Corrected Project Report 3-01-2011

CONTENTS

Chapter – I :

Introduction of research topic

Introduction Objective of the Study

Limitation of study

Chapter – II :

Research Methodology

Research methods

Sources of Data

Chapter – III :

Theoretical Framework of Inventory Management

Chapter – IV :

Company Profile

Chapter – V : Research Data Analysis & Interpretation.

Chapter – VI : Conclusions and Suggestions. Bibliography

Chapter – I

“INVENTORY MANAGEMENT’’FROM NILE LIMITED, HYDERABAD

INTRODUCTION

INTRODUCTION TO INVENTORY MANAGEMENT

Inventory Management or control refers to maintaining an adequate supply of material

to meet an expected demand pattern. It thus deals with determination of optimal policies

and procedures for procurement. Management of inventory is a risk return trade-off

exercise by mangers. Inventory is expressed in terms of both quantity and monetary

value. In terms of quantity, it can be expressed as the number of units of an item in stock

where as in monetary terms it is the sum total of the monetary value of all its items of

inventory..

Inventory refers to those idle resources which have economic value and thus it may

be defined as usable but idle resources that have economic value. Inventory is a stock of

direct or indirect material, from raw material to finished goods stocked in order to meet

an unexpected future demand. In other words inventory is a physical stock of goods kept

for the future purposes. Though Inventory is a blocked capital, in the sense that it is not

being used in the present, it plays a distinct role in the life of any organization for a

smooth and efficient running of business.

Thus the functions of inventory are to:

Protect against unpredictable fluctuations in demand and supply

Take the advantage of price discounts through bulk purchases

Take the advantage of batches and longer production run

Provide flexibility to allow changes in production plans in view of changes in

demands etc.

Facilitate uninterrupted production

The basic function of inventory is thus to insulate the production process from changes in

the external factors not in control of management.. It decouples various interlinked

functions and thus enables each function to conduct itself independently like Purchasing,

Production, Marketing etc

Classification of Inventory

Inventory is idle resources that have future economic value. It indicates that it may be

available in different forms depending upon the production cycle stage it is in.

Classification of inventory is done on this basis and thus the different classifications of

inventory are as follows

Raw materials - Raw materials are input goods intended for combination and/or

conversion through the manufacturing process into semi-finished or finished goods. They

change their form and become part of the finished product.

Components and Parts - Just as raw materials are converted to finished goods in a

manufacturing operation, components and parts are assembled into finished goods in an

assembly operation.

Maintenance, repair and operating Inventories (MRO) - These include parts, supplies, and

materials used in or consumed by routine maintenance and repair of operating equipment,

or in support of operations.

In-process goods - These are goods in the process of manufacturing and only partially

completed. They are usually measured for accounting purposes in between significant

conversion phases. In-process inventories provide the flexibility necessary to deal with

variations in demand between different phases of manufacturing.

Finished goods - These represent the completed conversion of raw materials into the final

product. They are goods ready for sale and shipment.

Resale goods - These are goods acquired for resale. Such goods may be purchased by a

wholesaler for resale to distributors, or by distributors for resale to consumers, etc.

Capital goods - These are items (such as equipment) that are not used up or consumed

during a single operating period, but have extended useful lives and must be expensed

over multiple operating periods. Tax laws require that such an item be capitalized, and a

predetermined percentage of its cost be recognized as an expense each operating period,

over a predetermined time frame, according to equipment classes.

Construction materials - These are raw materials and components for construction

projects such as a building, bridge, etc.

Hard goods/soft goods - What one identifies as hard goods and soft goods will vary

depending on the industry involved. For example, in data processing, hard goods include

apparatus such as computers and terminals, while soft goods include software, data

storage media, and the like.

Inventory Control Systems

Inventory control is concerned with minimizing the total cost of inventory. The three

main factors in inventory control decision making process are:

The cost of holding the stock (e.g., based on the interest rate).

The cost of placing an order (e.g., for row material stocks) or the set-up cost of

production.

The cost of shortage, i.e., what is lost if the stock is insufficient to meet all

demand.

The third element is the most difficult to measure and is often handled by establishing a

"service level" policy, e. g, certain percentage of demand will be met from stock without

delay.

OBJECTIVES OF THE STUDY

The main objective of the present study is to evaluate the performance of “Nile ltd” in

respect of inventory management. The specific sub-objectives of the study are given

below.

1. Categorizing the inventory in ABC for analysis in Nile ltd and to assess the

manage4ial level control on the vital items, in the inventory holding.

2. To study the method of major raw material controls being used in the Nile ltd.

3. To study the inventory management process in Nile ltd.

4. To evaluate the economic order quantity and lead time consumption of Nile ltd.

5. To evaluate reorder level, maximum stock level of Nile ltd.

6. To study which item is having the high percentage of usage in the processing of

finished goods.

7. To access the performance of inventory management of Nile ltd by selected

accounting ratios.

LIMITATIONS OF THE STUDY:

1. Financial policies of the organization are sensitive in nature; the same could not

be acquired easily.

2. Time constraint is another limitation to make the study more qualitative.

3. Another limitation of the study is collecting of data from finance department and

warehouse superiors. It is very difficult; as they are they are too busy in

discharging their own duties.

4. The study is limited to the Glass lining division of Nile Ltd.

Chapter –II

RESEARCH METHODOLOGY

For the purpose of the study data has been selected covering from 2006-2007 to 2009-

2010. Most of the data is based on the secondary data, personal discussions were held

with employees of stores department and finance department of Nile ltd.

The secondary data is the annual reports, other inventory valuation and quantity

reports. The data collected from the secondary source is processed and analyzed for

drawing inferences by applying simple statistical methods like percentage, average, etc.,.

The technical analysis like economic order quantity and ABC analysis have been studies.

Finally conclusions are drawn based on the study and suitable suggestions are made for

improving the performance of Nile ltd.

Chapter –III

THEORITICAL FRAMEWORK OF

INVENTORY MANAGEMENT

INVENTORY MANAGEMENT IN NILE LTD

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

of companies in India. On an average, materials are approximately 60 percent of current

assets in public limited companies in India. Because of large size of materials maintained

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

therefore, absolutely imperative to manage all aspects of material efficiently and

effectively in order to avoid unnecessary investment. A firm neglecting the management

of material will be jeopardizing its long-run profitability and many fail ultimately. It is

possible for a company to reduce its level of material to a considerable degree, e.g., 10 to

20 percent, without any adverse effect production and sales, by using simple material

planning and control techniques. The reduction in ‘excessive’ stocking material carries a

favorable impact on a company’s profitability.

Inventory is a list for goods and materials, or those goods and materials themselves, held

available in stock by a business. In accounting inventory is considered an asset.

In business management, inventory consists of a list of goods and materials held available

in stock.

Inventory management is primarily about specifying the size and placement of stocked

goods. Inventory management is required at different locations within a facility or within

multiple locations of a supply network to protect the regular and planned course of

production against the random disturbance of running out of materials or goods. The

scope of inventory management also concerns the fine lines between replenishment lead

time, carrying costs of inventory, asset management, inventory forecasting, inventory

valuation, inventory visibility, future inventory price forecasting, physical inventory,

available physical space for inventory, quality management, replenishment, returns and

defective goods and demand forecasting. Balancing these competing requirements leads

to optimal inventory levels, which is an on-going process as the business needs shift and

react to the wider environment

Systems and processes that identify inventory requirements, set targets, provide replen-

ishment techniques and report actual and projected inventory status.

Handles all functions related to the tracking and management of material. This would in-

clude the monitoring of material moved into and out of stockroom locations and the rec-

onciling of the inventory balances. Also may include ABC Analysis, lot tracking, cycle

counting support etc.

Management of the inventories, with the primary objective of determining/controlling

stock levels within the physical distribution function to balance the need for product

availability against the need for minimizing stock holding and handling costs.

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every

stage, requires that you maintain certain amount of inventory to use in this "lead

time".

2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in

demand, supply and movements of goods.

3. Economies of scale - Ideal condition of "one unit at a time at a place where user

needs it, when he needs it" principle tends to incur lots of costs in terms of

logistics. So bulk buying, movement and storing brings in economies of scale,

thus inventory.

NATURE OF MATERIAL:

Materials are stock of the products a company is manufacturing for sale and

components that make up the products. Most manufacturing organizations usually divide

their "goods for sale" inventory into:

Raw Materials- materials and components scheduled for use in making a product.

Work in process, WIP - materials and components that have begun their

transformation to finished goods.

Finished goods - goods which are ready for sale to customers.

Goods for resale - returned goods that are saleable.

RAW MATERIALS:

Raw materials are those basic inputs that are converted into finished products through the

manufacturing process. Raw materials are those units which have been purchased and

stored for future production. They are required to carry out production activities

uninterruptedly. The quantity of raw materials required will be determined by the rate of

the consumption and the time required for replacing the supplies. The factors like the

availability of raw materials and government regulations, etc., too affect the stock of raw

materials.

Raw material turnover ratio indicates the number of time materials is replaced during the

year. To judge whether the ratio of a firm is satisfactory or not, it should be compared

over a period of time of the basis or trend analysis.

In general, a high material turnover is better than a low ratio. Yet a very high ratio calls

for a careful analysis. It indicates of under investment in very low level of inventory has

serious implications. It is also likely that the firm may be following a policy of

replenishing it stock in too many small sizes.

Similarly, a very low material turnover ratio is dangerous. It signified excessive material

or over investment. Carrying excessive inventory involves the cost in terms of interest of

funds of rentals space and so on. Thus a firm should have neither too high nor low

material turnover.

To avoid “stock out list” associated with a high ratio and the cost of carrying the

excessive material; there should be reasonable level for mixed ratio. The firm would well

advise to maintain a close watch on the trend of ratio.

Inventory turnover ratio can be calculated as follows:

Inventory Turnover Ratio = Cost of Goods sold or Turnover

Average Inventory

WORK IN PROCESS:

Work in process is called as stock in process. It refers to goods in the intermediate stage

of production. These are semi finished product for sale. They represent products that

need more work before they become finished product for sale. The work in process is

that stage of stock which is in between raw materials and finished goods. The raw

materials enter the process of manufacturing but they are yet to attain the final shape of

finished goods. The quantum of work in process depends up on the time taken in

manufacturing; the more will be the amount of work in process.

FINISHED GOODS:

The finished goods materials are those completely manufactured products which are

ready for sale. Stocks of raw materials and work in process facility production, while

stock of finished goods is required for smooth marketing operations. These are goods,

which are ready for consumers. The stocks of finished goods provide buffer between the

production and market. The purpose of maintaining material is to ensured proper supply

of goods to the customers. In some concerns the production is undertaking on order

basis.

In these concerns there will not be a need for finished goods inventory. The need for

finished goods stock will be more when production is under taken in general without

waiting for specific orders. Those, inventory serve as the link between the production

and consumption of goods.

The levels of three kinds of inventories for a firm depend on the nature of its business. A

manufacturing firm will have substantially high levels of three kinds of materials, while

retail or wholesale firms will have a very high level of finished goods in material and

work in process stock. With in manufacturing firms there will be differences. Large

heavy engineering companies produce long production cycles products; therefore, they

carry large materials. On the other hand, materials of consumer Product Company will

not be large because of short production cycle and fast turnover.

A fourth kind of materials, supplies is also maintained by firms. These materials do not

directly enter production, but are necessary for production process.

Usually these supplies are small part of total material and do not involve significant

investment. Therefore, a sophisticated system of inventory control may not be

maintained for them.

SPARES:

The stock policies of spares differ from industry to industry. Some industries like

transport will require more spares than the other concerns. The costly spares parts like

engines, maintenance spares etc., are not discarded after use, rather they are kept in ready

position for further use.

All decisions about spares are based on the financial cost of inventory on such spares and

the cost that may arise due to their non-availability

NEED TO HOLD MATERIALS:

The question of managing materials arises only when the company holds the material.

for manufacturing end products for sale. Stocking of Materials involves blocking up the

company’s resources in currency, storage and handling costs. If it is expensive to

maintain materials, why do companies holds materials? There are three resources which

generally motivate for holding materials.

TRANSACTION MOTIVE:

Every firm tends to maintain some level of inventory to meet the day to day

requirements of sales, production process and customers demand etc. in this; raw

materials are stored for smooth production process of the firm.

PRECAUTIONARY MOTIVE:

A firm should keep some inventory for unforeseen circumstances also like

loss due to natural calamities in a particular area, strikes, layouts etc. So the firm must

have some finished goods as well as raw-materials to meet circumstances.

SPECULATIVE MOTIVE:

Influences the decision to increase or reduce material level to take

advantage of price fluctuation.

A company should maintain adequate stock of materials for a continuous supply to the

factory for an uninterrupted production. It is not possible for a company to procure raw

materials whenever it needed. A time lag exists between demand and supply. Also, there

exists uncertainly in procuring raw materials in time on many occasions. The

procurement of materials may be delayed because of such factors as strike, transport

disruption or short supply. Therefore, the firm should maintain sufficient stock of raw

materials at a given time to streamline production. Other factors which may necessitate

purchasing and holding of raw material inventories are quantities of raw materials than

needed for the desired production and sales level to obtain quantity discounts of bulk

purchasing. At time, the firm would like to accumulate raw materials in anticipation of

price rise.

Work in process material builds up because of the production cycle. Production cycle is

time span between introduction of raw material into production and emergence of

finished product at the completion of production cycle. Till production cycle completes,

stock of work in process has to be maintained. Efficient firm constantly try to make

production cycle smaller by improving their production techniques.

Stock of finished goods has to be held because production sales are not instantaneous. A

firm cannot produce immediately when goods are demanded by customers. Therefore, to

supply finished goods on a regular basis, their stock has to be maintained. Stock of

finished goods has also to be maintained for sudden demands from customers. In case the

firm’s sales are seasonal in nature, substantial finished goods material should be kept to

meet the peak demand. Failure to supply products to customers, when demanded, would

mean loss of the firm’s sales to competitors. The level of finished goods materials would

depends upon coordination between sales and production as well as on production time.

Costs:

The holding of inventories exposes the firm to certain risks. The various costs and risk

involved in holding are given below.

Capital Cost: The holding of inventories includes cost. So, the firm has to

arrange for additional funds in order to meet the cost of inventories. These funds

may be arranged from the firm’s sources or from outsiders. In both cases, the

firm has to incur a cost.

Storage and Handling Cost: Holding inventories also involves costs on storage.

For holding inventories in advance, for sufficient stock, for uninterrupted

production, the business has to pay for storage costs. The storage costs include the

rent of the warehouse, insurance charges etc.

The costs of holding inventories are as follows:

Material Costs: This is the cost of purchase of goods, transportation, handling

charges.

Ordering Costs: This is a variable cost associated with placing an order. Few

orders mean less cost and more orders mean more cost.

Carrying Costs: This basically includes expenses of storage of goods. The costs

are storage cost, insurance cost, spoilage cost, cost of funds tied up in inventory

etc.

LEAD TIME:

It is the time taken by the supplier to supply the materials. Technically it is the period

which lapses between the recognition of need and its fulfillment. There is a direct

relationship between lead time and inventory. As lead time increases, inventories also

increase. The lead time can be divided into administrative lead time, manufacturing lead

time, transportation lead time, inspection lead time etc.

RE-ORDER POINT:

It indicates when an order should be placed; it depends upon consumption ratio and lead

time.

RE-ORDER POINT = (LEAD TIME* AVERAGE USAGE)

SAFETY STOCK:

Using the above formula, it is difficult to predict usage and lead time accurately. The

demand for material may fluctuate from the normal lead time. If the actual usage

increases or the delivery of the material is delayed the firm can face a problem of stock-

out. Therefore, in order to guard against the stock-out, the firm may maintain a safety

stock i.e., some minimum or buffer material as cushion against expected increased usage

and/or delay in delivery in time.

Thus the formula to determine the re-order point when the safety stock is maintained is as

follows:

RE-ORDER POINT= (LEAD TIME*AVERAGE USAGE) + SAFETY

STOCK

ORDER CYCLE:

The time period between placements of two successive orders is referred to as an order

cycle. There are two inventory management system based on which the orders may be

placed. They are as follows:

Q-system: (Fixed order quantity system or re-order point system).

P-system: (Fixed periodic review system).

REORDER LEVEL:

The inventory level at which a new or fresh order is placed with the suppliers for

obtaining additional items is known as reorder level. This point is fixed between the

maximum stock and minimum stock levels. This depends on two factors:

The lead time between order placement and actual receipt, and

The demand during the lead time.

This is the quantity of the replacement order. In certain types of inventory control

system, the reorder quantity is the economic order quantity.

MAXIMUM STOCK LEVEL:

A stock level selected as the maximum desirable or allowable is referred to as maximum

stock. This is used as an indicator to show when stock levels have risen too high. The

maximum level is the largest quantity of a particular material, which should be kept in

store at any one time. The fixation of maximum level is necessary to avoid unnecessary

blocking of capital in materials, losses on account of deterioration and obsolescence of

materials, extra overheads and temptation to thefts.

The maximum level of materials should be decided after considering the following:

Storage space

Availability of working capital

Cost of storage, insurance, interest on capital invested in stock.

Rules framed by government for import or procurement.

MINIMUM STOCK LEVEL:

It is also known as buffer stock or safety stock. This is the additional stock needed to

allow for delay in delivery or for any unexpected demand that may arise during the lead

time.

IMPORTANCE OF INVENTORY MANAGEMENT TO A BUSINESS:

Inventory Management is the planning, control, organizing and leading the goods and

materials required by the business.

Inventory Management is very important for the business. It enables the business to meet

or exceed expectations of the customer by making the product readily available.

If managed properly, it can help the organization reduce its costs, achieve economies of

scale and prepares the organization for uncertainty.

OBJECTIVES OF INVENTORY MANAGEMENT:

To maintain a optimum size of material for efficient and smooth production and

sale operations.

To maintain a minimum investment in material to maximize profitability.

Both excessive and inadequate materials are not desirable. These are two danger points

within which the firm should operate. The objective of material management should be

to determine and maintain optimum level material investment. The optimum level

material will lie between the two danger points of excessive and inadequate inventories.

The firm should always avoid a situation of over investment or under investment in

materials.

The following are the main objectives of inventory management

To ensure continuous supply of materials to facilitate uninterrupted production.

Maintain sufficient stocks of raw materials against slack period supplies and

benefit from price changes.

Maintain sufficient finished goods inventory for smooth sales operation and

customer service.

Reduce the cost of production carrying cost and time.

To minimize losses through wastages and damages.

To ensure quality goods at reasonable prices.

It controls investment in inventories and keeps it at an optimum level.

To ensure uninterrupted production.

To facilities furnishing of data for short-term planning and control of inventory

TECHNIQUES OF INVENTORY MANAGEMENT:

ECONOMIC ORDER QUANTITY:

There are two questions relating to material management:

1. What should be the size of the Order?

2. At what level should the order placed?

To answer the first question the basic economic order quantity model is helpful. If the

firm is buying raw material, it has to be purchased on each replenishment. This problem

is called order quantity problem and the task of the firm is to determine the optimum or

EOQ.

The determination of the appropriate quantity to be purchased in each lot to replenish

stock as a solution to the order quantity problem necessitate resolution of conflicting

goals buying in large quantities implies a higher inventory level which will assure.

Smooth production/sales operations.

Lower ordering or set up costs.

But it will involve higher carrying costs. On the other hand small orders will reduce the

carrying costs would increase as there is a likelihood of interruption the operations due to

stock outs.

A firm should place neither too large nor too small orders on the basis of trade off

between the benefits from the availability of inventory and the cost of carrying.

To take enough care to avail the concession available in purchasing materials.

Ensuring that the materials of requisite specifications and quality have been

received in good condition.

EOQ = √ (2AO/I)

Where, A = Annual Total Requirement,

O = Ordering Costs,

I = Inventory Carrying Costs.

ABC ANALYSIS :

ABC analysis is a technique of exercising selective control also known as

management by exception;over inventory items. The technique is based on the

assumption that a firm should not exercise the same degree of control on items which are

more costly as composed to those items which are less costly. According to this

approach the inventory items are divided into three categories i.e., A, B and C.

Category ‘A’ may include more costly items, while category ‘B’ may consists of less

costly items and category ‘C’ of the least costly items. Therefore, ABC analysis

concentrates on important items hence also known as Control by Importance and

Exception (CIE). This approach is also known as Proportional Value Analysis (PVA).

There is no definite procedure for classifying the inventories as A, B and C categories.

The method usually adopted is,

1. The quantity of each material expected to be used is estimated.

2. The value of each of the above material is found out by multiplying quantity with

price.

3. The items are arranged in the descending order of their value irrespective of their

quantities and give the ranks.

4. Express the value for each item as a percentage of the aggregate usage value and

obtain the cumulative percentage of annual usage values.

5. Obtain the percentage value for each of the items. For n items, each item shall

represent 100/n percent. Also obtain the cumulative values of the percentages.

6. Plot the curve using the cumulative computed in step 4 and step 5 on x and y axes

respectively.

7. Determine appropriate divisions for the A, B and C categories.

In general, normal inventory item possess the following distribution pattern.

A: 5- 10% of the total number of items account for about 70% of the total consumption

value.

B: 10-20% of the items account for 20% of total consumption value.

C: The remaining large number of items account for the balance 10% of the consumption

value.

Chapter – IV

PROFILE OF THE COMPANY

PROFILE OF THE COMPANY

Introduction to NILE LTD:

Nile Limited was originally incorporated as a private limited company with the name

Navabharat Industrial Linings and Equipment Private Limited on May 18, 1984 and was

later converted to a public limited company with the name Navabharat Industrial Linings

and Equipment Limited. The name of the Company was changed to its present name of

NILE ltd. vide a fresh certificate of incorporation dated September 16, 1994.

Nile is a Public limited company and its shares are listed on the Bombay Stock Exchange

(BSE). Nile has emerged as a leader in glass lining by achieving customer satisfaction by

delivering quality products, with a fervent desire to convert every customer relationship

into a prospective partnership. Nile's Glass Lining and pressure vessel division is located

at Industrial estate, Nacharam, Hyderabad with a covered area of 8700 sq.m. The totally

integrated fabrication, machining and glass lining facilities ensure timely delivery of

quality products.

Nile's two Non-Ferrous plants are located One near Hyderabad, and another near

Tirupati. The combined capacity of these two plants is 32000 tons per annum. Nile’s 2

MW Wind Farm is located at Ramagiri, Ananthapur district.

The state-of-the-art CAD facilities and experienced engineers not only automate the day-

to-day engineering drawing requirements, but also innovate and improve the versatility of

the product. In addition to standard equipment, Nile designs and manufactures equipment

for specific customer applications or process performance improvement.

A Company with a difference - setting benchmarks:

Nile is an ISO 9001 certified Company manufacturing world class Glass Lined

Equipment, Pressure Vessels, Lead and Lead Alloys.

Product range of the company includes:

Reactors

Reactors with Conical bottom

Reactor with Insulation

Receivers (Jacketed &Unjacketed)/ Storage Tanks

Conical Dryer

Agitated Nutsche Filters

Heat Exchangers /Condensers

Columns

Lead products

Pure Lead 99.97% purity

Lead Antimonial alloys

Lead Selenium alloys

Lead Calcium alloys

Lead Tin alloys

Chapter –V

RESEARCH DATA ANALYSIS &

INTERPRETATION

ABC ANALYSIS

ABC ANALYSIS FOR THE YEAR 2009-10

In the year 2009-2010 the total annual value of material is Rs. 201278053. The materials

are divided into A category, B category and C category according to annual consumption.

The ABC Analysis table is as follows

no. material descriptionannual con-sumption

cost per unit

annual value

1 steel plates(12,14,18,20,25)mm 1002 44334 444444482 steel plates(8,16,22,32)mm 702 44319 311111133 steel plates(6,10,36,40,45,50,63,65)mm 301 44296 133333344 rods(80,100,122)dia 233 49496 115151785 chemicals 59770 119 70870186 mechanical seal(60,80,100)mm 240 27116 65849287 rods(50,180,240,250)dia 127 49456 62810068 gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 56002809 motors(3,7,5,10)hp 251 21376 5365376

10 accuators and variable frequency drive 98 49773 487772411 mildsteel seemless pipes 3680 955 351440012 electrodes(E7018) 10716 320 342912013 forgings(flanges) 102 31756 323911214 rods 63 49397 311201115 packaging material 10738 286 307106816 standguard and stand drive 85 33474 284533917 mechanical seal(50,125)mm 80 34296 274368018 hardware 121943 20 243886219 paints 17043 137 233489120 gearbox(AS-80,90F) 34 67388 229119221 motors(5,15,20)hp 81 27577 223373722 forgings(nozzles) 752 2892 217478423 teflon items(gaskets) 1529 1200 183480324 electrodes(E7018-1) 4286 400 171441825 mechanical seal(40mm) 108 15125 163350026 others in boughtout(sight and light glasses,hoses) 270985 6 162590827 abbressive material(grit) 36 43000 154800028 imported general stores(ceramic crucibles) 29 53364 154755629 teflon items(dippipes/sparges) 240 6354 152496030 castings(valve bodies) 425 3570 1517250

31others from general stores(oils, greases, hotmill jars, hand-gloves,nosemasks, glasses,cap) 97289 15 1459335

32 gearbox(RR310DNC,510DNC) 90 15581 140234533 motors 25hp 28 46704 130771234 stainless steel seemless pipes 768 1525 117120035 castings(rods and plates) 3392 322 1092224

36 electrodes(E316,316L,6013) 385 1500 102750037 tantalum 27 37516 101293238 teflon items(bushes/nozzles) 950 1040 98800039 electrical items 5414 176 95286440 imported chemicals 1515 610 92415041 oxygen gas 6644 123 81721242 flux wires 7620 90 68580043 castings(nozzles) 885 770 68145044 teflon items(gasket sheets) 500 1350 67500045 diesel 13606 37 50342246 imported tantalum 12 38560 46272047 job bearing 812 500 40600048 castings(sleeves) 40 9500 38000049 bearings 1166 250 29150050 LPG 131 2221 29095151 teflon items(spray ball) 17 16256 27635252 shafts 20 10412 20824053 teflon items(spacers/seperators) 3072 56 17203254 teflon items(tapes/'o' rings) 7702 22 16944455 screws and rods 42 3718 15615656 material handling 347 435 15094557 grinding machines 12 10115 12138058 abbressive material(sand) 30 4000 12000059 grinding wheels 48 2284 10963260 other in maintence(low value spares, lubricants) 1056 98 10348861 hoses and pipes 159 523 8315762 indegnous grind wheels and belts 1981 42 8320263 blasting accessories 52 1502 7810464 elements seperators 6 12147 7288265 tool bit 33 2025 6682566 argon gas 61 950 5795067 imported boughtout(gear box) 1 41764 4176468 measuring tapesand scales 103 365 3759569 wind mill spares 4 4637 1854870 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 2697271 cutting accessories 28 574 16072

‘A’ – Occupies 70% of Annual consumption, i.e., 70% of 201078053 = 140894637.

‘B’- Occupies 20% of Annual consumption, i.e., 20% of 201078053 = 40255610.

‘C’- Occupies 10% of Annual consumption, i.e., 10% of 201078053 = 20107805

ABC GRAPH FOR THE YEAR 2009-10

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

45000000

50000000

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69

annual value

no.

The following table shows the A items


cost per unit

annual value

1 steel plates(12,14,18,20,25)mm 1002 44334 444444482 steel plates(8,16,22,32)mm 702 44319 311111133 steel plates(6,10,36,40,45,50,63,65)mm 301 44296 133333344 rods(80,100,122)dia 233 49496 115151785 chemicals 59770 119 70870186 mechanical seal(60,80,100)mm 240 27116 65849287 rods(50,180,240,250)dia 127 49456 6281006

8gear box(as-55,60,35,RR210DNC,110DNC) 23 23730 5600280

9 motors(3,7,5,10)hp 251 21376 536537610 accuators and variable frequency drive 98 49773 487772411 mildsteel seemless pipes 3680 955 3514400

139714805

The following table shows the B items


cost per unit

annual value

1 electrodes(E7018) 10716 320 34291202 forgings(flanges) 102 31756 32391123 rods 63 49397 31120114 packaging material 10738 286 30710685 standguard and stand drive 85 33474 28453396 mechanical seal(50,125)mm 80 34296 27436807 hardware 121943 20 24388628 paints 17043 137 23348919 gearbox(AS-80,90F) 34 67388 2291192

10 motors(5,15,20)hp 81 27577 223373711 forgings(nozzles) 752 2892 217478412 teflon items(gaskets) 1529 1200 183480313 electrodes(E7018-1) 4286 400 171441814 mechanical seal(40mm) 108 15125 1633500

15others in boughtout(sight and light glasses,hoses) 270985 6 1625908

16 abbressive material(grit) 36 43000 154800017 imported general stores(ceramic crucibles) 29 53364 154755618 teflon items(dippipes/sparges) 240 6354 1524960

41342941

The following table shows the C items


cost per unit

annual value

1 castings(valve bodies) 425 3570 1517250

2others from general stores(oils, greases, hotmill jars, hand-gloves,nosemasks, glasses,cap) 97289 15 1459335

3 gearbox(RR310DNC,510DNC) 90 15581 14023454 motors 25hp 28 46704 13077125 stainless steel seemless pipes 768 1525 11712006 castings(rods and plates) 3392 322 10922247 electrodes(E316,316L,6013) 385 1500 10275008 tantalum 27 37516 10129329 teflon items(bushes/nozzles) 950 1040 988000

10 electrical items 5414 176 95286411 imported chemicals 1515 610 92415012 oxygen gas 6644 123 81721213 flux wires 7620 90 68580014 castings(nozzles) 885 770 68145015 teflon items(gasket sheets) 500 1350 67500016 diesel 13606 37 50342217 imported tantalum 12 38560 46272018 job bearing 812 500 406000

19 castings(sleeves) 40 9500 38000020 bearings 1166 250 29150021 LPG 131 2221 29095122 teflon items(spray ball) 17 16256 27635223 shafts 20 10412 20824024 teflon items(spacers/seperators) 3072 56 17203225 teflon items(tapes/'o' rings) 7702 22 16944426 screws and rods 42 3718 15615627 material handling 347 435 15094528 grinding machines 12 10115 12138029 abbressive material(sand) 30 4000 12000030 grinding wheels 48 2284 10963231 other in maintence(low value spares, lubricants) 1056 98 10348832 hoses and pipes 159 523 8315733 indegnous grind wheels and belts 1981 42 8320234 blasting accessories 52 1502 7810435 elements seperators 6 12147 7288236 tool bit 33 2025 6682537 argon gas 61 950 5795038 imported boughtout(gear box) 1 41764 4176439 measuring tapesand scales 103 365 3759540 wind mill spares 4 4637 1854841 others in tools(spanners,lowvalue jigggs,fixtures) 1226 22 2697242 cutting accessories 28 574 16072

A

B

C

Inventory Turnover Ratio:

Inventory turnover ratios are calculated to indicate whether inventories have been

used efficiently or not.

The inventory turnover ratios also known as stock velocity is normally calculated

as sales / average inventory of cost of goods sold/average inventory.

Inventory conversion period may also be calculated to find the average time taken

for clearing the stocks. Symbolically.

Cost of goods sold

Inventory turnover ratio = -------------------------------

Average inventory at cost

Or

Net sales

= --------------------------

Average inventory

Days/Months in a year

And, inventory conversion period = -------------------------------------

Inventory turnover ratio

STATEMENT SHOWING INVENTORY TURNOVER RATIO:

Particulars 2007-08 2008-09 2009-10

Turnover 425042979 398484821 321558291

Average Inventory 260035731 270449527 293925381Inventory Turnover

Ratio1.63 1.47 1.09

Interpretation:

In 2007-08 stocks are converted into cash/accounts receivable faster when compared to

the years 2008-09 and 2009-10. The turnover ratios is 1.63 in the year 2007-08 was

gradually decreased to 1.09 by the year 2009-10. This means the stock has not been sold

fast and stayed on the shelf for a longer period. This ratio is decreased because of

decrease in the sales and increase in average inventory. An efficient management of

inventory lies in higher inventory turn over ratio.

INVENTORYHOLDING PERIOD :

Particulars 2007-08 2008-09 2009-10

Turnover 425042979 398484821 321558291

Average Inventory 260035731 270449527 293925381

Inventory Holding

Period( In days)

221 225 331

Interpretation:

In 2007-08 the inventory holding period is less when compared to the years 2008-09 and

2009-10 respectively. In the year 2007-08 the inventory holding period was 221 days and

it was increased to 225 days by the year 2008-09 and further it is increased to 331 days

by the year 2009-10. These mainly because of the sales are gradually decreasing from

year to year. The ratio is gradually increasing from year to year.

INVENTORY TO CURRENT ASSETS RATIO:

Inventory

Inventory to current asset ratio = ------------------------ *100

Current Assets

Year Inventory Current Assets Inventory to Current

Assets Ratio

2006-07 267797121 328534407 81.51%

2007-08 252274341 308149728 81.86%

2008-09 288624713 344537428 83.77%

2009-10 299226049 336657938 88.88%

Interpretation:

In the year 2006-07, it was 81.51% and it was increased to 88.88% by the year 2009-10.

These means that the inventory is increasing from year to year but all the remaining

current assets are not increasing. These means the quick assets are decreasing from year

to year as inventory is excluded from the preview of quick assets..

Inventory to Total Assets:

Inventory

Inventory to total assets = ----------------- * 100

Total Assets

Year Inventory Total Assets Inventory to Total Assets Ratio

2006-07 267797121 447862056 59.79%

2007-08 252274341 421558838 59.84%

2008-09 288624713 458845760 62.90%

2009-10 299226049 441873054 67.72%

Interpretation:

In year 2006-07 it was 59.79% and it is gradually increased to 59.84% by the year 2007-

08 and further it is increased to 62.90% & 67.72% by the years 2008-09 and 2009-10

respectively. The Inventory is increasing from year to year but the other assets are not

increasing as the inventory.

Raw Materials to Sales Ratio:

Raw Materials

Raw materials to sales ratio = --------------------------- * 100

Sales

Year Sales Raw Materials

Consumed

Raw Materials to

Sales Ratio

2006-07 387724451 196580737 50.70%

2007-08 425042979 193155579 45.44%

2008-09 398484821 207481444 52.07%

2009-10 321558291 165648066 51.51%

Interpretation:

In year 2006-07 the ratio is 50.70% and it is decreased to 45.44% in the year 2007-08 and

then it is increased in the year 2008-09 to 52.07% and in the coming year it is slightly

decreased to 51.51%. The raw materials consumption is fluctuating year to year by

seeing these ratios we conclude the raw materials are blocked in the work in progress.

Closing Stock to Sales Ratio:

Closing Stock

Closing stock to sales ratio = ------------------------- * 100

Sales

Year Inventory Sales Closing Stock to

Sales Ratio

2006-07 267797121 387724451 69.07%

2007-08 252274341 425042979 59.35%

2008-09 288624713 398484821 72.43%

2009-10 299226049 321558291 93.05%

Interpretation:

In the year 2006-07 the ratio is 69.07% and in the year 2007-08 it was decreased to

59.35%., in 2008-09 it was increased to 72.43% and in the year 2009-10 it is increased to

93.05%. The inventory is increasing but sales are decreasing. The company should

increase the sales or else decrease the closing stock.

ECONOMIC ORDER QUANTITY:

Suppose the ordering cost per order ‘0’ is fixed. The order costs will be number of

orders during the year multiply by ordering cost per order. If ‘A’ represents the annual

requirements and ‘Q’ the order size, the number of orders will be ‘A/Q’ and the total

orders costs will be

AO

Total Ordering Cost = ---------------- -------------------------- (1)

Q

Where A = Annual requirement,

O = Ordering costs,

Q = Order size,

C = Carrying costs per unit.

Let us further assume that the carrying costs per unit ‘C’ are constant. The total carrying

costs will be the product of the average materials units and the carrying costs per unit. If

‘Q’ is the order size and the usage is to be steady, the average material will be.

Q

Average Material = ----------------- --------------------------------- (2)

2

QC

Average Material = -------------------- ---------------------------------- (3)

2

The Total material costs, then are the sum of total carrying and ordering costs:

QC AO

Total Cost = ------------ + ------------ ---------------------- (4)

2 Q

Calculate (4) reveals that a large quantity, ‘Q’ the carrying costs will increase, but the

ordering costs will decrease. On the other hand the carrying cost will be lower and the

ordering cost will be higher with the lower order quantity. Thus the total cost function

represents a trade-off between the carrying cost and the ordering cost for determining the

economic order quantity.

To obtain formula for economic order quantity (EOQ), equation (4) is differentiated with

respect to ‘Q’ and setting the derivative equal to zero.

QC AO

Total Cost (TC) = ---------- + ---------- -------------------------- (a)

2 Q

Differentiating Equation (a) with respect to Q

D (TC) C AO

------------------ + ------------------- - ----------- ---------------- (b)

DA 2 Q

Setting Equation (b) to zeros:

C AO

-------- - ----------- = 0

2 Q2

CO2 = 2AO

EOQ = SQRT (2AO/C) -------------------------------- (5)

CALCULATION OF EOQ USING THIS INFORMATION:

Sl. No. Code Material Description Annual

Consumption(Qty)

Price value

(Rs)

1 RNST Steel Plates (tons) 2004,929.00 88,888,897

2 RNBO Bought Outs(No’s) 344,594.00 40,647,703

3 RNRO Rods (tons) 423,114.00 20,936,688

4 GNOT General Items(No’s) 116,625.00 14,593,351

5 RNCA Chemicals(kgs) 59,770.00 7,087,018

6 RNTI Teflon Items (No’s) 14,010.00 5,648,844

7 RNFI Forgings (No’s) 855.00 5,437,192

8 RNSP Pipes and Fittings

( Mts)

5,066.00 4,686,741

9 RNCA Castings (No’s) 5,107.00 4,544,214

10 GNWP Packing Material

(Set)

10,738.00 3,073,419

11 GMOT Imported General

Stores(No’s)

57.00 2,212,421

12 GNM Maintenance(No’s) 2,848.00 1,041,281

Ordering Cost -- 4%

Inventory Carrying Cost -- 12.5%

EOQ = SQRT (2AO/C)

Calculation of EOQ using the above information:

1. RNST Steel Plates:

Annual consumption = Rs.2004,929.00

Ordering Cost = Rs.355,556

Inventory carrying cost = Rs.11,111,112.13

EOQ = √ ((2) (2004929) (355556)/11,111,112)

= √ 128,315.606

= 358.21 tons

= 358 tons.

2. RNBO Bought Outs:

Annual consumption = 344,594.00

Ordering Cost = Rs.185,908.

Carrying Cost = Rs.5,080,963.

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

= √25216.79

= 158.78 No’s

= 159 No’s.

3. RNRO Rods:

Annual consumption = 423114

Ordering Cost = Rs. 837468

Carrying Cost = Rs. 2617086

EOQ = √ ((2) ( 423114)(837468)/2617086) = 520 tons.

4. GNOT General Stores:

Annual Consumption = 116625

Ordering Cost = Rs. 583734

Carrying Cost = Rs. 1824169

EOQ = √ ((2) (116625) (583734)/1824169) = 273 No’s.

5. RNCA Chemicals:


Ordering Cost = Rs.283481

Carrying Cost = Rs.885877

EOQ = √((2)( 59770)(283481)/885877) = 195 Kgs.

6. RNTI Teflon Items:




EOQ = √((2)( 14010)(225954)/706106) = 94 No’s.

7. RNFI Forgings:




EOQ = SQRT ((2)( 855)(217488)/679649)

= 23 No’

8. RNSP Pipes & Fittings:




EOQ = SQRT ((2) (5066) (187470)/585843)

= 57 Mts.

9. RNCA Castings:




EOQ = √ ((2)( 5107)(181769)/568027) = 57 No’s.

10. GNWP Packing Material:




EOQ = √ ((2)( 10738)(122937)/384177) = 83 Sets.

11. GMOT Imported General Stores:




EOQ = √ (2)( 57)(88497)/276553) = 6 No’s.

12. GNM Maintenance:




EOQ = √ ((2)( 2848)(41651)/130160) = 43 No’s.

TABLE-2

STATEMENT SHOWING EOQ

SL. NO CODE MATERIAL

DESCRIPTION

ANNUAL

CONSUMPTION

ORDERING

COST

CARRYING

COST

EOQ

UNITS

1 RNST Steel Plates 2004929 355556 1111112 358 Tons

2 RNBO Bought Outs 344594 185908 5080963 158 No’s

3 RNRO Rods 423114 837468 2617086 520 Tons

4 GNOT General Stores 116625 583734 1824169 273 No’s

5 RNCA Chemicals 59770 283481 885877 195 Kgs

6 RNTI Teflon Items 14010 225954 706106 94 No’s

7 RNFI Forgings 855 217488 679649 23 No’s

8 RNSP Pipes & Fittings 5066 187470 585843 57 Mts

9 RNCA Castings 5107 181769 568027 57 No’s

10 GNWP Packing Material 10738 122937 384177 83 Sets

11 GMOT Imported

General Stores

57 88497 276553 6 No’s

12 GNM Maintenance 2848 41651 130160 43 No’s

INTERPRETATION: The company will do well to follow the E O Q as far as possible to

improve the inventory turn over ratio.

TABLE-3

STATEMENT SHOWING LEAD TIME CONSUMPTION

Average Consumption = Annual Consumption/365.

Lead time consumption = Lead time * Average consumption per day.

SL. NO CODE MATERIAL

DESCRIPTION

LEAD

TIME

AVG. CONSUMPTION

PER DAY

LEAD TIME

CONSUMPTION

1 RMCH Imported Chemicals 90 days 1515/365=4.15 373.50

2 GMOT Imported General

Stores

90 days 57/365=0.16 14.40

3 RMBO Imported Bought

outs

90 days 1/365=0.003 0.27

4 RNST Steel Plates 90 days 2004929/365=5492.96 494366.40

5 RNBO Bought Outs 75 days 344594/365=944.09 70806.75

6 RNCA Castings 60 days 5107/365=13.99 839.40

7 RNCH Chemicals 45 days 59770/365=163.75 7368.75

8 RNFI Forgings 60 days 855/365=2.34 140.40

9 RNSP Pipes & Fittings 30 days 5066/365=13.88 416.40

10 RNRO Rods 45 days 423114/365=1159.22 52164.90

11 RNTI Teflon Items 15 days 14010/365=38.38 575.70

12 GNWP Packing Materials 8 days 10738/365=29.42 235.36

TABLE-4

STATEMENT SHOWING RE-ORDER LEVEL:

Re-order level = (Lead time * Average Usage) + Safety stock

SL NO. CODE MATERIAL

DESCRIPTION

LEAD TIME

CONSUMPTION

SAFETY

STOCK

RE-ORDER

LEVEL

1 RMCH Imported

Chemicals

373.50 390.00 763.50

2 GMOT Imported

General Stores

14.40 21.00 35.40

3 RMBO Imported Bought

outs

0.27 1.00 1.27

4 RNST Steel Plates 494366.40 497400.00 991766.40

5 RNBO Bought Outs 70806.75 70900.00 141706.75

6 RNCA Castings 839.40 843.00 1682.40

7 RNCH Chemicals 7368.75 7370.00 14738.75

8 RNFI Forgings 140.40 142.00 282.40

9 RNSP Pipes & Fittings 416.40 420.00 836.40

10 RNRO Rods 52164.90 52170.00 104334.90

11 RNTI Teflon Items 575.70 610.00 1185.70

12 GNWP Packing

Materials

235.36 247.00 482.36

TABLE-5

STATEMENT SHOWING MAXIMUM STOCK LEVEL:

MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + EOQ

SL

NO.

CODE MATERIAL

DESCRIPTION

EOQ RE-ORDER

LEVEL

MAX. STOCK

LEVEL

1 RMCH Imported Chemicals 31 763.50 794.50

2 GMOT Imported General Stores 6 35.40 41.40

3 RMBO Imported Bought outs 1 1.27 2.27

4 RNST Steel Plates 358 991766.40 992124.40

5 RNBO Bought Outs 158 141706.75 141864.75

6 RNCA Castings 57 1682.40 1739.40

7 RNCH Chemicals 195 14738.75 14933.75

8 RNFI Forgings 23 282.40 305.40

9 RNSP Pipes & Fittings 57 836.40 893.40

10 RNRO Rods 520 104334.90 10485.90

11 RNTI Teflon Items 94 1185.70 1279.70

12 GNWP Packing Materials 83 482.36 565.36

Chapter – VI

CONCLUSIONS AND

SUGGESTIONS

FINDINGS AND CONCLUSIONS

Over all the inventory of Nile Limited - glass lining division is maintained at

optimal levels in the present market conditions, but a higher inventory turn over

ration above 1.63 times should be targeted to improve the profitability.

Sales are decreasing according to the study; revenue of the company is decreased

during the period 2007 to 2010. This impacts severely on the profitability and

liquidity position of the organization. An improvement n the inventory turn over

ratio may improve the profitability

During the study period, the inventory to current assets ratio is gradually

increasing, which indicates proportion of inventory in current assets is expanding.

the requirement for production/sales should be re assessed and an Endeavour to

reduce the inventory may improve the prospects of profitability.

The inventory turnover ratio is gradually decreasing from year to year. It is not

healthy to the company as more than required inventory leads to blocking of

capital. The firm should maintain reasonable stocks with the help of inventory

control.

The inventory conversion period is also increasing from year to year. Huge

inventory holding leads to blocking of cash, obsolescence, or deficiencies in the

product line or marketing effort. Over production or early production of goods

even before the customer requires them lead to poor inventory holding period.

According to the ABC Analysis throughout this period, A-items i.e. top 20 per

cent of items constituted around 90 per cent total annual consumption in value.

In the last year the closing stock is almost equal to the sales which require

correction.

SUGGESTIONS:

1. Always keep optimum stocks to keep production process continues

without interruption keeping in view costs of over stocking vis-à-vis the

benefits of more than required stock.

2. The company’s production should be re-scheduled dynamically according

to the marketing forecast to avoid overstocking of finished goods.

3. The company should closely monitor the inventories for optimum

utilization, so that idle inventories can be minimized.

4. Priority in managing the purchase and utilization should be given to

materials classified as “A” which constitutes Steel Plates, Bought outs and

Rods. Strict control is to be ensured for materials classified as “B”.

5. Search for alternate suppliers and materials to be used in production to

decrease the cost of holding huge inventory and lead time for procurement of

materials.

6. The investment in raw materials should be made with close monitoring

and optimum utilization.

7. Investment in slow moving items may block up the funds therefore the

company may consider using F N S D analysis. (Fast normal slow moving and

dead items.).

8. The raw material should be procured from right source at right quantity

and at right cost.

BIBLIOGRAPHY:

S.no. Title Author

1. Financial Accounting I.M.PANDEY

2. Cost and Management Accounting S.P.JAIN & K.L.NARANG

3. Cost Accounting R.P.TRIVEDI

4. Internet websites www.nileltd.com

www.google.com

http://www.google.com/

http://www.nileltd.com/

Documents

Corrected Project Report 3-01-2011