A STUDY ON INVENTORY MANAGEMENT OF PONNI SUGARS

LIMITED, PALLIPALAYAM

PROJECT REPORT

Submitted by

DHILEEPAN.M

Register No: 088001614017

in partial fulfillment for the award of the degree

Of

MASTER OF BUSINESS ADMINISTRATION

In

DEPARTMENT OF MANAGEMENT STUDIES

SSM COLLEGE OF ENGINEERING

KOMARAPALAYAM-638183

MAY 2010

SSM COLLEGE OF ENGINEERING

KOMARAPALAYAM-638183

Department of Management studies

PROJECT WORK

PHASE II

MAY 2010

This is to certify that the project entitled

A STUDY ON INVENTORY MANAGEMENT OF PONNI SUGARS

LIMITED, PALLIPALAYAM

is the bonafide record of project work done by

DHILEEPAN.M

Register No: 088001614017

of MBA (DEPARTMENT OF MANAGEMENT STUDIES) during the

year 2009-2010.

---------------------

----------------------------------

Project Guide Head of the Department

Submitted for the Project Viva-Voce examination held on__________

---------------------------

----------------------------

Internal Examiner External

Examiner

DECLARATION

I affirm that the project work title A STUDY ON INVENTORY

MANAGEMENT OF PONNI SUGAR PRIVATE LIMITED-

PALLIPALAYAM being submitted in partial fulfillment for the award of

MASTER OF BUSINESS ADMINISTRATION is the original work

carried out by me. It has not formed the part of any other project work

submitted for award of any degree or diploma, either in this or any other

University.

DHILEEPAN.M

(088001614017)

I certify that the declaration made above by the candidate is true

Mr.L. JOTHIBASU MBA..,

LECTURER

ACKNOWLEDGEMENT

I am deeply indebted to the management of S.S.M college of

Engineering, Komarapalayam, for giving me this ample opportunity to

do the training.

I feel great pleasure to thank our beloved Chairman Cavalier M.S

Mathivanan, M.A, M.Com, M.Phil, F.T.A, H.G.D.M (Lon) AIBM,

DIEM, Principal Prof. Dr. A. Subramanian, MR. P. Krishnakumar, BE,

MBA, MCSD, M.Phil. Ph.D Director of MBA Department, Esther

Gnanapoo MBA, MPhil, Ph.D HOD of MBA department, S.S.M

College of Engineering, Komarapalayam, S.S.M School of Management

who provided with us all facilities during the course of study.

I am also thankful to Mr.L.JOTHI BASU M.B.A., Department of

Management studies, for giving us a valuable learning experience by means

of this Organizational studies.

At the outset I would like to thank Mr. S.SURESH financial

manager for their valuable advice and guidance during my project

completion, for timely help concerning various aspects of project. I also

thanks to all staff members of account department PONNI SUGARS PVT

LTD for help me to complete my project.

Last but not least, I would like to thank all the respondents,

Company staffs, my parents, well wishers and friends who have directly

and indirectly helped me to complete this project.

DHILEEPAN.M

Chapter No. Description Page No.

List of Tables

List of Charts

Executive summary

1

1.1 Introduction

1.2 About the Study

1.2 About the industry

1.4 About the company

2

Main theme of the project

2.1 objectives of the study

2.2 scope and limitations

2.3 methodology

2.4 review of literature

3 Analysis and Interpretation

4

Findings

Suggestions

Conclusion

Bibliography

CONTENTS

LIST OF TABLES

SL.NO. TITLEPAGE

NO.

3.1.1TABLE SHOWING INVENTORY TO CURRENT ASSET RATIO

25

3.1.2 TABLE SHOWING INVENTORY TURNOVER RATIO

27

3.1.3 TABLE SHOWING RAW MATERIAL TO INVENTORY RATIO 29

3.1.4 TABLE SHOWING FINISHED GOODS TO INVENTORY RATIO 31

3.1.5 TABLE SHOWING CLASSIFICATION OF GOODS ITEM BASED ON THEIR CATEGORY 33

3.1.6 TABLE SHOWING CLASSIFICATION OF GOODS ITEM BASED ON THEIR STOCK VALUE 35

3.1.7TABLE SHOWING CLASSIFICATION OF GOODS ITEM BASED ON THEIR USAGE 37

LIST OF CHARTS

SL.NO. TITLEPAGE

NO.

3.1.1

CHART SHOWING INVENTORY TO CURRENT ASSET RATIO

26

3.1.2 CHART SHOWING INVENTORY TURNOVER RATIO

28

3.1.3 CHART SHOWING RAW MATERIAL TO INVENTORY RATIO 30

3.1.4CHART SHOWING FINISHED GOODS TO INVENTORY RATIO 32

3.1.5 CHART SHOWING CLASSIFICATION OF GOODS ITEM BASED ON THEIR CATEGORY

34

3.1.6 CHART SHOWING CLASSIFICATION OF GOODS ITEM BASED ON THEIR STOCK VALUE 36

3.1.7 CHART SHOWING CLASSIFICATION OF GOODS ITEM BASED ON THEIR USAGE 38

ABSTRACT

This project focuses on the inventory management system in the palli palayam ponni

sugar factory. A structured questionnaire was framed and various user departments were my

respondent.

A structured questionnaire was framed to find out the consumption pattern of

materials in various user department

Various statistical tools and financial ratio were used to find out the turnover ratio

performance of the stores.

The project was carried on for period of 60 days under professional guidance of faculty and

company guide.

The project gave a great exposure and through the project I came to know the mechanism

involved from raising an indent till receiving material

.

CHAPTER I

INTRODUCTION

1.1 INTRODUCTION ABOUT THE STUDY

Everything has a price; nothing in this world is for free. This statement talks

about the goods and services available to consumers and customers alike

throughout the globe. The hospital industry is no way an exception to this

statement, rather fact.

1.1.1ORIGINS OF THE WORD INVENTORY

The word inventory was first recorded in 1601. The french term inventaire, or

"detailed list of goods," dates back to 1415.

1.1.2BUSINESS INVENTORY

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at

every stage, requires that you maintain certain amount of inventory to use

in this "lead time"

2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in

demand, supply and movements of goods.

3. Economies of scale - Ideal condition of "one unit at a time at a place

where user needs it, when he needs it" principle tends to incur lots of costs

in terms of logistics. So bulk buying, movement and storing brings in

economies of scale, thus inventory

Buffer stock is held in individual workstations against the possibility that

the upstream workstation may be a little delayed in long setup or change-

over time. This stock is then used while that change-over is happening.

INVENTORY MANAGEMENT must tie together the following objectives ,to

ensure that there is continuity between functions :

• Company’s Strategic Goals

• Sales Forecasting

• Sales & Operations Planning

• Production & Materials Requirement Planning.

Inventory Management must be designed to meet the dictates of market place and

support the company’s Strategic Plan . The many changes in the market demand ,

new opportunities due to worldwide marketing , global sourcing of materials and

new manufacturing technology means many companies need to change their

Inventory Management approach and change the process For Inventory Control .

Inventory Management system provides information to efficiently manage the

flow of materials , effectively utilize people and equipment , coordinate internal

activities and communicate with customers . Inventory Management does not

make decisions or manage operations, they provide the information to managers

who make more accurate and timely decisions to manage their operations.

Inventory is defined as the blocked Working Capital of an organization in the

form of materials . As this is the blocked Working Capital of organization,

ideally it should be zero. But we are maintaining Inventory . This Inventory is

maintained to take care of fluctuations in demand and lead time. In some cases it

is maintained to take care of increasing price tendency of commodities .

Traditional Supply Chain solutions such as Materials Requirement Planning ,

Inventory Control ,typically focuses on implementing more rapid and efficient

systems to reduce the cost of communicating information between and across the

Inventory links in the SCM.COM focuses in optimizing the total investment of

materials cost and workload for every Inventory item throughout the chain from

procurement of raw materials to finished goods Inventory .

Optimization means providing a balance of supply to meet the demand at a

minimum total cost , Inventory level and workload to meet customers service goal

for each items in the link of Inventory Chain .

It is strategic in the sense that top management sets goals . These include

deployment strategies ( Push versus Pull ) , control policies , the determination of

the optimal levels of order quantities and reorder points and setting safety stock

levels . These levels are critical , since they are primary determinants of customer

levels.

Keeping in view all concerns , the latest concept of Vendor Managed Inventory is

used to optimize the Inventory . We are entering into Vendor Managed Inventory

Annual Rate Contracts with manufacturers or their authorized dealers , who

maintain Inventory on our behalf and supply the items as and when required .

VMI reduces stock-outs and optimize inventory in supply chain . Some features

of VMI include :

• Shortening of Supply Chain

• Centralized Forecasting

• Frequent communication of inventory, stock-outs and planned promotions

• Trucks are filled in a prioritized order , e.g. items that are expected to stock out

have top

priority then items that are furthest below targeted stock levels then advance

shipments of promotiona item Despite the many changes that companies go

through, the basic principles of Inventory Management and Inventory Control

remain the same. Some of the new approaches and techniques are wrapped in

new terminology, but the underlying principles for accomplishing good Inventory

Management and Inventory activities have not changed.

The Inventory Management system and the Inventory Control Process provides

information to efficiently manage the flow of materials, effectively utilize people

and equipment, coordinate internal activities, and communicate with customers.

Inventory Management and the activities of Inventory Control do not make

decisions or manage operations; they provide the information to Managers who

make more accurate and timely decisions to manage their operations.

The basic building blocks for the Inventory Management system and Inventory

Sales Forecasting or Demand Management

Sales and Operations Planning

Production Planning

Material Requirements Planning

Inventory Reduction

Any firm needs to keep enough of its inventory levels to meet the

requirement of the customers. Inventory management in such organization is

highly essential as major cash is involved in the inventory. The basic of

inventory management is to have a tradeoff between optimum levels of

inventory to meet the current requirements and minimizing the company’s

investment in blocking the opportunity cost of capital.

1.2 INDUSTRY PROFILE – SUGAR INDUSTRY

India has been known as the original home of sugar and sugarcane. Indian

mythology supports the above fact as it contains legends showing the origin of

sugarcane. India is the second largest producer of sugarcane next to Brazil.

Presently, about 4 million hectares of land is under sugarcane with an average.

India is the largest single producer of sugar including traditional cane

sugar sweeteners, khandsari and Gur equivalent to 26 million tonnes raw value

followed by Brazil in the second place at 18.5 million tonnes. Even in respect of

white crystal sugar, India has ranked No.1 position in 7 out of last 10 years.

Traditional sweeteners Gur & Khandsari are consumed mostly by the rural

population in India. In the early 1930’s nearly 2/3rd of sugarcane production was

utilised for production of alternate sweeteners, Gur & Khandsari. With better

standard of living and higher incomes, the sweetener demand has shifted to white

sugar. Currently, about 1/3rd sugarcane production is utilised by the Gur &

Khandsari sectors. Being in the small scale sector, these two sectors are

completely free from controls and taxes which are applicable to the sugar sector.

The advent of modern sugar processing industry in India began in 1930 with grant

of tariff protection to the Indian sugar industry. The number of sugar mills

increased from 30 in the year 1930 - 31 to 135 in the year 1935-36 and the

production during the same period increased from 1.20 lakh tonnes to 9.34 lakh

tonnes under the dynamic leadership of the private sector.

1.3 ABOUT THE COMPANY

PONNI SUGAR FACTORY is the largest SUGAR maker in India. With a

turnover of Rs. 45,555 crore, the company is among the top five highest profit

earning corporates of the country. It is a public sector undertaking wholly owned

by Government of India and acts like an operating company. Incorporated on

January 24, 1973, IT has more than 131,910 employees. The company's current

chairman is S.K. Roongta. With an annual production of 13.5 million metric

tons,The Government of India owns about 86% of the equity and retains voting

control of the Company.

Jaggery and Sugar markets, led the farmers to utilise the under lying

notion of self help and self reliance, in the Cooperative Societies Act and led to

the setting up of cooperative societies and cooperative sugar factories. However

the real growth of the cooperative sugar sector started after India’s independence,

when the Government decided to industrialise the country by expanding the

cooperative sector.

The principal of cooperation was assigned an important role for the

country’s economic and social development and was given priority over the other

sectors. Due to the involvement of farmers right from the inception, the sugar

factories were never looked upon as merely processing units of sugarcane, but

through the medium of the factories they endeavored for socio-economic,

educational and cultural development of the entire area surrounding the sugar

factories.

1.3.1WORK FLOW MECHANISM OF INVENTORY:

PURCHASE DEPARTMENT

ACTUAL USER

FINANCE DEPARTMENT

STORES AND SPARES

They are the persons who will generally raise the indent. They may

be anydepartment, who is in need of any tools for their use will generally raise

the indent. A person inany department alone cannot raise the indent. He has to

consult with the senior authority of that particular department after analyzing the

issue they will send the matter to the purchase department.

Genesis of Sugarcane and Sugar

The Cooperative Societies Act was enacted in India in 1904 with a limited

objective to provide cheap credit to the farmers and save them from exploitation

of money lenders.

 It was only in the early 1930’s that the cooperative movement penetrated

into the sugar sector. The increasingly high rates of interest charged by money

lenders and violent fluctuations in the Gur,

Jaggery and Sugar markets, led the farmers to utilise the under lying

notion of self help and self reliance, in the Cooperative Societies Act and led to

the setting up of cooperative societies and cooperative sugar factories. However

the real growth of the cooperative sugar sector started after India’s independence,

when the Government decided to industrialise the country by expanding the

cooperative sector. The principal of cooperation was assigned an important role

for the country’s economic and social development and was given priority over

the other sectors. Due to the involvement of farmers right from the inception, the

sugar factories were never looked upon as merely processing units of sugarcane,

but through the medium of the factories they endeavored for socio-economic,

educational and cultural development of the entire area surrounding the sugar

factories.

The sugar industry’s contribution, to the Indian economy is enormous with

its total turnover of over Rupees Forty Two thousand crores per year, out of

which the cooperative sector of the sugar industry accounts for about Rupees

Nineteen thousand five hundred crores. The Indian sugar industry is amongst the

largest tax payers to the Central and State exchequers contributing Rupees Two

thousand Two hundred crores per annum out of which the cooperative sector

accounts for Rupees One thousand crores. Over fifty million sugarcane farmers

and their dependents and a large mass of agricultural labourers are involved in

sugarcane cultivation, harvesting and ancillary activity. It is worth mentioning

that the industry employs over five lakh skilled and unskilled workers mainly

from the rural areas. Thus, over 7.5 per cent of the rural population of India is

directly or indirectly dependent on the sugar industry.

Today India is the second largest producer of sugar in the world after

Brazil and the cooperative sector is responsible for about 45 per cent of the total

production. The role of the cooperative sector of sugar factories in the socio-

economic development of India can hardly be over-emphasized. The role of the

cooperative sector is of paramount importance in the present scenario of

liberalized economy because it is only the cooperative effort which can make

Indian sugar globally competitive.

However, for this the Cooperative Sector of the sugar industry should be

permitted to function in a democratic manner.  There are still some States where

the Cooperative Sector sugar factories are managed by the Government appointed

Administrators.  It is universally acknowledged that India is the homeland of

sugarcane and sugar.

There are references of sugarcane cultivation, its crushing and preparation

of Gur in Atharva Veda as well as Kautaliya's Arthasastra. The scribes of

Alexander the Great, who came to India in 327 BC recorded that inhabitants

chewed a marvelous reed which produced a kind of honey without the help of

bees. The Indian religious offerings contain five 'Amrits' (elixirs) like milk, curd,

ghee (clarified butter),honey and sugar - which indicates how important sugar is

not only as an item of consumption but as an item which influences the Indian

way of life. It is understood that sugar was initially made in India during fourth

and sixth centuries by cutting sugarcane into pieces, crushing the pieces by weight

to extract the juice and then boiling it to crystalise.

These crystals were called 'Sarkara' meaning gravel in Sanskrit. The word

sugar is a derivative of 'Sarkara'. The larger lumps were called Khand from which

the English word 'Candy' is derived. Around 600 AD the Chinese Emperor, Tsai

Hang sent an emissary to Bihar - where sugarcane was cultivated for making

sugar - to learn the art of making sugar. Therefore it is from India that the art of

making sugar went to Persia and subsequently to the world over.

 Right from start

  Although sugarcane was being grown in India from time immemorial and

sugar produced in lumps during fourth century, there was no sugar industry in

India. It is said that the first sugar plant in India was established by the French

People at Aska in Orissa in 1824. Not much is known about this factory except

that it was maintained by Late James Fredrick Vivian Minchin and that it stopped

its operation around 1940. However, the first vacuum pan process sugar plant was

set up at Saran in Marhowrah in Bihar in 1904. By 1931-32 there were 31 sugar

factories in India all of which were in the private sector.

The total production of sugar at that time was only about 1.5 lakh tonnes,

whereas the consumption was about 12 lakh tonnes. To meet the domestic

demand of sugar, India had to import sugar mainly from Java (Indonesia).

CHAPTER II

2.1 OBJECTIVE OF THE STUDY

Primary objective

To examine the inventory management in the stores department of

ponni sugar factory.

Secondary objective:

To analyze the work flow mechanism of procuring, storing, indenting,

issuing and other procedures followed in the organization.

To analyze the impact of lead time on the cost of inventory in the

respective stores and user department.

To examine the impact of stock out situation with the user department.

To find out the adequate stock maintained in the organization for the

future consumption

NEED FOR STUDY

This study draws its parameters on the knowledge of

inventory and materials management with reference to the stores and purchase

department at pallipalayam ponni sugar plant. In this study we are trying to

identify the possibilities of reducing the excess stock and its cost in the stores

maintained by the stores and the user department.

2.2 SCOPE OF STUDY:

The study is focused only on materials management in

PONNI SUGAR. This study seeks to explain a practical approach to evaluate

the effectiveness of inventory management

.

1. How is the work flow mechanism?

2. Does there exist a correlation between the receipts and issues of items?

LIMITATION OF THE STUDY:

Every project has its own limitations and some of those encountered during

this study are listed below.

The study is limited to the store of PALLIPALAYAM,PONNI SUGAR.

This study is limited to the consumption pattern of the various user

departments.

Most of the data collected for the analysis has been extracted from past

records hence it is retrospective and some of it’s has been by means of

interviews.

The data collected for computation has been in quantitative terms rather

than qualitative as it involves cost aspect.

Project period is only for 3 months.

2.3 RESEARCH METHODOLOGY

Research Methodology is a systematic way of solving the problem.

Research is defined as a scientific and systematic search for pertinent information

on a specific topic. It is an art of scientific investigation. Research has its special

significance in solving various operational & planning problems of business and

industry. The scope of research methodology is very wide.

2.3.1 RESEARCH DESIGN:

The research design is the basic framework or a plan for a study that

guides the collection of data and analysis of data. The design may be a specific

presentation of the various steps in the process of Research. These steps include

the selection of research problem, presentation of the problem, formulation of the

hypotheses, methodology, survey of the literature and documentation,

bibliography, data collection, testing of hypothesis, interpretation, presentation

and report writing. In this market survey the design used is descriptive research.

ANALYTICAL RESEARCH DESIGN:

Analytical research design, the researcher has to use facts or information

already available, and analyze these to make a critical evaluation of the

performance.

2.3.2 SOURCES OF DATA:

Primary Data:

Data are collected through personal interviews and discussion with

Finance Executives.

Data are collected during the course of doing experiments in a research.

Data are collected either through direct communication with respondents

in one form or another through personal interviews.

Secondary Data:

Secondary data means data that are already available i.e., they refer to the

data which have already been collected and analyzed by someone else.

Secondary data about the company are collected from the reports, journals

and websites.

2.3.3 TOOLS USED FOR DATA ANALYSIS:

o ABC Analysis

o FSN Analysis

o XYZ Analysis

o Inventory turnover Ratio

ABC ANALYSIS:

MEANING:

The inventory if an organization generally consists of thousands of items

with varying prices, usage rate and lead time. It is neither desirable nor possible to

pay equal attention of all items.

ABC analysis is a basic analytical tool which enables management to

concentrate efforts where results will be greater. The concept applied to inventory

is called as ABC analysis

Statistics reveal that just a few items account for bulk of the annual

consumption of the materials. These few items are called A class items which

hold the key to business. The other items known as B & C which are numerous in

number but their contribution is less significant. ABC analysis thus tends to

segregate the items into three categories A,B&C on the basis of their values. The

categorization is made to pay right attention and control demanded by items.

FNS ANALYSIS:

All the items in the inventory are not required at the same frequency.

Some are required regularly, some occasionally and some very rarely. FSN

analysis classifies items into fast moving, slow moving, and non moving items.

FNS analysis divides the items of stores into 4 categories in the

descending order of importance of their usage rate.

'F' stands for fast moving items that are consumed in a short span of

time.

'N' stands for normal moving items which are exhausted over a period

of a year or so.

'S' indicates slow moving items which are not issued at frequent

intervals & are expected to be exhausted over a period.

2.3.4INVENTORY TURNOVER RATIO:

Kohler defines inventory turnover as “ a ratio which measures the number

of times a firm’s average inventory is sold during a year”.

A higher turnover rate indicates that the material in question is a fast

moving one. A low turnover rate, on the other hand, indicates over-investment

and locking up of working capital on undesirable items.

Inventory turnover ratio may be calculated in different ways by changing

the numerator, but keeping the same denominator. For instance, the numerator

may ne materials consumed, cost of goods sold or net sales. Based on any one of

these, the ratio differs from industry to industry.

Stock turnover is measured in terms of the ratio of the value of materials

consumed to the average inventory during the period; the ratio indicates the

number of times the average inventory is consumed and replenished.

By diving no. of days in a year by turnover ratio, the number of days for

which the average inventory is held, can be ascertained. Comparing the no. days

in the case of two different materials it is possible to know which is fast moving

& which us slow moving. On that basis, attempt may be to reduce the amount of

capital locked up, and prevent over-stocking of slow moving items.

Inventory Turnover Ratio: Cost of Sales / Average Inventory

Number of Days Inventory = 365 days / inventory turnover ratio.

2.3.5 TYPES OF INVENTORIES:

A manufacturing firm generally carries the following types of inventories:

Raw materials.

Bought out parts.

Work-in-process inventory(WIP).

Maintenance, repair and operating stores.

Tools inventory.

Miscellaneous inventory.

Goods in transit.

2.3.6 BENEFITS OF INVENTORY CONTROL:

The benefits of inventory control are:

Improvement in customers’ relationship because of the timely delivery of

goods and

services.

Smooth and uninterrupted production and hence, no stock out.

Efficient utilization of working capital.

Economy in purchasing.

Eliminating the possibility of duplicate ordering.

2.3.7 PRINCIPLES OF INVENTORY CONTROL

Inventory is only created by spending money for materials and labour and

overhead to process the materials.

Inventory is reduced through sales and scrapping.

Accurate sales and production schedule forecasts are essential for efficient

purchasing, handing and investment in inventory.

Management policies which are designed to effectively balance size and

variety of inventory with cost of carrying that inventory are the greatest

factor in determining inventory investment.

Forecasts help determine when to order materials. Controlling inventory is

accomplished through scheduling production.

Records do not produce control.

Controls is comparative and judgment rules and produces establish a base

from which the individuals can make evaluation and decision.

With the consistent practices being followed, inventory control can

become predictable and properly related to production and sales activity.

2.4 LITERATURE REVIEW

INVENTORY:

JAMES E.WARD Inventory is the total amount of goods and/or

materials contained in a store or factory at any given time. Another definition

of inventory is that it can be used to refer to stock on hand at a particular time

of raw materials, work in progress, finished goods and merchandise purchased

for resale, and the like tangible assets which can be seen, measured and

counted. Inventory is a list of goods and materials, or those goods and

materials themselves, held available in stock by a business.

Other definitions of inventory management

Involves a retailer seeking to acquire and maintain a proper merchandise

assortment while ordering, shipping, handling, and related costs are kept in check.

Systems and processes that identify inventory requirements, set targets,

provide replenishment techniques and report actual and projected inventory status.

Handles all functions related to the tracking and management of material.

This would include the monitoring of material moved into and out of stockroom

locations and the reconciling of the inventory balances. Also may include ABC

analysis, lot tracking, cycle counting support etc.

Management of the inventories, with the primary objective of

determining/controlling stock levels within the physical distribution function to

balance the need for product availability against the need for minimizing stock

holding and handling costs. See inventory proportionality.

Mercado, Ed C.

Better inventory management translates directly into better cash flow for

businesses. However, in order to successfully manage inventory, businesses must

strike a balance between customer demand and the amount of inventory they

keep.

Hands-On Inventory Management demonstrates principles key to

developing an inventory management process, which will meet customer needs

while keeping inventory costs at a level reasonable enough to produce a profit.

The text explains basic inventory principles, calculations, and techniques using

real-world examples.

Different operational situations require different inventory planning and

replenishment approaches; hence, this book emphasizes the prerequisites needed

for success in a number of different industries. These prerequisites include top

management support, a clear definition of responsibilities and alignment of goals

throughout the company, as well as uncomplicated item identification.

CHAPTER III

ANALYSIS AND INTERPRETATION

TABLE 1:

3.1.1INVENTORY TO CURRENT ASSET RATIO

Formula = Average inventory/ Current Asset

Year Inventory Asset ratio %

2005 121.3 211.75 0.57 57.28453365

2006 282.76 464.9 0.61 60.82168208

2007 334.71 435.34 0.77 76.88473377

2008 245.64 402.23 0.61 61.06953733

2009 349.91 431.32 0.81 81.12538255

INFERENCE:

From the above mentioned table it is clear that the ratio of the

inventory in the current asset is goes on increasing. The percentage of inventory

in the current asset is increased from 57.28 in the 2004 to 81.125 in the current

year. And there is nearly 40% Increase in the inventory.

GRAPH1:

3.1.1 INVENTORY TO CURRENT ASSET RATIO

INVENTORY TO CURRENT ASSET

0.00

20.00

40.00

60.00

80.00

100.00

2005 2006 2007 2008 2009

YEAR

inventory tocurrent

TABLE 2:

3.1.2: INVENTORY TURN OVER RATIO

Formula = cost of goods sold/ average inventory

Year cost of goods

sold

average

inventory

ratio

2005 555.41 103.335 5.37484879

2006 1005.35 173.225 5.80372348

2007 770.12 275.74 2.79292087

2008 1180.96 245.5 4.8104277

2009 1271.53 228.035 5.57603

INFERENCE:

The inventory turnover ratio trend over a period of five year was

analyzed and it was found that the inventory turnover ratio has fluctuated every

year and has decreased in the following year from 2007 to 2008. This shows that

an idle turnover ratio was maintained and this is considered as a positive indicator

f operating efficiency and good from the point of view of liquidity. The average

inventory turn over days will come around days 80.56

GRAPH 2:

3.1.2 INVENTORY TURN OVER RATIO

INVENTORY TURNOVER RATIO

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009

YEAR

RA

TIO

ratio

TABLE 3:

3.1.3 RAW MATERIAL TO INVENTORY RATIO

Formula= Raw material/ average inventory

Year raw material Inventory Ratio

2005 329.95 121.3 2.72011542

2006 865.28 282.76 3.06012166

2007 574.02 334.71 1.71497714

2008 699.33 245.64 2.84697118

2009 880.68 349.91 2.51687577

INFERENCE:

From the above mentioned table it is clear that the ratio of the raw

material in the inventory is average. This shows that the production is normal and

the raw material constitutes an average of 25% of inventory.

GRAPH 3:

3.1.3 RAW MATERIAL TO INVENTORY RATIO

0

0.5

1

1.5

2

2.5

3

3.5

RATIO

2005 2006 2007 2008 2009

YEAR

RAW MATERAL TO INVENTORY

ratio

TABLE 4:

3.1.4 FINISHED GOODS TO INVENTORY RATIO

Formula= finished goods/ Inventory

Year finished goods inventory Ratio

2005 93.89 121.3 0.77403133

2006 252.56 282.76 0.89319564

2007 298.93 334.71 0.89310149

2008 193.02 245.64 0.78578407

2009 263.05 349.91 0.75176474

INFERENCE:

From the table it is clear that finished goods constitute a vital part

in the inventory. And the level of the inventory is maintained at an average of

nearly 75%

GRAPH 4:

3.1.4 FINISHEDGOODS TO INVENTORY RATIO

FINISHED GOODS TO INVENTORY

0

0.2

0.4

0.6

0.8

1

2005 2006 2007 2008 2009

YEAR

ratio

ABC ANALYSIS:

TABLE 5:

3.1.5CLASSIFICATION OF ITEMS BASED ON THEIR CATEGORY

SL.NO Classification No of items

1 A 18

2 B 34

3 C 8

INFERENCE:

Among the major 60 items of the cold rolling mill 18 items fall under ‘A’

class. These items have consumption value greater than 70% of total

consumption. 34 items fall under ‘B’. These items have consumption

value of about 20% of total consumption.8 items fall under ‘C’. These

items have consumption value of about 10% of total consumption.

GRAPH 5:

3.1.5 CLASSIFICATION OF ITEMS BASED ON THEIR CATEGORY

ABC ANALYSIS

010203040

A B C

CATEGORY

NO

OF

ITE

MS

Series1

XYZ ANALYSIS:

TABLE 6:

3.1.6CLASSIFICATION OF ITEMS BASED ON THEIR STOCK VALUE

SL.NO Classification No of items

1 X 36

2 Y 10

3 Z 14

INFERENCE:

There is 36 items fall under ‘X’ category. These items have stock value

greater than Rs35000. There is 10 items fall under ‘Y’ category. These items

have stock value greater than Rs10000. There is 14 items fall under ‘Z’

category. These items have stock value less than Rs10,000

GRAPH 6:

3.1.6 CLASSIFICATION OF ITEMS BASED ON THEIR STOCK VALUE

XYZ ANALYSIS

0 20 40

X

Y

Z

NO OF ITEMS

Series1

FSN CLASSIFICATION

TABLE 7:

3.1.7 CLASSIFICATION OF ITEMS BASED ON THEIR USAGE

INFERENCE:

SL.NO CATEGORY NO OF ITEMS

1 Fast moving 20

2 slow moving 29

3 non moving 11

Around 20 items are considered to be Fast – Moving. Around 11 items are

considered to be N0n – Moving items. Around 29 items are considered to be

slow moving.

GRAPH 7:

3.1.7 CLASSIFICATION OF ITEMS BASED ON THEIR USAGE

0

5

10

15

20

25

30

NO OF ITEMS

Fast moving slow moving non moving

CATEGORY

FSN CLASSIFICATION

Series1

CHAPTER IV

4.1 FINDINGS

The researcher has been able to find out the following important

aspects from the study. They are: .

Inventory control techniques like ABC analysis, FSN analysis, XYZ

analysis, HML analysis are very significant in order to have a good

control and management over the large number of inventories kept in the

stores.

The percentage of inventory in the current asset is increased from 57.28 in

the 2004 to 81.125 in the current year. And there is nearly 40% increase in

the inventory.

This shows that an idle turnover ratio was maintained and this is

considered as a positive indicator of operating efficiency and good from

the point of view of liquidity. The average inventory turn over days will

come around days 80.56

Among the major 60 items of the cold rolling mill 18 items fall under ‘A’

class. These items have consumption value greater than 70% of total

consumption. 34 items fall under ‘B’. These items have consumption

value of about 20% of total consumption.8 items fall under ‘C’. These

items have consumption value of about 10% of total consumption.

There is 36 items fall under ‘X’ category. These items have stock value

greater than Rs35000. There is 10 items fall under ‘Y’ category. These

items have stock value greater than Rs10000. There is 14 items fall under

‘Z’ category. These items have stock value less than Rs10,000

Around 20 items are considered to be Fast – Moving. Around 11 items are

considered to be N0n – Moving items. Around 29 items are considered to

be slow moving.

The inventory stock in no. of days is found to be 80 days i.e., around 3

months which is an indicative of good inventory management.

4.2 SUGGESTIONS

The vital suggestions that can be considered for an effective management

and control of the inventories at ponni sugar factory pallipalayam.

1. Close control is required for ‘A’ class items. Class ‘C’ items account for the

bulk of inventory items, and routine controls should be adequate.

2. ‘X’ items have high stock value. The company should take special effort of

reduce these items.

3. The stock of Fast – Moving items has to be taken care, since non – availability

of these stock will lead to stock out costs. All non – availability stock can be

examined and immediate dispose of unnecessary Non – Moving stock can be

made in order to reduce the inventory stock in no. of days.

4. Since the percentage of inventory is more in the current asset the company

should regulate the further procurement of inputs.

5. System in the inventory should be standardized

6. Procurement in small lots to avoid heavy fluctuation in the input price

3.3 CONCLUSION

Managing and controlling the inventories, say raw materials, components,

spare parts, or finished goods is very significant and indispensable in any

organization, since it forms 80 % to 90 % of the working capital of the company.

It is therefore, necessary for the officer familiar with ways to control inventories

effectively so that there can be efficient allocation of funds and it leads to reduce

investment in inventories to the optimum level and leave sufficient funds for

more profitable channels which will ultimately result in maximization of the

shareholder’s wealth.

The techniques of inventory management help in determining the

optimum level of inventory as well as how much should be ordered and when it

should be ordered. All these techniques are helpful in efficient management of

inventories and balancing the advantages of holding additional inventory against

the cost of carrying inventory.

BIBLIOGRAPHY

SI. No.

Author Name Book Name &

Publications

1

2

3

4

SHARMA R.K.

SHASHI K. GUPTA

PANDEY I.M.

KHAN M.Y.

JAIN P.K.

KOTHARI C.R.

“Management Accounting” Principles and Practices, Kalyani Publishers, Seventh Revised Edition, 1996.

“Financial Management” Vikas Publishing house Pvt Ltd.,

Seventh Edition, 1997.

“Financial Management” Tata Mc Graw – Hill Publishing Company Ltd., New Delhi, 1997.

“Research Methodology methods Techniques”

Wishwa Prakashan, New Delhi, Second Edition.

“Management Accounting” Sultan chand & Sons, Second Edition, 2000.

5 PILLAI & BHAGAVATHI R.S.N.