Inventory Management

Effective inventory management is all about knowing what is on hand, where it is in use, and how much finished product results. Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy. Competent inventory management also seeks to control the costs associated with the inventory, both from the perspective of the total value of the goods included and the tax burden generated by the cumulative value of the inventory. Balancing the various tasks of inventory management means paying attention to three key aspects of any inventory. The first aspect has to do with time. In terms of materials acquired for inclusion in the total inventory, this means understanding how long it takes for a supplier to process an order and execute a delivery. Inventory management also demands that a solid understanding of how long it will take for those materials to transfer out of the inventory be established. Knowing these two important lead times makes it possible to know when to place an order and how many units must be ordered to keep production running smoothly. Calculating what is known as buffer stock is also key to effective inventory management. Essentially, buffer stock is additional units above and beyond the minimum number required to maintain production levels. For example, the manager may determine that it would be a good idea to keep one or two extra units of a given machine part on hand, just in case an emergency situation arises or one of the units proves to be defective once installed. Creating this cushion or buffer helps to minimize the chance for production to be interrupted due to a lack of essential parts in the operation supply inventory. Inventory management is not limited to documenting the delivery of raw materials and the movement of those materials into operational process. The movement of those materials as they go through the various stages of the operation is also important. Typically known as a goods or work in progress inventory, tracking materials as they are used to create finished goods also helps to identify the need to adjust ordering amounts before the raw materials inventory gets dangerously low or is inflated to an unfavorable level. Finally, inventory management has to do with keeping accurate records of finished goods that are ready for shipment. This often means posting the production of newly completed goods to the inventory totals as well as subtracting the most recent shipments of finished goods to buyers. When the company has a return policy in place, there is usually a sub-category contained in the finished goods inventory to account for any returned goods that are reclassified as refurbished or second grade quality. Accurately maintaining figures on the finished goods inventory makes it possible to quickly convey information to sales personnel as to what is available and ready for shipment at any given time.

In addition to maintaining control of the volume and movement of various inventories, inventory management also makes it possible to prepare accurate records that are used for accessing any taxes due on each inventory type. Without precise data regarding unit volumes within each phase of the overall operation, the company cannot accurately calculate the tax amounts. This could lead to underpaying the taxes due and possibly incurring stiff penalties in the event of an independent audit. Management of inventory assumes importance due to the fact that investment in inventory constitutes one of the major investments in current assets. The term inventory refers to the stockpile of the products a firm is offering for sale and the components that make up the product. The assets which firms store as inventory in anticipation of need are: (i) Raw Materials These represent inputs purchased and store to be converted into finished products in future by making certain manufacturing process on the same. (ii) Work in Process These represent semi-manufactured products which need further processing before they can be treated as finished products. (iii) Finished Goods These represent the finished products ready for sale in the market. (iv) Stores and Suppliers These represent that part of the inventory, which does not become a part of final product but are required for production process. They may be in the form of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc. Normally, they form a very minor part of total inventory and do not involve significant investment. Let us have a look on Different Inventory Management Views. Means emphasis role of Inventory Management in different Sectors.

Inventory Management
Physical Inventory Management Logistic Inventory Management

Financial Inventory Management

Physical Inventory Management

Meaning:
Keeping of goods is also a type of management. Whenever requirements comes from the production department, providing of those required materials in a proper manner & providing thoseat the specified period, is the main motto of Physical Inventory Management.

Benefits for Holding Inventory:

Benefits in Purchasing Benefits in Production Benefits in Work-in-Process Benefits in Sales

Objects of Inventory Management:

Usually, the company is faced with the following conflicting objectives in the area of inventory management: 1.To carry maximum inventory in order to facilitate efficient and s m o o t h production and sales operations. 2 . To minimize investment in inventory for maximize the profitability. Both over-investment and under investment in inventories is undesirable as both involve the consequences.

The over-investment involves the consequences like:

i ) Unnecessary blocking of funds in inventory and hence loss of profit. ii) Excessive storage and Insurance Cost. iii) Risk of liquidity. The inventories once purchased and stored are normally difficult to dispose off at the same value.

The under-investment involves the consequences like:

1). If sufficient stock of raw material and work in process is not available, it may result into frequent interruptions in production. 2). If sufficient stock of finished goods is not available it may not be possible for the company to serve the customers properly and they may shift to the competitors.

Thus, it can be said that the objective of inventory management is to minimize the investment in inventory without affecting production or sales operations. Inventory, as a current asset, differs from the other current assets because only financial managers are not involved. Rather, all the functional areas, finance, Marketing, Product &Purchasing are involved. The job of the financial manager is to reconcile the conflicting viewpoints of the various functional areas regarding the appropriate inventory levels in order to fulfill the overall objective of maximizing of owners wealth.

Two-Bin System:
Under this system, the inventory items are grouped into two categories. In one group or bin, sufficient quantity is kept to meet the current requirements over a designated period of item

Financial Inventory Management

Meaning:
Recording, maintaining and evaluating of stocks in a value terms is known as Financial Inventory Management. In other words valuation of stocks, and controlling of ordering and holding costs and also maintaining of sufficient valued stocks in Inventory is known as Financial Inventory Management.Financial Inventory Management is again divided into three different categories. 1)Based on Valuation 2)Based on Cost Analysis 3)Based on Financial Statement

1) Based on Valuation
There are number of generally accepted methods of determining the cost of inventories at the close of the accounting period. The selection of a suitable method assumes significance in view of the fact that it has a direct bearing on the cost of goods sold and consequently on profit. Therefore, the method should be selected in the light of probable effects on profits over a period of years. First In First Out (FIFO) Method: The FIFO method of valuation of inventory is based on the assumption that the inventory is consumed in chronological order, that is, those received first are issued/consumed first and value fixed accordingly. The merit of FIFO method is that the physical flow of materials matches the flow of cost.

Last in First Out (LIFO) Method: Under the LIFO method, the cost of goods sold and the value of closing inventory can be determined only after the final lot of the year has been received. This is because of the assumption underlying the valuation of inventory, according to this method. As the name LIFO suggests, the use of inventory is valued on the basis of the inverse sequence of receipts. Since the LIFO method assumes that the latest item in is the first item out, the current cost of materials are matched with the current selling price/current revenues. This matching of current costs with current revenues is the essence of the argument for the LIFO method. Average Cost Method: According to average cost method, each purchase is added to inventory and an average cost determined. Materials are charged into cost of sales at this average until another lot is received, when a new average unit inventory cost is calculated.

2) Based on Cost Analysis Cost of Holding Inventory:

One operating objective of inventory management is to minimize cost. Excluding the cost of merchandise, the costs associated with inventory fall into two basic categories: (i) Ordering or Acquisition or Set-up Costs, and (ii) Carrying Costs. These costs are an important element of the optimum level of inventory decisions.

3) Based on Financial Statement

For having assistance by banks, bankers should first evaluate the followings: 1. Collateral Strength. 2. Inventory Position 3. Some Financial Ratios 4. Payment of all requirements like Income Tax, Wealth Tax, Interests on debt etc., 5. Agreement papers of all authorized persons like Debenture holders, Shareholders etc., 6. All required documents. 7. Who is the Buyer and his Countrys relationship etc

Logistics Inventory Management

Meaning of Logistics:
Logistics is the Organization of Services and Supplies. In other words, logistics is making and taking the permission for sell/exporting the companys products in foreign countries. In fully export-oriented business this is one of the main department, where this department gets an approval to sell their goods in foreign countries. And also their main intention is to maintain all documents of those that are related to the exporting of their products.

Logistics Inventory Management:

Yes, already we have observed about the meaning of Inventory Management in theOrganization. But in fully export oriented business; Inventory Management is a very important concept. Because every exporter or importer, they do not know about each other who are staying in other countries.So every company, which are exporting or importing of materials, they shouldcommunicate e ach other through banks only. These banks are listed by Central Bank of that Nation. In our Country RBI is lists some banks for intermediating purpose and every year RBI declare some listed Banks as a mediator.

Fabindia (or Fabindia Overseas Pvt. Ltd.) is an Indian chain store retailing garments, furnishings, fabrics and ethnic products handmade by craftspeople across rural India. Established in 1960 by John Bissell, an American working for the Ford Foundation, New Delhi, Fabindia started out exporting home furnishings, before stepping into domestic retail in 1976, when it opened its first Fabindia retail store in Greater Kailash, New Delhi. Today it has over 170 stores across India and abroad, and is managed by his son, William Bissell. In 2008, Fabindia had revenue of $65 million, marking an increase of 30% from the previous year. Fabindia sources its product from across India through 17 community-owned-companies; a certain percentage of the shares of which are held by artisans and craft persons. Fabindia is India's largest private platform for products that are made from traditional techniques, skills and hand-based processes. Fabindia links over 80,000 craft based rural producers to modern urban markets, thereby creating a base for skilled, sustainable rural employment, and preserving India's traditional handicrafts in the process. Fabindia promotes inclusive capitalism, through its unique COC (community owned companies) model. The COC model consists of companies, which act as value adding intermediaries, between rural producers and Fabindia. These are owned, as the name suggests, by the communities they operate from; a minimum 26% shareholding of these companies is that of craft persons. Fabindia's products are natural, craft based, contemporary, and affordable. The Fabindia Head Office is located in New Delhi .

Philosophy
Fabindia was founded with the strong belief that there was a need for a vehicle for marketing the vast and diverse craft traditions of India and thereby help fulfill the need to provide and sustain employment. We blend indigenous craft techniques with contemporary designs to bring aesthetic and affordable products to todays consumers. Our endeavor is to provide customers with hand crafted products which help support and encourage good craftsmanship. Our products are sourced from all over India. Fabindia works closely with artisans by providing various inputs including design, quality control, access to raw materials and production coordination. The vision continues to be to maximize the hand made element in our products, whether it is handwoven textiles, hand block printing, hand embroidery or handcrafting home products.

Fabindia Products
The major portion of Fabindias product range is textile based. Non- textile introductions to this range are Home Products (introduced in October 2000), Organic Food Products (introduced in July 2004) & Fabindia Sana Fabindias range of authentic bodycare products (introduced in March 2006). The textile-based product range includes ready-to-wear garments and accessories for men, women, teenagers and children; bed, bath, table and kitchen linen; floor coverings, upholstery fabric and curtains. Cotton, silk, wool, grass, linen and jute are the basic fibers used. The Home Products range carries furniture, lighting, stationery, tableware, cane baskets and a selection of handcrafted utility items. Fabindia Organics carries several types of cereals, grains, pulses, spices, sugar, tea, coffee, honey, fruit preserves and herbs. Fabindia Sana, Fabindias range of authentic bodycare products includes soaps, shampoos, hair oils, pure oils, moisturizers, body scrubs, face packs, hair conditioners & special skin care products. Holding these major product lines together is the companys commitment to the rural and crafts sectors of India.

Garments

Accessories

Home linen

Home furnishings

Home products

Floor coverings

Personal products

Organics

Inventory Management of Fabindia

Physical Inventory Management
Each unit of Fabindia has its own store department that we can call it as Work-in-process inventory. This inventory process is fully computerized and here paper work is very less. Only maintaining of documents, which were sent by suppliers as like challans etc., are only here to maintain as paper documents. Otherwise it is fully computerized. Through computers only Store Department receives Purchase Order and by computer only they send documents of issuing of products to store. For easy to communicate and distribution of products, Fabindia has having only one Go down in Procedures involved in receiving and issuing of products are as follows: 1) Go down will first get Purchase Order No.

Purchase Order Number:

This PO is comes from Purchase Department. This Purchase Department gives a number for the each order made by Purchase Department only. Before placing any order to suppliers they first check the products in inventory as to know about whether products are available in Inventory or not. If not available in Inventory then only they will place an order according to the requirement. So, normally it does not have any stocks in its inventory. For every demand they make a fresh Purchase Order for purchasing of. It means products whatever the products are requiring for present orders, those products are only they kept as stocks in Inventory. In some cases, products may be in Go down, which they call it as Buffer Stock. If these old stock is matches the requirements of product which has ordered now by its customers, then purchase Department will sent a notice to Inventory for issuing of those products.

2) Receiving of Products
Any products comes-in or goes-out from the Go down it should be enter in the Gate that is they call it as Gate Entry, which is maintained by security Guard. Guard is not an employee of an organization. He is a contact-based employee. When Inventory receives products it first inspects some samples, so for it, they call up as Spot Inspection. Here they inspect the following points: Is it our supplier only and is this parcel is for us only? Are t h e s e r e c e i v e d products according to the Purchase Order? Like 1. Quantity 2. Date, etc. Is it having all required Challans or Invoices and also does it approved by authorized person?

Is it having all required documents? Is that Challan consisting the correct information of products?

After approval of products by sample inspection, inventory department put these details in manual book, this documentation is called as Day Book T h i s d a y b o o k i s c o n s i s t i n g o f information like Challan No., P.O. No., Style No., Description of products, Suppliers Name, transporters Name, and Quantity. After completing of these processes, products will send to inspection department. In this inspection department they inspect in details of products. After approval by department, this inventory department makes one document, which are they calling it as Goods Received Document

3). Issuing of Products

Merchandising Department will send one card called Job Card which it consisting of all details of Products requires for a store. According to that Card Inventory department should send the products to store. After receiving of products from inventory department they issue one document about received of products, quantity, description of products e t c . In this process sometimes it may happens like some products get damages and some are not fully matches with requirements. Then those products will be return to inventory. After utilizing of all these products by inventory department they will send one document called Order Completion Report (OCR). This report consists the information of Percentage of Utilized products for particular order and percentage of wastage of products. This report will send to inventory and also to Merchandising Department.

4). Return Back Products from Merchandising Units

Inventory takes those products, which are return back from merchandising units because of excess or surplus occurs . This excess or surplus exists because of purchase department, they always orders 20% more than its requirement to meet the requirement of next month. So these products are kept in Inventory as name it as Buffer stock. These Buffer Stocks will be utilize when company get the same type of Order. Inventory issues these products (Buffer Stock) only when it receives instruction from Merchandising and purchasing Department.

5). Rejected Products

Inspection department make the rejection of products, when products are not as per requirements and not as per the order. These rejected products are kept in separate section by Inventory Department. Inventory department inform to Purchase Department and also notice to Suppliers about rejection of products. That is called Rejection Card. In this card it involves Name of Supplier, Description of products, Challan No., Challan Date, Gate Entry No. & Date, No. of Quantity rejected, Reason for rejection etc., Some times supplier may issue

new products in place of rejected products. Or he may give some compensation for wrong supply and that is after paying of full payment of products.

6).Purchasing Procedure of Products

In Fabindia they purchase products from multiple Suppliers. There is a reason for purchase products from multiple suppliers. The reason is if one supplier delays to fulfill the supply then there must be alternative supplier for it to fulfill the requirement. So there must me no stock outs in the distribution process. Fabindia always purchases at bulk but by schedule wise. In other words they purchase products at a time for specific order. They make the agreement of supplying products only at once. And they negotiate the price only at once that is before supplying of products and once their agreement is over then they provide schedule to supplier to supply the products at a specific time and at a specified quantity.

Logistics Inventory Management

There is a department called Logistic Department in Fabindia, which is concerning about selling of goods and maintaining of all documents related to distribution of products and also taking the permission from banks to sell specific products in specific countries. So Logistic Department is one of the important front-office Departments, like Marketing Department .Marketing Department is one, which takes the orders from its stores. And this is entirely different from Logistic Department. Logistic Department is one, which sells its products and maintains all documents.

Financial Inventory Management

Already we saw about Logistic Inventory Management. Let us see the old and rejected stocks in financial terms and also have a look on the inventory ratios. Valuation method for Old and Rejected Stocks: Old Stock: This old stock means excess of products from specific order. As already viewed in Physical Inventory Process that always purchase department purchases 20% more than its order. So that remained or excess materials are said to be Buffer Stock .
Rejected Stocks: Again these are divides into three parts. Rejection of Products i.e., before sending to store. Rejection of products is valuating on Purchase value of those Products.

Holding or Ordering Cost

These costs are very important in manufacturing companies to minimize the cost. This is not applicable to Fabindia by virtue of its Business activities. Because, let us have a broad view on statement by following points: In Fabindia, they purchase the Products from multiple suppliers. Because to fulfill the requirements in required time limit. Fabindia orders the products to suppliers only at once and according to the schedule supplier will supply the Products .

Yes, Depending on Shorter order cycle Fabindia can hold entire stock well before order starts and also it can have a full stock at a time before starting process of selling. EOQ:
EOQ applicability due to the nature of Business as above said is not possible. Reorder Point: When only the buffer stock is remaining in the stock, the reorder take place. Lead Time: Fabindia purchases Products from multiple supplier and by on schedule Products basis to supply. So this is also not applicable in this type of business.

References
www.linkedin.com/title/buyer/at-fabindia-overseas-pvt-ltd http://books.google.co.in/books www.fabindia.com www.desai.com/innovation-applied/research/...FabIndia/.../Default.aspx