A STUDY ON INVENTORY MANAGEMENT WITH REFERENCE TO MAGNA MODULES AND SYSTEMS

FINAL PROJECT REVIEW CHAPTER-I

DONE BY PRASANNA VENKATESH N MBA II YR SIMS

INTRODUCTION Every enterprise needs inventory for smooth running of its activities. It server as a link between the production and distribution process. The greater a time lag, the higher the requirement of inventory the unforeseen fluctuation of inventory demand and supply of goods, fluctuating inventory prices, necessitate the need for inventory management. The investment inventory constitutes the most significant part of the current assets inventory of the under taking. Thus it is very essential to have a proper control and management of inventory. Meaning and nature of inventory The general meaning of inventory is stock of goods or list of goods inventory. In accounting language it means stock of finished goods. For inventory manufacturing concern it includes raw materials, work in progress, consumables finished goods and spares etc. 1) Raw materials: If forms a major input inventory in organization. The quantity of raw materials required will be determined by the rate of consumption. 2) Work in Progress:

The work in progress is that stage of stocks, which are in between raw materials and finished goods. 3) Consumables: These are the material, which are needed to smoothen, the process of production. These do not directly go into production, but act as catalyst.

4)

Finished Goods: These are the goods, which are ready to sale for the consumers. The stock of

finished goods provides as buffer between production and market. 5) Spares: Spares also from a part of inventory. The stocking policies differ from industry to industry. Inventories cost account for nearly 55 percent of the cost of production, as it is clear from an analysis of financial statements of large number of private and public sector organizations. So, It essential to establish suitable procedures for proper control of materials from the time of purchase order placed with supplier until they have been consumed properly and accounted for.

Definition: The term inventory refers to assets, which will be sold in future in the normal course of business operations. The assets, which the firm stores as inventory in anticipation of need, are raw materials, work-in-progress/process, and finished goods. Inventory often constitutes a major element of a total working capital and hence ft has been correctly observed, 'Good inventory management is good financial management. Inventory control is a system, which ensures the provision of the required quantity at the required time with the minimum amount of capital. Inventories are the second largest asset category for the manufacturing firms next to plant and equipment. Inventory control includes scheduling, the requirements, purchasing, receiving and inspecting, maintaining stock records and stock control. Inventory control is a matter of coordination. A proper material control helps in improving the input-output ratio.

Objective of inventory management The main objective of inventory management are operational and financial. undisturbed flow of production. The

operational object means availability of materials and spares in sufficient quantities for The financial objective means investments in inventories should not remain idle and minimum working capital should be locked in it. The other objectives are: To ensure continues supply of inventories to the production. To avoid over stocking and under stocking. To maintain optimum level of investment in inventories. To keep material cost under control, to keep low cost of production. To eliminate duplication in ordering or replacing stocks. To minimize losses through, deterioration, pilferage, wastage and damages. Designing structures for good inventory management. Perpetual inventory control of materials. To ensure right quality of goods at reasonable prices. Analysis of prices cost and value. To facilitate data for short and long term planning and control of inventory.

Need for inventory control:

If a cost accounting system is to be effective there must be a proper control of inventory and supplies form the time orders are placed with suppliers until they have been effectively utilized in production. Materials are equivalent to cash and they make up an important part of the total cost. It is essential that materials should be properly safeguarded and correctly accounted. Proper control of material can make a substantial contribution to the efficiency of a business. The success of a business concern largely depends upon efficient purchasing, storage, consumption and accounting. In a large firm the planning and routing department is responsible for arranging how and where the work is to be done and issue instructions. It sets definite time schedules so that necessary materials are delivered to the proper department in proper time not too long before hand neither lest it should interfere with other work nor after they are required as this result in idle time. Business firm keep inventories for different purposes. Every firm big or small trading or manufacturing has to maintain some minimum level of inventories. Based on some motives the inventories are maintained. a. Transaction motives:

Every firm has to maintain some level of inventory to meet the day-to-day requirements of sales, production process, customer demand etc. In this finished goods as well as raw material are kept as inventories for smooth production process of the firm. b. Precautionary motive:

A firm should keep some inventory for unforeseen circumstances also like loss due to natural calamities in a particular area, strikes, lay outs etc so the firm must have some finished goods as well as raw-materials tc meet circumstances. c. Speculative motive:

The firm may be made to keep some inventory in order to capitalize an opportunity to make profit due to price fluctuations.

Costs involved in inventory: Every firms maintains inventory depending upon requirement and other features of firm for holding such inventory some cost will be incurred there are as follows:

(a)

Carrying Cost: This is the cost incurred in Keeping or maintaining an inventory of one unit of

raw materials, work-in -process or finished goods. Here there are two basic cost involved. (i) Cost of storage: It includes cost of storing one unit of raw materials by the firm. This cost may be for the storage of materials. Like rent of spaces occupied by stock, stock for security, cost of infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc. (ii) Cost of financing: This cost includes the cost of funds invested in the inventories .It includes the required rate of return on the investments in inventory in addition to storage cost etc. The Carrying cost include there fore both real cost and opportunity cost associated with the funds invested in the inventories. The total carrying cost is entirely variable and rise in directly proportion to the level of inventories carried. Total carrying cost = (carrying Cost per unit) x (Average inventory) (b) Cost of ordering:

The cost of ordering includes the cost of acquisitions of inventories. It is the cost of preparation and execution of an order including cost of paper work and Communicating with the supplier. The total ordering cost is inversely proportion to annual inventory of firm. The ordering cost may have a fixed component, which is not affected by the order size: and a variable component, which changes with the order size. Total Ordering Cost = (No.Of orders) x (cost per order). (c) Cost of stock out: It is also called as Hidden cost. The stock out is the situation when the firm is not having units of an item in stores but there is a demand for that Item either for the customers or the production department .The stock out refers to zero level inventory .So there is a cost of stock out in the sense that the firm face a situation of lost sales or back orders .The stock outs are quite often expensive. Even the good will of firm also be effected due to customers dissatisfaction and may lose business in case of finished goods, where as in raw materials or work in process can cause the production process to stop and it is expensive because employees will be paid for the time not spend in producing goods. The carrying cost and the ordering cost are opposite forces and collectively. They determine the level of inventors in a firm. Total cost =(cost of items purchased) +(Total Carrying and ordering cost) Valuation of Inventory: The methods of valuing inventory are combination of the actual cost and replacement cost plans. The chief advantage of the cost or net realizable value rule is that it is conservative. Hence the methods of Valuation of inventory are quite independent of system of mincing. In balance sheet closing stock is shown under current assets and is also credited to manufacturing or trading accounts. The inventories are valued on the basis as follows.

Cost of raw materials in stock may include freight charges and carrying cost. But such cost should not exceed market price.

Work -in -process is generally valued at cost, which includes cost of materials, labor. And the proportionate factory overhead, as it is reasonable according to degree of completion,

Cost of finished goods wound normally to be total or full cost it includes prime cost plus appropriate amount of the overhead. Selling and distribution cost is deducted on the other hand work in progress may be valued at work in progress may be Valued at work cost, marginal cost, prime cost or, even at direct materials.

NEED FOR THE STUDY

Inventories are equivalent to cash and they make up an important of the total cost. It is essential that inventory should be properly safeguarded and correctly accounted. Proper control of inventory can make a substantial contribution to the efficiency of a business. The success of a business concern largely depends upon efficient purchasing, storage, consumption and accounting. This study focus on measuring the effectiveness of current inventory management technique at MAGNA MODULES AND SYSTEMS and analyses the changes that needed to make effective usage of inventory.

SCOPE OF THE STUDY

 This study is to find the facts and opinions of inventory management and control at MAGNA MODULES & SYSTEMS. In accordance with the present trends it aims mainly at finding out the inventory control procedures at MAGNA MODULES & SYSTEMS. This study gives the brief information about the inventory management of MAGNA MODULES & SYSTEMS. The study will be done by using annual reports, inventory manual and other records.

OBJECTIVE OF THE STUDY

To study the tools and techniques of inventory management adopted at MAGNA MODULES & SYSTEMS. To study the inventory control measures in inventory management. To study the demand forecast of inventory management at MAGNA MODULES & SYSTEMS. To determine the stock level in inventory management at MAGNA MODULES & SYSTEMS. To identify problems related to inventory management and to find out suitable measures to overcome them. To study the methods of factors affecting inventory.

REVIEW OF LITERATURE

A number of studies have been done in the field of inventory management by various researchers. Some of them are given below;

Bern at de William, 2008 , This study tells that the main focus of inventory management

is on transportation and warehousing. The decision taken by management depend s on the traditional method of inventory control models. The traditional method of inventory management is how much useful in these days the author tell about it. He is also saying that the traditional method is not a cost reducing, it is so much expensive. But the managing the inventory is most important work for any manufacturing unit.

Jon Schreibfeder,1992 ,He said that it is easy to turn cash into inventory, the challenge

is to turn inventory back into cash. In early 1990s many distributor recognize that they needed help controlling and managing their largest asset inventory. In response to this need several companies developed comprehensive inventory management modules and systems. These new package include many new features designed to help distributors effectively managed warehouse stock. But after implementing this many distributors do not feel that they have gained control of their inventory.

Wolf Bagby, 1996,Managing inventory ,In this study Mr. W.Bagby explains that by

managing the inventory it becomes easier for the organization to meet the profit goals, shorter the cash cycle, avoid inventory shortage, avoid excessive carrying costs for unused inventory, and improve profitability by decreasing cash conversion and adopt JIT system. According to this study companies need to get smart about inventory. Boosting financial performance is another benefit that comes from better inventory management. Infect large number of manufacturers enjoy savings and better performance by choosing the approach of inventory reduction.For this company needs to maximize the cash flow and profitability and this includes keeping a watchful discerning eye on charge in supply and demand.

Silver, Edward A Dec22, 2002 (Article from production and inventory management

journal), This article considers the context of a population of items for which the assumption

underlying the EOQ derivation holds reasonably well. However as is frequently the cash in practices there is an aggregate constraint that applies to the population as a whole. Two common forms of constraints are: The existence of budget to be allocated among the stocks of the items and A purchasing production facility having the capability to process at most a certain number of replenishment per year. Because of the constraint the individual replenishment quantities cannot be selected independently.

Charles Atkinson, 2003 (A study on inventory management), In the study by Mr.

Charles Atkinson, he explained the inventory management and assessment of inventory levels. As per this study inventory management need to address two issue Part I. How to optimize average inventory levels. Part II. How to assess (evaluate) inventory levels. This study tells about what the manager should do and not to do, and how much amount should be order in one placed orders. Average inventory can be calculated by simplistic method. Average inventory = beginning inventory +end inv./2

D.Hoopman April 7, 2003(Article from inventory planning and optimization), In this

article he said that inventory optimization recognize that different industry have different inventory profiles and requirements. Research has indicated that solutions are priced in a large range from tens of thousands of dollars to millions of dollars. In this niche market sector price is definitely not an indicator of the quality of solution, ROI and usability are paramount.

Asfaque Ahmed October 12, 2004(Article from master requirement planning and

master production scheduling) ,He said that most of the manufacturing company vendors have

planning and scheduling product which assume either infinite production capacity for calculating quantities of row material and work in progress (WIP) requirements or infinite quantities of raw material and WIP materials for calculating production capacity. There are many problems with this approach and how to avoid these by making sure that the product you are buying indeed takes into account finite quantities of required materials as well as finite capacities of work centers in your manufacturing facilities.

Delaunay C , Sahin E, 2007, A lots of work has been done but now if we want to go

ahead we must have good visibility upon this field of research. That is why we are focused on frame work for an exhaustive review on the problem of supply chain management with inventory inaccuracies . The author said that their aim in this work is also to present the most important criterion that allow a distinction between the different type of managing the inventory.

RESEARCH METHODOLOGY
In every research we have to follow some methodology in collecting required data and analyzing it. The data collection was done in MAGNA MODULES AND SYSTEMS for the purpose of my study on customer perception by using the following methods. TYPE OF RESEARCH Research Design: Research design is considered as a "blueprint" for research, dealing with at least four problems: which questions to study, which data are relevant, what data to collect, and how to analyze the results. The best design depends on the research question as well as the orientation of the researcher. Descriptive Research has been adopted in this study. Descriptive Research Design Descriptive research has been followed in this study because the study aims at describing the situation as it exists at present and also to determine accurate characteristics of a particular

object or a group. It is used to measure the behavior variables of people of subject who are under the study.

Applied Research Design

Applied research refers to scientific study and research that seeks to solve practical problems. Applied research has been followed in this study by applying various inventory tools in this study. DATA COLLECTION Sources of Data: In this study both the Primary data and Secondary data are used. Primary data: The primary data was collected from the respondents using questionnaire and direct observation. Secondary data: The Secondary data was collected from the companys records. Methods of data collection: Data was collected with the help of a Structured Questionnaire. Data analysis method: The Data was summarized from the main study and was analyzed. Based on the results, conclusions were drawn and suggestions were given. RESEARCH INSTRUMENT A testing device for measuring a given phenomenon, such as a paper and pencil test, a questionnaire, an interview, a research tool, or a set of guidelines for observation is called Research Instrument. The research instrument used in this study is a structured questionnaire. SAMPLING DESIGN

There are 2 types of sampling. They are probability sampling and non-probabilistic sampling. The non-probabilistic sampling used in this study is convenience sampling. CONVENIENCE SAMPLING Convenience sampling is a non-probability sampling technique where subjects are selected because of their convenient accessibility and proximity to the researcher. That is, a sample population selected because it is readily available and convenient. The subjects are selected just because they are easiest to recruit for the study and the researcher did not consider selecting subjects that are representative of the entire population. INVENTORY TOOLS: A Inventory tool used in this study is EOQ model.