INVENTORY MANAGEMENT INTRODUCTION:

Finance is regarded asTHE LIFE BLOOD OF BUSINESS ENTERPRISE. Finance function has become so important that it has given birth to financial management as a separate subject .So, this subject is acquiring universal applicability. Financial management is that activity which is concerned with the planning & controlling of the firms financial resources. As a separate activity or discipline is of recent origin, it was a branch of economics till 1890. Still today it has no unique knowledge its own, and it draws heavily on economy for its theoretical concept. The growth of any organization depends on the overall performance of production, marketing, HRM & Finance. The financial performance of the organization reflects the strengths, weakness, opportunities and threats of the organization with respect to profits earned on investment.

INVENTORY management is very important in an organization in order to have a Smooth move of it. The term inventory refers to the stockpiles of the products a fire is offering for sale and the components that make up the product. In other words, inventory is composed of asset that will be sold in future in the normal course of business operations, inventory as current asset differ from other assets because only financial managers are not involved, rather all functional areas finance, and marketing, production and purchasing are involved. The view concerning the appropriate level of inventory would differ among the different functional areas . The job of the financial manager is to reconcile the conflicting view poin ts of the various functional areas regarding the appropriate inventory level in order to fulfill the overall objective of maximizing the owners wealth. Thus, inventory management should be related to the overall objective of the firm. The basic responsibility of the financial management of inventory should ultimately result in the maximization of owe owners wealth.

Although our discussion of inventory management will focus on the finance

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perspective it is important to understand that good inventory management is vital to the success of virtually all firms. Inventory management activities can range from ensuring that there is an adequate selection of different sizes of clothing available in a retail store to stocking necessary replacement parts for commercial Aircraft. MEANING OF INVENTORY MANAGEMENT : Inventory Management means planning, procurement, holding and accounting and distribution of these and materials. Inventories are approximately 60% of current assets in India. In industries using agricultural raw materials the percentage is still higher. Thus, a large part of working capital is invested in inventories. The management of inventories is therefore necessary is therefore necessary to avoid heavy loss due to leakage, theft and wastage because neglecting the management of inventories may jeopardize. The long on profitability of the concern may fall ultimately. The reduction in excessive inventories carries a favorable impact on a companys profitability. The financial manager actually is a kind of watchdog over fuctional areas. Broadly speaking the inventory management problem is one of maintaining for a given financial investment an adequate supply of something in order to meet an accepted distribution or pattern of demand.

Need for the study

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The inventory plays a vital role in the efficient operation of the company. Particularly, it is in direct touch with manufacturing departments, materials department and marketing department in its day to day activities. In all most all industries 60% of the working capital invited in the materials. An efficient inventory management can help to achieve better utilization of this investment with considerable degree of success.

Providing all the required raw materials, consumable stores, components etc., to the manufacturing units at the right time and place, the lowest possible cost and adopting inventory control measures, using good materials handling practices are the principle objectives of stores management. In other words reducing the cost in all spares of the manufacturing activities will help in increasing the profits of the company

The efficiency with which the inventory is managed will invariable determines the efficiency of the production and levels of profits of the enterprises.

Scope of the study

The study includes systems, documentation procedures storage and compliance of statutory regulation which are in o[operations by SREE AKKAMAMBA TEXTILES LTD TANUKU, while giving emphasis on raw material and it also covers work in progress and finished goods. The present study covers purchase store functions and efficiency of many acquiring materials and utilizing them to minimize cost of materials and maximize profits The study is also undertaken to evaluate the companies present financial performance with a special regard to the value of inventory maintained and to know the influence of inventory levels on the sales turnover The scope also includes the study of various methods adopted by company in order to maintain the quality of its finally to assent the various steps ads by the company to maintain and control its inventory position. The scope inventory management is very wide that various techniques of inventory controls management like EOQ model ABC analysis have been undertaken.

OBJECTIVES OF THE STUDY

The study the methods and Techniques of inventor)' control and management adopted by the company. The assess the performance of materials and inventory control section of S.A.T.LTD.

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

To have an overview of the purchase and stores department contribution to inventory control and maintenance. To review the theoretical frame work.

METHODOLOGY The methodology designed for my project entitled "Inventory Control Management" at S.A.T. Ltd; Tanuku was based on two sources.

1. 2.

Primary Data Secondary Data

PRIMARY DATA: Primary data has been collected by interviewing various people in production department as well as administrative people who will generally give the details of inventory process and also know the existing software in the company.

The primary data has been collected from the personal observation and personal interviews with the officials of the firm.

As the main emphasis of the study is on the inventory management at M/s. SRI AKKAMAMBA TEXTILES LTD., the primary data for the study was gathered : discussions and experiences with some personnel the accounts department.

SECONDARY DATA: The primary data was supplemented by the secondary data collected from published reports of the organization and some important presented in the study with AKKAMAMBA TEXTILES LTD., is taken from material data. And text book which has been matched with the record obtained from the company in order to may a strategic view.

LIMITATIONS OF THE STUDY

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

the financial statements of other organizations are not available.

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

policy of die company.

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

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

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

satisfactory exercise has been made to study financial performance of S.A.T. LTD. by giving more important to ration analysis, which is a powerful tool of financial analysis.

CHAPTERII

PROFILE O F TEXTILE INDUSTRY

Cotton Textile Industry is one of the oldest and largest during the last 3 decades the textile industry still occupies a keep position in the economy of the country industries in India which has made rapid strides during the century of its excellence. At the end of the March 1992 there were 1,117 mills in the country ( 846 Spinning Mills & 271 Composite Mills ) with about 27 million spindles and 1.8 lakes looms. There were 123 closed mills by the end of March 1993. At present the industry provides direct employment to nearly 12 lakes workers, accounting for 18% of all factory labor in the country. It also provides indirect employment to many millions like the cotton growers, processors, handlooms and power loom weaves who alone are estimated three million and innumerable cloth dealers and shopkeepers. The Industry contributes in ever
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increasing measure to the central and state government by way of taxes and duties.

Being one of the oldest industries it-has history of over 150 years. It occupies a unique position in the world export where Indian in the second only to Japan in terms of total quantity of export and supplies 16% of the world exports.

It has influence agriculture because of its consumption of cotton, wool & silk and industries because of its requirements machinery, dyes, and chemicals and synthetic fibers. Thus the Industry has an important role to play both in economic prosperity of the country and in the supply of in essential commodity of the entire population. The Cotton Textile Industry consists of 3 distinct categories in the

organized sectors these are

1. Spinning Mills. 2. Course of Medium Composite Mills. 3. Fine and super fine composite Mills.
<

Spinning mills are generally small in size. Course and medium composite mills are not

able to adjust their cost in the face of rising prices of raw materials and increase in wages. Consequently many of them became uneconomic units and ram into difficulties. Fine and super Fine composite mills use foreign cotton, they are not subject to stock restriction can therefore carry on stable production programmed.

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

The Industry faced its major post Independence crisis in the yearly sixties. Up till then if had been more or less sellers market and most of the mills were making reasonable profits. But a member of factors contributed to a very big depression in the market and mills started incurring losses. The result was that in 1967 the spindle activity came down for 88.2% to 73.1% consequently. 'Bombay mills owners Association" is the first main formed Association formed in the indian in the year 1875 .When India became India independent 1947. There where 10 million there hundred thousand spindles and two lakes two thousand looms installed in million mills. Then were also and estimated two and half million handloom weavers in the country. Indian Textile Industry The textile industry is the largest industry of modern India. It accounts for over 20 percent of industrial production and is closely linked with the agricultural and rural economy. It is the single largest employer in the industrial sector employing about 38 million people. If employment in allied sectors like ginning, agriculture, pressing, cotton trade, jute, etc. are added then the total employment is estimated at 93 million. The net foreign exchange earnings in this sector are one of the highest and, together with carpet and handicrafts, account for over 37 percent of total export earnings at over
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US $ 10 billion. Textiles,1 alone, account for about 25 percent of Indias total forex earnings. Indias textile industry since its beginning continues to be predominantly cotton based with about 65 percent of fabric consumption in the country being accounted for by cotton. The industry is highly localised in Ahmedabad and Bombay in the western part of the country though other centres exist including Kanpur, Calcutta, Indore, Coimbatore, and Sholapur. The structure of the textile industry is extremely complex with the modern, sophisticated and highly mechanised mill sector on the one hand and the handspinning and handweaving (handloom) sector on the other. Between the two falls the small-scale powerloom sector. The latter two are together known as the decentralised sector. Over the years, the government has granted a whole range of concessions to the non-mill sector as a result of which the share of the decentralised sector has increased considerably in the total production. Of the two sub-sectors of the decentralised sector, the powerloom sector has shown the faster rate of growth. In the production of fabrics the decentralised sector accounts for roughly 94 percent while the mill sector has a share of only 6 percent. Being an agro-based industry the production of raw material varies from year to year depending on weather and rainfall conditions. Accordingly the price fluctuates too. India's trade in textiles and its share in world trade can be categorized as follows:

Indias Trade in Textiles

1

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(1998) Type Yarn Fabrics Apparel Made-ups Over-all India's Share in Compound Annual Growth Rate (CAGR) of different segments
Type
Yarn Fabric Made-ups Garment

World Trade 22% 3.2% 2% 9% 2.8%

CAGR (1993-98)
31.79% 9.04% 15.18% 6.795%

Global Scenario

The textile and clothing trade is governed by the Multi-Fibre Agreement (MFA) which came into force on January 1, 1974 replacing short-term and long-term arrangements of the 1960s which protected US textile producers from booming Japanese textiles exports. Later, it was extended to other developing countries like India, Korea, Hong Kong, etc. which had acquired a comparative advantage in textiles. Currently, India has bilateral arrangements under MFA with USA, Canada, Australia, countries of the European Commission, etc. Under MFA, foreign trade is subject to relatively high tariffs and export quotas restricting Indias penetration into these markets. India was interested in the early phasing out of these quotas in the Uruguay Round of Negotiations but this did not happen due to the reluctance of the developed countries like the US and EC to open up their textile markets to Third World imports because of high labour costs. With the removal of quotas, exports of textiles have now to cope with new challenges in the form of growing non-tariff / non-trade barriers such as growing regionalisation of trade between blocks of nations, child labour, anti-dumping duties, etc. Nevertheless, it must be realised that the picture is not all rosy. It is now being admitted universally and even officially that the year 2005 AD is likely to present more of a challenge than opportunity. If the industry does not pay attention to the very vital
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needs of modernisation, quality control, technology upgradation, etc. it is likely to be left behind. Already, its comparative advantage of cheap labour is being nullified by the use of outmoded machinery. With the dismantling of the MFA, it becomes imperative for the textile industry to take on competitors like China, Pakistan, etc., which enjoy lower labour costs. In fact the seriousness of the situation becomes even more apparent when it is realised that the non-quota exports have not really risen dramatically over the past few years. The continued dominance of yarn in exports of cotton, synthetics, and blends, is another cause for worry while exports of fabrics is not growing. The lack of value added products in textile exports do not augur well for India in a non-MFA world. Textile exports alone earn almost 25 percent of foreign exchange for India yet its share in global trade is dismal, having declined from 10.9 percent in 1955 to 3.23 percent in 1996. More significantly, the share of China in world trade in textiles, in 1994, was 13.24 percent, up from 4.36 percent in 1980. Hong Kong, too, improved its share from 7.06 percent to 12.65 percent over the same period. Growth rate, in US$ terms, of exports of textiles, including apparel, was over 17 percent between 1993-94 to 199596. It declined to 10.5 percent in 1996-97 and to 5 percent in 1997-98. Another disconcerting aspect that reflects the declining international competitiveness of Indian textile industry is the surge in imports in the last two years. Imports grew by 12 percent in dollar terms in 1997-98, against an average of 5.8 percent for all imports into India. Imports from China went up by 50 percent while those from Hong Kong jumped by 23 percent.

Global factors influencing textile industry The history of the textile and clothing industry has been replete with the use of various bilateral quotas, protectionist policies, discriminatory tariffs, etc. by the developed
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world against the developing countries. The result was a highly distorted structure, which imposed hidden costs on the export sectors of the Third World. Despite the fact that GATT was established way back in 1947, the textile industry, till 1994, remained largely out of its liberalisation agreements. In fact, trade in this sector, until the Uruguay Round, evolved in the opposite direction. Consequently, since 1974 global trade in the textiles and clothing sector had been governed by the Multi-fibre agreement, which was the sequel to an increasingly pervasive quota regime that began with the Short-term arrangement on cotton products in 1962 and followed by the LongTerm arrangement. After the successful conclusion of the Uruguay Round in 1994, the MFA was replaced by the Agreement on Textiles and Clothing (ATC), which had the same MFA framework in the context of an agreed, ten year phasing out of all quotas by the year 2005. The section that follows takes a brief look at the history of these protectionist regimes as also a more detailed look at the MFA and the ATC.

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MultiFibre Agreement (MFA) On January 1st, 1974, the Arrangement Regarding the International Trade in Textiles, otherwise known as the MFA came into force. It superseded all existing arrangements that had been governing trade in cotton textiles since 1961. The MFA sought to achieve the expansion of trade, the reduction of barriers to trade and the progressive liberalisation of world trade in textile products, while at the same time ensuring the orderly and equitable development of this trade and avoidance of disruptive effects in individual markets and on individual lines of production in both importing and exporting countries. Though it was supposed to be a short-term arrangement to enable the adjustment of the industry to a free trade regime, the MFA was extended in 1974, 1982, 1986, 1991, and 1992. Because of the quotas allotted, the MFA resulted in a regular shift of production from quota restricted countries to less restricted ones as soon as the quotas began to cause problems for the traders in importing countries. The first three extensions of the MFA, instead of liberalising the trade in textiles and clothing, further intensified restrictions on imports, specifically affecting the developing country exporters of the textile and clothing products. Increased usage of several MFA measures tended to further erode the trust which developing countries had originally placed in the MFA. The MFA set the terms and conditions for governing quantitative restrictions on textile and clothing exports of developing countries either through negotiations or bilateral agreements or on a unilateral basis. The bilateral agreements negotiated between importing and exporting countrys contained provisions relating to the products traded but they differed in the details. The restraints under the MFA were often negotiated, or unilaterally imposed at relatively short intervals, practically annually. The quotas could be either by function or fibre

15

Under the MFA, product coverage was extended to include textiles and clothing made of wool and man-made fibres (MMF), as well as cotton and blends thereof. With regard to applications of safeguard measures, import restrictions could be imposed unilaterally in a situation of actual market disruption in the absence of a mutually agreed situation. However, in situations involving a real risk of market disruption only bilateral restraint agreements were possible. The Textile Surveillance Body (TSB) was set up to monitor disputes regarding actions taken in response to market disruptions. The MFA permitted certain flexibility in quota restrictions for the exporters so that they could adjust to changing market conditions, export demands and their own capabilities. The MFA also provided for higher quotas and liberal growth for developing countries whose exports were already restrained. The MFA asked the participants to refrain from restraining the trade of small suppliers under normal circumstances. In general, developed countries, under MFA, chose not to impose restrictions on imports from other developed countries The TSB ensured compliance by all parties to the obligations of bilateral agreements or unilateral agreements. It called for notification of all restrictive measures. A Textiles Committee established as a management body consisting of all member countries was the final arbiter under the MFA and worked as a court of appeal for disputes that could not be resolved under TSB.

Unsatisfactory experience with several extension protocols of the MFA, retention clauses, such as good will, exceptional cases, and anti-surge and other trade related factors led the developing countries to press for the inclusion of the textile issue in the agenda of the GATT Ministerial meeting. The eventual outcome of prolonged negotiations was the Agreement on Textiles and Clothing.

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Agreement on Textiles and Clothing (ATC)

The ATC calls for a progressive phasing out of all the MFA restrictions and other discriminatory measures in a period of 10 years. In contrast to the MFA, the ATC is applicable to all members of the WTO. .

Four Steps over 10 Years

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Steps

Percentage of products to be brought under removal quotas) GATT of (including

How fast remaining quota should open 6% up, if 1994 rate was

Step 1 1 Jan 1995 31 Dec 1997 Step 2 1st Jan 1998 31st Dec 2002 Step 3 1st Jan 2002 31st Dec 2004 Step 4 1st Jan 2005 Full integration into GATT and final elimination of quotas , ATC terminates
st st

16 percent (minimum 6.96 percent annually taking 1990 imports as base) 17 percent 8.70 percent annually

18 percent

11.05 percent annually

49 percent (maximum)

No quotas left

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Top 10 Exporters (Textile)

Country Hong Kong China South Korea Germany Italy Taiwan USA France BelgiumLuxembourg Japan Total (Top 10) World

1990 Billion US$ 7.99 7.10 6.04 14.00 9.80 6.13 5.03 7.21 6.54 5.88 74.36 104.00

% share 7.68 6.82 5.81 13.46 9.43 5.90 4.83 4.65 6.29 5.65 71.5 100.00

1997 Billion US$ 14.6 13.83 13.35 13.05 12.9 12.73 9.19 5.86 7.01 6.75 110.62 155.00

% share 9.42 8.92 8.61 8.42 8.32 8.21 5.93 5.64 4.52 4.35 71.37 100.00

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Top 10 Exporters (Apparel) Country 1990 Billion US$ 9.41 15.37 12.07 2.57 7.82 3.44 % share 9.14 14.92 11.72 2.49 7.59 3.34 1997 Billion US$ 31.8 23.11 14.85 8.68 7.29 6.7 % share 21.06 15.30 9.83 5.75 4.83 4.44

China Hong Kong Italy USA Germany Turkey

France UK South Korea Thailand Total (top 10) World

4.65 3.08 8.11 2.86 69.38 103.00

4.51 2.99 7.87 2.78 67.36 100.00

5.34 5.28 4.19 3.77 111.01 151.00

3.54 3.50 2.77 2.50 73.52 100.00

EU Top Ten Suppliers of MFA Clothing: Rank Price (AGR 1994-96)

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1995 Ranks and Average Price

1996 Ranks and Average Price

Rank Price CAGR 1994-96

Country

Rank in Rank in Avg. Value Volume 1 2 3 7 6 8 5 4 10 Price, Ecu/Kg 9 2 6 3 5 2 7 10 4

Rank in Rank in Avg. Price, Value 1 2 3 4 5 6 7 8 9 Volume 1 2 3 6 7 8 5 4 10 Ecu/Kg 8 6 5 3 4 1 9 10 2 3 7 9 4 2 8 10 5 1

China Turkey Hong Kong Tunisia Morocco Poland India Bangladesh Romania

2 1 3 4 5 6 7 8 9

Post-MFA / ATC Scenario It is generally believed that quota phase-out can only be beneficial for the industry. In 1993, a study of seven countries found that the price of cotton yarn per kilo, was cheapest in India at US$ 2.79, compared to US$ 3.30 in Brazil, US$ 4.19 in Japan, and US$ 3.10 in Thailand. This was because overall labour and raw material costs are cheaper in India. However, it should be realised that the opposite can also happen. Removal of quotas
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may open new frontiers but will also close captive markets. The EU and the US will no longer be restrained in buying as much as they want from the cheapest possible sources. Some argue that the ending of quotas will result in cut-throat competition between developing countries. Coupled with this is erosion in the growth of markets in industrial countries. Apparent consumption of textile products, in real terms, remained stagnant during the decade 1985-95. Purchases become discretionary and fashion-driven. As a result, fashion cycles got shorter and order-cycles compressed. Retailers order requirements on short-order cycle term and demand rapid responses to in-season ordering. Hence, they are compelled to secure their supplies of top-up orders from those in close vicinity. There is, therefore, a propensity towards sourcing from low-cost countries in the neighbourhood as also a growth of offshore processing by manufacturers in developed countries. Regional integration reinforces this. Further exporters in India fear that freer imports could lead to dumping of low-cost fabrics from China and other Southeast Asian countries. Thus, the industry needs restructuring on all fronts. Although the policy framework can be blamed partially for its ills, internal factors are equally important. Recent studies indicate that India is beginning to lose out to its rivals. In one survey of US textile and apparel imports, China and Hong Kong had higher market shares than India. In certain categories, other Asian low cost producers like Pakistan and Indonesia had higher market shares and had emerged as close competitors to India. Because many of these countries depend on imports, however, India can take advantage of home production. Further, formation of NAFTA means direct competition from the Latin American countries. The United States has farmed-out offshore processing work to enterprises in Mexico and the Caribbean Base Initiative countries. Similar relocation has taken place in Europe with manufacturers shifting base to Eastern Europe, which provides similar advantages of cheap labour and proximity.

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According to projections by TECS, EU imports of ready-made fabrics will double between 1994 and 2004, as a result of the elimination of quotas. US imports are expected to treble over the same period. According to another prediction, apparel output could more than double (i.e. expand by 241%) between 1995 and 2005, compared to an increase of only 114%, without the agreement on textiles and clothing. By increasing market access, the ATC will generate multiplier effects in the Indian economy, eventually feeding back into the textile industry itself. The rise in demand for exports could increase output and employment in the textile industry. This in turn will stimulate the agricultural sector to meet the rising demand for cotton. As profits rise, so will wages, which will act as further stimulus. The export boom in the textile and clothing industry will also generate considerable foreign exchange. Given Indias high quota growth rates during the phase-out period, its competitive product niches and established links with retailers and importers in developed countries, it should experience vigorous growth in the future. The World Bank predicts a growth rate of 16% per annum in the coming decade. Ultimately, the extent that India will benefit from trade liberalisation depends on its current cost competitiveness, its ability to increase productivity and upgrade quality. Implications on Indian Exports (Optimistic Scenario)Yarn + Garment exports of Bangladesh increase leading to increase in consumption of Indian fabric and yarn + Exports of Far-East & ASEAN increase further + Rationalization in duties of MMF leading to increase in processing of fibres in India Fabric/Made-ups + Garmenting dereserved leading to entry of large textile players ensuring efficient sourcing and increase in the margins + Increase in investment for processing

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+ Improvement in SAPTA trade

Garments + Garmenting and Knitting de-reserved to allow the units to grow bigger to be able to service large orders and large clients + Labor laws in India become industry friendly + Garment parks come up in key regions giving a boost to exports + Successful Quota Phase-out without exports getting restricted by QRs Fig in US $ Mn Yarn Made-ups Fabric Garments Total * Projections 1994 590 851 1214 3713 6368 1998 1780 1498 1716 4829 9823 2002 2333 2620 2512 6510 14035 2005* 2701 4527 3530 10794 21552 2010* 3131 11266 7100 21711 43208

Implications on Indian Exports (Pessimistic Scenario) Yarn - Change works to the advantage for S. Korea/ASEAN/Far-East - Demand for packages increases - EEC other garment supply countries invest in back-end processes Fabric/Made-ups - Environmental Clause impacts
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- Investment in processing does not happen - Blends and synthetic fabrics dominate reducing advantage of Indian cotton

Garments - Social clause impact leading to ban on some categories, etc. - SSA is a reality impacting exports of garments from India to USA and EU - FTA becomes a reality - Other projectionist measures come up As opposed to the optimistic scenario, the pessimistic scenario shows a shortfall of nearly US $4000 mn of exports in year 2005 and the exports are not likely to be much higher than the present figures. It would also lead to development of textile and clothing industry in the other nations and India would lose out as a significant player in the industry. This would also stifle the domestic textile industry which would be in a very weak position to compete with imports. (These are expected to become cheaper with import duty rationalization as per international treaties and cost competitiveness of overseas players). Some of the subsidies currently extended by the Indian government to promote exports which are sector specific (TUF, 80 HHC) or region specific (EPZS, EOUS) may also need to be withdrawn.

Fig in US $ Mn Yarn Made-ups Fabric Garments Total * Projections 1994 590 851 1214 3713 6368 1998 1780 1498 1716 4829 9823 2002 2003 2038 1931 5435 11408 2005* 2126 2427 2050 5939 12542 2010* 2022 3098 2154 6885 14159

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Conclusions To effectively tackle the situation India needs to invest in research and development to develop new products, reduce transaction costs, reduce per unit costs, and finally, improve its raw material base. India needs to move from the lower-end markets to middle level value-for-money markets and export high value-added products of international standard. Thus the industry should diversify in design to ensure quality output and technological advancement.

The weakest links in the entire chain are the powerlooms and the processing houses. The latter especially are very important because they are responsible for the highest value addition in the manufacturing line. A powerloom co-operative structure could be evolved for pooling of common services and functions such as quality testing, marketing, short-term financing, etc. Further, because of the geographical proximity enjoyed, a cluster approach can be adopted. The government also needs to make policy changes like dereserving the small-scale sector so that it can achieve economies of scale and adopt a synergistic approach. Handlooms by their very nature can adopt a strategy of "niche marketing. In this respect, export promotion, common credit and marketing facilities and more significantly publicity are important areas for co-operation. Here too, a co-operative structure would be useful though government agencies should be involved because of their outreach. Newer and more innovative forms of involvement are required where decentralisation should be a key element. India has made little attempt to forge partnerships in equity, technology and distribution in overseas markets. The newer nuances of global apparel trade demand joint control of brand positioning, distributing and quality assurance systems. The Indian textile industry has recognised the need for a cradle-to-grave approach when tackling environmental issues i.e. eco prescription should be applied right from the stage of cultivation to spinning to weaving to chemical processing to packaging. Here
26

especially there is great scope for private -public partnerships. A great deal of work has been done by Indian trade and industry to comply with ecological and environmental regulations, and so Indian garments can adopt an appropriate label signifying a distinct quality. Efficiency and output of handloom and powerloom sectors also needs to be increased. The clothing sector needs the support of high quality and cost-effective cloth processing facilities. Modernisation of mills is a must. Human resource is another area of focus. The workforce must be trained and oriented towards high productivity. The business environment of the future will be intensely competitive. Countries will want their own interests to be safeguarded. As tariffs tumble, non-tariff barriers will be adopted. New consumer demands and expectations coupled with new techniques in the market will add a new dimension. E-commerce will unleash new possibilities. This will demand a new mindset to eliminate wastes, delays, and avoidable transaction costs. Effective entrepreneur-friendly institutional support will need to be extended by the Government, business and umbrella organisations.

Areas where German development co-operation can help are enumerated below. Input Areas Policy framework is complex with inputs from many ministries. The following chart is not meant to be exhaustive but only to indicate areas where German development co-operation can have an impact.

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

Technological upgradation (egs. Effluent treatment plants, energy saving devices, and other machinery related directly to the production process like spreading, cutting, finishing, etc.)

Adoption of environment-friendly technology to pre-empt the adverse impact of non-tariff barriers. This includes environmental monitoring / testing equipment and services, combating air pollution (package scrubber, special air pollutant treatment for H2S, CS2), solid waste removal, wastewater disposal

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

Working out alternative techniques / frame conditions such that sanitary and phytosanitary measures are not a problem

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

Usage of EPS (Electronic Point of Sale) software

Promoting labels like RUGMARK (carpets) in textiles so that consumers are satisfied that child labour has not been employed, to counter negative publicity generated by the "Clean Clothes" movement, etc.

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Promoting hand-made articles by improving quality of raw materials and introducing machinery where possible in the process so as to maintain standards of quality and design Development of new products Adoption and adaptation of state-of-the-art information technology in enterprise resource planning so as to pre-empt non-tariff barriers which curtail markets for the Indian textile industry Helping firms build close relationships with customers Training centres

Short-term credit

Improvement of synthetic fibre-base to reap economies of scale, use of genetic engineering, bio-technology, and cellular biology in both natural and synthetic fibre-base

THE TEXTILE COMMISIONER ORGANISATION The function of the Organization are many and diverse to advise the Government and planning commission on the targets of production for the varies Five Year plans, to scrutinize proposals form mills few expansion recommended new installations for licensing to exe4rcise control over the pattern of production, to ensure adequate supplies of Raw materials to the industry and to make recommendations to Government in this regard to collect and publish all relevant statistical data relating to production, stocks, imports, exports etc., in the Administrative authority for implementation of Government polices with regard to all Textile Industry. Cotton Textile Industry being the largest Industry in India. Has spread practically are all parts of the country, it is mostly localized in the states of Maharashtra and Gujarat. In recent years, Cotton Textile Industry has also spread to a number of other states like Madhya Pradesh, Bihar, Kerala , Andhra Pradesh, Uttar Pradesh and
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II. PROGRESS DURING FIVE YEAR PLAN.

In the Five year Plan period the Planning Commissioner fixed a target of about 745 million Kgs of yarn and about 4,230 million meters of cloth for the mill sector. The actual production amounted to 760 million Kgs of yam and about 4,775 million meters of cloth. In the Third fiver-year Plan period the target was fixed at 1,020 million kgs. Of yarn and 5,220 million meters of cloth. The actual production was lower than that in the Second Five Year Plan period.

The Fourth five-year Plan target was 81 lack bales. The fifty year plan target had been of the order of 84 lakes bales. The target for the sixth plan has been 92 lakes bales. The Government, to ensure proper import of cotton, had set up one agency called Cotton Corporation in 1970. Its authorized capital 5 corers and the paid up capital 50 lakhs. Through the corporation is intended to undertake only import trade purchase cotton by way of price support. The corporation also purchases cotton required for mills which are functioning under the national textile Corporation. The Industry however has no resources for the huge task of replacement and modernization. The government and public sector financial institutions will have to provide the necessary funds for this purpose. At one time nearly third of mills were closed down, throwing thousands of workers out of employment.The Government established in 1986, Textile Corporation (NTC) a restricted framework having the following 3 dimensions the industiy shall be viewed in terms of stages of its manufacturing process spinning, weaving and processing. The Industry shall be provided with fuller flexibility in the use of various fibers and the Industry shall be subjected to more programmatic polices
30

regarding creation or contraction of capacities by units in order to increase competition and promote health} growth in Industry. The new textiles policy has made an elaborate statement on take over and revival of sick units. The new textiles policy in the same breathes categorically status. Take over by the Government or nationalization of such units does not provide solution to the problem of sickness and the Government would not as a rule in intervene in such case.

Modernization in the spinning, weaving and processing sections shall be under taken on the basis of carefully identified needs of each unit as to installation of equipment, renovation of equipment, renovation of existing machinery, replacement and technology up gradation, there was a mixed relation to the new textile policy, specially the reduction of Piscal lives on man a made fibers and yarn, the liberal import of machinery which was not indigenously manufactured and the permission to close down nonviable units.

The Cotton textiles fund committee was established by an ordinance in 1944. The objectives of the Committee were to provide funds the textiles research, to under taken implications of all textiles for export and to conduct research into the consumption of textiles.

GENERAL:

In spite of adverse trading conditions that prevailed during the year, it is heartening to note that nine mills-seven full and two associated enrolled as members. SITRA has, in all 424 members comprising of 516 units which include 420 spinning mills, 72 composite mills, 13 machinery manufactures and 11 fiber manufacturing and process house. It is significant
31

that over 20% of the members are from outside SITRA Zone inclusive of 16 from overseas. In addition SURA'S services are availed by 56 small spinning mills who are registered as technical service card holders. SITRA ALSO DOES EFFECTIVE TRANSFER OF technology to the power looms units and the knitting industry in the southern region through its PLSC AND AEPC.

COMPANY PROFILE Sree Akkamamba Textiles limited (SATL), a part of Andhra Sugar: si In concern was promoted in 18 April 1954 Sri Mullapudi Harischandral'iu KI Associates. The promoters got equity support from Financial Institutions like II 'III. IIBI, ICICCI, Andhra Bank, State Bank of India, State Bank of Hyderabad and Pul-lii Deposits.

32

The company Sree Akkamamba Textiles Limited is a broad managed company 11 Directors on the Board. Sri. Mulapudi Harischandra Prasad is ||u-Chairman and Managing Director and Sri. M.S.R.V.K.Ranga Rao is the Director. The other members of the board include representatives of the
VHILHIS

financial institutions and organizations that

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

The company is a manufacturer of hank yarn and cone yarn. Production is carried out in the plant situated in Venkatarayapuram, Tanuku, West Goda
MM

District in Andhra

Pradesh. The plan operated with sophisticated talin-il collaboration of machinery by using it high-speed spinning and textile weaving process. The plant has dual feed facility with the help of which production can be carried out either like cotton or polyester or viscose as one of he major raw malci I; With recent expansion, the capacity has been increased substantially.

The expansion was completed in 1988, the plant function with 3 spinning in 11, having installed capacity of 9009 spindles. The Company Directors Director are assisted by qualified and experien s I professionals in various fields of production, research and development expi its finance marketing, secretarial and legal functions. The total manpower, ul IK company including managerial, personnel, executive staff, trainees and workmen amount to 750. SAT Ltd. Has its corporate of at Venktarayapuram Tanuku

The company has been operation the plant constantly since inception <ii nil capacity and has made a mark wit it quality product and its after sales service;!, i lie company has an impressive record in terms of increasing turnover (including expi lis) and its profits, as revealed by the financial statements. The company presently i; tol playing dividends the shareholders.

With a growing market of polyester fabrics, the company foresees i f-tiily large gap in demand and supply of its products. Presently, the firm is incurring as it is less that 5 years old and faces competition from the likes of Satyanarayana Spinning Ltd.,
33

Venkatarayan Spinning Ltd, Rambhadra Spinners Ltd, ami timet Andhra Pradesh Textiles industries etc.,

The company being a progressive one carries out research and Developmt ill in specific areas like reducing raw material consumption and reducing waste 1 hi company plant to manufacture value added polyester products as well.With an already impressive track record, State safety Award from Andhra Pradesh Government for environmental safe.

MARKET SCENARIO

The cotton yarn, viscose cotton yarn and polyester yarn market has Ifei expanding, opening venues in both domestic and international circuit for marketing The major buyers of the company's products are wavers, texruristers and povyei looms.

The customer's are mainly concentrated in the western region of the amnio This also making a mark in the Southern Market. Exports have increased ovi r ||. years. The company has tapped markets in Bangladesh, Srilankha and otliei Ire: I areas like Mumbai, Ahmedabad, Chennai, Calcutta and East and West GiHh'aii surrounding weavers' areas and etc.

The product cotton yarn is manufactured and marketed over a product i uu-The product range includes yarn of different levels.

Sl.No.

Item code No. (1TC code )

Product Descnpi inn

34

1 2 3.

520515.01 550953.00 551030.09

Cotton Yam Polyester Cotton Vain Viscose Cotton Y';im

The Company has vibrant demand for each yarn h modifies its product is as an when required. This flexibility enables He Company to maintain, if share and retain its customer base. The company is functioning in a competitive oligopolistic market, wherein thee are few but big players. Its present competitors are Satyanaryana Spinning Ltd. Venkataraya Spinning Ltd., Chowdary Spinning Ltd., Gamine Textiles Ltd.. Rambhadra Spinners Ltd., and other etc. It becomes necessary to carefully work out intricacies of pricing and credit policies, to face such competition, even though the market demand for products is higher then the supply.

REVIEW OF OPERATION 2009-10

The recessionary conditions and imbalance in demand and supply position in Textiles industry continue unabated during the year under review.

1.

The creation of additional capacity during last two years has resulted in over supply situation. The problem was father compounded by the thought ol cheaper imports form Southeast Asian countries. This has necessitated the Industry to price
35

the products competitively which we not remunerative.

2.

Despite severe competition the performance of industry was well I terms ol production and sales volume of cone yarn and hank yarn which registered in increase of 14% an^l6% respectively in previous year.

3.

The critical success factors of the company are: employing latest continuous polycondensation technology to manufacture of yarn at lower cost and with minimum wastage's unassured supply of yarn products, the two major raw materials of cotton, viscose cotton, and polyester cotton and strong morecety network.

4. The Production side however company* maintained a high level of production and productivity and sales despite the difficult market

EXPANSION PLANTS :

The company has also proposed to expand is spinning capacity by about 5000 spindles enchanced the total capacity tip to 6000 spindles at an estimates cost of Rs. 10 crores by adding two more spinning lines take fill advantage surplus capcity available wiht the company. The proposed expansion is completed

PRODUCTION:

The company has achieved of production of 2245518 meters of yam and 726817 meters of wastage of yran during the year 2008-2009

36

SALES:

The company has achieved a sales turnover of Rs.3402 lakhs which included exprots taken at FOB at Rs.280 lakhs.

PROFILE OF THE COMPANY :

NAME LOCATION STARTED ON DATE DATE OF COMMERCIAL

: :

Sir Akkamamba Textiles Ltd. Venkatarayapuram April, 18,1954

37

PRODUCTION STARTING SIZE PRESENT SPINDLE SIZE MILL AREA AFFILIATORY FIRMS TOTAL EMPLOYEES SHIFTS PRODUCTION CAPACITY POWER CONSUMPTION WATER
CAPACITY UTILIZAION

: : : : : : : : : : : : : : : :

Sep, 1, 1956 8000 Spindles 8600 Spindles 21 Acres Andhra sugars 895 3 Shifts (General 7.30 Am. to 5.00 Pm.) 6.5 tones per day 44,000 UTS 50000 gallons 95.72 76% 24% 100 crores per year Mumbai, Madras, Icchalaka Raji Chirala, Mangalagiri, Guntur.

CONE YARN
HANK YARN

TURNOVER CONEYARN HANKYARN

CHAPTER-III THEORITICAL BACKGROUND OF INVENTORY MANAGEMENT INTRODUCTION:

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

38

move of T the term inventory refers to the stockpile of the products a fire is offering for sale and the components that make up the product. In other words, inventory is composed of assets that will be sold in future in the normal course of business operations. Inventory as a current asset differ from other assets because only financial manager ctional areas finance, and marketing, production and purchasing are involved. The view concerning the appropriate level 0f inventory would differ among the different functional areas. The job of the financial manager is to reconcile the conflicting viewpoints of the various functional areas regarding the appropriate inventory level in order to fulfill the overall objective of maximizing the owner's wealth. Thus, inventory management should be related to the overall objective of the firm. The basic responsibility of the financial manager is to make sure the firm's cash flows are manager efficiently. Efficient management of inventory should ultimately result in the maximization of owner's wealth.

Although

0Ur

discussion of inventory management will focus on the finance

perspective it is important to understand that good inventory management is vital to the success of virtually ail firms. In fact inventory is the key to being a top player in many industries today including both retailing and manufacturing because of its importance, managers at all levels, and* in all functional areas, are involved management. Inventory management activities can range from ensuring that there is an adequate selection of different sizes of clothing available in a retail store to stocking necessary replacement parts for commercial Aircraft.

39

MEANING OF INVENTORY MANAGEMENT:

"Inventory Management" means planning, procurement, holding and accounting and distribution of these and materials. Inventories are approximately 60% of current assets in India. In industries using agricultural raw materials the percentage is still higher. Thus, a large part of working capital is invested in inventories. The management of inventories is therefore necessary is therefore necessary to avoid heavy loss due to leakage, theft and wastage because neglecting the management of inventories may jeopardize. The long on profitability of the concern may fall ultimately. The reduction in excessive inventories carries a favorable impact on a company's profitability.

The financial manager actually is a kind of watchdog over functional areas. Broadly speaking the inventory management problem is one of maintaining for a given financial investment an adequate supply of something in order to meet an accepted distribution or pattern of demand.

Infact, the very existence of inventory creates costs. Sometimes it is difficult to see what value is received from costs incurred. Inventory management may be defined as the sum total of those activities, which are necessary for the acquisition, storage, sales and disposal, or use of management; it is a subject. Which merits the attention of the top-levet management and the decisions of the planning and executive personnel.

40

Objectives of inventory management: In the contest of inventory management the firm is faced with the problem of meeting to conflicting needs.

To meet the demand for the product by efficiently organizing the production the production and sales operations. Control investment in inventories and keep it at an optimum level. To minimize investments in inventory, To ensure against delays in deliveries. To utilize the advantage of price fluctuations. To take advantage of quality discount control.

The inventory management includes the following aspects Maximum Minimum

Establishing timing schedules, procedures and lot of sizes for new orders. Ascertain minimum safety levels.

Co-coordinating sales, Production and inventory policies. Providing proper storage facilities. These objectives can express in terms of cost and benefit associated with inventory. Inventories provide benefits to the extent that they facilitate the smooth functioning of the firm.

Need to hold inventories:

41

Maintaining inventories involves tying up of company's funds and incurrence of storage and handling costs. There are three general motives for holding inventories.

Transitive motive emphasizes the need to maintain inventories to facilitate smooth production and sales operations.

Precautionary motive, necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.

Speculative motive influences the decision to increase or reduce.

Inventory levels to take advantage of price fluctuations.

Different Types of Inventories:

An inventory is an idle resource that possesses economic value. It is an item that is stored or reserved for meeting future demand such items may be materials, machines, money, or even human beings. Inventories are stock of product a company is manufacturing for sale and components that make up the product. Inventories are composed in to:

Raw materials Work in Progress Finished goods Consumables Bought out Components Packing materials Spare Parts

42

Raw Materials: Raw materials are those items purchase to be processed and are the major input into an organization and from the bulk, which gets converted into output. The function of raw materials is to -act as a buffer between procurement and manufacturing. There are 2 important factors: Internal Factors: Production Technology Critical ity of the item External Factors: Lead time (administrative and suppliers)

Vendor's relations Availability of materials Government Policy Seasonally Credit situation and govt, restriction

Consumables: These are the materials which act as 'catalyst' in the production process and not directly found in the end product. These enable the production process to function smoothly. The inventory level of these consumables can be fixed based on the past consumption. Bought Components: Organizations especially those in consumer goods and engineering industry do not always produce 100% of their out put from raw materials. At times they find it cheaper and more convenient to buy from regular vendors. This enables them to concentrates more on critical parts and assembly.

The important factors that influence the bought components are:

Make or buy decisions Source development

43

 Vendor relations

Make or buy decisions must be taken through "tech economic analysis". Source Development is laborious and time consuming more if the unit is located in backward area or region. Vendor relations are built up over the years depending upon quality, regularity or supply and financial transactions. Usually vendors operate at much smaller level.

Work in Progress:

The process inventories exist so long as we have been considering inventory as buffer between two or three subsystems, work - in - progress acts as a buffer with in manufacturing sub-system. There can be group of machines, which can be termed as work centers. The raw materials will have to go through a combination of operations before it takes shape as a "salvable product".

The rate of production at each production center depend upon the technology, while the production executive tries his best to balance lines, there is certain break downs which will effects down stream productions. To over come this work-in-progress inventories is stored as work centers.

Finished goods:

Finished goods are those goods available for delivery to consumer, finished goods act as buffer between production and marketing department. The input in quite predictable but output depend upon the behavior of market. The purpose of this inventory is to assure a constant supply in distribution channels. Some of the factors that contribute to high finished goods inventory'. Errors caused in forecasting Eagerness to satisfy the customers
44

Economic batch production Multiply stock points Imports Distribution system

Packing materials: Packing materials does not add to the value of the product. It protects what it sells and sells what is protects. Hence this cost comes out of one profit. Some consider packing material as consumable, the difference being that these are consumables for marketing subsystem to give a face lift to the product.

Spare Parts:

Spare parts are the important inventory. Their consumption pattern differs from raw materials, consumables or finished goods conversely stocking policies are' different.

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

>

Determination of level inventory for placing replenishment order and the quality to be ordered.

>

The extent of delay in supplies and the extent of variations in demand which
45

inventory should be able to withstand. Some spares are thus classified into.

Capital Spares Insurance Spares Routable Spares Maintenance Spares Over hauling Spares Capital spares and insurance spares are those spares of the machine, which have nearly equal life of the machine. Characteristics of these spares are.

These are held as contingency against any break down Their consumption is very low The procurement lead time is very high Normally these spares are procured along with original equipment.

Maintenance spares are those which have definite requirement compared to capital and insurance spares. These are required for the replacement of the old parts caused due to replacement of wear and tear; they are fast moving and are repetitive.

Ratable spares are costly so they are not usually scrapped but they are prepared and stored for use. The demand for such a spare part for any single machine is low but for group of machines is high. Queuing theory is practiced to control routable spares.Over hauling spars include those items which are specially needed during regular overhaul. These items are like valves, couplings etc, the strategy that adopted to control these spares are based on past consumption. Therefore initial provisioning either when starting a new industry or machinery is problematic.

46

PHASES OF INVENTORY MANAGEMENT:

> Maintaining continuity of production or operation buy enduring continuous supply of standardized raw material etc., > To take enough care to avail of the concessions available in purchasing materials. > Enduring that materials of requisite specification and quantity have been received in good condition. > Establishing thing schedules, procedures for new orders. > Formulating inventory receipts issue and storage procedures and proper recording of all transactions.

Cost of holding inventory:

47

Inventory cost Carrying cost Ordering cost Costs of running cost Stock out cost Ordering, shipping and receiving costs

Inventory cost: the goal of inventory management is to provide at the lowest total cost the inventories required to sustained efficient, first step in operations the inventory management is to identify all the costs involved in purchasing and Maintaining inventories.

Carrying cost: carrying cost generally raise indirect proportion to the average Amount of inventory carried. Inventories carried in turn, depend on the frequency With which orders are placed to illustrate if a firm sell's units per year, and if it Places Equalized orders "N" times per year, and then S/N units will be purchased with each order.

Ordering cost: although carrying cost are generally entirely variable and thus raising direct proportion to the average size of inventories, ordering costs are often fixed for example the costs of the placing and receiving an order-inter office memos, run and taking delivery are essentially fixed regardless of the size of an order.

Stock-out-costs: they are invisible yet very important Costs which a company has To incur if there is a stock-out resulting in a loss of production these costs are in the Form of loss of profit on lost production loss of goodwill, adverse impact on future Orders and temporary adverse, effects on machinery because of lack of use etc.

48

BENEFITS OF HOLDING INVENTORY:

The basic function of inventory is to act as a buffer to decouple or uncouple the various activities of a firm so that all do not have to be purchased at exactly the same rate the key activities are:

1. Purchasing 2. Production and 3. Selling

Since inventory enables uncoupling of the key activities of a firm, each of them can be operated at the most efficient rate. This has several beneficial effects on the firms operation. The term uncoupling means these interrelated activities can be carried out independently.

BENEFITS IN PURCHASING: If the purchasing of raw materials and other goods is not tied to production/sales i.e a firm can, e independently to ensure that most efficient purchase, several advantages would be available. In the first place, a firm can purchase larger quantities than is warranted by usage in
49

production or the sales levels. This will enable it to avail discounts that are available on bulk purchases moreover it will lower the ordering costs as fewer acquisitions would be made. There will, thus, be a significant serving in costs. Second, firms can purchase goods in anticipation of announced price increases. This will lead to a decline in the cost of production. Inventory will thus serve as a hedge against price increases as well ass shortage of raw materials. This is a highly desirable inventory strategy. Benefits in production:

Finished goods inventory serves to uncouple production and sales. This enables production at a rate different that of sales. That is production can be carried as a rate higher or lower than the sales rate. This would be a special advantage to firms with a seasonal sales pattern. In this case the sales rate will be higher than the production rate during a part of the year and lower during the off season. The choice before the firm is either to produce at a level to meet the actual demand i.e., higher production during peak season lower production during off season, produce continuously throughout the year and build up inventory which will be sold during the period of seasonal demand. The former involves discontinuity in the production schedule while the latter ensures level production.

BENEFITS IN SALES:

The maintenance of inventory also helps a firm to enhance its sales efforts, if' there are no Inventories of (finished goods the level of sales will depend upon the level of current production. A firm will not be able to meet demand instantaneously. This will be a lag depending upon the production process, if the firm has inventory, actual sales will not have to depend on lengthy Manufacturing process. Thus, inventory serves to
50

bridge the gap between the current production and actual sales. A related aspect is inventory serves as a competitive marking tool to meet customer demands. INVENTORY CONTROL:

The aim of production activity is the timely manufacture of desired product of specified quality in proper quantity at least possible cost. To achieve production goals, the production manager must simultaneously attempt to maintain stable operations, provide customers with adequate service and keep investment in stock and equipment at reasonable levels. Beyond the problems of planning, scheduling and expecting production and problems of inventory and distribution management, there are certain questions that business must face: Where shall we maintain, how much stock? Who will be responsible for it?

Why do we have inventories? The basic problem of inventory policy is to strike a balance operations savings and the costs arid capital requirements associated with larger stocks business management now has wide range of range of techniques for attacking production control and inventory control. CONTROL SYSTEM APPROACH:

Control over inventories means goggling range and intermediate planning of Production operations. A comprehensive and integrated control system, including production Planning, scheduling and control must be closely coordinated with other planning such as cash planning, capital budgeting and sales forecasting. The essentials of inventory control are: Long range planning, to budget capital for facilities and inventory investment intermediate policy making and planning as a basis for short-term scheduling Short-term scheduling of work assignments to keep facilities and men employed and stock Balanced in view of demand for output as it actually materializes.

51

FACTORS INFLUENCING INVENTORY;

There are various factors both inertial and external which have influence on Inventory. Internal conditions start right from forecasting a requirement such that required Materials is made available only a right time. External conditions including supplies lag time, Environmental conditions, govt rules and regulations, credit availability, market conditions etc, all Factors which have influence on the inventory could be summed up in to following categories: LEAD-TIME Lead-time is defined as the period that elapses between the 11.ignition need and its fulfillment, in any industrial network one has to follow lowing broad pattern before ordering item and making it available. Forecast the requirement Equation the exact quantity Selection of sources of supply Negotiation of rates Annual ordering Follow up with supplies Receiving materials Inspection of materials Proper warehousing Preservation of material Proper issues and recording Payment of suppliers recording Lead time Relevant costs Ordering costs Inventory carrying Costs under Stocking costs over Stocking costs Service level Obsolete inventory Scrap.

Payment of supplier's bills

52

Internal External time

lead-time lead-time lead-

Transportation inspection lead-time

I lead time, which is knows as administrative lead-time starts from identifying the need for till all order is placed for that time. Requirement for an item has to he first identified before it erred. It may take a long time before an actual need is finalized. The first activity is location of: which can be done by data bank, magazines etc. The next activity is negotiating the terms and ions o supply thirdly, placing an order with the trite source. Internal lead-time ceases once order reaches die supplier and confirms it.

External lead-time: which is also known as manufacturing lead time, depends on the business and the taken to manufacture and dispatch a product.

Transportation lead-time; is the period from the time a manufacturer dispatches the goods to the time receipt of goods at stores of tiie purchaser.

Inspection lead time: is the one where materials that comes to the stores, has to be checked to find out whether they are supplied as per the requirement of the organization and as per die stipulated orders.

RELEVANT COSTS:

53

There are several factors, which are affected by the conditions of. Excessive 0r insufficient inventories, it is for many reasons stocked inventory will be useless that we high cost. In generate cost of inventories will be under these classifications as: Ordering cost(U) * Inventory cost{I) * Under stocking cost(KlJ ) * Over stocking(KO)

Ordering cost is the one in which, each order that is placed on the supplier costs Money, since lot of executive time, stationary, salary and may be less in those of cash purchases. Ordering costs is the sura resultant of costs of fulfilling various activities that go into finalizing an order. The cost of ordering (U) will include costs due to:

* Stationery, typing, dispatching of orders * Salaries and wages * Receiving and inspection costs * Cost of source development

The cost per purchase order can be calculated as Total cost included on above leads Cost per purchase order = Total number of orders.

Inventory carrying cost is the costs, which involves in the storage of materials. This cost can be calculated computing the following costs: interest rate Obsolescence cost Overhead costs Insurance costs Under stocking costs (KU), are due to demand of an item

54

and not being provided for Production, if an inventory is not made available to production there would be loss of Production, sales, good will. Computation of KU is very problematic.

Over stocking cost (KO), is the cost, which incurs high expenditure, it involves loss of utilizing Company's valuable fimd. Over standing cost is therefore a cost basically arising due to Opportunity lost due to the investment in the inventory for a longer period.

SERVICE LEVEL: Service level is a relation between under stocking cost and over-stocking cost of keeping an inventory and being teed, or keeping an inventory and demand for that item arising leading to stock out.

KU Service level = KU+KO Obsolete inventory:

Inventory that is purchased and stored and which Is of no importance for the organization is termed as obsolete inventory. These can be due to anyone of the following reasons. Technology change Changes in product Jfne Changes in machines Changes in design and layouts Overbuying

SCRAP:
55

When utilizing the input it is not possible to utilize 100% area, so certain Scrap generation is inevitable. Manufacturing process itself generates scrap. One may'" generate scrap in the form of packing items, gunny bags, papers* which has resale value.

INVENTORY CONTROL TECHNIQUES:

ABC analysis HML analysis Two bin system MRP analysts

EOQ FSN

analysis

analysis

* VED analysis * SED analysis * MAX analysis (MAX-MIN).

ABC ANALYSIS (ALWAYS BETTER CONTROL):

Where there are a large number of items in the inventory, it becomes essential to
56

have an efficient control over all items of stores. How ever comparatively greater care should be given to the higher values.

The movement of certain service concern may consist of a small number Of items a minor portion of inventory value. The modern technique for collecting the Inventory is a value item analysis popularly known as ABC analysis that attempts to relate how the inventory value is concentrated among the individual items.

This analysis is based on praetor's law, which states mat a fewer item of high Usage having high investment value should be paid more than a bulk of items having low Usage value and having a low investment in capital.

Category-A, which includes the most important item which represents about 60 to 70% of stores but constitute only 10 to 15% of items.

Category-B, which includes less important items representing an Investment value of 20 to 25% and constitutes a similar % of items. Category-C, which consists of the least important items of stores and Constitutes 60 to 70% of stores hern representing only a capital investment between 10 to 15%.

STEPS IN ABC ANALYSIS:

1.

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

57

multiplying the quality of each item with the price.

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

3.

A running total of all values and items will then be taken and the figure so obtained should be converted into % of gross total.

4. It will be found that a small number of fust items may amount to large % of the total value of items. The management then will have to take a decision as to the % of the total value, which have to be converted by A, B and C categories.

ADVANTAGES OF ABC ANALYSIS:

It ensures closer control on costly items in large amount of capital invested. Helps in developing a scientific method of controlling inventories HI.

Inventory control at minimum oust.

Parameters for ABC classes of items is inventory:

Class A

Control very close

Lot size small

58

buffer stoek very small

B C

medium loose

medium medium

moderate large

M& analysis (economic order quantity): A strategic factor in the inventory managsment is the consumption of the optimum of normal purchase order. Decision about how much to order has great significance in inventory agreement. The quantity to be purchased neither should neither be small nor big because costs of buying and fling material are very high-

Economic order quantityroot 2D co/cs D=demand is the period. Co=cost placing an order. Cs=storage cost 0 carrying cost (OR)

EOQ=economic ordering quantity (or) the optimal quantity to be ordered each time an order is placed.

F=fixed costs of placing and receiving an order. S=annual sales in units C=annual carrying costs expressed as a percentage of average Inventory value P= purchase price the firm must pay per unit of inventory.

Economic order quantity is the size of the lot to be purchased which is economically die. This is the quantity of the material, which can be purchased with minimum casts. HMOL

59

ANALYSIS: This analysis is based on cost of items. H, M and L alphabets represent items having highest cost, medium cost and lower cost

FSN analysis: Under this analysis the quality and rate of consumption are to be taken in to consideration. Here 'F' stands for fast moving items; 'S' stands for slow moving items and 'N' for non-moving items.

TWO-BTN-SYSTERA: Under mis system all inventory hems are grouped under two categories. In the first group, a sufficient supply is kept to meet (fee emmvd lequkement over a designed period of time, ki fee second group or hm, a safety stock is cnamtamed to most the requirement of inventory at times when stock in the firs, bin is exhausted and reordering occurs.

MRP ANALYSIS: Material requirement planning is a computer based inventory and production schedule system mat considers all dial go into completing an order for large for shop situations whets many products are manufactured in periodic lots via several processing steps.

VED ANALYSIS: The VED analysis is used generally for spare parts. The requirements and urgency
60

of is different from that of materials. Spare parts are classified as vital (V), essential (E), & desirable (D).

SED ANALYSIS: This analysis is based on the availability of materials and is useful where items are scarily available. *S' stands for scarce items/D' for difficult hems and E stands for easily available in the market. PURCHASING: Purchasing is the first phase of materials management .it means procurement of goods and services from same external agencies. The objective of purchase department is to arrange lise supply of ? finished goods required by the organization to produce the desired products from agency or source outside the organization.

According to Aiford and beauty,"porchasing is the procuring of materials, supplies, machines tools and services required for equipment, maintenance and operation of manufacturing plant".

OBJECTIVES: Purchase of satisfactory material

To control the quantity of material Proper negotiations with suppliers Control proper use of materials Coordination with other departments Maintenance of good will Exploration to locate new suppliers
61

STORES CONTROL

Stores keeping: it is servicing facility, inside an organization responsible for proper storage of the material and then issuing to respective departments proper requisition. Those items which are not in use for some specific duration.

According to Maynard,'' the duties of store keeping are (i.e.) to receive materials, to protect memo white in storage from damage and unauthorized removal to issue me materials in the right quantities, at the right time to the right place and these services promptly and at least cost".

Receiving: The item order by purchase department is receive by this section. The supplier delivers the items along with order documents to receiving section of stores department The materials when received from the supplier are under the" temporary custody of receiving department. The materials are usually accompanied with one or both of the following documents.

1. Advice of dispatch, which is sent by the supplier dispatch of materials from his premises.
2.

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

62

transport and deliver the materials. 3 On receipt, the materials are checked with reference to the copy of fee purchase order in possession of receiving ikpatmzsii. fee quantity received is verified with the quantity order She quality specified on the purchase order is checked in inspection department

VALUATION OF MATERIALS RECEIVED: The general role is that the invoice price as billed by the supplier should be accounted for in the ledger. Certain problems regarding u\e accounting of receipts are specified as: Cash discount, is a discount allowed by the supplier if payments of bills are made with in the period specified. Trade and quantity discount is the amount of those discounts is already deducted from the invoice price no difficulty arises in their accounting. Stores section: This is a place where all materials received by the stores department are kept with protection against deterioration and pilferage. They are stored in such a way that lmeir location is easily identified at the time of issue.

The various stores operations are Ocation in stores section Layout of stores section Stores equipment Materials handling facilities

Identification of stores. STORAGE CONTROL A METHODS OF PRICING ISSUES: The stores procedure mainly consists of stores control and issue control.

STORES CONTROL :
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After the materials on cider are received, checked and approved, the stores keeper takes them on charge. He is responsible for placing him materials in their appropriate places inside the store and for ensuring that (hey are maintained in good condition during storage till required for utilization in production. The control during this stage may be called storage control.

ISSUE CONTROL: Materials when required for consumption are issued to the departments concerned as per authorized quality and under proper authority. The issues are priced and the values there of charged to the costs of the products. Any surplus is returned by die departments to the store and is property account

CLASSIFICATION & CODIFICATION OF MATERIALS: For the purpose of identification and for convenience in storage awl issue, each item of stores is given a distinct name. Similar items are. classified under subgroups and a number of subgroups are classified under main or major groups. Classification of stores should be accompanied with a suitable system of codification. Codification is the procedure foi assigning symbols, for each item in accordance with a proper arrangement

CODIFICATION HAS FOLLOWING ADVANTAGES:

64

* Ease in identification of stores

*

Writing full names and particulars of materials on documents ss dispensed with so that clerical work is reduced

* In mechanized accounting, codi fication is essential * Quoting symbols along wife nomenclature ensures clarity * Ensures secrecy

Three methods of codification are: Numeric numeric Alphabetic and

Perpetual Inventory System; It is also known as automatic inventory .die control of materials while in storage is affected through what is known as perpetual inventory. The two main functions of perpetual inventory system are: Recording stores receipts and issue so as to determine at any time the stuck in hand, in quantity or value or both with out the need for physical count of stock.

Continuous verification of physical! stock with reference to the balance recorded in the stores records at any frequency, as convents for the management

IMPORTANCE OF INVENTORY MANAGEMENT Importance of inventory management considers two companies.

65

1. WAL-MART 2. BOEING TOWAL - ART: The world's largest retailer, inventory control is its business. Wail-mart can not succeed if its stores do not have toe items that its customer wants at the time they want them and at the price to mak& a sale. To ensure that its customers are satisfied* wal-mart uses a sophisticated point of sale inventory rnanagement system to record each sale and to automatically reduce that items inventory balance.

TO BOEING: The world's largest commercial aircraft manufacture, inventory management means something totally different in manufacturing the inventory system is integrated with production systems, so firms must strive for joint inventory production efficiency "Besiege* which was %"mg high is the airline expansion years. Where is Boeing to find savings "of this magnitude? examining its inventory and production systems. ACCOUNTING FOR INVENTORY: When finished goods are sold, the firm must assign a coat ul goods sold, fhe cost of goods sold appears on the income statement as an ettfwnw loi llir |n:iincl and the balance sheet inventory account is reduced by a like amount Four methods can be used to value the cost of goods sold, mid lit remaining inventory: 1. Specific identification 2. First-in-first out (FIFO)
3.
IK

!. asm,

i. ilohcly

in value:

Last-in fast out (UFO)

4. Weighted average.

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1. SPECIFIC IDENTIFICATION: Under specific identification a unique cost is attached In cadi item in inventory. Then when an item is sold the specific amount. This method is only when the items are high imid move relatively slowly, such as would be the case for an automobile dealei

2. First-in-first out(FIFO): In the "FIFO" method the units sold during a given period me assumed io lie the first units. That was placed in inventory. As a result, the rosi is based on the cost of the order. Inventory consist of the newer goods.

3. LAST-IN FAST OUT (LIFO): "LIFO" is the opposite of "FIFO" .the cost of goods i.s based mi the lasl units placed in inventory while the remaining inventory consists oi the liisl goods placed in inventory. 4. Weighted average: The weighted average method involves the computation of the weighted average. Units cost of goods available for sale. From inventory iind this awiajit' cost is then applied to the goods sold to determine the cost of goods sold. OTHERS TOPICS IN INVENTORY MANAGEMENT Inventory control system

Just-in- time inventories

Out-sourcing 1. INVENTORY CONTROL SYSTEM: Inventory control system runs the gamut from very simple to cxiianVly complex, depending on the firm and the nature of its inventories. Computerized Systems: Large companies employ computerized inventory control system. The computer starts with an inventory count in memory as with drawls lire made they are recorded by the computer, and the inventory balance is revised,
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2. JUST- IN -TIME INVENTORIES: A relatively new appro Ti to inventory control called just- in-liinc is being used by more and more firms throughout the world. Toyota, which pioneered the concepts, provides a good example, just-in-time system art. also being adopted by smallei thins infect, some production experts say that small, companies are better positioned than large ones to use just-in-time methods.. 3. OUT-SOURCING: Another important development related to inventories is out-sourcing which is the practice of purchasing components rather then making them in house, it would be increasing its use of out-sourcing is often combined with just-in-time systems to reduce inventory levels.

INVENTORY MANAGEMENT

Inventory is list of movable items which are necessary to manufacture a product and to maintain the equipment and machinery in good working order. Inventory is actually 'money' kept in the store room in the shape of raw materials, spaces, tools, finished stock and work in progress. CLASSIFICATION OF INVENTORY
1.

Raw Materials: They include materials and semi finished products, supplied by another firm which is raw items for the present industry. These materials are processed to obtain finished goods.

2.

In process inventories/work in process: They are semi finished goods a various stage of manufacturing cycle. Finished Inventories: They are completed products awaiting sale. They are e final output of the production process in a manicuring firm. Indirect Inventories: They include lubricants, spare parts, needed for proper operation, repair an/maintenance during operating cycle etc.,

3.

4.

BENEFITS OF HOLDING INVENTORIES.

1.

Avoid losses of production: Holding inventories is necessary to continue smooth production an sales. For smooth production it is necessary to hold adequate raw
68

material and spare parts, lubricants etc.

2.

Reducing Ordering Costs: More the amount of inventory slocked up, lesser will be number o orders placed during a yea. By placing a few large orders instead of many small, orders, variable ordering costs can be saved.

3.

Avoiding Los of Sates; Loss of sales can occur as a consequences of inability to achieve production targets due to inadequate supp'y of raw because of inadequate stock of finished goods for sales. Thus adequate stocks of raw materials and finished goods have to be maintained o avoid loss of sales.

4.

Speculative Motive of Holding Inventory: In a constantly changing price scenario, ms hold large stocks of raw materials, if materials are likely to b in short supply and

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

5.

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

RISKS & COSTS INVOLVED IN HOLDING INVENTORIES

1. Price Decline: If prices of inventory decline then the value of inventory held reduces. Under conditions of declining prices, large inventory holdings are not advisable. 2. Loss Because of product deterioration: improper storage conditions a stocking up of large quantities of inventory am cause losses.
3.

Obsolescence: Under conditions of changing technology, tastes of customers, changing product design etc. Stocking large inventory could lead to loss due to obsolescence. Holding / Carrying Costs: Even though large inventory orders could reduce ordering cot, carrying costs of holding larges stocks increase. This includes storage costs, insurance, shortage, costs o funds tied up in inventories.

4.

MANGEMENT OF INVENTORY

Inventory constitutes a major potion of working capital of a firm, this is specially true with a manufacturing concern, which has continuous production system management of inventory covers a large numbers of issues including fixation of minimum and maximum
69

inventory levels, determining size of inventory to be carried, providing proper, storage facilities, maintaining proper stock records, determining issue price, keeping check on obsolescence, setting up effective information system with regard to inventories. Management of Inventory also requires, ensuing continuous supply of materials to production departments. Thu avoiding production hiccups, maintaining sufficient stocks of both raw materials and finished goods and keeping investment in inventor}' optimum level.

DETERMINATION OF EOQ: Determination of quantity for which order which order should be placed is an important task of inventory management. EOQ is the size of the order, which is most economical. It I determined by "taking into account both carrying costs and ordering costs.

Ordering costs are costs of placing an order and securing the supplies. They Include costs of receiving quotations, processing purchase requisitions, expediting Purchase orders, receiving material and inspecting it, processing seller's invoice. Ordering costs decrease as order quantity increases, because number of orders placed will come down.. Carrying costs are costs involved in keeping items in stock, it includes Interest on investment, obsolescence losses, storekeeping costs, insurance etc. Large the inventory holding higher will be carrying costs. These are cost of holding Increase with every increase in quantity purchases.

The economic order quantity is the quantity of materials ordered at which total costs i.e., ordering costs plus carrying costs are minimum.

E.O.O=2.U.O/C Where, U = the total quantity used annually 0 = ordering cost per order C = Annual carrying cost of one item

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MIXIMUM AND MINIMUM QUANTITY OF RAW MATERIALS:

Maximum quantity of raw materials is the maximum limit of inventory, which can be kept in the stores at anytime. Minimum quantity of raw materials is the Minimum limit of inventory, which must be kept in the stores at anytime. The Purpose should be to hold enough and not excessive stock of material.

INVENTORY MANAGEMENT IN SAT LIMITED The company SAT limited, is manufactures of hank yam and cone yam polyesters yarn under a continuous productions process. The three major raw materials required are purified and graded bf the skilled workers. Mono ethylene glycol chemical are subjected to a process of etherification and polycondensation process. Fiber is obtained from for teen spinning lines, which are fully operational now. Polyester chips, which are also obtained in the production process, can also be used as raw materials for further processing into polyester yarn. Of the three raw materials cotton and viscose and polyester, any can be used as feed mater SAT limited is only company in India with continuous textile yearning direct spinning technology having

Dual feed raw material system. This makes it convenient to shift from one raw material to anther, depending upon availability and requirement.

Besides the above- mentioned chemical, the entire production process requires a number of auxiliary materials, catalysts, packing materials and utility materials. 1. Direct materials include cotton, viscose and polyester and etc.
2.

Some of the auxiliary materials used are ventol, silicon oil, organic surface Active agent (OSAA), Isopropy alcohol, Afro tin, cleaning agent etc.

3. Catalysts include Antimony trioxide and phosphoric Acid.

4.

Packing materials like corrugated boxes, PF woven sacks, paper tubes, LDPE film
71

covers, Gap plates, adopters etc.

5.

Utility materials include furnace oil, hydrogen gas transfer Qulin etc.

cylinders, heat transfer, oil, heat

Hank yarn, cone yam and polyester yarn are finished goods. However when required for captive consumption, chips are included in work-in-progreys inventor. SOURCES OF RAW MATERIALS AND AVAILABILITY

Sources of Major indigenous raw materials are in Southern region, particularly The areas surrounding Andhra Pradesh, Karnataka, Tamilnadu and local areas like Guntur etc. the destination place is the factory at Venkatarayapuram, Tanuku West Godavari district...

The main raw materials for the manufacture of yarn products are cotton, viscose and polyesters. The company has been operating on cotton from its inception. The major suppliers of cotton were from formers.

Due to non-availability of polyester as supplies stopped form RIL, the sole manufacturers of polyester in the country, the company had to shift its feed stock from cotton to manufacturing Co.Ltd.

SAT LIMITED REASONS FOR FOLDING INVENTORIES

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In actual practice, there is generally a fluctuation from optimum inventory holding levels. This is because, the amount of inventory to be stocked depends upon a number of external and internal factors which may be either industry specific or firm specific. Some of the holding inventory is mentioned below.

1. Availability of raw materials fluctuates internationally. In case of the raw material cotton, the availability has gone down drastically and the company has had to shift its raw material from polyester to cotton. Th<re being a risk of short supply of the two raw materials, the quantity of raw materials and chemicals have been stocked up at reasonable levels. 2. Raising price of raw materials as a consequence of the availability crunch has also led to stocking large quantities of inventory.

POSITION OF INVENTORY FOR THE FIVE YEARS

Particulars

05-06

06-07 162.53

07-08 1818.69

08-09

09-10

Raw material inventory & other 1349.56 Consumables (imported & indigenous Store s& spares % loose Stock in process 99.43 Finished Goods Total inventory 155.36 1604.35

685.43 797.79

88.77 98.29 349.59

158.19 211.96 2188.84

190.59

160.01

275.03 160.94 1151.05 1118.74

During the five years of the study it is found that the inventory. level in S.A.T. Ltd, in increasing. In that major portion of invest is in raw material due to increasing productions the company invested high accounts in purchasing raw materials. The company is spending sufficient funds for purchasing raw material, according to production planning, it is a good sign for the company.

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1.

Captive consumption of polyester chips which is a semi finished product for the company and can be a raw materials for manufacturing polyester yarn was taken up. This led to increase in work-in-progress inventory as or. 31-3-99.

2.

captive consumption lof chips was also a consequence of availability crunch of raw
3.

materials. Finished stock, inventory also increased as on 31 -3-1999This was done in anticipation of rise in prices of cotton, viscose and polyester form April On words to task advantage of increasing prices, finished goods were stocked up.
4.

Availability of funds with the company increased over the three years staring from April 1997. Funds were raised by way of issue of shares during ihe year 1996 and in the next year long term loans from banks and by way of debentures on account of the expansion of the present and one more proposal to start a new plant in he same location. Excess funds were deployed for short term uses, including investment in inventory, which incidentally was facing an availability crunch.

RAW MATERIALS DEPARTMENT AND ITS FUNCTIONS

The activity of the raw materials department is to procure materials of right quality in right quantity at aright time from right source at competitive prices. The department functioning from Head office in Venktrayapuram, Tanuku procures raw materials, auxiliary, utility and packing materials.

Planning procurement of inventory is based on requirement of raw materials. Requirement of raw materials is arrived at based on operating level of production and procurement is planned accordingly. The key factor is the throughput level of the polymerization section and the cotton mix in spinning section. Throughput level will depend on market demand for chips and yarn. While arriving at material requirement, minimum inventory levels fixed are kept in mind.
74

Inventory requirement plans requirement plans are prepared on a monthly basis of the raw materials chemicals. Quarterly plans are prepared for packing materials.

PROCUREMENT OF RAW MATERIALS.

The specification for the materials required is obtained from the respective departments. The specifications will depend upon the requirements of the various departments including chemical lab, spinning department, mechanical and utilities department, polymerization department. On receipt of the specifications, the respective sources will be tapped.

Vendor evaluation has to be conducted carefully before sourcing the materials. This is done on the basis of recommendations from collaborators and assessment of vendors who have supplied materials for one year. Wile introducing new vendor's samples sent b vendors along with sale specifications are analyzed. Samples are sent to concerned departments for acceptability. Clarifications are made whenever necessary. Quality of materials is continuously monitored.

Usually more than one vendor is selected. Allocation of quantity to each vendor is done on basis o availability and price compositeness.

In case o imported materials, price negotiations are carried out through telephone, telex or fax to arrive a final price, in case of indigenous materials, communicated as and when there is revision in prices, Payments for most purchases are made through letters of credit, which is the payment mode That most suppliers prefer.

Issues of materials are made to the various departments as per their

75

requirements. Records of all receipts, issues and balances of materials are kept in a systematic manner in stock sheets giving details of quantity, per unit price and total value of each. The textile industry is faced with large price fluctuations. Thus, a method of pricing and valuing inventory, which smoothens the effect of such fluctuations, is necessary. This explains the reason for valuing materials at weighted average price. All issues and balances of materials are valued, taking into account the weighted average price of previous balance and new receipts.

DETERMINATION OF LEVELS OF INVENTORY TO BE PROCURED AND HELD

One of the important concepts of inventory control is the determination of economic order quantity, which depicts a trade off between inventor carrying costs and ordering costs. However, this concept can be applied under certain conditions, which are:
1.

The firm knows with certainty, the annual usage or demand of the particular items of inventories.

2. The rate at which the firm uses inventories or makes sales is constant throughout the year. 3. The orders of replenishment of inventory are planned exactly when inventories reach zero level. Inventory is available and socks arc replenished immediately.
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However, in a practical situation like the once faced by SAT limited, conditions are not certain. Various factors like price of raw materials, availability, fluctuations in production etc., have to be taken into account while procuring inventory. Besides, the above mentioned assumptions o not apply in practice.

1. EOQ doe not take into account price of inventory. In practice, however, prices ply an important role in procurement of inventory, If prices of inventory are likely to go up, larger inventory stocks are maintained. 2. Availability is another factor, which drives the inventory department to make changes in quantities ordered.
3.

It is not possible to wait till the inventories reach zero level, fot placing a new order for inventory. This is because it is not possible to make available. inventory as soon as orders are placed.

4.

Production and consumption is not constant throughout the: year. It fluctuates about a certain average production of 95 MT per day and a consumption norm for each of the raw materials used.

5.

In an economy of constantly changing prices, ordering costs and carrying costs fluctuate within a year.

Keeping the above few points in the background while inventory is procured constantly on the bases of production/throughput levels, there is no economic ordti quantity level determined to order inventory.

MINIMUM STOCK OF INVENTORY

While arriving a requirement of material due cart is minimum inventory levels. These levels are decided buy the Chairman, Finance Department executives and are fixed on a conservative basis. These levels have been maintained for certain major materials.

MINIMUM No. OF DAYS INVENTORY

77

NAME OF THE M ATERI Al,

10 DAYS 15 DAYS LEAD STOCK:

COTTON, VISCOSE POLYSTER

Lead stock is the stock maintained sustain the lead period. Lead period is defined as the time lapsed between placing an order for foods an receiving them. Them time lapse is caused by various reasons like time taken for communicating lo the supplier, transport goods, delays in transportation etc.,

Though called lead stock, it differs from the theoretical definition l "stock held to suffice the lead period". While determining the amount lead stock. Thc company takes into consideration a number of factors.

1. The company enters into forward contracts for purchase of raw materials. Such contracts are entered into a few months in advance of actual purchase, in orders the company a price advance and also to evenly distribute total annual purchase of raw materials. Thus for deterasiniag lead period and lead stock, the period for which such contracts are entered tola are lakers Into account
2.

A certain margin has to he provided for delays m receipt of goods, especially in case of imported materials. Itas will be accounted for while calculating lead period for which lead stock is maintained.

3.

The important factor which represents lead stock is the LC lead period refers to the time period required for me time of credit to be completed. Once the line of credit is established with the opening of the LC with the bank (opening bank), the amount of the LC is paid to the bank after a certain period of time, which is the L.C lead period. Stock equivalent to the LC lead period is always maintained as a security measure against non-payment of the amount.

The Company has always maintained a lead stock of three months consumption. It proposes to maintain the same level of lead stock in future.

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CHAPTER-IV

DATA ANALYSIS OF INVENTORY MANAGEMENT

CURRENT RATIO CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES Current assets=inventories+sundry debtors+cash+other current

assets+loans&advances. Current liabilities=liabilities other than provisions CURRENT RATIO: Current ratio of sree akkamamba text tiles limited during the period from 2005-2010

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

CURRENT ASSETS 24,00,55,475 29,48,96,104 35,14,57,352 27,24,83,867 23,57,84,357

CURRENT LIABILITIES 10,86,08,776 14,41,44,192 23,44,66,497 13,87,55,340 10,97,16,365

RATIO 2.21 2.04 1.49 1.96 2.14

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80

INTERPRETATION From the above graph is .

Raw material turn ratio: = RAWMATERIAL CONSUMED CLOSING RAW MATERIAL Table: 4.2 YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 RAW MATERIAL CLOSING CONSUMPTION 30,56,00,641 29,82,89,633 35,62,14,552 42,63,28,277 43,40,67,812 MATERIAL 11,67,48,925 14,33,69,468 16,05,86,370 4,89,32,124 5,95,18,662 2.617 2.080 2.21 8.71 7.29 RAW RATIO

INTERPRETATION : This ratio indicates the number of times raw material is replaced during the year 200405 to 2006-07. It shows the efficiency of the firm in maintaining the raw materials. The highest raw materials turnover ratio in the year 2007-08 is 8.71 and the lowest raw material turnover ratio in the year. 2005-06 is 2.08 in the 2008-09 is 7.29.

Finished goods turnover ratio := COST OF GOODS SOLD

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CLOSING FINISHED GOODS Table: 4.3

YEAR 2005-06 2006-07 2007-08 2008-09 2009-10

COST OF GOODS SOLD 46,56,57,416 45,86,52,104 49,63,80,222 60,70,46,176 64,48,96,233

FINISHED GOODS 1,55,36,368 98,29,528 2,11,96,530 2,75,03,741 1,60,94,861

RATIO 30.02 46.55 23.74 22.07 40.06

Interpretation : This finished goods turnovers ratio of the company for the past 5 years had undergone many changes. It records is highest ratio in the year 2005-06 is 46.55 to low level of finished goods as well as increase in sales. The ratio of the current year is 40.06 times to improve the ratio the firms should try to improve the sales as well as to maintain less stock.

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Working capital turnover ratio's : AFTER

COST OF GOODS SOLD

NET WORKING CAPITAL

Net working capital: = Current Assets - Current liabilities

Table: 4.4 YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 CURRENT ASSETS 24,00,55,475 29,48,96,104 35,14,57,352 27,24,83,867 23,57,84,357 CURRENT LIABILITIES 10,86,08,776 14,41,44,192 23,44,66,497 13,87,55,340 10,97,16,365 NETWORKING CAPITAL 13,14,46,699 15,07,51,912 11,69,90,855 13^7,28,527 12,60,67,992

A verage net working capital: = Current assets + Net working capital 2 Table: 4.5

YEAR 2005-06 2006-07 2007-08

CURRENT ASSETS 24.00.55.475 29,48,96,104 35,14,57,352

NETWORKIN AVG G CAPITAL 13.14.46,699 15.07,51,912 11,69,90,855

NET

WORKINGCAPITAL 18,57,51,087 22,28,24,008 22,92,24,103.5

83

2008-09 2009-10

27,24,83,867 23,57,84,357

2,75,03,741 1,60,94,861

20,31,06,197 18,09,26,325

Working capital turnover ratio :

Cost of goods sold Average net working capital

Table: 4.6 YEAR COST OF AVGNET

WORKING CAPITAL

WORKING CAPITAL TURNOVER RATIO 2.5068 2.058 2.1654 4.539 5.115

GOODS SOLD 2005-06 2006-07 2007-08 2008-09 2009-10 46,56,57,416 45,86,52,104 49,63,80,222 60,70,46,176 64,48,96,233

18,57,51,087 22,28,24,008 22,92,24,103.5 13,37,28,527 12,60,67,992

Working capital turnover Ratio

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Interpretation: This working capital turnover ratio of S.A.T. Ltd sources is continuous increases in 2005-06 to 2007-08. After 2005-06 is turnover. The fluctuations in working capital turnover. The working capital turnover ratio in the year 2008-09 is 5.115. Cost of goods sold ratio : = Cost of goods sold Net sales Table: 4.7 YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 COST OF SALES COST OF

GOODS GOODS RATIO 46,56,57,41 61,27,58,697 0.75 6 45,86,52,10 64,05,75,306 0.71 4 49,63,80,22 67,15,13,057 0.73 2 60,70,46,17 81,38,44,343 0.74 6 64,48,96,23 82,07,74,496 0.78 3

Interpretation:

85

Cost of goods sold ratio disclose the information related to cost of goods sold and net sales S.A.T. Ltd., during the period of 2005-09 in the year highest ratio i.e. 0.78 In the year 2002-03 is 0.66 in the year 2003-04 is 0.70, in the year 2004-05 is 0.75 in the year 2005-06 is 0.71 and in year 2006-07 is 0.73 were recorded. INVENTORY TURNOVER RATIO

Inventory turnover ratio:

This is calculated by subtracting closing stock from the opening stock and manufacturing costs adn purchases. The denominator is the average of the opening and closing inventories. This ratio indicates the number of times or stock is replaced die relationship between goods sold adn inventory level. The Stock turnover ratio. Table: 4.8 YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 COST GOODS SOLD 46,56,57,416 45,86,52,104 49,63,80,222 60,70,46,176 64,48,96,233 OF AVERAGE INVENTORY 3,71,73,762 2,20,90,182 2,78,61,179 4,17,89,486 3,93,29,825 OF RATIO 12.52 20.76 17.816 14.52 16.39

86

Interpretation:

Inventory turnover ratio discloses the information related to cost of goods sold and average inventory of S.A.T. Ltd., during the period of 2004-05 to 2008-09
87

in the year 2005-06 is 20.76 this is the highest value.

CHAPTER-V V FINDINGS

1.

There is a lack of inventory classification system based on a variety of practical norms like consumption rate importance in production.

2.

The system computers must be further improved which will reduce workload is not any proper policy for control inventory norms. For example: consumption rate.

3. The codification followed has resulted in frequent misunderstanding of material requisition orders.

4.

There is no proper and good communication between the purchases and stores department, which cause procedural delays.

5. Conversion period was also varying from time to time that is conversion from raw material to finished goods.

6.

The company is not follows the EOQ (economic order quantity) in issuing the raw material.

7.

Company is follows FIFO (first in first out) to issuing the raw materials to the production, weighted average method for issuing spares, and remaining is issued at valued at cost.

88

8. The company has been minimizing the investment to maximizing the profitability.

9.

The company has been maintained 3 types of inventories. Such as, ABC categories

10. Materials department and Bin cards system maintain in SAT Limited to control the inventory.

11.

The company maintains separate accounts for spares, chemicals and various categories of inventory.

12. The SAT Limited pays the sales tax at four percentages (4%) and Excise tax at various percentages such as (8%, 10%, 12%, 14%, 16%, 18% and 25%).

13.

The company follows the MOD VAT scheme. This scheme was introduced by the central government. The main object of the scheme is pay the single tax rather than various taxes.

14.

The company implements the SAP (system application program) planning by June 2010.

SUGGESTIONS

1.

Finding of items that reached the re-order level and raise the procurement of Indent is done by the stores clerk. But this can be done by the system itself by setting the appropriate system software programmed. It will reduce the workload.

2.

Investment in fast moving and non-moving items is high and it must be reduced freely available items are also maintained at stock levels. Excess investment in the
89

available items must be reduced as the transportation is at advanced stage. So no need to maintain them at large quantity.

3.

Centralization of stores in names itself indicating, but actually there is a diversified store located at different places, which will lead to lack of communication and high overheads and maintained charges. So they must come under one roof.

4.

Simple codification procedure may exist of correct the occurrence in the existing system.

5.

Suppliers are located at a distance from the company. Suppliers are scattered all over North India that resulted in higher lead-time. So there is a need to locate the local suppliers.

6. For efficient inventory management proper item classifications system is necessary that is establish of ABC and VED analysis.
7.

Conversion period of raw materials to finished goods is varying from time to time. This variation can be reduced by better co-ordination of the activities of all departments concerned.

8.

The sundry expenses like telephone charges and traveling expenses must reduce the ordering cost. _-

9. For effective inventory management following techniques have to be followed

VED analysis - vital, essential and desirable categories F.S.N analysisfast moving, slow moving and non-moving, HLM analysis high cost, low cost, and medium cost. SOS analysis seasonal and off- seasonal analysis. GOLF analysis- government, ordinary, local and foreign sources of availabilities of inventory.

90

To use the old material or FIFO (first in first out) first the storage godowns must have two-way door systems, through one door storage is loaded and from the other storage is unloaded of raw materials.

All business and small large must manage the company data in a fashion that always the business to run smoothly. Modern business consists of a set of highly integrated activities. It requires continuous between the top level management and various departments like marketing, finance, purchase, supplies and external consultants, Govt Authorities, most of this involves huge amount of paper work , accounting and requires extensive human interaction under strict supervision , computerizing is the process of automating the standard business computerization allows optimum use of available resources and also in predicting future trends.

Almost 90% of the industry uses computer for various activates like production, planning and control, scheduling, inventory control, accounting and financial management , payroll pricessing , Human Resource Department and providing several, other control information for management .A fundamental change occurred in the way of business go about using information system and technology. This study is carried out with the prime objective of understanding the inventory management practices of SAT Ltd., inventor)' management refers to an optimum investment in inventories. It should be neither inadequate nor excessive, this study mostly concerns the inventory decisions of SAT Ltd., that is how much to order, that is, what is the optimal quality of an item that should be ordered, when should be order be placed and also how much safety stock should be kept. Thus what quality of an item in excess of the expected requirement should be held as buffer stock in anticipation of the variations in its demand and or the time involved in acquiring fresh supplies is the essence of inventory management. Purchasing procedure and storing procedure of raw material, Work-in-process and
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finished goods in SAT Ltd., the study also relates to such aspects as which type of materials are used and which type of inventory management techniques are used to exercise the inventory control. Inventory management techniques include various aspects as Economic Order Quantity, Safety stock and Re-order point which is employed to regulate the inadequate and excessive inventory in SAT Ltd.

BIBLIOGRAPHY ANNUAL REPORTS IN SRI AKKAMAMBA TEXTILES FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT COST AND MANAGEMENT ACCOUNTING L.M. PANDY R.K. SHARMA SASHI GUPTHA S.N. MAHESWARI PRASANNA CHANDRA EUGENE.F BRIGHAM AND LOUISC. GAPENSKI M.RAVI KISHORE

JOURNELS SOURCE: Annual Report of SAT SAT PUBLISHED JOURANLS AND MAGAZINES THE MANAGEMENT ACCOUNTS JOURNALS

WEBSITES: WWW.SREEAKKAMAMBATEXTILESLIMITED.COM

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