CHAPTER I

1. INTRODUCTION TO THE STUDY

In this study, an attempt is made to analyze the inventory management in Shri Hari

Krishna Papers Pvt Ltd, Udumalpet during the period from 2006-2011.

Inventory is the quantity of goods and materials on hand. A manufacturer's inventory

represents those items that are ready and available for sale. Production includes those activities

involved in conceptualizing, designing, and creating products and services. In recent years there

have been dramatic changes in the way goods are produced.

Inventory Management System deals with the maintenance of equipments. Inventory

management is a discipline that encompasses the principles, concepts and techniques for

determining what to order, when to order and how much to order.

Today, computers help monitor, control, and even perform work. Flexible, high-tech

machines can do in minutes what it used to take people hours to accomplish. Another important

development has been the trend toward just-in-time inventory. The word inventory refers to the

amount of goods a business keeps available for wholesale or retail. In just-in-time inventory, the

firm stocks only what it needs for the next day or two.

Manufacturing and other service organizations have significantly invested in inventory.

Often investment in inventory has a direct bearing on the profitability of the firm. Experiences in

last twenty years suggest that the world class performance of a firm hinges on the firm’s ability

to cut investment in inventory to very low levels. In addition to cutting down cost, reduced

inventory levels help an organisation improve quality, planning systems and supply chain

coordination. They also reduce wastage and obsolescence. Hence inventory planning and control

continues to derive considerable attention of the management in the organizations.

1

NATURE OF RAW MATERIAL

Materials are stock of the product accompany in manufacturing for sale and

components that make up the products. The various forms in which materials exist in

manufacturing company are:

Raw Materials

Working- in- process

Finished Goods

RAW MATERIALS

Raw materials are those basic inputs that are converted in to finished products through

the manufacturing process. Raw materials are those units which have been purchase and stored

for future production. They are required to carry out production activities uninterruptedly. The

quantity of raw materials required will be determined by the rate of the consumption and the time

required for replacing the supplies. The factors like the availability of raw materials and

government regulation, etc affects the stock of raw materials.

WORK- IN- PROCESS

Work in process is called as stock in process. It refers to goods in the intermediate stage

of production. These are semi manufactured products. They represent products that need more

work before they become finished products for sale. The work in process is that stage of stocks

which are in between raw materials and finished goods. The raw materials enter the process of

manufacturing but they are yet to attain the final shape of finished goods. The quantum of work

in process depends up on the time taken in manufacturing: the more will be the amount of work

in process.

2

FINISHED GOODS

The finished goods materials are those completely manufactured products which are

ready for sale. Stocks of raw- materials and working process facility production, while stocks of

finished goods are required for smooth marketing operations. These are goods, which are ready

for consumers. The stocks of finished goods provide a buffer between production and market.

The purpose of maintaining material is to ensured proper supply of goods to the consumers. In

some concerns the production is undertaking on order basis.

Therefore, efficient inventory management reduces the cost of production and

consequently increases the profitability of the organization by minimizing the different type of

cost associated with holding inventory.

3

1.2 NEED AND IMPORTANCE

Effective inventory management is essential for realizing the full potential of the value

chain and financially, inventory is very important to manufacturing companies because cost of

carrying inventory influence profit. Every business organization is in need of a good inventory

management system which shall take care of all its inventories in the network. Companies spend

lacks of money every year to keep their network monitoring systems updated and to take care of

all their network related issues. No one wants problems like sudden stoppage of work due to

poor inventory and due to sudden needs of repairs and renewals. Companies often face sudden

situations when they realize that their work has stopped because something went terribly wrong

with their inventory. This problem can be solved with the right usage of inventory management

system.

So it is important to do the study on inventory management and cost control due to the

following:

To know about the unstable market conditions of raw materials.

Importance of having adequate materials on hand when needed.

To know about the variations in the profitability by means of inventory and cost

management.

4

1.3 INDUSTRY PROFILE

PAPER INDUSTRY

Paper industry in India is the 15th largest paper industry in the world. It Provides

employment to nearly 1.5 million people and contributes Rs.25 billion to the government. Paper

industry is primarily dependent upon forest-based raw materials. The first paper mill in India was

set up at Sreerampur, West Bengal, in the year 1812. It was based on grasses and jute as raw

material. Large scale mechanized technology of papermaking was introduced in India in early

1905.

Since then the raw material for the paper industry underwent a number of changes and

over a period of time, besides wood and bamboo, other non-conventional raw materials have

been developed for use in the papermaking. The Indian pulp and paper industry at present is very

well developed and established. Now, the paper industry is categorized as forest-based, agro-

based and others (waste paper, secondary fibre, bast fibers and market pulp).

In 1951, there were 17 paper mills, and today there are about 515 units engaged in the

manufacture of paper and paperboards and newsprint in India. The pulp & paper industries in

India have been categorized into large-scale and small-scale. Those paper industries, which have

capacity above 24,000 tonnes per annum, are designated as large-scale paper industries. India is

self-sufficient in manufacture of most varieties of paper and paperboards. Import is confined

only to certain specialty papers.

Indian paper industry has been de-licensed under the Industries (Development &

Regulation) Act, 1951 with effect from 17th July, 1997. The interested entrepreneurs are now

required to file an Industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for

Industrial Assistance (SIA) for setting up a new paper unit or substantial expansion of the

existing unit in permissible locations. Foreign Direct Investment (FDI) up to 100% is allowed on

5

automatic route on all activities except those requiring industrial licenses where prior

governmental approval is required for the paper industry.

The mills use a variety of raw material viz. wood, bamboo, recycled fibre, bagasse,

wheat straw, rice husk, etc approximately 35% are based on chemical pulp, 44% on recycled

fibre and 21% on agro-residues. The geographical spread of the industry as well as market is

mainly responsible for regional balance of production and consumption.

The added capacity of approximately 0.8 million tons during 2009-2011 the operating

capacity of the industry currently stands at 9.3 million tons. During this fiscal year, domestic

production of paper and paperboard is estimated to be 7.6 million tons.

Demand of paper has been hovering around 8% for some time. During the period 2008-

2011 while newsprint registered a growth of 13%, Writing & Printing, Containerboard, Carton

board and others registered growth of 5%, 11%, 9% and 1% respectively. So far, the growth in

paper industry has mirrored the growth in GDP and has grown on an average 6-7 per cent over

the last few years.

India is the fastest growing market for paper globally and it presents an exciting

scenario; paper consumption is poised for a big leap forward in sync with the economic growth

and is estimated to touch 13.95 million tons by 2015-16. The futuristic view is that growth in

paper consumption would be in multiples of GDP and hence an increase in consumption by one

kg per capita would lead to an increase in demand of 1 million tons.

6

1.4 COMPANY PROFILE

SHRI HARI KRISHNA PAPERS PVT LTD was incorporated in the year 1995 as a

private limited company with installed capacity of 3000 MT per annum of printing and writing

paper. The company commenced its production in the year 1996 with a capacity of 10 MT per

day and at present, the company has the production capacity of 85 Mt per day as follows:

Unit-1 30 MT per day- manufacture of printing & writing papers & news print papers.

Unit- 11 35 MT per day- manufacture of printing & writing papers

Unit -111 20 MT per day- manufacture of special varieties of papers

At present, the annual turnover of the company is around Rs.90 crores. The company

exports around Rs. 10.00 crores/annum and imports around RS. 12.00 crores/annum.

Shri Hari Krishna Papers Pvt Ltd is the sister concern of GVG group. The GVG group

has 2 paper mills and 3 textile mills with a combined turnover of Rs. 275 crores per annum. The

production capacity of 2 paper mills is 200 MT/day and the installed capacity of Textile mills is

65000 spindles.

Shri Hari Krishna Papers Pvt Ltd has put up 10 wind mills supplied by various

manufactures in Attukinathupatti village, Coimbatore & Kongalnagaram. There are 25 wind

mills in group of company. The company also have a back pressure turbine connected to the

FBC Boiler which produces around 224000 units of power per day. The power generated from

wind mills and turbine takes care of more than 50% of our power requirement and even during

power cut imposed by the Tamil Nadu Electricity Board we are able to comfortably maintain our

production without compromising any of our processes.

The company engages itself in lot of social welfare activities and have recently

contributed a sum of Rs.16.00 lakhs from our group towards the construction of a modern

electric crematorium in Udumalpet. The company also has a poly technique institution in the

name of Rudhraveni Muthuswamy Poly Technique which caters to the needs of lot of student in

7

and around our taluk and contributed for the building of a compound wall of a huge play ground

belonging to the Government High School in Udumalpet. Shri Hari Krishna Papers Pvt Ltd also

promotes Cricket by sponsoring a Team to play in district league matches and also sponsors lot

of other games which are being conducted in and around Udumalpet. Apart from this, the

company also do lot of charities for the Temples.

The following are the founders of the company.

Shri M. Soundarajan

Shri M. Veluswamy

Shri M. Amarnath

The following constitute the present Board of Directors of the company.

Managing Director : Shri M. Amarnath

Joint Managing Director : Shri A. Anish

Directors : Shri V. Vivek

8

PRODUCTS

The company produces different types of papers for various purposes. According to the

need and orders of the dealers the paper is produced and distributed. Each type of the paper has

its own and uses. Paper is often characterized by weight. The weight assigned to a paper is the

weight of a ream (500 sheets) of varying “basic sizes”, before the paper is cut into the size it is

sold to end customers.

Density of paper: The density of paper ranges from 250 kg/m3 (16 lb/ft3) for tissue

paper to 1500kg/m3 (94 lb/ft3) for some specialty paper. Printing paper is about 800 kg/m3

(500lb/ft3).

Newsprint

Bond paper

Book paper

Cotton paper

Kraft paper

Coated paper

Writing & Printing paper

Wall paper

Speciality paper

Industrial paper

News Print

News Print is mainly used in the printing of newspapers and magazines. Although used

for printing purposes, newsprint is considered a separate end-use category because of the marked

difference in its production process as compared with other W&P varities of paper. Besides,

newsprint is consumed in very large volumes vis-a-vis other varieties of paper.

9

Bond Paper

Bond paper is a high quality durable writing paper similar to bank paper but having a

weight greater than 50g/m2. It is used for letterheads and other stationery and as paper for

electronic printers. Widely employed for graphic work involving pencil, pen and felt-tip marker.

It is largely made from rag pulp which produces a stronger paper than wood pulp.

Book Paper

The book paper (or publishing paper) is a paper which is designed specifically for the

publication of printed books. Traditionally, book papers are off white or low white papers (easier

to read), are opaque to minimize the show through of text from one side of the page to the other

and are usually made to tighter caliper or thickness specifications, particularly for case bound

books.Typically, book papers are light weight 60-90gsm and often specified by their

caliper/substance ratios (volume basis).

Cotton Paper

Cotton paper is made from 100% cotton fibers. Cotton paper is superior in both strength

and durability to wood pulp-based papers, which may contain high concentrations of acids. May

also be known as cotton rag or ragged paper.

Cotton fiber papers is known to last several hundred years without fading, discoloring, or

deteriorating, so is often used for important documents such as the archival copies of dissertation

or thesis. Legal documents paper typically may contain 25% cotton. Cotton paper is also used in

bank notes.

10

Kraft Paper

Kraft paper is paper produced by the Kraft process from wood pulp. It is strong and

relatively coarse. Kraft paper is usually a brown color but can be bleached to produce white

paper. It is used for paper grocery bags, multiwall sacks, envelopes and other packaging.

Paper Towel

A paper towel is a disposable product made of paper. It servers the same general purpose

as conventional towels, such as drying hand, wiping windows and dusting. Because paper towels

are disposable, they are often chosen to avoid the contamination of germs.

Specialty Paper

This paper includes tissue paper, fine art paper, business card paper, photo paper and

greetings card paper, which find various specific applications. It contributes to a very small

percentage of total paper demand. Consumption of specialty papers is linked to the standard of

living as well the per capita income of the masses due to their high value products.

Writing and Printing Paper

This includes varieties of paper, normally under 120 GSM (grams per square meter), that

are used primarily for writing (stationery) purpose and printing (books, notebooks, share

applications forms, etc). The various varieties of W&P paper starting from the lower end of the

value chain are cream wove, map litho, copier and coated paper. While high-quality paper

segments have been garnering a greater share, low quality segments still account for a major

share of the market due to a higher base.

To a larger extent, growth in demand for paper in this segment depends on population

growth, level of literacy, public and private spending on education, level of business activity and

growth in the printing industry.

11

Industrial Paper

This includes Kraft paper, duplex boards, grey and white board, and MG paper. The

paper is used for various industrial purposes.

12

CHAPTER II

REVIEW OF LITERATURE

Premkumar Asit K. Ghosh in his book production management (1991) has viewed that

inventories are basically stocks of resources held for the purpose of future production or sales.

Inventories may be viewed as an idle resource, which has an economic value. Better

management of inventories would release capital for use elsewhere, productively.

A.K.Datta in his book material management (1994) reviewed as inventories are stock of

materials of any kind stored for future use, mainly in the production process. Inventories are

resources of any kind having some economical value, either awaiting conversion or use in future.

Rathan Lal Guptha in his book (1994) has explained as inventory comprises a significant

portion of the asset of many enterprises and bulk of working capital is locked up in this item. It

generally constitutes the second largest item after foxed assets in the financial statements,

particularly of manufacturing organizations.

Lambert, D.M., J.R. Stock, and L.M. Ellram, 1998 has analyzed the management of the

inventories, with the primary objective of determining, controlling stock levels within the

physical distribution function to balance the need for product availability against the need for

minimizing stock holding and handling costs.

Charles Atkinson says inventory management is about two things: not running out, and not

having too much. The desire is not to run out, along with uncertainties in demand and supplier

lead times are why we have inventory in the first place. Essentially, inventory is a reserve system

to prevent a stock out.

Tony Wild 2005 explains that good management of inventory enables companies to improve

their customer service, cash flow and profitability. 'Best Practice in Inventory Management'

outlines the basic techniques, how and where to apply them, and provides advice to ensure they

work to produce the desired effect in practice.

13

STANFORD, R.E. AND W. MARTIN 2007 Manufacturers invest considerable resources in

planning, analyzing and predicting the optimal timing and quantities to produce the variety of

company goods, and new technological tools enable high-quality data analysis to support these

growing decision-making needs. However, some traditional decision making systems may still

be useful for both high and low budget firms unable to invest in costly tools. These include

inventory classification systems, frequently referred to as ABC analyses, which provide an

important analytical framework for inventory. It is easy to see how purchase order patterns,

restructured based on ABC analysis, can mean considerable savings. ABC analysis thus ensures

significant cost savings, representing an invaluable tool in the management tactical arsenal.

(Towards a normative model for inventory cost management in a generalized ABC classification

system).

P.Periyasamy in his book financial management (2009) explains inventory is a physical stock of

items that a business or production organization keeps in hand for efficient running of affair of

its production. Inventories consists of raw materials, component part supplies and finished

assemblies, which an organization purchases from outside source and parts, assemblies and

finished products, which the company manufactures itself.

14

CHAPTER III

OBJECTIVES OF THE STUDY

To study the inventory ratios of Shri Hari Krishna Papers Pvt Ltd.

To study how ABC analysis is implemented in inventory management.

To study how FSN analysis is implemented in inventory management.

STATEMENT OF THE PROBLEM

A study on inventory management at Shri Hari Krishna Papers Pvt Ltd, Udumalpet is undertaken

in order to know the inventory performance and position of the company and to know the

strength and weakness and to assess the profitability of the company. Inventories constitute most

significant part of assets of large majority of the companies in India. It is therefore absolutely

very important to manage inventories efficiently and effectively in order to overcome

unnecessary investment and to identify the problems or challenges involved in the inventory

management process at Shri Hari Krishna Papers Pvt Ltd, Udumalpet.

15

CHAPTER IV

RESEARCH METHODOLOGY

Scope

The scope of the study is to examine the inventory management in Shri Hari Krishna Papers Pvt

Ltd for the period of study from 2006-11.

Data collection

The study is based on the secondary data collected from the annual reports and inventory manual

of the company.

Data Analysis

In order to examine the various objectives of the study the following tools have been used.

1. Inventory ratios

2. ABC analysis

3. FSN analysis

16

RATIO ANALYSIS

Ratio analysis is one of the techniques of financial analysis to evaluate the financial

condition and performance of a business concern. Ratio analysis determines trends and exposes

strengths or weaknesses of a firm. A tool used by individuals to conduct a quantitative analysis

of information in a company's financial statements. Ratios are calculated from current year

numbers and are then compared to previous years, other companies, the industry, or even the

economy to judge the performance of the company. Ratio analysis is predominately used by

proponents of fundamental analysis.

FSN ANALYSIS

FSN analysis is carried out on the basis of the rate of movement of materials in the stores

or on the basis of consumption pattern of components. Fast and slowing moving classification

helps in arrangement of stocks in the stores and is deciding distribution and handling patterns.

Fast , slow moving or non moving items analysis report brings out the list of dead materials

which have not have been used at all for quit some time and which should removed from stores.

ABC ANALYSIS

In this technique, the items of inventory are classified according to value of usage. The

higher value items have lower safety stocks, because the cost of production is very high in

respect of higher value items. The lower value items carry higher safety stocks. This method

divides inventory into three classes A,B and C. Items in class ‘A’ constitute the most important

class of inventories so far as the proportion (or percentage) in the total values of inventory is

concerned. Items in class B constitute an intermediate position while those in item ‘C’ are quite

negligible.

17

CHAPTER V

LIMITATIONS OF THE STUDY

The study was confined to only 2 years of the inventory manual.

The entire analysis applies only to Shri Hari Krishna Papers Pvt Ltd, Udumalpet and if any

body wants to generalise the results of this study, it has to be done with caution.

18

CHAPTER VI

ANALYSIS AND INTERPRETATION

6.1 INVENTORY RATIOS

6.1.1 INVENTORY TURNOVER RATIO

Inventory Turnover Ratio is also known as stock velocity and normally calculated as

sales by cost of goods sold/ average inventory. It would indicate whether inventory has been

efficiently used or not. The purpose is to see whether only the required minimum funds have

been locked in inventory.

A low inventory turnover ratio indicates an inefficient management of inventory. A low

inventory turnover implies over-investment in inventories, dull business, poor quality of goods,

stock accumulation, accumulation of obsolete and slow moving goods and low profits as

compared to total investment. The inventory turnover ratio is also an index of profitability, where

a high ratio signifies more profit, a low ratio signifies low profit. Sometimes, a high inventory

turnover ratio may not be accompanied by relatively a high profits. Similarly a high turnover

ratio may be due to under-investment in inventories.

Sales

Inventory turnover ratio = ____________________

Average Inventory

19

Table 6.1.1 presents the details of inventory turnover ratio of Shri Hari Krishna Papers Pvt Ltd

during the study period from 2006-11.

TABLE 6.1.1

INVENTORY TURNOVER RATIO

YEAR

SALES

(IN RS)

AVG INVENTORY

(IN RS)

RATIO

(IN TIMES)

2006-2007 539313949 46,817,163 11.5

2007-2008 559157924 61,714,683 9.06

2008-2009 688687570 69,459,534 9.91

2009-2010 657804603 62,635,803 10.5

2010-2011 719953719 65,612,118 10.9

MEAN 10.3

It is evident from the above table that the company’s mean inventory turnover ratio was 10.3

indicating that company is able to turn its inventory into sales about 10 times a year. There is an

increasing trend of the inventory turnover ratio, which indicates the company efficiently utilizes

inventory.

20

CHART 6.1.1

INVENTORY TURNOVER RATIO

21

6.1.2 INVENTORY CONVERSION PERIOD

The ratio expresses the number of days in which the inventory is converted in to

finished goods. The efficiency of the company can be determined from this ratio. Less inventory

conversion period is better because more fastly, we will convert our inventory into sales, there

will be less chance of obsolescence and paying of over-stocking cost. It can be calculated with

the following formula.

365

Inventory conversion period= ____________________

Inventory turnover ratio

Table 6.1.2 presents the details of inventory conversion period during the period from 2006-11

TABLE 6.1.2

INVENTORY CONVERSION PERIOD

YEAR NO OF DAYS

INVENTORY

TURNOVER RATIO

( IN TIMES)

PERIOD

(IN DAYS)

2006-2007 365 11.5 31.7

2007-2008 365 9.06 40.2

2008-2009 365 9.91 36.8

2009-2010 365 10.5 34.7

2010-2011 365 10.9 33.4

MEAN 35.3

22

The mean inventory conversion period during the study period from 2006-11 was 35.3 days

which implies that the inventory has been disposed off or sold on an average in 35 days.  

Inventory conversion period started decreasing from 40.2 days in 2007-08 to 33.4 days in 2010-

11, which shows the efficiency of management to convert the inventory into cash.

CHART 6.1.2

INVENTORY CONVERSION PERIOD

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

05

1015202530354045

INVENTORY CONVERSION PERIOD

PERIOD (IN DAYS)

YEAR

RATIO

23

6.1.3 INVENTORY TO CURRENT ASSET

The inventory to current asset represents the proportion of inventory in the total current

asset. It is determined by dividing the inventory to the current asset. This depicts the amount of

investment in inventories from the whole of currents.

Inventory

Inventory to current asset= _____________________

Current asset

Table 6.1.3 presents the details of inventory to current asset during the period from 2006-11

TABLE 6.1.3

INVENTORY TO CURRENT ASSET

YEAR

INVENTORY

( IN RS)

CURRRENT ASSET

( IN RS)

RATIO

(IN TIMES)

2006-2007 42019739 129509376 0.32

2007-2008 81409628 150991573 0.53

2008-2009 57509441 158631792 0.36

2009-2010 67762166 164101815 0.41

2010-2011 63462071 170914438 0.37

MEAN 0.39

24

The mean inventory in current assets ratio during the study period was 0.39 and it has fluctuated

over a period of time.

CHART 6.1.3

INVENTORY TO CURRENT ASSET

25

6.1.4 INVENTORY TO SALES

This indicates the level of inventory to sales of the organization. It reflects the proportion

of stock to that of the sales for the corresponding period. An increasing Inventory to Sales ratio is

generally a negative sign, showing the company may be having trouble keeping inventory down

and/or Net Sales have slowed, and can sometimes indicate larger financial problems the

company may be facing.

A decreasing Inventory to sales ratio is generally a positive sign, showing the company

has been more able to keep inventory down and/or Net Sales have increased. It is determined as

inventory divided by sales.

Inventory

Inventory To Sales = _____________

Sales

Table 6.1.4 presents the details of inventory to sales during the period from 2006-11.

TABLE 6.1.4

INVENTORY TO SALES RATIO

YEAR

INVENTORY

(IN RS)

SALES

(IN RS)

RATIO

(IN TIMES)

2006-2007 42019739 539313949 0.07

2007-2008 81409628 559157924 0.14

2008-2009 57509441 688687570 0.08

2009-2010 67762166 657804603 0.10

2010-2011 63462071 719953719 0.08

MEAN 0.094

26

The mean inventory to sales ratio during the study period was 0.094. The inventory to sales ratio

for the year 2006-07 is 0.07 and it shows an decreasing trend from 0.14 in 2007-08 to 0.08 in

2010-11. It is a positive sign, showing that the company's ability to manage Inventories while

attempting to increase sales.

CHART 6.1.4

INVENTORY TO SALES RATIO

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

INVENTORY TO SALES RATIO

RATIO (IN TIMES)

YEAR

RATI

O

27

6.1.5 INVENTORY TO WORKING CAPITAL RATIO

This ratio provides the relationship between inventory and working capital. If a firm has

to be financially sound then the amount of inventory should not exceed the amount of working

capital. This ratio is calculated to know whether there is any over stock.

A low value of 1 or less of inventory to working capital means that a company has high

liquidity of current asset, while it may also mean insufficient inventories. A high value inventory

to working capital ratio means that a company is carrying too much inventory in stock. It is not

favorable for management because excessive inventories can place a heavy burden on the cash

resources of a company. A key issue for a company to improve its operation efficiency is to

identify the optimum inventory levels and thus minimize the cost tied up in inventories.

Inventory

Inventory to Working Capital Ratio = _____________________

Working Capital

Table 6.1.5 presents the details of inventory to working capital ratio during the period from

2006-11.

TABLE 6.1.5

INVENTORY TO WORKING CAPITAL RATIO

YEAR

INVENTORY

(IN RS)

WORKING CAPITAL

(IN RS)

RATIO

(IN TIMES)

2006-2007 42019739 106,712,883 0.39

2007-2008 81409628 129718649 0.62

2008-2009 57509441 134235629 0.42

2009-2010 67762166 138203184 0.49

2010-2011 63462071 133132995 0.47

MEAN 0.47

28

The mean inventory to working capital ratio was 0.47. Since the ratio was less than 1, it is found

to be satisfactory.

CHART 6.1.5

INVENTORY TO WORKING CAPITAL RATIO

29

6.2 ABC ANALYSIS (ALWAYS BETTER CONTROL)

ABC Analysis helps in the classification of the items on the basis of their consumption

values in a given period. The logic behind this kind of analysis is that the management should

study each item of stock in terms of its usage, lead time, technical or other problems and its

relative money value in the total investment in inventories.

This analysis in inventory can be done for specified financial periods or for a range of

dates as specified by the user. It is possible to do this analysis for a particular warehouse in a

location or for all the warehouses in the location.

The consumption value of the items over the specified period for which analysis is to be

done is calculated on the basis of the Receipts, Returns and Adjustments made during that time.

The consumption value for items are then put in descending order of their values and the

percentage of total consumption value for each item calculated.

Usually the first 70% of the total consumption value in the specified period corresponds

to A Class, the next 20% are of B Class and the last 10% of the value corresponds to the C Class.

ABC analysis also helps in reducing the clerical costs and results in better planning and

improved inventory turnover. ABC analysis has to be resorted to because equal attention to A, B

and C items will not be worthwhile and would be very expensive.

A-    Items

1. Tight controls

2. Rigid estimates  of requirements

3. Strict and close watch

4. Safety stocks should be low

5. Management of items should be done at top management level.

30

B-    Items

1. Moderate control

2. Purchase based on rigid requirements

3. Reasonably strict watch and control

4. Safety stocks moderate

5. Management be done at middle level

C-    Items

1. Ordinary control measure

2. Purchase based on usage estimates

3. Controls exercises by store keeper.

4. Safety stocks high

5. Management be done at lower levels.

The following steps are involved in the classification of items into A, B and C categories.

1. Find out the unit cost and the usage of each material over a given period.

2. Multiply the unit cost by the estimated annual usage to obtain the net value.

3. List out all the items and arrange them in the descending value. (Annual Value)

4. Accumulate value and add up number of items and calculate percentage on total inventory in

value and in number.

31

6.2.1 ABC ANALYSIS FOR THE YEAR 2009-10

TABLE 1

RAW MATERIALS QUANTITY UNIT COSTCONSUMPTION VALUE ( IN RS)

% OF CONSUMPTION

VALUECUMULATIV

E % CATEGORYIMPORTED WASTE PAPER

147.88 17,6362608011.68 34.24 34.24 A

TEXT BOOKS 137.845 10,245.74 1412324.03 18.54 52.78 AIMPORTED WOOD PULP

34.7 24,863.81862774.207 11.32 64.1 A

NO II MACHINE CUTTING

87.578 8,939.80782929.8044 10.27 74.37 B

NOTE BOOKS 60.323 12,968.73 782312.6998 10.27 84.64 BWHITE RECORDS 49.388 10,190.88 503307.1814 6.6 91.24 CNO I ITEMS 26.178 13,811.83 361566.0857 4.74 95.98 CCOLOUR RECORDS 16.135 3,975.75 64148.72625 0.84 96.82 CDUPLEX BOARDS 8.31 7,107 59059.17 0.77 97.59 C

LOW GRADE WHITE RECORDS

7.09 6,177.9843801.8782 0.57 98.16 C

OINP (TAMIL) 5.212 8,126.74 42356.56888 0.55 98.71 CIND WOOD PULP 0.859 30,346.91 26067.99569 0.34 99.05 CSPL COLOUR RECORDS

4.37 4,14018091.8 0.23 99.28 C

BOX CRAFT 2.419 6,931.95 16768.38705 0.22 99.5 COINP (ENGLISH) 1.8 7,119 12814.2 0.16 99.66 CMAGAZINES 1.53 6,834 10456.02 0.13 99.79 COINP(MALAYALAM)

1.28 7,454.959542.336 0.12 99.91 C

TOTAL 7616332.771

TABLE 2

CATEGORY

NO OF ITEMS PERCENTAGE

A 3 18B 2 12C 12 71

TOTAL 17

32

It is evident from the table that 3 types of materials namely imported waste paper, text books and

imported wood pulp fall under category A where it accounts for 70% of the money value and 2

types of raw materials namely No 2 machine cuttings and note books fall under the category B

where it accounts for 20% of the money value and remaining 12 types of raw materials fall under

the category C where it accounts for 10% of the money value.

CHART 6.2.1

ABC ANALYSIS FOR THE YEAR 2009-10

33

6.2.2 ABC ANALYSIS FOR THE YEAR 2010-11

TABLE 1

RAW MATERIALS QUANTITYUNIT COST

CONSUMPTION VALUE

% OF CONSUMPTION

VALUECUMULATIVE

% CATEGORYWHITE RECORDS 116.63 15,071.65 1757807 27.13 27.13 AIMPORTED WOOD PULP 34.7 24,863.81 862774 13.31 40.44 ATEXT BOOKS 53.425 14,946.84 708535 10.93 51.37 ANOTE BOOKS 40.134 16,940 679870 10.49 61.86 AIMPORTED WASTE PAPER 35.91 17,857.04 641246 7.85 69.71 AOINP (TAMIL) 49.427 10,296.97 508948 7.85 77.56 BMAGAZINES 25.8 10,598.96 273453 4.22 81.78 BNO II MACHINE CUTTING 19.593 11,813.30 231458 3.57 85.35 BNO I ITEMS 9.72 22,664.50 220299 3.4 88.75 BOINP (ENGLISH) 14.515 10,530.29 152847 2.35 91.1 CCOLOUR RECORDS 19.78 5,287.48 104586 1.61 92.71 CIND WOOD PULP 2.61 33,054.75 86273 1.33 94.04 CBOX CRAFT 7.799 10,610 82747 1.27 95.31 CLOW GRADE WHITE RECORDS 7.56 7,276.39 55010 0.84 96.15 COINP(MALAYALAM) 5.09 10,658.05 54249 0.83 96.98 CSPL COLOUR RECORDS 8.88 5,700 50616 0.78 97.76 CDUPLEX BOARDS 0.835 8,859 7397 0.11 97.87 CTOTAL 6478115

TABLE 2

CATEGORY

NO OF ITEMS

PERCENTAGE

A 5 29B 4 24C 8 47

TOTAL 17

34

It is evident from the table that 5 types of materials namely imported waste paper, text books,

note books, white records and imported wood pulp fall under category A where it accounts for

70% of the money value and 4 types of raw materials namely No 2 machine cuttings, No I items,

OINP (Tamil) and magazines fall under the category B where it accounts for 20% of the money

value and remaining 8 types of raw materials fall under the category C where it accounts for 10%

of the money value.

CHART 6.2.2

ABC ANALYSIS FOR THE YEAR 2010-11

35

6.3 FSN ANALYSIS

FSN Analysis aims at classifying items on the basis of their movement from inventory.

Here the items are classified as Fast, Slow and Non moving items taking into consideration both

1) Average stay of the item in Inventory and

2) Consumption rate of the item.

This analysis can be done for a specified financial period or for a range of dates as

specified by the user. It is possible to do this analysis for a particular warehouse in a location or

for all the warehouses in the location.

The higher the average stay (relative) of an item in the warehouse, the slower its

movement from inventory. On the contrary a fast moving item will have a shorter stay in the

warehouse. A very high consumption rate (relative) implies that the item/variant is a fast moving

one and a slow moving item will have a low consumption rate.

36

TABLE 6.3.1

FSN ANALYSIS FOR THE YEAR 2009-10

Step I: Calculation of Average Stay

Average Stay for the item = Cumulative number of inventory holding days / (Total receipt

quantity + Opening Balance)

ITEMSRECEIPT QTY

CLOSING BALANCE

INVENTORY HOLDING DAYS

AVG STAY

CUMULATIVE AVERAGE STAY

% OF CUMULATIVE AVG STAY FSN

OINP(MALAYALAM) 0.1 1.28 393 307 307 46.2 NOINP (ENGLISH) 0 1.8 395 141 448 67.4 NIND WOOD PULP 0 0.859 591 93 541 81.4 SDUPLEX BOARDS 0 8.31 387 46.5 587.5 88.4 SIMPORTED WOOD PULP 0 34.7 590 17 604.5 91 FSPL COLOUR RECORDS 21 4.37 406 13 617.5 93 FBOX CRAFT 0.06 2.419 28 11.57 629.07 94.7 FMAGAZINES 3.4 1.53 407 10 639.07 96.2 FOINP (TAMIL) 32.12 5.212 392 7.84 646.91 97.4 FLOW GRADE WHITE RECORDS 68 7.09 402 5.6 652.51 98.2 FNO II MACHINE CUTTING 9.57 88 490 4.3 656.81 98.9 FIMPORTED WASTE PAPER 148 148 638 3.6 660.41 99.4 FTEXT BOOKS 5.55 138 776 1.8 662.21 99.7 FCOLOUR RECORDS 0.49 16 792 0.8 663.01 99.8 FNO I ITEMS 52 26 26 0.47 663.48 99.9 FWHITE RECORDS 34 49 75 0.36 663.84 99.9 FNOTE BOOKS 302 60 135 0.07 663.91 100 F

37

Step II: Calculation of consumption rate

Consumption Rate = Total Issue Quantity / Total period duration

ITEMSISSUE QTY CONSUMPTION

CUMULATIVE CONS

% OF CUM CONS FSN

NOTE BOOKS 1012 2.77 2.77 43.3 FOINP (ENGLISH) 1 2.73 5.5 86 SWHITE RECORDS 81 0.22 5.72 89.51 SLOW GRADE WHITE RECORDS 63 0.17 5.89 92.1 NOINP (TAMIL) 44 0.12 6.01 94 NMAGAZINES 37 0.1 6.11 95.6 NNO I ITEMS 29 0.07 6.18 96.7 NSPL COLOUR RECORDS 28 0.07 6.25 97.8 NCOLOUR RECORDS 22 0.06 6.31 98.7 NTEXT BOOKS 23 0.06 6.37 99.6 NIMPORTED WASTE PAPER 5.71 0.01 6.38 99.8 NIND WOOD PULP 5.5 0.01 6.39 100 NBOX CRAFT 0 0 6.39 100 NNO II MACHINE CUTTING 0 0 6.39 100 NDUPLEX BOARDS 0 0 6.39 100 NOINP(MALAYALAM) 0 0 6.39 100 NIMPORTED WOOD PULP 0 0 6.39 100 N

Step III: Final FSN classification based on average stay and consumption rate

38

ITEMSCONS RATE AVG STAY FINAL FSN

NOTE BOOKS F F FOINP (ENGLISH) S N NWHITE RECORDS S F SLOW GRADE WHITE RECORDS N F SOINP (TAMIL) N F SMAGAZINES N F SNO I ITEMS N F SSPL COLOUR RECORDS N F SCOLOUR RECORDS N F STEXT BOOKS N F SIMPORTED WASTE PAPER N F SIND WOOD PULP N S NBOX CRAFT N F SNO II MACHINE CUTTING N F SDUPLEX BOARDS N S NOINP(MALAYALAM) N N NIMPORTED WOOD PULP N F S

Step IV: FSN analysis for the year 2009-10

CATEGORYNO OF ITEMS PERCENTAGE

F 1 6S 12 71N 4 24

TOTAL 17

It is evident from the table that only one type of material namely note books fall under fast

moving items where it accounts for 6% of the total items. And 12 types of raw materials namely

39

white records, low grade white records, No 2 machine cuttings, No I items, OINP (Tamil), spl

colour records, colour records, magazines, text books, imported waste paper, box crafts, and

imported wood pulp fall under slow moving items where it accounts for 71% of the total items

and remaining 4 types of raw materials namely OINP (English & Malayalam), duplex boards,

and ind wood pulp fall under non moving items where it accounts for 24% of the total items.

CHART 6.3.1

FSN ANALYSIS FOR THE YEAR 2009-10

TABLE 6.3.2

40

FSN ANALYSIS FOR THE YEAR 2010-11

Step I: Calculation of Average Stay

Average Stay for the item = Cumulative number of inventory holding days / (Total receipt

quantity + Opening Balance)

ITEMSRECEIPT QTY

CLOSING BALANC

E

INVENTORY HOLDING

DAYS

AVG STA

Y

CUMULATIVE AVERAGE

STAY

% OF CUMULATIVE AVG STAY FSN

DUPLEX BOARDS 0 0.835 269 322 322 61.4 NOINP(MALAYALAM) 4 5 274 62.9 384.9 73.4 SIND WOOD PULP 0 3 277 26 410.9 78.4 SSPL COLOUR RECORDS 12 9 286 25.3 436.2 83.2 SOINP (ENGLISH) 3 15 301 23.4 459.6 87.7 SMAGAZINES 19 26 327 14.6 474.2 90.5 FIMPORTED WOOD PULP 0 35 362 13 487.2 92.9 FLOW GRADE WHITE RECORDS 17 8 370 11.1 498.3 95.1 FCOLOUR RECORDS 6 20 390 9.75 508.05 96.9 FNO II MACHINE CUTTING 17 20 410 5.15 513.2 97.9 FOINP (TAMIL) 42 49 459 3.27 516.47 98.5 FTEXT BOOKS 73 53 512 2.38 518.85 99 FBOX CRAFT 6.28 8 520 2.25 521.1 99.4 FIMPORTED WASTE PAPER 0 36 556 2.06 523.16 99.8 FWHITE RECORDS 240 117 673 0.33 523.49 99.9 FNO I ITEMS 33 10 10 0.27 523.76 99.9 FNOTE BOOKS 257 40 50 0.16 523.92 100 F

41

Step II: Calculation of consumption rate

Consumption Rate = Total Issue Quantity / Total period duration

ITEMS ISSUE QTY CONSUMPTIONCUMULATIVE

CONS% OF CUM

CONS FSNWHITE RECORDS 340 0.93 0.93 34.8 FNOTE BOOKS 302 0.82 1.75 65.5 FIMPORTED WASTE PAPER 166 0.45 2.2 82.3 STEXT BOOKS 49 0.13 2.33 87.2 SOINP (TAMIL) 47 0.12 2.45 91.7 NNO II MACHINE CUTTING 32 0.08 2.53 94.7 NNO I ITEMS 26 0.07 2.6 97.3 NLOW GRADE WHITE RECORDS 23 0.06 2.66 99.6 NSPL COLOUR RECORDS 5 0.01 2.67 100 NBOX CRAFT 0 0 2.67 100 NCOLOUR RECORDS 0 0 2.67 100 NDUPLEX BOARDS 0 0 2.67 100 NOINP(MALAYALAM) 0 0 2.67 100 NOINP (ENGLISH) 0 0 2.67 100 NMAGAZINES 0 0 2.67 100 NIMPORTED WOOD PULP 0 0 2.67 100 NIND WOOD PULP 0 0 2.67 100 N

42

Step III: Final FSN classification based on average stay and consumption rate

ITEMSCONS RATE

AVG STAY FINAL FSN

WHITE RECORDS F F FNOTE BOOKS F F FIMPORTED WASTE PAPER S F STEXT BOOKS S F SOINP (TAMIL) N F SNO II MACHINE CUTTING N F SNO I ITEMS N F SLOW GRADE WHITE RECORDS N F SSPL COLOUR RECORDS N S NBOX CRAFT N F SCOLOUR RECORDS N F SDUPLEX BOARDS N N NOINP(MALAYALAM) N S NOINP (ENGLISH) N S NMAGAZINES N F SIMPORTED WOOD PULP N F SIND WOOD PULP N S N

Step IV: FSN analysis for the year 2010-11

CATEGORY

NO OF ITEMS

PERCENTAGE

F 2 12S 10 59N 5 29

TOTAL 17

It is evident from the table that 2 types of material namely note books and white records fall

under fast moving items where it accounts for 12% of the total items. And 10 types of raw

materials namely low grade white records, No 2 machine cuttings, No I items, OINP (Tamil),

43

colour records, magazines, text books, imported waste paper, box crafts, and imported wood pulp

fall under slow moving items where it accounts for 59% of the total items and remaining 5 types

of raw materials namely OINP (English & Malayalam), duplex boards, spl colour records, and

ind wood pulp fall under non moving items where it accounts for 29% of the total items.

CHART 6.3.2

FSN ANALYSIS FOR THE YEAR 2010-11

CHAPTER 7

FINDINGS

44

The inventory turnover ratio shown an increasing trend during the period of the study

which indicates that the company efficiently utilizing its inventory.

The average inventory conversion period was 35.3 days. It means, the inventory has been

disposed off or sold on an average in 35 days, which shows the efficiency of management

to convert the inventory into cash in short period.

The average inventory in current assets during the study period was 0.39 and it has

fluctuated over a period of time.

The average inventory to sales ratio was 0.094, the lesser the ratio it is a positive sign,

showing that the company's ability to manage inventories while attempting to increase

sales.

The average inventory to working capital ratio was 0.47. Since the ratio was less than 1,

it is found to be satisfactory.

Raw materials like imported wood pulp, text books, white records and imported waste

paper fall under A category where it accounts for 70% of the money value and constitutes

29% of total items.

Raw materials like No II machine cuttings, note books, OINP (Tamil), magazines and No

I items fall under B category where it accounts for 20% of the money value and

constitutes 24% of total items.

Raw materials like colour records, low grade white records, OINP (English &

Malayalam), duplex boards and spl colour records fall under C category where it

accounts for 10% of the money value and constitutes 47% of total items.

 Raw materials like note books and white records fall under fast moving items where it

accounts for 12% of the total items.

Raw materials like low grade white records, No 2 machine cuttings, No I items, OINP

(Tamil), colour records, magazines, text books, imported waste paper, box crafts, and

imported wood pulp come under slow moving items where it accounts for 59% of the

total items.

45

Raw materials like OINP (English & Malayalam), duplex boards, spl colour records, and

Ind wood pulp come under non moving items where it accounts for 29% of the total

items.

CHAPTER 8

SUGGESTIONS

46

The company should have control over the non-moving items constituting 29% because

there will be unnecessary blocking of working capital.

As per analysis there is increase in inventory turnover ratio from 2006-11. The

management is required to maintain an increasing trend in inventory for the efficient

running of the business.

The percentage of fast moving items was very less when compared to the slow moving

and non-moving items and hence the company should maintain high percentage in fast

moving items.

Laying out formal procedures of inventory management for the effective inventory

management.

Training should be given to the employees on ways of handling and managing inventory

as well as new employees on stock management and handling.

Improvement of storage facilities.

Setting clear inventory controls as well as account for stock on regular periods.

47

CHAPTER 9

CONCLUSION

The overall inventory management followed at Shri Hari Krishna Papers Pvt Ltd seems

to be satisfactory. The company should implement the financial tools like ABC and FSN analysis

based on the consumption value for the better control of inventory. So the demand for scarce raw

materials could be met and at the same in the excess storage and investment in raw material can

be avoided. The control technique helps the management for the delegation of authority and

responsibility to the members in the stores. So the top management could focus attention only on

few items.

If the goal is to make the business more profitable, the organization must increase

efficiency and reduce costs. Inventory is the largest investment that must be carefully planned.

Classification of your inventory, and continuing analysis of those classifications, can play a vital

role in maintaining cost at the efficient levels the organization has established as goals. Inventory

control is a constant requirement of doing business successfully.

The main objective of inventory management is to avoid production bottlenecks by

providing continuous supply of all types of materials, avoidance of wastes, effective economy in

purchasing through economical order quantity and taking advantages of favorable markets,

maintaining optimum level of investment in inventories. So if the organization follows these

inventory can be maintained and cost can be controlled.

48

BIBLIOGRAPHY

Books

Wild, T., “Best Practices in Inventory Management, 1997, (chapter 3): Wiley

publication.

Khan M.Y., Jain P.K., “Financial Management”, Tata Mc Graw – Hill publishing

Company Limited, 2007.

Pandey I.M., “financial management”, Vikas Publishing House ltd,2005

Maheswari S.N., “management accounting”, sultan chand and sons,1995

Journals

Professure Hossein Ashram “views on inventory cost” Journal of Small Business

Management.2005. 8(5) pg 28-35

Berniker, E. and D.E. McNabb, “Applying matrixed Pareto analysis with activity based

costing for operations and cost management”, Journal of Business and Management,

2005. 11(1): p. 73-88.

Stanford, R.E. and W. Martin, “Towards a normative model for inventory cost

management in a generalized ABC classification system”. Journal of the Operational

Research Society, 2007. 58(7): p. 922-928.

Websites

www.inventorymanagementreview.org

www.effectiveinventory.com

en.wikipedia.org/wiki/Pareto principle

www.businessfinanace.com

http://wiki.sdn.sap.com/wiki/display/SI/Inventory+Analysis

http://www.paperex-india.com/paperscene.htm

http://iamsam.hubpages.com/hub/ABC-Analysis-Technique-of-Inventory-Control

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