Inventory management and its effects on working capital”

1. SAAB MARFIN MBA
“Inventory management and its effects on working
capital”
NVENTORY MANAGEMENT for MBA FINANCE
Page 1

2. SAAB MARFIN MBA
EXECUTIVE SUMMARY
G C T M Industry in India has traveled are less, now India is one of the
main cotton manufacturing & exporting cotten in the in india. The cotten in
India is with major players and gadag co operative mill Ltd is one of largest
manufacturer of cotten in India.
Inventory is a central process in Manufacturing Unit. This Inventory is
concerns to all departments i.e., from Planning Department to Selling
Department in which it passes though Production Department, HR Department,
Logistic Department, Finance Department, Costing Department, and
Commercial Department etc. So managing of Inventory is having wide Scope in
manufacturing Company.
NVENTORY MANAGEMENT for MBA FINANCE
Page 2

3. SAAB MARFIN MBA
“INVENTORY MANAGEMENT”
Statement of the problem
“Inventory management and its effects on working capital”
Management problem
Management is feeling that their huge amount of working capital is held
up, so the management wants to know whether they can reduce it through
inventory management.
Research problem
As above stated management problem the study was carried to know how
inventory management helps in proper maintenance of working capital, so the
title of this study is “ inventory management and its effect on working capital”
Objectives of the study
1. To study the inventory management based on the ratios
2. To find out the impact of inventory on working capital.
3. To study the inventory management and its effective control through
various techniques.
NVENTORY MANAGEMENT for MBA FINANCE
Page 3

4. SAAB MARFIN MBA
4. To suggest the measures for improving the inventory level.
Scope of the study
Inventory management being a very important concept in all the
company’s having a void coverage often calls for the managerial attention. In
the modern times inventory management has become the integral part of the
all companies. So all the firm gives special importance for inventory
management. The major objective of the study is to examine the effectiveness
of inventory management system adopted by Akash industry; the study mainly
focuses on the techniques used by the company to control the inventory. The
study also covers other areas like the financial ratios for the period of 2004 to
2007.
SUB OBJECTIVES:
1 To study the different accepts of Inventory Management.
METHODOLOGY
Primary Data:
1. Interaction with personnel of the company
2. Direct Observation in Inventory
Secondary Data:
1. Balance Sheet
2. Turnover Statements
3. Monthly Inventory Statements
4. Company Records
5. Internet
Tools Used:
NVENTORY MANAGEMENT for MBA FINANCE
Page 4

5. SAAB MARFIN MBA
MS-Excel has been used for calculations.
INDUSTRY PROFILE
FABRICATION
When used as an industrial term, applies to the building of machines,
structures and other equipment, by cutting, shaping and assembling
components made from raw materials. Small businesses that specialize in metal
are called fab shops.
Steel fabrication shops and machine shops have overlapping capabilities,
but fabrication shops generally concentrate on the metal preparation, welding
and assembly aspect while the machine shop is more concerned with the
machining of parts.
NVENTORY MANAGEMENT for MBA FINANCE
Page 5

6. SAAB MARFIN MBA
METAL FABRICATION
Metal fabrication is a value added process that involves the construction
of machines and structures from various raw materials. A fab shop will bid on a
job, usually based on the engineering drawings, and if awarded the contract will
build the product.
Fabrication shops are employed by contractors, OEM's (Original
Equipment Manufacturers) and VAR's (Value-added Reseller) Typical projects
include; loose parts, structural frames for buildings and heavy equipment, and
hand railings and stairs for buildings.
1. ENGINEERING
The fabricator may employ or contract out steel detailers to prepare shop
drawings, if not provided by the customer, which the fabricating shop will use
for manufacturing. Manufacturing engineers will program CNC machines as
needed.
2. RAW MATERIALS
Standard raw materials used by metal fabricators are;
Plate Metal
Formed And Expanded Metal
o Tube stock, CDSM
o Square stock
NVENTORY MANAGEMENT for MBA FINANCE
Page 6

7. SAAB MARFIN MBA
o Sectional metals (I beams, W beams, C-channel...)
Welding wire
Hardware
Castings
Fittings
3. CUTTING AND BURNING
The raw material has to be cut to size. This is done with a variety of tools.
The most common way to cut material is by Shearing (metalworking);
Special band saws designed for cutting metal have hardened blades and a
feed mechanism for even cutting. Abrasive cut-off saws, also known as chop
saws, are similar to miter saws but with a steel cutting abrasive disk. Cutting
torches can cut very large sections of steel with little effort.
Burn tables are CNC cutting torches, usually natural gas powered. Plasma
and laser cutting tables, and Water jet cutters, are also common. Plate steel is
loaded on a table and the parts are cut out as programmed. The support table
is made of a grid of bars that can be replaced. Some very expensive burn tables
also include CNC punch capability, with a carousel of different punches and
taps. Fabrication of structural steel by plasma and laser cutting introduces
robots to move the cutting head in three dimensions around the material to be
cut.
4. FORMING
Hydraulic brake presses with v-dies are the most common method of
forming metal. The cut plate is placed in the press and a v-shaped die is
NVENTORY MANAGEMENT for MBA FINANCE
Page 7

8. SAAB MARFIN MBA
pressed a predetermined distance to bend the plate to the desired angle. Wing
brakes and hand powered brakes are sometimes used.
Tube bending machines have specially shaped dies and mandrels to bend
tubular sections without kinking them.
Rolling machines are used to form plate steel into a round section.
English Wheel or Wheeling Machines are used to form complex double
curvature shapes using sheet metal.
5. Machining
Fab shops will generally have a limited machining capability including;
metal lathes, mills, magnetic based drills along with other portable metal
working tools.
6. Welding
Welding is the main focus of steel fabrication. The formed and machined
parts will be assembled and tack welded into place then re-checked for
accuracy. A fixture may be used to locate parts for welding if multiple
weldments have been ordered.
The welder then completes welding per the engineering drawings, if
welding is detailed, or per his own judgment if no welding details are provided.
Special precautions may be needed to prevent warping of the weldment
due to heat. These may include re-designing the weldment to use less weld,
welding in a staggered fashion, using a stout fixture, covering the weldment in
sand during cooling, and straightening operations after welding.
NVENTORY MANAGEMENT for MBA FINANCE
Page 8

9. SAAB MARFIN MBA
Straightening of warped steel weldments is done with an Oxy-acetylene
torch and is somewhat of an art. Heat is selectively applied to the steel in a slow,
linear sweep. The steel will have a net contraction, upon cooling, in the
direction of the sweep. A highly skilled welder can remove significant warpage
using this technique.
Steel weldments are occasionally annealed in a low temperature oven to
relieve residual stresses.
7. FINAL ASSEMBLY
After the weldment has cooled it is generally sand blasted, primed and
painted. Any additional manufacturing specified by the customer is then
completed. The finished product is then inspected and shipped.
COMPANY PROFILE
NVENTORY MANAGEMENT for MBA FINANCE
Page 9

10. SAAB MARFIN MBA
Name of the company : APEX AUTO LTD
Address of the Head office : M-1 phase- VII, TATA kandra main road,
industrial area ADITYAPUR,
JAMSHEDPUR-832109 INDIA.
Fax: 0657-2200010
Tel: 91-657-2408715, 2409041 & 2381346
E-mail: info@apexautoltd.com
Address of the registered : Nataraj mansion, Bistapur- 831001,
Office JAMSHEDPUR, INDIA
Fax: 91-657-2424526
WEBSITE: www.apexautoltd.com
Address of the UNIT II : APEX AUTO LTD (UNIT II) Block no: 2
Dharwad Telcon premises, K.I.A.D.B, P.B. Road
Dharwad- 580007, India
Fax: 0836-3293214
Tel: 0836-3293214
E-mail: pip@apexautolimited.com
Nature of the organization : Basically this company is heavy fabrication
Company. They are manufacturing back hoe
Loader components and excavator
Components
Type of organization : Apex auto limited company is private
limited
NVENTORY MANAGEMENT for MBA FINANCE
Page 10

11. SAAB MARFIN MBA
Company
ABOUT ORGANIZATION
Apex Auto Limited ("If you can imagine it, We can fabricate it.")
Apex Auto Limited is a publicly quoted company with a number of
shareholders, both Indian and Foreign. Promoted by Mr. Atul Taunk in 1995
with a modest capital outlay of Rs. 342 lakhs, Apex today has a capital outlay of
Rs. 1200 lakhs. A growth of over 350% per annum. Achieved by producing
thousands of dynamically stressed machined components for the construction
equipment industry
The raison deter of Apex is that the emerging scenario in post liberalized
India indicated that the nation was poised to go in for massive infrastructure
building: roads, super highways, ports, power projects, and so on. This would
put immense pressure on manufacturers of earth-moving equipment. Apex
eases the load on them by supporting the industry with precision engineered
sub-assemblies and major assemblies that can go directly into their equipment,
such as revolving frames, main frames, booms, arms, dozers, buckets, and so
on.
As a case in point, we're proud to have been entrusted with the single
share of business for all major fabrications that go into the making of TATA
Hitachi's top selling excavators, the EX-60. Over the last 5 years, we have
fabricated more than 10,000 components of this particular model alone.
VISION
To be recognized as a premier QUALITY manufacturer and supplier fabricated
components, embodying thus the spirit of commitment and humanity.
NVENTORY MANAGEMENT for MBA FINANCE
Page 11

12. SAAB MARFIN MBA
M I SSI ON
As per customer schedule requirement fulfill it, Deliver on time, every
time.
An eye on product quality and integrity
Highest productivity, thereby offering a cost advantage to all our clients.
Why Apex?
Aristotle - Greek inventor of the Science of Logic - recommends studying the
theory of 'The 4 Becauses' before making your choice Why Apex for your
Machined fabrication ?
The 1st because deals with what is it made of ?
Apex uses only prime quality steel sheets and plates procured from
leading players in the industry - Tata Steel and SAIL.
The 2nd because deals with how is it made ?
Apex has state of art Material Processing facilities including Indias largest
laser cutting machine. And excellent Production Engineering systems set up by
a highly experienced and technically qualified team of engineers.
The 3rd because deals with what is made ?
Based on our customer's drawings and design, Apex manufactures
dynamically stressed machined fabrications conforming to all the specifications
laid down by the customer.
The 4th because deals with why is it made thus ?
NVENTORY MANAGEMENT for MBA FINANCE
Page 12

13. SAAB MARFIN MBA
Apex follows the first three precepts so that the end customer gets a
world-class product which will withstand the ultimate test of time.
KEY AWARDS WON
For safety in manufacturing process awards (less accident in
manufacturing process) for continuous 3 years form Telco construction
equipment limited
For MINIMUM REJECTION award form Telco construction equipment
limited
SWOT Analysis of the Company
APEX AUTO LID KEY STRENGTHS
1. STRONG PRODUCT DEVELOPMENT
As per the specification from Telcon the new product is been developed
1. By the highly qualified internal engineering department
2. STRONG MERCHANDISING TEAM
NVENTORY MANAGEMENT for MBA FINANCE
Page 13

14. SAAB MARFIN MBA
Technically qualified and high skilled Merchandising department is
another asset of the company, who plays a major role in executing the orders
utmost efficiently to the satisfaction of Buyers.
3. PROFESSIONALLY MANAGED:
a) Company has two units in Dharwad, one is Apex auto Ltd Unit I and the
other is Apex auto Ltd Unit II
b) Unit I is headed by Mr. Arvind Gaur, Unit II is headed by Mr. Pravat Kumar
Rath
4. FACTORIES ENGINEERED TO PRODUCT SPECIFIC:
All their manufacturing units are engineered to product specific and
managed by effective and efficient internal engineering department.
5. QUALITY CONTROL SYSTEM:
There is an independent quality audit team in process control system in all
the factories, which has given quality production consistently.
6. SOURCING OF RAW MATERIALS UNDER VIGILANCE OF QUALITY
AUDIT SYSTEM:
They source all their raw materials 100% from within India. However, they
have a rigid control on their quality control system where by they ensure that all
the raw materials are produced as per their quality standard level before it gets
dispatched to their factories.
7. IN HOUSE LAB:
They have a lab situated in the major procurement centers, such as in
Dharwad and Jamshedpur to support their quality control team to carryout the
NVENTORY MANAGEMENT for MBA FINANCE
Page 14

15. SAAB MARFIN MBA
various quality tests at all level onwards to ensure that the product is produced
according to their quality in-house.
8. PRE-SHIPMENT INSPECTION TO MAINTAIN ZERO-CLAIM FROM
BUYERS:
A thorough Inspection by In-house Quality Control team and pre-shipment
Inspection by buyer representative for all their products helps company to
maintain zero-quality claims position with all their buyers.
9. CONFIDENCE OF THEIR BUYERS:
All the buyers as of today have been working with them since decades and
they started with them on continues basis with enhanced volume. This has
given them huge confidence as the confidence level of their buyers is very high
in their products, quality, timely deliveries and commitment towards work.
They have been awarded for 3 consecutive years for minimum rejection and
for safety in process of manufacturing by Telco construction equipment limited
APEX AUTO LTD WEAKNESS
No such entity has been identified so far.
NVENTORY MANAGEMENT for MBA FINANCE
Page 15

16. SAAB MARFIN MBA
APEX AUTO LTD KEY OPPORTUNITIES
Chances to get more products to manufacture form the Buyer i.e. Telcon
construction equipment limited
APEX AUTO LTD KEY THREATS
More-qualified competitors
CUSTOMER NAME
Apex auto ltd unit II has having only one customer that is TELCON
CONSTRUCTION EQUIPMENT LTD
SUPPLIERS NAMES
SUPPLIERS NAME LOCATION
A005 AKSHATA ENTERPRISES, HUBLI
A013 ASHA ELECTRICAL & SALES HUBLI
A045 ADITYA ELECTRICAL SALES CORPORATION HUBLI
A051 ANAND AIRLINE ACCESSORIES HUBLI
A052 ABHI ENGINEERING WORKS BANGALORE
A058 AMAR ELECTRICAL WORKS HUBLI
A063 ANDANUR PIPES DISTRIBUTORS DHARWAD
B031 BELGAUM CNC APPLICATIONS PVT. LTD BELGAUM
B036 ESHAK DADA BAMBOOWALA MUMBAI
NVENTORY MANAGEMENT for MBA FINANCE
Page 16

17. SAAB MARFIN MBA
B038 B. MAHENDRA & BROS DHARWAD
B041 BASAVESHWAR KHANAVALI DHARWAD
B044 BELUR INDUSTRIAL GASES DHARWAD
B045 B.B. ENTERPRISES HUBLI
C003 CHACHRA SERVIUCES JAMSHEDPUR
C004 CHAITANYA SALES PVT. LTD. JAMSHEDPUR
D019 DYNAMIC DRIVES HUBLI
D020 DELTA FURNITURE PRIVATELIMITED CHENNAI
E027 EUREKA FORBES LTD DHARWAD
F003 FABRO-TECH ENGINEERS DHARWAD
G008 GOUTAM MACHINE TOOLS HUBLI
G026 GAYATRIMATA INDUSTRIES DHARWAD
H010 HYDROPACK(INDIA) PVT LTD BELGAUM
I018 INDUS MARKETING BELGAUM
J003 JKAY ENTERPRISES HUBLI
K007 KAMATH ENTERPRISES BELGAUM
K008 KAPILA MARKETING DHARWAD
K010 KARNATAKA MATERIAL TESTING RESEARCH BELGAUM
K036 KULKARNI BOOK STALL & STATIONERIES DHARWAD
M008 MARUTI INDUSTRIAL SERVICE CENTRE BANGALORE
M017 MADRAS HARD TOOLS PVT LTD CHENNAI
M019 MANJUNATH GARMENTS DHARWAD
N016 NAVYA ENTERPRISE HUBLI
O003 OMEGA FABRICATIONS DHARWAD
P002 PETHE BRAKE MOTOR PVT. LTD RATNAGIRI
NVENTORY MANAGEMENT for MBA FINANCE
Page 17

18. SAAB MARFIN MBA
P006 PRAXAIR INDIA PVT LTD BANGALORE
P028 PRESSURE CONTROL EQUIPMENT KOLKATTA
P037 PAVAN ELECTRICAL COMPANY HUBLI
R001 R.R. ASSOCIATES HUBLI
R007 RENUKA ENGINEERING WORKS DHARWAD
R035 RITTAL INDIA PVT LIMITED BANGALORE
S019 SONA STEEL ENTERPRISES MUMBAI
S085 SAKSHAM AUTOMATION SYSTEMS HUBLI
S087 SHREE GANESH GAS IMPLEMENTS AND SER HUBLI
T001 TARACK ENGG SERVICES DAVENGIRI
T003 TECHNO COMMERCIAL CORPORATION JAMSHEDPUR
T031 TATA STEEL LIMITED BANGALORE
V001 VALJI & BROTHERS HUBLI
V007 VIJAYSHEER DISEL SALES AND SERVICES HUBLI
V008 VOLTAS LIMITED BANGALORE
V014 VIKAS VIDHUTIKARAN PVT LTD DHARWAD
W006 WELD INDIA CONSULTANCY DELHI
Y003 YALLAPPA HEGGERI DHARWAD
Apex Auto Ltd Unit II is having a numerous suppliers. They mainly
purchase Raw Materials like MS plates, Bush Stoppers, Seat Curve etc from
Indian suppliers.
NVENTORY MANAGEMENT for MBA FINANCE
Page 18

19. SAAB MARFIN MBA
ORGANIZATION STRUCTURE
NVENTORY MANAGEMENT for MBA FINANCE
Page 19

20. SAAB MARFIN MBA
Managing Director
General
Manager
Production Planning Finance Manager
& Control Manager
CEO
Human Production
Resources Assistant General
Assistant General Manager
Administration
Assistant
Supply Productio Quality Machine
Chain n Assuranc Departme
Mgmt departme e Head nt Head
Head nt
Store Productio Assistant Machine
Superviso n Q. A Operators
r Superviso
Subordina Workers Helpers
te
Members
NVENTORY MANAGEMENT for MBA FINANCE
Page 20

21. SAAB MARFIN MBA
1. Personnel Department
This department is almost like a human brain, since it is the human
beings that operate it. This department is concerned with implementation of
the plans, with the welfare of the plant, with the industrial relations and above
all safety and security of the plant and the work force is its prime concerns.
This department looks after the subsidiaries like recruitment selection training
and induction, canteen, community development disciplinary actions etc.,
welfare, security, guesthouse, medical facility etc., (As per Indian Factories Act
1948.)
Team Apex Professionally managed with a rich blend of experience and
enthusiastic youth, Engineers, Diploma Holders, draft men, ITI welders and
fitters, Gas cutters, workers and Fabrication Experts.
Let’s go through the process of the Recruitment in Apex Auto Ltd Unit II.
Recruitment is process of searching the prospecting candidate,
stimulating and encouraging them to apply for the job. The above meaning says
that every organization want skilled workers so Apex Auto Ltd Unit II also
recruit candidates as follows , they firstly check the organization culture which
type of employees needed in organization and they also check employment
condition in unit.
They are searching the candidates in two ways one is Advertisement and
the other is manual searching. In advertisement they give firstly the adz’s like
Draft Adv, Client review adv and Place adv, and then they receive the calls then
access their CV’s. In manual searching process they search the employee in
plan search, identity search, and contact search, then they check the candidates
interest after that they arrange meeting for selection process
NVENTORY MANAGEMENT for MBA FINANCE
Page 21

22. SAAB MARFIN MBA
Selection process Selection is a process of checking the candidate’s
knowledge, behavior, Skills, experience, and qualifications etc to select and
place the candidate their correct position.
2. Stores Department
The raw materials are stored separately under material cell in production
department; as per the demand this department does the work of receiving and
issuing of materials.
3. Purchase Department
Against the approved purchase requisition the department purchases of
raw material semi finished goods and Accessories and other needs of the
various departments. In order to make the work efficient it has the system of
sub contractors. So the purchase department does the creation of sub
contractors and vendors. This department is guided by the main motto the
plant and other departments working. Let’s have a look on the flow chart of the
purchase of raw materials in Apex Unit II
Material
indenting
(As per
customer
schedule)
Quotations request to one or
more vendors according to
requirement
Quotations
Best Negotiation
Purchase Order
NVENTORY MANAGEMENT for MBA FINANCE
creation
Page 22
Purchase Order send
to vendor (supplier)

23. SAAB MARFIN MBA
4. Dispatch Department
The dispatch of materials and finished goods is done in a very efficient
way.
5.Production Department
This department entrusted with the task of the production of Dozer
Blade, Loader Bucket, Narrow Bucket, Back Hoe Main Frame, Boom, Arm,
Counter Weight, Heavy Duty Bucket, Revolving Frame and Track Frame. From
our very inception at Jamshedpur in 1996 and at Dharwad in 1999, our
infrastructural facilities have been meticulously planned out with an eye
towards satisfying the exacting standards of world class players in the Earth
Moving Industry.
Let’s have a look on the process of manufacturing process in Apex Unit II,
basically this company is heavy fabrication company, they are manufacturing
BACK HOE LOADER COMPONENTD & EXCAVATOR COMPONENTS. Following are
the components. JHON DEER (JD) Boom, Arm, Loader Arm and EXCAVATORS 70,
110, 120, Boom and EXCAVATORS 70, 110,120 Arm. The below showing is the
manufacturing process of Excavators-70 Boom.
NVENTORY MANAGEMENT for MBA FINANCE
Page 23

24. SAAB MARFIN MBA
Flow chart of Excavator – 70
BOOM END BRACKET
ASSEMBLY
TC 00558/01(RH), TC
00558/02(LH)
BEVELING OF PLATES
TA 00233/01, TA22033/07,
TA 00233/08
IN FIXTURE
SUB ASSEMBLY 1ST STAGE
TA 01164/00, TA 00233/27,
TA 00233/01, TA00233/08,
TA00233/05, TA00233/06
TA00233/07
OUT OF FIXTURE
ST
1 STAGE WELDING
NVENTORY MANAGEMENT for MBA FINANCE
Page 24
2ND STAGE ASSEMBLY
TE 20789, TE 20790
TA 00233/03

25. SAAB MARFIN MBA
CONTINUE
OUT OF FIXTURE
2ND STAGE WELDING
IN FIXTURE
TA 00233/09, TA 00233/10
TA 00233/04
LUG FITTING
TA 00233/14, TA 00233/15,
TA 00233/16, TA 00233/17,
INSPECTION
Total length 3720+/- Rejection/
4mm Top lug distance Rectification
WRT Boom End Bracket,
Bottom lug distance
NVENTORY MANAGEMENT for MBA FINANCE
ASSEMBLY OUT OF
Page 25
FIXTURE
TA 00233/02

26. SAAB MARFIN MBA
Not Ok
OK
CONTINU
Not Ok
REJECTION/
INSPECTIO RECTIFICATION
MACHINING
OK
REJECTION/
INSPECTIO RECTIFICATION
Not Ok
DRESSING
INSPECTIO OK
RECTIFICATION
N
Not Ok
DESPATCH
OK
NVENTORY MANAGEMENT for MBA FINANCE
Page 26

27. SAAB MARFIN MBA
Manufacturing process of Ex-70 Boom
Manufacturing process of Ex- 70 Boom is having several steps
already you know in the flow chart now below showing manufacturing process
in detail
1. RAW MATERIALS
In every manufacturing process raw materials must required there
for APEX AUTO LTD (UNIT II) purchase raw materials from its main branch at
JAMSHEDPUR and form Apex Auto Ltd (Unit I). Some materials directly comes to
Unit II but some materials firstly comes to Unit I and after some process it is
send to Unit II. Then the stores department sends materials to production
department for production
2. BOOM AND BRACKET ASSEMBLY
In this process Boom and Bracket assembled or produced. Here
firstly they join 20mm Bkt Plate (RH) (TC 00558/01) and TA00233/22 according
to the diagram. Then they join 20mm Bkt Plate (LH) (TC 00558/02) and TA
00233/11. After that back up bars are join at the bottom of both 20mm Bkt
plates. Then these two jointed by the plate Back up plate (TA 00233/19), then
NVENTORY MANAGEMENT for MBA FINANCE
Page 27

28. SAAB MARFIN MBA
they join one square plate for maintaining required dimensions after welding of
all this parts this complete the manufacturing of Boom And Bracket Assembly.
3. BEVELING OF PLATES
Some plates beveled by Unit I and those plates are Top rolling
plate(TA 00233/01), Side bend plate LH(TA 00233/07) and side bend plate
RH(TA 00233/08)
4. IN FIXTURE SUB ASSEMBLY 1ST STAGE
In this process one sub assembly will be done in this stage BOSS
(TD01164/00) is joined to Top rolling plate (TA 00233/01) at one side then at
the top of the BOSS they join Side bend plate LH (TA 00233/07). After that
inside of the BOSS they join BOSS Back up Plate (TA 00233/27). Then in the
middle of Top rolling plate and Side bend plate they join Gasset
plate(TA00233/05) and near to that Bend Gasset plate is joined with required
dimension, after that Side bend plate RH(TA 00233/08) is joined according to
diagram so this complete Sub assembly first stage.
5. OUT OF FIXTURE FIRST STAGE WELDING
After completion of Sub assembly first stage each part is manually
weld in this process.
6. SECOND STAGE ASSEMBLY
In this process Back up bar (TE20789) 03 Back up bar(TE20790) are
attached in the inside part of Bottom rolling plate (TA00233/03) at the right
side with required dimension according to diagram
7. OUT OF FIXTURE
In this process second stage welding process is done manually.
NVENTORY MANAGEMENT for MBA FINANCE
Page 28

29. SAAB MARFIN MBA
8. IN FIXTURE
In this process firstly prepared Boom and Bracket is joined by using
plates such as Cover plate 6mm (TA00233/09) and Cover plate 8mm
(TA00233/10), after that there is some place which is empty so that place is
been filled by plates Taper side Plate(TA00233/04) 2 plates according to
diagram. So this process finishes boom and bracket assembly.
9. LUG FITTING
In this process Lugs are fitted to the prepared component which are
Top lug and bottom lugs and Top washers lugs and Bottom washer Lugs. Firstly
bottom lugs are joined to each other and then those lugs are attached to the
bottom of the prepared component. After joining the bottom lugs the top lug is
joined to the top of prepared component with required dimension or space so
as to complete this process.
10. INSPECTION
This is an important stage in manufacturing process. In this stage
they check total length of the component. Total length should be 3720mm if
there less difference of 4mm then there is no problem it must not exceed 4mm,
then they also check centre point of the component and top lug distance to the
boom and bracket, and bottom lug distance of the components if there is any
problem found then they go for rectification of the component.
11. ASSEMBLY OUT OF FIXTURE
NVENTORY MANAGEMENT for MBA FINANCE
Page 29

30. SAAB MARFIN MBA
In this process they join one Top cover plate (TA00233/02) to the
boom or prepared component according to the standard diagram and they also
join ‘M’ plate (TA00233/28) attach to the top lugs so this completes the
process of assembly.
12. ROBOT WELDING
Robot is a programmable multiplication, manipulate design to
material part, tools or specialized devices are t
o carry out specific task.
In Robot welding processed components are weld by Robot machine.
Firstly they set the programs to the robot for welding the components. Every
component has is its own welding program according to the standard drawing
of the components, after installation of the Ex – 70 program the welding
process of EX- 70 boom starts, Mig welding wire is been used by the robot to
weld the component.
13. LEFT OVER WELDING
After completion of the Robot welding there are some spaces left
which are weld manually by welders. In this process they also join BOSS
Reenforcement plate (TA00233/26) at the top and bottom side of the BOSS
according to the diagram.
14. SETTING
In this process they maintain required dimension in various parts of
the components through the gas heating which includes Organ and Co
15. INSPECTION
In this process they measure the components by using measuring
scale, try square, Vernier and gauges etc.
NVENTORY MANAGEMENT for MBA FINANCE
Page 30

31. SAAB MARFIN MBA
16. MACHINING
Machining process means removing the rough face as per the
standard drawing. In machining process they have two type of jobs one is
milling and the other is boring, in this process they are using two type of
machines one SHW that means hidden control machine and the other is Fanuc
control machine. To reduce heat in the process they are using coolant oil
because it helps to reduce the heat for insert ware and tear and it helps to
smooth milling and boring of the component in machining they are having
there stages
1. Rough stage
2. Semi finish
3. Finish Stage
In Ex- 70 boom components are having mainly four bores boss bore must have
the size of 75mm and lug bore must have the size of 55mm and bracket must
have 60mm.
17. INSPECTION
In this process they use the following instruments to check weather
the machining process is properly done or not
1. Bore dial gauge
2. Micrometer
3. Vernier
4. Measuring scale etc
18. DRESSING
Dressing is the very important stage in manufacturing process in this
process they clean the components by using grinding machine and sander
machine to remove spatters chips etc, here they also fit some items to prepare
components to according to standard diagram.
NVENTORY MANAGEMENT for MBA FINANCE
Page 31

32. SAAB MARFIN MBA
19. INSPECTION
In this process they are checking welding defects in the components
by using Ultrasonic Technique (UT) machine, the following are the defects we
can find by using UT machine.
1. Blow Holder area
2. Proper penetration
3. Porsity etc
20. DISPATCH
After completion of all this processes the quality assurance
department checks the quality of the component and after checking they finally
dispatch the product so this complete the manufacturing process of EX-70
boom model.
Apex Auto Limited is in the service of gaints in the field of Excavator
manufacturing Co. TELCON for 6 Years by maintaining a high QUALITY & SKILL.
And for its efforts, it has been certified by TELCON, and other quality maintaing
institutions.
NVENTORY MANAGEMENT for MBA FINANCE
Page 32

33. SAAB MARFIN MBA
INVENTORY MANAGEMENT
Management of inventory assumes importance due to the fact that
investment in inventory constitutes one of the major investments in current
assets.
The term inventory refers to the stockpile of the products a firm is
offering for sale and the components that make up the product. The assets
which firms store as inventory in anticipation of need are:
(i) Raw Materials:
These represent inputs purchased and store to be converted into finished
products in future by making certain manufacturing process on the same.
(ii) Work in Process:
These represent semi-manufactured products which need further
processing before they can be treated as finished products.
(iii) Finished Goods:
These represent the finished products ready for sale in the market.
(iv) Stores and Supplies:
These represent that part of the inventory, which does not become a part
of final product but are required for production process. They may be in the
form of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc.
NVENTORY MANAGEMENT for MBA FINANCE
Page 33

34. SAAB MARFIN MBA
Normally, they form a very minor part of total inventory and do not involve
significant investment.
Let us have a look on Different Inventory Management Views. Means
emphasis role of Inventory Management in different Sectors.
INVENTORY MANAGEMENT
3
V
I
E
W
S
Physical Logistic
Inventory Inventory
Management Management
Financial
Inventory
Management
NVENTORY MANAGEMENT for MBA FINANCE
Page 34

35. SAAB MARFIN MBA
Inventory Management is consisting of 3 hands. The first hand as shown
in the diagram is that Physical Inventory Management, Second one is Financial
Inventory Management and the last one (third one) is Logistic Inventory
Management.
The reason behind of dividing these views is: to gather the information
very easily and for easy to understanding of each view thoroughly. Let us see
the Meanings of each view one by one.
Physical Inventory Management
Meaning:
“Keeping of goods is also a type of management. Whenever requirements
comes from the production department, providing of those required materials
in a proper manner & providing those at the specified period, is the main motto
of Physical Inventory Management.”
Benefits for Holding Inventory:
Benefits in Purchasing
Benefits in Production
Benefits in Work-in-Process
Benefits in Sales
Objects of Inventory Management:
NVENTORY MANAGEMENT for MBA FINANCE
Page 35

36. SAAB MARFIN MBA
Usually, the company is faced with the following conflicting objectives in
the area of inventory management:
1. To carry maximum inventory in order to facilitate efficient and smooth
production and sales operations.
2. To minimize investment in inventory for maximize the profitability.
Both over-investment and under investment in inventories is undesirable as
both involve the consequences. The over-investment involves the
consequences like:
i) Unnecessary blocking of funds in inventory and hence loss of profit.
ii) Excessive storage and Insurance Cost.
i. Risk of liquidity. The inventories once purchased and stored are normally
difficult to dispose off at the same value.
The under-investment involves the consequences like:
b. If sufficient stock of raw material and work in process is not available, it
may result into frequent interruptions in production.
c. If sufficient stock of finished goods is not available it may not be possible
for the company to serve the customers properly and they may shift to
the competitors.
Thus, it can be said that the objective of inventory management is to
minimize the investment in inventory without affecting production or sales
operations.
Inventory, as a current asset, differs from the other current assets
because only financial managers are not involved. Rather, all the functional
areas, finance, Marketing, Product & Purchasing are involved.
NVENTORY MANAGEMENT for MBA FINANCE
Page 36

37. SAAB MARFIN MBA
The job of the financial manager is to reconcile the conflicting viewpoints
of the various functional areas regarding the appropriate inventory levels in
order to fulfill the overall objective of maximizing of owner’s wealth.
Two-Bin System:
Under this system, the inventory items are grouped into two categories.
In one group or bin, sufficient quantity is kept to meet the current requirements
over a designated period of item. In another group or bin, a safety stock is
maintained to meet the requirements of inventory at times when the stock in
the first bin is exhausted and re-ordering occurs.
Financial Inventory Management
Meaning:
“Recording, maintaining and evaluating of stocks in a value terms is
known as Financial Inventory Management.” In other words valuation of stocks,
and controlling of ordering and holding costs and also maintaining of sufficient
valued stocks in Inventory is known as Financial Inventory Management.”
Financial Inventory Management is again divided into three different categories.
NVENTORY MANAGEMENT for MBA FINANCE
Page 37

38. SAAB MARFIN MBA
1) Based on Valuation
2) Based on Cost Analysis
3) Based on Financial Statement
1) Based on Valuation
There are number of generally accepted methods of determining the cost
of inventories at the close of the accounting period. The selection of a suitable
method assumes significance in view of the fact that it has a direct bearing on
the cost of goods sold and consequently on profit. Therefore, the method
should be selected in the light of probable effects on profits over a period of
years.
Note:
It may not be out of place to mention that once a method is selected, it
must be used consistently and cannot be changed from year to year.
The discussion here of the methods to value inventory should, therefore be
viewed in this perspective.
First In First Out (FIFO) Method:
The FIFO method of valuation of inventory is based on the assumption
that the inventory is consumed in chronological order, that is, those received
first are issued/consumed first and value fixed accordingly. The merit of FIFO
method is that the physical flow of materials matches the flow of cost.
Last in First Out (LIFO) Method:
NVENTORY MANAGEMENT for MBA FINANCE
Page 38

39. SAAB MARFIN MBA
Under the LIFO method, the cost of goods sold and the value of closing
inventory can be determined only after the final lot of the year has been
received. This is because of the assumption underlying the valuation of
inventory, according to this method. As the name LIFO suggests, the use of
inventory is valued on the basis of the inverse sequence of receipts. Since the
LIFO method assumes that the latest item in is the first item out, the current
cost of materials are matched with the current selling price/current revenues.
This matching of current costs with current revenues is the essence of the
argument for the LIFO method.
Average Cost Method:
According to average cost method, each purchase is added to inventory
and an average cost determined. Materials are charged into cost of sales at this
average until another lot is received, when a new average unit inventory cost is
calculated.
Note: There are so many other than these above methods but most wide
usefully methods are these three so here we discussed those three methods
only.
2) Based on Cost Analysis
Cost of Holding Inventory: -
NVENTORY MANAGEMENT for MBA FINANCE
Page 39

40. SAAB MARFIN MBA
One operating objective of inventory management is to minimize cost.
Excluding the cost of merchandise, the costs associated with inventory fall into
two basic categories: (i) Ordering or Acquisition or Set-up Costs, and (ii)
Carrying Costs. These costs are an important element of the optimum level of
inventory decisions.
1) Ordering Cost:
It is the fixed cost of placing & receiving an inventory order. Like (a)
Preparing a purchase order or requisition form & (b) receiving, inspecting &
reordering goods received to ensure both quantity & quality. It is also called as
setup cost.
2) Carrying Cost:
The second broad category of costs associated with inventory is the carrying
costs. They are involved in maintaining or carrying inventory. The cost of
holding inventory may be divided into two categories.
1. Those that Arise Due to the Storing of Inventory: The main components
of this category of carrying costs are (i) storage cost, that is, depreciation,
insurance, maintenance of the building and utilities; (ii) insurance of
inventory against fire and theft; (iii) deterioration in inventory because of
pilferage, fire, technical obsolescence, style obsolescence and price
NVENTORY MANAGEMENT for MBA FINANCE
Page 40

41. SAAB MARFIN MBA
decline; (iv) serving costs, such as labour for handling inventory, clerical
and accounting costs.
2. The Opportunity Cost of Funds: This consists of expenses in raising
funds (interest on capital) to finance the acquisition of inventory. If funds
were not locked up in inventory, they would have earned a return. This is
the opportunity cost of funds or the financial cost component of the cost.
Linking of Costs based and Physical Based Inventory Management:
The carrying costs and the inventory size are positively related and move
in the same direction. If the level of inventory increases, the carrying costs also
increase and vice-versa.
Total Cost:
The sum of inventory increases, the carrying costs represent the total
cost of inventory. This is compared with the benefits arising out of inventory to
determine the optimum level of inventory.
Economic Order Quantity (EOQ):
How much inventory should be bought in a lot? Should the quantity to be
purchased be large or small? Should the requirements of material during a
given period (say 6 months or 1 year) be acquired in one lot or should it be
acquired in installments or in several small lots? Such inventory problems are
called Order quantity problems.
Therefore EOQ is that level of inventory at which total cost of inventory
comprising ordering cost & carrying costs is the minimum
NVENTORY MANAGEMENT for MBA FINANCE
Page 41

42. SAAB MARFIN MBA
Formulae for calculating Economic Order Quantity:
EOQ = 2AO
C
Where,
A= Annual Quantity
O= Ordering Cost
C= Carrying Cost
Assumptions:
1. The firm knows with certainty the annual usage (consumption) of a
particular item of inventory.
2. The rate at which the firm uses inventory is steady over time.
3. The orders placed to replenish inventory stocks are received at exactly
that point in time when inventories reach zero.
NVENTORY MANAGEMENT for MBA FINANCE
Page 42

43. SAAB MARFIN MBA
Order Point:
Reorder Point:
This is the point at which to order inventory-expressed
equation-ally as:
Lead Time in days X daily usage.
Lead Time:
It is the time normally taken in receiving delivery after placing orders with
suppliers.
Safety Stock:
It implies extra inventories that can be drawn down when actual
lead-time and/or usage rates are greater than expected.
3) Based on Financial Statement
For having assistance by banks, bankers should first evaluate the followings:
1. Collateral Strength.
2. Inventory Position
3. Some Financial Ratios
4. Payment of all requirements like Income Tax, Wealth Tax, Interests on
debt etc.,
NVENTORY MANAGEMENT for MBA FINANCE
Page 43

44. SAAB MARFIN MBA
5. Agreement papers of all authorized persons like Debenture holders,
Shareholders etc.,
6. All required documents.
7. Who is the Buyer and his Country’s relationship etc,
The main requirement for Banker is the Financial Statements of 3 to 5 years.
From this statement it can judge the financial strength of the Company. While
analyzing of Financial Strength of the Company, Inventory is also having its own
emphasis role. Because if company is having less inventory than its
requirement then company will get less finance from Banks and visa-versa. So
here high inventory means, high in the sense company should have sufficient
inventory according to its order. Not more than its order.
Let us have a look on some Inventory related Ratios and also some
important financial ratios those, which are related to Inventory. From
evaluating of these Financial Ratios, company can judge the stocks/goods level
in Inventory, so that company can get loan from Banks.
The financial statement provides a summarized view of the financial
position and operations of a firm. Therefore, much can be learnt about a firm
from a careful examination of its financial statements as invaluable
documents/performance reports. The analysis of financial statement is, thus
an important aid to financial analysis.
The analysis of financial statements is a process of evaluating
relationship between component parts of financial statements to obtain a better
understanding of the firm’s position and performance.
NVENTORY MANAGEMENT for MBA FINANCE
Page 44

45. SAAB MARFIN MBA
Tasks of Financial analyst is to:
1) Select the information relevant to the decision under consideration
from the total information contained in financial statement.
2) Arrange the information in way to highlight significant relationships.
3) Interpretation and drawing of inferences and conclusions.
In brief, financial analysis is the process of selection, relation and evaluation.
Financial analysis is the process of identifying the financial strengths and
weaknesses of the firm by properly establishing relationships between the
items of the balance sheet and the profit and loss account. Financial analysis
can be under taken by management of the firm, or by parties out side the firm,
viz., owners, creditors, investors and others. The nature of analysis will differ
depending on the purpose of the analyst.
Management of the firm would be interested in every aspect of the
financial analysis. It is their overall responsibility to see that the
resources of the firm are used most effectively and efficiently, and that
the firm’s financial condition is sound.
Trader creditors are interested in firm’s ability to meet their claims over a
very short period of time.
Investors, who have invested their money in the firm’s shares, are most
concerned about the firm’s earnings.
Suppliers of long-terms debt, on the other hand are concerned with the
firm’s long-term solvency and survival. They analyze the firm’s
profitability over time, its ability to generate cash to be able to pay
interest and repay principal and the relationship between various sources
of funds.
NVENTORY MANAGEMENT for MBA FINANCE
Page 45

46. SAAB MARFIN MBA
2.Ratio Analysis related to Inventory
Ratio analysis is a powerful tool of financial analysis. A ratio is defined as
“the indicated quotient of two mathematical expressions” and as “the
relationship between two or more things.” In financial analysis ratio is used as
a benchmark for evaluating the financial position and performance of a firm.
Ratios help to summarize large quantities of financial data and to make
qualitative judgment about to form a qualitative judgment the focus of financial
analysis is on the key figures in the financial statements and the significant
relationships that exist between them.
Types of Ratios:
a. Liquidity Ratios
b. Activity Ratios
c. Profitability Ratios
A. Liquidity Ratios:
Liquidity refers to the ability of the firm to meet its obligations in the
Short run, usually one year. Liquidity ratios measure the ability of the firm to
meet its current obligations. Liquidity ratios by establishing a relationship
between cash and other Current assets to Current obligations provide a quick
measure of liquidity. A firm should ensure that it does not suffer from lack of
liquidity, and also that it does not have excess liquidity.
NVENTORY MANAGEMENT for MBA FINANCE
Page 46

47. SAAB MARFIN MBA
Therefore it is necessary to strike a proper balance between high liquidity
and lack of liquidity. Following are some of the important liquidity ratios:
1. Current Ratio
2. Quick Ratio
3. Net working Capital Ratio
B. Activity Ratios:
Activity ratios are concerned with measuring the efficiency in asset
management. Sometimes, these ratios are also called efficiency ratios or asset
utilization ratios. The efficiency with which, assets are converted into sales.
The greater the rate of turnover or conversion, is the more efficient the
utilization. For this reason, such ratios are also designated as turnover ratios.
Turnover is the primary mode for measuring the extent of efficient employment
of assets by relating the assets to sales. An activity ratio may, therefore, be
defined as a test of the relationship between sales and various assets of a firm.
Several activity ratios can be calculated to judge the effectiveness of asset
utilization.
1. Inventory Turnover
2. Assets Turnover
3. Fixed Assets and Current Assets Turnover
Asset Measurement for different methods of inventory valuation:
FIFO Method:
NVENTORY MANAGEMENT for MBA FINANCE
Page 47

48. SAAB MARFIN MBA
Under this method, as noted earlier, inventory is valued on the
assumption of chronological cost flow. This implies that the unused/unsold
inventory consists of the most recent purchases and, therefore, can be assumed
to be valued at current cost. The vale of inventory as show in the balance sheet
would reflect the current cost , if FIFO method were used.
LIFO Method:
According to this method, obviously, the inventory figure would not
appear in the balance sheet at the Current Cost. It will reflect rather the cost of
raw materials purchased in the past year. Assuming rising prices, the inventory
value based on the LIFO method would tend to be undervalued. For example
inventory purchased as early as six years or more. In that situation, the
inventory figure included in the balance sheet would be actually the price paid
on the purchase of inventory six years ago. In a period of rising prices, this
value would naturally be grossly out of line with the currently prevailing price.
This would imply that the balance sheet would not reflect the current worth of
the inventory. That the inventory value will not be correct is another way of
saying that the balance sheet will present a distorted picture of the affairs of
the firms.
A possible solution to correct the above distortion in the balance sheet
implicit in the under-valuation of inventory with the LIFO method is a
modified/adjusted LIFO method.
The modified method will, thus, serve the needs of correct income
determination as well as correct asset measurement. However, this is subject
NVENTORY MANAGEMENT for MBA FINANCE
Page 48

49. SAAB MARFIN MBA
to a qualification, namely, the current year’s purchase (units) should exceed the
current year’s consumption (units). If for reasons such as strike/lockouts,
transportation problems, and so on, the current consumption exceeds the
current purchases, profits will rise. The increase will depend upon the extent of
liquidation of the previous years’ inventory. This increase in profit is termed as
liquidation profit, which is equal to the difference between the current cost of
inventory and the cost of inventory purchased in the past.
NVENTORY MANAGEMENT for MBA FINANCE
Page 49

50. SAAB MARFIN MBA
Logistics Inventory Management
Meaning of Logistics:
Logistics is the Organization of Services and Supplies. In other words,
logistics is making and taking the permission for sell/exporting the company’s
products in foreign countries.
In fully export-oriented business this is one of the main department,
where this department gets an approval to sell their goods in foreign countries.
And also their main intention is to maintain all documents of those that are
related to the exporting of their products.
Logistics Inventory Management:
Yes, already we have observed about the meaning of Inventory
Management in the Organization. But in fully export oriented business;
Inventory Management is a very important concept. Because every exporter or
importer, they do not know about each other who are staying in other countries.
So every company, which are exporting or importing of materials, they
should communicate each other through banks only. These banks are listed by
Central Bank of that Nation. In our Country RBI is lists some banks for
intermediating purpose and every year RBI declare some listed Banks as a
mediator.
For producing of materials and selling of those materials, every
company/business should need a Working Capital. This Working Capital can
also financed by Banks. While in export oriented business it is slightly different
NVENTORY MANAGEMENT for MBA FINANCE
Page 50

51. SAAB MARFIN MBA
task. Here Banks can acts as financial assistance for Pre-Shipment and for Post
Shipment of Goods.
For having an assistance by banks they should first evaluate followings:
1. Collateral Strength.
2. Inventory Position
3. Some Financial Ratios
4. Payment of all requirements like Income Tax, Wealth Tax, Interest etc.,
5. Agreement papers of all authorized persons like Debentures,
Shareholders etc.,
6. All required documents.
7. Who is the Buyer and his Country’s relationship etc,
Before going to detail decision on Banks let us have a look on Commercial
Papers. Which are also parts of financing the working capital requirements of
the Companies.
Commercial Papers (CPs):
In the recent past, Commercial Papers (CPs) have become one of the best
methods for financing the working capital requirements of the companies.
The companies trying to raise the funds by issuing the CP are regulated
by Guidelines for issue of Commerical Papers (CP), 2000 issued by Reserve Bank
of India on October 10, 2000. These guidelines apply to the companies trying
to raise the funds by issuing the CPs. As per these guidelines, a a company
means a company as defined in section 45-I(aa) of Reserve Bank of India Act,
1934. Section 45-I(aa) of Reserve Bank Act, 1934 defines a company as the
company as the company as defined in section 3 of the companies Act, 1956.
NVENTORY MANAGEMENT for MBA FINANCE
Page 51

52. SAAB MARFIN MBA
In the Indian circumstances, banks play a very major role in financing the
working capital requirement of the organizations. We will consider the bank as
a source for financing the working capital requirement of the organizations
under the following heads:
Amount of Assistance
To obtain the bank credit for financing the working capital requirements,
the company is required to estimate the working capital requirement properly.
To estimate the requirement of working capital requirement properly, the
company will be required to estimate its level of current assets and current
liabilities properly, as working capital is the difference between current assets
and current liabilities.
For this, the techniques like ratio analysis, trend analysis etc., can be
used by the company. More accurate the estimation of the level of current
assets and current liabilities, more accurate the estimation of level of current
capital. Then, the company will have to approach the bank along with the
necessary supporting data. On the basis of estimates submitted by the
company, the bank may decide the amount of assistance that can be extended.
While extending the working capital assistance, the bank may prescribe the
margin money requirement. The margin money stipulation is made by the
banks in order to ensure that borrowing company’s own stake in the business
and also to provide the cushion against the possible reduction in the value of
security offered to the bank. The percentage of margin money stipulation may
NVENTORY MANAGEMENT for MBA FINANCE
Page 52

53. SAAB MARFIN MBA
depend upon the credit standing of the borrowing company, fluctuations in the
price of security and the directives of RBI from time to time. The general
principle applicable will be, “more dicey the nature of security, higher of
security, higher will be the margin money stipulations.”
Form of Assistance:
After deciding the amount of overall assistance to be extended to the company,
the bank can disburse the amount in any of the following forms:
1. Non-Fund Based Lending
2. Fund Based Lending.
Non Fund Based Lending:
In case of Non-Fund Based Lending, the lending bank does not commit any
physical outflow of funds. As such, the funds position of the lending bank
remains intact. The Non-Fund Based Lending can be made by the banks in two
forms:
NVENTORY MANAGEMENT for MBA FINANCE
Page 53

54. SAAB MARFIN MBA
a. Bank Guarantees
b. Letter of Credit
Fund Based Lending:
In case of Non-Fund Based Lending, the lending bank commits the physical
outflow of funds. As such, the funds position of the lending does not affected.
The Fund Based Lending can be made by the banks in following forms:
a. Loan
b. Overdraft
c. Cash Credit
d. Bills Purchased/Discounted
e. Working Capital Term Loans
f. Packing Credit
Security for Assistance:
The bank may provide the assistance in any of the modes as stated above. But
normally no assistance will be available unless the company offers some
security in any of the following forms.
1) Hypothecation.
2) Pledge
3) Lien
4) Mortgage
NVENTORY MANAGEMENT for MBA FINANCE
Page 54

55. SAAB MARFIN MBA
Process of Physical Inventory Maintenance in Apex Auto Ltd
Each unit of Apex auto ltd has its own store department that we can call it
as Work-in-process inventory.
This inventory process is fully computerized and here paper work is very
less. Only maintaining of documents, which were sent by suppliers as like
challans etc., are only here to maintain as paper documents. Otherwise it is fully
computerized. Through computers only Store Department receives Purchase
Order and by computer only they send documents of issuing of materials to
manufacturing unit.
NVENTORY MANAGEMENT for MBA FINANCE
Page 55

56. SAAB MARFIN MBA
For easy to communicate and planning of production activity, Apex Auto
Ltd Unit II has having only one Godown in Procedures involved in receiving and
issuing of materials are as follows:
1) Godown will first get Purchase Order No..
Purchase Order Number:
This PO is comes from Purchase Department. This Purchase Department
gives a number for the each order made by Purchase Department only.
Before placing any order to suppliers they first checks the materials in
inventory as to know about whether materials are available in Inventory or not.
If not available in Inventory then only they will place an order according to the
requirement.
In Apex Auto Ltd (Unit II), it is very important to note that: purchase
department always places an order to those materials which have ordered by
Customers/buyers of Apex Auto Ltd (Unit II).
So, normally it does not have any stocks in its inventory. For every order
from customers they make a fresh Purchase Order for purchasing of materials.
It means whatever the materials are requiring for present orders, those
materials are only they kept as stocks in Inventory.
In some cases, materials may be in Godown, which they call it as “Buffer
Stock”. If these old stock is matches the requirements of product which has
ordered now by its customers, then purchase Department will sent a notice to
Inventory for issuing of those materials. These old stock may be in form of Raw
Material or in form of finished goods. Apex Auto Ltd (Unit II) always produces
more than its requirements. For example if Telcon has ordered for 20 EX- 70
NVENTORY MANAGEMENT for MBA FINANCE
Page 56

57. SAAB MARFIN MBA
boom then Apex produces 25 EX – 70 i.e., 20% more than its requirements. So
the remaining or excesses material they call it as “Buffer Stock”.
2) Receiving of Materials
Any materials comes-in or goes-out from the Godown it should be enter
in the Gate that is they call it as “Gate Entry”, which is maintained by security
Guard. Guard is not an employee of an organization. He is a contact-based
employee.
When Inventory receives materials it first inspects some samples, so for it,
they call up as “Spot Inspection.” Here they inspect the following points:
a) Is it our supplier only and is this parcel is for us only?
d. Are these received materials according to the Purchase Order? Like
i. Quantity
ii. Date, etc.,
e. Is it having all required Challans or Invoices and also does it approved by
authorized person?
f. Is it having all required documents like Octroi etc.,
g. Is that Challan consisting the correct information of materials?
After approval of materials by sample inspection, inventory department
put these details in manual book, this documentation is called as “Day Book.”
This daybook is consisting of information like Challan No., P.O. No., Style No.,
Description of Materials, Supplier’s Name, transporter’s Name, and Quantity.
After completing of these processes, materials will send to inspection
department. In this inspection department they inspect in-details of materials.
NVENTORY MANAGEMENT for MBA FINANCE
Page 57

58. SAAB MARFIN MBA
After approval by inspection department, this inventory department makes one
document, which is they call it as “Goods Received Document”.
This Goods Received Document is consisting of GR No., Date, GRN Type
(In-store), Mode of Transport, Challan No., Challan Date, Status, Gate Entry No.,
Gate Entry Date, Priority No., all Details of Materials and received quantity and
actual quantity also enters there.
3. Issuing of Materials
Merchandising Department will send one card called “Job Card” which it
consisting of all details of materials requires to produce a product. According
to that Card Inventory department should send the materials to manufacturing
department.
After receiving of materials by manufacturing department from inventory
department they issue one document about received of materials, quantity,
description of materials etc. Manufacturing Department uses these materials
for manufacturing purpose. In manufacturing process sometimes it may
happens like some materials get damages and some are not fully matches with
requirements. Then those materials will be return to inventory.
After utilizing of all these materials by manufacturing department they
will send one document called “Order Completion Report” (OCR). This report
consists the information of Percentage of Utilized Materials for particular order
and percentage of wastage of materials. This report will send to inventory and
also to Merchandising Department.
4. Return Back Materials from Manufacturing Units:
NVENTORY MANAGEMENT for MBA FINANCE
Page 58

59. SAAB MARFIN MBA
Inventory takes those materials, which are return back from
manufacturing units because of excess or surplus occurs while manufacturing
of products. This excess or surplus exists because of purchase department,
they always orders 20% more than its requirement to meet the requirement of
next month. So these materials are kept in Inventory as name it as “Buffer
stock.”
These Buffer Stocks will be utilize when company get the same type of
Order. Inventory issues these materials (Buffer Stock) only when it receives
instruction from Merchandising and purchasing Department.
5. Rejected Materials:
Inspection department make the rejection of materials, when materials
are not as per requirements and not as per the order. These rejected materials
are kept in separate section by Inventory Department.
Inventory department inform to Purchase Department and also notice to
Suppliers about rejection of materials. That is called “Rejection Card.” In this
card it involves Name of Supplier, Description of Materials, Challan No., Challan
Date, Gate Entry No. & Date, No. of Quantity rejected, Reason for rejection etc.,
Some times supplier may issue new materials in place of rejected
materials. Or he may give some compensation for wrong supply and that is
after paying of full payment of materials.
Sections in Inventory:
NVENTORY MANAGEMENT for MBA FINANCE
Page 59

60. SAAB MARFIN MBA
Inventory is again divided into 5 sections. Each is section handling by
only one persons, with the help of 3 to 4 assistants, who helps in maintaining
of materials at specific area. Five sections are as follows:
Sections in Inventory
D201
All bought out items are been stored here and processed to the manufacturing
as when required
D202
All consumables and tools and maintenance accessories are been stored in this
section
D203
All raw materials like direct, semi finished goods are stored in this section and
processed to the manufacturing as when required and old stock and rejected
items are also stored in this section.
D204
Gas tank and cylinders is stored in this section.
D205
All finished goods are stored in this section
NVENTORY MANAGEMENT for MBA FINANCE
Page 60

61. SAAB MARFIN MBA
Purchasing Procedure of Materials
In Apex they purchase materials at from a multiple Suppliers. There is a
reason for purchase materials from multiple suppliers. The reason is if one
supplier delays to fulfill the supply then there must be alternative supplier for it
to fulfill the requirement. So there must me no stock outs in the production
process
Apex always purchases at bulk but by schedule wise. In other words they
purchase materials at a time for specific order. They make the agreement of
supplying materials only at once. And they negotiate the price only at once that
is before supplying of materials and once their agreement is over then they
provide schedule to supplier to supply the materials at a specific time and at a
specified quantity.
So it reduces the spaces, which occupies in the Godown. So this method
is suitable for this type of industry because of same orders from customers.
WIP Store
Now we come to the WIP Store. As we have already seen that this Apex is
having only one Godown and every unit is having its own Store Departments.
As we know that Work In Process Store means Semi-finished Goods, here goods
are not completed yet and not these are in fully raw materials form.
NVENTORY MANAGEMENT for MBA FINANCE
Page 61

62. SAAB MARFIN MBA
So in valuation matter it is having slightly different way. And in Apex it is
as follows: Yes, these goods are includes some labour cost, some other costs.
So in valuation of WIP they valuate at Raw Material Price of that goods PLUS
incurred cost to produce till now.
Finished Goods
Valuation of Finished Goods in Apex is at 10% less than Selling Price of
those finished goods. Finished Goods are in the sense these goods should be
ready to dispatch.
There is no separate Godown for Finished Goods/Products. Every unit is
having it’s own Finished Goods Godown. In that Godown only they store these
Goods. And dispatching of these products is directly by each unit. They do not
consolidate these goods; they dispatch these finished products directly by each
unit.
Apex auto ltd (Unit II) has only one customer that is Telcon. So they
directly supply finished products to its customers. So it is not necessary to
have another Godown for Finished Goods.
NVENTORY MANAGEMENT for MBA FINANCE
Page 62

63. SAAB MARFIN MBA
Logistics Inventory Management
There is a department called Logistic Department in Apex Auto Ltd, which
is concerning about selling of goods and maintaining of all documents related
to exporting of products and also taking the permission from banks to sell
specific products in specific countries. So Logistic Department is one of the
important front-office Departments, like Marketing Department.
Marketing Department is one, which takes the orders from its customers.
And this is entirely different from Logistic Department. Logistic Department is
one, which sells its products and maintains all documents. But Marketing
Department is comes into picture before production process starts. And
Logistic Department comes into picture only after the production process
completes.
Logistic Department is not only taking the approval for selling its
products, but also it will concern for taking loan for its working capital. Banks
will provide these working capital requirements in two senses: one is on
Pre-Shipment Loan and another one is Post-Shipment Loan.
NVENTORY MANAGEMENT for MBA FINANCE
Page 63

64. SAAB MARFIN MBA
There are so many ways to get loan for working capital requirement.
Apex get loan for Working Capital requirement either through Commercial
Papers or through Letter of Credit. Apex is taking loan for Working Capital
Requirements from Axis Bank.
Who can issue the CP:
A company will be eligible to issue the CP provided:
1. the tangible net worth of the company as per latest
audited balance sheet is not less than Rs. 4 Crores.
Note:
Tangible net worth means share capital plus free reserves duly reduced
by intangible assets like accumulated losses, deferred revenue expenditure etc.
Free Reserves include share premium and debenture redemption reserve but do
not include revaluation reserve.
2. Company has been sanctioned working capital limits
by banks.
3. Borrowed amount of company is classified as a
standard asset by the bank.
Commercial Paper is an unsecured promissory note issued at a discount.
The rate of discount is required to be decided by the issuer and is not regulated.
Before the company issues the CPs it is required to obtain satisfactory
credit rating from an approved credit rating agency. Presently, following credit
rating agencies have been approving by RBI for this purpose.
NVENTORY MANAGEMENT for MBA FINANCE
Page 64

65. SAAB MARFIN MBA
a. Credit Rating Information Services of India Ltd.,
(CRISIL)
b. Investment Information and Credit Rating Agency
of India Ltd., (ICRA)
c. Credit Analysis and Research Ltd., (CARE)
d. FITCH Rating India (P) Ltd.,
The minimum credit rating required is P-2 of CRISIL. If the rating is given
by any other agency, equivalent minimum rating will be required. The rating so
obtained by the company should be current and should not have fallen due for
review.
Who can invest in CP:
Following persons can invest in the CP
4. Individuals
5. Banks
6. Corporate Bodies incorporated in India
7. Unincorporated Bodies
8. Non-resident Indians
9. Foreign Institutional Investors
Nature of a CP:
h. A CP can be issued for the maturity period of 7 days to one year.
NVENTORY MANAGEMENT for MBA FINANCE
Page 65

66. SAAB MARFIN MBA
i. A CP has the denomination of Rs. 5 Lakshs and every single investor
should invest minimum Rs. 5 Lakhs in CP.
j. Every issue of CP, including the renewal, will be considered to be the fresh
issue.
k. The amount of CP shall be within the overall limit sanctioned by the Board
of Directors. It can be issued a “stand alone” product. Banks will be free to
adjust the working capital limits after considering the CPs issued by the
Company.
It will not be out of place to mention here that CP is not treated as deposit as
per the provisions of Section 58-A of the Companies Act, 1956.
Procedure for issuing the CPs:
Every company issuing the CP should appoint a scheduled bank as the
Issuing and Paying Agent (IPA). It will satisfy it-self that company has obtained
satisfactory credit rating. It shall also verify the documents submitted by the
issuing company and issue a certificate that the documents are in order. IPA
should also certify that it has valid agreements with the issuing company.
The issuing company shall arrange to place the CPs on private
placement basis with the inventors. The issuing company shall disclose to the
potential investor its financial position. After the deal is confirmed, the issuing
company shall issue physical certificates to the investor. Investors shall be
given a copy of IPA certificate to the effect that the issuing company has a valid
agreement with the IPA and documents are in order. Every issue of CP should
be reported to RBI through the IPA within three days from the date of
completion of issue.
NVENTORY MANAGEMENT for MBA FINANCE
Page 66

67. SAAB MARFIN MBA
Apex Auto Ltd (Unit II) has setup in Telcon Premises so as we know earlier
that Apex Unit II is having only one customer that is Telcon so for short
distance there is no need of logistic department in Apex Unit II it is handled by
Purchase department incharge is Parmod Singh.
Financial Inventory Management
Already we saw about Logistic Inventory Management. Let us see how
Apex valuates the old and rejected stocks in financial terms and also have a
look on the inventory ratios.
NVENTORY MANAGEMENT for MBA FINANCE
Page 67

68. SAAB MARFIN MBA
Valuation method for Old and Rejected Stocks:
Old Stock:
This old stock means excess of materials from specific order. As already
viewed in Physical Inventory Process that, always purchase department
purchases 20% more than its order. So that remained or excess materials are
said to be “Buffer Stock”
These Old stock are in the form of Raw Materials then valuate it according
to purchasing of those materials. If these old stock are after Finishing of
production process. Then these are valuating on selling price of same products
to the customer.
In easy words it can be said that if materials are Raw, then taking as
Purchasing value for valuation purpose. If materials are Finished Goods then
taking Selling Price as a value for valuation of Old Stock in Godown.
Rejected Stocks:
Again these are divides into three parts. Rejection of Raw Materials i.e.,
before sending to Production Process. Rejection of Materials during the
Production Process and Rejection of Materials after the Production Process that
is, Rejection of Finished Goods.
Rejection of Raw Materials is valuating on Purchase value of those
materials. Rejection of WIP Materials then valuate as Purchase Value Plus its
partly incurred Costs like Labour, Overhead Costs etc., And for Rejection of
Finished Goods valuate at Purchase Value and Fully incurred Costs as said now.
Holding or Ordering Cost
NVENTORY MANAGEMENT for MBA FINANCE
Page 68

69. SAAB MARFIN MBA
These costs are every important in manufacturing companies to minimize
the cost. This is not applicable to Apex by virtue of its Business activities.
Because, let us have a broad view on statement by following points:
In Apex, they purchase the materials only from multiple supplier.
Because to fulfill the requirements in required time limit.
Apex orders the materials to suppliers only at once and according to the
schedule supplier will supply the materials.
Yes, Depending on Shorter order cycle Apex can hold entire stock well
before order starts and also Apex can have a full stock at a time before starting
process of product of that specific order.
EOQ
EOQ applicability due to the nature of Business as above said is not
possible.
Reorder Point:
This is the point is also not having much importance because of nature of
Business.
Lead Time
Apex purchases materials from multiple supplier and by on schedule
basis to supply materials. So this is also not applicable in this type of business.
NVENTORY MANAGEMENT for MBA FINANCE
Page 69

70. SAAB MARFIN MBA
Financial Ratios related to Inventory.
Raw material turnover ratio:
Raw material turnover ratio is velocity at which raw material converted
into goods ready for sale. If raw material turnover ratio is high then company is
efficiency converting into finished goods.
Formula: Material consumed / Average raw material
NVENTORY MANAGEMENT for MBA FINANCE
Page 70

71. SAAB MARFIN MBA
Raw Material Turnover Ratio
Raw material consumed
Year (Rs) Avg R.M Ratio
2008 576,484,922 53,608,082 10.75
2007 371,223,873 36,137,266 10.27
2006 230,779,236 132,002,490 1.74
Ratio
12
10
8
6 Ratio
4
2
0
2008 2007 2006
Years
Form above graph we come know that raw material turnover ratio is increased
rapidly in 2007 from 1.74 in 2006 to 10.27 for 2007. Indicates that company is
converting raw material into finished or semi finished goods very quickly
Holding period of raw material:
It refers to the number of days taken for the production unit to
convert raw material to finish goods.
Formula: 360 /Raw material turnover ratio
NVENTORY MANAGEMENT for MBA FINANCE
Page 71

72. SAAB MARFIN MBA
Holding period of raw material
Year Total Days Ratio Days
2008 360 10.75 33
2007 360 10.27 35
2006 360 1.74 206
Raw material holding Period
250
200
D 150
A RHP
Y 100
S
50
0
2008 2007 2006
Years
As the raw material turnover ratio is increasing form to 10.27 for 2007 it
indicates that firm is taking less days for conversion as compared to 2006. In
2006 conversion period was 206 days but in decreased to 35 days for 2007.
This is shown in above graph.
Before 2007 there was no production process they were converting
semi finished goods into finished products hence to start their own production
process they hold the raw material in 2006
Work in Process Turnover ratio:
NVENTORY MANAGEMENT for MBA FINANCE
Page 72

73. SAAB MARFIN MBA
Work in process turnover ratio is velocity at which W.I.P converted into
goods ready for sale. If W.I.P turnover ratio is high then company is efficiency
converting into finished goods.
Formula:
Cost of production
Average W.I.P
W.I.P turnover ratio
Year Cost of production Avg W.I.P Ratio
2008 849,054,442 36,720,702 23.12
2007 555,094,500 15,010,347 36.98
2006 361,110,197 9,755,839 37.01
Work in Process Turnover ratio
40
35
30
D 25
A 20 Ratio
Y
S 15
10
5
0
2008 2007 2006
Years
Form above graph we came to know that Work in process turnover ratio is
decreasing from 37.01 in 2006 to 23.12 2008. The ratio was high in 2006 as
compared to 2007 and 2008. The ratio was 37.01. Indicates that company is
converting semi finished into finished goods quickly
NVENTORY MANAGEMENT for MBA FINANCE
Page 73

74. SAAB MARFIN MBA
Holding period of W.I.P:
It refers to the number of days taken for the production unit to convert
semi finished goods into finish goods.
Formula:
360
W.I.P turnover ratio
Holding period of W.I.P
Year Total Days Ratio Days
2008 360 23.12 15.57
2007 360 36.98 9.73
2006 360 37.01 9.72
Holding period of W I P
18
16
14
12
D 10
A Ratio
8
Y 6
S 4
2
0
2008 2007 2006
Years
NVENTORY MANAGEMENT for MBA FINANCE
Page 74

75. SAAB MARFIN MBA
As the work in process turnover ratio is increasing form 9.72. in 2006 To 15.57
for 2008 it indicates that firm is taking less days for conversion. Which shown
in above graph
Finished goods turnover ratio:
Finished goods turnover ratio is velocity at which finished goods
converted into for sale. If finished goods turnover ratio is high then company is
efficient.
Formula:
Cost of goods sold
Average finished goods
Finished goods turnover ratio
cost of goods
Year sold Avg F.G Ratio
2008 849,054,442 26,243,339 32.35
2007 555,094,500 19,858,482 27.95
2006 361,110,197 10,940,008 33.01
NVENTORY MANAGEMENT for MBA FINANCE
Page 75

76. SAAB MARFIN MBA
Finished Goods Turnover Ratio
34
33
32
31
D 30
A 29 Ratio
Y
S 28
27
26
25
2008 2007 2006
Years
Form above graph we came know that finished goods turnover ratio is
decreasing from 33.01 in 2006 to 27.95 for 2007. Indicates that company is
selling goods little slowly as compared to 2006 but it is bit fast as compared to
2008. Where the ratio for that particular period was 32.35
decreased to 11.20 for 2008 it is satisfactory. Which shown in above graph.
Inventory to capital employed:
This ratio indicates the relationship between the total capitals employed
and inventories it shows how much capital utilized to invest in the inventories
other than the other assets. The normal manufacturing firms have low ratio of
inventory total capital employed in the organization.
Formula: Inventory / Total capital employed
Inventory to capital employed
Total capital
Year Inventory employed Percentage
2008 197,465,069 301,443,215 65.50
2007 121,558,000 145,492,599 83.54
2006 67,994,623 98,333,324 69.14
NVENTORY MANAGEMENT for MBA FINANCE
Page 76

77. SAAB MARFIN MBA
Inventory to capital employed
90
80
P
E
70
R 60
C 50
E ICE
N 40
T 30
A
G
20
E 10
0
2008 2007 2006
Years
By observing above graph we can say that the firm investing huge amount in
inventories compared to other assets. It invested 83.54% of its capital in
inventory in 2007 where as it reduced to 65.50% in 2008
Inventory to current asset ratio:
This ratio indicates the relationship between the inventory and current
assets. It shows the percentage of inventory to current assets, which helps the
organizations in deciding the current assets policy which also affect the
liquidity position of the organization.
Formula: Inventory / Current assets
Inventory to current asset ratio
Year Inventory current assets Percentage
2008 197,465,069 331,314,504 59.60
2007 121,558,000 237,687,684 51.14
NVENTORY MANAGEMENT for MBA FINANCE
Page 77