CONTENTS · Acknowledgment · Certificate CHAPTER 1 Introduction (Pg.-3) · An Introduction of Working Capital Management · Objectives of the project · Scope of the project CHAPTER 2 Research Methodology (Pg.-27) · Collection of data · Research Design · Limitations of the research CHAPTER 3 Company Profile (Pg.-34) · Steel industry in India · Competitors in the market · SWOT analysis of the company CHAPTER 4 Analysis and Discussion (Pg.-40) · Working Capital Analysis various departments of TATA Steel · Operating Cycle of TATA Steel · Inventory Management · Manufacturing Process · Receivables Management · Management of Accounts Payable · Comparative analysis of Working Capital through Ratios · EOQ Analysis 0
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CONTENTS
· Acknowledgment · Certificate CHAPTER 1 Introduction (Pg.-3) · An Introduction of Working Capital Management · Objectives of the project · Scope of the project CHAPTER 2 Research Methodology (Pg.-27) · Collection of data · Research Design · Limitations of the research
CHAPTER 3 Company Profile (Pg.-34) · Steel industry in India · Competitors in the market · SWOT analysis of the company
CHAPTER 4 Analysis and Discussion (Pg.-40) · Working Capital Analysis various departments of TATA Steel · Operating Cycle of TATA Steel · Inventory Management · Manufacturing Process · Receivables Management · Management of Accounts Payable · Comparative analysis of Working Capital through Ratios · EOQ Analysis CHAPTER 5 Conclusion & Summary (Pg.-76) ·Bibliography(Pg.-81)
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ACKNOWLEDGEMENT
An understanding of the study like this is never the outcome of the efforts of a single person; rather it bears the imprint of a number of persons who directly or indirectly helped me in completing the present study. I would be failing in my duty if I don’t say a word of thanks to all those whose sincere advice made my training period a real educative and pleasurable one.
I wish to acknowledge my whole hearted gratitude to Mr.Uttam Kumar Roy(Senior Finance Manager),who is my Training Faculty in TATA STEEL for providing help and guidance in the course. I am really very thankful to him for his encouragement given to me time to time and also for his help and guidance while programming.
I also express my immense gratitude to Mr.Vivek Kamra, Executive-In-Charge [Tubes], and Mr.Ashish Anupam (Chief Mktg & Sales, Tubes) for giving me opportunity for doing my project in TATA STEEL.
My sincere regards also continue for Mr. Vineet Saraf (Regional Sales Manager, Tubes) and Mr. Rajan Babu (Regional Finance Manager), for their valuable guidance and support all through my intern-ship.
I am also thankful to Mr. Shiva Kant Vishwakarma (Executive assistant to EIC, Tubes) who spent his valuable in coordinating to obtain approval from TATA STEEL management which allowed me to work upon my intern-ship project in TATA STEEL.My sincere thanks to my Faculty Guide, Mrs. Puja Agrawal (Senior Lecturer, Finance, Amity School of Business) who guided me through whole of my project and answered all of my queries without which it would have been difficult to complete the project in the correct manner.
1
An Introduction of
WORKING CAPITAL
MANAGEMENT
2
3
N ature of Working Capital
Management:
Working capital management is concerned with the problems that arise
in attempting to manage the current assets, the current liabilities and the
interrelationship that exists between them.
Current assets
It refers to those assets, which in the ordinary course of business can be,
or will be, converted into cash within one year without undergoing a
diminution in value and without disrupting the operations of the firm.
Example: Cash, marketable securities, accounts receivable and inventory
are the major current assets.
4
Current liabilities
These are those liabilities that are intended, at their inception, to be paid
in the ordinary course of business, within a year, out of current assets or
earnings of the concern.
Example: accounts payable, bills payable, bank overdraft and
outstanding expenses are the major current liabilities.
G OAL OF WORKING CAPITAL
MANAGEMENT:
The goal of WCM is to manage the firm’s current assets and liabilities in
such a way that a satisfactory level of working capital is maintained. This
is so because if the firm can’t maintain the satisfactory level of working
capital, it is likely to become insolvent & may even be forced into
bankruptcy. The current assets should be large enough to cover its
current liabilities in order to ensure a reasonable margin of safety. Each
5
of the current assets must be managed efficiently in order to maintain
the liquidity of the firm while not keeping too high a level of anyone of
them. Each of the short sources of financing must be continuously
managed to ensure that they are obtained and used in the best possible
way. The interaction between current assets & current liabilities is,
therefore the main theme of the theory of working capital management.
T ASK OF FINANCIAL MANAGER:
The task of financial manager in managing working capital efficiently is to
ensure sufficient liquidity in the operations of the enterprise. The
liquidity of a business firm is measured by its ability to satisfy short-term
obligations as they become due. The three basic measures of a firm’s
overall liquidity are
1) The current ratio
2) The acid-test ratio and
3) the net working capital.
6
I NGREDIENTS OF WORKING CAPITAL
MANAGEMENT:
There are three ingredients of working capital working capital
management, which are as follows:
1) TRADE-OFF BETWEEN PROFITABILITY AND RISK
2) DETERMINING FINANCING MIX
There are 3 basic approaches to determine an appropriate financing mix:
(a) Hedging approach, also called the Matching approach;
(b) Conservative approach, and
(c) Trade-off between these two.
7
N EED FOR WORKING CAPITAL:
The need for working capital (gross) or current assets can’t be
overemphasized. Given the objective of financial decision making to
maximize the shareholder’s wealth, it is necessary to generate sufficient
profits. The extent to which profits can be earned will naturally depend
upon the magnitude of the sales. A successful sales program is necessary
for earning profits by any business enterprise. However, sales don’t
convert into cash instantly; there is invariably a time lag between the
sale of goods and the receipt of cash. There is, therefore, a need for
working capital in the form of current assets to deal with the problem
arising out of the lack of immediate realization of cash against goods
sold. Therefore, sufficient working capital is necessary to sustain sales
activity. Technically, this is referred to as the operating or cash cycle.
8
OPERATING CYCLE:
The operating cycle can be said to be at the heart of the need for
working capital.
The continuing flow from cash to suppliers, to inventory, to accounts
receivables and back into cash is what is called operating cycle. In other
words the term cash cycle refers to the length of time necessary to
complete the following cycle of events:
Conversion of cash into inventory;
Conversion of inventory into receivables;
Conversion of receivables into cash;
9
Operating cycle
Operating Cycle is calculated as R + W + F + D – C
Where,
R = Raw material storage period
W = WIP Holding Period
F = Finished Goods Storage Period
D = Debtors Collection period
10
Cash
Receivables
InventoryPhase I
Phase III
Phase II
C = Credit period availed
C hanges in Working Capital
The changes in the level of working capital occur for the following three
basic reasons:
1. Changes in the level of sales and operating expenses.
2. Policy changes.
3. Changes in technology.
Changes in sales and operating expenses
The first factor causing a change in the working capital requirement is a
change in the sales and operating expenses. The changes in this factor
may be due to 3 reasons:
There may be a long run trend of change. For instance, the price of a raw
material may constantly rise, necessitating the holding of a large
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inventory. The Secular trends would mainly affect the need for
permanent current assets.
In the second place, Cyclical changes in the economy leading to ups and
downs in business activity influence the level of working capital, both
permanent and temporary.
The third source of change is seasonality in sales activity. Seasonality-
peaks and troughs- can be said to be the main source of variation in the
level of working capital.
Policy changes
The second major cause of changes in the level of working capital is
because of policy changes initiated by the management. A firm following
a conservative policy in this respect having a very high level of current
assets in relation to sales may deliberately opt for a less conservative
policy and vice versa. These conscious managerial decisions certainly
have an impact on the level of working capital.
12
Technological changes:
Finally, technological changes can cause significant changes in the level
of working capital. If a new process emerges as a result of technological
development, which shortens the operating cycles, it reduces the need
for working capital and vice versa.
13
D etermination of working capital
(I)Estimation of Current Asset:
Minimum desired cash & bank balances
Inventories
Raw material
Work-in-process
Finished Goods
Debtors
Total current assets
(II) Estimation of Current Liabilities:
Creditors
Wages
Overheads
Total Current Liabilities
14
(III) Net Working Capital (I-II)
Add margin for contingency
(IV) Net Working Capital Required
15
OBJECTIVES OF THE
PROJECT
16
UNDERSTANDING THE CONCEPT AND
IMPORTANCE OF WORKING CAPITAL
MANAGEMENT:
One of the major objectives of our project is to understand the concept
of WORKING CAPITAL MANAGEMENT.
Understanding the meaning of two terms i.e. gross working capital and
net working capital.
To know the two types of working capital i.e., permanent working
capital and temporary working capital. Working Capital Management
policies have a great effect on a firm’s profitability, liquidity and its
structural health. A finance manager should therefore, chalk out
appropriate working capital management policies in respect of each of
the components of working capital so as to ensure higher profitability,
proper liquidity and sound structural health of the organization.
17
UNDERSTANDING VARIOUS STEPS OF
OPERATING CYCLE SO WHICH ARE
INVOLVED IN WORKING CAPITAL
MANAGEMENT.
Steps of operating cycle which are necessary for proper working capital
management. These steps include:
Management of cash -
It is the duty of the Finance Manager to provide adequate cash to all
segments of the organization. He has to ensure that no funds blocked in
idle cash since this will involve cost in terms of interest to the business. A
sound cash management scheme, therefore, maintains the balance
between the twin objectives of liquidity and cost.
18
Management of Accounts Receivable and Payable -
Accounts receivables constitute a significant portion of the total
current assets of the business next after inventories. They are a
direct consequence of ‘trade credit’ which has become an essential
marketing tool in modern business.
Accounts payable constitute a significant portion of the total
current assets of the business. The objective in accounts payable is
to slow down the payments process as much as possible. Whereas
the underlying objective in accounts receivables is to maximize
acceleration of the collection process.
Management of inventories -
Inventories often constitute a major element of the total working
capital and hence it has been correctly observed, “Good inventory
management is good financial management”.
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UNDERSTANDING THE WORKING
CAPITAL MANAGEMENT OF TATA
STEEL [tubes division] Ltd.
Analyzing the data available with the help of various diagrams and
graphical tools of presentation like bar graphs, line graphs etc.
This would strengthen the theoretical knowledge that we have about
working capital management.
GETTING TO A CONCLUSION:
Getting to a conclusion regarding the appropriate and inappropriateness
of the working capital management strategies of Tata Steel ltd.
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GIVING SUGGETIONS AND
RECOMMENDATIONS
Giving suggestions and recommendations based on my theoretical
knowledge and practical analysis of data to make the working capital
management of TATA Steel ltd. better.
21
SCOPE OF THE PROJECT
22
This project report focuses on the working capital management of TATA
STEEL and its comparison with the industry and its competitors.
Chapter wise scope of the project is as follows-
Starting with the Company Profile which contains brief information
about the history, competitors, product range and the diverse fields in
which the company is operating. It creates an image of the company in
the reader’s mind which will further help the reader to understand the
project properly.
The next chapter is Research Methodology which indicates the various
sources of data used to make the project report and the type of research
design which is used to make it more meaningful.
The research methodology is followed by an overview of working capital
management which gives the theoretical knowledge of working capital
management which in turn would help building a strong base for the
research ahead. Theory is accompanied by graphs and diagrams which
would help the reader to understand the project and the subject
thoroughly.23
Next is Presentation and Analysis of data. Analyzing the data available
with the help of various diagrams and graphical tools of presentation like
bar graphs, line graphs etc. This would strengthen the theoretical
knowledge that we have about working capital management.
The last chapter is Conclusion & Recommendations. This chapter
contains the critical evaluation of the presentation and analysis of data.
Recommendations include what should be done to make the situation
better.
The aim of the project is to learn the importance of working capital
management for the efficient utilization of funds and proper financial
management of the company. The non-ideal production technology and
imperfect market and distribution systems are responsible for the
generation of current assets, which block the funds of an enterprise.
Working Capital is needed to release such blockage of funds. However
the consideration of the level of investment in current assets should
avoid two danger points- excessive and inadequate investments in
current assets.
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The concerned unit is a manufacturing unit so a good management of
working capital is indispensable for the company. The content of the
report has a clear sequence which defines the present background of the
company and TATA’s contribution to the market.
It discusses the method of comparison of financial statement of
companies like ratio analysis, working capital analysis and trend analysis
etc. Various ratios, which are required to be calculated, have been stated
in the report. The project deals with the study of working capital of the
company and to find method and solutions for achieving the most
efficient level. It will also look into the approach of risk return trade off in
terms of the cost of maintaining a particular level of current assets,
which are:
1) The cost of liquidity and
2) The cost of profitability.
The project deals with analyzing the operating cycle of the company and
discusses the technique used by the company for its management.
25
RESEARCH
METHODOLOGY
COLLECTION OF DATA26
DATA SOURCES :
Having defined and formulated a research problem and having
determined the objectives of research, a researcher has to face the
problem of data collection. The information collected should be both
accurate and relevant, as per the requirements of the researcher, who
has to work out a suitable data collection method.
Data collection methods can be broadly classified into
Primary methods
Secondary methods
Data collected from Primary methods is known as Primary data and data
collected from Secondary methods is known as Secondary data.
27
In this project I have used Secondary data most of which
was obtained from internal records of the company.
Usage of Secondary data enjoys some advantages but it
suffers from some limitations too.
ADVANTAGES OF SECONDARY DATA:
- The major advantage of secondary data is economy.
As the data are already available, they can be obtained at a
relatively low cost.
- The secondary data can be obtained quickly.
The secondary data enable the researchers to identify the
deficiencies in the data.
They are useful in the case of exploratory researches as they
provide increased understanding of the problem.
- The secondary data can be easily compared.
28
LIMITATIONS OF SECONDARY DATA :
- The available data may not suit the current purpose of research,
due to incompleteness, generalities and so on.
- Information may be outdated or obsolete.
- The methodology used in collecting the data such as the sample
size, date of the research, etc., may be unknown.
- All the findings of a research study may not be made public.
- Conflicting data may exist.
- It may be difficult to determine the accuracy of secondary data.
29
RESEARCH DESIGN
Research design or model indicates a plan of action to be carried out in
connection with a proposed research work. It provides a guideline for
the researcher to enable him to keep track of his actions and to know
that he is moving in the right direction in order to achieve his goal.
The purpose of research is to provide information that will aid in
management decision making.
TYPES OF RESEARCH DESIGN:
On the basis of the objectives of the marketing research can be classified
into:-
Exploratory Research
Conclusive Research
30
The research design for exploratory research is best characterized by its
lack of structure and flexibility. It is generally used for the development
of hypothesis regarding potential opportunities and problems.
Exploratory research is further subdivided into
- Search of secondary data
- Case study
- Survey of experts
Conclusive research which is use to provide information for the
evaluation of the alternative courses of action can be sub-divided into
- Descriptive research.
- Causal or experimental research.
In this project Exploratory research design has been
used. Flexibility and creativity characterize exploratory
research study.31
L imitations of the research
As only the secondary data is used in this project, it was difficult to
determine the accuracy of the data.
Some amount of data was not updated and was not of much use.
A considerable amount of conflicting data was there which was difficult
to match with.
Because of the company’s policy of maintaining secrecy some amount of
data was not made available to me which could have helped me in
making my project report better.
32
Company Profile:Established in 1907, Tata Steel is the world's 6th largest steel company with an existing annual crude steel capacity of 28 million tonnes. Asia's first integrated steel plant and India's largest integrated private sector steel company is now the world's second most geographically diversified steel producer, with operations in 24 countries and commercial presence in over 50 countries.
Tata Steel completed 100 glorious years of existence on August 26, 2007 following the ideals and philosophy laid down by its Founder, Jamsetji Nusserwanji Tata. The first private sector steel plant which started with a production capacity of 1,00,000 tonnes has transformed into a global giant .
Tata Steel plans to grow and globalise through organic and inorganic routes. Its 5 million tonnes per annum (MTPA) Jamshedpur Works plans to double its capacity by 2010. The Company also has three greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh and proposed steel making facilities in Vietnam and Bangladesh.
Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand) and NatSteel Asia, Singapore, the Tata Steel has created a manufacturing and marketing network in Europe, South East Asia and the Pacific-rim countries. Corus, which manufactured 18.3 MT of steel in 2006, has operations in the UK, the Netherlands, Germany, France, Norway and Belgium. Tata Steel (Thailand) is the largest producer of long steel products in Thailand, with a manufacturing capacity of 1.7 MT. NatSteel Asia produces about 2 MT of steel products annually across its regional operations in seven countries.
Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has also entered the steel building and construction applications market.
33
The iron ore mines and collieries in India give the Company a distinct advantage in raw material sourcing. Tata Steel is also striving towards raw materials security through joint ventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman.
Exploration of opportunities in titanium dioxide business in Tamil Nadu, high carbon ferro-chrome plant in South Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growth and Globalisation objective of Tata Steel.
Tata Steel's vision is to be the global steel industry benchmark for Value Creation and Corporate Citizenship.
Tata Steel is one of the few steel companies in the world that is Economic Value Added (EVA) positive. It was ranked the "World's Best Steel Maker", for the third time by World Steel Dynamics in its annual listing in February, 2006. Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times.
Products
Tata Steel is a global player with a balanced presence in developed European and fast growing Asian markets and with a strong position in the construction, automotive and packaging markets. Its Jamshedpur steel works produces hot and cold rolled coils and sheets, galvanised sheets, tubes,
wire rods, construction rebars, rings and bearings. In an attempt to 'decommoditise' steel, the Company has introduced several branded steel products, including Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (rebars), Tata Pipes, Tata Bearings, Tata Structura, Tata Agrico (hand tools and implements) and Tata Wiron (galvanised wire products). In the financial year 2006-07 revenue from the sale of these branded steel products was 26% of the company's sales revenues.
34
Corus' main operating divisions comprise Strip Products, Long Products and Distribution & Building Systems Division. Combining international expertise with local customer service, the company supplies a range of long and strip products to demanding customers worldwide in markets including the construction, automotive, packaging and engineering sectors. The NatSteel group produces construction grade steel such as rebars, cut-and-bend, mesh, precage bore pile, PC wires and PC strand. Tata Steel Thailand produces round bars and deformed bars for the construction industry.
Corporate Sustainability
Regarded globally as a benchmark in corporate social responsibility, Tata Steel's commitment to the community remains the bedrock of its hundred years of sustainability. Its mammoth social outreach programme covers the company-managed city of Jamshedpur and over 800 villages in and around its manufacturing and raw materials operations through uplift initiatives in the areas of income generation, health and medical care, education, sports, and relief.
The Company, fully conscious of its responsibilities to the future generations, has always taken pro-active measures to ensure optimum utilization of natural resources. This is reflected in the ISO-14001 certification that all its operations have achieved for environment management. The SA 8000 certification for work conditions and improvements in the workplace at the steel works in Jamshedpur, along with its Ferro Alloys and Minerals Division, is a reiteration of its commitment towards the Company's employees. Tata Steel has pioneered numerous employee welfare measures such as the 8 hours working day and the three tier joint consultation system of management which have been the platform for nearly 80 years of industrial harmony in its Steel Works in Jamshedpur.
Global Compact, United Nations -
Founder member.
35
Jamshedpur city has been chosen to participate in the UN Global Compact Cities Pilot Programme.
Awards and Recognition
World Steel Dynamics has ranked Tata Steel as the world's best steel maker (for two consecutive years) in its annual listing in February 2006.
Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times.
It has been awarded Asia's Most Admired Knowledge Enterprise award in 2003, 2004 and 2006.
Conferred the prestigious Global Business Coalition Award for Business Excellence in the Community in recognition of its pioneering work in the field of HIV/ AIDS awareness.
Tata Steel works has been conferred the prestigious social accountability (SA) 8000 certification by social. Accountability international (SAI), USA. It is the first steel company in the world to receive this certificate.
Corporate Sustainability Report of Tata Steel hailed by United Nation's Environment Programme (UNEP) and Standard and poor as strongest, submitted by any corporate house from emerging economies.
Best governed company Award 2006 for setting high standards in governance practices.
Tata Steel conferred Mother Teresa Award for Corporate Citizen. Tata Steel won "Award for Corporate Social Responsibility in Public
health" by US- Indian Business Council (USIBC), Population Services International (PSI) and the center for Strategic and International Studies (CSIS) in 2007.
36
SWOT Analysis of the Company:
Strength:
- 6th Largest Steel Manufacturer in world- Brown field expansion in Jamshedpur and
Greenfield project at Kalingangar to meet increasingdemand in future.
- TSL has formed a Global Minerals Group, in-orderto explore various opportunities to secure access toiron ore and coal in various geographies.
Weakness:
- TSL’s bottom line will be affected to increase in Interest cost, due to long term debt raised by the company for Corus acquisition.
Opportunities:
- The International Iron and Steel Institute forecast global steel consumption to grow at 6.1% in FY 08 driven by strong demand from Asia, Africa and South America.
- The amount allocated for development of infrastructure for 11th Five year plans amounts to USD 320 bn. As a result, the domestic steel consumption is expected to increase to 65 mn. Tones by FY 10 and over 125 mn tones by FY 15.
37
Threats:
- Increase in imported raw material prices may affect the operating margins of the companies.
- Change in economic environment- Threat of increased production in China and its ability to export.- Assuming interest rate goes up by 50 bps (Corus funding), such
increase will impact the PAT margins by 23 bps.
38
ANALYSIS AND
DISCUSSION
39
PRESENTATION AND ANALYSIS OF DATA:
Working Capital Analysis of TATA STEEL Ltd.
Working capital is a financial metric which represents the amount of day-
by-day operating liquidity available to a business. Also known as
operating capital, it is calculated as current assets minus current
liabilities. A company can be endowed with assets and profitability, but
short of liquidity, if these assets cannot readily be converted into cash. It
is a two edged sword where excess of working capital implies blockage of
fund and low working capital gives a fear of falling into liquidity crunch
therefore it is rightly said that :
“Never cross the border, wisdom says, there is fire beyond
the border”
40
The working capital of the company is given below:
41
Working capital of the company showing by graph:
2002-03 2003-04 2004-05 2005-06 2006-070.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
Working Capital
Gross Working Capital Net Working Capital
The figures above shows that the company has managed to bring down
the working capital which is a positive sign. A detailed analysis of the
various constituents of the working capital has been done to learn the
intricacies which have been managed to get the result.
42
The figure above shows that Gross Working Capital has an increasing
trend whereas net working capital is going down and in the year 2006-07
it has decreased too much. But prima facie it suggests that investment in
current assets has increased much and the liabilities have also not been
fixed to a great extent. There may be several reasons which will be
discussed later in detail.
43
OPERATING CYCLE OF TATA STEEL:
Operating cycle of TATA STEEL showing below:
2002-03 2003-04 2004-05 2005-06 2006-070
10
20
30
40
50
60
70
OPERATING CYCLE OF TATA STEEL
44
Working capital statement of TATA STEEL till 2007 showing below:
The operating cycle shows an irregular trend. It was increasing all the
way but all of a sudden it went down in 2006-07. The main reason
behind this is that debtors’ collection period has decreased and
creditors’ payment period has increased a lot. The credit period granted
by customers is generally 90 days but since the company is running on
loss sometimes it cannot pay the amount in stipulated time, this has led
to the increase in credit period availed from customer and thus
decreased the operating cycle to such an extent.
45
INVENTORY MANAGEMENT
“In clarity and confusion, imagination and emotion Creation
Proceeds towards Perfection”
For a long time inventory management remained everybody’s concern
but nobody’s responsibility. Every organizational unit along the
productive distributive channel of an enterprise wants to have full
control over the inventory it deals in: the purchasing department for
materials inventory; production department for work in process, and
marketing department for finished goods inventory. Although the
distribution appears to be logical, inherent in it is the tendency to
maximize individual goals at the cost of organizational goals. Thus the
process of sub-optimization begins which leads to disastrous results for
the enterprise and put inventory management in disarray.
46
Worldwide the corporate failures during and after the Second World War
and lately during ‘70s, led the corporate thinkers to redefine the goals of
inventory management as a part of overall materials management of the
enterprise. Materials requirement planning (MRP) which emerged as a
new discipline, attempted to define inventory management as an
integral part of MRP whose broad goals are: (1) to minimize investment
in inventory: (2) to ensure smooth and efficient operation of the plant
and, (3) to maximize customer service and satisfaction.
The TATA STEEL Limited has varied product line.[which includes Long
tubes, Semis, Hot Rods, Cold rods, Galvanized Tubes]. A number of
materials small and big are used in the production process. Their efficient
management is very much required to use the resources profitably.
A manufacturer is required to hold almost all the three types of
inventories namely raw materials, work in process and finished goods.
Inventory problems are most complex here because of the complexity of
47
products (e.g. a project or finished goods), processes (e.g. continuous or
intermittent) and distribution (e.g. geographical locations).
Inventory Strategy:
Inventory strategies vary with the kind of focus strategy and the product
market. For a cost focus strategy, make to stock could be ideal. For
focused premium market segment the strategies could partly be make to
stock and partly assemble to order. Focused differentiation in custom
based products may follow inventory strategy of make to order or
engineer to order. In both the cases production would not start until an
order is received. The consultancy Element is greater in the latter than in
the former strategy, which requires designing and/or developing a
prototype according to customer requirement and then producing it.
Customer wait time is therefore, longer in engineer to order strategy
than in make to order strategy.
The TATA STEEL [tubes division] uses Just – In - Time Purchases system
for its inventory and TOC (theory of constraints). The company runs on
48
the system make to order. Production is made on the basis of order
received or expected orders to be received. The marketing department
makes an estimation of the order to be received and accordingly issues
directions to the shop floor for the production requirement. The shop
floor on the basis of above requisitions check out its materials in stock
and accordingly issues requisition for purchase of raw materials to
purchase department.
49
A close look on the figures and graphs showing in figure 1,2,3.
50
Table 1:
2002-03 2003-04 2004-05 2005-06 2006-07
0
2
4
6
8
10
12
14
16
18
20
Consumption of Raw Materials per Day
2002-03 2003-04 2004-05 2005-06 2006-07
0
5
10
15
20
25
30
Raw Materials Inventory In Days
Graph 11 Graph 12
A close look on the figures and graphs above indicates that in the last
four years though the sales remained same or has decreased but the
stock of raw materials has increased. Besides this the consumption has
also increased from 66% in 2002-03 to 66.18% in 2006-07. This was due
to the fact the company has so far been unable to recover the rise in 51
price of raw materials from its sales. The price of raw material has
increased a lot from 2002 to 2007 but due to stiff competition in the
market it cannot be recovered by increasing the sale price so that the
company should not lose its market share. The increase in inventory may
pertain to wrong estimation of executable orders based on which
purchases were made which added on to the stock.
Manufacturing Process (Production Phase)
It is the process by which raw material or semi finished goods are
converted into finished goods by doing some processing on them or
adding something to them. Given below is the five-year data. To
calculate its effect on working capital requirement work in progress in
operating days is calculated for the following five years.
52
PRODUCTION PHASE of the TATA STEEL showing in table 2.
Table 2 (above)
Work in Progress (Holding Period 2002 to 2007) showing in graph 3:
2002-03 2003-04 2004-05 2005-06 2006-070
2
4
6
8
10
12Work In Progress Holding Period
Graph 3
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The data above shows that both cost of goods produced and work in
progress have increased during the period. Work in progress holding
period has also increased which should be taken care of. Since cost of
goods produced per day and average work in progress has increased WIP
holding period has increased.
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RECEIVABLES MANAGEMENT:
Collection of Receivables from Debtors:
Accounts receivables of a firm are created on both sides of the
productive system. On one side of this system, the firm may make
advance payments to the suppliers of inventories (raw materials) to
ensure timely supply, particularly when the suppliers hold monopolistic
position in the market place, or when materials are in short supply, or
simply to develop a captive supply base. A firm may also be motivated to
make advance payments for pure short term financial and profitability
considerations. Any one or a combination of them will create accounts
receivable on the left side of the productive system which may replace
the box for supply creditors or hinge parallel to it.
On the other side of the productive system, a firm creates accounts
receivables when it sells its outputs on credit. These are popularly
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termed as sundry debtors by the English to distinguish it from other
forms of accounts receivables. Sundry Debtors constitute nearly 60
percent of accounts receivables of an enterprise. Many of the
considerations that weigh in the minds of a seller are similar to that of
making advance payment for supply of materials, though often on the
opposite direction. But there are more to it than this, which will be
discussed later.
Size of accounts receivable
Although accounts receivable does not find much place in economics
literature because of its non-existence in national accounting framework
and the assumption of perfect financial market, its enormity as a
financial variable cannot be ignored at the firm level when we find that
even in an advanced economy, like the United States, it constitutes more
than 20 % of the total assets of manufacturing firms. In India, it is about
26%.
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Trade Credit Marketing Finance Trade Off
Whatever way we look at it, accounts receivables imply trade credit, and
the decision to grant trade credit may either be part of marketing
strategy or pure finance strategy, but mostly it is a trade-off between
marketing and finance strategies of a business.
An important goal of marketing is matching of the demand of a market
segment with adequate and timely supplies. Choice of a correct
distribution system or channel is chosen is therefore, key to achieving
such a goal. The decision to pick up a particular channel has a long term
effect on the business. Once a channel is chose it is difficult to alter it in
short term because of commitments made to a large number of people
and to independent firms whose principal business is distribution. It
often takes years to develop a distribution channel which may remain
external to the enterprise, but gets integrated so much with it that it
takes up the character of a total business system. Any attempt to snap
even a small part of this chain may have the effect of ultimately blocking
the inventory flow through the system.
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Distribution Channels:
Choice of a particular distribution channel has a direct impact on
inventory holding and level of receivables. Even when an enterprise does
not desire to own the entire channel, working capital requirement does
not change except marginally. Such is the importance of correct choice of
a distribution channel. Direct marketing or owning a marketing channel
(which is also called zero level channel) is best from the point of view of
receivables management. As the manufacturer has direct control over
the distribution system, receivables are closely monitored resulting into
lower level of receivables holding. There is also less distortion in
marketing and credit information flow to the business. While marketing
research information enables the firm to understand quickly the
changing consumer needs and product behavior, the credit information
helps it understand credit behavior of customer, which forms the basic
input to decide whom to grant trade credit and the degree of monitoring
required for a particular customer or a group of customers owing to any
change in their creditworthiness.
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As more and more cash is received from the debtors the liquid funds
available for the working of the company increases. In TATA STEEL
debtors are given a credit period of 90 days. However to encourage an
early payment customers are being given a discount of 3 % on payment
within 15 days and 1 ½ % on payment within 30 days, with the condition
that they should not have any old outstanding account which is due for
more than 60 days. Given below is the data for receivables of the