INVENTORY MANAGEMENT

INTRODUCTION:

Finance is regarded as”THE LIFE BLOOD OF BUSINESS ENTERPRISE”.

Finance function has become so important that it has given birth to financial

management as a separate subject .So, this subject is acquiring universal applicability.

Financial management is that activity which is concerned with the planning &

controlling of the firm’s financial resources. As a separate activity or discipline is of

recent origin, it was a branch of economics till 1890. Still today it has no unique

knowledge its own, and it draws heavily on economy for its theoretical concept.

The growth of any organization depends on the overall performance of

production, marketing, HRM & Finance. The financial performance of the

organization reflects the strengths, weakness, opportunities and threats of the

organization with respect to profits earned on investment.

INVENTORY management is very important in an organization in order to have a

Smooth move of it. The term inventory refers to the stockpiles of the products a fire is

offering for sale and the components that make up the product. In other words,

inventory is composed of asset that will be sold in future in the normal course of

business operations, inventory as current asset differ from other assets because only

financial managers are not involved, rather all functional areas finance, and

marketing, production and purchasing are involved. The view concerning the

appropriate level of inventory would differ among the different functional areas . The

job of the financial manager is to reconcile the conflicting view poin ts of the various

functional areas regarding the appropriate inventory level in order to fulfill the overall

objective of maximizing the owner’s wealth. Thus, inventory management should be

related to the overall objective of the firm. The basic responsibility of the financial

management of inventory should ultimately result in the maximization of owe

owner’s wealth.

1

Although our discussion of inventory management will focus on the finance

perspective it is important to understand that good inventory management is vital to

the success of virtually all firms. Inventory management activities can range from

ensuring that there is an adequate selection of different sizes of clothing available in a

retail store to stocking necessary replacement parts for commercial Aircraft.

MEANING OF INVENTORY MANAGEMENT :

“Inventory Management” means planning, procurement, holding and accounting

and distribution of these and materials. Inventories are approximately 60% of current

assets in India. In industries using agricultural raw materials the percentage is still

higher. Thus, a large part of working capital is invested in inventories. The

management of inventories is therefore necessary is therefore necessary to avoid

heavy loss due to leakage, theft and wastage because neglecting the management of

inventories may jeopardize. The long on profitability of the concern may fall

ultimately. The reduction in excessive inventories carries a favorable impact on a

company’s profitability. The financial manager actually is a kind of watchdog over

fuctional areas. Broadly speaking the inventory management problem is one of

maintaining for a given financial investment an adequate supply of something in order

to meet an accepted distribution or pattern of demand.

2

Need for the study

The inventory plays a vital role in the efficient operation of the company. Particularly, it is in

direct touch with manufacturing departments, materials department and marketing department

in its day to day activities. In all most all industries 60% of the working capital invited in the

materials. An efficient inventory management can help to achieve better utilization of this

investment with considerable degree of success.

Providing all the required raw materials, consumable stores, components etc., to the

manufacturing units at the right time and place, the lowest possible cost and adopting

inventory control measures, using good materials handling practices are the principle

objectives of stores management. In other words reducing the cost in all spares of the

manufacturing activities will help in increasing the profits of the company

The efficiency with which the inventory is managed will invariable determines the efficiency

of the production and levels of profits of the enterprises.

Scope of the study

3

The study includes systems, documentation procedures storage and compliance of statutory

regulation which are in o[operations by SREE AKKAMAMBA TEXTILES LTD TANUKU,

while giving emphasis on raw material and it also covers work in progress and finished goods.

The present study covers purchase store functions and efficiency of many acquiring materials

and utilizing them to minimize cost of materials and maximize profits

The study is also undertaken to evaluate the companies present financial performance with a

special regard to the value of inventory maintained and to know the influence of inventory

levels on the sales turnover

The scope also includes the study of various methods adopted by company in order to

maintain the quality of it’s finally to assent the various steps ads by the company to maintain

and control its inventory position.

The scope inventory management is very wide that various techniques of inventory controls

management like EOQ model ABC analysis have been undertaken.

OBJECTIVES OF THE STUDY

4

The study the methods and Techniques of inventor)' control and management

adopted by the company.

The assess the performance of materials and inventory control section of

S.A.T.LTD.

To analyze the efficiency of inventory management S.A.T. LTD.

To have an overview of the purchase and stores department contribution to

inventory control and maintenance.

To review the theoretical frame work.

METHODOLOGY

5

The methodology designed for my project entitled "Inventory Control

Management" at S.A.T. Ltd; Tanuku was based on two sources.

1. Primary Data

2. Secondary Data

PRIMARY DATA:

Primary data has been collected by interviewing various people in production

department as well as administrative people who will generally give the details of

inventory process and also know the existing software in the company.

The primary data has been collected from the personal observation and

personal interviews with the officials of the firm.

As the main emphasis of the study is on the inventory management at M/s. SRI

AKKAMAMBA TEXTILES LTD., the primary data for the study was gathered :

discussions and experiences with some personnel the accounts department.

SECONDARY DATA:

The primary data was supplemented by the secondary data collected from published

reports of the organization and some important presented in the study with AKKAMAMBA

TEXTILES LTD., is taken from material data. And text book which has been matched

with the record obtained from the company in order to may a strategic view.

LIMITATIONS OF THE STUDY

6

Comparison of the SAT. LTD. performance with any organization is not possible since

the financial statements of other organizations are not available.

Most of the information has kept confidential and as such is not passed on, as part of the

policy of die company.

To the extent that the executives could spare their time, they gave us the

information by way of small discussions for the purpose of date collection.

The study is limited only to financial statement analysis. However, a

satisfactory exercise has been made to study financial performance of S.A.T. LTD.

by giving more important to ration analysis, which is a powerful tool of financial

analysis.

7

CHAPTER – II

PROFILE O F TEXTILE INDUSTRY

Cotton Textile Industry is one of the oldest and largest during the last 3

decades the textile industry still occupies a keep position in the economy of the

country industries in India which has made rapid strides during the century of its

excellence. At the end of the March 1992 there were 1,117 mills in the country ( 846

Spinning Mills & 271 Composite Mills ) with about 27 million spindles and 1.8 lakes

looms. There were 123 closed mills by the end of March 1993. At present the industry

provides direct employment to nearly 12 lakes workers, accounting for 18% of all

factory labor in the country. It also provides indirect employment to many millions like

the cotton growers, processors, handlooms and power loom weaves who alone are

estimated three million and innumerable cloth dealers and shopkeepers. The Industry

contributes in ever increasing measure to the central and state government by way of

taxes and duties.

Being one of the oldest industries it-has history of over 150 years. It occupies a

unique position in the world export where Indian in the second only to Japan in terms

of total quantity of export and supplies 16% of the world exports.

It has influence agriculture because of its consumption of cotton, wool & silk and

industries because of its requirements machinery, dyes, and chemicals and synthetic

fibers. Thus the Industry has an important role to play both in economic prosperity of the

country and in the supply of in essential commodity of the entire population.

The Cotton Textile Industry consists of 3 distinct categories in the

organized sectors these are

8

1. Spinning Mills.

2. Course of Medium Composite Mills.

3. Fine and super fine composite Mills.

<

Spinning mills are generally small in size. Course and medium composite mills are

not able to adjust their cost in the face of rising prices of raw materials and increase in

wages. Consequently many of them became uneconomic units and ram into difficulties.

Fine and super Fine composite mills use foreign cotton, they are not subject to stock

restriction can therefore carry on stable production programmed.

India has been a manufacturing nation and an export of the fine cotton fabrics to all

the nations of the fine cotton fabrics to all the nations of the civilized world.

The Industry faced its major post Independence crisis in the yearly sixties. Up till

then if had been more or less sellers market and most of the mills were making reasonable

profits. But a member of factors contributed to a very big depression in the market and

mills started incurring losses. The result was that in 1967 the spindle activity came

down for 88.2% to 73.1% consequently.

'Bombay mills owners Association" is the first main formed Association formed in the

indian in the year 1875 .When India became India independent 1947. There where 10

million there hundred thousand spindles and two lakes two thousand looms installed in

million mills. Then were also and estimated two and half million handloom weavers

in the country.

Indian Textile Industry

The textile industry is the largest industry of modern India. It accounts for over 20

percent of industrial production and is closely linked with the agricultural and rural

economy. It is the single largest employer in the industrial sector employing about 38

9

million people. If employment in allied sectors like ginning, agriculture, pressing,

cotton trade, jute, etc. are added then the total employment is estimated at 93 million.

The net foreign exchange earnings in this sector are one of the highest and, together

with carpet and handicrafts, account for over 37 percent of total export earnings at

over US $ 10 billion. Textiles,1 alone, account for about 25 percent of India’s total

forex earnings.

India’s textile industry since its beginning continues to be predominantly

cotton based with about 65 percent of fabric consumption in the country being

accounted for by cotton. The industry is highly localised in Ahmedabad and Bombay

in the western part of the country though other centres exist including Kanpur,

Calcutta, Indore, Coimbatore, and Sholapur.

The structure of the textile industry is extremely complex with the modern,

sophisticated and highly mechanised mill sector on the one hand and the handspinning

and handweaving (handloom) sector on the other. Between the two falls the small-

scale powerloom sector. The latter two are together known as the decentralised

sector. Over the years, the government has granted a whole range of concessions to

the non-mill sector as a result of which the share of the decentralised sector has

increased considerably in the total production. Of the two sub-sectors of the

decentralised sector, the powerloom sector has shown the faster rate of growth. In the

production of fabrics the decentralised sector accounts for roughly 94 percent while

the mill sector has a share of only 6 percent.

Being an agro-based industry the production of raw material varies from year to year

depending on weather and rainfall conditions. Accordingly the price fluctuates too.

India's trade in textiles and its share in world trade can be categorized as follows:

1

10

India’s Trade in Textiles

(1998)

Type India's Share in

World Trade

Yarn 22%

Fabrics 3.2%

Apparel 2%

Made-ups 9%

Over-all 2.8%

Global Scenario

The textile and clothing trade is governed by the Multi-Fibre Agreement (MFA)

which came into force on January 1, 1974 replacing short-term and long-term

arrangements of the 1960’s which protected US textile producers from booming

Japanese textiles exports. Later, it was extended to other developing countries like

India, Korea, Hong Kong, etc. which had acquired a comparative advantage in

textiles. Currently, India has bilateral arrangements under MFA with USA, Canada,

Australia, countries of the European Commission, etc. Under MFA, foreign trade is

subject to relatively high tariffs and export quotas restricting India’s penetration into

these markets. India was interested in the early phasing out of these quotas in the

Uruguay Round of Negotiations but this did not happen due to the reluctance of the

developed countries like the US and EC to open up their textile markets to Third

World imports because of high labour costs. With the removal of quotas, exports of

textiles have now to cope with new challenges in the form of growing non-tariff /

11

Compound Annual Growth Rate (CAGR) of different segments

Type CAGR (1993-98)

Yarn 31.79%

Fabric 9.04%

Made-ups 15.18%

Garment 6.795%

non-trade barriers such as growing regionalisation of trade between blocks of nations,

child labour, anti-dumping duties, etc.

Nevertheless, it must be realised that the picture is not all rosy. It is now being

admitted universally and even officially that the year 2005 AD is likely to present

more of a challenge than opportunity. If the industry does not pay attention to the

very vital needs of modernisation, quality control, technology upgradation, etc. it is

likely to be left behind. Already, its comparative advantage of cheap labour is being

nullified by the use of outmoded machinery.

With the dismantling of the MFA, it becomes imperative for the textile industry to

take on competitors like China, Pakistan, etc., which enjoy lower labour costs. In

fact the seriousness of the situation becomes even more apparent when it is realised

that the non-quota exports have not really risen dramatically over the past few years.

The continued dominance of yarn in exports of cotton, synthetics, and blends, is

another cause for worry while exports of fabrics is not growing. The lack of value

added products in textile exports do not augur well for India in a non-MFA world.

Textile exports alone earn almost 25 percent of foreign exchange for India yet its

share in global trade is dismal, having declined from 10.9 percent in 1955 to 3.23

percent in 1996. More significantly, the share of China in world trade in textiles, in

1994, was 13.24 percent, up from 4.36 percent in 1980. Hong Kong, too, improved

its share from 7.06 percent to 12.65 percent over the same period. Growth rate, in

US$ terms, of exports of textiles, including apparel, was over 17 percent between

1993-94 to 1995-96. It declined to 10.5 percent in 1996-97 and to 5 percent in 1997-

98. Another disconcerting aspect that reflects the declining international

competitiveness of Indian textile industry is the surge in imports in the last two years.

Imports grew by 12 percent in dollar terms in 1997-98, against an average of 5.8

percent for all imports into India. Imports from China went up by 50 percent while

those from Hong Kong jumped by 23 percent.

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Global factors influencing textile industry

The history of the textile and clothing industry has been replete with the use of

various bilateral quotas, protectionist policies, discriminatory tariffs, etc. by the

developed world against the developing countries. The result was a highly distorted

structure, which imposed hidden costs on the export sectors of the Third World.

Despite the fact that GATT was established way back in 1947, the textile industry, till

1994, remained largely out of its liberalisation agreements. In fact, trade in this

sector, until the Uruguay Round, evolved in the opposite direction. Consequently,

since 1974 global trade in the textiles and clothing sector had been governed by the

Multi-fibre agreement, which was the sequel to an increasingly pervasive quota

regime that began with the Short-term arrangement on cotton products in 1962 and

followed by the Long-Term arrangement. After the successful conclusion of the

Uruguay Round in 1994, the MFA was replaced by the Agreement on Textiles and

Clothing (ATC), which had the same MFA framework in the context of an agreed, ten

year phasing out of all quotas by the year 2005. The section that follows takes a brief

look at the history of these protectionist regimes as also a more detailed look at the

MFA and the ATC.

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Multi–Fibre Agreement (MFA)

On January 1st, 1974, the Arrangement Regarding the International Trade in Textiles,

otherwise known as the MFA came into force. It superseded all existing

arrangements that had been governing trade in cotton textiles since 1961. The MFA

sought to achieve the expansion of trade, the reduction of barriers to trade and the

progressive liberalisation of world trade in textile products, while at the same time

ensuring the orderly and equitable development of this trade and avoidance of

disruptive effects in individual markets and on individual lines of production in both

importing and exporting countries. Though it was supposed to be a short-term

arrangement to enable the adjustment of the industry to a free trade regime, the MFA

was extended in 1974, 1982, 1986, 1991, and 1992. Because of the quotas allotted, the

MFA resulted in a regular shift of production from quota restricted countries to less

restricted ones as soon as the quotas began to cause problems for the traders in

importing countries. The first three extensions of the MFA, instead of liberalising the

trade in textiles and clothing, further intensified restrictions on imports, specifically

affecting the developing country exporters of the textile and clothing products.

Increased usage of several MFA measures tended to further erode the trust which

developing countries had originally placed in the MFA.

The MFA set the terms and conditions for governing quantitative restrictions on

textile and clothing exports of developing countries either through negotiations or

bilateral agreements or on a unilateral basis. The bilateral agreements negotiated

between importing and exporting country’s contained provisions relating to the

products traded but they differed in the details. The restraints under the MFA were

often negotiated, or unilaterally imposed at relatively short intervals, practically

annually. The quotas could be either by function or fibre

14

Under the MFA, product coverage was extended to include textiles and clothing made

of wool and man-made fibres (MMF), as well as cotton and blends thereof. With

regard to applications of safeguard measures, import restrictions could be imposed

unilaterally in a situation of actual market disruption in the absence of a mutually

agreed situation. However, in situations involving a real risk of market disruption

only bilateral restraint agreements were possible. The Textile Surveillance Body

(TSB) was set up to monitor disputes regarding actions taken in response to market

disruptions.

The MFA permitted certain flexibility in quota restrictions for the exporters so that

they could adjust to changing market conditions, export demands and their own

capabilities. The MFA also provided for higher quotas and liberal growth for

developing countries whose exports were already restrained. The MFA asked the

participants to refrain from restraining the trade of small suppliers under normal

circumstances. In general, developed countries, under MFA, chose not to impose

restrictions on imports from other developed countries

The TSB ensured compliance by all parties to the obligations of bilateral agreements

or unilateral agreements. It called for notification of all restrictive measures. A

Textiles Committee – established as a management body consisting of all member

countries – was the final arbiter under the MFA and worked as a court of appeal for

disputes that could not be resolved under TSB.

Unsatisfactory experience with several extension protocols of the MFA, retention

clauses, such as “good will”, “exceptional cases”, and “anti-surge” and other trade

related factors led the developing countries to press for the inclusion of the textile

issue in the agenda of the GATT Ministerial meeting.

The eventual outcome of prolonged negotiations was the Agreement on Textiles and

Clothing.

15

Agreement on Textiles and Clothing (ATC)

The ATC calls for a progressive phasing out of all the MFA restrictions and other

discriminatory measures in a period of 10 years. In contrast to the MFA, the ATC is

applicable to all members of the WTO.

.

Four Steps over 10 Years

16

Steps Percentage of products

to be brought under

GATT (including

removal of quotas)

How fast remaining

quota should open

up, if 1994 rate was

6%

Step 1

1st Jan 1995 – 31st Dec 1997

16 percent (minimum

taking 1990 imports as

base)

6.96 percent annually

Step 2

1st Jan 1998 – 31st Dec 2002

17 percent 8.70 percent annually

Step 3

1st Jan 2002 – 31st Dec 2004

18 percent 11.05 percent

annually

Step 4

1st Jan 2005

Full integration into GATT and final

elimination of quotas , ATC

terminates

49 percent (maximum) No quotas left

17

Top 10 Exporters (Textile)

Country 1990 1997

Billion US$ % share Billion US$ % share

Hong Kong 7.99 7.68 14.6 9.42

China 7.10 6.82 13.83 8.92

South Korea 6.04 5.81 13.35 8.61

Germany 14.00 13.46 13.05 8.42

Italy 9.80 9.43 12.9 8.32

Taiwan 6.13 5.90 12.73 8.21

USA 5.03 4.83 9.19 5.93

France 7.21 4.65 5.86 5.64

Belgium-

Luxembourg 6.54 6.29 7.01 4.52

Japan 5.88 5.65 6.75 4.35

Total (Top 10) 74.36 71.5 110.62 71.37

World 104.00 100.00 155.00 100.00

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Top 10 Exporters (Apparel)

Country 1990 1997

Billion US$ % share Billion US$ % share

China 9.41 9.14 31.8 21.06

Hong Kong 15.37 14.92 23.11 15.30

Italy 12.07 11.72 14.85 9.83

USA 2.57 2.49 8.68 5.75

Germany 7.82 7.59 7.29 4.83

Turkey 3.44 3.34 6.7 4.44

France 4.65 4.51 5.34 3.54

UK 3.08 2.99 5.28 3.50

South Korea 8.11 7.87 4.19 2.77

Thailand 2.86 2.78 3.77 2.50

Total (top 10) 69.38 67.36 111.01 73.52

World 103.00 100.00 151.00 100.00

19

EU Top Ten Suppliers of MFA Clothing: Rank Price

(AGR 1994-96)

1995

Ranks and Average Price

1996

Ranks and Average Price

Rank

Price

CAGR

1994-96

Country Rank in

Value

Rank in

Volume

Avg.

Price,

Ecu/Kg

Rank in

Value

Rank in

Volume

Avg. Price,

Ecu/Kg

China 2 1 9 1 1 8 3

Turkey 1 2 2 2 2 6 7

Hong Kong 3 3 6 3 3 5 9

Tunisia 4 7 3 4 6 3 4

Morocco 5 6 5 5 7 4 2

Poland 6 8 2 6 8 1 8

India 7 5 7 7 5 9 10

Bangladesh 8 4 10 8 4 10 5

Romania 9 10 4 9 10 2 1

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Post-MFA / ATC Scenario

It is generally believed that quota phase-out can only be beneficial for the industry.

In 1993, a study of seven countries found that the price of cotton yarn per kilo, was

cheapest in India at US$ 2.79, compared to US$ 3.30 in Brazil, US$ 4.19 in Japan,

and US$ 3.10 in Thailand. This was because overall labour and raw material costs are

cheaper in India.

However, it should be realised that the opposite can also happen. Removal of quotas

may open new frontiers but will also close captive markets. The EU and the US will

no longer be restrained in buying as much as they want from the cheapest possible

sources. Some argue that the ending of quotas will result in cut-throat competition

between developing countries. Coupled with this is erosion in the growth of markets

in industrial countries. Apparent consumption of textile products, in real terms,

remained stagnant during the decade 1985-95. Purchases become discretionary and

fashion-driven. As a result, fashion cycles got shorter and order-cycles compressed.

Retailers order requirements on short-order cycle term and demand rapid responses to

in-season ordering. Hence, they are compelled to secure their supplies of top-up

orders from those in close vicinity.

There is, therefore, a propensity towards sourcing from low-cost countries in the

neighbourhood as also a growth of offshore processing by manufacturers in developed

countries. Regional integration reinforces this.

Further exporters in India fear that freer imports could lead to dumping of low-cost

fabrics from China and other Southeast Asian countries. Thus, the industry needs

restructuring on all fronts. Although the policy framework can be blamed partially for

its ills, internal factors are equally important.

Recent studies indicate that India is beginning to lose out to its rivals. In one survey of

US textile and apparel imports, China and Hong Kong had higher market shares than

India. In certain categories, other Asian low cost producers like Pakistan and

Indonesia had higher market shares and had emerged as close competitors to India.

Because many of these countries depend on imports, however, India can take

advantage of home

21

production.

Further, formation of NAFTA means direct competition from the Latin American

countries. The United States has farmed-out offshore processing work to enterprises

in Mexico and the Caribbean Base Initiative countries. Similar relocation has taken

place in Europe with manufacturers shifting base to Eastern Europe, which provides

similar advantages of cheap labour and proximity.

According to projections by TECS, EU imports of ready-made fabrics will double

between 1994 and 2004, as a result of the elimination of quotas. US imports are

expected to treble over the same period.

According to another prediction, apparel output could more than double (i.e. expand

by 241%) between 1995 and 2005, compared to an increase of only 114%, without the

agreement on textiles and clothing.

By increasing market access, the ATC will generate multiplier effects in the Indian

economy, eventually feeding back into the textile industry itself. The rise in demand

for exports could increase output and employment in the textile industry. This in turn

will stimulate the agricultural sector to meet the rising demand for cotton. As profits

rise, so will wages, which will act as further stimulus. The export boom in the textile

and clothing industry will also generate considerable foreign exchange.

Given India’s high quota growth rates during the phase-out period, its competitive

product niches and established links with retailers and importers in developed

countries, it should experience vigorous growth in the future. The World Bank

predicts a growth rate of 16% per annum in the coming decade.

Ultimately, the extent that India will benefit from trade liberalisation depends on its

current cost competitiveness, its ability to increase productivity and upgrade quality.

Implications on Indian Exports (Optimistic Scenario)Yarn

+ Garment exports of Bangladesh increase leading to increase in consumption

of Indian fabric and yarn

22

+ Exports of Far-East & ASEAN increase further

+ Rationalization in duties of MMF leading to increase in processing of fibres in

India

Fabric/Made-ups

+ Garmenting dereserved leading to entry of large textile players ensuring

efficient sourcing and increase in the margins

+ Increase in investment for processing

+ Improvement in SAPTA trade

Garments

+ Garmenting and Knitting de-reserved to allow the units to grow bigger to be

able to service large orders and large clients

+ Labor laws in India become industry friendly

+ Garment parks come up in key regions giving a boost to exports

+ Successful Quota Phase-out without exports getting restricted by QRs

Fig in US $ Mn

1994 1998 2002 2005* 2010*

Yarn 590 1780 2333 2701 3131

Made-ups 851 1498 2620 4527 11266

Fabric 1214 1716 2512 3530 7100

Garments 3713 4829 6510 10794 21711

Total 6368 9823 14035 21552 43208

* Projections

Implications on Indian Exports (Pessimistic Scenario)

23

Yarn

- Change works to the advantage for S. Korea/ASEAN/Far-East

- Demand for packages increases

- EEC other garment supply countries invest in back-end processes

Fabric/Made-ups

- Environmental Clause impacts

- Investment in processing does not happen

- Blends and synthetic fabrics dominate reducing advantage of Indian cotton

Garments

- Social clause impact leading to ban on some categories, etc.

- SSA is a reality impacting exports of garments from India to USA and EU

- FTA becomes a reality

- Other projectionist measures come up

As opposed to the optimistic scenario, the pessimistic scenario shows a shortfall of

nearly US $4000 mn of exports in year 2005 and the exports are not likely to be much

higher than the present figures. It would also lead to development of textile and

clothing industry in the other nations and India would lose out as a significant player

in the industry. This would also stifle the domestic textile industry which would be in

a very weak position to compete with imports. (These are expected to become cheaper

with import duty rationalization as per international treaties and cost competitiveness

of overseas players). Some of the subsidies currently extended by the Indian

government to promote exports which are sector specific (TUF, 80 HHC) or region

specific (EPZS, EOUS) may also need to be withdrawn.

Fig in US $ Mn

24

1994 1998 2002 2005* 2010*

Yarn 590 1780 2003 2126 2022

Made-ups 851 1498 2038 2427 3098

Fabric 1214 1716 1931 2050 2154

Garments 3713 4829 5435 5939 6885

Total 6368 9823 11408 12542 14159

* Projections

Conclusions

To effectively tackle the situation India needs to invest in research and development

to develop new products, reduce transaction costs, reduce per unit costs, and finally,

improve its raw material base. India needs to move from the lower-end markets to

middle level value-for-money markets and export high value-added products of

international standard. Thus the industry should diversify in design to ensure quality

output and technological advancement.

The weakest links in the entire chain are the powerlooms and the processing houses.

The latter especially are very important because they are responsible for the highest

value addition in the manufacturing line. A powerloom co-operative structure could

be evolved for pooling of common services and functions such as quality testing,

marketing, short-term financing, etc. Further, because of the geographical proximity

enjoyed, a cluster approach can be adopted.

The government also needs to make policy changes like dereserving the small-scale

sector so that it can achieve economies of scale and adopt a synergistic approach.

Handlooms by their very nature can adopt a strategy of "niche” marketing. In this

respect, export promotion, common credit and marketing facilities and more

significantly publicity are important areas for co-operation. Here too, a co-operative

25

structure would be useful though government agencies should be involved because of

their outreach. Newer and more innovative forms of involvement are required where

decentralisation should be a key element.

India has made little attempt to forge partnerships – in equity, technology and

distribution in overseas markets. The newer nuances of global apparel trade demand

joint control of brand positioning, distributing and quality assurance systems.

The Indian textile industry has recognised the need for a cradle-to-grave approach

when tackling environmental issues i.e. eco prescription should be applied right from

the stage of cultivation to spinning to weaving to chemical processing to packaging.

Here especially there is great scope for private -public partnerships.

A great deal of work has been done by Indian trade and industry to comply with

ecological and environmental regulations, and so Indian garments can adopt an

appropriate label signifying a distinct quality.

Efficiency and output of handloom and powerloom sectors also needs to be increased.

The clothing sector needs the support of high quality and cost-effective cloth

processing facilities. Modernisation of mills is a must.

Human resource is another area of focus. The workforce must be trained and oriented

towards high productivity.

The business environment of the future will be intensely competitive. Countries will

want their own interests to be safeguarded. As tariffs tumble, non-tariff barriers will

be adopted. New consumer demands and expectations coupled with new techniques

in the market will add a new dimension. E-commerce will unleash new possibilities.

This will demand a new mindset to eliminate wastes, delays, and avoidable

transaction costs. Effective entrepreneur-friendly institutional support will need to be

extended by the Government, business and umbrella organisations.

Areas where German development co-operation can help are enumerated below.

26

Input Areas

Policy framework is complex with inputs from many ministries. The following

chart is not meant to be exhaustive but only to indicate areas where German

development co-operation can have an impact.

Areas of Co-operation

Provision of co-operative structures for quality testing, marketing, brand-building

Technological upgradation (egs. Effluent treatment plants, energy saving devices, and

other machinery related directly to the production process like spreading, cutting,

finishing, etc.)

Adoption of environment-friendly technology to pre-empt the adverse impact of non-

tariff barriers. This includes environmental monitoring / testing equipment and services,

combating air pollution (package scrubber, special air pollutant treatment for H2S, CS2),

solid waste removal, wastewater disposal

Development of textile-specific software for India, Computer-Aided Textile Designing,

aiding IT integration

Working out alternative techniques / frame conditions such that sanitary and phyto-

sanitary measures are not a problem

Managerial training to encourage adoption of techniques like JIT, Quick Response

27

Systems

Usage of EPS (Electronic Point of Sale) software

Promoting labels like RUGMARK (carpets) in textiles so that consumers are satisfied

that child labour has not been employed, to counter negative publicity generated by the

"Clean Clothes" movement, etc.

Promoting hand-made articles by improving quality of raw materials and introducing

machinery where possible in the process so as to maintain standards of quality and

design

Development of new products

Adoption and adaptation of state-of-the-art information technology in enterprise resource

planning so as to pre-empt non-tariff barriers which curtail markets for the Indian textile

industry

Helping firms build close relationships with customers

Training centres

Short-term credit

Improvement of synthetic fibre-base to reap economies of scale, use of genetic

engineering, bio-technology, and cellular biology in both natural and synthetic fibre-base

THE TEXTILE COMMISIONER ORGANISATION

28

The function of the Organization are many and diverse to advise the

Government and planning commission on the targets of production for the varies Five

Year plans, to scrutinize proposals form mills few expansion recommended new

installations for licensing to exe4rcise control over the pattern of production, to ensure

adequate supplies of Raw materials to the industry and to make recommendations to

Government in this regard to collect and publish all relevant statistical data relating to

production, stocks, imports, exports etc., in the Administrative authority for

implementation of Government polices with regard to all Textile Industry.

Cotton Textile Industry being the largest Industry in India. Has spread

practically are all parts of the country, it is mostly localized in the states of

Maharashtra and Gujarat. In recent years, Cotton Textile Industry has also spread to a

number of other states like Madhya Pradesh, Bihar, Kerala , Andhra Pradesh, Uttar Pradesh

and

II. PROGRESS DURING FIVE YEAR PLAN.

In the Five year Plan period the Planning Commissioner fixed a target of about 745

million Kgs of yarn and about 4,230 million meters of cloth for the mill sector. The actual

production amounted to 760 million Kgs of yam and about 4,775 million meters of cloth.

In the Third fiver-year Plan period the target was fixed at 1,020 million kgs. Of

yarn and 5,220 million meters of cloth. The actual production was lower than that in the

Second Five Year Plan period.

The Fourth five-year Plan target was 81 lack bales. The fifty year plan target had

been of the order of 84 lakes bales. The target for the sixth plan has been 92 lakes bales. The

Government, to ensure proper import of cotton, had set up one agency called Cotton

Corporation in 1970. Its authorized capital 5 corers and the paid up capital 50 lakhs.

Through the corporation is intended to undertake only import trade purchase cotton by way

of price support. The corporation also purchases cotton required for mills which are

functioning under the national textile Corporation.

The Industry however has no resources for the huge task of replacement and

29

modernization. The government and public sector financial institutions will have to

provide the necessary funds for this purpose. At one time nearly third of mills were closed

down, throwing thousands of workers out of employment.The Government established

in 1986, Textile Corporation (NTC) a restricted framework having the following 3

dimensions the industiy shall be viewed in terms of stages of its manufacturing process

spinning, weaving and processing. The Industry shall be provided with fuller

flexibility in the use of various fibers and the Industry shall be subjected to more

programmatic polices regarding creation or contraction of capacities by units in order

to increase competition and promote health} growth in Industry.

The new textiles policy has made an elaborate statement on take over and

revival of sick units. The new textiles policy in the same breathes categorically status.

Take over by the Government or nationalization of such units does not provide

solution to the problem of sickness and the Government would not as a rule in intervene

in such case.

Modernization in the spinning, weaving and processing sections shall be under

taken on the basis of carefully identified needs of each unit as to installation of

equipment, renovation of equipment, renovation of existing machinery, replacement

and technology up gradation, there was a mixed relation to the new textile policy,

specially the reduction of Piscal lives on man a made fibers and yarn, the liberal

import of machinery which was not indigenously manufactured and the permission to

close down nonviable units.

The Cotton textiles fund committee was established by an ordinance in 1944. The

objectives of the Committee were to provide funds the textiles research, to under

taken implications of all textiles for export and to conduct research into the

consumption of textiles.

GENERAL:

30

In spite of adverse trading conditions that prevailed during the year, it is heartening

to note that nine mills-seven full and two associated enrolled as members. SITRA has, in all

424 members comprising of 516 units which include 420 spinning mills, 72 composite

mills, 13 machinery manufactures and 11 fiber manufacturing and process house. It is

significant that over 20% of the members are from outside SITRA Zone inclusive of 16

from overseas. In addition SURA'S services are availed by 56 small spinning mills who

are registered as technical service card holders. SITRA ALSO DOES EFFECTIVE

TRANSFER OF technology to the power looms units and the knitting industry in the

southern region through its PLSC AND AEPC.

COMPANY PROFILE

31

Sree Akkamamba Textiles limited (SATL), a part of Andhra Sugar: si In concern

was promoted in 18 April 1954 Sri Mullapudi Harischandral'iu «KI Associates. The

promoters got equity support from Financial Institutions like II 'III. IIBI, ICICCI, Andhra

Bank, State Bank of India, State Bank of Hyderabad and Pul-lii Deposits.

The company Sree Akkamamba Textiles Limited is a broad managed company

11 Directors on the Board. Sri. Mulapudi Harischandra Prasad is ||u-Chairman and

Managing Director and Sri. M.S.R.V.K.Ranga Rao is the Director. The other members of

the board include representatives of the VHILHIS financial institutions and organizations

that have equity stake in the company nl have provided loan assistance to the

company.

The company is a manufacturer of hank yarn and cone yarn. Production is carried

out in the plant situated in Venkatarayapuram, Tanuku, West Goda MM District in

Andhra Pradesh. The plan operated with sophisticated talin-il collaboration of

machinery by using it high-speed spinning and textile weaving process. The plant has dual

feed facility with the help of which production can be carried out either like cotton or

polyester or viscose as one of he major raw malci I; With recent expansion, the capacity has

been increased substantially.

The expansion was completed in 1988, the plant function with 3 spinning in 11, having

installed capacity of 9009 spindles.

The Company Directors Director are assisted by qualified and experien s I

professionals in various fields of production, research and development expi its finance

marketing, secretarial and legal functions. The total manpower, ul IK company

including managerial, personnel, executive staff, trainees and workmen amount to 750.

SAT Ltd. Has its corporate of at Venktarayapuram Tanuku

The company has been operation the plant constantly since inception <ii nil capacity

and has made a mark wit it quality product and its after sales service;!, i lie company has an

impressive record in terms of increasing turnover (including expi lis) and its profits, as

revealed by the financial statements. The company presently i; tol playing dividends the

shareholders.

With a growing market of polyester fabrics, the company foresees i f-tiily large

gap in demand and supply of its products. Presently, the firm is incurring as it is less that

5 years old and faces competition from the likes of Satyanarayana Spinning Ltd.,

Venkatarayan Spinning Ltd, Rambhadra Spinners Ltd, ami timet Andhra Pradesh

32

Textiles industries etc.,

The company being a progressive one carries out research and Developmt ill in

specific areas like reducing raw material consumption and reducing waste 1 hi company

plant to manufacture value added polyester products as well.With an already impressive

track record, State safety Award from Andhra Pradesh Government for environmental

safe.

MARKET SCENARIO

The cotton yarn, viscose cotton yarn and polyester yarn market has Ifei

expanding, opening venues in both domestic and international circuit for marketing

The major buyers of the company's products are wavers, texruristers and povyei

looms.

The customer's are mainly concentrated in the western region of the amnio

This also making a mark in the Southern Market. Exports have increased ovi r ||.

years. The company has tapped markets in Bangladesh, Srilankha and otliei Ire: I

areas like Mumbai, Ahmedabad, Chennai, Calcutta and East and West GiHh'aii

surrounding weavers' areas and etc.

The product cotton yarn is manufactured and marketed over a product i uu-

The product range includes yarn of different levels.

Sl.No. Item code No.

(1TC code )

Product Descnpi inn

1 520515.01 Cotton Yam

2 550953.00 Polyester Cotton Vain

3. 551030.09 Viscose Cotton Y';im

33

The Company has vibrant demand for each yarn h modifies its product is as

an when required. This flexibility enables He Company to maintain, if share and

retain its customer base.

The company is functioning in a competitive oligopolistic market, wherein thee

are few but big players. Its present competitors are Satyanaryana Spinning Ltd.

Venkataraya Spinning Ltd., Chowdary Spinning Ltd., Gamine Textiles Ltd..

Rambhadra Spinners Ltd., and other etc. It becomes necessary to carefully work out

intricacies of pricing and credit policies, to face such competition, even though the

market demand for products is higher then the supply.

REVIEW OF OPERATION 2009-10

The recessionary conditions and imbalance in demand and supply position in Textiles

industry continue unabated during the year under review.

1. The creation of additional capacity during last two years has resulted in over

supply situation. The problem was father compounded by the thought ol

cheaper imports form Southeast Asian countries. This has necessitated the

Industry to price the products competitively which we not remunerative.

2. Despite severe competition the performance of industry was well I terms ol

production and sales volume of cone yarn and hank yarn which registered in

increase of 14% an^l6% respectively in previous year.

3. The critical success factors of the company are: employing latest continuous

polycondensation technology to manufacture of yarn at lower cost and with

minimum wastage's unassured supply of yarn products, the two major raw

materials of cotton, viscose cotton, and polyester cotton and strong morecety

network.

34

4. The Production side however company* maintained a high level of production

and productivity and sales despite the difficult market

EXPANSION PLANTS :

The company has also proposed to expand is spinning capacity by about 5000

spindles enchanced

the total capacity tip to 6000 spindles at an estimates cost of Rs. 10 crores by

adding two more spinning lines take fill advantage surplus capcity available wiht the

company. The proposed expansion is completed

PRODUCTION:

The company has achieved of production of 2245518 meters of yam and 726817

meters of wastage of yran during the year 2008-2009

SALES:

The company has achieved a sales turnover of Rs.3402 lakhs which included exprots

taken at FOB at Rs.280 lakhs.

35

PROFILE OF THE COMPANY :

NAME : Sir Akkamamba Textiles Ltd.

LOCATION : Venkatarayapuram

STARTED ON DATE April, 18,1954

DATE OF COMMERCIAL

PRODUCTION : Sep, 1, 1956

STARTING SIZE : 8000 Spindles

PRESENT SPINDLE SIZE : 8600 Spindles

MILL AREA : 21 Acres

AFFILIATORY FIRMS : Andhra sugars

TOTAL EMPLOYEES : 895

SHIFTS : 3 Shifts (General 7.30 Am. to 5.00 Pm.)

PRODUCTION CAPACITY : 6.5 tones per day

POWER CONSUMPTION : 44,000 UTS

WATER : 50000 gallons

CAPACITY UTILIZAION : 95.72

CONE YARN : 76%

HANK YARN : 24%

TURNOVER : 100 crores per year

CONE YARN : Mumbai, Madras, Icchalaka Raji

HANK YARN : Chirala, Mangalagiri, Guntur.

36

CHAPTER - III

THEORITICAL BACKGROUND OF INVENTORY MANAGEMENT

INTRODUCTION:

Inventory management is very important in an organization in order to have a

Smooth move of T the term inventory refers to the stockpile of the products a fire is

offering for sale and the components that make up the product. In other words, inventory

is composed of assets that will be sold in future in the normal course of business

operations. Inventory as a current asset differ from other assets because only financial

manager ctional areas finance, and marketing, production and purchasing are

involved. The view concerning the appropriate level 0f inventory would differ among

the different functional areas. The job of the financial manager is to reconcile the

conflicting viewpoints of the various functional areas regarding the appropriate inventory

level in order to fulfill the overall objective of maximizing the owner's wealth. Thus,

inventory management should be related to the overall objective of the firm. The basic

responsibility of the financial manager is to make sure the firm's cash flows are manager

efficiently. Efficient management of inventory should ultimately result in the

maximization of owner's wealth.

Although 0Ur discussion of inventory management will focus on the finance

perspective it is important to understand that good inventory management is vital to the

success of virtually ail firms. In fact inventory is the key to being a top player in many

industries today including both retailing and manufacturing because of its importance,

managers at all levels, and* in all functional areas, are involved management.

Inventory management activities can range from ensuring that there is an adequate

37

selection of different sizes of clothing available in a retail store to stocking necessary

replacement parts for commercial Aircraft.

MEANING OF INVENTORY MANAGEMENT:

"Inventory Management" means planning, procurement, holding and accounting

and distribution of these and materials. Inventories are approximately 60% of current assets in

India. In industries using agricultural raw materials the percentage is still higher. Thus, a

large part of working capital is invested in inventories. The management of inventories is

therefore necessary is therefore necessary to avoid heavy loss due to leakage, theft and

wastage because neglecting the management of inventories may jeopardize. The long on

profitability of the concern may fall ultimately. The reduction in excessive inventories

carries a favorable impact on a company's profitability.

The financial manager actually is a kind of watchdog over functional areas. Broadly

speaking the inventory management problem is one of maintaining for a given financial

investment an adequate supply of something in order to meet an accepted distribution or

pattern of demand.

Infact, the very existence of inventory creates costs. Sometimes it is difficult to see

what value is received from costs incurred. Inventory management may be defined as the

sum total of those activities, which are necessary for the acquisition, storage, sales and

disposal, or use of management; it is a subject. Which merits the attention of the top-

levet management and the decisions of the planning and executive personnel.

Objectives of inventory management:

In the contest of inventory management the firm is faced with the problem of

meeting to conflicting needs.

38

To meet the demand for the product by efficiently organizing the production

the production and sales operations.

Control investment in inventories and keep it at an optimum level.

To minimize investments in inventory,

To ensure against delays in deliveries.

To utilize the advantage of price fluctuations.

To take advantage of quality discount control.

The inventory management includes the following aspects

♦ Maximum

♦ Minimum

Establishing timing schedules, procedures and lot of sizes for new

orders. Ascertain minimum safety levels.

Co-coordinating sales, Production and inventory policies. Providing proper storage

facilities.

These objectives can express in terms of cost and benefit associated with

inventory. Inventories provide benefits to the extent that they facilitate the smooth

functioning of the firm.

Need to hold inventories:

Maintaining inventories involves tying up of company's funds and incurrence of

storage and handling costs. There are three general motives for holding inventories.

Transitive motive emphasizes the need to maintain inventories to facilitate

smooth production and sales operations.

Precautionary motive, necessities holding of inventories to guard against the risk of

unpredictable changes in demand and supply forces and other factors.

Speculative motive influences the decision to increase or reduce.

Inventory levels to take advantage of price fluctuations.

39

Different Types of Inventories:

An inventory is an idle resource that possesses economic value. It is an item that

is stored or reserved for meeting future demand such items may be materials, machines,

money, or even human beings.

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

components that make up the product. Inventories are composed in to:

Raw materials

Work in Progress

Finished goods

Consumables

Bought out Components

Packing materials

Spare Parts

Raw Materials:

Raw materials are those items purchase to be processed and are the major

input into an organization and from the bulk, which gets converted into output. The

function of raw materials is to -act as a buffer between procurement and

manufacturing.

There are 2 important factors:

Internal Factors:

Production Technology Critical ity of the item

External Factors:

Lead time (administrative and suppliers)

Vendor's relations Availability of materials

Government Policy

Seasonally

Credit situation and govt, restriction

Consumables:

These are the materials which act as 'catalyst' in the production process and not

40

directly found in the end product. These enable the production process to function

smoothly. The inventory level of these consumables can be fixed based on the past

consumption. Bought Components:

Organizations especially those in consumer goods and engineering industry do not

always produce 100% of their out put from raw materials. At times they find it cheaper

and more convenient to buy from regular vendors. This enables them to concentrates

more on critical parts and assembly.

The important factors that influence the bought components are:

Make or buy decisions

Source development

Vendor relations

Make or buy decisions must be taken through "tech economic analysis".

Source Development is laborious and time consuming more if the unit is

located in backward area or region. Vendor relations are built up over the years

depending upon quality, regularity or supply and financial transactions. Usually vendors

operate at much smaller level.

Work in Progress:

The process inventories exist so long as we have been considering inventory as

buffer between two or three subsystems, work - in - progress acts as a buffer with in

manufacturing sub-system. There can be group of machines, which can be termed as work

centers. The raw materials will have to go through a combination of operations before

it takes shape as a "salvable product".

The rate of production at each production center depend upon the technology,

while the production executive tries his best to balance lines, there is certain break downs

which will effects down stream productions. To over come this work-in-progress

inventories is stored as work centers.

Finished goods:

Finished goods are those goods available for delivery to consumer, finished goods

41

act as buffer between production and marketing department. The input in quite

predictable but output depend upon the behavior of market. The purpose of this

inventory is to assure a constant supply in distribution channels. Some of the factors that

contribute to high finished goods inventory'. Errors caused in forecasting

Eagerness to satisfy the customers

Economic batch production

Multiply stock points

Imports

Distribution system

Packing materials:

Packing materials does not add to the value of the product. It protects what it sells

and sells what is protects. Hence this cost comes out of one profit. Some consider

packing material as consumable, the difference being that these are consumables for

marketing subsystem to give a face lift to the product.

Spare Parts:

Spare parts are the important inventory. Their consumption pattern differs from

raw materials, consumables or finished goods conversely stocking policies are' different.

Many problems occur in case of these spares, some are:

> Determination of level inventory for placing replenishment order and the

quality to be ordered.

> The extent of delay in supplies and the extent of variations in demand which

inventory should be able to withstand.

42

Some spares are thus classified into.

■ Capital Spares

■ Insurance Spares

■ Routable Spares

■ Maintenance Spares

■ Over hauling Spares

Capital spares and insurance spares are those spares of the machine, which have

nearly equal life of the machine. Characteristics of these spares are.

♦ These are held as contingency against any break down

♦ Their consumption is very low

♦ The procurement lead time is very high

♦ Normally these spares are procured along with original equipment.

Maintenance spares are those which have definite requirement compared to capital

and insurance spares. These are required for the replacement of the old parts caused due to

replacement of wear and tear; they are fast moving and are repetitive.

Ratable spares are costly so they are not usually scrapped but they are prepared

and stored for use. The demand for such a spare part for any single machine is low but for

group of machines is high. Queuing theory is practiced to control routable spares.Over

hauling spars include those items which are specially needed during regular overhaul.

These items are like valves, couplings etc, the strategy that adopted to control these

spares are based on past consumption. Therefore initial provisioning either when

starting a new industry or machinery is problematic.

PHASES OF INVENTORY MANAGEMENT:

> Maintaining continuity of production or operation buy enduring continuous

supply of standardized raw material etc.,

> To take enough care to avail of the concessions available in purchasing

43

materials.

> Enduring that materials of requisite specification and quantity have been

received in good condition.

> Establishing thing schedules, procedures for new orders.

> Formulating inventory receipts issue and storage procedures and proper

recording of all transactions.

Cost of holding inventory:

Inventory cost

Carrying cost

Ordering cost

Costs of running cost

Stock out cost

Ordering, shipping and receiving costs

Inventory cost: the goal of inventory management is to provide at the lowest total cost

the inventories required to sustained efficient, first step in operations the inventory

management is to identify all the costs involved in purchasing and Maintaining

inventories.

Carrying cost: carrying cost generally raise indirect proportion to the average Amount

of inventory carried. Inventories carried in turn, depend on the frequency With which

orders are placed to illustrate if a firm sell's units per year, and if it Places Equalized orders

"N" times per year, and then S/N units will be purchased with each order.

Ordering cost: although carrying cost are generally entirely variable and thus raising direct

proportion to the average size of inventories, ordering costs are often fixed for example the

costs of the placing and receiving an order-inter office memos, run and taking delivery are

essentially fixed regardless of the size of an order.

Stock-out-costs: they are invisible yet very important Costs which a company has To incur

if there is a stock-out resulting in a loss of production these costs are in the Form of loss

of profit on lost production loss of goodwill, adverse impact on future Orders and temporary

adverse, effects on machinery because of lack of use etc.

44

BENEFITS OF HOLDING INVENTORY:

The basic function of inventory is to act as a buffer to decouple or uncouple the various

activities of a firm so that all do not have to be purchased at exactly the same rate the key

activities are:

1. Purchasing

2.Production and

3.Selling

Since inventory enables uncoupling of the key activities of a firm, each of them

can be operated at the most efficient rate. This has several beneficial effects on the firms

operation. The term uncoupling means these interrelated activities can be carried out

independently.

BENEFITS IN PURCHASING:

If the purchasing of raw materials and other goods is not tied to production/sales i.e a

firm can, e independently to ensure that most efficient purchase, several advantages

would be available. In the first place, a firm can purchase larger quantities than is warranted

by usage in production or the sales levels. This will enable it to avail discounts that are

available on bulk purchases moreover it will lower the ordering costs as fewer acquisitions

would be made. There will, thus, be a significant serving in costs. Second, firms can

purchase goods in anticipation of announced price increases. This will lead to a decline

in the cost of production. Inventory will thus serve as a hedge against price increases as well

ass shortage of raw materials. This is a highly desirable inventory strategy.

Benefits in production:

45

Finished goods inventory serves to uncouple production and sales. This enables

production at a rate different that of sales. That is production can be carried as a rate

higher or lower than the sales rate. This would be a special advantage to firms with a

seasonal sales pattern. In this case the sales rate will be higher than the production rate

during a part of the year and lower during the off season. The choice before the firm is

either to produce at a level to meet the actual demand i.e., higher production during

peak season lower production during off season, produce continuously throughout the

year and build up inventory which will be sold during the period of seasonal demand.

The former involves discontinuity in the production schedule while the latter ensures

level production.

BENEFITS IN SALES:

The maintenance of inventory also helps a firm to enhance its sales efforts, if'

there are no Inventories of (finished goods the level of sales will depend upon the level

of current production. A firm will not be able to meet demand instantaneously. This will

be a lag depending upon the production process, if the firm has inventory, actual sales

will not have to depend on lengthy Manufacturing process. Thus, inventory serves to

bridge the gap between the current production and actual sales. A related aspect is

inventory serves as a competitive marking tool to meet customer demands.

INVENTORY CONTROL:

The aim of production activity is the timely manufacture of desired product of

specified quality in proper quantity at least possible cost. To achieve production goals,

the production manager must simultaneously attempt to maintain stable operations,

provide customers with adequate service and keep investment in stock and equipment at

reasonable levels. Beyond the problems of planning, scheduling and expecting

production and problems of inventory and distribution management, there are certain

questions that business must face: Where shall we maintain, how much stock?

Who will be responsible for it?

46

Why do we have inventories?

The basic problem of inventory policy is to strike a balance operations savings

and the costs arid capital requirements associated with larger stocks business

management now has wide range of range of techniques for attacking

production control and inventory control.

CONTROL SYSTEM APPROACH:

Control over inventories means goggling range and intermediate planning of

Production operations. A comprehensive and integrated control system, including

production Planning, scheduling and control must be closely coordinated with other

planning such as cash planning, capital budgeting and sales forecasting. The essentials

of inventory control are:

Long range planning, to budget capital for facilities and inventory investment

intermediate policy making and planning as a basis for short-term scheduling Short-term

scheduling of work assignments to keep facilities and men employed and stock Balanced in

view of demand for output as it actually materializes.

FACTORS INFLUENCING INVENTORY;

There are various factors both inertial and external which have influence on

Inventory. Internal conditions start right from forecasting a requirement such that required

Materials is made available only a right time. External conditions including supplies lag

time, Environmental conditions, govt rules and regulations, credit availability, market

conditions etc, all Factors which have influence on the inventory could be summed up in

to following categories:

• Lead time

• Relevant costs

• Ordering costs

47

• Inventory carrying

• Costs under

• Stocking costs over

• Stocking costs

• Service level

Obsolete inventory

• Scrap.

LEAD-TIME

Lead-time is defined as the period that elapses between the 11.ignition need

and its fulfillment, in any industrial network one has to follow lowing broad pattern

before ordering item and making it available.

Forecast the requirement Equation the exact quantity Selection of sources of

supply Negotiation of rates Annual ordering Follow up with supplies Receiving

materials Inspection of materials Proper warehousing Preservation of material Proper

issues and recording Payment of suppliers recording

Payment of supplier's bills

Internal lead-time

External lead-time

Transportation lead-

time

inspection lead-time

I lead time, which is knows as administrative lead-time starts from identifying the

need for till all order is placed for that time. Requirement for an item has to he first

identified before it erred. It may take a long time before an actual need is finalized. The

first activity is location of: which can be done by data bank, magazines etc. The next

activity is negotiating the terms and ions o£ supply thirdly, placing an order with the trite

source. Internal lead-time ceases once order reaches die supplier and confirms it.

External lead-time: which is also known as manufacturing lead time, depends on the

48

business and the taken to manufacture and dispatch a product.

Transportation lead-time; is the period from the time a manufacturer dispatches the

goods to the time receipt of goods at stores of tiie purchaser.

Inspection lead time: is the one where materials that comes to the stores, has to be

checked to find out whether they are supplied as per the requirement of the

organization and as per die stipulated orders.

RELEVANT COSTS:

There are several factors, which are affected by the conditions of. Excessive 0r

insufficient inventories, it is for many reasons stocked inventory will be useless that we

high cost. In generate cost of inventories will be under these classifications as:

«• Ordering cost(U)

* Inventory cost{I)

* Under stocking cost(KlJ )

* Over stocking(KO)

Ordering cost is the one in which, each order that is placed on the supplier costs

Money, since lot of executive time, stationary, salary and may be less in those of cash

purchases. Ordering costs is the sura resultant of costs of fulfilling various activities that

go into finalizing an order. The cost of ordering (U) will include costs due to:

* Stationery, typing, dispatching of orders

* Salaries and wages

* Receiving and inspection costs

* Cost of source development

The cost per purchase order can be calculated as

49

Total cost included on above leads

Cost per purchase order = Total number of orders.

Inventory carrying cost is the costs, which involves in the storage of materials. This cost

can be calculated computing the following costs: interest rate Obsolescence cost

Overhead costs

Insurance costs Under stocking costs (KU), are due to demand of an item

and not being provided for Production, if an inventory is not made available to

production there would be loss of Production, sales, good will. Computation of KU

is very problematic.

Over stocking cost (KO), is the cost, which incurs high expenditure, it

involves loss of utilizing Company's valuable fimd. Over standing cost is therefore a

cost basically arising due to Opportunity lost due to the investment in the inventory for

a longer period.

SERVICE LEVEL:

Service level is a relation between under stocking cost and over-stocking cost of

keeping an inventory and being teed, or keeping an inventory and demand for that item

arising leading to stock out.

KU Service level = KU+KO

Obsolete inventory:

Inventory that is purchased and stored and which Is of no importance for the

organization is termed as obsolete inventory. These can be due to anyone of the

following reasons.

• Technology change

• Changes in product Jfne

50

• Changes in machines

• Changes in design and layouts

• Overbuying

SCRAP:

When utilizing the input it is not possible to utilize 100% area, so certain Scrap

generation is inevitable. Manufacturing process itself generates scrap. One may'" generate

scrap in the form of packing items, gunny bags, papers* which has resale value.

INVENTORY CONTROL TECHNIQUES:

• ABC analysis EOQ

analysis

• HML analysis FSN

analysis

• Two bin system

• MRP analysts

* VED analysis

* SED analysis

* MAX analysis (MAX-MIN).

ABC ANALYSIS (ALWAYS BETTER CONTROL):

Where there are a large number of items in the inventory, it becomes essential to

have an efficient control over all items of stores. How ever comparatively greater care

should be given to the higher values.

The movement of certain service concern may consist of a small number Of

51

items a minor portion of inventory value. The modern technique for collecting the

Inventory is a value item analysis popularly known as ABC analysis that attempts to

relate how the inventory value is concentrated among the individual items.

This analysis is based on praetor's law, which states mat a fewer item of high

Usage having high investment value should be paid more than a bulk of items having

low Usage value and having a low investment in capital.

Category-A, which includes the most important item which represents about 60 to

70% of stores but constitute only 10 to 15% of items.

Category-B, which includes less important items representing an Investment

value of 20 to 25% and constitutes a similar % of items.

Category-C, which consists of the least important items of stores and Constitutes 60 to 70%

of stores hern representing only a capital investment between 10 to 15%.

STEPS IN ABC ANALYSIS:

1. The money value of the items of materials chosen should be calculated by

multiplying the quality of each item with the price.

2. The item should be re-arranged in the descending order of their values

irrespective of their qualities.

3. A running total of all values and items will then be taken and the figure so

obtained should be converted into % of gross total.

4. It will be found that a small number of fust items may amount to large % of the

total value of items. The management then will have to take a decision as to the %

of the total value, which have to be converted by A, B and C categories.

ADVANTAGES OF ABC ANALYSIS:

It ensures closer control on costly items in large amount of capital invested.

Helps in developing a scientific method of controlling inventories HI.

Inventory control at minimum oust.

Parameters for ABC classes of items is inventory:

52

Class Control Lot size buffer stoek

A very close small very small

B medium medium moderate

C loose medium large

M& analysis (economic order quantity):

A strategic factor in the inventory managsment is the consumption of the

optimum of normal purchase order. Decision about how much to order has great

significance in inventory agreement. The quantity to be purchased neither should neither

be small nor big because costs of buying and fling material are very high-

Economic order quantity—root 2D co/cs

D=demand is the period. Co=cost placing an

order. Cs=storage cost 0 carrying cost (OR)

EOQ=economic ordering quantity (or) the optimal quantity to be ordered each time

an order is placed.

F=fixed costs of placing and receiving an order.

S=annual sales in units

C=annual carrying costs expressed as a percentage of average

Inventory value P= purchase price the firm must pay per unit

of inventory.

Economic order quantity is the size of the lot to be purchased which is economically die.

This is the quantity of the material, which can be purchased with minimum casts. HMOL

ANALYSIS:

This analysis is based on cost of items. H, M and L alphabets represent items

having highest cost, medium cost and lower cost

FSN analysis:

Under this analysis the quality and rate of consumption are to be taken in to

53

consideration. Here 'F' stands for fast moving items; 'S' stands for slow moving items

and 'N' for non-moving items.

TWO-BTN-SYSTERA:

Under mis system all inventory hems are grouped under two categories. In the first

group, a sufficient supply is kept to meet (fee emmvd lequkement over a designed period

of time, ki fee second group or hm, a safety stock is cnamtamed to most the

requirement of inventory at times when stock in the firs, bin is exhausted and

reordering occurs.

MRP ANALYSIS:

Material requirement planning is a computer based inventory and production

schedule system mat considers all dial go into completing an order for large for shop

situations whets many products are manufactured in periodic lots via several

processing steps.

VED ANALYSIS:

The VED analysis is used generally for spare parts. The requirements and

urgency of is different from that of materials. Spare parts are classified as vital (V),

essential (E), & desirable (D).

SED ANALYSIS:

This analysis is based on the availability of materials and is useful where items are

scarily available. *S' stands for scarce items/D' for difficult hems and ‘E” stands for

easily available in the market.

PURCHASING:

Purchasing is the first phase of materials management .it means procurement of

goods and services from same external agencies. The objective of purchase

department is to arrange lise supply of ?

finished goods required by the organization to produce the desired products from

agency or source outside the organization.

According to Aiford and beauty,"porchasing is the procuring of materials, supplies,

machines tools and services required for equipment, maintenance and operation of

manufacturing plant".

54

OBJECTIVES:

Purchase of satisfactory material

To control the quantity of material

Proper negotiations with suppliers

Control proper use of materials

Coordination with other departments

Maintenance of good will

Exploration to locate new suppliers

STORES CONTROL

Stores keeping:

it is servicing facility, inside an organization responsible for proper storage of

the material and then issuing to respective departments proper requisition. Those items

which are not in use for some specific duration.

According to Maynard,'' the duties of store keeping are (i.e.) to receive

materials, to protect memo white in storage from damage and unauthorized removal to

issue me materials in the right quantities, at the right time to the right place and these

services promptly and at least cost".

Receiving:

The item order by purchase department is receive by this section. The supplier

delivers the items along with order documents to receiving section of stores

department The materials when received from the supplier are under the" temporary

custody of receiving department. The materials are usually accompanied with one or

both of the following documents.

1. Advice of dispatch, which is sent by the supplier dispatch of materials from

his premises.

2. Delivery note of packing note (challenge), which is received from the carries

that transport and deliver the materials.

3 On receipt, the materials are checked with reference to the copy of fee

purchase order in possession of receiving ikpatmzsii. fee quantity received is

55

verified with the quantity order She quality specified on the purchase order is

checked in inspection department

VALUATION OF MATERIALS RECEIVED:

The general role is that the invoice price as billed by the supplier should be

accounted for in the ledger. Certain problems regarding u\e accounting of receipts are

specified as:

Cash discount, is a discount allowed by the supplier if payments of bills are

made with in the period specified.

Trade and quantity discount is the amount of those discounts is already deducted

from the invoice price no difficulty arises in their accounting.

Stores section:

This is a place where all materials received by the stores department are kept

with protection against deterioration and pilferage. They are stored in such a way that

lmeir location is easily identified at the time of issue.

The various stores operations are

• Ocation in stores section

• Layout of stores section

• Stores equipment

• Materials handling facilities

• Identification of stores.

STORAGE CONTROL A METHODS OF PRICING ISSUES:

The stores procedure mainly consists of stores control and issue control.

STORES CONTROL :

After the materials on cider are received, checked and approved, the stores

keeper takes them on charge. He is responsible for placing him materials in their

appropriate places inside the store and for ensuring that (hey are maintained in good

condition during storage till required for utilization in production. The control during this

stage may be called storage control.

56

ISSUE CONTROL:

Materials when required for consumption are issued to the departments

concerned as per authorized quality and under proper authority. The issues are priced and

the values there of charged to the costs of the products. Any surplus is returned by die

departments to the store and is property account

CLASSIFICATION & CODIFICATION OF MATERIALS:

For the purpose of identification and for convenience in storage awl issue, each

item of stores is given a distinct name. Similar items are. classified under subgroups and

a number of subgroups are classified under main or major groups.

Classification of stores should be accompanied with a suitable system of

codification. Codification is the procedure foi assigning symbols, for each item in

accordance with a proper arrangement

CODIFICATION HAS FOLLOWING ADVANTAGES:

* Ease in identification of stores

* Writing full names and particulars of materials on documents ss dispensed with

so that clerical work is reduced

* In mechanized accounting, codi fication is essential

* Quoting symbols along wife nomenclature ensures clarity

* Ensures secrecy

Three methods of codification are:

Numeric Alphabetic and

numeric

Perpetual Inventory System;

57

It is also known as automatic inventory .die control of materials while in storage is

affected through what is known as perpetual inventory. The two main functions of

perpetual inventory system are:

Recording stores receipts and issue so as to determine at any time the stuck in

hand, in quantity or value or both with out the need for physical count of stock.

Continuous verification of physical! stock with reference to the balance

recorded in the stores records at any frequency, as convents for the management

IMPORTANCE OF INVENTORY MANAGEMENT

Importance of inventory management considers two companies.

1. WAL-MART

2. BOEING

TOWAL - ART:

The world's largest retailer, inventory control is its business. Wail-mart can not

succeed if its stores do not have toe items that its customer wants at the time they

want them and at the price to mak& a sale. To ensure that its customers are satisfied*

wal-mart uses a sophisticated point of sale inventory rnanagement system to record

each sale and to automatically reduce that items inventory balance.

TO BOEING:

The world's largest commercial aircraft manufacture, inventory management

means something totally different in manufacturing the inventory system is integrated

with production systems, so firms must strive for joint inventory production efficiency

"Besiege* which was %"mg high is the airline expansion years.

Where is Boeing to find savings "of this magnitude? !». asm, H i. ilohcly

examining its inventory and production systems.

ACCOUNTING FOR INVENTORY:

When finished goods are sold, the firm must assign a coat ul goods sold, fhe cost

of goods sold appears on the income statement as an ettfwnw loi llir |n:iincl and the

balance sheet inventory account is reduced by a like amount

58

Four methods can be used to value the cost of goods sold, mid lit IK in value:

remaining inventory:

1. Specific identification

2. First-in-first out (FIFO)

3. Last-in fast out (UFO)

4. Weighted average.

1. SPECIFIC IDENTIFICATION:

Under specific identification a unique cost is attached In cadi item in

inventory. Then when an item is sold the specific amount. This method is only when

the items are high imid move relatively slowly, such as would be the case for an

automobile dealei

2. First-in-first out(FIFO):

In the "FIFO" method the units sold during a given period me assumed io lie the

first units. That was placed in inventory. As a result, the rosi is based on the cost of the

order. Inventory consist of the newer goods.

3. LAST-IN FAST OUT (LIFO):

"LIFO" is the opposite of "FIFO" .the cost of goods i.s based mi the lasl units placed

in inventory while the remaining inventory consists oi the liisl goods placed in

inventory.

4. Weighted average:

The weighted average method involves the computation of the weighted

average. Units cost of goods available for sale. From inventory iind this awiajit' cost

is then applied to the goods sold to determine the cost of goods sold.

OTHERS TOPICS IN INVENTORY MANAGEMENT

• Inventory control system

• Just-in- time inventories

• Out-sourcing

59

1. INVENTORY CONTROL SYSTEM:

Inventory control system runs the gamut from very simple to cxiianVly

complex, depending on the firm and the nature of its inventories. Computerized Systems:

Large companies employ computerized inventory control system. The computer

starts with an inventory count in memory as with drawls lire made they are recorded by the

computer, and the inventory balance is revised,

2. JUST- IN -TIME INVENTORIES:

A relatively new appro Ti to inventory control called just- in-liinc is being used by

more and more firms throughout the world. Toyota, which pioneered the concepts, provides a

good example, just-in-time system art. also being adopted by smallei thins infect, some

production experts say that small, companies are better positioned than large ones to use

just-in-time methods..

3. OUT-SOURCING:

Another important development related to inventories is out-sourcing which is the

practice of purchasing components rather then making them in house, it would be

increasing its use of out-sourcing is often combined with just-in-time systems to reduce

inventory levels.

INVENTORY MANAGEMENT

Inventory is list of movable items which are necessary to manufacture a

product and to maintain the equipment and machinery in good working order.

Inventory is actually 'money' kept in the store room in the shape of raw materials,

spaces, tools, finished stock and work in progress. CLASSIFICATION OF

INVENTORY

1. Raw Materials: They include materials and semi finished products, supplied by

another firm which is raw items for the present industry. These materials are

processed to obtain finished goods.

2. In process inventories/work in process: They are semi finished goods a various

60

stage of manufacturing cycle.

3. Finished Inventories: They are completed products awaiting sale. They are e final

output of the production process in a manicuring firm.

4. Indirect Inventories: They include lubricants, spare parts, needed for proper

operation, repair an/maintenance during operating cycle etc.,

BENEFITS OF HOLDING INVENTORIES.

1. Avoid losses of production: Holding inventories is necessary to continue smooth

production an sales. For smooth production it is necessary to hold adequate raw

material and spare parts, lubricants etc.

2. Reducing Ordering Costs: More the amount of inventory slocked up, lesser will be

number o orders placed during a yea. By placing a few large orders instead of

many small, orders, variable ordering costs can be saved.

3. Avoiding Los of Sates; Loss of sales can occur as a consequences of inability to

achieve production targets due to inadequate supp'y of raw

because of inadequate stock of finished goods for sales. Thus adequate stocks of raw

materials and finished goods have to be maintained o avoid loss of sales.

4. Speculative Motive of Holding Inventory: In a constantly changing price scenario,

effected by availability, it is necessary to hold adequate amount of inventory, Fir

5. ms hold large stocks of raw materials, if materials are likely to b in short supply and

prices may rise. Similarly, large finished goods slocks ma be held to take advantage of

rising prices.

RISKS & COSTS INVOLVED IN HOLDING INVENTORIES

1. Price Decline: If prices of inventory decline then the value of inventory held reduces.

Under conditions of declining prices, large inventory holdings are not advisable.

2. Loss Because of product deterioration: improper storage conditions a stocking

up of large quantities of inventory am cause losses.

3. Obsolescence: Under conditions of changing technology, tastes of customers, changing

product design etc. Stocking large inventory could lead to loss due to obsolescence.

4. Holding / Carrying Costs: Even though large inventory orders could reduce ordering

61

cot, carrying costs of holding larges stocks increase. This includes storage costs,

insurance, shortage, costs o funds tied up in inventories.

MANGEMENT OF INVENTORY

Inventory constitutes a major potion of working capital of a firm, this is

specially true with a manufacturing concern, which has continuous production system

management of inventory covers a large numbers of issues including fixation of

minimum and maximum inventory levels, determining size of inventory to be carried,

providing proper, storage facilities, maintaining proper stock records, determining issue

price, keeping check on obsolescence, setting up effective information system with

regard to inventories. Management of Inventory also requires, ensuing continuous

supply of materials to production departments. Thu avoiding production hiccups,

maintaining sufficient stocks of both raw materials and finished goods and keeping

investment in inventor}' optimum level.

DETERMINATION OF EOQ:

Determination of quantity for which order which order should be placed is an

important task of inventory management. EOQ is the size of the order, which is most

economical. It I determined by "taking into account both carrying costs and ordering

costs.

Ordering costs are costs of placing an order and securing the supplies. They

Include costs of receiving quotations, processing purchase requisitions, expediting

Purchase orders, receiving material and inspecting it, processing seller's invoice.

Ordering costs decrease as order quantity increases, because number of orders placed will

come down..

Carrying costs are costs involved in keeping items in stock, it includes Interest

on investment, obsolescence losses, storekeeping costs, insurance etc. Large the inventory

holding higher will be carrying costs. These are cost of holding Increase with every

increase in quantity purchases.

The economic order quantity is the quantity of materials ordered at which total costs

i.e., ordering costs plus carrying costs are minimum.

E.O.O=2.U.O/C

62

Where, U = the total quantity used annually 0 = ordering cost per order C = Annual

carrying cost of one item

MIXIMUM AND MINIMUM QUANTITY OF RAW MATERIALS:

Maximum quantity of raw materials is the maximum limit of inventory, which can

be kept in the stores at anytime. Minimum quantity of raw materials is the Minimum

limit of inventory, which must be kept in the stores at anytime. The Purpose should be

to hold enough and not excessive stock of material.

INVENTORY MANAGEMENT IN SAT LIMITED

The company SAT limited, is manufactures of hank yam and cone yam

polyesters yarn under a continuous productions process. The three major raw

materials required are purified and graded bf the skilled workers. Mono ethylene

glycol chemical are subjected to a process of etherification and polycondensation process.

Fiber is obtained from for teen spinning lines, which are fully operational now. Polyester

chips, which are also obtained in the production process, can also be used as raw materials

for further processing into polyester yarn. Of the three raw materials cotton and viscose and

polyester, any can be used as feed mater SAT limited is only company in India with

continuous textile yearning direct spinning technology having

Dual feed raw material system. This makes it convenient to shift from one raw

material to anther, depending upon availability and requirement.

Besides the above- mentioned chemical, the entire production process requires a

number of auxiliary materials, catalysts, packing materials and utility materials.

1. Direct materials include cotton, viscose and polyester and etc.

2. Some of the auxiliary materials used are ventol, silicon oil, organic surface Active

agent (OSAA), Isopropy alcohol, Afro tin, cleaning agent etc.

3. Catalysts include Antimony trioxide and phosphoric Acid.

4. Packing materials like corrugated boxes, PF woven sacks, paper tubes, LDPE film

covers, Gap plates, adopters etc.

5. Utility materials include furnace oil, hydrogen gas cylinders, heat transfer, oil, heat

transfer Qulin etc.

Hank yarn, cone yam and polyester yarn are finished goods. However when required for

captive consumption, chips are included in work-in-progreys inventor.

63

SOURCES OF RAW MATERIALS AND AVAILABILITY

Sources of Major indigenous raw materials are in Southern region, particularly The

areas surrounding Andhra Pradesh, Karnataka, Tamilnadu and local areas like Guntur etc.

the destination place is the factory at Venkatarayapuram, Tanuku West Godavari district...

The main raw materials for the manufacture of yarn products are cotton, viscose

and polyesters. The company has been operating on cotton from its inception. The major

suppliers of cotton were from formers.

Due to non-availability of polyester as supplies stopped form RIL, the sole

manufacturers of polyester in the country, the company had to shift its feed stock from

cotton to manufacturing Co.Ltd.

SAT LIMITED REASONS FOR FOLDING INVENTORIES

In actual practice, there is generally a fluctuation from optimum inventory holding levels.

This is because, the amount of inventory to be stocked depends upon a number of external

and internal factors which may be either industry specific or firm specific. Some of the

holding inventory is mentioned below.

1. Availability of raw materials fluctuates internationally. In case of the raw material

cotton, the availability has gone down drastically and the company has had to shift

its raw material from polyester to cotton. Th<»re being a risk of

short supply of the two raw materials, the quantity of raw materials and chemicals

have been stocked up at reasonable levels. 2. Raising price of raw materials as a

consequence of the availability crunch has also led to stocking large quantities of

inventory.

POSITION OF INVENTORY FOR THE FIVE YEARS

64

Particulars 05-06 06-07 07-08 08-09 09-10

Raw material inventory & other

Consumables (imported &

indigenous Store s& spares «% loose

1349.56 162.53 1818.69 685.43 797.79

Stock in process 99.43 88.77 158.19 190.59 160.01

Finished Goods 155.36 98.29 211.96 275.03 160.94

Total inventory 1604.35 349.59 2188.84 1151.05 1118.74

During the five years of the study it is found that the inventory. level in S.A.T. Ltd, in

increasing. In that major portion of invest is in raw material due to increasing

productions the company invested high accounts in purchasing raw materials. The

company is spending sufficient funds for purchasing raw material, according to

production planning, it is a good sign for the company.

1. Captive consumption of polyester chips which is a semi finished product for the

company and can be a raw materials for manufacturing polyester yarn was taken up.

This led to increase in work-in-progress inventory as or. 31-3-99.

2. captive consumption lof chips was also a consequence of availability crunch of

raw materials.

3. Finished stock, inventory also increased as on 31 -3-1999This was done in

anticipation of rise in prices of cotton, viscose and polyester form April On words

to task advantage of increasing prices, finished goods were stocked up.

4. Availability of funds with the company increased over the three years staring from

April 1997. Funds were raised by way of issue of shares during ihe year 1996 and in

the next year long term loans from banks and by way of debentures on account of

the expansion of the present and one more proposal to start a new plant in he same

location. Excess funds were deployed for short term uses, including investment in

inventory, which incidentally was facing an availability crunch.

65

RAW MATERIALS DEPARTMENT AND ITS FUNCTIONS

The activity of the raw materials department is to procure materials of right quality

in right quantity at aright time from right source at competitive prices. The department

functioning from Head office in Venktrayapuram, Tanuku procures raw materials,

auxiliary, utility and packing materials.

Planning procurement of inventory is based on requirement of raw materials.

Requirement of raw materials is arrived at based on operating level of production and

procurement is planned accordingly.

The key factor is the throughput level of the polymerization section and the cotton

mix in spinning section. Throughput level will depend on market demand for chips and

yarn. While arriving at material requirement, minimum inventory levels fixed are kept in

mind.

Inventory requirement plans requirement plans are prepared on a monthly basis of

the raw materials chemicals. Quarterly plans are prepared for packing materials.

PROCUREMENT OF RAW MATERIALS.

The specification for the materials required is obtained from the respective

departments. The specifications will depend upon the requirements of the various

departments including chemical lab, spinning department, mechanical and utilities

department, polymerization department. On receipt of the specifications, the respective

sources will be tapped.

Vendor evaluation has to be conducted carefully before sourcing the materials. This is

done on the basis of recommendations from collaborators and assessment of vendors who

have supplied materials for one year. Wile introducing new vendor's samples sent b vendors

66

along with sale specifications are analyzed. Samples are sent to concerned departments for

acceptability. Clarifications are made whenever necessary. Quality of materials is

continuously monitored.

Usually more than one vendor is selected. Allocation of quantity to each vendor

is done on basis o availability and price compositeness.

In case o imported materials, price negotiations are carried out through telephone,

telex or fax to arrive a final price, in case of indigenous materials,

communicated as and when there is revision in prices, Payments for most purchases are

made through letters of credit, which is the payment mode That most suppliers prefer.

Issues of materials are made to the various departments as per their

requirements. Records of all receipts, issues and balances of materials are kept in a

systematic manner in stock sheets giving details of quantity, per unit price and total

value of each. The textile industry is faced with large price fluctuations. Thus, a

method of pricing and valuing inventory, which smoothens the effect of such

fluctuations, is necessary. This explains the reason for valuing materials at weighted

average price. All issues and balances of materials are valued, taking into account the

weighted average price of previous balance and new receipts.

DETERMINATION OF LEVELS OF INVENTORY TO BE PROCURED AND

HELD

One of the important concepts of inventory control is the determination of

economic order quantity, which depicts a trade off between inventor carrying costs and

ordering costs. However, this concept can be applied under certain conditions, which

are:

1. The firm knows with certainty, the annual usage or demand of the particular

67

items of inventories.

2. The rate at which the firm uses inventories or makes sales is constant

throughout the year.

3. The orders of replenishment of inventory are planned exactly when inventories reach

zero level. Inventory is available and socks arc replenished immediately.

However, in a practical situation like the once faced by SAT limited, conditions are

not certain. Various factors like price of raw materials, availability, fluctuations in

production etc., have to be taken into account while procuring inventory. Besides, the above

mentioned assumptions o not apply in practice.

1. EOQ doe not take into account price of inventory. In practice, however, prices

ply an important role in procurement of inventory, If prices of inventory are

likely to go up, larger inventory stocks are maintained.

2. Availability is another factor, which drives the inventory department to make

changes in quantities ordered.

3. It is not possible to wait till the inventories reach zero level, fot placing a new order

for inventory. This is because it is not possible to make available. inventory as

soon as orders are placed.

4. Production and consumption is not constant throughout the: year. It fluctuates about

a certain average production of 95 MT per day and a consumption norm for each of

the raw materials used.

5. In an economy of constantly changing prices, ordering costs and carrying costs

fluctuate within a year.

Keeping the above few points in the background while inventory is procured

constantly on the bases of production/throughput levels, there is no economic ordti quantity

level determined to order inventory.

MINIMUM STOCK OF INVENTORY

While arriving a requirement of material due cart is minimum inventory levels. These

levels are decided buy the Chairman, Finance Department executives and are fixed on a

conservative basis. These levels have been maintained for certain major materials.

68

MINIMUM No. OF DAYS INVENTORY NAME OF THE M ATERI Al,

10 DAYS COTTON, VISCOSE

15 DAYS POLYSTER

LEAD STOCK:

Lead stock is the stock maintained sustain the lead period. Lead period is defined

as the time lapsed between placing an order for foods an receiving them. Them time

lapse is caused by various reasons like time taken for communicating lo the supplier,

transport goods, delays in transportation etc.,

Though called lead stock, it differs from the theoretical definition l "stock held to

suffice the lead period". While determining the amount lead stock. Thc company takes

into consideration a number of factors.

1. The company enters into forward contracts for purchase of raw materials. Such

contracts are entered into a few months in advance of actual purchase, in orders the

company a price advance and also to evenly distribute total annual

purchase of raw materials. Thus for deterasiniag lead period and lead stock, the

period for which such contracts are entered tola are lakers Into account

2. A certain margin has to he provided for delays m receipt of goods, especially in

case of imported materials. Itas will be accounted for while calculating lead

period for which lead stock is maintained.

3. The important factor which represents lead stock is the LC lead period refers to

the time period required for me time of credit to be completed. Once the line of

credit is established with the opening of the LC with the bank (opening bank), the

amount of the LC is paid to the bank after a certain period of time, which is the

L.C lead period. Stock equivalent to the LC lead period is always maintained as a

security measure against non-payment of the amount.

The Company has always maintained a lead stock of three months consumption. It

proposes to maintain the same level of lead stock in future.

CHAPTER-IV

DATA ANALYSIS OF INVENTORY MANAGEMENT

69

CURRENT RATIO

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

Current assets=inventories+sundry debtors+cash+other current

assets+loans&advances.

Current liabilities=liabilities other than provisions’

CURRENT RATIO:

Current ratio of sree akkamamba text tiles limited during the period from 2005-2010

YEAR CURRENT

ASSETS

CURRENT

LIABILITIES

RATIO

2005-06 24,00,55,475 10,86,08,776 2.21

2006-07 29,48,96,104 14,41,44,192 2.04

2007-08 35,14,57,352 23,44,66,497 1.49

2008-09 27,24,83,867 13,87,55,340 1.96

2009-10 23,57,84,357 10,97,16,365 2.14

70

INTERPRETATION

From the above graph is .

71

Raw material turn ratio: = RAWMATERIAL CONSUMED

CLOSING RAW MATERIAL

Table: 4.2

YEAR RAW MATERIAL

CONSUMPTION

CLOSING RAW

MATERIAL

RATIO

2005-06 30,56,00,641 11,67,48,925 2.617

2006-07 29,82,89,633 14,33,69,468 2.080

2007-08 35,62,14,552 16,05,86,370 2.21

2008-09 42,63,28,277 4,89,32,124 8.71

2009-10 43,40,67,812 5,95,18,662 7.29

INTERPRETATION :

This ratio indicates the number of times raw material is replaced during the year 2004-

05 to 2006-07. It shows the efficiency of the firm in maintaining the raw materials. The

highest raw materials turnover ratio in the year 2007-08 is 8.71 and the lowest raw material

turnover ratio in the year. 2005-06 is 2.08 in the 2008-09 is 7.29.

Finished goods turnover ratio := COST OF GOODS SOLD

CLOSING FINISHED GOODS

Table: 4.3

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YEAR COST OF GOODS SOLD FINISHED

GOODS

RATIO

2005-06 46,56,57,416 1,55,36,368 30.02

2006-07 45,86,52,104 98,29,528 46.55

2007-08 49,63,80,222 2,11,96,530 23.74

2008-09 60,70,46,176 2,75,03,741 22.07

2009-10 64,48,96,233 1,60,94,861 40.06

Interpretation :

This finished goods turnovers ratio of the company for the past 5 years

had undergone many changes. It records is highest ratio in the year 2005-06 is 46.55

to low level of finished goods as well as increase in sales. The ratio of the current

year is 40.06 times to improve the ratio the firms should try to improve the sales as

well as to maintain less stock.

Working capital turnover ratio's : = COST OF GOODS SOLD

AFTER NET WORKING CAPITAL

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Net working capital: = Current Assets - Current liabilities

Table: 4.4

YEAR CURRENT

ASSETS

CURRENT

LIABILITIES

NETWORKING

CAPITAL2005-06 24,00,55,475 10,86,08,776 13,14,46,699

2006-07 29,48,96,104 14,41,44,192 15,07,51,912

2007-08 35,14,57,352 23,44,66,497 11,69,90,855

2008-09 27,24,83,867 13,87,55,340 13^7,28,527

2009-10 23,57,84,357 10,97,16,365 12,60,67,992

A verage net working capital: = Current assets + Net working capital

2

Table: 4.5

YEAR CURRENT

ASSETS

NETWORKIN

G CAPITAL

AVG NET

WORKINGCAPITA2005-06 24.00.55.475 13.14.46,699 18,57,51,087

2006-07 29,48,96,104 15.07,51,912 22,28,24,008

22,92,24,103.52007-08 35,14,57,352 11,69,90,855

2008-09 27,24,83,867 2,75,03,741 20,31,06,197

2009-10 23,57,84,357 1,60,94,861 18,09,26,325

Working capital turnover ratio : Cost of goods sold

Average net working capital

Table: 4.6

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Working capital turnover Ratio

Interpretation:

This working capital turnover ratio of S.A.T. Ltd sources is continuous increases in

2005-06 to 2007-08. After 2005-06 is turnover. The fluctuations in working capital turnover.

The working capital turnover ratio in the year 2008-09 is 5.115.

Cost of goods sold ratio : = Cost of goods sold

Net sales

Table: 4.7

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YEAR COST OF

GOODS SOLD

AVGNET

WORKING CAPITAL

WORKING CAPITAL

TURNOVER RATIO

2005-06 46,56,57,416 18,57,51,087 2.5068

2006-07 45,86,52,104 22,28,24,008 2.058

2007-08 49,63,80,222 22,92,24,103.5 2.1654

2008-09 60,70,46,176 13,37,28,527 4.539

2009-10 64,48,96,233 12,60,67,992 5.115

YEAR COST OF

GOODS

SALES COST OF

GOODS 2005-06 46,56,57,4

16

61,27,58,697 0.75

2006-07 45,86,52,10

4

64,05,75,306 0.71

2007-08 49,63,80,22

2

67,15,13,057 0.73

2008-09 60,70,46,1

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81,38,44,343 0.74

2009-10 64,48,96,23

3

82,07,74,496 0.78

Interpretation:

Cost of goods sold ratio disclose the information related to cost of goods sold

and net sales S.A.T. Ltd., during the period of 2005-09 in the year highest ratio i.e.

0.78

In the year 2002-03 is 0.66 in the year 2003-04 is 0.70, in the year 2004-05 is

0.75 in the year 2005-06 is 0.71 and in year 2006-07 is 0.73 were recorded.

INVENTORY TURNOVER RATIO

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Inventory turnover ratio:

This is calculated by subtracting closing stock from the opening stock

and manufacturing costs adn purchases. The denominator is the average of the

opening and closing inventories. This ratio indicates the number of times or

stock is replaced die relationship between goods sold adn inventory level. The

Stock turnover ratio.

Table: 4.8

YEAR COST OF

GOODS SOLD

AVERAGE OF

INVENTORY

RATIO

2005-06 46,56,57,416 3,71,73,762 12.522006-07 45,86,52,104 2,20,90,182 20.762007-08 49,63,80,222 2,78,61,179 17.8162008-09 60,70,46,176 4,17,89,486 14.522009-10 64,48,96,233 3,93,29,825 16.39

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Interpretation:

Inventory turnover ratio discloses the information related to cost of

goods sold and average inventory of S.A.T. Ltd., during the period of 2004-05 to 2008-

09 in the year 2005-06 is 20.76 this is the highest value.

CHAPTER-V V

FINDINGS

1. There is a lack of inventory classification system based on a variety of practical

norms like consumption rate importance in production.

2. The system computers must be further improved which will reduce workload is not

any proper policy for control inventory norms. For example: consumption rate.

3. The codification followed has resulted in frequent misunderstanding of material

requisition orders.

4. There is no proper and good communication between the purchases and stores

department, which cause procedural delays.

5. Conversion period was also varying from time to time that is conversion from raw

material to finished goods.

6. The company is not follows the EOQ (economic order quantity) in issuing the raw

material.

7. Company is follows FIFO (first in first out) to issuing the raw materials to the

production, weighted average method for issuing spares, and remaining is issued at

valued at cost.

8. The company has been minimizing the investment to maximizing the profitability.

9. The company has been maintained 3 types of inventories. Such as, ABC categories

10. Materials department and Bin cards system maintain in SAT Limited to control

the inventory.

11. The company maintains separate accounts for spares, chemicals and various

categories of inventory.

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12. The SAT Limited pays the sales tax at four percentages (4%) and Excise tax at various

percentages such as (8%, 10%, 12%, 14%, 16%, 18% and 25%).

13. The company follows the MOD VAT scheme. This scheme was introduced by the

central government. The main object of the scheme is pay the single tax rather than

various taxes.

14. The company implements the SAP (system application program) planning by June

2010.

SUGGESTIONS

1. Finding of items that reached the re-order level and raise the procurement of Indent

is done by the stores clerk. But this can be done by the system itself by setting the

appropriate system software programmed. It will reduce the workload.

2. Investment in fast moving and non-moving items is high and it must be reduced

freely available items are also maintained at stock levels. Excess investment in the

available items must be reduced as the transportation is at advanced stage. So no need

to maintain them at large quantity.

3. Centralization of stores in names itself indicating, but actually there is a diversified

store located at different places, which will lead to lack of communication and high

overheads and maintained charges. So they must come under one roof.

4. Simple codification procedure may exist of correct the occurrence in the existing

system.

5. Suppliers are located at a distance from the company. Suppliers are scattered all over

North India that resulted in higher lead-time. So there is a need to locate the local

suppliers.

6. For efficient inventory management proper item classifications system is necessary

that is establish of ABC and VED analysis.

7. Conversion period of raw materials to finished goods is varying from time to time.

This variation can be reduced by better co-ordination of the activities of all

departments concerned.

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8. The sundry expenses like telephone charges and traveling expenses must reduce

the ordering cost. _-

9. For effective inventory management following techniques have to be followed

• VED analysis - vital, essential and desirable categories

• F.S.N analysis—fast moving, slow moving and non-moving,

• HLM analysis— high cost, low cost, and medium cost.

• SOS analysis— seasonal and off- seasonal analysis.

• GOLF analysis- government, ordinary, local and foreign sources of

availabilities of inventory.

To use the old material or FIFO (first in first out) first the storage godowns must

have two-way door systems, through one door storage is loaded and from the other

storage is unloaded of raw materials.

All business and small large must manage the company data in a fashion that

always the business to run smoothly. Modern business consists of a set of highly

integrated activities. It requires continuous between the top level management and

various departments like marketing, finance, purchase, supplies and external

consultants, Govt Authorities, most of this involves huge amount of paper work ,

accounting and requires extensive human interaction under strict supervision ,

computerizing is the process of automating the standard business computerization

allows optimum use of available resources and also in predicting future trends.

Almost 90% of the industry uses computer for various activates like production,

planning and control, scheduling, inventory control, accounting and financial

management , payroll pricessing , Human Resource Department and providing

several, other control information for management .A fundamental change occurred

in the way of business go about using information system and technology.

This study is carried out with the prime objective of understanding the inventory

management practices of SAT Ltd., inventor)' management refers to an optimum

investment in inventories. It should be neither inadequate nor excessive, this study

mostly concerns the inventory decisions of SAT Ltd., that is how much to order, that

is, what is the optimal quality of an item that should be ordered, when should be order be

placed and also how much safety stock should be kept.

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Thus what quality of an item in excess of the expected requirement should be held as

buffer stock in anticipation of the variations in its demand and or the time involved in

acquiring fresh supplies is the essence of inventory management.

Purchasing procedure and storing procedure of raw material, Work-in-process and

finished goods in SAT Ltd., the study also relates to such aspects as which type of

materials are used and which type of inventory management techniques are used to

exercise the inventory control.

Inventory management techniques include various aspects as Economic Order

Quantity, Safety stock and Re-order point which is employed to regulate the

inadequate and excessive inventory in SAT Ltd.

BIBLIOGRAPHY

ANNUAL REPORTS IN SRI AKKAMAMBA TEXTILES

FINANCIAL MANAGEMENT L.M. PANDY

FINANCIAL MANAGEMENT R.K. SHARMA SASHI GUPTHA

FINANCIAL MANAGEMENT S.N. MAHESWARI

FINANCIAL MANAGEMENT PRASANNA CHANDRA

FINANCIAL MANAGEMENT EUGENE.F BRIGHAM AND LOUISC.

GAPENSKI

COST AND MANAGEMENT ACCOUNTING M.RAVI KISHORE

JOURNELS SOURCE :

Annual Report of SAT

SAT PUBLISHED JOURANLS AND MAGAZINES

THE MANAGEMENT ACCOUNTS JOURNALS

WEBSITES:

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WWW.SREEAKKAMAMBATEXTILESLIMITED.COM

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