INTRODUCTION Adequate inventories facilitates production activities and help to customers satisfaction by providing good service.

The basic financial aim of an enterprise is maximization of its value. At the same time, a large both theoretical and practical meaning has the research for determinants increasing the firm value. Most financial literature contains information about numerous factors influencing the value. Among those factors is the net working capital and elements creating it, such as the level of cash tied in accounts receivable, inventories and operational cash balances. A large majority of classic financial models proposals, relating to the optimum current assets management, were constructed with net profit maximization in view. In order to make these models more suitable for firms, which want to maximize their value, some of them must be reconstructed. In the sphere of inventory management, the estimation of the influence of changes in a firms decisions is a compromise between limiting risk by having greater inventory and limiting the costs of inventory. It is the essential problem of the corporate financial management. The basic financial inventory management aim is holding the inventory to a minimally acceptable level in relation to its costs. Holding inventory means using capital to finance inventory and links with inventory storage, insurance, transport, obsolescence, wasting and spoilage costs. However, maintaining a low inventory level can, in turn, lead to other problems with regard to meeting supply demands. The inventory management policy decisions, create the new inventory level in a firm. It has the influence on the firm value. It is the result of opportunity costs of money tied in with inventory and generally of costs of inventory managing. Both the first and the second involve modification of future free cash flows, and in consequence the firm value changes. Inventory changes (resulting from changes in inventory management policy of the firm) affect the net working capital level and the level of operating costs of inventory management in a firm as well. These operating costs are result of storage, insurance, transport, obsolescence, wasting and spoilage of inventory. Maximization of the owners wealth is the basic financial goal in enterprise management. Inventory management techniques must contribute to this goal. The modifications

to both the value-based EOQ model and value-based POQ model may be seen in this article. Inventory management decisions are complex. Excess cash tied up in inventory burdens the enterprise with high costs of inventory service and opportunity costs. By contrast, higher inventory stock helps increase income from sales because customers have greater flexibility in making purchasing decisions and the firm decrease risk of unplanned break of production. Although problems connected with optimal economic order quantity and production order quantity remain, we conclude that value-based modifications implied by these two models will help managers make better value-creating decisions in inventory management. INTRODUCTION OF INVENTORY Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Because of the large size of inventories maintained by firms, a considerable amount of feuds is required to be committed to them. It is therefore, absolutely imperative to mnage inventories efficiently and efficiently in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. It is possible for fore a company to reduce its levels of inventories to a considerable degree e.g. 10 to 20 percent, without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in excessive inventory carries a favourable impact on a companys profitability. MEANING OF INVENTORY:Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may includes raw materials, work-in-progress and stores etc. In the form of materials or supplies to be consumed in the production process or in the rendering of services. In brief, Inventory is unconsumed or unsold goods purchased or manufactured. NATURE OF INVENTORIES :-

Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventory exist in a manufacturing company are raw materials, work in progress and finished goods. RAW MATERIALS:Raw materials are those inputs that are converted into finished product though the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions. WORK IN PROGRESS:These inventories are semi manufactured products. They represent products that need more work before they become finished products for sales. PACKAGING MATERIAL:Packaging material includes those items which are used for packaging of perfumery product i.e. cap of the bottle, pump, coller,liver, box etc. FINISHED GOODS:Finished goods inventories are those completely manufactured products which are ready for sale. Stock of raw materials and work in progress facilitate production. While stock of finished goods is required for smooth marketing operation. Thus, inventories serve as a link between the production and consumption of goods. The levels of four kinds of inventories for a firm depend on the nature of its business. A manufacturing firm will have substantially high levels of all three kinds of inventories, while a retail or wholesale firm will have a very high and no raw material and work in progress inventories. Within manufacturing firms, there will be differences. Large heavy engineering companies produce long production cycle products, therefore they carry large inventories. On the other hand, inventories of a consumer product company will not be large, because of short production cycle and fast turn over. INVENTORY MANAGEMENT

As the cost of logistics increases the manufacturers are looking to inventory management as a way to control costs. Inventory is a term used to describe unsold goods held for sale or raw materials awaiting manufacture. These items may be on the shelves of a store, in the backroom or in a warehouse mile away from the point of sale. In the case of manufacturing, they are typically kept at the factory. Any goods needed to keep things running beyond the next few hours are considered inventory. "Inventory" to many small business owners is one of the more visible and tangible aspects of doing business. Raw materials, goods in process and finished goods all represent various forms of inventory. Each type represents money tied up until the inventory leaves the company as purchased products. Likewise, merchandise stocks in a retail store contribute to profits only when their sale puts money into the cash register. In a literal sense, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled, they are unreliable, inefficient and costly. Inventory management simply means the methods you use to organize, store and replace inventory, to keep an adequate supply of goods while minimizing costs. Each location where goods are kept will require different methods of inventory management. Keeping an inventory, or stock of goods, is a necessity in retail. Customers often prefer to physically touch what they are considering purchasing, so you must have items on hand. In addition, most customers prefer to have it now, rather than wait for something to be ordered from a distributor. Every minute that is spent down because the supply of raw materials was interrupted costs the company unplanned expenses

DEFINITIONS OF INVENTORY MANAGEMENT

1. Policies, procedure and techniques employed in maintaining the optimum number or amount of each inventory item. 2. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. 3. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. DEFINITIONS OF INVENTORY 1. Inventory: goods that businesses intend to sell to their customers or raw materials or inprocess items that will be converted into salable goods 2. Inventory is the stock of idle resources which has economic value and is maintained to fulfill the present and future needs of an organization 3. In Manufacturing Organization : Inventory can be as raw components and finished goods etc 4. In Service Organization : Inventory of any Bank can be broachers, forms, pamphlets and also can be currency notes and coins. Hospitals can have inventory as syringes, glucose bottles, medicines etc. IMPORTANCE OF INVENTORY Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and materials, spare parts,

subsequent earnings for the company's shareholders/owners. The word 'inventory' can refer to both the total amount of goods and the act of counting them. Many companies take an inventory of their supplies on a regular basis in order to avoid running out of popular items. Others take an inventory to insure the number of items ordered matches the actual number of items counted physically. Shortages or overages after an inventory can indicate a problem with theft or inaccurate accounting practices.

Possessing a high amount of inventory for long periods of time is not usually good for a business because of inventory storage, obsolescence and spoilage costs. However,

possessing too little inventory isn't good either, because the business runs the risk of losing out on potential sales and potential market share as well.

OBJECTIVES OF INVENTORY MANAGEMENT

The basic managerial objectives of inventory control are two-fold; first, the avoidance over-investment or under-investment in inventories; and second, to provide the right quantity of standard raw material to the production department at the right time. In brief, the objectives of inventory control may be summarized as follows:

A. Operating Objectives:
(1) Ensuring Availability of Materials: There should be a continuous availability of all types of raw materials in the factory so that the production may not be help up wants of any material. A minimum quantity of each material should be held in store to permit production to move on schedule.

(2)

Avoidance of Abnormal Wastage: There should be minimum possible wastage of materials while these are being stored in the godowns or used in the factory by the workers. Wastage should be allowed up to a certain level known as normal wastage. To avoid any abnormal wastage, strict control over the inventory should be exercised. Leakage, theft, embezzlements of raw material and spoilage of material due to rust, bust should be avoided.

(3)

Promotion of Manufacturing Efficiency: If the right type of raw material is available to the manufacturing departments at the right time, their manufacturing efficiency is also increased. Their motivation level rises and morale is improved.

(4)

Avoidance of Out of Stock Danger: Information about

availability of materials should be

made continuously available to the management so that they can do planning for procurement of raw material. It maintains the inventories at the optimum level keeping in view the operational requirements. It also avoids the out of stock danger.

(5) Better Service to Customers: Sufficient stock of finished goods must be maintained to match reasonable demand of the customers for prompt execution of their orders. (6)Highlighting slow moving and obsolete items of materials. (7) Designing poorer organization for inventory management: Clear cut accountability should be fixed at various levels of organization.

B. Financial Objectives:
(1) Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets.

(2)

Reasonable Price: While purchasing materials, it is to be seen that right quality of material is purchased at reasonably low price. Quality is not to be sacrificed at the cost of lower price. The material purchased should be of the quality alone which is needed.

(3) Optimum Investing and Efficient Use of capital: The basic aim of inventory control from the financial point of view is the optimum level of investment in inventories. There should be no excessive investment in stock, etc. Investment in inventories must not tie up funds that could be used in other activities. The determination of maximum and minimum level of stock attempt in this direction.

IMPORTANCE OF INVENTORY MANAGEMENT

1. COUNTING CURRENT STOCK All businesses must know what they have on hand and evaluate stock levels with respect to current and forecasted demands. You must know what you have in stock to ensure you can meet the demands of customers and production and to be sure you are ordering enough stock in the future. Counting is also important because it is the only way you will know if there is a problem with theft occurring at some point in the supply chain. When you become aware of such problems you can take steps to eliminate them. 2. CONTROLLING SUPPLY AND DEMAND

Whenever possible, obtain a commitment from a customer for a purchase. In this way, you ensure that the items you order will not take space in your inventory for long. When this is not possible, you may be able to share responsibility for the cost of carrying goods with the salesperson, to ensure that an order placed actually results in a sale. You can also keep a list of goods that can easily be sold to another party, should a customer cancel. Such goods can be ordered without prior approval. Approval procedures should be arranged around several factors. You should set minimum and maximum quantities which your buyers can order without prior approval. This ensures that you are maximizing any volume discounts available through your vendors and preventing overordering of stock. It is also important to require pre-approval on goods with a high carrying cost. 3. KEEPING ACCURATE RECORDS Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the goods. When inventory arrives, this is when you will find breakage or loss on the goods you ordered. Inventory leaving your warehouse must be counted to prevent loss between the warehouse and the point of sale. Even samples should be recorded, making the salesperson responsible for the goods until they are returned to the storage facility. Records should be processed quickly, at least in the same day that the withdrawal of stock occurred. 4. MANAGING EMPLOYEES Buyers are the employees who make stock purchases for your company. Reward systems should be set in place that encourage high levels of customer service and return on investment for the product lines the buyer manages. Warehouse employees should be educated on the costs of improper inventory management. Be sure they understand that the lower your profit margin, the more sales must be generated to make up for the lost goods. Incentive programs can help employees keep this in perspective. When they see a difference in their paychecks from poor inventory management, they are more likely to take precautions to prevent shrinkage.

Each stock item in your warehouse or back room should have its own procedures for replenishing the supply. Find the best suppliers and storage location for each and record this information in official procedures that can easily be accessed by your employees. Inventory management should be a part of your overall strategic business plan. As the business climate evolves towards a green economy, businesses are looking for ways to leverage this trend as part of the big picture. This can mean re-evaluating your supply chain and choosing products that are environmentally sound. It can also mean putting in place recycling procedures for packaging or other materials. In this way, inventory management is more than a means to control costs; it becomes a way to promote your business. SUCCESSFUL INVENTORY MANAGEMENT Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Many small business owners fail to appreciate fully the true costs of carrying inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of money tied up in inventory. This fine line between keeping too much inventory and not enough is not the manager's only concern. Others include: Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin; Increasing inventory turnover -- but not sacrificing the service level; Keeping stock low -- but not sacrificing service or performance. Obtaining lower prices by making volume purchases -- but not ending up with slowmoving inventory; and Having an adequate inventory on hand -- but not getting caught with obsolete items. The degree of success in addressing these concerns is easier to gauge for some than for others. For example, computing
ABOUT INVENTORY CONTROL

Inventory consists of the goods and materials that a retail business holds for sale or a manufacturer keeps in raw materials for production. Inventory control is a means for maintaining

the right level of supply and reducing loss to goods or materials before they become a finished product or are sold to the consumer. Inventory control is one of the greatest factors in a companys success or failure. This part of the supply chain has a great impact on the companys ability to manufacture goods for sale or to deliver customer satisfaction on orders of finished products. Proper inventory control will balance the customers need to secure products quickly with the business need to control warehousing costs. To manage inventory effectively, a business must have a firm understanding of demand, and cost of inventory.

ADVANTAGES OF INVENTORY CONTROL:

(1) Reduction in investment in inventory. (2) Proper and efficient use of raw materials. (3)No bottleneck in production. (4) Improvement in production and sales. (5) Efficient and optimum use of physical as well as financial resources. (6)Ordering cost can be reduced if a firm places a few large orders in place of numerous small orders. (7)Maintenance of adequate inventories reduces the set-up cost associated with each production Run.

INVENTORY COSTS There are three main types of cost in inventory. There are the costs to carry standard inventories and safety stock. Ordering and setup costs come into play as well. Finally, there are shortfall costs. A good inventory control system will balance carrying costs against shortfall costs. SAFETY STOCK

Safety stock is comprised of the goods needed to be kept on hand to satisfy consumer demand. Because demand is constantly in flux, optimizing the Safety Stock levels is a challenge. However, demand fluctuations do not wholly dictate a companys ability to keep the right supply on hand most of the time. Companies can use statistical calculations to determine probabilities in demand. ORDERING COSTS Ordering costs have to do with placing orders, receiving and stowage. Transportation and invoice processing are also included. Information technology has proven itself useful in reducing these costs in many industries. If the business is in manufacturing, then to production setup costs are considered instead. THE COST OF SHORTFALLS Stock out or shortfall costs represent lost sales due to lack of supply for consumers. Sales departments prefer these numbers be kept low so that an ample stock will always be kept. Logistics managers prefer to err on the side of caution to reduce warehousing costs. Shortfall costs are avoided by keeping an ample safety stock on hand. This practice also increases customer satisfaction. However, this must be balanced with the cost to carry goods. The best way to manage stockout is to determine the acceptable level of customer service for the business. One can then balance the need for high satisfaction with the need to reduce inventory costs. Customer satisfaction must always be considered ahead of storage costs. CYCLICAL COUNTING Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted. This means that a particular section of the warehouse or plant is counted physically at particular times, rather than counting all inventory at once. While this method may be less accurate than counting the whole, it is much more cost effective. Cyclical counting is preferred because it allows for operations to continue while inventory is taken. If not for this practice, a business would have to shut down while counts were taken, often

requiring the hire of a third party or use of overtime employees. Cyclical counting usually utilizes the ABC rule, but there are other variations of this method that can be used. The ABC rule specifies that tracking 20 percent of inventory will control 80 percent of the cost to store the goods. Therefore, businesses concentrate more on the top 20 percent and counter other goods less frequently. Items are categorized based on three levels:

A Category: Top valued 20 percent of goods, whether by economic or demand value B Category: Midrange value items C Category: Cheaper items, rarely in demand

Warehouse staff can now schedule counting of inventories based on these categories. The A category is counted on a regular basis while B and C categories are counted only once a month or once a quarter. COMMON INVENTORY VALUATION METHODS The methods a company uses to value the costs of inventory have a direct effect on the business balance sheets, income statements and cash flows. Three methods are widely used to value such costs. They are First-In, First-Out (FIFO), Last-In First-Out (LIFO) and Average Cost. Inventory can be calculated based on the lesser of cost or market value. It can be applied to each item, each category or on a total basis.

FIFO FIFO operates under the assumption that the first product that is put into inventory is also the first sold. An example of this in action can be made when we assume that a widget seller acquires 200 units on Monday for Rs.1.00 per unit. The next day, he spots a good deal and gets 500 more for Rs.75 per unit. When valuing inventory under the FIFO method, the sale of 300 units on Wednesday would create a cost of goods sold of Rs.275. That is, 200 units at Rs1.00 each and 100 units at Rs.75 each. In this way, the first 200 units on the income statement were

valued higher. The remaining 400 widgets would be valued at Rs.75 each on the balance sheet in ending inventory. LIFO LIFO assumes instead that the last unit to reach inventory is the first sold. Using the same example, the income statement and balance sheet would instead show a cost of goods sold of Rs.225 for the 300 units sold. The ending inventory on the balance sheet would be valued at Rs.350 in assets. When this method is used on older inventories, the companys balance sheet can be greatly skewed. Consider the company that carries a large quantity of merchandise over a period of 10 years. This accounting method is now using 10-year-old information to value its assets. WEIGHTED AVERAGE Average Cost works out a weighted average for the cost of goods sold. It takes an average cost for all units available for sale during the accounting period and uses that as a basis for the cost of goods sold. To site our example again, we would calculate the cost of goods sold at [(200 x Rs.1) + (500 x Rs.75)]/700, or Rs.821 each. The remaining 400 units would also be valued at this rate on the balance sheet in ending inventory.

SPECIFIC IDENTIFICATION A less commonly used, but important method to valuation is called specific identification. This method is used for high-end items that are more easily tracked. In some cases, this method can be used for more common items, but less value is realized from this accounting method is such cases. This is because powerful and detailed tracking software is required to employ specific identification on large numbers of goods. INFLATIONARY EFFECTS ON VALUATION

No matter how you look at it, you are still coming up with 700 widgets that cost you a total of Rs.575. This would all be well and good if the value of money remained static. However, market conditions change causing inflationary changes. When this happens, your accounting method can have a strong impact on how healthy the business looks on income statements and balance sheets. The affects cash flow when businesses seek credit to pay for ongoing operations. RISING PRICES When prices are rising, using FIFO will show a greater value on the balance sheet, thereby increasing tax liabilities but also improving credit scores and the ability to borrow cash for ongoing operations. Older inventory is being used to determine the cost of goods sold and newer inventory is being used to report assets. LIFO decreases the value on the income statement, but can reduce the level of depreciation you are able to take on assets. This is good for taxes but bad for borrowing. Industries most likely to adopt LIFO are department stores and food retailers. The method is rarely used in defences.

NEED OF THE STUDY:-

Inventories are equivalent to cash and they make up an important of the total cost. It is essential that inventory should be properly safeguarded and correctly accounted. Proper control of inventory can make a substantial contribution to the efficiency of a bussiness. The success of a business concern largely depends upon efficient purchasing, storage, consumption and accounting.

INVENTORY MANAGEMENT TECHNIQUES

In managing inventories, the firms objective should be in consonance with the wealth maximization principle. To achieve this, the firm should determine the optimum level of investment in inventory. To deal with the problems of inventory management effectively, it becomes necessary to be conversant with the different techniques of inventory control. Although the concepts involved in inventory management are production-oriented and are not strictly financial it is important that the financial manager understand them since they have certain built-in financial costs. The different techniques of inventory control may be summarized as follows:

(1)

Inventory level Technique The main objective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor unnecessary investment in inventory. For this purpose, determination of maximum and minimum limits of inventory and ordering level is necessary.

(2)

Maximum stock Limit: This represents the quantity of inventory above which it should not be allowed to be kept. The main object of fixing this limit is to ensure that unnecessary working capital is not blocked in stores. The quantity is fixed keeping in view the disadvantages of overstocking.

RE-ORDERING LEVEL (ORDERING LEVEL)

It is the point at which if the stock of the material in stores reaches, the storekeeper should initiate the purchase requisition for fresh supply of material. This level is fixed somewhere between maximum and minimum level is such a way that the difference of quantity of the material between the reordering level and the minimum level will be sufficient to meet requirements of production up to the time of fresh supply of the material. It is fixed after taking into consideration the following factors:

ABC ANALYSIS: ABC Analysis is a basic analytical management tool which enables top management to place the effort where the result will be greatest. This technique, popularly known as always better control or the alphabetical approach, has universal applications in many areas of managing the inventory. The technique tries to analyze the distribution of any characteristic by money value of importance in order to determine its priority. The annual consumption analysis of any organization would indicate that a handful of top high value items less than 10% of total number will account for a substantial portion of about 75% of the total consumption value and these few vital item are called A class items which need careful attention of the materials manager. Similarly a large number of bottom items over 70% of total number called the trival many account only for about 10% of the consumption value and are known as the C class. The items that lie between the top and bottom are called the B category item. The following facts need to be noted with regard to ABC Analysis: 1. Through usually the inventory items are classified into three categories viz AB andC only, but nothing prohihibits a firm to undertake the analysis on the basis of a larger catagorisization. 2.It is necessary for an effective ABC analysis that all the items should be included for the Classification. 3.Through according to ABC Analysis category C gets only a simple attention, the management should nevertheless have to be vigilant in its approach. For example an items may be of small value but may be critical in the sense that its non-availability hampers the production process and its supply is irregular. The management has to be extra careful about its inventory, even though the items figures in the category C. Thus the ABC analysis not the ultimate exercise in inventory management, it needs supplementing with detailed knowledge

and monitoring. 4.Price of the items and their physical quantities shouldnt be made the basis of ABC analysis. It is rather the usage value of the items which must be used for the purpose of classification.

ECONOMIC ORDER QUANTITY TECHNIQUE

One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lost in which it has to be purchased on replenishment. If the firm is planning a production run, the issue is how much production to schedule (or how much to make). These problems are called order quantity problems, and the task of the firm is to determine the optimum or economic order quantity (or economic lot size). Determining an optimum inventory level involves two type of costs: (a) ordering costs and (b) carrying costs: The economic order quantity is that inventory level that minimize the total of ordering and carrying costs.

EOQ = 2(annual usage in unit)(order cost) Annual carrying cost per unit

VED ANALYSIS: The VED analysis is used generally for spare parts. The requirement and urgency of spare parts is different from that of materials. A-B-C analysis may not be properly used for spare parts. The demand for spares depends upon the performance of the plant and machinery. Spare parts are classified as: Vital (V), Essential (E) and Desirable (D). The vital spares are a must for running the concern smoothly and these must be stored adequately. The non-availability of vital spares will cause havoc in the concern. The E types of spares are also necessary but their stocks may be kept at

low figures. The stocking of D types of spares may be avoided at times. If the lead time of these spares is less, then stocking of these spares can be avoided. The classification of spares under three categories is an important decision. A wrong classification of any spare will create difficulties for production department. The classification of spares should be left to the technical staff because they know the need, urgency and use of these spares. JUST-IN-TIME (JIT) SYSTEM: Japanese firms popularized the just-in-time (JIT) system in the world. In a JIT system material or the manufactured components and part arrive to the manufacturing sites or stores just few hours before they are put to use. The delivery of material is synchronized with the manufacturing cycle and speed. JIT system eliminates the necessity of carrying large inventories, and thus, saves carrying and other related costs of manufacturer. The system requires perfect understanding and coordination between the manufacturer and supplier in terms of the timing of delivery and quality of the material. Poor quality material or complements could halt the production. The JIT inventory system complements the total quality management (TQM). The success of the system depends on how well a company manages its suppliers. The system puts tremendous pressure on suppliers. They will have to develop adequate system and procedures to satisfactory meet the needs of manufacturers INVENTORY TURNOVER RATIO: (ITR) In accounting, the Inventory turnover is an equation that measures the number of times inventory is sold or used over in a period such as a year. The equation equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, stock turn, stock turns, turns, and stock turnover.

ITR = Cost of goods sold Average inventory