CHAPTER 3

INVENTORY MANAGEMENT : CONCEPT, PRACTICES, TECHNIQUES,

POLICIES AND ACTUAL PRACTICES.
Synopsis
A. Inventoiy Management - An Overview :
a. Literature Review On Inventory Terminology
b. Types of Inventories
c. Reasons for Holding Inventory
d. Cost Associated with Inventory
e. Inventories as a Means of Increasing ROI
B. Inventory Management Concept:
a. Principles of Inventory Management
b. Logistic Inventory Management
c. Importance of Inventory Management in Indian Context
C. Inventory Policies, Practices and Techniques
D. Inventory Operations :
a. Forecasting and Planning for Inventory
b. Purchasing - Concept Policies, Methods
c. Store Keeping - Functions, Issue Procedure, Storing Policies and Stores
System, Methods of Issue
E. Inventory Control:
a. Policies for Replenishment of Inventories
b. Inventory Analysis - Types of Analysis
c. Inventory Levels
d. Practices for Inventory Identification and Verification, Classification
and Codification of Inventory
e. Inventory Stock Taking / Verification
f. Inventory Audit System
F. Disposal Management:
a. Waste
b. Types of Waste Inventory
c. Waste Management
G. Inventory Control Through Accounting Techniques :
a. Valuation of Inventory - Purpose, Methods
b. Monitoring and Control of Inventories - Inventory Turnover Ratios
H. Inventory Control Through Scientific Techniques :
a. Value Analysis
b. Materials Requirements Planning
c. Just-In-Time (JIT)
I. Recent Developments in Inventory Management:
a. Multi Echelon Inventory System
b. Optimised Production Technology (OPT)
c. Management Information System (MIS) for Inventory Control
 CHAPTER 3
INVENTORY MANAGEMENT : CONCEPT, PRACTICES, TECHNIQUES,
POLICIES AND ACTUAL PRACTICES.
A. Inventory Management - An Overview :
In modem competitive world, the major problem and primary responsibility of an
organisation, whether it is an public sector, private sector or government department
(business or industry) is to optimise the use of resources. For the survival and growth
of an industrial enterprise, it is highly essential that all the pervasive efforts are made to
minimise and control the total costs, to achieve higher operational efficiency and
profitability of an organisation. Inventory is an important resource of an enterprise.
Inventory management is an important scientific device for controlling inventory and
eliminating wastage, is considered an integral part of Industrial management in modern
times. Modem management has started taking more and more interest in “Inventory
Management” as Inventories are highly essential for any enterprise and at the same
time it has a direct impact on the financial resource, as it locks up funds. There are lot of
possibilities to minimise inventory, both in terms of investment as well as quality, as
it is a controllable variable.
a. Literature Review On Inventory Terminology :
Different authors in the field of Materials management, Inventory management,
Production/Operation management as well as Financial management have defined term
“Inventory” in different ways, in different contexts. But the squeeze centres around
almost the same meaning.
To begin with, if we look at the conceptual part, the word Inventory has been defined i
as complete list of goods, household items, personal possessions. Goods list in this;
Stock in Trade (in U. S.)
Inventory is Raw materials and Supplies, goods finished and in the process, of
manufacturing and merchandise on hand, in transit and owned in storage or consigned
to others at the end of an accounting period, their aggregate value, usually at cost or
some proportion of cost; The process of counting, listing and pricing them; The list
showing description, qualities, unit prices, extensions and totals etc. Inventories are

51
expandable physical articles held for resale, for use in manufacturing a product or for
consumption in carrying on business activity.
Thus, materials which are either usable directly or indirectly in the manufacturing
process as also those which are ready for making finished products by some other
process or by composing them either by the concern itself or by outsiders can be termed
as inventory.
In the similar context it has also been defined as, “Those items or materials which are to
be kept in stock to meet the operational and maintenance requirements”. 2
“Inventory is an necessary evil”. Necessary as it guards against uncertainties of
demand and supply by decoupling supply and demand, Evil as it blocks money.
“Physical inventory in any business, is made up of a no. of stock keeping units or items.”3
Stock keeping items which are help in a stock point and which serve to decouple
successive operations in the process of manufacturing a product and getting it to the
customer.
Inventory is also used to designate a detailed list of the articles, with perhaps the
description, identification number, quantity and value.
Aggregate of those items of tangible personnel property which are “Held for sale in the
ordinary course of business, To be currently consumed in the production of goods 01-
services to be available for sale.” In the process of production of such sale. 4
Inventory is “An idle resource of any kind, provided that such resource has an economic
value”.
In this definition the element of futurity is implied since idle resource represent sunk cost
for future decisions and actions. 5
According to research officer of one of NTC mills (, Inventory in the business parlance,
connotes “The value of Raw materials, consumables and spares, work in progress and
finished goods in which the company's working capital funds have been invested.”
A practical definition from Materials Management angle would be “Items of stores or
materials kept in stock to meet future demands of production spares, maintenance,
construction etc.”
The terms “Stock and Inventory” are generally used synonymously. Inventory means
tangible property held for sale in the ordinary course of business, in the process of

52
production for consumption in the production and sale of goods or services after sales
including maintenance, supplies and consumables other than machinery spares.
Implications : Thus it can be seen from the above definitions that the term viz. flocks,
herds, granaries warehouses, etc. whereas with the passage of time the needs and
activities of men, have multiplied, the range of inventory has become larger and more
diversified with industrialisation, the concept has undergone serious changes as besides
inventories as above, money is also considered as an important merchandise
inventories, over and above the requirements of continuity of production and
distribution, were welcome to safeguard against uncertainties and stock out
positions, on the other hand, increased requirement of liquidity, the tendency has changed
from holding inventories to holding of cash as now a days excessive inventories are
considered as “Grave Yard” of business as many business have failed on account of
surplus stocks or excessive inventories,
b. Types of Inventories :
Inventories as defined earlier consist of different components/types classified on the basis
of their nature, importance, functions, conditions during manufacturing processes, stages
of completion, end use, value of production, ease of handling etc.
Different authors have classified inventories into different categories. Accordingly
inventories are classified (1) By their condition during processing and (2) By Functions 7
(1) By conditions during processing Inventories may be classified as :
Raw Materials : These are Iron ore for steel, grain for flour, wood for furniture, raw
cotton yarn for cloth and materials used to make the components of the finished product.
Components : Parts of sub-assemblies ready to go into the final assembly of the product.
Work in Progress : Materials of components being worked on or waiting between
operations in the factory.
Finished Product : Finished items carried in inventory in a make of stock plant or
finished goods ready to ship to a customer against an order in a make to order plant.

53
 (2) By Functions :
TYPE FUNCTION BENEFITS
1. Lot Uncoupled manufacturing Purchasing discounts, reduced
Size operations freight material handling paper
work, inspection etc.
2.Demand Insurance against Increased sales, reduced freight,
Fluctuatio unexpected demand (safety customer service, clerical,
n stock) telephone, packaging cost etc.
3. Supply Insurance against Reduced downtime and overtime
interrupted supply i.e. and substitute material and
Fluctuatio strikes lead time variation incoming freight, increased sales
n
4. Level out production [i.e. Reduced overtime, sub-contract,
Anticipati to meet seasonal sales, hiring, lay-off training, scrap and
on marketing promotion] rework expenses
5. Fill distribution pipeline Increased sales, reduced freight,
Transport [i.e. in transit] handling and packaging cost
ation
6. Hedge Provide hedge against Lower material cost
price increase [i.e. copper,
silver]

A slightly different classification is given in the following table, g

INVENTORY PRIMARY INVENTORY
USAGE MANAGEMENT
FUNCTION
1. Raw Material Production and Stores all components and
Assembly materials for production
2. Sub-assemblies Production and Monitor movement of stores
in process manufactured Assembly and all in process inventories
items
3. Finished goods and Sales To maintain adequate
Service Parts finished products to fill
customer orders and parts
needed for after sales service
4. Repair parts Maintenance To keep adequate supply of
and Service parts and avoid costly delays
when equipment fails
5. Office Supplies Administration To stock forms, papers,
stencils and items of clerical
book keeping
6. Computer Data Processing Maintain tapes, cards, repair
Supplies parts for EDP

54
Inventories are also classified as under by a leading author 9 on Materials Management
and Purchasing.
1. Production Inventories : Raw materials, parts and components which enter the firms
product in the production process. These may consist of two general types :
a. Special Items manufactured to company specifications.
b. Standard industrial items purchased off-the-shelf.
2. MRO Inventories : Maintenance Repair and Operating supplies, which are
consumed in the production process but do not become part of the product (e.g.
lubricating oil, soap, machine repair-parts etc.).
3. In Process Inventories : Semi-finished products found at various stages in the
production operation.
4. Finished Goods Inventories : Completed products ready for shipment.
Another author divides Inventory into different groups as under :
• Raw materials • Packing materials • Loose tools
• Fuel stock • Finished stock
5. Partly finished stock : Parts manufactured but not to be sold as completed or finished
product of the concern.
6. Work in progress : Materials processed to a stage in production shop that they
cannot be separated exactly in accordance with their respective specifications and
manufactured items issued from stores department
7. Unused stock : These include wastage unused, scrap or defectives which may be sold
or destroyed. , -
A research analyst 10 classifies inventory as :
1. Movement Inventory : This arises because of the time required to move stock from
one place to another.
Mathematically I - ST where :
I = Movement Inventory needed
S = Average Sales Rate
T = Transit Time from one stage to the next

55
 2. Organisation Inventory : More of such inventories are carried between stages
in a manufacturing distribution process, the less co-ordination is desired to keep the
process running smoothly.
On the basis of common Inventory functions :
a) Lot Size Inventory : Inventories based on buying or manufacturing on EOQ basis.
b) Fluctuation Stock : Held to cushion the shocks arising basically from predictable
fluctuation in consumer demand.
3. Anticipation Stock : Required where goods are consumed on a predictable but
changing pattern throughout the year and whereby completing inventories rather than by
changing production rates with attendant fluctuations in employment and additional
capacity requirements . Inventories to meet a special sale or fill needs during planned
shutdown.
RBI study group 11 classified inventory as :
• Flabby inventory • Profit making inventories
• Safety inventory • Normal inventory
Due to changes in manufacturing or other reasons, the inventory becoming obsolete
cannot be disposed off. In view of this situation inventories can be divided into three

groups:
Current inventory : It is applicable to current sales and may be disposed off at a profit
within a reasonable period of time.
Slow moving inventory: Inventory which applies to orders received only occasionally or
to repair parts for which there is an occasional call. It cannot be disposed off in near future
and may also have to be disposed off at a price much lower, than the inventory value.
An obsolete inventory: Inventory which has no demand and has only scrap value.
Despite of diversity of opinions among thinkers and authors on the subject, inventories in
a Textile mill may be classified n into the following six constituents :
• Raw materials • Semi finished goods
• Work in process • Yarn or packed
• Cloth • Finished goods (loose grey and packed)
• Cloth (grey with processors) • Cloth (packed and processed)
• Wastes / Scraps i Usage

56
 From the different types of inventories as detailed above, it seems that there are difference
of opinions among diffeient authors and researchers. But certainty, the typology
throws light on different reasons and basis for the same. However, for the sake of
convenience* in this study, inventory may be classified into the following types:
• Stores and spares
• Coal and fuel e.g. furnace oil lignite gas etc.
• Stock in trade which includes raw materials viz. raw cotton, yam etc.
•Finished goods (loose and packed)
• Waste (cotton yarn and cloth usable and saleable)
• Retail shop stock/trading goods.
• Yam for trading
• Goods in transit (stores, coals, raw materials, finished cloth etc.)
• Process stock. Cloth in processing department Stock in spinning and weaving
department
• Stock of canteen and grain shop (in case of few mills)
• Colours, chemicals and paints.
• The word convenience is used here because the classification is based upon the annual
reports referred as well as the questionnaires answeredfor this research study.
c. Reasons for Holding Inventory :
What is the reason for Inventory ? The question which may seem trivial, surprising
enough however, is often overlooked. The answer to this question is critical in
determining the control system, specifying costs and other factors to be considered.
The following is a list of reasons n neither necessarily exhaustive nor mutually exclusive,
though closely related:
• Protection against uncertainties in Transit and handling
• To give customer assurance of availability
• To hedge against expected surges in sales
• To await shipment to fill a definite order
• To handle production variations
• To make materials in economic lot sizes

57
• To permit flexibility in plant scheduling
• To hold off increasing capacity
• To provide raw material storage
• To take advantage of favourable raw material price
• To take advantage of distribution cost
• To hold by-products
• To store overruns or misruns
• To await disposition
• To keep storage equipment operational
• To allow for errors in measuring and recording
• To protect against strike and work stoppages
• To protect against hurricanes and other natural calamity
• To speculate against price and cost changes.
In short the motives for holding inventories are: u
Transaction motive - To maintain inventories to facilitate both production and sales
operation.
The Precautionary motives - To guard against the risk of predictable changes in
demand and supply forces and other errors.
The Speculative motive - To increase or decrease inventory levels to take advantage of
price fluctuations.
The basic objective of holding Inventories:
• Raw materials inventory - to decouple purchase and production activities.
• Finished goods inventory - to separate production and sales activities.
• Semi-finished goods - to separate one process / department / work centre / M/c to
another
Theoretical literature review on Reasons to keep inventory :
In the opinion of another author 15 the reasons for inventory build up are different for
different components of inventories as under :
1) Raw materials
• Weak purchase organisation not in touch with marketing
• Absence of suitable classification codification, accounting etc.

58
 • Ineffective control on issue and consumption
• Higher lead time for important items
• Single source of supply
• Lack of co-ordination between materials management and production control deptt
• Lack of automation
2. ) Work in Process

• Intermittent manufacturing process

• Long operating cycle time
• Lack of standardisation
• Power shortage and power cut
• Absenteeism
• Mismatch of production component
• Machine breakdown and poor materials handling
3. ) Finished goods stock

• Types of manufacturing system e.g. manufacture as per order or off the shelf
• Lack of aggressive marketing strategies
• Lack of co-ordination and inspection
• Non availability of shipping space
4. ) Spares

• Overstocking of imported spares

• Critical spares for urgent supply
• Non availability of some spares
• Lack of standardisation
Majorities of the companies hold inventories for attaining efficient production only,
neglecting the investmert aspects. In addition to this, it is also for gaining quantity
discount, reducing ordering cost and avoiding loss of sales, in the opinion of a researcher.
If we analyse the above reasons it may be seen that some of the reasons are common to
almost all the components and most of the reasons are based on the peculiarity or
characteristics of the items. It may also be possible to classify all the reasons into the
factors which are controllable and uncontrollable for the purpose of effective inventory
management

59
 d. Cost Associated with Inventory :
An author i6 opines that a company’s inventory policy affects the following costs :
1) Inventory carrying cost : This cost is variable, semi-variable and fixed, incurred in
keeping the inventory of various types in stores until used for production or sales. It can
be further classified as:
a) Capital Cost : Capital cost is the cost of borrowing capital or opportunity cost of
company’s funds to be invested in inventories.
b) Storage Cost : Storage cost is the cost of preservation, storage, record keeping, stock
verification, deterioration and obsolescence, insurance etc.
2) Procurement Cost : It is a cost for ordering, replenishing and recouping the inventory
viz., paper cost, postage cost, cost of follow up, inspection and testing cost and
administrative cost etc.
3) Set up cost / Preparatory cost : It is a cost of production to enable the machines to
change over the job, to prepare the machine for the job. It also include idle time cost,
works order cost etc.
4) Stock out cost : It is the cost of non-availability of the items when required and its
related cost. It may consist of followings :
• Idleness of resources
• Loss of profit
• Cost of emergency actions e.g. premium price paid
• Loss of goodwill
• Loss of customers
One research n reveals that inventory is the life-blood of a concern. Excess or short
supply of inventory is like the high or low blood pressure respectively, both dangerous to
health. Hence it requires a regular check and verification to keep the concern healthy
otherwise it will have an adverse affect on the followings:
• Ordering cost
• Inventory carrying cost
• Cost of running out of stock
As per an American Consultant Agency is, the annual carrying cost averages over 20% of
inventory value i.e. within a range of 10% to 34% with the following elements :

60
 Element Percent

Interest charge on capital investment in inventories 4-15

Insurance cost 1 -3
Property cost 1 -3
Storage Cost Upto 3
Obsolescence and deterioration 4-10

e. Inventories as a Means of Increasing ROI :

Inventories are controllable and any reduction in materials cost will directly
contribute to increasing profitability and ROI.
The following equation defines relationship of inventory to Return on Investment in
an organisation:
ROI = (Profit / Capital Employed) X 100
Reduction of inventories affect the profitability in the following manner :
• Reducing cost of keeping stocks, saving of interest on capital and thereby
increasing percentage profit on sales
• Reducing working capital and thereby increasing capital turnover.
Peculiarities :
• It accounts for highest share in working capital of CTMS.
• It is the only item of working capital which involves all functional area of
management viz., marketing, production, purchasing and finance
• Risk involved in holding inventory is much higher as compared to other items of
current assets.
• Unlike other items of current assets, inventory is associated with ordering costs,
carrying costs, procurement cost, stocking cost etc.
• It is the only item of current assets which has direct impact on the prices and
income of a firm.
In India where approximately 60 to 70 percent of working capital is tied up in
industrial inventories, there is a vast scope of cost reduction through scientific
inventory management Inventories in India are four times than those in USA. 19

61
 B. Inventory Management Concept:
The concept of Inventory Management has been visualised differently by different
authors, academicians and researchers on the subject. In an attempt to gain an
insight in inventory management, it is found imperative to know different opinions
on the subject.
One prominent author on production management 20 defines Inventory
management as The branch of business management, concerned with the
development ofpolicies to which the firm's inventory is meant to conform.
Thus, Inventory Management is uThe sum total of those activities necessary for the
acquisition, storage, sale, disposal or use of material
The approach differs as policy and managerial aspects as well as functional aspects
of management are emphasised.
Inventory management is also perceived as 21 The co-ordination of a series of
functions according to a plan which will economically utilise the plant facilities and
regulate the orderly movement of goods through their manufacturing cycle from
procurement of all materials to the shipping offinished goods at a predetermined
rate.
Thus, Inventory Management deals with the determination ofpolicies and procedures
for procurement of commodities and its effective management within the financial
discipline ofa concern.
Inventory control, a part of inventory management, is a planned method of
determining what to indent, how much to indent and how much to stock so that
purchasing and storing costs are the lowest possible, without adversely affecting
production and sales.
This includes functions of planning and programming of materials, purchasing,
warehousing, disposal of scrap and surplus material and utilisation of by-products.
Thus, Inventory management presents the sum total of the activities required for
acquisition, storage, sale, disposal or use of materials. From this definition it can be
said that inventory management in concerned with :
• Planning and programming.
• Purchasing

62
 • Storage and care
• Disposal of surplus stores
• Controlling of inventories 22
a. Principles of Inventory Management:
• Adequate inventory has to be maintained to avoid stock out causing consequent
production held up and customer dissatisfaction
• Excessive investment in inventory items must be avoided as it increases carrying
cost resulting in loss of profit.
The scope of inventory management includes the following:
• Inventory planning based on sales forecast and production plans and also
include preparation of budget classification and codification of inventory items
etc.
• Inventory execution including setting inventory levels , fixing norms for safety
stock level, lead time analysis, calculation of inventory costs, inventory pricing
decisions etc.
• Stores and Inventory control : Physical control over inventories,
preservation of stores, minimisation of obsolescence and damage, disposal of
waste, inventory records, accounting and reporting system etc.
On the basis of a careful study of above definitions by different authors, academicians
and researchers on the subject, it may now be possible to define inventory
management as the determination and applications of the functions, policies,
techniques and practices of management to various activities connected with the use
and management of inventory resources.
That is to say, the Inventory management comprises ofplanning, organisation, co­
ordination (of various departments and inventory functions) as well as control of
inventory. The application of various policies and techniques and practice of the
above functions are the key factors to be performed and monitored for attaining
the objectives and goals of business organisation.
Pre-requisites of Scientific Inventory Management
In the context of inventory management the firm is faced with the problem of meeting
the two conflicting needs viz.

63
• To maintain a large size of inventory for effective production and sales
management.
• To maintain minimum investment in inventories.
Both excessive and inadequate inventories are undesirable. The^ objective of
inventory management should be to determine and maintain optimum level of
inventory. The dangers of over investment are :
• Unnecessary tie up of firms, funds and loss of profit
• Excessive carrying costs
• Risk of liquidity
whereas inadequate inventory leads to :
• Production holdups
• Failure to meet delivery commitments
Production and sales marketing departments are interested in maximum inventory
whereas financial management attempts to minimise inventories.
Characteristics of scientific inventory management should be as under: 23
• Maximum co-ordination amongst the departments concerned with inventory viz.
buying, receiving, inspection, storage, finance departments etc.
• Effective classification, codification, standardisation and simplification of
materials requisition forms, order forms etc.
• Proper handling of material and efficient traffic management
• Existence of effective internal control and internal check system for verification
of financial and physical inventory transactions
• Proper planning, programming and scheduling of inventory requirements
• Well planned storage and stock control, proper authorisation of receipts, issues
etc.
• Properly thought out procedures for verification of stock viz. Perpetual,
periodical, snap checking etc.
• Fixation of inventory levels e.g. maximum level, danger level, safety stock,
minimum level etc.
• Maintenance of inventory records to control inventories during production or
storage

64
 • Effective communication and management information system, quick and regular
reporting regarding inventory balances, issue, receipts, obsolete stock, wastage,
defective items etc.
• Analysis of inventory items on various basis to concentrate more on important
and critical item and thus facilitating management by exception
• Use of computers and electronic data processing, quantitative techniques,
operation research techniques for inventory control
b. Logistic Inventory Management:
Inventory Management is the function responsible for co-ordination, planning,
sourcing, purchasing, moving, storing and controlling inventories in an optimum
manner, so as to provide predetermined services to the customers at a minimum
cost. 24
Today, Inventory Management is practised as a confederacy of traditional
materials activities bound by a common idea i.e. the idea of an integrated
management approach to planning, acquisition, conversion, flow and distribution
of inventories of raw materials, work in progress, factory supplies and finished
goods awaiting for dispatch. Sometimes inventories of retail shops are also
included in this broad concept.
Inventory management includes the activities of purchasing, traffic, receiving,
warehousing, surplus and salvage/scrap management as well as production planning
and control. In addition to this customer service, scheduling, shipping and
physical distribution are also sometimes included.
Business organisation is a system of which inventory management is a sub system.
Similarly inventory planning, programming, purchasing handling storage and
control are the sub systems of inventory management system. The functions of
which must be carried out either concurrently or in sequence.
In most of the firms, Inventory Management, Marketing and Manufacturing are the
three main operating sub systems in an organisation, which overlaps significantly
and hence are continuing source of conflicts. The other sub systems like finance and
personnel serve the needs of the above three functions and also frequently add
to conflict, too. One of the paramount advantages of logistic management is that

65
it forces co-ordination between all these above functions.
Inventory management cannot be performed in isolation and it does not occur in
vacuum. It is closely related with other functional areas of business.
Inventory management is an activity integrated, co-ordinated and entwined with such
widely spread functions of management as purchasing, production, planning and
scheduling, finance, marketing, physical distribution, store keeping etc. Inventory
management is closely related with all the functions of engineering, procurement of
materials down to final distribution. 25
Research into the field of materials management have revealed that inventory
management cannot function efficiently without proper co-ordination with other
functions of business, due to following reasons :
• Due to specialisation the materials and consequently inventory management
activities have become so wide that it requires co-ordination or direction
towards common goal of business.
• To avoid jurisdictional disputes and overlapping between various functions of
management
• Any development or change in any one function or department has its impact on
other functions.
• Accepting inventory management as a system requires subordination of
departmental interest to organisational interest.
• Inventory controller can control and co-ordinate with an overview that ensures *
proper balance of conflicting objectives.
• Rapid transfer of data reporting informal and short communication channels
(along with formal ones) and necessitates integration.
• Increased computerisation/mechanisation, development of new tools and
techniques of inventory management, use of operation research techniques like
simulation, linear programming, queuing theory and Materials Requirement
Planning, Just In Time inventories, crisis management etc. require that all the
functions of business must be integrated for most economical operations.
Logistic Inventory Management can be broadly classified in two types : 26

66
Horizontal Integration : Integration of Inventory Management with other
functions on horizontal line in the organisation structure viz. Design and
Engineering, Research and Development, value analysis, Purchasing,
Manufacturing, Marketing etc.
Vertical Integration : Integration of the activities of Inventory Management viz.
Planning, Procuring, Sourcing, Handling, Storing, Controlling, Receiving and
Inspection, Disposal of wastes and scraps.
All these functions and activities are responsible for attainment of organisational
goal viz. minimising inventories and production cost, on time delivery of
production materials and meeting delivery commitment to customer.
Components of Total value 27 with respect to Logistic Inventory Management:
Manufacturing Selling Distribution Inventory Management.
1. Materials 1 .Advertising 1. Channels 1. Inventory Planning
2. Labour 2.Sales 2. Production and 2. Purchasing
Promotion Supply
3. Overhead 3. Packaging 3. Warehousing 3. Receiving
4. Depreciation 4. Sales 4. Transportation 4. Inspection and Quality
Activities Control
5.R and D 5. Extension 5. Communication 5. Value Analysis
of Credit and Data
Processing
6. Design and 6. Profit Taking 6. Customer 6. Inventory Control
Engineering Services
7. Quality 7. Inventory Carrying
Control
8. Use of Computer, EDP
and OR techniques
Functional Areas of Management in a typical manufacturing company 28 and
their relevance to Inventory:
Marketing Finance and Manufacturing Personnel
Accounting
1. Distribution 1. Raising and 1. Production 1. Determining
Channel Allocation of and Supply Requirement
Finance
2. Customer 2. Communica­ 2. Warehousing 2. Recruitment
Service tion and Data and Selection
Processing
3. Inventory 3. Carrying 3. Transportation 3. Service
obsolescence Inventory and Handling Conditions
4.Transfer,
Promotion,
Training and
Development

67
Relevance to Inventory:
1 .More Less Inventory Right men
Inventory for right job
2. Frequent Long
short runs Production
Runs
3. Fast order Cheap Order Employee
Processing Processing Satisfaction,
Safety,
Morale and
Development
4. Fast delivery Low Cost
Routing
5. Field Less Plant Organisation
Warehousing Warehousing Warehousing Goals

Now it will be possible for us to clearly position the Logistic Inventory Management
in the organisational hierarchy and place different functions circumscribed in the said
concept as under:

68
 Chart 1 : Organisational hierarchy for a Logistic Inventory Management.

Where :

P = Policies
S = Systems'
T = Techniques
M = Methods
A = Actual Practices
 Some of the largest companies in foreign countries like Du Pont, Gillette, Champion
International Corporation etc. have saved materials cost and increased efficiency
through co-ordination.
Thus, Logistics Inventory Management is important to attain the objectives of the
organisation most effectively and with minimum of conflicts and rheochromatics
(smooth flow of material).
The concept of Logistics Inventory Management is based on the concept of
logistics management The former forces co-ordination and manages different
departments of an organisation v/hile the later does the same for different
function of inventory management That is to say in the former, Inventory
Management is a sub-system of management system whereas in the later, Inventory
Management is regarded as a system in itself which is decomposed into sub systems,
c. Importance of Inventory Management in Indian Context:
Inventory Management has gained importance in India due to following reasons. 29,

1. Late industrialisation
2. To conserve valuable foreign exchange
3. To Release surplus capital for productive purpose
4. To increase competitiveness in foreign markets by reducing costs
5. Seller's market
6. Inflationary hoarding of stocks
7. Strict import procedure
8. Excessive dependence on foreign collaboration
9. Inadequate storage facilities and higher cost of storage
10. Use of scientific techniques at low ebb
11. Mechanisation
As defined in the concept of Inventory Management, application of different policies,
techniques, system and actual practices to different functions of Inventory Management
of CTMI can be explained as under :

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 Policies : The word policy may be defined 30 as under:
• course of action adopted by a government / business / individual
• prudent conduct
• sagacity - showing insight or good judgement
Policies are statement of aims, purposes, principles, or intentions which serve as
continuing guidelines for management in accomplishing objectives.
Policy has been defined 31 as :
• A rule or set of rules that guides and governs action
• A collection of stated or implied intentions of an organisation
• In the field of management that branch dealing with decisions and their
planning, formulation and assessment, establishing the objectives and general
methods of administration by which the operations of any organisation are
conducted.
Policy is a statement which describes in very general terms, an intended course of
action. Policies are developed to serve as general guidelines in channelising
future action towards objectives.
C. Inventory Policies, Practices and Techniques:
Inventory Policies are broad and overall guides to performance. Policies define, in
general terms, the basic jobs of each department and its relation to other
departments. They are derived from the general goals and objectives of the
department itself and the company as a whole.
Inventory policies must strive to attain a balance between profitability and
liquidity of the company/mill. In a cotton textile mill, which is plagued by shortage
of working capital, inventory policies dovetail affects the working capital of which
inventory constitutes a major portion.
In the opinion of one researcher 32 “Too little inventory jeopardizes the ability of
the firm to function efficiently and too much of it reduces profitability.”
Well defined policies must be established to meet the goals of:
• Efficient manufacturing operations
• Inventory turnover
• Customer service levels etc.

71
Responsibility for inventory policy rest with top management Such policies should
be flexible enough to be exercised by operating personnel in new conditions.
Two basic types of policies are :
• Reorder level policy - based on the level of inventory held
• Reorder cycle or periodic review policies - decisions based on a regular time
basis.
In addition to this, the researcher also emphasized the need for grouping of
inventories into ABC analysis to arrive at overall comprehensive stocking policy e.g.
• Category A - Periodic review policy
• Category B - Reorder level policy
• Category C - Reorder level policy with a regular review of policy.
It is desirable to compile inventory policy manual covering all aspects of inventory
management due to complex nature of inventory management Top management
should prepare it and circulate to middle level to attain corporate objectives.
An eminent author 33 is of the view that management policies for inventories are :
A) Inventory Turnover policy vis-a-vis average cost of goods sold : A high
inventory turnover should be the policy. Similarly, ratio of inventory to total
assets is another such policy.
B) Since inventories are money, inventory policy of management is to find out
opportunity cost of investment of funds affecting the size of inventory.
C) A company's inventory policy may be whether to hedge or not against the
possibility of interruptions in flow of materials or price changes.
D) Whether to operate with very small inventory or large inventory.
E) Pricing of inventories to give the best price break
F) Categorization of inventories
G) What should be supplies and what should be materials for production ?
H) What products should be logged in and out on a perpetual inventory records ?
I) How much inventory should be on hand ?
J) No of inventory stock-outs permitted
K) Availability of service parts

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As inventories of different types in a textile mill are managed and accounted for by
different departments, as can be observed from the Logistic Inventory Management
chart, the policies reflect the views of concerned department and must be co­
ordinated by top level management Inventory policies differ from mill to mill
depending upon categories and characteristics of CTMs.
Inventory Practices - Techniques :
The word practice has been defined as 34:
• Habitual action of performance
• Repeated activity undertaken to improve skill
• Session of the above
• Action as opposed to theory (i.e. based on theory)
• Procedure especially of a specific kind
• When actually applied, in reality
Thus, policies are general principles of conducting business, on the basis of which
administrative practices are devised.
Policies and practices are sometimes used collectively as a phrase or interchangeably.
Written policies and procedures, sometimes are called standard practices or standard
operating procedure 35.
In simple terms policies are 'what we intend to do ’ and practices are ‘what we do
Specific Policies and Practices :
When both the above terms are applied to a specific function of management, they
become specific policies and practices. In the context of working capital management,
policy of financing the Inventory requirement may be with :
• Short term funds only
• Long term funds only
• Short and long term funds
Depending upon the duration of the fund, the above policies can be practised as:
• Cash credit
• Trade finance
• Shares and debentures

73
 • Public deposits
• Retained earnings
• Advance from customers
• Any other
Similarly for Inventory Control, usage of different ratios, statements and reports related
to inventory may practised.
Techniques :
The word technique connotes 36 :
• Mechanical skill or art
• Skilful manipulation of situation
• Methods details
Technique is ‘skilled way of doing a job and dealing with practical work'.
Following techniques may be used in order to assess the financial policies :
• EOQ
• Materials levels
• Lead time analysis
• Weeding out slow and non moving items
• Any other
Inventory Management and Inventory control techniques were originally developed
in manufacturing industries in the early 1960s. Any organisation which makes use of
modern tools of management in various phases of their operations, often find that the
areas where these tools are most readily applicable and often the most profitable,
are those concerned with the control and optimisation of inventories.
It is accepted that a prudent business is one where maximum sales are obtained
with minimum balance of inventories.
D. Inventory Operations :
a. Forecasting and Planning for Inventory :
Inventory planning should be co-ordinated with other planning and control activities,
such as sales forecasting, cash planning and capital budgeting. Hence it affects all of
these activities in many ways. The specific steps and timing will vary from one
company to another, depending on the product and process requirements.

74
 Methods of Forecasting : For effective sales estimate following methods of
forecasting are prescribed by many authors on the subject:
• Judgement
• Intuition based on commercial and technical knowledge
• Mathematical Analysis
• Statistical Analysis
• Statistical and Mathematical models
As suggested by Gopalkrishnan and Sundaresan and Dean. S Ammer, prominent
authors on the subject, Statistical and Mathematical analysis methods of forecasting
may comprise of following techniques :
• Statistical average (mean) method including simple, weighted and moving
average respectively
• Long term and short term trend analysis
• Correlation
• Simple exponential smoothing
• Regression analysis
• Time series analysis
• Probability/Bayesian analysis
• Random fluctuation etc.
Inventory Planning :
Inventory/Materials planning is a stepping stone in the materials cycle, a circulatory
flow of materials to and from materials management department within the
organisation. Materials plan is related with the overall plan of the organisation.
Therefore, there should be congruence of organizational and materials/inventory
planning goals.
Inventory planning may be defined as scientific way of determining the requirements
of raw materials, components, spares and other items that go into meeting production
needs within economic investment policies.
Inventory planning in a textile mill consists of planning for inventory management
functions, policies, practices, techniques etc. related to different components of
inventory viz. raw materials, work in progress, finished goods, spares, stores etc. It is

75
basically materials requirement planning, budgeting etc. which also acts as guiding
and controlling device. Inventory planning covers non programmed decisions and
dealing with uncontrollable factors at top level, while at middle level and operating
level it is programmed decisions related to controllable factors.
The entire function of materials management can be sub divided into forecasting,
inventory/ materials planning, purchasing and inventory management as presented
below 37:

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 Chart 2 : Logistics Inventory Management

Forecasting Sales History L

Sales Forecast 0
Forecasting Techniques G
Finishedgoods 1
Finished goods S
Forecast nventory on Hand T
I
Inventory Materials Planning C
S
Materials Requirement —►Bill of Materials etc.

Materials to be Purchased Materials Inventory I

on Hand N
V
Purchasing E
r N
Purchase Ore ers, follow Supplier history, T
up, delivery schedules lead time, quality, O
timely delivery, R
rating price etc. Y

Inventory Management Inventory Co ntrol Reorder Point,

Max/Min Inventory,
EOQ, scrap, receipt
and issue, analysis

77
 Inventory Planning is a part of Materials Planning and vice versa. There exists a
conceptual difference between the two but so far as the basic function of planning is
concerned it remains the same for both.
Cotton textile industry being a manufacturing industry, scope of Inventory Planning is
very wide.
Inventory forecasting and planning policies in the opinions of mill executives may
constitute the followings :
• Planning and review period policy
• Norms for Inventory Planning e.g. Planning and control on the basis of Inventory
ratios namely:
• inventory component to total inventory
• inventory to total current assets
• inventory to net working capital
• inventory to total fixed assets
• inventory to sales
• Factors to be considered for Inventory Planning as a policy matter may be taken
as under:
• Production schedule
• Government controls
• Prices
• Availability
• Competition
• Company Policy
• Capacity utilisation
• Any other
Planning and Control system can be grouped into three broad classes namely long
range planning, short range planning, and scheduling.
The factors affecting inventory planning may be classified as under :
Macro Factors : These are the uncontrollable factors affecting inventory planning in a
cotton textile mill. These can be government policy for import and export of cotton
cloth, price trends of raw cotton, yarn, fibers availability etc.

78
 Micro Factors : These are the factors subject to control by the company/mill. These
can be capacity utilization, product mix, inventory policies, techniques to be used,
delegation of power, division of work, working capital management, inventory
levels, stores policy etc.
It is very difficult to draw a clear line of demarcation between the two due to semi
variable nature of some of the factors.
Techniques of Inventory Planning
Inventory planning can be used to assess firm’s requirements for different
planning horizons. In order to have a sound and reliable Materials/Inventory plan,
different techniques for inventory planning as given under may be practised:
1. Past consumption Analysis : It is a simple technique used by continuous
manufacturing units. In case of majority of cotton textile mills, production is meant
for stock or direct to market i.e. not based on specific job order. This does not
necessarily mean the CTM should continuously pour the unwanted goods into the
market. In order to attain the twin objectives of producing only the necessary
goods to match production with demand and also optimise the use of resources,
past consumption analysis of different input as also the analysis of demand for
finished goods in the market is a prerequisite.
2. Bill of Materials Explosion Charts : Sales forecast is the basis for materials
planning. Bill of materials can be effectively exploded on computers in order to
arrive at accurate requirements of materials.
Bill of Materials: It is a document containing the list of raw materials, components
and subassemblies, unit consumption and location code, supply conditions, lead
time required for manufacturing a particular final product.
As Bills of Materials are prepared from engineering drawings, new cards can be
replaced for old and invalid cards and some items can be recorded using punched
cards.
Explosion Charts : It is just a series of bills of materials grouped together in a matrix
form so that combining the requirements for different components can be done.
Computerised materials planning send the exploded requirements for future period.
But this is not possible without preparing a product structure i.e. assigning different

79
 levels where finished product is always at zero level and raw materials, assemblies,
subassemblies etc. are shown at other levels. 38
It is impossible to find out the total requirements of common parts and components
common to all products, along with earliest/latest time, lead time, rejection rate etc.
Now a days readymade softwares are available for different levels thus making the
materials planning easy and more user friendly.
3. Inventory/Materials budget : A budget is a financial or quantitative statement,
prepared prior to a defined period of time, of the policy to be pursued during that
period for the purpose of attaining a given objective. Inventory budget is the plan
which shows different components’ requirements and their use, purchasing, levels
of inventories, storing levels etc. not only in quantitative but also in financial
terms. Usually inventory budgets are prepared on annual basis which, like materials
plans, should be periodically reviewed.

Chart I: Process of Inventory Budget 39

4. Annual operating plans :

Planning under this technique is similar to budgeting i.e. estimates of operations to be
carried out during the year are prepared well in advance and accordingly the
requirements of different types of materials and levels of inventory are planned.

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5. Materials Requirement Planning :
It is a computer based inventory planning and control system to analyse and
manipulate large volumes of data to produce information for quick decision
making. This technique challenges traditional concept of inventory holding in
advance. It provides a different approach to production inventory through
explosion and aggregation of requirements on computers for various
department/products. This is more effective especially in an intermittent
manufacturing unit like a cotton textile mill which produces variety of clothes using
different mixings as well as processing different gray clothes purchased from
others spinning mills.
6. Bayesian Analysis:
Traditionally, materials planning was done on all or nothing basis especially for
decisions under uncertainties.
Bayesian analysis is a technique that permits a more realistic approach to decisions
under uncertainties. It enables to estimate that probability of occurrence of various
events after careful consideration of facts. It provides quantitative basis for
weighing relative values of decisions under uncertainties, along with the probability
of their occurrence.
b. Purchasing - Concept Policies, Methods :
Purchasing is a policy well planned, properly co-ordinated and covering a wide
range of control to the selection of materials sources of supply, the follow up to
ensure timely deliveries, a complete inspection for quantity and quality, well
planned procedures free from much formalities and development of up-to date
methods and techniques of higher standard to reveal efficiency and economy.
According to Gopalkrishnan and Sundaresan purchasing is ‘The function of
procurement with a view to reducing investment in and the variety and value of
materials so as to facilitate standardisation and competitive marketability of the
product’.

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Purchasing may be classified basically into two types :
Mercantile Purchasing: Where buying is intended for resale at a profit i.e. no value
is added to materials except the value intrinsic in purchasing itself.
Industrial Purchasing : It is concerned with the procurement of items for purpose of
consumption/conversion of inputs/raw materials into output/fmished goods. 39
Purchasing Policies :
1. Relating to Organisation :
Centralised or decentralised purchasing : Centralised or decentralised purchasing
activity is a top management policy to attain the objectives of the firm. The
fundamental operating policies are of interest to top management
Centralisation : Centralisation of purchasing function is necessary for the
attainment of optimum efficiency as well as maximum profits. Centralisation of
purchasing is concerned solely with the placement of purchasing authority and it
has nothing to do with the location of buying personnel. When a single person is
made responsible for the entire purchase, he is held accountable for proper
performance.
Decentralisation : When personnel from other functional areas viz. production,
engineering, sales, finance, personnel etc. perform the function of purchasing, it is a
case of decentralisation. If a firm adopts purchasing on a decentralised basis,
individual departments’ managers will handle their own purchasing.
Centrally decentralised purchasing : Sometimes, a company may follow a policy
where the entire purchasing is divided between the two - centralised and
decentralised. It is very difficult to follow complete centralisation as there is no
watertight compartmentalisation between the two.
Decentralisation with centralisation also becomes necessary in case of multi-plant
manufacturing firms where multi-plant centralisation and multi-plant decentralisation
is accepted as a policy. Whatever may be the organisational philosophy, the basic
policy must be established so that authorities and responsibilities are clearly
defined.

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2. Relating to Sources and Methods :
Different authors on the subject differ in respect of purchasing policies and methods.
Here it is imperative to clarify that Method is defined as the way of doing something,
where, the way in which purchasing is done may be termed as purchasing
method. This implies peculiarities entwined with purchasing, where, from whom
to purchase may be termed as a purchasing policy. For example, Purchasing from
different size of suppliers viz. small or large, single supplier or multiple suppliers,
established supplier or a new supplier who offers favourable terms, local, national
on international markets etc. 40
Methods of Purchasing:
Different methods of purchasing to be followed again, are a part of policy matter.
The way of purchasing based on the requirements, availability, price, discount,
staggered delivery etc. determine the method. Broadly speaking these methods are as
discussed below:
Methods based on period of purchase :
Requirement contract: The policy of buying here is according to market conditions
which may be defined as A purchase quantity that provides from 1 to 3 months
coverage as one which satisfies current operating requirements especially during
price stability period. Hand to mouth and forward buying may fall into this
category. In this case inventory built up will be low.
a) Hand to mouth buying : It is the practice of buying material to satisfy current
operating requirements in quantities smaller then those normally considered
economical, usually covering 1 to 4 weeks requirements.
b) Forward Buying : It is a practice of buying materials to satisfy operating
requirements ranging from 1 to 12 months. Here, buying is meant for conversion
or processing activities.
Speculative Buying : This type of purchasing is not considered as a legitimate part of
industrial purchasing as the buying is not meant for conversion but for reselling at a
higher price in future. When forward buying exceeds a period of one year, then also it
is treated to have entered into the sphere of speculation. It should be avoided as far as
possible. In this case inventory built up is very high and risky. 41

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Methods based on period of purchase as well as requirements :
a) Single order and staggered deliveries : It is neither advisable nor economical to
order and purchase the entire requirements of an organisation in a single order
and delivery. On the other hand, both the possibilities i.e. staggered orders and
single delivery, may also be thought of. In practice, frequency of orders and
deliveries increases ordering costs and inventory carrying costs respectively.
b) Consignment Contract: Purchase orders are placed in such a way that the
entire consignment or unit load is purchased in one lot where a group of buyers
can consolidate their requirements properly described and clubbed into related
groups along with the rate of their usage.
c) Quantity contracts : Under this method purchase order is placed for annual
requirements but arrangement is made for a predetermined phased delivery at an
agreed price which can not be changed without fresh negotiations.
d) Blanket order/Group purchase : As the name indicates, the entire requirements of
a group or family of items are ordered under a single blanket order. On the basis
of past experience, requirements are determined, suppliers are selected for each
family of items and blanket orders are placed on the basis of lowest group
totals. Estimated usage and not the specific order quantities are specified.
e) Stockless/Zero stock buying : Under this method the buying concern is not
required to maintain the stock as the onus of maintaining the same rests with
the supplier. The financial incidence of ordering cost and inventory carrying
cost is borne by the supplier. Prices charged by supplier are higher.
Methods based on peculiarity of purchase :
a) Tender buying: Tenders are invited by buying concerns on a competitive basis,
where in technical specifications and other terms and conditions are negotiated.
The buying company invites tenders by advertising through different media,
especially through newspapers. On the basis of tender, the buyer establishes
bidders lists and solicits bids from few/selected suppliers. Bids are evaluated
either in one step bidding where commercial and technical considerations are
evaluated together or two step bidding where technical aspects are evaluated

84
 first and commercial evaluation done subsequently, before the supplier is finally
selected. Orders are usually placed with the supplier offering lowest price, other
things being equal. This is the most popular method in government and nowadays
in private concerns too, to have a wider field of supply. But at the same time it
is costly as well as time consuming method.
b) Rate contract : In public sector organisations like GSTC and NTC mills, this
method is prevalent. The government purchase department, DGS&D, usually
enters into negotiations with suppliers to supply the entire requirements for a
specific period at an agreed rate which is not allowed to exceed once it is fixed.
The supplier on rate contract advertises in newspapers as ‘on rate contract
with DGS&D’.
c) Running contract: This method resembles rate contract adopted by government
department In addition to rate, here quantity to be supplied is also agreed upon
with agreed variation within specific limits for a specific period
d) Reciprocal buying : Practice of buying from ones’ customers in preference to
others.
e) Personal purchase for employees
Purchasing methods as described above are not mutually exclusive nor to do they fall
into a watertight compartment. Combination of more than one method for a
component is found in practice. Selection of any method or combination of more
than two may also be required which again may change periodically.
c. Store Keeping - Functions, Issue Procedure, Storing Policies and Stores
System, Methods of Issue :
A proper system of Inventory Control together with scientific methods of store keeping
will make inventory management most effective. This is the function which is much
more concerned directly with inventory management as compared to other functions.
Since stored materials constitute the inventory, the terms store and inventory may be
treated at par for the convenience of study.
Store is the safe custody of all the items of materials stocked in the store room for
which the store keeper acts as a trustee or custodian. The most important function
performed by stores is to provide uninterrupted service to manufacturing and

85
 marketing divisions.
Store Keeping is a function of receiving, storing and issuing of materials. It involves
supervision, safety and readiness of materials for use and issuing them against
requisitions.
Stores Management is concerned with carrying right type of materials in right quantity,
provisioning materials quickly as and when required, keeping itself against any kind of
deterioration, pilferage or theft and to carry out efficient performance of all these
functions at the lowest possible cost.
Stores Issue Procedure :
The user department will logically judge the efficiency of stores department by
provision of services of high standard rendered by the stores department Inventory
management fundamentals also emphasis this aspect.
In order to prevent indiscriminate issue, consequently wastage and improper use of
goods the issues must be properly authorised, either in written or verbal form if it is a
routine arrangement.
The following points should be considered for issue procedures. 42
• Authorisation of issue - Against written/signed document or verbal instruction as
per the policy
• Validity ofdemand - Items to be issued for the job/purpose it is meant
• Identification of requirement - Required items must be identified through code
numbers
• Timing of issue - To ensure timely issue, requisition must flow in time
Storing Policies:
1. Policies Relating to Organisation
Generally, stores department is headed by store keeper or stores manager in an
organisation. But, depending upon the location of stores and policy of centralisation or
decentralisation the stores organisation may be as under:
Centralised stores : Centralisation of store keeping is concerned with the placement of
an authority with the store keeper or stores manager as the case may be. It is least
concerned with the location of the storekeeper even though it may be an important
consideration.

86
 Centralisation takes place when the entire store keeping function is made the
responsibility of single person, who is held accountable by the top management for
proper performance. 43
Decentralised Stores : Decentralisation of stores occurs when personnel from other
functional areas or other departments viz. production, engineering besides stores
department perform the function of stores.
Benefits of Decentralisation
1. Minimised handling and associated work
2. Smooth flow of materials as and when required
3. Quick decisions for disposal and availability of materials
4. It is highly suitable for very large organisations having many departments
Complete centralisation is not desirable. Therefore, a combination of the two would
give better results.
2. Policies Relating to Stores system and categories
a. Open Access Storage System : This is widely used in highly repetitive mass
production types of organisation which shows a continuous and predictable demand for
materials.
Under this system, no store room exists as such and normally material is physically
stored nearest to the point of it’s use just as it is stored in the store room. Materials are
stored in bins, racks, shelves, pallets, in boxes etc. Storage facilities are open and an
employee has open access to any storage facility.
b. Closed Storage System : Materials are stored in closed and controlled store area.
Usually the storage area is kept locked for physical control purpose. All the receipts
and issues are made with authentic documents only. Maximum physical security and
tighter accounting control is ensured through this system. No one except the stores
personnel is permitted to withdraw materials from stores.
c. Random Access Storage System : This is a unique storage system where materials
are stored at random locations in the stores. Whenever materials are received, they are
stored in available shelf. On the issue of any stores items, the space available is used
for any other materials coming in the stores. Usually records for stores are
computerised to know the locations. Nonetheless, effects are made to groups of similar

87
types and sizes of storage equipments which may facilitate division of stores as per the
storage requirements of different items. Whenever punched record card is prepared for
records purpose, location address is written on the card.
This system suffers from following drawbacks :
• It is very expensive
• Physical control becomes difficult
• Creates problems when record card is lost
d. Stores at suppliers plant: From the discussion of the above systems, it is clear
that each one has it’s own limitations. Therefore, practically combination of any two or
more may be used in any particular organisation.
3. Policies Relating to Methods and Practices of Issue
Before discussing various methods of issue it is advisable to understand the following
different issue systems:
a. Issue on Demand System : In this system material is issued against material
requisition note prepared by competent authority. Sometimes, stores in-charge may
be required to check the papers prepared at works planning stage or the work order

papers.
b. Trolley Delivery System : In this system a trolley is routed to various user
departments at a regular interval of time. Foremen are asked to withdraw the goods
from the trolley according to their need, surely against the withdrawal slip.
c. Open Access Bin System : For regular items, open access bin are kept in the user
departments. This bin is replenished from time to time. User department can
withdraw the goods from the open access bins without undergoing any formal
procedure.
Various methods of issue are as under :
/. Issue on Request .This method again, can be used in the following three different

manners
I. Immediate issues on presentation of M.R. note
II. Issue made after the receipt of M.R. note
III. Immediate issues on verbal request only

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 2. Scheduled issue to production : In mass production factories, production materials
are issued in quantities and at times to correspond with the manufacturing
programme. In this case issue schedule is prepared and stores department has to issue
the materials accordingly under any of the systems discussed above.
3. Assemblies and Kits : In certain instances, composite issues of a standard nature are
required. An assembly of a given item might consist standard items in standard
number. In this case, instead of preparing different Materials Requisition Notes, a
single note must serve the purpose. Similarly, tools or gauges for special jobs may be
issued in complete kits.
4. Imprest Issue : An imprest system is one whereby sub-stores of production
department are allowed to carry certain items in given quantities. At the end of the
given period the user concerned prepares a list of materials to be consumed during
that time and present an appropriate issue document for replenishment of goods to
bring back the imprest stock up to the same level as it was at the beginning of the
period.
5. Replenishment Issue : Certain items like tools etc. may be issued against the used
articles or empty containers. This is called as a replenishment issue.
6. Loan Issue : Tools or certain equipments may be given to user departments on
loan, i.e. on returnable basis. For such issues, a register may be maintained, or instead
of that, such items may be given in exchange of tallies provided to the workmen.
7. In this seventh group we will cover all issues made outside the organisation. When
finished goods have to be dispatched, it must be done against issue order or sales
advice note or similar documents from sales department Similarly, procedure for the
issue of item for repair or scrap should be like it is for the issue of the finished goods.
E. Inventory Control:
Inventory control is a science based art of ensuring that just enough inventory/stock is
held by an organisation to economically meet its’ internal and external demand and
commitments. Inventory control was developed in theory along scientific lines in the
year 1915.
Inventory Control is the most important function of Inventory Management which
forms the nerve centre in any organisation.

89
Inventory Control is “the process of dividing what and how much of various items
are to be kept in stock” and also determining time and quantity of various items to be
procured.
Inventory control thus, “Pertains to the implementing and carrying out of policies
which have been established by management”. 44
Inventory control is a continuous process of regulating the inflow of materials into
the store in relation to materials move outs from stock and maintaining a safety stock to
avoid stock out.
“Effective Inventory control should provide adequate stock of goods of proper quality
to meet the requirements of production and sales, keeping the required investment to a
minimum, considering it’s effect on profits as well as working capital needs.” 45
The major objectives of Inventory Control are as follows :
• To reduce financial investment in Inventories, through proper Inventory
balances.
• To facilitate production operations
• To avoid losses of Inventory obsolescence
• To minimise total ordering cost and total carrying cost
• To improve customer service
• To follow government policies with regard to inventories
Three of the major objectives of manufacturing units emphasising on earning profit

are:
• Maximum customer service
• Minimum Inventory Investment
• Efficient (low cost) plant operation
The main peculiarity of these three objectives are that they are conflicting. In
modern times, few companies can afford to work towards one or other as all are
equally important for sustaining success of any business unit.
Inventory control and production control are basically concerned with the provision
of information required for these purpose i.e. reconciling these conflicting objectives.
Such a reconciliation in modern times, becomes a challenging problem, as

90
responsibilities of different departments have been sharply defined and store
managers have been motivated to sub-optimise by their performance.
Inventory control is one of the less exploited areas of the management control
system in the Textile industry despite the fact that it is the oldest industry of our
country. In modern times, almost all the efforts have been made to reduce the cost of
production, maximising rate of return on capital employed and consequently wealth
maximisation. It would be fool hardy to treat ‘Inventory Control’ as an exception.
The magnitude of inventory can be expressed in relation to total current assets. The
Raw material constitutes 60 to 65% of the cost of the product and other inventories, in
case of yarn and 40 to 45% in case of fabric. 46

a. Policies For Replenishment of Inventories:

Basically there are three types of inventory policies relating to replenishment of
inventory as under : 47
1. Fixed Order Quantity System (Q system /Economic Order Quantity):
EOQ is a quantity which is most economical to order where overall total cost i.e. the
total cost of purchasing, carrying inventories, stock out cost etc. is minimum.
The basic inventory model, though some what classic but widely accepted, is referred
to as Wilson formulation. This model is simple and deals with typical assumptions.
Under this system, Reorder quantity is fixed and order is placed when inventory on
hand falls below a particular level which is known as reorder point.
Total inventory carrying cost line intersects ordering cost point Q i.e. ordering
quantity units. EOQ is attained as total ordering cost and carrying costs are
minimum at that level.

EOQ=V(2AO/CS)
A = Annual requirements in units
O = Cost of Ordt ring
C = Cost per Unit
S = Storage or Inventory Carrying cost

In the determination of EOQ, we have assumed that:

a) Lead time is constant
b) Consumption/Sales during lead time is also constant

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 c) Ordered quantity is received instantaneously i.e. in one lot at a time.
d) Annual demand can be accurately forecast
e) ordering cost and CC are known / given in advance and so on
In order to calculate ROP it is necessary to estimate expected sales during lead time
and it is to be added to zero stock. But in practice both LT and CDL varies which may
lead to temporary stock out position. This can be avoided by maintaining safety stock.
ROP = Safety Stock + Average consumption during Lead Time
Here the position will be as under :
a) Cdl = average consumption during lead time
b) B = buffer stock
ROP = Buffer stock (Safety stock) + Average consumption during lead time. 4g
ROP = B + Cdl
Inventory = B + Nu/2
I = B + Nu/2
When usage rate is very high/fast, stock out occurs as the units of safety stock are
exhausted.
Order point = buffer stock + consumption/sales during lead time, i.e.
P = B + Cdl
where :
P = order point
B = Buffer Stock
Cd = Average daily sales/consumption in units
1 = Lead Time
I = B + Q/2
where :
I = Average inventory units
B = Buffer Stock
Q = economic order quantity
2. Fixed Order Interval Replenishment System (P System/Periodic
Ordering/Periodic Review System):
Under this system, ordering times are fixed rather than the quantities. It can be

92
characterised as follows :
1. The time interval for ordering is fixed either for a group of items or for individual
items.
2. The inventory carrying costs as well as fixed reorder quantity are not considered
explicitly.
3. Review of inventory is done at definite time intervals.
4. Average consumption during review period and lead time are forecast.
Replenishment level is computed as under:
RPL = B + CD (L + R)
RPL = Replenishment Level
L = Lead time (days)
R = Review interval (days)
B = Buffer stock
CD - Average daily sales (units/day)
Order is placed after fixed period, for the quantity by which inventory level had
come down from a predetermined level or point. It is determined on the basis of
requirement of materials during review period and lead time plus safety stock.
Average inventory level = buffer stock +h sales/ consumption during review period,
i.e.
I = S+4CDR
In case of constant sales, variation in inventory would be within the range of Mx -
CDL (Immediately after receipt of a reorder) to a low of buffer stock (before the
receipt)
This difference = CDR, and
Average inventory = h the difference + safety/buffer stock
Buffer stock can be specified from distribution of sales during lead time + review
period
3. Optional Replenishment System (s, S System):
This system, i.e. (s, S System) where ‘s’ denotes reorder point while ‘S’ is for desired
inventory level, is applicable in situations where the cost of reviewing the inventory
and the cost of ordering play a very significant role.

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Under this system, order quantity at the time of each review period is as under:
OQ = R -1 - QO, whenever I +QO < P, where
OQ = quantity on order
R = replenishment level (units)
I = inventory on hand
QO = Quantity on Order
P = reorder point (units)
This system has the benefit of combining the good points of lixed order quantity
system and variable order quantity system. The status of stock is periodically reviewed
and both, the maximum stock level (S) and minimum stock level (s) are prescribed. At
the time of review the inventory on hand is compared with ‘S’ and ‘s’. If the level is
lower than ‘s’, an order is placed. This system is particularly advantageous where
physically the stock can be held in two places adjacent to each other. In one location
stock equal to ‘s’ will be kept and the balance will be kept in the record location.
4. Single Order and Staggered Deliveries Replenishment System
In order to minimise excessive inventory build up necessitated by first two systems, a
more practical approach, which is generally followed by majority of the mills, is
single order with staggered deliveries. This system practically combines the
advantages of both the above systems, where an order is placed only once a year or
any other specified period, but specific arrangements are made with the suppliers
(usually registered) to deliver the goods in requisite quantities. Suppliers are
communicated through telephonic or fax messages, sometimes, they are instructed to
supply in instalments of specific quantities at specified intervals in the absence of any
instruction.
5. Maximum - Minimum Inventory System (Two Bin System):
Actually speaking this system is a variation/extension of Q system. The absence of a
perpetual inventory record is a feature which distinguishes it from other systems.
Practically the stock is physically maintained in two separate bins viz. upper bin and
lower bin. The upper bin contains a quantity of stock equal to the difference
between the maximum level and the order point figure. The lower bin contains a
quantity of stock equal to the order point figure - the quantity just enough to last or

94
slightly more than that, during the purchase lead time. The operation of the system
is as shown under :

Order
Quantity

Lower

* LTC - Lead Time Consumption

Source : Inventory Management by L. C. Jhamb - Ed. 1987
Thus, it can be generalised that several or all of these systems can be used
advantageously in a firm as none of them is mutually exclusive.
Safety Stock - Policies and Practices
Q - system (EOQ) ana P - system (review, reorder period) System for stock
replenishment would be incomplete without considering supplementary systems viz.
safety stock, two bin or kardex card system etc.
Firms’ requirements are ordered only after verifying stock levels of different
inventory items on hand. The inventory on hand, again depends on safety stock
policies of the firm, which focuses on the level of safety stock determination.
What is safety stock ?
In practical life two factors are more important:
1. Demand is never certain and it is distributed over a set of probable values.
2. Lead time is also variable and uncertain.
As these uncertainties are unpredictable, an exact stock maintained all along
which is known as buffer/safety/reserve stock.
Safety stock is the minimum stock i.e. the lower limit below which the stock should
not be allowed to fall, under normal circumstances.
It is advisable to know two important phenomenon affecting safety stock :

95
1. Safety stock and Service level: Service level is defined as the ratio of no. of units
supplied to the no. of units demanded. The desired service level determines the size
of safety stock e.g. 90% service level means 10% probability of demand exceeding
the reorder level. But higher service level entails higher costs.
Before deciding safety stock level, the following aspects must be analysed :
a) Which one of the following two is more predominant and why ?
• Variation in lead time
• Variation in consumption
b) What is the period of such a variation ?
Whether it is seasonal/ confined to specific period only or for long term e.g.
seasonal variation in cotton availability and demand for cotton cloth.
2. Determining safety stock: In simple situations, assuming lead time and
consumption during lead time to be constant and maximum usage can be
calculated, the safety stock would be determined as under:
SS = (MC - AC) * LT, where
SS = Safety Stock
MC = Maximum consumption
AC = Average consumption
LT = Lead time
Situations where the range of demand variation is wide and lead time and usage
rates vary then :
SS = (MC * MT) - (AC * AT), where
MT = Maximum Time
AT = Average lead time
This would mean excess inventory to have complete protection. But excess
inventory means unnecessary locking up of funds, adversely affecting profitability.
b. Inventory Analysis - Types of Analysis :
Inventory analysis means the natural divisions within the overall field of inventory
theory stem from variations in the process of acquisition of goods and future
demand for the same.

96
Information For Inventory Analysis
For an effective analysis of inventory, the following information is required:
(a) Demand Pattern
(b) Lead Time Pattern
(c) Stock out policy
(d) Review policy: Whether the inventories are to be reviewed :
a) Periodically
b) Continuously
c) Randomly/at random/snap review
d) Exceptional review
(e) The relevant costs
(f) Miscellaneous factors
Types Of Analysis
1. ABC analysis:
The application of ABC analysis, is on the basis of Annual Consumption
value. ABC analysis is based on the principle Vital few and Trivial many! Always
Better Control, by allocating on selective basis, of the available control efforts in
such a way that the efforts for control of inventory is proportional to its
importance. It facilitates management by exception. It is an effective tool for
controlling raw materials, components, and consumable stores inventory. It should
be reviewed periodically, so that changes in price and consumption are taken into
account. The consumption figures may be annual, half yearly or quarterly but it
should be representative. ABC analysis is one where A B and C strands for nothing
but expressing the consumption value of commodities in descending order. It
may be called Always Better Control system for it provides very important
directives for controlling the inventory.

97
 The relationship between inventory quantity and inventory value is found very
interesting. It has been generalised as below:
Inventory group % in quantity % in consumption
value
A 5 to 10 75 to 80
B 10 to 20 20 to 25
C 70 to 80 5 to 10

Note : Percentage for different inventory groups may vary with different industries.
Inventory can be analysed into A, B and C groups in the following manner:
1. Calculate annual consumption value for each item.
2. Arrange all items in descending order of its’ annual consumption value.
3. Decide the cut-offline either based on quantity or based on consumption value.
Basic principles of ABC analysis:
a) Analysis neither depends upon the unit cost of the item nor on the importance of
it but only on the annual consumption value of it.
b) The limits for ABC categorisation are uniform but will depend on the size of
undertaking, its inventory as well as the number of items controlled.
2. H.M.L. (High Medium and Low analysis):
H.M.L. analysis resembles ABC analysis except that instead of usage value as
criteria, the unit price criterion is used. The items are classified as high, medium and
low, on the basis of price per unit, to ensure proper security, storage and control
requirements. The cut off line is decided by the management for such classification.
H.M.L. analysis is useful:
a) To delegate authority for issuing inventories to the user departments. The senior
level executive may be authorised to sign requisition forms for 'H' and 'M' items,
whereas low priced items may be requisitioned and withdrawn by operating
personnel. Hence this analysis facilitates "Management by Exception"
b) To assess storage and security control requirements e.g. 'H' and 'M' items with
tight security and so on.
c) To determine frequency of stock/inventory verification
d) To evolve buying policies or methods to have control over purchases
e) To control consumption of inventory at the departmental level.

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3. V-E-D Analysis
This type of analysis attempts to classify inventory items on the basis of their
criticality. The inventory groups are called vital, essential and desirable. The
criticality of items can be determined on the basis of it’s absence effecting production
and other services.
a) Vital: This category encompasses those most critical items having extremely
high opportunity cost of shortage, without which the production would come to
a halt. Such items must be available when demanded. It is normally used for
classification of maintenance spares.
b) Essential : Essential items are quite critical with substantial cost associated
with shortage and should be available in stock. By and large stock out of such
items may cause temporary stoppage of production. In other words, the stock out
would result in expensive procurement and cessation of work in a major area
of plant operation for which no stand-by facilities are available.
c) Desirable : Desirable group of items do not have very serious consequences viz.
stoppage of production and so on, if not available when demanded but can be
stocked. The stock out may entail nominal losses/expenses of procurement.
Logically the vital items call for high level of service where the percentage risk has to
be very small albeit for essential items one can take relatively higher risk of shortage
and even higher for desirable items. It would be advantageous to use V-E-D analysis
along with ABC analysis so as to make effective management of spares.
In recent times the modified and supplementary method V-E-I-N - Vital, Essential,
Important and Normal, would prove to be more effective.
4. S-D-E Analysis:
The S-D-E (Scarce, Difficult, Easy) analysis classifies the items on the basis of
availability and problems of procurement viz. 49
• Scarcity
• Longer lead time
• Non availability
• Reliability and geographical location of supplier etc.
This analysis helps to develop purchasing strategies.

99
Scarce: Such items are generally in short supply and are procured through
government machineries / agencies e.g. DGS&D and distributed to small industries.
Considering the difficulties, efforts and expenditure of procurement, it is advisable to
procure such items infrequently and once in a year.
Difficult: Such items, though indigenous, are not easily available. Those items where
reliability (in terms of supply) of suppliers is in question and are procured from far
off places, fall under this category. The items which are available from either
monopolists or oligopolists and even difficult to manufacture may also be brought
under this category. For effective purchase of such items, the suppliers/manufacturers
must be informed well in advance.
Easy: Items which are readily available from local markets and produced according to
commercial standards are included under this category.
S-D-E classification helps purchase department:
• To decide the purchasing method e.g. forward buying for scarce items,
scheduled buying and contract buying for easy ones.
• To facilitate management by exception through fixation of responsibility
on buyers.
5. F-S-N Analysis:
F-S-N (Fast moving, Slow moving , Non moving) analysis is based on the movement
and consumption of the items. For the purpose of classification, the quantity and rate
of consumption are analysed. The last date of receipt or issue which ever is later, is
taken to determine the number of months since the last movement. Generally, the items
are grouped in the period of 12 months.
Fast moving inventories are required quite regularly, the slow moving ones very
occasionally while the non moving inventories may become obsolete and not
required for years altogether. Within the non moving items the inventories may be
further sub-classified as stagnant (dead stock) for 2 years, 3 years, 5 years and so on.
F-S-N analysis helps to identify:
a) Inventory policies and models for each of the categories.
b) Review policies for different categories of items.
c) Surplus stock where stock > consumption

100
 d) Non moving items, for determining optimal stock disposal rules rather than
inventory provisioning rules, for releasing the idle capital for productive

purposes.
Inventory Policies For Slow Moving Items
In order to devise effective inventory policy it is essential to identify the nature of slow
moving items e.g. off the shelf movement of spare parts is occasional due to lack of
it’s regular demand and therefore over buying decision can take years together to
remedy the situation.
Policy for such items may be as follows :
a) Place the procurement order sufficiently well in advance keeping the lead time
in mind, so that these arrive just in time when needed, especially when spares are
needed at a pre-specified date.
b) Place an order as soon as you get the warning, e.g. parts which give adequate
warning of impending breakdown. In such a case the lead time < warning time.
c) Usually maximum stock level will be policy dependent. 50
6. G/NG-O-L-F (GOLF) Analysis :
It is presumed that the sources of supply determine quality, lead time, terms of
payment and administrative work involved and accordingly GOLF analysis is
performed, just like S-D-E.
G (Government) refers to analysis of items purchased from Government sources viz.
STC, MMTC, DGS&D, DTC and PSUs, which requires long lead time, advance
payment/payment against delivery; no credit terms etc.
NG-0 (Non Government - Ordinary) refers to analysis of items procured from non
Government / ordinary sources of supply, which involve moderate delivery time,
availability of credit, well rated quality and assurance of supply (from suppliers
of repute) etc.
L (Local) refers to items purchased from local source of supply. It is possible to
procure materials on urgent notice, with shortest lead time especially in case of
blanket orders of 'C' items. Other items can also be procured from the local
suppliers.
F (Foreign) refers to the analysis of items procured from sources of supply located

101
 outside the political boundaries of the country where the buying firm is located
Purchase from foreign sources of supply involves following attributes :
a) compliance with Government rules and regulation. Such as clearance from
government agencies like DGTD.
b) lot of procedural and administrative work, which increases lead time.
c) search for reliable foreign sources of supply.
d) arrangement for shipping and port clearance.
7. S-O-S Analysis
S-O-S (Seasonal - Off Seasonal) refers to analysis of season dependent inventory.
Seasonal items may further be classified into following groups:
a) Those items which are available only for a limited period e.g. agricultural
products viz. raw cotton used as raw material in CTMI. Such items require long
term/yearly procurement.
b) Items available throughout the year, but at lower price/fresh quality
during season and premium price at any other time. This requires computation
of quantity on the basis of cost/benefit analysis or opportunity cost.
Quantity of non/off seasonal items is decided on different considerations. Such an
analysis helps to decide purchasing/holding strategies.
8. X-Y-Z Analysis :
XYZ analysis of items is based on its’ value in storage or inventory investment. Those
with high inventory values are X items and with low inventory values are Z items.
Items with their inventory value falling between X and Z are Y items. Such an analysis
can be used along with other forms of analysis by preparing a matrix, e.g. The
analysis may vary from firm to firm depending upon it’s combination with other
forms of analysis.
Items not falling in any of the above discussed category of analysis may also be
classified as XYZ.
Lead Time
Lead time means the total time that elapses from the placement of an order till the
final receipt of materials, si But this notion may slightly differ with reference to
management/production activity, as well as purchasing.

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 c. Inventory Levels :
Inventory planning and control centres around the size and time of inventory.
Fixation of inventory level solves the problem of time for purchasing and
replenishment of inventory considering the lead time as well as the rate of
consumption.
Ordering Level
This level is set between the maximum and minimum level in such a way that
before the material ordered is received into the stores, there is sufficient quantity on
hand to cover both normal and abnormal circumstances. 52 It is the sum of the
minimum stock and usage expected to occur in the reorder period or lead time. It
may also be considered as the level to which the stock is allowed to fall before an
order for further supply is placed.
Factors to be considered:

1. The time interval between the date of the order for goods and their arrival.
2. The average quantity consumed within a stipulated time period.
3. Margin of safety.
There is no unanimity among authors regarding ordering level and minimum stock
level in the absence of margin of safety.
Ordering Level = Maximum consumption X maximum time

or
Safety stock + consumption during lead time
Maximum level: It is level or quantity beyond which the actual stock is not allowed
to exceed unless authorised by the management The idea behind holding maximum
level is to prevent excessive investment and to reduce stock out cost. Maximum level
is usually higher than ordering level, minimum level, average level and safety stock.
Factors affecting Maximum level 5.1
Following factors are to be considered for determining the maximum level:
(1) Nature of material (2) Rate of consumption (3) Lead time (4) EOQ (5) price
fluctuation (6) seasonal supplies (7) availability conditions (8) storage space (9)
cost of storage (10) funds availability.
Maximum Level = Ordering level - (MnT X MnC) + ROQ

103
MnT = Minimum lead time
MnC = Minimum consumption
ROQ = Recorder quantity (Economic Order quantity)
Minimum level:
It represents the minimum quantity of stock that should be regularly held by the
firm or the lowest level below which the stock of an item should not be allowed to
fall. It is also known as Safety stock or Buffer stock. It also provides a margin of
safety or a cushion against danger of stoppage of production/sales.
Therefore, it is a safeguard against production stoppage due to non availability of
material. 54

Minimum Level = OL - (AC X AT)

Mnl = Minimum level
OL = ordering level
AC = Average/normal consumption
AT = Average/normal time
The minimum level may also be considered as an allowance to cover errors in
forecasting the consumption during lead time or lead time itself.
Factors affecting Minimum level:
1. Lead time
2. Nature of item
3. Rate of consumption
4. Availability of substitutes
5. Stock out costs
Danger Level:
It is the level below minimum level which is deliberately fixed where the stock level
is expected to fall either due to increased consumption during lead time or increased
lead time. Danger level indicates immediate actions to be initiated by the
concerned department to replenish the stock for preventing a possible stock out.
Average stock level:
Average stock level means the average of maximum and minimum level of stock,
expected to be normally held by company.

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 The followings are different formulae used by different authors :
Maximum level + Minimum level
1. Average level =
2

Minimum level + EOQ

2. Average level = ----------------------------
2

or

Minimum level + 1/2 EOQ

The second formula considers the following assumptions :

1. Minimum level is stock on hand to meet the abnormal situation.
2. Minimum stock + ROQ (when received) is not equal to maximum quantity.
Inventory Control Operations / Practices
Before any attempt is made to proceed systematically to apply the policies, techniques
etc., it is advisable to have a birds’ eye view on important inventory operations.
As regards these, unanimity among different authors/researchers is lacking. Some
authors have included some of the policies and techniques as inventory operations.
Inventory operations and different management practices may be following :
• Inventory Operating Costs comprising of determination of Ordering costs.
Inventory Carrying costs and Stock out costs
• Lead Time Analysis
• Size of demand either deterministic or probabilistic
• Stock Replenishment
• Inventory Levels
• Factors affecting Inventory Levels viz. Rupee Level and Unit Level
• Dangers of Excessive and Inadequate Levels
• Types of Levels viz. Maximum level, Minimum level etc.

105
d. Practices for Inventory Identification and Verification, Classification and
Codification of Inventory :
(1) Standardisation :
Standardisation means an agreement on definite sizes, design, quality and the likes. It
is essentially technical and engineering concept.
It is a model or general agreement of a rule established by authority, consensus or
custom created and used by various levels of interest. In the context of inventory,
standardisation may be used for variety reduction, interchangeability of parts. As per
International Standards Organisaton (Resolution 19 of council 1962).
Standardisation is the process of formulating and applying rules for orderly approach to
specific activity for the benefit and with the co-operation of all concerned and in
particular for the promotion of optimum overall economy taking due account of
functional conditions and safety requirements.
Standardisation is the process of formulating and applying rules for regulating variety
related to sizes, types, quantities and measures of products.
(2) Classification and codification of Inventory (Inventory Identification):
Codification is the process of representing each item by a number digits of which
indicate the group, the subgroup, the type and the dimension of the item.
Codes should be based on :
• Nature of stock item
• Purpose
• Local circumstances etc.
A stores vocabulary should be prepared to publish numbers, descriptions, size etc.
Methods :
1. Alphabetical: Alphabets are used to identify the inventory items on logical basis
e.g. AL for aluminium items and so on.
2. Numerical /Decimal System : Use of nos. instead of alphabets or combination of
the two especially when there are number of items of the same kind e.g.
Aluminium spares of 10 different items 11, 12 ...... 20 and so on. There is a
provision for expansion of codes for items.

106
 3. Alpha Numerical : It is a combination of both Alphabetical and Numerical
System especially to identify inventory items of the same class.
4. Mnemonic : Classification of items is made in such a way that it is easy to
identify the items by their respective code itself e.g. SMF for steel, mild and flat.
5. Decimal System : It is an extension of numerical system so as to include more
number and variety1 of items under the same group e.g. 15.11, 15.12, 15.13 and so
on. It is based on Dash/Stroke, Numerical system etc. This system can be
categorised as :
• Main Classification
• Sub Classification
• Sub Classification into different classification
6. Brisch system : It is an extended form of numerical system classified as under :
• Major group
• Preliminary grouping
• System numbers upto 7 digits (not rigidly) are given to an item
7 Kodak system : This system was first introduced by Eastman Kodak company of
New York, U.S.A. It is fundamentally based on numerical system, Hyphens (-)
are used instead of Numbers.This system is more useful for punch cards.
Computerisation codes may be used for location, supply price lists, stock taking
sheet etc. for classification up to 99 with 10 sub classifications. It is flexible and
more comprehensive and can be integrated for common use when suppliers also
use the same code. Large varieties of inventories like that of CTMI can be easily
incorporated using this. 55
e. Inventory Stock Taking / Verification :
Inventory stock taking is the complete process of verifying the quantity balances of the
entire range of inventories items held in stock. Whereas Inventory checking is the
checking of physical quantities which may be applied either regularly or intermittently.
In literal terms inventory stock taking and inventory stock verification are different but
for all practical practices they are treated at par.
Inventory stock taking is thus the process of counting, weighing or measuring of all
items in stock and recording the results.

107
 Purposes :
1. Verification of stock records.
2. Verification of values of inventories appearing in the balance sheet.
3. To detect fraud, theft, pilferage and losses at an early stage.
4. To reveal weakness of the system.
Methods Of Inventory Verification
(1) Periodic Inventory Verification : The whole of the stock is covered at the same
time, at the end of a given period i.e. the end of the financial year.56 Thus, it is less
costly, convenient and compatible to its intended use.
(2) Perpetual/Continuous Inventory Verification : Kohler’s Dictionary for
Accountants this kind of verification connotes as per ‘A book inventory kept in
continuous agreement with stock on hand by means of detailed record that may also
serve as subsidiary ledger where amounts as well as physical quantities are
maintained, sections of the stockroom are inventoried at short intervals and the
quantities or amounts or both are adjusted, where necessary, to the physical count’.
Continuous Inventory may also be conceptualised as ‘A process of testing inventories
and of maintaining an equality between inventory - item quantities physically
determined by count, weight or measure - and those appearing at the same time on
perpetual inventory records’. 57

Stock taking should be continuously carried out throughout the year in accordance
with a predetermined programme. The programme is chalked out well in advance and
regular stock verification is to be ensured accordingly.
Perpetual Inventory implies the same meaning where complete detailed stock records
are kept showing receipts, issues and balances on hand. The programme should be
prepared in advance and be implemented during slack season. It would be highly
desirable if the frequency of verification is related to the usage value of items e.g.
frequent counting of ‘A’ items, vital items etc.
(3) Blind or Snap Checking : It is a random stock taking in which neither the stock
taker nor stores staff are given advance information about stock taking. The authority
concerned should issue orders in this regard and stock taking process is undertaken
immediately.

108
 This method ensures a moral check on the stores employees and makes them alert all
the times.
This method is based on the philosophy that check is more reliable when a person
doing it is not informed about it in advance.
This method suffers from the certain limitations viz. it is laborious, slow, errors prone
and requires additional staff. To overcome these, it is desirable that the stock takers
be provided with locations and identifications but withheld from the quantity balance.
(4) Reorder Point Stock Taking : Physical verification or counting of items is done
when the stock level falls below the reorder point (when the stock in first bin is
exhausted in case of Two-Bin system). Under this method it becomes the
responsibility of the stock controller to notify the stock position to the concerned
department
In order to minimise the trouble of stock taking, a stock certificate signed by a senior
member of management declaring the value of stock on hand should be obtained.
The annexure / appendix, containing the amount of stock in each storehouse,
supported by all individual stock taking sheets, should be attached with such
certificate to ensure the authenticity of entries, records etc. appearing in relevant
records.
f. Inventory Audit System :
1. Inventory Audit may be perceived from two different viewpoints as under:
2. Inventory Audit / Verification by the employees, certified by management and
subsequently by auditors.
Inventory Audit is to see whether the levels, size, value, period, turnover etc. of
Inventory conforms to the Inventory policy, norms, levels etc. established by the top
level management or by the department concerned.
Thus, Inventory Audit is concerned with both - setting norms for different variables on
different basis and also to see that the norms are strictly adhered to and may be carried
out.
Following methods as under:
1. Comparing with that of past years
2. Comparing with that of Industry norms

109
 3. Comparing with that of best competitors
4. Other methods as per requirements and budgeted figures.
The methods of Inventory verification as described above are not mutually exclusive.
On the other hand, they may be used as supplementary to each other, depending upon
the requirements of each particular unit.
F. Disposal Management:
Disposal management is basically concerned with effective control of waste i.e.
obsolete, scrap and surplus inventory, usually performed by stores personnel. A huge
sum of money is locked up in the form of idle inventory due to the presence of such
surplus/obsolete stock
Disposal means sales. Therefore, when material has been declared as surplus, the
materials, purchasing or salvage and reclamation department, as appropriate, should be
informed. The managers are concerned with efficient effective and profitable
disposal of surplus, obsolete, scrap and waste materials, generated within the firm.
In modem times, disposal problem has become highly complex and important due
to following reasons : 58

• Wide varieties of wastes, and surplus materials

• Increased size and diversified product lines and decentralised management of
companies
• The need to develop and use new methods to avoid generation of solid waste
products
• Disposing wastes into air and waterway causing pollution of different types
• Resistance from community and government.
• Strict rules and regulations of government for disposal of waste and effluents
• Increased level of competition and hence necessity of reworking or reprocessing
for cost economics
• Need to conserve scarce material and natural resources etc.
Responsibility : Depending upon the size, type of manufacturing processes and the
nature and complexity of wastes, the disposal management may either be centralised
i.e. separately organised or may be subordinated to either purchase department,
sales department, marketing department or stores department
a. Waste:
Industrial waste i S ■’ defined as “Costs incurred without procuring a proper
profitable return to the enterprise” by H. N. Broom a prominent author on
Production Management.
Failure to use money, materials, machines, manpower, markets with maximum
effectiveness will lead to wastage with the result that the enterprise suffers a loss.
England and Leenders prominent authors on Materials Management defines waste as
“Materials and supplies which have been changed during the production process
and which, through carelessness, faulty production methods, poor handling or
other causes have been spoiled, broken or otherwise rendered unfit for further use or
reclamation.”
It may also be defined as “The residue of materials which results from normal
manufacturing process and has no economic (resale) value but may change later on
e.g. smoke, cutting oil, that cannot be reclaimed.
Loss, shrinkage, evaporation of materials during manufacturing process or a residue
without measurable recovery value may also be termed as waste.
Considering control and accounting aspects waste may broadly be classified as :
1. Normal waste : The cost of such wastes may be absorbed from normal or good
output, i.e. due to such waste, per unit cost will go up and the profit will be
adversely affected. Such waste is normal, natural and logical looking to the nature of
products and process. However, such legitimate wastes are reducible.
2. Abnormal waste : Such wastes are controllable by appropriate policies of the
management < Abnormal loss arising out of abnormal wastes are charged to costing
profit and loss account and therefore the cost of production, will not be inflated,
unnecessarily.
3. Recoverable : The waste that can be converted into some useful resource or as a
joint/by products, e.g. energy.
4. Irrecoverable : The resources that get lost with the passage of time and
cannot be regained later on e.g. Handlooms in textile mill, manpower, energy
capacity services etc.
Thus as an element of the system “Waste is any unnecessary input or undesirable

111
output from any system encompassing all types of resources”.

b. Types of Waste Inventory :

1. Surplus Inventory :
An item is said to be surplus when its existing stocks is likely to last longer than
the normal period of consumption. Surplus is usually not an inspiring word. It
includes those materials and equipments which have no immediate use but have
accumulated due to faulty planning, forecasting and purchasing. However, such
stocks have usage value in future.
It is the excess of materials in the stock either not required by the unit concerned
or likely to last longer.
2. Obsolete Inventory :
An item which may become obsolete due to change in design modification or
substitution, new inventions, discoveries and are unlikely to be used in near future. It
also includes those materials and equipments which are not damaged and which have
economic worth but which are no longer useful for the company’s operation owing to

many reasons.
Obsolescence is “The loss of intrinsic value of an asset due to its supercession”. 59

Channels For Disposal Of Surplus and Obsolete Materials

Disposal may take any of the following routes, as shown in the figure given below: 60

a. Use Within The Firm : This practise if resorted to, obtains maximum value
from disposal items which may take any one or more of the following ways :

• Use items other than for which they were originally purchased
• Avoid the need to buy lower sizes by converting the surplus to lower sizes
• Convert it into different blocks, jigs, fixtures, maintenance parts etc.
b. Return To Original Suppliers: This may fetch 90 % to 100 % of purchase
price, by requesting the supplier to modify the purchase order and receive the
goods back at an agreed price/discount within specified time agreed upon.
c. Sale To Actual Users : This channel facilitates sale of disposal items on as is
where is basis, communicated either through letters or advertisements to the actual

users.

112
3. Scrap :
Scrap may be defined as process wastage such as turnings, borings, sprues and
flashes.
They may have an end use within the plant.
Materials which have outlived their useful life or for which there is no demand in
their original form are classified as scrap.
Disposal ofScraps
Scraps may be disposed off by:
a) By public auction
b) Selling it to sister concerns for using it as an input in joint products or by­
products.
c) By entering into annual contracts
d) By reworking for reuse
e) By inviting tenders from scrap purchasers.
f) To sell directly to the end users.
4. Salvaged Inventory :
Those materials which cannot be put to use for their original purpose. However,
parts may be collected and utilised in repairs and replacements etc.
Salvaged inventory may better be reclaimed for the purpose of effecting economy
especially in the use of funds.
5. Spoilage and Defectives :
Spoilage includes surplus generated from inefficient use of production
machinery, carelessness and poor purchasing.
Defectives arises due to use of wrong machine or carelessness/unfitness/
inattentiveness of workers, unauthorised set-up change during processing.
c. Waste Management:
Waste Management is a inter and multi disciplinary activity involving engineering
principles, economic urban and regional planning, management techniques and
social sciences, to minimise overall wastivity of the system under consideration.

Therefore, a systematic approach to waste management encompassing the wastes of

all kinds of resources at all stages should be adopted.

113
 As inventory is a major element of cost in cotton textile mill, wastage of materials
is of critical importance from management’s view points. The goal of waste
management is to minimise the waste whereas, that of resource management is to
maximise the utilisation of resources.

To measure the performance of any system the new concept of "Wastivity’,

formulated as under, has been propounded :
Waste (W)
Wastivity = -----------
Input (I)
Waste management can be functionally classified as under 6i :
1) Generation or inception
2) Reduction or minimisation
3) Collection and segregation
4) Recycling or reuse
5) Disposal
The list is more suggestive rather than exhaustive
For the purpose of effective disposal, waste may be classified as :
1. Salvable Waste : The waste with some salvage value e.g. scrap, rejected goods,
surplus/obsolete items, equipment etc. which, if disposed off efficiently, may provide
good return to the organisation through cost reduction and consequently higher profit
and material conservation.
2. Non Salvable Waste : The waste with no salvage value, but requires further
processing and treatment for disposal. Such wastes pose environmental hazards and
entails other social costs. Hence, proper management ensures resource recovery as
well as lesser overall costs.
Identification of Excess Inventory : Excess inventory depends upon company policy
with regard to inventory holding. Usually such inventories are identified at the time of
periodical physical verification.
G. Inventory Control Through Accounting Techniques :
Inventory constitutes a substantial portion of total assets of many companies, especially
manufacturing and trading concerns. If one analyses the financial statement of such
concerns, it is found that lot of working capital is invested in it. The opening and

114
closing balance of stock on hand are shown on Debit and Credit side respectively of
trading account and as a working asset it is shown on asset side of the Balance Sheet.
The literal meaning 62 of the term Inventory Control itself depicts that it is both,
Physical as well as Accounting control of inventories. For convenience, accounting
control has been separately studied due to it’s unique contribution towards inventory
control. Control has been defined as Physical control as opposed to Accounting control
which is mainly concerned with financial responsibility and asset accounting. Accounts
department maintains control by correctly accounting for receipts and withdrawals
reported by warehouse. 63
Accounting normally takes place prior to issue and shipment. Entries are verified after
reports relating to shipping and receiving have been consummated. Physical
inventories are taken to ensure that actual inventory agrees with perpetual book
inventory. Inventory accounting plays as important role in ascertaining productivity
measures as well as for control modelling relating to inventory. In addition to this it
helps in determining the cost associated with inventories as well as transaction
reporting and requiring accurate and continuous update of stock records.
Inventory control being a management process requires up-to-date records and reports
for effective implementation of different policies and techniques,
a. Valuation of Inventory - Purpose, Methods :
Purposes :
a. Determination of current Income : Correct valuation of inventories in annual
accounts reveals the current income through the process of matching cost
against revenues i.e. overvaluation will unnecessarily inflate the profit and
under valuation will lead to decrease in profit
b. True Correct and Fair View of Financial / Economic Affairs : Under valued
or overvalued inventory, which is a major item of current assets affect profit
figures which is included in the capital also. Therefore, proper valuation of
inventory exhibits true and fair view of economic affairs.
c. Computation of Ratios : Computation of all the ratios based on inventory and
capital viz., ROTA, ROI, NP Ratio, GP Ratio, Sales Turnover Ratio,
Inventory Turnover Ratio, Current / Liquid Ratio and Decisions based on

115
 these ratio will be misleading if inventories are not valued properly. Any
change in the methods of valuation must be disclosed (Appendix 3).
Methods:
Methods based on cost price and other factors relating to the use of inventory may be
enumerated as follows:
(1) FIFO (First-In First-Out)
The materials (issued) are priced at the oldest cost price and consequently the
inventory is valued at the price of latest purchases.
(2) LIFO (Last-In First-Out)
The cost of latest acquisitions or purchases are matched against the sales revenue of
the period and the cost of earliest purchases / acquisitions.
(3) HIFO (Highest-In First-Out)
The materials with highest prices are issued first for production / sales. Thus highest
price of materials are recovered first.
(4) NIFO (Next-In First-Out)
Issues are priced at the cost of material ordered but not yet received at the price
estimated or expected for the next purchase.
(5) Specific cost method (Identification cost method)
Identify the consignment to which the unsold goods belong and then value the unsold
goods on the basis of cost price at which they were purchased.
(6) Base Stock Method
It is (necessary) inevitable to carry certain minimum quantity of inventory of
materials to carry out the production uninterruptedly. The investment in fixed current
/ working capital at their original cost.
(7) Average Cost Method
In case of frequent purchases where goods have been mixed up in such a manner that
it is difficult to identify each lot separately, the average of the prices at which such
lots were purchased, is taken for valuation of unsold stock.
 (8) Standard Price Method
Predetermined fixed price on the basis of a specification of ail factors affecting the
price. Thus, it is a planned and scheduled price used by firms operating standard
costing.
(9) Market / Realisable / Replacement Price Method
Under this method the issue is priced at the market price prevailing on the date of
issue, so as to reflect the current market conditions in the costs.
(10) Inflated Price Method
It is used as an accounting procedure to adjust or cover the losses and expenses as
direct charges in the materials consumed.
(11) Reuse Price Method
When materials unfit / substandard for the purpose for which they were originally
purchased, are issued for an alternative use valued at a price different from its
purchase price, it is known as reuse Price.
As per government notification dated 28th June 1977 schedule-1 Rule-3 Sub rule-1 to

XII - The cotton textiles are required to maintain records which shall indicate actual
quantity and value of each variety of cotton or other Raw materials used in each
mixing prepared for manufacturing different counts of yarn, waste yarn, sizing
material, process materials, consumables stores, small tools, machinery spares,
wastage, spoilage, rejection, loss etc. of materials, packing materials yarn / cloth in
gray stage for self consumption, work in progress andfinished goods stock etc.
The (Accounting and Costing) method followed for determining the costs shall be
indicated in the cost records so as to reveal the cost elements that have been taken
into account in such computation. The method adopted shall be followed
consistently.
b. Monitoring and Control of Inventories - Inventory Turnover Ratios :
In an enterprise usually Raw Materials inventory decisions are taken by purchasing and
production executives, whereas working process inventory decisions are taken by
production and materials department executives but finished goods policy requires
concurrence of production, marketing and stores department
 Financial Management has a direct impact on Inventory Management. Therefore, it is
also the responsibility of finance manager to control and monitor inventories of
different types.
Inventory Turnover Ratios(Measures for effectiveness of Inventory Management)
For the purpose of monitoring the effectiveness of Inventory management, the
following ratios and indices would be of great help :
RMITR Annual consumption of raw material
Average raw material inventory
OR
RMITR Annual Sales
Average RMI

SSPTIR Annual Sales/ Cost of Goods sold

Average SSPI

WIPITR = Cost of manufacture/ Annual sales

Average WIPI

FGITR = Cost of goods sold/ Annual Sales

Average inventory of finished goods at cost

OITR Cost of goods sold / Annual Sales

Average total Inventories at cost

NWCTR/NCATR - Annual Sales

NCA/NWC
(NWCTR/ NCATR = Net Working Capital / Current Assets Turnover Ratio)

Current Ratio Current Assets

Current Liabilities

Note : For detailed analysis, the above ratios should be calculated separately for
different components of Inventory items.
H. Inventory Control Through Scientific Techniques :
a. Value Analysis :
The CTMI witnessed increased cost of materials and production, competition among
cotton textile mills, availability of imported cloth at a comparatively cheaper rate,
better quality of imported cloth etc. in the past few years. All the features mentioned
above have compelled CTMI, to concentrate on cost economics without adversely
affecting quality of finished goods.

118
The CTMI has adopted various types of raw materials, mixing of raw materials,
substitutes for component spare parts etc. for efficient service at a lower cost.
Through value analysis, one can identify such areas by using less expensive alternate
materials and newer simple methods of manufacture. Value analysis is a combination
of quality, efficiency, price, service, ultimate economy and satisfaction to the purchaser
and the user.
Value Analysis is the application of technique to components which are already
existing in production for the purpose of cost correction whereas Value Engineering is
an organised creative approach for the achievement of the required function at the
lowest cost.
It is an analytical, step wise, organised, creative technique, which examines all the
facets of costs and function of a product or system to identify and eliminate
unnecessary cost.
Value analysis or value engineering comprises of a group of techniques aimed at
systematic identification of unnecessary costs in a product or service and efficiently
eliminating them without detriment to its quality and efficiency. 64
Thus, it is a simple common sense approach, practised by majority of mills understudy,
as can be seen later on, of course, without giving it a fancy name.
For applying value analysis technique in a systematic manner one should seek answers
to the following questions :
(a) What is the item ?
(b) What functions does it perform ?
(c) What does it cost ?
(d) What else can do the same function ?
(e) What will that cost ?
We shall relate our discussions to the value analysis techniques that have been
successfully tried out in Textile Industry.
In the same manner following substitutes are also giving efficient service :
Wood To Plastic
• Pirns
• Inter frame bobbins

119
Paper To Plastic
• Ring Frame Tubes
Leather To Leather Nylon Sandwich
• Driving belts for a number of applications
• Lug straps
• Check straps
Fabric Laminated Blocks To Nylon/High Density Polythelene
• For various types of gears.
Cotton Ropes To Nylon Ropes
• For Carding machines.
A number of non-ferrous items (Brass, Gunmetal, Aluminium etc.) have been replaced
by Plastics. The advantage of using this substitute is that they are cheaper
comparatively in the long run and also unlike non-ferrous items these will not be
pilfered.
Cotton Tape To Synthetic Tapes
• For driving Ring Frame Spindles.
C. I. And M. S. Material replaced by plastic
• Gears
• Treadle bowls
• Picking rollers
Sheet Metal Replaced By Plastic
• Bobbin chute for Ruti ‘B’ Autolooms
A few other cost saving areas are given hereunder:
(a) Bigger size used Fabric laminated or plastic gears could be suitably reduced in size
and the teeth recut to make smaller size gears.
(b) Aluminium Harness Suspenders : Used longer size suspenders could be cut and
used for small size applications.
(c) Used Laminates Wood Picking sticks : These could be given to wood
manufacturers and smaller wooden parts could be prepared.
(d) Used Leather Nylon sandwiched belts of one particular size cut and rebuilt to make
other longer or smaller size belts.

120
(e) Salvage of parts by metallising, welding, hard chrome plating is very commonly
done.
The exercise of value analysis will prove most beneficial if the persons involved have
thorough knowledge of the various materials available in the market. The best way to
learn is by discussing the matter with the manufacturers, visiting exhibitions,
consulting the Research Organisations, liaison with other Mills personnel.
It is observed that we keep purchasing a number of times in ‘imported’ category
exactly as per import design without going into the details of the prices, design,
alternate material available etc. A few tried out examples are given hereunder:
To sum up, we can only say that the mills can immensely gain by adopting
standardisation, variety reduction and value analysis technique in procurement of
materials. People have natural resistance to change but this can be overcome by
experience.
b. Materials Requirements Planning :
For Inventory control of dependent items, mostly manufacturers of finished goods,
where forecast of only one or few items are required to be made at the top level mgt.
the MRP (Materials Requirements Planning) can be effectively used. The MRP
technique recognises the existence of demand dependence and covers materials and
parts which are not end products, but are fabricated and assembled to become major
assemblies and end products. 65
It is the process of work.ng backward from scheduled completion dates of end products
or major assemblies to determine the dates and quantities when the various component
parts and materials are to be ordered.
MRP needs accurate Bill of Materials for finished goods demand based on forecast,
backlog of order or both. modified by existing inventories.
Approach towards an effective MRP requires discarding all the previous plans and
preparing a new master schedule and exploding the forecast requirement into a gross
component requirement after deducting balance of inventory on hand.
The master schedule becomes an input for MRP, which calculates the requirements by
parts explosion for all dependent items. Such calculation requirement for complex

121
assemblies becomes difficult for diversified product lines, without data processing on

computers.
Benefits :
(a) Minimises inventory
(b) Helps maintain higher service coverage
(c) Provides control and information system in co-ordination of all manufacturing
decisions from finished goods.
(d) Co-ordinates delivery schedules, purchasing inventory levels, simultaneously.
The requirements are phased by quantity, based on a due date planning system to reach
zero stock-outs.
Difference Between MRP and EOQ System 66

MRP System EOQ System

(a) Product / Component oriented Item / part oriented

(b) Demand is dependent Demand is independent
(c) Demand is Intermittent Demand is independent
(d) No lead time demand Continuous lead time demand
(e) Time phased ordering signal ROP ordering signal
(f) Use future production as base Use past production base
(g) Forecast of only end items Forecast of all items
(h) Quantity and time based Quantity based
(D___ Safety stock of end items only Safety stock of all items
Assumptions underlying MRP system
1) Availability of precise demand forecast.
2) Bill of materials for each product / sub assembly can be prepared accurately.
3) Unlimited capacity in all work centres.
4) Availability of tremendous amount of data.
5) Strict discipline to feed updated data.
6) Continuous tracking system through entire manufacturing / purchase stage,
detailed auditing procedure.

122
 A general MRP outline system 67

The Inventory Status File

As the name indicates it maintains record of all transactions and balances of all stock
throughout the organisation viz. receipts, issues of completed product out of factory on
order condition (in transit inventory) and also includes adjustments in stock position, as
a result of inspection rejects and physical verification.
c. Just-In-Time (JIT):
Concept and Philosophy :
Just In Time is a revolutionary concept in operations and is fast catching up in the
Industrial world. It is an effort to translate an imaginary and ideal situation into reality.
It is based on the philosophy that if the production / Mfg. / procurement of goods is
done only at the time when they are needed and in the quantity required and when this
holds true for finished and semi-finished products then inventories of both as well as
raw material would almost be ni’. If we ensure that the suppliers of raw material and
spare parts agree to deliver goods only at the time and in required quantity then
inventory would almost be nil.
JIT production system was found by Taiichi Ohno (Vice president, Toyota, Japan) and
was implemented in Toyota Motor company’s plant in Japan.
It is a concept involving methods, techniques and philosophy, operating in a conducive
work environment and hence a holistic concept.

123
The basic principle is to produce at each Mfg. Stage, only necessary products at
necessary time with minimum possible inventory to hold the successive manufacturing
stages together. An organisation cannot hold JIT in isolation of environment.
In short, in JIT we have :
(1) No wait times
(2) Balancing of conveyance times.
JIT is a combination of single unit production and conveyor system called “IKKO
Nagare” in Japanese.
Thus, JIT is viewed as a level of perfection achieved by continuous elimination of
wasteful use of resources. It represents a philosophy of eliminating wastes in the total
process from purchasing through distribution.
Components of JIT to eliminate waste :
1. Establishing balance, synchronisation and flow in manufacturing process.
2. Attitude towards quality - ‘doing it right the first time’
3. Employee Involvement
JIT is not simply an Inventory reduction programme, but inventory reduction is a part
of JIT system. JIT is founded on the principle that Inventory is a necessary evil and is a
hurdle in the problem. Ifyou will buy a thing you do not need, you will need a thing
you cannot buy.
Basically JIT is divided into two parts :
Planning Stage
(a) MRP-I with computer assistance - This includes a comprehensive group of
techniques developed between 1960 and 1975, by U.S. experts in “Production
and Inventory Control” with emphasis on customer service.
(b) MRP - II - Manufacturing Resource Planning : This may further be divided into
demand management, supply management and capacity management and
consisting of two main levels viz. planning stage and implementation stage as
follows :

124
 chfl^-3

Demand Mangement Supply Management Capacity

Mamgefiievfc
Product Product
Forecasting and Distribution Production Resource Planning
control Requirements Planning
Planning
▲
f

Master Production Capacity Planning

Scheduling (Rough)

Spares
Sales Forecasting Distribution Material Capacity
and Control — » Requirements «—— ► Requirements <------------------- 1 Requirements
Planning Planning Planning

1
SHOP FLOOR CONTROL 1

Source HBR:-

“The Just In Time Break

through”
John Wiley and Sons PURCHASING
1988
Write : EDWARD J. HAY Purchase Vendor
order 4—► capacity
scheduling control

• This function only applies when spares are stocked in a separate locations. If
combined with component stock, spares forecasting is embedded in “Materials
Requirements Planning” as is done in CTMI in Gujarat.
Note : Majority of the methods concerned with replenishment of inventory and
fixation of inventory levels based on mathematical, statistical etc scientific methods

125
are also included under the heading of Inventory Control through Scientific
Techniques for the purpose of this study.
I. Recent Developments in Inventory Management:
a. Multi Echelon Inventory System :
When the term inventory management is used in practice, logically, one may think of
a very large organisation. In practice, in case of such organisations, the stores /
inventory may be located at decentralised stores at different places. In case of multi­
plant organisation, there may be a central store and a number of field stores or project
stores. Such inventory in all the locations belong to the same organisation. It is
worthwhile to perceive inventory management as an integrated system, instead of
treating each storage location separately. 68
Certain vital decisions concerning design and operation of such systems are, number
of locations, echelons, no. of storage point, location of certralised store, optimum
inventory policy to he followed by each location, stock replenishment policy
redistribution policy etc.
Under this system, slow and expensive items may be located at central store instead
of locating them in decentralised stores if the item is standardised and usable at each
location.
b. Optimised Production Technology (OPT):
As a system OPT calculates near optimum schedule of requirements, after
considering priorities of jobs and capacities of work centre. Thus it minimises
inventories (WIP inventories), lead time and maximise capacity utilisation.
A weighted function incorporating criteria like inventory hold-up, delivery schedule,
safety stock and critical machines is used in priority determination. 69

c. Management Information System (MIS) for Inventory Control :

(Computers in Inventory Management, and Control - Inventory Records and Reports)
For effective management and decisions in inventory control it is necessary to evolve
and develop a powerful management information system. It is necessary that all the
information from different departments be provided to centralised planning and
control deptt. For a sound Inventory control system, review of actual progress against
standards or norms must be made at regular intervals of time.

126
Regular reporting based on systematic data processing is possible with the use of
computers. Manual, mechanical and unit data processing system must be co­
ordinated to make MIS move effective.
Inventory MIS may be applied in the following areas with the use of computers 70
1. Long term and short term production schedules.
2. Inventory / Materials Manual.
3. Requirement of non-stock items from user department
4. Lead time shortages, availability price trends etc.
5. Materials and purchase requisition information, Bill of Material etc.

6. Materials supplied from stores to production, maintenance and other departments,

inter unit transfer etc.
7. To and fro information between stores and inspection.
8. Receipts and issues from stores.
9. Information to purchase department for follow up of supplies.
10. Purchase order, Receipt of materials.
11. Materials consumption data.

Reports and Statements for MIS.

1. Inventory status reports.
2. Inventory levels report.
3. Unsold stock / packed stock report.
4. Packing report.
5. Loose stock, unpacked stock report.

6. Monthly consumption / collection reports.

7. Scraps and wastes report.

8. Cotton bales for job work.

9. Obsolete stock, Non moving stock reports.
10. Reports of stock supplied to retail shops.
11. Cotton wastes report etc.
In addition to these documents of stores, records may be classified function wise as :-
(a) Reports for Receip of materials.
(b) Reports for Uses of materials.

127
(c) Reports for Inspection of goods.
(d) Reports for Purchase of goods.
(e) Reports for Issue of Stores.
(f) Reports for Inventory control.
(g) Reports for Wastes / Scraps / Surplus Inventories.
(h) Quantitative / Financial / Monetary Reports.
(i) Qualitative Reports etc.
All the above information may be useful for inventory planning, execution, counting
and control purposes. Use of computers in this area facilitates data processing,
analysis and dissemination.
It may be noted that for practical reasons and due to difficulties of making a water
tight compartment between policies, practices and techniques of Inventory
management and also due to applicability of a specific technique and policy (matter)
for a specific function only, they have not been discussed separately.
But policies, practices and techniques have been combined to maintain the sequence
of this study e.g. EOQ is a technique for inventory control but at the same time if
may salso be treated as a policy for Inventory replenishment.

128
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[4] Opcit : Committee on Accounting procedure : Management Accountant :
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[5] A survey of Inventory theory from operations research view point 1 : Fred
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[6] Inventory Management in Cotton Textile Industry : A. Velliangiri and N.
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[7] Production and Inventory Control: Principles and Techniques : George W Plossal
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[8] Operational Financial Management: Robert E Pritchard : Prentice Hall Inc. : New
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[10] Production Planning and Inventory Control: Magee and Boodman : TMH Pub Co.
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[11] Reserve Bank of India: The report of the study group to frame guideline for follow
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[12] Inventory Management in Cotton Textile Industry : A. Velliangiri and N.
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[14] Studies in Mathematical Theory of Inventory and Production : Standford
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[15 ] Lok Udyog : Vol XVIII No 4 : July 1984 : P 65.

129
[16] Inventory Management : L. C. Jhamb : Everest Publishing House, Pune : Ed.
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[17] Theory and Practice of Inventory Management : B K Mishra : Prateeksha
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[18] Tested Scientific Inventory Control : Management Publishing Co., Greenwitch :
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[19] Inventory Management : Text and Cases : Gopalkrishnan and Sandilya : The
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[22] Management of Working Capital in India : Kamta Prashad Singh : Ed. 1985 :
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[23] Theory and Practice of Inventory Management: B K Mishra : Opcit: PP 8-10.
[24] Materials Management: An Integrated Approach : Gopalkrishnan and Sundaresan
: Ed. 1994 :P 7.
[25] Integrated Materials Management : Patel, Chunawala and Patel : Himalaya
Publishing House : Ed. 1989 : P 135.
[26] Materials Management: Dean S. Ammer: Richard Irwin Inc Homewood: Ed
1977: P 270.
[27] Inventory Policy : Harward Business Review :
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[28] Ibid : PP 170-172.
[29] Materials Management: An Integrated Approach : Gopalkrishnan and Sundaresan
: PHI Pvt. Ltd. New Delhi : Ed. 1994, PP 199-201, and Based on personal
discussion with Mr. V.A. Desai, Cost Accountatnt - New Shorrock Mills, Nadiad,
Gujarat.
[30] The Oxford Dictionary for The Business World : Oxford University Press.
[31] Kohlers Dictionary for Accountants : Ed. 6th: P 285.
[32] Theory and Practice of Inventory Management: B K Mishra : Opcit: P 71.

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[33] Production and Inventory Control : Systems and Decisions : James H. Greene :
Richard D Irwin Inc. Honewood Illions : Ed. 1972 : PP 201-202.
[34] The Oxford Dictionary for The Business World : Oxford University Press.
[35] Dictionary of Business and Economics : Ammer Christine and Ammer Dean. S.
[36] The Oxford Dictionary for The Business World : Oxford University Press.
[37] Materials Management an Integrated Approach : P. Gopalkrishnan and M
Sundaresan : PHI Pvt. Ltd . : Ed .1994 : P 27.
[38] Ibid : PP 27-30.
[39] Integrated Materials Management : Concepts and Cases : Patel, Chunawala and
Patel: Himalaya Publishing House, Bombay : Ed. 1984 : PP 20-21.
[40] A Business Dictionary : P H Collin : Oxford University Press : Delhi.
[41] Purchasing and Materials Management: Text and Cases : Lee and Dobler : TMH
: Ed. 1988 : PP 232-237.
[42] Storage and Stock Control : A. Morrison : Pitman Paperbacks : Ed. 1970
PP 190-195.
[43] Essentials of Store keeping and Purchasing : M. M. Varma : S. Chand and Co. -
Ed. 1991 :P 140.
[44] Production and Inventory Control: James H. Greene : Ed. 1974 : P 201.
[45] Financial Hand Book : Julice I. Bogan : The Ronald Press Company, New York :
Ed. 1957 :P 156.
[46] BTRA Study : (ATIRA Library) on Inventory Control : Control of In Process
Inventory : PP 11-13.
[47] Scientific Inventory Management : Joseph Buchan and Koenigsberg : Prentice
Hail of India: Ed. 1963 :P 7-8.
[48] Fundamentals of Financial Management : Prasanna Chandra : TMH Pub. : Ed.
1994 :P 274.
[49] Inventory Management: Gopalkrishnan and Sandilya : The MacMillan Company
of India Ltd. : Ed. 1976 :P 177.
[50] Inventory Management: IGNOU Study Material : P 39.
[51] Inventory Control: B. D. Khare and R. C. Monga : NPC : P 25.
[52] Financial Policies and Practices of Giant Companies in India : Dr. B M Patel :

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 IFMR, Chennai :Ed. 1992 : P 67.
[53] Cost Accounting :S. P. Iyengar : S. Chand and Co., New Delhi: Ed. 1994 : P 87.
[54] Ibid : P 86.
[55] Purchasing and Materials Management : England, Leenders and Fearson.
Universal Book Stall: New Delhi: Ed. 1988 : P 122.
[56] Storage and Control of Stock: A Morrison: Pitman-Publication. : Ed. 1970 : P 125
[57] Ibid : P 120-21.
[58] Purchasing and Materials Management: England and Leenders: Ed. 1988 : P 392.

[59] Materials Management: Deb.: Academic publishers, Calcutta : Ed. 1979 : P 121.
[60] Inventory Management: L. C. Jhamb : Everest Publishing House, Pune: Ed. 1987 :
P 350.
[61] Waste Management: Unit 20 : IGNOU study material: Page 77.
[62] Inventory Management: T.V. Mansukhani: Lok Udyog Magazine,
Vol. XVIII No. 4
[63] Encyclopaedia of Professional Management: Lester, Robert, Bittel: McGraw Hill
and Co., New York : P 575.
[64] 23rd AURA Technology Conference.

[65] Management Memo ‘Requirement Planning for Inventory Control’ : Harward

Business Review : Philip H. Thurston : P 140.
[66] Operations Management : David Bennet Lewis and Mark Oakley Phillip Allen
Oxford and New Jersey : PP 178-179.
[67] The Just In Time Breakthrough : John Wiley and Sons: Harward Business Review :
Ed. 1988.
[68] IGNOU Study Material: Unit 20 : Page 40 .
[69] Production Planning and Control : G.D.Shardana Baroda Management Association
Seminar : September 1986 at Express Hotel, Baroda.
[70] Inventory Management, in Cotton Textile Industry : The Indian Textile Journal:
December 1991 : P 75.

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