A

PROJECT REPORT ON

“INVENTORY MANAGEMENT”

AT

MAHINDRA SONA LTD. NASHIK

SUBMITTED TONAGALAND OPEN UNIVERSITY

IN PARTIAL FULFILLMENT OFEXECUTIVE MBA

BY

KAMLESH SHIVAJI NANDREROLL NO. PG/2051/EMBA/2008J

UNDER THE GUIDANCE OF

Mr. NITIN SONI

NASHIK COLLEGE OF MANAGEMENT NASHIK

2009 – 2010

ACKNOWLEDGEMENT

I express my gratitude to my Principal Dr Mr. P.SONI Whose precious suggestions and constructive guidance has been indispensable in completion of this work and without whom project would not been complete.

Working at MAHINDRA SONA LTD. was a great learning experience. I would

like to take up the opportunity to extend my gratitude to my guide Mrs.Nitin

soni. His continuous support and co-operation has always been a source of

inspiration to me. I would also like to thank Mr. Jayant Dixit for providing me

an opportunity to work with this esteemed organization.

I am immensely grateful to Mr. Prashant Mamarde, my internal guide, who

offered me with his valuable suggestions and guidance and helped me focus on

crucial aspects that helped me add significant quality in my efforts in

compilation of project.

Moreover, I am sincerely grateful to the all the staff members of MSL, for

extending their kind co-operation several times.

MAHINDRA SONA LTD.

( NASHIK PLANT)

INDEX

CHAPTER NO. TITLE. PAGE NO.

1 Introduction

1.1 Importance of inventory1.2 Good inventory policy1.3 Requirement of stock control1.4 Input-Output ratio1.5 Stock Turnover ratio1.6 Economic Order Quantity1.7 Fixation of inventory levels1.8 Types of inventory control systems

2 Objectives

2.1 Objectives

3 Profile

3.1 Company profile3.2 Quality policy3.3 Products3.4 Applications

4 Research Methodology

4.1 Research4.2 Steps in Research Methodology4.3 Methods of Data collection

5 Data Analysis

6 Findings and Observations

6.1 Inventory Control methods at MSL

7 Suggestions

8 Conclusions

9 Bibliography

10 Annexure

CHAPTER-1

INTRODUTION

INTRODUCTION.

Inventory represents the largest proportion of current assets in business

organizations. In a manufacturing unit usually about 20% to 30% of the

total assets are in the form of inventory. Accordingly, accomplishment of

profit maximization goal of a firm calls for efficient management of

inventories.

The inventory of a manufacturing concern is classified into the following

types:

Raw materials : It includes direct materials, components, fuel, etc.used in the manufacture of a product.

Work in progress: It includes partly finished goods and materials, sub- assemblies, etc. held between manufacturing stages.

Finished goods: The goods ready for sale or distribution are finished goods.

Inventory can be defined as, “the materials or resources of any kind having

some economic value, either awaiting conversion or use in future.”

The classification of inventory of a particular firm depends upon the nature of

business it carries. A manufacturing concern’s inventory consists of all the

above 3 types of inventory but in case of a Trading concern, the first two

categories will not appear in their stocks.

1.1 IMPORTANCE OF INVENTORY.

The importance of inventory to an organization can be listed as follows:

Provides and maintains good customer service.

Enables smooth flow of goods through the production process.

Provides protection against uncertainty of demand and supply.

Various production operations can be performed economically and

independently. It can allow temporary variations in operating rates.

By purchases in bulk, discounts can be availed.

1.2 GOOD INVENTORY POLICY.

A good inventory policy should consist of the following features:

There should be proper accounting and physical controls.

The inventory should be stored properly to avoid the losses like breakage,

spoilage, wastage, damage, deterioration, pilferage, etc.

Fixation of inventory levels like minimum, maximum and re-order levels

and Economic order quantity (EOQ) to ensure the optimum level of stocks.

Proper care should be taken to avoid stock out situations.

Continuous supply of material should be ensured at the right time and right

cost.

The investment in inventory should be optimized by avoiding over

stocking.

Regular monitoring of stock movements and reduce the investments in

dormant and slow moving stocks.

1.3 REQUIREMENTS OF STOCK CONTROL.

Stock control can be defined as “the systematic regulation of stock level”.

The requirements of a better control over stocks are given below:

Centralized purchase function i.e. all the purchases should be through

purchase department.

Material is purchased with prior authority.

Proper planning of purchase function.

Materials purchased should be of proper quality and specification.

Standardization of materials.

Selection of suppliers keeping in view the quality, price and delivery.

Direct materials used in production should be charged to production on an

appropriate and consistent pricing basis.

Indirect materials used in production and service departments should be

appropriately apportioned and absorbed into product cost.

Proper documentation and accounting of material receipts and issues.

1.4 INPUT-OUTPUT RATIO.

Input-Output ratio is used in material control, which indicates the relations

between quantities of material used in the production and the quantity of final

output.

Input-Output ratio = Input units x 100

Output units

1.5 STOCK TURNOVER RATIO.

The stock turnover ratio indicates the movement of average stock holding of

each item of material in relation to its consumption during the accounting

period.

Stock turnover ratio = Cost of materials used during the period

Average stock of materials used during the period.

1.6 ECONOMIC ORDER QUANTITY.

The prime objective of inventory management is to find out and maintain

optimum level of investment in inventory to minimize the total cost associated

with it. The EOQ is the optimum size of the order for a particular item of

inventory calculated at a point where the total inventory costs are at a minimum,

for that particular stock item. It is an optimum size of either a normal outside

purchase order or an internal production order that minimizes total annual

holding and ordering costs of inventory.

The formula for calculating EOQ is:

EOQ = 2AB

CS

Where,

A = Annual Consumption.

B = Cost of placing an order.

C = Cost per unit.

S = Storage and other inventory carrying cost.

Shortage costs arise when inventories are short of requirement for meeting the

needs of production or the demand of customers. Inventory shortages may result

in one or more of the following: high costs concomitant with ‘crash’

procurement, inefficient and uneconomic production schedules, customer

dissatisfaction and loss of sales.

Ordering costs relating to purchased items include expenses on requisitioning,

preparation of purchase order, expediting, transport and receiving and placing in

storage. Ordering costs pertaining to items manufactured in the company

include requisitioning, set-up and receiving and placing in storage.

Carrying costs include expenses on Interest on Capital locked up in inventory,

storage, insurance, obsolescence and taxes. Carrying costs are generally about

25% of the value of inventories held.

The fewer the orders, the lower is the cost of ordering, but the greater the size of

the order the greater is the cost of carrying.

1.7 FIXATION OF INVENTORY LEVELS.

Various levels of inventory are fixed to see that no excess inventory is carried

and simultaneously there will not be any stock outs.

1. Re-order level: It is the level of stock availability when a new order

should be raised. This level is fixed between the minimum and maximum stock

levels and the following formula is useful for this purpose:

Maximum usage x Maximum lead time.

2. Minimum stock level: It is the lower limit below which the stock of

any stock item should not normally be allowed to fall. Their level is also called

as ‘safety stock’ or ‘buffer stock level’.

Re-order level – (Average or normal usage x Average lead time)

3. Maximum stock level: It represents the upper limit beyond which the

quantity of any item is not normally allowed to rise to ensure that unnecessary

working capital is not blocked in stock items.

Re-order level + EOQ – (Minimum usage x Maximum lead time)

4. Danger level: It is fixed below the minimum stock level and if stock

reaches below this level, urgent action for replenishment of stock should be

taken to prevent stock out position.

Average consumption x lead time for emergency purchases.

5. Average stock level: It is the average of minimum and maximum

stock levels.

Minimum stock level + Maximum stock level

2

1.8 TYPES OF INVENTORY CONTROL SYSTEMS

Following are some of the types of inventory control systems:

1. ABC Analysis:

Items in class ‘A’ consist of approximately 15% of the total items, accounts for

80% of the total material usage.

Items in class ‘B’ constitute approximately 35% of the total items, accounts for

approximately 15% of the total material consumption.

Items in class ‘C’ constitute remaining 50% items, accounting for only 5% of

the monetary value of total material usage.

2. VED Analysis:

‘V’ stands for vital items and their stock analysis requires more attention,

because out-of-stock situation will result in stoppage of production. Thus, ‘V’

items must be stored adequately to ensure smooth operation of the plant.

‘E’ means essential items. Such items are considered essential for efficient

running but without these items, the system would not fail. Care must be taken

to see that they are always in stock.

‘D’ stands for desirable items which do not affect the production immediately

but availability of such items will lead to more efficiency and less fatigue.

3. FNSD Analysis:

‘F’ stands for fast moving items and stocks of such items are consumed in a

short span of time. Stocks of fast moving items must be observed constantly and

replenishment orders be placed in time to avoid stock-out situations.

‘N’ stands for normal moving items and such items are exhausted in a year or

so. The order levels and quantities for such items should be on the basis of a

new estimate of future demand, to minimize the risks of a surplus stock.

‘S’ indicates slow moving items, existing stock of which would last for 2 years

or more at the current rate of usage but it is still expected to be used up. Slow

moving stock must be reviewed very carefully before any replenishment orders

are placed.

‘D’ stands for dead stock and for its existing stocks no further demand can be

foreseen. Dead stock figures in the inventory represent money spent that cannot

be realized but it occupies useful space.

CHAPTER-2OBJECTIVES

2.1 OBJECTIVES

Protection against fluctuation in demand.

Better use of men, machines and materials.

To economize production level.

To maintain adequate inventory so as to avoid stoppages.

To fix various inventory levels such as EOQ, Maximum level,

Minimum level, Re-order level, etc.

To take advantage of lower bulk transportation cost.

CHAPTER-3COMPANY PROFILE

3.1 COMPANY PROFILE.

NAME OF THE COMPANY : MAHINDRA SONA LIMITED.

ADDRESS : MAHINDRA SONA LTD. PLOT NO. 89/1, MIDC SATPUR NASHIK 422007

PHONE NO. : 02536610500.

FAX NO. : 0253661504.

STRENGTH OF EMPLOYEE : 370 (Approx)

PRODUCTS : Propeller shafts, Universal joints. Steering joints. Clutch.

Axle shafts.

ESTABLISHMENT: 1979.

MISSION & VISION : MAHINDRA SONA LIMITED ARE COMMITTED TO SATISFY OUR CUSTOMERS BY DESIGNING MANUFACTURING & DELIVERING PRODUCTS THROUGH A WELL DEFINED QUALITY SYSTEM MEETING ISO/TS 16949 STANDARD AND CONTINUALLY IMPROVE OUR PRODUCTS,PROCESSES & SYSTEMS.

THEORY:

The company has a long history, which dates back to the year 1885 when M/S Turner Hoare & Co. started its activity in imports and exports of traditional Indian consumer goods.

In 1968, M/S Turner Hoare & Co. took over another company M/S East Asiatic

Co. and realistic market potential entered into execution of engineering projects

like hydro-pneumatic ash handling system, mechanical cleaning like

Vibroscreen, traveling Water screens and bagged import substitution award

twice.

In 1977, with equity participation of Dana Corporation, USA, the company

went into technical collaboration to manufacture automotive components like

Propeller shafts, Axle shafts, UJ Kits, Automotive clutches.

The Nashik plant commenced production in 1979 following a technical and

financial joint venture between Mahindra & Mahindra Ltd. and Dana

Corporation, USA, named Mahindra Spicer Ltd.

In 1984, Mahindra Spicer Ltd. merged with its parent company Mahindra &

Mahindra Ltd. and became Mahindra Sona Ltd. In March 1995, Mahindra &

Mahindra Ltd. and Sona Koyo Steering Systems Ltd. formed a new company

Mahindra Sona Ltd. to take over the automotive component business of MSL

division of Mahindra & Mahindra Ltd.

MAHINDRA SONA LTD. was formed in collaboration with Dana Corporation

of USA, over 2 decades ago through access to international technology and has

since emerged as a leading independent manufacturer of automotive

components. These include Propeller shafts, UJ components and automotive

clutches. Progressively, MSL has expanded its products range to meet the

demands of various automotive manufacturers.

The facilities contain more than 9300 meters of manufacturing space

strategically located in western India providing easy accessibility to various

vehicle manufacturers and provide ample scope for future expansion to almost 5

times the current size. MSL has a strong team of 350 employees of which 50 are

qualified engineers and professionals.

3.2 QUALITY POLICY.

We, at MAHINDRA SONA LTD., are committed to satisfy our customers by

designing, manufacturing and delivering products through a well defined quality

management system meeting ISO/ TS 16949 standard and to continually

improve our products, processes and systems.

3.3 PRODUCTS.

Propeller shafts.

Universal joints.

Steering joints.

Clutch.

Axle shafts.

3.4 APPLICATIONS.

Used in Automobile industry.

Used in engineering sector on a large scale.

AXLE

CLUTCHES

STEERING WHEEL

C V JOINT

YOKE

CHAPTER-4RESEARCH METHODLOGY

RESEARCH METHODOLOGY.

4.1 RESEARCH.

Research as a means for gaining knowledge can be carried out either arbitrarily

or in a systematic fashion. Research is a purposive investigation. Research is a

way of finding new ways of looking at familiar things in order to explore ways

of changing it.

“Research concerns itself with obtaining information through empirical

observation that can be used to systematically develop logically related

propositions so as to attempt to establish casual relationships among variables.”

A research design is the logical and systematic planning and directing of a piece

of research. The research design attempts to integrate various aspects of the

research study.

In planning and designing a specific research project, it is necessary to

anticipate all the steps that must be reliable and informative.

Preparing the list of needed information

Design the data collected

Sample design

4.2 STEPS IN RESEARCH METHODOLOGY.

Specifying research objectives

Analyzing the collected data and reporting findings

Preparing a project report

4.3 METHODS OF DATA COLLECTION.

The data collected are facts, figures and other relevant materials, past and

present, serving as bases for study and analysis.

4.3.1 PRIMARY DATA:

Data that is collected for the specific purpose at hand is called as Primary data.

It calls for greater planning and co-ordination. In situations where it is

impossible to use the secondary data keeping in view the requirements of the

study or in cases where there is no secondary data available, the only way out is

to collect the primary data.

SOURCES OF COLLECTING PRIMARY DATA:

1. Questionnaire method.

2. Interviews.

3. Discussions.

4.3.2 SECONDARY DATA:

Data that has been collected earlier for some purpose other than the present

study is called as Secondary data. Secondary sources of data provide a wealth of

information to the researcher. It acts as a reference for the present study.

SOURCES OF COLLECTING SECONDARY DATA:

1. Internet.

2. Data from company brochure.

3. Magazines.

4. Books.

RESEARCH METHODLOGY USED FOR PROJECT:

Research Type Descriptive

Data Resources Primary & Secondary

Research Approach Observations & Survey

Research Instrument Questionnaire

Contact Method Personal Interview

Sampling Unit Mahindra sona Ltd. Nasik unit.

Sampling Size 25 (Management staffs)

Sampling Method Convenience

Type of Questionnaire Structured

Population Size 50

CHAPTER-5DATA ANALYSIS

DATA ANALYSIS

In the year under review, the company’s efforts to increase selling prices

commensurate with the increase in input costs met with resistance from the

original equipment manufacturers as well as the aftermarket. Through persistent

efforts, the company was able to set off to some extent the rise in the prices of

iron and steel, the company’s basic raw materials.

The transportation cost is added to the value of the finished goods. It is

sometimes set as per the policies of the company, as it is a policy matter or

sometimes it is added as per the original bill produced.

The purchase procedure followed by the company is:

The Sales department prepares a sales plan for the next month.

The Production Planning and Control department (PPC) breaks

into Bills of Material (BOM).

The Purchase department is informed about the material to be purchased.

When the actual quantity of material to be purchased is known, the

purchase department sends a schedule to the supplier for supply.

The Economic Order Quantity as well as ABC Analysis is not applicable in the

system itself. There is no specific quantity produced. The products are produced

as per the order is placed by various customers. The main object is to achieve

the given target.

Physical verification is done at the end of every financial year. The Stores head

counts the number of products, i.e. the remaining stock and submits it to the

accounts department.

The shortage in cost means loss to the company. In such cases, the goods may

be wasted or there may be some theft or some illegal sale of stock, etc. If there

is an excess, then the system /management is not proper. It should be taken into

account seriously.

The company also follows a method called as ‘Perpetual Inventory’. This

means, physical verification is carried out weekly i.e. in a week, 6-7 items are

chosen and accordingly the items are verified.

The person in charge for maintaining the inventory details in the computer

system, cross checks it, i.e. tallies it with the actual remaining stock. The

‘inventory tag’ is put on the verified stock, after completing the whole

procedure. One part of the tag is put on the stock whereas the other is recorded

or kept with the accounts department in the Inventory tag book.

As per analysis every supplier is the regular supplier of Mahindra Sona Ltd. All

the suppliers maintain proper quality and standard of their products. Due to the

Min-Max Stock level method, the suppliers get benefited as they come to know

actual requirement of stock and how much quantity they have produced.

The products manufactured currently besides Propeller Shafts include Clutch

Driven Plates and Clutch Cover assemblies, Axle shafts, Steering Universal

joints, Universal joint kits, Steering Spindle and Sleeve assemblies and other

Steering column components. Mahindra Sona Ltd. offers a broad range of

Driveline Components and Sub-assemblies for Original Equipment

manufacturers, service and after market requirement.

The INVENTORY TURNOVER RATIO of the company for the past three

years is as follows:

2007 2008 20090

0.5

1

1.5

2

2.5

Interpretations :

The Inventory turnover ratio for the past 3 years is:

For year 2007 = 2.25 times

For year 2008 = 1.83 times

For year 2009 = 1.95 times

We can also compute average consumption period as we know the Inventory

turnover ratio. It is calculated as:

162.22

199.45

187.18

Avg. Consumption period for past 3 years.

200720082009

Interpretations :

Average consumption period = No. of days in a year

Inventory turnover ratio

For 2007: 365 = 162.22

2.25

For 2008: 365 = 199.45

1.83

For 2009: 365 = 187.18

1.95

The company has taken cost cutting measures to reduce the cost of inventory

like, the inventory levels are reduced to some extent as well as standardization

of products is made.

CHAPTER-6FINDINGS AND OBSERVATIONS

FINDINGS AND OBSERVATIONS.

The inventory turnover ratio in the year 2007 was highest which was 2.25

times and it declined to 1.83 times in 2008. But it showed a slight

improvement in the year 2009 as the ratio in 2009 was 1.95 times.

Average consumption period for the past 3 years was:

2007 - 162.22 days

2008 – 199.45 days

2009 – 187.18 days

The company uses the Min-max stock level method for inventory control.

6.1 INVENTORY CONTROL METHODS AT MSL.

MSL applies 2 methods for inventory control:

1. Minimum-maximum stock level method.

2.

3. Schedule stock level method.

6.1.1 Minimum-maximum stock level method:

Under this method maximum level & minimum level of stock is fixed. Re-

ordering is done after a period of review and order or re-order is placed when

quantity touches a certain level.

Suppose the company has an inventory for which maximum level is fixed at

1000 units and minimum quantity to be held in stock is 250 units. Previous

experience shows that a safety stock of 250 units is quiet sufficient. If during

the

past 2 months consumption rate has been 300 units per month on an average and

if the lead time is taken to be 2 months, then the company will run out soon, if

either delivery is not received just after 2 months or if during the subsequent

month’s consumption rate increases.

The weakness of this system is:

1. Stock levels are actually fixed at lower levels since managers have no time

to study inventory levels of individual items.

2. Re-order points and safety levels once fixed are not frequently changed after

study.

6.1.2 Schedule stock level method:

In schedule method MSL sends a monthly schedule to its vendors. The schedule

is sent by 2 ways:

1. By courier.

2. By e-mail.

In this method, each week’s schedule i.e. how many parts are required? is given,

so that the vendor can arrange for raw materials before and can send finished

goods.

CHAPTER-7SUGGESTIONS

SUGGESTIONS.

The transportation cost is sometimes added as per company’s policy and

sometimes as per the original bill produced. This system leads to commit

more errors. There should be a single method to compute the transportation

cost. It will be more effective and easy to determine the transportation cost

of the material procured.

The company should follow the technique of EOQ for procuring the material

so that the cost of procurement of material will be minimized.

The company does not even practice ABC Analysis. ABC Analysis classifies

the items properly according to their contribution to the total material usage.

The Inventory turnover level should be improved. The management should

try to further improve Inventory turnover ratio, as it was lower in 2009

compared to 2007.

Average consumption period is too high. It should be reduced to a great

extent.

CHAPTER-8CONCLUSIONS

CONCLUSIONS.

Physical verification is carried out weekly and the method followed is

systematic.

The documentation procedure followed by the purchase department to

procure material is effective and satisfactory. Every step is carried out

systematically.

Due to Min-Max stock level method, the suppliers are benefited as they

come to know the daily requirement of stock.

CHAPTER-9BIBLOGRAPHY

BIBLIOGRAPHY.

1. Ailwadi – singh “Logistics Management”

2. GopalKrishnan sundersan “Materials Management”

3. Prasanna Chandra, “Finance Sense”, Tata McGraw- Hill Publishing

a. Company Ltd., New Delhi, (1993).

4. Ravi Kishore, “Financial Management”, 6th Edition, Taxmann Allied

Services (P.) Ltd., New Delhi, (2007).

5. www.mahindrasona.com

6. www.alibaba.com

CHAPTER -10APPENDIX

APPENDIX

QUESTIONNAIRE

Name of the employee:

Gender:

Education qualification:

Department:

Is the transportation cost added to the value of the product?

Ans:

What are the techniques used to control the Inventory levels?

Ans:

Is EOQ system used?

Ans:

Is ABC analysis followed?

Ans:

Name the major suppliers of material required for production.

Ans:

Name the major customers.

Ans:

Names of major products sold by the company.

Ans:

Suggestions, if any, to reduce the inventory carrying cost.

Ans:

Suggestions, if any, to improve the methods of inventory control.

Ans:

ANNEXURE