inventory anu

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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

40



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.

41



TABLE 5.1

Table showing components of inventory

Components Rs.(lakhs) PercentageRaw materialWork in ProgressFinished goodsStores & spares

Total inventory

42



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

43



44



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

45



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,

46



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

47



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

48



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

49



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

50



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

51



Raw materials inventory Turnover ratio

= material consumed

Average raw materialsinventory

Raw Materials Conversion Period


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

52



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

53



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

54



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.

55



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

56



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

57



conversion presently the companies work in progress

turnover is standing in a very good position.

5.7 Work –in- Progress Conversion Period


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

58



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.

59



60



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.

61



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.

62



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

63



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.

64



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.

65



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.

66



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.

67



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

68



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)

69



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.

70



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

71



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

72



CHAPTER VI

FINDINGS, SUGGESTIONS,

AND CONCLUSION

73



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.

74



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.

75



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.

76



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

77



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.

inventory anu

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