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Inventory Management

INTRODUCTION
Every enterprise needs inventory for smooth running of its activities. It serves
as a link between production and distribution process. There is, generally, a time lag
between the recognition of a need and its fulfillment. The greater the time lag, the
higher requirements for inventory. It also provides a cushion for future price
fluctuations.
In a complex industry like HERITAGE FOODS INDIA LIMITED it studied
clearly of how the thing are being performed and what is the real impact of these on
industry and how effectively the inventory is utilized is interested to be known by
researcher because of its great significance in the research.
Need for the Study
Every industry on average spends 70% on raw materials (inventory).
Therefore there is a need to know the raw material cost and also there is great
importance to understand the inventory management system of this industry.
The study helps a log to various departments to take steps to control the
inventory process.

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OBJECTIVES OF THE STUDY


1. To examine the organization structure of inventory management in the
stores of HERITAGE FOODS INDIA LIMITED.
2. To discuss pattern, levels and trends of inventories in HERITAGE FOODS
INDIA LIMITED.
3. To understand the various inventory control techniques followed by
studies in HERITAGE FOODS INDIA LIMITED.
4. To access the performance of inventory management of the HERITAGE
FOODS INDIA LIMITED by selected accounting ratios.
5. To know the inventory control techniques of HERITAGE FOODS INDIA
LIMITED.

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METHODOLOGY OF THE STUDY:


The study is based on both primary and secondary data.
The primary data has been collected through structured questionnaire
reflecting inventory management practices of HERITAGE FOODS INDIA
LIMITEDs. The collected data is tabulated and suitable interpretation had been made
by considering the data collection through secondary data like annual reports purchase
registers, storage records of the organization.
LIMITATIONS OF THE STUDY:
The study has the following limitations:
1.

The study is limited only for a period of 5 years i.e., from 2005 -06to
2009 -10.

2.

The limitations of ratio analysis can be applicable of the study.

3.

There may be approximation in calculating ratios and taking the


figures from the annual reports.

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CHAPTER II
COMPANY PROFILE

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COMPANY PROFILE
Heritage at a Glance:
The Heritage Group, founded in 1992 by Sri Nara Chandra Babu Naidu, is
one of the fastest growing Private Sector Enterprises in India, with three-business
divisions viz., Dairy, Retail and Agri under its flagship Company Heritage Foods
(India) Limited (HFIL), one infrastructure subsidiary - Heritage Infra Developers
Limited and other associate Companies viz., Heritage Finlease Limited, Heritage
International Limited and Heritage Agro Merine Private Limited. The annual turnover
of Heritage Foods crossed Rs.347 crores in 2008-09 and is aiming for Rs.700 crores
during 2009-10.
Presently Heritages milk products have market presence in Andhra
Pradesh, Karnataka, Kerala, Tamil Nadu and Maharastra and its retail stores across
Bangalore, Chennai and Hyderabad. Integrated agri operations are in Chittoor and
Medak Districts and these are backbone to retail operations.
In the year 1994, HFIL went to Public Issue to raise resources, which
was oversubscribed 54 times and its shares are listed under B1 Category on BSE
(Stock Code: 519552) and NSE (Stock Code: HERITGFOOD)
About the founder:
Sri Chandra Babu Naidu is one of the greatest Dynamic, Pragmatic,
Progressive and Visionary Leaders of the 21st Century. With an objective of bringing
prosperity in to the rural families through co-operative efforts, he along with his
relatives, friends and associates promoted Heritage Foods in the year 1992 taking
opportunity from the Industrial Policy, 1991 of the Government of India and he has
been successful in his endeavour.
At present, Heritage has market presence in all the states of South
India. More than three thousand villages and five lakh farmers are being benefited in

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these states. On the other side, Heritage is serving more than 6 lakh customers needs,
employing more than 700 employees and generating indirectly employment
opportunity to more than 5000 people. Beginning with a humble annual turnover of
just Rs.4.38 crores in 1993-94, the sales turnover has reached close to Rs.300 crores
during the financial year 2007-2008.
Sri Naidu held various coveted and honorable positions including Chief Minister of
Andhra Pradesh, Minister for Finance & Revenue, Minister for Archives &
Cinematography, Member of the A.P. Legislative Assembly, Director of A.P. Small
Industries Development Corporation, and Chairman of Karshaka Parishad.
Sri Naidu has won numerous awards including " Member of the World
Economic Forum's Dream Cabinet" (Time Asia ), "South Asian of the Year " (Time
Asia ), " Business Person of the Year " (Economic Times), and " IT Indian of the
Millennium " ( India Today).
Sri Naidu was chosen as one of 50 leaders at the forefront of change in
the year 2000 by the Business Week magazine for being an unflinching proponent of
technology and for his drive to transform the State of Andhra Pradesh .
Forward looking statements:
We have grown, and intended to grow, focusing on harnessing our
willingness to experiment and innovate our ability to transform our drive towards
excellence in quality, our people first attitude and our strategic direction.
Mission:
Bringing prosperity into rural families of India through co-operative
efforts and providing customers with hygienic, affordable and convenient supply of "
Fresh and Healthy " food products.
Vision:
To be a progressive billion dollar organization with a pan India foot
print by 2012.To achieve this by delighting customers with "Fresh and Healthy" food
products, those are a benchmark for quality in the industry.

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We are committed to enhanced prosperity and the empowerment of the
farming community through our unique "Relationship Farming" Model.
To be a preferred employer by nurturing entrepreneurship, managing
career aspirations and providing innovative avenues for enhanced employee
prosperity.

Heritage Slogan:
When you are healthy, we are healthy
When you are happy, we are happy
We live for your "HEALTH & HAPPINESS"
Quality policy of HFIL:
We are committed to achieve customer satisfaction through hygienically
processed and packed Milk and Milk Products. We strive to continually improve the
quality of our products and services through upgradation of technologies and systems.
Heritage's soul has always been imbibed with an unwritten perpetual
commitment to itself, to always produce and provide quality products with continuous
efforts to improve the process and environment.
Adhering to its moral commitment and its continuous drive to achieve
excellence in quality of Milk, Milk products & Systems, Heritage has always been
laying emphasis on not only reviewing & re-defining quality standards, but also in
implementing them successfully. All activities of Processing, Quality control,
Purchase, Stores, Marketing and Training have been documented with detailed quality
plans in each of the departments.
Today Heritage feels that the ISO certificate is not only an epitome of
achieved targets, but also a scale to identify & reckon, what is yet to be achieved on a

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continuous basis. Though, it is a beginning, Heritage has initiated the process of
standardizing and adopting similar quality systems at most of its other plants.

Commitments:
Milk Producers:
Change in life styles of rural families in terms of:

Regular high income through co-operative efforts.

Women participation in income generation .

Saved from price exploitation by un-organized sector .

Remunerative prices for milk .

Increase of milk productivity through input and extension activities

Shift from risky agriculture to dairy farming

Heritage

Financial support for purchase of cattle; insuring cattle

Establishment of Cattle Health Care Centers

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Supplying high quality Cattle feed

Organizing "Rythu Sadasu" and Video programmes for educating the


farmers in dairy farming

Customers:

Timely Supply of Quality & Healthy Products

Supply high quality milk and milk products at affordable prices

Focused on Nutritional Foods

More than 4 lakh happy customers

High customer satisfaction

24 hours help lines ( <10 complaints a day)

Employees:

Enhancing the Technical and Managerial skills of Employees through


continuous training and development

Best appraisal systems to motivate employees

Incentive, bonus and reward systems to encourage employees

Heritage forges ahead with a motto "add value to everything you do"

Shareholders:
Returns:
Consistent Dividend Payment since Public Issue (January 1995)
Service:

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Highest impotence to investor service; no notice from any regulatory


authority since 2001 in respect of investor service

Very transparent disclosures

Suppliers:
Doehlar: technical collaboration in Milk drinks, yogurts drinks and fruit
flavoured drinks Alfa-Laval: supplier of high-end machinery and technical support
Focusing on Tetra pack association for products package.
Society:

Potential Employment Generation more than 3500 employees are working


with heritage more than 9500 procurement agents got self employment in rural
areas more than 5000 sales agents associated with the company

Employment for the youth by providing financial and animal husbandry


support for establishing MINI DAIRIES

Producing highly health conscious products for the society

Qualities of management principles:


1.

Customer focus to understand and meet the changing needs and expectations
of customers.

2.

People involvement to promote team work and tap the potential of people.

3.

Leadership to set constancy of purpose and promote quality culture trough


out the organization.

4.

Process approach to assess the efficiency and effectiveness of each process.

5.

Systems approach to understand the sequence and interaction of process.

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6.

Factual approach to decision making to ensure its accuracy.

7.

Continual improvement processes for improved business results.

8.

Development of suppliers to get right product and services in right time at


right place.

Product/Market wise performance:


The total turnover is Rs 341 Crores during the financial year 2009-10
against the turnover of 292.02 Crores in 2008-09. Today Heritage distributes quality
milk & milk products in the states of A.P, Karnataka, Kerala & Tamil nadu.
During the year 2009-10 liquid milk sales was Rs.28329.79 lakhs
against Rs.24525.23 lakhs in the previous year. The sales of milk products including
bulk sales of cream, ghee and butter were recorded Rs 5781.59 lakhs against Rs
4677.21 lakhs.
Milk sales:
23% growth was recorded in AP 2.38 lakhs litres per day(LLPD) in 2009-10
against 1.93 LLPD in 2008-09. 13% growth was recorded in Tamilnadu-1.53 LLPD in
2009-10 against 1.35 LLPD in 2008-09. Over all growth of 6% was recorded- 5.49
LLPD in 2009-10 against 5.16 LLPD. Flavoured milk sales recorded a growth rate of
77% over 2008-09. Butter milk sales have gone up by 45% over 2008-09.

Outlook:
Considering the growth potential in the liquid milk market, the
company has drawn plans to increase its market share in the existing markets and to
enter into new markets there by doubling revenues in dairy business in the next 3

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years. To achieve this object, company is undertaking major expansion in dairy
business by inverting over Rs20 crores during 2009-10 and over Rs10 crores during
the current year to strengthen the milk procurement.
BRANCHES OF HFIL:
HFIL has 3 wings. They are
1.

Dairy

2.

Retail

3.

Agribusiness

1. Dairy:
It is the major wing among all. The dairy products manufactured by HFIL are
Milk, curd, butter, ghee, flavoured milk, paneer, doodhpeda, ice cream.
2. Retail:
In the retail sector HFIL has outlets namely Fresh@. In those stores the
products sold are vegetables, milk& milk products, grocery, pulses, fruits etc.
In Hyderabad 19 retail shops are there. In Bangalore& Chennai, 3&4
respectively are there. Totally there are 26 retail shops are there.
Fresh@ is a unique chain of retail stores, designed to meet the needs of
the modern Indian consumer. The store rediscovers the taste of nature every day
making grocery shopping a never before experience.
The unique&

distinctive feature of Fresh@ is that it offers the widest

range of fresh fruits and vegetables which are directly hand picked from the farms.
Freshness lies in their merchandise and the customers are always welcomed with fresh
fruits and vegetables no matter what what time they walk in.

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3. Agri Business:
In this business HFIL employees will go to farmers and have a deal
with them. Those farmers will sell their goods like vegetables, pulses to HFIL only.
And HFIL will transport the goods to retail outlets.
The agricultural professors will examine which area is suitable to
import vegetables from and also examine the vegetables, pulses and fruits in the lab.
And finally they report to the Head-Agribusiness. Representatives as per the
instructions given by the agri professors will approach the farmers directly and make
a deal with them. It is the process of registering the farmers.

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CHAPTER III

]
CONCEPTUAL BACKGROUND
The investment in inventories constitutes the most significant part of current
assets / working capital in most of the undertakings. Thus, it is very essential to have
proper control and management of inventories.
The purpose of inventory management is to ensure availability of materials in
sufficient quantity as and when required and also to minimize investment in
inventories.
Meaning and Nature of Inventory:

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In accounting language, inventory may mean the stock of finished goods only.
In a manufacturing concern, it may include raw materials, work- in progress and
stores etc.,
Inventory includes the following things:
a)

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
supplies. The factors like the availability of raw materials and Government
regulations etc., too affect the stock of raw materials.

b)

Work in progress: The work in progress is that stage of stocks


which are in between raw materials and finished goods. The quantum of
work in progress depends upon the time taken in the manufacturing
process. 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.

c)

Consumables: These are the materials which are needed to


smoother the process of production but they act as catalysts.
Consumables may be classified according to their consumption add
critically. Generally, consumable stores doe not create any supply problem
and firm a small part 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.

d)

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.

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BENEFITS OF HOLDING INVENTORIES


Although holding inventories involves blocking of a firms and the costs of
storage and handling, every business enterprise has to be maintain certain level of
inventories of facilitate un interrupted production and smooth running of business.
In the absence of inventories a firm will have to make purchases as soon as it receive
orders. It will mean loss of time and delays in execution of orders which sometimes
may cause loss of customers and business.
A firm also needs to maintain inventories to reduce ordering cost and avail
quantity discounts etc.
There are three main purpose of holding inventories.
1.

The transaction motive: Which facilitates continuous production and


timely execution of sales order.

2.

The precautionary motive: Which necessitates the holding of


inventories for meeting the unpredictable changes in demand and supplies of
materials.

3.

The speculative motive: Which induces to keep inventories for taking


advantage of price fluctuations, saving in re ordering costs and quantity
discounts?

RISK AND COSTS OF HOLDING INVENTORIES


The holding of inventories involves blocking of a firms funds and incurrence
of capital and other costs.
The various costs and risks involved in holding inventories are:

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

Storage and Handling Costs: Holding of inventories also involves costs


on storage as well as handing of materials. The storage of costs include the
rental of the godown, insurance charges etc.

2.

Risk of Price decline: There is always a risk of reduction in the prices of


inventories by the supplies, competition or general depression in the market.

3.

Risk of Obsolescence: The inventories may become absolute due to


improved technology, changes in requirements, change in customer tastes etc.

4.

Risk Determination in quality: The quality of materials may also


deteriorate while the inventories are kept.

Objects of Inventory Management


Definition of Inventory Management: Inventory Management is concerned
with the determination of optimum level of investment for each components of
inventory and the operation of an effective control and review of mechanism.
The main objectives of inventory management are operational and financial.
The operational objective mean that the materials and should be available in
sufficient quantity so that work is not disrupted for want of inventory.
The financial objective means that inventory should not remain idle and
minimum working capital should be locked in it.
The following are the objectives of inventory management:

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1.

To ensure continuous supply of materials, and finished goods so that


production should not suffer at any time and the customers demand should
also be met.

2.

To avoid both over stocking and under stocking of inventory.

3.

To maintain investment in inventories at the optimum level as required


by the operational and sales activities.

4.

To keep material cost under control so that they contribute in reducing


the 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 minimize loses through deterioration, pilferages, wastages and


damages.

7.

To ensure perpetual inventory control so that materials shown in stock


ledgers should be actually lying in the stores.

8.

To ensure right quality goods at reasonable prices. Suitable quality


standards will ensure proper quality of stocks. The price analysis, the cost
analysis and value analysis will ensure payment of proper prices.

9.

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

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FOODS AND TECHNIQUES OF INVENTORY MANAGEMENT


A proper inventory control not only helps in solving the acute problem of
liquidity but also increases profit and causes substantial reduction in the working
capital of the concern.

The following are the important FOODS and techniques

of inventory management and control.


1.
2.

Determination of stock levels:


Carrying of too much and too little of inventory is detrimental to
the firm. If the inventory level is too little, the firm will face frequent

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stock outs involving heavy ordering cost and if the inventory level is too
high it will be unnecessary tie up of capital.
An efficient inventory management requires that a firm should maintain an
optimum level of inventory where inventory costs are the minimum and at the same
time there is no stock out which may result in loss or sale or shortage of production.
a)

Minimum stock level:


It represents the quantity below its stock of any item should not be allowed to

fall.
Lead time: A purchasing firm requires sometime to process the order and time
is also required by the supplying firm to execute the order.
The time in processing the order and then executing it is know as lead time.
Rate of Consumption: It is the average consumption of materials in the
factory. The rate of consumption will be decided on the basis of past experience and
production plans.
Nature of materials: The nature of material also affects the minimum level. If
a material is required only against the special orders of the customer then minimum
stock will not be required for such material.
Minimum stock level can be calculated with the help of following formula.

Minimum stock level Re ordering level (Normal consumption x Normal re


order period)
b)

Re ordering Level:
When the quantity of materials reaches at a certain figure then fresh order is

sent to get materials again. The order is sent before the materials reach minimum
stock level.
Re ordering level is fixed between minimum level maximum level.

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c)

Maximum Level:
It is the quantity of materials beyond which a firm should not exceeds its

stocks. If the quantity exceeds maximum level limit then it will be over stocking.
Overstocking will mean blocking of more working capital, more space for
storing the materials, more wastage of materials and more chances of losses from
obsolescence.

Maximum stock level Reordering Level + Reorder Quantity (Maximum


Consumption x Minimum reorder period)
d)

Danger Stock Level:


It is fixed below minimum stock level. The danger stock level indicates

emergency of stock position and urgency of obtaining fresh supply at any cost.

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Danger Stock level = Average rate of consumption x emergency delivery time.
e)

Average Stock Level:


This stock level indicates the average stock held by the concern.

Average stock level = Minimum stock level + x reorder quantity.


2)

Determination of Safety Stocks:


Safety stock is a buffer to meet some unanticipated increase in usage. The

demand for materials may fluctuate and delivery of inventory may also be delayed in
such a situation the firm can be face a problem of stock out.
In order to protect against the stock out arising out of usage fluctuations, firms
usually maintain some margin of safety stocks.
Two costs are involved in the determination of this stock that is opportunity
cost of stock outs and the carrying costs.
If a firm maintains low level of safety frequent stock outs will occur resulting
into the larger opportunity costs. On the other hand, the larger quantity of safety
stocks involves carrying costs.

3)

Economic Order Quantity (EOQ):


The quantity of material to be ordered at one time is known as economic

ordering quantity.
This quantity is fixed in such a manner as to minimize the cost of ordering and
carrying costs.
Total cost material = Acquisition Cost + Cost + Carrying Costs + Ordering Cost.
Carrying Cost:

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It is the cost of holding the materials in the store.
Ordering Cost:
It is the cost of placing orders for the purchase of materials.
EOQ can be calculated with the help of the following formula
EOQ = 2CO / I
Where C = Consumption of the material in units during the year
O = Ordering Cost
I = Carrying Cost or Interest payment on the capital.

4)

A B C Analysis: (Always better control analysis):


Under A B C Analysis. The materials are divided into 3 categories viz., A,

B and C.
Almost 10% of the items contribute to 70% of value of consumption and this
category is called A category.
About 20% of the items contribute about 20% of value of category C covers
about 70% of items of materials which contribute only 10% of value of consumption.

5)

VED Analysis : (Vitally Essential Desire)


The VED analysis is used generally for 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 E type of are also necessary but their stocks may be kept

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at low figures. The stocking of D type may be avoided at times. If the lead time of
these is less, then stocking of these can be avoided.
6)

Inventory Turnover ratio:


Inventory turnover ratios are calculated to indicate whether inventories have

been used efficiently or not.


The inventory turnover ration also known as stock velocity is normally
calculated as sales / average inventory of cost of goods sold / average inventory.
Inventory conversion period may also be calculated to find the average time
taken for clearing the stocks. Symbolically.
Inventory Turnover Ratio

Cost of goods sold


__________________________
Average inventory at cost

Or
=

Net sales
_____________________
(Average) Inventory

And, Inventory conversion period

Days in a year
______________________
Inventory Turnover ratio

7)

Classification and Codification of Inventories:

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The inventories should first be classified can then code numbers should be
assigned for their identification. The identification of short names are useful for
inventory management not only for large concerns but also for small concerns. Lack
of proper classification may also lead to reduction in production.
Generally, materials are classified accordingly to their nature such as
construction materials, consumable stocks, lubricants etc. After classification the
materials are given code numbers. The coding may be done alphabetically or
numerically. The later method is generally used for coding.
The class of materials is assigned two digits and then two or three digits are
assigned to the categories of items divided into 15 groups. Two numbers will be
category of materials in that class.
8)

Valuation of inventories Method of valuation:


FIFO method
LIFO method
Base Stock method
Weighted average price method

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CRITERIA FOR JUDGING THE INVENTORY SYSTEM


While the overall objective of the inventory system is to minimize the cost to
the firm at the risk level acceptable to management, the more proximate criteria for
judging the inventory system are:
Comprehensibility
Adaptability
Timeliness

Area of improvement:
Inventory management in India can be improved in various ways.
Improvements could be affected through.

Effective Computerization: Computers should not be used merely for accounting


purpose but also for improving decision making.

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Review of Classification: ABC and FSN classification must be periodically reviewed.

Improved Coordination: Better coordination among purchase, production,


marketing and finance departments will be help in achieving greater efficiency in
inventory management.

Development of long term relationship:


Companies should develop long term relationship with vendors. This would
help in improving quality and delivery.

Disposal of obsolete / surplus inventories:


Procedures for disposing obsolete / surplus inventories must be simplified.

Adoption of challenging norms:


Companies should set benchmarks with global competitors and use ideals like
JIT to improve inventory management.

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Inventory cost an overall view
Introduction:
In financial parlance, inventory is defined as the sum of the value of the raw
materials, fuels and lubricants maintenance consumable semi processed materials
and finished goods stock at any giving point of time. The operational definition of
inventory would be amount of raw materials, fuel and lubricants, and semi
processed materials to be stock for the smooth running of the plant / industry.

Need of Inventory:
Inventories are maintained basically for the operational smoothness which
they can be affected by uncoupling successive stages of production, whereas the
monetary value of the inventory serves as a guide to indicate the size of the
investment made to achieve this operational convenience. The materials management
departments primary function is to

provide this operational convenience with a

minimum possible investment in inventories. Materials department is accused of both


stock outs as well a large investments in inventories. The solution lies in exercise a
selective inventory control and application of inventory control techniques.
Inventories build to act as a cushion between supply and demand. It is sufficient to
take care of the requirements of demand till the next supply arrives. It is sufficient to
take care of probable delays in supply as well as probable variations in demand.

The size of the inventory depends upon the factors such as size of industry internal
lead time for purchase, suppliers lead time, vendor relations availability of the
materials, annual consumption of the materials. Inventory coat can be controlled by
applying Modern Techniques viz., ABC analysis, SDE, ESN, HMC, VED etc. These
techniques can be used effectively with the help of computerization.

What is meant by inventory cost:

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A.

The total value of stores and spares and capital spares.

B.

Stores in transit and under inspection and

C.

Stock of finished products.


Normally, there are certain problems in maintaining optimum level of

inventory. Problems of inventory can be resolved by the cost implications. Costs


which are relevant for consideration are discussed in the following lines;

Basically there are four costs for consideration in developing and inventory
model.
1.

The cost of placing a replenishment order.

2.

The cost of carrying inventory.

3.

The cost of under stocking and

4.

The cost of over stocking.


The cost of ordering and inventory carrying cost are viewed as the supply side

costs and help in the determination of the quantity to be ordered for each
replenishment.
The under stocking and over stocking costs are viewed as the demand side
costs and help in the determination of the amount of variations in demand and the
delay in supplies which the inventory should withstand.
Whenever an order placed for stock replenishment, certain costs are involved,
and, for most practical purpose it can be assumed that the cost per order is constant.

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The ordering cost may vary depending upon the type of items, for example raw
material like steel against production component like castings in steel plants, support
materials in the case of coal industry.

The cost ordering includes:


1)

Paper work costs, typing and dispatching an order.

2)

Follow up costs the follow up, the telephones, telex and postal bills etc.,

3)

Costs involved in receiving of the order, inspection, checking and handling


in the stores.

4)

Any set up cost of FOODS charged by the supplier, either directly


indicated in quotations or assessed through quotations of various
quantities.

5)

The salaries and wages of the purchase department.

Cost of Inventory carrying:


This cost in measured as of the unit cost of the item. This measure gives basis
for estimating what is actually costs a company to carry stock.

This cost includes:

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1)

Interest on capital.

2)

Insurance and tax charges.

3)

Storage costs labour costs, provision of storage area and facilities like
bins, racks etc.,

4)

Transport bills and hamali charges.

5)

Allowance for deterioration or spoilages.

6)

Salaries of stores staff.

7)

Obsolescence.
The inventory carrying cost varies and a major portion of this is

accounted for by the interest on capital.

Under stocking cost:


This cost is the cost incurred when an item is out of stock. It includes cost of
lost production during the period of stock out and the extra cost per unit which might
have to be paid for an emergency purchase.

Over stocking cost:


This cost is the inventory carrying cost (which is calculated per year) for a
specific period of time. The time varies in different contexts it could be the lead
time of procurement of entire life time of machine. In the case of one time purchases,
over cost would be = Purchase Price Scrap Price.

INVENTORY VALUATION AND COST FLOWS:

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What is the cost of inventory?
One can readily visualize the determination of inventory quantities by physical
count or by use of perpetual inventory records. When this quantity is determined, it
must be multiplied by a unity cost in order to determine the inventory value that is
used on financial statements.
Trade and quantity discount are to be excluded from unit cost since these
discount exist for the purpose of defining the true invoice cost of merchandise. Cash
discounts, on the other hand, have been considered as a reward for early payment and
as a penalty for late payment. The reward has often been interpreted as a loss rather
than as a part of unit cost. Thus it would not be difficult to find difference of opinion
as to whether invoice cost includes or excludes cash discount.

When the current repla FOODS cost of material on hand at the close of a
year is less than the actual cost, the inventory value is reduced to repla FOODS cost
(current market price). Thus the acceptable basis inventory valuation is the lower of
cost or market or more properly the lower of actual cost or repla FOODS cost.
The determination of inventory values is very important from the point of
view of the balance sheet and the income statement since costs not included in the
inventory (the balance sheet) are considered to be expensive and are thus included in
the income statement.

Valuation of inventories methods of determination:


Although the prime consideration in the valuation of inventories is cost, there
are a number of generally accepted methods of determining the cost of inventories at
the close of an accounting period. The most commonly used methods are first in
first out (FIFO) average, and last in first out (LIFO). The selection of the method
for determining cost for inventory valuation is important for it has a direct bearing on
the cost of goods sold and consequently on profit. When a method is selected, it must

Inventory Management
be used consequently and cannot be changed for year to year in order to secure the
most favorable profit for each year.

THE FIFO METHOD (FIRST IN FIRST OUT METHOD)


Under this method it is assumed that the materials or goods first received are
the first to be issued or sold. Thus, according to this method, the inventory on a
particular date is presumed to be composed of the items which were acquired most
recently.
The value inventory would remain the same even if the perpetual inventory
system is followed.
Advantage:- The FIFO method has the following advantages.
1)

It values stock nearer to current market prices since stock is presumed to


be consisting of

2)

The most recent purchases.

3)

It is based on cost and, therefore, no unrealized profit enters into the


financial accounts of the company.

4)

The method is realistic since it takes into account the normal procedure of
utilizing or selling those materials or goods which have been longer
longest in stock.

Disadvantages:- The method suffers from the following disadvantages.

Inventory Management
1)

It involves complicated calculations and hence increases the possibility of


clerical errors.

2)

Comparison between different jobs using the same type of material


becomes sometimes difficult. A job commenced a few minutes after
another job may have to bear an entirely different charge for materials
because the first job completely exhausted the supply of materials of the
particular lot.
The FIFO method of valuation of inventories is particularly suitable in
the following circumstances.

I.

The materials or goods are of a perishable nature.

II.

The frequency of purchases is not large.

III.

There are only moderate fluctuations in the prices of materials or goods


purchased.

IV.

Materials are easily identifiable as belonging to a particular purchase lot.

The LIFO method (Last in First Out method)


This method is based on the assumption that last item of materials or goods
purchased are the first to be issued or sold. Thus, according to this method, inventory
consists of items purchased at the earliest cost.

Advantages:- This method has the following advantages:


1)

It takes into account the current market conditions while valuing materials
issued to different jobs or calculating the cost of goods sold.

Inventory Management
2)

The method is base on cost and, therefore, no unrealized profit or loss is


made on account of use of this method.
The method is most suitable for materials which are of bulky and non
perishable type.

Base Stock Method:


This method is based on the contention that each enterprise maintains at all
times a minimum quantity of materials or finished goods in its stock. This quantity is
termed as base stock. The base stock is always valued at this price and its carried
forward as a fixed asset. Any quantity over and above the base stock is valued in
accordance with any other appropriate method. As this method aims at matching
current costs to current sales, the LIFO method will be most suitable for valuing stock
of materials or finished goods other than the base stock. The base stock method has
advantage of charging out material / goods at actual cost. Its other merits or demerits
will depend on the method which is used for valuing materials other than the base
stock.

Weighted average price method:


This method is based on the presumption that once the materials are put into a
common bin, they lose their identity. Hence, the inventory consists of no specific
batch of goods. The inventory is thus priced on the basis of average priced on the
quantity purchased at each price.

Weighted average price method is very popular on account of its being based
on the total quantity and value of materials purchased besides reducing number of
calculations. As a matter of fact the new average price is to be calculated only when a
fresh purchase of materials is made in place of calculating it every now and then as is

Inventory Management
the case with FIFO, LIFO methods. However, in case of this method different prices
of materials are charged from production particularly when the frequency of
purchases and issues/sales in quite large and the concern is following perpetual
inventory system.

Valuation of inventories impact on the flow of costs:


As should be quite evident, the different methods of calculating inventory
values will all have their impact on the flow of costs through the balance sheet into
the income statement. The dollars that are paid to acquire inventory are always
divided between the balance sheet (inventories) and the income statement (cost of
goods sold), there is not other place to put them. Thus if the different methods of
calculating inventory produce differing inventory values, they will also produce
differing cost of goods sold figures, and the differing cost of goods sold figures will
naturally produce differing profit figures.
In order show the impact of inventory valuation on cost flows, the preceding
exhibits are summarized. Each method produces a different figure for the transfer of
raw materials to work in process. These differences appear small, but the only reason
for this is that the dollar amounts have been kept small to make the illustration
workable.

With the transfer of materials to work in process, the cost flow or transfer with
have its impact on the work in process inventory and the transfer of completed
merchandise to finished gods. Ultimately when goods are sold; the varying methods
of valuing inventories will have their impact on cost of goods sold and these profits.
The effects of the cost flows on cost of gods sold and profits can be accentuated
further it the differing methods of valuing inventories are applies to work in process
and finished goods.

Inventory Management

Evaluation of methods What causes the differences?


The differences in inventory values and flows for each of the method
illustrated result from only one factor, that it, changing purchases prices or unit costs.
If purchase prices had remained stable or unchanged, each method would have
produced the same inventory value and cost flow.
Cost flows and inventory are exactly the some under stable prices. With a falling price
level, the LIFO method produces the highest cost flow and the lowest inventory. With
a falling price level, the LIFO method produces the lowest cost flow and highest
inventory. The cost flow under LIFO follows the price level, LIFO produces larger
cost flows when prices are rising and smaller cost flows when prices are falling. A
final item to consider is that the average method produces results which fall between
the extremes of LIFO and FIFO.

Evaluation of methods can we justify the differences?


The best method of inventory valuation might be specific identification, that
is, the units in inventory should be identified with the specific invoices and thus
specific unit costs to which they apply.
Fortunately, the FIFO method constitutes a very useful approximation to the
specific identification method if on can reasonably assume that the actual flow of
materials is first-in first-out. This assumption is not unreasonable and thus we have
stated the main argument for the FIFO inventory scheme, that is, the physical flow of
materials would match the flow of costs under the first in first out method.
When the units in inventory are identical, interchangeable and do not follow
any specific pattern of physical flow, the average cost system would seen to
appropriate.

Inventory Management

The primary difference between the FIFO and average methods is centered on
the physical flow since both methods could involve identical and interchangeable
units. The FIFO method fits a first-in first-out physical flow. The average method fits
a system which has no specific pattern of physical flow. Finding a situation where
there is no specific pattern of physical flow should be quite difficult because of the
fact that most inventory items are subject to deterioration by instituting a person
would attempt to reduce such deterioration and any reasonable person would attempt
to reduce such deterioration by instituting a physical flow approximating first-in-firstout. The major reason for the use of the average method is something other than the
lack of specific physical flow.
Ordinarily the LIFO method cannot be justified on the basis of the physical
flow of materials. Under conditions of changing prices, the advocate of LIFO says
that the only method which matches costs and revenues is the LIFO method. The
LIFO method assumes that the latest item is the first item out, and thus the current
costs of materials are matched with the other hand, assumes that the first item in is the
first item out, and thus the non-current costs of matching current costs with current
revenues is the essence of the argument for the LIFO method.
As can be seen by the above comments, there is no one best method of valuing
inventories. The method chosen should fit the situation. A physical flow pattern
comparable to FIFO would force one to consider the FIFO method. The lack of a
discernible physical flow pattern would force one to consider the average method.
Concentration on cost flows, as distinct from physical flows, would force to consider
the LIFO method especially where there appears to be a discernible trend towards
rising prices (or falling prices) as has been the case in our economy during recent
years.

Inventory Management

Inventories valued at standard cost:


A very useful method of valuing inventories is at a standard cost. With a
standard cost system is no need of spending a great deal of time and money tracing
unit cost through perpetual inventory record.

PERPETUAL INVENTORY CARD UNDER A STANDARD COST SYSTEM


Perpetual inventory Plant: Standard cost:
Location: Order Quantity:.....
Order Point: ..
Date

Description

On order

Received Issued

Available
On order

On hand

Inventory Management

As shown above, there is need only for physical quantities since the inventory
values is the physical quantity multiplied by the standard cost. With the cost and value
columns disposed off, a perpetual inventory card can include additional data such as
quantities on order, quantities reserved, and quantities available. These additional data
are very useful for inventory and production control purpose. On the basis of a few
calculations concerning into inventories on a FIFO, a LIFO, or an average cost basis.

Inventory of Obsolescence:
Absolvent inventories cannot be used or disposed off at values carried on the
books. Frequent reviews should be made of all inventories, and when obsolescence is
indicated a request for revaluation should be prepared for approval by management.
The difference between original and obsolete value should be recorded by a change to
an operating account. Inventory obsolescence, and a credit to inventory. If the
material is scrapped, this will be for the full inventory value or used in areas where it
will be work less than its original value, the entry would be only for the amount of
write down. Some companies carry a solvage inventory and transfer to it materials
which may be sold or used at reduced values.
Where this is done, the entry would be:
Dr. Solvage inventory
Dr. Inventory Obsolescence. Cr. Raw Material inventory or Supplies
inventory.

Inventory cost in relation HERITAGE FOODS INDIA LIMITEDs shall to


classifieds follows:

Inventory Management
Inventory can be classified as capital and revenue certain items through titled
as capital in nature. Hence, due care is to be take whole drawing the material.
Materials which are to be imported from other countries have to be planned
well in advance nearly about 24 months are to initiate the proposals for procurement.
Similarly some of the items do not require any lead time some they are
available in the local market.
FOODS is highly energy intensive industry, the inputs like power and coal are
the major part of the variable cost since Government controls the coal & fuel sector,
and increase is rates adversely effects the FOODS industry.
HERITAGE FOODS INDIA LIMITED has it own power plant and through
which it saves energy consumption. By this the cost since Government controls the
coal & fuel sector, any increase rates adversely effects the FOODS industry.
Inventory cost of any organization also adversely affects by retaining obsolete / scrap
and inventory costs can be reduced by management with an advance planning of
procurement of materials, periodical reviews of existing spares with reference to the
fast consumption, ascertaining the information regarding the availability of in other
areas. Holding of extra inventory will be an additional financial burden to the
company due to payment of interest charges on the materials purchased, diminishing
value of materials purchased, diminishing value of materials by keeping them in
stores for a log time, handling charges, etc.,
The inventory of HERITAGE FOODS INDIA LIMITED mainly includes
Foods, , CNC FOODS, Dairy.Inventory in HERITAGE FOODS INDIA LIMITED
during 2005 -06to 2009 -10are as follows: (Units in m.t)

Years

2005 -06

2006 -07

2007 -08

2008 -09

2009-10

Inventory Management
Foods

1051620

96465

966540

958620

1209536

HFIL

44637

45267

42871

43151

65960

22142

19602

20705

22011

36567

4756

9022

16201

32607

149255

Agro
Merine
Dairy

The value of the above raw materials for the year 2005 -10are as follows: (Value in
Rs.)

Years

2005 -06

Foods
HFIL
Agro
Merine
Dairy

2006 -07

2007 -08

2008 -09

2009-10

118261591 12544982

13544920

140120920 195410120

31884665

28967991

29067890

23487760

32551176

18513002

16100572

16100772

18799582

46061197

27102

555475

676115

2647958

20111502

Value of imported and indigenous raw materials, stores, and components


consumed during the year:

Imported

Years

2005-06

2006 -07

2007 -08

2008 -09

2009
-10

Inventory Management
Raw Materials

15542

94753497

493005633 766180015 451229526

521577053

511577057 76345208

Years

2005-06

2006 -07

Raw Materials

1085786879 2995878412 3457765427 4107605228 7806531617

Finished
Goods

121624112

36987
41178
038

Indigenous

Finished
Goods

508106545

881880956

2007 -08

179159560

2008 -09

1264674286 3776712867

FOODS FACTORY RUNS WITH VARIOUS EQUIPMENTS:


I.

TECHNICAL DEPARTMENT
1.

FOODS

2.

MATERIAL

3.

PRODUCTION

2009 -10

Inventory Management

II.

COMMERCIAL DEPARTMENTS
1.

STORES

2.

PURCHASE

3.

ACCOUNTS

TO RUN THE PLANT AND MAINTAIN EQUIPMENTS DEPARTMENTS


REQUIRE FOR SUCH REQUIREMENT OF RAISE INDENTS AND SEND THE
INDENTS TO PURCHSE DEPARTMENT THROUGH STORES.

INDENTS:
1. ANNUAL INDENTS FOR CONSUMABLE ITEMS (STORES ITEMS).
2. REGULAR INDENTS RAISED BY CONSUMING DEPARTMENTS.
3. ANNUAL REQUIREMENT OF RAW MATERIALS PROMOP & QC.

ENQUIRIES:
1)

ENQUIRES WILL BE SENT APPROVED SUN CONTRACTORS.

ORDER PROCESSING FORM:


1)

RECEIVING QUOTATIONS FROM SUB CONTRACTORS.

2)

ENTER THE PRICE DETAILS OF ENQUIRY SENT IN THE


ORDER PROCESSING FORM.

Inventory Management
3)

SELECTION OF PARTY ON MERIT BASIS.

PURCHASE ORDER:
1)

PREPARE PURCHSE ORDER ON SELECTED PARTY.

2)

SEND PURCHASE ORDER COPIES TO PARTY, STORES AND


DEPARTMENTS.

GOODS RECEIPT NOTE:


1)

RECEIVING GOODS RECEIPT NOTE FROM STORES.

PURCHASE DEPARTMENT:
ACTIVITY RECEIVING INDENTS:
FLOW CHART:
Receipt of annual indents for consumable items / stores items from stores
department.
Checking of indent number an authority of item, delivery time consumption
period.
In case of any deficiency, send the information to concerned department for
clarification.

Inventory Management
Segregation of indents for attending at C.P.D. and Hyderabad Office.
Sent the Hyderabad indents to Hyderabad Office.
Enter the indents details in indent register.

Inventory Management

PURCHASE DEPARTMENT
PURCHASE ENQUIRY
Ms.
Sl.
No.

Material Code

Department Quantity

Unit

When
Required

Inventory Management
ACTIVITY: FLOATING ENQUIRIES:
FLOW CHART:

Checking indented items and equipment name.

Taking previous suppliers information form previous supply. If new


equipment / item, information to be taken from concerned department or
from competitors / journals / yellow pages.

Prepare enquiry to approved sub contractors through enquiry format.

If emergency requirement, send the enquiries through fax / e-mail.

Enter the details of enquiries sent in order processing form.

PURCHASE DEPARTMENT
ORDER PROCESSING FORM

Sl.

Indent

No. Ref

Material
Code
No.

Description Size Qty 1 2 3 4 5 6 Remarks

Inventory Management

ACTIVITY : PREPARATION OF ORDER PROCESSING FROM


FLOW CHART:

Receiving quotation against enquiries sent.

Enter price and other of the quotation received from sub contractors in
the order processing from.

Mention the earlier purchase details of indented items against each item in
the order processing form if available.

Put up the processing from with enquiry and quotations to head (purchase).

Examine order processing from with decide the sub contractor to whom
purchase order to be placed.

Inventory Management

PURCHASE DEPARTMENT
PURCHASE ORDER

Sl. No.

Indent

Item

No.

Code

Description Qty

Rate

Unit

Amount

ACTIVITY: PREPARATION OF PURCHASE ORDER


FLOW CHART:

Prepare purchase order after finalization of price and other technical terms
mentioning the following details.
1. Material code
2. Indent number

Inventory Management
3. Material specification & part number
4. Quantity
5. Rate
6. Payment and other terms & conditions

Stipulation of terms of test certificate / ibr / manufactures certificate


where applicable.

Fill in and attach the purchase order review proforma to purchase order.

Send the prepared purchase order to head (purchase) and competent


authority for approval.

Send the purchase order to identified approved sub contractor.

Send the purchase order copies to store and concerned departments.

Enter the details of purchase order in purchase order register.

PURCHASE DEPARTMENT
AMENDMENT / CANCELLATION OF ORDER

Inventory Management
Material Code

Material

Price / Quantity Amended Price /


as per Order

Quantity

ACTIVITY: ORDER AMENDMENT, ORDER FOLLOW UP AND INFORM


THE SUPPLIER FOR THE REJECTIONS / DAMAGES / SHORTAGES:
FLOW CHART:

Issue of amendments in case of modification to purchase order.

Review the pending order and follow up the pending order for breakdown
requirement.

Send regular reminders to suppliers against pending purchase order every


month.

Receive shortage / excess / damages report from stores for the material
received.

Information the supplier for the rejections / damage / excess / shortage.

Inventory Management

PURCHASE DEPARTMENT

ACTIVITY: IMPORTS:
FLOW CHART:

Receipt of indents for import items from stores department.

Taking previous / item, information to be taken from concerned


department or from competitors / journals / Yellow pages.

Send enquiry to overseas supplier.

Receiving quotations against enquiries sent.

Enter price and other terms of the quotations received from overseas
supplier in the order processing form.

Examine order processing form and decide the sub contractor to whom
purchase order to be placed.

Inventory Management

Prepare purchase order after finalization of price and other technical terms
mentioning the following details.

1) Material code
2) Indent number
3) Material specification & part number
4) Quantity
5) Rate
6) Payment
7) Insurance and other terms and conditions.

Send the prepared purchase order to head (purchase) and competent


authority for approval.

Send the purchase order to overseas supplier.

Send the purchase order copies to stores and concerned departments.

Prepare IC documents and submit to bank for onward transmission to


overseas supplier.

STORES DEPARTMENT

ACTIVITY: RECEIPTS AND UNLOADING MATERIAL

Receiving of Goods through Trunk / Personnel Delivery.

Entry of vehicle at Gate Office.

Inventory Management

Stamping on Dispatch Advise / Delivery challan by Gate Office.

Checking of challans / Dispatch Advise with purchase order.

Unloading of Goods at allotted place or in case of urgency direct at works


site.

All safety precautions are taken while unloading of material like workers
should wear safety shoes, helmets, leather head gloves, noise respirator,
nose mask.

Training is given to workers for unloading Heavy & Bulky material by


using chain pulley Blocks, Wire Rope Ceilings, Fork Lift. After UIL
receipt acknowledgement given to driver maintaining Lorry receipts
register.

Inventory Management
STORES DEPARTMENT

ACTIVITY: PREPARATION OF RECEIPT AND APPROVAL BOOK FOR


GENERAL MATERIAL / D.C. ENTER OF BLOCK, AND STATIONARY
MATERIAL MANUALLY IN REGISTER

Sorting of Delivery challans as below:


a) General
b) Stationery
c) Block

Checking with P.O. and mentioning Material Code, Party Code, Indent No.
Department Name on each & every challans.

Creation of D.C. entry in system for general materials.

Preparation of identification tags for General Materials through system.

Preparation of Receipt & Approval Book for General materials.

Manual entry of block, stationery, Preparation of intimations for block,


stationery, repair materials.

Inventory Management

STORES DEPARTMENT
ACTIVITY: PHYSICAL VERIFCATION OF GOODS:

All D.C. handed over to stores assistant physical verification like


measuring, counting and tallying with D.C.s Quantity / Description of the
materials by the Stores Assistant.

Identification tags to be attached to the verified material. Shortage / Excess


/ Damages if any found to be noted on challans and inform to section
incharge.

Preparation of Shortage / Excess / Reports if any sending to parties under


copy to purchase / bills sections.

Inventory Management

STORES DEPARTMENT
ACTIVITY: APPROVAL OF MATERIAL AND PREPARATION OF GOODS
RECEIPT NOTES:

Intimation is be sent to all the concerned departments. Showing materials


to concern person.

Taking approval of the material in receipt & approval book.

Preparation general material in receipt & approval book.

Preparation general material GRNs through system and stationery /


block / repairs GRNs manually.

Forwarding true copy to issue section of GRN for general material


forwarding true copy to issue section of GRN for General material
forwarding true copy of block / Repair / Stationery GRN to issue section
and copy to purchase department.

Inventory Management
]

STORES DEPARTMENT
ACTIVITY: REJECTED MATERIALS

Rejected materials kept in allotted area of rejected materials.

Packing of rejected materials.

Preparation of gate passes for rejected materials.

Sending back to suppliers through our Hyderabad Office.

Sending consignee copy to party vide Register Letter for booking of


Register goods to partys other than.

STORES DEPARTMENT
ACTIVITY: EXCISE GATE PASSES

Sending duplicate for transport copy of excise invoice from suppliers


delivery challans.

Mentioning A.B. Sl. No. and named of concerned department.

Duplicate for transport copy of excise invoice over to bills section for
sending the same to Excise Department.

Inventory Management

Corresponding with supplier. If the Excise Invoice is not found with


delivery challans.

STORES DEPARTMENT
ACTIVITY: RECEIPTS OF MEDICINES

Physical verification of Medicines as per Invoices.

Verification of expiry date on medicines.

Verification of MRP.

Sending shortage / excess note if any found.

Taking approval of Medical Officer.

Sending Rejection notes if any medicine is rejected.

Issuing to dispensary.

Bills forwarding to Account Department vide IOM for making the


payment.

Inventory Management

CHAPTER IV

Inventory Management

RATIO ANALYSIS

Inventory Management

The investment on raw materials over a period of 5 years from 2000 to 2010 is
presented in the following table.

1.

Investment on Raw Materials:

Year

Investment on Raw Material (in crores)

2004 2005

12226.70

2005 2006

13498.80

2006 2007

50975.78

2007 2008

51686.81

2008 2009

42925.25

2009 2010

87905.86

Inventory Management
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2004-05

2005-06

2006-07 2007-08

2008-09

2009-10

Interpretation:

1)

From the above table it can be understood that the inventory of HERITAGE
FOODS INDIA LIMITED was recorded at 12226.70 during the year 2004 -05
and it is increased to 87905.86 during the year 2008 -09.

2)

It shows that there is on increase in the inventory to the more extent of


87905.86.

3)

The average inventory of HERITAGE FOODS INDIA LIMITED was


recorded at Rs52454.75

4)

The highest investment in inventory was recorded in the years 2009-10

2.

Trend Analysis:

Inventory Management
Trend analysis technique is applied to know the growth rate in investment of
raw material of HERITAGE FOODS INDIA LIMITED over the review period which
is shown in the following table.

Trend Analysis:

Raw

Year

Material

Lacks)

(in

Trend %

2004 2005

12226.70

98%

2005 2006

13498.80

94%

2006 2007

50975.78

385%

2007 2008

51686.81

295%

2008 2009

42925.25

313%

2009 2010

87905.86

799%

100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2004-05

Interpretation:

2005-06

2006-07

2007-08

2008-09

2009-10

Inventory Management

1)

The investment on investment has increased in the year 2008 -10. And the lost
year investment has declared continuously. The percentage in 2005 -06was
295% as compared to years 2006 -07 to 2009 -10.

2)

The trends in inventories show that inventory have been more in the year 2009
-10and then it has shown a downward trend and again it increased to some
extent.

3.

Inventory Turnover Ratio:

ss

This ratio indicates the number of times the stock has been turned over during

the period & evaluates the efficiency with which a firm is able
inventory. This ration is calculated by applying the following formula.
Cost of goods sold
Inventor turn over ration

_________________
Average inventory

Inventory turn over ration:


yrs

Cost

of

sold

goods

Avg. Inventory

Ratio

2004 2005

59225.45

6900.22

8.58

2005 2006

58022.22

36225.20

1.58

2006 2007

110221.21

96075.65

1.14

2007 2008

120522.68

11490.07

10.48

2008 2009

125492.78

12223.99

10.26

2009 2010

309266.98

150025.22

2.06

to manage its

Inventory Management
120000
100000
80000
60000
40000
20000
0
2004-05

2005-06

2006-07 2007-08

2008-09

2009-10

Interpretation:

1.

From the above table 2004 it can be observed that (1) inventory turn
over ratio is 8.58 during 2004 2005 and it gradually decreased to 1.58 during
2005 2006.

2.

In the year 2006 -07 it is clear that the ratio is very less i.e., he stock
is not turned into sales quickly.

3.

As compared to all the years the ratio is very less in 2006 -07

4.

Inventory conversion period:

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

Inventory Management
Days in a year (360 days)
Inventory conversion period

_____________________
Inventory turnover ratio

Inventory conversion period: (in crores)


Cost of goods Avg.

Year

Ratio

ICP (Days)

6900.22

8.58

42

58022.22

36225.20

1.58

230

110221.21

96075.65

1.14

26

11490.07

10.48

33

sold

inventory

2004 2005

59225.45

2005 2006
2006 2007

120522.68
2007 2008
2008 2009

125492.78

12223.99

10.26

32

2009 2010

309266.98

150025.22

2.06

271

120000
100000
80000
60000
40000
20000
0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Inventory Management

Interpretation:
From the above table it can be identified the following observations:
1)

The inventory conversion period was 230 days during the year 2005 -06but it
declined to 204 during 2006 - 05, which indicates that the stock has been very
quickly converted into sales which mean the company is managing the
inventory efficiently.

2)

The lowest inventory conversion period was recorded at 26 days in the year
2006 -07 and the highest inventory conversion was recorded at 271days in the
year 2009 -10.

3)

The average inventory conversion period was recorded at 107 days during the
review period.

Inventory Management

5.

Percentage of Inventory over current assets:


In order to know the percentage of inventory over current assets the

Ratio of inventory to current assets is calculated and which is presented in the


following table.

Inventory Management
Inventory
Inventory over current assets ratio =

__________ X 100
Current assets

Percentage of Inventory Over current assets:


Year

Inventory

Current Assets

Ratio (%)

2004 2005

14286.75

25129.23

56%

2005 2006

11780.77

29780.68

39%

2006 2007

50925.70

54073.55

94%

2007 2008

43950.76

46000.22

94%

2008 2009

47077.45

50722.25

92%

2009 2010

94605.76

87111.59

108%

100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Interpretation:

1)

From the above table it can be understand that the % of inventory over current
assets ratio was showing a declining trend for two years 2004 - 2005.

Inventory Management
2)

However from the year2009 -10it is showing an increasing trend.

3)

The lowest inventory over current assets ratio was recorded at 39% during the
year 2005 -06and the highest inventory over current assets ratio we recorded at
108% during 2009 -10.

4)

The average inventory over current assets ratio was recorded at 85%.

6.

Percent of Inventory Over total current assets & fixed assets:


Inventory / Current + Fixed assets

Year

Inventory

Current Assets

Ratio (%)

2004 2005

14286.75

88122.55

16.21%

2005 2006

11780.77

89133.25

13.21%

2006 2007

50928.70

118900.79

42.83%

2007 2008

43950.76

114659.62

38.33%

2008 2009

47077.45

114769.56

41.01%

2009 2010

94605.76

199340.25

47.45%

Inventory Management
250000
200000
150000
100000
50000
0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Interpretation:

1)

During the year 2004 03the ratio was 16.21% on it declined to


13.21% in the year 2005 -06

2)

From the year 200605 it is showing fluctuating trend but as compared to


above 2 years it is increasing.

3)

The lowest inventory over total assets ratio was recorded at 13.21% during the
year 2005 -06and the highest inventory ratio was recorded at 42.83% during
the year 2009 -10.

4)

The average inventory to total assets ration was recorded at 38.33% during the
review period.

Inventory Management
7.

Percentage of Inventory over current liabilities:

In order to know the percentage of inventory over current liabilities the


ration of inventory to current liabilities is calculated and which is presented in
the following table.
Inventory
Inventory over current liabilities ratio

= __________________ X 100
Current liabilities

Percentage of Inventory Over current liabilities:


Year

Inventory

Current liabilities

Ratio (%)

2004 2005

14286.75

7900.21

18%

2005 2006

11780.77

8101.11

145%

2006 2007

50925.70

17202.41

296%

2007 2008

43950.76

17800.42

246%

2008 2009

47077.45

18728.24

257%

2009 2010

94605.76

37257.22

253%

Inventory Management
40000
35000
30000
25000
20000
15000
10000
5000
0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Interpretation:
1)

From the above table it can be understand that the %


inventory over current liabilities ratio was showing a declining trend for two
years 2004 -05

2)

During the year 2005-06the ratio was it gradually increased


to 145 and there is a net increase to the extent of 128.

3)

The lowest inventory over total amounts ratio was recorded


at 18 during the year 2004 -05

8.

Current Ratio:

In order to know the current ratio the percentage of current assets to current
liabilities is calculated and which is presented in the following table.
Current assets
Current Ratio

= _____________________
Current liabilities

Inventory Management
Calculation of Current Ratios:
Year

Inventory

Current liabilities

Ratio (%)

2004 2005

25272.33

8000.12

3.15%

2005 2006

29769.79

8042.70

3.70%

2006 2007

54077.69

17299.15

3.12%

2007 2008

46600.02

17900.15

2.60%

2008 2009

50714.25

18600.25

2.72%

2009 2010

87899.25

37256.42

2.35%

100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Interpretation:

1)

From the above table it can be interpreted that the % of current assets over
current liabilities ratio i.e., current ratio was showing a decreasing trend
from year 2005 -06

2)

In the year 2004 -05the ratio was 3.15% and has increased to 3.70% in the
year 2005 -06

3)

The lowest current ratio was recorded at 2009 -10which is 2.35% and the
highest current ratio was recorded at 3.70% during the year 2005 -06

Inventory Management
4)

9.

The average current ratio was recorded at 3.09% during the review period.

Quick Ratio:

The quick ratio is the relationship between quick to current liabilities quick
assets is more rigorous test of liability position of a firm it is computed by applying
the following formula.
Quick ratio

Quick assets / Current Liabilities

Where Quick assets = Current Assets Inventory

Year

Inventory

Current liabilities

Ratio (%)

2004 2005

9787

6828

1.43%

2005 2006

17460

9042

2.12%

2006 2007

3216

15202

0.21%

2007 2008

3500

17202

0.20%

2008 2009

3701

17204

0.21%

2009 2010

3203

37256

0.08%

Inventory Management
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Interpretation:
1)

From the above table it can be understand as that the % of quick assets to
current liabilities i.e., the quick ratio was 0.002% in 2006 -07and from that
year it is showing increasing trend.

2)

The highest quick ratio was recorded at 2.42% during the year 2005
-06and the lowest quick ratio was recorded at 0.21% during the year 2006
-07

Inventory Management
CHAPTER V

Inventory Management

CONCLUSIONS;

1)

Over all the inventory of HERITAGE FOODS INDIA LIMITEDs is up to


the mark.

2)

The production of clinker and FOODS during 2006 2007 was 6,74,634
and 6,87,092 respectively which is higher as compared to 2009 2010
which is 5,97,374 and 6,57,756.

3)

Investment on raw material is 95605.89 lakhs which very high as


compared to 2009 -10which is only 560700.56 lakhs.

4)

The inventory turn over ratio shows that the stock has been converted into
sales is only 1.02 times.

5)

In the year 2006 -07 the stock was cleared within 27 days whereas it took
230 days in the year 2005 2006 which took more days for clearing stock.

6)

Year 2006 -07 is not showing sample profits. This is because of FOODS
prices have been continuously under pressure due to persistent mismatch
between supply and demand.

7)

The quantity of dairy in the year 2009 -10is 8,98,240 and its value
is12,94,24,815 but whereas in the year 2008 -09 the quantity was 8,92,560
and the value is 12,10,71,545.

8)

In purchase department for want of any item it should go through several


process. This may include receiving indents, floating enquiries,
preparation of order processing form, preparation of purchase order and
order follow up inform the supplier. Most of the time was spent in
accounts payable.

9)

In this type of process, it requires more number of employees and supplier


should also wait for until the accounts are matched.

Inventory Management
10)

This process takes an input, adds value to it and provides an output to an


internal or external customer.

SUGGESTION:

1)

Though the production is higher is the year 2006 -07 and the sales were
very high i.e., as per inventory conversion period it took 270 days. This
shows that there is demand for FOODS and the funds unnecessarily tied
up. So, proper demand forecasting should be done and according to that it
may be manufactured.

2)

The investment on raw material should be made as per the requirement.


Unnecessary investment may block up the funds.

3)

Neither too high nor too low inventory turnover ratios may reduce profit
and liquidity position of the industry. So, proper balance should be made to
increase profits and to ensure liquidity.

4)

The raw material should be acquired from the right source at right quality
and at right cost.

Inventory Management
5)

The process that was being used by HERITAGE FOODS INDIA


LIMITEDs with the purchasing department should undergo changes, so
that, it seeks enhance the celerity of the delivery of a product without
compromising its quality by improving the utilization of materials, labour
and equipment.

6)

To reduce the work, the purchasing department may enter the purchasing
order into database and did not send a copy to any one. When the
merchandise arrived, the receiving clerk would enter the database and
determine whether the order agreed with the electronic purchase order.
If it did, payment was authorized to be made at the appropriate

Time. If it didnt match, the order would be returned until if it is agreed by the
HERITAGE FOODS INDIA LIMITED.
If it institutes Invoice less purchasing where the supplier did not need to
send an invoice to be paid.
This generally simplifies the process for all concerned. As a result, it would
able to reduce the work of its accounts payable department.

BIBLIOGRAPHY

Inventory Management

1.

Financial Management

By IM Pandey

2.

Financial Management

By Prasanna Chandra

3.

Total Quality Management

By K. Shridhara Bai

4.

Companys Stores Manual

5.

Companys Annual Reports