CHAPTER -04

Data Analysis and Interpretation

Techniques of Inventory Management:

 Inventory Turnover Ratio

 ABC analysis
 Economic Order Quantity
 Re-Order Level
 Safety stock
 HML Analysis
 FSN Analysis

4.1.1 Inventory Turnover Ratio

This ratio indicates the number of times inventory is replaced during the year. It measures the
relationship between costs of goods sold and inventory level. Inventory turnover reflects how
frequently a company flushes from its system with-in a given financial reporting period.

ITR = Cost of Goods Sold ÷ Average Inventory

 Table 4.1.1

Statement Showing Inventory Turnover Ratio

Year Cost of Goods Sold Average inventory Ratio

2016-2017 24,52,000 9,67,456 2.53

2017-2018 34,32,800 16,57,092 2.07

Chart 4.1.1

Chart showing Inventory Turnover Ratio

 Chart Title
6000000

5000000

4000000

3000000 2016-2017
2017-2018
2000000

1000000

0
Cost of Goods Sold Average inventory Ratio

Interpretation

It is evident from the graph that the firm is efficient in procuring and selling its product is in the year
2016-2017. In the year 2017-2018 the firm’s sales increased, improved its sales.

STOCK LEVELS

During 2016-2017

The company requires manufactured of products for the year 2016-17. The company
makes safety stock equal to 30 day requirement and the normal lead time is 10-20 days.
The company works for 300days in a year.

a. Reorder level = lead time*Average usage+ safety stock

= (10*64,185) + 2, 84,766.1

= 9, 26,616.1

Safety stock = usage * period of safety stock/ total working days in a year

= 2, 84,766.1*30/300
 = 28, 476.6

Average usage = usage/total working days in a year

= 284766.1/300

= 949.2

b. Minimum stock level = re-order level –(Average usage * Average lead time)

= 926616.1 – (284766.1* 10+20/2)

= 4, 97,224.4

c. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 9, 26,616.1+949.2-(949.2*10)

= 9,26616.1

d. Danger level = Average usage * Maximum re-order period for emergency

purchases
=
949.2*20
=
18984
e. Average stock = ½(Minimum stock level + Maximum stock level)
level
= 4, 97,224.4+9,26616.1/2

= 711920.25

During 2017-2018

It is evident from the graph that the firm efficient in procuring and selling its product is less in the year
2016-2017. In the year 2017-2018 the firm’s sales increased, improved its sales.

d. Reorder level = lead time*Average usage+ safety stock

= (10*75,553) + 3, 84,666.1
 = 11,40, 196.1

Safety stock = usage * period of safety stock/ total working days in a year

= 3, 84,666.1*30/300

= 38,466.61

Average usage = usage/total working days in a year

= 3, 84,666.1/300

= 1282.22

e. Minimum stock level = re-order level –(Average usage * Average lead time)

= 11,40, 196.1– (1282.22* 10+20/2)

= 1268418.1

f. Maximum stock level = re-order level + re-ordering quantity-

(Minimum usage * minimum lead time)

= 11, 40, 196.1+6421.1-(6421.1*10)

= 1082407.1

d. Danger level = Average usage * Maximum re-order period for emergency

purchases
=
1282.22*20
=
25644.4

e. Average stock = ½(Minimum stock level + Maximum stock level)

level
= 1268418.1+1082407.1/2
= 1175412.6
4.1.2 Inventory to Current Assets

This ratio indicates the amount of inventory which forms a part of current assets. It indicates the raw
material products, work in progress which is the part of the gross current assets. The other part of
current assets would be debtors and receivables.

Inventory to Current Assets = Total Inventory ÷ Current Assets × 100

Table 4.1.2

Statement showing relationship of Inventory with Current Assets

Year Total Inventory Current Assets Percentage

2016-2017 4,34,913 15,29,833 28%

2017-2018 6,14,184 18,13,071 33%

 Chart 4.1.2

Chart showing inventory to current assets

2000000 1813071
1800000
1600000 1529833

1400000
1200000
1000000
800000 614184
600000 434913
400000
200000
28% 33%
0
Total Inventory Current Assets Percentage

2016-2017 2017-2018

Interpretation:

From the above graph it can be observed that the current assets related to inventory were more from
the year 2016 to 2018.

4.1.3 Inventory Conversion Period

The inventory conversion period is the time required to obtain materials for a product, manufacture it,
and sell it. The inventory conversion period is essentially the time period during which a company
must invest cash while it converts materials into a sale.

ICP = Annual Days ÷ Inventroy Turnover Ratio

 Table 4.1.3

Statement showing Inventory Conversion Period

Inventory Turnover Inventory conversation

Year Annual Days Ratio period

2016-2017 365 2.53 144 days

2017-2018 365 2.07 176 days

Chart 4.1.5

Chart showing relationship between inventory and cost of goods sold

Chart Title
800
700
600
500
Axis Title

400
300
200
100
0
Annual Days ITR ICP , Days
2017-2018 365 2.07 176
2016-2017 365 2.53 144
Interpretation:

From the above analysis it is cleared that the industry was utilizing its resources efficiently till the year
2017-18. But from 2016-17 the firm is not utilizing its available resources optimally this is mainly
because of cash flow problems. When cash doesn’t flows in a required manner the activities cannot be
carried out in efficient manner.

Fixed Asset Turnover Ratio

Fixed-asset turnover is the ratio of sales to the value of fixed assets. It indicates how well the business
is using its fixed assets to generate sales. The higher the fixed asset turnover ratio, the more effective
the company's investments in fixed assets have become.

Fixed Asset Turnover Ratio = Cost of Goods Sold ÷ Net fixed Assets

Year Cost of Goods Sold Net Fixed Assets Ratio

2016-2017 24,52,000 45,52,000 0.53

2017-2018 34,32,800 57,65,444 0.59

 Chart 4.1.6

Chart showing fixed asset turnover ratio

6000000

5000000

4000000

3000000
2016-2017
2000000
2017-2018
1000000

Cost of Goods
Net Fixed
Sold Ratio
Assets

Interpretation:

According to the table and the graph above it is clearly understandable that from the year 2016-17 to
2017-18 the company had good fixed asset turnover ratio.

ABC Analysis

ABC analysis classifies various inventory into three sets or groups of priority the
allocates managerial efforts in proportion of
The priority the most important item are classified into class - A,
Those of intermediate importance are classified as “class - B’’ and remaining items are
classified into class - C’.
The financial manager has to monitor the items belonging to monitor the items
belonging to different groups in that order of priority and depending upon the
consumptions.

The items with the highest values is given priority and soon and are more controlled
 then low value item. The re - rational limits are as follows.

Procedure

(I) Items with the highest value is given top priority and soon.

(II) There after cumulative totals of annual value

consumption are expressed as percentage of total
value of consumption.

(III) Then these percentage values are divided into three categories.

ABC analysis helps in allocating managerial efforts in proportion to importance of

various items of inventory.

ABC Analysis

Raw material (at closing stock)

YEAR AMOUNT OF RAW MATERIALS

2016-2017 863633
2017-2018 1346433

AMOUNT
1200000

1000000

800000

600000
AMOUNT
400000

200000

0
20016-2017 2017-2018
 Interpretation:

The above graph shows the amount of raw materials at cost. In 2016-17 the cost of
material less, in the year 2017-18 increased.

Stock in process (at closing stock):-

YEAR AMOUNT OF STOCK in PROCESS

20016-17 647382
2017-18 986746

AMOUNT
1200000

1000000

800000

600000
AMOUNT

400000

200000

0
20016-2017 2017-2018

Interpretation:

The above graph shows that work in progress at cost. In 20016-17 the cost of material is
less. In the year 2017-18 it increased.
 Finished goods (at closing stock):-

YEAR AMOUNT OFFINISHED GOODS

20016-2017 1268802
2017-2018 1744213

AMOUNT
1200000

1000000

800000

600000
AMOUNT

400000

200000

0
20016-2017 2017-2018
s

Interpretation:
The above graph shows the amount of finished goods at cost. In 2016-17 the cost of
material is 2704.08 less, in the year 2017-18 it increased.
 Stores & consumables (closing stock):-

YEAR AMOUNT OF COST OF STORES

2016-17 462826
2017-18 637382

AMOUNT
1200000

1000000

800000

600000
AMOUNT

400000

200000

0
20016-2017 2017-2018

Interpretation:

The above graph shows the amount of store cost. In 2016-17 the cost of material is
2704.08 less, in the year 2017-18 it increased.
Raw material consumed:-

YEAR AMOUNT
20016-2017 637384
2017-2018 1036473

AMOUNT
1200000

1000000

800000

600000
AMOUNT
400000

200000

0
20016-2017 2017-2018

Interpretation:

The above graph shows consumption of raw materials .The consumption of raw material
in the year 20016-17 less, in the year 2017-18 it increased.
2. Economic order quantity:
EOQ DURING 2016-2017

The firm requires below given units of material for manufacturing of products. The
following are the details of their operation during 2016-2017

PARTICULARS
Products 8, 26,000
Ordering cost per order 1,04,334
Carrying cost 10%
Purchase price per unit Rs 500

1. Calculation of EOQ:-

Total units required (A) =8, 26,000

The ordering cost per order (O) = 1,04,334

Carrying cost per unit (C) = 10%

EOQ = √2AO/C

= 2*8, 26,000*1,04,334/50

= Rs.58712.82
2. Number of orders for the year = A/EOQ
= 8, 26,000/58,712.82
= 14.02~15 orders

3. Total annual cost = carrying cost + ordering cost

= 5245669+ 7600
= Rs.5253269
Carrying cost = order size average inventory

order size = A/no of orders

= 8, 26,000/15

= 55,066.66

Average inventory = order size/2

= 55,066.66 /2
= Rs.27533.33

Carrying cost = 2531.31*1668.655

= Rs.4223883.08

Ordering cost = cost per order no of orders

= 1, 34,334*15
= Rs.20,15,010
EOQ DURING 2017-2018

The firm requires below given units of material for manufacturing of products. The
following are the details of their operation during 2016-2017

PARTICULARS
Products 12,26,000
Ordering cost per order 1,34,334
Carrying cost 10%
Purchase price per unit Rs 600

1. Calculation of EOQ:-

Total units required (A) =12, 26,000

The ordering cost per order (O) = 1, 34,334

Carrying cost per unit (C) = 10%

EOQ = √2AO/C

= 2*12, 26,000*1, 34,334/60

= Rs.74,093.06

2. Number of orders for the year = A/EOQ

= 12,26,000/74,093.06
=
16.4~17orders

3. Total annual cost = carrying cost + ordering cost

= 6245669+ 77000
= Rs.6322669
Carrying cost = order size average inventory

order size = A/no of orders

= 12, 26,000/17

= 72,117.64

Average inventory = order size/2

= 72,117.64/2
= Rs.3608.82

Carrying cost = 3531.31*1768.655

= Rs.6245669

Ordering cost = cost per order no of orders

= 1,34,334*17
= Rs.22,83,678
THE RE-ORDER LEVEL

The re-order level is the level of inventory at which the fresh order for that item
must be placed to procure fresh supply. The re-order level depends upon.

1. Length of time between the placement of an order and receiving the supply.
2. The usage rate of the item. The inventory is constantly being used up. The rate at
which the inventory is being used up. The rate at which the inventory is being
used up is called the usage rate.

The reorder level can be determined as follows:

R= M+TU

R=Reorder level
M=Minimum level of
inventory T=time
gap/delivery time
U=Usage Rate
The reorder level and inventory patterns have be shown as follows:

The figure shows that if the usage rate is constant, the order are made at even
intervals for the same amounts each time and the inventory goes to zero just before
an order is received.

Safety stock:
The safety stock protects firm from tradeoffs due to unanticipated demand for the
items level of inventory investments is however increased by the amount of safety
stock. Safety level is ascertained in inventory as a part because there is always an
uncertainly involved in time lag usage rate or other factors.

Usually smaller the safety level greater the risk of stock – outs. If stock levels
are predictable then there is a chance of stock out occurring. However stock inflows
and outflows are unpredictable or lesser predictable it becomes to carry additional
safety to prevent unexpected stock outs so usage rate is estimated if cost is low then
no safety stock is needed.
Just – In – Inventory:

The Basic concept is that every firm should keep a minimum level of inventory
on hand, relying suppliers to furnish just in time as and when required. JIT helps in
emphasizing sufficient level of stock to ensure that production will not be
interrupted. Although the large inventories may be had idea due to heavy carrying
JIT is a modern approach to inventory management and the goal is essentially to
minimize such inventories and there by maximizing turnover.

JIT system significantly reduces inventory carrying cost be requiring that the
raw material be procured just in time to be placed into production. Additionally the
work in process inventory is minimized by eliminating inventory buffers between
different production departments.

If JIT is to be implemented successfully there must be a high degree of

coordination and co operation between the supplier and manufacturer and among
different production centers. JIT does not appear to have any relation with EOQ
however it is in fact alters some of the assumptions of EOQ model. The average
inventory level under the EOQ model is defined as

Average inventory =1/2EOQ+safety level JIT attacks this equation in two ways.

 By reducing the order cost.

 By reducing the safety stock

The basic philosophy in JIT is that benefits, associated with reducing

inventory and delivery time to a bare minimum through adjustment IEOQ model,
will more than offset the costs associated with the increased possibility of stock –
outs.
FSN Analysis:-

In FSN Analysis, items are classified according to their rate of consumption. The items are
proudly classified into 3 groups: F means fast moving, S means slow moving, N means non
moving. The FSN analysis is conducted generally on the basis last date of receipt of the items or
the last date of the issue of items, whichever is later is taken into account and the time period is
usually calculated in terms of months or number of days and it pertains to the time elapsed since
the last movement was recorded. The FSN Analysis helps company in identification of the items
considered to be “active” may be reviewed regularly on more frequent basis. Items who stock at
hand are higher as compared to their rate of consumption. Non moving items whose consumption
is “zero” or almost in significant.

FastMoving:

SL No. Commodity Rank

1 Chicken Masala 1

2 Garam Masala 2

3 Kabab Masala 3

4 Jeera Powder 4

5 Kitchen King 5
 sSlow-Moving:

SL No. Commodity Rank

1 Chat Masala 7

2 Chana Masala 8

3 Sambar Powder 9

4 Rasam Powder 10
 Table 4.2.1

Statement showing FSN Analysis

Moving Method Commodity

Fast Moving Chicken Masala

Garam Masala

Kabab Masala

Jeera Powder

Kitchen King

Slow Moving Chat Masala

Chana Masala

Sambar Powder

Rasam Powder
 Chart 6.2.1

Chart showing FSN Analysis

Ranks
Ranks

9
8
7
6
5
4
3
2
1

chicken garam kabab Chat Jeera Kitchen Chana Sambar Rasam

masala masala masala Masala Powder King Masala Powder Powder
High High High Medium Medium Medium Low Low Low

Interpretation:

The products are some are fast moving and slow moving products are there.
6.2.2 HML Analysis:

HML Analysis is classified based on their unit prices. Here cost / unit criteria is used they are
categories in 3 groups, where H means high price item, L means low price items. Objectives of
HML analysis are to determine the frequency of stock verification to keep control over the
consumption at the department level, considering buying policy and delegation of authority.

High Value:

SL No Commodity Rank

1 Chicken Masala 1

2 Garam Masala 2

3 Kabab Masala 3

Medium Value:

SL No Commodity Rank

1 Chat Masala 4

2 Jeera Powder 5

3 Kitchen King 6
 Low Value:

SL No Commodity Rank

1 Chana Masala 7

2 Sambar Powder 8

3 Rasam Powder 9
 Table 6.2.2

Statement showing HML Analysis

Value Product Rank

High Chicken Masala 1

High Garam Masala 2

High Kabab Masala 3

Medium Chat Masala 4

Medium Jeera Powder 5

Medium Kitchen King 6

Low Chana Masala 7

Low Sambar Powder 8

Low Rasam Powder 9

 Ranks
10
9
8
7
6
5
4
3 Ranks
2
1
0
chicken garam kabab Chat Jeera Kitchen Chana Sambar Rasam
masala masala masala Masala Powder King Masala Powder Powder
High High High Medium Medium Medium Low Low Low

Interpretation:

The chikan masala, garam masala , kabab masala high value material in the industry. value and it’s rank
will be respectively second and third is considered as a medium , low value materials.
 Chapter-5

Findings, suggestions and Conclusions

Findings:

1. The inventory turnover ratio of the company has increased in the year 2017-18 due to
increase in its sales.
2. The company is having good sales for their products during 2017-18.
3. Spices pvt limited is providing quality, taste, healthy products to its customers.
4. Saheb pices limit is updated its technology.
5. The firm has taken up Saheb pollution control measures.
6. The firm suffered from number of marketing problems like adequate and cheap transport
facilities and lack of publicity.
7. It supplies its products mainly to patna.
8. Its competitors are high in local market.
9. The company has manufacturing some new products.
Suggestions:

 It must improve its inventory by proper utilization of stock.

 The firm should adopt appropriate techniques to increase the overall efficiency.
 The company is suggested to have its own vehicle, so that high transportation cost can
be avoided. It will be helpful in bringing raw material to the factory premises.
 The machinery should be properly maintained, those who are working on machineries
should be trained properly.
 A small amount of investment of advertisement may increase the sales in long run. As
the unit exists under modern complex world.
 Another important remedy is that the firm The firm has to show more consideration
towards labor welfare measures. And company should provide more facility to the workers.
 should keep an eye on international market and affective marketing policies.
 The organization can expand their business with the same products are by diversifying
its products.
Conclusion:

Saheb Spices pvt limited is medium scale industry established in 2016 by three directors
which manufacturer of spices products. This industry is based on management directors. After the
study, we can come to a conclusion that, effectiveness of inventory management should improve
in all the aspects; hence the industry can still strengthen its position by looking into the following:

 The inventory should be fast moving so that warehouse cost can be reduced.
 The finished goods have to be dispatched in feasible time as soon as manufacturing is
completed.

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