A STUDY ON INVENTORY MANAGEMENT AND CONTROL

(A Comparative Study on Herbs Production and Processing

Company Limited and National Trading Limited)

By:
Ganesh Prasad Timilsina
Balkumari College
T.U. Regd. No.: 7-2-508-5-202
Roll No.: 06 (062-064)

A Thesis submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirements of the degree of

Master of Business Studies (MBS)

Narayangarh, Chitwan
December, 2009

1
 DECLARATION

I hereby declare that the work reported in this thesis entitled

"A Study on Inventory Management and Control (A Comparative Study
of HPPCL and National Trading Limited)" submitted to the Office of the
Dean, Faculty of Management, Tribhuvan University, is my original work done
in the form of partial fulfillment of the Master Degree in Business Studies
(M.B.S.), under the supervision and guidance of Lecturer Bhim Narayan
Adhikari, Balkumari College, Narayangarh, Chitwan.

Date: .........................

___________________________
Ganesh Prasad Timilsina
Researcher
Balkumari College, Narayangarh

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 ACKNOWLEDGEMENT

I would like to express my heartily thanks and gratitude to thesis supervisor,

Lecturer Bhim Narayan Adhikari of Balkumari College for the precious
recommendations, guidance and regular co-operation throughout this study period.

I am grateful to especially Mr. Bharat Khanal, Programme Incharge of MBS,

Mr. Shiva Prasad Poudel, Mr. Baburam Panthi and Mr. Bijaya Lal Pradhan
lecturers of Balkumari College for their kind suggestion and co-operation

I would like to express my gratitude to all my respected lectures of MBS

program and library staff of Balkumari College for intellectual support and co-
operation.

I would like to thank the staffs of National Trading Limited and Herbs
Production and Processing Company Limited for providing the data and
related information.

I would like to express my heartily thanks towards all of my family members

who spent their valuable time and efforts and made a great sacrifice for my
higher education and always created goods environment and regularly
promoted for this study. My special thanks goes to my friends Mr Rishi Ram
Poudel, Mr. Ram Hari Dhakal, Mr. Kashi Ram Acharya for their valuable
suggestions and advice to the fulfillment of this thesis.

Ultimately, my appreciation goes to Mr. Hari Adhikari (Classic Computer Link,

Narayangarh) to his help for typing, processing and upto final bindings nicely.

Last but not least, I am responsible for any errors and I apologize for any of
them committed that may have remained in this work. Thanks.

_______________________
Ganesh Prasad Timilsina
Narayangarh, Chitwan

Date: .............................

3
 TABLE OF CONTENTS
Page No.

Recommendation i
Viva-Voce Sheet ii
Declaration iii
Acknowledgements iv
Table of Contents v-vi
List of Tables vii-viii
List of Figures ix
List of Abbreviation x

CHAPTER I: INTRODUCTION 1-8

1.1 Background of the Study 1
1.1.1 Introduction of the Companies 2
1.2 Statement of Problems 5
1.3 Objectives of the Study 6
1.4 Limitation of the Study 6
1.5 Needs of the study 6
1.6 Organization of the Study 7

CHAPTER II: REVIEW OF LITERATURE 9-57

2.1 Theoretical Framework 9
2.1.1 Inventory 9
2.2 Objective of Inventory Management 12
2.3 Need of Holding Inventory 13
2.4 Evils for Excess Inventory 14
2.5 Factors affecting Inventory Management 14
2.6 Inventory Cost 15
2.7 Technical Framework 18
2.7.1 Inventory Model 19
2.7.2 Economic Order Quantity 20
2.7.2.1 Purchasing 25
2.7.2.2 Store Keeping 26
2.7.2.3 Issuing and Pricing 28
2.7.3 Re-order point 28
2.7.4 ABC Inventory Analysis 33

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2.8 Inventory valuation method under cost basis 36
2.8.1 Benefits of Inventory Control 36
2.9 Inventory System 37
2.9.1 Inventory control procedure 38
2.10 Inventory Reports 39
2.11 Review of Related Studies 41
2.11.1 Dissertation 41
2.11.2 Review of Article and Institutions Report 54
2.12 Research Gap 56
CHAPTER III: RESEARCH METHODOLOGY 58-61
3.1 Research Design 58
3.2 Nature and Source of Data 58
3.3 Data Gathering Procedure 59
3.4 Presentation and Analysis of Technique and Tools 59
3.4.1 Statistical Tools 60
3.4.2 Financial Tools 61
CHAPTER IV: PRESENTATION AND ANALYSIS OF DATA 62-100
4.1 ABC Analysis 62
4.1.1 National Trading Limited 62
4.1.2 HPPCL 64
4.2 Economic Order Quantity Analysis 65
4.2.1 National Trading Limited 65
4.2.2 Herbs Production and Processing Company Limited 80
4.3 Correlation between Sales and Net Profit 97
4.3.1 National Trading Limited 97
4.3.2 Herbs Production and Processing Company Limited 98
4.4 Major Findings 98
CHAPTER V: SUMMARY,CONCLUSION AND RECOMMENDATION 101-105
5.1 Summary 101
5.2 Conclusion 103
5.3 Recommendation 104
Bibliography 106-109

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 LIST OF TABLES

Table No. Titles Page No.

2.1 Calculation of EOQ by Trail and Error Method 23

2.2 Stock Analysis Under ABC 34

4.1 Classification of Goods of NTL 62
4.2 ABC Classification of NTL 63
4.3 Classification of Goods of HPPCL 64
4.4 A, B, C Classification OF HPPCL 64
4.5 Economic Order Quantity and Water Pump 66
4.6 Annual Demand for Water Pump 67
4.7 Safety Stock, Lead time, Daily Usage Rate and Reorder Level 69
4.8 Economic Order Quantity of Various Liquor 71
4.9 Annual Demand for Various Liquor 71
4.10 Daily Usage, Lead Time, Safety Stock and Re-order Point 73
4.11 Economic Order Quantity and Sugar 74
4.12 Annual Demand for Sugar 75
4.13 Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point 76
4.14 Economic Order Quantity of Rice Cooker 78
4.15 Annual Demand for Rice Cooker 79
4.16 Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point 80
4.17 Economic Order Quantity of Wintergreen Oil 82
4.18 Annual Demand for Wintergreen Oil 82
4.19 Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point 84
4.20 Economic Order Quantity of Xanthoxylum Oil 86
4.21 Annual Demand for Xanthoxylum Oil 87

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4.22 Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point 88
4.23 Economic Order Quantity and Eucalyptus Oil 90
4.24 Annual Demand for Eucalyptus Oil 91
4.25 Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point 92
4.26 Economic Order Quantity and Cinnamon Leaf Oil 94
4.27 Annual Demand for Cinnamon Leaf 95
4.28 Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point 96
4.29 Correlation between Sales and Net Profit of NTL 97
4.30 Correlation between Sales and Net Profit of HPPCL 98

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 LIST OF FIGURES

Figure No. Titles Page No.

2.1 Order-size-cost Relationship 19

2.2 Graphic Inventory Model 22
2.3 EOQ Graphic Figure 24
2.4 Re-ordering Point Under Certainty 29
2.5 Re-order Point Under Uncertainty 30
2.6 Classification of Items According to ABC Analysis 35
4.1 ABC Analysis NTL 63
4.2 ABC Analysis of HPPCL 65
4.3 Annual Demand of Water Pump 68
4.4 Annual Demand of Various Liquor 72
4.5 Annual Demand of Sugar 76
4.6 Annual Demand of Rice Cooker 79
4.7 Annual Demand of Sugar 83
4.8 Annual Demand of Xanthoxylum Oil 87
4.9 Annual Demand of Eucalyptus Oil 91
4.10 Annual Demand of Cinnamon Leaf Oil 95

8
 LIST OF ABBREVIATION

ABC = Always Better Control

AD = Anno Domini
AIC = Agriculture Inputs Corporations
B.S. = Bikram Sambat
CCC = Corporation Coordination Council
CDM = Central Department of Management
CEDA = Centre for Economic Development and Administration
e.g. = For example
EOQ = Economic Order Quantity
F/Y = Fiscal Year
HPPCL = Herbs Production and Processing Company Limited
i.e. = That is
Ltd. = Limited
Mt. = Metric Ton
No. = Number
NTL = National Trading Limited
PEs = Public Enterprises
Rs. = Rupees
T. = Ton
TU = Tribhuvan University

9
 CHAPTER I

INTRODUCTION

1.1 Background of the Study

Nepal is the country with least development in industrial sector, so the

economic status of Nepal is very poor. Most of the Nepalese public sector
manufacturing enterprises are suffering from losses. Due to lack of proper
inventory management and control many public enterprise is going to suffering
losses day by day. Few private sector manufacturing enterprises has playing
vital role in the Nepalese economy. After industrial act 2049, and by adopting
privatization policy by Nepalese government, now a day’s private industries
operation is increasing day by day. So industrialization is an important factor to
achieve basic objective of a country’s economy and social progress.

Much business organization became failure due to not properly managing

inventory. To produce any goods or service, it requires many types of material,
direct or indirect. If the company did not get the required materials at needed
time then production, system may be disturbed and fails to produce and sale
required quantity of products Inventory is the stock of materials or product
which frequently occurs in the organization. In this industrial age every
organization has an own inventory system. There are various techniques to
the solution of inventory management and control. When the materials are
purchased by an organization they have to be stored until they are put into
the production process. When the production is over the finished product
have to be stored again until they are sold. Thus, inventory involves high
amount of cost in terms of occupying the space and blocking the capital.
However, we can not avoid inventories, because with out inventory it may
effect even badly by creating obstacles on continuous production and
ultimately on supply requirements. So inventory should be maintained in
appropriate quantity so as to avoid both under-stock and over-stock
situation, for this, proper inventory management is necessary. It is because,

10
the aim of inventory management is to avoid excessive and inadequate
level of inventories and to maintain optimum level of inventory for the
smooth production and sales operation.

Inventory management involves the planning of the optimal level, of

inventories and control of inventory cost, supported by an appropriate
organization structure which is staffed by trained persons and directed by
top management. It involves both financial dimensions as well as physical
dimensions and these dimensions are interrelated and can not be looked in
isolation. (Agrwal, 1980)

Inventory management is primarily concerned with minimizing cost of

investment in inventory, cost of maintain desired level of inventory and
minimizing total cost of inventory.

Both the physical as well as financial dimensions of inventory should be

effectively managed thus, real task of top management lies in formulation
the plans and policy that will lead to optimal inventory investment for
attainment of desired objectives.

Inventory control also deserves special attention as over-investment in

inventories results shortage of cash for other purpose like payment of
maturing liabilities carrying of account receivable and expansion of fixed
assets similarly the consequences of investment in inventories are loss of
regular customs. They don’t find selection of varieties and burden of
unnecessary cost of operation due to shortages of raw materials.

Therefore inventory control involves the inventory decision models and

determines the optimum investment inventory, so it is a topic of
considerable and wide spread interest.

1.1.1 Introduction of The Companies

A) Introduction of “National Trading Limited”

National trading Limited (NTL) was established as a public limited company in
March 1962AD A.D. (1st Chaitra 2018 B.S) under the Nepal company Act in

11
public sector completely owned by his majesty's Government of Nepal. NTL
was created in order to channels commodity aids from the people's Republic of
China and USSR with a view to meet the local cost of development projects
initiated by these countries through the sales of aid goods in the domestic
market. It has authorized capital of Rs 30 crores, issued capital and paid up
capital of Rs169.335,000 each. NTL has five regional offices in five
development regions of the country. It also maintains six branch offices and
eight sales depots across the business centers of the kingdom. Its head office is
situated in Teku. Kathmandu. Previously, the department of commerce, HMG
handled this function in order to create a better channel to serve growing needs
of the national economy and the people at large through the regular supply of
essential goods at reasonable prices. HMG set up the NTL as a State Trading,
Organization. It was entrusted with the functions of engaging on all kinds of
trading activities including quote goods to be imported from India for the
purpose of establishing domestic prices. regularizes, industrial raw materials.
machinery and equipment and consumer goods.

As NTL began to produce goods from diverse sources and also as it -was
exporting to diverse market. NTL through activities definitely support the
country's policy of trade diversification. As the first leading trading
organization at the national level, NTL was made of deal with both the import
and export aspects of foreign trade for the purpose of rendering support
services to the economic development of the country.

B) Introduction of “Herbs Production and Processing Company Limited”

Different kinds of public enterprises are operating in Nepal. Among them

"Herbs Production and Processing Company Limited" is one of the pubic
enterprises. With production of the different kinds of the medicine and
perfumery oil, it processes the herbs, which are collected from the
Himalayan region.

12
Due to the variation of climate and geographical structure of the country,
Different kinds of medicinal and aromatic plants are found in the country.
They are valuable forest resources. It has had a good recognition in the
Indian market since ancient time. The highest peak of the world, Mt.
Everest and a series of Himalayan ranges found in the country are symbolic
of the existence of the valuable medicinal and aromatic plants. During the
past days, the country had significant role in trading of crude herbs till the
date about 700 varieties have been identified. The major thrust of the nation
is to process the natural resources domestically balancing their depletion in
nature with regeneration the inception of herbs production and processing
company limited in 1981AD as an undertaking of the then HMG/Nepal.
After thorough research and dedication of the national core of scientists
under the department of medicinal plants, this company was founded.

HPPCL is the first company in the country to harness the rich treasure of
herbs and aromas for processing production medicinal extracts and
essential oils for drugs and perfumery industries within the country and
abroad. The painstaking research on selected herbs resources and flora of
the country by modern scientific methods results the introduction of the
production of selective medicinal extracts and essential on a commercial
scale. At present, the company is capable of exporting indigenous products
like Sugandha Kokila Oil and Jatamasi oil as well as the exotic varieties
such as Palmorosa oil, Citronella oil, Lemongrass oil and some crude drugs
to neighboring and third countries.

This company was established in 1981AD at Koteshwor with authorized

capital five crore and paid-up capital two crore seventy five lakh and
seventeen thousand. There are 198 employees in HPPCL. Among them 23
employees are in officer level and 145 employees are in assistant level.

These raw materials for the production of the different kinds of perfumery
oil are either purchased directly or taken from the cultivated area. There are
no specific methods for the collection of different kinds of raw materials.

13
1.2 Statement of Problems

The public enterprises process in Nepal is being developed very slowly. In

spite of various activities, policies of the government. Investment on PEs
sectors is not satisfactory. The rate of return of public corporation is very
low.

In the context of inventory management, “Management experts claim that

inventory management of Nepal is probably the weakest aspect of
management the tool and techniques for controlling its physical as well as
financial dimensions” (Agrawal, 1980)

Industrialization plays the vital role for the national development but most
of Nepalese enterprises are operating in losses. The then HMG had
established a number of PEs in different fields. But the financial
performances of such enterprises in Nepal are quite dismal and have not
been able to contribute towards the generation of surplus there could be
many factors for the failure of the PEs i.e. lack of integration of activities,
mismanagement, less utilization of capacity, lack of motivated skilled
employees and mismanagement of inventory. One probable cause for
failure of the enterprises might be related to inventory management and
control. So, to address the problem, the study intents proper inventory
management of the PEs. The study covers the following research questions

Some research questions are given below

1. What types of inventory maintained by HPPCL and National Trading
Limited?
2. What are the techniques being used to manage the inventory by
HPPCL and National Trading Limited?
3. Which inventory policy is adopted by both companies?
4. How do both companies control the cost?
5. How do both companies manage the Inventory?

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1.3 Objectives of the study
The objectives of the study are as follows:
1. To analyze the inventory level maintained by National Trading Limited
and Herbs Production and Processing Company Limited.
2. To study the inventory management and control system followed by
National Trading Limited and Herbs Production and Processing
Company Limited.
3. To examine the techniques being employed to manage the inventory by
these enterprises.

1.4 Limitation of the Study

The study confines only to budgeting inventory management and profit of

public enterprise. The following factors have limited the scope of the study.
 The main concern of this study is to cover the present managerial
status in terms of their inventory planning as well as profit planning.
So, this study is naturally confined to the planning aspect.
 The data and trend have been analyzed based on last five year period.
 Analysis is concentrated in some managerial, financial and
accounting aspect and does not cover the other aspects of the
selected enterprises (HPPCL and NTL).

1.5 Needs of the Study

Every organization can not be success with out proper management of

inventory, proper inventory reduce cost and increase profit and maintain
sound level of stock also.

A firm cannot achieve its goals unless inventories are controlled effectively
and capital is allocated efficiently. Therefore study on inventory
management is inevitable. "Inventory is the most important thing but large
inventory is the evil for the company." (I.M Panday, 1993)

15
Inventory is the current assets playing vital role for the organization. Many
Nepalese public enterprises have poor inventory management systems so
that they can not be run successfully. When market demand is high at that
period, if there is lack of proper inventory there will be few production and
can not supply regularly. Some times due to over stock level inventory hold
unnecessary current assets. So that excessive as well as inadequate
inventories are not desirable. Inadequate inventories cause obstacles in
smooth production as well as in market operation.

In this competitive age organization should be conscious about own

product. They should try to give quality, durable and cheap price for
product to the customer. So that it is necessary to public enterprises to run
smoothly, efficiently as well as profitably. So that in this situation, the
management and control system of inventory play a prime role even to the
manufacturing public enterprise thus, it is very important to know how the
PEs utilizes its inventory to fulfill its objectives.

1.6 Organization of the Study

The overall study work has divided into five chapters.

Introduction

The first chapter consists of the introduction of the study, Statement of

problems, objectives of the study, needs of the study, and organization of
the study.

Review of Literature

The second chapter is review of literature consists of reviews of different

dissertations including findings and recommendations, and the Conceptual
framework.

16
Research Methodology

The third chapter is research methodology consisting of research design,

nature and scope of data, population and sample size, data collection
procedure and data analytical tools.

Presentation and Analysis of Data

The fourth chapter is presentation and analysis of data based on facts and
figures gathered by different methods i.e. EOQ, targeted and actual
production, targeted and annual sales and major findings.

Summary Conclusion and Recommendation

The fifth chapter is last chapter which includes summary, conclusion and
recommendation.
Bibliography and appendixes are also included at the end.

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 CHAPTER II

REVIEW OF LITERATURE

2.1 Theoretical Framework

2.1.1 Inventory Management

Managing of inventory is a challenging task for both private as well as

public manufacturing and non-manufacturing enterprises. There are various
scientific tools and techniques for the solution of inventory management
problem. However, in Nepalese context many manufacturing public
enterprises have been facing the problem of effective handling of inventory.
In this study, attempts have been made towards the review of literature
regarding inventory management and control system. The term ‘inventory
management’ is formed with ‘inventory’ and ‘management’.

The stock of different types of consumable goods held by an organization is

called inventory. Inventory is the indispensable item for all types of
organizations. Inventories are vital elements in the efforts of the firm to
achieve desired sales levels. Depending upon the nature of the industry and
firm, inventories may be durable or endurable perishable or undesirable,
valuable or inexpensive.

In the context of manufacturing or trading enterprises, most of the public

enterprises have been facing the problem of effective managing of
inventory. We know large proportion of the total capital will be invested in
the inventory. This is vital element on the efforts of the firm to achieve
desired sales level.

Management is the function consists of planning, organizing, directing,

coordinating and controlling of different activities that is done to achieve
predetermined goal of the organization. Hence, Inventory management can

18
be defined as the function to plan, organize, direct, co-ordinate and control
of inventory as per the requirement of the organization.

“Inventories Management involves the planning of the optimal level of

inventories and control of inventory cost, supported by an appropriate
organization structure which is staffed by trained persons and directed by
top leveled management. It involves both financial dimensions as well as
physical dimensions and these dimensions are interrelated and cannot be
looked in isolation.” (Hampton, 1990)

Every organization associates with inventory as their nature. The majority

of the company’s inventory represents a substantial investment. Thus, the
goal of the wealth maximization is related to the efficiency with which
inventory is managed. Consequently, the financial manager has an
important role to play in the management of inventory, although it is not
his/her responsibility to control inventory. The financial manager should
see that only an optimum amount is invested in inventory. He/she should be
familiar with the inventory control techniques and ensures that inventory is
managed well. In other words inventory management can be defined as the
planning, directing, coordinating and controlling of various activities which
are concerned with inventory requirement.

Therefore Inventory management is mainly concerned with minimizing

investment on inventories on one hand and minimizing cost of inventory
maintaining on other hand. Both physical as well as financial dimensions of
inventory should be managed effectively; the main duty of top-level
management is formulating planned policies that will be helpful to maintain
optimum level of inventory investment of achievement of desired goal.

(i) Raw Material

Raw materials are those basic inputs. Which are generally purchased from
outside and converted into finished goods through this production process.
Raw materials are those basic inputs that are converted into finished
product through the manufacturing process. Raw materials inventories are

19
those units have been purchased and stored for future production. And raw
material is very important factor of production in a manufacturing
organization. It is the first and the most important element production
which covers nearly 60% of cost of production.

(ii) Work in Progress

Industries generally have work in progress inventories if they involve in

production activities. These types of inventories consist of all the items, of
finished products which are accurately on the production cycle. In other
words, work in progress is semi finished products, which help in the
smooth production process. It includes those materials that have not been
completed such item are component and subassemblies that are not ready to
sale. It is difficult to identify which are semi-finished goods, because the
same materials might be work in progress for one organization whereas
finished for the organization. It depends upon the nature of production.

(iii) Finished Goods

Finished goods inventory is those manufactured products that are ready to

sale or that satisfies the anticipated demand of customer in future. “Finished
goods inventories are those completely manufactured products which are
ready for sale. Stocks of raw materials and work in progress facilitate
production while stock of finished goods is required for smooth marketing
operation.” (I.M. Panday, 1993)

(iv) Supplies Store and Spare Parts

Suppliers maintain a forth Kind of inventory supplies, which are indirect

inputs in process of production. A Forth kind of inventory of supplies
includes office and cleaning materials do not directly involve in to
production but are necessary for the production process. Unusually these
supplies are small part of the total inventory and do not invoice significant
investment.

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2.2 Objective of Inventory Management

Inventory management is challenging management for these days. Both

excessive and inadequate inventories are not desirable. These are two
danger points within which the firm should operate. The objective of
inventory management is to keep optimum level of inventory for smooth
production and sales operation as well as to maintain minimum investment
in inventory so as to minimize cost or to maximize profit. Every firm
should maintained adequate inventory to insure an adequate supply of
materials to the customer.

Inventory management plays a crucial role in any manufacturing or non

manufacturing company. So, aim of the inventory management should be
determined and maintained at an optimum level of inventory management.
The aim of the inventory management is to avoid excessive inventory for
smooth production, sales operations, and efficient customer service and
centralize in investment.
1) To maintain optimum level of inventory for efficient, smooth
production and sales operation.
2) To control excess investment in inventories and keep it an optimum
level.
3) To minimize carrying, ordering and other indirect cost.
4) To minimize the cost and time.
5) Risk of spoilage and obsolescence of inventory must be avoided.
6) Information about availability of stock should be made
continuously available to the management

2.3 Need of Holding Inventory

The questions of managing inventories arise only when the company holds
inventories. Maintaining inventories involves tying of the company’s funds
and incur race of storage and handling costs if it expenses to maintain

21
inventories, why do companies hold inventories? There are three general
motives for holding inventories (Starr & Miller, 1962).

The Transaction Motive: This emphasizes the need to maintain

inventories to facilitate smooth production and sales operations.

The Precautionary Motive: This necessities holding of inventories to

guard against the risk of unpredictable change in demand and supply forces
and other factors.

The Speculative Motive: Which influence the decision in increase or

reduce inventory levels to take advantage from price fluctuations.

A company should maintain adequate stock of material for continuous

supply to the factory for an uninterrupted production. It is not possible for a
company to procure raw materials whenever it is needed; a time lag exists
between demand for materials and its supply. In addition, there exists
uncertainty in procuring of material because of factors such as strike,
transport disruption and short supply. Therefore the firm should maintain
sufficient stock of raw materials at a given time to streamline production.

Some purposes of holding inventories are as follows:

 To maintain optimum level of inventory for efficient smooth
production and sales operation.
 To maintain minimum investment in inventory.
 To maintain adequate accountability inventory assets.
 To ensure an adequate supply of materials, stores spares etc.
minimize stock out, shortage and avoid costly interruption in
operation.
 To control the quantity of finished product.

The fundamental reason for carrying inventories is that it is physically

impossible and economically impractical for each stock to arrive exactly
where it is needed. Even if it were physically possible for a supplier to
deliver raw materials every few hour for example, it could still be probably

22
expensive. The manufacturer must therefore keep extra needed in the
conversion process. Other reason for carrying inventories is summarized
below.

2.4 Evils for Excess Inventory

Inventory being a vital element for the organization, but it is harmful to

hold excess quantity. Some of the evils are:
1. Excess inventory covered the huge amount of capital. Which could
be invested in operations that are more profitable?
2. Excess inventory adds to the cost of carrying, ordering, factory staff
remuneration, space equipment and personnel, insurance, taxes,
pilferage etc.
3. Excess inventory invites risk of deterioration and obsolescence.
4. Price levels of inventories changes sometimes, which may be
unfavorable.
5. Maintenance and packaging, repairing cost automatically increase.

2.5 Factors Affecting Inventory Management

Inventory planning is the way to determine the requirement of raw

materials, spare parts and other items that are necessary to meet production
need. Taking of sufficient working capital, lead time, re-ordering system
also affects in production system. Schedule of purchase and sale in proper
manner, it helps in production system & selling system. Some of the factors
which influencing inventory planning are given below.
1. Working capital
2. Store keeping or inventory control management
3. Total lead time
4. Techniques used to determine for cost.
5. Storage capacity
6. Supply of the item.

23
 7. Demand of the product
8. Price trend and rigidity
9. Credit Policies
10. Import \Export policies
11. Available Information
12. Information about substitute product
13. Plant utilization
14. Technology availability
15. Business cycle
16. Rejection cycle
17. State of health of nation economy.
18. Foreign exchange regulation.
19. International market condition
20. Corporate objectives.
21. Communication system.
22. Delegation Power
23. Location of plant and location of suppliers

2.6 Inventory Cost

Cost Incurred for maintaining given levels is called carrying cost. Carrying
cost varies with inventory size. Because of second world war, American
economy as well as world economy plagued by capital utilization, material
shortage, inflation. Balance of cost lie heart of all the production and
inventory control problems (Killen, 1969).
Some of the factors which influencing inventory cost are given below:
(1) Material costs
(2) Ordering costs
(3) Safety stock cost
(4) Cost of funds tied up in inventory.
(5) Cost of running out of goods
(6) Carrying cost

24
1) Material Costs

These are the costs of purchasing of the goods plus transportations and
handling. This may be calculated by adding the purchase price (less any
discount). The delivery charges and the sales tax (if any).

(2) Procurement/Ordering Cost

These are variable costs of placing of orders of the goods. Each separate
shipment involves certain expenses connected worth requesting and
receiving materials. Examples of these are the tying of the order and
inspection of goods after they arrive. The fewer the orders the lower the
order cost will before the firm. Ordering cost will be for the firm. Ordering
cost can be calculated by the following formula.
A
Ordering Cost = O
Q
Where,
A = Annual Requirement
Q = Order size
O = ordering cost per order

(3) Cost of Funds Tied-up in Inventory

Whenever the firm commits its resources to inventory, it is using funds that
might be available for other purposes. A portion inventories is financed by
trade credit from supplies and involves on costs. If the firm buys
inventories on terms net 30, the inventories may be sold before the firm
must pay its suppliers the balance of the inventory must be financed from
the firm's general funds and involves a cost. If the firm is considering an
expansion of inventories and plans to borrow to obtain funds, they will
have to pay interest on the additional debt. if the firm finances additional
inventory through the sale of common stock, an opportunity cost is
involved. The firm has lost the use of funds for others, profit making
process. What ever the sources of funds, inventory has a cost in terms of
financial resources, excess inventories represents an unneeded cost.

25
(4) Cost of Running Out of Goods

Whenever a firm incurs shortage of production, it incurs cost. If the firm

unable to fill an order, the firm losses its regular customer. If the firm runs
out of raw materials, it may force a costly shutdown of the production
process. Adequate inventory helps reduce additional costs and lost revenues
due to shortages.

(5) Carrying Cost

These are the expenses of storing goods. Once the goods have been
accepted, they become a part of the firm’s inventories. These costs refer to
cost related to holding of inventory over a given time period. Total carrying
costs vary in proportion to the value of inventory; usually they are
computed from the following formula.
Carrying Cost = Average inventory × Carrying cost per unit
Symbolically,
Q
Carrying Cost = × (Carrying cost per unit)
2
The following are examples of different kinds of carrying costs.
(I) Storage Cost
(II) Insurance
(III) Obsolescence and Spoilage
(IV) Damage of Theft

(I) Storage Cost

Maintenance of inventory means store cost. Theses costs include

expenditures made on inventory staff, insurance of items and expenditure
on providing various facilities like floor, space, racks, bins and containers,
materials handling equipment and other provisions for safe and proper
storage items. (Goel, 1992)

26
(II) Insurance

In spite of best precaution, firm must protect themselves against such

hazards as fire or accident in the warehouse. Larger amounts of inventory
require larger amount of insurance.

(III) Obsolescence and Spoilage

When firms hold goods, they expose themselves to the possibility that the
goods will not be saleable when the time arrives. Obsolescence is the cost
of being unable to sell goods because of current market factors deriving
from changes in styles, tastes or other factors. If a product is no longer
wanted, the firm must sell it at a fraction of its value or destroy it. Spoilage
occurs when a product is not saleable because of deterioration during
storage, such as foods that rot, plants that die, garments that are attacked by
moths, candles that discolor or the chemical that decompose.

(IV) Damage or Theft

Although a firm makes every effort to protect goods against damage and
safeguard item against pilferage, goods are damaged and stolen. A portion
of these expenses is not covered by insurance and are losses to the firm. In
some business, particularly retail stores and producing luxury products such
as alcoholic beverages, damage and theft may constitute major carrying
cost.

2.7 Technical Framework

Technical formulation includes the question, which reduce the cost and
increase in profitability. The problem, which is common to all, is how
much to estimate and execute inventory policies. How much should they
buy at a time? How low should they let inventory to fall before they
replenish it? From whom they should buy and how should they ensure for
getting items? but it is not possible to answer the entire questions. It has

27
been possible to answer these varied question or problems faced by the
business units. (Adam, 1993)

2.7.1 Inventory Model

We have already discussed about the different forms of costs then lets see
how the production manager attack the problem fixed unit of given items of
lowest price or produced for stock at a given time. The large quantity
purchase enables the management to reduce the order placing cost incurred
in a given period. Buying a bulk of items also makes it possible to take
advantages of quantity discount and lower handling cost. We have that the
procurement cost decreases, the carrying cost will increase. This is the cost
trade off between the two. If we add the cost graphically, we will obtain the
total cost curve. The optimal order quantity is the point at which annual
total cost is at a minimum. The purchase of large increased size of the
average inventory maintained which is shown below. (Magee, 1995)

Figure No. 2.1

Order-size-cost Relationship
Order-size-cost Relationship

Total cost

A
Carrying
Cost (Rs.)

cost

Ordering
cost

Size of order

28
Since order placing cost are largely independent of the size of the order.
Ordering cost goes down as the order size is increased because fewer order
are placed to reduce the inventory cost.

To illustrate the relationship between those costs let us consider the case of
printing press that needs 1000 tons of newsprint. Of the process of orders
from the manufacture in quantities of 100 tons at time means that ten orders
must be placed whereas only two orders are needed for an order size of 500
tons. As consequences inventories cost such as storage, insurance and
interest, which very with inventory level will be lower and are economic
that belongs to large orders such as quantity discount. Lower ordering cost
and lower receiving cost, a balance must be stock between the inventory
carrying costs, will reflect a compromise and accommodation between the
two costs, will reflect a compromise and accommodation between the two
cost patterns. This compromise occurs at the lowest point in the total cost
curve “A” shown in figure 2.1.

2.7.2 Economic Order Quantity

The EOQ is an important concept in the purchase of equipment as well as in

the storage of goods and transit inventories. It attempts to establish the most
economic balance between the carrying costs and ordering costs determining
the quantities to be ordered. The economic order quantity is that inventory
level, which minimizes the total of ordering and carrying, costs. The question
of how much to be ordered can be solved by the EOQ technique. It always
tries to balance the ordering cost and holding cost. The relationship between
the ordering costs and carrying costs is called cost factor.

In our analysis we wish to determine the optimal order quantity for a

particular time of inventory given, its forecasted usage, ordering cost and
carrying cost. Ordering means either the purchase of the items or the
production. Assume, for the moment that the usage of a particular items of
inventory is known with certainty. This usage is steady throughout the
period of time being analyzed. In other words, if usage is 2,600 items for a
six months period, 100 items would be used each week. Although, EOQ,

29
model can be modified to take account for increasing and decreasing
overtime. We shall not get into these types of complexity.

We assume that ordering cost 'O' is constraint regardless of the size of the
order. In the purchase of materials or other items these costs represent the
clerical costs involved in packing an order as well as certain cost of
receiving and checking the goods once they arrive. For finished goods
inventories, ordering cost involve scheduling a production run for in transit
inventories, ordering cost are likely to involve nothing more than record
keeping. The total ordering costs for a period is simply the number of
orders for that period of items multiply by the cost pert order.

Carrying cost per period 'C' represent the cost of inventory storage,
handling insurance, together with the required rate of return on the
investment in inventory. These costs are assumed to be constant per unit of
inventory of a time. Thus the total carrying cost for a period is the average
numbers of unit of inventory multiply by the carrying cost per unit.

If the usage of on inventory items is perfect steady over a period of time

question of safety does not arise. Where average inventory in units can be
expressed as Q/2 total inventory cost then are the carrying cost plus
A Q
ordering cost or T  O  C
Q 2

AO
Optimum Quantity (Q) =
C

Where,
Q = Optimum quantity
A = Annual requirement
O = Ordering cost
C = Carrying cost

It indicated that Q is the quantity (in unit) order and is assumed to be

constant for the period. This problem is to illustrate in this figure although
the quantities demanded, is a step function. We assume for analytical

30
purpose that can be approximated by a straight line. We see the zero
inventories always indicate that further inventory must be ordered.

Figure No. 2.2

Graphic Inventory Model
EOQ
Inventory Unit

Q
Average Inventory
2

Time
EOQ can be determined by three approaches
 Formula approach,
 Trail and error approach and
 Graphical approach

Formula Approach
This method, we calculate EOQ by following formulas.
From Economic Order Quantity Statement, we have
Total ordering cost = Total carrying cost
Total ordering cost = Number of orders × Ordering cost per order
Annual Requirement
= × Ordering Cost per Order
Order Size
Symbolically,
A AO
Total Ordering Cost = ×O =
Q Q
Again, Total carrying cost = Average quantity × Carrying cost per unit
Ordering size
= × carrying cost per unit
2

31
Symbolically,
Q QC
Total carrying cost = ×C=
2 2
Now, we have
AO QC
=  Total ordering cost = Total carrying cost
Q 2
OR, Q2C = 2AO
2AO
Q=
C
AO
EOQ =
C

Where,
EOQ = Economic Order Quantity
A = Annual Requirement
O = Ordering cost per unit
C = Carrying cost

Trial and Error Approach

By this method we can calculate EOQ following steps:
Table No. 2.1
Calculation of EOQ by Trail and Error Method
Step 1 To estimate number of order
Step 2 Order size To find out order size
Order size = Annual Requirement/No. of order
Step 3 Average Quantity To find out the average quantity
Average quantity = order size /2
Step 4 Carrying cost To find out the carrying cost
Average quantity × Carrying cost per unit
Step 5 Ordering cost To find out the ordering cost
Number of orders × Ordering cost per order
Step 6 Total cost To find out the total cost
Carrying cost + Ordering cost
This approach indicates from which point has the minimum total cost, when
the ordering cost is equal to carrying cost.

32
Graphic Approach

Total ordering cost curve is increased with the no of orders increase but it
reduces the carrying and vice-versa. Addition of ordering cost curve and
carrying cost curve represent the total cost. The point where the total cost
curve is minimized represents the EOQ.

Figure No. 2.3

Y EOQ Graphic Figure

Total cost

M
Carrying
Cost (Rs.)

cost

Ordering
cost

O X
Order size (Units)
In the above figure, OX shows order size and OY shows the total cost if
order size is increasing no. of order is decreasing, so the ordering cost curve
is decrease and just opposite carrying cost curve is increasing. The total
cost is the summation of carrying and ordering cost. Total cost is
minimized at M.

Although EOQ is easier, techniques to solve the problem of how much to

purchase at once but it has limitations/assumptions they are:
 Uniformity of demand,
 Instantaneous supply,
 No consideration over discount factor and
 Stable demand

Generally, inventory management covers the function of:

33
  Purchasing
 Store keeping
 Issuing and Pricing

2.7.2.1 Purchasing

Purchasing is the most important function of material management as the

moment an order is placed for the purchase of materials, a substantial part
of the company’s finance is committed which affects cash flow position of
the company. Purchase management plays important role in the
manufacturing companies. The process of inventory management begins
with purchasing. Firm should purchase raw materials, supplies at the right
time with good quality of right quantity and with cost effectiveness.

Purchase management should be effective otherwise, it hampers in the

quality of production and cost of the product. Scarcity of raw materials also
hampers in production, so, purchasing department should take greater
responsibilities. The department should analyze the existing procurement
policy and should tune with the overall organizational objectives and
policies. Efficiency of any business depends upon having materials, supply
and equipment available in good price. Purchasing, therefore, should be
carefully planned for effective inventory management.
Objective of Purchasing are:

The reasonability of the purchasing department is to buy materials of the

right quality at the right time, at the right price from the right source with
delivery at the right place.

The following are the main objectives of the purchasing:

 Procurement of required quality and quantity of materials at their
best price, not necessary the lowest price.
 Procurement of materials, which best suit the product and the
purpose for which they are intended.
 Purchasing for the time ultimately been a schedule, sufficiently in
advance of the demand of the production department so that the
production work shall not suffer due to lack of materials.

34
  Buying the quantity, which in neither too much that involves
belonging of capital nor too little that holds up the regular supply for
production.
 Improvement of product with reference to quality and the
distribution by means of selection of adequate materials.
 Maintaining continuous supply to insure production schedule at a
minimum investment.
 Avoidance of duplication of materials, leaving to waste of materials
and equipment.
 Maintenance of company competitive position is the market by the
customer having company’s quality standards in accordance with the
demand of customer.
 Creation of goodwill for the company through dealing with
suppliers.
 Developing, full-operation and co-ordination and maintenance of
internal relationship among various department of the company.

The main objective of the purchasing should be uninterrupted and smooth

production to provide regular service to the customers at possible cost.

2.7.2.2 Store Keeping

The best method of maintaining materials properly is store keeping. Store

keeping is the aspect of inventory control, which is concerned with the
physical storage of goods. The responsibilities of store keeping management
are to receive materials, to protect them in storage from unauthorized
removal, to issue the materials in the right quantities at the right time in the
right place and provide these services promptly and at least cost.

Store keeping refers to the safe custody of all materials stocked in stores for
which the store keeper acts as a trustee. It simply means that the materials
are to be stored in stores in such a manner that there is least possibility of
theft, fire, damage and they may be easily located and issued whenever
required for use.

35
Store keeping embraces all the activities right from the receipt of supplies
of raw materials, spare parts, equipment, their proper storage and issue to
used department. This also includes the storage of finished product before
dispatch to dealers. These activities involve maintenance of proper records
of all the transactions.

The importance of store keeping has not been properly recognized by the
manufacturing organizations so far. Many organizations spend lavishly on
machines and wages while store keeping is ignored and stores are not in
proper place and condition. Storekeepers are also not paid attention in
comparison to others in similar status. All these causes are responsible for
wrong or short issue. Loss of stock of raw materials unexpectedly running
out of stock and preparation or correct vouchers all these lead to theft and
pilferage of stock and delay in production.

In the light of the above explanation store keeping can be described as the
keeping of materials in stores in a scientific and systematic way.
Objectives of store-keeping are

The Major objectives of store-keeping may be stated as follows.

 Receiving, handling and issuing goods economically and efficiently
 Using the storage available space and labor effectively.
 Protection of all goods in stores against all losses from fire, theft and
obsolesce.
 Minimizing the investment on inventories.
 Maintaining regular supply of raw materials at all items when
properly authorized.
 Facility ordering of required materials
 Minimizing the inventory holding cost

To achieve the above objectives, a firm generally used bin card and store
ledger as a store controlling devices.

36
2.7.2.3 Issuing and Pricing

Pricing the inventory is one of the most interesting and it widely matters in
accounting process. Many organizations are interested in the various
methods of pricing inventories because it has a direct effect on the income.
Inventory valuation approach is important in the aspect of income tax
problem. One method of inventory valuation may lead to lower tax liability
than other inventory valuation method. There are many methods of
inventory valuation but most significant method is cost and other method is
the lower of cost or market. Both methods give different results.

2.7.3 Re-order Point

The problem, how much to order is solved by determining the economic

order quantity. The economic ordering discussed above assumptions but
sometimes these are found to be unrealistic because in real word situation
there should be gap between the time of placing order and the receipt of the
delivery. This time gap can be due to delay in transportation, loading and
many other factors, which are beyond control.

If order is placed when the stocks are over, then other is always a chance
that the firm may suffer the situation of shortage. Another alternative is to
place the order before the stock is completely exhausted i.e. to order in
advance is a difficult exercise. If an order is placed too early then it may
result in pilling up of inventory for the longer period and it is placed too
late then this may result in shortage. Both these situations are not in the
interest of the firm. The problem it is known as 'what to order' and is very
important for the organization in other words the choice of appropriate
point at which an order to replenish the inventory is of great significance.
The level of inventory at which re-order should be placed is known as
known as re-order and re-order point. (Goyal, 1992) To determine the re-
order level under certainty, following factors should be taken in to account.
 The time intervening between the date of order of goods and the
arrival of supplies,

37
  The average quantity consumed with in stipulated them period and
 The margin of safety.

The ordering level revised from time to time on consideration of the

exigencies relating to supplies of a demand of goods. (Goyal, 1992)

Under certainty situation, re-order point is simple that inventory level

which wile be maintain for consumption during the lead-time.

Re-ordering point is calculated as following formulas.

Re-order level = Lead time × Daily consumption
Re-order level = Maximum consumption × Maximum lead time
Re-order level = Minimum level + (Lead time × Daily consumptions)

Figure No. 2.4

Re-ordering Point Under Certainty

200

150
Order point (Unit)

100

50

O 10 20 30 40 50
Lead Time (days)
In our example, the re-order point is computed under the assumption of
certainty. It is difficult to predict usage and lead-time accurately. The
demand for material may fluctuate for day by day or from week to week.
Similarly, the delivery time may be different form the normal lead-time. If
the actual usage increase of the delivery of inventory is delayed, the firm

38
can face a problem of stock out. The stock out can prove to be costly for the
firm. Therefore, in order to guard against the stock out, the organization
with a policy of safe guarding their interest. These uncertainties maintain
the level inventory at some desired minimum level. This minimum level of
inventory to cover some unforeseen and uncalled for situation is known as
'safety.' Alternatively a safety stock can also be defined as the average stock
available in inventory when the fresh supply arrives.
Factors affecting choice of safety stocks are :
 Uncertainty in demand,
 Degree of insurance of any item,
 Uncertainty in load time and
 Size of the batch

Assume in the previous example the reasonable expected stock out is 10

units per day. Thus safety stock is maintained which is as follows:
Re-order point = Safety Stock (Daily Consumption × Lead Time)
= 5 days (20 units + 10 units)
= 150 units

Figure No. 2.5

Re-order Point Under Uncertainty
Maximum Inventory

200

150
Order point (Unit)

100 Safety stock

O 10 20 30 40

Lead Time (days)

39
I) Situation, where demand rate various

Safety stock = (lead time) × (maximum demand rate - average demand rate)

II) Incases where both lead time & demand are fluctuating:

Safety stock = (maximum lead time × maximum demand rate) - (average

lead time × average demand)

III) Incase of lead time varies & demand rate is uniform

Safety stock = (maximum lease time - average lead time) × demand rate

The proper amount of safety stock to maintain depends on several things.

The greater the cost of varying inventory, the more costly it is to maintain a
safety stock, all other things being equal. Determination of the proper
amount of safety stock involves balancing the probability and cost of a
stock-out against the cost of carrying enough safety stock to avoid this
possibility. Ultimately, the questions reduce to the probability of inventory
stock out that management is willing total rate. (Goyal, 1992)

Stock Level

This stock keeps tracks of the goods help by the firms the issuance of goods
and the arrival of orders. It is prepared for recording as well as accounting
of goods in stock. Thus, this stock helps to maintain the record of inventory
at appropriate level.
For simplicity the stock level are divided in following headings.

Maximum Stock Level

The maximum level represents that level of stock above which the stock
should not be allowed to rise. This level is to be fixed keeping in mind
unnecessary blocking of capital in stocks.
The quality is fixed so that there may be on over stocking. It is computed
as:

Maximum Stock Level = Reorder level - (Minimum Usage - Minimum

Delivery Time) + Re-order Quantity

40
The maximum stock level of fixed by taking in to account the following
factors:
 Amount of capital available for maintaining stocks,
 Go-down space available,
 Rate of consumption of the material during the lead-time,
 The time lag between indenting and receiving of the material,
 Possibility of loss in stores by deterioration and evaporation and
 Cost of maintaining stock.

Minimum Stock Level

It is that level below which the inventory of any item should not be allowed to
fall. It is known as safety stock. The main object of fixing this level is to avoid
unnecessary delay or amputation of production due to shortage of materials.

It is computed as

Minimum stock level = Re-ordering level - (Normal consumption × Normal

re-order period)

In fixing this level the following factors are making into consideration.
 Lead time, i.e. time lag: between indenting and receiving of material,
 Is the time required replenishing the supply?
 Rate of consumption if material during the lead-time and
 Nature of the material: minimum level is not required in cost of a
special material, which is required against customer specific order.

Danger Stock Level

Generally this level is fixed below the minimum level and represents the
stage where immediate steps are taken for getting stock replenished. In
some cases, danger level of stock is fixed above the minimum level but
below the re-ordering level. (Sahajahan, 1997)

It is computed as follows:
Danger level = Normal consumption × Maximum energy period

41
Average Stock Level
It is the average level of stock that should be maintained throughout the
year. Average stock is the cost of storage departments. (Sahajahan, 1997)
It is computed as follows:
Average stock level = 1/2 (Maximum × Minimum)

2.7.4 ABC Inventory Analysis

In a large manufacturing company where stocks of direct materials and

component parts consist of thousands of different items, companies find it
useful to divide materials, parts, supplies and finished foods into sub-
classifications for purposes of inventory control. Many business firms have
introduced a system of analyzing stocks by value categories known as
"ABC analysis". Under this method, inventory items are ranked according
to investments in each item in the inventory. The large value items are
grouped together into one class for inventory control purposes. The lowest
value items are grouped into another class and those items which are of
intermediate value are grouped into a "middle" classification. High value
items are labeled "Class A", middle value items, "Class B", and low value
items, "Class C". This division reflects the concept that it is uneconomical
to spend the same effort on all items. As the items are classified in the
important of their relative value, this approach is known as proportional
value analysis (PVA). As in most activities, a small part of the total
inventory makes up greater part of the total investment. (Magee, 1985).

The firm keeps various items in inventory. All items in the inventory
cannot be treated easily. They are differ in value and can follow a selective
control system. A selective control system is the ABC analysis. The group
"A" item consists of highest rupee value item. "B" item consists of middle
rupee value and "C" item consists of lowest rupee value item. (Pandey,
1993)

42
All items in stock are listed in order of descending values showing quantity
held and the corresponding value of the materials (See Table 2).
The percentages given in Table 2 are only guidelines and are subject to
change according to prevailing circumstances and choice of management.
Table 2 shows that only 20% of the items represent 72% of the total costs.
Table No. 2.2
Stock Analysis Under ABC
Class Items Investment
No. of items Percent of total items Total cost Percent of total
A 20,000 20% 2,88,000 72%
B 30,000 30% 76,000 19%
C 50,000 50% 36,000 9%
1,00,000 100% 4,00,000 100%

The items under Class A are subject to greater continuous control and
planning than are the items under other categories. The Class A item
account for high annual consumption costs and correspondingly high
investment in inventories. Because of high investments in Class A items,
there would be frequent ordering and low safety stocks. This also assumes
that the cost of placing and following up orders is relatively low in
comparison with the cost of carrying excess inventories. A number of
things can be done to reduce inventory of 'A' items. For example, A items
can generally be ordered for specific runs, the economic order quantity
could be applied; local suppliers could be asked to stock supplies so that
delivery time can be shortened. On the other hand, where the total annual
purchase cost is relatively low as in the case of Class C items, there will be
less frequent ordering and higher safety stocks. Items in Class C receive the
least amount of control and should be under simple physical controls such
as the two-bin system with safety stocks.

A graph can be prepared to show quantity and amount of items in different

categories in descending order of value (Fig. 2.6).

43
 Figure No. 2.6
Classification of Items According to ABC Analysis
100

90

80

70 "C" item (Low

% of Value

rupee value)
60 "A"
50 items "B" item
(high (Medium rupee
40 rupees value)
value)
30

20
0 20 30 40 50 60 70 80 90 100
% of Inventory Item

Class 'A' items which represents only 20% of amount of quantity for over
72% of the total value in Rupees. The opposite relation holds for category
'C' where 50% of total amount in quantity. Category 'B' occupies the middle
place items. A and B are jointly represent about 50% of the total units and
91% of the investment. More than half of the total units are item 'C'
represent merely 9% of the investment. The highest control should be
exercised on item 'A' in order to maximize the profit on its investment. In
case of 'C' simple control will be sufficient. High rupees or value is treated
most carefully at first time.

An example of the treatment that would be given the three dimensions is,

Item "A": In item "A", the economic order quantities are carefully calculated
for each time. The uses rate and the procurement costs are reviewed
continuously with each other. Tight inventory control should be maintained.

Items "B”: In item "B", the economic order quantities are developed
periodically. Normal inventory control is exercised.

44
Items "C”: In item "C", the specific order quantities are not made. Roughly
estimate the inventory or the quantities that will be sufficient for long
period are ordered. Inventories are checked physically once in every six
months or every year to determine if new order should be placed.

2.8. Inventory Control

As the term inventory control has two functions, which are quite different
but related to each other only in that they both required the maintenance of
adequate record of inventories as well as receipt and issues. These functions
are accounting control and operating control.

1) Accounting control of inventories is concerned with the safeguarding

of the following: Taking property in the form of raw materials, work-
in-progress and semi-finished as well as finished products, and the
proper recording of receipt and consumption of materials as well as
flow of the goods through the plant in to finished stock and
eventually to customers.

2) Operating control of inventories is concerned with maintaining

inventories at the optimum level keeping in view the operational
requirements and financial resources of the business.

Every organization holds inventory at necessary level. Under and over

stocking of an inventory is evil for business. Therefore, inventory control
may be defined as the planning, ordering and scheduling of materials used
in the manufacturing process. It is possible to exercise control over the
three types of inventories recognized by accountant i.e. raw materials,
work-in-progress and finished goods.

2.8.1 Benefits of Inventory Control

The Primary purpose of holding inventories is to meet the demand from

indenters or users. The simplest way of satisfying user is to hold large
amount of stocks. However, holding large stocks means high inventory

45
carrying charges (such as storage and deterioration expenses) and possible
losses caused by price declines. Similarly, shortages in inventories interrupt
production, making machines and employee idle and causing sales loss.
Hence, there is need of for inventory control or that is sometimes termed as
‘inventory planning’.

It would be appropriate to mention that effective inventory control/planning

system secures various benefits to the concerned business unit. Some of the
important benefits of inventory control system are as follows:

 It enables the material to be procured in economic quantities i.e. it

obtains economics through a reduction in needless variety of items
carried in stock.
 It acts as a cushion against an unpredictably high rate of usage.
 It eliminates delays in production caused by the non-availability of
required materials.
 It works as a check on the over accumulation of inventories and
thereby results in minimum investment consistent with production
requirements.
 It reduces inventory losses caused by inadequate inspection of
incoming materials and losses due to obsolescence, deterioration,
waste and theft while in storage.
 It ensures proper execution of policies covering procurement and
use of materials. It also facilitates timely adjustment with changing
conditions in the market.

It also serves, through ‘balance of store’ records, as a reliable basis for

production planning and preparation of financial reports.

2.9. Inventory System

An organization keeps different types of items in inventory to meet its

needs. In order to know the concept of inventory and its application in our

46
real practice, it will be better to be clear about the inventory system
concepts.

The concept inventory system can be broadly viewed as follows.

a) Multi-stage Inventory

When parts are stocked at more that one point of the sequential production
process, there are multi-stage inventories, these parts must eventually come
together into finished goods.

b) Multi-echelon inventory

Multi-echelon inventories are inventories of products at the various levels,

or echelons, in the distribution system. On the other words, it deals with the
management of inventories at different points, such as factory, warehouse,
retailer and customer, of distribution system.

2.9.1 Inventory control procedure

There is various inventory management systems. They are used to follow

according to adequate need of control over each inventory item and
ensuring accuracy of stock on hand. The following are some controlling
systems.

1. Fixed order- sizes system

Fixed order sizes system is a fixed quantity of good is ordered wherever

inventory decrease below to predetermined level. The time between ordered
various with the demand rates but the size of the order remains constant. In
practice, fixed- order-size systems are generally called perpetual inventory
system.

2. Two-Bin system

The two bin system an application of the fixed order size approach is one of
the oldest inventory system, where all materials or given type is the second
is put into use and replacement order for a fixed amount is dispatched
immediately.

47
Interval system, periodic reviews of inventories are mode at which time
they are restored to some predetermined optimum level, no running records
of daily inventory activities are kept.

The status of the inventory is known only at the time of the review, which
may take place weekly monthly, quarterly or yearly that are commonly
called periodic inventory system.(Star and Devid, 1977)

3. Cardex File System:

A cardex file system is a manually operated inventory system, in which

inventory card represents each stock item with transaction kept on the
cardex. When transaction sales the entry, with corresponding date is
recorded. When physical inventories are taken cards are adjusted to show
current inventory levels.

4. Management Accounting and production information control system

(IBM’s MAPICS).

It is an IBM’s computerized common data base system and manufacturing

for implementation of planning. Key models to control are product data
management, production costing and control applications.

Inventory management application reduces times, increase overall plant

capacity, and reduces investment stock and space improves customer
service and provides inventory data and reports.

2.10 Inventory Reports

Inventory reports main objectives are management for exercising effective

inventory control and appropriate decisions. Inventory reports serve as
means of communication usually in the written from of facts relating to
inventory which from all level of management brought attention who can
use them to take suitable action for the purpose of inventory control.
Purpose of inventory report is to achieve the result of inventory control. It
is difficult to give the design of inventory reports, which will be inventory

48
reports suitable for all organizations. Design inventory reports should be
according to the individual requirements of the organization.

General inventory reports prepared are given the table:

Frequency Style of Sent to Contents Purpose of Report
Reports
Weekly Material Works Actual quantity of Controlling use of
usage and manager material used against materials and
waste report standard quantity elimination of
specified excessive wastage,
scrap, spoilage
defectives
Monthly Material price Purchase Comparison of actual Watching efficiency
variance manager prices of materials of the purchase
report with standard prices of department and trend
materials for of price movements
quantities purchased
Monthly Purchasing Purchase Comparison of actual Determining the
report committee purchase consumption result of the policies
and stock figures decide upon
Special Inventory Top A study of slow Controlling
report management moving stock, investment in
dominant stocks and materials
absolute stock
Special Physical Storekeeper Discrepancy between Controlling storage
verification physical and book of materials
balance
Special Materials Top Cost of idleness due to Avoiding stoppage
shortage management stoppage of of production due to
report production for want of shortage of materials
material
Source: Bulletin of RDL 1992.

49
2.11 Review of Related Studies

There are many researchers for the study of inventory management in

Nepalese perspective. In the sector of public & private enterprises some
researcher study on the manufacturing public enterprises and some
researcher study on the trading enterprises. This previous studies cannot be
ignored because they provided the foundation to the present study, so that
the continuity of research is ensured by linking the present study with the
previous research studies.

Review of literature is the available literature in owns field of study. The

literature study provides the researcher with the knowledge of the status of
their field of research. The library is rich storage for all kinds of published
materials including thesis, dissertations, business reports and government
publications. The purpose of literature review is to find out what research
has been conducted in owns chosen field of study and what remains to be
done. It provides the foundation for developed for testing. The literature
survey also minimizes the risk of pursuing the dead ends of research.
In this study, attempts have been made towards the review of literature
regarding inventory management. Review of dissertation, Articles and
Magazines are done for study of inventory management and control.

2.11.1 Dissertation Consists of Various Studies About The Inventory

Management and Control.

Their findings and recommendations are presented as follows:

1. Bindo Raj Thapa (2005) "Inventory Management System of Royal

Drugs Limited

Thapa has made study about inventory management system of Royal Drugs
Limited. Mainly this study focused on the problems of inventory
management and control system of Royal Drugs Limited objectives are as
follows:

50
  To identify the present position of inventory of Royal Drugs Limited.
 To analyze the inventory management of Royal Drugs Limited.
 To provide suggestion based on the analysis.

Major Findings are as follows:

 Com. has not conducted any ABC analysis at the period of this research.
 When and how much to order is estimated haphazardly by the Royal
Drugs Limited. In other wards, a purchase quantity made by Royal
Drugs Limited differs from year to year and are not in EOQ.
 The Royal Drugs Limited has established a separate unit for
management of inventory although the separate unit is unable to
management the inventory.
 The company has been able to produce goods quality medicine because
of its quantity control.
 Company's production is not regularly and decreasing order.
 Annual purchase made by company differs from year to year and highly
fluctuated.

Recommendations:
 The drugs company should not define its goals and objective clearly
with regards to minimized inventory costs. Company has store only with
store keeper and store officer. There is need of separate management
department.
 Company should not use any kind of scientific tools and techniques so
that there cost is maximized. Scientific inventory management.
Techniques are EOQ, reorder level, safety stock and lead time. It should
not be identified properly and lack of safety stock. Its bad impact from
one month before company’s production breaks for few days.
 Company has not categorized its raw materials inventory in A, B, & C
group at present. Its result company is bearing the maximum loss.
Company categorized A, B & C till 2050 and that time company's
financial condition was considerable.

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  In a simple way bin card should be used to manage inventory. This card
includes the name of items, quantity and unit price, quantity issued and
balance of stock.
 Material purchase system using EOQ method is best for company to
make production target oriented.
2. Dinesh Kumar Pant (1999): Impact of Inventory of Over the profit
(A case study of Gorkhapatra Corporation)
Finding in his study and given recommendation is as below:

Findings:
 Gorkhapatra corporation has not been used the optimal inventory level
i.e. EOQ to procure the required inputs.
 Inventory turnover is flexible over the study period and net profit margin
is inconstant in various years.
 Return on total assets is more flexible in previous but slightly consistent
in later year.
 Regression and correlation analysis has shown the positive relationship
between the inventory, costs and profit as per the analysis done.
 Correlation analysis has shown both the independent variable have
highly positive relationship with the dependent variable profit as
indicated by the correlation coefficient 0.87 and 0.827
 Coefficient of regression shows the linear relationship between
inventory cost and material cost.

Recommendation
 The corporation needs to apply the appropriate tools and techniques of
inventory management for maintain optimal level of inventory thereby
reducing ideal lost at minimum possible level as it has the direct impact
over the profit.
 Gorkhapatra Corporation should adopt the reliable procurement
procedure important materials with the help of good purchase plan to
avoid the possible crisis of stock out.

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  The formality of making decision regarding the tender procedure a
placing the order should be shortened to increase its competitiveness.
 The corporation should maintain its own warehouse as it has been
suffering form the higher amount of holding cost for leasing the
warehouse of outside parties even thought it has adequate land and other
resources necessary for its arrangement.
 The recruitment and selection procedure of qualified personnel handling
the inventory should be unbiased on the basis of which the corporation
will be able to acquire the efficient technician’s regular training on
inventory and store management should be given.
 The vision of top authority should be clear for solving the problems
appeared in course on inventory management system (Pant,1999)
3. Indra Shrestha (2000): Inventory management of manufacturing
industries in Nepal (With special reference to quick foods)

Indra Shrestha has made a study as inventory management of

manufacturing industries in Nepal (with special reference to quick foods.)
His major findings and recommendations are as below.

Findings
 The selling price of noodles (Thai Foods) was constant for the fiscal
year 2051/056 but cost price of Noodles was increasing from year to
year with different rate. There is no correlation between selling and cost
price because if cost price increases the selling price should also
increase.
 The selling price and cost price of cheese ball was increasing from year
to year. There is highest degree of correlation between cost price and
selling price. The company has not classified its inventory for the
purpose of control and equal attention for the entire inventory hold in
the store but they are using bin card for inventory.

53
  When and how much to order is estimated haphazardly by Thai foods
and quick Foods P. Limited different from year to year and are not in
economic order quantity.
 This purchase made by company is increasing from previous year to this
year. It shows good production of company
 The company has maintained safety stock but company is not using re-
order level for when to re-order.
 Raw material turnover ratio of some inventories is increasing year to
year and some are fluctuating year to year but this ratio was satisfactory.

Recommendations
From this study following suggestions have been suggested.

Record keeping system should be scientific. It means the company should

define its goals clearly with regards to its input and output separately i.e. the
quantities, time period should be specified. So factory can locate the post
records. It is also helpful for researchers.

Some raw materials were imported from Japan, New Zealand, Singapore, India,
Korea and China. This should be discouraged and alternative should be
searched within the nation as possible.

In case of Thai foods the cost of price of Noodles for the five,fiscal year
2051/052 to 2055/056 is increasing but selling price is constant i.e. some price
for five fiscal year. If cost price increases then selling price should also
proportionally increase for good profitability.

Thai foods and quick Foods P. Ltd was not conducted the ABC analysis. The
company should follow scientific tools and techniques i.e. economic order
quantity and economic lot size formula which help to reduce the relevant total
cost for manufacturing the product. The output obtained from quantitative
analyzes results the lowest cost and consumer can use with low cost than
company can increase their selling.

54
4. Kashi Joshi's Study (2001)

He studied on topic of inventory management of Herbs Processing and

Production Company Ltd. He found the following problems the area of
inventory management in HPPCL like.
 What types of inventory problems do they face?
 Do they have any plan for inventory?
 What are the bases of such plan?
 Are there any plans and policies to increase profit reduce expenditure
through improving size of inventory in future, if yes what, if no. why?
He set some objectives, which are given below:
 Identify present position of inventory in HPPCL.
 What types of problems faced by HPPCL in the management cost and
profit that should be identified.
 Provide the appropriate recommendation and suggestion improvement
of inventory management in HPPCL on the basis of above study and
findings.

He concluded after study, if the company wanted to be success, it was

necessary to apply the theoretical and practical methods in collection,
production, distribution management, marketing, proper remuneration and
rewards and punishment etc. The company had given extra facilities and
inspiration to the farmer to produce the raw materials to reduce the loss of
inventory expenses. Transportation high change and loss of company would
reduce if the company were able to fulfill desired raced materials from private
resources.

5. Krishna Narayan Shrestha (2000): Inventory management in Royal Drugs

Company limited

Krishna Naraya Shrestha has made a study which is concerned that in what
extent the company is applying the inventory management techniques to
minimize the cost of inventory which directly affect the price of Drugs.

55
His major findings and recommendation are as below:

Findings
 Required raw material for the production of different types of Drugs are
imported by the company from India, China and other third world
countries on global tender agreement.
 The company has purchased some material from other than listed
supplier and producers of the company.
 The company has purchased some material at higher price although
there is the possibility of purchasing at lower price.
 The company has purchased more raw material than requirement.
 The valued of closing inventory of raw material is in increasing from
year to year.
 The company has not determined the re-order level, maximum stock
level and minimum stock level
 The company has not following scientific inventory management
technique i.e. economic order quantity model for purchasing different
types of raw materials.
 The company has prepared purchase budget of raw material but it is
highly differ from the actual purchase
 The investment of inventory stock of RDL is large and the value of
inventory stocks is in increasing from year to year.
 The company has not applied ABC analysis technique to control the
various types of inventory in the store.
 The company’s purchase position of different types of material is highly
differing from year to year.

Recommendation
 Purchase plan should be prepared of different types of raw material
with the proper cooperation among the planning, purchasing storing,
and production, marketing and sales department to avoid the
excessive investment on inventory.

56
  The popular scientific inventory management techniques should
apply by the company for purchasing varieties types of raw material
so as to maintain optimum level of inventory and to minimize the
total inventory cost i.e. carrying and holding cost.
 The selective inventory model should apply by the company for
control the inventories in the store. ABC analysis divides the
inventory into three groups i.e. ABC according to their usage values
helps to apply proper degree of control for different group of
inventory minimize the investment on inventory and minimize the
cost of storage.
 Minimum, maximum and recording level for each type of material
should be fixed by the company to avoid the over stocking of
different types of material.
 The recruitment and selection procedures of efficient personnel
handling the inventory should be unbiased on the basis, which the
corporation will be able to acquire the efficient and skilled
technician, and require giving regular training about on inventory
management.
 For the timely procurement and supply of inventory items, reliable
supplier should be selected and RDL should impose appropriate
actions to them if they follow against the term and condition.
 The frequent change in top level management creates the unstable
environment in the company, which leads the company backwards so
the post of general manager should be professionalized.

6. Laxmi Pandey (2000): Inventory management:

(A case study of Gorkhapatra Corporation.
Laxmi Pandey had also studied about the inventory management of
Gorkhapatra Corporation, On her study the following major findings and
recommendations are as follows.

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Findings
Major finding in her study are tentative solution for the question about how
much to buy and when to order and buy to maintain proper balance of
inventory to fulfill the corporation’s requirement.

Recommendation
Following recommendations are given by Laxmi Pandey on the basis of her
study.
 Corporation should follow the EOQ model for minimizing the
inventory cost.
 To maintain the inventory smoothly, ABC classification should
adopt by the corporation.
 Ledger cards can be used by the corporation to manage inventory. It
contains the column for inserting the data or order and its receipt
with date and quantity issued and sold. In this card, name of the item
number, unit price, usage rate, supplier’s name the percentage of
carrying cost and the ordering cost should be maintained.
 The scarp material (unsold stock or wastage) should be recycled with
in the corporation, so that, cost of some possible extent can be cut-
down. Hence, the corporation should setup the recycling sector.
 For getting skilled technicians, the process of recruitment and
selection should be unbiased.
 Record keeping system should be scientific, so that, the corporation
can locate the past records which are also helpful for the researcher.

7. Liladhar Dhital (1995): Inventory Management.

(A case study of Nepal Food Corporation)

Findings in his study and given recommendation are as below:

Mr. Liladhar Dhital has conducted the research work on the topic of
inventory management (A case study of Nepal Food Corporation). The
main objectives focused by him were to analyze the various related
variable, like purchase, sales demand and food quota of Nepal Food

58
Corporation and to find out their trends. The nature of data used was both
primary as well as secondary. The primary data were collected through
interview

With personal observation, the secondary data were collected from the
unpublished and published materials such as journals, articles and books
concerned with respective corporation.

Mr. Dhitaxl has pointed out some conclusion based on major findings.

Under food grains purchasing the domestic purchase is more fluctuated one
greater than import. Primary market purchase is made the paddy, maize,
wheat, pulse but rice is purchased only in open market. The relationship
between edible cereal production and requirement is negative etc.

8. Narayan Bahadur Karki (1999) has studies on the “Inventory

management and control of Sajha Swasthya Sewa” for his degree
thesis some major points started by Karki are reviewed below.
 The main objectives of the study are to analyze the present system of
inventory management in Sajha Swasthya Sewa. This study is based
upon quality as well as price aspect.
 To access the types of inventory maintained in Sajha Swasthya
Sewa.
 To examine the techniques being employed to manage the inventory
in Sajha Swasthya Sewa.
 To suggest proper inventory model to Sajha Swasthya Sewa based
on the analysis.

From the analysis and interpretation of available data the following Mr.
Karki has made conclusions as the major findings is derived;
 The purchase quantities made by the organization differ from year to
year are not in economic order quantity.

59
  In Shaja Swasthya Sewa the economic order quantity model is not
applied and the organization has maintained the safety stock which is
highly fluctuated and estimated roughly.
 The organization has not categorized its inventory for the purpose of
control and paid equal attention for the inventory held in the store.
 The annual target made by the organization differs from year to year
and highly fluctuated.

On the basis of analysis and the conclusion, the following recommendation

have to improve the state of affair of existing inventory management
system of Sajha Swasthya Sewa has been forwarded,
 The organization should define its goals and objectives clearly with
regard to its inputs and outputs separately.
 The organization should follow the quantitative models because with
the application of economic order quantity formula and economic lot
size formula or selling/distribution the total relevant costs for both
can be minimized.
 Sajha Swasthya Sewa is not adopting the ABC analysis, so the
organization should categorize its inventory.
 Ledger card can also be used to manage inventory in a simple way.
 The frequently changing the board member including chairman and
General Manager has been found as disturbance for the effective
management.

9. Ram Bahadur Rawal Kshetry (2003): Inventory Management

(A case study of Agriculture Inputs Corporation with special reference to
chemical fertilizer in Kathmandu valley)
 The procurement procedure followed by the corporation are i)
estimation of requirements ii) inviting tender iii) evaluation of bids iv)
placing the order v) dispatch orders to clearing and forwarding agency.

60
 Except global tender are procure the fertilizer through negotiation,
through assistance from donor countries and agencies, through
agreement of government.
 There are 196 institutional and Pvt. Dealers to chamalie the fertilizer
to the farmers in Kathmandu valley but they don't get adequate
fertilizers, as they need to distribute.
 The education level of farmer in Kathmandu valley is poor for right
mix of fertilizers to be used in farm. They are following urea only,
which lead the problem of inventory management.
 In AIC targeted supply of fertilizers and actual supply various
largely every year. So, it the case with Kathmandu valley also? The
most important aspect of inventory management is to match the
regular supply, demand and purchase of inventory components. If
supply targeted supply don't match each other then there would be
either under stock position or over stock position.
 There is rate problem due to dependence on foreign country, in
accessible memorable roads for hilly regions of Nepal have created
inventory management problem. However, there is no such problem
in Kathmandu valley
 For the efficient management, the AIC has not taken any measure
regarding the improvement of its inventory management practices.
AIC don't take any action on supplier who delays supply of ordered
fertilizers.
 In the conclusion, AIC is applying scientific techniques of inventory
management, which is the most crucial point in AIC. Despite it there
are several internal and external causes not to be used scientific
techniques but AIC is neglecting the inventory management almost
completely. This is the matter of misfortune to the corporation, to
farmers, as well as to the nation as a whole.

61
Suggestions:
 AIC should make an effort to match the targeted demand and actual
supply to overcome to overstocking position or under stocking
position or out of stocking position of inventory.
 For the timely procurement and supply of the inventory items AIC
should not depend on the other sources except through global tender
because this source is more reliable, economic considering of season
to be required of chemical fertilizers, lead-time, transportation, time
process to be taken by tender, tender should be called.
 According to provides valuable information to the decision makers
this can serve the controlling function and important function of
management if records and classified properly, costing of different
factors related to inventory of AIC requires sound classification and
definitions of activities.
 They should attempt to use the scientific models like economic order
quantity (EOQ), ABC analysis, reorder point etc. So that inventory
problems whether it is the over stock, under stock, out of stock will
be solves. As a result AIC can delivery the regular supply of
chemical fertilizer to farmer at the right time.

10. Suraj Sigdel (2002): Inventory Management of “Agriculture Inputs

Corporation Regarding Chemical Fertilizers and Seeds”

Findings
 The major procurement procedures/ ways are through inventing
global tender negation, through aid/ assistance from donor agencies/
countries and through negotiation/ agreement of two governments.
 AIC procure of collect seeds from external as well as internal
sources.
 walls of warehouses are built with bricks of stone as available
locally, with cement building.

62
  AIC does not have adequate fleet of trucks. So in most cases
transport companies under contractual agreement carryout this job.
 AIC is not using scientific models of inventory management.

Recommendation
 To avoid the problems of over stocking of chemical fertilizers and
seeds. AIC should consider these points;
a) Target should be realistic.
b) Target should be with the capacity of being fulfilled.
c) If AIC is able to hold only optimum level of ending stock the locked
up capital will be reduced.
d) AIC should develop appropriate standard record keeping system of
ending stock.
 Before calling global tenders, seeds growers’ season of requirement,
lead time and means of transportation should be considered.
 Numbers of warehouses should be made according to the area and
consumption of chemical fertilizers and seeds, which will make the
distribution of fertilizers easier.

2.11.2 Review of Article and Institutions Report

Some articles are revised with related to inventory management and control
These are under

Dr. G.R. Agrawal has made study relating to the Nepalese public
enterprises stated that inventory management is the weakest aspect of
management in Nepal. The tools and techniques for controlling inventory
has not been applied in Nepalese enterprises for controlling their physical
as well as financial dimensions (Agrawal, 1980)

Rao and N.V.S. Jagmohan Rao also observed that for the efficient
management of inventory. There are the needs of tackling the human
element in the third world country like Nepal. They have suggested to
orienting the attitude of the staffs towards material cost because lack of

63
knowledge and carelessness which were the responsible of this
management of the inventory. (Rao, K. 1981)

A study relating to Nepal Transport Corporation concerning with aspects

has been made by CEDA. One of the major finding was that thought
inventory management of this factory is rather simple but due to the
mismanagement of stocking of the spare parts that hampered the smooth
operation of the enterprise. (CEDA, 1973)

Another significance study relating to agriculture tools factory has been

conducted by CEDA was that the ratio of inventory to sales give more
frustrate picture as the sales could not go with inventory or vice versa
(CEDA, 1974)

A comprehensive study of Bansbari Leather and shoe factory,’ conducted

by Corporation Coordination Council in which it was found that
inventory planning is out of scope of concerning this factory. Because of
this, some of that the materials are not available some are not procured in
time resulting in the bottlenecks in the smooth flow of production function.
(CCC, 2033)

Industrial Service Center has conducted a study regarding the

performance of Biratnanagar Jute mills Ltd. Some of the major finding of
this study was that store keeping and control stock level of various item are
not fixed up, goods received not normally entered with goods received
notes along with quality verification. Bin cards are not mentioned and stock
ledgers are not kept up to date (I.S.C, 2036). Leather

Bajracharaya, Puskar made the study about the inventory management of

GPS came to conclusion that the procedure of recording stock out cost and
back order cost of the corporation was very poor no techniques of inventory
management is possible to apply to calculate one of the major decision
when to buy. If no concrete steps are taken with regard to recording and
maintaining to proper data, future researcher would not able to predict the
reorder point properly. Thus, the real situation of the operation of the

64
corporation regarding its inventory managing system could not be found
(Bajracharya, 1983)

Center for Economic Development and Administration Center has

conducted as study on management problem in public sector manufacture
enterprise in Nepal. One of the important findings was the inventory
management. Suffer from the lack of planning, high carrying cost, poor
recording and stores management and virtual absence of controlling system.
(CEDA, 1974)

Referring the above given facts and figures, it is implied that most of the
Nepalese manufacturing concerns are not that much serious regarding the
inventory and material management. It also shows that there is not
comparative study. Public manufacturing as well as trading companies are
not applied the inventory model effectively. that is why the company has
been success to achieve their targets.

Most of the researchers in Nepal, in the field of inventory management are

focusing on only scientific technique for the inventory management.
Researchers recommend only EOQ technique to reduce total cost. In
context of Nepal political instability, strike and various abnormal cases
arrives time to time so all of the PEs must consider this factor too and hold
inventory. In my view not only scientific technique are applicable in Nepal
but also consider about the abnormal cases and manage the inventory
properly for regular production and regular supply to customer.

2.12 Research Gap

Although there are various studies related to inventory management

regarding different organizations and available in different libraries, but
review literature indicates that there are few studies devoted to inventory in
Nepalese context. These few studies conducted earlier have now needed to
carryout a study to assess the recent development in inventory
management. The data used in the previous study is few years but this study

65
covers the data of five years. Nobody of the earlier studies had focused on
role of inventory in overall profit planning of the organization although
inventory and different components of profit planning like production
planning, purchase planning etc are closely related to each other. Similarly
nobody had shown the relationship o Inventory with sales, production and
purchase although they are closely related to each other. Moreover this
study has not been done by pervious researcher as separately. Further no
one had test the correlation of different parts of the inventories using data.
Thus, to fill the gap, this study has been conducted. Thus this study will be
milestone in the field of inventory management and control in National
Trading Ltd. and Herbs Production and Processing Company Ltd. In spite
of above, multiple gaps among the researcher's view as well as there is time
gap regarding the study of inventory management.

66
 CHAPTER III

RESEARCH METHODOLOGY

The success of a work largely depends upon the way it is performed the
processes involved throughout the whole work need to be systematic for the
achievement of the objectives. Since research is a scientific discipline, it
deserves much more attention on the part of researcher. A systematic study
needs to follow a proper methodology to achieve the predetermined
objectives. “Research methodology is a way to systematically solve the
research problem”. It is the process of aiming at the solution of problem
through the planned and systematic dealing with collection, analysis and
interpretation of fact and figures.
 This chapter deals with research design, sources of data,
population and sample size, data gathering procedure and data
analysis tools to fulfill the above mentioned objectives.

3.1 Research Design

Research design is the plan, structure and the strategy of the investigation
conceived so as to obtain answer to research questions and to control
variance.

The research design of this study is descriptive as well as analytical. The

study is primarily based on secondary data. However, primary data can also
be used. Primary data are mainly collected through questionnaires, direct
interview from officers and non-officers of the companies.

3.2. Nature and Source of Data

The nature of data of this study has been primary as well as secondary.

67
 a) Primary Data: - primary data are original data gathered by the
researcher for the research work at hand. Thus, these data are
collected for meeting the specify objectives of the study. Primary
data has been collected through questionnaire, interviews and
observation.

b) Secondary Data: - secondary data are often in the form of published

data. Secondary source refers to those for already gathered by others.
The sources of secondary data can be divided into two groups:
internal and external. The internal secondary data are found within
the company where as external secondary data are collected from
sources outsides the company.

3.3. Data Gathering Procedure

In order to collect the required data from the official records of both
"National Trading Limited and Herbs Production and Processing Company
Limited" the researcher has visited there personally. Similarly, personal
observation, informal discussion, interview with the officials, collect the
data from journals, magazines published, financial statement and annual
reports has been carried out to collect data at first hand. Regarding the
primary sources, personnel observations and personal discussion methods
are used.

3.4 Presentation and Analysis of Technique and

Tools

To analyze the collected facts and figures, various accounting tools are used
to effectiveness on inventory management and control wherever necessary.
The techniques included are statistical tools, graphs, Karl person coefficient
and correlation. And the inventory management techniques applied in this
study is EOQ, different stock levels, Inventory turnover ratio and ABC
analysis.

68
To achieve the objectives of the study, various financial as well as
statistical tools have been used in this study. The analysis of data will be
done according to pattern of data available. Because of limited time and
resources, some simple analytical tools such as percentage change,
coefficient of correlation and method of least square are adopted in this
study. Similarly, some strong accounting tools such as ratio analysis and
trend analysis have also been used for financial analysis.

3.4.1 Statistical Tools

Some important statistical tools are used to achieve the objective of this
study. In this study, statistical tools such as coefficient of correlation
analysis, standard deviation, and coefficient of variance have been used.

A) Coefficient of Correlation

This analysis identifies and interprets the relationship between two or more
variables. In the case of highly correlated variables, the effect on one
variable may have effect on other correlated variable. Under this topic,
Karal people co-efficient has been used to find out the relationship between
the different variables. The formula for computing person's correlation
coefficient (r) using direct method is as follows.
N  xy   x  y

N  x 2   x  N  y 2   y 
2 2

r=

Where
X = Dependent Variable
Y = Independent variable
r = Correlation coefficient
N = No. of time period

69
3.4.2 Financial Tools
A) Percentage Analysis

This ratio is calculated to measure the acceleration or retardation of any

variable to the company in each year. This helps the bank to identify the
degree how the variable is moving in each year. It also helps the
organization to take the suitable direction. It is calculated in following
way:-

Amount of ThisYear  Amount of Last Year

Annual Percentage Change =
Amount of Last Year

B) ABC Analysis :

This technique is used to identify various items of inventory for the purpose
of inventory control. In this analysis, we divide the inventory items into
three group A, B and C. According to investment and valuable inventories
are classified A, B and C groups.

C ) EOQ analysis

The economic order quantity may be defined as that level of inventory

order that minimize the total cost associated with inventory management.
a) Formula method
b) Table method
c) Graph method

D) Different Turnover ratios (Inventory Turnover ratio, R.M turnover

ratio, FG turnover ratio etc.)

70
 CHAPTER IV

PRESENTATION AND ANALYSIS OF DATA

The basis objective of this study is to analyze the present problems of

inventory management and control system of National Trading Limited and
Herbs Production And Processing Company Limited on the basis of the
analysis and diagnosis of the collected data to provide the suggestions and
recommendation to National Trading Limited and HPPCL. For this purpose
ABC Analysis, EOQ Analysis, Safety Stock Analysis, Re-Order Level
Analysis and Trend Analysis have done.

4.1 ABC Analysis

4.1.1 National Trading Limited

According to the concept of ABC analysis, the item of goods with

regarding to three purchase department of NTL are divided ABC on the
basis of usage value and volume as shown in table below.
Table No. 4.1
Classification of Goods of NTL
Division Good Items
A Rice mill, power teller, machine, food processing, bicycles,
water pumps, noodles making, tools
B Various Liquor (vodka, xxx Rum, Back piper, Red level, Tiya
mariya Jose etc.)
C Blanket, Sugar, Electric Fan, Sport Goods, DAP fertilizer, TV,
Rice Cooker, Vacuum Cleaner Tea etc.
Source: National Trading Limited, Teku

According to the concept of ABC Analysis, the item of goods with

regarding to three purchase department of NTL are divided ABC on the
basis of usage value and volume as shown in table below

71
 Table No. 4.2
ABC Classification of NTL
Category Items (Units) % of items Value (Rs.) % of value
A 505 2% 164300000 58%
B 8465 28% 45000000 16%
C 20990 70% 72950000 26%
Total 29960 100% 282250000 100%
Source: National Trading Ltd. Teku.

Figure No. 4.1

ABC Analysis NTL

80
70
70
58
60
Percentage

50
40
28 26
30
20 16
10 2
0
A B C
Categories

% of items % of value

Source: Table No. 4.2

The table and graphic presentation indicate that "item A" form a minimum
proportion 2% units of all items, but represents the highest volume 58%
total cost on the other hand "item B" consists 28% of total volume but only
16% of total value. Similarly, "item C" consists maximum 70% of the
volume but least 26% of total value. This division of goods items reflects
the concept of inventory control according to their volume and cost but the
company spends the same effect on all items. Since it is clear that a strict
control should be exercised on "item A" in order to minimize inventory

72
control cost and less control "item C & B respectively. On its investment
"item A" should be traced first and most carefully, in case of "item B"
simple control will be sufficient.

4.1.2 HPPCL (Herb Production and Processing Company Limited)

According to the concept of ABC analysis, the item of good with regarding to
three purchase department of HPPCL are divided ABC on the basis of usage
value and volume as show in table below.

Table No. 4.3

Classification of Goods of HPPCL
Division Goods Item
A Artemisia Oil, Anthopogon Oil, Camomile Oil, Cinnamomum Leaf
(Tejpat) Oil, Juniperberry Oil, Jatamansi Oil, Xanthoxylum Oil,
Texus Resin, etc.
B Calamus Oil, French Basil Oil, Kachur Oil, Lemon Grass Oil,
Palmarosa Oil, Wintergreen Oil, Dill Oil, Shilajit Processed etc.
C Citronella Oil, Eucalyptus Oil, Mehtha Arvensis Oil, Mentha
Spicata Oil, Sugandh Kokila Fixed Oil, Turpentine Oil, Rosin,
Matricaric Flower etc.

Table No. 4.4

A, B, C Classification OF HPPCL
Categories Item (kg) % of item Value (B) % of value
A 289 5.75 2273109 35.34
B 1085 21.60 2507435 38.98
C 3650 72.65 1651364 25.68
Total 5024 100.00 6431908 100.00
Source: Herbs Production and Processing Company Limited, Koteshwor.

It can be presented simply and clearly by figure:

73
 Figure No. 4.2
ABC Analysis of HPPCL

80 72.65
70
60
Percentage

50
38.98
40 35.34
30 25.68
21.6
20
10 5.75
0
A B C
Categories

% of item % of value

4.2 Economic Order Quantity Analysis

4.2.1 National Trading Limited

1. Cleaned Water Pump

(A) Optimum Order Level (By Formula Method):

Based on the company records, the following data are available,

Annual Demand (A) = 160 units
Total Amount tied up = Rs.2,46,400

Ordering Charges
Transportation Charge = Rs.70
Bank charge and commission = Rs.25
Telephone, Fax, Interest = Rs.10
Total ordering cost = Rs.105

Carrying /Holding Cost

Insurance Charges = Rs.150
Holding Charges = Rs.100
= Rs.250

74
 250
Carrying Cost per unit = = 1.5625
160

(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C
2×160×105
=
1.5625
= 21504
= 147 (Approx.)

It indicates that if the company seeks to minimize the total cost by

compromizing the carrying cost and ordering cost, the EOQ should be 147
units of cleaned water pump.

Number of order should be placed in a year can be calculated by using the

A
Formula: i.e. = 1.088
EOQ
That indicates NTL should placed its order at once.

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for cleaned water pump can be calculated
as follows:

Table No. 4.5

Economic Order Quantity and Water Pump
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2 = 3 3×6=4 1×0=5 4+5=6
1 160 80 125 105 230
2 80 40 62.5 210 272.5
3 53.33 26.67 41.67 315 356.67
4 40 20 31.25 420 451.25
5 32 16 25 525 550

75
Where,
Order size
Average Inventory =
2
Carrying cost = Average inventory × Carrying cost per unit
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

From the above calculation, it is clear that by the use of tabulation method, the
minimum cost of cleaned water pump is Rs.230, where the total orders cost
Rs.105 and carrying cost Rs.125 respectively. The number and order is 1 times.

The company should order cleaned water pump once in a year to minimize the
total cost. If it orders twice a year the total cost will increase. From table, we
can conclude that when company order twice a year then the cost is increased
by Rs.42.5. Therefore, when the number of order increases the total cost will
also be increases.

(C) The company's annual demand of the cleaned water pump is given below:
Table No. 4.6
Annual Demand for Water Pump
Fiscal year (B.S.) Quantity unit
2060/61 175
2061/62 100
2062/63 135
2063/64 145
2064/65 160

76
 Figure No. 4.3
Annual Demand of Water Pump

200
180
160
140
Quantity (Units)

120
100
80
60
40
20
0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

The analysis shows that annual demand of cleaned water pump is reduced in
fiscal year 2061/62, but it is growing from this year. It would be due to
environmental effect such as increase in construction of building and most
people used cleaned water pump.

(D) Re-order Level and Safety Stock of Cleaned Water Pump

Re-order is that level of inventory the firm places an order with the suppliers
for purchasing additional inventory equal to economic order quantity when the
inventory reaches the reorder point. To analyze the reorder point of cleaned
water pump on the basis of lead time, safety stock and daily usage rate, we can
used following procedure.

77
 Table No. 4.7
Safety Stock, Lead time, Daily Usage Rate and Reorder Level
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × days stock stock
(Units) Usage (Units) days lead
rate time
1 2 3 4 5 2×5 = 6 3+5 = 7 4+6=8
2060/61 0.486 15 7.29 4 1.944 19 9.324
2061/62 0.277 15 4.155 4 1.108 19 5.258
2062/63 0.375 15 5.625 4 1.5 19 7.125
2063/64 0.403 15 6.045 4 1.612 19 7.657
2064/65 0.444 15 6.666 4 1.776 19 8.442

Annual consumption
Where, Usage rate =
No. of days in a year

No. of days in a year assumed 360 days

Reorder point = Usage rate × (Lead time + Safety stock)

Lead time is assumed 15 days on the basis of replay of respondents.

The company don't consider the good in transit due to lead time is less than
order frequency.

This table includes calculation of ROP with safety stock. NTL need cleaned
water pump with 19 days safety stock all the day. In year 2064/65 NTL has
procure 160 units of cleaned water pump with no. of order 1 time. According to
ROP, the company should placed an order when 19 days consumption remains
balance i.e. 8.442 units.

(2) Various Liquor

(A) Optimum Order Level (By Formula Method):

Based on the company records, the following data are available,
Annual Demand (A) = 16000 liters
Total Amount tied up = Rs.27520000

78
Ordering Charges
Transportation Charge = Rs.3000
Bank charge and commission = Rs.1500
Telephone, Fax, Interest = Rs.200
Total ordering cost = Rs.4700

Carrying /Holding Cost

Insurance Charges = Rs.2000
Administration = Rs.1200
Order Charges = Rs.800
Total Carrying Cost = 22000
22000
Carrying Cost per unit = = 1.375
1600

(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C

2×16000×4700
=
1.375
= 10458.57 ~ 10459 (approx.)
A 16000
No. of order = = = 1.53
EOQ 10459

Above calculation indicate that, to obtain the minimum total cost, the company
should order 10459 liters at a time and over the year the company should order
2 times in a year.

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for various liquor can be calculated as
follows:

79
 Table No. 4.8
Economic Order Quantity of Various Liquor
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 16000 8000 11000 4700 15700
2 8000 4000 5500 9400 14900
3 5333.33 2666.67 3666.07 14100 17766.67
4 4000 2000 2750 18800 21550
5 3200 1600 2200 23500 25700

The table shows that, the minimum cost of various liquor is Rs.14900, where
the total ordering cost and carrying cost are Rs.9400 and Rs.5500 respectively,
the number of order is 2 times. If the company orders except two times in a
year, the cost will increase. Therefore, the company should purchase the
various liquor twice a year to minimize its cost.

(B) The trend of annual demand made by the company for the various
liquor is given below:
Table No. 4.9
Annual Demand for Various Liquor
Fiscal year (B.S.) Quantity (liters)
2060/61 14412
2061/62 25000
2062/63 14000
2063/64 18000
2064/65 16000

80
 Figure No. 4.4
Annual Demand of Various Liquor

30000

25000

20000
Quantity (Litres)

15000

10000

5000

0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

From the table and figure, the annual demand is on the basis of roughly
estimate. The demand of various liquor for different year is difference due to
unsystematic purchase plan of company. The company should be make
systematic plan of various liquor.

(D) Reorder Level and Safety Stock of Various Liquor

NTL procure various liquor 16000 liters in a year. The policy of company's is
to maintain 15 days for lead time and 5 days minimum balance of safety stock.

81
 Table No. 4.10
Daily Usage, Lead Time, Safety Stock and Re-order Point
Fiscal Usage Lead Lead time Stock Safety Safety ROP
year rate time × Usage (Stock stock stock
(Units) rate days) (Units) +Lead
time
1 2 3 4=2×3 5 2×5=6 3+5=7 4+6=8
2060/61 40.00 15 600.00 5 200.00 20 800.0
2061/62 69.44 15 1041.60 5 347.20 20 1338.8
2062/63 38.89 15 583.35 5 194.45 20 777.8
2063/64 50.00 15 750.00 5 250.00 20 1000
2064/65 44.44 15 666.60 5 222.20 20 888.8

This table includes calculation of ROP with safety stock. NTL need various
liquor with 20 days stock all the day. In year 2064/65 NTL has procure 1600
Liters of various liquor with number of order 2 times. According to ROP, the
company should placed an order when 20 days consumption remains balance
i.e. 888.8 units.

(3) Sugar
(A) Optimum Order Level (By Formula Method):
Based on the company records, the following data are available,
Annual Demand (A) = 120 Tons
Total Amount tied up = Rs.4800000

Ordering Charges
Transportation Charge = Rs.14000
Bank charge and commission = Rs.1800
Telephone, Fax, Interest = Rs.700
Total ordering cost = Rs.16500

Carrying /Holding Cost

Insurance Charges = Rs.18000
Administration = Rs.5000

82
 Other = Rs.10000
Total Carrying Cost = Rs.33000
33000
Carrying Cost per ton = = 275
120
(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C

2×120×16500
=
275
= 120 tons (approx.)

Above calculation shows that, if the company seeks to minimize the total cost,
the optimal order should be 120 tons. The number of order size for the sugar
can be calculated by using formula.
A 120
No. of order = = =1
EOQ 120

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for sugar can be calculated as follows:

Table No. 4.11

Economic Order Quantity and Sugar
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 120 60 16500 16500 33000
2 60 30 8250 33000 41250
3 40 20 5500 49500 55000
4 30 15 4125 66000 70125
5 24 12 3300 82500 85800

83
Where,
Order size
Average inventory =
2
Carrying cost = Average inventory × Carrying cost per ton
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

From the use of tabulation method, the lowest minimum cost of sugar is
Rs.33000 where the total ordering costs and carrying costs both are equal to
Rs.16500. The number of order is 1 times. This is the best possible number of
order, where the total cost is minimum with minimum equal ordering and
carrying cost.

If the company purchase or order two times in year, ultimately it increase the
total cost. So, it will better to purchase one time over a year.

(c) The trend of annual demand made by the company for the sugar is
given below:
Table No. 4.12
Annual Demand for Sugar
Fiscal year (B.S.) Quantity demand (tons)
2060/61 180
2061/62 136
2062/63 100
2063/64 105
2064/65 120
The graphic representation of annual demands of sugar can be shown as below:

84
 Figure 4.5
Annual Demand of Sugar

200
180
160
140
Quantity (tons)

120
100
80
60
40
20
0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

From above table and figure, the annual demand of sugar is reduced up to the
year 2062/63, due to political conflict in the country. But, now it is growing on
slowly with stopped the conflict in the country. The company should formulae
plans and policy about when and how much to buy the inventory.

(D) Reorder Level and Safety Stock of Sugar

Table No. 4.13
Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × (Stock stock stock +
(Units) Usage days) (Units) Lead
rate time
1 2 3 4=2×3 5 2×5=6 3+5=7 4+6=8
2060/61 0.50 2 1.00 2 1 4 2.00
2061/62 0.37 2 0.74 2 0.74 4 1.48
2062/63 0.27 2 0.54 2 0.54 4 1.08
2063/64 0.29 2 0.58 2 0.58 4 1.16
2064/65 0.33 2 0.66 2 0.66 4 1.32

85
Where,
Annual consumption
Usage rate =
No. of days in a year
Re-order point = Usage rate × (Lead time + Safety stock)
Lead time is assumed 2 days on the basis of replay of respondents.
From the table, in a year 2064/65, NTL has to procure 120 tons of sugar with
the number of order 1 times. Also, NTL need minimum balance at re-order
point 1.32 units for all the days in a year.

(4) Rice Cooker

(A) Optimum Order Level (By Formula Method):
Based on the company records, the following data are available,
Annual Demand (A) = 2000 units
Total Amount tied up = Rs.2250000
Ordering Charges
Transportation Charge = Rs.3500
Bank charge and commission = Rs.1800
Telephone, Fax, Interest = Rs.200
Total ordering cost = Rs.5500
Carrying /Holding Cost
Insurance Charges = Rs.13500
Administration = Rs.1600
Other = Rs.900
Total Carrying Cost = Rs.16000
16000
Carrying Cost per unit = =8
2000
(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C
2×2000×5500
=
8
= 1658.31
= 1659 units (approx.)

86
Above calculation shows that if the company seeks to minimize the total cost,
the optimal order should be 1659 units. The number of order size for the Rice
cooker can be calculated by using formula,
A 2000
No. of order = = = 1.21
EOQ 1659

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for Rice Cooker can be calculated as
follows:
Table No. 4.14
Economic Order Quantity of Rice Cooker
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 2000 1000 8000 5500 13500
2 1000 500 4000 11000 15000
3 666.67 333.33 2666.67 16500 19166.67
4 500 250 2000 22000 24000
5 400 200 1600 27500 29100
Where,
Order size
Average inventory =
2
Carrying cost = Average inventory × Carrying cost per unit
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

The above table shows that the minimum cost of Rice Cooker is Rs.13500,
where total ordering cost and carrying cost are Rs.5500 and Rs.8000
respectively, the number of order is 1 times. If the company orders except 1
times in a year, the cost will increase. Therefore, the company should purchase
Rice Cooker one time over a year.

87
(C) The trend of annual demand made by the company for the sugar is
given below:
Table No. 4.15
Annual Demand for Rice Cooker
Fiscal year (B.S.) Quantity demand (units)
2060/61 1300
2061/62 1400
2062/63 1600
2063/64 1750
2064/65 2000
The graphic representation of annual demands of Rice Cooker can be shown as
below:
Figure No. 4.6
Annual Demand of Rice Cooker

2500

2000
Quantity (tons)

1500

1000

500

0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

According to Table and Figure, the annual demand of Rice Cooker is growing
in comparison of previous year. It would be due to environmental effect such as
shortage and increase in price of kerosene oil and L.P. Gas, man become
familiar with rice cooker.

88
(D) Reorder Level and Safety Stock of Rice Cooker
Table No. 4.16
Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × (Stock stock stock
(Units) Usage days) (Units) +Lead
rate time
1 2 3 4=2×3 5 2×5=6 3+5=7 4+6=8
2060/61 3.61 10 36.1 5 18.05 15 54.15
2061/62 3.89 10 38.9 5 19.45 15 58.35
2062/63 4.44 10 44.4 5 22.2 15 66.6
2063/64 4.86 10 48.6 5 24.3 15 72.9
2064/65 5.56 10 55.6 5 27.8 15 8.34
Where,
Annual consumption
Usage rate =
No. of days in a year
Re-order point = Usage rate × [Lead time + Safety stock]
Lead time is assumed 10 days on the basis of replay of respondents.
From the table, in a year 2064/65, NTL has to procure 2000 units of Rice
Cooker with the number of order 1 times. Also, NTL need minimum balance at
re-order point 83.4 units for all the days in a year.

4.2.1 Herbs Production and Processing Company Limited

(1) Wintergreen Oil
(A) Optimum Order Level (By Formula Method):
Based on the company records, the following data are available,
Annual Demand (A) = 517 kg.
Total Amount tied up = Rs.517×1210
= Rs.625570

89
Ordering Charges
Transportation Charge = Rs3250
Bank charge and commission = Rs.4200
Telephone, Fax, Interest = Rs.950
Total ordering cost = Rs.8400
Carrying /Holding Cost
Insurance Charges = Rs.12000
Administration = Rs.3800
Other = Rs.7000
Total Carrying Cost = Rs.22800
22800
Carrying Cost per ton = = 44.1
517
(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C

2×517×8400
=
44.1
= 443.79 ~ 444 kg.

Above calculation shows that if the company seeks to minimize the total cost,
the optimal order should be 444 kgs. The number of order size for the
Wintergreen Oil can be calculated by using formula.
A 517
No. of order = = = 1.164
EOQ 444
That indicates HPPCL should place its order at once.

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for Wintergreen Oil can be calculated as
follows:

90
 Table No. 4.17
Economic Order Quantity of Wintergreen Oil
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 517.00 258.50 11399.85 8400 19799.85
2 258.50 129.25 5699.93 16800 22499.93
3 172.33 86.17 3800.10 25200 29000.10
4 129.25 64.63 2850.18 33600 36450.18
5 103.40 51.70 2279.97 42000 44279.97
Where,
Order size
Average inventory =
2
Carrying cost = Average inventory × Carrying cost per unit
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

From the use of calculation, it is cleared that by the use of tabulation method,
the minimum cost of wintergreen oil is Rs.19799.85, where the total ordering
cost is Rs.8400 and total carrying cost is Rs.11399.85 respectively.

If the company order two times in year, the cost will be increased by (22499.93
- 19799.85) Rs.2700.08. So, company should order the wintergreen oil once a
year to minimize its cost.

(C) The trend of annual demand made by the company for the
Wintergreen oil is given below:
Table No. 4.18
Annual Demand for Wintergreen Oil
Fiscal year (B.S.) Quantity demand (kg)
2060/61 2100
2061/62 1752
2062/63 1545
2063/64 850
2064/65 517

91
The graphic representation of annual demands of Wintergreen Oil can be
shown as below:
Figure No. 4.7
Annual Demand of Sugar

2500

2000
Quantity (kg.)

1500

1000

500

0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

From the table and figure, it is clear that the company has no fixed rule applied.
The purchase made by the company is haphazard. It does not follow according
to the EOQ model. The annual demand of Wintergreen Oil is respectively
decreasing in corresponding latest year. It would be happen because in general,
increase in price of goods forced people to reduce consumption.

(D) Reorder Level and Safety Stock of Wintergreen Oil

HPPCL procure Wintergreen oil 517 liters. in a year. The policy of company's
is to maintain 30 days for lead time and 5 days minimum balance of safety
stock. To analyze the re-order point of wintergreen oil on the basis of lead time,
safety store and daily usage rate, we can used following procedure.

92
 Table No. 4.19
Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × days stock stock
(kg) (days) Usage (Units) +Lead
rate time
1 2 3 4=2×3 5 2×5=6 7 4+6=8
2060/61 5.833 30 175.0 5 29.17 35 204.17
2061/62 4.87 30 146.1 5 24.35 35 170.45
2062/63 4.29 30 128.7 5 21.45 35 150.15
2063/64 2.36 30 70.8 5 11.80 35 82.60
2064/65 1.44 30 43.2 5 7.20 35 50.40

Where,
Annual consumption
Usage rate =
No. of days in a year
No. of days in a year assumed 360 days

The table includes calculation of ROP with safety stock. The company needs
wintergreen oil with 35 days safety stock all the day. In year 2064/65 HPPCL
has procure 517 kg. of wintergreen oil with no. of order 1 times. According to
ROP, the company should placed an order with 35 days consumption remains
balance i.e. 50.40 kg.

(2) Xanthoxylum Oil

(A) Optimum Order Level (By Formula Method):
Based on the company records, the following data are available,
Annual Demand (A) = 150 kg.
Total Amount tied up = Rs.150×4225 = 633750
Ordering Charges
Transportation Charge = Rs.250
Bank charge and commission = Rs.840

93
 Telephone, Fax, Interest = Rs.150
Total ordering cost = Rs.1240

Carrying /Holding Cost

Insurance Charges = Rs.2160
Administration = Rs.240
Other = Rs.480
Total Carrying Cost = Rs.2880
2880
Carrying Cost per unit = = 19.2
150

(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C
2×150×1240
=
19.2
= 139 kg.

Above calculation shows that if the company seeks to minimize the total cost,
the optimal order should be 139 kgs. The number of order size for the
Xanthoxylum Oil can be calculated by using formula.

A 150
No. of order = = = 1.079
EOQ 139
Therefore the number of order for the Xanthoxylum oil is 1.

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for Xanthoxylum Oil can be calculated as
follows:

94
 Table No. 4.20
Economic Order Quantity of Xanthoxylum Oil
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 150 75 1440 1240 2680
2 75 37.5 720 2480 3200
3 50 25 480 3720 4200
4 37.5 18.75 360 4960 5320
5 30 15 288 6200 6488

Where,
Order size
Average inventory =
2
Carrying cost = Average inventory × Carrying cost per unit
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

In case of Xanthoxylum Oil, the EOQ comes to 150 kg. Per order which gives
the number of order per year is one. The number of order per year is again
justified by the use of tabulation method. This is the best possible number of
order, where the total ordering cost and carrying cost is minimum.

In this case, the carrying cost is Rs.1440 and ordering cost is Rs.1240
respectively gives the total cost of Rs.2680. If the company order two times in
a year the cost will be increased by Rs.(3200-2680) 520. So, the company
should order the Xanthoxylum Oil once a year to minimize its cost.

95
(C) The trend of annual demand made by the company for the
Xanthoxylum Oil is given below:
Table No. 4.21
Annual Demand for Xanthoxylum Oil
Fiscal year (B.S.) Quantity demand (kg)
2060/61 218
2061/62 276
2062/63 300
2063/64 240
2064/65 150

The graphic representation of annual demands of Xanthoxylum Oil can be

shown as below:

Figure No. 4.8

Annual Demand of Xanthoxylum Oil

350

300

250
Quantity (kg.)

200

150

100

50

0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

From the table and figure, it is clear that the company has no fixed rule applied.
The purchase made by the company is haphazard. It does not follow according
to the EOQ model. The annual demand of Xanthoxylum Oil is increasing up to
2062/63, than it is decreasing in corresponding latest year. It would be
happened due to poor quality and less demand of product.

96
(D) Reorder Level and Safety Stock of Xanthoxylum Oil
HPPCL procure Xanthoxylum Oil 150 kg. in a year. The policy of company's is
to maintain 15 days for lead time and practice used by the company for the
safety stock its equal to 4 days consumption.
Table No. 4.22
Calculation of Daily Usage, Lead Time, Safety Stock
and Re-order Point
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × (Stock stock stock
(days) Usage days) (kg) +Lead
rate time
1 2 3 4=2×3 5 2×5=6 3+5=7 4+6=8
2060/61 0.61 15 9.15 4 2.44 19 11.59
2061/62 0.77 15 11.55 4 3.08 19 14.63
2062/63 0.83 15 12.45 4 3.32 19 15.77
2063/64 0.67 15 10.05 4 2.68 19 12.73
2064/65 0.42 15 6.30 4 1.68 19 7.98
Where,
Annual consumption
Usage rate =
No. of days in a year
No. of days in a year assumed 360 days

The table includes calculation of ROP with safety stock. The company need
Xanthoxylum Oil with 19 days safety stock all the day. In year 2064/65
HPPCL has procure 150 kg of Xanthoxylum oil with no. of order 1 times.
According to ROP, the company should place an order with 19 days
consumption remains balance i.e. 7.98 kg.

(3) Eucalyptus Oil

(A) Optimum Order Level (By Formula Method):
Based on the company records, the following data are available,
Annual Demand (A) = 4680 kg.
Total Amount tied up = Rs.4680×800 = 3744000

97
Ordering Charges
Transportation Charge = Rs.1450
Bank charge and commission = Rs.1960
Telephone, Fax, Interest = Rs.580
Total ordering cost = Rs.3990

Carrying /Holding Cost

Insurance Charges = Rs.10500
Administration = Rs.2800
Other = Rs.4140
Total Carrying Cost = Rs.17440
17440
Carrying Cost per kg = = 3.73
4680

(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C

2×4680×3990
=
3.73
= 3164.24 kg.
= 3164 kg.
Above calculation shows that if the company seeks to minimize the total cost,
the optimal order should be 3164 kgs. The number of order size for the
Eucalyptus Oil can be calculated by using formula.
A 4680
No. of order = = = 1.48
EOQ 3164

(B) Optimum Order of Inventory (Tabulation Method)

By the tabulation method, the EOQ for Eucalyptus Oil can be calculated as
follows:

98
 Table No. 4.23
Economic Order Quantity and Eucalyptus Oil
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 4680 2340 6224.4 1590 7814.4
2 2340 1170 3112.2 3180 6292.2
3 1560 780 2074.8 4770 6844.8
4 1170 585 1556.1 6360 7916.1
5 936 468 1244.88 7950 9194.88
Where,
Order size
Average inventory =
2
Carrying cost = Average inventory × Carrying cost per unit
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

From above calculation, it is clear that by the use of tabulation method, the
minimum cost of Eucalyptus Oil is Rs.6292.20, which lies in the order size of
2340 kg. The number of order per year is again justified by the use of
tabulation method. This it the best possible number of order, where the total
carrying cost and ordering cost is lowest. If the company orders except two
times in a year, the cost will increase. So, company should order the Eucalyptus
Oil twice a year to minimize its cost.

99
(C) The trend of annual demand made by the company for the
Eucalyptus Oil is given below:
Table No. 4.24
Annual Demand for Eucalyptus Oil
Fiscal year (B.S.) Quantity demand (kg)
2060/61 2905
2061/62 3224
2062/63 4379
2063/64 4510
2064/65 4680
The graphic representation of annual demands of Eucalyptus Oil can be shown
as below:
Figure No. 4.9
Annual Demand of Eucalyptus Oil

5000
4500
4000
3500
Quantity (kg.)

3000
2500
2000
1500
1000
500
0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

From the table and figure, the annual demand of Eucalyptus Oil is increasing
corresponding latest year. It would be happen due to right demand of product.

100
(D) Reorder Level and Safety Stock of Eucalyptus Oil
The company procure Eucalyptus Oil is 4680 kg in a year. By the use of EOQ
formula, we have computed the quantity of Eucalyptus Oil to be procured in a
year 3164 kg. With the number of order per year is 2 times. The lead time for
the procurement of this product is 25 days and the practiced used by the
company for the safety stock is equal to 5 days consumption.

Table No. 4.25

Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × (Stock stock stock
(days) Usage days) (kg) +Lead
rate time
1 2 3 4=2×3 5 2×5=6 7 4+6=8
2060/61 8.07 25 201.75 5 40.35 30 242.10
2061/62 8.96 25 224.00 5 44.80 30 268.8
2062/63 12.16 25 304.00 5 60.80 30 364.80
2063/64 12.52 25 313.00 5 62.60 30 375.60
2064/65 13.00 25 325.00 5 65.00 30 390.00

Where,
Annual consumption
Usage rate =
No. of days in a year
No. of days in a year assumed 360 days

The table includes calculation of ROP with safety stock. HPPCL need
Eucalyptus Oil with 30 days safety stock all the day. In year 2064/65 HPPCL
has procure 4680 kg of Eucalyptus Oil with no. of order 2 times. According to
ROP, the company should place an order when 30 days consumption remains
balance i.e. 390 kg.

101
(4) Cinnamon Leaf (Tejpat) Oil
(A) Optimum Order Level (By Formula Method):
Based on the company records, the following data are available,
Annual Demand (A) = 137 kg.
Total Amount tied up = Rs.137×5000= Rs.685000
Ordering Charges
Transportation Charge = Rs.350
Bank charge and commission = Rs.280
Telephone, Fax, Interest = Rs.150
Total ordering cost = Rs.780
Carrying /Holding Cost
Insurance Charges = Rs.800
Administration = Rs.360
Other = Rs.700
Total Carrying Cost = Rs.1860
1860
Carrying Cost per ton = = 13.58
137
(i) By fitting the above mentioned data into Economic Order Quantity
Formula, we get
2AO
EOQ =
C
2×137×780
=
13.58
= 125.45
= 125 kg. (Approx.)
It means that if the company seeks to minimize the total cost by compromising
the carrying cost and ordering cost, the economic order quantity should be 125
kg. of Cinnaman Lef Oil. Now we are able to calculate the number of order for
cinnamon leaf oil per year by using the formula.
A 137
No. of order = = = 1.096
EOQ 125

102
(B) Optimum Order of Inventory (Tabulation Method)
By the tabulation method, the EOQ for Cinnamon Leaf Oil can be calculated as
follows:
Table No. 4.26
Economic Order Quantity and Cinnamon Leaf Oil
No. of Order Average Carrying Ordering Total
orders size Inventory cost (Rs.) cost (Rs.) cost (Rs.)
1 2 2÷2= 3 3×C=4 1×0=5 4+5=6
1 137 68.5 930.23 780 1710.23
2 68.5 34.25 465.12 1560 2025.12
3 45.67 22.835 310.10 2340 2650.10
4 34.25 17.125 232.56 3120 3352.56
5 27.40 13.70 186.05 3900 4086.05

Where,
Order size
Average inventory =
2
Carrying cost = Average inventory × Carrying cost per unit
Ordering cost = No. of order × Ordering cost per order
Total cost = Carrying cost + Ordering cost

The EOQ in case of Cinnamon leaf oil is 125 kg. per order, which gives the
number of order per year is 1. From the tabulation method, the number of order
is also one where the total ordering and carrying cost are low.

In this case, the carrying cost and ordering cost are Rs.930.23 and Rs.780
respectively which gives the total cost of Rs.1710.23. This is the lowest
possible cost. So, the company should order once in a year to reduce the total
cost.

103
(C) The trend of annual demand made by the company for the
Cinnamon leaf oil is given below:
Table No. 4.27
Annual Demand for Cinnamon Leaf
Fiscal year (B.S.) Quantity demand (kg)
2060/61 198
2061/62 261
2062/63 184
2063/64 137
2064/65 137

The graphic representation of annual demands of Cinnamon leaf oil can be

shown as below:
Figure No. 4.10
Annual Demand of Cinnamon Leaf Oil

300

250

200
Quantity (kg.)

150

100

50

0
2060/61 2061/62 2062/63 2063/64 2064/65
Fiscal Year

From the table and figure, it is clear that the company has no fixed rule applied.
The purchase made by the company is haphazard. It does not follow according
to the EOQ model. The annual demand of Cinnamon leaf oil is increased and
decreased by great quantity.

104
(D) Reorder Level and Safety Stock of Cinnamon Leaf Oil

The lead time for the procurement of this product is 10 days and the practiced
used by the company for the safety stock is equal to 4 days consumption.
Table No. 4.28
Calculation of Daily Usage, Lead Time, Safety Stock and Re-order Point
Fiscal Usage Lead Lead Stock Safety Safety ROP
year rate time time × (Stock stock stock
(days) Usage days) (Units) +Lead
rate time
1 2 3 4=2×3 5 2×5=6 3+5=7 4+6=8
2060/61 0.55 10 5.5 4 2.20 14 7.70
2061/62 0.73 10 7.3 4 2.92 14 10.22
2062/63 0.51 10 5.1 4 2.04 14 7.05
2063/64 0.38 10 3.8 4 1.52 14 5.32
2064/65 0.38 10 3.8 4 1.52 14 5.32

Where,
Annual consumption
Usage rate =
No. of days in a year
No. of days in a year assumed 360 days

The table includes calculation of ROP with safety stock. The company needs
Cinnamon Leaf Oil with 14 days safety stock all the day. In year 2064/65
HPPCL has procure 137kg of Cinnamon Leaf Oil with no. of order 1 time.
According to ROP, the company should place an order when 14 days
consumption remains balance i.e. 5.32 kg.

105
4.3 Correlation between Sales and Net Profit.

4.3.1 National Trading Ltd.

Table No. 4.29
Correlation between Sales and Net Profit of NTL
Rs. in million
Fiscal Net
Sales X2 Y2 XY
year Profit
2060/61 701.49 182.70 492088.22 33379.29 128162.22
2061/62 613.90 149.31 376873.21 22293.48 91661.41
2062/63 618.67 159.81 382752.57 25539.24 98869.65
2063/64 628.64 153.00 395188.25 23409.00 96181.92
2064/65 635.86 157.32 404317.94 24749.58 100033.50
Total 3198.56 802.14 2051220.19 129370.59 514908.70

Source: Annual Report of NTL

Correlation between sales (x) and Net Profit (y)

N  XY -  X  Y
r
N  X 2  ( X ) 2 N  Y 2  ( Y ) 2

5  514908.70 3198.56  802.14

r
5  2051220.19 (3198.56) 2 5  129370.59 (802.14) 2

= 0.95

Correlation (r) = 0.95

106
4.3.2 HPPCL
Table No. 4.30
Correlation between Sales and Net Profit of HPPCL
Rs. in million
Fiscal Net
Sales X2 Y2 XY
year Profit
2060/61 341.39 30.16 116547.13 909.63 10296.32
2061/62 348.19 36.91 121236.28 1362.35 12851.69
2062/63 415.39 42.32 172548.85 1790.98 17579.30
2063/64 396.93 35.94 157553.42 1291.68 14265.66
2064/65 333.07 21.93 110935.62 480.92 7304.23
Total 1834.97 167.26 678821.31 5835.56 62297.21
Source: Annual Report of HPPCL
Correlation between sales (x) and Net Profit (y)
N  XY -  X  Y
r
N  X 2  ( X ) 2 N  Y 2  ( Y ) 2

5  62297.21 1834.97  167.26

r
5  678821.31 (1834.97) 2 5  5835.56 (167.26) 2

= 0.45
Correlation (r) = 0.45

4.4 Major Findings

Inventory Management planning and control are highly complicated task since
it affects the profitability of manufacturing industries. The major findings out
of the analysis of the inventory management National Trading ltd. and Herbs
Production and Processing Company are as follow.
i) The inventory management and controlled tools followed by both
companies are ABC analysis, EOQ and Level setting.
ii) Purchase of inventory and goods haphazardly by the national trading
and HPPCL. In other words, the purchase quantities made by the
company differ from year to and are not in economic order quantity.

107
iii) HPPCL and National Trading Limited also has established a separate
unit for management of inventory although the separate unit is
unable to manage the inventory effectively.
iv) Both company have not categorized its inventory for the purpose of
control and paid equal attention for the entire inventory held in the
store.
v) In the both company the annual demand and purchase made by
company differ from year to year and highly fluctuated.
vi) Cost related with ordering and holding inventory is not recorded
separate in both companies which are recorded as a whole.
vii) The raw materials used by HPPCL are not classified according to
ABC.
viii) Purchase of raw material in HPPCL is on the agreement and local
tender basis some materials are imported and some are taken from
the market with huge amount at a time.
ix) In the company, there are different types of inventories, like RM, WIP,
finished goods and stores and spare parts. For the question is asked to
reveal the ranking of cost for solution of ABC analysis the company
could give only the name of inventories but not specified the cost.
x) For the question asked to HPPC about the cost of ordering and carrying,
the researcher found that there is no systematic and scientific system to
determine ordering and carrying cost but in NTL there is limited type of
ordering and carrying cost management system.
xi) Purchasing is the first step of inventory management of manufacturing
companies. As the question was asked about the purchasing system they
said that procedures are followed by HPPC. The researcher had found
that the company has been following the centralize purchasing
procedure and required RM and WIP materials are purchased form
Nepalese and Indian's brokers.
xii) As the question is asked to NTL about the valuation of inventories with
various options, the researcher found that the pricing of issues can be

108
 determined by value as per weighted average cost method but in HPPCL
there is they were not aware about valuation of pricing the inventory.
xiii) There are various problems faced by the manufacturing companies
regarding the management of inventories. As the question asked to
HPPCL about the problem faced by the HPPCL in managing the
inventories, the researcher found the following major problems faced by
the company while operating and managing the inventories.
Political crisis and especially Nepal Bandh, uncertainty about the future
supply of materials, operation of factory strikes, fluctuation of material
prices and lockout organized by different pressure groups directly affect
the company and its inventory management while geographical barriers
and transportation problems are other problems faced by both company.
xiv) The company has not been adopting appropriate inventory policy
because inventory constitutes the higher proportion than that of other
items of current assets. The co. has not followed any type of inventory
policies.
xv) The fluctuation in stock of RM during the study period is very high.
Defective purchasing policy and poor planning of raw materials are the
main responsible factors for such fluctuation. There is no fixed policy of
purchasing materials.
xvi) Demand and sales of both company is very fluctuation. The main reason
of such fluctuation is lack of appropriate inventory policy and
ineffective demand forecast.
xvii) The correlation between sales and net profit shows that significant
relationship between sales and net profit.
xviii) The both company have used EOQ model to manage and control of the
inventory but there is not satisfactory result.
xix) Both company have not defined its objectives clearly in terms of
quantity and quality.

109
 CHAPTER V

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary

There are different types of enterprises either public or private operating in

the country. Among them some are running with profit and some are
running in loss. So that the success of an enterprises depends upon the
strength of management along with efficiency in managing the various
functional aspects and modeling them to achieve the company's objectives.
Management is basically concerned with getting the jobs done effectively
and efficiently.

In present context, public enterprises provide the goods and services which
are provided by private enterprises are more effective. Public enterprises
face two types of challenges, the first one is to meet public responsibility of
providing goods and services cheaply and the second one is to utilize the
scarce resources more effectively. In this context, the study is concerned to
appraise HPPCL and National Trading Limited examine that in what extent
the company is applying inventory management and control system so as to
minimize the cost, that ultimately affect the price of manufacturing goods
and trading goods. Most of the manufacturing and trading company invests
a huge amount of money in inventories. The expenses involve for carrying
on functional associated with inventories such as purchasing, handling
storage and record keeping is large. Thus in recent year, the subject
inventory management has engaged the attention of management and
extensive literature has evolved which encompass statistical tools like
economic order quantity for how much to purchase together with the re-
order point.

There are certain problems of the study. Therefore, the basis problem of
this study is to examine the inventory management system practiced by the

110
company. The order size, carrying cost, ordering cost, safety stock are
determined unscientifically by the company and is not given proper
attention to the lead-time and all these functions lead to increase the total
cost of the company.

Herbs Production and Processing Company Limited and National Trading

Limited invest a huge amount of capital in the form of inventory. The main
objectives of this study is to find out what technique have been used by the
Herbs Production and Processing Company Limited and National Trading
Limited to manage the inventory and provide suggestions to use the
scientific technique to help in the reduction of cost and getting profit. For
this purpose, the researcher interviewed with officials and observes the
inventory system personally and data were collected from various sources.
Quantitative tools were applied in this study to analyze the collected data.

All the collected data and facts are analyzed on the basis of inventory
management theory and with the help of ABC analysis, EOQ model, and
Re-order label as well as safety stock. For making certain type of inventory
management decision, many mathematical tools and techniques have been
available for controlling the inventory but these companies have not applied
any sort of techniques for managing their inventories.

Every study has certain findings, so that, the following findings are
extracted from this study about the inventory management and control of
Herbs Production and Processing Company Limited and National Trading
Limited.
1. Purchase of inventory and goods haphazardly by the national trading
and HPPCL. In other words, the purchase quantities made by the
company differ from year to and are not in economic order quantity.
2. HPPCL and National Trading Limited also has established a separate
unit for management of inventory although the separate unit is
unable to manage the inventory effectively.

111
 3. In the National Trading Limited the EOQ model is not applied and
the company has maintained the safety stock which is highly
fluctuated and estimated roughly and HPPCL has also same
condition.
4. Both company have not categorized its inventory for the purpose of
control and paid equal attention for the entire inventory held in the
store.
5. In the both company the annual demand and purchase made by
company differ from year to year and highly fluctuated.
6. Cost related with ordering and holding inventory is not recorded
separate in both companies which are recorded as a whole.
7. The raw materials used by HPPCL are not classified according to
ABC.
8. Purchase of raw material in HPPCL is on the agreement and local
tender basis some materials are imported and some are taken from
the market with huge amount at a time.

5.2 Conclusion

On the basis of analysis of data and information collected from HPPCL and
NTL separately the following conclusion have been drawn.

To meet the consumer demand production on time efficiently and

effectively, the study focus the need for a good inventory system to
maintain a suitable level of inventory and also control the cost for the
HPPCL and National Trading Limited.

The values maintaining proper stock of inputs as well as discussed

previously are necessary to know the answer about when and how much to
buy. The models examples and formula as discussed previously are
necessary for every manufacturing and non-manufacturing enterprise to
reduce unnecessary cost incurred on ordering and carrying the inventory.

112
Though, these models, example and formula etc. For managing inventory
are available they could not be used fully for finding out the necessary
operation of the company because of the lack of adequate data. No
techniques for inventory management are possible to apply to calculate one
of the major decisions when to buy because of the lack of planning and
unsystematic methods of recording cost. If no concrete step is taken with
regards to recording and maintaining of proper data on stock out cost,
carrying cost, ordering cost, price of raw material etc. Separately, future
researcher would not be able to predict the re-order period and how much
to maintain the safety stock properly. Thus, in the real situation of the
operation of the company regarding its inventory managing system could
not be found. From study and analysis of data, inventory management and
control system is same.

5.3 Recommendation

On the basis of the study, the following suggestions may be recommended

for consideration:
1. The both company should define its goals and objectives clearly with
regards to its inputs and outputs separately i.e. the quantities, time
period should be specified.
2. The most applicable model of ABC classification is another tool that
can be applied for managing inventory smoothly. The classification
of ABC analysis helps to know which items in inventory have higher
usage value and which have not and accordingly a precise control
over the items in inventory can be applied HPPCL and NTL are not
adopting the ABC analysis.
3. The company should follow scientific tools and technique i.e.
economic order quantity and economic lot size formula which help
to reduce the relevant total cost for manufacturing product. The
output obtained from quantitative analyzed results the lowest cost

113
 and consumer can use with low cost than company can increase their
selling.
4. Expert technicians are needed for the production of qualitative
products and effective sales plan. So the process of selection and
recruitment techniques should be unbiased.
5. To manage inventory, ledger cards can also be used by both
companies. In this card the name of items, item numbers, unit price,
usage rate, suppliers name, the percentage of carrying cost and the
ordering cost, data of order and its receipts with date, quantity used
and issues of raw materials are maintained.
6. Job evaluation should be launched in certain time interval so that the
hard-working employees can be reworded and the task avoiding once
can be taken into action of both companies.
7. In case of HPPCL, the encouragement should be done to the farmers
to cultivate herbs plants.
8. Record keeping system should be scientific and computerized. So
that the corporation can locate the past records which are helpful for
the researcher as well as concern parties of this company.
9. The vision of the top level management should be clear for solving the
problems appeared in course of inventory management system.
10.The frequently changing of the general manager has also affected the
management. It should create unstable environment. Therefore, the
post of the manger should be professionalized and it should be far
from political interfering.

114
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Planning", Kathmandu : Taleju Prakashan.
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  Killeen, Lousis M. (1969), "Techniques of Inventory Management",
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Dissertation, Thesis, Reports and Newspapers

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Manufacturing in Nepal", CEDA, T.U., Kathmandu.

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 Bajracharya, Samarna (2003), A Study on Financial Position of
National Trading Limited, Dissertation, Faculty of
Management, T.U.
 Baral, Puspa Raj (1996), "Inventory Management", A Case Study of
Gandaki Noodles Pvt. Ltd., Dissertation, Faculty of
Management, T.U.
 Bhandari, Gopi (1993), "Profit Planning in Nepal", Case Study of
Royal Drug Limited, Dissertation, Faculty of Management,
T.U.
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Kirtipur.
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Study of Sajha Swasthya Sewa", An Unpublished Master
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Introductory Profile", Teku : National Trading Limited.
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Gorkhapatra Corporation", An Unpublished Master Degree
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Gorkhapatra Corporation", Dissertation, Faculty of
Management, T.U.

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 Pant, Dinesh Kumar (1999), "Impact of Inventory Over the Profit: A
Case Study of Gorkhapatra Corporation", Dissertation,
Faculty of Management, T.U.
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Gorkhapatra Corporation", Dissertation, Faculty of
Management, T.U., Kirtipur.
 Rawal, Ram Bahadur Chhetri (1999), "Inventory Management: A
Case Study of Agriculture Input Corporation with Special
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 Shrestha, Indra (2000), "Inventory Management of Manufacturing
Industries in Nepal with Reference to Quick Foods",
Dissertation, Faculty of Management, T.U.
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Royal Drugs Limited", An Unpublished Master Degree
Dissertation, Faculty of Management, T.U., Kirtipur.

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