EASTMAN Final Project1

Jun. 24

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A SUMMER TRAINING PROJECT REPORT ON INVENTORY MANAGEMENT Submitted in the partial fulfillment of the requirement for the award of degree of Master of Business Administration, Punjabi University, Patiala.

Submitted By: Tinu Joshi Roll Number: 10110125028 Uni. Reg. No. MBA 3rd Semester Under the guidance of: Mr. Sunil Kumar Sharma Finance Manager Eastman Cast & Forge Ltd. Ludhiana

DESH BHAGAT INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, MANDI GOBINDGARH 2011

DECLARATION

I_____________________________________ Roll No __________________ a full time bonafide student of Master of Business Administration (MBA) Programme of Desh Bhagat Institute Of Management And Computer Sciences, Mandi Gobindgarh. I hereby certify that this project entitled Inventory Management carried out by me at_________________________________________________. The report submitted in partial fulfillment of the requirements of the programme is an original

work

of

mine

under

the

guidance

of

the

industry

guide

_________________________________________________________________ and is not based or reproduced from any existing work of any other person or on any earlier work undertaken at any other time or for any other purpose, and has not been submitted anywhere else at any time. Date: -

Name & sign of student Roll No

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ACKNOWLEDGEMENT I consider it pleasant privilege to express my heartiest gratitude and indebtedness to those who have assisted me towards the completion of my project report. I am very much thankful to Mr. Sunil Kumar Sharma & Sumit Gupta Senior Manager in Accounts Department for making me capable of conducting such a study. I express my heartiest and sincere thanks to my company guide Mr. Sunil Kumar Sharma, Mr. Sumit Gupta, Miss Geetika Gulati, Mr. Daya Bhachu, S. Pargat Singh, Miss Barinder Kaur, Mr. Ashish Sood, Mr. Vinay Gupta of Accounts Department In ECFL who have been a constant source of inspiration and encouragement to me in carrying out this study. I would also like to express my gratitude towards my Faculty guide Mr. Sandeep Bansal who helped me to complete the project. I owe my special regards to God, my parents and my elders for their blessings and good wishes. Under his able guidance I have increased my capacity to understand and work in a demanding environment. (TINU JOSHI)

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EXECUTIVE SUMMARY 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 manufacturing concern, it may include raw material, work in process and stores, etc. Inventory includes following kinds; Raw Material: Raw material from a major input into the organization. They are required to carry out production activities uninterruptedly. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the suppliers. The factors like the availability of raw material and government regulation, etc. too affect the stock of raw materials. Work –in-Progress: The work-in-progress is that stage of stocks which are in between raw materials and finished goods. The raw materials enter the process of manufacture but they are yet to attain a final shape of finished goods. The quantum of work-in-progress depends upon the time taken in the manufacturing process. The greater the time taken in manufacturing, the more will be the amount of work in progress. Consumables: These are the materials which are needed to smoothen the process of production. These materials do not directly enter production but they act as catalysts, etc. Consumables may be classified according to their consumption and criticality. Generally, consumable stores do not create any supply problem and form a small part

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of production cost. There can be instances where these materials may account for much value than the raw materials. The fuel oil may form a substantial part of cost. 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 purpose 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 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 material, consumables, finished goods are different from that of spares. The stocking policies of spares are different from industry to industry. Some industries like transport will require more spares than the other concerns. The costly spares parts like engines, maintenance spares etc. are not discarded after use, rather they are kept in ready position for further 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.

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Contents Ch. No. 1

2 3 4 5

Title

Page No. (Example) 8-49

INTRODUCTION  Introduction to the company

8-28

 Introduction of the topic

29-48

 Objectives of the study RESEARCH METHODOLOGY ANALYSIS & INTERPRETATION OF DATA FINDINGS & CONCLUSION SUGGESTIONS BIBLIOGRAPHY APPENDIXES

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49 50-54 55-62 63-65 66 67 68-70

CHAPTER: - 1

INT

RODUCTION OF EASTMAN CAST & FORGE LTD.

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(1.1) EASTMAN CAST & FORG AT LUDHIANA PLANT We have manufacturing facilities at Ludhiana for Hand Tools and Power Tools. The Export of Tools is directed towards 27 markets out of India such as Russia, Ukraine, Belarus, Turkey, Panama, Peru, Bulgaria, France, Portugal, Malaysia, and Srilanka etc. Eastman brand has presence in domestic market and 21 vehicle manufacturers such as Tata Motors, Mahindra & Mahindra, Ashok Leyland, John-Deere, New Holland, Eicher, TAFE, Hero Honda Motors etc. Eastman tool kits are supplied as original equipments along with the vehicles manufactured by these companies. In India Eastman products are available through a strong network of more than 400 dealers and Company's exclusive Show Rooms cum Demo & Service Centers. We have installed capacity of 300000 Tools per annum. To ensure the quality parameters we have state of the art testing lab that contains equipments for Motor Endurance, Complete unit life testing, temperature rise testing, High voltage testing, Parts testing, Cable tension etc. Being a customer focused organization and to increase its competitiveness in the overseas markets the company has full fledged strong technical force to adhere to the goals of the company. We look forward "to help you work better" with our tools.

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(1.2) 5S AT ECFL This enables the plant to have better working conditions and also increase work efficiency. A copy of it also displayed at each shop and depth to motivate the employee towards healthy work environment. Meaning and benefits of 5S system are as follows:

1. SEIRI:

It stands for “Sorting”

Take out necessary items and suitably dispose with them

Benefits: 1. Effective Space Utilization 2. Stop Material from deteroiting or getting damaged 3. Reduce wastage and searching items

2. SEITON:

It stands for “Set in Order”

Arrange. All necessary items in a proper order so that they can be easily picked up for use

Benefits: 1. Reduce preparation and machine setting and machine setting timings. 2. Reduce time in locating or waiting for Tool Parts and Machines.

3. SEISON:

It stands for “Shine/Completely Clean”

Clean your workplace completely so that there is no dust anywhere.

Benefits: 58

1. Promotes Orderly and Safe Working Environment 2. Reduces Breakdown and Accidents.

4. SEIKETSU:

It stands for “Standardize”

Maintain a high standard of house keeping and work place organizational at all times

Benefits: 1. Quick Response through Visual Management 2. Create a maintenance system of House keeping for all the times.

5. SHITSUKE:

It stands for “Self Discipline Attitude”

Train People to follow Good House Keeping Discipline Independently

Benefits: 1. Self Discipline 2. Improves Industrial Safety 3. Creates Healthy Attitude and Habits

Advantages of 5S  Healthy Working Environment  Improves Work Efficiency  Producing Better Quality Products and Higher Productivity  Cutting Cost Down  Ensuring Delivery on time  Safe Working  High Morale and Better Life 59

(1.3) ECFL MISSION & VISSION (1.3.1)

ECFL VISION

Vision “Create a team of Business Managers with a clear visible career growth path to run and lead the organization to a virtuous cycle and gain national leadership in hand tools and power tools”

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(1.3.2) ECFL MISSION

Mission “To provide Competitive quality product with maximum customer satisfaction by active participation of all members of the organization”

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(1.4) COMPANY MANAGEMENT WHOLETIME DIRECTOR Sh. Sanjay Gautam

DIRECTORS Smt. Darshana Singal Smt. Reema Jain Sh. Ranjodh Singh Sh. Satish Kumar Vadera Sh. Joginder Singh Juneja Sh. S.K.Singal Sh. Shekher Singal Sh. Vineet Jain Smt. Vandana Aggarwal

REGISTERED OFFICE Flate no-101, First floor, 1, Community center, Naraina industrial area, New Delhi-110028

BANKERS State Bank of India

COMPANY SECRETARY Mr. Mohit Jindal

AUDITORS M/S Dass Khanna & co.

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(1.5) HISTORICAL BACKGROUND

1970 Mr. J. R. Singal, our Chairman sets up a bicycle brake shoe manufacturing plant in Ludhiana, Punjab.

1974 Our first export consignment gets dispatched to Thailand. 1978 First Export to Argentina & Ivory Cost by now Chairman & CMD (Eastman Group) Mr. J R Singal.

1982 "EASTMAN INDUSTRIES LIMITED" (E.I.L), a corporate entity established as a first step to professionalize operations.

1986 "EASTMAN CAST & FORGE LTD" (E.C.F.L.) incorporated for export of hand tools.

1990 Major product and market expansion initiated. "EASTMAN" products are available in all major markets of South America and introduced in Mediterranean regions of Europe. E.C.F.L. adds garden and agriculture tools to its range.

1994 E.I.L. wins the "Latin America Focus" award as per the Foreign Trade Policy decided by Directorate of Foreign Trade, (Ministry of Commerce, Govt. of India).

1998 Both E.I.L. and E.C.F.L. certified ISO 9002 & ISO 9001 respectively.

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1999 E.I.L. wins Focus LAC Award for outstanding Export performance in 19992000.

2000 E.I.L. wins "National Export Awards" for excellence in Exports. 2002 After a small beginning previous year, "EASTMAN INDUSTRIAL COMPANY" (E.I.C) is formed for export of two wheelers and their spare parts.

2005 E.C.F.L. wins the "EEPC INDIA" Excellence award 2005-06. 2006 "EASTMAN AUTO & POWER LIMITED" is Incorporated for launch of Lead Acid Batteries.

2006 E.C.F.L. wins the "EEPC INDIA" Excellence award 2006-07. 2007 E.I.L. awarded "Niryat Shree" for Excellence in exports. 2008 E.C.F.L. wins the "EEPC INDIA" Excellence award 2008-09. 2009 E.C.F.L. wins the "Energy Conservation - 2008" award as per the Punjab Energy development Agency.

2010 E.C.F.L. wins the "Energy Conservation Award” under the aegis of power ministry.

2010 E.A.P.L. certified ISO 9001:2008. 2010E.C.F.L. awarded “The Corporate Citizen of the year Award 2010 “by PHDCCI.

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(1.6) GEOGRAPHICAL OVERVIEW

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(1.7) Group Structure 58

Eastman Industries Limited, Ludhiana

Eastman Cast & Forge Ltd., Ludhiana

EASTMAN GROUP

Eastman Industrial Company Gurgaon

Eastman Auto & Power Limited Baddi

(1.8) PRODUCT PROFILE The main products of the company are: 59

Adustable Wrench

Non Sparking Tools

Alien Keys

Oil Can

Automotive Spanners

Pincer

Automotive Tools

Pipe Cutting Tools

Bi-Hexagonal Spanners

Pipe Wrench

Carpenter Tools

Punches

Combination Spanners

Ratchet

Doe Spanners

Saw

Hammer

Socket

Jumbo Spanners

Socket Bits

Leather Aprons

Tap Wrench

Mason Tools

Vice

Measurement Instrument

Water Pump & Plier

Products Adjustable

Adjustable Wrench

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Adjustable

Wrench

Wrench

Automotive Allen Keys

Automotive Spanners

Spanners

Automotive Spanners

Automotive Tools

Automotive Spanners

Bi-Hexagonal Spanners Automotive Tools

Carpenter Tools

Carpenter Tools

Carpenter Tools

Carpenter Tools

Combination Spanners

Doe Spanners Hammer

Jumbo Spanners Hammer

Leather Aprons

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Measurement Mason Tools

Mason Tools

Instrument

Non Sparking Tools

Oil Can

Oil Can

Pincer

Pincer

Pincer

Pipe Cutting Tools

Pipe Wrench

Pipe Cutting Tools

Pipe Wrench

Pipe Wrench

Pipe Wrench

Punches

Ratchet

Saw

Saw

Socket

Socket Bits

Tap Wrench

Tap Wrench

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Vice

Vice

Water Pump Plier

Water Pump Plier

(1.9) MANUFACTURING PROCESS

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RAW MATERIAL

Incoming raw material is Lab tested at entry level to the plant BLANKING

The Quality of Blanks are checked for primary conformity

FORGING

The forging Die is Inspected for good forging out put TRIMMING

Good finished products are selected after Trimming stage

PUNCHING

Inspection at punching stage rejects poorly finished goods BROACHING

After broaching all spanners are checked for Jaw accuracy

HEAT TREATMENT

Heat treated product’s are is inspected for proper internal structural formation and Hardness of the Product GAUGING

All Products are checked with gauges for operational fitment

SHOT BALLAST

Inspection at Shot Ballasting checks for finishing out 59

put ELECTRO PLATING

Final inspection is carried after electroplating stage. This is the final and detailed inspection carried out manually.

(1.10) OEM Clients:

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(1.11) DEPARTMENTS

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Procurement

Excise

Audit

HR

IT

Accoun t& Finance

Marketing

Documentatio n

Delhi & Gurgaon Off.

Ten Showroom

China Off.

C-88

Production

(1.12) SWOT ANALYSIS 59

SWOT analysis provides the information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. Environmental factors internal to the firm can be classified as Strengths (S) and Weaknesses (W) and those external to the firm are classified as Opportunities (O) and Threats (T). Such an analysis of strategic environment is called SWOT ANALYSIS. SWOT ANALYSIS OF EASTMAN CAST & FORGE LTD, LUDHIANA IS AS FOLLOWS:

STRENGTHS:The firm’s strengths are its resources and capabilities that can be used as competitive advantage. The main strengths of Eastman Cast & Forge Ltd. are:  Full-fledged strong technical force.  Good reputation among the customers (like M&M, Tata Motors)  Peaceful Industrial Environment.  Strong discipline and positive attitude culture.  Strong HRD development tools for work force.  Approach to the plant at Ludhiana, It is through National highway.

WEAKNESS:The absence of certain strengths may be viewed as weakness and the major weakness faced by the ECFL is:  Non-availability of tax exemptions and subsidies.  Gross profit is going downward in the comparison of last year.  Raw material Turnover ratio is going downward.  It is not registered under any stock exchange.

OPPORTUNITIES:58

External environment analysis may reveal certain new opportunities for profit and growth and the opportunities before ECFL are:  Availability of latest / state of art technology 

Liberalization in Gov. policies and tax laws

THREATS:Changes in external environment may also poses threats to the firm Major threats to ECFL are:  High inflation has offset the rise in household incomes as the disposable income of people has declined vis-à-vis previous years.  Government Policies, Rules and Regulations.  Competition from other MNCs like Snap on company, Kraft Tool Company, Hands 2 you-US Company.

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CHAPTER :- 2 INTRODUCTION OF INVENTORY MANAGEMENT

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(2.1)Meaning of Inventory 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 manufacturing concern, it may include raw material, work in process and stores, etc.

Nature / Kind of Inventory Inventory includes following kinds; 1. Raw Material: Raw material from a major input into the organization. They are required to carry out production activities uninterruptedly. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the suppliers. The factors like the availability of raw material and government regulation, etc. too affect the stock of raw materials. 2. Work –in-Progress: The work-in-progress is that stage of stocks which are in between raw materials and finished goods. The raw materials enter the process of manufacture but they are yet to attain a final shape of finished goods. The quantum of work-in-progress depends upon the time taken in the manufacturing process. The greater the time taken in manufacturing, the more will be the amount of work in progress. 3. Consumables: These are the materials which are needed to smoothen the process of production. These materials do not directly enter production but they act as catalysts, etc. Consumables may be classified according to their consumption and criticality. Generally, consumable stores do not create any supply problem and form a small part 59

of production cost. There can be instances where these materials may account for much value than the raw materials. The fuel oil may form a substantial part of cost. 4. 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 purpose 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 inventory will be more when production is undertaken in general without waiting for specific orders. 5. Spares: spares also form a part of inventory. The Consumption pattern of raw material, consumables, finished goods are different from that of spares. The stocking policies of spares are different from industry to industry. Some industries like transport will require more spares than the other concerns. The costly spares parts like engines, maintenance spares etc. are not discarded after use, rather they are kept in ready position for further 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.

STRATEGIC ISSUES IN INVENTORY MANAGEMENT Following are the issues in inventory management:

a. Organizational Forces Pushing For Inventory (1). Middle to senior management; in general, prefer higher buffer stocks to cover mistakes and inefficiencies in their operations that they have not been able to remove. Their promotion and reward depend on smooth operations. (2). Production management prefers higher inventories because they allow 1.  Lower operating costs. 58

2.  Longer production runs 3.  More in process stock 4.  Higher raw materials levels (3). Marketing sales management prefer higher inventories because they make it possible to provide 5.  Better customer service 6.  Shorter lead time 7.  Higher orders fill rates 8.  Full product lines 9.  More new product 10.  More flexibility

b. Organizational Forces Pushing For Lower Inventory (1). When corporation faces difficult times one of the first actions examined is lower inventory investment that is, reducing the organizational slack present in the form of buffer stock. “We must tighten our belts.” (2). Finance / accounting management are rewarded for: 11.  Reducing working capital requirements 12.  Demonstrating higher return on investment 13.  Increasing profit by decreasing carrying costs

Purpose of holding Inventory Every business enterprise has to maintain a certain level of inventory to facilitate uninterrupted production and smooth running of business. In the absence of inventory a firm will have to make purchases as soon as it receives other. It will mean loss of time and delay in execution of order which sometime may cause loss of customers 59

and business. A firm also needs to maintain inventory to reduce ordering costs and avail quantity discounts, etc. Generally speaking, there are three main purposes or motives of holding inventories: 1. The Transaction Motive: which facilitates continuous production and timely execution of sales orders. 2. The Precautionary Motive: which necessitates the holding of inventory for meeting the unpredictable changes in demand and supplies of material. 3. The Speculative Motive: which induces to keep inventory for taking advantage of price fluctuations, saving in re-ordering costs and quantity discounts, etc.

Risk and Costs of holding Inventory The holding of inventory involves blocking of a firm’s funds and incurrence of capital and other costs. It also exposes the firm to certain risks. The various costs and risks involved in holding inventories are as below: 1. Capital costs: Maintaining of inventories results in blocking of firm’s financial resources. The firm has, therefore, to arrange for additional funds to meet the costs of inventories. The funds may be arranged from own resources or from outsiders. 2. Storage and Handling Costs:

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Holding of inventories also involves costs on storage as well as handling of materials. The storage costs include the rental of godown, insurance charges, etc. 3. Risk of Price Decline: There is always a risk of production in the prices of inventories by the supplier 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 due to improved technology changes in requirement, change in customer’s tastes, etc. 5. Risk Deterioration in quality: The of materials may also deteriorate while the inventories are kept in stores.

Meaning of Inventory Management Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.

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(2.2)Definition of Inventory Management 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.

Objective of Inventory Management 1. To ensure continuous supply of material, spares and finished goods so that production should not suffer at any time and customers demand should also be met. 2. To avoid both over-stocking and under-stocking of inventory.

3. To maintain investments in inventories at the optimum level as required by the operation and sales activities. 4. To keep material cost under control so that they contribute in reducing cost of production and overall costs.

5. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. 6. To minimise losses through deterioration, pilferage, wastage and damages.

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7. To design proper organization for inventory management. A clear cut accountability should be fixed at various level of the organization. 8. To ensure perpetual inventory control so that material shown in stock ledger should be actually lying in the stores.

9. To ensure right quality goods at reasonable prices. Suitable quality standards will ensure proper quality of stocks. The price-analysis, the costs-analysis and value-analysis will ensure payment of proper prices. 10. To facilitate furnishing of data for short-term and long-term planning and control of inventory.

(2.3)Tools and Techniques of Inventory Control Management: 1. Determination of Stock levels. 2. Determination of Safety Stocks. 3. Selecting a proper System of Ordering for Inventory. 4. Determination of Economic Order Quantity. 5. A.B.C. Analysis. 6. VED Analysis. 7. Inventory Turnover Ratios. 8. Aging Schedule of Inventories. 9. Classification and Codification of Inventories. 10. Preparation of Inventory Reports. 11. Lead Time. 12. Perpetual Inventory System. 13. JIT Control System. 59

1. Determination of Stock levels : (a)

Minimum Level: This represents the quantity which must be maintained in hand at all times. If stocks are less than the minimum level then the work will stop due to shortage of materials. Following factors are taken into account while fixing minimum stock level:

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 to maintain some inventory during this period.

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

Minimum stock level= Re-ordering level-(Normal consumption×Normal Re-order period). Nature of Material: The nature of material is also affects the minimum level. If a material is required only against special orders of the customer then minimum stock will not be required for such materials. Minimum stock level can be calculated with the help of following formula:

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(b) Re-ordering Level: When the quantity of material reaches at a certain figure then fresh order is sent to get materials again. The order is sent before the material reach minimum stock level. Re-ordering level or ordering level is fixed between minimum level and maximum level. The of consumption, number of days required to replenish the stocks, and maximum quantity of material required on any day are taken into account while fixing re-ordering level. Re-ordering level is fixed with the following formula:

Re-ordering level=Maximum Consumption×Maximum Re-order period. (c) Maximum Level: It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceed maximum level limit then it will be overstocking. A firm should avoid overstocking because it will result in high material costs. Overstocking will mean blocking of more working capital, more space for storing the materials, more wastage of material and more chances of losses from obsolescence. Maximum stock level will depend upon the following factors: 1. The availability of capital for the purchase of materials. 2. The maximum requirements of materials at any point of time. 3. The availability of space for storing the materials. 4. The rate of consumption of material during lead time. 5. The costs of maintaining the stores. 6. The possibility of fluctuations in prices. 7. The nature of materials. If the materials are perishable in nature, then they cannot be stored for long. 8. Availability of materials. If the materials are available only during seasons then they will have to store for rest period. 59

9. Restriction imposed by Government. 10. The possibility of change in fashion will also affect the maximum level. The following formula may be used for calculating maximum stock level:

Maximum Stock Level=Re-ordering Level + Re-ordering Quantity (Minimum Consumption×Minimum Re-ordering period). (d) Danger Level: It is the level beyond which material should not fall in any case. If danger level arises then immediate step should be taken replenish the stocks even if more cost is incurred in arranging the materials. If materials are arranged immediately there is a possibility of stoppage of work. Danger level is determined with the following formula:

Danger Level=Average Consumption×Maximum re-order period for emergency purchases.

(a) Average Stock Level: The average stock level is calculated as such:

Average Stock Level=Minimum Stock Level+1/2 of re-order quantity.

2. Determination of Safety Stocks: Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted. It fluctuates over a period of time. The 58

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 concern. In order to protect against the stock-out arising out of usage fluctuations, firm usually maintain some margin of safety stocks. The basic problem is to determine the level of quantity of safety stocks. Two costs are involved in determination of this stock i.e. opportunity cost of stock-out and the carrying costs. Similarly, the stock-out of finished goods result into the failure of the firm in competition as the firm cannot provide proper customer service. If a firm maintain low level of safety frequent stock-out will occur resulting into the large opportunity costs. On the other hand, the large quantity of safety stocks involves higher carrying costs.

3. Ordering Systems of inventory: The basic problem of inventory is to

decide the re-order point. This 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) during of lead time, (c) economic order quantity, when the inventory is depleted to lead time consumption, the order should be placed. There are three system of ordering and a concern can choose any one of these: (a) Fixed order quantity system generally known as economic order quantity system; (b) Fixed period order system or periodic re-ordering system or periodic review system; (c) Single order and scheduled part delivery system.

4. Economic Order Quantity (EOQ): 59

Inventory models deal with idle resources like men, machines, money and materials. These models are concerned with two decisions: how much to order (purchase or produce) and when to order so as to minimize the total cost. For the first decision—how much to order, there are two basic costs are considered namely, inventory carrying costs and the ordering or acquisition costs. As the quantity ordered is increased, the inventory carrying cost increases while the ordering cost decreases. The ‘order quantity’ means the quantity produced or procured during one production cycle. Economic order quantity is calculated by balancing the two costs. Economic Order Quantity (EOQ) is that size of order which minimizes total costs of carrying and cost of ordering. i.e., Minimum Total Cost occurs when Inventory Carrying Cost = Ordering Cost. Economic

order

quantity

can

be

1.Tabulation

determined

by

two

methods: method.

2. Algebraic method.

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1. Determination of EOQ by Tabulation (Trial & Error) Method This 1.

method Select

the

involves number

of

the

following

possible

lot

sizes

steps:

to

purchase.

2. Determine average inventory carrying cost for the lot purchased. 3.

Determine

the

total

ordering

cost

for

the

orders

placed.

4. Determine the total cost for each lot size chosen which is the summation of inventory 5.

Select

carrying the

ordering

cost quantity,

and which

ordering

minimizes

the

cost. total

cost.

The data calculated in a tabular column can plot showing the nature of total cost, inventory cost and ordering cost curve against the quantity ordered as in Fig. 4.6.

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2. Determination of EOQ by Analytical Method In order to derive an economic lot size formula following assumptions are made: 1. Demand

is

known

and

uniform.

2. Let D denotes the total number of units purchase/produced and Q denotes the

lot

size

in

each

production

run.

3. Shortages are not permitted i.e., as soon as the level of the inventory reaches zero, 4.

the Production

5. 6.

inventory or

supply

of

is commodity

Lead-time Set-up

cost

per

replenished. is

instantaneous.

is

production

run

or

procurement

zero. cost

is

C3.

7. Inventory carrying cost is C1 = CI, where C is the unit cost and I is called inventory carrying cost expressed as a percentage of the value of the average inventory. 2. This fundamental situation can be shown on an inventory-time diagram, (Fig.

4.7)

with

Q

on the vertical axis and the time on the horizontal axis. The total time period (one

year)

is

into n parts.

58

divided

59

58

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5. Just In Time (JIT) Inventory Control System: Just in time philosophy, which aims at eliminating waste every aspect of manufacturing and its related activities, was first development in Japan. Toyota introduced this technique in 1950’s in Japan, however, U.S. companies started using this technique in 1980’s. The term JIT refers to management tool that help to produce only the needed quantity at needed time. According to the official terminology of C.I.M.A.,JIT, is “a technique for the organization of workflows, to allow repaid, high quality, flexible production whilst minimizing manufacturing work and stock level.” There are broadly aspects of JIT (I) just in time production, and (II) just in time purchasing. Schonberger define, JIT as, “to produce and deliver finish goods just in time to sold, sub assembles just in time to be assembled into finish goods, fabricates parts just in time to go into sub-assembles and purchased materials just in time to be transformed into fabricated parts.

6. VED Analysis: The VED analysis is used generally for spare parts. The requirement and urgency of spare parts is different from that material. A-B-C analysis may not be properly used for spare parts. The demand for spares depends upon the performance of the plant and machinery. Spare parts are classified as Vital (V), Essential (E) and Desirable (D). The vital spares are a must for running the concern smoothly and these must be stored adequately. The non-availability of vital spares will cause havoc in concern. The E types of spares are also necessary but their stocks may be kept at low figures. The stocking of D type of spares may be avoided at time. If the lead time of these spare is less, then stocking of these spares can be avoided. 58

7. Inventory Turnover Ratios: Inventory turnover ratio are calculated to indicate whether inventory have been used efficiently or not. The purpose is to ensure the blocking of only required minimum fund in inventory. The Inventory Turnover Ratio also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/average inventory cost. Inventory conversion period may also be calculated to find the average time taken for clearing the stocks. Cost of goods sold Inventory Turnover Ratio =

──────────────── Average Inventory at cost

Net Sales Or

────────────── (Average) Inventory

Days in a year And, Inventory Conversion Period = ────────────── Inventory Turnover Ratio

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8. Aging Schedule of Inventories: Classification of inventories according to period (age) of their holding also helps in identifying slow moving inventories thereby helping in effective control and management of inventories. The following table shows aging of inventory of a firm.

9. Classification and Codification of Inventories: The inventories may be classified either according to their nature or according to their use. Generally, materials are classified according to their nature such as construction material, consumable stocks, spares, lubricants, etc. After classification, the materials are given code numbers. The coding may be done alphabetically or numerically. The latter method is generally used for coding. The class of material is assigned two digits and then two or three digits are assigned to the categories of material in that class. The third distinction is needed for the quality of goods and decimals are used to note this factor. For example, a concern has two categories of item divided into 15 groups. Two number will be used for main categories and two in sub-groups (because the number is 15 i.e., more than 9) and then decimals will be used to the quantity etc. If mobile oil is to be coded, two digits will be used in categories, i.e., lubricant oils say 12, two digits will be used for mobile oil, say 56 and one digit may be used for the quantity of mobile oil, say 1. The code of mobile oil will be 1256.1.

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10. Inventory Reports: From effective inventory control, the management should be kept informed with the latest stock position of different items. This is usually down by preparing periodical inventory reports .These reports should contain all information necessary for management action. On the basis of these reports management takes corrective action wherever necessary. The more frequently these reports are prepared the less will be the chances of lapse in the administration of inventory.

11. Lead Time: Lead time is the period that elapses between the recognition of a need and its fulfillment. There is a direct relationship between lead time and inventories. The levels of inventory of an item depends upon the length of its lead time .suppose, lead time is one month. Any action taken now will have an effect only one month letter. So inventory for the current month must be in hand. During lead time there will be no delivery of materials and consuming departments will have to be served from the inventories held. Lead time has two components: Lead time for company (administrative lead time) from initiation of procurement action until the placing of an order, and the lead time for the producer, know as delivery lead time from the placing of an order unites the delivery of the order material. Administrative lead time also follows take some time. Administrative lead time is in the hands of those who are dealing with material procurement. Delivery time has to be negotiated at the time of preparing purchase contract.

Administrative lead time

Producer’s lead time 59

________________________ Lead Time _________________________ It is often seen that bulk of the lead time is taken up by administrative lead time. This is the time over which company has control but still too much time is taken up in receiving and inspection of goods. A businessman may find to his frustration that the good which he has persuaded a supplier to deliver in an extremely short time have been lying in his own goods inwards department after delivery. Stock control or purchase section of the organization should maintain lead time schedule for all group of materials.

12. Perpetual inventory system: The stock taking may either be down annually or continually. In the latter method, the stoke taking continues throughout the year. A schedule is prepared for stock taking of various bins (store room). One bin is selected at random and the goods are checked as per shown in the bin card. Then some other bin is selected at random and so on. The personal associated with store keeping are not told of stock taking programme because store rooms are chosen at random. The institute of cost and management accountants, London defines perpetual inventory system as “a system of records maintained by the controlling department, which reflects the physical movements of stocks and their current balance.” The store ledger and bin cards are helpful in this system because these records help in keeping the movement of stores. This facilitates regular checking of stores without closing down the plant.

13. ABC analysis: 58

In this analysis, the classification of existing inventory is based on annual consumption and the annual value of the items. Hence we obtain the quantity of inventory item consumed during the year and multiply it by unit cost to obtain annual usage cost. The items are then arranged in the descending order of such annual usage cost. The analysis is carried out by drawing a graph based on the cumulative number of items and cumulative usage of consumption cost. Classification is done as follows:

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Once ABC classification has been achieved, the policy control can be formulated as follows:

A-Item: Very tight control, the items being of high value. The control need be exercised at higher level of authority.

B-Item: Moderate control, the items being of moderate value. The control need be exercised at middle level of authority.

C-Item: The items being of low value, the control can be exercised at gross root level of

authority,

i.e.,

by

respective

user

department

managers.

ABC Procedure for Categorizing of Inventory The general procedure for categorization of items into `A', `B' and `C' groups is briefly outlined below: • All the items of inventory are to be ranked in the descending order of their annual usage value. • The cumulative totals of annual usage values of these items along with their percentages to the total annual usage value are to be noted alongside. • The cumulative percentage of items to the total number of items is also to be recorded in another column. • An approximate categorization of items into A, B, and C groups can be made by comparing the cumulative percentage of items with the cumulative percentage of the corresponding usage values.

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Advantages of the ABC Inventory System The advantages of the ABC system are as follows: 1. It ensures closer control on costly items in which a large amount of capital has been invested. 2. It helps in developing a scientific method of controlling inventories, Clerical costs are reduced and stock is maintained at optimum level. 3. It helps in achieving the main objective of inventory control at minimum cost. 4. The stock turnover rate can be maintained at comparatively higher level through.

(2.4) ABC Analysis of ECFL: 59

Categories

Quantity (in

Value (in Rs.)

A

Units) 181402

2899502.08

B

163654

4297290.40

C

46324

7397577.28

(2.5) OBJECTIVES of ABC Analysis The study was conducted with following broad and specific objectives: 58

BROAD OBJECTIVE:  Main objective of the project is to analysis the whole data of ECFL and find various opportunities to improve the Inventory of the company.

SPECIFIC OBJECTIVES:  To standardize the credit period provided by the suppliers of raw materials, packaging materials, finished goods and store items.  To determine the difference between the standard norms and actual number of days for which the inventory of raw materials, packaging materials, finished goods and store items is kept.  To understand the cash forecasting and budgeting at ECFL, Ludhiana.  To determine the method for controlling Inventory, use in ECFL.  To determine the RMCP, WIPCP, FGCP, DRCP & CPCP.

CHAPTER :- 3 59

RESEARCH MEHODOLOGY

Objectives of the study 1. To know the functioning of the inventories and understand the system of procurement of material, its receipt, inspection and it’s issuing. 58

2. To understand the accounting and valuation of raw material, work-inprogress and finished goods. 3. To analyze the inventory control techniques used by company and their techniques. 4. To study the performance of the company in relation to inventories and thus provide suggestions if any on the basis of analysis Interpretation of the data.

(3.1) SCOPE OF STUDY The above project was conducted keeping in mind the components of Working capital mentioned above i.e. inventory, receivables, and payables and further, credit terms with suppliers; project Working Capital took its shape. The project Working Capital was started at LUDHIANA plant of ECFL Ltd. early this year with an idea of standardization of credit period across sites, scrutinizing the inventory holding period of raw materials, packaging materials and finished goods and estimating the working capital thus released through these initiatives.

(3.2) RESEACH METHODOLOGY This part of the report i.e. Research Methodology is intended to give the details of the conceptual framework within which the study has been carried out. This section covers the following aspects:

Research Methodology 59

The methodology used for the collection of data was divided into Two sources:-

1. PRIMARY DATA This data is based upon personal discussions with manager and other officer working in various sections of finance department and store department.

2. SECONDARY DATA It is mainly based upon annual reports, magazines, office reports and various published documents of Eastman Cast & Forge Ltd. Ludhiana. Data has been collected for two years, then compiled and thereafter statistical analysis of the information has been done, thereafter various ratios relating to the inventories has been calculated and tables showing variation in the inventories for two years have been made.

(3.3)ANALYSIS: The data thus obtained was ready for analysis, interpretations and drawing conclusions out of it. Thus the data used for conducting the project was secondary in nature. For purpose of analysis, data was further captured in spreadsheet for better comparisons both within a site as well as between different sites simultaneously. The results obtained after comparing it within a site and across different sites were presented in form of power point presentation.

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(3.4) LIMITATIONS OF THE STUDY Due to constraints of time & resources the present study is likely to suffer from certain limitations some of these are mentioned below, so that study can be understood in a proper way: From my part: 1. Shortage of time available for the survey 2. As the study was conducted only in LUDHIANA, District Punjab i.e. only one Plant has been covered therefore results evolving out may not be true at International level. 3. The use of all the accounting techniques is not possible. 4. Study depends on the availability and reliability of secondary data.

CHAPTER :- 4

ANALYSIS 59

& INTERPRETATION

(4.1) Inventory Turnover Ratio:

Particulars

2011(Rs. Lacs)

2010(Rs. Lacs)

Cost of Good Sold

6083.05

4765.61

Average Inventory

1142.66

1115.47

5.32

4.27

INVENTORY TURNOVER RATIO

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ECFL’s Inventory Turn over Ratio is 5.32 in Year 2011 & 4.27 Inventory Turn over Ratio in Year 2010.

(4.2) RAW MATERIALS TURNOVER RATIO:

Particulars RAW MATERIALS

2011(Rs. Lacs) 52.54

2010(Rs. Lacs) 52

TURNOVER RATIO

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ECFL’s Raw Materials Turn over Ratio is 52.54 in Year 2011 & 52 Raw Materials Turn over Ratio in Year 2010.

(4.3) Stock Holding Period:

Particulars Stock Holding Period

2011(in Days )

2010(in Days)

34

42

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ECFL’s Stock Holding Turn over Ratio is 34 in Year 2011 & 42 Stock Holding Turn Over Ratio in Year 2010.

(4.4) ABC Analysis of ECFL:

Categories

Quantity (in

Value (in Rs.)

A

Units) 181402

2899502.08

B

163654

4297290.40

59

C

46324

7397577.28

(4.5) OPERATING CYCLE OF ECFL:

1. Raw Material Conversion Period (RMCP): Average raw material inventory

x 365

Raw material consumed during the year Particulars Opening Stock of R.M Closing Stock of R.M Average Stock Raw Material

2011(Rs. Lacs) 7659.75 4276.4 5968.07 161018.09 58

2010(Rs. Lacs) 4244.43 7659.75 5952.09 127932.28

Consumed Raw Material

13 Days

17 Days

Conversion Period 13 days are sufficient time period for the Raw Material Consumption in ECFL.

2. Finished Goods Conversion Period (FGCP): Average finished goods inventory x 365 Cost of goods Particulars Opening Stock Closing Stock Average Stock Cost of Good Sold Finished Goods

2011(Rs. Lacs) 16366.07 17562.95 16964.51 258647.18 24Days

2010(Rs. Lacs) 20336.67 16336.07 18336.37 199124.66 33Days

Conversion Period 24 days are sufficient time period for the Conversion in Finished Goods at ECFL. 59

3. Work in process conversion period (WIPCP)

Average stock in process inventory x 365 Cost of production Particulars Opening Stock of Work

2011(Rs. Lacs)

2010(Rs. Lacs)

in Process Closing Stock of Work in Process Average Stock of Work in Process Cost of Production Conversion Period Days Period of are sufficient time period for the Conversion of Work In Progress at ECFL. 58

4. Debtors Conversion Period or Book Debts Conversion Period Average debtors x 365 Credit sales Particulars Average Debtors Credit Sales Debtors Conversion

2011(Rs. Lacs) 1708.64 7987.55 78Days

2010(Rs. Lacs) 1489.15 6289.36 86Days

Period Period of 78 days is good time period Debtors Conversion at ECFL.

5. Creditors Conversion Period or Payable Deferral Period Average creditors x 365 Credit purchases Particulars Average Creditors Credit Purchases Creditors Conversion

2011(Rs. Lacs)

2010(Rs. Lacs)

976.33 4196.65 85days

643.89 3270.57 72days

Period Period of 85 days are good time period Creditors Conversion at ECFL Also it is greater than the Debtor Conversion period.

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CHAPTER :- 5

FINDINGS & RECOMMENDATIONS 58

(5.1) MAJOR FINDINGS  ECFL’s Inventory Turn over Ratio is 5.32 in Year 2011 & 4.27 Inventory Turn over Ratio in Year 2010.  ECFL’s Raw Materials Turn over Ratio is 52.54 in Year 2011 & 52 Raw Materials Turn over Ratio in Year 2010.

 ECFL’s Stock Holding Turn over Ratio is 34 in Year 2011 & 42 Stock Holding Turn over Ratio in Year 2010.  13 days are sufficient time period for the Raw Material Consumption in ECFL.

 24 days are sufficient time period for the Conversion in Finished Goods at ECFL.  Days Period of are sufficient time period for the Conversion of Work In Progress at ECFL.

 Period of 78 days is good time period Debtors Conversion at ECFL. 59

 Period of 85 days are good time period Creditors Conversion at ECFL Also it is greater than the Debtor Conversion period.  ECFL is applying only ABC Technique.

(5.2) RECOMMENDATONS The result of the live project done at ECFL is presented in the form of following recommendations:

Inventory can be improved by:

 Company is using only ABC analysis for controlling the should use another methods for inventory controlling. 

Reducing the inventory-holding period of items.

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inventory it

(5.3) SUGGESTIONS: 1. The company should borrow some funds from markets. As Loan today is the cheaper source of Finance. 2. The company should keep an eye on the competitor’s strategy. 3. The company could make use of the funds in more organized manner rather then blocking money by keeping unnecessary inventory. 4. Inventory should be maintained at an organized and appropriate level. 5. The company should spend on the advertisements, to create brand awareness.

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BIBLIOGRAPHY BOOKS:1) Goel, D.K., Management Accounting & Financial Management, Avichal Publishing Company, 2008. 2) Bhalla V.K., Working Capital Management, Anmol Publication Pvt. Ltd., 2007. 3) I.M. Pandey, Financial Management, Vikas Publishing House (P) limited, New Delhi, 9th edition, 2006.

WEBSITE:1) www.ECFLhandtool.com 2) www.Wikipedia.org 3) Investopedia.com 4) Study finance.com 5) Google.com

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