Report on WORKING CAPITAL AND INVENTORY MANAGEMENT IN TATA STEEL Declaration This is to declare that the Report entitled “WORKING CAPITAL AND INVENTORY MANAGEMENT IN TATA STEEL” has been made for the partial fulfillment of the Course: Summer Internship Program (SIP) by me at TATA STEEL LTD. under the guidance of Prof.L.Narsimham Pappu. I confirm that this Report truly represents my work undertaken as a part of my Summer Internship Program (SIP). This work is not a replication of work done previously by any other person. I also confirm that the contents of the report and the views contained therein have been discussed and deliberated with the Faculty Guide. IBS HYDERABAD Page 1
Transcript
Report on
WORKING CAPITAL AND INVENTORY MANAGEMENT IN TATA STEEL
Declaration
This is to declare that the Report entitled “WORKING CAPITAL AND INVENTORY MANAGEMENT IN TATA STEEL” has been made for the partial fulfillment of the Course: Summer Internship Program (SIP) by me at TATA STEEL LTD. under the guidance of Prof.L.Narsimham Pappu.
I confirm that this Report truly represents my work undertaken as a part of my Summer Internship Program (SIP). This work is not a replication of work done previously by any other person. I also confirm that the contents of the report and the views contained therein have been discussed and deliberated with the Faculty Guide.
Signature of the Student :
Name of the Student : Shailaja S
Enrollment No : 11BSPHH010746
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ACKNOWLEDGEMENT
The fundamental characteristic of the summer internship Program lies not just in the successful
completion of a given assignment but also in the positive expansion of the professional business
person inside the student who undertakes such an assignment. I would like to pay my gratitude to
the following people for guiding me throughout my association with them.
I would like to extend my gratitude to Mr. Indrajit Roy (Head Financial Accounts) for giving
me opportunity to work in such an important sphere and for sharing his vision and experience.
Mr. Imtiaz Ahmed for his continuous support and guidance; Mr. G. Ghosh (Manager,
Management Development TMDC) for providing me the opportunity to learn and complete my
summer internship in this esteemed organization
I also take the opportunity to thank Prof. L. Narsimham Pappu (IBS Hyderabad) for his
guidance and invaluable inputs in the development of the project, and in terms of managing the
real time issues that we faced in the corporate world.
Last but not the least I would like to extend my thanks to all the employees at Finance
department, my family and friends for their cooperation, valuable information and feedback
during my project.
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Executive Summary
Inventories are the most integral part of the current assets of an organization. Management of
inventories is important because it has a direct impact on the financial resources of the
organization. Excess investment in inventories is not good because the funds will then be held up
in inventories and will not be available for other important uses. Less investment is also
detrimental because the company might be incapable of fulfilling the demand for its products.
Therefore, proper inventory management is very essential for an organization.
The project explains in detail the concepts of inventory management which serves as a platform
for the study conducted. Various ratios have been taken out on the basis of the data so as to find
out the trends of inventory management in Tata Steel. A brief study of the Indian steel industry
has also been conducted so as to carry out a comparative analysis of Tata Steel with two other
major players namely SAIL and Jindal Steel Works. This analysis studies the different
techniques used by different companies, and the effectiveness of these.
A company of Tata Steel’s stature is expected to have a good management of its Working
Capital. Working Capital of a company is the difference between its current assets and the
current liabilities. It includes the company’s debtors, bank/cash, creditors, inventory, outstanding
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and other miscellaneous expenses. Each of these needs to be managed separately so as to have a
control over the liquidity of business. Management of Working Capital includes various
sub-components at the operational level of the company which directly affect the level of
Working Capital. These include study of Letter of Credit, Bill Discounting, Factoring through
Receivable Purchases, Channel Financing, and Overdraft management. Proper Working Capital
Management depends on how well these sub-components are handled. The company needs to
overcome the shortcomings in this respect.
CHAPTER-1
INDUSTRY AND COMPANY PROFILE
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STEEL INDUSTRY OVERVIEW
Steel Industry is a booming industry in the whole world. The increasing demand for it was
mainly generated by the development projects that have been going on along the world,
especially the infrastructural activities and real estate projects that have been on the boom around
the developing countries. Steel Industry was till recently dominated by the United States of
America but this scenario is changing in a rapid pace with the Indian steel companies on an
acquisition spree. In the last few years, the world has seen two big M&A deals taking place:-
The Mittal Steel has acquired the world's largest steel company called Arcelor Steel to
become the world's largest producer of Steel named Arcelor-Mittal.
Tata Steel of India has acquired the world's fifth largest steel company “Corus” with the
highest ever stock price.
It has been observed that Steel Industry has grown tremendously in the last one and a half decade
with a strong financial condition. The increasing needs of steel by the developing countries for
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its infrastructural projects have pushed the companies in this industry near their operative
capacity. The most significant growth that can be seen in the Steel Industry is during the period
of 1960 to 1974 when the consumption of steel around the whole world being nearly doubled.
Between these years, the rate at which the Steel Industry grew has been recorded to be 5.5 %.
This roaring market saw a phase of deceleration from the year 1975 which continued till 1982.
After this period, the continuous fall slowed down and again started its upward movement from
the early 1990s.
Steel Industry is becoming more and more competitive with every passing day. During the
period of 1960’s to late 1980’s, the steel market used to be dominated by OECD (Organization
for Economic Cooperation and Development) countries. But with the fast emergence of
developing countries like China, India and South Korea in this sector has led to slipping market
share of OECD countries. The balance of trade line is also tilting towards these countries. World
crude steel production for the 59 countries reporting to the World Steel Association (world steel)
was 119 million tonnes (Mt) in February 2012. This is 1.9% higher than February 2011.
The main demand for World Steel Industries comes from the construction industry. With the
developmental works on a rise in both the developed and developing countries, the infrastructure
industry along with real estate boom, the demand for steel is rising like anything. For example,
more and more real estate companies are using steel frames for building houses. In USA, it had
been observed in the early 90’s that the use of steel for house building has increased by nearly
five times in just one year. The automobile industry is also coming up fast as a potential
demander for World Steel Industries because through research it has been found out that the use
of steel in the vehicles would cause the weight of the same to lessen by almost twenty five per
cent. The other industries who demand steel involve appliance industries, Oil and Gas industries
and container industries.
On the technological front, the World Steel Industries are making rapid improvement with the
implementation of cutting-edge technologies like steel making through the utilization of electric
furnace, continuous annealing, casting of thin slabs, and vacuum degassing.
The global steel industry is highly cyclical, very competitive and still fragmented in terms of
market share. Currently the industry is at the height of the business cycle and is going through a
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consolidation phase, which might result in the smaller players being acquired by the larger ones.
The steel industry demonstrates a high degree of variability, both in terms of earnings and
production. The factors attributable for driving this variability are global economic conditions
with a particular sensitivity to the performance of the automotive, construction, capital goods and
other industrial products industries. The commodity nature of steel, the producers and consumers
limited control on price, and the demand & supply disparity have made steel prices volatile.
Significant increases in prices for metals and energy over the past two years have also
contributed to increased variability in the industry.
GLOBAL STEEL INDUSTRY
The current global steel industry is in its best position in comparison to last decades. The price
has been rising continuously. The demand expectations for steel products are rapidly growing for
coming years. The shares of steel industries are also in a high pace. The steel industry is enjoying
its consecutive years of growth in supply and demand. There are many more mergers and
acquisitions which overall buoyed the industry and showed some good results.
China, Japan, India and South Korea are the leading steel producing countries in Asia. China
accounts for one third of total production i.e. 419 million tonnes, Japan accounts for 9% i.e. 118
million tonnes, India accounts for around 53 million tonnes and South Korea is accounted for 49
million tonnes, which when combined accounts for more than 50% of global production. Apart
from this USA, BRAZIL, UK account for the major chunk of the world steel production.
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The global steel industry is highly cyclical, very competitive and still fragmented in terms of market
share. Currently the industry is at the height of the business cycle and is going through a consolidation
phase, which might result in the smaller players being acquired by the larger ones. The steel industry
demonstrates a high degree of variability, both in terms of earnings and production. The factors
attributable for driving this variability are global economic conditions with a particular sensitivity to the
performance of the automotive, construction, capital goods and other industrial products industries. The
commodity nature of steel, the producers and consumers limited control on price, and the demand &
supply disparity have made steel prices volatile. Significant increases in prices for metals and energy over
the past two years have also contributed to increased variability in the industry.
IMPACT OF GLOBAL ECONOMIC CRISIS ON STEEL INDUSTRY
The three key pillars of the international financial markets are confidence, capital and liquidity
and these three are somewhat interrelated. Until September 2008, all these three pillars were on a
high and therefore, businesses across the various sectors were performing in a robust manner.
However, the confidence in the financial system was shaken with successive crises across
various banks in the US and Europe. This then resulted in a significant erosion of capital in the
banking industry in the developed world which eventually spiraled into an unprecedented global
financial crisis. This phenomenon brought about a sharp decline in consumption of steel as it did
in other products, affecting the steel demand across the globe.
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Consequently, global liquidity was choked and the manufacturing sectors including the
consumers of the steel industry were severely affected. It is estimated that during the second half
of the year, the steel demand declined by around 20% globally over the same period last year.
India’s net steel imports have fallen drastically in the first eleven months of 2011-12 to 2.503 m
tonnes as against 6.79 m tonnes for the whole of 2010-11 and this has mainly resulted due to the
economic crisis prevailing in European nations which has got deep rooted.
INDIAN STEEL INDUSTRY
The century old Indian Iron and Steel Industry saw commencement of its operations with the
Tata Iron & Steel co being set up in the year 1907 at Jamshedpur. The Iron & Steel industry of
India is the first core sector which was freed from pricing and distribution controls and from the
licensing regime.
The steel industry is one of the major industries of India. It has also gained considerable
importance in the global steel industry. This century old industry of India was mostly a regulated
one till 1990.
The economic reforms undertaken in India in the early 90’s gave a major boost to the steel
industry and it grew considerably in terms of investment, production capacity and number of
producers. The industry faced a downturn during the late 90’s but revived again by 2002.
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The size of India's steel industry has increased considerably in recent years. As of 2011,India
occupies the 5th position in the world in steel production at 72.2 million tonnes and has huge
potential for growth as India’s per capita steel consumption is far lower compared to China and
world standards.
The steel industry of India has capital investments of more than Rs 100, 000 crores. The total
employment in the industry is more than two million (including direct and indirect employment)
and it has been assessed that, on a most likely scenario basis, crude steel production capacity in
the country by the year 2012-13 will be nearly 110 million tonne. Also, the India’s consumption
of stainless steel is much higher at 14% as compared to the global consumption of 6% in the last
10 years.
Ministry of Steel has initiated the process of drafting the New National Steel Policy in place of
existing National Steel Policy of 2005 in order to discourage export. According to Beni Prasad
Verma, India Minister for Steel, India has become a net importer of steel from 2007-08 due to
high growth in steel consumption relative to production.
Some of the major reasons that have led to the growth in the size of Indian steel industry are:-
Availability of iron-ore in abundance in India
Facilities for steel production available are favourable to producers.
Increased consumption of steel in the sectors like construction, automobile and
infrastructure.
Steel Industry
Steel is an important indicator to analyze the economic development of a country. The steel
industry is highly scientific and technology oriented. Technological advancement is very
important for the overall health of the steel industry.
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During Ancient Period
The history of iron and steel making in India goes back by several centuries. It dates to 480 BC
when archers in India used arrows tipped with steel. The iron pillar of Dhar near Indore in
Madhya Pradesh dates back to about 321 AD, the iron pillar of Qutub Minar near Delhi dates
back to about 400 AD and the iron beams of Sun temple of Konark in Orissa dates back to 13th
century. These pillars are a testimony to ancient India's expertise in the making of steel.
Before Independence
The roots of the Indian Steel industry in modern times can be traced to the year 1874, when a
company called Bengal Iron works at Kulti near Asansol in West Bengal produced iron. One of
the most important landmarks in the history of Indian steel industry was the commencement of
the Tata Iron and Steel Company at Jamshedpur in the state of Bihar in 1907.The other
prominent steel manufacturers before independence were Indian Iron and Steel Company (1922),
Mysore Iron and Steel Works(1923) and Steel Corporation of Bengal (1937).
After Independence
India found it very difficult to sustain development in steel sector after independence on its own
due to the lack of technological development. The high cost of developing technology in this
sector proved to be a major hindrance. That's when the government decided to go for synergy
with other countries for technology transfer. Some of the prominent steel plant set up then was in
Rourkela in collaboration with West Germany and in Bokaro in collaboration with Russia. These
steel plants came under the purview of public sector enterprises.
Post Liberalization
The post liberalization scenario in the Indian Steel industry has witnessed a monumental shift.
Some of the salient features are:
The need for license for increasing capacity has been abolished.
Steel industry has been removed from the list of Industries under the control of state
sector.
Foreign equity investment in steel has gone up to 74%.
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In January 1992 the price and distribution controls were removed.
Policies like convertibility of rupee on trade account, freedom to mobilize resources from
overseas financial markets and restructuring of existing tax structure have immensely
benefited the industry.
Milestone
The Indian steel industry has come a long way since its humble beginnings. The takeover of the
British steel giant, Corus steel by Tata Steel and the acquisition of Arcelor by Mittal Steel
herald a new beginning for the Indian steel industry. These events signify the fact that the Indian
steel industry has acquired a global identity and are today extremely competitive globally.
Some of the prominent steel producers today are Posco, Tata Steel, Essar, Ispat, Sail and Rinl.
Future trends
It has to be said that the global recession has affected the Indian steel industry especially
stainless steel, but the steel industry is trying to offset the negative effect of the recession
by focusing on transportation and construction projects which are usually funded by the
government.
India is the only country globally to record a positive overall growth in crude steel
production at 1.01 per cent for the period January -March 2009.
It is estimated that India's steel consumption will grow at nearly 16% annually till 2012.
The National Steel Policy has forecasted the demand for steel would reach 110 million
tons by 2019-2020.
Industry Statistics
Government targets to increase the production capacity from 56 million tonnes annually
to 124 MT in the first phase which will come to an end by 2011 - 12. Currently with a
production of 56 million tones India accounts for over 7% of the total steel produced
globally, while it accounts to about 5% of global steel consumption. The steel sector in
India grew by 5.3% in May 2009. Globally India is the only country to post a positive
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overall growth in the production of crude steel at 1.01% for the period of January - March
in 2009.
SIZE OF INDIAN STEEL INDUSTRY
The steel industry is one of the major industries of India. It has also gained considerable
importance in the global steel industry. This century old industry of India was mostly a regulated
one till 1990.
The economic reforms undertaken in India in the early 1990s gave a major boost to the steel
industry and it grew considerably in terms of investment, production capacity and number of
producers. The industry faced a downturn during the late nineties but revived again by 2002.
The size of India's steel industry has increased considerably in recent years. According to latest
available estimates, India ranks eighth among the top steel producers of the world with a
production capacity of 35 MT.
The steel industry of India has capital investments of more than Rs 100, 000 crores. The total
employment in the industry is more than two million (including direct and indirect employment).
Some of the major reasons that have led to the growth in the size of India's steel industry
a. Abundant availability of iron-ore in India.
b. Good facilities for steel production.
c. Increased consumption of steel in the sectors like construction, automobile and
infrastructure.
Structure of Indian Steel Industry
The steel industry in India is concentrated in the east, south and west of the country. The
integrated foundries are located in the east, while electric steel is produced predominantly in the
south and west. In the future the east will see rapid expansion as more integrated capacities are
being built in Orissa and other eastern states due to its raw materials.
Although India is now one of the worlds top ten steel producers, its domestic output is
insufficient to meet the demand in all segments. Imports increased in 2005 by 8% and it is likely
that India will continue to import in many segments over the medium term. According to
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Deutsche Bank Research, the three biggest steelmakers in India have a combined output of
almost 20 million tons and have a domestic market share of 51%. Their domestic competitors are
numerous medium-sized and smallish companies and more mergers can be expected between
these companies as these firms need to improve their position with regard to the powerful
suppliers of raw materials.
COMPETITION ANALYSIS
Concentration Ratio:
In Economics the concentration ratio of an industry is used as an indicator of the relative size of
firms in relation to the industry as a whole. This may also assist in determining the market form
of the industry. One commonly used concentration ratio is the four-firm concentration ratio,
which consists of the market share, as a percentage, of the four largest firms in the industry. In
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general, the N-firm concentration ratio is the percentage of market output generated by the N
largest firms in the industry.
The 4 firm concentration ratio of the Iron and Steel Industry is 71%.
This implies that there is oligopoly in the industry as it is dominated my few major
players. Major percentage of market output is generated by the 4 largest firms in the
industry.
Herfindahl Index:
The Herfindahl index, also known as Herfindahl-Hirschman Index or HHI, is a measure of the
size of firms in relationship to the industry and an indicator of the amount of competition among
them. It is an economic concept but widely applied in competition law and antitrust. It is defined
as the sum of the squares of the market shares of each individual firm. As such, it can range from
0 to 1 moving from a very large amount of very small firms to a single monopolistic producer.
Decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in
competition, whereas increases imply the opposite.
M & A STRATEGY IN THE INDUSTRYActive mergers and acquisitions (M&A s) among players were indicative of the consolidation
dynamics within the steel industry globally. Consolidation among top steel companies would
continue in 2008 since industry players are engaged in an unfettered rush for scale. In so doing
steelmakers are pursuing two main objectives: by purchasing additional production capacity they
aim to both improve their cost structure and increase their market clout. The merger of the
world’s two biggest steelmakers Mittal Steel (Netherlands) and Arcelor (Luxembourg) will
create an industry giant whose output is nearly four times as much as that of the next biggest
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player (Nippon Steel) and eight times as much as SAIL’s, If it continues like this 35% of steel
production confined in the top 10 companies within the next five years.
Consolidation among industry players would be driven by strategic fits between companies,
rather than financially centered deals. A company can be a good strategic fit for merger if it has,
among other things, attractive access to raw materials, production capabilities, proven success in
complementary markets, new technologies or patented products and a successful global supply
network. In India the three biggest steelmakers, whose combined output is almost 20 million
tons, have a market share of 51%. Their domestic competitors are numerous medium sized and
smallish companies. One of these, for example, is Ispat with an output of 2 million tons. More
mergers can be expected between companies of this size as these firms need to improve their
position with regard to the powerful suppliers of raw materials. But till now there is no sign of
acquisition or mergers of Indian steel companies within India because most of the major
producers are public. As different major global steel producers like Arcelor-Mittal, Posco and
others are setting up plants in India, competition in the future will increase. In that case several
mid-size domestic companies may go for mergers. But if we see from the current position of the
industry we can say that in future Indian steel industry will remain oligopoly or can become a
competitive one.
Consumption of Steel in India
Driven a booming economy and concomitant demand levels, consumption of steel has grown by
12.5 per cent during the last three years, well above the 6.9 percent envisaged in the National
Steel Policy. Steel consumption amounted to 58.45 mt in 2006-07 compared to 50.27 mt in
2005-06, recording a growth rate of 16.3 per cent, which is higher than the world average.
During the first half of the current year, steel consumption has grown by 16 per cent. A study
done by the Credit Suisse Group says that India's steel consumption will continue to grow by 17
per cent annually till 2012, fuelled by demand for construction projects worth US$ 1 trillion.
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The scope for raising the total consumption of steel in the country is huge, as the per capita steel
consumption is only 35 kgs compared to 150 kg in the world and 250 kg in China. With this
surge in demand level, steel producers have been reporting encouraging results. For example, the
top six companies, which account for 70 per cent of the total production capacity, have recorded
a year-on-year growth rate of 13.4 per cent, 15.7 per cent and 11.7 per cent in net sales, operating
profit and net profit, respectively, during the second quarter of 2007-08.
We expect strong demand growth in India over the next five years, driven by a boom in
construction (43%-plus of steel demand in India). Soaring demand by sectors like infrastructure,
real estate and automobiles, at home and abroad, has put India's steel industry on the world steel
map.
PORTER’s FIVE ANAYLYSIS
Michael Porter had identified five competitive forces that shape every single industry and the
market. These forces help in analyzing the industry from the intensity of competition to the
probability and attractiveness of an industry.
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Threat of new Entrants - The easier it is for new companies to enter the industry, the more cut-
throat competition there will be. Steel industry is highly capital intensive and is estimated that to
set up 1 MTPA capacity of integrated steel plant, it requires around Rs. 30 billion of investment
depending upon the location of the plant and technology used. The government follows a
favorable policy for steel manufacturers but certain discrepancies involved in allocation of iron
ore mines and land acquisition in India.
Bargaining power of suppliers - If one supplier has large impact on the company’s margin and
volume then it holds substantial power. In the steel industry the bargaining power of supplier is
very low because the big players in the industry have their own mines for major raw materials.
However, still a few companies have to depend up on suppliers for the raw materials.
Bargaining power of buyers - In the steel industry unlike the household goods market the
buyers have a very low bargaining power. The only effort which can be done towards ensuring
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that the buyers are saved in the curb or ceiling laid by the government on the prices which can be
charged by the companies on its product. However, most of the sale of steel is to the other
industries or to through the distribution network and very less to the common man.
Competitive Rivalry - In India the steel industry is dominated by a major few players only and
the degree of competitive rivalry is very low as the demand is always more than the supply or the
production of the companies.
Threats of substitutes - The presence of substitute products increases the propensity of
customers to switch to alternatives. The usage of aluminum has been constantly growing in the
automobile sector which used to be the major customer of the steel industry. However, because
of the durability and other features of the steel, aluminum does not stand as a threat in the
market.
SWOT ANALYSIS OF STEEL INDUSTRY
Strengths:
Abundance of Iron-Ore and other minerals for steel
Skilled manpower and low unit labor costs
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High ash content of domestic coking coal
Low labor productivity
Weaknesses:
High costs of some basic inputs like power, coal, fuel, etc.
High social costs
Poor quality of basic infrastructure
Distribution network
Low IT usage in efficiency enhancement
Fragmentation
Opportunities:
Low per capita consumption
Unexplored rural market
Low export market penetration
Threats:
Substitution by aluminum, plastic and composites one of the most remunerative Markets
– Automobiles
Poor R&D and threat of technological obsolescence in a large part of the market
Availability of imported low ash coking coal.
Role of Government in Steel Industry
The Indian iron and steel sector has been under strict government control for almost the whole
period since independence. Government intervention took place in the form of both direct and
indirect intervention. Direct intervention happened in the form of government control over
distribution of available steel among consumers and indirect intervention took the form of price
control and import levies.
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After independence in 1947, the government took full control over the iron and steel sector and
established a policy of restricting development of new integrated steel plants to the public sector.
From then on first two and after conversion of IISCO to a public entity only one integrated steel
company was privately owned. In 1959 the government formally approved the setting up of
privately owned EAF based mini plants by modifying the Industrial Policy Resolution, 1956.
The policy change was due to sustained shortage of steel in the Indian economy. Although these
units expanded their capacity rapidly they could not make up for the consequent neglect of
expansion in the public steel sector during that time. However, they contributed significantly to
the availability of steel keeping the amount of steel imports relatively low.
Prices of different steel products were determined by the government and announced by the Joint
Plant Committee (JPC), a body constituted in 1964 under the Iron and Steel Control Order. The
Committee is headed by the Development Commissioner for Iron and Steel. All major steel
plants and the railways are members of the JPC. However, not all steel items were under
immediate control of JPC. Rerolling units, electric arc furnace units and alloy steel producers
were allowed to fix their own prices for their products. From the main producers about 80% of
production of the plants under the Steel Authority of India Limited (SAIL) and about 65% of the
production of the private company (TISCO) were regulated by the JPC.
From 1972 on, due to impeded growth in the steel industry, the government introduced dual
pricing in the iron and steel industry. Certain steel products such as heavy structures, flats and
railway materials were made available at low prices. For other products, prices were allowed to
increase significantly. Such asymmetric fixed prices remained active for a long period. In 1982,
the Bureau of Industrial Costs and Prices (BICP) officially observed what had been implied for a
long time: Costs and prices of different categories of iron and steel did not show any systematic
relationship under dual pricing. A comparison of actual and calculated ‘normated’ costs for each
steel item revealed that only two items, i.e. heavy structural and H.R. coils, had been priced
adequately. Some products, such as pig iron and semi-finished steel, were substantially under
priced, others substantially overpriced. Since 1992 the government has gradually decontrolled
prices and distribution of steel. The new policy still includes control over distribution to priority
sectors. Private production, however, has been totally decontrolled. The levies charged by JPC
for the Steel Development Fund,
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Engineering Goods Exports Assistance Fund and JPC Cess will continue. Yet, freight
equalization has been abandoned subject to certain conditions. Furthermore import duties have
been substantially reduced by 20% and more on imports of various semi-finished and finished
steel products. In the progress of industrial development the government has also provided
facilities to support mini-steel plants. These include (i) liberal import of melting scrap and
sponge iron without import duty, (ii) free diversification into all grades of carbon and alloy
steels, including stainless steel, (iii) installation of captive rolling units, (iv) addition of balancing
facilities like continuous casting machines, heat treatment furnaces, etc.
PRESENT SCENARIO OF THE STEEL INDUSTRY
India is increasingly attracting the world's interest as a result of the country's impressive
economic performance, brought about by the liberalization process of the past two decades and
its opening up to the world economy. India is a reputed name in the world steel industry. The
industry has gained strength from the strong Indian economy, and strong sectors like
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infrastructure, construction and automobile. India has been ranked as the 5th largest producer of
crude steel in the world in 2008. Thus, the country offers vast scope for the steel industry in
future. Indian Steel Producers are increasingly looking for overseas acquisitions in steel as well
as raw materials. Mittal Steel acquired Arcelor to become the largest steel producer in the
world. Similarly, Tata Steel acquired Corus to become the 5 th largest producer of steel in the
world.
However, the current market turmoil has dented the growth curve of various industries such as
automobile and construction, which, in turn, has hit the Indian steel industry hard. The
government’s plans to boost up the economy by injecting funds in various industries like
infrastructure, construction, automobile and power, near future is expected to see growth.
Although the Indian steel industry is experiencing a slow but steady growth, the steel industry in
India has huge scopes in the future with massive scale of infrastructural development happening
all across the country. The Indian steel industry caters to many other industrial sectors such as
construction industry, mining industry, transportation industry, automobile industry, engineering
industry, chemical industry, etc.
The steel industry of India has further plans for development. Plans are being chalked out for
setting up of 3 pig iron manufacturing units of a combined capacity of 6 lakh tons per year and a
steel manufacturing unit of the capacity of producing 1 million tons yearly in West Bengal, with
the technical and financial support from China. With all these developments, the Steel Industry
of India is all set to become one of the most reputed industries in the international market.
The world crude steel output reached 1,344 million tonnes in 2007, up by around 100 million
tonnes over 2006. This increase of 7.5% was driven mainly by China where the crude steel
production grew by 60 million tonnes over 2006 (an increase of 14%). While China’s production
constitutes 34% of the world production, the country’s consumption constitutes almost 31% of
the world consumption. The crude steel production in India was higher by 8% in 2007 over 2006.
The increase primarily was due to a sustained demand momentum in key-end use segments like
construction, capital goods and automobiles. The supply side has not been able to keep pace with
the strong demand resulting in India becoming a net importer of steel. Steel production in the
European Zone remained stable, with year-end figures of 210 million tonnes, a growth of around
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2% over 2006. The imports in the European Union also remained at a high level during 2007.
The latest global steel consumption forecast predicts 6.77% year on year increase in steel
consumption in the current year. The additions in the capacity are likely to be around 90 million
tonnes. The greatest concern of the steel industry is the availability of raw materials at a
competitive price. There have been unprecedented cost increases in iron ore by around 65% and
coking coal by around 200% in 2008, which would have an impact on the steel prices.
Indian steel industry also experienced a strong growth in demand, propelled particularly by the
demand for steel in China. The production of crude steel at 53 million tonnes in 2007 was more
than double the production level a decade back in 1998 (23 million tonnes) portraying the
significant growth in the Indian Steel Industry. India now ranks fifth in terms of crude steel
production among the top six crude steel producing nations in the world, the others being China,
Japan, United States, Russia and South Korea. The Finished Steel production in India in the
current financial year stands at 48 million tonnes registering an increase of 9% over the previous
year.
Factors holding back the Indian Steel Industry.
The growth of the Indian steel industry and its share of global crude steel production could be
even higher if they were not being held back by major deficiencies in fundamental areas.
Investment in infrastructure is rising appreciably but remains well below the target levels set by
the government due to financing problems.
Energy Supply - Power shortages hamper production at many locations. Since 2001 the
Indian government has been endeavoring to ensure that power is available nationwide by
2012. The deficiencies have prompted many firms with heavier energy demands to opt
for producing electricity with their own industrial generators. India will rely squarely on
nuclear energy for its future power generation requirements. In September 2005 the 15th
and largest nuclear reactor to date went on-line. The nuclear share of the energy mix is
likely to rise to roughly 25% by 2050. Overall, India is likely to be the world’s fourth
largest energy consumer by 2010 after the US, China and Japan.
Problems in procuring raw-material inputs - Since domestic raw material sources are
insufficient to supply the Indian steel industry; a considerable amount of raw materials
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has to be imported. For example, iron ore deposits are finite and there are problems in
mining sufficient amounts of it. India’s hard coal deposits are of low quality. For this
reason hard coal imports have increased in the last five years by a total of 40% to nearly
30 million tons. Almost half of this is coking coal (the remainder is power station coal).
India is the world’s sixth biggest coal importer. The rising output of electric steel is also
leading to a sharp increase in demand for steel scrap. Some 3.5 million tons of scrap have
already been imported in 2006, compared with just 1 million tons in 2000. In the coming
years imports are likely to continue to increase thanks to capacity increases.
Inefficient transport system - In India, insufficient freight capacity and a transport
infrastructure that has long been inadequate are becoming increasingly serious
impediments to economic development. Although the country has one of the world’s
biggest transport networks – the rail network is twice as extensive as China’s – its poor
quality hinders the efficient supply of goods. The story is roughly the same for port
facilities and airports. In the coming years a total of USD 150 bn is to be invested in
transport infrastructure, which offers huge potential for the steel industry. In the medium
to long term this capital expenditure will lay the foundations for seamless freight
transport.
Outlook and the future expected trend:
From the year 2002, the global steel industry grew with the steel demand shooting from 2% to
8% year on year. The Indian steel industry with its 43 million tonnes of steel production in a
booming economy was also showing rapid growth. At such a time when the situation could not
have been any better, in 2008 the global economic slowdown cast its shadow on almost all
industries including steel. The steel industry was suddenly faced with a high locked up capital
and is now having to resort to serious firefighting measures to overcome the current scenario. In
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the medium term the global steel industry is likely to undergo a more extensive process of
consolidation since industry players are engaged in an unfettered rush for scale. In so doing
steelmakers are pursuing two main objectives: by purchasing additional production capacity they
aim to both improve their cost structure and increase their market clout. The merger of the
world’s two biggest steelmakers Mittal Steel (Netherlands) and Arcelor (Luxembourg) will
create an industry giant whose output is nearly four times as much as that of the next biggest
player (Nippon Steel) and eight times as much as SAIL’s. In India the three biggest steelmakers,
whose combined output is almost 20 million tonnes, have a market share of 51%. Their domestic
competitors are numerous medium-sized and smallish companies. One of these, for example, is
Ispat with an output of 2 million tonnes. More mergers can be expected between companies of
this size as these firms need to improve their position with regard to the powerful suppliers of
raw materials.
Going forward, India’s lower wages and favourable energy prices will continue to promise
substantial cost advantages compared to production facilities in (Western) Europe or the US. The
growth prospects of the client industries are also very good. The deployment of modern
production systems is increasingly enabling India to improve the quality of its steel products and
thus to enhance its export prospects.
Company ProfileTata Steel formerly known as TISCO (Tata Iron & Steel Company) was established in 1907 by
Mr. Jamshedji Nusserwanji Tata. Tata Steel has completed over 100 years of experience in steel
making; it is a pioneer in steel industry in India. It is the Asia’s first integrated steel plant and
now world’s second most diversified steel producer and a fortune 500 company.
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Tata Steel has been ranked at the top of the Nielson’s corporate image monitor study followed by
Tata Motors.
The world’s most admirable companies 2011, published by fortune Magazine, ranks Tata Steel
6th in metal industry category.
Tata Steel the world’s 5th largest steel company has an annual crude steel capacity of 30 mtpa
(million tonnes per annum). It is the 2nd largest private sector steel company in India in terms of
domestic production. It is a part of the Tata Group of Companies with consolidated turnover of
29396.35 crores during the year ended 31st march 2011. Its main plant is located in Jamshedpur.
With its acquisition of the Corus, NatSteel and Millennium Steel it has become a multinational
company with operations in various countries. Tata Steel has a balanced global presence in over
50 developed European and fast growing Asian markets, with manufacturing unit in 24
countries. It is the world’s second most geographically diversified steel producer. Also it is the
world’s lowest cost producer of steel with shareholder base of 800,000 people and employee
strength over 81,000 across 5 continents.
With new industrial policy adopted by the Government of India has opened up the iron & steel
sector for private investment by removing it from the list of industries reserved for public sector
and exempting it from compulsory licensing. Imports of foreign technology as well as foreign
direct investment are freely permitted up to certain limits under an automatic route. This, along
with the other initiatives taken by the government has given a definite impetus for entry
participation and growth of the private sector in the steel industry. While the existing units are
being expanded, a large number of Greenfield steel plants have also come up in different parts of
the country based on modern equipment’s, cost effectiveness and state of the art technologies.
FOUNDERS OF TATA STEEL:-
Tata Steel is a business house that has created wealth for the nation. It is a story of struggle,
adventure and achievement. The founder along with his successors is as follows:-
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• Jamshedji Nusserwanji Tata (1839-1904)
• Sir Dorabji Tata (1859-1933)
• Jehangir Ratanji Dadabhai (1904-1993)
• Ratan Naval Tata ( born 28th Dec193 till date)
SUBSIDERIES
Jamshedpur Injection Powder Limited (Jamipol)
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JAMIPOL manufactures carbide de-sulphurising compounds which are used for de-sulphurising
hot metal for the production of low-sulphur, high-quality steel.
www.jamipol.com
Jamshedpur Utility and Services Company Limited (JUSCO)
Re-engineered out of Tata Steel's town services, JUSCO is a wholly owned subsidiary of Tata
Steel and is the country's first enterprise that provides municipal and civic services for
townships. JUSCO is the only EMS 14001 civic services provider in the country.
www.juscoltd.com
Lanka Special Steel Limited
The only unit in Sri Lanka manufacturing galvanised wires.
Rawmet Ferrous Industries
Tata Steel acquired 100% equity stake in Rawmet Ferrous Industries on January 15, 2007.
Currently, the Company is based out of Kolkata and operates as a subsidiary of Tata Steel.
Rawmet has a Ferro Alloy Plant near Cuttack, with a capacity of 50,000 tonnes production per
annum of High Carbon Ferro Chrome.
Sila Eastern Company Limited
Established to develop limestone mines in Thailand, mainly for the captive
comprising SBQ (Special Bar Quality), Wire rods, Merchant
bars and semis in the form of continuous cast billets.
Ferro Alloys and Minerals: This business unit operates the
chrome mines in Sukinda valley in Orissa and has a Ferro-
chrome making unit in Bamnipal and a Ferro-manganese unit
in Joda. It is one of the largest players in global Ferro-chrome
market.
Tubes: Tata Steel tubes business unit is the largest domestic manufacture of steel tubes. It
promotes 3 lines of businesses: Standard tubes, Precision tubes and closed structural.
Bearings: Tata Steel produces around 22.46 million ball
bearings and 2.56 million taper roller bearings.
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Growth Shop: Growth shop offers world class services and
equipment. Over the years it has played an important role in
modernization of Tata Steel’s Jamshedpur plant. The growth
shop has the capacity to design, manufacture and commission
equipment for the steel and allied industries.
Agrico: Tata Agrico products are the most sought after hand
tools and implements for agriculture and industrial applications
in the country.
CHAPTER-2
RESEARCH METHODOLOGY
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OBJECTIVES OF THE STUDY
PRIMARY OBJECTIVE:
The main objective of the study is to put the theory into practice regarding the WORKING CAPITAL MANAGEMENT & INVENTORY MANAGEMENT at TATA STEEL Ltd.
SECONDARY OBJECTIVE:
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To learn how companies like TATA STEEL Ltd manages its working capital resources.
1. To understand the different components of working capital & inventory management.
2. To have the in depth knowledge about Working Capital calculations and its interpretations.
3. To analyze and find out the reasons as to what brings changes in working capital and inventory management for TATA STEEL Ltd.
4. To understand the strategy adopted by TATA STEEL Ltd to manage its working capital in comparison with that of other companies over the years.
5. To know the overall position of TATA STEEL Ltd in the steel industry in respect of working capital and inventory management.
SUGGESTIVE OBJECTIVE:
To offer suggestions and recommendations based on the study undertaken.
Type of research:
The project is based on descriptive and applied research. Various inventory handling
departments and techniques of inventory management have been explained in detail.
Data collection methods:
Data has been collected from two sources:
1. Primary sources:
Discussion with executives
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Company records
2. Secondary sources:
Annual reports
Company website
Other journals and books
Presentation of data:
Data collected from different sources have been presented in the following ways:
Tables
Pie charts
LIMITATIONS OF THE STUDY:
The study is limited to the scope of the data available publicly.
Ratio Analysis cannot be taken as the same indicator of the financial performance and
growth of the company.
The study is based on the comparison across companies in the steel industry. However,
the choice of different accounting policies and practices followed by these companies
might distort the comparative analysis.
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The study is based on a very short time frame which may have impact on the scope of the
project in terms of the detailed analysis of the aspects of working capital management,
the topic being wide.
CHAPTER-3
WORKING CAPITAL MANAGEMENT
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WORKING CAPITAL MANAGEMENT
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
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Every business needs funds for two purposes for its establishment and to carry out its day- to-day
operations. Long terms funds are required to create production facilities through purchase of
fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that
part of firm’s capital which is blocked on permanent or fixed basis and is called fixed capital.
Funds are also needed for short-term purposes for the purchase of raw material, payment of
wages and other day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part of
the firm’s capital which is required for financing short- term or current assets such as cash,
marketable securities, debtors & inventories. Funds, thus, invested in current assts keep
revolving fast and are being constantly converted in to cash and this cash flows out again in
exchange for other current assets. Hence, it is also known as revolving or circulating capital or
short term capital.
Decisions relating to working capital and short term financing are referred to as working capital
management. The basic objective of working capital is to provide adequate support for the
smooth functioning of the normal business operations of a company. These involve managing the
relationship between a firm's short-term assets and its short-term liabilities. The goal of working
capital management is to ensure that the firm is able to continue its operations and that it has
sufficient cash flow to satisfy both maturing short-term debt, upcoming operational expenses and
meet unforeseen contingencies.
Companies can follow two approaches to manage its working capital:
1) Conservative approach- This involves a lower degree of risk as it involves and increased
level of current assets for a given level of sales.
2) Aggressive approach- This approach results in greater profitability but lower liquidity.
The level of current assets to sales will be less as compared to that of conservative
approach.
Working capital management chiefly involves choosing the pattern of financing. In the normal
course of business, a company usually has access to non-interest bearing short term liabilities,
called spontaneous liabilities. The difference between Current assets and spontaneous liabilities
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needs to be financed by a combination of bank borrowings and long term sources of finance such
as debentures and equity share capital.
Implementing an effective working capital management system is an excellent way for many
companies to improve their earnings. The two main aspects of working capital management are
ratio analysis and management of individual components of working capital.
Types of Working Capital:
1) On the basis of concept:
a)Gross Working Capital:
It is that working capital which is used for all the current assets. Total value of current
assets will equal to Gross Working Capital.
b)Net Working Capital:
Net Working Capital is the excess of current assets over current liabilities.
Net Working Capital = Current Assets – Current Liabilities
1) On the basis of concept:
a)Permanent Working Capital:
It is that amount of capital which must be in cash or current assets for continuing the
activities of the business.
b)Temporary Working Capital:
In normal working of the business we don’t need temporary working capital but it may be
possible that the company have to pay fixed liabilities at the time it needs working capital
which is more than permanent working capital which is called temporary working capital.
Factors affecting the composition of working capital:
1) Nature of Business: Companies such as Tata Steel, which is a manufacturing company,
will have high proportion of current assets in the form of inventory of Raw Materials and
Work-in-Progress.
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2) Nature of Raw Material used: Nature of the major raw material used to produce the
finished good will greatly influence the quantum of raw material inventory. In steel
industry, the main source of Raw Materials, i.e., Iron Ore comes from mining. Thus,
companies maintain a high level of inventory as the mining activity requires reasonably
more time.
3) Process Technology Used: In case where the raw material undergoes many stages of
production, a high level of work-in-progress is held than any other item of Current
Assets.
4) Nature of Finished Goods: The nature of finished goods in case of steel industry has a
longer shelf life. Also, there has been a growing demand for steel over the years. Thus,
the companies operating in this industry can hold a reasonable amount of finished steel in
their inventory. The level of inventory can be determined by anticipating sales in the
years to come.
5) Degree of competition in the market: When the degree of competition is high in the
industry, the companies have to resort to offering a higher credit period to their customers
so as to lure them. Practices such as this is likely to result in a high proportion of
accounts receivables.
Components of working capital:
There are various items which constitutes the Working Capital under the two heads namely
current assets and current liabilities.
1. Current Assets:-
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It is a balance sheet account that represents the value of all assets that are reasonably
expected to be converted into cash within one year in the normal course of business.
Bills Receivable:
Money which is owed to a company by a customer for products and services
provided on credit. This is often treated as a current asset on a balance sheet. A
specific sale is generally treated as an account receivable after the customer is
sent an invoice.
Sundry Debtors:
It is an account for individuals or businesses who owe money to a company and
whose information and accounts are recorded in the books of the company.
Short Term Loans & Advances:
Short term loan is a loan that has to be repaid within a year, usually within a few
weeks whereas advances are the prepayment received for goods or services to be
rendered. Some contracts require an advance before completion (e.g., construction
project).
Inventories:
In terms of business it is the sum total of all the commercial assets owned by the
organization whereas in terms of productions and operations it is the sum of raw
materials, work in progress and finished goods held by the company.
Temporary Investment:
It is a type of investment that is structured to only last for a short amount of time.
With this type of investment investors can quickly access and use money invested
in these temporary options. Money market fund accounts, treasury bills, and some
short-term CDs are a few examples of temporary investments.
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Prepaid Expenses:
A type of asset that arises on a balance sheet as a result of business making
payments for goods and services to be received in the near future. While prepaid
expenses are initially recorded as assets, their value is expensed over time as the
benefit is received onto the income statement, because unlike conventional
expenses, the business will receive something of value in the near future.
Accrued Income:
Income that is earned in a fund or by company by providing a service or selling a
product, but has yet to be received. Mutual funds or other pooled assets that
accumulate income over a period of time but only pay it out to shareholders once
a year are, by definition, accruing their income. Individual companies can also
accrue income without actually receiving it, which is the basis of the accrual
accounting system.
Marketable Securities:
These are the very liquid securities that can be converted into cash quickly at
reasonable prices. Marketable securities are very liquid as they tend to have
maturities of less than one year. Furthermore, the rate at which these securities
can be bought or sold has little effect on their prices.
2. Current Liabilities:-
A company's debts or obligations that is due within one year. Current liabilities appear on
the company's balance sheet and include short term debt, accounts payable, accrued
liabilities and other debts.
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Outstanding Expenses:
It is the expense in which the firm makes the provisions for the liabilities for the
expenses relating to current year but actual payments incur in the next financial
year.
Short term Loans and Deposits:
Short term loan is a loan that has to be repaid within a year, usually within a few
weeks whereas the deposit is a liability owed by the bank to the depositor (the
person or entity that made the deposit), and refers to this liability rather than to the
actual funds that are deposited.
Dividends Payable:
It is the dollar amount of dividends which have been declared by a company's
board of directors and which are obligated to be paid to shareholders.
Bank Overdraft:
It is the money owed to the bank in a cheque account where payments exceed
receipts.
Provision for Taxation:
It is an amount on the profit and loss statement that estimates a company's total
income tax liability for the year. This is especially important when the
Government or an employer does not automatically deduct estimated tax
payments from pay checks or other revenue.
Bills Payable:
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This term is used to describe a bank's indebtedness to other banks, principally a
Reserve Bank of India that is backed by collateral consisting of the bank's
promissory note and a pledge of government securities. In other words, bills
payable is the money a bank borrows, mainly on a short-term basis, and owes to
other banks.
Sundry Creditors:
Sundry Creditors refers to the companies or individuals to whom money is owed
by the company.
IMPORTANCE OF ADEQUATE WORKING CAPITAL
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IN DETAIL:
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SOLVENCY OF BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production.
GOOD WILL: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill.
EASY LOANS: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms.
CASH DISCOUNTS: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost.
ABILITY TO FACE CRISES: A concern can face the situation during the depression.
HIGH MORALE: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.
EXCESS OR INADEQUATE WORKING CAPITAL MANAGEMENT
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Every business concern should have adequate amount of working capital to run its business
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous
from the point of view operations. It should have neither redundant or excess working capital
nor inadequate nor of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING
CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation of
inventories.
3. Excessive working capital implies excessive debtors and defective credit policy which
causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and other
financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
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Every business needs some amounts of working capital. The need for working capital arises due
to the time gap between production and realization of cash from sales. There is an operating
cycle involved in sales and realization of cash. There are time gaps in purchase of raw material
and production; production and sales; and realization of cash.
Thus working capital is needed for the following purposes:
· For the purpose of raw material, components and spares.
· To pay wages and salaries
· To incur day-to-day expenses and overload costs such as office expenses.
· To meet the selling costs as packing, advertising, etc.
· To provide credit facilities to the customer.
· To maintain the inventories of the raw material, work-in-progress, stores and spares and
finished stock.
For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size
of the company and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and expensing of
the business till it gains maturity. At maturity the amount of working capital required is
called normal working capital.
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MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital management is to
manage the current assets and current liabilities of a firm in such a way that a satisfactory level
of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations
are bad for any firm. There should be no shortage of funds and also no working capital should be
ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great on its
probability, liquidity and structural health of the organization.
WORKING CAPITAL ANALYSIS
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As we know working capital is the life blood and the centre of a business. Adequate amount of
working capital is very much essential for the smooth running of the business. And the most
important part is the efficient management of working capital in right time. The liquidity position
of the firm is totally effected by the management of working capital. So, a study of changes in
the uses and sources of working capital is necessary to evaluate the efficiency with which the
working capital is employed in a business. This involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis
can be employed for measuring short-term liquidity or working capital position of a firm. The
following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
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6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source from which additional
funds were derived and the use to which these sources were put. The fund flow analysis consists
of:
a. Preparing schedule of changes of working capital
b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial dates.
WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and polices to be
pursued in the future period time. Working capital budget as a part of the total budge ting process
of a business is prepared estimating future long term and short term working capital needs and
sources to finance them, and then comparing the budgeted figures with actual performance for
calculating the variances, if any, so that corrective actions may be taken in future. He objective
working capital budget is to ensure availability of funds as and needed, and to ensure effective
utilization of these resources. The successful implementation of working capital budget involves
the preparing of separate budget for each element of working capital, such as, cash, inventories
and receivables etc
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ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF
LIQUIDITY
The short –term creditors of a company such as suppliers of goods of credit and commercial
banks short-term loans are primarily interested to know the ability of a firm to meet its
obligations in time. The short term obligations of a firm can be met in time only when it is
having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth
functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be
strong. But a very high degree of liquidity of the firm being tied – up in current assets. Therefore,
it is important proper balance in regard to the liquidity of the firm. Two types of ratios can be
calculated for measuring short-term financial position or short-term solvency position of the
firm.
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OPERATING CYCLE
Analysis of Operating Cycle:
The Operating Cycle, also known as cash to cash conversion cycle describes the interdependence among the components of working capital. This can be explained with the help of the flow chart as shown under:
This cycle explains that normal business activities of a company start with cash, go through the successive segments of the working capital, viz, Raw Materials storage period, Work-in-Progress conversion period, Finished goods holding period and average collection period before getting
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back cash along with profit. The total duration of all these items are called Gross Operating Cycle period. When the Average Payment period is deducted from the Gross Operating Cycle period, the resultant is the Net Operating Cycle Period. The Net Operating Cycle Period indicates the number of days it takes for the transformation of current assets to cash.
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CHAPTER-4
DATA ANALYSIS
TATA STEEL LTD.
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RAW MATERIAL HOLDING PERIOD:
This ratio states that how much time (interms of days) raw materials have to spent in stores before sending to the production department for work-in-progress.
SIGNIFICANCE
Lesser the Raw Material Conversion Period, better for the company. This results in smoother and uninterrupted production process.
Lesser the Raw Material Conversion Period, lesser the carrying cost, better profit & vice-versa.
Greater Raw Material Conversion Period reflects inefficient & ineffective inventory management.
Raw Material Holding Period (RMHP) = Avg. Stock of raw material x 365
Total raw material consumed
Where, Avg. Stock of raw material = (Opening stock + Closing stock)/2
Table 1 : RAW MATERIAL HOLDING PERIOD:
Year 2011 2010 2009 2008 2007
RMHP
Opening stock of Raw Materials 11539.4 14332.6 9015.60 7205.20 7075.40
Closing stock of Raw Materials 17638.8 11539.4 14332.6 9015.60 7205.20
Average Stock of Raw Materials 20358.8 20102.3 16181.9 11713.0 10678.0
Raw Material Consumed 62440.1 57947.4 57099.1 33552.0 31214.6RMHP 85.28 85.93 74.63 88.23 83.49
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365*Average stock of Raw Materials Raw Material Consumed
Graph 1: RAW MATERIALS HOLDING PERIODS:
ANALYSIS AND INTERPRETATION:
The RMHP of Tata Steel for the year 2011 is 85 days. This indicates that 85 days worth of Raw Material Consumed is held as inventory on an average. It is noted here that RMSP is maximum for Tata Steel amongst the other current assets and the reason for it is that Tata Steel has a number of sources for Raw materials that originally comes from Mining Activities. Tata Steel has to maintain stock with itself to meet any uncertain requirements and to maintain Buffer Stock.
The time period of 2008-09 was lowest and was the best during the five year period. Low value of holding period expresses the efficient operation and the momentum with which the raw materials were absorbed during this period for work in progress. This mainly happened because of the high production resulting from the commissioning of H-Blast Furnace and improvements in the other facilities and operations which sufficed the greater demand compared to the last year.
The year 2009-10 had the highest value because there was a drop of 4% in the Raw materials consumed driven primarily by non-usage of imported coke. Although there was an increase in volume, prices of imported coal were at a level lower than the last year which resulted in the higher value of the raw material holding period
WORK-IN-PROGRESS HOLDING PERIOD:
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This ratio states that how much time (interms of days) taken by the production department to convert raw materials into finished goods.
SIGNIFICANCE:
Lesser the Work-in-Progress conversion period, better the utilization of factors of production to produce finished goods.
Lesser the Work-in-Progress conversion period, greater the company’s ability to procure excess demands.
Lesser the Work-in-Progress conversion period, better the utilization of funds in the production process for the company.
Work-in-Progress conversion period = Avg. Stock of WIP x 365
WIP HP Opening stock of WIP 1586.50 731.70 714.80 289.40 239.30Closing stock of WIP 811.90 1586.50 731.70 714.80 289.40Average Stock of WIP 1199.20 1159.10 723.25 502.10 264.35
Cost of goods sold 64242.1 56638.2 60687.8 37431.4 35720.6Manufacturing expenses 296123.9 28283.3 61040.2 51974.7 50117.5Cost of Production 360366.0 84921.5 121728.0 90149.3 85838.1 WIP HP 1.21 4.98 2.17 2.03 1.12
Graph3: Work-in-Progress Holding Period:
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365*Average stock of WIP Cost of Production
ANALYSIS AND INTERPRETATION:
Tata Steel holds 2 days worth of Cost of Production as stock of Work-in-Progress. This reflects
the efficiency in management of Work-in-Progress as a very little amount is locked in this.
The work in progress was much higher in 2009-10 as compared to its previous year because
there was an increase in purchase of power mainly due to additional volumes of power to cater to
the requirement for additional production and also due to revision of fuel surcharge rates by
DVC and increase in purchased power tariff by the Jharkhand State Electricity Regulatory
Committee. Also the staff cost was higher during this year mainly due to annual increases in
salary and allowances partly offset by lower charges of employee benefits towards gratuity and
ESS. In the year 2010-11 the purchase of power for own use was lower as compared to the
previous year and also due to marginally increased demand WIP was converted to finished
goods.
FINISHED GOODS CONVERSION PERIOD:
This ratio states that how much time (interns of days) finished goods resides in warehouse before converted into sales. i.e., time period between production and sales.
SIGNIFICANCE:
Lesser the Finished Goods Conversion Period, greater the company’s ability to recover the cost incurred in the production.
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Lesser Finished Goods Conversion Period also saves the warehousing cost, thus increases the profit.
Lesser the Finished Goods Conversion Period, indicates greater demand of product and uninterrupted supply in the market.
Finished Goods Conversion Period = Avg. Stock of finished goods x 365 Cost of Goods Sold
FGHP Opening stock of FG 11414.00 13618.50 10742.70 10780.80 10006.20Closing stock of FG 13925.10 11414.00 13618.50 10742.70 10780.80Average Stock of FG 12669.55 12516.25 12180.60 10761.75 10393.50 Cost of Goods Sold 64242.1 56638.2 60687.8 38174.6 35720.6 FGHP 71.98 80.70 73.26 102.90 106.20
Graph 2: FINISHED GOODS HOLDING PERIOD:
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365*Average stock of Finished Goods Cost of Goods Sold
ANALSIS AND INTERPRETATION:
In the year 2011, Tata Steel held 71 days worth of Cost of Sales as average finished goods inventory. The finished goods held at Tata Steel are heavy goods and need time to produce as well as reach its destination when dispatched. There is a booming market for finished steel, thus Tata steel maintains stock to meet the increasing demand.
We can see that the FGHP is higher in the year 2008 but is just marginally lower than the previous year. This happened because in 2007 due to the recessionary phenomena sales of steel declined but it came into track when the world economy started improving. Even though the recession hit again in 2010 but it didn’t affect much of the sales because FY 11 saw a recovery, post the downturn in the FY 09 and the recession in the FY 10. Infrastructural investments in Asia (primarily in China, Korea, Taiwan, India & Japan) and increased automotive production in Asia & US resulted in improvement in the demand for steel and stainless steel bringing down the FGHP to 20.24 days.
ACP indicates that in the year 2011, Tata Steel held 6 days worth of Credit sales in the form of Average Debtors. This also indicated high turnover of Accounts receivables highlighting efficiency in managing receivables.
We can see that The Debtors collection period has increased which shows how quickly Tata Steel has collected the amount for its sale to other parties. This mainly happened because of two reasons. Firstly the net credit sales volume during FY 11 recorded an increase of 4% over FY 10. Higher prices across all divisions and higher volumes in Tubes, Wires and Bearings divisions also contributed to the increase in net sales. Secondly, debtors as on 31st March, 2011 declined marginally over the level as at end March 2010 due to stringent credit control measures and lower steel exports which resulted in the increase in the DCP resulting in the collection of amount in just 5.28 days.
APP of Tata Steel for the year 2011 is 147 days. This indicates that Tata Steel holds 147 days worth of credit purchases in the form of Accounts Payables. This is due to the high Credibility of the company that the suppliers are willing to extend such high credit period to them. Creditors are the non interest bearing current liability. However, having a high average payment period is seen good as it leads to reduction in operating cycle.
Retaining the cash and giving late to the creditors within the prescribed time is one of the business strategy followed by almost all the companies. Tata Steel is also following this strategy so that cash is retained for maximum period for working capital requirements. In the year 2007 the Creditor’s Payable Period is more as compared to other years because there was an expansion in the Tata Steel for 1.8 million tonnes in Jamshedpur and some money worth of rs. 255 crores were blocked on account of wages and salaries.
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RATIO ANALYSIS OF TATA STEEL
Table 6: WORKING CAPITAL RATIO ANALYSIS OF TATA STEEL:
Total Current Liabilities 10995.81 8999.61 8974.05 6768.78 5453.66
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Net Current Assets 7028.91 1375.62 871.43 -7025 1013.39
Graph 5: WORKING CAPITAL RATIOS:
ANALYSIS AND INTERPRETATION:
In the year 2007-08, there was 25% increase in the amount of current liabilities and provisions due to increase in sundry creditors, which ultimately have decreased the net working capital balance. It shows that the company does not hold enough liquid assets in order to meet the current liabilities. Whereas in the year 2010-11, the net working capital is the highest due to high loans and advances given to the subsidiary companies and increased inventories. It is a good sign for the company.
A. LIQUIDITY RATIOS:
Table 7: CURRENT RATIOS:
This ratio is used to judge the short term solvency of a company and is worked out by dividing the aggregate current assets by its aggregate current liabilities.
YEAR 2011 2010 2009 2008 2007
RATIOS 1.18 0.89 1.09 1.15 1.63
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Graph 6: CURRENT RATIOS:
ANALYSIS AND INTERPRETATION:
As per the conventional rule, the current ratio of 2:1 is said to be ideal for any company. In 2008, it has deceased by almost 29.44% because even though in 2008 the current liabilities remained almost same but the cash & bank balances and stock in trade decreased significantly which lowered down the ratio. The ratio has also decreased marginally by 5.21% in 2009 on account of increased current liability with subsidiary companies, 18.34% decrease in the year 2010 and 32.58% increase in 2011.The increase happened because the stock in trade and cash & bank balances increased as compared to the previous year. This shows that the company is trying to get up to the standard of 2:1 ratio and is achieving a good position.
Table 8: QUICK RATIOS:
This ratio is also known as acid test ratio or liquid ratio. It is more severe test of liquidity of a company. It shows the ability of a business to meet its immediate financial commitments.
YEAR 2011 2010 2009 2008 2007
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RATIOS 0.76 0.51 0.72 0.81 1.27
Graph 7: QUICK RATIOS:
ANALYSIS AND INTERPRETATION:
A quick ratio of 1:1 is considered favourable for a company. In 2008, quick ratio has decreased by 36.22% which is not a favourable situation for the company as compared to the previous year. In 2009 too, the ratio has decreased by 11.10%, 29.16% in 2010 and increased by 49% in the year 2011. In any of the first four years the quick assets has not crossed the standard ratio of 1:1 which is not a good sign for the company. This decrease in quick ratio occurred because the current liabilities prevailed to near around amount in all the four years but quick assets decreased to some extent on account of payments and reduction in cash & bank balances.
B. TURNOVER RATIOS:
Table 9: CURRENT ASSETS TURNOVER RATIOS:
This ratio shows how effectively company uses its current asset to generate sales.
YEAR 2011 2010 2009 2008 2007
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RATIOS 0.61 0.41 0.40 0.30 0.36
Graph 8: CURRENT ASSETS TURNOVER RATIOS:
ANALYSIS AND INTERPRETATION:
The above chart and table shows that there is decrease in current asset ratio by 16.67% in the year 2008.In the year 2009 there is a slight increase in net sales because of the increase in demand which has resulted in the increase of the ratio due to efficient use of technology to produce enough products to meet the demands and generate sales. In the year 2010 there is a marginal change in current assets turnover ratio because there was a decrease in price of steel and related products and sales were only 3% higher than the previous year. Again in 2011 there is an increase in the ratio by 20%.This happened mainly because there was an increase in prices across all divisions. This indicates that Tata Steel is trying to maintain an adequate ratio but need to pay attention to its current assets especially cash and inventories.
Table 10: INVENTORY TURNOVER RATIOS:
This ratio shows that in how many days’ inventories are converted into net sales and generates revenue for the company.
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YEAR 2011 2010 2009 2008 2007
RATIOS 10.33 9.40 9.89 10.09 9.86
Graph 9: INVENTORY TURNOVER RATIOS:
ANALYSIS AND INTERPRETATION:
From the graph we can see that in 2008 there has been an increase in the ratio by 2.33%. This resulted mainly because of the increase in operations by Tata Steel. But, it decreased in 2009 by 1.98% and this happened because the prices of the products decreased thereby decreasing the ratio even though the sales were at par. But in 2010 we can see that the ratio decreased by 4.95% and this happened because of weak demand in the market. But it increased by 9,89% in 2011 because of higher purchase at Bearing division and Agrico units to support higher volumes and to support more sales of steel products.
Table 11: WORKING CAPITAL RATIOS:
This ratio indicates the velocity of the utilization of net working capital of the firm.
YEAR 2011 2010 2009 2008 2007
RATIOS 0.36 0.30 0.40 -0.41 0.61
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Graph 10: WORKING CAPITAL RATIOS:
ANALYSIS AND INTERPRETATION:
In 2008 there is a decrease in ratio leading to negative value by 167% due to negative net working capital. But in 2008-09 it has increased by almost 100% due to increase in cash, stocks and loans and advances. But again in 2009-10 the ratio has decreased by 25% even though the sales and working capital both increased as compared to previous year. In 2011 the ratio increased marginally by 20%. This happened because there was an increase in current assets. The above results indicate that Tata steel needs to pay attention towards its working capital management.
Table 12: RAW MATERIALS TURNOVER RATIOS:
YEAR 2011 2010 2009 2008 2007
RATIOS 24.58 24.28 20.82 19.34 20.15
Graph 11: RAW MATERIALS TURNOVER RATIOS:
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ANALYSIS AND INTERPRETATION:
We can see that the Raw Material Turnover Ratios are following a particular trend in which the values are decreasing except in 2011. In all the other four years even though the value is showing the decreasing trend but it doesn’t imply that the company is unable to generate enough demand or it is undergoing losses. It happened because of couple of factors i.e; the price of the raw materials decreased with recession adding the discomfort to the company. But with the increase in its operations raw materials were consumed more in 2011 which increased the value by 4.18%.
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CHAPTER-5
COMPARATIVE ANALYSIS
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JINDAL STEEL & POWER LIMITED:
Jindal Steel & Power Limited (JSPL), part of the US$ 4billion Jindal usually developed rotary kilns. The
company has achieved complete backward integration with its captive iron & coal mines making it one of
the lowest-cost producers of sponge iron. The steelmaking capacity has been expanded from 400,000TPA
to 1.15 million TPA. JSPL also has 265 MW power generation facility based on Waste Heat Recovery
from rotary kilns, washery rejects & coal fines, with a capacity expansion of 350 MW, on anvil. Jindal
Power Limited, a company promoted by JSPL, is in the process of setting up a 1000 MW Pithead Power
Plant at Raigarh, with an investment of over Rs.4500 Crore.
JSPL today is the largest private sector investor in Chhattisgarh with a total investment of Rs.10, 000
crores. JSPL has recently signed an MoU with the State Government of Orissa to set up a 2 million tonne
steel plant with an investment of Rs.13, 500 crores which would be expanded to 6 million tonne and
another MoU has been signed with the State Government of Jharkhand to set up a 5 million tonne steel
plant with an investment of Rs.12, 000 crores. Jindal Steel & Power Limited was nominated as one of the
Emerging Companies of the Year 2001 by The Economic Times, and as the top 20-investor friendly
companies in the
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An ISO-9002 and ISO 14001 certified company, JSPL is committed to conducting business safely,
ethically and in an environmentally responsible manner that protects the natural resources and
environment. The company has been felicitated with a number of awards for its efforts towards ensuring
safety and energy conservation. These primarily include the National Safety Award 2004, by the Ministry
of Labor, National Energy Conservation Awards for 2001, 2002 and 2003 by the Ministry of Power, IIM
Quality Award for 2000-01 and 2002-03 by the Indian Institute of Metals, the Golden Peacock
Environment Management Award 2002-03 by the Institute of Directors, Rajiv Gandhi National Quality
Commendation Certificate 2001 instituted by the Bureau of Indian Standards and Greentech Environment
Excellence Award 2002-03 and Greentech Safety Award, 2002-03 by the Greentech foundation.
Universal Beams & Columns:
The Mill is also producing Hot Rolled Parallel Flange Beams & Columns for the first time in India.
Typically known as H-Beams, these beams and columns are well accepted by consultants, designers and
fabricators and is the material of choice internationally; because of their better statistical properties such
as section modulus, radius of gyration and higher load carrying capacity under direct compression
coupled with substantial cost benefits over conventionally available taper flange beams or built-up
sections. Produced under Technical Services Assistance Agreement with JFE (earlier known as NKK
Corporation), Japan employing Universal Rolling Technology; these sections meet exacting end-user
requirements with substantial saving in steel consumption vis-a-vis conventional Beams. These H-Beams
& Columns are now available in steel grades with yield strength ranging from 250 Mpa to 450 Mpa.
These sections are ideally suited for construction of multi-storied buildings, bridges, flyovers, offshore
structures, car parks, material handling systems, industrial systems and other industrial applications.
These Universal Sections provide:
- Superior statistical properties
- Greater flexibility to designers
- Better value for money to end-user
Product Range encompasses H-Beams & Columns viz. NPB/ WPB Beams (conforming to IS:12778 –
Indian Standard), UB/ UC Sections (as per BS:4-1:1993 –British Standard) and IPE Sections (as per
Euronorm 19-57), Steel Grades in yield strength from 250-450 Mpa as per IS:2062 Gr B / IS:8500 Steel
supporting the production of Finished Products, JSPL has the most modern steel-making capacity
presently to the tune of 1.15million TPA through one 60 ton Electric Arc Furnace, For obtaining clean
refined steel one Ladle Refining Furnace (LRF) and one Vacuum De-gassing (VD) unit are installed. One
351m3 mini-blast Furnace has been added for improving productivity and reduces cost of production of
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steel by using Hot Metal and sponge Iron mix. Further, a new steel melting shop is now commissioned
adjacent to the Rolling Mill comprising of one 100 ton LRF, 100 ton VD unit and one Bloom-cum-Beam
Blank Continuous Caster as Phase-I.
Power:
JSPL generates power from waste hot gases & washery rejects to meet its captive requirements. The
surplus power is supplied to the Chhattisgarh State Electricity Board. The current generation of power is
265 MW. Work on another 75 MW plant is under installation. Sponge Iron at Raigarh, coal-based sponge
iron is manufactured using 10 indigenously developed rotary kilns, with a capacity of 1.37 MTPA,
making JSPL the largest manufacturer in the world.
Mining:
Iron Ore, Coal & Coal Washing Jindal Steel & Power Limited has its own captive Iron Ore Mines at
Tensa, District Sundergarh, and Orissa, which produces 555,000 TPA of Iron Ore to meet the part
requirement of its Sponge Iron Plant. The Company has its captive Coal Mines at Dongamahua, District
Raigarh, Chhattisgarh with a present capacity of 2.0 MTPA. Since the coal is of very poor grade and
quality it has to be beneficiated. Hence a coal washery with a capacity of 2.5 MTPA to wash 47-48% coal
ash to 26% has been commissioned and is operating successfully. The washery meets the requirements of
Sponge Iron Plant. The captive mine is the core strength of the company. To meet the increased
requirement a new 3.5 million tonne coal washery has been installed.
Ferro Chrome:
Ferro Chrome, an essential component in the production of stainless and special steel, is manufactured at
Raigarh using a Submerged Arc Furnace (SAF) with a present capacity of 36,000TPA. Continuous
smelting of chrome ore, coke and quartz at temperature of 1600-17000 C ensures consistent quality of
Ferro Chrome. Throughout the manufacturing process, the focus is on quality assurance; Almost the
entire production of Ferro Chrome is committed to India's leading manufacturer of stainless steel. An
increase in production capacity is on the anvil and global markets are being tapped to sell the increased
production.
STEEL AUTHORITY OF INDIA LIMITED:
Steel Authority of India Limited (SAIL) is one of the largest steel makers in India. With a turnover of Rs. 48,681 crore, the company is among the top five highest profit earning corporates of the country. It is
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a public sector undertaking which trades publicly in the market is wholly owned by Government of India and acts like an operating company. Incorporated on January 24, 1973, SAIL has more than 131,910 employees. The company's current chairman is S.K. Roongta. With an annual production of 13.5 million metric tons, SAIL is the 16th largest steel producer in the world.
Major plants owned by SAIL are located at Bhilai, Bokaro, Durgapur, Rourkela, Burnpur (near Asansol) and Salem. SAIL is a public sector company, owned and operated by the Government of India. According to a recent survey, SAIL is one of India's fastest growing Public Sector Units.
Major Units:
SAIL Integrated Steel Plants:
1. Rourkela steel plant(RSP) in Orissa, set up with German collaboration (The first integrated steel plant in the Public Sector in India, 1959).
2. Bhilai steel plant(BSP) in Chhattisgarh set up with Soviet collaboration (1959).
3. Durgapur steel plant(DSP) at Durgapur, West Bengal set up with British collaboration (1965).
4. Bokaro steel plant (BSL) in Jharkhand (1965) set up with Soviet collaboration (The Plant is hailed as the country’s first Swadeshi steel plant, built with maximum indigenous content in terms of equipment, material and know-how).
5. IISCO Steel Plant (ISP) at Burnpur, West Bengal.
Special Steel Plants:
1. Alloy Steels Plants (ASP), Durgapur, West Bengal.2. Salem Steel Plant (SSP), Tamilnadu.
3. Visveswaraya Iron and Steel Plant(VISL), at Bhadravathi, Karnatka.
Subsidiaries:
1. Maharashtra Elektro-smelt Limited (MEL) in Maharashtra.
Central Units:
1. Centre for Engineering and Technology2. Research and Development Centre for iron and steel
A 50:50 joint venture between Steel Authority of India Ltd. (SAIL) and National Thermal Power Corporation Ltd. (NTPC Ltd.); manages the captive power plants at Rourkela, Durgapur and Bhilai with a combined capacity of 314 megawatts (MW). It has installed additional capacity by implementation of 500 MW (2 x 250 MW Units) power plant at Bhilai. The commercial October generation of 1st Unit has commenced in Aprill’2009 and the 2nd Unit in October’ 2009.
Bokaro Power Supply Company Pvt. Limited (BPSCL):
This 50:50 joint venture between SAIL and the Damodar Valley Corporation formed in January 2002 is managing the 302-MW power generating station and 660 tonnes per hour steam generation facilities at Bokaro Steel Plant. BPSCL has proposed to expand its capacity by installing 2x250 MW coal based thermal unit at Bokaro. In addition, construction activities are underway for installation of 9th Boiler (300T/Hr) & 36 MW Back Pressure Turbo Generator (BPTG) project at Bokaro.
M-Junction Services Limited:
A 50:50 joint venture between SAIL and Tata Steel formed in 2001. This company promotes e-commerce activities in steel and related areas. Newly added services include e-Assets sales, Events & Conferences, Coal Sales & Logistics, Publications etc..
SAIL-Bansal Service Center Ltd:
SAIL has formed a joint venture with BMW industries Ltd. on 40:60 basis to promote a service centre at Bokaro with the objective of adding value to steel.
Bhilai JP Cement Ltd:
SAIL has incorporated a joint venture company with M/s Jaiprakash Associates Ltd to set up a 2.2 MT slag based cement plant at Bhilai. The company shall commence cement production at Bhilai by March'2010, whereas clinker production at Satna shall start within 2009.
Bokaro JP Cement Ltd:
SAIL has incorporated another joint venture company with M/s Jaiprakash Associates Ltd to set up a 2.1 MT cement plant at Bokaro utilizing slag from BSL. The project implementation is under progress with commencement of cement production likely by July’2011.
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SAIL & MOIL Ferro Alloys (Pvt.) Limited:
SAIL has incorporated a joint venture company with M/s Manganese Ore (India) Ltd on 50:50 basis to produce ferro-manganese and silico-manganese required for production of steel..
S&T Mining Company Pvt. Ltd:
SAIL has incorporated a joint venture company with TATA Steel for joint acquisition & development of coal blocks/mines. New indigenous opportunities for coking coal development are being explored by the Joint Venture company for securing coking coal supplies.
International Coal Ventures Private Limited:
Towards achieving the target of making steel PSUs self-reliant in the area of coking coal, a joint venture company has been incorporated comprising of five central PSU companies i.e. SAIL, Rashtriya Ispat Nigam Limited (RINL), Coal India Limited (CIL), NTPC Limited and National Mineral Development Corporation (NMDC). The company is scouting for coal properties in Australia, Mozambique and other target countries.
Achievements:
SAIL was featured in the 2008 list of Forbes Global 2000 companies at position 647. National Institute of Personnel Management conferred the National Award on SAIL for Best HR
Practices 2008.
SAIL was adjudged as the top Indian company under the Iron and Steel Sector for the Dun & Bradstreet – Rolta Corporate Awards 2008.
Operating Cycle of JSW and SAIL:
Operating Cycle of JSW
OPERATING CYCLE OF JSWPARTICULARS 2011 2010 2009 2008 2007
Raw Material Consumed 147548.50 104,608.20 87,357.00 58,835.30 39,640.00Average Stock of Raw Materials 15872.30 10401.5 8099.95 7150 5465.35Raw Material Holding Period 39.26 36.29 33.84 44.36 50.32
Cost of Production(cost of goods sold +manufacturing expenses) 211666.10 112046.20 95233.80 66164.60 49246.30
Average Stock of WIP 1889.70 1337.10 1202.65 631.00 511.70
WIP Turnover Ratio=Average Stock of WIP*365/Cost of prod. 3.75 5.48 5.55 4.44 4.74
Cost of Goods Sold 183925.10 89080.40 79157.50 51915.90 39428.30
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average stock of FG 10800.60 7342.35 5614.85 3283.8 2162.75
FG Conversion Period=Average Stock of Finished Goods*365/Cost of Goods
NET OPERATING CYCLE -711.92 -591.37 -707.24 -590.05 -428.05
Opearting Cycle of SAIL:
OPERATING CYCLE OF SAILParticulars 2011 2010 2009 2008 2007
Raw Material Consumed 202520 160370 200769.2 139601.4 132710.8Average Stock Of Raw Materials 28610.25 26335.8 20115 15965.8 17808.3Raw Material Holding Period 51.56 59.94 36.57 41.74 48.98
Cost Of Production(Cost Of Goods Sold +Manufacturing Expenses) 294386.2 245249.7 282471.4 213247.3 199244.7
Average Stock Of WIP 0 0 0 0 0WIP Turnover Ratio=Average
Stock Of WIP*365/Cost Of Production 0 0 0 0 0
Cost Of Goods Sold 220806.2 173429.7 202067.7 139352.7 132723.7Average Stock Of FG 53962.35 52391.15 48814.05 37268.3 33660.85
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FG Conversion Period=Average Stock Of Finished
Goods*365/Cost Of Goods Sold 89.20 110.26 88.17 97.62 92.57Credit Sales 432516.5 412302.7 436698.8 399276.5 432516.5
Average Debtors=(Opening Debtors+Closing Debtors)/2 39062.9 33284.05 30673.15 27319.3 21327.2
The inventory turnover ratio is high for Tata steel and JSW having very less fluctuations every year. It shows that the velocity of turning inventory into sales is good, which shows company’s inventory management is highly effective. On the other hand, the ratio is low for SAIL. The company should work on its inventory turnover, which can be done by shortening the operating cycle in number of days taken from the purchase of raw materials to its conversion into sales and getting money back from the customers, to be utilized again to purchase the raw materials for further production.
Receivables management indicates management’s efficiency in getting the money back into the organization in the shortest period of time. The debtor’s turnover ratio reflects the number of times the money received from debtors is rotated in the business cycle in a year. The Debtors Turnover Ratio of Tata steel is the best indicating the management’s efficiency in getting the money back from the debtors and again rotating it in the business to generate sales. Whereas, JSW and SAIL should adopt more stringent policies in order to have effective debtor’s management.
The debtor’s collection period is low for Tata Steel. It shows that company is less prone to the risk of converting debtor’s receivable into bad debts. Whereas JSW and SAIL should adopt effective debtors management policies in order to avoid difficulties in future.
The creditor’s turnover ratio is low for JSW indicates that the credit worthiness of the company is not good. It should pay to the creditors on time or take some limited amount of time. So that it can get credit in the future and not be harmful for the company. On the other hand Tata Steel shows a good position by having less creditor’s turnover ratio.
Creditors’ turnover period is very high for JSW. It can damage the relationships with the creditors by affecting their credit worthiness. Tata Steel has optimum creditors turnover period indicating efficient credit management compared to other two.
CHAPTER-6
INVENTORY MANAGEMENTIBS HYDERABAD Page 89
NEED FOR INVENTORY MANAGEMENT
Inventories generally constitute the most significant part of current assets of most of the
manufacturing companies, especially in India. They are approximately 60% of the total current
assets in a company. Inventories are the 2nd largest constituents of the total assets, standing next
to the plant and machinery of an organization. Considerably large amount of funds are
committed towards inventories, hence arises great need to manage them effectively and
efficiently. A firm which neglects the management of inventories, may jeopardize in the long
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run, and may fail ultimately. The use of simple inventory planning and control techniques will
reduce excessive inventories which in-turn will have a favourable impact on the company’s
profitability.
NATURE OF INVENTORY:
The various forms in which inventories exist in a manufacturing company are:
Raw Materials
Work in progress
Finished goods
There is one more kind of inventory that many manufacturing concerns maintain, i.e., Supplies
or Stores and Spares.
NEED TO HOLD INVENTORIES
There are three general motives of holding inventories:
Transactionary motive: It emphasises the need to maintain inventories to facilitate
smooth production and operations.
Precautionary motive: It necessitates holding of inventories to guard against the risk of
unpredictable changes and contingencies in demand and supply or other factors relating
to inventories.
Speculative motive: It influences the decision to increase or reduce inventory levels to
take advantage of price fluctuations.
OBJECTIVE OF INVENTORY MANAGEMENT:
To maintain sufficient quantity of raw material and work in progress for efficient and
smooth production of finished goods for uninterrupted sales operations.
To maintain a minimum investment in inventory to maximize profitability.
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To determine the optimum level of inventory and of inventory investment.
Hence, an effective inventory management should:
Ensure a continuous supply of raw material to facilitate uninterrupted production.
Maintain sufficient stocks of raw materials in periods of short supply and anticipate price
changes.
Maintain sufficient finished goods inventory for smooth sales operation leading to
efficient customer service.
Minimize the carrying cost and time
Control investment in inventory and keep it at an optimum level.
INVENTORY MANAGEMENT TECHNIQUES:
In managing inventories, the firm’s objective should be in consonance with the shareholder’s
wealth maximization principle. To achieve this, the firm should decide the optimum level of
inventory. To manage inventories efficiently, answers should be sought for the following
questions:
How much should be ordered?
When should it be ordered?
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The first question can be answered by determining the ECONOMIC ORDER QUANTITY
(EOQ). The second question, when to order is answered by determining the RE-ORDER
POINT.
ECONOMIC ORDER QUATITY
One of the major inventory management problems is “how much inventory should be added
when inventory is replenished”. The issue is how much production is to be done, and how much
material is to be ordered. Determining the optimum inventory level involves two types of costs.
They are:
Ordering costs: it includes the entire costs of acquiring raw materials. They include the
costs of the following:
1) Requisitioning
2) Purchase ordering
3) Transportation
4) Receiving
5) Inspecting and storing
Carrying costs: costs involved in maintaining a certain level of inventory are known as
carrying costs. They include the following:
1) Storage
2) Insurance
3) Taxes
4) Deterioration and Obsolescence
5) Warehousing
6) Stores and handling
7) Administrative
The formula for calculation of Economic order quantity is:
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EOQ=
Where, EOQ=Economic order quantity
A= Quantity required
B= Ordering cost
C= Carrying cost
RE-ORDER POINT
The reorder point is that level of inventory at which an order should be placed to replenish the
inventory. To determine the Reorder point under certainty, we should know:
Lead time: is the time normally taken in replenishing the inventory after placing the
order.
Average usage: is the average use of the inventory in production cycle.
Economic order quantity: is the quantity of material to be ordered.
With these in place, the Reorder point is calculated by:
Re-order point= lead time× average usage
INVENTORY CONTROL SYSTEMS:
Here are several inventory control systems in practice. They range from simple systems to very
complicated systems. The choice of an inventory control system depends upon the nature of
business and size of the firm. A few inventory control systems are given below:
ABC INVENTORY CONTROL SYSTEMIBS HYDERABAD Page 94
Many firms have to maintain several types of inventories, and it is undesirable to keep the same
degree of control over all items. In this case, the firm should classify its inventories to identify
which item should receive the most effort in controlling. The firm should be selective in its
approach to control investment in various types of inventory. ABC analysis tends to measure the
significance of each item of inventory in terms of its value. High value items are classified as ‘A
item’ and are under highest control. ‘C item’ represent the least value inventory and would be
under simple control. ‘B items’ fall in between these two categories and require reasonable
attention of the management. The ABC analysis follows the principle of Control by importance
and exception. This approach is also known as PROPORTIONAL VALUE ANALYSIS
(PVA).
The following steps are involved in implementing the ABC analysis:
Classify the items of inventories, determining the expected use in terms of price per unit
for each item.
Determining the total value of each item by multiplying the expected units by its unit
price.
Rank the items in accordance with the total value, giving first rank to the one with
highest value and so on.
Compute the ratio of number of units of each item to total units of all items and the ratio
of value of each item to total value of all items.
Combine items on the basis of their relative value to form three categories-A, B and C.
JUST-IN-TIME (JIT) SYSTEM
In a JIT system, material or manufactured components and parts arrive to the manufacturing sites
just before they are put to use. The delivery of the material is synchronized with the
manufacturing cycle and speed. JIT system eliminates the necessity of carrying large inventories,
and thus, saves carrying and other related costs to the manufacturer. The system requires perfect
understanding and coordination between manufacturer and suppliers in terms of timing of
delivery and quality of the material. The JIT inventory system complements the TOTAL
QUALITY MANAGEMENT (TQM). The success of the system depends on how well a
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company manages its suppliers. This system also needs the suppliers to develop adequate
systems and procedures to satisfactorily meet the needs of the manufacturer.
VENDOR MANAGEMENT INVENTORY (VMI) SYSTEM
Companies outsource the inventory supply to vendors who take care of the supply and
replenishment of materials. Companies pay their vendors only at the time of consumption.
VED ANALYSIS
VED, defined as VITAL, ESSENTIAL and DESIRABLE, is a classification based on the criticality
of the component, as defined by the users. Non-availability of the vital parts may result in the
closure of the entire factory. It is based on considerations such as stock out cost, safety,
operational aspects, etc. the user has the responsibility to classify the materials under these
heads, and has to avoid the temptation to categorize all items as vital. This system is applicable
in stores and spares.
INVENTORY MANAGEMENT IN TATA STEELTata Steel, being a manufacturing concern, has to maintain its inventory in a proper manner. It
has to keep itself regularly regarding the requirements of various inventories, namely:
Raw material
Work-in-Progress
Finished goods
Stores and Spares
It has also to be aware of various costs related to the above mentioned items in order to make
appropriate inventory decisions.
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In a manufacturing concern, a major portion of the funds employed is blocked in inventories
which form a large chunk of the current assets. That is why it is necessary for a manufacturing
concern to carefully invest in inventories keeping in mind that it has enough liquid assets to meet
emergencies.
Almost every aspect of inventories is SAP automated.
Tata Steel has adopted the concept of “Theory of Constraints” (TOC) in order to efficiently and
effectively handle inventories. TOC is a process where improvement is carried in continuously
based on the logic that there is at least one constraining factor in an organization that limits its
rate of goal attainment. This constraining factor is identified by TOC and the entire concern is
remodeled around it. This remodeling is done on the basis of five focusing steps:
1) Identification of the constraint
2) Deciding the methods of exploiting the constraint
3) Aligning the remaining processes to the above decision.
4) Expanding the constraints if possible.
5) Repeating the above cycle if it results in the removal of the constraint.
Through the five focusing steps, the organization not only encounters the constraint but also
takes advantage of it.
INVENTORY HANDLING AT TATA STEEL
Being a large manufacturing concern, Tata Steel has to handle a huge volume of inventories. As
explained earlier Tata Steel’s inventories are mainly classified as:
Raw material inventories
Work-in-Progress Inventories
Finished goods inventories
MRO Inventories (Stores and spares)
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For efficient management and timely availability of all the inventories, Tata Steel has formed
various departments to be responsible for different categories of inventories. Raw materials are
maintained by Raw Material Handling Department (RMHD), finished goods are maintained by
Customer Service Department (CSD) and stores and spares are maintained by the Raw Material
Handling Department (SMD). There is no particular department for work-in-progress. The
various user departments are accountable for it.
The primary departments are explained in detail below:
1. RAW MATERIAL HANDLINH SEPARTMENT (RHMD):
This department was formed on 1st May, 2001. It deals with the raw materials required for
manufacturing steel. Tata Steel’s Indian operation has raw material security of 80%.
Approximately 35000 tonnes of raw materials are regularly procured for its production activities
around Rs. 80 crores. The various raw materials consumed by Tata Steel are as follows:
Iron ore
Coal
Coke
Limestone and Dolomite
Zinc and Zinc alloys
Spelter, Sulphur and other materials
Tata Steel acquires most of its raw materials from its own mines and collieries. About ninety
eight percent of the raw materials are brought from the mines and collieries by rail. Raw
materials are brought into the Tata Steel, Jamshedpur plant by around 10 goods train or 580
wagon called rakes. Inside plant raw materials are carried to different departments by trucks.
Tata Steel has 3 exchange yards, namely Tata Nagar Exchange Yard, New Reception Yard and
Adityapur Railway Yard.
RMHD takes care of all the requirements of consuming departments within the plant. A central
stocks yard is maintained by the department where buffer stocks of major raw materials are
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available. RMHD is also responsible for disposing waste materials and recycling and utilizing
solid by products.
The department has the following sections through which it satisfies the needs of different
production departments:
Raw Material
Stock Yard
MRH (ore)
Inbound Logistics
Road Transport
WHMS
General
These sections are associated with raw material planning, quantity and quality control, receiving
and unloading of materials, maintaining balance between demand and supply, demurrage wagon
deficiency accounting and many more functions.
Tata Steel procures its entire iron ore inventory from its own mines such as Joda maines ans
Noamundi mines. The basic types of iron ore are:
Lump ore
Fine ore
LD ore
Lump ore is used in blast furnace, Fine ore in sinter plant and LD ore in steel melting plant. The
approximate average consumption of these ores is 10000 tonnes, 20000 tonnes and 1000 tonnes
respectively. The company keeps a stock of only about 8 hours to transport the iron ores from the
mines to the plant at Jamshedpur. So, safety stock of lump ore is about 50000 tonnes and fine ore
is about 100000 tonnes. LD ore should have an ideal stock of about 5000 tonnes but during
monsoon more stock is kept because LD ore needs to be kept dry.
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Tata Steel procures coal from its own collieries as well as from outside India. There are 2 main
types of coal.
COAL
Coking coal Non Coking coal
1) Domestic 1) PCI coal
2) Imported 2) Imported
Domestic coking coal is produced from collieries at Jamadoba, Bhelatand and West Bokaro.
The approximate average per day requirement of coking coal from Jamadoba and Bhelatand is
1500 tonnes respectively; from West Bokaro is 6000 tonnes and that of imported coal is 7000
tonnes. The level of inventory for domestic coking coal is of 5 days and that of imported coking
coal is 21 days.
PCI coal has an average per day requirement of about 2500 tonnes and Tata Steel maintains
about 50-60 days’ inventory of this item. Around 7000 tonnes of imported non coking coal is
maintained on a daily basis and its desired level of inventory is also about 21 days.
Imported coals are received at ports in Haldia and Paradeep. In case of emergency Vizag port is
also used. Tata Steel has also entered into a venture with Hooghly Met Coke and Power
Company Ltd.(HMCPCL). It is a 100% subsidiary of Tata Steel and is situated in West Bengal.
This project satisfies the need of metallurgical coke at the blast furnace in the Jamshedpur plant.
Merchant coke oven units have been set up for this purpose. In case excess heat is produced in
the coke oven process, Tata Power Company Limited uses the heat to produce electricity with a
power capacity of about 120 MW.
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Limestone is mainly of two types:
CP Grade limestone
SP Grade limestone
CP Grade limestone is calsinised plant and used in LD shops whereas SP Grade limestone is
used in sinter plant and blast furnace. Domestic CP Grade limestone is procured from Jaiselmer.
The average per day requirement for both domestic and imported CP Grade limestone is around
3500 tonnes and the desired level is 15 days’ inventory.
Similarly, domestic SP Grade limestone is procured from Gotan in Rajasthan and many places a\
in central India. The average per day requirement of both domestic and imported SP Grade
limestone is around 2000 tonnes and the desired level is 10days’ inventory.
Pyroxenite is acquired from Sukhinda and is used in blast furnace and sinter plant. The daily
requirement is around 1000 tonnes and safety stock is about 15000 tonnes.
Quartzite is used in blast furnace. The daily requirement is around 200-300 tonnes and safety
stock is about 5000 tonnes.
All the above requirements are managed by the Raw Material Handling Department. The RMHD
prepares a monthly schedule of raw material requirements at the beginning of the year. Domestic
collieries and mines provide raw materials according to this schedule only. Imported raw
materials are received annually. So orders are placed after carrying out a through survey of the
future demand because adjustments cannot be made easily for unexpected changes.
2. CUSTOMER SERVICE DEPARTMENT(CSD):
The customer service department is responsible for delivering finished goods to the customers
and executes them. It receives orders from customers and executes them. It converts orders into
final delivery. Earlier the department was involved in controlling production but now it looks
after customer satisfaction which is very important in building brand and increasing sales. The
CSD efficiently uses logistics to speed up transportation and warehousing of finished goods.
External processing agents facilitate the above process. Satisfying the customers is the main job.
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If customers are satisfied only then can an organization grow. So the CSD has to coordinate with
the sales, marketing, advertising, production and procurement divisions to satisfy customers.
Tata Steel has 19 stock yards throughout the country to facilitate the delivery of the products and
services to the customers. CSD attempts to specialize on fronts like delivery accuracy, total
deliver cost, optimum inventory and lead time so that the company can ve a front runner in the
current competitive environment.
3. SUPPLY MANAGEMENT DEPARTMENT (SMD):
The Supply Management Department is also known as the stores department and handles stores
and spare parts consumables like aluminum, calcium, iron, cold wire, zinc, manganese, etc. for
stores and spare parts the head MRO and head Process Consumables are responsible. Stores and
Spares are used in all departments of Tata Steel. The entire SMD is SAP oriented. Tata Steel
deals in flat products like cold rolling mils, hot strip mills, LD2 and slab caster and long products
like merchant mills, wire and rod mills and LD1.
SAP categorizes flat and long products as profit centres, iron ore as cost centre and Stores and
Spares as Shared services. SAP has a plan for all departments. Plant 073 is assigned to supply
management. Stores available in Plant 073 can be used by all departments. Material Reservation
slips are placed by departments requiring the material. If materials are available in stores then
delivery is made within 24 hours. All materials are issued through SAP except safety items
which are issued manually. FIFO system of valuation is used. In Tata Steel, as soon as the goods
enter the stores, a Goods Receipt Department (GRD) is prepared which carries the quantity of
material received. Once the quantity and quality matches specifications, Q-11 is issued. If there
are any modifications, they are made in QA-12. The final document is issued on SAP Screen
QA-13 as it displays items which cannot be altered. Stores department also performs the
important function of invoice verification. After the suppliers supply the materials, they shall
produce challans with particulars like order placed, quantity supplied, price quoted for payment,
etc.
All calculations regarding Economic Order Quantity, minimum and maximum levels are done
through SAP. ( Due to insufficient data, calculation of the above has not been possible). Tata
Steel has around 50000 main items apart from 10000 other items.
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The storekeeper should be very careful regarding the maintenance of stocks. There should be
neither over stocking nor under stocking of materials because under stock might lead to
unavailability of materials when required and overstocking will lead to unnecessary blockage of
capital which could otherwise be invested in better option. The Jamshedpur Plant stores items on
the basis of ABC classification. However, SAP is responsible for spares procurement.
SAP categorizes spares or materials as follows:
VM-which is similar to type A and B and helps to plan reorder point automatically.
W-which is similar to C and is used to make forecasts.
ZR-consists of items which are not classified either under either type A, B or C. These
items may belong to category D and is useful for planning requirements of slow moving
items.
Materials are categorized into the above classes according to their requirements. Spares, which
are purchased immediately after a new plant is commissioned, are called “Vital Spares” or
“Insurance Spares” and they fall under “Initial Spares”. The department requiring spares and
the project team are responsible for identifying initial spares. If the spares are unique and
required by a single user, then the consuming department is responsible for the process of
planning the requirement. However, if the spares are required by multiple users, then the entire
procurement team becomes responsible for the process of planning, buying and storing spares.
Materials are issued from the stores under the FIFO method of stock valuation.
This task of planning spares is very difficult because there is no fixed consumption pattern of
spares.
TECHNIQUES OF INVENTORY MANAGEMENT FOLLOWED AT TATA
STEEL:
ABC ANALYSIS- Items with consumption more than 23 quantities (units, kg, numbers, tonnes,
sets, etc.) are classified under the heads A, B, or C. Items with consumption of less than or equal
to 23 quantities are classified under category D.
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Items covering 80% of the total cost of consumption fall under category A. Requirement
planning of these items are done monthly or bimonthly.
Items covering 15% of the total cost of consumption fall under category B. Requirement
planning of these items are done half yearly.
Items covering 5% of the total cost of consumption fall under category C. Requirement
planning of these items are done half yearly.
Category D consists of around 80% of stores and spares. Requirement planning for these items
are done manually and not through SAP.
VED ANALYSIS-The Company has nearly two lakh items of spare parts. One lakh items out of
these have been classified under VED. These items are procured through E-Procurement
Systems.
FSN ANALYSIS-MRO stores and spares are controlled through this technique. Under this
method, most of the items are classified under A, B and C categories are termed as fast moving
goods. Requirement planning of such goods are termed as fast moving goods. Requirement
planning of such goods are done through SAP. The remaining items are termed as slow moving
goods and these items are planned manually. Stores and spares used to keep old machineries and
assets up-to-date are termed as non-moving or obsolete.
VENDOR MANAGED INVENTORY SYSTEM- In this case vendors look after the level of
inventory in an organization. They supply inventory depending upon the requirements of the
organization. These vendors may operate either from their own workshops or from the place
provided by the company within their campus. As in the case of Tata Steel, different types of
lubricants are issued to Tata Steel whenever required by Indian Oil Corporation which has its
depot inside works. Only after the supplies have been consumed does Tata Steel make the
payment. In the current year, 27% of the inventory will be controlled through VMI system as
compared to 17% last year. Even British Oxygen Corporation has its depot inside Tata Steel.
JUST-IN-TIME SYSTEM-Items such as refractories are managed under this system because
the suppliers of such items are situated near production units. The external processing agents
deliver items as and when required.
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FIRST IN FIRST OUE METHOD (FIFO)- Tata Steel uses this method to issue inventories
from stores to different departments on the basis of their requirements. This method is followed
so as to save inventories from obsolescence.
ACCOUNTING POLICIES AT TATA STEEL:
Finished and semi finished products produced and purchased by the company are carried
at lower cost and net realizable value. Purchased goods are carried at cost.
Work in progress is carried at lower cost and net realizable value.
Coal, iron ore, and other raw materials produced and purchased by the company are
carried at lower cost and net realizable value.
Purchased raw materials in transit carried at cost.
Stores and spares are carried at below cost.
Cost of inventory is generally ascertained on weighted average basis. WIP, Finished
goods, and Semi finished goods are valued on full absorption cost basis.
INVENTORY REPORTING SYSTEM IN TATA STEEL
Precise inventory control is an essential part of the operation of a successful, well organized
company and successful business require timely and accurate information on the receipts of
goods, the movement of goods within or between locations, the sale removal or other disposition
of goods and the precise valuation and status of goods remaining in inventory at any point of
time. This is because stock out means loss of sales while too much stock implies lack of cash
flows that will adversely affect the profitability of the company.
An efficient inventory reporting system has an equally important role to play to manage
inventory with proficiency as other control systems. A good reporting system provides
information to efficiently manage the flow of material, equipment, coordinate internal activities
and provide services to customers. A reporting system does not make decisions or manage
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operations, it provides the information to managers to make accurate and timely decision to
administer to functionality of the company.
Tata Steel maintains a wide assortment of inventory for all- raw materials, stores and spares and
finished goods. Therefore it becomes imperative that inventory is managed and reported with
utmost care. As mentioned before, the entire inventory system including the reporting is done
with the help of SAP in Tata Steel. The various divisions /department keeping the inventory
reserves report their stock level individually. These reports are then complied by the finance
department to prepare a consolidated report.
Different kinds of inventory reports are prepared monthly to report about the stocks maintained
by the company. Inventory maintained by the company at a certain point in time is compared
with that of the previous month and the previous year and the difference is recorded. This
comparison is made both in terms of value and volume. The reports are made category wise
which summarizes the particulars of the overall inventory stocks of finished and semi- finished
goods, raw material and stores and spares with the company. Another repot that is prepared gives
details of the total inventory of the company division-wise. The division where the inventory is
maintained is divided into two- steel division and other division.
This report gives information regarding the inventory stocks kept by each division and
accordingly analyze the changes over the previous month and year. This reported is supported by
another detailed report which shows break-up of inventory between raw material, finished goods
and stores and spares. The finished goods are again reported in a comprehensive manner as flats,
long, scrap and other products which are again divided as saleable and re rollable products.
Inventory-wise reporting is also done. Separate reports are prepared for finished and semi-
finished inventory, raw material and stores and spares.
For finished and semi finished inventory the reporting is done by all the above mentioned
departments depending on the different types maintained by them at various locations.
Raw material inventory reporting is done in an elaborate way. Reporting is broken down as raw
material for steel works, mines and colleries and other divisions. In case of steel works the raw
material maintained is divided into five categories and reported. They are ;
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Coal ,coke and ores
Metals
Ferro alloys
Imports
In-transit
Again for mines and colleries there are four heads which are further sub-divided.
They are;
West bokaro colleries
Jharia collieries
Mines
Tailings at west bokaro colliery and jharia colliery.
Lastly the report of stock at other divisions is prepared. Since raw material is the most important
component of inventory in a production unit like tata steel,its reporting is done in an extensive
manner. Similar to finished and semi finished goods ,the inventory of stores and spares is also
reported division wise. All the above reports are compiled into a master report which gives
complete picture of the entire stock with the company.
Apart from this ,three special reports are also prepared : saleable steel summary report ,raw
material summary report and stores and spares summary report. Theses are highly structured
reports which give the minutest of details of inventory.
The stock of finished steel is maintained at mostly at four locations namely steel works,
stockyard and consignment agents ,external processing agents and in-transit agents.
Likewise for consignment agents ,stockyards, external processing agents and in-transit stock
inventory is reported depending on the types of inventory held by them. The raw material
summary report gives in depth details about the different varieties of coal coke ferro alloys and
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other materials based on the places where these are procured . This report is more elaborate than
the earlier raw materials report prepared by the company.
The materials are classified and re-classified for reporting purpose.Stores and spares are
primarily classified as spare, operating consumables and packaging material. Almost all
departments make use of stores and spares.
Inventory reporting at Tata Steel is a detailed and complex process. This is primarily because of
the numerous types of inventories maintained by the company. Every department has a different
requirement for materials based on its functions and produce different end products. Accordingly
their reporting schedule also varies. It becomes a cumbersome job for the officials of the finance
department to classify data, compile it, and prepare varied reports. Classification of inventory is
the most difficult task for the department. The importance of reporting system cannot be
undermined as it provides vital information regarding stock levels of different inventories and
facilitate the decision making process.
CHAPTER-7
CONCLUSION AND
RECOMMENDATIONS
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CONCLUSION
As explained earlier, inventory management is integral ro the growth of any firm. Inventory is
directly related to the working capital of an organization. Proper management of inventory leads
to proper flow of working capital. Tata Steel has been able to manage its onventory quite
satisfactorily which is shown by the high inventory turnover of the company. Tata Steel has
closely monitered ENTERPRISE RESOURCE PLANNING systems as a result of which it has
an up-to-date SAP technology in place. The entire Supply chain is SAP oriented which makes it
one of the most efficient systems in the entire steel industry.
Tata Steel has a raw material security of 80%, which means 80% of raw materials come from
Tata Steel’s own mines and collieries. Also the proximity of these mines are an added advantage
to the company.
Overall, Tata Steel has proper inventory management techniques in place. The MANAGEMENT
INFORMATION SYSTEM at Tata Steel is also up-to-date.
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We have identified and examined the main elements of working capital. We have seen that the
management of working capital requires an evaluation of both the cost and the benefits
associated with each element. Some of these costs and benefits may be hard to quantify in
practice. Some assessment must be in order to try and optimize the use of funds within a
business. We have examined various techniques for management of working capital. These
techniques vary in their sophistication; some rely heavily on management judgement, while other
adopts a more objective, quantitative approach.
Tata Steel maintains sound position interns of working capital. Its efficiency in receivable and deferral management is reflected in the constantly decreasing operating cycle. The company has primarily been operating on cash drawn from the market and reaping full benefits of its brand name. Inventory which constitutes an important component of working capital in a steel manufacturing company has also been managed well. This is evident from the high inventory turnover in comparison to the industry average. However, the conversion period of raw material needs to be worked upon. The company has a well built supply chain and all its processes of inventory maintenance are SAP linked. It has a competent control system in place for managing stores, spares and finished goods. Nevertheless there is scope for improvements in raw material management.
FINDINGS:
1. The idle current ratio for any firm is 2:1. The current ratio of Tata steel except in 2007 is far less than the standard ratio.
2. The quick ratio of any firm should be 1:1 but that of Tata Steel is quiet less.3. Tata Steel has implemented effective strategies to reduce cost of production and
is enjoying high operating profit than other firms by lowering production cost.4. Tata Steel is managing its inventories by following different inventory control
tools for different items.5. Tata Steel’s Debtors Collection Period is less which signifies the availability of
liquid assets most of the time.6. Tata Steel is also following a good strategy for blocking its funds for a longer
period of time when it comes for payment.7. As part of the financing of the imports for the 2.9 mtpa expansion in Jamshedpur,
the Company also tied up long-term ECA backed buyer’s credit of €72.85 million to be drawn over the next 18 months and repaid over the next ten years.
8. Tata Steel has been engaged in many expansion projects through which it has invested around rs. 13288 crores including expansion in Jamshedpur plant increasing the steel capacity to 9.2 mtpa.
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RECOMMENDATIONS:
1. The Company should look forward to maintain the standard current ratio and quick ratio.
2. Although the creditors payable period is high for Tata Steel but far less as compared to JSW. The Company can devise a strategy to increase the payable period so that liquid assets will be available to meet the unforeseen events.
3. At this moment the Company should hedge their most of the funds because of the volatility of exchange rate.
4. The essence of effective working capital is proper cash flow forecasting. This should take into account the impact of unforeseen events, market cycles and competitors movement. So the effect of unforeseen demand should be factored in.
5. Advance payment should be avoided or else should be made against securities.
