A

STUDY ON

“INVENTORY MANAGEMENT”

AT

DR.REDDY’S

BY

G.SIVA NANDI REDDY

HT.NO:151209672002

(2009-2011)

Project submitted to OSMANIA UNIVERSITY for the partial fulfillment of

the Requirement for the award of degree for

MASTER OF BUSINESS ADMINISTRATION

RAJA BAHADHUR VENKATA RAMA REDDY INSTITUTE OF TECHNOLOGY

Hanuman Tekdi, Abids-Hyderabad-500001

1

DECLARATION

I hereby declare that, this project report title “INVENTORY

MANAGEMENT” in DR.REDDY’S LAB submitted by me to the Department of

Business Management, RBVRRRIT., Hyderabad, is a bonafied work undertaken by me

and it is not submitted to any Other University or institution for the award of any degree

Diploma / certificate or Published any time before.

Name and Address of student signature of the student

Date :

2

CERTIFICATE

D a t e :

This is to certify that Mr.G.SIVA NANDI REDDY S/o.G.ESWARA REDDY.

HT.NO: 151209672002 has submitted a proiject report title “INVENTORY

MANAGEMENT” at Dr’ REDDY’S LAB, HYDERABAD in partial fulfillment for the

degree of Master of Business Administration of Osmania University for the academic year

2011.

PROJECT GUIDE HEAD OF THE DEPARTMENT

3

ABSTRACT

The management and control of inventory is a problem common to all organizations

in any sector of the economy. The problems of inventory do not confine themselves to

profit making business firms. The same types of problems are encountered by social and

non-profit organizations too. Inventories are common to besides industries – agriculture,

wholesalers, retailers, hospitals, temples churches, prisons, zoos, universities and national,

state and local governments.

Inventory problems have been encountered by every society, but it not until the 20 th

century that analytical techniques were developed to study them. The initial impetus for

analysis expectedly came from the manufacturing sector. It was not until after World War

II that a concerted effort on risk and uncertainty aspects of inventory was made. In theory,

inventory is an area of organizational operation that is well developed. In practice, it is very

backward. This gap will narrow as educational institutions integrated materials

management into their course structures.

The term inventory had been defined by several authors. The more

popular of them are: ‘the term inventory includes materials – raw, in process, finished

packaging, spares and others stocked in order to meet an unexpected demand or

distribution in the future’.

Another definition of inventory is that it ‘can be used to refer to the

stock on hand at a particular time of raw materials, goods-in-process of manufacture,

finished products, merchandise purchased for resale, and the like, tangible assets which

can be seen, measured and counted. In connection with financial statements and accounting

records, the reference may be to the amount assigned to the stock of goods owned by an

enterprise at a particular time’.

4

ACKNOWLEDGMENT

I take the opportunity to express my deep sense of gratitude

to my principal Mrs. G.SUMAVALLY HOD Mr.P.CHARY project guide Ms.

M.RADHIKA OSMANIA UNIVERSITY for initially granting me permission to

collect the data at DR”REDDY’S LAB on my request.

I am extremely greatful to DR”REDDY’S LAB Director Mr. RAM

REDDY For giving the necessary permission to do the project study for six

weeks at the premises of .On receipt of letter from the college

authorities.

I extend my sincere and whole hearted thanks to Mr.SRINIVAS

GARU (Hyderabad), for his consent to pursue the six weeks study at

DR”REDDY’S LAB premises in Hyd.

I am thankful to Mrs.T.CHANDANA, Librarian for helping me to the

relevant material.

I thankful to my parents and friends for all the direct and indirect help

given throughout my work

5

CONTENTS

CHAPTER NO PAGE NO

1. INTRODUCTION (1-4)

NEED FOR THE STUDY

OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

RESEARCH METHODOLOGY

LIMITATIONS OF THE STUDY

TOOLS AND TECHNIQUES

2. REVIEW OF THE LIERATURE (5-28)

3. COMPANY PROFILE (29-49)

4. DATA ANALYSIS & INTERPRETATION (50-64)

5. FINDING, SUGGESTION AND CONCLUSION (65-67)

BIBLILOGRAPHY (68)

6

LIST OF TABLES

7

S.NO NAME OF THE TABLE PAGE NO

1. INVENTORY TREND WITH RESPECT TO TURNOVER

INVENTORY TURNOVER RATIO

50

2. TREND ANALYSIS FOR INVENTORY

Estimated inventory

56

3. TREND ANALYSIS FOR TURNOVER

ESTIMATED INVENTORY

58

4. ABC ANALYSIS 62

LIST OF FIGURES

8

S.NO NAME OF THE FIGURES PAGE NO

1. INVENTORY TREND WITH RESPECT TO TURNOVER

INVENTORY TURNOVER RATIO

51-54

VARIOUS INVENTORY 51

MATERIAL INVENTORY 52

PRODUCTION INVENTORY 53

ENGNEERING INVENTORY 54

2. TREND ANALYSIS FOR

INVENTORY

57

Estimated inventory

3. TREND ANALYSIS FOR

TURNOVER

59

ESTIMATED INVENTORY

4. ABC ANALYSIS 62

1. INTRODUCTION

DEFINITION & MEANING OF PHARMACEUTICAL

DEFINATION:

A substance used in the treatment of disease; Drug, Medicament, Medication,

Medicine.

MEANING:

Drug or medicine that is prepared or dispensed in pharmacies & used in medical

treatment.

INTRODUCTION TO INVENTORY MANAGEMENT

The management and control of inventory is a problem common to all organizations

in any sector of the economy. The problems of inventory do not confine themselves to

9

profit making business firms. The same types of problems are encountered by social and

non-profit organizations too. Inventories are common to besides industries – agriculture,

wholesalers, retailers, hospitals, temples churches, prisons, zoos, universities and national,

state and local governments.

Inventory problems have been encountered by every society, but it not until the 20 th

century that analytical techniques were developed to study them. The initial impetus for

analysis expectedly came from the manufacturing sector. It was not until after World War

II that a concerted effort on risk and uncertainty aspects of inventory was made. In theory,

inventory is an area of organizational operation that is well developed. In practice, it is very

backward. This gap will narrow as educational institutions integrated materials

management into their course structures.

MEANING AND DEFINITION

The term inventory had been defined by several authors. The more

popular of them are: ‘the term inventory includes materials – raw, in process, finished

packaging, spares and others stocked in order to meet an unexpected demand or

distribution in the future’.

Another definition of inventory is that it ‘can be used to refer to the

stock on hand at a particular time of raw materials, goods-in-process of manufacture,

finished products, merchandise purchased for resale, and the like, tangible assets which

can be seen, measured and counted. In connection with financial statements and accounting

records, the reference may be to the amount assigned to the stock of goods owned by an

enterprise at a particular time’.

NEED OF THE STUDY

The question of managing inventories arises only when the company holds

inventories. Maintaining inventories involves tying up of the company’s funds and

incurrence of storage and handling costs. If it is expensive to maintain inventories, why do

companies hold inventories? There are three general motives for holding inventories.

10

• Transactions motive emphasizes the need to maintain inventories to facilitate

smooth production and sales operations.

• Precautionary motive necessitates holding of inventories to guard against the risk

of unpredictable changes in demand & supply forces & other factors.

• Speculative motive influences the decision to increase or reduce the inventory

levels to take the advantage of price fluctuations.

OBJECTIVES OF THE STUDY

• The basic objective of the project is to study the inventory control technique

adopted by Dr.Reddy’s Laboratories Ltd.

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• To study the inventory management of the Dr.Reddy’s Laboratories Ltd., for the

past few years.

• To suggest the suitable technique in order to reduce down the cost of inventory.

• To find the trends in figures for the past years.

• To provide full range of reports that will satisfy informational requirements.

SCOPE OF THE STUDY

The topic titled “A STUDY ON INVENTORY MANAGEMENT is conducted in

DR. REDDY’S Laboratories Ltd. Hyderabad”. The scope of the study is limited to

inventory management and period is limited to five financial years of the company. The

analysis was conducted from 2003 -04 to 2007-08. The tools used for are ratio analysis.

The trend analysis is for sales and inventory is conducted. The study is based on the

inventory data available from financial statements and internal records of the company and

primary data collected through informal interview with the company officials.

METHODOLOGY

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For the preparation of project the collection of data is very essential & there are two

broad methods, which are followed in project. They are primary and secondary data

Primary Data:

Direct personnel & oral investigation

The staff of Finance, Production & Risk management

Secondary Data:

Annual reports of the company

Other reports of the corporation

Text books

Internet

LIMITATIONS

Since the study is based on the inventory management i.e. obtained from the

company’s finance & production department, the limitations of the inventory

management shall be equally applicable.

The study is conducted within a short period thus it may not be as detailed & fully

fledged.

The study is conducted with the data available & analysis was made according to it.

Additional information cannot be gathered because of the busy schedule of the

‘white color’ people.

TOOLS AND TECHNICS

• Inventory management tools

• Ratio analysis

• ABC analysis

• Trend analysis

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2.REVIEW OF LITERATURE

INTRODUCTION TO INVENTORY MANAGEMENT

Inventories constitute the most significant part of current assets of a large majority

of companies in India. On an average, Inventories are approximately 60 per cent of current

assets in public limited companies in India. Because of the large size of inventories

maintained by firms, a considerable amount of funds is required to be committed to them.

It is, therefore, absolutely imperative to manage inventories efficiently and effectively in

order to avoid unnecessary investment. A firm neglecting the management of inventories

will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a

company to reduce its levels of inventories to a considerable degree, e.g., 10 to 20 per cent,

without any adverse effect on production and sales, by using simple inventory planning and

control techniques. The reduction in ‘excessive’ inventories carries a favorable impact on a

company`s profitability

Nature of Inventories

Inventories are stock of the product a company is manufacturing for sale and

components that make up the product. The various forms in which inventories exist in a

manufacturing company are: raw materials, work-in -process and finished goods.

• Raw materials are those basic inputs that are converted into finished product

through the manufacturing process. Raw materials inventories are those units which

have been purchased and stored for future productions.

• Work-in-process inventories are semi-manufactured products. They represent

products that need more work before they become finished products for sale.

14

• Finished goods inventories are those completely manufactured products which are

ready for sale. Stocks of raw materials and work-in-process facilitate production,

while stock of finished gods is required for smooth marketing operations.

Thus, inventories serve as a 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 all three kinds of

inventories, while a retail or wholesale firm will have a very high level of finished goods

inventories and no raw material and work-in-process inventories. Firms also maintain a

fourth kind of inventory, supplies or stores and spares. Supplies include office and plant

cleaning materials like soap, brooms, oil, fuel, light bulbs etc. These materials do not

directly enter production, but are necessary for production process. Usually, these supplies

are small part of the total inventory and do not involve significant investment. Therefore, a

sophisticated system of inventory control may not be maintained for them

Objectives of Inventory Management

• To maintain a minimum investment in inventories to maximize profitability.

• Ensure a continuous supply of raw materials to facilitate uninterrupted production

• Maintain sufficient stock of raw materials in periods of short supply and anticipate

price changes

• Maintain sufficient finished goods inventory for smooth sales operations and

efficient customer service

• Minimise the inventory costs

• Control inventory investment by maintaining optimum inventory

15

The objective of inventory control is to make available all materials required for operation

with 5 R’s

i. Right time

ii. Right quality

iii. Right quantity

iv. Right price

v. Right source

IMPORTANT TERMS IN INVENTORY CONTROL

Demand

Demand is the number of units required per period. The study of demand pattern is

necessary to determine the amount of stock to be maintained. The demand pattern may be

either deterministic or probabilistic. In the deterministic case, it is assumed that quantities

needed over subsequent periods of time are known certainty. Probabilistic or stochastic

demand occurs when the demand over a certain period of time is not known with certainty

but its pattern can be described by a known probability distribution.

Lead time

The time gap between placing an order for an item and actual receipt of the item is known

as lead time. The length of lead time decides upon the level of inventory. Two types of lead

times are

i. Administrative lead time : Time gap between initiation of procurement of item and

placing of an order

ii. Delivery lead time : Time gap between placing of an order and actual receipt of item

16

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

a) Q-system (Fixed order quantity system or re-order point system)

The new order is placed when the level of inventory reduced to a specific point

called reorder point. The quantity of purchase in each order will be same

b) P-system (Fixed periodic review system)

In this system, the level of inventory is revived at fixed intervals and orders are

placed at that time. The quantity of order is decided depending upon the level of

inventory at the time of review.

Reserve Stock

An extra amount of stock which is kept on hand to take care of greater than normal usage

during the replenishment lead time or an average during a greater than the normal lead time

or a combination of two.

Maximum & Minimum Stock

a) Maximum stock

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.

b) Minimum stock

This is also known as buffer stock or safety stock. This is the addition stock needed

to allow for delay in deliver or for any unexpected demand that may arise during

the lead time

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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 &

minimum stock levels. This depends on two factors:

I. The lead time between order placements & actual receipt and

II. The demand during the lead time.

Costs & Risks Associated With Inventories

Cost

Ordering cost

The term ordering costs is used in case of raw materials (supplies) & includes the

entire costs of acquiring raw materials. They include costs incurred in the following

activities: requisitioning, purchase ordering, transporting, receiving, inspecting &

storing. Ordering cost increase in proportion to the number of orders placed.

On the other hand, if the firm maintains large inventory levels, there will be few

orders placed & ordering costs will be relatively small. Thus, ordering costs

decrease with increasing size of inventory.

Carrying costs

Costs incurred for maintaining a given level of inventory are called carrying costs.

They include storage, insurance, taxes, deterioration & obsolescence. The storage

costs comprise cost of storage space, stores handling costs & clerical& staff service

costs incurred in recording & providing special facilities such as fencing, lines,

racks etc.

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Carrying costs vary with inventory size. This behavior is contrary to that of

ordering costs which decline with increase in inventory.

ORDERING COSTS CARRYING COSTS

• Requisitioning

• Order placing

• Transportation

• Receiving, inspecting & storing

• Clerical & staff

• Warehousing

• Handling

• Clerical & staff

• Insurance

• Deterioration & obsolescence

RISK

The risks of holding inventories are as follows

Price decline due to increase in supply and price cutting through competition

Production deterioration due to storing for a long period or improper storing

Obsolescence change in customer taste, in production techniques, improvement in

product design, specifications etc.

Meaning of the term stores, stocks & stores department- Locations &

Layout.

STORES

Direct and indirect materials purchased for stocks purpose to be issued to different

jobs, work orders or Departments as and when required are known as stores.

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STOCK

Finished goods are treated as stocks.

INVENTROY

It includes the stock not only for raw material but also stores and spares, work in progress

and finished goods. Thus stock of raw materials is only a part of the inventory held by a

manufacturing unit.

DIRECT MATERIALS

Materials, which form part of a finished product, are known as direct materials. For

Ex. lubricating oil required for the maintenance of machine.

STORES DEPARTMENT-LOCATION AND LAYOUT

The location of the stores department should be carefully planned out and it should

be housed in a position that is very near to the receiving department so that transportation

charges are at a minimum. At the same time, there should be an easy access to all other

departments of the factory, roads, railways siding and wharf so that the minimum of

expense is incurred in unloading. It is very important that bulky and heavy stores should be

stores nearest to the departments requiring them in order to minimize the lab our and

transportation charges.

The layout of the stores department needs careful consideration. The stores should

be divided into racks, which should be further subdivided into small spaces. All these

20

spaces are known as bins and for one item of materials one bin is allocated. Bin is not

necessarily a space on a rack but it really means any space on a rack material is kept. All

bins should be serially numbered.

TYPES OF STORES:

The three types of stores are as follows:

1. Centralized stores

2. Decentralized stores

3. Central stores with sub-stores

CENTRALISED STORES

This is the commonly used stores. In case of such stores materials are received by

and issued from one stores department. All materials are kept at one central stores.

DECENTRALIZED STORES

In this type of stores independent stores are situated in various departments

handling if stores is undertaken by the stores keeper in each department. The departments

requiring stores can draw from their respective stores situated from their departments.

CENTRAL STORES WITH SUB-STORES

In large factories, Departments are situated at distance from central stores, so in

order to keep the transportation costs and handling charges to minimum, sub-stores situated

near production departments.

21

For each item of materials, a quantity is determined and this should be kept in stock

in sub-stores at the beginning of any period. At the end of the period the storekeeper of

each sub-store will requisition from the central stores the quantity of the material consumed

to bring the stock up to the predetermined quantity. In short this type of stores operates in a

similar way to a petty cash system, so this system of stores is also known as the imp rest

system of stores control.

We can conclude that the ideal course for a large factory to overcome the

disadvantages of centralized and decentralized stores is to have central stores with sub

stores. The major goal of inventory management is to discover and maintain the optimum

level of inventory investment.

STORES OR MATERIAL RECORDS

The bin cards and the stores ledger are the two important stores records that are

generally kept for making a record of various items of stores.

Bin Card

A bin card makes a record of the receipt and issue of material and is kept for each

item of stores carried. Quantity of stores received is entered in the receipts column and the

bin card and a balance at any time can be readily seen. The storekeepers maintain these

cards and it assist him to control the stock. For each item of stores, minimum quantities are

stated in the card. By seeing the bin card the storekeeper can send the material requisition

for the purpose of material in time. It is also known as bin tag or stock card and is usually

hung up or placed in shelf, rack or bin where the material has been kept.

Store Ledger

22

This ledger is kept in the costing department and is identical with the bin card

except that receipts, issues and balances are shown along with their money values. This

contains an account for every item of stores and makes a record of the receipts, issues and

the balances, both the information for the pricing of materials issued and the money value

at any time of each item of stores.

The difference between Bin Card and Stores Ledger

Bin Card Ledger Stores

A record of quantities only A record of both quantities and values

Maintained by storekeeper Maintained by cost department

Normally posted just before the transaction takes place.

Always posted after the transaction takes place

Each transaction is individually posted Transactions may be posted periodically

Usually kept inside the stores Kept outside the stores

INVENTORY MANAGEMENT TECHNIQUES

In managing inventories, the firm’s objective should be in consonance with the

shareholder wealth maximization principle. To achieve this, the firm should determine the

optimum level of inventory. Efficient controlled inventories make the firm flexibile.

Inefficient inventory control results in unbalanced inventory & inflexibility-the firm may

sometimes may pile up unnecessary stocks. This increases the level of investment and

makes the firm unprofitable

To manage inventories efficiency, answer should be sought to the following two questions:

• How much should be order?

• When should be it ordered?

23

The first question, how much to order, relates to the problem of determining

Economic Order Quantity (EOQ), and is answered with an analysis of costs of maintaining

certain level of inventories. The second questions, when to order, arises because of

uncertainty and is a problem of determining the re-order point.

1 Economic Order Quantity (EOQ)

One of the major inventory management is to be resolved is how much inventory

should be added when inventory is replenished, if the firm is buying raw materials, it has to

decide lots in which it has to be purchased on replenishment. If the firm is planning a

production run, the issue is how much production to schedule (or how much to take). These

problems are called order quantity problems, and the task of the firm is to determine

the optimum or economic order quantity (or economic lot size). Determining an optimum

inventory level involves two types of costs:

Where EOQ =Quantity to be ordered

A = Annual consumption of the material in units

O = Cost of placing one order including the cost of receiving the goods

C = Carrying cost / cost of storage per unit per year

Assumptions

• Only on product is involved.

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• Annual demands are known.

• Demand should be spread evenly throughout the year.

• Constant demand rate are known with certainty.

• Doesn’t involve constraints (e.g. truck capacity or material handling

limitations).

• Involve two types of costs only i.e. ordering cost & carrying cost.

• Each order is received in a single delivery

Illustration

Calculate EOQ from the following:

Annual consumption 600 units; Ordering cost: Rs. 12 per order; Carrying cost 20%; Price

per unit Rs.20

Solution

Given A = Annual Consumption = 600; O = Ordering Cost per order = 12; C = Carrying

Cost per unit = 29% * 20 = 4/-

EOQ = SQRT 2*600*12÷4 = 60 units

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2 Level Setting

In order to have proper control on materials, the following levels are set

A. Re-order Level

B. Minimum Level / Safety Stock

C. Maximum Level

D. Danger Level

E. Average Stock Level

These are discussed one by one.

Re-Order Level. It is the point at which if stock of a particular material in store

approaches, the storekeeper should initiate the purchase requisition for fresh supplies of

that material. It is the point lying between the maximum and minimum levels at which time

it is essential to initiate purchase orders for fresh supplies of the materials. This point will

26

usually be slightly higher than the minimum stock, to cover such emergencies as abnormal

usage of materials or unexpected delay in delivery of supplies.

Formulae.

Re-ordering Level = Maximum Consumption * Maximum Re-order Period.

Or

Re-ordering Level = Minimum Level + Consumption during the time required to get the

fresh delivery.

Minimum Level / Safety Stock. It represents the quantity below which stock of any items

should not be allowed to fall

Formulae

Minimum Stock Level = Re-ordering Level – (Normal Usage * Normal Re-order Period).

Maximum Level. It represents the quantity above which stock of any item should not be

allowed to be kept.

Formulae

Maximum Stock Level = Re-ordering Level + Re-order Quantity – (Minimum Usage *

Minimum Re-order Period)

Danger Level. It is fixed below minimum stock level. The danger level of stock indicates

emergency of stock positions and urgency of obtaining fresh supply at any costs. The

factors considered are like quickest possible means of transport or the time required for

obtaining suppliers from any available sources.

Formulae.

27

Danger Level = Average Rate of Consumption * Emergency Delivery Time

Average Stock Level. This stock level indicates the average stock held by the concern.

Formulae.

Average Stock Level = Minimum Stock Level + ½ (Re-ordering Quantity)

Illustration

Calculate the minimum stock level, maximum stock level and reordering level from the

following information.

i. Minimum consumption = 100 units per day

ii. Maximum consumption = 150 units per day

iii. Normal consumption = 120 units per day

iv. Re-order period = 10-15 days

v. Re-order quantity = 1500 units

vi. Normal re-order period = 12 days

Solution:

Re-ordering Level = Maximum Consumption * Maximum Re-order Period

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=150 units * 15 days = 2250 units

Minimum Stock Level = Re-ordering Level – (Normal Usage * Normal Re-order Period).

= 2250 – (120*12) = 810 units

Maximum Stock Level = Re-ordering Level + Re-order Quantity – (Minimum Usage *

Minimum Re-order Period)

= 2250+1500-(100*10) = 2270.

INVENTORY CONTROL SYSTEM

A firm needs an inventory control system to effectively manage its inventory.

There are several inventory control system in vogue in practice. They range from simple

systems to very complicated systems. The nature of business and the size dictate the choice

of an inventory control system. For example, a small firm may operate a two-bin system.

Under this system, the company maintains two bins. Once inventory in one bin is used, an

order is placed, and meanwhile the firm uses inventory in the second bin. For a large

departmental store that sells hundreds of items, this system is quite unsatisfactory. The

departmental store will have to maintain a self-operating, automatic computer system for

tracking the inventory position of various items and placing order. The techniques most

commonly used are the following:

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The Table Showing Salient Features Of ABC Analysis

NATURE CATEGORY “A” CATEGORY “B” CATEGORY “C”

Extent of control Very strict control Moderate control Lose control

Frequency orders

Frequent ordering Once in 3 months Once in 6 months or once in a year

Lead time Maximum effort to reduce lead time

Moderate effort Minimum electrical effort

Level of management

Must be taken care by the senior officials

Can be supervised by middle management

Can be done by electrical staff

Period of review Generally after a month Generally after 3 months

Annual review

Source of supplies

As many sources as possible for each item

3 or more reliable sources

3 reliable sources for each item

Follow-up Maximum follow up Period follow up Follow up in exceptional cases

Safety stocks Very low Low High

Centralization Centralized purchasing Centralized and Decentralized

30

decentralized purchasing

purchasing

JUST-IN-TIME (JIT) SYSTEMS

Japanese firm popularized the just-in-time (JIT) system world. In a JIT system

material or the manufactured component and parts arrive to the manufacturing sites or

stores just few before they are put to use. The delivery of material is synchronized with the

manufacturing cycle and speed. JIT system eliminates the necessity of carrying large

inventories, & thus, saves carrying & other related costs to the manufacturer. The system

requires perfect understanding and coordination between the manufactured and suppliers in

terms of the timing of delivery and quality material. Poor quality material or component

could halt the production. The JIT inventory system complements the Total Quality

Management (TQM). The success of the system depends on how well a company

manages its suppliers. The system puts tremendous

pressure on suppliers. They will have to develop adequate systems & procedures to

satisfactory meet the needs of manufacturers.

OUT-SOURCING

A few years ago there was a tendency on the parts of many companies to

manufacture all components in-house. Now more and more companies are adopting the

practice out-sourcing. Out-sourcing is a system of buying parts and components outside.

Rather than manufacturing them internally. Companies develop a single source of supply,

and many other help developing small and middle size suppliers of components that they

require.

31

COMPUTERIZED INVENTORY CONTROL SYSTEMS

More and more companies, small or large size, are adopting the computerized

system of controlling inventories A computerized inventory control system enables a

company to easily track large items of inventories. It is an automatic system of counting

inventories, recording withdrawals and revising the balance. There is an in-built system of

placing order as the computer notices that the reorder point has been reached. The

computerized inventory system is inevitable for large retail stores, which carry thousands

of items. The computer information system of the buyers and suppliers are linked to each

other. As soon as the supplier’s computer receives an order from the buyer’s system the

supply process is activated.

FNSD ANALYSIS

FNSD analysis divides the items of stores into four categories in the descending

order of importance of their usage rate. ’F’ stands for fast moving items that are consumed

in a short span of time. ’N’stands for normal moving items which are exhausted over a

period of a year or so. ’S’ indicates slow moving items which are not issued at frequent

intervals and are expected to be exhausted over a period of two years or more. ’D’ means

dead items and the consumption of such item is almost nil.

INPUT-OUTPUT RATIO

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This ratio is used to judge the efficiency in the usage of material. The ratio indicates

the relation between the units of material put in for production and the units of finished

product.

Input-Output Ratio = Units of Input/Units of Output*100

For example, if 1080 units are introduce into a process and final output is 900 units, then

input-output ratio is:1080/900*100=120%

VED ANALYSIS

Vital, Essential and Desirable analysis is used primarily for control of spare parts.

The spare parts are divided into 3 categories keeping in view the criticality production.

Vital Spares

The spares, stock out of which even for short time will stop production for quite some time

and where the cost of stock out is very high, are known as vital spares.

Essential Spares

The spares, the absence of which cannot be tolerated for more than a few hours or a day

and the cost of production is high and which are essential for production to continue, are

known as essential spares.

Desirable Spares

These spares which are needed but their absence for even a week or so will not lead the

stoppage if production is known as desirable spares. Some spares though negligible in

monetary value, may be vital for the production to continue and requires constant attention.

Such spares may not receive the attention they deserve if they are maintained according to

ABC analysis because their value of consumption is small. So in that case, VED analysis is

made to get effective results.

33

MINI MAX SYSTEM

This is the one of the oldest methods and still widely used. For each type of

inventory a maximum level is set that demand presumably will not exceed as minimum

level representing a margin of safety required prevent out of stock conditions. The

minimum level also governs the ordinary point. An order of significant size is placed to

bring inventory to the maximum point when the minimum level is reached.

TWO BIN SYSTEM OR DOUBLE BIN SYSTEM

In this system, the stock of each item is separated into 2 piles, bins or groups. In the

1st group a sufficient supply is kept to meet current demand over a designed period of time.

In the 2nd group safety stock is available to meet the demand during the lead time necessary

to fill the order. When the first bin stock has been exhausted reordering occurs and the

stock on the second bin is used requirements.

MATERIAL (INVENTORY) TURNOVER RATIO

Inventory turnover ratio indicates the efficiency of a firm selling its products. Generally

high inventory turnover ratio indicates a good management. A too high inventory turnover

ratio is also be analyzed because it may due to low inventory. Therefore a low and too high

inventory turnover is not good for the firm.

Cost of goods sold

• Inventory turnover ratio = ------------------------- Average inventory

Raw material consumed

• Raw material turnover ratio = --------------------------------------- Average raw material inventory

34

Cost of goods sold

• Finished goods turnover ratio = -------------------------------- Average of finished stock

Average inventory

• Ratio of inventory to current assets = ------------------------ By current assets

THE INVENTORY MANAGEMENT PROCESS

The techniques of inventory management, discussed above, are very useful in determining

the optimum level of inventory and finding answers to the problems of the economic order

quantity, the re-order point and the safety stock. These techniques are very essential to

economise the use of resource by minimizing the total inventory cost. Our discussion of

inventory management indicates the broad framework for managing inventories. More

sophisticated techniques may be used to handle inventory management problems more

efficiently and efficiently. It should, however, be realized that inventory management, more

than the use of techniques, is a managerial process of continuous planning, coordination,

control and monitoring, motivation etc. it involves a number of steps in these areas.

35

The goal of the wealth maximization is affected by the efficiency with which

inventory is managed. The task of managing inventory primarily rests with the operating

managers-purchase manager; materials control manager, production manager and

marketing manager. Financial manager has no operating responsibility to control inventory.

He has a role to analyse the behavior of inventory and report its implications to operating

managers. The financial manager should see that an optimum amount of funds is invested

in inventory. He should be familiar with the inventory control techniques. He should

introduce the policies which reduce the lead time, regulate usage and thus, minimize safety

stock. The net effect would be to reduce inventory investment and increase the firm’s

prospects of making more profits.

HOW IS A FINANCIAL MANAGER INVOLVED IN INVENTORY

MANAGEMENT

The financial executive is only one of the persons in the top management concerned with

the levels and fluctuation of investment in inventories. The inventory programme is a part

of planning budget, which often falls within the financial area. He plays an important role

in determining the general nature of controls exercise the method of balancing the relative

cost involved and the measurement of performance of inventory controls. He may have

supervisory authority in these areas or he may a member of policy committee with board

responsibilities. In smaller firms, he often participates even more directly in the

management of inventories.

36

The financial officer can do a good job of anticipating change in the need for funds

if he thoroughly understands the implication of changing inventory policy and position. He

has to help directly in shaping inventory policy where finance is a limiting factor. Good

inventory management is a good financial management.

The financial executive should pay attention to the following aspects of inventory

management.

• Action taken against imbalance of raw materials and goods in process inventory

that may limit the utility of stocks to that items which is in shortest supply

• The full safety against shortages of inventory has a prohibitive cost. There should,

however be reasonable procurement head time assumption and safety stocks level

• Production schedule, as far as possible, should firmly adhere to reducing inventory

of raw material and work in progress goods. In case of a change of a production

schedule, purchasing department should get early notification.

• There should be an efficient system to dispose of goods that are obsolete surplus for

production.

• Continuous efforts have to be made to shorten the production cycle. The larger

production runs should be worth the cost and risk of the extra inventory investment.

• Special pricing policy may be required to extremely slow moving finished items.

Often once is inclined to agree with the observation that a serious look into the

inventory accumulation proves highly rewarding. Even if there is no shortage of funds in

the business, the financial executive has to participate actively in the formulation of

37

inventory policies with a view to speeding inventory turnover ratio and maximizing return

on investment.

The financial manger is responsible for providing necessary funds to be support the

firm’s investment in inventory. So in order to assess the requirement of funds for

inventories, he should be in a position to ask the requirement of inventory and about

various methods and techniques that are employed for efficient management of inventories

with finance is a concentrate the finance manager should helping preparing inventory

policy .a cost benefit analyses has to be made so as to avoid unnecessary blocking of funds

in inventory.

3.COMPANY PROFILE

The Indian pharmaceutical industry today is in the front rank of India’s science based

industry with wide ranging capabilities in the complex field of drugs manufacturing and

technology. It ranks very high in the world, in terms of technology, quality and range of

medicines manufactured from simple headaches pills to sophisticated antibiotics and

complex cardiac compounds, almost every type of medicines is now made in India.

The organized sector of the pharmaceutical industry has played a key role in

promoting and sustaining development in this vital field. International companies

38

associated with a sector have stimulated, assisted and spearheaded this dynamic

development in the past 53 years and helped to put India on the pharmaceutical map of the

world.

The pharmaceutical industry in India provides excellent facilities. It has quality

producers and regulatory authorities in U.S.A and U.K approve many units. It has a pool of

personnel with high managerial and technical competence, as also skilled work force.

It track record of development particularly in the area of improved cost-beneficial

chemical synthesis for various drug molecules is excellent. It provides a wide variety of

bulk drugs and exports sophisticated bulk drugs.

The Indian market has some unique advantages. India has a 61 years old

democracy. It has an educated work force and English is commonly used. It has a solid

legal frame work and strong financial markets. Professional services are easily available.

The country is now committed to free market economy and globalization. Above

all, it has 70 million middle class markets, which is continuously growing. For first time in

many years the international pharmaceutical industry is finding great opportunities in India.

The process of consolidation power, which has become a generalized phenomenon in the

world pharmaceutical industry, has started taking place in India. The pharmaceutical

industry, with its rich scientific talent and research capabilities, supported by intellectual

property protection regime, is well set to mark its place as a sunrise industry.

ADVATAGES TO INDIA

COMPETENT WORK FORCE:

39

India has a pool of personnel with high managerial and technical competence, as

also skilled work force. It has an educated workforce and English is a commonly used.

Professional service is easily available.

COST-EFFECTIVE CHEMICAL SYNTHESIS:

It track record of development particularly in the area of improved cost-beneficial

chemical synthesis for various drug molecules is excellent. It provides a wide variety of

bulk drugs and exports sophisticated bulk drugs.

LEGAL AND FINANCIAL FRAMEWORK:

India has a 61-years-old democracy and hence has a solid legal framework and

strong financial markets. There is already established international industry and business

community.

INFORMATION TECHNOLOGY:

It has a good network of world class educational institutions and established

strengths in Information technology.

THE GROWTH SCENAARIO

India’s US$ 3.1 billion pharmaceutical industry growing at the rate of 14% per annum. It

is one of the largest most advanced among the development countries. Over 20,000

registered pharmaceutical manufactures exist in the country. The domestic pharmaceutical

industry output is expected to exceed Rs. 260 billion in the financial year 2002, which

accounts nearly 1.3% of the pharmaceutical sector. Of this, bulk drugs will accounts for

Rs.54 billion (21%) formulations, the remaining Rs.210 billion (79%). In financial year

2001, imports for Rs.20 billion while exports were Rs.87 billion.

40

STEPS TO STRENGTHEN THE INDUSTRY

India Company needs to attain the right product-mix for sustained future growth. Core

competencies will play an important role in determining the future of many Indian

pharmaceutical companies in the post product –patent regime after 2005. Indian companies

in an effort to consolidate their position will have to increasing the look at merger

acquisition options of either companies or products. This would help them to offset loss of

new products options, improve their R&D effort and improve distribution to penetrate

markets. R&D has always taken the back seat amongst Indian pharmaceutical companies.

In order to say competitive, in the future Indian companies will have refocus and invest

heavily in R&D. The Indian pharmaceutical industry also need to take advantage of the

research advances in Bio-technology and IT. The future of the industry will be determined

by how well it markets it’s products to several regions and distribute risk, I’s forward and

backward integration capabilities, it’s R&D, it’s consolidation through mergers and

acquisition, co-marketing and licensing agreement. Profit margins of players vary widely

in both domestic and export sales due to many factors.

EXPORTS

Over 60% of India’s bulk drug production is exported. the balance is sold locally to other

formulation India’s pharmaceutical export are to the tune of Rs.87 billion of which

formulation contribute nearly 55% and the rest 45% comes from bulk drugs. In financial

year 2000, exports grown by 21%.

India’s pharmaceutical imports were to the tune of rs.20.3 billion in financial

year2001. Imports are registered a CAGR of only 2% in the past 5 years. Imports of bulk

drugs have been reduced in the recent years. The exports of pharmaceuticals during the

41

years 1989-1999 were Rs.49780 million. From a merger Rs. 46 crores worth of

pharmaceutical, drugs and fine chemicals exports in 1980-1981, pharmaceutical exports

has rise to approximately to Rs. 6152 crores a rise of 11.19% against the last year export.

Amongst the total export of India the percentage share of drugs, pharmaceuticals and fine

chemicals during April & October (2000-01) was 4.1% an increasing of 7%.

RESEARCH & DEVELOPMENT

It is a key of the future of pharmaceutical industry. The pharmaceutical advance for

considerable improvement in life expectancy and health all over in the world are the result

of steadily increasing investment in research. There is considerable scope for collaborative

R&D community. These strengths related to availability of excellent scientific talents who

can develop combinatorial chemistry, new synthetic molecules and plant derived candidate

drugs. R&D in pharmaceutical industry in India is critical to find answers for some of the

diseases peculinar to a tropical country like India and also for finding solutions for UN

served medical needs. Industry R&D group can carry out limited primary screening to

identify lead molecules or even candidate for further vivo screening, pre-clinical

pharmaceutical , toxicology, animal & human pharma co kinetics and metabolic studies

before taking them up for human trail. In such collaborations, harmonize standards of

screening can be assured following establishing good laboratory practices.

The R&D expenditure by Indian pharmaceutical industry is around 1.9% of the

industry turnover. This obviously, is very low when compared to the investment on R&D

by foreign research based pharma companies. They spend 10-16% of the turnover on R&D.

However, now that India is entering into the patent protection area , many companies are

spending relatively more on R&D. when it comes to clinical evaluation at the time of

multi-center trials, India would provide a strong based considering the real availability of

42

clinical materials in diverse therapeutic areas. Such active collaboration will be mutually

beneficial to both partners. According to survey by the pharmaceutical outsourcing

management association and bio/pharmaceutical outsourcing report, pharmaceutical

companies are utilizing substantially the service of contract research organization (CRO),

Indian pharmaceutical industry, with its scientific talents provides cost effective clinical

trial research. It has an excellent record of developing of improved cost beneficial chemical

synthesis for various drug molecules. Some MNC’s are already sourcing these services

from their Indian affiliates. The pharmaceutical and biotechnology industry is eligible for

weight deduction for R&D expenses up to 150%. These R&D companies will go also enjoy

tax holiday for 10 years. A promotional research and development funds of Rs.150Cr is

setup by the government to promote R&D in the pharmaceutical sector. Ever since its

inception in 1984, At Dr. Reddy's we aim at providing affordable and innovative

medicines for healthier lives. We serve society’s important needs for affordable

medicines through the API component of PSAI and the Global Generics

business, and for innovative products that solve unmet medical needs through

the CPS component of PSAI and the Proprietary Products Businesses.

Headquartered in India, we are a global pharmaceutical company with a presence in

more than 100 countries. We have wholly-owned subsidiaries in the US, UK, Russia,

Germany and Brazil; joint ventures in China, South Africa and Australia; representative

offices in 16 countries; and third-party distribution set ups in 21 countries. Dr. Reddy’s is

the first pharmaceutical company in Asia outside of Japan to be listed on the NYSE.

Our strong portfolio of businesses, geographies and products gives us an edge in an

increasingly competitive global market and allows us to provide affordable medication to

people across the world, regardless of geographic and socio-economic barriers.

What We Are

43

Dr. Reddy’s is a global, vertically integrated pharmaceutical company with a

presence across the value chain, producing and delivering safe, innovative, and high quality

finished dosage forms, active pharmaceutical ingredients and biological products. Our

products are marketed across the globe, with an emphasis on North America, Europe,

India, Russia and other emerging markets. We conduct NCE drug discovery research in the

areas of metabolic disorders and cardiovascular indications at our research facilities in

Atlanta (USA) and Hyderabad (India). Through our Custom Pharmaceutical Services

business unit, we provide drug substance and drug product development and manufacturing

services on a proprietary basis.

CORPORATE OVERVIEW

We are …

An Integrated Global Pharmaceutical Company

Our Purpose:

“Providing affordable and innovative medicines for healthier lives”

Our Vision:

“To be a top 20 global pharmaceutical company by 2020”

Dual Impact Approach

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Improve accessibility through generic pharmaceuticals

Satisfy unmet medical needs through new and improved pharmaceuticals

Our values

“We strive for excellence in everything we think, say and do”

PHARMACEUTICAL SERVICES & ACTIVE INGREDIENTS

Active Pharmaceutical Ingredients (API)

Our capabilities span 24 major chemistries including stereo-selective synthesis,

cryogenics, hydrogenations and cyanations. Our strong IP, Regulatory and Analytical skills

45

are evident in the 84 US DMFs we have filed, the highest in India and second highest in the

world. Our manufacturing facilities are capable of supporting the product development

effort through the concurrent scale-up and piloting of feasible routes as they are developed

by the R&D teams. State-of-the-art equipment and instruments give us the edge to compete

globally. Our operations are fully integrated through supply-chain and ERP systems (SAP

R/3), which enable seamless response to customers, all the while keeping the environment

around our plants clean, green and safe.

Custom Pharmaceutical Services (CPS)

In an industry cluttered with chemical manufacturers, CPS stands out because of

our understanding of the pharmaceutical business and the associated expertise needed.

Rather than just being a chemical provider, CPS offers a service mix covering the entire

pharmaceutical value chain. We execute cost-effective and time-bound projects for our

customers, and provide them with GMP-compliant products manufactured in FDA-

inspected, ISO-certified facilities. A team ofexperienced project manager ensures smooth

progress of projects from initiation to closure in order to avoid any cost and time overruns.

GLOBAL GENERICS

Generic Formulations

46

Geographic diversification, cost containment, strengthening our product portfolio

and building scale – we at Dr. Reddy’s are strong in all these aspects in the generics space.

We are now the fourth largest player in Germany after the acquisition of betapharm, and

are constantly looking for opportunities to maximize the potential of our current and future

portfolio in different territories across the US and EU. We have the necessary expertise for

customer-specific packaging, compliance packaging, and anti-counterfeit packaging. In

fact, Dr. Reddy’s has won several awards globally for our packaging efforts, including the

Asia Star, AmeriStar and WorldStar awards.

Branded Formulations

Dr. Reddy’s brands are today recognized and trusted across several continents.

Brands like Omez (Omeprazole), Nise (Nimesulide), Stamlo (Amlodipine), Ciprolet

(Ciprofloxacin), Enam (Enalapril) and Ketorol (Ketorolac) are leaders in their category in

several countries, with many of them being used by more patients than use the innovator’s

47

product. Over 1.5 million patients across the world take ‘Omez’ for their acid peptic

disorders every single day! Entrepreneurship, coupled with the will to make a difference

drives our 2,000-strong field force to reach out to over 210,000 doctors and 115,000

pharmacies in more than 40 countries across the world

More than 200 brands collectively

Top Brands

Omez (Omeprazole) No. 1 in 14 countries

Stamlo (Amlodipine) No. 1 in 8 countries

Nise (Nimesulide) No. 1 in 7 countries

Ciprolet (Ciprofloxacin) No. 1 in 5 countries

Ketorol (Ketorolac) No. 1 in 5 countries

Enam (Enamapril) No. 1 in 2 countries

PROPRIETARY PRODUCTS

Discovery Research

We have put in place a state-of-the-art, fully-integrated discovery infrastructure to

strengthen our effort to discover and develop therapeutically useful New Chemical Entities

(NCEs) and market them globally. Our two Discovery Research centers – one in Atlanta,

48

USA, and the other in Hyderabad, India, have more than 300 scientists actively involved in

a number of drug-discovery and clinical development programs.

Differentiated Formulations

Our Differentiated Formulations business deals with assets like acquired proprietary

technologies, internally developed proprietary drug-delivery platforms, and current internal

compounds under pre-clinical and clinical development. Our initial global therapeutic area

focus is on dermatology and oncology, two therapeutic areas that best leverage our internal

assets. A key component of the strategy in this area is a strong, targeted business

development effort to accelerate market entry.

Biopharmaceuticals

Our Biologics Development Center spans an area of 36,000 sq. ft., with

development and manufacturing suites for both E. coli and mammalian cell culture. It

caters to the highest development standards of cGMP, GLP and applicable levels of bio-

49

safety. Grafeel (Filgrastim), our first biologics product to enter the market, enjoys a market

share of almost 50% in India and has been able to reach many more patients than the

innovator’s product due to its affordability. Our second product Reditux (Rituximab) is the

first biosimilar monoclonal antibody to be developed and launched anywhere in the world.

The Management Team

The Management Council is the top tier of our company's management structure.

The management of Dr. Reddy's has developed and implemented policies, procedures and

practices that attempt to translate the company's vision, mission and purpose into reality.

The management also identifies, measures, monitors and controls the risks factors in the

business and ensures safe, sound and efficient operation.

The Management Council meets every quarter under the chairmanship of the CEO.

50

Dr. Anji ReddyChairman

Dr. Anji Reddy is the founder-Chairman of Dr. Reddy's Laboratories, and is greatly respected by the Indian Pharmaceutical industry for his work in developing affordable medicines and for sparking drug discovery efforts in the private sector. A philanthropist, Dr. Anji Reddy has founded two not-for-profit organizations that are focused on alleviating urban poverty and providing primary education to underprivileged children.

G V PrasadVice-Chairman and Chief Executive Officer

GV Prasad drives the overall strategy for the organization, with particular emphasis on innovation and growth. He spearheaded the company's foray into the global generics markets and is now focused on the Innovative Products business, which includes Discovery Research, Biologics and Specialty Pharmaceuticals.

Satish ReddyManaging Director and Chief Operating Officer

Satish Reddy drives operational excellence across the organization. He has built the finished dosage business in the emerging markets, including India, and is now focused on strengthening the global generic finished dosage business and giving more attention to the Pharmaceutical Services and Active Ingredients.

Key milestones

2008

• Acquires BASF’s Pharmaceutical manufacturing contract business and related

facility at Shreveport, Louisiana

• Acquires Dowpharma’s small molecule business at its Mirfield and Cambridge

facilities, UK.

2007

• Becomes No.1 pharmaceutical company in India in turnover and profitability.

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• Launches Reditux ™ (Rituximab) – the World’s first biosimilar of a monoclonal

antibody.

• Blaglitazone (DRF 2593) enters Phase III of clinical trials becoming India’s most

advanced NCE.

2006

• Revenues touch USD 1 Billion in December 2006.

• Dr. Reddy's obtains its second 180-day marketing exclusivity for a generic drug in

the US market with the launch of Ondenesetron Hydrochloride Tablets.

• Becomes an Authorized Generic Partner for Merck’s Proscar® & Zocor® in the US

market during 180 day exclusivity period.

• Acquires betapharm- the fourth-largest generics company in Germany for a total

enterprise value of € 480 million.

2005

• Acquires Roche's API Business at the state-of-the-art manufacturing site in Mexico

with a total investment of USD 59 million.

• Announces India's first major co-development and commercialization deal for it's

molecule Balaglitazone (DRF 2593), with Rheoscience.

• Announces a unique partnership for the commercialization of ANDAs with

ICICI Venture.

2004

• Acquires Trigenesis gives access to drug delivery technology platforms

2003

• Announces a 15-year exclusive product development and marketing agreement for

OTC drugs with Leiner Health Products in the US.

• Launches Ibuprofen, first generic product to be marketed under the “Dr. Reddy’s”

label in the US

2002

• Conducts its first overseas acquisition – BMS Laboratories Limited and Meridian

Healthcare in UK.

52

2001

• Becomes the first Asia Pacific pharmaceutical company, outside Japan, to list on

the New York Stock Exchange. Listed with the symbol ‘RDY’ on April 11, 2001.

• Launches its first generic product, Ranitidine, in the US market

• Becomes the first Indian pharmaceutical company to obtain an 180-day exclusive

marketing rights for a generic drug in the US market with the launch of Fluoxetine

40 mg capsules on August 3, 2001.

2000

• Dr. Reddy's Laboratories becomes India's third largest pharmaceutical company

with the merger of Cheminor Drugs Limited, a group company

• Reddy US Therapeutics, a wholly-owned subsidiary, is established at Atlanta, US to

conduct target based drug discovery

1999

• Acquisition of American Remedies Limited, a pharmaceutical company based in

India.

1998

• Licenses anti-diabetic molecule, DRF 2725 (Ragaglitazar), to Novo Nordisk

1997

• Licenses anti-diabetic molecule, DRF 2593 (Balaglitazone), to Novo Nordisk.

Becomes the first Indian pharmaceutical company to out-license an original

molecule.

• First ANDA filed with the United States Food and Drug Administration for

Ranitidine.

1996

• Sets up of a Joint Venture in Russia.

53

1994

• Makes a GDR issue of USD 48 million

• Foundation stone laid for a finished dosages facility to cater to the highly regulated

markets such as the US.

1993

• Dr. Reddy's Research Foundation established. The company's drug discovery

programme starts

1991

• First formulation exports to Russia commence

1990

• Dr. Reddy’s, for the first time in India, exports Norfloxacin and Ciprofloxacin to

Europe and Far East.

1988

• Acquires Benzex Laboratories Pvt. Limited to expand its Bulk Actives business.

1987

• Obtains its first USFDA approval for Ibuprofen API

• Starts its formulations operations

1986

• Dr. Reddy’s goes public

• Dr. Reddy’s listed on Bombay Stock Exchange (BSE)

• Dr. Reddy’s enters international markets with exports of Methyldopa

1984

• Dr Anji Reddy establishes Dr. Reddy's Laboratories with an initial capital outlay of

Rs.25 lakhs

54

Sustainability - Safety Health and Environment Policy

We at Dr. Reddy’s consider safety, health and environment protection an integral

part of our business. We are committed to the principles of sustainable development. As a

part of this commitment, we protect the environment in which we operate and ensure the

health and safety of our employees, contractors, visitors and communities.

All employees are responsible for being aware about safety, health and environment

needs in their areas of work. We expect them to participate actively in developing solutions

to fulfill these needs and establish a high level of safety, health and environment

performance.The SHE policy shall be communicated to all employees and will also be

made available to the public on request.In order to implement various elements of our SHE

Policy we have created the suitable organization structure for SHE Management System

Sustainability - Social Initiatives

We at Dr. Reddy’s take pride in the company’s mission – to help people lead

healthier lives. This objective is achieved by increasing access and affordability of

medicines through the company’s generics, API and branded generics products, and by

addressing unmet medical needs by innovation through its Specialty and NCE businesses.

We see Social Initiatives as an integral component of Corporate Social

Responsibility. Our investments in the community have gone beyond the adhoc

disbursement of funds, to planned programs in capability building. We do this by

supporting the following organizations:

Dr. Reddy’s Foundation

55

The Naandi Foundation

Dr. Reddy's Foundation For Health Education (DRFHE)

The Centre for Social Initiative & Management (CSIM)

Our Social Initiatives do not involve just the community, but employees as well. By

including employees in our definition of Social Initiatives, the company ensures that the

initiators also figure among the beneficiaries.

Worldwide employees : 10000+

1700+ : Research & Scientific staff

3300+ : Marketing & Sales force

3300 + : Manufacturing staff

45 + : Nationalities

56

GLOBAL PRESENCE

Corporate OfficeDr. Reddy's Laboratories Ltd.7- 1 - 27 Ameerpet, Hyderabad 500 016,India.Tel: +91-40-23731946Fax: +91-40-23731955Email: webmaster@drreddys.com

Headquartered in Hyderabad, India. We enjoy a wide global presence and an

extensiveMarketing network through international subsidiaries and joint ventures. Our

Global presence leads to a sensitive understanding of the local laws in the countries where

our company has a presence.

• Global commercialization infrastructure with focus on US, Europe, India, and

Russia.

• Manufacturing locations in India, UK, US, China and Mexico.

• Research and development locations in India and the US.

• Wholly-owned subsidiaries in the US, UK, Russia, Germany, Brazil, New Zealand,

Turkey and Mexico.

• Joint Ventures in China, South Africa and Australia.

• Representative Offices in 16 countries.

• Third party distribution setups in 23 countries.

57

• 79% of the company's revenues in FY08 came from geographies outside India.

AWARDS & ACHIEVEMENTS

• BSE & NASSCOM Foundation – Social & Corporate Governance Award for

Best CSR Initiative.

• Global HR Excellence Awards 2008-09, Asia Pacific HR Congress.

• Best Workplaces 2008 In Biotech / Pharma Industry Sector, The Economic

Times.

• Best Performing CFO in the Pharma Sector for 2007, CNBC-TV18.

• NDTV Profit Business Leadership Awards 2007, Business Leader in the

Pharmaceutical Sector.

• Amity Leadership Award for Best Practices in HR in Pharmaceutical Sector,

4th HR Summit ‘08.

• Dun & Bradstreet American Express, Corporate Awards 2007, Top Indian

Company.

• Pharma Excellence Awards 2006-07 for Corporate Social Responsibility, for

Sustained Growth and for Shareholder Protection _ The Indian Express.

• Asia Pacific HRM – Recruiting and Staffing Best in class Award 07-08 for best

use of Technology

• Golden Shield Award for Excellence in Financial Reporting by ICAI, 2008.

• Economic Times Corporate Excellence Award – Best Corporate Citizenship

2008.

58

4. DATA ANALYSIS & INTERPRETATION

59

DATA OF INVENTRIES IN Dr. REDDY LAB (UNIT- IV TH BLOCK)

INVENTORY TREND WITH RESPECT TO TURNOVER

YearMaterial

Inventory

Production

Inventory

Engineering

Inventory

Total

InventoryTurnover

2003-2004 34315593 85788982 2451114 122555689 784578687

2004-2005 53657482 127667802 3700516 185025800 972625415

2005-2006 59247801 148119504 4231986 211599291 1081139341

2006-2007 81485686 193879736 5619702 280985124 1976597554

2007-2008 84068811 210172029 6004915 300245755 1600863896

INVENTORY TURNOVER RATIO

YearTotal

Inventory

Average

InventoryTurnover

Inventory

Turnover

ratio

2003-2004 122555689 122555689 784578687 6.40

2004-2005 185025800 153790745 972625415 6.32

2005-2006 211599291 198312546 1081139341 5.45

2006-2007 280985124 246292208 1976597554 8.03

2007-2008 300245755 290615440 1600863896 5.51

60

VARIOUS INVENTORIES

INTERPRETATION:

The above graph is showing the various amounts of inventory (Material, Production

& Engineering) used in the last 5 years. Material usage in every year go on increasing

especially production inventory usage is very high which is indicating the good production

level of the company.

INTERPRETATION:

61

0

50000000

10000000

15000000

20000000

25000000

2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

MATERIAL

PRODUCTION

ENGINEERING

This graph is showing the amount of material purchased during the 5 years. The

purchases of company is regularly in the increasing trend. However it is find that, the

company made more purchases in the year 2004-05 in comparison with 2003-04. after that,

again the company made more investment in purchases for the year 2006-07. So , I could

be expected that again the company need more amount to purchase inventory for the year

2008-09.

INTERPRETATION:

It is observed the there is more increase in the usage of production inventory during

the years 2004-05 & 2006-07 which is showing the more amount of production carried for

that years.

62

INTERPRETATION:

It is observed the there is an increase in the usage of engineering inventory during

the years. There is more increase in the usage of engineering inventory during the years

2004-05 & 2006-07.

TREND ANALYSIS

The term trend is very commonly used in day to day operation. For example we

often talk of increasing the rising trend of share market, population, prices etc, trend also

called secular or long term trends in the basic tendency of production, sales, income,

employment, etc, to grow or decline over a period of time.

There are all sorts of trends, some series increase slowly and some increase fast,

others decreasing at varying rates, some remain relatively constant for a long period of

63

2451114

37005164231986

56197026004915

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

2003-20042004-20052005-20062006-20072007-2008

ENGINEERING INVENTORY

ENGINEERING INVENTORY

time, and some after a period of growth or decline reverse themselves and enter a period of

decline or growth.

Formula for calculating trend

y= a + bx

ΣY a = -------- N

ΣXY b = -------- ΣX2Where,

x = years

Y=inventory

N= total no. Of years

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TREND ANALYSIS FOR INVENTORY

Table showing trend analysis for inventory

Year(x) Inventory (y) X= (x-

2006)

2X

XY Trend value

2004 122555689 -2 4 -245111378 168664900

2005 185025800 -1 1 -185025800 194373616

2006 211599291 0 0 0 220082332

2007 280985124 1 1 280985124 245791048

2008 300245755 2 4 600491510 271499764

ΣY=

1100411659

ΣX= 3 ΣX2=16 ΣXY=

451339456

Y = a + bx

ΣY a = -------- N

1100411659

= ------------------ 5

= 220082332

ΣXY b = -------- ΣX2

411339456 = ---------------- 16

= 25708716

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Substitute these values into the equation y = a+bx

Estimated inventory for the coming 5 years

Year Estimated inventory

2009 297208480

2010 322917196

2011 348625912

2012 374334628

2013 400043344

INTERPRETATION:

The above table shows a positive trend of the inventory for the coming four years.

Material usage in every year go on increasing especially production inventory usage is very

high which is indicating the good production level of the company.

TREND ANALYSIS FOR TURNOVER (sales)

Table showing trend analysis for turnover (sales)

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297208480322917196

348625912374334628

400043344

0

50000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

2009 2010 2011 2012 2013

Estimated inventory

Estimated inventory

Year(x) Turnover (y) X= (x-

2006)

2X XY Trend value

2004 784578687 -2 4 -1569157374 953593159.4

2005 972625415 -1 1 -972625415 1118377069

2006 1081139341 0 0 0 1283160979

2007 1976597554 1 1 1976597554 1447944889

2008 1600863896 2 4 3201727792 1612728799

ΣY=

6415804893

ΣX= 3 ΣX2=16 ΣXY=

2636542557

Y = a + bx

ΣY a = -------- N

6415804893

= ------------------ 5

= 1283160979

ΣXY b = -------- ΣX2

2636542557 = ---------------- 16 = 164783910

Substitute these values into the equation y = a+bx

Estimated inventory for the coming 5 years

Year Estimated turnover

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2009 1777512708

2010 1942296618

2011 2107080528

2012 2271864438

2013 2436648348

INTERPRETATION:

The above table shows a positive trend of the turnover for the coming five

years.

ABC INVENTORY CONTROL SYSTEM

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17775.1270819422.96618

21070.8052822718.64438

24366.48348

0

5000

10000

15000

20000

25000

30000

2009 2010 2011 2012 2013

Estimated turnover

Estimated turnover

Large numbers of firms have to maintain several types of inventories. It is not

desirable to keep the same degree of control on all the items. The firm should pay

maximum attention to those items whose value is the highest. The firm should, therefore,

classify inventories to identify which item should receive the most effort in controlling.

The firm should be selective in its approach to control investment in various types of

inventories. This analytical approach is called the ABC analysis & tends to measure the

significance of each item of inventories in terms of its value. The high value items are

classified as ‘A items’ & would be under the tightest control. ’C items’ represents

relatively least value & would be under simple control. ‘B items’ fall in between these two

categories & require reasonable attention of management.

The ABC analysis concentrates on important items & also known as control by

importance & exception (CIE)

The following steps are involved in implementing the ABC analysis:

• Classify the items of inventories, determining the expected use in units & the price

per unit for each item.

• Determine the total value of each item by multiplying the expected units by its unit

price.

• Rank the items in accordance with the total value, giving first rank to the item with

highest total value & so on.

• Compute the ratios of number of units of each item to total units of all items & the

ratio of total value of each item to total value of all items.

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• Combine items on the basis of their relative value to form three categories-A, B &

C.

ABC ANALYSIS

Items Units % of

Total

Cumulativ

e %

Unit

price

(Rs)

Total

cost (Rs)

% of

Total

Cumulative

%

1 10,000 1015

30.40 304,000 38.0070

2 5,000 5 51.20 256,000 32.003 16,000 16

455.50 88,000 11.00

904 14,000 14 5.14 72,000 9.005 30,000 30

1001.70 51,000 6.38

1006 15,000 15 1.50 22,500 2.817 10,000 10 0.65 6,500 0.81

Total 100,000 800,000

70

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Series 1

Series 2

Column1

The tabular & graphic presentation indicates that ‘Item A’ forms a minimum

proportion, 15 % of total units of all items, but represent the highest value of 70 %. On the

other hand, ‘Item C’ represents 55 % of the total units & only 10 % of the total value. ‘Item

B’ occupies the middle place. Represents 40% of the total units & only 20 % of the total

value.

WE CAN NOW QUANTIFY THE DEPTH OF THE INVENTORY MANAGEMENT

SYSTEM BY COMPLETING THE TABLE.

If your “yes” response rate is

Inventory management system is

Higher than 95% EXCELLENT! There is little improvement anybody will be able to bring about. You may waste time & money if you try to improve on your management system.

Between 90 & 95% VERY GOOD! Additional improvement can be made, but they will most likely require an upgrade of your data processing system

Between 80 & 90% GOOD! Your management system needs to be reviewed. However, analyzing your negative response will give you an indication of where to start improving your methods. The

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benefits will be tangible and will come quite rapidly

Between 70 & 80% FAIR! Your approach to managing inventories is incomplete and outdated, you can make substantial improvements. Your inventories performance is worse than your competitors

Between 60 & 70% POOR! Your inventories need major redesign. Your inventory turnover is poor an expertise appears to be missing in your company to manage inventories. You need to take a firm action and define a long plan of action

Less than 60% UNACCEPTABLE! You should redesign all your methods from ground zero. Establish a task force to study inventory management with in your company to stop the inventory drain on your cash balances

ANALYZING THE RESULTS

Total number of questions 60

1. Subtract the number of “N/A” responses -

2. Total number of applicable questions 60

3. Total number of “yes” responses 49

4. Percentage “yes” responses (49) divided by the total number of applicable questions (60)

81.6%

CALCULATING THE SCORE

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The percentage of ”yes” response computed in items above with be a first indicator

of the quality of the overall management system. The table above enables you to compare

the “yes” response rate against a scale that will put the company’s in perspective

ANALYSIS IN RESPECT TO DR.REDDY’S LABORATORIES

By filling the above questionnaire with the expert opinion of some responsible

executives, we came to a conclusion that the inventory management is Good! Since it is

lying in the range of 80 to 90%. This means that the inventory management is quite

satisfactory. However it is to be reviewed. The negative responses should be scrutinized

and by doing so the benefits will come quite rapidly

5. FINDINGS

• The firm has focusing more on efficient use of ABC (always better control)

technique.

• Presently company maintains adequate inventory turnover ratio as a

pharmaceutical company it exhibits good signs. There was good

coordination between the Marketing, planning, procurement, production and

distribution functions of DRL, higher inventory turnover was possible.

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• The company maintains balanced position on Raw Material at cost. For few

finished products, most of the important raw materials are either self

manufactured or procured locally.

• There is more increase in the usage of production inventory during the years 2004-

05 & 2006-07 which is showing the more amount of production carried for that

years.

• The trend analysis for total inventory is showing that, after five years the

total inventory will exceed more than 40 crores.

• The trend analysis for turnover (sales) is showing a significant increase in the

coming years.

SUGGESTIONS

• For inventory control it is advisable to the firm to use JIT (just in time) it helps to

the company by way of minimization in holding cost because all items are value

based.

• Company may try to order annually rather than monthly depending upon

demand for the products.

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• Once non-moving inventory is observed and declared a quick disposal action

has to be initiated this exercised has to be carried on through the year.

CONCLUSION

In this project an attempt has been made to study the underline principles of

inventory management by using some of the tools & techniques. The main objective of

this project is to analyze the inventory management from the FINANCE angle . All

the analytical work was done by keeping view of the finance aspect. Necessary theory has

been provided to support & analyze the inventory management.

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The trend of materials inventory, production inventory, engineering inventory &

turnover inventory has been made with authentic figures which were scrutinized by some

responsible heads. The figure of turnover has been taken from reliable sources which is

the most accurate and authentic data. The inventory turnover ratios have been calculated

for the past 5 years & also calculated the trend analysis of the future, Total Inventory &

Turnover for 5 years to analyze the trend. This is the most important tool for the Finance

Manager to assess the situation. The questionnaire on the inventory management was

designed in such a way that it covers inventory management of raw materials, work in

process & finished goods. By doing so, I was able to access, in general, the inventory

management of the company.

A through scrutiny of contribution of various authors has been done in order to

reach the depth of the subject. Thus this project gives the company a very clear picture of

their inventory management. The analysis can help the organization in framing some

important policies on inventories & also facilitate them in decision making on

inventories, which can decided the position of the organization in the industry.

BIBLOGRAPHY

TEXT BOOKS

• Financial Management-AUTHOR-PRASANNA CHANDRA-NEW DELHI

• Financial Accounting-AUTHOR-R. NARAYANASWAMY

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• Financial market and services-AUTHOR-GORDAN&NATRAJAN-

GURGEON

NEWS PAPER:-

• Economic times

• Times of india

• Business standard

Websites

• www.inventorymanagement.com

• www.drreddys.com

• www.edelweiss.com

• www.vikaspublishing.com

• www.phindia.com

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