CONTENTS PAGE NO.S CHAPTER—I CHAPTER—II CHAPTER—III CHAPTER—IV CHAPTER—V Introduction to the topic Conceptual background Need or significance of the study Objectives of the study Research design Industrial profile Organization profile Data analysis and interpretation 1
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CONTENTSPAGE
NO.S
CHAPTER—I
CHAPTER—II
CHAPTER—III
CHAPTER—IV
CHAPTER—V
Introduction to the topic
Conceptual background
Need or significance of the
study
Objectives of the study
Research design
Industrial profile
Organization profile
Data analysis and
interpretation
Findings
Suggestions
Bibliography
1
CHAPTER-I
INTRODUCTION
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INTRODUCTION
Material is a very important factor of a production. It includes physical
commodities used to manufacture the final product. It is the inventorial and does not get
waste and exhaust with the passage of time as labor is wasted with the passage of time
whether in used or not. The other feature of material is that, is firm, where as other
elements of cost like labor and other services can’t be easily varied once they are
established. From this it can be concluded that material is most flexible on controllable
input. It is the first and most important element of cost. Materials account for nearly
60% of the cost of production which is clear from analysis of financial statements of a
large number of private and public sector organizations.
According to the Indian association of materials management of 64 paisa in a rupee
are spent on materials by Indian industries, 16 paisa on and the rest of 1 rupee of cost is
spent on over heads. Importance of material control lies in the fact that any saving made
in the cost of materials will go a long way in reducing the cost of production and
improving the profitability of the concern. Studies by experts in this field have
highlighted the facts that if an organization can affect 5% saving in material cost, it
would be as good as increasing the production or sales by about 36%. Proper control of
material is necessary from the time orders for purchasers of materials are placed with
suppliers until they have been consumed the object of material control is to attack
material cost on fronts, so that the cost of material may be reduced. In other words,
efforts are to be made to reduce the cost of materials when it is purchase, stored and
used
Before coming to the discussion of material control, we may clear that purchase of
materials will include both direct and indirect materials. Direct materials and indirect
materials are both treated as stores items, where as stock of finished goods id not treated
as a stores item, direct and indirect materials purchased for stock purpose to be issued to
different jobs, works orders of departments as and when required. On the other hand,
finished goods are treated as stock. We may also refer to the commonly used term
“INVENTORY” which includes the stock not only of raw materials but also stores and
spares, work-in-progress and finished goods. The stock materials are only a part of the
inventory held by a manufacturing unit. Every enterprise needs inventory for smooth
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running of its activities. It serves
As a link between production and distribution process. There is generally a time lag
between the recognition of a need and its fulfillment. The greater the time lag, the higher
requirements for inventory. It also provides a question for future price fluctuations.
The investment in inventories constitutes the most significant part of current assets/
Working capital most of the undertaking. Thus, it is very essential to have proper control
and management of inventories.
The purpose of inventory management is to ensure availability of materials in
sufficient quantity as and when required and also to minimize investment in inventories.
MEANING AND NATURE OF INVENTORY
In accounting language, inventory may mean the stock of finished goods only. In
manufacturing concern, it may include raw materials, work-in-process and stores etc.
Inventory includes the following things.
a) Raw Material:
Raw material form a major input into the organization. They are required to carry out
production activities uninterruptedly. The quantity of raw materials required will be
determined by the rate of consumption and the time required for replenishing the
supplies. The factories like the availability of raw materials and government regulations
etc, to affect the stock of raw materials.
b) Work in Progress:
The work in progress is that stage of stocks which are in between raw materials and
finished good. The quantum of work in progress depends up on the time taken in the
manufacturing process. Together the time taken in manufacturing, the more will be the
amount of work in progress.
c) Consumables:
These are the materials which are needed to smoother the process of production. These
materials do not directly enter production but they act as catalysts. Consumables may be
classified according to their consumption and critically.Generally, consumable stores do
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not create any supply problem and firm a small part of production cost. There can be
instances where these materials may account for much value than the raw materials. The
fuel oil may form a substantial part of cost.
d) Finished goods:
These are the goods which are ready for he consumers. The stock of finished goods
provides a buffer between production and market. The purpose of maintaining inventory
is to ensure proper supply of goods to customers.
e) Spares:
The stocking policies of spares differ from industry to industry. Some industries like
transport will require more spares than the other concerns. The costly spare parts like
engines, maintenance spares etc are not discarded after use, rather they are kept in ready
position for further use. All decisions about spare are base o the financial cost of
inventory on such spares and the costs that may arise due to their non-availability.
BENEFITS OF HOLDING INVENTORIES
Although holding inventories involves blocking of a firm's funds and the costs
of storage and handling, every business enterprise has to be maintaining certain level of
inventories to facilitate uninterrupted production and smooth running of business.
In the absence of inventories a firm will have to make purchases as soon as it receives
order. It will mean loss of time and delays in execution of orders which sometimes may
causes loss of customers and business. A firm also needs to maintain inventories to
reduce ordering cost and avail quantity discounts etc.
There are three main purposes of holding inventories.
The transaction motive: This facilitates continuous production and timely execution of
sales orders.
The precautionary motive: This necessitates the holding of inventories for meeting the
unpredictable changes in demand and supplies of materials
The speculative motive: This induces to keep inventories for taking advantage of price
fluctuations, saving in re-ordering costs and quantity discounts
5
RISK AND COSTS OF HOLDING INVENTORIES
The holding of inventories involves blocking of a firm's funds and concurrence of
capital and other costs.
The various costs and risk involved in holding inventories are:
i. Capital Costs: Maintaining of inventories results in blocking of the firms financial
resources. The firm has therefore to arrange for additional funds to meet the cost of
inventories.
The fund may be arranged from own resources of firm outsiders. But in both the case,
the firm incurs a cost. In the former case, there is an opportunity cost of investment
while in the later case; the firm has to pay interest to the outsiders.
ii. Storage and handling costs: Holding of inventories also involves cost on
storage as well as handling of materials. The storage of costs includes the rental of the
go down, insurance charges etc.
iii. Risk of price decline: There is always a risk of reduction in the prices of
inventories by the suppliers in holding inventories. This may be due to increase market
suppliers, competition or general depression in the market.
iv. Risk of obsolescence: The inventories may become obsolete due to improved
technology, change in requirements, change in customer tastes etc.
v. Risk determination in quality: The quality of materials may also deteriorate
while the inventories are kept.
TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT
A proper inventory control not only helps in solving the actual problem of liquidity but
also increase profits and causes substantial reduction in the working capital of the
concern.
1. Determination of stock levels:
Carrying of too much and too little of inventory is determined to the firm. If the
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inventory level is too little, the firm will face frequent stock outs involving heavy
ordering cost and if the inventory level is too high it will be unnecessary tie up of
capital.An efficient inventory management requires should maintain an optimum level of
inventory where inventory costs are the minimum and at the same time there is no stock
out which may result in loss or shortage of production.
a)Minimum stock level:
It represents the quantity below its stock of item should not be allowed to fall.
Lead-time: A purchase firm requires some time to process the order time is also
required by the supplying firm to execute the order. The time taken in processing the
order and then executing it is known as lead time.
Rate of consumption: It is the average consumption of materials in the factory. The
rate of consumption will be decided on the basis of past experience and production
plans.
Nature of material: The nature of material also affects the minimum level if a
material `is required for such material.
Minimum stock level can be calculated with the help of following formula.
Minimum stock level = Re ordering level -
(Normal consumption x normal reorder period.)
b) Re ordering level:
When the quantity of materials reaches at a certain figures then fresh order is sent
to get material again. The order is sent before the materials reach minimum stock
level. Re – ordering level is fixed between minimum level and maximum level.
Re-ordering level = Maximum consumption x Maximum Re- order period.
c) Maximum Level:
It is the quantity of materials beyond which a firm should not exceed its stocks. If
the quantity exceeds minimum level limit then it will be overstocking. Overstocking
will mean blocking of more working capital, more space for storing the materials, more
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wastage of materials and more chances of losses from obsolescence.
Maximum Stock Level = Re-ordering Level + Re-order Quantity –
(Minimum consumption x Minimum Re-order period)
d) Danger Stock Level:
It is fixed below minimum stock level. The danger stock level indicates emergence of
stock position and urgency of obtaining, fresh supply at any cost.
Danger stock level = Average Rate of consumption x emergency delivery time
e) Average stock level:
This stock level indicates the average stock held by the concern.
Average stock level = Minimum stock level + ½ x Re-order quantity.
2. Determination of safety stocks:
Safety stock is a buffered to meet some unanticipated increase in usage. The demand
for materials may fluctuate and delivery of inventory may also be delayed and in such a
situation the firm can face a problem of stock out.
In order to protect against the stock out arising out of usage fluctuation, firms usually
maintain some margin of safety stock. Two costs are involved in the determination of
this stock that is opportunity cost of stock outs and the carrying costs.
If a firm maintains low level of safety frequent stock outs will occur resulting into the
larger opportunity costs. On the other hand, the larger quantity of safety stock involves
carrying costs.
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ECONOMIC ORDER QUANTITY:
The quantity of material to be ordered at one time knows an economic ordering
quantity. This quantity is fixed in such a manner as to minimize the cost of ordering and
carrying costs.
Total cost off material = Acquisition cost + carrying costs + ordering cost.
Carrying cost:
It is the cost of holding the materials in the store.
Ordering cost:
It is the cost of placing order for the purchase of materials.
EOQ can be calculated with the help of the following formula
EOQ=√2RCO/CH
Where R = Annual Consumption
CO = Ordering Cost
CH = Carrying Cost
4. A-B-C Analysis: (Always better control analysis)
Under ABC analysis, the materials are dividing into 3 categories viz. A, B and C
Almost 10%of the items contribute to 70% of value of consumption and this category is
called 'A' category. About 20% of the items contribute about 20% of value of
consumption and this is known as category 'B' materials.
Category 'C' covers about 70% of items of materials which contribute only 10% of
value of consumption.
5. JIT Analysis (Just in time):
The goal of just in time analysis is manufacturing is not new. The basic desired for
continued reduction material resources requirements is quiet common. The means by
which goal of JIT is now being accomplished is considered to be new. The primary goal
of JIT is to achieve zero inventories with in an organization as well as through out entire
supply chain. JIT the key theme is to work with out buffer stock/with minimal buffer
stock.
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6. Inventory Turn over ratio:
Inventory turn over ratios is calculated to indicate whether inventories have been used
efficiently or not. The inventory turnover ratio also knows as stock velocity is normally
calculated as sales/ average inventory of cost of goods sold/average inventory. Inventory
conversion period may also be calculated to find the average time taken for clearing the
stocks. Symbolically
Cost of goods sold
Inventory Turnover Ratio = -------------------------
Average inventory at cost
( Or )
Net sales
= ------------------------
Average inventory
Days in a year
Inventory conversion period = ----------------------------
Inventory Turnover Ratio
7. Classification and codification of Inventories:
The inventories should first be classified and then code numbers should be assigned for
their identification. The identification of short names is useful for inventory
management not only for large concerns but also for small concerns. Lack of proper
classification may also lead to reduction in production.
Generally, materials are classified accordingly to their nature such as construction
materials, consumable stocks, spares, lubricants etc, after classification the materials are
given code numbers. The coding may be done alphabetically or numerically. The later
method is generally used for coding.
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The class of materials is assigned two digits and then two or three digits are
assigned to the categories of items divided into 15 groups. Two numbers will be
category of materials in that class. The third distinction is needed for the quality of
goods and decimals are used to note this factor.
8 Valuation of inventories- Methods of valuation:
FIFO method
LIFO method
Base Stock method
Weighted average price method
CRITERIA FOR JUDGING THE INVENTORY SYSTEM
While the overall objective of the inventory system is to minimize the cost to the
firm at the risk level acceptable to management, the more proximate criteria for judging
the inventory system are
Comprehensibility
Adaptability
Timeliness
Areas of improvement:
Inventory management in India can be improved in various ways. Improvements
could be affected through.
Effective Computerization:
Computers should be used merely for accounting purposes but also for improving
decision making. Review of Classification: ABC & FSN classification must be
periodically reviewed.
Improved Co-ordination: Better co-ordination among purchase, production, marketing
and finance department will help in achieving greater efficiency in inventory
management.
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Development of Long Term Relationships:
Procedures for disposing obsolete/surplus inventories must be simplified.
Adoption of Challenging Norms:
Companies should set benchmarks with global competitors and use ideas like JIT
to improve inventory management.
Valuation of inventories- methods of determination
Although the prime consideration in the valuation of inventories is cost, there are
a number of generally accepted methods of determining the cost of inventories at the
close of an accounting period. The most commonly used methods are First-in-first-out
(FIFO) average, and Last-in-first-out (LIFO). The selection of the method for
determining cost of inventory valuation is important for it has a direct bearing on the
cost of goods sold and consequently on profit. When a method is selected, it must be
used consistently and cannot be changed from year to year in order to secure the most
favorable profit for each year.
1. The FIFO METHOD (FIRST-IN-FIRST-OUT METHOD):
Under this method it is assumed that the materials or goods first received are the
first to be issued or sold. Thus, according to this method the inventory on a particular
date is presumed to be composed of the items, which were acquired most recently.
Advantages: The FIFO method has the following advantages
It values stock nearer to current market prices since stock is presumed to be
consisting of the most recent purchases.
It is based on cost ad; therefore, no unrealized profit enters into the financial
accounts of the company.
The method is realistic since it takes into
Account the normal procedure of utilizing or selling those materials or goods,
which have been longest in stock.
Disadvantages: The method suffers from the following disadvantages.
It involves complicated calculations and hence increases the possibility
of clerical errors.
Comparison between different jobs using the exhausted the supply of same type
of material becomes some times difficult. A job commenced a few minutes
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after another job may have to bear an entirely different charge for materials
because the first job completely exhausted the supply of materials of the
particular lot.
The FIFO method of valuation of inventories is particularly suitable in the following
circumstances:
The materials or goods are of a perishable nature.
The frequency of purchases is not large.
There is only moderate fluctuation in the prices of materials or goods purchased.
Materials are usually identifiable as belonging to a particular purchase lot.
2. THE LIFO METHOD (LAST-IN-FIRST-OUT)
This method is based on the assumption that last time of material or goods
purchased are the first to be issued or sold. Thus, according to this method inventory
consists of items purchased at the earliest cost.
Advantages: This method has the following advantage.
It takes into account the current market conditions while valuing materials
issued to different jobs or calculating the cost of goods sold.
The method is based on cost and therefore no unrealized profit or loss is made
on account of use of this method.
The method is most suitable for materials which are of a bulky and non-
perishable type.
3. BASE STOCK METHOD:
This method is based on the contention that each enterprise maintains at all time a
minimum quantity of materials or finished goods in its stock. This quantity is termed as
base stock. The base stock is deemed to have been creating out of the first lost
purchased; therefore it is always valued at this price and is carried forward as a fixed
asset. Any quantity over and above the base sock is valued in accordance with any other
appropriate method. As this method aims at matching current costs to current sales, the
LIFO method will be most suitable for valuing stock of materials or finished good other
than base stock. The base stock method has the advantage of charging out
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materials/goods at actual cost. Its other merits or demerits will depend on the method
which is used for valuing materials other than the base stock.
4. WEIGHTED AVERAGE PRICE METHOD:
This method is based on the presumption that once the materials are put into a
common bin, they lose identity. Hence, the inventory consists of no specific batch of
goods. The inventory is thus priced on the basis of average prices paid for the good,
weighted according to the quantity purchased at each price.
Weighted average price method is very popular on account of its being based on
the total quantity and value of materials purchased besides reducing number of
calculations. As a matter of fact the new average price is to be calculated only when a
fresh purchase of materials is made in place of calculating it very now and then as is the
case with FIFO, LIFO methods. However, in case of this method different prices of
materials are charged from production particularly when the frequency of purchases and
issues/sales is quite large and the concern is following perpetual inventory system.
5. INVENTORIES VALUED AT STANDARD COST:
A very useful method of valuing inventories is at standard cost. With a
standard cost system there is no need for spending a great deal of time and money
tracing unit cost through perpetual inventory record.
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ACQUIRING RAW MATERIALS FROM THE STORE ROOM
Recognized
need
for materials in
production
Stores
requisition Materials are sent to work place
Notifies
storeroom
Clerk of
need.
Requisition is recorded in
1. Requisition summary used to record general
ledger Entry transferring R.M's to WIP.
2. Perpetual inventory records.
3. Job cost sheets used when manufacturing is of a
job Shop variety and costs must be kept by individual
jobs.
4. Departmental cost records used to accumulate
materials Costs by responsibility centers and to
determine Costs for individual production process.
RECORDING THE STORES REQUISITION – THE GENERAL
LEDGER:
The stores requisition is recorded in the general ledger and in
various subsidiary ledgers. Among the usual subsidiary ledgers are
the perpetual inventory cards, departmental cost records, and job
cost sheets.
INTERNAL INDENT Document No.: ST/F/1506
Revision No. : 02,Dated 01-05-2000
Page No. : 1 of 1
Section: Unit: Date: S.No.
15
S.No. Computer
Code No.
Description
of the Material
Quantity Purpose
Signature
Indenter Approved Received
In the general ledger, stores requisition are recorded by a transfer
from raw materials inventory (a credit) to work in process (a debit)Each stores
requisition is not the subject of a general ledger entry. The stores requisition for a month
are totaled, and this total is the subject of the above general ledger entry. Ordinarily each
stores requisition is recorded in a requisition summary, which is totaled each month to
determine the dollar amount of the general ledger entry. A requisition summary
shown above provides departmental distinctions as well as distinction between direct
and indirect materials.When the general ledger contains only one work in process
account and one factory overhead account the monthly entry from the requisition
summary would be:
Dr. Work in process (for direct materials)
Dr. Factory overhead (for indirect materials)
Cr. Raw materials inventory.
When the general ledger contains departmental account the monthly entry from the
16
requisition summary would be:
Dr. Work in process – I
Dr. Factory overhead - I
Dr. Work in process – II
Dr. Factory Overhead – II
Cr. Raw materials inventory
As shown above, there is need only for physical quantities since the inventory
value is the physical quantity multiplied by the standard cost. With the cost and value
columns disposed off, a perpetual inventory card can include additional data such as
quantities on order, quantities reserved, and quantities available. These additional data
are very useful for inventory and production control purposes. On the basis of a few
calculations concerning actual units cost, inventories at standard cost could easily be
converted into inventories on a FIFO, a LIFO or an average cost basis.
Inventory of Obsolescence:
Obsolescent inventories cannot be used or disposed off at values carried on the
books. Frequent reviews should be made of all inventories and when obsolescence is
indicated a request for revaluation should be prepared for approval by management. The
difference between original and obsolete value should be recorded by a charge to an
operating account. Inventory obsolescence, and a credit to inventory. If the material is
scrapped, this will be for the full inventory of the material. If it is anticipated that the
material can be sold at reduced value or used in areas where it will be worthless than its
original value, the entry would be only for the amount of write down. Some companies
carry a salvage inventory and transfer to its materials which may be sold or used at
reduced values.
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CHAPTER—II
RESEARCH METHODOLOGY
NEED OF THE STUDY:
For the purpose of the study, Kusalava International Ltd. is selected, as being it is
a monopoly. Sponge iron manufacturing unit in the country at the time when it was
established in 1980 as a public sector unit, specially to meet raw materials requirements
18
of mini steel plants. It seems that one of the important problems faced by public
enterprises id ineffective control measures especially out dated and unused inventory
control measures. Therefore, it is felt quite appropriate to make a micro study on
inventory control methods and policies of the Kusalava International Ltd. So as to find
out the responsible factors that caused for high inventory cost.
SCOPE AND SIGNIFICANCE OF THE STUDY:
A study on Inventory management was carried out at Kusalava International
Limited for the months of May to June. The study was done for the raw materials and
cylinder liners for the plant situated at Adavinekkalam. The study was conducted in
consultation with plant and head office executives.
Inventory Management is essential for the viability and long run survivalist of business
as it is most important component of Current Assets. Being an outside research the
study will definitely make an impression in term of much useful to the production
department and top level management to review proceedings of inventory management
department. Thereby facilitate the control measures to be taken if any deviations found
in due course.
As an academician the study will enhance an understanding on the practical
aspects of business and inventory management in particular. Even though the study
scope is limited, the findings will help the managers to examine day to day as well the
periodical proceedings.
OBJECTIVES OF THE STUDY:
To understand the importance of Auto component Industry in India.
To study about the tradeoffs between costs and benefits associated with the
level of inventory.
To study the common techniques for managing inventory-ABC system, the
basic economic order quantity model, the reorder point and the safety stock.
To identify the problems if any, and to provide appropriate suggestions for the
improvement of the Inventory management
DATA COLLECTION:
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Methodology is a systematic procedure of collecting information in order to analyze
and verify a phenomenon. The collection is done through two principle sources viz.
Primary data
Secondary data
1. Primary Data:
It is the information collected directly without any reference. In this study it was mainly
through interviews with concerned officers and staff, either individually or collectively.
Some of the information had been verified of supplemented conducting personal with
observation.
The data includes:
Interviews with Kusalava International Ltd. employees.
Organization chart has been drawn through observation.
2. Secondary data:
The secondary data was collected from already published source such as Pamphlets,
annual reports, returns and international records.
The data includes:
Methodology under study has been collected from the annual reports of Kusalava
International Ltd., in house magazines, Publications, books, Journals on Management
and Websites.
PERIOD OF THE STUDY:
To analyse the inventory management here we have taken the data
from the companies annual reports during the period 2006-2010.
LIMITATIONS OF THE STUDY:
The study was conducted with the data available and the analysis was made on
the basis of secondary data only.
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The time for data collection is only 2 months.
The availability of data pertaining to 5 years is one of the constraints.
As there is more dependency on secondary data realistic conclusion may not be
possible to be made.
The study was conducted within the selected unit of Kusalava International
Limited, Adavinekkalam.
PLAN OF THE STUDY:
First chapter deals with introduction regarding inventory management, objectives
and methodology. Present in chapter-2 and chapter-3 gives a brief profile of
organization , data analysis and interpretation. Present in chapter-4, the 5 and the last
chapter is findings and suggestions .
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CHAPTER—III
INDUSTRIAL PROFILE
ORGANISATIONAL PROFILE
INDUSTRY PROFILE
AUTOMOBILE INDUSTRY:
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The Indian automotive market managed to stand to the vagaries of the economic melt-
down to show slightly positive growth during fiscal 2008-09. Overall vehicle sales at
97.23 lakh grew 0.71 per cent from 96.54 lakh units in 2007-08.
AUTOMOBILE DOMESTIC SALES TRENDSNo. OF VEHICLES
Category 2007-08 2008-09 DIFF GROWTH %
Passenger
Vehicles
15,49,882 15,51,880 1998 0.13
Commercial
Vehicles
4,90,494 3,84,122 -10637 -21.69
Three Wheelers 3,64,781 3,49,719 -15062 -4.13
Two Wheelers 72,49,278 74,37,670 188392 2.6
Grand Total 9654435 9723391 164691 0.71
COMMERCIAL VEHICLES SEGMENT:
The Indian Automobile sector is presently going through a phase of slow down for the
last two years i.e. 2007-08 and 2008-09. The sector witnessed a net decline in produc-
tion in 2007-08 of (-) 2.29% and in 2008-09 the sector posted a modest growth in pro-
duction at 2.96% over 2007-08. The worst affected segment in the auto sector is the
Commercial Vehicle segment, which has witnessed a production decline by almost 24%
in 2008-09 over the previous year. The medium and Heavy Commercial vehicle cate-
gory has been the hardest hit which has seen a decline in production by 35% in 2008-09.
The exports of CVs have also plummeted. The department of heavy industry has taken
the initiative to ensure that under the Stimulus Package-II announced by the Govern-
ment, the state governments will be allowed to buy transport vehicles (buses) under the
JNNURM programmed. Among commercial vehicle makers, all major players saw sub-
stantial fall in volumes. Market leader Tata Motors with a 60 per cent plus share,
showed 22 per cent drop in numbers at 2.34 lakh units while Ashok Leyland showed 37
23
per cent drop at 47,632. Eicher’s sales volume fell 37 per cent at 17,341 units and Force
Motors was down 28 per cent at 7,819 units in 2008-09. “The freight movement is un-
likely to improve this fiscal which will impact truck sales.
AUTO COMPONENTS INDUSTRY:
In 2008-09, the automobile industry grew 2.96 % but the components industry outpaced
the vehicle manufacturers with a 6 per cent growth. The total value of auto parts sold is
Rs. 76,300 crore from Rs 72,000 crore. During the year both automotive industry and
the auto-component industry adversely affected by a unprecedented increase in the
prices of major input materials along with the pricing pressures due to the economic
slowdown, put significant pressures on the margins of the automobile manufacturers and
the auto-component manufacturers.
PROSPECTS:
As per SIAM estimates, passenger vehicles are expected to record a sales growth of 3-5
per cent in FY09-10, commercial vehicles at 7-10 per cent (over a low base of the previ-
ous fiscal), two-wheelers at 0-5 per cent and three-wheelers at 5-8 per cent. According to
SIAM in the fiscal 2009-10, passenger vehicles are expected to have sales of 18.9 lakh
to 19.2 lakh units. Commercial vehicles have been forecast to clock sales of 5.2-5.4 lakh
units, while two-wheelers sales have been pegged at 83.4-87.6 lakh units .The Indian
auto components industry has an estimated production of US$ 10 billion. The spiraling
demand from domestic and international auto companies has seen this sector emerging
as one of the fastest growing manufacturing sectors in India and globally.
The Auto components industry is predominantly divided into five segments:
Engine parts
Drive Transmission & Steering Parts
Suspension & Brake Parts
Electrical Parts
Body and chassis
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According to the ACMA (Auto Components Manufacturers Association of India), the
sector is set to grow at a CAGR of 15 per cent till fiscal 2012. This sector is now work-
ing towards an open market. A large number of joint ventures with leading global manu-
facturers have already been set up in the auto-components sector. And with India esti-
mated to have the potential to become one of the top five auto component economies by
2025, the pace is expected to pick up even further.
Moreover the automotive components industry is perceived as a lucrative sector with
tremendous potential for foreign direct investments. The year 2006-07 saw the auto
components sector soar with exports touching the US$ 3 billion mark and investments
continuing unabated. The ACMA estimates the global sourcing of components from the
country to double from US$ 2.95 billion to US$ 5.9 billion in 2008-09, and touch US$
20 billion in seven years owing to the huge and growing markets both within India, and
overseas.
Domestic Investments
The market is so large and diverse that a large number of players can be absorbed to ac-
commodate buyer needs. The sector not only has global players looking to invest and
expand but leading domestic component companies are also pumping in huge sums into
expanding operations:
Bharat Forge invested US$ 135 million in its Pune plant for increasing domestic capac-
ity to 240,000 tones.
Amtek Auto is expanding capacity of its castings unit to 70,000 tonnes per an-
num (TPA) from 30,000 TPA.
Sona Koyo plans to have capacity of three million pieces of manual steering
gears, 500,000 units of hydraulic power steering and 250,000 units of electronic
power steering (EPS), apart from doubling the capacity of steering columns from
one million parts.
Rico Auto is investing US$ 23 million to expand capacity.
Apollo Tyres plans to invest US$ 469.58 million in the next three years to in-
crease its production capacity both in India and abroad.
25
Kesoram Industries is planning to set up three new tyre units in the northern state
of Uttaranchal to take its tyre-making capacity to 734 metric tonnes per day.
With such accelerating interest by both domestic and foreign investors, the Indian auto
component industry is set to growth exponentially.
Foreign Investments
India enjoys a cost advantage with respect to casting and forging as manufacturing costs
in India are 25 to 30 percent lower than their western counterparts. Seeing the growing
popularity of India in the automotive component sector (a whopping US$ 530 million in
terms of foreign direct investment), the Investment Commission has set a target of at-
tracting foreign investment worth US$ 5 billion for the next five years to increase India's
share in the global auto components market from the existing 0.4 per cent to 3-4 per
cent.
Chrysler is setting up a local sourcing unit in Chennai and is expected to start
sourcing for its global plant by next year.
Pal finger AG, the Austrian hydraulic lifting, loading and handling systems manu-
facturer, has joined hands with Western Auto LLC, Dubai, the vehicle dealership
arm of ETA Star group, have invested US$ 1.7 million to set base in India.
IFCI Venture Capital Funds Limited is launching a private equity fund in associa-
tion with German consultancy UBF-B worth US$ 144.67 million focused en-
tirely on domestic automotive components industry.
Auto parts maker Robert Bosch of Germany will invest US$ 201.4 million in its
Indian subsidiaries over the next two years.
Japan’s Omron Corporation, the leading manufacturers of automation components
has set up the company's first production base on the subcontinent.
Swiss company Reiter Automotive India aims to increase its production capacity
in India and extend its product range to heat shields
Fiat is setting up a group purchasing office in India as part of its strategy to cut
costs by buying more components from low-cost centers such as India and
China.
26
Daimler, Hero joint venture will invest US$ 1.1 billion in 5 years to manufacture
light and medium CVs initially, and heavy-duty vehicles by 2012.
Destination India
The ACMA-McKinsey Vision 2015 document forecasts the potential for the Indian auto
component industry to be US$ 40-45 billion by 2015. Investments and exports in this
segment are witnessing continuous growth. Global automobile manufactures see India as
a manufacturing hub for auto components and are rapidly ramping up the value of com-
ponents they source from India due to:
The cost competitiveness in terms of labor and raw material
Its established manufacturing base
Fine quality of components manufactured in India (used as original components
for vehicles made by General Motors, Mercedes, IVECO and Daewoo among
others).
As a result Japanese and British component manufacturers are seeking joint-ventures in
India. Delphi, the auto component division of General Motors is planning to set up
plants in India. Robert Bosch, auto parts maker of Germany has relocated manufacture
of certain products to MICO, India. Crosslink International Wheels, Malaysia's leading
automobile security provider has set up its manufacturing unit at Baddi to make India
the export hub for the SAARC region.
Foreign auto makers, including Ford Motor Co., General Motors Corp., Honda Motor
Co., Toyota Motor Corp., DaimlerChrysler AG and Hyundai Motor Co., are all looking
to increase their presence in India and use it as an export hub.
The Indian automotive export industry has made a global mark. Both the automobile in-
dustry along with the component industry is contributing to India’s overall export effort.
According to ACMA, more than a third (36 per cent) of Indian auto component exports
head for Europe, with North America featuring a close second at 26 per cent.
The Indian automotive industry has grown at a CAGR of 14 percent p.a. over the
last 5 years sales of vehicles reaching around 9 million vehicles in 2005-06. It has the
potential to emerge the largest in the world. Presently, India is:
27
2nd largest two-wheeler market in the world
4th largest commercial vehicle market in the world
11th largest passenger car in the world and is expected to be the 7 th largest
market.
The industry has emerged as a key contributor to the Indian economy.
Inventory conversion period = --------------------------------
Inventory Turnover Ratio
THE PERCENTAGE OF INVENTORY IN CURRENT ASSETS:THE PERCENTAGE OF INVENTORY IN CURRENT ASSETS:
Inventory Inventory
The percentage of inventory in Current Assets = ---------------------The percentage of inventory in Current Assets = ---------------------
Current Assets Current Assets
RE – ORDER LEVELRE – ORDER LEVEL::
When the quantity of materials reaches at a certain figures then fresh order is sent to get
material again. The order is sent before the materials reach minimum stock level.
Re – ordering level is fixed between minimum level and maximum level.
Re-ordering level = Maximum consumption x Maximum Re-order period.
57
Delivery time: 4-6 weeks.
Normal Usage: 7 weeks.
Re-Order Level=Maximum Usage x Maximum Delivery TimeRe-Order Level=Maximum Usage x Maximum Delivery Time
MINIMUM LEVEL:MINIMUM LEVEL:
Minimum stock level:
It represents the quantity below its stock of item should not be allowed to fall.
Lead-time: A purchase firm requires some time to process the order time is also
required by the supplying firm to execute the order. The time taken in processing the
order and then executing it is known as lead time.
Rate of consumption: It is the average consumption of materials in the factory. The rate
of consumption will be decided on the basis of past experience and production plans.
Nature of material: The nature of material also affects the minimum level. If a material
is required for such material.
Minimum stock level can be calculated with the help of following formula.
Minimum stock level = Re ordering level - (Normal consumption x
normal re order period
MAXIMUM LEVEL:MAXIMUM LEVEL:
It is the quantity of materials beyond which a firm should not exceed its stocks. If the
quantity exceeds minimum level limit then it will be overstocking.
Overstocking will mean blocking of more working capital, more space for storing the
materials, more wastage of materials and more chances of losses from obsolescence.
Maximum Stock Level = Re-ordering Level + Re-order Quantity –
58
(Minimum
consumption x Minimum Re-order period)
AVERAGE LEVEL:AVERAGE LEVEL:
This stock level indicates the average stock held by the concern.
Average stock level = Minimum stock level + ½ x Re-order quantity
TABLE:1 RAW MATERIAL:
YEAR
ANNUAL
CONSUMPTION
IN M/T (R)
ORDERING
COST
IN RS. (CO)
CARRYING
COST
IN RS. (CH)
EOQ
IN M/T
2006 5446 10 216 22.44
59
2007 6108 10 407 17.30
2008 6905 10 250 23.48
2009 5168 10 555 14.00
2010 7772 10 495 16.00
CHART:-1
INTERPRETATION:
When compared to all the years, the EOQ is high in the year 2007. Because in this year,
the annual demand is higher than the rest years. Due to highly ordering of Raw material,
the carrying cost will be less.
TABLE:2 CYLINDER LINERS:
YEAR
ANNUAL
CONSUMPTION R
ORDERING
COST CO
CARRYING
COST CH
EOQ
IN NOS
2006 11785983 10 4.1 3559
2007 24859847 10 7.09 2984
60
2008 17293582 10 3.67 4808
2009 10203 10 7 3255
2010 189581 10 7.3 3311
CHART:2
INTERPRETATION:
EOQ for cylinder liner was comparatively high in the year 2008, it was 4808 nos. This
was due to the increased demand in the market for the same period. In this year carrying
cost also low.
TABLE:3 INVENTORY TURNOVER RATIO
YEAR SALES INVENTORY
INVENTORY
TURNOVER
RATIO
61
2006 370959201 56925237 6.52
2007 484833736 68352276 7.09
2008 500922885 67352546 7.44
2009 670730918 134707864 4.97
2010 805074792 213142088 3.77
CHART:3
INTERPRETATION:INTERPRETATION:
In the year 2008, the Inventory Turnover Ratio was very high than the rest of the years.In the year 2008, the Inventory Turnover Ratio was very high than the rest of the years.
It implies good inventory management. In the year 2010, it was 4.81 it was very lowerIt implies good inventory management. In the year 2010, it was 4.81 it was very lower
than the other years. It means excessive inventory or it may be overinvestment inthan the other years. It means excessive inventory or it may be overinvestment in
inventory. Excessive inventory due to funds locked up, rental of space.inventory. Excessive inventory due to funds locked up, rental of space.
TABLE:4 INVENTORY CONVERSION PERIOD IN DAYS TABLE:4 INVENTORY CONVERSION PERIOD IN DAYS
YEARINVENTORY TURN OVER
RATIO
INVENTORY CONVER-
SION PERIOD IN DAYS
2006 6.52 56
2007 7.09 51
62
2008 7.44 49
2009 4.97 74
2010 3.77 97
CHART:4
INTERPRETATION: INTERPRETATION:
Inventory conversion period was decreasing from 2006-2008. It was very good to the Inventory conversion period was decreasing from 2006-2008. It was very good to the
firm. But in the years 2009 and 2010, it was increased. It may be due to the inflation.firm. But in the years 2009 and 2010, it was increased. It may be due to the inflation.
Being the price of the product was increasing and the sales were decreased. So theBeing the price of the product was increasing and the sales were decreased. So the
inventory conversion period increased. But it should be decreased. inventory conversion period increased. But it should be decreased.
TABLE:5 PERCENTAGE OF INVENTORY IN CURRENT ASSETS TABLE:5 PERCENTAGE OF INVENTORY IN CURRENT ASSETS
YEAR INVENTORY CURRENT ASSETS PERCENTAGE
2006 56925237 157939330 36.04
63
2007 68352276 234814785 29.1
2008 67352546 275344324 24.46
2009 134707864 376047336 35.82
2010 213142088 453569567 46.99
CHART:5
INTERPRETATION:INTERPRETATION:
The Kusalava International Limited was giving more importance to inventory in CurrentThe Kusalava International Limited was giving more importance to inventory in Current
Assets. In the earlier year they gave more preference to inventory. This will show theAssets. In the earlier year they gave more preference to inventory. This will show the
percentage of inventory in totals Current Assets. Inventory plays a vital role in the totalpercentage of inventory in totals Current Assets. Inventory plays a vital role in the total
Current Assets. More attention has to be played by the management towards InventoryCurrent Assets. More attention has to be played by the management towards Inventory
as it consists 35% of Current Assets.as it consists 35% of Current Assets.
TABLE:6 RAW MATEIAL:RAW MATEIAL:
YEAR RE-ORDER
64
LEVEL
IN M/T
2006 5040
2007 5664
2008 6384
2009 4848
2010 6048
CHART:6
INTERPRETATION:INTERPRETATION:
In the year 2008, at 6384 M/T of Raw material, the order should be placed. Because theIn the year 2008, at 6384 M/T of Raw material, the order should be placed. Because the
annual demand is high but the Re-order level was decreased. It may be happened due toannual demand is high but the Re-order level was decreased. It may be happened due to
decrease in the demand of final productdecrease in the demand of final product
TABLE:7 CYLINDER LINERS:CYLINDER LINERS:
YEARRE-ORDER LEVEL
IN NOS
65
20062006 23973122397312
20072007 29137442913744
20082008 39152463915246
20092009 34298403429840
20102010 36931203693120
CHART:7
INTERPRETATION:INTERPRETATION:
By comparing the Re-order levels in all the years, it was 3915264 nos in the 2008. AtBy comparing the Re-order levels in all the years, it was 3915264 nos in the 2008. At
the level of 3915264 nos the order was placed. So definitely there should be high annualthe level of 3915264 nos the order was placed. So definitely there should be high annual
demand for the finished product where as in the year 2006 the reorder level wasdemand for the finished product where as in the year 2006 the reorder level was
2397312 nos but it was gradually increased that means annual demand was increasing.2397312 nos but it was gradually increased that means annual demand was increasing.
TABLE:8 RAWRAW
MATERIAL:MATERIAL:
66
YEARMINIMUM LEVEL
IN M/T
2006 4515
2007 5074
2008 1729
2009 1313
20101638
CHART:8
INTERPRETATION:INTERPRETATION:
Minimum level was reduced. Because by reducing the storage cost and to avoid theMinimum level was reduced. Because by reducing the storage cost and to avoid the
obsolete goods.obsolete goods.
TABLE:9 CYLINDERCYLINDER
LINERS:LINERS:
67
YEAR MINIMUM LEVEL
IN NOS
2006 649272
2007 789139
2008 1060384
2009 927290
2010 1000220
CHART:9
INTERPRETATION:INTERPRETATION:
In the year 2006, they maintained only 649272 nos as Minimum level. But it wasIn the year 2006, they maintained only 649272 nos as Minimum level. But it was
gradually increasing. That means the production was increasing. But in 2008, thegradually increasing. That means the production was increasing. But in 2008, the
production is high so they maintained 1060384 nos as minimum level but in 2009 itproduction is high so they maintained 1060384 nos as minimum level but in 2009 it
slightly decreased because annual demand decreased.slightly decreased because annual demand decreased.
TABLE:10 RAW MATERIAL:RAW MATERIAL:
68
CHART:10
INTERPRETATION:INTERPRETATION:
The maximum levels were increased because the sales were increased.The maximum levels were increased because the sales were increased.
Due to increasing of annual demand the maximum level varied. In the year 2009, theDue to increasing of annual demand the maximum level varied. In the year 2009, the
maximum level decreases because the production was decreased due to low sales.maximum level decreases because the production was decreased due to low sales.
TABLE:12 RAW MATERIAL:
70
YEAR MAXIMUM LEVEL
2006 1415082
2007 1719921
2008 2311096
2009 2021018
2010 279968
YEAR AVERAGE LEVEL
IN M/T
20062006 47424742
20072007 5328.55328.5
20082008 2016.52016.5
20092009 1532.51532.5
20102010 1911.51911.5
CHART:12
INTERPRETATION:INTERPRETATION:
Average level for the Raw material was calculated by maximum and minimum levelsAverage level for the Raw material was calculated by maximum and minimum levels
were taking into account.were taking into account.
TABLE:13 CYLINDER LINERS:CYLINDER LINERS:
71
CHART:13
IINTERPRETATIONNTERPRETATION: :
Generally Kusalava International Limited was maintaining these stock levels per annum.Generally Kusalava International Limited was maintaining these stock levels per annum.
Stock was necessary to run the production. It was gradually decreasingStock was necessary to run the production. It was gradually decreasing
72
YEAR AVERAGE LEVEL
2006 757485
2007 920663
2008 1237116
2009 1081839
20101166924
CHAPTER-VCHAPTER-V
FINDINGSFINDINGS
&&
SUGGESTIONSSUGGESTIONS
FINDINGSFINDINGS::
73
The Economic Order Quantity of Raw material in Metric Tones is high in the yearThe Economic Order Quantity of Raw material in Metric Tones is high in the year
2008 it was 23.48. And it was low in the year 2009 it was 14. The total cost was low in2008 it was 23.48. And it was low in the year 2009 it was 14. The total cost was low in
the year 2006 and it was very high in the year 2009. EOQ was better in the year 2006.the year 2006 and it was very high in the year 2009. EOQ was better in the year 2006.
Economic order quantity for cylinder liners in nos is high in the year 2008 it was 4808Economic order quantity for cylinder liners in nos is high in the year 2008 it was 4808
and low in the year 2007 it was 2984and low in the year 2007 it was 2984
Inventory Turnover Ratio was very high in the year 2008. It was 7.44. It wasInventory Turnover Ratio was very high in the year 2008. It was 7.44. It was
gradually decreasing. In the year 2010 it was 4.81. Because of increase in the averagegradually decreasing. In the year 2010 it was 4.81. Because of increase in the average
stock maintained in the company.stock maintained in the company.
Inventory Conversion Period increases from 2008 to 2010 that was 49 to 76 days.Inventory Conversion Period increases from 2008 to 2010 that was 49 to 76 days.
Because of average stock maintained in the company. It was not good practice.Because of average stock maintained in the company. It was not good practice.
The percentage of inventory over current assets increased from 25 in the year 2008 toThe percentage of inventory over current assets increased from 25 in the year 2008 to
35 in the year 2010. The more importance was given to inventory in the current assets.35 in the year 2010. The more importance was given to inventory in the current assets.
Reorder level of Raw material was in the year 2006 it was 5040 Metric Tones. And itReorder level of Raw material was in the year 2006 it was 5040 Metric Tones. And it
was 6384 in the year 2008. That is gradually increasing. And also it was decreasingwas 6384 in the year 2008. That is gradually increasing. And also it was decreasing
from 2008 to 2010. It was decreasing because the orders may be decreased. That meansfrom 2008 to 2010. It was decreasing because the orders may be decreased. That means
sales were decreasing. sales were decreasing.
For Cylinder liners to reorder level in the year 2006 it was 239712 numbers, it was For Cylinder liners to reorder level in the year 2006 it was 239712 numbers, it was
gradually increasing. It increased from 237312 to 3693120 numbers due to high rate ofgradually increasing. It increased from 237312 to 3693120 numbers due to high rate of
stock level should be carried out. stock level should be carried out.
Minimum level of Raw material in the year 2006 it was 4515 Metric Tones. It wasMinimum level of Raw material in the year 2006 it was 4515 Metric Tones. It was
gradually decreasing. In the year 2010 it was 1638. Minimum level was decreasinggradually decreasing. In the year 2010 it was 1638. Minimum level was decreasing
because the sales were increasing. The demand was increasing to the raw material. because the sales were increasing. The demand was increasing to the raw material.
For Cylinder liners, in minimum level in the year 2006 it was 649272 numbers. It For Cylinder liners, in minimum level in the year 2006 it was 649272 numbers. It
was gradually increasing from 649272 to 1000220 numbers. So that the sales werewas gradually increasing from 649272 to 1000220 numbers. So that the sales were
increased and consumption was increased.increased and consumption was increased.
Maximum level of Raw material in the year 2006, it was 2974 M/T. It was increasedMaximum level of Raw material in the year 2006, it was 2974 M/T. It was increased
to 3571 M/T in the year 2010 because of the sales was increasing. to 3571 M/T in the year 2010 because of the sales was increasing.
11. For cylinder liners to maximum level in the year 2006 it was 1415082 numbers.11. For cylinder liners to maximum level in the year 2006 it was 1415082 numbers.
Gradually the level was increased up to 2008. But in 2009 it slightly reduced. Even inGradually the level was increased up to 2008. But in 2009 it slightly reduced. Even in
74
2010 it was increased due to the high requisition for the product.2010 it was increased due to the high requisition for the product.
12.Average level of raw material in the year 4742 M/T. It was increased to 5328 M/T12.Average level of raw material in the year 4742 M/T. It was increased to 5328 M/T
in the year 2007. It was gradually decreased from 2007 to 2009. In the year 2010 it wasin the year 2007. It was gradually decreased from 2007 to 2009. In the year 2010 it was
1911.5 M/T due to increasing of sales. 1911.5 M/T due to increasing of sales.
13 Average level for cylinder liners from 2006 to 2008; it was gradually increased that13 Average level for cylinder liners from 2006 to 2008; it was gradually increased that
is from 757485 to 1237116 numbers. Where as in the year 2009 it reduced 1081839.is from 757485 to 1237116 numbers. Where as in the year 2009 it reduced 1081839.
But in the year 2010, it increased to 1166924 numbers due to the high need of cylinderBut in the year 2010, it increased to 1166924 numbers due to the high need of cylinder
liners. liners.
SUGESTIONS:SUGESTIONS:
The Economic Order Quantity can be further increased by another 10% byThe Economic Order Quantity can be further increased by another 10% by
reducing the carrying cost.reducing the carrying cost.
As the demand increasing for cylinder liners the Raw material Turn over RatioAs the demand increasing for cylinder liners the Raw material Turn over Ratio
can further increased.can further increased.
In the year 2010, Reorder level was 6048 M/T, this can be increased seeing theIn the year 2010, Reorder level was 6048 M/T, this can be increased seeing the
more demand for the final product.more demand for the final product.
The component of inventory in the Current Assets has been increasing every yearThe component of inventory in the Current Assets has been increasing every year
approximately 40% on the same line for the next year the share of inventory furtherapproximately 40% on the same line for the next year the share of inventory further
increased by 50%.increased by 50%.
As a demand for Cylinder liners in other countries are also increasing, the twoAs a demand for Cylinder liners in other countries are also increasing, the two
levels of inventories that are minimum and maximum have to be increased. For Rawlevels of inventories that are minimum and maximum have to be increased. For Raw
material it can be increased by 50%. Similarly for Cylinder liners also increased bymaterial it can be increased by 50%. Similarly for Cylinder liners also increased by
60%.60%.
Inventory Conversion Period has increased from 70 to 76; there is a chance toInventory Conversion Period has increased from 70 to 76; there is a chance to
improve this period by bringing down approximately to 65 to 70 in the current financialimprove this period by bringing down approximately to 65 to 70 in the current financial
year.year.
More sophisticated techniques can be used in order too has more control overMore sophisticated techniques can be used in order too has more control over
various items under ABC system.various items under ABC system.