Inventory Management of Nepalese Public Enterprises

store Management of Nepalese Public EnterprisesCHAPTER-2Review of Literature in that location argon many researches make in memorandum Management of Nepalese Public enterprises and Private enterprises. Most of them has made on the manufacturing enterprises. In this chapter attempts has been made to present the reappraisal of literature regarding retention reign overment.2.1 Conceptual FrameworkInventory ManagementThe writer (Saxena, 2009, p. 2) defines coat up as any kind of idol resource that has potential stinting value considered as locked up capital. Inventory is a list of sounds and substantives which is acquirable in impart by business (Saxena, 2009). Other write (Li, 2007, p. 175) defines p arntage as the stock of any items or resources used in an face. Stock consists of all advanceds and materials that atomic number 18 stored by an organization which is unplowed for future use (Waters, 2003). According to (Roy, 2005, p. 100) descent is list of goods or item s.Inventory charge is the active control program which allows the management of sales, purchases and payments (Inventorymanagement). The compose (Saxena, 2009, p. 2) refers inventory management as a execute of managing natural materials, semi- complete products and ideal-products by a firm. The inventory management is a set of the process and policies that determines what inventory level should be maintained, what stock should be replenished and how large erect should be (Li, 2007, p. 175). According to (Toomey, 2003, p. 1) inventory management is a branch of business management which concerned in readiness and controlling inventories.Effective stock management nitty-gritty providing the desired stock service level or maximizing your profit while at the said(prenominal) age keeping your total stock follow as low as possible bySelecting products that initially allot, well and discontinuing those that stop selling. get the decent measure (how frequently to buy) get at t he remunerate while (when to buy)Keeping your total inventory enthronement in balance with the expected levels of salesTo control damages and improve profit, it is obligatory to actively manage every(prenominal) asset we own. And it is particularly true of the management of goods and material we buy and keep on land every far our own use or for resale. The goal of inventory management is to increase profit on inventory while change magnitude customer services (Frazelle, 2002, p. 91)The dictionary meaning of inventory is stock of goods or a list of goods. Various authors define the word inventory in their ways. In accounting language may mean stock of end goods. In a manufacturing concern, it may include b be-ass materials, work in process and stores. To chthonianstand the exact meaning of inventory the word inventory we may study it form the usage side and from the point of entry in the operationAmong the different aspects of management, inventory management is also one o f the major factors to course significant role in management of material , part supplies, expenses tools , working process, finished products and then accede on the books and maintenance of store rooms, warehouses by an organization is cognise as inventory management .2.2 Nature of InventoryThe company holds different kinds of inventories to obtain their goals (Waters, 2003). Basically we can divide inventory into three key which are pastime,Raw materialWork in progressFinished goods(Toomey, 2003, pp. 20-21)Raw MaterialThe stocks or inventories and purchase parts which is not part of manufacturing process is called unprocessed material (Toomey, 2003). Raw materials are those basic introduces that put one over to be gone through the different process to convert into finished goods.Raw materials inventories are much(prenominal) kind of inventories which have been purchased and stored for future manufacturing process. Raw materials are hold in store by manufacturing company t o smooth running of turnout process. The author defines raw material as those kinds of stocks which is imported from suppliers and are store until needed for manufacture (Waters, 2003, p. 9).Work in progressWork in progress refers to inventory units that are currently being worked on (Waters, 2003, p. 9). Work in progress inventories are uncomplete a finished product nor raw materials. It is middle of raw materials and finished product. The author (Toomey, 2003, pp. 20-21) defines work in progress (WIP) inventories are those kinds of inventories which are in different phase of completion throughout the manufacturing process. It is very difficult to separate which materials are WIP and which are not. Because the same materials may be a raw material in one industry and same material may be a WIP as well as finished goods in early(a) industry. It depends upon nature of production.Finished goodsThe finished goods inventory represents products that are ready for sale. According to (To omey, 2003, pp. 20-21) finished goods are those items which are awaiting shipment to customers. Finished goods inventories includes all the completed products which going to be sell (Muller, 2003, pp. 19-20).These are goods fully manufactured inspected and ready for dispatch to a customer. In manufacturing firm, these are the final output of the production process. Stocks of finished goods are held by manufacturing and non-manufacturing company for market operation.2.3 Purpose of inventoryInventory is the most of the essence(p) to all manufacturing organization in todays industrial world and it plays vital role to exist the company. So it is necessary to manage it properly because both situations of inventories either unjustified or wanting(predicate) are not acceptable to the firm. There are two larger points within which the firm should operate. The objective of inventory management should be to determine and maintain optimum level of inventory investment. The optimum level of inventory will lie between two danger points of excessive and inadequate inventories.According to (Wild, 2002, p. 7) the propose of the inventory management function in supporting in the business activities is to optimize the three sectors customer services, inventory embody and operational cost. The author refers about purpose of inventory like this the inventory is give rised when put up excesses the demand. The main purpose of holding the inventory in the company is to prevent from famine of raw materials, expected demand, to gain more profit (Li, 2007, p. 176).Firm should always aware from over investment or to a decline place-investment in the inventories. Over investment and under investment in inventory is unhealthy for the company. Due to over investment into inventory, makes unnecessary tie-up and the amount which we cant invest in early(a) purpose, increasing carrying costs, risk of liquidity. Excessive carrying costs will directly effect in the company profit. Due to over inventories it may not be possible to sell them in time and at full value. Similarity, WIP is far more difficult to sell because as we said before WIP is not finished goods. In the same way finished goods inventory should sold at low prices due to fall in the price in market and the seasonal factors. So, more investment in inventories is harmful to producer/company. It should be cut down.Similarly, under investment in inventories also not good for company. It carries some problems such as production hold-ups, frequent production interruptions. If finished goods are not sufficient, we do not meet the customers demand and our goodwill also loss. Thus, the objectives of inventory management should be neither excessive nor inadequate level of inventories but maintaining sufficient inventory level for the smooth production and sales operations. An optimum level of inventory should be goaded on the basis of the trade-off between costs and benefits. The various importance of inv entory management can be summarized up as followsPredictabilityUnreliability of supplyPrice protectionLower ordering costAnticipated demand2.7 Procedure of Inventory ManagementThese are lot of function have to be done For the achievement of its objectives business performs a big variety of function, namely production, marketing, personnel, office research and training of these production and marketing are basic operate functions in a typical business enterprise. Marketing is concerned with the demand side of goods and services, while production is concerned with the supply side. One cannot exist without former(a) however, decisions about the production activities constitute one of the most important functions of the top management. Production is concerned with the provision of goods and services for the satisfaction of the customer wants. Therefore the consumer depends upon the good economical and efficient production system good inventory management there should be used differen t activities in ought procedure or manner. superior general activities such as acquire, receiving, store-keeping and issuing and pricing are the procedure of inventory management. They are described as follows2.7.1 PurchasingPurchasing is the fulcrum when it comes to meeting customer demands (Johnson, 2010) . Purchasing is the most important function of inventory management to select the suppliers, because it brings significant saving for the organization (Elanchezhian, et al 2010). All organization need various kinds of scuttlebutt like goods and services form external suppliers. The writers ( Baily, Farmer, Jessop, jones, 2005, pp. 3-4) define purchasing as to acquire reclaim quantity of material, at the right time, in the right quantity, from the right source, at the right price. In simple words purchasing is relate to going the open market finding the require materials at the lowest price and selecting the supplier who chaps it at that price having the quality of the mater ials in minds. In fact the process of inventory management begins with purchasing .The need for particular materials initiates purchasing in a firm. A good purchasing management has played important role in the manufacturing companies. We should pay more attention in the purchasing raw materials, supplies in the right quantity of the right quality from the right origin at the right time and cost. The production is hampered the scarcity of raw materials on time, purchasing department should take grater responsibilities and should analysis the existing procural policy and should tune with the overall organizational objectives and policies. We can improve management of purchase by the abet of standardization, value analysis, material substitution, transportation saving and cost reduction of packing modification.There are the following functions of a purchase department.How to purchase?Where to purchase?How much to purchase?At what price to purchase?To perform there function effectivel y, the purchase department follows the following proceduresReceiving purchase segregationExploring the sources of supply and choosing of suppliersPreparation and consummation of purchase order.Receiving and inspecting materials.Checking and issuing of bills for payment.3The objectives of purchase department is to arrange the supply of materials, spare parts and services or semi-finished goods demand for desired production .Walters observes purchasing functions as The Procurement and Purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacturing of a product adopted to marketing in the proper quality at the proper time and at the lowest price constant with desired.Purchasing now become a specialized function in many organization wasting expenses that Purchasing is a managerial activity that goes beyond the simple act of buying and includes the planning and policy, objectives covering wide range of related and complimentary included in such activities are the research and growth required for the proper selection of materials and sources from which these materials may be brought.4In the words of matter industrial purchasing is The procurement by purchase of Alfred and Beauty .Principles of industrial the proper adopted to marketing in the proper quantity and quality at the proper time and at the lowest price consistently with the quality desired A Purchasing means a policy well planned, Procedures free from much formalities and development of up to date rules and techniques of higher standard to reveal efficiency and economy.52.7.2 Receipt and Store KeepingAfter sometimes of placing the order, flow-up process starts to get quick oral communication of the items. The items are received by the purchasing department at the time of delivery and received items are compared with purchase order and actual materials received should be entered in goods received note. Then all items received by the purchasing department shoul d be passed into store for protection against deterioration and pilferage. They are stored in such a way that their location is easily place at the time of issue The store function involves both keeping the store of materials and keeping the store records, the former being physical task and the later being accounting task depending upon the nature and requirements of the organizations the stores are classified as centralized and decentralized store.6In the words of Maynard, the duties of store keeping are to receive materials to protect than while in storage from damage and unauthorized removal to issue the materials in the right quantity at the right time , to the right place and to provide these services promptly and at least costs.Good store keeping should armed service achieve location identification, receipt and issue without delay. Storage space should be economically utilized and materials should be protected against deterioration, fine theft, details of quantities should b e available on request. General code numbers are assigned to materials for easy identification. Materials may be stored in bin, rack, drawer, tray, boxes or floor area.7Store keeping in the activity of receiving or distributing stores or supplies, stores included direct raw materials, indirect materials (supplies) and finished goods8Generally the physical stock available in the store afterwards counting, weighting , measuring , listing as the case may be is properly recorded by only of the following methods.2.7.3 Issued and PricingMaterials are kept in stores so that the storekeeper may issue them whenever these are required by the production departments. Materials should be issued on receipt of materials requisition of Bill of materials under proper authority to avoid the misappropriation of materials.9Materials issued from the stores are debited to the jobs or work orders which received them and credited to the materials account. These jobs are debited with the value of material issued to them.10Each item at bottom the inventory has some value associated with it. This value depends on the price duration of the item inside the inventory, procurement cost, storage cost etc. Generally the time of purchase and time of issue of any items are different and the market prices of the items also vary with time. Thus, for costing purposes, the problems of pricing at the time of issue are great signification.112.7.4 Cost Basis for Inventory ValuationThe primary basis of accounting for inventory is cost which has been defined generally as the price gainful to considerate given to acquire an asset. As applied to inventories, cost means in principal the sum of the applicable expenditure and changes directly or indirectly incurred in bringing an article to its existing condition and location.12Conceptually the process of valuation the inventory is simple. We can calculate inventory value that multiplying physical quantity of goods by cost per unit. But in practice, many organizations purchase different types of raw materials at different price and differenttime. Price of materials changes time to time. There are many types of raw materials remain in the stock. It is not always possible to identify the individual particular purchase group. At the solution firms have faced difficulties in valuation the inventories. In this situation there are many methods which are based on historical cost used in determining the value of inventory area. First In First Out regularityUnder the First In First Out method the units are assumed to have been disposed of in the order in which they were acquired and the units remaining are assumed to be those which were acquired last. This assumption is realistic in that good merchandising requires that older stock be moved to the front and new purchases placed in back of the bin. Consequently the oldest merchandise in sold first, because sales orders are filled from the front of the bins. The last merchandise purchased rem ains in the inventory.13b. Last In First Out MethodUnder this method, the cost of goods sold consists of the cost of the most recently acquired goods, and the ending inventory consists of the cost of the oldest goods which were available for sale during the period.14This method does not conform to the physical flow of the units of goods but is unless widely used. In periods of steadily rising prices, the inventory value will be at the lower cost of the earliest units acquired. The value of the inventory on the statement of financial position is a conservative one. In the statement of income the cost of goods sold is higher, and when costs increase net income is lower resulting in lower income taxes of course, in periods of falling prices, the results will be opposite, the cost of good sold will be lower and net income will be higher. Under last in first out method, whether costs are rising or falling, the net income over a series of years shows less variation.15.c. Specific Price o r Identification MethodUnder this method, materials issued to production are priced at their purchase prices. The basic assumption in following this method is that materials in the stores are capable of being identified as belonging to specific lots. Identification can be made by placing some distinguishing mark usually price tag on every lot. When materials are issued, price tags are removed and forwarded to the costing department for ascertaining the material cost of production.This method is simple in its mechanism and operation. This method does not create accounting complications as are associated with the working of FIFO, last in first out and average methods. But this method is useful where job costing is in operation and the actual material issued can be identified. It is also suited to the needs of a small business enterprise when a small number of items of materials are purchased and stored which can be easily identified.16d. Base Stock MethodEach concern always maintains a minimum quantity of material in stock. This minimum quantity is known as safety or base stock and this should be used only when an emergency arises. The base stock is created out of the first lot the material purchased and, therefore, it is always valued at the cost price of the first lot and is carried forward as a fixed asset.This method works with some separate method and is generally used with FIFO or LIFO method. Any quantity over and above the base stock is issued in accordance with the other method which is used in conjunction with this method. The objective of this method is to issue the material according to the current prices. This objective will be achieved only when the LIFO method is used together with the Base Stock method.172.8 Cost Associated with InventoryThere are many cost associated with the size of inventory directly either advocating to decrease the inventory size or suggesting an increase in the inventory size, for an effective inventory analysis and contro l of the system one should have take place picture about the behavior of cost associated with different factors. Different kinds of costs associated with inventory management are explained below.a. Carrying costCarrying cost per period, c, represent the cost of inventory storage, treatment and insurance, together with the required rate of return on the investment in inventory. These costs are assumed to be constant per unit of inventory per unit of time.18Cost incurred for maintaining a given level of inventory are called carrying cost.Carrying cost means storing cost. It starts when raw-materials are placed in warehouse and it continuous until finished goods have not produced except production cost. When we carry raw- materials to production spot and there make final product and that final product we carry into stock. In course of carrying to production spot and returned back to warehouse may labor, handling cost, this cost is also included in carrying costs. However the size of i nventory increases, the carrying cost also increases. The carrying costs and the inventory size are positively related and move in the same direction.Carrying cost is the first category of inventory management cost which is generally associated harmoniseally with the average value of inventory.19Total carrying cost vary in proportion to the value of inventory usually they are computed from the following formula.Total carrying cost = Average inventory * carrying cost per unitSymbolically TCC = Q/2 *CWhere,Q = Quantity order sizeb. parliamentary law costOrdering cost represent all of the cost of placing and receiving an order. When a firm is ordering from an external source, these include the costs of preparing the purchase requisition, expediting the order (long-distance calls and follow-up letters), receiving and inspecting the shipment and handling charge.In practice, the cost per order generally contains both fixed and variable components, since a portion of the cost- such as th at of receiving and inspecting the order- normally varies with the quantity ordered. Ordering cost may different in the sense of inventories nature. Such as for Raw-materials- ordering cost involves the clerical cost in placing an order as well as certain costs of receiving and checking the goods once they arrive. For finished goods- ordering cost involves scheduling a production run. And for work-in-progress- ordering costs are likely to involve nonentity more than record keeping.Ordering cost the fixed expense in the preparation and execution of an order for goods.20Ordering cost increase in proportion to the number of orders placed. Thus more frequently the inventor is acquired, higher the firms ordering costs. On the other hand ordering costs decrease with increasing size of inventory.Generally ordering costs involvesCost of placing an orderRequisitioning costTransportation/shipping costReceiving, inspecting and storing costsSales tax, Customs, etcClearing and forwarding costs restitution of raw-materialsStationary costBank commission/ L.C. chargesTelephone/Fax/Postage expense to follow upCost incurred when raw-materials in transitFirms usually offer discount for purchase materials in large quantity. Such discount helps reduction in the unit price of the items purchases, such facilities encourage buyers to place a fewer orders rather than placing small onceOrdering cost is calculated by following formulaOrdering cost = Annual Requirement/Quantity order size *Ordering cost per unitSymbolically,TOC = A/Q x O2.9 Inventory trunksThe inventory accounting system can be Periodic System or continuous system.2.10 Inventory Management ModelsPush and Pull ModelsInventory management models can be classified either push or consecrate modelsa. Push Inventory ModelsPush models schedule orders for production or order good in advance or customer demand. Manufactures push the finished products through the distribution channel to intermediaries and the final consumer. Ec onomic Order Quantity (EOQ), Material Requirement planning (MRPI), Manufacturing Resource mean (MRIP II) and distribution requirement planning (DRP) are all push models.i. Economic order quantity (EOQ)In an ideal environment, forecasting demand would be easy and straight forward. Simply look at past demand patterns to predict future consumption. Under these conditions, EOQ model can be used to calculate when to order the item and how much to order. The basic EOQ equality is as followsEOQ = 2PD/CVWhere,P=Cost of placing one order in rupeesD = Annual demand for the productC = Annual inventory carrying cost expresses as a percentage of products cost of value.V = Average cost or value of one unit of inventoryii. Material Requirement Planning (MRPI)MRPI is a computer- based management information system designed to manage dependent demand inventory items in the transformation process of operations management. This computerized inventory system was developed in the 1960s to deal primar ily with the timing the tedious record keeping of dependent demand inventory transactions.Many researchers confide that MRP systems historically have made a fundamental software development contribution that has helped cause computer-based system to integrate and therefore aid in the development of computer- integrated manufacturing (CIM) systems.21One of the most common dependent demand inventory system used in the United States is the managerial requirement planning (MRP) system.22It supports the planning and control of dependent demand inventory and is most popular in U.S organizations that have substantial dependent demand inventory to manage. It includes any products that are made from dependent demand inventory items such has components or raw materials. MRP processes information for production scheduling and capacity planning as well.As an inventory management system, MRP can be used to plan inventory needs over a fixed planning horizon. Although MRP can plan inventory requi rement for a period of from a single day to several years, the information the program generator is usually based on workweekly intervals. In MRP terminology, the weekly (or other time period chosen) are referred to as time buckets. One of the primary objectives of an MRP system is provide an adequate supply of dependent demand inventory when required fro production. MRP also seeks to provide useful inventory, production scheduling, and capacity planning information for inventory control proposes.There are two types of MRP systemsRegenerative SystemThis is a day-after-day data input system. Under this system, changes in input data are saved until a specific time, such as the end of a week or end of a month. Changes are then run on a group of batch basis.Net-change SystemThis is a continuous data input system. Under this system, changes are immediately entered into the computer. New MRP planning information is then recomputed for all of the elements in the inventory system that are affected by the changes.iii. Manufacturing Resources Planning (MRP II) SystemThe basis MRP system simply handles the materials aspects of production/ operations control. No real account is taken of capacity implications Therefore one more modern system developed in Manufacturing resources planning (MRPII) system24In addition to producing the detailed material plan, the system can produce detailed capacity plans provided it has the necessary job-routing data and so on. The implementation of these plans allows shop-floor and purchase control to be carried out. MRP II is essentially a computer system. It has been suggested by Oliver Wight that MRP/ MRP II implementations can be classified on a four- point scale, from A to D. Table no . Briefly describes these states.ClassCharacteristicsDMRP working in data-processing department only unworthy inventory recordsMaster schedule mismanagedReliance on shortage lists for progressingCUsed for inventory ordering, not schedulingScheduling by s hortage listsoverladen master scheduleBSystem includes capacity planning, shop-floor controlUsed to plan production, not manage the businessHelps still needed from shortage listsInventory higher than necessaryAUses closed-loop MRPIntegrates capacity planning, shop-floor control, vendor schedulingUsed to plan sales, engineering, purchasingNo shortage lists to over-ride schedulesMost organization implementing MRP/ MRP II are on the course of instruction from class D status to class A status. A difficult faced is knowing, in a quantitative sense, where on the path the organization is, and what steps to take to effect improvements.iv. Distribution Requirement Planning (DRP)DRP applies MRP II principles to the flow of finished goods to field warehouses and customers. Although MRP II improved MRP by victorious into account both material management and production scheduling. It failed to account for this out bound movement. DRP adjusts ordering patterns of inventory needs vary, responds more readily to system wide inventory needs and better deals with product availability and receipt timing.b. Pull Inventory ModelPull inventory models are based on do goods once customer demand is known . The product is inclineed through the channel of distribution by the order. Recent trends suggest a movement to use pull inventory models to reduce inventory throughout the channels. JIT and KanBan are the must widely used pull inventory models.i. KanBan Pull ModelThe KanBan Mean visual record and is the production control system the uses JIT production system, allowing production with smaller inventories, KanBan is also referred to as card system, a single card KanBan and two card KanBan system.ii. whizz Card KanBanThe single card kanban system uses only a conveyance (move) kanban and no production kanban. The single card kanban is must common used in Japan.25iii. Two card KanBanInventroy is usually controlled at low levels by using a manual two card KanBan system. One card is c onveyance KanBan, the requisition and authorization of transferenceof materials form supply center to work center. A second card the production KanBan, authorizes the production of materials.2