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ACKNOWLEDGEMENT
I wish to express my sincere thanks to Elecon Engineering Co. Ltd. for allowing me to work in an open
and free manner in their organization.
I am also thankful to my project guide, Mr. ________________ for his continuous support throughout
my project work without which, the true and accurate understanding of the project would not have
been possible.
I am deeply indebted to Mr. K.N Acharya (Manager, Store and Inventory ) who consistently guided
and, advised me during my project work and all the staff of store department for providing me
necessary information.
Last but not least, I would like to express my gratitude to my parents and friends for their
unconditional love and support.
PREFACE
I have made this report as an essential part of curriculum of MBA. The title of project is
“Inventory management System at Elecon Engineering Co. Ltd.- EP division”
In the course of my training I have had the golden opportunity of seeing the practical
application of whatever theoretical knowledge was imparted to me in a class room
studies. I have had the good fortune in interacting with the executive and employee
of Elecon Engineering Co. Ltd. who were very warm and cordial in their conduct
toward me.
My report mainly focuses on Inventory management. I hope that the finding of the
project work must conform to the company’s expectation & suggestion made on that
basis must be useful for effective inventory management at Elecon Engineering Co.
Ltd.
TABLE OF CONTENT
Chapter No. Content Page no.Executive Summary
1 Company ProfileIntroduction
Product ProfileCore industry sector served
New advancementVision
MissionQuality certificationGroup Companies
Brief history of Gear DivisionProduct of gear division
Information about EP division sub division of gear division
2 Objective and research Methodology3 Conceptual framework of inventory management
IntroductionDefinitions
Functions of inventoryClassification of inventories
Risk of holding inventoryInventory costs
Techniques of inventory management
4 Inventory management at Elecon EP divisionInventory management
Store FunctionInventory Receipt Section
Custody SectionMaterial Planning and Inventory Control Section
Valuation of InventoryInventory control techniques at Elecon
5 Findings6 Suggestions7 Bibliography
EXECUTIVE SUMMARY
Inventory management assumes significant importance in a highly integrated supply
chain and the module facilitate accomplishment of organizational objectives including
cost efficiency and enhanced consumer loyalty by rendering superior visibility and
streamlined processes.
To be competitive today, it is essential to decrease the overall production cycle
times, reduce inventories and build those products that is most in demand. It means
focusing on good expediting and rescheduling, reduced supplier lead time, improved
turnaround rated, reduced cost to carry inventory.
Inventories constitute the principal item in the working capital of the majority of
trading and industrial companies. In inventory, we include raw materials, finished
goods, work-in-progress, supplies and other accessories. To maintain the continuity
in the operations of business enterprise, a minimum stock of inventory required.
Management of inventory records and relevant details is an important area of
concern for every organization, whether it is large or small. And also calls for efficient
planning and maintenance. No matter the viewpoint, effective inventory management
is essential to supply chain competitiveness.
Businesses require timely and accurate information on inventory location,
movement, and valuation. Inaccurate inventory counts can cost you sales and delay
shipments past the promise date. Out-of stock items as well as overstocked items in
inventory can be devastating to business. Additionally, an overstated or understated
inventory valuation can result in incorrectly reported assets within financial
statements. Properly used, the Inventory Management module can help bring about
the formulation of new or improved purchasing policies, sales policies, pricing
methods, and even enhanced customer service.
Project starts with introduction of the company, its vision, values and product profile.
Second chapter is about the objective and research methodology. Third chapter is
about conceptual framework of inventory management, its control techniques and
costs associated with it. Fourth chapter deals with the inventory management at
Elecon Engineering Co. Ltd. Company’s store management system, inventory ratios
etc. are studied in this chapter.
CHAPTER -1
COMPANY PROFILE
Introduction
Established in 1951, Elecon Engineering Co. Ltd, India, pioneered breakthrough
innovations in the manufacture of material handling equipment, industrial Geared
Motors (Products of PBL) and reducers, mining equipment, casting processes etc.
Elecon is one of the largest manufacturers of MHE and Industrial gears in Asia.
Elecon's recent acquisition of Benzlers - Radicon Group of businesses from David
Brown Gear Systems Group adds to the expertise in manufacturing customized
gearboxes for Steel Mills, High speed Turbines, satellites for Indian Space Research
Program and Naval aircraft carriers.
During the span of 6 decades, Elecon has encompassed all the major core sectors
through its supplies of highly sophisticated equipment bearing ample testimony of
the symbolic mark of Elecon's unbeatable technology. Elecon has thus with its
marketing network and execution capabilities, made its presence felt through
consistent and satisfactory performance of its equipment and successful delivery of
projects in core sectors as fertilizer, cement, coal, power generation, mining,
chemical, steel, port mechanization, minerals & metals processing, etc.
Elecon has expanded its skills and expertise to execute EPC contracts and has
successfully executed several EPC projects in India. Elecon has transformed into a
fully integrated EPC company in areas of its specialization.
Product Profile
Elecon is the first company in India to have manufactured sophisticated equipment
for Bulk Material Handling and have their footprints in every industrial sector and
customer in India. Its product range includes design, engineering, manufacture,
supply, erection and commissioning of:
Wagon tipplers
Bucket wheel
stacker/reclaimers
Crawler-mounted trippers
Stationary and shiftable
conveying systems for open
Barrel-type blender reclaimers
Fertilizer reclaiming scrapers
Limestone pre-homegenizing
and blending plants
Single and twin bucket wheel
bridge-type reclaimers
cast lignite mines
Integrated coal handling plants
for power stations
Underground mining conveyors
Open-cast conveying systems
Ferrous and non-ferrous
foundry products
Core Industry Sectors Served
Coal handling Plants for Thermal Power Projects
Overburden and Coal/Lignite handling System for Open Cast Mines
Raw material handling, Crushing and Blending system for Cement Plants
Ore Handling and Stockyard Equipments for Steel Plant
Product & Bag Handling Plants
Cross Country Conveyor System
Wagon Loading and Unloading System (Bulk)
Bagging, Handling and Truck/Wagon Loading (Fertilizer, Cement, Sugar)
Ship Loader and Un-loaders handling bulk / bags at the Port Terminals
New Advancements
Pipe Conveyors:
With the ever increasing use of pipe conveyors as an acceptable form of bulk solids
transportation, especially when environmental, operating and maintenance costs are
of primary importance, has come the added advantage, of suppliers breaking new
ground in the innovation stakes.
With Co.’s collaboration with CKIT, one of the leading engineering services company
for providing conveying solutions, Co. is now executing a 7.5 kms Cross country pipe
conveyor project for Manikgarh cements and a complex downhill conveyor project for
NMDC.
High Speed Rollers:
Elecon is a pioneer in developing the technology to manufacture high speed rollers
in house. Co.’s roller shop is equipped to produce 30,000 rollers/ month in total and
12,000 high speed rollers/month in specific. Elecon is already supplying High speed
rollers up to belt speeds of 7.5 m/s to its clients.
Yard Management and Manless machines:
Elecon with its partners have developed the capability of automated stockyard
systems and unmanned yard equipments. Co. has the capability to undertake
specialized projects of stockyard management with built-in capability to provide
Monitoring of stock pile equipment, programming of stacking and reclaiming,
monitoring stockpile composition, monitoring of stacking & reclaiming, preparation of
material balances and analyses, build-up of stockpiles with specific blends, historical
balances, future planning and hot spot control.
Co. also has capabilities to undertake specialized projects to provide wireless
solutions for, manless operation of machines, alternate control methodology for
wagon tippler by using Profibus on Energy Chain, particular solutions for stacker
reclaimer (depth of cut control), on line intelligent health monitoring & predictive
maintenance management system for mechanical, structural, electrical, instrument,
machines parameter sub systems.
Vision:
Create global presence in power transmission by innovating and developing
products to enhance value and satisfaction of Customers.
Mission:
We are committed to
Be present in all the leading & emerging markets of the world by
expanding, collaborating and associating with other partners and
consolidating our presence in already penetrated markets.
Remain "Always A Step Ahead in Technology" by Continuously
investing in research and development to cater to new applications,
industries and segments as well as improvementofourexisting product
ranges.
Empower human resources to promote entrepreneurship, team spirit
leading to value enhancement for our Customers and Stakeholders.
Follow environment friendly practices to protect environment and
continuously review and improve products and processes throughout the
supply chain.
Upliftment of society at large and well being of our employees.
QUALITY CERTIFICATION:
- ISO 9001:1994 (TUV management service) – Elecon Engineering Co. Ltd.
(MHE Division)
- ISO 9001:2008 (TUV Rheinland) - Elecon Engineering Co. Ltd. (Gear
Division)
- EN 292-1-1991 (Bureau Veritas) – Elecon Engineering Co. Ltd. (Product-
Worm gearbox, “SNU” size 3”,3.54”,4” & 5” Ratio 11 for each size )
GROUP COMPANIES:
Eimco Elecon
Power Build Ltd
EMTICI Engineering Ltd.
Prayas Engineering Ltd.
Elecon Information Technology Ltd.
Radicon & Benzlers
BRIEF HISTORY OF GEAR DIVISION:
Gear Plant having an area spread over 1,73,098 Sq. Meters
1975 - 1985 : Collaboration with WGW (TGW) Thyssen Getribe Works for Sprial
Bevel & Helical Gearboxes, today it is designated as "ET" series.
1985 -1992 : Collaboration with Renk AG, Germany for
A) High Speed Gearboxes
B) Bucket wheel & Slewing Planetary Gearboxes
C) Marine Gearboxes
D) Vertical Roller Mill Gearboxes
1999 - 2002 : Collaboration with PIV, Germany for Posired - II - Sprial Bevel &
Helical - Bevel drives Gearboxes today it is designated as "EP" series. 1992
onwards we have tie up with Renk AG, Germany on.. project to project basis. We
had collaboration with SIME France for Hydrokinetic Fluid Couplings from for
various sizes up to COR/CORP 870.
1998 : Developed Lift Gear Box - TM 500 Model for M/S. Kinetic Transportation
Products Ltd. (Indian counter part of Hyundai Elevator Co., Korea)
1999 : Developed Lift Gear Box - G140 Model for M/S. Bharat Bijlee Ltd.
2000 : Developed Lift Traction Machine - W140 Model for M/S. Schindler India Pvt.
Ltd.
2003 : Developed Elevator Traction Machine Model - L 127
2004 : Developed Elevator Traction Machine Model - L 163
2005 : Developed Elevator Traction Machine Model - L 115
2008 : Collaboration with M/S. Haisung Industrial System Co. Ltd., South Korea
Co. signed collaboration with Renk AG, Germany w.e.f. April 07 for Vertical Roller
Mill Gearboxes for KPAV type upto size 200 & output torque 1040 KNM.
Products of gear division:
Helical and Bevel Helical Gear boxes
Worm Gear boxes
Elevator Traction Machines (Lift Gear boxes)
Couplings
Wind Mill Gear boxes
High Speed Gear boxes
Planetary Gear boxes
Marine Gear boxes
Geared Motors
Custom built Gear boxes
Vertical Roller Mill Drive (VRM)
Elecon has expertise in providing customized gear boxes
for Steel Mills, High Speed Turbines, Sugar Mills, Marine vessels, Coast
Guard Ships, Plastic Extrusions, Antena Drives and for Satellites in the
Indian Space Programme.
Information about EP- Division for sub division of gear division of Elecon
1999 - 2002 : Collaboration with PIV, Germany for Posired - II - Sprial Bevel &
Helical - Bevel drives Gearboxes today it is designated as "EP" series.
EP-Series is totally new developed gear program with the latest technology.
EP-Series is an intelligent gear concept because it answer the purpose with fewer
but more versatile parts (High degree of standardization and the use of common
parts size to size givens optimum availability and short delivery times)
The sizes encompass smaller ranges and also the permissible torque with increasing
size are smaller bands.
It offers more advantages owing to faster delivery times, more variable and universal
possible application and greater standardization of the series.
Construction types- 1 to 4 stage helical gears, 2 to 4 stage bevel helical gears & 19
sizes follow, the modular concept.
Construction and structural shapes - for horizontal, vertical and standing design
CHAPTER -2
OBJECTIVE AND RESEARCH METHODOLOGY
◈ OBJECTIVE OF THE STUDY
Following were the objectives of the study:-
a) To study inventory management system of EP division of Elecon Engineering Co.
Ltd.
b) Maintaining adequate inventory so as to avoid production held up leading to
customer dissatisfaction loss of revenue and increase in cost for emergency
purchase.
c) Avoiding excessive investment in inventory and consequently reducing carrying cost.
d) Relieving Management in taking inventory decisions for each and every item of
inventory.
e) To evaluate the performance of each component of inventory management of EP
division. To calculate the ratios related to inventory.
f) To understand the problems faced by company in handling inventory.
g) To design and calculate safety stock, the reorder point and minimum and maximum
level of inventory.
h) To study and come out with any solution for improvement of inventory management
in EP division.
◈ RESEARCH METHODOLOGY
RESEARCH DESIGN
A research design is a framework to prepare plan or study. It is useful as a guide to
collect the data and analyzing it. It is a blue print that is followed in completing the
study. Research design is the conceptual structure within which the research will be
conduct.
Type of Research: The study exploratory in nature
◈ SOURCES OF DATA COLLECTION:
Primary data was collected through interview of store manager,
finance manager and other official staff of the store department.
Secondary data was collected through balance sheet, profit and loss
account, assistant ledger book MRN, company manual, website,
journals, etc.
◈ DATA ANALYSIS
It was done with the help of simple percentage and graphical method. Pie and Bar chart was
used to present data in graphical manner. Ratios of inventory were calculated to study
efficiency of inventory management is concerned. The data was analysed for last 2 years.
◈ LIMITATION
1. This project is restricted to study purpose only and can be used keeping in
view the object that is made for.
2. The respondent in the project may not reveal important / confidential
information pertaining to the company policy and for this the project should be
used keeping in view the said limitation.
3. Finding of the study was based on the assumptions that respondents have
given correct information.
4. Ratios of inventory were calculated for last 2 years only.
CHAPTER -3
CONCEPTUAL FRAMEWORK OF INVENORY MANAGEMENT
INTRODUCTION
In financial parlance, inventory is defined as the sum of the value of raw materials, fuels and
lubricants, spare parts, maintenance consumables, semi-processed materials and finished
goods stock at any given point of time. The operational definition of inventory would be: the
amount of raw materials, fuel and lubricants, spare parts and semi-processed material to be
stocked for the smooth running of the plant. Since these resources are idle when kept in
stores, inventory is defined as an idle resource of any kind having an economic value.
Inventories are maintained basically for the operational smoothness, which they can affect by
uncoupling successive stages of production, whereas the monetary value of inventory serves
as a guide to indicate the size of the investment made to achieve this operational convenience.
The materials management department is expected to provide this operational convenience
with a minimum possible investment in inventories. The objectives of inventory, operational
and financial, needless to say, are conflicting. The materials department is accused of both
stock-outs as well as large investment in inventories. The solution lies in exercising a
selective inventory control and application of inventory control techniques.
DEFINATIONS
In order to understand the concept of inventory terms are used for managing inventory at a
logistical facility, let us first view the definitions:
Inventory level is the actual inventory quantity held at a logistical facility at a particular point
of time.
Cycle inventory or base stock refers to the inventory quantity held in stock due to the
replenishment time required in the ordering process.
Replenishment time or lead-time is the time elapsed between order placement and order
receipt for an inventory item. In case inventory is to be replenished by manufacturing, this id
the time elapsed between the work order issue for manufacturing and the completion of
manufacturing.
Safety stock or buffer stock inventory is the inventory held due the differences in demand and
supply rate of material at each stage in-between supplier, purchase, manufacture, distribution,
and customer to avoid stock outs at each stage.
Average inventory is the calculated average of the inventory quantity held at a logistical
facility over a period of time.
Reorder point is the pre-decided inventory level, which is reached by a falling inventory level
during utilization of inventory, at which point an order is placed for replenishing the
inventory in order to avoid a stock out.
Order quantity is the inventory quantity, which is ordered for replenishing depleting
inventory.
FUNCTIONS OF INVENTORY
The necessity of holding inventory is due to the following functions of inventory:
Specialization:
A firm can either produce all the required variety products at a plant at one location, or,
produce different products at separate plant locations. Locating separately will enable the
firm to select the location of each different product manufacturing plant based on the
particular requirements of that product, thus achieving specialization efficiencies like
geographical facilities and economies of scale. This specialization approach creates inventory
at diverse locations. Also, pipeline inventories are created due to transport linkages required
between different manufacturing plants and with distribution warehouses.
Balancing supply and demand:
Demand depends upon the requirements of customers relating to time and quantity of
products, and is not in the control of the producer. Supply, on the other hand is under the
producer’s control, but has to be economized and also paced with the time and quantity
requirements of customer demand. In order to ensure that customers are not dissatisfied when
they demand the required quantity of products, it is necessary to have adequate inventory of
products available at all times. This is the balancing inventory required due to the different
rates of manufacturing and consumption. In case of seasonal products when production has to
take place for a longer period of time in advance of the season, production throughout the
year ensures lower investments in production capacities while increasing inventory. An
example is the production of rainwear throughout the year for the sales which will occur only
during the rainy season. Another example of balancing is seasonal production during raw
material availability and year-round consumption, which also requires inventory. The
example of this is seasonal availability of mango fruit and year-round consumption of mango
–based products.
Economies of scale:
Economies of scale are obtained by holding large inventories a) While purchasing, ordering
in large quantities provides cost economies and discounts; (b) transportation economies are
obtained by transporting in larger quantities; and, (c) during manufacturing, producing in
economic batch quantities lower costs.
Overcoming uncertainty:
Safety stock of inventory is required to overcome uncertainty of customer demand on the one
hand; and, purchasing, receiving, manufacturing, and order processing delays on the other.
Either of these may result in shortages of products at the time of customer requirements if
adequate safety stock of material is not provided for. If such material stock outs are not
frequent occurrences, the customer may look elsewhere leading to a last order at the very
least, or a lost customer. This uncertainty results in buffer stocks being created between (a)
supplier and purchasing, (b) purchasing and production, (c) production and marketing, (d)
marketing and distribution, (e) distribution and intermediary, (f) intermediary and customer,
in order to avoid stock outs.
CLASSIFICATION OF INVENTORIES
Production inventories:
They represent raw materials, parts and components that are used in the process of
production. Production inventories include
Standard industrial items purchased from outside (also called bought outs)
Non-standard items (purchased items)
Special items manufactured in the factory itself (also called works made parts or piece
parts.
MRO inventories:
They refer to the maintenance; repairs and operation supplies, which are consumed during
process of, manufacture but do not become a part of the product.
In-process inventories:
They represent items in the semi-finished condition (i.e. items in the partially completed
stage)
Goods-In-Transit:
They represent such materials, which have been paid for but have not yet been received by
the stores.
RISK OF HOLDING INVENTORY
The holding of inventory creates the following risks for a firm:
The investments committed to a particular inventory combination are not available for
alternative uses for the benefit of the firm. The risks in these case is due to the interest
cost incurred on this inventory until the investment is recovered, as also the
opportunity cost of profit which might have been made in alternative investment.
The inventory may be pilfered or lost.
The inventory may become absolute and/ or useless.
Determination of inventory is another risk for holding inventory.
INVENTORY COST
In operating an inventory system manager should consider only those costs that vary directly
with the operating doctrine in deciding when and how much to recorder; cost independent of
the operating doctrine are irrelevant. Basically, there are five types of relevant costs.
Cost of the item.
Cost of procuring the item.
Cost of carrying the item in inventory.
Cost associated with being out of stock when units are demanded but are unavailable
(stock outs).
Cost associated with data gathering and control procedures for the inventory system.
Often these five costs are combined in one way or another, but let’s discuss them separately
before we consider combinations.
Cost of Item:
The cost, or value, of the item is usually its purchase price: the amount paid to the supplier
for the item. In some instances, however, transportation, receiving, or inspection costs, for
example, may be included as part of the cost of the item. If the cost of the item per unit is
constant for all quantities ordered, the total cost of items purchased during the planning
horizon is irrelevant to the operating doctrine. If the unit cost varies with the quantity
ordered, a price reduction called a quantity discount, this cost is relevant.
If the facility manufactures the item, the cost of the item is its direct manufacturing cost.
Again, constant unit cost mean total costs are irrelevant.
Procurement Costs:
Procurement costs are the placing a purchase order or the setup costs if the item is
manufactured at the facility. These costs vary directly with each purchase order placed.
Procurement costs include costs of postage, telephone calls to the vendor, labor costs in
purchasing and accounting, receiving costs, computer time for record keeping, and purchase
order supplies.
Carrying Costs:
Carrying or holding casts are the costs of maintaining the inventory warehouse and protecting
the inventoried items. Typical costs are insurance, security, warehouse rental, heat, lights
taxes, and losses due to pilferage spoilage, or breakage. The cost of typing up capital
inventory is also considered a carrying cost.
Stock-out Cost:
Stock out cost, associated with demand when stocks have been, takes the form of lost sales or
backorder costs. When sales are lost because of stock-outs, the firm loses both the profit
margin on unmade sale and its customer’s good will. If customers take their business
elsewhere, future profit margins may also be lost. When customers agree to come back after
inventories have been replenished, they make backorders. Backorder costs include loss of
good will and money paid to reorder goods and notify customers when goods arrive. As the
next example shows, stock-outs can and do occur in the service industries.
Cost of operating the information processing system:
Whether by hand or by computer, someone must update records as stock levels change, for
system in which inventory levels are not recorded daily, the cost is primarily incurred in
obtaining accurate physical counts of inventories. Frequently, these operating costs are more
fixed than variable over a wide quantity range. Therefore since fixed costs are not relevant to
the operating doctrine, we will not consider them further.
Cost tradeoffs:
Our objective in the inventory control is to find the minimum cost operating doctrine over
some planning horizon; these costs can be expressed in a general cost equation.
TECHNIQUES OF INVENTORY MANAGEMENT
1. Economic Order quantity:
The order quantity depends upon the cost of the inventory items, the rate and nature of
demand (whether constant or fluctuating), the replenishment time, and the inventory carrying
costs and ordering costs for the inventory items.
The EOQ can be calculated with the help of a mathematical formula. Following assumptions
are implied in the calculation:
Constant or uniform demand- although the EOQ model assumes constant demand, demand
may vary from day to day. If demand is not known in advance- the model must be modified
through the inclusion of safe stock.
Constant unit price- the EOQ model assumes that the purchase price per unit of material will
remain unaltered irrespective of the order offered by the suppliers to include variable costs
resulting from quantity discounts, the total costs in the EOQ model could be redefined.
Constant carrying costs- unit carrying costs may very substantially as the size of the
inventory rises, perhaps decreasing because of economies of scale or storage efficiency or
increasing as storage space runs out and new warehouses have to be rented.
Constant ordering cost- this assumption is generally valid. However any violation in this
respect can be accommodated by modifying the EOQ model in a manner similar to the one
used for variable unit price.
Instantaneous delivery- if delivery is not instantaneous, which is generally the case; the
original EOQ model must be modified through the inclusion of a safe stock.
Independent orders- if multiple orders result in cost saving by reducing paper work and the
transportation cost, the original EOQ model must be further modified. While this
modification is somewhat complicated, special EOQ models have been developed to deal
with it.
These assumptions have been pointed out to illustrate the limitations of the basic EOQ model
and the ways in which it can be easily modified to compensate for them.
2. Just In Time:
The time-based approach to inventory management came into focus when Toyota Motors
Company came out with the concept of kanban in 1950. This lead to the dramatic reduction
in WIP quantities tying the inventory closely to the demand from subsequent process or
internal customer. Kanban is conceptually a two-bin system, a signal being raised to warrant
replenishment.
JIT approach became a modern production system seeking to implant concept of stockless
production. JIT embraced a variety of manufacturing concepts like reduced lot sizes, quick
switch over [SMED], load leveling [response to tact time], group technology, statistical
process control [control charts], preventive maintenance and quality circles.
3. ABC Analysis:
ABC analysis underlines a very important principle “Vital few: trivial many”. Statistics
reveal that just a handful of items account for bulk of the annual expenditure on materials.
These few items, called ‘A’ items, therefore, hold the key to business. The other items,
known as ‘B’ and ‘C’ items, are numerous in number but their contribution is less significant.
ABC analysis thus tends to segregate all items into three categories: A, B, and C on the basis
of their annual usage. The categorization so made enables one to pay the right amount of
attention as merited by the items.
A-items: it is usually found the hardly 5-10% of the total items account for 70-75% of the
total money spent on the materials. These items require detailed and rigid control and need to
be stocked in smaller quantities. These items should be procured frequently, the quantity per
occasion being small.
B-items: these items are generally 10-15% of the total items and represent 10-15% of the
total expenditure on the materials. These are intermediate items. The control on these items
need not be as detailed and as rigid as applied to C items.
C-items: these items are generally 70-80% of the total items and represent 5-10% of the total
expenditure on the materials. The procurement policy of these items is exactly the reverse of
A items. C items should be procured infrequently and in sufficient quantities. This enables
the buyers to avail price discounts and reduce work load of the concerned departments.
Policies of Control for A, B and C Categories:
Any sound stock control system should ensure that the each item gets the right amount of
attention at the right time. ABC analysis makes this possible with considerably less effort due
to its selective approach there are number of ways in which ABC classification can be made
use of:
Degree of Control:
Some one at the senior level should be made responsible for regular reviewing of these items.
Up-to-date and accurate records should be maintain for these items. “B” items should be
brought under normal control made possible by goods record keeping and periodic attention.
Little control is required for “C” items.
Ordering Procedure:
A items should be subject to frequent review to reduce unwarranted stockouts and
possibilities of overstocking. A reasonable good analysis for order points is required for “B”
items but the stocks may be reviewed less frequently. No such computations are necessary for
“C” items. These should be bought in bulk.
Staggering of delivery schedules:
Staggering of delivery schedules is one of the best strategies to reduce the inventory
investment and ensure un-interrupted inflow of materials. Staggered deliveries tend to reduce
cost of order writing but increase the cost of inspection and receiving. Annual contract with
scheduled deliveries are desirable for “A” and “B” class of items. “C” class of items,
however, should be purchased in bulk on single-order-basis.
Stock records:
Details records of goods ordered, received, issued and goods on hand should be maintained
for “A” category of items. No such detailed records are necessary for “C” items. Any routine
method that ensures goods and accurate records is enough for “B” category of items.
Priority treatment:
VIP treatment may be accorded to A items in all activities such a processing of purchases
orders, receiving, inspection movement on the shop floor, etc., with an object to reduce lead
time and average inventory. No such treatment is necessary for “B” items. No priority is
assigned to “C” items.
Safety Stock:
All items of consumption are equally important from production point of view. Safety stock
should be less for “A” items. The possibility of stockouts can considerably be cut down by
closer forecasting, frequent reviewing and more progressing. “C” items, on the contrary,
should have sufficient safety stock to eliminate progressing and to reduce the probability of
stockouts. A moderate policy is required for “B” items, safety stock being neither too high
nor too low.
Value Analysis:
To secure maximum benefits, it is essential to select those items for value analysis which
offer the highest scope for cost reduction. The usage classification is a useful step in this
direction. Only “A” and “B” items are selected for detailed value analysis and the former is
given priority over the latter. “C” items should not be value analyzed
4. HML Analysis:
H-M-L analysis is similar to ABC analysis except for the difference that instead of “usage
value”, “price” criterion is used. The items under this analysis are classified into three groups
that are called “high”, “medium” and “low”. To classify, the items are listed in the
descending order of their unit price. The management for deciding three categories then fixes
the cut-off-lines. For example, the management may decide that all items of unit price above
Rs. 1000/-will of ‘H’ category, those with unit price between Rs. 100/- to Rs.1000/- will be of
‘M’ category and those having unit price below Rs. 100/- will be of ‘L’ category.
HML analysis helps to -
Assess storage and security requirements.
To keep control over consumption at the departmental head level.
Determine the frequency of stock verification.
To evolve buying policies to control purchase.
To delegate authorities to different buyers to make petty cash purchase
5. VED Analysis:
‘V’ stands for vital, ‘E’ for essential, ‘D’ for desirable. This classification is usually applied
for spare parts to be stocked for maintenance of machines and equipments based on the
criticality of the spare parts. The stocking policy is based on the criticality of the items. The
vital spare parts are known as capital or insurance spares. The inventory policy is to keep at
least one number of the vital spare irrespective of the long lead-time required for
procurement. Essential spare parts are those whose non-availability may not adversely affect
production. Such spare parts may be available from many sources within the country and the
procurement lead time many not be long. Hence, a low inventory of essential spare parts is
held. The desirable spare parts are those, which, if not available, can be manufactured by the
maintenance department or may be procured from local suppliers and hence no stock is held
usually.
6. S-D-E Analysis:
S-D-E analysis is based on the problems of procurement namely:
Non-availability
Scarcity
Longer lead time
Geographical location of suppliers, and
Reliability of suppliers, etc.
S-D-E analysis classifies the items into three groups called “scarce”, “difficult” and “easy”.
The information so developed is then used to decide purchasing strategies.
“Scare” classification comprise of items, which are in short supply, imported or canalized
through government agencies. Such items are best to procure limited number of times a year
in lieu of effort and expenditure involved in the procedure for import.
“Difficult” classification includes those items, which are available indigenously but are not
easy to procure. Also items, which come from long distance and for which reliable sources do
not exist, fall into this category. Even the items, which are difficult to manufacture and only
one or two manufacturers are available belong to this group. Suppliers of such items require
several weeks of advance notice.
“Easy” classification covers those items, which are readily available. Items produced to
commercial standards, items where supply exceeds demand and others, which are locally
available, fall into this group.
The purchase department employs S-D-E analysis:
To decide on the method of buying
To fix responsibility of buyers
7. S-OS Analysis:
S-OS analysis is based on seasonality of the items and it classifies the items into two groups
S (seasonal) and OS (off seasonal). The analysis identifies items which are:
Seasonal and are available only for a limited period. For example agriculture produce like
raw mangoes, raw materials for cigarette and paper industries, etc. are available for a limited
time and therefore such items procured to last the full year.
Seasonal but are available throughout the year. Their prices, however, are lower during the
harvest time. The quantity of such items requires to be fixed after comparing the cost savings
due to lower prices if purchased during season against higher cost of carrying inventories if
purchased throughout the year.
Non-seasonal items whose quantity is decided on different considerations.
8. M-N-G Analysis:
M-N-G analysis based on stock turn over rate and it classifies the items into M (moving
items), N (non-moving items) and G (ghost items).
M (moving items) is those items, which are consumed from time to time. N (non-moving
items) are those items, which are not consumed in the last one year. G (ghost items) is those
items that had nil balance, both in the beginning and at the end of the last financial year and
there were no transactions (receipt or issues) during the year.
Analysis mainly helps to identify non-existing items for which the store keeps bin-cards or
waste computer memory or waste computer stationary while preparing stores ledger. Stores
department even might have even ear-marked space for these non-existent items.
All pending/ open purchase orders (if any) of such items should be canceled.
9. F-S-N Analysis:
F-S-N analysis is based on the consumption figures of the items. The items under this
analysis are classified into three groups: F (fast moving), S (slow moving) and N (non-
moving).
To conduct the analysis, the last date of receipt or the last date of issue whichever is later is
taken into account and the period, usually in terms of number of months, that has elapsed
since the last movement is recorded.
Such an analysis helps to identify:
Active items which require to be reviewed regularly
Surplus items whose stocks are higher than their rate of consumption; and
Non-moving items which are not being consumed
10. X-Y-Z Analysis:
X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory investment). Items
whose inventory values are high are called as X items while those inventory values are low
are called Z items. And Y items are those which have moderate inventory stocks.
Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.
XYZ analysis helps to identify a few items, which account for large amount of money in
stock and take steps for their liquidation/retention.
XYZ when combined with FSN analysis helps to classify non-moving items into XN, YN,
and ZN group and thereby identify a handful of non-moving items, which account for bulk of
non-moving stock. These can be studied individually in details to take decision on their
disposal or retention.
CHAPTER -4
INVENTORY MANAGEMENT AT ELECON EP DIVISION
Inventory management is one of the most important managerial activities. Each
types of production department maintain separate inventory level. Elecon
Engineering Co. Ltd. maintains different types of inventory i.e. raw material, WIP,
finished goods, transit inventory, buffer inventory, anticipation inventory and cycle
inventory.
◈ Inventory Management
Around 15,000 items of various natures are handled by Stores. Inter departmental
linkages also need to be established to ensure continuous availability of material to
the user and thereby improve the plant availability. The Stores of an industrial set-up
is considered as a measuring point to judge the effectiveness of Material
Management Services.
The basic objective of the Stores Management is to achieve a system oriented
functioning to be followed uniformly within all units of the Elecon and thereby
contribute to continual improvement in day to day working. It is also intended to
ensure proper handling, preservation and accountable inventories. The Stores
management mainly includes the activities like:-
1. Clearance of Goods from carriers.
2. Receipts and Inspection
3. Warehousing
4. Preservation
5. Issue of Material
6. Inventory Control
7. Codification
8. Stores Accounting
9. Claims and Disposal of Scrap, Surplus & Obsolete Items.
Online Integrated Materials & Financial Accounting System have been introduced for
computerized Material Management System.
STORES FUNCTION
A. To arrange clearance, receipt, inspection, acceptance and storage of
materials.
B. To regulate inventory, planning and budgeting through liaison with all
associated departments e.g. Purchase, User, FQA, EDP and Finance etc.
C. To review the stock positions of AR (Automatic Recoupment) items and
prepare indents based on corporate guidelines / norms. For other non-stock
items, screening and checking of indents (raised by user), critical analysis is
required before forwarding the indents to Purchase wing.
D. To Store and preserve the material ensuring proper handling facilities.
E. To arrange insurance policies covering various types of risk coverage, lodging
of claims and follow up with insurance agencies for early settlement.
F. To identify non-moving, surplus and obsolete materials and arrange their
disposal.
G. To maintain proper up-to-date records of issue, receipt, rejection etc.
H. To generate all relevant MIS for circulation as per format.
I. To review the performance Periodically/Annually with that of agreed
Standard /Benchmark.
J. To carry out Stock Verification Activities on Periodical basis.
K. To codify the materials as per functional utility of each item and Corporate
guidelines and explore the ways and means for Standardisation of
nomenclature / specification to minimize the varieties of items and to put them
in to the OLIMFAS for proper accounting and inventory control. While allotting
code numbers it is to be ensured that all information regarding the item are
available so that the duplication of the code for the same item is totally
avoided.
The functional interfaces among various departments :-
Tasks involved in the Stores management
◈ INVENTORY RECEIPT SECTION
This section initiates all prerequisites in smooth transfer of materials on its
arrival to the custody section. This section is responsible for getting the goods
cleared from different transporting agencies. On receipt of the materials, Unloading
Report (UR), MIS cum SRV are prepared; goods get inspected and finally handed
over to the custody section.
This section also raises discrepancy and rejection memos whenever
damages, rejections and shortfalls are noticed and deals with the concerned
authorities that include Insurance Companies, Transporters, Suppliers etc. and
makes settlement of claims.
This section is further sub-divided into three functional groups for monitoring
and control:
A) Inventory Clearance and Dispatch Group. (ICDG)
B) Inventory Inspection and Inward Group. (IIIG)
C) Risk Management Group.(RMG)
A. INVENTORY CLEARANCE AND DISPATCH GROUP
FUNCTIONS.
The function of Clearance and Dispatch group is to arrange receipt of goods and
transfer the same to IIIG and performs the following activities in general.
A. To receive Documents:
i) Receipt of Purchase Order and Amendments:
A hard copy of P.O and subsequent Amendments if any will be received from
purchase section and the same will be kept serially purchase order-wise. The
P.O is also available On-line in the Computer. ICDG can view the Purchase
Order and Amendments to track the supply position.
ii) Receipt of Dispatch Documents:
ICDG shall receive dispatch document from various internal / external
Agencies
e.g. Purchase, Finance (Received through Bank) or directly from Supplier for
door delivery /advance intimation.
B. To maintain LR/RR register.
Once dispatch documents are received by Goods Receipt section, ICDG shall
register LR/RR details in On-line system. Provision for maintenance of manual
LR / RR – Register may be kept to record data in case the On-line system is
down. But the concerned authority shall take care about updating of database
when the On-line is available.
C. To arrange clearance of materials from different clearing point of various
transport agencies /authorities e.g.
i) Road Transport / Railway Go-down.
The ICDG shall maintain close and regular contact with Transporter / Railway
to get intimation regarding arrival / awaiting clearance of consignments.
Information will be collected with reference to RR / LR. The Group shall get
the consignment released after presenting the negotiable documents to the
Transporters / Railways and on payment of freight, demurrage or any other
charges as per terms of order. Collection of consignments shall be done by
this Group in case of urgency / as per terms of order or where no Transport
contract is existing.
(ii) Railway Yard.
(iii) R P P
(iv) Domestic Airport / Seaport for Imported consignments through T & CC.
D. To receive materials at receipt section itself in case of door delivery.
E. To prepare unloading report (UR).
F. To maintain accounts for different incidental charges towards Clearance &
Dispatch including Imprest account.
i) The expenditures on account of payment of freight, wharfage / demurrage,
under charges, loading and unloading charges, packing and repackaging
charges (in case of packing of any delicate item stores may take necessary
help from respective users and FQA.), if any, shall be incurred from Imprest
Fund, sanctioned by site GM.
ii) All these expenditures and subsequent recoupment of Imprest shall be
recorded in "Imprest Control Register" along with supporting documents duly
signed by the Incharge of Goods Receipt Section.
iii) Chief of Materials shall approve and authorize ICDG representative to draw
the sanctioned Imprest amount and its recoupment and maintenance of
records.
iv) The carriers will submit their bills with acknowledgement duly signed by
the authorized signatory of clearance and dispatch group. Transportation cell
of Clearance Group shall verify the bills w.r.t, LR/RR entries available in the
on-line system (The print outs of LR/ RR in chronological order has to be
maintained strictly by Clearance Group) and shall stamp the bills as "verified"
confirming its accuracy and protecting duplicate payment before sending
advice to accounts department.
G. To obtain Shortage / Damaged certificate from appropriate transporting
agencies.
H. To handover the material to IIIG.
I. To dispatch rejected & other materials for repair or transfer to other Plants.
J. To inform Risk Management Group (RMG) for abnormally delayed
consignment in transit.
K. To obtain sanction of payment of Demurrage / Wharf age charges.
B. INVENTORY INSPECTION AND INWARD GROUP
FUNCTION
After receipt of material from supplier and prior to taking the same in stock, IIIG is
responsible for the following activities:
A. To receive material from Goods clearance and dispatch Group
i) On arrival of material from cartage contractor / ICDG, consignment will be
Checked with respect to Unloading Report.
ii) After necessary checking of the consignment material will be received and
copy of UR to be returned to cartage contractor / ICDG duly
acknowledged.
B. To arrange inspection of material.
C. To keep material in IIIG custody till it is inspected.
D. To hand over material to concerned Custody section / Rejection cell.
i) After inspection, the accepted materials are to be handed over to
Custody section along with relevant documents.
ii) Custody on receipt of material from IIIG will fill up the following in SRV
1. BIN Line No.
2. BIN Balance.
iii) IIIG shall distribute the SRVs among the following departments for their
action.
1. Finance / Stores Bill Section
2. Purchase
3. Indentor
4. Custody or warehousing
5. Risk Management Group (in case of rejection or excess /
shortage)
E. To prepare Discrepancy Memo.
◈ CUSTODY SECTION
Being one of the most important sections of Stores Management System , it consists
of various Custody cells which look after Stockyard / Godowns having different group
of items such as general stores, Oils, Lubricants & Chemicals, iron, ore, Spares for
specific installation / unit, Construction Stores for Electrical, Mechanical and C & I
items, Scrap & surplus etc.
Activities of each custody cell consist of the following:
i) Receipt and Issue.
ii) Warehousing and Storage.
iii) Preservation.
iv) Stock Verification.
v) Scrap and surplus Management.
i) Receipt & Issue
Stores custody section is responsible for receipt, custody, storage and issue
of materials. The major functions of this section are:
A. Receipt of material from Receipt Section / other Stores Cells / Project sites
(Through R & I)etc.
B. Receipt of Materials returned from Users.
C. Storage and Accounting of Material Receipt and Issue.
Handling Of Documents By Custody (Receipt And Issue Cell)
Documents to be Raised
MTN
Regularisation of Stores Requisition cum Issue Voucher (SRIV) & MIS
cum SRV
SIV (for loan to other organisation)
Documents to be Received
MIS cum SRV
MRN
SIV
ii) Ware Housing And Storage
The functions of Warehousing and Storage are as under:
A. Safe custody of all materials (Stores and Equipment) warehoused in the Project
Site / Power Station.
B. The correct tally of materials with the Kardex, or on computer ledger.
C. Correct preparation and posting of all initial documents in the available On-line
system. In case of the On-line system gets down the above document should be
maintained manually and the same should be re-entered into the On-line system
whenever the system is available.
D. Periodical identification of Materials in stock (likely to become inactive) and
declaration of the same as "Surplus for Sale".
STORING ARRANGEMENT
The stock statement maintained by each project / station should be distributed
among different enclosures (i.e. "Yards" or "Godown") and are provided with proper
handling facilities and modes of access appropriate to the size, shape and weights of
the material stocked. Each Yard or Godown shall cover almost all the items in a
Main Group of the Material Codification System. Each Yard / Godown or the sub-
section of the Yard / Godown that can conveniently be locked and secured and
operated by a custodian.
Handling And Stacking Of Materials :
No materials (except certain heavy materials) is kept on the floor of the Yard /
Godown. These are stacked in the appropriately designed racks. Incase stacking on
floor is unavoidable adequate dunnage is invariably used to provide at least 20 mm
air space above the floor from the bottom of the material stacked .
For satisfactory stacking, the following things should be kept in mind:-
i) Appropriate dunnage for various kinds of materials (equipment and stores)
and optimum air space at the floor of the stack.
ii) Optimum stack sizes and stocks construction to minimize deterioration /
damage through environmental hazards.
iii) Permanent labeling arrangements of each stack.
In order to achieve compact stacking of materials and to facilitate an assessment
of the level of existing stock at a glance, a system of stacking is developed with
number of rows and layers depending upon the size of the material. In case of small
items the packing system is uniform considering quantities in convenient weights or
numbers of items.
Furthermore wherever possible, graduation marks are to be painted on the bins
to indicate certain previously ascertained quantities. This action enables custodian to
know the appropriate level of existing stocks at a glance and facilitate him in
regulating levels of issue and giving priority of the items needed to be taken up for
recoupment and/or expediting action.
PRECAUTIONARY MEASURES DURING RECEIPTS
During any Receipt of Materials in custody Section the following precautionary
measures are to be taken invariably.
a. The relevant vouchers must accompany all receipts of material. The quantity
of materials must be carefully checked with the particulars given in the
vouchers.
b. A broad comparison is to be made w.r.t. colour, appearance and other visual
characteristics of such receipts with the stocks available under the same
material code number. In case of significant discrepancy, the same is to be
brought to the notice of authorised signatory before acknowledging the
receipts.
c. In case of materials recovered in the Yard without documents or otherwise,
adjustments should be done using Stock Verification Sheet (SVS).
d. When an assembly in stock is disassembled and put into stocks as
components, this involves the preparation of a certified (adjustment) SRIV and
SRVs subject to approval from Head of user department.
MATERIALS PLANNING AND INVENTORY CONTROL SECTION
The prime objective of this cell is to optimize Inventory in totality as well as to
reduce the probability of Stock-Out situation. This cell is fully responsible for the
Materials Planning and Inventory Control of stock items and will act as a bridge
between the user and procurement group so that the stock balancing and availability
of goods are maintained.
The Major Functions of this cell are:
A. Material Codification and its management.
B. Implementation of Computerization.
C. Recommendation of Inventory Level (Safety Stock, Economic Order
Quantity, Re Order levels etc).
D. Planning and Indenting of Automatic Recoupment items.
E. Overall Inventory Management.
F. Coordination / Liaison with all interface departments.
G. Adoption & Formulation of Management Systems and Procedures.
H. Generation of MIS(2) to take proactive action.
I. Screening of Purchase Requisition from user department.
J. Co-ordination with Corporate Materials for Inventory Management
(Classification, Codification, Surplus , Obsolete declaration and Scrap
Disposal MIS(2) , Insurance Claims MIS(2) Inventory Status etc.)
K. Inventory Management - Review and Analysis
L. Identification of Surplus and Obsolete items in consultation with User
Department.
◈ VALUATION OF INVENTORY
For valuation of inventory Elecon generally uses FIFO method and for ordering, they
use EOQ method.
First in first out (FIFO): A method of valuation of inventory, by which the cost are
allocated on the assumption that goods are consumed or sold in the order in which
they are received and taken in to stock.
Finished and semi-finished products produced and purchased by the
Company are carried at lower of cost and net realizable Value.
Work-in-progress is carried at lower of cost and net realizable value.
Coal, iron ore and other raw materials produced and purchased by the
Company are carried at lower of cost and net realizable value.
Stores and spare parts are carried at cost. Necessary provision is made and
charged to revenue in case of identified obsolete and non-moving items.
Cost of inventories is generally ascertained on the ‘weighted average’ basis.
Work-in-progress and finished and semi-finished products are valued on full
absorption cost basis.
Inventory control techniques:
1. ABC CLASSIFICATION
In the year 2010-2011 the total annual value of material is Rs. 201278053. The materials are
divided into A category, B category and C category according to annual consumption.
The ABC Analysis table is as follows
no
. material description
annual
consumption
cost per
unit
annual
value
1 steel plates(12,14,18,20,25)mm 1002 44334 44444448
2 steel plates(8,16,22,32)mm 702 44319 31111113
3 steel plates(6,10,36,40,45,50,63,65)mm 301 44296 13333334
4 rods(80,100,122)dia 233 49496 11515178
5 chemicals 59770 119 7087018
6 mechanical seal(60,80,100)mm 240 27116 6584928
7 rods(50,180,240,250)dia 127 49456 6281006
8 gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 5600280
9 motors(3,7,5,10)hp 251 21376 5365376
10 accuators and variable frequency drive 98 49773 4877724
11 mildsteel seemless pipes 3680 955 3514400
12 electrodes(E7018) 10716 320 3429120
13 forgings(flanges) 102 31756 3239112
14 rods 63 49397 3112011
15 packaging material 10738 286 3071068
16 standguard and stand drive 85 33474 2845339
17 mechanical seal(50,125)mm 80 34296 2743680
18 hardware 121943 20 2438862
19 paints 17043 137 2334891
20 gearbox(AS-80,90F) 34 67388 2291192
21 motors(5,15,20)hp 81 27577 2233737
22 forgings(nozzles) 752 2892 2174784
23 teflon items(gaskets) 1529 1200 1834803
24 electrodes(E7018-1) 4286 400 1714418
25 mechanical seal(40mm) 108 15125 1633500
26 others in boughtout(sight and light glasses,hoses) 270985 6 1625908
27 abbressive material(grit) 36 43000 1548000
28 imported general stores(ceramic crucibles) 29 53364 1547556
29 teflon items(dippipes/sparges) 240 6354 1524960
30 castings(valve bodies) 425 3570 1517250
31
others from general stores(oils, greases, hotmill
jars, handgloves,nosemasks, glasses,cap) 97289 15 1459335
32 gearbox(RR310DNC,510DNC) 90 15581 1402345
33 motors 25hp 28 46704 1307712
34 stainless steel seemless pipes 768 1525 1171200
35 castings(rods and plates) 3392 322 1092224
36 electrodes(E316,316L,6013) 385 1500 1027500
37 tantalum 27 37516 1012932
38 teflon items(bushes/nozzles) 950 1040 988000
39 electrical items 5414 176 952864
40 imported chemicals 1515 610 924150
41 oxygen gas 6644 123 817212
42 flux wires 7620 90 685800
43 castings(nozzles) 885 770 681450
44 teflon items(gasket sheets) 500 1350 675000
45 diesel 13606 37 503422
46 imported tantalum 12 38560 462720
47 job bearing 812 500 406000
48 castings(sleeves) 40 9500 380000
49 bearings 1166 250 291500
50 LPG 131 2221 290951
51 teflon items(spray ball) 17 16256 276352
52 shafts 20 10412 208240
53 teflon items(spacers/seperators) 3072 56 172032
54 teflon items(tapes/'o' rings) 7702 22 169444
55 screws and rods 42 3718 156156
56 material handling 347 435 150945
57 grinding machines 12 10115 121380
58 abbressive material(sand) 30 4000 120000
59 grinding wheels 48 2284 109632
60 other in maintence(low value spares, lubricants) 1056 98 103488
61 hoses and pipes 159 523 83157
62 indegnous grind wheels and belts 1981 42 83202
63 blasting accessories 52 1502 78104
64 elements seperators 6 12147 72882
65 tool bit 33 2025 66825
66 argon gas 61 950 57950
67 imported boughtout(gear box) 1 41764 41764
68 measuring tapesand scales 103 365 37595
69 wind mill spares 4 4637 18548
70 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 26972
71 cutting accessories 28 574 16072
‘A’ – Occupies 70% of Annual consumption, i.e., 70% of 201078053 = 140894637.
‘B’- Occupies 20% of Annual consumption, i.e., 20% of 201078053 = 40255610.
‘C’- Occupies 10% of Annual consumption, i.e., 10% of 201078053 = 20107805
ABC GRAPH FOR THE YEAR 2011-12
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
45000000
50000000
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69
annual value
no.
The following table shows the A items
no. material description annual
consumptio
cost
per
annual
value
n unit
1 steel plates(12,14,18,20,25)mm 1002 44334 44444448
2 steel plates(8,16,22,32)mm 702 44319 31111113
3
steel
plates(6,10,36,40,45,50,63,65)mm 301 44296 13333334
4 rods(80,100,122)dia 233 49496 11515178
5 chemicals 59770 119 7087018
6 mechanical seal(60,80,100)mm 240 27116 6584928
7 rods(50,180,240,250)dia 127 49456 6281006
8
gear box(as-
55,60,35,RR210DNC,110DNC) 23 23730 5600280
9 motors(3,7,5,10)hp 251 21376 5365376
10
accuators and variable frequency
drive 98 49773 4877724
11 mildsteel seemless pipes 3680 955 3514400
139714805
The following table shows the B items
no. material description
annual
consumptio
n
cost
per
unit
annual
value
1 electrodes(E7018) 10716 320 3429120
2 forgings(flanges) 102 31756 3239112
3 rods 63 49397 3112011
4 packaging material 10738 286 3071068
5 standguard and stand drive 85 33474 2845339
6 mechanical seal(50,125)mm 80 34296 2743680
7 hardware 121943 20 2438862
8 paints 17043 137 2334891
9 gearbox(AS-80,90F) 34 67388 2291192
10 motors(5,15,20)hp 81 27577 2233737
11 forgings(nozzles) 752 2892 2174784
12 teflon items(gaskets) 1529 1200 1834803
13 electrodes(E7018-1) 4286 400 1714418
14 mechanical seal(40mm) 108 15125 1633500
15
others in boughtout(sight and light
glasses,hoses) 270985 6 1625908
16 abbressive material(grit) 36 43000 1548000
17
imported general stores(ceramic
crucibles) 29 53364 1547556
18 teflon items(dippipes/sparges) 240 6354 1524960
41342941
The following table shows the C items
no. material description
annual
consum
ption
cost per
unit
annual
value
1 castings(valve bodies) 425 3570 1517250
2 others from general stores(oils, greases, hotmill jars, 97289 15 1459335
handgloves,nosemasks, glasses,cap)
3 gearbox(RR310DNC,510DNC) 90 15581 1402345
4 motors 25hp 28 46704 1307712
5 stainless steel seemless pipes 768 1525 1171200
6 castings(rods and plates) 3392 322 1092224
7 electrodes(E316,316L,6013) 385 1500 1027500
8 tantalum 27 37516 1012932
9 teflon items(bushes/nozzles) 950 1040 988000
10 electrical items 5414 176 952864
11 imported chemicals 1515 610 924150
12 oxygen gas 6644 123 817212
13 flux wires 7620 90 685800
14 castings(nozzles) 885 770 681450
15 teflon items(gasket sheets) 500 1350 675000
16 diesel 13606 37 503422
17 imported tantalum 12 38560 462720
18 job bearing 812 500 406000
19 castings(sleeves) 40 9500 380000
20 bearings 1166 250 291500
21 LPG 131 2221 290951
22 teflon items(spray ball) 17 16256 276352
23 shafts 20 10412 208240
24 teflon items(spacers/seperators) 3072 56 172032
25 teflon items(tapes/'o' rings) 7702 22 169444
26 screws and rods 42 3718 156156
27 material handling 347 435 150945
28 grinding machines 12 10115 121380
29 abbressive material(sand) 30 4000 120000
30 grinding wheels 48 2284 109632
31 other in maintence(low value spares, lubricants) 1056 98 103488
32 hoses and pipes 159 523 83157
33 indegnous grind wheels and belts 1981 42 83202
34 blasting accessories 52 1502 78104
35 elements seperators 6 12147 72882
36 tool bit 33 2025 66825
37 argon gas 61 950 57950
38 imported boughtout(gear box) 1 41764 41764
39 measuring tapesand scales 103 365 37595
40 wind mill spares 4 4637 18548
41 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 26972
42 cutting accessories 28 574 16072
A
B
C
Inventory Turnover Ratio:
Inventory turnover ratios are calculated to indicate whether inventories have been
used efficiently or not.
The inventory turnover ratios 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,
Cost of goods sold
Inventory turnover ratio = -------------------------------
Average inventory at cost
Or
Net sales
= --------------------------
Average inventory
Days/Months in a year
And, inventory conversion period = -------------------------------------
Inventory turnover ratio
1. STATEMENT SHOWING INVENTORY TURNOVER RATIO:
Particulars 2009-10 2010-11 2011-12
Turnover 425042979 398484821 321558291
Average Inventory 260035731 270449527 293925381
Inventory Turnover
Ratio
1.63 1.47 1.09
Interpretation:
In 2009-10 stocks are converted into cash/accounts receivable faster when compared to the
years 2010-11 and 2011-12. The turnover ratios is 1.63 in the year 2009-10 was gradually
decreased to 1.09 by the year 2011-12. This means the stock has not been sold fast and stayed
on the shelf for a longer period. This ratio is decreased because of decrease in the sales and
increase in average inventory. An efficient management of inventory lies in higher inventory
turn over ratio.
2. INVENTORY HOLDING PERIOD:
Particulars 2009-10 2010-11 2011-12
Turnover 425042979 398484821 321558291
Average Inventory 260035731 270449527 293925381
Inventory Holding
Period( In days)
221 225 331
Interpretation:
In 2009-10 the inventory holding period is less when compared to the years 2010-11 and
2011-12 respectively. In the year 2009-10 the inventory holding period was 221 days and it
was increased to 225 days by the year 2010-11 and further it is increased to 331 days by the
2009-10 2010-11 2011-120
0.20.40.60.8
11.21.41.61.8
Inventory Turnover Ratio
year 2011-12. These mainly because of the sales are gradually decreasing from year to year.
The ratio is gradually increasing from year to year.
2009-10 2010-11 2011-120
50
100
150
200
250
300
350Inventory Holding Period
3. INVENTORY TO CURRENT ASSETS RATIO:
Inventory
Inventory to current asset ratio = ------------------------ *100
Current Assets
Year Inventory Current Assets Inventory to Current
Assets Ratio
2008-09 267797121 328534407 81.51%
2009-10 252274341 308149728 81.86%
2010-11 288624713 344537428 83.77%
2011-12 299226049 336657938 88.88%
Interpretation:
In the year 2008-09, it was 81.51% and it was increased to 88.88% by the year 2011-12.
These means that the inventory is increasing from year to year but all the remaining current
assets are not increasing. These means the quick assets are decreasing from year to year as
inventory is excluded from the preview of quick assets..
2008-09 2009-10 2010-11 2011-1276
78
80
82
84
86
88
90
Inventory to Current Assets Ratio
Inventory to Total Assets:
Inventory
Inventory to total assets = ----------------- * 100
Total Assets
Year Inventory Total Assets Inventory to Total
Assets Ratio
2008-09 267797121 447862056 59.79%
2009-10 252274341 421558838 59.84%
2010-11 288624713 458845760 62.90%
2011-12 299226049 441873054 67.72%
Interpretation:
In year 2008-09 it was 59.79% and it is gradually increased to 59.84% by the year 2009-10
and further it is increased to 62.90% & 67.72% by the years 2010-11 and 2011-12
respectively. The Inventory is increasing from year to year but the other assets are not
increasing as the inventory.
2008-09 2009-10 2010-11 2011-12545658606264666870
Inventory to Total Assets Ratio
Year
Valu
e
CHAPTER -5
FINDINGS
Over all the inventory of Elecon Engineeing Co. Limited - EP division is maintained
at optimal levels in the present market conditions, but a higher inventory turnover
ratio above 1.63 times should be targeted to improve the profitability.
Sales are decreasing according to the study; revenue of the company is decreased
during the period 2009 to 2012. Thisimpacts severely on the profitability and liquidity
position of the organization. An improvement n the inventory turnover ratio may
improve the profitability
During the study period, the inventory to current assets ratio is gradually increasing,
which indicates proportion of inventory in current assets is expanding. The
requirement for production/sales should be re assessed and an Endeavour to reduce
the inventory may improve the prospects of profitability.
The inventory turnover ratio is gradually decreasing from year to year. It is not
healthy to the company as more than required inventory leads to blocking of capital.
The firm should maintain reasonable stocks with the help of inventory control.
The inventory conversion period is also increasing from year to year. Huge inventory
holding leads to blocking of cash, obsolescence, or deficiencies in the product line or
marketing effort. Over production or early production of goods even before the
customer requires them lead to poor inventory holding period.
According to the ABC Analysis throughout this period, A-items i.e. top 20 per cent of
items constituted around 90 per cent total annual consumption in value.
In the last year the closing stock is almost equal to the sales which require correction.
CHAPTER -6
SUGGESTIONS
1. Always keep optimum stocks to keep production process continues without
interruption keeping in view costs of over stocking vis-à-vis the benefits of more
than required stock.
2. The company’s production should be re-scheduled dynamically according to
the marketing forecast to avoid overstocking of finished goods.
3. The company should closely monitor the inventories for optimum utilization,
so that idle inventories can be minimized.
4. Priority in managing the purchase and utilization should be given to materials
classified as “A” which constitutes Steel Plates, Bought outs and Rods. Strict
control is to be ensured for materials classified as “B”.
5. Search for alternate suppliers and materials to be used in production to
decrease the cost of holding huge inventory and lead time for procurement of
materials.
6. The investment in raw materials should be made with close monitoring and
optimum utilization.
7. Investment in slow moving items may block up the funds therefore the
company may consider using F N S D analysis. (Fast normal slow moving and dead
items.).
8. The raw material should be procured from right source at right quantity and at
right cost.
CHAPTER -7
BIBLIOGRAPHY
S.no. Title Author
1. Financial Accounting I.M.PANDEY
2. Cost and Management Accounting S.P.JAIN & K.L.NARANG
3. Cost Accounting R.P.TRIVEDI
4. Internet websites www.elecon.com
www.google.com
