A PROJECT REPORT

ON
INVENTORY MANAGEMENT
A STUDY OF EATON FLUIDE POWER

UNDER THE GUIDANCE OF:

Mr. Manoj Doshi

Submitted By:
Atul Patil
Deepak Borole

Oriental Institute Of Management

Navi Mumbai
 ACKNOWLEDGEMENT

I express my sincere gratitude to Mr. Manoj Doshi (Senior Manager,

EATON FLUIDE POWER) under whose supervision has helped to clarify my
concepts of Inventory Management, distinguished scholars and authors, whose
work I heve used in this project.

I would also like to thank to Mr. Prakash Rupeye No words of

appreciation are good enough for the constant encouragement, which I have
received from him.

I thank Mr. Gomes for his unstinted support to the project.

Finally, I would like to thank Mr. S. RAUIT (Plant Head,Eaton Fluide

Power) to give the opportunity to complete the project in the esteemed organization.
INTRODUCTION OF THE TOPIC

INTRODUCTION

Inventories constitute the most significant part of current assets of a large majority
of companies in India. On an average, inventories are approximately 60% of current
assets in public limited companies in India. Because of the large size of inventories
maintained by firms, a considerable amount of feuds is required to be committed to
them. It is therefore, absolutely imperative to ménage inventories efficiently and
efficiently in order to avoid unnecessary investment. A firm neglecting the
management of inventories will be jeopardizing its long run profitability and may
fail ultimately. It is possible for fore a company to reduce its levels of inventories to
a considerable degree e.g. 10 to 20 percent, with out any adverse effect on
production and sales, by using simple inventory planning and control techniques.
The reduction in excessive inventory carries a favorable impact on a company’s
profitability.

MEANING OF INVENTORY:-

Inventory is the physical stoke of goods maintained in an organization for its

smooth sunning. In accounting language it may mean stock of finished goods only.
In a manufacturing concern, it may includes raw materials, work-in-progress and
stores etc. In the form of materials or supplies to be consumed in the production
process or in the rendering of services.
In brief, Inventory is unconsumed or unsold goods purchased or manufactured.

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 inventory exist in a manufacturing company are raw materials, work in
progress and finished goods.

RAW MATERIALS:-

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

WORK IN PROGRESS:-

These inventories are semi manufactured products. They represent

products that need more work before they become finished products for sales.

FINISHED GOODS:-

Finished goods inventories are those completely manufactured

products which are ready for sale. Stock of raw materials and work in progress
facilitate production. While stock of finished goods is required for smooth
marketing operation. Thus, inventories serve as a link between the production and
consumption of goods.

The level of three kinds of inventories for a firm depend on the nature of its
business. A manufacturing firm will have substantially high levels of all three kinds
of inventories, while a retail or wholesale firm will have a very high and no raw
material and work in progress inventories. Within manufacturing firms, there will be
differences. Large heavy engineering companies produce long production cycle
products, therefore they carry large inventories. On the other hand, inventories of a
consumer product company will not be large, because of short production cycle and
fast turn over. Firms also maintain a fourth kind of inventory, supplies or stores and
spares.

SUPPLIES:

It includes office and plant cleaning materials like soap, brooms, oil, fuel,
light, bulbs etc. These materials do not directly enter production, but are necessary
for production process. Usually, these supplies are small part of the total inventory
and do not involve significant investment. Therefore, a sophisticated system of
inventory control may not be maintained for them.
MANAGEMENT OF INVENTORY

Inventories constitute the principal item in the working capital of the

majority of trading and industrial companies. In inventory, we include raw
materials, finished goods, work-in-progress, supplies and other accessories. To
maintain the continuity in the operations of business enterprise, a minimum
stock of inventory required. However, the physical control of inventory is the
operating responsibility of stores superintendent and financial personnel have
nothing to do about it but the financial control of these inventories in all lines of
activity in which they comprise a substantial part of the current assets is a
frequent problem in the management of working capital. Management of
inventory is designed to regulate the volume of investment in goods on hand, the
types of goods carried in stock to meet the needs of production, and sales while
at the same time, the investment in them is to be kept at a reasonable level.

CONCEPT OF INVENTORY MANAGEMENT

The term inventory management is used in two ways- unit control and
value control. Production and purchase officials use this word in term unit
control whereas in accounting this word is used in term of value control. As
investment in inventory represents in many cases, one of the largest asset items
of business enterprises particularly those engaged in manufacturing, wholesale
trade and retail trade. Sometimes the cost of material used in production
surpasses the wages and production overheads. Hence, the proper management
and control of capital invested in the inventory should be the prime
responsibility of accounting department because resources invested in inventory
are not earning a return for the company. Rather, on the other hand, they are
costing the firm money both in terns of capital costs being incurred and loss of
opportunity income that is being foregone.

OBJECTIVES OF INVENTORY MANAGEMENT

The basic managerial objectives of inventory control are two-fold; first, the
avoidance over-investment or under-investment in inventories; and second, to
provide the right quantity of standard raw material to the production department
at the right time. In brief, the objectives of inventory control may be
summarized as follows:

A. Operating Objectives:

(1) Ensuring Availability of Materials: There should be a continuous

availability of all types of raw materials in the factory so that the production
may not be help up wants of any material. A minimum quantity of each material
should be held in store to permit production to move on schedule.

(2) Avoidance of Abnormal Wastage: There should be minimum possible

wastage of materials while these are being stored in the godowns or used in the
factory by the workers. Wastage should be allowed up to a certain level known
as normal wastage. To avoid any abnormal wastage, strict control over the
inventory should be exercised. Leakage, theft, embezzlements of raw material
and spoilage of material due to rust, bust should be avoided.
 (3) Promotion of Manufacturing Efficiency: If the right type of raw material
is available to the manufacturing departments at the right time, their
manufacturing efficiency is also increased. Their motivation level rises and
morale is improved.

(4) Avoidance of Out of Stock Danger: Information about availability of

materials should be made continuously available to the management so that they
can do planning for procurement of raw material. It maintains the inventories at
the optimum level keeping in view the operational requirements. It also avoids
the out of stock danger.

(5) Better Service to Customers: Sufficient stock of finished goods must be

maintained to match reasonable demand of the customers for prompt execution
of their orders.

(6)Highlighting slow moving and obsolete items of materials.

(7) Designing poorer organization for inventory management: Clear cut

accountability should be fixed at various levels of organization.

B. Financial Objectives:

(1) Economy in purchasing: A proper inventory control brings certain

advantages and economies in purchasing also. Every attempt has to make to
effect economy in purchasing through quantity and taking advantage to
favorable markets.
(2) Reasonable Price: While purchasing materials, it is to be seen that right quality
of material is purchased at reasonably low price. Quality is not to be sacrificed at
the cost of lower price. The material purchased should be of the quality alone
which is needed.

(3) Optimum Investing and Efficient Use of capital: The basic aim of inventory
control from the financial point of view is the optimum level of investment in
inventories. There should be no excessive investment in stock, etc. Investment in
inventories must not tie up funds that could be used in other activities. The
determination of maximum and minimum level of stock attempt in this
direction.

TYPES OF INVENTORY

1. Movement Inventories:-
 Movement inventories are also called transit or pipeline
inventories. Their existence owes to the fact that transportation time is involved in
transferring substantial amount of resources.

2.Buffer inventories:-
In Buffer inventories are held to protect against the uncertainties
of demand and supply. An organization generally knows the average demand for
various items that it needs.
Prod.deptt. issue store inspect receive supplier
Su
pplies

Demand

Inventory in

Hand place
Orders
Purchase
dep’t.
Net order issue receive tender
Quantity tenders quotation evaluations

Inventory cycle

3. Anticipation Inventories.
Anticipation inventories are held for the reason that future demand for the product is
anticipated. Production of specialized times like crackers well before dewily,
umbrellas and raincoats before taints set in, fans while summers are approaching; or
the piling up of inventory stocks when a strike is on the anvil, are all examples of
anticipation inventories.

CONTROL OF MATERIALS :

Rigid control over materials are necessary not only to guard against theft, but also to
minimize waste and misuse from causes such as excessive inventories, over issue,
deterioration, spoilage, and obsolescence.

There are certain prerequisites to an effective control system for materials:

1.Materials of the desired quantity will be available when needed;

2.Materials will be purchased only when a need exists and in economical qualities;
3.Purchases of materials will be made at most favorable prices;
4.Vouchers for the payments of materials purchased will be approved only if the
materials have been received in good condition;
5.Materials will be protected against loss by proper physical control;
6.Issue of materials will be properly authorized and accounted for; and
7.All materials, at all times, will be charged, as the responsibility of some
individual.

The control of materials, as an element of cost of production, is illustrated with

reference to the purchase and issues procedures, inventory systems, and inventory
control techniques.
 IMPORTANCE OF INVENTORY CONTROL:

The importance or necessity of inventory control is well explained in the

terms of the objects of inventory control, which are obtained through it. A
proper inventory control lowers down the cost of production and improves
profitability of enterprise.

ADVANTAGES OF INVENTORY CONTROL:

(1) Reduction in investment in inventory.

(2) Proper and efficient use of raw materials.

(3) No bottleneck in production.

(4) Improvement in production and sales.

(5) Efficient and optimum use of physical as well as financial resources.

(6) Ordering cost can be reduced if a firm places a few large orders in place of
numerous small orders.

(7) Maintenance of adequate inventories reduces the set-up cost associated with
each production run.
 Risk and cost Associated with Inventories:

Holding of Inventories expose the firm to a number of risks and costs.

Major risks are:

(a) Price decline: They may be due to increase in market supply of the product,
introduction of a new competitive product, price-cut by the competitors etc.

(b) Product deterioration: This may due to holding a product for too long a period
or improper storage conditions.

(c) Obsolescence: This may due to change in customer’s taste, new production
technique, improvements in product design, specifications etc.

The Costs of holding inventories are as follows:

(a) Material Cost: This include the cost of purchasing the goods, transportation and
handling charges less any discount allowed by the supplier of goods.
(b) Ordering Cost: This includes the variables cost associated with placing an
order for the goods. The fewer the orders, the lower will be the ordering costs
for the firm.

(c) Carrying Cost: This includes the expenses for storing and handling the goods.
It comprises storage costs, insurance costs, spoilage costs, cost of funds tied up
in inventories etc.

ESSENTIALS OF INVENTORY CONTROL SYSTEM

For an efficient and successful inventory control there are certain important
conditions that are a follows:

(1) Classification and Identification of inventories: The usual inventory

of manufacturing firm includes raw-material, stores, work-in-progress and
component etc. To facilitate prompt recording the dealing, each item of the
inventory must be assigned a particular code number and it must be classified in
suitable group or sub-divisions. ABC analysis of material is very helpful in this
context.

( 22 Standardization and simplification of inventories: In order to

facilitate inventory control, the inventory line should be simplified. It refers to
the elimination of excess types and sizes of items. Simplification leads to
reduction in classification of inventories and its carrying costs. Standardization,
on the other hand, refers to the fixation of standards of raw material to be
purchased and specification of the components and tools to be used.

( 22 Setting the Maximum and Minimum limits for each part of

inventory: The third step in this process is to set the maximum and minimum
limits of each item of the inventory. It avoids the chances of over-investment as
well as running a short of any item during the cost of producing. Reordering
point should also be fixed beforehand.

( 22 Economic Order Quantity: It is also a basic inventory problem to

determine the quantity as how much to order at a time. In determining the EOQ,
the problem is one to set a balance between two opposite costs, namely, ordering
costs and carrying costs. This quantity should be fixed beforehand.

(5)Adequate storage Facilities: To make the system of inventory control

successful and efficient one, it is also essential to provide the adequate storage
facilities. Sufficient storage area and proper handling facilities should be
organized.

(6)Adequate Reports and Records: Inventory control requires the maintenance

of adequate inventory record and reports. Various inventory records must
contain information to meet the needs of purchasing, production, sales and
financial staff. The typical information required about any class of inventory
may be relating to quantity on hand, location, quantities in transit, unit cost,
code for each item of inventory, reorder point, safety level etc. Statements forms
and inventory records should be so designed that the clerical cost of maintaining
these records must be kept a minimum.
(7)Intelligent and Experienced Personnel: An important requirement of
successful inventory control system is the appointment of qualified and
experienced staff in purchase and stores department. Mere establishment of
procedures and the maintenance of records would not give the desired results as
there is no substitute for sincere and devoted as well as experienced hands.
Hence, the whole inventory control structure should be manned with trained,
qualified, experienced and devoted employees.

(8)Coordination: There must be proper coordination of all departments

involved in the process of inventory control, such as purchase, finance,
receiving, approving, storage and accounting departments. These all departments
have different outlook and objects in inventory management but financial
manager has to coordinate them all.

(9)Budgeting: An efficient budgeting system is also required. Preparation of

budgets concerning materials, supplies and equipment to ensure economy in
purchasing and use of material is also necessary.

(10)Internal Check: Operating of a system of internal check is also vital in

inventory management so that all transactions involving material supplies and
equipment purchase are properly approved and automatically checked.

FACTORS AFFECTING STOCK INVESTMENT LEVEL

These factors can be put in two categories: General and Specific.

 General Factors: These factors include those factors, which affect directly or
indirectly level of investment in any asset. These are as follows:

(1) Nature of Business

(2) Size and scale of Business
(3) Expected Sales Volumes
(4) Price Level Changes
(5) Availability of Funds
(6) Management view Point

Specific Factors: These factors are directly related with investment in stock.

Following are the main factors:

(1) Seasonal Character of Raw Materials: If supply of raw material used

in the firm is seasonal, the firm will require more funds for the purchase of raw
material during season. Usually, raw materials are available at cheaper rates
during is production season.

(2) Length and Technical Nature of the production process: If production

process is lengthy and of technical nature, higher investment is required in raw
material. In the technical nature production process, quality control of raw
material is given more emphasis.

(3) Terms of Purchase: If some concessions or discount in price or facilities of

credit are provided by suppliers on purchase of raw materials in huge quantity
then the firm is inspired for excessive purchase of goods and hence
comparatively more investment is required in inventory.
(4) Nature of End Product: Nature of end product also influences investment
in inventory. If the end product is a durable good, high investment will be
required because durable goods can be stored for a long period. On the other
hand, perishable goods cannot be stored for a long period. Hence, investment in
inventory of such products is low.

(5) Supply Conditions: If the supply of raw material is regular and there is no
possibility of interruption in future, high investment in inventories is not
required.

(6) Time Factor: The lead time of raw material time token in production
process and sale of product also influence investment in inventories. Longer the
period, higher will be the investment in inventories.

(7) Loan Facilities: If raw materials are purchased on credit or loan from the
bank or other financial institution can be obtained on the security of raw
material, lesser investment would be required. In the absence of such loan
facility, higher investment would be required.

(8) Price Level Fluctuations: If there are expectations of price rise in future
then raw materials may be store in high quantity and so more investment would
be required. On the contrary, if the prices of raw materials are expected to go
down in future, then comparatively lesser investment would be required.

(9) Other factors: Price control, rationing, change in taxation and export policy
of governments etc. also influence investment in inventories.
TECGNIQUES OF INVENTORY CONTROL
In managing inventories, the firm’s objective should be in consonance with the
wealth maximization principle. To achieve this, the firm should determine the
optimum level of investment in inventory. To deal with the problems of
inventory management effectively, it becomes necessary to be conversant with
the different techniques of inventory control. Although the concepts involved in
inventory management are production-oriented and are not strictly financial it is
important that the financial manager understand them since they have certain
built-in financial costs. The different techniques of inventory control may be
summarized as follows:

(1) Inventory level Technique

The main objective of stock control is to determine and maintain the optimum
level of stock so that there is neither shortage of any material nor unnecessary
investment in inventory. For this purpose, determination of maximum and
minimum limits of inventory and ordering level is necessary.

(2) Maximum stock Limit: This represents the quantity of inventory above
which it should not be allowed to be kept. The main object of fixing this limit is
to ensure that unnecessary working capital is not blocked in stores. The quantity
is fixed keeping in view the disadvantages of overstocking.
 The disadvantages of overstocking are:

1. Capital is blocked up unnecessarily in stores so there will be loss of interest.

2. More godown space is needed so more rent will have to be paid.
3. There are chances of deterioration in quality because large stocks will require
more time for use is the factory.
4. There is the possibility of loss due to obsolescence.
5. There is danger of depreciation in market values.

The maximum stock level is fixed by taking into account the

following factors:

(1) Amount of capital available for maintaining stores.

(2) Godown space available.

(3) Rate of consumption of the material.

(4) The time lag between indenting and receiving of the material.

(5) Length and technical nature of the production process.

 (6) Possibility of loss in stores by deterioration, evaporation etc.

There are certain stores, which deteriorate in quality if they are

stored for longer period.

(7) Cost of maintaining stores.

(8) Likely fluctuation in prices. For instance, if there is a possibility of a

substantial increase in prices in the coming period, a comparatively large
maximum stock level will be fixed. On the other hand, if there is the possibility
of decrease in price in the near future, stocks are kept at a much reduced level.

(9) The seasonal nature of supply of material. Certain materials are available
only during specific periods of year. So these have to be stocked heavily during
these periods.

(10)Restrictions imposed by the government or local authority in regard to

materials which there are inherent risks, e.g. fire and explosion.

(11)Risk of obsolescence, i.e., possibility of change in fashion and habit which

will necessitate change in requirements of materials.

The following formula may be applied to calculate the maximum

stock:
(1) Maximum Stock = Minimum Inventory + Lot size

(2) Maximum Stock = Reorder Level - Minimum consumption during Minimum

lead time + Lot size

Minimum Stock Limit (Safety or Buffer stock)

This represents the quantity below which stock should not be allowed to
fall. It is maintained to save from the situation of stock out in the event of
abnormal increase in material usage rate and/or delivery period. In fact
determination of this quantity is significant because of uncertainty in respect to
material usage rate and delivery period. The main purpose of this level is to
ensure that production is not held up due to shortage of any material. This level
is fixed for all items of stores and following factors are taken into account for
the fixation of this level:

(a) Lead time i.e. time lag between intending and receiving the material.

(b) Rate of consumption of the material during the lead time.

(c) Re-order Level

The following formula is applied to calculate Minimum Stock:

Minimum Stock = Re-order Level - Normal usage during Normal Lead

time

But if normal usage and normal lead time is not known then average usage will
be treated as normal usage and average re-order will be treated as normal re-
order period.

Re-ordering Level (Ordering Level)

It is the point at which if the stock of the material in stores reaches, the
storekeeper should initiate the purchase requisition for fresh supply of material.
This level is fixed somewhere between maximum and minimum level is such a
way that the difference of quantity of the material between the reordering level
and the minimum level will be sufficient to meet requirements of production up
to the time of fresh supply of the material. It is fixed after taking into
consideration the following factors:
(a) Rate of material usage: Generally this rate is found out as usage rate per
day, pre week or per month. The quantity of production fluctuates according to
demand of the product which results in variation in usage rate.

Hence, the following three factors:

(i) Maximum usage rate: It implies quantity of material required at maximum

capacity production.
(ii) Minimum usage rate: It implies quantity of material required at capacity
production in most unfavorable business conditions.

(iii) Normal or average Usage Rate: It implies quantity of material required at

capacity production under normal business conditions.

(b) Ordering Period: The time taken in preparing the order for purchase of
material is called ordering period. In some concerns this period may be
significant but in large concerns this period is significant because before placing
the order the purchase manager has to trace out the best suppliers, after that only
he places the order.

© Delivery, Lead or Procurement Time: The time taken from the date of
placing the order to the date of delivery by the suppliers is called procurement
 time. The maximum, minimum and average procurement time should also be
determined.

(D) Minimum Stock Level: This is the level of stock below which stocks
should normally not be allowed to fall.

Calculation of Re-order Point:

After taking into account the above facts re-order quantity is ascertained. For
this purpose, the following formula is applied:

Situation1:

When rate of usage and lead time are known with certainty;

Re-order point = Rate of usage x lead time.

Situation2:

When rate of usage is known with certainty and lead time is also known but is
variable:

(i) Re-order point = Minimum Inventory + Average usage during Normal lead
Time.
(ii) Re-order point = Rate of usage x Maximum Lead Time.
Situation3:

When rate of usage and lead time is known but variable and lead time is known
with certainty:

(i) Re-order point = Minimum Inventory +

Average usage during lead time.
(ii) Re-order point = Maximum Usage rate x
Lead time.

Situation4:

When the rate of usage and lead time are known and are variable;

(i) Re-order point = Minimum Inventory + Average usage during lead period.
(ii) Re-order point = Maximum Usage rate x Maximum Lead time.

Danger Level

This means a level at which normal issues of the material are stopped and issues
made only under specific instructions. The purchase officer will make special
arrangements to procure the materials reaching at their danger levels so that the
production may not stop due to shortage of materials. It is determined as
follows:

Danger level = Average Consumption x Maximum Re-order period for

Emergency Purchase

ECONOMIC ORDER QUANTITY TECHNIQUE

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 lost in which it has to be purchased on replenishment. If
the firm is planning a production run, the issue is how much production to schedule
(or how much to make). These problems are called order quantity problems, and
the task of the firm is to determine the optimum or economic order quantity (or
economic lot size). Determining an optimum inventory level involves two type of
costs: (a) ordering costs and (b) carrying costs: The economic order quantity is that
inventory level that minimize the total of ordering and carrying costs.

Ordering costs: the term ordering costs 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,
transporting, receiving, inspecting and storing (store placement). Ordering costs
increase in proportion to the number of order placed.
Ordering costs increase with the number of order; thus the more frequently
inventory is acquired, the higher the firm’s ordering costs. Ordering costs decrease
with increasing size of inventory.

Carrying costs: Costs incurred for maintaining a given level of inventory are
called carrying costs. They include storage, insurance, taxes, deterioration and
obsolescence. The storage costs comprise cost of storage space (warehousing cost),
stores handing costs and clerical and staff service costs (administrative costs).

Table: Ordering and Carrying Costs

Ordering Costs Carrying Costs

(1)Requisitioning (1) Warehousing
(2)Order placing (2) Handling
(3) Transportation (3) Clerical and staff
(4) Receiving inspecting and storing (4) Insurance
(5) Clerical and staff (5) Deterioration
Obsolescence

Carrying costs vary with inventory size. The economic size of inventory would thus
depend on trade-off between carrying costs and ordering costs.

Ordering and Carrying Costs trade-off: The optimum inventory size is

commonly referred to as economic order quantity. It is that order size at which
annual total costs of ordering and holding are the minimum. We can follow three
approaches-the trial and error approach, the formula approach and the graphic
approach-to determine the economic order quantity (EOQ).

Trail and Error Approach: The trail and error, or analytical, approach to
resolve the order quantity problem can be illustrated with the help of a simple
example. Let us assume the following data for a firm.

Estimated annual requirements, A 1,200 units

Purchasing cost (per order), (Rs) 50
Ordering cost (per order), (Rs.) 37.50
Carrying cost per unit, (Re) 1

Average inventory - (1200 + 0)/2 = 600 units

Average value - Rs 30,000 (600*Rs50)
If we choose the multiple order than we order 100units on monthly basis
Average inventory - (100+0)/2 = 50units)
Average value - 50 * Rs 50 = 2, 500
Many other possibilities can be worked out in the same manner.

1200
1000

800
Q/2
600

stock 400
200
50
0 2 4 6 8 10 15
 Time
Inventory level over time

Order- formula approach: The trial error, or analytical, approach is somewhat

tedious to calculate the EOQ. An easy way to determine EOQ is to use the order-
formula approach. Let us illustrate this approach.

Suppose the ordering cost per order, O, is fixed. The total order costs will be
number of orders during the year multiplied by ordering cost per order. If a
represents total annual requirements and Q the order size, the number of orders
will be A/Q and total order costs will be:

Total ordering cost = (Annual requirement * Per order cost)

Order size

TOC = AO/ Q

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

The total carrying costs will be the product of the average inventory units and the
carrying cost per unit.

If Q is the order size and usage is assumed to be steady, the average inventory will
be.

Average inventory = order size = Q

2 2

And total carrying costs will be:

 Total carrying cost = Average inventory
* Per unit carrying cost

TCC = Qc
2
The total inventory cost, then, is the sum of total carrying and ordering costs:
Total cost = Total carrying cost + Total order cost

TC = Qc + AO
2 Q

Equation (4) reveals that for a large order quantity, Q, the carrying cost will
increase, but the ordering costs will decrease. On the other hand, the carrying
costs will be lower and ordering cost will be higher with the order quantity. Thus,
the total cost function represents a trade-off between the carrying costs and ordering
costs for determining the EOQ.

To obtain the formula for EOQ, Equation (4)is differentiated with respect to Q and
setting the derivative equal to zero, we obtain:

Economic order quantity = 2* quantity required * ordering cost

Carrying cost
EOQ = 2AO
C
Graphic approach:

The economic order quantity can also be found out graphically. Figure illustrates
the EOQ function. In the figure, costs-carrying, ordering and total- are plotted on
vertical axis and horizontal axis is used to represent the order size. We note that
total carrying costs increase as the order size increasers, because, on an average, a
larger inventory level will be maintained, and ordering costs decline with increase in
order size means less number of orders. The behaviors of total costs line is
noticeable since it is a sum of two types of cost which behave differently with order
size. The total costs decline in the first instance, but they start rising when the
decrease in average ordering cost is more than offset by the increase in carrying
costs. The economic order quantity occurs at the point Q* where the total cost is
minimum. Thus, the firm’s operating profit is maximized at point Q*.
 Minimum total
Cost

Carrying cost
Costs ordering cost

Q* order size (Q)

Economic order quantity

Optimum productions run:

The use of the EOQ approach can be extended to production runs to determine
the optimum size of manufacture. Two costs involved are set-up costs and carrying
costs. Set-up costs include costs on the following activities: preparing and
processing the stock orders, preparing drawings and specifications, tooling
machines set-up, handling machines, tools, equipment and materials, over time etc.
Production runs but carrying costs will increase as large stocks of manufactured
inventories will be held. The economic production size will be the one where the
total of set-up and carrying costs is minimum.
 Reorder Point:

The problem, how much to order, is solved by determining the economic order
quantity, yet answer should be sought to be second problem, when to order. This is a
problem of determining the reorder point. The reorder point is that inventory level
at which an order should be placed to replenish the inventory. To determine the
reorder point under certainty, we should known: (a) lead time (b) average usage, and
(c) economic order quantity. Lead time is the normally taken is replenishing
inventory after the order has been placed. By certainty we mean that usage and lead
time do not fluctuate. Under such a situation, reorder point is simply that inventory
level which will be maintained for consumption during the lead time. That is:

Reorder point = Lead * Average usage

Safety stock:

The demand for inventory is likely to fluctuate from time to time. In particular,
at certain points of time the demand may exceed the anticipated level. In other
words, a discrepancy between the assumed (anticipated/expected) and the actual
usage rate of inventory is likely to occur in practice.
The effect of increased usage and/or slower delivery would be shortage of
inventory. That is, the firm would disrupt production schedule and alienate the
customers. The firm would, therefore, be will advised to keep a sufficient safety
margin by having additional inventory to guard against stock-out situation. Such
stocks are called safety stocks. This would act as a buffer/cushion against a possible
shortage of inventory. Safety stock may, thus, be defined as minimum
additional inventory to serve as safety margin/buffer/cushion to meet
unanticipated increase in usage resulting form unusually high demand and/or
uncontrollable late receipt of incoming inventory.
The carrying costs are the costs associated with the maintenance of inventory. Since
the firm is required to maintain additional inventory, in excess of the normal usage,
additional carrying costs are involved.
The stock-out and carrying costs are counterbalancing. The larger the safety stock,
the larger the carrying costs and vice versa. Conversely, the larger the safety stock,
the smaller the stock-out costs.

max. inventory

average usage
EOQ

avg. inventory----------------------------------------------------

re-order point-----------------------------------------------------
max.usage
safety stock -------------------------------------------------------

weeks lead time

re-order point under safety stock

VED Analysis: The VED analysis is used generally for spare parts. The
requirement and urgency of spare parts is different from that of materials. A-B-C
analysis may not be properly used for spare parts. The demand for spares depends
upon the performance of the plant and machinery. Spare parts are classified as: Vital
(V), Essential (E) and Desirable (D). The vital spares are a must for running the
 concern smoothly and these must be stored adequately. The non-availability of vital
spares will cause havoc in the concern. The E types of spares are also necessary but
their stocks may be kept at low figures. The stocking of D types of spares may be
avoided at times. If the lead time of these spares is less, then stocking of these
spares can be avoided.
The classification of spares under three categories is an important decision. A wrong
classification of any spare will create difficulties for production department. The
classification of spares should be left to the technical staff because they know the
need, urgency and use of these spares.

Assumptions: In applying EOQ formula, it is assumed that:

(i) Total demand is known with certainty.

(ii) The usage rate of material is steady.

(iii) Orders for replenishment on inventory are placed exactly when

inventories reach ordering level.

(iv) The ordering cost per order and holding cost per unit are constant.
EOQ and Total Inventory Cost: At EOQ level total inventory cost is
minimum. Total inventory cost is the sum of material purchase cost, ordering
cost and carrying cost

As per the formula:

Total Inventory Cost (TIC) = Material Purchase Cost + Total Ordering Cost
+ Total Carrying Cost

= (R x P) + (R/Po x Cp) + (Qo/2 x Ch)

Discount Offer and Economic Order Quantity:

Sometimes supplier offers different discounts on orders of large quantity. In

such a situation, at fist we should calculate EOQ and find out TIC without
considering discount offer. Then we should calculate TIC of each alternative
offer. That quantity will be EOQ at TIC is the lowest.

PERPETUAL INVENTORY CONTROL TECHNIQUE

Perpetual inventory system implies maintenance of up-to-date stock

records and in its broad sense it covers both continuous stock taking as well as
up-to-date recording stores books. According to Weldon, It may be defined as “a
method of recording stores balances after every receipt and issue to facilitate
regular checking and to obviate closing down for sock-taking”. The basic object
of this system is to make available details about the quantity and value of stock
of each item at all times. The system thus provides a rigid control over stock of
each item of store can regularly be verified with the stock records in the bin
cards kept in the stores and stores ledger maintained in cost office.
Advantages of Perpetual Inventory system:

1. Saving in time: The long and costly work of

stocktaking is avoided. Hence, interim and final financial accounts can be
prepared with greater convenience.

2. Arrangement of proper verification: In

this system a detailed and more reliable checking of the store is exercised
because of the continuous and random checking.

3. Verification of Errors: Errors are easily

located and rectified. This gives an opportunity for preventing a recurrence in
many cases.

4. Double control: Due to separate records in

Bin card and stores ledger, double control is maintained.

5. Optimum size of material: Overstocking

and under stocking can be avoided because perpetual inventory system covers
verification of stock with regards to maximum, minimum and other levels.
6. Lack of misuse of Material: Under this
system, effective control on issue of material is possible, thus misuse of material
can be avoided.

7. Moral Check on Stores staff: Due to

continuous checking, this system serves as a moral check on the stores staff.
They are discouraged from committing dishonesty.

8. Loss of stock due to obsolescence: It is

detected at an early stage and so timely action can be taken to prevent
recurrence.

THE SELECTIVE INVENTORY CONTROL OR ABC SYSTEM OF

CONTROL

Most manufacturing firms find themselves confronted with virtually

thousands of different inventory items. Most of these items are relatively
inexpensive, while other items are quite expensive and account for a large
portion of the firm’s investment. Some inventory items, although not expensive,
turnover slowly and therefore, they require a high average investment. The firm
should classify them into A.B.C category items. Category A will include more
expensive items (in cost of product) with high investment and it will require
more intensive control.
The ‘B’ group will consist of the items accounting for the next largest
investment.

The ‘C’ group will consist of a large number of items of inventory accounting
for small investment.

The ‘A’ items require intensive inventory control and most sophisticated
inventory control techniques should be applied to these items.

The ‘B’ items can be controlled using less sophisticated technique, and their
level can be viewed less frequently than ‘A’ items.

The ‘C’ items can receive the minimum attention: they will probably be ordered
in large quantities in order to obtain them at the lowest price.

Though the ABC technique is a good technique but it cannot be universally

applied. Certain items of inventory may be inexpensive but may be critical to the
product in process and cannot be easily obtained. Therefore, they may require
special attention.

These types of items must be treated as “A” class items even though, using the
broad framework, they would be “B” or “C” class items.
Although, not perfect, the ABC system is an excellent method for determining
the degree of inventory control efforts required to expand each item of
inventory.

The following points should be kept in mind for ABC analysis:

(1) Where items can be

substituted for each other, they should be preferably treated as one item.
(2) More emphasis
should be given to the value of consumption and not to price per unit of the item.
(3) All the items
consumed by an organization should be considered together for classifying as A, B
or C instead of taking item as spare, raw materials, semi-finished and finished items
and then classifying as A, B and C.
There can be more then three classes and the period of consumption need not
necessarily be one year
 Application of ABC Analysis:
ABC analysis can be effectively used in Material
Management. The various stages where it can be applied are:
1.Information of items which require higher degree of control.
2. Stock records
3. Priority treatment to diffrent items.
4.Determination of safty stock items.
5.Stores Layout
6.Value analysis

(2) Just-in-time (JIT) System:

Japanese firms popularized the just-in-time (JIT)
system in the world. In a JIT system material or the manufactured components and
part arrive to the manufacturing sites or stores just few hours before they are put to
use. The delivery of material is synchronized with the manufacturing cycle and
speed. JIT system eliminates the necessity of carrying large inventories, and thus,
saves carrying and other related costs of manufacturer. The system requires perfect
understanding and coordination between the manufacturer and supplier in terms of
the timing of delivery and quality of the material. Poor quality material or
complements could halt the production. The JIT inventory system complements the
total quality management (TQM). The success of the system depends on how well
a company manages its suppliers. The system puts tremendous pressure on
suppliers. They will have to develop adequate system and procedures to satisfactory
meet the needs of manufacturers.
System of Accounting for Material Issued/Inventory Systems

Either the periodic inventory system or the perpetual inventory system may be
used to account for materials issued to production and ending materials inventory.

Periodic Inventory System

Under the periodic inventory system, the purchase of

materials is recorded in Purchase of Raw Materials Account. The
opening/beginning inventory, if any, is recorded in a separate Materials Inventory-
Opening Account. The materials available for use during a period equal purchases
plus opening inventory. A physical count is made of the materials on hands at the
end of the period to arrive at the closing/ending materials inventory. The cost of
materials for the period is determined as shown in Exhibit:

Cost of Materials Issued

Materials inventory-opening
+ Purchases
= Materials available for use
- Materials inventory-closing (based on physical count)
= Cost of materials issued
 The entire book inventory is verified at a given date by an actual count of materials
on hand. This physical inventory is usually taken near the end of the accounting
year/period. This method provides for the recording of the purchases on a daily
basis but does not provide for a continuous inventory-taking. Neither a physical
count is made of the quantity of goods on hand, nor the value of the inventory in
determined by using an appropriate pricing method and attaching costs to units
counted. It is assumed that goods not on hand at the end of the period have been
sold. There is no system and accounting period, and they can be discovered only at
the end.

INVENTORY TURNOVER RATE TECHNIQUE

One important technique of inventory control is to use inventory turn over

ratios. These ratios are calculated to asses the efficiency in use of inventories.
Following control ratios can be computed for inventory analysis:

(i) Inventory Turnover Ratio = Cost of goods sold/ Average Inventory

Where Average Inventory = (Opening Inventory + Closing Inventory)/2

Inventory Turnover Ratios ca be calculated separately for raw materials and

finished goods.

(A) Raw Material Turnover Ratio = Raw Material Consumed/ Average

stock of Raw material.

(B) Finished Goods Turnover Ratio = Cost of Goods Sold/ Average Stock
of Finished Goods
 Average Age of inventory of inventory Turnover in Days = Days during the
period/ Inventory Turnover Ratio

(ii) Average inventory to total cost of production = (Average Inventory/

total cost of production) x 100

(iii) Slow Moving Stores to Total Inventory = Average Cost of Slow

Moving Stores/Average Inventory

(iv) Inventory Performance Index = (Actual Material Turnover Ratio/

Standard Material Turnover Ratio) x 100

These ratios provide a broad framework for the control and provide the basis for
future decisions regarding inventory control. The ratios provide a tough
indication of when Inventory levels are going to be high. Even if it appears from
the ratio that the levels are too high there might be a perfectly good reason why
the level of Inventory is being maintained. The ratios also indicate the situation
and trend. However, the limitation of ratios should be kept in mind. They are not
an end themselves, but only tools of sound Inventory Management.

FINANCIAL MANAGER’S ROLE IN INVENTORY MANAGEMENT

Inventory represents a large investment by manufacturing concern:

therefore, great emphasis must be placed on its efficient management. Though,
 the operative responsibility for Inventory management lies with the inventory
manager, the financial manager must also be concerned with all types of
inventories- raw materials, work-in-progress and finished goods. He must
monitor Inventory levels and see that only an optimum amount is invested in
Inventory. He should be familiar with the Inventory control techniques and
ensure that Inventory is managed well.

He should try to resolve the conflicting view points of all the departments in
order to have efficient inventory management. He has to act as a careful
inspector levels. He should introduce the policies which reduce the lead time,
regulate usage and thus, minimize safety stock. All these techniques of
Inventory management lead to the goal of wealth maximization.

VALUATION OF INVENTORIES

OBJECTIVE:

A primary issue in accounting for inventories is the determination of the value at

which inventories are carried in the financial statements until the related
revenues are recognized. This statement deals with the determination of such
value, including the ascertainment of cost of inventories and any write-down
thereof to net realizable value.

1. This statement should be applied in accounting for inventories other

than:

(a) Work-in-progress arising under construction contacts, including directly related

service contracts.

(b) Work-in-progress arising in the ordinary course of business of service providers.

(c) Shares, debentures and other financial instruments held as stock-in-trade.

(d) Producer’s inventories of livestock, agricultural and forest products and mineral
oils, ores and gases to the extent that they are measured at net realizable value in
accordance with well established practices in those industries.

2. The inventories referred are measured at net realizable value at certain

stages of production. This occurs, for example, when agricultural crops have
been harvested or mineral oils, ores and gases have been extracted and sale is
assured under a forward contract or a government guarantee or when a
homogenous market exists and there is a negligible risk of failure to sell. These
Inventories are excluded from the scope of this statement.

DEFINITIONS

The following terms are used in this statement with the meanings specified:

Inventories are assets:

(a) Held for sale in the ordinary course of business.

(b) In the process of production for such sale, or
(c) In the form of materials or supplies to be consumed in the
production process or in the rendering of services.

1. Inventories encompass goods purchased and held for resale, for example,
merchandise purchased by a retailer and held for resale, computer software held
for resale, or land and other property held for resale. Inventories also encompass
finished goods produced, or work-in-progress being produced, by the enterprise
and include materials, maintenance supplies, consumables and loose tools
awaiting use in the production process. Inventories do not include machinery
spares which can be used only in connection with an item of fixed asset and
whose use is expected to be irregular; such machinery spares are accounted for
in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets.

2. Inventories should be valued at lower of cost net realizable value.

3. Cost of Inventories

The cost of inventories should comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to their present
location and condition.

4. Costs of Purchase

The costs of purchase consist of the purchase price including duties and taxes
(other than those subsequently recoverable by the enterprise from the taxing
authorities), freight, inwards and other expenditure directly attributable to the
acquisition. Trade discounts, rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase.
5. Costs of Conversion

The costs of conversion of inventories include costs directly related to

the units of production, such as direct labour. They also include a systematic
allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods. Fixed production overheads are those
indirect costs of production that remain relatively constant regardless of the
volume of production, such as depreciation and maintenance of factory
buildings and the cost of factory management and administration. Variable
production overheads are those indirect costs of production that vary directly, or
nearly with the volume of production such as indirect materials and indirect
labour.

6. The allocation of fixed production overheads for purpose of their inclusion in

the costs of conversion is on based on the normal capacity of the production
facilities. Normal capacity is the production expected to be achieved on an
average over a number of periods or seasons under normal circumstances, taking
into account the loss of capacity resulting from planned maintenance. The actual
level of production may be used if it approximates normal capacity. The amount
of fixed production overheads allocated to each unit of production is not
increased as a consequence of low production or idle plant. Unallocated
overheads are recognized as an expense in the period in which they are incurred.
In periods of abnormally high production, the amount of fixed production
overheads allocated to each unit of production is decreased so that inventories
are not measured above cost. Variable production overheads are assigned to
each unit of production on the basis of the actual use of the production facilities.

7. A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are produced
or when there is a main product and a by- product. When the costs of conversion
of each product are not separately identifiable, they are allocated between the
products on a rational and consistent basis. The allocation may be based, for
example, on the relative sales value of each product either at the stage in the
production process when the products become separately identifiable, or at the
completion of production. Most by- products as well as scrap or waste materials,
by their nature, are immaterial. When this is the case, they are often measured at
net realizable value and this value is deducted from the cost of the main product.
As a result, the carrying amount of the main product is not materially different
from its cost.

8. Other costs are included in the costs of inventories only to the extent that they
are incurred in bringing the inventories to their present location and condition.
For example, it may be appropriate to include overheads other than production
overheads or the costs of designing product for specific customers in the cost of
inventories.

9. Interest and other borrowing costs are usually considered as not relating to
bringing the inventories to their present location and condition and are,
therefore, usually not included in the cost of inventories.

10. Exclusions from the cost of Inventories

In determining the cost of inventories in accordance with paragraph 3. It is
appropriate to exclude certain costs and recognize them as expenses in the
period in which they are incurred. Examples of such costs are;
 1. Abnormal amounts of wasted materials, labour, or other production costs.

2. Storage costs, unless those costs are necessary in the production process
prior to a further production stage.

3. Administrative overheads that do not contribute to bringing the inventories

to their present location and condition, and

4. Selling and distribution costs.

11. The cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects should be
assigned by specific identification of their individual costs.

12. Specific identification of cost means that specific costs are attributed to
identify items of inventory. This is an appropriate treatment for items that are
segregated for a specific project, regardless of whether they have been
purchased or produced. However, when there are large numbers of items of
inventory which are ordinarily interchangeable, specific identification of costs is
inappropriate since, in such circumstances, an enterprise could obtain
predetermined effects on the net profit or loss for the period by selecting a
particular method of ascertaining the items that remain in inventories.

13. The cost of inventories, other than those dealt with in paragraph 11, should
be assigned by using the first-in, first-out (FIFO), or weighted average cost
formula. The formula used should reflect the fairest possible approximation to
 the cost incurred in bringing the items of inventory to their present location and
condition.

14. A variety of cost formulas is used to determine the cost of inventories other
than those for which specific identification of individual costs is appropriate.
The formula used in determining the cost of an item of inventory needs to be
selected with a view to providing the fairest possible approximation to the cost
incurred in bringing the item to its present location and condition.

The FIFO formula assumes that the items of inventory which were purchased
or produced first are consumed or sold first, and consequently the items
remaining in inventory at the end of the period are those most recently
purchased or produced. Under the weighted average costs formula, the cost of
each item is determined from the weighted average of the cost of similar items at
the beginning of a period and the cost of similar items purchased or produced
during the period. The average may be calculated on a periodic basis or as each
additional shipment is received, depending upon the circumstances of the
enterprise.

15. Techniques for the measurement of the cost of inventories, such as the
standard cost method or the retail method, may be used for convenience if the
results approximate the actual cost. Standard costs take into account normal
levels of consumption of materials and supplies, labour, efficiency and capacity
utilization. They are regularly reviewed and if necessary, revised in the light of
current conditions.

16. The retail method is often used in the retail trade for measuring inventories
of large numbers of rapidly changing items that have similar margins and for
 which is impracticable to use other costing methods. The cost of the inventory is
determined by reducing from the sales value of the inventory the appropriate
percentage gross margin. The percentage used takes into consideration inventory
which has been marked down to below its original selling price. An average
percentage for each retail department is often used.

17. The cost of inventories may not be recoverable if those inventories are
damaged, if they have become wholly or partially obsolete, or if their selling
prices have declined. The cost of inventories may also not be recoverable if the
estimated costs of completion or the estimated costs necessary to make the sale
have increased.

The practice of writing down inventories below cost to net realizable value is
consistent with the view that assets should not be carried in excess of a amounts
expected to be realized from their sale or use.

18. Inventories are usually written down to net realizable value on an item-by-
item basis. In some circumstances, however, it may be appropriate to group
similar or related items. This may be the case with items of inventory relating to
the same product line that have similar purposes or end uses and are produced
and marketed in the same geographical area and cannot be practicably evaluated
separately from other items in that product line. It is not appropriate to write
down inventories based on a classification of inventory, for example, finished
goods, or all the inventories in a particular business segment.

19. Estimates of net realizable value are based on the most reliable evidence
available at the time the estimates are made as to the amount the inventories are
 expected to realize. These estimates take into consideration fluctuations of price
or cost directly relating to events occurring after the balance sheet date to the
extent that such events confirm the conditions existing at the balance sheet date.

20. Estimates or net realizable value also take into consideration the purpose for
which the inventory is held. For example, the net realizable value of the quantity
of inventory held to satisfy firm sales or service contracts is based on the
contract price. If the sales contracts are for less than the inventory quantities
held, the net realizable value of the excess inventory is based on general selling
prices.

Contingent losses on firm sales contracts in excess of inventory quantities held

and contingent losses on firm purchase contracts are dealt with in accordance
with the principles enunciated in Accounting Standard (A.S) 4, contingencies
and events occurring after the balance sheet date.

21. Materials and other supplies held for use in the production of inventories are
not written down below cost if the finished products in which they will be
incorporated are expected to be sold at or above cost. However, when there has
been a decline in the price of materials and it is estimated that the cost of the
finished products will exceed net realizable value, the materials are written
down to net realizable value. In such circumstances, the replacement cost of the
materials may be the net available measure of their net realizable value.
An assessment is made of net realizable value as at each balance sheet
date.

22. Disclosure.

The financial statements should disclose:

 The accounting policies adopted in measuring inventories, including the cost
formula used, and The total carrying amount of inventories and its classification
appropriate to the enterprise.

24. Information about the carrying amounts held in different classifications

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

DATA COLLECTION

In analysis of inventory of EATON, We collect the data by the different sources.

We collect the primary and secondary data.

SECONDARY DATA – The secondary data are those data the already in
presence for specific purpose we use the secondary data about inventory to looks
old records of the company .For the daily information about the items We show
 the MRN, ledger register and daily issue slip of materials the purchase register
and other documentary evidence used for the findings.

In the analysis of inventory the secondary data are not sufficient .then We
collect primary data.

PRIMARY DATA –
Primary data are those data that are originated very
first time or fresh data .with the help of primary data formulated the research
objectives. Primary data are the accurate attainable reliable and useful data.

1. Inventory control techniques used by the company

2. Inventory systems as perpetual and periodic systems.
3. Stock levels etc.
4. Companies website
A STUDY OF INVENTORY MANAGEMENT IN
EATON FLUIDE POWER

COMPANY PROFILE: -

Eaton is a diversified power management company and we have been doing

Business for nearly 100. Eaton is one of the multinational company. Because of the
pivotal role, Eaton is committed to creating and maintaining powerful customer
relationships built on a foundation of excellence. From the products manufacture to
dedicated customer service and support, they know what’s important for customers.

Eaton is a global technology leader in electrical components and systems for

power quality, distribution and control; Hydraulics components, systems and
services for industrial and mobile equipment; aerospace fuel, hydraulic and
pneumatic systems for commercial and military use; and truck and automotive drive
train and power train systems for performance, fuel economy and safety. Eaton has
approximately 70,000 employees and sells products to customers in more than 150
countries.

Eaton’s Industries: -

Automotive: -

Eaton's automotive segment, with sales of $1.8 billion in 2005, is a partner to the
passenger car and light-truck industry. Principal products include superchargers,
engine valves, valve train components, cylinder heads, locking and limited slip
differentials, sensors, actuators, intelligent cruise control systems, tire valves, fluid
connectors, decorative body moldings and spoilers.

Aerospace: -

Eaton's aerospace products are elevating aviation to new heights. When it comes to
Aerospace, Eaton's experience is deep and wide-ranging. Recognized for our
leadership in fluid power, electrical distribution and control, and sensor components
and systems, we can help you achieve many critical goals, including improved fuel
economy, aircraft safety and reliability.
Electrical: -

The Electrical segment had sales of $3.8 billion in 2005. The business is a
leader in electrical control, power distribution, uninterruptible power systems and
industrial automation products and services. The Electrical segment provides
customer-driven solutions that serve the changing needs of the industrial, utility,
light commercial, residential and original equipment markets.

Hydraulics: -

The Fluid Power segment had sal3.2 billion in 2005. The business is a
Worldwide leader in the design, manufacture and marketing of a comprehensive line
of reliable, high-efficiency hydraulic systems and components for use in mobile,
industrial and aerospace applications. Mobile and industrial markets include
agriculture, construction, mining, forestry, utility, civil engineering, offshore,
marine, material handling, machine tools, molding and primary metals.

HISTORY

Eaton Corporation has been serving the needs of its customers for nearly 100 years. During this time, we've
progressed from a small truck parts supplier to a multinational diversified industrial. Follow some of the key
historical events that contributed to Eaton's transformation below.

Major Milestones

1911 – J. O. Eaton, brother-in-law Henning O. Taube and V. V. Torbensen incorporated the Torbensen
Gear and Axle Co. in Bloomfield, NJ. The company built seven axles by hand in 1911. Just six years later,
axle production had increased to 33,000.

1914 – Torbensen Gear and Axle moved to Cleveland on the advice of Edith Eaton, J.O. Eaton's wife, and
was incorporated in Ohio as the Torbensen Axle Co.

1917 – Torbensen Axle Co. was sold to Republic Motor Truck Co., the nation's largest truck manufacturer
and Torbensen's biggest customer.

1922 – J. O. Eaton bought back his original company, Torbensen Axle Co., from Republic Motor Truck Co.

1923 – Company changed name to The Eaton Axle and Spring Co.

1923 – J. O. Eaton bought The Eaton Axle Co. plant at East 140th Street in Cleveland, The Perfection
Spring Co. (chassis leaf springs) and other properties from the receiver of Standard Parts Company.

1923 – The Eaton Axle and Spring Co. acquired Cox Brothers Manufacturing Co. Inc., Albany, NY
(bumpers).
1930 – Acquired control of Wilcox-Rich Corp. (engine valves, tappets, valve seat inserts, hardened and
ground engine parts), making Eaton the largest manufacturer of auto valves and tappets in the world, and
the Peterson Spring Co. (coil springs). Both acquisitions were from Detroit.

1932 – Changed name to Eaton Manufacturing Co.

1935 – Acquired Detroit Motor Valve Co., Detroit (engine valves).

1946 – Acquired Dynamatic Corp., Kenosha, WI (eddy current power devices).

1949 – J.O. Eaton died in his home in Cleveland at the age of 75.

1958 – Acquired Fuller Manufacturing Co. (heavy-duty truck transmissions), subsidiary Shuler Axle Co. and
Unit Drop Forge, Kalamazoo, MI.

1963 – Acquired Yale & Towne Manufacturing Co. (locks and hardware, and materials handling equipment)
and Dole Valve Co. (appliance and automotive valves).

1963 – Fuller Transmission Division introduced the Roadranger twin-countershaft truck transmission.

1966 – Company changed corporate name to Eaton Yale & Towne Inc., reflecting the 1963 merger with
Yale & Towne Inc.

1968 – Acquired Fawick Corp. (clutches, brakes and compound rubber golf club grips) and American
Monorail Co. (overhead conveyor cranes and stackers), both of Cleveland.

1969 – Chairman E. L. Ludvigsen retired; E. M. de Windt named chairman; William Mattie elected president.

1969 – Sold Dearborn Marine, which had been acquired in 1960.

1969 – Acquired Tinnerman Products, Inc. (fasteners), Cleveland, and McQuay-Norris Manufacturing Co.
(automotive parts distribution), St. Louis, MO.

1969 – Acquired assets of Troy Tool Products Co. Inc., Pinebrook, NJ (micro-miniature connectors for
electronics and communications industries). Built first "new philosophy" plant in Kearney, NE.

1970 – Acquired Char-Lynn Co. (hydraulic motors for agriculture and industrial equipment).

1971 – Stockholders approved change in company name to Eaton Corporation.

1978 – Acquired Cutler-Hammer Inc. (industrial control and power distribution, aircraft, commercial,
appliance and semiconductor) for nearly $400 million.

1981 – Eaton's defense business got a big push when the company was chosen as one of four prime
contractors for the B-1B, supplying electronic countermeasures system.

1983 – Closed nine U.S. plants as part of "Operation Shrink" and sold its Materials Handling businesses.

1983 – Expanded a 50/50 joint venture with Sumitomo Heavy Industries called SEHYCO (hydraulic motors
and transmissions). Established a 50/50 joint venture with Sumitomo (ion implanters). Purchased a 30
percent interest in Ghisalba SPA (industrial controls).

1988 – Acquired Cessna's Fluid Power Division, with plants in Glenrothes, Scotland, and Hutchinson, KS,
which increased the size of the company's hydraulics business by 50 percent.

1994 – Purchased Westinghouse's Distribution and Control Business Unit for $1 billion, the second largest
acquisition in the company's history.
1997 – Sold its worldwide Appliance Controls business to Siebe plc for $310 million.

1998 – Sold its worldwide Axle and Brake business to Dana Corp. for $287 million.

1999 – Acquired Aeroquip-Vickers Inc., a global manufacturer of engineered components and systems for
industrial, aerospace and automotive markets, for $1.7 billion. Aeroquip-Vickers is the largest acquisition in
Eaton history.

2000 – Eaton President and Chief Operating Officer Alexander M. (Sandy) Cutler becomes Eaton's 10th
chairman and chief executive officer and maintains the title of president.

2000 – Concluded the spin-off of its semiconductor equipment business, Axcelis Technologies Inc.

2001 – Purchased Sumitomo Heavy Industries Ltd.'s 50 percent interest in its fluid power joint venture
(SEHYCO), renamed Eaton Fluid Power Ltd.; this was the company's first wholly owned Japanese
business.

2001 – Sold its automotive Vehicle Switch/Electronics Division, a manufacturer of a wide range of
electromechanical and mechatronic controls for automotive applications, to Delphi Automotive Systems for
$300 million.

2001 – Eaton selected by Lockheed Martin to provide the primary fluid power system for the Joint Strike
Fighter program; award expected to generate nearly $1 billion for Eaton over the life of the contract.

2002 – Sold its Navy Controls business to DRS Technologies Inc. for $92.2 million.

2002 – Purchased the remaining 40 percent interest in its Jining Eaton Hydraulics Company Ltd. (JEHYCO)
hydraulic systems joint venture company in Jining, China.

2002 – Acquired the Boston Weatherhead division of Dana Corp. (hose, tubing and fluid connectors for fluid
power systems) for $130 million.

2002 – Purchased the aerospace circuit breaker line from Mechanical Products Inc.

2003 – Acquired the power systems business (power factor correction systems and harmonic filters for
power quality and energy management applications) of Commonwealth Sprague Capacitor Inc.

2003 – Purchased the electrical division of London-based Delta plc.

2003 – Industrial and Commercial Controls business and Cutler-Hammer group are reorganized to become
Eaton's Electrical group.

2003 – Introduced a low-emission, hybrid-electric-powered delivery vehicle in concert with FedEx Express, a
subsidiary of FedEx Corp., and advocacy group Environmental Defense.

2003 – Unveiled the world's first 5000-psi commercial aircraft hydraulic pump specifically designed for the
world's largest passenger aircraft – the Airbus A380.

2003 – Formed Intelligent Switchgear Organization LLC, a joint venture with Caterpillar Inc. to provide a
total systems approach to integrated, reliable electric power solutions for customer needs.

2004 – Formed a joint venture with Changzhou Senstar Automobile Air Conditioner Co. Ltd. in China to
produce automotive air conditioning hose and tube assemblies, and power steering hose and tube
assemblies.

2004 – Purchased UK-based Ultronics Limited and its advanced electro-hydraulic valve system technology.

2004 – Acquired the Electrum Group Ltd., a New Jersey-based company that provides power management
services and web-based software for telecommunications, data center and government applications.
2004 – Formed a joint venture with FAW Jiefang Automotive Co. Ltd., in Changchun, China to produce a
complete line of medium-duty truck transmissions.

2004 – Purchased Powerware Corp., the power systems business of Invensys plc, for $560 million.

2004 – Purchased the Walterscheid Rohrverbindungstechnik GmbH hydraulic connector business from
GKN plc for $48 million.

2005 – Purchased Pigozzi S.A. Engrenagens e Transmissões, an agricultural powertrain business located
in Caxias do Sul, Brazil.

2005 – Purchased the businesses of Winner Group Holdings Ltd., a China-based company that produces
hydraulic hose fittings and adapters for the greater Chinese market.

2005 – Purchased Mexican automotive lifter manufacturer Morestana S.A. de C.V.

2005 – Bought Tractech Holdings, Inc.

2005 – Purchased the industrial filtration business of Hayward Industries.

2005 – Acquired the assets of Pringle Electrical.

2005 – Bought Cobham plc's aerospace fluid and air division.

2005 – Bought PerkinElmer's aerospace division.

2006 – Eaton completes purchase of Synflex, maker of thermoplastic hoses and tubing, from Saint-Gobain
Performance Plastics Corp..

2006 – Eaton completes purchase of Ronningen-Petter industrial fine filtration business from Dover
Resources Inc.

2006 – Eaton acquires the diesel fuel processing technology and associated business assets of Catalytica
Energy Systems Inc.

2006 – Reached a definitive agreement with Dover Resources, Inc. to purchase its Ronningen-Petter
industrial fine filtration business.

2006 – Acquired Senyuan International Holdings Ltd. Its wholly owned subsidiary, Changzhou Senyuan
Switch Co., Ltd. is a well-established manufacturer of vacuum circuit breakers and other electrical
switchgear components in the People’s Republic of China.

2006 – Acquired the remaining 50 percent ownership of Schreder-Hazemeyer from Schreder SA, a
manufacturer of low- and medium-voltage electrical distribution switchgear based in Brussels, Belgium.
Eaton had acquired half ownership when it bought the electrical division of Delta plc in 2003.

2007 – Acquired the Power Protection Business of Power Products Ltd., a Prague-based distributor and
service provider for Powerware® and other uninterruptible power sources.

2007 – Purchased AT Holdings Corp., the parent of Argo-Tech Corp., a leader in high-performance
aerospace systems for commercial and military markets.

2007 – Acquired Aphel Technologies Ltd., a global supplier of high-density, fault-tolerant distribution
solutions for data centers, technical offices, laboratories and retail environments.

2007 – Purchased the fuel components division of Saturn Electronics & Engineering Inc.

2007 – Acquired the technology and related assets associated with SMC Electrical Products Inc.’s industrial
medium-voltage adjustable-frequency drive division.
2007 – Acquired Pulizzi Engineering, a leading manufacturer of AC power distribution, AC power
sequencing, redundant power and remote-reboot power management systems.

2007 – Sold its Mirror Controls Division, part of Eaton’s Automotive Group.

2007 – Acquired the assets of Babco Electric Group, a manufacturer of specialty low- and medium-voltage
switchgear and electrical housings for the Canadian gas and oil industry and in other harsh environments.

2007 – Completed the purchase of the small systems business of Schneider Electric’s MGE UPS Systems.
(Uninterruptible power supplies, power distribution units, static transfer switches and surge suppressors).

2007 – Acquired Arrow Hose & Tubing Inc., a manufacturer of specialty thermoplastic hose and tubing for
the industrial, food and beverage, and agricultural markets.

2007 – Ethisphere Institute names Eaton one of the world’s most ethical companies, an honor bestowed
annually on Eaton through at least 2010.

2008 – Honored by CALSTART, North America’s leading advanced transportation technologies consortium,
with a Blue Sky Award for pioneering heavy-duty hybrid drive technology for trucks.

2008 – UPS and CocaCola announced plans to purchase fleets of delivery vehicles using Eaton hybrid
drivetrains.

2008 – Guangzhou Yiqi Bus Co. of China announced plans to purchase more than 200 city buses using
Eaton diesel-electric hybrid power systems.

2008 – Eaton expanded European hydraulics business with acquisition of Integ Holdings Ltd.

2008 – Completed purchase of The Moeller Group, maker of commercial and residential building
components and industrial controls.

2008 – Completed acquisition of Phoenixtec Power Company Ltd., maker of uninterruptible power supply
systems.

2009 – Announced that Eaton’s truck and electrical businesses would support a $45.4 million U.S.
government stimulus grant to produce plug-in electric hybrid power systems for 378 vehicles, the nation’s
largest deployment of commercial hybrid vehicles and electrical charging infrastructure support.

2009 – Newsweek ranked Eaton’s environmental efforts among the top 10 percent of America’s 500 largest
corporations.

2010 – Solaris Bus & Coach of Poland announced commercial availability of the Solaris Urbino 12 city bus
with Eaton’s electric hybrid power system to reduce fuel consumption and emissions in Europe.

INTRODUCTION OF VARIOUS DEPARTMENTS

Receiving store

Work –Instruction:-

1. Confirm the material Receipt Report (RR) is made.

2. Ensure following documents the along with material
Supplier Inspection Report.
• Raw Material Test Certificate.
• Spl. Process certificate (If any)

Ensure the correctness of the same in line with Eaton’s requirements.

3. Check Material as per Quality Plan and sample size as Sampling Plan.

4. Submit the randomly picked part to the Heat Treatment lab for inspection of
Following parameter (As applicable part to part)
• Surface Hardness.
• Core Hardness.
• Case Depth.
• Microstructure.
5. Submit the 2 Nos. min. to the Metrology Lab for geometrical parameters inspection
i.e (As applicable to part to part)
• Roundness
• Straightness
• Cylindricity
• Surface Finish
• Angle
• Co-ordinate measurement (as per requirement)

6. Record the measurement data in format (Currently for Hitch Valve)

7. Inform the rejection status to all concern buyers and SDE’s and write on the
board displayed at Receipt Inspection.
8. Clear the O K material RR into the MFG-PRO and Put Green Tag on the
Material.
9. In case of Rejection, transfer the material to SUPRTN location in MFG-PRO
with Supplier code and Quantity.
10. Hold the rejected material for supplier / SDE /Buyer’s verification.
• Hold Local supplier material for 1 day (24 Hrs) after communication.
• Hold Outside supplier material for 2 days (48 Hrs) after communication.
11. If no response from the concerns persons mentioned in point no.10, reject the
Material into Mfg –Pro system

Supply chain management

Supply chain management (SCM) is the management of a network of interconnected

businesses involved in the ultimate provision of product and service packages required
by end customers (Harland, 1996). Supply Chain Management spans all movement and
storage of raw materials, work-in-process inventory, and finished goods from point of
origin to point of consumption (supply chain).
 Another definition is provided by the APICS Dictionary when it defines
SCM as the "design, planning, execution, control, and monitoring of supply chain
activities with the objective of creating net value, building a competitive
Infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and
measuring performance globally."

Idea: -
More common and accepted definitions of Supply Chain Management are:
 Supply Chain Management is the systemic, strategic coordination of the
traditional business functions and the tactics across these business functions
within a particular company and across businesses within the supply chain, for
the purposes of improving the long-term performance of the individual
companies and the supply chain as a whole (Mentzer et al, 2001).[1]
 Global Supply Chain Forum - Supply Chain Management is the integration of
key business processes across the supply chain for the purpose of adding value
for customers and stakeholders (Lambert, 2008)[2].
 According to the Council of Supply Chain Management Professionals
(CSCMP),
Supply chain management encompasses the planning and management of all activities
 involved in sourcing, procurement, conversion, and logistics management. It
also includes the crucial components of coordination and collaboration with
channel partners, which can be suppliers, intermediaries, third-party service
providers, and customers. In essence, supply chain management integrates
supply and demand management within and across companies. More recently,
the loosely coupled, self organizing work of businesses that cooperate to
provide product and service offerings have been called the Extended Enterprise.
 A supply chain, as opposed to supply chain management, is a set of
organizations directly linked by one or more of the upstream and downstream
flows of products, services, finances, and information from a source to a
customer. Managing a supply chain is 'supply chain management' (Mentzer et
al., 2001).
 Supply chain management software includes tools or modules used to execute
supply chain transactions, manage supplier relationships and control associated
business processes.
 Supply chain event management (abbreviated as SCEM) is a consideration of
all possible events and factors that can disrupt a supply chain. With SCEM
possible scenarios can be created and solutions devised.

INVENTORY MANAGEMENT AT EATON FLUIDE POWER

The company has complete and accurate knowledge of the stock across the units and

inventory management at all units greatly improved post implementation.

Matching aspiration with execution is an important ingredient for success,

especially for companies playing in the global market. And to execute well,

visibility into operations is a pre -requisite. As Eaton figured, a robust system can

provide this much needed visibility. So they chose MfgPro® Business One

application to automate operations across global locations. And reaped the

benefits.

Work Carride out at Eaton Industry

Need for the Project :

There was an edge Inventory in the Eaton which needs to liquidet to

save the companies inventory carring cost.

Actions taken for liquidation :

In EATON ABC Classification is the method used to categorize

inventory into groups based upon certain activity characteristics.

• ABC by velocity (times sold)

• ABC by sales dollars

• ABC by quantity sold / consumed

• ABC by average inventory investment

• ABC by margin.

ABC Classifications are used to develop inventory planning policies, set

count frequencies for cycle counting, slot inventory for optimized order

picking, and other inventory management activities.

Here the Classification is done based on the consumption which is:

Sum of = Qty consumed * Standard Cost

Classification Based on Consumption:

Class Cons Per No of Items % of Items

A 80% 574 5%

B 14% 1123 10%

C 6% 9705 85%

To liquidate we first checked all the Open sales order and according

to open sales order checked wiche part of the inventory can be full fill

that requirement.

In the stores there were many items such as DGMC2,CG5,DGMX1,

and seal kit wiche are required and available so we sent those item to

the warehouse for dispatch and the same way there were many items

which were in warehouse.

Also there are open sales order for the items which are already in

warehouse but not dispatched because of the due date issue. So we

changed the due date and dispatched it as early as possible to the

customer so by doing this we reduce our inventory carring cost as well

as gain customer satisfaction.

We cleared the inventory of RS 640925 by managing the inventory

against the open sales order

Then we check the consumption report of the several years and

acording to the data analysis we checked which parts are fast moving

and which are slow moving.

 The reason behind doing that analasys is to check if there is any

part convertable then to check what is the market demand for that item

if the item is in fast moving catageri then it could be send to the

conversion process.

The conversion of items can be perform inhouse as well as we send

it to other sub contracting companies which make the changes in the

valves configuration and make them usable for as assembly or the

finished product.

Acording to consumption we sent some items such as RG-06-A2-10 ,

RT-06-F4-10-INB to the sub contractor in Mumbai for convesion

which

Cost around Rs 284946.15

Also there were some items which have no consumption for last many
years also those items are non-convertable such as DGFN-01-20
costing around Rs.769346.66 and diffrent name plates costing
Rs.336524.81 so we informed this to the inventory management to take
apropriate action against this inventory.

Future scope of the Project

Convesion of the valves is one of the important and major

processs in liquidating the inventory there are may items in the

inventory which can be convertable by changing it’s configuration. To

make that item in use requred small changes but to make these changes

need team of technically sound people who must have the knowledge of

these valves and their application. So by using these consumption

analysis the items which can be fast moving and convertable can be

identify and it will help to reduce the inventory carring cost.

Interpretation:

The future of inventory management system at EATON industries appear to pretty

good, going by the response of our study.

WHAT CONTRIBUTION WOULD THE PROJECT MAKE ?

Out of all types of feasibility, technical feasibility generally is the most difficult to

determine. It may be hubmly submitted that the thesis shall be useful for further
reserach as well as for the related industry for understanding an effective inventory

management.

CONCLUSION

It was really a great experience working in EATON, working under

such big presonalities, knowing new people and interacting with them
gave a newly way to life.

Thanks to Mr. shashikant Rauit sir & Mr. Manoj Doshil sir for giving
us the apportunity to work in EATON FLUIDE POWER...
SITES REFERRED

⇒ www.EATON.com

⇒ www.answer.com