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Chapter-1 Introduction
1.1 INTRODUCTION: If we observe closely, inventories can be found everywhere. We dont know since when ants and squirrels have been keeping inventories of their food supplies. And we dont know how they learned to keep an account of these inventories. Not only wildlife but also humans have been smart enough to realize the benefits of inventories. Since the stone-ages, we have been carrying inventories and managing them. Businesses, may it be a small mom-and-pop store or the worlds biggest retailer Wal-Mart, maintain inventories and try managing them efficiently to fulfill their customers demands at lowest possible costs. Bottom line for a profit -seeking business is to increase the operating income. Operating income = Operating revenues Operating expenses Inventories affect both terms on the right side. Sales revenue can increase if inventories are allocated among different products in improved ways. But they profoundly affect operating expenses because they represent a major component of it.

Figure 1 Inventory between supply and demand Figure presents an abstraction of the inventory. As simple as it is, a great deal cannot be presented in such an abstraction. For instance, in the real world, demand as well as supply processes are quite complex. The degree of complexity in these two processes mainly differentiates strategies to manage inventories. There can be some inventories which possess single-item and single-location structure as in this Figure. There can also be more complex larger systems with multiple items and/or multi-echelon structures, commonly referred to as supply chains or supply
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networks. However, the single-item and single-location systems are embedded in these more complex multi dimensional systems and can be operationally dependent on each other. In simplest terms, inventory management deals with the eternal issues of how much to keep on hand and how much and how frequently to reorder. For many companies, inventory is an essential resource needed for day-to-day operations. Assembly and manufacturing companies need raw materials to process and combine with purchased items to assemble into finished goods. Distribution centers and retail stores need products to sell. Companies that are predominantly service operations need an assortment of office and other supplies. All operations need various types of maintenance, repair, and operating suppliesalso known as MRO or indirect items. The pattern, timing, and level of demand for end products rarely exactly match the amount and type of inventory a company has on hand. When demand is low, a company may have inventory on hand that it wishes it did not have. On the other hand, there are times when demand is high and companies wish they had more on hand. It is not really a no-win situation. It is a situation that gave rise to what I would call the eternal issues of inventory management, which deal with how much to keep on hand and how much and how frequently to reorder. Ideally, if we are always certain of the level of demand and the order lead time, there will be no need to keep any inventory. The level of demand refers to the quantities and timing of the need for the various products we produce. The order lead time refers to the period between placing a replenishment order and the time it is actually received. Alas, in our real world we all know that we often cannot determine customer demand or the order lead time. We therefore say that we keep inventory on hand primarily to cover these uncertainties. The reason this is a concern for us is that we want to meet customer needs in good time and with the right quantities and at the same time meet customer needs and produce a profit for our firm. We cannot afford to be reckless in deciding what quantities of inventory to keep on hand, because, although it may help us meet customer needs, we may end up losing money in the process.

1.2 THEORETICAL FOUNDATION: One could argue that inventory management principles can be traced back at least to biblical times as evidenced by the stor y of Joseph interpreting the Pharaohs dream as being seven years of plentiful harvests followed by seven years of crop failures and his associated advice to the Pharaoh to stockpile enough harvested grain during the plentiful years to ensure adequate food during the subsequent famine. In terms of published professional material probably the earliest article (laying out the principles of the economic order quantity) was by Harris (1913) as reported by Erlenkotter (1990). Military applications and the formation of associated research teams (e.g. the RAND Corporation in the USA and the Defense Research Board in Canada) led to considerable research and development work after World War II. In particular, all of K.J. Arrow, A.J. Clark, S. Karolin, H.E. Scarf, H.M. Wagner and T.M. Whiten were affiliated with RAND. One of the earliest papers in this era was Arrow et al (1951). Other important publications in the 1950s, with at least elements related to

inventory management, included Dvoretsky et al (1952a, 1952b, 1953) Karr and Geyser (1956), Wagner And Whiten (1958) several articles in Arrow et al (1958a, 1958b), Gallaher et al(1959), Simpson (1959), and Scarf (1959). It is noteworthy that much of this activity occurred precisely during the period in which CORS originated. From the 1960s onward there was a rapid proliferation of publications, some of which will be mentioned later, in a wide range of outlets. Text books on inventory management began to appear in the 1960s. Early examples included Wagner (1962), Hadley and Whiten (1963), Nadir (1966) and Brown (1967). In addition, Elion and Limpkin (1968) published a compilation of abstracts of papers that had appeared in the period 1953-1965.

1.3 OBJECTIVES:

To study of inventory system of KSRM. To identify the drawbacks of the existence system. To calculate the effectiveness of the proposed method. To check whether it is the best method or not. Trying to implement the scientific method of comparing with old method. Implementation of the proposed method.

1.4 METHODOLOGY: To study the present approach system of KSRM To identify the BSRM inventory record keeping system To verify the procedure of inventory record keeping and ordering system To check which method is followed To design an improved system 1.5 SCOPE AND LIMITATION: 1. The Standards and Procedures Manual section relating to Inventory Management must be created and published. This section must describe the process by which assets are identified, entered into the Inventory Management System, tracked, and finally deleted. 2. Financial and technical product information must be available through the Inventory System, as needed to support the functional responsibilities of personnel within the finance and contracts management departments. 3. All mainframe and data network based hardware and software assets must be identified and entered into the Inventory System.

Chapter 2 Inventory Management

2.1 INTRODUCTION:

The control and maintenance of inventory is a vital problem experienced almost by all sectors of the economy. This topic is very important, as all organizations deal with inventories on a daily basis. Neglecting the importance of inventory in any organization can lead to the closing down of the company, especially if the factors of production are not well management in order to meet customers needs or desires, the company will grind to a halt. The inventory problem consists of having sufficient items available when desired by the customers. The stock of items must be reasonable, meaning that it should be in a position to meet customers demand in terms of quantity and quality.

Management inventory has become a special issue when selling globally because holding goods in non-domestic markets is virtually a necessity if customer service levels are to be maintained. Inventory management is of great importance especially for managers who must decide how much (if any) to hold and how to administer the rest of the logistics system more creatively in order to ensure that customer service does not suffer as a result particular attention or the support of the entire companys management levels in order to meet customers satisfaction.

2.2 INVENTORY MANAGEMENT: 2.2.1 Definition of inventory: The word inventory has been defined in many ways, as indic ated in the literature. Three definitions have been chosen which seem to be more appropriate to the topic developed in this dissertation. Inventories are stockpiles of raw materials ,suppliers, components, work in process and finished goods that appear at numerous points throughout a firms production and logistics channel (Ballou 2004:326).According to Chase, Jacobs and Aquiline (2004:545), inventory is the stock of any item or resource used in an organization. An inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be. Finally, Rycroft et al (2000:419) define inventory or 5

6 stock as the stored accumulation of materials, a tax office will hold stocks of material resources in an transformation system. So a company will hold stocks of materials, a tax office will hold stocks of information and a theme park will hold stocks of customers (when it is customers which are being processed we normally refer to the stocks of them as a queues).

2.2.2 Mission: The mission of an Inventory System is to provide a Central Asset Repository of information used to define assets and relate the asset to its owner, location, and relative importance. This information will provide personnel with data needed to support their job functions, for example: Facilities Management will be able to plan Heating, Ventilation and Air Conditioning (HVAC) requirements, as well as power and floor space needed to support equipment listed in the Asset Repository for a specific location. Financial Services will be able to budget for asset procurement, depreciate assets over time, and prepare complete tax documents. Contracts Management will be able to negotiate vendor discounts and enterprise agreements. Contingency Planning personnel will be able to develop recovery plans for mainframe and office assets contained within the Inventory System based on the assets relative importance (as stated within the Criticality field). Technical personnel will be able to resolve problems more quickly with the information contained within the Inventory System, because they will have a listing of the assets contained within a location and any support or maintenance activities associated on the asset. The Inventory System should be integrated within the everyday functions performed by personnel associated with entering and maintaining asset information. The system will reduce the effort devoted to asset management, while supplying many personnel with the information they need to perform their functional responsibilities. Every effort should be made to develop a central Asset Repository that covers the entire enterprise, rather than having separate Asset Repositories for mainframe, network, and distributed environments. Having a single repository will simplify accounting and asset management, while allowing for the implementation of enterprise-wide asset management standards and procedures.

7 2.3CLASSIFICATION OF INVENTORY: 2.3.1 Raw material: Material that will be processed or repackaged or assembled into final product, a bakery uses flour and sugar as raw materials, whereas an electronic manufacturing plant uses boards and chips. 2.3.2 Under inspection: Material which is currently undergoing some type of inspection. Another term used is MRB, which stands for material review board. Some companies have elaborate systems for performing incoming inspection of material. 2.3.3 Work-in-process (WIP): Material which is currently at some incomplete stage of processing. For some companies, WIP can be substantial. With effective planning, it is possible to reduce WIP to reduce space requirements and eliminate chaos on the shop floor. 2.3.4 Partially completed parts: These are subcomponents produced within the company from raw materials. These are stocked temporarily and issued out at a later time for use in completing an end item or a sales order. 2.3.5 Finished goods: Final products ready to be shipped out to customer. Depending on the environment, it is possible to further classify this type of inventory among distribution centers in different geographic locations.

2.4 MAINTENANCE, REPAIR, AND OPERATING (MRO) SUPPLIES: These materials are not directly used as part of the final product; they are used for the equipment that processes the final product. Examples are grease, grinding wheels, drill bits, office supplies, packaging material, and so on. Technically, they are considered used in the production process. 2.5 CLASSIFICATION BY RESPONSIBILITY: 2.5.1Consigned inventory: There are some situations where suppliers store inventory at a customers facility for which they receive no payment until the material is used up. The stock is owned by the supplier, not the buying company. Consignment programs need clearly defined procedures to ensure accurate records 7

8 2.5.2 Outside independent location inventory: There may be inventory owned by the company that is in outside warehouses owned by other firms. There needs to be accurate and verified records of what materials are in such warehouses. This inventory classification is usually associated with accounting processes and the various activities of materials, warehousing, and purchasing departments. There are other ways of classifying inventory as we shall see in the following text. 2.6 CLASSIFICATION BY VALUE OF ANNUAL USAGEABC CLASSIFICATION ABC classification is a way of grouping inventory into low, medium, or high value of annual usage. The technique begins by sorting all inventory items from highest to lowest value of annual usage. Annual usage is computed by multiplying the annual quantity used by its unit cost. One common use of this ABC classification is for planning cycle count schedules. Cycle counting is an inventory control technique that periodically compares physical on hand inventory against records to determine variances and identify and eliminate the causes for said discrepancies. Items with high value of annual usage are called A items, medium value are called B items and low value are called C items. A items are scheduled to be cycle-counted more frequently than B which in turn are counted more frequently than C items. The general concept is that A items are more important since they have high value of annual usage. Another use of ABC classification is to assign responsibility for items to various planners or buyer/planners. The assignment of a group of part numbers to a materials planner can be based on value of annual usage and whatever other considerations are decided by management. In some cases, items are assigned by product group. In this case, ABC classification within product group can be used. Still another method of assigning planning responsibility within product group is a combination of ABC classification and category within a product.

2.7 OTHER WAYS OF CLASSIFYING INVENTORY There are many other ways of classifying inventory. Depending on the purpose, we could classify inventory based on any combination of the following characteristics:

Annual usage, demand Unit price State of obsolescence Pattern of demandindependent and dependent demand Hazardous handling requirement
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No usage for the past X months Government regulation Availability in the marketplace Order lead time Recyclable packaging Weight Bulk Pilferage Lot control requirements
Any of these attributes can be combined with others to develop a classification of interest. Then, a control report to monitor that aspect of inventory can be periodically generated and analyzed. For example, items can be marked as subject to high pilferage and can perhaps be specially monitored using a special process or inventory report. A classification can also be set up and a system developed that indicates possible obsolescence of an item. Such a measure could indicate the number of months since last issued. A high number of months since last issue could be an indicator of an item that has become obsolete. There are many reasons for obsolescence. Sometimes, the engineering design department just decides to stop calling out for an item without informing all concerned; or an engineering change notice is issued, but the process of dissemination and implementation is imperfect, and no decision or action is ever taken on the obsolete inventory. Lot control requirements are a critical element for food and pharmaceutical ingredients. Lot control is also required in varying extent for inventory used to produce components for aerospace equipment. Lot numbers and heat numbers are frequently required for various inventory such as structural steel, for example, bars, angles, tubing, pipes, plates, beams, and channels. Structural bolts, nuts, and washers also need traceability when used for vari-ous products. All these impose procedural control on inventory management personnel and other departments in the firm. Weight considerations along with bulk (volume) are used for storage and logistics decisions. Sensitive inventory such as explosives, hazardous material, or controlled substances like narcotics are subject to many control regulations. Some of these regulations may require special certification of personnel who handle and record inventory transactions .I do not have to limit ourselves to a ranking solely by value of annual usage. We have to keep in mind that the purpose of cycle counting is to maintain suitable control over important inventory items. I can therefore define the meaning of important to include value of annual usage as well as other factors that we feel are important.

10 2.8 REASONS TO CARRY INVENTORY There are many factors in the real world that are beyond our control. We are there-fore forced to deal with these and tackle the problems they present. We take action to minimize or eliminate the ill effects of these outside factors on our operation. Unfortunately, many of these actions involve keeping more inventory than we really want. The following are reasons for carrying inventory: 2.8.1Market demand: There are items that are expected by customers to be on the shelf when they demand them. Examples are bread, milk, fast food, furniture, music CDs, cars, etc. For this market situation, the producers and distributors are forced to carry inventory on hand. The challenge is, of course, to be able to guess the correct type and quantity of inventory to produce and keep on the shelf. After the quantity and type of inventory to be produced is decided, success is governed by operations efficiency and a good combination of market savvy and aggressive salesmanship such as the type exhibited by car and furniture salespeople. 2.8.2 Safety stock: Safety stock is the extra inventory above current or short-term needs that is kept on hand intentionally to cover the possibility that demand will be higher than usual or the order lead time longer than usual. Ideally, if we are absolutely certain of the demand and the order lead time, there would be no need for any safety stock. 2.8.3 To cover minimum run lots: There are many items that have to be produced in large quantities to be economically feasible. Although it is true that all firms should continually strive to reduce run lot size, nevertheless, many factors can make producers set minimum-size runs for their customers. When a buying firm has requirements that are nowhere close to the minimum run lot imposed by producers, the buyer firm is still able to purchase its inventory from distributors. The advantages of buying from distributors include lower minimum quantities, better payment terms and, usually, more responsive technical support. The main disadvantage, though, would usually be the higher price. Distributors are able to meet more than the minimum order sizes of producers because of the following reasons: 2.8.4 Transportation stock: This refers to inventory that is in transit between locations. This type of inventory is common for finished goods that are moved through several layers and channels of distribution. The flow of these goods is also continual; at any time there is a substantial quantity in transit.

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11 2.8.5 Distribution inventory: Distribution inventory are goods that are kept in warehouses close to concentrations of customers. The intention is to reduce freight costs in delivering the goods to the final customers. Meantime, the freight from the manufacturers plant can be accumulated to fill larger units such as full van loads or railcars. The physical proximity of distribution centers makes for quick response and hence superior customer service. 2.8.6 Anticipation stock: This term denotes stock purposely accumulated based on some planned activity, such as a marketing promotion or an upcoming seasonal event. 2.8.7 Hedge stock: This is stock kept or accumulated in expectation of rising prices or supply uncertainty in the marketplace. The reason for price fluctuations or uncertain supply often includes global economic conditions or geopolitical turmoil. Some types of inventory that have historically been subject to volatility are certain minerals, wood products, oil, and steel. 2.8.8Process buffer stock: In the real world, there is always a discrepancy between the rate of demand for a product and the rate of production. Even within a process, different work stations have different rates due to the speed of the process itself or the current technological capabilities of the equipment. I should be aware that there is an inventory buffer between me and my suppliers. This is due, in part, to the reordering process. My suppliers, in turn have a buffer with their suppliers. And so on up the supply chain. There is also a buffer between me and my customers. This buffer is due, partly, to the ordering process and partly to transportation factors. Finally, within my company, there are buffers between various departments from the receiving dock through each work station on through to the finished goods area. 2.9 TO COVER FOR INADEQUATE SYSTEMS: I have to admit that a companys inventory system may be inadequate and may therefore provide inaccurate information in terms of part numbers, quantities, and timing. The ineffective system provides incorrect information that shows inventory requirements that are either overstated or understated. Also, the timing of the need provided by the system could be wrong. Another possible error relates to the part number. 11

12 It is common practice among inventory and purchasing people to over order inventory and has it delivered earlier simply because they are using planning information that is unreliable. This is an extremely awkward situation for many reasons. Firstly, they do not know that over ordering will meet their needs. Secondly, the philosophy of better over order than under order is flawed, because an unreliable inventory system rarely shows the correct requirements. The inventory order will, therefore, invariably be either high or low. Either way, I end up with overstock or a shortage. Thirdly, both shortages and overstock have a cost associated with them. A shortage results in angry customers, whereas an overstock situation results in lost profits due to higher expenses. The solution to this situation is to eliminate the causes of unreliable data. 2.10 INVENTORY SYSTEMS FEATURES: The Inventory System in Commerce Server comes with many important features that aid in the realtime management of inventory for items in your catalog. These features allow you to do the following: Display real-time inventory conditions of your products and product variants, including in stock, out-of-stock, back-ordered, or pre-orderable. Filter products and product variants listings to show only those products that are currently available in stock. Decrement inventory levels when orders are processed. Receive notifications when inventory levels reach an out-of-stock threshold. Integrate inventory levels with LOB applications. Gain insight into how well products and product variants are selling.

2.11 MEASURES of INVENTORY EFFECTIVENESS: There are many measures that indicate the degree of effectiveness of inventory management. These different indicators focus on some aspect of inventory management.The measure is also called days of supply or some other time period such as weeks of supply. This is computed by dividing the quantity on hand by the average daily demand or usage. This can be done for individual part numbers or for a particular category of items. For individual items, units of measure such as pieces, pounds, or gallons are used. For categories of part numbers, there are often different units of measure, so it is more meaningful to use dollar figures to compute the days.

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13 2.12 OTHER MEASURES: These are measures that are tied to the customer-service aspect of inventory management:

Orders shipped on schedule. Line items shipped on schedule. Total units shipped on schedule. Dollar volume shipped on schedule.
2.14 MOTIVATION FOR HOLDING INVENTORY: 2.14.1 Rationale for having inventory: There are many reasons that motivate companies to have stock. Bloomberg, Lemay and Hanna (2002:136-137) have identified five reasons for holding stock, namely: Economics of scale. A firm can realize economies of scale in manufacturing, purchasing and transportation by holding inventory. If the business buys large amounts, in gets quantity discounts. In turn, transportation can move larger volumes and get economies of scale through better equipment utilization. Manufacturing can have longer production runs if more material is inventoried, allowing per unit fixed cost reductions. Balancing supply and demand. Some firms must accumulate inventory in advantage of seasonal demand. A toy manufacturer sees some demand year-round, but 60 percent or more of sales will come in the Christmas season. By manufacturing to stock, production can be kept level throughout the year. This reduces idle plant capacity and maintains a relatively stable workforce, keeping costs down. If demand is relatively constant but input materials are seasonal, such as in the production of canned fruits, then finished inventory helps meet demand when the materials are no longer available. Specialization, inventory allows firms with subsidiaries to specialize. Instead of manufacturing a variety of products, each plant can manufacture a product and then ship the finished products directly to customers or to a warehouse of storage. By specializing each plant can gain economies of scale through long production runs. Protection from uncertainties. A primary reason to hold inventory ie. To offset uncertainties in demand. If demand increases and raw material stocks run out, the production line shuts down until more material is delivered. Likewise, a shortage of work in process means the product cannot be finished. Finally, if customer orders outstrip finished goods supply, the resulting stock outs could lead to lost customers. 13

14 2.15 IMPORTANCE OF INVENTORY: Inventory plays an negligible role in the growth an survival of an organization in the sense that failure to an effective and efficient management of inventory, will mean that the organization will lose customers and sales will decline. Emphasizing on the importance of inventory on the balance sheet of companies, Coyle, Brady and Langley (2003:188) state that inventory as an asset on the balance sheet of companies has taken an increased significance because of the strategy of many firms to reduce their investment in fixed assets, that is, plants, warehouses, office buildings, equipment and machinery, and so on. The research done by Holdren and Hollingshead (1999:1) in the United States of America witnesses that much of the $700 million worth of inventory held by American businesses is financed by bank loans with the goods pledged as security. An important industrial marketing relationship exists between inventory managers and commercial lending officers who write these inventory loans. Inventory mangers need to provide their lenders with sufficient information to obtain financing at the lowest rate. Loan officers need to assess the degree of inventory risk in order to assign a proper interest rate. Issues of risk and return of inventory loans are matters of concern for both inventory managers and creditors. Inventory management is an important concern for managers in all types of businesses. The challenge is not to pare inventories to the bone to reduce costs or to have plenty around to satisfy all demands, but to have the right amount to achieve the competitive priorities for business most efficiently. Finally, according to the U .S Bureau of Census (Ballou 2004:326-328), inventories are found in such places as warehouses, yards, shop floors, transportation equipment and on retail store shelves. Having these inventories on hand can cost between 20 and 40 percent of their value per year. Therefore, carefully managing inventory levels makes good economic sense. Even though many strides have been taken to reduce inventories through just-in-time, time

compression, quick response and collaborative practices applied throughout the supply channel, the annual investment in inventories by manufacturers, retailers, and merchant wholesalers, whose sales represent about 99 percent of GNP, is about 12 percent of U.S gross domestic product. 2.16 SYMPTOMS OF POOR INVENTORY MANAGEMENT: A certain number of symptoms allow discovering poor inventory management. Lambert and Stock (2001: 254-255) mention the following elements in order to diagnose poor inventory management:

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15 a. Increasing number of back orders. b. Increasing dollar investment in inventory with back orders remaining constant. c. High customer turnover rate. d. Increasing number of orders cancelled. e. Periodic lack of sufficient storage-space. f. Wide variance in inventory turnover among distribution centers and among major inventory items g. Deteriorating relationships with intermediaries as typified by dealer cancellations and declaring orders. h. Large quantities of obsolete items. In many instances, inventory levels can reduced by one or more of the following steps :

a. Multi-echelon inventory planning. ABC analysis is an example of such planning. b. Lead time analysis. c. Delivery time analysis. This may lead to a change in carriers or negotiation with existing carriers. d. Elimination of turnover and or obsolete items. e. Analysis of pack size and discount structure. f. Examination of returned goods procedures. g. Encouragement or automation of product substitution. h. Installation of formal re-order review system. i. Measurement of fill rates by stock-keeping unit. (SKP)
j. Analysis of customer demand characteristics. 2.17 JUST-IN-TIME INVENTORY MANAGEMENT: Just-in time (JIT) production system (as the Toyota Production System) was introduced by Shigeo Shying and Taichi Ohno at the Toyota Motor plant in the mid-1970. JIT production is called by many names: zero inventory production system (ZIPS), minimum inventory production system (MIPS), kanban production, kaizen production, stockless production, pull through production and quick response (QR) inventory systems. JIT manufacturing, both as a philosophy and a disciplined method of production, has received much attention since its introduction. The JIT production philosophy is founded upon three fundamental principles: elimination of waste,, continuous quality improvement and encouragement of worker participations planning and execution.

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16 Gordon (2001:76) adds that this just-in-time manufacturing philosophy requires manufacturers to work in concert with suppliers and transportation providers to get required items to the assembly line at the precise time they are needed for production. JIT is a disciplined approach to improve manufacturing quality, flexibility and productivity through the elimination of waste and the total involvement of people. JIT is not simply reducing inventory; rather its overall objective is increased quality. If properly developed, a number of potential benefits can follow. To realize these benefits, certain conditions must prevail. The goals must include the respect for people and the elimination of waste. Respect for people includes creating a stable environment, motivation and trust, bottom round management, robotics, quality circles and subcontractor networks. The employees, not management, operate JIT. The employees determine problems and solve them. The employees increase product quality. If the employees do not believe in the JIT concepts, the system will fail no matter what management tries to do. (Bloomberg, Lemay and Hanna 2002:165-166). Gourdin (2001:76-78) has identified a number of basic tenets, advantages and disadvantages will be briefly discussed in order to provide basic information on just-in-time inventory management.

2.18 BASIC TENETS OF JIT

A successful JIT system is based upon the following key concepts:

Quality with JIT, the customer must receive high quality goods. One of the historical roles of inventory has been to protect the customer against defective items; if a bad product is received it can be discarded and a new one drawn from inventory. With a JIT system, however, poor quality means the production line stops or the external customer gets a defective item. There are no extra items to replace the poor ones. Vendors as partners. Generally, firms using JIT rely on fewer vendors rather than more. Purchases are concentrated with a limited number of suppliers in order to give buyer leverage with respect to quality and service. Purchasers also include vendors in the planning process, sharing information regarding sales and production forecasts so that vendors then have a clear idea of what their customers need. Vendor co-location with customer. Ideally, suppliers should be located in close proximity to their customers. As the distance between vendors and buyers increases, so does the opportunity for system disruption and stock-outs. In order to minimize this risk, customers often demand that vendor facilities be co-located on the same site or at least in the same geographical era as their own.

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2.19 ADVANTAGES OF JIT: More inventory turns: Because there is less on hand, the inventory that is maintained stays for a shorter period of time. The problem with an extremely high number of turns is that it can raise the probability of stocking out to an unacceptable high label while raising ordering cost as well. Better quality: As was mentioned earlier, high quality products must be received with a JIT system or else the entire benefit production process collapses, Customers concentrate their purchases with a small number of vendors in exchange for receipting high quality items and requisite service. The cost of failure on either count to the vendor thus become very high. Less warehousing space needed: When there is less inventory, fewer and/or smaller warehouses are required. Under BMWs JIT production strategy, only a minimum amount of inventory is held on the production line at its new U.S. plant. In some cases, the time supply is a mere four hours. To ensure a reliable delivery system, the plane employs a pull strategy whereby part orders are automatically issued once the supply on the lines falls below a critical level. 2.20 DISADVANTAGES OF JIT: Disadvantages of JIT are: Risk of stock-outs. When firms eliminate inventory, the risk of stock-outs can rise. Managers attempt to minimize this occurrence by demanding very high levels of service from their vendors and logistics service providers. However, when co-location of customer and vendor is not feasible, for example, the resultant variability in the pipeline can lead to stock-outs despite management best effort to prevent them. Increased transportation costs. Since JIT requires frequent shipments of small quantities, transportation costs almost always rise. As long as these costs are more than offset by the inventory savings, it is advantageous for the organization to permit them. However, it is possible to spend more on transport than is being saved with the JIT system, so management must ensure that movement expenses are closely monitored. Increased purchasing costs. As mentioned earlier, purchasing discounts are generally associated with buying large quantities at a time. Theoreticaly, JIT means foregoing those price-breaks in favors of obtaining smaller amounts more frequently. Managers

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must make sure that purchasing costs are not rising more than what inventory costs are failing. Small channel members may suffer. JIT is sometimes criticized as a system that allows strong organizations to unload their inventory on smaller firms in the channel. Theoretically, every company in the pipeline can utilize JIT, the reality, however, is that channel leaders may impose such stringent delivery criteria that vendors may feel compelled to hold inventory in order to satisfy them. Environmental issues. In a micro sense, JIT can lead to high levels of traffic congestion and air pollution because additional transportation is often required to maintain customer service levels in the absence of inventory.

2.21 INVENTORY MANAGEMENT IMPROVEMENT Gordon (2001:72) has identified six activities in order to improve inventory management. These activities will be explained in order to provide some background information on the improvement of inventory management in business organizations. Top management commitment. Because lower inventories have an impact on many different parts of the logistics systems, senior leadership must ensure that all those activities are working together to meet customer needs without the luxury of excess stock. ABC analysis of all inventory items. Management must first understand that goods in inventory are most important in terms of their contribution to the objectives of the organization. These few items most important customers would be designated A items and perhaps maintained at virtually 100 percent availability. The bulk of the goods in inventory would be denoted B items that might be supported at for instance, 80 percent levels, Finally, there could be some low-demand items classified as C Which are maintained at very low levels or possibly not stocked at all. Improved performance of other logistics activities, Managers should ensure that the rest of the logistics system is functioning efficiently. It may be that inventory policies have evolved as a way to obscure other problems that should be dealt with directly. By reviewing transportation, order processing, and warehousing functions, for example, management may find that order-cycle variability can be reduced by improving those activities that would lower the need for inventory.

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Improved demand forecasting. Demand forecasting is also a way of reducing variability, this time in terms of expected versus actual sales. Better forecasting techniques can be utilized to more accurately predict actual sales. Inventory management software. Software is currently available for virtually any type of inventory management situation and allows managers to track sales by item costs length of time in inventory and other vectors as well. Many of the more comprehensive packages are structured around some variation of material requirements planning (MRP) or distribution requirements planning (BRP) depending on the nature of the inventory concerned. Briefly, MRP manages material and inprocess inventory for production while (DRP) deals with finished flow finished p Postponement involves modifying or customizing products after the main manufacturing process is complete. Final configuration of products can be delayed until the distribution cycle, or even performed after delivery. Broglie, Grassy and Minatare (2004:1) leaning on their research done on th multiattribute classification method for spare inventory management have found that any improvement in the management of this type of inventory is desirable and useful in practice, leading to both improved factory performance and reduced investment in inventories.

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Chapter-3 Inventory Policy

3.1 POLICY: A policy is a principle or rule to guide decisions and achieve rational outcomes. A policy is an intent and is implemented a procedure or protocol. The board of or governance body within in an organization generally adopts policies. Whereas procedure or protocol developed and adopted by senior executive officers .Policies can assist in both subjective and objective decision-making would usually assist senior management with decisions that must consider the relative merits of a number of factors before making decisions and as a result are often hard.

3.2 INVENTORY POLICY: Inventory is the stock of any item or resource used in an organization. An inventory system is the set of policies and controls that monitor levels of inventory and determine what levels should be maintained, when stock should be replenished, and how large orders should be maintained. By convention, manufacturing inventory generally refers to items that contribute to or become part of a firms product output. Manufacturing inventory is typically classified into raw materials, finished products, component parts, supplies, and work-in-process. In distribution, inventory is classified as intransit, meaning that it is being moved in the system, and warehouse, which is inventory in a warehouse or distribution center. Retail sites carry inventory for immediate sale to customers. In services, inventory generally refers to the tangible goods to be sold and the supplies necessary to administer the service. The basic purpose of inventory analysis, whether in manufacturing, distribution, retail, or services, is to specify (1) when items should be ordered and (2) how large the order should be. Many firms are tending to enter into longer-term relationships with vendors to supply their needs for perhaps the entire year. This changes the when and how many to order to when and how many to deliver.

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3.3 INVENTORY SYSTEMS: An inventory system provides the organizational structure and the operating policies for maintaining and controlling goods to be stocked. The system is responsible for ordering and receipt of goods: timing the order placement and keeping track of what has been ordered, how much, and from whom. The system also must follow up to answer such questions as: Has the supplier received the order? Has it been shipped? Are the dates correct? Are the procedures established for reordering or returning undesirable merchandise? This section divides systems into Single period systems and Multiple period systems.

The classification is based on whether the decision is just a one-time purchasing decision where the purchase is designed to cover a fixed period of time and the item will not be reordered, or the decision involves an item that will be purchased periodically where inventory should be kept in stock to be used on demand. We begin with a look at the onetime purchasing decision and the single-period inventory model.

3.4 PURPOSES OF THE POLICY: All firms (including JIT operations) keep a supply of inventory for the following reasons: To maintain independence of operations: A supply of materials at a work center allows that center flexibility in operations. For example, because there are costs for making each new production setup, this inventory allows management to reduce the number of setups. Independence of workstations is desirable on assembly lines as well. The time that it takes to do the identical operations will naturally vary from one unit to the next unit. Therefore, it is desirable to have a cushion of several parts within the workstation so that shorter performance times can compensate for longer performance times. This way the average output can be fairly stable. To meet variation in product demand: If the demand for the product is known precisely, it may be possible (though not necessarily economical) to produce the product to exactly meet the demand. Usually,
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however, demand is not completely known, and a safety or buffer stock must be maintained to absorb variation. To allow flexibility in production scheduling: A stock of inventory relieves the pressure on the production system to get the goods out. This causes longer lead times, which permit production planning for smoother flow and lower-cost operation through larger lot-size production. High setup costs, for example, favor producing a larger number of units once the setup has been made. To provide a safeguard for variation in raw material delivery time: When material is ordered from a vendor, delays can occur for a variety of reasons: a normal variation in shipping time, a shortage of material at the vendors plant causing backlogs, an unexpected strike at the vendors plant or at one of the shipping companies, a lost order, or a shipment of incorrect or defective material. To take advantage of economic purchase order size: There are costs to place an order: labor, phone calls, typing, postage, and so on. Therefore, the larger each order is, the fewer the orders that need be written. Also, shipping costs favor larger ordersthe larger the shipment, the lower the per-unit cost. Many other domain-specific reasons: Depending on the situation, inventory may need to be carried. For example, in-transit inventory is material being moved from the suppliers to customers and depends on the order quantity and the transit lead time. Another example is inventory that is bought in anticipation of price changes such as fuel for jet planes or semiconductors for computers.

3.5 INVENTORY COSTS: 3.5.1Holding (or carrying) costs: This broad category includes the costs for storage

facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital. Obviously, high holding costs tend to favor low inventory levels and frequent replenishment. 3.5.2 Setup (or production change) costs: To make each different product involves

obtaining the necessary materials, arranging specific equipment setups, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of material.

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If there were no costs or loss of time in changing from one product to another, many small lots would be produced. This would reduce inventory levels, with a resulting savings in cost. One challenge today is to try to reduce these setup costs to permit smaller lot sizes. (This is the goal of a JIT system). 3.5.3 Ordering costs: These costs refer to the managerial and clerical costs to prepare the purchase or production order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs. 3.5.4 Shortage costs: When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be canceled. When the demand is not met and the order is canceled, this is referred to as a stock out. A backorder is when the order is held and filled at a later date when the inventory for the item is replenished. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stock outs and backorders. This balance is sometimes difficult to obtain be-cause it may not be possible to estimate lost profits, the effects of lost customers, or lateness penalties. Frequently, the assumed shortage cost is little more than a guess, although it is usually possible to specify a range of such costs. Establishing the correct quantity to order from vendors or the size of lots submitted to the firms productive facilities involves a search for the minimum total cost resulting from the combined effects of four individual costs: holding costs, setup costs, ordering costs, and shortage costs. Of course, the timing of these orders is a critical factor that may impact inventory cost.

3.6 FACTORS OF INVENTORY POLICY STATEMENT: 3.6.1Work-Context Factors Boredom monotony, lack of interest, dull Upward Communication how often employee talks to people in higher positions Decision Influence opportunity for independent decisions and control Growth Opportunities personal growth and development of skills, knowledge Personal Control autonomous function Salary appropriate compensation for work required Task Identity completion of whole task vs. just a part Task Responsibility accountability, responsibility of tasks Task Significance impact on lives and work of others
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Skill Variety different activities, skills and talents used Specialized Skills high complex skill level or expertise Supervisor Support immediate supervisor supports work efforts Work Load not too heavy or light

3.6.2Organizational Factors Leadership Effectiveness leadership effective inspiring excellence, getting work done Planning planning part of organizational processes Clarity of Policies and Procedures clearly articulated and meaningful Organizational Philosophy/Mission guides peoples work throughout the organization

3.6.3Alienation Factors Meaninglessness future isnt as good as current position or profession Cultural Estrangement low reward value to goals typically valued by organization Powerlessness employees own behavior wont determine outcomes or reinforcement they seek Social Isolation exclusion or rejection Work-Activity Estrangement position duties and tasks dont provide enjoyment or satisfaction Worker Alienation degree to which person disassociates from a work identity

3.7 FACTORS INFLUENCE THE LEVEL OF EACH COMPONENT OF INVENTORY: 3.7.1 Raw Material Inventory: 1. The volume of safety stock against material shortages that interrupt production. 2. Considerations of economy in purchase. 3. The outlook for future movements in the price of materials. 4. Anticipated volume of usage and consumption. 5. The efficiency of procurement and inventory control function. 6. The operating costs of carrying the stocks. 7. The costs and availability of funds for investment in inventory. 8. Storage capacity. 9. Re-component cycle. 10. Indigenous or foreign.
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11. The lead-time of supply. 12. Formalities for importing.

3.7.2Work-in-process Inventory: 1. The length of the complete production process. 2. Management policies affecting length of process time. 3. Length of process in runs. 4. Action that speed up the production process, e.g. adding second or third production shifts. 5. Managements skills in production scheduling and control. 6. Volume of production. 7. Sales expectations. 8. Level of sales and new orders. 9. Price level of raw materials used, wages and other items that enter production cost and the value added in production. 10. Customer requirements. 11. Usual period of aging.

3.7.3 Finished Goods Inventory: 1. The policy of the management to gear the production to meet the firm order in hand. 2. The policy to produce for anticipated orders and stock keeping. 3. Goods required or the purpose of minimum and safety stocks. 4. Sales policies of the firm. 5. Need for maintaining stability in production. 6. Price fluctuations for the product. 7. Durability, spoilage and obsolescence. 8. Distribution system. 9. Ability to fill orders immediately. 10. Availability of raw material on seasonal basis while customers demand spread throughout the year. 11. Storage capacity.

3.7.4 Stores and Spares Inventory: 1. Nature of the product to be manufactured and its lead time of manufacture. 2. State of technology involved.
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3. Consumptions patterns. 4. Lead time of supply. 5. Indigenous or foreign. 6. Minimum and safety stock and ordering quantities. 7. Capacity utilization. 8. Importing formalities.

3.8 SOME OF THE IMPORTANT INVENTORY POLICIES RELATES TO : 1. Minimum, maximum and optimum stocks. 2. Safety stocks, order quantities, order levels and anticipated stocks. 3. Waste, scrap spoilage and defective. 4. Policies relating to alternative use. 5. Policies relating to order filling.

3.9 MEASURE OF EFFECTIVENESS OF INVENTORY MANAGEMENT: 1. Size of Inventory = Total inventory/Total Current assets 2. Size of Raw material Inventory = Raw material inventory/Total inventory 3. Size of Work in Process Inventory = Work in process Inventory/Total Inventory 4. Size of Stores and Spares parts Inventory = Stores and Spares parts inventory/Total Inventory 5. Size of Finished Goods Inventory = Finished goods inventory/Total inventory 6. Overall inventory turnover ratio = Cost of goods sold/average total inventories at cost 7. Raw material inventory turnover ratio = Annual consumption of Raw material / Average Raw material inventory 8. Work-in-process inventory turnover ratio = Cost of manufacture/average work-in-process inventory at cost 9. Finished Goods inventory turnover ratio = Cost of goods sold / Average finished stock 10. Stores and spare parts inventory turnover ratio = Stores and Spares consumed/Average stock of stores and spares 11. Age of Finished Goods inventory = 365/Finished Goods inventory turnover ratio 12. Average age of raw material inventory = 365/Raw material inventory turnover ratio 13. Average age of Work-in-Process inventory = 365/Work-in-Process inventory turnover ratio
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14. Age of Stores and spare parts inventory = 365/Stores and spare parts inventory turnover ratio 15. Inventory holding period = 365/Inventory turnover ratio

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Chapter-4 Inventory Control

4.1 INVENTORY CONTROL: Inventory control is concerned with the acquisition, storage, handling and use of inventories so as to ensure the availability of inventory whenever needed, providing adequate provision for contingencies, deriving maximum economy and minimizing wastage and losses. Hence Inventory control refers to a system, which ensures the supply of required quantity and quality of inventory at the required time and at the same time prevent unnecessary investment in inventories. It is one of the most vital phases of material management. Reducing

inventories without impairing operating efficiency frees working capital that can be effectively employed elsewhere. Inventory control can make or break a company. This explains the usual saying that inventories are the graveyard of a business. Designing a sound inventory control system is in a large measure for balancing operations. It is the focal point of many seemingly conflicting interests and considerations both short range and long range. The aim of a sound inventory control system is to secure the best balance between too much and too little. Too much inventory carries financial rises and too little reacts adversely on continuity of productions and competitive dynamics. The real problem is not the reduction of the size of the inventory as a whole but to secure a scientifically determined balance between several items that make up the inventory. The efficiency of inventory control affects the flexibility of the firm. Insufficient procedures may result in an unbalanced inventory. Some items out of stock, other overstocked, necessitating excessive investment. These inefficiencies ultimately will have adverse effects upon profits. Turning the situation round, difference in the efficiency of the inventory control for a given level of flexibility affects the level of investment required in inventory. The less efficient is the inventory control, the greater is the investment required. Excessive investment in inventories increase cost and reduce profits, thus, the effects of inventory control of flexibility and on level of investment required in inventories represent two sides of the same coin. Control of inventory is exercised by introducing various measures of inventory control, such as ABC analysis fixation of
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norms of inventory holdings and reorder point and a close watch on the movements of inventories. 4.2 WHY INVENTORY CONTROL? Control of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too much of their limited resource, capital, tied up in their major asset, inventory. Worse, they may have their capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal of the total operation. Inventory control systems range from eyeball systems to reserve stock systems to perpetual computer-run systems. Valuation of inventory is normally stated at original cost, market value, or current replacement costs, whichever is lowest. This practice is used because it minimizes the possibility of overstating assets. Inventory valuation and appropriate

accounting practices are worth a book alone and so are not dealt with here in depth. The ideal inventory and proper merchandise turnover will vary from one market to another. Average industry figures serve as a guide for comparison. Too large an inventory may not be justified because the turnover does not warrant investment. On the other hand, because products are not available to meet demand, too small an inventory may minimize sales and profits as customers go somewhere else to buy what they want where it is immediately available. Minimum inventories based on reordering time need to become important aspects of buying activity. Carrying costs, material purchases, and storage costs are all expensive. However, stock-outs are expensive also. All of those costs can be minimized by efficient inventory policies. 4.3 OTHER REASONS FOR INVENTORY CONTROL: Helps balance the stock as to value, size, color, style, and price line in proportion to demand or sales trends. Help plan the winners as well as move slow sellers Helps secure the best rate of stock turnover for each item. Helps reduce expenses and markdowns.

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Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colors. Three major approaches can be used for inventory control in any type and size of operation. The actual system selected will depend upon the type of operation, the amount of goods. 4.4 INVENTORIES CONTROL TECHNIQUES: ABC Analysis of Inventories The ABC inventory control technique is based on the principle that a small portion of the items may typically represent the bulk of money value of the total inventory used in the production process, while a relatively large number of items may from a small part of the money value of stores. The money value is ascertained by multiplying the quantity of material of each item by its unit price. According to this approach to inventory control high value items are more closely controlled than low value items. Each item of inventory is given A, B or C denomination depending upon the amount spent for that particular item. A or the highest value items should be under the tight control and under responsibility of the most experienced personnel, while C or the lowest value may be under simple physical control. It may also be clear with the help of the following examples: A Category 5% to 10% of the items represent 70% to 75% of the money value. B Category 15% to 20% of the items represent 15% to 20% of the money. C Category The remaining number of the items represent 5% to 10% of the money value. The relative position of these items show that items of category A should be under the maximum control, items of category B may not be given that much attention and item C may be under a loose control.

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After classification, the items are ranked by their value and then the cumulative percentage of total value against the percentage of item is noted. A detailed analysis of inventory may indicate above figure that only 10 per cent of item may account for 75 per cent of the value, another 10 per cent of item may account for 15 per cent of the value and remaining percentage items may account for 10 per cent of the value. The importance of this tool lies in the fact that it directs attention to the key items. 4.5 ADVANTAGES OF ABC ANALYSIS: It ensures a closer and a more strict control over such items, which are having a sizable investment in there. It releases working capital, which would otherwise have been locked up for a more profitable channel of investment. It reduces inventory-carrying cost. It enables the relaxation of control for the C items and thus makes it possible for a sufficient buffer stock to be created. It enables the maintenance of high inventory turnover rate.

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4.6 FIXATION OF NORMS OF INVENTORY HOLDINGS: Either by the top management or by the materials department could set the norms for inventories. The top management usually sets monitory limits for investment in inventories. The materials department has to allocate this investment to the various items and ensure the smooth operation of the concern. It would be worthwhile if norms of inventories were set by the management by objectives, concept. This concept expects the top management to set the inventory norms (limit) after consultation with the materials department. A number of factors enter into consideration in the determination of stock levels for individual items for the purpose of control and economy. Some of them are: Lead time for deliveries. The rate of consumption. Requirements of funds. Keeping qualities, deterioration, evaporation etc. Storage cost. Availability of space. Price fluctuations. Insurance cost. Obsolescence price. Seasonal consideration of price and availability. EOQ (Economic Order Quantity), and Government and other statuary restriction

Any decision involving procurement storage and uses of item will have to be based on an overall appreciation of the influence of the critical ones among them. Material control necessitates the maintenance of inventory of every item of material as low as possible ensuring at the same time, its availability as and when required for production. These twin objectives are achieved only by a proper planning of inventory levels. It the level of inventory is not properly planned, the results may either be overstocking or under stocking. If a large stock of any item is carried it will unnecessarily lock up a huge amount of working capital and consequently there is a loss of interest. Further, a higher quantity than what is legitimate would also result in deterioration. Besides there is also the risk of obsolescence if the end product for which the inventory is required goes out of fashion. Again, a large stock necessarily involves an increased cost of carrying such as insurance, rent handling charges.
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Under stocking which is other extreme, is equally undesirable as it results in stock outs and the consequent production holds ups. Stoppage of production in turn, cause idle facility cost. Further, failure to keep up delivery schedules results in the loss of customers and goodwill. These two extreme can be avoided by a proper fixation of two important inventory levels via, the maximum level and the minimum level. The fixation of inventory levels is also known as the demand and supply method of inventory control. Carrying too much or too little of the inventories is detrimental to the company. If too little inventories are maintained, company will have to encounter frequent stock outs and incur heavy ordering costs. Very large inventories subjects the company to heavy inventory carrying cost in addition to unnecessary tie up of capital. An efficient inventory management, therefore, requires the company to maintain inventories at an optimum level where inventory costs are minimum and at the same time there is no stock out which may result in loss of sale or stoppage of production. This necessitates the determination of the minimum and maximum level of inventories. 4.7 MINIMUM LEVEL The minimum level of inventories of their reorder point may be determined on the following bases: Consumption during lead-time. Consumption during lead-time plus safety stock. Stock out costs. Customer irritation and loss of goodwill and production hold costs.

To continue production during Lead Time it is essential to maintain some inventories. Lead Time has been defined as the interval between the placing of an order (with a supplier) and the time at which the goods are available to meet the consumer needs. There are sometimes fluctuations in the lead-time and/ or in the consumption rate. If no provision is made for these variations, stock out may take place-causing disruption in the production schedule of the company. The stock, which takes care to the fluctuation in demand, varies in lead-time and consumption rate is known as safety stock. Safety stock may be defined as the minimum additional inventory, which serves as a safety margin or buffer or cushion to meet an unanticipated increase in usage resulting from an unusually high demand and or an uncontrollable late receipt of incoming inventory. It can be determined on the basis
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of the consumption rate, plus other relevant factor such as transport bottleneck, strikes or shutdowns. In the case of uncertainly, the probabilistic approach may be applied to determine the safety margin. To avoid stock out arising out of such eventualities, companies always carry some minimum level of inventories including safety stock. Safety stock may not be static for all the times. A change in the circumstances and in the nature of industry demand, necessitates are adjusted in its level. In this study an effort has been made to examine how the current companies determine their minimum level for re-order inventories, safety stock, whether a level of study is maintained throughout the year or not. For each type of inventory a maximum level is set that demand presumably will not exceed as well as a minimum level representative a margin of safety required to prevent out of stock condition. The minimum level also governs the ordering point. An order to sufficient size is placed to bring inventory to the maximum point when the minimum level is reached. 4.8 MAXIMUM LEVEL The upper limit beyond which the quantity of any item is not normally allowed to rise is known as the Maximum Level. It is the sum total of the minimum quantity, and ECQ. The fixation of the maximum level depends upon a number of factors, such as, the storage space available, the nature of the material i.e. chances of deterioration and obsolescence, capital outlay, the time necessary to obtain fresh supplies, the ECQ, the cost of storage and government restriction. 4.9 SEVERAL TOOLS OF INVENTORY CONTROL The economic order quantity which enables determination of optimal size of order to place on the basis of demand or usage of the inventory. The technique of safety stocks to overcome problems of uncertainty. The order point formula, which tells us, the optimal point at which to reorder a particular item of inventory. Together, these tools provide the means for determining an optimal average level of inventory for the firm. Ratio analysis has a wider application as a measure of inventory control among most manufacturing firms. Some of the important ratios are explained below:

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4.9.1 Inventory to Sales: Total Inventory/Sales for the Period the ratio explains variations in the level of investment. An increase in inventory levels, substantially beyond that which might be expected from an increase in sales, may reflect such phenomena as the result of a conscious policy shift to higher stock levels, of unintended accumulation of unsold stocks, and of inventory speculation, or simply stocking in anticipation of an almost certain surge of orders. 4.9.2 Inventory Turnover (Cost of Goods Sold/Average Inventory) The ratio tells us the rapidity with which the inventory is turned over into receivables through sales. Generally, the higher the inventory turnover, the more efficient the management of a firm is. However, a relatively high inventory turnover ratio may be the result of too low a level of inventory and frequent stock outs. Therefore, the ratio must be judged in relation to the past and expected future ratios of the firm and in relations of similar firms or the industry average or both. 4.9.3 Sales to Inventory (Annual Net Sales/Inventory at the End of Fiscal Period) The ratio indicates the volume of sales in relation to the amount of capital invested in inventories. When inventory for affirm is larger in relation to sales (the condition which causes it to have a lower net sales to inventory ratio than other firms) the firms rate of return is less since it has more working capital tied up in inventories than has the firm with a higher ratio. 4.9.4 Inventory to Current Assets (Total Inventory/Total Current Assets) The ratio indicates the amount of investment in inventory per rupee of current assets investment. Generally an increasing proportion of inventory is indicative of inefficient inventory management. The ratio may also indicate the state of liquidity position of concern. The lower the inventory to current assets lowers the liquidity as compared to other current assets, viz., receivables, cash and marketable securities. 4.9.5 Inventories Expressed in Terms of Number of Days Sales The ratio indicates the size of inventory in terms of number of days sales. For this purpose first the sales per day are calculated and inventory is divided by the amount of sales per day. The increasing inventory in terms of number of days sales may indicate either accumulation of inventory or decline in sales. Inventory for this purpose is assumed to include finished
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goods only. While the former situation signifies poor inventory management, the later indicates the poor performance of the marketing department. 4.9.6 Sundry Creditors to Inventory (Sundry Creditors/Inventory) The ratio reveals the extent to which inventories are procured through credit purchases. Inventories for this purpose are assumed to include raw materials and stores and spares only. If the ratio is less than unity, it reveals that the credit available is lower than the total inventory required. It also explains the extent of inventory procured through cash purchases. Indirectly it emphasizes the inventory financing policy of the firm. If the ratio is more than one, it explains that the entire inventory is purchased on credit. 4.9.7 Inventory to Net Working Capital (Inventory/Net Working Capital) The ratio explains the amount of inventory per rupee of equity/long-term financed portion of current assets. A higher ratio may mean greater amount of net working capital investment in inventory. 4.10 PROCESS OF CONTROLLING INVENTORY: Controlling inventory does not have to be an onerous or complex proposition. It is a process and thoughtful inventory management. There are no hard and fast rules to abide by, but some extremely useful guidelines to help your thinking about the subject. A five step process has been designed that will help any business bring this potential problem under control to think systematically thorough the process and allow the business to make the most efficient use possible of the resources represented. The final decisions, of course, must be the result of good judgment, and not the product of a mechanical set of formulas. STEP 1: Inventory Planning Inventory control requires inventory planning. Inventory refers to more than the goods on hand in the retail operation, service business, or manufacturing facility. It also represents goods that must be in transit for arrival after the goods in the store or plant are sold or used. An ideal inventory control system would arrange for the arrival of new goods at the same moment the last item has been sold or used. The economic order quantity, or base orders, depends upon the amount of cash (or credit) available to invest in inventories, the number of units that qualify for a quantity discount from the manufacturer, and the amount of time goods spend in shipment.
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STEP 2: Establish order cycles If demand can be predicted for the product or if demand can be measured on a regular basis, regular ordering quantities can be setup that take into consideration the most economic relationships among the costs of preparing an order, the aggregate shipping costs, and the economic order cost. When demand is regular, it is possible to program regular ordering levels so that stock-outs will be avoided and costs will be minimized. If it is known that every so many weeks or months a certain quantity of goods will be sold at a steady pace, then replacements should be scheduled to arrive with equal regularity. Time should be spent developing a system tailored to the needs of each business. It is useful to focus on items whose costs justify such control, recognizing that in some cases control efforts may cost more the items worth. At the same time, it is also necessary to include low return items that are critical to the overall sales effort. If the business experiences seasonal cycles, it is important to recognize the demands that will be placed on suppliers as well as other sellers. A given firm must recognize that if it begins to run out of product in the middle of a busy season, other sellers are also beginning to run out and are looking for more goods. The problem is compounded in that the producer may have already switched over to next seasons production and so is not interested in (or probably even capable of) filling any further orders for the current selling season. Production resources are likely to already be allocated to filling orders for the next selling season. Changes in this momentum would be extremely costly for both the supplier and the customer. On the other hand, because suppliers have problems with inventory control, just as sellers do, they may be interested in making deals to induce customers to purchase inventories offseason, usually at substantial savings. They want to shift the carrying costs of purchase and storage from the seller to the buyer. Thus, there are seasonal implications to inventory control as well, both positive and negative. The point is that these seasonable implications must be built into the planning process in order to support an effective inventory management system. STEP 3: Balance Inventory Levels Efficient or inefficient management of merchandise inventory by a firm is a major factor between healthy profits and operating at a loss. There are both market-related and budgetrelated issues that must be dealt with in terms of coming up with an ideal inventory balance: Is the inventory correct for the market being served?
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Does the inventory have the proper turnover? What is the ideal inventory for a typical retailer or wholesaler in this business?

To answer the last question first, the ideal inventory is the inventory that does not lose profitable sales and can still justify the investment in each part of its whole. An inventory that is not compatible with the firms market will lose profitable sales. Customers who cannot find the items they desire in one store or from one supplier are forced to go to a competitor. Customer will be especially irritated if the item out of stock is one they would normally expect to find from such a supplier. Repeated experiences of this type will motivate customers to become regular customers of competitors. STEP 4: Review Stocks Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping inventory up to date and devoid of obsolete merchandise is another critical aspect of good inventory control. This is particularly important with style merchandise, but it is important with any merchandise that is turning at a lower rate than the average stock turns for that particular business. One of the important principles newer sellers frequently find difficult is the need to mark down merchandise that is not moving well. Markups are usually highest when a new style first comes out. As the style fades, efficient sellers gradually begin to mark it down to avoid being stuck with large inventories, thus keeping inventory capital working. They will begin to mark down their inventory, take less gross margin, and return the funds to working capital rather than have their investment stand on the shelves as obsolete merchandise. Markdowns are an important part of the working capital cycle. Even though the margins on markdown sales are lower, turning these items into cash allows you to purchase other, more current goods, where you can make the margin you desire. Keeping an inventory fresh and up to date requires constant attention by any organization, large or small. Style merchandise should be disposed of before the style fades. Fad merchandise must have its inventory levels kept in line with the passing fancy. Obsolete merchandise usually must be sold at less than normal markup or even as loss leaders where it is priced more competitively. Loss leader pricing strategies can also serve to attract more' consumer traffic for the business thus creating opportunities to sell other merchandise as well as well as the obsolete items. Technologically obsolete merchandise should normally be removed from inventory at any cost.
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Stock turnover is really the way businesses make money. It is not so much the profit per unit of sale that makes money for the business, but sales on a regular basis over time that eventually results in profitability. The stock turnover rate is the rate at which the average inventory is replaced or turned over, throughout a pre-defined standard operating period, typically one year. It is generally seen as the multiple that sales represent of the average inventory for a given period of time. Turnover averages are available for virtually any industry or business maintaining inventories and having sales. These figures act as an efficient and effective benchmark with which to compare the business in question, in order to determine its effectiveness relative to its capital investment. Too frequent inventory turns can be as great a potential problem as too few. Too frequent inventory turns may indicate the business is trying to overwork a limited capital base, and may carry with it the attendant costs of stock-outs and unhappy and lost customers.Stock turns or turnover, is the number of times the "average" inventory of a given product is sold annually. It is an important concept because it helps to determine what the inventory level should be to achieve or support the sales levels predicted or desired. Inventory turnover is computed by dividing the volume of goods sold by the average inventory. Stock turns or inventory turnover can be calculated by the following equations:

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If the inventory is recorded at cost, stock turn equals cost of goods sold divided by the average inventory. If the inventory is recorded at sales value, stock turn is equal to sales divided by average inventory. Stock turns four times a year on the average for many businesses. Jewelry stores are slow, with two turns a year, and grocery stores may go up to 45 turns a year. If the dollar value of a particular inventory compares favorably with the industry average, but the turnover of the inventory is less than the industry average, a further analysis of that inventory is needed. Is it too heavy in some areas? Are there reasons that suggest more inventories are needed in certain categories? Are there conditions peculiar to that particular firm? The point is that all markets are not uniform and circumstances may be found that will justify a variation from average figures. In the accumulation of comparative data for any particular type of firm, a wide variation will be found for most significant statistical comparisons. Averages are just that, and often most firms in the group are somewhat different from that result. Nevertheless, they serve as very useful guides for the adequacy of industry turnover, and for other ratios as well. The important thing for each firm is to know how the firm compares with the averages and to deter- mine whether deviations from the averages are to its benefit or disadvantage. STEP 5: Follow-up and Control Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fast sellers are essential for proper inventory management. Taking regular and periodic inventories must be more than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is the responsibility of key management to study the figures and review the items themselves in order to make correct decisions about the disposal, replacement, or discontinuance of different segments of the inventory base. Just as an airline cannot make money with its airplanes on the ground, a firm cannot earn a profit in the absence of sales of goods. Keeping the inventory attractive to customers is a prime prerequisite for healthy sales. Again, the seller's inventory is usually his largest investment. It will earn profits in direct proportion to the effort and skill applied in its management. Inventory quantities must be organized and measured carefully. Minimum stocks must be assured to prevent stock-outs or the lack of product. At the same time, they must be balanced
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against excessive inventory because of carrying costs. In larger retail organizations and in many manufacturing operations, purchasing has evolved as a distinct new and separate phase of management to achieve the dual objective of higher turnover and lower investment. If this type of strategy is to be utilized, however, extremely careful attention and constant review must be built into the management system in order to avoid getting caught short by unexpected changes in the larger business environment.

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Chapter-5 KSRM Steel Plant Ltd.

5.1 INTRODUCTION Kabir Group of Industries consists of eight individual factory having workforce near about 2500 with the aim to delivering high quality product of maximum quantity. KSRM Steel Plant Ltd Started its journey successfully meeting the demand of its customers as well as giving high standard of product. KSRM consists of many departments. Most significant of them are-HR & Admin, Accounts, IT, Production & Quality control, Mechanical, Electrical, Workshop, Store, Transport etc. 5.2 HISTORY OF THE GROUP: 1985 The establishment of the Ship yard

1986

The establishment of the first manual mill Kabir Steel(Unit-1)

1992

The establishment of Kabir Steel Ltd(Unit-2)

1993

The establishment of Kabir Oxygen Limited

2001

The establishment of KSRM and Royal cement Ltd

2004

The establishment of Shipping Services

2006

The establishment of Royal PP Bags Ltd

2010

The establishment of KSRM Steel Plant Ltd.

2012

The establishment of KSRM Billet Industries Ltd.

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5.3 MISSION: Minimizing the Cost and maximizing the availability of the product while maintaining a high quality standard Constantly increasing logistical support to ensure timely supply and reach steel users in every corner of the country Maintaining a good relation with the stakeholders Continually searching for new avenues to get better as an organization Striving to match the product ranges of the market and continually grows as a company.

5.4 VISION: Be up to date with modern and sophisticated technology Match the demand of the customers through a diverse product and service range Let the tradition and experience be the stepping stone towards success Be a significant contributor to the countrys construction and shipping industry Be the market leader with the superior quality KSRM steel products

5.5 STRATEGY: Using the sales centers cum officers across Bangladesh to reach the steel users in the remote places of the country in order to reduce their dependency on the intermediaries. Increasing awareness about the brand name, product range and product quality of KSRM by various awareness programs such as advertisements through various medias, seminars, workshops. Facilitating training programs to make the employees equipped with necessary skills to carry out their jobs effectively using new technologies and processes as to ensure the best service to the customer.

5.6 CERTIFICATE & STANDARD ISO: 9002 in 2002, than UP Grade URS: (United registered system U.K) ISO: 9001:2008 in 2004 from URS, URS is Agent of ISO ISO: (International Standardization organization)

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5.7 PURPOSE & SCOPE: To maintain a simplified organized system of monitoring goods received, proper handling and safe storage of the same in store and to maintain accurate records of all related documents needed in performing those duties.

5.8 PROCEDURE: 5.8.1 Indent/Purchase Requisition: Respective department issues indent/purchase requisition for goods according to their requirements (which are duly checked and approved by H.O.D & The GM/Plant Head respectively). Store department checked stock status then forwards the said indent to Honorable Executive Director for his kind approval. In case of import purchase, Honorable Director take necessary steps for arranging the goods in due time. If indented goods are available in store, respective department is requested to issue Factory Store Requisitions (F.S.R) for the same goods and after receiving that F.S.R. that goods are delivered (issued) to them.

5.8.2 Receiving Goods (Local & Imported): Goods are received against the proper documents such as Indent/purchase requisition, Purchase order, packing list, Performa Invoice, Bill of Entry etc. While indented goods are come to factory gate, security department check the materials at the gate and entry in their receiving register and also give security receiving seal on the back page of the chalan/Packing List/commercial invoice. After entry given at the gate ledger, goods are carried to store department premises. Than the presence of security representatives and store representatives, the goods are unloaded and they check the quantity and physical conditions of goods according to the packing list/commercial invoice and keep them in receiving area. If the goods are found short, store officials note them down on the challan and give an entry to goods receiving register. For the imported materials, Store dept. issue an Inter -Office Memo (receiving declaration) to Honorable Executive Director, Plant Head & other respective departments on the basis of physical condition of material. Meanwhile respective department is requested to inspect the goods and department Authorized person(s) inspect the goods and verify the quality of them by M.R.R (Materials Received Report) form with remarks and a copy of M.R.R forwarded to Head Office

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Accounts/ Purchase department. If any of the goods are return back through purchase department, prepare a Final Gate Pass and give entry to Final Gate Pass Register. After giving the entry of the received goods to Goods Receiving Register, materials are stored into the storeroom in their proper place by checking location.

5.8.3 Internal Goods: Preserve able previous used, damaged and/or rejected materials are received by store department before issuing another item of the same to respective department.

5.8.4 External Goods: External goods from the factories of our sister concern are received and stored and issued to respective department as per normal issuing procedure. 5.8.5 Issuing / delivery of Goods 1. New items, which is not issued before, is delivered to respective department. By receiving proper F.S.R. from them duly singed by the Head of the department. 2. New item is issued to the respective department by receiving the same previous item and the F.S.R. of the new item duel checked by authorized person(s). 3. Those goods issued/delivered to the respective departments authorized person by giving posting of issuing Register according to the F. S.R.

5.9 HOW TO MAINTAIN ACCOUNTS IN STORE: 5.9.1 By Register/Ledger: Separate Register/Ledger is maintained for every purpose, which are as follows: -

S.L

File Name/Record Type

Form

Location

Responsible Person

Retention Period 1 Year

Master List of Record

STR-FRM01

File Cabinet-1 File Cabinet-1 File Cabinet-1 File

ManagerStore ManagerStore ManagerStore Manager-

Daily Materials Receiving STR-FRMStatement 02 Receiving STR-FRM03

1 Year

Materials Register

1 Year

Daily Receiving Challan STR-FRM-

1 Year

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Register 5 Purchase Requisition File

04 STR-FRM05

Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1

Store ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore 1 Year 1 Year 1 Year 1 Year 1 Year

Daily Scale Report File

STR-FRM06

Gate Pass File

STR-FRM07

Daily

Store

requisition STR-FRM08

File(S.R) 9 Daily Raw

Materials STR-FRMReport 09

Consumption register 10

L/C File of Raw Materials

STR-FRM10

File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File

ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore ManagerStore Manager-

1 Year

11

L/C File of Spare Parts

STR-FRM11

1 Year

12

Scrap Weight Scale Report STR-FRMRegister 12 STR-FRM13

1 Year

13

Quotation File

1 Year

14

Rejected Materials Challan STR-FRMFile 14 STR-FRM15

1 Year

15

Duty Roster File

1 Year

16

D/O File

STR-FRM16

1 Year

17

Tools Loan Register

STR-FRM17

1 Year

18

LP

Gas

Receiving

& STR-FRM18

1 Year

issuing Register 19 Intercompany Register 20 Gate Pass Register

Receiving STR-FRM19 STR-FRM46

1 Year

1 Year

47

20 21 Spares Loan Register STR-FRM21 22 Scrap Delivery Register STR-FRM22 23 Inter Company issuing STR-FRM23 Assets issuing STR-FRM24

Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1 File Cabinet-1

Store ManagerStore ManagerStore ManagerStore ManagerStore 1 Year 1 Year 1 Year 1 Year

Register 24 Fixed Register

5.9.2 On Software/System: Now a days various works of our store department are done by computer software. Other report/ statements are done manually as per requirements of Management by the help of system/software. All sort of formalities are maintained and preserve on computer by proper software.

5.9.3 Report/Statement: Some are through proper documents are maintained manually and some are preserved on computer by proper software. Daily Materials receiving Report Daily Materials Issuing Report Monthly Inter Company Transfer Report MRR Statement Report. Daily Purchase Requisition Report Use area wise consumption Report Department wise consumption Report Issuing Report of all Contractors Stock Status by Item Group Stock Status by Item Category Stock Status by Item Sub Category Supplier Wise Materials Receiving Report How to Stored Goods All materials are kept on their specific racks & location in the store-room.
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Stock Condition Assessment Stock condition in store is assessed on quarterly (03 months) and half yearly (06 months) or a regular interval. If any item is found damaged or deteriorated is segregated and disposed off accordingly Respective Head of the Department is requested to assess the goods whether they can be used or not.

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Chapter-6 Proposal of New Policy

6.1 PURPOSE & SCOPE: To maintain a simplified system of monitoring material control and warehousing is to define the standard procedure for receipt, checking, storing, protection and issue of materials to the user, customer and maintain accurate records of all related documents needed in performing these included for piping material control by making use of a computer.

6.2 PROCEDURE 6.2.1 Indent: Authorized persons of respective department provide a note for materials according to their requirement. Store department checked stock status then prepared software Indent & forwards the said indent to Factory Manager for final approval through system. He forwards the said indent to either Procurement department or commercial department where necessary. If indented goods are available in store respective department is requested to issue S.R. for the same goods and receiving that S.R. that goods are delivered to them.

6.2.2 Receipt Of Material: Based on the type of material being received the materials are directed to the following locations as described below: 1. Damage/Scrap: All damage/scrap received are directed to the Scrap preserving area. 2. Consumable & general items: All consumables and General items are received at the Stores. 3. Project & Civil items: Project and Civil items are directed to the Project/respected sites by Stores/Security & Civil/project team jointly.
Once goods are received at the gate, Security Officer will verify for presence of the following documents:

1. Original copy of Delivery Challan or Invoice, 2. Purchase Order Copy, if available 3. Packing List, if available
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4. Test Certificate, if any 5. Lorry receipt, if any The Security Officer also physically verify for any apparent damage as a primary check for materials other than Raw Materials for e.g. spares. In case, any apparent/clear damages are found, or there is a shortage of relevant documentation, then the Security Officer not allow the materials to enter the plant, and return the materials to the supplier under intimation to the In-Charge Store. The Security Officer will then provide confirmation of receipt on the documents received with the goods. The authentication will contain: 1. Date of receipt & sign 2. Time of receipt 3. Manual reference number After the materials have entered the plant, quantities received for the same is verified by Store team duly primary QC checks by respective authorized person (s). After receiving, materials should be kept in inspection area and given entry on receiving register. In case any material is needed to unload in different locations (Civil materials/Machineries) receiving responsibilities should be goes to respective store/ Security dept. After receiving the whole materials, quality for the same is verified by authorized person (s) of respective department. Materials of cash purchase (from factory people) should be received the same above system.

6.2.3 Receipt of Repaired Material: Quality of certain repaired items is verified after actual usage over a period of time. Such items are received with qualification with regard to their quality check status. When such items are received, Gate Security writes down the work order number/Challan no in the respected RGP. As and when the respective department approves the QC of the repaired material, the stores department intimates the gate security to close the RGP with status QC passed / rejected in their respected register. In case QC Department rejects the repaired material, it is mentioned in suppliers challan accordingly. 6.2.4 Quantity Verification: Process for quantity verification of the materials depend upon the Unit of Measurement (UOM) mentioned in the Delivery Challan & own logic. Type of materials defines UOM, and it will vary between weight or count based on easiness of inventory management and control.
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6.2.5 In Case Of Raw /Packing Materials: Prior to arrival of material on site, "purchase order" or other documents are received by the Store team. They record the volume and nature of the materials and assign a storage location. Whenever material arrives on site without advance notification, the store team will (if necessary in co-operation with the In-charge Inventory or Plant Manager), allocate storage and unloading location without any delay, to avoid demurrage on vendors transport. After the trucks carrying the raw/ packing materials, they are directed to the Electronic Weigh Bridge where the gross weight is taken by the Security department and a Gross Weight Slip is generated (3 copies Store, security, and Truck Driver). All the documents are given back to the truck driver and he is asked to proceed towards Stores. This information will be transmitted by the store team to related Q.C. dept& contractor for the off-loading facilities. Then same quality of sticks is handed over to security and vehicle driver as per challan quality after doing gross scale. Labors collect one stick against each bag after getting unloading permission from vehicle duly primary inspection/ Q.C. check by QAD dept. That stick is given to security after unloading the bag in a particular place. After complete the unloading of vehicle whole sticks are counting by store, security and vehicle driver jointly for confirming challan quality. After arrangement, the material is off-loaded on to the foundation or at the storage location, in the presence of one or more checkers.

On receipt/loading of material at plant, store team authenticates the Loading Slip & Gross Weight Slip. The In-charge/ Officer signs on the Unloading Slips, Gross Weight Slips and retains one copy of each. The truck comes back to weighbridge for tare weight; the weight slip is printed and signed by the weighbridge operator (3 copies Store, security, and Truck Driver). All the documents are given back to the truck driver and he is asked to proceed towards Stores. The Stores - In-charge/ Officer Hand over the Gross Weight and Net Weight Slip to Security dept. for complete the receiving. The
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truck driver retains a copy of each of the signed documents (Unloading Slip, Gross and Tare Weight Slip). In case the UOM is in pieces, the above mentioned steps not are undertaken. These types of materials are counted by visual inspection at the gate and record the number and quantity. A small Weigh scale is kept in the store for capture the weight of light items. This weight is recorded in challan by Store & security team jointly, when necessary. Stores Team will reconcile the goods received with the PO in the following manner: 1. Match the Vendor Name and details, 2. Match PO reference number on the invoice in the ERP, 3. Match the item description, 4. Match the quantity, 5. Determine whether the goods are for the Main stores or need to be transferred to other unit stores. 6. Segregate goods which require QC approval and goods which do not require QC approval as per QA standards. All items waiting for QC will be stored separately and marked with Red color. 6.3 DAILY MATERIAL RECEIVING RECORD: The Store team enter all materials received (from information on challan, PO, Invoice or packing lists), in a Daily Material Receiving Record immediately after receipt. Copies of this report will be distributed at next day morning through e-mail. The description of materials received will be in abbreviated form. 6.3.2 Quality Verification: 1. After quantity verification of incoming materials it comes under the QC Department / User Department to conduct the inspection of the goods received. 2. In-Charge / Shift In-Charge signed the Quality / inspection certificate after checking physically. 3. Once verification is carried out, the QC Department / User Department will update the quality results in Quality / inspection certificate as follows: Accepted Rejected Accepted with Qualifications.

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In case the material is rejected by the QC Department, Stores will initiative to return the goods by return process. The QC Department / User Department will be allowed a maximum time of say 24 to 72 hours for clearing pending quality checks.

6.3.3 Material Accepted With Qualification: 1. Material accepted with qualification is typically applicable for bulk inventory items for which no scope for return / rejection exists. 2. In case there are any QC qualifications, then at the time of making payment, the qualification as noted is taken into consideration by the F&A Team only upon the approval of Head SCM. 6.4 PREPARATION OF GRN: Once QC is done, the goods are moved from restricted area, to unrestricted area in store/ warehouse according to specific location marked with green color by Stores Team. Then prepared to acknowledge the receipt of the material against the relevant Purchase Order i.e. generates the GRN from ERP. The timeline for processing GRN will be 24 hours from the Quality certificate date. For materials arriving at site not covered by Requisition or Purchase Order, information is given to related procurement dept. After receipt of P.O. and requisition, materials are checked & generate the GRN against these documents. If the materials or goods have not passed the QC test or they are not of the desired specification, stores will initiate the proceedings for returning the materials to the vendor/Procurement dept. For this, the store team prepare a Final Gate Pass (FGP) with reference to challan no. The FGP contain the number of quantities rejected and reasons for rejections. Returnable materials (sample items) would be transferred to the rejection area after rejections by the respective dept. Incase GRN has already been processed; GRN can be reversed only with approval of Head of Internal Audit. 6.5 INVENTORY LEVEL MONITORING: Standard Inventory Levels are maintained & calculated for Raw Materials, Finished Goods & regular inventory items which would be decided by the user department in coordination with stores on the following basis
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Raw Materials - Based on the Consumption Pattern and Monthly Production Plan, safety stock, minimum & maximum inventory levels are defined & maintained.

Other Items (Spares, Consumables, etc.) Based on the established consumption patterns and analysis such as the yearly consumption, minimum level reached, maximum level reached, average monthly consumption, safety stock, lead time in getting the material as well as the future estimated requirement, levels would be defined & updated in ERP. These items are classified into Auto Procurement and Non-Auto Procurement Items.

Inputs are taken from Stores and User Department while fixing these limits. On a cyclic basis 1. Stores is analyze the standard inventory levels for all input items and recommend changes if any, based on the consumption details. Based on this analysis, stores send the report to the User department. 2. User department review the report and recommend changes in the levels. Post recommendation, User and SCM Department approve the changes and sends it to the Stores to make changes in the system. Further at the time of Item Master updating, Auto Procurement (AP) items are also defined/classified. These items are managed by defining minimum, maximum and reorder levels in ERP and tracking and managing the levels in ERP. For AP items (Auto Procurement), provision is there in the ERP system to restrict break of defined minimum/ maximum/ re-order levels. The stores person are conduct the AP run in ERP to check the levels of inventory on a quarterly basis. Procurement of all AP items is initiated by ERP. Therefore, all AP items reviewed periodically, i.e. quarterly to assess the alignment of stock levels to consumption pattern. The AP analysis is considering the following: 1. The stock levels maintained, 2. The consumption pattern for a relative period, 3. The procurement leads time. 6.5 PHYSICAL VERIFICATION PROCESS: Based on the frequency of usage, the physical verification is carried out at the following frequency: 1. Fast moving (FM) Items:- Four times a year
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2. Slow moving (SM) Item: - Twice in a year 3. Nonmoving (NM) Item: - Once in a year Plant Head and Head of Inventory define: 1. Physical verification calendar for the Stores 2. A cross functional inventory verification team to carry out verification (Stores, Internal Audit, Production Department/user dept) 3. What items are to be verified as per Category FM,SM &NM based on frequency of usage, 4. In case of store, spares and raw materials stock count, no issues and receipts are permitted, and all existing issues are physically moved out of the store area. During physical verification, any invoiced material and/or transferred stock of same item should not be physically present in store area. All issuance are completed before commencement of the working day. Any issuance that could not be made by end of day, though invoiced are segregated and stored separately in a designated area. On beginning of stock count, physical prints of the stock statements from the ERP System are taken and submitted to the stock count team.The count sheets are serially numbered, stamped and distributed to the team earlier to the stock count.
Store Team update the P.V result in the ERP. All the results are documented by the Store Team in Stock Count Sheets which are signed off by all members of the team, stores representative assisting in the verification function & In-Charge Inventory. Based on the Stock Count Report, an Inventory Verification Report is prepared by the Store Team. The report contains the following columns:

1. Date of Verification, 2. Item Code & Name, 3. Book & Physical Quantity, 4. Excess/ Shortage, 5. Reason for Variance, if any, 6. Inspected By. (signature of all team members) The reason for variance is filled in by In-Charge Inventory. In-Charge Inventory is also required to verify variance through documentary evidences and do a root cause analysis for the variances. Head of Inventory circulate the Inventory Verification Report to all HODs and Plant Head. If the variances are not sorted out, the same needs to be written off as per SOP after circulation.

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Once the Inventory Verification Report is approved by the Plant Head, the original copy to be filed with the office of the Plant Head, 2nd copy sent to the stores for reference and 3rd copy is sent to accounts for making necessary adjustment entries. All entries in material module on account of shortage and excess found for all items to be checked on cyclic basis and adjustments entry in stock to be done by HOD Accounts. 6.6 SHELF LIFE / WARRANTY ITEMS: The shelf life / warranty items are separately flagged into ERP. During the physical verification, remaining life is ascertained and near expiry items are communicated to the users for hurry up the usage before expiry. If the material is expired and as per the User Department, it is not in usable condition, the material is declared as obsolete. Approval from Plant Head are obtained for the write offs.

6.7 SEGREGATION & IDENTIFICATION: All inspected materials cleared from inspection area into stores on a daily basis by the Quality Control Executive / User Department. There are separate storage areas (Bin location) for each item. Each storage area (Bins) is separated. Permit flexibility in the warehouse design to optimize warehouse utilization and facilitate better management of inventory.
Bin location for all the items as well as their quantity is defined in the ERP system to facilitate easiness in identification of materials. The storage area and the movement area are formulated into a floor plan. Bin card is maintained for all store items containing details such as item name, code, opening stock, issued quantity and closing stock. Depending on the nature and type of items, shelf life of items would be defined in the ERP system & monitored. For monitoring shelf life, the expiry date as mentioned by the manufacturer would be updated in the ERP system. The shelf life items would be separately flagged into the ERP system. Ensure to keeping inflammable / explosives materials at protected places far off from shop floor to avoid risk of fire / explosion. There are adequate fire safety measures in and around the stores area.

Heavy materials (Steel sections) is stored in yard item wise & size wise in a manner to facilitate movement of Fork Lift truck, unloading, loading etc. The yard should be enclosed by boundary wall / fenced by barbed wire. Fast moving categories of goods are stored at a handy location for easy movement of goods. Items must be appropriately tagged. Materials are tagged on the basis of date of unloading. Tag contains the following information:
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1. Type of material, 2. Item code, 3. Date of unloading, 4. QC date, 5. QC reference, 6. Date of receipt in stores. To facilitate First-In-First-Out (FIFO), newer lots of material is stacked behind the existing/older lots in the specified storage area. Alternatively, unique color code is marked on items for easiness of identification at the time of issuance, when necessary. Clearly visible signboards placed on every storage location for clearly identifying the type of goods stored.

6.8 ISSUE OF MATERIAL: Every requisition has approved from HOD & given from their SR book fixed for every department. If HOD is absent, he will approve the SR (which is issued in absence of HOD) next day morning in store willingly. New item, which is not issued before, is delivered to respective department by receiving proper S.R. from them duly singed & marked by the Head of the department. Permanent tools issue is done as per particular people or department. Here entry is done separately with SR in the register. New item is issued to the respective department by receiving the same previous old/damaged item and the S.R. of the new item duly checked by authorized person(s). These materials are sent to head office for reconcile & sale (the materials which can be sold from market after repairing; those materials are fully damaged & sent). If there is no old/damaged item, HOD will mention it in the SR & approved it. Separate register is maintained for the goods. Material never is issued twice. If delivered by error, the store team will collect this material from the respective dept by SR cancellation. The materials which will be repaired by respective dept., it is not necessary to give them back at the time of issuing goods. But it should be mentioned as repairable item in SR. If repairable items are needed to repair from outside then these should be given through admin/local purchase dept. Those goods issued/delivered to the respective authorized person by giving posting of issuing Register (through software & manually) according to the S.R. After the relevant materials have been issued, the material requisition is posted in the Bin
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card accordingly. Under no circumstances material is issued from the warehouse or storage yard to any people without all required material control documents. 6.9 SPARES & RAW MATERIALS: Material received on weight also issued on weight basis. At the time including the material into the inventory, a conversion factor on a per unit basis is stated. At the time of consumption the number of units that has been issued & converted using the conversion factor to arrive at the weight and then be recorded in the ERP, when necessary. Item wise inventory reports are visible in ERP, with the history of receipt and issuance. The issuance from stores is done under the direct supervision of the In-charge Inventory with the help of Stores - Executives. The Stores - Head ensure that the designated stores personnel carries out the following activities for material issues:

1. Identification of material for issue, 2. Make entry in the ERP system for issuance of material against manual SR on FIFO basis, 3. Segregate the required material (by weighing or counting), 4. Update the SR & sign off on the same (Physically / ERP) 5. Handover material to concerned person from user department, and 6. Obtain receivers signature on the SR. 7. File the SR for record. 8. Collect same old/ damage materials

6.10 ISSUANCE TO CONTRACTOR: For ongoing Projects (Civil, Electrical, Fabrication), materials are required to be issued from Stores to the contractors as per their needs. All such requisitions are approved by the Technical / Non-technical Project Head. The management perform a periodic (monthly / quarterly) reconciliation for the material issued to the contractors with the records maintained by contractors. In such cases, the total value of issues from the stores to be deducted from the contractors bills at the time of making payment. Necessary agreement with respect to taxation needs to be taken care of at the time of issuance of material on chargeable basis. The stores generate an MIS on a monthly basis stating the materials issued to the contractors on
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chargeable basis. Such MIS would be sent to the Accounts Department on a monthly basis for deducting the required amount from the contractors bill at the time of bill processing.

6.11 RETURN FROM SHOP FLOOR: User department prepare a Material Return Note for return of material which would be physically checked & approved by their HODs. To create a return note, following information are given to store for necessary initiative: 1. Material code, 2. Date of Issue ,if possible 3. Quantity, 4. Date of return, 5. Reason & Status (whether usable, repairable, scrap or obsolete),
Details of the material return note are checked by the Stores with the returned material. If the material is not in usable condition then confirmation from the user department is taken for declaring the

material to be obsolete. On the basis of the declaration, the Stores Department changes the storage location of the specified material and quantity in ERP as obsolete/ scraps items.

6.12 SCRAP CONTROL: All material moved to the scrap location is inspected by the plant head. After confirmation, all scrap materials are kept separately by types. Also dispose of scrap is maintained in the most economical manner and proper (auditable) records are kept. 6.13 MATERIAL ISSUE FOR RGP & NRGP: FGP & RGP are prepared manually. Entry is done in a particular register. FGP/ RGP is prepared after getting proper information/ note from respective authority. 6.14 RGP Returnable gate pass is prepared by store after getting proper note from respective authority. For sending of samples to HO: Materials is sent to HO in case the concerned store department / user department which has raised the indent thinks it appropriate to send sample to the HO procurement Team for easiness of procurement, or when the HO Procurement Team raises a request via e-mail to the user department for sending the physical sample of the item requisitioned. Further, the HO would return the material to the Plant against an NRGP along with previous RGP references.
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Based on the requisition, Stores Team prepares 3 copies of Returnable Gate Pass (RGP) from the manual book and duly approval from plant authorized person (s).The RGP is capture following details: 1. RGP Serial Number (Auto-generated) 2. Date 3. Work Order Reference, if available 4. Vendor Name 5. Item Name 6. Quantity 7. Name and Department of requisitioned 8. Purpose / Nature of Work (to be carried out) 9. Expected Date of Return

Original copy kept by the stores, one copy retained by the security at the main gate, and one copy handed over to vendor while taking materials out from plant. The goods move out of the Plant premises on the basis of Returnable Gate Pass. Security Inspector (Gate) makes an exit entry against RGP manually after verifying the documents and material being carried by the vendor. Return of material from vendor / HO Procurement team is accompanying one copy of relevant RGP. Security Inspector (Gate) verifies the copy of RGP and updates the entry of material being returned against RGP in manually. The gate entry and exit of all items sent out on RGP basis done by the security personnel at the gate. Quality Check is performed on the material received by the QC team / User department. Materials that do not qualify the quality standards as set by the company returned back to the vendor / Plant from where the goods are coming. The quantity received to be verified with the respective RGP by the QC Team. Receipt of material is accepted against RGP. In case any of the sister concern of SA Group returns material/machine in damaged condition, then material owning unit have the right to return that damaged material/machine and realize cost of such material/machine from user unit which should be less from the book value of that material/machine. In case such damage in repairable, then owning unit can report such damage at the cost of user unit. However, the responsibility of user unit to return any material/machine in good working condition to the owning unit. At times, contractor brings his own material, such as machines/tools etc. inside the Plant premises. In such a situation, the contractor give a declaration of all items & quantities
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brought inside the plant on his letter head and also ensure that all the items contain their respective companys name printed on it. All such items are verified by HOD/Project Head, security and Stores. After the contract is over, the concerned HOD/Project Head is authorizing requisitions raised by the contractor for exit of such material. The stores & security dept. reconcile the items mentioned in the declarations earlier & verify the approvals and prepare NRGP from the manual book for release of material.

6.16 BY REGISTER/LEDGER Separate Register/Ledger is maintained for every purpose, which are as follows: 1. Materials Receiving Register 2. Tools Loan Register 3. Short Loan Register (Inter Factory) 4. Returnable Gate Pass Register Final Gate Pass Register. 5. Scrap Delivery Register 6. Old/damaged (mat.) not return register 7. SR book issuing register. 6.17 STOCK CONDITION ASSESSMENT Stock condition in store is assessed on quarterly (03 months) and half yearly (06 months) basis. If any item is found damaged or deteriorated is segregated and disposed off accordingly. Respective Head of the department is requested to assess the goods whether they can be used or not.

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