A Project Report On INVENTORY MANAGEMENT At Dr.

Reddys Laboratories

By

K. Srinivasulu 02008125

Project submitted in partial fulfillment for the award of the Degree of MASTER OF BUSINESS ADMINISTRATION

By

Osmania University, Hyderabad-500007

DECLARATION I hereby declare that this Project Report titled Inventory Management submitted by me to the department of Nava Bharathi College of P.G. Studies, Bolarum, Secunderabad, is a bonafide work undertaken by me and it is not submitted to any other University or Institution for the award of any degree diploma/ certificate or published any time before.

K.SRINIVASULU ASHOK NAGAR SECUNDERABAD Date:

Signature of the student

Abstract:
In this competitive business world each and every business organization need inventory management system for determining what to order, when to order, where and how much to order so that purchasing and storing costs are the lowest possible without affecting production and sales. Thus, inventory management control incorporates the determination of the optimum size of the inventory-how much to be order and when after taking into consideration the minimum inventory cost. The over all inventory management includes design and inventory control organization with proper accountability establishing procedure for inventory handling disposal of scrap, simplification, standardization and codification of inventories, determining the size of inventory holdings, maintaining record points and safety stocks, economic order quantity, ABC analysis and VALUE analysis and finally framing an INVENTORY MANUAL.

AIM:
1. 2. 3. 4. 5. To analyze the purchasing procedure of the inventories. To observe the classification of inventories. Codification of inventories. To analyze the records of stock levels. To Analyze the JIT system of Dr.Reddys.

Conclusion:
The classification and analysis can be done by The following are the statistical tools employed for analysis and interpretation are ABC Analysis, Economic Order Quantity, VED Analysis, RE-ORDER Level, Safety Stock, and Just-in-time Inventory.

ACKNOWLEDGEMENT
I extend my sincere gratitude to Shri Dr. M. Ghosh, Director, Nava Bharathi College of P.G. Studies, and to Mr. Md Naseeruddin Ahmed, Head of the department of management studies, for their kind support and guidance for making my project great success. I thank my internal faculty guide Ms. P.O. Maheshwari, guide for the project, for the valuable support extended to me, without which the project would not have been efficiently completed. I render my whole hearted thanks to all the other respected faculties of the management department, librarian, for their assistance and co-operation given to me in regard to this work. I am extremely indebted to the management of Dr. Reddys Laboratories who gave me the privilege to carry out my project in their distinguished institution. I thank my parents and all other family members for their valuable support in completion of this project. I also take this opportunity to thank all my friends and well wishers for their support in helping me in this work. K. Srinivasulu

TABLE OF CONTENTS
SI:NO I II III 1 CONTENTS List of Tables List of Charts List of Figures INTRODUCTION 1.1 OBJECTIVES OF THE STUDY 1.2 RESEARCH METHODOLOGY 2 LITERATURE REVIEW 2.1 MEANING AND NATURE OF INVENTORY 2.2 INVENTORY CONTROL PG:NO i ii ii 1 1 2 4 4 5 13

2.3 INVENTORY CLASSIFICATION

COMPANY PROFILE 3.1 3.2 3.3 5 S PLANS BOARD OF DIRECTORS ABOUT INDUSTRY

31 33 36 48

ANALYSIS OF DATA

51

FINDINGS & SUGGESTIONS

76

BIBLIOGRAPHY

78

LIST OF TABLES
SI: NO:
2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17

PARTICULARS
Valuation of Inventories at the Division STORES LEDGER ACCOUNT MATERIAL RETURN NOTE MATERIAL TRANSFER NOTE Analysis of share capital Total inventory trend Raw Material Trend at Bulk Actives Division Work in process Trend at Bulk Actives Division Finished Goods Stores and Spares Analysis of class item A Analysis of class item B Analysis of class item C Analysis of class items ABC Analysis at Bulk Actives Division Work in progress Analysis of finished goods

PAGE NO:
17 26 27 28 51 53 55 57 58 58 61 62 63 64 65 66 68 75

2.18 Ca Calculation of Inventory turnover ratio

LIST OF CHARTS
SI: NO: 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 PARTICULARS Generic revenue by market Analysis of share capital Analysis of sales by division Total inventory trend chart Raw material trend Work in progress trend Finished Goods Trend Stores and Spares ABC Analysis at Bulk Actives Division chart ABC Analysis at Bulk Actives Division chart Analysis of finished goods chart Calculation of Inventory turnover ratio PAGE NO: 41 51 52 53 55 57 58 59 65 67 68 75

LIST OF FIGURES
SI:NO PARTICULARS PG:NO

2.1 2.2

Figure showing inventory classification Analysis ofE.O.Q

13 71

Introduction:
In this competitive business world each and every business organization need inventory management system for determining what to order, when to order, where and how much to order so that purchasing and storing costs are the lowest possible without affecting production and sales. Thus, inventory management control incorporates the determination of the optimum size of the inventory-how much to be order and when after taking into consideration the minimum inventory cost. The over all inventory management includes design and inventory control organization with proper accountability establishing procedure for inventory handling disposal of scrap, simplification, standardization and codification of inventories, determining the size of inventory holdings, maintaining record points and safety stocks, economic order quantity, ABC analysis and VALUE analysis and finally framing an INVENTORY MANUAL.

1.1 OBJECTIVE OF THE STUDY

The main objective of the project work is to study and analyze and preparation INVENTORY MANAGEMENT in Dr.Reddys.

The objectives are:

6. Purchasing procedure of the inventories.

7. 8. 9. 10. 11. 12.

Classification of inventories. Codification of inventories. Analyze the records of stock levels. Analyze the JIT system of Dr.Reddys. Analyze the two bin system. Analyze the inventory turn over ratio.

1.2 METHODOLOGY
Scope of the Study:
This research design confines its scope to studying about inventory turnover and inventory carrying cost

Data Collection Method:

To attain the objective of studying the inventory of Dr.Reddys. The information has been collected in two ways: 1. 2. Primary data Secondary data

Primary Data:
In Primary data the analysis of purchasing procedure, inventory data, inventory turn over ratio, stock levels, ABC analysis, Two bin system, JIT has made possible by the discussions with various administrative executives and other concerned people of Dr.Reddys.

Secondary Data:

The Secondary data has been collected from annual reports of organization, internet (www.Dr.Reddys.com) and books.

Research Techniques:
The following are the statistical tools employed for analysis and interpretation are ABC Analysis, Economic Order Quantity, VED Analysis, Safety Stock, and Just-in-time Inventory. RE-ORDER Level,

LIMITATIONS:
1. Since the study covers only bulk division of Dr Reddys laboratories Limited, it does not represent the over all scenario of the bulk industry. 2. The period of the study is limited to 45days. 3. All inventory management techniques were not studied, as some information is related to purchase department.

Review of literature 2.1 MEANING AND NATURE OF INVENTORY

Inventory can be referred to as sum of the value of raw materials fuels and lubricants, spare parts, maintenance consumables, semi processed materials and finished goods, stock at any given point of time. In large companies inventory place a most significant part of the current assets. The business has about 15 to 30% of inventories in total assets. Inventory is composed of assets that will be sold in feature in the normal course of business operations. The assets which firms stores as inventory is anticipation of need are raw materials, work in progress and finished goods.

MEANING OF INVENTORY MANAGEMENT

Inventory management consists of maintaining for a given financial investment an adequate of something in order to meet and accepted pattern of demand. Inventory

considers control over costs of inventory on one hand and handles the size of inventory on other hand. Controlling investments in inventories constitute crucial part in current assets. An efficient inventory controlling system will decide, What to purchase? When to purchase? How to purchase? Size of purchase? And from where to purchase (Suppliers)? The main purpose of inventory management is to ensure

1. 2. 3.

Required quantity of availability of raw materials Minimize the investments in inventories Maintain reasonable stock levels not excess or not under stocks.

2.2 INVENTORY CONTROL

Inventory control is the system devised an adopted for controlling investments in inventory. It involves inventory planning and decision making with regard to the quantity and time of purchase, fixation of stock levels, maintenance of stock records and continuous stock taking.

OBJECTIVES OF INVENTORY CONTROL

Inventory control includes not only of the physical stocks but also of the funds invested on it. The two objectives of inventory control are: 1. To maintain a balanced inventory. 2. To keep the amount invested in inventory as low as possible without hampering either flow of the production or deliveries of finished goods. To avoid both under stocking and over stocking of inventory. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralized purchasing. To ensure continues supply of materials, spares and finished goods so that production should not suffer and any time and customers demand should also be met.

To design proper structure for inventory management. Clear cut accountability should be fixed at various levels of the organizations.

To ensure right quality goods at reasonable prices. Suitable quality standards will ensure proper quality of stocks. The price analysis, the cost analysis will ensure paying of proper prices.

To facilitate furnishing of data for short term and long term planning and control of inventory.

INVENTORY MANAGEMENT
Definition of Inventory:
The Dictionary meaning of Inventory is 'a list of goods'. In a wider sense, inventory can be defined as an idle resource which has an economic value. It is however, commonly used to indicate various items of stores kept in stock in order to meet future demands. In any organization, there may be following four types of inventory: (a) Raw materials & partsthese may include all raw materials,

components and assemblies used in the manufacture of a product; (b) Consumables & Spares -- These may include materials required for maintenance and day-to-day operation; (c) Work in progress -- These are items under various stages of production not yet converted as finished goods; (d) Finished Products -- Finished goods not yet sold or put into use.

Need For Inventory:

Many of the items we need for our day-to-day maintenance and operation are required to be specially manufactured for the drugs. The time to procure these materials, therefore, is longer due to various reasons and it is not possible to procure these materials when instantaneously required. It is, therefore, necessary to keep stocks of such items. Even for those items which are readily available in the market, it may not be economical to buy these items every time as buying in piecemeal involves additional costs to the administration. Therefore, we may find it cheaper to buy in bulk and to stock some of these items and supply our indenters through such stocks. There are always some fluctuations in demand as well as fluctuations in the time with in which material can be procured. It is therefore, not possible to forecast our requirements exactly and time the purchases in such a way so that the materials will arrive just when they are physically required. It, therefore, becomes necessary to maintain stocks of these items.

Basic Management Problems of Inventory:

From the above discussions, it will be seen that on the one hand inventories are idle and valuable resource i.e. capital remains locked up in the inventories which can be used for other productive purposes but on the other hand, they are desirable to satisfy manufacturing, maintenance or operation requirement of the organization. Hence basic problem of inventory management is to optimize the stock levels of different materials so that their stocks are maintained at optimum levels without affecting the production or dayto-day maintenance.

Three basic problems associated with this optimization of stocks are;

(a) When to initiate purchase of the materials (b) How much quantities are to be purchased at a time and (c) What should be the stock levels of different items?

Inventory Control Techniques:

Various techniques employed for controlling stock levels are:
1. Selective Management

In this technique, various items of stores are

classified in various classifications depending upon their consumption, value, unit price, criticality for the organization, source of supply, purchasing problems, and rate of drawl from stores, seasonality and stores balances on a particular date. Different approaches of control are being followed for different types of items. 2. Management by exception

In this technique, items with certain exceptions are tackled on different points of time. For example, overstock items, surplus items and inactive items may require more attention. (a) Designing of recoupments policies :Recoupments policies are designed in such a manner that average stocks of materials are optimum. (b) Rationalization :Techniques of standardization and variety reduction are used to minimize lead time of the material, and reduce unnecessary inventory carrying costs.

(c) Value Analysis :Functions performed by the materials are analyzed and alternative designs/raw materials are suggested to achieve the same function at minimum cost. (d) Computerization :Computer Outputs can be used for scientific forecast of demand to solve many inventory models, providing optimum safety stocks and for controlling funds.

OBJECTIVE:
A truly effective inventory management system will minimize the complexities involved in planning, executing and controlling a supply chain network which is critical to business success. The opportunities available by improving a companys inventory management can significantly improve bottom line business performance. From a financial perspective, inventory management is no small matter. Oftentimes, inventory is the largest asset item on a manufacturers or distributors balance sheet. As a result, there is a lot of management emphasis on keeping inventories down so they do not consume too much cash. The objectives of inventory reduction and minimization are more easily accomplished with modern inventory management processes that are working effectively.

SCOPE OF COVERAGE:
Active Management Asset Management Supply Chain Management Annual Report

METHODOLOGY:
Information is collected from primary and secondary sources Primary Sources of Secondary data: The data has been gathered through interactions and discussions with the executives working in the division. Some important information has been gathered through couple of unstructured interviews of executives. Secondary Source of Secondary data: 1. Referred standards texts and reference books for collecting the information regarding the theoretical aspects, of the topic. 2. Annual reports and other magazines published by the company are used for collecting the required information.

SUCCESSFUL INVENTORY MANAGEMENT:

LARSON (1999) observed that inventory personnel have to constantly track market conditions and price trends for successful inventory management. Software has to be designed to input these trends to determine the inventory requirements and economic order quantity (EOQ),The inventory management has also be in constant contact with the production and sales departments, In order to ensure that stock outs at the sales end do not occur as a result of material storage at the production end. Computerized systems have help improve the efficiency of data recording. The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. 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

subsequent earnings for the company's share holders/owners. 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.

2.3 INVENTORY CLASSIFICATION:

INVENTORY

PROCESS STAGE

NUMBER & VALUE

DEMAND TYPE

OTHER

Raw materials WIP FINISHED GOODS Finished Goods

Maintenance A Item Independent Dependent B Items Operating inventory C 2.1 Figure showingDependentclassification Items C Items

Costs involved in inventory: Every firms maintains inventory depending upon requirement and other

features of firm for holding such inventory some cost will be incurred there are as follows:

(a)

Carrying Cost:

This is the cost incurred in Keeping or maintaining an inventory of one unit of raw materials, work-in -process or finished goods. Here there are two basic cost involved. (i) Cost of storage: It includes cost of storing one unit of raw materials by the firm. This cost may be for the storage of materials. Like rent of spaces occupied by stock, stock for security, cost of infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc. (ii) Cost of financing: This cost includes the cost of funds invested in the inventories .It includes the required rate of return on the investments in inventory in addition to storage cost etc. The Carrying cost include there fore both real cost and opportunity cost associated with the funds invested in the inventories. The total carrying cost is entirely variable and rise in directly proportion to the level of inventories carried. Total carrying cost = (carrying Cost per unit) x (Average inventory) (b) Cost of ordering: The cost of ordering includes the cost of acquisitions of inventories. It is the cost of preparation and execution of an order including cost of paper work and Communicating with the supplier.

The total ordering cost is inversely proportion to annual inventory of firm. The ordering cost may have a fixed component, which is not affected by the order size: and a variable component, which changes with the order size. Total Ordering Cost = (No. Of orders) x (cost per order). (c) Cost of stock out: It is also called as Hidden cost. The stock out is the situation when the firm is not having units of an item in stores but there is a demand for that Item either for the customers or the production department .The stock out refers to zero level inventory .So there is a cost of stock out in the sense that the firm face a situation of lost sales or back orders .The stock outs are quite often expensive. Even the good will of firm also be effected due to customers dissatisfaction and may lose business in case of finished goods, where as in raw materials or work in process can cause the production process to stop and it is expensive because employees will be paid for the time not spend in producing goods. The carrying cost and the ordering cost are opposite forces and collectively. They determine the level of inventors in a firm. Total cost = (cost of items purchased) + (Total Carrying and ordering cost)

Valuation of Inventory:
The methods of valuing inventory are combination of the actual cost and replacement cost plans. The chief advantage of the cost or net realizable value rule is that it is conservative. Hence the methods of Valuation of inventory are quite independent of system of mincing.

In balance sheet closing stock is shown under current assets and is also credited to manufacturing or trading accounts. The inventories are valued on the basis as follows. (i) Cost of raw materials in stock may include freight charges and carrying cost. But such cost should not exceed market price, (ii) Work -in -process is generally valued at cost, which includes cost of materials, labor. And the proportionate factory overhead, as it is reasonable according to degree of completion, (iii) Cost of finished goods wound normally to be total or full cost it includes prime cost plus appropriate amount of the overhead.

Valuation of Inventories at the Division (As well as whole DRL):

Indian GAAP US GAAP

Inventories are valued at the lower of Cost Inventories are stated at lower of Cost or or Net realizable value. Market Value

Cost of inventories comprises all cost of Stores and Spares comprise engineering purchase, cost of conversion and other spares i.e., Machinery Spares &

costs incurred in bringing the inventories Consumables such as lubricants, cotton to their present location and condition Method: Raw Materials FIFO ores and Spares Weighted Average WIP & FG (manf.) FIFO + appropriate share of manufacturing overheads FG traded Cost of Purchase Goods in Transit At Actual Cost waste & oil which are used in operating machines or consumed as indirect

materials in the manufacturing process. Stores and Spares Weighted Average Method: All Other Categories FIFO Method Cost of Raw Material, Stores and Spares = Purchase Price + Attributable direct cost trade discounts Cost in case of Work in process & Finished Goods comprise Material Cost,

Direct labor, Purchased overheads Table 2.1: - Valuation of Inventories at the Division

Purchase & Stores Procedure:

In inventory management the purchase department, stores department plays a major role to be the effective inventory there must be cooperation of various departments such as purchase, receiving and inspections, stores, production and stock control departments.

The main functions of each department are as follows: (1) Purchase departments: It is responsible for purchase of all necessary goods of proper quality to produces, without interruption to supply the finished goods. It receives purchase requisitions. Invites quotations or tenders from suppliers with desired quality. Issue purchase orders to the selected supplier. Certify the quality and quantity of order received in specified time Approve purchase invoice for payment after checking invoice for paying after checking prices and extensions if any needed.

Material Cost: Materials cost of a job or cost unit can be ascertained by multiplying the quantity consumed for the job or cost unit by the price of the materials. For ascertaining the quantity consumed for each job or cost unit we have devised material requisition which will indicate the quantity required for the job and the job number against which the material cost will be change directly. For indirect material issued the material requisition will not indicate the job

number but the cost center number will be indicated for charging to relevant cost center as indirect materials. (2) Receiving and inspection Department: Receiving all raw materials and other supplies from various suppliers. Verify items by count, weight etc., and report any shortage. Inspect materials and supplied as to quality by analyzing them suitably. Inform the purchasing department and accounts department all facts that may require adjustment with vendor. Analyze and give them the code depending up on the type of materials. (3) Stores keeping department: Check and accept all materials from the received department Identity each material received with the stock list, check the code number and place in the respective bins. Issue materials and supplies for use upon presentation of authorized requirement. (4) Production departments: a) Make out materials requirement note i.e. requisition of requisite quantity and quality of materials at the right moment so the all materials may be available without delay on production. Check and verify that the materials of requisite quantity and quality

have been have been received and charged to production. Keep proper records of materials received and their progress through different operations or progress.

Prepare materials return note for excess materials.

(5)

Inventory control department: In may be a subdivision of the cost accounting department, although in many concerns, it is a part of the stores keeping department. It keeps perpetual inventory records. Adjust the stock on receipt of the property authorized adjustment notes. Prepare weekly or monthly, statements of receipts, issue, balance and average consumption of materials both in terms of quantity and value.

ISSUE PRISING METHOD:

There are two categories: (i) (a) (b) (ii) Cost prices: FIFO (First in First out) LIFO (last in first out) Derived from cost prices: (a) Weighted average price (b) Standard price

(c) Inflated price First in First out (FIFO): This is the price paid for the material first taken into stock from which the material to be priced could have been drawn. Under this method stocks of materials may not be used up in chronological order but for pricing purpose it is assumed that items longest in stock are used up first. The method is most suitable for use where in material is slow-moving and comparatively high unit cost. Last in first out (LIFO): This is the price paid for the material last taken into stock from which the materials to be priced could have been drawn. This method also ensure material being issued at the actual cost. Its use is based on the principle that costs should be as closely as possible related to current price level. Under this method production cost is calculated on basis on replacement cost. Weighted average price: This is the price which is calculated by dividing the total cost of material in the stock from which the material to be priced have been drawn, by the total quantity of material in the stock. This method differs from all other methods because here issue prices are calculated on receipts of materials and not on issue of materials. Thus as soon as new lot is received a new price is calculated and issues are then taken. Standard price: It is the predetermination of fixed price on basis of a specification of all

factors affecting price like the quantity of materials in hand and to be normally purchased and rate of discount compared with existing price including or excluding freight and ware housing expense. A standard price for each material is set and the actual price paid is compared with standard. It is paid exceeds the standard a loss will be realized if not profit will be obtained.

Inflated price: This is the price, which includes a charge designed to cover the cost of contingencies or related costs. This price includes not only the cost involved in bringing the material to the purchases premises but also the loss due to evaporation and breakage etc. as well as carrying costs.

RECEIPT AND ISSUE OF INVENTORIES:

(a) Receipt of Inventories in to stores: After incoming materials have been examined and approved they are passed on to the appropriate stores together with the goods received note. Articles are inspected and passed and on the stores in the usual way. In order to keep the accounting procedure uniform, it is desirable that a goods received note be prepared for these articles also: The store keeper then places the inventory in appropriate bin or shelf and makes necessary entries in the receipt column of the

Bin Card. A location code for materials helps in proper store -keeping with greater efficiency, because stores can be easily identified. It is a part and parcel of stock control procedure. Location code helps in mechanized accounting and safeguard against omission in counting as verification.

BIN CARD
DESCRIPTION: MATERIAL CODE: LOCATION CODE: BIN NO: STORES LEDGER NO: RECIEPTS Date Goods Qty Date ISSUES Requisition note no. Qty (units ) MAXIMUM LEVEL: MINIMUM LEVEL: ORDERING LEVEL: ORDERING QUANTITY: UNITS: BALANCE AUDIT Qty (units) Initial & Date

Received (units) note no. BIN CARD

For each kind of materials or article a Bin card is attached to the bin on which each individual's materials is stored. A bin card provides a running record of receipts, issues and stock in the simplest form. An entry will be made at the time of each receipt or issue and a new balance will be extended.

These cards should agree with the quantities entered in the relevant accounts in the stores ledger. The main advantage is to enable the stores keeper to ascertain at a

glace the quantity of materials in stock and remind him to place purchase requisition for further suppliers the ordering level has been reached more over they provide on independent check on stores ledger and anciently a second perpetual inventory. If the Bin card is from three years then the transactions are made in same card .If Bin card does not exist new Bin card to be opened (b) Issues of Materials from Stores: The storekeeper issue materials on receipt of proper authorized document usually called a materials requisition or a specification of material. Materials requisition is a document which authorities and records the issue of materials for use. The materials requisition details the items required for use showing the quantity, description, code or past number and the cost center of job to be charged. Requisition is normally prepared in triplicate; the department receiving the goods retains one copy and the other two copies are handed over to the two copies are handed over to the storekeeper. He keeps one along with him and enters on the issue sides of the appropriate bin card Day-to day transactions are noted in stores ledger. Stores ledger: The stores ledger which is usually a loose leaf or card type, contains an account for each class of materials their ledger is kept in the cost department and contains such information as well facilitate the ascertainment of all details relating to the materials in the minimum of time.

STORES LEDGER ACCOUNT

FORM NO. : MATERIALS FOLIO MAXIMUM LEVEL:

MINIMUM LEVEL: UNITS CODE NO. LOCATION: Date CSRV/STO No. No. Production Receipts & Issue Quantity In Table 2.2:- STORES LEDGER ACCOUNT (c)Materials retuned to stores: Where materials are issued in excess of requirement the excess quantity is return to the stores together with materials Return note. Since the materials return to store from a works order is a reduction in the amount recorded as issued, the preferable entry is to enter the number of units and the value of materials returned and received in a different work in the issue column of the stores ledger account. These values are deducted from total issues, and amount returned by each department as shown by materials return note is deducted from the total amount charged to each department. In enterprises where return of materials to stores return of material to stores is a major problem it is customary to use a materials and supplies journal for keeping records of items. Out Balance ORDERING LEVEL: ORDERING LEVEL:

MIR Order No. / Section

MATERIAL RETURN NOTE

FROM: NO.:

Department: JOB No.: ORDER NO.: Qty. Description

DATE:

Code No.

Office Use only Rate Amount

Remarks

Approved by

Returned by

Received by

Bin No., Stores ledger Folio No.

Cost officer Ref.No.

Priced by

Table2.3:- MATERIAL RETURN NOTE

MATERIAL TRANSFER NOTE

NO. FROM DEPARTMENT: JOB NO: ORDER NO. Qty. Description Code No. DATE: TO: DEPARTMENT: JOB NO: ORDER NO. Office Use only Rate Amount Remarks

Approved

Issued

Received by

Cost Ref. Officer

Priced by

by

No. Table2.4:- MATERIAL TRANSFER NOTE

(d) Transfer of Materials: Transfer of materials from one job to another is prohibited unless the detail is adequately recorded on the materials Transfer note. Such transfer is permissible only where an urgent order has to be made and work started on a less urgent order may be appropriates. Such a note shows are incessancy date for ordering and debiting the cost accounts affected. These note are passed direct to the cost office for the appropriate adjustment in the work-in -progress ledger. All these four notes including stores ledger and Bin card are major for Inventory management which are valued and checked for every Quarterly or Half yearly or Annually.

Valuation of Materials Issues:

The fixation of the price at which the materials are issued are to be charged to production is an important one from the point of view to Inventory management. These are numerous factors to be taken into amount in pricing the material they are. a) The nature of the business and type of production. The frequency of purchase price fluctuations and issues of materials.

b)

Range of price fluctuations and value of material issued and size of bath of materials issued.

c) d) e)

Requirement that purchasing efficiency should be revealed or not. The accuracy with which issues can be computed. The durability of stock i.e. whether it evaporates, absorbs moisture or deteriorates quickly.

f)

The length of inventory turnover period and quantity of material to be handled with the necessity for maintaining uniformity with in an industry.

COMPANY PROFILE

Dr. K. ANJI REDDY (a Bachelors of Science in Pharmaceuticals & Fine Chemicals from Bombay University, and a PhD in Chemical Engineering from the National Chemical Laboratory, Pune) is the Founder-Chairman of Dr. Reddys. He served in the state-owned Indian Drugs and Pharmaceuticals Limited from1969 to 1975, was Founder-Managing Director of Uniloids Ltd from 1976 to 1980 and Standard Organics Limited from 1980 to 1984, before founding Dr. Reddys in 1984.He Started the Business with the capital of 25 Lakhs. Dr. Reddys was listed on the New York Stock Exchange in

April 2001 (RDY) the first non-Japanese Asian pharmaceutical company to be listed on the NYSE. The present turnover of the company is in excess of 1 Billion U.S. dollars. Under Dr. Anji Reddys leadership, Dr. Reddys has become a pioneer and a trendsetter in the Indian Pharmaceutical industry.

BUSINESS DIVISIONS OF DR REDDYS LABORATORIES: Dr. Reddys is a global pharmaceutical power house committed to protecting and improving health and well-being. Their strategic business units are as follows Active Pharma Ingredients Generics Special Pharmaceuticals Branded Formulations Biologics Custom Pharma Service

Business core Area

Dr.Reddys Laboratories Ltd is a research-driven emerging global pharmaceutical company. The company develops, manufactures and markets wide range of products in India and overseas. Dr.Reddys laboratories produce finished dosage forms, active pharmaceutical ingredients, and critical care, diagnostics and biotechnology products. The basic research programme focuses on Cancer, Diabetes, Bacterial infection and pain management. Since the companys inception in 1984,

Dr.Reddys has chosen to walk the path of discovery and innovation in health sciences. The company has been a quest to sustain and improve the quality of life, and it had nearly two decades of creating safe pharmaceutical solution with the ultimate purpose of making the world a healthier place. The companys research centre uses cutting edge technology and has discovered breakthrough pharmaceutical solutions in therapeutic areas.

In a short span of operations, it has filed more than 75 patents. DRL is the first Indian company to out-license an NCE (New chemical entity) molecule for clinical trials. To strengthen their research arm, try have set up a research subsidiary, Reddy US Therapeutics Inc, in Atlanta, USA. The company exports API, branded formulations and generic formulations to over 60 countries. The inherent strength lies in identifying relevant API and formulations, and selling them at affordable prices across the world. A few of our API such as Norfloxacin, Ciprofloxacin and Enrofloxacin enjoy a large customer base. The finished dosages have an enviable track record. Some of them such as Nise, Omez, Enam, Stamlo, Stamlo Beta, Gaiety and Ciprolet are among the top brands in India, and many have become household names in near-regulated countries too. The generic formulations have also become very popular in quality-conscious regulated markets such as the US and Europe. All this has been possible because of this of its innovative and sustained marketing efforts The Company set to spread its wings further and touch more lives across the globe.

3.1 5 S PLAN
Dr. Reddys adopt the 5 S plans. And these five S are a follows: 1. Sort 2. Set in order(straighten) 3. Shine or sweep 4. Standardize or schedule 5. Sustain A Systematic and rational approach to workplace organization and methodical house keeping with a sense of purpose, consisting of the following five elements:

1. SEIRI - Sort Out -Segregate necessary from unnecessary. -Discard what is not required. -Decide on frequency of sorting. 2. SEITON - Systematic arrangement -Arranging in order. -A place for everything and everything in its place 3. SEISO - Spic and Span -Cleaning the work place / Equipment - Ensuring Tip Top Condition

4. SEIKETSU - Standardization -Working Methodology (procedures and work instructions) 5. SHITSUKE - Self Discipline -Forming the habit -Training -Be disciplined They propose to accomplish this by: -Training the people and creating awareness on 5 S -Motivating and changing the behavior patterns of the people -Establishing standards/procedures for the implementation of each element of 5 S. They believe that effective implementation of 5 S techniques will result in:

 Consistent and better quality product. Higher productivity Lesser Accidents Higher Employee Morale

3.2 Board of Directors:

WHOLE TIME DIRECTORS ARE: Dr. Anji Reddy (founder-Chairman) G. V Prasad (Vice chairman and chief executive officer) Satish Reddy (Managing Director and chief operating officer) INDEPENDENT & NON WHOLE TIME DIRECTORS ARE: Dr. Omkar Goswami Dr. Bruce LA Carter Ravi Bhoothalingam Dr. Krishna Palepu Anupam Puri Figure2.2:- ORGAZATIONAL CHART JP Moreau Ms. Kalpana Morparia

LEADERSHIP MODEL

The Dr.Reddys Laboratories has 3 Strategic Business Units. (SBU): 1. Pharmaceutical Chemicals 2. Generics 3. Innovation

PHARMACUTICAL CHEMICALS:
(a)Active Pharmaceutical Ingredients:

Active Pharmaceutical Ingredients (API) is one of the major business divisions of Dr. Reddy's. We have eight USFDA approved, state-of-the-art facilities, which offer over 100 varieties of bulk actives and several key intermediates. Our active pharmaceutical ingredients are exported worldwide. Principal markets in this business segment include North America (the United States and Canada), Europe, the Middle East, Southeast Asia and India.

(bCustom Pharmaceutical Services : In an industry cluttered with chemical manufacturers, CPS stands out because of our understanding of the pharmaceutical business and the associated expertise needed. Rather than just being a chemical provider,

CPS offers a service mix covering the entire pharmaceutical value chain. We execute costeffective and time-bound projects for our customers, and provide them with GMPcompliant products manufactured in FDA-inspected, ISO-certified facilities. A team of experienced project managers ensures smooth progress of projects from initiation to closure in order to avoid any cost and time overruns.

Generics:
(a)Generic Formulation:

The discovery and development of new active ingredients for a medicine is a long and expensive process which is why a patent protects new active ingredients for a certain time. When the patent expires, other

pharmaceutical companies market medicines with the same active ingredient, known as Generics. The generics business gives Dr.Reddys a direct presence in first world markets. It has always had an export focus and has grown aggressively on the back of a slew of profitable products, successfully inspections by USFDA, MCC and the MCA. Its path to value has taken the high risk, high return route, with a series of patent challenge products. Its current focus: innovate and build both technological and commercial skills to build capabilities skills to build capabilities for specialty products.

Dr.Reddys generics portfolio accounted for 18% of the companys total revenues for fiscal 2008, contributing Rs.17.8 billion. The revenue break-up by geography is indicated below

Generics- Revenue by Market

North America Europe Rest of the world

Chart2.1:- Generic revenue by market

Global Generics Revenue (FY 08) Rs 17.8 bn

Dr.Reddys believes that various favorable factors (such as increased awareness and acceptance of generics, favorable legislation, etc), together with the large volume of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceutical market. The company intends to capitalize on the opportunity by depending on its product development capabilities, manufacturing capacities (inspected and approved by various international regulatory agencies) and access to its own APIs, which offers significant supply chain efficiencies. Through the coordinated efforts of teams the US, Europe and India, Dr.Reddys constantly seeks to expand its pipeline of generic products.

(b)Branded Formulation:

Dr. Reddys brands are today recognized and trusted across several continents. Brands like Omez (Omeprazole), Nise (Nimesulide), Stamlo (Amlodipine), Ciprolet (Ciprofloxacin), Enam (Enalapril) and Ketorol (Ketorolac) are leaders in their category in several countries, with many of them being used by more patients than use the innovators product. Over 1.5 million patients across the world

take Omez for their acid peptic disorders every single day! Entrepreneurship, coupled with the will to make a difference drives our 2,000-strong field force to reach out to over 210,000 doctors and 115,000 pharmacies in more than 40 countries across the world.

OUR BRANDS

ENAM

CIPROLET

KETOROL

NISE

OMEZ

Innovation: (a)Discovery Research:

Dr.Reddys drug discovery program is at the heart of its vision -To be a global, discovery led major. With 260 scientists focused exclusively on discovery research, 23 patents, and a 9-molecule pipeline, it has built an array of discovery skills. The research foundation in India has world-class chemistry and strong pharmacology skills. Its Atlanta, USA lab focuses on early stage research skills, like target identification and high throughput screening. Aurigene, a discovery services unit, adds automated medicinal chemistry and structure-based drug design structure-based drug design to the mix.

(b)Specialty Pharmaceuticals:

Our Specialty Pharmaceuticals business deals with assets like acquired proprietary technologies, internally developed proprietary drug-delivery platforms, and current internal compounds under pre-clinical and clinical development. Our initial global therapeutic area focus is on dermatology and oncology, two therapeutic areas that best leverage our internal assets. A key component of the strategy in this area is a strong, targeted business development effort to accelerate market entry. (c)Biopharmaceuticals:

Our Biologics Development Center spans an area of 36,000 sq. ft., with development and manufacturing suites for both E. coli and mammalian cell culture. It caters to the highest development standards of GMP, GLP and applicable levels of bio-safety. Grafeel (Filgrastim), our first biologics product to enter the market, enjoys a market share of almost 50% in India and has been able to reach many more patients than the innovators product due to its

Affordability . Our second product Reditux (Rituximab) is the first biosimilar monoclonal antibody to be developed and launched anywhere in the world.

Sustainability: Social Initiatives

Dr. Reddys Foundation: At Dr. Reddys, we believe that for any development to be sustainable, people need to be empowered to support themselves. The company also believes that in every human being and organization there is a latent need to give back to society. It is with this perspective that Dr K Anji Reddy, Chairman of Dr. Reddys, created Dr. Reddys Foundation in 1996. In Dr. K. Anji Reddys own words, "The Foundation is a laboratory for catalysing innovative, reproducible and sustainable experiments for social change. The highest form of patriotism and philanthropy consists of helping and stimulating men and women to elevate and improve themselves by their own free and independent individual action." Dr. Reddys Foundation is engaged in promoting pioneering public-private partnership models linking life, learning and livelihoods. The foundation addresses the cause of poverty alleviation, with specific emphasis on livelihoods for marginalized youth.

The Naandi Foundation: The Naandi Foundation is an autonomous, public trust that works together with governments, corporate houses and the society to improve the lives of the underprivileged. It was founded by Dr. K Anji Reddy, Chairman of Dr. Reddys, who brought together other similar-minded corporate houses to create Naandi (Naandi means dawn or a new beginning).

Dr. Reddys foundation for Health Education: (DRFHE)

Dr. Reddy's Foundation for Health Education (DRFHE) was initiated in 2002 with the aim of providing long term value added benefits to our customers in terms of meeting unfulfilled needs in the area of health education. Our Branded Finished Dosages launched this initiative and was instrumental in conducting activities related to health education for doctors assistants, nurses, potential post graduates etc. Recognizing that our forte was developing innovative healthcare solutions, we forayed into the field of Health education with a vision to become a globally admired provider for Healthcare Education.

Centre for Social Initiative and Management: (CSIM)

The Center for Social Initiative and Management (CSIM) is a learning center that discovers and moulds Social Entrepreneurs who can generate radical, path-breaking solutions to social divides, who can take reasonable risks and who can persistently work towards creating a lasting social impact. Alongside, CSIM also supports the process of social entrepreneurship in small and medium NGOs, and provides a volunteer constituency that these NGOs and social entrepreneurs can draw from.

ABOUT THE INDUSTRY

Global Market: The global Pharmaceuticals Market has demonstrated consistent strong growth patterns in the last five years. Much of the growth in the Global Pharmaceutical industry can be attributed to the change in the disease profile of the global population. Increasing incidence of lifestyle related diseases have led to an increase in demand for drugs for these particular categories. North America remains the largest Pharmaceutical market constituting 49% of the worldwide market followed by Europe and Asia-Pacific. Pharmaceutical market across the world is witnessing increased opportunities in the area of Bio Pharmaceuticals, Pharmacogenomics and Biologics market. The smaller national markets in Asia-Pacific and Latin America are expected to grow significantly and will increase their presence in the global Pharmaceutical landscape.

Indian Market:
The Indian Pharmaceutical Industry today is in the front rank of Indias sciencebased industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made in digenerously. Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Parma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles.

There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations.

The Pharmaceutical Industry Today:

The pharmaceutical industry is one of the largest and most exciting sectors to be working in today. It is a rapidly changing environment where many advances have taken place over the past 20 years. Furthermore, it will continue to develop and evolve at an everincreasing pace over the next decade. New drugs, new technologies and exciting new discoveries have driven this evolution. A clear picture of today's pharmaceutical industry.

The origins of the industry Where are we now and what issues are we likely to face in the future? How do generic medicines and parallel trade affect the industry? What is Biotech and how does it fit into the sector?

DATA ANALYSIS
Share Capital:

Particulars Share

2004-05

2005-06 22621417 9238695 31860112

2006-07 43733566 3299019 47032585

2007-08 48118049 4623074 48580423

holders 20740838

fund Long term Debt 2732371 Total 23473209

Table2.5:-Analysis of share capital

Chart2.2:- Analysis of share capital

Sales by division:

Chart2.3:- Analysis of sales by division

Dr.

REDDYS

LABORATORIES

LTD

BULK

ACTIVES

DIVISION:
Total Inventory trend (All figure in thousands) Particular Raw material Work progress Finished Goods 732561 2465468 697155 1052467 2004-05 992425 in 1008575 2005-06 2334552 1436810 2006-07 2099552 1643466 2007-08 2533789 2226873

Store Spares Total

and 304547

428381

596214

435663

3038108

6665211

4875836

6409343

Table2.6:- Total inventory trend

Chart2.4:- Total inventory trend chart

Inventories play a major role in a business or company depending on nature of the business. The inventories may be classified as under:(i)Raw materials: Primary or secondary material that is used to produce a product. Unfinished goods used in the manufacture of a product. For example, a steelmaker uses iron ore and other metals in producing steel. A publishing company uses paper and ink to create books, newspapers, and magazines. Raw materials are carried on a company's balance sheet as inventory in the current assets section. Amount of raw materials to be kept by a firm depends upon number of factors, including the speed with which raw materials can be ordered and received. Its purpose is to uncouple the production function from the purchasing function i.e. to make these two functions independent of each other so that delay in procurement of raw-materials do not

cause production delays and the firm can satisfy its need for raw-materials out of the inventory lying in the stores.

Raw Material Trend at Bulk Actives Division:

Particulars Raw material

2004-05 992425

2005-06 2334552

2006-07 2099552

2007-08 2533789

Table2.7:- Raw Material Trend at Bulk Actives Division

Chart2.5:-Raw material trend

(2)Work in-process or progress: It refers to the raw materials engaged in various phases of production process. The degree of completion may be varying for different units some units may be 40% finished, or some other 90% completed. The value of work in progress involves material costs, the direct wages and expenses already incurred and the overheads if any. So, work in progress inventory contains partially produced or completed goods. The purpose of work-in-progress inventory is to uncouple the various operations in the production process, so that machine failures and stoppage in operations will not affected by one another. It depends on the user of the terms. I use the term work in process to mean a manufacturers inventory that is not yet completed. I think of work in process as the goods that are on the factory floor of a manufacturer. The amount of Work in Process Inventory would be reported along with Raw Materials Inventory and Finished Goods Inventory on the manufacturers balance sheet as a current asset.

Work in process Trend at Bulk Actives Division:

Particulars WIP 2004-05 1008575 2005-06 1436810 2006-07 1643466 2007-08 2226873

Table2.8:- Work in process Trend at Bulk Actives Division

Work in Progress trend Chart2.6:-Work in progress trend (3)Finished Good: Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user. In trading firm purchase are made where as in the manufacturing firm produce or process the goods. However, it may be. These are goods that are either being purchased by the firm or are being produced or processed in the firm. These are just ready for sale to customers. If the firms do

not maintain a sufficient finished goods inventory, they run the risk of losing sales due to customer dissatisfaction. The purpose of finished goods inventory is to uncouple the production and sale can be made directly out of inventory. Particular Finished 2004-05 732561 2005-06 2465468 2006-07 697155 2007-08 1052467

Good Table2.9:-Finished Goods

Finished Goods Trend Chart2.7:- Finished Goods Trend (4)Stores and Spares: Particulars 2004-05 Store and 304547 Spares Table2.10:- Stores and Spares 2005-06 428381 2006-07 596214 2007-08 435663

Stores and Spares CHART2.8:- Stores and Spares

TOOLS AND TECHNIQUES

Main problems in inventory management are to answer. (i) Are all items of inventory important if not what are items to be given more importance? (ii) (iii) What should be the size of the order for replenishment be placed? What should be the over level? To answer the above question following techniques are used: ABC Analysis Economic Order Quantity VED Analysis RE-ORDER Level Safety Stock Just-in-time Inventory

ABC Analysis:
In accounting, ABC stands for activity-based costing. In inventory or stock management, it's a method of stock control. Its basic assumption is that not all stock is equally valuable, therefore doesn't need the same kind of attention. So you categories all your stock according to its cost and quantity - and create a graph with cost shown on Y axis and quantity shown on X. From left to right, you place your stock from highest value to lowest. Typically, you see that a small portion of stock is the most valuable, and therefore needs maximum attention and resources - that's called 'A. Then utmost valuable section of stock is B, the next is C and so on. Basically it shows you which stocks need more attention and which need less. It helps in utilizing resources for stock management more effectively. The items with the highest value is given top priority and soon and are more controlled then low value item. The re-rational limits are as follows.
A Item: The Top 10% of all items which have the highest rupee percentages and classify them as A items B Items: The Next 20% of all items with the next highest rupee percentages and designate them as B items C Items: The Next 70% of all items with the lowest rupee percentages are C items

A CLASS ITEMS
Description Qty Succenic Acid 1034 Dimethicone 3728 Sodium Benojate 1634 Micro Crystalline 328 SUB TOTAL 6724 SCRAP 11221 Table2.11:-Analysis of class item A Interpretation It is observed that five items fall under A class items namely Drugs manufacturing and scrap based on their consumption value which constitutes 70% of the total consumption value. Rate 30805 30988 23295 19116 28511 16900 Value 31852370 115523264 38064030 6270048 191707964 189634900

B CLASS ITEMS
Description Anidrisorb Opadry Purple Magnesium Stearate Qty 271 261875 5292 Rate 71812 49 2103 Value 19461052 12831875 11129076

Ethyl Cellulose Sillica colloidal

93 443138

106564 85

9910452 37666730

Table2.12-Analysi of class item B Interpretation It is observed that five above items fall under B class items coating, based on their consumption value i.e., which constitutes 20% of the total consumption value.

C CLASS ITEMS
DESCRIPTION Lactose Anhydrous Calcium Chloride Macrogol Titanium Dioxide Potassium Desloratadine Black Currant EHG Capsules Povid One IP Poloxamer Docusate Sodium Powered cellulose QTY 294 3475 3 352 64 6592 6990 5630 47 12165 2751 102 RATE 32488 23 40152 7701 13355 65 185 124 49762 310 350 13265 VALUE 9551472 79925 120456 2710752 854720 428480 1293150 698120 2338814 3771150 962850 1353030

Table2.13:-Analysis of class item C

Interpretation It is observed that twelve items fall under C class items based on their consumption value which constitutes 10% of the total consumption value. Category % of Items A 5-10 B 10-20 C 70-85 Table2.14:- Analysis of class items % of total materials cost 70-85 10-20 5-10

Procedure: (i) (ii) Items with the highest value is given top priority and soon. There after cumulative totals of annual value of consumption are expressed as percentage of total value of consumptions, (iii) Then these percentage values are divided into three categories.

ABC analysis helps in allocating managerial efforts in proportion to importance of various items of inventory.

ABC Analysis at Bulk Actives Division:

RAW MATERIAL * Rs In millions Particulars A B C Table2.15:2004-05 69% 23% 8% ABC Analysis 2005-06 72% 19% 9% at 2006-07 2007-08 70% 71% 17% 14% 13% 15% Bulk Actives Division

Chart2.9:- ABC Analysis at Bulk Actives Division chart

Interpretation: Consumption of raw material A gradually increased every year from 2005 to 2006 and decrease in 2007 after that it again increase in the year 2008, raw material Bs consumption increased from 2005 to 2006 and decreased thereafter and raw material Cs consumption increased gradually every year from 2005 to 2008.

WORK IN PROCESS
in millions Particulars % 2004-05 % 1008575 695917 72% 231972 19% 80686 9%

*Rs

2005-06 % 2006-07 % 2007-08 1436810 1034503 70% 272994 17% 129313 13% 1643466 1150426 71% 279389 14% 213651 15% 2226873 1581080 311762 334031

Total Work in Process A 69% B 23% C 8% Table2.16:-Work in progress

Chart2.10:- ABC Analysis at Bulk Actives Division chart

Interpretation:
The consumption of work-in-progress A gradually increased from 2005 to 2008, work-in-progress Bs consumption increased from 2005 to 2008 and work-in-progress Cs consumption when compared to 2005 and increased there after.

Finished Goods
* Rs In millions

Particulars Finished Goods A B 69% 23%

2004-05 732561 505467 168489

2005-06 2465468 19% 468439

2006-07 697155

2007-08 1052467

72% 1775137 70% 488009 71% 747252 17% 118516 14% 147345 13% 90630 15% 157870

C 8% 58605 9% 221892 Table2.17:- Analysis of finished goods

Chart2.11:-Analysis of finished goods chart

Interpretation:
The consumption of finished goods A increased in the year 2006 when compared 2005 and then it decreased in the year 2007 and again it increased in 2008. Finished goods Bs consumption increased in the year 2006 and it is decreased in the year 2007 and again it increased in the year 2008. Finished goods Cs

consumption gradually decreased in the years 2007 when compared to 2005 and 2006. In the year 2008 it again increased.

ECONOMIC ORDER QUANTITY:

After various inventory items are classified on the basis of the ABC analysis the management becomes aware of the type of control that would be appropriate for each of the three categories of the inventory items. The determination of the appropriate quantity to be purchased in each lot to replenish stock as a solution to the order quantity problems necessitates resolution of conflicting goals. Buying in a higher average inventory level will assure, (i) (ii) Smooth production / sale operation and. Lower ordering or setup costs. But it will involve higher carrying costs. On the other hand small orders would reduce the carrying cost of inventory by reducing the average inventory level but the ordering costs would increase, as there is a likelihood of interruption in operations due to stock-outs. A firm should not place either too high or small orders on the basis of a tradeoff between benefits derived from the availability of inventory and the cost of carrying that level of inventory, appropriate or optimum level of order to be placed should be determined. The optimum level of inventory is popularly referred to as the economic order quantity or economic lot size. It may be defined as that level of inventory order that minimizes the total lost associated with inventory management. It is based on some assumptions, which are restrictive.

a.

The firm knows with certainty the annual usage of a particular item of inventory.

b. Rate at which the firm uses inventory is steady over time. c. The orders placed to replenish inventory stocks are received at exactly that point in time when inventories reach zero.

EOQ can be illustrated by (i) (ii) Trial and error approach, Mathematical approach.

Trial and Error approach:

In this approach the procedure of procuring the inventory is assumed the smaller the lot the lower is average inventory and vice versa and high average inventory would involve high carrying costs. This approach is used for determination of EOQ uses different permutations and combinations of lots of inventory purchases so as to find out the least ordering and carrying cost combinations. The carrying cost and acquisition cost for different sizes of order to purchase inventories are computed and the order size with lowest total cost of inventory is EOQ.

Mathematical Approach:
The EOQ quantity can use a short-cut method calculated by following EOQ= EOQ = Where,

2AB C

A = Annual usage of inventory B = Buying cost per order C = carrying cost per unit

Figure 2.2 :-Analysis ofE.O.Q

Safety Stock:
The safety stock protects firm from Tradeoffs due to unanticipated demand for the items level of inventory investment is however increased by the amount of safety stock. Safety level is ascertained in inventory as a part because there is always an uncertainty involved in time lag usage rate or other factor. Usually smaller the safety level greater the risk of stock-outs. If stock-levels are predictable then there is a chance of stock out occurring. However stock inflows and outflows are unpredictable or lesser predictable it becomes to carry additional safety stock to prevented.

JUST-IN-TIME INVENTORY:
The basic concept is that every firm should keep a minimum level of inventory on hand, relying suppliers to furnish stock just in time as and when required. JIT helps in emphasizing sufficient levels of stocks to ensure that production will not be interrupted. Although the large inventories may be bad idea due to heavy carrying JIT is a modern approach to inventory management and the goal is essentially to minimize such inventories and there by maximizing the turnover. JIT system significantly reduces inventory-carrying cost by requiring that the raw materials be procured just in time to be placed into production. Additionally the work in process inventory is minimized by eliminating inventory is minimized by eliminating inventory buffers between different production departments. If JIT is to be implemented successfully there must be a high degree of coordination and co-operation between the supplier and manufacturer and among different production centers. JIT does not appear to have any relation with EOQ however it is in fact alters some of the assumptions of EOQ model. The average inventory level under the EOQ model is defined as Average inventory= 1/2 EOQ + safety level JIT attacks this equation in two ways. (i) (ii) By reducing the ordering cost By reducing the safety stock.

The basic philosophy in JIT is that the benefits, associated with reducing inventory and delivery time to a bare minimum through adjustment in the EOQ model; will more than offset the costs associated with the increased possibility of stock-outs.

INVENTORY TURNOVER RATIO:

This ratio how often a firms inventory turns over during the course of the year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for the industry could mean a business is losing sales because of inadequate stock on hand.

A ratio showing how many times a company's inventory is sold and replaced over a period.

Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

Calculation of Inventory turnover ratio:

PARTICULARS COST OF GOODS SOLD AVERAGE INVENTORY 2004-05 2005-06 2006-07 2007-08

15576946 20044468 37481978 33306557 3038108 4430968 4875836 6409343 7.69 5.20

INVETORY TURNOVER RATIO 5.13 4.52 Table2.18:- Calculation of Inventory turnover ratio

Chart 2.12:- Calculation of Inventory turnover ratio Interpretation The Ratio increased to 7.69 in 2006-07 from 4.52 in 2005-06, implying there was a consistent and good management control. Being a Pharmaceutical company, generally the inventory turnovers will be high. But it decreases in 2007-2008 from 7.69 to 5.2 it implies poor sales and, therefore, excess inventory.

FINDINGS
1. There was good coordination between the Marketing, planning, procurement, production and distribution functions of DRL, higher inventory turnover was possible. 2. For few finished products, most of the important raw materials are either self manufactured or procured locally. 3. The companys focus after 2005 had increased much towards the Global markets like USA, Europe, Middle East, and South-East Asian Countries. Therefore the company had built up huge stocks to cater to the needs of the customers abroad. 4. During the year 2005-2006, the company had initiated a Cost Reduction project named Pragathi. One of the findings of the project was that instead of decentralized procurement of stores & spares, organization of a specialized function to centralize would provide opportunities of mass procurement, better negotiation of rates etc. This initiative had lead to the considerable decrease in the cost of the stores & Spares and hence the decrease in value of stocks. 5. In the year 2005-06 the inventory turnover ratio is less i.e, 4.52% when compared to 2006-07, 7.69% and again it was decreased to 5.2%.

6.

Total inventory trend also increased in 2005-06 and it decreased in 2007-08 7.69 to 5.2.

7. 8.

Material and finished goods were well managed at inventories through ABC analysis. In inventory stores & spares at cost 2004-05 were increased to 60% and in the year 2007 were decreased due to sales and centralized procurement of stores & spares.

SUGGESTIONS:

1. If the inventory turnover ratio can be increased to 7% from 5.2% in the year 2007 by the inventory holding period will be decreased to 60 days from 85 days, then the average inventory can be reduced. As a result inventory cost also can be reduced about 10%. 2. e-commerce: sourcing the input material and marketing, distribution of finished goods through e-commerce. This has to be strengthened to increase the turnover of the company. 3. By maintaining the co-ordination among the raw material, WIP, finished goods and adequate inventory can be held. 4. The company has to concentrate more on Research & Development so that it can keep abreast with the latest developments. 5. Company should strive for getting the right goods to the right places at the right time for the least cost 6. Company has to position inventory items according risk and opportunity.

BIBLIOGRAPHY
1. Khan. M .Y. Jain. P.K., 2007 , Management Accounting Text ,Problems and Fourth Edition, Tata McGraw Hill ,New Delhi-8 2. K.S. Menon, purchasing and Inventory control, Third Edition, Wheeler Publishers 3. Gopalakrishnan, Sundaresan, Materials Management, prentice-hall of India. 4. Anthony A.Atkison, Robert S. koplan, S. Mark young, Management Accounting, Fourth Edition, Pearson Prentice hall 5. I.M.Pandey: Financial Management, Vikas Publishers. cases,

Dr. Reddys Laboratories Websites

http://www.Drredddys.com
http://www.Myreddys.com