A

RESEARCH PROJECT REPORT

ON

E- BUSINESS AND ITS ROLE IN

INVENTORY
MANAGEMENT
Project Submitted To:
SWAMI VIVEKANAND SUBHARTI UNIVERSITY
MASTER OF BUSINESS ADMINISTRATION
Session- 2013-15

Submitted To:

Submitted By:

Ms. VISHAKA

Anumat Kumar Singh

(Faculty of Management)

Roll No-1308253002
MBA IV SEM

SUBHARTI INSTITUTE OF MANAGEMENT

&COMMERCE
1

SUBHARTIPURAM, MEERUT
DECLARATION

I am Anumat Kumar Singh student of SIMC, Meerut here by solemnly declare that the

project titled E- BUSINESS AND ITS ROLE IN INVENTORY MANAGEMENT is

the outcome of my own efforts & research is conducted by me and finally report has
been Submitted to:- Ms. VISHAKA, Faculty of Management SIME, Meerut
drawn by my own creativity and skills only and the same has submitted to Subharti
University, Meerut any other organization, institution or university in order to get
any other degree.

DATE..

Anumat Kumar Singh

Roll No-1308253002
MBA IV SEM

ACKNOWLEDGEMENT
Presenting a project of this type is an arduous task, demanding a lot of time. I cannot
in full measure appreciate and acknowledgement the kindness shown and help
extended by various persons in this endeavor. I will remember all of them with
gratitude.
My sincere thanks are also due to Ms. VISHAKA, Faculty of Management SIME,
Meerut for their significant help extended for the successful completion of the
project. I highly the help I got from them in providing me and lot of information
regarding the functioning of this organization.
I am always beholden to my God, for always being with me and showing me the
right ways, my family, for always doing favors to me and my friends and colleagues
consistently helped with encouragement and criticism throughout the project work,
for always lifting my sights to higher vision, raising my personality beyond normal
limitation and for realizing me my strengths and potential, as I did not always
welcome her exhortation, try again; you can do better. But this project owes a great
deal to it and so do I.

ANUMAT KUMAR SINGH

PREFACE
No professional curriculum is considered complete without work experience. Every
individual who is doing management studies has to go this phase of practical study
before he/she considers himself/herself fully qualified as potential managers.
I got an opportunity to do training with a Financial company I undertake the training
to study E- BUSINESS AND ITS ROLE IN INVENTORY MANAGEMENT "
This study discusses on the various aspects of Study human relationship
management and its importance in retailing. The study is based on questionnaire
survey results of Company The study concentrates on the concept of Finance
management it is correct to my knowledge.

CONTENTS

Executive summary
Objective of the study
Company profile
Inventory management
Research methodology
Findings
Data analysis
Limitations
Conclusions
Bibliography

EXECUTIVE SUMMARY

With the ongoing revolution in electronic and communication where Innovations are
taking at the blink of eye; it is impossible to keep the pace with the emerging trends.
Excellence is an attitude that that whole of human race is born with. It is the
environment that makes sure that whether the result of this attitude is visible or
otherwise. A Well planned, properly executed and evaluated Industrial training helps
a lot in inculcating a professional attitude. It provides a linkage between the
student and industry to develop an awareness of industrial approach to problem
solving, based on a broad understanding of process and mode of Inventory of
organization.
During this period, the student gets the real experience for working in the actual
Industry environment. Most of the theoretical knowledge that has been gained during
the course of their studies is put to test here. Apart from this the student gets an
opportunity to learn the latest technology , which is immensely helps in them in
building their career .
I had the opportunity to have a real experience on many ventures, which increased
my sphere of knowledge to great extent. I got a chance to learn

many

new

technologies and was also interfaced to many instruments. And all this credit
goes to organization.

OBJECTIVES OF THE STUDY

To assess the significance of the inventory management.

To know the level of inventory to be kept.
To know the amount of investment in inventory.

E- business
The emerging e-business market affords companies of all sizes and types the
opportunity to leverage their existing assets, employees, technology infrastructure,
and information to gain or maintain marketshare. For example, in the
telecommunications industry, service, rather than technology, is now the key
differentiator. With lower barriers to entry, new competitors are rapidly entering the
market offering new services, such as online bill presentment and payment, and
leveraging their unique digital assets.
Information technology research analysts agree that e-business is any net-enabled
business activity that transforms internal and external relationships to create value
and exploit market opportunities driven by new rules of the connected economy.
However, todays e-business requires more. Industry analysts further point out that ebusiness involves the continuous optimization of an organizations value proposition
and value-chain position through the adoption of digital technology.
The challenge for an organization is to turn the vision and the market opportunity
into a viable business. Developing the marketing strategy and plans and designing
and deploying the business solution is key. Those who successfully architect,
develop, and deploy e-business solutions will need to formulate and adopt a
comprehensive business plan. Because of the critical role of Internet technologies
and integration requirements, it is recommended that organizations need a
8

comprehensive planning frameworkan actual e-business model. This structured

planning approach enables the organization to assess, plan for, and implement the
multiple aspects of an e-business.
Building an e-business (an integrated value chain) that leverages the Internets
communications capabilities is a complex undertaking. The complex integration
requirements of the business solutions, all performing at extremely high levels of
availability and scalability, require an e-business model architectural approach. The
value chain (comprised of the traditional supply chain management functions,
planning, procurement, and inventory management, coupled with the customerfacing functions, typically referred to as customer relationship management) has
integration and performance demands that exceed the requirements seen in traditional
businesses. In a successful e-business, all of these areas are tightly integrated to
provide an organization the ability to quickly and efficiently sell, manufacture, and
deliver products or services.
Furthermore, in a successful e-business, this value chain rests on a foundation that
leverages the organizations existing core operational business systems, as well as
meets the new business-critical operational requirements for reliability, scalability,
flexibility, and 24 7 365 availability in a highly volatile, electronic marketplace.
An e-business model includes three essential elements:

Solid strategies
9

Knowledge management techniques applied to a companys information and

intellectual assets

Effective e-business processes typically grouped in the customer relationship

management (CRM), supply chain management (SCM), and core business
operations domains

Solid Strategies
Strategy and execution are key to developing and sustaining a successful e-business.
Only those organizations that successfully integrate key business strategies and
processes dramatically increase their efficiencies. To be successful, organizations
must also form the right strategic relationships and develop efficient business
processes with robust backend solutions that are able to meet users demands for realtime service today and into the future.
In the past, businesses had the luxury of developing business strategies in the
boardroom and IT strategies in the IT department. They then brought these strategies
together to run the overall business. E-businesses cannot afford this luxury. The
ability to react and change direction is critical. Speed is everything. Grounding the
organization with sound, winning strategies is key.
In the new economys competitive electronic environment, it is easier for an
organization to be global, but it is also harder to maintain consistency in the levels of
services offered around the world. E-businesses must be ready and able to adjust
10

their business and IT strategies rapidly, depending on unpredictable competitors and

market pressures. Todays e-business climate requires the continuous optimization of
an organizations business and IT strategies. Because IT now has such a significant
impact on every business process (from order taking to inventory to billing), both
business and IT strategies are now developed in parallel.
The best example of this is Dell Computer. From the start, the companys business
strategy was tightly aligned with its IT strategy, allowing Dell to successfully
integrate every aspect of its business (from order taking to inventory to billing) with
both its customers and suppliers. Dell vaulted to the forefront of its industry when it
came to market with a winning strategy, the unique just-in-time-delivery model.
Unlike traditional computer suppliers, Dells business strategy was founded on the
premise of zero inventory.
Similarly, online brokerage companies have been leaders in the area of integrating IT
and business strategies. The rapid adoption of Internet technologies combined with
market globalization, industry deregulation, and media convergence has afforded
these companies the opportunity to gain share and create value in the e-business
marketplace.
Turning an organizations intellectual assets into knowledge is a key business
differentiator. In addition to a continually optimized business strategy, successful ebusinesses must establish solid knowledge management practices. Knowledge
11

management is the definitive way to leverage an organizations information and

intellectual assets for business advantage. It is the formalized, integrated approach
that every organization must take to know its business.
Knowledge Management Techniques
Every business has both tacit and explicit knowledge. One is undocumented, and the
other is documented about what is known in the company. This knowledge may
include information about products and services or information about how the
company works with a particular supplier. No matter what type of knowledge an ebusiness has, the company must put into place processes for organizing that
knowledge.
Knowledge management includes managing intellectual capital, such as best
practices, critical business processes, and operating metrics. Establishing ongoing
processes for acquiring, organizing, and distributing this knowledge about customers,
products, and processes is critical to success. The business domains, CRM, SCM, and
core business operations, are dependent on this information and these intellectual
assets.
Effective E-Business Processes
In every successful e-business, the business process domains (CRM, SCM, and core
business operations) are an integral part of the continuous optimization process. The
12

advantage and, thus, the return on investment for an e-business integrating its
business process domains is that it extends the organizations business directly to
customers and suppliers.
When business process domains are integrated, they can increase productivity and
improve customer and supplier satisfaction. For example, when a repeat customer
views a successful e-businesss Web site, an integrated CRM system presents that
individual with offers or items of interest based on previous orders. After the
customer places an order, this same e-business allows that individual to view the
status of his order in real time as it moves through the supply chain.
Business process domains are aggregations of core business processes. Although
there is growing popularity of business process domains as their own entities (CRM,
SCM, and core business operations), they are commanding a mind-share in the
marketplace (and each has attracted various vendors and products to support it).
These domains must operate together as a key component to the overall e-business
strategy
In a successful e-business, convergence is the driving connection of all of the
business process domains. When there appears to a customer or a supplier to be no
barrier between departments, the business process domains are tightly integrated with
the business and IT strategies.

13

Customer Relationship Management

Customer relationships are becoming a more important factor in differentiating one
business from another. In order to stay competitive, e-businesses in every industry
have begun to analyze these relationships with customers using CRM solutions.
In the past, customers would place an order via the telephone and wait until the
companys purchasing department processed and shipped the order. Todays
customers place an order electronically and then demand to be able to check the
status of their order within minutes.
CRM enables an organization to adopt a comprehensive view of the customer and
maximize this relationship. These CRM systems enable a business to identify, attract,
retain, and support customs centers, direct mail, and retail facilities. In an efficient ebusiness, there are CRM processes in place to handle:
Analytical CRM: The analysis of data created on the operational side of the CRM
equation for the purpose of business performance management; utilizing data
warehousing technologies and leveraging data marts
Customer interactions: Sales, marketing, and customer service (call center, field
service) via multiple, interconnected delivery channels and integration between front
office and back office

14

Operational CRM: The automation of horizontally integrated business processes

involving front office customer touch points
Personalization: The use of new and traditional groupware/Web technologies to
facilitate customer and business partner communications
Supply Chain Management
Integration of the SCM functions is emerging as one of the greatest challenges facing
todays e-businesses. SCM is the integration of business processes from end user
through to original supplier. The goal of SCM is to create an end-to-end system that
automates all the business processes between suppliers, distribution partners, and
trading partners. The new mantra for this process, according to industry analysts, is
replacing inventory with information. In an effective e-business, the following
SCM independent processes must be highly integrated
Demand management: These are shared functions, including demand planning,
supply planning, manufacturing planning, and sales and operations planning.
Inbound/outbound logistics: These include transportation management, distribution
management, and warehouse management.
Supply management: These include products and services for customer order
fulfillment

15

Core Operations
E-businesses also need to develop and operate complex transaction processing
systems that support their core business operations. These core operations include the
operational systems that support their particular business, such as claims processing,
trade execution, enterprise resource planning (ERP), and enterprise resource
management (ERM).
Whether a company is just beginning to transform its business into an e-business or
is an e-business strengthening its market position, organizations must put in place
architectures that support large and complex integrated solutions. E-businesses must
address the performance requirements for reliability, scalability, and high availability.
These systems also require a high level of flexibility, integration, and often the added
complexity of operating in a global business environment. These e-businesses need
to integrate their customer relationship management, supply chain, and core business
operational systems such as enterprise resource planning, accounting, and general
business support systems to operate efficiently.

TYPES OF INVENTORY
Raw materials: The purchased items or extracted materials that are transformed into
components or products.
16

Components: Parts or subassemblies used in building the final product.

Work-in-process (WIP): Any item that is in some stage of completion in the
manufacturing process.
Finished goods: Completed products that will be delivered to customers.
Distribution inventory: Finished goods and spare parts that are at various points in
the distribution system.
Maintenance, repair, and operational Inventory (MRO) inventory (often called
supplies): Items that are used in manufacturing but do not become part of the finished
product.

17

INDEPENDENT VS. DEPENDENT DEMAND INVENTORY

Some inventory items can be classified as independent demand items, and some can
be classified as dependent demand items. While we need to make the timing and
sizing decisions for all inventory items, we must be careful in the manner in which
we make those decisions for these two types of items.
Independent demand inventory item: Inventory item whose demand is not related to
(or dependent upon) some higher level item. Demand for such items is usually
thought of as forecasted demand. Independent demand inventory items are usually
thought of as finished products.
Dependent demand inventory item: Inventory item whose demand is related to (or
dependent upon) some higher level item. Demand for such items is usually thought
of as derived demand. Dependent demand inventory items are usually thought of as
the materials, parts, components, and assemblies that make up the finished product.

18

REASONS FOR MAINTAINING INVENTORY

Anticipation Inventory or Seasonal Inventory: Inventory are often built in
anticipation of future demand, planned promotional programs, seasonal demand
fluctuations, plant shutdowns, vacations, etc.
Fluctuation Inventory or Safety Stock: Inventory is sometimes carried to protect
against unpredictable or unexpected variations in demand.
Lot-Size Inventory or Cycle Stock: Inventory is frequently bought or produced in
excess of what is immediately needed in order to take advantage of lower unit costs
or quantity discounts.
Transportation or Pipeline Inventory: Inventory is used to fill the pipeline as products
are in transit in the distribution network.
Speculative or Hedge Inventory: Inventory can be carried to protect against some
future event, such as a scarcity in supply, price increase, disruption in supply, strike,
etc.

Maintenance, Repair, and Operating (MRO) Inventory: Inventories of some items

(such as maintenance supplies, spare parts, lubricants, cleaning compounds, and
office supplies) are used to support general operations Inventory and maintenance.

19

OBJECTIVES OF INVENTORY MANAGEMENT

There are three main objectives of inventory management, as follows:
Provide the desired level of customer service. Customer service refers to a
companys ability to satisfy the needs of its customers. There are several ways to
measure the level of customer service, such as: (1) percentage of orders that are
shipped on schedule, (2) the percentage of line items that are shipped on schedule,
(3) the percentage of dollar volume that is shipped on schedule, and (4) idle time due
to material and component shortage. The first three measures focus on service to
external customers, while the fourth applies to internal customer service.
Achieve cost-efficient operations Inventory. Inventories can facility cost-efficient
operations Inventory in several ways. Inventories can provide a buffer between
operations Inventory so that each phase of the transformation process can continue to
operate even when output rates differ. Inventories also allow a company to maintain a
level workforce throughout the year even when there is seasonal demand for the
companys output. By building large production lots of items, companies are able to
spread some fixed costs over a larger number of units, thereby decreasing the unit
cost of each item. Finally, large purchases of inventory might qualify for quantity
discounts, which will also reduce the unit cost of each item.
Minimize inventory investment. As a company achieves lower amounts of money
tied up in inventory, that companys overall cost structure will improve, as will its
profitability. A common measure used to determine how well a company is managing
its inventory investment (i.e., how quickly it is getting its inventories out of the
system and into the hands of the customers) is inventory turnover Inventory, which is
a Inventory of the annual cost of goods sold to the average inventory level in dollars.

BASIC INVENTORY DECISIONS

20

There are two basic decisions that must be made for every item that is maintained in
inventory. These decisions have to do with the timing of orders for the item and the
size of orders for the item.

Basic Inventory Decisions

How much?

When?

Lot sizing decision

Lot timing decision

Determination

of

the

Determination

quantity to be ordered.

of

timing for the orders.

21

the

RELEVANT INVENTORY COSTS

Relevant Inventory Costs

Ordering

Item Costs

Holding Costs

Direct cost for

Costs

Fixed

getting

associated

associated

associated

item. Purchase

with carrying

with

with

cost

items

an

an
for

outside orders,

Shortage Costs

Costs

in

inventory.

(either

22

costs
placing
order
a

Costs
not

having enough
inventory

to

BEHAVIOR OF COSTS FOR DIFFERENT INVENTORY DECISIONS

When assessing the cost effectiveness of an inventory policy, it is helpful to measure
the total inventory costs that will be incurred during some reference period of time.
Most frequently, that time interval used for comparing costs is one year. Over that
span of time, there will be a certain need, or demand, or requirement for each
inventory item. In that context, the following describes how the annual costs in each
of the four categories will vary with changes in the inventory lot sizing decision.
Item costs: How the per unit item cost is measured depends upon whether the item is
one that is obtained from an external source of supply, or is one that is manufactured
internally. For items that are ordered from external sources, the per unit item cost is
predominantly the purchase price paid for the item. On some occasions this cost may
also include some additional charges, like inbound transportation cost, duties, or
insurance. For items that are obtained from internal sources, the per unit item cost is
composed of the labor and material costs that went into its production, and any
factory overhead that might be allocated to the item. In many instances the item cost
is a constant, and is not affected by the lot sizing decision. In those cases, the total
annual item cost will be unaffected by the order size. Regardless of the order size
(which impacts how many times we choose to order that item over the course of the
year), our total annual acquisitions will equal the total annual need. Acquiring that
total number of units at the constant cost per unit will yield the same total annual
cost. (This situation would be somewhat different if we introduced the possibility of
quantity discounts. We will consider that later.)
Holding costs (also called carrying costs): Any items that are held in inventory will
incur a cost for their storage. This cost will be comprised of a variety of components.
One obvious cost would be the cost of the storage facility (warehouse space charges
and utility charges, cost of material handlers and material handling equipment in the
warehouse). In addition to that, there are some other, more subtle expenses that add
23

to the holding cost. These include such things as insurance on the held inventory;
taxes on the held inventory; damage to, theft of, Inventory of, or obsolescence of the
held items. The order size decision impacts the average level of inventory that must
be carried. If smaller quantities are ordered, on average there will be fewer units
being held in inventory, resulting in lower annual inventory holding costs. If larger
quantities are ordered, on average there will be more units being held in inventory,
resulting in higher annual inventory holding costs.
Ordering costs: Any time inventory items are ordered, there is a fixed cost associated
with placing that order. When items are ordered from an outside source of supply,
that cost reflects the cost of the clerical work to prepare, release, monitor, and receive
the order. This cost is considered to be constant regardless of the size of the order.
When items are to be manufactured internally, the order cost reflects the setup costs
necessary to prepare the equipment for the manufacture of that order. Once again,
this cost is constant regardless of how many items are eventually manufactured in the
batch. If one increases the size of the orders for a particular inventory item, fewer of
those orders will have to be placed during the course of the year, hence the total
annual cost of placing orders will decline.
Shortage costs:

Companies incur shortage costs whenever demand for an item

exceeds the available inventory. These shortage costs can manifest themselves in the
form of lost sales, loss of good will, customer irritation, backorder and expediting
charges, etc. Companies are less likely to experience shortages if they have high
levels of inventory, and are more likely to experience shortages if they have low
levels of inventory. The order size decision directly impacts the average level of
inventory. Larger orders mean more inventory is being acquired than is immediately
needed, so the excess will go into inventory. Hence, smaller order quantities lead to
lower levels of inventory, and correspondingly a higher likelihood of shortages and
their associated shortage costs. Larger order quantities lead to higher levels of
inventory, and correspondingly a lower likelihood of shortages and their associated
24

costs. The bottom line is this: larger order sizes will lead to lower annual shortage
costs.

25

CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

The EOQ model is a technique for determining the best answers to the how much
and when questions. It is based on the premise that there is an optimal order size that
will yield the lowest possible value of the total inventory cost. There are several
assumptions regarding the behavior of the inventory item that are central to the
development of the model
EOQ assumptions:
1. Demand for the item is known and constant.
2. Lead time is known and constant. (Lead time is the amount of time that elapses
between when the order is placed and when it is received.)
3. The cost of all units ordered is the same, regardless of the quantity ordered (no
quantity discounts).
4. Ordering costs are known and constant (the cost to place an order is always the
same, regardless of the quantity ordered).
5. When an order is received, all the items ordered arrive at once (instantaneous
replenishment).
6. Since there is certainty with respect to the demand rate and the lead time,
orders can be timed to arrive just when we would have run out. Consequently
the model assumes that there will be no shortages.
Based on the above assumptions, there are only two costs that will vary with
changes in the order quantity, (1) the total annual ordering cost and (2) the total
annual holding cost. Shortage cost can be ignored because of assumption 6.
Furthermore, since the cost per unit of all items ordered is the same, the total
annual item cost will be a constant and will not be affected by the order quantity.

26

EOQ symbols:
D=

annual demand (units per year)

S = cost per order (dollars per order)

H = holding cost per unit per year (dollars to carry one unit in inventory for one year)
Q = order quantity

27

CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

We saw on the previous page that the only costs that need to be considered for the
EOQ model are the total annual ordering costs and the total annual holding costs.
These can be quantified as follows:
Annual Ordering Cost
The annual cost of ordering is simply the number of orders placed per year times the
cost of placing an order. The number of orders placed per year is a function of the
order size. Bigger orders means fewer orders per year, while smaller orders means
more orders per year. In general, the number of orders placed per year will be the
total annual demand divided by the size of the orders. In short,
Total Annual Ordering Cost = (D/Q)S
Annual Holding Cost
The annual cost of holding inventory is a bit trickier. If there was a constant level of
inventory in the warehouse throughout the year, we could simply multiply that
constant inventory level by the cost to carry a unit in inventory for a year.
Unfortunately the inventory level is not constant throughout the year, but is instead
constantly changing. It is at its maximum value (which is the order quantity, Q) when
a new batch arrives, then steadily declines to zero. Just when that inventory is
depleted, a new order is received, thereby immediately sending the inventory level
back to its maximum value (Q). This pattern continues throughout, with the
inventory level fluctuating between Q and zero. To get a handle on the holding cost
we are incurring, we can use the average inventory level throughout the year (which
is Q/2). The cost of carrying those fluctuating inventory levels is equivalent to the
cost that would be incurred if we had maintained that average inventory level
continuously and steadily throughout the year. That cost would have been equal to

28

the average inventory level times the cost to carry a unit in inventory for a year. In
short,
Total Annual Holding Cost = (Q/2) H

Total Annual Cost

The total annual relevant inventory cost would be the sum of the annual ordering cost
and annual holding cost, or
TC = (D/Q)S + (Q/2)H
This is the annual inventory cost associated with any order size, Q.

29

CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL

At this point we are not interested in any old Q value. We want to find the optimal Q
(the EOQ, which is the order size that results in the lowest annual cost). This can be
found using a little calculus (take a derivative of the total cost equation with respect
to Q, set this equal to zero, then solve for Q). For those whose calculus is a little
rusty, there is another option. The unique characteristics of the ordering cost line and
the holding cost line on a graph are such that the optimal order size will occur where
the annual ordering cost is equal to the annual holding cost.
EOQ occurs when:
(D/Q)S = (Q/2)H
a little algebra clean-up on this equation yields the following:
Q2 = (2DS)/H
And finally
Q = 2DS/H
(This optimal value for Q is what we call the EOQ)

30

E.O.Q ILLUSTIRATION IVENTORY

Annual demand (D) = 10,000 units per year
Ordering cost (S) = $75 per order
Holding cost (H) = $6 per unit per year
Lead time = 5 days
The company operates 250 days per year (hence, daily demand = 10,000/250 = 40
units per day)
Results of computations:
EOQ = 500 units
Number of orders placed per year = 20
Average inventory level = 250 units
Annual ordering cost = $1500
Annual holding cost = $1500
Total annual inventory cost = $3000
Time between the placement of orders = 12.5 days

SOME OBSERVATIONS ABOUT OUR EOQ ILLUSTINVENTORYN

Given data
Annual demand (D) = 10,000 units per year
Ordering cost (S) = $75 per order
Holding cost (H) = $6 per unit per year
31

Lead time = 5 days

The company operates 250 days per year (hence, daily demand = 10,000/250 = 40
units per day)

Results of computations
EOQ = 500 units
Number of orders placed per year = 20
Average inventory level = 250 units
Annual ordering cost = $1500
Annual holding cost = $1500
Total annual inventory cost = $3000
Time between the placement of orders = 12.5 days

Observation #1

32

The total annual inventory cost of $3000 includes only the annual ordering cost and
the annual holding cost. We were able to ignore the shortage cost because all of the
certainty in our assumptions led to a "no shortage" situation. We also ignored the
total annual item cost, since it was a horizontal line that had no impact on the optimal
size of our orders. However, we will still have to pay for those 10,000 items that
were ordered over the course of the year, so that annual purchase cost will contribute
to the total of our inventory related costs (ordering + holding + item cost). Let's
assume for dement ration Inventory purposes that the item purchase price is $ 1.00
per unit. This would make the total annual purchase cost $1.00 per unit x 10,000
units = $10,000.
Our total annual inventory cost would then be $1500 + $1500 + $10,000 = $13,000.
SOME OBSERVATIONS ABOUT OUR EOQ ILLUSTINVENTORYN
Observation #2
We discovered that our order quantity of 500 units would lead to replenishment every
12.5 days. We projected that we would run out on days 12.5, 25, 37.5, 50, 62.5, 75,
etc. With a 5 day lead time, we were smart enough to order 5 days in advance of
when we would run out, which had us placing orders on days 7.5, 20, 32.5, 45, 57.5,
70, etc. We only have to watch the calendar to keep track of when those order
instants arise so that we can place the orders.
An alternative to watching the calendar would be to watch the inventory levels.
Recall that the average daily demand for this item is 40 units per day. This means that
at the moment we place an order, we have just enough inventory to cover the demand
that will occur during the 5 day lead time. The demand during the 5 day lead time is
5 days x 40 units per day = 200 units. So, all we have to do is keep our eyes on our
inventory level, and when it reaches 200 units, that is the signal that it is time to
reorder. This level of inventory that triggers a reorder is called the reorder point (R).
33

Inventory Level

200

Time

34

INVENTORY MONITORING APPROACHES

Continuous review system: This approach maintains a constant order size, but allows
the time between the placements of orders to vary. This method of monitoring
inventory is sometimes referred to as a perpetual review method, a fixed quantity
system, and a two-bin system. When the inventory is depleted to the reorder point, a
replenishment order is placed. The size of that order is the economic order quantity
for that item. This type of system provides closer control over inventory items since
the inventory levels are under perpetual scrutiny.
Periodic review system:

This approach maintains a constant time between the

placements of orders, but allows the order size to vary. This method of monitoring
inventory is sometimes referred to as a fixed interval system or fixed period system.
It only requires that inventory levels be checked at fixed periods of time. The amount
that is ordered at a particular time point is the difference between the current
inventory level and a predetermined target inventory level (also called an order up to
level). If demand has been low during the prior time interval, inventory levels will be
relatively high, and the amount to be ordered will be relatively low. If demand has
been high during the prior time interval, inventory levels will have been depleted to
low levels, and the amount to be ordered will be higher.
Min-max system: This approach allows both the order size and the time between the
placements of orders to vary. This method of monitoring inventory is sometimes
referred to as an optional replenishment system. It is a hybrid system that combines
elements of both the continuous review system and the periodic review system. It is
similar to the periodic review system in that it only checks inventory levels at fixed
intervals of time, and it has a target inventory level. However, when one of those
review periods arises the system does not automatically place an order. An order is
only placed if the size of the order would be sufficient to warrant placing the order.
This determination is made by incorporating the reorder point concept from the
35

continuous review system. At the review period the inventory level on hand is
compared to a reorder point for the item. If inventory has not fallen below the reorder
point, no order is placed. However, if the inventory level has dropped below the
reorder point, an order is placed. The size of the order is the difference between the
inventory on hand and the target inventory level.

36

INVENTORY OF SAFETY STOCK DETERMINATION

Data:
Average daily demand = 50 units per day
Operating year contains 300 days of operation Inventory (D = 15,000 units per year)
Ordering cost S = $3 per order
Holding cost H = $1 per unit per year
Lead time = 1 day
Computations:
EOQ (from EOQ formula) = 300 units per order
Resulting number of orders per year = 50 orders per year
Reorder point = 50 units (the average number of units demanded during the 1 day
lead time)
Additional Data
Demand is not always a constant 50 units per day. There is variability in daily
demand according to the following table of demands and probabilities:
Daily Demand

10

20

30

40

50

60

70

80

90

Probability

.01

.04

.05

.2

.4

.2

.05

.04

.01

Which suggests that if you waited until you had 50 units left in inventory before
placing an order for 300 more units, you would be O.K. if the demand during the 1
day lead time was 10, 20, 30, 40, or 50? However, if the demand during the 1 day
lead time was 60, 70, 80, or 90 you would have had a shortage. The size of the
shortage would depend upon how many units were demanded during the lead time,
37

but the maximum possible shortage would have been 40 units (if demand was the
largest possible value of 90).
You can prevent shortages by providing safety stock when there is uncertainty in
demand. (Safety stock can be viewed as a cushion placed at the bottom of the saw
tooth graph of inventory fluctuations over time.) If you wanted to guarantee that you
would never have a shortage in this situation, you would need 40 units of safety stock
at the bottom of the graph to "dip into" if demand spiked to higher than average
values. But, adding 40 units of safety stock really mean that you have elevated your
reorder point. You are not waiting until there are only 50 units in inventory to place
your order. You are ordering when there are 90 units in inventory. (And, of course, 90
units is sufficient to cover the worst case scenario for this problem.)

HOW MUCH SAFETY STOCK IS APPROPRIATE?

38

Service level: The probability that demand during lead time will not exceed the
inventory on hand when the order is placed.
In the previous illustration Inventory, it was suggested that you might provide 40
units of safety stock. If you had done so, you would never experience a shortage. You
would have achieved a service level of 100%. This might not be a desirable solution
for this problem. We are carrying a relatively high amount of safety stock, and there
is a very low probability that lead time demand will actually go as high as 90 units
(only a 1% chance).
If you had chosen to carry only 30 units of safety stock (order when inventory drops
to 80 units), you will be fine if lead time demand is anything up to and including 80
units. If lead time demand turns out to be 90 (there is a 1% chance of that), you will
come up 10 units short. But, since you had enough inventories to cover 99% of the
demands that might have occurred, you achieved a 99% service level. Many people
might opt for this policy, for it will reduce the average annual level of inventory
carried (i.e., reduce holding costs) and run only a slight risk of incurring a shortage
cost.
Others might be even more aggressive, and opt for an even lower service level. We
could have achieved a 95% service level with a reorder point of 70 (only 20 units of
safety stock). We've lowered our inventory holding costs even further, but exposed
ourselves to even more shortage cost risk.
While the service level concept is a widely used measure of protection against
shortages, it can be a bit misleading, as the next illustration of Inventory will show.

INVENTORY OF SHORTAGES WITH A GIVEN SERVICE LEVEL

39

Continuing with the previous illustration of Inventory, assume that management has
made a policy decision that the company will achieve a 90% service level (reorder
point = 60 units). Some incorrectly assume that this means 10% of demand will be
unsatisfied. Things aren't really that bad. The 90% service level really means that on
90% of the order cycles we will have enough to satisfy demand, but on 10% we will
come up short. Let's look at the expected shortage on any given order cycle:
Inventory Policy: Service level = 90%, Reorder point = 60 units
Lead time demand

# of units short

Probability

Expected value of shortage

10

.01

20

.04

30

.05

40

.2

50

.4

60

.2

70

10

.05

.5

80

20

.04

.8

90

30

.01

.3

Total expected value of shortage per order cycle

40

1.6

This means that the average shortage per order cycle will be 1.6 units. (Of course, we
will never be short 1.6 units on any order cycle. For any order cycle, we will be short
either 0 units, 10 units, 20 units, or 30 units. The 1.6 reflects the long run average per
cycle).
Go back a few pages and refresh yourselves on the calculations for the data of this
problem. Order size (the calculated EOQ) is 300 units. This order size, coupled with
the annual demand of 15,000 units, will have us ordering 50 times per year. On each
of those 50 order cycles we have an expected shortage of 1.6 units. This means the
total expected shortage for the full year will be 50 x 1.6, or 80 units of demand per
year that we cannot satisfy. This is 80 units out of a total annual demand of 15,000
units, which is 80/15000 or .0053 of our demand that goes unsatisfied. This converts
to a percentage of only .53% (a little more than 1/2 a percent of our annual demand
goes unfilled). Another way to look at this is 99.47% of our annual demand is met.
This is a lot better sounding than the 90% service level might have led us to believe.

41

HOW MUCH CONTROL? ABC ANALYSIS

Inventory

Annual

Value

Annual

Item Number

Usage

Per Unit

Dollar Usage

25,000

$3

75,000

5,000

$4

20,000

1,000

$10

10,000

10,000

$2

20,000

4,000

$5

20,000

70,000

$10

700,000

25,000

$5

125,000

5,000

$1

5,000

3,000

$5

15,000

10

2,000

$5

10,000

Item

Annual

% of

Cumulative % of

Cumulative ABC

Number

$ Usage

Items

% of Items

Value

% of Value

Class*

$700,000

10%

10%

70

70

$125,000

10%

20%

12.5

82.5

$75,000

10%

30%

7.5

90

42

$20,000

10%

40%

92

$20,000

10%

50%

94

$20,000

10%

60%

96

$15,000

10%

70%

1.5

97.5

$10,000

10%

80%

98.5

10

$10,000

10%

90%

99.5

$5,000

10%

100%

.5

100

Total

$1,000,000

*When classifying the items as A, B, or C items, it can be somewhat subjective as to

where the lines are drawn. With the unrealistically small Inventory above, the first
20% of the inventory items constitute 82.5% of the inventory value, so these items
(Items 6 and 7) will be designated as A items. On the other extreme, 70% of the items
constitute only 10% of the inventory value, so these items (Items 2, 4, 5, 9, 3, 10, and
8) will be designated as C items. Finally, 10% of the items constitute 7.5 % of the
inventory value, so this item (Item 1) will be designated as a B item.
The purpose of the ABC classification was to separate the "important few" from the
"trivial many" so that the appropriate level of control can be assigned to each item. A
items need the tightest degree of control, while C items do not need very close
scrutiny.

43

ABC CLASSIFICATION OF ITEMS

Cumulative % of Value

100%

Cumulative % of Items
100%

INVENTORY MANAGEMENT
44

Introduction
Inventories constitute most significant part of current assets, in most of the
companies in India. To maintain a large size of inventory, a considerable amount of
fund is required. It is, therefore, absolutely imperative to manage inventories
efficiently and effectively 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 a company to reduce its levels
of inventories to a considerable degree, e.g.10% to 20%, without any adverse effect
on production and sales, by using inventory planning and control techniques. The
reduction in excessive inventories carries a favorable impact on a companys
profitability.
There are at least three motives for holding inventories:
1-To facilitates smooth production and sales operation Inventory (transaction
motive).
2-To guards against the risk of unpredictable changes in usage rate and delivery time
(precautionary motive).
3- To make advantage of price fluctuations (speculative motive).

45

The evolving discipline of marketing:

The marketing discipline had its origins in the early 20th century as an offspring of economics.
Economic science had neglected the role of middlemen and the role of functions other than price in the
determination of demand levels and characteristics. Early marketing economists examined
agricultural and industrial markets and described them in greater detail than the classical economists.
This examination resulted in the development of three approaches to the analysis of marketing
activity: the commodity, the institution, and the function. Commodity analysis studies the ways in
which a product or product group is brought to market. A commodity analysis of milk, for example,
traces the ways in which milk is collected at individual dairy farms, transported to and processed at
local dairy cooperatives, and shipped to grocers and supermarkets for consumer purchase.

For example, any marketing effort must ensure that the product is transported from the supplier to the
customer. In some industries, a truck, while in others it may be done by mail, facsimile, television signal, or
airline may handle this transportation function. All these institutions perform the same function.

As the study of marketing became more prevalent throughout the 20th century, large companies
particularly mass consumer manufacturersbegan to recognize the importance of market research, better
product design, effective distribution, and sustained communication with consumers in the success of their
brands. Marketing concepts and techniques later moved into the industrial-goods sector and subsequently
into the services sector. It soon became apparent that organizations and individuals market not only goods
and services but also ideas (social marketing), places (location marketing), personalities (celebrity
marketing), events (event marketing), and even the organizations themselves (public relations).

46

Role of marketing:

As marketing developed, it took a variety of forms. It was noted above that marketing can be viewed as a set
of functions in the sense that certain activities are traditionally associated with the exchange process. A
common but incorrect view is that selling and advertising are the only marketing activities. Yet, in addition
to promotion, marketing includes a much broader set of functions, including product development,
packaging, pricing, distribution, and customer service.

Many organizations and businesses assign responsibility for these marketing functions to a specific group of
individuals within the organization. In this respect, marketing is a unique and separate entity. Those who
make up the marketing department may include brand and product managers, marketing researchers, sales
representatives, advertising and promotion managers, pricing specialists, and customer service personnel. As
a managerial process, marketing is the way in which an organization determines its best opportunities in the
marketplace, given its objectives and resources. The marketing process is divided into a strategic and a
tactical phase. The strategic phase has three componentssegmentation, targeting, and positioning (STP).
The organization must distinguish among different groups of customers in the market (segmentation),
choose which group(s) it can serve effectively (targeting), and communicate the central benefit it offers to
that group (positioning). The marketing process includes designing and implementing various tactics,
commonly referred to as the marketing mix, or the 4 Ps: - Product, Price, Place and promotion.
Evaluating, controlling, and revising the marketing Process to achieve the organizations objectives follow
the marketing mix
It is the process by which a society organizes and distributes its resources to meet the material needs of its
citizens. However, marketing activity is more pronounced under conditions of goods surpluses than goods
shortages. When goods are in short supply, consumers are usually so desirous of goods that the exchange
process does not require significant promotion or facilitation. In contrast, when there are more goods and
services than consumers need or want, companies must work harder to convince customers to exchange with
them.

47

The marketing process:

The marketing process consists of four elements: strategic marketing analysis, marketing-mix planning,
marketing implementation, and marketing control.

Strategic marketing analysis

Market segments:

The aim of marketing in profit-oriented organizations is to meet needs profitably. Companies must therefore
first define which needsand whose needsthey can satisfy. For example, the personal transportation
market consists of people who put different values on an automobile's cost, speed, safety, status, and styling.
No single automobile can satisfy all these needs in a superior fashion; compromises have to be made.
Furthermore, some individuals may wish to meet their personal transportation needs with something other
than an automobile, such as a motorcycle, a bicycle, or a bus or other form of public transportation. Because
of such variables, an automobile company must identify the different preference groups, or segments, of
customers and decide which group(s) they can target profitably.
Market niches:

Segments can be divided into even smaller groups, called sub segments or niches. A niche is defined as a
small target group that has special requirements. For example, a bank may specialize in serving the
investment needs of not only senior citizens but also senior citizens with high incomes and perhaps even
those with particular investment preferences. It is more likely that larger organizations will serve the larger
market segments (mass marketing) and ignores niches. As a result, smaller companies typically emerge that
are intimately familiar with a particular niche and specialize in serving its needs.

Marketing to individuals:

48

A growing number of companies are now trying to serve segments of one. They attempt to adapt their
offer and communication to each individual customer. This is understandable, for instance, with large
industrial companies that have only a few major customers. For example, The Boeing Company (United
States) designs its 747 planes differently for each major customer, such as United Airlines, Inc., or American
Airlines, Inc. Serving individual customers is increasingly possible with the advent of database marketing,
through which individual customer characteristics and purchase histories are retained in company
information systems. Even mass marketing companies, particularly large retailers and catalog houses,
compile comprehensive data on individual customers and are able to customize their offerings and
communications.

Positioning:

A key step in marketing strategy, known as positioning, involves creating and communicating a message that
clearly establishes the company or brand in relation to competitors. Thus, Volvo Aktiebolaget (Sweden) has
positioned its automobile as the safest, and Daimler-Benz AG (Germany), manufacturer of Mercedes-Benz
vehicles, has positioned its car as the best engineered. Some products may be positioned as outstanding
in two or more ways. However, claiming superiority along several dimensions may hurt companys
credibility because consumers will not believe that any one offering can excel in all dimensions.
Furthermore, although the company may communicate a particular position, customers may perceive a
different image of the company as a result of their actual experiences with the company's product or through
word of mouth.
Marketing-mix planning:

Having developed a strategy, a company must then decide which tactics will be most effective in achieving
strategy goals. Tactical marketing involves creating a marketing mix of four components product, price, and
place, promotionthat fulfills the strategy for the targeted set of customer needs.
1. Product: -

Product development:

49

The first marketing-mix element is the product, which refers to the Offering or group of offerings that will
be made available to customers. In the case of a physical product, such as a car, a company will gather
information about the features and benefits desired by a target market. Before assembling a product, the
marketer's role is to communicate customer desires to the engineers who design the product or service. This
is in contrast to past practice, when engineers designed a product based on their own preferences, interests,
or expertise and then expected marketers to find as many customers as possible to buy this product.
Contemporary thinking calls for products to be designed based on customer input and not solely on
engineers' ideas. In traditional economies, the goods produced and consumed often remain the same from
one generation to the nextincluding food, clothing, and housing. As economies develop, the range of
products available tends to expand, and the products themselves change. In contemporary industrialized
societies, products, like people, go through life cycles: birth, growth, maturity, and decline. This constant
replacement of existing products with new or altered products has significant consequences for professional
marketers. The development of new products involves all aspects of a businessproduction, finance,
research and development, and even personnel administration and public relations.

Packaging and branding:

Packaging and branding are also substantial components in the marketing of a product.
Packaging in some instances may be as simple as customers in France carrying long loaves of
unwrapped bread or small produce dealers in Italy wrapping vegetables in newspapers or
placing them in customers' string bags. In most industrialized countries, however, the
packaging of merchandise has become a major part of the selling effort, as marketers now
specify exactly the types of packaging that will be most appealing to prospective customers.

Marketing a service product:

The same general marketing approach about the product applies to the development of service offerings as
well. For example, a health maintenance organization (HMO) must design a contract for its members that
50

describes which medical procedures will be covered, how much physician choice will be available, how outof-town medical costs will be handled, and so forth. In creating a successful service mix, the HMO must
choose features that are preferred and expected by target customers, or the service will not be valued in the
marketplace.

2. Price

The second marketing-mix element is price. Ordinarily companies determine a price by gauging the quality
or performance level of the offer and then selecting a price that reflects how the market values its level of
quality. However, marketers also are aware that price can send a message to a customer about the product's
presumed quality level. A Mercedes-Benz vehicle is generally considered to be a high-quality automobile,
and it therefore can command a high price in the marketplace. But, even if the manufacturer could price its
cars competitively with economy cars, it might not do so, knowing that the lower price might communicate
lower quality. On the other hand, in order to gain market share, some companies have moved to more for
the same or the same for less pricing, which means offering prices that are consistently lower than those
of their competitors. This kind of discount pricing has caused firms in such industries as airlines and
pharmaceuticals (which used to charge a price premium based on their past brand strength and reputation) to
significantly reevaluate their marketing strategies.

3. Place: -

Place, or where the product is made available, is the third element of the marketing mix and is most
commonly referred to as distribution. When a product moves along its path from producer to
consumer, it is said to be following a channel of distribution. For example, the channel of distribution
for many food products includes food-processing plants, warehouses, wholesalers, and supermarkets.
By using this channel, a food manufacturer makes its products easily accessible by ensuring that they
51

are in stores that are frequented by those in the target market. In another example, a mutual funds
organization makes its investment products available by enlisting the assistance of brokerage houses
and banks, which in turn establish relationships with particular customers.

4. Promotion: -

Promotion, the fourth marketing-mix element, consists of several methods of communicating with and
influencing customers. The major tools are sales force, advertising, sales promotion, and public relations.

Sales force:
Sales representatives are the most expensive means of promotion, because they require income, expenses,
and supplementary benefits. Their ability to personalize the promotion process makes salespeople most
effective at selling complex goods, big-ticket items, and highly personal goodsfor example, those related
to religion or insurance. Salespeople are trained to make presentations, answer objections, gain
commitments to purchase, and manage account growth. Some companies have successfully reduced their
sales-force costs by replacing certain functions (for example, finding new customers) with less expensive
methods (such as direct mail and telemarketing).
Advertising:
Advertising includes all forms of paid, no personal communication and promotion of products, services, or
ideas by a specified sponsor. Advertising appears in such media as print (newspapers, magazines, billboards,
flyers) or broadcast (radio, television). Advertisements typically consist of a picture, a headline, information
about the product, and occasionally a response coupon. Broadcast advertisements consist of an audio or
video narrative that can range from short 15-second spots to longer segments known as infomercials, which
generally last 30 or 60 minutes.

Sales promotion:
While advertising presents a reason to buy a product, sales promotion offers a short-term incentive to
purchase. Sales promotions often attract brand switchers (those who are not loyal to a specific brand) who
are looking primarily for low price and good value. Thus, especially in markets where brands are highly
similar, sales promotions can cause a short-term increase in sales but little permanent gain in market share.
Alternatively, in markets where brands are quite dissimilar, sales promotions can alter market shares more
52

permanently. The use of promotions has risen considerably during the late 20th century. This is due to a
number of factors within companies, including an increased sophistication in sales promotion techniques and
greater pressure to increase sales. Several market factors also have fostered this increase, including a rise in
the number of brands (especially similar ones) and a decrease in the efficiency of traditional advertising due
to increasingly fractionated consumer markets.

Public relations:

Public relations, in contrast to advertising and sales promotion, generally involve less
commercialized modes of communication. Its primary purpose is to disseminate information
and opinion to groups and individuals who have an actual or potential impact on a company's
ability to achieve its objectives. In addition, public relations specialists are responsible for
monitoring these individuals and groups and for maintaining good relationships with them.
One of their key activities is to work with news and information media to ensure appropriate
coverage of the company's activities and products. Public relations specialists create publicity
by arranging press conferences, contests, meetings, and other events that will draw attention
to a company's products or services. Another public relations responsibility is crisis
managementthat is, handling situations in which public awareness of a particular issue may
dramatically and negatively impact the company's ability to achieve its goals. For example,
when it was discovered that a harmful chemical, Source Perrier, might have tainted some
bottles of Perrier sparkling water SA's public relations team had to ensure that the general
consuming public did not thereafter automatically associate Perrier with tainted water.

Marketing implementation:

Companies have typically hired different agencies to help in the development of advertising,
sales promotion, and publicity ideas. However, this often results in a lack of coordination
between elements of the promotion mix. When components of the mix are not all in harmony,
a confusing message may be sent to consumers. For example, a print advertisement for an
automobile may emphasize the car's exclusivity and luxury, while a television advertisement
may stress rebates and sales, clashing with this image of exclusivity. Alternatively, by
integrating the marketing elements, a company can more efficiently utilize its resources.
Instead of individually managing four or five different promotion processes, the company
53

manages only one. In addition, promotion expenditures are likely to be better allocated,
because differences among promotion tools become more explicit.

54

Need to Push Full Throttle Ahead:

Increasing knowledge among societies is forcing the banks to adopt international best practices to
remain in business. Important dimensions of change are market, customers, competition, technology
& society. Banks should focus beyond technologies and geographies to accelerate growth. Indian
banking sector has adopted many dynamic innovations but still some more are needed like risk
management, e-commerce etc. The new game requires new strategies with an accent on innovational
transformation.
Two roads diverged in a wood, and I
Took the one less traveled by,
And that has made all the difference.
-

Robert Frost

It is Customary to describe the unfolding world as of unprecedented change, of a whirlwind of ideas, of

explosive growth of since-based technology. Prospects for continued escalation of change are awesome: the
worlds knowledge based now doubles every eight years, but by 2020, the doubling time is estimated to be
slashed to 76 days. A strong momentum and apparent inevitability of globalization strongly suggest an
accentuation of the pace of development. Such contextual changes recd. An impetus through increasing
integration of the productive process, rapid technological advances, splashing of legal & institutional
barriers to global trade & a smother flow of global capital.

Discontinuity The New Disequilibria:

Everything in business is always in flux & flow. Engels stressed, equilibrium is inseparable from motion &
all equilibrium is relative & temporary. The quickening of change (Table 1), however, caused discontinuity
& ripples of concern on the boardrooms. But it is necessary to realize, as powerfully argued by Gary Hamel,
We stand on the threshold of a new age the age of revolution.

55

TABLE 1: DIMESIONS OF CHANGES

Impact on Business

Change
Markets

Local to Global

Investments

in

Identifying
& Servicing New
markets

Customers

Acceptance to delight

Listening

to

Consumers.
-

Knowing

&Understanding
their needs.
- Fulfilling Customers
Requirements.
Competition

- Increased Competition
-

Shortage

to

- Squeeze in margins

surplus

leading

Economy

to cost cuttings.
- Consolidating &
Convergence.

Technology

Gradual

change

quantum Change

to

Innovational

Shareholders
Transparency.

Society

Demanding Rights

- Corporate Governance
- Concern for social
Obligations.

56

Impact on Business

Change
Markets

Local to Global

Investments

in

Identifying
& Servicing New
markets

Customers

Acceptance to delight

Listening

to

Consumers.
-

Knowing

&Understanding
their needs.
- Fulfilling Customers
Requirements.
Competition

- Increased Competition
-

Shortage

to

- Squeeze in margins

surplus

leading

Economy

to cost cuttings.
- Consolidating &
Convergence.

Technology

Gradual

change

quantum Change

to

Innovational

Shareholders
Transparency.

Society

Demanding Rights

- Corporate Governance
- Concern for social
57

Obligations.

Historically, Changes in society have always been preceded by the flow of ideas, which provide the cutting
Edge of development. In contemplating the challenges, the approaches of those enterprise, which
successfully weathered the challenges of this volatile era, shows that innovation is not only power but also
the key to sustained economic success. While the debate over innovation in the world of business has raged
for long, innovation has now rapidly emerged as a critical lament of the growth strategy.

Despite the multi-layered any multi-dimensional aspect of ubiquitous change, most organization still
disconcertingly confine themselves to incremental improvement & innovation without trying to alter the
rules of the game, bring about breakthrough innovation. What is prognostically alarming is that most
companies in the given industry or market tend to follow the same unwritten rules for conducting business
with limited deviations from de facto strategies. This is reflected by the fact that though agglomeration & the
location of innovative activities are closely related, important sectoral clusters like textiles (Triupur),
diamond-cutting (Surat), hosiery (Ludhiana), call centers (Gurgoan), auto-companies & automobiles
(Chennai), with the notable exception of banglore (IT) are largely confined to incremental innovations.

Further the blistering pace of change quickly renders existing strategies obsolete necessitating frequent
course corrections. An urgent policy appraisal is, therefore, impulses in banks by radical and discontinuous
innovative measures for enhanced performance in this turbulent era.

58

The Innovation Imperative Accelerating Growth beyond Technologies and Geographies:

Traditionally, innovation has been defined with focus on traditional concepts of industry research &
development & the commercialization of new products and/or process technologies. But the definition of
innovation as acceptance of & readiness to change across the organization, dedication to continuous
improvement processes, willingness to experiment and explore novel ways, building new relationship &
alliance, establishing new approaches to markets, channels, customers, pricing strategies & new & varied
approaches to organization, measurement and performance measurement is generally a acceptable.

The history of the growth of financial development, as indeed of all other development, is intertwined with
the growth of innovation. Compelling & incontrovertible cross-country evidence prove that successful
innovation is crucial to the competitive edge of all businesses. But innovation is particularly important for
banking & finance companies. Innovation, which transcends invention, represents the point of convergence
of invention & insight. Organizational ethos needs to stress innovation as a key driver of growth that
surprises & delights the customer with new, differentiated & relevant benefits. This is not a clich but
defining characteristics of the modern cooperate saga.

59

SURVIVAL IS THE MOTHER OF INNIVATION

Banks can provide innovation products and services to their corporate and retail customers only when
creative people are in place along with latest technology. Such people might provide innovative ideas to
customers and banks. By converting there acceptable ideas into reality, banks can get an edge to compete
effectively in the global village. Indian banking is also changing its shape rapidly by adopting innovative
technology, products and services.
Innovation is the key to success for any activity. Innovation banking is therefore not an exception.
Innovation banking is possible only when we have innovative people in banking. Moreover, innovative
ideas of such people have to be heard at the right time by the right people. Only then the needed
encouragement and support is given to convert such innovative ideas in reality.
In the past, a generation gap is considered to be with a span of at least 10 years. Whereas with the
improvement in the technology followed by integration of people and places across the world on
account of revolutionary changes in information and communication. The entire world has become
virtually a small global village. Since all organizations and people use technologies, we find that a new
generation of techno savvy people emerging in a very short span of 5 years in every sphere of activity
infusing dynamism and creativity leading to several innovations.
Globally, usage of technology is very extensive in the financial sector of which banking sector is an
integral part. Indian financial sector has made rapid strides in late 1980s and early 1990s picking up
momentum with the advent of 21st century. Liberalization of the Indian economy has provided scope
to the banking sector to reorient its focus by shifting from developmental role obligated mostly by
socio-political considerations into professional financial agencies keen on preserving their bottom
lines. The direction in which the Indian banking is moving presently indicates that the prevailing
competition will lead to consolidation and convergence. Small players will either have to forge a
merger to become big players or else they will be either extinguished or swallowed by larger players in
the years to come. The pressure will equally be more on the existing large players to retain their lead
over others. This emerging scenario warrants innovative approach by banks to keep themselves
sailing in the sea of competition.
No wonder we find a very interesting trend in the recent past in the Indian banking. The trend is the
major shift from routine banking functions to a very aggressive financial marketing organization. We
find most of the routines banking jobs are out source, thanks to automation made possible by
technology. Direct selling agents are actively engaged by most of the foreign and new generation
60

private sector banks for marketing all the banking products with specified targets. Therefore, the real
core people who will be retained by these banks in the long run under there direct pay roles will only
be experts at senior levels in marketing, corporate and retail banking specialists along with risk
management professionals who will be required in view of the impending implementation of the BasleII norms which attaches significant to assessment and management of risk factors in banking activity.

ATMs of the larger banks are either fully out sourced by the individual banks or handed over to an
autonomous agency by most of the banks collectively. Small players in ATMs are also trying to be a
part of this shared network with regard to clearing operations, Reserve Bank of India has already
initiated the required steps to gradually dispense with the physical presentation of chques and replace
the same with electronic clearing in major cities. Similarly the audit and inspection of the
computerized branches is now being done in many cases by transfer of data files to the supervisory
and inspecting authorities. Qualitative inspection and supervision of the banks by Reserve Bank of
India is made possible by the technology, leaving the routine audit work to the concerned internal
audit departments of the individual banks.
With the automation of the routine work process and rapid technological developments, a host of
customer friendly banking products with flexibility are now available to one and all. Few departments
of the government (e.g. customs, income tax, central excise, commercial taxes and sales tax) have
already initiated the process of EDI (Electronic Data Interface) there by reducing the manual tasks in
the preparation of documentation and enhancing the levels of automation. This also facilitates
standardization in documentation with uniformity. This will also ensure submission of such standard
data in electronic form and scanning the physical documents where required. In the long run, this
enables e-commerce to gain momentum. Therefore, banks can also equally look forward to submission
of commercial documents by the trade industry through EDI in the near future. Once this is done, the
need for the business segment to personally visit the bank branches to submit the documents will be
eliminated. When ATMs on one side have reduce the depends of individuals customers on the bank
branches to conduct their routine banking operations, the EDI when gains momentum will reduce the
dependence of corporate customers on the bank branches in a similar fashion. These developments
taking place mainly on account of automation will reduce the differentiation in the service delivery
systems, as they are mostly standardized. Therefore, banks have to be innovative to maintain their
brand values.
Few banks have already started marketing aggressively for retail business loans by tying up with a
select-reputed builders and conducting road shows in India and abroad to lure the salaried people and
professionals. This role is intermediation of the banker between the builders and salaried people and
61

professionals can be further extended to cover other areas as well. For example banks can connect the
manufacturers of goods and services with the ultimate buyers. The process is very simple. Banks are
required to have a common agency with which the entire database of all the banks should be shared.
This data should be analyzed and classified into various segments say- according to activity, age,
place, income, education, etc., of the organizations and people who constitute this data. When this
process is done on all India bases, a wealth of information will be available, which can be used as a
marketing tool. Few relaxations in the existing banking laws are required for this purpose.

62

INNOVATION IN CUSTOMER SERVICE IN BANKS

Satisfied customers are the best guarantee for the stability and growth. Customers will be satisfied only
when the banks provide the customized and innovative products and services at responsible cost. This article
focuses on the kind of services provided by developed countries and level of innovative services provided by
Indian banks. Many innovative services are currently available from Indian banks like E-Banking, ATMs,
Anywhere Banking etc., but there is a wast6 scope of improvement. Globalization, the buzzword, which
engulfed all the nations of the world since the beginning of the last decade of the past millennium, did
not leave the banking industry untouched. The opening of the world trade has brought out several
changes in the global banking map.
The continuing evolution of the banking and financial market has created opportunities both for
providers and for users of financial products and this evolution have proven beneficial to the economy.
However, innovations in financial products also have given rise to some new challenges for market
participants and their supervisors in the areas of corporate governance and compliance. The changes
that are taken place in the last decade demonstrate again the technical weakness and weak corporate
governance at a few firms can dramatically change the cost of capital and impose additional
regulatory burden on even well managed organizations.

Technology is rapidly transforming the banking industry- and expanding its ability to reach the
unbanked. Employers in the developed countries are turning increasingly to electronic payroll cards
as a cost-effective way to reduce the burden of writing and processing checks. Consumers are using
their payroll cards and other versions of prepaid debit card- also know as stored value cards- as a
substitute for cash and checking accounts. Monitoring this trend, the American Bankers Association
reported last December that in 2003, for the first time, electronic payments surpassed cash and chques
as consume in store purchases- an evolution of payment behavior, the ABA noted, driven by the
increasing popularity of debit cards.rs preferred payment method for in store purchases- an
evolution of payment behavior, the ABA noted, driven by the increasing popularity of debit cards.
Coming across through the performance of Banking Institutions of the west and seeing their
performance in the use of innovative methods to make themselves more customer-friendly we would
have no doubts about their strong banking mail-order company L.L. Bean, know for its superb ordertaking and service delivery systems, as its model for change. A major result of this functional
benchmarking was the establishment of a 24-hour customer service center that can not only respond
to queries and complaints but also promote and sell the banks products and services. The center even
allows customers to open a checking account anytime or negotiate an overdraft at 2 am. The ATM was
also reconfigured from mere cash dispenser to a versatile and tireless account executive. The machine
63

can even buy and sell mutual funds. Inspired by LL Bean, Banks published a 50-page catalogue to
help customers appreciate and select from its more than 160 financial services.

Other banks in the west have, sledded their conversation finance and control images, have likewise
adopted innovative service strategies and practices. Many Banks have established an information
center or encyclopedia in the waiting lounge. Here customers can browse through various bits and
pieces of important service information like the average time to finish a transaction and the
companys products and services. Information about the busiest day or days in the branch is displayed
so that the customers who want to avoid these periods may do so. Phone lines dedicated to customer
service have been installed. Many Indian banks have also adopted some of these systems. Any
customer can pick up this phone and relay his or her complains, questions, or difficulties.

64

Constraints:
The constraints that need to be removed to make our banking sector progressive are:

1. To remove inflexibility like lack of users friendly front and environment for bank officials;
2. Use of a very technical and proprietary back and software, which cannot be customized easily.
3. Users in banks as we know are not IT professionals and though they are trained in various aspects, it
really makes impractical for them to covers themselves suddenly to new upcoming systems.

Concluding Remarks:

We feel that first of all, innovation is required in banks to render better and efficient
customer services. Electronic banking enables new products and services to be geared for
specific customers. We have variety of customers today and the need of each customer is
different and varied. Looking to other economies like France and United States our banking
system has also adopted credit cards, debit cards, electronic checks, smart cards, e-cash or
cyber cash, automated teller machines, which are being extensively practiced in these
countries.

Internet banking is in vogue nowadays. It is the one of the latest example of IT in banking
sector. We can perform all the banking operations, just on the click of a button by sitting at
our homes.

Finally, watchword is share information; money and resources (human, physical, and
technological) to improve our banking sector, for better tomorrow.

65

BANKING SCENE: INDIA

Mid Term Appraisal of the 10th Plan Targets

The Mid Term Appraisal of The 10th Plan conducted by the National Development Council (NDC) noted that
in some areas of the economy is doing well and these gains need to be consolidated, but there are also
important weaknesses, which if not corrected could undermine even the performance of the economy and
problems of the economy are assumed as follows:

GDP growth has averaged 6.5% in the first three years, which is below the 10 th plan target of 8.1%. Positive
factor include:

A) Improvement in private corporate sector investments,

B) Positive international perceptions on India
C) Tolerant inflation level
D) Comfortable external payment position with substantial inflow from abroad lending to comfortable
foreign exchange position.

Industrial sector also showed signs of improvement. The ultimate aim should be to consolidate the gains
in these developments and to overcome the weaknesses in the economy. Key weaknesses are identified
as follows:

1. Aggregate Growth

Though the plan fixed a target of 8.1%, it is difficulty to achieve the target and the likely growth
rate expected to below 7% during the plan period. An important reason for the lower growth is
that investment did not increase in line with available investible resources.

66

2. Agricultural Growth:

Agriculture Growth is very poor over the last two decades. Agriculture Growth has decelerated
sharply from 3.2% to 1.9% between 1980-81 and 1995-96. There is a need to revamp the entire
strategy ad more action is called for to improve the performance in agriculture sector.

3. Infrastructure Problems:

Inadequate infrastructures in both rural and urban areas are a major factor constraining on
Indias growth. The quality of infrastructure impacts on our ability to compete globally and also
to attract Foreign Direct Investment.

4. International Development:

Owing to high oil prices, our import outgo is quite high. Since we have ample foreign exchange
reserves at the moment, the impacts of the oil prices are not passed on to the users. But if the oil
prices remain high, its impact need to be passed on to the consumer, which will lead to inflation
or fiscal deficit in the country. Another cause of concern is that the downturn in the world
economy, which will affect our export growth considerably. It s estimated that every 1
percentage point reduction in our export growth rate will reduce the growth rate of GDP by
0.2% points.

5. Social Developments:

Our social indicators are not only lower then the levels in East Asian countries, but they are
lower even in comparison with the levels achieved by these countries twenty-five years ago. The
social indicators are also show wide disparity in the gender gaps, large rural and urban
differences and wide variation across states.

6. Employment:
67

This is another area of grave concern. Studies based on data collected from organized and
unorganized sectors state that while employment may be increasing in the unorganized sector in
response to growth, there is actually a contraction in employment in the organized sector, which
is the preferred sector for employment by new entrants to the labour force.

7. Inequality and Poverty:

Though the poverty has declined the decline was less then targeted. The moderate improvement
in education ad health indicators implies that access to more productive employment remains
limited, especially in backward regions and amongst disadvantaged groups.

8. Balance Regional Development:

Regional imbalance in the development of different states presents a picture, which requires a
focused attention. Some states were able to reap the benefits of the economic reforms, but some
others were not able to do so. Even district backwardness in a well performing state also
presents a grim picture.

9. Resources in the Public Sector:

The availability of resources in the public sector to meet targeted levels of plan expenditure is an
area, which deserves attention. Neither the center nor the state have been able to mobelize the
resources needed to keep outlays in line with 10 th plan projections and this has led to significant
under funding in many sectors. The consolidated public debt of the Center and States taken
together is about 80% of the GDP, which is among the highest in emerging market economies.

10. Declaration of Dividend:

68

The RBI has decided to grant general permission to banks to declare dividends, provided they
comply with the following conditions:

Eligibility Criteria

1. Only those banks, which comply with the following minimum prudential requirements, would be
eligible to declare dividends without the Reserve Banks prior approval:

a) Capital to risk-weighted assets ratio (CRAR) of at least 9% for preceding two

completed years and the accounting year for which it proposes to declare dividends
b) Net Non-performing Assets (NPAs) of less then 7%.
In case any bank does not meet the above CRAR norm, but is having a CRAR of at
least 9% for the accounting year for which it proposes to declare dividend. It would
be eligible to declare dividend provided, its net NPA ratio is less then 5%.

2. The bank should comply with the provisions of section 15 and 17 of the Banking Regulations Act, 1949.

3. The bank should comply with the Reserve Banks prevailing regulations/guidelines, including creating
adequate provisions for impairment of assets and staff retirement benefits, transfer of profits to statutory
reserves, etc.

4. The proposed dividend should be payable out of the current years profit.

5. The Reserve Bank of India should not have placed any explicit restrictions on the bank for declaration of
dividends.

Regarding the quantum of dividend, the RBI made the following stipulations.

69

Banks, which fulfill the eligibility criteria, may declare and pay dividends, provided-

a) The divined payout ratio does not exceed 40 per cent. (Divined pay out ratio should be calculated as
a percentage of dividend payable in a year (excluding dividend tax) to net profit during the year.
b) In case the profit for relevant period includes any extraordinary profits/income, the payout ratio
should be computed after excluding such extraordinary items for reckoning compliance with the
prudential pay out ratio.
c) The financial statements pertaining to the financial year to which the dividend is declared, should be
free of any qualification by the statuary auditors, which have an adverse bearing on the profit during
that year. In case of any qualification to that effect, the net profit should be suitably adjusted while
computing the dividend pay out ratio.

The reserve bank will not entertain any application for a higher dividend payout ratio than the one for
which the banks qualify.

Door-Step Banking:

The reserve bank has advised all scheduled commercial banks to formulate a scheme for
providing services at the premises of a customer within the framework section 23 of the
banking regulation Act, 1949.
According, the banks have to formulate the scheme with the approval of their respective bank
boards and send the same for RBI approval. In the instruments, etc., from the premises of
central and state governments departments.

70

ENTRY OF LIC INTO BANKING: A WISE DECISION

LIC is a long-term player with long-term resources garnered at a low cost. It has chosen Corporation Bank and Oriental Bank of Commerce, for
investments in their equity shares. These two public sector banks have the distinction of turning out superlative performance. The business per
employee and intermediation costs for these two banks are the lowest in the industry. So are there Non Performing Assets. Corporation bank
incidentally, is the only public sector bank, where the recent voluntary retirement schemes has not been implemented, as it does not have any excess
staff to be sent out.

In the Mangalore based Corporation bank are perhaps the biggest gambles over undertaken by the two
giants. That, despite the state banks status as one of the best-managed bank in the country. Competition is
intense in both domence at last count there were 19 public sectors, 34 private sectors, and 45 foreign banks
operating in the country, and at the time of going to press, 6 companies have secured license from the IRDA
to start operations (four of these already had).

The State Bank of Indias decision may have something to do with the state of the banking business. Indian
banks have seen there interest speared- the difference between the rate at which they lend money and the rate
at which they borrow it squeezed over the last 5 years. From a healthy 4% in 1996, this has come down to
around 2.7% now.

The Life Insurance Corporations belated attempt to leverage its consideration financial and distribution
muscle could have stemmed from a desire to become more ten a insurance company. It is highly likely that
the immediate motivation was the entry of aggressive private sector player into its home-turf, insurance.
Bajpai believes the Corporation Bank deal is a win-win one. The proposed synergy between the two
efficient public sector organizations will be mutually rewarding and help LIC in marketing, servicing, and
cash flow management.

Ads Ashwin Parekh, the managing partner at consulting major author Andersen, The ongoing convergence
in (Indian) financial markets will result in the emergence of three or four large universal banks. Both LIC
and SBI WANT to be serious contenders for the post.

It is logical for the two companies to want to be universal banks. The marriage of banking and insurance,
explains Ravi Trivedi, an Executive director with consulting firm PricewaterhouseCoopers,will provide
71

banks with a source of long-term funds to manage their short-term liabilities. That both companies are
serious about their universal-banking ambitions is evident. Says Bajapai: We have put in a place a very
wide array of products and today we are truly financial supermarket.
Today 65 per cent of SBIs revenues come from banking, and almost all of LICs revenues come form insurance. Both are seeking to reduce this
proportion over the next five years. Only, SBI is seeking to become a universal bank through organic means, while LIC has started its campaign with
the acquisition of a significant stake in corporation bank.

The Same Ends:

The Life Insurance Corporations acquisition of a 27 percent stake in corporation bank for rs.470.40 crore
does make great business sense: Corporation Bank is among the better banks in the country; and a greenfiled banking entity will find it difficult to establish itself in these trying times. Bajpai has already articulated
his desire to up LICs stake in the banks once the government amends the banking companies Act, allowing
private holdings in nationalized banks to exceed 49 per cent.

Thanks to the acquisition of this stake, Indias largest insurance company now benefit from Corporation
Banks expertise in money management. LIC boasts an annual cash flow of around rs.85000 crore. The bank
can help it manage this money. Managing a sum of this magnitude will not only enable Corporation Bank
earn a large management fee, it will also help it acquire a significant clout in the money market.

By acquiring a 33% stake in corpbank securities, LIC acquires an almost in house fund manager for all the
Rs.25, 000 crore it needs to invest in government securities. And by gradually increasing its stake in the
profit making Oriental Bank of Commerce (2001 deposits, Rs. 24,680 crore; net profit, Rs.202.8 crore) to
11%, LIC has made its intent clear; to restructure itself into what Bajpa terms a transnational competitive
financial conglomerate of significance to societies.

Whos Better?

72

Discounting the overlap that must exist between the two, both companies on their existing customer base to
help them make the transformation to universal bank. SBI, for instance, can sell a clutch of offering to its
account-holders; LIC, to its policyholders. Then there are operational efficiencies to be gained.

Despite SBIs strong brand, sizeable network, and huge customer base, it does look second best (to LIC) in
the first lap of what must certainly be a long-distance race.

One reason is its decision to link the fortunes of its insurance subsidiaries, SBI-life, to the ability of its
banking-branches to sell insurance policies-the classic BANCASSURANCE model. The decision is a result
of its desire to augment its fee-based income through commission from the sale of policies.

The strategy has imposed several limitations on SBI. Its progress in the insurance business has been slow
simply because the parliament has yet to clear a bill allowing banks to sale insurance.

73

OBJECTIVE: Inventories represent investment of a firms funds. The objective of the inventory
management should be the maximization of the value of the firm. The firm should
therefore consider:
(a)

costs,

(b)

return, and

(c)

Risk factors in establishing its inventory policy.

Two types of costs are involved in the inventory maintenance:

1-Ordering costs: - Requisition, placing of order, transportation, and staff services.
Ordering costs are fixed per order size increases.
2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance and
taxes. Carrying cost increases.
The firm should minimize the total cost (ordering cost + carrying cost). The
economic order quantity (EOQ) of inventory will occur at a point where the total cost
is minimum. The following formula can be used to determine EOQ:
EOQ=(2AO/C)^1/2
Where,
A= Annual requirement.
O= Per order cost.
C= Per unit carrying cost.

74

WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH

INVENTORY?
The inventory level at which the firm places order to replenish inventory is called
reorder point. It depends on (a) the lead time and (b) the usage rate.
Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead
time0, the reorder point will be equal to:

Lead-time *Usage rate +Safety stock.

The firm should strike a trade-off between the marginal rate of return and marginal
cost of funds to determine the level of safety stock.
A firm, which carries a number of items in inventory, which differ in value, can
follow a selective control system. A selective control system, such as the A-B-C
analysis, classifies inventories in to three categories according to the value of item:
A-Category consists of highest value items,
B- Category consists of high value items,
C-Category consists of lowest value items.
More categories of inventories can also be created. Tight control may be applied for
high-value items and relatively loose control for low-value items.

75

FUNCTION OF INVENTORY CONTROL

Functions to be performed in the field of Inventory Control are:
1 Setting up norms for carrying Inventory.
2 Determining what items to be stocked.
3 Setting rules for Inventory replenishments.
4 Receiving, storing and issuing inventory items as needed.
5 Maintaining records of inventory quantities and values.
6 Identifying and deposing of slow moving, non-moving, obsolete or damage
inventories.
7 Furnishing summary information on inventory position for control purposes.
Locations of position responsible for performing each of these functions in
organization structure greatly vary from company to company.
In New Holland Fiat India determination of product material or direct work order
material (what?) to be carried in Inventory is more or less automatic result of product
design formulation and is given in material forecast for a work order. Indirect
materials consumed in manufacturing process such as electrodes, brazing alloys,
tooling etc. are usually given by process engineering or at times by design
departments.
Balance great bulk of indirect materials is made up of repair parts and general
supplies. Responsibility for specific (what?) items to be carried in inventory rests
with Works Engineering.
With respect to raw materials and purchased parts, responsibility for determining
(when?) and how much to buy is a sign to relevant product manufacturing i.e.
production planning and material planning groups. However a strict budgetary
control and allocation to specific work order control on high value items is exercised
by Inventory control department organized separately under Material Management.
Purchase department attached to manufacturing department determines (where?) to
buy.
76

Determination of indirect material (when?) and how much to buy and (where?), is
done by central group under Material Management by consolidating requirements of
all sections and while looking at consumption trends over a No. Years.
Again a strict budgetary control and control on high value items for their allocation is
exercised by Inventory control group.
Receiving and storing is done by Central Stores CSX under Material Management
Department.
Issuing Inventory is done by CSX on demand from manufacturing and is controlled
by Material Planning. Again some on
Line checks are proposed to be introduced at raising of Store Issue voucher stage
itself, for high value items so that induction is controlled strictly as per requirement
of production schedule based on lead time for manufacture to keep WIP inventory
under control.
Records of Inventory are maintained on a main frame computer centrally arranged
having shared access from all functions for their specific use.

77

The Internet in E-commerce: Inventory planning and order management

Most of the time the job of forecasting demand and replenishing inventory to suit the
demand is not accomplished in a manner that is useful. We'll tell you how to
collaborate over the Internet on order management, inventory management, and
demand forecasting, production scheduling and transportation. We'll describe how
through collaborative planning on the Internet, consumer behavior can be
communicated throughout the organization.
Scenarios: What happens when a customer contacts you and asks for a product that
he wants immediately and you discover that your warehouse doesn't stock it at that
moment? And if this happens after the item has been logged in as a confirmed order?
Are you able to respond in a timeframe that's suitable to your customer?
What happens if the customer contacts you through telesales, or through online sales
on the web? Is your staff able to respond accurately to the customer's query? In the
process are you really making money in these deals? What do you need to ensure that
you are not in a situation where you are in the dark about orders and inventories, and
maybe even customers?
We know that customer orders drive a supply chain. A primary requisite for any ecommerce business is that it employs systems that manage orders and inventory
levels efficiently.
78

When customers demand service through multiple channels, order promising,

tracking and fulfillment become more complex and intensive. Multiple channels
could mean customers calling in through the web; phone, fax or email and usually
different people attend to these calls in an organization.
Disparate order processing can lead to serious gaps in demand and fulfillment. If
order commitments are not honored throughout the enterprise a consolidated order
status at any point of time can be difficult to view and this difficulty may in turn to
be communicated to the customer.
Consolidating orders into a single interface for submission, tracking, routing,
fulfillment, and order status queries, can help all employees access vital information
from a common interface thus ensuring visibility in the entire process. And if this
visibility is in turn communicated to the customer, it means that the customer has a
complete picture of the status of his order until the final delivery. Customer order
history implies viewing and managing pending orders by status, accessing order
numbers by invoice numbers, tracking number or customer.
Order management services:
Order management services are a critical component of customer service - enabling
internal communications within an organization and facilitating collaboration among
trading partners to ensure that all customer orders are fulfilled and delivered when
promised.
79

Profitable order management features can afford the following:

Consolidated order management that lowers costs in turn.

Advanced order commitment and tracking that can in turn help improve
customer service.

Allocation of inventory and products in a profitable manner.

Automation of workflows through order management processes Order

visibility (order tracking)

Optimized price lists and customer quotes to maximize margins

Consolidation of order data to support enterprise forecasting and

replenishment initiatives

Significant increase in the visibility of demand and future requirements

Elimination of repetitive tasks and physical paper handling

Addition of the value of availability to a product

Reduced lead times, reduced administrative workloads and the use of multi
databases

Optimization of catalog price lists for profitability.

80

Inventory management:
One of the largest costs to any business is that of inventory or stock at hand. Whether
a manufacturer, retailer or distributor, the amount of inventory held directly impacts
your bottom line in more number of ways than you can imagine. Having too much
cash tied up by not stocking up on items that customers need, can have a major
impact on your business.
A product that is in excessive demand is usually extremely difficult to manage.
Supplying the right amount of products implies that an accurate demand forecast is
essential. This impacts the entire supply chain. A similar situation exists at the
warehouse level and even the manufacturer end.
Continuous replenishment in a warehouse can become a mammoth task if consumer
response is not studied accurately. To facilitate efficient consumer response based on
consumer demands, warehouse data, sales forecasts, and inventory planning, it
becomes imperative that such companies consider inventory management seriously.
Making accurate demand and supply predictions is an ideal situation that anyone in
the supply chain management arena could dream off.
Inventory management can remove barriers between manufacturer and retailers and
establish a closer relationship between them. Ideally inventory management should
be easy as the main aim is to reduce inventories. If items wanted are not at hand or
81

even if merchandize wanted is reordered often, sales will be lost to competitors.

Precise control of inventory is an essential ingredient for a successful company.
The 3 main aims in inventory management are:
1. Improved customer service
2. Reduced inventory investment
3. Increased productivity
Benefits of inventory management:

Complete control of inventory.

Complete information about the value of the inventory

Complete visibility on Quantities on hand, Quantities committed and

Quantities sold

Response time to demand changes reduced

Increased sales

Knowledge of the exact size of merchandizing inventory

Frequent analysis of purchases, sales and inventory records.

Removal of unnecessary use of warehouse space used by unneeded part of

inventory.

82

Reduction in excess merchandize stock.

Taxes and insurance premiums paid on excess merchandize inventory avoided.

By providing timely accurate information pertaining to inventory location, movement

and valuation, receipt of goods, sale and return of goods and profits you can make
sure that your inventory is visible throughout a network.
With inventory management you can set your product catalog to hide products that
are not in stock, or change prices based on the amount of products available in the
warehouse. The quantity available can be displayed to the shopper and this can
prevent unnecessary confusion when the shopper adds items not available to a
shopping cart. The store buyer can be automatically notified about low inventory
levels.
IT is a key enabler in the transformation of purchasing into a strategic business
function. The challenge is to find a way to put these technologies to use and create
value and competitive advantage.
Contact us for innovative ideas and solutions in creating and building online stores
with advanced features like Order management and Inventory management. Check
out our e-store packages.

83

Inventory Management in e-business (An EOQ Approach with Compensation

Policy)
In the past several years, we have seen very rapid growth in e-commerce. Even
though online retailing was still less than 1% of retail economy in 1999, online
retailing is forecasted to be more than $204 billion in 2004 [5]. There are several
similarities and differences between online and traditional retailing. One of the
significant differences is that there are many online retailers who do not carry any
inventory. Obviously, the stockless policy can reduce holding cost, and online
retailers can have competitive advantages from the policy.
However, it is obvious that stockouts will hinder consumers' decision making for
buying a product. There are many marketing papers studying the relationship
between stockouts and consumer response. Fitzsimons argues that when consumers
face stockouts, consumers react substantially and negatively to the stockout-they
report lower satisfaction with the decision process and show a higher likelihood of
switching stores on subsequent shopping trips [3]. Therefore, there exists trade-off
between cost savings and lost sales in the stockless policy.
Currently, many traditional retailers keep positive stock on hand except some special
cases (e.g., car dealers). However, in e-business, there are many online retailers who
are doing business without carrying any stock. They are just accepting backorders.
The inventory policies between online and traditional retailers are almost opposite.
Then, basic and fundamental questions to ask are "can the stockless policy be an
84

optimal inventory policy?" and "if it can be an optimal inventory policy, what are the
sufficient conditions for the optimality?"
It is well known that, under the EOQ model with backorders, accepting only
backorders cannot be an optimal solution unless backorder cost is equal to 0 [1, 4].
There are many papers about lost sales cases and partial lost sales cases. However,
the stockless policy has not been researched fully yet. This paper's main purpose is to
find the stockless policy's sufficient conditions for the optimality and to generate
some insights from the sufficient conditions.
To analyze and answer the above basic questions, we introduce a new inventory
policy, Compensation policy. In this policy, the only difference from the other
inventory policy occurs when we do not have any stock on hand. That means, if we
do not have any stock on hand, we will offer a compensation, R, to keep or increase
demand rate.
Therefore, we compensate consumer's waiting time with compensation due to stockouts. From customer's point of view, stock-outs will give a negative effect. Therefore,
some customers may postpone the final purchase or stop by the other stores when
they notice that they cannot buy what they want immediately. However, with the
compensation policy, the customers may still want to buy the product because of the
compensation. Furthermore, it is possible that the compensation policy may have
higher demand rate compare to the demand rate with stock. From retailer's point of
view, as long as they can make profits, they want to increase demand rate. Therefore,
this inventory policy is beneficial for both customers and retailers as long as they can
85

get benefits from the policy.

To implementing this policy is not difficult. In traditional retailing, if a store will post
its compensation rate with waiting time, it may be attractive some customers who are
not interested in purchasing the product at that time. In e-business retailing, the
policy can be implemented more easy way. Due to the advanced web-technology, we
can change our products price very easily. Therefore, a store will announce the
compensation immediately when its inventory is out of stock.
Under this compensation policy, there is also trade-off. Because we will have an
additional compensation cost, our total cost will be also increased. However, due to
the policy, if the demand rate with stock-outs will be increased, our total profit will
be increased also. Furthermore, we may have different optimal inventory policy (e.g.,
stockless policy) under certain conditions.
In this paper, we consider two types of compensation. One is flat rate and the other is
time dependent compensation. Under the flat rate compensation policy, we will offer
a fixed compensation regardless of waiting time. Therefore, during the stock-outs
period, all customers who placed backorders get same fixed compensation. On the
other hand, under the time dependent compensation policy, customers will be
compensated according to waiting time.
To investigate and find sufficient conditions for each inventory policies, we
formulate Compensation models based on the EOQ model with backorders.
However, there are several differences. First, we generalize the assumption about
demand rate. Under the EOQ model with backorders, the demand rate is always
86

same. However, in our model, we can have different demand rates between with
stock and with stock-outs. Second, if the demand rates are not same, just minimizing
average inventory cost will not give us the solution that will maximize profit.
Therefore, there are two ways to solve this problem. One is maximizing profit
function, and the other is minimizing average inventory cost including the effect of
different demand rate. In this paper, we introduce new cost, opportunity cost. This
cost represents and takes into account changes of profit due to the difference of
demand rate. Therefore, in our model, minimizing the average inventory cost
guarantee that the solution from our model is also maximizing the profit function.

Our major findings from our inventory policy and models are as followings. First, the
EOQ model with backorders and its solution are special case of our model. This
result is obvious. When we will not offer any compensation and have same demand
rates between with stock and with stock-outs, our model is exactly same as the EOQ
model with backorders. Second, our model also generalizes the EOQ model with
backorders in case of partial lost sales. This is also our model's special case when we
will not offer any compensation and have partial lost sales. Third, we found that,
without any compensation, the stockless policy cannot be an optimal inventory
policy unless backorder cost is zero.
Therefore, with no compensation, we can have only positive stock on hand or
mixture inventory policy according to our cost structure and demand rates. Fourth,
the stockless policy can be an optimal solution only with positive compensation
87

under certain conditions. Fifth, we derive sufficient conditions for the three optimal
inventory policies, which are positive stock on hand, mixture inventory, and stockless
inventory policy. These sufficient conditions are simple and easy to understand.
Finally, we show the optimal solutions for each case. Therefore, given cost structure
and demand rates for a product, we can tell what is the optimal inventory policy and
what is the exact solution to minimize the average inventory cost which is equivalent
to maximizing profit function. Throughout the rest of this paper, we will review the
traditional EOQ model with backorders, formulate Compensation models, analyze
these Compensation models, find insights from our research, and discuss further
research issues. To our knowledge, except the traditional EOQ with backorders, all
models are new and also the optimal solutions are new.

88

RESERACH METHODOLOGY
It is the arrangement of the conditions for collection and analysis of data in a
manner that aims to combine relevance to the New Holland Fiat India purpose with
economy in procedure.
The New Holland Fiat India is explanatory in the beginning as the secondary data is
collected mostly from the higher management and some from middle management.
This information is able to give knowledge about the company and its share in the
market.

SOURCES OF DATA
Both primary and secondary data were collected to meet the objective; the data is
collected for the last three years from the annual reports of the new holland fiat
india. Due to non-availability of the accounts of sepaInventoryn units. I measure the
performance on the base of all aggregate units.
Data is taken as per the requirements of the study of the inventory management.
Secondary data is used for it. Primary data is collected for the purpose of the
theoretical part.

89

CONCLUSION
1. By studying last two years performance of the company, we say that the
working capital of the company is increasing.
2. The operational Inventory performances of the company are continuously
rising because of the increase in the sales of the companies products.
3. The Debt Equity Inventory of the company is increasing as company is now
paying its debt due to which the company Liquidity Inventory is falling.

90

FINDINGS
Formation of specific group in each area to identify the wastage elements and
seek participation of all.
Identification of wastage.
Formulation of action plan to eliminate/minimize wastage.
Review of status.
Identification of corrective actions and their implementation.
Highlighting the gains.

91

LIMITATION
The study is limited to two month only.
Price level changes are not considered.
Time is short for deep research.
Separate records of the all units are not available.
No comparison made with other firms Inventory while during the study
period and making conclusion time.
The readjusted and regroup figure slightly affects the Inventory figures.
Study is limited with the one unit of New Holland Fiat India Industries
limited.
The data is used in the project have been taken from annual report only.
Hence, grouping and sub grouping and annuliasation of data may slightly
affect the results.

92

SUGGESTIONSD
Although new holland fiat india, has satisfied the Inventory. The following are the
suggestion being made out by me as observed during study of the performance
through Inventory Management:
Company should increase its sales of all the production units with increase
in the sales of the company that can be able to increase its financial
position.
Company should decrease the operating expenses to increase its operating
profit.
Maximize the production capacity.
Maintain the amount of current sales level and try to increase it.
Maximize the utilization of fixed assets and working capital.
All other management, personal and administrative suggestion to be
incorporated.
To follow the strict credit collection policy.
Reduce the current assets and quick assets Inventory to maintain the
standard Inventory.
Cash Inventory performance is poor. So make policies to improve it.
Return on investment is in satisfactory position and they try to maintain it
in future.
Try to start those companies, which are closed due to non-availability of
funds.
Try to best utilization of the available resources.
Try to maintain the standard Inventory in the financial Inventory.

93

BIBLIOGRAPHY
Books
Manuals and Files of New Holland Fiat India.

Deep & Deep Publication Pvt. Ltd.

Year -2005.

Principles and Techniques of Personnel Management Udai Pareek Himalya

Publishing House Delhi
Year -1997
WEB. Sites
www.google.com /

94