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A Study on Inventory Management and Its Impact on Profitability in Foundry

Industry at Belagavi, Karnataka

Article in International Journal of Engineering Management and Economics · September 2018

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 International Journal of Latest Technology in Engineering, Management & Applied Science (IJLTEMAS)
Volume VII, Issue IX, September 2018 | ISSN 2278-2540

A Study on Inventory Management and Its Impact on

Profitability in Foundry Industry at Belagavi,
Karnataka
Prof. Prayag P. Gokhale1, Megha B Kaloji2
1
Asst. Professor, Department of MBA, KLE DR. M S Sheshgiri College of Engineering and Technology,
Belgaum, Karnataka India.
2
Research Student, Department of MBA, KLE DR. M S Sheshgiri College of Engineering and Technology,
Belgaum, Karnataka India.

Abstract- In day-to-day management of the firm, it is essential to much and too low inventories bring down the level of
manage the inventory so as to maintain proper supply of goods at profitability of an organization.
proper time. Inventory represents an important decision variable
at all stages of product manufacturing, distribution and sales, in Inventory management is a business process which is held
addition to being a major portion of current assets of many responsible for developing and managing the inventory levels,
organizations. Too much and too low inventories bring down the whether the inventory is raw materials, semi-finished
level of profitability of an organization. Therefore, whether it is a materials or finished goods, so that adequate supplies must
manufacturing or merchandized organization, the goal should always be available and the firm must make sure that the cost
always be the same that is, to ensure the inventory is ready and of over or under stocks are always low.
at the same time inventory is at a low level. Inventory
management is functional field of finance and production that Inventory management techniques
covers the efficient and effective use of raw materials and spares
which are consumed in producing the finished goods in 1. Economic Order Quantity(EOQ) :
manufacturing concern. A firm ignoring the management of The economic order quantity is the quantity at which, the
inventories will be jeopardizing its long run profitability and
may fail finally. The reduction in ‘excessive’ inventories carries a
ordering & carrying cost is low. This is the quantity of a
favourable impact on a company’s profitability.This paper material that can be purchased at least costs.
consists of different parts where the inventory management It involves 2 types of costs:
concepts are discussed, and different inventory control
techniques are discussed. This paper also introduces the various  Ordering Costs: It is the cost related to the bringing
costs incurred due to the storage inventory, economic order the inventory to the production system. It includes all
quantities, stock levels, shortage costs, inventory methods. costs which are directly or indirectly involved in
Keywords: Economic Order Quantities, Inventory, Inventory bringing the inventory to the production system.
Management, Stock levels, Trial & error approach. Costs included in ordering costs are tendering cost,
quality inspection cost, transportation cost etc.
I. INTRODUCTION  Carrying Costs: It is the cost which is associated
with costs which are spent to the storage of the

I nventory is a crucial asset for numerous companies, as it is

often a huge asset on the company‟s financial statements
and it represents a source of revenue in the near forthcoming
inventory items in the store. It depends upon the
quantity and period of time till when the inventory is
to be stored. It includes storage cost, damage cost,
through sales of the goods. In other words, “Inventory refers depreciation, handling cost, insurance cost etc.
to the stockpile of the products, a firm would sell in future in
the normal course of business operations and the components 2. Stock Level Analysis:
that make up the product”. It is the crucial part of every Stock level is important for the control of materials. The
organisation, whether big/small has to keep inventory in the following techniques are used to have good and proper control
system. In accounting language inventory means stock of materials;
finished goods only. In manufacturing concern, it may include
raw materials, work in progress, and stores etc. An efficient 1. Minimum Stock Level
management of inventory is required because a substantial 2. Reorder Level
share of a firm‟s funds is invested in them. Every company 3. Maximum Stock Level
must ensure that inventory is maintained at desired levels. Too

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 International Journal of Latest Technology in Engineering, Management & Applied Science (IJLTEMAS)
Volume VII, Issue IX, September 2018 | ISSN 2278-2540

3. Trial Error Approach Annual Holding Cost

5% 5% 5% 5%
%
According to this approach, the carrying and acquisition costs Purchase Price Per
Rs.30950 28323 23940 30120
for different sizes of orders to purchase inventories are Ton
computed and the size with the lowest total cost (ordering plus Carrying Cost Per Ton
Rs.1548 1416 1197 1506
(C)
carrying) of inventory is the economic order quantity. Economic Order
6.24 6.93 8.98 7.49
Quantity (In Tons)
II. LITERATURE REVIEW
Dr. Rakesh Kumar (2016) said that Inventors are assets of the
firm and that they describe an investment. Such investment Economic Order Quantity (In Tons)
needs a commitment of funds, thus a firm has to keep
inventories at the accurate level. If the stocks are too large, the 10 8.98
firm loses the chance to employ the funds more efficiently. 9
Likewise, if they become too small, the firm might lose sales. 8 7.49
Thus, there is an optimal level of inventories. The economic 6.93
7 6.24
ordering quantity is used to compute the optimum quantity
that can be procured to reduce the carrying and ordering costs. 6
5
Serhii Z (2015) according to this paper Inventories involves
raw materials, work-in-progress and entirely completed goods 4
that are in to be included in the firm‟s assets that are in 3
position or would be in position for sale. 2
Sachin Agarwal (2014) according to author Invent0ry 1
constitutes the furthermost essential part of industries. It is 0
very important to manage inventories efficiently so as to 2014-2015 2015-2016 2016-2017 2017-2018
evade the expenses of fluctuating production rates, excessive
cost of sales and back order consequences during periods of
peak and vigorous demand. The model provides the optimal Figure 5.1 Shows EOQ of pig iron
solution in closed form which aids to know about the Interpretation: Figure 5.1 shows that the EOQ of Pig Iron, in
performance of the inventory system. The closed-form 2014-15 was 6.24 tons and it increased to 6.93 in the year
solution is also easy to calculate. The objective is to find the 2015-16. It further increased to 8.98 tons due to decrease in
economic order quantities for warehouse which reduce the carrying cost in 2016-17 and in 2017-18 it decreased to 7.49
total cost. tons. The company could save a significant amount of money
III. OBJECTIVES by simply utilizing the EOQ method efficiently for purchasing
pig iron.
 To calculate the EOQ of raw materials.
The following table‟s shows calculation of different stock
 To calculate the EOQ using trial and error approach
levels of Pig iron
to find out the least ordering and carrying cost
combination. Table 5.2 Calculation of reorder level
 To calculate the stock levels ofraw materials. 2014- 2015- 2016- 2017-
Particulars
15 16 17 18
IV. METHODOLOGY Maximum Consumption 2.63 3.95 5 6

 The study is undertaken on the basis of secondary Maximum Delivery Period 5 5 5 5

data. Reorder Level 13 20 25 25
 Statistical tool – MS Excel.
Table 5.3 Calculation of minimum stock level
V. RESULTS Particulars 2014-15
2015- 2016- 2017-
16 17 18
Table 5.1 Calculation of EOQ of Pig Iron at Foundry Industry
Reorder Level 13 20 25 25
2014- 2015- 2016- 2017-
Particulars Normal Consumption 1.84 2.46 3.30 3.20
2015 2016 2017 2018
Annual Requirement Normal Delivery Period 4.5 4.5 4.5 4.5
401.89 453.59 642.95 563.15
(A) Qty. (Mt)
Ordering Cost Per Minimum Stock Level 5 9 10 11
Rs.75 75 75 75
Order (O)

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 International Journal of Latest Technology in Engineering, Management & Applied Science (IJLTEMAS)
Volume VII, Issue IX, September 2018 | ISSN 2278-2540

Table 5.4 Calculation showing maximum stock level of pig iron Less : Discount 0 280772 994965 872713
2014- 2015- 2016- 2017- Total Cost of
Particulars 12438496 13757838 18904337 16581540
15 16 17 18 Purchase ( C )
Reorder Level 13 20 25 25
Reorder Quantity 6.24 6.93 8.98 7.49 Total Cost
12448165 13767648 18915123 16594101
(A+B+C)
Minimum Consumption 1.04 0.96 1.60 1.40
Minimum Delivery Period 4 4 4 4
Maximum Stock Level 15 23 28 27
Interpretation: Assuming quantity discount at 0% the EOQ
comes to 6 tons which will incur least cost of 12448165 as
Interpretation: Table shows that there is an increase in stock compared to other quantities.
levels every year, the company is suggesting to maintain
maximum stock level, stock exceeding this level will lead to VI. CONCLUSION
blocking capital and unnecessary increase in stock holding The overall study gives a view that how the inventory
cost. management plays a significant role not only in the financial
Table 5.5 Calculation of EOQ of pig iron using trial and error approach statement but also in the operational activities of the
Ordering Quantity
organization. So, for smooth functioning business there should
6 7.5 9.5 12 be optimum inventory maintained, but the organization should
/ Lot Size
Annual neither have over stock nor under stock.
401.89 453.59 642.95 563.95
Requirement (A)
Ordering Cost
Through the study it isfound that, the company can opt the
„Economic Order Quantity‟ for optimum procurement and it
No of Orders 67 60 68 47 can maintain different stock level for its
Cost Per Order 75 75 75 75 mechanisms/components in order to avoid inventory-out
Total Ordering conditions and helps in different flows of production. This
5025 4500 5100 3525
Cost ( A ) would decrease the cost and maximize the profit. If they could
properly implement and monitor the norms and methods of
Carrying Cost inventory management, they can maximize the profit with
minimum cost.
Average Inventory 3.00 3.75 4.75 6.00
Carrying Cost Per REFERENCES
1548 1416 1197 1506
Ton
Total carrying [1]. Dr. Rakesh Kumar, “Economic order quantity model”, Global
4644 5310 5686 9036 journal of finance and economic management, Vol.5 (2016).
Cost ( B )
[2]. Serhii Z, “A literature review on models of inventory management
under uncertainty” (2015).
Cost of Purchase [3]. IOSR Journal of Economics and Finance (IOSR-JEF) Volume 7,
Issue 6 Ver. I (Nov. - Dec. 2016).
Quantity 401.89 453.59 642.95 563.95 [4]. IOSR Journal of Business and Management (IOSR-JBM) Volume
17, Issue 4.Ver. VI (Apr. 2015).
Price Per Ton 30950 30950 30950 30950 [5]. Sachin Agarwal, “Economic Order Quantity Model”, International
Cost of Purchase 12438496 14038611 19899303 17454253 Journal of Mechanical, Civil, Automobile and Production
Engineering, Vol.5, Issue 12(2014).
Discount 2% 5% 5%

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