Chapter - I

INTRODUCTION
1.1 Introduction
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, and Marketing etc 1

1.2 OBJECTIVES
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.

1.3 LIMITATIONS

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.

1.4 Present Study

For the purpose of the study data has been selected covering from 2007-2008 to 2010-2011. 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 II

RESEARCH METHODOLOGY
For the purpose of the study data has been selected covering from 20072008 to 2010-2011. 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
3.1 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 companys 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 6

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 replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling 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.

3.2 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. 7

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.

3.3 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.

3.4 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. 9

Goods for resale - returned goods that are saleable.

3.5 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 10

Average Inventory

3.6 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.

3.7 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 11

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.

3.8 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

3.9 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 companys 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: 12

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 firms 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 firms sales to competitors. The level of finished goods materials would depends upon coordination between sales and production as well as on production time. 13

3.10 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 firms 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.

3.11 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. 14

3.12 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)

3.13 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 STOCK POINT= (LEAD TIME*AVERAGE USAGE) + SAFETY

3.14 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). 15

3.15 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.

3.16 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. 16

Rules framed by government for import or procurement.

3.17 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.

3.18 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.

3.19 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.

17

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

3.20 Techniques of Inventory Management

ECONOMIC ORDER QUANTITY: There are two questions relating to material management: 1. What should be the size of the Order? 18

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, 19

I = Inventory Carrying Costs.

3.21 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). for classifying the inventories as A, B and C categories. The method usually adopted is, This approach is also known as Proportional Value Analysis (PVA). There is no definite procedure

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. 20

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.

21

Chapter IV

PROFILE OF NILE LTD.

4.1 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. Niles 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. 22

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

23

Chapter V

DATA ANALYSIS
5.1 ABC ANALYSIS
ABC ANALYSIS FOR THE YEAR 2010-11 In the year 2010-2011 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 description

annual consumptio n 1002 702 301 233 59770 240 127 24

cost per unit 44334 44319 44296 49496 119 27116 49456

annual value 44444448 31111113 13333334 11515178 7087018 6584928 6281006

1 steel plates(12,14,18,20,25)mm 2 steel plates(8,16,22,32)mm 3 steel plates(6,10,36,40,45,50,63,65)mm 4 rods(80,100,122)dia 5 Chemicals 6 mechanical seal(60,80,100)mm 7 rods(50,180,240,250)dia

8 gear box(as-55,60,35,RR210DNC,110DNC) 9 motors(3,7,5,10)hp 10 accuators and variable frequency drive 11 mildsteel seemless pipes 12 electrodes(E7018) 13 forgings(flanges) 14 Rods 15 packaging material 16 standguard and stand drive 17 mechanical seal(50,125)mm 18 Hardware 19 paints 20 gearbox(AS-80,90F) 21 motors(5,15,20)hp 22 forgings(nozzles) 23 teflon items(gaskets) 24 electrodes(E7018-1) 25 mechanical seal(40mm) 26 others in boughtout(sight and light glasses,hoses) 27 abbressive material(grit) 28 imported general stores(ceramic crucibles) 29 teflon items(dippipes/sparges) 30 castings(valve bodies) others from general stores(oils, greases, hotmill jars, 31 handgloves,nosemasks, glasses,cap) 32 gearbox(RR310DNC,510DNC) 33 motors 25hp 25

23 251 98 3680 10716 102 63 10738 85 80 121943 17043 34 81 752 1529 4286 108 270985 36 29 240 425 97289 90 28

23730 21376 49773 955 320 31756 49397 286 33474 34296 20 137 67388 27577 2892 1200 400 15125 6 43000 53364 6354 3570 15 15581 46704

5600280 5365376 4877724 3514400 3429120 3239112 3112011 3071068 2845339 2743680 2438862 2334891 2291192 2233737 2174784 1834803 1714418 1633500 1625908 1548000 1547556 1524960 1517250 1459335 1402345 1307712

34 stainless steel seemless pipes 35 castings(rods and plates) 36 electrodes(E316,316L,6013) 37 Tantalum 38 teflon items(bushes/nozzles) 39 electrical items 40 imported chemicals 41 oxygen gas 42 flux wires 43 castings(nozzles) 44 teflon items(gasket sheets) 45 Diesel 46 imported tantalum 47 job bearing 48 castings(sleeves) 49 Bearings 50 LPG 51 teflon items(spray ball) 52 Shafts 53 teflon items(spacers/seperators) 54 teflon items(tapes/'o' rings) 55 screws and rods 56 material handling 57 grinding machines 58 abbressive material(sand) 59 grinding wheels 60 other in maintence(low value spares, lubricants) 26

768 3392 385 27 950 5414 1515 6644 7620 885 500 13606 12 812 40 1166 131 17 20 3072 7702 42 347 12 30 48 1056

1525 322 1500 37516 1040 176 610 123 90 770 1350 37 38560 500 9500 250 2221 16256 10412 56 22 3718 435 10115 4000 2284 98

1171200 1092224 1027500 1012932 988000 952864 924150 817212 685800 681450 675000 503422 462720 406000 380000 291500 290951 276352 208240 172032 169444 156156 150945 121380 120000 109632 103488

61 hoses and pipes 62 indegnous grind wheels and belts 63 blasting accessories 64 elements seperators 65 tool bit 66 argon gas 67 imported boughtout(gear box) 68 measuring tapesand scales 69 wind mill spares 70 others in tools(spanners,lowvalue jigggs,fixtures) 71 cutting accessories

159 1981 52 6 33 61 1 103 4 1226 28

523 42 1502 12147 2025 950 41764 365 4637 22 574

83157 83202 78104 72882 66825 57950 41764 37595 18548 26972 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 2010-11

27

50000000 45000000 40000000 35000000 30000000 25000000 20000000 15000000 10000000 5000000 0 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 annual consumptio n 1002 702 301 233 59770 240 127 23 251 98 28 cost per unit 44334 44319 44296 49496 119 27116 49456 23730 21376 49773

no.

material description 1 steel plates(12,14,18,20,25)mm 2 steel plates(8,16,22,32)mm steel 3 plates(6,10,36,40,45,50,63,65)mm 4 rods(80,100,122)dia 5 Chemicals 6 mechanical seal(60,80,100)mm 7 rods(50,180,240,250)dia gear box(as8 55,60,35,RR210DNC,110DNC) 9 motors(3,7,5,10)hp 10 accuators and variable frequency

annual value 44444448 31111113 13333334 11515178 7087018 6584928 6281006 5600280 5365376 4877724

drive 11 mildsteel seemless pipes 3680 955 3514400 139714805

The following table shows the B items annual consumptio n 10716 102 63 10738 85 80 121943 17043 34 81 752 1529 4286 108 270985 36 29 29 cost per unit 320 31756 49397 286 33474 34296 20 137 67388 27577 2892 1200 400 15125 6 43000 53364

no.

material description 1 electrodes(E7018) 2 forgings(flanges) 3 Rods 4 packaging material 5 standguard and stand drive 6 mechanical seal(50,125)mm 7 Hardware 8 paints 9 gearbox(AS-80,90F) 10 motors(5,15,20)hp 11 forgings(nozzles) 12 teflon items(gaskets) 13 electrodes(E7018-1) 14 mechanical seal(40mm) others in boughtout(sight and light 15 glasses,hoses) 16 abbressive material(grit) 17 imported general stores(ceramic

annual value 3429120 3239112 3112011 3071068 2845339 2743680 2438862 2334891 2291192 2233737 2174784 1834803 1714418 1633500 1625908 1548000 1547556

crucibles) 18 teflon items(dippipes/sparges) 240 6354 41342941 1524960

The following table shows the C items annual consumptio n 425 97289 90 28 768 3392 385 27 950 5414 1515 6644 7620 885 500 13606 30 cost per unit 3570 15 1558 1 4670 4 1525 322 1500 3751 6 1040 176 610 123 90 770 1350 37

no.

material description 1 castings(valve bodies) others from general stores(oils, greases, hotmill jars, 2 handgloves,nosemasks, glasses,cap) 3 gearbox(RR310DNC,510DNC) 4 motors 25hp 5 stainless steel seemless pipes 6 castings(rods and plates) 7 electrodes(E316,316L,6013) 8 Tantalum 9 teflon items(bushes/nozzles)

annual value 1517250 1459335 1402345 1307712 1171200 1092224 1027500 1012932 988000 952864 924150 817212 685800 681450 675000 503422

10 electrical items 11 imported chemicals 12 oxygen gas 13 flux wires 14 castings(nozzles) 15 teflon items(gasket sheets) 16 Diesel

17 imported tantalum 18 job bearing 19 castings(sleeves) 20 Bearings 21 LPG 22 teflon items(spray ball) 23 Shafts 24 teflon items(spacers/seperators) 25 teflon items(tapes/'o' rings) 26 screws and rods 27 material handling 28 grinding machines 29 abbressive material(sand) 30 grinding wheels 31 other in maintence(low value spares, lubricants) 32 hoses and pipes 33 indegnous grind wheels and belts 34 blasting accessories 35 elements seperators 36 tool bit 37 argon gas 38 imported boughtout(gear box) 31

12 812 40 1166 131 17 20 3072 7702 42 347 12 30 48 1056 159 1981 52 6 33 61 1

3856 0 500 9500 250 2221 1625 6 1041 2 56 22 3718 435 1011 5 4000 2284 98 523 42 1502 1214 7 2025 950 4176 4

462720 406000 380000 291500 290951 276352 208240 172032 169444 156156 150945 121380 120000 109632 103488 83157 83202 78104 72882 66825 57950 41764

39 measuring tapesand scales 40 wind mill spares 41 others in tools(spanners,lowvalue jigggs,fixtures) 42 cutting accessories

103 4 1226 28

365 4637 22 574

37595 18548 26972 16072

A B C

5.2 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. 32

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 rati

5.3 Statement Showing Inventory Turnover Ratio

Particulars Turnover Average Inventory Inventory Turnover

2008-09 425042979 260035731 1.63 33

2009-10 398484821 270449527 1.47

2010-11 321558291 293925381 1.09

Ratio

Interpretation
In 2008-09 stocks are converted into cash/accounts receivable faster when compared to the years 2009-10 and 2010-11. The turnover ratios is 1.63 in the year 2008-09 was gradually decreased to 1.09 by the year 2010-11. 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 turnover ratio.

InventoryTurnover Ratio
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2008-09 2009-10 2010-11

Inventory Holding Period

2009-10 398484821 270449527 225 2010-11 321558291 293925381 331

Particulars Turnover Average Inventory Inventory Period( In days)

2008-09 425042979 260035731 Holding 221

34

Interpretation:
In 2008-09 the inventory holding period is less when compared to the years 2008-09 and 201011 respectively. In the year 2008-09 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 2010-11. These mainly because of the sales are gradually decreasing from year to year. The ratio is gradually increasing from year to year.

5.4 Inventory to Current Assets Ratio

Inventory Inventory to current asset ratio = ------------------------ *100 Current Assets Year Inventory Current Assets Inventory to Current Assets Ratio 2007-08 267797121 328534407 35 81.51%

2008-09 2009-10 2010-11

252274341 288624713 299226049

308149728 344537428 336657938

81.86% 83.77% 88.88%

Interpretation:
In the year 2007-08, it was 81.51% and it was increased to 88.88% by the year 2010-11. 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.

5.5 Inventory to Total Assets

Inventory Inventory to total assets = ----------------- * 100 Total Assets Year 2007-08 2008-09 Inventory 267797121 252274341 36 Total Assets 447862056 421558838 Inventory to Total Assets Ratio 59.79% 59.84%

2009-10 2010-11 Interpretation

288624713 299226049

458845760 441873054

62.90% 67.72%

In year 2007-08 it was 59.79% and it is gradually increased to 59.84% by the year 2008-09 and further it is increased to 62.90% & 67.72% by the years 2009-10 and 2009-10 respectively. The Inventory is increasing from year to year but the other assets are not increasing as the inventory.

5.6 Raw Materials to Sales Ratio

Raw Materials Raw materials to sales ratio = --------------------------- * 100 Sales Year Sales Raw Consumed 2007-08 387724451 196580737 37 Materials Raw Materials to

Sales Ratio 50.70%

2008-09 2009-10 2010-11 Interpretation

425042979 398484821 321558291

193155579 207481444 165648066

45.44% 52.07% 51.51%

In year 2007-08 the ratio is 50.70% and it is decreased to 45.44% in the year 2008-09 and then it is increased in the year 2009-10 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.

5.7 Closing Stock to Sales Ratio

Closing Stock Closing stock to sales ratio = ------------------------- * 100 Sales Year Inventory Sales 38 Closing Stock to

Sales Ratio 2007-08 2008-09 2009-10 2010-11 Interpretation In the year 2007-08 the ratio is 69.07% and in the year 2008-09 it was decreased to 59.35%., in 2009-10 it was increased to 72.43% and in the year 2010-11 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. 267797121 252274341 288624713 299226049 387724451 425042979 398484821 321558291 69.07% 59.35% 72.43% 93.05%

Closing Stock to Sales Ratio

Years

5.8 Economic Order Quantity

39

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 = ---------------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) -------------------------- (1)

QC Average Material = -------------------2 40 ---------------------------------- (3)

The Total material costs, then are the sum of total carrying and ordering costs: QC Total Cost = -----------2 AO + -----------Q ---------------------- (4)

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 Total Cost (TC) = ---------- + 2 AO ---------Q -------------------------- (a)

Differentiating Equation (a) with respect to Q D (TC) -----------------DA + C ------------------2 AO ----------Q ---------------- (b)

Setting Equation (b) to zeros: C -------AO ----------= 0 41

2 CO2 EOQ = 2AO

Q2

= SQRT (2AO/C)

-------------------------------- (5)

Table 1 CALCULATION OF EOQ USING THIS INFORMATION

Sl. No. Code Material Description Annual Price Consumption(Qty) (Rs) value

1 2 3 4 5 6 7 8

RNST RNBO RNRO GNOT RNCA RNTI RNFI RNSP

Steel Plates (tons) Bought Outs(Nos) Rods (tons) General Items(Nos) Chemicals(kgs) Teflon Items (Nos) Forgings (Nos) Pipes ( Mts) and

2004,929.00 344,594.00 423,114.00 116,625.00 59,770.00 14,010.00 855.00

88,888,897 40,647,703 20,936,688 14,593,351 7,087,018 5,648,844 5,437,192 4,686,741

Fittings 5,066.00

9 10

RNCA GNWP

Castings (Nos) Packing (Set)

5,107.00

4,544,214 3,073,419

Material 10,738.00

11

GMOT

Imported

General 57.00 42

2,212,421

Stores(Nos) 12 GNM -Maintenance(Nos) 4% 2,848.00 1,041,281

Ordering Cost

Inventory Carrying Cost -- 12.5% EOQ = SQRT (2AO/C)

Calculation of EOQ using the above information

1. RNST Steel Plates: Annual consumption Ordering Cost Inventory carrying cost = = = Rs.2004, 929.00 Rs.355, 556 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 Ordering Cost Carrying Cost = 344,594.00 = Rs.185, 908. = Rs.5, 080,963.

EOQ = ((2) (344,594.00) (185908)/5080963) 43

= 25216.79 = 158.78 Nos = 159 Nos. 3. RNRO Rods: Annual consumption Ordering Cost Carrying Cost = 423114 = Rs. 837468 = Rs. 2617086

EOQ = ((2) (423114)(837468)/2617086) = 520 tons. 4. GNOT General Stores: Annual Consumption Ordering Cost Carrying Cost = 116625 = Rs. 583734 = Rs. 1824169

EOQ = ((2) (116625) (583734)/1824169) = 273 Nos. 5. RNCA Chemicals: Annual Consumption Ordering Cost Carrying Cost = 59770

= Rs.283481 = Rs.885877

EOQ = ((2)( 59770)(283481)/885877) = 195 Kgs. 6. RNTI Teflon Items: 44

Annual Consumption Ordering Cost Carrying Cost

14010

= Rs.225954 = Rs.706106

EOQ = ((2)( 14010)(225954)/706106) = 94 Nos.

7. RNFI Forgings: Annual Consumption Ordering Cost Carrying Cost = 855

= Rs.217488 = Rs.679649

EOQ = SQRT ((2)( 855)(217488)/679649) = 23 No 8. RNSP Pipes & Fittings: Annual Consumption Ordering Cost Carrying Cost = 5066

= Rs.187470 = Rs.585843

EOQ = SQRT ((2) (5066) (187470)/585843) = 57 Mts. 9. RNCA Castings: Annual Consumption = 5107 45

Ordering Cost Carrying Cost

= Rs.181769 = Rs.568027

EOQ = ((2)( 5107)(181769)/568027) = 57 Nos.

10. GNWP Packing Material: Annual Consumption Ordering Cost Carrying Cost = 10738

= Rs.122937 = Rs.384177 = 83 Sets.

EOQ = ((2)( 10738)(122937)/384177) 11. GMOT Imported General Stores: Annual Consumption Ordering Cost Carrying Cost = 57

= Rs.88497 = Rs.276553

EOQ = (2)( 57)(88497)/276553) = 6 Nos. 12. GNM Maintenance: Annual Consumption Ordering Cost Carrying Cost = 2848

= Rs.41651 = Rs.130160 = 43 Nos 46

EOQ = ((2)( 2848)(41651)/130160)

TABLE-2 STATEMENT SHOWING EOQ

SL. NO CODE 1 2 3 4 5 6 RNST RNBO RNRO GNOT RNCA RNTI MATERIAL DESCRIPTION Steel Plates Bought Outs Rods General Stores Chemicals Teflon Items ANNUAL CONSUMPTION 2004929 344594 423114 116625 59770 14010 ORDERING CARRYING EOQ COST 355556 185908 837468 583734 283481 225954 COST 1111112 5080963 2617086 1824169 885877 706106 UNITS 358 Tons 158 Nos 520 Tons 273 Nos 195 Kgs 94 Nos

7 8

RNFI RNSP

Forgings Pipes & Fittings

855 5066

217488 187470

679649 585843

23 Nos 57 Mts

RNCA

Castings

5107

181769

568027

57 Nos

10

GNWP

Packing Material

10738

122937

384177

83 Sets

47

11 12

GMOT GNM

Imported General Stores Maintenance

57 2848

88497 41651

276553 130160

6 Nos 43 Nos

INTERPRETATION: The Company will do well to follow the E O Q as far as possible to improve the inventory turnover 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 1 2 RMCH GMOT Imported Chemicals Imported Stores 3 RMBO Imported outs 4 5 6 7 8 9 10 RNST RNBO RNCA RNCH RNFI RNSP RNRO Steel Plates Bought Outs Castings Chemicals Forgings Pipes & Fittings Rods 90 days 75 days 60 days 45 days 60 days 30 days 45 days 48 2004929/365=5492.96 344594/365=944.09 5107/365=13.99 59770/365=163.75 855/365=2.34 5066/365=13.88 423114/365=1159.22 494366.40 70806.75 839.40 7368.75 140.40 416.40 52164.90 Bought 90 days 1/365=0.003 0.27 LEAD TIME 90 days AVG. CONSUMPTION LEAD PER DAY 1515/365=4.15 57/365=0.16 TIME

CONSUMPTION 373.50 14.40

General 90 days

11 12

RNTI GNWP

Teflon Items Packing Materials

15 days 8 days

14010/365=38.38 10738/365=29.42

575.70 235.36

TABLE-4 STATEMENT SHOWING RE-ORDER LEVEL

Re-order level = (Lead time * Average Usage) + Safety stock SL NO. 1 CODE RMCH MATERIAL LEAD TIME SAFETY RE-ORDER LEVEL 763.50

DESCRIPTION CONSUMPTION STOCK Imported 373.50 390.00 Chemicals

GMOT

Imported General Stores

14.40

21.00

35.40

RMBO

Imported Bought 0.27 outs

1.00

1.27

4 5 6 7 8 9 10 11 12

RNST RNBO RNCA RNCH RNFI RNSP RNRO RNTI GNWP

Steel Plates Bought Outs Castings Chemicals Forgings Pipes & Fittings Rods Teflon Items Packing Materials

494366.40 70806.75 839.40 7368.75 140.40 416.40 52164.90 575.70 235.36

497400.00 70900.00 843.00 7370.00 142.00 420.00 52170.00 610.00 247.00

991766.40 141706.75 1682.40 14738.75 282.40 836.40 104334.90 1185.70 482.36

49

TABLE-5 STATEMENT SHOWING MAXIMUM STOCK LEVEL

MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + EOQ

SL NO. 1 2

CODE

MATERIAL DESCRIPTION

EOQ

RE-ORDER MAX. STOCK LEVEL LEVEL 794.50 41.40

RMCH GMOT

Imported Chemicals Imported General Stores

31 6

763.50 35.40

3 4 5 6 7 8 9 10 11 12

RMBO RNST RNBO RNCA RNCH RNFI RNSP RNRO RNTI GNWP

Imported Bought outs Steel Plates Bought Outs Castings Chemicals Forgings Pipes & Fittings Rods Teflon Items Packing Materials

1 358 158 57 195 23 57 520 94 83

1.27 991766.40 141706.75 1682.40 14738.75 282.40 836.40 104334.90 1185.70 482.36

2.27 992124.40 141864.75 1739.40 14933.75 305.40 893.40 10485.90 1279.70 565.36

50

Chapter -VI

CONCLUSIONS AND SUGGESTIONS

6.1 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 turnover ratio 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 2008 to 2011. This impact severely on the profitability and liquidity position of the organization. An improvement n the inventory turnover 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 51

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
52

1.

Always keep optimum stocks to keep production process continues without

interruption keeping in view costs of over stocking vis--vis the benefits of more than required stock. 2. The companys 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
53

S.no. 1.

Title Financial Accounting

Author 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

54