“A Study on Inventory Management at KFIL”

EXECUTIVE SUMMARY

The study of project work is carried out in Kirloskar Ferrous Industries Ltd, on the topic
“INVENTORY MANAGEMENT”. This internship report was done to know Inventory
management system in Kirloskar Ferrous Industries Ltd (A Kirloskar Group Company).
The main objective of the study is to understand the method of inventory management in KFIL
Ltd. This study titled “Inventory management in KFIL Ltd” is based on the information collected
from KFIL Ltd, annual reports.

The study was descriptive in nature. The attempt was made to evaluate the performance
of the company, for ascertaining the performance of inventory management, that techniques and
method has been used in KFIL Ltd.

Inventory is an essential current asset to any type of production unit. The Inventory
constitutes of raw materials, work in progress (semi-finished goods) and finished goods. The
inventory occupies a vital role after cash and receivables. The management of inventory is an
important factor to be considered. The inventory should be maintained at an optimum level, the
excess of inventory leads to increase in maintaining cost and the inadequate inventory leads to
disturbances to the production department.
In KFIL, the present ratio is not up to the industrial norms. The company should try to attain the
industrial norms in order to move towards profits.

Finally I would like to conclude based on my analysis that the stores and purchase
department presently managing inventory efficiently.

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CHAPTER - 1

INTRODUCTION

1.1 INTRODUCTION

Inventory management is one of the most important business processes during the
operation of a manufacturing company as it relates to purchases, sales and logistic activities. It
concerned with the control of stocks throughout the whole supply chain. Inventory control sits at
the data level where the day-to-day business is organized. Activities here are data driven and are
primarily concerned with short-term planning and recording of events. Inventory control is
concerned with maintaining the correct level of stock and recording its movement. It deals
mainly with historic data.

Inventory is generally considered to comprise in three main areas which are raw
materials, work in progress and finished goods. Where these are held and in what quantities, and
how they are managed will vary significantly from one organization to another. The activities of
inventory management involves are identifying inventory requirements, setting targets, providing
replenishment techniques and options, monitoring item usages, reconciling the inventory
balances, and reporting inventory status.

Inventories constitute the most significant part of current assets for a large majority
of companies in India. On an average, are approximately 60 percent of current assets in public
limited companies in India. Because of by firms a considerable amount of funds is required to be
committed to them. It is, therefore, absolutely imperative to manage inventories efficiently and
effectively, in order to avoid unnecessary investment. A firm neglecting the management of
inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible
for a company to reduce its levels of inventories to a considerable degree, e.g. 10 to 20 percent,
without any adverse effect on production and sales, by using simple inventory planning and
control techniques. The reduction in ‘Excessive’ inventories carries a favorable impact on a
company’s profitability.
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NATURE OF INVENTORIES

Inventories are stock of the product a company is manufacturing for sale and
components that make up the product. The various forms in which inventories exist in a
manufacturing company are; raw materials, work-in process and finished goods.

Raw materials: are those basic inputs that are converted into finished product through the
manufacturing process raw material inventories are those units which have been purchased and
stored for future productions.

Work-in-process: inventories are semi manufactured products. They represent products

that need more work before they become finished products for sale.

Finished goods: inventories are those completely manufactured products which are ready
for sale. Stock of raw materials and work-in-process facilitates production, while stock of
finished goods is required for smooth marketing operations. Thus, inventories serve as a link
between the production and consumption of goods.

1.2 REVIEW OF LITERATURE

Purpose – The purpose is to provide a review of inventory management articles

published in major logistics outlets, identify themes from the literature and provide future
direction for inventory management research to be published in logistics journals.
Publisher-Emerald Group Publishing Limited
Findings – Two major themes are found to emerge from logistics research focused on
inventory management. First, logistics researchers have focused considerable attention on
integrating traditional logistics decisions, such as transportation and warehousing, with inventory
management decisions, using traditional inventory control models. Second, logistics researchers
have more recently focused on examining inventory management through collaborative models.
As Ross et al. (2008) observed, the Economic Order Quantity (EOQ) model is an approach of
determining the optimal inventory level that takes into account the inventory carrying costs,

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stock-out costs and total costs which are helpful in the determination of the appropriate inventory
levels to hold.

Grablowsky (1984) observed that large businesses rely more on quantitative techniques,
such as EOQ and linear programming, to provide additional information for decision-making,
while small firms make use of management judgment without quantitative back up.

A survey of 351 management accountants by the National Association of Accountants

(NAA) in a cross-section of industries to assess current inventory management practices in the
U.S indicated that: just-in-time inventory management techniques are increasing in popularity, as
are automated time-phased inventory re-order system. The survey further established that 85
percent of respondents have no plans to change their inventory controls and that actual business
experience is relied upon more than inventory quantitative models. Also, the survey established
that some inventory management practices such as assessing inventory levels and balancing
stock-out costs against expenses related to higher inventory levels are seldom used in practice
(Romano, 2011)

Lazaridis & Dimitrios (2005) in their study of 131 companies listed in the Athens Stock
Exchange showed that mismanagement of inventory will lead to tying up excess capital at the
expense of profitable operations and suggested that managers can create value for their firms by
keeping inventory to an optimum level.

Juan &Martinez

(2002) in their study of 8872 small and medium-sized Spanish firms also demonstrated
that managers of firms can create value by reducing the number of days of inventory. Effective
inventory management processes helps increase operational efficiency of firms; improves
customer service; reduces inventory and distribution costs; and enables businesses track items
and their expiration dates consequently balance between availability and demand.

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1.3 STATEMENT OF PROBLEM

Whatever be the size of business, inventory management is the very significant fact to run
the business. Inventory management to many small business is one if the more visible and
tangible aspects of doing business. Raw materials, goods in process and finished goods all
represent various forms of inventories. Each represent money tied up until the inventory leaves
the company as purchase product. It helps the business to reduce the cost and increase the sale in
the market to get high return on investment.

The inventory management will help us to know tale stock of kept to meet the future demand
and managing the timing and the quantities of goods to be ordered and stocked, so that demand
can be met satisfactorily and economically. Thus inventory management should carefully
managed by reduce their investment in inventories and lowering operating cost.

1.4 OBJECTIVES OF THE STUDY

The following are the objectives of the study:
 The main objective of the study is to understand the method of inventory management in
KFIL Ltd.
 To analyze the material storage facilities and other storage practices
 To study the techniques adopted by the company in inventory management.
 To analyze the practices followed by company in inventory management.
 To suggest suitable remedies for improving the inventory management process in the
company.
 To study the liquidity position of the company.

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1.5 SCOPE OF THE STUDY

The study is conducted at KFI Ltd, near Koppal.

This study titled “Inventory management in KFI Ltd” is based on the information collected
from KFI Ltd, from finances department and various records of the company during month of
January 2016 for the purpose of information this study makes an attempt to understand the
financial performance of the company.

1.6 RESEARCH METHODOLOGY

The study was conducted at KFI Ltd, in purchase, store and finance department.

Research design:

The study was descriptive in nature. The attempt was made to evaluate the
performance of the company, for ascertaining the performance of inventory management, that
techniques and method has been used in KFI Ltd.

Source of data: Major part of the research consisted of historic secondary data was used for the
purpose the study, through company Annual reports, books and periodicals etc….

1.7 LIMITATIONS OF THE STUDY

 The study has been made for a particular period.

 No direct interaction with suppliers of raw materials.
 Lack of some information due confidentiality.
 As the study focuses mainly on inventory management and control system in the
company, the study was focused mainly function of the store department and purchase
department of the company.

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CHAPTER-2
KIRLOSKAR FERROUS INDUSTRIES LIMITED

KIRLOSKAR FERROUS INDUSTRIES LTD PROFILE:

2.1 INTRODUCTION
Kirloskar Ferrous Industries Ltd (KFIL) is the youngest company in the Kirloskar
group. The company is the large-scale industry to begin operation in the rural & industrially
backward district of Koppal. It began manufacturing foundry Grade Pig in April 1994
Automotive Castings in April 1995. The company‘s Pig Iron & Casting are well known for their
quality throughout the country. The company is awarded ISO 9002 Quality Certificate in
January 1996 &is awarded QS-9000 in December 2001 the first QS -9000 certified company
for manufacture &selling of pig iron in India . The manufacturing facilities at the company are of
world standard & the market for its automotive castings is growing steadily.

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All required environmental control equipment’s are planned at the planning stage itself &
are in operation now. This well within the limits prescribes Govt. authorities the pollutions. The
success of this company is that industrially backward rural area has led to high –level industrial
activity & it is not surprising that the new Koppal District has found its due place in the
industrial map of Karnataka.

The Company is located on the banks of Tungabhadra reservoir, near to the rich iron belt
of the Hospet – Bellary range, adjacent to NH -63 connecting Hospet –Hubli passing Through
Koppal & Gadag . The plant is 16K.m. from Hospet & koppal .NH-13 is connecting Chitradurga
& Solapur passes by the side of the plant (approx., 1.0K.m.) the nearest railway station is
Ginigera is 5.0 Km away from the plant.

The industry is born with unique advantage of having behind the immense Accumulated
experience of the group in the field of foundry business, at a time when the deli censing and
liberalization policies of the Government are resulting in rapid growth in Automotive and
liberalization and farm mechanization.

The plant has two mini blast furnaces of 350 MT capacity each, capable of producing
1,20,000MT/year. This amounts to a installed capacity of 2,40,000MT/year.

The plant Manufactures foundry grade pig iron suitable for automotive casting& other
grades such as basic grade& special grade pig iron to meet the requirement of other steel
Industries. The plant has a foundry unit, quipped to produce 3,09,000 MT/year of Iron Grey
casting for a variety application such as cylinder heads & different types of Housings required by
automotive sector tractor division, commercial vehicles& diesel engine industries.

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The company has engaged 873 direct employees & about 800 peoples are working through
contract for effective functioning of the day-to day activities, with an annual Turnover of
Rs.2500 million per annum. The Company is committed to achieve total Consumer satisfaction
through adoption state-of-the-art manufacturing technologies &7 Processes with continue
improvements. The company is also committed to improve quality of work life of its employees
through improved work practices. The company is responsible for the coming up of many
ancillaries present, there are around 20 ancillary units spreads over Koppal. The company has
provided direct employment to about 1000 people & indirect employment to about 10,000
people.

Iron Ore is brought from the mine owners in the calibrated from Hospet & Bellary Iron ore
within the distance of 50 Kms. Coke is mostly imported from China. Other Minerals like
limestone, Dolomite, Manganese ore, Quartz etc., are produced locally.

Almost all foundries and pig iron users in the country are purchaser of pig iron from the
company supplies, quality castings to all renowned automobile manufactures like Mahindra &
Mahindra, Marti Udyog, Escorts, TAFE and Simpson etc

2.2 HISTORY OF THE KIRLOSKAR FERROUS INDUSTRIES LTD

The vision of Mr LAXMANRAO KIRLOSKAR, which is being respected worldwide for
engineering excellence, can be traced to have its beginning of having cast the casting of a
humble plough.

All through the passing years the Kirloskar group has had a long & close relationship
with the business with several group units specializing in the manufacture of high Quality ferrous
and non –ferrous casting.

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Kirloskar Ferrous Industries limited is the unique advantage of having been Conceived
with ideas accumulated through experience & expertise of the group in the Field of foundry
business, at a time when the de-licensing and liberalization policies of the Government came
forth in the year 1996 resulting in the rapid growth and farm Mechanization sectors.

2.3 THE KIRLOSKAR GROUP OF COMPANIES:

Kirloskar in made up of 8 major group companies, who players in major sectors like
manufacturing, oil And gas , power , construction and mining , agriculture, industry and
transport each led by the engineering and managerial talent in India . In addition to Technology
and communication. These 8 Companies are from the core of Kirloskar group.

Each company is a renowned name in its own area of operation and is respected
worldwide for its services and products.
 Kirloskar Brother Limited (KBL)
 Kirloskar Ferrous Industries Limited (KFIL)
 Kirloskar Middle East FZE (KMEF)
 Kirloskar Oil Engines Limited (KOEL)
 Kirloskar pneumatic Limited (KPCL)
 Kirloskar Proprietary Limited (KEPL)

Kirloskar is also partner in joint venture with companies as Copeland Limited. This is a
Joint venture between Kirloskar Brother limited, India‘s leading engineering company And
Copeland corporation of the USA, the world leader in air –conditioning and refrigeration
Compressors. Also Kirloskar Ebara and Toyota Kirloskar Motors are prestigious joint Ventures.
 Kirloskar Copeland Limited (KCL)
 Kirloskar Ebara Pumps Limited (KEPL)

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COMPANY PROFILE
NAME OF THE COMPANY KIRLOSKAR FERROUS INDUSTRIES
Ltd
ESTABLISHMENT YEAR 1992
INCORPPRATION YEAR 1994
SALES TURNOVER 2012-2013 INR 11981 Million Tonnes
NO.OF EMPLOYEES 1,242
TURNOVER in (rupees) MORE THAN 1000 CRORES
BUSINESS AREA PIG IRON
PRODUCT RANGE  FOUNDRY GRADE
 SPHERICAL GRAPHITE
GRADE
 BASIC GRADE
KEY PEOPLE Mr. Atual C. Kirloskar (Chairman)
Mr. R.V. Gumaste (M.D)
Mr.C.S Panicker (Auditor)
Mr. Bhagawat (C.A)
TAGLINE With Logo

2.4 NATURE OF BUSINESS CARRIED:

The company manufactures the pig in three different grades, by Calibrated Iron- ore
Brought from mine owners in the Hospet& Bellary Iron – ore within the distance of 50 Kms.
Coke is imported from china. Iron ore, Limestone, Coke & Dolomite are raw materials for the
manufacturing pig Iron.

VISION, MISSION AND QUALITY POLICY:

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VISION
“To be a product leader in Pig iron & casting business preferred business partner to all
Stake holders”

MISSION
PIG IRON :
 To be a lowest cost producer of pig iron.
 To be a preferred supplier and quality delivery.
 Introduce value added products.
 To achieve 425,000 MT of liquid metal.

CASTINGS :
 To be a preferred supplier for domestic & global OEMs
 Meet customer expectation in new product development cycle time
 Meet customer expected level of quality
 100% delivery performance
 Machined castings to customers
 Reach 150,000 MT casting sales
 To be a preferred employer and responsible neighbors

VALUES
 Customer focus
 Integrity
 Fairness & partnership development
 Mutual trust & team work
 Ability with discipline
 Responsible corporate neighbors

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2.5 QUALITY POLICY

Kirloskar Ferrous Industries Ltd is committed to achieve total customer satisfaction
through adoption of state of art manufacturing technology and processes with continual
improvements. KFIL is also committed to improve the quality of work life of its employees
through improved work practices.

QUALITY OBJECTIVES
 CUSTOMER SATISFACTION:
Maximization of Customer Satisfaction by consistent supply of Quality Casting & Pig Iron.

 SUPPLIER QUALITY ASSURANCE:

Provide technical support and guidance to our suppliers through Quality Assurance
Programmes to ensure highest Quality of purchased materials. Supplier is a critical link in our
Quality System.

EMPLOYEE DEVELOPMENT:
Development and motivation of all employees by providing necessary training and
support to bring out their full potential.

PRODUCT EXCELLENCE
Continuously striving for Product Excellence through adherence to documented work
practices, technical and managerial innovation and continuous improvements. Our endeavor is
to push ourselves till our recesses and products are finest in the country and compare with the
best in the world.

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2.6 BOARD OF DIRECTORS

Mr. Atul C. Kirloskar Chairman
Mr. R.V. Gumaste Managing Director
Mr. Sanjay C. Kirloskar Directors
Mr. A.R. Jimenis Directors
Mr. C.V. Tikeker Directors
Mr. S.N. Inamdar Directors
Mr. S.G. Chitnis Directors
Mr. A.N. Alawani Directors

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2.6 ORGANISATION CHART

MD
Mr. R.V.GUMASTE

VP - Foundry VP- PIP Sr. VP - HR Sr. VP FIN

Sr. GM Sr. GM Sr.GM

Sr.GM
GM GM GM
GM
DGM DGM DGM
DGM
Sr. Mgr. Sr.Mgr. Sr.Mgr.
Sr. Mgr.

Mgr. Mgr. Mgr. Mgr.

Dy. Dy.Mgr. Dy.

Dy.
Mgr Mgr Sr.
Mgr.
Sr. Sr.
Sr. Officers Officers
Engi. Engi.
Enginee Officer Officer
Enginee
r s s
r
Ast Ast.Eng
Asst.Officers Asst.Officers
Engi i

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2.8 SWOT ANALYSIS

SWOT analysis is the analysis where the strengths, weaknesses, opportunities and threats
of the company, strength and weakness are the internal of the company; it can be controlled by
the company, whereas opportunities and threats are the external of the company, which cannot be
controlled by the company.

STRENGTHS:
The company has some its own strengths and competencies. They are as under:
 It is suited on the bank of river Tungabhadra.
 Availability of rich iron ore from the iron belts of Hospet and Sandur.
 Market leader I quality.
 Low power cost in manufacturing.
 Good brand image in the market.
 Wide distribution network.
 Only foundry in India with backward integration of pig iron plant.
 Low cost of production by use of Russian technology (Hot Blast Stove)
 Near to the transportation- railways as well as road transportation.

WEAKNESS
 Transportation problem during harvest season
 Non-availability of adequate water during the summer season.
 Company is facing pollution for coke.
 Highly dependent on China for coke.
 Poor market share in eastern and northern part of the country.

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OPPORTUNITIES
 The company has a good share in the market.
 The company has opportunities to tie up with customers.
 Huge land availability for future expansion.
 Strong financial position makes it possible for the company to adapt new
Technology in its operation.
 Possible tie-ups with major foundries in Gujarat market.

THREATS:
 New foundry grade production entry
 Increase price I coke
 New constricts in market
 Imposition of sales tax and VAT.
 Non exclusively with dealers
 Threats of using substitute products like plastic and fiber.
 Many new steel industries are being raised like mushrooms Hospet and Koppal , which
may in decline in demand for KFIL. Products.

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FUTURE GROWTH AND PROSPECTUS:

GLOBAL SCENARIO OF PIG IRON:
The demand for the international has a sharp rise, the total production of iron estimated
at 500mt. developed nation accounts for 45% of the production seeing the potential demand
many mills in USA such as a Nucor, Norigstar, steel are swicing over to pig iron production.

GROWTH TREND OF PIG IRON SECTOR IN INDIA:

Before liberalization the pig iron industry was monopolized by integral steel plants to
utilize the liberalization policy initiated by the government. Decline the pig iron production and
paved way of helping the Ispt’s be utilize pig iron for making steel to gain Value addition
The integrated steel plant (IPS) s the major supplier of pig iron .public
sector (ISP) contributes up to 90% of the pig iron supply.

GROWTH TREND OF THE COMPANY:

As the company is committed to produce quality products, it results in attracting
more number of customers & to be the competition.

As per the infrastructure is concerned, the company has a well-equipped& sophisticated

infrastructure which helps the company to meet the customer demand in time. By looking at the
present infrastructure, skilled workforce, technology & emerging demand condition, company is
planning to put one step ahead i.e. By diversifying to steel manufacturing industry. As the
demand for the automobile’s are increasing the demand for the products of the company is also
increasing, so the company has got a clear & bright future.

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CHAPTER-3
THEORETICAL BACKGROUND OF THE STUDY
3.1 INTRODUCTION OF THE INVENTORY
Inventory is an essential current asset to any type of production unit. The Inventory
constitutes of raw materials, work in progress (semi finished goods ) and finished goods. The
inventory occupies a vital role after cash and receivables. The management of inventory is an
important factor to be considered. The inventory should be maintained at an optimum level, the
excess of inventory leads to increase in maintaining cost and the inadequate inventory leads to
disturbances to the production department.

Point of time. Materials will be stocked for the smooth running of the company. Since
these resources are ideal when kept in the store's inventory is defined as an idle resources of any
kind having an economic value.

Inventory management decisions in the new economic scenario can no longer be isolation
from the rest of organizational activities. Inventory management, corporate strategy and
financial parlances are closely linked.

In financial parlances, "inventory" is defined as the sum of value of raw materials,

maintenance of consumables and finished goods, stocks at any given

MEANING OF INVENTORY MANAGEMENT:

The literally meaning of the term inventory is stock of goods. It is composed of goods
that will be sold in future in the normal course of business of operations. The goods, which a
firm stores as inventory in anticipation of need, can be classified as follows :

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 Raw materials
 work- in- progress
 finished goods
 consumable stores and spares

A) RAW MATERIALS

The raw materials inventory contains items that are parched by the firm from others and
converted into finished goods through the manufacturing (production) possess. They are an
important input of the final product.

B) WORK-IN-PROGRASS (SEMI FINISHED GOODS):

The work - in - progress inventory consists of items currently being used in the
production process. They are normally semi-finished goods that are at various stages of
production in a multi -stage production process.

C) FINISHED GOODS:

Finished goods represent final or completed products which are available for sale. The
inventory of such goods consists of items that have been produced but are yet to be sold.

D) CONSUMABLE STORES AND SPARES:

These are the goods held for consumption by machines in a manufacturing concern. They
include spare parts, lubricants, clearing materials, oils, cottons waste, etc, they do not enter into
the final product but they are required for mentioning and running the machines for the
production purpose.

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DEFINITION

Inventory as been defined as " The aggregate of those items of tangible personal property
which are held for sale in the ordinary course of business, are in process of production for such
sale or are to be currently consumed in the production of goods and services to be available for
sale ".

The Inventory management includes the fallowing aspects

 Size of inventory-maximum and minimum level.

 Ascertaining the minimum safety levels.

 Assigning responsibility for carrying out inventory control function.

 Coordinating sales, production and inventory policy.

 Establishing timings schedules, procedures and lots of sizes for new orders.

 Providing the report necessary for supervising the overall activity.

IMPORTANCE OF INVENTORY

In many organizations materials from the largest single expenditure item, an analysis of
the largest single expenditure of large number of private and public sector organization indicate
that material accounts for nearly 73% of the total expenditure. Thus the importance of material
management lies in the fact that any significant contribution made by the materials manager in
reducing materials cost will go a long way in improving the profitability and the rate of return on
investment. Materials form an important part of the current assets in any organization. Return on
investment (ROI) depends a great deal on the manner of utilization of material.

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3.2 OBJECTIVES OF INVENTORY MANAGEMENT

Through the efficient Management of Inventory of the wealth of owners will be maximized.
To reduce the requirement of cash in business, inventory turnover should be maximized and
management should save itself from loss of production and sales, arising from its being out of
stock.

 To ensure adequate stock: An endeavor is made by inventory control to see that any
department will get the raw materials or other necessary item as and when required.
Hence an effective system of purchasing, storage and maintenance is effectively
arranged so that enough stock is available on hand.
 To minimize Inventory on hand: The next objective of inventory control is to
minimize inventories on hand. It has to be ensured that excessive stock is not kept and
unnecessary capital is not locked up. But it must be consistent with adequate stock, so
that production is not disrupted.
 To maintain continuity in production: The supplies of materials spare parts,
consumable stores etc., must be stocked to the optimum level, so that continuity of
operations is maintained. The inventory control system should ensure that production
is completed as per schedule.
 Minimize the Cost of Purchasing and Storage: It is essential that there is economy
in cost of purchasing, cost of receiving and inspection, storage and issue of materials
etc. The expenses to be reduced to minimum are interest on capital locked, insurance,
maintenance and inspection and transportation costs.
 To Minimize the Wastage and Loss: In every manufacturing organization, there is a
risk of wastage and theft of stores, wastage and losses are likely to occur during
movements and during the production processes. Inventory control ensures that the
risk of theft, wastage and losses are minimized.

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3.3 BENEFITS OF HOLDING INVENTORY

Holding of inventory results in a following benefits.

 Quick Services:
A customer desires a prompt fulfillment of orders. A firm will have to make the goods
available for sale. In the event of its not being able to offer quick service to customers, the
later are likely to get their orders executed by competitors.

 Reduction in Order Costs

Each order increases certain costs. If the number of orders is reduced, it is possible to
economize on these costs or the procedure involving each other need not be repeated each
time.

 Discounts:
A firm is in position to take advantage of trade discounts by placing bulk order with suppliers.
A proper proportion will have to be maintained between the costs of maintaining inventories
and the discount that is likely to be gained.

 Continuous production schedule:

Proper stock of raw material not only benefits the company of cash discounts and renders
cost but also useful production scheduling. Adequate inventory is useful to production
schedule which ultimately keep its supply regular and meet the required demand of its
customer.

 Benefits in sales
The maintenance of inventory also helps a firm to boost its sales efforts. If there is no
proper inventory maintained, then firm will not able to meet demand instantaneously

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 Reasonable return on capital employed

When inventories are more than required it will means that the company has used its finds
in such lines from where the return will suffer and it is recommended that adequate inventory
to be maintained.

 Essentials of good inventory control system:

An efficient and successful inventory control system must possess the fallowing
essentials:

 Classification and identification of inventories:

In order to facilitate prompt recording, locating and dealing each item of inventory must
be assigned a particular code for proper identification and must be sub divided in group. ABC
analysis of inventory is very helpful in this regard.

STANDARDIZATION AND SIMPLIFICATION OF INVENTORIES

Standardization refers to the dictation of standards of materials for the use in the
production finished goods. Simplification of inventory refers to the elimination of excess type
and size of items. It leads to reduction in inventories and its carrying cost.

 Adequate storage facility:

Adequate storage facilities are necessary to have the proper control of inventory.

2. Fixing economic order quantity:

It is also a basic consideration in inventory control, problem has much quantity of

particular item should be ordered at a time. In finding EOQ, ordering and carrying should be
considered.

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3.4 TECHNIQUES OF INVENTORY MANAGEMENT

In managing inventories, the firm’s objective should be in consonance with the wealth
maximization principle. To achieve this, the firm should determine the optimum level of
inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory
control results in unbalanced inventory and inflexibility the firm may be sometimes out of
stock and sometimes may pile up unnecessary stocks. This increases the level of investment
and makes the firm unprofitable. The fallowing techniques of inventory management are as
fallows

 Fixing the maximum and minimum levels of inventory:

In order to have a proper control over the investments in inventory, it is necessary to fix
the minimum and maximum limits of inventory, so by that they can manage proper inventories
in order to control over stocking of materials or shortage of raw materials, in fixing the levels
of inventories, the fallowing two factors should be keep in mind.

a) Time gap between indenting and receiving of the raw materials i.e., lead time the
company maintained the lead time of 7 days.

b) Rate of consumption during lead time was as to the safety stock level.

 Re-ordering or ordering level:

It is a point if material reaches at this point, orders for fresh supplies of materials are
placed with the suppliers. The point is fixed somewhere in between the maximum and
minimum point in such a way that the quantity available between the minimum level and this
point is sufficient to meet the requirements of production upon the time fresh supplies are
received. Reordering level may be decided in the following manner:

Reorder level = Minimum level + (Time in acquiring the materials x Rate of

Consumption)

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In fixing the ordering level, a danger level is also considered. It is a level at which normal
issues of materials are stopped or made at specific instructions by purchase office. Purchase
officer at this point, makes the efforts to get the materials available within an earliest possible
time. This level is below the minimum level of stock

 Economic ordering quantity(EOQ) :

EOQ is the inventory management technique for determining optimum order quantity
which minimizes the total of its order and carrying cost, one of the major inventory
management problems to be resolved is how much inventory should be added when inventory
is replenished. If the firm is buying raw materials, it has to decide lots in which it has to be
purchased on each replenishment. If the firm is planning a production run, the issue is how
much production to schedule. Determining an optimum inventory level involves three types
of costs:
 Ordering costs
 Carrying costs, and
 Shortage costs

 Ordering costs:

The term ordering cost is used in case of raw materials and includes the entire cost of
acquiring raw materials. They include costs incurred in the following activities:
requisitioning, purchase ordering, transporting, receiving, inspecting and storing.

 Carrying costs:

Costs incurred for maintaining a given level of inventory are called carrying costs. They
include storage, insurance, taxes, deterioration and obsolescence.

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ORDERING AND CARRYING COSTS

Ordering cost Carrying costs

Requisitioning Warehousing
Order placing Handling
Transportation Clerical and staff
Receiving ,inspecting and Insurance
storing
Clerical and staff Deterioration and obsolescence

 Order cycling system:

In this system, a review of each item of inventory is made from time to time depending
upon the criticality of the item to have the predetermined level of inventory. Critical items
may require a short review cycles and on the other hand, lower cost non-critical item may
require longer review cycles. At each review date, a required quantity of inventory is ordered
to bring it to the predetermined level

 Perpetual Inventory Control System:

In accounting terms the word perpetual means continuous. Normally a perpetual

inventory is updated in real time. As a product is sold, the inventory is updated
instantaneously.

 ABC analysis system:

ABC system is inventory management technique that divides inventory into three
categories of descending importance based on the rupee investment in each. The ABC system
is a widely-used classification technique to identify various items inventory for purpose of
inventory control. The items included in group A involve the largest investment. Therefore,
inventory control should be applied to these items.

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The following steps are involved in implementing the ABC analysis:

 Classify the items of inventories, determining the expected use in units and the price per
unit for each item.

 Determine the total value of each item by multiplying the expected units by its unit’s price.

Interpretation:

Among available techniques of inventory management the KFIL uses ordering cycling
system to maintain continues production activity throughout the year. And also re-ordering
level or ordering level to be used to re-order raw materials to maintain proper production
activities. The re-order point KFIL is 15lakh tons of raw materials per day.

Pricing of Raw materials and Valuation of Stocks:

Pricing of Raw Materials:

Several methods are used for pricing inventories used in production. The important ones are:

 FIFO Method

This method assumes that the order in which materials are received in the stores is
the order in which they are issued from the stores. Hence, the material which is issued first is
priced on the basis of the cost of material received earliest, so on and so forth.

 Weighted Average Cost Method:

Under this method, material issues are priced at the weighted average cost of
materials in the stock. Unlike the simple average method, this method gives due to importance
on quantities received also. Issue prices are calculated at the average cost price of materials in
hand, i.e., by dividing value of materials in stock by the quantities in stock. Weighted average
rate is calculated each time a fresh lot is received. Average price remains the same till the next
issue is received. Thus, issue prices are derived at the time of receipt, not at the time of issues.

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3.5 PURCHASE PROCEDURE IN KFIL LTD

The systematic Purchase Procedure followed in KFIL. Is as follows:

INDENT

SUPPLIER INDENTIFICATION

ENQUIRY

RECEIPT OF OFFERS / QUOTATIONS

COMPARISION STATEMENT OF OFFERS

PRICE AND TERMS NEGOTIATION

PURCHASE ORDER

PAYMENT OF INVOICE

RCEIPT OF MATERIALS

PURCHASE FOLLOW UP

MAINTAINENCE OF RECORDS

3.6 TERMS AND CONDITIONS OF PURCHASE AT KFIL

 The following are the terms & conditions of purchase procedure which was followed in
KFIL.
 All materials must be exact as per samples and specifications.
 In case of delay, the contract is liable for cancellation and the penalty will be initiated.
 All the materials must be forwarded by the particular root. The freight and extra Cost of
carriage etc. will be charged to seller account.

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 No charges will be allowed for carriage on package, unless agreed previously in Writing
by the buyer.

 The seller shall be liable for all breakage, loses etc. resulting from defective Package.
 No variation of the order shall be valid unless made in writing.
 Any banks commission will not be paid by the company.

3.7 INDENT OR PURCHASE REQUISITON (PR) FORM

The purchase procedure starts the moment, when the to purchase department receives a
document called the indent or purchase requisition (PR) form. An indent is a requisition slip
form the user department that requires some material. It gives details of the item required like
material code, dimension, specification, quantity required and when it is required and also
other information that required in getting the material. The details of the items required are
furnished in standard format.

The indent or material requisition is prepared by stores in-charge to purchase department.

Normally an indent may be received from the storekeeper, production planner, plant engineer
or department heads.

 SUPPLIER IDENTIFICATION

After receiving the indent from stores department, the next step is to identify the best
suppliers from various alternative suppliers. The reputed suppliers are the intangible assets of
any organization. The suppliers not only supply the material but also provide the extreme
important sources of information with regard to the present market condition and price trends.

The proper selection of suppliers helps in bringing about a fair competition among the
suppliers and supply failures are kept at a minimum.

In KFIL. Assessment of suppliers is based on the information available through:

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 Experiences of personnel

 Information available through other reputed foundries

 Through NET

 Yellow pages/trade journals/foundry journal

 Information available with user department.

 SENDING AN ENQUIRY LETTER

Once the best supplier identified among various suppliers, the company prepares an
enquiry letter and it is sent to the supplier asking him to quote the last price for the material
required, including other applicable expenses. In case of regular supplier, the firm directly
orders the materials required without any delay.

 RECEIPT OF QUOTATION / OFFERS

When the supplier receives the purchase enquiry letter from the company, the supplier in
return writes a quotation with details asked by the company and specifying the terms and
conditions of supply. This quotation is named as receipt of offer.

 COMPARITIVE STATEMENT OF QUOTATION / OFFERS

It is a statement prepared by the purchase manager / assistants when the purchase

department receives more quotations by the different supplier by quoting their price for the
materials asked by the company. The company can observe the variations in the quotations
with respect to price. In such situation the keen study of comparative statement is prepared
not only with special attention towards the price but also with respect to time of delivery, good
quality, terms of payment, goodwill of the supplier and other terms and conditions.

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 PLACING THE PURCHASE ORDER (PO)

The purchase order is place to the selected supplier. It indicates on official’s

announcement by the buyer addressed to the supplier to receive the specified materials.
Generally, printed forms are used for the purpose it includes the prices, date of requirement,
mode of delivery, payment terms, LD Clause (Liquidate Damage) and other relevant terms are
mentioned in the Purchase Order.

The original copy of purchase order is sent to the supplier, sometimes the additional copy
of also sent to the suppliers who are supposed to return the same signifying his acceptances.
Such procedures ensure that the supplier has received the stores department, finance
department, user / receiving department, inspection department and one copy retains in the
purchase department.

 PAYMENT OF INVOICE:

When the goods are received in satisfactory condition, the invoice is checked before it is
appraised / processed for the payment. Generally, the invoices are checked to refer, that the
goods were properly ordered and they are priced as per agreed terms (as per purchase order
terms & conditions), the quantity and quality confirm to the order and the calculation are
arithmetically correct etc.

 RECEIPT OF MATERIALS:

When the goods are received from the supplier, the stores department will intimate to the
user department for its inspection (Material inspection). After getting the clearance from the
user department, the quality is verified and tallied with purchase order. The receipt of
materials is recorded in the receiving slip / goods receipt note (GRN), which also specifies the
name of the render and the purchase order number.

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In case the materials are rejected, the stores department will intimate to the purchase
department regarding material rejection. And they will also intimate to the supplier for which
purpose the materials are rejected. Before rejecting the materials, the receipt of materials is
recorded in the receiving slip and then rejected materials is recorded in the rejection slip.

 PURCHASE FOLLOW – UP:

Receiving the materials at the right time and from the right place are the important
ingredient of effective purchasing. Simply placing an order with the supplier doesn’t ensure
that materials will be made available where and when they are wanted, so follow-up or
expanding purchase order is considered as essential step in the purchase procedure.

 MAINTENANCE OF RECORDS:

The last function in the purchase procedure is maintain of all the necessary records which
will have full and detail information about the purchases made during a particular period. So
it is essential to maintain the past records as they are very helpful in future to make any
decision. Most of the purchases are repeat orders and hence the past records serve as a good
source for the future actions

 TWO-BIN TECHNIQUE:

The KFIL is using two-bin technique. It is one of the technique of inventory control.
Generally it is used to control ‘C’ category inventory. According to this technique stock of
each item is separated into two pipes, bins or groups. First bin contains stock, just enough
to last from the date a new order is placed until it is received in inventory. The second bin
contains stock, which is enough to meet current demand over the period of replenishment.
First stock is issued when the first bin stock is completed, then an order for replenishment
is placed, and the stock in the second is utilized until the ordered material is received.

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CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

ABC ANALYSIS

4.1 Table showing ABC Analysis of 2012-13

Items Rank Annual consumption Cumulative usage(Amt in lakhs)

Work in progress 1 1057.13 1057.13
Raw materials 2 10796.09 11853.22
Finished goods 3 740.52 12593.74
Materials in transit 4 3.87 12597.61
Stores and spares 5 1436.18 14033.79
Scrape 6 236.68 14270.47
Others 7 8784.27 23054.74
A – Occupies 70% of annual consumption value , 70% of 23054.74 is 16138.32.

A+B - occupies 90% of annual consumption value, 90% of 23054.74 is 20749.27.

A+B+C - occupies 100% of annual consumption value, 100% 23054.74

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4.1.1 Chart Showing the ABC analysis

4.2 Table shows ABC analysis for the year 2013-14:

A – Occupies 70% of annual consumption value , 70% of 29385.6 is 20569.92

Items Rank Annual consumption Cumulative usage

(Amount in lakhs)
Work in progress 1 1288.43 1288.43
Raw materials 2 4676.34 5964.77
Finished goods 3 1794.47 7759.24
Materials in transit 4 6299.99 14059.23
Stores and spares 5 1999.56 16058.79
Others 6 13326.81 29385.6

A+B - occupies 90% of annual consumption value, 90% of 29385.6 is 26447.04

A+B+C - occupies 100% of annual consumption value, 100% 29385.6

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4.2.1 Chart Showing the ABC analysis

4.3 Table shows ABC analysis for the year 2014-15

Items Rank Annual consumption Cumulative usage

(Amount in lakhs)
Work in progress 1 1754.13 1754.13
Raw materials 2 6219.74 7973.87
Finished goods 3 928.98 8902.85
Materials in transit 4 1780.19 10683.04
Stores and spares 5 1855.85 12538.89
Others 6 622.25 12580.78

A – occupies 70% of annual consumption value , 70% of 12580.78 is 8806.55

A+B - occupies 90% of annual consumption value, 90% of 12580.78 is 11322.71

A+B+C - occupies 100% of annual consumption value, 100% 12580.78

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4.3.1 Chart Showing the ABC analysis

4.4. Table shows ABC analysis for the year 2015-16

Items Rank Annual consumption Cumulative usage

(Amount in lakhs)
Work in progress 1 2061.52 2061.52
Raw materials 2 4645.24 6706.76
Finished goods 3 2056.25 8763.01
Materials in transit 4 3633.33 12396.34
Stores and spares 5 2705.03 15101.37
Others 6 79.36 15180.73

A – occupies 70% of annual consumption value , 70% of 15180.73 is 10626.51

A+B - occupies 90% of annual consumption value, 90% of 15180.73 is 13662.66

A+B+C - occupies 100% of annual consumption value, 100% 15180.73

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4.4.1 Chart Showing the ABC analysis

4.5. Table shows ABC analysis for the year 2016-17

Items Rank Annual consumption Cumulative usage

(Amount in lakhs)
Work in progress 1 2561.22 2561.22
Raw materials 2 4009.32 7008.65
Finished goods 3 2017.14 7763.01
Materials in transit 4 3833.12 10245.45
Stores and spares 5 3260.62 15101.37
Others 6 287.34 12485.21
A – occupies 70% of annual consumption value , 70% of 15180.73 is 10626.51

A+B - occupies 90% of annual consumption value, 90% of 15180.73 is 13662.66

A+B+C - occupies 100% of annual consumption value, 100% 15180.73

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4.5.1 Chart Showing the ABC analysis

4.6 Current ratio:

Formula: Current Ratio = Current Assets / Current Liabilities
4.6.1 Table Showing the Current Ratio:

Year Current assets Current liabilities Current ratio

2011-12 24831.31 22723.38 1.09

2012-13 31593.38 28400.41 1.12

2013-14 35089.76 33223.35 1.06

2014-15 36440.65 35153.34 1.04

2015-16 34109.21 38939.88 0.87

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4.6.2 Chart Showing the Current Ratio:

1.2 1.12
1.09 1.06 1.04
1
0.87

0.8

0.6

0.4

CURRENT RATI O

0.2

0
2011-12 2012-13 2013-14 2014-15 2015-16

YEARS

Interpretation: The above table Shows that the company current ratio in the year 2011-12 is
1.09 and in the year 2012-13 the ratio increased by 0.03 which show more liquidity. In the year
2013-14 and 2014-15 current ratio decreased by 0.06 and 0.02. Although the current ratio is
above 1 in 2013-14 and 2014-15. In the year 2015-16 decreased by 0.17. This shows that
company’s liquidity position is sound. This impact the high liquidity of the firm.

4.7 Cash Ratio

Formula: Cash Ratio = (Cash + Marketable securities) / current liabilities
4.7.1 Table showing cash Ratio:
Year Cash in hand + cash At bank Current liabilities Cash Ratio
2011-12 1666.02 22726.84 0.07
2012-13 1843.58 28400.41 0.06
2013-14 1361.50 33223.00 0.04
2014-15 1458.10 35135.34 0.04
2015-16 1010.54 38939.88 0.02

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4.7.2 Chart showing cash Ratio:

0.07
0.06
0.05
0.04
0.03 CASH RATIO

0.02
0.01
0
2011-12 2012-13 2013-14 2014-15 2015-16

Interpretation:

`From the above table it is found that cash Ratio is Bellow 0.5 the ability to satisfy short
term labilités is veryless and There Is continuous decrease in cash ratio for past 4years. It was
0.07 in the year 2011-12& it has been decreased to 0.06, 0.04 and 0.04 in the year 2012-13,
2013-14 and 2014-15. In 2015-16 it has been decreased to 0.04 to 0.02

4.8 Inventory turnover ratio:

Formula: Inventory turnover ratio = (Cost of goods sold) / Average inventory
4.8.1 Table showing inventory turnover ratio:
Year Sales Inventory Inventory turnover Ratio

2011-12 87471.05 10018.37 8.73

2012-13 120296.02 15276.26 7.87
2013-14 120531.94 14722.24 8.18
2014-15 134825.23 14259.68 9.45
2015-16 136509.23 11833.57 11.53

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4.8.2 Chart showing inventory turnover ratio:

12

10

6 INVENTORY TURN OVER

RATIO
4

0
2011-12 2012-13 2013-14 2014-15 2015-16

Interpretation:
From the above table it is found that Inventory Turnover Ratio has decreased to 7.87 in
the year 2011-12 but in 2012-13, 2013-14 and 2014-15 there is an increase in inventory turnover
ratio to 8.18,9.45 and 11.53 times. High inventory levels are usual unhealthy because they
represent an investment with a rate of return of zero. It also opens the company up to trouble if
the prices begin to fall.

4.9 Raw materials turnover ratio:

Formula : Raw materials turnover ratio = Total sales / Raw materials

4.9.1 Table Showing raw materials turnover ratio:
Year Sales Raw Material Ratio
2011-12 87471.05 10796.09 8.10
2012-13 120296.02 10976.34 10.96
2013-14 120531.94 7999.94 15.07
2014-15 134825.23 8278.57 16.29
2015-16 136509.23 11833.57 11.53

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4.9.2 Chart Showing the Raw materials turnover ratio:

18 16.29
16 15.07
14
10.96 11.53
12
10
8.1
8 ratio

6
4
2
0
RAW MATERIALS T URN OVER RATI O
2011- 12 2012 - 13 2013 - 14 2014 - 15 2015 - 16

YEARS

Interpretation:
The above table shows the Raw materials turnover ratio was increasing year to year. In
2011-12 it was 8.10 but in 2014-15 it increased to 16.29 because of more demand. But in the
year 2015-16 again it has been decreased to 11.53.

4.10 Work-in progress turnover ratio:

Formula : Work-in progress turnover ratio = Total sales / Average work-in progress

4.10.1 .Table Showing Work-in progress inventory turnover ratio:

Year Sales Average work in progress Stock turnover ratio (WIP)

2011-12 87471.05 6346.41 13.78

2012-13 120296.02 8007.67 15.02
2013-14 120531.94 9777.69 12.33
2014-15 134825.23 10471.64 12.88
2015-16 136509.23 11833.57 11.53

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4.10.2 Chart Showing Work-in progress inventory turnover ratio:

16 15.02
14 13.78
12.33 12.88
12 11.53
10
8 INVENTORY TURNOVER RATIO
6 (WIP)
4
2
0
2011-12 2012-13 2014-15 2015-16

Interpretation:

From the above chart, in the year 2011-12, 2012-13 the work in progress turnover ratio was
very high, it shows that in this year the work in progress invenotry are moved very fast but it
decreased in the year 2013-14 and 2014-15 again work in progress turnover was increased but
in the year 2015-16 it decreased to 11.53 it implies that fast conversion work in progress.

4.11 Raw material conversion period:

Formula: Raw material conversion period =No of days in a year / Raw material turnover
ratio 4.11.1 Table shows Raw material conversion period:

Year No of days in a year Raw material turnover ratio Raw material conversion period
2010-11 365 8.10 45.06
2011-12 365 10.96 33.30
2012-13 365 15.07 24.22
2013-14 365 16.29 22.41
2014-15 365 18.10 20.60

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4.11.2 Chart showing Raw material conversion period:

Raw material conversion period

50
45.06
45
40
33.3
35
30
24.22
25 22.41
20.6
20
15
10
5
0
2011 - 12 2012 - 13 2013 - 14 2014 - 15 2015 - 16
RAW MATERIAL CONVERSION PERI OD

YEARS

Interpretation:
From the table it is found that in 2011-12 the raw material conversion period was 45
days, in the year 2012-13 there is a decrease in raw material conversion period to 33 days, In the
year 2013-14 the again there is a declined to 24 days, in the year 2014-15 the ratio slightly
declined to 22 day and in the year 2015-16 finally declined to 20 day.

4.12 Work in progress conversion period:

Formula: work in progress conversion period = No of days in a year / Work in progress

turnover ratio

4.12.1 Table Showing work in progress conversion period

Year No of days in a Work in progress turnover Work in progress conversion

year ratio period
2011-12 365 13.78 26.48
2012-13 365 15.02 24.30
2013-14 365 12.33 29.60
2014-15 365 12.88 28.34
2015-16 365 12.17 27.11

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4.12.2 Chart Showing the Work in progress conversion period:

30
25
20
15 WORK IN PROGR ESS CONVERSION
PERIOD
10
5
0
2011-12 2012-13 2013-14 2014-15 2015-16

Interpretation:

From the above Graph shows the work in progress conversion period is fluctuating between
24.30 to 28.34. in the year 2011-12 the ratio was 26.48, and there is a decrease in ratio by 2.18. in
the year 2013-14 the ratio was 29.60.in 2014-15 it was slightly decreased to 1.26 and again in the
year 2015-16 it was decreased 1.23.

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CHAPTER-5

FINDINGS, SUGGESTIONS AND CONCLUSTION

5.1 FINDINGS

 KFIL is adopting FIFO method for issuing of materials.

 The inventory turnover ratio is not satisfactory.

 The inventory holding period was high from past one year because of decline in two
demand.
 The liquidity ratio is not satisfactory.
 The debtor’s turnover ratio of the company is satisfactory and debts are collected
Promptly.
 The contribution of inventory to working capital is increased from past three years.
 The company is maintaining average payment period in line with the credit terms of
the supplier.
 The raw material holding period of the company was increased from past four years
because of decrease in the production.
 The finished goods turnover ratio of the company shows the fluctuations in the
sales.
 The finished goods holding period was increased in year 2011-12 because of
decrease in the demand.

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5.2 SUGGESTIONS

 As the inventory turnover ratio is not sufficient, great care should be taken in managing
the inventory.
 The days of holding inventories should be minimized.
 The inventory to sales increased over the years; generally it shows a negative sign.
Hence the company has to improve its sales.
 The liquidity ratio of the company should be improved.
 There are more funds are blocked in the form of inventory hence it should be reduced.
 The production should be increased to avoid raw material stock outs.

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5.3 CONCLUSION

Inventories occupy a very important place in representing the company. The main
component of material is purchased; stores and inventory are the important aspects of stores
department.

For an organization purchasing is a window to the outside world, the prime function
of purchasing is that of being sensitive to the external market situation. However, it is usually
understood to get the right quantity of materials, of the right quantity at, right time from the
right sources and the right cost.

In KFIL, the present ratio is not up to the industrial norms. The company should try
to attain the industrial norms in order to move towards profits.

Finally I would like to conclude based on my analysis that the stores and purchase
department presently managing inventory efficiently.

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BIBLIOGRAPHY:

 Company annual reports

 KFIL Journals
 Office records

REFRENCE BOOKS:

 Prasanna Chandra., Financial management

 Khan & Jain, Financial Management

WEBSITE:

WWW. Wikipedia. Com

WWW. Kirloskar Ferrous Industries Ltd.

WWW. Kirloskar brothers Ltd.

WWW. Slideshare.com

K.K. Institute of Commerce (M.Com) Koppal. Page 50

 “A Study on Inventory Management at KFIL”

ANNEXURE

1. Table showing ABC Analysis of 2011-12

2. Table shows ABC analysis for the year 2012-13
3. Table shows ABC analysis for the year 2013-14
4. Table shows ABC analysis for the year 2014-15
5. Table shows ABC analysis for the year 2015-16
6. Current ratio
7. Cash Ratio
8. Inventory turnover ratio
9. Raw materials turnover ratio
10. Work-in progress turnover ratio
11. Raw material conversion period
12. Work in progress conversion period

K.K. Institute of Commerce (M.Com) Koppal. Page 51