PROJECT REPORT

INVENTORY
MANAGEMENT WITH
REFERENCE TO “SHARA
HOME TEXTILE”

Submitted by:
ALOK KUMAR
HARISHARAN
HUNISH SINGLA
NITIKA KATARIA
PANKAJ AGARWAL
RAHUL KUMAR
 EXECUTIVE SUMMARY
LPG or Liberalization, Privatization and Globalization as it is referred in short today have
changed the scenario of corporate world and management of enterprises in our country. It has
now become more important to not just manage an organization but to achieve corporate
excellence simultaneously as the future belongs to learning and performing organizations.
As every business concern irrespective of its size, nature, and age needs an adequate level of
inventory to carry out business operations and survive, inventory becomes an important and
integral part of business. Inadequate inventories means interruption of production and sales
operation whereas excessive inventories means accumulation of idle funds and increase in
carrying cost. Therefore, to manage inventories in any sector is a challenging job.
The project report titled “Inventory Management with reference to Shara Home Textile”
deals with this matter and is based on the industrial visits at “Shara complex”, pertaining to the
requirement for the Diploma of PGDM from “Integrated Institute of Learning &
Management.”
Unless organization learn to manage its inventory, success, will be elusive. Thus, the
effectiveness of an organization depends much on the strength of its inventory management
which is an important part of the whole system..
Keeping this background in view, an attempt is made to examine the performance of inventory
management at “Shara Home Textile Ltd.”. The project contains the procedures for the
analysis of inventory, ratios being used to define the efficiency of inventory management and
the impact of shortcomings in the management of it. All this had been done to get a clear view
of the techniques of inventory management in Shara.

OBJECTIVE OF THE STUDY

✔ To find out the efficiency of Inventory management in “Shara Home Textile Ltd.”
✔ To have a first hand experience of the functioning of a Textile company.
✔ To have a practical experience of the functioning of the Finance Department of a
company.
 ✔ To study how inventory management practices plays an important role in supporting
other activities of an organization.
✔ To gain familiarity with the various methods and techniques followed by “Shara Home
Textile Ltd” in maintaining their inventory.
✔ To judge the success of the management in balancing the production with the demand.
✔ To find out the difference between the theoretical and practical aspect of inventory
management.
✔ To study and come out with any solution for improvement of inventory management in
“Shara Home Textile Ltd”.

METHODOLOGY
The data which I have collected for making this project is combination of both primary and
secondary data.
PRIMARY DATA:
This data had been collected through meetings and interviews with various managers and
employees of the finance department of “Shara Home Textile Ltd”. At the same time we had
visited various other departments for collection of data. The departments that had been visited
are as follows:-
✔ Finance Department
✔ Designing & cutting Department
✔ Merchandising & Shipping Department.
✔ Warehouse & sales Department
SECONDARY DATA:
Apart from the primary data certain secondary data were required for this project. Following
are the sources of secondary data:-
✔ Annual Reports
✔ Inventory Reports
✔ Cash Report
✔ Raw Materials Report
✔ Production Reports
✔ Sales Reports
✔ Financial Year Book.
The initial step of the project was studying about the company and the industry. For the study,
the inventory size of the company has been taken into consideration. Apart from it, three
important ratios were calculated and studied during the period of study. These are:
(a) Inventory Turnover Ratio,
(b) Inventory Holding Ratio, and
(c) Inventory to Total Assets Ratio.

Industry Overview
BRIEF HISTORY
New innovations in clothing production, manufacture and design came during the Industrial
Revolution - these new wheels, looms, and spinning processes changed clothing manufacture
forever.

The ‘rag trade’, as it is referred to in the UK and Australia is the manufacture, trade and
distribution of textiles.

There were various stages - from a historical perspective - where the textile industry evolved
from being a domestic small-scale industry, to the status of supremacy it currently holds. The
‘cottage stage’ was the first stage in its history where textiles were produced on a domestic
basis.
During this period cloth was made from materials including wool, flax and cotton. The
material depended on the area where the cloth was being produced, and the time they were
being made.

In the later half of the medieval period in the northern parts of Europe, cotton came to be
regarded as an imported fiber. During the later phases of the 16th century cotton was grown in
the warmer climes of America and Asia. When the Romans ruled, wool, leather and linen were
the materials used for making clothing in Europe, while flax was the primary material used in
the northern parts of Europe.

During this era, excess cloth was bought by the merchants who visited various areas to procure
these left-over pieces. A variety of processes and innovations were implemented for the
purpose of making clothing during this time. These processes were dependent on the material
being used, but there were three basic steps commonly employed in making clothing. These
steps included preparing material fibers for the purpose of spinning, knitting and weaving.

During the Industrial Revolution, new machines such as spinning wheels and handlooms came
into the picture. Making clothing material quickly became an organized industry - as compared
to the domesticated activity it had been associated with before. A number of new innovations
led to the industrialization of the textile industry in Great Britain.
OVERVIEW OF INDIAN SECTOR
India's textile sector is the second largest industry after agriculture. It provides employment to
about 35 million people. The country's current share in the world textile trade is only 4%,
according to the study done by the World Trade Organization. The Indian government says
that it can reach to 8% share by 2010.

India is one of the leading producers of cotton, goatskin and cashmere wool. It ranks top in
goatskin and third in cotton after China and United States. The fabric industry in India
accounts for about 20% of total exports of the country and represent the largest net foreign
exchange earner.

Size of India's Textile Industry

• The textile industry in India covers a wide gamut of activities ranging from production
of raw material like cotton, jute, silk and wool to providing high value-added products
such as fabrics and garments to consumers.
• The industry uses a wide variety of fibers ranging from natural fibers like cotton, jute,
silk and wool to man made fibers like polyester, viscose, acrylic and multiple blends of
such fibers and filament yarn.
• The textile industry plays a significant role in Indian economy by providing direct
employment to an estimated 35 million people, by contributing 4 per cent of GDP and
accounting for 35 per cent of gross export earnings. The textile sector contributes 14 per
cent of the value-addition in the manufacturing sector.
• Textile exports during the period of April-February 2003-2004 amounted to $11,698.5
million as against $11,142.2 million during the same period in the previous year,
showing an increase of around 5 per cent.
 • Estimates say that the textile sector might achieve about 15 to 18 per cent growth this
year following dismantling of MFA.
Exports from India to US and Europe

India's textile exports to the US have shown a good rise of 29.5% between January and June'
2005. Exports of pillow cases and bed sheets have registered a growth rate of 56.2% and
56.3% respectively. Products like towel and bed spread also figures northward by 19% and
12% respectively.

According to Confederation of Indian Textile Industry (CITI), the rise in exports of these
home textile fabrics is due to the large-scale use of wide-width looms. With the rise in the use
of shuttle less looms and processing sector getting fresh impetus, the production of these home
textile items are able to meet both the foreign as well as the domestic demands.

There is a great demand of terry towel from European countries also. This is because of the
shrinking base of the European textile manufacturers. The manufacturers are closing down
their productions. A large part of the demand will be met by India, China and Pakistan.

Human Resource Chain in Indian Fabric Industry

• The fiber producers - Those who produce the raw materials used in fabrics.
• The knitting mills and weavers - Those who make the fabric.
• The dyers and finishers - Those who dye and finish the fabric.
• The designers - Those who design the garments or products.
• The contractors - Those who cut and sew the fabric.
• The manufacturers - Those who manufacturer the finished products.
• The retailers - Those who sell the products.
 SHARA – PROFILE
“BASIC TO
BOLD”
“WORK PHILOSPHY – HONESTY, APPLICATION, CREATIVITY,
RELATIONSHIP”
SHARA came into inception in 1994; the name was conceived putting
the first two alphabets of Shalini, Rajiv and Arushi, a small family with
great dreams.
Mr. Sirohi a Visionary Entrepreneur, highly skilled in all areas of
management with outstanding levels of achievements - marketing,
production, personnel, finances. Visualization to project design and
execution for many projects at national international levels has provided an
experience of expert practical management.
In 1978, Rajiv Sirohi, started his career in International Marketing, working
closely with the handicrafts sector, exporting products created, crafted and
produced in this sector to the international market, traveled all over the
globe to promote the products and developed a passion, interpreting
European and American fashion to gifted artisans and craftsmen in the
cottage handicraft industry in India, the efforts were sometimes rewarding
and sometimes huge failures, but he never gave up. With the same zeal
and passion he started out on his own with a few friends and had his own
enterprise in partnership, starting with Rs. 5000 (US$ 100) but a grit and
vision to take over the world! After 14 years in this enterprise, which
brought in the best names all over the world to work with like Debenhams,
Her tie, Haase, Katag, Manor, Breuninger, Galeries Lafayette, Galleries
Nouvelle, Sarmag, Pier Imports, Ahlens, IKEA, JC Penney and so on. The
time had come to redefine and rejuvenate to meet the coming changes in
the world, we worked with a telex then and a fax was a novelty! The digital
world and internet was arriving.

In 1994, therefore the new independent family venture was started to

meet the new challenges, the first digital camera in 1995, and the fast
internet in 1999. The world changed and the firm changed to take on the
new challenges – a new state of the art factory came up in 2001 on the
outskirts of New Delhi, the new energy brought in Burlington Industries,
Guilford Mills, Jo-Ann Stores, Restoration Hardware, and Brylane Home.

SHARA is engaged in design, development of products, manufacturing and

export of the complete home-textiles range of products to USA and Europe.
Have successfully interfaced the traditional crafts of India with
International fashion, devised modern production and quality control
methods for meeting highest international standards. A continuous up
gradation of craftsmen techniques and productivity to meet the challenges
of emerging competition and keep a unique product positioning for the
best retail outlets worldwide.
Rajiv Sirohi has been in the handicraft, home-furnishings and home-textile
industry in India since 1979.Involved in working closely with the handicraft
sector, creating, designing, manufacturing and export of these products
world over.
Some companies SHARA do its business with, are –
Scandinavia: Ahlens, OY stockman
Belgium: GB Inno, Sarmag
Holland: Vroom and Dreesman, Hema, Bijenkorf
Germany: E.Breuninger, Neckermann, Karlstad, Katag, and Hertie
U.K.: Debenhams, GUS, Next, Selfridges, House of Fraser, As
dale,
Lewis's.
USA: J.C. Penney, Pier 1 Imports, Guilford Mills, Burlington
Mills,
DKNY, the Company Stores, Restoration Hardware,
Brylane.
Australia: J.Rapee & Co.
New Zealand: Ballantynes
South Africa: Edgar's.
Italy: Upim, La Renascent
Product profile
The products of “SHARA HOME TEXTILE LTD” are Beddings, Cushions, Table Linens,
Kid Beddings, kitchen linens, Curtains and Throws.

Shara beddings

Bedding refers to the materials laid above the mattress of a bed for warmth and decorative
effect. Bedding does not include the mattress, box spring and bed frame. Down materials are
often used for warmth in bedding. A large number of linen covers used for the varied
purposes of covering different things such as pillows, cushion etc comprise the category of
bedding covers. A beautiful medley of floral, stripes and several other prints, besides the
embellishment by the way of embroidery, patch work etc
Material used
100% cotton.
800 Thread count cotton percale.
600 thread count cotton sateen.

All styles are expertly tailored with different style embroideries.

Shara curtains

Light and airy curtains, drapery and window treatment products to decorate your home.
From casual to elegant styles- light curtains, drapery, and window treatment and
coordinating products.
Shara Curtain Collection includes:
Living Room Curtains, Kitchen Curtains, Window Panel Covers, Door Curtains Covers
Shara table linens
Table linens are a wonderful addition to enhance the door of your dining room. Napkins, table
cloths, coasters, table mats and other fine table linens add style and substance to your entire
table settings. Available in various colors, styles, designs and range, table linens can add a
fashionable touch to any meal.
Materials used
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 Living room Breakfast table Dining table

Shara Kid beddings

Kid bedding covers canopies

Kids bedding includes bed sheets, pillows, and quilts etc that are made specifically for kids of
different ages. Kids bedding is available in many designs, and made of superior quality of
fabrics that is soft on the skin of the kids.
Shara kitchen linens

Kitchen mats kitchen table cloth kitchen

table cover

Kitchen linen is basic necessities which are not only fashionable but also functional. Kitchen
linens are practical, functional and stylish to make yourself comfortable in a harsh, hot,
rigorous environment of your kitchen These linens are manufactured in different sizes for
different purposes and can also be made customized.
Materials used
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INVENTORY MANAGEMENT
AN OVERVIEW
INTRODUCTION

In financial parlance, inventory is defined as the sum of the value of raw materials, fuels and
lubricants, spare parts, maintenance consumables, semi-processed materials and finished
goods stock at any given point of time. The operational definition of inventory would be: “the
amount of raw materials, fuel and lubricants, spare parts and semi-processed material to be
stocked for the smooth running of the plant”. Since these resources are idle when kept in
stores, inventory is defined as an idle resource of any kind having an economic value.

Inventories are maintained basically for the operational smoothness, which they can affect by
uncoupling successive stages of production, whereas the monetary value of inventory serves as
a guide to indicate the size of the investment made to achieve this operational convenience.
The materials management department is expected to provide this operational convenience
with a minimum possible investment in inventories. The objectives of inventory, operational
and financial, needless to say, are conflicting. The materials department is accused of both
stock-outs as well as large investment in inventories. The solution lies in exercising a selective
inventory control and application of inventory control techniques.

INVENTORY TERMINOLOGY

Inventory or stock is referred to in a variety of ways:

A Stock-keeping unit (SKU) is a separately identifiable class of item, which is complete in the
sense that a customer in that form can utilize it.

Manufacturing, wholesale and retail inventory depends on the type of firm holding the
inventory. These could be held in different forms for the same material. For example,
wholesale in bulk form, and retail in packaged form.

During manufacturing, input inventory is raw material; an inventory in-between processing

stage is referred to as work-in-process; and after the completion of manufacturing is called as
finished goods inventory.
Transit or in-transit or pipeline inventory is inventory that either waiting or in the process of
transportation. The speed of transportation and the point of time of ownership transfer of
pipeline inventory determines the time of holding, and hence the cost of holding this
inventory.

Seasonal stock refers to the material, which is purchased or manufactured in anticipation of

seasonal demand.

Promotional stock is the additional stock kept ready for the increase in demand due to market
promotions of products.

Speculative stock is the additional stock purchased as a hedge against the possibility of future
increase in price of the material.
Dead stock is unused and / or obsolete stock, which cannot be sold.

DEFINATIONS

In order to understand the concept of inventory terms are used for managing inventory at a
logistical facility, let us first view the definitions:

Inventory level is the actual inventory quantity held at a logistical facility at a particular point
of time.

Cycle inventory or base stock refers to the inventory quantity held in stock due to the
replenishment time required in the ordering process.

Replenishment time or lead-time is the time elapsed between order placement and order
receipt for an inventory item. In case inventory is to be replenished by manufacturing, this id
the time elapsed between the work order issue for manufacturing and the completion of
manufacturing.

Safety stock or buffer stock inventory is the inventory held due the differences in demand and
supply rate of material at each stage in-between supplier, purchase, manufacture, distribution,
and customer to avoid stock outs at each stage.
Average inventory is the calculated average of the inventory quantity held at a logistical
facility over a period of time.

Reorder point is the pre-decided inventory level, which is reached by a falling inventory level
during utilization of inventory, at which point an order is placed for replenishing the inventory
in order to avoid a stock out.

Order quantity is the inventory quantity, which is ordered for replenishing depleting inventory.

FUNCTIONS OF INVENTORY

The necessity of holding inventory is due to the following functions of inventory:

Specialization:
A firm can either produce all the required variety products at a plant at one location, or,
produce different products at separate plant locations. Locating separately will enable the firm
to select the location of each different product manufacturing plant based on the particular
requirements of that product, thus achieving specialization efficiencies like geographical
facilities and economies of scale. This specialization approach creates inventory at diverse
locations. Also, pipeline inventories are created due to transport linkages required between
different manufacturing plants and with distribution warehouses.

Balancing supply and demand:

Demand depends upon the requirements of customers relating to time and quantity of
products, and is not in the control of the producer. Supply, on the other hand is under the
producer’s control, but has to be economized and also paced with the time and quantity
requirements of customer demand. In order to ensure that customers are not dissatisfied when
they demand the required quantity of products, it is necessary to have adequate inventory of
products available at all times. This is the balancing inventory required due to the different
rates of manufacturing and consumption. In case of seasonal products when production has to
take place for a longer period of time in advance of the season, production throughout the year
ensures lower investments in production capacities while increasing inventory. An example is
the production of rainwear throughout the year for the sales which will occur only during the
rainy season. Another example of balancing is seasonal production during raw material
availability and year-round consumption, which also requires inventory. The example of this is
seasonal availability of mango fruit and year-round consumption of mango –based products.

Economies of scale:
Economies of scale are obtained by holding large inventories a) While purchasing, ordering in
large quantities provides cost economies and discounts; (b) transportation economies are
obtained by transporting in larger quantities; and, (c) during manufacturing, producing in
economic batch quantities lower costs.

Overcoming uncertainty:
Safety stock of inventory is required to overcome uncertainty of customer demand on the one
hand; and, purchasing, receiving, manufacturing, and order processing delays on the other.
Either of these may result in shortages of products at the time of customer requirements if
adequate safety stock of material is not provided for. If such material stock outs are not
frequent occurrences, the customer may look elsewhere leading to a last order at the very least,
or a lost customer. This uncertainty results in buffer stocks being created between (a) supplier
and purchasing, (b) purchasing and production, (c) production and marketing, (d) marketing
and distribution, (e) distribution and intermediary, (f) intermediary and customer, in order to
avoid stock outs.
CLASSIFICATION OF INVENTORIES
Production inventories:
They represent raw materials, parts and components that are used in the process of production.
Production inventories include
✔ Standard industrial items purchased from outside (also called bought outs)
✔ Non-standard items (purchased items)
✔ Special items manufactured in the factory itself (also called works made parts or piece
parts.
MRO inventories:
They refer to the maintenance; repairs and operation supplies, which are consumed during
process of, manufacture but do not become a part of the product.
In-process inventories
They represent items in the semi-finished condition (i.e. items in the partially completed stage)
Goods-In-Transit:
They represent such materials, which have been paid for but have not yet been received by the
stores.
RISK OF HOLDING INVENTORY
The holding of inventory creates the following risks for a firm:
✔ The investments committed to a particular inventory combination are not available for
alternative uses for the benefit of the firm. The risks in these case is due to the interest
cost incurred on this inventory until the investment is recovered, as also the opportunity
cost of profit which might have been made in alternative investment.
✔ The inventory may be pilfered or lost.
✔ The inventory may become absolute and/ or useless.
✔ Determination of inventory is another risk for holding inventory.
INVENTORY COST
In operating an inventory system manager should consider only those costs that vary directly
with the operating doctrine in deciding when and how much to recorder; cost independent of
the operating doctrine are irrelevant. Basically, there are five types of relevant costs.
✔ Cost of the item.
✔ Cost of procuring the item.
 ✔ Cost of carrying the item in inventory.
✔ Cost associated with being out of stock when units are demanded but are unavailable
(stock outs).
✔ Cost associated with data gathering and control procedures for the inventory system.
Often these five costs are combined in one way or another, but let’s discuss them separately
before we consider combinations.
Cost of Item:
The cost, or value, of the item is usually its purchase price: the amount paid to the supplier for
the item. In some instances, however, transportation, receiving, or inspection costs, for
example, may be included as part of the cost of the item. If the cost of the item per unit is
constant for all quantities ordered, the total cost of items purchased during the planning
horizon is irrelevant to the operating doctrine. If the unit cost varies with the quantity ordered,
a price reduction called a quantity discount, this cost is relevant.
If the facility manufactures the item, the cost of the item is its direct manufacturing cost.
Again, constant unit cost mean total costs are irrelevant.
Procurement Costs:
Procurement costs are the placing a purchase order or the setup costs if the item is
manufactured at the facility. These costs vary directly with each purchase order placed.
Procurement costs include costs of postage, telephone calls to the vendor, labor costs in
purchasing and accounting, receiving costs, computer time for record keeping, and purchase
order supplies.
Carrying Costs:
Carrying or holding casts are the costs of maintaining the inventory warehouse and protecting
the inventoried items. Typical costs are insurance, security, warehouse rental, heat, lights
taxes, and losses due to pilferage spoilage, or breakage. The cost of typing up capital inventory
is also considered a carrying cost.
Stock-out Cost:
Stock out cost, associated with demand when stocks have been, takes the form of lost sales or
backorder costs. When sales are lost because of stock-outs, the firm loses both the profit
margin on unmade sale and its customer’s good will. If customers take their business
elsewhere, future profit margins may also be lost. When customers agree to come back after
inventories have been replenished, they make backorders. Backorder costs include loss of
good will and money paid to reorder goods and notify customers when goods arrive. As the
next example shows, stock-outs can and do occur in the service industries.
Cost of operating the information processing system:
Whether by hand or by computer, someone must update records as stock levels change, for
system in which inventory levels are not recorded daily, the cost is primarily incurred in
obtaining accurate physical counts of inventories. Frequently, these operating costs are more
fixed than variable over a wide quantity range. Therefore since fixed costs are not relevant to
the operating doctrine, we will not consider them further.
Cost tradeoffs:
Our objective in the inventory control is to find the minimum cost operating doctrine over
some planning horizon; these costs can be expressed in a general cost equation.
TECHNIQUES OF INVENTORY MANAGEMENT
Economic Order quantity:
The order quantity depends upon the cost of the inventory items, the rate and nature of demand
(whether constant or fluctuating), the replenishment time, and the inventory carrying costs and
ordering costs for the inventory items.
The EOQ can be calculated with the help of a mathematical formula. Following assumptions
are implied in the calculation:
Constant or uniform demand- although the EOQ model assumes constant demand, demand
may vary from day to day. If demand is not known in advance- the model must be modified
through the inclusion of safe stock.
Constant unit price- the EOQ model assumes that the purchase price per unit of material will
remain unaltered irrespective of the order offered by the suppliers to include variable costs
resulting from quantity discounts, the total costs in the EOQ model could be redefined.
Constant carrying costs- unit carrying costs may very substantially as the size of the inventory
rises, perhaps decreasing because of economies of scale or storage efficiency or increasing as
storage space runs out and new warehouses have to be rented.
Constant ordering cost- this assumption is generally valid. However any violation in this
respect can be accommodated by modifying the EOQ model in a manner similar to the one
used for variable unit price.
Instantaneous delivery- if delivery is not instantaneous, which is generally the case; the
original EOQ model must be modified through the inclusion of a safe stock.
Independent orders- if multiple orders result in cost saving by reducing paper work and the
transportation cost, the original EOQ model must be further modified. While this modification
is somewhat complicated, special EOQ models have been developed to deal with it.
These assumptions have been pointed out to illustrate the limitations of
the basic EOQ model and the ways in which it can be easily modified to compensate for
them.
Just In Time:
The time-based approach to inventory management came into focus when Toyota Motors
Company came out with the concept of kanban in 1950. This lead to the dramatic reduction in
WIP quantities tying the inventory closely to the demand from subsequent process or internal
customer. Kanban is conceptually a two-bin system, a signal being raised to warrant
replenishment.
JIT approach became a modern production system seeking to implant concept of stockless
production. JIT embraced a variety of manufacturing concepts like reduced lot sizes, quick
switch over [SMED], load leveling [response to tact time], group technology, statistical
process control [control charts], preventive maintenance and quality circles.
ABC Analysis:
ABC analysis underlines a very important principle “Vital few: trivial many”. Statistics reveal
that just a handful of items account for bulk of the annual expenditure on materials. These few
items, called ‘A’ items, therefore, hold the key to business. The other items, known as ‘B’ and
‘C’ items, are numerous in number but their contribution is less significant. ABC analysis thus
tends to segregate all items into three categories: A, B, and C on the basis of their annual
usage. The categorization so made enables one to pay the right amount of attention as merited
by the items.
A-items: it is usually found the hardly 5-10% of the total items account for 70-75% of the total
money spent on the materials. These items require detailed and rigid control and need to be
stocked in smaller quantities. These items should be procured frequently, the quantity per
occasion being small.
B-items: these items are generally 10-15% of the total items and represent 10-15% of the total
expenditure on the materials. These are intermediate items. The control on these items need
not be as detailed and as rigid as applied to C items.
C-items: these items are generally 70-80% of the total items and represent 5-10% of the total
expenditure on the materials. The procurement policy of these items is exactly the reverse of A
items. C items should be procured infrequently and in sufficient quantities. This enables the
buyers to avail price discounts and reduce work load of the concerned departments.
Policies of Control for A, B and C Categories:
Any sound stock control system should ensure that the each item gets the right amount of
attention at the right time. ABC analysis makes this possible with considerably less effort due
to its selective approach there are number of ways in which ABC classification can be made
use of:
Degree of Control:
Some one at the senior level should be made responsible for regular reviewing of these items.
Up-to-date and accurate records should be maintain for these items. “B” items should be
brought under normal control made possible by goods record keeping and periodic attention.
Little control is required for “C” items.
Ordering Procedure:
A items should be subject to frequent review to reduce unwarranted stockouts and possibilities
of overstocking. A reasonable good analysis for order points is required for “B” items but the
stocks may be reviewed less frequently. No such computations are necessary for “C” items.
These should be bought in bulk.
Staggering of delivery schedules:
Staggering of delivery schedules is one of the best strategies to reduce the inventory
investment and ensure un-interrupted inflow of materials. Staggered deliveries tend to reduce
cost of order writing but increase the cost of inspection and receiving. Annual contract with
scheduled deliveries are desirable for “A” and “B” class of items. “C” class of items, however,
should be purchased in bulk on single-order-basis.
Stock records:
Details records of goods ordered, received, issued and goods on hand should be maintained for
“A” category of items. No such detailed records are necessary for “C” items. Any routine
method that ensures goods and accurate records is enough for “B” category of items.
Priority treatment:
VIP treatment may be accorded to A items in all activities such a processing of purchases
orders, receiving, inspection movement on the shop floor, etc., with an object to reduce lead
time and average inventory. No such treatment is necessary for “B” items. No priority is
assigned to “C” items.
Safety Stock:
All items of consumption are equally important from production point of view. Safety stock
should be less for “A” items. The possibility of stockouts can considerably be cut down by
closer forecasting, frequent reviewing and more progressing. “C” items, on the contrary,
should have sufficient safety stock to eliminate progressing and to reduce the probability of
stockouts. A moderate policy is required for “B” items, safety stock being neither too high nor
too low.
Value Analysis:
To secure maximum benefits, it is essential to select those items for value analysis which offer
the highest scope for cost reduction. The usage classification is a useful step in this direction.
Only “A” and “B” items are selected for detailed value analysis and the former is given
priority over the latter. “C” items should not be value analyzed
HML Analysis:
H-M-L analysis is similar to ABC analysis except for the difference that instead of “usage
value”, “price” criterion is used. The items under this analysis are classified into three groups
that are called “high”, “medium” and “low”. To classify, the items are listed in the descending
order of their unit price. The management for deciding three categories then fixes the cut-off-
lines. For example, the management may decide that all items of unit price above Rs. 1000/-
will of ‘H’ category, those with unit price between Rs. 100/- to Rs.1000/- will be of ‘M’
category and those having unit price below Rs. 100/- will be of ‘L’ category.
HML analysis helps to -
✔ Assess storage and security requirements.
✔ To keep control over consumption at the departmental head level.
✔ Determine the frequency of stock verification.
✔ To evolve buying policies to control purchase.
✔ To delegate authorities to different buyers to make petty cash purchase
VED Analysis:
‘V’ stands for vital, ‘E’ for essential, ‘D’ for desirable. This classification is usually applied
for spare parts to be stocked for maintenance of machines and equipments based on the
criticality of the spare parts. The stocking policy is based on the criticality of the items. The
vital spare parts are known as capital or insurance spares. The inventory policy is to keep at
least one number of the vital spare irrespective of the long lead-time required for procurement.
Essential spare parts are those whose non-availability may not adversely affect production.
Such spare parts may be available from many sources within the country and the procurement
lead time many not be long. Hence, a low inventory of essential spare parts is held. The
desirable spare parts are those, which, if not available, can be manufactured by the
maintenance department or may be procured from local suppliers and hence no stock is held
usually.
S-D-E Analysis:
S-D-E analysis is based on the problems of procurement namely:
✔ Non-availability
✔ Scarcity
✔ Longer lead time
✔ Geographical location of suppliers, and
✔ Reliability of suppliers, etc.
S-D-E analysis classifies the items into three groups called “scarce”, “difficult” and “easy”.
The information so developed is then used to decide purchasing strategies.
“Scare” classification comprise of items, which are in short supply, imported or canalized
through government agencies. Such items are best to procure limited number of times a year in
lieu of effort and expenditure involved in the procedure for import.
“Difficult” classification includes those items, which are available indigenously but are not
easy to procure. Also items, which come from long distance and for which reliable sources do
not exist, fall into this category. Even the items, which are difficult to manufacture and only
one or two manufacturers are available belong to this group. Suppliers of such items require
several weeks of advance notice.
“Easy” classification covers those items, which are readily available. Items produced to
commercial standards, items where supply exceeds demand and others, which are locally
available, fall into this group.
The purchase department employs S-D-E analysis:
✔ To decide on the method of buying
✔ To fix responsibility of buyers
S-OS Analysis:
S-OS analysis is based on seasonality of the items and it classifies the items into two groups S
(seasonal) and OS (off seasonal). The analysis identifies items which are:
Seasonal and are available only for a limited period. For example agriculture produce like raw
mangoes, raw materials for cigarette and paper industries, etc. are available for a limited time
and therefore such items procured to last the full year.
Seasonal but are available throughout the year. Their prices, however, are lower during the
harvest time. The quantity of such items requires to be fixed after comparing the cost savings
due to lower prices if purchased during season against higher cost of carrying inventories if
purchased throughout the year.
Non-seasonal items whose quantity is decided on different considerations.
M-N-G Analysis:
M-N-G analysis based on stock turn over rate and it classifies the items into M (moving
items), N (non-moving items) and G (ghost items).
M (moving items) is those items, which are consumed from time to time. N (non-moving
items) is those items, which are not consumed in the last one year. G (ghost items) is those
items that had nil balance, both in the beginning and at the end of the last financial year and
there were no transactions (receipt or issues) during the year.
Analysis mainly helps to identify non-existing items for which the store keeps bin-cards or
waste computer memory or waste computer stationary while preparing stores ledger. Stores
department even might have even ear-marked space for these non-existent items.
All pending/ open purchase orders (if any) of such items should be canceled.
F-S-N Analysis:
F-S-N analysis is based on the consumption figures of the items. The items under this analysis
are classified into three groups: F (fast moving), S (slow moving) and N (non-moving).
To conduct the analysis, the last date of receipt or the last date of issue whichever is later is
taken into account and the period, usually in terms of number of months, that has elapsed since
the last movement is recorded.
Such an analysis helps to identify:
Active items which require to be reviewed regularly
Surplus items whose stocks are higher than their rate of consumption; and
Non-moving items which are not being consumed
X-Y-Z Analysis:
X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory investment). Items
whose inventory values are high are called as X items while those inventory values are low are
called Z items. And Y items are those which have moderate inventory stocks.
Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.
XYZ analysis helps to identify a few items, which account for large amount of money in stock
and take steps for their liquidation/retention.
XYZ when combined with FSN analysis helps to classify non-moving items into XN, YN, and
ZN group and thereby identify a handful of non-moving items, which account for bulk of non-
moving stock. These can be studied individually in details to take decision on their disposal or
retention.

Shara – raw material to finished good

Major inventory- fabrics
Designing and cutting
Finished goods on display
Shipment department
COMPONENTS OF INVENTORY
1) RAW MATERIAL
Fabrics, zips, laces, labels, silks, cotton, threads, screen,
leathers, trading items, cartage
2) WORK IN PROCESS
3) FINISHED GOODS

Cotton made ups, cotton fabric, silk made ups, leather made
ups.
ANALYSIS OF SHARA
SHARA HOME Textile ltd. Started its journey on dec 14th 1994 under
visionary entrepreneur “mr rajiv sirohi” CEO of Shara India
He created a full production facility in 2001 at kasna, with a state
of art facility and latest technology.
Shara is involved in working closely with the handicraft sector, creating ,
designing, manufacturing, export of these products world over.
1) SHARA is totally an export based company and works on the “JUST-IN-
TIME MODEL” for inventory. The material is only acquired when the
order is placed by any company. They have to fulfill their order
The major raw material of SHARA is fabric, fabrics of
different varieties like cotton, silk, satin, jute, denim, polyester etc.
The designing and manufacturing of the product is done in house and
order is sent by shipment. Their inventory storage is limited to their
order size so as their finished goods material.

2) SHARA value their inventory manually based on lifo model and does
not use any kind of inventory software.

3) Their issuing policy uses assignment model to issue the raw material
for inventory

4) For controlling the inventory they use FSN model and their raw
material is controlled on the basis of fast moving and slow moving
finished goods.

5) They use TALLY software for their accounting practice.

 6) Company order’s the quantity of raw material based on EOQ model
and at the time of stock out problem they go for ROUTINE BUYING.

7) For the pricing of raw material they use FIFO method i.e. the raw
material purchased 1st, payment for that is also made first.

8) INVENTORY RATIOS

A) Inventory turnover ratio

This ratio indicates the number of times the inventory is replaced during the
financial year. It reflects the degree of liquidity of the firm and it shows how effectively the
executive in charge of maintaining the inventory level performs the task. Generally, a high
inventory turnover ratio is indicative of good inventory management, whereas a low inventory
turnover ratio signifies over investment in inventory or excessive inventory levels warranted
by production and sales activities, or slow moving or obsolete inventory.

2006- 2007- 2008-09

2007 08

inventory turnover ratio 1.96 2.76 3.6

Inference
The inventory turnover ratio is increasing over the year,
which is beneficial for the company

B) INVENTORY HOLDING RATIO

 2006- 2007-
07 08

holding ratio 186 132

Inference
The decline is holding ratio is because the company is
using “JUST IN TIME MODEL”.
C) INVENTORY CURRENT ASSETS RATIO

2006-07 2007-08 2008-09

current asset ratio 0.0632 0.5393 0.4646

Inference
As the company inventory current asset ratio is declining
over the year that means the company is improving its inventory
management practices.

1) INVENTORY ANALYSIS

A) RAW MATERIAL
2006-07 2007-08 2008-09

Raw 25423322 27646252 20684024

material

(% 8.74 -25.18
change)

Inference
 As in 2008-09 the raw material of the company is declining
drastically. It can be because sales of the finished goods have gone
down.

B) FINISHED GOODS

2006-07 2007-08 2008-09

Finished 71114236 68119393 53293109

goods

(% change) -4.21 -21.77

Inference
In both years sales are declining due to heavy fall in exports.