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Project: Performance Appraisal Through Inventory Management With Reference To Dankuni Coal Complex
Project: Performance Appraisal Through Inventory Management With Reference To Dankuni Coal Complex
Report
Performance Appraisal through Inventory
Management with reference to Dankuni Coal
Complex
SUMITTED BY:
RUDRANIL BAG
Roll No. A-08-38
Graduate School of Business &
Administration
Greater Noida
National Capital Region
ACKNOWLEDGEMENT
Last but not the least, I would like to thank my internal project
guide Prof. Rashid Khan, Graduate School of Business And
Administration for his help as and when required.
RUDRANIL BAG
(Roll No.A-08-38)
CONTENTS
TOPICS
EXECUTIVE SUMMARY
OBJECTIVE OF THE STUDY
METHODOLOGY
COAL INDUSTRY IN INDIA -A RETROSPECT
COAL INDIA LTD.-A PROFILE OF THE PARENT
CONCLUSION
RECOMMENDATIONS
BIBLIOGRAPHY
EXECUTIVE SUMMARY
LPG or Liberalization, Privatization and Globalization as it is referred in short
today have changed the scenario of corporate world and management of
enterprises in our country. It has now become more important to not just
manage an organization but to achieve corporate excellence simultaneously as
the future belongs to learning and performing organizations.
As every business concern irrespective of its size, nature, and age needs an
adequate level of inventory to carry out business operations and survive,
inventory becomes an important and integral part of business. Inadequate
inventories means interruption of production and sales operation whereas
excessive inventories means accumulation of idle funds and increase in carrying
cost. Therefore, to manage inventories in any sector is a challenging job.
The project report titled “Performance appraisal through Inventory
Management with reference to Dankuni Coal Complex” deals with this
matter and is based on the in-house industrial training at Dankuni Coal
Complex, pertaining to the requirement for the Diploma of PGDM from
“Graduate School of Business And Administration.”
Unless organization learn to manage its inventory, success, will be elusive.
Thus, the effectiveness of an organization depends much on the strength of its
inventory management which is an important part of the whole system. In the
context of India’s Coal Industry inventory management holds a greater
significance because coal which is one of the major source of fuel for any
industry, in recent years has become more crucial for achieving rapid economic
growth of our country.
Keeping this background in view, an attempt is made to examine the
performance of inventory management in SECL with special reference to
Dankuni Coal Complex. The project contains the procedures for the analysis of
inventory, ratios being used to define the efficiency of inventory management
and the impact of shortcomings in the management of it. All this had been done
to get a clear view of the techniques of inventory management in Dankuni Coal
Complex.
To find out the difference between the theoretical and practical aspect of
inventory management.
To study and come out with any solution for improvement of inventory
management in Dankuni Coal Complex.
METHODOLOGY
The data which I have collected for making this project is combination of both
primary and secondary data.
PRIMARY DATA:
This data had been collected through meetings and interviews with various
managers and employees of the finance department of Dankuni Coal Complex.
At the same time I had visited various other departments for collection of data.
The departments that had been visited are as follows:-
♣ Main Cash Department
♣ Billing and Operation Department
♣ Excise Department.
♣ Sales Department
SECONDARY DATA:
Apart from the primary data certain secondary data were required for this
project. Following are the sources of secondary data:-
♣ Annual Reports
♣ Inventory Reports
♣ Cash Report
♣ Raw Materials Report
♣ Production Reports
♣ Sales Reports
♣ Financial Year Book.
The initial step of the project was studying about the company and the industry.
For the study, the inventory size of the company has been been taken into
consideration. Apart from it, three important ratios were calculated and studied
during the period of study. These are: (a) Inventory Turnover Ratio, (b)
Inventory Holding Ratio and (c) Inventory to Total Assets Ratio.
Further some statistical techniques such as Chi-Square Test and Least Square
method have also been employed in the study to assess the behavior of the ratio.
But the story of coal is not merely the story of the unrelented struggle against
odds to produce and supply coal throughout the country. It is also the story of
the heart beats of 4.25 lakhs employees and their families working and staying,
at times, in remote areas in 8 states of our country and constituting a mini India.
Their achievements, social roots, cultural moorings have become a part of ethos
of the region in which the coalfields are situated.
Historical records in India indicate that mining and the use of some metals and
their alloys, including iron took place in the ancient of civilization. Ruins of old
smith furnaces and slag heaps close to coal deposit regions in Eastern India
indicate that coal industry remained nebulous until the middle of the eighteenth
century.
In their memoir of 1774, Summer and Heatly of the East India Company
recorded the receipt of the proposal by the council of Revenue ‘for working coal
mines and selling coal in Bengal’. M/S Summer and Heatly were granted
permission to mine coal in six mines and actually started operations in one of
them. Following that, industrial coal mining operations in India continued in
low key, principally as a result of indifference and neglect. This state of affairs
persisted until 1813, when the government deputed an experienced mining
engineer to make an appraisal of the prospects of coal mining in India. By the
mid-nineteenth century, coal mining was well established and production was
about 90000 T/yr by 1850.The level of coal production in India reached 6.12
MT/yr by 1900 and the same reached 18 MT/yr by 1920. A number of
committees and commissions at that time recommended conservation and
scientific exploration of coal, improvement of working conditions in mines and
the safety of the mines. Coal production during this period was mostly by
manual means, only a few coal cutting machines being employed in some of the
mines which were electrified. By 1946, the year before India gained
independence, coal production reached 30 MT/yr.
♣ The CMAL (Coal Mines Authority Limited) was converted into a holding
company and named Coal India Limited (CIL).
MISSION OF CIL
The mission of Coal India Ltd. is to produce planned quality of coal efficiently
and economically with due attention to safety, conservation and quality.
Coking Coal, Semi Coking Coal, NLW Coking Coal, Non Coking Coal, Hard
Coal, Washed and Beneficiated Coal, Middling, Rejects, CIL-Coke/LTC Coke,
Coal Fines/Coke Fines, Tar/Heavy Oil/Light Oil/Soft Pitch, Gradation of Coal,
and Suitability of Coal.
COAL INDIA
1975
478MINES
NEC
ECL (MARGHERI
(SANCTORIA TA) 1975,
) 1975, 7MINES
112MINES
BCCL CCL
(DHANBAD) (RANCHI)
1973, 1975,
80MINES 63MINES
AREA OF SECL
The coal deposits of SECL occur in five districts i.e. Bilaspur, Korba,
Raigarh ,Surguja &Korea in Chhattisgarh and three districts Shahdol, Umaria,
Anuppur district in Madhya Pradesh. This occurs in the great Son Mahanadi
master basin.
SECL has 93 Mines. Total UG Mines are 72 and Total OC mines are 20.There
is 1 mixed mines.
TECHNOLOGY AT SECL
SECL is in it’s strive for higher production from underground mines has already
successfully introduced thick seam extraction with cable bolting, depillaring of
contiguous seams with floor pinning and Powered Support Longwall
Technology with chinese collaboration at Balrampur and Rajendra Under
ground mines, Mass production technology with continuous miners in
collaboration with UK and other developed countries, Hydro-fracturing and
long hole blasting at goaf from underground for hard roof management at
Churcha West Mines, Indigenously developed Cutter Loader to avoid blasting
in gassy mine etc.Upgradation of technology is continous process to be
competitive. Modern generation of shovel and dumpers having capacity 10 m
cube and 120 tonne dumper are being used on Open Cast mines. With use of
such HEMM SECL has the distinction of operating biggest opencast mine in the
country. SECL has planned to use shovel up to 40 m cube and Dumper up to
240 T capacity in Gevra Coal field.
Dankuni Coal Complex Plant has been leased out by Coal India Ltd. to SECL
Coke- Manufactured from low ash, low phosphorous, low sulphur coal source.
Available in (+) 35 (-) 70 mm, (+) 6 (-) 35 mm and 0-6 mm size range.
Coal Fines: Size of 0-25 mm, Ash- 18-22%, Calorific Value- 5400 to 5800
K.Cal/Kg
(iii) Due to long flame character, suitable for Boiler and furnace, Brick
and lime kilns.
Usage: Effective substitute of Furnace Oil, Preparation for Boat Paint, Tar-felt
etc. Can be distilled to yield wide spectrum value added chemicals such as
phenol, Ortho-Cresol, Meta-para-Cresol, Xylenol, HBTA.
INVENTORY MANAGEMENT-AN OVERVIEW
INTRODUCTION
Inventories are maintained basically for the operational smoothness, which they
can affect by uncoupling successive stages of production, whereas the monetary
value of inventory serves as a guide to indicate the size of the investment made
to achieve this operational convenience. The materials management department
is expected to provide this operational convenience with a minimum possible
investment in inventories. The objectives of inventory, operational and
financial, needless to say, are conflicting. The materials department is accused
of both stock-outs as well as large investment in inventories. The solution lies in
exercising a selective inventory control and application of inventory control
techniques.
INVENTORY TERMINOLOGY
Promotional stock is the additional stock kept ready for the increase in demand
due to market promotions of products.
DEFINATIONS
In order to understand the concept of inventory terms are used for managing
inventory at a logistical facility, let us first view the definitions:
Cycle inventory or base stock refers to the inventory quantity held in stock due
to the replenishment time required in the ordering process.
Safety stock or buffer stock inventory is the inventory held due the differences
in demand and supply rate of material at each stage in-between supplier,
purchase, manufacture, distribution, and customer to avoid stock outs at each
stage.
Average inventory is the calculated average of the inventory quantity held at a
logistical facility over a period of time.
Reorder point is the pre-decided inventory level, which is reached by a falling
inventory level during utilization of inventory, at which point an order is placed
for replenishing the inventory in order to avoid a stock out.
FUNCTIONS OF INVENTORY
Specialization:
A firm can either produce all the required variety products at a plant at one
location, or, produce different products at separate plant locations. Locating
separately will enable the firm to select the location of each different product
manufacturing plant based on the particular requirements of that product, thus
achieving specialization efficiencies like geographical facilities and economies
of scale. This specialization approach creates inventory at diverse locations.
Also, pipeline inventories are created due to transport linkages required between
different manufacturing plants and with distribution warehouses.
Overcoming uncertainty:
Safety stock of inventory is required to overcome uncertainty of customer
demand on the one hand; and, purchasing, receiving, manufacturing, and order
processing delays on the other. Either of these may result in shortages of
products at the time of customer requirements if adequate safety stock of
material is not provided for. If such material stock outs are not frequent
occurrences, the customer may look elsewhere leading to a last order at the very
least, or a lost customer. This uncertainty results in buffer stocks being created
between (a) supplier and purchasing, (b) purchasing and production, (c)
production and marketing, (d) marketing and distribution, (e) distribution and
intermediary, (f) intermediary and customer, in order to avoid stock outs.
CLASSIFICATION OF INVENTORIES
Production inventories:
They represent raw materials, parts and components that are used in the process
of production. Production inventories include
♣ Special items manufactured in the factory itself (also called works made
parts or piece parts.
MRO inventories:
They refer to the maintenance; repairs and operation supplies, which are
consumed during process of, manufacture but do not become a part of the
product.
In-process inventories:
They represent items in the semi-finished condition (i.e. items in the partially
completed stage)
Goods-In-Transit:
They represent such materials, which have been paid for but have not yet been
received by the stores.
INVENTORY COST
In operating an inventory system manager should consider only those costs that
vary directly with the operating doctrine in deciding when and how much to
recorder; cost independent of the operating doctrine are irrelevant. Basically,
there are five types of relevant costs.
♣ Cost associated with being out of stock when units are demanded but are
unavailable (stock outs).
♣ Cost associated with data gathering and control procedures for the
inventory system.
Often these five costs are combined in one way or another, but let’s discuss
them separately before we consider combinations.
Cost of Item:
The cost, or value, of the item is usually its purchase price: the amount paid to
the supplier for the item. In some instances, however, transportation, receiving,
or inspection costs, for example, may be included as part of the cost of the item.
If the cost of the item per unit is constant for all quantities ordered, the total cost
of items purchased during the planning horizon is irrelevant to the operating
doctrine. If the unit cost varies with the quantity ordered, a price reduction
called a quantity discount, this cost is relevant.
If the facility manufactures the item, the cost of the item is its direct
manufacturing cost. Again, constant unit cost mean total costs are irrelevant.
Procurement Costs:
Procurement costs are the placing a purchase order or the setup costs if the item
is manufactured at the facility. These costs vary directly with each purchase
order placed. Procurement costs include costs of postage, telephone calls to the
vendor, labor costs in purchasing and accounting, receiving costs, computer
time for record keeping, and purchase order supplies.
Carrying Costs:
Carrying or holding casts are the costs of maintaining the inventory warehouse
and protecting the inventoried items. Typical costs are insurance, security,
warehouse rental, heat, lights taxes, and losses due to pilferage spoilage, or
breakage. The cost of typing up capital inventory is also considered a carrying
cost.
Stock-out Cost:
Stock out cost, associated with demand when stocks have been, takes the form
of lost sales or backorder costs. When sales are lost because of stock-outs, the
firm loses both the profit margin on unmade sale and its customer’s good will.
If customers take their business elsewhere, future profit margins may also be
lost. When customers agree to come back after inventories have been
replenished, they make backorders. Backorder costs include loss of good will
and money paid to reorder goods and notify customers when goods arrive. As
the next example shows, stock-outs can and do occur in the service industries.
Cost tradeoffs:
Our objective in the inventory control is to find the minimum cost operating
doctrine over some planning horizon; these costs can be expressed in a general
cost equation.
The order quantity depends upon the cost of the inventory items, the rate and
nature of demand (whether constant or fluctuating), the replenishment time, and
the inventory carrying costs and ordering costs for the inventory items.
The EOQ can be calculated with the help of a mathematical formula. Following
assumptions are implied in the calculation:
Constant unit price- the EOQ model assumes that the purchase price per unit of
material will remain unaltered irrespective of the order offered by the suppliers
to include variable costs resulting from quantity discounts, the total costs in the
EOQ model could be redefined.
Constant carrying costs- unit carrying costs may very substantially as the size
of the inventory rises, perhaps decreasing because of economies of scale or
storage efficiency or increasing as storage space runs out and new warehouses
have to be rented.
These assumptions have been pointed out to illustrate the limitations of the
basic EOQ model and the ways in which it can be easily modified to
compensate for them.
Just In Time:
ABC Analysis:
ABC analysis underlines a very important principle “Vital few: trivial many”.
Statistics reveal that just a handful of items account for bulk of the annual
expenditure on materials. These few items, called ‘A’ items, therefore, hold the
key to business. The other items, known as ‘B’ and ‘C’ items, are numerous in
number but their contribution is less significant. ABC analysis thus tends to
segregate all items into three categories: A, B, and C on the basis of their annual
usage. The categorization so made enables one to pay the right amount of
attention as merited by the items.
A-items: it is usually found the hardly 5-10% of the total items account for 70-
75% of the total money spent on the materials. These items require detailed and
rigid control and need to be stocked in smaller quantities. These items should be
procured frequently, the quantity per occasion being small.
B-items: these items are generally 10-15% of the total items and represent 10-
15% of the total expenditure on the materials. These are intermediate items. The
control on these items need not be as detailed and as rigid as applied to C items.
C-items: these items are generally 70-80% of the total items and represent 5-
10% of the total expenditure on the materials. The procurement policy of these
items is exactly the reverse of A items. C items should be procured infrequently
and in sufficient quantities. This enables the buyers to avail price discounts and
reduce work load of the concerned departments.
Any sound stock control system should ensure that the each item gets the right
amount of attention at the right time. ABC analysis makes this possible with
considerably less effort due to its selective approach there are number of ways
in which ABC classification can be made use of:
Degree of Control:
Some one at the senior level should be made responsible for regular reviewing
of these items. Up-to-date and accurate records should be maintain for these
items. “B” items should be brought under normal control made possible by
goods record keeping and periodic attention. Little control is required for “C”
items.
Ordering Procedure:
Stock records:
Details records of goods ordered, received, issued and goods on hand should be
maintained for “A” category of items. No such detailed records are necessary
for “C” items. Any routine method that ensures goods and accurate records is
enough for “B” category of items.
Priority treatment:
Safety Stock:
All items of consumption are equally important from production point of view.
Safety stock should be less for “A” items. The possibility of stockouts can
considerably be cut down by closer forecasting, frequent reviewing and more
progressing. “C” items, on the contrary, should have sufficient safety stock to
eliminate progressing and to reduce the probability of stockouts. A moderate
policy is required for “B” items, safety stock being neither too high nor too low.
Value Analysis:
HML Analysis:
H-M-L analysis is similar to ABC analysis except for the difference that instead
of “usage value”, “price” criterion is used. The items under this analysis are
classified into three groups that are called “high”, “medium” and “low”. To
classify, the items are listed in the descending order of their unit price. The
management for deciding three categories then fixes the cut-off-lines. For
example, the management may decide that all items of unit price above Rs.
1000/-will of ‘H’ category, those with unit price between Rs. 100/- to Rs.1000/-
will be of ‘M’ category and those having unit price below Rs. 100/- will be of
‘L’ category.
VED Analysis:
‘V’ stands for vital, ‘E’ for essential, ‘D’ for desirable. This classification is
usually applied for spare parts to be stocked for maintenance of machines and
equipments based on the criticality of the spare parts. The stocking policy is
based on the criticality of the items. The vital spare parts are known as capital or
insurance spares. The inventory policy is to keep at least one number of the vital
spare irrespective of the long lead-time required for procurement. Essential
spare parts are those whose non-availability may not adversely affect
production. Such spare parts may be available from many sources within the
country and the procurement lead time many not be long. Hence, a low
inventory of essential spare parts is held. The desirable spare parts are those,
which, if not available, can be manufactured by the maintenance department or
may be procured from local suppliers and hence no stock is held usually.
S-D-E Analysis:
♣ Non-availability
♣ Scarcity
S-D-E analysis classifies the items into three groups called “scarce”, “difficult”
and “easy”. The information so developed is then used to decide purchasing
strategies.
“Easy” classification covers those items, which are readily available. Items
produced to commercial standards, items where supply exceeds demand and
others, which are locally available, fall into this group.
S-OS Analysis:
S-OS analysis is based on seasonality of the items and it classifies the items into
two groups S (seasonal) and OS (off seasonal). The analysis identifies items
which are:
Seasonal and are available only for a limited period. For example agriculture
produce like raw mangoes, raw materials for cigarette and paper industries, etc.
are available for a limited time and therefore such items procured to last the full
year.
Seasonal but are available throughout the year. Their prices, however, are lower
during the harvest time. The quantity of such items requires to be fixed after
comparing the cost savings due to lower prices if purchased during season
against higher cost of carrying inventories if purchased throughout the year.
M-N-G Analysis:
M-N-G analysis based on stock turn over rate and it classifies the items into M
(moving items), N (non-moving items) and G (ghost items).
M (moving items) is those items, which are consumed from time to time. N
(non-moving items) are those items, which are not consumed in the last one
year. G (ghost items) is those items that had nil balance, both in the beginning
and at the end of the last financial year and there were no transactions (receipt
or issues) during the year.
Analysis mainly helps to identify non-existing items for which the store keeps
bin-cards or waste computer memory or waste computer stationary while
preparing stores ledger. Stores department even might have even ear-marked
space for these non-existent items.
All pending/ open purchase orders (if any) of such items should be canceled.
F-S-N Analysis:
F-S-N analysis is based on the consumption figures of the items. The items
under this analysis are classified into three groups: F (fast moving), S (slow
moving) and N (non-moving).
To conduct the analysis, the last date of receipt or the last date of issue
whichever is later is taken into account and the period, usually in terms of
number of months, that has elapsed since the last movement is recorded.
Surplus items whose stocks are higher than their rate of consumption; and
X-Y-Z Analysis:
XYZ analysis helps to identify a few items, which account for large amount of
money in stock and take steps for their liquidation/retention.
XYZ when combined with FSN analysis helps to classify non-moving items
into XN, YN, and ZN group and thereby identify a handful of non-moving
items, which account for bulk of non-moving stock. These can be studied
individually in details to take decision on their disposal or retention.
Following are the figures of sales and inventory in Dankuni Coal Complex for
the last five years with effect from the financial year 2003-04 to 2007-08.
Rs in Crores
YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 AVERAGE
INFERENCE
The above table indicates that the quantum of inventories in Dankuni Coal
Complex showed an increasing trend during the first three years i.e. in FY
2003-04, FY 2004-05 and FY 2005-06. During the above three years the
inventory level increased from 20.91 crores to 33.67 crores. It indicated a
positive growth rate of 61%. But in the FY 2006-07 inventory level decreased to
31.10 crores which was about 96% of the inventory value as maintained in the
FY 2005-06. The last two years i.e. FY 2006-07 and 2007-08 indicates a
positive growth rate of 49% and 55% respectively. This analysis suggests that
the company invested more funds in inventories during the first three years of
study period.
However, the above analysis is not sufficient to evaluate the qualitative
efficiency of inventory management. This is a shortcoming of the above
analysis. In order to avoid this bottleneck the following ratios are computed and
studied during the study period.
♣ Inventory Turnover
This ratio indicates the number of times the inventory is replaced during the
financial year. It reflects the degree of liquidity of the firm and it shows how
effectively the executive in charge of maintaining the inventory level performs
the task. Generally, a high inventory turnover ratio is indicative of good
inventory management, whereas a low inventory turnover ratio signifies over
investment in inventory or excessive inventory levels warranted by production
and sales activities, or slow moving or obsolete inventory.
A high level of sluggish inventory amounts to unnecessary tie-up of funds,
impairment of profits, and increased costs. If the obsolete inventories have to be
written off, this will adversely affect the working capital position and the
liquidity of the firm. Again, a relatively high turnover should be carefully
analyzed. A too high inventory turnover may be the result of a very low level of
inventory which results in frequent stock-outs. The turnover will also be high if
the firm replenishes its inventory in too many small lot sizes. The situation of
frequent stock-outs and too many small inventory replacements are costly for
the firm. Thus, too high and too low inventory turnover ratios should be
investigated further. The computation of inventory turnovers for individual
components of inventory may help to detect the imbalanced investments in the
various inventory components.
Since the cost of goods and average inventory figures are not available in the
annual accounts, the figures of sales and inventory as on 31march of each year
has been taken for calculation of Inventory Turnover Ratio.
Inventory Turnover Ratio= Sales/Inventory
INFERENCE
According to the table given in the previous page, it is observed that there had
been a decreasing trend till the FY 2005-06 after which the Inventory Turnover
Ratio increased in each of the following year. Overall, the Inventory Turnover
Ratio increased from 2.79 times to 3.76 times with an average of 2.87 times
which can be considered as a satisfactory position.
This ratio indicates the length of time required for the conversation of
investment in inventories to cash of a firm. Lower the ratio, better the inventory
management and vice-versa. High ratio indicates that the management is taking
more time in making the funds idle and it involves more carrying cost for
holding such inventories.
Inventory Holding Ratio (in days) = 365/Inventory Turnover Ratio
INFERENCE
The analysis of the above table shows that there has been an
uneven trend in Inventory Holding Ratio. There has been an
increasing trend till 2005-06 after which it decreased
significantly in the following year 2006-07. The Inventory
Holding Ratio which had been reduced by 25% to 97days in
2007-08 is the lowest and it indicates the reduction of carrying
cost which proves the effectiveness of a good system of
inventory management. The management of the company
needs to continue with the same policy in future which it had
followed in 2007-08.
To avoid stock out associated with a high ratio as well as cost of carrying
excessive inventory associated with a low ratio, a firm should have neither too
high nor too low Inventory Turnover Ratio. So, to judge the reasonableness of
this ratio during the period under study, it is compared on the basis of trend
analysis during the study period.
For this purpose, let Y=a + bX be the equation of the straight with origin at the
year 2005-06, where X is independent variable relating to time period under (X
unit is 1 year) and Y is dependent variable in Rs. to be predicted. By the method
of least squares, the normal equations for finding the values of a and b are:
∑Y = Na + b∑X
And ∑XY = a∑X + b∑X2
2003-04 -2 82.76+14.74×-2=53.28
2004-05 -1 82.76+14.74×-1=68.02
Y= a + bX
a= 143.39/5 = 28.68
2003-04 -2 28.68+4.79×-2=19.10
2004-05 -1 28.68+4.79×-1=23.89
5
4.5
4
3.76
3.5
3
2.79 2.66 2.82
2.5 2.33
2
1.5
1
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Inference
From the above line chart drawn it is observed that the actual Inventory
Turnover Ratio is at par with the trend line of Inventory Turnover Ration in
2003-04. But the original line of actual Inventory Turnover Ratio fluctuated as
compared to the trend line in 2004-05, 2005-06 and 2006-07 probably due to
accumulation of stock. Thereafter, the original line of actual Inventory Turnover
Ratio crossed over the trend line which indicated the improvement made by the
management in Inventory Turnover Ratio in 2007-08 by proper supervision and
control.
The Inventory Holding Ratio has been computed on basis of trend Inventory
Turnover Ratio. The same formula of 365/Inventory Turnover Ratio has been
used to find out the trend Inventory Holding Ratio. The Table also shows the
Original Inventory Holding Ratio.
160 157
150
140 137
130 131 129
120
110
100
97
90
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Inference
It is observed from the above line chart that the actual time duration required for
conversion of investment in inventories into cash through sales is always on the
higher side compared to the trend line in 2004-05, 2005-06 and 2006-07. This
represents the span of time taken is more for these years which had probably
resulted in the increase of carrying cost of holding the inventory. The reduction
in holding period of inventory in 2007-08 indicates that it may have been
achieved by suitable actions taken by the management.
y = 3.25x-10.45
By applying the above equation we get the figures of expected sales as 57.50
crores for 2003-04, 71.78 crores for 2004-05, 98.98 crores for 2005-06, 90.63
crores for 2006-07 and 94.88 crores for 2007-08.
Chi-Square Test:-
Let the null hypothesis be H0 such that there is no significant relation between
sales and inventory. Then, the alternative HA implies that a significant relation
between sales and inventory exists. The value of χ2 is calculated as follows:
This ratio indicates the proportion of inventories invested out of total current
assets of the company. Since the inventory is less liquid compared to other
current assets of a company, a high ratio indicates less liquidity position of the
company and vice-versa.
INFERENCE
From the above table it can be said that this Inventory to Total Current Assets
Ratio has been decreased to 0.62 in 2007-08. It represents that 62% of the total
current assets is required for maintaining the inventory. This ratio was 0.70 in
2003-04 and so a lower ratio in 2007-08 shows a better control of the inventory
by the management of Dankuni Coal Complex.
CONCLUSION
The inventory level may also be reduced to the possible level in order to
release idle funds absorbed in inventories.
The efficiency of the company in turning the inventories into cash is fair
as reflected by its Inventory Turnover Ratio.
The Chi-Square Test also exhibits the difference between actual sales and
expected sales.
On the whole it can be said that Dankuni Coal Complex which is a unit of
South Eastern Coalfields Ltd. follows some of the best techniques of
inventory management.
RECOMMENDATIONS
Dankuni Coal Complex should concentrate on JIT (Just-in-time)
technique of manufacturing. This will help in minimizing the blockage of funds
in inventories.
The management must try to find out the causes of differences between
actual sales and expected sales as shown by Chi-Square Test.
BIBLIOGRAPHY
www.CoalIndia.nic.in
www.SECL.nic.in
www.Managementparadise.com