Jun.

24

iWcap

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

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

DESH BHAGAT INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES,

MANDI GOBINDGARH
2011

DECLARATION

I_____________________________________ Roll No __________________ a full

time bonafide student of Master of Business Administration (MBA) Programme
of Desh Bhagat Institute Of Management And Computer Sciences, Mandi
Gobindgarh. I hereby certify that this project entitled Inventory Management
carried out by me at_________________________________________________. The
report submitted in partial fulfillment of the requirements of the programme is an
original

work

of

mine

under

the

guidance

of

the

industry

guide

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

Name & sign of student

Roll No

59

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

58

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

59

of production cost. There can be instances where these materials may account for
much value than the raw materials. The fuel oil may form a substantial part of cost.
Finished goods:
These are the goods which are ready for the consumers. The stock of finished goods
provides a buffer between production and market. The purpose of maintaining
inventory is to ensure proper supply of goods to customers. In some concerns the
production is undertaken on order basis, in these concerns there will not be a need for
finished goods. The need for finished goods inventory will be more when production
is undertaken in general without waiting for specific orders.

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

58

Contents
Ch. No.
1

2
3
4
5

Title

Page No.
(Example)
8-49

INTRODUCTION
Introduction to the company

8-28

Introduction of the topic

29-48

Objectives of the study

RESEARCH METHODOLOGY
ANALYSIS & INTERPRETATION OF DATA
FINDINGS & CONCLUSION
SUGGESTIONS
BIBLIOGRAPHY
APPENDIXES

59

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

CHAPTER: - 1

INT

RODUCTION OF EASTMAN CAST

& FORGE LTD.

58

(1.1) EASTMAN CAST & FORG AT LUDHIANA PLANT

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

59

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

1. SEIRI:

It stands for Sorting

Take out necessary items and suitably dispose with them

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

2. SEITON:

It stands for Set in Order

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

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

3. SEISON:

It stands for Shine/Completely Clean

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

Benefits:
58

1. Promotes Orderly and Safe Working Environment

2. Reduces Breakdown and Accidents.

4. SEIKETSU:

It stands for Standardize

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

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

5. SHITSUKE:

It stands for Self Discipline Attitude

Train People to follow Good House Keeping Discipline Independently

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

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

(1.3) ECFL MISSION & VISSION

(1.3.1)

ECFL VISION

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

58

(1.3.2) ECFL MISSION

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

59

(1.4) COMPANY MANAGEMENT

WHOLETIME DIRECTOR
Sh. Sanjay Gautam

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

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

BANKERS
State Bank of India

COMPANY SECRETARY
Mr. Mohit Jindal

AUDITORS
M/S Dass Khanna & co.

58

(1.5) HISTORICAL BACKGROUND

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

1974 Our first export consignment gets dispatched to Thailand.

1978 First Export to Argentina & Ivory Cost by now Chairman & CMD (Eastman
Group) Mr. J R Singal.

1982 "EASTMAN INDUSTRIES LIMITED" (E.I.L), a corporate entity established

as a first step to professionalize operations.

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

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

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

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

59

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

2000 E.I.L. wins "National Export Awards" for excellence in Exports.

2002 After a small beginning previous year, "EASTMAN INDUSTRIAL
COMPANY" (E.I.C) is formed for export of two wheelers and their spare parts.

2005 E.C.F.L. wins the "EEPC INDIA" Excellence award 2005-06.

2006 "EASTMAN AUTO & POWER LIMITED" is Incorporated for launch of
Lead Acid Batteries.

2006 E.C.F.L. wins the "EEPC INDIA" Excellence award 2006-07.

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

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

2010 E.A.P.L. certified ISO 9001:2008.

2010E.C.F.L. awarded The Corporate Citizen of the year Award 2010 by
PHDCCI.

58

(1.6) GEOGRAPHICAL OVERVIEW

59

(1.7) Group Structure

58

Eastman
Industries
Limited,
Ludhiana

Eastman
Cast &
Forge Ltd.,
Ludhiana

EASTMAN
GROUP

Eastman
Industrial
Company
Gurgaon

Eastman
Auto &
Power
Limited
Baddi

(1.8) PRODUCT PROFILE

The main products of the company are:
59

Adustable Wrench

Non Sparking Tools

Alien Keys

Oil Can

Automotive Spanners

Pincer

Automotive Tools

Pipe Cutting Tools

Bi-Hexagonal Spanners

Pipe Wrench

Carpenter Tools

Punches

Combination Spanners

Ratchet

Doe Spanners

Saw

Hammer

Socket

Jumbo Spanners

Socket Bits

Leather Aprons

Tap Wrench

Mason Tools

Vice

Measurement Instrument

Water Pump & Plier

Products
Adjustable

Adjustable Wrench

58

Adjustable

Wrench

Wrench

Automotive
Allen Keys

Automotive Spanners

Spanners

Automotive Spanners

Automotive Tools

Automotive
Spanners

Bi-Hexagonal Spanners
Automotive Tools

Carpenter Tools

Carpenter Tools

Carpenter Tools

Carpenter Tools

Combination
Spanners

Doe Spanners
Hammer

Jumbo Spanners
Hammer

Leather Aprons

59

Measurement
Mason Tools

Mason Tools

Instrument

Non Sparking
Tools

Oil Can

Oil Can

Pincer

Pincer

Pincer

Pipe Cutting Tools

Pipe Wrench

Pipe Cutting Tools

Pipe Wrench

Pipe Wrench

Pipe Wrench

Punches

Ratchet

Saw

Saw

Socket

Socket Bits

Tap Wrench

Tap Wrench

58

Vice

Vice

Water Pump Plier

Water Pump Plier

(1.9) MANUFACTURING PROCESS

59

58

RAW MATERIAL

Incoming raw material is Lab tested at entry level to

the plant
BLANKING

The Quality of Blanks are checked for primary

conformity

FORGING

The forging Die is Inspected for good forging out put

TRIMMING

Good finished products are selected after Trimming

stage

PUNCHING

Inspection at punching stage rejects poorly finished

goods
BROACHING

After broaching all spanners are checked for Jaw

accuracy

HEAT TREATMENT

Heat treated products are is inspected for proper

internal structural formation and Hardness of the
Product
GAUGING

All Products are checked with gauges for operational

fitment

SHOT BALLAST

Inspection at Shot Ballasting checks for finishing out

59

put
ELECTRO PLATING

Final inspection is carried after electroplating stage.

This is the final and detailed inspection carried out
manually.

(1.10) OEM Clients:

58

59

(1.11) DEPARTMENTS

58

Procurement

Excise

Audit

HR

IT

Accoun
t&
Finance

Marketing

Documentatio
n

Delhi &
Gurgaon
Off.

Ten
Showroom

China Off.

C-88

Production

(1.12) SWOT ANALYSIS

59

SWOT analysis provides the information that is helpful in matching the firms
resources and capabilities to the competitive environment in which it operates.
Environmental factors internal to the firm can be classified as Strengths (S) and
Weaknesses (W) and those external to the firm are classified as Opportunities (O) and
Threats (T). Such an analysis of strategic environment is called SWOT ANALYSIS.
SWOT ANALYSIS OF EASTMAN CAST & FORGE LTD, LUDHIANA IS AS
FOLLOWS:

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

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

OPPORTUNITIES:58

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

Liberalization in Gov. policies and tax laws

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

59

CHAPTER :- 2
INTRODUCTION OF
INVENTORY
MANAGEMENT

58

(2.1)Meaning of Inventory
The dictionary meaning of inventory is stock of goods, or a list of goods.
The word Inventory is understood differently by various authors. In accounting
language it may mean stock of finished goods only. In manufacturing concern, it may
include raw material, work in process and stores, etc.

Nature / Kind of Inventory

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

of production cost. There can be instances where these materials may account for
much value than the raw materials. The fuel oil may form a substantial part of cost.
4. Finished goods:
These are the goods which are ready for the consumers. The stock of finished goods
provides a buffer between production and market. The purpose of maintaining
inventory is to ensure proper supply of goods to customers. In some concerns the
production is undertaken on order basis, in these concerns there will not be a need for
finished goods. The need for finished goods inventory will be more when production
is undertaken in general without waiting for specific orders.
5. Spares:
spares also form a part of inventory. The Consumption pattern of raw material,
consumables, finished goods are different from that of spares. The stocking policies of
spares are different from industry to industry. Some industries like transport will
require more spares than the other concerns. The costly spares parts like engines,
maintenance spares etc. are not discarded after use, rather they are kept in ready
position for further use. All decisions about spares are based on the financial cost of
inventory on such spares and the costs that may arise due to their non-availability.

STRATEGIC ISSUES IN INVENTORY MANAGEMENT

Following are the issues in inventory management:

a. Organizational Forces Pushing For Inventory

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

2. Longer production runs

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

b. Organizational Forces Pushing For Lower Inventory

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

Purpose of holding Inventory

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

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

Risk and Costs of holding Inventory

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

58

Holding of inventories also involves costs on storage as well as handling of

materials. The storage costs include the rental of godown, insurance charges,
etc.
3. Risk of Price Decline:
There is always a risk of production in the prices of inventories by the supplier
in holding inventories. This may be due to increased market supplies,
competition or general depression in the market.
4. Risk of Obsolescence:
The inventories may become due to improved technology changes in
requirement, change in customers tastes, etc.
5. Risk Deterioration in quality:
The of materials may also deteriorate while the inventories are kept in stores.

Meaning of Inventory Management

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

59

(2.2)Definition of Inventory Management

Management of the inventories, with the primary objective of determining.
Controlling stock levels within the physical distribution function to balance the
need for product availability against the need for minimizing stock holding and
handling costs.

Objective of Inventory Management

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

3. To maintain investments in inventories at the optimum level as required by the

operation and sales activities.
4. To keep material cost under control so that they contribute in reducing cost of
production and overall costs.

5. To eliminate duplication in ordering or replenishing stocks. This is possible

with the help of centralizing purchases.
6. To minimise losses through deterioration, pilferage, wastage and damages.

58

7. To design proper organization for inventory management. A clear cut

accountability should be fixed at various level of the organization.
8. To ensure perpetual inventory control so that material shown in stock ledger
should be actually lying in the stores.

9. To ensure right quality goods at reasonable prices. Suitable quality standards

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

(2.3)Tools and Techniques of Inventory Control Management:

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

1. Determination of Stock levels :

(a)

Minimum Level: This represents the quantity which must be maintained in

hand at all times. If stocks are less than the minimum level then the work will
stop due to shortage of materials. Following factors are taken into account
while fixing minimum stock level:

Lead Time: A purchasing firm requires some time to process the order and
time is also required by the supplying firm to execute the order. The time
taken in processing the order and then executing it is known as lead time . It
is essential to maintain some inventory during this period.

Rate of consumption: It is average consumption of material in factory. The

rate of consumption will be decided on the basis of past experience and
production plans.

Minimum stock level= Re-ordering level-(Normal consumptionNormal

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

58

(b) Re-ordering Level: When the quantity of material reaches at a certain

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

Re-ordering level=Maximum ConsumptionMaximum Re-order period.

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

9. Restriction imposed by Government.

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

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

Danger Level=Average ConsumptionMaximum re-order period for

emergency purchases.

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

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

2. Determination of Safety Stocks:

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

demand for materials may fluctuate and delivery of inventory may also be delayed
and in such a situation the firm can face a problem of stock-out. The stock-out can
prove costly by affecting the smooth working of concern. In order to protect against
the stock-out arising out of usage fluctuations, firm usually maintain some margin of
safety stocks. The basic problem is to determine the level of quantity of safety stocks.
Two costs are involved in determination of this stock i.e. opportunity cost of stock-out
and the carrying costs. Similarly, the stock-out of finished goods result into the failure
of the firm in competition as the firm cannot provide proper customer service. If a
firm maintain low level of safety frequent stock-out will occur resulting into the large
opportunity costs. On the other hand, the large quantity of safety stocks involves
higher carrying costs.

3. Ordering Systems of inventory:

The basic problem of inventory is to

decide the re-order point. This point indicates

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

4. Economic Order Quantity (EOQ):

59

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

order

quantity

can

be

1.Tabulation

determined

by

two

methods:
method.

2. Algebraic method.

58

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

This
1.

method
Select

the

involves
number

of

the

following

possible

lot

sizes

steps:

to

purchase.

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

3.

Determine

the

total

ordering

cost

for

the

orders

placed.

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

Select

carrying
the

ordering

cost
quantity,

and
which

ordering

minimizes

the

cost.
total

cost.

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

59

2. Determination of EOQ by Analytical Method

In order to derive an economic lot size formula following assumptions are made:
1. Demand

is

known

and

uniform.

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

the

lot

size

in

each

production

run.

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

the
Production

5.
6.

inventory
or

supply

of

is
commodity

Lead-time
Set-up

cost

per

replenished.
is

instantaneous.

is

production

run

or

procurement

zero.
cost

is

C3.

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

4.7)

with

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

year)

is

into n parts.

58

divided

59

58

59

5. Just In Time (JIT) Inventory Control System:

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

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

7. Inventory Turnover Ratios:

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

Average Inventory at cost

Net Sales
Or

(Average) Inventory

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

59

8. Aging Schedule of Inventories:

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

9. Classification and Codification of Inventories:

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

58

10. Inventory Reports:

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

11. Lead Time:

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

Administrative lead time

Producers lead time

59

________________________ Lead Time _________________________

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

12. Perpetual inventory system:

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

13. ABC analysis:

58

In this analysis, the classification of existing inventory is based on annual

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

59

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

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

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

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

authority,

i.e.,

by

respective

user

department

managers.

ABC Procedure for Categorizing of Inventory

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

58

Advantages of the ABC Inventory System

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

(2.4) ABC Analysis of ECFL:

59

Categories

Quantity (in

Value (in Rs.)

Units)
181402

2899502.08

163654

4297290.40

46324

7397577.28

(2.5) OBJECTIVES of ABC Analysis

The study was conducted with following broad and specific objectives:
58

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

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

CHAPTER :- 3
59

RESEARCH
MEHODOLOGY

Objectives of the study

1. To know the functioning of the inventories and understand the system of
procurement of material, its receipt, inspection and its issuing.
58

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

(3.1) SCOPE OF STUDY

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

(3.2) RESEACH METHODOLOGY

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

Research Methodology
59

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

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

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

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

58

(3.4) LIMITATIONS OF THE STUDY

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

CHAPTER :- 4

ANALYSIS
59

&
INTERPRETATION

(4.1) Inventory Turnover Ratio:

Particulars

2011(Rs. Lacs)

2010(Rs. Lacs)

Cost of Good Sold

6083.05

4765.61

Average Inventory

1142.66

1115.47

5.32

4.27

INVENTORY
TURNOVER RATIO

58

ECFLs Inventory Turn over Ratio is 5.32 in Year 2011 & 4.27 Inventory Turn
over Ratio in Year 2010.

(4.2) RAW MATERIALS TURNOVER RATIO:

Particulars
RAW MATERIALS

2011(Rs. Lacs)
52.54

2010(Rs. Lacs)
52

TURNOVER RATIO

59

ECFLs Raw Materials Turn over Ratio is 52.54 in Year 2011 & 52 Raw
Materials Turn over Ratio in Year 2010.

(4.3) Stock Holding Period:

Particulars
Stock Holding Period

2011(in Days )

2010(in Days)

34

42

58

ECFLs Stock Holding Turn over Ratio is 34 in Year 2011 & 42 Stock Holding
Turn Over Ratio in Year 2010.

(4.4) ABC Analysis of ECFL:

Categories

Quantity (in

Value (in Rs.)

Units)
181402

2899502.08

163654

4297290.40

59

46324

7397577.28

(4.5) OPERATING CYCLE OF ECFL:

1. Raw Material Conversion Period (RMCP):

Average raw material inventory

x 365

Raw material consumed during the year

Particulars
Opening Stock of R.M
Closing Stock of R.M
Average Stock
Raw Material

2011(Rs. Lacs)
7659.75
4276.4
5968.07
161018.09
58

2010(Rs. Lacs)
4244.43
7659.75
5952.09
127932.28

Consumed
Raw Material

13 Days

17 Days

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

2. Finished Goods Conversion Period (FGCP):

Average finished goods inventory x 365
Cost of goods
Particulars
Opening Stock
Closing Stock
Average Stock
Cost of Good Sold
Finished
Goods

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

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

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

3. Work in process conversion period (WIPCP)

Average stock in process inventory x 365

Cost of production
Particulars
Opening Stock of Work

2011(Rs. Lacs)

2010(Rs. Lacs)

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

4. Debtors Conversion Period or Book Debts Conversion Period

Average debtors x 365
Credit sales
Particulars
Average Debtors
Credit Sales
Debtors Conversion

2011(Rs. Lacs)
1708.64
7987.55
78Days

2010(Rs. Lacs)
1489.15
6289.36
86Days

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

5. Creditors Conversion Period or Payable Deferral Period

Average creditors x 365
Credit purchases
Particulars
Average Creditors
Credit Purchases
Creditors Conversion

2011(Rs. Lacs)

2010(Rs. Lacs)

976.33
4196.65
85days

643.89
3270.57
72days

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

59

CHAPTER :- 5

FINDINGS
&
RECOMMENDATIONS
58

(5.1) MAJOR FINDINGS

ECFLs Inventory Turn over Ratio is 5.32 in Year 2011 & 4.27 Inventory Turn
over Ratio in Year 2010.
ECFLs Raw Materials Turn over Ratio is 52.54 in Year 2011 & 52 Raw
Materials Turn over Ratio in Year 2010.

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

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

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

59

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

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

Inventory can be improved by:

Company is using only ABC analysis for controlling the

should use another methods for inventory controlling.

Reducing the inventory-holding period of items.

58

inventory it

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

59

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

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

58