A PROJECT REPORT ON INVENTORY MANAGEMENT SYSTEM A STUDY OF JOHNSON & JOHNSON LTD.
INVENTORY MANAGEMENT SYSTEM A STUDY OF JOHNSON & JOHNSON LTD. Submitted By:
A PROJECT REPORT ON INVENTORY MANAGEMENT SYSTEM A STUDY OF JOHNSON & JOHNSON LTD. Submitted By: ACKNOWLEDGEMENT I have prepared this study paper for the “Inventory Management System – A Study of Johnson & Johnson Ltd”. I have derived the contents and approach of this study paper through discussions with company executives and internet as well as with the help of various Books, Magazines and Newspapers etc. I would like to give my sincere thanks to a host of Company Executive, friends and the teachers who, through their guidance, enthusiasm and counseling helped me enormously as I think there will be always need for improvement. Apart from this, I hope this study would stimulate the need of thinking and discussion on the topics like this one. Contents PART- I *Objective of the Study *Introduction of Company * Company Profile * History * Board of Directors * Awards * Products * Guiding Principles of Company * Structure of the Company * Research Methodology * Introduction of the Topic PART- II * Data Collection * Financial Statements * Data Analysis and Interpretation * Problems and Suggestions * Conclusions * Bibliography OBJECTIVE OF THE STUDY Inventories constitute the principal item in the working capital of the majority of trading and industrial companies. In inventory, we include raw materials, finished goods, work in progress, supplies and other accessories. To maintain the continuity in the operations of business enterprise, a minimum stock of inventory required. However, the physical control of inventory is the operating responsibility of stores superintendent and financial personnel have nothing to do about it but the financial control of these inventories in all lines of activity in which they comprise a substantial part of the current assets is a frequent problem in the management of working capital. Management of inventory is designed to regulate the volume of investment in goods on hand, the types of goods carried in stock to meet the needs of production and sales while at the same time, the investment in them is to kept at a reasonable level. Company Profile Johnson & Johnson and its subsidiaries have approximately 115,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. Johnson &Johnson is a holding company, which has more than 250 operating companies conducting business in virtually all countries of the world. Johnson & Johnsonâ€™s primary focus has been on products related to human health and wellbeing. Johnson & Johnson was incorporated in the State of New Jersey in 1887. The Companyâ€™s structure is based on the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments. Each subsidiary within the business segments is, with some exceptions, managed by citizens of the country where it is located. . Johnson & Johnson is known for its corporate reputation, consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's most respected company by Barron's Magazine, and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U.S. State Department for its funding of international education programs. Johnson & Johnson is known for its corporate reputation, consistently ranking at the top of Interactive National Corporate Reputation Survey ranking as the world's most respected company by Barron's Magazine, and was the first corporation awarded the Benjamin Franklin Award for Public Diplomacy by the U.S. State Department for its funding of international education programs The corporation's headquarters is located in New Brunswick, New Jersey, United States. Its consumer division is located in Skillman, New Jersey. The corporation includes some 250 subsidiary companies with operations in over 57 countries. Its products are sold in over 175 countries. J&J had worldwide pharmaceutical sales of $24.6 billion for the full-year 2008. Segments of Business Johnson & Johnson’s operating companies are organized into three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. Consumer The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products, and wellness and prevention platforms. The Baby Care franchise includes the JOHNSON’S Baby line of products. Major brands in the Skin Care franchise include the AVEENO; CLEAN & CLEAR; JOHNSON’S Adult; NEUTROGENA; RoC; LUBRIDERM; Dabao; and Vendôme product lines. The Oral Care franchise includes the LISTERINE and REACH oral care lines of products. The Wound Care franchise includes BAND-AID brand adhesive bandages and PURELL instant hand sanitizer products. Major brands in the Women’s Health franchise are the CAREFREE Pantiliners; STAYFREE sanitary protection products; and Vania Expansion products. The nutritional and over-the-counter lines include SPLENDA , No Calorie Sweetener; the broad family of TYLENOL acetaminophen products; SUDAFED cold, flu and allergy products; ZYRTEC allergy products; MOTRIN IB ibuprofen products; and PEPCID AC Acid Controller from Johnson & Johnson • Merck Consumer Pharmaceuticals Co. These products are marketed to the general public and sold both to retail outlets and distributors throughout the world. Pharmaceutical The Pharmaceutical segment includes products in the following therapeutic areas: antiinfective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. These products are distributed directly to retailers, wholesalers and health care professionals for prescription use. Key products in the Pharmaceutical segment include: REMICADE (infliximab), a biologic approved for the treatment of a number of immune mediated inflammatory diseases; PROCRIT (Epoetin Alfa, sold outside the U.S. as EPREX), a biotechnology-derived product that stimulates red blood cell production; LEVAQUIN (levofloxacin) in the anti-infective field; RISPERDAL CONSTA (risperidone), a long-acting inject able for the treatment of schizophrenia; CONCERTA (methylphenidate HCl), a product for the treatment of attention deficit hyperactivity disorder; ACIPHEX /PARIET , a proton pump inhibitor co-marketed with Eisai Inc.; DURAGESIC /Fentanyl Transdermal (fentanyl transdermal system, sold outside the U.S. as DUROGESIC ), a treatment for chronic pain that offers a novel delivery system; VELCADE (bortezomib), a product for the treatment for multiple myeloma; PREZISTA (darunavir) for the treatment of HIV/AIDS patients; and INVEGA (paliperidone), a once-daily atypical antipsychotic. Medical Devices and Diagnostics The Medical Devices and Diagnostics segment includes a broad range of products distributed to wholesalers, hospitals and retailers, used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories and clinics. These products include Cordis’ circulatory disease management products;DePuy’s orthopaedic joint reconstruction, spinal care and sports medicine products; Ethicon’s surgical care, aesthetics and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products; LifeScan’sblood glucose monitoring and insulin delivery products; Ortho-Clinical Diagnostics’ professional diagnostic products; and Vistakon’s disposable contact lenses. Distribution to these health care professional markets is done both directly and through surgical supply and other dealers. Geographic Areas The international business of Johnson & Johnson is conducted by subsidiaries located in 59 countries outside the United States, which are selling products in virtually all countries throughout the world. The products made and sold in the international business include many of those described above under “— Segments of Business — Consumer,”“— Pharmaceutical” and “— Medical Devices and Diagnostics.” However, the principal markets, products and methods of distribution in the international business vary with the country and the culture. The products sold in international business include not only those developed in the United States, but also those developed by subsidiaries abroad. Investments and activities in some countries outside the United States are subject to higher risks than comparable U.S. activities because the investment and commercial climate is influenced by restrictive economic policies and political uncertainties. Raw Materials Raw materials essential to Johnson & Johnson’s operating companies’ businesses are generally readily available from multiple sources. Patents and Trademarks Johnson & Johnson and its subsidiaries have made a practice of obtaining patent rotection on their products and processes where possible. They own or are licensed under a number of patents relating to their products and manufacturing processes, which in the aggregate are believed to be of material importance to Johnson & Johnson in the operation of its businesses. Sales of the Company’s largest product, REMICADE ® (infliximab), accounted for approximately 7% of Johnson & Johnson’s total revenues for fiscal 2009. Accordingly, the patents related to this product are believed to be material to Johnson & Johnson. During 2007 through 2009, RISPERDAL ® (risperidone) oral and TOPAMAX ® (topiramate) lost basic patent protection and market exclusivity and became subject to generic competition in the United States and international markets. RISPERDAL ® oral sales declined by 57.7% and 37.8% in 2009 and 2008, respectively. TOPAMAX ® lost market exclusivity in March 2009 and sales declined by 57.9% as compared to 2008. The next significant patent scheduled to expire on December 20, 2010 is for LEVAQUIN ® (levofloxacin), which accounted for 2.5% of the Company’s 2009 sales. A pediatric extension for LEVAQUIN ® was granted by the U.S. Food and Drug Administration (“FDA”), which extends market exclusivity in the United States through June 20, 2011. Johnson & Johnson’s operating companies have made a practice of selling their products under trademarks and of obtaining protection for these trademarks by all available means. These trademarks are protected by registration in the United States and other countries where such products are marketed. Johnson & Johnson considers these trademarks in the aggregate to be of material importance in the operation of its businesses. Competition In all of their product lines, Johnson & Johnson’s operating companies compete with companies both large and small, and both local and global, located throughout the world. Competition exists in all product lines without regard to the number and size of the competing companies involved. Competition in research, involving the development and the improvement of new and existing products and processes, is particularly significant. The development of new and innovative products is important to Johnson & Johnson’s success in all areas of its business. This also includes protecting the Company’s portfolio of intellectual property. The competitive environment requires substantial investments in continuing research and in maintaining sales forces. In addition, the development and maintenance of customer demand for the Company’s consumer products involves significant expenditures for advertising and promotion. Research and Development Research activities represent a significant part of Johnson & Johnson’s subsidiaries’ businesses. Major research facilities are located not only in the United States, but also in Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore and the United Kingdom. The costs of worldwide Company sponsored research activities relating to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients (excluding purchased in-process research and development charges for fiscal 2008 and 2007), amounted to $7.0 billion, $7.6 billion and $7.7 billion for fiscal years 2009, 2008 and 2007, respectively. These costs are harged directly to expense, or directly against income, in the year in which incurred. Environment Johnson & Johnson’s operating companies are subject to a variety of U.S. and international environmental protection measures. Johnson & Johnson believes that its operations comply in all material respects with applicable environmental laws and regulations. Johnson & Johnson’s compliance with these requirements did not during the past year, and is not expected to, have a material effect upon its capital expenditures, cash flows, earnings or competitive position. Regulation Most of Johnson & Johnson’s businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward increasingly stringent regulation. In the United States, the drug, device, diagnostics and cosmetic industries have long been subject to regulation by various federal and state agencies, primarily as to product safety, efficacy, manufacturing, advertising, labeling and safety reporting. The exercise of broad regulatory powers by the FDA continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends are also evident in major markets outside of the United States. The costs of human health care have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world. In the United States, attention has been focused on drug prices and profits and programs that encourage doctors to write prescriptions for particular drugs or recommend, use or purchase particular medical devices. Payers have become a more potent force in the market place and increased attention is being paid to drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of health care. The regulatory agencies under whose purview Johnson & Johnson’s operating companies operate have administrative powers that may subject those companies to such actions as product withdrawals, recalls, seizure of products and other civil and criminal sanctions. In some cases, Johnson & Johnson’s operating companies may deem it advisable to initiate product recalls. In addition, business practices in the health care industry have come under increased scrutiny, particularly in the United States, by government agencies and state attorneys general, and resulting investigations and prosecutions carry the risk of significant civil and criminal penalties. PROPERTIES Johnson & Johnson and its subsidiaries operate 143 manufacturing facilities occupying approximately 21.4 million square feet of floor space. The manufacturing facilities are used by the industry segments of Johnson & Johnsonâ€™s business approximately as follows: Available Information Consumer Pharmaceutical Medical Devices and Diagnostics Worldwide Total Square Feet (in Segment thousands) 6,825 6,369 8,251 21,445 Within the United States, 7 facilities are used by the Consumer segment, 12 by the Pharmaceutical segment and 37 by the Medical Devices and Diagnostics segment. Johnson & Johnsonâ€™s manufacturing operations outside the United States are often conducted in facilities that serve more than one business segment. The locations of the manufacturing facilities by major geographic areas of the world are as follows: Geographic Area Number of Facilities United States 56 Europe 38 Western Hemisphere, excluding U.S. 16 Africa, Asia and Pacific 33 Worldwide Total 143 (Square Feet in thousands) 7,489 7,336 3,372 3,248 21,445 EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the executive officers of Johnson & Johnson as of February 8, 2010, each of whom, unless otherwise indicated below, has been an employee of the Company or its affiliates and held the position indicated during the past five years. There are no family relationships between any of the executive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of the Board of Directors, the executive officers are elected by the Board to hold office for one year and until their respective successors are elected and qualified, or until earlier resignation or removal. Information with regard to the directors of the Company, including those of the following executive officers who are directors, is incorporated herein by reference to the material captioned â€œElection of Directorsâ€? in the Proxy Statement. Name & Position Dominic J. Caruso Member, Executive Committee; Vice President, Finance; Chief Financial Officer (a) Russell C. Deyo Member, Executive Committee; Vice President, Human Resources and General Counsel (b) Colleen A. Goggins Member, Executive Committee; Worldwide Chairman, Consumer Group(c) Alex Gorsky Member, Executive Committee; Worldwide Chairman, Medical Devices and Diagnostics Group (d) Sherilyn S. McCoy Member, Executive Committee; Worldwide Chairman, Pharmaceuticals Group (e) William C. Weldon Chairman, Board of Directors; Chairman, Executive Committee; Chief Executive Officer History Robert Wood Johnson, inspired by a speech by antisepsis advocate Joseph Lister, joined brothers James Wood Johnson and Edward Mead Johnson to create a line of readyto-use surgical dressings in 1885. The company produced its first products in 1886 and incorporated in 1887. Robert Wood Johnson served as the first president of the company. He worked to improve sanitation practices in the nineteenth century, and lent his name to a hospital in New Brunswick, New Jersey. Upon his death in 1910, he was succeeded in the presidency by his brother James Wood Johnson until 1932, and then by his son, Robert Wood Johnson II. RWJ's granddaughter, Mary Lea Johnson Richards, was the first baby to appear on a J&J baby powder label. His great-grandson, Jamie Johnson, made a documentary called Born Rich about the experience of growing up as the heir to one of the world's greatest fortunes. Since the 1900s, the company has pursued steady diversification. It added consumer products in the 1920s and created a separate division for surgical products in 1941 which became Ethicon. It expanded into pharmaceuticals with the purchase of McNeil Laboratories, Inc., Cilag, and Janssen Pharmaceutical, and into women's sanitary products and toiletries in the 1970s and 1980s. In recent years, Johnson & Johnson has expanded into such diverse areas as biopharmaceuticals, orthopedic devices, and Internet publishing. Recently, Johnson & Johnson has purchased Pfizer's Consumer Healthcare department. The transition from Pfizer to Johnson and Johnson was completed December 18, 2006. Johnson & Johnson has been consistently named one of the 100 Best Companies for Working Mothers by Working Mother. Along with Gatorade, Johnson & Johnson is one of the founding sponsors of the National Athletic Trainers' Association. About Ethicon (Brand Name) Our company was founded 80 years ago on the pillars of research, vision, innovation, and a commitment to improving the quality of patients’ lives. The first group of Ethicon scientists and researchers, who thought about healing in a new way - and in doing so, pioneered our sutures to enhance the work of surgeons and the lives of patients recognized the opportunity for limitless innovation. Almost a century later, Ethicon produces much more than sutures. We have continuously introduced innovations in all areas where we focus our expertise including: wound closure; general surgery; biosurgery; women’s health, and aesthetic medicine. While a lot has changed in healthcare, one thing has not: Ethicon remains committed to developing the best surgical solutions to help doctors heal both the wounds you can see and the ones you can’t. Innovations that Restore Bodies...and Lives. How do we do it? How do we stay on the cutting edge of science? By way of our greatest asset: the talented, highly educated, experienced group of professionals who work at ETHICON - 8,500 gifted professionals around the world come together every day to advance, innovate, and respond to their customers’ needs. Our commitment to fulfilling the needs of surgeons and their patients, of transforming surgery, of helping patients heal faster and more safely is never ending. And so our work must be, too. Ethicon has a legacy all its own. But we’re part of a broader heritage, too. As a member of the Johnson & Johnson Family of Companies, we’re guided by Our Credo: company values that empower all of our employees to consider first the needs of our customers and patients we serve and to improve the health, education, and quality of life in the communities where we work and live. Caring for the world, one person at a time… inspires and unites the people of Johnson & Johnson. We embrace research and science - bringing innovative ideas, products and services to advance the health and well-being of people. Our 119,400 employees at more than 250 Johnson & Johnson companies work with partners in healthcare to touch the lives of over a billion people every day, throughout the world. Suture Manufacturing Plants in India Baddi Aurangabad Growth & Expansion Of Johnson & Johnson Since our founding in 1886, we have grown to meet the health care needs of people worldwide. Through mergers, acquisitions and the formation of new companies, we have become the world’s largest and most broadly based health care company. Here are some highlights of our historical growth. 1886 – 1926: Johnson & Johnson Founded With Surgical and Wound Care Products In 1886, our founders – Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson – started a small medical products company in New Brunswick, New Jersey. They made the first-ever commercial sterile surgical dressings, which helped save the lives of patients. • We introduced dental floss, the first Aid kits, sanitary napkins for women, sterile sutures, JOHNSON’S Baby Powder, and BAND-AID Brand Adhesive Bandages. • Our international expansion began with Canada in 1919 and England in 1924. • Our disaster relief program began in 1906 when, within hours of the San Francisco earthquake and fire, we sent trainloads of our products to the city to help survivors. 1926 – 1946: Growth of Product Lines and Expansion Overseas Help Johnson & Johnson Go Public In 1943 our chairman Robert Wood Johnson wrote Our Credo, outlining our responsibilities to doctors, nurses, patients, consumers, employees, and the community. During this period we also continued our overseas growth and began to broaden our efforts in pharmaceuticals and medical products. • We expanded into Mexico, South Africa, Australia, France, Belgium, Ireland, Switzerland, Argentina, and Brazil. • We introduced MODESS sanitary napkins and JOHNSON’S Baby Oil and Baby Lotion. We also launched the first U.S. prescription birth control product, ORTHO GYNOL Gel, in 1931. • In 1944 we became a publicly traded company. 1946 – 1966: Continued Product Growth and Our Credo Position Johnson & Johnson as Responsible Industry Leader. • • • • • • • We steadily continued our growth during these decades. We expanded to Zimbabwe, Austria, Sweden, the Philippines, Colombia, Puerto Rico, the Netherlands, India, Scotland, Pakistan, Zambia, Venezuela, Italy, Malaysia and Portugal. New companies formed or acquired included: ETHICON, Inc., Personal Products Company (products related to women’s health); McNeil Laboratories, Inc. (bringing us TYLENOL acetaminophen); European pharmaceutical companies Cilag Chemie, A.G. and Janssen Pharmaceutical, and Codman & Shurtleff, Inc. (medical and surgical instruments). In 1963 Ortho Pharmaceutical began marketing its first birth control pill, ORTHO-NOVUM 10 mg. 1966 – 1986: Medical Advances Create Groundbreaking Products Our operating companies pioneered several important medical advances during this period. The acquisition of Frontier Contact Lenses would grow into our vision care business, the pioneer in disposable contact lenses. In 1985 we expanded to China. We introduced a wide range of groundbreaking products during these decades including: • RhoGAM a life saving treatment for hemolytic disease in newborns. • HALDOL (haloperidol), the gold standard for treating schizophrenia for over 25 years. • MONISTAT (miconazole nitrate) Cream, a milestone product for women’s health. • VICRYL Synthetic absorbable sutures, an important new tool for surgeons. • The PROXIMATE Linear Stapler, a new way to close surgical incisions without sutures. • ORTHOCLONE OKT3, the first therapeutic monoclonal antibody to treat the rejection of transplanted organs. 1986 – 2008: Industry Leadership Enhanced by Acquisitions and Internal Development From the 1980s to the present, we continue to grow through acquisitions and internally developed businesses that give us leadership positions in a number of areas. • We acquired Life Scan, Inc. (blood glucose monitors for diabetics), Neutrogena Corporation, and skin care brands such as CLEAN & CLEAR, RoC and AVEENO. • The acquisition of DePuy, Inc. made us a world leader in orthopedics. • We formed Ortho Biotech Products, LP (a biotechnology pioneer) and Ethicon Endo-Surgery, Inc. (minimally invasive surgery) out of internal businesses. • We merged with Centocor, Inc. which brought us REMICADE (infliximab). • Through our operating companies, we introduced the first mass market disposable contact lenses, the first coronary stent and the first drug eluting stent. • Prescription medications we introduced during this period include: • PROCRIT/EPREX (Epoetin Alfa) • RISPERDAL (risperidone) • RAZADYNE (galantamine hydro bromide) • PREZISTA (darunavir) • INVEGA (paliperidone) Extended Release Tablets • INTELENCE (etravirine) Looking to the Future Johnson & Johnson is dedicated to advancing the health and well-being of people around the world. Our people come to work each day inspired by their personal knowledge that their caring transforms people's lives. Our whole history has been based on their passion for making a difference in this world and we aspire, in the years to come, to take human health and well-being to new levels. We are arguably the best-positioned company to do this because of our breadth, financial strength and collaborative nature. STRUCTRE OF THE COMPANY Johnson & Johnson Ltd. act upon the rules & regulations of the Companies Act, 1948. The company has well defined structure .It have the following departments: 1. HR/ Personnel department 2. Accounts departments 3. Purchase departments 4. Store department 5. Quality Assurance & Quality Control 6. IT department 7. R&D Department 8. Sales & Excise department RESEARCH METHODOGY Research methodology is the way to systematically solve the research problem. Objective of research study is Analysis of inventory of Johnson & Johnson Ltd. Analyzing of inventory, we determining following inventories1. Raw materials inventory. 2. Work in progress inventory. 3. Finished goods inventory & 4. Supplies inventory. In this section of inventories, we should analyze the annual investment in inventories, Valuation of inventory after closing balance of items in inventory. In this manner, we calculate reorder point, safety stock levels, minimum & maximum levels of inventory. Working hypothesis of the objective is that inventories are the stock piles of goods .The all organization on their inventories. J&J invests about 60%of total assets inventory should be analyzed their records. The analysis of inventory according to their data available in the company. The data collection of inventory for analysis by the direct store department. We should record primary and secondary data by the helps of assistants ledger books M R N etc. We went to the all inventories as raw material, work in progress inventory, finished goods inventory by the proper observation of dataâ€™s of the company. INTRODUCTION OF THE TOPIC INTRODUCTION: Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Because of the large size of inventories maintained by firms, a considerable amount of feuds is required to be committed to them. It is therefore, absolutely imperative to mĂŠnage inventories efficiently and efficiently in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. It is possible for fore a company to reduce its levels of inventories to a considerable degree e.g. 10 to 20 percent, without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in excessive inventory carries a favorable impact on a companyâ€™s profitability. MEANING OF INVENTORY:Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In accounting language it may mean stock of finished goods only. In a manufacturing concern, it may include raw materials, work-inprogress and stores etc. In the form of materials or supplies to be consumed in the production process or in the rendering of services. In brief, Inventory is unconsumed or unsold goods purchased or manufactured. NATURE OF INVENTORIES:Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventory exist in a manufacturing company are raw materials, work in progress and finished goods. RAW MATERIALS:Raw materials are those inputs that are converted into finished product though the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions. WORK IN PROGRESS:These inventories are semi manufactured products. They represent products that need more work before they become finished products for sales. FINISHED GOODS:Finished goods inventories are those completely manufactured products which are ready for sale. Stock of raw materials and work in progress facilitate production. While stock of finished goods is required for smooth marketing operation. Thus, inventories serve as a link between the production and consumption of goods. The levels of three kinds of inventories for a firm depend on the nature of its business. A manufacturing firm will have substantially high levels of all three kinds of inventories, while a retail or wholesale firm will have a very high and no raw material and work in progress inventories. Within manufacturing firms, there will be differences. Large heavy engineering companies produce long production cycle products, therefore they carry large inventories. On the other hand, inventories of a consumer product company will not be large, because of short production cycle and fast turn over. Firms also maintain a fourth kind of inventory, supplies or stores and spares. SUPPLIES: It includes office and plant cleaning materials like soap, brooms, oil, fuel, light, bulbs etc. These materials do not directly enter production, but are necessary for production process. Usually, these supplies are small part of the total inventory and do not involve significant investment. Therefore, a sophisticated system of inventory control may not be maintained for them. MANAGEMENT OF INVENTORY Inventories constitute the principal item in the working capital of the majority of trading and industrial companies. In inventory, we include raw materials, finished goods, work-inprogress, supplies and other accessories. To maintain the continuity in the operations of business enterprise, a minimum stock of inventory required. However, the physical control of inventory is the operating responsibility of stores superintendent and financial personnel have nothing to do about it but the financial control of these inventories in all lines of activity in which they comprise a substantial part of the current assets is a frequent problem in the management of working capital. Management of inventory is designed to regulate the volume of investment in goods on hand, the types of goods carried in stock to meet the needs of production, and sales while at the same time, the investment in them is to be kept at a reasonable level. CONCEPT OF INVENTORY MANAGEMENT The term inventory management is used in two ways- unit control and value control. Production and purchase officials use this word in term unit control whereas in accounting this word is used in term of value control. As investment in inventory represents in many cases, one of the largest asset items of business enterprises particularly those engaged in manufacturing, wholesale trade and retail trade. Sometimes the cost of material used in production surpasses the wages and production overheads. Hence, the proper management and control of capital invested in the inventory should be the prime responsibility of accounting department because resources invested in inventory are not earning a return for the company. Rather, on the other hand, they are costing the firm money both in terms of capital costs being incurred and loss of opportunity income that is being foregone. OBJECTIVES OF INVENTORY MANAGEMENT The basic managerial objectives of inventory control are two-fold; first, the avoidance over-investment or under-investment in inventories; and second, to provide the right quantity of standard raw material to the production department at the right time. In brief, the objectives of inventory control may be summarized as follows: A. (1) Operating Objectives: Ensuring Availability of Materials: There should be a continuous availability of all types of raw materials in the factory so that the production may not be help up wants of any material. A minimum quantity of each material should be held in store to permit production to move on schedule. (2) Avoidance of Abnormal Wastage: There should be minimum possible wastage of materials while these are being stored in the godowns or used in the factory by the workers. Wastage should be allowed up to a certain level known as normal wastage. To avoid any abnormal wastage, strict control over the inventory should be exercised. Leakage, theft, embezzlements of raw material and spoilage of material due to rust, bust should be avoided. (3) Promotion of Manufacturing Efficiency: If the right type of raw material is available to the manufacturing departments at the right time, their manufacturing efficiency is also increased. Their motivation level rises and morale is improved. (4) Avoidance of Out of Stock Danger: Information about availability of materials should be made continuously available to the management so that they can do planning for procurement of raw material. It maintains the inventories at the optimum level keeping in view the operational requirements. It also avoids the out of stock danger. (5) Better Service to Customers: Sufficient stock of finished goods must be maintained to match reasonable demand of the customers for prompt execution of their orders. (6)Highlighting slow moving and obsolete items of materials. (7) Designing poorer organization for inventory management: Clear cut accountability should be fixed at various levels of organization. B. Financial Objectives: (1) Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets. (2) Reasonable Price: While purchasing materials, it is to be seen that right quality of material is purchased at reasonably low price. Quality is not to be sacrificed at the cost of lower price. The material purchased should be of the quality alone which is needed. (3) Optimum Investing and Efficient Use of capital: The basic aim of inventory control from the financial point of view is the optimum level of investment in inventories. There should be no excessive investment in stock, etc. Investment in inventories must not tie up funds that could be used in other activities. The determination of maximum and minimum level of stock attempt in this direction. TYPES OF INVENTORY 1. Movement Inventories: - Movement inventories are also called transit or pipeline inventories. Their existence owes to the fact that transportation time is involved in transferring substantial amount of resources. 2. Buffer inventories: -In Buffer inventories are held to protect against the uncertainties of demand and supply. An organization generally knows the average demand for various items that it needs. Prod.deptt. issue store inspect receive supplier Supplies Demand Inventory in Hand place Orders Purchase depâ€™t. Net order Quantity issue tenders receive tender quotation evaluations Inventory cycle 3. Anticipation Inventories. Anticipation inventories are held for the reason that future demand for the product is anticipated. Production of specialized times like crackers well before dewily, umbrellas and raincoats before taints set in, fans while summers are approaching; or the piling up of inventory stocks when a strike is on the anvil, are all examples of anticipation inventories. CONTROL OF MATERIALS: Rigid control over materials are necessary not only to guard against theft, but also to minimize waste and misuse from causes such as excessive inventories, over issue, deterioration, spoilage, and obsolescence. There are certain prerequisites to an effective control system for materials: 1. Materials of the desired quantity will be available when needed; 2. Materials will be purchased only when a need exists and in economical qualities; 3. Purchases of materials will be made at most favorable prices; 4. Vouchers for the payments of materials purchased will be approved only if the materials have been received in good condition; 5. Materials will be protected against loss by proper physical control; 6. Issue of materials will be properly authorized and accounted for; and 7. All materials, at all times, will be charged, as the responsibility of some individual. The control of materials, as an element of cost of production, is illustrated with reference to the purchase and issues procedures, inventory systems, and inventory control techniques. IMPORTANCE OF INVENTORY CONTROL: The importance or necessity of inventory control is well explained in the terms of the objects of inventory control, which are obtained through it. A proper inventory control lowers down the cost of production and improves profitability of enterprise. ADVANTAGES OF INVENTORY CONTROL: (1) Reduction in investment in inventory. (2) Proper and efficient use of raw materials. (3) No bottleneck in production. (4) Improvement in production and sales. (5) Efficient and optimum use of physical as well as financial resources. (6) Ordering cost can be reduced if a firm places a few large orders in place of numerous small orders. (7) Maintenance of adequate inventories reduces the set-up cost associated with each production run. Risk and cost Associated with Inventories: Holding of Inventories expose the firm to a number of risks and costs. Major risks are: (a) Price decline: They may be due to increase in market supply of the product, introduction of a new competitive product, price-cut by the competitors etc. (b) Product deterioration: This may due to holding a product for too long a period or improper storage conditions. (c) Obsolescence: This may due to change in customerâ€™s taste, new production technique, improvements in product design, specifications etc. The Costs of holding inventories are as follows: (a) Material Cost: This include the cost of purchasing the goods, transportation and handling charges less any discount allowed by the supplier of goods. (b) Ordering Cost: This includes the variables cost associated with placing an order for the goods. The fewer the orders, the lower will be the ordering costs for the firm. (c) Carrying Cost: This includes the expenses for storing and handling the goods. It comprises storage costs, insurance costs, spoilage costs, cost of funds tied up in inventories etc. ESSENTIAL OF INVENTORY CONTROL SYSTEM For an efficient and successful inventory control there are certain important conditions that are as follows: (1) Classification and Identification of inventories: The usual inventory of manufacturing firm includes raw-material, stores, work-inprogress and component etc. To facilitate prompt recording the dealing, each item of the inventory must be assigned a particular code number and it must be classified in suitable group or sub-divisions. ABC analysis of material is very helpful in this context. (2) Standardization and simplification of inventories: In order to facilitate inventory control, the inventory line should be simplified. It refers to the elimination of excess types and sizes of items. Simplification leads to reduction in classification of inventories and its carrying costs. Standardization, on the other hand, refers to the fixation of standards of raw material to be purchased and specification of the components and tools to be used. (3) Setting the Maximum and Minimum limits for each part of inventory: The third step in this process is to set the maximum and minimum limits of each item of the inventory. It avoids the chances of over-investment as well as running a short of any item during the cost of producing. Reordering point should also be fixed beforehand. (4) Economic Order Quantity: It is also a basic inventory problem to determine the quantity as how much to order at a time. In determining the EOQ, the problem is one to set a balance between two opposite costs, namely, ordering costs and carrying costs. This quantity should be fixed beforehand. (5)Adequate storage Facilities: To make the system of inventory control successful and efficient one, it is also essential to provide the adequate storage facilities. Sufficient storage area and proper handling facilities should be organized. (6)Adequate Reports and Records: Inventory control requires the maintenance of adequate inventory record and reports. Various inventory records must contain information to meet the needs of purchasing, production, sales and financial staff. The typical information required about any class of inventory may be relating to quantity on hand, location, quantities in transit, unit cost, code for each item of inventory, reorder point, safety level etc. Statements forms and inventory records should be so designed that the clerical cost of maintaining these records must be kept a minimum. (7)Intelligent and Experienced Personnel: An important requirement of successful inventory control system is the appointment of qualified and experienced staff in purchase and stores department. Mere establishment of procedures and the maintenance of records would not give the desired results as there is no substitute for sincere and devoted as well as experienced hands. Hence, the whole inventory control structure should be manned with trained, qualified, experienced and devoted employees. (8)Coordination: There must be proper coordination of all departments involved in the process of inventory control, such as purchase, finance, receiving, approving, storage and accounting departments. These all departments have different outlook and objects in inventory management but financial manager has to coordinate them all. (9)Budgeting: An efficient budgeting system is also required. Preparation of budgets concerning materials, supplies and equipment to ensure economy in purchasing and use of material is also necessary. (10)Internal Check: Operating of a system of internal check is also vital in inventory management so that all transactions involving material supplies and equipment purchase are properly approved and automatically checked. FACTORS AFFECTING STOCK INVESTMENT LEVEL These factors can be put in two categories: General and Specific. General Factors: These factors include those factors, which affect directly or indirectly level of investment in any asset. These are as follows: (1) Nature of Business (2) Size and scale of Business (3) Expected Sales Volumes (4) Price Level Changes (5) Availability of Funds (6) Management view Point Specific Factors: These factors are directly related with investment in stock. Following are the main factors: (1) Seasonal Character of Raw Materials: If supply of raw material used in the firm is seasonal, the firm will require more funds for the purchase of raw material during season. Usually, raw materials are available at cheaper rates during its production season. (2) Length and Technical Nature of the production process: If production process is lengthy and of technical nature, higher investment is required in raw material. In the technical nature production process, quality control of raw material is given more emphasis. (3) Terms of Purchase: If some concessions or discount in price or facilities of credit are provided by suppliers on purchase of raw materials in huge quantity then the firm is inspired for excessive purchase of goods and hence comparatively more investment is required in inventory. (4) Nature of End Product: Nature of end product also influences investment in inventory. If the end product is a durable good, high investment will be required because durable goods can be stored for a long period. On the other hand, perishable goods cannot be stored for a long period. Hence, investment in inventory of such products is low. (5) Supply Conditions: If the supply of raw material is regular and there is no possibility of interruption in future, high investment in inventories is not required. (6) Time Factor: The lead time of raw material time token in production process and sale of product also influence investment in inventories. Longer the period, higher will be the investment in inventories. (7) Loan Facilities: If raw materials are purchased on credit or loan from the bank or other financial institution can be obtained on the security of raw material, lesser investment would be required. In the absence of such loan facility, higher investment would be required. (8) Price Level Fluctuations: If there are expectations of price rise in future then raw materials may be store in high quantity and so more investment would be required. On the contrary, if the prices of raw materials are expected to go down in future, then comparatively lesser investment would be required. TECHNIQUES OF INVENTORY CONTROL In managing inventories, the firmâ€™s objective should be in consonance with the wealth maximization principle. To achieve this, the firm should determine the optimum level of investment in inventory. To deal with the problems of inventory management effectively, it becomes necessary to be conversant with the different techniques of inventory control. Although the concepts involved in inventory management are production-oriented and are not strictly financial it is important that the financial manager understand them since they have certain built-in financial costs. The different techniques of inventory control may be summarized as follows: (1) Inventory level Technique The main objective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor unnecessary investment in inventory. For this purpose, determination of maximum and minimum limits of inventory and ordering level is necessary. (2) Maximum stock Limit: This represents the quantity of inventory above which it should not be allowed to be kept. The main object of fixing this limit is to ensure that unnecessary working capital is not blocked in stores. The quantity is fixed keeping in view the disadvantages of overstocking. The disadvantages of overstocking are: 1. Capital is blocked up unnecessarily in stores so there will be loss of interest. 2. More godown space is needed so more rent will have to be paid. 3. There are chances of deterioration in quality because large stocks will require more time for use is the factory. 4. There is the possibility of loss due to obsolescence. 5. There is danger of depreciation in market values. The maximum stock level is fixed by taking into account the following factors: (1) Amount of capital available for maintaining stores. (2) Godown space available. (3) Rate of consumption of the material. (4) The time lag between indenting and receiving of the material. (5) Length and technical nature of the production process. (6) Possibility of loss in stores by deterioration, evaporation etc. There are certain stores, which deteriorate in quality if they are stored for longer period. (7) Cost of maintaining stores. (8) Likely fluctuation in prices. For instance, if there is a possibility of a substantial increase in prices in the coming period, a comparatively large maximum stock level will be fixed. On the other hand, if there is the possibility of decrease in price in the near future, stocks are kept at a much reduced level. (9) The seasonal nature of supply of material. Certain materials are available only during specific periods of year. So these have to be stocked heavily during these periods. (10)Restrictions imposed by the government or local authority in regard to materials which there are inherent risks, e.g. fire and explosion. (11)Risk of obsolescence, i.e., possibility of change in fashion and habit which will necessitate change in requirements of materials. The following formula may be applied to calculate the maximum stock: (1) Maximum Stock = Minimum Inventory + Lot size (2) Maximum Stock = Reorder Level - Minimum consumption during Minimum lead time + Lot size Minimum Stock Limit (Safety or Buffer stock) This represents the quantity below which stock should not be allowed to fall. It is maintained to save from the situation of stock out in the event of abnormal increase in material usage rate and/or delivery period. In fact determination of this quantity is significant because of uncertainty in respect to material usage rate and delivery period. The main purpose of this level is to ensure that production is not held up due to shortage of any material. This level is fixed for all items of stores and following factors are taken into account for the fixation of this level: (a) Lead time i.e. time lag between intending and receiving the material. (b) Rate of consumption of the material during the lead time. (c) Re-order Level The following formula is applied to calculate Minimum Stock: Minimum Stock = Re-order Level - Normal usage during Normal Lead time But if normal usage and normal lead time is not known then average usage will be treated as normal usage and average re-order will be treated as normal re-order period. Re-ordering Level (Ordering Level) It is the point at which if the stock of the material in stores reaches, the storekeeper should initiate the purchase requisition for fresh supply of material. This level is fixed somewhere between maximum and minimum level is such a way that the difference of quantity of the material between the reordering level and the minimum level will be sufficient to meet requirements of production up to the time of fresh supply of the material. It is fixed after taking into consideration the following factors: (a) Rate of material usage: Generally this rate is found out as usage rate per day, pre week or per month. The quantity of production fluctuates according to demand of the product which results in variation in usage rate. Hence, the following three factors: (i) Maximum usage rate: It implies quantity of material required at maximum capacity production. (ii) Minimum usage rate: It implies quantity of material required at capacity production in most unfavorable business conditions. (iii) Normal or average Usage Rate: It implies quantity of material required at capacity production under normal business conditions. (b) Ordering Period: The time taken in preparing the order for purchase of material is called ordering period. In some concerns this period may be significant but in large concerns this period is significant because before placing the order the purchase manager has to trace out the best suppliers, after that only he places the order. ÂŠ Delivery, Lead or Procurement Time: The time taken from the date of placing the order to the date of delivery by the suppliers is called procurement time. The maximum, minimum and average procurement time should also be determined. (D) Minimum Stock Level: This is the level of stock below which stocks should normally not be allowed to fall. Calculation of Re-order Point: After taking into account the above facts re-order quantity is ascertained. For this purpose, the following formula is applied: Situation1: When rate of usage and lead time are known with certainty; Re-order point = Rate of usage x lead time. Situation2: When rate of usage is known with certainty and lead time is also known but is variable: (i) Re-order point = Minimum Inventory + Average usage during Normal lead Time. (ii) Re-order point = Rate of usage x Maximum Lead Time. Situation3: When rate of usage and lead time is known but variable and lead time is known with certainty: (i) Re-order point = Minimum Inventory + Average usage during lead time. (ii) Re-order point = Maximum Usage rate x Lead time. Situation4: When the rate of usage and lead time are known and are variable; (i) Re-order point = Minimum Inventory + Average usage during lead period. (ii) Re-order point = Maximum Usage rate x Maximum Lead time. Danger Level This means a level at which normal issues of the material are stopped and issues made only under specific instructions. The purchase officer will make special arrangements to procure the materials reaching at their danger levels so that the production may not stop due to shortage of materials. It is determined as follows: Danger level = Average Consumption x Maximum Re-order period for Emergency Purchase ECONOMIC ORDER QUANTITY TECHNIQUE One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lost in which it has to be purchased on replenishment. If the firm is planning a production run, the issue is how much production to schedule (or how much to make). These problems are called order quantity problems, and the task of the firm is to determine the optimum or economic order quantity (or economic lot size). Determining an optimum inventory level involves two type of costs: (a) ordering costs and (b) carrying costs: The economic order quantity is that inventory level that minimize the total of ordering and carrying costs. Ordering costs: the term ordering costs is used in case of raw materials (or supplies) and includes the entire costs of acquiring raw materials. They include costs incurred in the following activities: requisitioning, purchase ordering, transporting, receiving, inspecting and storing (store placement). Ordering costs increase in proportion to the number of order placed. Ordering costs increase with the number of order; thus the more frequently inventory is acquired, the higher the firmâ€™s ordering costs. Ordering costs decrease with increasing size of inventory. Carrying costs: Costs incurred for maintaining a given level of inventory are called carrying costs. They include storage, insurance, taxes, deterioration and obsolescence. The storage costs comprise cost of storage space (warehousing cost), stores handing costs and clerical and staff service costs (administrative costs). Table: Ordering and Carrying Costs Ordering Costs Carrying Costs (1)Requisitioning (1) Warehousing (2)Order placing (2) Handling (3) Transportation (3) Clerical and staff (4) Receiving inspecting and storing (4) Insurance (5) Clerical and staff (5) Deterioration Carrying costs vary with inventory size. The economic size of inventory would thus depend on trade-off between carrying costs and ordering costs. Ordering and Carrying Costs trade-off: The optimum inventory size is commonly referred to as economic order quantity. It is that order size at which annual total costs of ordering and holding are the minimum. We can follow three approaches-the trial and error approach, the formula approach and the graphic approach-to determine the economic order quantity (EOQ). Trail and Error Approach: The trail and error, or analytical, approach to resolve the order quantity problem can be illustrated with the help of a simple example. Let us assume the following data for a firm. Estimated three month requirements, A 1,200 Dz. Purchasing cost (per order), (Rs) 50 Ordering cost (per order), (Rs.) 37.50 Carrying cost per unit, (Re) 1 Average inventory - (1200 + 0)/2 = 600 units Average value - Rs 30,000 (600*Rs50) If we choose the multiple order than we order 100units on monthly basis Average inventory - (400+0)/2 = 150units) Average value - 150 * Rs 50 = 7, 500 Many other possibilities can be worked out in the same manner. 1200 1000 800 Q/2 600 Stock 400 200 50 0 2 4 6 8 10 Time Inventory level over time 15 Order- formula approach: The trial error, or analytical, approach is somewhat tedious to calculate the EOQ. An easy way to determine EOQ is to use the order-formula approach. Let us illustrate this approach. Suppose the ordering cost per order, O, is fixed. The total order costs will be number of orders during the year multiplied by ordering cost per order. If a represents total annual requirements and Q the order size, the number of orders will be A/Q and total order costs will be: Total ordering cost = (Annual requirement * Per order cost) Order size TOC = AO/ Q Let us further assume the carrying cost per unit, c, is constant The total carrying costs will be the product of the average inventory units and the carrying cost per unit. If Q is the order size and usage is assumed to be steady, the average inventory will be. Average inventory = order size = Q 2 2 And total carrying costs will be: Total carrying cost = Average inventory * Per unit carrying cost TCC = Qc 2 The total inventory cost, then, is the sum of total carrying and ordering costs: Total cost = Total carrying cost + Total order cost TC = Qc + AO 2 Q Equation (4) reveals that for a large order quantity, Q, the carrying cost will increase, but the ordering costs will decrease. On the other hand, the carrying costs will be lower and ordering cost will be higher with the order quantity. Thus, the total cost function represents a trade-off between the carrying costs and ordering costs for determining the EOQ. To obtain the formula for EOQ, Equation (4) is differentiated with respect to Q and setting the derivative equal to zero, we obtain: Economic order quantity = 2* quantity required * ordering cost Carrying cost EOQ = 2AO C Graphic approach: The economic order quantity can also be found out graphically. Figure illustrates the EOQ function. In the figure, costs-carrying, ordering and totalare plotted on vertical axis and horizontal axis is used to represent the order size. We note that total carrying costs increase as the order size increasers, because, on an average, a larger inventory level will be maintained, and ordering costs decline with increase in order size means less number of orders. The behaviors of total costs line is noticeable since it is a sum of two types of cost which behave differently with order size. The total costs decline in the first instance, but they start rising when the decrease in average ordering cost is more than offset by the increase in carrying costs. The economic order quantity occurs at the point Q* where the total cost is minimum. Thus, the firmâ€™s operating profit is maximized at point Q*. Minimum total Cost Carrying cost Costs Q* ordering cost order size (Q) Economic order quantity Optimum productions run: The use of the EOQ approach can be extended to production runs to determine the optimum size of manufacture. Two costs involved are set-up costs and carrying costs. Set-up costs include costs on the following activities: preparing and processing the stock orders, preparing drawings and specifications, tooling machines set-up, handling machines, tools, equipment and materials, over time etc. Production runs but carrying costs will increase as large stocks of manufactured inventories will be held. The economic production size will be the one where the total of set-up and carrying costs is minimum. Reorder Point: The problem, how much to order, is solved by determining the economic order quantity, yet answer should be sought to be second problem, when to order. This is a problem of determining the reorder point. The reorder point is that inventory level at which an order should be placed to replenish the inventory. To determine the reorder point under certainty, we should known: (a) lead time (b) average usage, and (c) economic order quantity. Lead time is the normally taken is replenishing inventory after the order has been placed. By certainty we mean that usage and lead time do not fluctuate. Under such a situation, reorder point is simply that inventory level which will be maintained for consumption during the lead time. That is: Reorder point = Lead * Average usage Safety stock: The demand for inventory is likely to fluctuate from time to time. In particular, at certain points of time the demand may exceed the anticipated level. In other words, a discrepancy between the assumed (anticipated/expected) and the actual usage rate of inventory is likely to occur in practice. The effect of increased usage and/or slower delivery would be shortage of inventory. That is, the firm would disrupt production schedule and alienate the customers. The firm would, therefore, be will advised to keep a sufficient safety margin by having additional inventory to guard against stock-out situation. Such stocks are called safety stocks. This would act as a buffer/cushion against a possible shortage of inventory. Safety stock may, thus, be defined as minimum additional inventory to serve as safety margin/buffer/cushion to meet unanticipated increase in usage resulting from unusually high demand and/or uncontrollable late receipt of incoming inventory. The carrying costs are the costs associated with the maintenance of inventory. Since the firm is required to maintain additional inventory, in excess of the normal usage, additional carrying costs are involved. The stock-out and carrying costs are counterbalancing. The larger the safety stock, the larger the carrying costs and vice versa. Conversely, the larger the safety stock, the smaller the stock-out costs. Max. Inventory Average usage EOQ Avg. inventory---------------------------------------------------Re-order point----------------------------------------------------max.usage Safety stock ------------------------------------------------------- Weeks lead time Re-order point under safety stock VED Analysis: The VED analysis is used generally for spare parts. The requirement and urgency of spare parts is different from that of materials. AB-C analysis may not be properly used for spare parts. The demand for spares depends upon the performance of the plant and machinery. Spare parts are classified as: Vital (V), Essential (E) and Desirable (D). The vital spares are a must for running the concern smoothly and these must be stored adequately. The non-availability of vital spares will cause havoc in the concern. The E types of spares are also necessary but their stocks may be kept at low figures. The stocking of D types of spares may be avoided at times. If the lead time of these spares is less, then stocking of these spares can be avoided. The classification of spares under three categories is an important decision. A wrong classification of any spare will create difficulties for production department. The classification of spares should be left to the technical staff because they know the need, urgency and use of these spares. Assumptions: In applying EOQ formula, it is assumed that: (i) Total demand is known with certainty. (ii) The usage rate of material is steady. (iii) Orders for replenishment on inventory are placed exactly when inventories reach ordering level. (iv) The ordering cost per order and holding cost per unit are constant. EOQ and Total Inventory Cost: At EOQ level total inventory cost is minimum. Total inventory cost is the sum of material purchase cost, ordering cost and carrying cost As per the formula: Total Inventory Cost (TIC) = Material Purchase Cost + Total Ordering Cost + Total Carrying Cost = (R x P) + (R/Po x Cp) + (Qo/2 x Ch) Discount Offer and Economic Order Quantity: Sometimes supplier offers different discounts on orders of large quantity. In such a situation, at first we should calculate EOQ and find out TIC without considering discount offer. Then we should calculate TIC of each alternative offer. That quantity will be EOQ at TIC is the lowest. PERPETUAL INVENTORY CONTROL TECHNIQUE Perpetual inventory system implies maintenance of up-to-date stock records and in its broad sense it covers both continuous stock taking as well as up-to-date recording stores books. According to Weldon, It may be defined as â€œa method of recording stores balances after every receipt and issue to facilitate regular checking and to obviate closing down for socktakingâ€?. The basic object of this system is to make available details about the quantity and value of stock of each item at all times. The system thus provides a rigid control over stock of each item of store can regularly be verified with the stock records in the bin cards kept in the stores and stores ledger maintained in cost office. Advantages of Perpetual Inventory system: 1. Saving in time: The long and costly work of stocktaking is avoided. Hence, interim and final financial accounts can be prepared with greater convenience. 2. Arrangement of proper verification: In this system a detailed and more reliable checking of the store is exercised because of the continuous and random checking. 3. Verification of Errors: Errors are easily located and rectified. This gives an opportunity for preventing a recurrence in many cases. 4. Double control: Due to separate records in Bin card and stores ledger, double control is maintained. 5. Optimum size of material: Overstocking and under stocking can be avoided because perpetual inventory system covers verification of stock with regards to maximum, minimum and other levels. 6. Lack of misuse of Material: Under this system, effective control on issue of material is possible, thus misuse of material can be avoided. 7. Moral Check on Stores staff: Due to continuous checking, this system serves as a moral check on the stores staff. They are discouraged from committing dishonesty. 8. Loss of stock due to obsolescence: It is detected at an early stage and so timely action can be taken to prevent recurrence. THE SELECTIVE INVENTORY CONTROL OR ABC SYSTEM OF CONTROL Most manufacturing firms find themselves confronted with virtually thousands of different inventory items. Most of these items are relatively inexpensive, while other items are quite expensive and account for a large portion of the firm’s investment. Some inventory items, although not expensive, turnover slowly and therefore, they require a high average investment. The firm should classify them into A.B.C category items. Category A will include more expensive items (in cost of product) with high investment and it will require more intensive control. The ‘B’ group will consist of the items accounting for the next largest investment. The ‘C’ group will consist of a large number of items of inventory accounting for small investment. The ‘A’ items require intensive inventory control and most sophisticated inventory control techniques should be applied to these items. The ‘B’ items can be controlled using less sophisticated technique, and their level can be viewed less frequently than ‘A’ items. The ‘C’ items can receive the minimum attention: they will probably be ordered in large quantities in order to obtain them at the lowest price. Though the ABC technique is a good technique but it cannot be universally applied. Certain items of inventory may be inexpensive but may be critical to the product in process and cannot be easily obtained. Therefore, they may require special attention. These types of items must be treated as “A” class items even though, using the broad framework, they would be “B” or “C” class items. Although, not perfect, the ABC system is an excellent method for determining the degree of inventory control efforts required to expand each item of inventory. The following points should be kept in mind for ABC analysis: (1) Where items can be substituted for each other, they should be preferably treated as one item. (2) More emphasis should be given to the value of consumption and not to price per unit of the item. (3) All the items consumed by an organization should be considered together for classifying as A, B or C instead of taking item as spare, raw materials, semi-finished and finished items and then classifying as A, B and C. There can be more then three classes and the period of consumption need not necessarily be one year Application of ABC Analysis: ABC analysis can be effectively used in Material Management. The various stages where it can be applied are: (1) Information of items which require higher degree of control. (2) To evolve useful re-ordering strategy. (3) Stock records. (4) Priority treatment to different items. (5) Determination of safety stock items. (6) Stores layout. (7) Value analysis. Just-in-time (JIT) System: Japanese firms popularized the just-in-time (JIT) system in the world. In a JIT system material or the manufactured components and part arrive to the manufacturing sites or stores just few hours before they are put to use. The delivery of material is synchronized with the manufacturing cycle and speed. JIT system eliminates the necessity of carrying large inventories, and thus, saves carrying and other related costs of manufacturer. The system requires perfect understanding and coordination between the manufacturer and supplier in terms of the timing of delivery and quality of the material. Poor quality material or complements could halt the production. The JIT inventory system complements the total quality management (TQM). The success of the system depends on how well a company manages its suppliers. The system puts tremendous pressure on suppliers. They will have to develop adequate system and procedures to satisfactory meet the needs of manufacturers. System of Accounting for Material Issued/Inventory Systems Either the periodic inventory system or the perpetual inventory system may be used to account for materials issued to production and ending materials inventory. Periodic Inventory System Under the periodic inventory system, the purchase of materials is recorded in Purchase of Raw Materials Account. The opening/beginning inventory, if any, is recorded in a separate Materials Inventory- Opening Account. The materials available for use during a period equal purchases plus opening inventory. A physical count is made of the materials on hands at the end of the period to arrive at the closing/ending materials inventory. The cost of materials for the period is determined as shown in Exhibit: Cost of Materials Issued Materials inventory-opening + Purchases = Materials available for use - Materials inventory-closing (based on physical count) = Cost of materials issued The entire book inventory is verified at a given date by an actual count of materials on hand. This physical inventory is usually taken near the end of the accounting year/period. This method provides for the recording of the purchases on a daily basis but does not provide for a continuous inventorytaking. Neither a physical count is made of the quantity of goods on hand, nor the value of the inventory in determined by using an appropriate pricing method and attaching costs to units counted. It is assumed that goods not on hand at the end of the period have been sold. There is no system and accounting period, and they can be discovered only at the end. INVENTORY TURNOVER RATE TECHNIQUE One important technique of inventory control is to use inventory turnover ratios. These ratios are calculated to assess the efficiency in use of inventories. Following control ratios can be computed for inventory analysis: (i) Inventory Turnover Ratio = Cost of goods sold/ Average Inventory Where Average Inventory = (Opening Inventory + Closing Inventory)/2 Inventory Turnover Ratios ca be calculated separately for raw materials and finished goods. (A) Raw Material Turnover Ratio = Raw Material Consumed/ Average stock of Raw material. (B) Finished Goods Turnover Ratio = Cost of Goods Sold/ Average Stock of Finished Goods Average Age of inventory of inventory Turnover in Days = Days during the period/ Inventory Turnover Ratio (ii) Average inventory to total cost of production = (Average Inventory/ total cost of production) x 100 (iii) Slow Moving Stores to Total Inventory = Average Cost of Slow Moving Stores/Average Inventory (iv) Inventory Performance Index = (Actual Material Turnover Ratio/ Standard Material Turnover Ratio) x 100 These ratios provide a broad framework for the control and provide the basis for future decisions regarding inventory control. The ratios provide a tough indication of when Inventory levels are going to be high. Even if it appears from the ratio that the levels are too high there might be a perfectly good reason why the level of Inventory is being maintained. The ratios also indicate the situation and trend. However, the limitation of ratios should be kept in mind. They are not an end themselves, but only tools of sound Inventory Management. FINANCIAL MANAGERâ€™S ROLE IN INVENTORY MANAGEMENT Inventory represents a large investment by manufacturing concern: therefore, great emphasis must be placed on its efficient management. Though, the operative responsibility for Inventory management lies with the inventory manager, the financial manager must also be concerned with all types of inventories- raw materials, work-in-progress and finished goods. He must monitor Inventory levels and see that only an optimum amount is invested in Inventory. He should be familiar with the Inventory control techniques and ensure that Inventory is managed well. He should try to resolve the conflicting view points of all the departments in order to have efficient inventory management. He has to act as a careful inspector levels. He should introduce the policies which reduce the lead time, regulate usage and thus, minimize safety stock. All these techniques of Inventory management lead to the goal of wealth maximization. VALUATION OF INVENTORIES OBJECTIVE: A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements until the related revenues are recognized. This statement deals with the determination of such value, including the ascertainment of cost of inventories and any write-down thereof to net realizable value. 1. This statement should be applied in accounting for inventories other than: (a) Work-in-progress arising under construction contacts, including directly related service contracts. (b) Work-in-progress arising in the ordinary course of business of service providers. (c) Shares, debentures and other financial instruments held as stock-intrade. (d) Producerâ€™s inventories of livestock, agricultural and forest products and mineral oils, ores and gases to the extent that they are measured at net realizable value in accordance with well established practices in those industries. 2. The inventories referred are measured at net realizable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or mineral oils, ores and gases have been extracted and sale is assured under a forward contract or a government guarantee or when a homogenous market exists and there is a negligible risk of failure to sell. These Inventories are excluded from the scope of this statement. DEFINITIONS The following terms are used in this statement with the meanings specified: Inventories are assets: (a) Held for sale in the ordinary course of business. (b) In the process of production for such sale, or (c) In the form of materials or supplies to be consumed in the production process or in the rendering of services. 1. Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work-in-progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process. Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular; such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets. 2. Inventories should be valued at lower of cost net realizable value. 3. Cost of Inventories The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. 4. Costs of Purchase The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight, inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. 5. Costs of Conversion The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly with the volume of production such as indirect materials and indirect labour. 6.The allocation of fixed production overheads for purpose of their inclusion in the costs of conversion is on based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities. 7. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by- product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by- products as well as scrap or waste materials, by their nature, are immaterial. When this is the case, they are often measured at net realizable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost. 8. Other costs are included in the costs of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include overheads other than production overheads or the costs of designing product for specific customers in the cost of inventories. 9.Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories. 10. Exclusions from the cost of Inventories In determining the cost of inventories in accordance with paragraph 3. It is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred. Examples of such costs are; 1. Abnormal amounts of wasted materials, labour, or other production costs. 2. Storage costs, unless those costs are necessary in the production process prior to a further production stage. 3. Administrative overheads that do not contribute to bringing the inventories to their present location and condition, and 4. Selling and distribution costs. 11. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs. 12. Specific identification of cost means that specific costs are attributed to identify items of inventory. This is an appropriate treatment for items that are segregated for a specific project, regardless of whether they have been purchased or produced. However, when there are large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories. 13. The cost of inventories, other than those dealt with in paragraph 11, should be assigned by using the first-in, first-out (FIFO), or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. 14.A variety of cost formulas is used to determine the cost of inventories other than those for which specific identification of individual costs is appropriate. The formula used in determining the cost of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average costs formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis or as each additional shipment is received, depending upon the circumstances of the enterprise. 15.Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate the actual cost. Standard costs take into account normal levels of consumption of materials and supplies, labour, efficiency and capacity utilization. They are regularly reviewed and if necessary, revised in the light of current conditions. 16. The retail method is often used in the retail trade for measuring inventories of large numbers of rapidly changing items that have similar margins and for which is impracticable to use other costing methods. The cost of the inventory is determined by reducing from the sales value of the inventory the appropriate percentage gross margin. The percentage used takes into consideration inventory which has been marked down to below its original selling price. An average percentage for each retail department is often used. 17. The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs necessary to make the sale have increased. The practice of writing down inventories below cost to net realizable value is consistent with the view that assets should not be carried in excess of a amounts expected to be realized from their sale or use. 18. Inventories are usually written down to net realizable value on an itemby-item basis. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write down inventories based on a classification of inventory, for example, finished goods, or all the inventories in a particular business segment. 19. Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realize. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date. 20. Estimates or net realizable value also take into consideration the purpose for which the inventory is held. For example, the net realizable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realizable value of the excess inventory is based on general selling prices. Contingent losses on firm sales contracts in excess of inventory quantities held and contingent losses on firm purchase contracts are dealt with in accordance with the principles enunciated in Accounting Standard (A.S) 4, contingencies and events occurring after the balance sheet date. 21. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the materials may be the net available measure of their net realizable value. An assessment is made of net realizable value as at each balance sheet date. 22. Disclosure. The financial statements should disclose: The accounting policies adopted in measuring inventories, including the cost formula used, and The total carrying amount of inventories and its classification appropriate to the enterprise. 24. Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are raw materials and components, work in progress, finished goods, stores, spares and loose tools. DATA COLLECTION In analysis of inventory of J&J, We collect the data by the different sources. We collect the primary and secondary data. SECONDARY DATA – The secondary data are those data the already in presence for specific purpose we use the secondary data about inventory to looks old records of the company .For the daily information about the items We show the MRN, ledger register and daily issue slip of materials the purchase register and other documentary evidence used for the findings. In the analysis of inventory the secondary data are not sufficient .then We collect primary data. PRIMARY DATA – Primary data are those data that are originated very first time or fresh data .with the help of primary data formulated the research objectives. Primary data are the accurate attainable reliable and useful data. 1. Inventory control techniques used by the company 2. Inventory systems as perpetual and periodic systems. 3. Stock levels etc. 4. Companies website JOHNSON & JOHNSON AND SUBSIDIARIES SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Fiscal Years Ended January 3, 2010, December 28, 2008 and December 30, 2007 2009 Accrued Rebates (1) Accrued Returns Accrued Promotions Subtotal Reserve for doubtful accounts Reserve for cash discounts Total 2008 Accrued Rebates (1) Accrued Returns Accrued Promotions Subtotal Reserve for doubtful accounts Reserve for cash discounts Total (Dollars in Millions) Balance Accruals Payments / at Other Beginning of Period $1808 6584 (6,753 ) $794 355 (460 ) $356 2446 (2,373 ) $2958 9385 (9,586 ) $267 110 (44 ) Balance at End of Period 1639 689 429 2757 333 $79 $1163 (1,141 ) 101 $3304 Balance at Beginning of Period $1802 $648 $578 $3028 $193 $10658 Accruals (10,771 ) Payments / Other 3191 Balance at End of Period $5578 $402 $2991 $8971 $101 (5572) (256) (3213) (9041) (927) 1808 794 356 2958 267 $71 $905 (897) 79 $3292 $9977 (9965) 3304 ) Includes reserve for customer rebates of $729 million, $721 million, $710 million at January 3, 2010, December 28, 2008 and December 30, 2007, respectively. (2) Includes $171 million adjustment related to previously estimate accrued sales reserve. (1 MEDICAL DEVICES AND DIAGNOSTICS SEGMENT The Medical Devices and Diagnostics segment achieved sales of $23.6 billion in 2009, representing an increase of 1.9% over the Prior year, with operational growth of 4.2% and a negative currency impact of 2.3%. U.S. sales were $11.0 billion, an increase of 4.5% over the prior year. International sales were $12.6 billion, a decrease of 0.2%, with growth of 4.0% from operations and a decrease of 4.2% resulting from the negative impact of currency fluctuations. The DePuy franchise achieved sales of $5.4 billion in 2009, a 4.6% increase over the prior year. This was primarily due to growth in the spine, hip and knee product lines. Additionally, new product launches in the Mitek sports medicine product line contributed to the growth. The Ethicon Endo-Surgery franchise achieved sales of $4.5 billion in 2009, a 4.8% increase over the prior year. This was attributable to growth in the endoscopy, HARMONIC 速 , ENSEAL 速 and Advanced Sterilization product lines. The Ethicon franchise achieved sales of $4.1 billion in 2009, a 7.3% increase over the prior year. This was attributable to growth in the sutures, biosurgical and mesh product lines in addition to sales of newly acquired products from the acquisitions of Omrix Biopharmaceuticals, Inc. and Mentor Corporation. The growth was partially offset by the divestiture of the Professional Wound Care business of Ethicon, Inc. in the fiscal fourth quarter of 2008. Sales in the Cordis franchise were $2.7 billion, a decline of 10.3% versus the prior year. The decline reflects lower sales of the CYPHER 速 Sirolimus-eluting Coronary Stent due to increased global competition. The decline was partially offset by growth of the Biosense Webster business. The Vision Care franchise achieved sales of $2.5 billion in 2009, a 0.2% increase over prior year primarily related to growth in the Astigmatic contact lens product line offset by the negative impact of currency. Sales in the Diabetes Care franchise were $2.4 billion in 2009, a decline of 3.7% versus the prior year. Declines in the LifeScan product line were partially offset by growth of the Animas insulin delivery business resulting from new product launches and continued development in international markets. The Ortho-Clinical Diagnostics franchise achieved sales of $2.0 billion in 2009, a 6.6% increase over the prior year primarily attributable to the recent launch of the VITROS 速 3600 and 5600 analyzers. The Medical Devices and Diagnostics segment achieved sales of $23.1 billion in 2008, representing an increase of 6.4% over the prior year, with operational growth of 3.5% and 2.9% due to a positive impact from currency fluctuations. U.S. sales were $10.5 billion, an increase of 1.0%. International sales were $12.6 billion, an increase of 11.3%, with 5.8% from operations and a positive currency impact of 5.5%. Analysis of Consolidated Earnings Before Provision for Taxes on Income Consolidated earnings before provision for taxes on income decreased by $1.1 billion to $15.8 billion in 2009 as compared to the $16.9 billion earned in 2008, a decrease of 6.9%. The decrease was primarily related to lower sales, the negative impact of product mix, lower interest income due to lower rates of interest earned and restructuring charges of $1.2 billion. This was partially offset by lower selling, marketing and administrative expenses due to cost containment efforts across all the businesses. 2008 included purchased in-process research and development (IPR&D) charges of $0.2 billion and increased investment spending in selling, marketing and administrative expenses utilized from the proceeds associated with the divestiture of the Professional Wound Care business of Ethicon, Inc. The increase in 2008 of 27.4% over the $13.3 billion in 2007 was primarily due to lower IPR&D charges of $0.6 billion, gains from divestitures of $0.5 billion and higher litigation gains of $0.5 billion versus restructuring charges of $0.7 billion and the write-down of the NATRECOR ® intangible asset of $0.7 billion recorded in 2007. As a percent to sales, consolidated Major Medical Devices and Diagnostics Franchise Sales*: MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 29 % Change (Dollars in Millions) 2009 2008 2007 ’09 vs. ’08 ’08 vs. ’07 DEPUY ® $ 5,372 5,136 4,698 4.6 % 9.3 ETHICON ENDO-SURGERY ® 4,492 4,286 3,834 4.8 11.8 ETHICON ® 4,122 3,840 3,603 7.3 6.6 CORDIS ® 2,679 2,988 3,314 (10.3 ) (9.8 ) Vision Care 2,506 2,500 2,209 0.2 13.2 Diabetes Care 2,440 2,535 2,373 (3.7 ) 6.8 ORTHO-CLINICAL DIAGNOSTICS ® 1,963 1,841 1,705 6.6 8.0 Total $ 23,574 23,126 21,736 1.9 % 6.4 OPERATING PROFIT BY SEGMENT Operating profits by segment of business were as follows: Percent of Segment Sales (Dollars in Millions) 2009 2008 Consumer $ 2,475 2,674 Pharmaceutical 6,413 7, 605 Med Devices and Diagnostics 7,694 7,223 Total (1) 16,582 17,502 Less: Expenses not allocated to segments (2) 827 573 Earnings before provision for taxes on income $ 15,755 16,929 25.4 % 26.5 2009 2008 15.7 % 16.7 28.5 % 31.0 32.6% 31.2 26.8% 27.4 Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, as was the case in 2009 and will be the case again in 2014. RECLASSIFICATION Certain prior period amounts have been reclassified to conform to current year presentation. 2. Cash, Cash Equivalents and Current Marketable Securities As of January 3, 2010, current marketable securities consist of $3,434 million and $181 million of government securities and obligations and corporate debt securities, respectively. As of December 28, 2008, current marketable securities consist of $1,663 million, $342 million and $36 million of government securities and obligations, corporate debt securities and time deposits, respectively. Fair value of government securities and obligations and corporate debt securities were estimated using quoted broker prices in active markets. The Company invests its excess cash in both deposits with major banks throughout the world and other high-quality money market instruments. The Company has a policy of making investments only with commercial institutions that have at least an A (or equivalent) credit rating. 3. Inventories At the end of 2009 and 2008, inventories were comprised of: 4. Property, Plant and Equipment At the end of 2009 and 2008, property, plant and equipment at cost and accumulated depreciation were: The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2009, 2008 and 2007 was $101 million, $147 million and $130 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2009, 2008 and 2007, was $2.1 billion, $2.0 billion January 3, 2010 December 28, 2008 Amortized Unrealized Estimated Amortized Unrealized Estimated (Dollars in Millions) Cost Gains/(Losses) Fair Value Cost Gains/(Losses) Fair Value Current Investments Cash $ 2,517 — 2,517 3,276 — 3,276 Government securities and obligations 13,370 1 13,371 7,486 4 7,490 Corporate debt securities 426 — 426 627 1 628 Money market funds 1,890 — 1,890 813 — 813 Time deposits 1,222 — 1,222 607 — 607 Total cash, cash equivalents and current marketable securities $ 19,425 1 19,426 12,809 5 12,814 (Dollars in Millions) 2009 2008 Raw materials and supplies $ 1,144 839 Goods in process 1,395 1,372 Finished goods 2,641 2,841 $ 5,180 5,052(Dollars in Millions) 2009 2008 Land and land improvements $ 714 886 Buildings and building equipment 8,863 7,720 Machinery and equipment 17,153 15,234 Construction in progress 2,521 3,552 29,251 27,392 Less accumulated depreciation 14,492 13,027 $ 14,759 14,365 and $1.9 billion, respectively. Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in earnings. 5. Intangible Assets and Goodwill At the end of 2009 and 2008, the gross and net amounts of intangible assets were: 43 (Dollars in Millions) 2009 2008 Intangible assets with definite lives: Patents and trademarks — gross $ 5,697 5,119 Less accumulated amortization 2,177 1,820 Patents and trademarks — net $ 3,520 3,299 Other intangibles — gross $ 7,808 7,376 Less accumulated amortization 2,680 2,433 Other intangibles — net $ 5,128 4,943 Total intangible assets with definite lives — gross $ 13,505 12,495 Less accumulated amortization 4,857 4,253 Total intangible assets with definite lives — net $ 8,648 8,242 Intangible assets with indefinite lives: Trademarks $ 5,938 5,734 Purchased in-process research and development* 1,737 — Total intangible assets with indefinite lives $ 7,675 5,734 Total intangible assets — net $ 16,323 13,976 DATA ANALYSIS AND INTERPRETATION INVENTORY TURN OVER RATIO- Total sales Inventory turn over ratio = Average inventory The sale of J&J in year 2007 is 720 million & its investment on inventory is 126 million. Then inventory turnover ratio = 720/126 = 5.71 J&J used Rs. 6 million worth inventory for operation. It could generates additional sales, sales Sales = 6 million * 5.71 = 34.26 million If J&J increases investment more on their inventories, then company increases their sales. Inventory turn in year 2006 Total sales in 2006 = 670 million Investment on inventories = 118 million Turnover ratio = 670/118 = 5.67 Inventory turnover in year 2005Total sales in 2005 = 620 million Investment on inventories = 110 million Turnover ratio = 620/ 110 = 5.63 Inventory turn ratio in year 2004 Total sales in 2004 = 615 million Investment on inventories = 100 million Turnover ratio = 615 / 100 = 6.15 Investment of inventories & sales on wards 2004- year Investment on inventories in million total sales in million 2007 100 615 2008 110 620 2009 118 670 2010 126 720 Johnson & Johnson Ltd. increases investment on their inventories. Every year, then total sales increases year by year. Date Q t y Cos t Valu e Qt y Cos t Valu e Qt y Cos t Valu e 100 00 2.10 21000 110 00 - 23210 Jan 1 9 1 0 0 2.21 2210 0 12 20 00 27 2.31 2.10 4200 2310 90 00 - 19010 100 00 - 21320 60 00 - 12920 Feb 10 16 40 00 2.10 8400 2 0 0 0 2.41 4820 80 00 - 17740 2 0 0 0 2.41 4820 100 00 - 2256 0 60 00 - 14160 March 3 17 29 40 00 2.10 8400 4 0 0 0 2.29 9160 100 00 - 23320 2 0 0 0 2.14 4280 120 00 - 2760 0 60 00 - 18260 Apr 4 18 40 00 @ 9340 0 23 2 0 0 0 2.0 4 4080 100 00 - 2234 0 90 00 - 19940 120 00 - 2594 0 110 00 - 2354 0 130 00 - 2758 0 May 12 24 100 0 3 0 0 0 2.0 0 2.4 0 2400 6000 Jun 10 100 0 30 2 0 0 0 2.02 4040 Total 1 9 0 0 0 2.19 41700 160 00 Where @ is 1000 2.21 2210 1000 2.31 2310 2000 2.41 4820 4000 - 9340 Total Interpretation - 2.4 0 - 2400 35140 The FIFO method of valuation of inventory is based on the assumption that the inventory consumed in chronological order. That is received first are issued / consumed first and value fixed accordingly. From the table with an opening inventory of 10000 units at rs 2.10, the first 10000 units issued are charged to the cost of goods sold at these opening inventory rate rs 2.10. The April 18 issue or consignment of 4000 units is cosseted on the basis of first received of the year. January 9, 1000 units at rs 2.21, January 27 1000 units at rs 2.31, and February 16, 2000 units at rs 2.41. The 1000 each issued on May 12 and June 10 are cosseted on the basis of the 2000 units received on March 3. Therefore the cost of the 13000 inventory on June 30 is composed of the received of March29, April 4 and 23, May 24 and June 30 and the value is the sum of the cost of these receipts. Valuation under perpetual inventory system- Date Receipts Issues Balance Q R A Q R 1Jan - - - - - - 6Jan - - - 100 7 8Jan 1100 9Jan Q A 200 1400 700 100 700 - - 1200 10050 8.50 9350 - - - 200 8.50 1700 1000 15Jan - - - 400 8.50 3400 600 4950 25Jan 300 9 2700 - - - 7650 27Jan - - - 300 8.50 2550 300 240 300 9 2700 0 - - 31Jan 400 9.20 3680 - A 900 - The value of inventory after 31 January is 6080 /rs Interpretation:- 700 8350 6080 The value of inventory under periodic & perpetual inventory system is different. The value of inventory under perpetual system is more than periodic system DETERMINATION OF STOCK LEVELS Data of concentrate at J&J is as follows â€“ Maximum consumption = 5000Dz per day Minimum consumption = units per day Normal consumption = 59 units per day Re-order period = 10-15 days Re-order quantity = 878 units Normal re-order period = 12 days Re-order level = Maximum consumption * Maximum Re-order period Data of concentrate at J&J is as follows â€“ Maximum consumption = 65 units per day Minimum consumption = 55 units per day Normal consumption = 59 units per day Re-order period = 10-15 days Re-order quantity = 878 units Normal re-order period = 12 days Re-order level = 65 units * 15 days = 975 units Minimum stock level = re-order level â€“ (normal consumption * Normal re-order period) Maximum stock level - = 975 - (59 units * 12 days) = 267 units = (re-order level + re-order quantity ) ( min. consumption â€“ order period) = ( 975 units + 878 units ) - (55 units * 15 days) = 1028 units Average stock level = minimum stock level + Â˝ of Re-ordering Quantity = 267 units + Â˝ * 878 units = 267 units + 439 units = 706 units Interpretation of result : - 1. After calculation the re-order level of J&J is 975 units but the actual re-order quantity is 878 units. 2. The minimum stock level of J&J is 267 units. 3. The maximum stock level of J&J is 1028 units. 4. The average stock level must be 706 units. Calculation of expected stock out cost â€“ Safety stock stock Stock out (units) out Level prob. Of expected total stock stock out expt. cost (40/unit) out cost SOC 500 0 0 0 0 0 400 100 4000 0.01 40 40 250 250 10000 0.01 100 150 100 50 0 6000 400 0.02 120 16000 0.01 160 300 12000 0.02 240 150 6000 450 18000 0.01 180 350 14000 0.02 280 200 8000 0.03 240 50 2000 0.04 80 500 20000 0.01 200 400 16000 0.02 250 1000 0.03 300 100 4000 0.04 160 50 2000 0.10 200 0.03 220 580 180 780 320 1180 Expected stock out cost == stock out cost * probability of stock out . PROBLEMS AND SUGGESTIONS PROBLEMS FACED BY THE ORGANITION J&J faces the following problems1 Johnson & Johnson Ltd. Faces the problem of competition. 2. Organization facing the problem of proper skilled employees in the production department. 3. There is no proper sequence &acknowledgement board for certain items in store department .It is not good when external auditing held in company. 4. Organization has no record of wastage items. It is not good for operating profit of the company. 5. In organization store assistants have no proper knowledge about engineering goods & raw materials. SUGGESTIONS TO THE ORGANISATION: The organizations give proper knowledge & training for unskilled employees about their work. 1. In store department items should placed their proper sequence & acknowledgement. 2. There should be proper record of wastage. It is good for the company. 4. Store manager give the proper knowledge about engineering & raw materials. CONCLUSION The goal of the wealth maximization is affected by the efficiency with which inventory is managed. Inventories constitute about 60% of current assets of companies in India. The manufacturing companies hold inventories in the form of raw materials, work in progress and finished goods. Inventories facilitate smooth production and sales operation (transaction motive), to guard against the risk of unpredictable changes in usage rate and delivery time (precautionary motive), & to take advantage of price fluctuations (speculative motive). Inventories represent investment of a firmâ€™s funds. The objectives of the inventory management should be the maximization of the value of the firm. Therefore the firm should consider: 1. Cost 2. Return 3. Risk factors In inventory maintenance two types of costs are involved carrying cost & ordering cost .the firm should minimize the total cost (carrying plus ordering cost).The firm follows inventory control techniques as A-B-C technique EOQ & JIT techniques for better holding inventories. PRIMARY DATA ANALYSIS (Bio â€“ Profile of the Respondents):1 30 percent of the officials belong to the age group of 35 and 50 2 58 percent of the officials belong to the age group of 25 to 34 3 12percent of the officials belong to the age group of above 50 4 69 percent are male officials 5 31 percent are female officials 6 72 percent are graduates and above 7 12 percent are those who are having technical and professional qualifications 8 16 percent are undergraduates. 9 55 percent are those who are associated with the field 10 25 percent are those who are in the managerial and administrative posts. 11 20 percent belongs to the others category DATA ANALYSIS 1 Are you aware about Inventory Management System? Yes ------------------------------------------ 75 per cent No ------------------------------------------- 17 per cent Do not know/ Can not say ---------------- 08 per cent Interpretation: The awareness level among the company officials regarding the existence, functioning and applicability of inventory management system is high that is 75 per cent, as per the result of the study. 2 Do you know that your company has an inventory management system? Yes ---------------------------------------------- 72 per cent No ------------------------------------------------ 20 per cent Do not know/ Cannot say -------------------- 08 per cent 80% 70% 60% 50% 40% Yes 30% No 20% Do not know/Can Not say 10% 0% Yes 72% No 20% Do not know/Can Not say 8% Interpretation: The company officials are aware about their company having an inventory management system. 72 per cent of the respondents do have this awareness as against 20 per cent+08 per cent of the respondents who are either not aware or not able to provide any information in this regard. 3 Do you agree that there should be an inventory management system in place in any organization / company? ď‚Ą Agree ------------------------------------------------ 68 per cent ď‚Ą Disagree --------------------------------------------- 12 per cent ď‚Ą Do not know/ Cannot say ------------------------- 20 per cent Interpretation: According to the response to the above question, it appears that every company/organization should have a system or mechanism in place for managing their inventory. 4 For what reasons do you feel that there should be an inventory management system? ď‚Ą To smoothen operational requirement --------------------- 27 per cent To save time ---------------------------------------------------- 22 per cent To maintain accountability and transparency ----------------30 per cent Other reasons --------------------------------------------------- 15 per cent Do not know/ Cannot say ------------------------------------ 06 per cent Interpretation: To everyone’s surprise, 30 per cent of the respondents feel that it is for accountability and transparency purpose that inventory records are maintained and hence the need for an inventory management system. This is followed by the need for saving time and the requirement of operational smoothness. 5 Do you agree that the inventory management system in your company has fulfilled the needs for which it was evolved? Strongly Agree -------------------------------------- 20 per cent Agree ------------------------------------------------- 47 per cent Disagree ----------------------------------------------- 15 per cent Strongly Disagree ------------------------------------- 07 per cent Do not know/ Cannot say ---------------------------- 11 per cent Interpretation: From the above response, it appears that the inventory management system has more or less achieved its objectives for which it was in place. This is evident from the 67 per cent of the respondents’ opinion who have either agreed or strongly agreed in favor of this proposition. However the response of 22 per cent of the respondents who think otherwise also speaks something. 6 What according to you is the major benefit of going for an inventory management system by your company? It has made storage and retrieval of material easier --------- 37 per cent Improved Sales Effectiveness ---------------------------------- 26 per cent Reduced Operational Cost ----------------------------------- 18 per cent Other Benefits -------------------------------------------------- 10 per cent Do not know/ Cannot say ------------------------------------ 09 per cent Interpretation: As regards the benefits of having an inventory management system by the company, the respondents are of the opinion that the major benefit lies in relaxation in terms of storage and retrieval of material. This is followed by increasing sales effectiveness and reduction in operational cost. However, all these benefits are interlinked and the spearing between them is more analytical than anything else. 7 Do you have skilled professionals in your company for inventory management? ď‚Ą Yes ----------------------------------------------- 48 per cent ď‚Ą No ------------------------------------------------- 30 per cent ď‚Ą Do not know/ Cannot say ---------------------- 22 per cent 50% 45% 40% 35% 30% 25% Yes 20% No 15% Do not know/Can Not say 10% 5% 0% Yes 48% No 30% Do not know/Can Not say 22% Interpretation: Recruitment of skilled professionals well vesed with latest inventory management technology, particularly in chemicals and paint industry is a concern for the company as it appears that it lacks in this domain. What category of professionals is managing your company inventory? Skilled and trained --------------------------------- 32 per cent Only skilled but not trained ----------------------- 16 per cent Non skilled but trained professionals -------------- 20 per cent Non skilled and non trained professionals --------- 25 per cent ď‚Ą Others --------------------------------------------------- 07 per cent 35% 30% 25% 20% Skilled and trained 15% Only skilled but not trained 10% 5% Non skilled but trained professionals 0% Skilled and trained 32% Only skilled but not trained 16% Non skilled but trained professionals 20% Non skilled and non trained professionals 25% Others 7% Non skilled and non trained professionals Others Interpretation: As already stated above in the earlier question, availability of trained and skilled professionals for inventory management needs serious attention of the company. 8. Do you agree that your company gives more emphasis on software than skilled manpower with regard to inventory management? ď‚Ą Strongly Agree -------------------------------------- 18 per cent Agree ------------------------------------------------- 52 per cent Disagree ----------------------------------------------- 15 per cent Strongly Disagree ------------------------------------- 07 per cent Do not know/ Can not say ---------------------------- 08 per cent Interpretation: The above response gives an impression that the company puts greater emphasis on software than skilled manpower for inventory details management. 9. Do you think that the software used by your company is according to the design and needs of the system? Yes -------------------------------------------------- 86 per cent No ---------------------------------------------------- 10 per cent Do not know/ Cannot say ------------------------- 04 per cent Interpretation: The company appears to be using the software according to the system requirement and design and according to the customers’ needs. 10. What is the prime challenge before Yor Company with reheard to inventory management? Lack of trained professionals ------------------------------- 42 per cent Maintenance cost --------------------------------------------- 21 per cent Changing requirements of customers ------------------------- 27 per cent Other problems -------------------------------------------------- 06 per cent Do not know/ Cannot say ------------------------------------- 04 per cent Interpretation: Lack of availability of trained professionals coupled with maintenance cost and changing needs of the customers are perceived to be the inventory challenges before the company. 12. What is the future of inventory management system in your company? Will continue as a successful mechanism --------------------- 43 per cent May change according to time ----------------------------------- 33 per cent Shall collapse ------------------------------------------------------- 12 per cent Do not know/ Cannot say ----------------------------------------- 12 per cent Interpretation: The future of inventory management system at Johnson & Johnson Ltd. appear to pretty good, going by the response of our study Bibliography • Advanced Accountancy Ninth Edition S N Maheshwari, S K Maheshwari Vikas Publishing House Pvt. Ltd. • Financial Management Ninth Edition I M Pandey Vikas Publishing House Pvt. Ltd • Management Accounting Third Edition M Y Khan, P K Jain Tata Mc-Graw Hill Publishing Company Ltd â€˘ Purchase , Sales Boucher & Other Documents of the Company Johnson & Johnson Ltd.