A PROJECT REPORT

ON
A STUDY ON INVENTORY
MANAGEMENT SYSTEM IN
COMPANY"
Submitted By:
Sumit Soni
Roll No. 1405004198
Master of Business Administration
Sikkim Manipal University
UNDER THE GUIDANCE OF:
Dr. Prashant Sharma
Centre Code- 03487
(Vans InfoTech)
1

DECLARATION
I Sumit Soni, student of Sikkim Manipal University, hereby
declare that the project work titled A STUDY ON INVENTORY
MANAGEMENT IN COMPANY which is submitted to Sikkim
Manipal University in partial fulfillment of the requirements for the
degree of Master of Business Administration, is a record of original
research work done by me under the guidance of, Dr. Prashant
Sharma of Vans InfoTech, that this is genuine and has not been
submitted elsewhere for any other degree or diploma.

PLACE: Aligarh
Sumit Soni
DATE:
ROLL NO: 1405004198

ACKNOWLEDGEMENT
I have prepared this study paper for the A Study on Inventory
Management System in Company have derived the contents
and approach of this study paper through discussions with my
Colleagues, friends and internet as well as with the help of various
Books, Magazines and Newspapers etc.
I would like to give my sincere thanks to my guide Dr. Prashant
Sharma, friends who, through their guidance, enthusiasm and
counseling helped me enormously as I think there will be always
need for improvement. Apart from this, I hope this study would
stimulate the need of thinking and discussion on the topics like
this one.

INDEX
Sr. No.

Topic

1
2
3
4
5
6
7
8
9
10
11
12

INTRODUCTION TO THE STUDY

OBJECTIVE OF THE STUDY
NEED FOR THE STUDY
SCOPE OF THE STUDY
MANAGEMENT OF INVENTORY
CONCEPT OF INVENTORY MANAGEMENT
OBJECTIVES OF INVENTORY MANAGEMENT
TYPES OF INVENTORY
NEED TO HOLDING INVENTORIES
FACTORS INFLUENCING INVENTORY
ADVANTAGES OF INVENTORY CONTROL
RISK AND COST ASSOCIATED WITH
INVENTORIES
ESSENTIAL OF INVENTORY CONTROL SYSTEM
FACTORS AFFECTING STOCK INVESTMENT
LEVEL
INVENTORY CONTROL TECHNIQUES
REVIEW OF LITERATURE
RESEARCH METHODOLOGY

13
14
15
16
17
18
19
20
21
22
23

OBJECTIVES OF INVENTORY CONTROL IN

ORGANIZATION
FINANCIAL MANAGERS ROLE IN INVENTORY
MANAGEMENT
VALUATION OF INVENTORIES
DEFINITIONS
CONCLUSION
BIBLIOGRAPHY

Page
No.
5
6
7
7
8
8
9
11
12
13
14
14
15
17
19
32
37
39
71
72
73
81
82
4

INTRODUCTION TO THE STUDY

Inventory is the business largest asset .It is stock of item used in
business. Inventory represent one of most important asset that
most businesses posses, because the turnover of the inventory
represents one of the primary sources of revenue generation and
subsequent earnings for the companys shareholder and owners.
Inventory is very vital to every company that is without inventory
no company would survive. Inventory is meant for protection
and for economy in cost.
Keeping inventory of sufficient stock will help to face lead time
component, demand and supply fluctuation and any unforeseen
circumstance in the procurement of materials. Though to have
inventory is must, inventory is such a thing that will pile up and
creep into the area of profits to turn them as losses and can put
the company in red. It is therefore, necessary to have Control over
inventory to save the company from piling up inventories and to
avoid losses. Better said than done, is the word that suits
inventory Control.
The management of inventory is a key concern of all business. If a
company's inventory level is too low, it risks delays in fulfilling its
customers orders. If the inventory is too high, it is tying up
dollars that can be better used in other areas. It also risks
obsolescence and spoilage. Successful businesses keep their
5

inventory turns high, but also keep their service level at or above
the industry standard.
Inventory is a stock of goods required by an organization for its
successful operation. Inventory refers to materials procured,
stored and used for day to day functioning of the whole
organization. Inventory is directly related to production and
marketing department, still the finance department has to play a
vital role in the management of inventory. The purpose of
inventory management is to keep stock in such a way that there
is no overstocking or under stocking.
Inventory is one of the most expensive assets of many companies
representing as much as 50% of total invested capital. Inventory
Control relates to a set of policies and procedure by which an
industry determines which materials it will hold in stock and the
quality of each that it will carry in stock.
Inventory is the largest item in the current assets category and
must be accurately counted and valued at the end of each
accounting period to determine a companys profit or loss. So the
management of inventory is important. Inventory management is
the process of efficiently overseeing the constant flow of units
into and out of an existing inventory.
Inventory

management

is

very

important

function

that

determines the health of the supply chain as well as the impacts

the

financial

health

of

balance

sheet.

Every

organization

constantly strives to maintain optimum inventory to meet its

requirements and avoid over or under inventory that can impact

the financial figures.

OBJECTIVE OF THE STUDY

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 kept at a reasonable level.

NEED FOR THE STUDY

Inventories perform certain basic functions which are of crucial
importance in the firms production and marketing strategies.
Effective Control over the utilization of materials has much
bearing

on

profit

and

here

is

an

attempt

to

study

the
7

management of materials. This study helps the company to

detect and evaluate its own strength and weakness and also give
recommendation for the better inventory management.
Without inventory management it would be difficult for any
company to maintain Control and be able to handle the needs of
customers. Inventories are necessary for a firm to operate
efficiently and almost all business transactions involve the
delivery of a product or services in exchange of currency.

SCOPE OF THE STUDY

Inventory is the major element in the working capital of any
trading and manufacturing concern. The scope of the present
study extends to ensure proper inventory management and cost
Control. It provides a guideline for the management of the
materials of the company and helps to introduce necessary
changes as and where required.
The scope of inventory management concerns the fine line
between replenishment lead time, carrying cost of inventory,
asset management, inventory forecasting, quality management,
replenishment,

returns

and

defective

goods

and

demand

forecasting. Balancing these competing requirements lead to

optimal inventory levels, which is an ongoing process as the
business need shift and react to the wider environment

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.

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
9

in inventory are not earning a return for the company. Rather, on

the other hand, they are costing the firm money both in terms 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.

10

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) 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.
11

(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
Movement inventories
Movement inventories also called as transit or pipeline
inventory. Pipeline inventory exist because material cannot be
transported instantaneously between point of supply and point
of demand.
Buffer inventories
Buffer inventory also called as safety inventory. Its purpose is
to compensate for unexpected fluctuations in supply and
demand as well as unpredictable events such as poor delivery
reliability or poor quality of suppliers products. Generally
higher the level of buffer inventory, the better the firms
customer service.
12

 Cycle inventory
It is held for the reason that one or more stages in the process
cannot supply all the items it produces simultaneously. This
type of inventory result from the need to produce products in
batches and amount of it depends on volume decisions.
Decoupling inventory
Inventory is used to allow work centers or processes to operate
relatively independently. When such inventory are held even if
a machine breaks down the work would not stop
Anticipation inventory
This type of inventory is accumulated to cope up with expected
future demand or interruption in supply. It is a way for
manufacturers to maintain consistent operations when the
demand for the product is low.

NEED TO HOLDING INVENTORIES

Maintaining inventories involves tying up of the companys funds
and incurrence of storage and handling cost. If it is expensive to
maintain inventories, why do companies hold inventories? There
are those general motives for holding inventories;

Transaction motive

13

According to this s motive, an enterprise maintains inventories

to avoid bottlenecks in its production and sales. By maintaining
inventories, the business ensures that production is not
interrupted for want of raw materials, on the other hand and
sales also are not affected on account of non-availability of
finished goods, on the other.
Precautionary motive
Inventories are also held with a motive to have a cushion
against unpredicted business. There may be sudden and
unexpected spurt in demand for finished goods at times.
Similarly, there may be unforeseen slump in the supply of raw
materials at a time. In both cases, a prudent business world
surely likes to have some cushion to guard against the risk for
such unpredictable changes.

Speculative motive
An enterprise may also hold inventories to take the advantage
of price fluctuation. Suppose, if the prices of raw materials are
to increase rather steeply the enterprise would like to hold
more inventories than required at lower prices.

FACTORS INFLUENCING INVENTORY

The inventory management of an organization has an impact on
the whole system.
How much to buy at onetime and when to by this quantity.
This two fundamental things on which inventory Control depends.

14

Many factors govern these fundamental things. The prime factors

that govern these two fundamental things are;

Requirements
Quality in stock or on stock
Lead time
Obsolesce

ADVANTAGES OF INVENTORY CONTROL

Here are the following advantages of inventory control

Reduction in investment in inventory.

Proper and efficient use of raw materials.
No bottleneck in production.
Improvement in production and sales.
Efficient and optimum use of physical as well as financial

resources.
Ordering cost can be reduced if a firm places a few large orders
in place of numerous small orders.
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 as follows(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.
15

(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 customers 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.

ESSENTIAL OF INVENTORY CONTROL SYSTEM

For an efficient and successful inventory control there are certain
important conditions that are as follows:
(1)

Classification
inventories: The usual

and

Identification

of

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
16

code number and it must be classified in suitable group or

sub-divisions. ABC analysis of material is very helpful in this
context.
(2)

Standardization
inventories:
inventory

line

and

simplification

of

In order to facilitate inventory control, the

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.
(3)

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.

(4)

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.
17

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
18

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

19

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
its 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.
20

(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.

INVENTORY CONTROL TECHNIQUES

Inventory is being maintained as a cushion in supply of materials
for continuous production without causing stock out situation. This
cushion should not be suicidal to any organization. The following
scientific techniques and methods are being used in control of
inventory.
1.
2.
3.
4.
5.
6.

Inventory Management Techniques

Standardization
Selective Inventory Control
Just In Time
Perpetual Inventory System
Inventory Turnover Ratio
21

1. INVENTORY MANAGEMENT TECHNIQUES

I.

ECONOMIC ORDER QUANTITY:If the firm is buying raw materials, it has to decide lots 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. These problems are called order quantity
problems and the task of the firm is to determine the

optimum or economic order quantity.

(a) Ordering cost
The term ordering cost is used in case of raw materials and
includes the entire cost of acquiring raw materials.
(b) Carrying cost :
Cost incurred for maintaining a given level of inventory is
called carrying cost.
Economic Order Quantity is given by the formula:
EOQ =

2 AO /C

And the cost of inventory is given by formula:

Total cost of inventory = (A x P) + (A x Q)/EOQ + (EOQ x C)/
2
Where, A= Annual Consumption (in units)
O= Ordering cost per order (in Rs)
C= Carrying cost per unit (in Rs)
P= Price per unit (in Rs)

II.

Reorder Point

22

The reorder point is that inventory level at which an order

should be placed to replenish the inventory .To determine
reorder point:
(a)
Lead time is the time normally taken in replenishing
inventory after the order has been placed.
(b) Average usage
(c)
Economic order quantity
III. Safety stock
The demand for material may fluctuate from day to day. The
actual delivery time may be different from the normal lead time. If
the actual usage increases or the delivery of inventory is delayed
the firm can face problem of stock out, which can be costly. So, in
order to guard against the stock out the firm may maintain a
safety Stock.
2. STANDARDIZATION :
Standardization is very essential to control the inventory, as by
standardization reduction in variety of materials is possible. And
because of the reduction in variety the advantages are low cost,
low inventory, less storage stocks, conservation of materials,
variety reduction, less paper work, easily follow up with suppliers,
less number of orders.
The importance of this field has been recognized since the days of
F.W. Taylor , who first drew attention to this fundamental need in
any organization .Just as work study is necessary preliminary to
work simplification , and a basic technique for production control,
quality control, materials handling , estimated cost control, etc.
Standardization is preliminary necessity to design a basic
technique on build control and standardization procedure.
23

3. SELECTIVE INVENTORY CONTROL MANAGEMENT

Any manufacturing organization consumes few thousand items of
stores. A high degree of control of inventories of each item would,
therefore neither be practical considering the work involved, nor
worthwhile since all items are not of equal importance. Hence it is
desirable to classify or group items to control commensurate with
importance. This is the principle of selective control as applied to
inventories and the technique of grouping is termed as selective
technique.
Selective inventory means variation in the methods of inventory
control from item to item and this differentiation should be on
selective basis by classification. A company has to stock
thousands of items of raw materials, standard parts, stores and
spares, sub contract items, tools, stationary etc. To have better
control over the inventory/ stock on hand, selective inventory
control technique should be used in isolation/ or in conjunction.
Thus, selective control means selecting the area of control so that
required objective is achieved as early as possible without any
lost of time due to taking care of full area
Minimum loss of energy and efforts.
At maximum cost without loss of time.
There are following selective control techniques:

ABC Analysis
FSN Analysis
XYZ Analysis
VED Analysis
HML Analysis

a) ABC ANALYSIS
24

ABC Analysis is a selective control technique which is required to

be applied when we want to control value of consumption of the
items in Rupees obviously when we want to control value of the
consumption of the material we must select those materials
where consumption is very high.
In any company manufacturing, there are number of items which
are consumed or traded it may run into thousands. It is found
after number of studies for different companies that
Value

of No. of items

consumption

of

items (value in Rs )
70% of consumption
20% of consumption
10% of consumption

10% of no. of items

15% of no. of items
75% of no. of items

Grade

A
B
C

A items these are those items which are found hardly 5% 10%
but their consumption may amount 70% 75% of the total money
spend on materials.
B items these are those items which are generally 10% 15% of
the total items and their consumption amounts to 10% 15% of the
money spend on the materials.
C items these are larger number of items which are cheap and
inexpensive and hence insignificant. They are large in number of
running into hardly 5% 10% of the total money spends on the
materials.
A Class Items

B Class Items

C Class Items

(High

(Moderate

(Low consumption

consumption

consumption

Value)
25

value)
value)
Very strict control
Moderate control
No safety stocks or Low Safety stocks
very

low

Lose control
High safety stocks

safety

stocks
Maximum follow up Periodic follow up

Follow up and

and expediting

expediting in

Rigorous

value 1) Moderate value

exceptional cases
I.
Minimum value

analysis
analysis
Must be handled by Can be handled by

analysis
Can be fully

senior officers

delegated

management

b) FSN ANALYSIS
This type of analysis is more concerned from the point of view of
movement of the item or issue of the item under this type of
analysis.
F items are those items, which are fast moving i.e.in a given
period of time, say a month or a year they have been issued up
till number of items. Although fast moving does not necessarily
mean that these items are consumed in large items.
S items are those items which are slow moving in the sense
that in the given period of time they have been issued in a very
limited number of time.
N non moving items are those, which are not at all issued for a
considerable period of time.

26

Thus, stores department whos concerned with the moving of

items would like to know and classify that the items are storing in
the categories FSN. So that they can manage operate and plan
stores activity accordingly.
For example, for efficient operations it would be necessary that
fast moving items as far as possible should be stored as near as
possible to the point of issue. So that it can be issued with
minimum of handling. Also such items must be stored at the floor
level avoiding storing them at high heights.
Similarly, if the items are slow moving or issued once in a while in
a given period of time they can be stored in the interior of the
stores and even at the higher heights because handling of these
items becomes very rare.
Further it is necessary for stores in charge to know about non
moving items for various reasons:1. They mean unnecessary blockage of money and affecting the
rate of returns of the company.
2. Further they also occupy valuable space in the stores without
any usefulness and therefore it becomes necessary to identify
these items and go into details and find reasons for their none
moving and if justified to recommend to top management for
their

speedy

disposal

so

that

company

operations

are

performed efficiently.
Also inventory control to some extent can also be exercised on
the basis of FSN analysis.
For example, fast moving items can be controlled more severely,
particularly when their value is also very high. Similarly, slow
moving items may not be controlled and reviewed vey frequently
27

since their consumption may not be frequent and their value may
not be high.
c) XYZ ANALYSIS
This type of analysis is carried out from the point of view of value
of balance stocks lying in the stores from time to time and
classifies all the items as given below.
X items are those items whose value of balance stocks lying in
the stock is very high.
Y items are those items whose value of balance stock is
moderate.
Z items are those items whose value of balance stock lying in
the stocks is very low.
After knowing this type of classification and their items can be
taken to control the situation as shown below:
o From security point of view high value items must be stored
and kept under lock and key or if not possible they should be
kept in such a way that is always under supervision. Similarly
arrangement can be made for y and z items accordingly.
o From inventory control point of view we must know why there is
high inventory for X items. We should review inventory control
procedure for each and every high item because stock should
be maintained to take care of lead time consumption and also
to provide safety stocks. For high value items lying in stores we
should review the reasons for long lead time as well as demand
variations and see whether lead time consumption and safety

28

stocks

can

be

reduced.

Thus

proper

inventory

control

procedures can be developed on the basis of XYZ analysis.

Thus proper selective control methods should be selected to
control the materials and prevent from facing loss, taking
advantage and knowing what exactly is to be done.
d) VED ANALYSIS
VED analysis is carried out to control situation, which are critical.
When applied to material in VED analysis we try to identify
material according to their criticality to the production, which
means the material, without which the production will come to
stop and so on from this point of view material classified in three
categories:V- Vital
E- Essential
D- Desirable
Vital categories of the items are those items for the want of which
the production will come to stop. For example: - Power in the
Factory
Essential group of items are those items because of non
availability of which the stock out cost is very high.
Desirable group of items are those items because of non
availability of which there is no immediate loss of production and
stock cost is very less and it may cause minor disruption in the
production for a short time.

29

e) HML ANALYSIS
This analysis, analysis the material according to their prices and
then classifies them as H item or M item or L items.
H stands for high price,
M stands for medium price and
L stands for low price.
Since price is more concerned of purchase department mostly
purchase department people analyses the material according to
HML analysis.
HML analysis must be carried out from any one of the following
objectives or some of the objective as the case may be
When it is desire that purchasing responsibility should be
delegated to right level of people.
When it is desired to evolve purchasing policies then also HML
analysis is carried out i.e. whether to purchase in exact
quantities as required or to purchase in EOQ or purchase only
when absolutely necessary.
When the objective is to keep control over consumption at the
department level then authorization to draw materials from the
stores will be given to high level H item, low level for L items
and medium level for M items.
When it is desired to decide frequency of stock taking then very
frequently H category, very rarely L category and averagely M
category.
When it is desired to arrange security arrangements for the
items, then H items under lock and key, L items keep open on
the shop floor and under supervision for M items.
30

4. JUST IN TIME INVENTORY SYSTEM

Keeping in view the enormous carrying cost of inventory in the
stores and go downs, manufactures and merchandisers are asking
for more frequent deliveries with shorter purchase order lead
times from their suppliers. Today organizations are becoming
more and more interested in getting potential gains from making
smaller and more frequent purchase orders. In other words, they
are becoming interested in just in time purchasing system. Just in
time purchasing (JIT) is the purchasing of material or goods in
such a way that delivery of purchased items is assured before
their use or demand.
Just in time purchasing recognizes too much carrying costs
associated with holding high inventory levels. Therefore, it
advocates developing good relations with suppliers and making
timely purchases from proven suppliers who can make ready
delivery of goods available as and when need arises. EOQ model
assumes a constant order quantity whereas JIT purchasing policy
advocates

different

quantity

for

each

order

if

demand

fluctuates.EOQ lays emphasis on ordering costs to include

purchase costs quality costs and stock out. Just in time purchasing
takes into consideration all these costs and move outside the
assumptions of the EOQ model.
Advantages of JIT purchasing
1. Investment in inventory is reduced because more frequent
purchase orders of small quantities are made.
31

2. Carrying cost is reduced as a result of low investment in

inventory.
3. A reduction in the number of suppliers to be dealt with is
possible. Only proven suppliers who can give quick delivery of
quality goods are given purchase orders. As a result of this
reduction in negotiation time is possible. The use of long run
contracts with some suppliers with minimal paper work
involved is possible.
4. Quality costs such as inspection cost of incoming materials or
goods, scraps and rework costs are reduced because JIT
purchasing assures quick and frequent delivers of small size
orders which results in low level of inventories causing
minimum

possible

wastage.

Therefore,

JIT

purchasing

is

frequently applied by organizations dealing in perishable

goods.
5. PERPETUAL INVENTORY SYSTEM
The Chartered Institute of Management Accountants, London,
defines the perpetual inventory as a system of records
maintained by the controlling department, which reflects the
physical movements of stocks and their current balance. Bind
cards and the stores ledger help the movements of the stock on
the receipts and in maintaining this system as they make a record
of to physical movements of the stock on the receipts and issues
of the materials and also reflect the balance in the stores. Thus, it
is a system of ascertaining balance after every receipt and issue
of every material through stock record to facilitate regular
checking and to avoid closing down the firm for stocktaking. To
32

ensure the accuracy of perpetual inventory records (i.e. Bind card

and stores ledger), physical verification of the stores is made by
Bind cards and store ledger may differ from the actual balance of
stock as ascertained by physical verification. It may be done to
the following avoidable and unavoidable causes.
6. INVENTORY TURNOVER RATE TECHNIQUE
One important technique of inventory control is to use inventory
turnover ratios. These ratios are calculated to assess 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 can 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
33

(i)

Average inventory to total cost of production =

(Average Inventory/ total cost of production) x 100

(ii)

Slow Moving Stores to Total Inventory = Average

Cost of Slow Moving Stores/Average Inventory

(iii)

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.

REVIEW OF LITERATURE
Survey of the available literature relating to his field of study is a
must for the researcher so that he can keep himself updated in
his field and related areas. Without this it will not be possible for a
researcher to make a worthwhile contribution. Review of literature

34

in this study deals with the importance and necessity for

inventory management in an organization.
Inventory management can help business to be more profitable
by lowering their cost of goods sold and by increasing sales.
Inventory management is required at different 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.. Following paragraphs review the available
literature:
Mansi Aggarwal (2006) in his article An Introduction to
Inventory Management said that the primary and foremost
step

in

inventory

management

is

acquiring

accurate

information for inbound operations. The information so gained

in advance can be a crucial factor in improving the inbound
productivity. Setting up of an advanced inbound strategy and
execution framework can be done without too much of reengineering effort for the supply chain. The perfect way to
commence is to make the best use of information available and
establish a set of rules and regulations to harness the
information efficiently.
Steven Ronsworth
Inventory

(2005)

Management

mentioned

Review

that,

in

his

article

when

having

inventory, a company does not ever want to have too much of

a product, nor does it want to have not enough of that product
to meet demand. Inventory management helps to ensure that a
proper inventory is maintained at all times. Steven also says
that a proper inventory management has many benefits for
35

companies. Inventory management can help make it so that a

company has the exact inventory needed. No more, no less.
Inventory management is also an effective way to keep track of
exactly what products a company has.
Philip Slater (2007) in his article (Inventory Management
One Size Does Not Fit All) says that if there is one great
myth in inventory management it is that one single technique
will solve all inventory problems. Not that people believe that
one technique will solve all problems in all situations but that in
any given company one approach is all that is required to
manage all inventory. He also pointed out that, there is a wide
range of techniques and approaches that people use to
manage inventory. These include JIT, ABC and FSN, VED
analysis,

Risk

Management,

safety

stock

and

EOQs.

Sometimes they are used on a standalone basis and sometimes

in conjunction with each other. All are worthwhile techniques
when used appropriately.
Charles Atkinson, in his publication Point of sale, Inventory
Control, Retail and Money Management (October 25,
2005) indicates that there are three types of inventory that
require management: raw materials, finished goods and workin- progress. Raw materials can be cut down in a number of
different ways, most notably by ordering smaller batches with
more frequency from suppliers (JIT). Finished goods inventories
can be cut down in multiple ways as well, most notably by

36

either producing only when you actually have an order (JIT) or

by achieving more accurate demand projections.
Experts argue that inventory levels should decline markedly as
a

result

of

the

implementation

of

improved

inventory

management systems such as JIT. A paper by Rajagopalan

and Malhotra Have Inventories Declined: An Empirical
Study (2001) indicates that while it appears that the general
level of inventories has decreased across all industries since
the 1960s, it does not appear that the trend accelerated in the
1980s or thereafter, as JITs proponents might suggest.
A more recent study by Chen, Frank, and Wu, Optimal
Control

and

Equilibrium

Behavior

of

Production-

Inventory System (2003) indicates that, when studying

inventories on a firm level instead of on an industry level, there
appears to be a significant decrease in inventories since 1980.
However, Chen, Frank and Wu focus on the economy as a
whole. They do not focus on a particular industry, nor do they
focus on distribution, as opposed to production systems.
Apart from the tools and techniques, Mike Schramm (2009)
in his Five Tips to Inventory Management has suggested
certain tips to have a successful inventory management. They
are.
Sell the junk (even if you think its not junk).
Get a bank alt, and use it for everything
Gear up right.
Organize.
Regular maintenance is better than emergency cleaning.
37

 Adam. J Fein in his article Building a Lean Supply Chain,

(2006) said that there is a widely held, but inaccurate,
perception that new technologies have led directly to declines
in the inventory-to-sales ratio, an important indicator of buffer
inventory in the supply chain . in theory, information
technology-based supply chain practices such as just-intime(JIT) inventory management, warehouse automation, and
the introduction of bar codes should have allowed companies
to improve their management of orders and stockpiles of
materials.
Bruce D. Caldwell (2009) has mentioned some benefits of
ABC Analysis in his article The Benefits of ABC Analysis for
Inventory Reduction. Using theABC concept to analyze
Control inventory investment and turns is the simplest and
most efficient method. Most inventories are made up of
hundreds and possibly thousands of individual items necessary
to manufacture a companys products.
Ashwathappa, Productions and Operations Management
(2008) has stated that inventory management involves the
development and administration of policies , systems and
procedures which will minimize total costs relative to inventory
decision and related functions such as customer service
requirements, production scheduling, purchasing and traffic.
Lucey, Quantitative techniques for Management (2002)
defined

inventory

management

as

the

recording

and

monitoring of stock level, forecasting future demand and

deciding when and how to order.
38

 Juhi Gonzales in his article Inventory Control (1999) says

inventory management is making sure that items are available
when customers call for it, but not too much stock , so that
inventory turnover goals are met.
Bardia in Accounting And Finance For Managers (1988)
opines that for a firm to be successful, the proportion of
inventory to current asset should be kept at the minimum. Also
a

high

inventory

turnover

ratio

which

indicates

faster

movement of materials is advantageous to the firms. He also

points out that the proportion of finished / semi-finished
inventory should be kept at minimum.
Khadalwal (1985) on his book Inventory Management And
Stock Evaluation revealed that the selected units were found
to have recorded slower and declining rates of transmutation of
working capital. The main reason responsible for this situation
is the high share of inventories in current assets which ranged
between 40% and 70% with an increasing trend during the
period of study.
Jain in his book The Working of Stock Exchanges in India
(1988) has highlighted various facts of working capital
management in the state of Rajasthan. He opined that the cash
position of working capital should be improved by reducing
inventories and efficient collection of debts.
Rao (1990) in Equivalence of Inventory Control Models
evaluates the management of working capital and degree of
efficiency of managing inventories in the manufacturing
undertakings of Andhra Pradesh public sector. The analysis of
39

the structure of inventory reveals that there was overstocking

with regards to each and every component overstocking with
regards to each and every component of inventory in the
undertakings selected for study.
Mohan Reddy in Management of Working Capital (1991)
considered inventory formed the major chunk of current assets
of the sample private sector enterprises studied. Bigger
enterprises in the private sector carried the larger inventories
as compared to the smaller ones. Inventory turnover ratios
have shown that name of the private sector units carried on
inventory unduly in the aggregate.
Kurian Jose Aerthail in (1999) conducted a study to
Analyze the Efficiency of Inventory Management System
in KEL, mamala unit. The study revealed that due to improved
inventory management, the unit enables proper arrival of
goods, reducing lead-time
Arifa T. Mohammed in his book Stores and Inventory
Management (2004) conducted study on working capital
management, the suggestion made by her was that the
unnecessary inventories should be avoided as it may cause
loss to the concern.
Renju Mohan P.T

(2008)

conducted study on

stores

inventory management at Carborundum Universal Limited.

There should be strict Control over the A class items as well as
the vital items. Highly trained inventory managers and highquality software will help make inventory management a
success. The ROI of inventory management will be seen in the
40

forms of increased revenue and profits, positive employee

atmosphere, and an overall increase of customer satisfaction.
M.Z Babai and Y .Dallery IESM, (May 2005), the literature
dealing with inventory management policies is very rich and
has grown fast during the last year; they classify these policies
into

approaches

according

to

the

type

of

demand

information. In the first approach the policies suppose that

there is no advance demand information and the decisions are
made in real time using the inventory depletion.

RESEARCH METHODOLOGY
INTRODUCTION
Research is a systematized effort to gain new knowledge.
Research is an art of scientific investigation. According to Clifford
woody, Research comprises, defining and redefining problems,
formulation

hypothesis

of

suggestion

solution,

collecting,

organizing and evaluating to determine whether they fit the

formulation hypothesis.
A research is the systematic investigation into and study of
materials and sources in order to establish facts and reach new
conclusion.
RESEARCH DESIGN
The research design used as analysis in nature of analytical. A
research design is the determination and statement of general
research approach or strategy adopted for a particular project.

41

It is the heart of planning. The research design adopted for the

study is analytical in nature. It is the specification of methods and
procedures for acquiring the information needed. The research
design used in the study is descriptive research.
DATA COLLECTION
The source which are used mainly on secondary sources of data
which is collected from the audited books of accounts of
organization, annual reports and financial statements prepared
and published by the concern Journals , books and websites have
been referred to have an overview about the company.
TOOLS USED
o
o
o
o

Financial ratio
Correlation
Trend analysis
Inventory Techniques

LIMITATIONS OF THE STUDY

The study is limited for a limited period. Hence result
obtained can be applied for the selected period.
The study is mainly done with the secondary data and
figures drawn from accounting records, this has some
limitations and it affects the study also.

The financial ratios imply only the monitory aspects of the

functions of the firm. The ratios cannot be directly regarded
as indicator of good or bad performance of management.
42

 Accuracy and correctness of tools like ratio analysis is

depends upon the accuracy of published accounts.
The time available for the study was another constraining
factor.
The inventory management of organization is limited to the
extent of information made available through published
documents and personnel discussion.

OBJECTIVES OF INVENTORY CONTROL IN

ORGANIZATION
The main objectives of Inventory control are:
To reduce capital locked up.
To ensure that production does not suffer
To ensure that sale of finished goods is not affected
To avoid wide fluctuations in production.
To study the Inventory Management the several of interview
techniques

depending

on

the

situations

were

followed.

Discussions were carried out with various personnel of the

company to study the following 3 broad areas.
A.

PURCHASE CONTROL

B.

STORAGE CONTROL

C.

WAREHOUSE SYSTEM & PROCEDURE

43

To study the above a relationship and link was sought between

theory and practice. An evaluation was done to each stage and
suggestions were also made to improve the existing Inventory
control system.
A. PURCHASE CONTROL
I.

Purchase Department-

The prime responsibility of Purchase Department is to arrange

supply of various raw materials, consumables, spare parts etc. to
the

plant

for

departments

the

for

production

maintenance

purpose
and

and

operation

to

the

purpose.

other
The

materials should be procured at the right prices from right source

of supply.
II.

Purchase Procedure-

The following are some of the essential steps in this regard.

(a) Responsibility for Purchases - Functions
All purchase functions shall be the responsibility of the Materials
Manager posted in the plant. The purchase functions in other
offices

shall

be

handled

by

one

single

office

nominated/designated for the purpose. The indenters from

various departments should refrain from issuing inquiries, inviting
bids

entering

into

correspondence

or

negotiation

with

vendors/contractors. All requisitions for purchase duly processed

in accordance with the procedure laid down, hereinafter should be

44

forwarded to Materials Manager/Designated officer for necessary

action.
(b) Registration of Vendors
The purchase department is responsible for developing a list of
approved vendors for various types of materials, services. An
advertisement is issued in all the leading newspapers inviting
applications in the prescribed Performa for registration of
suppliers and contracts listing out various types of purchases and
services that are likely to be made during the next three to five
years. The applications received is scrutinized by a Committee
consisting of a representative from Technical, Finance and
Purchase Department (nominated by the General Manager) and to
ascertain the resources, capacity and quality of workmanship of
vendor. The Committee can also call the vendor and contractors
for

personal

discussions

and

seek

clarifications

on

the

applications and obtain such other information as may be

considered necessary by the Committee.
The list of approved vendors and contractors should be updated
at least every specified time by issuing a press advertisement.
(c)

Requisition to Purchase/Work

The

indenters

from

the

various

departments

will

raise

requisition called the Material Purchase Requisition for purchase

in the prescribed Performa. It should be ensured that the

45

requisition for purchase should be completed in all respects with

regard to:
Description of the material/equipment/scope of work.
Material of construction/specification
Temperature/Pressure/Standard if anywhere applicable.
Quantity and unit of measurement.
Date when delivery of material/services is required.
Name of vendor in case of the item is of proprietary nature.
Estimated value and budget head.
Whether item is a stock item/non-stock item.
The requisition for purchase of materials which have been
declared as stock-item will be raised by the stores Department
after the quantity in stock has reached the Re-order level as
determined for the respective items.
Such requisition amongst other particulars should also indicate
the minimum, maximum and re-order level the date on
which last supply was received and the average consumption per
month since last purchase.
The requisition for purchase of non-stock items will be invariably
rooted through the Stores Department which will endorse on the
requisition, the availability/non-availability. In case the item is
available, the quantity there of be indicated on the purchase
requisition so that the quantity to be purchased can be adjusted
by the Materials Manager in consultation with the indenter.

46

The requisition for purchase of capital items award of Civil Work,

erection contracts, contracts for repairs to plant and machinery
and

equipment

handling

and

transportation

of

materials,

repair/servicing of equipment hiring of casual labors. Selection of

contractors

for

repair/maintenance

of

township

and

plant

buildings, mechanical, electrical, isolation, provision of other

services and painting jobs on schedule of rate valid for one year
will be sent directly to the Materials Manager after the same are
approved by the competent authority.
All requisitions for purchase of materials or for award of work as
described above will be raised by the respective departments.
The Department Manager would ensure that the purchase
requisitions must indicate:
The budget provision. (This will be checked by F&A)
The amount utilized up to the previous requisition.
The estimated value of the present requisition and
The balance available under the budget head after booking
the present requisition.
(d) Record and Numbering of Requisitions
All purchase requisitions received in the purchase department
shall be entered department wise in a register maintained for the
purpose. The Indenting department shall allot a number to each
requisition and endorse the same on all copies of the requisition.
The numbering procedure should be such that the requisition can
be identified department-wise. The Purchase Department will
47

issue a report by the 15th of the following month listing out the
requisitions received during the previous month and their current
status

and

mail

the

same

to

the

respective

Indenting

Departments. A copy of these reports will be put to the General

Manager for his information. The Indenting Departments will
review the report from the Purchase Department and shall ensure
that the missing requisitions are traced and are handed over to
the Purchase Department promptly.
(e)

Enquiries/Invitation to Bid

On receipt of the requisitions from the various departments,

enquiries are issued by the Purchase Department as per the
procedure detailed below:
Enquiries to be issued in the prescribed Performa.
Enquiry document is suitably modified to conform to the
material/services proposed to be procured.
Enquiry document describes in detail the description of the
material/services the technical specifications etc.
The delivery time and the various general and special terms
and conditions governing the purchase/work.
The idea in prescribing the minimum number of vendors to whom
enquiries to be issued and bids to be obtained is to create a
healthy competition amongst the bidders, so that society is able
to procure materials and services at the most economical price.
Open tenders are invited for selecting contractors for performing
maintenance work, relating to civil, mechanical electrical and
48

instrumentation work against a rate contract (SOR) which will be

renewable every year. Press tenders for selecting such contractors
will be advertised in one of local English and another in local
language paper which has a good circulation: where fabrication of
equipment or major repairs to plant and machinery are involved,
the enquiry floated to all the major fabrication/repair shops for
determining the number and/or mode of enquiry to be issued the
requisition is evaluated on the basis of last purchase order or the
present estimated market value of the material/equipment
whichever is more.
Notwithstanding the forgoing, invitation of bids by press tender
will not be necessary in respect of:
1)

Purchase of proprietary items

2)

Items, the prices of which are fixed by the Government.

3)

Items, the import of purchase of which is canalized through a

Government Department or public sector undertaking and

4)

Items, standardized for particular brand/make.

5)

However, all purchases of proprietary items and such other

items the prices of which are fixed by the Government will
require prior approval of the Managing Director/Executive
Committee/Board of Director if the value of such purchase
exceeds

the

delegated

authority

of

the

General

Manager/Group Manager.
The competent authority, if he is satisfied may waive the
advertisement of tenders for such purchases, the value of which
does not exceed the power delegated to him for making
49

purchases. The General Manager/Group Managers will obtain prior

approval of E.D./Managing Director for waiving advertisement of
tenders where the purchase exceeds his delegated authority. The
General

Manager/Group

Managers

may

however

waive

advertisement of tenders in excess of their delegated authority of

the purchase is required to be made to meet an emergency in the
plant. In such cases post facto approval of the Managing Director
may be obtained later. Normally, such waivers may be resorted to
in the case of purchase of proprietary items or to cater to an
emergency in the plant whenever the competent authority waives
advertisement in the press for inviting bids, reasons are recorded
in writing. A monthly report on such waivers is submitted to the
Managing Director for his information by 15th of the following
month. NIL report should also be submitted in case there was no
waiver during the preceding month.
If the tender proposal to be advertised is for a work which
involves design and engineering amongst other things. It would
be preferable if the bids are invited in two parts viz. (a) Technical
and commercial unpriced bid and (b) Priced bid. The date of
opening the priced bid is fixed later than unpriced bid.
(f)

Time Allowed for Submission of Bids

Normally 2-3 weeks time is given to the vendors for submitting

their bids. In case of enquiries for engineering civil and fabrication
works where calculation is involve and it is not feasible to obtain
50

the bids early. The time limit for submission of bids may be
increased to four weeks.
Bidders are advice to indicate on the envelopes containing the
bid, the enquiry number, the date and time of opening the bid.
The bids shall be addressed to Materials Manager or such other
officer nominated to perform purchase functions.
Extension in due date may be done in consultation with indenting
department, if inadequate/no response to enquiry.
(g) Validity of Bids
Generally the bidders are advice to submit bids valid for 45 to 60
days. It is ensures by the Purchase Department that the orders
are placed on the successful bidder within the validity period of
the bid. If after opening of the bids, it is inevitable to charge the
specification of material/work, the revised specifications are
circulated to all the bidders who responded against the original
enquiry and bids will be obtained a fresh from all the bidders.
However occasions for changing specifications and asking bidders
to quote a fresh are rare and in all such cases prior approval of
the General Manager/Group Manager must be obtained.
The enquiry document stipulates that no bidder would be allowed
to revise/alter his bid after opening of the bids and within the
validity period. In case any bidder revises/alters his bid, the same
shall be rejected even through the revise bid may conform to
specification and be the lowest.
(h) Opening of Bids
51

The bids received against the open tender are opened on the date
and the time stipulated in the tender document as under:
All advertised bids to be opened publicly.
Bids not advertised (published) but where estimated value is
more than Rs.5 lakh bids should also be opened publicly.
For bids where value is less than Rs.5 lakh, public opening is
not a must but if representative of some bidders, who wish
to be present may be allowed..
All bids received are opened by the Purchase Department in the
presence of the representatives from the Indenting Department
and Finance Department. The bids opened are initiated and dated
on all pages by all the persons who attend the bid opening. In
case there is any cutting or alterations in the rates quoted or to
the prescribed terms and conditions, the same will also be
attested by all the persons attending the bid opening.
All the persons including the bidders should sign against their
name in token of having attended the bid opening. Bids opened
are read out to the vendors who attend the bid opening. `Enquiry
Response Sheet may also be filled giving details of tender
enquiry Number, Date, Due date, Opening date, Number of bids
received etc. and is signed by organizations representative.
Where and priced bids have been invited in two parts, i.e.
unpriced and priced bids, the unpriced bids is opened first. Any
clarifications/additional information required by Tender Committee
are sought in writing from the bidders. The bidders will have all
option to revise the price in the commercial bid before the same
52

is opened. In case any bidder wants to revise/alter the bid, he can

do so and submit the changes in the price in a closed envelope
before the due date. The commercial bid along with any revision
is opened on the appointed day and time in the presence of
bidders who wish to be present.
(i)

Late, Invalid and Unsolicited Bids

All bids received after the opening of bids are treated as `Latebids and will be ignored. All late bids are returned to bidders unopened. Bids which are not accompanied by the prescribed
earnest money deposit will be treated as `Invalid Bids and will be
endorsed as such. The tender documents stipulate that earnest
money can be deposited either in cash or by a Bank Draft or in
form of Bank Guarantee in the prescribed Performa attached to
the tender document. `Unsolicited Bids are not considered not be
opened and even though they may be the lowest will not be
entertained.
(j)

Quotation Comparison Statement (QCS)

After the tenders are opened a Quotation comparison statement

(QCS) is prepared by the Purchase Department. All the bids
received are listed in the QCS. In-valid bids are listed in a
separate statement and attached to the QCS. The QCS is checked
by an official of the Purchase Department (not below grade `N)
and both the persons who prepared and checked the QCS will sign
the same.
53

The bids conforming to the specifications and lowest in value will

be rated in the QCS, as lowest (L1). Second lowest (L2), third
lowest (L3). After the QCS has been checked and rated the
Purchase Department In charge forwards the same along with
bids in original to the Indenting Department for the review of the
bids and making recommendations for Purchase.
The review of QCS and selection of successful bidder is done
through
Manager

Tender

nominates

Committee.
a

Tender

The

General

Committee

Manager/Group

consisting

of

representative from Indenters Department, Purchase Department

and Finance Department, Purchase Department will forward the
relevant papers/file prior to the meeting to the members of the
Tender Committee is so required by them for review. The Tender
Committee keeps a return record of their discussion on the QCS
as and when they meet. The Tender Committee may obtain any
clarifications

from

the

bidders

as

may

be

necessary.

All

clarifications are sought through Purchase Department only. The

Indenting Department shall not enter into direct correspondence
with the bidders. All proposal for purchases detailed below shall
be referred to the Tender Committee (As may be appointed by
General

Manager/Group

Manager)

for

review

and

making

necessary recommendations.
(k) Selection of Successful Bidders
Normally the lowest bid which conforms to the specifications is
accepted. However, while the lowest bid even though conform to
54

the specifications is not accepted. Full justification for accepting

other than lowest bid shall be recorded in writing and approval of
the competent authority will be obtained.

(l)

Single Tender

Where in response to enquiry only one bid is received and the

purchase order is proposed to be finalized on a single tender,
approval of the competent authority is obtained as per the
delegation

of

powers,

while

according

such

approval

the

competent authority records the justification for making the

purchase on single tenders.
(m) Negotiation
Where the lowest acceptable bid received against the enquiry is
considered high or where there is scope for reduction in price in
the opinion of the Tender Committee (which may be recorded)
and negotiations are considered necessary.
Negotiation is conducted commencing with the technically
acceptable lowest four bidders. In conducting negotiations the
parties are called one after another starting with the lowest
bidder. The original lowest bidder can be given second change to
offer further reduction if the other bidders revises his price lower
than the original bid of the lowest bidder. The scope of negotiation

55

can be enlarged beyond the lowest four bidders in the following

circumstances:
1)

If the work to be awarded is intended to be split and

awarded to more than one contractor.

2)

If a ring is suspected and the negotiation with the initial four

lowest bidders do not yield satisfactory results.

3)

If higher bids are in very close proximity of the two lowest

bids and any change in quantities can change the rating of
the bidders.

If a single bid is received against the open enquiry. The same can
be accepted if the rates are considered reasonable. Otherwise,
negotiations are held with the bidder and a decision taken either
to accept the single bid or to resort to re-tender.
If a single bid is received against a limited enquiry normally it is
rejected and re-tendering resorted to. However, the competent
authority, if he is satisfied that it would be in the interest of
Organization, to accept the single bid received. He may do so and
record

reason

in

writing..

Such

bid

is

accepted

on

the

recommendations of the Tender Committee and concurrence of

the Finance Department.
(n) Guarantors
The Purchase Department obtains from the vendors/contractors
Bank guarantees in the Performa prescribed.
Advance payment
Performance Bond
56

 Free issue materials

The Bank Guarantee in respect of free issue materials may be
waived by the competent authority in such cases where he is
satisfied that the material issued to the vendor contractor will not
be moved out of the factorys/housing colonys secured work site.
(o) Amendment to Purchase Order
Any change/amendment to the purchase order/work order shall
be issued in writing after the same has been approved by the
competent authority. The amendment to purchase order shall be
issued in the prescribed Performa and shall be numbered serially.
All change orders where the terms and conditions are altered
and/or which have financial implications will be routed through
finance department for concurrence before the same is approved
by the competent authority. The amendments to the purchase
orders will also be raised in the same number and will be
distributed in the same manner as the original purchase order.
(p) Repeat Orders
Repeat orders without calling for fresh bids may be placed against
previous orders within one year from the date of issue of original
order. No repeat order shall however; be placed against a
purchase order which was placed at higher prices in the interest
of early delivery. The quantity and value of the repeat order
should not exceed the quantity and value stipulated in the original
order and should not be resorted to more than once in any case.
57

While placing the repeat order, it should be ensured that there

has been no down-ward trend in prices since the original order
was placed. Repeat orders shall be placed with the concurrence of
the finance department and approval of the competent authority.
The authority competent to approve repeat orders will be the
same which approved the original order.
(q) Follow-Up of Purchase Orders
The Purchase Department shall receive all the mail from the
vendors and shall reply to them in consultation with other
departments whenever necessary.
The purchase department shall keep Indenting Department
informed of the status through periodical/monthly reports.
The Purchase Department shall be responsible for following up of
the purchase order/contract with vendors and transporters until
the material is received and accepted at the plant/stores.
(r) Inspection of Material
The

Purchase

Department

shall

Co-ordinate

with

other

departments and arranges inspection of materials at vendors

shops prior to dispatch wherever stipulated in the purchase order.
Inspection of materials in other cases shall be carried out on
receipt of materials at plant site/stores only those materials
cleared by the inspection as conforming to purchase order
specifications will only be taken on charge in stores. The person

58

inspecting the material will sign on the `Stores Receipt Voucher

in taken of having inspected and accepted the material.
(s)

Damaged/Short/Rejected Materials

The Stores Department shall be responsible for sending suitable

intimations to the:
Vendor for materials rejected if the same do not conform to
the specifications mentioned in the purchase order.
Vendor and Insurance Company for material received short
or damaged.
Where the delivery offered by the vendor was ex-works the
intimation for damaged/short receipt of materials will be sent
only to the Insurance Company. The intimation to vendor and
the Insurance company for material received short or
damaged or rejected should sent as early as possible after
the material is inspected but in any case not later than a
week from the date of their receipt at plant/site. A copy of
the intimation issued by the Store Department will be
endorsed to:
Finance and Accounts Departments for lodging the Insurance
claim or making suitable recovery from the vendor.
Purchase Department for following up, the replacement
supplies or obtaining the non-delivered quantity.
The Purchase Department shall be responsible for following up
with the vendor, the replacement of materials rejected or short
59

supplied by him. The Purchase Department shall evolve a suitable

system so that suitable communication is issued to the vendor
until the replacement supply is received or quantity short
delivered is made good by him.
(t)

Insurance Claim

The Accounts Department on receipt of a copy of the letter issued

by Stores Department make and entry in a register maintained for
the purpose and shall lodge suitable insurance claims. The
Accounts Department shall co-ordinate with other departments
wherever necessary and collects the details of materials and
other costs as may be required for preferring a claim.
(u) Cash Purchase
Cash purchases or materials should be avoided as far as possible.
Cash purchases should be resorted to only meet the plants
emergencies or where it would not be economical to call for
quotations owing to the small value of purchases.
The General Manager/Group Manager may, however, consider
keeping a suitable amount as Imperest fund with the Purchase
Department,

Maintenance

Department

and

Administration

Department to enable them to make cash purchase of items to

meet the urgent day-to-day needs of the plant.
(v)

Bank Guarantees

60

The Finance and Accounts Department is responsible for safe

custody of Bank Guarantees received from vendors/contractors.
The Finance and Accounts Department maintains a separate
register for keeping records in the Performa enclosed for Bank
Guarantee obtained against:
Advance payment
Performance guarantee
Free issue of materials
The Bank Guarantee register is reviewed every month to ensure
that all the guarantees obtained are valid. Such of the bank
guarantees which are found to be maturing /expiring will be
reviewed with the respective department to ascertain if any
further revalidation would be required to conform to the dates of
completion of work/delivery of material.
Normally the validity of Bank Guarantee should be as under:
Bank Guarantee for: From the date of payment until the
advance is liquidated.
Performance guarantee: From the date of payment of
advance or commencement of work whichever is earlier until
expiry of maintenance period.
Free issued material: From the date of issue of material until
settlement of quantitative account of material issued or
delivery of fabricated equipment whichever is later.
The Finance and Accounts Department is responsible for issuing
instructions to the vendor/contractor for obtaining the extension
of the existing Bank Guarantees before expiry of the claim period.
61

A suitable system should be introduced by the Finance and

Accounts Department to ensure that a regular follow-up is done
with the respective vendors/contractors until the extension to
Bank Guarantees are received. Finance and Accounts Department
also ensures that until extension to bank guarantees are received
from vendors/contractors on equipment amount is with held from
running/final payment due to the vendors/contractors. The Bank
Guarantee shall discharged in consultation with the respective
department after receiving the conformable from them that the
maintenance period under the purchase order/work contract has
been

completed

and

that

there

is

no

claim

against

vendor/contractor. The Bank Guarantee for advance payment can

be discharged by the Finance and Accounts Department after
ensuring that the advance paid have been liquidated/recovered
from running final payment where the vendor/contractor does not
communication issued for extending the validity of the bank
Finance and Accounts Department will invoke the bank guarantee
before expiry of the claim period after consulting the respective
department

and

obtaining

the

approval

of

the

General

Manager/Group Manager.

(w) Evaluation of existing purchasing system

A study in any organization should carried out taking into
consideration the concept of total material control, which
62

significant that efficiency of any organization is contingent upon

having the right material of right quality or right place in the right
quantity at the right time and place.

R
i
Rg i
hg t
hS t
Qo
uu r
ac l
ie t
ys

g
R
h
i
t
g
P
h
r i
t
c
t i
e
m
e

h
Q
u
a
n
i
y

i
(
5t
R
i
g
ht
tt
)

5 R for better Purchase (Material) Control-

The existing purchase procedure gives fair chances of competition

to all the vendors. It leaves no room for malpractices or favoritism
of employees i.e. nobody oblige any one out of way. It is not very
rigid. In time of urgency of requirement, necessary deviations are
approved by competent authority so as to avoid stoppage of
work. The procedure is based on democratic way of working.
Good suggestions to improve efficiency are always considered.
Various annual rate contract running contracts are entered for
regular consumable items, like oil and lubricants, stationery,
chemicals, medicines, printing job etc. This is reducing the
repetitive job times and money of company.

63

But there are shortcomings also, which are evaluated taking into
consideration the five essentials of purchase functions are as
follows:
Purchase time
Purchase quantity
Purchase quality
Purchase price and
Source of supply
(i)Purchase time
The purchase time indicates the lead-time i.e. time taken to
physically receive the material from the date of its indent.
To find out the lead time five cases different items have been
studied randomly, and analyzed its fact which indicates that by
following the existing procedure, the administrative lead time is
long 6 to7 months (in some cases only), while suppliers lead time
is also about normally 2 to 3 months.
(ii) Purchase quality and quantity
It has been observed that the quantity of material is being
purchased considering 6 to 12 months consumption that means
no economic order quantity has been fixed for different types of
material. Due to the existing system:
Company is incurring cost of carrying Inventory interest of capital
rent etc. Company is also incurring losses due to the depreciation
in quantity, depreciation in quality and obsolesce of materials
during storage.
64

Company is also incurring avoidable expenditure such as holding

up keep of surplus material, financial losses due to fall in the price
of materials, extra expenditure on excess of materials required.
It is suggested that before taking final decision economic order
quantity should be determined for each item and order should be
placed accordingly.
The determination of economic order quantity techniques has
been discussed on succeeding pages.
(ii) Purchase Price
The price of each item is being compared with suppliers
quotations considering the quality of material to be supplied.
Although, purchase department should keep itself informed of the
price trends, with the help of market reports, trade papers and
journals, report by purchase against and sales representative of
the suppliers, published catalogue and price list.
(iii)

Source of supply

The selection of a particular supplier is made after inviting

tenders from possible source of supply. There are four types of
tenders commonly used, which are Single tender
Limited tender
Open tender
Global tender

65

The tender received are opened on the date and time stipulated
and compared to select a final vendors, considering quality,
delivery after sales services etc. which indicates that right source
is selected, only thing taken in to consideration is to maintain
cordial relations with suppliers.

B.

STORAGE CONTROL

Meaning of Store: Place for all & all are at their places
Here in above sentence all is mean as Material-InventoryStock
Store DepartmentIn a manufacturing unit or in any organization, stores are
constructed according to the needs of the organization and
materials to be stored in the stores.
1. Receipt Section
Receipt store usually function as part of the stores and it is
manned depending upon size of the industry and complexity of
the materials to be handled.
Receipt Procedures
All incoming goods must be received in receipt section and after
making necessary documentation and paper work goods should
be delivered for its custody or other destination. During that
period same shall be identified and kept in separate specified
place to prevent any misplacement/pilferge or mix up.
66

 Verification of Quantity
Packed materials are opened and verified with challan or bills
accompanied with the lost and the same is matched with P.O. and
also P.O is progressed simultaneously.
Daily Receipt Report
A

report

indicating

`SRV

reference

of

all

the

individual

consignments on daily basis are being circulated to the purchase

section/indenter/user for management information of its arrival
and arranging inspection of the same thereof.
Inspection and Discrepancy Report
In order to ensure quality for all the incoming material with the
help of skill, personnels, material is offered for inspection. The
normal methods used are by visual, by touch, by smell, by
comparison, by actual testing, Laboratory methods - ISI test etc.
This is to determine the acceptability of the article received. Item
rejected in inspection and observation regarding any deviation in
quantity/condition is recorded separately in a register called
MATERIALS EXCEPTION REGISTER, all this informations also
simultaneously sent to the purchase indenter and the supplier
through a report. It is called MATERIAL EXCEPTION REPORT. The
custody of rejected items remains with receipt section till it is
disposed of as per the instruction of purchaser, indenter and
looking to its status of payment respectively. The action for
disposal may be one out of the details as under:
a)

Items to be returned to the supplier/Insurance company.

67

b)

Items accepted later with some deviation and or reduction in

price with or without rectification.

c)

Item is scraped and or destroyed.

Claim for Loss/damage to the Material in Transit

The losses are liable for recovery either from the insurance
company or from the vendor or from the carrier and to materialize
of the same claim is lodged on the carrier/vendor, whosoever
handled/brought or dispatched the material with the supporting
documents. In our case Open Marine Policy theyre with
insurance company.
Legal Action
Whenever organizations claims are pending i.e. on the event of
carrier/vendor

not

settling

the

claim

under

stipulated

or

reasonable time period, a suit against them may be filed in

consultation with legal advisor and with the managements
consent.
2. Custody Section
After the material is accepted it is sent to the custody section
where the material is again check for the quantity according to
the P.O. and for the condition.
Here the material is handled and preserved at proper and definite
locations as decided. Thus the main function of custody section is
68

physical checking. Location and preservation of material received

from the receipt section.
The material preserved here is issued to the user department
through SIV (Store Issue Voucher). Here MPR (Material Purchase
Requisition) is prepared only for stock items which are then sent
to the Purchase Department through Stores Department for the
stock items MPR is made keeping the Re-order level while
proceeding.
Lead Time
In all organization there is a time gap between the demands
(indenting) and the fulfillment i.e. supply of materials. This finite
time

interval

between

the

cycle

of

indenting

and

actual

procurement of material is called lead time or lead period. Leadtime has direct impact on inventory levels. Longer the lead times
higher the inventories.
Safety Stock
If the lead-time and the consumption during the lead time are
known with certainty. There would be no need of providing any
buffer stock or safety stock. In practice, however, there are
variations in both lead-time as well as lead time consumption and
hence it is usual to provide for buffer stock. The safety stock is
calculated based on an analysis of the variation in Lead-time
consumption.

69

Stores are like a bank which holds materials which are valuable
assets and it should, therefore, be planned properly. Its location
should be decided at the time of original plant lay-out. Raw
materials,

packing

materials,

imported

components,

etc.

exclusively required by the plant are to be stored in the vicinity.

3. Disposal Section
The word meaning of disposal is, disposing of, getting rid of, sell
etc. Etc. In our daily life, we are disposing of household goods for
various reasons and well aware of the terminology. In industry,
the disposal is of mainly following types:
Surplus
Scrap/waste

Surplus
Surplus is usually defined as excess of firms operational
requirements. The industrial surpluses are due to mistakes in
over procurement. Wasteful production process and inefficiency in
general.
The surpluses also result from the inefficient use of production
machinery, carelessness and poor purchasing. The least costly
method of controlling surplus is its elimination at the source. This
is why effective value analysis programmes which eliminate
surpluses before they occur are so profitable.
70

Identifications
The identification of surplus stocks can be done by making age
and consumption analysis. This is a simple statement showing of
stock held and issues made during the last few years i.e. 3 to 5
years if no issue has been made at all of the items for the past
say 3 years, it is a case non-moving items. If 2000 pieces are in
stock, and in last five years only 6, 14, 30, 35 Nos. Have been
issued it will reveal a case of surplus stocking or slow moving.
Such an analysis will throw up cases of slow moving and nonmoving items from which surplus and obsolete stocks can be
identified /codified from such analysis one can also know the time
from which the material has been in storage.
It will also be desirable to find out what recent changes which
have taken place in production or operation and what charges are
imminent from this information it can be determined what major
items, spares are likely to become obsolete and surplus. These
can also be considered while reviewing along with slow moving
and non-moving items.
After sorting of items, find list should be made showing particulars
of all items to be disposed off and finally written off. In public
sector organizations a Committee consisting of representative
each from technical, finance, stores, purchase is set up to make
final list which is approved by chief executive or a senior member
of the management.
The following information usually appears:
71

* Code Number of each item

* Description
* Quantity in stock
* Quantity to be retained
* Quantity to be disposed off
* Original book value of quantity in stock
* Recommended Book value of Quantity to be retained
*

Recommended Book value of Quantity to be disposed off,

amount to be
Written off.
Scrap/Waste
This terms applies to unusable material whose value is only in
terms of its materials content, be it metal, paper or cloth. The
scrap industry is a very big industry in India. Merely because all
scrap can be re-cycled to produce materials of utility and greater
value. Waste papers are used to produce cardboards and other
packing paper. Steel scrap is melted and re-rolled. Waste oil are
purified and converted to engine oil with original specifications. It
is impossible to eliminate scrap/waste from industry but can be
minimized by intelligent planning and controls.
When material has been declared surplus and reserve price fixed.
Usually the following methods of disposal are followed:
Circulation within the company
Return to suppliers
72

 Selling to other firms

Selling to dealers and bookers
Selling to employees
Selling by auction
Disposal through presses tender
Disposal through limited tender inquiry.
C. WAREHOUSE SYSTEM AND PROCEDURE
The control of materials while in storage is affected through what
is known as the perpetual Inventory. Thus two main functions of
the perpetual Inventory system have been studied which are:
Receipt and issue system
Maintenance of store records
The ScopeThe procedure comes in to operation immediately on receipt of
dispatched documents or dispatched intimation in the stores and
covers on the activities, i.e. clearance, delivery, inspection, stock
charging and preservation, issue and return of materials by the
user (Indenter) and ends after striking out balance from the stock
card and delivery of documents VIZ. SRV.SIV., to the account
department.

RECEIPT SYSTEM

73

The system for receipt starts even before the time when the
material actually reached the plant, when purchase order is
planned a copy is sent to the stores indicating quantity and
approximate delivery date. These are arranged in chronological
order so that any time the volume of receipt can be estimated.
This also helps in planning labor contracts when unloading
activities exceed a particular limit. This is the first step in the
store system.
Suppliers, once they dispatch the goods, normally send and
advice note, dispatch note to the stores. This provides information
on the date of dispatch, carrier details, description consignment
and value. This is sent in advance so that quick and easy
clearance may be done. On receipt of consignments, the store
personnel check the consignment and tally the material with
suppliers delivery note / challans along with relevant documents,
the material is visually checked for any apparent damage or
discrepancy.
accordingly

Appropriate
on

the

remarks

delivery

notes

endorsement
/

challans

in

is

made

case

of

discrepancies on deviation being found in the suppliers received.

Material received against the delivery notes / challans will be
checked with the relevant purchase orders details mentioned in
the challans / delivery notes and packing notes received with the
consignment. Store receipt voucher is prepared in seven copies
for item found in an order. The material is than paid up for
inspection, items finally accepted is physically handed over to the
custody

stores

or

project

departments

and

their
74

acknowledgement obtained in the appropriate columns of the

receipt notes.

INSPECTION
In exercising control on the quality of incoming materials
inspection plays an important role. Materials purchased in India
and abroad are inspected according specifications, prescribed
tests, drawings, approved samples etc as stipulated in the
purchase order. To inspect different types of materials following
inspection methods are used.

Inspection by third party:

Such agencies are EIL cloyed register, IBR; etc. acceptance of
material is based on the certificates and reports of these
agencies.

Inspection by indenting departments:

At vendors premises during manufacture of materials or before
dispatch of the same the concerned officers of indenters carry out
such inspection.

Materials test certificates:

The material may be inspected and accepted based on the
manufactures test certificates. Materials are inspected and
75

accepted by carrying out chemical, electrical or mechanical test

either of the project site or through the recognized lab as
stipulated in the purchase order. Some materials like shop, cotton,
waste, phenol etc are accepted by visual inspection. Proprietary
nature of materials are accepted by either visual inspection or
carrying necessary tests whenever required . Materials are also
accepted after ascertaining the quality as per samples on
stipulated in the order.

ISSUE SYSTEM:
The issue system relates to function of issue card and Inventory
control section of stores. It covers all material stocked by the
KRIBHCO stores and all bulk and raw materials directly stored by
the users. It begins with the preparation of issue voucher and
ends with their submission to accounts departments.

GENERAL AUTHORITY AND RESPONSIBILITY:

The authority for receipt and storage of all the materials is
centralized in the store department accepts medicines and
stationary. Issue will be made only on receipt or presentation of
authorized requisition.
Stores department is responsible to provide material (through
stores issue voucher) to the authorized requisition on demand, all
material declared as stock items and contained in the store

76

catalogue as the desired and the quantities requested for

immediate use by them.

QUANTITY OF ISSUE:
In respect of consumable stores and such other materials as are
required frequent or at odd hours, the issue is made in large
quantities to reduce electrical work and to ensure ready
availability of materials at sight place when required. The quantity
issued is for 15 days consumption. The entire issued quantity is
charred in full to the requisition cost center though all of its not
actually used or consumed immediately. In case an item stocked
as a set it is issued as a set not in parts.

PERPETUAL INVENTORY SYSTEM:

Generally organizations have the following perpetual Inventory
system, which comprises:
Cardex system
Stores ledger and
Physical stock verification

Because of Computerization (MIS) Cardex & Stores Ledger systems

are not used now.

CARDEX SYSTEM
77

To maintain the quantitative records of receipt and issues and

closing balances of items of stock a cardex system is followed.
Stores department is doing all the quantitative accounting of
materials.

STORES LEDGER
For the all quantitative accounting of materials stores department
is responsible. Whereas for monitory accounts of materials
accounts department is responsible. One set of each document
for receipt issue and return of materials is sent to price store
ledger section in the accounts department. Based on these
documents priced stores ledgers are prepared for each item of the
stores. The price store ledger provides the volume of each receipt
issue and return along with the quantity accounts.

PHYSICAL VERIFICATION OF STOCK

The physical verification of stock is contemplated with a view to
ensuring that stores and materials held in stock tally with the
quantity and specification shown in the cardex. The actual
balances agree with the balances recorded in the cardex and
discrepancies noticed if any are investigated and adjusted for
accounting purpose.
It has been observed that time gap of verification is six months,
which should be reduced to be three months for non-stock items,
and for stock items verification should be done at the time of
78

placing orders. So that the determine Inventory level can be

maintained even of spoilage, damages and obsolescence takes
place.

FINANCIAL

MANAGERS

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 inventoriesraw 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
OBJECTIVE79

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:
(r)

Work-in-progress

arising

under

construction

contacts,

including directly related service contracts.

(s)

Work-in-progress arising in the ordinary course of business of

service providers.

(t)

Shares, debentures and other financial instruments held as

stock-in-trade.

(u)

Producers 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.
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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.

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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 labor. 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
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costs of production that vary directly, or nearly with the volume of

production such as indirect materials and indirect labor.
7. 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.
8. 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
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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.

9. 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

appropriate

to

and

condition.

include

For

overheads

example,
other

than

it

may

be

production

overheads or the costs of designing product for specific customers

in the cost of inventories.

10. 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.

11. 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
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recognize them as expenses in the period in which they are

incurred. Examples of such costs are;
a. Abnormal amounts of wasted materials, labor, or other
production costs.
b. Storage costs, unless those costs are necessary in the
production process prior to a further production stage.
c. Administrative overheads that do not contribute to bringing the
inventories to their present location and condition, and
d. Selling and distribution costs.

12. 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.
13. 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.

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14. 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.

15. 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.

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16. 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, labor, efficiency and capacity utilization.
They are regularly reviewed and if necessary, revised in the light
of current conditions.

17. 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.

18. 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
87

be carried in excess of a amounts expected to be realized from

their sale or use.

19. 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.

20. 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.

21. 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
88

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.

22. 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.
23. 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 .

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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.

CONCLUSION
This project on The study on inventory management gave me
an opportunity to understand the level of inventory management
in the organization. This research will help the organization to
make necessary measure to the inventories. This will certainly
bring down the causes of inventory problems and help the
management of inventories. The high turnover ratio indicates
efficient management of inventory because more frequently the
stock sold. So the organization should try to improve the
inventory turnover ratio.
The current study helped me to understand the current inventory
control measures practiced in any organization. The cordial and
corporate relationship between management and employees is
the secret behind the success every organization.

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BIBILIOGRAPHY
BOOKS
Khan M.I and Jain PK, Basic financial management, The
McGraw-Hill publishing company limited, New Delhi.,2000.
Aswathappa & K. Shridhara Bhat, productions and
0perations Management, Himalaya Publishing House,
Second edition,2008
Shashi. K. Gupta and R. K. Sharma, Management
Accounting, Kalayani publishers,11th edition,2007
Dr. S. N. Maheswari, Financial Management, Sultan Chand &
sons,9th edition,2004
D. Chandra Bose, Inventory Management, Prentice hall of
India Private Limited, New Delhi.

WEBSITES
www.iplgt.in
www.wikipedia.com
www.google.com

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