1.1 INTRODUCTIONGood planning is good inventory management and
good inventory management is good financial management. S.K.
Kuchal. Inventory comprises stock of raw materials,
work-in-process, finished products, stores and components. John
HAMPTON treats inventory as "locked up capital". Inventory measured
by rupee value constitutes, the major element in the "Working
Capital" (approximately 60 percent of current assets) of many
business undertaking in India.
DEFINITION OF INVENTORY
"John J. Hampton" defined inventory as The goods for eventual
resale by the firm. Inventory, measured by rupee value constitute
the major element in the working Capital of many business
undertakings. Inventory is the value of raw materials, Consumables,
and spares, work-in-process, finished goods and scraps are called
as locked up capital. The major determinants of investment in
inventory are: Level of sales. Length and technical nature of the
production process. Durability vs. Perish ability or styling
obsolescence of the product.
Inventory involves two types of costs. The first is "Direct
Costs", which is connected to buying and holding of goods and the
second is "Indirect Costs" or "Financial Costs". The direct costs
includes firstly ordering costs. These costs include cost of
placing order, Shipping, handling and quality discount etc., If the
firm places few orders frequently, the ordering cost will be
higher. Secondly, carrying cost are the costs which are incurred
for storing the goods. These costs include the space insurance,
obsolescence, spoilage and damages or thefts. The indirect costs
include interest paid on the capital tied up in the inventory and
the inadequacy of materials involves the cost.
Efficient inventory management reduces levels of inventories to
a considerable degree without effect on production and sales by
using simple inventory planning and control techniques. An
understanding neglecting the management of inventories will be
jeopardizing its long run profitability and survival.
Inventory is an idle resource which is usable and has value. It
may be men, money, materials, plant acquisition, spares other
stocked to meet future demand. A physical resource that a firm
holds in stock with the intent of selling it or transforming it
into a more valuable state. Raw Materials Works-in-Process Finished
Goods Maintenance, Repair and Operating (MRO)
Inventory Management means safeguarding the company's property
in the form of inventories and maintaining it at the optimum level,
considering the operating requirements and financial resources of
the business. Inventory Management emphasizes control over
purchases, storage, consumption of materials and determining the
optimum level for each item of inventory. The reduction in "an
excessive inventory i.e., excesses above the optimum level carries
a favorable impact on company's profitability, likewise maintaining
inventory below optimum level negatively affects the company's
profitability. Hence, inventory management should be comprehensive
enough to cover the flow of materials starting from the point when
some one makes a request for the purchase, up to the stage when the
finished products are sold.
Meaning of Inventory Control
Inventory comprises stock of raw materials, work-in-process,
finished goods, stores and components. The aim of inventory control
is to achieve maximum efficiency in the management of inventory.
"Inventory Control" may be defined as "Safe-guarding of company's
property in the form of inventory and maintaining it at the optimum
level, considering the operating requirements and financial
resources of the business". The definition embraces control over
purchases, storage and consumption of materials and determining the
optimum level for each item of inventory. The system of control
should be comprehensive enough to cover the flow of materials
starting from the point when some one makes a request for the
purchases up to stage when materials are consumed and their costs
compiled and assembled in cost sheet.
Objectives of inventory control
The following purpose should be kept in mind in developing and
maintaining a system of control.
Effective use of financial resources available to business i.e.
to maintain the investment in inventory at the lowest level
consistent with operating requirements.
Avoidance of the "out-of-stock" danger i.e., to provide a supply
of required materials with out any delay for efficient and
uninterrupted operations.
Reduction to a minimum of the risk through obsolescence.
Economy in purchasing as affected by quantity buying and
favorable raw material market.
Storage of inventory with a minimum of handling time and cost
and to protect them from losses by theft, fire and damage.
Service to customers i.e., maintaining sufficient stock of
finished products to meet reasonable expectations of customers for
prompt delivery of their order.
Accurate and regular material reports to management by keeping
perpetual inventory and other up to date records.
Techniques of inventory controlThe various techniques used for
inventory control are as follows:1. ABC Analysis.2. Level
Setting.3. Economic order quantity.4. Proper Purchase Procedure.5.
Proper Storage.6. Perpetual Inventory Systems.7. Establishment of a
system of Budgets.8. Review of slow and non-moving items.9. Use of
radios, e.g. inventory turnover.
Essential requirements of Inventory controlEssential to an
adequate control of inventory are the following requirements. there
should be proper co-ordination and co-operation between various
Concerns, viz., purchasing, departments receiving, inspection,
storage, Issues and cost departments. Purchasing should be
centralized under the control of a competent Manager.There should
be proper planning of materials requirements.There should be proper
classification of materials with codes, materials satisfactorily
storage control procedures. There should be planned storage control
and issues so that there will be delivery of materials upon
requisition to departments in the right quantity at the time they
are needed.Appropriate records should be maintained to control
issues and utilization of stores in production. The system of
perpetual inventory should be operated so that it is possible to
determine at any time the amount and value of each item of material
in stock.Maximum, minimum and re-ordering levels of stocks should
be fixed. There should be a system of regular reporting to
management regarding materials purchase, storage and utilization.
There should be an efficient system of internal audit and internal
checks.
ECONOMIC ORDER QUANTITY (EOQ)
The economic order quantity is that inventory level, which
minimizes the total of ordering costs and carrying costs.
It is the question, how much to order the quantity when
inventory is replenished. If the firm is buying raw materials, the
question is to purchase the quantity of each replenishment and if
it has to plan for production run, it is how much production to
schedule. It may be solved through EOQ. It involves two types of
costs:
a. Ordering Cost b. Carrying Cost
a.Ordering Cost
Ordering cost is referred to as the cost of placing an order and
securing the supplies. Ordering cost depends upon the number of
orders placed and a number of items ordered at a time. Higher will
be the ordering cost when frequent orders are placed. Similarly,
lesser the ordered quantity, higher the ordering cost.
b.Carrying Cost
Carrying cost or holding cost refers to the cost of keeping the
materials which includes capital cost, cost of storage and cost of
deterioration and redundancy. Larger the volume of inventory,
higher the inventory carrying cost and vice versa.
EOQ for an item is arrived on the following assumptions:
1.Demand is continuous at a constant rate.2. The process
continuous infinity.3. No constraints are imposed on qty ordered,
storage capacity, budget etc., 4. Replenishment is instantaneous.5.
All costs are time invariant. 6. No shortages are allowed.7.
Quantity discounts are not available.
EOQ for an item is arrived by the following formula,
EOQ =
Where, EOQ = Economic Order QuantityAC = Annual Consumption of
an item CO = Cost of Ordering an order CH = Cost of Carrying one
unit / year.
ABC ANALYSIS
The ABC method is an analytical method of stock control which
aims at concentrating efforts on those items where attention is
needed most. It is based on the Premise that a small number of the
items in inventory may typically represent the bulk money value of
the total materials used in production process. While a relatively
large number of items may represent a small portion of the money
value of stores used and that small number of items should be
subject to the greatest degree of continuous control under this
system, the materials stocked may be classified into a number of
categories according to their importance i.e., their value and
frequency of replenishment during a period.The first category, we
may call it the group of 'A' items, which consists of only a small
percentage of total items handled but its combined value may be a
large portion of the total stock value. The second category, naming
it as group of 'B' items, which may berelatively less important. In
the third category consisting of 'C items, all the remaining items
of stock may be included which are quite large in number but their
value is not high.
Advantages of ABC Analysis
Closer and stricter control on those items which represent a
major portion of total stock value. Investment in inventory can be
regulated and funds can be utilized in the best possible manner.
Saving in stock carrying costs. Helps in maintaining enough safety
stock for "C" category of items.
Always Better Control This is based on cost criteria. It helps
to exercise selective control when confronted with large number of
items it rationalizes the number of orders, number of items &
reduce the inventory. About 10 % of materials consume 70 % of
resources About 20 % of materials consume 20 % of resources About
70 % of materials consume 10 % of resources
ABC
Maintaining close control Maintains moderate controlMaintains
loose control
Size of order based on calculated requirementSize of order based
on usageSize of order based on level of inventory
Procurement from many sourcesProcured from two or three
sourcesProcured from two sources
Keeps records of receipt and use Keep records of receipt and
useNo records are kept
More effort to reduce lead time Moderated effortMinimum
effort
Close checks on schedule revisionSome checks on changes in
needNo checks against need
Frequent orderingLess frequent orderingBulk ordering
Continual expeditingExpediting for prospective shortagesNo
expediting
Accurate forecastsLess accurate forecastsApproximate
forecasts
Low safety stock for less than two weeksLarge safety stock up to
2 to 3 monthsLarge safety stock for more than 3 months
High consumption valueAverage consumption ValueLow consumption
value
INVENTORY TURNOVER RATIO
Inventory Turnover Ratio indicates the efficiency of the firm in
producing and selling its product. It is calculated by dividing the
cost of goods soled by the average inventory:
Cost of goods sold Inventory Turnover =
--------------------------- Average Inventory
The Average Inventory is the average of opening and closing
balances of inventory. In a manufacturing company inventory of
finished goods is used to calculate inventory turnover.
Components of Inventory
The manufacturing inventory consists of two more components: (i)
raw materials and (ii) Work-in-Process. An analyst may also be
interested in examining the efficiency with which the firm converts
raw materials into Work-in-Process and Work-in-Process into
finished goods. That is, the analyst would like to know the levels
of raw materials inventory and work-in-process inventory held by
the firm on an average. The raw materials inventory should be
related to materials consumed and work-in-process to the cost of
production. Thus:
Raw materials Material ConsumedInventory turnover =
-----------------------------------------Average Raw material
inventory
Work in process Cost of productionInventory turnover =
-------------------------------------Avg.Work in process
inventory
Finished goods Cost of goods soldTurnover Ratio =
---------------------------Avg.Finished goods
Inventory Average inventoryholding period =
------------------------- x 365 Cost of goods sold
Materials Consumed can be found as opening balance of raw
material plus purchases minus closing balances of raw material.
Cost of Production is determined as material consumed plus other
manufacturing expenses plus opening balances of work-in-process. In
the absence of information of material consumed or cost production,
raw material and work-in-process inventories may be related to
sales.
The inventory turnover shows how rapidly the inventory is
turning into receivable through sales. Generally, a high inventory
turnover is indicative of goods inventory management. A low
inventory turnover implies excessive inventory levels than
warranted by production and sales activities or a slow-moving or
obsolete inventory. A high level of sluggish inventory amounts to
unnecessary tie-up of funds reduced profit and increased cost.
If the obsolete inventory is written off, this will adversely
affect the working capital and liquidity position of the firm.
However, a relatively high inventory turnover should be carefully
analyzed a high inventory turnover may be the result of a very low
level of inventory which results in frequent stock outs: the firm
may be form hand-to-mouth. The turnover will also be very high if
the firm replenishes its inventory in too many small lot sizes. The
situation of frequent stock outs and too many small inventory
replacements are costly for the firm. Thus, too high and too low
inventory turnover ratios should be investigated further. The
computation of inventory turnovers for individual components of
inventory may help to detect the imbalanced investments in the
various inventory components.
Efficient inventory management reduces levels of inventories to
a considerable degree without effect on production and sales by
using simple inventory planning and control techniques. An
understanding neglecting the management of inventories will be
jeopardizing its long run profitability and survival.
CONTINUOUS FLOW FOR OPTIMAL RESULTS
FINISHEDPRODUCTINVEN-TORY
CASHFLOW
INVEST-MENTSALES
1.2 INDUSTRY PROFILEIndia has emerged as the fourth largest
steel producing nation in the world, as per the recent figures
release by World Steel Association in April 2011. In 2010, India
was the 5th largest producer, after China, Japan, USA and Russia
had recorded a growth of 11.3% in steel production as compared to
2009. Overall domestic crude steel production grew at a compounded
annual growth rate of 8.4% during 2011-12 to 2009-10. The Indian
steel industry accounted for around 5% of the worlds total
production in 2010.Total crude steel production in India for
2010-11 was around 69 million tonnes and its expected that the
crude steel production in capacity in the country will increase to
nearly 110 million tonne by 2012-13. Further, if the proposed
expansion plans are implemented as per schedule, India may become
the second largest crude steel producer in the world by 2015-16.
The demand for steel in the country is currently growing at the
rate of over 8% and it is expected that the demand would grow over
by 10% in the next five years. However, the steel intensity in the
country remains well below the world levels. Our per capita
consumption of steel is around 110 pounds as compared to 330 Pounds
for the global average. This indicates that there is a lot of
potential for increasing the steel consumption in India. Immense
growth potential in Indian Steel Sector Domestic crude steel
production grew at a compounded annual growth rate of 8.4% in the
last few years. Crude steel production capacity of the country is
projected to be around 110 million tonne by 2012-13. 222 Memorandum
of Understandings (MOU) have been signed with various states for
planned capacity of around 276 million tonnes by 2019-20.
Investments at stake are to the tune of $187 billion in the Steel
sector. Increase in the demand of steel in India is expected to be
14% against the global average of 5-6% due to its strong domestic
economy, massive infrastructure needs and expansion of industrial
production. Demand of steel in the major industries like
infrastructure, construction, housing, automotive, steel tubes and
pipes, consumer durables, packaging and ground transportation.
Target for $ 1 trillion of investments in infrastructure during the
12th Five Year Plan. Infrastructure projects (like Golden
Quadrilateral and Dedicated Freight Corridor) will give boost to
the demand in the steel sector in near future. Projected New
Greenfield & up-gradation of existing Airport shall keep the
momentum up. Increased demand of specialized steel in hi-tech
engineering industries such as power generation, automotive
petrochemicals, fertilizers etc.India, the world's fourth largest
steel maker, logged 5.86 per cent growth in production in 2012-13 -
the highest among major global producers, World Steel Association
has said. According to WSA, India produced 78.12 million tonne (MT)
steel during the fiscal as against 73.39 MT in 2011-12.China had
produced the maximum steel during the fiscal at 726.33 MT, almost
half of the world's total output of 1,521 MT; but India outpaced
the neighbor in the rate of growth. Production in China grew by
5.39 per cent during 2012-13 over 689.192 MT in 2011-12. Global
production grew by 1.59 per cent during the fiscal.World's second
largest steel maker Japan produced 107.30 MT in 2012-13, clocking
0.78 per cent growth over 106.46 MT produced in the previous
fiscal.The US, the world's third largest steel producing nation,
clocked a negative rate, down 1.61 per cent, during the fiscal at
86.94 MT compared to 88.36 MT a year ago.Russia produced 69.56 MT
steel in 2012-13, recording just 0.17 per cent growth over the
previous fiscal. South Korea has also clocked a de-growth of 1.62
per cent to produce 68.15 MT steel during the year.In 2011 India
became the fourth largest steel-producing nation in the world with
production of over 74 million tonnes (MT). However, it has a very
low per capita consumption of steel of around 59 kgs as against an
average of 215 kgs of the world. This wide gap in relative steel
consumption indicates that the potential ahead for India to raise
its steel consumption is high. Being a core sector, steel industry
tracks the overall economic growth in the long term. Also, steel
demand, being derived from other sectors like automobiles, consumer
durables and infrastructure, its fortune is dependent on the growth
of these user industries. The Indian steel sector enjoys advantages
of domestic availability of raw materials and cheap labour. Iron
ore is also available in abundant quantities. This provides major
cost advantage to the domestic steel industry, with companies like
Tata Steel being one of the lowest cost producers in the world. The
Indian steel industry is largely iron-based through the blast
furnace (BF) or the direct reduced iron (DRI) route. Indian steel
industry is highly consolidated. About 60% of the crude steel
capacity is resident with integrated steel producers (ISP). But the
changing ratio of hot metal to crude steel production indicates the
increasing presence of secondary steel producers (non integrated
steel producers) manufacturing steel through scrap route, enhancing
their dependence on imported raw material.Overall the global steel
industry witnessed steady growth during 2011. The growth in global
steel demand was driven by increased demand from key steel end-user
industries including infrastructure, construction and automotive,
especially in the emerging markets; in spite of financial
turbulence in the Euro zone, weak private demand in the United
States and events in Japan and the Middle East. In 2011, the global
steel demand is estimated to have increased by 6% to reach a new
high of 1,373 MT, 13% above the pre crisis levels in 2007. Global
steel consumption grew from 1.302 MT in 2010 to 1373 MT. Emerging
nations accounted for 72% of global consumption, at 980 MT in 2011
up from 928 MT in 2010. Growth was led by the emerging economies,
notably China (6% up) and India (4% up), where new demand records
were set. In the developed economies, demand levels remained 15-25%
below 2007 levels. Europe saw steel demand increase by 5% and North
America by 9% in 2011, but steel demand in Japan fell by 3%, as the
impact of the earthquake and subsequent tsunami was felt on the
manufacturing activity. The growth in 2011 can be segregated in two
halves. In the first half of 2011, global steel consumption grew
relatively faster, underpinned by infrastructure construction and
manufacturing activity. In the second half of 2011, steel
consumption was lower than in the first half due to moderate
economic growth in China, the United States and Europe. In 2011,
global steel output reached 1.5 billion tonnes, an increase of 7%
compared to 2010 and a new record for world crude steel production.
All major steel producing countries apart from Japan and Spain
showed growth in 2011. Growth was particularly strong in Turkey,
South Korea and Italy.ProspectsGovernment delays in allocating coal
blocks for captive consumption by steel manufactures is seriously
hurting the competitive edge of Indian steel sector. The same story
is with iron ore. There are delays in allocating iron ore mines as
well as approval for mining licenses. As a result no new investment
on the ground in the steel sector is happening to add new steel
capacities. There are delays in land acquisition for Greenfield
projects and environment approvals in India. There is thus delay in
converting the intent into project on ground especially in the area
of expansion and modernization. This impedes growth of domestic
steel capacity creation. The Indian steel sector may face threat
from cheap imports, now that the import duties on steel in India
are amongst the lowest in the world. Import pressures could
consequently lead to pressure on margins of the domestic companies
on account of lower steel realisations. However, if the Indian
government increases the import duty on steel products, domestic
steel industry could get protection to an extent. But since India
has already agreed to the WTO norms, it might become difficult for
the government to increase duties substantially. Looking ahead,
global steel market developments are likely to remain generally
positive, but with lower growth in 2012 compared to 2011. In the
first few months of 2012, apparent steel demand remained muted due
to the uncertain economic climate. For 2012 as a whole, global
steel demand is forecast to grow by a further 4% to reach 1,422 MT.
China, India and other emerging markets will continue to drive
demand but recent market developments suggest likely slackening of
demand. This is primarily due to the recent changes in the monetary
policy in China to reduce bank credit and improve asset quality as
well as lower growth forecast in India. While USA and Japan is
expected to continue its recovery, steel demand in Europe is
expected to fall. Going forward, we remain apprehensive about the
continuation of the strong performance by steel companies. We
believe that volume growth would be visible in the years to come,
largely due to the continuation of infrastructure spending
(including housing), strong demand from the auto sector, which
could help in driving demand for value added steel products like CR
(cold roll) steel and exports. We expect realizations to remain
under pressure on account of excessive supplies. However, a
recovery in steel prices could be sooner if steel producers across
the globe take continuous efforts at curtailing production.
1.3 COMPANY PROFILESBQ STEELS LIMITEDIS SETTING UP A NEW
INTEGRATED STEEL PLANT WITH A CAPACITYOF 5,00,000 TPA IN NELLORE
DISTRICT OF ANDHRA PRADESH.SBQ Steels Limited, manufacturers of Pig
Iron, Sponge Iron, Steel Billets, Blooms, Bars, and Wire Rods,
caters to the steel requirements of automobile and engineering
sectors, and also to the nuclear power industry, in India and
abroad.Promoted by RKKR Steels, one of South India's oldest and
largest steel manufacturers, SBQ Steels produces high quality
products at cost-effective prices.SBQ Steels Limited, part of RKKR
Group, is a fully integrated Special Bar Quality Alloy Steel
manufacturer - from iron ore to ready-to-market products.
Incorporated in the year 2007, the steel plant has a capacity of
0.5 million tonus per annum (MTPA).Located in Nellore District,
Andhra Pradesh, the plant is one of the most modern steel plants in
South India equipped with the state-of-the-art technologies. The
steel plant is strategically located to cater to the needs of
customers across the country.SBQ Steels will be able to fulfill the
gap in demand and supply of Special Bar Quality Alloy Steel. The
company uses best quality iron ore from Hospet and Bellary mines.
Coal is imported from Australia to produce metallurgical coke
in-house to assure the best quality of Pig Iron. An in-house
chemical laboratory and quality control department ensures product
quality.With its good logistic support, SBQ Steels can meet the
needs and expectations of its customers in terms of deliveries even
at short notice.Latest TechnologiesWith the aim to lower production
costs and improve the efficiencies, SBQ Steels has implemented
latest technologies.Implementation of SAP Better MIS Faster
Decision Making Lower Inventory Costs Accurate Costing for Better
PricingCoke Oven Plant
The manufacturing process used in the plant is Eco-Friendly
Stamp Charged process of CFRI. The stamp charging technology
basically involves formation of a stable coal cake with finely
crushed coal (85-90% - 3mm) by mechanically stamping outside the
oven and pushing the cake thus formed inside the oven for
carbonization. Coal moisture is maintained at 8-10% for the
formation of cake. Due to stamping, bulk density of charge
increases by 30-35% causing significant improvement in mecum
indices and CSR values of coke. Oven productivity increases by
10-12%Direct-Reduced Iron (DRI) PlantThe primary function of this
plant is to produce DRI from iron ore in a rotary kiln.
Direct-reduced iron (DRI), also called sponge iron, is produced
from direct reduction of iron ore (in the form of lumps, pellets or
fines) by a reducing gas produced from natural gas or coal. The
reducing gas is a mixture majority of Hydrogen (H2) and Carbon
Monoxide (CO) which acts as reducing agent. This process of
directly reducing the iron ore in solid form by reducing gases is
called direct reduction.In the process of production of sponge
iron, the raw materials (iron ore, feel coal and lime stone
/dolomite) are fed to the rotary kiln through feed tube in a
pre-determined ratio. Due to inclination and rotary motion of the
kiln the material moves from the feed end of the kiln to the
discharge end. The fine coal is blown counter currently from the
discharge end of the kiln to maintain the required temperature and
the carbon concentration in the bed. Air is blown in the zones to
maintain the required temperature profile. The material and the hot
gases move in the counter current direction, and as a result iron
ore gets pre-heated, and reduces gradually by the time it reaches
the discharge end.Sinter PlantSinter Plant - engaged in delivering
sinter product by agglomerating the finer particles of iron ore to
a porous mass by incipient fusion within the mass itself. It is the
function of the sintering plant to process fine grain raw material
into coarse grained iron ore sinter for charging the blast furnace
Meticulously prepared mixtures are created consisting of fine ore,
concentrates, extras, and under sizes arising from screening lumpy
burden components at the blast furnace. Ferriferous fine grain
discharged from the production chain of the entire steel works are
also put into the mixtures. By igniting suitable fuel, iron ore
sinter is produced by down draft process.Mini Blast Furnace
(MBF)MBF has a working volume of 250 cum and produces about 700
tons liquid hot metal per day for steel making and casting pigs in
pig casting machine.The purpose of a blast furnace is to chemically
reduce and physically convert iron oxides into liquid iron called
"hot metal". The blast furnace is a huge, steel stack lined with
refractory brick, where iron ore, coke and limestone are dumped
into the top, and preheated air is blown into the bottom. The raw
materials require 6 to 8 hours to descend to the bottom of the
furnace where they become the final product of liquid slag and
liquid iron. These liquid products are drained from the furnace at
regular intervals. The hot air that was blown into the bottom of
the furnace ascends to the top in 6 to 8 seconds after going
through numerous chemical reactions.MBF is provided with
full-fledged instrumentation and control system distributed both
locally and in the MBF control room, supported by automation back
up.Pig Casting MachinePurpose of this machine is to cast hot metal
into pigs.Steel Melting Shop Electric Arc Furnace Ladle Furnace
Vacuum Degassing Billet casterRolling Mill Reheating Furnace
Rolling Mill Bar & Section Mill Finishing FacilitiesSBQ Steels
produces both basic grade as well as foundry grade suitable for
steel producers and foundries respectively.The Special Bar Quality
Alloy Steel, the final product, will mainly be used in auto &
auto ancillary industry, viz - Forgings, Heat Treatment Steels,
Ball Bearing Steel, Engineering Sector, Components & Seamless
Pipe manufacturing sector and as well as Construction steel
consisting of Structural Steel/RE-bars.Pig IronPig iron is the
intermediate product of smelting iron ore with coke, usually with
limestone as a flux. Pig iron has very high carbon content,
typically 3.54.5%, which makes it very brittle and not useful
directly as a material except for limited applications.Pig iron
comprises three main types: Basic Grade Pig Iron, used mainly in
electric arc steelmaking, Foundry Grade Pig Iron used mainly in the
manufacture of grey iron castings in cupola furnaces, and Nodular
Pig Iron (SG) used in the manufacture of ductile iron castings. Pig
iron contains at least 92% Fe. Other constituents are typically:
Pig Iron Carbon (%)Silicon (%)Manganese (%)Sulphur (%)Phosphorus
(%) Basic Grade3.5 - 4.51.5 Max0.5 - 1.00.05 Max0.12 Max Foundry
Grade 3.5 - 4.51.5 - 3.50.5 - 1.00.05 Max0.12 Max SG Grade 3.5 -
4.50.05 Max0.05 Max0.05 MaxBilletsBillet is a section of steel used
for rolling into bars, rods and sections. Billets can be directly
produced by continuous casting.Special Bar Quality Alloy
Steel(SBQ)SBQ represents a wide variety of higher-quality carbon
and alloy bars that are used in the forging, machining and
cold-drawing industries for the production of automotive parts,
hand tools, electric motor shafts and valves. SBQ or Engineering
Steel generally contains more alloys than merchant quality and
commodity grades of steels bars, and is produced with more precise
dimensions and chemistry.Structural SteelStructural steel is steel
construction material, a profile, formed with a specific shape or
cross section and certain standards of chemical composition and
strengthRolling Mill Product SpecificationsRebars: 10 to 36 mm
diaWire Rod :5.5 to 12 mm sizeSBQ Steels' integrated steel plant
has the capacity to produce 1,50,000tonnes of sponge iron, 5,00,000
tonnes of steel billets and blooms, and nearly 6,00,000 tonnes of
bars and wire rods.As a responsible corporate citizen, SBQ Steels
has taken effective measures in the areas of resource conservation,
pollution prevention and water treatment.The company has installed
water treatment plants, where the effluent water is treated and
converted into potable water for gardening purposes.Adhering to its
core beliefs, SBQ Steels has taken up many social welfare
activities for the benefits of the nearby villages. The company
regularly conducts health camps in the rural areas. SBQ Steels
gives priority to utilize the available local resources; it
provides employment opportunities for the locals. The company also
plans to build schools for the underprivileged.The company has
built health care centers and township for the benefits of its
employees.
2.1 NEED FOR THE STUDY
In todays competitive scenario especially in the manufacturing
sector, the management of inventory is given the highest
importance. Organizations are in the process of implementing
various techniques in order to maintain inventory at an optimum
level. Hence this study is undertaken to look into various aspects
of inventory management of sbq steels ltd., The choice of area of
the study for the project work was given after initial study of
company's operations and the system of working. Though the company
has several departments, the prime area of my interest was in
Finance. Every firm must maintain adequate inventory for its smooth
running of the business and to give the competition and want to use
of customers and business for that purpose maintenance of adequate
inventory is must. To facilitate smooth production and sales
operations. To face the risk of variation in demand and supply. To
face the price changes in inventory and quantity discounts.
As the global inventory scenario is moving at very fast pace.
sbq steels ltd., being a manufacturing concern had huge number of
items and the inventory constitutes of variety of items. There is a
need for the system to be devised on value basis. So that effective
control can be exercised on inventory.
2.2 OBJECTIVES OF THE STUDY
Primary Objective To study about Inventory Management of sbq
steels ltd.,
Secondary Objectives: To study the raw materials for the better
control. To study out how much quantity should be ordered (EOQ) and
to make a comparative study during the last three years. To study
the inventory turnover of the company. To study the minimum and
maximum consumption level of the raw material of the company. To
draw the conclusion and offer feasible suggetions to improve the
efficiency of Inventory management in sbq steels ltd.
2.3 SCOPE OF THE STUDY
The rate of turnover or uses of inventory is an excellent
measure of the performance and rate of the wages of manufacturing
companies. Everywhere there is a drive to do much better than was
previously through possible.
sbq steels ltd., 85% of raw materials are imported and other B
and C class elements are specially items made for them only. Lead
times and bench quantity for an imported material is high like 70
days from the date of order. Hence adopting required strategies and
techniques to maintain balanced inventory is inevitable to
contribute to the bottom line.
80% of raw materials are imported. High lead time for imported
raw material.
2.4 RESEARCH METHODOLOGYThe present study is based on both
Primary Data Secondary Data
Primary DataFirst hand information was collected from experts of
Finance department on their course of actions towards
collections.
Secondary DataThe second hand information was collected from
annual reports, schedules, budgets,companywebsite
(www.sbqsteels.com), and previous reports etc.
2.5 LIMITATIONS OF THE STUDYTime period for the study has been
limited to make a detailed analysis i.e. only 8 weeks.80% of raw
materials are imported.Much of the data is collected from secondary
source and the analysis is made on five years data only.Only
important materials would take into the consideration because of
there is no time for getting the full fledged materials list while
in the limited period.
3.1 REVIEW OF LITERATURE
ABC ANALYSISABC analysis is a basic analytical management tool
which enables top management to place the efforts where the results
will be greatest. ABC analysis is a technique which is used to
classify the items in store based on the demand of the stock. The
NCCPL uses several types of inventories. Inventory Management is an
attempt to control the quantity and value of the inventory.
Inventory Management process starts with classification of
different type of inventories to determine the degree of control
required for each. The ABC system is widely used technique to
identity various items of inventory for purposes of Inventory
Management. This technique is based on the assumption that a firm
should not exercise the same degree of control on all items of
inventories. It should rather keep a more rigorous control on
items.CATEGORIES OF ABC ANALYSISIn ABC analysis the items are
classified in three main categories based on their respective
consumption value.1. Category A items:The items, which are most
costly and valuable, are classified as A nearly 10% of the total
number of items stored will account for 70% of total value of all
items stocked.2. Category B items:The items having average
consumption value are classified as B nearly 20% of total number of
items will account for 20% of total value statistical sampling is
general useful to control them.3. Category C items:The items having
low consumption value are put in category C nearly 70% of total
number of items will account for 10% total value. Generally these
items are slow and non-moving items in the stores, which are
frequently used for production process but with more quantity.
PROCEDURE FOR DEVELOPING AN ABC ANALYSIS List each item carried
in inventory by number or some other designation. Determine the
annual volume of usage and rupee value of each item. Multiply each
items annual volume of usage by its rupee value. Compute each items
percentage of the total inventory in terms of annual usage in
rupees. Select the top 10% of all items which have the highest
rupee percentages and classify them as A items. Select the next 20%
of all items with the next highest rupee percentages and designate
those B items. The next 70% of all items with the lowest rupee
percentages are C items.
ADVANTAGES OF ABC ANALYSIS This analysis has helped in reducing
the clerical costs and resulted in better planning and improved
inventory turnover. By this method materials manager is able to
control inventories and show visible results in a short span of
time. It becomes possible to concentrate all efforts in areas,
which needed genuine efforts. It is the most effective and
economical method as it is based on selective approach. It helps in
placing orders, deciding the quantity of purchase, safety stock
etc., this saving the enterprise from unnecessary stock outs or
surplus and their resultant consequences.STOCK LEVELFor effective
material control and to avoid overstocking and under stocking of
materials, an important requirement is to decide upon various
levels of materials these are maximum level, minimum level and
re-order level. By taking action on the basis of these levels, each
item of material will be automatically be held with in appropriate
limits of control.. These levels are not permanent but revision
according to the changes in the factors, which determine these
levels.
FACTORS Rate of consumption of materials Lead-time Storage
Capacity Availability of funds for investment in inventories Cost
of storage Risk of loss due to theft, fire etc., Seasonal factors
Fluctuations in market prices Insurance costs
MAXIMUM LEVELImprested system or Maximum level system reordering
is made at regular time intervals. The maximum level of each item
is predetermined. At a particular fixed period, say after one week,
a fresh collective order for all the times will be placed. This
level is fixed after taking into account some factors. Rate of
consumption of materials Amount of capital needed and available
Storages space available Cost of storing above normal stock Risk of
obsolescence and deterioration and Re-order quantity
THE FORMULA FOR COMPUTING MAXIMUM LEVEL IS:
Maximum Level = Re-order level + Re-order quantity (Minimum
consumption* Minimum re-order period)
MINIMUM LEVELIn this system, when the inventory items reaches to
a predetermined minimum level, it is replenished by the fresh
purchases up to the predetermined maximum level. The minimum level
serves as a reordering point. The fresh order is placed for that
much quantity which shows deficiency in maximum level. This level
is fixed by considering the following factors. Rate of consumption
The time required under top priority conditions to acquire enough
supplies to avoid a stoppage in production.THE FORMULA FOR
COMPUTING MINIMUM LEVEL IS:
Minimum Level = Re-order level (Normal consumption * Normal
re-order period)
RE-ORDER LEVELThe prescription of re-order level (ROL) is an
important technique of Inventory Management. It fundamentally deals
with when to order to replenish the inventories. Re-order level is
predetermined point, and when the existing stock of inventories
reaches this point or falls below it, the purchase action is
initiated to replenish them.The Re-order level is decided for each
important item of inventory on the basis of following
considerations Lead time Average periodic consumption (Daily
consumption) Safety stockRE-ORDER LEVEL IS DECIDED AS UNDER:
ROL = (Lead time * Average daily consumption) + Safety stock
ECONOMIC ORDER QUANTITYEOQ is an important technique of
Inventory Management. EOQ prescribes the size of the order at which
the ordering cost and the inventory carrying cost will be the
minimum. Re-order quantity is some times known as economic order
quantity (EOQ), because it is the quantity, which is most economic
to order. In other words, EOQ is the size of the order. This gives
maximum economy in purchase of any materials and ultimately
contributes towards maintaining the material at an optimum level
and at the minimum cost. It equates the cost of ordering with the
cost of storing materials.ORDERING COSTIt consists of the cost of
paper work for placing an order like use of paper, typing, posting,
filling etc., the cost of the staff involved in this work, the
costs incidental to order like follow-up, receiving, inspection
etc., Ordering costs includes 1. Cot of placing an order with a
vendor of materials Preparing a purchase order Processing payments
Start-up scarp generated the material2. Ordering from the plant
Machine setup Start-up scarp generated from getting a production
run started.Ordering cost is ascertained as under:
Annual Requirement (R)Order sizeX Cost per orderO.C. =
CARRYING COSTCosts incurred for maintaining a given level of
inventory are called Carrying Cost. They include the cost of store
keeping (stationery, salaries, rent, material handling cost etc.,)
interest on capital locked up in stores, the incidence of insurance
cost, risk of obsolescence, determined and wastage of materials,
evaporation etc., When the inventories are stored it involves
following types of costs: Interest cost due to locking up of funds
Cost of storage space Cost of insurance and taxes.
Total Carrying cost is ascertained as under:
T.C.C. = Average Inventory X Per unit carrying cost
ECONOMIC ORDER QUANTITY IS ASCERTAINED AS UNDER:
2 X Quantity required X Ordering costCarrying costE.O.Q =
INVENTORY TURNOVER RATIOTurnover of materials is a ratio of
materials consumed during a period to the average stock of
materials during the period. It indicates the rate of consumption
of materials. The turnover of different types of materials may be
compared to detect those items, which do not move regularly. This
enables the management to avoid keeping capital locked up in
undesirable items of materials. Inventory Turnover indicates the
efficiency of the firm in producing and selling its product.
Turnover of materials is often measured by the following
formula:
Cost of goods soldAverage InventoryInventory Turnover =
Materials consumed = Opening stock + Purchases Closing stock
Opening stock + Closing stock2Average Inventory =
Materials consumed during the yearAverage InventoryInventory
Turnover Ratio = 4.DATA ANALYSIS AND INTERPRETATIONS
Inventory Management Techniques
In managing inventory the firms objective should be in
consonance with the shareholders, wealth maximization principle. To
achieve this, the firm should determine the optimum level of
inventory. Efficiency controlled inventories make the firm
flexible. Inefficient inventory controlled inventories make the
firm flexible. In efficient inventory control results in unbalanced
inventory and inflexibility the firm may sometimes run out of stock
and sometimes may pile up unnecessary stocks. This increases the
level of investment and makes the firm unprofitable.
To manage inventories efficiency, answers should be sought to
the following two questions: How much should be ordered? When
should it be ordered?
The first question, how much to order, relates to the problem of
determining Economic Order Quantity (EOQ), and is answered with an
analysis of costs of certain level of inventories. The second
question, when to order, arises because. Of uncertainty and as a
problem of determining the re-order point.
Economic Order Quantity (EOQ)
One of the major inventory management problem to be resolved is
how much inventory should be added when inventory in replenished.
If the firm is buying raw materials, it has to decide lots in which
it has to be purchased with each replenishment. If the firm is
planning a production run, the issue is how much production to
schedule (or how much to make). These problems are called order
quantity problem, and the task of the firm is to determine the
optimum or economic order quantity (a) Ordering cost (b) Carrying
cost. The Economic Order Quantity is that inventory level which
minimizes the total of ordering cost and carrying cost.
EOQ for an item is arrived by the following formula,
EOQ =
Where, EOQ = Economic Order QuantityAC = Annual Consumption of
an item CO = Cost of Ordering an order CH = Cost of Carrying one
unit / year.
Ordering CostThe term ordering cost is used in case of raw
materials (or supplies) and includes the entire costs of acquiring
raw materials. They include costs incurred in the following
activities: requisitioning, purchase ordering, transporting,
receiving, inspecting and storing (store placement) ordering costs
increase in proportion to the number of orders placed. The clerical
and staff costs, however, do not have to vary in proportion to the
number of order placed. And one view is that so long as they are
committed costs, they need not be reckoned in computing ordering
cost. Alternatively, it may be argued that as the number of orders
increases, the clerical and staff force released now can be used in
other departments. Thus, these costs may be included in the
ordering costs. It is the more appropriate to include clerical and
staff costs on a pro rata basis.
Carrying Cost
Cost incurred to maintaining a given level of inventory are
called carrying costs. The including storage, insurance, taxes,
deterioration and obsolescence. The storage costs comprise cost of
storage space (warehousing cost), storage handling costs and
clerical and staff service costs (administrative costs) incurred in
recording and providing special facilities such as fencing, lines,
racks etc.,
Ordering Costs and Carrying Cost
Ordering CostsCarrying Cost
Requisitioning Storage
Purchase Ordering Insurance
Transporting Taxes
Receiving, Inspecting & StoringDeterioration
Clerical and StaffObsolescence
INTERPRETATION:
Carrying costs vary with inventory size. This behavior is
contrary to that ordering cost which decline with increases in
inventory size. The economic size of inventory would thus depend on
trade-off between carrying costs and carrying cost.
TABLE NO.1ECONOMIC ORDER QUANTITY
(2011-2012)DescriptionAnnualConsumptionOrderingCostCarryingCostEOQ
LEAD-A132827193.27395.63.339561035767009.1
LEAD-B10667526.615400.300133651195923.4
LEAD-C5238997.962890.131719665151622.2
LEAD-D362802426.4221558.9044508031343638
LEAD-E82222161.0953022.362562052607488
LEAD-F151503021.7103053.990497753884577.9
LEAD-G90219604.1852612.646367148598927.9
LEAD-H75688159.8442101.948271607571933.1
LEAD-I51622360.527621.297897061468733.1
767009.1195923.41343638607488884577.9598927.9571933.1468733.10200000400000600000800000100000012000001400000MATERIALSECONOMIC
ORDER QUANTITY
(2011-2012)LEAD-ALEAD-BLEAD-CLEAD-DLEAD-ELEAD-FLEAD-GLEAD-HLEAD-IORDERS
INTERPRETATIONThe above data indicates in the year 2012
indigenous items like Lead-A and Lead-C are increased based on the
company orders and the EOQ respectively.TABLE NO. 2ECONOMIC ORDER
QUANTITY (2012-2013)
DescriptionAnnualconsumptionOrderingcostCarryingcostEOQ
LEAD-A197502159.60726415.81230149425982.047
LEAD-B23815321.449231.033302007206267.324
LEAD-C8056951.102810.324606244118106.85
LEAD-D371790043.101190014.59495924778638.569
LEAD-E91534338.8437394.066062402410296.427
LEAD-F166562629.3476576.882704027608770.442
LEAD-G99352279.4033214.515980384382263.058
LEAD-H79324194.96140503.031998152857415.895
LEAD-I52048334.7019102.070089408309913.538
425982.0477206267.3246118106.85778638.5699410296.4271608770.4427382263.0582857415.8952309913.53890100000200000300000400000500000600000700000800000900000MATERIALSECONOMIC
ORDER QUANTITY
(2012-2013)LEAD-ALEAD-BLEAD-CLEAD-DLEAD-ELEAD-FLEAD-GLEAD-HLEAD-IORDERS
INTERPRETATIONThe above table shows in the year 2013 indigenous
items like Lead-A, Lead-D and imported items like Lead-F, Lead-H
increased as compared to the year 2011 respectively.
TABLE NO. 3ECONOMIC ORDER QUANTITY (2013-2014)
DescriptionAnnualconsumptionOrderingCostCarryingcostEOQ
LEAD-A75939897627700.8218192932262568.412
LEAD-B122876107580.134980812371490.1401
LEAD-C1014547014610.8874424416495.46548
LEAD-D1486665394150.123427151999862.5682
LEAD-E2480825608200.2383439311306525.806
LEAD-F1226377083550.114488865872086.4981
LEAD-G772013881800.077529479598729.1058
LEAD-H361428073210.032430905845860.8362
LEAD-I1283485326930.1170282971232910.711
2262568.412371490.140116495.46548999862.56821306525.806872086.4981598729.1058845860.83621232910.71105000001000000150000020000002500000MATERIALSECONOMIC
ORDER QUANTITY
(2013-2014)LEAD-ALEAD-BORDERSLEAD-CLEAD-DLEAD-ELEAD-FLEAD-GLEAD-HLEAD-IINTERPRETATIONThe
above table shows in the year 2014 indigenous items like Lead-A,
Lead-D and imported items like Lead-F, Lead-H decreased as compared
to the year 2012 respectively.
TABLE NO. 4COMPARISON OF ECONOMIC ORDER QUANTITY
DESCRIPTION2011-20122012-20132013-2014
LEAD-A767009.1425982.04772262568.412
LEAD-B195923.4206267.3246371490.1401
LEAD-C151622.2118106.8516495.46548
LEAD-D1343638778638.5699999862.5682
LEAD-E607488410296.42711306525.806
LEAD-F884577.9608770.4427872086.4981
LEAD-G598927.9382263.0582598729.1058
LEAD-H571933.1857415.8952845860.8362
LEAD-I468733.1309913.53891232910.711
COMPARISON OF ECONOMIC ORDER
QUANTITY05000001000000150000020000002500000LEAD-ALEAD-B
LEAD-DLEAD-CLEAD-ELEAD-FLEAD-GLEAD-ILEAD-HMATERIALS2010-20112011-20122012-2013ORDERS
INTERPRETATIONIn the year 2014 the items like Lead-A, Lead-B's
EOQ and company orders are increased when compared to previous
years. In the year 2013 Lead-E, Lead-F, Lead-Gs EOQ and Company
Orders are decreased when compared to 2012 respectively.
TABLE NO. 5
ABC ANALYSIS (2011-2012)
ClassQuantity% of QtyNo. ofitems% of ItemsCumulative %Value% of
ValueCumulative%
A2339352939.33550.755287009138830442470.5870.58
B1134970619.0818233.47432024239977030920.3390.91
C2473595941.59+6396621001788135749.09100
Total594791941006621966888307100
ABC Analysis (2011-2012)
INTERPRETATION:In the year 2011-2012, there are 5 items which
constitutes 5% and 70.58% in the total value which comes under "A"
category, 18 items which constitutes 23% and 20.33% in the total
value which comes under "B" category and 639 items which
constitutes 662% and 9.09% in the total value which comes under "C"
category.
TABLE NO. 6
ABC ANALYSIS (2012-2013)
ClassQuantity% of QtyNo. ofitems% of itemsCumulative %Value% of
ValueCumulative%
A-71318-1.6790.335320420.3353204239570604484970.5170.51
B179589841.69240.894187781.2295082114241908999720.3690.87
C258272259.98265198.77049181005122321919239.13100
Total43073021002684561171129769100
ABC Analysis (2012-2013)
INTERPRETATION:In the year 2007-2008, there are 9 items which
constitutes 0.33% and 70.51% in the total value which comes under
"A" category, 24 items which constitutes 0.89% and 20.36% in the
total value which comes under "B" category and 2651 items which
constitutes 98.7% and 9.13% in the total value which comes under
"C" category.
TABLE NO. 7
ABC ANALYSIS (2013-2014)
ClassQuantity% of QtyNo. ofitems% of ItemsCumulative %Value% of
ValueCumulative%
A1039648044.97120.4270462630.42704626316748893371.7371.73
B673239029.1290.3202846980.7473309614272335718.390.03
C598739725.91278999.25266904100232738179.97100
Total231162671002810233486107100
ABC Analysis (2013-2014)
INTERPRETATIONIn the year 2013-2014, there are 12 items which
constitutes 0.42% and 71.73% in the total value which comes under
"A" category, 9 items which constitutes 0.32% and 18.3% in the
total value which comes under "B" category and 2789 items which
constitutes 99.2% and 9.97% in the total value which comes under
"C" category.
TABLE NO.8
INVENTORY TURNOVER RATIO
Turnover Ratio
2010-11
2011-12
2012--13
2013-14
2014-15
Raw Materials 7.378.5411.4715.2917.4
Work in Process 10.079.610.6213.3816.18
Finished Goods 16.7812.0413.1624.6315.42
Inventory 3.115.12.893.324.26
TABLE NO.9
RAW MATERIALS TURNOVER RATIO
Turnover Ratio2010-112011-122012-132013-142014-15
Raw Materials 7.378.5411.4715.2917.4
7.378.5411.4715.2917.4024681012141618Times2008-092009-102010-112011-122012-13YearsRAW
MATERIALS TURNOVER RATIORaw Materials 2011 2012 2013 2014 2015
INTERPRETATIONThe above data indicates raw material turnover
Ratio is 7.37 times in the year 2011 and it is increased
continuously to 15.29 in the year 2012. Then, it is increased to
17.4 in the year 2015.
TABLE NO. 10
WORK IN PROCESS TURNOVER RATIO
Turnover Ratio2010-112011-122012-132013-142014-15
Work in Process10.079.610.6213.3816.18
10.079.610.6213.3816.18024681012141618Times2008-092009-102010-112011-122012-13YearsWORK
IN PROGRESS TURNOVER RATIOWork in Process 2011 2012 2013 2014
2015INTERPRETATIONThe above data indicates work-in-process turnover
ratio is 10.07 times in the year. But, it is decreased to 9.6 in
the year 2010.Then, it is increased to 10.62 in the year 2011 and
16.18 in the year 2015.
TABLE NO. 11FINISHED GOODS TURNOVER RATIO
Turnover Ratio2010-112011-122012-132013-142014-15
Finished Goods16.7812.0413.1624.6315.42
16.7812.0413.1624.6315.420510152025Times2008-092009-102010-112011-122012-13YearsFINISHED
GOODS TURNOVER RATIOFinished Goods 2011 2012 2013 2014 2015
INTERPRETATIONThe above data indicates finished Goods ratio is
16.78 times in the year 2010. But, it is decreased continuously to
13.16 in the year 2011. Then, it is increased to 24.63 in the year
2012.
TABLE NO. 12
INVENTORY TURNOVER RATIO
Turnover Ratio2010-112011-122012-132013-142014-15
Inventory3.115.12.893.324.26
2011 2012 2013 2014
20153.115.12.893.324.260123456Times2008-092009-102010-112011-122012-13YearsINVENTORY
TURNOVER RATIOInventory INTERPRETATIONThe above data indicates
inventory turnover ratio is 3.11 times inthe year 2010. But, it is
increased to 5.1 in the year 2011. Then, it is decreased to 2.09 in
the year 2013. Again it is increased to 3.32, 4.26 in the year 2014
and 2015 respectively.Inventory turnover ratio declined for year by
year that is company production is also declined. Subsequently
sales are also declined.
TABLE NO. 13COMPARISON OF TURNOVER RATIO
Turnover Ratio2010-112011-122012-132013-142014-15
Raw Materials 7.378.5411.4715.2917.4
Work in Process 10.079.610.6213.3816.18
Finished Goods 16.7812.0413.1624.6315.42
Inventory 3.115.12.893.324.26
0510152025TIMES2008-092009-102010-112011-122012-13YEARSCOMPARISON
OF TURNOVER RATIOSRaw Materials Turnover RatioWork in Process
Turnover RatioFinished Goods Turnover RatioInventory Turnover Ratio
2011 2012 2013 2014 2015
INTERPRETATIONThe above data indicates inventory turnover ratio
is 3.11 times in the year 2011. But, it is increased to 5.1 in the
year 2012. Then, it is decreased to 2.89 in the year 2013.Inventory
turnover ratio declined for year by year that is company production
is also declined. Subsequently sales are also declined.
TABLE NO. 14INVENTORY HOLDING PERIOD
Inventory
2010-11
2011-12
2012-13
2013-14
2014-15
Raw Materials 4942312421
Work in Process 3638342722
Finished Goods 2230271523
Inventory 1167112510885
TABLE NO. 15RAW MATERIALS HOLDING PERIOD
Inventory2010-112011-122012-132013-142014-15
Raw Materials 4942312421
494231242105101520253035404550Times2008-092009-102010-112011-122012-13YearsRAW
MATERIALS HOLDING PERIODRaw Materials 2011 2012 2013 2014
2015INTERPRETATIONInventory holding period is 49 days in the year
2011. But, it is decreased to 42 days in the year 2012. Then, it is
decreased continuously to 21 days in the year 2015
respectively.
TABLE NO. 16WORK IN PROCESS HOLDING PERIOD
Inventory2010-112011-122012-132013-142014-15
Work in Process 3638342722
36383427220510152025303540Times2008-092009-102010-112011-122012-13YearsWORK
IN PROCESS HOLDING PERIODWork in Process 2011 2012 2013 2014
2015INTERPRETATIONWork-in-process holding period is 36 days in the
year 2011. But, it is increased to 38 days in the year 2012. Then,
again it is decreased continuously to 22 days in the year 2015
respectively.
TABLE NO. 17
FINISHED GOODS HOLDING PERIOD
Inventory2010-112011-122012-132013-142014-15
Finished Goods 2230271523
2230271523051015202530Times2008-092009-102010-112011-122012-13YearsFINISHED
GOODS HOLDING PERIODFinished Goods 2011 2012 2013 2014
2015INTERPRETATIONFinished Goods holding period is 22 days in the
year 2011. But, it is increased to 30 days in the year 2012. Then,
again it is decreased to 15 days in the year 2014 and increased to
23 days in the year 2015 respectively.
TABLE NO. 18INVENTORY HOLDING PERIOD
Inventory2010-112011-122012-132013-142014-15
Raw Materials 4942312421
Work in Process 3638342722
Finished Goods 2230271523
Inventory 1167112510885
1167112510885020406080100120140Times2008-092009-102010-112011-122012-13YearsINVENTORY
HOLDING PERIODInventory 2011 2012 2013 2014
2015INTERPRETATIONInventory holding period is 116 days in the year
2011. But, it is decreased to 71 days in the year 2012. Then, it is
increased continuously to 108 days in the year 2014 and decreased
to 85 days in the year 2015 respectively.
TABLE NO. 19COMPARISON OF INVENTORY HOLDING PERIOD
Inventory2010-112011-122012-132013-142014-15
Raw Materials 4942312421
Work in Process 3638342722
Finished Goods 2230271523
Inventory 1167112510885
020406080100120140TIMES2008-092009-102010-112011-122012-13YEARSCOMPARISON
OF INVENTORY HOLDING PERIODRaw Materials Turnover RatioWork in
Process Turnover RatioFinished Goods Turnover RatioInventory
Turnover Ratio 2011 2012 2013 2014 2015INTERPRETATIONThe above data
indicates inventory holding period is 49 days in the year 2011.
But, it is decreased to 42 days in the year 2012. Then, it is
decreased continuously to 21 days in the year 2015
respectively.
SAFETY STOCK
Safety stocks are held to protect against the uncertainties of
demand and supply. An organization generally knows the average
demand for various items that it needs. However, the actual demand
may not exactly match the average and could well exceed it. To meet
this kind of a situation, inventories may be held in excess of the
average for expected demand. Similarly, the average delivery time
(that is, the time elapsing between placing an order and having the
goods in stock ready for use, and technically called as the lead
time) may be known. But unpredictable events could cause the actual
delivery time to be more than the average. Thus, excess stocks
might be kept in order to meet the demand during the time for which
the delivery is delayed. These inventories which are in excess of
those necessary just to meet the average demand (during the average
lead time period), held for protecting against the fluctuations in
demand and lead time.
Safety stocks should be as small as possible for A materials,
since those materials have a high value, which means that even
small stocks would generate a high inventory value. For C parts
also, the safety stocks shouldnt be too high, but they can contain
more buffers than the A material stocks because the value of C
materials is lower. A materials should be regularly procured in
short order cycles. C materials can be procured weekly or monthly
in fixed lot sizes.
Lead time is the period that elapses between the recognition of
a need and its fulfillment. There is a direct relationship between
lead time and inventories.Lead time has two components:(a)
Administrative lead time(b) Delivery lead time
For example the safety stocks are determined in table below:
SAFETY STOCK FOR PE ITEMS
DESCRIPTIONANNUALCONSUMPTION LEADTIMEPER DAYREQ.SAFETYSTOCK
PE-A257016055 Days7042387310
PE-B75430860 Days2067124020
PE-C41395265 Days113473710
PE-D11920850 Days32716350
PE-E43158070 Days118282740
PE-F5774448 Days1587584
PE-G67560065 Days1851120315
SAFETY STOCK FOR LEAD ITEMS
DESCRIPTIONANNUALCONSUMPTION (MT)LEADTIMEPER
DAYREQ.SAFETYSTOCK
LEAD-A5182857 Days1428094
LEAD-B937255 Days261430
LEAD-C902450 Days251250
LEAD-D277248 Days8384
LEAD-E670845 Days18810
LEAD-F490860 Days13780
LEAD-G8440 Days0.239
LEAD-H254445 Days6.97315
LEAD-I280850 Days8400
LEAD-J67255 Days2110
LEAD-K61248 Days296
SAFETY STOCK FOR AGM ITEMS
DescriptionAnnual Consumption(Kgs)LeadTimePer
DayReq.SafetyStock
AGM A62966457172598325
AGM B893285724513965
AGM C0000
AGM D870365723813566
AGM E673325718410488
AGM F0000
AGM G2407257663762
AGM H26457157
AGM I876485724013680
AGM J705657191083
AGM K 40000571327524
AGM L650765717810146
AGM M0000
AGM N1243257341938
AGM O 759965720811856
AGM P1263657351995
AGM Q0000
AGM R0000
AGM S 1099257301710
AGM T59405716912
AGM U0000
AGM V2275257623534
AGM W 786057221254
5.1 FINDINGS Variance and uncertainties in lead time.Good
quality of materials is supplied to stores.Gradual increase in the
inventory (levels) consumptions.As the procurement of the orders is
not according to the requirement of the orders received, a major
part of the inventory is held up as non-moving.The stores
department depreciation is increased during the year 2010-2011 and
2011-2012. They calculated depreciation on dead items also this is
affected to coming loss.Do not have well defined out bound
logistics system.Have not been implementing any evolved technique
in material or stores management like two bin system or Just in
Time.
5.2 SUGGESTIONS
The company has to concentrate more on Research and Development
so that it can keep abreast with the latest Developments.Weekly
inventory report should be prepared without fail. This helps to
ensure quality, controlling of materials, eliminations of exclusive
wastage scrap, spoilage and defective and detailed information of
the materials in the stores.The company has to maintain sufficient
stocks of finished products to meet reasonable expectations of
customers for prompt delivery of their orders. The company has to
eliminate dead inventory as depreciation is charged even on the
dead inventory and this has resulted in decrease profits. Company
should strive for "getting the right goods to the right places at
the right time for the least cost". Company has to position
inventory items according to risk and opportunity. Company has to
distinguish between bottleneck items, critical Items (high risk,
high opportunity).
CONCLUSIONSThe company can reduce ordering cost by the following
proper inventory management technique like Just in Time
(JIT)JUST-IN-TIMEIt is philosophy of continuous improvement in
which non value adding activities (or wastes) are identified and
removed for the purpose of:1)Reducing Cost2)Improving
Quality3)Improving performance4)Improving Delivery5)Adding
Flexibility6)Increase InnovationsJIT is not about automation. It
not only eliminates waste but also helps for controlling inventory
by providing the environment to perfect and simplify the processes.
It is collection of techniques used to improve operations. It can
also be a new production system that is used to produce goods and
services.When the JIT principles are implemented successfully,
significant competitive advantages are realized. JIT principles can
be applied to all parts of an organization: order taking,
purchasing, operations, distribution, sales, accounting, design,
etc.,
ELIMINATION OF WASTEJIT usually identifies seven prominent types
of waste to be eliminated:a)Waste from over production.b)Waste of
waiting/idle time.c)Transportation waste.d)Inventory
waste.e)Processing waste.f)Waste of motion.g)Waste from product
defects. Where the JIT concept is implemented?Transfer of plastic
moulds from plastic Manufacturing Unit to Automotive Battery
Division.Transfer of Finished components from Mangal Precision
Products to Industrial Battery Division.
Inventory control is the Life System control needed for
continuous operation in all businesses. Inventory can be compared
to the life blood of the human body. Just as used-up red and white
cells need replacement in the human body in the correct quantity
and quality at the right time for continuous operation.
BIBLIOGRAPHY
REFERENCE BOOKSS.P. JAIN, K.L. NARANG (2003),"Advanced
Accountancy"10 Edition, Kalyani Publishers, Ludhiyana.I.M. PANDEY
(2002),"Financial Management"8th Edition, Vikas Publishing House
Pvt. Ltd., New Delhi.R.K. SHARMA, SHASHI K. GUPTA," Management of
Accounting"2nd Edition, Kalyani Publishers, Ludhiyana.PRASANNA
CHANDRA (2002),"Financial Management"5th Edition, Tata-McGraw hill
Publishing Company Ltd., New Delhi.M.Y. KHAN and P.K.
JAIN,"Management Accounting", Tata McGraw Hill Publishing Company
Limited, New Delhi.
JOURNALSThe ICFAI journal of applied financeFinance India
(Indian Institute of Finance)Investment Monitor
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