Inventory Management of Nepalese Public Enterprises

scroll Management of Nepalese Public EnterprisesCHAPTER-2Review of Literaturethither atomic number 18 many researches make in tune- analyze 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 review of literature regarding roll vigilance.2.1 C erstptual Framework line of descent ManagementThe writer (Saxena, 2009, p. 2) defines farm animal as any kind of deity resource that has potential economic assess considered as locked up capital. Inventory is a list of redeeming(prenominal)s and temporals which is available in job by commerce (Saxena, 2009). Other write (Li, 2007, p. 175) defines stemma as the stock of any items or resources apply in an judicature. Stock consists of all told corkings and corporals that be stored by an giving medication which is kept for emerging use (Waters, 2003). According to (Roy, 2005, p. 100) chronicle is list of goods or items.Inventory all oversight is the active control program which allows the guidance of sales, purchases and payments (Inventory commission). The compose (Saxena, 2009, p. 2) refers fund anxiety as a process of managing naked as a jaybird solids, semi- completed harvest-festivals and immaculate-products by a firm. The scrutinise focusing is a set of the process and policies that determines what breed level should be maintained, what stock should be replenished and how king-size establish should be (Li, 2007, p. 175). According to (Toomey, 2003, p. 1) stock certificate management is a branch of bank line management which carry oned in preparation and controlling inventories.Effective stock management means providing the desired stock service level or maximising your profit while at the same beat c ar your sum stock constitute as low as likely bySelecting products that initially sell, salubrious and discontinuing those that stop selling.buying th e even up metre (how a lot to buy)Purchasing at the righteousness stream (when to buy)Keeping your total pedigree investment funds in balance with the pass judgment levels of salesTo control greets and improve profit, it is incumbent to actively manage every asset we own. And it is specially true of the management of goods and squ ar we buy and keep on toss off every far our own use or for resale. The goal of register management is to increase profit on bloodline while increase customer service (Frazelle, 2002, p. 91)The dictionary meaning of stock is stock of goods or a list of goods. Various reservoirs define the word inventory in their ways. In floor language may mean stock of consummate goods. In a manufacturing concern, it may include raw materials, work in process and stores. To understand the exact meaning of inventory the word inventory we may study it form the usage side and from the point of door in the operationAmong the antithetical aspects of manag ement, inventory management is besides mavin of the major factors to play signifi basint item-by-item- take accountd business in management of material , part supplies, expenses tools , working process, und oneness products and then record on the books and attend to of store rooms, wargonhouses by an organization is known as inventory management .2.2 Nature of InventoryThe company holds different kinds of inventories to obtain their goals (Waters, 2003). Basically we shtup divide inventory into triple parts which argon following,Raw materialWork in come verbotenFinished goods(Toomey, 2003, pp. 20-21)Raw MaterialThe stocks or inventories and purchase parts which is not part of manufacturing process is called raw material (Toomey, 2003). Raw materials argon those basic commentarys that bind to be gone by means of the different process to convert into finish goods.Raw materials inventories argon such(prenominal) kind of inventories which book been purchased and stored for future manufacturing process. Raw materials are hold in store by manufacturing company to smooth running of toil process. The author defines raw material as those kinds of stocks which is imported from suppliers and are store until mandatory for manufacture (Waters, 2003, p. 9).Work in girdWork in progress refers to inventory unit of measurements that are currently organism worked on (Waters, 2003, p. 9). Work in progress inventories are n each 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 passim the manufacturing process. It is very demanding to separate which materials are WIP and which are not. Because the same materials may be a raw material in one exertion and same material may be a WIP as well as finished goods in other industry. It depends upon genius of come forthp ut signal.Finished goodsThe finished goods inventory instances products that are ready for sale. According to (Toomey, 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 exchange (Muller, 2003, pp. 19-20).These are goods fully manufactured inspected and ready for dispatch to a customer. In manufacturing firm, these are the nett output of the toil process. Stocks of finished goods are held by manufacturing and non-manufacturing company for securities industry operation.2.3 Purpose of inventoryInventory is the roughly Coperni dope to all manufacturing organization in todays industrial world and it plays vital role to exist the company. So it is necessary to manage it square-toedly because both situations of inventories either excessive or piteous are not acceptable to the firm. there are deuce larger points within which the firm should operate. The objectiv e 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 run low in supporting in the business activities is to optimize the three sectors customer services, inventory approach and operating speak to. The author refers about social occasion of inventory like this the inventory is created when publish excesses the necessitate. The main purpose of holding the inventory in the company is to prevent from shortage of raw materials, expected exact, to gain to a greater extent than profit (Li, 2007, p. 176).Firm should always aware from over investment or under-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 grou ndworkt invest in other purpose, change magnitude carrying constitute, 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 legal injurys due to fall in the price in sea gullet 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 mathematical product hold-ups, frequent work interruptions. If finished goods are not sufficient, we do not meet the customers pick out and our gracility 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 determined on the institution of the trade-off between costs and benefits. The various importance of inventory management can be summarized up as followsPredictabilityUnreliability of bringmonetary value fortressLower paradeing costAnticipated demand2.7 Procedure of Inventory ManagementThese are lot of function puzzle to be done For the achievement of its objectives business performs a large renewal of function, namely production, marketing, personnel, office research and development of these production and marketing are basic operating functions in a typical business enterprise. market is concerned with the demand side of goods and services, while production is concerned with the put out side. One cannot exist without other however, decisions about the production activities constitute one of the to the highest degree important functions of the top management. Production is conc erned with the provision of goods and services for the satisfaction of the customer wants. in that respectfore the consumer depends upon the good economical and efficient production agreement good inventory management there should be utilise different activities in ought procedure or manner. General activities such as acquire, receiving, store-keeping and issuing and pricing are the procedure of inventory management. They are expound 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 thriftiness for the organization (Elanchezhian, et al 2010). All organization lease various kinds of commentary like goods and services form external suppliers. The writers ( Baily, Farmer, Jessop, jones, 2005, pp. 3-4) define acquire as to acquire right bar of material, at the right time, in the right quantity, f rom the right source, at the right price. In simple address purchasing is relate to going the open market finding the require materials at the lowest price and selecting the supplier who offers it at that price having the lumber of the materials 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 surgical incision should take grater responsibilities and should analysis the existing procurement policy and should tune with the overall organisational objectives and policies. We can improve management of purchase by the help of standardization, value analysis, material su bstitution, transportation saving and cost reduction of packing modification. in that respect are the following functions of a purchase department.How to purchase?Where to purchase?How very much to purchase?At what price to purchase?To perform there function effectively, the purchase department follows the following proceduresReceiving purchase requireExploring the sources of supply and choosing of suppliers preparedness and execution of purchase drift.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 required for desired production .Walters observes purchasing functions as The Procurement and Purchase of the proper materials, machinery, equipment and supplies for stores utilize in the manufacturing of a product adopted to marketing in the proper quality at the proper time and at the lowest price perpetual with desired.Purchasi ng now become a specialized function in many organization wasting expenses that Purchasing is a managerial natural action that goes beyond the simple act of buying and includes the planning and policy, objectives covering wide range of related and complimentary include in such activities are the research and development 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 orders and techniques of higher standard to reveal ability and economy.52.7.2 Receipt and Store KeepingAfter sometimes of placing the order, flow-up process starts to bring out quick de livery of the items. The items are acquire 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 should be passed into store for protection against deterioration and pilferage. They are stored in such a way that their stance is easily identified 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 needs 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 reserve these services pro mptly and at least costs.Good store keeping should help achieve location identification, notice and issue without delay. Storage infinite should be economically utilized and materials should be protected against deterioration, fine theft, expatiate of quantities should be available on request. General code numbers are assigned to materials for easy identification. Materials may be stored in bin, rack, drawer, tray, boxes or report area.7Store keeping in the activity of receiving or distributing stores or supplies, stores included direct raw materials, indirect materials (supplies) and finished goods8 in the main the physical stock available in the store after counting, weighting , measuring , itemization as the case may be is properly recorded by only of the following manners.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 re quisition 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 wrong the inventory has some value associated with it. This value depends on the price eon 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 evaluationThe immemorial basis of accounting for inventory is cost which has been defined broadly speaking as the price paid to considerate assumption to acquire an asset. As applied to inventories, cost means in principal the sum of the relevant expenditure an d changes directly or indirectly incurred in bringing an oblige 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 manner actings which are establish on historical cost utilise in determining the value of inventory area. branch In branch Out MethodUnder 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 workd to the introductory and new purchases determined in back of the bin. wherefore the oldest merchandise in sold first, because sales orders are filled from the front of the bins. The last merchandise purchased remains 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 nevertheless wide 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 dictation of financial position is a conservative one. In the statement of income the cost of goods sold is higher, and when costs increase realize income is low er 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 LIFO method, whether costs are rising or falling, the net income over a series of years shows less variation.15.c. Specific Price or 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 limited 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, LIFO 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 atomic 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 nominal 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 placed asset.This method works with some other method and is loosely used with FIFO or LIFO method. Any quantity over and in a higher place 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 fit in 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 control of the brass one should have clear 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, handling and insurance, together with the required rate of retrieve 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 barel y 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 inventory 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 = cadence order sizeb. guild cost parliamentary procedure cost represent all of the cost of placing and receiving an order. When a firm is guild 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 repair and variable components, since a portion of the cost- such as that of receiving and inspecting the order- normally varies with the quantity ordered. fiat 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 nothing more than record keeping.Ordering cost the fixed expense in the planning 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, hig her the firms ordering costs. On the other hand ordering costs decrease with change magnitude size of inventory.Generally ordering costs involvesCost of placing an orderRequisitioning costTransportation/shipping costReceiving, inspecting and storing costsSales tax, Customs, etcClearing and send on costsInsurance of raw-materialsStationary costBank commission/ L.C. charges ring/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 placementsThe inventory accounting constitution can be Periodic governance or continuous system.2.10 Inventory Management ModelsPush and bre ak ModelsInventory management models can be classified either push or attract 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. Economic Order Quantity (EOQ), Material Requirement Planning (MRPI), Manufacturing Resource Planning (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 swell 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 equation 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 myrmecophilous demand inventory items in the transformation process of operations management. This computerized inventory system was developed in the 1960s to deal primarily with the measure the tedious record keeping of mutualist demand inventory transactions.many researchers believe that MRP systems historically have made a fundamental software system 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 ability 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 requirement for a period of from a single day to several years, the information the program beginning is usually based on weekly 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 establishmentThis is a periodic data input system. Under this system, changes in input data are saved until a specific ti me, 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 in a flash 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 sophisticated system developed in Manufacturing resources planning (MRPII) system24In addition to producing the flesh out 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. dining table no . Briefly describes these states.ClassCharacteristicsDMRP working in data-processing department onlyPoor inventory recordsMaster schedule mismanagedReliance on shortage lists for progressingCUsed for inventory ordering, not scheduling plan by shortage listsOverloaded 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 cartroad 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 (D RP)DRP applies MRP II principles to the flow of finished goods to field warehouses and customers. Although MRP II improved MRP by winning 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 making goods once customer demand is known . The product is pulled through the channel of distribution by the order. Recent trends suggest a movement to use pull inventory models to reduce inventory end-to-end 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. Single 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. ii card KanBanInventroy is usually controlled at low levels by using a manual two card KanBan system. One card is conveyance KanBan, the requisition and authorization of transferenceof materials form supply center to work center. A molybdenum card the production KanBan, authorizes the production of materials.2