the product line and the impact that peripheral products have on invent.

Ensure that inventory strategies are in place for each product and reviewed on a regular basis.

Review transportation alternatives and their impact on inventory / warehouse capacities.

Undertake periodic reviews to ensure that inventory is held at the levels that best meets customer needs; this applies to all levels of business, including raw materials, intermediate assembly, and finished products.

Regularly canvas key employees for information that can inform future inventory control plans.

Determine what level of service (lead time, etc.) is necessary to meet the demands of customers.

Establish and regularly review a system for effectively identifying and managing excess or obsolete inventory, and determining why these goods reached such status.

Devise a workable system wherein safety inventory stocks can be reached and distributed on a timely basis when the company sees an unexpected rise in product demand.

Calculate the impact of seasonal inventory fluctuations and incorporate them into inventory fluctuations and incorporate them into inventory management strategies.

Review the companys forecasting mechanisms and the volatility of the marketplace, both of which can (and do) have a big impact on inventory decisions.

Institute continuous improvement philosophy in inventory in inventory management.

Make inventory management decisions that reflect a recognition that inventory is deeply interrelated with many other areas of business operation.

To summarize, inventory management system should be regularly reviewed from top to bottom as an essential part of the annual strategic and business and business planning processes. Indeed, even cursory examinations of inventory statistics can sometimes provide business owners with valuable insights into the companys foundations. business consultants and managers alike note that if an individual business has an inventory turnover ratio that is low in relation to the average for the industry in which it operates, or if it is low in comparison with the average ratio for the business, it is pretty likely that the business is carrying a surplus of obsolete or otherwise unsalable stock inventory. Conversely, they note that if a business is experiencing unusually high inventory turnover when compared with industry or business averages, then the company may be losing out on sales because of a lack of adequate stock on hand. it will be helpful to determine the turnover rate of each stock item so that you can evaluate how will each is moving, noted the entrepreneur magazine small business advisor. You may even want to base your inventory turnover on more frequent periods than a year. For perishable items, calculating turnover periods based on daily weekly or monthly periods may be necessary to ensure the freshness of the product. This is especially important for food-service operations.

4.5 INVENTORY ACCOUNTING:

The way in which a company accounts for its inventory can have a dramatic affect on its financial statements. Inventory is a current asset on the balance sheet. Therefore, the valuation of inventory directly affects the inventory, total current asset, and total asset balances. Companies intend to sell their inventory, and when they do, it increases the cost of goods sold, which is often a significant expense on the income statement. Therefore, how a company values its inventory will determine the cost of goods sold amount, which in turn affects gross profit (margin), net income before taxes, taxes owned, and ultimately net income. It is clear, then, that a companys inventory valuation approach can cause a ripple effect throughout its financial picture.

One may think that inventory valuation is relatively simple. For a retailer, inventory should be valued for what it cost to acquire that inventory. When an inventory item is sold, the inventory account should be reduced (credited) and cost of goods sold should be increased (debited) for each inventory item. This works if a company is operating under the specific identification method. That is, a company knows the cost of every individual item that is sold. This method works well when the amount of inventory a company has is limited and each inventory item is unique. Examples would car dealerships, jewelers, and art galleries.

The specific identification method, however, is cumbersome in situations where a company owns a great deal of inventory and each specific inventory item is relatively indistinguishable from each other. As a result, other inventory valuation methods have been developed. The best known of these are the FIFO (first-in, first out) and LIFO (last-in, first-out) methods.

First in, first out (FIFO):

Method of accounting for inventory whereby, quite literally, the inventory is assumed to be sold in the chronological order in which it was purchased. For example, the following formula is used in computing the cost of goods sold:

Under the FIFO method, inventory costs flow from the oldest purchases forward, with beginning inventory as the starting point and ending inventory representing the most recent purchases. The FIFO method contrasts with the LIFO or last in, first out method, which is FIFO in reverse. The significance of the difference becomes apparent when inflation or deflation affects inventory prices. In an inflationary period, the FIFO method produces a higher ending inventory, a lower cost of goods soled figure, and a higher gross profit. LIFO, on the other hand, produces a lower ending inventory, a higher cost of goods sold figure, and a lower reported profit.

In accounting for the purchase and sale of securities for tax purposes, FIFO is assumed by the IRS unless it is advised of the use of an alternative method.

First in, first out (FIFO):

Method of inventory valuation that assumes merchandise is sold in the order of its receipt. The first-price in is the first-price out. Hence cost of sales is based on older dollars. Ending inventory is reflected at the most recent prices. Assume the following data regarding inventory during the year:

(LIFO) last-in, first-out:

On the other hand, is an accounting approach that assumes that the most recently acquired items are the first one sold? Therefore, the inventory that remains is always the oldest inventory. During economic periods in which prices are rising, this inventory accounting method yields a lower ending inventory, a higher cost of goods sold, a lower gross profit, and a lower taxable income. The LIFO Method is preferred by many companies because it has the effect of reducing a companys taxes, thus increasing cash flow. However, these attributes of LIFO are only present in an inflationary environment.

The other major advantage of LIFO is that it can have an income smoothing effect. Again, assuming inflation and a company that is doing well, one would expect inventory levels to expand. Therefore, a company is purchasing inventory, but under LIFO, the majority of the cost of these purchases will be on the income statement as part of cost of goods sold. Thus, the most recent and most expensive purchases will increase cost of goods sold, thus lowering net income before taxes, and hence net income. Net income is still high, but it does not reach the levels that it would if the company used the FIFO method.

Given the importance differences that exist between the various inventory accounting methodologies, it is imperative that the inventory footnote be read carefully in financial statements, for this part of the document will inform the reader of the method of inventory valuation chosen by a company. Assuming inflation, FIFO will result in higher net income during growth periods and a higher and more realistic inventory balance. In periods of growth, LIFO will result in lower net income and lower income tax payments, thus enhancing a companys cash flow. During periods of contraction, LIFO will result in higher income levels, but will also undervalue inventory over time.

Small business owners weighing a switch to a LIFO inventory valuation method should note that while making the change is a relatively simple process (the company files IRS Form 970 with its tax return), switching away from LIFO is not so easy. Once a company adopts the LIFO method, it can not switch to FIFO without securing IRS approval.

Donating Excess Inventory:

In recent years, many small (and large) business have gained valuable tax deductions by donating obsolete or excess inventory to charitable organizations, churches, and disaster relief efforts. The type of deduction that can be claimed depends on the business structure of the donating company. If youre organized as an S corporation (S Corporation with a limited number of stockholders (35 or fewer) that elects not to be taxed as a regular (C) corporation and meets certain other requirements Shareholders include in their personal tax returns their pro Rata share of capital gains, ordinary income, tax preference items, and so on. This form avoids corporate Double Taxation while providing limited liability protection to shareholders of a corporation.)

4.6 OBJECTIVES OF INVENTORY MANAGEMENT:

The main objective so inventory management are operation and financial. The operational objective mean that the material and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain idle and minimum working capital should be locked in it.

The objectives of inventory management are as follows:

To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met.

To avoid both over-stocking and under-stocking of inventory.

To maintain investment in inventories at the optimum level as required by the operational and sales activities.

To keep material cost under control so that they contribute in reducing cost of production and overall cost.

To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.

To minimize losses through deterioration, pilferage, wastages and damages.

To design proper organization for inventory management. Clear cut accountability should be fixed at various levels of the organization.

To ensure perpetual inventory control so that materials shown in stock ledgers should be fixed actually lying in the stores.

To ensure right quality goods at reasonable prices. Suitable quality standard will ensure proper quality of stocks. The price analysis, the cost analysis and value analysis will ensure payment of proper prices.

To facilitate furnishing of data for short term and long term planning and control of inventory.

Material Control:

Most of the manufacturing concerns. The cost of raw materials represents a major part of the total cost of production. Hence proper control over material is necessary from the time the order is place with the supplier till they are actually consumed. An efficient system of material control will lead to significant reduction in production cost.

Material control may be defined as the Systematic control over the procurement, storage and usage of materials so as to maintain an even flow of materials and avoiding at the same time excessive investment in inventories. Material control covers three stages namely.

Purchases of material

Storing of material

Issue of material

Objectives:

The objectives of material controls as follows:

1) To ensure regular and uninterrupted supply of materials i.e., to make materials available as and when they are needed.

2) To keep investment in stock at a reasonable levels, so that there is no loss of interest on capital.

3) To purchase the materials at a reasonable price without sacrificing the quality of such materials.

4) To avoid abnormal wastage by exercising direct control.

5) To avoid the risk of spoilage and obsolescence of the materials by fixing the maximum stock level.

Issue of Material Management:

As per major activity groups involved in material management in any manufacturing organization.

Issue related to materials planning.

Issues related to purchase

Issues related to stores or inventory.

Issue related to material handling & display.

Issue Related to Material Planning:

Material Identification

Standardization

Make or Buy

Coding & Classification

Quality specification

By providing samples or prototype.

By providing manufacturing operation specification.

By brand or trade name.

By specifying well accepted market grades.

By specifying testing producers relevant standards.

By specifying/ providing engineering drawing/blue prints.

4.7 TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT:

Effective inventory management requires an effective control system for inventories. A proper inventory control not only helps in solving the acute problem of liquidity but also increases profits and causes substantial reduction in the working capital of the concern. The following are the important tools and techniques of inventory management and control:

Determination of stock levels.

Determination of Safety Stocks.

Selecting a proper system of Ordering for Inventory.

Determination of Economic Order Quantity.

A.B.C. Analysis.

Inventory Turnover Ratios (Conversion period)

Classification and Codification of Inventories.

Preparation of Inventory Reports.

Determination of stock levels.

Determination of safety stock levels.

Selecting a proper system of ordering for inventory.

Determination of economic order quantity (EOQ)

A.B.C. Analysis.

Determination of Stock Levels:

Carrying of too 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 is too high it will be unnecessary tie-up of capital. Therefore, an optimum level of inventory where cost is the minimum and at the same time their Id. No. stock-out, which may result is loss of sale or stoppage of production. Various stock levels are discussed as such.

Minimum Level:

This presents the quantity, which must be maintained in hands at all times. If stock is less than the minimum level then the work will stop due to shortages of materials.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 in processing the order and then executing it is known as lead-time. It is essential some inventory during this period.Rate of consumption:

It is the average consumption of materials in the factory. The rate of consumption will be decided on the basis of past experience and production.

Nature of material:

The nature of materials also affects the minimum level. If material is required only against special orders of the consumers then minimum stock will not be required for such materials minimum stock level can be calculated using the formula:

Minimum stock level = Re-order level (normal consumption* normal re-order period).

Re-order level:

When the quantity of materials reaches at a certain figures then fresh order is sent to get materials again. The order is sent before the materials reach minimum stock level. Re-ordering level or ordering level is fixed between minimum stock level and maximum stock level. The rate of consumption, number of days required on any day is taken into account while fixing reordering level. Re-ordering level is fixed with the following formula;

Re- order level = maximum consumption * maximum re-order period

Maximum level:

It is the quantity of materials beyond which a firm should not exceed its stock. If the quantity exceeds maximum level limit then it will be over-stocking. A firm should avoid over-stocking because it will result in high materials costs. Over stocking will more blocking of more working capital, more space for storing the materials, more wastage of materials and more chances of losses from obsolescence. Maximum stock level will depend upon following factors:

The maximum requirement of materials at any point of time.

The availability of space for storing the materials.

The rate of consumption of materials during lead-time.

The cost of maintaining the stores.

The possibility of fluctuation in prices.

Availability of materials. If the materials are available only during seasons then they have to store for the rest of the period.

The possibility of change in fashion and production process will also affect the maximum stock level.

The following formula may be used for calculating maximum stock level:

Maximum stock level = re-order level + re-ordering quantity (minimum consumption * minimum re-ordering period).

Danger level:

It is the level beyond which material should not fall in any case. If level arises then immediately steps should be taken to replenish the stock even if more cost is incurred in arranging the materials. If materials. If material is not arranged immediately then there is a possibility of stoppage of work. Danger level is determined with the formula:

Danger level = consumption * maximum re- order period for emergency purchases.

Average stock level:

The average stock level is calculated as such:

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

Determination of safety stock

The safety stock is a buffer to meet unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. Ft fluctuates over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out. The stock-out can prove costly by affecting the smooth working of the concern. In order to protect against out of usage fluctuations, firms usually some margin of safety stocks. The basic problem is to determine the level of safety stocks. Two costs are involved in determination of this stock. I.e. opportunity cost of stock outs and the carrying costs. The stock-outs of raw material cause production as the firm cannot provide stock-outs will occur resulting into the large opportunity costs. On the other hand, the larger quantity of safety stocks involves higher carrying costs.

Ordering system of inventory:

The basic problem of inventory is ton decide the re-order point. The point indicates when an order should be placed. The re-order point is determined with the help of these things

A.) Average consumption rate.

B.) Duration of lead time.

Economic order quantity, when the inventory is depicted to lead time consumption, the order should be placed.

There are three prevalent system of ordering and a concern may use any one of these;

Fixed order quantity system generally known as economic order quantity (EOQ) systems.

Fixed period order system of periodic re-ordering system or periodic review system;

Single order and schedule part delivery system.

Economic order quantity (EOQ):

The quantity of material to be ordered at one time is known as economic ordering quantity. This quantity is fixed in such a manner as to minimize the cost of ordering and carrying the stock. Carrying cost is the cost of holding the materials. The quantity to be ordered should be such which minimizes the carrying and ordering costs. The order for the material to be purchased should be large to earn more trade discount and to take advantage of bulk transport, but at the same time it should not be tool large to incur too heavy a payment on account of interest, storage and insurance cost. If the price to be paid is stable, quantity to be ordered each time can be ascertained by following formula:

Q = 2CO\I.

Where: q = quantity to be ordered.

C = consumption of the material concerned in units during a yearO = cost of placing and order including the cost of receving the goods i.e. cost of getting an item into the firms inventory.

I = interest payment including variable cost of storing per unit per year i.e., holding costs of inventory.

Economic order quantity is determined keeping in view the ordering costs and carrying costs. With the interaction of these two costs, the economic ordering costs

During a particular period are equal to carrying costs during that period and total cost to order and carry is lowest.

There are many variations on the basic EOQ model. I have listed most useful once below,

Quantity discount logic can programmed to work in conjunction with the EOQ formula to determined optimum order quantity. Most systems will require this additional programming.

Additional logic can be programmed to determine max quantities for subject to spoilage or to prevent obsolescence on items reaching end of their product life cycle.When use in manufacturing to determine lost size where production runs are very long and finished product is being released to stock and consumed /sold through out the production run you may need to take into account the ratio of production consumption to more accurately represent the average inventory level.

Assumptions:

There are a number of assumptions that must be made with the EOQ. These include:

Only one product is involved

Deterministic demand(demand is known with certainty)

Constant demand (demand is stable throughout the year)

No quantity discounts.

Constant costs (no price increase or inflating)

While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it is relevant for items that have independent demand .this means that the demand for the items is not derived from the demand for something else. For example, the demand for steering wheels would be derived from the demand for automobiles but the demand for purses is not derived from anything else; purses have independent demand.

Inventory Turnover Ratio:

Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. It is harmful to hold more inventories for the following reasons.

It unnecessarily blocks capital which can otherwise be profitably used somewhere else.

Over-stocking will require more go down space, so more rent will be paid.

There are chances of obsolescence of stocks. Consumers will prefer goods of latest design, etc.

Slow disposal of stacks will mean slow recovery of cash also which will adversely affect liquidity.

There are chances of deterioration in quality if the stocks are held for more periods.

It wills there fore, be advisable to dispose off inventory as early as possible. On the other hand, too low inventory may mean loss of business opportunities. Thus, it is very essential to keep sufficient stocks in business.

Inventory turnover ratio also known as stock velocity is normally calculated as sales/ average inventory or 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 up in inventory. Inventory turnover ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able mange its inventory

Inventory turnover ratio is calculated to indicate whether inventories have required minimum funds in inventory. The inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost goods sold/ average inventory cost. Inventory conversion period may also be calculated to find the average time taken for clearing the stock.

Inventory turnover ratio = cost of goods sold/ average inventory at cost

Inventory turnover ratio = net sales / average inventory.

And

Inventory conversion period = days in year / inventory turnover ratio.

Generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as denominator and where the opening inventory is not known the closing inventory figure may be taken as the average inventory.

Inventory turnover ratio = net sales / average inventory at cost

Inventory Turnover ratio = Net sales/ Average inventory at selling cost.

Inventory Turnover ratio = Net sales / Inventory.

Inventory Conversion Period:

It may also be of interest to see average time taken for clearing the stocks. This can be possible by calculating inventory conversion period. This period is calculated by dividing the number of days by inventory turnover.

Inventory Reports:

From effective inventory control, the management should be kept informed with the latest stock position of different items. This usually done by information necessary for managerial action. On the basis of these reports management takes corrective action wherever necessary.

Valuation of Inventory:

The value of materials has a direct bearing on the income of a concern, so it is necessary that a method of pricing of materials should be such that