Chapter - 1

INTRODUCTION

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INVENTORY MANAGEMENT

INTRODUCTION:

Every enterprise needs inventory for smooth running of its activities it serves as alike

between production and distribution process. There is generally, a time lag between there

cognition of need and its fulfillment. The greater the time lag, the higher requirement for

inventory. It also provided a cushion for future price fluctuations.

In a complex industry like Zuari Cement Industries Limited it studied clearly of how

the thing are being performed and what is the real impact of these on industry and how

effectively is utilized is interested to be known by researches of its great significance in the

research.

NEED OF THE STUDY:

Every industry on average spends 70% on raw materials (inventory). Therefore there is a

need to know the raw material cost and also there is a great importance to understand the

inventory management system of this industry.

The study helps a log to various departments to take steps to control the inventory

process.

OBJECTIVE OF THE STUDY:

1) To examine the organization structure of inventory management in the stores of Zuari

Cement.

2) To discuss pattern, levels and trends of inventories in Zuari Cements.

3) To understand the various inventory control techniques followed by studied by Zuari

Cements.

4) To access the performance of inventory management of the Zuari Cements by selected

accounting ratios.

5) To know the inventory control techniques of Zuari Cements.

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6)

METHODOLOGY OF THE STUDY:

The study is based on both primary and secondary data. The primary data has been

collected through structured questionnaire reflecting inventory management practices of Zuari

Cements. The collected through secondary data like annual reports purchase register, storage

records of the organization.

LIMITATIONS OF THE STUDY:

1) The study has the following limitations;

2) The study is limited only for a period 5 years i.e., from 1988-99 or 2003-04.

3) The limitations of ratio analysis can be applicable of the study.

4) There may be approximation in calculating ratios and taking the figure from the annual

reports.

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Chapter 2

REVIW OF LITERATURE

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INVENTORY INTRODUCTION:

The inventories constitute the most significant part of current assets/working capital in

most of the undertaking. Thus, it is very essential to have proper control and management of

inventories.

The purpose Inventory Management is to ensure availability of material in sufficient

quantity as and when required and also to minimize investment in inventories.

Meaning and Nature of Inventory:

In accounting language, inventory may be the stock of insured goods only.

In a manufacturing company concern it may include raw-materials, work-in process and

stores etc.

Inventory includes the following things:

1. Raw-Materials:

Raw-Material from a major into the organization. They are requiring carrying out production

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

of consumption and the time required for replenishing the supplies. The factors like the

availability of Raw-Materials and Government regulations etc., too affect the stock of Raw-

Materials.

2. Work-in-progress:

The Work-in-progress is that stage of stocks which are in between Raw-Material and finished

goods. The quantum of Work-in-progress depends upon the time taken in the manufacturing

process.

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3. Finished Goods:

These are the goods which are ready for the consumers. The stock of finished goods provides a

buffer between production and market. The purpose of maintaining inventory is to ensure

proper supply of goods to customers.

4. Spares:

The stock policies of space fifer from industry to industry. Some industries like transport will

require more spares than the others concerns. The costly spare parts like engines, maintenance

etc., are not discarded after use, rather they are kept in ready position for further use.

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

costs that may arise due to their non availability.

BENEFITS OF HOLDING INVENTORIES:

Although holding inventories involves blocking of firms funds and the costs of storage and

handling, every Business enterprise has to be maintain certain levels of inventories to facilitate

un-interrupted production and smooth running of business.

In the absence of inventories a firm will have to make purchases as soon as it receives

order. It means loss of time and delays in execution of orders with some times may cause loss of

customers and business.

A firm needs to maintain inventories to reduce ordering cost and quantity discounts etc.,

These are 3 main purpose of holding inventories:

A. The transaction motive: which facilities continuous production and timely execution of

sales order?

B. The transaction motive: which necessitates the holding of inventories for meeting the

unpredictable changes in demand and supply of materials?

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C. The speculative motive: this induces to keep inventories for taking advantage of price

fluctuations, savings in re-ordering costs and quantity discounts.

RISKS AND COSTS OF HOLDING INVENTORIES:

The holding of inventories involves blocking of firm’s funds and incurrence of capital

and other costs.

The various costs and risks involved in inventories are:

a) Capital Costs:

Maintaining of inventories results in blocking of the firms financial resources. The firm has

therefore to arrange for additional funds to meet the cost of inventories.

b) Storage and Handling Costs:

Holding of inventories also involves costs on storage as well as handling of materials. The

storage of costs include the rental of the go down, insurance charges etc.,

c) Risk of Price Decline:

There is always a risk of reduction in the prices of inventories by the supplies, competition or

general depression in the market.

d) Risk of Obsolescence:

The inventories may become obsolete due to improved technology, changes in requirements,

changes in customer tastes etc.,

1. Risk determination in quality:

The quality of materials may also deteriorate while the inventories are kept.

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OBJECTIVES OF INVENTORIES MANAGEMENT:

Definition of Inventory Management:

Inventory Management is concerned with the determination of optimum level of

investment for each component of inventory and the efficient use of components and the

operation of components and the operation of and effective control and review of mechanism.

The main objectives of Inventory Management are operational and financial. The

operational objective mean that the materials and spares should be available in sufficient

quantity that work is not disrupted for want of inventory.

The financial objective means that investments inventory should not remain Idle and

minimum working capital should be locked init.

The following are the objectives of Inventory Management:

2. To ensure continuous supply of materials, spares and finished goods so that production

should not suffer at any time and customers demand should also be met.

3. To avoid both over-stocking and under-stocking of inventory.

4. To maintain investment in inventories at the optimal level as required by operational and

sales over all costs.

5. To keep material cost under control so that they contribute in reducing the cost of

production and over all costs.

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6. To eliminate duplication in ordering or replenishing stocking. This is possible with the

help of centralizing purchases.

7. To ensure perpetual inventory control so that materials shown in stock ledgers should be

actually lying in the stores.

8. To ensure right quality goods at reasonable prices. Suitable quality standards will ensure

proper quality of stock. The price – analysis, the cost analysis and value –analysis will

ensure payment of proper prices.

9. To facilitate furnishing of data for short-term and long-term planning and control of

inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMEN

A proper inventory control not only helps in solving the acute problem of

liquidity but also increases profit and caused substantial reduction in the working capital of the

concern.

The following are the important tools and techniques of Inventory Management and

control:

1. Determination of Stock Levels:

Carrying of too much and too little of inventory is detrimental to the firm. If the

inventory level is too little, the firm will face frequent stock outs involving heavy Ordering Cost

and if the inventory level is too high it will be unnecessary tie up of capital.

An efficient Inventory Management requires that a firm should maintain an Optimum

Level of inventory where inventory costs are the minimum and at the same time there is no

stock out which may result in loss or sale or shortage of production.

i. Minimum Stock Level:

It represents the quantity below its stock of any item should not be allowed to fall.

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Lead Time:

A purchasing firm requires sometime to process the order and time is also required by the

Supplying firm to execute the order.

The time in processing the order and then executing it is known as Lead Time.

Rate of Consumption:

It is the average consumption of materials in the factory. The rate of consumption will be

decided on the basis of past experience and production plans.

Nature of Materials:

The nature of materials also affects the minimum level. If a material is required

only against the special orders of the customers then minimum stock will not be required for

such material.

Minimum stock level can be calculated with the help of following formula.

[Minimum Stock Level = Re-ordering Level – (Normal X Normal Re-order Period)]

ii. Re-Ordering Level:

When the quantity of materials reaches at a certain figures then fresh order sent

to get materials again. The order is sent before the materials reach minimum stock level.

Re-Ordering level is fixed between Minimum level and Maximum level.

iii. Maximum Level:

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It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity

exceeds maximum level limit then it will be over stocking.

Over stocking will mean blocking of more working capital, more space for store the materials,

more wastage of materials and more changes of losses from obsolescence.

[Maximum Stock = Re-Ordering Level + Re-order Quantity – (minimum consumption X

minimum order period)].

iv. Danger Stock Level:

It is fixed below minimum stock level.

The Danger stock indicates emergency of stock position and urgency to

obtaining fresh at any cost.

[Danger stock Level = Average rate of consumption X Emergency delivery time].

v. Average Stock Level:

This stock level indicates the average stock held by the concern.

[Average Stock Level = Minimum stock level = ½ X Order quantity].

2. Determination of Safety Stocks:

Safety stock is a buffer to meet some unanticipated increase in usage. The demand for material

may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can

face a problem of stock out.

In order to protect against the stock out arising out of usage fluctuations, firms usually

maintain some margin of safety stock.

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Two costs are involved in the determination of this stock outs will occur resulting into

the larger opportunity costs. On other hand, the larger quantity of safety stocks involves

carrying costs.

3. Economic Order Quantity (EOQ):

The quantity of material to be ordered at one time is known as Economic Order Quantity.

The quantity is fixed in such a manner as to minimize the cost of ordering and carrying costs.

Total cost of Material = Acquisition cost + cost + Carrying cost + Ordering cost.

Carrying Costs:

It is cost of holding the material in the store.

Ordering Cost:

It is the cost of placing orders for the purchase of materials.

EOQ can be calculated with the help of the following formula.

EOQ = 2CO/I

Where,

C = Consumption of the material in units during a year.

O = Ordering Cost.

I = Carrying Cost or Interest payment on the capital.

4. A-B-C Analysis (Always Better Control Analysis)

Under A-B-C Analysis, the materials are divided into 3 categories viz., A, B, and C. almost

10% of

the items contribute to 705 of value of consumption and this category is called a ‘A’ category.

About 205 of the items contribute about 20% of value of consumption and this is known as

category ‘B; materials.

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Category ‘C’ covers about 705 of the items of materials which contribute only 10% of value of

consumption.

5. VED Analysis: (Vitality Essential Desire)

The VED Analysis is used generally for spare parts. Spare parts classified as Vital (V),

essential (E), and Desirable (D).

The Vital spares are a must for running the concern smoothly and these must be stored

adequately.

The ‘E’ type of spares is also necessary but their stocks may be kept at low figures.

The stocking of ‘D’ type spares may be avoided at times. If the lead time of these spares

is less, then stocking of these spares can be avoided.

6. Inventory Turnover Ratio:

Inventory Turnover Ratios are calculated to indicate whether inventories have been used

efficiently or not.

The Inventory Turnover Ratio also known as stock velocity is normally calculated as

sale/average inventory of cost of goods sold/average inventory.

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

the stocks.

Symbolically…..

7. Valuations of Inventories – Method of Valuation:

FIFO Method

LIFO Method

Base Stock Method

Weighted Average Price Method.

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INVENTORY COST-AN OVERALL VIEW:

Introduction:

In financial parlance, Inventory is defined as the value of the raw materials, fuels

and lubricants spares parts maintenance consumable, semi processed materials and finished

goods stock at any given point of time. The operational definition of inventory would be amount

of raw materials, fuel and lubricants, spare parts and semi processed materials to be stock for

smooth running of the plant/industry.

Need of Inventory:

Inventories are maintained basically for the operational smoothness which they can be

affected by uncoupling successive stage of production, whereas the monetary value of the

inventory serves as guide to indicate the size of each investment made to achieve this

operational convenience. The materials management departments’ primary function is to

provide this operational convenience with a minimum possible investment in inventories.

Materials department is accused of both stocks outs as well as large investments in excising a

selective inventory control and application of inventory control techniques. Inventories build to

act as a cushion between supply and demand. It is sufficient to take care of probable delays in

supply as well as probable variations in demand.

The size of inventory depends upon the factors such as size of industry internal lead time

for purchase, supplier’s lead time, vendor’s relations, availability of the materials, and annual

consumption of the materials. Inventory cost can be controlled by applying modern techniques

viz., ABC Analysis, SDE, ESN, HEMC, VED etc., these techniques can be used effectively

with the help of computerization.

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What is meant by Inventory Cost?

i. The total value of stores and spares and capital spares,

ii. Stores in transit and under inspection and

iii. Stock of finished products.

Normally, there are certain problems in maintaining Optimal Level of Inventory. Problems of

inventory can be resolved by the cost implication. Costs which are relevant for consideration are

discussed in the following lines:

Basically there are four costs consideration in developing and inventory model.

The cost of placing a replenishment order,

The cost of carrying inventory,

The cost of under stocking and

The cost of over stocking.

The cost of ordering and inventory carrying cost are viewed as the supply side costs and help in

the determination of the amount of variations in demand and the delay in supplies which is the

inventory should with stand.

The under stocking and over stocking costs are viewed as the demand side costs and help in the

determination of the amount of variations in demand and the delay in supplies which is the

inventory should with stand.

Whenever an order placed for stock replenishment, certain costs are involved, and, for most

practical purpose it can be assumed that the cost per is constant. The ordering cost may vary

depending upon the type of items, for example raw material like steel production component

like casting in steel plants, support materials in the case of coal industry.

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The cost ordering includes:

Paper work costs, typing and dispatching an order,

Follow up costs, the follow up required to ensure timely supplies includes the several

cost for purchase follow up, the Telephones, Telex and Postal bills etc.,

Costs involved in receiving of the order, inspection, checking and handling in the stores,

Any set up cost of machines charged by the supplier, either directly indicated in

quotations or assessed trough quotations of various quantity,

The salaries and wages of the purchase department.

Cost of Inventory Carrying:

This cost is measured as of the item. This measure gives basis for estimating what is actual costs

a company to carry stock.

This cost includes:

Interest on capital,

Insurance and Tax charges,

Storage cost-labor costs, provision of storage area and facilities like bins, racks etc.,

Transport bills and Hamali charges,

Allowance for deterioration or spoilage,

Salaries of stores staff,

The inventory carrying cost varies and a major portion of this an accounted for the

interest on capital.

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Under Stocking Cost:

The cost is the cost incurred when an item is out of stock. It included cost of lost production

during the period of stock out and the extra cost per unit which might have to be paid for an

emergency purchase.

Over Stocking Cost:

This cost is the inventory carrying cost (which is calculated per year) for a

specific period of time. The varies in different contexts it could be the time of procurement of

entire life time of machine. In the case of one time purchase,

[Over cost = Purchasing Price – Scrap Value]

THE FIFO METHOD (FIRST - IN - FIRST OUT):

Under this method it is assumed that the materials or goods first received are the

first to be issued or sold. Thus, according to this method, the inventory on a particular date is

presumed to be composed of the items which were acquired most recently.

The value inventory would remain the same even if the “Perpetual Inventory

System” is followed.

Advantages:

The FIFO Method has the following advantages:

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It values stock nearer to current market price since stock is presumed to consisting of the

most recent purchases,

It is based on cost and, therefore, no unrealized profit enters into the financial accounts

of the company,

The method is realistic since it takes into account the normal procedure or utilizing or

selling those materials or goods which have been longest in stock.

Disadvantages:

The method suffers from the following disadvantages:

i. It involves complicated calculations and hence increases the possibility of clerical errors.

ii. Comparison between different jobs using the same type of material becomes sometimes

difficult. A job commenced a few minutes after another job may have to bear an entirely

different charge for materials because the first job completely exhausted the supply of

materials of the particular lot.

The FIFO method of valuation of inventories is particularly suitable in the following

circumstances:

i. The materials or goods are of a perishable nature,

ii. The frequency of purchases is not large,

iii. There are moderate fluctuations in the prices of materials or goods,

iv. Materials are easily identifiable as belonging to a particular purchase lot.

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BASE STOCK METHOD:

This method is based on the contention that each enterprise maintains or finished goods

in its stock, this out of the first lost purchased; therefore, it is always valued at this price and is

carried forward as a foxed asset. Any quantity over and above the Base Stock Method aims at

matching current costs to current sales, the LIFO method will be most suitable for valuing

stocking material or finished goods other than the Base Stock. The Base Stock Method has

advantage of charging out materials/goods at actual cost. Its other merits or demerits will

depend on the method which is used for valuing materials other than the Base Stock.

WEIGHTED AVERAGE PRICE METHOD:

This method is based on the presumption that once the materials are put into a common bin,

they lose their identity. Hence, the inventory consists of no specific batch of goods. The

inventory is thus priced on the basis of average prices paid for the goods .Weighted according to

the quantity purchased at each price.

Weighted Average Price method is very popular on account of its being based on the

total quantity and value of materials purchased besides reducing number of calculations. As a

matter of facts the new average price is to be calculated only when a fresh purchases of

materials is made in place of calculating it every now and then as is the case with FIFO, LIFO

methods. However, in case of this method different prices of materials are charged from

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production particularly when the frequency of purchases and issue/sales is quite large and the

concern is following perpetual inventory system.

VALUATION OF INVENTORIES – IMPACT ON THE FLOW OF COSTS:

As should be quite evident, the different methods calculating inventory values will have

their impact on the flow of costs through the Balance Sheet into the Income Statement. The

dollars that are paid acquire inventory are always divided between the Balance (Inventories) and

the Income Statement (Costs of Goods Sold), there is not other place to put to them. Thus if the

different methods of calculating inventory produce different inventory values, they will also

produce different Costs of Goods Sold figures, and the differing Costs of Goods Sold figures

will naturally produce different profit figures.

In order show the impact of inventory valuation on cost flow, the preceding exhibits are

summarized; each method produces different figures for the transfer of raw materials to work in

process. These differences appear small, but the only reason for this that the dollar amounts has

been kept small to make the illustration workable.

With the transfer of raw materials to work in process, the cost flow or transfer with have

its impact on the work in process inventory and the transfer of completed merchandise to

finished goods. Ultimately when goods are sold, the varying methods of valuing inventories will

have their impact on Costs of Goods Sold and these profits, the effects of the cost flows on costs

of goods sold and profits can be accentuated further if the different methods of valuing

inventories are applied to work in process and finished goods.

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EVALUATION OF METHODS – What causes the differences?

The best method of inventory valuation might be “Specific Identification”, that is, the

unit’s inventory should be identified with the specific invoice and thus specific unit’s costs to

which they play.

Fortunately, the FIFO method constitutes a very useful approximation to the specific

identification method if one can reasonably assume that the actual flow of materials is First-in-

First-Out. This assumption is not unreasonable and thus we have stated the main argument for

the FIFO inventory scheme, that is, the physical flow of materials would match the flow of costs

under the first-in-First-Out method.

When the units in inventory are identical, interchangeable and do not flow any specific

pattern of physical flow. The average costs system would seem to appropriate.

The primary difference between the FIFO and Average methods are centered on the

physical flow since both methods could involve identical and interchangeable units. The FIFO

method fits a First-in-First-Out physical flow. The average method fits a system which has no

specific pattern of physical flow should be quite difficult because of the fact that most inventory

items are subjects to deterioration by instituting a physical flow approximating FIFO. The major

reason for the use average method is something other than the lack of specific physical flow.

Ordinarily the LIFO method cannot be justified on the basis of the physical flow of

materials. Under conditions of prices, the advocated of LIFO say that than only method which

matches costs and revenues is the LIFO method assumes that the latest item is the first item is

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the first time out, and thus the current costs of materials are matched with the current selling

prices or current revenues. The FIFO method, on the non-current costs of materials are matched

with current selling prices or current revenues. This matching current cost with current revenues

is the essence of the argument for the LIFO method.

As can be seen by the above comments, there is no one best method of valuing

inventories. The method chosen should fit the situations. A physically flow pattern comparable

to FIFO would force one to consider the average method. Concentration on cost flows, as

distinct form physical flows, would force one to consider the LIFO method especially where

appear to be a discernible trend towards rising prices (or falling prices) as has been the case in

our economy during recent years.

Inventories Valued at Standard Cost:

A very useful method of valuing inventories is at a standard cost. With a standard cost system is

no need for spending a great deal of and money tanking unit costs trough perpetual inventory

record.

As shown above, where is need only for physical quantities since the inventory value is the

physical quantity multiplied by the standard cost. With the cost and value columns disposed off,

a perpetual inventory card can include additional data such as quantities on order, quantities

reserved, and quantities available. These additional data are very useful for inventory and

production control purpose. On the basis of a few calculations concerning actual unit’s costs,

inventories at standard costs could easily be converted into inventories on a FIFO, a LIFO, or an

Average cost basis.

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INVENTORY OF OBSOLESCENCE:

Obsolete inventories cannot be used or disposed off at values carried on the book,

frequent reviews should be made of all inventories, and when obsolescence is indicated a

request for revaluation should be prepared for approval is management. The difference between

original and obsolete value should be recorded by a charge to an operating account. Inventory

obsolescence, and a credit to inventory. If the material is scrapped that material can be sold at

reduced value or used in areas where is will work less than its original value, the entry would be

only for the amount of write down. Some companies carry a salvage inventory and transfer to it

materials which may be sold or used at reduced values. Where this is done, the entry would be:

Dr. Salvage Inventory

Dr. Inventory Obsolescence

Cr. Raw Material Inventory or Supplies Inventory.

Inventory Cost in Relation to Zuari Cement shall to Classified Follows:

Inventory can be classified as capital and revenue certain items through titled as capital

in nature. Hence, due care is to be taken whole drawing the material.

Materials which are to be imported from other countries have be planned well in

advance nearly about 24 months and to initiate the proposals for procurement.

Cement is highly energy intensive industry, the inputs like power and coal are the major

part of the variable cost since government controls the coal and fuel sector, any increase rate is

adversely affects the cement industry.

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Zuari Cement has in own power plant and through which is saves energy consumptions. By this

cost of production reduces and can race the fluctuations in prices.

Inventory cost of any organization also adversely affects by retaining obsolete/scrap and

inventory costs can be reduced by management with an advance planning of procurement of

materials, periodical review of existing spares with reference to the fast consumption,

ascertaining the information regarding the availability of spares in other areas. Holding of extra

inventory will be an additional financial burden to the company due to payment of interest

changes none the materials purchased, diminishing value of materials by keeping them is stores

for a long time, handling charges, spares rent etc.

The Inventories of Zuari Cement mainly during 2005-06 to 2010-11 are as follows:

Year Quantity Limestone Bauxite Gypsum

2005-06 9,74,490 44,256 21,747 18,101

2006-07 9,53,940 41,872 21,747 18,101

2007-08 9,68,730 43,151 23,091 33,695

2008-09 11,19,980 53,877 27,978 90,577

2009-10 11,22,840 59,790 29,452 1,38,456

2010-11 13,23,801 63,252 31,310 1,46,057

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The value of the above Raw Materials for the year 2005-06 to 2010-11 is as follows:

Value of imported and indigenous Raw Materials, Stores, Spares Parts and components

consumed during the year

Imported (Rs)

Year Limestone Bauxite Gypsum Fly ash

2005-06 1,38,53,482 2,79,71,903 1,71,00,574 6,44,473

2006-07 13,85,812 2,45,60,387 1,79,86,280 12,22,822

2007-08 15,71,30,922 2,34,88,745 1,96,99,583 25,46,948

2008-09 16,18,61,868 2,77,50,163 2,41,23,722 76,25,541

2009-10 18,89,17,209 3,19,79,898 2,71,11,391 1,29,47,144

2010-11 22,26,24,787 3,55,63,552 3,30,76,665 1,49,25,480

Years Raw Materials Stores Spares and Components

2005-06 59,30,02,633 45,39,79,698

2006-07 6,661,90,014 7,53,42,109

2007-08 49,13,39,625 13,16,24,912

2008-09 80,04,41,963 9,89,65,107

2009-10 146,43,21,607 8,28,63,063

2010-11 157,09,46,700 5,63,05,296

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Indigenous:

CEMENT FACTORY RUNS WITH VARIOUS EQUIPMENTS INSTALLED IN

THE FACTORY

A. NICAL DEPARMENT

Mines

Mechanical

Electrical

Civil

B. COMMERCIAL DEPARTMENTS

Stores

Purchases

Years Raw Materials Stores Spares and Components

2005-06 399,58,69,418 98,49,90,949

2006-07 355,88,75,126 18,91,49,420

2007-08 411,74,05,138 136,56,64,385

2008-09 503,92,81,020 57,80,78,491

2009-10 498,44,98,872 62,48,90,434

2010-11 578,12,76,577 333,32,29,062

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Accounts

To run the plant and maintained Equipments Departments require spares. For such requirements

of spares department raise Indents and send the indents to purchase department through stores.

INDENTS:

1. Annual indents for consumable items (stores items),

2. Regular indents raised by consuming departments,

3. Annual requirements of raw materials PROMP & QC.

ENQUIRIES:

Enquiries will be sent approved sub contractors.

ORDER PROCESSING FORM:

Receiving quotations from sub-contractors

Enter the price details of enquiry sent in the order processing form

Selection of party on merit basis.

PURCHASE ORDER:

Prepare purchase order on selected party

Send purchase order copies to party, stores and department.

GOODS RECEIPT NOTE:

Receiving goods receipt note from stores.

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PURCHASE REQUEST / INDENT

SI. NO.

MAT. CODE

Description

Quantity required

Quantity in Stock

Pending Indent/order reference

Quantity

App. Cost

Reason for requirement remarks

When required

Period of issue form stores

PURCHASE DEPARTMENT

ACTIVITY: RECEIVING INDENTS:

Receipt of annual indents for consumable items/stores items from stores department.

Checking of indent numbers and authority signature.

Checking department name, specification of item, delivery.

Time consumption period.

Incase of any deficiency, send the information to concerned department for clarification.

Segregation of indents for attending at cpd Hyderabad office.

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Enter the indents details in indent register.

ACTIVITY:

PREPARATION OF ORDER PROCESSING FORM

Receiving quotations against enquires sent.

Enter price and other terms of the quotations received from

Sub-contractors in the order processing form.

Mention the earlier purchase details of indented items against each item in the order

processing form.

Put up the order processing form with enquiry and quotations to head (purchase).

Examine order processing form and decide the sub-contractor to whom purchase order

to be placed.

ACTIVITY:

PREPARATION OF PURCHASE ORDER

Prepare purchase order after finalization of price and other technical terms

mentioning the following details.

Material code

Indent number

Material Specification & Part number

Quantity

Rate

Payment and other terms & Condition.

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Chapter -3

INDESTRY PROFILE

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HISTORY OF INDIAN CEMENT INDUSTRY

By starting production in 1914 the story of Indian cement is a stage of continuous

growth. Cement is derived from the Latin word “cement am”

Egyptian and Romans found the process of manufacturing cement. In England

during the first century the hydraulic cement has become more versatile building material. Later

on, Portland cement was invented and the invention was usually attributed to Joseph Asp din of

England.

India is the world 4th largest cement produced after china, Japan and USA the south

industries have produced cement for the first time in 1904. The company was setup in Chennai

with the installed capacity of 30 tones per day. Since then the cement industry has progressing

leaps and 1950-51. The capacity of production was only 3.3 million tones. So for annual

production and demand have been growing a pace at roughly 78million tones with an installed

capacity of 87 million tones.

In the remaining two year of 8th plan an additional capacity of 23 million tones will actually

come up.

India is will endowed with cement grade limestone (90 billion tones). During the

nineties it had a particularly impressive expansion with growth rate of 10percent.

The strength and vitality of Indian cement industry can be gauged by the interest shown

and supports give by World Bank. Considering the excellent. Performance of the industry in

utilizing the loans and achieving the objectives and targets. The World Bank examining the

31

feasibility of providing a third line of credit for further upgrading the industry in varying areas,

which will make it global. With liberalization policies of Indian government. The industry is

posed for a high growth rates in nineties and the installed capacity is expected to cross 100

million tones and production 90 million tones by 2003 AD.

The industry has fabulous scope for exporting its product to countries like the USA,

UK, Bangladesh Nepal and other several countries. But there are not enough wagons to

transport cement for shipment.

CEMENT- the product:

The natural cement is obtained by burning and crushing the stones containing clayey,

carbonate of time and some amount of carbonate of magnesia. The natural cement is brown in

color and its best variety is known as “ROMAN CEMENT”. It set very quickly after addition

of water.

It was in the eighteenth century that the most important advances in the

development of cement were which finally led to the invention of Portland cement.

In 1756 John Smeation showed that hydraulic lime which can resist the action of water can be

obtained not only from hard lime stone but from a lime stone which contain substantial

proportion of clayey.

In 1796. Joseph parker found that module of argillaceous lime stone made excellent hydraulic cement when burned in the usual manner. After burning the Product was reduced to a power. This started the natural cement industry.

32

COMPOSITION OF CEMENT:

The ordinary cement contains two basic ingredients, namely, argillaceous and calcareous. In

argillaceous materials the clayey predominates and in calcareous materials the calcium

carbonate predominates.

A good chemical analysis of ordinary cement along with desired range of ingredients.

Ingredients Percent Range

Lime (Cao)

Silica (sio2)

Alumina (A12o3)

Calcium sulphate (CaSo4)

Iron Oxide (Fe203)

Magnesia (MgO)

Sulphar (S)

Alkalies

62

22

5

4

3

2

1

1

62-67

17-25

3-8

3-4

3-4

1-3

1-3

0.2-1

33

The common variety of artificial cement is known as normal setting cement or ordinary cement.

A mason Joseph Aspdn of Leeds of England invented this cement in 1824. he took out a patient

for this cement called it “PORTLAND CEMENT” because it had resemblance in its color

after setting to a variety of stand stone, which is found a abundance in Portland England.

The manufacture of Portland cement was started in England around” 1825” Belgium and

Germany started the same 1855. American started the same in 1872 and India started in 1904.

The first cement factory installed in Tamilanadu in 1904 by South India limited and then

onwards a number of factories manufacturing cement were started. At present there are more

than 150 factories producing different types of cement.

INDUSTRY STRUCTURE AND DEVOLOPMENT:

With capacity of 115 million tones of large cement plant, Indian cement industry is

the fourth largest in the world. How ever per capita consumption in our country is still at only

100 kg of develop countries and offers significant potential for growth of cement consumption

as well as addition to cement capacity. The recent economic policy announcement by the

government in respect of housing, roads, power etc., will increase cement consumption.

OPPORTUNITIES AND THREATS

In view of lower per capita consumption in India, there is a considerable scope for

growth in cement consumption and creation of new capacities In coming years.

The cement industry does not appear to have adequately exploited cement

consumption in rural segment where damaged growth is possible.

Landed cost of cement (with import duty) continues to be higher than home market

prices but with reduced import duty, increasing imports, may pose a serious threat to the

domestic cement industry.

34

OUT LOOK:The recent change in the budget 2001-02 relating to fiscal incentives for individual

housing and reduction in borrowing cost for this purpose and with the government reaffirmation

to accelerate the reform process. Infrastructure development should logically get priority

leading to increase in demand of cement in coming years. The addition capacity of cement in

the pipeline is limited and therefore the demand and supply situation is expected to be more

favorable and cement prices are likely to firm up.

RISK AND CONCERNS:

Slow down of Indian economy or drop in growth rate of agriculture may adversely

affect the consumption. The recent increase in railway freight coupled with diesel / petrol price

like will increase the cost of production and distribution, as being bulky, cement is freight

intensive increase in limestone royalty also adds to the cost of production, which is considerably

higher than corresponding costs of many other developing countries.

In our country there is need to under take a massive programme of house

construction activity into the rural and urban areas. It is impossible to construct a house without

cement and steel, in other words, cement is one of the basic construction materials and therefore

it is one of the vital elements for the economic development of the nation.

India is spite of being the 4th biggest producer of cement in the world has still a very

low per capital consumption of cement.

Cement companies 51 Nos

Cement plant 99 Nos

Installed company 64.8 mt

Total investment (approx) Rs.10,000 crore

Total man power over 1.25 lakh.

35

Management award of the government of Andhra Pradesh Zuari is also conscious of

its social responsibilities. Its rural and community development programmes include of two

yearly villages, running and Agricultural Demonstration Farm, a Model Dairy Farm etc.,

impressed by these activities, FAPCCI

Chose Zuari to confer the Award for “ Best efforts of an industrial unit in the state to

develop rural economy” twice, in the year 1994 as well as in 1998. Zuari also has to its credit

the National Award (shri. S. R. Rangta Award for social Awareness) for the year 1995-96, for

the Best rural Development Efforts made by the company. In the same year Zuari also got the

FAPCCI Award for “Best workers welfare” Zuari got the first prize for mine Environment and

pollution control for year 1999 too, for the 3rd year in succession in July, 2001 Zuari annexed

the” Vana Mithra Award from the government of Andhra Pradesh.

History

Quality conscious and progressive in its out look, ZUARI CEMENT an OHSAS 08001

company and also joined the select brand of ISO 9001-2000 Companies

The first unit was installed at Basanth Nagar with a capacity of 2.5 lakh TPA (Tones per

annum) incorporating humble supervision, preheated system, during the year 1969.

The second unit followed suit with added a capacity of 2 lakh TPA in 1971

The plant was further expanded to 9 lakh by adding 205 lakh tones in August, 1978,

1.13 lakh tones in January, 1987 and 0.87 lakh tones in September, 1981.

POWER

Singareni collories make the supply of coal for this industry and the power was

obtained from AP TRASCO. The power demand for the factory is about 21 MW. Zuari has got

2 diesel generator sets of 4 MW each installed in the year 1987.

Zuari cement now has a 15 KW capacity plant to facilitate for uninterrupted power

supply for manufactured of cement.

36

ZUARI CEMENT

One among the industrial giants in the country today, serving the nation on the

industrial front Zuari industries limited has a chequered d eventful history is dating back to the

Twenties when the industrial House and Birla acquired it. With only a textile Mill under it

banner in 1924, it grew from strength to strength and spread is its activities to never fields like

Rayon, Pulp, transport paper, Spun pipes and refractory types. Oil mill and Refinery Extraction.

Looking to the wide gap between demand and supply, of a vital commodity cement,

which plays an important role in nation building the Government of India de-licensed the

cement industry in the year 1966 with a view to attract private entrepreneurs to augment the

cement product Zuari rose to the occasion and decided to set up a few cement plant in the

country

The first cement plant of Zuari with a capacity of 2.5 lack tones per annum based on

dry process, was established in 1969 at Basanth Nagar a back ward area in Karim Nagar

District, Andhra Pradesh, and christened in Zuari cement. The second unit followed suit, which

added a capacity of 2.00 lakh tones in 1971. The plant was further expanded to 9.00 lack tones

in August 1978. 1.14 lakh tones in January, 1981 and 0.87 lakh tones in September, 1981.

Zuari cement has outstanding track record of performance and distinguished itself

among all the cement factories in India by bagging the coveted National Award for two

successive year, i.e., in 1985 and 1936, so also the National Award for mines safety for two year

1985-86 and 1986-87. Zuari also bagged NCBM’S (National council for cement and Building

materials) National Award for energy conservation for the year 1989.90

Zuari bagged the prestigious Andhra Pradesh state productivit89 also annexed state

award for industrial management in 1988-89 and also “Best industrial promotion expansion

efforts” in the estate and Yajamanyza Ratna and baste efforts of an industrial unit in the state to

develop rural economy was bagged for it is contribution towards the responsibility of rural and

community development programmers of the year 1991.It also bagged the May Day award “of

the government of Andhra Pradesh for the best management and the pundit Jawaharlal Nehru

37

silver rolling trophy for the industrial productivity efforts in the state of Andhra Pradesh by

FAPCCI and also the Indian Gandhi memorial national award for excellence. Best management

award of the government of Andhra Pradesh for the year 1993

PERFORMANCE:

The performance of Zuari Cement industry has been outstanding Achieving over

cent per cent capacity utilization although despite many odds like power cuts and which most

40% was waste due to wagon shortage etc.

The company being a continuous process industry progress with industrial

Performance. The company had a glorious track record for the last 27 years in the industry.

TECHNOLOGY:

Zuari Cement uses most modern technology and computerized control in the plant. A

team of dedicated and well-experienced exports manages the plant. The quality is maintained

much above the bureau of Indian Standards.

The Raw Materials used for manufacturing cement are:

1 Lime

stone.

1 Bauxite

2 Hematite

3 Gypsum

ENVIRONMENTAL AND SOCIAL OBLIGATIONS

The Environmental Promotion and to keep-up the Ecological balance, this section

has undertaken various social welfare programs by adopting ten nearly villages, organizing

family welfare camps, surgical camps, children immunization camps, animal health camps,

blood donation camps, distribution of fruit bearing trees and seeds,traning for farmers etc.,were

arranged.

38

WELFARE AND RECREATION FACILITIES

For the purpose of Recreation of facility 2 auditoriums were provided for playing

indoor games, cultural function and activities like drama, music and dance etc.

The industry has provided libraries and reading rooms. About 1000 books are

available in the library. All kinds of news paper, magazines are made available.

Cantine is provided to cater to the needs to the employees for supply snacks, tea,

coffee and meals etc.

One English medium and one telugu medium school are provided to meet the

educational requirements.

The company has provided a dispensary with a qualified medical office and

paramedical staff for the benefit of the employees. The employees covered under ESI hospital.

Competitions in sports and games are conducted every year for august 15th,

Independence Day and January 26th Republic day among the employees.

ELECTRICITY:

The power consumption per ton for cement has come down to 108 units against 113

units last year, due to implementation of various energy saving measures. The performance of

captive power plant of this section continues to be satisfactory. Total power generation during

the year was 84 million units last year. This captive power plant is playing a major role in

keeping power costs with in economic levels.

The management has introduced various HRD program’s for training and

development and has taken various other measures for the betterment of employees

efficiency/performance

The section has installed adequate air pollution control system and equipment and is

ISO 14001 such has environment management system is under implementation.

39

LIST OF AWARDS BAGGED BY ZUARI CEMENT

Zuari cement distinguished itself among all the cement factories in India bagging a No of awards.

Sl.no. YEAR DETAILS

1 1984 FAPCCI Award for best family planning efforts in states.

2 1985 FAPCCI Award for best Industrial promotion expansion Efforts in the states.

3 1986 Best family planning in the state.

4 1987 National productivity Award.

5 1987-88 National award for Mines safety.

6 1988 National productivity Award.

7 1988-89 National award for Mines safety.

8 1989-90 Best family planning efforts in states.

9 1990-91 AP state for the Best Industrial Relation.

10 1991 AP State Yajamanya Ratna And Best management Award.

11 1991 Best family planning Efforts in the State by FAPCCI.

12 1991-92 NCBM’S National Award for Energy performance.

13 1993-94 Indira Gandhi Memorial national award Excellence in Industry.

14 1995 Best Management award by AP Govt.

15 1996 Mines safety award in AP.

16 1997 Award for Mines Safety in AP.

40

17 1997-98 Best Workers Welfare by FAPCCI

18 1998 Company got ISO-9002 certification from bureau of Indian standard.

19 1999 The “Best Pay role saving group award among private sector”. First prize in the level by International savings Organization, Govt of India.

20 2000-01 The best efforts in rural development by an industry in the state by the federation of A.P. of commerce & industry (FAPCCI)

21 2001 Mines environment & pollution control-First prize.

22 2001-02 Award for efforts in environmental protection in the region by the Godavari Pradushana Pariharana.Pariyvana Parieractiona Gavkshamu (GAPPG ).( A voluntary organization for pollution control & environmental protection.

23 2003 First Prize for HORTICULTURE SHOW (for corombola fruit) held at public gardens, Hyderabad being Organized by Director of Horticulture

24 2002-03 Award for the best environment protection efforts put in by Zuari cement being organized by Godavari Pradushana Pariharana.Pariyvana Parieractiona Gavkshamu (GAPPG ).At Ravindra Bharthi, Hyderabad on the occasion of earth day( On 22-04-2001) The award was presented Hon’ble Minister of State for urban development Sri Bandaru Dattatreya.

25 2003 Company has got ISO-4001 cetfication pertaining to environment from burau of Indian standards.

26 July2003 Vana Mithra award from the direct collector.

27 2004 Company has got OHSAS-18001 certification from DNV New Delhi.

28 2004-05 MINES SAFITY WEEK;(24-11-2002) Over all performance Second prize. Operation and maintenance of machines of first prize.

Protection equipment vocational and supervision standard 1st prize. Enivronment and pollution control 1st prize. House keeping 2nd Prize.

29 2005 MINES ENVIRONMENT AND MINERAL

41

CONSERVATION WEEK1) Dump yard management 1st prize2) A forestation 2nd prize3) Noise Vibration 2nd prize

Air quality and dust suppression. 30 2006 Three first prize in HORTICULTURAL SHOW (for sapota,

banana and Caombola fruits)in connection with Shathavahana kalotsavalu.

31 2007 FAPCCI Award for “Excellence in industrial productivity” on behalf of Zuari cement from the Hon’ble chief minister of Andhra Pradesh,Dr Y.S.Rajashekar reddy.on the 8th June 2007 at Hyderabad.

In the mines safety week celebrations, under the auspices of the Director General of mines Safety,

Zuari

Basantnagar limestone mines won 2 first prizes environment and pollution control and safe

drilling and blatting

and 14th 2nd prizes for over all performance, productivity, operation and maintenance of machines

publicity/propaganda etc.

This section also bagged the award for environment protection in the Godavari river belt, sponsored by the Godavari Pradushana Pariharana Paryavarana.

42

PRODUCTION

Last 20 years production of Zuari cements industry, Basanth Nagar.

Year Production in Tunes

1983-84 749797

1984-85 761581

1985-86 805921

1986-87 760708

1987-88 550254

1988-89 601453

1989-90 643307

1990-91 643663

1991-92 748258

1992-93 685596

1993-94 731177

1994-95 784555

1995-96 782383

1996-97 731049

1997-98 746474

1998-99 688305

1999-2000 777092

2000-01 692424

2001-02 727447

2002-03 735012

2005-06 1046166

2006-07 1056742

2007-08 11,99,445

43

Note: production including internal consumption also cement and clinkerproduction were lower

than the previous year mainly because of lower dispatchesof cement due to recession prevailing

in cement industry with slow down in demand during the year under review. This section had to

curtail production due ton accumulation of large stocks of clinker. However ,sales realization

during the second half of the year has improved and it is hoped that prices will stabilize at some

reasonable levels.

DIRECTORS OF ZUARI INDUSTRIES LIMITED

Chairman

1 Syt.B.K.Birla

Directors

2 Smt. K. G. Maheswari

3 Shri. Pramod Khaitan

4 Shri. B. P. Bajoria

5 Shri. P. K. Chokesy

6 Smt. Neete Mukerji

7 (Nominee of I.C.I.C.I)

8 Shri D. N. Mishra

9 (Nominee of L.I.C)

10 Shri Amitabha Ghosh

11 (Nominee of U.T.I)

12 Shri.P. K. Malik

13 Smt Manjushree Khaitan

Scretary

1 Shri S.K. Parilk

44

Senior Executives

2 Shri K. C. Jain (Manager of the Company)

3 Shri J.D. Poddar

4 Shri O.P. Podar

5 Shri P.K. Goyenka

6 Shri D. Tandon

Auditors

1 Messrs Price Waster house

Subsidiary Companies Of Zuari Industries

2 Bharat General & Textile Industries Limited

3 KICM Investment Limited

4 Assam Cotton Mills Limited

5 Softshree Estates Limited

The investment inventory consisted the most significant part of current assets

working capital in most of the undertaking. Thus, it is very essential to have proper control and

management inventories.

The purpose of inventory management is to ensure availability of materials in

sufficient quantity as and when required and also to minimize investment in inventories.

MEANING AND NATURE OF INVENTOR:

RAW MATERIAL:

Raw material from a major input in to the organization. The are required to carry out

production activities uninterruptedly. The quantity of raw materials required will be determined

by the rate of consumption and the time required for replenishing the supplies. The factors like

the availability of raw material and Government regulations etc., too affect the stock of raw

materials.

45

WORK IN PROGRESS:

The work in progress in that stage of stocks which are in between raw material and

finished goods. The quantum of work in progress depends upon the taken the in manufacturing

process. The quantum of work in progress depends upon the time taken in the manufacturing

process. The greater the time taken in manufacturing the more will be the amount of work in

progress.

CONSUMABLES:

These are the materials which ae needed to smoother the process of production but

they act as catalysts. Consumables may be classified according to their consumption add

critically. Generally, consumable stores does not supply problem and firm a small part of

production cost. There can be instances where these materials may account for much value than

the raw material. The fuel oil they a substantial part of cost.

FINISHED GOODS:

These are the goods which are ready for the consumers. The stock of finished goods

provides a buffer between production and market, the purpose of maintaining inventory is to

ensure proper supply of goods to customers.

SPARES:

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

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

maintenance spares etc., are not discarded after use, rather they ae kepy in ready position for

father use.

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

and the cost that may arise due to their non-availability.

46

BENEFITS OF HOLDING INVENTORIES

Although holding inventories involves blocking of a firm’s and the costs of storage

and handling, every business enterprises has to be maintain certain level of inventories of

facilities un-interrupted production and smooth running of business. In him absence of

inventories a firm will have to make purchases as soon as it receives orders. It will mean loss of

time and delays in execution of orders which sometimes may cause loss of customers and

business.

A firm also needs to maintain inventories to reduce ordering cost and avail quantity

discounts etc.

There are three main purpose of holding inventories.

1. The transaction motive: which facilities continuous production and timely

execution of sales order.

2. The precautionary motive: which necessitates the holding of inventories for

meeting the unpredictable changes in demand and supplies of materials?

3. The speculative motive: which induces to keep inventories for taking advantage

of price fluctuations, saving in re-ordering costs and quantity discounts?

RISK AND COSTS OF HOLDING INVENTORIES:

The holding of inventories blocking of a firms funds and incurrence of capital and

other costs.

The various costs and risks involved in holding inventories are;

Capital costs; maintaining of inventories results in blocking of the firms financial

recourses. The firm has therefore to arrange for additional funds to meet the cost of inventories.

The funds may be arranged from own resources or from outsiders. But in both the

cased, the firm incurs a cost. In the former case, there is an opportunity cost of investment while

in the later case; the firm has to pay interest to the outsiders.

47

1) Storage

and handling costs: holding of inventories also involves costs on storage as well as handling of

materials. The storage of costs include the rental of the go down, insurance charges etc.

1) Risk of

price decline: there is always a risk of reduction in the prices of inventories by the supplies,

competition or general depression in the market.

2) Risk of

obsolescence: the inventories may become absolute due to improve technology, changes in

requirements, change in customer tastes etc.

3) Risk

determination in quality: the quality of materials may also deteriorate while the inventories are

kept.

Objectives of Inventory Management :

Definition of inventory management: inventory management is concerned with the

determination of optimum level of investment for each components of inventory and the

operation of an effective control and review of mechanism.

The main objectives of inventory management are operational and financial.

The operational objective mean that the materials and spares should be available in

sufficient quantity so that work is not disrupted for want of inventory.

The financial objectives means that inventory should not remain idle and minimum

working capital should be locked in it.

The following are the objectives of inventory management

1) To ensure

continuous supply of materials spares and finished goods so that production should not suffer at

any time and the customers demand should also be met.

1) To avoid

both ever-stocking and under-stocking of inventory.

48

2) To

maintain investment in inventories at the optimum level as required by the operational and sales

activities.

3) To keep

material cost under control so that they contribute in educing the cost of production and overall

costs.

4) To

eliminate duplication in ordering or replenishing stocks. This is possible with the help of

centralizing purchases.

5) To

minimize loses through deterioration, pilferages, wastages and damages.

6) To ensure

perpetual inventory control so that materials shown in stock ledgers should be actually lying in

the stores.

7) To ensure

right quality goods at responsible prices. Suitable quality standards will ensure proper quality of

stocks. The price analysis, the cost analysis and value-analysis will ensure payment of proper

prices.

8) To

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

TOOLS AND TECHNIQUES OF INVENTORY

MANAGEMENT

A proper inventory control not only helps in solving the acute problem of liquidity but

also increases profit and cause substantial reduction in the working capital of the concern.

The following are the important tools and techniques of inventory management and

control.

49

1. DETER

MINATION OF STOCK LEVELS:

Carrying of too much and too little of inventory is deter mental to the firm. If the

inventory level is too little, the firm will face frequent stock outs involving heavy ordering cost

and if the inventory level is too high it will be unnecessary tie up of capital.

An efficient inventory management requires that a firm should maintain an optimum

level of inventory where inventory costs are the minimum and at the same time there is no stock

out which may result in loss or sale or storage of production.

a) MINIM

UM STOCK LEVEL:

It represents the quantity below its stock of any item should not be allowed to fall. Lead

time: a purchasing firm requires sometime to process the order and time is also required by the

supplying firm to execute the order.

The time in processing the order and then executing it is know as lead time

RATE OF CONSUMPTION: it is the average consumption of materials in the

factory. The rate of consumption will be decided on the basis of past experience and production

plan.

Nature of materials: the mature of materials also affect the minimum level. If a material

is required only against the special orders of the customer then minimum stock will not be

required for such material.

Minimum stock level can be calculated with the help of following formula.

Minimum stock level-Re-ordering level - (Normal consumption

*Normal re-order period)

b) Re-

ordering Level

When the quantity of materials reaches at a certain figure the fresh order is sent to get

materials again: the order is sent before the materials reach minimum stock level.

50

Re –ordering level is fixed between minimum levels.

c) Maxim

um level

It is the quantity of materials beyond which a firm should not exceeds its stocks. If the

quantity exceeds maximum level limit then it will be over-stocking.

Overstocking will mean blocking of more working capita,more space for storing

the materials, more wastages of materials and more chances of losses from obsolescence.

Maximum stock level-reordering level + reorder quantity – (Maximum

consumption * Minimum reorder period)

d) Danger

stock level

It is fixed below minimum stock level. The danger stock level indicates emergencies of

stock position and urgency of obtaining fresh supply at any cost.

Danger stock level =average rate of consumption * emergency delivery

time

e) Averag

e stock level:

This stock level indicates the average stock held by the concern.

2) Determination of safety stocks:

Safety stock is a buffer to meet some unanticipated increase in usages. The demand for

materials may fluctuate and delivery of inventory may also be delayed and in such a situation

the firm can be face a problem of stock out.

In order to protect against the stock out arising out of usage fluctuations, firms usually

maintain some margin of safety stocks.

51

Two costs are involved in the determination of this stock that is opportunity cost of

stock outs and the carrying costs.

If a firm maintains low level of safety frequent stock outs will occur resulting into the

larger opportunity costs. On the other hand, the larger quantity of safety stocks involves

carrying costs.

3) Economic Order Quantity (EOQ):

The quantity of materials to be ordered at one time is known as economic ordering

quantity.

The quantity is fixed in such a manner as to minimize the cost of ordering and carrying

costs.

Total cost material = Acquisition cost + cost + carrying costs + ordering

cost

Carrying cost:

It is the cost of holding the materials in the store.

Ordering cost:

It is the cost of placing orders for the purchase of materials.

EOQ can be calculated with the help of the following formula.

EOQ = 2 co/I

Where C=consumption of the material in units during the year

O= ordering cost

I = carrying cost or interest payment on the capital.

4) A-B-C

Analysis: (Always better control analysis):

Under A-B-C analysis the materials are divided into 3 categories viz.., A, B and C

Almost 10% of the items contribute to 70% of value of consumption and this category

‘A’ category.

52

About 20% of the items contribute about 20% of value of category ‘C’ covers about

70% of items of materials which contribute only 10% of value of consumption.

5) VED

Analysis: (Vitally Essential Desire)

The VED analysis is used generally for space pats. Spare parts classified as Vital (V),

Essential (E), and Desire (D).

The vital spares are a must for running the concern smoothly and these must be stored

adequately. The ‘E’ types of spares are also necessary but their stocks may be kept at low

figures. The stocking of ‘D’ type spares may be avoided at times. If the lead time of these spares

is less, then stocking of these spares can be avoided

6) Invento

ry turnover ratio:

Inventory turnover ratios are calculated to indicate whether inventories have been used

efficiently or not.

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

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

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

clearing the stocks. Symbolically.

Cost of good sold

Inventory turnover Ratio = -------------------------

Average inventory at cost

OR

Net sales

-------------------------

Average inventory

53

Days in a year

Inventory conversion period = -------------------------

Inventory turnover ratio

7) Classifi

cation of inventories:

The inventories should first be classified can then code number should be assigned for

their identification. The identification of short names is useful for inventory management not

only for large concerns also for small concerns. Lack of proper classification may also lead to

reduction in production.

Generally materials are classified accordingly to their nature such as construction

materials, consumable stocks, spars; lubricants etc. after classification the material are given

code numbers. The coding may be done alphabetically or numerically. The later method is

generally used for coding.

The class of materials is assigned two digits and then two or three digits are assigned to

the categories of items divided into 15 groups. Two numbers will be category of materials in

that class.

The third distinction is needed for the quality of goods and decimals are used to note this

factor.

8) Valuati

on of inventories-method of valuations:

FIFO method

LIFO method

Base stock method

Weighted average price method

54

CRITERIA FOR JUDGING THE INVENTORY SYSTEM

While the overall objective of the inventory system is to minimize the cost to the firm at

the risk level acceptable to management the more proximate criteria for judging the inventory

system are:

1 Comprehensibility

1 Adaptability

2 Timeliness

AREA OF IMPROVEMENT:

Inventory management in India can be improved in various ways. Improvement could be

affected through.

Effective computerization: computers should not be used for accounting purpose

but also for improving decision making.

Review of classification: ABC and FSN classification must be periodically

reviewed.

Improved of coordination: Better coordination among purchase, production,

marketing and finance departments will help in achieving greater efficiency in inventory

management.

Development of long term relationship:

Companies should develop long term relationship with vendors. This would help in

improving quality and delivery.

Disposal of obsolete / surplus inventories:

55

Companies for disposing obsolete / surplus inventories must be simplified Adoption of

challenging norms:

Companies should set benchmarks with global competitors and use ideals like JIT to

improve inventory management.

Inventory cost-an overall view

Introduction:

In financial parlance, inventory is defined as the sum of the value of the raw material,

fuels and lubricants spare parts maintenance consumable, semi-processed materials and finished

goods stock at any giving point of time. The operational definition of inventory would be

amount of raw material, fuel and lubricants , spare pats and semi-processed material to be stock

for the smooth running of the plant/industry.

Need of inventory:

Inventories are maintained basically for the operational smooth less which they can be

affected by uncoupling successive stags of production, whereas the monetary value of the

inventory serves as a guide to indicate the size of the investment made to achieve this

operational convince. The material management department primary function is to provide this

operational convenience with a minimum possible investment in inventories. Materials

departments is accused of both stock outs as well as large investments in inventories. The

solution lies in exercise a selective inventory control and application of inventory control

techniques. Inventories build to act as a cushion between supply and demand. It is sufficient to

take care of probable delays in supply as well as probable variations in demand. The size of the

inventory depends upon the factors such as size of industry internal lead time for purchase,

supplier’s lead time, vendor relations availability of the materials annual consumption of the

materials. Inventory cost can be controlled by applying Modern Techniques viz., ABC analysis,

SDE, ESN, HMC, VED etc. these techniques can be used effectively with the help of

computerization.

What is meant by inventory cost?

56

A. The total

value of stores and spares and capital spares.

A. Stores in

transits and under inspection and

B. Stock of

finished products.

Normally, there are certain problems in maintaining optimum level of inventory.

Problems of inventory can be

resoled by the cost implications. Costs which are relevant for consideration are discussed

in the following lines.

Basically there are four costs for consideration in developing and inventory model.

1. The cost of placing a replenishment order.

2. The cost of carrying inventory.

3. The cost of under stocking and

4. The cost of over stocking.

The cost of ordering and inventory carrying cost are viewed as the supply side costs and

help in the determination of his quantity to be ordered for each replenishment.

The under stocking and over stocking costs are viewed as the demand side costs and

help in the determination of the amount of variations in demand and the delay in supplies which

the inventory should withstand.

When ever an order placed for stock replenishment, certain costs are involved. And, for

most practical purpose it ca be assumed that the cost for order is constant. The ordering cost

may vary depending upon the type of items. For examples raw material like steel against

production component like castings in steel plants, support materials in the case if coal industry.

The cost ordering includes:

57

1. Paper work costs, typing and dispatching an order.

2. Follow up costs the follow up, the telephones, telex and postal bills etc.

3. Costs involved in receiving of the order, inspection, checking and handling in the

stores.

4. Any set up cost of machines charged by the suppliers, either directly indicated in

quotations or assessed through quotations if various quantities.

5. The salaries and wages of the purchase department

Cost of inventory carrying:

The cost in measured as of the unit of the item. This measure gives basis for estimating

what is actually costs a company to carry stock.

This cost includes:

1. Interest on capital.2. Insurance and tax charges.3. Storages costs-labor cost, provision of storage area and facilities like bins racks etc.4. Transport bills and homely charges.5. Allowance for deterioration or spoilages.6. Salaries of stores staff7. Obsolescence.

The inventory carrying cost varies and a major portion of this is accounted for by the

interest on capital.

Under stocking cost:

This cost is the incurred when an item is out of stock. It includes cost of lost production

during the period of stock out and the extra cost per unit which might have to be paid for an

emergency purchase.

Over stocking cost:

58

This cost is the inventory carrying cost (which is calculated per year) for a

specific period of time. The time varies in different contexts- it could be the lead time of

procurement of entire life time of machine. In the case of one time purchases, over cost would

be = purchase price-scrap price.

INVENTORY VALUATION AD COST FLOWS:

What is the cost of inventory?

One can readily visualize the determination of inventory quantities by physical count or

by use of perpetual inventory records. When this quantity is determined, it must be multiplied

by a unity cost in order to determine the inventory value that is used on financial statement.

Trade and quantity discount are to be exclude from unit cost since these discount exist

for the purpose of defining the true invoice cost of merchandise. Cash discounts, on the other

hand, have been considered as a reward for early payment and as a penalty for late payment.

The “reward” has often been interpreted as a loss rather than as a pat of unit cost. Thus in would

not be difficult to find difference of opinion as to whether invoice cost includes or excludes cash

discount.

When the “current replacement cost” of material on hand at the close of a year is less

than the actual cost, the inventory value is reduced to replacement cost (current market price).

Thus the acceptable basis inventory valuation is he “ lower of cost or markers” or more properly

the “lower of actual cost or replacement cost”.

The determination of inventory values is very important from the point of view of the

balances sheet and the income statements since costs not included in the inventory (the balance

sheet) are considered to be expensive and are thus included in the income statements.

Valuation of inventories-method of determination:

Although the prime consideration I the valuation of inventories is cost, thee are a

number of generally accepted methods of determining the cost of inventories at the close of an

accounting period. The most commonly used methods are first in firs out (FIFO) average, and

last in fist out (LIFO). The selection of the method for determining cost for inventories

59

valuation is important for its has a direct bearing on the cost of goods sold and consequently on

profit. When a method is selected, it must be used consequently and cannot be change year to

year in order to secure the most favorable profit for each year.

THE FIFO METHOD (FIRST-IN FIRST-OUT METHOD):

Under this method it is assumed that the materials or goods first received are the first to

be issued or sold. Thus, according to this method, the inventory on a particular date is presumed

to be composed of the items which were acquired most recently.

The value inventory would remain the same even if the “perpetual inventory system” is

followed.

Advantage: The FIFO method has the following advantages.

1. It values stock nearer to current market prices since stock is presumed to be

consisting of the most recent purchases.

2. It is based on cost and there fore no unrealized profit enters in the financial accounts

of the company.

3. The method is realistic since it takes into account the normal procedure of utilizing or

selling those materials or goods which have been longer in stock.

Disadvantages: the method suffers from the following disadvantages.

1. It involves complicated calculations and hence increases the possibility of clerical

Eros.

2. Comparison between jobs, using the same type of material becomes sometimes

difficult. A job commenced a few minutes after another job may have to bear an entirely change

for materials because the first jobs completely executed the supply of materials of the

particulars lot.

The FIFO method of valuation of inventories is particularly suitable in the following

circumstance.

1. The materials of goods are of perishable nature.

2. The frequency of purchase is not large.

3. There are only moderate fluctuations in the prices of materials or goods purchased.

60

4. Materials are easily identifiable as belonging to a particular purchase lot.

The LIFO method (last in first out method)

This method is based on the assumption that last item of material or goods purchased are

the first to be issued or sold. Thus according to this method, inventory consists of items

purchased at the earliest cost.

Advantages: this method has the following advantages.

1) It takes out account the current market conditions while valuing materials issued

to different jobs or calculating the cost of goods sold.

1) The method is based on cost and, therefore , no unrealized profit and on-profit or

loss is made on account of use of this method.

The method is most suitable for materials which are bulky ad on-perishable type.

Base stock Method:

This method is based on the contention that each enterprise maintenance at all times a

minimum quantity of materials or finished goods in its stock. This quantity is termed as base

stock. The base stock is always valued at this price and is cried forward as a fixed asset. Ay

quantity over and above the base stock is valued in accordance with any other appropriate

method. As this method aims at matching current costs to current sales, the LIFO method will

be most suitable for valuing stock of material of finished goods other then the base stock. The

base stock method has advantage of charging out material/goods at actual cost. Its other merits o

demerits will depend on the method which is used for valuing materials other than the base

stock.

Weighted average price method:

This method is based on the presumption that once the materials are put into a common

bin, they lose their identify. Hence, the inventory consists of no specific batch of goods. The

inventory is thus priced o the basis of average priced on the quantity purchased at each price.

61

Weighted average price method is very popular on account of its being based on the total

quantity and value of materials purchased besides reducing number of calculations. As a matter

of fact the new average price is to be calculated only when a fresh purchase of materials is made

in place of calculating it every own then has is the case with FIFO, LIFO method. However in

case of these method different prices of materials are charged from production particularly when

the frequency of purchase and issues/sales is quite large and the concern is following perceptual

inventory system.

Valuation of inventories-impact on the flow of costs:

As should be quite evident, different methods of calculating inventory values will all

have their impact on the flow of costs through the balance sheet into the income statements. The

dollars that are paid to acquire inventory are always divided between the balance sheet

(inventories) and the income statements (cost of goods sold), there is not other place to put

them. Thus if the different methods of calculating inventory produce differing inventory values,

they will also produce differing cost of goods sold figure, and the differing cost of goods sold

will naturally produce differing profit figure.

In order show the impact of inventory valuation on cost flows, the preceding exhibits are

summarized. Each method produces a different figure for the transfer of raw materials to work

in process. The differences appear small, but the only reason for this that the dollar amounts has

been kept small to make the illustration workable.

With the transfer of materials to work in process, the cost flow or transfer with have its

impact on the work in process inventory and the transfer of completed merchandise to finished

goods. Ultimately when goods are sold the varying methods of valuing inventories will have

their impact on cost of goods sold and these profits. The effects of the cost flows on cost of

goods sold and profits can be accentuated further it the differing methods of valuing inventories

are applies to work in process and finished goods.

Evaluation of methods-What causes the differences?

62

The differences in inventory values and flows for each of the method illustrated result

from only one factor, that it, changing furshaces prices or unit costs. If purchase prices had

remained stable or unchanged, each method would have produced the same inventory value and

cost flow.

Cost flows and inventory ae exactly the some under stable prices. With a fall in price

level, the LIFO method produces the highest cost flow and the lowest inventory. With a falling

price level, the LIFO method produces the lowest cost flow and highest inventory. The cost

flow under LIFO follows the price level, LIFO produces lager cost flows when prices are rising

and smaller cost flows when prices are falling. A final item to consider is that the average

method produces results which fall between the extremes of LIFO and FIFO.

Evaluation of methods- can we justify the differences?

The best method of inventory valuation might be “specific identification”, that is, the

units in inventory should be identified with the specific ivoices and thus specific units costs to

which they apply.

Fortunately, the FIFO method constitute a very useful approximation to the specific

identification method if one can reasonably assume that the actual flow of materials is fist-in

first-out. This assumption is not unreasonable and thus we have stated the main argument for

the FIFO inventory scheme, that is, physical flow of materials would match the flow of costs

under the first-in first-out method.

When the units in inventory are identical, interchangeable and do not follow any specific

pattern of physical flow, the average cost of system would seen to appropriate.

The primary differences between the FIFO and average methods are entered on the

physical flow since both methods could involve identical and interchangeable units. The FIFO

methods fit a first-I first-out physical flow. The average methods fits a system which has no

specific pattern of physical flow. Finding a situation where thee is no specific pattern of

physical flow should be quite difficult because of the fact tha most inventory items are subject

63

to deterioration by instituting a person would attempt to reduce such deterioration and any

reasonable person would attempt to reduce such deterioration by instituting a physical flow

approximating first-in first-out. The major reason for the use of the average method is

something other than the lack of specific physical flow.

Ordinary the LIFO method cannot be justified on the basis of the physical flow of

materials. Under conditions if changing prices, the advocate of LIFO says that the oly method

which matches costs and revenues is the LIFO method. The LIFO method assumes that the

latest item is the first item out, and thus the current costs of materials are matched with the other

hand, assumes that the first item in is the first item out, and thus the non-current costs of

matching currents costs with current revenues is the essence of the argument for the LIFO

method.

As can be seen by the above comments, there is no one best method of valuing

inventories. The method chosen should fir the situation. A physical flow pattern comparable

physical flow pattern would force one to consider the average method. Concentration on cost

flows, as distinct from physical flows, would force to consider the LIFO method especially

where there appears to be a discernible trend towards rising prices for falling prices as has been

the case in our economy during recent years.

Inventories valued at standard cost:

A very useful method of valuing inventories is at standard cost. With a standard cost system is

not need for spending a great deal of time and money tracing unit costs perpetual inventory

record.

PERPETUAL INVENTOTY CARD UNDER A STANADARD COST SYSTEM

64

Perpetual inventory plant:…………………. Standard Cost:

…………………………………………..

Location:………………………………….. Order Quantity………………

Order Point …………………..

Date Description On

order

Received Issued Available

On order On hand

As shown above, there is need only for physical quantities since the inventory values is the

physical quantity multified by the standard cost. With the cost and value columns disposed off,

a perceptual inventory card can include additional data such as quantities on order, quantities

reserved, and quantities available. These additional data are very useful for inventory and

production control purpose. On the basis of a few calculations concerning into inventories on a

FIFO, a LIFO, or an average cost basis. Inventory of obsolescence.

Obsolete inventories cannot be used for disposed off at values carried on the books. Frequent

reviews should be made of all inventories, and when obsolescence is indicated a request for

revaluation should be prepared foe approval by management. The difference between original

and obsolete value should be recorded by a change to an operating account. Inventory

obsolescence, and a credit to inventory. If the material is scrapped, this will be for the full

inventory value or used in area where it will be work less that its original value; the entry would

be only for the amount of write down. Some companies carry a salvage inventory and transfer to

it materials which may be sold or used at reduced values. Where this is done the entry would be;

Dr. Salvage inventory

65

Dr. Inventory obsolescence. Cr. Raw materials inventory or supplies inventory.

Inventories cost in relation Zuari cements shall to classified follows:

Inventory can be classified as capital and revenue certain items through titled as capital in

nature. Hence, due care to be take whole drawing the materials.

Materials which are to be imported from other countries have to be planned well in advances

nearly about 24 months are to initiate the proposals for procurement.

Similarly some of the items do not require any lead time some they are available in the local

market.

Cement is highly energy intensive industry, the inputs like power and local are the major part of

the variable cost since government controls the coal & fuel sector, and increase is rates

adversely effects the cement industry.

Zuari cement has it own power plant and through which it saves energy consumption. By this

the cost since government controls the coal & fuel sector, any increase rates adversely affects

the cement industry.

Inventory cost of any organization also adversely affects by retaining obsolete/scrap and

inventory costs can be educed by management with an advance planning of procurement of

materials, periodical reviews of existing spares with references to the fast consumption,

ascertaining the information regarding the availability of spares in other areas. Holding of extra

inventory will be an additional financial burden to the company due to payment of interest

charges on the materials purchased, diminishing value of materials purchased, and diminishing

value of materials by keeping them in stores for a long time, handling charges, space rent etc.

The inventory of Zuari cement mainly includes limestone, bauxite gypsum, fly ash.

Inventory in Zuari cement during 2006-11 are as follows: (unit in mt)

66

The values of the above raw materials for the year 2003-08 are as follows:

Year 2006-07 2007-08 2008-09 2009-10 2010-11

Limestone 13853482 13853482 157130922 243412189 28,59,95,631

Bauxite 27971993 27971993 23488745 38552277 -

Gypsum 17100574 17100574 19699583 49061196 5,99,65,669

Fly ash 644473 644473 2546948 20223404 3,89,40,355

Values of imported and indigenous raw materials, stores, spare parts and component

consumed during the year:

Year 2006-07 2007-08 2008-09 2009-10 2010-11

Limestone 974490 956940 968730 1239443 28,59,95,631

Bauxite 44256 41872 431151 64961 -

Gypsum 20703 21747 23091 38765 5,99,65,669

Fly ash 10301 18101 33695 159344 3,89,40,355

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Imported:

2006-07 2007-08 2008-09 2009-10 2010-11

Raw

Material

593002633 666190014 491339625 1454235982 1,20,43,390

Stores spare

part’s and

components

522588043 75345209 131624912 42279637 33,96,87,016

Indigenous:

Year 2006-07 2007-08 2008-09 2009-10 2010-11

Raw Material 3995869418 3558875426 4117405138 7906341716 9,57,53,48,408

Stores spare

part’s and

components

981990949 189149420 1365664385 3868715827 5,71,76,80,819

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CEMENT FACTORY RUNS WITH VARIOUS EQUIPMENT:

1.TECHNICAL DEPARTMENT

1.MINES

2.MECHANICAL

3.ELECTRICAL

4.CIVIL

1) COMMERCIAL DEPARTMENT

1. SRORES

2. PURCHASE

3. ACCOUNTS

To run the plant and maintain equipments departments require spares. For such requirements of

spares departments rraise indent and send the indents to purchase departments through stores.

INDENTS:

1) Annual indents for consumable items ( stores items)

2) Regular indents raised by consuming departments.

3) Annual requirements of raw material promop & qc.

69

ENQUIRIES:

1) Enquires will be sent approved sun contractors.

ORDER PROCESSING FORM:

2) Receiving quotations from sub-contractors.

3) Enter the price detail of enquiry sent in the order processing form.

4) Selection of party on merit basis.

PURCHASE ORDER:

1) Prepare puchase order on selected party.

2) Send purchase order copies to party, stoes department.

GOODS RECEIPT NOTE:

1) Receiving goods receipt note from stores.

PURCHASE DEPARTMENT:

ACTIVITY RECEIVING INDENTS:

FLOW CHART:

1 Receipt of annual indents for consumable items/stores items form stores department.

2 Checking of indent number an authority of item, delivery time consumption period.

3 In case of any deficiency, send the information to concerned department for clarification.

4 Segregation of indents for attending at C.P.D and Hyderabad office.

5 Sent the Hyderabad indents to Hyderabad office.

6 Enter the indents details in indent register.

70

URCHASE DEPARTMENT

PURCHASE ENQUIRY

Sl.No Material Code

Department Quantity Unit When required

ACTIVITY: FLOATING ENQUIES

FLOW CHART:

Checking indent items and equipment name

71

Taking previous suppliers information form previous supply. If new equipment/item,

information to be taken from concerned department or form competitors/journals/yellow

pages.

Prepare enquiry to approved sub-contractors through enquiry format

If emergency requirement, send the enquires through fax/e-mail.

Enter the detail of enquires sent in order processing form.

PURCHASE DEPARTMENT

ORDER PROCESSING FORM

S.No Indent

Ref

Material

code No

Description Size Qty 1 2 3 4 5 6 Remarks

ACTIVITY: PREPARATION OF ORDER PROCESSING FROM

FLOW CHART:

Receiving quotation against sent.

Enter price and other of the quotation received from sub-contractors in the order processing

from.

72

Mention the earlier purchase details of indented items against each item in the order processing

form if available.

Pup up the processing from with enquiry and quotation to head (purchase)

Examine orde processing from with decide the sub-contractor to whom purchase order to be

placed.

PURCHASE DEPARTMENT

PURCHASE ODER

Sl.No Indent

No

Item code

Description Qty Rate Unit Amount

ACTIVITY: PREPARATION OF ORDER

FLOW CHART: Prepare purchase order after financilization of price and other technical

terms mentioning the following details.

1. Material code

2. Indent number

3. Material specification & part number

73

4. Quantity

5. Rate

6. Payment and other terms &conditions

Stipulation of terms of test certificate/ibr/manufactures certificate where applicable. Fill in and attach the purchase order review profama to purchase order.

Send the prepaed puchase order to head (purchases) and competent authority for approval.

Send the purchase oder to identified approved sun-contractor.

PURCHASE DEPARTMENTAMENDMENT / CANCELLATION OF ORDER

Material Code Material Price/Quantity/as per order

Amended price/Quantity

ACTIVITY: ORDER AMENDMENT, ODER FOLLLOW UP AND INFORM THE

SUPPLIER FO THE REJECTIONS / DAMAGES / SHORTAGES:

FLOW CHART:

1 Issues of amendment in case of modification to purchase order.

2 Review the pending order and follow up the pending order for breakdown requirements.

3 Send regular reminders to suppliers against pending purchase order every month.

4 Receive shortage/ excess/ damages report from stores for the material received.

5 Inform the supplier for the rejections/damages/excess/shortage.

74

PURCHASE DEPARTMENT

ACTIVITY: IMPORTS:

FLOW CHART:

1 Receipt of indents for important items from stores department.

2 Taking previous/ item information to be taken from concerned department or

3 From competitors/ journals / yellow pages.

4 Send enquiry to overseas supplier.

5 Receiving quotations against enquiries sent.

6 Enter price and other terms of the quotation received from oversea supplier in the order

processing form.

7 Examine order processing from and decide the sub-contractor to whom purchase order to be

place.

8 Prepare purchase order after financilization of price and other technical terms mentioning

the following details.

1)Material code

2)Indent number

3)Material specification & part number

4)Quantity

5)Rate

6)Payment

5) Insurance and other terms and conditions

Send the prepared purchase order to head purchase and competent authority for approval.

75

Send the purchase order to over as suppliers.

Send the purchase order copies to stores and concerned department.

Prepare IC documents and submit to bank for onward transmission to overseas supplier.

Receive shipping documents from overseas supplier and send name to clearing agents for

collection of the material.

STORES DEPARTMENT

ACTIVITY: RECEIPTS AND UNLOADING MATERIAL

Receiving of goods through trunk / personnel delivery.

Entry of vehicle at gate office.

Stamping on dispatch advice with purchase order.

Unloading of goods at allocated place or in case of urgency direct at works site.

All safety precautions are taken while unloading of material like workers should wear safety

shoes, helmets, leather head gloves, noise respirator, nose mask.

Training is given to workers for unloading heavy & bulky material by using chain pulley

blocks, write rope ceilings, fork lift. After UIL receipt acknowledge given to driver maintaining

lorry receipts register.

STORES DEPARTMENT

ACTIVITY: PREPARATION OFRECEIPT AND APPROVAL BOOK FOR GENERAL

MATERIAL / D. C ENTER OG BLOCK. EPAIR ANDSTATIONARY MATERIAL

MANUALLY IN REGISTER

76

Sorting of delivery challans as bellow:

a. General

b.Stationary

c.Repairs

d.Block

Checking with P.O and mentioning material code. Party code, indent no.

Department name on each & every challans.

Creation of D>C entry in system for general materials through system.

Preparation of receipts & approval book for general materials.

Manual entry of block, stationary, repair materials,

Preparation of intimation for block, stationary, repair materials.

STORES DEPARTMENT

ACTIVITY: PHYSICAL VERIFICATION OF GOODSAll D.C handed over to store assistant physical verification like measuring, counting and

tallying with D.C’s Quantity/ description of materials by the stores assistant.

Identification tags to be attached to the verified material. Shortage/ excess / Damages if any

found to be noted on challans and inform to section in charge.

Preparation of shortage / excess/ reports if any sending to parties under copy to purchase / bill

sections.

STORES DEPARTMENTACTIVITY: APPROVAL OF MATERIALS AND PREPARATION OF GOODS RECEIPT NOTES:Intimation is being sent to all the concerned departments. Showing material to concern person.

Taking approval of the material in receipt & approval book.

Preparation general material GRNs through system and stationery/block/repairs GRNs

manually.

77

Forwarding true copy to issue section of GRN for general material forwarding true copy to

issue section of GRN for general material forwarding true copy of block/repair/ stationary GRN

to issue section and copy to purchase department.

SORES DEPARTMENTACTIVITY: REJECTED MATERIALSRejected materials kept in allocated area of rejected materials.

Packing of rejected materials.

Preparation of gate passes for rejected materials.

Sending back to supplies through our Hyderabad office.

Sending consignee copy to party vides Register Letter for booking of Register goods to party’s

other than.

STORES DEPARTMENT

ACTIVITY: EXCISE GATE PASSES

Sending duplicate for transport copy of excise invoice from suppliers delivery challans.

Mentioning A.B.S 1. No. and named of concerned department.

Duplication for transfer copy of excise invoice over to bills section for sending the same to

excise department.

Corresponding with supplier. If the excise invoice is not found with delivery challans.

STORES DEPARTMENT

ACTIVITY: RECEIPTS OF MEDICINES

Physical verification of medicines as per invoices.

Verification of expiry date on medicines.

78

Verification of MRP

Sending shortage/ excess note if any found.

Taking approval of Medical Officer.

Sending rejection notes if any medicines is rejected.

Issuing to dispensary.

Bills forwarding to Account Department vide for making the payment.

79

Chapter -4

Company Profile

80

HISTORY OF INDIAN CEMENT INDUSTRY

By starting production in 1914 the story of Indian cement is a stage of continuous

growth. Cement is derived from Latin word “Cemented”.

Egyptians and Romans found the process of manufacturing cement in England during 1st

century the Hydraulic cement has become more versatile building material. Later on, Pat land

cement was invented and the invention was usually attributed to Joseph Asp Din of England.

India is the world’s 4th largest cement produced after China, Japan & USA. The South

Industries have produced cement for the 1st time in 1904, the most basic and progressive

industry. Till1950-51, the capacity if production was only 3.3 Million tones. So far annual

production and demand have been growing a pace at roughly 78 Million tones with installed

capacity of 78 MT.

In the remaining 2 Years of 8th plan an additional of 23 MT has been planed, assuming

that at least 16 MT will actually come up.

India is well endowed with cement grade limestone (90 Billion Tones) and coal (190

Billion Tones). During the 90’s it had a particularly impressive expansion with growth rate of

10 %.

The strength and vitality of Indian cement industry can be gauged by interest shown and

support given by World Bank, considering the excellent performance of the industry in utilizing

the loans and achieving the objectives and targets. The World Bank is examining the feasibility

of providing a 3rd line of credit for further upgrading the industry varying areas, which we make

it global with the liberalization policy of Indian Govt. The industry is posed for a high growth

rate in 90s and the installed capacity is expected is 199 MT and production 90 MT by 2003.

81

The industry has fabulous scope for exporting is product to countries like the USA, UK,

Bangladesh, Nepal and other several countries. But there not enough wagons to transport

cement for shipment.

CEMENT-THE PRODUCT:

The natural cement is

obtained by burning and crushing the stones containing clay, carbonate of line and some amount

of carbonate of magnesia. The natural cement is brown in color and its best variety is known as

“ROMAN CEMENT”. It sets very quickly after addition of water.

It was in the 18th century that the most important advances in the development were it

finally led to the invention of Portland cement.

In 1756, John Seaton showed that Hydraulic lime which can resist the action of water

can be obtained not only from hard limestone but from a limestone which contain substantial

proportion of clay.

In 1756, Joseph Parker found that modules of argillaceous limestone made excellent

hydraulic cement when burned in the usual manner. After burning the product was reduced to a

powder. This started the natural cement industry.

The artificial cement is obtained by burning at a very high temperature a mixture of

calcareous and argillaceous material. The mixture of ingredients should be intimate and they

should be in correct proportion. The claimed product is known as Clinker. A small quantity of

gypsum is added to clinker and it is then pulverized into fine powder, which is known as

CEMENT.

The common variety of artificial cement is known as normal setting cement of ordinary

cement. A mason Joseph Asp Din of leads in England invented in 1824. He took out a patent for

82

this cement and called it “PORTLAND CEMENT” because it had resemblance in its color after

setting to a variety or sandstone, which is found in abundance in Portland England.

The manufacturing of Portland cement was started in England around 1825. Belgium and

Germany started the same in 1855. America started in 1872 and India started in 1904 by South

India Ltd. And then onwards a number of factories producing different types of cements.

COMPOSITION OF CEMENTS:

The ordinary cement contains two bases ingredients, namely Argillaceous and

Calcareous. In Argillaceous materials the clay predominates and in calcareous materials the

calcium carbonate predominates.

A good chemical analysis of ordinary cement along with desired range of ingredients.

INGREDIENTS PERCENT RANGE

Lime (CaO) 62 62-67

Silica (SiO2) 22 17-25

Alumina (Al2 O3) 5 3-8

Calcium Sulphate

(CaSo4)

4 3-4

Iron Oxide (Fe2 O3) 3 3-4

Magnesia (MgO) 2 1-3

Sulphur (S) 1 1-3

Alkalis 1 0.2-1

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Chapter-5

Data analysis Interpretation

ANALYSIS

The investment on raw material over a period of 5 years form 2003 to 2008 preseted in the

following table.

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Investment on Raw materials:

Year Raw material(in lacks)

2005-2006 13386.80

2006-2007 11690.67

2007-2008 49950.88

2008-2009 42950.66

2009-2010 46087.45

2010-2011 93605.78

Interpretation:

1)Form the above table it can be understood that the inventory of Zuari Cement was recorded at

13,386.80 during the year 2005-06 and it is increased to 93605.78 during the year 2010-11.

2)It shows that there is on increase in the inventory to the more extent of 80218.98

3)The average inventory of Zuari Cement was recorded at Rs.42945.41

4)The highest investment in inventory was recorded I the year 2010-11

2)Trend analysis:

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Trend analysis technique is applied to know the growth rate in investment of raw material of

Zuari Cement over the review period which is shown in the following table.

Trend analysis:

Year Raw material(in lacks) Trend(%)

2005-2006 13386.80 100

2006-2007 11690.67 87

2007-2008 49950.88 373

2008-2009 42950.66 315

2009-2010 46087.45 344

2010-2011 93605.78 699

Interpretation:

1) The investment on investment has increased in the year 2010-11. and the lost yea

investment has declared continuously. The percentage in 2009-10 was 315% as compared to

year 2007-08 to 2010-11.

2) The trends in inventories show that inventory have been more in the year 2010-11 and then

it has shown a downward trend and again it increased to some extent.

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3) The investment I inventories has sown fluctuating trend is initial years and then it raised

699% and again showing fluctuating trend.

3) Inventory Turn over Ratio:

This ratio indicates the number of times the stock has been turned over during the period &

evaluated the efficiency with which a firm is able to manage its inventory. This ratio is

calculated by applying the following formula.

Cost of goods soldInventory Turn over Ratio = ------------------------------- Average inventory

Inventory Turn over ratio:

Year Cost of goods sold Avg . inventory Ratio

2005-2006 60150.35 7402.31 8.13

2006-2007 59021.41 37975.30 1.55

2007-2008 121551.71 95065.28 12.79

2008-2009 127533.58 12390.86 10.29

2009-2010 130392.68 13338.01 9.78

2010-2011 211636.92 160035.93 1.32

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Interpretation:

1) From the above table 2005 it can be observed that (1) inventory turn over ratio is 8.13

during 2005-06 and its gradually decreased to 1.55 during 2006-07.

2) In the year 2006-11 it is clear that the ratio is very less i.e., his stock is not turned in to sales

quickly.

3) As compared to all the year the ratio is very less in 2010-11.

4) The average inventory turn over ratio was recorded at 7.3 times during the review period.

4.Inventory Conversion Period: (in corers)

Year Cost of goods

sold

Avg . inventory Ratio ICP(days)

2005-2006 60150.35 7402.31 8.13 44

2006-2007 59021.41 37975.30 1.55 232

2007-2008 121551.71 95065.28 12.79 28

2008-2009 127533.58 12390.86 10.29 34

2009-2010 130392.68 13338.01 9.78 36

2010-2011 211636.92 160035.93 1.32 272

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Interpretation:

1. Inventory conversion period was 232 days during 2006-07 but it decreased to 204 during

2006-07, which indicates that the stock has been very quickly converted into sales which mean

the company is managing the Interpretation:

From the above table 2005 it can be observed that (1) inventory turn over ratio is 8.13 during

2003-04 and its gradually decreases to 1.55 during 2006-07. Efficiently.

2. The lowest inventory conversion period was recorded at 28 days in the year 2007-08 and

the highest inventory conversion was recorded at 272 days in the year 2010-11.

2. The average inventory conversion period was recorded at 107 days during the review

period.

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5. Percentage of Inventory Turnover Current Assets:

In order to know the percentage of inventory over current assets the ratio of inventory to

current assets is calculated and which is presented in the following table.

InventoryInventory turnover current assets ratio = ------------------- * 100 Current ratio

Year Inventory Current assets Ratio(%)

2005-2006 13386.80 24172.33 55

2006-2007 11690.67 28770.78 40

2007-2008 49950.88 53063.75 94

2008-2009 42950.66 45598.02 92

2009-2010 46087.45 46713.32 92

2010-2011 93605.78 86811.49 107

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6. Percent of inventory over total current assets & fixed assets:

Inventory/current + fixed assets

Year Inventory Current assets Ratio(%)

2005-2006 13386.80 87167.64 15.35

2006-2007 11690.67 87468.76 13.36

2007-2008 49950.88 117985.89 42.33

2008-2009 42950.66 112647.26 37.50

2009-2010 46087.45 112637.07 40.91

2010-2011 93605.78 197330.5 47.43

Interpretation:

1)During the year 2006-07 the ratio was 15.35% on its declined to 13.36% in the year 2006-07.

2)From the year 2007-08 it is showing fluctuating trend but as compared to above 2 years it is

increasing.

3)The lowest inventory over total assets ratio was recorded at 13.36% during the year 2007-08

and the highest inventory ratio was recorded at 43.43%during the year 2010-11.

3) The average inventory to total assets ratio was recorded at 32.81% during the review period.

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7. Percent of Inventory over total current liabilities:

In order to know the percentage of inventory over current liabilities the ratio of

inventory to current liabilities is calculated and which is presented in the following table.

InventoryPercent of inventory over total current liabilities = -------------------------* 100 Current liabilities

Present of inventory over total current liabilities:

Year Inventory Current assets Ratio (%)

2005-2006 13386.80 7862.11 17

2006-2007 11690.67 8042.62 145

2007-2008 49950.88 16204.14 308

2008-2009 42950.66 14876.45 284

2009-2010 46087.45 17728.22 259

2010-2011 93605.78 36253.41 258

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Interpretation:

1) From the above table it can be understand that the 17% of inventory over current liabilities

ration was showing a declining trend for two years 2009-2010.

2) During the year 2010-2011 the ratio was it gradually increased to 145 and there is a net

increase to the extent of 128.

3) The lowest inventory over total amounts ratio was recorded at 14 during the year 2009-

2010.

4) The highest inventory to current liabilities ratio was recorded at 308 during the year 2007-

08.

5) The average inventory to current liabilities ratio was recorded at 211 during the review

period.

Current Ratio:

In order o know the current ratio the percentage of current assets to current liabilities is

calculated and which is presented in the following table.

Current assets Current ratio = ---------------------------- Current liabilities

Calculation of current ratio:

Year Current assets Current liabilities Ratio (%)

2005-2006 24172.33 7862.11 3.07

2006-2007 28770.78 8042.62 3.57

2007-2008 53063.75 16204.14 3.27

2008-2009 45598.02 14876.45 3.06

2009-2010 49713.32 17728.22 2.80

2010-2011 86811.49 36253.41 2.39

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Interpretation:

1)From the above table it can be interpreted that the 3.07% of current assets over current

liabilities ratio i.e., current ratio was showing a decreasing trend from year 2006-07.

2) In the year 2005-06 the ratio was 3.07 and has increased to 3057 in the 2006-07.

3) The lowest current ratio was recorded at 2008-09 which is 2.39% and the highest ratio was

recorded at 3.57 during the year 2006-07.

4) The average current ratio was recoded at 3.02 during the review period.

9. Quick ratio:

The quick ratio is the relationship between quick to current liabilities quick assets is

more rigorous test of liability position of a firm it is computed by applying the following

formula.

Quick ratio= current assets-current liability

Where quick assets = current assets-inventory

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Interpretation:

1)From the above table it can be understand as that the % of quick assets to current liabilities

i.e., the quick ratio 0.002 in 2008-09 and from that year it is showing increasing trend.

2) The highest quick ratio was recorded at 2.12 during the year 2006-07 and the lowest quick

ratio was recorded at 0.002 during the year 2007-08.

3) The average quick ratio was recorded at 0.66 during the review period.

Year Quick assets Current liabilities Ratio(%)

2005-2006 10785 7862.11 1.37

2006-2007 17080 8042.62 2.12

2007-2008 3112 16204.14 0.02

2008-2009 3347 14876.45 0.22

2009-2010 3625 17728.22 0.20

2010-2011 3207 36253.41 0.08

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SUGGESTION:

1)Though the production is higher is the year 2007-08 and the sales were very high i.e., as per

inventory conversion period it took 272 days. This shows that there is demand for cement and

the funds unnecessarily tied up. So, proper demand forecasting should be done and according to

that it may be manufactured.

2)The investment on raw material should be made as per the requirement. Unnecessary

investment may block up the funds.

3)Neither too high nor too may inventory turnover ratios reduce profit and liquidity positions of

the industry. So, proper balance should be made to increase profit and to ensure liquidity.

4)The raw material should be acquired from the right source at right quality and at right cost.

5)The process that was being used by Zuari Cement with the purchasing department should

undergo changes, so that, it seeks enhance the celerity of the delivery of a product without

compromising its quality by improving the utilization of material, labour and equipment.

6) To reduce the work, the purchasing department may enter the purchasing order into a

database and did not send a copy to any one. When the merchandise arrived, the receiving clerk

would enter the database and determine whether the order agreed with the electronic purchase

order.

If it did, payment was authorized to be made at the appropriate time. If it didn’t the order

would be retuned until if it is agreed by the Zuari Cement.

If it institutes “invoice less purchasing” where the supplier did not need to send and

invoice to be paid.

This generally simplifies the process for all concerned. As a result it would able to

reduce the work of its accounts payable department.

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CONCLUSION:

1) Over all the inventory of Zuari Cement is up to the mark.

2) The production of clinke4r and cement during 2004-05 was 7,47,436 and 7,77,092

respectively which is higher as compared to 2008-09 which is 6,87,373 and 7,27,447

respectively.

3) Investment on aw material are 93605.78 lakh which very high as compared to 2005-06

which is only 460870.45 lakh.

4) The inventory turn over ratio shows that the stock has been converted into sales is only 1.32

times.

5) In the year 2006-07 the stock was cleared with in 28 days where as it took 232 days in the

year 2003-04 which took more days for clearing stock.

6) Year 2005-06 is not showing sample profits. This is because of cement prices have been

continuously under pressure due to persistent mismatch between supply and demand.

7) The quantity of limestone in the year 2008-09 is 9,53,940 and its value is 13,85,34,812 but

where as in the year 2007-08 the quantity was 9,74,490 and the value is 12,21,61,492.

8) In this type process, it requires more number of employees and supplier should also wait for

until the accounts are matched.

9) This process takes an input, adds value to it and provides an out put to an internal or external

customer.

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BIBLIOGRAPHY

1) FINANCIAL MANAGEMENT

----By I.M Pandey

98

2) FINANCIAL MANAGEMENT

---- By Prasanna Chandra

3) TOTAL QUALITY MANAGEMENT

----By k. Shridhara Bai

4) COPANY’S STORES MANUAL

5) COMPANY’S ANNUAL REPORTS

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