PADMASHRI ANNASAHEB JADHAV BHARATIYA SAMAJ UNNATI MANDAL ‘S

B.N.N. COLLEGE, BHIWANDI

DIST.THANE 421305

UNIVERSITY OF MUMBAI

PROJECT ON

“A COMPARATIVE STUDY ON GST RETURN”

SUBMITTED BY

SINGH SWATI JAGDISH.

ROLL NUMBER

31

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF THE DEGREE OF

M.COM. (ADVANCE ACCOUNTANCY) (PART-2) (SEM- 4)

OF

UNIVERSITY OF MUMBAI

UNDER THE GUIDANCE OF

Prof. Sonam More

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 CERTIFICATE

This is to certify that, SINGH SWATI JAGDISH (ROLL NO.31) of

M.COM.PART 2 (ADVANCE ACCOUNTANCY) SEMESTER-IV
(Academic Year 2023-2024) has successfully completed the project on

“A Comparative Study of GST Return”

Under the guidance of ―Prof. Sonam More” in partial fulfillment of the

requirement for the reward of the Degree of M.COM Part 2 (ADVANCE
ACCOUNTANCY) SEMESTER- IV of University Of Mumbai for the
Academic year 2023-2024.

SIGNATURE

Principal: Dr. Ashok.D.Wagh

Project Guide: Prof. Sonam More

External Examiner: Prof.

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 DECLARATION

I the undersigned Miss / Mr. SINGH SWATI JAGDISH here by, declare that
the work embodied in this project work titled,
“A Comparative Study on GST Return” forms my own contribution to
the research work carried out under the guidance of PROF. SONAM MORE
is a result of my own research work and has not been previously submitted
to any other University for any other Degree/ Diploma to this or any other
University.

I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical conduct.

SINGH SWATI JAGDISH

(Signature of student)

Certified by

Prof. Sonam More (Signature) Date:

Place: Bhiwandi

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 ACKNOWLEDGEMENT

The project would not have been possible without the support of many
people. Firstly, I would like to thank God almighty for his continuous blessing
that he has showered on me all through my life. I would like to thank the
University of Mumbai, Prof. Dr. A. D. Wagh, and B.N.N. For giving me a
chance to work on such an interesting topic.

I express a deep sense of gratitude toward my project guide Prof.

SONAM MORE for his valuable guidance, motivation and insistence on
perfection. Working with such a scholarly person was a pleasant and an
enriching learning experience.

In a special way I would even like to thank my parents for their

continuous prayer to the almighty for my success in life and for their kind
blessing, continuous support and motivation in every stage of my life.

Last, but not the least, I would like to thank the entire teaching as well as office
staff at B.N.N COLLEGE for their motivation, support and help rendered to
me in my academic journey and especially while working on this project .I
sincerely thank to all them.

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 INDEX

Sr.no Title Pg.no

1 Introduction 6-7

2 Company Profile

3 Terminologies

4 Objective of Study

5 History of GST and its Type

6 GST Returns

7 Comparison of GSTR-3B and GSTR-2A

8 Limitation

9 Research Methodology

10 Conclusion 70

Reference

5
 “A Comparative Study on GST Return”

Introduction

The title of the project study “A Comparative study of GST return”

gives us broad knowledge about GST and analysis of GST return. The
study also helps to know how auditing of various GST return done in
practical world of finance.
The Goods and Services Tax, or GST, is an indirect tax law applicable
across India. It has replaced multiple indirect taxes such as excise duty,
service tax, value-added tax, octroi, entry tax, and luxury tax. Laws
pertaining to the same were put into effect on July 01, 2017, in India.
This indirect taxation system has gone through multiple amendments
since to arrive at the current juncture. However, it must be noted that
GST does not replace customs duty, which is still mandatory on
imported goods and services. Every kind of product and service attracts
a different tax rate under GST. For example, luxury or sin goods are
classified to attract a higher interest rate, whereas necessities have been
included in lower and nil rate slab rates.

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Small businesses will often keep track of stock manually and determine the reorder points
and quantities using Excel formulas. Larger businesses will use specialized enterprise
resource planning (ERP) software. The largest corporations use highly customized software
as a service (SaaS) applications.

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Motives for holding inventories:

There are different motives of holding inventories which are as follows:

Transaction motive:

The transaction motive propels a business to maintain inventories so that there are no
bottlenecks in production and on sales. It is natural for a business to plan inventory
investment commensurate with the level of transactions in the business. The business seeks to
ensure that on the shop floor, production does not get stalled for want of materials etc., and
sales do not suffer on account of non-availability of finished goods.

Transaction motive for holding inventory is to satisfy the expected level of activities of the
firm. For example, a vada pav wala who receives its material consignment every two days
stock, which are sufficient to make the number of vada pavs to be ordered over the two days.

Precautionary motive:

It is a pre-cautionary move taken by the firm which acts as a cushion in case the actual level
of activity is different than anticipated. The precautionary motive is also at work. Inventories
are held so that there is a cushion against unpredictable events. For instance, there may be a
sudden and unforeseen spirit in demand for finished goods or there may occur a sudden and
unforeseen slump or delay in supply of raw materials or other components needed for
production. An enterprise would surely like to have some cushion to tide over such situations.

Speculative motive:

The firm generally purchases larger quantity of materials than normal in anticipation of
making profits. The second reason for speculative inventory purchases may involve an
anticipated change in a product.

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Contractual Requirements:

In this it is necessary to carry certain level of inventory to meet a contractual agreement.

Inventories may also be held so that advantage can be taken of price fluctuations. For
instance, if the price of a particular raw material is expected to go up rather steeply, an
enterprise may decide to hold a larger than necessary stock of this item (acquire prior to
escalation).

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Costs of holding inventories:

Holding of inventory exposes the manufacturing and merchandising firms to a number of

risks and costs. The various risks and costs of maintaining higher levels of inventory have
been highlighted as follows:

 Ordering cost:

Cost of ordering is one another factor that a firm has to consider in Inventory management.
Ordering costs includes cost of requisitioning, preparation of purchase order, transportation
of inventory, receiving the supplies at the warehouse etc.

Ordering costs are the expenses incurred to create and process an order to a supplier. These
costs are included in the determination of the economic order quantity for an inventory item.
Examples of ordering costs are:

 Cost to prepare a purchase requisition

 Cost to prepare a purchase order
 Cost of the labor required to inspect goods when they are received
 Cost to put away goods once they have been received
 Cost to process the supplier invoice related to an order
 Cost to prepare and issue a payment to the supplier

There will be an ordering cost of some size, no matter how small an order may be. The total
amount of ordering costs that a business incurs will increase with the number of orders
placed. This aggregate order cost can be mitigated by placing large blanket orders that cover
long periods of time, and then issuing order releases against the blanket orders.

An entity may be willing to tolerate a high aggregate ordering cost if the result is a reduction
in its total inventory carrying cost. This relationship occurs when a business orders raw
materials and merchandise only as needed, so that more orders are placed but there is little
inventory kept on hand. A firm must monitor its ordering costs and inventory carrying costs
in order to properly balance order sizes and thereby minimize overall costs.

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  Carrying cost:

 Cost of money tied up in inventory, such as the cost of capital or the opportunity cost
of the money.
 Cost of the physical space occupied by the inventory including rent, depreciation,
utility costs, insurance, taxes, etc.
 Cost of handling the items.
 Cost of deterioration and obsolescence.

Often the costs are computed for a year and then expressed as a percentage of the cost of the
inventory items. Others may focus on the incremental costs of carrying or holding inventory.

The cost of carrying inventory will vary from company to company. For instance, if a
company has a large cash balance with no attractive investment options, has excess space for
storage, and its products have a low probability for deterioration or obsolescence, the
company's holding or carrying costs are very low. A company with enormous debt, little
space, and products subject to deterioration will have very high holding costs.

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Example of Calculating the Cost of Carrying Inventory

Based on the above items, let's assume that a company's holding costs add up to 20% per
year. If the company's inventory has a cost of $300,000 the cost of carrying or holding the
inventory is approximately $60,000 per year.

In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost
of holding inventory. This includes warehousing costs such as rent, utilities and salaries,
financial costs such as opportunity cost, and inventory costs related to perishability, shrinkage
(leakage) and insurance. Carrying cost also includes the opportunity cost of reduced
responsiveness to customers' changing requirements, slowed introduction of improved items,
and the inventory's value and direct expenses, since that money could be used for other
purposes. When there are no transaction costs for shipment, carrying costs are minimized
when no excess inventory is held at all, as in a Just in Time production system.

Excess inventory can be held for one of three reasons. Cycle stock is held based on the re-
order point, and defines the inventory that must be held for production, sale or consumption
during the time between re-order and delivery. Safety stock is held to account for variability,
either upstream in supplier lead time, or downstream in customer demand. Physical stock is
held by consumer retailers to provide consumers with a perception of plenty. Carrying costs
typically range between 20-30% of a company's inventory value.

Carrying cost includes the cost of storing the inventory in warehouse, handling expenses,
insurance and rent paid for managing the inventory, opportunity cost locked up in stocks etc.
Opportunity cost here refers to the alternative use of funds that the firm would have used to
invest in stocks.

The carrying cost of inventory will depend on your products and storage needs, your total
number of SKUs, your location, your inventory turnover rate, and whether you keep
fulfillment in-house or outsource it.

Three reasons why carrying cost is important for businesses

Ecommerce logistics is complex and expensive, yet inventory management affects your
available capital, ability to meet customer expectations, and ultimately the future of your
business. Learn the importance of carrying costs in ecommerce.

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1. Keep track of expenses

Carrying costs are a critical part of an ecommerce business‘s expenses. Inventory Accounting
or the process of accounting for changes in the value of inventory over time relies on properly
tracking carrying costs.

By knowing how many units you have on hand and how much your warehouse costs are for
expenses like rent, staff salaries, depreciation, insurance, and other operational processes
involved in storing inventory (or warehousing fees if you use a third-party warehouse), you
can have an accurate picture of your carrying costs.

2. Accurately calculate profit

The accuracy of the profit that your business record is directly dependent on the accuracy of
your inventory carrying costs. Simply knowing the inventory value doesn‘t acknowledge the
total costs associated with storing a product until a customer is ready to buy. When you
understand your carrying cost, you can calculate your potential profit as well as how much
cash you will have available for future production needs.

Let‘s take this (oversimplified) example: If it costs you $5 to manufacture a product and you
sell it for $10, then you can record a $5 profit, right? Well, if you forgot to account for the $1
it costs on average to store each unit before it sells, then you should actually add $1 more to
the cost per item. This takes your profit margin from 50% to an actual margin of 40%.

3. Make your business more efficient

If you‘re paying a lot of money to hold inventory that‘s not selling quickly or much at all, the
financial health of your business may be in jeopardy. For example, if you sell inventory
within 180 days of buying it as compared to having it sit for only 90 days, your carrying costs
may double.

Tracking your carrying cost should help reveal areas of potential savings for your business
and ways to optimize inventory storage and repurpose funds. If your business has poor
inventory flow and high carrying costs, you may want to identify products that are low sellers

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to be phased out, warehouse locations that can save you money, or even find different
manufactures that can lower costs.

Four critical components of carrying costs

To calculate the carrying cost of inventory, you need a few line items related to the cost of
doing business (or the holding costs of inventory).

1. Storage costs

Warehousing, or the storing of physical goods before they are sold, is one of the top expenses
of a business‘s inventory carrying cost. Warehousing can simply be rent for your warehouse,
or the fees that a third-party charges. These can range from per-SKU or per-unit storage, to a
fixed fee for each bin, shelf, or pallet used. If your sales fluctuate seasonally or month-over-
month, storage costs may become costly during the low season.

Many businesses choose to work with a third-party logistics or 3PL company, who will store
inventory in their warehouses for the merchant. Each SKU needs its own storage unit in the
fulfillment center, and those costs will contribute to the carrying cost. Of course, more
complex storage requirements such as temperature regulation or refrigeration will cost even
more.

2. Labor costs

If you manage order fulfillment in-house, you need to invest in the workforce needed to
receive, stow, organize, pick, audit inventory, and otherwise move product. You should
ensure operations are streamlined with everything from an efficient layout to optimized
picking lists by bin location to help reduce costs.

3. Cost of insuring and replacing items

Besides the inventory storage space and labor needed to maintain inventory, carrying costs
also factor in damaged, expired, destroyed, or out-of-season items, as well as insurance for
storing inventory in the event that a disaster strikes and it‘s insured.

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4. Opportunity cost

The money spent on carrying inventory could be spent more productively in ways that help
you scale your business like investing in capital cost. By reducing the inventory you hold,
you free up both cash and time for better, more revenue-generating facets of the business —
from building your customer community to marketing your products and getting them in
front of new eyes.

How to calculate inventory carrying cost: an example formula

To use a simple total inventory carrying cost formula, first add up the following annual costs:

 Storage costs (rent, taxes, insurance, etc.)

 Employee salaries
 Opportunity costs (if able to calculate)
 Depreciation costs (spoiled, expired, out-of-season inventory that no longer has value)

Then, divide the carrying costs by the total value of annual inventory to get a percentage.
Together, the inventory carrying cost formula looks like:

(Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value
of Annual Inventory = Inventory Carrying Cost

 Shortage (Stock out) cost:

Stocks results in higher costs when they fall short of demand. Shortage of stocks also results
in higher cost, dissatisfaction among customers, decrease in sales and increase of loss to firm.

Measurement of shortage cost is relatively difficult because of its intangible nature. In

practice, the lost contribution resulting from failure to meet demand provides a reasonable
approximation. In cases where stock out does not result in loss in business, additional cost for
crash procurement etc. may be considered as shortage cost.

Shortage costs are those costs that are incurred when a business runs out of stock, including:

 Time lost when raw materials are not available

 Cost of shrinkage, pilferage and obsolescence

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  Idle employees
 Lost sales
 Machinery set up costs,

Filling back-orders through expedited shipping or replenishing stock at higher than wholesale
prices are some examples of shortage costs. The most damaging cost of shortage however is a
dis satisfied customer and the temporary or permanent loss of sales through insufficient stock
levels.

Inventory Costs Curves:

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Reducing inventory costs:

Understanding the three categories of inventory costs will help your business to identify what
works and what doesn‘t. You are then able to provide an analysis of your current position.

Negative relationships will often exist between ordering costs and carrying costs. Larger
orders, placed less frequently will minimize ordering costs but will lead to an increase in
carrying costs.

In turn, reducing your carrying costs means placing smaller more frequent orders, which
subsequently increases ordering costs for the period? If that‘s not enough to give you a
headache, you can run into shortage costs if the smaller orders are not covering current
demand.

Sound confusing? It doesn‘t need to be. A good inventory management system will give you
a clear picture of where costs are being incurred with regards to inventory.

An inventory management system can also streamline operations and monitor inventory
levels in real-time to improve forecasting, increase efficiency and reduce the ordering,
carrying and shortage costs of inventory.

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Pros and Cons of holding inventories:

One of the most important aspects of every item based business is your inventory. Your
inventory is your main source of your revenue, so it is essential to be smart about making
decisions about how much inventory you have, how much you should store, and how much to
reorder.

Pros to holding inventory:

1. Quicker response time

You are able to easily and quickly fill all customer orders as soon as they come in, without
having to worry about waiting on your stock to come in to ship their order out. Customers
can be lost if you can‘t ship an order quickly.

2. Decreased risk of shortages

By keeping stock on hand, you are able to guarantee, up to a certain point, that you will not
run out of a particular item, and you have less to worry about if a product is discontinued.
Should there be a shift in the demand for your product, you are more able to meet (or even
beat) the competition; you will be more likely to be able to sell your excess inventory at an
ideal price.

3. Quick replenishment

By keeping excess inventory, you are able to work to make sure that your shelves are always
full, and that your store always has a neat and tidy appearance.

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Cons of holding inventory:

1. Tying up Cash flow

The more inventories you have on hand, the greater the amount of the business‘ capital is tied
up. You will risk slowing down your business‘ cash flow.

2. Risk of inventory becoming obsolete

The value and quality of your product decreases the longer you keep it on stock. You have to
make it a priority to sell your inventory while they‘re new to the market. Smart phones, for
example, are updated almost every six months, so you have to sell your stock before new
versions arrive. You might end up having to sell them at a smaller price because it has
become outdated or obsolete. Similarly, if you are selling perishable goods, you would have
to sell them at a much lower price the nearer it gets to its expiration date. You would
potentially lose money on the item if it must be sold below cost in order to clear it out.

3. Risk of item not selling

By keeping excess inventory on hand, it‘s possible that you have misjudged what will and
what will not sell, and in doing so, you could end up with a large quantity of items on hand
that people do not wish to purchase. Again, you might have to sell at a steep discount, or sell
below cost to move the inventory out of your warehouse.

4. Higher storage costs

Excess inventory means extra space needed for storage. Extra space also means extra costs,
and since you have to include those extra costs in your price, you might end up losing to
competition with other sellers because your price is too high. Even if you have your own
warehouse, you would still be having extra costs in maintenance, and you also risk not having
enough space for new items.

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 5. Risk of natural disasters

Any type of stock is always at a risk of being destroyed or damaged by fires, floods, or other
natural disasters. Having less of it in excess, however, would incur smaller losses should
these natural disasters happen.

6. Higher insurance premiums

The more inventories you keep and the longer you keep it, the more insurance you pay on it.

So how can you keep the perfect inventory balance?

While it is true that there are different ways to get around many of the cons on the list, it is
important to keep in mind these very real issues that present themselves when dealing with
keeping excess inventory on hand.

In many cases, you will probably find that keeping additional inventory in stock is a good
thing. You have probably found that having enough of a hot-selling product is a constant
problem. Rather than come up short when a customer is eager to buy, it is wise to keep a few
more in the back, in reserve so that your shelves are never empty (which doesn‘t look good
for any retailer).

One way to help ensure that you always have a good balance of inventory is to use software
specifically designed to manage item based businesses. For example, in Flow Cloud will alert
you when your stock hits a certain point and allows you to create a purchase order with a few
clicks.

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Types of inventories:

Basic types of inventories are raw materials, work-in-progress, finished goods, packing
material, and MRO supplies. Inventories are also classified as merchandise and
manufacturing inventory. Other such classifications on various bases are goods in transit,
buffer stock, anticipatory stock, decoupling inventory, and cycle inventory.

There are three types of businesses such as trading or merchandising, manufacturing, and
service. Out of these, services are not inventorial. Here, the first classification of inventory is
based on the nature of business – Merchandise and Manufacturing Inventory.

MERCHANDISE INVENTORY

It is the inventory of trading goods held by the trader.

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MANUFACTURING INVENTORY

It is the inventory for manufacturing and selling of goods. Based on the value addition or
stage of completion, the manufacturing inventories are further classified into 3 types of
inventory – Raw Material, Work-In-Progress, and Finished Goods. Another type is MRO
inventories which are to support the whole manufacturing and administrating operation.

Types of Inventory:

RAW MATERIALS

These are the materials or goods purchased by the manufacturer. The manufacturing process
is applied to the raw material to produce desired finished goods. For example, aluminum
scrap is used to produce aluminum ingots. Flour is used to produce bread. Finished goods for
someone can be raw material for someone. For example, the aluminum ingot can be used as
raw material by utensils manufacturer.

The business importance of raw material as an inventory is mainly to protect any interruption
in production planning. Other reasons can be availing price discount on bulk purchases, guard
against market shortage situation, etc.

WORK-IN-PROGRESS (WIP)

These are the partly processed raw materials lying on the production floor. They may or may
not be saleable. These are also called semi-finished goods. It is unavoidable inventory which
will be created in almost any manufacturing business.

This level of this inventory should be kept as low as possible. Since a lot of money is blocked
over here which otherwise can be used to achieve better returns. Speeding up the
manufacturing process, proper production planning, customer and supplier system integration
etc. can diminish the levels of work in progress. Lean management considers it as waste.

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FINISHED GOODS

These are the final products after manufacturing process on raw materials. They are sold in
the market.

There are two kinds of manufacturing industries. One, where the product is first
manufactured and then sold. Second, where the order is received first and then it is
manufactured as per specifications. In the first one, it is inevitable to keep finished goods
inventory whereas it can be avoided in the second one.

PACKING MATERIAL

Packing material is the inventory used for packing of goods. It can be primary packing and
secondary packing. Primary packing is the packing without which the goods are not usable.
Secondary packing is the packing done for convenient transportation of goods.

MRO GOODS

MRO stands for maintenance, repair, and operating supplies. They are also called as
consumables in various parts of the world. They are like a support function. Maintenance and
repairs goods like bearings, lubricating oil, bolt, nuts etc. are used in the machinery used for
production. Operating supplies mean the stationery etc. used for operating the business.

Other Types of Inventories are classified on various bases are as follows:

Materially, there are 4 types of inventories only as explained above. Following types of
inventories are either the reasons to hold those 4 basic inventory or business requirement for
the same. Some of them are suitable strategies for certain businesses.

GOODS IN TRANSIT

Under normal conditions, a business transports raw materials, WIP, finished goods etc from
one site to other for various purpose like sales, purchase, further processing etc. Due to long
distances, the inventory stays on the way for days, weeks and even months depending on

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distances. These are called Inventory / Goods in Transit. Goods in transit may consist of any
type of basic inventories.

BUFFER INVENTORY

Buffer inventory is the inventory kept or purchased for the purpose of meeting future
uncertainties. Also known as safety stock, it is the amount of inventory besides the current
inventory requirement. The benefit is smooth business flow and customer satisfaction and
disadvantage is the carrying cost of inventory. Raw material as buffer stock is kept for
achieving nonstop production and finished goods for delivering any size, any type of order by
the customer.

ANTICIPATORY STOCK

Based on the past experiences, a businessman is able to foresee the future trends of the
market and takes certain decisions based on that. Expecting a price rise, a spurt in demand etc
some businessman invests money in stocking those goods. Such kind of inventory is known
as anticipatory stock. It is normally the raw materials or finished goods and this strategy is
executed by traders.

DECOUPLING INVENTORY

In manufacturing concern, plant and machinery should always keep running. The act of
stopping machinery, costs to the entrepreneur in terms of additional set up costs, repairs, idle
time depreciation, damages, trial runs etc. The reason for halt is not always the demand of the
product. It may be because of the availability of input. In a production line, one
machine/process uses the output of other machines/process. The speed of different machines
may not always integrate with each other. For that reason, the stock of input for all the
machines should be sufficient to keep the factory running. Such WIP inventory is called
decoupling inventory.

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CYCLE INVENTORY

It is a type of inventory accumulated due to ordering in lots/sizes to avoid carrying the cost of
inventory. In other words, it is the inventory to balance the carrying cost and holding cost for
optimizing the inventory ordering cost as suggested by Economic Order Quantity (EOQ).

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Methods of inventory management:

Depending on the type of business or product being analyzed, a company will use various
inventory management methods. Some of these management methods include just-in-time
(JIT) manufacturing, materials requirement planning (MRP), economic order quantity (EOQ),
and Days sales of inventory (DSI).

Just-in-Time Management

Just-in-time (JIT) manufacturing originated in Japan in the 1960s and 1970s; Toyota Motor
Corp. (TM) contributed the most to its development. The method allows companies to save
significant amounts of money and reduce waste by keeping only the inventory they need to
produce and sell products. This approach reduces storage and insurance costs, as well as the
cost of liquidating or discarding excess inventory.

JIT inventory management can be risky. If demand unexpectedly spikes, the manufacturer
may not be able to source the inventory it needs to meet that demand, damaging its reputation
with customers and driving business toward competitors. Even the smallest delays can be
problematic; if a key input does not arrive "just in time," a bottleneck can result.

Materials Requirement Planning

The materials requirement planning (MRP) inventory management method is sales-forecast

dependent, meaning that manufacturers must have accurate sales records to enable accurate
planning of inventory needs and to communicate those needs with materials suppliers in a
timely manner. For example, a ski manufacturer using an MRP inventory system might
ensure that materials such as plastic, fiberglass, wood, and aluminum are in stock based on
forecasted orders. Inability to accurately forecast sales and plan inventory acquisitions results
in a manufacturer's inability to fulfill orders.

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Economic Order Quantity

The economic order quantity (EOQ) model is used in inventory management by calculating
the number of units a company should add to its inventory with each batch order to reduce
the total costs of its inventory while assuming constant consumer demand. The costs of
inventory in the model include holding and setup costs.

The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a
company does not have to make orders too frequently and there is not an excess of inventory
sitting on hand. It assumes that there is a trade-off between inventory holding costs and
inventory setup costs, and total inventory costs are minimized when both setup costs and
holding costs are minimized.

Days Sales of Inventory

Days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a
company takes to turn its inventory, including goods that are a work in progress, into sales.

DSI is also known as the average age of inventory; days inventory outstanding (DIO), days in
inventory (DII), day‘s sales in inventory or day‘s inventory and are interpreted in multiple
ways. Indicating the liquidity of the inventory, the figure represents how many days a
company‘s current stock of inventory will last. Generally, a lower DSI is preferred as it
indicates a shorter duration to clear off the inventory, though the average DSI varies from one
industry to another.

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Qualitative Analysis of Inventory:

There are other methods used to analyze a company's inventory. If a company frequently
switches its method of inventory accounting without reasonable justification, it is likely its
management is trying to paint a brighter picture of its business than what is true. The SEC
requires public companies to disclose LIFO reserve that can make inventories under LIFO
costing comparable to FIFO costing.

Frequent inventory write-offs can indicate a company's issues with selling its finished goods
or inventory obsolescence. This can also raise red flags with a company's ability to stay
competitive and manufacture products that appeal to consumers going forward.

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Techniques of inventory management:

Inventory management uses several techniques to keep the right amount of goods on hand to
fulfill customer demand and operate profitably. This task is particularly complex when
organizations need to deal with thousands of stock keeping units (SKUs) that can span
multiple warehouses. Managing inventory can be a daunting task, and if it isn‘t done properly
it could cost company thousands of dollars. Inventory management grows more and more
complicated with increase in sales volume and diversification of product assortment.

 ABC Method:

The concept ABC (Always Better Control) Analysis is based on ‗Think on the Best and then
on the Rest‘. ABC analysis underlines a very important principle ―Vital few: trivial many‖
Generally, companies are required to keep stock of large number of items used in production
and distribution. In practice, it is not possible to maintain and control a similar/ proper level
of inventory of all items, which is also not feasible due to resource constraints. Hence, the
prevalent practice is that sincere efforts are made to have a proper control on the most
circulating items and least on rare circulating once.

ABC analysis offers a basis for grouping of items on certain basis of annual/ monthly
consumption value. In other words, of an item‘s unit price is very little but if it is a most
circulating items and its monthly/annual consumption value is maximum, then closer and
careful control will be done and vice versa. Hence, In ABC analysis, items are categorized in
three broad groups, namely; A, B, and C, on the basis of their monthly/annual consumption
value.

It has become an indispensable part of a business and the ABC analysis is widely used for
unfinished good, manufactured products, spare parts, components, finished items and
assembly items.

This method of management divides the items into three categories A, B and C; where A is
the most important item and C the least valuable.

41
Need for prioritizing inventory:

Item A:

In the ABC model of inventory control, items categorized under A are goods that register the
highest value in terms of annual consumption. It is interesting to note that the top 70 to 80
percent of the yearly consumption value of the company comes from only about 10 to 20
percent of the total inventory items. Hence, it is crucial to prioritize these items.

Item B:

These are items that have a medium consumption value. These amount to about 30 percent of
the total inventory in a company which accounts for about 15 to 20 percent of annual
consumption value.

Item C:

The items placed in this category have the lowest consumption value and account for less
than 5 percent of the annual consumption value that comes from about 50 percent of the total
inventory items.

Note: The annual consumption value is calculated by the

formula: (Annual demand) × (item cost per unit)

The policies governing the ABC method of inventory management:

The idea behind using the ABC analysis is to leverage the imbalances of sales. This means
that each item must be given the appropriate amount of weight depending on their class:

42
Item A:

a) These are subjected to strict inventory control and are given highly secured areas in terms
of storage

b) These goods have a better forecast for sales

c) These are also the items that require frequent reorders on a daily or a weekly basis

d) They are kept as a priority item and efforts are made to avoid unavailability or stock-out of
these items

Item B:

a) These items are not as important as items under section A or as trivial as items categorized
under

b) The important thing to note is that since these items lie in between A and C, they are
monitored for potential inclusion towards category A or in a contrary situation towards
category C

Item C:

a) These items are manufactured less often and follow the policy of having only one of its
items on hand or in some cases they are reordered when a purchase is actually made

b) Since these are low demand goods with a comparatively higher risk of cost in terms of
excessive inventory, it is an ideal situation for these items to stock-out after each purchase

c) The questions managers find themselves dealing with when it comes to items in category C
is not how many units to keep in stock but rather whether it is even needed to have to these
items in store at all

43
The uses of ABC Analysis:

The ABC analysis is widely used in supply chain management and stock checking and
inventory system and is implemented as a cycle counting system. It is most important for
companies that seek to bring down their working capital and carrying costs.

This done by analyzing the inventory that is in excess stock and those that are obsolete by
making way for items that are readily sold. This helps avoid keeping the working capital
available for use rather than keeping it tied up in unhealthy inventory.

When a company is better able to check its stock and maintain control over the high-value
goods it helps them to keep track of the value of the assets that are being held at a time. It
also brings order to the reordering process and ensures that those items are in stock to meet
the demands.

The items that fall under the C category are those that slow-moving and need not be re-
ordered with the same frequency as item A or item B. When you put the goods into these
three categories, it is helpful for both the wholesalers and the distributors to identify the items
that need to be stocked and those that can be replaced.

Advantages of implementing the ABC method of inventory control:

i) This method helps businesses to maintain control over the costly items which have large
amounts of capital invested in them

ii) It provides a method to the madness of keeping track of all the inventory. Not only does it
reduce unnecessary staff expenses but more importantly it ensures optimum levels of stock is
maintained at all times

iii) The ABC method makes sure that the stock turnover ratio is maintained at a
comparatively higher level through a systematic control of inventories

iv) The storage expenses are cut down considerably with this tool

v) There is provision to have enough C category stocks to be maintained without

compromising on the more important items

44
Disadvantages of using the ABC analysis:

i) For this method to work and render successful results there must be proper standardization
in place for materials in the store

ii) It requires a good system of coding of materials already in operation for this analysis to
work

iii) Since this analysis takes into consideration the monetary value of the items, it ignores
other factors that may be more important for your business. Hence, this distinction is vital

 Inventory Ratios:

Asset management ratio also called for efficiency or activity ratio indicates the return
generated from a particular type of asset using the sales, cost and asset data. This ratio helps
the business to identify effective utilization of the assets and thereby facilitates efficient
management.

Inventory turnover ratio is one of the most important asset management ratios for an entity
selling physical goods. Ratios related to inventory are given below:

Inventory turnover ratio

Inventory turnover ratio is used to ascertain the rate at which the company‘s inventory is
converted to cash. A company with higher inventory ratio is considered to have the effective
sales strategy. It is generally measured using inventory period which is the average inventory
divided by average cost of goods is sold

*Average Inventory is the opening balance of the inventory plus the closing balance divided
by 2.

A high inventory turnover ratio indicates efficient management of inventory and goods are
fast moving.

Inventory Outstanding Days

45
Inventory Outstanding days represent the average number of days it takes for an entity to sell
the inventory. It is the number of days the inventory stored in the warehouse before it is sold
to the customer.

Operating Cycle

Operating cycle is the number of days it takes for an entity to sell the inventory and collect
cash from the customers. This is termed as operating cycle because it is the process of
purchasing inventories, selling them, recovering cash from customers, using that cash to
purchase inventories and so on is repeated as a cycle

*It is the average days taken to sell the inventory i.e. (365/ Inventory Turnover ratio)

+ This is the number of days for realizing the receivables i.e. (365/ account receivable
turnover ratio)

A short operating cycle is good as it ensures the entity‘s cash is held up for a shorter period.

Illustration:

Cost of goods sold is Rs. 300,000 opening inventory is Rs 40,000 and closing inventory is Rs.
80,000, we shall calculate the inventory ratio as follows:

So the entity‘ inventory management is 5 times efficient and fast moving.

The entity‘s inventory outstanding days are 73 meaning, on an average, the inventory is
stored in the warehouse for 73 days in a year.

 Economic Order Quantity (EOQ):

The Economic Order Quantity (EOQ) is the number of units that a company should add to
inventory with each order to minimize the total costs of inventory—such as holding costs,
order costs, and shortage costs. The EOQ is used as part of a continuous review inventory
system in which the level of inventory is monitored at all times and a fixed quantity is
ordered each time the inventory level reaches a specific reorder point. The EOQ provides a

46
model for calculating the appropriate reorder point and the optimal reorder quantity to ensure
the instantaneous replenishment of inventory with no shortages. It can be a valuable tool for
small business owners who need to make decisions about how much inventory to keep on
hand, how many items to order each time, and how often to reorder to incur the lowest
possible costs.

The EOQ model assumes that demand is constant, and that inventory is depleted at a fixed
rate until it reaches zero. At that point, a specific number of items arrive to return the
inventory to its beginning level. Since the model assumes instantaneous replenishment, there
are no inventory shortages or associated costs. Therefore, the cost of inventory under the
EOQ model involves a tradeoff between inventory holding costs (the cost of storage, as well
as the cost of tying up capital in inventory rather than investing it or using it for other
purposes) and order costs (any fees associated with placing orders, such as delivery charges).
Ordering a large amount at one time will increase a small business's holding costs, while
making more frequent orders of fewer items will reduce holding costs but increase order
costs. The EOQ model finds the quantity that minimizes the sum of these costs.

The basic EOQ relationship is shown below. Let us look at it assuming we have a painter
using 3,500 gallons of paint per year, paying $5 a gallon, a $15 fixed charge every time
he/she orders, and an inventory cost per gallon held averaging $3 per gallon per year.

The relationship is TC = PD + HQ/2 + SD/Q '¦ where

TC is the total annual inventory cost—to be calculated.

P is the price per unit paid—assumes $5 per unit.

D is the total number of units purchased in a year—assumes 3,500 units.

H is the holding cost per unit per year—assumes $3 per unit per annum.

Q is the quantity ordered each time an order is placed—initially assume 350 gallons per
order.

S is the fixed cost of each order—assumes $15 per order.

47
Calculating TC with these values, we get a total inventory cost of $18,175 for the year.
Notice that the main variable in this equation is the quantity ordered, Q. The painter might
decide to purchase a smaller quantity. If he or she does so, more orders will mean more fixed
order expenses (represented by S) because more orders are handles—but lower holding
charges (represented by H): less room will be required to hold the paint and less money tied
up in the paint. Assuming the painter buys 200 gallons at a time instead of 350, the TC will
drop to $18,063 a year for a savings of $112 a year. Encouraged by this, the painter lowers
his/her purchases to 150 at a time. But now the results are unfavorable. Total costs are now
$18,075. Where is the optimal purchase quantity to be found?

The EOQ formula produces the answer. The ideal order quantity comes about when the two
parts of the main relationship (shown above)—"HQ/2" and the "SD/Q"—are equal. We can
calculate the order quantity as follows: Multiply total units by the fixed ordering costs (3,500
× $15) and get 52,500; multiply that number by 2 and get 105,000. Divide that number by
the holding cost ($3) and get 35,000. Take the square root of that and get 187. That number is
then Q.

In the next step, HQ/2 translates to 281, and SD/Q also comes to 281. Using 187 for Q in the
main relationship, we get a total annual inventory cost of $18,061, the lowest cost possible
with the unit and pricing factors shown in the example above.

Thus EOQ is defined by the formula: EOQ = square root of 2DS/H. The number we get, 187
in this case, divided into 3,500 units, suggests that the painter should purchase paint 19 times
in the year, buying 187 gallons at a time.

The EOQ will sometimes change as a result of quantity discounts offered by some suppliers
as an incentive to customers who place larger orders. For example, a certain supplier may
charge $20 per unit on orders of less than 100 units and only $18 per unit on orders over 100
units. To determine whether it makes sense to take advantage of a quantity discount when
reordering inventory, a small business owner must compute the EOQ using the formula (Q =
the square root of 2DS/H), compute the total cost of inventory for the EOQ and for all price
break points above it, and then select the order quantity that provides the minimum total cost.

48
  Stock levels:

The maximum stock level represents the upper limit beyond which the quantity of any item is
not normally allowed to rise. The main object of establishing this limit is to ensure that
unnecessary working capital is not blocked in stores. Theoretically, maximum stock level is
the sum-total of minimum stock level and economic order quantity. Maximum level may be
expressed as follows:

Maximum level = reorder level + reordering quantity – minimum consumption. = reorder

level + reordering quantity – (minimum consumption per period × Minimum Recording
period)

The maximum stock level for a particular item is fixed after considering the following points:

•Rate of consumption of material

•Storage space available

• Lead-time from the date of placing the order

•Nature of material

•Working capital required

• Inventory carrying cost

•Market trends

•Fashion habits

•Government restriction

•Economic order quantity, etc.

The minimum stock level is the lower limit below which the stock of any item should not
normally be allowed to fall. This is also technically known as safety or buffer stock. The
main object of determining this limit is to protect against stock outs of a particular item. The
prime considerations in fixing the minimum stock level or safety stocks are:

•Average rate of consumption

• Lead-time i.e. time required for replenishment.

49
Minimum level = reordering level – (normal usage per period × average delivery time)

The re-order level is fixed between the minimum and maximum stock levels. When stock of a
material reaches this point, the purchase process should be initiated. The reorder level is
slightly more than the minimum stock level to guard against abnormal usage, abnormal delay
in supply, etc.

Re-order level = maximum consumption during the period × maximum period required for
delivery

The danger level is generally fixed below the minimum stock level. Normally stock quantities
should not be below the minimum level. If it reaches the danger level at any point in time,
urgent action for replenishment of stock must be taken to prevent stock out.

The economic order quantity (EOQ) can be defined as the purchase order size, which takes
into account the optimum combination of stock-holding costs and ordering costs. Economic
order quantity helps to achieve the lowest unit cost for stored material. The concept of
economic order quantity is primarily based on the consideration of acquisition cost and
possession cost, which has been discussed below.

The EOQ calculation is based on the following assumptions:

•Known stock-holding cost

•Known constant ordering cost

•Rate of demand is known

•Constant price per unit is known

•Replenishment is made instantaneously.

The acquisition cost (S) is used in determining the EOQ. It is necessary to know the cost of
placing a purchase order, the cost of material units and the quantity discounts available for
the items being purchased. It is the incremental cost rather than the average cost per order
that is important when determining these costs.

S = Cost per order × number of orders

S = Cost per order × anticipated usage/order quantity

50
The inventory carrying cost is referred to as possession cost (I). Carrying inventory carries a
substantial cost. This cost is represented by items like rent of a storehouse, cost of insurance,
and opportunity cost of tying up large working capital in inventory.

The major components of carrying cost are as follows:

•The cost of money invested in the stocks.

•Cost incurred on the physical storage facilities such as storage space, racks, handling
equipment, etc.

•Cost added by deterioration of items with low self-life or losses due to evaporation etc.

•Salaries to stores personnel.

• Losses in stores due to pilferage, wastage, breakage, etc.

I = Average inventory quantity × unit cost × Inventory holding cost%

I = Order quantity/2 × unit cost × Inventory holding cost%

The EOQ is used to determine the most optimum order quantity in terms of total cost.
Smaller orders mean less possession cost (I), but more frequent orders with the associated
acquisition costs (S). Bigger orders mean higher possession cost (I) but less frequent orders
and associated acquisition costs (S). The EOQ is where the ordering costs equal the inventory
holding cost (S=I), as this is the point where the total cost (TC) would be at its lowest.

51
In a situation where the following is applied to the above formulas, S = 80.00, I = 0.3, unit
cost = 5.00 and the anticipated usage = 6000, the following table can be developed for
possible order quantities (Q).

Q S I TC
10 48000 7 48007
100 4800 75 4875
300 1600 225 1825
500 960 375 1335
600 800 450 1250
700 685 525 1210
750 640 563 1203
800 600 600 1200
850 565 638 1203
900 533 675 1208
1000 480 750 1230
1200 400 900 1300
1500 320 1125 1445

It can be seen from the table that the lowest total cost is at 800 units where S = I.

52
The following is assumed:

•Average rate of use/demand = a

• Time to get a delivery/lead-time = d.

A = the product of the average rate of use, a, and the average time to deliver, d. A = a · d

A is therefore the number of units which one would expect to use during the delivery period.
We assume that the delivery is always in a batch of size n, which is fixed for all time.

Other techniques:

Stock review, which is the simplest inventory management methodology and is generally
more appealing to smaller businesses. Stock review involves a regular analysis of stock on
hand versus projected future needs. It primarily uses manual effort, although there can be
automated stock review to define a minimum stock level that then enables regular inventory
inspections and reordering of supplies to meet the minimum levels. Stock review can provide
a measure of control over the inventory management process, but it can be labor-intensive
and prone to errors. Stock review is a regular analysis of stock versus projected future needs.
This can be done through a manual review of stock or by using inventory software.
Defining your minimum stock level will allow you to set up regular inspections and reorders
of supplies. Make sure to take into account certain situations that can arise, such as vendors
taking longer than average to replenish stock. This will aid you in using just-in-time ordering,
where the inventory is held for a minimum amount of time before it moves to the next stage
in the supply chain.
In businesses where manual inventory management techniques are still in use, the primary
inventory control methods include:
Visual control
Tickler control
Click-sheet control

53
Just-in-time (JIT) methodology, in which products arrive as they are ordered by customers,
and which is based on analyzing customer behavior. This approach involves researching
buying patterns, seasonal demand and location-based factors that present an accurate picture
of what goods are needed at certain times and places. The advantage of JIT is that customer
demand can be met without needing to keep quantities of products on hand, but the risks
include misreading the market demand or having distribution problems with suppliers, which
can lead to out-of-stock issues. The objective of JUST IN TIME method is to increase the
inventory turnover and at the same time reduce the inventory holding cost. JIT inventory
system also exposes the unwanted or the dead inventory held by the retailer/ manufacturer.
This method is ideal for manufacturing organization and it is not used in Retail industry in
general. This will also involve usage of Kanban card to track inventory movement.

SDE ANALYSIS, SDE analysis is based on problems of procurement namely:

Non-availability
Scarcity
Longer lead time
Geographical location of suppliers
Reliability of suppliers, etc.
SDE analysis classifies the items into three groups called ‗Scarce‘, ‗Difficult‘ And ‗Easy‘.
The information so developed is then used to decide purchasing Strategies.

VENDOR MANAGED INVENTORY, as the name explains, it involved SKUs managed

directly by the supplier. Inventory is replenished based on the sales on regular intervals by the
vendor. The retailer provides shop floor space and the vendor is charged a consignment rate
on every product sold at the location. The ownership of the items from receiving to sales and
inventory loss if any will be with the supplier.

54
High-level inventory management:
It seems that around 1880. There was a change in manufacturing practice from companies
with relatively homogeneous lines of products to horizontally integrated companies with
unprecedented diversity in processes and products. Those companies (especially in
metalworking) attempted to achieve success through economies of scope - the gains of jointly
producing two or more products in one facility. The managers now needed information on the
effect of product-mix decisions on overall profits and therefore needed accurate product-cost
information. A variety of attempts to achieve this were unsuccessful due to the huge overhead
of the information processing of the time.

However, the burgeoning need for financial reporting after 1900 created unavoidable
pressure for financial accounting of stock and the management need to cost manage products
became overshadowed. In particular, it was the need for audited accounts that sealed the fate
of managerial cost accounting. The dominance of financial reporting accounting over
management accounting remains to this day with few exceptions, and the financial reporting
definitions of 'cost' have distorted effective management 'cost' accounting since that time.
This is particularly true of inventory.

Hence, high-level financial inventory has these two basic formulas, which relate to the
accounting period:

1. Cost of Beginning Inventory at the start of the period + inventory purchases within the
period + cost of production within the period = cost of goods available
2. Cost of goods available − cost of ending inventory at the end of the period = cost of
goods sold

The benefit of these formulas is that the first absorbs all overheads of production and raw
material costs into a value of inventory for reporting. The second formula then creates the
new start point for the next period and gives a figure to be subtracted from the sales price to
determine some form of sales-margin figure.

Manufacturing management is more interested in inventory turnover ratio or average days to

sell inventory since it tells them something about relative inventory levels.

55
 1. Inventory turnover ratio (also known as inventory turns) = cost of goods sold /
Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending
Inventory) / 2)
And it‘s inverse

2. Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio
= 365 days a year / Inventory Turnover Ratio

This ratio estimates how many times the inventory turns over a year. This number tells how
much cash/goods are tied up waiting for the process and is a critical measure of process
reliability and effectiveness. So a factory with two inventory turns has six months stock on
hand, which is generally not a good figure (depending upon the industry), whereas a factory
that moves from six turns to twelve turns has probably improved effectiveness by 100%. This
improvement will have some negative results in the financial reporting, since the 'value' now
stored in the factory as inventory is reduced.

While these accounting measures of inventory are very useful because of their simplicity,
they are also fraught with the danger of their own assumptions. There are, in fact, so many
things that can vary hidden under this appearance of simplicity that a variety of 'adjusting'
assumptions may be used.

These include:

 Specific Identification
 Lower of cost or market
 Weighted Average Cost
 Moving-Average Cost
 FIFO and LIFO.
 Queuing theory.

56
Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily
a management tool. Inventory management should be forward looking. The methodology
applied is based on historical cost of goods sold. The ratio may not be able to reflect the
usability of future production demand, as well as customer demand.

Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI)
and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and
increase inventory turns. VMI and CMI have gained considerable attention due to the success
of third-party vendors who offer added expertise and knowledge that organizations may not
possess.

Inventory management in modern days is online oriented and more viable in digital. This
type of dynamics order management will require end-to-end visibility, collaboration across
fulfillment processes, real-time data automation among different companies, and integration
among multiple systems.

57
VED ANALYSIS:

This type of analysis divides the inventory into three categories in the descending order of
their critically as given below;

V: It stands for ‗vital‘ items analysis of stock requires more attention. In case of out of stock
there will be stoppage of production. V items must be stored in adequate quantity to ensure
smooth operation of the plant.

E: It stands for ‗essential‘ items. Such items are essential for efficient running. The system
will not fail without these items. It should be seen that these items are always in stock.

D: It stands for desirable items which do not stop the production immediately. Availability of
such items will ensure more efficiency and less fatigued.

VED analysis is suitable for capital intensive industries. It is useful for such material which is
difficult to procure.

58
FNSD ANALYSIS:

This type of analysis shows moving position of inventory during a certain period. If the age is
minimum the inventory position is satisfactory. If the age is maximum it indicates slow
moving items. It may be due to lower demand or inefficiency in stocking position. Excessive
investment in inventory means huge amount is blocked in inventory. It amounts to low
profitability.

FNSD analysis shows division of inventory into four categories in the descending order of
their usage;

F: It stands for ‗fast moving items‘. Such inventory is consumed in a short period. It is a
stock of fast moving items. In order to avoid stock out position the items in this category
must be observed constantly.

N: It stands for ‗normal items‘. Such stock is adjusted over a period of year. In order to avoid
surplus stock the inventory levels should be fixed on the basis of new estimates.

S: It stands for ‗slow moving items‘. Such item lasts for two or more years. Such items
should be reviewed very carefully before placement of any order.

D: It stands for ‗dead stock‘. No further demand is seen for the existing stock. It implies
money spent cannot be realized but it requires some useful space. Such items should be
identified and efforts should be made to find alternative uses.

59
 „A GLIMPSE OF INVENTORY MANAGEMENT OF TATA MOTORS‟

Inventory management has emerged as most of the important tools to improve operational
efficiency over the last 30-40 years across the globe. The automobile industry uplift it for
profit it solve unemployment problem, it shows new technologies through this save time
money and manpower.

Inventory is individual of the major and most significant resources a developed commerce
possesses, and the earnings of stock is one of the major source of proceeds production for a
company The aim of inventory administration is to hold inventory at the lowest potential
charge, given the objectives to guarantee continual provisions for continuing operations.
While creation decisions on inventory management has to find a compromise between
different cost components. Such as the costs of supplying inventory inventory–holding costs
and costs resulting from insufficient inventories.

One of the major operating difficulties in the scientific inventory control is an extremely large
variety of items stocked by various organizations. These may vary from 10,000 to 100,000
different types of stocked items and it is neither feasible nor desirable to apply rigorous
scientific principles of inventory control in all these items. Such an indiscriminate approach
may make cost of inventory control more than its benefits and therefore may prove to be
counter-productive. Therefore, inventory control has to be exercised selectively. Depending
upon the value, criticality, and usage frequency of an item we may have to decide on an
appropriate type of inventory policy.

The selective inventory management thus plays a crucial role so that we can put our limited
control efforts more judiciously to the more significant group of items. In selective
management we group items in few discrete categories depending upon value; criticality and
usage frequency. Such analyses are popularly known as ABC, VED and FSN Analysis
respectively. This type of grouping may well form the starting point in introducing scientific
inventory management in an organization.

The study contains the Inventory management of the Tata motors Limited. To know about
the raw materials of the company for the last five years. The data‘s are to be collected from
the secondary. This analysis to know about the stock levels under EOQ method. Finally

60
shows the company economic order quantity of the stock levels for the last five years (2012-
2016).

Analysis of the Study ECONOMIC ORDER QUANTITY:

EOQ= 𝟐𝑨𝑩𝑪𝑺 or 𝟐𝑨𝑶𝑪 Where, A=Annual Consumption B or O = Ordering Cost C =

Carrying cost S = Storage Cost

ECONOMIC ORDER QUANTITY:

EOQ = 𝟐𝑨𝑶𝑪 Where, A=Annual Consumption O = Ordering Cost C = Carrying cost

During 2012-13:

The firm requires below given units of raw material for manufacturing. The following
are the details of their operation during 2012-13.

PARTICULARS

RAW MATERIAL

33168.73

Ordering Cost Per Order

3500

Carrying Cost

10 %

Purchase Price Per Unit

550

Calculation of EOQ:- Total units required (A) =33168.73 The ordering cost per order
(O) = Rs.3500 Carrying cost per unit (C) = 10% (i.e.) 10% of Rs.550 =Rs.55 EOQ
=√2AO/C = 2∗33168.73∗3500 / 55 =Rs.2054.62

61
During 2013-14:

The firm requires below given units of raw material for manufacturing. The following
are the details of their operation during 2013-14.

PARTICULARS

RAW MATERIAL

25542.69

Ordering Cost Per Order

4000

Carrying Cost

10 %

Purchase Price Per Unit

600

Calculation of EOQ:- Total units required (A) =25542.69 The ordering cost per order
(O) = Rs.4000 Carrying cost per unit (C) = 10% (i.e.) 10% of Rs.600 =Rs.60 EOQ
=√2AO/C = 2∗25542.69∗4000 /60 =Rs.1845.45

During 2014-15:

The firm requires below given units of raw material for manufacturing. The following
are the details of their operation during 2014-15.

PARTICULARS

RAW MATERIAL

27920.47

Ordering Cost Per Order

4500

62
Carrying Cost

10 %

Purchase Price Per Unit

650

1.Calculation of EOQ:- Total units required (A) =27920.47 The ordering cost per order
(O) = Rs.4500 Carrying cost per unit (C) = 10% (i.e.) 10% of Rs.650 =Rs.65 EOQ
=√2AO/C = 2∗27920.47∗4500 /65 =Rs.1966.19

During 2015-16:

The firm requires below given units of raw material for manufacturing. The following
are the details of their operation during 2015-16.

PARTICULARS

RAW MATERIAL

29099.37

Ordering Cost Per Order

5000

Carrying Cost

10 %

Purchase Price Per Unit

700

1. Calculation of EOQ:- Total units required (A) =29099.37 The ordering cost per order
(O) = Rs.5000 Carrying cost per unit (C) = 10% (i.e.) 10% of Rs.700 =Rs.70 EOQ
=√2AO/C = 2∗29099.37∗5000 /70 =Rs.2038.89

63
During 2016-17:

The firm requires below given units of raw material for manufacturing. The following
are the details of their operation during 2016-17.

PARTICULARS

RAW MATERIAL

31600.37

Ordering Cost Per Order

5500

Carrying Cost

10 %

Purchase Price Per Unit

750

1. Calculation of EOQ:- Total units required (A) =31600.37 The ordering cost per order
(O) = Rs.5500 Carrying cost per unit (C) = 10% (i.e.) 10% of Rs.750 =Rs.75 EOQ
=√2AO/C = 2∗31600.37∗5500 /75 =Rs.2152.84

TABLE SHOWING 5 YEARS RESULT OF EOQ:

YEAR 2012-13 2013-14 2014-15 2015-16 2016-17

EOQ 2054.62 1845.45 1966.19 2038.89 2152.84

64
INTERPRETATION:
The above graph shows the economic order quantity of the company. In 2013 the EOQ is
2054.62 which decrease to1845.45 in the year 2014. But increases further and reaches
2152.84 in the year 2017.

Inventory management has to do with keeping accurate records of finished goods that are
ready for shipment. This often means posting the production of newly completed goods to the
inventory totals as well as subtracting the most recent shipments of finished goods to buyers.
When the company has a return policy in place, there is usually a sub-category contained in
the finished goods inventory to account for any returned goods that are reclassified or second
grade quality. Accurately maintaining figures on the finished goods inventory makes it
possible to quickly convey information to sales personnel as to what is available and ready
for shipment at any given time.

To ensure Inventory control is maintained over all locations, following critical points
if focused upon will help:

 Establish and outline Operations Process for Service furnishers:

Draw Standard Operating procedure detailing warehouse inventory system process,
warehouse operations process, as well as documentation process. Especially in a third
Party Service furnisher‘s facility, it is important to have process Adherence as well as
define administration, approval and appreciation construction for Function fading which
inventory operations will not be under control
.
 Establish inventory visibility at every location through MIS Reports:
Initiate daily merchandise count procedure to be carried out at all of the locations and
reported return to the inventory desk. Daily merchandise count should be able to reflect
location accuracy, stock accuracy as well as transaction summary for the day.

 Monthly audits and archive count should be implemented at all locations without fail
and insist on one hundred percent adherence.

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 Central archive team to be responsible for ensuring review of all reports
and controlling inventories at all locations.

 Visiting major sites and being present during physical stock audits on periodical
or semiannual base is extremely significant.

 finally maintain reviewing processes and ensure training and re training is carried
out Frequently in addition to at all period at location so that a process oriented
culture is Imbibed and all operating staff understand the importance of maintaining
processes as well as achieve health.

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Conclusion:

Today‘s market is a customer oriented market and customer satisfaction is the most important
goal of every organization therefore it is inevitable to adopt integrated Inventory
Management approach for new product development strategy. Financial – Material
management for any product is a dynamic decision making process involving a series of
inter-related activities.

In today‘s dynamic market ―Every Bench marks are dynamic, challenge them for continual
improvement‖. In order to remain in market any organization needs to define the process,
Benchmark for the excellence, endeavor to achieve it by strategizing & creating environment,
providing required resources & effective monitoring.

Inventory system is an extremely important problem area in the management of materials

handling. It is quite susceptible to control and a very large amount of scientific models are
available in the literature to enable us to choose an optimal inventory policy. Buying the
optimal quantity can result only from a sound inventory control system that is achieved by
judicious reconciliation of conflicting costs and departmental objectives.

However, inventory is only an indicator of performance of materials management function

and to cut down inventories we use not only scientific inventory management principles but
also models along with it also take long-term measures to reduce inventories through
strategies such as variety reduction and standardization, source development and
optimization, and vendor rating, lead-time reduction through improvement in the systems and
procedures of procurement. It is obvious that scientific inventory management has to be
practiced selectively rather than indiscriminately to make it cost-effective. It is also important
to have Informational inputs like demand forecast, lead-time estimate, and other cost
estimates to be realistic to make effective use of inventory models.

In any business or organization, all functions are interlinked and connected to each other and
are often overlapping. Some key aspects like supply chain management, logistics and
inventory form the backbone of the business delivery function. Therefore these functions are
extremely important to marketing managers as well as finance controllers. Inventory
management is a very important function that determines the health of the supply chain as

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well as the impacts the financial health of the balance sheet. Every organization constantly
strives to maintain optimum inventory to be able to meet its requirements and avoid over or
under inventory that can impact the financial figures.

Inventory is always dynamic. Inventory management requires constant and careful evaluation
of external and internal factors and control through planning and review. Most of the
organizations have a separate department or job function called inventory planners who
continuously monitor, control and review inventory and interface with production,
procurement and finance departments.

The direction or method you chose will all depend upon the business you‘re conducting and
the essentials you feel must be fulfilled.

The bottom line is that inventory control is vital to the survival of your business. If you don‘t
have a good handle on your inventory you‘ll never have a true account for how your business
is doing. It‘s a competitive market out there. Don‘t let inventory excess or shortages become
your downfall.

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