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A PROJECT REPORT ON

INVENTORY MANAGEMENT SYSTEM A STUDY OF JOHNSON & JOHNSON LTD.

Submitted B !
P"#"$ T%"&u' M"(te' )* M"$"+eme$t ,B"t-% .//01223 UNDER THE GUIDANCE OF! D'. Bim"4 A$5um6 H.O.D.Bu(i$e(( Admi$i(t'"ti)$.

RIMT1IET6 MANDI GOBINDGARH

AC7NO8LEDGEMENT
I have prepared this study paper for the 9I$:e$t)' M"$"+eme$t S (tem ; A Stud )* J)%$()$ & J)%$()$ Ltd<. I have derived the contents and approach of this study paper through discussions with company executives and internet as well as with the help of various Books, Magazines and Newspapers etc. I would like to give my sincere thanks to a host of Company xecutive, friends and the teachers who, through their guidance, enthusiasm and counseling helped me enormously as I think there will !e always need for improvement. "part from this, I hope this study would stimulate the need of thinking and discussion on the topics like this one.

C)$te$t(
PART1 I

#$!%ective of the &tudy #Introduction of Company # Company 'rofile # (istory # Board of )irectors # "wards = 'roducts # *uiding 'rinciples of Company # &tructure of the Company # +esearch Methodology # Introduction of the ,opic PART1 II # )ata Collection # -inancial &tatements # )ata "nalysis and Interpretation # 'ro!lems and &uggestions # Conclusions # Bi!liography

OBJECTIVE OF THE STUDY


Inventories constitute the principal item in the working capital of the ma%ority of trading and industrial companies. In inventory, we include raw materials, finished goods, work in progress, supplies and other accessories. ,o maintain the continuity in the operations of !usiness enterprise, a minimum stock of inventory re.uired.

(owever, the physical control of inventory is the operating responsi!ility of stores superintendent and financial personnel have nothing to do a!out it !ut the financial control of these inventories in all lines of activity in which they comprise a su!stantial part of the current assets is a fre.uent pro!lem in the management of working capital. Management of inventory is designed to regulate the volume of investment in goods on hand, the types of goods carried in stock to meet the needs of production and sales while at the same time, the investment in them is to kept at a reasona!le level.

Company Profile

/ohnson 0 /ohnson and its su!sidiaries have approximately 115,500 employees worldwide engaged in the research and development, manufacture and sale of a !road range of products in the health care field. /ohnson 0/ohnson is a holding company, which has more than .>/ operating companies conducting !usiness in virtually all countries of the world. /ohnson 0 /ohnson1s primary focus has !een on products related to human health and well!eing. /ohnson 0 /ohnson was incorporated in the &tate of New /ersey in 2??@. ,he Company1s structure is !ased on the principle of decentralized management. ,he xecutive Committee of /ohnson 0 /ohnson is the principal management group responsi!le for the operations and allocation of the resources of the Company. ,his Committee oversees and coordinates the activities of the Consumer, 'harmaceutical and Medical )evices and )iagnostics !usiness segments. ach su!sidiary within the !usiness segments is, with some exceptions, managed !y citizens of the country where it is located. . Johnson & Johnson is known for its corporate reputation, consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's ost respected co pany !y "arron's #aga$ine, and was the first corporation awarded the "en%a in &ranklin 'ward for (u!lic )iplo acy !y the *.S. State )epart ent for its funding of international education progra s. Johnson & Johnson is known for its corporate reputation, consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's ost respected co pany !y "arron's #aga$ine, and was the first corporation awarded the "en%a in &ranklin 'ward for (u!lic )iplo acy !y the *.S. State )epart ent for its funding of international education progra s +he corporation's head,uarters is located in New "runswick, New Jersey, *nited States. Its consu er division is located in Skill an, New Jersey. +he corporation includes so e 50 su!sidiary co panies with operations in over -. countries. Its products are sold in over 1!5 countries. J&J had worldwide phar aceutical sales of " #$% !illion for the full/year 00&$

Se+me$t( )* Bu(i$e((
/ohnson 0 /ohnson1s operating companies are organized into three !usiness segments2 Consumer, 'harmaceutical and Medical )evices and )iagnostics.

Con'(mer
,he Consumer segment includes a !road range of products used in the !a!y care, skin care, oral care, wound care and women1s health care fields, as well as nutritional and over3the3counter pharmaceutical products, and wellness and prevention platforms. ,he Ba!y Care franchise includes the /$(N&$N1& Ba!y line of products. Ma%or !rands in the &kin Care franchise

include the AVEENOA CLEAN & CLEARA JOHNSONBS "dult4 NEUTROGENAA R)CA LUBRIDERMA D"b")A "$d Ve$dCme product lines. ,he $ral Care franchise includes the LISTERINE and REACH oral care lines of products. ,he 5ound Care franchise includes BAND1AID !rand adhesive !andages and PURELL instant hand sanitizer products. Ma%or !rands in the 5omen1s (ealth franchise are the CAREFREE P"$ti4i$e'(A STAYFREE sanitary protection products4 and 6ania xpansion products. ,he nutritional and over3the3 counter lines include SPLENDA , N) C"4)'ie S#eete$e'4 the !road family of TYLENOL acetaminophen products4 SUDAFED cold, flu and allergy products4 DYRTEC allergy products4 MOTRIN IB ibuE')*e$ products4 and PEPCID AC A-id Controller from /ohnson 0 /ohnson 7 Merck Consumer 'harmaceuticals Co. ,hese products are marketed to the general pu!lic and sold !oth to retail outlets and distri!utors throughout the world.

P)arma*e(+i*al
,he 'harmaceutical segment includes products in the following therapeutic areas2 anti3 infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. ,hese products are distri!uted directly to retailers, wholesalers and health care professionals for prescription use. 8ey products in the 'harmaceutical segment include2 REMICADE 9inflixima!:, a !iologic approved for the treatment of a num!er of immune mediated inflammatory diseases4 PROCRIT 9 poetin "lfa, sold outside the ;.&. as EPREF36 a !iotechnology3derived product that stimulates red !lood cell production4 LEVAGUIN 9levofloxacin: in the anti3infective field4 RISPERDAL CONSTA 9risperidone:, a long3acting in%ect a!le for the treatment of schizophrenia4 CONCERTA 9methylphenidate (Cl:, a product for the treatment of attention deficit hyperactivity disorder4 ACIPHEF HPARIET , a proton pump inhi!itor co3marketed with isai Inc.4 DURAGESIC HFe$t"$ 4 T'"$(de'm"4 9fentanyl transdermal system, sold outside the ;.&. as DUROGESIC :, a treatment for chronic pain that offers a novel delivery system4 VELCADE 9!ortezomi!:, a product for the treatment for multiple myeloma4 PREDISTA 9darunavir: for the treatment of (I6<"I)& patients4 and INVEGA 9paliperidone:, a once3daily atypical antipsychotic.

,e-i*al De.i*e' an- Dia/no'+i*'


,he Medical )evices and )iagnostics segment includes a !road range of products distri!uted to wholesalers, hospitals and retailers, used principally in the professional fields !y physicians, nurses, therapists, hospitals, diagnostic la!oratories and clinics. ,hese products include C)'di(B circulatory disease management products4)e'uy1s orthopaedic %oint reconstruction, (Ei$"4 -"'e and sports medicine products4 thicon1s surgical care, aesthetics and women1s health productsA Et%i-)$ E$d)1Su'+e' B( minimally invasive surgical products4 =ife&can1s!lood glucose monitoring and insulin delivery products4 $rtho3Clinical )iagnostics1 professional diagnostic products4 and 6istakon1s disposa!le contact lenses. )istri!ution to these health care professional markets is done !oth directly and through surgical supply and other dealers.

Ge)+'"E%i- A'e"(
,he international !usiness of /ohnson 0 /ohnson is conducted !y su!sidiaries located in >? countries outside the ;nited &tates, which are selling products in virtually all countries throughout the world. ,he products made and sold in the international !usiness include many of those descri!ed a!ove under @A &egments of Business A Consumer,B@A 'harmaceuticalB and @A Medical )evices and )iagnostics.B (owever, the principal markets, products and methods of distri!ution in the international !usiness vary with the country and the culture. ,he products sold in international !usiness include not only those developed in the ;nited &tates, !ut also those developed !y su!sidiaries a!road. Investments and activities in some countries outside the ;nited &tates are su!%ect to higher risks than compara!le ;.&. activities !ecause the investment and commercial climate is influenced !y restrictive economic policies and political uncertainties.

R"# M"te'i"4(
+aw materials essential to /ohnson 0 /ohnson1s operating companies1 !usinesses are generally readily availa!le from multiple sources.

P"te$t( "$d T'"dem"'&(


/ohnson 0 /ohnson and its su!sidiaries have made a practice of o!taining patent rotection on their products and processes where possi!le. ,hey own or are licensed under a num!er of patents relating to their products and manufacturing processes, which in the aggregate are !elieved to !e of material importance to /ohnson 0 /ohnson in the operation of its !usinesses. &ales of the Company1s largest product, + MIC") C 9inflixima!:, accounted for approximately DE of /ohnson 0 /ohnson1s total revenues for fiscal FGG?. "ccordingly, the patents related to this product are !elieved to !e material to /ohnson 0 /ohnson. )uring FGGD through FGG?, +I&' +)"= C 9risperidone: oral and ,$'"M"H C 9topiramate: lost !asic patent protection and market exclusivity and !ecame su!%ect to generic competition in the ;nited &tates and international markets. +I&' +)"= C oral sales declined !y >D.DE and ID.JE in FGG? and FGGJ, respectively. ,$'"M"H C lost market exclusivity in March FGG? and sales declined !y >D.?E as compared to FGGJ. ,he next significant patent scheduled to expire on )ecem!er FG, FGKG is for = 6"L;IN C 9levofloxacin:, which accounted for F.>E of the Company1s FGG? sales. " pediatric extension for = 6"L;IN C was granted !y the ;.&. -ood and )rug "dministration 9@-)"B:, which extends market exclusivity in the ;nited &tates through /une FG, FGKK. /ohnson 0 /ohnson1s operating companies have made a practice of selling their products under trademarks and of o!taining protection for these trademarks !y all availa!le means. ,hese trademarks are protected !y registration in the ;nited &tates and other countries where such products are marketed. /ohnson 0 /ohnson considers these trademarks in the aggregate to !e of material importance in the operation of its !usinesses.

C)mEetiti)$

In all of their product lines, /ohnson 0 /ohnson1s operating companies compete with companies !oth large and small, and !oth local and glo!al, located throughout the world. Competition exists in all product lines without regard to the num!er and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. ,he development of new and innovative products is important to /ohnson 0 /ohnson1s success in all areas of its !usiness. ,his also includes protecting the Company1s portfolio of intellectual property. ,he competitive environment re.uires su!stantial investments in continuing research and in maintaining sales forces. In addition, the development and maintenance of customer demand for the Company1s consumer products involves significant expenditures for advertising and promotion.

Re(e"'-% "$d De:e4)Eme$t


+esearch activities represent a significant part of /ohnson 0 /ohnson1s su!sidiaries1 !usinesses. Ma%or research facilities are located not only in the ;nited &tates, !ut also in Belgium, Brazil, Canada, China, -rance, *ermany, India, Israel, /apan, the Netherlands, &ingapore and the ;nited 8ingdom. ,he costs of worldwide Company sponsored research activities relating to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients 9excluding purchased in3process research and development charges for fiscal FGGJ and FGGD:, amounted to MD.G !illion, MD.N !illion and MD.D !illion for fiscal years FGG?, FGGJ and FGGD, respectively. ,hese costs are harged directly to expense, or directly against income, in the year in which incurred.

E$:i')$me$t
/ohnson 0 /ohnson1s operating companies are su!%ect to a variety of ;.&. and international environmental protection measures. /ohnson 0 /ohnson !elieves that its operations comply in all material respects with applica!le environmental laws and regulations. /ohnson 0 /ohnson1s compliance with these re.uirements did not during the past year, and is not expected to, have a material effect upon its capital expenditures, cash flows, earnings or competitive position.

Re+u4"ti)$
Most of /ohnson 0 /ohnson1s !usinesses are su!%ect to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward increasingly stringent regulation. In the ;nited &tates, the drug, device, diagnostics and cosmetic industries have long !een su!%ect to regulation !y various federal and state agencies, primarily as to product safety, efficacy, manufacturing, advertising, la!eling and safety reporting. ,he exercise of !road regulatory powers !y the -)" continues to result in increases in the amounts of testing and documentation re.uired for -)" clearance of new drugs and devices and a corresponding increase in the expense of product introduction. &imilar trends are also evident in ma%or markets outside of the ;nited &tates. ,he costs of human health care have !een and continue to !e a su!%ect of study, investigation and regulation !y governmental

agencies and legislative !odies around the world. In the ;nited &tates, attention has !een focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend, use or purchase particular medical devices. 'ayers have !ecome a more potent force in the market place and increased attention is !eing paid to drug and medical device pricing, appropriate drug and medical device utilization and the .uality and costs of health care. ,he regulatory agencies under whose purview /ohnson 0 /ohnson1s operating companies operate have administrative powers that may su!%ect those companies to such actions as product withdrawals, recalls, seizure of products and other civil and criminal sanctions. In some cases, /ohnson 0 /ohnson1s operating companies may deem it advisa!le to initiate product recalls. In addition, !usiness practices in the health care industry have come under increased scrutiny, particularly in the ;nited &tates, !y government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties.

PROPERTIES
/ohnson 0 /ohnson and its su!sidiaries operate KOI manufacturing facilities occupying approximately FK.O million s.uare feet of floor space. ,he manufacturing facilities are used !y the industry segments of /ohnson 0 /ohnson1s !usiness approximately as follows2 A:"i4"b4e I$*)'m"ti)$ Consumer Pharmaceutical Medical Devices and Diagnostics Worldwide otal SIu"'e Feet ,i$ Se+me$t t%)u("$d(3 6,825 6,369 8,251 21,!!5

5ithin the ;nited &tates, D facilities are used !y the Consumer segment, KF !y the 'harmaceutical segment and ID !y the Medical )evices and )iagnostics segment. /ohnson 0 /ohnson1s manufacturing operations outside the ;nited &tates are often conducted in facilities that serve more than one !usiness segment. ,he locations of the manufacturing facilities !y ma%or geographic areas of the world are as follows2 Geographic Area Number of Facilities "nited #tates 56 %uro&e 38 Western 'emis&here, e(cluding ")#) 16 (Square Feet in thousands) $,!89 $,336 3,3$2

*+rica, *sia and Paci+ic Worldwide otal

33 1!3

3,2!8 21,!!5

EFECUTIVE OFFICERS OF THE REGISTRANT


=isted !elow are the executive officers of /ohnson 0 /ohnson as of -e!ruary J, FGKG, each of whom, unless otherwise indicated !elow, has !een an employee of the Company or its affiliates and held the position indicated during the past five years. ,here are no family relationships !etween any of the executive officers, and there is no arrangement or understanding !etween any executive officer and any other person pursuant to which the executive officer was selected. "t the annual meeting of the Board of )irectors, the executive officers are elected !y the Board to hold office for one year and until their respective successors are elected and .ualified, or until earlier resignation or removal. Information with regard to the directors of the Company, including those of the following executive officers who are directors, is incorporated herein !y reference to the material captioned @ lection of )irectorsB in the 'roxy &tatement.

N"me & P)(iti)$


D)mi$i- J. C"'u() Mem!er, xecutive Committee4 6ice 'resident, -inance4 Chief -inancial $fficer 9a: Ru((e44 C. De ) Mem!er, xecutive Committee4 6ice 'resident, (uman +esources and *eneral Counsel 9!: C)44ee$ A. G)++i$( Mem!er, xecutive Committee4 5orldwide Chairman, Consumer *roup9c:

A4eJ G)'(& Mem!er, xecutive Committee4 5orldwide Chairman, Medical )evices and )iagnostics *roup 9d: S%e'i4 $ S. M-C) Mem!er, xecutive Committee4 5orldwide Chairman, 'harmaceuticals *roup 9e: 8i44i"m C. 8e4d)$ Chairman, Board of )irectors4 Chairman, xecutive Committee4 Chief xecutive $fficer

Hi'+ory
Ro!ert 0ood Johnson, inspired !y a speech !y antisepsis advocate Joseph 1ister, %oined !rothers Ja es 0ood Johnson and 2dward #ead Johnson to create a line of ready/to/use surgical dressings in 344-. +he co pany produced its first products in 3445 and incorporated in 344.. Ro!ert 0ood Johnson served as the first president of the co pany. 6e worked to i prove sanitation practices in the nineteenth century, and lent his na e to a hospital in New "runswick, New Jersey. *pon his death in 3738, he was succeeded in the presidency !y his !rother Ja es 0ood Johnson until 379:, and then !y his son, Ro!ert 0ood Johnson II. R0J's granddaughter, #ary 1ea Johnson Richards, was the first !a!y to appear on a J&J !a!y powder la!el. 6is great/grandson, Ja ie Johnson, ade a docu entary called "orn Rich a!out the e;perience of growing up as the heir to one of the world's greatest fortunes. Since the 3788s, the co pany has pursued steady diversification. It added consu er products in the 37:8s and created a separate division for surgical products in 37<3 which !eca e 2thicon. It e;panded into phar aceuticals with the purchase of #cNeil 1a!oratories, Inc., Cilag, and Janssen (har aceutical, and into wo en's sanitary products and toiletries in the 37.8s and 3748s. In recent years, Johnson & Johnson has e;panded into such diverse areas as !iophar aceuticals, orthopedic devices, and Internet pu!lishing. Recently, Johnson & Johnson has purchased (fi$er's Consu er 6ealthcare depart ent. +he transition fro (fi$er to Johnson and Johnson was co pleted )ece !er 34, :885.

Johnson & Johnson has !een consistently na ed one of the 388 "est Co panies for 0orking #others !y 0orking #other.

'long with =atorade, Johnson & Johnson is one of the founding sponsors of the National 'thletic +rainers' 'ssociation.

01o(+ E+)i*on 2Bran- 3ame4


>ur co pany was founded 48 years ago on the pillars of research, vision, innovation, and a co it ent to i proving the ,uality of patients? lives. +he first group of 2thicon scientists and researchers, who thought a!out healing in a new way / and in doing so, pioneered our sutures to enhance the work of surgeons and the lives of patients / recogni$ed the opportunity for li itless innovation. 'l ost a century later, 2thicon produces uch ore than sutures. 0e have continuously introduced innovations in all areas where we focus our e;pertise including@ wound closureA general surgeryA !iosurgeryA wo en?s health, and aesthetic edicine. 0hile a lot has changed in healthcare, one thing has not@ 2thicon re ains co itted to developing the !est surgical solutions to help doctors heal !oth the wounds you can see and the ones you can?t. Innovations that Restore "odies...and 1ives. 6ow do we do itB 6ow do we stay on the cutting edge of scienceB "y way of our greatest asset@ the talented, highly educated, e;perienced group of professionals who work at 2+6IC>N / 4,-88 gifted professionals around the world co e together every day to advance, innovate, and respond to their custo ers? needs. >ur co it ent to fulfilling the needs of surgeons and their patients, of transfor ing surgery, of helping patients heal faster and ore safely is never ending. 'nd so our work ust !e, too. 2thicon has a legacy all its own. "ut we?re part of a !roader heritage, too. 's a e !er of the Johnson & Johnson &a ily of Co panies, we?re guided !y >ur Credo@ co pany values that e power all of our e ployees to consider first the needs of our custo ers and patients we serve and to i prove the health, education, and ,uality of life in the co unities where we work and live. Caring for the world, one person at a ti eC inspires and unites the people of Johnson & Johnson. 0e e !race research and science / !ringing innovative ideas, products and services to advance the health and well/!eing of people. >ur 337,<88 e ployees at ore than :-8 Johnson & Johnson co panies work with partners in healthcare to touch the lives of over a !illion people every day, throughout the world.

S(+(re ,an(fa*+(rin/ Plan+' in In-ia

Baddi

Aurangabad

5ro6+) 7 E8pan'ion Of Jo)n'on 7 Jo)n'on

Since our founding in 3445, we have grown to eet the health care needs of people worldwide. +hrough ergers, ac,uisitions and the for ation of new co panies, we have !eco e the world?s largest and ost !roadly !ased health care co pany. 6ere are so e highlights of our historical growth.

1&&% 9 1: %; Jo)n'on 7 Jo)n'on Fo(n-e- <i+) S(r/i*al an- <o(n- Care Pro-(*+'
In 3445, our founders D Ro!ert 0ood Johnson, Ja es 0ood Johnson and 2dward #ead Johnson D started a s all edical products co pany in New "runswick, New Jersey. +hey ade the first/ever co ercial sterile surgical dressings, which helped save the lives of patients. 0e introduced dental floss, the first 'id kits, sanitary napkins for wo en, sterile sutures, J>6NS>N?S "a!y (owder, and "'N)/'I) "rand 'dhesive "andages. >ur international e;pansion !egan with Canada in 3737 and 2ngland in 37:<. >ur disaster relief progra !egan in 3785 when, within hours of the San &rancisco earth,uake and fire, we sent trainloads of our products to the city to help survivors.

1: % 9 1:#%; 5ro6+) of Pro-(*+ =ine' an- E8pan'ion O.er'ea' Help Jo)n'on 7 Jo)n'on 5o P(1li*
In 37<9 our chair an Ro!ert 0ood Johnson wrote >ur Credo, outlining our responsi!ilities to doctors, nurses, patients, consu ers, e ployees, and the co unity. )uring this period we also continued our overseas growth and !egan to !roaden our efforts in phar aceuticals and edical products. 0e e;panded into #e;ico, South 'frica, 'ustralia, &rance, "elgiu , Ireland, Swit$erland, 'rgentina, and "ra$il. 0e introduced #>)2SS sanitary napkins and J>6NS>N?S "a!y >il and "a!y 1otion. 0e also launched the first *.S. prescription !irth control product, >R+6> =EN>1 =el, in 3793. In 37<< we !eca e a pu!licly traded co pany.

1:#% 9 1:%%; Con+in(e- Pro-(*+ 5ro6+) an- O(r Cre-o Po'i+ion Jo)n'on 7 Jo)n'on a' >e'pon'i1le In-('+ry =ea-er$

0e steadily continued our growth during these decades. 0e e;panded to Fi !a!we, 'ustria, Sweden, the (hilippines, Colo !ia, (uerto Rico, the Netherlands, India, Scotland, (akistan, Fa !ia, Gene$uela, Italy, #alaysia and (ortugal.

New co panies for ed or ac,uired included@ 2+6IC>N, Inc., (ersonal (roducts Co pany Hproducts related to wo en?s healthIA #cNeil 1a!oratories, Inc. H!ringing us +E12N>1 aceta inophenIA 2uropean phar aceutical co panies Cilag Che ie, '.=. and Janssen (har aceutical, and Cod an & Shurtleff, Inc. H edical and surgical instru entsI. In 3759 >rtho (har aceutical !egan arketing its first !irth control pill, >R+6>/N>G*# 38 g.

1:%% 9 1:&%; ,e-i*al 0-.an*e' Crea+e 5ro(n-1rea?in/ Pro-(*+'


>ur operating co panies pioneered several i portant edical advances during this period. +he ac,uisition of &rontier Contact 1enses would grow into our vision care !usiness, the pioneer in disposa!le contact lenses. In 374- we e;panded to China. 0e introduced a wide range of ground!reaking products during these decades including@ Rho='# a life saving treat ent for he olytic disease in new!orns. 6'1)>1 HhaloperidolI, the gold standard for treating schi$ophrenia for over :years. #>NIS+'+ H icona$ole nitrateI Crea , a ilestone product for wo en?s health. GICRE1 Synthetic a!sor!a!le sutures, an i portant new tool for surgeons. +he (R>JI#'+2 1inear Stapler, a new way to close surgical incisions without sutures. >R+6>C1>N2 >K+9, the first therapeutic onoclonal anti!ody to treat the re%ection of transplanted organs.

1:&% 9 00&; In-('+ry =ea-er')ip En)an*e- 1y 0*@(i'i+ion' an- In+ernal De.elopmen+


&ro the 3748s to the present, we continue to grow through ac,uisitions and internally developed !usinesses that give us leadership positions in a nu !er of areas. 0e ac,uired 1ife Scan, Inc. H!lood glucose onitors for dia!eticsI, Neutrogena Corporation, and skin care !rands such as C12'N & C12'R, RoC and 'G22N>. +he ac,uisition of )e(uy, Inc. ade us a world leader in orthopedics.

0e for ed >rtho "iotech (roducts, 1( Ha !iotechnology pioneerI and 2thicon 2ndo/Surgery, Inc. H ini ally invasive surgeryI out of internal !usinesses. 0e erged with Centocor, Inc. which !rought us R2#IC')2 Hinfli;i a!I. +hrough our operating co panies, we introduced the first ass arket disposa!le contact lenses, the first coronary stent and the first drug eluting stent. (rescription edications we introduced during this period include@ (R>CRI+L2(R2J H2poetin 'lfaI RIS(2R)'1 HrisperidoneI R'F')EN2 Hgalanta ine hydro !ro ideI (R2FIS+' HdarunavirI ING2=' HpaliperidoneI 2;tended Release +a!lets IN+212NC2 HetravirineI

=oo?in/ +o +)e F(+(re


Johnson & Johnson is dedicated to advancing the health and well/!eing of people around the world. >ur people co e to work each day inspired !y their personal knowledge that their caring transfor s people's lives. >ur whole history has !een !ased on their passion for aking a difference in this world and we aspire, in the years to co e, to take hu an health and well/!eing to new levels. 0e are argua!ly the !est/ positioned co pany to do this !ecause of our !readth, financial strength and colla!orative nature.

STRUCTRE OF THE COMPANY


/ohnson 0 /ohnson =td. act upon the rules 0 regulations of the Companies "ct, K?OJ. ,he company has well defined structure .It have the following departments2 K. (+< 'ersonnel department

F. "ccounts departments I. 'urchase departments O. &tore department >. Luality "ssurance 0 Luality Control N. I, department D. +0) )epartment J. &ales 0 xcise department

RESEARCH METHODOGY
+esearch methodology is the way to systematically solve the research pro!lem. $!%ective of research study is "nalysis of inventory of /ohnson 0 /ohnson =td. "nalyzing of inventory, we determining following inventories3K. +aw materials inventory. F. 5ork in progress inventory. I. -inished goods inventory 0

O. &upplies inventory. In this section of inventories, we should analyze the annual investment in inventories, 6aluation of inventory after closing !alance of items in inventory. In this manner, we calculate reorder point, safety stock levels, minimum 0 maximum levels of inventory. 5orking hypothesis of the o!%ective is that inventories are the stock piles of goods .,he all organization on their inventories. /0/ invests a!out NGEof total assets inventory should !e analyzed their records. ,he analysis of inventory according to their data availa!le in the company. ,he data collection of inventory for analysis !y the direct store department. 5e should record primary and secondary data !y the helps of assistants ledger !ooks M + N etc. 5e went to the all inventories as raw material, work in progress inventory, finished goods inventory !y the proper o!servation of data1s of the company.

INTRODUCTION OF THE TOPIC


INTRODUCTION!

Inventories constitute the most significant part of current assets of a large ma%ority of companies in India. $n an average, inventories are approximately NGE of current assets in pu!lic limited companies in India. Because of the

large size of inventories maintained !y firms, a considera!le amount of feuds is re.uired to !e committed to them. It is therefore, a!solutely imperative to mPnage inventories efficiently and efficiently in order to avoid unnecessary investment. " firm neglecting the management of inventories will !e %eopardizing its long run profita!ility and may fail ultimately. It is possi!le for fore a company to reduce its levels of inventories to a considera!le degree e.g. KG to FG percent, without any adverse effect on production and sales, !y using simple inventory planning and control techni.ues. ,he reduction in excessive inventory carries a favora!le impact on a company1s profita!ility.

MEANING OF INVENTORY!1
Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may include raw materials, work3in3progress and stores etc. In the form of materials or supplies to !e consumed in the production process or in the rendering of services. In !rief, Inventory is unconsumed or unsold goods purchased or manufactured.

NATURE OF INVENTORIES!1
Inventories are stock of the product a company is manufacturing for sale and components that make up the product. ,he various

forms in which inventory exist in a manufacturing company are raw materials, work in progress and finished goods. RA8 MATERIALS!1 +aw materials are those inputs that are converted into finished product though the manufacturing process. +aw materials inventories are those units which have !een purchased and stored for future productions. 8OR7 IN PROGRESS!1 ,hese inventories are semi manufactured products. ,hey represent products that need more work !efore they !ecome finished products for sales. FINISHED GOODS!1 -inished goods inventories are those completely manufactured products which are ready for sale. &tock of raw materials and work in progress facilitate production. 5hile stock of finished goods is re.uired for smooth marketing operation. ,hus, inventories serve as a link !etween the production and consumption of goods. ,he levels of three kinds of inventories for a firm depend on the nature of its !usiness. " manufacturing firm will have su!stantially high levels of all three kinds of inventories, while a retail or wholesale firm will have a very high and no raw material and work in progress inventories. 5ithin manufacturing firms, there will !e differences. =arge heavy engineering companies produce long production cycle products, therefore they carry large inventories. $n the other hand, inventories of a consumer product company will not !e large, !ecause of short production cycle and

fast turn over. -irms also maintain a fourth kind of inventory, supplies or stores and spares. SUPPLIES! It includes office and plant cleaning materials like soap, !rooms, oil, fuel, light, !ul!s etc. ,hese materials do not directly enter production, !ut are necessary for production process. ;sually, these supplies are small part of the total inventory and do not involve significant investment. ,herefore, a sophisticated system of inventory control may not !e maintained for them.

MANAGEMENT OF INVENTORY
Inventories constitute the principal item in the working capital of the ma%ority of trading and industrial companies. In inventory, we include raw materials, finished goods, work3in3progress, supplies and other accessories. ,o maintain the continuity in the operations of !usiness enterprise, a minimum stock of inventory re.uired. (owever, the physical control of inventory is the operating responsi!ility of stores superintendent and financial personnel have nothing to do a!out it !ut the financial control of these inventories in all lines of activity in which they comprise a su!stantial part of the current assets is a fre.uent pro!lem in the management of working capital. Management of inventory is designed to regulate the volume of investment in goods on hand, the types of goods carried in stock to meet the needs of production, and sales while at the same time, the investment in them is to !e kept at a reasona!le level.

CONCEPT OF INVENTORY MANAGEMENT


,he term inventory management is used in two ways3 unit control and value control. 'roduction and purchase officials use this word in term unit control whereas in accounting this word is used in term of value control. "s investment in inventory represents in many cases, one of the largest asset items of !usiness enterprises particularly those engaged in manufacturing, wholesale trade and retail trade. &ometimes the cost of material used in production surpasses the wages and production

overheads. (ence, the proper management and control of capital invested in the inventory should !e the prime responsi!ility of accounting department !ecause resources invested in inventory are not earning a return for the company. +ather, on the other hand, they are costing the firm money

!oth in terms of capital costs !eing incurred and loss of opportunity income that is !eing foregone.

OBJECTIVES MANAGEMENT

OF

INVENTORY

,he !asic managerial o!%ectives of inventory control are two3fold4 first, the avoidance over3investment or under3investment in inventories4 and second, to provide the right .uantity of standard raw material to the production department at the right time. In !rief, the o!%ectives of inventory control may !e summarized as follows2

A.
9K:

OEe'"ti$+ Ob5e-ti:e(!
E$(u'i$+ A:"i4"bi4it )* M"te'i"4(! ,here should !e a continuous

availa!ility of all types of raw materials in the factory so that the production may not !e help up wants of any material. " minimum .uantity of each material should !e held in store to permit production to move on schedule. 9F: A:)id"$-e )* Ab$)'m"4 8"(t"+e! ,here should !e minimum possi!le wastage of materials while these are !eing stored in the godowns or used in the

factory !y the workers. 5astage should !e allowed up to a certain level known as normal wastage. ,o avoid any a!normal wastage, strict control over the inventory should !e exercised. =eakage, theft, em!ezzlements of raw material and spoilage of material due to rust, !ust should !e avoided. 9I: P')m)ti)$ )* M"$u*"-tu'i$+ E**i-ie$- ! If the right type of raw material is availa!le to the manufacturing departments at the right time, their manufacturing efficiency is also increased. ,heir motivation level rises and morale is improved. 9O: A:)id"$-e )* Out )* St)-& D"$+e'! Information a!out availa!ility of

materials should !e made continuously availa!le to the management so that they can do planning for procurement of raw material. It maintains the inventories at the optimum level keeping in view the operational re.uirements. It also avoids the out of stock danger. 9>: Bette' Se':i-e t) Cu(t)me'(! &ufficient stock of finished goods must !e maintained to match reasona!le demand of the customers for prompt execution of their orders. ,K3Hi+%4i+%ti$+ (4)# m):i$+ "$d )b()4ete item( )* m"te'i"4(. ,@3 De(i+$i$+ E))'e' )'+"$iL"ti)$ *)' i$:e$t)' m"$"+eme$t! Clear cut

accounta!ility should !e fixed at various levels of organization.

B. Fi$"$-i"4 Ob5e-ti:e(!
,23 E-)$)m i$ Eu'-%"(i$+! " proper inventory control !rings certain very attempt has to make to

advantages and economies in purchasing also. markets. ,.3

effect economy in purchasing through .uantity and taking advantage to favora!le

Re"()$"b4e P'i-e! 5hile purchasing materials, it is to !e seen that right

.uality of material is purchased at reasona!ly low price. Luality is not to !e sacrificed at the cost of lower price. ,he material purchased should !e of the .uality alone which is needed. 9I: OEtimum I$:e(ti$+ "$d E**i-ie$t U(e )* -"Eit"4! ,he !asic aim of

inventory control from the financial point of view is the optimum level of investment in inventories. ,here should !e no excessive investment in stock, etc. Investment in inventories must not tie up funds that could !e used in other activities. ,he determination of maximum and minimum level of stock attempt in this direction.

TYPES OF INVENTORY

2. M):eme$t I$:e$t)'ie(2 3
su!stantial amount of resources.

Movement inventories are also called transit or pipeline

inventories. ,heir existence owes to the fact that transportation time is involved in transferring

F. Bu**e' i$:e$t)'ie(2 3In Buffer inventories are held to protect against the uncertainties of
demand and supply. "n organization generally knows the average demand for various items that it needs. 'rod.deptt. issue store inspect receive supplier &upplies

)emand

Inventory in (and place $rders 'urchase dep1t. Net order Luantity issue tenders receive tender

.uotation evaluations

I$:e$t)' - -4e

I. A$ti-iE"ti)$ I$:e$t)'ie(. "nticipation inventories are held for the reason that future demand for the product is anticipated. 'roduction of specialized times like crackers well !efore

dewily, um!rellas and raincoats !efore taints set in, fans while summers are approaching4 or the piling up of inventory stocks when a strike is on the anvil, are all examples of anticipation inventories. CONTROL OF MATERIALS! +igid control over materials are necessary not only to guard against theft, !ut also to minimize waste and misuse from causes such as excessive inventories, over issue, deterioration, spoilage, and o!solescence. ,here are certain prere.uisites to an effective control system for materials2 K. Materials of the desired .uantity will !e availa!le when needed4 F. Materials will !e purchased only when a need exists and in economical .ualities4 I. 'urchases of materials will !e made at most favora!le prices4 O. 6ouchers for the payments of materials purchased will !e approved only if the materials have !een received in good condition4 >. Materials will !e protected against loss !y proper physical control4 N. Issue of materials will !e properly authorized and accounted for4 and D. "ll materials, at all times, will !e charged, as the responsi!ility of some individual. ,he control of materials, as an element of cost of production, is illustrated with reference to the purchase and issues procedures, inventory systems, and inventory control techni.ues.

IMPORTANCE OF INVENTORY CONTROL!

,he importance or necessity of inventory control is well explained in the terms of the o!%ects of inventory control, which are o!tained through it. " proper inventory control lowers down the cost of production and improves profita!ility of enterprise. ADVANTAGES OF INVENTORY CONTROL! 9K: +eduction in investment in inventory. 9F: 'roper and efficient use of raw materials. 9I: No !ottleneck in production. 9O: Improvement in production and sales. 9>: fficient and optimum use of physical as well as financial resources.

9N: $rdering cost can !e reduced if a firm places a few large orders in place of numerous small orders. 9D: Maintenance of ade.uate inventories reduces the set3up cost associated with each production run.

Ri(& "$d -)(t A(()-i"ted #it% I$:e$t)'ie(!


(olding of Inventories expose the firm to a num!er of risks and costs. M"5)' 'i(&( "'e2

9a: P'i-e de-4i$e2 ,hey may !e due to increase in market supply of the product, introduction of a new competitive product, price3cut !y the competitors etc. 9!: P')du-t dete'i)'"ti)$! ,his may due to holding a product for too long a period or improper storage conditions. 9c: Ob()4e(-e$-e! ,his may due to change in customer1s taste, new production techni.ue, improvements in product design, specifications etc. T%e C)(t( )* %)4di$+ i$:e$t)'ie( "'e "( *)44)#(! 9a: M"te'i"4 C)(t! ,his include the cost of purchasing the goods, transportation and handling charges less any discount allowed !y the supplier of goods. 9!: O'de'i$+ C)(t! ,his includes the varia!les cost associated with placing an order for the goods. ,he fewer the orders, the lower will !e the ordering costs for the firm. 9c: C"'' i$+ C)(t! ,his includes the expenses for storing and handling the goods. It comprises storage costs, insurance costs, spoilage costs, cost of funds tied up in inventories etc.

ESSENTIAL

OF

INVENTORY

CONTROL SYSTEM
-or an efficient and successful inventory control there are certain important conditions that are as follows2

,23 C4"((i*i-"ti)$ "$d Ide$ti*i-"ti)$ )* i$:e$t)'ie(! ,he usual

inventory

of manufacturing firm includes raw3material, stores, work3in3progress and component etc. ,o facilitate prompt recording the dealing, each item of the inventory must !e assigned a particular code num!er and it must !e classified in suita!le group or su!3divisions. "BC analysis of material is very helpful in this context. ,.3 St"$d"'diL"ti)$ "$d (imE4i*i-"ti)$ )* i$:e$t)'ie(! In order to facilitate inventory control, the inventory line should !e simplified. It refers to the elimination of excess types and sizes of items. &implification leads to reduction in classification of inventories and its carrying costs. &tandardization, on the other hand, refers to the fixation of standards of raw material to !e purchased and specification of the components and tools to !e used. ,M3 Setti$+ t%e M"Jimum "$d Mi$imum 4imit( *)' e"-% E"'t )* i$:e$t)' ! ,he third step in this process is to set the maximum and minimum limits of each item of the inventory. It avoids the chances of over3investment as well as running a short of any item during the cost of producing. +eordering point should also !e fixed !eforehand.

,N3

E-)$)mi- O'de' Gu"$tit ! It is also a !asic inventory pro!lem to

determine the .uantity as how much to order at a time. In determining the $L, the pro!lem is one to set a !alance !etween two opposite costs, namely, ordering costs and carrying costs. ,his .uantity should !e fixed !eforehand.

,>3AdeIu"te (t)'"+e F"-i4itie(! ,o make the system of inventory control successful and efficient one, it is also essential to provide the ade.uate storage facilities. &ufficient storage area and proper handling facilities should !e organized. ,K3AdeIu"te ReE)'t( "$d Re-)'d(! Inventory control re.uires the maintenance of ade.uate inventory record and reports. 6arious inventory records must contain information to meet the needs of purchasing, production, sales and financial staff. ,he typical information re.uired a!out any class of inventory may !e relating to .uantity on hand, location, .uantities in transit, unit cost, code for each item of inventory, reorder point, safety level etc. &tatements forms and inventory records should !e so designed that the clerical cost of maintaining these records must !e kept a minimum.

,@3I$te44i+e$t "$d EJEe'ie$-ed Pe'()$$e4! "n important re.uirement of successful inventory control system is the appointment of .ualified and experienced staff in purchase and stores department. Mere esta!lishment of procedures and the maintenance of records would not give the desired results as there is no su!stitute for sincere and devoted as well as experienced hands. (ence, the whole inventory control structure should !e manned with trained, .ualified, experienced and devoted employees.

,?3C))'di$"ti)$! ,here must !e proper coordination of all departments involved in the process of inventory control, such as purchase, finance, receiving, approving, storage and accounting departments. ,hese all departments have different outlook and o!%ects in inventory management !ut financial manager has to coordinate them all. ,03Bud+eti$+! "n efficient !udgeting system is also re.uired. 'reparation of !udgets concerning materials, supplies and e.uipment to ensure economy in purchasing and use of material is also necessary. ,2/3I$te'$"4 C%e-&! $perating of a system of internal check is also vital in inventory management so that all transactions involving material supplies and e.uipment purchase are properly approved and automatically checked.

FACTORS AFFECTING STOC7 INVESTMENT LEVEL


,hese factors can !e put in two categories2 *eneral and &pecific. Ge$e'"4 F"-t)'(! ,hese factors include those factors, which affect directly or indirectly level of investment in any asset. ,hese are as follows2 9K: 9F: 9I: 9O: 9>: 9N: Nature of Business &ize and scale of Business xpected &ales 6olumes 'rice =evel Changes "vaila!ility of -unds Management view 'oint

Spe*ifi* Fa*+or'; ,hese factors are directly related with investment in stock. -ollowing are the main factors2 9K: Se"()$"4 C%"'"-te' )* R"# M"te'i"4(! If supply of raw material used in the firm is seasonal, the firm will re.uire more funds for the purchase of raw material during season. ;sually, raw materials are availa!le at cheaper rates during its production season. 9F: Le$+t% "$d Te-%$i-"4 N"tu'e )* t%e E')du-ti)$ E')-e((! If production process is lengthy and of technical nature, higher investment is re.uired in raw material. In the technical nature production process, .uality control of raw material is given more emphasis. 9I: Te'm( )* Pu'-%"(e! If some concessions or discount in price or facilities of credit are provided !y suppliers on purchase of raw materials in huge .uantity then the firm is inspired for excessive purchase of goods and hence comparatively more investment is re.uired in inventory. 9O: N"tu'e )* E$d P')du-t! Nature of end product also influences investment in inventory. If the end product is a dura!le good, high investment will !e re.uired !ecause dura!le goods can !e stored for a long period. $n the other hand, perisha!le goods cannot !e stored for a long period. (ence, investment in inventory of such products is low. 9>: SuEE4 C)$diti)$(! If the supply of raw material is regular and there is no possi!ility of interruption in future, high investment in inventories is not re.uired. 9N: Time F"-t)'! ,he lead time of raw material time token in production process and sale of product also influence investment in inventories. =onger the period, higher will !e the investment in inventories.

9D:

L)"$ F"-i4itie(! If raw materials are purchased on credit or loan from the !ank or other financial institution can !e o!tained on the security of raw material, lesser investment would !e re.uired. In the a!sence of such loan facility, higher investment would !e re.uired.

9J:

P'i-e Le:e4 F4u-tu"ti)$(! If there are expectations of price rise in future then raw materials may !e store in high .uantity and so more investment would !e re.uired. $n the contrary, if the prices of raw materials are expected to go down in future, then comparatively lesser investment would !e re.uired.

TECH3IAUES OF I3VE3TO>Y CO3T>O=


In managing inventories, the firm1s o!%ective should !e in consonance with the wealth maximization principle. ,o achieve this, the firm should determine the optimum level of investment in inventory. ,o deal with the pro!lems of inventory management effectively, it !ecomes necessary to !e conversant with the different techni.ues of inventory control. "lthough the concepts involved in inventory management are production3oriented and are not strictly financial it is important that the financial manager understand them since they have certain !uilt3in financial costs. ,he different techni.ues of inventory control may !e summarized as follows2 9K: I$:e$t)' 4e:e4 Te-%$iIue ,he main o!%ective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor unnecessary

investment in inventory. -or this purpose, determination of maximum and minimum limits of inventory and ordering level is necessary. 9F: M"Jimum (t)-& Limit! ,his represents the .uantity of inventory a!ove which it should not !e allowed to !e kept. ,he main o!%ect of fixing this limit is to ensure that unnecessary working capital is not !locked in stores. ,he .uantity is fixed keeping in view the disadvantages of overstocking. T%e di("d:"$t"+e( )* ):e'(t)-&i$+ "'e! K. F. I. O. >. Capital is !locked up unnecessarily in stores so there will !e loss of interest. More godown space is needed so more rent will have to !e paid. ,here are chances of deterioration in .uality !ecause large stocks will re.uire more time for use is the factory. ,here is the possi!ility of loss due to o!solescence. ,here is danger of depreciation in market values. T%e m"Jimum (t)-& 4e:e4 i( *iJed b *"-t)'(! 9K: "mount of capital availa!le for maintaining stores. 9F: *odown space availa!le. 9I: +ate of consumption of the material. 9O: ,he time lag !etween indenting and receiving of the material. t"&i$+ i$t) "--)u$t t%e *)44)#i$+

9>: =ength and technical nature of the production process. 9N: 'ossi!ility of loss in stores !y deterioration, evaporation etc. ,here are certain stores, which deteriorate in .uality if they are stored for longer period. 9D: Cost of maintaining stores. 9J: =ikely fluctuation in prices. -or instance, if there is a possi!ility of a

su!stantial increase in prices in the coming period, a comparatively large maximum stock level will !e fixed. $n the other hand, if there is the possi!ility of decrease in price in the near future, stocks are kept at a much reduced level. 9?: ,he seasonal nature of supply of material. Certain materials are availa!le only during specific periods of year. &o these have to !e stocked heavily during these periods. 9KG:+estrictions imposed !y the government or local authority in regard to materials which there are inherent risks, e.g. fire and explosion. 9KK:+isk of o!solescence, i.e., possi!ility of change in fashion and ha!it which will necessitate change in re.uirements of materials.

T%e *)44)#i$+ *)'mu4" m" be "EE4ied t) -"4-u4"te t%e m"Jimum (t)-&! (1) Maximum &tock Q Minimum Inventory R =ot size (2) Maximum &tock Q +eorder =evel 3 Minimum consumption during Minimum lead time R =ot size

Mi$imum St)-& Limit ,S"*et )' Bu**e' (t)-&3


,his represents the .uantity !elow which stock should not !e allowed to fall. It is maintained to save from the situation of stock out in the event of a!normal increase in material usage rate and<or delivery period. In fact determination of this .uantity is significant !ecause of uncertainty in respect to material usage rate and delivery period. ,he main purpose of this level is to ensure that production is not held up due to shortage of any material. ,his level is fixed for all items of stores and following factors are taken into account for the fixation of this level2 9a: 9!: ,-3 Le"d time i.e. time lag !etween intending and receiving the material. R"te )* -)$(umEti)$ of the material during the lead time. Re1)'de' Le:e4 ,he following formula is applied to calculate Minimum &tock2

Mi$imum St)-& O Re1)'de' Le:e4 1 N)'m"4 u("+e du'i$+ N)'m"4 Le"d time But if normal usage and normal lead time is not known then average usage will !e treated as normal usage and average re3order will !e treated as normal re3 order period. Re1)'de'i$+ Le:e4 ,O'de'i$+ Le:e43 It is the point at which if the stock of the material in stores reaches, the storekeeper should initiate the purchase re.uisition for fresh supply of material. ,his level is fixed somewhere !etween maximum and minimum level is such a way that the difference of .uantity of the material !etween the reordering level and the minimum level will !e sufficient to meet re.uirements of production up to the time of fresh supply of the material. It is fixed after taking into consideration the following factors2 9a: R"te )* m"te'i"4 u("+e2 *enerally this rate is found out as usage rate per day, pre week or per month. ,he .uantity of production fluctuates according to demand of the product which results in variation in usage rate.

He$-e6 t%e *)44)#i$+ t%'ee *"-t)'(! 9i: M"Jimum u("+e '"te! It implies .uantity of material re.uired at maximum capacity production.

9ii: Mi$imum u("+e '"te! It implies .uantity of material re.uired at capacity production in most unfavora!le !usiness conditions. 9iii: N)'m"4 )' ":e'"+e U("+e R"te! It implies .uantity of material re.uired at capacity production under normal !usiness conditions. 9!: O'de'i$+ Pe'i)d2 ,he time taken in preparing the order for purchase of material is called ordering period. In some concerns this period may !e significant !ut in large concerns this period is significant !ecause !efore placing the order the purchase manager has to trace out the !est suppliers, after that only he places the order. S De4i:e' 6 Le"d )' P')-u'eme$t Time! ,he time taken from the date of placing the order to the date of delivery !y the suppliers is called procurement time. ,he maximum, minimum and average determined. 9): Mi$imum St)-& Le:e4! ,his is the level of stock !elow which stocks should procurement time should also !e

normally not !e allowed to fall.

C"4-u4"ti)$ )* Re1)'de' P)i$t! "fter taking into account the a!ove facts re3order .uantity is ascertained. -or this purpose, the following formula is applied2 Situ"ti)$2! 5hen rate of usage and lead time are known with certainty4

Re1)'de' E)i$t O +ate of usage x lead time. Situ"ti)$.! 5hen rate of usage is known with certainty and lead time is also known !ut is varia!le2 9i: Re1)'de' E)i$t Q Minimum Inventory R "verage usage during Normal lead ,ime. 9ii: Re1)'de' E)i$t O +ate of usage x Maximum =ead ,ime. Situ"ti)$M! 5hen rate of usage and lead time is known !ut varia!le and lead time is known with certainty2 ,i3 usage during lead time. ,ii3 Re1)'de' E)i$t Q Maximum ;sage rate x =ead time. Re1)'de' E)i$t Q Minimum Inventory R "verage

Situ"ti)$N! 5hen the rate of usage and lead time are known and are varia!le4 9i: Re1)'de' E)i$t Q Minimum Inventory R "verage usage during lead period. 9ii: Re1)'de' E)i$t Q Maximum ;sage rate x Maximum =ead time.

D"$+e' Le:e4 ,his means a level at which normal issues of the material are stopped and issues made only under specific instructions. ,he purchase officer will make special arrangements to procure the materials reaching at their danger levels so that the production may not stop due to shortage of materials. It is determined as follows2 D"$+e' 4e:e4 O A:e'"+e C)$(umEti)$ J M"Jimum Re1)'de' Ee'i)d *)' Eme'+e$- Pu'-%"(e

ECONOMIC ORDER GUANTITY TECHNIGUE


$ne of the ma%or inventory management pro!lems to !e resolved is how much inventory should !e added when inventory is replenished. If the firm is !uying raw materials, it has to decide lost in which it has to !e purchased on replenishment. If the firm is planning a production run, the issue is how much production to schedule 9or how much to make:. ,hese pro!lems are called )'de' Iu"$tit E')b4em(6 and the task of the firm is to determine the optimum or

economic order .uantity 9or e-)$)mi- 4)t (iLe:. )etermining an optimum inventory level involves two type of costs2 9a: ordering costs and 9!: carrying costs2 ,he economic order .uantity is that inventory level that minimize the total of ordering and carrying costs.

O'de'i$+ -)(t(! the term ordering costs is used in case of raw materials 9or supplies: and includes the entire costs of ac.uiring raw materials. ,hey include costs incurred in the following activities2 re.uisitioning, purchase ordering, transporting, receiving, inspecting and storing 9store placement:. $rdering costs increase in proportion to the num!er of order placed. $rdering costs increase with the num!er of order4 thus the more fre.uently inventory is ac.uired, the higher the firm1s ordering costs. $rdering costs decrease with increasing size of inventory. C"'' i$+ -)(t(! Costs incurred for maintaining a given level of inventory are

called carrying costs. ,hey include storage, insurance, taxes, deterioration and o!solescence. ,he storage costs comprise cost of storage space 9warehousing cost:, stores handing costs and clerical and staff service costs 9administrative T"b4e! O'de'i$+ "$d C"'' i$+ C)(t( costs:.

O'de'i$+ C)(t( 9K:+e.uisitioning ,.3$rder placing

C"'' i$+ C)(t( ,23 5arehousing ,.3 (andling

9I: ,ransportation

,M3 Clerical and staff

9O: +eceiving inspecting and storing ,N3 Insurance 9>: Clerical and staff ,>3 )eterioration

Carrying costs vary with inventory size. ,he economic size of inventory would thus depend on trade3off !etween carrying costs and ordering costs.

O'de'i$+ "$d C"'' i$+ C)(t( t'"de1)**! ,he optimum inventory size is commonly referred to as e-)$)mi- )'de' Iu"$tit . It is that order size at which annual total costs of ordering and holding are the minimum. 5e can follow three approaches3the trial and error approach, the formula approach and the graphic approach3to determine the economic order .uantity ,EOG3.

T'"i4 "$d E'')' AEE')"-%! ,he trail and error, or analytical, approach to resolve the order .uantity pro!lem can !e illustrated with the help of a simple example. =et us assume the following data for a firm.

stimated three month re.uirements, " 'urchasing cost 9per order:, 9+s: $rdering cost 9per order:, 9+s.: Carrying cost per unit, 9+e: >G

K,FGG )z.

ID.>G K

"verage inventory 3 9KFGG R G:<F Q NGG units "verage value 3 +s IG,GGG 9NGG#+s>G: If we choose the multiple order than we order KGGunits on monthly !asis "verage inventory 3 9OGGRG:<F Q K>Gunits: "verage value 3 K>G # +s >G Q D, >GG Many other possi!ilities can !e worked out in the same manner.

KFGG KGGG

JGG L<F NGG

&tock FGG >G G

OGG

KG

K>

,ime Inventory level over time

O'de'1 *)'mu4" "EE')"-%! ,he trial error, or analytical, approach is somewhat tedious to calculate the $L. "n easy way to determine $L is to use the order3 formula approach. =et us illustrate this approach.

&uppose the ordering cost per order, $, is fixed. ,he total order costs will !e num!er of orders during the year multiplied !y ordering cost per order. If a size, the num!er of orders represents total annual re.uirements and L the order will !e "<L and total order costs will !e2

,otal ordering cost Q ,A$$u"4 'eIui'eme$t = Pe' )'de' -)(t3 O'de' (iLe

TOC O AO< G

=et us further assume the carrying cost per unit, c, is constant

,he total carrying costs will !e the product of the average inventory units and the carrying cost per unit.

If L is the order size and usage is assumed to !e steady, the average inventory will !e.

A:e'"+e i$:e$t)' O )'de' (iLe O G . .

"nd total carrying costs will !e2

,otal carrying cost Q "verage inventory # 'er unit carrying cost

TCC O G. ,he total inventory cost, then, is the sum of total carrying and ordering costs2 ,otal cost Q ,otal carrying cost R ,otal order cost

,C Q Lc R "$

.uation 9O: reveals that for a large order .uantity, L, the carrying cost will increase, !ut the ordering costs will decrease. $n the other hand, the carrying costs will !e lower and ordering cost will !e higher with the order .uantity. ,hus, the total cost function represents a trade3off !etween the carrying costs and ordering costs for determining the $L.

,o o!tain the formula for $L, .uation 9O: is differentiated with respect to L and setting the derivative e.ual to zero, we o!tain2

conomic order .uantity Q F# .uantity re.uired # ordering cost Carrying cost $L Q F"$ C G'"E%i- "EE')"-%! ,he economic order .uantity can also !e found out graphically. -igure illustrates the $L function. In the figure, costs3carrying, ordering and total3 are plotted on vertical axis and horizontal axis is used to represent the order size. 5e note that total carrying costs increase as the order size increasers, !ecause, on an average, a

larger inventory level will !e maintained, and ordering costs decline with increase in order size means less num!er of orders. ,he !ehaviors of total costs line is noticea!le since it is a sum of two types of cost which !ehave differently with order size. ,he total costs decline in the first instance, !ut they start rising when the decrease in average ordering cost is more than offset !y the increase in carrying costs. ,he economic order .uantity occurs at the point L# where the total cost is minimum. ,hus, the firm1s operating profit is maximized at point L#.

Minimum total Cost

Carrying cost Costs ordering cost

L#

order size 9L: E-)$)mi- )'de' Iu"$tit

OEtimum E')du-ti)$( 'u$!

,he use of the $L approach can !e extended to production runs to determine the optimum size of manufacture. ,wo costs involved are set3up costs and carrying costs. &et3up costs include costs on the following activities2 preparing and processing the stock orders, preparing drawings and specifications, tooling machines set3up, handling machines, tools, e.uipment and materials, over time etc. 'roduction runs !ut carrying costs will increase as large stocks of manufactured inventories will !e held. ,he e-)$)mi- E')du-ti)$ (iLe will !e the one where the total of set3up and carrying costs is minimum. Re)'de' P)i$t! ,he pro!lem, how much to order, is solved !y determining the economic order .uantity, yet answer should !e sought to !e second pro!lem, when to order. ,his is a pro!lem of determining the reorder point. ,he 'e)'de' E)i$t is that inventory level at which an order should !e placed to replenish the inventory. ,o determine the reorder point under certainty, we should known2 9a: lead time 9!: average usage, and 9c: economic order .uantity. Le"d time is the normally taken is replenishing inventory after the order has !een placed. By certainty we mean that usage and lead time do not fluctuate. ;nder such a situation, reorder point is simply that inventory level which will !e maintained for consumption during the lead time. ,hat is2

+eorder point Q =ead # "verage usage

S"*et (t)-&!

,he demand for inventory is likely to fluctuate from time to time. In particular, at certain points of time the demand may exceed the anticipated level. In other words, a discrepancy !etween the assumed 9anticipated<expected: and the actual usage rate of inventory is likely to occur in practice. ,he effect of increased usage and<or slower delivery would !e shortage of inventory. ,hat is, the firm would disrupt production schedule and alienate the customers. ,he firm would, therefore, !e will advised to keep a sufficient safety margin !y having additional inventory to guard against stock3out situation. &uch stocks are called safety stocks. ,his would act as a !uffer<cushion against a possi!le shortage of inventory. &afety stock may, thus, !e defined as minimum additional inventory to serve as safety margin<!uffer<cushion to meet unanticipated increase in usage resulting from unusually high demand and<or uncontrolla!le late receipt of incoming inventory.

,he carrying costs are the costs associated with the maintenance of inventory. &ince the firm is 'eIui'ed to maintain additional inventory, in excess of the normal usage, additional carrying costs are involved. ,he stock3out and carrying costs are counter!alancing. ,he larger the safety stock, the larger the carrying costs and :i-e :e'(". Conversely, the larger the safety stock, the smaller the stock3out costs.

Max. Inventory

"verage usage $L

"vg. inventory3333333333333333333333333333333333333333333333333333 +e3order point33333333333333333333333333333333333333333333333333333 max.usage &afety stock 3333333333333333333333333333333333333333333333333333333

5eeks

lead time

+e3order point under safety stock

VED A$"4 (i(!

,he 6 ) analysis is used generally for spare parts. ,he

re.uirement and urgency of spare parts is different from that of materials. "3B3C analysis may not !e properly used for spare parts. ,he demand for spares depends upon the performance of the plant and machinery. &pare parts are classified as2 6ital 96:, ssential 9 : and )esira!le 9):. ,he vital spares are a must for running the concern smoothly and these must !e stored ade.uately. ,he non3availa!ility of vital spares will cause havoc in the concern. ,he types of spares are also

necessary !ut their stocks may !e kept at low figures. ,he stocking of ) types of spares may !e avoided at times. If the lead time of these spares is less, then stocking of these spares can !e avoided. ,he classification of spares under three categories is an important decision. " wrong classification of any spare will create difficulties for production department. ,he classification of spares should !e left to the technical staff !ecause they know the need, urgency and use of these spares. A((umEti)$(! In applying $L formula, it is assumed that2 9i: 9ii: 9iii: ,otal demand is known with certainty. ,he usage rate of material is steady. $rders for replenishment on inventory are placed exactly when

inventories reach ordering level. 9iv: ,he ordering cost per order and holding cost per unit are constant.

EOG "$d T)t"4 I$:e$t)' cost and carrying cost "s per the formula2

C)(t! "t

$L level total inventory cost is

minimum. ,otal inventory cost is the sum of material purchase cost, ordering

,otal Inventory Cost 9,IC: Q Material 'urchase Cost R ,otal R ,otal Carrying Cost Q 9+ x ': R 9+<'o x Cp: R 9Lo<F x Ch:

$rdering Cost

Di(-)u$t O**e' "$d E-)$)mi- O'de' Gu"$tit ! &ometimes supplier offers different discounts on orders of large .uantity. In such a situation, at first we should calculate $L and find out ,IC without considering discount offer. ,hen we should calculate ,IC of each alternative offer. ,hat .uantity will !e $L at ,IC is the lowest.

PERPETUAL INVENTORY CONTROL TECHNIGUE 'erpetual inventory system implies maintenance of up3to3date stock records and in its !road sense it covers !oth continuous stock taking as well as up3to3date recording stores !ooks. "ccording to 5eldon, It may !e defined as @a method of recording stores !alances after every receipt and issue to facilitate regular checking and to o!viate closing down for sock3takingB. ,he !asic o!%ect of this system is to make availa!le details a!out the .uantity and value of stock of each item at all times. ,he system thus provides a rigid control over stock of each item of store can regularly !e verified with the stock records in the !in cards kept in the stores and stores ledger maintained in cost office.

Ad:"$t"+e( )* Pe'Eetu"4 I$:e$t)' ( (tem! K. S":i$+ i$ time2 ,he long and costly work of stocktaking is avoided. (ence, interim and final financial accounts can !e prepared with greater convenience.

F.

A''"$+eme$t )* E')Ee' :e'i*i-"ti)$! In this system a detailed and more relia!le checking of the store is exercised !ecause of the continuous and random checking.

I.

Ve'i*i-"ti)$ )* E'')'(! rrors are easily located and rectified. ,his gives an opportunity for preventing a recurrence in many cases.

O.

D)ub4e -)$t')42 )ue to separate records in Bin card and stores ledger, dou!le control is maintained.

>.

OEtimum (iLe )* m"te'i"4! $verstocking and under stocking can !e avoided !ecause perpetual inventory system covers verification of stock with regards to maximum, minimum and other levels.

N. avoided. D.

L"-& )* mi(u(e )* M"te'i"4! ;nder this system, effective control on issue of material is possi!le, thus misuse of material can !e M)'"4 C%e-& )$ St)'e( (t"**! )ue to continuous checking, this system serves as a moral check on the stores staff. ,hey are discouraged from committing dishonesty.

J.

L)(( )* (t)-& due t) )b()4e(-e$-e! It is detected at an early stage and so timely action can !e taken to prevent recurrence.

THE SELECTIVE INVENTORY CONTROL OR ABC SYSTEM OF CONTROL


Most manufacturing firms find themselves confronted with virtually thousands of different inventory items. Most of these items are relatively inexpensive, while other items are .uite expensive and account for a large portion of the firm1s investment. &ome inventory items, although not expensive, turnover slowly and therefore, they re.uire a high average investment. ,he firm should classify them into ".B.C category items. Category " will include more expensive items 9in cost of product: with high investment and it will re.uire more intensive control. ,he TB1 group will consist of the items accounting for the next largest investment. ,he TC1 group will consist of a large num!er of items of inventory accounting for small investment. ,he T"1 items re.uire intensive inventory control and most sophisticated inventory control techni.ues should !e applied to these items. ,he TB1 items can !e controlled using less sophisticated techni.ue, and their level can !e viewed less fre.uently than T"1 items.

,he TC1 items can receive the minimum attention2 they will pro!a!ly !e ordered in large .uantities in order to o!tain them at the lowest price. ,hough the "BC techni.ue is a good techni.ue !ut it cannot !e universally applied. Certain items of inventory may !e inexpensive !ut may !e critical to the product in process and cannot !e easily o!tained. ,herefore, they may re.uire special attention.

,hese types of items must !e treated as @"B class items even though, using the !road framework, they would !e @BB or @CB class items. "lthough, not perfect, the "BC system is an excellent method for determining the degree of inventory control efforts re.uired to expand each item of inventory. ,he following points should !e kept in mind for "BC analysis2

9K: 9F: 9I:

5here items can !e su!stituted for More emphasis should !e given to "ll the items consumed !y an

each other, they should !e prefera!ly treated as one item. the value of consumption and not to price per unit of the item. organization should !e considered together for classifying as ", B or C instead of

taking item as spare, raw materials, semi3finished and finished items and then classifying as ", B and C. ,here can !e more then three classes and the period of consumption need not necessarily !e one year

AEE4i-"ti)$ )* ABC A$"4 (i(! "BC analysis can !e effectively used in Material Management. ,he various stages where it can !e applied are2 9K: higher degree of control. 9F: strategy. 9I: 9O: 9>: 9N: 9D: &tock records. 'riority treatment to different items. )etermination of safety stock items. &tores layout. 6alue analysis. ,o evolve useful re3ordering Information of items which re.uire

Ju(t1i$1time ,JIT3 S (tem!


/apanese firms popularized the 5u(t1i$1time ,JIT3 ( (tem in the world. In a /I, system material or the manufactured components and part arrive to the manufacturing sites or stores %ust few hours !efore they are put to use. ,he delivery of material is synchronized with the manufacturing cycle and speed. /I, system eliminates the necessity of carrying large inventories, and thus, saves carrying and other related costs of manufacturer. ,he system re.uires perfect understanding and coordination !etween the manufacturer and supplier in terms of the timing of delivery and .uality of the material. 'oor .uality material or complements could halt the production. ,he /I, inventory system complements the total Iu"4it m"$"+eme$t ,TGM3. ,he success of the system depends on how well a company manages its suppliers. ,he system puts tremendous pressure on suppliers. ,hey will have to develop ade.uate system and procedures to satisfactory meet the needs of manufacturers.

S (tem )* A--)u$ti$+ *)' M"te'i"4 I((uedHI$:e$t)' S (tem(

ither the periodic inventory system or the perpetual inventory

system may !e

used to account for materials issued to production and ending materials inventory.

Pe'i)di- I$:e$t)' S (tem ;nder the periodic inventory system, the purchase of materials is recorded in Pu'-%"(e )* R"# M"te'i"4( A--)u$t. ,he opening<!eginning inventory, if any, is recorded in a separate M"te'i"4( I$:e$t)' 1 OEe$i$+ A--)u$t. ,he materials availa!le for use during a period e.ual purchases plus opening inventory. " physical count is made of the materials on hands at the end of the period to arrive at the closing<ending materials inventory. ,he cost of materials for the period is determined as shown in xhi!it2

C)(t )* M"te'i"4( I((ued

Materials inventory3opening R 'urchases Q Materials availa!le for use 3 Materials inventory3closing 9!ased on physical count: Q Cost of materials issued

,he entire !ook inventory is verified at a given date !y an actual count of materials on hand. ,his physical inventory is usually taken near the end of the accounting year<period. ,his method provides for the recording of the purchases on a daily !asis !ut does not provide for a continuous inventory3taking. Neither a physical count is made of the .uantity of goods on hand, nor the value of the inventory in determined !y using an appropriate pricing method and attaching costs to units counted. It is assumed that goods not on hand at the end of the period have !een sold. ,here is no system and accounting period, and they can !e discovered only at the end.

INVENTORY TURNOVER RATE TECHNIGUE $ne important techni.ue of inventory control is to use inventory turnover ratios. ,hese ratios are calculated to assess the efficiency in use of inventories. -ollowing control ratios can !e computed for inventory analysis2 9i: I$:e$t)' Tu'$):e' R"ti) O Cost of goods sold< "verage Inventory 8%e'e A:e'"+e I$:e$t)' O 9$pening Inventory R Closing Inventory:<F Inventory ,urnover +atios ca !e calculated separately for raw materials and finished goods.

9":

R"# M"te'i"4 Tu'$):e' R"ti) Q +aw Material Consumed< "verage stock of +aw material.

9B:

Fi$i(%ed G))d( Tu'$):e' R"ti) Q Cost of *oods &old< "verage &tock of -inished *oods "verage "ge of inventory of inventory ,urnover in )ays Q )ays during the period< Inventory ,urnover +atio

9ii:

A:e'"+e i$:e$t)' t) t)t"4 -)(t )* E')du-ti)$ Q 9"verage Inventory< total cost of production: x KGG

9iii:

S4)# M):i$+ St)'e( t) T)t"4 I$:e$t)' Q "verage Cost of &low Moving &tores<"verage Inventory

9iv:

I$:e$t)'

Pe'*)'m"$-e I$deJ Q 9"ctual Material ,urnover +atio<

&tandard Material ,urnover +atio: x KGG ,hese ratios provide a !road framework for the control and provide the !asis for future decisions regarding inventory control. ,he ratios provide a tough indication of when Inventory levels are going to !e high. ven if it appears from the ratio that the levels are too high there might !e a perfectly good reason why the level of Inventory is !eing maintained. ,he ratios also indicate the situation and trend. (owever, the limitation of ratios should !e kept in mind. ,hey are not an end themselves, !ut only tools of sound Inventory Management.

FINANCIAL MANAGERBS ROLE IN INVENTORY MANAGEMENT Inventory represents a large investment !y manufacturing concern2 therefore, great emphasis must !e placed on its efficient management. ,hough, the operative responsi!ility for Inventory management lies with the inventory manager, the financial manager must also !e concerned with all types of inventories3 raw materials, work3in3progress and finished goods. (e must monitor Inventory levels and see that only an optimum amount is invested in Inventory. (e should !e familiar with the Inventory control techni.ues and ensure that Inventory is managed well. (e should try to resolve the conflicting view points of all the departments in order to have efficient inventory management. (e has to act as a careful inspector levels. (e should introduce the policies which reduce the lead time, regulate usage and thus, minimize safety stock. "ll these techni.ues of Inventory management lead to the goal of wealth maximization.

VALUATION OF INVENTORIES OBJECTIVE!

" primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognized. ,his statement deals with the determination of such value, including the ascertainment of cost of inventories and any write3down thereof to net realiza!le value. K. than2 9a:5ork3in3progress arising under construction contacts, including directly related service contracts. 9!: 5ork3in3progress arising in the ordinary course of !usiness of service providers. 9c:&hares, de!entures and other financial instruments held as stock3in3trade. 9d: 'roducer1s inventories of livestock, agricultural and forest products and mineral oils, ores and gases to the extent that they are measured at net realiza!le value in accordance with well esta!lished practices in those industries. ,his statement should !e applied in accounting for inventories other

F.

,he inventories referred are measured at net realiza!le value at certain

stages of production. ,his occurs, for example, when agricultural crops have !een harvested or mineral oils, ores and gases have !een extracted and sale is assured under a forward contract or a government guarantee or when a

homogenous market exists and there is a negligi!le risk of failure to sell. ,hese Inventories are excluded from the scope of this statement.

DEFINITIONS ,he following terms are used in this statement with the meanings specified2 Inventories are assets2 9a: 9!: 9c: (eld for sale in the ordinary course of !usiness. In the process of production for such sale, or In the form of materials or supplies to !e consumed in the production process or in the rendering of services. K. Inventories encompass goods purchased and held for resale, for example, merchandise purchased !y a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work3in3progress !eing produced, !y the enterprise and include materials, maintenance supplies, consuma!les and loose tools awaiting use in the production process. Inventories do not include machinery spares which can !e used only in connection with an item of fixed asset and whose use is expected to !e irregular4 such machinery spares are accounted for in accordance with "ccounting &tandard 9"&: KG, "ccounting for -ixed "ssets.

F. Inventories should !e valued at lower of cost net realiza!le value. M. C)(t )* I$:e$t)'ie( ,he cost of inventories should comprise all costs of purchase, costs location and condition. of conversion and other costs incurred in !ringing the inventories to their present

N. C)(t( )* Pu'-%"(e ,he costs of purchase consist of the purchase price including duties and taxes 9other than those su!se.uently recovera!le !y the enterprise from the taxing authorities:, freight, inwards and other expenditure directly attri!uta!le to the ac.uisition. ,rade discounts, re!ates, duty draw!acks and other similar items are deducted in determining the costs of purchase.

>. C)(t( )* C)$:e'(i)$ ,he costs of conversion of inventories include costs directly related to the units of production, such as direct la!our. ,hey also include a systematic allocation of fixed and varia!le production overheads that are incurred in converting materials into finished goods. -ixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory !uildings

and the cost of factory management and administration. 6aria!le production overheads are those indirect costs of production that vary directly, or nearly with the volume of production such as indirect materials and indirect la!our.

N. ,he allocation of fixed production overheads for purpose of their inclusion in the costs of conversion is on !ased on the normal capacity of the production facilities. Normal capacity is the production expected to !e achieved on an average over a num!er of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. ,he actual level of production may !e used if it approximates normal capacity. ,he amount of fixed production overheads allocated to each unit of production is not increased as a conse.uence of low production or idle plant. ;nallocated overheads are recognized as an expense in the period in which they are incurred. In periods of a!normally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured a!ove cost. 6aria!le production overheads are assigned to each unit of production on the !asis of the actual use of the production facilities. D. " production process may result in more than one product !eing produced simultaneously. ,his is the case, for example, when %oint products are produced or when there is a main product and a !y3 product. 5hen the costs of conversion of each product are not separately identifia!le, they are allocated !etween the products on a rational and consistent !asis. ,he allocation may !e !ased, for example, on the relative sales value of each product either at the stage in the production process when the products !ecome separately identifia!le, or at the

completion of production. Most !y3 products as well as scrap or waste materials, !y their nature, are immaterial. 5hen this is the case, they are often measured at net realiza!le value and this value is deducted from the cost of the main product. "s a result, the carrying amount of the main product is not materially different from its cost.

J. $ther costs are included in the costs of inventories only to the extent that they are incurred in !ringing the inventories to their present location and condition. -or example, it may !e appropriate to include overheads other than production overheads or the costs of designing product for specific customers in the cost of inventories.

?. Interest and other !orrowing costs are usually considered as not relating to !ringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories. 2/. EJ-4u(i)$( *')m t%e -)(t )* I$:e$t)'ie(

In determining the cost of inventories in accordance with paragraph I. It is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred. xamples of such costs are4

1. "!normal amounts of wasted materials, la!our, or other production costs. 2. &torage costs, unless those costs are necessary in the production process prior to a further production stage. 3. "dministrative overheads that do not contri!ute to !ringing the inventories to their present location and condition, and 4. &elling and distri!ution costs.

KK. ,he cost of inventories of items that are not ordinarily interchangea!le and goods or services produced and segregated for specific pro%ects should !e assigned !y specific identification of their individual costs. KF. &pecific identification of cost means that specific costs are attri!uted to identify items of inventory. ,his is an appropriate treatment for items that are segregated for a specific pro%ect, regardless of whether they have !een purchased or produced. (owever, when there are large num!ers of items of inventory which are ordinarily interchangea!le, specific identification of costs is inappropriate since, in such circumstances, an enterprise could o!tain predetermined effects on the net profit or loss for the period !y selecting a particular method of ascertaining the items that remain in inventories.

KI. ,he cost of inventories, other than those dealt with in paragraph KK, should !e assigned !y using the first3in, first3out 9-I-$:, or weighted average cost formula. ,he formula used should reflect the fairest possi!le approximation to the cost incurred in !ringing the items of inventory to their present location and condition.

KO.

" variety of cost formulas is used to determine the cost of inventories

other than those for which specific identification of individual costs is appropriate. ,he formula used in determining the cost of an item of inventory needs to !e selected with a view to providing the fairest possi!le approximation to the cost incurred in !ringing the item to its present location and condition. ,he -I-$ formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and conse.uently the items remaining in inventory at the end of the period are those most recently purchased or produced. ;nder the weighted average costs formula, the cost of each item is determined from the weighted average of the cost of similar items at the !eginning of a period and the cost of similar items purchased or produced during the period. ,he average may !e calculated on a periodic !asis or as each additional shipment is received, depending upon the circumstances of the enterprise.

K>.

,echni.ues for the measurement of the cost of inventories, such as the

standard cost method or the retail method, may !e used for convenience if the

results approximate the actual cost. &tandard costs take into account normal levels of consumption of materials and supplies, la!our, efficiency and capacity utilization. ,hey are regularly reviewed and if necessary, revised in the light of current conditions. KN. ,he retail method is often used in the retail trade for measuring inventories of large num!ers of rapidly changing items that have similar margins and for which is impractica!le to use other costing methods. ,he cost of the inventory is determined !y reducing from the sales value of the inventory the appropriate percentage gross margin. ,he percentage used takes into consideration inventory which has !een marked down to !elow its original selling price. "n average percentage for each retail department is often used.

KD. ,he cost of inventories may not !e recovera!le if those inventories are damaged, if they have !ecome wholly or partially o!solete, or if their selling prices have declined. ,he cost of inventories may also not !e recovera!le if the estimated costs of completion or the estimated costs necessary to make the sale have increased. ,he practice of writing down inventories !elow cost to net realiza!le value is consistent with the view that assets should not !e carried in excess of a amounts expected to !e realized from their sale or use.

KJ. Inventories are usually written down to net realiza!le value on an item3!y3item !asis. In some circumstances, however, it may !e appropriate to group similar or related items. ,his may !e the case with items of inventory relating to the same product line that have similar purposes or end uses and are produced and marketed in the same geographical area and cannot !e practica!ly evaluated separately from other items in that product line. It is not appropriate to write down inventories !ased on a classification of inventory, for example, finished goods, or all the inventories in a particular !usiness segment.

K?.

stimates of net realiza!le value are !ased on the most relia!le evidence

availa!le at the time the estimates are made as to the amount the inventories are expected to realize. ,hese estimates take into consideration fluctuations of price or cost directly relating to events occurring after the !alance sheet date to the extent that such events confirm the conditions existing at the !alance sheet date. FG. stimates or net realiza!le value also take into consideration the purpose for which the inventory is held. -or example, the net realiza!le value of the .uantity of inventory held to satisfy firm sales or service contracts is !ased on the contract price. If the sales contracts are for less than the inventory .uantities held, the net realiza!le value of the excess inventory is !ased on general selling prices.

Contingent losses on firm sales contracts in excess of inventory .uantities held and contingent losses on firm purchase contracts are dealt with in accordance

with the principles enunciated in "ccounting &tandard 9".&: O, contingencies and events occurring after the !alance sheet date. FK. Materials and other supplies held for use in the production of inventories are not written down !elow cost if the finished products in which they will !e incorporated are expected to !e sold at or a!ove cost. (owever, when there has !een a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realiza!le value, the materials are written down to net realiza!le value. In such circumstances, the replacement cost of the materials may !e the net availa!le measure of their net realiza!le value. "n assessment is made of net realiza!le value as at each !alance sheet date. ... Di(-4)(u'e. ,he financial statements should disclose2 ,he accounting policies adopted in measuring inventories, including the cost formula used, and ,he total carrying amount of inventories and its classification appropriate to the enterprise. FO. Information a!out the carrying amounts held in different classifications of

inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are raw materials and components, work in progress, finished goods, stores, spares and loose tools.

DATA COLLECTION
In analysis of inventory of /0/, 5e collect the data !y the different sources. 5e collect the primary and secondary data. & C$N)"+U )"," V ,he secondary data are those data the already in

presence for specific purpose we use the secondary data a!out inventory to looks old records of the company .-or the daily information a!out the items 5e show the M+N, ledger register and daily issue slip of materials the purchase register and other documentary evidence used for the findings. In the analysis of inventory the secondary data are not sufficient .then 5e collect primary data. '+IM"+U )"," V 'rimary data are those data that are originated very first time or fresh data .with the help of primary data formulated the research o!%ectives. 'rimary data are the accurate attaina!le relia!le and useful data.

K. Inventory control techni.ues used !y the company F. Inventory systems as perpetual and periodic systems. I. &tock levels etc. O. Companies we!site

JOHNSON & JOHNSON AND SUBSIDIARIES SCHEDULE II P VALUATION AND GUALIFYING ACCOUNTS Fi(-"4 Ye"'( E$ded J"$u"' M6 ./2/6 De-embe' .?6 .//? "$d De-embe' M/6 .//@ ,D)44"'( i$ Mi44i)$(3 .//0 B"4"$-e "t A--'u"4( P" me$t( H B"4"$-e "t Be+i$$i$+ Ot%e' E$d )* )* Pe'i)d Pe'i)d "ccrued +e!ates 9K: MKJGJ N>JO 9N,D>I : KNI? "ccrued +eturns MD?O I>> 9ONG : NJ? "ccrued 'romotions MI>N FOON 9F,IDI : OF? &u!total MF?>J ?IJ> 9?,>JN : FD>D +eserve for dou!tful MFND KKG 9OO : III accounts +eserve for cash MD? MKKNI 9K,KOK : KGK discounts T)t"4 QMM/N Q2/K>? ,2/6@@2 3 M202 .//? B"4"$-e "t A--'u"4( P" me$t( H B"4"$-e "t Be+i$$i$+ Ot%e' E$d )* )* Pe'i)d Pe'i)d "ccrued +e!ates 9K: MKJGF M>>DJ 9>>DF: KJGJ "ccrued +eturns MNOJ MOGF 9F>N: D?O "ccrued 'romotions M>DJ MF??K 9IFKI: I>N &u!total MIGFJ MJ?DK 9?GOK: F?>J +eserve for dou!tful MK?I MKGK 9?FD: FND accounts +eserve for cash MDK M?G> 9J?D: D? discounts T)t"4 QM.0. Q00@@ ,00K>3 MM/N

: Includes reserve for customer re!ates of MDF? million, MDFK million, MDKG million at /anuary I, FGKG,
9K

)ecem!er FJ, FGGJ and )ecem!er IG, FGGD, respectively. 9F: Includes MKDK million ad%ustment related to previously estimate accrued sales reserve.

MEDICAL DEVICES AND DIAGNOSTICS SEGMENT ,he Medical )evices and )iagnostics segment achieved sales of MFI.N !illion in FGG?, representing an increase of K.?E over the 'rior year, with operational growth of O.FE and a negative currency impact of F.IE. ;.&. sales were MKK.G !illion, an increase of O.>E over the prior year. International sales were MKF.N !illion, a decrease of G.FE, with growth of O.GE from operations and a decrease of O.FE resulting from the negative impact of currency fluctuations. ,he )e'uy franchise achieved sales of M>.O !illion in FGG?, a O.NE increase over the prior year. ,his was primarily due to growth in the spine, hip and knee product lines. "dditionally, new product launches in the Mitek sports medicine product line contri!uted to the growth. ,he thicon ndo3&urgery franchise achieved sales of MO.> !illion in FGG?, a O.JE increase over the prior year. ,his was attri!uta!le to growth in the endoscopy, ("+M$NIC C , N& "= C and "dvanced &terilization product lines. ,he thicon franchise achieved sales of MO.K !illion in FGG?, a D.IE increase over the prior year. ,his was attri!uta!le to growth in the sutures, !iosurgical and mesh product lines in addition to sales of newly ac.uired products from the ac.uisitions of $mrix Biopharmaceuticals, Inc. and Mentor Corporation. ,he growth was partially offset !y the divestiture of the 'rofessional 5ound Care !usiness of thicon, Inc. in the fiscal fourth .uarter of FGGJ. &ales in the Cordis franchise were MF.D !illion, a decline of KG.IE versus the prior year. ,he decline reflects lower sales of the CU'( + C &irolimus3eluting Coronary &tent due to increased glo!al competition. ,he decline was partially offset !y growth of the Biosense 5e!ster !usiness. ,he 6ision Care franchise achieved sales of MF.> !illion in FGG?, a G.FE increase over prior year primarily related to growth in the "stigmatic contact lens product line offset !y the negative impact of currency. &ales in the )ia!etes Care franchise were MF.O !illion in FGG?, a decline of I.DE versus the prior year. )eclines in the =ife&can product line were partially offset !y growth of the "nimas insulin delivery !usiness resulting from new product launches and continued development in international markets. ,he $rtho3Clinical )iagnostics franchise achieved sales of MF.G !illion in FGG?, a N.NE increase over the prior year primarily attri!uta!le to the recent launch of the 6I,+$& C INGG and >NGG analyzers. ,he Medical )evices and )iagnostics segment achieved sales of MFI.K !illion in FGGJ, representing an increase of N.OE over the prior year, with operational growth of I.>E and F.?E due to a positive impact from currency fluctuations. ;.&. sales were MKG.> !illion, an increase of K.GE. International sales were MKF.N !illion, an increase of KK.IE, with >.JE from operations and a positive currency impact of >.>E. "nalysis of Consolidated arnings Before 'rovision for ,axes on Income Consolidated earnings !efore provision for taxes on income decreased !y MK.K !illion to MK>.J !illion in FGG? as compared to the MKN.? !illion earned in FGGJ, a decrease of N.?E. ,he decrease was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of MK.F

!illion. ,his was partially offset !y lower selling, marketing and administrative expenses due to cost containment efforts across all the !usinesses. FGGJ included purchased in3process research and development 9I'+0): charges of MG.F !illion and increased investment spending in selling, marketing and administrative expenses utilized from the proceeds associated with the divestiture of the 'rofessional 5ound Care !usiness of thicon, Inc. ,he increase in FGGJ of FD.OE over the MKI.I !illion in FGGD was primarily due to lower I'+0) charges of MG.N !illion, gains from divestitures of MG.> !illion and higher litigation gains of MG.> !illion versus restructuring charges of MG.D !illion and the write3down of the N",+ C$+ C intangi!le asset of MG.D !illion recorded in FGGD. "s a percent to sales, consolidated Ma%or Medical )evices and )iagnostics -ranchise &ales#2 M"N"* M N,1& )I&C;&&I$N "N) "N"=U&I& $- + &;=,& $- $' +",I$N& "N) -IN"NCI"= C$N)I,I$N F? E Change 9)ollars in Millions: FGG? FGGJ FGGD 1G? vs. 1GJ 1GJ vs. 1GD ) ';U C M >,IDF >,KIN O,N?J O.N E ?.I ,(IC$N N)$3&;+* +U C O,O?F O,FJN I,JIO O.J KK.J ,(IC$N C O,KFF I,JOG I,NGI D.I N.N C$+)I& C F,ND? F,?JJ I,IKO 9KG.I : 9?.J : 6ision Care F,>GN F,>GG F,FG? G.F KI.F )ia!etes Care F,OOG F,>I> F,IDI 9I.D : N.J $+,($3C=INIC"= )I"*N$&,IC& C K,?NI K,JOK K,DG> N.N J.G ,otal M FI,>DO FI,KFN FK,DIN K.? E N.O OPERATING PROFIT BY SEGMENT $perating profits !y segment of !usiness were as follows2 Pe'-e$t )* Se+me$t S"4e( ,D)44"'( i$ Mi44i)$(3 .//0 .//? .//0 .//?

Consumer M F,OD> F,NDO K>.D E KN.D 'harmaceutical N,OKI D, NG> FJ.> E IK.G Med )evices and )iagnostics D,N?O D,FFI IF.NE IK.F ,otal 9K: KN,>JF KD,>GF FN.JE FD.O =ess2 xpenses not allocated to segments 9F: JFD >DI arnings !efore provision for taxes on income M K>,D>> KN,?F? F>.O E FN.>

Normally each fiscal year consists of >F weeks, !ut every five or six years the fiscal year consists of >I weeks, as was the case in FGG? and will !e the case again in FGKO. RECLASSIFICATION Certain prior period amounts have !een reclassified to conform to current year presentation. .. C"(%6 C"(% EIui:"4e$t( "$d Cu''e$t M"'&et"b4e Se-u'itie( "s of /anuary I, FGKG, current marketa!le securities consist of MI,OIO million and MKJK million of government securities and o!ligations and corporate de!t securities, respectively. "s of )ecem!er FJ, FGGJ, current marketa!le securities consist of MK,NNI million, MIOF million and MIN million of government securities and o!ligations, corporate de!t securities and time deposits, respectively. -air value of government securities and o!ligations and corporate de!t securities were estimated using .uoted !roker prices in active markets. ,he Company invests its excess cash in !oth deposits with ma%or !anks throughout the world and other high3.uality money market instruments. ,he Company has a policy of making investments only with commercial institutions that have at least an " 9or e.uivalent: credit rating. M. I$:e$t)'ie( "t the end of FGG? and FGGJ, inventories were comprised of2 N. P')Ee't 6 P4"$t "$d EIuiEme$t "t the end of FGG? and FGGJ, property, plant and e.uipment at cost and accumulated depreciation were2 ,he Company capitalizes interest expense as part of the cost of construction of facilities and e.uipment. Interest expense capitalized in FGG?, FGGJ and FGGD was MKGK million, MKOD million and MKIG million, respectively. )epreciation expense, including the amortization of capitalized interest in FGG?, FGGJ and FGGD, was MF.K !illion, MF.G !illion J"$u"' M6 ./2/ De-embe' .?6 .//? Am)'tiLed U$'e"4iLed E(tim"ted Am)'tiLed U$'e"4iLed E(tim"ted ,D)44"'( i$ Mi44i)$(3 C)(t G"i$(H,L)((e(3 F"i' V"4ue C)(t G"i$(H,L)((e(3 F"i' V"4ue Cu''e$t I$:e(tme$t( Cash M F,>KD A F,>KD I,FDN A I,FDN *overnment securities and o!ligations KI,IDG K KI,IDK D,OJN O D,O?G Corporate de!t securities OFN A OFN NFD K NFJ Money market funds K,J?G A K,J?G JKI A JKI ,ime deposits K,FFF A K,FFF NGD A NGD ,otal cash, cash e.uivalents and current marketa!le securities Q 206N.> 2 206N.K 2.6?/0 > 2.6?2N ,D)44"'( i$ Mi44i)$(3 .//0 .//? +aw materials and supplies M K,KOO JI? *oods in process K,I?> K,IDF -inished goods F,NOK F,JOK Q >62?/ >6/>.,D)44"'( i$ Mi44i)$(3 .//0 .//?

=and and land improvements M DKO JJN Buildings and !uilding e.uipment J,JNI D,DFG Machinery and e.uipment KD,K>I K>,FIO Construction in progress F,>FK I,>>F F?,F>K FD,I?F =ess accumulated depreciation KO,O?F KI,GFD Q 2N6@>0 2N6MK> and MK.? !illion, respectively. ;pon retirement or other disposal of property, plant and e.uipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. ,he difference, if any, !etween the net asset value and the proceeds are recorded in earnings. >. I$t"$+ib4e A((et( "$d G))d#i44 "t the end of FGG? and FGGJ, the gross and net amounts of intangi!le assets were2 OI ,D)44"'( i$ Mi44i)$(3 .//0 .//? I$t"$+ib4e "((et( #it% de*i$ite 4i:e(! 'atents and trademarks A gross M >,N?D >,KK? =ess accumulated amortization F,KDD K,JFG 'atents and trademarks A net Q M6>./ M6.00 $ther intangi!les A gross M D,JGJ D,IDN =ess accumulated amortization F,NJG F,OII $ther intangi!les A net Q >62.? N60NM ,otal intangi!le assets with definite lives A gross M KI,>G> KF,O?> =ess accumulated amortization O,J>D O,F>I ,otal intangi!le assets with definite lives A net Q ?6KN? ?6.N. I$t"$+ib4e "((et( #it% i$de*i$ite 4i:e(! ,rademarks M >,?IJ >,DIO 'urchased in3process research and development# K,DID A ,otal intangi!le assets with indefinite lives Q @6K@> >6@MN ,otal intangi!le assets A net Q 2K6M.M 2M60@K

DATA ANALYSIS AND INTERPRETATION INVENTORY TURN OVER RATIO3

,otal sales Inventory turn over ratio Q "verage inventory

,he sale of /0/ in year FGGD is DFG million 0 its investment on inventory is KFN million.

,hen inventory turnover ratio Q DFG<KFN Q >.DK

/0/ used +s. N million worth inventory for operation. It could generates additional sales, sales

&ales Q N million # >.DK Q IO.FN million

If /0/ increases investment more on their inventories, then company increases their sales. Inventory turn in year FGGN

,otal sales in FGGN

Q NDG million

Investment on inventories Q KKJ million

,urnover ratio

Q NDG<KKJ Q >.ND

Inventory turnover in year FGG>3 ,otal sales in FGG> Q NFG million

Investment on inventories Q KKG million

,urnover ratio

Q NFG< KKG Q >.NI

Inventory turn ratio in year FGGO

,otal sales in FGGO

Q NK> million

Investment on inventories Q KGG million ,urnover ratio Q NK> < KGG Q N.K>

I$:e(tme$t )* i$:e$t)'ie( & ("4e( )$ #"'d( .//@1

year

Investment on inventories in million KGG KKG KKJ KFN

total sales in million NK> NFG NDG DFG

FGGD FGGJ FGG? FGKG

/ohnson 0 /ohnson =td. increases investment on their inventories.


very year, then total sales increases year !y year. )ate L t y Cos t 6alue Lt y Cos t 6alue Lt y Cos t 6alue

/an K KG GG G K G G G F.FK FFKG KK GG G FG GG F.IK FIKG F.KG OFGG ?G GG KG GG G F.KG FKGG G FIFK G

KF FD

3 3

K?GK G FKIF G

-e! KG OG GG F.KG JOGG NG GG 3 KF?F G

KN

F G G G

F.OK

OJFG

JG GG

KDDO G

March I F G G G F.OK OJFG KG GG G OG GG O G G G F.F? ?KNG F.KG JOGG NG GG KG GG G 3 FF>N G

KD F?

3 3

KOKN G FIIF G

"pr O F G G G F.KO OFJG KF GG G OG GG F G G G F.GO OGJG W ?IOG NG GG G KG GG G 3 FDNG G

KJ

KJFN G FFIO G

FI

May KF FO I G G F.GG NGGG KG GG F.OG FOGG ?G GG KF GG G 3 3 K??O G F>?O G

G /un KG KG GG F G G G K ? G G G F.GF OGOG F.OG FOGG KK GG G KI GG G KN GG G 3 I>KO G 3 FI>O G FD>J G

IG

,otal

F.K?

OKDG G

5here W is KGGG KGGG FGGG ,otal OGGG

F.FK F.IK F.OK 3

FFKG FIKG OJFG ?IOG

I$te'E'et"ti)$ 1 ,he -I-$ method of valuation of inventory is !ased on the assumption that the inventory consumed in chronological order. ,hat is received first are issued < consumed first and value fixed accordingly. -rom the ta!le with an opening inventory of KGGGG units at rs F.KG, the first KGGGG units issued are charged to the cost of goods sold at these opening inventory rate rs F.KG. ,he "pril KJ issue or consignment of OGGG units is cosseted on the !asis of first received of the year. /anuary ?, KGGG units at rs F.FK, /anuary FD KGGG units at rs F.IK, and -e!ruary KN, FGGG units at rs F.OK. ,he KGGG each issued on May KF and /une KG are cosseted on the !asis of the FGGG units received on March I. ,herefore the cost of the KIGGG inventory on /une IG is composed of the received of MarchF?, "pril O and FI, May FO and /une IG and the value is the sum of the cost of these receipts. V"4u"ti)$ u$de' Ee'Eetu"4 i$:e$t)' ( (tem1

)ate

+eceipts

Issues

Balance

L K/an N/an J/an ?/an K>/an F>/an FD/an 3 3 KKGG 3 3 IGG 3

+ 3 3 J.>G 3 3 ? 3

" 3 3 ?I>G 3 3 FDGG 3

L 3 KGG 3 FGG OGG 3 IGG IGG

+ 3 D 3 J.>G

" 3 DGG 3

L FGG KGG KFGG

" KOGG DGG KGG>G JI>G O?>G DN>G FOG G DGG NGJG

KDGG KGGG IOGG NGG 3 ?GG

J.>G 3 J.>G ? 3

F>>G IGG FDGG 3

IK/an

OGG

?.FG

INJG

,he value of inventory after IK /anuary is NGJG <rs I$te'E'et"ti)$!1 ,he value of inventory under periodic 0 perpetual inventory system is different. ,he value of inventory under perpetual system is more than periodic system

DETERMINATION OF STOC7 LEVELS

)ata of concentrate at /0/ is as follows V Maximum consumption Minimum consumption Normal consumption +e3order period Q >GGG)z per day Q units per day Q >? units per day Q KG3K> days

+e3order .uantity Normal re3order period

Q JDJ units Q KF days

+e3order level

Q Maximum consumption # Maximum +e3order period

)ata of concentrate at /0/ is as follows V Maximum consumption Minimum consumption Normal consumption +e3order period +e3order .uantity Normal re3order period Q N> units per day Q >> units per day Q >? units per day Q KG3K> days Q JDJ units Q KF days

+e3order level

Q Q

N> units # K> days ?D> units

Minimum stock level

Q re3order level V 9normal consumption # Normal re3order period:

Q Q

?D> 3 9>? units # KF days: FND units

Maximum stock level -

Q 9re3order level R re3order .uantity : 9 min. consumption V order period:

Q 9 ?D> units R JDJ units : 3 9>> units # K> days: Q KGFJ units

"verage stock level Q minimum stock level R X of +e3ordering Luantity

Q FND units R X # JDJ units Q FND units R OI? units Q DGN units

I$te'E'et"ti)$ )* 'e(u4t 2 3

K. F. I. O.

"fter calculation the re3order level of /0/ is ?D> units !ut the actual re3order .uantity is JDJ units. ,he minimum stock level of /0/ is FND units. ,he maximum stock level of /0/ is KGFJ units. ,he average stock level must !e DGN units.

C"4-u4"ti)$ )* eJEe-ted (t)-& )ut -)(t ; &afety &tock =evel stock out 9units: stock out pro!. $f stock cost 9OG<unit: out expected stock out cost total expt. &$C

>GG OGG F>G K>G

G KGG F>G NGGG

G OGGG KGGGGG.GK G.GF

G G.GK KGG KFG

G OG

G OG

FFG

KGG IGG K>G >G O>G I>G FGG >G

OGG

KNGGGG.GK KFGGGG.GF NGGG KJGGGG.GK KOGGGG.GF JGGG FGGG G.GI G.GO G.GI KJG FJG FOG

KNG >JG KJG

FOG JG

DJG

>GG OGG F>G KGG >G

FGGGGG.GK KNGGGG.GF KGGG OGGG FGGG G.GI G.GO G.KG

FGG IFG IGG KNG FGG KKJG

xpected stock out cost QQ stock out cost # pro!a!ility of stock out .

PRIMARY DATA ANALYSIS (Bio Profile of the Respondents):1 30 percent of the officials belong to the age group of 35 and 50 2 58 percent of the officials belong to the age group of 25 to 34 3 12percent of the officials belong to the age group of above 50 4 69 percent are male officials 5 31 percent are female officials 6 72 percent are graduates and above 7 12 percent are those who are having technical and professional ualifications 8 16 percent are undergraduates!

9 55 percent are those who are associated with the field 1025 percent are those who are in the managerial and administrative posts! 1120 percent belongs to the others categor"

DATA ANALYSIS 1 Are o! "#"re "$o!t In%entor M"n"&e'ent S ste'(


#es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 75 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 17 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$ 08 per cent

Interpret"tion: *he awareness level among the compan" officials regarding the e+istence, functioning and applicabilit" of inventor" management s"stem is high that is 75 per cent, as per the result of the stud"!

) Do o! *no# th"t o!r +o'p"n h"s "n in%entor '"n"&e'ent s ste'( #es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 72 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 20 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$ 08 per cent
80% 70% 60% 50% 40% 30% 20% 10% 0%
Yes No Do not know/Can Not say 72% 20% 8%

Yes No Do not know/Can Not say

Interpret"tion:

*he compan" officials are aware about their compan" having an inventor" management s"stem! 72 per cent of the respondents do have this awareness as against 20 per cent-08 per cent of the respondents who are either not aware or not able to provide an" information in this regard!

, Do o! "&ree th"t there sho!ld $e "n in%entor '"n"&e'ent s ste' in pl"+e in "n or&"ni-"tion . +o'p"n ( .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 68 per cent &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 12 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$ 20 per cent

Interpret"tion: .ccording to the response to the above uestion, it appears that ever" compan"(organi/ation should have a s"stem or mechanism in place for managing their inventor"!

/ 0or #h"t re"sons do o! feel th"t there sho!ld $e "n in%entor '"n"&e'ent s ste'(

*o smoothen operational re uirement $$$$$$$$$$$$$$$$$$$$$ 27 per cent

*o save time $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 22 per cent *o maintain accountabilit" and transparenc" $$$$$$$$$$$$$$$$30 per cent 0ther reasons $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 15 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 06 per cent

Interpret"tion: *o ever"one1s surprise, 30 per cent of the respondents feel that it is for accountabilit" and transparenc" purpose that inventor" records are maintained and hence the need for an inventor" management s"stem! *his is followed b" the need for saving time and the re uirement of operational smoothness!

1 Do o! "&ree th"t the in%entor '"n"&e'ent s ste' in o!r +o'p"n h"s f!lfilled the needs for #hi+h it #"s e%ol%ed( 2trongl" .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 20 per cent .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 47 per cent &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 15 per cent 2trongl" &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 07 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$ 11 per cent

Interpret"tion: 3rom the above response, it appears that the inventor" management s"stem has more or less achieved its ob4ectives for which it was in place! *his is evident from the 67 per cent of the respondents1 opinion who have

either agreed or strongl" agreed in favor of this proposition! 5owever the response of 22 per cent of the respondents who thin' otherwise also spea's something! 2 3h"t "++ordin& to o! is the '"4or $enefit of &oin& for "n in%entor '"n"&e'ent s ste' $

o!r +o'p"n (

6t has made storage and retrieval of material easier $$$$$$$$$ 37 per cent 6mproved 2ales 7ffectiveness $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 26 per cent 8educed 0perational )ost $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 18 per cent 0ther 9enefits $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 10 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 09 per cent

Interpret"tion:

.s regards the benefits of having an inventor" management s"stem b" the compan", the respondents are of the opinion that the ma4or benefit lies in rela+ation in terms of storage and retrieval of material! *his is followed b" increasing sales effectiveness and reduction in operational cost! 5owever, all these benefits are interlin'ed and the spearing between them is more anal"tical than an"thing else! 5 Do o! h"%e s*illed profession"ls in o!r +o'p"n for in%entor '"n"&e'ent(

#es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 48 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 30 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$ 22 per cent

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%


Yes No Do not know/Can Not say 48% 30% 22%

Yes No Do not know/Can Not say

Interpret"tion: 8ecruitment of s'illed professionals well vesed with latest inventor" management technolog", particularl" in chemicals and paint industr" is a concern for the compan" as it appears that it lac's in this domain! 3h"t +"te&or of profession"ls is '"n"&in& o!r +o'p"n in%entor (

2'illed and trained $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 32 per cent 0nl" s'illed but not trained $$$$$$$$$$$$$$$$$$$$$$$ 16 per cent %on s'illed but trained professionals $$$$$$$$$$$$$$ 20 per cent %on s'illed and non trained professionals $$$$$$$$$ 25 per cent

0thers $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 07 per cent


35% 30% 25% 20%
Skilled and trained

15% 10% 5% 0%
Skilled and trained Only skilled but not trained Non skilled but trained !ro"essionals Non skilled and non trained !ro"essionals Ot$ers 32% 1 % 20% 2#% 7% Only skilled but not trained Non skilled but trained !ro"essionals Non skilled and non trained !ro"essionals Ot$ers

Interpret"tion: .s alread" stated above in the earlier uestion, availabilit" of trained and s'illed professionals for inventor" management needs serious attention of the compan"!

67 Do o! "&ree th"t o!r +o'p"n &i%es 'ore e'ph"sis on soft#"re th"n s*illed '"npo#er #ith re&"rd to in%entor '"n"&e'ent(

2trongl" .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 18 per cent .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 52 per cent &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 15 per cent 2trongl" &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 07 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$ 08 per cent

Interpret"tion: *he above response gives an impression that the compan" puts greater emphasis on software than s'illed manpower for inventor" details management!

87 Do o! thin* th"t the soft#"re !sed $ to the desi&n "nd needs of the s ste'(

o!r +o'p"n is "++ordin&

#es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 86 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 10 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$ 04 per cent

Interpret"tion: *he compan" appears to be using the software according to the s"stem re uirement and design and according to the customers1 needs!

197 3h"t is the pri'e +h"llen&e $efore Yor :o'p"n #ith rehe"rd to in%entor '"n"&e'ent( :ac' of trained professionals $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 42 per cent ;aintenance cost $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 21 per cent )hanging re uirements of customers $$$$$$$$$$$$$$$$$$$$$$$$$ 27 per cent 0ther problems $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 06 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 04 per cent

Interpret"tion: :ac' of availabilit" of trained professionals coupled with maintenance cost and changing needs of the customers are perceived to be the inventor" challenges before the compan"!

1)7 3h"t is the f!t!re of in%entor '"n"&e'ent s ste' in o!r +o'p"n ( <ill continue as a successful mechanism $$$$$$$$$$$$$$$$$$$$$ 43 per cent ;a" change according to time $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 33 per cent 2hall collapse $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 12 per cent &o not 'now( )annot sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 12 per cent
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
%ill &ontinue as a su&&ess"ul 'e&$anis' (ay &$an)e a&&oedin) to ti'e S$all &olla!se Do not know/ Can not say 43% 33% 12% 12%

%ill &ontinue as a su&&ess"ul 'e&$anis' (ay &$an)e a&&oedin) to ti'e S$all &olla!se Do not know/ Can not say

Interpret"tion: *he future of inventor" management s"stem at =ohnson > =ohnson :td! appear to prett" good, going b" the response of our stud"

'+$B= M& "N) &;** &,I$N&


PROBLEMS FACED BY THE ORGANITION /0/ faces the following pro!lems3 K /ohnson 0 /ohnson =td. -aces the pro!lem of competition. F. $rganization facing the pro!lem of proper skilled employees in the production

department. I. ,here is no proper se.uence 0acknowledgement !oard for certain items in store

department .It is not good when external auditing held in company. O. $rganization has no record of wastage items. It is not good for operating profit of the company. >. In organization store assistants have no proper knowledge a!out engineering goods 0

raw materials. SUGGESTIONS TO THE ORGANISATION! ,he organizations give proper knowledge 0 work. training for unskilled employees a!out their

K. In store department items should placed their proper se.uence 0 acknowledgement. F. ,here should !e proper record of wastage. It is good for the company. O. &tore manager give the proper knowledge a!out engineering 0 raw materials.

CONCLUSION
,he goal of the wealth maximization is affected !y the efficiency with which inventory is managed. Inventories constitute a!out NGE of current assets of companies in India. ,he manufacturing companies hold inventories in the form of raw materials, work in progress and finished goods. Inventories facilitate smooth production and sales operation 9transaction motive:, to guard against the risk of unpredicta!le changes in usage rate and delivery time 9precautionary motive:, 0 to take advantage of price fluctuations 9speculative motive:. Inventories represent investment of a firm1s funds. ,he o!%ectives of the inventory management should !e the maximization of the value of the firm. ,herefore the firm should consider2

K. Cost

F. +eturn

I. +isk factors

In inventory maintenance two types of costs are involved carrying cost 0 ordering cost .the firm should minimize the total cost 9carrying plus ordering cost:.,he firm follows inventory control techni.ues as "3B3C techni.ue $L 0 /I, techni.ues for !etter holding inventories.

Bib4i)+'"E%

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Pu'-%"(e 6 S"4e( B)u-%e' & Ot%e' D)-ume$t( )* t%e C)mE"$ J)%$()$ & J)%$()$ Ltd.

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1 Are o! "#"re "$o!t In%entor M"n"&e'ent S ste'(


#es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 75 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 17 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$ 08 per cent

) Do o! *no# th"t o!r +o'p"n h"s "n in%entor '"n"&e'ent s ste'( #es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 72 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 20 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$ 08 per cent , Do o! "&ree th"t there sho!ld $e "n in%entor '"n"&e'ent s ste' in pl"+e in "n or&"nis"tion . +o'p"n ( .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 68 per cent &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 12 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$ 20 per cent / 0or #h"t re"sons do o! feel th"t there sho!ld $e "n in%entor '"n"&e'ent s ste'(
*o smoothen operational re uirement $$$$$$$$$$$$$$$$$$$$$ 27 per cent *o save time $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 22 per cent *o maintain accountabilit" and transparenc" $$$$$$$$$$$$$$$$30 per cent

0ther reasons $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 15 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 06 per cent

1 Do o! "&ree th"t the in%entor '"n"&e'ent s ste' in o!r +o'p"n h"s f!lfilled the needs for #hi+h it #"s e%ol%ed( 2trongl" .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 20 per cent .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 47 per cent &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 15 per cent 2trongl" &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 07 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$ 11 per cent 2 3h"t "++ordin& to o! is the '"4or $enefiit of &oin& for "n in%entor '"n"&e'ent s ste' $ o!r +o'p"n (

6t has made storage and retrieval of material easier $$$$$$$$$ 37 per cent 6mproved 2ales 7ffectiveness $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 26 per cent 8educed 0perational )ost $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 18 per cent 0ther 9enifits $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 10 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 09 per cent

5 Do o! h"%e s*iled profession"ls in o!r +o'p"n for in%entor '"n"&e'ent(


#es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 48 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 30 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$ 22 per cent

67 3h"t +"te&or of professionls "re '"n"&in& o!r +o'p"n in%entor (


2'illed and trained $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 32 per cent 0nl" s'illed but not trained $$$$$$$$$$$$$$$$$$$$$$$ 16 per cent %on s'illed but trained professionals $$$$$$$$$$$$$$ 20 per cent %on s'illed and non trained professionals $$$$$$$$$ 25 per cent 0thers $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 07 per cent

87 Do o! "&ree th"t o!r +o'p"n &i%es 'ore e'ph"sis on soft#"re th"n s*illed '"npo#er #ith re&"rd to in%entor '"n"&e'ent(
2trongl" .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 18 per cent .gree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 52 per cent &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 15 per cent 2trongl" &isagree $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 07 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$ 08 per cent

197 Do o! thin* th"t the soft#"re !sed $ desi&n "nd needs of the s ste'(

o!r +o'p"n is "++ordin& to the

#es $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 86 per cent %o $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 10 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$ 04 per cent 117 3h"t is the pri'e +h"llen&e $efore or +o'p"n #ith reh"rd to in%entor '"n"&e'ent( :ac' of trained professionls $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 42 per cent

;aintenance cost $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 21 per cent )hanging re uirements of customers $$$$$$$$$$$$$$$$$$$$$$$$$ 27 per cent 0ther problems $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 06 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 04 per cent 1)7 3h"t is the f!t!re of in%entor '"n"&e'ent s ste' in o!r +o'p"n ( <ill continue as a successful mechanism $$$$$$$$$$$$$$$$$$$$$ 43 per cent ;a" change accoeding to time $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 33 per cent 2hall collapse $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 12 per cent &o not 'now( )an not sa" $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ 12 per cent