Name: - Konar Esakikumar

Class: - Mcom Part 2(ROLL NO. 25)

Mobile: 9819302686

MANAGEMENT OF INVENTORIES
CHAPTER-1
INTRODUCTION
Inventory in wider sense is defined as an idle source of all enterprises. However, it is
commonly used to indicate raw material in process, finished, packaging spares and other,
stocked in order to meet an expected demand and distribution in future. Even thought
inventory of material is an idle resource in the sense it is not meant for the most immediate
use, it is almost a necessary to maintain some inventories for the smooth functioning of the
organization.
The benefit of inventory can be best understand one imagines of an organisation is
working on inventories at all organisation on receiving a sales order would have to order
out the quality of materials required for computer this order wait fill the arriver and start
production.
One will think of various dis-advantage of this way of fluctuating customers would
invariable have to part every high price because of the price meal buy inch. The production
cost also be high because of facilities to take advantage of parching incase these is
excessive receiving at either receipts or at any of the manufacturing staged, long waiting
be inevitable to get French suppliers. The bad on the manufacturing shop vary from period
depending upon the order on hand in show a come punt would not be able to provide
satisfactory customers service and would fail to take advantage of economics in bulk
procurement and batch manufacturing and their would not be able to provide satisfactory
customers service and would fail to take advantage of economics in bulk procurement and
batch manufacturing and their would net stand long in completion both in the mater of
price and customers.
In many organizations materials from the largest used expenditure items analyze of the
financial start of large no of private and public sector organisation indicates that materials
accounts of nearly 60% of total expenditure exist in manufacturing companies are raw
1

materials, work in progress ( semi finished goods), and finished goods. Raw materials are
those basic input materials that are converted into finished products.
Working process inventories are semi- manufactured products that need more work before
they become finished work before they become finished products for sale finished goods
inventories are those completed manufactured products for sale, stock of raw materials and
work in processes facilities productions. This inventory serves as link between the
production and consumption of goods. A manufacturing firm will have subsequently high
level of all 3 kinds of inventories retail of whole sales, firms will have a very high level of
finished goods inventories and no raw materials and work in process inventories,
inventories constitute that most significant part of current assets of a large majority of
countries in India. For example an organization inventories are approximately 60% of
current assets in public limited companies in India.
There are different types of inventories;
a) Raw material
b) Work in progress
c) Finished goods
d) Stores & Supplies
Raw material inventory are the materials and components used to manufacturing the
product by the company. These are use as inputs in making the finished goods.
Work in progress is the materials used in different stages of production. These are also
called as stock in progress. These are normal semi-finished goods that are at different
stages of production.
Finished goods inventory consist of final product manufactured, which are ready to sale
but not yet sold. Generally, manufacturing firms hold all these types of inventory and
distribution firms hold finished products.

Stores and Suppliers are that part of inventory which does not become fart of final product
but are required for production process. These involve the cotton waste, oil and lubricants,
soaps, brooms light bulbs etc. They form a very minor part of total inventory, which does
not involve significant investment.
1. CASH AND MARKETABLE INVESTMEN:

Cash and Marketable securities can be brought of an inventory of liquidity that allows
separation of collection from disbursement. Without this payment of bills would be
dependent on collection of accounts. So in some cash payment in delay until accounts
receivable are collected.
Inventory is the second largest current assets category next to plant and machinery for
manufacturing firms. It differs from other current assets as a decision relating to
inventories is taken by executives in finance marketing, production and purchasing. Thus
inventory management should be related to overall objective of the firm like the
manufacturing of current assets.
A. Definition
Inventory management is primarily about specifying the size and placement of stocked
goods. Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods.
The scope of inventory management also concerns the fine lines between replenishment
lead time, carrying costs of inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting, physical inventory,
available physical space for inventory, quality management, replenishment, returns and
defective goods and demand forecasting and also by replenishment Or can be defined as
the left out stock of any item used in an organization.
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Inventory management is a science primarily about specifying the shape and percentage
of stocked goods. It is required at different locations within a facility or within many
locations of a supply network to precede the regular and planned course of production and
stock of materials.
The scope of inventory management concerns the fine lines between replenishment
lead time, carrying costs of inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting, physical inventory,
available physical space for inventory, quality management, replenishment, returns and
defective goods, and demand forecasting. Balancing these competing requirements leads to
optimal inventory levels, which is an on-going process as the business needs shift and
react to the wider environment.
Inventory management involves a retailer seeking to acquire and maintain a proper
merchandise assortment while ordering, shipping, handling, and related costs are kept in
check. It also involves systems and processes that identify inventory requirements, set
targets, provide replenishment techniques, report actual and projected inventory status and
handle all functions related to the tracking and management of material. This would
include the monitoring of material moved into and out of stockroom locations and the
reconciling of the inventory balances. It also may include ABC analysis, lot tracking, cycle
counting support, etc. Management of the inventories, with the primary objective of
determining/controlling stock levels within the physical distribution system, functions to
balance the need for product availability against the need for minimizing stock holding and
handling costs.

CHAPTER 2
Objectives of Inventory Management
A fundamental objective of a good inventory management is to place an order at the right
time from the right source to acquire the right quantity at the right place and quality. While
developing an appropriate level of inventory the following objectives should
be kept in mind:
1.Protect your company against theft
Make sure that the only people in your warehouse belong in your warehouse.
Pilferage is a larger problem than most distributors realize.
2.Establish an approved stock list for each warehouse
Most dead inventory is "D.O.A" (dead on arrival). Order only the amount of nonstock or special order items that your customer has committed to buy. Before adding an
item to inventory, try to get a purchase commitment from your customer. If this is not
possible, inform the salesperson who requests the item that he or she is personally
responsible for half the carrying cost of any part of the initial shipment that isn't sold
within

nine

months.

3.Assign and use bin locations

Assign primary and surplus bin locations for every stocked item. All picking and
receiving documents should list the primary bin location (in either characters or a bar
code). With correct bin locations on documents, order picking is probably the least
complicated job in your warehouse. Assign inexperienced people to this task and your
most experienced warehouse workers to receiving inventory and stock management.
4.Record all material leaving your warehouse
There should be appropriate paperwork for every type of stock withdrawal. Under
no circumstances should material leave the warehouse without being entered in the
computer. Eliminate "no charge/no paperwork" material swaps. Product samples should be
charged to a salesperson's account until they are either returned to stock or charged to the
5

customer.
5.Process paperwork in a timely manner
All printed picking documents should be filled by the end of the day. Stock receipts
should be put away and entered in the computer system within 24 hours of arrival.
6.Set appropriate objectives for your buyers
Buyers should be judged and rewarded based on the customer service level,
inventory turns, and return on investment for the product lines for which they are
responsible.
7.Ensure that stock balances are accurate and will remain accurate
Implement a comprehensive cycle counting program. A good cycle counting
program can replace your traditional year-end physical inventory.

CHAPTER 3
Motives for holding inventories
A company has various motives for holding the inventory as stated below:
1) Transaction Motive :
The Company may be required to hold the inventory in order to facilitate the smooth and
uninterrupted production and sale operations. It may not be possible for the company to
procure the raw material whenever necessary. There may be a time lag between the
demand for the material and its supply. Hence it is needed to hold the raw material
inventory. Similarly it may not be possible to produce the goods immediately after they are
demanded by the customers. Hence it is needed to hold the finished goods inventory. They
need

to

hold

work

in

progress

may

arise

due

to

production

cycle.

2) Precaution Motive :
In addition to the requirement to hold the inventory for routine transactions, the company
may like hold them to guard against risk of unpredictable changes in demand and supply
forces. Eg. The supply of raw material may get delayed due to factors like strike, transport,
disruption, short supply, lengthy processes involved in import of raw material etc. hence
the company should maintain sufficient level of inventory to take care of such situations.
Similarly, the demand for finished goods may suddenly increases (especially in case of
seasonal type of products) and if the company is unable to supply them, it may mean gain
of competition. Hence, company will like to maintain sufficient supply of finished goods.
3) Speculative Motive:
The Company may like to purchase and stock the inventory in the quantity which is more
than needed for production and sales purpose. This may be with the intention to get
7

advantage in term of quantity discounts connected with bulk purchasing or anticipating

price rise.
Reasons for keeping stock
There are some basic reasons for keeping an inventory
1. Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amounts of inventory to use in this lead
time. However, in practice, inventory is to be maintained for consumption during
'variations in lead time'. Lead time itself can be addressed by ordering that many
days in advance.
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand,
supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where a user
needs it, when he needs it" principle tends to incur lots of costs in terms of logistics.
So bulk buying, movement and storing brings in economies of scale, thus inventory.
4. Appreciation in Value - In some situations, some stock gains the required value
when it is kept for some time to allow it reach the desired standard for consumption,
or for production. For example; beer in the brewing industry.
Purpose
Inventory proportionality is the goal of demand-driven inventory management. The
primary optimal outcome is to have the same number of days' (or hours', etc.) worth of
inventory on hand across all products so that the time of run out of all products would be
simultaneous. In such a case, there is no "excess inventory," that is, inventory that would
be left over of another product when the first product runs out. Excess inventory is sub-

optimal because the money spent to obtain it could have been utilized better elsewhere, i.e.
to the product that just ran out.
The secondary goal of inventory proportionality is inventory minimization. By integrating
accurate demand forecasting with inventory management, rather than only looking at past
averages, a much more accurate and optimal outcome is expected.
Integrating demand forecasting into inventory management in this way also allows for the
prediction of the "can fit" point when inventory storage is limited on a per-product basis.

4. COST OF HOLDING INVENTORY

The cost associated with inventory is of two types:
a) Ordinary or Acquisition or Set-up costs.
b) Carrying Costs.
These costs are important elements of the optimum level of inventory decisions.
1. Ordering Costs
This includes the cost associated with placing the order. Every time the order is placed for
stock replenishment these cost are involved.
This include:i) Paper work costs
ii) Typing and dispatching an order
iii) Follow up costs ; This need to be done to ensure timely supply which include travelling
cost for purchase, telephone, telex and postal bills.
iv) Cost of receiving the order, inspection, checking and handling to the stores.
v) Any set up cost of machine if charged by the supplier, indicated in quotations.
The carrying cost varies directly with the order size.
Behavior of inventory Logistics costs

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1. Ordering cost varies inversely with the order size. Greater the size less the cost and vice
versa.
2. Carrying cost varies directly with the order size increase carrying cost increases and
vice versa.
a) Material Cost
This includes the cost of purchasing the goods, transportation and handling charges less
any discount allowed by the supplier of the goods.
b) Stockout Cost:
It is the stock involved when the firm is unable to fulfill order because demand is greater
than the amount currently available in inventory.
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Stock out in raw materials will include cost of placing orders and cost of delay in
production.
Stock out in work in progress inventory result in additional cost of re-scheduling and
speeding production within the plant. It may result on lost production cost.
The fewer the order or larger the inventories the lower will be the ordering cost of the firm
and the larger the placed, or more frequent the acquisition of the firm inventory made, the
higher are such costs.
Hence these costs are inversely related to the size of inventory. This cost can be reduced by
placing less order for large amount.
2. Carrying Cost:
These cost include expenses involve in storing the goods for a period to time.
These are of two types:
a) Cost arise due to storage of inventory
b) Opportunity Cost

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CHAPTER 5
BENEFITS OF INVENTORY MANAGEMENT:
Inventory allows customers to be served quickly and conveniently
Inventory can be used so that a company can by in bulk which is usually cheaper.
Inventory allows operations to meet unexpected surges in demand.
Inventory is insurance, if there is an expected interruptions in supply from outside the
operations are with in the operation.
Inventory is insurance, if there is an unexpected interruption in supply from outside
the operations are with in the operation.
Inventory allows different parts of the operations to decoupled, this means that they
can operate independently to suit there own constraints and convenience while the
stock of items between these absorbs short term difference between supply and
demand.

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CHAPTER 6.
TECHNIQUES OF INVENTORY MANAGEMENT
Inventory management require an effective control over inventories. Inventory control
refers to a system which ensure supply of require quantity and quality of inventory at
required time, taking into consideration that is no unnecessary investment in inventories.
Hence the aim of financial manager is to obtain an optimum level of inventory on
the basis of trade-off between cost and benefit to maximize the owner wealth.

ABC ANALYSIS:

ABC Analysis is one of widely used inventory control tool. Under this we
have to classify materials according to their importance and concentrate more on critical
items. Importance of any item arises due to the two factors namely, consumption values
and critically in -use. Classification of materials according to importance has its basis on
the promise "Vital Few and Trivial Many".

The classification based on consumption value is called ABC Analysis and the
classification based on the critically of the items is called VED Analysis (Vital, Essential
and Desirable). Periodical consumption values are used as the basis for VED Analysis.
ABC is said to denote "Always Better Control", the method of classification of material is
also known as "selective method control". The basis of analyzing the annual consumption
cost (or usage cost) goes after the principle "Vital Few and Trivial Many".

Items held in the stores can grouped into class A, B and C respectively based
on their Annual Consumption Values. It has been found in a large number of organization
that about 10% of the items contribute to 70% of the annual consumption value, 20% of
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the number of items contributes about 20% of the annual consumption value and the
remaining 70% of the items contribute 10% of the annual consumption value. Hence
consumption value need to be controlled at the highest level and these are the A items. The
control of bottom 70% of the items that contribute only 10% of the annual consumption
value, that are denoted as C items can be delegated to the lowest decision making levels
while, the middle B items can be controlled by the middle levels of personnel.

"The following figures bring out clearly the concept of ABC Analysis".
Category Value

Item 10% % of Annual

Consumption
A Item

10

70

BItem

20

20

CItem

70

10

The Advantage of ABC method of Inventory control is as folio ws: It becomes possible to concentrate all efforts in areas which need genuine
efforts. This method produces better results and involves minimum control. In
the case of A items careful attention is paid at every stage i.e., estimates of
requirements, purchasing safety stocks, , receipts, inspection and issues. A
close watch on high consumption items and their progress of replenishment
etc, maintained. In the case of C items which are numbers and at the same
time in expensive are loosely controlled.
The items fall under B category may be dispensed within the record keeping
system. This will help in saving time, money and labor without endangering
15

production schedule, it is most effective and economical method as it is based

on the selective method. It helps in placing the orders, deciding the quantity
of
Purchasing safety stocks etc. Thus saving the organization from the
unnecessary stocks outs or surpluses.

ECONOMIC ORDER QUANTITY:One of the major inventory management problems to be resolved is how much inventory
should be added when inventory is replenished. If the firm is buying raw materials, it has
to decide lots in which it has to be purchased on cash replenishment
If the firm is planning production as per schedule. These problems are called order
quantity problem and task of the firm is to determine optimum inventory level involves
two types of costs:
(1) Ordering cost
(2) Carrying cost.
The economic order quantity is that inventory level, which minimizes the total of
ordering and carrying costs.
Ordering costs:The term ordering cost is used in case of raw materials (or supplies)and includes the entire
costs of acquiring raw materials. They include costs incurred in the following activities.
Requisitioning, purchase ordering, transport receiving, inspecting, and storing(store
placement), ordering cost increase in proportion to the number of orders placed the critical
and staff costs, however, don't vary in proportion to the number orders placed, and one
16

view is that so long as they are committed cost they need not to be revoked in computing
ordering cost. Carrying costs:Cost incurred for maintaining a given level of inventory are called carrying cost, they
include storage, insurance, taxes, deterioration and obsolescence's

2 x quality required x order cost

EOQ ((economic order quantity) = Carrying Costs

In order to have proper control on materials the following Levels are set:
Re-order Level
Ordering Level
Minimum Level
Maximum Level
Average Stock Level
Danger Level
Safety Stock Level
Re-order Level: It is the point at which if stock of a particular material in store approaches the storekeeper
should initiate the purchase requisition for fresh suppliers of the material. This level is
fixed somewhere between the maximum and minimum Levels in such a way that the
difference of the quantity of the material between the re-ordering level and the minimum
17

level will be sufficient to meet the requirements of production up to the time fresh supply
of the material is received.
"Reorder level can be calculated by applying the following formula":Ordering level= Minimum Level + Consumption during the time required to get the fresh
delivery.
Another formula given by wheldon in his book 'cost accounting' is follows:
Recording Level= Maximum consumption X Maximum re-order level period.
Ordering Level:This is the quantity of stock fixed between the maximum and minimum level of stock.
When this level is reached, it-becomes the duty of the store-in-charge to replenish the
stock within reasonable time. This level is usually a little higher than the minimum level.
In order to be prepared for such emergencies as abnormal consumption delay in delivery of
new supplies etc., while fixing this level following points are taken into consideration: Time required for obtained fresh suppliers.
Possible unexpected requirements which cannot be avoided.
Minimum Level:Formula level represents the level beyond, which the stock in hand is not allowed to
exceed. This is because:
If the stock exceeds this level, it will
Involves more investment
Requires more space for storages
18

 Amount to more wastage because of more handling, spoilage, obsolescence

Involves more carrying cost.
Excess stock will increase the cost of storage, thereby increasingly selling cost. Excess
stock will involve unnecessary blockade of working capital and prevent its availability for
a more profitable use.
Stock in excess will prevent the management from taking advantages of price fluctuation
and favorable market condition.
The fixation of maximum level depends on the following factors: Rate of consumption of the material
Money available
Time required to obtain deliveries
Storage space available
Economic order quantity
Market conditions, seasonality and price fluctuation
Possibility of loss due to deterioration
The formula for the calculation of Maximum stock Level given by Wheldon is as
follows:-Maximum stock Level= Re- ordering + Re- ordering - quality (Minimum
Consumption X Minimum re- ordering period)
Average Stock level:The Average stock is calculated by the following formula.
19

Average stock level=Minimum stock level + Vi of recorder quantity of '/z

(Minimum Stock Level+ Maximum Stock Level) Danger Level: This means levels at which normal issues are made only under specific instructions. The
purchases officer will make special arrangements to get the materials which reach at their
danger level so that the production may not stop due to storage of material Danger Level
-Average Consumption X Maximum re-order period for Emergency purchase.
Safety Stock level: This level is below the minimum level and represents the stage at which emergency and
immediately steps have to be taken for getting the stock Replenished.

INVENTORY Ratios:This ratio indicates the efficiency of the firm in selling its product. It is calculated by
dividing the cost of goods sold by the average inventory.
Inventory turnover = cost of goods sold
Average Inventory
Here cost of sold goods = Opening stock + Purchases + Manufacturing
Expenses - Closing stock
The average inventory is the average of opening and closing balances of inventory.
In a manufacturing company inventory of finished goods is used to calculate inventory
turnover.
Average inventory = Opening stock + Closing stock
2
20

The manufacturing firm's inventory consists of two more components:

Raw Material
Work in process
An analyst also is interested in examining the efficiency with which the firm
converts raw material into work in process and the work in process into finished goods.
That is, he would like to know the levels of raw materials inventory and work in process
inventory held by the firm on an average. The raw material inventory should be related to
materials consumed, and work in process to the cost of production.
Raw material inventory turnover =

material consumed

Average raw material inventory

Work in process inventory turnover =

cost of production

Average work in process inventory

The inventory turnover shows how rapidly the inventory is turning into receivable through
sales. Generally, a high inventory turnover is indicative of good inventory management. A
low inventory turnover implies excessive inventory levels than warranted by production
and sales activities, or a slow moving or obsolete inventory. A high level of sluggish
inventory amounts to unnecessary tie- up of funds, impairment of profit and increased
costs. If the obsolete inventories have to be written off, this will adversely affect the
working capital and liquidity position of the firm. Again, a relatively high inventory
turnover should be carefully analyzed. A high inventory turnover may be the result of a
very low level of inventory which results in frequent stock outs. The turnover will also be
high if the firm replenishes its inventory in too many small lot sizes. The situations of
frequent tock outs and too many small inventory replacements are costly for the firm.
21

Thus, too high and too low inventory turnover ratios should be investigated further. The
components of inventory may help to detect the imbalanced investments in the various
inventory components.
7. VED ANALYSIS
This type of analysis divides the inventory into three categories in the descending order of
their critically as given below:
V: It stands for vita items analysis of stock requires more attention. In case of out of
stock there will be stoppage of production. V. items must be stored in adequate quantity to
ensure smooth operation of the plant.
N: It stands for essential items. Such items are essential for efficient running. The system
will not fail without these items. It should be seen that these items are always in stock.
S: It stands for desirable items which do not stop the production immediately. Availability
of such items will ensure more efficiency and less fatigued.
VED analysis is suitable for capital intensive industries. It is useful for such material
which is difficult to procure.

8. FNSD ANALYSIS
F: This types of analysis shows moving position of inventory during a certain period. If
the age is minimum the inventory position is satisfactory. If the age is maximum it

22

indicates slow moving items. It ay be due to lower demand or inefficiency in stocking

position. Excessive investment in inventory means huge amount is blocked in inventory.
It amounts to low profitability.
FNSD analysis shows division of the inventory into four categories in the descending
order of their usage.
F: It stands for fast moving items. Such inventory is consumed in a short period. It is a
stock of fast moving items. In order to avoid stock out position the items in this category
must be observed constantly.
N: It stands for normal items; such stock is exhausted over a period of year. In order to
avoid surplus stock the inventory levels should be fixed on the basis of new estimates.
S: It stands for slow moving items. Such items last for two or more years. Such items
should be reviewed very carefully before placement of any order.
D: It stands for dead stock. No further demand is seen for the existing stock. It implies
money spent cannot be realized but it requires some useful space. Such items should be
identified and efforts should be made to find alternative uses.

CHAPTER 9
CASE STUDY ON
INVENTORY MANAGEMENT OF HINDUSTAN SHIPYARD LIMITED
An overview:
Each item has a bin card posting are done manually at present monthly consumption
statement are prepared and circulated to all concerned prepared levels based on 3 years
history has been fixed an places his order correspondingly a min max system is being
operated and a min stock of6 months is aimed for B&C category item. Usually high value
items are ordered on the basis of EOQ quantities or as in the case of regular order are
23

placed and delivery schedule is given to these suppliers. The delivery may be daily or
weekly or monthly depending upon the quantity consumed. For instance hydrochloric acid
is delivered on daily basis. For B&C class items min-mix system is adhered to strictly
while as stated before B&C items are operated on nil stock basis. Usually C items are
ordered manually or capitalizing the spare parts received along with the equipment.
All the indents that are raised by user department come to the interruption similarly
if finished goods inventories are not sufficient to meet the demand of competition which
will amount to a permanent loss to the materials planning section. The indents are checked
for specifications substitute and availability and then cleared for necessary purchase action
capital items are not process through the material planning or maintenance sections but
directly by the process through operation plant executive after clearance by the finance and
the management the chairman reviews the approves budgets frequently and the consumed
departments responsible for adverse variance and questioned.
The follow up action is required to get the material as per the delivery scheduled
inspections department will inspections department will inspect the materials is technical
and quality aspects of the material is technical and quality aspects of the materials received
after receiving the material receipts reports (MRR) along with inspection report the
purchase department will advise the finance department to arrange the payment for the
materials received. If any irregularities in supplying of material the action are sought
according to the terms and conditions of the purchases order for and rejected materials the
purchase department will have to correspondence with the suppliers and make necessary
arrangement against the damaged materials.
FUNCTIONS OF THE INSPECTION DEPARTMENT
The Hindustan shipyard limited materials inspection department is functioning
under the control division, which is directly reported to directly (technical). Inspection
dept is equipped with the technically known ledged group person to inspect the materials
per the requirement the incoming materials is received and brought the clearance
24

department and handed over the clearance owner. The store personal will change for the
inspection of the materials with co-ordination of the inspection department will inspect the
materials specification as per the purchases order technical specifications mentioned by
used department drawing and design office and the classification certifies if any
The following methods while inspecting
The materials are followed:
Bulk like bolts and bulbs, paint & consumable etc are inspected at random only.
For steal 100% verification is done for above 4.5 mm thickness inspection is done at
random only.
For timbres 100% inspection is done.
For pipes 100% inspection is done, inspection is conducted in the following areas.
Quality as per specifications.
Quality as per purchase order of suppliers packing list.
Condition of materials such as shelf life expiry/working/serviceable conditions etc.
After inspecting the material the inspection reports (IR) which is containing all details
of the materials with reasons. Inspection report is prepared is 5 copies which are prepared
and submitted to the following department.
Purchase department: - For taking necessary arrangement adjustment on the basis of
IR purchases department will correspond the matter with the suppliers relations
adjustments, short suppliers, etc and follow up actions as curtained.
Sales department: - For preparing material receipt report (MRR) for the accepted
quantity and accounting the material.
Drawing office/user department/project: - Who raised the purchase indent for the
intimation about the procurement.
Account department: - For arranging the payment/adjustments for the accepted
quantity self office copy for record purpose.
25

FUNCTIONS OF STORE DEPARTMENT

In Hindustan shipyard limited, store department is sub-divided on the basis of
materials wise. The organization chart encloses here will give clear view about the total
stores organization in Hindustan shipyard limited. Normally the functioning of all stores is
similar. The main function is to maintain the proper stock levels of various stores items for
smooth run of the production schedule and at the same tie the store function should see the
huge amount of capital is not locked up in the form of inventories. The proper documents,
which are using for the materials in stores, are as follows.
Materials Receipt Report (MRR) : - This is normally prepared by the concerned
stores on the basis of inspection report MRR no, date, materials code, description code,
unit of measurement, quantity received, quantity accepted & P.O no suppliers, name of
code, 1R no & date etc, MRR will be prepared in 5 copies for.
Concerned stones: - Concerned for the stones is bin card.
Cost Accounts (Material Section): - Cost accounting the receipts in precise stores ledger
(PSL).
Accounts bills: - Accounts bill for arrangement the payment adjustments.
Purchase department: - For information and to take necessary follow up actions as per the
purchase order.

Material Requisition (MR): This is normally written in a prescribed format be the materials user department. This is
prepared and sent to stores department for issue of materials MR is having the details of
materials code, job number, and signature of the authorized drawer etc. After the issue then
materials the first 2 copies are taking by the stores department and sending the third copy
along with the issued materials to the user department. Store department will enter the
issued quantity on requisition and in bin cards. The original MR is sent to cost account
department for charging the issue to the work order.
26

Material Return Notes(MRN): This is similar as material requisition written by the user/production department the MRN
is for returning the un-used materials to the store the MRN is also containing all the details
as MR but it is normally printed in different colors. In Hindustan shipyard limited MR is
pink/red color and MRN is yellow color.
INVENTORY NORMS
Maintain the inventory balance and intimating to the higher levels for taking
necessary steps wherever required intimating to the other level of management about the
non-moving insisting the non mobbing surplus materials with the entry about department
co-ordination the inventory control management is organization of Hindustan shipyard
limited. In order to supervise the dues of the funds are required to get from the borrowing
quickly management information report pertaining operating system, funds flow
statements, peak level balance sheets for the ensuring year in as much as only 10%
variance between actual and projected figures are allowed the information system will
ensure in disciplined and planned approached to credit planning for inventory control.
The maximum level of norms has been given as 4-10m weeks for raw materials now
to 5 weeks for semi finished goods, 3-8 weeks for accounts receivables, depending upon
the nature of industry. In a few cases the finished goods are account receivables has been
combined and variation allowed depending on location of factories, types of input etc, the
norms are to apply by the lending institutions with a flexible approach. Hindustan shipyard
limited is following the inventory norms of BPE since 1985 approves total inventory
norms is Rs. 1910 Lakhs. The following table is the break up to each store wise.
Machinery Equipment

100

Steel

550

General Stores

250

Timber Stores

20

Other Stores
Total

27

90
1010

However the above norms are dated norms. These norms were firms for full
capacity. Since the shop construction activity to reduce the norms to be evaluated a fresh.
If in a relationship between costs of goods expressing that how many times stocks is
purchased during this year. High inventory turn over is more profit for the organisation. It
means the efficient utilization of working capital and the stock inventory.
In French and non obsolete such company can operate on a small profit margin with
a large scale volume on low turn indicates a poor quality of marketing efficiency and poor
management of working capital. Executive inventory is also for low turn over resulting in
heavy loss due to obsolesce. The problem of spares and management which are different
from other classes are initially presented the categorized of spares provisioning of spares,
cost of spares, role of maintenance budget is brought in the content of solving the spare
parts problem.

INVENTORY OF VARIOUS STORES

The entire store organization is sub-divided into four stores as:
1. Bond Stores
2. Steel Stores
3. Timber Stores
4. General Stores
Bond Stores: - Bond stores are dealing with all the imported materials and specific
materials particularly for ship construction activities. The materials consumption of bond
stories is contributing major share about 60% to 70% of the total materials cost not meant
28

for stocks. They are meant for immediate consumption this material tailor made items
according to the size and design of the ship. The imported materials are like man engine,
diesel generator sets, and electrical equipment.
Main shifts and propellers rader and communication equipment in Hindustan
shipyard limited premises there is a customers office to look after all the matters receipts
and issue of imported materials, customers vigilance is required on the ship building
materials store they area all exempted from customs duty they should used for specifies
purpose.
Steel Stores: - For the procurement of steel there are two indenting departments.
1. Drawing Design Office: - For the material for vessel construction higher value and
higher quality material such as A glass, plates and Sections the material may be
both indigenous and imported.
2. Steel Store: - For the materials of B class and c class, lesser close items such as flat etc.
this type items is called as standard stock items for these items the steel and stores is not
only raise the purchases indent but fixed on the basis of present and future consumption
pattern out to total stores around 80% materials is A category for which the design and
drawing office will be purchased indent. For procurement according to the ordered vessel.
Remaining 205 materials is standard stock items for which steel is identified by specific
codifications as A, B, C & D international standards. Specific graded steel is required for
the construction of ocean- going vessels and it should by at the grades certified by
1. LRS Lioyds Register of Shipping.
2. ABS American Bureau of Shipping.
Generally still it is received in standard size of thickness, length, breadth, but it is
accounting in weightiest i.e. in metric tones, the main supplies are sail and foreign counties
like Japan. Korea, etc and same procured from local suppliers. If any rejected material
that material is kept separately, on the advice of purchase department drawing office that
material is handed over to the supplier by the steel stores.
29

Timber Stores: - Timber stores is dealing with procurement storing and issue of
timer material such as blue pine, teak sal wood, pin wood, staging plant, supporting board
bale wood stock and also for maintenance work as per the norms of drawing office
estimates and production department requirements. Timber stores are assisting the
purchase department in finalization of the tenders by study of the following:
Finalization of the tender by study of the following:
1. Quality.
2. Delivery Period.
3. Specification Size and Standards.
4. Sample.etc
General Stores: - The function of the general stores is sub divided into various
groups because it deals with various items of more those 40000 items. There are well
organized procedures for accounting of imported materials customs office pro available
with in the premiser of Hindustan shipyard limited to look after the matters of imported for
ship construction is accepted from the average cost method for inventory as well as for the
consumption of steel timber and general stores Bond stores material is accounted specific
accounting.
Receipt Section: - Receipt of all the materials of incoming from clearance
department from suppliers directly. Enter all the details in a separate register as per the
delivery chillness. Keep the materials at the earlier. Preparation of MRR for accepted
quantity as per the inspection report. Handling over the materials along with MRR to the
concerned group (store).regulating the rejected materials entered in a separate register and
kept them under safe conditions. Registered material is handed over to the suppliers on the
advice (rejected rerun advice) pf purchase department.
Group (Concerned stores): - The entire general stores activity stocking and issuing
is looking after by 10 groups. General stores items are also given 8 digit codes starting
30

with 3, 4, 5, 6 & 7. The following table will give a clear idea of group and it is suffering
areas. Groups and its functioning areas:
Group
0.30 Group
0.31 Group
0.32 Group
0.33 Group
0.34 Group
0.35 Group
0.37 Group
0.38 Group
0.40 Group
0.60 Group
0.70 Group

Dealing Materials
General stores
Cabin Hardware
Pipes and pipe fitting
Industrial consumable (gases and
electrodes)
Bolts and Nuts
Oil and Paints
General consumables
Electrical consumables
Central tools
Canteen materials
Spares for plants and Machinery

The above all groups are engaged in maintaining the bin cards. Storing the materials
and issuing the materials to the user department. The bin balance is verified with the priced
stores ledgers periodically and if any discrepancies noticed that will be corrected by
intimating sections will pass necessary consumption statements groups personnel are
extending their co-operation to conduct the physical stock verification of per capital
inventory section.
SIZE OF STORES
Hindustan shipyard limited is maintained in a board head and their sizes available
for the last 5 years for 1995-96 to 1999-2000 in the following statement.
Accumulation of Inventory:
The question of managing inventory areas only when the company accumulates on
inventory maintaining inventories involves typing important of the company funds and
strong and handling costs if it expiring to maintain inventories why do companies
accumulate of inventories.

31

1. The transaction motive emphasizes to the maintain inventories to fascinated

smooth production and sales operations.
2. The pre cautionary motive which emphasizes the need to maintain inventories to
guard against the risk of a predictable changing in demand suppliers force and other
factor.
3. The speculation Motive which influences the decisions in increase or decrease
inventory levels to take advantage of price fluctuating at times the industry would
like to accumulate raw materials in anticipation of price rise A category of
moderate values with modern at consumption of items but the quantity is more in
consumption.
None Moving and Surplus Materials Analysis:
The Hindustan shipyard limited is the year period is considered as a period for non-moving
it any items are not consumed for more than 3 years than it is considered as non-moving.
Surplus material is the materials which is not having any requirement in present raw
consumption and in after consumption.
The following are the main reason for the surplus inventories in Hindustan shipyard
limited.
Excess Procurement: - Normally steel and other consumable are procured at 5%
excess to the requirement to the production damages.
Extra procurement of spares for general maintenance of plan and machinery
subsequently which is dated.
Due to change of Design of the product (i.e. shop construction)
Spare parts of out dated assets etc.
All the above surplus material is unused raw material the identification of surplus
material is the important part inventory control cell is adopting the following procedures
for reducing disposing the surplus and non-moving inventory.
Stage I
32

Searching for alternative use/users keeping them in stock to meet the future
requirement this can be done with co-ordinates of design and drawing office/ship repairs
department.
Stage II
By intimate to the other public sector understanding publicity.
Stage III
By calling public tender and auctions for disposal. Before calling public tender the
reserve prices are to be fixed for the surplus non-moving items by the experts committee
the fixed reserves prices are to be approved by the chairman and managing director.
Disposal Activities: Disposal activities are looking after by disposal sector which is under the control of
managing (material). The main activity of the disposal sections is to dispose the unwanted
materials co depending stores, scrap material and etc.

Analysis of Investigation
Year

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Steel

489.71

5584.86

1199.58

1199.53

7864.16

8569.50

Store spears

969.46

999.30

1095.14

122.84

2507.47

2481.22

Timber

54.08

81.79

54.78

50.57

49.72

51.06

Ship equipment

0.22

0.22

Loose Tools

4.9

9.05

10.14

14.95

Goods-in-Transit

299.83

967.31

8611.60

943.99

1502.60

6222.65

Other materials

4.01

7.71

7.84

591.46

61.83

55.29

71.96

87.35

104.80

130.47

536.18

449.09

Steel cut price and

scrap
Work in process at
cost

33

Work in process

2519.01

1399.61

Total

4939.23

9554.23

Less:- Provision

318.00

318.42

Balance

4621.23

9235.81

7.46

21.47

atrible value

4777.95

9437.94

15828.9

13553.5

291.28

347.81

15537.7

13205.7

459.7

631.03

13574.00

20006.08

25602.75

37460.98

247.53

245.67

25355.22

37215.31

The task if steel

stores & spares
equipment to

931.01

months
consumptions

Interpretation: As per the above table, it is clear that the inventory levels of Hindustan shipyard
limited showed a fluctuating trend. The spare parts more or less remained constant. The
usage of loose tools showed a very erratic trend of increased and decreased in all the six
years of study. The inventory levels of steel also indicate is fluctuating trend the usage of
timber has increased a fluctuating trend. The usage of timber has increased considerable.
One noticeable thing about inventory is the decreasing level of scrap.

Inventory turn Over Ratio

The ratio indicates the efficiency of the firm of selling its product. It is calculated by
dividing the costs of goods sold by the average inventory.
The cost of goods sold is known then the inventory turn over ratio and can be computed by
dividing sales by average is turning into receivables through sales. This ratio signifies the

34

liquidity to inventory. It is used to measure and discover the possible in the form of over
stocking or over valuation.
Cost of goods sold
Inventory Turn Over Ratio =
Inventory
Inventory (in

Inventory Turn

Lakhs)

Over Ratio

12719.94

4621.72

2.75

2004-05

23697.61

9235.81

2.57

2005-06

31084.25

15537.71

2.01

2006-07

38627.70

13205.73

2.92

2007-08

48976.63

25355.22

1.93

2008-09

46960.47

37215.31

1.26

Year

Sales (in Lakhs)

2003-04

35

3
2.5
2
1.5

ITOR

1
0.5
0
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Graph:
Inventory Turn over Ratio

Interpretation:

36

As per the above table it is clear that the inventory levels of Hindustan Shipyard
Limited should a fluctuating trend. The spare parts more or less remained constant. The
usage of loose tools should a very erratic trend of increased and decreased in all the six
years of study if is clear that the stock has been utilized more efficiently to produce goods.

Raw Materials Inventory Turnover Ratio:

The ratio indicates the efficiency of the firms raw materials consumed. It is calculated by
material consumed divided by average material inventory.
Material Consumed
Raw Material inventory Turnovers Ratio =
Average Material Inventory

Year

Inventory
(in Lakhs)

Material
Consumed
(in LakHes)

Raw Material
Inventory
Turnover
Ratio

2003-04

4621.72

3802.53

0.82

2004-05

9235.81

10308.48

1.17

2005-06

15537.71

14453.49

0.93

37

Graph:

2006-07

13205.73

19019.22

1.44

2007-08

25355.22

22255.48

0.88

2008-09

37215.31

26466.04

0.71

Raw Material Inventory Turnover Ratio

1.6
1.4
1.2
1
0.8

RMITOR

0.6
0.4
0.2
0
2003-04

2004-05

2005-06

2006-07

38

2007-08

2008-09

Interpretation: The ratio is calculated to know the level of raw materials inventory held by the firm
on an average. This ratio indicates the efficiency with the firm converts raw materials into
work in process. It is clear from the above table that the raw material inventory turn over
ratio of Hindustan Shipyard Limited is very erratic trend of increase and decrease in all the
six years of study.
Inventory
Days of Inventory Holding =_______________*360
Sales

Years
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

Days of Inventory Holding

4621.72/12719.94*360= 131
9235.81/23697.61*360= 140
15537.71/31084.25*360= 180
13205.73/38627.70*360= 123
25355.22/48976.63*360= 186
37215.31/46960.47*360= 285

WORK IN PROGRESS TURN OVER RATIO

39

This is unable for the company in establishing the time gap between different stages
in a production cycle and the efficient with the production cycle gets completed. In case of
Hindustan Shipyard limited work in progress inventory turn over ratio has been fluctuating
over the year it is calculated form cost of production divided by average work in progress
inventory.
Cost of Production
Work in Progress Turnover Ratio =
Average work in progress

Cost of

Average work in

Production

Progress

(in Lakhs)
17787.13

(in Lakhs)

2004-05

24573.30

2048.69

11.99

2005-06

30647.70

4877.77

6.28

2006-07

46218016

9437.97

4.90

2007-08

473318.55

13574.00

3.49

2008-09

55189.35

20006.08

2.76

Year

2003-04

3055.96

40

Work in Progress
Turnover Ratio
5.82

Graph:

Work in Progress Turnover Ratio

12
10
8
6

Work in Progress Turnover Ratio

4
2
0
2003-04

2004-05

2005-06

2006-07

41

2007-08

2008-09

Interpretation:
This ratio is calculated in know the level of work in process inventory hold by the
firm on an average. It indicates the efficiency with which the firm converts work in
process into finished goods from this ratio it can interpret that work in process is which in
the year 2003 and 2009 and then decreased considerably over the year.

INVENTORY HOLDING PERIOD

The inventory holding period indicates of inventory and finished good into sales in a year.
In other words it holds average inventory for some months or days.
360
Inventory Holding Period =
Inventory Turnover Ratio (ITR)

Year

Inventory

Inventory

Holding Period

Turnover Ratio

in Days

2003-04

2.75

131

2004-05

2.57

140

2005-06

2.00

180

2006-07

2.92

123

2007-08

1.93

186

2008-09

1.26

286

42

Graph:
300
250
200
150

Inventory Holding Period

100
50
0
2003-04

2004-05

2005-06

2006-07

43

2007-08

2008-09

Interpretation:
The above table and graph shows the comparative period of inventory holding of the
company. A fluctuating ratio can be observed.

44