INTRODUCTION:

Management must be concerned with all aspects of the firms operations

including production of goods and delivery of services, sales and marketing activities,

and supporting functions, such as personal training and data processing to handle

these responsibilities, most firms make extensive use of financial data and reports. As

businesses become larger and more complex, finance assumed the responsibility of

dealing with problems and decisions associated with managing the firms assets.

Inventories constitute the major element in the working capital of many

business enterprises. For instance, inventories on an average constitute 60 percent of

current assets in public limited companies in INDIA. It is, therefore, necessary to

manage inventories efficiently and effectively to avoid unnecessary investments in

them .Inventories have a direct Impact on the profits of the firm. Profit is affected by

inventories in several ways. Firstly, too much, or too little inventory affects the firms

rate of return on investment. Secondly, the rate at which the inventories move through

the production on distribution process also affects the cost of doing business.It is

therefore, necessary to formulate and initiate inventory policies which will serve as

guides in determining the correct level of inventory to maintain and the correct

amount of working capital to invest in inventory. To develop adequate inventory plan,

it is necessary to have thorough knowledge of the objectives of inventory

management and inventory management techniques. A firm neglecting the

management of inventories will be jeopardizing its long-run profitability and may fail

ultimately. It is possible for a company to reduce its levels of inventories to a

considerable degree e.g., 10 to 20 percent, without any adverse effect on production

and sales, by using simple inventory planning and control techniques. The reduction

in excessive inventories carries a favorable impact on company profitability.

 Inventory

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.

Inventory or stock refers to the goods and materials that a business holds for
the ultimate purpose of resale. 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.

Introduction to inventory management

Financial management is the managerial activity which is concern with the

planning and controlling of the firms financial resources. Though it was a branch of
economics till 1890 as a separate activity or discipline. It is of recent origin still it as
no unique body of knowledge of its own. And draws heavily on economics for its
theoretical concepts even today.

The subject of financial management is of immense to both academician and

practicing managers. It is of great interest to academicians the subject is still
developing and there are still certain areas when controversies exist for which
unanimous solutions have been reached as yet.
 In financial management the working capital management plays a major role.
The working capital management will be effectively managed by inventory
management. In my present chapter the inventory management will be discussed in
these topics, importance of inventory management, nature of inventories, need to hold
inventories, cost of holding inventories, other characteristics of inventory situations,
types of inventory, economic order quantity, techniques of inventory management.

Meaning of inventory management

Inventory management means safeguarding the company property in the form
of inventories and maintaining it at the optimum level, considering the operating
requirements and financial resources of the business. Inventory management
emphasizes control over purchases, storage, consumption of materials and
determining the optimum level for each item of investments.

Importance of Inventory Management

Inventory management is concerned with keeping enough products on hand to

avoid running out while at the same time maintaining a small enough inventory
balance to allow for a reasonable return on investment. Proper inventory management
is important to the financial health of the corporation; being out of stock forces
customers turn to competitors or results in a loss of sales. Excessive level of
inventory however, results in large carrying costs, including the cost of capital tied up
in inventory warehouse fees, insurance etc.

A major problem with managing inventory is that the demand for a

corporations product is to a degree uncertain. The supply of the raw materials used
in its production process is also somewhat uncertain. In addition the corporations
own production contains some degree of uncertainty due to possible equipment
breakdowns and labor difficulties.
 Because of these possibilities, inventory acts as a shock absorber between
product demand and product supply. If product demand is greater than expected,
inventory can be depleted without losing sales until production can be stepped up
enough to select the unexpected demand. However inventory is difficult to manage
because it crosses so many lines of responsibility. The purchasing manager is
responsible for supplies of raw material and would like to avoid shortages and to
purchases in bulk order take advantages of quantity discounts.
The production manager is responsible for uninterrupted production and wants
to have enough raw materials and work in process, inventory on hand to avoid
disruption in the production process. The marketing manager is responsible for
selling the product and wants to minimize the chances of running out of inventory.
The financial manager is concerned about achieving an appropriate overall
rate of return. Funds invested in an inventory are idle and do not earn a return.

Nature of Inventories

Inventories are stock of the product a company is manufacturing for sale and
components that make up the product. The various forms in which inventories that
exist in manufacturing company are

Raw materials
Work-in-process
Finished goods

Raw materials

These are those basic inputs that are converted into finished product through
the manufacturing process. Raw materials inventories are those units which have
been purchased and stored for future production.

Work-in-process
 These inventories are semi-manufacture products. They represent products
that need more work before they became finished for sale.

Finished goods
These inventories are those completely manufactured products which are
ready for sale. Stocks of raw materials and work-in-process facilitate production
while stock of finished goods is required for smooth marketing operations. Thus,
inventories serve as link between the production and consumption of goods.

Need to hold inventories

Maintaining of inventories involves trying up the companies and incurrence of

storage and handling cost. There are three general motives for holding inventories.

Transaction motive

It emphasizes the need to maintaining inventories to facilitate smooth

production and sales operation.

Precautionary motive

It necessitates the holding of inventories to guard against risk of unpredictable

changes in demand and supply force and other factors.

Speculative inventories

It influences the decision to increase or reduce inventory level to take

advantage of price fluctuations.
The firm should always avoid a situation of over investment or under
investment in inventories.
The major dangers of over investment in inventories are

i. Unnecessary tie up of the funds and loss of profits.

 ii. Excessive carrying cost.
iii. The risk of liquidity.
The consequences of under investment in inventories are

i. Production hold-ups
ii. Failure to meet delivery commitments. Inadequate raw
materials.
iii. Work-in-process will result in frequent in production interrupts.

An efficient inventory management should

Ensure a continuous supply of raw materials to facilitate uninterrupted

production.
Maintain sufficient supply of raw materials in periods of short supply and
anticipate price changes.
Maintain sufficient finished goods inventory for smooth sales operation and
efficient customer service.
Minimize the transportation cost on time.
Control investment in inventories and keep it at an optimum level

Cost of holding inventories

The determination of inventory cost is essentially an income measurement

problem, a means whereby there is rational orderly, systematic interpretation of the
effect on the economic progress of the company of expenditures involved acquiring
goods or in maintaining and operating productive facilities. Ability to quantify and
develop rigorous models of most managerial problems is dependent on the
determination behavior of relevant costs.
The practical application of such models is also dependent on ability to obtain
the cost data. Relevant inventory costs which change with level of inventory are
listed below.

Ordering costs
 Every order is placed for stock replenishment, certain cost are involved. The
ordering cost may vary, dependent upon type item.
This cost of ordering includes

Paper work cost, typing and dispatching order.

Follow-up costs the follow-up required ensure timely supplies include the
travel cost for purchases follow-up, telephone telex and postal bills.
Cost involved in receiving the order inception, checking and handling to the
stores.
Any set up cost of machines if charged by supplier, either directly indicated in
quotations or assessed thought quotations for various quantities.
The salaries and wages to the purchase department are relevant for
consideration if the purchasing function is carried out at the same level with
existing staff.

There are certain costs that remain the same regardless of the size of the lot
purchased or requisitioned. This would be retailer ordering from the distributor, from
the distributor ordering from a factory warehouse, for the factory warehouse ordering
a new production run from the factory, and for the factory ordering raw materials
from vendors. These kinds of costs are called preparation or set up costs.
If we are ordering to replenish supplies at one stock point from another stock
point, our interest is in the incremental clerical costs of preparing orders, following
these orders. Expediting them when necessary, etc, a large segment of the total cost
of the ordering function is fixed, regardless of the number orders issued. Even then it
may be difficult determined satisfactorily the incremental cost, which results from one
more order. Quantity discounts and handling and transport cost are other factors,
which vary lot sizes.

Preparation cost are the incremental costs of planning production, writing

production orders, setting machines and controlling the flow orders through the
factory. Material handling cost in the plant have an effect on production lot sizes in
much the same way that freight costs may effect purchase lot sizes.
 Besides the preparation costs of production, there are some other production
costs, which have a direct bearing on inventory models, however. These are over time
premiums and the incremental cost of changing production levels, such as hiring,
training, and separation costs.
Carrying costs
Carrying costs constitutes all the costs of holding items in inventory for a
given period of time. They are expressed either in rupees per period or as percentage
of the inventory value per period.
Components of these costs include the following
Storage and handling cost.
Obsolescence and deterioration costs
Insurance
Taxes
The cost of the funds invested in inventories
Storage and handling costs include the cost of warehouse space.

Obsolescence costs represent the decline in inventory value caused by style

changes that make the existing product less salcable Deterioration costs represent the
decline in value caused by changes in the physical quality of the inventory such as
spoilage and breakage.

Another element of carrying cost is the cost of insuring the inventory against
losses due to theft, fire and natural disaster. In addition, a company must pay any
personal property taxes required by local and state government on the value of its
inventories. Like ordering costs, inventory-carrying costs contain both fixed and
variable components. Most carrying costs vary with inventory level, but a certain
portion of them-such as warehouse rent and depreciation on inventory handling
equipment- are relatively fixed over the short run, inventory model such as EOQ
model treat the entire carrying cost as variable.
INVENTORY CONTROL:

A firm needs an inventory control system to effectively manage its inventory.

There are several inventory control systems in vogue in practice. They range from
simple systems to very complicated systems. The nature of business and the size

dictate the choice of an inventory control system .For example; a small firm may

operate a two-bin-system. Under this system, the company maintains two bins. Once

inventory in one bin is used, an order is placed, and means while the firm uses

inventory in the second bin .For a larger departmental store that sells hundreds of

items, this system is quite unsatisfactory. The departmental store will have to maintain

a self-operating, automatic computer system for tracking the inventory position of

various items and placing order.

The main objective of inventory control is to achieve

maximum efficiently in production and sales with the minimum

investment in inventory.

FUNCTIONS:

As mentioned earlier, inventory is a necessary evil. Necessary because it aims

at absorbing the uncertainties of demand and supply by decoupling the demand and

supply sub-systems. Thus an organization may be carrying inventory for the following

reasons.

a) Demand and lead-time uncertainties building of safety stock (buffer stocks) so

as to enable various sub-systems to operate somewhat in a Decoupled manner.

It is obvious that the larger the uncertainty of demand and supply, the larger

Will have to be the amount of buffer stocks to be carried for a prescribed

Service level.

b) Time long in deliveries also necessitates building of inventories; if the

Replenishment lead times are positive then stocks are needed for system

Operation.
a) Cycle stocks may be maintained to get the economies of scale so that total system

cost due to ordering carrying inventory and back logging are minimized.

Technology requirement of batch processing also build up cycle stock.

b) Stocks may build up as pipeline inventory or work-in-progress inventory due to

finiteness of production and transportation rates. This includes materials actually

being worked or moving between work centers.

c) Inventory may also be build up for other reasons such as quantity discounts being

offered by suppliers, discount sales anticipated increase in material price

possibility of future non-availability etc.

ESSENTIAL OF GOOD INVENTORY CONTROL SYSTEM:

1) Classification and codification of inventories by allotting proper code

Number to each item and group and regroup on some basis.

2) Standardization and simplification of inventories in order to maintain Quality

and reduce the number of items.

3) Adequate storage facility.

4) Setting different levels and reorder point for each item of inventories.

5) Fixing Economic Order Quantity.

6) Experienced personnel for handling inventories properly.

7) Intelligent and experienced Personnel.

8) Co-ordination.

9) Budgeting.

10) Internal Check.

TECHNIQUES OF INVENTORY CONTROL:

Effective inventory management requires an effective control system of

inventories. A proper inventory control not only helps in solving the acute problem
 of liquidity but also increases profits and causes substantial reduction in the working

capital of the concern. The following are the important techniques of inventory

control.

Setting of various stocks levels.

ABC analysis.

Two bin system.

Establishment of system of budgets.

Use of perpetual inventory records and continuous stock verification.

Determination of Economic Order Quantity (E.O.Q).

Review of slow and non-moving items.

Use of control ratios.

SETTING OF VARIOUS STOCKS LEVEL:

Carrying of too much little of inventories is determined to the firm, if the

inventory level is too little the firm will face frequent stock outs involving heavy

ordering cost and if the inventory level is too high it will be unnecessary tie up to

capital.

Therefore, an efficient inventory management requires that a firm should

maintain an optimum level of inventory costs are the minimum and at a same time there

is not stock out which may result in loss of sale or stoppage production of various stock

levels are discussed as such.

Re-ordering 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 supplies of that material.

This level is fixed somewhere between the maximum and minimum levels in such a

way that the difference of quantity of the material between the re-ordering level and the

minimum level will be sufficient to meet the requirements of production up to the time

the fresh supply of the material is received. Re-ordering level can be calculated

by applying the following formula.

Re-ordering level =Maximum Consumption x Maximum re-order period. OR

Re-ordering level =

Safety stock +[Average daily consumption X Average delivery period ]

Where:

Safety stock=

Annual Demand X [Maximum lead time Normal lead time ]

365

Minimum level:

It indicates the lowest figure of inventory balance, which must be maintained

in hand at all times, so that there is no stoppage of production due to non-availability

of inventory.

The main consideration for the fixation of minimum level of inventory is as follows:

1) Information about maximum consumption and maximum delivery period in respect

of each item to determine its re-order level.

2) Average rate of consumption for each inventory item.

3) Average delivery period for each item. This period can be calculated by averaging

the maximum and minimum period.

The formula used for its calculation is as follows:

Minimum Level of inventory =

Re-order level [Normal consumption X normal re-order period ]

Maximum level:

It represents the maximum quantity of an item of material which can be held

in stock at any time. Stock should not exceed this quantity. The quantity is fixed so

that there may be no overstocking.

The maximum stock level is fixed by taking into account the following factors.

Amount of capital available for maintaining stores.

Godown space available.

Maximum requirement of the stores for production purposes at any point of

time.

Rate of consumption of the material during the lead time.

The time lag between indenting and receiving of the material.

Possibility of loss in stores by deterioration, evaporation etc.

Cost of maintaining stores.

Likely fluctuation in prices.

The seasonal nature of supply of material. Certain materials are available only

during specific periods of the year, so these have to be stocked heavily during

these periods.

Restrictions imposed by the government or local authority in regard to

material in which there are inherent risks e.g. fire and explosion.

Possibility of change in fashion and habit which will necessitate change in

requirement of materials.
Maximum level of inventory=

Reorder level + Reorder quantity

[Minimum consumption X minimum re-ordering period]

Average stock level:

The average stock level is calculated by the following formula:

Average stock level = Minimum stock level + [1/2 of re-order quantity]

Danger level:

When the stock level falls below the minimum level, it reaches the danger

level, when immediate action is to be taken for replenishment of stock.

Danger level=

Average consumption X lead time for emergency purposes.

Stock out costs

Stocks out costs are incurred when ever a business is unable to fill orders
because the demand for an item is greater than the amount currently available in
inventory. When a stock out in raw materials occur, for example, stock out costs
include the expenses of placing special orders (back ordering) and delays.
A stock out in work in progress inventory results in additional costs of
rescheduling and speeding production with in the plant, and it also may result in
reduce production costs if work stoppages occur. Final, a stock out in finished goods
inventory may result in the immediate loss of profits of customers decide to purchase
the product from the competitor and in potential long-term losses if customers decide
to order from other companies in the future.

Other characteristics of inventory situations

 Besides the various types of costs involved, there are other characteristics of
the situation that vary among types of inventory and must be captured if the decision
model is to be an accurate representation of the physical circumstances.
Lead times
Obtaining inventory usually requires a lag from the initiation of the process
until the inventory starts to arrive. This lead-time may be a few minutes or it may be
many months, and depends in part on whether the firm is producing goods for its
inventory or is ordering these goods from another firm. To produce goods for its own
use, the firm must schedule, set up and adjust manufacturing equipment.
Sources and levels of risk
Uncertainties play a significant role in inventory situations. Uncertainties
usually involve lead times and demand times and demand levels, but situations where
other variables are uncertain also occur. Where are substantial uncertainties and
where the costs of stock out are important Strategies for addressing risk must be
formulated?
Static versus dynamic problems
Inventory problems are usually divided into two types based on the
characteristics of the goods involved. In static inventory problems, the goods have
one-period life; there can be carrying over of goods from one period to the next.
Inventory situations where decisions involve the number of news papers to print, the
number of greeting cards to purchase or the number of calendars to produce are static
inventory problems.
Replenishment rate
Once goods start to be received from a vendor or from the firms own
production processes, there are differences among goods in the rate at which they are
received. Small orders from vendors are likely to by receive all at once. For
example, assume that a firm has placed in order for 10 cases of paper towels. For
such a small order the rate of replenishment is infinite; the firms inventories well go
up 10 cases in a very short time as the goods are quickly unloaded.
For large order from vendors, or for inventory produced with in the firm, the
replenishment rate may be slower.
Types of inventory
 Inventories can be classified into five basic types on the basis of their
production. These various types of inventories cannot be identified and segregated
within the organization. These five types are

1. Management inventory

They are needed because of the time required to move stocks from one place
to another place.

2. Lot size Inventories

These are as a result of buying materials in quantities larger than the

immediate requirement, with a view to minimizing cost of transportation, buying,
receipt and handling and to obtaining quantity discount.

3. Fluctuation Inventories

These are carried to ensure ready suppliers to consumer even when these are
irregular and unpredictable fluctuations in their demand

4. Anticipation inventories

These are usually maintained to meet a predictable but changing pattern of

future demand.

5. Cycle Inventories
These result from managements attempt to minimize the total cost of carrying
and ordering inventory. They arise from ordering in batches or lots, rather from
needed basis.
 Inventories can be further classified into production inventories maintenance
repair and operation (MRO) inventories, in-process inventories and finished goods
inventories.
Production inventory consists of raw materials parts and components which
are used in the production process forming parts of the final product.
Maintenance, repair and operation supplies which are used in the production
of goods or services but do not become part of the product.
In-process inventories are semi-finished materials, parts and assemblies found
at various stages in the production operation.
Finished goods inventory consists of completed products ready for sale.

Techniques of inventory management

1) ABC analyses
The ABC method is an analytical method of stock control which aims at
concentrating efforts on those items where attention is needed most. It is based on the
premise that a small number of the items in inventory may typically represent the bulk
money value of the total materials used in production process. While a relatively
large number of items may represent a small portion of the money value of stores
used and that small number of items should be subject to the greatest degree of
continuous control.
Under this system, the materials stocked may be classified into a number of
categories according to their importance i.e., their value and frequency of
replenishment during a period. The first category, we may call it the group of A
items, may consist of only a small percentage of total items handled but its combined
value may be a large portion of the total stock value.
The second category, naming it as group of B items, may be relatively less
important. In the third category consisting of C items, all the remaining items of
stock may be included which are quite large in numberbut their value is not high.

Categories of ABC analysis

In ABC analysis the items are classified in three main categories based on
their respective consumption value.
 1. Category A items:
The items, which are most costly and valuable, are classified as A nearly
10% of the total number of items stored will account for 70% of total value of
all items stocked.
2. Category B items: The items having average consumption value are
classified as B nearly20% of total number of items will account for 20% of
total value. Statistical sampling is general useful to control them.
3. Category C items:
The items having low consumption value are put in category C nearly 70% of
total number as items will account for 10% total value. Generally these items are slow
and non-moving items in the stores, which are frequently used for production process
but with more quality.

2) VED classification
This analysis is based on criticality of inventory, it is used to determine the
criticality of the item and its effect on production and other services .it is specially
used for classification of spare parts. If a part is vital, it is given V classification. if
essential ,then it is given E classification and if it is not essential the part is given D
classification for V items, a large stock of inventory is generally maintained ,these
item have immediate effect on production more attention paid for this items

3) ECONOMIC ORDER QUANTITY

The economic order quantity is that inventory level, which minimizes the total
of ordering cost and carrying costs.
It is the question, how much to order the quantity when inventory is
replenished. If the firm is buying raw materials, the question is to purchase the
quantity of; each replenishment and if it has to plan for production run, it is how much
production to schedule. It may be solved through EOQ.

COST OF HOLDING INVENTORIES

The determination of inventory costs is essentially an income measurement

problem, a means whereby there is a rational, orderly, systematic interpretation of the
effect on the economic progress of the company of expenditures involved in acquiring
goods or in maintaining and operating productive facilitates. Ability to quantify and
develop rigors models of most managerial problems is dependent on the
determination of the behavior of relevant costs. The practical application of such
models is also dependent on ability to obtain the cost data. Relevant inventory costs
which change with the level of inventory are listed below.
Ordering cost:

Every timer an order is placed for stock replenishment, certain costs are involved.

The ordering cost may vary, dependent upon the type of item. However, an estimate

of ordering cost can be obtained for a given range of items.

1. Paper work costs, typing and dispatching an order.

2. Follow up costs-the follow-up required to ensure timely to ensure timely

supplies include the travel cost for purchase followup, telephone, telex and

postal bills.

3. Cost involved in receiving the order inspection, checking and handling to the

stores.

4. Any set up cost of machines if charged by the supplier, either directly

indicated in quotations or assessed through quotations for various quantities.

5. The salaries wages to the purchase department are relevant for consideration if

the purchasing function is carried out at the same decreases significantly,

obviously a proportional amount of personnel will be transferred to other

departments.

Carrying Costs:
 Carrying costs constitute all the costs of holing items in inventory for a given
period of time. They are expressed either in rupees per unit per period or as a
percentage of the inventory value per period. Components of this cost include the
following.

1. Storage and Handling costs: It includes the cost of warehouse space.

2. Obsolescence and deterioration costs:Obsolescence costs represent the
decline in inventory value caused by technological or style changes that make
the existing product less salable. Deterioration costs represent the decline in
value caused by changes in the physical quality of the inventory, such as
spoilage and breakage.
3. Insurance: The inventory against losses due to the theft, fire, and natural
disaster.
4. Taxes: A company must pay any personal property taxes and business taxes
required by local and state governments on the value of its inventory.
5. The cost of funds invested in inventories: It is measured by the required
rate of return on these funds. Because inventory investments are likely to be
of average risk the overall weighted cost of capital should be used to
measure the cost of these funds.
6. Storage and Handling costs: It includes the cost of warehouse space.
7. Obsolescence and deterioration costs: Obsolescence costs represent the
decline in inventory value caused by technological or style changes that make
the existing product less salable. Deterioration costs represent the decline in
value caused by changes in the physical quality of the inventory, such as
spoilage and breakage.
8. Insurance: The inventory against losses due to the theft, fire, and natural
disaster.
9. Taxes: A company must pay any personal property taxes and business taxes
required by local and state governments on the value of its inventory.
10. The cost of funds invested in inventories: It is measured by the required
rate of return on these funds. Because inventory investments are likely to be of
average risk the overall weighted cost of capital should be used to measure the
cost of these funds.
EOQ for an item is arrived on the following assumptions
1. Demand is continuous at a constant rate.
2. The process continues infinity.
3. No constraints are imposed on quantities ordered, storage capacity, budget
etc.,
4. Replenishment is instantaneous.
5. All costs are time invariant.
6. Units are not available.

EOQ for an item is arrived by the following formula

2 * AD * Co
EOQ=
CH

Where
EOQ=economic order quantity
Co=cost of ordering an order
AD= annual consumption of an item
CH=cost of carrying one unit/year

4) HML classification
The high .and medium and low (HML) classification follows the same
procedure as is adopted in ABC classification. Only difference is that in HML, the
classification unit value is the criterion and not the annual consumption value. The
item of inventory should be listed to the descending order of unit value and it is up to
the management to fix limits for the three categories.
For example, the the management may decided that all units with unit value
of Rs.2000 and above will be H items, Rs 1000 to 2000 M items and less than Rs.
1000, l items. The HML analyses is useful for keeping control over consumption at
department levels for deciding the frequency of physical , and for controlling
purchases.
5) SDE classification
The SDE classification is based upon the availability of items and is very
useful in the context of scarcity of supply. In this analysis, S refers to scarce items,
generally imported, and those which are in short. D refers to difficult items, which are
available indigenously but are difficult items to procure. Items which have to
comeform distance places or for which reliable suppliers are difficult to come by, fall
in to D category. E refers to items which are easy to acquire and which are available
in the local strategies The SDE classification. Based on problems faced in
procurement, is vital to the lead-time analyses and in deciding on purchases strategies.
6) MINIMUM-MAXIMUM TECHNIQUE
The minimum maximum system is often used in connection with manual
inventory control system. The minimum quantity is established in the same way as
any re- order point. The maximum is the minimum quantity plus the optimum lot
size. In practice, a requisition is initiated when, a withdrawal reduces the inventory
below the minimum level, and the order quantity is the maximum minus the inventory
status after the withdrawal. If the final withdrawal reduce the stock the stock
substantially below the minimum level, the order quantity will be higher than the
calculated EOQ. The effectiveness of a minimum system is determined by the method
and precision with which the minimum and maximum parameters are established
7) TWO BIN SYSTEM
One of the oldest systems of inventory control is the two-bin system, which is
mainly adopted to control C group inventories. In the two bin system. Stock of each
item is separated in to two bins. One bin contained stock; just enough to last from the
date a new order is placed until it is received in inventory.
The other bin contains a quantity of stock. Enough to satisfy probable demand
during the period of replenishment. to start with , the stock is issued from the first bin.
When the first bin is empty, an order for replenishment is placed, and the stock in the
second bin is utilized until the order material is received Such a method is appropriate
to ideal conditions in which the rate of consumption is fairly constant and for items.
The lead-time of which is fairly established and regular.
RESEARCH METHODOLOGY:

NEED OF THE STUDY:

The American institute of Accountants has set forth a definition of inventories

which has been accepted both by accountants and finance executives. The definition is

as follows:

The term inventory designate the aggregate of those items of tangible personal

property which (1) are held for sale in the course of business,(2) are in the process of

production for sale, or (3) are to be currently consumed in the production of goods or

services to be available for sale.

The definition implies that there are four types of inventories; finished goods, work in

progress, raw material, and supplies which are consumed in the creation and

distribution goods and services.

Raw materials are those basic inputs that are converted into finished product

through the manufacturing process. Raw materials inventories are those units which

have been purchased and stored for future productions.

Work-in-progress inventories are semi-manufactured products. They

represent products that need more work before they become finished products for

sale.

Finished goods inventories are those completely manufactured products which are

ready for sale. Stocks of raw materials and work-in-progress facilitate production

while stock of finished goods is required for smooth marketing operations .Thus;

inventories serve as a link between the production and consumption of goods.

The final category includes materials and supplies other than raw materials

which are necessary to the normal operation.

Scope of the study

Raw materials contribute a single largest expenditure item, which account for

nearly 70% of the total value. The important of the inventory management lies in the

fact that in significant contribution made in reducing material cost through proper

control will go a long way in improving the profitability and R.O.I.

Fixed assets constitute capital already suck and the only scope for improving

the R.O.I. lies in the efficient management of materials. So the inventory control

assumes greater importance.

Holding inventory is inevitable for keeping the production wheels running. It

also acts as lubricant and spring for production, distribution system. But holding costs

are involved in inventory control tool guide in formulating an inventory policy for

various raw materials, which goes in the production process.

The study has been conducted to know the most suitable and economies

maintenance of inventory for .

Objectives of the study.

Generally the objective of the present case study to analyze the inventory

Management Analysis in particular this analysis aims at.

To analyze the stock control in MAHINDRA TRACTORS by adopting ABC

Technique.

To estimate the EOQ for the Mahindra Tractors.

To calculate the stock control levels of Inventory.

To present analysis of Inventory Ratios.

To suggest necessary measures for an effective Inventory Management System

for the Mahindra Tractors.

To maintained large size of inventory of raw materials and work in process for
efficient and smooth production and finished goods for uninterrupted sales
operation
To maintain a minimum investment in inventory to maximize profitability

To study which item is having the high percentage of usage in the processing
of finished goods.