Project Report

On Analysis of Conversion Cost in Colour Coating Line At JSW Steel Limited
(May-June’2009)

Under the guidance of Mr. Manoj Kumar (Manager(Costing)) Submitted By: Mohd Arif khan (arifkhan47@rediffmail.com)

As part of the MBA-Core Program Curriculum of A.C. Patil College of Mgmt Research (Navi Mumbai)

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Analysis of Conversion Cost

JSW STEEL LTD. TARAPUR

CERTIFICATE
This is to certify that Mr. Mohd Arif khan student of A.C. PATIL COLLEGE OF MGMT. & RESEARCH has successfully completed her project entitled “ANALYSIS OF CONVERSION COST” for the period of two months May to June’09 in our organization as part of her summer internship. During this period we found them honest, sincere & hardworking. We wish them all the success in their future endeavors.

Manoj Kumar Nitin Tekade (External Guide) Manager- Costing HOD - HR

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Analysis of Conversion Cost

INDEX
SR.NO
1 2 3 4 5 6

PARTICULARS
Acknowledgment Executive Summary About JSW Group About JSW Steel Ltd Process Flow of JSW Introduction of Cost Optimization Strategies

PAGE NO

7 8 9 10 11 12

Broad analysis of Cost elements in JSW Analysis of CCL Plant - Data Analysis Sources of Data Conclusion Recommendation Bibliography

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Analysis of Conversion Cost

ACKNOWLEDGEMENTS
I take this opportunity to express our sense of gratitude to all those who guided me and helped me whenever the going seemed difficult and the road ahead was not visible. I am highly thankful to Mr. P.K. Pandey, HOD(Costing) for giving me this opportunity to enhance my knowledge. I am also thankful to Mr.Manoj Kumar Jha, Manager (Costing), JSW, Tarapur, for assigning me to the projects which were truly enriching in nature and scope. I am obliged and thankful to Mr. Nitin Tekade, HOD (HR), JSW, Tarapur who made this training possible. I am greatly indebted to Mr.Anil Sharma, DGM (CCL Plant), JSW Steel, for providing me with an immense learning opportunity. I would like to extend our gratitude to our guides Mr. T.J. Singh HOD (Packaging); Mr.Praveen Mobian; Mr.Rahul Mahakal, Sr.Manager(CCL); Mr.Ravi Agarwal (CCL); Mr. Dinesh Soni, Jr. Manager(Costing); Mr.Atul Tayade Asst. Manager(CCL); Mr. Mahesh Bhonsle, Asst Manager(CCL); Mr. Sanjay Swami, Dy Manager (PPC) who were with me through this entire journey. They inspired me to think beyond and to always look for better solutions. I am deeply inspired by their profound thoughts, which took me to light whenever the path became difficult. I appreciate the help of Ms. Shweta Bhalekar, Jr. Manager (HR),JSW, Tarapur, who made our stay a pleasant one and also provided us with all we needed and were always cordial and helping. Last but not the least, I wish to extend our thanks to all the staff of JSW, Tarapur, who gave me great insight into the day to day operations of the plant.

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Analysis of Conversion Cost

I also wish to thank our faculty at ACPCE, specially Dr. Mahesh , HOD and my internal guide Mr.Pampat & colleagues for making this all possible and all others who helped us during these two months.

EXECUTIVE SUMMARY
This report is the presentation of findings of the project work carried out during the summer internship at JSW Steel Limited, Tarapur during the period of May’09-June’09. A Project entitled “Analysis of Conversion Cost” was undertaken during this internship. Overall study of JSW Tarapur and recommendations for cost optimization strategies were studied. Broad study was done of the whole plant & later as a sampling CCL plant was studied. The project involved the initial study of basic operations at this plant. The main objective was to understand and analyze the prevailing conversion cost practices, their effects and efficiency. It also intended to find the shortcomings and recommend solutions for the same. The various touch points were analyzed, and discussions were made with employees responsible in these areas to understand the prevailing processes and areas of improvement. Based on these recommendations, cost optimization strategies have been made as part of this study. The main products of the company are GI, GL, PPGI & PPGL. The project is mainly about study of the costing of these products and analysis of the variable costs for cost reduction by studying various cost elements involved. The objective of project is Analysis of conversion cost of production & to find the area of cost optimization that can be adopted by company.

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Analysis of Conversion Cost

About JSW GROUP
JSW Group is one of the fastest growing business conglomerates with a strong presence in the core economic sector. This Sajjan Jindal led enterprise has grown from a steel rolling mill in 1982 to a multi business conglomerate worth Rs. 14700 Crore (US $ 3.7billion). As part of the US $ 10 billion O. P. Jindal Group, JSW Group has diversified interests in Steel, Energy, Minerals and Mining, Aluminum, Infrastructure and Logistic, Cement and Information Technology. JSW Steel Limited is engaged primarily in manufacture of flat products viz. H R Coils, CR Coils, Galvanized products, auto grade / white goods grade CRCA Steel and Power. JSW Steel Limited has the largest galvanizing production capacity in the country and is the largest exporter of galvanized products with presence in over 74 countries across five continents. On its road to growth and expansion, the Group is also conscious about its responsibility towards environment and social development. Eco-efficiency is a matter of principle. Preventive measures for damage to the environment are taken into account at the planning stage of production and growth. JSW Foundation, an integral part of the Group, is the CSR wing, with a vision to create socio economic difference in the fields of Education, Health and Sports, Community Relationship/Propagation as well as Art, Culture and Heritage. Group Companies:

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Analysis of Conversion Cost

• JSW Steel Limited, • JSW Energy Limited • JSW Holdings Limited, • JSW Infrastructure and Logistics Limited, • Vijaynagar Minerals Pvt Ltd • Jindal Praxair Oxygen Co. Ltd • JSoft Solutions Limited.

ABOUT JSW STEEL LIMITED
JSW's history can be traced back to 1982, when Jindal Group acquired Piramal Steel Ltd., which operated a mini steel mill at Tarapur in Maharashtra. The Jindals, who had wide experience in the steel industry, renamed it as Jindal Iron and Steel Co Ltd. (JISCO) now known as JSW Steel Limited (Tarapur & Vasind Works)

In 1994, to achieve the vision of moving up the value chain and building a strong, resilient company, JISCO promoted Jindal Vijayanagar Steel Ltd (JVSL) now known as JSW Steel Limited (Upstream). Its plant is located at Toranagallu in the Bellary-Hospet area of Karnataka, the heart of the high-grade iron ore belt, and spread over 3,700 acres of land. It is just 340 kms from Bangalore, and well connected to Goa and Chennai ports. JSW Steel Ltd. Encompasses: •

Tarapur and Vasind Works (Downstream) Vijayanagar Works (Upstream)

India’s third largest steelmaker, JSW Steel Ltd. consists of the most modern, eco-friendly steel plants with the latest technologies for both upstream & downstream processes. JSW Steel Ltd. has received all the three certificates: • ISO:9001 for Quality Management System

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Analysis of Conversion Cost

• ISO:14001 for Environment Management System • OHSAS:18001 for Occupational Health & Safety Management System Facilities: Vijayanagar Works Vijayanagar Works is a fully integrated steel plant, located in Bellary district, 340 kms from Bangalore. It is also well connected to Goa and Chennai ports. The plant is also equipped with modern technologies to ensure international quality standards. It produces products from iron ore pellets to hot and cold rolled flat products. Vijayanagar Works was the first Greenfield project in the world to have Corex technology to produce Hot Metal. By 2008, Vijayanagar Works will achieve 7 MTPA status making it India's largest integrated steel plant at one location. By 2010, it will further expand to 10 MTPA. This makes it among the fastest growing steel plants in the world. It's eco-friendly approach has also led to the development of Vijayanagar into a modern township. Enveloped by acres of greenery and maintained by JSW, Vijayanagar is prospering by leaps and bounds. Be it education, career opportunity or women empowerment, the Company's initiative has gone a long way in making Vijayanagar the success that it is today. Vasind and Tarapur : It is here that all began. A new chapter was written in the history of Indian Steel Industry when JSW made its foray at Vasind in 1982 and setup a 20 Hi CR mill. JSW then acquired a mini steel mill, which moved on to become JSW Steel Ltd. Apart from being a leading manufacturer of cold rolled and color coated steel, Tarapur and Vasind works is today India’s biggest producer & largest exporter of galvanized steel. At Vasind Works, the Company has recently launched GALVALUME, a revolutionary product in the steel industry. Its strategic location, with access to the major ports of Mumbai, markets and raw material sources has worked to its advantage.

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Analysis of Conversion Cost

The total capacity of Vasind and Tarapur Works is 0.9 MTPA of Galvanized, GALVALUME & Color Coated Cold Rolled products. As JSW grew phenomenally, it also steered Tarapur and Vasind towards newer horizon of prosperity. Apart from providing more jobs, JSW actively participates and organizes various social and cultural activities to make lives richer. The region is now cleaner happier and even more beautiful. Better health initiative, promotion of sports & education are few of the development initiative that has gained in JSW presence. Salem Works: JSW Steel group acquired the Company and took over the Management from November 2004. Salem Works is the only integrated steel plant in Tamil Nadu and is located at Pottaneri/M. Kalipatti villages and at about 35 kms from Salem. As part of the JSW Steel group, the plant underwent a dramatic transformation and started making profits from the first year onwards. A fast paced expansion plan has been drawn for the company to quickly become the first 1 MTPA integrated steel plant in Tamil Nadu. The plant is having facilities for production of Pig Iron, Steel, Billet and Rolled Steel products in the long product category. The present capacity is being expanded to one million tones per annum. It has adopted the Sinter plant – Blast furnace – Energy Optimizing Furnace – Ladle Furnace, Vacuum Degassing Continuous Casting Machine – bar and rod mill route with iron ore as the basic input material. It also has plants for generation of power and production of oxygen. Salem Works is highly environment conscious and the process and technology is designed for reusing and recycling the process waste. We have an expanding green belt to provide a green environment. Products of Salem Works have the hallmark of quality and combined with competitive pricing, they are highly preferred in automobile and construction sectors.

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Analysis of Conversion Cost

Products: Hot Rolled products: HR Coil, HR plate and sheet, HRPO, HRSPO Applications: Automobile, Boiler and Pressure Vessels, Ship Building, Railways, Transmission Towers, Oil and Petro Chemicals, Marine Containers, Coal and Mining General and Heavy Engineering Cold Rolled Products: CR coil and Sheet Applications: Automobile, White good, Cold rolled formed section, General engineering & fabrication, Packing, Drums/ barrels, Furniture Galvanized Product: Galvanized Corrugated Sheet, GP Sheet and Coil Applications: Automobile, Boiler and Pressure Vessels, Ship Building, Railways, Transmission Towers, Oil and Petrochemicals, Marine Containers, Coal and Mining, General and Heavy Engineering. Pre-Painted Galvanized Product: PPGI coil, PPGI sheet, PPGI profile Application: Roof, Wall cladding and other building products, Household appliances, Furniture, Automotives Jindal Vishwas GC Sheets It is the roof that has to take the brunt of nature's extremities during its entire life and

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Analysis of Conversion Cost

hence utmost care must be taken in selection of the right roofing material. Wrong choice of roofing and cladding can create losses in terms of human lives and material in cases of natural disasters A good reliable roof with least number of complications gives peace of mind to meet these challenging needs of the customers, JSW offers superior quality Galvanized Corrugated sheets under the brand name "Jindal Vishwas".

New Initiatives:
JSW Shoppe In an endeavor to expand retail base and ensure the easy available of quality and branded steel in all its market, JSW Steel plans to setup 200 exclusive JSW Shoppes across the length and breadth of the country by 2010. It has launched JSW Shoppe at Hubli and Jaipur. Mr. Sajjan Jindal, vice chairman and managing director, JSW steel has inaugurated two exclusive JSW Shoppe in Hubli, Karnataka on December 4, 2007 and target is to open several more Shoppe in India. The concept originated from the fact that the company wants the end consumer to get the right quality of product at competitive prices at the right place. It will help in building trust with the end user and provide them steel at their door-step. All technical specification and details on manufacturing ranges are available in JSW Shoppe. Information of all types of JSW steel product, ranging from HR coils to Color Coated Steel and Long Products would help in enhancing the awareness on wide usage of steel among cross section of society & industries. At JSW Shoppe, end consumer will also know about different application of different steel products being manufactured by M/s JSW Steel through actual components and pictures from Automobile, White Goods Sectors, and Construction. STEELeMARTS :

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Analysis of Conversion Cost

STEELeMART, a B2B steel-trading portal is a venture of Sapphire Technologies Ltd. It is promoted by the ‘JSW Group’ - one of the leading and fastest growing integrated steel enterprises in India having interests in long & flat steel products. STEELeMART’s intrinsic strength is derived from its trading modules, which have been designed keeping in mind the specific buyers needs. Amongst these trading modules the versatile auction module is immensely popular. It has established for itself a reputation of being the most transparent, cost- effective and interactive online steel trading portal and this is what sets STEELeMART apart from its contemporaries. Everyday hundreds of steel users and traders across the country, trade on STEELeMART to get the best deals on steel products. STEELeMART cares for its customers and believes in continually evolving to provide better services, which will enhance the experience of its customers while trading through STEELeMART. JSW, Tarapur With an employee strength of more than 600 regular employees, Tarapur based unit of JSW is crucial part of JSW steel empire. The Tarapur unit, has an annual sales turnover of more than Rs. 4200 crore and is one of the Quality-conscious units of this conglomerate.

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Analysis of Conversion Cost

Hot Rolled Steel, the primary input material for the JSW, Tarapur unit comes to the plant from Bellary based unit of JSW. The first process to which the hot rolled iron is subjected to is termed as “Slitting”. In this, the hot rolls are cut from both sides or from a single side into sheets of desired width as per the customer orders. This step removes the damaged edges of the rolls, thus improving the quality of the end product . Cold Rolling, Galvanizing, Color Coating Hot Rolled Steel Slitting Pickling After slitting, the next step is “Pickling” of rolls. During transit and previous processing underwent, surface of the rolls acquire some impurities and also gets oxidized, so they are treated with chemicals (HCl acid) to remove these impurities. Later these sheets are rinsed, dried and oiled to avoid further surface impurities. Next process in line is “Cold Rolling” of sheets. After initial uncoiling and welding, the sheet is subjected to a pair of rotating rolls to reduce thickness of pickled sheets, and achieve desired mechanical and metallurgical properties for the sheets. A sensitive balance has to be obtained in terms of the sheet thickness, width and length and involves a high precision work. The “Galvanizing process” takes place next and begins with the uncoiling and welding of the coils to produce a continuous steel strip. This strip is then cleaned and degreased in a continuous cleaning section. The strip next enters the heat treatment furnace. It has an atmosphere of nitrogen and hydrogen to prevent oxidation of the steel surface. Here the steel is subjected to a controlled heating and cooling cycle to alter its physical properties. The zinc coating operation is performed by passing the steel strip directly from the exit of the annealing furnace into a molten zinc bath of Analysis of Conversion Cost

temperature of around 4600 C. Excess zinc on the surface is wiped off by air "knives" after the strip leaves the bath. The zinc composition in the bath is carefully controlled to ensure that the optimum coating characteristics are achieved. Zinc provides a tough, metallurgical bonded coating that completely protects the steel surface from corrosive action of the environment. The galvanized steel then passes through a set of rollers in the skinpass / leveller unit. Here any distortions that the strip has acquired in the annealing furnace are smoothed out.From the leveller, the strip passes through a chromate spray which reacts with the fresh zinc to produce a passive film of zinc and iron oxides. Galvanized sheets are the major finished goods produced at this plant. “Color Coating” is the next activity in the processing cycle of the sheets and provides a variety of color coated sheets. This is totally market driven initiative and is earning rich dividends for the organization. A major application of these sheets is in consumer goods industries. The coil is subjected to unwinding, pre-treatment and coating process before being recoiled. This process here employs high grade green technologies and makes little waste, usually burning solvents to provide energy for curing the paint. Various types of paints can be used on the surface for different applications and properties i.e. polyester, epoxy, pvdf, plastisol etc. The organic coating can be done on the cold rolled steel coils, galvanized coils, galvalume and various grades of aluminium. Galvalume, a zinc-aluminum alloy coated steel sheet, is an upgraded product from JSW’s hot dip metal coating galvanizing line is the latest offering. JSW Steel Ltd is the first Indian Company, under a technology licensing from BIEC International Inc., USA to produce Galvalume sheets - the fastest-growing sheet steel product renowned for its excellent corrosion resistance and heat reflectivity. Galvalume sheet's superior performance has been proven in the field. Over three decades of actual buildings in North America, Europe, Australia and Asia testify to the product’s unrivaled corrosion resistance and long service life. Galvalume sheet’s has 2-6 times longer service life compared to G-90 (275 gsm) galvanized sheet. A patented alloy of barrier-resistant aluminum and corrosion-fighting zinc gives Galvalume sheet its superior corrosion resistance. Galvalume coating features an alloy that is 55% aluminum, 43.5% zinc and

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Analysis of Conversion Cost

1.5% silicon. The Galvalume production has started at Vasind unit and is at advanced stages of production at Tarapur.

Importance of Cost Optimisation Strategies:
In today’s competitive world Corporate and businesses are struggling to maintain profits and healthy bottom lines .Cost of production, fuel, raw material and human resources is rising each year. These developments have prompted people to look for Cost Optimisation Ideas & methods. Those who have opted for focused cost reduction strategies have survived those who could not managed have perished .In recent economic down turn it becomes more important to make Cost Optimisation program a major initiative in industry. Companies are finding it difficult to retain people and are lying off people, which is unprecedented in recent history of industrial recession. Companies have to develop its own cost reduction program for savings without cutting jobs. Cost Optimisation in Steel Company can be achieved through reduction, elimination, modification, substitution or innovation .All cost drivers are taken into account and with thorough analysis the best and least cost path is adopted for each activity. The best methods to achieve results are to benchmark operating parameters to world-class companies. The major Cost parameters for Steel industry: 1. Raw materials cost. 2. Power (kw h/unit) 3. Fuel (kw/unit) 4. Stores and Spares (Rs/unit). 5. Waste & defectives ( Process Loss) 6. Mfg. Overheads

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Analysis of Conversion Cost

7. Packaging 8. Labour 9. Salary 10. Admin. Overhead It gives us rapid turnover & thus decrease the amount of money tied in materials. The major problem with just-in-time operation is that it leaves the supplier & downstream consumers open to supply shocks & large supply or demand changes. Following are the list of raw materials used in Galvanizing & Color-coating Line of JSW: --a) HR/ CR COILS : It contributes about 64% of the total conversion cost. So the company must try to find out different alternatives through which they can reduce the cost of their raw materials. Some of the available Suppliers for HR & CR coils: 1. Bao Steel-China 2. POSCO-Japan 3. Arcelor Mittal-MNC 4. CORNS-MNC

Big Indian Players in Steel Industry: 1. Tata Steel 2. SAIL 3. JSW Steel Ltd. 4. ISPAT 5. Essar Steel

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Analysis of Conversion Cost

Secondary Steel Players in the Market: 1. Bhushan-GP/GL 2. ISPAT-GP/GL 3. National Steel 4. JSW Steel Ltd. 5. Uttam Steel.

Present Supplier: In Tarapur plant of JSW, the HR/CR coils are brought down from Bellary plant of JSW. Company processes the HR coils which are bought from Bellary plant of Jindal, by passing it through various stages and converting it into CR coils which are used in further stages of production. If the company plans to buy the HR coils from outside rather than its own company then it would NOT get HR coils at lower price than its own company. Also the company buys the HR coils at the market value from Bellary plant, as it cannot negotiate with them. An outside company will always want some surplus, additional profit if it is selling its product to other company. But while dealing with outside companies, it can negotiate well to bring down the prices with its good negotiating skills. Cold Rolling department is completely dependent on the raw materials in the form of HR coils as supplied by Slitting and pickling lines. As the stock level of HR coils is maintained at a very low level, this plant has to be closed often, whenever HR coils are not available. So, company must plan to built some inventory for maintaining sufficient stock of HR coils so that there is no stoppage in other lines due to raw material shortage. Buying coils from your own sub-branches is beneficial as they are aware of the quality of products required at their own organization. The sources of raw materials are

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Analysis of Conversion Cost

limited. All the companies in the business of steel making have to depend on the existing available sources of raw material required for steel making. Though India has good reserves of iron ore but at the same time lack of matching and adequate reserves of coking coal and non-availability of good quality lime-stone for steel making have also to be considered while project planning unless the suitable technology bypass these primary requirements. The input costs for making of HR coils in Bellary plant is approx. Rs. 19000. Out of which 85% is raw material cost i.e. Iron ore & the remaining 15% is conversion cost. In this 85%, there is 70:30 ratio of iron ore & coke. So company must try to reduce the input costs by acquiring new mines having good ironore percentage or getting into long term contract with major suppliers of iron ores in domestic as well as international market. Company must also try to develop good negotiation skills so that they can settle at lower costs with suppliers. But acquiring iron-ore from own mines is very more beneficial. The policies of Governments, both Central and State, should be transparent so that renewal or re-allotments of existing mining leases of primary raw materials like iron ore and coal can be made without any problem. The grants of some of the new mining leases are essential for making investment and expansion of some of the mines for new projects or capacity enhancements (example, Posco). Alternative ways like plans to enter into strategic investments/ tie-ups for coking coal blocks in India and abroad to ensure assured supply of coking coal is a major hurdle to cross. b) ZINC & ALLOYS : Zinc & alloys constitutes about 10 % of the total cost of conversion in Galvalume & Galvanising plant. It has been estimated that corrosion costs about 4% of the GDP of an industrial country’s economy. In Galvanizing industry the 45% of the conversion cost involves the zinc consumption. The technique used in Tarapur plant of JSW is hotdipped galvanizing. The main zinc supplier for Tarapur branch is ‘Hindustan Zinc’. The coating products of zinc & its alloys are as follows:-

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Analysis of Conversion Cost

1. Galvanized: A zinc coating, usually hot-dipped, in which the zinc and steel form a metallurgical bond. The thickness of a hot-dipped coating can be vary from thin zinc/iron layer to heavy applications. 2. Galvanneal: A zinc-iron coating produced by post-heating a hot-dipped coating. It is used when paint is to be applied to the coated sheet.

3. Galvalume: Here Zn-Al alloy is used in which contribution of Aluminum is about 55% with superior corrosion resistance. So, the thickness of the zinc coating plays very important role in deciding the costs. More the thickness more will be the cost of galvanizing. So, constant efforts must be taken by company to develop new mechanism to reduce the zinc consumption. Increasing the temperature of molten zinc can reduce the thickness of the zinc coating. Also research was done to analyse the cost of other metals that can be used for galvanizing. But it was found that cost of existing metals & alloys that provide good corrosion resistance is very high when compared with zinc except some alloys like terne made from tin & lead & NASSAC. c) PAINT: Paint constitutes about 50% of the total conversion cost in Colour Coating plant. Paint is applied over Galvanized product as per the customer requirements. In JSW, Primer, Top coat & Back coat are three important elements in Colour-coating line. Here, the colour-coating line applies about 5µ of primer coating on both the side of GI/GL coils. Top coat is applied as per the customer requirements. Viscosity of paint is

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Analysis of Conversion Cost

one of the factor which affects the coverage area of paint. More viscous the paint more is the volume solid percentage. Volume solid is the material that is actually applied over coils & rest part is evaporated. Previously, company use to prefer Epoxy backcoat which consists of 35% volume solid. Its main characteristic was that it offer good pufadhesion & its cost was also low. But for a good back coat its volume solid % must be high enough, so company thought of using Polyester or PU back coat. But polyester’s pufadhesion was low and PU’s cost was high. So, a company named Akzo nobel developed an intermediate product which contains combination of above 3 back Coats having good volume solid percentage, good pufadhesion & reduced cost. Company at present keeps only 10-15 days inventory of paints. It has tied-up contract for 50 shades with suppliers so as to meet its demand. Time procurement plays very important role in deciding cost & continuity in process can be maintained only if there is proper supply of raw materials from suppliers. They also sometimes make use of tinters which are mixed with excess stock & old stock in inventory to make new shades. Hence, stock which would have contributed to waste is actually converted into useful product and thus this recycled product can be used for colour-coating on coils. In this way, these processes help in reducing the cost. Recommendations: Company can go for setting up their own ‘Mixing Stations’ beside their Color-coating section, so that they can meet their paint requirements easily without any delay. In mixing station they can prepare their own colours so that they can reduce their procurement time & cost as well as save their transportation cost. But after feasibility study we found that setting up our own big mixing station won’t be beneficial as we are not into paint business. The company will have to incur additional cost for procurement of raw materials for making of paints. But our main business is Steel so we cannot indulge our manpower & other resources in paint business. Also the Analysis of Conversion Cost

capital coat required prevents from setting up of a big mixing station. And moreover we won’t be getting much profit out of it as we will be not be able to compete in market with already established big brands. But we can set up a small mixing station, so that we can make use of the old stock or excess stock by mixing them with tinters to form new shades. This new shades formed from old stock can be applied on GI coils. Thus, it can help a lot to reduce the inventory. Reduced inventory means reduced inventory carrying costs carrying cost on account of interest, storage and handling charges, insurance, record keeping, inspection and risk of deterioration in quality. In November 2008 Company converted most of the part of their old stock of paints to form new shades by mixing with tinters. The thickness of the colour coat has to be reduced. The thickness of the top coat must be minimum but satisfying the customer specification. Even if we are able to reduce the coating by 1µ then we could save lakhs of rupees. In Colour coating business, product rejections are mainly due to change in colour shades. These colour changes occur due to variation in temperature of primer & top coat. The cooking process of primer & top coat must be carefully controlled by maintaining proper temperature in furnaces. The thickness & colour of primer also plays very important role in defining the shade of top coat on GI coils. The quantity & price of the paint vary with their quality.

2. FUEL:
Fuel contributes about 1% of the total conversion cost. Basic manufacturing industry consumes fuel in large quantum. Fuels also make large part of cost of production hence any cost reduction strategies would have significant impact. Following factors helps in fuel consumption:1. Air fuel ratios

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Analysis of Conversion Cost

2. Flue gas recycling 3. Nozzles sizes 4. Proper maintenance of burners. NET VALUE OF FUEL = CALORIFIC VALUE X COST Present fuel: Fuel used in plant is LPG for producing heat in furnace & many other applications. Available substitutes: Cheaper substitutes available for LPG according to me is Natural Gas, another substitute can be Corex gas. Natural gas is much cheaper than LPG. But the calorific value of the fuels play important role in deciding the cost of the fuel. At ambient temperatures it remains in gaseous form; however, it can be compressed (CNG) under high pressure to make it convenient for use in other applications or liquefied (LNG) under extremely cold temperatures (-260°F) to facilitate efficient transportation of the gas. But consumption of CNG will be 3 times more than the consumption of LPG for the same heating required. Liquefied natural gas (LNG) takes up only 1/600th of the space that natural gas would in its gaseous state and thus can be stored and transported more efficiently. Essar steels and Bhushan Steel co are presently using LNG. Corex gas is used in Bellary plant of Jindal but it is one of the by-products over there so easily available to them & hence it is cheaper substitute for them. So availability cost of fuel and its calorific value must be considered before selection of fuel. Fuel consumption also depends upon the type of the burners used. Weishaupt burners & Benetone burners can be used. Burner’s efficiency results in low fuel consumption.

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Analysis of Conversion Cost

Other important factor of combustion is air -fuel ratio. All manufacturers of burner provides exact ration of air fuel. This ratio must be maintained within plant also. Regular maintenance of burners also helps in fuel consumption. In CCL plant of JSW, there are 2 lines running in parallel namely CCL 1 & CCL 2. In CCL 1, the fuel consumption rate is about 26-28 kg/MT & in CCL-2 the fuel consumption rate is about 14-16 kg/MT. This difference is due to installation of RTO system in CCL-2 which has reduced the fuel consumption rate. So, same system must be installed in CCL-1 so as to increase its efficiency.

3. POWER:
Power contributes around 2% of the total production cost. All manufacturing industry consumes power or other energy sources for its production activities. Major source of power consumption are production equipment like furnaces, ovens, prime movers, air compressors, HVAC, cooling towers, lightning etc. It is recommended to conduct an internal audit of energy consumption of all equipment in the factory. It is found that either equipment are overrated or are running idle for sometime. Equipment selection & introducing control features can reduce energy cost. JSW Tarapur branch have already started with their 30 MW power plant to meet its electricity requirements and also gain profit from surplus production by selling it to MSEB. Here they have set-up of thermal power plant. Previously, company use to buy power from MSEB for its production and other purposes. In 1983, they started with just one plant but now they are having about 7-8 lines running parallel. So their power requirements are increasing day-by-day due their various expansion plans. So they have set-up their own Captive Power plant. In a Captive power plant, company uses 50% of the power generated for its own use & the rest 50% is sold to MSEB. The company has to pay double the amount paid by domestic holdings. So, the company will be benefiting a lot with its own Captive power Analysis of Conversion Cost

plant. Also it will be gaining profit through selling of the power generated to MSEB at higher rates. Company previously converted many of its power-driven devices to fuel-driven because of high cost of power. But now since it has its own power plant it can have more of power-driven devices if its fuel prices are more than power prices.Various other modifications can be done in production line for reducing power consumption.

4. STORES & SPARES:
Stores and Spares contribute about 2 % in total cost of production. Stores include the raw materials that will be required in future. It is not always good to keep lot of stock with you. For proper store management, forecast of the production must be accurate. Higher amount of materials in stores, then higher will be our carrying cost. Spares include maintenance of machinery. Proper care of the machinery must be taken in order to prevent any sudden breakdown, which may abruptly affect the production line. Alertness among the employees will help to reduce the cost of Stores and Spares. In Tarapur JSW branch, ABC method of Stores control is followed. The classification of the items into the categories A, B and C is made on the basis of such factors as their value of consumption, investment value, or sales or profit potential. Thus, here with minimum of effort, control is exercised over the items of comparatively high importance. Proper forecast of the stores must be done based on production. Thus, forecast must be accurate of the production. Stores & spares department here follows Zero movement Inventory process at the end of each month. Through this study they try to find out those items in inventory that have not been moved i.e. there is no issue or dispatch of that item. They prepare the

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Analysis of Conversion Cost

frequency reports through which they classify non-usable inventory into non-moving inventory, obsolete inventory etc. Based on their results they try to find out reasons for non-usability of an inventory item and how to deal with it. The primary reason for nonusability is modification in technologies. But there are many other reasons also. Study of critical items is done and buffer stock is maintained for critical items. Here they have their inventory period of 30 days. Some of the raw materials such as Zinc & HR/CR coils follow just-in-time approach. They have mainly 3-4 days inventory, while for paints a proper lead-time is planned. According to me, Cost reduction strategy that can be followed in Stores & spares is – Standardization of equipments, reduction of lead-time in inventory & procurement time must be realistic. Standardization of equipments would help to reduce the spares for machinery. Periodic verification of the stores must be done. Mostly this is done once a year. Periodic stocktaking usually necessitates the shut down of the factory, and it should therefore be completed as soon as possible. indentation plan. Wastage should be reviewed in detail. Excess inventory holding leads to excessive carrying cost on account of interest, storage and handling charges, insurance, record keeping, inspection and risk of deterioration in quality and thus adversely affects the profitability of the organization. Non processible material if any is taken either for Rework or Auction considering current order status and Aging/physical condition respectively. Therefore, company plans

5. PROCESS LOSS:
Process Loss constitutes about 3% in CCL plant. There are various reasons for Process loss. Process loss may be due to breakdowns, line stoppages, repetitive works on production line which consume time & money, human error, inefficient working of some machinery parts, some defects or delays in raw materials, etc……. Process loss can be minimized by reducing the arising’s percentage and increasing the yield. Also steps must be taken to reduce the breakdowns. Mainly process losses are due Analysis of Conversion Cost

to breakdowns due to raw materials defects, raw material delay or shortage, Operational or mechanical or electrical reasons. Corrective & preventive actions must be taken. Line stoppages must be reduced by maintaining continuity within the plant. Continuity can be maintained by proper planning of orders. Shortage of raw materials & orders often affect the production. Repetitive works must be identified within the plant and corrective measures must be taken to taken to reduce redundancy of work. Rewinding of the coils is done on the same line in CCL plant. So setting up a separate rewinding line would give better results. Changing of campaigns also results in process loss as it requires cleaning of equipments involved in colour coating purpose & there is loss of thinners. Thus, there should be proper scheduling of similar campaigns in groups or batches & clubbing of same campaigns so that there is less loss due to frequent cleaning of these painting equipments. As, thickness and width of coils change, many changes have to be brought in into the systems parameters. But the machines are designed in such a way that abrupt changes in thickness and widths will not give satisfactory results. Hence, it has to be done in stages to ensure necessary quality levels. So, ideally the planning of coils must be done carefully so as to reduce the wastage in the form of dummy coils. Dummy coils are used to assimilate the systems to the new thickness and width parameters.

6. PACKAGING :
Responsibility for coil quality does not end at the mill. Quality at final point of delivery is dependent on the protection afforded by the coil packaging. Increasing demands for suitable packaging for coil stock led to a new approach to protect coils during transportation and at their final destination. Storage at destination is one aspect which determines the type of packaging. However, there are still no commonly used standards on how such packaging should look. Starting from the strapping machines, whether manual or fully automatic, a variety of packaging systems are available. Some of the packaging materials that are used here are GP sheet, OD ring GP, ID ring HR, straps, wood for providing support at base etc. Most Analysis of Conversion Cost

of the packing materials used are reuse of the packing material obtained from HR coils packing. In JSW, they follow floating budget for packaging cost. This floating budget depends on coil weight. As the coil weight decreases by 25% its packing cost budget increases by 1015%. Saving potential is shown in data & analysis section. There are two main finished goods produced at this plant, namely GI (Galvanized Steel) and PPGI (color coated steel) rolls. Following are the sales channels through which these products are sold in the market, namely: a) Trade b) OEM c) Export Packaging specification for these 3 segments is different depending upon nature of packaging required for different customers. OEM are the manufacturers of white goods whose quality constraints are very high.

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Analysis of Conversion Cost

Analysis of Conversion Cost in Colour Coating Line
COST SHEET OF JSW STEEL LTD

(A)

(B)

(C)

(D)

Particular Avg. PPGI Thick X Width X Coating Raw Material Cost Paint 5000 Sub-Total(A) Operating Cost(Variable Cost) 1.Process Loss 400 2.Stores And Spares 350 3.Fuel 574 4.Power 250 Sub Total(B) Fixed Cost 1.Other Mfg Overheads 62 2.Personal Expenses 600 3.Factory/Admin.overheads 200 Sub Total(C) Operating Cost

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Analysis of Conversion Cost

(E)

(F)

7436 Packing &Selling Cost 1.Packing 2.Clg.,Fwd 3. Commission Sub Total(F) 2000 Conversion Cost(D+E)Rs. /T 9426 (Before Interest & Depreciation)

Above format has been obtained from costing department, which is applicable as on 31.05.2009. The same format has been used for study of all the Six months under consideration of current analysis.

Data and Analysis
To understand the problem areas, and the consumption of raw materials & Contribution of each cost elements in total cost of production in CCL plant the following data of past six months has been collected from different departments. From the six months data, the deviations in cost of various factors like paint, Power, fuel, packaging, process loss which are responsible for total conversion cost of production have been represented through following data. CCL-1 Months Oct-08 Nov-08 Dec-08 Jan-09 Avg thickness
0.277 302 791 705 62

Table: 1 Production Paint Litres/Mt.
44 28 35.94
48

Paintcost (Rs./Mt.)
6483 4954 5701 7137

Paint Consumption in lts.
13160 12861 26088 2985

0.38 0.29 0.209

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Analysis of Conversion Cost

Feb-09 Mar-09

0.37 0.332

1637 5088

25.75 29.44

4414 4506

44276 150315

Following graph illustrates the variation in Avg. thickness & Production month-wise: Fig - 1
6000 5000 4000 3000

Avg. thickness Production in MT

T M / n i t c u d o r P

2000 1000 0 0.277 0.38 0.29 0.209 0.37 0.332

MonthwiseAvg thick . ness(m ) m

EXAMPLE: Thickness of coils 0.25 mm o.50 mm 0.75 mm 10 11.08 5.54s 3.69 DFT (Microns) 18 19.94 9.97 6.65 25 27.69 13.85 9.23

1. Low production is observed in some months, mainly in January-2009 2. There is very high fluctuation in paint cost 3. From the trend analysis it is also observed that the back coat consumption rate is not varying in the same manner as top coat & Primer in some cases. Reasons: 1. As the thickness decreases, the revolution of coils increases and so the paint consumption increases. Increase in paint consumption may also be due to low volume solid percentage in paints.

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Analysis of Conversion Cost

2. Low production was observed in some months in CCL-1, due to the shortage of raw materials and also the customers were not placing the orders, because of recession. So, these reasons gave rise to shut down the line in the plant. 3. Due to the recession, the company could negotiate well with their suppliers for the low cost of paints, so the paint cost has gradually decreased from Nov-08 to Dec-08. 4. Back coat consumption is not varying proportionally with top coat & primer. It may be due to variation in thickness of back coat on coils. The coating thickness which is measured in microns may have been decreased or there may incorrect booking of data.

1. In Jan ’09, the back coat consumption is not varying in proper proportion with other paint. Reasons: 1. Increased production resulted in lower paint consumption per metric tonne because of increase in Avg. thickness of GI/GL coils. E.g.2. Variation in back coat consumption is due to increase in production in Jan 2009 & increase in its coating thickness from 10 µ to 12 µ. Paint Calculation:
X = 1000 / (7.85*GP thick) Y= Vol. Solid* 10/DFT
X Constant 1000 Vol. Solid Density 7.85 Constant GP THICK 0.35 DFT 364

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Analysis of Conversion Cost

Y

46

10

20

23.00 Lit / Ton 15.824663

Z=X/Y Ord. Qty. Total Paint Yield(97%) - A Tray Qty - B TOTAL (A+B)

500 7912 8157

8157

DFT Gauge 10.00 11.00 12.00 13.00 14.00 15.00 16.00
0.25 0.30 0.35 0.40 11.08 9.23 7.91 6.92 12.18 10.15 8.70 7.62 13.29 11.08 9.49 8.31 14.40 12.00 10.29 9.00 15.51 12.92 11.08 9.69 16.62 13.85 11.87 10.38 17.72 14.77 12.66 11.08

From the above table it is clear that by saving one micron coating we can save approximately 0. 9 to 1 litre paint per metric tonne. Avg. cost of paint presently is Rs.166. Therefore, Cost of paint/MT that can be saved by reducing 1 µ is approximately Rs.166/MT.

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Analysis of Conversion Cost

1. The high fuel consumption rate is observed in CCL-1 in one month inspite of low production because of in continuity in production line & less utilization percentage. 2. There may be number of colour changes in CCL-1 because of many small orders placed by customers.

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Analysis of Conversion Cost

1. It is also observed that budgeted and actual power consumption is very high in CCL-1in January month. Reasons: 1. The thickness of the coil is inversely proportional to the length of the coil and the length of the coil is directly proportional to the power consumption. 2. The line speed is directly proportional to the production rate, which directly affects power consumption per metric tonne. 3. Power consumption is very high in CCL-1in one of the month, due to low production which affects the continuity in line.

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Analysis of Conversion Cost

Reasons: 1. Cost of applicator rollers is about Rs. Two lakhs. So if the production is low then the Rs./MT cost of applicator rollers increases. Also there may frequent changing of rollers due breakage, change in its shape.

PROCESS LOSS :
CCL – 1 table : 1.5 CCL - 2 table : 2.5
Month Yield Production Proces s % s Loss 96% 302 4% Oct-08

Nov-08 Dec-08 Jan-09 Feb-09 Mar-09
Month s

96% 90% 80% 94% 95% Yield % 95% 96% 96% 96% 95% 95%

791 705 62 1637 5088 Producti on

4% 10% 20% 6% 5%

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

Proces s Loss 6600 5% 6557 6435 6992 5959 6150 4% 4% 4% 5% 5%

Summary of CCL -1: -

table : 1.5.1 Analysis of Conversion Cost

EXP <0.3 EXP >0.3 EXP OEM WG OEM NWG OEM TRD <0.3 TRD >0.3 TRD TOTAL

BUD 94.00 97.07 96.89 90.02 96.99 95.96 94.00 96.50 94.64 96.32

TOTAL PROD. 1711.87 26896.18 28608.05 1731.81 10023.34 11755.14 5267.78 1810.14 7077.92 47441.10

ACT. 93.89 96.61 96.43 93.06 97.15 96.42 95.80 94.98 95.53 96.26

ACTUAL PROD. 1601.31 25977.33 27578.63 1581.00 9729.45 11310.45 5044.99 1712.29 6757.28 45646.43

Summary of CCL -2:
EXP <0.3 EXP >0.3 EXP OEM WG OEM NWG OEM TRD <0.3 TRD >0.3 TRD TOTAL BUD 94.00 91.04 91.25 92.25 90.44 90.64 90.99 86.72 87.97 90.77 TOTAL PROD. 2086.70 28213.66 30300.36 839.88 6474.08 7313.96 1420.36 3408.39 4828.75 42443.08 ACT 94.21 95.88 95.72 88.23 93.56 92.91 95.76 96.65 96.35 95.26

table : 2.5.1
ACTUAL PROD. 1952.96 27031.67 28984.63 736.81 6050.60 6787.41 1358.54 3288.91 4647.45 40419.49

Interpretation: 1. From the above data it can be seen that the process loss is more case ‘Trade’ & ‘OEM’ as compare to ‘Export’. Reasons: 1. In case of OEM, there is more process loss due to quality constraint involved with customers & in Trade, the customer requirements vary frequently for more and more reduced thickness of coil so there is more process loss in attending the same. 2. Process loss also occurs when there is no line continuity and when adjusting production line according to production.

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Analysis of Conversion Cost

Packaging :
It contributes about 20- 22% of total conversion cost in CCL plant. Export Coil – PPGI Avg. lot wt.(mt) Actual 5.28 5.79 5.62 5.82 4.80 4.54 5.31 Budgeted packing Cost (Rs./MT) 730 651 624 565 502 671 624 Actual Packing Cost(Rs./M T) 703 598 563 564 464 630 587 table : 3 Packing Qty. ( Mt ) 4832 5436 5401 5267 4638 7539 5519 table : 4

Month Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Avg.

OEM Coil – PPGI

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Analysis of Conversion Cost

Month Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Avg.

Avg. lot wt.(mt) Actual 3.50 3.64 3.65 3.34 3.40 3.28 3.47

Budgeted Packing Cost 834 807 681 718 690 782 752

Actual Packing Cost 767 693 569 701 620 727 680

Packing Qty. ( Mt ) 814 858 197 568 1,852 894 864 table : 5 Packing Qty. ( Mt ) 131 304 471 417 49 225 266

Trade Coil - PPGI Avg. lot Month wt.(mt) Actual Oct-08 2.30 Nov-08 2.22 Dec-08 3.43 Jan-09 3.04 Feb-09 3.47 Mar-09 2.44 Avg. 2.82

Budgeted Packing Cost 416 409 246 280 214 275 307

Actual Packing Cost 372 323 214 269 180 226 264

Interpretation :
1. From the Trend analysis, it can be observed that Budgeted packaging costs for OEM & Export Coils are more than Trade coils. 2. Also actual packing cost per metric tonne is always well below the budgeted cost/MT. 3. Packing cost varies with the change in Avg. Coil weight. Reasons : 1. Packing costs are high in OEM due to high quality constraints. Export coils also need very good packing due rough handling during transportation. In trade coils, metal packaging is not needed sometimes, so the packaging cost is automatically reduced.

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Analysis of Conversion Cost

2. There is saving in actual cost due reuse waste packing materials. 3. Packing cost depends highly upon the coil weight & price of packing materials.

Cost optimization in ‘straps’ used for Packaging :
1. Presently company uses steel strap having dimensions 0.64 x 31.75 mm from ITW suppliers. Another Supplier named FROMM packaging systems is ready to offer straps having dimensions 0.79 x 25.40 mm. Monthly requirement of company is 25000 kgs. of straps. So, with ITW 6.289 mtrs/Kgs strap is required. Therefore total requirement for whole month goes to 157232 mtrs/month. With FROMM packaging suppliers, 6.35 mtrs/kgs strap is required. Therefore total requirement for whole month goes to 158750 mtrs/month. So, Savings is 1517 mtrs = 239 kg/month Rate of strap is Rs. 52/Kg Therefore, total savings is Rs. 12428/ month. So, annually, total savings can be Rs. 149136.

Sources of Data
Sources of data are mainly secondary. The data is collected from internal sources of company through direct interactions with the concerned persons. Some of the data was collected through Internet. Sampling method is used for study by studying the conversion cost in CCL through past six monts data and based on this analysis have been carried out.

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Analysis of Conversion Cost

Conclusion
1. JSW does not own mines for some of its basic raw materials. 2. Inability to utilize 100% capacity. 3. Low perception among investors about the company’s management and ability to sustain growth. 4. Although the company is focusing a on R&D, the budget is only a fraction of what international competitors can afford to invest in their R&D activities. 5. The labor and conversion costs ( these include labour cost, energy cost and other manufacturing costs) per tonne of steel are among the lowest in the industry( both domestically and internationally)

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Analysis of Conversion Cost

6. JSW is India’s largest private steel maker. This allows JSW to the economies of scale in production and better bargaining power with respect to suppliers and customers. 7. JSW steel is located in a fast growing country like India where the per-capita steel consumption is still low but this means huge potential for growth. 8. JSW steel has access to top talent from the country and that too at comparatively lower prices than the competition. 9. JSW steel still does not have captive mines and once they have it, their cost structure would improve further and the external risk to the company will be mitigated to a large extent. 10. The current economic scenario where steel demand is declining around the world is another major area of concern for the organization. The company has already postponed and/or delayed some of its projects which were in the pipeline. 11. JSW Steel though is driven by technology, does not spend much on Research and development and prefer to acquire and get technology solutions from outside either through purchase or sometimes through Joint ventures and projects.

12. The average cost of production/tonne has reduced over the years and the productivity of labor has increased substantially over the years. This has primarily been due to the deployment of latest technology in their processes and this domain. in order for this trend to continue, it needs to sustain investment in

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Analysis of Conversion Cost

Recommendations
1. Controlling coating parameters such as air, temperature & viscosity using closed loop controls is important. 2. Improvements in continuous coating operations typically relate to increasing the Line speed of the process. 3. Paint jobs must be scheduled to minimize changing colour in roll & coil coating equipment. Paint with light colours first, then darker ones; the lighter coating does not need to be completely removed, but can blend into the darker coating.

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Analysis of Conversion Cost

4. Roll & coil coating equipments should be cleaned regularly to prevent coating materials from drying on the rollers & feed lines. Water should be used in cleaning steps to reduce the amount of hazardous waste generated. Initial cleaning should be performed with used solvents, saving fresh solvents for final cleaning stages. 5. In Packaging, efforts must be made to lower the budgeted cost in all the 3 segments by bringing automation in packaging line, replacing GP sheets with CR sheets for packing if possible & reducing the strap’s dimensions without affecting its strength. 6. Company must try to acquire some mines to satisfy its basic raw material requirements. 7. It must put some efforts to convert its fuel- driven devices into power- driven devices. 8. Company may plan in future to built its own mixing stations for paint. 9. Develop good relations with suppliers so as to reduce the raw material shortages & improve procurement time.

Bibliography / Referances
Websites: 1. www.steelbb.com 2. www.steelonthenet.com 3. www.shumaonline\costreductionstrategies.com 4. www.energysavings.com 5. www.google.com

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Analysis of Conversion Cost

Referance books : 1. Principles of Cost Accounting – Mr. N.K Jain 2. Financial management – Mr. I.M. Pandey.

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Analysis of Conversion Cost

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