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The project titled ‘Analysis Of Inventory Management’ aims at understanding and analyzing the
Layout planning of the plant, Shahjahanpur ELECTROLUX Industries Limited Works, a
manufacturing unit of Refrigerator. The scope of inventory management also concerns the fine
lines between replenishment lead time, carrying costs of inventory, asset management, inventory
forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical
inventory, available physical space for inventory, quality management, replenishment, returns
and defective goods and demand forecasting. Balancing these competing requirements leads to
optimal inventory levels, which is an on-going process as the business needs shift and react to
the wider environment..

As a part of inventory management, various inventory management techniques are studied. Most
of these are being implemented in the plant (like PIV, ABC Analysis, JIT, Single Piece Flow
System etc). Even those tools, which are not practically implemented (like Reorder Point, Safety
Stock etc) are studied. These methods, along with their working and importance, are studied in


"Accomplishment of any task necessarily depends upon the willingness and enthusiastic
contribution of time and energy of many people."

From the starting till the completion of this project, there are many people without whose
assistance all my efforts would have been fruitless. I, therefore, acknowledge all who generously
helped me by sharing their time, experience and knowledge with me without which this project
would have never been accomplished.

Words can’t express my sincere thanks to the entire faculty of IIPM who had been a constant
source of guidance throughout my project.

Finally, I would like to state that the project not only fulfilled an academic
requirement, but would also help me in future endeavors in the years to come.



• Primary objective

The primary objective of the study is to understand the existing techniques of inventory
management used in this concern with a view to find out the extent to which the scientific
inventory control are being applied and suggest new pratical inventory and management
techniques, if needed.

• Other objectives

1. To supplement the various inventory control techniques in the organization for effective
inventory management
2. To minimize the idle time and cost caused by the storage of raw material , store or spare
3. To provide necessary guidelines for determining Economic order quantity and
classification of items using appropriate basis.


Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. It is also used for a list of the contents of a household and for a
list for testamentary purposes of the possessions of someone who has died. In accounting
inventory is considered an asset.

In business management, inventory consists of a list of goods and materials held available in

Inventory Management

Inventory management is primarily about specifying the size and placement of stocked goods.
Inventory management is required at different locations within a facility or within multiple
locations of a supply 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, inventory valuation, inventory visibility, future inventory
price forecasting, physical inventory, available physical space for inventory, quality
management, replenishment, returns and defective goods and demand forecasting. Balancing
these competing requirements leads to optimal inventory levels, which is an on-going process as
the business needs shift and react to the wider environment.

Involves a retailer seeking to acquire and maintain a proper merchandise assortment while
ordering, shipping, handling, and related costs are kept in check.

Systems and processes that identify inventory requirements, set targets, provide replenishment
techniques and report actual and projected inventory status.

Handles all functions related to the tracking and management of material. This would include the
monitoring of material moved into and out of stockroom locations and the reconciling of the
inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc.

Management of the inventories, with the primary objective of determining/controlling stock

levels within the physical distribution function to balance the need for product availability
against the need for minimizing stock holding and handling costs. See inventory proportionality.

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every stage,
requires that you maintain certain amount of inventory to use in this "lead time".
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand,
supply and movements of goods.

3. Economies of scale - Ideal condition of "one unit at a time at a place where user needs it,
when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk
buying, movement and storing brings in economies of scale, thus inventory.

All these stock reasons can apply to any owner or product stage.

• Buffer stock is held in individual workstations against the possibility that the upstream
workstation may be a little delayed in long setup or change-over time. This stock is then
used while that change-over is happening. This stock can be eliminated by tools like

These classifications apply along the whole Supply chain not just within a facility or plant.

Where these stocks contain the same or similar items it is often the work practice to hold all
these stocks mixed together before or after the sub-process to which they relate. This 'reduces'
costs. Because they are mixed-up together there is no visual reminder to operators of the adjacent
sub-processes or line management of the stock which is due to a particular cause and should be a
particular individual's responsibility with inevitable consequences. Some plants have centralized
stock holding across sub-processes which makes the situation even more acute.

Special terms used in dealing with inventory

• Stock Keeping Unit (SKU) is a unique combination of all the components that are
assembled into the purchasable item. Therefore any change in the packaging or product is
a new SKU. This level of detailed specification assists in managing inventory.
• Stockout means running out of the inventory of an SKU.
• "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to
merchandise being offered for sale which was manufactured long ago but that has never
been used. Such merchandise may not be produced any more, and the new old stock may
represent the only market source of a particular item at the present time.


1. Buffer/safety stock
2. Cycle stock (Used in batch processes, it is the available inventory excluding buffer stock)
3. De-coupling (Buffer stock that is held by both the supplier and the user)
4. Anticipation stock (building up extra stock for periods of increased demand - e.g. ice
cream for summer)
5. Pipeline stock (goods still in transit or in the process of distribution - have left the factory
but not arrived at the customer yet)

Example :

A canned food manufacturer's materials inventory includes the ingredients to form the foods to
be canned, empty cans and their lids (or coils of steel or aluminum for constructing those
components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The

firm's work in process includes those materials from the time of release to the work floor until
they become complete and ready for sale to wholesale or retail customers. This may be vats of
prepared food, filled cans not yet labelled or sub-assemblies of food components. It may also
include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory
consists of all the filled and labelled cans of food in its warehouse that it has manufactured and
wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to
consumers through arrangements like factory stores and outlet centers.

Examples of case studies are very revealing, and consistently show that the improvement of
inventory management has two parts: the capability of the organisation to manage inventory, and
the way in which it chooses to do so. For example, a company may wish to install a complex
inventory system, but unless there is a good understanding of the role of inventory and its
perameters, and an effective business process to support that, the system cannot bring the
necessary benefits to the organisation in isolation.

Typical Inventory Management techniques include Pareto Curve ABC Classification and
Economic Order Quantity Management. A more sophisticated method takes these two techniques
further, combining certain aspects of each to create The K Curve Methodology. A case study of
k-curve benefits to one company shows a successful implementation.

Unnecessary inventory adds enormously to the working capital tied up in the business as well as
the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a
key concept in Lean. Too big an inventory reduction too quickly can cause a business to be
anorexic. There are well proven processes and techniques to assist in inventory planning and
strategy, both at business overview and part number level. Many of the big MRP/and ERP
systems do not offer the necessary inventory planning tools within their integrated planning


At time of delivery

1. Verify count -- Make sure you are receiving as many cartons as are listed on the delivery
2. Carefully examine each carton for visible damage -- If damage is visible, note it on the
delivery receipt and have the driver sign your copy.
3. After delivery, immediately open all cartons and inspect for merchandise damage.

When damage is discovered

1. Retain damaged items -- All damaged materials must be held at the point received.
2. Call carrier to report damage and request inspection.
3. Confirm call in writing--This is not mandatory but it is one way to protect yourself.
4. Carrier inspection of damaged items

5. Have all damaged items in the receiving area -- Make certain the damaged items have not
moved from the receiving area prior to inspection by carrier.
6. After carrier/inspector prepares damage report, carefully read before signing.

After inspection

1. Keep damaged materials -- Damaged materials should not be used or disposed of without
permission by the carrier.
2. Do not return damaged items without written authorization from shipper/supplier.


• Successful inventory management involves balancing the costs of inventory with the
benefits of inventory. Many small business owners fail to appreciate fully the true costs
of carrying inventory, which include not only direct costs of storage, insurance and taxes,
but also the cost of money tied up in inventory. This fine line between keeping too much
inventory and not enough is not the manager's only concern. Others include:
• Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too
• Increasing inventory turnover -- but not sacrificing the service level;
• Keeping stock low -- but not sacrificing service or performance.
• Obtaining lower prices by making volume purchases -- but not ending up with slow-
moving inventory; and
• Having an adequate inventory on hand -- but not getting caught with obsolete items.
• The degree of success in addressing these concerns is easier to gauge for some than for
others. For example, computing the inventory turnover ratio is a simple measure of
managerial performance. This value gives a rough guideline by which managers can set
goals and evaluate performance, but it must be realized that the turnover rate varies with
the function of inventory, the type of business and how the ratio is calculated (whether on
sales or cost of goods sold). Average inventory turnover ratios for individual industries
can be obtained from trade associations .


The Electrolux Group is a Swedish manufacturer of home and professional appliances and is
the world's 2nd largest appliance manufacturer. According to the company, it sells more than 40
million products to customers in 150 countries annually, which translates to 2 products every
second, every day of the year. Electrolux products include refrigerators, dishwashers, washing
machines, vacuum cleaners and cooktops sold under brand names like Germany's AEG, Italy's
Zanussi, Australia's Kelvinator and in the US; Eureka, Frigidaire, and Electrolux USA.

Following an analysis made by internationally renowned Forbes Magazine in 2010, Electrolux

has been named one of 130 Global High Performers and named in the top 5 companies in
consumer durables.


Electrolux was founded in 1910 as Elektromekaniska AB, and changed its name to Elektrolux
after merging with Lux AB in 1919. The merger with Lux was brokered by the Swedish
entrepreneur Axel Wenner-Gren. (The direct sales division of Electrolux kept the name "Lux"
and is now autonomous. The legal name spelling was changed to Electrolux in 1957. The
company was organized as a holding company in 1928 and during the 1970s grew rapidly under
the leadership of Hans Werthén.

In North America, the Electrolux name was long used by a vacuum cleaner manufacturer,
founded by a Swedish businessman who emigrated to the U.S. In 1998, that company transferred
its rights to the trademark in North America to the Electrolux Group and now operates under the
name Aerus LLC. Following transfer of the trademark, Electrolux of Sweden added a new line of
Electrolux home appliances for sale in the U.S. and Canada.

In 2002 Hans Stråberg was appointed president and CEO.


Our Vision:
1. To become the No.1 Service Provider in India.
2. To build a brand around substance.
3. To communicate simple truths that customers understand.
4. To become a leader in our chosen field and become a globally recognized, prestigious
company through synergistic business investment, differentiation through innovation, passion
through empowerment, cost through economies of scale and world class systems.

Our Mission:
5. To ensure Total Customer Delight by offering prompt and quality services
6. Contribute to product quality improvements
7. Train service force continuously on field requirements
8. To build the image of customer service and to ensure bench marking of all functional areas
with the best in the trade

Our Objectives:
1. To restructure the service network in terms of automation, infrastructure and manpower to
meet the best of service requirements and to minimize service response time as per market
2. To establish the service organization as a value addition to the brand and to provide total
customer convenience and satisfaction at par with or better than the best in the trade.
Our Primary Objectives


Product Name Unit Quantity Value

Plastic Parts & Powder Numbers 9,341,424 2,012.19

Passive Components Not Applicable NA 1,491.04

Other Raw Materials Not Applicable NA 844.39

Printed Circuit Boards Numbers 7,640,602 582.38


Electrolux currently has three state-of-the art manufacturing facilities in India located at
Shahjahanpur (Rajasthan) and Warora (Maharashtra) producing refrigerators and Butibori
(Maharashtra) producing washing machines. Electrolux has a 11 per cent market share in fridges
and a 3 per cent share in washing machines.


The operating cycle of ELECTROLUX is as follows:-

 Procurement of raw material

The operating cycle for a company primarily begins with the purchase of raw materials, which
are paid for after a delay representing the creditor's payable period. ELECTROLUX is a
consumer electronics goods manufacturer. Some raw materials are procured from outside, some
manufactured by its own.

Sometimes it may happen that company needs product in the form of raw material manufactured
by its own SBU’s. In this case stock is transferred within the company but it won’t be considered
as actual sale and no sale tax levied but it is liable to pay excise duty since excise duty is paid on
production and it is the liability of manufacturer.

 Conversion of Raw material into finished goods

These purchased raw materials are then converted by the production unit into finished goods
and then sold. The time lag between the purchase of raw materials and the sale of finished
goods is known as the inventory period.


Labor is vital for conversion of inputs into finished goods.

There are three types of labour here

Skilled Labour

Here a labour hour rate is fixed and the number of hours required to perform that work is
determined and on the basis of this labor expenses are determined. This is treated as fixed

Casual labour

This is not permanent labor. They are paid on daily basis to perform work of a non-
recurrent nature. They are sourced from the Contractors of the Company.


When there is a capacity constraint then a part of the work is done by vendors and the
parts manufactured by these vendors are assembled. This is also called job work

 Conversion of Work-in-progress into finished goods

 Sale of Finished Goods
Goods are sold either on cash basis or credit basis. Upon sale of finished goods on credit
terms, there exists a time lag between the sale of finished goods and the collection of cash
on sale. This period is known as the accounts receivables period

 Conversion of Receivables into Cash

There are basically two ways available to vendors to pay their dues to ELECTROLUX .

These are:-

Cash Payment method

In this a vendor is supposed to clear his dues within a limited amount of time and mode
of payment must be highly liquid. The vendors can pay by demand drafts, pay orders, or
cheques of party which are subject to realization.

Channel Financing

Channel financing is used to receive fast money from debtors. Most of the firms generally sells
goods or services on credit and it takes a little time to realize. Hence, receivables form an
important part of working capital management.

TECHNIQUES used for inventory management

The finance department of every organization aims at maintaining an optimum level of inventory
on the basis of the trade-off between cost and benefit to maximize the owners wealth. There are
various tools for effective inventory management. The tool depends upon the type of inventory,
namely materials, work-in-progress or finished goods. some of these tools have an impact not
only on inventory but on whole structure of the organization. They help in reducing cost and
improving the efficiency of organization as a whole.

Perpetual Inventory Verification

This is done to check out actual inventory level and is done on a continuous basis. In PIV
method, the amount of inventory is checked both in documents as well as stores. Here, some
items are checked randomly and while checking those items issues and receipt of those items is
stopped we can say that these items are brought to freezing state.

The database which, ideally, should be refreshed simultaneously whenever there is a change in
inventory and it should match with physical inventory level. Practically, these two numbers
rarely match. This happens because of various reasons, which may or may not be under the
control of management.

Some of the reasons for mismatch are:

• Delay in entering data

• Technical Errors (intranet or SAP not working)
• Documentation Error (document not submitted)
• Posting Error
• Material issued but document not processed
• Document processed but material not issued

• Material send for job work but not received effectively
• Pilferage
• Material waiting for quality check
Benefits Of Perpetual Inventory Verification

a. The exact amount of inventory present in the plant can be checked.

b. Checking it against the database of the stores can give us a fair idea about how
efficiently the system is working
c. Any faults in the system, regarding the errors associated with updating of
database of stores department can be traced.

• PIV should be done as frequently as possible.

• It should be made sure that data is updated from time to time that is as soon as material is
issued or received, corresponding data should be updated on the plant database.
• Unless or until data is entered no material should be issued or received.

ABC Analysis

This is done to solve classification problem. The most important thing in inventory control
management is classification of different types of inventories to determine the type and control
required for each. The ABC analysis is based on the assumption that same degree of control
should not be exercised on all items of inventory. The ABC analysis classifies various inventory
items into three sets of groups of priority and allocates managerial efforts in proportion of the
priority. The most important items are classified as class ‘A’ , those of intermediate importance
are classified as class ‘B’ and the remaining items are classified as class ‘C’.

The financial Manager should monitor different items belonging to different groups in that order
of priority. Utmost attention is required for class ‘A’ items, followed by items in class ‘B’ and
then items in class ‘C’.

This is done based on the experience

That 10% of items in the inventory accounts for 70% of consumption in value so they are
classified as ‘A’ class items

20% of items in the inventory account for 20% of consumption in value so they are classified as
‘B” class items

70% of the items in the inventory accounts for 10% of consumption in value so they are
classified as ‘C’ class items.

Class No Of Inventory
Items (%) Value (%)

A 10 70

B 20 20

C 70 10

Total 100 100

Table: - ABC Analysis

Benefits of ABC analysis

• It serves as a tool for classification for inventory.

• Each item can be given appropriate attention as per classification.

Limitations of ABC analysis

This system suffers from major drawback. An item of inventory may not be very expensive, but
may be very critical to production process and/ or may not be easily available; still it will be
classified under group ‘C’. It would require serious attention but due to this classification, it will
receive less attention. Similarly a not very important component may receive extra attention then

it deserves . In either case it is detrimental to the growth of the company. This is a serious
limitation of ABC analysis.

Practical Implementation

ABC analysis is strictly followed in ELECTROLUX. It keeps an eye ion those items which are
more crucial for production process than others, such items are given due attention so that there
is neither an excess nor deficit of such materials. On the other hand there is not much to worry
about class B and class C items. There are around 7000 items which are categorized as A, B, and
C items.

Economic Order Quantity Model:

This is to solve order quantity problem.

After ABC analysis we get to know which item deserves how much attention. The next Problem
is to determine the lot size in which a particular item of inventory will be required. The
importance of effective inventory management is directly related to size of the inventory. A firm
should neither place too large or too small orders. The inventory management basically focuses
on maintaining an optimum level of inventory in order to minimize the cost attached with
different inventory levels.

The optimum level of inventory is known as Economic Order Quantity (EOQ) or Economic lot
size. This refers to that quantity per order, which ensures that total of carrying and ordering cost
is minimum.

The approach to determine EOQ is based on the following assumptions:-

• The total usage of particular item for a given period (usually a year) is known with
certainty and the usage rate is even throughout the year.
• There is no time gap between placing an order and getting its supply
• The cost per order of an item is constant and the cost of carrying inventory is also fixed
and is given as a percentage of average value of inventory.

• There are only two costs associated with the inventory, and these are the cost of ordering
and the cost of carrying the inventory.

EOQ is generally used to determine the order quantities of class ‘C’ items and sometimes for
class ‘B’ items also. This method is rarely used for class ‘A’ items because class ‘A’ items are
ordered only when requirement arises, there is no need to keep inventory of class ‘A’ items.

The formula for estimating EOQ is:

EOQ= √ (2A*O)/C

Where, A = annual requirement of a particular material in units or numbers

Or Kgs

O = Ordering cost per order

C = carrying cost per unit

Figure :- Graphical Presentation Of EOQ Model


The figure shows that the total ordering cost for any particular item is decreasing as the size per
order is increasing. This will happen because with the increase in the size of order, the total
number of order for a particular item will decrease resulting in decrease in the order cost. The
total annual carrying cost is increasing with the increase in order size. This will happen because
the firm would be keeping more and more items in the stores. However, the total cost of
inventory (i.e. the total carrying cost + the total ordering cost) initially reduces with the increase
in size of order. The trade-off of these two costs is attained at the level at which the total amount
of cost is least. At this particular level the order size is designated as the economic order
quantity. If the firm places the orders for that item of this economic order quantity, then the total
annual cost of inventory of that item will be minimized.

Benefits of EOQ

• It makes sure that there is neither an excess nor deficit of inventory.

• It saves cost as it saves carrying and ordering cost.
• It also results in strong relationship with vendors.
• It results in saving of time.

Practical Implication

EOQ is a relatively old technique for assessing the lot size of the order. Moreover, it suffers from
the disadvantage that the order cost is assumed to be uniform during a particular period. The
main point of problem in calculating EOQ is regarding the estimation of ordering and carrying
costs. Because there are no set rules to find exact storage cost, maintenance cost etc. Since the
production unit of ELECTROLUX is involved in manufacturing of tailor-made products,
assessment of EOQ is not very relevant for this kind of business line. However, the general usage
items like nuts, bolts, crimps, wires, batons, nails, lubricants, gaskets etc. are common for all
types of items. Hence, it may have restricted application in the Refrgerator plant.

EOQ is estimated on the basis of prior experience and future requirements. This happens so
because it is very difficult to classify to calculate storage and maintenance costs. They have to be
estimated because there are no provisions available to calculate them. To prove the usefulness of
this method, some arbitrary costs (ordering cost and carrying cost) are assumed. Accordingly,
EOQ is calculated to show how this model works and how it can be useful in maintaining proper
inventory levels.


SL98354BOOOS 219

CS94314KOOOS 237

SL97299OMOOS 327

SH97609OOKOS 245

SH97608OOMOS 258

Table – Economic Order Quantity


• Provisions to calculate EOQ must be made because a guess work may prove to be wrong.
• At first, the total cost involved in ordering, transporting, procurement, storage and
maintenance must be calculated. Than, a part of this (say 20%) should be taken as
carrying cost and rest as ordering cost.

Safety stock: To overcome unexpected situations

The EOQ and the reorder point have some assumptions, which are not possible practically. For
instance, the demand for inventory is like to fluctuate from time to time. The demand may
exceed the anticipated level.

Similarly, the receipt of inventory from the suppliers may be delayed beyond the expected lead
time. The delay may be due to strikes, floods, transportation, and other bottlenecks. To avoid
such undesirable situations safety stock is maintained.

Safety Stock may be defined as the minimum additional inventory to serve as a safety margin or
buffer or cushion to meet an unexpected increase in usage resulting from an unusually high
demand and/or an uncontrollable late receipt of incoming inventory.

Benefits of Safety Stock

• It is useful as it makes sure that even after reorder point is passed, the plant is able to
maintain its immediate demand.
• It acts as a buffer.
• It is an effective tool to minimize shortage cost.


The determination of the optimum safety stock involves dealing with uncertain demand. The first
step, therefore, is to estimate the probability of being out of stock as well as the size of stock-out
in terms of the shortage of inventory at different levels of safety stock.

To give an overview of the whole process, I calculated safety stock of a few items based on
certain assumptions regarding the stock-out acceptance factor, average number of units per order,
average daily usage of inventory and lead time.


SL98354BOOOS 156

CS94314KOOOS 256

SL97299OMOOS 213

SH97609OOKOS 187

SH97608OOMOS 209

Table – Safety Stock

Kanban System

The Japanese refer to Kanban as a simple parts-movement system that depends on cards and
boxes/containers to take parts from one work station to another on a production line. Kanban
stands for Kan- card, Ban- signal. The essence of the Kanban concept is that a supplier or the
warehouse should only deliver components to the production line as and when they are needed,
so that there is no storage in the production area. Within this system, workstations located along
production lines only produce/deliver desired components when they receive a card and an
empty container, indicating that more parts will be needed in production. In case of line
interruptions, each work-station will only produce enough components to fill the container and
then stop. In addition, Kanban limits the amount of inventory in the process by acting as an
authorization to produce more inventory. Since Kanban is a chain process in which orders flow
from one process to another, the production or delivery of components are pulled to the
production line. In contrast to the traditional forecast oriented method where parts are pushed to
the line.

The Kanban method described here appears to be very simple. However, this is a "visual
record" procedure.

Figure :- Kanban System

Advantages of Kanban Process

• A simple and understandable process

• Provides quick and precise information
• Low costs associated with the transfer of information
• Provides quick response to changes
• Limit of over-capacity in processes
• Avoids overproduction
• Is minimizing waste
• Control can be maintained
• Delegates responsibility to line workers

"Kanban represents an efficient tool to continuously rationalize the production process and find
the source of problems". Since the circulation of Kanban will stop if there is a production
problem on line, it is easy to both spot and correct the problem instantaneously.


Kanban is implemented in Stores Department at ELECTROLUX, Shahjahanpur. For this, a

Kanban card is attached with each and every item present in the Stores Department. Each
Kanban carries all the relevant information about the item, which is useful in estimating its
requirements. A typical Kanban card bears following information:

CAT NO.:.........................................................................................





MAXIMUM LEVEL:......................................................................

MINIMUM LEVEL:........................................................................

REORDER LEVEL:........................................................................

Figure – Kanban Card


• CAT numbers should be different, that is no two CAT numbers should be


• To make it more effective, no one should be permitted to take material out of or to put
back the material in the bin unless and until he has updated the entries on the Kanban
• The data mentioned on the card attached with each bin should be updated as soon as
some material is issued from that bin.
• Reorder level should always be kept in mind so that as soon as that point is reached, the
bin should again be filled with the same material up to its optimum capacity.

Single piece flow system

To become lean, companies have to create continuous flow wherever applicable. Shortening the
elapsed time from raw materials to finished goods leads to the best quality, lowest cost, and
shortest delivery time. Creating flow exposes inefficiencies that demand immediate solutions.
Everyone concerned is motivated to fix the problems and inefficiencies because the plant will
shut down if they don't.

Flow means that a customer order triggers the process of obtaining the raw materials needed just
for that customer's order. The raw materials then flow immediately to supplier plants, where
workers immediately fill the order with components, which flow immediately to a plant, where
workers assemble the order, and then the completed order flows immediately to the customer.
The whole process should take a few hours or days, rather than a few weeks or months.

There are, Various steps involved in production of any item at ELECTROLUX Refrigerator
plant. Every second step acts as a customer to the previous step. Each step depends on its
immediate predecessor for performing its function.

A problem/delay at any one or more of the steps will lead to a halt in the production process. So,
each and every employee involved at different stages of the production process is thoroughly
trained, and is held responsible for his part in the production process.

The production process starts with planning, where it is decided what is to be produced in the
next one month or so. After this, a blue-print of the products is made in the programming stage.
A computerized design is made by using various kinds of programming softwares available with

the plant. Now, the punching process on metal sheets and other items starts followed by bending
and drilling/tapping. To make the product attractive and easy-to-use, powder coating is done.
After that, painting of different parts takes place. Finally, different parts are assembled together
to get the product as desired by the customer.

Thus, the layout of company should be such that all these processes should be done in a
continuous manner

Advantages of single piece flow system

• Quality. It is much easier to build in quality in one-piece flow. Every operator is an

inspector and works to fix any problems in station before passing them on. But if defects
do get missed and passed on, they will be detected very quickly and the problem can be
immediately diagnosed and corrected.

• Higher Productivity. In a one-piece-flow cell, we can quickly see who is too busy and
who is idle. It is easy to calculate the value-added work and then figure out how many
people are needed to reach a certain production rate.


Cost of holding Inventory

Every firm maintains some stock of raw materials, work-in-progress and finished goods
depending upon the requirement and other features of the firm. It is benefited, by holding
inventory but there is cost involved with it. had these cost not there, there would not have been
any problem of inventory management and every firm would have maintained higher and higher
level of inventories. The cost of holding inventory includes the following:-

Ordering Cost-
The cost associated with the acquisition or ordering of inventory is known as ordering cost.
Firms have to place order with suppliers to replenish inventory of raw materials. Such expenses
involved are referred to as ordering cost. The ordering cost may have fixed component which is
not affected by the order size; and a variable component which changes with the order size. It
o Carriage Inward

o Insurance Inward
o Communication cost
o Stationary Cost
o Demurrage Charges

Ordering Cost= (A*O)/Q

Where, A= Annual Requirement of a particular material in units or numbers

or kgs.

O= Ordering cost per order

Q= Lot size, in units

Carrying Cost:

The very fact that the items are required to be kept in stock means additional expenditure to the
organization. The different elements of costs involved in holding inventory are as follows:

(a) Interest on capital / cost of capital / opportunity costs

(b) Obsolescence and depreciation

(c) The cost of storage, handling and stock verification

(d) Insurance Costs

The average inventory carrying costs can, therefore, be as follows:

Interest/costs of capital/opportunity cost 15 to 25%

Obsolescence and depreciation cost 2 to 5%

Storage, handling etc. 3 to 5%

Insurance costs 1 to 2%

Total 21 to 37%

Carrying Cost is calculated by:

Carrying Cost= ( C*O)/Q

where, C is carrying cost

Stock-out Cost (A Hidden Cost):

A stock out is a situation when the firm is not having units of an item in store but there is
demand for that either from the customers or production department. There is always a cost of
stock out in the sense that the firm faces a situation of lost sales or back orders.

Some examples are:

o Non availability/ small amount available with vendors

o Non availability of substitutes
o Quality desired not matching with the supplied ones
o Updated or improved product not available.

Total Cost

The total cost associated with inventory is the sum of ordering and carrying cost i.e.

Total cost= Carrying Cost+ Ordering Cost

= C*O/Q + A*O/Q

One Underlying principle should be kept in time that ordering cost and carrying cost are
inversely related to each other. Suppose the ordering cost increases because more number of
times the order is repeated, a direct consequence would be reduction in inventory held and hence
carrying cost would be less. Conversely, if the number of order is less, this means that average
value of inventory held is higher with the consequence of higher inventory carrying cost.


 There has been tremendous increase in the level of inventories year by year.

 Among ABC classification no special consideration has been given to B and C class

 MIS reports has been prepared by the finance department to manage the inventory level.

 The prices for the supplies has been decided at the beginning of the year & factory
receives the material at that very price throughout the year.

 Only maximum and re-order level are maintained. No weightage is given to min. level
due to SAP.

 The various items in raw material are stored at different location according to the
suitability of their use near to respective departments. But same are controlled from
central location i.e. from general store.

 As and when material is received in the store, the same is given material as well as SAP
code. These codes are decided in company itself.

 Re-order level is calculated in the firm by the formula max. level* max. lead time.

 The lead time is based on the distance between sending & receiving ports.


 The company should make realistic production program and there should not be frequent
changes in the same.

 Suppliers should be given schedule for the supply of raw-material and other supplies in

 Still better co-ordination should be there among various departments.

 A large part of company’s investments are tied up with the loan, the company should try
to pool its capital investments.

 It should start its own marketing program to promote company’s sale and to face

 Standardized tools should in production.

 In stores and spares there are certain items which are slow or non moving, investment in
these items should be made reduced

 The company should give attention to improve the packing material .





4. Books-

(a) Essentials of Inventory management by Max Muller

(b) Inventory management by D. Chandra bose