Inventory management and its effects on working capital”

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NVENTORY MANAGEMENT for MBA FINANCEPage 1

“Inventory management and its effects on working

capital”

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EXECUTIVE SUMMARY

G C T M Industry in India has traveled are less, now India is one of themain cotton manufacturing & exporting cotten in the in india. The cotten inIndia is with major players and gadag co operative mill Ltd is one of largest

manufacturer of cotten in India.Inventory is a central process in Manufacturing Unit. This Inventory is

concerns to all departments i.e., from Planning Department to Selling

Department in which it passes though Production Department, HR Department,Logistic Department, Finance Department, Costing Department, and

Commercial Department etc. So managing of Inventory is having wide Scope inmanufacturing Company.

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“INVENTORY MANAGEMENT”Statement of the problem

“Inventory management and its effects on working capital”

Management problemManagement is feeling that their huge amount of working capital is held

up, so the management wants to know whether they can reduce it throughinventory management.

Research problemAs above stated management problem the study was carried to know how

inventory management helps in proper maintenance of working capital, so thetitle of this study is “ inventory management and its effect on working capital”

Objectives of the study

1. To study the inventory management based on the ratios2. To find out the impact of inventory on working capital.

3. To study the inventory management and its effective control throughvarious techniques.

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4. To suggest the measures for improving the inventory level.

Scope of the studyInventory management being a very important concept in all the

company’s having a void coverage often calls for the managerial attention. Inthe modern times inventory management has become the integral part of theall companies. So all the firm gives special importance for inventory

management. The major objective of the study is to examine the effectivenessof inventory management system adopted by Akash industry; the study mainlyfocuses on the techniques used by the company to control the inventory. The

study also covers other areas like the financial ratios for the period of 2004 to2007.

SUB OBJECTIVES:1 To study the different accepts of Inventory Management.

METHODOLOGYPrimary Data:

1. Interaction with personnel of the company2. Direct Observation in Inventory

Secondary Data:

1. Balance Sheet2. Turnover Statements3. Monthly Inventory Statements

4. Company Records5. Internet

Tools Used:

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MS-Excel has been used for calculations.

INDUSTRY PROFILE

FABRICATION

When used as an industrial term, applies to the building of machines,

structures and other equipment, by cutting, shaping and assemblingcomponents made from raw materials. Small businesses that specialize in metal

are called fab shops.

Steel fabrication shops and machine shops have overlapping capabilities,

but fabrication shops generally concentrate on the metal preparation, weldingand assembly aspect while the machine shop is more concerned with themachining of parts.

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METAL FABRICATION

Metal fabrication is a value added process that involves the constructionof machines and structures from various raw materials. A fab shop will bid on a

job, usually based on the engineering drawings, and if awarded the contract willbuild the product.

Fabrication shops are employed by contractors, OEM's (OriginalEquipment Manufacturers) and VAR's (Value-added Reseller) Typical projectsinclude; loose parts, structural frames for buildings and heavy equipment, and

hand railings and stairs for buildings.

1. ENGINEERING

The fabricator may employ or contract out steel detailers to prepare shopdrawings, if not provided by the customer, which the fabricating shop will use

for manufacturing. Manufacturing engineers will program CNC machines asneeded.

2. RAW MATERIALS

Standard raw materials used by metal fabricators are;

Plate MetalFormed And Expanded Metal

o Tube stock, CDSMo Square stock

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o Sectional metals (I beams, W beams, C-channel...)Welding wireHardware

CastingsFittings

3. CUTTING AND BURNING

The raw material has to be cut to size. This is done with a variety of tools.

The most common way to cut material is by Shearing (metalworking);

Special band saws designed for cutting metal have hardened blades and a

feed mechanism for even cutting. Abrasive cut-off saws, also known as chopsaws, are similar to miter saws but with a steel cutting abrasive disk. Cutting

torches can cut very large sections of steel with little effort.

Burn tables are CNC cutting torches, usually natural gas powered. Plasma

and laser cutting tables, and Water jet cutters, are also common. Plate steel isloaded on a table and the parts are cut out as programmed. The support tableis made of a grid of bars that can be replaced. Some very expensive burn tables

also include CNC punch capability, with a carousel of different punches andtaps. Fabrication of structural steel by plasma and laser cutting introduces

robots to move the cutting head in three dimensions around the material to becut.

4. FORMING

Hydraulic brake presses with v-dies are the most common method offorming metal. The cut plate is placed in the press and a v-shaped die is

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pressed a predetermined distance to bend the plate to the desired angle. Wingbrakes and hand powered brakes are sometimes used.

Tube bending machines have specially shaped dies and mandrels to bendtubular sections without kinking them.

Rolling machines are used to form plate steel into a round section.

English Wheel or Wheeling Machines are used to form complex double

curvature shapes using sheet metal.

5. Machining

Fab shops will generally have a limited machining capability including;metal lathes, mills, magnetic based drills along with other portable metal

working tools.

6. Welding

Welding is the main focus of steel fabrication. The formed and machinedparts will be assembled and tack welded into place then re-checked foraccuracy. A fixture may be used to locate parts for welding if multiple

weldments have been ordered.

The welder then completes welding per the engineering drawings, if

welding is detailed, or per his own judgment if no welding details are provided.

Special precautions may be needed to prevent warping of the weldment

due to heat. These may include re-designing the weldment to use less weld,welding in a staggered fashion, using a stout fixture, covering the weldment in

sand during cooling, and straightening operations after welding.

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Straightening of warped steel weldments is done with an Oxy-acetylenetorch and is somewhat of an art. Heat is selectively applied to the steel in a slow,linear sweep. The steel will have a net contraction, upon cooling, in the

direction of the sweep. A highly skilled welder can remove significant warpageusing this technique.

Steel weldments are occasionally annealed in a low temperature oven torelieve residual stresses.

7. FINAL ASSEMBLY

After the weldment has cooled it is generally sand blasted, primed andpainted. Any additional manufacturing specified by the customer is then

completed. The finished product is then inspected and shipped.

COMPANY PROFILE

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Name of the company : APEX AUTO LTD

Address of the Head office :M-1 phase- VII, TATA kandra main road,

industrial area ADITYAPUR,JAMSHEDPUR-832109 INDIA.Fax: 0657-2200010

Tel: 91-657-2408715, 2409041 & 2381346E-mail: [email protected]

Address of the registered : Nataraj mansion, Bistapur- 831001,Office JAMSHEDPUR, INDIA

Fax: 91-657-2424526WEBSITE: www.apexautoltd.com

Address of the UNIT II : APEX AUTO LTD (UNIT II) Block no: 2Dharwad Telcon premises, K.I.A.D.B, P.B. Road

Dharwad- 580007, India

Fax: 0836-3293214Tel: 0836-3293214

E-mail: [email protected]

Nature of the organization : Basically this company is heavy fabrication

Company. They are manufacturing back hoeLoader components and excavatorComponents

Type of organization : Apex auto limited company is privatelimited

www.apexautoltd.com

mailto:[email protected]

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Company

ABOUT ORGANIZATION

Apex Auto Limited ("If you can imagine it, We can fabricate it.")Apex Auto Limited is a publicly quoted company with a number of

shareholders, both Indian and Foreign. Promoted by Mr. Atul Taunk in 1995with a modest capital outlay of Rs. 342 lakhs, Apex today has a capital outlay of

Rs. 1200 lakhs. A growth of over 350% per annum. Achieved by producingthousands of dynamically stressed machined components for the constructionequipment industry

The raison deter of Apex is that the emerging scenario in post liberalizedIndia indicated that the nation was poised to go in for massive infrastructure

building: roads, super highways, ports, power projects, and so on. This wouldput immense pressure on manufacturers of earth-moving equipment. Apex

eases the load on them by supporting the industry with precision engineeredsub-assemblies and major assemblies that can go directly into their equipment,such as revolving frames, main frames, booms, arms, dozers, buckets, and so

on.

As a case in point, we're proud to have been entrusted with the single

share of business for all major fabrications that go into the making of TATAHitachi's top selling excavators, the EX-60. Over the last 5 years, we have

fabricated more than 10,000 components of this particular model alone.

VISIONTo be recognized as a premier QUALITY manufacturer and supplier fabricated

components, embodying thus the spirit of commitment and humanity.

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MISSION

As per customer schedule requirement fulfill it, Deliver on time, everytime.

An eye on product quality and integrityHighest productivity, thereby offering a cost advantage to all our clients.

Why Apex?

Aristotle - Greek inventor of the Science of Logic - recommends studying thetheory of 'The 4 Becauses' before making your choice Why Apex for your

Machined fabrication ?

The 1st because deals with what is it made of ?

Apex uses only prime quality steel sheets and plates procured fromleading players in the industry - Tata Steel and SAIL.

The 2nd because deals with how is it made ?

Apex has state of art Material Processing facilities including Indias largestlaser cutting machine. And excellent Production Engineering systems set up by

a highly experienced and technically qualified team of engineers.

The 3rd because deals with what is made ?

Based on our customer's drawings and design, Apex manufacturesdynamically stressed machined fabrications conforming to all the specifications

laid down by the customer.

The 4th because deals with why is it made thus ?

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Apex follows the first three precepts so that the end customer gets aworld-class product which will withstand the ultimate test of time.

KEY AWARDS WON

For safety in manufacturing process awards (less accident in

manufacturing process) for continuous 3 years form Telco constructionequipment limited

For MINIMUM REJECTION award form Telco construction equipment

limited

SWOT Analysis of the Company

APEX AUTO LID KEY STRENGTHS

1. STRONG PRODUCT DEVELOPMENT

As per the specification from Telcon the new product is been developed1. By the highly qualified internal engineering department

2. STRONG MERCHANDISING TEAM

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Technically qualified and high skilled Merchandising department isanother asset of the company, who plays a major role in executing the ordersutmost efficiently to the satisfaction of Buyers.

3. PROFESSIONALLY MANAGED:

a) Company has two units in Dharwad, one is Apex auto Ltd Unit I and theother is Apex auto Ltd Unit II

b) Unit I is headed by Mr. Arvind Gaur, Unit II is headed by Mr. Pravat Kumar

Rath

4. FACTORIES ENGINEERED TO PRODUCT SPECIFIC:All their manufacturing units are engineered to product specific and

managed by effective and efficient internal engineering department.

5. QUALITY CONTROL SYSTEM:

There is an independent quality audit team in process control system in allthe factories, which has given quality production consistently.

6. SOURCING OF RAW MATERIALS UNDER VIGILANCE OF QUALITY

AUDIT SYSTEM:They source all their raw materials 100% from within India. However, they

have a rigid control on their quality control system where by they ensure that all

the raw materials are produced as per their quality standard level before it getsdispatched to their factories.

7. IN HOUSE LAB:They have a lab situated in the major procurement centers, such as in

Dharwad and Jamshedpur to support their quality control team to carryout the

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various quality tests at all level onwards to ensure that the product is producedaccording to their quality in-house.

8. PRE-SHIPMENT INSPECTION TO MAINTAIN ZERO-CLAIM FROMBUYERS:

A thorough Inspection by In-house Quality Control team and pre-shipment

Inspection by buyer representative for all their products helps company tomaintain zero-quality claims position with all their buyers.

9. CONFIDENCE OF THEIR BUYERS:

All the buyers as of today have been working with them since decades andthey started with them on continues basis with enhanced volume. This hasgiven them huge confidence as the confidence level of their buyers is very high

in their products, quality, timely deliveries and commitment towards work.

They have been awarded for 3 consecutive years for minimum rejection andfor safety in process of manufacturing by Telco construction equipment limited

APEX AUTO LTD WEAKNESSNo such entity has been identified so far.

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APEX AUTO LTD KEY OPPORTUNITIESChances to get more products to manufacture form the Buyer i.e. Telconconstruction equipment limited

APEX AUTO LTD KEY THREATSMore-qualified competitors

CUSTOMER NAMEApex auto ltd unit II has having only one customer that is TELCON

CONSTRUCTION EQUIPMENT LTD

SUPPLIERS NAMES

SUPPLIERS NAME LOCATION

A005 AKSHATA ENTERPRISES, HUBLI

A013 ASHA ELECTRICAL & SALES HUBLI

A045 ADITYA ELECTRICAL SALES CORPORATION HUBLI

A051 ANAND AIRLINE ACCESSORIES HUBLI

A052 ABHI ENGINEERING WORKS BANGALORE

A058 AMAR ELECTRICAL WORKS HUBLI

A063 ANDANUR PIPES DISTRIBUTORS DHARWAD

B031 BELGAUM CNC APPLICATIONS PVT. LTD BELGAUM

B036 ESHAK DADA BAMBOOWALA MUMBAI

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B038 B. MAHENDRA & BROS DHARWAD

B041 BASAVESHWAR KHANAVALI DHARWAD

B044 BELUR INDUSTRIAL GASES DHARWAD

B045 B.B. ENTERPRISES HUBLI

C003 CHACHRA SERVIUCES JAMSHEDPUR

C004 CHAITANYA SALES PVT. LTD. JAMSHEDPUR

D019 DYNAMIC DRIVES HUBLI

D020 DELTA FURNITURE PRIVATELIMITED CHENNAI

E027 EUREKA FORBES LTD DHARWAD

F003 FABRO-TECH ENGINEERS DHARWAD

G008 GOUTAM MACHINE TOOLS HUBLI

G026 GAYATRIMATA INDUSTRIES DHARWAD

H010 HYDROPACK(INDIA) PVT LTD BELGAUM

I018 INDUS MARKETING BELGAUM

J003 JKAY ENTERPRISES HUBLI

K007 KAMATH ENTERPRISES BELGAUM

K008 KAPILA MARKETING DHARWAD

K010 KARNATAKA MATERIAL TESTING RESEARCH BELGAUM

K036 KULKARNI BOOK STALL & STATIONERIES DHARWAD

M008 MARUTI INDUSTRIAL SERVICE CENTRE BANGALORE

M017 MADRAS HARD TOOLS PVT LTD CHENNAI

M019 MANJUNATH GARMENTS DHARWAD

N016 NAVYA ENTERPRISE HUBLI

O003 OMEGA FABRICATIONS DHARWAD

P002 PETHE BRAKE MOTOR PVT. LTD RATNAGIRI

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P006 PRAXAIR INDIA PVT LTD BANGALORE

P028 PRESSURE CONTROL EQUIPMENT KOLKATTA

P037 PAVAN ELECTRICAL COMPANY HUBLI

R001 R.R. ASSOCIATES HUBLI

R007 RENUKA ENGINEERING WORKS DHARWAD

R035 RITTAL INDIA PVT LIMITED BANGALORE

S019 SONA STEEL ENTERPRISES MUMBAI

S085 SAKSHAM AUTOMATION SYSTEMS HUBLI

S087 SHREE GANESH GAS IMPLEMENTS AND SER HUBLI

T001 TARACK ENGG SERVICES DAVENGIRI

T003 TECHNO COMMERCIAL CORPORATION JAMSHEDPUR

T031 TATA STEEL LIMITED BANGALORE

V001 VALJI & BROTHERS HUBLI

V007 VIJAYSHEER DISEL SALES AND SERVICES HUBLI

V008 VOLTAS LIMITED BANGALORE

V014 VIKAS VIDHUTIKARAN PVT LTD DHARWAD

W006 WELD INDIA CONSULTANCY DELHI

Y003 YALLAPPA HEGGERI DHARWAD

Apex Auto Ltd Unit II is having a numerous suppliers. They mainlypurchase Raw Materials like MS plates, Bush Stoppers, Seat Curve etc fromIndian suppliers.

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ORGANIZATION STRUCTURE

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AdministrationAssistant

Production

department

SupplyChainMgmtHead

QualityAssurance Head

WorkersSubordinate

Members

StoreSuperviso

r

Production

Superviso

MachineOperators

MachineDepartment Head

AssistantQ. A

Helpers

ProductionAssistant General

Manager

HumanResources

Assistant General

C E O

GeneralManager

Production Planning& Control Manager

Finance Manager

Managing Director

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1. Personnel DepartmentThis department is almost like a human brain, since it is the human

beings that operate it. This department is concerned with implementation ofthe plans, with the welfare of the plant, with the industrial relations and aboveall safety and security of the plant and the work force is its prime concerns.

This department looks after the subsidiaries like recruitment selection trainingand induction, canteen, community development disciplinary actions etc.,

welfare, security, guesthouse, medical facility etc., (As per Indian Factories Act1948.)

Team Apex Professionally managed with a rich blend of experience and

enthusiastic youth, Engineers, Diploma Holders, draft men, ITI welders andfitters, Gas cutters, workers and Fabrication Experts.Let’s go through the process of the Recruitment in Apex Auto Ltd Unit II.

Recruitment is process of searching the prospecting candidate,stimulating and encouraging them to apply for the job. The above meaning saysthat every organization want skilled workers so Apex Auto Ltd Unit II also

recruit candidates as follows , they firstly check the organization culture whichtype of employees needed in organization and they also check employment

condition in unit.They are searching the candidates in two ways one is Advertisement and

the other is manual searching. In advertisement they give firstly the adz’s like

Draft Adv, Client review adv and Place adv, and then they receive the calls thenaccess their CV’s. In manual searching process they search the employee inplan search, identity search, and contact search, then they check the candidates

interest after that they arrange meeting for selection process

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Selection process Selection is a process of checking the candidate’sknowledge, behavior, Skills, experience, and qualifications etc to select andplace the candidate their correct position.

2. Stores DepartmentThe raw materials are stored separately under material cell in production

department; as per the demand this department does the work of receiving and

issuing of materials.3. Purchase Department

Against the approved purchase requisition the department purchases ofraw material semi finished goods and Accessories and other needs of thevarious departments. In order to make the work efficient it has the system of

sub contractors. So the purchase department does the creation of subcontractors and vendors. This department is guided by the main motto theplant and other departments working. Let’s have a look on the flow chart of the

purchase of raw materials in Apex Unit II

Quotations request to one ormore vendors according torequirement

Quotations

Best Negotiation

Purchase Ordercreation

Purchase Order sendto vendor (supplier)

Materialindenting(As percustomerschedule)

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4. Dispatch DepartmentThe dispatch of materials and finished goods is done in a very efficient

way.

5.Production Department

This department entrusted with the task of the production of Dozer

Blade, Loader Bucket, Narrow Bucket, Back Hoe Main Frame, Boom, Arm,Counter Weight, Heavy Duty Bucket, Revolving Frame and Track Frame. Fromour very inception at Jamshedpur in 1996 and at Dharwad in 1999, our

infrastructural facilities have been meticulously planned out with an eyetowards satisfying the exacting standards of world class players in the EarthMoving Industry.

Let’s have a look on the process of manufacturing process in Apex Unit II,basically this company is heavy fabrication company, they are manufacturing

BACK HOE LOADER COMPONENTD & EXCAVATOR COMPONENTS. Following arethe components. JHON DEER (JD) Boom, Arm, Loader Arm and EXCAVATORS 70,

110, 120, Boom and EXCAVATORS 70, 110,120 Arm. The below showing is themanufacturing process of Excavators-70 Boom.

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Flow chart of Excavator – 70

2ND STAGE ASSEMBLYTE 20789, TE 20790

TA 00233/03

OUT OF FIXTURE1ST STAGE WELDING

IN FIXTURESUB ASSEMBLY 1ST STAGE

TA 01164/00, TA 00233/27,TA 00233/01, TA00233/08,TA00233/05, TA00233/06

TA00233/07

BOOM END BRACKETASSEMBLY

TC 00558/01(RH), TC00558/02(LH)

BEVELING OF PLATESTA 00233/01, TA22033/07,

TA 00233/08

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NVENTORY MANAGEMENT for MBA FINANCEPage 25ASSEMBLY OUT OF

FIXTURETA 00233/02

ROBOT WELDING

Rejection/Rectification

INSPECTIONTotal length 3720+/-4mm Top lug distanceWRT Boom End Bracket,Bottom lug distance

CONTINUE

OUT OF FIXTURE2ND STAGE WELDING

IN FIXTURETA 00233/09, TA 00233/10

TA 00233/04

LUG FITTINGTA 00233/14, TA 00233/15,TA 00233/16, TA 00233/17,

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Not Ok

OK

Not Ok

OK

Not Ok

OK

Not Ok

OK

MACHINING

DESPATCH

RECTIFICATION

REJECTION/RECTIFICATION

REJECTION/RECTIFICATION

INSPECTION

DRESSING

INSPECTIO

INSPECTIO

CONTINU

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Manufacturing process of Ex-70 BoomManufacturing process of Ex- 70 Boom is having several steps

already you know in the flow chart now below showing manufacturing process

in detail

1. RAW MATERIALS

In every manufacturing process raw materials must required therefor APEX AUTO LTD (UNIT II) purchase raw materials from its main branch at

JAMSHEDPUR and form Apex Auto Ltd (Unit I). Some materials directly comes toUnit II but some materials firstly comes to Unit I and after some process it issend to Unit II. Then the stores department sends materials to production

department for production2. BOOM AND BRACKET ASSEMBLY

In this process Boom and Bracket assembled or produced. Here

firstly they join 20mm Bkt Plate (RH) (TC 00558/01) and TA00233/22 accordingto the diagram. Then they join 20mm Bkt Plate (LH) (TC 00558/02) and TA

00233/11. After that back up bars are join at the bottom of both 20mm Bktplates. Then these two jointed by the plate Back up plate (TA 00233/19), then

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they join one square plate for maintaining required dimensions after welding ofall this parts this complete the manufacturing of Boom And Bracket Assembly.

3. BEVELING OF PLATESSome plates beveled by Unit I and those plates are Top rolling

plate(TA 00233/01), Side bend plate LH(TA 00233/07) and side bend plate

RH(TA 00233/08)

4. IN FIXTURE SUB ASSEMBLY 1ST STAGEIn this process one sub assembly will be done in this stage BOSS

(TD01164/00) is joined to Top rolling plate (TA 00\233/01) at one side then at

the top of the BOSS they join Side bend plate LH (TA 00233/07). After thatinside of the BOSS they join BOSS Back up Plate (TA 00233/27). Then in themiddle of Top rolling plate and Side bend plate they join Gasset

plate(TA00233/05) and near to that Bend Gasset plate is joined with requireddimension, after that Side bend plate RH(TA 00233/08) is joined according to

diagram so this complete Sub assembly first stage.

5. OUT OF FIXTURE FIRST STAGE WELDING

After completion of Sub assembly first stage each part is manuallyweld in this process.6. SECOND STAGE ASSEMBLY

In this process Back up bar (TE20789) 03 Back up bar(TE20790) areattached in the inside part of Bottom rolling plate (TA00233/03) at the right

side with required dimension according to diagram7. OUT OF FIXTURE

In this process second stage welding process is done manually.

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8. IN FIXTUREIn this process firstly prepared Boom and Bracket is joined by using

plates such as Cover plate 6mm (TA00233/09) and Cover plate 8mm

(TA00233/10), after that there is some place which is empty so that place isbeen filled by plates Taper side Plate(TA00233/04) 2 plates according todiagram. So this process finishes boom and bracket assembly.

9. LUG FITTING

In this process Lugs are fitted to the prepared component which areTop lug and bottom lugs and Top washers lugs and Bottom washer Lugs. Firstlybottom lugs are joined to each other and then those lugs are attached to the

bottom of the prepared component. After joining the bottom lugs the top lug isjoined to the top of prepared component with required dimension or space soas to complete this process.

10. INSPECTION

This is an important stage in manufacturing process. In this stagethey check total length of the component. Total length should be 3720mm ifthere less difference of 4mm then there is no problem it must not exceed 4mm,

then they also check centre point of the component and top lug distance to theboom and bracket, and bottom lug distance of the components if there is any

problem found then they go for rectification of the component.

11. ASSEMBLY OUT OF FIXTURE

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In this process they join one Top cover plate (TA00233/02) to theboom or prepared component according to the standard diagram and they alsojoin ‘M’ plate (TA00233/28) attach to the top lugs so this completes the

process of assembly.12. ROBOT WELDING

Robot is a programmable multiplication, manipulate design to

material part, tools or specialized devices are to carry out specific task.

In Robot welding processed components are weld by Robot machine.Firstly they set the programs to the robot for welding the components. Everycomponent has is its own welding program according to the standard drawing

of the components, after installation of the Ex – 70 program the weldingprocess of EX- 70 boom starts, Mig welding wire is been used by the robot toweld the component.\

13. LEFT OVER WELDING

After completion of the Robot welding there are some spaces leftwhich are weld manually by welders. In this process they also join BOSSReenforcement plate (TA00233/26) at the top and bottom side of the BOSS

according to the diagram.

14. SETTING

In this process they maintain required dimension in various parts ofthe components through the gas heating which includes Organ and Co

15. INSPECTIONIn this process they measure the components by using measuring

scale, try square, Vernier and gauges etc.

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16. MACHININGMachining process means removing the rough face as per the

standard drawing. In machining process they have two type of jobs one is

milling and the other is boring, in this process they are using two type ofmachines one SHW that means hidden control machine and the other is Fanuccontrol machine. To reduce heat in the process they are using coolant oil

because it helps to reduce the heat for insert ware and tear and it helps tosmooth milling and boring of the component in machining they are having

there stages1. Rough stage2. Semi finish

3. Finish StageIn Ex- 70 boom components are having mainly four bores boss bore must havethe size of 75mm and lug bore must have the size of 55mm and bracket must

have 60mm.

17. INSPECTIONIn this process they use the following instruments to check weather

the machining process is properly done or not

1. Bore dial gauge2. Micrometer3. Vernier

4. Measuring scale etc18. DRESSING

Dressing is the very important stage in manufacturing process in thisprocess they clean the components by using grinding machine and sandermachine to remove spatters chips etc, here they also fit some items to prepare

components to according to standard diagram.

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19. INSPECTIONIn this process they are checking welding defects in the components

by using Ultrasonic Technique (UT) machine, the following are the defects wecan find by using UT machine.1. Blow Holder area

2. Proper penetration3. Porsity etc

20. DISPATCHAfter completion of all this processes the quality assurance

department checks the quality of the component and after checking they finally

dispatch the product so this complete the manufacturing process of EX-70boom model.

Apex Auto Limited is in the service of gaints in the field of Excavator

manufacturing Co. TELCON for 6 Years by maintaining a high QUALITY & SKILL.And for its efforts, it has been certified by TELCON, and other quality maintaing

institutions.

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INVENTORY MANAGEMENTManagement of inventory assumes importance due to the fact that

investment in inventory constitutes one of the major investments in current

assets.

The term inventory refers to the stockpile of the products a firm isoffering for sale and the components that make up the product. The assetswhich firms store as inventory in anticipation of need are:

(i) Raw Materials:

These represent inputs purchased and store to be converted into finishedproducts in future by making certain manufacturing process on the same.

(ii) Work in Process:These represent semi-manufactured products which need further

processing before they can be treated as finished products.

(iii) Finished Goods:These represent the finished products ready for sale in the market.

(iv) Stores and Supplies:These represent that part of the inventory, which does not become a part

of final product but are required for production process. They may be in theform of cotton waste, oil and lubricants, soaps, brooms, light bulbs etc.

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Normally, they form a very minor part of total inventory and do not involvesignificant investment.

Let us have a look on Different Inventory Management Views. Means

emphasis role of Inventory Management in different Sectors.

PhysicalInventory

Management

FinancialInventory

Management

LogisticInventory

Management

INVENTORY MANAGEMENT

3

VIEWS

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Inventory Management is consisting of 3 hands. The first hand as shownin the diagram is that Physical Inventory Management, Second one is Financial

Inventory Management and the last one (third one) is Logistic InventoryManagement.

The reason behind of dividing these views is: to gather the informationvery easily and for easy to understanding of each view thoroughly. Let us see

the Meanings of each view one by one.

Physical Inventory ManagementMeaning:

“Keeping of goods is also a type of management. Whenever requirements

comes from the production department, providing of those required materialsin a proper manner & providing those at the specified period, is the main mottoof Physical Inventory Management.”

Benefits for Holding Inventory:Benefits in Purchasing

Benefits in ProductionBenefits in Work-in-ProcessBenefits in Sales

Objects of Inventory Management:

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Usually, the company is faced with the following conflicting objectives inthe area of inventory management:

1. To carry maximum inventory in order to facilitate efficient and smoothproduction and sales operations.

2. To minimize investment in inventory for maximize the profitability.

Both over-investment and under investment in inventories is undesirable asboth involve the consequences. The over-investment involves the

consequences like:i) Unnecessary blocking of funds in inventory and hence loss of profit.ii) Excessive storage and Insurance Cost.

i. Risk of liquidity. The inventories once purchased and stored are normallydifficult to dispose off at the same value.

The under-investment involves the consequences like:

b. If sufficient stock of raw material and work in process is not available, itmay result into frequent interruptions in production.

c. If sufficient stock of finished goods is not available it may not be possiblefor the company to serve the customers properly and they may shift tothe competitors.

Thus, it can be said that the objective of inventory management is to

minimize the investment in inventory without affecting production or salesoperations.

Inventory, as a current asset, differs from the other current assetsbecause only financial managers are not involved. Rather, all the functional

areas, finance, Marketing, Product & Purchasing are involved.

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The job of the financial manager is to reconcile the conflicting viewpointsof the various functional areas regarding the appropriate inventory levels in

order to fulfill the overall objective of maximizing of owner’s wealth.

Two-Bin System:

Under this system, the inventory items are grouped into two categories.In one group or bin, sufficient quantity is kept to meet the current requirements

over a designated period of item. In another group or bin, a safety stock ismaintained to meet the requirements of inventory at times when the stock inthe first bin is exhausted and re-ordering occurs.

Financial Inventory ManagementMeaning:

“Recording, maintaining and evaluating of stocks in a value terms isknown as Financial Inventory Management.” In other words valuation of stocks,

and controlling of ordering and holding costs and also maintaining of sufficientvalued stocks in Inventory is known as Financial Inventory Management.”

Financial Inventory Management is again divided into three different categories.

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1) Based on Valuation2) Based on Cost Analysis3) Based on Financial Statement

1) Based on Valuation

There are number of generally accepted methods of determining the costof inventories at the close of the accounting period. The selection of a suitable

method assumes significance in view of the fact that it has a direct bearing onthe cost of goods sold and consequently on profit. Therefore, the method

should be selected in the light of probable effects on profits over a period ofyears.

Note:It may not be out of place to mention that once a method is selected, itmust be used consistently and cannot be changed from year to year.

The discussion here of the methods to value inventory should, therefore beviewed in this perspective.

First In First Out (FIFO) Method:The FIFO method of valuation of inventory is based on the assumption

that the inventory is consumed in chronological order, that is, those receivedfirst are issued/consumed first and value fixed accordingly. The merit of FIFOmethod is that the physical flow of materials matches the flow of cost.

Last in First Out (LIFO) Method:

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Under the LIFO method, the cost of goods sold and the value of closinginventory can be determined only after the final lot of the year has beenreceived. This is because of the assumption underlying the valuation of

inventory, according to this method. As the name LIFO suggests, the use ofinventory is valued on the basis of the inverse sequence of receipts. Since theLIFO method assumes that the latest item in is the first item out, the current

cost of materials are matched with the current selling price/current revenues.This matching of current costs with current revenues is the essence of the

argument for the LIFO method.

Average Cost Method:

According to average cost method, each purchase is added to inventory

and an average cost determined. Materials are charged into cost of sales at thisaverage until another lot is received, when a new average unit inventory cost iscalculated.

Note: There are so many other than these above methods but most wide

usefully methods are these three so here we discussed those three methodsonly.

2) Based on Cost Analysis

Cost of Holding Inventory: -

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One operating objective of inventory management is to minimize cost.Excluding the cost of merchandise, the costs associated with inventory fall into

two basic categories: (i) Ordering or Acquisition or Set-up Costs, and (ii)Carrying Costs. These costs are an important element of the optimum level ofinventory decisions.

1) Ordering Cost:

It is the fixed cost of placing & receiving an inventory order. Like (a)Preparing a purchase order or requisition form & (b) receiving, inspecting &reordering goods received to ensure both quantity & quality. It is also called as

setup cost.

2) Carrying Cost:

The second broad category of costs associated with inventory is the carrying

costs. They are involved in maintaining or carrying inventory. The cost ofholding inventory may be divided into two categories.

1. Those that Arise Due to the Storing of Inventory: The main componentsof this category of carrying costs are (i) storage cost, that is, depreciation,

insurance, maintenance of the building and utilities; (ii) insurance ofinventory against fire and theft; (iii) deterioration in inventory because ofpilferage, fire, technical obsolescence, style obsolescence and price

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decline; (iv) serving costs, such as labour for handling inventory, clericaland accounting costs.

2. The Opportunity Cost of Funds: This consists of expenses in raising

funds (interest on capital) to finance the acquisition of inventory. If fundswere not locked up in inventory, they would have earned a return. This isthe opportunity cost of funds or the financial cost component of the cost.

Linking of Costs based and Physical Based Inventory Management:

The carrying costs and the inventory size are positively related and movein the same direction. If the level of inventory increases, the carrying costs alsoincrease and vice-versa.

Total Cost:The sum of inventory increases, the carrying costs represent the total

cost of inventory. This is compared with the benefits arising out of inventory todetermine the optimum level of inventory.

Economic Order Quantity (EOQ):How much inventory should be bought in a lot? Should the quantity to be

purchased be large or small? Should the requirements of material during agiven period (say 6 months or 1 year) be acquired in one lot or should it beacquired in installments or in several small lots? Such inventory problems are

called Order quantity problems.

Therefore EOQ is that level of inventory at which total cost of inventorycomprising ordering cost & carrying costs is the minimum

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Formulae for calculating Economic Order Quantity:

EOQ = 2AO

C

Where,

A= Annual Quantity

O= Ordering Cost

C= Carrying Cost

Assumptions:

1. The firm knows with certainty the annual usage (consumption) of a

particular item of inventory.

2. The rate at which the firm uses inventory is steady over time.

3. The orders placed to replenish inventory stocks are received at exactly

that point in time when inventories reach zero.

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Order Point:

Reorder Point:

This is the point at which to order inventory-expressedequation-ally as:

Lead Time in days X daily usage.

Lead Time:

It is the time normally taken in receiving delivery after placing orders withsuppliers.

Safety Stock:It implies extra inventories that can be drawn down when actual

lead-time and/or usage rates are greater than expected.

3) Based on Financial Statement

For having assistance by banks, bankers should first evaluate the followings:1. Collateral Strength.

2. Inventory Position3. Some Financial Ratios4. Payment of all requirements like Income Tax, Wealth Tax, Interests on

debt etc.,

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5. Agreement papers of all authorized persons like Debenture holders,Shareholders etc.,

6. All required documents.

7. Who is the Buyer and his Country’s relationship etc,

The main requirement for Banker is the Financial Statements of 3 to 5 years.

From this statement it can judge the financial strength of the Company. Whileanalyzing of Financial Strength of the Company, Inventory is also having its own

emphasis role. Because if company is having less inventory than itsrequirement then company will get less finance from Banks and visa-versa. Sohere high inventory means, high in the sense company should have sufficient

inventory according to its order. Not more than its order.

Let us have a look on some Inventory related Ratios and also some

important financial ratios those, which are related to Inventory. Fromevaluating of these Financial Ratios, company can judge the stocks/goods level

in Inventory, so that company can get loan from Banks.

The financial statement provides a summarized view of the financial

position and operations of a firm. Therefore, much can be learnt about a firmfrom a careful examination of its financial statements as invaluabledocuments/performance reports. The analysis of financial statement is, thus

an important aid to financial analysis.

The analysis of financial statements is a process of evaluatingrelationship between component parts of financial statements to obtain a betterunderstanding of the firm’s position and performance.

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Tasks of Financial analyst is to:1) Select the information relevant to the decision under consideration

from the total information contained in financial statement.

2) Arrange the information in way to highlight significant relationships.3) Interpretation and drawing of inferences and conclusions.

In brief, financial analysis is the process of selection, relation and evaluation.

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between theitems of the balance sheet and the profit and loss account. Financial analysiscan be under taken by management of the firm, or by parties out side the firm,

viz., owners, creditors, investors and others. The nature of analysis will differdepending on the purpose of the analyst.

Management of the firm would be interested in every aspect of the

financial analysis. It is their overall responsibility to see that theresources of the firm are used most effectively and efficiently, and that

the firm’s financial condition is sound.

Trader creditors are interested in firm’s ability to meet their claims over avery short period of time.

Investors, who have invested their money in the firm’s shares, are mostconcerned about the firm’s earnings.

Suppliers of long-terms debt, on the other hand are concerned with the

firm’s long-term solvency and survival. They analyze the firm’sprofitability over time, its ability to generate cash to be able to pay

interest and repay principal and the relationship between various sourcesof funds.

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2.Ratio Analysis related to Inventory

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as“the indicated quotient of two mathematical expressions” and as “the

relationship between two or more things.” In financial analysis ratio is used asa benchmark for evaluating the financial position and performance of a firm.

Ratios help to summarize large quantities of financial data and to makequalitative judgment about to form a qualitative judgment the focus of financialanalysis is on the key figures in the financial statements and the significant

relationships that exist between them.

Types of Ratios:

a. Liquidity Ratiosb. Activity Ratios

c. Profitability Ratios

A. Liquidity Ratios:

Liquidity refers to the ability of the firm to meet its obligations in theShort run, usually one year. Liquidity ratios measure the ability of the firm tomeet its current obligations. Liquidity ratios by establishing a relationship

between cash and other Current assets to Current obligations provide a quickmeasure of liquidity. A firm should ensure that it does not suffer from lack ofliquidity, and also that it does not have excess liquidity.

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Therefore it is necessary to strike a proper balance between high liquidityand lack of liquidity. Following are some of the important liquidity ratios:

1. Current Ratio2. Quick Ratio3. Net working Capital Ratio

B. Activity Ratios:

Activity ratios are concerned with measuring the efficiency in asset

management. Sometimes, these ratios are also called efficiency ratios or assetutilization ratios. The efficiency with which, assets are converted into sales.

The greater the rate of turnover or conversion, is the more efficient theutilization. For this reason, such ratios are also designated as turnover ratios.Turnover is the primary mode for measuring the extent of efficient employment

of assets by relating the assets to sales. An activity ratio may, therefore, bedefined as a test of the relationship between sales and various assets of a firm.Several activity ratios can be calculated to judge the effectiveness of asset

utilization.

1. Inventory Turnover

2. Assets Turnover3. Fixed Assets and Current Assets Turnover

Asset Measurement for different methods of inventory valuation:

FIFO Method:

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Under this method, as noted earlier, inventory is valued on theassumption of chronological cost flow. This implies that the unused/unsold

inventory consists of the most recent purchases and, therefore, can be assumedto be valued at current cost. The vale of inventory as show in the balance sheetwould reflect the current cost, if FIFO method were used.

LIFO Method:

According to this method, obviously, the inventory figure would notappear in the balance sheet at the Current Cost. It will reflect rather the cost of

raw materials purchased in the past year. Assuming rising prices, the inventoryvalue based on the LIFO method would tend to be undervalued. For exampleinventory purchased as early as six years or more. In that situation, the

inventory figure included in the balance sheet would be actually the price paidon the purchase of inventory six years ago. In a period of rising prices, this

value would naturally be grossly out of line with the currently prevailing price.This would imply that the balance sheet would not reflect the current worth ofthe inventory. That the inventory value will not be correct is another way of

saying that the balance sheet will present a distorted picture of the affairs ofthe firms.

A possible solution to correct the above distortion in the balance sheetimplicit in the under-valuation of inventory with the LIFO method is a

modified/adjusted LIFO method.

The modified method will, thus, serve the needs of correct income

determination as well as correct asset measurement. However, this is subject

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to a qualification, namely, the current year’s purchase (units) should exceed thecurrent year’s consumption (units). If for reasons such as strike/lockouts,transportation problems, and so on, the current consumption exceeds the

current purchases, profits will rise. The increase will depend upon the extent ofliquidation of the previous years’ inventory. This increase in profit is termed asliquidation profit, which is equal to the difference between the current cost of

inventory and the cost of inventory purchased in the past.

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Logistics Inventory Management

Meaning of Logistics:

Logistics is the Organization of Services and Supplies. In other words,logistics is making and taking the permission for sell/exporting the company’s

products in foreign countries.

In fully export-oriented business this is one of the main department,where this department gets an approval to sell their goods in foreign countries.And also their main intention is to maintain all documents of those that are

related to the exporting of their products.

Logistics Inventory Management:

Yes, already we have observed about the meaning of Inventory

Management in the Organization. But in fully export oriented business;Inventory Management is a very important concept. Because every exporter or

importer, they do not know about each other who are staying in other countries.

So every company, which are exporting or importing of materials, theyshould communicate each other through banks only. These banks are listed byCentral Bank of that Nation. In our Country RBI is lists some banks for

intermediating purpose and every year RBI declare some listed Banks as amediator.

For producing of materials and selling of those materials, everycompany/business should need a Working Capital. This Working Capital can

also financed by Banks. While in export oriented business it is slightly different

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task. Here Banks can acts as financial assistance for Pre-Shipment and for PostShipment of Goods.

For having an assistance by banks they should first evaluate followings:

1. Collateral Strength.2. Inventory Position3. Some Financial Ratios

4. Payment of all requirements like Income Tax, Wealth Tax, Interest etc.,5. Agreement papers of all authorized persons like Debentures,

Shareholders etc.,6. All required documents.7. Who is the Buyer and his Country’s relationship etc,

Before going to detail decision on Banks let us have a look on Commercial

Papers. Which are also parts of financing the working capital requirements ofthe Companies.

Commercial Papers (CPs):

In the recent past, Commercial Papers (CPs) have become one of the bestmethods for financing the working capital requirements of the companies.

The companies trying to raise the funds by issuing the CP are regulatedby Guidelines for issue of Commerical Papers (CP), 2000 issued by Reserve Bank

of India on October 10, 2000. These guidelines apply to the companies tryingto raise the funds by issuing the CPs. As per these guidelines, a a company

means a company as defined in section 45-I(aa) of Reserve Bank of India Act,1934. Section 45-I(aa) of Reserve Bank Act, 1934 defines a company as thecompany as the company as defined in section 3 of the companies Act, 1956.

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In the Indian circumstances, banks play a very major role in financing theworking capital requirement of the organizations. We will consider the bank as

a source for financing the working capital requirement of the organizationsunder the following heads:

Amount of Assistance

To obtain the bank credit for financing the working capital requirements,

the company is required to estimate the working capital requirement properly.To estimate the requirement of working capital requirement properly, thecompany will be required to estimate its level of current assets and current

liabilities properly, as working capital is the difference between current assetsand current liabilities.

For this, the techniques like ratio analysis, trend analysis etc., can beused by the company. More accurate the estimation of the level of current

assets and current liabilities, more accurate the estimation of level of currentcapital. Then, the company will have to approach the bank along with the

necessary supporting data. On the basis of estimates submitted by thecompany, the bank may decide the amount of assistance that can be extended.While extending the working capital assistance, the bank may prescribe the

margin money requirement. The margin money stipulation is made by thebanks in order to ensure that borrowing company’s own stake in the businessand also to provide the cushion against the possible reduction in the value of

security offered to the bank. The percentage of margin money stipulation may

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depend upon the credit standing of the borrowing company, fluctuations in theprice of security and the directives of RBI from time to time. The generalprinciple applicable will be, “more dicey the nature of security, higher of

security, higher will be the margin money stipulations.”

Form of Assistance:

After deciding the amount of overall assistance to be extended to the company,

the bank can disburse the amount in any of the following forms:

1. Non-Fund Based Lending

2. Fund Based Lending.

Non Fund Based Lending:

In case of Non-Fund Based Lending, the lending bank does not commit any

physical outflow of funds. As such, the funds position of the lending bankremains intact. The Non-Fund Based Lending can be made by the banks in twoforms:

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a. Bank Guaranteesb. Letter of Credit

Fund Based Lending:In case of Non-Fund Based Lending, the lending bank commits the physicaloutflow of funds. As such, the funds position of the lending does not affected.

The Fund Based Lending can be made by the banks in following forms:a. Loan

b. Overdraftc. Cash Creditd. Bills Purchased/Discounted

e. Working Capital Term Loansf. Packing Credit

Security for Assistance:

The bank may provide the assistance in any of the modes as stated above. Butnormally no assistance will be available unless the company offers some

security in any of the following forms.1) Hypothecation.2) Pledge

3) Lien4) Mortgage

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Process of Physical Inventory Maintenance in Apex Auto Ltd

Each unit of Apex auto ltd has its own store department that we can call itas Work-in-process inventory.

This inventory process is fully computerized and here paper work is very

less. Only maintaining of documents, which were sent by suppliers as likechallans etc., are only here to maintain as paper documents. Otherwise it is fullycomputerized. Through computers only Store Department receives Purchase

Order and by computer only they send documents of issuing of materials tomanufacturing unit.

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For easy to communicate and planning of production activity, Apex AutoLtd Unit II has having only one Godown in Procedures involved in receiving andissuing of materials are as follows:

1) Godown will first get Purchase Order No..

Purchase Order Number:

This PO is comes from Purchase Department. This Purchase Departmentgives a number for the each order made by Purchase Department only.

Before placing any order to suppliers they first checks the materials ininventory as to know about whether materials are available in Inventory or not.If not available in Inventory then only they will place an order according to the

requirement.

In Apex Auto Ltd (Unit II), it is very important to note that: purchasedepartment always places an order to those materials which have ordered by

Customers/buyers of Apex Auto Ltd (Unit II).So, normally it does not have any stocks in its inventory. For every order

from customers they make a fresh Purchase Order for purchasing of materials.

It means whatever the materials are requiring for present orders, thosematerials are only they kept as stocks in Inventory.

In some cases, materials may be in Godown, which they call it as “BufferStock”. If these old stock is matches the requirements of product which has

ordered now by its customers, then purchase Department will sent a notice toInventory for issuing of those materials. These old stock may be in form of Raw

Material or in form of finished goods. Apex Auto Ltd (Unit II) always producesmore than its requirements. For example if Telcon has ordered for 20 EX- 70

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boom then Apex produces 25 EX – 70 i.e., 20% more than its requirements. Sothe remaining or excesses material they call it as “Buffer Stock”.

2) Receiving of MaterialsAny materials comes-in or goes-out from the Godown it should be enter

in the Gate that is they call it as “Gate Entry”, which is maintained by security

Guard. Guard is not an employee of an organization. He is a contact-basedemployee.

When Inventory receives materials it first inspects some samples, so for it,they call up as “Spot Inspection.” Here they inspect the following points:

a) Is it our supplier only and is this parcel is for us only?d. Are these received materials according to the Purchase Order? Like

i. Quantityii. Date, etc.,

e. Is it having all required Challans or Invoices and also does it approved byauthorized person?

f. Is it having all required documents like Octroi etc.,

g. Is that Challan consisting the correct information of materials?

After approval of materials by sample inspection, inventory department

put these details in manual book, this documentation is called as “Day Book.”This daybook is consisting of information like Challan No., P.O. No., Style No.,

Description of Materials, Supplier’s Name, transporter’s Name, and Quantity.

After completing of these processes, materials will send to inspection

department. In this inspection department they inspect in-details of materials.

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After approval by inspection department, this inventory department makes onedocument, which is they call it as “Goods Received Document”.

This Goods Received Document is consisting of GR No., Date, GRN Type(In-store), Mode of Transport, Challan No., Challan Date, Status, Gate Entry No.,Gate Entry Date, Priority No., all Details of Materials and received quantity and

actual quantity also enters there.

3. Issuing of Materials

Merchandising Department will send one card called “Job Card” which it

consisting of all details of materials requires to produce a product. Accordingto that Card Inventory department should send the materials to manufacturingdepartment.

After receiving of materials by manufacturing department from inventory

department they issue one document about received of materials, quantity,description of materials etc. Manufacturing Department uses these materialsfor manufacturing purpose. In manufacturing process sometimes it may

happens like some materials get damages and some are not fully matches withrequirements. Then those materials will be return to inventory.

After utilizing of all these materials by manufacturing department theywill send one document called “Order Completion Report” (OCR). This report

consists the information of Percentage of Utilized Materials for particular orderand percentage of wastage of materials. This report will send to inventory and

also to Merchandising Department.

4. Return Back Materials from Manufacturing Units:

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Inventory takes those materials, which are return back frommanufacturing units because of excess or surplus occurs while manufacturing

of products. This excess or surplus exists because of purchase department,they always orders 20% more than its requirement to meet the requirement ofnext month. So these materials are kept in Inventory as name it as “Buffer

stock.”

These Buffer Stocks will be utilize when company get the same type ofOrder. Inventory issues these materials (Buffer Stock) only when it receivesinstruction from Merchandising and purchasing Department.

5. Rejected Materials:

Inspection department make the rejection of materials, when materialsare not as per requirements and not as per the order. These rejected materials

are kept in separate section by Inventory Department.

Inventory department inform to Purchase Department and also notice to

Suppliers about rejection of materials. That is called “Rejection Card.” In thiscard it involves Name of Supplier, Description of Materials, Challan No., ChallanDate, Gate Entry No. & Date, No. of Quantity rejected, Reason for rejection etc.,

Some times supplier may issue new materials in place of rejected

materials. Or he may give some compensation for wrong supply and that isafter paying of full payment of materials.

Sections in Inventory:

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Inventory is again divided into 5 sections. Each is section handling byonly one persons, with the help of 3 to 4 assistants, who helps in maintaining

of materials at specific area. Five sections are as follows:

Sections in Inventory

D201All bought out items are been stored here and processed to the manufacturing

as when requiredD202All consumables and tools and maintenance accessories are been stored in this

sectionD203All raw materials like direct, semi finished goods are stored in this section and

processed to the manufacturing as when required and old stock and rejecteditems are also stored in this section.

D204Gas tank and cylinders is stored in this section.D205

All finished goods are stored in this section

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Purchasing Procedure of Materials

In Apex they purchase materials at from a multiple Suppliers. There is areason for purchase materials from multiple suppliers. The reason is if one

supplier delays to fulfill the supply then there must be alternative supplier for itto fulfill the requirement. So there must me no stock outs in the productionprocess

Apex always purchases at bulk but by schedule wise. In other words they

purchase materials at a time for specific order. They make the agreement ofsupplying materials only at once. And they negotiate the price only at once thatis before supplying of materials and once their agreement is over then they

provide schedule to supplier to supply the materials at a specific time and at aspecified quantity.

So it reduces the spaces, which occupies in the Godown. So this methodis suitable for this type of industry because of same orders from customers.

WIP Store

Now we come to the WIP Store. As we have already seen that this Apex is

having only one Godown and every unit is having its own Store Departments.As we know that Work In Process Store means Semi-finished Goods, here goodsare not completed yet and not these are in fully raw materials form.

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So in valuation matter it is having slightly different way. And in Apex it isas follows: Yes, these goods are includes some labour cost, some other costs.So in valuation of WIP they valuate at Raw Material Price of that goods PLUS

incurred cost to produce till now.

Finished Goods

Valuation of Finished Goods in Apex is at 10% less than Selling Price ofthose finished goods. Finished Goods are in the sense these goods should be

ready to dispatch.

There is no separate Godown for Finished Goods/Products. Every unit ishaving it’s own Finished Goods Godown. In that Godown only they store these

Goods. And dispatching of these products is directly by each unit. They do notconsolidate these goods; they dispatch these finished products directly by eachunit.

Apex auto ltd (Unit II) has only one customer that is Telcon. So they

directly supply finished products to its customers. So it is not necessary tohave another Godown for Finished Goods.

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Logistics Inventory Management

There is a department called Logistic Department in Apex Auto Ltd, whichis concerning about selling of goods and maintaining of all documents related

to exporting of products and also taking the permission from banks to sellspecific products in specific countries. So Logistic Department is one of theimportant front-office Departments, like Marketing Department.

Marketing Department is one, which takes the orders from its customers.

And this is entirely different from Logistic Department. Logistic Department isone, which sells its products and maintains all documents. But MarketingDepartment is comes into picture before production process starts. And

Logistic Department comes into picture only after the production processcompletes.

Logistic Department is not only taking the approval for selling itsproducts, but also it will concern for taking loan for its working capital. Banks

will provide these working capital requirements in two senses: one is onPre-Shipment Loan and another one is Post-Shipment Loan.

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There are so many ways to get loan for working capital requirement.Apex get loan for Working Capital requirement either through CommercialPapers or through Letter of Credit. Apex is taking loan for Working Capital

Requirements from Axis Bank.

Who can issue the CP:

A company will be eligible to issue the CP provided:1. the tangible net worth of the company as per latest

audited balance sheet is not less than Rs. 4 Crores.

Note:Tangible net worth means share capital plus free reserves duly reduced

by intangible assets like accumulated losses, deferred revenue expenditure etc.

Free Reserves include share premium and debenture redemption reserve but donot include revaluation reserve.

2. Company has been sanctioned working capital limitsby banks.

3. Borrowed amount of company is classified as astandard asset by the bank.

Commercial Paper is an unsecured promissory note issued at a discount.The rate of discount is required to be decided by the issuer and is not regulated.

Before the company issues the CPs it is required to obtain satisfactorycredit rating from an approved credit rating agency. Presently, following credit

rating agencies have been approving by RBI for this purpose.

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a. Credit Rating Information Services of India Ltd.,(CRISIL)

b. Investment Information and Credit Rating Agencyof India Ltd., (ICRA)

c. Credit Analysis and Research Ltd., (CARE)

d. FITCH Rating India (P) Ltd.,

The minimum credit rating required is P-2 of CRISIL. If the rating is given

by any other agency, equivalent minimum rating will be required. The rating soobtained by the company should be current and should not have fallen due forreview.

Who can invest in CP:

Following persons can invest in the CP4. Individuals5. Banks

6. Corporate Bodies incorporated in India7. Unincorporated Bodies

8. Non-resident Indians9. Foreign Institutional Investors

Nature of a CP:h. A CP can be issued for the maturity period of 7 days to one year.

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i. A CP has the denomination of Rs. 5 Lakshs and every single investorshould invest minimum Rs. 5 Lakhs in CP.

j. Every issue of CP, including the renewal, will be considered to be the fresh

issue.k. The amount of CP shall be within the overall limit sanctioned by the Boardof Directors. It can be issued a “stand alone” product. Banks will be free to

adjust the working capital limits after considering the CPs issued by theCompany.

It will not be out of place to mention here that CP is not treated as deposit asper the provisions of Section 58-A of the Companies Act, 1956.

Procedure for issuing the CPs:

Every company issuing the CP should appoint a scheduled bank as theIssuing and Paying Agent (IPA). It will satisfy it-self that company has obtained

satisfactory credit rating. It shall also verify the documents submitted by theissuing company and issue a certificate that the documents are in order. IPA

should also certify that it has valid agreements with the issuing company.

The issuing company shall arrange to place the CPs on private

placement basis with the inventors. The issuing company shall disclose to thepotential investor its financial position. After the deal is confirmed, the issuing

company shall issue physical certificates to the investor. Investors shall begiven a copy of IPA certificate to the effect that the issuing company has a validagreement with the IPA and documents are in order. Every issue of CP should

be reported to RBI through the IPA within three days from the date ofcompletion of issue.

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Apex Auto Ltd (Unit II) has setup in Telcon Premises so as we know earlierthat Apex Unit II is having only one customer that is Telcon so for shortdistance there is no need of logistic department in Apex Unit II it is handled by

Purchase department incharge is Parmod Singh.

Financial Inventory Management

Already we saw about Logistic Inventory Management. Let us see howApex valuates the old and rejected stocks in financial terms and also have a

look on the inventory ratios.

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Valuation method for Old and Rejected Stocks:

Old Stock:

This old stock means excess of materials from specific order. As alreadyviewed in Physical Inventory Process that, always purchase departmentpurchases 20% more than its order. So that remained or excess materials are

said to be “Buffer Stock”

These Old stock are in the form of Raw Materials then valuate it accordingto purchasing of those materials. If these old stock are after Finishing ofproduction process. Then these are valuating on selling price of same products

to the customer.

In easy words it can be said that if materials are Raw, then taking asPurchasing value for valuation purpose. If materials are Finished Goods thentaking Selling Price as a value for valuation of Old Stock in Godown.

Rejected Stocks:

Again these are divides into three parts. Rejection of Raw Materials i.e.,

before sending to Production Process. Rejection of Materials during theProduction Process and Rejection of Materials after the Production Process thatis, Rejection of Finished Goods.

Rejection of Raw Materials is valuating on Purchase value of those

materials. Rejection of WIP Materials then valuate as Purchase Value Plus itspartly incurred Costs like Labour, Overhead Costs etc., And for Rejection ofFinished Goods valuate at Purchase Value and Fully incurred Costs as said now.

Holding or Ordering Cost

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These costs are every important in manufacturing companies to minimize

the cost. This is not applicable to Apex by virtue of its Business activities.Because, let us have a broad view on statement by following points:

In Apex, they purchase the materials only from multiple supplier.

Because to fulfill the requirements in required time limit.

Apex orders the materials to suppliers only at once and according to theschedule supplier will supply the materials.

Yes, Depending on Shorter order cycle Apex can hold entire stock well

before order starts and also Apex can have a full stock at a time before startingprocess of product of that specific order.

EOQEOQ applicability due to the nature of Business as above said is not

possible.

Reorder Point:

This is the point is also not having much importance because of nature ofBusiness.

Lead TimeApex purchases materials from multiple supplier and by on schedule

basis to supply materials. So this is also not applicable in this type of business.

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Financial Ratios related to Inventory.Raw material turnover ratio:

Raw material turnover ratio is velocity at which raw material converted

into goods ready for sale. If raw material turnover ratio is high then company isefficiency converting into finished goods.

Formula: Material consumed / Average raw material

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Form above graph we come know that raw material turnover ratio is increasedrapidly in 2007 from 1.74 in 2006 to 10.27 for 2007. Indicates that company isconverting raw material into finished or semi finished goods very quickly

Holding period of raw material:It refers to the number of days taken for the production unit to

convert raw material to finish goods.

Formula: 360 /Raw material turnover ratio

Raw Material Turnover Ratio

YearRaw material consumed(Rs) Avg R.M Ratio

2008 576,484,922 53,608,082 10.75

2007 371,223,873 36,137,266 10.27

2006 230,779,236 132,002,490 1.74

Ratio

0

2

4

6

8

10

12

2008 2007 2006Years

Ratio

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As the raw material turnover ratio is increasing form to 10.27 for 2007 itindicates that firm is taking less days for conversion as compared to 2006. In2006 conversion period was 206 days but in decreased to 35 days for 2007.

This is shown in above graph.Before 2007 there was no production process they were converting

semi finished goods into finished products hence to start their own productionprocess they hold the raw material in 2006

Work in Process Turnover ratio:

Holding period of raw material

Year Total Days Ratio Days

2008 360 10.75 33

2007 360 10.27 35

2006 360 1.74 206

Raw material holding Period

0

50

100

150

200

250

2008 2007 2006Years

DAYS

RHP

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Work in process turnover ratio is velocity at which W.I.P converted intogoods ready for sale. If W.I.P turnover ratio is high then company is efficiencyconverting into finished goods.

Formula:Cost of production

Average W.I.P

W.I.P turnover ratio

Year Cost of production Avg W.I.P Ratio

2008 849,054,442 36,720,702 23.12

2007 555,094,500 15,010,347 36.98

2006 361,110,197 9,755,839 37.01

Form above graph we came to know that Work in process turnover ratio isdecreasing from 37.01 in 2006 to 23.12 2008. The ratio was high in 2006 as

compared to 2007 and 2008. The ratio was 37.01. Indicates that company isconverting semi finished into finished goods quickly

Work in Process Turnover ratio

05101520

25303540

2008 2007 2006

Years

DAYS

Ratio

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Holding period of W.I.P:It refers to the number of days taken for the production unit to convert

semi finished goods into finish goods.

Formula:360

W.I.P turnover ratio

Holding period of W.I.P

Year Total Days Ratio Days

2008 360 23.12 15.57

2007 360 36.98 9.73

2006 360 37.01 9.72

Holding period of W I P

024681012141618

2008 2007 2006Years

DAYS

Ratio

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As the work in process turnover ratio is increasing form 9.72. in 2006 To 15.57for 2008 it indicates that firm is taking less days for conversion. Which shownin above graph

Finished goods turnover ratio:Finished goods turnover ratio is velocity at which finished goods

converted into for sale. If finished goods turnover ratio is high then company isefficient.

Formula:Cost of goods soldAverage finished goods

Finished goods turnover ratio

Yearcost of goodssold Avg F.G Ratio

2008 849,054,442 26,243,339 32.35

2007 555,094,500 19,858,482 27.95

2006 361,110,197 10,940,008 33.01

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Form above graph we came know that finished goods turnover ratio is

decreasing from 33.01 in 2006 to 27.95 for 2007. Indicates that company isselling goods little slowly as compared to 2006 but it is bit fast as compared to2008. Where the ratio for that particular period was 32.35

decreased to 11.20 for 2008 it is satisfactory. Which shown in above graph.

Inventory to capital employed:This ratio indicates the relationship between the total capitals employed

and inventories it shows how much capital utilized to invest in the inventoriesother than the other assets. The normal manufacturing firms have low ratio ofinventory total capital employed in the organization.

Formula: Inventory / Total capital employed

Inventory to capital employed

Year InventoryTotal capitalemployed Percentage

2008 197,465,069 301,443,215 65.50

2007 121,558,000 145,492,599 83.54

2006 67,994,623 98,333,324 69.14

Finished Goods Turnover Ratio

25262728293031323334

2008 2007 2006

Years

DAYS

Ratio

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By observing above graph we can say that the firm investing huge amount ininventories compared to other assets. It invested 83.54% of its capital in

inventory in 2007 where as it reduced to 65.50% in 2008

Inventory to current asset ratio:This ratio indicates the relationship between the inventory and current

assets. It shows the percentage of inventory to current assets, which helps theorganizations in deciding the current assets policy which also affect theliquidity position of the organization.

Formula: Inventory / Current assets

Inventory to current asset ratio

Year Inventory current assets Percentage

2008 197,465,069 331,314,504 59.60

2007 121,558,000 237,687,684 51.14

Inventory to capital employed

0102030405060708090

2008 2007 2006Years

PERCENTAGE

ICE

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2006 67,994,623 117,022,625 58.10

The inventory to current assets ratio in the year 2006 was 58.10% and it

decreased to 51.14% in the year 2007 but again it increased to 59.60% in 2008.It shows that the firm investing 59.60% of its investment is for inventory only.

Inventory to total assets:This ratio indicates the relationship between the inventory and total

assets. The significance of this ratio is it reflects the portion the inventory as apercentage of the total assets, which helps the management deciding the

utilization remaining resources profitably, since the inventory will lock up thehuge funds and reduces the profitability of the organization

Formula: Inventory / Total assetsInventory to total assets

Year Inventory Total assets Percentage

2008 197,465,069 990,329,087 19.93

Inventory to current asset ratio

4648505254

56586062

2008 2007 2006Years

PERCENTAGE

Ratio

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2007 121,558,000 540,916,088 22.47

2006 67,994,623 414,901,234 16.38

During the year 2006 the rate of inventory to total assets was 16.38% itincreased to 22.47% in 2007. But again it reduced to 19.93% in 2008. It

indicates that firm investing only 19.93% in inventory out of total assets.

Inventory to working capital:This ratio indicates the relationship between inventory to working

capital and it also indicates the amount to inventory tied up in the working

capital and it also shows the efficiency of inventory management.

Formula: InventoryWorking capital

Inventory to total assets

0

5

10

15

20

25

2008 2007 2006Years

PERCENTAGE

Ratio

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In the year the ratio was 146.45% in 2006. It decreased to 83.20% for 2007 butit increased it to 99.05% in 2008. It indicates that firm investing huge amount

in inventory

FINDINGS:

1. Raw material turnover ratio is increased rapidly in 2007 from 1.74 in2006 to 10.27 for 2007.

Inventory to working capital

Year Inventory Working capital Percentage

2008 197,465,069 199,345,123 99.05

2007 121,558,000 146,097,210 83.20

2006 67,994,623 46,338,277 146.45

Inventory to working capital

020406080100120140160

2008 2007 2006Years

PERCENTAGE

Ratio

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2. As the raw material turnover ratio is increasing form to 10.27 for 2007it indicates that firm is taking less days for conversion as compared to2006.

3.Work in process turnover ratio is decreasing from 37.01 in 2006 to23.12 2008. The ratio was high in 2006 as compared to 2007 and 2008.

4.As the work in process turnover ratio is increasing form 9.72. in 2006 To

15.57 for 2008 it indicates that firm is taking less days for conversion

5.Finished goods turnover ratio is decreasing from 33.01 in 2006 to 27.95

for 2007. Indicates that company is selling goods little slowly as comparedto 2006but it is bit fast as compared to 2008.

6.Company is selling goods little slowly as compared to 2006 but it is bit

fast as compared to 2008. Where the ratio for that particular period was32.35

7.The inventory to current assets ratio in the year 2007 was 58.10% and itdecreased to 51.14% in the year 2008 but again it increased to 59.60% in

2008. It shows that the firm investing 59.60% of its investment is forinventory only.

8.During the year 2007 the rate of inventory to total assets was 16.38% it

icreased to 22.47% in 2008. But again it reduced to 19.93% in 2009. Itindicates that firm investing only 19.93% in inventory out of total assets.

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9.In the year the ratio was 146.45% in 2006. It decreased to 83.20% for2007 but it increased it to 99.05% in 2008. It indicates that firm investinghuge amount in inventory.

10.As the finished goods turnover ratio is increasing form 10.87 in 2007to 12.86 for 2008 it indicates that firm is taking less days for sale. In 2008

conversion period was 12.86 days but in decreased to 11.20 for 2008 it issatisfactory.

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SUGGESTIONS:a) From the findings it is came to know that in the year 2006 the

number of days for holding Raw material is more, it is not good forthe company because it eats unnecessary investment. To avoid this

problem the following points will help.

Purchase Raw Materials at the time when the stock reaches theminimum level.

The purchases should not cross the Maximum limit otherwise thestock kept in stores idle.

Quantity should be ordered as per the demand. We can assume the

demand for the goods from past experience.

We can have more Raw materials which are imported from other

countries but carry reasonable stocks which are available locally.b) If we purchase less quantity of materials at a time it will reduce the

carrying cost but increases the ordering cost and vise versa.Therefore optimum ordering quantity is necessary, which minimizesthe cost.

c) The company should maintain a safety level and also reordering

point so that they come to know at what time they should order forthe supply of material and need not to suffer from short fall ofrequired material.

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CONCLUSIONAfter the study, we can came to a conclusion that, effectiveness of inventory

management should improve in all the aspects, hence the industry can stillstrengthen its position by looking into the following.

The inventory should be fast moving so that warehouse cost can bereduced.

The finished goods have to be dispatched in feasible time as soon as

manufacturing is completed.

Optimum order quantity should be maintained, hence cost can be

minimized.

Proper inventory control techniques are employed by the inventory

control organization within the framework of one of the basicmodels like ABC, HML and VED etc.

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BIBIIOGRAPHY

BOOKSFinancial Management : I.M.Panday

Production Management : K. Ashwatappa

WEBSITESwww.apexautoltd.comwww.google.com

http://www.apexautoltd.com

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Economy & Finance

Inventory management and its effects on working capital”