A STUDY ON INVENTORY MANAGEMENT IN J.Q.

TYRE MANUFACTURING
INDUSTRY AT COIMBATORE
ABSTRACT
The purpose of inventory management is to ensure availability of raw material in
sufficient qualities as and when required and also minimize investment in inventories. There is
an essential to manage inventories efficiently and effectively in order to avoid excess investment.
It is possible for a company to reduce the level of inventories to a considerable extent
without any adverse effect on production and sales by using simple inventory planning and
control techniques. The reduction of excessive inventories will create a favorable impact on the
company profitability.
Inventory turnover ratio, inventory conversion period are very helpful to know how
effectively plays and control in the organization EOQ analysis will enables the organization to
use of EOQ analysis is very effective and useful tool for classifying, monitoring and control of
inventories.

CHAPTER I
INTRODUCTION OF THE STUDY
INTRODUCTION
Financial management is that managerial activity which is concerned with the planning &
controlling of the financial resources. In other words managing the funds of the firm most wisely
with a view to maximize the wealth of shareholders. It is concerned with effective use of
important economic resources of business firm.
Financial management is concerned with the acquisition. Financing and management of
assets with overall goal in mind. Financial manager has to forecast expected events in business
and note their financial implication.
Firm anticipating financial needs means estimation of funds required for investment in
fixed and current asserts or long term and short term assets.
FINANCIAL MANAGEMENT
A modern financial management performs several functions it is difficult to task to
identify the functional areas of modern financial management. They are mainly three types as
follows.
  Investment decision
 Financial decisions
 Dividend decisions

INVESTMENT DECISION
1. A firms investment decisions involve capital expenditures.
2. They are therefore referred as a capital budgeting decision.
3. It commitment of long-term assets that would yield benefits in the future.
FINANCIAL DECISIONS
 It is the second important decision or function to be performed by the financial manager.
 Decide how to acquire funds and how met the firm's investment needs.

DIVIDEND DECISION
 The proportion of profits distribute as a dividends is called the dividend decision.
 Maximize the market value of the firm's shares is optimum dividend policies
ABOUT THE STUDY
Inventory management is primarily about specifying the size and placement of stocked
goods. Inventory management is recurred at different locations within a facility or within
multiple locations of a supply or network to protect the regular and planned course of production
against the random disturbance of running out of materials or goods. The scope of Inventory
management also concerns the fine lines between replenishment lead time, carrying costs of
inventory, asset management, Inventory forecasting, physical inventory, available physical space
for Inventory, quality management, returns and defective goods and demand and forecasting.
Types of inventory
Normally the inventory has divided into two types. These,
 Merchandising inventory,
 Manufacturing inventory.
The manufacturing inventory has been subdivided into three types. These,
 Raw materials,
 Work in process,
 Finished goods.
RAW MATERIALS:
 Everything the crafter buys to make the product is classified as raw materials. That
includes leather, dyes, snaps and grommets. The raw material inventory only includes
items that have not yet been put into the production process.
 Work in process: This includes all the leather raw materials that are in various stages of
development. For the leather crafting business, it would include leather pieces cut and in
the process of being sewn together and the leather belts and purse etc. that are partially
constructed.
 In addition to the raw materials, the work in process inventory includes the cost of the
labor directly doing the work and manufacturing overhead. Manufacturing overhead is a
catchall phrase for any other expenses the leather crafting business has that indirectly
relate to making the products. A good example is depreciation of leather making fixed
assets.
 Finished goods: When the leather items are completely ready to sell at craft shows or
other venues, they are finished goods. The finished goods inventory also consists of the
cost of raw materials, labor and manufacturing overhead, now for the entire product.

INVENTORY MANAGEMENT PRACTICES

The Inventory Management Practices on the following heads:
 Organization for Inventory Management.
 Purchasing
 Receiving and Inspection of Materials.
 Stores Management
 Inventory Control System.

MEANINIG OF INVENTORY:
Every enterprise needs inventory for smooth running of its activities; it serves as a link
between the recognition of a need and its fulfillment the greater the time leg. The higher the
requirements of inventory, the unforeseen fluctuations in demand and supply of goods also
necessitate the need for inventory.
 It also serves as a cushion for future prices fluctuations. The simple meaning of inventory
is "stock of goods" or "list of goods" the word inventory is understood differently by various
authors. In accounting language it means stock of finished goods only, for a manufacturing
concern it includes raw-materials, work-in-progress, finished goods etc
Inventories constitute the most significant part of current assets. Many companies
maintain 60% of current assets as inventories. Because of the large size of the inventories
maintained by the firms, a considerable amount of funds is required to be committed to them. It
is therefore absolutely imperative to manage inventories efficiently in order to avoid unnecessary
investment.
A firm neglecting the management of inventories will be failed in its long run
profitability and may fail ultimately. It is possible for a company to reduce its levels of
inventories to a considerable degree within the range of 10 to 20% without any adverse effect by
using simple inventory planning and control techniques. The reduction in excess inventories has
a favorable impact on the profitability of the firm.
OBJECTIVES OF INVENTORY MANAGEMENT:
 Minimize investment in inventories in order to maximize profits.
 In order to minimize carrying costs and ordering costs of inventory. To minimize
obsolescence in stores.
 To avoid excess and inadequate stocks.
 To provide check against losses of materials.

NATURE OF INVENTORIES:
Inventories are the stock of the product a company is manufacturing for sale and components
that make up the product. The various forms in which inventories may exist in a manufacturing
company are:-
 Raw materials
 Work-in-progress
 Finished goods
RAW MATERIALS
Raw materials are those basic inputs that are converted into finished product through the
manufacturing process. Raw materials inventories are those units, which have been purchased
and stored for future productions.
A company should maintain adequate stock of a continuous supply to the factors for an
uninterrupted production. If it is not possible for a company to produce raw materials whenever
needed, a time lag exists between demand for materials and its supply also there will be some
uncertainty on procuring raw materials in time on many occasions.
The procurement of materials is delayed because of uncertain factors like strike,
transport, disruption or short supply. Therefore the firm should maintain sufficient stock of raw
materials at a given time to streamline production.
Other factors which may necessitate purchasing and holding raw materials are quantity
discounts and anticipated price increase. The firm may purchase large quantities of raw materials
than needed for the desired production and sales levels to obtain quantity discounts of bulk
purchasing. At times the firm would like to accumulate raw materials in anticipation of price
rise.
WORK IN PROGRESS
The inventories are semi-finished products. They represent products that need more work
before they become finished products for sale. Work in progress inventory builds up because of
production cycle. Production cycle is the time span between introduction of raw-materials and
mergence of finished products at the completion of production cycle.
Still, production cycle completes, stock of work in progress has to be maintained.
Efficient firms constantly try to make production cycles smaller by improving their production
techniques.
FINISHED GOODS
Finished goods are the completely manufactured products, which are for sale. Stocks of
raw materials and work in progress facilitate production, while stock of finished goods is
required for smooth marketing operations. Stock of finished goods has to hold because
production and sales are not instantaneous.
A firm cannot produce immediately when customers demand goods. Therefore to supply
finished goods on a regular basis, their stock has to be maintained for sudden demand from
customers. In case the firm sales are seasonal in nature, substantial finished goods should be kept
to meet the peak demand. Failure to supply products to customers would mean loss to firm's
sales to competitors.
The level of finished goods inventories would depend upon the co-ordination between
sales and production as well as on production time. The levels of three kinds of inventories for a
firm depend on the nature of business.
A manufacturing firm will have substantially high levels of three kinds of inventories
while a retail or wholesale firm will have a very high level of finished goods inventories and no
raw materials or work in progress inventories. Within manufacturing firms there will be
differences.
Large Engineering companies produce long production cycle, products therefore they
carry large inventories on the other hand, and inventories of a consumer product will not be large
because of short production cycle and fast turnover. Firms also maintain a fourth kind of
inventory called supplies. Supplies include office and plant cleaning materials like soap brooms,
oil, fuel, light, bulbs, etc. these materials do not directly enter production, but are necessary for
production process.
INVENTORY DECISIONS
 In an inventory control situation, there are three basic questions to be answered. They are:
 How much to order? That is to say, what is the optimal quantity of an item that should be
ordered whenever an order is placed?
 When should the order be placed?
 How much safety stock should be kept? Thus, what quantity of an item in excess of the
expected requirements should be held as buffer stock in anticipation of the variations in
its demand and/or the time involved in acquiring fresh supplies.
INVENTORY COSTS:
In determining optimal inventory policy, the criterion most often is the cost function. The
classical inventory analysis identifies four major cost components. Depending on the structure of
an inventory situation, some or all of these are included in the objective function.
PURCHASE COSTS:
This refers to nominal cost of inventory. It is the purchase price for the items that are bought
outside sources, and the production cost if the items are produced within the organization. This
may be constant per unit, or it may vary as the quantity purchased/ produced increases or
decreases. Quite often, situation is found when it may be stipulated that, for example the unit
price is rest 20 for an order unto 100 units and rest 19.50 if the order is for more than 100 units.

ORDERING COSTS/ SET-UP COSTS:-

 This category of costs is associated with the acquisition or ordering of inventory. Firms
have to place orders with suppliers to replenish inventory of raw materials. It includes
costs associated with the processing and chasing of the purchase order, transformation,
inspection for quality, expediting overdue orders and so on.
 The parallel of the ordering cost when units are produced within the organization and the
cost of acquiring materials consists of clerical costs and costs of stationery. It is therefore
called a set-up cost. The ordering cost is likely and taken to be independent of the order
size. Therefore the unit ordering/setup cost declines as the purchase order/ production run
increases in size. Ordering costs are costs involved in:
 Preparing a purchase order
 Receiving, inspecting and recording the goods received to ensure both quantity & qty.
CARRYING COSTS:
 They are involved in maintaining or carrying the inventory. It represents the cost that is
associated with storing an item in inventory. Carrying costs are also known as holding
cost or the storage cost. The main components of this category of carrying costs are
 Storage cost i.e. tax, depreciation and maintenance of the building, utilities etc.
 Insurance of inventory against fire and theft
 Deterioration in inventory because of pilferage, fire, technical obsolescence, style
obsolescence etc.
 Serving costs such as lab our for handling inventory, clerical and accounting costs.
 The opportunity cost of funds consists of expenses in raising funds (interest of capital) to
finance the acquisition of inventory.
 It funds were not locked up in inventory they would have earned a return. This is the
opportunity cost of funds or the financial cost.
  The carrying cost and the inventory size are positively related and move in same
direction. If the level of inventory increases, the carrying costs also increased and vice-
versa.

STOCK OUT COSTS:

 Stock out cost means the cost associated with not serving the customers. Stock outs imply
shortages.
 If the stock out is internal (i.e. in the production system) it would imply that some
production is lost, resulting in idle time for men and machines, or that the work is delayed
which might attract some penalty.
 While if the stock out is external, it would result in a loss of potential sales and /or loss
of customer goodwill.
 A shortage can evoke different reactions from customers.

TYPES OF INVENTORY VALUATION:

XYZ ANALYSIS
XYZ analysis is based on the closing inventory value of different items. Items, whose
inventory values are high, are classed as X-items while those with low investment in them are
termed as Z- items. Other items are the Y-items whose inventory value is neither too high nor too
low.
It can be easily visualized that the several types of analysis discussed are not mutually
exclusive. They can be, and often are, used jointly to ensure better control over materials. For
example ABC and XYZ analysis may be combined to classify and control depending on whether
the items are AX, BY, CZ, AY of and so on. Similarly XYZ - FSN combine classification
exercise will help in timely prevention of obsolescence.

PURCHASING:
INTRODUCTION:
The scarcity of raw materials has practicality put the people in purchasing department in a very
tight position. The purchasing department can be in a better position. As of today there are four
different groups of buyers, viz, a) Consumers, b) Middle men, c) Government agencies and d)
Manufacturers. In fact the whole economy is dependent on this group for survival. The second
group comprises such as money collection of traders as wholesalers, retailers, and distributors
who buy not for their own consumption, but to sell to others. The fourth category of purchases
includes manufacturers who convert raw materials, components, consumables and packing
materials for use in industrial establishments where saleable products are produced. The subject
of purchasing is discussed here as it applies to the buying, made by manufacturers.

DEFINITION:
In its narrow sense, the term "purchasing" refers merely to the act of buying an item at a
price. This very narrow concept of purchasing has been gradually widened during the last 70
days.
According to Alford and Beatty "Purchasing" is the procuring of materials, supplies,
machines, tools and services required for equipment, maintenance and operation of a
manufacturing plant".
According to Walters, purchasing function means "The procurement by purchase of the
proper materials machines, equipment and supplies for stores used in the manufacture. Of a
product adapted to marketing in the proper quality and quantity at the proper time and at the
lowest price, consistent with quality desired".
According to Wasting, Fine and Zen "Purchasing is a managerial activity that goes
beyond the simple act of buying. It includes research and development for the proper selection of
materials and sources, follow-up to ensure timely delivery; inspection to ensure both quantity
and quality ; to control receiving , sore keeping and accounting operations related to purchases".

IMPORTANCE OF PURCHASING:-
 Purchasing function provides materials to the factory without which wheels of machines
cannot move.
 A one percent saving in material cost is equivalent to a 10% increase in turnover.
Efficient buying can achieve this.
 Purchasing manager is the custodian of his firm's purse as he spends more than 50% of
his company earnings on purchases.
  Increasing proportion of one's requirements, are now brought instead of being made as
was the practice in the earlier days. Buying therefore assumes significance.
 Purchasing can contribute to import substitution and save foreign exchange.
 Purchasing is the main factor in the timely execution of industrial projects.
 Materials management organizations that exist now have evolved out of purchasing
departments.
 Other factors like:-
• Postwar shortages
• Cyclical swings of surpluses and shortages and the first rising materials costs.
• Heavy competition.
• Growing worldwide markets have contributed to the importance of purchasing.

OBJECTIVES OF PURCHASING:
 It may be emphasized that some of the functions are the sole responsibility of the
purchasing department, some are shared with order departments and the remaining are
the responsibilities in which the purchasing department has considerable interest.

RESPONSIBILITIES DELEGATED TO THE PURCHASING FUNCTION:-

 Obtaining prices
 Selecting vendors
 Awarding purchase orders
 Following up on delivery promises
 Adjusting and settling complaints
 Selecting and training of purchasing personnel
 Vendor relations
METHODS OF PURCHASING:
There are number of methods used by different purchase departments. The methods used depend
on the classification of products in the production system, policy of the organization and
behavior of the market.
FOLLOWING ARE SOME POPULAR METHODS OF PURCHASING:
 Purchasing according to requirement.
 Purchasing for some definite future period.
 Market purchasing
 Speculative purchasing
 Contract purchasing
 schedule purchasing

PURCHASING ACCORDING TO REQUIREMENT:

 In this case the order is placed only when there is some need for the product.
 This method is appropriate for those items which are not of regular and common use in
the production process.
 These items are generally not stored in inventories.
 In such cases the purchasing department should keep a record of reliable and trustworthy
suppliers who were sincere to the organizations in past.

PURCHASING FOR SOME DEFINITE FUTURE PERIOD:

This method of purchasing is generally used for those items which are regularly consumed but
the consumption is comparatively low and the price changes for these items are not much.
MARKET PURCHASING:
 The policy of making the purchases at the time when fluctuations in price of the items
provide advantage to the purchaser is known as market purchasing.
 This method provides procurement at lower price and saving in purchase expenses.
 This method is useful in situations where major price variations are prominent.
 Here the purchasing may not relate with the production needs and if the assessment of
price fluctuations is wrong then the organization may suffer losses.
SPECULATIVE PURCHASING:
Here excessive purchases are made when market is low for the item with the hope of earning
profit by selling the items purchased in excess at a higher price. This procedure is most suitable
in the case of staple commodities.
CONTRACT PURCHASING:
 Here the purchase department enters into agreement with various suppliers to supply the
items at some future period or periodically.
 In the words of Alford and Beatty, "all purchasing is contract but the term 'contract
purchasing' is applied to that special contract which calls for deferred delivery over a
period of time".
 According to Spiegel “the purchasing under contact is usually formal for the needed
material, the delivery of which is frequently spread over a period of time".
 The organization tries to enter into the contract when prices are comparatively low.
 Here the supply is ensured per scheduled requirements as well as there is protection
against frequent price fluctuations.
SCHEDULED PURCHASING:

 It is a scientific method of purchasing. The purchasing is scheduled according to

requirements of various departments of the organizations. Vendors know in advance
about the future demand of the purchaser.
STEPS IN PURCHASING PROCEDURE:
 Various departments are requested to send their requirements on a proper requisition
form this authorizes the purchase department to procure the requisitioned items i.e. to
issue purchase order.
 Purchasing department consolidates the requirements from various departments to know
the total requirement for each item.
 Market exploration is made to locate the goods and services of desired quality and
quantity at reasonable price.
 Potential suppliers are identified from catalogues, quotations and past records.
 Purchase order in specified form is prepared and sent to the approved suppliers purchase
order establishing a contractual relationship between buyer and seller.
 After some time of placing the order, follow up process starts to get quick delivery of the
items. The follow up of procedures implies acceptance of the order and promise to supply
the items on desired date.
 The items are received by the purchasing department at the time of delivery and the items
received and compared with purchase order.
 The checking of the delivered goods is done with regard to prices charged and quoted
 Approval of the invoice.
 To ascertain the quality and quantity of the items.
RECEIVING AND INSPECTION OF MATERIALS:
RECEIVING MATERIALS:
INTRODUCTION:
Receivable management refers to the decisions a business makes regarding its overall credit and
collection politics and the evaluation of individual credit applicants. In formulating an optional
credit policy, finance manager must analyze the marginal benefits and costs associated with
changes in credit standards, credit terms, collection efforts etc. Receivable management proves
for a firm, both, an asset and a problem.
MEANING:
Receiving is an important control point in the material control system. It is sometimes considered
that receiving is a routine clerical work where the materials shipped by the supplies are received,
unpacked, checked and compared with the purchasing and material management, stated that,
"any problem or error in specific purchase transaction should come to light during the receiving
operation". If the problem (shortage in quantity, damaged material, wrong item shipped etc.) is
the detected and corrected during the receiving operation, the cost of to correct the mistake later
is much higher. Many hours are frequently spent in determining what really happened and
rectifying the situation. Hours are required to correct the error that could have been corrected at
the receiving station in minutes.
RECEIVING PROCEDURE:-
 The receiving involves much of the paper work and it varies from firm to firm. However
the key issues involved in the receiving function are commodity described in the
following standard procedure.
 The receiving division unloads the goods at the delivery bay and verifies the condition of
the consignment to satisfy that it is not received in a damaged condition. The receiving
clerk opens the consignment and verifies the contents with the packing slip and the
purchase order.
 The details are recorded in the separate report, which is popularly known as "the goods
received note or GR note". The goods received note is an important document because it
is the only document with the firm which signifies the details of the materialist has
received.
INSPECTION OF MATERIALS: ?
MEANING AND DEFINITION
 Inspection is the process of examining an object for identification or checking it for
verification of quality and quantity in any of its characteristics. It is an important tool for
ascertaining and controlling the quality of a product. In the words of Alford and Beatty
"Inspection is the art of applying tests. Preferably by the aid of measuring appliances to
observe whether a given item or product is within the specified limits of variability or
not". According to Sprigged and Ransburg "Inspection is the process of measuring the
qualities of a product or services in terms of established standard". The standards can be
in terms of strength, hardness, shape etc.
 The purpose of inspection is to items are produced within the specified items of
variability. Inspection in list broadest sense is the art of comparing materials, product or
performances with established standards. By means of inspection one can take a decision
to accept are reject certain item. The items are accepted if these conform to the given
specifications otherwise rejected.
FUNCTIONS OF INSPECTION:
The following are some important functions of inspection:
 Maintenance of specified standards of the quality of products.
 Devising means for conducting inspection at lower cost.
 Segregating spoilt work, which may be salvaged by recuperation.
 Maintaining inspection equipment in good condition.
 Detection of defects at source to reduce scraps and defective work.
 Reporting source of manufacturing troubles to management
OBJECTIVES OF INSPECTION
Fundamental objectives of inspection are:
 To safeguard the quality of the finished products by comparing raw-materials,
workmanship and final product with some set standards. It prevents further work being
done on semi-finished product already detected as spoiled.
 The defective items are located and the factors responsible for this discrepancy in the
quality of the product are then identified to take corrective measures. This results in
 enhancing the prestige and confidence of the organization in the eyes of the customer.
This results in enhancing the prestige and confidence of the organizations in the eyes of
the consumer.
 The reduction in the risk and possibility of items not accepted by consumer saves the
producer as well as the consumer from losses if any and also reduces the cost of
production.
 To detect sources of weakness and troubles in the finished product and thus check the
work of designers.

ESSENTIAL STEPS FOR INSPECTION

There are five main steps in inspection:
 Characteristics about which the quality of the items is to be inspected should be carefully
established.
 A decision regarding when and where the inspection should take place is to be taken.
 To find that how many items are to be inspected i.e. 100% or sampling inspection. Here
the level of accuracy desired and the nature of the production process are taken into
consideration.
METHODS OF VALUATION:
The government of India has given sufficient flexibility for companies to introduce scientifically
developed methods of valuation of their stocks. In order to prevent malpractices, it has been
stipulated that such methods must be studied and approved by the Board of Directors, and must
be followed for a minimum prior of three years. The various methods of valuation available are
given below.
 First in first out [FIFO]
 Last-in -first -out [LIFO]
 Periodical Simple Average Method
 Normal cost/ Standard cost method
 Weighted average method
 Replacement price method
1. FIFO:
In this case it is assumed that the stores follow the principal that oldest stock issued first so that
stock left out is from the later arrivals. Hence all issues are assumed to have come out from older
stocks. These are valued at old price. The cumulative value of stock out will give the net value of
the existing stock.

2. LIFO:
Here stores are issued from the last stock. This means issues have taken place from later arrivals.
Hence all issued are valued as per the price of the latest arrivals to compute value of stock left in
stores.

3. PERIODICAL SIMPLE AVERAGE:

In this case after each receipt of material, adding the cost of materials in hand with the cost of
materials received and dividing the same by the total number of units calculate the average cost.
This process is repeated every time new items are received. This average cost is used for
computing the value of items issued and value of items remaining in the stock.

NORMAL COST / STANDARD COST METHOD:

This method is mostly used for items manufactured in house. Here the average cost of a certain
lot is calculated and used as cost of items issued. Since this method is used for items
manufactured, one can use standard costing method also for valuation of such stocks.

4. WEIGHTED AVERAGE METHOD:

This method is used when the quantity and prices of items vary widely from each purchase. In
this case, the weighted average price is calculated for each item. This price is used for computing
the value of items and those remaining in stock.

5. REPLACEMENT PRICES METHOD:

This is a modern method developed by George Tarboro. However without application it is
difficult to price each item. This has not yet become popular. FIFO, LIFO and Weighted Average
methods are popular and acceptable to the government tax authorities.

INVENTORY CONTROL SYSTEM: ?

INTRODUCTION:
Inventory control keeps track of inventories. It is observed that 'too much', 'too little' or badly
balanced inventories are all to be avoided because they cost too much on many counts. To much
leads to undue carrying charges in the form of taxes, insurance, storage, obsolescence and
depreciation and undue proportion of total working capital is invested in them. "Too little"
implies of too frequent ordering, loss of quantity discounts and higher transportation charges. It
may be 'too low' in view of likely shortages in future or future increases the prices or shortfall in
output. Again due to dynamic and unpredictable environmental situation "Too little" at one time
can be very quickly become "Too much in a subsequent period. Similarly inventory purchased at
higher prices remaining unused in stock or uncancelable order represents loss to the
organizations. The balance between 'too much' and 'too low' can be done by means of effective
inventory control. Some of the definitions of inventory control are:
 Inventory control is a system of ordering based on the maintenance of the stock in store
using reorder rule based on the stock level.
 Inventory control is the technique of maintaining the size of the inventory at some desired
level keeping in view the best economic interests of an organization.
 Inventory control is concerned with various items stocked at predetermined level or
within some safe limits.
 Inventory control is that part of a production program which specifies the material
requirements and schedules the order of work to be done.

OBJECTIVES OF INVENTORY CONTROL:

Though inventory control may not be treated as an executive function but it is one of the most
important functions in an enterprise. The following are the main objectives of inventory control:
PROTECTION AGAINST FLUCTUATIONS IN DEMAND:
The demand foreseen of any product can never be exact or accurate. There is likely to become
difference that too of varying magnitude, in predicted demand and actual demand of the product.
If sufficient items are available in the inventory, then the fluctuations in demand can be easily
adjusted and the organizations can project it from unforeseen economic losses.

BETTER USE OF MEN MACHINES AND MATERIALS:

In manufacturing system producing for stock the production planning can be done with an object
to have optimum use of resources namely men, machines and materials. Here the resources can
remain engaged during slack period of demand and there will be no need of generating additional
resources in the boom periods as then the inventory enlarged in slack period can utilize. This will
lead to uniform and proper utilization of resources available with the enterprise.

PROTECTION AGAINST FLUCTUATIONS IN OUTPUT:

Another important function of inventory is to reduce the gap between actual and scheduled
production. In practice, production scheduled cannot be adhered due to a number of reasons e.g.
sudden breakdown in supply of raw-materials, machines, labour strikes etc.
CONTROL OF STOCK VOLUME:
Inventory control is concerned with the size and the value of goods present in stock. It is
responsible to forecast the value of the stocks on a regular intervals, so that
Capital invested in inventories does not exceed the funds available for the purpose.
The amount invested in inventory is correctly recorded in account books.
Protection against theft is ensured.

1. CONTROL OF STOCK VOLUME:

Stock analysis is done to be sure that it is in balance and that obsolescence and depreciation are
determines the appropriate size of the inventory keeping in view the interest of

2. The production department as well as of the outside customer and side by side holding down
the costs.
Inventory is maintained due to the following reasons.
  To carry reserves in order to prevent stock outs or cost sales.
 Never having much of anything on hand.
 To gain economies in purchases by buying items beyond the desired amount.
 To maintain reserves in stocks for the period of replenishment.
 Thus a well formulated inventory policy of an enterprise in likely to ensure smooth and
efficient running of production operation providing optimum
 Utilization of man, machine and material. The decision regarding the appropriate size of
the inventory is of paramount significance.
LIMITATIONS OF INVENTORY CONTROL:
 The control of inventories is complex because of the many functions it performs. It
should be viewed as a shared responsibility.
 The objectives of better sales through improved service to customer, reduction in
inventories to reduce size of investment and reducing cost of production by smoother
production operations are conflicting with each other.

METHODS OF INVENTORY CONTROL:

The fundamental purpose of inventory analysis is to keep the stock of items at such level that
there is a balance between the costs which increase or decrease with the size of the inventory.
This needs determination of
 i)quantities should be ordered each time and ii) the time at which this order should be
placed so that both inventory carrying costs and the losses arising out of stock-outs are
kept at the minimum. These objectives are accomplished by determining.
o Economic lot size
o Re-order level

ECONOMIC LOT SIZE:

 The amount of material procured or quantity produced during one production run by any
enterprise is known as lot size. The quantity to be ordered, whether from inside sources
or from out agencies depends on a number of factors. The size of inventory depends on
lot size. Due to increase in inventory size expenditure on storage, deterioration etc, is
 likely to increase whereas expenditure on setting up plant, procurement of materials etc,
will increase.
 Thus with lot size, there are two sets of factors having opposite contribution towards the
expenditure i.e. one encourages the lot size and other discourage. The total cost
associated with particular lot size is a combination of expenditures on all these factors.
These opposing forces exhibit an interesting behavior towards total cost. It is observed
that the factors whose costs decrease with lot size has a tendency at a faster rate than the
rate of increase in cost of those factors whose costs increase with inventory size.

SAFETY OR BUFFER STOCK:

 The demand and supply rates can never be assessed exactly. There is bound to be
discrepancy between actual and estimated demand and supply quantities with fair degree
of uncertainty. The organization with a policy of safeguarding interest. Against these
uncertainties maintain the level of inventory at some desired minimum level. This
minimum level of inventory to cover some unforeseen and uncalled for situations is
known as safety or Buffer stock available in inventory when fresh supply arrives. It is
presumed that this stock will be able to, cope with the emergency if and when
experienced. Generally, buffer stock is maintained at the desired level by discontinuous
replenishments at varying intervals of tim
FACTORS EFFECTING CHOICE OF BUFFER STOCKS ARE:

 Uncertainty in demand.
 Degree of insurance for any item.
 Uncertainty in lead time and
 Size of the batch.

RE-ORDER LEVEL/POINT:
The concept of re-order point is basically related with lead time demand. The problem is that
demand can never be accurately projected over the lead-time. Once we know the demand in lead
time, re-order level can be easily determined mathematically Re-order Level=Lead Time demand
+ Safety Stock.
ABC (ALWAYS BETTER CONTROL) ANALYSIS:-
ABC analysis is the selective inventory control technique and this is the first step in the
inventory control process. This is the process in which 1000's of different types of inventories
are classified to determine the type an degree of control required for each. This technique is
based on the assumption that the firm should not exercise the same degree of control on the items
of inventory.
On the basis of unit price and consumption, various inventory items are categorized into three
classes of this analysis:
A
B
C
"A" group involves the largest investment and inventory control must be rigorous and intensive
and the most sophisticated inventory control technique should be applied to these items. Type
"A" is of higher cost and highly scarce resource without which the production process cannot be
imagined, which will be very less in quantity when compared to the investor level.
"A" type of items are only about 10% in number. But account for 75% of the annual inventory
usage value.
"B" group stands mid-way. It deserves less attention than "A" and more than "C". Employing
less sophisticated techniques can also control it. Type "B" is of moderate cost and moderately
important. These are freely available when compared type "A".
"B" type of items are only about 20% in number. . But account for next 50% of the annual
inventory usage value.
"C" group consists of items of inventory, which involve relatively small investments although
the number of items is fairly large. These items deserve minimum attention.
Type "C" items is of lowest cost and less importance when compared to "A" & "B". As these
types of inventories are freely available in the market and can immediately replace or purchase.
"C" types of items are about 70% in number. . But account for next 10% of the annual inventory
usage value.
THE VARIOUS TYPES OF SELECTIVE CONTROLS ON THE BASIS "ABC
ANALYSIS":
CATEGORY "A":
  Tight control
 Assess exact requirement
 Frequent reviews
 Quantity control
 Regular and item wise expediting
 Low safety stocks and order point control
 Reduced and stabilize lead-time
CATEGORY "B":
 Moderate control
 Individual postings
 Assess frequent reviews
 Less frequent reviews
 Item wise expediting
 Medium safety stocks
 Lead time
 Stoked at regional or zonal stores
CATEGORY "C":
 Minimum control
 Simple checks
 Estimate appropriate requirements
 Group postings
 Infrequent reviews
 Visual control
 Limited and periodic expediting
 Minimum lead-time control
 Large order size
 Stocking at point of view.

STEPS FOR CONDUCTING ABC ANALYSIS ARE:

 Obtain unit cost of each manufactured or purchased item in inventory.
 Obtain the usage in units for each item or estimate the usage over a period of time.
  Obtain the net value of the usage by multiplying unit cost and the usage.
 Arrange the items in descending order of the usage value.
 The no. of items and their values are accumulated on a % of total basis.
 Roughly divide the total list into 3 groups namely A-items of high usage value which
accounts for 70-75%of the usage value of inventories and about 10-15%. In number B-
items of medium usage value which accounts for the next 15-20% of the usage value .
WHILE APPLYING THE ABC ANALYSIS, THE FOLLOWING POINTS SHOULD BE
TAKEN INTO CONSIDERATION:
 Although every part of the item is important for the repair of machine, the items with low
value can be given a loose control.
 Tight control of the high value stocks must reduce costs sufficiently to more than off set
the increased costs caused by lesser controls on the low value items. When applying the
ABC principle, some high value items, Which will not be required due to being in excess,
should actually be considered for disposal at a worthwhile price.
 The ABC analysis in variably involves only items moving items since the annual
consumption value is based on consumption besides unit cost. The items, which are non-
moving, have also been considered separately for retention.

JUST IN TIME [JIT]:

 JIT means that virtually no inventories are held at any stage of production and that the
exact number of units is brought to each successive stages of production at right time.
The JIT concept originated from the Motomachi plant of Toyota in Japan where the
system has been perfected and results achieved. In this concept the plant has a long line
of trucks waiting outside with full loads of automotive parts and components for the
assembly line. As soon as one truck comes out at one end of the plant another gets inside.
There is no warehouse for the parts.
 The JIT concept assumes certain conditions which are found wanting in our industries.
What required is for its successful implementation all ancillary industries and suppliers of
inventory operate in the vicinity of the main industry to avoid problems of transportation.
If the suppliers are located at considerable distances and there is more than one supplier
 problems in delivery are bound to arise. There should be one supplier and the products
supplied must be of the best quality to prevent rejections and consequent delays.
INVENTORY CONTROL SYSTEM:
All of the items are not of equal importance, a high degree control inventories of each item is
neither applicable not useful. So stores department classify the inventory management to adopt a
selective approach in laying down inventory levels, order quantities and the extent and closeness
of the control be exercised. This is because a general characteristic of most inventories is that
some items have much higher annual usage value than others. Here we shall discuss the
techniques of selective control like:
 Re-ordering level,
 Economic Order Quantity.
 A.B.C Analysis.
RE-ORDERING LEVEL:
It is a point (if material reaches at this point) where order for fresh supplies of materials are
placed with the suppliers. The point is fixed some where in between the maximum and minimum
point in such a way that quantity is sufficient to meet the requirements of production upon the
time fresh supplies are received.
Re-ordering Level=Minimum Level + (Time in acquiring the materials * Rate of consumption).
ECONOMIC ORDER QUANTITY:
EOQ is an important factor in controlling the inventory, it is a quantity of inventory which can
reasonably be ordered economically at a time. It is also known as 'Standard Order Quantity',
'Economic Lot Size' or 'Economical Ordering Quantity', in determining this point ordering cost
and carrying costs are taken into consideration. Ordering costs are basically the cost of getting an
item of inventory and it storage facilities, property insurance, loss of value through physical
deterioration, cost of obsolescence. Either of these two costs affects the profits of the firm
adversely and management tries to balance these two costs. The balancing or reconciliation point
is known as Economic Order Quantity. And the concept of EOQ applies to the items which are
replenished periodically into inventory in lots covering several periods' needs.
Formulae for calculation of EOQ:
Whereas A =Annual Demand
O = Ordering Cost
C = Carrying Cost
ABC ANALYSIS:
ABC Analysis is basic tool, which helps the management to place their efforts where the results
would be useful to the greatest possible extent. The first important step in inventory management
is to have a selective approach to fix-up inventory levels and the extent to which the control can
be exercised. This selective approach mainly depends on the annual consumption of various
items. The technique involves the classification of inventory items into three categories A, B and
C. In descending order or annual consumption and annual monetary value of each item.

CATEGORY- 'A' ITEMS:

Such items have large investment but not much in number i.e., 10% of items account for 70% of
total capital invested in inventory. So more careful and closer control is needed for such items.

CATEGORY- 'B' ITEMS:

The items having low consumption value are put in category 'B'. Nearly 20% of the items in an
inventory account for 20% of the total investment. These items have less importance than 'A'
class items, but are much costly to pay more attention on their use. These items require less
degree of control than those in category 'A'. Statistical sampling is generally useful to control
them.

CATEGORY- 'C ITEMS:

The items having medium consumption value are put in category 'C. Nearly 70% of the items in
an inventory account for 20% of the total investment. Such items can be stocked at an operative
place. These items can be charged to an overhead account. In fact, lose control of 'C items
increase their investment and expenditure as a shelf wear, obsolescence and wasteful use, but this
will not be so much in saving the recording costs.
STATEMENT OF THE PROBLEM
 There are a number of problems that can cause havoc with inventory management. Some
happen more frequently than others. Here are some of the more common problems with
inventory systems.
 Unqualified employees in charge of inventory, Using a measure of performance for their
business that is too narrow, Not identifying shortages ahead of time, Bottlenecks and
weak points can interfere with on-time product delivery, Too much distressed stock in
inventory, Excessive inventory in stock and unable to move it quickly enough, Computer
assessment of inventory items for sale is inaccurate, Computer inventory systems are too
complicated, Items in-stock gets misplaced, Not keeping up with the rising price of raw
materials

NEED OF THE STUDY:

This project report entitled "A STUDY ON INVENTORY MANAGEMENT", starts with the
necessity of realization of definition, concepts and importance of inventory. Inventory may be
defined as usual, but idle resource. If resource may be tangible and physical such as materials
then it is termed as inventory. Inventory Management has acquired a great significance and
sound position in recent years with an objective of profitability and liquidity. The success or
failure of a business enterprise largely depends upon the management of inventory management.

No firm can be maintained without inventory management, but the requirement of inventory
differs from firm to firm. Inventory management is needed to every business enterprise because
it indicates liquidity position of the firm. The problem of inventory management is one of the
maintenance, with in a financial investment, an adequate supply of goods to meet an expected
supply of demand pattern. This could be raw-materials, work in progress (semi finished goods)
and finished foods.

Moreover inventory can be one of the indicators of the management effectiveness on the material
management front. Inventory management deals with determinants if optimal policies and
procedure for Procuring of commodities. Inventories constitute, in every business concern, the
most significant part of working capital or current assests. Inventories in Indian industries
constitute more than 60% of the current assests. Inventories are significant elements in cost
process.A management student should properly understand the various aspects. Inventory
management if opted for specialization in finance management.
OBJECTIVES OF THE STUDY:
PRIMARY OBJECTIVES
 To determine and maintain optimum level of inventory management in J.Q.TYRE
MANUFACTURING INDUSTRY AT COIMBATORE
 To find out the reasons for the problems and to evaluate possible ways for resolving the
problems.
SECONDARY OBJECTIVES
 To minimize the firm's investment in inventories and to maximize profits.
 TO analyze how inventory is maintained in J.Q.TYRE MANUFACTURING
INDUSTRY AT COIMBATORE
 TO ensure better services to the customer
 To study and analyze the various categories of inventory items in J.Q.TYRE
MANUFACTURING INDUSTRY AT COIMBATORE

SCOPE OF THE STUDY:

 The study is done on inventories help by bulk active division of J.Q.TYRE
MANUFACTURING INDUSTRY AT COIMBATORE
 The scope of the study includes ABC analysis of Raw material work in progress and
finished goods for five financial years.
 This study provides insight to the management of high value items and also brings
attention of management towards movement of ‘A’ class items over period of 5 years.
 CHAPTER II
REVIEW OF LITERATURE

REVIEW OF LITERATURE
 Bharathi pathak 1991 the bulk of the banking business in the country is in the public
sector comprising the state bank of India and its seven associated banks and twenty
nationalized commercial banks till 1991, the Indian banking industry was operating in a
highly regulated and protected regime. But with the acceptance of Norseman committee
recommendation, competition has been injected into the banking industry in two forms.
 The study has been found that HDFC Bank emerged as a leader in this financial analysis
of the year ended 2000-01. It closest competitor was ICICI Bank. Financial performance
of the other three, no doubt, lagged behind them, but it by no means, depressing. These
Bank obviously, have to focus more improving parameters like credit quality and cost
control for the emerge as the top performance.
 R. Hamsalakshmi-M.Manicham 2000 “The study, it has been found the liquidity position
and working capital positions were favorable and good during period of study. Regarding
turnover ratio, efficiency in management of fixed assets and total assets must be
increased. Regarding return on investment and return on equity was proved that the
overall profitability position of the software companies had been increasing at a moderate
way.
 Dr R.Dharmaraj 2003 ”The study airtical “positing in Indian management industry ’’
have concluded that for the last five year, there has been proliferation of international and
domestic providence of mutual funds. He says that this increased growth is due to the
increasing cash flows among innovative young companies through India.
REFERECNE

o Bharathi pathak, Finance India Dec 2003

o R. Hamsalakshmi-M.Manicham, Finance India Sep2 2009
o Dr R.Dharmaraj Indian journal of finance volume4 Allen and Carolinian (2003)

 Dr Harish kumar 2008 A capital adequacy ratio was constant over a period of time.
During the study period. It was observed that the return on net worth had negative
 correlation with the debt equity ratio. Inters income to working funds also had a negative
association with interest coverage ratio and the non performing to net advance was
negatively correlated with interest coverage ratio.
 J R Raiyani 2009 During the periods of high inflation depending on conventional
accounting wisdom. May results in firm’s financial information losing its meaning and
creation of unrealistic expectation among information users.
 Dr.Kavitha Chavvali 2009 Inventory analysis of gold exchange trade funds. Mathew
T.Jones and Maurice ousted (2007) revised and evaluated pre world war ii current date
for countries by treating gold follows on a continuous basis. The historical data of saving
and investment was taken over a time period of 1850- 1945.
 N.Prasanna 2009 Stock performance Aitkin 1997 the external effect foreign direct
investment on export with example of Bangladesh where entry of a koala multinational
in garment exports led establishment of a member of domestic export firms creating the
country’s largest export industry.
 Awedh 2005 defend that inflator does not have really an effect on the profitability
measured by return on equity of foreign banks exerting in Lebanon. In the same way, the
author steers that the level of inflation affect more than the return on assets of Lebanese
bank than foreign banks in Lebanon.
REFERENCE
 Dr Harish kumar single,The icfai journal of inventory management (vol vii Feb.
2008)
 J R Raiyani, The infaciS university journal of inventory research (vol viii, No 2
Feb. 2009)
 Dr.Kavitha Chavvali, Indian journal of inventory (vol 3 No: 2 dec 2009)
 N.Prasanna, Indian journal of inventory (vol 5 No: 1 Jan 2008)
 Dr.R.B.Bhatasna, Indian journal of inventory (vol 5 No: 2 Feb 2011)

 Dr Sushil kumar Mehta 2010 The financial performance mutual funds schemes. Jayadew
(1996) attempted of evaluate the performance of two growth oriented mutual funds on the
basis of monthly return. It was found that master gain performed better according to
Jensen and trey nor measures and basis of sharps ratio.
 
Monika uppal 2010 Financial performance factors a survey of the literature shows that
the foreign bank performance is affected by factors like the economic and financial
environment. Among these factors one can equate the growth rate of gross domestic
product, monetary market rate, inflation rate and foreign exchange rate. (Williams 1998).
REFERENCE
 Dr Sushil kumar Mehta, Indian Journal of inventory vol: 4 No: 2 Feb, 2010
 Monika uppal, Indian Journal of inventory vol: 5 No: 1 Jan 2011

CHAPTER III
RESEARCH METHODOLOGY

RESEARCH METHODOLOGY
RESEARCH DESIGN
The Descriptive type of research has been applied in the study. This research the
researcher has no control over the variables. Only reports what has happened or what is
happening. The research can only discover causes but cannot control the variables.
METHODOLOGY OF THE STUDY:
PRIMARY DATA:
The primary data, which is collected, is entirely based on the details given by the purchase;
stores, production and sales department are mainly concerned in J.Q.TYRE
MANUFACTURING INDUSTRY AT COIMBATORE

SECONDARY DATA:
The secondary data is entirely based on the data obtained for the officers, Managers and staff of
J.Q.TYRE MANUFACTURING INDUSTRY AT COIMBATORE
Managers and supervisors of the organization have also been interviewed to elicit necessary
information on the basis of non-structured schedules. And secondary was collected from the
company's manuals and office records pertaining to production, marketing, personal and
financial position.
DATA COLLECTION
This study purely based on secondary sources of information. The necessary data
calculated from annual report, books, journals and websites.
PERIOD OF STUDY
This study covers a period of five years from 2012-2013 and 2016-2017. The accounting year
commenced from April and ending with March of the next year.
AREA OF STUDY
This study was conducted in J.Q.TYRE MANUFACTURING INDUSTRY AT
COIMBATORE
TOOLS FOR ANALYSIS
The following tools have been applied in the present study.
They are listed below
 Ration analysis (inventory) and
 EOQ analysis

Ratio Analysis (Inventory)

The percentage of a mutual fund or other investment vehicle's holdings that have been
"turned over" or replaced with other holdings in a given year. The type of mutual fund, its
investment objective and/or the portfolio manager's investing style will play an important role in
determining its turnover ratio.

Economic Order Quantity (EOQ)

Economic order quantity is that level of inventory that minimizes the total of
inventory holding cost and ordering cost. The framework used to determine this order quantity is
also known as Wilson EOQ Model. The model was developed by F. W. Harris in 1913.The most
economical quantity of a product that should be purchased at one time. The EOQ is based on all
associated costs for ordering and maintaining the product. EOQ refers to the size of the order
which gives maximum economy in punches of materials.

2 Ao
EOQ = √
C1

Where
 A = Annual usage in unit
O = Ordering cost
C1 = Carriying cost

LIMITATIONS OF THE STUDY:

Any study is having of its own advantages and certain disadvantages. Among such few of the
limitations are expressed below such as:-
 The reliability of the study depends upon the information furnished by the officials.
 Due to time constraint it is difficult to go into details of the organization.
 This study is entirely based on the given by the stores department, purchase department,
production department and sales department of J.Q.TYRE MANUFACTURING
INDUSTRY AT COIMBATORE The study is limited for a period of 8 weeks.
 Since milk is perishable and it has to be converted into the finished goods within 24
hours, so there will be no operating cycle of this industry.
 The study is exclusively done for the stores department inventory items in J.Q.TYRE
MANUFACTURING INDUSTRY AT COIMBATORE