Corrected Project Report 3-01-2011
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Transcript of Corrected Project Report 3-01-2011
CONTENTS
Chapter – I :
Introduction of research topic
Introduction Objective of the Study
Limitation of study
Chapter – II :
Research Methodology
Research methods
Sources of Data
Chapter – III :
Theoretical Framework of Inventory Management
Chapter – IV :
Company Profile
Chapter – V : Research Data Analysis & Interpretation.
Chapter – VI : Conclusions and Suggestions. Bibliography
Chapter – I
“INVENTORY MANAGEMENT’’FROM NILE LIMITED, HYDERABAD
INTRODUCTION
INTRODUCTION TO INVENTORY MANAGEMENT
Inventory Management or control refers to maintaining an adequate supply of material
to meet an expected demand pattern. It thus deals with determination of optimal policies
and procedures for procurement. Management of inventory is a risk return trade-off
exercise by mangers. Inventory is expressed in terms of both quantity and monetary
value. In terms of quantity, it can be expressed as the number of units of an item in stock
where as in monetary terms it is the sum total of the monetary value of all its items of
inventory..
Inventory refers to those idle resources which have economic value and thus it may
be defined as usable but idle resources that have economic value. Inventory is a stock of
direct or indirect material, from raw material to finished goods stocked in order to meet
an unexpected future demand. In other words inventory is a physical stock of goods kept
for the future purposes. Though Inventory is a blocked capital, in the sense that it is not
being used in the present, it plays a distinct role in the life of any organization for a
smooth and efficient running of business.
Thus the functions of inventory are to:
Protect against unpredictable fluctuations in demand and supply
Take the advantage of price discounts through bulk purchases
Take the advantage of batches and longer production run
Provide flexibility to allow changes in production plans in view of changes in
demands etc.
Facilitate uninterrupted production
The basic function of inventory is thus to insulate the production process from changes in
the external factors not in control of management.. It decouples various interlinked
functions and thus enables each function to conduct itself independently like Purchasing,
Production, Marketing etc
Classification of Inventory
Inventory is idle resources that have future economic value. It indicates that it may be
available in different forms depending upon the production cycle stage it is in.
Classification of inventory is done on this basis and thus the different classifications of
inventory are as follows
Raw materials - Raw materials are input goods intended for combination and/or
conversion through the manufacturing process into semi-finished or finished goods. They
change their form and become part of the finished product.
Components and Parts - Just as raw materials are converted to finished goods in a
manufacturing operation, components and parts are assembled into finished goods in an
assembly operation.
Maintenance, repair and operating Inventories (MRO) - These include parts, supplies, and
materials used in or consumed by routine maintenance and repair of operating equipment,
or in support of operations.
In-process goods - These are goods in the process of manufacturing and only partially
completed. They are usually measured for accounting purposes in between significant
conversion phases. In-process inventories provide the flexibility necessary to deal with
variations in demand between different phases of manufacturing.
Finished goods - These represent the completed conversion of raw materials into the final
product. They are goods ready for sale and shipment.
Resale goods - These are goods acquired for resale. Such goods may be purchased by a
wholesaler for resale to distributors, or by distributors for resale to consumers, etc.
Capital goods - These are items (such as equipment) that are not used up or consumed
during a single operating period, but have extended useful lives and must be expensed
over multiple operating periods. Tax laws require that such an item be capitalized, and a
predetermined percentage of its cost be recognized as an expense each operating period,
over a predetermined time frame, according to equipment classes.
Construction materials - These are raw materials and components for construction
projects such as a building, bridge, etc.
Hard goods/soft goods - What one identifies as hard goods and soft goods will vary
depending on the industry involved. For example, in data processing, hard goods include
apparatus such as computers and terminals, while soft goods include software, data
storage media, and the like.
Inventory Control Systems
Inventory control is concerned with minimizing the total cost of inventory. The three
main factors in inventory control decision making process are:
The cost of holding the stock (e.g., based on the interest rate).
The cost of placing an order (e.g., for row material stocks) or the set-up cost of
production.
The cost of shortage, i.e., what is lost if the stock is insufficient to meet all
demand.
The third element is the most difficult to measure and is often handled by establishing a
"service level" policy, e. g, certain percentage of demand will be met from stock without
delay.
OBJECTIVES OF THE STUDY
The main objective of the present study is to evaluate the performance of “Nile ltd” in
respect of inventory management. The specific sub-objectives of the study are given
below.
1. Categorizing the inventory in ABC for analysis in Nile ltd and to assess the
manage4ial level control on the vital items, in the inventory holding.
2. To study the method of major raw material controls being used in the Nile ltd.
3. To study the inventory management process in Nile ltd.
4. To evaluate the economic order quantity and lead time consumption of Nile ltd.
5. To evaluate reorder level, maximum stock level of Nile ltd.
6. To study which item is having the high percentage of usage in the processing of
finished goods.
7. To access the performance of inventory management of Nile ltd by selected
accounting ratios.
LIMITATIONS OF THE STUDY:
1. Financial policies of the organization are sensitive in nature; the same could not
be acquired easily.
2. Time constraint is another limitation to make the study more qualitative.
3. Another limitation of the study is collecting of data from finance department and
warehouse superiors. It is very difficult; as they are they are too busy in
discharging their own duties.
4. The study is limited to the Glass lining division of Nile Ltd.
Chapter –II
RESEARCH METHODOLOGY
For the purpose of the study data has been selected covering from 2006-2007 to 2009-
2010. Most of the data is based on the secondary data, personal discussions were held
with employees of stores department and finance department of Nile ltd.
The secondary data is the annual reports, other inventory valuation and quantity
reports. The data collected from the secondary source is processed and analyzed for
drawing inferences by applying simple statistical methods like percentage, average, etc.,.
The technical analysis like economic order quantity and ABC analysis have been studies.
Finally conclusions are drawn based on the study and suitable suggestions are made for
improving the performance of Nile ltd.
Chapter –III
THEORITICAL FRAMEWORK OF
INVENTORY MANAGEMENT
INVENTORY MANAGEMENT IN NILE LTD
Materials constitute the most significant part of the current assets of a large majority
of companies in India. On an average, materials are approximately 60 percent of current
assets in public limited companies in India. Because of large size of materials maintained
by firms, a considerable amount of funds is required to be committed to them. It is,
therefore, absolutely imperative to manage all aspects of material efficiently and
effectively in order to avoid unnecessary investment. A firm neglecting the management
of material will be jeopardizing its long-run profitability and many fail ultimately. It is
possible for a company to reduce its level of material to a considerable degree, e.g., 10 to
20 percent, without any adverse effect production and sales, by using simple material
planning and control techniques. The reduction in ‘excessive’ stocking material carries a
favorable impact on a company’s profitability.
Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business. In accounting inventory is considered an asset.
In business management, inventory consists of a list of goods and materials held available
in stock.
Inventory management is primarily about specifying the size and placement of stocked
goods. Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods. The
scope of inventory management also concerns the fine lines between replenishment lead
time, carrying costs of inventory, asset management, inventory forecasting, inventory
valuation, inventory visibility, future inventory price forecasting, physical inventory,
available physical space for inventory, quality management, replenishment, returns and
defective goods and demand forecasting. Balancing these competing requirements leads
to optimal inventory levels, which is an on-going process as the business needs shift and
react to the wider environment
Systems and processes that identify inventory requirements, set targets, provide replen-
ishment techniques and report actual and projected inventory status.
Handles all functions related to the tracking and management of material. This would in-
clude the monitoring of material moved into and out of stockroom locations and the rec-
onciling of the inventory balances. Also may include ABC Analysis, lot tracking, cycle
counting support etc.
Management of the inventories, with the primary objective of determining/controlling
stock levels within the physical distribution function to balance the need for product
availability against the need for minimizing stock holding and handling costs.
The reasons for keeping stock
There are three basic reasons for keeping an inventory:
1. Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amount of inventory to use in this "lead
time".
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where user
needs it, when he needs it" principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings in economies of scale,
thus inventory.
NATURE OF MATERIAL:
Materials are stock of the products a company is manufacturing for sale and
components that make up the products. Most manufacturing organizations usually divide
their "goods for sale" inventory into:
Raw Materials- materials and components scheduled for use in making a product.
Work in process, WIP - materials and components that have begun their
transformation to finished goods.
Finished goods - goods which are ready for sale to customers.
Goods for resale - returned goods that are saleable.
RAW MATERIALS:
Raw materials are those basic inputs that are converted into finished products through the
manufacturing process. Raw materials are those units which have been purchased and
stored for future production. They are required to carry out production activities
uninterruptedly. The quantity of raw materials required will be determined by the rate of
the consumption and the time required for replacing the supplies. The factors like the
availability of raw materials and government regulations, etc., too affect the stock of raw
materials.
Raw material turnover ratio indicates the number of time materials is replaced during the
year. To judge whether the ratio of a firm is satisfactory or not, it should be compared
over a period of time of the basis or trend analysis.
In general, a high material turnover is better than a low ratio. Yet a very high ratio calls
for a careful analysis. It indicates of under investment in very low level of inventory has
serious implications. It is also likely that the firm may be following a policy of
replenishing it stock in too many small sizes.
Similarly, a very low material turnover ratio is dangerous. It signified excessive material
or over investment. Carrying excessive inventory involves the cost in terms of interest of
funds of rentals space and so on. Thus a firm should have neither too high nor low
material turnover.
To avoid “stock out list” associated with a high ratio and the cost of carrying the
excessive material; there should be reasonable level for mixed ratio. The firm would well
advise to maintain a close watch on the trend of ratio.
Inventory turnover ratio can be calculated as follows:
Inventory Turnover Ratio = Cost of Goods sold or Turnover
Average Inventory
WORK IN PROCESS:
Work in process is called as stock in process. It refers to goods in the intermediate stage
of production. These are semi finished product for sale. They represent products that
need more work before they become finished product for sale. The work in process is
that stage of stock which is in between raw materials and finished goods. The raw
materials enter the process of manufacturing but they are yet to attain the final shape of
finished goods. The quantum of work in process depends up on the time taken in
manufacturing; the more will be the amount of work in process.
FINISHED GOODS:
The finished goods materials are those completely manufactured products which are
ready for sale. Stocks of raw materials and work in process facility production, while
stock of finished goods is required for smooth marketing operations. These are goods,
which are ready for consumers. The stocks of finished goods provide buffer between the
production and market. The purpose of maintaining material is to ensured proper supply
of goods to the customers. In some concerns the production is undertaking on order
basis.
In these concerns there will not be a need for finished goods inventory. The need for
finished goods stock will be more when production is under taken in general without
waiting for specific orders. Those, inventory serve as the link between the production
and consumption of goods.
The levels of three kinds of inventories for a firm depend on the nature of its business. A
manufacturing firm will have substantially high levels of three kinds of materials, while
retail or wholesale firms will have a very high level of finished goods in material and
work in process stock. With in manufacturing firms there will be differences. Large
heavy engineering companies produce long production cycles products; therefore, they
carry large materials. On the other hand, materials of consumer Product Company will
not be large because of short production cycle and fast turnover.
A fourth kind of materials, supplies is also maintained by firms. These materials do not
directly enter production, but are necessary for production process.
Usually these supplies are small part of total material and do not involve significant
investment. Therefore, a sophisticated system of inventory control may not be
maintained for them.
SPARES:
The stock policies of spares differ from industry to industry. Some industries like
transport will require more spares than the other concerns. The costly spares parts like
engines, maintenance spares etc., are not discarded after use, rather they are kept in ready
position for further use.
All decisions about spares are based on the financial cost of inventory on such spares and
the cost that may arise due to their non-availability
NEED TO HOLD MATERIALS:
The question of managing materials arises only when the company holds the material.
for manufacturing end products for sale. Stocking of Materials involves blocking up the
company’s resources in currency, storage and handling costs. If it is expensive to
maintain materials, why do companies holds materials? There are three resources which
generally motivate for holding materials.
TRANSACTION MOTIVE:
Every firm tends to maintain some level of inventory to meet the day to day
requirements of sales, production process and customers demand etc. in this; raw
materials are stored for smooth production process of the firm.
PRECAUTIONARY MOTIVE:
A firm should keep some inventory for unforeseen circumstances also like
loss due to natural calamities in a particular area, strikes, layouts etc. So the firm must
have some finished goods as well as raw-materials to meet circumstances.
SPECULATIVE MOTIVE:
Influences the decision to increase or reduce material level to take
advantage of price fluctuation.
A company should maintain adequate stock of materials for a continuous supply to the
factory for an uninterrupted production. It is not possible for a company to procure raw
materials whenever it needed. A time lag exists between demand and supply. Also, there
exists uncertainly in procuring raw materials in time on many occasions. The
procurement of materials may be delayed because of such factors as strike, transport
disruption or short supply. Therefore, the firm should maintain sufficient stock of raw
materials at a given time to streamline production. Other factors which may necessitate
purchasing and holding of raw material inventories are quantities of raw materials than
needed for the desired production and sales level to obtain quantity discounts of bulk
purchasing. At time, the firm would like to accumulate raw materials in anticipation of
price rise.
Work in process material builds up because of the production cycle. Production cycle is
time span between introduction of raw material into production and emergence of
finished product at the completion of production cycle. Till production cycle completes,
stock of work in process has to be maintained. Efficient firm constantly try to make
production cycle smaller by improving their production techniques.
Stock of finished goods has to be held because production sales are not instantaneous. A
firm cannot produce immediately when goods are demanded by customers. Therefore, to
supply finished goods on a regular basis, their stock has to be maintained. Stock of
finished goods has also to be maintained for sudden demands from customers. In case the
firm’s sales are seasonal in nature, substantial finished goods material should be kept to
meet the peak demand. Failure to supply products to customers, when demanded, would
mean loss of the firm’s sales to competitors. The level of finished goods materials would
depends upon coordination between sales and production as well as on production time.
Costs:
The holding of inventories exposes the firm to certain risks. The various costs and risk
involved in holding are given below.
Capital Cost: The holding of inventories includes cost. So, the firm has to
arrange for additional funds in order to meet the cost of inventories. These funds
may be arranged from the firm’s sources or from outsiders. In both cases, the
firm has to incur a cost.
Storage and Handling Cost: Holding inventories also involves costs on storage.
For holding inventories in advance, for sufficient stock, for uninterrupted
production, the business has to pay for storage costs. The storage costs include the
rent of the warehouse, insurance charges etc.
The costs of holding inventories are as follows:
Material Costs: This is the cost of purchase of goods, transportation, handling
charges.
Ordering Costs: This is a variable cost associated with placing an order. Few
orders mean less cost and more orders mean more cost.
Carrying Costs: This basically includes expenses of storage of goods. The costs
are storage cost, insurance cost, spoilage cost, cost of funds tied up in inventory
etc.
LEAD TIME:
It is the time taken by the supplier to supply the materials. Technically it is the period
which lapses between the recognition of need and its fulfillment. There is a direct
relationship between lead time and inventory. As lead time increases, inventories also
increase. The lead time can be divided into administrative lead time, manufacturing lead
time, transportation lead time, inspection lead time etc.
RE-ORDER POINT:
It indicates when an order should be placed; it depends upon consumption ratio and lead
time.
RE-ORDER POINT = (LEAD TIME* AVERAGE USAGE)
SAFETY STOCK:
Using the above formula, it is difficult to predict usage and lead time accurately. The
demand for material may fluctuate from the normal lead time. If the actual usage
increases or the delivery of the material is delayed the firm can face a problem of stock-
out. Therefore, in order to guard against the stock-out, the firm may maintain a safety
stock i.e., some minimum or buffer material as cushion against expected increased usage
and/or delay in delivery in time.
Thus the formula to determine the re-order point when the safety stock is maintained is as
follows:
RE-ORDER POINT= (LEAD TIME*AVERAGE USAGE) + SAFETY
STOCK
ORDER CYCLE:
The time period between placements of two successive orders is referred to as an order
cycle. There are two inventory management system based on which the orders may be
placed. They are as follows:
Q-system: (Fixed order quantity system or re-order point system).
P-system: (Fixed periodic review system).
REORDER LEVEL:
The inventory level at which a new or fresh order is placed with the suppliers for
obtaining additional items is known as reorder level. This point is fixed between the
maximum stock and minimum stock levels. This depends on two factors:
The lead time between order placement and actual receipt, and
The demand during the lead time.
This is the quantity of the replacement order. In certain types of inventory control
system, the reorder quantity is the economic order quantity.
MAXIMUM STOCK LEVEL:
A stock level selected as the maximum desirable or allowable is referred to as maximum
stock. This is used as an indicator to show when stock levels have risen too high. The
maximum level is the largest quantity of a particular material, which should be kept in
store at any one time. The fixation of maximum level is necessary to avoid unnecessary
blocking of capital in materials, losses on account of deterioration and obsolescence of
materials, extra overheads and temptation to thefts.
The maximum level of materials should be decided after considering the following:
Storage space
Availability of working capital
Cost of storage, insurance, interest on capital invested in stock.
Rules framed by government for import or procurement.
MINIMUM STOCK LEVEL:
It is also known as buffer stock or safety stock. This is the additional stock needed to
allow for delay in delivery or for any unexpected demand that may arise during the lead
time.
IMPORTANCE OF INVENTORY MANAGEMENT TO A BUSINESS:
Inventory Management is the planning, control, organizing and leading the goods and
materials required by the business.
Inventory Management is very important for the business. It enables the business to meet
or exceed expectations of the customer by making the product readily available.
If managed properly, it can help the organization reduce its costs, achieve economies of
scale and prepares the organization for uncertainty.
OBJECTIVES OF INVENTORY MANAGEMENT:
To maintain a optimum size of material for efficient and smooth production and
sale operations.
To maintain a minimum investment in material to maximize profitability.
Both excessive and inadequate materials are not desirable. These are two danger points
within which the firm should operate. The objective of material management should be
to determine and maintain optimum level material investment. The optimum level
material will lie between the two danger points of excessive and inadequate inventories.
The firm should always avoid a situation of over investment or under investment in
materials.
The following are the main objectives of inventory management
To ensure continuous supply of materials to facilitate uninterrupted production.
Maintain sufficient stocks of raw materials against slack period supplies and
benefit from price changes.
Maintain sufficient finished goods inventory for smooth sales operation and
customer service.
Reduce the cost of production carrying cost and time.
To minimize losses through wastages and damages.
To ensure quality goods at reasonable prices.
It controls investment in inventories and keeps it at an optimum level.
To ensure uninterrupted production.
To facilities furnishing of data for short-term planning and control of inventory
TECHNIQUES OF INVENTORY MANAGEMENT:
ECONOMIC ORDER QUANTITY:
There are two questions relating to material management:
1. What should be the size of the Order?
2. At what level should the order placed?
To answer the first question the basic economic order quantity model is helpful. If the
firm is buying raw material, it has to be purchased on each replenishment. This problem
is called order quantity problem and the task of the firm is to determine the optimum or
EOQ.
The determination of the appropriate quantity to be purchased in each lot to replenish
stock as a solution to the order quantity problem necessitate resolution of conflicting
goals buying in large quantities implies a higher inventory level which will assure.
Smooth production/sales operations.
Lower ordering or set up costs.
But it will involve higher carrying costs. On the other hand small orders will reduce the
carrying costs would increase as there is a likelihood of interruption the operations due to
stock outs.
A firm should place neither too large nor too small orders on the basis of trade off
between the benefits from the availability of inventory and the cost of carrying.
To take enough care to avail the concession available in purchasing materials.
Ensuring that the materials of requisite specifications and quality have been
received in good condition.
EOQ = √ (2AO/I)
Where, A = Annual Total Requirement,
O = Ordering Costs,
I = Inventory Carrying Costs.
ABC ANALYSIS :
ABC analysis is a technique of exercising selective control also known as
management by exception;over inventory items. The technique is based on the
assumption that a firm should not exercise the same degree of control on items which are
more costly as composed to those items which are less costly. According to this
approach the inventory items are divided into three categories i.e., A, B and C.
Category ‘A’ may include more costly items, while category ‘B’ may consists of less
costly items and category ‘C’ of the least costly items. Therefore, ABC analysis
concentrates on important items hence also known as Control by Importance and
Exception (CIE). This approach is also known as Proportional Value Analysis (PVA).
There is no definite procedure for classifying the inventories as A, B and C categories.
The method usually adopted is,
1. The quantity of each material expected to be used is estimated.
2. The value of each of the above material is found out by multiplying quantity with
price.
3. The items are arranged in the descending order of their value irrespective of their
quantities and give the ranks.
4. Express the value for each item as a percentage of the aggregate usage value and
obtain the cumulative percentage of annual usage values.
5. Obtain the percentage value for each of the items. For n items, each item shall
represent 100/n percent. Also obtain the cumulative values of the percentages.
6. Plot the curve using the cumulative computed in step 4 and step 5 on x and y axes
respectively.
7. Determine appropriate divisions for the A, B and C categories.
In general, normal inventory item possess the following distribution pattern.
A: 5- 10% of the total number of items account for about 70% of the total consumption
value.
B: 10-20% of the items account for 20% of total consumption value.
C: The remaining large number of items account for the balance 10% of the consumption
value.
Chapter – IV
PROFILE OF THE COMPANY
PROFILE OF THE COMPANY
Introduction to NILE LTD:
Nile Limited was originally incorporated as a private limited company with the name
Navabharat Industrial Linings and Equipment Private Limited on May 18, 1984 and was
later converted to a public limited company with the name Navabharat Industrial Linings
and Equipment Limited. The name of the Company was changed to its present name of
NILE ltd. vide a fresh certificate of incorporation dated September 16, 1994.
Nile is a Public limited company and its shares are listed on the Bombay Stock Exchange
(BSE). Nile has emerged as a leader in glass lining by achieving customer satisfaction by
delivering quality products, with a fervent desire to convert every customer relationship
into a prospective partnership. Nile's Glass Lining and pressure vessel division is located
at Industrial estate, Nacharam, Hyderabad with a covered area of 8700 sq.m. The totally
integrated fabrication, machining and glass lining facilities ensure timely delivery of
quality products.
Nile's two Non-Ferrous plants are located One near Hyderabad, and another near
Tirupati. The combined capacity of these two plants is 32000 tons per annum. Nile’s 2
MW Wind Farm is located at Ramagiri, Ananthapur district.
The state-of-the-art CAD facilities and experienced engineers not only automate the day-
to-day engineering drawing requirements, but also innovate and improve the versatility of
the product. In addition to standard equipment, Nile designs and manufactures equipment
for specific customer applications or process performance improvement.
A Company with a difference - setting benchmarks:
Nile is an ISO 9001 certified Company manufacturing world class Glass Lined
Equipment, Pressure Vessels, Lead and Lead Alloys.
Product range of the company includes:
Reactors
Reactors with Conical bottom
Reactor with Insulation
Receivers (Jacketed &Unjacketed)/ Storage Tanks
Conical Dryer
Agitated Nutsche Filters
Heat Exchangers /Condensers
Columns
Lead products
Pure Lead 99.97% purity
Lead Antimonial alloys
Lead Selenium alloys
Lead Calcium alloys
Lead Tin alloys
Chapter –V
RESEARCH DATA ANALYSIS &
INTERPRETATION
ABC ANALYSIS
ABC ANALYSIS FOR THE YEAR 2009-10
In the year 2009-2010 the total annual value of material is Rs. 201278053. The materials
are divided into A category, B category and C category according to annual consumption.
The ABC Analysis table is as follows
no. material descriptionannual con-sumption
cost per unit
annual value
1 steel plates(12,14,18,20,25)mm 1002 44334 444444482 steel plates(8,16,22,32)mm 702 44319 311111133 steel plates(6,10,36,40,45,50,63,65)mm 301 44296 133333344 rods(80,100,122)dia 233 49496 115151785 chemicals 59770 119 70870186 mechanical seal(60,80,100)mm 240 27116 65849287 rods(50,180,240,250)dia 127 49456 62810068 gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 56002809 motors(3,7,5,10)hp 251 21376 5365376
10 accuators and variable frequency drive 98 49773 487772411 mildsteel seemless pipes 3680 955 351440012 electrodes(E7018) 10716 320 342912013 forgings(flanges) 102 31756 323911214 rods 63 49397 311201115 packaging material 10738 286 307106816 standguard and stand drive 85 33474 284533917 mechanical seal(50,125)mm 80 34296 274368018 hardware 121943 20 243886219 paints 17043 137 233489120 gearbox(AS-80,90F) 34 67388 229119221 motors(5,15,20)hp 81 27577 223373722 forgings(nozzles) 752 2892 217478423 teflon items(gaskets) 1529 1200 183480324 electrodes(E7018-1) 4286 400 171441825 mechanical seal(40mm) 108 15125 163350026 others in boughtout(sight and light glasses,hoses) 270985 6 162590827 abbressive material(grit) 36 43000 154800028 imported general stores(ceramic crucibles) 29 53364 154755629 teflon items(dippipes/sparges) 240 6354 152496030 castings(valve bodies) 425 3570 1517250
31others from general stores(oils, greases, hotmill jars, hand-gloves,nosemasks, glasses,cap) 97289 15 1459335
32 gearbox(RR310DNC,510DNC) 90 15581 140234533 motors 25hp 28 46704 130771234 stainless steel seemless pipes 768 1525 117120035 castings(rods and plates) 3392 322 1092224
36 electrodes(E316,316L,6013) 385 1500 102750037 tantalum 27 37516 101293238 teflon items(bushes/nozzles) 950 1040 98800039 electrical items 5414 176 95286440 imported chemicals 1515 610 92415041 oxygen gas 6644 123 81721242 flux wires 7620 90 68580043 castings(nozzles) 885 770 68145044 teflon items(gasket sheets) 500 1350 67500045 diesel 13606 37 50342246 imported tantalum 12 38560 46272047 job bearing 812 500 40600048 castings(sleeves) 40 9500 38000049 bearings 1166 250 29150050 LPG 131 2221 29095151 teflon items(spray ball) 17 16256 27635252 shafts 20 10412 20824053 teflon items(spacers/seperators) 3072 56 17203254 teflon items(tapes/'o' rings) 7702 22 16944455 screws and rods 42 3718 15615656 material handling 347 435 15094557 grinding machines 12 10115 12138058 abbressive material(sand) 30 4000 12000059 grinding wheels 48 2284 10963260 other in maintence(low value spares, lubricants) 1056 98 10348861 hoses and pipes 159 523 8315762 indegnous grind wheels and belts 1981 42 8320263 blasting accessories 52 1502 7810464 elements seperators 6 12147 7288265 tool bit 33 2025 6682566 argon gas 61 950 5795067 imported boughtout(gear box) 1 41764 4176468 measuring tapesand scales 103 365 3759569 wind mill spares 4 4637 1854870 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 2697271 cutting accessories 28 574 16072
‘A’ – Occupies 70% of Annual consumption, i.e., 70% of 201078053 = 140894637.
‘B’- Occupies 20% of Annual consumption, i.e., 20% of 201078053 = 40255610.
‘C’- Occupies 10% of Annual consumption, i.e., 10% of 201078053 = 20107805
ABC GRAPH FOR THE YEAR 2009-10
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
40000000
45000000
50000000
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69
annual value
no.
The following table shows the A items
no. material descriptionannual con-sumption
cost per unit
annual value
1 steel plates(12,14,18,20,25)mm 1002 44334 444444482 steel plates(8,16,22,32)mm 702 44319 311111133 steel plates(6,10,36,40,45,50,63,65)mm 301 44296 133333344 rods(80,100,122)dia 233 49496 115151785 chemicals 59770 119 70870186 mechanical seal(60,80,100)mm 240 27116 65849287 rods(50,180,240,250)dia 127 49456 6281006
8gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 5600280
9 motors(3,7,5,10)hp 251 21376 536537610 accuators and variable frequency drive 98 49773 487772411 mildsteel seemless pipes 3680 955 3514400
139714805
The following table shows the B items
no. material descriptionannual con-sumption
cost per unit
annual value
1 electrodes(E7018) 10716 320 34291202 forgings(flanges) 102 31756 32391123 rods 63 49397 31120114 packaging material 10738 286 30710685 standguard and stand drive 85 33474 28453396 mechanical seal(50,125)mm 80 34296 27436807 hardware 121943 20 24388628 paints 17043 137 23348919 gearbox(AS-80,90F) 34 67388 2291192
10 motors(5,15,20)hp 81 27577 223373711 forgings(nozzles) 752 2892 217478412 teflon items(gaskets) 1529 1200 183480313 electrodes(E7018-1) 4286 400 171441814 mechanical seal(40mm) 108 15125 1633500
15others in boughtout(sight and light glasses,hoses) 270985 6 1625908
16 abbressive material(grit) 36 43000 154800017 imported general stores(ceramic crucibles) 29 53364 154755618 teflon items(dippipes/sparges) 240 6354 1524960
41342941
The following table shows the C items
no. material descriptionannual con-sumption
cost per unit
annual value
1 castings(valve bodies) 425 3570 1517250
2others from general stores(oils, greases, hotmill jars, hand-gloves,nosemasks, glasses,cap) 97289 15 1459335
3 gearbox(RR310DNC,510DNC) 90 15581 14023454 motors 25hp 28 46704 13077125 stainless steel seemless pipes 768 1525 11712006 castings(rods and plates) 3392 322 10922247 electrodes(E316,316L,6013) 385 1500 10275008 tantalum 27 37516 10129329 teflon items(bushes/nozzles) 950 1040 988000
10 electrical items 5414 176 95286411 imported chemicals 1515 610 92415012 oxygen gas 6644 123 81721213 flux wires 7620 90 68580014 castings(nozzles) 885 770 68145015 teflon items(gasket sheets) 500 1350 67500016 diesel 13606 37 50342217 imported tantalum 12 38560 46272018 job bearing 812 500 406000
19 castings(sleeves) 40 9500 38000020 bearings 1166 250 29150021 LPG 131 2221 29095122 teflon items(spray ball) 17 16256 27635223 shafts 20 10412 20824024 teflon items(spacers/seperators) 3072 56 17203225 teflon items(tapes/'o' rings) 7702 22 16944426 screws and rods 42 3718 15615627 material handling 347 435 15094528 grinding machines 12 10115 12138029 abbressive material(sand) 30 4000 12000030 grinding wheels 48 2284 10963231 other in maintence(low value spares, lubricants) 1056 98 10348832 hoses and pipes 159 523 8315733 indegnous grind wheels and belts 1981 42 8320234 blasting accessories 52 1502 7810435 elements seperators 6 12147 7288236 tool bit 33 2025 6682537 argon gas 61 950 5795038 imported boughtout(gear box) 1 41764 4176439 measuring tapesand scales 103 365 3759540 wind mill spares 4 4637 1854841 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 2697242 cutting accessories 28 574 16072
A
B
C
Inventory Turnover Ratio:
Inventory turnover ratios are calculated to indicate whether inventories have been
used efficiently or not.
The inventory turnover ratios also known as stock velocity is normally calculated
as sales / average inventory of cost of goods sold/average inventory.
Inventory conversion period may also be calculated to find the average time taken
for clearing the stocks. Symbolically.
Cost of goods sold
Inventory turnover ratio = -------------------------------
Average inventory at cost
Or
Net sales
= --------------------------
Average inventory
Days/Months in a year
And, inventory conversion period = -------------------------------------
Inventory turnover ratio
STATEMENT SHOWING INVENTORY TURNOVER RATIO:
Particulars 2007-08 2008-09 2009-10
Turnover 425042979 398484821 321558291
Average Inventory 260035731 270449527 293925381Inventory Turnover
Ratio1.63 1.47 1.09
Interpretation:
In 2007-08 stocks are converted into cash/accounts receivable faster when compared to
the years 2008-09 and 2009-10. The turnover ratios is 1.63 in the year 2007-08 was
gradually decreased to 1.09 by the year 2009-10. This means the stock has not been sold
fast and stayed on the shelf for a longer period. This ratio is decreased because of
decrease in the sales and increase in average inventory. An efficient management of
inventory lies in higher inventory turn over ratio.
INVENTORYHOLDING PERIOD :
Particulars 2007-08 2008-09 2009-10
Turnover 425042979 398484821 321558291
Average Inventory 260035731 270449527 293925381
Inventory Holding
Period( In days)
221 225 331
Interpretation:
In 2007-08 the inventory holding period is less when compared to the years 2008-09 and
2009-10 respectively. In the year 2007-08 the inventory holding period was 221 days and
it was increased to 225 days by the year 2008-09 and further it is increased to 331 days
by the year 2009-10. These mainly because of the sales are gradually decreasing from
year to year. The ratio is gradually increasing from year to year.
INVENTORY TO CURRENT ASSETS RATIO:
Inventory
Inventory to current asset ratio = ------------------------ *100
Current Assets
Year Inventory Current Assets Inventory to Current
Assets Ratio
2006-07 267797121 328534407 81.51%
2007-08 252274341 308149728 81.86%
2008-09 288624713 344537428 83.77%
2009-10 299226049 336657938 88.88%
Interpretation:
In the year 2006-07, it was 81.51% and it was increased to 88.88% by the year 2009-10.
These means that the inventory is increasing from year to year but all the remaining
current assets are not increasing. These means the quick assets are decreasing from year
to year as inventory is excluded from the preview of quick assets..
Inventory to Total Assets:
Inventory
Inventory to total assets = ----------------- * 100
Total Assets
Year Inventory Total Assets Inventory to Total Assets Ratio
2006-07 267797121 447862056 59.79%
2007-08 252274341 421558838 59.84%
2008-09 288624713 458845760 62.90%
2009-10 299226049 441873054 67.72%
Interpretation:
In year 2006-07 it was 59.79% and it is gradually increased to 59.84% by the year 2007-
08 and further it is increased to 62.90% & 67.72% by the years 2008-09 and 2009-10
respectively. The Inventory is increasing from year to year but the other assets are not
increasing as the inventory.
Raw Materials to Sales Ratio:
Raw Materials
Raw materials to sales ratio = --------------------------- * 100
Sales
Year Sales Raw Materials
Consumed
Raw Materials to
Sales Ratio
2006-07 387724451 196580737 50.70%
2007-08 425042979 193155579 45.44%
2008-09 398484821 207481444 52.07%
2009-10 321558291 165648066 51.51%
Interpretation:
In year 2006-07 the ratio is 50.70% and it is decreased to 45.44% in the year 2007-08 and
then it is increased in the year 2008-09 to 52.07% and in the coming year it is slightly
decreased to 51.51%. The raw materials consumption is fluctuating year to year by
seeing these ratios we conclude the raw materials are blocked in the work in progress.
Closing Stock to Sales Ratio:
Closing Stock
Closing stock to sales ratio = ------------------------- * 100
Sales
Year Inventory Sales Closing Stock to
Sales Ratio
2006-07 267797121 387724451 69.07%
2007-08 252274341 425042979 59.35%
2008-09 288624713 398484821 72.43%
2009-10 299226049 321558291 93.05%
Interpretation:
In the year 2006-07 the ratio is 69.07% and in the year 2007-08 it was decreased to
59.35%., in 2008-09 it was increased to 72.43% and in the year 2009-10 it is increased to
93.05%. The inventory is increasing but sales are decreasing. The company should
increase the sales or else decrease the closing stock.
ECONOMIC ORDER QUANTITY:
Suppose the ordering cost per order ‘0’ is fixed. The order costs will be number of
orders during the year multiply by ordering cost per order. If ‘A’ represents the annual
requirements and ‘Q’ the order size, the number of orders will be ‘A/Q’ and the total
orders costs will be
AO
Total Ordering Cost = ---------------- -------------------------- (1)
Q
Where A = Annual requirement,
O = Ordering costs,
Q = Order size,
C = Carrying costs per unit.
Let us further assume that the carrying costs per unit ‘C’ are constant. The total carrying
costs will be the product of the average materials units and the carrying costs per unit. If
‘Q’ is the order size and the usage is to be steady, the average material will be.
Q
Average Material = ----------------- --------------------------------- (2)
2
QC
Average Material = -------------------- ---------------------------------- (3)
2
The Total material costs, then are the sum of total carrying and ordering costs:
QC AO
Total Cost = ------------ + ------------ ---------------------- (4)
2 Q
Calculate (4) reveals that a large quantity, ‘Q’ the carrying costs will increase, but the
ordering costs will decrease. On the other hand the carrying cost will be lower and the
ordering cost will be higher with the lower order quantity. Thus the total cost function
represents a trade-off between the carrying cost and the ordering cost for determining the
economic order quantity.
To obtain formula for economic order quantity (EOQ), equation (4) is differentiated with
respect to ‘Q’ and setting the derivative equal to zero.
QC AO
Total Cost (TC) = ---------- + ---------- -------------------------- (a)
2 Q
Differentiating Equation (a) with respect to Q
D (TC) C AO
------------------ + ------------------- - ----------- ---------------- (b)
DA 2 Q
Setting Equation (b) to zeros:
C AO
-------- - ----------- = 0
2 Q2
CO2 = 2AO
EOQ = SQRT (2AO/C) -------------------------------- (5)
CALCULATION OF EOQ USING THIS INFORMATION:
Sl. No. Code Material Description Annual
Consumption(Qty)
Price value
(Rs)
1 RNST Steel Plates (tons) 2004,929.00 88,888,897
2 RNBO Bought Outs(No’s) 344,594.00 40,647,703
3 RNRO Rods (tons) 423,114.00 20,936,688
4 GNOT General Items(No’s) 116,625.00 14,593,351
5 RNCA Chemicals(kgs) 59,770.00 7,087,018
6 RNTI Teflon Items (No’s) 14,010.00 5,648,844
7 RNFI Forgings (No’s) 855.00 5,437,192
8 RNSP Pipes and Fittings
( Mts)
5,066.00 4,686,741
9 RNCA Castings (No’s) 5,107.00 4,544,214
10 GNWP Packing Material
(Set)
10,738.00 3,073,419
11 GMOT Imported General
Stores(No’s)
57.00 2,212,421
12 GNM Maintenance(No’s) 2,848.00 1,041,281
Ordering Cost -- 4%
Inventory Carrying Cost -- 12.5%
EOQ = SQRT (2AO/C)
Calculation of EOQ using the above information:
1. RNST Steel Plates:
Annual consumption = Rs.2004,929.00
Ordering Cost = Rs.355,556
Inventory carrying cost = Rs.11,111,112.13
EOQ = √ ((2) (2004929) (355556)/11,111,112)
= √ 128,315.606
= 358.21 tons
= 358 tons.
2. RNBO Bought Outs:
Annual consumption = 344,594.00
Ordering Cost = Rs.185,908.
Carrying Cost = Rs.5,080,963.
EOQ = √ ((2) ( 344,594.00) (185908)/5080963)
= √25216.79
= 158.78 No’s
= 159 No’s.
3. RNRO Rods:
Annual consumption = 423114
Ordering Cost = Rs. 837468
Carrying Cost = Rs. 2617086
EOQ = √ ((2) ( 423114)(837468)/2617086) = 520 tons.
4. GNOT General Stores:
Annual Consumption = 116625
Ordering Cost = Rs. 583734
Carrying Cost = Rs. 1824169
EOQ = √ ((2) (116625) (583734)/1824169) = 273 No’s.
5. RNCA Chemicals:
Annual Consumption = 59770
Ordering Cost = Rs.283481
Carrying Cost = Rs.885877
EOQ = √((2)( 59770)(283481)/885877) = 195 Kgs.
6. RNTI Teflon Items:
Annual Consumption = 14010
Ordering Cost = Rs.225954
Carrying Cost = Rs.706106
EOQ = √((2)( 14010)(225954)/706106) = 94 No’s.
7. RNFI Forgings:
Annual Consumption = 855
Ordering Cost = Rs.217488
Carrying Cost = Rs.679649
EOQ = SQRT ((2)( 855)(217488)/679649)
= 23 No’
8. RNSP Pipes & Fittings:
Annual Consumption = 5066
Ordering Cost = Rs.187470
Carrying Cost = Rs.585843
EOQ = SQRT ((2) (5066) (187470)/585843)
= 57 Mts.
9. RNCA Castings:
Annual Consumption = 5107
Ordering Cost = Rs.181769
Carrying Cost = Rs.568027
EOQ = √ ((2)( 5107)(181769)/568027) = 57 No’s.
10. GNWP Packing Material:
Annual Consumption = 10738
Ordering Cost = Rs.122937
Carrying Cost = Rs.384177
EOQ = √ ((2)( 10738)(122937)/384177) = 83 Sets.
11. GMOT Imported General Stores:
Annual Consumption = 57
Ordering Cost = Rs.88497
Carrying Cost = Rs.276553
EOQ = √ (2)( 57)(88497)/276553) = 6 No’s.
12. GNM Maintenance:
Annual Consumption = 2848
Ordering Cost = Rs.41651
Carrying Cost = Rs.130160
EOQ = √ ((2)( 2848)(41651)/130160) = 43 No’s.
TABLE-2
STATEMENT SHOWING EOQ
SL. NO CODE MATERIAL
DESCRIPTION
ANNUAL
CONSUMPTION
ORDERING
COST
CARRYING
COST
EOQ
UNITS
1 RNST Steel Plates 2004929 355556 1111112 358 Tons
2 RNBO Bought Outs 344594 185908 5080963 158 No’s
3 RNRO Rods 423114 837468 2617086 520 Tons
4 GNOT General Stores 116625 583734 1824169 273 No’s
5 RNCA Chemicals 59770 283481 885877 195 Kgs
6 RNTI Teflon Items 14010 225954 706106 94 No’s
7 RNFI Forgings 855 217488 679649 23 No’s
8 RNSP Pipes & Fittings 5066 187470 585843 57 Mts
9 RNCA Castings 5107 181769 568027 57 No’s
10 GNWP Packing Material 10738 122937 384177 83 Sets
11 GMOT Imported
General Stores
57 88497 276553 6 No’s
12 GNM Maintenance 2848 41651 130160 43 No’s
INTERPRETATION: The company will do well to follow the E O Q as far as possible to
improve the inventory turn over ratio.
TABLE-3
STATEMENT SHOWING LEAD TIME CONSUMPTION
Average Consumption = Annual Consumption/365.
Lead time consumption = Lead time * Average consumption per day.
SL. NO CODE MATERIAL
DESCRIPTION
LEAD
TIME
AVG. CONSUMPTION
PER DAY
LEAD TIME
CONSUMPTION
1 RMCH Imported Chemicals 90 days 1515/365=4.15 373.50
2 GMOT Imported General
Stores
90 days 57/365=0.16 14.40
3 RMBO Imported Bought
outs
90 days 1/365=0.003 0.27
4 RNST Steel Plates 90 days 2004929/365=5492.96 494366.40
5 RNBO Bought Outs 75 days 344594/365=944.09 70806.75
6 RNCA Castings 60 days 5107/365=13.99 839.40
7 RNCH Chemicals 45 days 59770/365=163.75 7368.75
8 RNFI Forgings 60 days 855/365=2.34 140.40
9 RNSP Pipes & Fittings 30 days 5066/365=13.88 416.40
10 RNRO Rods 45 days 423114/365=1159.22 52164.90
11 RNTI Teflon Items 15 days 14010/365=38.38 575.70
12 GNWP Packing Materials 8 days 10738/365=29.42 235.36
TABLE-4
STATEMENT SHOWING RE-ORDER LEVEL:
Re-order level = (Lead time * Average Usage) + Safety stock
SL NO. CODE MATERIAL
DESCRIPTION
LEAD TIME
CONSUMPTION
SAFETY
STOCK
RE-ORDER
LEVEL
1 RMCH Imported
Chemicals
373.50 390.00 763.50
2 GMOT Imported
General Stores
14.40 21.00 35.40
3 RMBO Imported Bought
outs
0.27 1.00 1.27
4 RNST Steel Plates 494366.40 497400.00 991766.40
5 RNBO Bought Outs 70806.75 70900.00 141706.75
6 RNCA Castings 839.40 843.00 1682.40
7 RNCH Chemicals 7368.75 7370.00 14738.75
8 RNFI Forgings 140.40 142.00 282.40
9 RNSP Pipes & Fittings 416.40 420.00 836.40
10 RNRO Rods 52164.90 52170.00 104334.90
11 RNTI Teflon Items 575.70 610.00 1185.70
12 GNWP Packing
Materials
235.36 247.00 482.36
TABLE-5
STATEMENT SHOWING MAXIMUM STOCK LEVEL:
MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + EOQ
SL
NO.
CODE MATERIAL
DESCRIPTION
EOQ RE-ORDER
LEVEL
MAX. STOCK
LEVEL
1 RMCH Imported Chemicals 31 763.50 794.50
2 GMOT Imported General Stores 6 35.40 41.40
3 RMBO Imported Bought outs 1 1.27 2.27
4 RNST Steel Plates 358 991766.40 992124.40
5 RNBO Bought Outs 158 141706.75 141864.75
6 RNCA Castings 57 1682.40 1739.40
7 RNCH Chemicals 195 14738.75 14933.75
8 RNFI Forgings 23 282.40 305.40
9 RNSP Pipes & Fittings 57 836.40 893.40
10 RNRO Rods 520 104334.90 10485.90
11 RNTI Teflon Items 94 1185.70 1279.70
12 GNWP Packing Materials 83 482.36 565.36
Chapter – VI
CONCLUSIONS AND
SUGGESTIONS
FINDINGS AND CONCLUSIONS
Over all the inventory of Nile Limited - glass lining division is maintained at
optimal levels in the present market conditions, but a higher inventory turn over
ration above 1.63 times should be targeted to improve the profitability.
Sales are decreasing according to the study; revenue of the company is decreased
during the period 2007 to 2010. This impacts severely on the profitability and
liquidity position of the organization. An improvement n the inventory turn over
ratio may improve the profitability
During the study period, the inventory to current assets ratio is gradually
increasing, which indicates proportion of inventory in current assets is expanding.
the requirement for production/sales should be re assessed and an Endeavour to
reduce the inventory may improve the prospects of profitability.
The inventory turnover ratio is gradually decreasing from year to year. It is not
healthy to the company as more than required inventory leads to blocking of
capital. The firm should maintain reasonable stocks with the help of inventory
control.
The inventory conversion period is also increasing from year to year. Huge
inventory holding leads to blocking of cash, obsolescence, or deficiencies in the
product line or marketing effort. Over production or early production of goods
even before the customer requires them lead to poor inventory holding period.
According to the ABC Analysis throughout this period, A-items i.e. top 20 per
cent of items constituted around 90 per cent total annual consumption in value.
In the last year the closing stock is almost equal to the sales which require
correction.
SUGGESTIONS:
1. Always keep optimum stocks to keep production process continues
without interruption keeping in view costs of over stocking vis-à-vis the
benefits of more than required stock.
2. The company’s production should be re-scheduled dynamically according
to the marketing forecast to avoid overstocking of finished goods.
3. The company should closely monitor the inventories for optimum
utilization, so that idle inventories can be minimized.
4. Priority in managing the purchase and utilization should be given to
materials classified as “A” which constitutes Steel Plates, Bought outs and
Rods. Strict control is to be ensured for materials classified as “B”.
5. Search for alternate suppliers and materials to be used in production to
decrease the cost of holding huge inventory and lead time for procurement of
materials.
6. The investment in raw materials should be made with close monitoring
and optimum utilization.
7. Investment in slow moving items may block up the funds therefore the
company may consider using F N S D analysis. (Fast normal slow moving and
dead items.).
8. The raw material should be procured from right source at right quantity
and at right cost.
BIBLIOGRAPHY:
S.no. Title Author
1. Financial Accounting I.M.PANDEY
2. Cost and Management Accounting S.P.JAIN & K.L.NARANG
3. Cost Accounting R.P.TRIVEDI
4. Internet websites www.nileltd.com
www.google.com