inventory anu
TRANSCRIPT
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INTRODUCTION
Inventories are maintained basically for the
operational smoother which they can affect by uncoupling
successive of production, where as the monetary value of
inventory serves as guide to indicate the size of the
investment made to achieved this operational
convenience. The material management department is
expected to provide this operational convenience with a
minimum possible investment in investors. Inventory
control has been attracting the attention of managers
India for a long time.
Managing working capital is synonymous with
controlling inventory. Good inventory management is
good finance management. Even where funds are painful,
the finance officer should be prepared. Managing the
level of inventories fundamental to establishing a long
term competitive advantage. Inventory and how it is
managed is strongly related to the celerity of firms to
obtain the necessary competitive edge to make money
now and in the future. Inventory management policy has
become a competitive weapon.
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Inventory management may be defined as the
sum total of those activities which are necessary for the
acquisition, storage, sale and disposal or use of materials.
It is a subject which the merits the attention of the top
level management and influences the decision of the
planning and Executive personnel. An inventory is a list or
schedule of articles comprised in an estate, describing
each article separately and precisely so as to show what
the state consists of; it is well recognized assed assuming
importance as asset management. Inventory is the total
amount of goods and, or materials contained in a store of
factory at any given time. Store owners need to know the
precise number of items on their shelves and storage
areas in order to place orders or control losses.
Today the efficiently and state of method of
inventory management because poor or Miss
Management of inventory is harmful not only to the
industry, but also to the country as a whole as it affect
the economic, social and political environment of the
country. Inventory is a stock of goods required by an
organization for its successful operation. Inventory is
classically defined as an idea resource of any kind having
an economic value. Inventory makes a significant
contribution to the operational efficiency and profitability
of the enterprise, and so, it is very essential to reduce to
amount of capital locked up in inventories; operating
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efficiency of the industry can be optimized if inventories
are handled properly and effectively.
Hence the analysis of inventory management of
the firm forms part of financial management. The present
study is intended to explore the performance of
inventories of KAMCO Ltd Athani for a period of 2006-
2007 to 2010-2011.It is presumed that a discussion of
published accounts of the company can give the essential
requirement of data. However, the information need to
completely pinpoints the efficiency or inefficiency due to
their inherit limitations.
1.1 Scope and relevance of the study
This study is conducted to analyze the performance
of inventory system in KAMCO Ltd. In KAMCO Ltd,
inventory management is complex activity. Changeable
business scenario and economic realities of investments
made in different inventory levels, there is a scope for
further studies with respect to measuring the
effectiveness of inventory management undertaken by
the company. This study helps to obtain general view of
the inventory management practices of KAMCO Ltd. The
major area covered under this study is performance of
inventory in the company that is whether it has improved,
deteriorated or remains constant.
1.1 objective of the study
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The objective of the study includes:
1. To ascertain the efficiency of KAMCO Ltd in the
management of inventories.
2. To study the inventory control techniques and
valuation method followed by the company.
3. To suggest the management to optimum level of
inventory maintained for the efficient running of the
company.
4. To suggest a minimum inventory in inventory to
maximize profitability.
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1.2 Methodology
The study is partly descriptive and partly analytical.
It is descriptive as regards the literature and analytical as
regards the data collected and the data are collected from
both primary and secondary sources.
1.3 Source of data
1. Primary data:
The primary data was collected through unstructured
interview and discussion with manager and staffs of
KAMCO Ltd.
2. Secondary data:
The study mainly based on the secondary data.
Secondary data was collected from company websites,
records, annual reports, journals, magazines, and balance
sheet profit and loss account.
1.4 Period of study
The period of study is 5 years from 2006to 2011.
1.5 Tools for analysis
Tools used for the analysis and interpretations of
inventory management are:-ABC analysis, VED analysis.
1.6 Chapter schemes
This study is organized into six chapters namely
introduction, review of literature, industry and company
profile, theoretical analysis, data analysis and findings
suggestions and conclusion.
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Chapter-1 Introduction
The first chapter is an introduction chapter. It deals
with the general idea about inventory management, scope
and relevance of inventory management, objective,
methodology, period of study, tools used for analysis and
interpretation and limitation of the study.
Chapter –II Review literature
This chapter includes review of literature of various
books, journals, magazines and project studies.
Chapter –III Industry and company profile
This chapter includes Indian tiller industry company
profile, product profile and organization chart of the
KAMCO Ltd.
Chapter –IV Theoretical analysis of the study
This chapter deals with the theoretical background of
inventory management which includes meaning, nature,
objective, components, benefits, and techniques used for
measuring efficiency.
Chapter – V Data analysis
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Data analysis consists of different techniques for
evaluating the performance of inventory management.
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Chapter – VI Findings, suggestions, and conclusion.
This chapter deals with important findings
suggestions to strengthen the inventory management in
the company and conclusion of the study.
1.7 Limitations of the study
The study is not free from limitations. The important
limitations are:
1. This study is mainly based on secondary data
which were collected from the company records.
2. The cost data is not available because it is
confidential.
3. The study has been made only on the basis of
selective inventory tools.
4. This study is limited to five years.
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CHAPTER-II
REVIEW OFLITERATURE
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REVIEW OF LITERATURE
In any research studies, it is necessary to carry out
a comprehensive literature survey to identify the
research gaps and scope for conducting the study. So an
attempt is made in this chapter to review some of the
existing literature in the area of inventory management.
Generally, research studies and articles are reviewed in
this context.
According to Webster’s dictionary 1 (1993), the
term “inventory” actually means a list of items with
description and quantities of each. In manufacturing
terms, in addition to manufacturing tools, equipment,
raw materials, hardware and measurement instruments,
which are the focus in this article, investments, also
include component parts, work-in-progress and finished
product or goods.
Rajagopalan and malhorta 2 (2001) indicates
that while it appears that the general level of inventories
has decreased across all industries since the 1960’s it
does not appear that the trend accelerated in the 1980’s
or there after, as JIT’s proponents might suggest.
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Chen, Frank and Wu 3 (2003) indicates that, when
studying inventories on a firm level instead of an industry
level, there appears to be significant decrease in
inventories since 1980 however, Chen, Frank, and Wu
focus on the economy as a whole.
Addressing the utility of manufacturing inventory
system in general, Voolman, Berry and Why Bark 4
(1997) noted that a key management issue is
determining the inventory control system’s performance. They also indicated that in manufacturing industry
performance is measured by such factures as inventory
carrying costs and inventory turnover.
Wagner and Whitin5 proposed the WW-model for
the anticipated lot sizing problem and gave acorresponding polynomial-time algorithm. Newahartetal6
(1993) quantified the effects of inventory required for
locating parts of the supply chain in different geographic
areas by using a two- phased approach.
Chaing and Gutierrez 7 (1996) analyzed a periodic
review inventory system in which there are two modes of
re-supply, namely a regular mode and an emergency
mode, within the framework of an order- up- to-inventory
level.
Hoshino 8 (1996) proposed two theoretical criteria
allowing for selection form fixed- size ordering policies and
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the choice between the pull- type ordering and the push-
type ordering policies.
Relph and Barrar 9 (2003) argued that excess
was important because there was evidence that even in
well managed businesses a significant proportion of the
inventory existed in excess any given time.
The literature dealing with inventory
management policies is very rich and has grown fast
during the last year. Below, we classify these policies into
two approaches according to the type of demand
information. In the first approach, the policies suppose
that there is no advance demand information and the
decisions are made in real time using the inventory
depletion. We call this approach “standard inventory
management approach”. The second approach includes
all the inventory management policies that assume the
existence of advance demand information as firm or
forecasts.
Gross and Harris and Buzacott and
Shanthikumar10 considers supply systems with
endogenous lead times due to congestion effects. They
study the base stock policy through a detailed analysis
based on queuing theory. Note that these works are
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between the border of inventory management systems
and production/inventory management.
During the last years, with the development of
information technology, the literature on inventory
systems has been oriented towards inventory
management with advance demand information. The
advance demand information can be given in the form of
firm orders or forecasts. Karaesmen give a rich literature
Review on advance demand information based inventory
systems.
There is also a body of related literature dealing with
future demand information in the form of demand
forecast. Health and Jackson and Graves 11 study
mono stage and multi stage inventory systems managed
by an Adaptive Base stock policy in the presence of
forecasts, and they used the MMFE model(Martingol Model
of for caste Evolution) for the updates of the forecast
vector.
More recently, we propose a new forecast based
inventory management approach. We introduce the
concept of forecast uncertainty and we show the impact of
the forecast uncertainty model on the inventory
management system.
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CHAPTER- IIIINDUSTRY AND
COMPANY PROFILE
INDUSTRY PROFILE
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Life on earth is supported by the inches of
earths crust, fulfilling the basic needs of food, shelter
and clothing. Over 100 million Indian farmers and farm
workers have been the backbone of Indians agriculture.
In beginning, all crops are produced and prepared by
human muscles. This was a time consuming and need a
lot of labour work. Cost of production was very high.
Indian agriculture has contributed significantly in
achieving self- sufficiency to avoid food shortage in ourcountry. Rapid growth of agriculture is essential not only
to achieve self reliance at national level but also for
house hold food security.
In order to achieve the objective of meet the
farmers need, Indigenous Agro Machinery Units were to
be set up, without resorting to imports undoubtedly
posed a heavy burden on the nation’s exchange and
were hardly suited to the local conditions. Thus out of
the nations need, KAMCO was born in the year 1973, as
a fully owned undertaking of Government of Kerala. In
partial fulfillment of the PGDM programme, the trainee
had undergone 30 days internship training at KAMCO.
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Kerala being a consumer state it depends largely on
agricultural products from the neighboring states. It has
ting and small farmlands owned by private landowners.
Even those available lands are not fully utilized for
cultivation, owning to economic reasons. Traditional
cools and cackles employed by the farmers. In the
cultivation, there were no motorized or mechanizedequipments available in the state. KAMCO was
adventurous enough to venture into this bleak scenario,
and introduced its power tillers and other medium and
small sized mechanical cods of cultivation. KAMCO is the
one and only one industrial unit in the state which
provides machineries to the farming segment as an aid
to their cultivation being a monopoly; KAMCO controls
the Kerala market in supplies of automated farming
equipments other competitors are yet to step in to
scene in the state. This industry is facing a great threat
that the changing of agricultural economy in to an
industrial economy.
Producers in the same industry in world market
are:
1. KUBOTA POWER LTD, JAPAN.
2. SUNTEC LTD, SHENZHEN.
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Producers in the same industry in the domestic
market.
1. VST TILLERS LTD, Bangalore.
2. BULL AGRO IMPLEMENTS, Coimbatore
3. ASB GROUP INDIA, New Delhi.
4. SOVZA SIFANG AGRO ENG. PVT. LTD. Maharashtra
5. BANWAIT TRADE SERVICES, Punjab.
INDIAN SCENARIO
Farm mechanization helps in effective utilization
of inputs to increase the productivity of land and
labour.It helps in reducing the drudgery in farm
operations. The early agricultural mechanization in India
was greatly influenced by technological development inEngland. After the green revolution in 1960, farmers
enabled to adopt mechanization inputs. The
development of Power Thresher in 1960, with integrated
Bhusa making attachments and aspiration blower was
the major achievements of Indian Engineers.
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These threshers are widely adopted by farmers.
Demand for other farm machinery such as reapers and
other harvesters increased. Even farmers with small
holdings also use these equipments. The present trend in
agricultural mechanizations is to use high capacity
machines.
With the modest beginning of manufacture of
tractors in 1960s in with foreign collaboration, today the
Indian farm machinery industries meet the bulk of
mechanization inputs and also exports. These industries
have adopted sophisticated production technologies, and
some of them match international standards. The
enabled scope of imported technology by organized
sector and entry of foreign investor is likely to accelerate
exports. Since cost of production of farm machinery in
India is more competitive due to lower wages the
importers from various countries will find Indian farm
equipments more attractive. Indian products however
shall need improvements in quality for giving major
export growth for this mass production of critical and fast
wearing components and their standardization would
greatly help the industry.
COMPANY PROFILE
Kerala Agro Machinery Corporation Ltd,
popularly known as KAMCO was established in the year
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1973 as a subsidiary of Kerala Agro Industry Corporation
Ltd, subsequently become a fully owned government of
Kerala undertaking at Athani, 25 Kms to North Kochi. It
all began in 1958, when Dr.Rajendra Prasad the
president of India was presented with a “Kubola power
Tiller” by the Japanese.
The machine helped to open up new avenues in
farm mechanization for a country predominantly
agrarian. It was realized that mechanization of farming
operations would be one of the key to engineering a
successful Green Revolution and reliable manufactured
farming equipment become the need of the day. With
these purpose KAMCO was set up in 1973.
KAMCO was established in 1973, to impart
momentum to the agriculture scenario in India Modern
mechanized farming techniques were required to make
large scale cultivation profitable. Moreover independent
India looked up on agriculture as the back bone of its
economy.
KAMCO started off setting up its first fully
fledged plant in ATHANI were, KAMCO Power Tillers was
manufactured KUBOTA, JAPAN. The product was warmly
received by the agricultural community and has still
relined its No: 1 position for over 3 decades. Other
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products like Diesel Engines and Power reaper which
were launched in course of time, also met huge success.
Today KAMCO has four manufacturing plants in
Kerala.
1. Athani - Started in 1973 for manufacturing of
Power Tillers.
2. Kalamassery – started in 1975 to set up
production of diesel engines.
3. Kanjikode – started in 1990 to set up production of
Power tillers.
4. Mala – began in 200 to meet the rising demand for
Power Reapers.
KAMCO an ISO 9001-2000 company has a full –
fledged research development using in addition to
sophistical testing equipments for comprehensive quality
control checks.
KAMCO drives its power from a 567 strong
proactive and flexible work force. Today KAMCO- Athani
has three states of the cart plants in Kerala. Our pioneer
plant at Athani, just 25Km from the port city of Kochi and
3 km from, international Airport, is the prime centre.
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A major mile stone achievement of the
company is that KAMCO got the international quality
Excellence Certificate under ISO 9002 in OCTOBER 1996.
KAMCO is the 2nd public sector undertaking in Kerala
getting this converted certificate and the only public
sector undertaking that has got ISO- 9002 certification
justifying the high standards of the products for their
three units. From 15.03.2002 onwards KAMCO becomes
an ISO 9001- 200 registered companies by KPMG quality
registration accredited by the Dutch Council for
certification.
Vision Beyond
KAMCO with over three decades of engineering
excellence, stands as the No.1 power tiller manufacture
in India not surprising, with four state of the art
production plants an innovative R&D and stringent quality
control systems rated as one of the best in the country.
The technically competent, dedicated management and
workforce will go on to ensure that KAMCO shall be the
leader for several for years to come.
Mission
• To be an innovative, resourceful and profitable
company.
• To meet customer requirements of quality,
service and price constantly.
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• To provide “doing business with us easy” and
delightful to our customers.
• To provide a congenial and entrepreneurial
work environment in which employees can
respond to the needs of business and service,
earn fair rewards and can be satisfied.
Objective of the company
The objectives of the company are tomanufacture in India, either in collaboration with or
otherwise import and trade agricultural machinery like
Tractors, Power Tillers, Power Reapers, combine
harvester, Transplanter, Diesel engines Pump sets,
Implements, Accessories and spares there to. The
objective also include establishment of engineering
workshops/ repair shops to undertake repairs and
servicing of agricultural machinery or other machinery,
equipment, implements and tools. Assembling unit was
established in 1970 at Athani by M/s. Kerala Agro
Industries Corporation for the assembly of Kubota Power
Tillers in technical collaboration with M/s Kubota Ltd,
Japan, the world’s leading manufacture of Power Tillers
and other Agricultural machinery. On expiry of the
collaboration, KAMCO manufactures power tillers with
their own facilities. KAMCO Power Tillers have become the
most sought after Power Tiller in India because of their
quality and reliability.
Product profile
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Product and services
Product list
KAMCO manufactures and market mainly theseproducts
• KAMCO POWER TILLER MODEL KMB 200
• KAMCO Super DI power tiller
• KAMCO power reaper model KR 120
•
KAMCO stone cutter KSC 625• KAMCO Agria 602 DE POWER Tiller
Quality systems and certifications
ISO 9001- 2000 version
• Improvement in the systems and improved
satisfaction.
• Comply with the requirement of customers and
applicable statutory requirements.
• Improvement in the effectiveness of the
established quality system.
• Address customers, dealers, vendors, society
employee and shareholders for their requirement
and satisfaction.
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Quality standards
Quality standards for every component have
been established by the company. All components are
subjected to close instructions and observation. Quality
assurance departments equipped with all modern
facility. The company got a standard room for calibration
all measuring instrument. The company’s is to equip its
with all modern inspection and testing equipment and
addition well as replacement.
Quality policy
• Total customer satisfaction through quality
product and services with improved technology and
participation.
• Comply with requirements of customer and
applicable statutory requirements.
Performance details of the company
KAMCO’S plant in Athani is designed for
manufacturing of KAMCO power tillers. It is one of the
public sector companies which got the ISO certificate for
the quality product. This one of the financially sound
public organization. The company had carried over loss
of 210 lacks up to march 1984. The company is running
on profit for last 22 years continuously increasing its
production turnover and profit year after year. KAMCO
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has established three more units it’s internally generate
units.
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Mile stone
1973 –KAMCO ltd was established as wholly owned
subsidiary of KAIC.
1986 – KAMCO becomes a separate government of
Kerala undertaking.
1992- Second unit established at Kalamssery.
1995- Witness the setting up of third unit of KAMCO
at kanijikode. 1996- KAMCO won international Quality Excellence
certification.
2000- latest additional units were being started at
Mala/ Thrissur District.
2002- KAMCO become an ISO 9001- 2000 registered
company by quality registration Accredited by the DutchCouncil for certification.
Present Status of the Company
Present status of the KAMCO is synonymous
with service to their precision and quality is
revolutionizing the small and marginal holdingthroughout the country. Today KAMCO power tiller in the
most sought after tillers in India, enjoying over 60% of
the market value at national level. The company with its
four plants at Athani, Kalamassery, Kanjikode, Mala units
is confidently meeting the demands of KAMCO products
in India and in aborad. The main markets for the power
tiller are at West Bengal, Assm, Tripura.
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Various Departments of KAMCO
Purchase Department
Stores Department
Quality assurance Department
Assembly department
Human resource Development department
Marketing Department
System Department
Human Resource Managing Department
SWOT Analysis of the Organization
Strengths
1. Good production facility.
2. Good incentive scheme.
3. Qualified and skilled labours.
4. Environment friendly.
5. Efficient management.
6. Strong and accepted products.
7. Reputed brand name and image.
8. Financially sound.
9. Good industrial relation.
10. Good working atmosphere.
Weakness
1. Average age of workforce in the company is 54
years.
2. Legally depends on stow sates growth.
3. For the recruitments, time delay will come.
4. Lack of technical up gradation and automation.
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5. Thrust on It application is not adequate.
6. Political interference.
Opportunities
1. Dominating shares.
2. Good brand loyalty.
3. Government support.
4. Diversification programs.
5. Innovative and bring out new products to meet
new needs.
6.Boom in the automobile industry and related
engineering services.
Threats
1. Government policies.
2. High competition from choice products.
3. Liberation privatization globalization.
4. Growth of private enterprise in the sector.
5. Charging the position head- through research.
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CHAPTER-IV
THEORETICAL ANALSIS
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THEORETICAL ANALYSIS
Introduction
Every enterprise needs inventory for smooth running
of activities. It serves as a link between production anddistribution process. There is generally, a time lag
between the recognition of a need and its fulfillment
greater the time-lag, the higher the requirements of
inventory. The unforeseen fluctuation in demand and
supply of goods also necessitate the need for inventory. It
also provides a cushion for future price fluctuation.
The investment in inventories constitutes the
most significant part of current assets. So it is very
essential to have proper control and management of
inventories. The purpose of inventory management is to
ensure availability of material in sufficient quantity as and
when required also to minimize investment in inventories.
4.2 Meaning and nature of inventory
The term inventory refers to the stock piles of the
production which a firm is offering for sale and the
components that make up the product. In other words,
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inventory is composed of assets that will be solved
influence in the normal course of business operations.
The dictionary meaning of inventory is “stock of
goods or list of goods”. Many understand the Word
inventory as stock of goods. But, the general accepted
meaning of the word of goods, in accounting language is
the stock of finished goods only. In a manufacturing firm,
however goods, raw material and stores. The collective
name for all those items is inventory.
The ICAI define inventory as “tangible property held.
• For sale in the ordinary course of business, or
• In the process of production or sale, or
• For consumption in production of goods or service
for sale including maintenance, supplies and consuls
other than spares.”
Inventory measured in terms of money constitutes
an important element in the working capital of most
business firm expected financial once. Their size and rate
or turnover, there for influence greatly the size and rate
of turnover of working capital and through them, the
income and profit of a business. Thus inventory
management is having considerable significance to all
business firms.
4.3 Components of inventories
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a) Raw materials
Raw materials 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.
b) Work in progress
The work-in-progress is that stage of stocks
which are in between raw materials and finished goods.
The raw materials enter the process of manufacture but
they are yet to attain a final shape of finished goods.
c) Finished goods
These are which are ready for delivery to the
consumers. The stock of the finished goods provides
buffer between production and market. The purpose of
maintaining inventory is to ensure proper supply of
goods to consumers. The need for finished goods
inventory will be more when production is under taken
in general without waiting for specific orders.
d) Stores and spares
These are materials which are needed to
smooth the production process. These are not directly
entering production but they are as catalysts. It is also
know as ‘supplies’ it includes office and plant clearing
materials( Soap, Brooms) oil, fuel etc.
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4.4 Benefit of holding inventories
Although holding inventories involves blocking of a
firm’s funds and the cost of storage and handling. Every
business enterprise has to maintain a certain level of
inventories to facilitate uninterrupted production and
smooth running of business generally there are three
main purpose or motives of holding inventories.
i. The transaction motive
Every firm has to maintain some level of inventory to
meet the day- to- day requirements of sales, production
process, customer demands etc.
ii. The precautionary motive
Firm should keep some inventories for unforeseen
circumstances also. It helps to meet the unpredictable
changes in demand and supplies of materials.
iii. The speculative motive
The firm may keep some inventory in order to
capitalize an opportunity of making profit.
4.5 Inventory Management
Inventories often constitute a major element of the
total working capital and hence it has been correctly
Observed, “Good inventory management is Good financial
management.” Inventory management is concerned with
keeping enough products on hand to avoid running out
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while at the same time maintaining a small enough
inventory balance to allow for a reasonable return on
investment.
Objective of Inventory Management
• To ensure continuous supply of materials, spares
and finished goods, so that production should not
suffer at any time and the customers demand
should also be met.
• To avoid both over stocking and under stocking
of inventory.
• To maintain investments in inventories at the
optimum level as required by the operational and
sales activities.
• To keep material cost under control. So that they
contribute in reducing cost production and overall
costs.
4.6 Benefits of Holding Inventory
Every business enterprise has to maintain a certain
level of inventories to facilitate uninterrupted production
and smooth running of business. In the absence of
inventories a firm will have to make purchase as soon as it
receives orders. It will mean loss of time land delays in
execution of orders which sometimes may cause loss of
customers and business. A firm also needs to maintain
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inventories to reduce ordering costs and avail quantity
discounts and so on. Generally speaking; there are three
purposes or motives of holding inventories.
a) Transaction motive
Emphasis the need to maintain inventories
to facilitate continuous production and timely
execution of sales orders.
b) Precautionary motive
Necessitates holding of inventories to
guard against the risk of unpredictable changes on
demand and supply forces and other factors.
c) Speculative motive
Influence the decision to keep inventories
for taking advantage of price fluctuations, savings in
reducing costs quantity discounts and so on.
4.7 Risk and Costs of Holding Inventories
The holding of inventory involves blocking of a firm’s
funds and incurrence of capital and other costs. It
also exposes the firm to certain risks.
The various costs and risks involved in holding inventories
are:
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1. Capital Costs
Maintaining of inventories results in blocking of a
firm’s financial resources. The has therefore to arrange for
additional funds to meet the cost of inventories. The funds
may be arranges from own resource or from outsiders. But
in both the cases 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 the
outsiders.
2. Storage and Handing Cost
Holding of inventories also involves on storage as
well as handling of materials. The storage costs include
the rental of the godown, insurance charges and soon.
3. Risk of Price Decline
There is always a risk of reduction in the prices of
inventory by the suppliers in holding inventories. Thus
may be due to increased market supplies, competition or
general depression in the market.
4. Risk of Obsolescence
The inventories may become obsolete due to
improved technology, changes in requirements, and
change in customer’s taste and so on.
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5. Risk of Deterioration Quality
The quality of the materials may also deteriorate
while inventories are keep in the stores.
4.8 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
• Timelines
Comprehensibility
Inventory systems range from the utterly simple to
the widely complex. Irrespective of flow simple or complex
a system is, regardless of whether it is automated or
manual, it should be clearly understood by all affected
parties. The system must be properly explained to al
concerned so that its purpose, logic and rational are
transparent. This generates enthusiasm for the system
and enhances its credibility. Otherwise it is likely to be
perceived as a mysterious black box of dubious value.
Adaptability
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A certain degree of flexibility and adaptability
must be designed in to the system to make it versatile.
However, the system, the system must not provide for
every possible and imaginable contingency. If it is
developed with this, it is likely to be a complex
monstrosity.
Timelines
Inventories may suffer loss in value on
account of a variety of factors. The more common
source of value decline are:
Obsolescence caused by changes in the
technology and shifts in consumer tastes.
Physical deterioration with the passage of time.
Price fluctuation because of inherent volatility of
certain commodities. The inventory system should
be capable of including timely action. It should
provide adequate forewarning which trigger
appropriate corrective steps.
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CHAPTER-V
DATA ANALYSIS
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DATA ANALYSIS AND
INTERPPRETATION
The data after collection has to be processed and
analyzed in accordance with the outline laid for the
purpose at the time of developing the research plan. This
is essential for scientific study and for ensuring that all
relevant data are collected for making comparison and
analysis. It is mainly concentrated on computation and
certain measures along with searching for pattern and
relationship that exists among the data groups.
MEASURES OF EFFECTIVENESS OF INVENTORY
MANAGEMENT
For monitoring the effectiveness of inventory
management, it is helpful to look in to the following
ratios and induces.
5.1 COMPONENTS OF INVENTORY
Inventory could be raw materials, work in
progress, finished goods and stores and spares.
KAMCO being a manufacturing company, the following
table gives the inventory components of the company
as on 31.03.2010.
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TABLE 5.1
Table showing components of inventory
Components Rs.(lakhs) PercentageRaw materialWork in ProgressFinished goodsStores & spares
Total inventory
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5.2 INVENTORY TURNOVER RATIO
Inventory turnover speed at which the inventory
will be converted into sales, there by contributing for the
profits of the concern, when a remain constant, greater
the turnover and inventory more will be efficiency of its
management. This ratio reveals the number of times
finished stock is turned over during a given accounting
period. The higher the ratio, the better the performance
of the company, for it has managed to operate with a
relatively small average loading of funds. The high
levels of inventory reflect dull business, over investment
in inventory, which reduces the profitability of the
business.
Inventory Turnover Ratio = Net sales
Average Inventory
Opening stock +closing stockAverage inventory = 2
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Table 5.2Table showing inventory
turnover
Figure 5.2
Figure showing inventory turnover
Year Net salesAverageInventor
y
Inventory
Turnover
Ratio
2005-06 8003.69 1994.85 4.01
2006-07 9121.74 2078.32 4.39
2007-08 10121.86 1994.88 5.07
2008-09 12028.49 2146.47 5.60
2009-10 136432.37 24974.42 5.46
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0
1
2
3
4
5
6
2005-06 2006-07 2007-08 2008-09 200
R a t i o
Inference
The graph shows that the inventory turnover
ratio of KAMCO Ltd increasing higher the ratio better it is.
A higher inventory turnover indicates efficient
management of the inventory because the stocks are
sold more frequently. In the 2007- 2008 the ratio was the
lower position however during the last three the turnover
ratio of KAMCO Ltd has increased. A lower turnover ratio
is not desirable because it reveals the accumulation of
absolute stock or the carrying of too much stock. In the
year 2005- 2006 the ratio was higher position. However,
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the ratio has decreased slightly in the year 2006-2007.
But it is not considered as reasonable position
5.3 Inventory Conversion Period
It refers to the average time taken for clearing
out of the stocks. This period is calculated by dividing
the number of days in a year by inventory turnover ratio.
Inventory holding period =
365Inventory turnover ratio
Inventory turnover ratio =
NetSales
Average inventory
Shorter the inventory conversion period,
better it is because it indicates that the inventories are
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turned over within a short period. A high conversion
period means long time taken for clearing the stocks.
Table 5.3Table showing Inventory holding period( Rs.in lakhs)
Figure 5.3
Figure Showing inventory holding Period
0
10
20
30
40
50
60
70
80
90
2005-06 2006-07 2007-08 2008-09 200
D a y s
yearNo.of days
In a year
Inventory
turnover
Holdingperiod
2005-06 365 4.01 91
2006-07 365 4.39 832007-08 365 5.07 72
2008-09 365 5.60 65
2009-10 365 5.46 66
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Inference
The above table shows the number of day’s
needed for converting the raw materials. This graph
means the company takes less time than earlier years for
clearing the raw materials. In overall the raw materials
conversion period is very reasonable.
5.4 Raw Materials, Work in Progress and Finished
Goods Turnover Ratios
The manufacturing firm’s inventory consists of two more
components.
(1) Raw materials (2) work in progress (3) finished goods.
An analyst may also be interested in examining the
effectiveness with the firm converts’ raw material into
work in progress and work in progress into finished goods. That is, the analyst would like to know the levels of raw
materials inventory and work in progress inventory held
by the firm on an average.
1) Raw Materials Inventory Turnover
This helps to examining the effectiveness withwhich the firm coverts raw materials in to work in
progress.
Raw material inventory turnover = Materialconsumed
Average raw material
consumed
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Material consumed = opening stock + purchases +
closing stock
Average raw materials inventory =
Opening stock of raw materials +closing stock of raw
materials
2
Higher the ratio better it is, because it shows that raw
materials inventory is rapidly turned over.
Table .5.4
Table showing the raw materials inventory turnover
of
KAMCO Ltd 2005- 2006 to 2009- 2010
(Rs. In Lakhs)
yearMaterial
consumed
AverageRaw
materialinventory
RawmaterialInventoryturnover
ratio
2005-06 5560.56 847.56 6.56
2006-07 5694.85 920.59 6.18
2007-08 6722.07 1129.49 5.952008-09 8390.07 1402.69 5.98
2009-10 9650.89 1538.80 6.27
Figure 5.4
Figure showing raw materials inventory turnover
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5.6
5.7
5.8
5.9
6
6.1
6.2
6.3
6.4
6.5
6.6
6.7
2005-06 2006-07 2007-08 2008-09 200
R a t i o
Inference
From the graph we can understand that the raw
material inventory turnover ratio of KAMCO Ltd is very
reasonable. Moreover, in every year this ratio lays in
between 6to 7. This is because of the relation between
materials consumed and the average inventory higher the
ratio better it is. Because it shows the raw material
inventory is rapidly turnover. Otherwise the raw materials
will be stocked idle and it will affect the working capital of
the company.
5.5 Raw Materials Conversion Period
It refers to the average time taken for
clearing out the raw materials in to work- in- progress.
This period is calculated by dividing the number of days in
a year by raw materials inventory turnover ratio.
Raw materials Conversion period = 365
Raw material turnoverratio
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Raw materials inventory Turnover ratio
= material consumed
Average raw materialsinventory
Raw Materials Conversion Period
It refers to the average time taken for
clearing out the raw materials in to work- in- progress.
This period is calculated by dividing the number of days in
a year by raw materials inventory turnover ratio.Raw materials Conversion period = 365
Raw materialturnover ratio
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Raw materials inventory
Turnover ratio = material consumed
Average raw materials
inventory
Shorter the raw materials inventory conversion period;
the better it is because it indicates that the raw materials
are turned over within a short period. A high conversion
period means long time taken for clearing the raw
materials.
Table 5.5
Table showing raw material conversion
period
yearNumber of days in a
year
RawmaterialinventoryTurnover
ratio
Rawmaterial
Conversionperiod
2005-06 365 6.56 55
2006-07 365 6.17 59
2007-08 365 5.95 61.342008-09 365 5.98 61.03
2009-10 365 6.27 58.21
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Figure 5.5
Figure showing raw material holding
period
51
52
53
54
55
56
57
58
59
60
61
62
2005-06 2006-07 2007-08 2008-09 200
D a y s
Inference
The above table shows the number of days needed
for converting the raw material. In the year 05-06 the
number of days required was 55 days. However 2006-
2007 onwards it has increased in the 2009-2010 the
number of days taken for conversion is 58 days andduring this year company had fewer days for conversion
compared to the 2008-2009 this means the company
takes less time for clearing the raw materials. Sa
compared to the conversion period of 2005-2006 the
other three year shows and increasing in days of
conversion period and last on e year shows decrease indays of conversion but in overall the raw material period
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is very reasonable and moreover in every year this period
lays in between 50 to 60 days.
5.6 Work in Progress Turnover Ratio
Work in progress is that stage of stocks, which
are between raw materials and finished goods. Work in
progress inventories are semi manufactured products.
The quantum of work- in- progress depends up on the
time taken in the manufacturing process. The larger the
steps involved the production process, the larger the
work- in – progress inventory and vice versa. By
shortening the production time, efficiency of the
production process can be improved and the size of this
type of inventory reduced.
Work –in - progress turnover ratio = Sales
Work – in-
progress
Higher the ratio better it is because it shows that work in
progress is rapidly turnover.
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Table 5.6
Table showing Work in Progress Turnover Ratio
( Rs. In lakhs)
year salesWork inprogress
Work inProgressInventoryTurnover
ratio
2005-06 8003.69 298.48 26.58
2006-07 9121.74 338.99 26.90
2007-08 10121.86 353.76 28.61
2008-09 12028.49 425.55 28.26
2009-10 136432.37 538.84 253.19
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Figure 5.6
Figure showing work- in – progress turnover ratio
0
50
100
150
200
250
300
2005-06 2006-07 2007-08 2008-09 200
R a t i o
Inference
From the above graph, we can understand that the
working progress inventory during the last five years. In
the 2005-2006 year, the working progress turnover was
26.58 times, but in the next year 2006-2007 it decrease
23.61 times. More over in the next year 2007-2008 the
ratio again increased to 25.79 times. Higher working
capital turnover is better because it indicates the
efficiency of the firm in progress turnover is high, it
means the company is holding the work in progress for
short period. In the year 2005-2006 the turnover was
26.58 times, that is the company took 13 days
(365/26.58=13) for converting the work-in-progress into
finished goods. But in the year 2006-2007 the turnover
was 23.61times it means the company took 15 days for
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conversion presently the companies work in progress
turnover is standing in a very good position.
5.7 Work –in- Progress Conversion Period
It refers to the average time taken for
clearing out the work- in – progress. This period is
calculated by dividing the number of days in a year by
work –in – progress turnover ratio.
Work in progress conversion
Period = Sales
Work – in progress turnover ratio
Work – in progress turnover ratio = sales
Work- in progressShorter the work-in –progress conversion period, the
better it is because it indicates that the work – in –
progress are turned over with in a short period. A high
conversion period means long time taken for clearing the
work- in – progress.
Table 5.7Table showing work-in-progress conversion period
yearNumber of Days in a
year
Work- in-ProgressTurnover
ratio
Work – inProgress
Conversionperiod
2005-06 365 26.81 13.61
2006-07 365 26.90 13.56
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2007-08 365 28.61 12.75
2008-09 365 28.26 12.9
2009-10 365 253.19 1.44
Figure 5.7
Figure showing work-in-progress conversion
period
0
2
4
6
8
10
12
14
16
- - - -
Year
D a y s
Inference
The above table shows the number of day’s needed
for converting the work-in-progress into finished goods.
We can analyze that the company has maintained the
work-in-progress conversion period stable in all years
except in the year 2009-2010. In the year the period has
increased as compared to other years. This means the
company took more time in clearing the work-in-progress.
But during for all years the conversion period was very
low. That means the company took very less time for
clearing the work-in-progress. So the company is
maintaining a good work-in-progress conversion period.
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5.8 Finished Goods Inventories Turnover
It indicates the rate speed at which the
finished goods inventories are sold. Finished goods
turnover helps to know how many times finished goods
are help in stock during a given period.
Finished goods Inventories turnover = cost of goods
sold
Average finished goods
inventory
Cost of goods sold = cost of production + opening stock
of finished goods –closing stock of
Finished goods
Higher the ratio better it is because it shows that finishedgoods inventory is rapidly turnover.
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Table 5.8
Table showing finished Goods Inventories Turnover
( Rs in lakhs)
year Cost of goods
AverageFinishedgoods
inventory
FinishedInventoryTurnover
ratio
2005-06 3251.07 766.53 4.24
2006-07 8071.12 748.97 10.77
2007-08 5902.47 423.94 13.92
2008-09 9221.24 20220.17 4.562009-10 9922.85 2568.31 4.63
Figure 5.8
Figure showing finished Goods Inventories
Turnover
0
2
4
6
8
10
12
14
16
2005-06 2006-07 2007-08 2008-09 20
year
R a t i o
Inference
It indicates rate of speed at which the
finished goods inventories are solved, is that the
inventory become turned over during a given period. In
the year 2009-2010 the finished goods are easily sold by
during previous year it shows a decreasing in trend.
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5.9 Finished Goods Conversion Period
It refers to the average time taken for clearing
out the finished goods. This period is calculated by
dividing the number of days in a year by finished goods
turnover ratio.
Finished goods holding period
Finished goods holding period =
Number of days in a year (365
days)
Finished goods Inventory Turnover
Ratio
Table 5.9
Table showing finished goods conversion period
yearNo.of
years inA year
Finishedgoods
turnover
Finishedgoods
conversionperiod
2005-06 365 4.24 86
2006-07 365 10.77 33
2007-08 365 13.92 262008-09 365 4.56 80
2009-10 365 4.63 74
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Figure 5.9
Figure showing finished goods conversion period
0
10
20
30
40
50
60
70
80
90
100
2005-06 2006-07 2007-08 2008-09 2
Year
D a y s
Inference
From the graph, we can analyze the number of
days required for converting the finished goods. In the
year 2005-06 the number of days required was 86. That
means company took long period for conversion of
finished goods. However 06-07 the was decreased that
means company took less time for conversion of finished
goods. In the year 2007-08 company took 26 days for
conversion of finished goods. After that in the year 2008-
09 the period was increased but in the year 2009-10 thefinished goods conversion period decreased 74 days. The
company finished goods are stocked idly.
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Table 5.10
Table showing Raw materials and Stores
Year Raw materials and
stores2005-2006 838.852006-2007 856.262007-2008 984.912008-2009 1274.052009-2010 1531.34
Figure 5.10
Figure showing Raw materials and Stores
0
200
400
600
800
1000
1200
1400
1600
1800
2005-2006 2006-2007 2007-2008 2008-2009 2009
R u p e e s
Inference
Raw materials inventory show an increasing trend.
It helps to maintain frequent production.
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INVENTORY METHODS
ABC analysis underline very important
principle ‘vital few trivial many’. It also known as “always
better control” or the alphabetical approach based on the
concept of selection of inventory. This is modern method
of inventory control. It based on the principle of
management by exception is business should not exercise
same degree of control on all items. Static’s reveal that
just a handful of items account for bulk of the annual
expenditure on materials. These few items called a items
and therefore hold the key of business. Other items
known as B and C items are numerous in number but their
contribution is less significant.
A class item has higher percentage of value and
smaller percentage of consumption. This means 10% of
the total item accounts for 75% of the total money spend
on materials. These items require detailed and right
control and need to be stocked in similar quantities. They
attract utmost attention. Some senior executives should
be made responsible of regular reviewing of these items.
B class items carry 205 of the total items and
represent 20% of the total expenditure on the materials.
Control on these need not be as detailed and as rigid as
applied to ‘A’ class items.
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Class items are numerous is that 70% of the total
items, inexpensive and occupy 10% of the total value and
hence do not require close control.
In case it is warranted to hold higher inventory due
to commercial/ manufacturing reasons approval from
divisional head/ MD is taken while clearing purchase
proposal. Minimum stock level of all critical components,
which affect the production, is fixed as per list approved
by divisional head are maintained by HOD. Purchase
department takes appropriate actions in order to maintain
this minimum stock level. The following are the ABC
analysis of different products.
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ABC ANALYSIS OF TRILLER, REAPER AND ENGINE
In cost ‘A’ value items is the 755 of the total coat
and 20% and 5% is the B and C value respectively. But in
the case of number wise calculation ‘C’ value item give
more importance because they have lot of numbers in
machinery. The following are some of the items under R,
B and C.
TRILLER‘A’ VALUE ‘B’ VALUE ‘C’ VALUEFuel tank Machine
components
Washers
Flywheel Balance Weight BoltsFuel pumps First Shaft NutsCentral Gear
Chain
REAPER:Main gear box Chain case Drive Shaft-
3Cutter assembly Star wheel Sprocket
20TRear Frame Bommet Nuts
ENGINECylinder frame MBC Cover Oil filterRadiator MB Case Fan shaftFly Wheel Cam gear Head studCrank Shaft Mash RC cover
The ABC classification system is to
grouping items into annual issue value, (in terms of
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money), in an attempt to identify the small number of
items that will account for most of the issue value and
that are the most important ones to control for effective
inventory management, the emphasis is on putting effort
where it will have the most effect.
A) First of all, collect data of the inventory and calculate
the consumption or sale value. For a stores, maintaining
inventory, this shall be quantity issued multiplied by unit
rate of an item.
TABLE 5.11
Table showing ABC analysis 1
Sl.N
oItem Unit Rate
(Qty
issued)1 Lever C 9.15 102 Fitting metal 12.72 103 UW cover 14.11 124 Spring retainer 19.38 55 OS cover 26.27 26 Connecting rod nut 4.72 1007 Bolt m**100 4.00 808 BV assembly 15.52 12
9 Reverse shaft belt 14.18 2210 Arm shaft 35.00 6
B) Now, arrange all the consumption values in ascending
or descending order of values. Let us arrange the values
in ascending order (starting with lowest consumption
value item to highest consumption value item)
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c) Create next column and start adding to the cumulative
total of consumption value, starting form the top and
finishing with the last item as given in the table below.
Table 5.12
Table Showing ABC analysis 2
Consumptionvalue
Value inAscending order
Cumulative value
ItemClas
s
91.50 52.54 52.54 Os cover C127.20 91.50 144.04 Lever C C
169.32 96.90 240.94Spring
retainerC
96.90 127.20 368.14Fitting
metalC
52.54 169.32 537.46 Uw cover C
472.00 186.24 723.70Bv
assemblyC
320.00 210 933.70 Arm Shaft C
186.24 311.96 1254.66 ReverseShaft brush
B
311.96 320.00 1565.66 Boltm8*100 A
210 472.00 2037.66Connecting
rod nutA
From the last column it is clearly evident that the
bottom of 20% of items (6 and 7) consume togethernearly 70% of value, upper 70% (1,2,3,4,5,8 and 10)
items consume only 20% of value and the remaining 10%
items (9) consume 10% of value. Respectively, these are
a, b and c classes of items. From the analysis of all the
materials it has been it has been found out that the
company follows the following composition.
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Table 5.13
Table showing ABC analysis 3
Classe
s
Percentag
e
of total
items
Percenta
ge
of value
items
Total cost of
materials
A 10 70 Above Rs.5000B 20 20 Rs. 3000 to Rs.
5000
C 70 10 Below Rs.3000
Interpretation
The higher control is established for the
class items, which contributes more to the expense of the
inventories. This is considered as the most importantamong the other two classes without the class item the
production is interrupted. Hence, these high value items
are closely controlled and monitored by the company.
About 20% of items contribute B class items, which are
more numerous but present smaller amount of money. They require lesser control than the A class items.
Category C c class items covers only 10% of value which
require only lesser monitoring and controlling.
This classification can be done any time during a
financial year but since control is to be exercised, thisexercise is usually done by the company at the end of the
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financial year. So that suitable policies are for A, B, and
C class items for then next financial year and are really
followed.
VED ANALYSIS:
VED- Vital Essential and Desirable analysis issued
primarily for control of spare parts spares can be divided
into 3 categories – vital essential or desirable keeping in
view the critically to production. Vital items are important
items which are o be kept as stand by to avoid break
down. These items are very costly in nature. Example
over hauling – it. Essential items are those whose absence
tolerated for more than a few hours or a day. The
expenses on lost production due to the absence of such
items are usually high. Desirable items are those spares
which are needed but their absence for even a week or
so will lead to stoppage of production.
VED ANALYSIS
ClassesNumber of
itemsPrices
Percenta
ge
V 50 6500 51%E 30 2500 30%D 18 1000 18%
INTERPRETATION:
From the above table it shows that 50items of cost Rs.
6500 is under Vital, 30 items cost Rs. 2500 is under
Essential and 18 items of Rs 1000 is given as Desirable
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CHAPTER VI
FINDINGS, SUGGESTIONS,
AND CONCLUSION
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FINDINGS
The study was under taken mainly to evaluate
the efficiency of inventory management in KAMCO Ltd.
The major findings of the study are the following.
1. On analyzing the inventory turnover ratio of KAMCO
Ltd, it is decreasing year after year. Higher inventory
turnover ratio is better for the concern average inventory
ratio for the company for 5 years is 4.91 times.
2.
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SUGGESTIONS
From the above study, it is clear that KAMCO
Ltd, gives more care in managing the inventories, the
company can improve their performance and profitability
more and more. The following are the suggestions for
further improvement.
If the company gives more attention to improve the
inventory, can increase the profitability.
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The raw material inventory turnover of KAMCO Ltd is
moving in a good position. There fore, the company
should try to maintain this turnover in future.
Working progress turnover ratio KAMCO Ltd, shows a
fluctuating trend in during the five years. Therefore, the
company should try to make better and stable ratio
position in future.
If the company tries to reduce the finished goods
conversion period, company can increase the sale volume
and thereby they can earn more profits. In addition, the
company can avoid cost of storage.
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CONCLUSION
KERALA AGRO MACHINERY CORPORATION LTD,
being the prime supplier of agricultural products is
traditionally enjoying the market leadership. However the
liberalization policy has increased the competition and
result of competition, profit has become skin-deep. In this
study, an attempt is made to provide an idea about the
way on which the decision can be taken to plan the field
of inventory for better program. The analysis and
interpretation of inventory management shows that the
inventory position of KAMCO Ltd is quite satisfactory. In
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the last year, the company’s sales turnover is high, but
the inventory conversion period has increased and net
profit is comparatively higher than the previous years.
Though the analysis it can be concluded that though the
company is progressing, there are so many problems in
the industry like competitors with low cost machine,
increasing the cost of raw material and so on. For this
KAMCO Ltd, should try to utilize its strength to overcome
its weakness and take advantage of opportunities by
avoiding threats.