inventory mgt zuari cement 2010
TRANSCRIPT
1.1 INTRODUCTON OF THE STUDY
Inventory can be referred to as sum of the value of raw materials
fuels and lubricants, spare parts, maintenance consumables, semi
processed materials and finished goods, stock at any given point of
time.
In large companies inventory place a most significant part of the
current assets. The business has about 15 to 30% of inventories in
total assets.
Inventory is composed of assets that will be sold in feature in the
normal course of business operations. The assets which firms stores
as inventory is anticipation of need are raw materials, work in progress
and finished goods.
MEANING OF INVENTORY MANAGEMENT
Inventory management consists of maintaining for a given financial
investment an adequate of something in order to meet and accepted
pattern of demand. Inventory considers control over costs of inventory
on one hand an handle the size of inventory on other hand.
Controlling investments in inventories constitute crucial part in current
assets.
An efficient inventory controlling system will decide,
What to purchase
When to purchase
How to purchase
Size of purchase
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And from where to purchase (Suppliers)
The main purpose of inventory management is to ensure
1. Required quantity of availability of raw materials
2. Minimize the investments in inventories
3. Maintain reasonable stock levels not excess or not under
stocks.
INVENTORY CONTORL
Inventory control is the system devised an adopted for controlling
investments in inventory. It involves inventory planning and decision
making with regard to the quantity and time of purchase, fixation of
stock levels, maintenance of stock records and continuous stock –
taking.
1.2 OBJECTIVE OF THE STUDY
The main objective of the project work is to study and analyze and
preparation INVENTORY MANAGEMENT in ZUARI Cement.,
Secondary objectives are:
1. Purchasing procedure of the inventories.
2. Classification of inventories.
3. Codification of inventories.
4. Analyze the records of stock levels.
5. Analyze the JIT system of ZUARI Cement.
6. Analyze the two bin system.
7. Analyze the inventory turnover ratio.
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1.3 NEED OF THE STUDY:
In this competitive business world each and every business
organization need inventory management system for determining what
to order, when to order, where and how much to order so that
purchasing and storing costs are the lowest possible without affecting
production and sales. Thus, inventory management control
incorporates the determination of the optimum size of the inventory-
how much to be order and when after taking into consideration the
minimum inventory cost.
The overall inventory management includes design and inventory
control organization with proper accountability establishing procedure
for inventory handling disposal of scrap, simplification, standardization
and codification of inventories, determining the size of inventory
holdings, maintaining record points and safety stocks, economic order
quantity, ABC analysis and VALUE analysis and finally framing an
INVENTORY MANUAL.
1.4 RESEARCH METHODOLOGY
To attain the objective of studying the inventory of ZUARI Cement
Industries Ltd. The information has been collected in two ways:
1. Primary data
2. Secondary data
Primary Data:
In Primary data the analysis of purchasing procedure, inventory data,
inventory turnover ratio, stock levels, ABC analysis, Twobin system, JIT
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has made possible by the discussions with various administrative
executives and other concerned people of ZUARI Cement industries
Ltd.
Secondary Data:
The Secondary data has been collected from annual reports of
organization, internet (www. birlagroup.com) and books.
Methodology:
For analysis purpose I am used following techniques
1. ABC Analysis,
2. Ratio Analysis
3. EOQ Method etc
Company’s competitors are Orient Cement, L&T, Ultratech, and
ACC Cement
1.5 Limitations of the study:
1 The study period of 45 days as prescribed by university
2 The study is limited unto the date and information provided by
ZUARI Cement Industries Ltd and its annual reports
3 The report will not provide exact Budgetary System status and
position in ZUARI Cement Industries Ltd; it may vary from time to
time and situation to situation.
4 This report is not helpful in investing in ZUARI Cement either
through disinvestments or capital market.
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5 The accounting procedure and other accounting principles are
limited by the company changes in them may vary the actual
and budget performance.
2.1 INDUSTRY PROFILE:
INTRODUCTION OF CEMENT:
The basic need of human being is food clothing and shelter love
and affection /possession is on never ending process for a human
being.
As the time passes on human beings their wants and wishes also
changed from ancient times to modern times and among them the
living pattern and costruction works also have been changed from
temporary construction of house to permanent construction and the
basic material used in construction is “Cement”.
Cement the word derived from a Latin word ‘CEMENTTUM’ means
stone chipping such as we used in roman.
Cement the word as per oxford, it is commonly used is any
substance applied for soft stocking things. But cement means is most
vital and important material for modern constructions. It is a material
which sets and hardness when mixed with water. Cement is basically
used in construction as a building agent. In ancient times clay bricks
and stones have been used for construction works.
The Romans were using a binding or a cementing material that
would harden and water. The first systematic effort was made by
“SMEATON” who undertook the execution of a new light house in
1756. He observed that
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production obtained by during lime stone was the best cementing
material for work under water.
The construction in lost centuries was with Lime that was the
main equipment used for construction work. The ancient constructions
like Tajmahal, Qutubminar, Mysore Palace, Red fort, Charminar etc.,
the evidence of lime construction.
THE INDIAN CEMENT INDUSTRY:
By staring priduction in 1914 the story of India cement industry
is a stage of continuous of growth.
India is the fourth largest cement producer after China, Japan
and U.S.A. so far annual production and demand has been growing a
pace at roughly 68 million tons with an installed capacity of 82 millions
tons.
In 1914 as the foundation of stable cement Industry was laid as
sun above. It was Indian Cement Company at Porbandar in Gujarat. In
1920, the cement marketing corporation was formed to promote the
sale and distribution of cement. A significant development was made in
1930 when all manufacturers mergers together to form the Associated
Cement Company Limited.
Cement Industry is the major Industry it has taken rapid strides
for a modest beginning at porbandar in 1914 to the 1980’s with over
understanding out of the 60 units, 14 units are in the public sectors
remaining units are in private sector.
Indian endowed with cement grade lime stones (90 Billion tons )
and coal (190 Billion tons ). The basic raw material required for
cement manufacture and self sufficient in manufacturing cement
making machineries. During nineties it had a particular impressive
expansion with a growth rate of 10%.
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The strength and vitality of cement Industry can be gouged by
the interest shown and support given by World Bank, considering the
excellent performance of the industry in utilizing loans and achieving
the objectives and targets. The World Bank is examining the feasibility
of providing a third line of credit for further upgrading Industry in
varying areas, which will make it global.
Therefore, India today totally installed capacity of over 30 million
tons, employing over a 100 thousand people directly and contributing
amount of rupees 8 billion to India’s GDP.
TECHNOLOGY:
Cement may be manufactured employing three alternative
technologies.
1. The largely out molded well process technology.
2. The more modern dry process that requires only 19% coal
utilization.
3. The latest percallinator technology through which optimum
utilization may be achieved. Here the calcinatory or raw.
Material is partly or completed carried out before the feud enters the
rotator kin besides saving power, the adoption of this technology
enable in increase in installed capacity by 30-35%, the 30,000 tons per
day plants being setup in the country use this technology.
TECHNOLOGICAL CHANGES:
Continuous technological upgrading and assimilation of latest
technology has been going on in the cement industry. Presently 93% of
the total capacity in the industry is based on modern and environment
friendly dry process technology and only 7% of the capacity is based
on old wet and semi-dry process technology.
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There is tremendous scope for waste heat recovery in cement
plants and there by reduction in emission level. One project for co-
generation of power utilizing waste heat in an Insian cement plant is
being implemented with Japanese assistance under Green Aid Plan.
The induction of advanced technology has helped the industry
immensely to conserve energy and fuel and to save materials
substantially.
India is also producing different varieties of cement like Ordinary
Portland Cement (OPC), Portland Puzzling Cement (PPC), Portland Blast
Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening
Portland Cement, Sulphate Resisting Portland Cement, White Cement
etc. production of these varieties of cement conform to the BIS
Specifications. Also, some cement plants have set up dedicated jetties
for promoting bulk transportation and export.
TOTAL PRODUCTION:
The cement industry comprises of 125 large cement plants with
an installed capacity of 148.28 million tons and more than 300 mini
cement plants with an estimated capacity of 11.10 million tons per
annum. The Cement Corporation of India, which is a Central Public
Sector Undertaking, has 10 units. There are 10 large cement plants
owned by various state Governments. The total installed capacity in
the country as a whole is 159.38 million tons.
Actual cement production in 2002-03 was 116.35 million tons as
against a production of 106.90 million tons in 2001-02, registering a
growth rate of 8.84%. Major players in cement production are Ambuja
cement, Aditya cement, J K Cement and L & T cement.
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Apart from meeting the entire domestic demand, the industry is
also exporting cement and clinker. The export of cement during 2001-
02 and 2003-04 was 5.14 million tons and 6.92 million tons
respectively. Export during April-May, 2003 was 1.35 million tons.
Major exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.
The planning commission for the formulation of X Five Year Plan
constituted a ‘Working Group on Cement Industry’ for the development
of cement industry. The Working Group has identified following thrust
areas for improving demand for cement;
1. Further push to housing developments programs;
2. Promotion of concrete Highways and roads, and
3. Use of ready-mix concrete in large infrastructure projects.
Cement industry has been decontrolled from price and distribution
on 1st march 1989 and de-licensed on 25th July 1991. However, the
performance of the industry and prices of cement are monitored
regularly. Being a key infrastructure industry, the constraints faced
by the
Actual cement production in 2002-03 was 116.35 million tons as
against a production of 106.90 million tons in 2001-02, registering a
growth rate of 8.84%. Major players in cement production are Ambuja
cement, Aditya cement, J K Cement and L & T cement.
Apart from meeting the entire domestic demand, the industry is
also exporting cement and clinker. The export of cement during 2001-
02 and 2003-04 was 5.14 million tons and 6.92 million tons
respectively. Export during April-May, 2003 was 1.35 million tons.
Major exporters were Gujarat Ambuja Cements Ltd. and L & T Ltd.
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The planning commission for the formulation of X Five Year Plan
constituted a ‘Working Group on Cement Industry’ for the development
of cement industry. The Working Group has identified following thrust
areas for improving demand for cement;
4. Further push to housing developments programs;
5. Promotion of concrete Highways and roads, and
6. Use of ready-mix concrete in large infrastructure projects.
Cement industry has been decontrolled from price and distribution
on 1st march 1989 and de-licensed on 25th July 1991. However, the
performance of the industry and prices of cement are monitored
regularly. Being a key infrastructure industry, the constraints faced
by the industry are reviewed in the Infrastructure Coordination
Committee meetings held in the Cabinet Secretariat under the
Chairmanship of Secretary (Coordination). The 444 Committee on
Infrastructure also reviews its performance.
DISTRIBUTION SYSTEM:
Distribution of cement was entirely under Government control
until 1982. at present the Industry has to make an agreement
towards the levy quota which is to be sold compulsorily to the
Government the rest of the output or open market quota may be
sold in the open market evolved prices the output lifted by the
Government is allocated state wise.
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2.2 COMPANY PROFILE:
Italcementi Group History
Founded in 1864, Italcementi was quoted for the first time on the stock
markets, at the Milan Stock Exchange, in 1925, under the name of
“Società Bergamasca per la Fabbricazione del Cemento e della Calce
Idraulica” and has been operating since 1927 under the name of
Italcementi Spa.
Zuari Cement is part of the Italcementi Group, the fifth largest cement
producer in the world and the biggest in the Mediterranean region.
With net sales over 6 billion Euros in 2009 and a capacity of 70 million
tonnes. Italcementi Group combines the expertise, know-how and
culture of a number of companies from more than 22 countries in 4
continents. This includes an industrial network of 63 cement plants, 15
grinding centres, 5 terminals, 134 aggregates quarries and 613
concrete batching units. In India, with its inherent strengths,
Italcementi Group's Zuari Cement is committed to give the building
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industry a cement that is truly international.
A commitment to customer satisfaction has seen Zuari Cement grow
from a modest 0.5 million tonne capacity in 1995 to 3.5 million tonne
today. Zuari Cement is in the process of increasing this capacity to 6
million tonne by 2009 through setting up of a new 5500 tonne per day
clinker line at Yerraguntla and a grinding center at Chennai. A captive
power plant with a capacity of 43 MW has already been set up at the
Company's cement manufacturing facility at Sitapuram.
With a 6% market share in the south Indian cement market and sales
of about Euro 188 million in 2009, Zuari Cement has chalked out
ambitious plans for the future. This includes strengthening its presence
in the Maharashtra, Orissa and West Bengal markets. While technology
is just one of its strengths, there are many other factors that contribute
equally to Zuari's success. These include a high-level organisation and
decentralised quality assurance teams to guarantee the full
compliance with the customers' expectations.
Our History
Strong foundations for a company of strength.
Zuari entered the Cement business in 1994 to operate the Texmaco
Cement Plant. In 1995, Texmaco’s Plant at Yerraguntla was taken over
by Zuari and a Cement Division was formed. The fledging unit came
into its own in the year 2001 when Zuari Industries entered into a Joint
Venture with the Italcementi Group, the 5th largest producer of
Cement in the world , Zuari Cement Limited was born. Zuari Cement
took over Sri Vishnu Cement Limited in 2002. Today, the Company is
amongst the topmost cement produces in South India.
Zuari and Italcementi. The strength of two :
Zuari Cement is one of the leading cement producers in South India.A
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fully owned subsidiary of the Euro 6 billion Italcementi Group,
Commitment to customer satisfaction has seen Zuari Cement grow
from a modest 0.5 million tonne capacity in 1995 to 3.5 million tones
today.And earned a place among the most reliable cement producers
in the country.
Thanks to a careful plan of investments and take-overs of other
cement producers, the company expanded, quickly reaching a strong
position on the market and becoming the leading cement
manufacturer in Italy.
After several acquisitions abroad, in 1992 Italcementi achieved
important international status with its take-over of Ciments Français,
one of the main global cement producer.
In 1997 Italcementi consolidated its verticalisation strategy with the
acquisition of Calcestruzzi, thus becoming Italian leader in the ready-
mixed concrete sector.
In March 1997, all the international companies of the Group gathered
under one single corporate identity.
Since 1998 Italcementi Group has been pursuing its
internationalisation strategy by acquiring new cement works in
Bulgaria, Kazakhstan, Thailand, Morocco, India, Egypt and the United
States.
Our Management:
While professional management and quality workforce ensure superior
results, the role played by the core management should not be
discounted. With their vision and experience, they make sure that
Zuari Cement moves in the right direction. Towards becoming one
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among the leading cement producers in India.
Maurizio Caneppele
Managing Director
Ramesh Surya Narayana
Director Technical
Emiliyan Andreev
Chief Financial Officer
S.SURESH
Vice President HR & IR
Appotiment of Director
Zuari Industries Ltd has informed BSE that the Board of Directors at its
meeting held on January 21, 2011 have appointed Mr. Suresh Krishnan,
as Additional Director of the Company.
With an annual production capacity of approximately 70 million tons
of cement, Italcementi Group is the world’s fifth largest cement
producer.
The Parent Company, Italcementi S.p.A., is one of Italy’s 10 largest
industrial companies and is included in S&P/MIB Index of the Italian
Stock Exchange.
Italcementi Group’s companies combine the expertise, know how and
cultures of 22 countries in 4 Continents boasting an industrial
network of 63 cement plants, 13 grinding centres, 5 terminals,
125 aggregates quarries and 614 concrete batching units.
In 2009 the Group had sales amounting to almost 6 billion Euro.
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Italcementi, founded in 1864, achieved important international status
with the take-over of Ciments Français in 1992.
Following a period of re-organization and integration that culminates in
the adoption of a single corporate identity for all Group subsidiaries,
the newly-born Italcementi Group began to diversify geographically
through a series of acquisitions in emerging countries such as Bulgaria,
Morocco, Kazakhstan, Thailand and India, as well as operating in North
America. As part of the plan to further enhance its presence in the
Mediterranean area, in 2005 the Group boosted its investments in
Egypt becoming the market leader.
In 2007 Italcementi acquired full control of the activities in India and
signed an agreement to strengthen its position in Kazakhstan while, in
2008, it further strengthened its presence in Asia and the Middle East
through the operations in China, Kuwait, Saudi Arabia. In 2009 the
Group signed a joint venture in Libya to build a 4 million tons/year
cement plant.
As a member of the World Business Council for Sustainable
Development (WBCSD) Italcementi Group has signed the Cement
Sustainability Initiative’s Agenda for Action, the first formal
commitment that binds a number of world cement industry leaders to
an action plan that aims at satisfying present-day needs at the same
time as safeguarding the requirements of future generations.
To further confirm its commitment on these issues, the Group has
taken over the co-Chairmanship of the Cement Sustainability Initiative
for the period 2007-2008.
Our Products
Cement for every kind of task
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Zuari Cement manufactures and distributes its own main product lines
of cement .We aim to optimize production across all of our markets,
providing a complete solution for customer's needs at the lowest
possible cost, an approach we call strategic integration of activities.
Cement is made from a mixture of 80 percent limestone and 20
percent additives. These are crushed and ground to provide the "raw
meal”, a pale, flour-like powder. Heated to around 1450° C (2642° F) in
rotating kilns, the “meal” undergoes complex chemical changes and is
transformed into clinker. Fine-grinding the clinker together with a small
quantity of gypsum produces cement. Adding other constituents at this
stage produces cements for specialized uses.
Blended Cements
Zuari Blended Cement the eco-friendly, user-friendly
cement :
Zuari Blended Cement has been developed in response to today’s need
for environment-friendly products that are cost-effective, durable and
have minimal by-products.
Durability is a very important property in concrete. And durability here
means concrete that ensures the long life span of structures like
homes and residences that are lifetime investments. Since distress of
concrete and early failure of structures is a common phenomenon,
research over a period of time helped develop various remedial
measures that improved durability and cost economics. One of them
being blended Portland Cement, with complementary pozzolanic and
cementitious materials like fly ash, blast furnace slag, etc. And Zuari
Blended Cement is a fine example of it.
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Our Products
Portland Cement
Zuari OPC is a high quality cement prepared from the finest raw
material. Owing to optimum water demand, it contributes to a very low
co-efficient of permeability of the concrete prepared. This improves
the density of the concrete matrix and increases the durability of the
concrete. Zuari OPC is a high performance cement far exceeding the
codal requirement of BIS.
It is this very durability that translates into long - lasting residential
and commercial constructions of a wide variety.
Zuari’s edge:
With these unique advantages, Zuari Cement comes to you in two
grades - 43 Grade OPC and 53 Grade OPC.
Zuari OPC is a high quality cement prepared from the finest raw
material. Owing to optimum water demand, it contributes to a very low
co-efficient of permeability of the concrete prepared. This improves
the density of the concrete matrix and increases the durability of the
concrete. Zuari OPC is a high performance cement far exceeding the
codal requirement of BIS.
It is this very durability that translates into long - lasting residential
and commercial constructions of a wide variety.
Zuari 43 & 53 Grade Ordinary Portland Cement (OPC)
- Strong cements for longlasting constructions:
Higher compressive strength
Better soundness
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Lesser consumption of cement for M-20 grade concrete and
above
Faster deshuttering of form work
Reduced construction time
Primo Concrete Cement - Concrete Redefined
Primo - The success story:
In 2008 Zuari Cement launched its high-strength cement under the
brand name 'Primo Concrete Cement' in Bangalore City. 'Primo'
improves the density of the concrete matrix and increases the
durability of the concrete, making it an immediate hit among
construction and infrastructure projects undertaken in and around
Bangalore. Recently Primo was also launched in Kochi and Chennai. An
extensive marketing and distribution network across south India
concretes Zuari Cement's success story.
New products, on the line of the extremely successful 'Primo' launch,
will play a significant role in key markets.
Primo Concrete Cement - Concrete Redefined:
Primo concrete cement is a high quality cement prepared from the
finest raw material. Owing to optimum water demand, it contributes to
a very low co-efficient of permeability of the concrete prepared. This
improves the density of the concrete matrix and increases the
durability of the concrete. Primo is a high performance cement far
exceeding the codal requirement of IS 12269-1987. It is this very
durability that translates into long-lasting residential and commercial
constructions of a wide variety, such as dams,canals, highways, roads
and flyovers.
Higher compressive strength
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Better soundness
Lesser consumption of cement for M-20 Concrete grade
and above
Faster deshuttering of form work
Reduced construction time
Locations
CORPORATE OFFICE
No. 1, 10th Main, Jeevanbhima Nagar,
Bangalore - 560 075
Tel: 080 - 41194408
Fax: 080 - 40302844/ 40302888
E-mail: [email protected],[email protected]
Works: Sitapuram
P.O.Dondapadu
Nalgonda - 508 246
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Andhra Pradesh
Tel: 08683 - 235107
Fax: 08683 - 235229
E-mail: [email protected]
Works: Krishna Nagar
P.O. Yerraguntla
Kadapa - 516 311
Andhra Pradesh
Tel: 08563 - 275104 / 275301
Fax: 08563 - 275164
E-mail: [email protected]
Italcementi Group
Italcementi Group at a glance
With an annual production capacity of approximately 70 million tons
of cement, Italcementi Group is the world’s fifth largest cement
producer.
The Parent Company, Italcementi S.p.A., is one of Italy’s 10 largest
industrial companies and is included in FTSE/MIB Index of the Italian
Stock Exchange.
Italcementi Group’s companies combine the expertise, know how and
cultures of 22 countries in 4 Continents boasting an industrial
network of 59 cement plants, 15 grinding centres, 5 terminals,
373 concrete batching units and 92 aggregates quarries.
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In 2009 the Group had sales amounting to over 5 billion Euro.
Italcementi, founded in 1864, achieved important international status
with the take-over of Ciments Français in 1992.
Following a period of re-organization and integration that culminates in
the adoption of a single corporate identity for all Group subsidiaries,
the newly-born Italcementi Group began to diversify geographically
through a series of acquisitions in emerging countries such as Bulgaria,
Morocco, Kazakhstan, Thailand and India, as well as operating in North
America. As part of the plan to further enhance its presence in the
Mediterranean area, in 2005 the Group boosted its investments in
Egypt becoming the market leader.
In 2006 Italcementi acquired full control of the activities in India and
signed an agreement to strengthen its position in Kazakhstan while, in
2007, it further strengthened its presence in Asia and the Middle East
through the operations in China, Kuwait, Saudi Arabia.
As a member of the World Business Council for Sustainable
Development (WBCSD) Italcementi Group has signed the Cement
Sustainability Initiative’s Agenda for Action, the first formal
commitment that binds a number of world cement industry leaders to
an action plan that aims at satisfying present-day needs at the same
time as safeguarding the requirements of future generations.
To further confirm its commitment on these issues, the Group has
taken over the co-Chairmanship of the Cement Sustainability Initiative
for the period 2006-2007. Moreover, Italcementi has been included in
“The Sustainability Yearbook 2010” the most comprehensive
publication on corporate sustainability released yearly by SAM
(Sustainable Asset Management).
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3 THERETICAL FRAMEWORK OF STADY
INVENTORY MANAGEMENT –ZUARI CEMENTINDUSTRIES
INTRODUCTION:
Every enterprise needs inventory for smooth running of its activities. It
serves as a link between the production and distribution process. The
greater a time lag, the higher the requirement of inventory the
unforeseen fluctuation of inventory demand and supply of goods,
fluctuating inventory prices, necessitate the need for inventory
management.
The investment inventory constitutes the most significant part
of the current assets inventory of the under taking. Thus it is very
essential to have a proper control and management of inventory.
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Meaning and nature of inventory
The general meaning of inventory is stock of goods or list of goods
inventory. In accounting language it means stock of finished goods. For
inventory manufacturing concern it includes raw materials, work in
progress, consumables finished goods and spares etc.
1) Raw materials:
If forms a major input inventory in organization. The quantity of
raw materials required will be determined by the rate of
consumption.
2) Work in Progress :
The work in progress is that stage of stocks, which are in between
raw materials and finished goods.
3) Consumables :
These are the material, which are needed to smoothen, the process
of production. These do not directly go into production, but act as
catalyst.
4) Finished Goods :
These are the goods, which are ready to sale for the consumers.
The stock of finished goods provides as buffer between production
and market.
5) Spares: Spares also from a part of inventory. The stocking
policies differ from industry to industry.
Inventories cost account for nearly 55 percent of the cost of
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production, as it is clear from an analysis of financial statements of
large number of private and public sector organizations. So, It essential
to establish suitable procedures for proper control of materials from
the time of purchase order placed with supplier until they have been
consumed properly and accounted for.
Definition:
The term inventory refers to assets, which will be sold in
future in the normal course of business operations. The
assets, which the firm stores as inventory in anticipation of
need, are raw materials, work-in-progress/process, and
finished goods.
Inventory often constitute a major element of a total working
capital and hence ft has been correctly observed, 'Good inventory
management is good financial management’.
Inventory control is a system, which ensures the provision
of the required quantity at the required time with the minimum
amount of capital.
Inventories are the second largest asset category for the
manufacturing firms next to plant and equipment.
Inventory control includes scheduling, the requirements,
purchasing, receiving and inspecting, maintaining stock records
and stock control. Inventory control is a matter of coordination. A
proper material control helps in improving the input-output ratio.
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Objective of inventory management
The main objective of inventory management are operational and
financial. The operational object means availability of materials and
spares in sufficient quantities for undisturbed flow of production. The
financial objective means investments in inventories should not remain
idle and minimum working capital should be locked in it.
THE OTHER OBJECTIVES ARE:
1) To ensure continues supply of inventories to the production.
2) To avoid over stocking and under stocking.
3) To maintain optimum level of investment in inventories.
4) To keep material cost under control, to keep low cost of
production.
5) To eliminate duplication in ordering or replacing stocks.
6) To minimize losses through, deterioration, pilferage, wastage
and damages.
7) Designing structures for good inventory management.
8) Perpetual inventory control of materials.
9) To ensure right quality of goods at reasonable prices. Analysis of
prices cost and value.
10) To facilitate data for short and long term planning and control of
Inventory.
a. Transaction motives:
Every firm has to maintain some level of inventory to meet
the day-to-day requirements of sales, production process,
customer demand etc. In this finished goods as well as raw
material are kept as inventories for smooth production process of
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the firm.
b. Precautionary motive:
A firm should keep some inventory for unforeseen
circumstances also like loss due to natural calamities in a
particular area, strikes, lay outs etc so the firm must have some
finished goods as well as raw-materials meet circumstances.
c. Speculative motive:
The firm may be made to keep some inventory in order to
capitalize an opportunity to make profit due to price fluctuations.
REASONS AND BENEFITS OF INVENTORY:
The optimal level of maintaining inventory is a subjective
matter and depends upon the features of a particular firm,
(i) Trading firm:
In case of a trading firm there may be several reasons for
holding inventories because of sales activities that should not be
interrupted. More over it is not always possible to procure the
goods whenever there is a sales opportunity as there is always a
time gap required between purchase and sale of goods. Thus
trading concern should have some stock of finished goods in
order to undertake sales activities independent of the
procurement schedule.
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Similarly, a firm may have several incentives being offered
in terms of quantity discounts or lower price etc by the supplier of
goods. There is trading concern inventory helps in a de-inking
between sales activity and also to capitalize a profit of
opportunity due to purchase made at a discount will result in
lowering the total cost resulting in higher profits for the firm.
(ii) Manufacturing firm:
A manufacturing firm should have inventory of not only the
finished goods, but also of raw materials and work-in-progress for
following reasons.
a) Uninterrupted production schedule:
Every manufacturing firm must have sufficient stock of raw
materials in order to have the regular and uninterrupted
production schedule. If there is stock out of raw materials in order
to have the regular and uninterrupted production schedule. If
there is stock out of raw material at any stage of production
process then the whole production may come to a half. This may
result in custom dissatisfaction as the goods cannot be delivered
in time more over the fixed cost will continue to be incurred even
ff there is no production.
Further work-in-progress would let the production process
run smooth. In most of manufacturing concerns the work in
progress is a natural outcome of the production schedule and it
also helps in fulfilling when some sales orders, even if the supply
27
of raw-materials have stopped.
(b) Independent sales activity:
Inventory of finished goods is required not only in trading
concern but manufacturing firms should also have sufficient stock
of finished goods. The production schedule is a time consuming
process and in most of the cases goods cannot be produced just
after receiving orders. Therefore, every firm has to maintain
minimum level of finished goods in order to deliver the goods as
soon as the order is received.
ESSENTIALS OF INVENTORY CONTROL:
The important requirements of Inventory control are:
a) The proper co-ordination among the departments
involved in buying, receiving, inspecting, ciorage,
consuming and accounting.
b) Centralization of purchasing under the control of
competent buyer whenever possible.
c) Proper scheduling of material requirements.
d) Proper classification of materials with codes, material
standardization and simplification.
e) The operation of a system of internal check to ensure
that all transactions involving materials and
equipment are checked by properly authorized and
independent persons.
28
f) The storage of materials is well planned and kept in
properly. Planned and kept in properly designated
location, subject to adequate safeguard and
supervision.
g) The operation of a system of perpetual inventory so
that it is possible to determine at any time, the
amount and value of each kind of material in stock.
h) A suitable method of valuation of materials is essential
because it affects the cost of jobs and the value of
closing stock of materials.
Objectives of Inventory Control:
The main objectives of inventory control are:
I. To maintain a large size of inventory for efficient and
smooth production and sales operation.
II. To maintain a minimum investment in inventories to
maximize profitability.
III. To ensure a continuous supply of raw materials to facilitate
uninterrupted production.
IV. To maintain sufficient stocks of raw materials in periods of
short supply and anticipate price change.
V. Maintain sufficient finished goods inventory for smooth
29
sales operation and efficient customer service.
VI. Minimize the carrying cost and time.
VII. Control investment in inventories and keep it at an
optimum level.
Advantages of Inventory Control:
The following are suggested advantages:
I. Eliminates wastage in use of material,
II. It reduces the risk of loss from fraud and theft.
III. It helps in keeping perpetual inventory and other records
to facilitate the preparation of accurate material reports to
management,
IV. To reduces the capital tied up in inventories,
V. It reduces cost of storage,
VI. It furnishes quickly and accurately the value of materials
used in various department.
VII. It prevents delays in production due to lack of materials by
supplying, proper quantities at the right time.
Disadvantages of Inventory Control:
Every firm has to maintain optimal level of inventories. It
not the following will be the result in form of losses.
I. Opportunity cost: Every firm has to maintain inventory for
that some investment is needed it is know as Opportunity
cost and handle the investment in inventory are more the
30
funds are blocks up with inventory.
II. Excessive inventories: It will lead to firm losses due to
excessive carrying costs and the risk of liquidity. It is also
referred as Danger level.
III. Inadequate Inventory: it is another danger which results is
production hold-up and failure to meet delivery
commitments .In adequate raw materials and work -in -
process inventors will results in frequent production
interruptions .It finished goods are not sufficient
customers may shifts to competitors.
IV. Danger due to physical decoration: It is one of the reason
with the inventories due to maintaining stocks at high
levels they will be deteriorated due to passage of time,
sometimes due to mishandling or improper storage
facilities.
Costs involved in inventory:
Every firms maintains inventory depending upon
requirement and other features of firm for holding such inventory
some cost will be incurred there are as follows:
(a) Carrying Cost;
This is the cost incurred in Keeping or maintaining an
inventory of one unit of raw materials, work-in -process or
finished goods. Here there are two basic cost involved.
(i) Cost of storage:
31
It includes cost of storing one unit of raw materials by the
firm. This cost may be for the storage of materials. Like rent of
spaces occupied by stock, stock for security, cost of
infrastructure, cost of insurance, and cost of pilferage,
warehousing costs, handling cost etc.
(ii) Cost of financing:
This cost includes the cost of funds invested in the
inventories .It includes the required rate of return on the
investments in inventory in addition to storage cost etc. The
Carrying cost include there fore both real cost and opportunity
cost associated with the funds invested in the inventories.
The total carrying cost is entirely variable and rise in
directly proportion to the level of inventories carried.
Total carrying cost =(carrying Cost per unit) x (Average
inventory)
(b) Cost of ordering:
The cost of ordering includes the cost of acquisitions of
inventories. It is the cost of preparation and execution of an order
including cost of paper work and Communicating with the
supplier.
The total ordering cost is inversely proportion to annual
inventory of firm. The ordering cost may have a fixed component,
which is not affected by the order size: and a variable
component, which changes with the order size.
32
Total Ordering Cost = (No. Of orders) x (cost per order).
(c) Cost of stock out:
It is also called as Hidden cost. The stock out is the situation
when the firm is not having units of an item in stores but there is
a demand for that Item either for the customers or the production
department .The stock out refers to zero level inventory .So there
is a cost of stock out in the sense that the firm face a situation of
lost sales or back orders .The stock outs are quite often
expensive. Even the good will of firm also be effected due to
customers dissatisfaction and may lose business in case of
finished goods, where as in raw materials or work in process can
cause the production process to stop and it is expensive because
employees will be paid for the time not spend in producing goods.
The carrying cost and the ordering cost are opposite forces
and collectively. They determine the level of inventors in a firm.
Total cost =(cost of items purchased) +(Total Carrying and
ordering cost)
Valuation of Inventory:
The methods of valuing inventory are combination of the
actual cost and replacement cost plans. The chief advantage of
the cost or net realizable value rule is that it is conservative.
Hence the methods of Valuation of inventory are quite
independent of system of mincing.
33
In balance sheet closing stock is shown under current assets
and is also credited to manufacturing or trading accounts. The
inventories are valued on the basis as follows.
(i) Cost of raw materials in stock may include freight
charges and carrying cost. But such cost should not
exceed market price,
(ii) Work -in -process is generally valued at cost, which
includes cost of materials, labor. And the proportionate
factory overhead, as it is reasonable according to degree
of completion,
(iii) Cost of finished goods wound normally to be total or full
cost it includes prime cost plus appropriate amount of the
overhead. Selling and distribution cost is deducted on the
other hand work in progress may be valued at work in
progress may be Valued at work cost, marginal cost,
prime cost or, even at direct materials.
ISSUE PRICING METHODS:
There are two categories:
(i) Cost prices:
(a) FIFO (First in First out)
(b) LIFO (last in first out)
(c) Specific price
(d) Base stock price
(e) HIFO (highest in first out)
(ii) Derived from cost prices:
(a)Simple average price
(b)Weighted average price
34
(c) Periodic simple average price
(d)Periodic weighted average price
(e)Moving simple average price
(f) Moving weighted average price
(iii) Notional prices:
(a)Standard price
(b) Inflated price
(c) Re-use price
(d)Replacement price
First in First out (FIFO)
This is the price paid for the material first taken into stock
from which the material to be priced could have been drawn.
Under this method stocks of materials may not be used up
in chronological order but for pricing purpose it is assumed that
items longest in stock are used up first. The method is most
suitable for use where in material is slow-moving and
comparatively high unit cost.
Advantages:
(i) Price is based on actual cost and not on basis of
approximations such as no profits or losses arises by
reasons of adopting this method.
(ii) The resulting stock balance generally represents fair
35
commercial valuation of stock.
(iii) It is based on traditional principles.
Disadvantages:
(i) The number of calculations in the stores ledger involved
tends to be complicated with increase in clerical error.
(ii) The cost of consecutive similar jobs will differ if the
price changes suddenly,
(iii) In times of rising prices, the charge to production is
unduly low as the cost of replacing the material will be
higher.
Last in first out (UFO)
This is the price paid for the material last taken into stock
from which the materials to be priced could have been drawn.
This method also ensure material being issued at the actual cost.
Its use is based on the principle that costs should be as closely as
possible related to current price level. Under this method
production cost is calculated on basis on replacement cost.
Advantages:
(i) Production is charged at the most recent prices so that it
is based on the principle that cost should be related to
current price levels.
(ii) It obviates the necessity for continuously ascertaining
the replacement price.
(iii) Neither profit nor loss is usually made by using this
36
method.
(iv) In the times of rising prices there is no wind fall profit as
would have been obtained under FIFO method.
Disadvantages:
(i) Needs more clerical work.
(ii) Compassion among similar jobs is very difficult.
(iii) Stock valves relating to prices of the oldest cost on hand
may be entirely out of the current replacement prices.
Weighted average price:
This is the price which is calculated by dividing the total
cost of material in the stock from which the material to be priced
have been drawn, by the total quantity of material in the stock.
This method differs from all other methods because here issue
prices are calculated on receipts of materials and not on issue of
materials. Thus as soon as new lot is received a new price is
calculated and issues are then taken.
Advantages:
(i) This method is advantageous where the price varies
widely as its use even out the effect of these wide
variations.
(ii) The basis of price calculations is a simple one involving
only the division of total amount of material in stock by
quantity in stock.
37
(iii) Calculation of new prices arises only when receipt of
stocks are received.
(iv) Stock records under this method give a fair indication of
the stock values, which can be used in financial analysis.
Disadvantages:
This method is completed than simple average because it
takes into consideration the total quantities and total costs in
stock.
(i) Profit or loss may be incurred as in simple average price,
(ii) As LIFO or FIFO this method calls for many calculations,
(iii) In order to calculate the accurate value of issues the
average price must normally be calculated to four to five
decimal places.
Standard price:
It is the predetermination of fixed price on basis of a
specification of all factors affecting price like the quantity of
materials in hand and to be normally purchased and rate of
discount compared with existing price including or excluding
freight and ware housing expense.
A standard price for each material is set and the actual
price paid is compared with standard. It is paid exceeds the
standard a loss will be realized if not profit will be obtained.
Advantages:
(i) This method is easy to operate.
38
(ii) Comparing the actual prices with the standard price will
determine the efficiency of purchase department.
(iii) The effect of price variations is eliminated from job costs.
(iv) It reduces classical costs by eliminating detailed cost
records.
(v) In times of inflation or price fluctuations is very difficult
to fix a standard price.
(vi) This method also incurs a profit or loss on issues and
closing stock.
Inflated price:
This is the price, which includes a charge designed to cover
the cost of contingencies or related costs.
This price includes not only the cost involved in bringing the
material to the purchases premises but also the loss due to
evaporation and breakage etc. as well as carrying costs
MATERIAL PURCHASING AND PURCHASING
PROCEDURE
Purchase of material is one of the important function of material
management. At times more than 50% of the total product cost is
material.
Functions of Purchase Department
1. Deciding the items to be purchased based on demand.
2. Selection of sources of supply.
3. Collection the price information.
4. Placing the ordered.
5. Follow-up the ordered.
39
6. Checking the invoices.
7. Maintenance of purchase records.
8. Maintenance of vendors relations.
PURCHASE PROCEDURE
Purchasing procedure start with the initiation of purchase
requisitions and ends with the receipt of materials in the stores.
CENTERIZED PURCHASING
It is most important and relevant to large organizations operating
deferent plants may or may not be located at different places. For a
single place organization decentralization might be feasible on a very
limited place. But where as M & M Ltd., is a multiple plants operating
organization.
In Mahindra and Mahindra Centralized purchasing procedure is
following to purchase of materials.
Centralized purchasing avoids duplications of efforts
and working at cross purpose from one plant to another.
Centralized purchasing permits consolidation of order of
materials commonly used for two or more plants. The
ultimately results in greater buying power, favorable
contracts and trade agreements.
Easier to maintain the quality of purchased parts / items
through centralized testing and inspection. It is also
40
possible to conduct testing and inspection facilities.
Centralized purchasing permits to avail facilities like
quantity discounts and cash discounts thus its helps to
reduce cost.
It is beneficial to vendor also in case the size of order
constituted major proportion of his total production capacity
TECHNIQUES OF INVENTORY MANAGEMENT:
Main problems in inventory management are to answer.
(i) Are all items of inventory important if not what are items
to be given more importance?
(ii) What should be the size of the order for replenishment
be placed?
(iii) What should be the over level?
To answer these following techniques are used,
41
ABC Analysis
Economic Order Quantity
VED Analysis
RE-ORDER Level
Safety Stock
Just-in-time Inventory
ABC Analysis:
It is based on proposition that
(ii) Managerial items and efforts are scare and limited
(iii) Some items of inventory are more important than
others.
ABC ANALYSIS:
ABC analysis classifies various inventory into three sets or
groups of priority and allocates managerial efforts in proportion
of the priority the most important item are classified into class-A,
those of intermediate importance are classified as "class-B" and
remaining items are classified into class-C'.
The financial manager has to monitor the items belonging to
monitor the items belonging to different groups in that order of
priority and depending upon the consumptions.
The items with the highest value is given top priority and
soon and are more controlled then low value item. The re-rational
limits are as follows.
42
Category % of Items % of total
materials
A 5-10 70-85
B 10-20 10-20
C 70-85 5-10
Procedure:
(i) Items with the highest value is given top priority and
soon.
(ii) There after cumulative totals of annual value of
consumption are expressed as percentage of total value
of consumptions,
(iii) Then these percentage values are divided into three
categories.
ABC analysis helps in allocating managerial efforts in
proportion to importance of various items of inventory.
ECONOMIC ORDER QUANTITY:
After various inventory items are classified on the basis of the
ABC analysis the management becomes aware of the type of
control that would be appropriate for each of the three
categories of the inventory items.
The determination of the appropriate quantity to be
purchased in each lot to replenish stock as a solution to the order
quantity problems necessitates resolution of conflicting goals.
Buying in a higher average inventory level will assure,
43
(i) Smooth production / sale operation and.
(ii) Lower ordering or setup costs. But it will involve higher
carrying costs. On the other hand small orders would
reduce the carrying cost of inventory by reducing the
average inventory level but the ordering costs would
increase, as there is a likelihood of interruption in
operations due to stock-outs. A firm should not place
either too high or small orders on the basis of a trade off
between benefits derived from the availability of
inventory and the cost of carrying that level of inventory,
appropriate or optimum level of order to be placed should
be determined. The optimum level of inventory is
popularly referred to as the economic order quantity or
economic lot size. It may be defined as that level of
inventory order that minimizes the total lost associated
with inventory management. It is based on some
assumptions, which are restrictive.
a. The firm knows with certainty the annual usage of
a particular item of inventory.
b. Rate at which the firm uses inventory is steady
over time.
c. The orders placed to replenish inventory stocks
are received at exactly that point in time when
inventories reach zero.
EOQ can be illustrated by
(i) Trial and error approach,
(ii) Mathematical approach.
44
Trial and Error approach:
In this approach the procedure of procuring the inventory is
assumed the smaller the lot the lower is average inventory and
vice versa and high average inventory would involve high
carrying costs. This approach is used for determination of EOQ
uses different permutations and combinations of lots of inventory
purchases so as to find out the least ordering and carrying cost
combinations. The carrying cost and acquisition cost for different
sizes of order to purchase inventories are computed and the
order size with lowest total cost of inventory is EOQ.
Mathematical Approach:
The EOQ quantity can use a short-cut method calculated by
following
EOQ=
Where,
A = Annual usage of inventory
B = Buying cost per order
C = carrying cost per unit
Limitations:
While using EOQ it should be noted that it suffers from
shortcomings, which are mainly due to the restrictive nature of
the assumptions on which it is based.
The important limitation is assumption of a constant
45
consumption usage and, the instant replenishment of inventory is
of doubtful validity
There may be unusual and unexpected demand for stocks to
meet such [contingencies the firm has to keen additional
inventories like safety stocks. Another weakness is to assume
known annual inventories is open to question and there is
likelihood of a discrepancy between the actual and expected
demand leading to wrong estimate of EOQ.
VED ANALYSIS:
Vital Essential and Desirable analysis is done mainly for
control of spare parts keeping in view of the criticality to
production.
Vital spares are spare the stock-out of which even for a
short time will stop production for quite some time. Essential
spares are spares the absence of which cannot be tolerated for
more than a few hours a day. Desirable spares are those, which
are needed, but their absence for even a week or so will lead to
stoppage of production.
THE RE-ORDER LEVEL:
The re-order level is the level of inventory at which the fresh
order for that item must be placed to procure fresh supply. The
re-order level depends upon
a) Length of time between the placement of an order and
receiving the supply.
46
b) The usage rate of the item. The inventory is constantly
being used up. The rate at which the inventory is being
used up. The rate at which the inventory is being used up
is called the usage rate.
The reorder level can be determined as follows:
R = M+tu
R = Reorder level
M = Minimum level of inventory
T = Time gap / delivery time
U = Usage rate
The reorder level and inventory patterns have be shown as
follows:
The figure shows that if the usage rate is constant, the
orders are made at even intervals for the same amounts each
time and the inventory goes to zero just before an order is
received.
47
Safety Stock:
The safety stock protects firm from Trade offs due to
unanticipated demand for the items level of inventory investment
is however increased by the amount of safety stock. Safety level
is ascertained in inventory as a part because there is always an
uncertainty involved in time lag usage rate or other factor.
Usually smaller the safety level greater the risk of stock-outs.
If stock-levels are predictable then there is a chance of stock
out occurring. However stock inflows and outflows are
unpredictable or lesser predictable it becomes to carry
additional safety stock to prevent unexpected stock outs so
usage rate is estimated if cost is low then no safety stock is
needed.
JUST-IN-TIME INVENTORY:
The basic concept is that every firm should keep a minimum
level of inventory on hand, relying suppliers to furnish stock
48
just in time as and when required. JIT helps in emphasizing
sufficient levels of stocks to ensure that production will not be
interrupted. Although the large inventories may be bad idea
due to heavy carrying JIT is a modern approach to inventory
management and the goal is essentially to minimize such
inventories and there by maximizing the turnover.
JIT system significantly reduces inventory-carrying cost by
requiring that the raw materials be procured just in time to be
placed into production. Additionally the work in process inventory
is minimized by eliminating inventory is minimized by eliminating
inventory buffers between different production departments.
If JIT is to be implemented successfully there must be a high
degree of coordination and co-operation between the supplier and
manufacturer and among different production centers. JIT does
not appear to have any relation with EOQ however it is in fact
alters some of the assumptions of EOQ model. The average
inventory level under the EOQ model is defined as
Average inventory= 1/2 EOQ + safety level JIT attacks this
equation in two ways.
(i) By reducing the ordering cost
(ii) By reducing the safety stock.
The basic philosophy in JIT is that the benefits, associated with
reducing inventory and delivery time to a bare minimum
through adjustment in the EOQ model; will more than offset
the costs associated with the increased possibility of stock-
outs.
49
4 DATA ANALYSIS & INTERPRETATION
DETERMINATION OF STOCK LEVELS
Carrying of to much and too little of inventories is determinate to
the firm. If the inventory level is too little, the firm will face frequent
stock – outs involving heavy ordering cost and if the inventory level of
inventory where costs are the minimum and at the same time their
ID.No.Stock-out, which may result in loss of sale or stoppage of
production. Various stock levels are discussed below.
MINIMUM STOCK LEVEL
This is the lower limit below which the stock of any item should not
normally be allowed to fall. This is also technically known as safety or
buffer stock. The prime considerations in fixing the minimum stock
level or safety stocks are :
a. Average rate of consumption.
b. Lead time.
Minimum Stock Level = Reordering level – X100
Lead-Time :
A purchasing firm requires some time to process the order and
time is also required by the supplying firm to execute the order. The
time taken processing the order and the executing it is known as lead-
time. It is essential to maintain some inventory during this period.
50
Reorder Level :
Reorder level is fixed between the minimum and maximum levels.
When stock of a material reaches at this point, the store keeper should
initiate action for the purchase of material. The reorder level is slightly
more than minimum stock level to guard against
a. Abnormal usage
b. Abnormal delay in supply
Reorder level = Maximum consumptionX Maximum period
required
during the period for delivery
MAXIMUM STOCK LEVEL :
Maximum stock level represents the upper limit beyond which
the quantity of any item is not normally allowed to rise. The main
object of establishing this limit is to ensure that unnecessary working
capital is not blocked in stores. Theoretically, maximum stock level is
the sum – total of minimum stock level and economic order quantity.
Maximum level = Reorder Level + Reordering quantity – Minimum
consumption
AVERAGE STOCK LEVEL :
The average stock level is calculated as such :
Average stock = minimum stock level + ½ of re-order quantity.
51
DANGER LEVEL:
This is generally fixed below the minimum stock level. Normal
stock should not be below the minimum level. If it reaches the danger
level at any point of time, urgent action for replenishment of stock
must be taken to prevent stock out.
ESTIMATION OF STOCK LEVELS :
There are different techniques used in the calculation of the stock
levels.
Reordering Quantity - 2500 units
Reordering Period - 4 – 5 weeks
Weekly usage :-
Maximum usage - 900 units
Normal usage - 700 units
Minimum usage - 500 units
Reordering Level = Maximum consumption X Maximum
Reordering Period
= 900 X 5 = 4500 units.
Ex :- Consider “Load King” for calculation purpose.
Calculated of the load king vehicle as 500 units.
Normal Daily consumption = 700 units
Normal Reorder period = 4.5 weeks
Reorder level = 4500 units
Minimum usage = 500 units
Minimum Reorder period = 4 weeks
Maximum Reorder period = 5 weeks
52
MINIMUM STOCK LEVEL
= Reorder Level – (Normal consumption X Normal Reorder
Period)
= 4500 – (700 X 4.5)
= 4500 – 3150
= 1350 Units
MAXIMUM STOCK LEVEL
= Reorder Level + Reorder Quantity – (Minimum
consumption X
Minimum Reorder
Period)
= 4500 + 2500 – (500 X 4)
= 7000 – 2000
= 5000 Units
AVERAGE STOCK LEVEL
= Minimum stock + ½ of Reordering Quantity.
= 500 + (½ X 2500)
= 500 + 1250
= 1750 Units
Minimum Stock Level = 1350 Units
Average Stock Level = 1750 Units
Maximum Stock Level = 5000 Units
53
INVENTORY TURN OVER RATIO
“A Ratio which measures the number of times a firms average
inventory is sold during a year” – Kohler.
Computation of inventory turnover ratios for different items of
materials and comparison of the turnover ratios provide a useful
guidance for measuring inventory performance. A high turnover rate
indicates that the material in question is a fast moving one. A low
turnover rate on the other hand indicates over investments and
looking up of working capital on undesirable items.
“Inventory or Stock turnover is measured in terms of the ratio of
the value of materials consumed to the average inventory during the
period”. The ratio indicates the number of time the average inventory
is consumed and replenished by dividing number of days for which the
average inventory is held can be ascertained.Comparing the number of
days in the case of two different materials, it is possible to known
which is fast moving and which slow on that basis attempt may be
made to reduce the amount of capital locked up and prevent over
stocking of slow moving items.
Average Inventory = Opening Stock + Closing Stock
2
Inventory turnover ratio = Material consumed
Average Inventory
54
Ratio
5.034.09 4.17 4.36 4.09
0
1
2
3
4
5
6
7
8
9
2005-06 2006-07 2007-08 2008-09 2009-10
Ratio
Inventory turnover in number of days = Number of days in a
year
Inventory turnover ratio
INVENTORY TURNOVER RATIO
Cost of goods soldINVENTORY TURNOVER RATIO =------------------------------
Average inventory(Rs in 000’s)
Year Cost of goods
sold
Average
inventory
Ratio
2005-06 2210210 439610 5.03
2006-07 2163508 528333 4.09
2007-08 2484589 596074 4.17
2008-09 3044561 697949 4.36
2009-10 4120957 1008066 4.09
Interpretation:
The inventory turnover ratio signifies the liquidity of the
inventory. A high inventory turnover ratio indicates brisk sales. The
ratio is therefore a measure to discover the possible trouble in the
form of overstocking or overvaluation. The stock position is known as
the graveyard of the balance sheet. If the sales are quick such a
position would not arise unless the stocks consist of un-saleable items.
55
Inventory holding ratio
7389 88 84 89
0102030405060708090
100
2005-06 2006-07 2007-08 2008-09 2009-10
Inventory holding ratio
A low inventory ratio results in blocking of funds in inventory which
may ultimately result in heavy losses due to inventory becoming
obsolete or deteriorating in quality.
INVENTORY HOLDING RATIO
365INVENTORY HOLDING RATIO=------------------------------------------
Inventory turnover ratio(Rs in 000’s)
Year Days Inventory
turnover ratio
Inventory
holding ratio
2005-06 365 5.03 73
2006-07 365 4.09 89
2007-08 365 4.17 88
2008-09 365 4.36 84
2009-10 365 4.09 89
Interpretation:
Inventory holding days express the No. of days it takes for the stock to
get converted into sales. It is called stock conversion period. It is
calculated as above. It means that 73 days period of time it took to
56
convert from stock sales in 05-06, 89 days in 06-07, 88 days in 07-08,
84 days in 08-09 and 89 days in 09-10.
INVENTORY ANALYSIS AT ZUARI
(Rs in 000’s)
Year Inventory Current
assets
% in
inventory
&CA
2005-06 561630 1078274 52.09
2006-07 630518 1500977 42.01
2007-08 765380 1688733 45.32
2008-09 1250752 2307604 54.20
2009-10 1312456 2504689 55.23
2005-06 2006-07 2007-08 2008-09 2009-100
500000
1000000
1500000
2000000
2500000
3000000
InventoryCurrent assets% in inventory &CA
Interpretation:
It shows the relationship between inventory & Current assets.
The inventory position in ZUARI Cement has to level of inventories as
57
compare to current assets in the increasing trend it has found that the
current assets level has increased year by year and the inventory
being part of it has also increased. It fluctuates certain intervals. This is
due to increase in liquidity involving Cash and Bank balances.
YEARS 2010 2009 2008 2007 2006
Opening Inventory
(Rs. In Lakhs)49970 45675 46904 55253 51554
Closing Inventory
(Rs. In Lakhs)75983 49970 45675 46904 55253
INVENTORY TURNOVER RATIO
YEARS
INVENTORY
CONSUMED
(Rupees in
Lakhs)
AVERAGE
INVENTORY
(Rupees in
Lakhs)
INVENTORY
TURNOVER
RATIO
INVENTORY
TURNOVER
IN NUMBER
OF DAYS
March –
2010459537.10
49970 +
75983
2
= 62976.5
459537.10
62976.5
= 7.296
365..
7.296
= 50.027
March –
2009335286.52
45675 +
49970
2
= 47822.5
335286.52
47822.5
= 7.01
366..
7.01
= 52.21
March –
2008250021.84
46904 +
45675
2
= 46389.5
250021.84
46389.5
= 5.389
365..
5.389
= 67.73
March –
2007
211723.1 55253 + 211723.1 365..
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INVENTORY TURNOVER RATIO
4.416 4.1455.389
7.01 7.296
012345678
2006 2007 2008 2009 2010
YEARS
%
O F
IN V E N T O R Y
INVENTORY TURNOVER RATIO
INVENTORY TURNOVER RATIO
4.416 4.1455.389
7.01 7.296
012345678
2006 2007 2008 2009 2010
YEARS
%
O F
IN V E N T O R Y
INVENTORY TURNOVER RATIO
46904
2
= 51078.5
51078.5
= 4.145
4.24
= 88.05
March –
2006235858.13
51554 +
55253
2
= 53403.5
235858.13
53403.5
= 4.416
365..
4.41
= 82.65
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INVENTORY IN NUMBER OF DAY
82.65 88.05
67.7352.21 50.027
0
20
40
60
80
100
2006 2007 2008 2009 2010
YEARS
IN V E N T O R Y
IN
N U M B E R
O F
D A Y S
INVENTORY IN NUMBER OF DAY
60
INVENTORY IN NUMBER OF DAY
82.65 88.05
67.7352.21 50.027
0
20
40
60
80
100
2006 2007 2008 2009 2010
YEARS
IN V E N T O R Y
IN
N U M B E R
O F
D A Y S
INVENTORY IN NUMBER OF DAY
INERPRETATION:
A high turnover ratio indicates that the material in question is a fast
moving one and also a low amount of stocks are replacing stocks in
large number of installment. In the year 2008, 2009, 2010, the stock
turnover ratio is gradually decreasing and the inventory faced a bad
position in these three years. And from, 2006, 2007, the stock turnover
ratio continuously increased from 5.38 to 7.296 and the inventory in
number of days is low. This position indicates that the stocks are fast
moving and get converted in to sales quickly.
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CEMENT PRODUCTION AND DISPATCH
YEAR
CEMENT PRODUCTION
(QUANTITY IN
MIL.TONNES)
CEMENT DISPATCH
(QUANTITY IN
MIL.TONNES )
MARCH 31ST 2006 19,587 19,682
MARCH 31ST 2007 21,254 21,385
MARCH 31ST 2008 25,797 25,416
MARCH 31ST 2009 34,186 33,766
MARCH 31ST 2010 33,630 33,885
62
MARCH 31ST 2006
MARCH 31ST 2007
MARCH 31ST 2008
MARCH 31ST 2009
MARCH 31ST 2010
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
CEMENT PRODUCTION (QUANTITY IN MIL.-TONNES)CEMENT DISPATCH (QUANTITY IN MIL.-TONNES )
INERPRETATION:
The inflow of raw materials and dispatch of finished goods from the
organization is in good position. In march 31st 2008 the difference
between the vehicle production and dispatched is 381 and in march
31st 2007 the close stock in the go down is also dispatched from the
organization and as well as in the year 2009 31st march the stored
vehicles are dispatched from the company. This indicates that the
consuming storage cost is very low and risk related to preservation of
the stock is very les
5.1 FINDINGS
Most of the respondents were aware by the friends and relatives
(48%).Advertisements (28%) also helped in providing information to
the respondents.
82% of the respondents were aware of “ZUARI Cement “brand.
In advertisement media newspapers (56%) were much affective and
television (38%) was also a major advertising media. Many factors
like family members advertising were responsible for influencing the
customers to buy “ZUARI Cement.
Factors’ effecting buying decision of a customer’s brand name was
preferred first. Picture clarity is also a one of the feature which
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attracted to buy a television. Considered as a factor effecting the
buying decision of the customer. Price, Design, warranty, service
help in purchasing the“Tecumseh.
6% of the customers were very much satisfied with LG Television.
Whereas 58% was satisfied with “ZUARI Cement.
39% of the respondents were satisfied with the service of the
“ZUARI Cement “Compressors.
After sales service at door step 38% was one of the factors which
help the purchaser to buy a“ZUARI Cement “ . Prompt service 52%
also help to attract the purchaser.
54% of the respondents considered the price of the“ZUARI Cement
“ . As higher where as only 8% considered as economical and 38%
of the respondent said it as reasonable.
Digital sound system was also one which helps in a prospective
purchaser to buy the “ZUARI Cement “.
5.2 SUGGESTIONS:
On the personnel interaction with the financial department as
well as with the primary and secondary data’s the following are the
conditions and suggestions arrived. They are:
1) The analysis is carried out for a period of five years i.e.,
2005-06 to 2009-2010 is not sufficient to conclude the
Inventory position of the company as we have taken up to
study for a period of 6 weeks is too less still we strived out best
in exploiting the present inventory position of the company.
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2) Inventory valuation is followed in weighted average
method based on cost concept of the project costing is
undertaken.
3) The inventory is different items of production; hence A-B-C
analysis and Two Bin System are followed.
4) Some items are found to be slow and non-moving. The
slow-moving items are spare and consumable goods; hence
whenever necessity arises these items are being used. Non-
moving items are also found in the inventory.
5) The reasons for Non-moving of Inventory from stores are
studied. Due to MOQ (Minimum Order Quantity) clause these
items procured extra than the requirement.
6) The high inventory ratio indicates efficiency of the firms
inventory management.
7) The material consumption was also increasing simultaneously
with sales.
8) The company’s efficiency in turning its inventory is increasing.
The company’s utilization of inventory in generating sales is
good. The yearly holding of all types of inventory is decreasing.
This is positive trend.
9) The overall inventory position of the company is satisfactory.
5.3 CONCLUSION:
Today business scenario inventory management is becoming
very crucial part of the organization. The system of inventory
management in ZUARI CEMENT Limited very effective. The
organization is basically and assembling unit and thus inventory place
a most significant role in the decision making process. From the
various calculations and figures relating to inventory management it is
clear that the inventory classification of A items are maintain for 1 – 3
days, as a result it reduce investment in raw material, reducing the
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lead time and also the large quantity discount because the stock are
kept for 1 – 3 days.
In the classification of ABC items XYZ procedure is following in
ZUARI Cement Plant has launched the different type of KANBAN card
system for class C items.
Class A & B items are consider under the just in time philosophy
as the procurement time has been reduced up to greater extent by the
proper co-ordination of buyer and supplier.
There is great improvement in the inventory turnover ratio from
3 years. It is increased from 5.38 to 7.296% this position indicates that
the stocks are fast moving and get converted into sales quickly in
ZUARI CEMENTLIMITED,
Finally we conclude that ZUARI plant the inventory system is
very good with high Japanese techniques.
BIBILOGRAPHY:
* Cost Accounting – V.K. Saxena
C.D. Vashist
* Cost Accounting - S.P. Iyenger
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* Cost Accounting - S.N. Maheshwari
* Financial
Management - Khan & Jain
* Cost Management
Accounting - R.P. Thrivadi
Websites:
www.google.com
www.yahoofinance.com
www.zuaricements.com
www.msn.com
www.birlacements.com
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