CHAPTER 3

INVENTORY MANAGEMENT : CONCEPT, PRACTICES, TECHNIQUES,

POLICIES AND ACTUAL PRACTICES.

Synopsis

A. Inventoiy Management - An Overview :

a. Literature Review On Inventory Terminology

b. Types of Inventories

c. Reasons for Holding Inventory

d. Cost Associated with Inventory

e. Inventories as a Means of Increasing ROI

B. Inventory Management Concept:

a. Principles of Inventory Management

b. Logistic Inventory Management

c. Importance of Inventory Management in Indian Context

C. Inventory Policies, Practices and Techniques

D. Inventory Operations :

a. Forecasting and Planning for Inventory

b. Purchasing - Concept Policies, Methods

c. Store Keeping - Functions, Issue Procedure, Storing Policies and Stores

System, Methods of Issue

E. Inventory Control:

a. Policies for Replenishment of Inventories

b. Inventory Analysis - Types of Analysis

c. Inventory Levels

d. Practices for Inventory Identification and Verification, Classification

and Codification of Inventory

e. Inventory Stock Taking / Verification

f. Inventory Audit System

F. Disposal Management:

a. Waste

b. Types of Waste Inventory

c. Waste Management

G. Inventory Control Through Accounting Techniques :

a. Valuation of Inventory - Purpose, Methods

b. Monitoring and Control of Inventories - Inventory Turnover Ratios

H. Inventory Control Through Scientific Techniques :

a. Value Analysis

b. Materials Requirements Planning

c. Just-In-Time (JIT)

I. Recent Developments in Inventory Management:

a. Multi Echelon Inventory System

b. Optimised Production Technology (OPT)

c. Management Information System (MIS) for Inventory Control

CHAPTER 3

INVENTORY MANAGEMENT : CONCEPT, PRACTICES, TECHNIQUES,

POLICIES AND ACTUAL PRACTICES.

A. Inventory Management - An Overview :

In modem competitive world, the major problem and primary responsibility of an

organisation, whether it is an public sector, private sector or government department

(business or industry) is to optimise the use of resources. For the survival and growth

of an industrial enterprise, it is highly essential that all the pervasive efforts are made to

minimise and control the total costs, to achieve higher operational efficiency and

profitability of an organisation. Inventory is an important resource of an enterprise.

Inventory management is an important scientific device for controlling inventory and

eliminating wastage, is considered an integral part of Industrial management in modern

times. Modem management has started taking more and more interest in “Inventory

Management” as Inventories are highly essential for any enterprise and at the same

time it has a direct impact on the financial resource, as it locks up funds. There are lot of

possibilities to minimise inventory, both in terms of investment as well as quality, as

it is a controllable variable.

a. Literature Review On Inventory Terminology :

Different authors in the field of Materials management, Inventory management,

Production/Operation management as well as Financial management have defined term

“Inventory” in different ways, in different contexts. But the squeeze centres around

almost the same meaning.

To begin with, if we look at the conceptual part, the word Inventory has been defined i

as complete list of goods, household items, personal possessions. Goods list in this;

Stock in Trade (in U. S.)

Inventory is Raw materials and Supplies, goods finished and in the process, of

manufacturing and merchandise on hand, in transit and owned in storage or consigned

to others at the end of an accounting period, their aggregate value, usually at cost or

some proportion of cost; The process of counting, listing and pricing them; The list

showing description, qualities, unit prices, extensions and totals etc. Inventories are

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expandable physical articles held for resale, for use in manufacturing a product or for

consumption in carrying on business activity.

Thus, materials which are either usable directly or indirectly in the manufacturing

process as also those which are ready for making finished products by some other

process or by composing them either by the concern itself or by outsiders can be termed

as inventory.

In the similar context it has also been defined as, “Those items or materials which are to

be kept in stock to meet the operational and maintenance requirements”. 2

“Inventory is an necessary evil”. Necessary as it guards against uncertainties of

demand and supply by decoupling supply and demand, Evil as it blocks money.

“Physical inventory in any business, is made up of a no. of stock keeping units or items.”3

Stock keeping items which are help in a stock point and which serve to decouple

successive operations in the process of manufacturing a product and getting it to the

customer.Inventory is also used to designate a detailed list of the articles, with perhaps the

description, identification number, quantity and value.

Aggregate of those items of tangible personnel property which are “Held for sale in the

ordinary course of business, To be currently consumed in the production of goods 01-

services to be available for sale.” In the process of production of such sale. 4

Inventory is “An idle resource of any kind, provided that such resource has an economic

value”.

In this definition the element of futurity is implied since idle resource represent sunk cost

for future decisions and actions. 5

According to research officer of one of NTC mills (, Inventory in the business parlance,

connotes “The value of Raw materials, consumables and spares, work in progress and

finished goods in which the company's working capital funds have been invested.”

A practical definition from Materials Management angle would be “Items of stores or

materials kept in stock to meet future demands of production spares, maintenance,

construction etc.”

The terms “Stock and Inventory” are generally used synonymously. Inventory means

tangible property held for sale in the ordinary course of business, in the process of

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production for consumption in the production and sale of goods or services after sales

including maintenance, supplies and consumables other than machinery spares.

Implications : Thus it can be seen from the above definitions that the term viz. flocks,

herds, granaries warehouses, etc. whereas with the passage of time the needs and

activities of men, have multiplied, the range of inventory has become larger and more

diversified with industrialisation, the concept has undergone serious changes as besides

inventories as above, money is also considered as an important merchandise

inventories, over and above the requirements of continuity of production and

distribution, were welcome to safeguard against uncertainties and stock out

positions, on the other hand, increased requirement of liquidity, the tendency has changed

from holding inventories to holding of cash as now a days excessive inventories are

considered as “Grave Yard” of business as many business have failed on account of

surplus stocks or excessive inventories,

b. Types of Inventories :

Inventories as defined earlier consist of different components/types classified on the basis

of their nature, importance, functions, conditions during manufacturing processes, stages

of completion, end use, value of production, ease of handling etc.

Different authors have classified inventories into different categories. Accordingly

inventories are classified (1) By their condition during processing and (2) By Functions 7

(1) By conditions during processing Inventories may be classified as :

Raw Materials : These are Iron ore for steel, grain for flour, wood for furniture, raw

cotton yarn for cloth and materials used to make the components of the finished product.

Components : Parts of sub-assemblies ready to go into the final assembly of the product.

Work in Progress : Materials of components being worked on or waiting between

operations in the factory.

Finished Product : Finished items carried in inventory in a make of stock plant or

finished goods ready to ship to a customer against an order in a make to order plant.

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(2) By Functions :

TYPE FUNCTION BENEFITS1. Lot Uncoupled manufacturing Purchasing discounts, reducedSize operations freight material handling paper

work, inspection etc.2.Demand Insurance against Increased sales, reduced freight,Fluctuatio unexpected demand (safety customer service, clerical,n stock) telephone, packaging cost etc.3. Supply Insurance against Reduced downtime and overtime

interrupted supply i.e. and substitute material andFluctuation

strikes lead time variation incoming freight, increased sales

4. Level out production [i.e. Reduced overtime, sub-contract,Anticipati to meet seasonal sales, hiring, lay-off training, scrap andon marketing promotion] rework expenses5. Fill distribution pipeline Increased sales, reduced freight,Transportation

[i.e. in transit] handling and packaging cost

6. Hedge Provide hedge against price increase [i.e. copper, silver]

Lower material cost

A slightly different classification is given in the following table, g

INVENTORY PRIMARYUSAGE

INVENTORYMANAGEMENT

FUNCTION1. Raw Material Production and

AssemblyStores all components and materials for production

2. Sub-assemblies in process manufactured items

Production and Assembly

Monitor movement of stores and all in process inventories

3. Finished goods andService Parts

Sales To maintain adequate finished products to fill customer orders and parts needed for after sales service

4. Repair parts Maintenance and Service

To keep adequate supply of parts and avoid costly delays when equipment fails

5. Office Supplies Administration To stock forms, papers, stencils and items of clerical book keeping

6. ComputerSupplies

Data Processing Maintain tapes, cards, repair parts for EDP

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Inventories are also classified as under by a leading author 9 on Materials Management

and Purchasing.

1. Production Inventories : Raw materials, parts and components which enter the firms

product in the production process. These may consist of two general types :

a. Special Items manufactured to company specifications.

b. Standard industrial items purchased off-the-shelf.

2. MRO Inventories : Maintenance Repair and Operating supplies, which are

consumed in the production process but do not become part of the product (e.g.

lubricating oil, soap, machine repair-parts etc.).

3. In Process Inventories : Semi-finished products found at various stages in the

production operation.

4. Finished Goods Inventories : Completed products ready for shipment.

Another author divides Inventory into different groups as under :

• Raw materials • Packing materials • Loose tools

• Fuel stock • Finished stock

5. Partly finished stock : Parts manufactured but not to be sold as completed or finished

product of the concern.

6. Work in progress : Materials processed to a stage in production shop that they

cannot be separated exactly in accordance with their respective specifications and

manufactured items issued from stores department

7. Unused stock : These include wastage unused, scrap or defectives which may be sold

or destroyed. , -

A research analyst 10 classifies inventory as :

1. Movement Inventory : This arises because of the time required to move stock from

one place to another.

Mathematically I - ST where :

I = Movement Inventory needed

S = Average Sales Rate

T = Transit Time from one stage to the next

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2. Organisation Inventory : More of such inventories are carried between stages

in a manufacturing distribution process, the less co-ordination is desired to keep the

process running smoothly.

On the basis of common Inventory functions :

a) Lot Size Inventory : Inventories based on buying or manufacturing on EOQ basis.

b) Fluctuation Stock : Held to cushion the shocks arising basically from predictable

fluctuation in consumer demand.

3. Anticipation Stock : Required where goods are consumed on a predictable but

changing pattern throughout the year and whereby completing inventories rather than by

changing production rates with attendant fluctuations in employment and additional

capacity requirements . Inventories to meet a special sale or fill needs during planned

shutdown.

RBI study group 11 classified inventory as :

• Flabby inventory • Profit making inventories

• Safety inventory • Normal inventory

Due to changes in manufacturing or other reasons, the inventory becoming obsolete

cannot be disposed off. In view of this situation inventories can be divided into three

groups:Current inventory : It is applicable to current sales and may be disposed off at a profit

within a reasonable period of time.

Slow moving inventory: Inventory which applies to orders received only occasionally or

to repair parts for which there is an occasional call. It cannot be disposed off in near future

and may also have to be disposed off at a price much lower, than the inventory value.

An obsolete inventory: Inventory which has no demand and has only scrap value.

Despite of diversity of opinions among thinkers and authors on the subject, inventories in

a Textile mill may be classified n into the following six constituents :

• Raw materials • Semi finished goods

• Work in process • Yarn or packed

• Cloth • Finished goods (loose grey and packed)

• Cloth (grey with processors) • Cloth (packed and processed)

• Wastes / Scraps i Usage

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From the different types of inventories as detailed above, it seems that there are difference

of opinions among diffeient authors and researchers. But certainty, the typology

throws light on different reasons and basis for the same. However, for the sake of

convenience* in this study, inventory may be classified into the following types:

• Stores and spares

• Coal and fuel e.g. furnace oil lignite gas etc.

• Stock in trade which includes raw materials viz. raw cotton, yam etc.

•Finished goods (loose and packed)

• Waste (cotton yarn and cloth usable and saleable)

• Retail shop stock/trading goods.

• Yam for trading

• Goods in transit (stores, coals, raw materials, finished cloth etc.)

• Process stock. Cloth in processing department Stock in spinning and weaving

department

• Stock of canteen and grain shop (in case of few mills)

• Colours, chemicals and paints.

• The word convenience is used here because the classification is based upon the annual

reports referred as well as the questionnaires answered for this research study.

c. Reasons for Holding Inventory :

What is the reason for Inventory ? The question which may seem trivial, surprising

enough however, is often overlooked. The answer to this question is critical in

determining the control system, specifying costs and other factors to be considered.

The following is a list of reasons n neither necessarily exhaustive nor mutually exclusive,

though closely related:

• Protection against uncertainties in Transit and handling

• To give customer assurance of availability

• To hedge against expected surges in sales

• To await shipment to fill a definite order

• To handle production variations

• To make materials in economic lot sizes

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• To permit flexibility in plant scheduling

• To hold off increasing capacity

• To provide raw material storage

• To take advantage of favourable raw material price

• To take advantage of distribution cost

• To hold by-products

• To store overruns or misruns

• To await disposition

• To keep storage equipment operational

• To allow for errors in measuring and recording

• To protect against strike and work stoppages

• To protect against hurricanes and other natural calamity

• To speculate against price and cost changes.

In short the motives for holding inventories are: u

Transaction motive - To maintain inventories to facilitate both production and sales

operation.

The Precautionary motives - To guard against the risk of predictable changes in

demand and supply forces and other errors.

The Speculative motive - To increase or decrease inventory levels to take advantage of

price fluctuations.

The basic objective of holding Inventories:

• Raw materials inventory - to decouple purchase and production activities.

• Finished goods inventory - to separate production and sales activities.

• Semi-finished goods - to separate one process / department / work centre / M/c to

another

Theoretical literature review on Reasons to keep inventory :In the opinion of another author 15 the reasons for inventory build up are different for

different components of inventories as under :

1) Raw materials

• Weak purchase organisation not in touch with marketing

• Absence of suitable classification codification, accounting etc.

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• Ineffective control on issue and consumption

• Higher lead time for important items

• Single source of supply

• Lack of co-ordination between materials management and production control deptt

• Lack of automation

2. ) Work in Process

• Intermittent manufacturing process

• Long operating cycle time

• Lack of standardisation

• Power shortage and power cut

• Absenteeism

• Mismatch of production component

• Machine breakdown and poor materials handling

3. ) Finished goods stock

• Types of manufacturing system e.g. manufacture as per order or off the shelf

• Lack of aggressive marketing strategies

• Lack of co-ordination and inspection

• Non availability of shipping space

4. ) Spares

• Overstocking of imported spares

• Critical spares for urgent supply

• Non availability of some spares

• Lack of standardisation

Majorities of the companies hold inventories for attaining efficient production only,

neglecting the investmert aspects. In addition to this, it is also for gaining quantity

discount, reducing ordering cost and avoiding loss of sales, in the opinion of a researcher.

If we analyse the above reasons it may be seen that some of the reasons are common to

almost all the components and most of the reasons are based on the peculiarity or

characteristics of the items. It may also be possible to classify all the reasons into the

factors which are controllable and uncontrollable for the purpose of effective inventory

management

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d. Cost Associated with Inventory :

An author i6 opines that a company’s inventory policy affects the following costs :

1) Inventory carrying cost : This cost is variable, semi-variable and fixed, incurred in

keeping the inventory of various types in stores until used for production or sales. It can

be further classified as:

a) Capital Cost : Capital cost is the cost of borrowing capital or opportunity cost of

company’s funds to be invested in inventories.

b) Storage Cost : Storage cost is the cost of preservation, storage, record keeping, stock

verification, deterioration and obsolescence, insurance etc.

2) Procurement Cost : It is a cost for ordering, replenishing and recouping the inventory

viz., paper cost, postage cost, cost of follow up, inspection and testing cost and

administrative cost etc.

3) Set up cost / Preparatory cost : It is a cost of production to enable the machines to

change over the job, to prepare the machine for the job. It also include idle time cost,

works order cost etc.

4) Stock out cost : It is the cost of non-availability of the items when required and its

related cost. It may consist of followings :

• Idleness of resources

• Loss of profit

• Cost of emergency actions e.g. premium price paid

• Loss of goodwill

• Loss of customers

One research n reveals that inventory is the life-blood of a concern. Excess or short

supply of inventory is like the high or low blood pressure respectively, both dangerous to

health. Hence it requires a regular check and verification to keep the concern healthy

otherwise it will have an adverse affect on the followings:

• Ordering cost

• Inventory carrying cost

• Cost of running out of stock

As per an American Consultant Agency is, the annual carrying cost averages over 20% of

inventory value i.e. within a range of 10% to 34% with the following elements :

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Element Percent

Interest charge on capital investment in inventories 4-15Insurance cost 1 -3Property cost 1 -3Storage Cost Upto 3Obsolescence and deterioration 4-10

e. Inventories as a Means of Increasing ROI :

Inventories are controllable and any reduction in materials cost will directly

contribute to increasing profitability and ROI.

The following equation defines relationship of inventory to Return on Investment in

an organisation:

ROI = (Profit / Capital Employed) X 100

Reduction of inventories affect the profitability in the following manner :

• Reducing cost of keeping stocks, saving of interest on capital and thereby

increasing percentage profit on sales

• Reducing working capital and thereby increasing capital turnover.

Peculiarities :

• It accounts for highest share in working capital of CTMS.

• It is the only item of working capital which involves all functional area of

management viz., marketing, production, purchasing and finance

• Risk involved in holding inventory is much higher as compared to other items of

current assets.

• Unlike other items of current assets, inventory is associated with ordering costs,

carrying costs, procurement cost, stocking cost etc.

• It is the only item of current assets which has direct impact on the prices and

income of a firm.

In India where approximately 60 to 70 percent of working capital is tied up in

industrial inventories, there is a vast scope of cost reduction through scientific

inventory management Inventories in India are four times than those in USA. 19

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B. Inventory Management Concept:

The concept of Inventory Management has been visualised differently by different

authors, academicians and researchers on the subject. In an attempt to gain an

insight in inventory management, it is found imperative to know different opinions

on the subject.

One prominent author on production management 20 defines Inventory

management as The branch of business management, concerned with the

development ofpolicies to which the firm's inventory is meant to conform.

Thus, Inventory Management is uThe sum total of those activities necessary for the

acquisition, storage, sale, disposal or use of material

The approach differs as policy and managerial aspects as well as functional aspects

of management are emphasised.

Inventory management is also perceived as 21 The co-ordination of a series of

functions according to a plan which will economically utilise the plant facilities and

regulate the orderly movement of goods through their manufacturing cycle from

procurement of all materials to the shipping of finished goods at a predetermined

rate.Thus, Inventory Management deals with the determination of policies and procedures

for procurement of commodities and its effective management within the financial

discipline of a concern.

Inventory control, a part of inventory management, is a planned method of

determining what to indent, how much to indent and how much to stock so that

purchasing and storing costs are the lowest possible, without adversely affecting

production and sales.

This includes functions of planning and programming of materials, purchasing,

warehousing, disposal of scrap and surplus material and utilisation of by-products.

Thus, Inventory management presents the sum total of the activities required for

acquisition, storage, sale, disposal or use of materials. From this definition it can be

said that inventory management in concerned with :

• Planning and programming.

• Purchasing

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• Storage and care

• Disposal of surplus stores

• Controlling of inventories 22

a. Principles of Inventory Management:

• Adequate inventory has to be maintained to avoid stock out causing consequent

production held up and customer dissatisfaction

• Excessive investment in inventory items must be avoided as it increases carrying

cost resulting in loss of profit.

The scope of inventory management includes the following:

• Inventory planning based on sales forecast and production plans and also

include preparation of budget classification and codification of inventory items

etc.

• Inventory execution including setting inventory levels , fixing norms for safety

stock level, lead time analysis, calculation of inventory costs, inventory pricing

decisions etc.

• Stores and Inventory control : Physical control over inventories,

preservation of stores, minimisation of obsolescence and damage, disposal of

waste, inventory records, accounting and reporting system etc.

On the basis of a careful study of above definitions by different authors, academicians

and researchers on the subject, it may now be possible to define inventory

management as the determination and applications of the functions, policies,

techniques and practices of management to various activities connected with the use

and management of inventory resources.

That is to say, the Inventory management comprises of planning, organisation, co­

ordination (of various departments and inventory functions) as well as control of

inventory. The application of various policies and techniques and practice of the

above functions are the key factors to be performed and monitored for attaining

the objectives and goals of business organisation.

Pre-requisites of Scientific Inventory Management

In the context of inventory management the firm is faced with the problem of meeting

the two conflicting needs viz.

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• To maintain a large size of inventory for effective production and sales

management.

• To maintain minimum investment in inventories.

Both excessive and inadequate inventories are undesirable. The^ objective of

inventory management should be to determine and maintain optimum level of

inventory. The dangers of over investment are :

• Unnecessary tie up of firms, funds and loss of profit

• Excessive carrying costs

• Risk of liquidity

whereas inadequate inventory leads to :

• Production holdups

• Failure to meet delivery commitments

Production and sales marketing departments are interested in maximum inventory

whereas financial management attempts to minimise inventories.

Characteristics of scientific inventory management should be as under: 23

• Maximum co-ordination amongst the departments concerned with inventory viz.

buying, receiving, inspection, storage, finance departments etc.

• Effective classification, codification, standardisation and simplification of

materials requisition forms, order forms etc.

• Proper handling of material and efficient traffic management

• Existence of effective internal control and internal check system for verification

of financial and physical inventory transactions

• Proper planning, programming and scheduling of inventory requirements

• Well planned storage and stock control, proper authorisation of receipts, issues

etc.• Properly thought out procedures for verification of stock viz. Perpetual,

periodical, snap checking etc.

• Fixation of inventory levels e.g. maximum level, danger level, safety stock,

minimum level etc.

• Maintenance of inventory records to control inventories during production or

storage

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• Effective communication and management information system, quick and regular

reporting regarding inventory balances, issue, receipts, obsolete stock, wastage,

defective items etc.

• Analysis of inventory items on various basis to concentrate more on important

and critical item and thus facilitating management by exception

• Use of computers and electronic data processing, quantitative techniques,

operation research techniques for inventory control

b. Logistic Inventory Management:

Inventory Management is the function responsible for co-ordination, planning,

sourcing, purchasing, moving, storing and controlling inventories in an optimum

manner, so as to provide predetermined services to the customers at a minimum

cost. 24

Today, Inventory Management is practised as a confederacy of traditional

materials activities bound by a common idea i.e. the idea of an integrated

management approach to planning, acquisition, conversion, flow and distribution

of inventories of raw materials, work in progress, factory supplies and finished

goods awaiting for dispatch. Sometimes inventories of retail shops are also

included in this broad concept.

Inventory management includes the activities of purchasing, traffic, receiving,

warehousing, surplus and salvage/scrap management as well as production planning

and control. In addition to this customer service, scheduling, shipping and

physical distribution are also sometimes included.

Business organisation is a system of which inventory management is a sub system.

Similarly inventory planning, programming, purchasing handling storage and

control are the sub systems of inventory management system. The functions of

which must be carried out either concurrently or in sequence.

In most of the firms, Inventory Management, Marketing and Manufacturing are the

three main operating sub systems in an organisation, which overlaps significantly

and hence are continuing source of conflicts. The other sub systems like finance and

personnel serve the needs of the above three functions and also frequently add

to conflict, too. One of the paramount advantages of logistic management is that

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it forces co-ordination between all these above functions.

Inventory management cannot be performed in isolation and it does not occur in

vacuum. It is closely related with other functional areas of business.

Inventory management is an activity integrated, co-ordinated and entwined with such

widely spread functions of management as purchasing, production, planning and

scheduling, finance, marketing, physical distribution, store keeping etc. Inventory

management is closely related with all the functions of engineering, procurement of

materials down to final distribution. 25

Research into the field of materials management have revealed that inventory

management cannot function efficiently without proper co-ordination with other

functions of business, due to following reasons :

• Due to specialisation the materials and consequently inventory management

activities have become so wide that it requires co-ordination or direction

towards common goal of business.

• To avoid jurisdictional disputes and overlapping between various functions of

management

• Any development or change in any one function or department has its impact on

other functions.

• Accepting inventory management as a system requires subordination of

departmental interest to organisational interest.

• Inventory controller can control and co-ordinate with an overview that ensures *

proper balance of conflicting objectives.

• Rapid transfer of data reporting informal and short communication channels

(along with formal ones) and necessitates integration.

• Increased computerisation/mechanisation, development of new tools and

techniques of inventory management, use of operation research techniques like

simulation, linear programming, queuing theory and Materials Requirement

Planning, Just In Time inventories, crisis management etc. require that all the

functions of business must be integrated for most economical operations.

Logistic Inventory Management can be broadly classified in two types : 26

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Horizontal Integration : Integration of Inventory Management with other

functions on horizontal line in the organisation structure viz. Design and

Engineering, Research and Development, value analysis, Purchasing,

Manufacturing, Marketing etc.

Vertical Integration : Integration of the activities of Inventory Management viz.

Planning, Procuring, Sourcing, Handling, Storing, Controlling, Receiving and

Inspection, Disposal of wastes and scraps.

All these functions and activities are responsible for attainment of organisational

goal viz. minimising inventories and production cost, on time delivery of

production materials and meeting delivery commitment to customer.

Components of Total value 27 with respect to Logistic Inventory Management:

Manufacturing Selling Distribution Inventory Management.1. Materials 1 .Advertising 1. Channels 1. Inventory Planning2. Labour 2.Sales

Promotion2. Production andSupply

2. Purchasing

3. Overhead 3. Packaging 3. Warehousing 3. Receiving4. Depreciation 4. Sales

Activities4. Transportation 4. Inspection and Quality

Control5.R and D 5. Extension

of Credit5. Communication and DataProcessing

5. Value Analysis

6. Design and Engineering

6. Profit Taking 6. CustomerServices

6. Inventory Control

7. QualityControl

7. Inventory Carrying

8. Use of Computer, EDP and OR techniques

Functional Areas of Management in a typical manufacturing company 28 and their relevance to Inventory:

Marketing Finance and Accounting

Manufacturing Personnel

1. DistributionChannel

1. Raising and Allocation ofFinance

1. Production and Supply

1. Determining Requirement

2. CustomerService

2. Communica­tion and Data Processing

2. Warehousing 2. Recruitment and Selection

3. Inventory obsolescence

3. CarryingInventory

3. Transportation and Handling

3. ServiceConditions4.Transfer,Promotion,Training and Development

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Relevance to Inventory:

1 .MoreInventory

Less Inventory Right men for right job

2. Frequent short runs

LongProductionRuns

3. Fast order Processing

Cheap Order Processing

EmployeeSatisfaction,Safety,Morale and Development

4. Fast delivery Low CostRouting

5. FieldWarehousing

LessWarehousing

PlantWarehousing

OrganisationGoals

Now it will be possible for us to clearly position the Logistic Inventory Management

in the organisational hierarchy and place different functions circumscribed in the said

concept as under:

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Chart 1 : Organisational hierarchy for a Logistic Inventory Management.

Where :

P = Policies S = Systems'T = Techniques M = Methods A = Actual Practices

Some of the largest companies in foreign countries like Du Pont, Gillette, Champion

International Corporation etc. have saved materials cost and increased efficiency

through co-ordination.

Thus, Logistics Inventory Management is important to attain the objectives of the

organisation most effectively and with minimum of conflicts and rheochromatics

(smooth flow of material).

The concept of Logistics Inventory Management is based on the concept of

logistics management The former forces co-ordination and manages different

departments of an organisation v/hile the later does the same for different

function of inventory management That is to say in the former, Inventory

Management is a sub-system of management system whereas in the later, Inventory

Management is regarded as a system in itself which is decomposed into sub systems,

c. Importance of Inventory Management in Indian Context:

Inventory Management has gained importance in India due to following reasons. 29,

1. Late industrialisation

2. To conserve valuable foreign exchange

3. To Release surplus capital for productive purpose

4. To increase competitiveness in foreign markets by reducing costs

5. Seller's market

6. Inflationary hoarding of stocks

7. Strict import procedure

8. Excessive dependence on foreign collaboration

9. Inadequate storage facilities and higher cost of storage

10. Use of scientific techniques at low ebb

11. Mechanisation

As defined in the concept of Inventory Management, application of different policies,

techniques, system and actual practices to different functions of Inventory Management

of CTMI can be explained as under :

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Policies : The word policy may be defined 30 as under:

• course of action adopted by a government / business / individual

• prudent conduct

• sagacity - showing insight or good judgement

Policies are statement of aims, purposes, principles, or intentions which serve as

continuing guidelines for management in accomplishing objectives.

Policy has been defined 31 as :

• A rule or set of rules that guides and governs action

• A collection of stated or implied intentions of an organisation

• In the field of management that branch dealing with decisions and their

planning, formulation and assessment, establishing the objectives and general

methods of administration by which the operations of any organisation are

conducted.

Policy is a statement which describes in very general terms, an intended course of

action. Policies are developed to serve as general guidelines in channelising

future action towards objectives.

C. Inventory Policies, Practices and Techniques:

Inventory Policies are broad and overall guides to performance. Policies define, in

general terms, the basic jobs of each department and its relation to other

departments. They are derived from the general goals and objectives of the

department itself and the company as a whole.

Inventory policies must strive to attain a balance between profitability and

liquidity of the company/mill. In a cotton textile mill, which is plagued by shortage

of working capital, inventory policies dovetail affects the working capital of which

inventory constitutes a major portion.

In the opinion of one researcher 32 “Too little inventory jeopardizes the ability of

the firm to function efficiently and too much of it reduces profitability.”

Well defined policies must be established to meet the goals of:

• Efficient manufacturing operations

• Inventory turnover

• Customer service levels etc.

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Responsibility for inventory policy rest with top management Such policies should

be flexible enough to be exercised by operating personnel in new conditions.

Two basic types of policies are :

• Reorder level policy - based on the level of inventory held

• Reorder cycle or periodic review policies - decisions based on a regular time

basis.

In addition to this, the researcher also emphasized the need for grouping of

inventories into ABC analysis to arrive at overall comprehensive stocking policy e.g.

• Category A - Periodic review policy

• Category B - Reorder level policy

• Category C - Reorder level policy with a regular review of policy.

It is desirable to compile inventory policy manual covering all aspects of inventory

management due to complex nature of inventory management Top management

should prepare it and circulate to middle level to attain corporate objectives.

An eminent author 33 is of the view that management policies for inventories are :

A) Inventory Turnover policy vis-a-vis average cost of goods sold : A high

inventory turnover should be the policy. Similarly, ratio of inventory to total

assets is another such policy.

B) Since inventories are money, inventory policy of management is to find out

opportunity cost of investment of funds affecting the size of inventory.

C) A company's inventory policy may be whether to hedge or not against the

possibility of interruptions in flow of materials or price changes.

D) Whether to operate with very small inventory or large inventory.

E) Pricing of inventories to give the best price break

F) Categorization of inventories

G) What should be supplies and what should be materials for production ?

H) What products should be logged in and out on a perpetual inventory records ?

I) How much inventory should be on hand ?

J) No of inventory stock-outs permitted

K) Availability of service parts

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As inventories of different types in a textile mill are managed and accounted for by

different departments, as can be observed from the Logistic Inventory Management

chart, the policies reflect the views of concerned department and must be co­

ordinated by top level management Inventory policies differ from mill to mill

depending upon categories and characteristics of CTMs.

Inventory Practices - Techniques :

The word practice has been defined as 34:

• Habitual action of performance

• Repeated activity undertaken to improve skill

• Session of the above

• Action as opposed to theory (i.e. based on theory)

• Procedure especially of a specific kind

• When actually applied, in reality

Thus, policies are general principles of conducting business, on the basis of which

administrative practices are devised.

Policies and practices are sometimes used collectively as a phrase or interchangeably.

Written policies and procedures, sometimes are called standard practices or standard

operating procedure 35.

In simple terms policies are 'what we intend to do ’ and practices are ‘what we do

Specific Policies and Practices :

When both the above terms are applied to a specific function of management, they

become specific policies and practices. In the context of working capital management,

policy of financing the Inventory requirement may be with :

• Short term funds only

• Long term funds only

• Short and long term funds

Depending upon the duration of the fund, the above policies can be practised as:

• Cash credit

• Trade finance

• Shares and debentures

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• Public deposits

• Retained earnings

• Advance from customers

• Any other

Similarly for Inventory Control, usage of different ratios, statements and reports related

to inventory may practised.

Techniques :

The word technique connotes 36 :

• Mechanical skill or art

• Skilful manipulation of situation

• Methods details

Technique is ‘skilled way of doing a job and dealing with practical work'.

Following techniques may be used in order to assess the financial policies :

• EOQ

• Materials levels

• Lead time analysis

• Weeding out slow and non moving items

• Any other

Inventory Management and Inventory control techniques were originally developed

in manufacturing industries in the early 1960s. Any organisation which makes use of

modern tools of management in various phases of their operations, often find that the

areas where these tools are most readily applicable and often the most profitable,

are those concerned with the control and optimisation of inventories.

It is accepted that a prudent business is one where maximum sales are obtained

with minimum balance of inventories.

D. Inventory Operations :

a. Forecasting and Planning for Inventory :

Inventory planning should be co-ordinated with other planning and control activities,

such as sales forecasting, cash planning and capital budgeting. Hence it affects all of

these activities in many ways. The specific steps and timing will vary from one

company to another, depending on the product and process requirements.

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Methods of Forecasting : For effective sales estimate following methods of

forecasting are prescribed by many authors on the subject:

• Judgement

• Intuition based on commercial and technical knowledge

• Mathematical Analysis

• Statistical Analysis

• Statistical and Mathematical models

As suggested by Gopalkrishnan and Sundaresan and Dean. S Ammer, prominent

authors on the subject, Statistical and Mathematical analysis methods of forecasting

may comprise of following techniques :

• Statistical average (mean) method including simple, weighted and moving

average respectively

• Long term and short term trend analysis

• Correlation

• Simple exponential smoothing

• Regression analysis

• Time series analysis

• Probability/Bayesian analysis

• Random fluctuation etc.

Inventory Planning :

Inventory/Materials planning is a stepping stone in the materials cycle, a circulatory

flow of materials to and from materials management department within the

organisation. Materials plan is related with the overall plan of the organisation.

Therefore, there should be congruence of organizational and materials/inventory

planning goals.

Inventory planning may be defined as scientific way of determining the requirements

of raw materials, components, spares and other items that go into meeting production

needs within economic investment policies.

Inventory planning in a textile mill consists of planning for inventory management

functions, policies, practices, techniques etc. related to different components of

inventory viz. raw materials, work in progress, finished goods, spares, stores etc. It is

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basically materials requirement planning, budgeting etc. which also acts as guiding

and controlling device. Inventory planning covers non programmed decisions and

dealing with uncontrollable factors at top level, while at middle level and operating

level it is programmed decisions related to controllable factors.

The entire function of materials management can be sub divided into forecasting,

inventory/ materials planning, purchasing and inventory management as presented

below 37:

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Chart 2 : Logistics Inventory Management

Forecasting Sales History Sales Forecast

Forecasting TechniquesFinishedgoods

Forecast

Inventory Materials Planning

Finished goods nventory on Hand

Materials Requirement —►Bill of Materials etc.

Materials to be Purchased

Purchasing

Inventory Management

rPurchase Ore up, delivery

ers, follow schedules

Inventory Control

Materials Inventory on Hand

Supplier history, lead time, quality, timely delivery, rating price etc.

Reorder Point, Max/Min Inventory, EOQ, scrap, receipt and issue, analysis

L0 G1 S T ICS

INV E N T O RY

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Inventory Planning is a part of Materials Planning and vice versa. There exists a

conceptual difference between the two but so far as the basic function of planning is

concerned it remains the same for both.

Cotton textile industry being a manufacturing industry, scope of Inventory Planning is

very wide.

Inventory forecasting and planning policies in the opinions of mill executives may

constitute the followings :

• Planning and review period policy

• Norms for Inventory Planning e.g. Planning and control on the basis of Inventory

ratios namely:

• inventory component to total inventory

• inventory to total current assets

• inventory to net working capital

• inventory to total fixed assets

• inventory to sales

• Factors to be considered for Inventory Planning as a policy matter may be taken

as under:

• Production schedule

• Government controls

• Prices

• Availability

• Competition

• Company Policy

• Capacity utilisation

• Any other

Planning and Control system can be grouped into three broad classes namely long

range planning, short range planning, and scheduling.

The factors affecting inventory planning may be classified as under :

Macro Factors : These are the uncontrollable factors affecting inventory planning in a

cotton textile mill. These can be government policy for import and export of cotton

cloth, price trends of raw cotton, yarn, fibers availability etc.

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Micro Factors : These are the factors subject to control by the company/mill. These

can be capacity utilization, product mix, inventory policies, techniques to be used,

delegation of power, division of work, working capital management, inventory

levels, stores policy etc.

It is very difficult to draw a clear line of demarcation between the two due to semi

variable nature of some of the factors.

Techniques of Inventory Planning

Inventory planning can be used to assess firm’s requirements for different

planning horizons. In order to have a sound and reliable Materials/Inventory plan,

different techniques for inventory planning as given under may be practised:

1. Past consumption Analysis : It is a simple technique used by continuous

manufacturing units. In case of majority of cotton textile mills, production is meant

for stock or direct to market i.e. not based on specific job order. This does not

necessarily mean the CTM should continuously pour the unwanted goods into the

market. In order to attain the twin objectives of producing only the necessary

goods to match production with demand and also optimise the use of resources,

past consumption analysis of different input as also the analysis of demand for

finished goods in the market is a prerequisite.

2. Bill of Materials Explosion Charts : Sales forecast is the basis for materials

planning. Bill of materials can be effectively exploded on computers in order to

arrive at accurate requirements of materials.

Bill of Materials: It is a document containing the list of raw materials, components

and subassemblies, unit consumption and location code, supply conditions, lead

time required for manufacturing a particular final product.

As Bills of Materials are prepared from engineering drawings, new cards can be

replaced for old and invalid cards and some items can be recorded using punched

cards.

Explosion Charts : It is just a series of bills of materials grouped together in a matrix

form so that combining the requirements for different components can be done.

Computerised materials planning send the exploded requirements for future period.

But this is not possible without preparing a product structure i.e. assigning different

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levels where finished product is always at zero level and raw materials, assemblies,

subassemblies etc. are shown at other levels. 38

It is impossible to find out the total requirements of common parts and components

common to all products, along with earliest/latest time, lead time, rejection rate etc.

Now a days readymade softwares are available for different levels thus making the

materials planning easy and more user friendly.

3. Inventory/Materials budget : A budget is a financial or quantitative statement,

prepared prior to a defined period of time, of the policy to be pursued during that

period for the purpose of attaining a given objective. Inventory budget is the plan

which shows different components’ requirements and their use, purchasing, levels

of inventories, storing levels etc. not only in quantitative but also in financial

terms. Usually inventory budgets are prepared on annual basis which, like materials

plans, should be periodically reviewed.

Chart I: Process of Inventory Budget 39

4. Annual operating plans :

Planning under this technique is similar to budgeting i.e. estimates of operations to be

carried out during the year are prepared well in advance and accordingly the

requirements of different types of materials and levels of inventory are planned.

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5. Materials Requirement Planning :

It is a computer based inventory planning and control system to analyse and

manipulate large volumes of data to produce information for quick decision

making. This technique challenges traditional concept of inventory holding in

advance. It provides a different approach to production inventory through

explosion and aggregation of requirements on computers for various

department/products. This is more effective especially in an intermittent

manufacturing unit like a cotton textile mill which produces variety of clothes using

different mixings as well as processing different gray clothes purchased from

others spinning mills.

6. Bayesian Analysis:

Traditionally, materials planning was done on all or nothing basis especially for

decisions under uncertainties.

Bayesian analysis is a technique that permits a more realistic approach to decisions

under uncertainties. It enables to estimate that probability of occurrence of various

events after careful consideration of facts. It provides quantitative basis for

weighing relative values of decisions under uncertainties, along with the probability

of their occurrence.

b. Purchasing - Concept Policies, Methods :

Purchasing is a policy well planned, properly co-ordinated and covering a wide

range of control to the selection of materials sources of supply, the follow up to

ensure timely deliveries, a complete inspection for quantity and quality, well

planned procedures free from much formalities and development of up-to date

methods and techniques of higher standard to reveal efficiency and economy.

According to Gopalkrishnan and Sundaresan purchasing is ‘The function of

procurement with a view to reducing investment in and the variety and value of

materials so as to facilitate standardisation and competitive marketability of the

product’.

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Purchasing may be classified basically into two types :

Mercantile Purchasing: Where buying is intended for resale at a profit i.e. no value

is added to materials except the value intrinsic in purchasing itself.

Industrial Purchasing : It is concerned with the procurement of items for purpose of

consumption/conversion of inputs/raw materials into output/fmished goods. 39

Purchasing Policies :

1. Relating to Organisation :

Centralised or decentralised purchasing : Centralised or decentralised purchasing

activity is a top management policy to attain the objectives of the firm. The

fundamental operating policies are of interest to top management

Centralisation : Centralisation of purchasing function is necessary for the

attainment of optimum efficiency as well as maximum profits. Centralisation of

purchasing is concerned solely with the placement of purchasing authority and it

has nothing to do with the location of buying personnel. When a single person is

made responsible for the entire purchase, he is held accountable for proper

performance.

Decentralisation : When personnel from other functional areas viz. production,

engineering, sales, finance, personnel etc. perform the function of purchasing, it is a

case of decentralisation. If a firm adopts purchasing on a decentralised basis,

individual departments’ managers will handle their own purchasing.

Centrally decentralised purchasing : Sometimes, a company may follow a policy

where the entire purchasing is divided between the two - centralised and

decentralised. It is very difficult to follow complete centralisation as there is no

watertight compartmentalisation between the two.

Decentralisation with centralisation also becomes necessary in case of multi-plant

manufacturing firms where multi-plant centralisation and multi-plant decentralisation

is accepted as a policy. Whatever may be the organisational philosophy, the basic

policy must be established so that authorities and responsibilities are clearly

defined.

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2. Relating to Sources and Methods :

Different authors on the subject differ in respect of purchasing policies and methods.

Here it is imperative to clarify that Method is defined as the way of doing something,

where, the way in which purchasing is done may be termed as purchasing

method. This implies peculiarities entwined with purchasing, where, from whom

to purchase may be termed as a purchasing policy. For example, Purchasing from

different size of suppliers viz. small or large, single supplier or multiple suppliers,

established supplier or a new supplier who offers favourable terms, local, national

on international markets etc. 40

Methods of Purchasing:

Different methods of purchasing to be followed again, are a part of policy matter.

The way of purchasing based on the requirements, availability, price, discount,

staggered delivery etc. determine the method. Broadly speaking these methods are as

discussed below:

Methods based on period of purchase :

Requirement contract: The policy of buying here is according to market conditions

which may be defined as A purchase quantity that provides from 1 to 3 months

coverage as one which satisfies current operating requirements especially during

price stability period. Hand to mouth and forward buying may fall into this

category. In this case inventory built up will be low.

a) Hand to mouth buying : It is the practice of buying material to satisfy current

operating requirements in quantities smaller then those normally considered

economical, usually covering 1 to 4 weeks requirements.

b) Forward Buying : It is a practice of buying materials to satisfy operating

requirements ranging from 1 to 12 months. Here, buying is meant for conversion

or processing activities.

Speculative Buying : This type of purchasing is not considered as a legitimate part of

industrial purchasing as the buying is not meant for conversion but for reselling at a

higher price in future. When forward buying exceeds a period of one year, then also it

is treated to have entered into the sphere of speculation. It should be avoided as far as

possible. In this case inventory built up is very high and risky. 41

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Methods based on period of purchase as well as requirements :

a) Single order and staggered deliveries : It is neither advisable nor economical to

order and purchase the entire requirements of an organisation in a single order

and delivery. On the other hand, both the possibilities i.e. staggered orders and

single delivery, may also be thought of. In practice, frequency of orders and

deliveries increases ordering costs and inventory carrying costs respectively.

b) Consignment Contract: Purchase orders are placed in such a way that the

entire consignment or unit load is purchased in one lot where a group of buyers

can consolidate their requirements properly described and clubbed into related

groups along with the rate of their usage.

c) Quantity contracts : Under this method purchase order is placed for annual

requirements but arrangement is made for a predetermined phased delivery at an

agreed price which can not be changed without fresh negotiations.

d) Blanket order/Group purchase : As the name indicates, the entire requirements of

a group or family of items are ordered under a single blanket order. On the basis

of past experience, requirements are determined, suppliers are selected for each

family of items and blanket orders are placed on the basis of lowest group

totals. Estimated usage and not the specific order quantities are specified.

e) Stockless/Zero stock buying : Under this method the buying concern is not

required to maintain the stock as the onus of maintaining the same rests with

the supplier. The financial incidence of ordering cost and inventory carrying

cost is borne by the supplier. Prices charged by supplier are higher.

Methods based on peculiarity of purchase :

a) Tender buying: Tenders are invited by buying concerns on a competitive basis,

where in technical specifications and other terms and conditions are negotiated.

The buying company invites tenders by advertising through different media,

especially through newspapers. On the basis of tender, the buyer establishes

bidders lists and solicits bids from few/selected suppliers. Bids are evaluated

either in one step bidding where commercial and technical considerations are

evaluated together or two step bidding where technical aspects are evaluated

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first and commercial evaluation done subsequently, before the supplier is finally

selected. Orders are usually placed with the supplier offering lowest price, other

things being equal. This is the most popular method in government and nowadays

in private concerns too, to have a wider field of supply. But at the same time it

is costly as well as time consuming method.

b) Rate contract : In public sector organisations like GSTC and NTC mills, this

method is prevalent. The government purchase department, DGS&D, usually

enters into negotiations with suppliers to supply the entire requirements for a

specific period at an agreed rate which is not allowed to exceed once it is fixed.

The supplier on rate contract advertises in newspapers as ‘on rate contract

with DGS&D’.

c) Running contract: This method resembles rate contract adopted by government

department In addition to rate, here quantity to be supplied is also agreed upon

with agreed variation within specific limits for a specific period

d) Reciprocal buying : Practice of buying from ones’ customers in preference to

others.

e) Personal purchase for employees

Purchasing methods as described above are not mutually exclusive nor to do they fall

into a watertight compartment. Combination of more than one method for a

component is found in practice. Selection of any method or combination of more

than two may also be required which again may change periodically.

c. Store Keeping - Functions, Issue Procedure, Storing Policies and Stores

System, Methods of Issue :

A proper system of Inventory Control together with scientific methods of store keeping

will make inventory management most effective. This is the function which is much

more concerned directly with inventory management as compared to other functions.

Since stored materials constitute the inventory, the terms store and inventory may be

treated at par for the convenience of study.

Store is the safe custody of all the items of materials stocked in the store room for

which the store keeper acts as a trustee or custodian. The most important function

performed by stores is to provide uninterrupted service to manufacturing and

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marketing divisions.

Store Keeping is a function of receiving, storing and issuing of materials. It involves

supervision, safety and readiness of materials for use and issuing them against

requisitions.

Stores Management is concerned with carrying right type of materials in right quantity,

provisioning materials quickly as and when required, keeping itself against any kind of

deterioration, pilferage or theft and to carry out efficient performance of all these

functions at the lowest possible cost.

Stores Issue Procedure :

The user department will logically judge the efficiency of stores department by

provision of services of high standard rendered by the stores department Inventory

management fundamentals also emphasis this aspect.

In order to prevent indiscriminate issue, consequently wastage and improper use of

goods the issues must be properly authorised, either in written or verbal form if it is a

routine arrangement.

The following points should be considered for issue procedures. 42

• Authorisation of issue - Against written/signed document or verbal instruction as

per the policy

• Validity of demand - Items to be issued for the job/purpose it is meant

• Identification of requirement - Required items must be identified through code

numbers

• Timing of issue - To ensure timely issue, requisition must flow in time

Storing Policies:

1. Policies Relating to Organisation

Generally, stores department is headed by store keeper or stores manager in an

organisation. But, depending upon the location of stores and policy of centralisation or

decentralisation the stores organisation may be as under:

Centralised stores : Centralisation of store keeping is concerned with the placement of

an authority with the store keeper or stores manager as the case may be. It is least

concerned with the location of the storekeeper even though it may be an important

consideration.

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Centralisation takes place when the entire store keeping function is made the

responsibility of single person, who is held accountable by the top management for

proper performance. 43

Decentralised Stores : Decentralisation of stores occurs when personnel from other

functional areas or other departments viz. production, engineering besides stores

department perform the function of stores.

Benefits of Decentralisation

1. Minimised handling and associated work

2. Smooth flow of materials as and when required

3. Quick decisions for disposal and availability of materials

4. It is highly suitable for very large organisations having many departments

Complete centralisation is not desirable. Therefore, a combination of the two would

give better results.

2. Policies Relating to Stores system and categories

a. Open Access Storage System : This is widely used in highly repetitive mass

production types of organisation which shows a continuous and predictable demand for

materials.

Under this system, no store room exists as such and normally material is physically

stored nearest to the point of it’s use just as it is stored in the store room. Materials are

stored in bins, racks, shelves, pallets, in boxes etc. Storage facilities are open and an

employee has open access to any storage facility.

b. Closed Storage System : Materials are stored in closed and controlled store area.

Usually the storage area is kept locked for physical control purpose. All the receipts

and issues are made with authentic documents only. Maximum physical security and

tighter accounting control is ensured through this system. No one except the stores

personnel is permitted to withdraw materials from stores.

c. Random Access Storage System : This is a unique storage system where materials

are stored at random locations in the stores. Whenever materials are received, they are

stored in available shelf. On the issue of any stores items, the space available is used

for any other materials coming in the stores. Usually records for stores are

computerised to know the locations. Nonetheless, effects are made to groups of similar

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types and sizes of storage equipments which may facilitate division of stores as per the

storage requirements of different items. Whenever punched record card is prepared for

records purpose, location address is written on the card.

This system suffers from following drawbacks :

• It is very expensive

• Physical control becomes difficult

• Creates problems when record card is lost

d. Stores at suppliers plant: From the discussion of the above systems, it is clear

that each one has it’s own limitations. Therefore, practically combination of any two or

more may be used in any particular organisation.

3. Policies Relating to Methods and Practices of Issue

Before discussing various methods of issue it is advisable to understand the following

different issue systems:

a. Issue on Demand System : In this system material is issued against material

requisition note prepared by competent authority. Sometimes, stores in-charge may

be required to check the papers prepared at works planning stage or the work order

papers.b. Trolley Delivery System : In this system a trolley is routed to various user

departments at a regular interval of time. Foremen are asked to withdraw the goods

from the trolley according to their need, surely against the withdrawal slip.

c. Open Access Bin System : For regular items, open access bin are kept in the user

departments. This bin is replenished from time to time. User department can

withdraw the goods from the open access bins without undergoing any formal

procedure.

Various methods of issue are as under :

/. Issue on Request .This method again, can be used in the following three different

mannersI. Immediate issues on presentation of M.R. note

II. Issue made after the receipt of M.R. note

III. Immediate issues on verbal request only

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2. Scheduled issue to production : In mass production factories, production materials

are issued in quantities and at times to correspond with the manufacturing

programme. In this case issue schedule is prepared and stores department has to issue

the materials accordingly under any of the systems discussed above.

3. Assemblies and Kits : In certain instances, composite issues of a standard nature are

required. An assembly of a given item might consist standard items in standard

number. In this case, instead of preparing different Materials Requisition Notes, a

single note must serve the purpose. Similarly, tools or gauges for special jobs may be

issued in complete kits.

4. Imprest Issue : An imprest system is one whereby sub-stores of production

department are allowed to carry certain items in given quantities. At the end of the

given period the user concerned prepares a list of materials to be consumed during

that time and present an appropriate issue document for replenishment of goods to

bring back the imprest stock up to the same level as it was at the beginning of the

period.

5. Replenishment Issue : Certain items like tools etc. may be issued against the used

articles or empty containers. This is called as a replenishment issue.

6. Loan Issue : Tools or certain equipments may be given to user departments on

loan, i.e. on returnable basis. For such issues, a register may be maintained, or instead

of that, such items may be given in exchange of tallies provided to the workmen.

7. In this seventh group we will cover all issues made outside the organisation. When

finished goods have to be dispatched, it must be done against issue order or sales

advice note or similar documents from sales department Similarly, procedure for the

issue of item for repair or scrap should be like it is for the issue of the finished goods.

E. Inventory Control:

Inventory control is a science based art of ensuring that just enough inventory/stock is

held by an organisation to economically meet its’ internal and external demand and

commitments. Inventory control was developed in theory along scientific lines in the

year 1915.

Inventory Control is the most important function of Inventory Management which

forms the nerve centre in any organisation.

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Inventory Control is “the process of dividing what and how much of various items

are to be kept in stock” and also determining time and quantity of various items to be

procured.

Inventory control thus, “Pertains to the implementing and carrying out of policies

which have been established by management”. 44

Inventory control is a continuous process of regulating the inflow of materials into

the store in relation to materials move outs from stock and maintaining a safety stock to

avoid stock out.

“Effective Inventory control should provide adequate stock of goods of proper quality

to meet the requirements of production and sales, keeping the required investment to a

minimum, considering it’s effect on profits as well as working capital needs.” 45

The major objectives of Inventory Control are as follows :

• To reduce financial investment in Inventories, through proper Inventory

balances.

• To facilitate production operations

• To avoid losses of Inventory obsolescence

• To minimise total ordering cost and total carrying cost

• To improve customer service

• To follow government policies with regard to inventories

Three of the major objectives of manufacturing units emphasising on earning profit

are:• Maximum customer service

• Minimum Inventory Investment

• Efficient (low cost) plant operation

The main peculiarity of these three objectives are that they are conflicting. In

modern times, few companies can afford to work towards one or other as all are

equally important for sustaining success of any business unit.

Inventory control and production control are basically concerned with the provision

of information required for these purpose i.e. reconciling these conflicting objectives.

Such a reconciliation in modern times, becomes a challenging problem, as

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responsibilities of different departments have been sharply defined and store

managers have been motivated to sub-optimise by their performance.

Inventory control is one of the less exploited areas of the management control

system in the Textile industry despite the fact that it is the oldest industry of our

country. In modern times, almost all the efforts have been made to reduce the cost of

production, maximising rate of return on capital employed and consequently wealth

maximisation. It would be fool hardy to treat ‘Inventory Control’ as an exception.

The magnitude of inventory can be expressed in relation to total current assets. The

Raw material constitutes 60 to 65% of the cost of the product and other inventories, in

case of yarn and 40 to 45% in case of fabric. 46

a. Policies For Replenishment of Inventories:

Basically there are three types of inventory policies relating to replenishment of

inventory as under : 47

1. Fixed Order Quantity System (Q system /Economic Order Quantity):

EOQ is a quantity which is most economical to order where overall total cost i.e. the

total cost of purchasing, carrying inventories, stock out cost etc. is minimum.

The basic inventory model, though some what classic but widely accepted, is referred

to as Wilson formulation. This model is simple and deals with typical assumptions.

Under this system, Reorder quantity is fixed and order is placed when inventory on

hand falls below a particular level which is known as reorder point.

Total inventory carrying cost line intersects ordering cost point Q i.e. ordering

quantity units. EOQ is attained as total ordering cost and carrying costs are

minimum at that level.

EOQ=V(2AO/CS)A = Annual requirements in units O = Cost of Ordt ring C = Cost per UnitS = Storage or Inventory Carrying cost

In the determination of EOQ, we have assumed that:

a) Lead time is constant

b) Consumption/Sales during lead time is also constant

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c) Ordered quantity is received instantaneously i.e. in one lot at a time.

d) Annual demand can be accurately forecast

e) ordering cost and CC are known / given in advance and so on

In order to calculate ROP it is necessary to estimate expected sales during lead time

and it is to be added to zero stock. But in practice both LT and CDL varies which may

lead to temporary stock out position. This can be avoided by maintaining safety stock.

ROP = Safety Stock + Average consumption during Lead Time

Here the position will be as under :

a) Cdl = average consumption during lead time

b) B = buffer stock

ROP = Buffer stock (Safety stock) + Average consumption during lead time. 4g

ROP = B + Cdl

Inventory = B + Nu/2

I = B + Nu/2

When usage rate is very high/fast, stock out occurs as the units of safety stock are

exhausted.

Order point = buffer stock + consumption/sales during lead time, i.e.

P = B + Cdl

where :

P = order point

B = Buffer Stock

Cd = Average daily sales/consumption in units

1 = Lead Time

I = B + Q/2

where :

I = Average inventory units

B = Buffer Stock

Q = economic order quantity

2. Fixed Order Interval Replenishment System (P System/Periodic

Ordering/Periodic Review System):

Under this system, ordering times are fixed rather than the quantities. It can be

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characterised as follows :

1. The time interval for ordering is fixed either for a group of items or for individual

items.

2. The inventory carrying costs as well as fixed reorder quantity are not considered

explicitly.

3. Review of inventory is done at definite time intervals.

4. Average consumption during review period and lead time are forecast.

Replenishment level is computed as under:

RPL = B + CD (L + R)

RPL = Replenishment Level

L = Lead time (days)

R = Review interval (days)

B = Buffer stock

CD - Average daily sales (units/day)

Order is placed after fixed period, for the quantity by which inventory level had

come down from a predetermined level or point. It is determined on the basis of

requirement of materials during review period and lead time plus safety stock.

Average inventory level = buffer stock +h sales/ consumption during review period,

i.e.

I = S+4CDR

In case of constant sales, variation in inventory would be within the range of Mx -

CDL (Immediately after receipt of a reorder) to a low of buffer stock (before the

receipt)

This difference = CDR, and

Average inventory = h the difference + safety/buffer stock

Buffer stock can be specified from distribution of sales during lead time + review

period

3. Optional Replenishment System (s, S System):

This system, i.e. (s, S System) where ‘s’ denotes reorder point while ‘S’ is for desired

inventory level, is applicable in situations where the cost of reviewing the inventory

and the cost of ordering play a very significant role.

93

Under this system, order quantity at the time of each review period is as under:

OQ = R -1 - QO, whenever I +QO < P, where

OQ = quantity on order

R = replenishment level (units)

I = inventory on hand

QO = Quantity on Order

P = reorder point (units)

This system has the benefit of combining the good points of lixed order quantity

system and variable order quantity system. The status of stock is periodically reviewed

and both, the maximum stock level (S) and minimum stock level (s) are prescribed. At

the time of review the inventory on hand is compared with ‘S’ and ‘s’. If the level is

lower than ‘s’, an order is placed. This system is particularly advantageous where

physically the stock can be held in two places adjacent to each other. In one location

stock equal to ‘s’ will be kept and the balance will be kept in the record location.

4. Single Order and Staggered Deliveries Replenishment System

In order to minimise excessive inventory build up necessitated by first two systems, a

more practical approach, which is generally followed by majority of the mills, is

single order with staggered deliveries. This system practically combines the

advantages of both the above systems, where an order is placed only once a year or

any other specified period, but specific arrangements are made with the suppliers

(usually registered) to deliver the goods in requisite quantities. Suppliers are

communicated through telephonic or fax messages, sometimes, they are instructed to

supply in instalments of specific quantities at specified intervals in the absence of any

instruction.

5. Maximum - Minimum Inventory System (Two Bin System):

Actually speaking this system is a variation/extension of Q system. The absence of a

perpetual inventory record is a feature which distinguishes it from other systems.

Practically the stock is physically maintained in two separate bins viz. upper bin and

lower bin. The upper bin contains a quantity of stock equal to the difference

between the maximum level and the order point figure. The lower bin contains a

quantity of stock equal to the order point figure - the quantity just enough to last or

94

slightly more than that, during the purchase lead time. The operation of the system

is as shown under :

OrderQuantity

Lower

* LTC - Lead Time Consumption

Source : Inventory Management by L. C. Jhamb - Ed. 1987

Thus, it can be generalised that several or all of these systems can be used

advantageously in a firm as none of them is mutually exclusive.

Safety Stock - Policies and Practices

Q - system (EOQ) ana P - system (review, reorder period) System for stock

replenishment would be incomplete without considering supplementary systems viz.

safety stock, two bin or kardex card system etc.

Firms’ requirements are ordered only after verifying stock levels of different

inventory items on hand. The inventory on hand, again depends on safety stock

policies of the firm, which focuses on the level of safety stock determination.

What is safety stock ?

In practical life two factors are more important:

1. Demand is never certain and it is distributed over a set of probable values.

2. Lead time is also variable and uncertain.

As these uncertainties are unpredictable, an exact stock maintained all along

which is known as buffer/safety/reserve stock.

Safety stock is the minimum stock i.e. the lower limit below which the stock should

not be allowed to fall, under normal circumstances.

It is advisable to know two important phenomenon affecting safety stock :

95

1. Safety stock and Service level: Service level is defined as the ratio of no. of units

supplied to the no. of units demanded. The desired service level determines the size

of safety stock e.g. 90% service level means 10% probability of demand exceeding

the reorder level. But higher service level entails higher costs.

Before deciding safety stock level, the following aspects must be analysed :

a) Which one of the following two is more predominant and why ?

• Variation in lead time

• Variation in consumption

b) What is the period of such a variation ?

Whether it is seasonal/ confined to specific period only or for long term e.g.

seasonal variation in cotton availability and demand for cotton cloth.

2. Determining safety stock: In simple situations, assuming lead time and

consumption during lead time to be constant and maximum usage can be

calculated, the safety stock would be determined as under:

SS = (MC - AC) * LT, where

SS = Safety Stock

MC = Maximum consumption

AC = Average consumption

LT = Lead time

Situations where the range of demand variation is wide and lead time and usage

rates vary then :

SS = (MC * MT) - (AC * AT), where

MT = Maximum Time

AT = Average lead time

This would mean excess inventory to have complete protection. But excess

inventory means unnecessary locking up of funds, adversely affecting profitability.

b. Inventory Analysis - Types of Analysis :

Inventory analysis means the natural divisions within the overall field of inventory

theory stem from variations in the process of acquisition of goods and future

demand for the same.

96

Information For Inventory AnalysisFor an effective analysis of inventory, the following information is required:

(a) Demand Pattern

(b) Lead Time Pattern

(c) Stock out policy

(d) Review policy: Whether the inventories are to be reviewed :

a) Periodically

b) Continuously

c) Randomly/at random/snap review

d) Exceptional review

(e) The relevant costs

(f) Miscellaneous factors

Types Of Analysis

1. ABC analysis:

The application of ABC analysis, is on the basis of Annual Consumption

value. ABC analysis is based on the principle Vital few and Trivial many! Always

Better Control, by allocating on selective basis, of the available control efforts in

such a way that the efforts for control of inventory is proportional to its

importance. It facilitates management by exception. It is an effective tool for

controlling raw materials, components, and consumable stores inventory. It should

be reviewed periodically, so that changes in price and consumption are taken into

account. The consumption figures may be annual, half yearly or quarterly but it

should be representative. ABC analysis is one where A B and C strands for nothing

but expressing the consumption value of commodities in descending order. It

may be called Always Better Control system for it provides very important

directives for controlling the inventory.

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The relationship between inventory quantity and inventory value is found very

interesting. It has been generalised as below:

Inventory group value

% in quantity % in consumption

A 5 to 10 75 to 80B 10 to 20 20 to 25C 70 to 80 5 to 10

Note : Percentage for different inventory groups may vary with different industries.

Inventory can be analysed into A, B and C groups in the following manner:

1. Calculate annual consumption value for each item.

2. Arrange all items in descending order of its’ annual consumption value.

3. Decide the cut-offline either based on quantity or based on consumption value.

Basic principles of ABC analysis:

a) Analysis neither depends upon the unit cost of the item nor on the importance of

it but only on the annual consumption value of it.

b) The limits for ABC categorisation are uniform but will depend on the size of

undertaking, its inventory as well as the number of items controlled.

2. H.M.L. (High Medium and Low analysis):

H.M.L. analysis resembles ABC analysis except that instead of usage value as

criteria, the unit price criterion is used. The items are classified as high, medium and

low, on the basis of price per unit, to ensure proper security, storage and control

requirements. The cut off line is decided by the management for such classification.

H.M.L. analysis is useful:

a) To delegate authority for issuing inventories to the user departments. The senior

level executive may be authorised to sign requisition forms for 'H' and 'M' items,

whereas low priced items may be requisitioned and withdrawn by operating

personnel. Hence this analysis facilitates "Management by Exception"

b) To assess storage and security control requirements e.g. 'H' and 'M' items with

tight security and so on.

c) To determine frequency of stock/inventory verification

d) To evolve buying policies or methods to have control over purchases

e) To control consumption of inventory at the departmental level.

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3. V-E-D Analysis

This type of analysis attempts to classify inventory items on the basis of their

criticality. The inventory groups are called vital, essential and desirable. The

criticality of items can be determined on the basis of it’s absence effecting production

and other services.

a) Vital: This category encompasses those most critical items having extremely

high opportunity cost of shortage, without which the production would come to

a halt. Such items must be available when demanded. It is normally used for

classification of maintenance spares.

b) Essential : Essential items are quite critical with substantial cost associated

with shortage and should be available in stock. By and large stock out of such

items may cause temporary stoppage of production. In other words, the stock out

would result in expensive procurement and cessation of work in a major area

of plant operation for which no stand-by facilities are available.

c) Desirable : Desirable group of items do not have very serious consequences viz.

stoppage of production and so on, if not available when demanded but can be

stocked. The stock out may entail nominal losses/expenses of procurement.

Logically the vital items call for high level of service where the percentage risk has to

be very small albeit for essential items one can take relatively higher risk of shortage

and even higher for desirable items. It would be advantageous to use V-E-D analysis

along with ABC analysis so as to make effective management of spares.

In recent times the modified and supplementary method V-E-I-N - Vital, Essential,

Important and Normal, would prove to be more effective.

4. S-D-E Analysis:

The S-D-E (Scarce, Difficult, Easy) analysis classifies the items on the basis of

availability and problems of procurement viz. 49

• Scarcity

• Longer lead time

• Non availability

• Reliability and geographical location of supplier etc.

This analysis helps to develop purchasing strategies.

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Scarce: Such items are generally in short supply and are procured through

government machineries / agencies e.g. DGS&D and distributed to small industries.

Considering the difficulties, efforts and expenditure of procurement, it is advisable to

procure such items infrequently and once in a year.

Difficult: Such items, though indigenous, are not easily available. Those items where

reliability (in terms of supply) of suppliers is in question and are procured from far

off places, fall under this category. The items which are available from either

monopolists or oligopolists and even difficult to manufacture may also be brought

under this category. For effective purchase of such items, the suppliers/manufacturers

must be informed well in advance.

Easy: Items which are readily available from local markets and produced according to

commercial standards are included under this category.

S-D-E classification helps purchase department:

• To decide the purchasing method e.g. forward buying for scarce items,

scheduled buying and contract buying for easy ones.

• To facilitate management by exception through fixation of responsibility

on buyers.

5. F-S-N Analysis:

F-S-N (Fast moving, Slow moving , Non moving) analysis is based on the movement

and consumption of the items. For the purpose of classification, the quantity and rate

of consumption are analysed. The last date of receipt or issue which ever is later, is

taken to determine the number of months since the last movement. Generally, the items

are grouped in the period of 12 months.

Fast moving inventories are required quite regularly, the slow moving ones very

occasionally while the non moving inventories may become obsolete and not

required for years altogether. Within the non moving items the inventories may be

further sub-classified as stagnant (dead stock) for 2 years, 3 years, 5 years and so on.

F-S-N analysis helps to identify:

a) Inventory policies and models for each of the categories.

b) Review policies for different categories of items.

c) Surplus stock where stock > consumption

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d) Non moving items, for determining optimal stock disposal rules rather than

inventory provisioning rules, for releasing the idle capital for productive

purposes.Inventory Policies For Slow Moving Items

In order to devise effective inventory policy it is essential to identify the nature of slow

moving items e.g. off the shelf movement of spare parts is occasional due to lack of

it’s regular demand and therefore over buying decision can take years together to

remedy the situation.

Policy for such items may be as follows :

a) Place the procurement order sufficiently well in advance keeping the lead time

in mind, so that these arrive just in time when needed, especially when spares are

needed at a pre-specified date.

b) Place an order as soon as you get the warning, e.g. parts which give adequate

warning of impending breakdown. In such a case the lead time < warning time.

c) Usually maximum stock level will be policy dependent. 50

6. G/NG-O-L-F (GOLF) Analysis :

It is presumed that the sources of supply determine quality, lead time, terms of

payment and administrative work involved and accordingly GOLF analysis is

performed, just like S-D-E.

G (Government) refers to analysis of items purchased from Government sources viz.

STC, MMTC, DGS&D, DTC and PSUs, which requires long lead time, advance

payment/payment against delivery; no credit terms etc.

NG-0 (Non Government - Ordinary) refers to analysis of items procured from non

Government / ordinary sources of supply, which involve moderate delivery time,

availability of credit, well rated quality and assurance of supply (from suppliers

of repute) etc.

L (Local) refers to items purchased from local source of supply. It is possible to

procure materials on urgent notice, with shortest lead time especially in case of

blanket orders of 'C' items. Other items can also be procured from the local

suppliers.

F (Foreign) refers to the analysis of items procured from sources of supply located

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outside the political boundaries of the country where the buying firm is located

Purchase from foreign sources of supply involves following attributes :

a) compliance with Government rules and regulation. Such as clearance from

government agencies like DGTD.

b) lot of procedural and administrative work, which increases lead time.

c) search for reliable foreign sources of supply.

d) arrangement for shipping and port clearance.

7. S-O-S Analysis

S-O-S (Seasonal - Off Seasonal) refers to analysis of season dependent inventory.

Seasonal items may further be classified into following groups:

a) Those items which are available only for a limited period e.g. agricultural

products viz. raw cotton used as raw material in CTMI. Such items require long

term/yearly procurement.

b) Items available throughout the year, but at lower price/fresh quality

during season and premium price at any other time. This requires computation

of quantity on the basis of cost/benefit analysis or opportunity cost.

Quantity of non/off seasonal items is decided on different considerations. Such an

analysis helps to decide purchasing/holding strategies.

8. X-Y-Z Analysis :

XYZ analysis of items is based on its’ value in storage or inventory investment. Those

with high inventory values are X items and with low inventory values are Z items.

Items with their inventory value falling between X and Z are Y items. Such an analysis

can be used along with other forms of analysis by preparing a matrix, e.g. The

analysis may vary from firm to firm depending upon it’s combination with other

forms of analysis.

Items not falling in any of the above discussed category of analysis may also be

classified as XYZ.

Lead Time

Lead time means the total time that elapses from the placement of an order till the

final receipt of materials, si But this notion may slightly differ with reference to

management/production activity, as well as purchasing.

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c. Inventory Levels :

Inventory planning and control centres around the size and time of inventory.

Fixation of inventory level solves the problem of time for purchasing and

replenishment of inventory considering the lead time as well as the rate of

consumption.

Ordering Level

This level is set between the maximum and minimum level in such a way that

before the material ordered is received into the stores, there is sufficient quantity on

hand to cover both normal and abnormal circumstances. 52 It is the sum of the

minimum stock and usage expected to occur in the reorder period or lead time. It

may also be considered as the level to which the stock is allowed to fall before an

order for further supply is placed.

Factors to be considered:

1. The time interval between the date of the order for goods and their arrival.

2. The average quantity consumed within a stipulated time period.

3. Margin of safety.

There is no unanimity among authors regarding ordering level and minimum stock

level in the absence of margin of safety.

Ordering Level = Maximum consumption X maximum time

orSafety stock + consumption during lead time

Maximum level: It is level or quantity beyond which the actual stock is not allowed

to exceed unless authorised by the management The idea behind holding maximum

level is to prevent excessive investment and to reduce stock out cost. Maximum level

is usually higher than ordering level, minimum level, average level and safety stock.

Factors affecting Maximum level 5.1

Following factors are to be considered for determining the maximum level:

(1) Nature of material (2) Rate of consumption (3) Lead time (4) EOQ (5) price

fluctuation (6) seasonal supplies (7) availability conditions (8) storage space (9)

cost of storage (10) funds availability.

Maximum Level = Ordering level - (MnT X MnC) + ROQ

103

MnT = Minimum lead time

MnC = Minimum consumption

ROQ = Recorder quantity (Economic Order quantity)

Minimum level:

It represents the minimum quantity of stock that should be regularly held by the

firm or the lowest level below which the stock of an item should not be allowed to

fall. It is also known as Safety stock or Buffer stock. It also provides a margin of

safety or a cushion against danger of stoppage of production/sales.

Therefore, it is a safeguard against production stoppage due to non availability of

material. 54

Minimum Level = OL - (AC X AT)

Mnl = Minimum level

OL = ordering level

AC = Average/normal consumption

AT = Average/normal time

The minimum level may also be considered as an allowance to cover errors in

forecasting the consumption during lead time or lead time itself.

Factors affecting Minimum level:

1. Lead time

2. Nature of item

3. Rate of consumption

4. Availability of substitutes

5. Stock out costs

Danger Level:

It is the level below minimum level which is deliberately fixed where the stock level

is expected to fall either due to increased consumption during lead time or increased

lead time. Danger level indicates immediate actions to be initiated by the

concerned department to replenish the stock for preventing a possible stock out.

Average stock level:

Average stock level means the average of maximum and minimum level of stock,

expected to be normally held by company.

104

The followings are different formulae used by different authors :

Maximum level + Minimum level1. Average level =

2

Minimum level + EOQ2. Average level = ----------------------------

2

or

Minimum level + 1/2 EOQ

The second formula considers the following assumptions :

1. Minimum level is stock on hand to meet the abnormal situation.

2. Minimum stock + ROQ (when received) is not equal to maximum quantity.

Inventory Control Operations / Practices

Before any attempt is made to proceed systematically to apply the policies, techniques

etc., it is advisable to have a birds’ eye view on important inventory operations.

As regards these, unanimity among different authors/researchers is lacking. Some

authors have included some of the policies and techniques as inventory operations.

Inventory operations and different management practices may be following :

• Inventory Operating Costs comprising of determination of Ordering costs.

Inventory Carrying costs and Stock out costs

• Lead Time Analysis

• Size of demand either deterministic or probabilistic

• Stock Replenishment

• Inventory Levels

• Factors affecting Inventory Levels viz. Rupee Level and Unit Level

• Dangers of Excessive and Inadequate Levels

• Types of Levels viz. Maximum level, Minimum level etc.

105

d. Practices for Inventory Identification and Verification, Classification and

Codification of Inventory :

(1) Standardisation :

Standardisation means an agreement on definite sizes, design, quality and the likes. It

is essentially technical and engineering concept.

It is a model or general agreement of a rule established by authority, consensus or

custom created and used by various levels of interest. In the context of inventory,

standardisation may be used for variety reduction, interchangeability of parts. As per

International Standards Organisaton (Resolution 19 of council 1962).

Standardisation is the process of formulating and applying rules for orderly approach to

specific activity for the benefit and with the co-operation of all concerned and in

particular for the promotion of optimum overall economy taking due account of

functional conditions and safety requirements.

Standardisation is the process of formulating and applying rules for regulating variety

related to sizes, types, quantities and measures of products.

(2) Classification and codification of Inventory (Inventory Identification):

Codification is the process of representing each item by a number digits of which

indicate the group, the subgroup, the type and the dimension of the item.

Codes should be based on :

• Nature of stock item

• Purpose

• Local circumstances etc.

A stores vocabulary should be prepared to publish numbers, descriptions, size etc.

Methods :

1. Alphabetical: Alphabets are used to identify the inventory items on logical basis

e.g. AL for aluminium items and so on.

2. Numerical /Decimal System : Use of nos. instead of alphabets or combination of

the two especially when there are number of items of the same kind e.g.

Aluminium spares of 10 different items 11, 12 ...... 20 and so on. There is a

provision for expansion of codes for items.

106

3. Alpha Numerical : It is a combination of both Alphabetical and Numerical

System especially to identify inventory items of the same class.

4. Mnemonic : Classification of items is made in such a way that it is easy to

identify the items by their respective code itself e.g. SMF for steel, mild and flat.

5. Decimal System : It is an extension of numerical system so as to include more

number and variety1 of items under the same group e.g. 15.11, 15.12, 15.13 and so

on. It is based on Dash/Stroke, Numerical system etc. This system can be

categorised as :

• Main Classification

• Sub Classification

• Sub Classification into different classification

6. Brisch system : It is an extended form of numerical system classified as under :

• Major group

• Preliminary grouping

• System numbers upto 7 digits (not rigidly) are given to an item7 Kodak system : This system was first introduced by Eastman Kodak company of

New York, U.S.A. It is fundamentally based on numerical system, Hyphens (-)

are used instead of Numbers.This system is more useful for punch cards.

Computerisation codes may be used for location, supply price lists, stock taking

sheet etc. for classification up to 99 with 10 sub classifications. It is flexible and

more comprehensive and can be integrated for common use when suppliers also

use the same code. Large varieties of inventories like that of CTMI can be easily

incorporated using this. 55

e. Inventory Stock Taking / Verification :

Inventory stock taking is the complete process of verifying the quantity balances of the

entire range of inventories items held in stock. Whereas Inventory checking is the

checking of physical quantities which may be applied either regularly or intermittently.

In literal terms inventory stock taking and inventory stock verification are different but

for all practical practices they are treated at par.

Inventory stock taking is thus the process of counting, weighing or measuring of all

items in stock and recording the results.

107

Purposes :

1. Verification of stock records.

2. Verification of values of inventories appearing in the balance sheet.

3. To detect fraud, theft, pilferage and losses at an early stage.

4. To reveal weakness of the system.

Methods Of Inventory Verification

(1) Periodic Inventory Verification : The whole of the stock is covered at the same

time, at the end of a given period i.e. the end of the financial year.56 Thus, it is less

costly, convenient and compatible to its intended use.

(2) Perpetual/Continuous Inventory Verification : Kohler’s Dictionary for

Accountants this kind of verification connotes as per ‘A book inventory kept in

continuous agreement with stock on hand by means of detailed record that may also

serve as subsidiary ledger where amounts as well as physical quantities are

maintained, sections of the stockroom are inventoried at short intervals and the

quantities or amounts or both are adjusted, where necessary, to the physical count’.

Continuous Inventory may also be conceptualised as ‘A process of testing inventories

and of maintaining an equality between inventory - item quantities physically

determined by count, weight or measure - and those appearing at the same time on

perpetual inventory records’. 57

Stock taking should be continuously carried out throughout the year in accordance

with a predetermined programme. The programme is chalked out well in advance and

regular stock verification is to be ensured accordingly.

Perpetual Inventory implies the same meaning where complete detailed stock records

are kept showing receipts, issues and balances on hand. The programme should be

prepared in advance and be implemented during slack season. It would be highly

desirable if the frequency of verification is related to the usage value of items e.g.

frequent counting of ‘A’ items, vital items etc.

(3) Blind or Snap Checking : It is a random stock taking in which neither the stock

taker nor stores staff are given advance information about stock taking. The authority

concerned should issue orders in this regard and stock taking process is undertaken

immediately.

108

This method ensures a moral check on the stores employees and makes them alert all

the times.

This method is based on the philosophy that check is more reliable when a person

doing it is not informed about it in advance.

This method suffers from the certain limitations viz. it is laborious, slow, errors prone

and requires additional staff. To overcome these, it is desirable that the stock takers

be provided with locations and identifications but withheld from the quantity balance.

(4) Reorder Point Stock Taking : Physical verification or counting of items is done

when the stock level falls below the reorder point (when the stock in first bin is

exhausted in case of Two-Bin system). Under this method it becomes the

responsibility of the stock controller to notify the stock position to the concerned

department

In order to minimise the trouble of stock taking, a stock certificate signed by a senior

member of management declaring the value of stock on hand should be obtained.

The annexure / appendix, containing the amount of stock in each storehouse,

supported by all individual stock taking sheets, should be attached with such

certificate to ensure the authenticity of entries, records etc. appearing in relevant

records.

f. Inventory Audit System :

1. Inventory Audit may be perceived from two different viewpoints as under:

2. Inventory Audit / Verification by the employees, certified by management and

subsequently by auditors.

Inventory Audit is to see whether the levels, size, value, period, turnover etc. of

Inventory conforms to the Inventory policy, norms, levels etc. established by the top

level management or by the department concerned.

Thus, Inventory Audit is concerned with both - setting norms for different variables on

different basis and also to see that the norms are strictly adhered to and may be carried

out.Following methods as under:

1. Comparing with that of past years

2. Comparing with that of Industry norms

109

3. Comparing with that of best competitors

4. Other methods as per requirements and budgeted figures.

The methods of Inventory verification as described above are not mutually exclusive.

On the other hand, they may be used as supplementary to each other, depending upon

the requirements of each particular unit.

F. Disposal Management:

Disposal management is basically concerned with effective control of waste i.e.

obsolete, scrap and surplus inventory, usually performed by stores personnel. A huge

sum of money is locked up in the form of idle inventory due to the presence of such

surplus/obsolete stock

Disposal means sales. Therefore, when material has been declared as surplus, the

materials, purchasing or salvage and reclamation department, as appropriate, should be

informed. The managers are concerned with efficient effective and profitable

disposal of surplus, obsolete, scrap and waste materials, generated within the firm.

In modem times, disposal problem has become highly complex and important due

to following reasons : 58

• Wide varieties of wastes, and surplus materials

• Increased size and diversified product lines and decentralised management of

companies

• The need to develop and use new methods to avoid generation of solid waste

products

• Disposing wastes into air and waterway causing pollution of different types

• Resistance from community and government.

• Strict rules and regulations of government for disposal of waste and effluents

• Increased level of competition and hence necessity of reworking or reprocessing

for cost economics

• Need to conserve scarce material and natural resources etc.

Responsibility : Depending upon the size, type of manufacturing processes and the

nature and complexity of wastes, the disposal management may either be centralised

i.e. separately organised or may be subordinated to either purchase department,

sales department, marketing department or stores department

a. Waste:Industrial waste i S ■’ defined as “Costs incurred without procuring a proper

profitable return to the enterprise” by H. N. Broom a prominent author on

Production Management.

Failure to use money, materials, machines, manpower, markets with maximum

effectiveness will lead to wastage with the result that the enterprise suffers a loss.

England and Leenders prominent authors on Materials Management defines waste as

“Materials and supplies which have been changed during the production process

and which, through carelessness, faulty production methods, poor handling or

other causes have been spoiled, broken or otherwise rendered unfit for further use or

reclamation.”

It may also be defined as “The residue of materials which results from normal

manufacturing process and has no economic (resale) value but may change later on

e.g. smoke, cutting oil, that cannot be reclaimed.

Loss, shrinkage, evaporation of materials during manufacturing process or a residue

without measurable recovery value may also be termed as waste.

Considering control and accounting aspects waste may broadly be classified as :

1. Normal waste : The cost of such wastes may be absorbed from normal or good

output, i.e. due to such waste, per unit cost will go up and the profit will be

adversely affected. Such waste is normal, natural and logical looking to the nature of

products and process. However, such legitimate wastes are reducible.

2. Abnormal waste : Such wastes are controllable by appropriate policies of the

management < Abnormal loss arising out of abnormal wastes are charged to costing

profit and loss account and therefore the cost of production, will not be inflated,

unnecessarily.

3. Recoverable : The waste that can be converted into some useful resource or as a

joint/by products, e.g. energy.

4. Irrecoverable : The resources that get lost with the passage of time and

cannot be regained later on e.g. Handlooms in textile mill, manpower, energy

capacity services etc.

Thus as an element of the system “Waste is any unnecessary input or undesirable

111

output from any system encompassing all types of resources”.

b. Types of Waste Inventory :

1. Surplus Inventory :An item is said to be surplus when its existing stocks is likely to last longer than

the normal period of consumption. Surplus is usually not an inspiring word. It

includes those materials and equipments which have no immediate use but have

accumulated due to faulty planning, forecasting and purchasing. However, such

stocks have usage value in future.

It is the excess of materials in the stock either not required by the unit concerned

or likely to last longer.

2. Obsolete Inventory :

An item which may become obsolete due to change in design modification or

substitution, new inventions, discoveries and are unlikely to be used in near future. It

also includes those materials and equipments which are not damaged and which have

economic worth but which are no longer useful for the company’s operation owing to

many reasons.Obsolescence is “The loss of intrinsic value of an asset due to its supercession”. 59

Channels For Disposal Of Surplus and Obsolete Materials

Disposal may take any of the following routes, as shown in the figure given below: 60

a. Use Within The Firm : This practise if resorted to, obtains maximum value

from disposal items which may take any one or more of the following ways :

• Use items other than for which they were originally purchased

• Avoid the need to buy lower sizes by converting the surplus to lower sizes

• Convert it into different blocks, jigs, fixtures, maintenance parts etc.

b. Return To Original Suppliers: This may fetch 90 % to 100 % of purchase

price, by requesting the supplier to modify the purchase order and receive the

goods back at an agreed price/discount within specified time agreed upon.

c. Sale To Actual Users : This channel facilitates sale of disposal items on as is

where is basis, communicated either through letters or advertisements to the actual

users.

112

3. Scrap :Scrap may be defined as process wastage such as turnings, borings, sprues and

flashes.

They may have an end use within the plant.

Materials which have outlived their useful life or for which there is no demand in

their original form are classified as scrap.

Disposal of Scraps

Scraps may be disposed off by:

a) By public auction

b) Selling it to sister concerns for using it as an input in joint products or by­

products.

c) By entering into annual contracts

d) By reworking for reuse

e) By inviting tenders from scrap purchasers.

f) To sell directly to the end users.

4. Salvaged Inventory :

Those materials which cannot be put to use for their original purpose. However,

parts may be collected and utilised in repairs and replacements etc.

Salvaged inventory may better be reclaimed for the purpose of effecting economy

especially in the use of funds.

5. Spoilage and Defectives :

Spoilage includes surplus generated from inefficient use of production

machinery, carelessness and poor purchasing.

Defectives arises due to use of wrong machine or carelessness/unfitness/

inattentiveness of workers, unauthorised set-up change during processing.

c. Waste Management:Waste Management is a inter and multi disciplinary activity involving engineering

principles, economic urban and regional planning, management techniques and

social sciences, to minimise overall wastivity of the system under consideration.

Therefore, a systematic approach to waste management encompassing the wastes of

all kinds of resources at all stages should be adopted.

113

As inventory is a major element of cost in cotton textile mill, wastage of materials

is of critical importance from management’s view points. The goal of waste

management is to minimise the waste whereas, that of resource management is to

maximise the utilisation of resources.

To measure the performance of any system the new concept of "Wastivity’,

formulated as under, has been propounded :

Waste (W)Wastivity = -----------

Input (I)

Waste management can be functionally classified as under 6i :

1) Generation or inception

2) Reduction or minimisation

3) Collection and segregation

4) Recycling or reuse

5) Disposal

The list is more suggestive rather than exhaustive

For the purpose of effective disposal, waste may be classified as :

1. Salvable Waste : The waste with some salvage value e.g. scrap, rejected goods,

surplus/obsolete items, equipment etc. which, if disposed off efficiently, may provide

good return to the organisation through cost reduction and consequently higher profit

and material conservation.

2. Non Salvable Waste : The waste with no salvage value, but requires further

processing and treatment for disposal. Such wastes pose environmental hazards and

entails other social costs. Hence, proper management ensures resource recovery as

well as lesser overall costs.

Identification of Excess Inventory : Excess inventory depends upon company policy

with regard to inventory holding. Usually such inventories are identified at the time of

periodical physical verification.

G. Inventory Control Through Accounting Techniques :

Inventory constitutes a substantial portion of total assets of many companies, especially

manufacturing and trading concerns. If one analyses the financial statement of such

concerns, it is found that lot of working capital is invested in it. The opening and

114

closing balance of stock on hand are shown on Debit and Credit side respectively of

trading account and as a working asset it is shown on asset side of the Balance Sheet.

The literal meaning 62 of the term Inventory Control itself depicts that it is both,

Physical as well as Accounting control of inventories. For convenience, accounting

control has been separately studied due to it’s unique contribution towards inventory

control. Control has been defined as Physical control as opposed to Accounting control

which is mainly concerned with financial responsibility and asset accounting. Accounts

department maintains control by correctly accounting for receipts and withdrawals

reported by warehouse. 63

Accounting normally takes place prior to issue and shipment. Entries are verified after

reports relating to shipping and receiving have been consummated. Physical

inventories are taken to ensure that actual inventory agrees with perpetual book

inventory. Inventory accounting plays as important role in ascertaining productivity

measures as well as for control modelling relating to inventory. In addition to this it

helps in determining the cost associated with inventories as well as transaction

reporting and requiring accurate and continuous update of stock records.

Inventory control being a management process requires up-to-date records and reports

for effective implementation of different policies and techniques,

a. Valuation of Inventory - Purpose, Methods :

Purposes :

a. Determination of current Income : Correct valuation of inventories in annual

accounts reveals the current income through the process of matching cost

against revenues i.e. overvaluation will unnecessarily inflate the profit and

under valuation will lead to decrease in profit

b. True Correct and Fair View of Financial / Economic Affairs : Under valued

or overvalued inventory, which is a major item of current assets affect profit

figures which is included in the capital also. Therefore, proper valuation of

inventory exhibits true and fair view of economic affairs.

c. Computation of Ratios : Computation of all the ratios based on inventory and

capital viz., ROTA, ROI, NP Ratio, GP Ratio, Sales Turnover Ratio,

Inventory Turnover Ratio, Current / Liquid Ratio and Decisions based on

115

these ratio will be misleading if inventories are not valued properly. Any

change in the methods of valuation must be disclosed (Appendix 3).

Methods:Methods based on cost price and other factors relating to the use of inventory may be

enumerated as follows:

(1) FIFO (First-In First-Out)

The materials (issued) are priced at the oldest cost price and consequently the

inventory is valued at the price of latest purchases.

(2) LIFO (Last-In First-Out)

The cost of latest acquisitions or purchases are matched against the sales revenue of

the period and the cost of earliest purchases / acquisitions.

(3) HIFO (Highest-In First-Out)

The materials with highest prices are issued first for production / sales. Thus highest

price of materials are recovered first.

(4) NIFO (Next-In First-Out)

Issues are priced at the cost of material ordered but not yet received at the price

estimated or expected for the next purchase.

(5) Specific cost method (Identification cost method)

Identify the consignment to which the unsold goods belong and then value the unsold

goods on the basis of cost price at which they were purchased.

(6) Base Stock Method

It is (necessary) inevitable to carry certain minimum quantity of inventory of

materials to carry out the production uninterruptedly. The investment in fixed current

/ working capital at their original cost.

(7) Average Cost Method

In case of frequent purchases where goods have been mixed up in such a manner that

it is difficult to identify each lot separately, the average of the prices at which such

lots were purchased, is taken for valuation of unsold stock.

(8) Standard Price Method

Predetermined fixed price on the basis of a specification of ail factors affecting the

price. Thus, it is a planned and scheduled price used by firms operating standard

costing.

(9) Market / Realisable / Replacement Price Method

Under this method the issue is priced at the market price prevailing on the date of

issue, so as to reflect the current market conditions in the costs.

(10) Inflated Price Method

It is used as an accounting procedure to adjust or cover the losses and expenses as

direct charges in the materials consumed.

(11) Reuse Price Method

When materials unfit / substandard for the purpose for which they were originally

purchased, are issued for an alternative use valued at a price different from its

purchase price, it is known as reuse Price.As per government notification dated 28th June 1977 schedule-1 Rule-3 Sub rule-1 to

XII - The cotton textiles are required to maintain records which shall indicate actual

quantity and value of each variety of cotton or other Raw materials used in each

mixing prepared for manufacturing different counts of yarn, waste yarn, sizing

material, process materials, consumables stores, small tools, machinery spares,

wastage, spoilage, rejection, loss etc. of materials, packing materials yarn / cloth in

gray stage for self consumption, work in progress and finished goods stock etc.

The (Accounting and Costing) method followed for determining the costs shall be

indicated in the cost records so as to reveal the cost elements that have been taken

into account in such computation. The method adopted shall be followed

consistently.

b. Monitoring and Control of Inventories - Inventory Turnover Ratios :

In an enterprise usually Raw Materials inventory decisions are taken by purchasing and

production executives, whereas working process inventory decisions are taken by

production and materials department executives but finished goods policy requires

concurrence of production, marketing and stores department

Financial Management has a direct impact on Inventory Management. Therefore, it is

also the responsibility of finance manager to control and monitor inventories of

different types.

Inventory Turnover Ratios(Measures for effectiveness of Inventory Management)

For the purpose of monitoring the effectiveness of Inventory management, the

following ratios and indices would be of great help :

RMITR

RMITR

Annual consumption of raw material Average raw material inventory

OR

Annual Sales Average RMI

SSPTIR Annual Sales/ Cost of Goods sold Average SSPI

WIPITR

FGITR

= Cost of manufacture/ Annual sales Average WIPI

= Cost of goods sold/ Annual Sales Average inventory of finished goods at cost

OITR Cost of goods sold / Annual Sales Average total Inventories at cost

NWCTR/NCATR - Annual SalesNCA/NWC

(NWCTR/ NCATR = Net Working Capital / Current Assets Turnover Ratio)

Current Ratio Current Assets Current Liabilities

Note : For detailed analysis, the above ratios should be calculated separately for different components of Inventory items.

H. Inventory Control Through Scientific Techniques :

a. Value Analysis :

The CTMI witnessed increased cost of materials and production, competition among

cotton textile mills, availability of imported cloth at a comparatively cheaper rate,

better quality of imported cloth etc. in the past few years. All the features mentioned

above have compelled CTMI, to concentrate on cost economics without adversely

affecting quality of finished goods.

118

The CTMI has adopted various types of raw materials, mixing of raw materials,

substitutes for component spare parts etc. for efficient service at a lower cost.

Through value analysis, one can identify such areas by using less expensive alternate

materials and newer simple methods of manufacture. Value analysis is a combination

of quality, efficiency, price, service, ultimate economy and satisfaction to the purchaser

and the user.

Value Analysis is the application of technique to components which are already

existing in production for the purpose of cost correction whereas Value Engineering is

an organised creative approach for the achievement of the required function at the

lowest cost.

It is an analytical, step wise, organised, creative technique, which examines all the

facets of costs and function of a product or system to identify and eliminate

unnecessary cost.Value analysis or value engineering comprises of a group of techniques aimed at

systematic identification of unnecessary costs in a product or service and efficiently

eliminating them without detriment to its quality and efficiency. 64

Thus, it is a simple common sense approach, practised by majority of mills understudy,

as can be seen later on, of course, without giving it a fancy name.

For applying value analysis technique in a systematic manner one should seek answers

to the following questions :

(a) What is the item ?

(b) What functions does it perform ?

(c) What does it cost ?

(d) What else can do the same function ?

(e) What will that cost ?

We shall relate our discussions to the value analysis techniques that have been

successfully tried out in Textile Industry.

In the same manner following substitutes are also giving efficient service :

Wood To Plastic

• Pirns

• Inter frame bobbins

119

Paper To Plastic

• Ring Frame Tubes

Leather To Leather Nylon Sandwich

• Driving belts for a number of applications

• Lug straps

• Check straps

Fabric Laminated Blocks To Nylon/High Density Polythelene

• For various types of gears.

Cotton Ropes To Nylon Ropes

• For Carding machines.

A number of non-ferrous items (Brass, Gunmetal, Aluminium etc.) have been replaced

by Plastics. The advantage of using this substitute is that they are cheaper

comparatively in the long run and also unlike non-ferrous items these will not be

pilfered.

Cotton Tape To Synthetic Tapes

• For driving Ring Frame Spindles.

C. I. And M. S. Material replaced by plastic

• Gears

• Treadle bowls

• Picking rollers

Sheet Metal Replaced By Plastic

• Bobbin chute for Ruti ‘B’ Autolooms

A few other cost saving areas are given hereunder:

(a) Bigger size used Fabric laminated or plastic gears could be suitably reduced in size

and the teeth recut to make smaller size gears.

(b) Aluminium Harness Suspenders : Used longer size suspenders could be cut and

used for small size applications.

(c) Used Laminates Wood Picking sticks : These could be given to wood

manufacturers and smaller wooden parts could be prepared.

(d) Used Leather Nylon sandwiched belts of one particular size cut and rebuilt to make

other longer or smaller size belts.

120

(e) Salvage of parts by metallising, welding, hard chrome plating is very commonly

done.

The exercise of value analysis will prove most beneficial if the persons involved have

thorough knowledge of the various materials available in the market. The best way to

learn is by discussing the matter with the manufacturers, visiting exhibitions,

consulting the Research Organisations, liaison with other Mills personnel.

It is observed that we keep purchasing a number of times in ‘imported’ category

exactly as per import design without going into the details of the prices, design,

alternate material available etc. A few tried out examples are given hereunder:

To sum up, we can only say that the mills can immensely gain by adopting

standardisation, variety reduction and value analysis technique in procurement of

materials. People have natural resistance to change but this can be overcome by

experience.

b. Materials Requirements Planning :

For Inventory control of dependent items, mostly manufacturers of finished goods,

where forecast of only one or few items are required to be made at the top level mgt.

the MRP (Materials Requirements Planning) can be effectively used. The MRP

technique recognises the existence of demand dependence and covers materials and

parts which are not end products, but are fabricated and assembled to become major

assemblies and end products. 65

It is the process of work.ng backward from scheduled completion dates of end products

or major assemblies to determine the dates and quantities when the various component

parts and materials are to be ordered.

MRP needs accurate Bill of Materials for finished goods demand based on forecast,

backlog of order or both. modified by existing inventories.

Approach towards an effective MRP requires discarding all the previous plans and

preparing a new master schedule and exploding the forecast requirement into a gross

component requirement after deducting balance of inventory on hand.

The master schedule becomes an input for MRP, which calculates the requirements by

parts explosion for all dependent items. Such calculation requirement for complex

121

assemblies becomes difficult for diversified product lines, without data processing on

computers.

Benefits :

(a) Minimises inventory

(b) Helps maintain higher service coverage

(c) Provides control and information system in co-ordination of all manufacturing

decisions from finished goods.

(d) Co-ordinates delivery schedules, purchasing inventory levels, simultaneously.

The requirements are phased by quantity, based on a due date planning system to reach

zero stock-outs.

Difference Between MRP and EOQ System 66

MRP System EOQ System

(a) Product / Component oriented Item / part oriented(b) Demand is dependent Demand is independent(c) Demand is Intermittent Demand is independent(d) No lead time demand Continuous lead time demand(e) Time phased ordering signal ROP ordering signal(f) Use future production as base Use past production base(g) Forecast of only end items Forecast of all items(h) Quantity and time based Quantity based(D___ Safety stock of end items only Safety stock of all items

Assumptions underlying MRP system

1) Availability of precise demand forecast.

2) Bill of materials for each product / sub assembly can be prepared accurately.

3) Unlimited capacity in all work centres.

4) Availability of tremendous amount of data.

5) Strict discipline to feed updated data.

6) Continuous tracking system through entire manufacturing / purchase stage,

detailed auditing procedure.

122

A general MRP outline system 67

The Inventory Status File

As the name indicates it maintains record of all transactions and balances of all stock

throughout the organisation viz. receipts, issues of completed product out of factory on

order condition (in transit inventory) and also includes adjustments in stock position, as

a result of inspection rejects and physical verification.

c. Just-In-Time (JIT):

Concept and Philosophy :

Just In Time is a revolutionary concept in operations and is fast catching up in the

Industrial world. It is an effort to translate an imaginary and ideal situation into reality.

It is based on the philosophy that if the production / Mfg. / procurement of goods is

done only at the time when they are needed and in the quantity required and when this

holds true for finished and semi-finished products then inventories of both as well as

raw material would almost be ni’. If we ensure that the suppliers of raw material and

spare parts agree to deliver goods only at the time and in required quantity then

inventory would almost be nil.

JIT production system was found by Taiichi Ohno (Vice president, Toyota, Japan) and

was implemented in Toyota Motor company’s plant in Japan.

It is a concept involving methods, techniques and philosophy, operating in a conducive

work environment and hence a holistic concept.

123

The basic principle is to produce at each Mfg. Stage, only necessary products at

necessary time with minimum possible inventory to hold the successive manufacturing

stages together. An organisation cannot hold JIT in isolation of environment.

In short, in JIT we have :

(1) No wait times

(2) Balancing of conveyance times.

JIT is a combination of single unit production and conveyor system called “IKKO

Nagare” in Japanese.

Thus, JIT is viewed as a level of perfection achieved by continuous elimination of

wasteful use of resources. It represents a philosophy of eliminating wastes in the total

process from purchasing through distribution.

Components of JIT to eliminate waste :

1. Establishing balance, synchronisation and flow in manufacturing process.

2. Attitude towards quality - ‘doing it right the first time’

3. Employee Involvement

JIT is not simply an Inventory reduction programme, but inventory reduction is a part

of JIT system. JIT is founded on the principle that Inventory is a necessary evil and is a

hurdle in the problem. If you will buy a thing you do not need, you will need a thing

you cannot buy.

Basically JIT is divided into two parts :

Planning Stage

(a) MRP-I with computer assistance - This includes a comprehensive group of

techniques developed between 1960 and 1975, by U.S. experts in “Production

and Inventory Control” with emphasis on customer service.

(b) MRP - II - Manufacturing Resource Planning : This may further be divided into

demand management, supply management and capacity management and

consisting of two main levels viz. planning stage and implementation stage as

follows :

124

chfl^-3

Demand Mangement Supply Management

Product ProductForecasting and Distribution

control RequirementsPlanning

▲

CapacityMamgefiievfc

ProductionPlanning

Resource Planning

f

Master Production Scheduling

Capacity Planning (Rough)

SparesSales Forecasting Distribution Material Capacity

and Control—» Requirements «——► Requirements <------------------- 1 Requirements

Planning Planning Planning

Source HBR:-

“The Just In Time Break through”

John Wiley and Sons 1988

Write : EDWARD J. HAY

SHOP FLOOR CONTROL1 1

PURCHASING

Purchase Vendororder 4—► capacity

scheduling control

• This function only applies when spares are stocked in a separate locations. If

combined with component stock, spares forecasting is embedded in “Materials

Requirements Planning” as is done in CTMI in Gujarat.

Note : Majority of the methods concerned with replenishment of inventory and

fixation of inventory levels based on mathematical, statistical etc scientific methods

125

are also included under the heading of Inventory Control through Scientific

Techniques for the purpose of this study.

I. Recent Developments in Inventory Management:

a. Multi Echelon Inventory System :

When the term inventory management is used in practice, logically, one may think of

a very large organisation. In practice, in case of such organisations, the stores /

inventory may be located at decentralised stores at different places. In case of multi­

plant organisation, there may be a central store and a number of field stores or project

stores. Such inventory in all the locations belong to the same organisation. It is

worthwhile to perceive inventory management as an integrated system, instead of

treating each storage location separately. 68

Certain vital decisions concerning design and operation of such systems are, number

of locations, echelons, no. of storage point, location of certralised store, optimum

inventory policy to he followed by each location, stock replenishment policy

redistribution policy etc.

Under this system, slow and expensive items may be located at central store instead

of locating them in decentralised stores if the item is standardised and usable at each

location.

b. Optimised Production Technology (OPT):

As a system OPT calculates near optimum schedule of requirements, after

considering priorities of jobs and capacities of work centre. Thus it minimises

inventories (WIP inventories), lead time and maximise capacity utilisation.

A weighted function incorporating criteria like inventory hold-up, delivery schedule,

safety stock and critical machines is used in priority determination. 69

c. Management Information System (MIS) for Inventory Control :

(Computers in Inventory Management, and Control - Inventory Records and Reports)

For effective management and decisions in inventory control it is necessary to evolve

and develop a powerful management information system. It is necessary that all the

information from different departments be provided to centralised planning and

control deptt. For a sound Inventory control system, review of actual progress against

standards or norms must be made at regular intervals of time.

126

Regular reporting based on systematic data processing is possible with the use of

computers. Manual, mechanical and unit data processing system must be co­

ordinated to make MIS move effective.

Inventory MIS may be applied in the following areas with the use of computers 70

1. Long term and short term production schedules.

2. Inventory / Materials Manual.

3. Requirement of non-stock items from user department

4. Lead time shortages, availability price trends etc.

5. Materials and purchase requisition information, Bill of Material etc.

6. Materials supplied from stores to production, maintenance and other departments,

inter unit transfer etc.

7. To and fro information between stores and inspection.

8. Receipts and issues from stores.

9. Information to purchase department for follow up of supplies.

10. Purchase order, Receipt of materials.

11. Materials consumption data.

Reports and Statements for MIS.

1. Inventory status reports.

2. Inventory levels report.

3. Unsold stock / packed stock report.

4. Packing report.

5. Loose stock, unpacked stock report.

6. Monthly consumption / collection reports.

7. Scraps and wastes report.

8. Cotton bales for job work.

9. Obsolete stock, Non moving stock reports.

10. Reports of stock supplied to retail shops.

11. Cotton wastes report etc.

In addition to these documents of stores, records may be classified function wise as :-

(a) Reports for Receip of materials.

(b) Reports for Uses of materials.

127

(c) Reports for Inspection of goods.

(d) Reports for Purchase of goods.

(e) Reports for Issue of Stores.

(f) Reports for Inventory control.

(g) Reports for Wastes / Scraps / Surplus Inventories.

(h) Quantitative / Financial / Monetary Reports.

(i) Qualitative Reports etc.

All the above information may be useful for inventory planning, execution, counting

and control purposes. Use of computers in this area facilitates data processing,

analysis and dissemination.

It may be noted that for practical reasons and due to difficulties of making a water

tight compartment between policies, practices and techniques of Inventory

management and also due to applicability of a specific technique and policy (matter)

for a specific function only, they have not been discussed separately.

But policies, practices and techniques have been combined to maintain the sequence

of this study e.g. EOQ is a technique for inventory control but at the same time if

may salso be treated as a policy for Inventory replenishment.

128

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129

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[37] Materials Management an Integrated Approach : P. Gopalkrishnan and M

Sundaresan : PHI Pvt. Ltd . : Ed .1994 : P 27.

[38] Ibid : PP 27-30.

[39] Integrated Materials Management : Concepts and Cases : Patel, Chunawala and

Patel: Himalaya Publishing House, Bombay : Ed. 1984 : PP 20-21.

[40] A Business Dictionary : P H Collin : Oxford University Press : Delhi.

[41] Purchasing and Materials Management: Text and Cases : Lee and Dobler : TMH

: Ed. 1988 : PP 232-237.

[42] Storage and Stock Control : A. Morrison : Pitman Paperbacks : Ed. 1970

PP 190-195.

[43] Essentials of Store keeping and Purchasing : M. M. Varma : S. Chand and Co. -

Ed. 1991 :P 140.

[44] Production and Inventory Control: James H. Greene : Ed. 1974 : P 201.

[45] Financial Hand Book : Julice I. Bogan : The Ronald Press Company, New York :

Ed. 1957 :P 156.

[46] BTRA Study : (ATIRA Library) on Inventory Control : Control of In Process

Inventory : PP 11-13.

[47] Scientific Inventory Management : Joseph Buchan and Koenigsberg : Prentice

Hail of India: Ed. 1963 :P 7-8.

[48] Fundamentals of Financial Management : Prasanna Chandra : TMH Pub. : Ed.

1994 :P 274.

[49] Inventory Management: Gopalkrishnan and Sandilya : The MacMillan Company

of India Ltd. : Ed. 1976 :P 177.

[50] Inventory Management: IGNOU Study Material : P 39.

[51] Inventory Control: B. D. Khare and R. C. Monga : NPC : P 25.

[52] Financial Policies and Practices of Giant Companies in India : Dr. B M Patel :

131

IFMR, Chennai :Ed. 1992 : P 67.

[53] Cost Accounting :S. P. Iyengar : S. Chand and Co., New Delhi: Ed. 1994 : P 87.

[54] Ibid : P 86.

[55] Purchasing and Materials Management : England, Leenders and Fearson.

Universal Book Stall: New Delhi: Ed. 1988 : P 122.

[56] Storage and Control of Stock: A Morrison: Pitman-Publication. : Ed. 1970 : P 125

[57] Ibid : P 120-21.

[58] Purchasing and Materials Management: England and Leenders: Ed. 1988 : P 392.

[59] Materials Management: Deb.: Academic publishers, Calcutta : Ed. 1979 : P 121.

[60] Inventory Management: L. C. Jhamb : Everest Publishing House, Pune: Ed. 1987 :

P 350.

[61] Waste Management: Unit 20 : IGNOU study material: Page 77.

[62] Inventory Management: T.V. Mansukhani: Lok Udyog Magazine,

Vol. XVIII No. 4

[63] Encyclopaedia of Professional Management: Lester, Robert, Bittel: McGraw Hill

and Co., New York : P 575.[64] 23rd AURA Technology Conference.

[65] Management Memo ‘Requirement Planning for Inventory Control’ : Harward

Business Review : Philip H. Thurston : P 140.

[66] Operations Management : David Bennet Lewis and Mark Oakley Phillip Allen

Oxford and New Jersey : PP 178-179.

[67] The Just In Time Breakthrough : John Wiley and Sons: Harward Business Review :

Ed. 1988.

[68] IGNOU Study Material: Unit 20 : Page 40 .

[69] Production Planning and Control : G.D.Shardana Baroda Management Association

Seminar : September 1986 at Express Hotel, Baroda.

[70] Inventory Management, in Cotton Textile Industry : The Indian Textile Journal:

December 1991 : P 75.

132