PREFACE

A project is a scientific and systematic study of real issues on a problem with the application of

management concept and skills. The study can deal with small or big issues in any division of an

organization. It can be case study where a problem has been dealt with, through the process of

management. The essential equipment of a project is that, it should contain scientific collection of data,

analysis and interpretation of data leading to valid conclusion.

Project Report is an essential part in MBA curriculum. It enables the student to share the real

experience in industry. My project is about the Inventory Management.

Project helps in understanding concept of inventory management and its control in Phoenix motors ltd.

An attempt has been made throughout the report to clarify various inventory management concepts with

the help of collective information.

1

ACKNOWLEDGEMENT

“Accomplishment of a task with desired success calls for dedication towards work and

prompting guidance, co-operation and deliberation from seniors.”

This report is the outcome of the project that I did in the Phoenix Motors Ltd. It gives me immense

pleasure to acknowledge my deep sense of gratitude and sincere thanks to Mr. M. S. Arora (Manager,

Store) and to Mr. Rajender Pal (Executive Store) for agreeing for the project and providing me necessary

information for completion of project.

I am extremely grateful to Mr. _____________________ for his valuable guidance and glorious

teaching.

In last, I express my profound gratefulness and indebtedness to the esteemed organization for granting

me the grand privilege of working on a project under team of experts and professionals in the field of

inventory.

TABLE OF CONTENT

2

Chapter No. Content Page No.

Executive Summary

1 Objective and Research Methodology

Objective of the study

Research Methodology

Limitations

2 Company Profile

Phoenix Group

Phoenix Motors Ltd.

Vision of Phoenix

Services offered by phoenix

Products available at Phoenix

Spare parts

3 Theoretical framework of inventory management

Introduction

Nature of inventory

Purpose of holding inventory

Objective of inventory management

Valuation of inventory

Benefits of holding inventory

Inventory control

Inventory control techniques

3

4 Inventory management at Phoenix Motors Ltd.

Functional strategies/objectives

Purchase Control

Storage Control

Accounting Control

Valuation of material issue

Tools and Techniques of inventory control

Classification of inventories

Estimation of different costs

5Findings and Suggestions

6Bibliography

4

EXECUTIVE SUMMARY

The success of a venture depends on its ability to provide services to customers or users and remain

financially viable. For an organization which is supplying goods to its customers, the major activity is to

have suitable products available at an acceptable price within a reasonable timescale. Many parts of a

business are involved in setting up this situation. Initially these are the marketing and design

departments. Then purchasing, and in some cases, manufacture is involved. For an item, which is

already in the marketplace, the main activity is providing a continuity of supply for the customers.

Inventory control is the activity, which organizes the availability of items to the customers. It co-

ordinates the purchasing manufacturing and distribution functions to meet the marketing needs. This

role includes the supply of current sales items, new products, consumables, spare parts, obsolescent

items and all other supplies.

Inventory enables a company to support the customer service, logistic or manufacturing

activities in situations where purchase or manufacture of the items is not able to satisfy the demand.

Lack of satisfaction could arise either because of the speed of purchasing or manufacturing is to

protected or because quantity cannot be provided without stocks.

Stock control exists at a cross roads in the activity of a company. Many of the activities depend on the

correct level of stock being held. The investments in inventories constitute the most significant part of

current assets/working capital in most of the undertakings. Thus, it is very essential to have proper

control and management of inventories. The purpose of inventory control and its management is to

ensure availability of materials in sufficient quantity as and when required and also to minimize

investment in inventories.

The fundamental objective of a good inventory control system is to be able to determine, what, when,

how much to order, how much to carry in stocks so as to gain economy in purchasing. To achieve a

business goal without much effort, a proper inventory management has to be definitely considered for

5

the increase of profitability and reduce the unwanted working capital investment in the process of

manufacturing.

This project is all about inventory management in Phoenix Motors Ltd. Project starts with objective and

research methodology. Second chapter is about introduction of the company, its product, vision, mission

and values. Third chapter deals with theoretical framework of inventory management, its techniques, its

advantages and disadvantage and cost associated with inventory. Last chapter is about inventory

management in the company. Suggestions are made on the basis of findings. I have used both primary

and secondary data for preparing project.

6

CHAPTER -1OBJECTIVE AND RESEARCH METHODOLOGY

Following were the objectives of the study:-

● To analyze inventory management system of Phoenix Motors P. Ltd.

● To study the annual investment in raw material inventory, work in process inventory,

finished goods inventory

● To calculate ratios relating to inventory.

● To understand the problems faced by company in handling inventory.

● To fix various inventory levels such as EOQ, Maximum level, Minimum level, Re-order

level, etc.

● To minimize idle time caused by storage of raw materials, stores or spare parts.

RESEARCH METHODOLOGY

RESEARCH DESIGN

A research design is a framework to prepare plan or study. It is useful as a guide to collect

the data and analyzing it. It is a blue print that is followed in completing the study. Research

design is the conceptual structure within which the research will be conduct.

Type of Research : The study Descriptive in nature.

SOURCES OF DATA COLLECTION:

Primary data will be collected through interview of official staff and

head of inventory department.

7

Secondary data will be collected through assistant ledger book

MRN, website, journals, etc.

LIMITATION

1) This project is restricted to study purpose only and can be used keeping in view the

object that is made for.

2) The respondent in the project may not reveal important / confidential information

pertaining to the company policy and for this the project should be used keeping in view the

said limitation.

3) Finding of the study will be based on the assumptions that respondents have given

correct information.

8

CHAPTER – 2COMPANY PROFILE

Phoenix Motors Ltd.

Phoenix Motors was established on 21st March 2003 by the golden hands of Hero Honda

Managing Director Mr. Brij Mohanlal Manjal.

Company has two show rooms of Hero Honda. One at Habsiguda, Hyderabad and New

generation Dealership at Hitechcity, Hyderabad. Company has been meeting customer diverse

needs with Wide Range of New Two Wheeler, Genuine Spare Parts and Easy Finance.

A  State of  The Art 4S Dealership with new visual identity , 90 feet frontage with which

massive 6000 sft Show Room has been carved . Company’s after sales 7000 sft sprawling

attached Automated Work Shop equipped with modern equipments with skilled trained

9

PHOENIX GROUP:

Phoenix is a diversified corporate business group. Company’s core competence is

infrastructure and other business ventures include automobiles, steel and power.

Co. is innovators in the infrastructure domain with capabilities ranging from turnkey executions

to global marketing. The Group is well-poised to take on the toughest challenges, and meet

the strictest project timelines.

Phoenix implements all standard safety and environment-protection norms while creating any

venture. Co. creates properties with complete luxuries, tech-specs and modern amenities that

provide an overall fulfilling lifestyle.

technicians by Hero Motocorp which results 100% customer satisfaction both on sales &

service. An exclusive 2000 sft huge space for accommodating large range of Genuine Spare

Parts.

With best contribution on all fronts M/s Hero Moto Corp Limited has awarded Phoenix group

with a second dealership i.e. one more Phoenix Hero sun rised in the year 2012, 3rd March on

the West of Hyderabad in Hi Tech City also one of the most noted place on world IT map.

Facilities at Hi Tech City workshop, the first of its kind among entire Hero Moto Corp Limited

A.P. Dealers, Phoenix has Installed Dynamo Test Equipment which takes care of Mileage

Testing, Test Ride. Pollution under Control certificate also can be availed with use of the latest

Four Gas Analyser. Phoenix’s concept of Go Green workshop includes an Effluent Treatment

Plant which treats the water and helps in conservation of water. One more latest facility added

up that is Nitrogen Air Filling facility, which makes riding lighter and improves suspension,

mileage also increases tyre life and is also eco friendly.

VISION OF PHOENIX

PHOENIX is committed to provide consistently high quality of services and to continuously

improve the services through a process of teamwork and utmost satisfaction of the customers.

PRODUCTS AND SERVICES OFFERED BY PHOENIX:

1. Sales of Hero Honda Motorbikes

2. Servicing of Hero Honda Motorbikes

3. Sales of spare parts

4. Insurance of new Hero Honda motorbikes

1. Sales of hero Honda Motorbikes

10

Phoenix Motors has franchise of Hero Honda Company. Hero Honda Company manufactures

various types of motor cycles.

These are:

Hero Honda CD Dawn

Hero Honda CD Deluxe

Hero Honda Splendor

Hero Honda Splendor +

Hero Honda Super Splendor

Hero Honda passion +

Hero Honda Ambition135

Hero Honda CBZ*

Hero Honda Karizma

Exchange of motorbike:

Phoenix Hero exchange two-wheelers of all brands and models for new Hero two-wheelers.

Co. offers the best of exchange advantage at its dealership. The deals offered are genuine and

transparent.

Two-wheeler’s value will be judged by at least two exchange agents to provide the best

possible price.

11

The procedure - The price finalized for old-vehicle will be straight away adjusted towards the

payment for new two-wheeler.

PROMOTIONAL ACTIVITIES:

The promotional activities adopted by Phoenix Motors are

1) Advertising in Newspapers

2) Free Campaigns

3) Test Rides

4) Gift Schemes

5) Hoarding and Wall paintings

6) Mileage Contents

Promotional expenses have been borne by both Phoenix Motors and Hero Honda,

shares in advertisement cost.

2. SERVICING OF MOTORBIKE:

The services offered to the customer in Phoenix Motors are Six free Services and paid

services after sale of motor cycles.

Free checkup campaigns

Finance through banks

Demonstrations for new products

Acceptance of warranty claims.

3. Sale of Spare parts

12

Hero MotoCorp is the highest two wheeler vehicle seller in India & obviously consumption of

Hero MotoCorp auto spare parts is also the highest too. Co. has required infrastructure & can

supply any auto part suitable for Hero MotoCorp in the shortest possible time.

Co. offer you Spare Parts and Accessories at competitive prices. Co. has wide range of Spare

Parts for different models of Hero MotoCorp.

Phoenix Hero Motors offers Quality Its reputation for high-quality products, combined with on-

time deliveries, favorable technical assistance and excellent after sales service, has made

company the ultimate source for Hero MotoCorp motorcycle parts. Co. gives full stress to the

Quality of Spare Parts. Co. guarantees the supreme quality, ingenuity and durability of the

Spare Parts.

13

CHAPTER -3THEORETICAL FRAMEWORK OF INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the most significant part of current assets of a company like in India. On an

average, Inventories are approximately 60% of current assets in public Ltd. companies in India. A firm

neglecting the management of Inventories will be jeopardizing its long run profitability and may fail

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

degree. The reduction in “excessive” inventories carries a favorable impact on a company’s profitability.

Inventory is composed of assets that will sell or used in future in the normal course of business

operations. The assets, which firms store as inventory in anticipation of need, are

1. Raw material

2. Work in progress

3. Finished Goods

Inventory, is current assets, but differs from other current assets. Because only financial managers are

not involved rather, all the functional areas, i.e. finance, marketing, production & purchasing are

involved.

14

The job of the financial manager is to reconcile the conflicting view points of the various functional

areas regarding the appropriate inventory level in order to fulfill the over all objective of maximizing the

owner’s wealth.

Thus, Inventory management like the management of other current assets, should be related to the over-

all objective of the firm.

NATURE OF INVENTORY

Inventories are stock of the company. The various forms in which inventories exist in a manufacturing

company are:

1. Raw Material: Raw Material is those basic inputs that are converted into finished goods

through manufacturing process. Raw Material inventories are those units, which will

purchase & stored for future production.

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

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

3. Finished goods: These are completely manufactured products which are ready for sale.

Stock of raw materials and work in progress facilitates production while stock of finished

goods is required for smooth marketing operations.

PURPOSE OF HOLDING INVENTORY

15

A firm also needs to maintain inventories to reduce costs and ordering costs and avail quantity discounts.

There are three main purposes or motive:

1. Transactions motive: It emphasizes the need to maintain inventories to facilitate smooth

production & sales operations.

2. Precautionary motive: It necessitates holding of inventories to guard against the

unpredictable changes in demand & supply force & other factors.

3. Speculative motive: It influences the decisions to increase or reduce inventory levels to take

advantage of price fluctuations

OBJECTIVES OF INVENTORY MANAGEMENT

1. To meet the demand of the product by efficiently organizing the firm’s production and sale

operations.

2. To minimize the firm’s investment in inventory.

3. To avoid both over-stock and under-stock of inventory.

4. To eliminate duplications in ordering or replenishing stocks.

5. To minimize losses through deterioration, pilferage, wastages & damages.

6. To ensure right quality goods at reasonable prices.

7. To design proper organization for inventory management.

8. To facilitate furnishing of data for short –term & long-term planning & control of inventory.

16

VALUATION OF INVENTORY

The price of materials and income of a concern is directly proportional to each other. So it is necessary

that a method of pricing materials should be such that it gives a realistic value stocks.

To safe guard public interest, the Government of India has instituted statutory controls to prevent

frequent change of material valuation method for at least three years.

The following material pricing methods are generally used:

First in First out (FIFO)

Last in First out (LIFO)

Average Price Method

Simple average method Weighted average method

Base Stock Method

17

Market Price Method

Standard Price Method

BENEFITS OF HOLDING INVENTORY

Although holding inventories involves blocking of firms funds and the cost of storage and handling,

every business enterprise has to maintain certain level of inventories to facilitate un- interrupted

production and smooth running of business.

In the absence of inventories a firm will have or mark purchases as soon as it receives order. It

will mean loss of time and delays in execution of orders which sometimes may causes loss of

customers and business. A firm also needs to maintain inventories to reduce ordering cost and avail

quantity discounts etc.

The various costs and risks involve in holding inventories are.

Capital Costs:-Maintaining of inventories results in blocking of firms financial resources.

The firm has therefore to arrange for additional funds to meet the costs of inventories.

The funds may be arranged from own resources or from outsiders. But in both the case, the

firm incurs the cost. In the former case, there is an opportunity cost of investment while in

the later case; the firm has to pay interest to the outsiders.

18

Storage and Handling Costs:-Holding of inventories also involves cost on storage as well

as handing of materials. The storage of cost include the rental of the go down, insurance

charges etc.,

Risk of Price Decline:- There is always a risk of reduction in the prices of inventories by

the supplier in holding inventories. This may be due to increased market supply,

competition or general depreciation in the market.

Risk of Obsolescence:- The inventories may become obsolete due to improved

technology, changes in requirements, changes in customer tastes etc.,

Risk Determination in Quality:- The quality of materials also deteriorates while the

inventories are kept.

INVENTORY CONTROL

Effective inventory management requires an effective control system for the inventories. In managing

inventories, the firm’s objective should be in consonance with the shareholders, wealth maximization

principle. To achieve this, the firm should determine the optimum level inventory. Efficiently controlled

inventories make the firm flexible. Inefficient control results in unbalanced inventory and inflexibility –

the firm may sometimes run out of the stock and sometimes may pile up unnecessary stocks. This

increases the level of investment and makes the firm unprofitable. To manage inventories efficiency,

answers should be sought to the following two questions:

1. How much should be ordered?

2. When it should be ordered?

19

The first questions, how much to order relates to the problem of determining economic order quantity

(EOQ), and is answered with an analysis of costs of maintaining certain level of inventories.

The second question, when to order arises because of uncertainty and is problem of determining the

reorder point.

ECONOMIC ORDER QUANTITY

One of the major inventory management problem is to be resolved is how much inventory should be

added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it

has to be purchased on each replenish. If the firm is planning a production run, the issue is how much

production to schedule. These problem, are called order quantity problems, and the task of the firm is to

determine the optimum or economic order quantity.

Determining an optimum level of inventory level involves two types of costs:

1. Ordering costs

2. Carrying costs

(1) ORDERING COST

This category of cost is associated with the acquisition or ordering of inventory. Firms have to place

orders with suppliers to replenish inventory of raw material. The expenses involved are referred to as

ordering costs. Included in the ordering costs are involved in

1.1 Preparing a purchase order or requisition form

1.2 Receiving, inspection and recording the goods received

20

Ordering costs increase with the number of orders; thus more frequently inventory is acquired, the

higher the firm’s ordering costs. On the other hand, if the firms maintain large inventory levels, there

will be few orders placed and Ordering costs will be relatively small. Thus, ordering costs decrease with

increasing size of inventory.

(2)CARRYING COST

Costs incurred for maintaining a given level of inventory are called Carrying costs. They include:

Storage. insurance, taxes, deterioration and Obsolescence. Carrying costs vary with inventory size. This

behavior is contrary to that of ordering costs which decline with increase in size of inventory. The

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

The optimum inventory size is commonly referred to as economic order quantity. It is that order size at

which annual total costs of ordering and holding are the, minimum. We can follow three approaches –

the trail and error approach, the formula approach and the graphic approach – to determine the economic

order quantity (EOQ).

2AO

EOQ = C

Where, A is annual requirement.

O is Ordering cost.

And C is Carrying cost.

RE-ORDER POINT

21

The problem, how much to order is solved by determining the economic order quantity, yet the answer

should be sought to the second problem, when to order. This is a problem of determining the re-order

point. The re-order point is that inventory level at which an order should be placed to replenish the

inventory. To determine the re-order point under certainty, we should know: (a) Lead time, (b) average

usage, and (c) economic order quantity.

Lead time is the time normally taken in replenishing inventory after the order has been placed. By

certainty we mean that usage and lead time do not fluctuate. Under such a situation, re-order point is

simply that inventory level which will be maintain for consumption during the lead time.

That is:

Re-order point= Lead Time* Average usage.

SAFETY STOCK

It is difficult to predict usage and lead time accurately. The demand for material may fluctuate from day

to day or from week to week. Similarly, the actual delivery time may be different from the normal lead

time. If the actual usage increases or the delivery of inventory is delayed, the firm can face a problem of

stock-out which can prove to be costly for the firm. To guard this problem, the firm may maintain a

safety-stock – some minimum or buffer inventory as cushion against expected increased usage and delay

in delivery time.

INVENTORY CONTROL TECHNIQUES

22

1. ABC ANALYSIS

Usually a firm has to maintain several types of inventories. It is not desirable to keep the same degree of

control on all of the items. The firm should pay maximum attention to those items whose value is the

highest. The firm should, therefore, classify inventories to identify which items should receive the most

effort in controlling. The firm should be selective in its approach to control investment in various types

of inventories. This analytical approach is called ABC analysis and tends to measure the significance of

each item of inventories in terms of its value. The high value items are classified as ‘A item’ and would

be under the tightest control. ‘C items’ represent relatively least value and would be under simple

control.

‘B items’ fall in between these two categories and require reasonable attention of management. The

ABC analysis concentrates on important items is also known as control by importance and exception

(CIE). As the items are classified in the importance of their relative, this approach is also known as

proportional value analysis (PVA).

The following steps are involved in implementing the ABC analysis:

1. Classify the items of inventories, determining the expected use in units and the price per unit

for each item.

2. Determine the total value of each item by multiplying the expected units by its unit’s price.

3. Rank the items in accordance with the total value, giving first rank to the item with highest

total value and so on.

4. Compute the ratios of number of units of each item to total units of all items and the ration of

total value of each item to total value of all items.

23

5. Combine items on the basis of their relative value to form three categories – A, B and C

6. The data in the following table illustrate the ABC analysis.

CLASS NO. OF

ITEMS%

VALUE OF ITEMS

%

A 15 70

B 30 20

C 55 10

2. Just In Time:

The time-based approach to inventory management came into focus when Toyota Motors Company

came out with the concept of kanban in 1950. This lead to the dramatic reduction in WIP quantities tying

the inventory closely to the demand from subsequent process or internal customer. Kanban is

conceptually a two-bin system, a signal being raised to warrant replenishment.

JIT approach became a modern production system seeking to implant concept of stockless production.

JIT embraced a variety of manufacturing concepts like reduced lot sizes, quick switch over [SMED],

load leveling [response to tact time], group technology, statistical process control [control charts],

preventive maintenance and quality circles.

3. HML Analysis:

24

H-M-L analysis is similar to ABC analysis except for the difference that instead of “usage value”,

“price” criterion is used. The items under this analysis are classified into three groups that are called

“high”, “medium” and “low”. To classify, the items are listed in the descending order of their unit price.

The management for deciding three categories then fixes the cut-off-lines. For example, the management

may decide that all items of unit price above Rs. 1000/-will of ‘H’ category, those with unit price

between Rs. 100/- to Rs.1000/- will be of ‘M’ category and those having unit price below Rs. 100/- will

be of ‘L’ category.

HML analysis helps to -

Assess storage and security requirements.

To keep control over consumption at the departmental head level.

Determine the frequency of stock verification.

To evolve buying policies to control purchase.

To delegate authorities to different buyers to make petty cash purchase

4. VED Analysis:

‘V’ stands for vital, ‘E’ for essential, ‘D’ for desirable. This classification is usually applied for spare

parts to be stocked for maintenance of machines and equipments based on the criticality of the spare

parts. The stocking policy is based on the criticality of the items. The vital spare parts are known as

capital or insurance spares. The inventory policy is to keep at least one number of the vital spare

irrespective of the long lead-time required for procurement. Essential spare parts are those whose non-

availability may not adversely affect production. Such spare parts may be available from many sources

25

within the country and the procurement lead time many not be long. Hence, a low inventory of essential

spare parts is held. The desirable spare parts are those, which, if not available, can be manufactured by

the maintenance department or may be procured from local suppliers and hence no stock is held usually.

5. S-D-E Analysis:

S-D-E analysis is based on the problems of procurement namely:

Non-availability

Scarcity

Longer lead time

Geographical location of suppliers, and

Reliability of suppliers, etc.

S-D-E analysis classifies the items into three groups called “scarce”, “difficult” and “easy”. The

information so developed is then used to decide purchasing strategies.

“Scare” classification comprise of items, which are in short supply, imported or canalized through

government agencies. Such items are best to procure limited number of times a year in lieu of effort and

expenditure involved in the procedure for import.

“Difficult” classification includes those items, which are available indigenously but are not easy to

procure. Also items, which come from long distance and for which reliable sources do not exist, fall into

this category. Even the items, which are difficult to manufacture and only one or two manufacturers are

available belong to this group. Suppliers of such items require several weeks of advance notice.

26

“Easy” classification covers those items, which are readily available. Items produced to commercial

standards, items where supply exceeds demand and others, which are locally available, fall into this

group.

The purchase department employs S-D-E analysis:

To decide on the method of buying

To fix responsibility of buyers

6. S-OS Analysis:

S-OS analysis is based on seasonality of the items and it classifies the items into two groups S (seasonal)

and OS (off seasonal). The analysis identifies items which are:

Seasonal and are available only for a limited period. For example agriculture produce like raw mangoes,

raw materials for cigarette and paper industries, etc. are available for a limited time and therefore such

items procured to last the full year.

Seasonal but are available throughout the year. Their prices, however, are lower during the harvest time.

The quantity of such items requires to be fixed after comparing the cost savings due to lower prices if

purchased during season against higher cost of carrying inventories if purchased throughout the year.

Non-seasonal items whose quantity is decided on different considerations.

7. M-N-G Analysis:

M-N-G analysis based on stock turn over rate and it classifies the items into M (moving items), N (non-

moving items) and G (ghost items).

27

M (moving items) is those items, which are consumed from time to time. N (non-moving items) are

those items, which are not consumed in the last one year. G (ghost items) is those items that had nil

balance, both in the beginning and at the end of the last financial year and there were no transactions

(receipt or issues) during the year.

Analysis mainly helps to identify non-existing items for which the store keeps bin-cards or waste

computer memory or waste computer stationary while preparing stores ledger. Stores department even

might have even ear-marked space for these non-existent items.

All pending/ open purchase orders (if any) of such items should be canceled.

8. F-S-N Analysis:

F-S-N analysis is based on the consumption figures of the items. The items under this analysis are

classified into three groups: F (fast moving), S (slow moving) and N (non-moving).

To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into

account and the period, usually in terms of number of months, that has elapsed since the last movement

is recorded.

Such an analysis helps to identify:

Active items which require to be reviewed regularly

Surplus items whose stocks are higher than their rate of consumption; and

Non-moving items which are not being consumed

9. X-Y-Z Analysis:

28

X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory investment). Items whose

inventory values are high are called as X items while those inventory values are low are called Z items.

And Y items are those which have moderate inventory stocks.

Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.

XYZ analysis helps to identify a few items, which account for large amount of money in stock and take

steps for their liquidation/retention.

XYZ when combined with FSN analysis helps to classify non-moving items into XN, YN, and ZN

group and thereby identify a handful of non-moving items, which account for bulk of non-moving stock.

These can be studied individually in details to take decision on their disposal or retention.

29

CHAPTER -4

INVENTORY MANAGEMENT AT PHOENIX MOTORS LTD.

The efficiency of any business activity depends upon having materials supplies, and equipments

available in proper quantity with the proper quality, at the proper place and time at proper cost. Failure

ay any of these points adds to the costs and decreases the profit.

Functional Strategies/ Objectives of inventory management at Phoenix:

a) Evolve and implement a scientific inventory control system to achieve optimization of

inventory levels.

b) Standardize and improve equipment design.

c) Create and sustain computer culture.

d) Bring more common items under centralized procurement system to get better control.

e) Preservation of materials to avoid damages/ deterioration during storage.

f) Improvement in purchase procedure for reduction in procurement lead-time.

As Phoenix Motros Ltd. is authorized dealer and not a manufacturer. It doesn’t need any raw material. It

is authorized service station of Hero Honda. Hence company keeps inventory of different spare part of

Hero Honda Motorcycle.

Inventory management at Phoenix was divided into three broad areas

1. PURCHASE CONTROL

2. STORAGE CONTROL

30

3. ACCOUNTING CONTROL

PURCHASE CONTROL

Following is existing purchase policy of the company. Main purchase include purchase of spares

required for services of motorbikes.

1. Requisition to purchase

Material purchase request is raised from servicing and maintenance department for purchase of

particular product. It should be insured that the requisition for purchase should be completed in all

respects with regard to,

Each item of purchase shall have a precise, complete and unambiguous identification.

Identification sell include the generic name of the material as recognized commercially and

physical dimensions (weight, size, volume, and other technical specifications) and code number as

relevant.

Required date of delivery

Estimated value and approved budget head

Whether the item is a stock item/non-stock item/capital item

The stores section will raise the requisition for purchase of materials, which have been declared as

stock item, after the quantity in stock has reached the ‘reorder level’ as determined for the respective

items. Such requisition amongst other particulars should also indicate the ‘maximum’, ’minimum’ and

‘re-order’ level, the date on which last supply was received and the average consumption per month

since last purchase.

The requisition for purchase non-stock items will be invariably routed through the stores section that

will endorse on the requisition the availability/ non-availability. In case the item is available, the

31

quantity thereof is indicated on the purchase requisition so that the quantity to be purchased can be

adjusted by the head of the purchase dept. in consultation with the indenters.

2. Order placing.

On receipt of the requisition from the departments, enquiries shall be issued by the purchase dept. as per

the procedure detailed. Order is given to Hero Honda Ltd. for the purchase of spares and material

required. Purchase order will name of item, quantity required, description of items, date at which

material is required.

Lead Time:

The purchase time indicates the lead-time i.e. time taken to physically receive the material from the date

of its indent.

Current lead time of the company is 15 days.

STORAGE CONTROL:

The procurement action of stock items is initiated by store. Normally working hours of store is general

shift hours. However, in case of shut down, emergency service of stores is made available as requested

by user department.

OBJECTIVE OF STORES

To render materials, services to the organization by receiving, issuing the spare parts, preserving the

spares in custody, disposing the scrap/ surplus materials. The objective is achieved through following

function. Stores function is basically a service function. The main functions of the stores are:

1) To receive all types (Stock and Non-Stock) materials, to arrange inspection of

materials.

2) To keep materials safe custody, issue of materials to service and maintenance department.

3) To initiate action for procurement of stock items, to keep in custody and issue to service

department.

32

4) Disposal of Non-moving item, surplus item, and scraps item.

5) Implement stores related policies and functions.

6) Coordinating with other departments for stores related activities.

7) To maintain records/ files of all stores activities, issue vouchers, stores receipt vouchers

(SRV), stock adjustment vouchers (SAV), material exception reports (MER), claims/

dispatch advice etc.

STORE DEPARTMENT IS ALSO DIVIDED INTO THREE SECTIONS:

RECEIPT SECTION

CUSTODY SECTION

DISPOSAL SECTION

RECEIPT SECTION

Main Functions of receipt section;

To arrange copies of purchase order/work order and amendments thereof for ready reference.

Receiving of materials – checking and arranging for inspection.

Documentation – SRV (Store Receipt Voucher)

Handling over of accepted materials to custody section

Accounting / segregation of rejected material.

Follow up with handling contractor and transporter

Processing bills for services availed.

33

CUSTODY SECTION

Main function of section;

1. Codifying all the items with 9+1 digit code structure.

2. Receiving & posting of “accepted materials” against SRV and storing at proper location

3. Preservation of material during storage period.

4. ‘Stock Verification’ reconciliation of stock with management approval.

5. Issue of material to the service and maintenance department as and when required.

6. Maintenance of records and accounting for each transaction.

7. Verification of “Material statement” for the material issued against various ‘work orders’

9. Preparation of MPRs for ‘stock controlled’ items.

11. Review and fixing of ‘stock level’ for “stock control items”.

12. Housekeeping of the entire covered area under stores

STORES FLOW DIMAGRAM

34

Receipt Section

Receiving of materials

from Hero Honda Ltd.

Return of rejected materials

to Hero Honda Ltd.

Return of material

through ISRV-Inspection of material.

-SRV

-Accepted material.

Custody Section

MPR for stock

item to purchase

Issue of material to

User Dept.

PROCEDURE FOR RECEIVING THE ACCEPTED MATERIAL IN CUSTODY

SECTION

A) The materials are received in custody section through two sources mainly.

From receipt section through SRV and;

From user dep’t through ISRV (Material once drawn from stores and not consumed

can be returned to custody till it is further required for consumption).

1) If the material is received through SRV,

i) SRV for receipt of accepted material will be checked for special remarks for storage

condition (if any) & taken into custody.

ii) The appropriate location for the material will be selected/arranged.

iii) The material will be shifted to the selected place of its storage.

iv) The material will be “stock charged” i.e. taken into account by posting in computer.

2) If material is received through ISRV,

i) SIV reference no. & date (when this material was drawn).

ii) Reasons of return.

iii) % Value of material indicated by user or not.

35

The preservation

of material

Handing over surplus

material for disposal

to Disposal sec.

Disposal section

iv) If it is repaired & returned to stores.

v) Condition of material.

B) Quantity mentioned in ISRV is checked with quantity received by stores.

PROCEDURE FOR RECONCILIATION OF INVENTORY STATUS

It is a system for identifying the unwanted inventory and the deviation in physical stocks for

reconciliation of the stock and maintaining the accuracy in “management reporting system” for

inventory status.

All items in stocks are to be physically verified once in a year so that necessary adjustments can

be made in stocks after obtaining necessary approvals from competent authority.

PROCEDURE

Every item will be verified under perpetual type of “inventory verification system” once in a

year.

The finance department will prepare the group wise list of the items.

On hand quantity against the individual item will be noted with their respective location.

The physical stock is then verified with the representative of stores dep’t.

The deviation will be checked, scrutinized and sorted out.

The final list of unsettled item with deviation in quantity will be prepared.

Management approval for write-off / write on the stock is obtained.

Stock is adjusted through a voucher- SAV

PROCEDURE FOR MATERIAL ISSUE

Materials are issued within the specified time period i.e. 9.00 AM to 12.00 noon. In case of

emergency, materials can be issued depending upon the merit of the case.

36

Materials are issued against SIV format signed by authorized persons.

SIV will be checked.

Indication for type of transaction will be checked on SIV

Quantity on hand and location of the item will be noted on the SIV for respective item.

Quantity to be issued is decided based on type of material required.

If required materials is “stock item”, then quantity issued is depending on stock

available.

If required material is “non-stock” item, it can be issued full (i.e. equal to demanded

quantity).

If required material is material is from “reserved material category”, then it can be

issued to maximum quantity kept reserved for that particular dep’t.

Material will be issued for the decided quantity-obtaining signature & name of the drawer

for its physical receipt.

Quantity issued for the item will be posted to update the stock position.

DISPOSAL SECTION

The various function of disposal section;

To receive surplus material, scrap, unserviceable stores.

It is ensured that scrap materials are properly located / stored for fetching good price.

Coordinating activities of declaring items as surplus / obsolete, fixing of reserve price for

their disposal and obtaining management approval for their final disposal.

Accounting Control

Inventories are the assets of a company and such as their valuation get reflected in the balance sheet and

profit and loss account. These can be valued at actual, at the last price paid, on the basis of an average

37

price, current market price, and so on. A company may adopt a particular method of inventory valuation,

but it is obligatory to follow it for a minimum period of three years. Any changeover to a new method

requires the approval of the board.

Inventories measured by money value usually constitute the major element in the working capital of

manufacturing companies. Only proper stores accounting procedure can successfully achieve control of

inventory.

A good system of stores accounting is found to be necessary for certain other purposes like:

a) Preparation of accurate cost accounts

b) Evaluation of purchase performance

c) Working out important management ratio like sales to inventory, consumption to inventory,

purchase to inventory, inventory turnover etc.

d) Preparation of materials budget

When a material is purchased, received, inspected, and placed in the stores, an entry is made about

the purchase through a Goods Receipt Voucher. The entry for the quantity received is simple, but the

entry for the value of a purchase is a vexed problem because the value is the sum of a number of

items like:

a) Invoice price

b) Sales tax/ octroi

c) Excise duty/ custom duty

d) Insurance

e) Freight, carriage, handling charges etc.

The goods receipt voucher is priced from the appropriate invoice and the material account is debited in

the stores ledger.

Valuation of the Material Issue

The method of valuation followed in Phoenix Motors Ltd. is the weighted average pricing mechanism.

In this method the total quantities and total costs are considered, unlike simple average method where

only total costs are considered. This pricing mechanism is quite advantageous as the price is fixed for a

particular period say for one month and the system takes care of price fluctuations.

38

Preparation of Bin Cards

Bin card is a quantitative stock ledger. It shows the on-line stock position. Whatever any basic document

relating to movement of stores (SIV, SRV, SAV etc) is punched into system, automatic-posting goes

into Bin-Card

.

Pricing of Receipts (SRV)

The custody section sends SRV to finance for purpose of pricing. Finance prices the SRV on the basis of

terms and conditions of the purchase order and bill of vendor. SRV for which bills are not received from

the vendor are valued provisionally at the month end. Preparing a SR amendment voucher does

adjustments for variation in value.

Pricing of Issues (SIV)

Issues are valued on monthly weighted average basis. The issue of material or spare will be valued at

monthly weighted average method.

Preparation of Price Store Ledger (PSL)

The PSL is an item wise stores ledger. It shows both quantity and value.

TOOLS AND TECHINIQUES OF INVENTORY MANAGEMENT, WHICH

COMPANY IS ADOPTING: -

JIT

MILK RUN CONCEPT

TWO BIN SYSTEM

1) JUST IN TIME INVENTORY CONTROL:-

39

the just-in-time inventory control system, originally developed by taichi okno of happen, simply

implies that the firm should maintain a minimum level of inventory and rely on suppliers to provide

parts and components just in time to meet its assembly requirements. This may be contrasted with the

traditional inventory management system, which calls for maintaining a healthy level of safety stock to

provide a reasonable protection against uncertainties of consumption and supply the traditional system

may be referred to as a “just-in-case” system.

The just in time inventory system, while conceptually very appealing, is difficult to implement because

it involves a significant change in the total production and management system. It requires inter alias

(i) A strong and dependable relationship with suppliers who are geographically not very

remote from the manufacturing facility.

(ii) A reliable transportation system and

(iii) As easy physical access in the form of enough doors and conveniently located docks and

storage areas to dovetail incoming supplies.

.

under the just in time inventory system a concentrated effort is made to lower the ordering cost (F in the

above equation) and also the safety stock by forging stronger long-term relationship with the supplier.

As a result both the components on the right hand side of the above equation declaim and this means that

the average inventory level as lower.

2) MILK RUN CONCEPT:-

The concept of the milk run is day to day purchasing. Here the buyer will purchase the material

according to the production, which is for the next one day.

40

The buyer will first know the safety and control stock and then he tells to the supplier the estimated

trigger value. In milk run concept only quality-certified stock will be delivered. The purchaser should

estimate the lead-time and it is compulsory so as to have the control over lead-time. It is direct on-line

system. There will be no inspection so as to save time.

Advantages: -

Economical transportable lot(minimum transportation cost per piece)

No inventory carrying cost at plant and at warehouse.

It is direct online system

Quality certified stock will be delivered and so no inspection is required.

CLASSIFICATION OF INVENTORIES: -

CLASSIFICATION:-

The materials are classified into 2 they are

1. ABC analysis

ABC classification for the year 2011-12 is tabulated below:

ABC Class Criteria No. of material Cumulative consumption

value ( in lac)

A 70% of

consumption

value

219 75.25

B 20% of

consumption

937 21.54

41

value

C 10% of

consumption

value

9080 10.76

10236 107.56

A class item having criteria 70% consumption value has 219 items and value of 75.25 lacs.

These items are required to be ordered frequently to reduce capital locked up in inventory. They should

also have low safety stock and strict control. These items should be handled by senior staff.

B class item having criteria 20% consumption value has 937 items and value of 21.54 lacs. These items

require only periodic follow up and have moderate safety stock. They need moderate control.

C class item having criteria 10% consumption value has 9080 items and value of 10.76 lacs. These items

require exceptional follow up and high safety stock and require lose control.

For ‘A’ class items Phoenix Company uses direct online (DOL).

Some of the A class items includes Chasis, Aluminum, Ferro, liners, back spares, etc.

B class items are spring, stickers, rubber components, plastics etc

C class items are wires, nut bolts etc.

A class parts are purchased daily

B class parts are purchased up to 4 days

C class parts are purchased up to 7 days or 10 days.

2) XYZ CLASSIFICATION: -

XYZ classification is consumption based.

X – RUNNER MODEL

42

Y – REAPETER MODEL

Z - STRANGER MODEL

AX – daily consumption.

AY – taken 2 to 3 days for consumption.

AZ - by taking as per order.

At Phoenix they maintain less stock, which are costly.

Estimation of different costs: -

In the calculation of the ordering cost and also for other calculation purpose or analyzing

purpose, ‘I have considered ALL CLASSES ITEMS AND TO ALL MODELS’, To calculate the

various costs which are involved in the analysis of inventory management as explained earlier.

TRANSPORTATION COST:-

These are the cost, which are incurred when the spare parts/materials are procured and the cost is

incurred by procuring the spare parts from Companies place to vendor’s place.

There are different slab for the transportation cost procured from different places.

Two main important factors are considered in calculating transportation cost.

Distance between the company and vendors place.

Depending upon the weight of the spare part to be transported.

Transportation cost is taken as maximum 2.5% of the basic price of the spare parts on an average. It is

calculated as the overall fright incurred during previous year divided by purchases made.

CARRYING COST: -

43

These are the costs for holding the inventories. These costs will be depending up on their classes.

These costs will not be incurred if inventories are not carried.

Usually 4 days inventory are kept in stock for any ‘A’ category items. Hence the carrying cost includes

various costs and those are capital locked in the inventories, storage cost, maintenance cost etc.

CHAPTER -5

FINDINGS AND SUGGESTIONS

JIT And milk run system is being implemented in Phoenix as consumption of materials

for all models are procured for a definite period of time.

While purchasing materials a definite codification is given to each and every spare

parts of vehicle for all models and it is maintained with that particular code only.

As there is not reorder level, minimum and maximum level for different spare, Company

should calculate these levels for different spares so that unnecessary more money should not

be tied up in inventory.

44

The company should maintain the average stock level accordingly in order to reduce

the various costs of inventory management.

Investment of finance will be less if the stock is brought day-to-day. So the full inventory has

to be made direct online system on basis of milk run concept.

Proper codification leads to maximum cost control.

Proper storage facilities are recommended to prevent loss of inventory due to the lack of it or

faulty methods of storage.

Finally I suggest that Phoenix should continue in using the high Japanese technology .

CHAPTER - 6

BIBILIOGRAPHY

FINANCIAL MANAGEMENT - PRASANNA CHANDRA

COST ACCOUNTING - S. N. MAHESHWARI

COST ACCOUNTING - VARSHINI & SAXENA

Websites:

www.phoenixhero.com

45