PAF KARACHI INSTITURE OF ECONOMICS AND TECHNOLOGY

COURSE INSTRUCTOR: Sir Shaham Ahmed

COURSE : Cost and Managerial Accounting

Project: Inventry Management of Gulahmed Textile Mills

Group Members
SHAIQUE SIDDIQUE (57754)

MUZNAH SIDDIQUI (5519)

NAVEED SHAHZAD (55691)

Cost and Managerial Accounting Page 1

 TABLE OF CONTENTS

Scope of project ……………………………………………………………………………………………………………..4

Company Background ……………………………………………………………………………………………………..5

Inventory Description ……………………………………………………………………………………………………..6

Procurement flow chart of GTM ………………………………………………………………………………………7

Issuance procedure from store ………………………………………………………………………………………..8

Inventory control, ABC Analysis ……………………………………………………………………………………….9

Advantage of ABC Analysis ……………………………………………………………………………………………..10

V.E.D. Analysis ………………………………………………………………………………………………………………..11

Periodic review and fix order quantity ……………………………………………………………………………12

EOQ model ………………………. …………………………………………………………………………………………..13

Calculation of EOQ ………………………………………………………………………………………………………… 14

Issues of inventory of GTM ……………………………………………………………………………………………..15

Stock movement ………………………………………………………………………………………………………………16

Conclusion and recommendation ………………………………………………………………………………………17

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 ACKNOWLEDGMENT

First of all, we are grateful to ALLAH, who gave us the strength to strive for our goal and

paved the path to the completion of this report.

This report provides us “over view of the Inventory Management system of Gulahmed

textile mills limited”...

We render us due respect and appreciation to our course teacher Mr. Shaham Ahmed,

who provided us all the guidance and required information about the report.

We would also like to acknowledge our parents for their utmost co-operation and their love
and affection which have become my strength.

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SCOPE OF PROJECT

We are a team from the Management Science, and a project assigned to our

Group in course of Cost and Managerial Accounting to make a report on

Inventory management system for any industry to have the thorough

Practical industrial knowledge regarding the project.

In this regard we selected the Gulahmed textile mills, which is one of the

Leading textile mills of Pakistan in bed linen, curtain and apparel as well

And our scope of this project is to analyze the inventory of spare parts

of Processing unit.

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COMPANY BACKGROUND.
The story of textiles in the subcontinent is the story of Gul Ahmed. The group began trading in
textiles in the early 1900s.
The group entered in the field of manufacturing with the establishment of today's iconic name of
Gul Ahmed Textile Mills Ltd in the year 1953. Since its listing on the Karachi Stock Exchange
in 1970, the company has been making rapid progress and enjoying a leading position in the
world of textiles.

With an installed capacity of more than 130,000 spindles, 300 state-of-the-art weaving machines
and most modern yarn dyeing, processing & stitching units, Gul Ahmed is a composite unit –
making everything from cotton yarn to finished products.

Gul Ahmed has its own captive power plant comprising of gas engines, gas & steam turbines,
and backup diesel engines. Believing in playing its role in protecting the environment, Gul
Ahmed has also set up a waste water treatment plant to treat 100% of its effluent, bringing it to
NEQS levels.

Gul Ahmed is playing a vital role not only as a textile giant, but has its strong presence in the
retail business as well. The opening of its flagship store – Ideas by Gul Ahmed– marked the
group's entry into the retail business. Starting from Karachi, Gul Ahmed now has an extensive
chain of more than 40 retail stores across the country, offering a diverse range of products from
home accessories to fashion clothing.

More than 50 years since its inception, the name Gul Ahmed is still globally synonymous with
quality, innovation & reliability.

BUSINESS ACTIVITIES
Excellence in quality and service is the hallmark of all operations performed at Gul Ahmed.
Firmly standing by its business values, Gul Ahmed is active in manufacture and sale of textile
products.

The manufacturing wing is an essential component in Gul Ahmed's operations. The

manufacturing cycle, which includes spinning, weaving, processing, designing and stitching,
results in an end product that is tailored to the most stringent customer requirements.

On the retail front, Ideas by Gul Ahmed offers fabrics and made-ups, ranging from home
accessories to clothing. It not only provides fashion at great value, but also caters to various
customer needs by offering a diverse product mix. This leads to a complete and enjoyable retail
experience. As a result of this, the chain has expanded to 40 stores across Pakistan since its
inception in 2003.

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Inventory

is a physical resource that a firm holds in stock with the intent of selling it or transforming it into
a more valuable state

Inventory is the most expensive asset of the most of the companies and can be as much as the
50% of total capital investment. Hence good management is crucial and firms can reduce cost by
reducing the inventory and if not managed properly then production may be stopped and
customer may become dissatisfied.

The inventory of Gulahmed is divided into the following heads;

 Spare Parts
 Fuel
 Packing Item Others
 Non Production Chemicals
 Construction and Fabrication Items
 Health & Safety for Workers
 Stationary & Accessories
 Admin Items
 Tools & Measuring Equipments
 General & Miscellaneous Items
 Repair, Maintenance, Services & Contract
 Lubricants
 Computer and Accessories Consumable
 Machinery Consumables
 Health and Safety Environmental
 Furniture and Fixture Consumables
 Appliances and Accessories Consumables
 Assets
 Machinery Assets
 Furniture & Fixture Assets
 Appliances & Accessories Assets
 Computer & Accessories Assets
 Capital Spares
 Dyes and Chemicals
 Chemicals

We will focus only the spare parts of machines as this is the scope of our work.

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 Work flow of procurement Departement

Indent

Approved by
HOD

If accepted then
processed for
Approved by DO
payment to
account

If rejected then
Sent to store for Grn is accepted/ sent back to
EBS # rejected by user suppliers

GRN(goods
Checking of
received note) is
stock in store
generated

Checked by store
Coding of items
personal and
in EBS
user

Approved by Rcieving the

store Manager deliveries

Sent to purchase Issuance of

deprtement purchase order

Arrangement of
quotation by Selection of
atleast 03 vendor
vendor/suppliers

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 Store Issuance process Diagramme

Issuance request
is generated
from dept.

Approved by
HOD

Sent to central
store

Approved by the
store Manager

Stock is checked

Item is issued

Requistion is
received and
entered in
system

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INVENTORY CONTROL
Because of the large number of materials used in production at many manufacturing
plants, it is desirable to classify materials according to the amount of analysis that can be
justified. Selective inventory control means that the method of inventory control varies from item
to item and the differentiation should be on selective basis.

Several techniques of inventory control are in use and it depends on the convenience of
the firm to adopt any of the techniques. The techniques more commonly used are the following:

Always better control (ABC) classification

High, medium and low (HML) classification

Vital, essential and desirable (VED) classification

Fast moving, slow moving and non-moving (FSN)

Mix- minimum system

Two bin system

ABC ANALYSIS –

One of the widely used techniques for control of inventories is the ABC (Always better
control) analysis. The objective of ABC control is to vary the expenses associated with
maintaining appropriate control according to the potential savings associated with proper level of
such control. For example, an item having an inventory cost of Rs. 1000000 such as sheet steel,
has a much greater potential for savings expenses related to maintaining inventories than an item
with a cost of Rs.100 the ABC approach is a means of categorizing inventory items into three
classes ‘A’, ‘B’ and ‘C’ according to the potential amount to be controlled.

Once inventory is classified, we have a firm base for deciding where we will put our effort.
Logically, we expect to maintain strong controls over the ‘A’ items talking whatever special
actions needed to maintain availability of these items and hold stocks at the lowest possible level
consistent with meeting demands. At the other end of the scale, we cannot afford the expense of
rigid controls, frequent ordering, expediting, etc. because of the low amounts in this area. Thus,
with the ‘C’ group we may maintain somewhat higher safety stocks, order more months of
supply; expect lower levels of customer service, or all the three. It is for this selective approach,
ABC analysis is often called the selective Inventory Control Method (SIM).

Extending pareto’s principle to inventory, it is always possible and necessary to separate “vital
few” from “trivial many” of the stock items for their effective control. Separating vital few from
trivial many is what is precisely done in ABC analysis.

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Pareto’s principle was brought to the attention of people concerned with inventory management
by H. Ford Dickie, who applied pareto’s law inventory and developed the general concept of
ABC analysis. Like so many ideas, however it has not been completely understood. Many people
refer to the ABC system or the ABC technique. The idea of distribution of value for inventory
stratification is neither a system nor a technique; it is a fundamental management principle with
universal application potential.

Advantage of ABC Analysis

This approach helps the materials manager to exercise selective control and focus
attention on ‘A’ category items. By controlling the inventory of ‘A’ category items, the total
inventory costs can be considerably reduced. Usually, fixed order quantity system or ‘Q’ system
of inventory control is used for ‘A’ category items advising the supplier to follow staggered
supplies (i.e. EOQ is ordered and the supplier is asked to supply fraction of EOQ on weekly
basis to match the consumption rate). For ‘B’ category items the fixed order cycle system on ‘P’
system is used without appreciably increasing the average inventory value. For ‘C’ category
items “two-bin system” is used wherein the annual requirement of the item is ordered in one or
two lots and the quantity received is distributed into two bins-bin number one keeping the re-
order level inventory and bin number two keeping he balance quantity. The item is consumed
from bin number two and once it becomes empty, the repeat order is placed for the annual or six
month’s requirement. Item is issued from the first bin till the supply is received.

Limitations of ABC Analysis

i. To be fully effective, it should be carried out with standardization and codification.

ii. Importance is given to an item based only on its annual consumption in value and not on
its criticality for the production.
iii. It should be reviewed periodically so that changes in prices and consumption are taken
into account.
iv. It does not apply to dependent demand inventory which is controlled by Material
Requirement Planning (MRP) system.

MINIMUM-MAXIMUM TECHNIQUE

The minimum-maximum system is often used in connection with manual inventory

control system. The minimum quantity is established in the same way as any re-order point. The
maximum is the minimum quantity plus the optimum lot size. In practice, a requisition is
initiated when a withdrawal reduces the inventory below the minimum level, the order quantity
is the maximum minus the inventory status after the withdrawn reduce the stock level
substantially below the minimum level, the order quantity will be longer than the calculated
EOQ.

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The effectiveness of a minimum-maximum system is determined by the method and precision
with which the minimum and maximum parameters are established. If these parameters are based
upon arbitrary judgments with the limited factual basis, the system will be limited in its
effectiveness. If the minimum are based on an objective rational basis, the system can be very
effective.

TWO-BIN TECHNIQUE

Once of the oldest system of inventory control is the two-bin system which is mainly
adopted to control ‘C’ group inventories. In the two-bin system, stock of each item is separated
into two-bins. One bin contains stock, just enough to last from the date a new order is placed
until it is received in inventory. The other bin contains a quantity of stock enough to satisfy
probable demand during the period of replenishment is placed, and the stock in the second bin is
utilized until the ordered material is received.

Such a method is appropriate to ideal conditions in which rate of consumption is fairly constant
and for items lead time of which is fairly established and regular.

Although the system itself possesses a high degree of automacy, in practice, we need to allow for
variations in the rate of consumption as well as lead time. A possible disadvantage of the system
in some case is the requirement of additional storage facilities and perhaps some practical
difficulty in keeping the two stocks properly separated.

V-E-D ANALYSIS

‘V’ stands for vital, ‘E’ for essential and ‘D’ for desirable. This classification is usually
applied for spare parts to be stocked for maintenance of machines and equipments based on the
criticality of the spare parts. The vital spare parts are those which can cause stoppage of the plant
if not available. Usually such spare parts are known as capital or insurance spares. The inventory
policy is to keep at least one number of the vital spare irrespective of its value. Also, spare parts
to be supplied by foreign manufactures are treated as vital spares because of the long lead time
required for procurement. Essential spare parts are those whose non-availability may not
adversely affect production. Such spare parts may be available from many sources within the
country and the procurement lead time may not be long. The desirable spare parts are those
which if not available can be manufactured by the maintenance department or may be procured
from local suppliers and hence no stock is held usually.

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F-S-N ANALYSIS

It stands for Fast-moving, Slow-moving and Non-moving items. It is based on past

consumption pattern. Items which are usually drawn from stores frequently are classified as fast
moving items; Items which are drawn only once or twice a year are classified as slow moving
items not at all drawn for the past two years are classified as non-moving items. F-S-N analysis
is useful to control obsolescence of raw materials, components, tools and spare parts.

H-M-L ANALYSIS

This stands for High value, medium value and low value items on unit price of the item.
For instance, a firm may decide to categories items having unit price of the item. For instance,
firm may decide to categories items having unit price more than Rs. 5000 as ‘H’ items. From Rs.
1000 to 5000 as ‘M’ items and below Rs. 1000 as ‘L’ items. On the basis, materials management
may delegate authority to various levels of purchase officers/mangers to authorize and sign
purchase orders. Also, for high value items, alternative source of supplier are developed

The ordering of the items can be done using the following two procedures.

• Periodic review
• Fix order quantity

• In periodic stock position is reviewed periodically rather than

continuously. A new order is always placed at the end of the each review.
• In Fixed order quantity system the stock of an item is continuously
reviewed. A reorder level is decided on. Whenever the stock of the item
equals the reorder level, a new order is placed. The time between orders
can vary. In this system, the order quantity ordered is always fixe and is
equal to the EOQ. EOQ (Economic Order Quantity) is calculated by a
formula which ensures that the total cost is minimum.

• Lead time is the lapsed time between the placement of an order and its
actual delivery.

• Safety stock level is also known as buffer stock. It is the extra quantity of
merchandise that is stocked to take care of delay in delivery and higher
demand during the lead time.

• Lead time is the lapsed time between the placement of an order and its
actual delivery.

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 • Safety stock level is also known as buffer stock. It is the extra quantity of
merchandise that is stocked to take care of delay in delivery and higher
demand during the lead time.

EOQ has Three Approaches

• Trial and Error method

• Order-formula approach
• Graphical approach

Model I: Basic EOQ

In this following typical assumptions are made:-

• Annual demand (D), carrying cost (C) and ordering cost (S) can be estimated
• Average inventory level is the fixed order quantity (Q) divided by 2 which implies
• No safety stock
• Orders are received all at once
• Demand occurs at a uniform rate
• No inventory when an order arrives
• Assumptions (continued)
• Stock out, customer responsiveness, and other costs are inconsequential
• Acquisition cost is fixed, i.e., no quantity discounts
• Annual carrying cost = (average inventory level) x (carrying cost) = (Q/2)C
• Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)S
• Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C
+ (D/Q)S
• The order quantity where the TSC is at a minimum (EOQ) can be found using calculus
(take the first derivative, set it equal to zero and solve for Q)

Example: Basic EOQ

Zartex Co. produces fertilizer to sell to wholesalers. One raw material –

calcium nitrate – is purchased from a nearby supplier at $22.50 per ton.
Zartex estimates it will need 5,750,000 tons of calcium nitrate next year.
The annual carrying cost for this material is 40% of the acquisition cost,
and the ordering cost is $595.
a) What is the most economical order quantity?
b) How many orders will be placed per year?
c) How much time will elapse between orders?

• Economical Order Quantity (EOQ)

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 D = 5,750,000 tons/year
C = .40(22.50) = $9.00/ton/year
S = $595/order

= 27,573.135 tons per order

• Total Annual Stocking Cost (TSC)

TSC = (Q/2)C + (D/Q)S
= (27,573.135/2)(9.00)
+ (5,750,000/27,573.135)(595)
= 124,079.11 + 124,079.11
= $248,158.22
• Number of Orders Per Year
= D/Q
= 5,750,000/27,573.135
= 208.5 orders/year

• Time Between Orders

= Q/D
= 1/208.5
= .004796 years/order
= .004796(365 days/year)
= 1.75 days/order

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PROBLEMS IN INVENTRY OF GULAHMED

1. There is no specific periodic review of inventory

2. Items duplication is in the inventory

3. Obsolete parts are not removed from inventory which are causing unnecessary carrying cost

4. Issuance of items is not systematic (neither FIFO nor LIFO)

5. No Technique being used like ABC,VED and FSN analysis

6. Bin Nos. are improper and cause delay in issuance

7. Dead stock not removed from inventory

Stock movement

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The following is the stock position which shows that many of parts are not moved for last 02 years
because of systematic way being followed.

The analysis and reviews are not as per standards and issuance techniques are very poor.

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Conclusion:
There is no specific review of the inventory being done and the stock movement is not
satisfactory which is not only causing to increase the volume of inventory and reducing the life
of the parts.

Many of the parts are lying in the stores for more than 02 years and not being utilized and there
is no analysis and plan of these parts for their future utilization.

Recommendations:
1. There should be V.E.D. Analysis of this inventory to separate the vital, essential and desireable
spare parts of the machine.

2. There should be pre defined periodic review of the inventory to analyze the movement of stock
and its position.

3. Items duplication should be reviewed and corrected.

4. Location of the inventory items should be proper.

References:
Mr. Shabbir Ahmed (Deputy Manager Costing)

Mr. Saleem Taj (Store Manager)

Mr. Khalil Ahmed (store office)

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