ravi inventory 09

CHAPTER-I

INTRODUCTION

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INTRODUCTION:

Inventory management is very important in an organization in order to have a

Smooth move of it. The term inventory refers to the stockpile of the products a fire is

offering for sale and the components that make up the product. In other words,

inventory is composed of assets that will be sold in future in the normal course of

business operations. Inventory as a current asset differ from other assets because only

financial managers are not involved, rather all functional areas finance, and

marketing, production and purchasing are involved. The view concerning the

appropriate level of inventory would differ among the different functional areas. The

job of the financial manager is to reconcile the conflicting viewpoints of the various

functional areas regarding the appropriate inventory level in order to fulfill the

overall objective of maximizing the owner’s wealth. Thus, inventory management

should be related to the overall objective of the firm. The basic responsibility of the

financial manager is to make sure the firm’s cash flows are manager efficiently.

Efficient management of inventory should ultimately result in the maximization of

owner’s wealth.

Although our discussion of inventory management will focus on the finance

perspective it is important to understand that good inventory management is vital to

the success of virtually all firms. In fact inventory is the key to being a top player in

many industries today including both retailing and manufacturing because of its

importance, managers at all levels, and in all functional areas, are involved

management. Inventory management activities can range from ensuring that there is

an adequate selection of different sizes of clothing available in a retail store to

stocking necessary replacement parts for commercial Aircraft.

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MEANING OF INVENTORY MANAGEMENT:

“Inventory Management” means planning, procurement, holding and

accounting and distribution of these and materials. Inventories are approximately

60% of current assets in India. In industries using agricultural raw materials the

percentage is still higher. Thus, a large part of working capital is invested in

inventories. The management of inventories is therefore necessary is therefore

necessary to avoid heavy loss due to leakage, theft and wastage because neglecting

the management of inventories may jeopardize. The long on profitability of the

concern may fall ultimately. The reduction in excessive inventories carries a

favorable impact on a company’s profitability.

The financial manager actually is a kind of watchdog over functional areas.

Inventory management consist of Raw-material work in process finished goods

packaging material and semi finished goods.

Infant, the very existence of inventory creates costs. Sometimes it is difficult

to see what value is received from costs incurred. Inventory management may be

diffident as the sum total of those activities, which are necessary for the acquisition,

storage sale and disposal, or use o management. It is a subject. Which merits the

attention of the top-level management and the decisions of the planning and

executive personnel.

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Objectives:

In the contest of inventory management the firm is faced with the problem of

meeting to conflicting needs.

1 To meet the demand for the product by efficiently organizing the production

the production and sales operations.

2 Control investment in inventories and keep it at an optimum level.

3 To minimize investments in inventory.

4 To ensure against delays in deliveries.

5 To utilize the advantage of price fluctuations.

6 To take advantage of quality discount control.

Inventory control techniques:

1 ABC analysis

2 EOQ analysis

3 HML analysis

4 FSN analysis

5 Two bin system

6 MRP analysis

7 VED analysis

8 SED analysis

9 MAX analysis (MAX-MIN).

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OBJECTIVES OF THE STUDY

To assess the performance of materials and inventory control section of Hetro

Drugs LTD.

To evaluate the various techniques of Inventory being adopted by Hetero

Groups.

To understand inventory management procedure followed at HETERO

DRUGS LTD.

To know the efficiency of the firm in utilizing its Current Assets in general

To assess overall financial performance of HETERO DRUGS LTD.

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SCOPE OF THE STUDY

The study is done on inventories held by HETERO DRUGS LTD. The

scope of the study includes the LIFO- FIFO Statements, Techniques of Inventory

Management & Just in Time System. The scope of the study is limited to collect in the

financial data published in the annual report of company with reference of the objective

stated above and any analysis of the data with a view to suggest favorable solution to

the various problems related to financial performance.

The project “INVENTORY MANAGEMENT OF HETERO DRUGES

LIMITED” provides information with regard to the comparative common size recent

trends and development and comprehensive review of the financial performance of the

bank. This projects gives an insight of the various tools to ascertain and evaluated the

financial performance of the HETERO DRUGES PVT LIMITED.

The scope of the study is limited to collect from last five years data of the

company and using of Ratios techniques of liquidity ratio, profitability ratios.

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NEED FOR THE STUDY

The present study carried out is The “Inventory Management” of HETERO

DRUGS LTD. at the instant of the management of that company. As there is a need

for every company to analyze its present financial position and inventory

management. I was provided with the required data for analyzing present inventory

management and trends during last five years. The present study makes an attempt to

analyze financial performance of HETERO DRUGS LTD.. besides the future

prospects.

Besides studying financial position one can study the entire organization as

financial analysis covers every aspect. This would be the primary reason that evoked

in the interest and need for the study.

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METHODOLOGY

The methodology designed for my project entitled “Inventory Management” at

HETERO DRUGS LTD. was based on two sources.

1. Primary Data

2. Secondary Data

PRIMARY DATA:

Primary data means first hand information is collected by researcher

Primary data has been collected by interviewing various people in production

department as well as administrative people who will generally give the details

of inventory process and also know the existing software in the company. The

primary data has been collected from the personal observation and personal

interviews with the officials of the firm.

SECONDARY DATA:

Secondry data means already existing data. Which was collected by some one

else .The primary data was supplemented by the secondary data collected from

published annual general reports of the organization and some important presented in

the study with respect to HETERO DRUGS LTD., is taken from material data and

text book which has been matched with the record obtained from the company in

order to may a strategic view.

Internal records and files of HETERO DRUGS LTD.., including

information reports published material on transaction such as the Inventory

statements. Stock data registers have been analyzed interpreted.

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LIMITATIONS

Due to the limited time available the authenticity of conclusions drawn based

on the observations made cannot be ensured.

The analysis of Inventory Management is based on information available and

if any mistake would be reflected in the study.

The figures and facts claimed in the annual reports and other forms are

assumed true.

It is based on the data supplied by the factory personnel.

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CHAPTER FRAMEWORK

Chapter-I First chapter deals with Introduction, Need, Scope, Limitation, Objectives,

of the study.

Chapter-II Second chapter encompasses with Industrial profile-Lorses companies Pharmaceuticals in toppers - pharmaceutical industry - origin of the Pharmaceutical industry – post independence era – Dramatic process.

Chapter-III Third chapter covers the Company profile- Hetero Drugs ltd, Hetero

groups ,vision and mission values,R&D over review,operating .

procedures,careers,offices,branch offices.

Chapter-IV Fourth chapter explains about Theoretical frame work-Introduction of inventory

management and control,types of inventory,raw materials inwards for five years

units, purchased plan,development inventory management and successful

inventory management.

Chapter –V Fifth chapter consists of Data analysis and Interpretation-techniques of

the inventory management,ordering level, two bin system,the ABC

analysis,FIFO- LIFO,VEDanalysis,just in time management

Chapter-VI Sixth chapter deals with Findings & Suggestions

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CAPTER-II

INDUSTRY PROFILE

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INDUSTRY PROFILE

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The pharmaceutical industry is said to be the second fastest growing industry after

software industry. Pharmaceutical industry is perhaps the most challenging one on the

Indian industrial scene today. The total pharmaceutical market for the year 2002 is of

22000 crores. Pharma companies have out performed by substantial margin the 58

industries index covered by CMIE in terms of growth in sales profit after tax and asset

creation. Very intensive competition with about 16000 companies large, big, medium and

small fighting for their own place under the sun in an Rs.8500 crore (including bulk drugs

as per 1995 estimates). The competition is at its fiercest currently.

The seemingly ever-increasing and almost never ending governmental regulations

and policy changes since the output of the industry is usual to the basic health requirement

and quality of life an emphasis is placed on controlling the quality at all stages of

production, including a check on the ingredient used. Government intervention exists in

the form of price control patenting and compulsory licensing etc. Entry barriers due to

initial setting up costs are extremely high. Stiffing price controls, eroding profits and

consequently a vanishing bottom line. Rigorous controls on formulations and an absence

of international patient protection resulting in me-too maze of products with little or no

product differentiation.

Increasing dominance of trade associations and their constant demand for increase

in trade margins. In the pharmacy industry firms have to come up with new drugs and

newer ways of combating existing as well as newly identified diseases. This makes the

industry highly R & D sales ratio [a standard measure of the technology intensity of an

industry world wide 5.5% for the electronics industry, 8% for computers and 16% for

pharmaceuticals.

The path of a drug evolution from molecular synthesis to fine approval by the FDA is

an expensive affair costing a few hundred million dollars for a single drug. The

possibility of the molecule or drug getting rejected because of side effects, or unacceptable

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toxicity, exists at recovery stage of evolution. This implies a high degree of risk in Pharma

basic research. However, margins a potential drug command (especially under the patent

protection zone) makes basic research a high degree of risk and high gain game. Block

buster patented drugs are known to have brought in revenue of more than $ 1 billion a year

enabling the others not son successful products with in the company a piggy back side. In

short, it is a rat race, where a “better mouse-trap” just will not do. One needs much more

than that. And as in any jungle concrete or real only the fittest survive.

PHARMACEUTICAL INDUSTRY

From ancient times, two systems of medicine will in vague in India firstly, there

was Ayurvedic medicine, which dates back to the vedic period. Ayurvedic medicine

depends largely on the combination of various herbs, minerals and metals like gold, copper

etc. Secondly, there was the Arabian system of medicine. An innumerable invasion has

brought the Arabian system into India. In contrast to, two others systems of medicine,

namely Allopathic and Homeopathy, were in vague in the western part of the

world.Despite of being very advanced indigenous systems of medicine, Ayurvedic

medicine has not really become popular enough, probably because of very long British

Rule and the consequent development of an educational system including medical

educational based on a typical British model. As Allopathic or modern medicine started

taking roots in India, all the research and development activities the world over filled its

growth in India as well. Conversely, there was hardly any research and development

activity in the area of ayurvedic medicine. Though the government has been making some

efforts to promote ayurvedic medicine, its development seems to be a long way off.

It is still popular in rural areas, may be because modern medicine cannot reach

there. In urban areas it has yet to gain importance in so far as the prescription drug market

is concerned.

The indication of allopathic doctors towards prescribing an ayurvedic medicine is

very low indeed. Of late, however, the attitude of customers towards ayurvedic medicine

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seems to be increasingly favorable. Some of the pharmaceutical companies are planning to

diversify into ayurvedic drugs mainly to improve their profitability ayurvedic drugs re

exempted from price control.

ORIGIN OF THE INDIAN PHARMACEUTICAL INDUSTRY

The exact date on which the allopathic systems of medicine make its entry into the country

is not available but it is generally estimated that it happened some time during the early

part of the 19th century. The Britishers for there personal use imported the medicines when

they come to do business. This was the beginning of the pharmaceutical industry in India.

Later, when they ultimately took over the country, the imports became a regular feature.

These pharmaceutical products, which were introduced in India to provide relief to

britishers, soon gained popularity among the people in urban areas. For the first few

decades after their introduction, pharmaceutical products were being imported into the

country, mostly from Germany and the United Kingdom.

Indigenous production of these medicines, however, was started in 1901 with the

establishment of the Bengal chemical and pharmaceutical works, due to the pioneering

efforts of Acharya P.C.Roy. the world of medical treatment was witnessing some

significant, developments, like Louis Pasteur’s discovery of pathogenic bacteria as the

cause of infectious diseases while the Indian Pharmaceutical industry was in its early

stages.

Scientists in India undertook research in tropical diseases like malaria, typhoid and

cholera. Between 19904 and 1907 four research institutes, namely The Haffkine Institute

and Pasteur Institute were established. Yet another significant development of this period

was the use of chemicals for treating various diseases. Some very important drugs like

aspirin and barbiturates were made available during this period.

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The First World War gave a real stimulus to domestic production of pharmaceutical. There

was a step rise in demand and a drastic cut in imports. Consequently, the production of

quinine salts registered a substantial increase for the first time. Production of caffeine from

tea waste and manufacture of surgical dressings were also taken up during this period.

However with the resumption of imports after the war, the industry was back to square

one. It received a setback, s it was unable to compete with imported products.

The Bengal chemical and pharmaceutical works started production of tetanus antitoxin, a

basic drug in 1930. Indigenous production in 1939 was sufficient to meet only about 13

percent of medical requirements. Thus a large part of domestic demand for drugs was still

met by imports. The second world was another landmark in the history of the Indian

pharmaceutical industry it provided a propitious atmosphere for further expansion of

production.

By 1941, the industry took up the manufacture of new drugs like iodochlorohydroxy

quinoline as well as a number of alkaloids like ephedrine and codeine. Besides, the

industry made a beginning in the production of chemotherapeutic drugs like arsenicals,

anti-leporsy drugs and colloidal preparations of calcium, silver, manganese and iodine.

The production of glandular products like liver extracts was also undertaken. The

production of several formulations based on imported bulk drugs also showed a significant

expansion during the period.

Post-war developments in the west resulted in a high degree of product obsolescence,

replacing many older drugs with antibiotics and new chemotherapeutic agents. This put the

fledging Indian pharmaceutical industry at a great disadvantage. As a result, Indian

companies had to stop production of many items that were manufactured during the war

years. Instead, they started manufacture of formulations based on imported bulk drugs and

extraction of therapeutic agents from plant sources. Medicines, the industry could not

make much headway, in the absence of consistent govern-medal support to a nascent

industry. The estimated value of production of pharmaceuticals in 1947 and Rs.10 crores.

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POST-INDEPENDENCE ERA

Immediately after independence, the government addressed itself to the task of achieving a

high rate of economic progress with special emphasis on speedy industrialization. When

the government of independent India embarked on planned economic expansion about four

decades ago, the development of the Indian pharmaceutical industry was not

commensurate with the size of the country and the growing needs of its population. Since,

then the progress of the pharmaceutical industry in the country has been substantial and

many sided can best be described as dramatic.

DRAMATIC PROGRESS

From a mere Rs.10 crore (production value) in 1947 to a whopping Rs.14, 160 crores in

2000 the pharmaceutical industry in India, has come a long way. Today India

manufactures over 400 bulk drugs and around 60000 formulations. The numbers of

pharmaceutical units too have increased from classification of the developing countries

according to the “state of the arts” in the pharmaceutical sector, India is ranked among the

top. Exports of bulk drugs and formulations too are showing a remarkable increase from a

total import –based technology. The Indian pharmaceutical industry has certainly 1970-71

the value of exports was Rs.10 crores. Pharmaceutical exports from formulations have

crosses the Rs.1200 crore mark in 1991-92, thus achieving a net exporter status in the

drugs and pharmaceutical industry. The dramatic progress of drug industry at a glance is

presented in the given table.

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DRUG INDUSTRY: GROWTH INDICATORS

1947-48

(Rupees in crores)

1991-92

(Rupees in crores)

Capital Investment 24(1952-53) 950

Production 10 4200

Formulations

Bulk Drugs

18(1956-66) 790

Imports 100 1000

Exports 1.27(1963-64) 1281

R & D Expenditure 6(1972-73) 70

INDUSTRY STRUCTURE

The pharmaceutical industry is very aptly described as a “life-line” industry. It plays a

vital role in alleviating the suffering of millions of people and controlling various ailments

that afflict human beings. Recognizing this, the planners of Indian economic development

after independence have rightly included this industry in the core sector.

The present day Indian pharmaceutical industry has three main sectors:

The public sector

The Indian private sector ( including the organized sector) and

The foreign sector:

It is estimated that there are presently 16000 firms engaged in the production of drugs and

pharmaceuticals. About 300 units out of these are on the list of the Directorate

General of Technical Development.

PRODUCTIONBULK DRUGS

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Bulk drugs are medically effective chemicals. They are derived from 4 type s of

intermediate (raw materials), namely prescription and these are called ethical products.

However, same formulation such as pain balms, health tonics etc can also be purchased by

users directly. These are called over the counter (OTC) products. Formulations can be

categorized as per the route of ministration t patients, viz. Oral i.e., tablets, syrups,

capsules, powders internally. Topical i.e., Ointments, creams, liquids, aerosols that are

applied on the skin Potentials i.e., sterile solutions injected in an extra venous or

intramuscularly fashion. Others such as eye drops, surgical dressing etc. Production of

formulations was valued at Rs.3840 crores in 1990-91. import of formulations is

negligible (Rs. 60 crores in 1990-91) and consists of specialized drug such as anti-cancer

drugs. The estimated value of formulation is around Rs.200 crores in 1991-92. the details

regarding the progress of pharmaceutical production in India are presented below.

PHARMACEUTICAL PRODUCTION IN INDIA:

1986-87 458 2140

1987-88 480 2350

1988-89 550 3150

1989-90 640 3420

1990-91 730 3840

1991-92 720 4200

EXPORTS:

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At the time of independence there were no exports of pharmaceuticals from India.

The total value of exports of pharmaceuticals was a mere by Rs.3 crores in 1965-66.

During the last seven years, the Indian pharmaceutical industry has achieved commendable

progress on the export front. The industry total exports were valued at Rs.1281 crores in

1991-92. The progress of the industry in terms of exports can be seen in the tab

Research & Development:

Pharmaceuticals industry is driven by a global need to conquer disease. Medicines are

developed to treat new diseases or improve upon the existing treatment. An in-depth

understanding of human physiology and disease mechanism is a pre-requisite to pharmacy

R & D to facilitate research, as anti-ulcer, anti-cancer etc. major diseases for which new

drugs are arthritis (rheumatism), cancer depression, diabetes, heart disease, osteoporosis

stroke.

Basic research deals with discovery/invention of a new medicinally effective

chemical process R & Discussion is basically reverse engineering of a molecule through

slight process modifications. Basic research is both time and cost intensive possible

effectiveness. Following such laboratory testing, actual clinical trials are then carried out

to determine the drugs efficacy on patients. The process thus requires around 12-15 years

and costs US $350mm per new chemical entity (NCE). Process R & D is far easier and

costs are negligible compared to basic research.

The drug industry R & D expenditures is estimated at Rs.70 crores in 1991-92 which is

about 2 percent of sales,, as against 1 percent of sales spent on R & D facilities approved

by the Departments of Science & Technology, Government of India. In the developed

countries, pharmaceutical companies spend about 10 to 20 percent of sales on R & D, if

the current low profitability of the industry were to improve it wil be able to spent more on

R & D collaborate with national laborites and also fund some of their more promising

research projects.

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CHAPTER-III

ORGANISATION PROFILE

COMPANY PROFILE

HETERO DRUGS LTD

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Established in the year 1993, with the motto to be the best in the API

manufacture, Hetero today embodies the vision of a top-notch player in developing

and commercializing products catering to a variety of therapeutic categories,

integrating into a leading finished dosage manufacturer.

True to the statement, “WHERE THE FUTURE STARTED

YESTERDAY”, with a foresight on the current trends in the pharmaceutical market,

HETERO has grown from strength to strength, combining its research strengths,

manufacturing capabilities, Human Resources and well established quality

management system. With full-fledged marketing capabilities the company has been

able to market its products in over 80 countries in Asia, Middle – east, Eastern,

Europe and Latin America.

With its compliance to the most stringent regulatory requirements, Hetero

has today gained foothold to market. Several of its APIs in the United States, Canada

and Europe. With all six manufacturing facilities being supported by excellent

infrastructure and compliance to the GMP requirements, Hetero has crossed

numerous milestones in a comparatively small period since its inception

HETERO GROUPS

HETERO DRUGS LTD

HETERO LABS

HETERO RESEARCH FOUNDATION

CIREX PHARMACEUTICALS

SYMED LABS

GENX PHARMA

LYKA HETERO

EXPICOR

FOUNDER & MILESTONES

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The spirit and brain behind the success story of Hetero is its founder

Dr.B.Parthasarathi Reddy, a scientist who started the company drawing

immense strength from the vast and rich experience he gained during his

earlier.

Stint at the laboratory where he was instrumental in developing and

commercializing processes for several APIs.

The company was started by him with a vision to be recognized as an

aggressive company that combines its strength of R&D and manufacturing

with definite advantages in terms of cost and chemistry with a strong

emphasis on quality of the products.

The untiring efforts of the Chairman saw HETERO develop processes for

several products at relatively low cost, thus making it possible for several life

saving drugs to be available tat affordable prices, meeting all the regulatory

and quality norms.

With the organization having reached a point where it is identified among the

widely recognized companies, the Chairman is now focusing on giving new

dimensions to the company in terms of exploring possibilities of further

growth, exploring new horizons in the field of pharmaceutical development

and evolving strategies to take the company to greater heights

All the members of HETERO Family draw inspiration and motivation from

the Chairman in working towards achieving the organizational goal.

VISION AND VALUES

Hetero visualizes itself as an aggressive player in the global pharmaceutical

scenario, supplying generics developed, combining intellectual property,

research strengths and strong human resource inputs.

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The company values the concepts of having social responsibilities ion the

course of its assent to greater heights. It strongly believes in focusing on

customer requirements and delivering the products at the right pace.

Hetero considers its human resources as the core of all its capabilities and

believes in tapping and honing the talents of its members to reach the zenith of

success.

It believes in continuous evaluation and improvement in all the factors that

contribute in transforming the organization into a global force to reckon with.

Hetero takes due cognizance to the fact that the processes that it develops

should be all Eco- friendly and should not result in any consequence that

harms the ecological harmony.

MISSION

HETERO’s mission is to be a globally acclaimed pharmaceutical company, meeting

the requirements of healthcare imbibing the philosophy of both commercial and

social concerns, driven by research and manufacturing capabilities.

HETERO STRENGTH

Strong emphasis on Research and Development.

Ability to develop processes for a large range of therapeutic categories.

Ability to orient and adapt to the changing facets of industry, particularly in

terms of regulations, intellectual property and manufacturing capabilities.

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Cohesive team of skilled professionals in all wings related to research,

manufacture and marketing.

Strong customer base and market presence.

A strong commitment towards the society to provide timely support by

providing life saving drugs at relatively low costs, short span of time

CAPABILITIES:

Type of Reactors – Glass, Glass-Lined and Stainless Steel

Reactors Sizes –250-10,000 LTR Commercial Plant

5-250 LTR – Pilot Plant

Total Reactor Volume -- 1000 Kilo Ltr

Temperature Range -- 80degrees C to 300degrees C

Pressure Range -- Unto 50 KG/cm square

ANALYTICAL Strength of Hetero Group

HPLCs (with PDA facility)

GCs (with Head space facility)

Infra Red Spectrophotometers

Ultra violet Spectrophotometers

Practical size analyzer

Digital polar meters

Differential Scanning Calorimeters

P-XRD

NMR

GCMS

LCMSM

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QUALITY SYSTEMS

All the activities at HETERO right from receipt of raw materials to dispatch of the

finished product are carried out in accordance to a well-oiled quality management

system. The importance of having a strong quality based system has been recognized

by organization due to which every individual in each department understands

his/her responsibilities and carries out them with utmost care avoiding any confusion,

thus delivering the best results.

In addition, talking about quality of the product itself, the company has

evolved the systems to implement GMP’s in the manufacture of the product to

protect the safety, quality and integrity. The approval of Hetero’s API Facility by

USFDA and Finished Dosage Facility by WHO bear a testimony to this fact.

R & D OVERVIEW

HETERO’s emphasis has always been on Research and Development. The

emphasis was to ensure that the processes being adopted for the products are

cost effective, safe to handle and with optimum advantage in terms of yield

and quality.

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Having laid solid foundation towards the end HETERO’s R&D approach has

also taken cognizance of the present scenario where stringent patent regime is

under implementation. HETERO’s teams of scientists have been and are

involved in developing non-infringing processes for its products. With its

ability to explore high and achieve the best, HETERO has been able to file

patents for several of its processes.

From an organization, which was concentrating on developing processes for

API’s HETERO, has now a full-fledged R&D facility for formulation

department.

HETERO research capabilities have been proven with its ability to carry out a

wide range of reactions, which are difficult to carry

Given its research capabilities HETERO has today has initiated contract

research. Towards the end, the company has already evolved its strategies and

is into discussions with renowned companies for carrying out the contract

research. Custom synthesis is one area where the company has been

concentrating on and has initiating work on several projects.

In addition to the above, the company is now on the threshold of commencing

basic research activities to develop and screening new chemical entities for

different therapeutic categories.

STANDARD OPERATING PROCEDURES

LIST OF STANDARD OPERATING PROCEDURES:

Receipt, Storage, Handling&Distribution of Raw Material.

Handling &Disposal of Raw Material.

Writing Pharma Distribution.

Cleaning of Dispensing equipment.

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Sanitation.

Raw Material distribution from Warehouse to Production

Handling of Hosepipes& their periodical change

Handling of Desiccant bags

Procedure:

Receipt, Storage, Handling and Distribution of Raw Material

Receipt of Raw Material:

Upon receipt of rawmaterial the following checks can be taken up:

Whether the rawmaterial is recorded as per the purchase order.

Whether the consignment is supplied along with the certificate of analysis by

the vendor.

Whether the vehicle carrying the consignment is clean

In case of tankers carrying liquid raw material, check whether the valves and

manholes are free from dust, grease or any other lubricant

Above the all conditions are not fulfill the consignment is rejected

Storage of Raw Material:

After de-dusting bring the decoding list and deface the original name of the

material on each container or bags and write in-house code of the material.

Before defacing check the label on each container for vendor batch number

and weight.

Transfer the material to quarantine area. Enter the details into the inward

registar. Allot the in-house batch numbers to the consignment.

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If the number of containers shall be less than 25 then the under test label shall

be pasted on all containers. If it is more than 25 then the under test labels shall

be pasted along four corners of the consignment

Sampling and Testing:

The warehouse personnel shall then raise a” raw material alert to Quality

Control” for sampling and analysis of the consignment

The Quality Control personnel shall paste the sampled labels on the containers

from which the samples were taken.

The Quality Control personnel shall paste Approved/Rejected labels on the

yellow of the under test labels of the consignment.

Storage and Handling:

Raw Material shall be stored in such a manner that proper spacing between

different lots of the same material and also different material to avoid cross-

contamination between the materials.

Inventory cards along with the raw material alert and pre-inspection report

shall also be placed along with the status boards.

Special storage conditions are essential for the raw material say low

temperature and low humidity

Distribution of Raw Materials:

On receipt of the raw material request from the production department the

warehouse personnel shall issue the requisite quantity of raw material to the

concerned production department.

The warehouse personnel shall then enter the details of issue of the material in

the inventory card.

While issuing the material to the production department, the warehouse

personnel shall follow the “First In First Out system”.

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Re-testing of Raw Material:

Raw materials being stored for longer periods of time shall be re-tested from

time to time i.e., within 5 days of re-test date.

Handling and Disposal of Rejected Raw Materials

In case of rejection of any consignment subsequent to the analysis, the quality

control personnel shall paste “Rejected” labels on the containers/packages.

The warehouse personnel should inform to the materials department regarding

the rejection of consignment and ask the material department to dispose the

material within 30 days in case domestic vendor, while incase of overseas

vendor material shall be disposed within 90 days.

Writing Pharma Distributioin

After receiving the goods transfer note from the production department it is the

responsibility of the warehouse personnel

Check the batch number, quantity

Ensure all the details mentioned in Goods Transfer Note are correct and check

all the required labels are pasted on the drums.

After confirming all the above details enter the details in the Pharma

Distribution

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Cleaning of Dispensing Equipment

All the dispensing equipment like scoop, measuring jars, funnels and buckets

barrels pumps etc should be cleaned after their use.

After completion of dispensing operations transfer the dispensing equipments

to wash area and rinse the dispensing equipment with water after wearing

goggles, nose masks and hand gloves.

Cover the hosepipe ends, scoops, funnels, buckets etc and pump end with

clean polythene bag/rexine cover and keep the dispensing equipment in their

dedicated area.

Sanitation

De-dust the entire area using nylon soft broom.

Mop the floor with clean cloth if not satisfied repeat it again.

Frequency-Everyday in the first shift

Sampling Room:

Clean the room before arranging for sampling to Quality Control.

Follow the cleaning activity in between two different materials sampling.

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Clean the walls, doors and floor with dry cloth, collect the dust and dispose it

into a dustbin, if not satisfied repeat it again.

Details shall be entered in the sampling and sanitation record.

Frequency-Every after sampling operation

Dispensing Room:

Clean the room before starting dispensing activity and after completion of

every dispensing operation.

Use vacuum cleaner to suck all dust.

Mop the floor with water and allow to dry if not satisfied repeat it again.

Details shall be entered in the sampling and sanitation record.

Frequency-Every after dispensing operation

Raw Material Distribution from Warehouse to Production

Solids:

After receiving raw material requesting check whether all details are entered

or not.

Raw Material shall be taken into the dispensing room. Material shall be taken

using a clean scoop and tie the bags tightly after dispensing.

A tag shall be assigned there remaining quantity of the material and the details

shall be entered in the inventory card.

Liquids from Drums:

32

Drums shall be cleaned with a clean cloth and open the lid with drum opener.

Measure the volume with guage rods/measure jars/buckets/by weighing.

Transfer the required quantity of solvent by using PVC siphon pipe/barrel

pump and drums shall be closed tightly.

Liquids from Tanks:

Check the day tanks/measuring tanks for the volume.

Ensure that the solvent valves in the alter production blocks are closed.

Measure the required volume of liquid raw material in measuring tank then

open the valves from measuring tank.

Close all the valves of measuring tank and enter the details in the inventory

card.

Handling of Hose pipes and their Periodical Change

All the hosepipes shall be colored as mentioned in the Annexure.

Before starting of operation the hosepipe shall be cleared with 5 to 10 liters of

the same solvent and discard it.

Upon completion of operation, when not in use, the ends of the pipe shall be

covered with rexine covers/polythene bags and store at the designated place

keeping both the ends of the pipe facing down.

Hosepipe shall be checked monthly once and if any damages the pipe shall be

discarded and new pipe shall be used.

Enter the details of checking and replacement of pipe in the record.

Pipes shall be replaced with new one after completion of 3 years of usage.

33

Handling of desiccant bags:

Place the Desiccant bags in secador desiccator’s cabinet.

If the humidity is>40% activate the desiccant bags by drying in a oven for 1- 2

hrs at90degrees to –105degrees centigrade

Always maintain humidity below 40%

At the time of issuing desiccant bags check the humidity if it is >40% activate

the bags as mentioned above& then use only

Record the receipt& issuing details in the inventory card.

CAREERS

HETERO considers its Human Resources as its core strength. The company

believes in the fact that its present position as an aggressive player can be

attributed to the efforts on part of all its employees working in different

departments in realizing its goal of being a Top Notch Company.

The Company offers the best of the opportunities to work, where the potential

and capabilities of personnel are tapped to the maximum advantage of both

the organization and the personnel. The latent talents are honed to meet the

challenges faced by the organization and achieve the best.

34

HETERO believes in recognizing and rewarding contributions of its

employees to meet its staff requirements, HETERO has several openings in

different departments for those who are ready to take up the challenge and

deliver the goods.

OFFICES

Corporate Office

HETERO DRUGS LIMITED

“Hetero House”

H.no.8-3-166/7/1,Erragadda,

Hyderabad-500018,

(A.P)INDIA

Tel: +91-40-23704923/24/25

Fax: +91 – 40 – 23704926,

23714250

E- mail:

35

Contact@heterodrugs com

BRANCH OFFICES

HETERO SINGAPORE PTE LTD. HETERO DRUGS LIMITED

19 Loyang way 607/608,6th floor, Matharu Arcade

#02 – 03, C.I.L.C Building Subash road, vile parle (E)

Singapore – 508724 Mumbai - 400057

Tel: (65)65458442/65467901 India

Fax: (65)65458443 Tel: +91 – 22 – 56910809/10/11/12/13

E – Mail: [email protected]

36

mailto:[email protected]

mailto:[email protected]

CHAPTER-IV

THEORETICAL FRAME WORK

THEORETICAL FRAME WORK OF INVENTORY MANAGEMENT

Introduction of Inventory Management:

Inventory management is the active control program, which allows the

management, sales, purchases and payments.

37

Inventory management software helps create invoices, purchase orders,

receiving lists, payment receipts and can print bar coded labels. An inventory

management software system configured to your warehouse, retail or product line

will help to create revenue for your company. The Inventory Management will

control operating costs and provide better understanding.

OBJECTIVES OF INVENTORY CONTROL

Scientific control of inventories should serve the following purpose:

To provide continuous flow of required materials, parts and components for

efficient and uninterrupted flow of production.

To minimize investment in inventories keeping in view operating

requirements.

To provide for efficient store of materials so that inventories are protected

from loss by fire and theft and handling time and cost are kept at a minimum.

To keep surplus and obsolete items to minimum.

Purpose of Inventory

The only inventory that is required is that which is actually being processed

in a manufacturing environment or being delivered to a customer in a distribution

environment. Leading companies in all industries recognize that inventory usually

indicates a potential area of improvement; it is a symptom rather than an asset.

Traditional approaches to inventory management include six reasons for

carrying inventory. While each of the reasons seems valid, especially in the short

38

term, each reason also represents a failure to operate in the most efficient or effective

manner.

Those are as follows:

Process buffer: Inventory should be used to buffer processes only at strategic

points. As viewed by a supply chain, a warehouse or distribution center is

really just a process buffer goods arrive in batches (pallets, truckloads,

cartons, and so on) and are “processed” (distributed to the customer) in

smaller lots. In a manufacturing company, processes frequently operate at

different rates, thereby requiring inventory buffers.

Fluctuations in demand: This inventory allows a supplier to satisfy customer

demand that is higher than expected. However, inventory is an expensive

substitute for information. When you can see actual usage of your product by

the end customer as well as inventory levels in the supply chain, you can

satisfy your customers while carrying minimal inventories. This approach

requires you to reduce your lead times and those of your suppliers. You can

use this same approach to help your suppliers reduce their inventories, and

therefore their costs. As you will see in another way to reduce the need for this

type of inventory is to reduce the re supply time.

Unreliability of supply: In the short run, inventory can be used as a buffer

against unreliable suppliers (both internal and external). In the long run, you

can work with suppliers to insure their reliability, or you can replace them.

The total cost of supplier unreliability is usually far greater than any savings

in purchase price. The best suppliers deliver “perfect” materials directly to the

desired location inside your company on schedule. This is equally true for

internal suppliers in a manufacturing company. If varying quality is a root

cause of unpredictability, it should be addressed by an appropriate quality

initiative (for example, Six Sigma or Total Quality Management).

39

Price protection: Buying large quantities at one time has been a traditional

hedge against price increases. You can negotiate pricing and long-term

contracts with key suppliers, but you should request multiple deliveries. As

your suppliers implement lean practices, they will strongly prefer to ship

smaller quantities at frequent intervals, rather than asking you to take delivery

of the entire purchased amount at once. Pricing agreements should also

include the possibility of cost reductions, automatically passing on the

supplier’s cost reductions.

Quantity discounts: Some suppliers offer discounts for buying large quantities.

Quantity discounts work just like price protection. Quantity discounts are

being replaced today by key supplier agreements, in which you agree to

purchase your entire year’s usage of various product families from one

supplier in exchange for highly favorable pricing, superb service, impeccable

quality, and rapid response and delivery. This reflects a culture of partnering

with key suppliers rather than treating them as adversaries.

Lower ordering costs: Traditionally companies looked at ordering costs as a

necessary cost that should be traded off against carrying costs. However,

today’s preferred way to lower ordering costs is to eliminate all non-value-

added steps in the ordering cycle. Value stream mapping is a technique of

flow-charting all steps in a process (such as placing an order), calculating the

total cost and total elapsed time, then identifying all those steps that don’t

really add value in the customer’s eyes and deciding how to eliminate them.

40

Types of Inventory

Inventory can be falls under three basic categories:

Raw materials

Work –in- progress.

Finished Goods

Raw Materials:

41

RAW MATERIAL FINISHED GOODS

- REJECTED- APPROVED

- REJECTED- APPROVED

TYPES OF INVENTORY

WORK-IN-PROGRESS

IN-PROCESS-REJECTED-APPROVED

INTERMEDIARIES-REJECTED-APPROVED

SEMI-FINISHED GOODS-REJECTED-APPROVED

These are the Inputs to produce the products. It includes direct material used

in the manufacture of a product and it also includes the components, fuel etc. used in

the manufacture.

These raw materials can be again divided in to two categories. They are: Approved

raw material: Raw materials can be checked by the Quality Control people by using

certain Quality Control Methods. If they are approved after applying those methods

label can be pasted by the quality control people called ‘Approved Label’. It is in

green colour.

Ex: (Robin Singh) 4-Amino-4-Metgyl-3-N Proply Pyrazole-carboxamide silden-

afilicatrate amine, (Richa) PTHALIMIDOAMLODIPINE

Rejected raw material: Raw materials can be checked by the Quality Control

people by using certain Quality Control Methods. If they are rejected after applying

those methods label can be pasted by the quality control people called ‘Rejected

Label’. It is in red colour.

Ex: (Maaza) L-PROLINE, (Sridevi) N2-(1-(S)-ETHOXYCABONY-3-

PHENYPROPYL)-N6- RIFLUOROACETYL -L-LYSINE BENZL ESTER

Work in progress (WIP):

It includes partly finished goods and materials, sub-assemblies etc.held

between manufacturing stages. WIP should be kept to a minimum.Work-in-progess

again can be divided in to three categories. They are:

Intermediaries: The material which is in middle of the production process for

final product is called Intermediaries.

42

Semi-finished goods: The material which is in the last stage of production

process is called Semi-finished goods. In this stage also the products can be

approved or rejected by the quality control people.

In process: Every stage in the production process contains again certain

process. If the materials are in this stage then we may call it as under process.

In these stages also the products may be approved or rejected.

Finished product:

The goods ready for sale or distribution will come under this category. In this

stage also the products may be rejected due to certain reasons.

Ex: Sertraline HCL, Lisino Pril USP, Omeprazole etc.

The classification of inventory of a particular firm depends upon the nature of

the business it carries. For a spinning mill, cotton is the raw material and yarn is the

finished product. But in case of textile mill yarn is the raw material and fabric is the

finished product. A manufacturing concern’s inventory consists of all the above three

types of inventory but in case of trading concern, the first two categories will not

appear in their stocks. The efficiency shown in inventory will have direct impact on

profitability of a business enterprise.

HOW RAW MATERIAL IS INWARDED DURING THE YEAR IN HETERO

DRUGS RAW MATERIAL INWARD FOR THE YEAR APR 2008-MAR

2009(In Units)

ITEMS APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR

DHARNI

V SALT

KAKI-

320

0

0

1000

700

4000

2000

0

0

490

0

0

2000

0

0

3040

0

3000

0

0

0

2520

0

3000

1050

0

3000

5800

2500

3000

0

0

0

0

0

3000

1520

43

http://www.books24x7.com/viewer.asp?bkid=11512&destid=490#490

HYFLOW

1498 2020 2020 2020 2020 4040 2043 3995 2497 2542 2497 4540

Note: ORGINAL NAMES USED FOR ABOVE DECODED MATERAILS

DHARANI : Sodium Bi Carbonate

V SALT : Vaccum Salt

HYFLOW : Hyflow Super Cell

KAKI – 320 : Acetavated Carbon 320

From the above graph we can understood that how different raw materials are In

warded throughout the year.Hyflow,Kaki-320 & V salt raw materials are Inwarded

more & Dharani material is inwarded less in the year 2008-2009.

RAW MATERIAL INWARD FOR THE YEAR APR 2007-MAR 2008 (In

Units)


DHARANI 0 3000 2000 0 4000 0 2000 0 0 0 0 1000

V SALT 2000 13000 7000 1000 2000 1000 2000 2000 2000 0 1000 2000

KAKI-320 3000 2000 1000 1000 0 0 1000 1000 0 0 2000 1575

HYFLOW 4994 1997 2996 4994 0 0 998 2247 2270 499 998 2270


44





From the above graph we can understood how different raw materials

are Inwarded throughout the year.Hyflow & V salt raw materials are Inwarded

throughout the year.Dharani & Kaki-320 raw materials are inwarded less in the year

2007-2008.


Units)


DHARAN

I 2000 1000 3000 0 2000 3000 6000 2000 2000 15000 2000 7000

V SALT 4000 17000 4000 5000 11000 12000 7500 10500 14000 5000 5000 9950

KAKI-320 0 1000 1000 1000 1000 0 1000 2000 1000 0 1000 2120

HYFLOW 2996 4994 2996 0 1997 5992 5992 3995 0 1997 1997 3995

45







are Inwarded throughout the year.V salt & Dharani raw materials are Inwarded more

through out the year.Hyflow & Kaki-320 raw materials are inwarded less in the year

2006-2007

RAW MATERIAL INWARD FOR THE YEAR APR 2005-MAR 2006(In

Units)


DHARANI 2000 2000 6000 0 4000 6000 2000 0 20000 0 0 0

V SALT 1450 5000 2500 3050 3000 12000 0 0 5000 5000 0 8000

KAKI-320 1000 0 1000 1000 1000 1000 1000 1000 0 1000 1000 1000

HYFLOW 1997 2996 2996 3495 3495 0 1997 3995 1997 1997 1362 3632

s



46





are Inwarded throughout the year.V salt raw material was Inwarded continuously

through out the year but Dharani raw material was inwarded only upto the month

December.Hyflow & Kaki-320 raw materials are inwarded less in the year 2005-

2006.


Units)


DHARAN

I 18000 15700 0 5000 0 3000 3000 2000 2200 0 0 3500

V SALT 10000 5000 0 0 0 2500 0 0 0 0 0 0

KAKI-320 1000 0 1000 1000 1000 1000 1000 0 1000 0 0 1000

HYFLOW 2497 0 1997 1997 1997 2996 0 0 1498 1997 2497 0

47







are Inwarded throughout the year.Dharani, Hyflow & Kaki-320 raw materials are

inwarded continuously through out the year but V salt was Inwarded less in the year

2004-2005.

PURCHASING PLAN

The purchasing plan details:

When commitments should be placed;

When the first delivery should be received;

When the inventory should be peaked;

When reorders should no longer be placed; an

When the item should no longer be in stock.

Well planned purchases affect the price, delivery and availability of products for

sale.

CONTROLLING YOUR INVENTORY

48

To maintain an in-stock position of wanted items and to dispose of

unwanted items, it is necessary to establish adequate controls over inventory on order

and inventory in stock. There are several proven methods for inventory control.

They are listed below, from simplest to most complex.

Visual control enables the manager to examine the inventory visually to

determine if additional inventory is required. In very small businesses

where this method is used, records may not be needed at all or only for

slow moving or expensive items.

Tickler control enables the manager to physically count a small portion of

the inventory each day so that each segment of the inventory is counted

every so many days on a regular basis.

Click sheet control enables the manager to record the item as it is used on a

sheet of paper. Such information is then used for reorder purposes.

Stub Control (used by retailers) enables the manager to retain a portion of

the price ticket when the item is sold. The manager can then use the

stub to record the item that was sold.

As a business grows, it may find a need for a more sophisticated and

technical form of inventory control. Today, the use of computer systems to control

inventory is far more feasible for small business than ever before, both through the

widespread existence of computer service organizations and the decreasing cost of

small sized computers. Often the justification for such a computer-based system is

enhanced by the fact that company accounting and billing procedures can also be

handled on the computer.

49

Point-of-sale terminals relay information on each item used or sold. The

manager receives information printouts at regular intervals for review

and action.

Off-line point-of-sale terminals relay information directly to the supplier's

computer who uses the information to ship additional items

automatically to the buyer/inventory manager.

The final method for inventory control is done by an outside agency.A

manufacturer's representative visits the large retailer on a scheduled basis, takes the

stock count and writes the reorder. Unwanted merchandise is removed from stock

and returned to the manufacturer through a predetermined, authorized procedure.

A principal goal for many of the methods described above is to

determine the minimum possible annual cost of ordering and stocking each item.

Two major control values are used:

1. The order quantity, that is, the size and frequency of orders; and

2. The reorder point that is, the minimum stock level at which additional

quantities are ordered.

The Economic Order Quantity (EOQ) formula is one widely used

method of computing the minimum annual cost for ordering and stocking each item.

The EOQ computation takes into account the cost of placing an order, the annual

sales rate, the unit cost, and the cost of carrying inventory. Many books on

management practices describe the EOQ model in detail.

DEVELOPMENTS IN INVENTORY MANAGEMENT

In recent years, two approaches have had a major impact on inventory management:

Material Requirements Planning (MRP) and

Just-In-Time (JIT and Kanban).

50

Their application is primarily within manufacturing but suppliers might

find new requirements placed on them and sometimes buyers of manufactured items

will experience a difference in delivery.

Material Requirements Planning is basically an information system in

which sales are converted directly into loads on the facility by sub-unit and time

period. Materials are scheduled more closely, thereby reducing inventories, and

delivery times become shorter and more predictable. Its primary use is with products

composed of many components. MRP systems are practical for smaller firms. The

computer system is only one part of the total project which is usually long-term,

taking one to three years to develop.

Just-In-Time inventory management is an approach which works to

eliminate inventories rather than optimize them. The inventory of raw materials and

work-in-process falls to that needed in a single day. This is accomplished by

reducing set-up times and lead times so that small lots may be ordered. Suppliers

may have to make several deliveries a day or move close to the user plants to support

this plan.

SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory

with the benefits of inventory. Many small businesses owners fail to appreciate

fully the true costs of carrying inventory, which include not only direct costs of

storage, insurance and taxes, but also the cost of money tied up in inventory. This

fine line between keeping too much inventory and not enough is not the manager's

only concern. Others include:

Maintaining a wide assortment of stock--but not spreading the rapidly moving

ones too thin.

51

Increasing inventory turnover--but not sacrificing the service Level.

Keeping stock low--but not sacrificing service or performance.

Obtaining lower prices by making volume purchases--but not ending up with

slow-moving inventory and

Having an adequate inventory on hand--but not getting caught with obsolete

items.

The degree of success in addressing these concerns is easier to gauge

for some than for others. For example, computing the inventory turnover ratio is a

simple measure of managerial performance. This value gives a rough guideline by

which managers can set goals and evaluate performance, but it must be realized that

the turnover rate varies with the function of inventory, the type of business and how

the ratio is calculated (whether on sales or cost of goods sold). Average inventory

turnover ratios for individual industries can be obtained from trade associations.

CHAPTER-V

52

DATA ANALYSIS AND INTERPRETATIONS

DATA ANALYSIS AND INTERPRETATIONS.

TECHNIQUES OF INVENTORY MANAGEMENT

1. Min-Max levels and Ordering levels

Minimum stock Level: It is the lower limit below, which the stock of any

stock item should not normally be allowed to fall. Their level is also called

‘safety stock’ or ‘buffer stock level’ .The main object of establishing this level

is to protect against stock-out of a particular stock item and in fixation of

which average rate o f consumption and the item required for replacement,

i.e., lead time are given prime consideration.

Minimum stock Level = Re-order Level-(average or Normal Usage x Average Lead

53

Time)

Maximum Stock Level: It represents the upper limit beyond which the quality

of any item is not normally allowed to rise to ensure that unnecessary working

capital is not blocked in stock items. Maximum stock level represents the total

of safety stock level and economic order quantity. Maximum stock level can

be expressed in the formula given below:

Maximum Stock Level= Re-order Level + Economic Order Quantity – (Minimum

Usage x Minimum Lead time)

ORDERING LEVEL

The annual consumption of an item and the time lag between ordering

and receiving can be collected from past records. Based on these facts and policies,

the ordering level and ordering quantity of Hetero Drugs Ltd. can be calculated, as

follows:

Ordering level= Minimum level + Consumption during time lag period

(OR)

Maximum consumption x Maximum re-order period

The ordering level should be fixed so that when an indent is placed at the

ordering level, the stock reaches the minimum level when the replenishment is

received. The ordering level is calculated from the following factors:

1. The expected usage

2. The minimum level

54

3. The lead time

Q. Calculate Maximum level, Minimum level, Ordering level & Average level

Example of Material: D (-) Mandalic acid

Minimum Usage –120 Kgs per week

Maximum Usage – 420 Kgs per week

Normal Usage – 230 Kgs per week

Ordering quantity – 6000 Kgs per week

Delivery period – 6 to 8 weeks

Solution:

ORDERING LEVEL = Maximum usage x Maximum deliveryperiod

=420 x 8 = 3360 Kgs

MINIMUM USAGE LEVEL = Ordering level –

(Normal usage x Normal delivery period)

= 3360 - (230 x 7)

=1750 Kgs

MAXIMUM USAGE LEVEL = (Ordering level + Ordering quantity) –

(Minimum usage x Minimum delivery period)

= (3360 + 6000) – (120 x 6)

55

= 9360-720

= 8640 Kgs

AVERAGE LEVEL = (Minimum level + Maximum level)/2

= (1750 + 8640)/2

= 5195 Kgs

Q. Calculate Maximum level, Minimum level, Ordering level & Average level

Example of Material: Di isopropyl ether

Minimum Usage –350 Kgs per week

Maximum Usage – 700 Kgs per week

Normal Usage – 450 Kgs per week

Ordering quantity – 12000 Kgs per week

Delivery period – 6 to 8 weeks

Solution:

ORDERING LEVEL = Maximum usage x Maximum delivery period

=700 x 8 = 5600 Kgs

MINIMUM USAGE LEVEL = Ordering level - (Normal usage x Normal

delivery period)

= 5600 - (450 x 7)

= 2450 Kgs

56

MAXIMUM USAGE LEVEL = (Ordering level + Ordering quantity) –


= (5600 + 12000) – (350 x 6)

= 15500 Kgs


= (2450 + 15500)/2

= 8975 Kgs

2. TWO BIN SYSTEM:

Under two bin systems, each item of material is stored in two bins and

material is continuously issued from one bin until the stock material is emptied in

that bin. Then material from the second bin is started using and action will be taken

to replenish the material in the first bin. The material in the second bin will be

sufficient enough until the fresh delivery is received. The maintenance of two-bin

system is a continuous process.

This system is maintained in another form by maintenance of a single

bin marking it inside with a red line. It indicates the re-order stock position for

replenishment. The operative convenience and the cost analysis is to be made before

adopting two bin system. The major advantage under this system is that stock can be

kept at a lower level because of the ability to re-order whenever stock fall to a low

57

level, rather than having wait for the next re-order date.

3. THE ABC ANALYSIS

In this technique, the items of inventory are classified according to value of

usage. The higher value items have lower safety stocks, because the costs of

production are very high in respect of higher value items. The lower value items

carry higher safety stocks. ABC analysis divides the total inventory list into three

classes A, B and C using the rupee volume, as follows:

Items in class A constitute the most important class of inventories so for as

the proportion in the total value of inventory. The A items consists of

approximately 15% of the total items, accounts for 80% of the total

material usage.

Items in class B constitute an intermediate position, which constitute

approximately 35% of the total items, accounts for approximately 15% of

the total material consumption.

Items in class C are quite negligible. It consists remaining 50% items,

accounting only 5% of the monetary value of total material usage.

‘A’ Class Items

(High consumption

value)

‘B’ Class Items

(Moderate consumption

value)

‘C’ Class Items

(Low consumption

value)

1 Very strict control. Moderate control Loose control.

58

2 No safety stocks or

very Low safety

stocks

Low safety stocks. High safety stocks.

3 Maximum follow-up

and expediting

Periodic follow-up Follow-up & expediting

4 Rigorous value

analysis

Moderate value analysis. Minimum value analysis.

5 Must be handled by

senior officers.

Can be handled by

middle Management.

Can be fully delegated

How an organization treats the various class of items according to their

consumption value. For ‘A’ class items, the inventory policy, i.e., order quantity and

re-order point should be carefully determined and the close control over the usage of

materials is desirable. For ‘B’ class items, the economic order quantities and re-order

level calculations can be done and larger stocks can be maintained. The review of

these items may be done quarterly or half-yearly. In case of ‘C’ class items, generally

one year supply can be maintained. Periodic review once a year may be sufficient.

The technique tries to analyze the distribution of any characteristics by

stock values of importance in order to determine its priority. This technique can be

applied in all facets of organization. Many organizations are applying this technique

in materials management and spare parts management to identify the contribution

59

made by the materials/spares in the total inventory value. On the basis of stock value,

materials procurement strategy and consumption strategy is decided.

ABC ANALYSIS OF 30 STOCK MATERIAL FOR THE PERIOD 2004-05

CLASS A MATERIAL CLASS B MATERIAL CLASS C MATERIAL

Material

code Annual usage Material code Annual usage Material code Annual usage

Chanti 1004614 Aarthi 612500 AC-501 6136

Colin 861220 Ankita 572707 Bony mix 72406

7 Up 1939860 BPL 160500 Brisk 45056

DSP 671550 C.P.Flakes 248527 Buffer 120890

Honey 676522 C.S.Flakes 232339 Canon 28090

Cat-HH 141525 Cat-C 14994

Dharani 206895 Cat-H 116901

Maaza 383350 Champion 56848

Complan 62130

60

Dandi 6600

DCM 52080

Dimple 12500

Dranex 3400

Captain Cook 156000

Tata tea 2060

Kores 46400

Limca 10500

5 5153766 8 2558343 17 812991

16.60% 60.40% 26.70% 30% 56.70% 9.60%

NOTE: ORIGINAL NAMES USED FOR ABOVE DECODED

MATERIALS

CHANTI: FORMALDEHYDE

COLIN: 1 4 DIOXANE

7UP: 2-METHYL PIPERZINE

DSP: PYRIDINE

HONEY: BENZENE SULFONIC ACID

AARTHI: 3,3A,4,5,6,7,-2H-HEXA HYDRO INDOLE-2-CARBOXTLIC

ACID HYDROCHLORIDE

ANKITA:PHENYL ISOCYANATE

BPL: TITANIUM TETRA ISOPROPO

C.P.FLAKES: CAUSTIC POTASH FLAKES

C.S.FLAKES: CAUSTIC SODA FLAKES

CAT – HH: HYDROZEN HYDRIDE 100%

61

DHARANI:SODIUM BI CARBONATE

MAAZA: L-PROLINE

AC – 501: E.D.T.A

BONY MIX: TRIETHYL AMINE

BRISK: FORMIC ACID

BUFFER: DI SODIUM PHOSPHATE

CANON: CALCIUM CARBONATE

CAT – C: TETRA BUTYL AMMONIUM BROMIDE

CAT-H: HYDROZEN HYDRIDE

CHAMPION: L-ALANINE

COMPLAN: 2 CHLORO METHYL 3,5 DIMETHYL 4 METHOXY

PYRIDINE HCL

DANDI:SODIUM ACETATE (ANHYDROUS)

DCM: DI METHYL CARBONATE

DIMPLE: 2 MARCAPTO BENZIMIDAZOLE

DRANEX: TRITYL CHLORIDE

CAPTIAN COOK:P.T.S CHLORIDE

TATA TEA: MONO METHYL AMINE 40%

KORES: CUMENE HYDRO - PEROXIDE.

LIMCA: DIMETHYL FORMAMIDE

62

Percentage of A Class item is 60.04%

B Class item is 30%

C Class item is 9.60%

ABC ANALYSIS OF 30 STOCK MATERIALS FOR THE PERIOD 2005-06

CLASS A MATERIALS CLASS B MATERIALS CLASS C MATERIALS

Material

code Annual usage Material code Annual usage Material code Annual usage

Pepsi 92568000 Limca 142876 Henko 85500

Chacobar

s 1711400 Castrol 289142 Hema 38135

63

Seeta 217674 Nutrine 8736

Jasmine 211250 Tata tea 39312

Durban 327540 Dimple 24500

Reeta 179790 Maaza 27060

Hazard 146400 Brisk 21428

Dabour 577500 Chanti 56980

Dhanraj 467116 SBH 54300

Ankita 6540

BPL 40446

Thinner 71853

Sunil 66780

Sagar 5500

Kaki-320 7040

Dharani 96750

Eno carbon 32200

Champion 81600

Kasthuri 56472

2 94279400 9 2559288 19 821132

6.60% 96.50% 30.00% 2.60% 63.40% 0.80%

NOTE: ORIGINAL NAMES USED FOR ABOVE DECODED MATERIALS

Pepsi: N-(1-(S)-ETHOXY CARBONYL -3- PHENYL) ALANINE

Chacobar: TRANS -4- HYDROXY -L- PROLINE(DEEC)

Limca: DIMETHYL FORMAMIDE

Castrol: ETHYLENE DICHLORIDE

64

Seeta: CITRIC ACID MONO HYDRATE

Jasmine: TRIBUTYL TIN CHLORIDE

Durban: L-VALINE

Reeta: BENZYOL CHLORIDE

Hazard:

Dabur: ACETONITRILE

Dhanraj: 1,2,BENZISOTHIAZOLINE-3ONE

Henko: 1 HYDROXY BENZO TRIAZOLE

Hema: SODIUM-2-ETHYLHEXANOATE

Nutrine: SODIUM METHOXIDE

Tata tea: MONO METHYL AMINE 40%

Dimple: 2 MARCAPTO BENZIMIDAZOLE

Maaza: L-PROLINE

Brisk: FORMIC ACID

Chanti: FORMALDEHYDE

SBH: SODIUM BORO HYDRIDE

Ankita: PHENYL ISOCYANATE

BPL: TRANS-4PHENYL-PROLINE

Thinner: P.T.S ACID

Sunil: PHOSPHORIC ACID 85%

Sagar: SULFOMIC ACID

Kaki-320: ACETAVATED CARBON 320

Dharani: SODIUM BI CARBONATE

Eno carbon: ENO CARBON

Champion: L-ALANINE

Kasthuri: VANADYL ACETYL ACETONA

65


B Class item is 2.60%



CLASS A MATERIALS CLASS B MATERIALS CLASS C MATERIALS

Material

code

Annual

usage

Material

code

Annual

usage Material code

Annual

usage

Cycle 11778400 C.P.Flakes 191611 7 Up 2925

Bony mix 1395558 Bacardi 269640 AC-501 5664

66

C.S.Flakes 2378040 Captian cook 126750 Amisha 10050

Ankitha 1049670 Castrol 724572

Ammonium

formate 15000

Arundhathi 838559 Cat-HH 267399 Anamika 15000

Colin 123420 BPL 5778

Dharani 402930 Bogi 900

Duran 200850 Brisk 28644

DCM 101122 Amruthanjan 93000

Cat-C 49504

Cat-H 66030

Chakobar 9025

Chanti LR 15015

Dabour 28500

Dandi 17292

Dimple 1250

5 17440227 9 2408294 16 363577

16.67% 86.28% 30% 11.92% 53.33% 1.80%


Cycle: SODIUM CYANO BORO HYDRIDE

Bonymix: TRIETHYL AMINE

C.S.Flakes: CAUSTIC SODA FLAKES

Ankitha: PHENYL ISOCYANATE

Arundhathi: TRI METHYL SILYL CHLORIDE

67

C.P.Flakes: CAUSTIC POTASH FLAKES

Bacardi: FORMAMIDE 99%

Captian cook: P.T.S CHLORIDE

Castrol: ETHYLENE DICHLORIDE

Cat-HH: HYDROZEN HYDRIDE 100%

Colin: 1 4 DIOXANE


Duran: L-VALINE

DCM: DI METHYL CARBONATE

7 Up: 2-METHYL PIPERZINE

AC-501: E.D.T.A

Amisha: AMMONIUM CHLORIDE

Ammonium formate: AMMONIUM FORMATE

Anamika: ORTHO FLURO NITRO BENZENE

BPL: TRANS-4PHENYL-PROLINE

Bogi: OXALIC ACID

Brisk: FORMIC ACID

Amruthanjan: DI METHYL SULPHATE

Cat-C: TETRA BUTYL AMMONIUM BROMIDE

Cat-H: HYDROZEN HYDRIDE

Chakobar: TRANS -4- HYDROXY -L- PROLINE(DEEC)

Chanti LR: FORMALDEHYDE

Dabur: METHYL(R)-(-)-3-HYDROXY BUTYRATE

Dandi: SODIUM ACETATE (ANHYDROUS)

Dimple: 2 MARCAPTO BENZIMIDAZOLE

68




ABC ANALYSIS OF 30 STOCK MATERIAL FOR THE PERIOD 2007-08

CLASS A MATERIAL CLASS B MATERIAL CLASS C MATERIAL

Material

code

Annual

usage

Material

code

Annual

Usage

Material

code

Annual

usage

Chakobar 8600000 Champion 580448 Konica 581685

Frooty 3228165 Reeta 454974 Maaza 90200

69

Picnic 7656120 Arundati 228980 Saffola 61740

Bonymix 1102050 Kaki-320 288000 Brisk 32912

Hazard 1281000 Henna 485300 Mypol 57600

Chanti 453145 Lalu 13250

Manasa 255117 Sunil 16200

Sesikala 608985 Thinner 8600

RM – 162 210270 Tamrind 122500

Bogi 2500

Patna 17800

Amisha 7000

Juhichawala 51220

Menthal 47505

Cat-H 18786

Henko 8100

5 21867335 9 3565219 16 1137598

17.00% 82.30% 30.00% 13.42% 53% 4.28%


Chakobar: TRANS -4- HYDROXY -L- PROLINE(DEEC)

Frooty: TETRA HYDROFURAN

Picnic: 4-PHENYL BUTANE -1

Bonymix: TRIETHYL AMINE

Hazard: ACETONITRILE

Champion: L-ALANINE

70

Reeta: BENZYOL CHLORIDE

Arundati: TRI METHYL SILYL CHLORIDE


Henna: CYCLO HEXANE

Chanti: FORMALDEHYDE

Manasa: D (-) MANDALIC ACID

Sesikala: HYDRO BROMIC ACID

RM – 162: METHANE SULPHONYL CHLORIDE

Konica: DIMETHYL SULPHOXIDE

Maaza: L-PROLINE

Saffola: N,N DICYCLO HEXYL CORBIDIMIDE

Brisk: FORMIC ACID

Mypol: N-METHYL PIPERZINE

Lalu: LIQUID BROMINE


Thinner: P.T.S ACID

Tamrind: L+ TARTARIC ACID

Bogi: OXALIC ACID

Patna: SODIUM PERSULPHATE

Amisha: AMMONIUM CHLORIDE

Juhichawala: PHENYL CHLORO FORMATE

Menthal: SODIUM TUNGASTANATE

Cat-H: HYDROZEN HYDRIDE

Henko: 1 HYDROXY BENZO TRIAZOL

71





Class A Materials Class B Materials Class C Materials

Material Annual Material Annual Material Annual

72

Code Usage Code Usage Code Usage

Sridevi 14,74,20,000 Dabaur 48,51,000 Honey 486472

Manasa 11050638 Richa 43,96,500 Kaki-320 454720

ZEC 6053400 Maaza 31,95,335 Cat-S 414400

Picnic 5354280 Orpat 2680935 Thiophene 251920

Chachobar 2184400 Zing thing 214682

Aarthi 2003750 Eno Carbon 164680

Frooty 1656000 Anaconda 123980

Hazard 1369950 Seeta 101268

Saffola 706986 Champion 91,936

Sunrise 572500 Dharani 68,550

Sunil 559776 7 Up 64,935

Anamika 43,950

Anchor 4,600

Dhanraj 2,764

Limca 8,600

4 169878318 11 11734297 15 2,497,457

13.36% 85% 36.64% 10% 50% 5%

NOTE: ORIGINALS NAMES FOR ABOVE DECOEDED MATERIALS

Sredevi: N2-(1-(S)-ETHOXYCABONY-3-PHENYPROPYL)-N6-

RIFLUOROACETYL -L-LYSINE BENZL ESTER

Manasa: D (-) MANDALIC ACID

73

ZDC: N,N CORBONYL DI IMDAZOLE(DEEC)

Picnic: 4-PHENYL BUTANE -1

Dabur: METHYL(R)-(-)-3-HYDROXY BUTYRATE

Richa: PTHALIMIDO AMLODIPINE

Maaza: L-PROLINE

Orpat: INDOLE-2-CARBOXYLIC ACID

Chachobar: YDROXY -L- PROLINE(DEEC)

Aarthi: 3,3A,4,5,6,7,-2H-HEXA HYDRO INDOLE-2-CARBOXTLIC ACID

HYDROCHLORIDE

Frooty: TETRA HYDROFURAN

Hazard: ACETONITRILE

Saffola: CYCLO HEXYL CORBIDIMIDE

Sunrise: CINCHONIDINE BASE HYDROUS


Honey: BENZENE SULFONIC ACID


Cat-S: 1,4 DIMETHYL AMINO PYRIDINE

Thiophene: THIOPHENE

Zing thing: HYDROZEN PEROXIDE

Eno Carbon: ENO CARBON

Anaconda: VITRIDE(SODIUM DIHYDROBIS (2-

METHOXYETHOXY)ALUMINTE TOLUNE

Seeta: TRIC ACID MONO HYDRATE

Champion: L-ALANINE


7 Up: 2-METHYL PIPERZINE

Anamika: ORTHO FLURO NITRO BENZENE

Anchor: PROPINIC ANHYDRIDE

Dhanraj: 2,BENZISOTHIAZOLINE-3ONE

74

Limca: DIMETHYL FORMAMIDE

Percentage of A Class item is 85%

B Class item is 10%

C Class item is 5%

4. i) First-in First-out Method (FIFO):

75

CIMA defines FIFO as ‘a material of pricing the issue of material using the purchase

price of the oldest unit in the stock’. Under this method materials are issued out of

stock in the order in which they were first received into stock. It is assumed that the

first material to come into stores will be the first material to be used.

Stores Ledger Account of Zing Thing for the period 2008-09(FIFO)

Date Particulars

Receipts Issues Balance

Qty Price Value Qty Price Value Qty Price Value

06.05.08 Purchases 1000 22 22000 1000 22 22000

21.06.08 Purchases 1700 22 37400 1000 22 22000

1700 22 37400

21.07.08 Issues 1000 22 22000 1200 22 26400

500 22 11000

28.08.08 Purchases 500 22 11000 1200 22 26400

500 22 11000

15.09.08 Purchases 2500 22 55000 1200 22 26400

500 22 11000

2500 22 55000

22.09.08 Issues 1200 22 26400 300 22 6600

200 22 4400 2500 22 55000

19.10.08 Issues 300 22 6600 900 22 19800

1600 22 35200

76

21.11.08 Purchases 4000 22 88000 900 22 19800

4000 22 88000

19.12.08 Issues 900 22 19800 2450 22 53900

1550 22 34100

13.01.09 Purchases 1050 22 23100 2450 22 53900

1050 22 23100

27.02.09 Issues 2450 22 53900 1050 22 23100

02.03.09 Purchases 2500 22 55000 1050 22 23100

2500 22 55000

09.03.09 Issues 1050 22 23100 1400 22 30800

1100 22 24200

NOTE: ZING THING :Hydrogen Peroxide

ii) LAST-IN FIRST –OUT METHOD (LIFO):

77

Under this method most recent purchase will be the first to be issued. The

issues are priced out at the most recent batch received and continue to be charged

until a new batch received is arrived in to stock.

Stores Ledger Account of Zing Thing for the period 2008-09(LIFO)

Date Particulars

Receipts Issues Balance

Qty Price Value Qty Price Value Qty Price Value

06.05.0

8 Purchases 1000 22 22000 1000 22 22000

21.06.0

8 Purchases 1700 22 37400 1000 22 22000

1700 22 37400

21.07.0

8 Issues 1000 22 22000 1000 22 22000

500 22 11000 200 22 4400

28.08.0

8 Purchases 500 22 11000 1000 22 22000

200 22 4400

500 22 11000

15.09.0

8 Purchases 2500 22 55000 1000 22 22000

200 22 4400

500 22 11000

2500 22 55000

78

22.09.0

8 Issues 2000 22 44000 1000 22 22000

700 22 15400 200 22 4400

300 22 6600

19.10.0

8 Issues 300 22 6600 700 22 15400

200 22 4400

300 22 6600

21.11.0

8 Purchases 4000 22 88000 700 22 15400

4000 22 88000

19.12.0

8 Issues 2450 22 53900 700 22 15400

1550 22 34100

13.01.0

9 Purchases 1050 22 23100 700 22 15400

1550 22 34100

1050 22 23100

27.02.0

9 Issues 1050 22 23100 700 22 15400

1400 22 30800 150 22 3300

02.03.0 Purchases 2500 22 55000 700 22 15400

79

9

150 22 3300

2500 22 55000

09.04.0

9 Issues 1050 22 23100 700 22 15400

1100 22 24200 150 22 3300

350 22 7700

In HETERO DRUGS LTD there are certain reasons for slow or non-moving

items. They are as follows:

Order cancel

Products Ban by the Government.

Rejected imported material.

Damage in transit.

Sudden decrease of cost for the products in the market.

Expiry of items.

When process changed.

1. Order cancel: Customers may cancel the orders at any time for different

reasons. In HETERO DRUGS LTD some of the items became non-moving because

of order cancel.

For Example: Premipexale, Di HCL

2. Products Ban by the Government: Some products are ban by the

government due to different causes. In HETERO DRUGS LTD some products

80

became non-moving because of products ban by the government. For Example:

Valdicoxib & Gati Floxacan.

3. Rejected Imported material: In some manufacturing companies once

the materials are imported from other countries they may not be returned if they are

damaged. In HETERO DRUGS LTD some materials are imported from China, US,

UK etc.Once the materials are imported they may not be returned. If they are

damaged or rejected by the Quality control people they may become non-moving

items.

Example: Ikon

4. Damage in Transit: Some materials may become non-moving because

of damage in Transit. In HETERO DRUGS LTD some materials became non-

moving because of damage in transit.

Example: krack jack (BENZYL BROMO ACETATE/BENZYL-2-BROMO

ACETATE)

5. Sudden decrease of cost for the products in the market: Some times the

products may get very cheaper in the market than we produced. Then we may incur

losses when we produce those products. So we may stop the production to avoid

losses. In HETERO DRUGS LTD some items became non-moving because of this

reason only.

Example: Cetrlin Hydro Chloride.

6. Expiry of items: Some items may became non-moving because they

may reach the expiry date due to certain reasons. If some items are not used they may

expire and will become non-moving items. In HETERO DRUGS LTD some

materials expired due to process changed. When process changed some items will

not be used.

81

7. For Example: Ranenikel and London

8. When process changed: Some items may became non-moving because

of process changed. In HETERO DRUGS LTD some items became non-moving

when the company changes its process due to reduce the cost of production.

For Example: Lisno pril and Fosino pril

All the above are certain reasons for slow or non-moving of items in the stores

]

ECONOMIC ORDER QUANTITY (EOQ):

The prime objective of inventory management is to find out and maintain

optimum level of investment in inventory to minimize the total costs associated with

it. The EOQ is the optimum size of the order for a particular item of inventory

calculated at a point where the total inventory costs are at a minimum for a particular

stock item .It is an optimum size of either a normal out side purchase order or an

internal production order that minimizes total annual holding and ordering costs of

inventory. Stock-out costs are difficult to incorporate into this model. Since they are

based on qualitative and subjective judgment.

The ordering costs are the costs of placing a separate order multiplied by the

number of separate orders placed in the period. The carrying costs can be calculated

based on the assumption that annual cost of carrying a particular stock item on

average, half the stock is on hand all the time in addition to the safety or buffer stock.

The fewer the orders, the lower costs of ordering, but the greater the size of the order

the greater the costs of carrying. The safety or buffer stock has no bearing on the

EOQ, only on the timing of orders. The EOQ is an optimum quantity of materials to

82

be ordered after consideration. Of the following three categories of costs:

Ordering Costs: The costs of ordering inventory include the following:

Preparation of purchase order.

Costs of receiving goods.

Documentation processing costs.

Transport costs.

Intermittent costs of chasing orders, rejecting faulty goods.

Additional costs of frequent or small quantity orders.

Where goods are manufactured internally, the set-up and tooling costs

associated with each production run.

Carrying Costs: The carrying costs of inventory include the following:

Storage costs (rent, lighting, heating, refrigeration, air-conditioning etc.)

Stores staffing, equipment maintenance and running costs.

Handling costs.

Audit, stock taking or perpetual inventory costs.

Required rate of return on investment in current assets.

Obsolescence and security costs.

Costs of money tied up in inventory.

Pilferage and damage costs.

Stock-out Costs: The stock-out costs are associated with running out of stock, which

include the following:

Lost contribution through the lost sales caused by the stock-out.

Loss of furniture sales because customers go elsewhere.

Loss of customer goodwill.

Cost of production stoppages caused by stock-outs of WIP or raw material.

Labour frustration.

83

Over stoppages.

Extra costs associated with urgent replenishment purchases of small

quantities.

Q. Calculate Re-order Quantity; Re-order level, Minimum level, Maximum level,

Average stock level

Hetero Drugs Ltd. Manufactures D (-) Mandalicacid material and the

following particulars are collected for the year ended March 2009:

Monthly demand 3000

Cost of placing an order 300

Annual carrying cost 15

Normal usage 230

Minimum usage 120

Maximum usage 420

Re-order period 4 to 6 weeks

Solution:

Reorder Quantity

2U x P

S

Where, U= Annual consumption (units) during the year

P= Cost of placing an order

S= Annual carrying cost per unit

2 x 33878 x 300

15

84

=1164 Kgs

RE-ORDER LEVEL = Maximum usage x Maximum delivery

period

= 420 x 8 = 3360 Kgs

MINIMUM LEVEL = Re-Order level –


= 3360 - (230 x 7)

= 1750 Kgs

MAXIMUM LEVEL = (Re-Order level + Re-Order quantity) –


= (3360 + 1164) – (120 x 6)

= 3804 Kgs


= (1750 +3804)/2

= 3652 Kgs

Q. Calculate Re-order Quantity; Re-order level, Minimum level, Maximum level,

Average stock level

Hetero Drugs Ltd. manufactures material Di isopropyl ether and the

following particulars are collected for the year ended March, 2009:

Monthly demand 6000

Cost of placing an order 600

85

Annual carrying cost 15

Normal usage 450

Minimum usage 350

Maximum usage 700

Re-order period 6 to 8 weeks

Solution:

Reorder Quantity

2U x P

S

Where, U= Annual consumption (units) during the year

P= Cost of placing an order

S= Annual carrying cost per unit

2 x 87077 x 600

15

=2640Kgs

RE-ORDER LEVEL = Maximum usage x Maximum delivery period

= 700 x 8 = 5600 Kgs

MINIMUM LEVEL = Re-Order level –


= 5600 - (450 x 7)

= 2450 Kgs

86

MAXIMUM LEVEL = (Re-Order level + Re- Order quantity) –

(Minimum usage and Minimum delivery period)

= (5600 + 2640) – (350 x 6)

= 6140 Kgs

= 15500 Kgs

AVERAGE LEVEL = Minimum level +Maximum level/2

= 2450 + 15500/2

= 10200 Kgs

6. VED ANALYSIS

VED analysis divides items in to three categories in the descending order of their

critically as follows:

‘V’ stands for vital items and their stock analysis requires more attention,

because out-of-stock situation will result in stoppage of production. Thus, ‘V’

items must be stored adequately to ensure smooth operation of the plant.

‘E’ means essential items. Such items are considered essential for efficient

running but without these items the system would not fail. Care must be taken

to see that they are always in stock.

‘D’ stands for desirable item which do not affect the production immediately

but availability of such items will lead to more efficiency and less fatigue.

VED analysis can be very useful to capital intensive process industries. As it

analysis items based on their importance and it can be used for those special raw

materials which are difficult to procure.

7. JUST-IN-TIME MANAGEMENT

87

Japanese firms popularized the Just-in Time (JIT) system in the world. In a JIT

system material or the manufacturing components and parts arrive to the

manufacturing sites or stores just few hours before they are put to use. The delivery

of material is synchronized with the manufacturing cycle and speed. JIT system

eliminates the necessity of carrying large inventories, and thus, saves carrying and

other related costs to the manufacturer.

The system requires perfect understanding and coordination between the

manufacturer and suppliers in terms of the timing of delivery and quality of the

material. Poor quality material or components could halt the production. The JIT

inventory system complements the Total Quality Management. The success of the

system depends on how well a company manages its suppliers. They will have to

develop adequate systems and procedures to satisfactory meet the needs of

manufacturers

Who can use JIT?

Quality process improvement is usually thought of as a

continuous journey of improvement, with no definite ending, since there is always

more potential. From the point of view of material flow the principle of JIT is

obviously ideal but it is often difficult to implement in practical situations unless the

conditions are right. Of course, the right conditions do not happen by accident and

anyone looking for the benefits has to work hard to create the appropriate situation.

Just-in-time supply should be considered as a quality process,

although most of the objections to JIT are based on lack of quality in some aspect of

supply or demand. If stock levels are incorrect, this is often the result of complacency

or lack of understanding. There is no perfect solution to stockholding but, like any

other quality improvement process, JIT operations gradually develop an existing

88

unsatisfactory situation into an improved one. A decrease in lead times and

simplification of processes should be the aim of all inventory managers.

From the viewpoint of JIT, time is a value-added commodity and

wasting it is unprofitable. The more time saved the better, and continuous

improvement means reducing the timescales.

The definition of just in time presented so far can apply to any

material management process, which actively minimizes timescales. The purist

would think that there is more to JIT than this simple concept and there are some

specific concepts for achieving this reduction in timescales, particularly:

Desire to improve

Simplification

Demand-led supply (pull)

Quality conformance

Devolution of responsibilit

If these concepts are put into practice, then an operation has a JIT

philosophy supported by improvements in communications and driven by the need

for better service and lower costs, the influence of JIT has been felt in all types of

business and has fuelled change

Advantages of JIT:

Operational benefits:

How can it be more efficient to deliver in small quantities, manufacture in small

batches and increase the amount of administration? Equally, someone who only

knows JIT would ask:

Why do you buy things when you don't need them?

How do you know what the demand is so far ahead?

What use is a warehouse?

89

The operational benefits arising from JIT are

Inventory investment

'Supply to order' instead of 'provision for stock' easier forecasting so less slow

moving stock

Better flexibility

Simplified administration

Waste elimination

Less scrap should there be a problem.

For each of these operational benefits there is a corresponding cost

benefit, which can be offset against any additional costs, which arise. These

additional costs usually occur because methods have not been changed to suit JIT.

For instance: if an item is delivered in a batch once per month, it can be invoiced,

delivery documentation produced and payment made. If through a change to JIT the

item is delivered every day, then it would not be sensible to place a purchase order

for each load, to raise delivery paperwork and to arrange separate payments for each

load. Information is still required for control, but the information system has to be re-

created to meet the new conditions. In the short term this may not be possible and,

so, extra costs can arise. As JIT embodies the process of continuous improvement,

the inefficiency will eventually be eliminated.

Inventory Turn Over Ratio: -

Inventory turn ratio helps management to avoid capital being locked up

unnecessarily. The ratio reveals the efficiency of stock keeping.

Inventory turnover ratio is given by the formula:

Cost of material consumed

Cost of average stock held during the period

Cost of average stock

Cost of opening stock + Cost of closing stock

2

90

The Inventory turnover ratio can be calculated (in days) as follows:

Days during the period

Inventory turnover ratio

This will reveal the number of days for which the stocks are held.

Example for Inventory turnover ratio for the year ended 2004-05

Material: 7up (2-METHYL PIPERZINE)

Material consumed during the year = 3317

Cost of Material per Kg = 585

Cost Material consumed = 3317 x 585 =185445

Opening Stock = 918

Cost of Opening Stock = 918 x 585 = 537030

Closing Stock = 63

Cost of Closing Stock = 63 x 585 = 3685

Inventory turnover ratio:



= 185445

286943

= 0.6

Cost of average stock

Cost of Opening Stock + Cost of Closing

2

= 537030 +36855

2

= 286943

Inventory turnover ratio calculated in days:


91


= 365 days

0.6

= 608 days


Material: B - Soda



Cost Material consumed = 301770 x 30 = 9053100

Opening Stock Stock = 12300 x 30 = 369000

Closing Stock = 5700





= 9053100

270000

= 33.53

Cost of average stock:


2

= 369000 + 171000

2

= 270000


= Days during the period

92


= 365 x 100

33.53

= 1088 days


Material: (Kasturi) VANADYL ACETYL ACETONA



Cost Material consumed = 87 x 29 = 2523

Opening Stock = 118


Closing Stock = 63



= Cost of material consumed


= 2523

26245

= 0.09

Cost of average stock :


2

= 3422 + 1827

2

= 26245


= Days during the period


93

= 365

0.09

= 4055 days


Material: (Manasa) D (-) MANDALIC ACID



Total Cost of Material consumed = 1215 x 775 = 941625

Opening Stock = 20


Closing Stock = 872





= 941625

345650

= 2.7


Cost of Opening Stock + Cost of Closing Stock

2

= 15500 + 675800

2

= 345650



94


= 365

2.7

= 135 days


Material: (Maaza) L-PROLINE



Total Cost of Material consumed = 3050 x 451 = 1375550

Opening Stock = 500


Closing Stock = 76





= 1375550

129888

= 10.5



2

= 225500 + 34276

2

= 129888



95


= 365

10.5

= 35 days

CHAPTER-VI

FINDINGS&SUGGESTIONS

96

FINDINGS

During the 2004-05 Inventory turnover ratio (in days) 608 days and 2005-06

inventory turnover ratio 1088days.

During the 2006-07 inventory turnover ratio(in days) 4055 and 2007-08

inventory turnover ratio 135 days

During the 2008-09 inventory turnover ratio(in days) 35 days only.

There was good coordination between the Marketing, planning procurement,

production and distribution.

There is a lack of inventory classification system based on a variety of

practical norms like consumption rate importance in production.

Hetero exports stock to many countries in world like china, USA,

The company is not follows the EOQ (economic order quantity) in issuing the

raw material.

Lead-time for the items was very high. It is high in “A” Class items

Conversion period was also varying from time to time that is conversion

from raw material to finished goods.

Company is follows FIFO (first in first out) to issuing the raw materials to the

production, weighted average method for issuing spares, and remaining is

issued at valued at cost.

97

SUGGESTIONS

The inventory turnovers ratio during the year 2005-06 are 608 days and 1088

days. The days are increased. It is better to reduce the days because if the days

are increased the cost of maintenance is also increased (holding cost, carrying

cost)

The inventory turnover ratios during the year 2007-08 are 4055 days to 135

days. It is a good signal to the organization why because if the days are

decreased the cost of maintenance is also decreased. If leads to the over ratio

cast is also decreased.

The inventory turnover ratio in the year 2008-09 just 35 days only. It shows

the effective inventory management in Hetero Drugs Ltd.

They have to satisfy the employees needs.

JIT system has to be implemented in the hetero Drugs. This system eliminates

the necessity of carrying large inventories, and thus, saves carrying and other

related costs to the manufacturer.

Finding of items that reached the re-order level and

raise the procurement of Indent is done by the stores clerk. But this can be

done by the system itself by setting the appropriate system software

programmed. It will reduce the workload.

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Conversion period of raw materials to finished goods is varying from time to

time. This variation can be reduced by better co-ordination of the activities of

all departments concerned.

Investment in fast moving and non-moving items is high and it must be

reduced freely available items are also maintained at stock levels. Excess

investment in the available items must be reduced as the transportation is at

advanced stage. So no need to maintain them at large quantity.

For efficient inventory management proper item classifications system is

necessary that is establish of ABC and VED analysis

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BIBLIOGRAPHY

Referred from the following standard texts and websites:

1. Financial Management,I.M.Pandey, 9th Edition

Vikas Publishing Housing Ltd. P no :500535

2. Cost & Management Accounting , M.Ravi Kishore

3. Financial management by M.Y. Khan and P.K. Jain

http://www.Hetero.com

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http://www.Hetero.com/

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