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Chapter 1 Inventory Management Introduct
Chapter 1 Inventory Management Introduct
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INVENTORY MANAGEMENT
INTRODUCTION:
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NEED OF THE STUDY:
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The overall inventory management includes design and inventory control
organization with proper accountability establishing procedure for inventory
handling disposal of scrap, simplification, standardization.
1. The report will not provide exact Budgetary System status and position
in HERITAGE FOODS it may vary from time to time and situation to
situation.
2. The study is limited unto the date and information provided by
HERITAGE FOODS and its annual reports
4
3. There may be approximation in calculating ratios and taking the
figures from the annual reports.
CHAPTER-2
5
REVIEW OF LITERATURE
6
taken in the manufacturing process. The greater the time taken in
manufacturing, the more will be the amount of work in progress.
7
A firm also needs to maintain inventories to reduce ordering cost and
avail quantity discounts etc.
8
3. Risk of Obsolescence: The inventories may become absolute due to
improved technology, changes in requirements, change in customer
tastes etc.
4. Risk Determination in quality: The quality of materials may also
deteriorate while the inventories are kept.
Objects of Inventory Management
Definition of Inventory Management: Inventory Management is
concerned with the determination of optimum level of investment for each
components of inventory and the operation of an effective control and review
of mechanism.
The main objectives of inventory management are operational and
financial.
The operational objective mean that the materials and spares should be
available in sufficient quantity so that work is not disrupted for want of
inventory.
The financial objective means that inventory should not remain idle
and minimum working capital should be locked in it.
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6. To minimize loses through deterioration, pilferages, wastages and
damages.
7. To ensure perpetual inventory control so that materials shown in stock
ledgers should be actually lying in the stores.
8. To ensure right quality goods at reasonable prices. Suitable quality
standards will ensure proper quality of stocks. The price analysis, the
cost analysis and value analysis will ensure payment of proper prices.
9. To facilitate furnishing of data for short term and long term
planning and control of inventory.
10
The time in processing the order and then executing it is know as lead
time.
Rate of Consumption: It is the average consumption of materials in
the factory. The rate of consumption will be decided on the basis of past
experience and production plans.
Nature of materials: The nature of material also affects the minimum
level. If a material is required only against the special orders of the customer
then minimum stock will not be required for such material.
Minimum stock level can be calculated with the help of following
formula.
Minimum stock level Re ordering level (Normal consumption x
Normal re order period)
b) Re ordering Level:
When the quantity of materials reaches at a certain figure then fresh
order is sent to get materials again. The order is sent before the materials reach
minimum stock level.
Re ordering level is fixed between minimum level maximum level.
c) Maximum Level:
It is the quantity of materials beyond which a firm should not exceeds
its stocks. If the quantity exceeds maximum level limit then it will be over
stocking.
Overstocking will mean blocking of more working capital, more space
for storing the materials, more wastage of materials and more chances of
losses from obsolescence.
Maximum stock level Reordering Level + Reorder Quantity
(Maximum Consumption x Minimum reorder period)
d) Danger Stock Level:
It is fixed below minimum stock level. The danger stock level indicates
emergency of stock position and urgency of obtaining fresh supply at any cost.
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Danger Stock level = Average rate of consumption x emergency delivery
time.
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Ordering Cost:
It is the cost of placing orders for the purchase of materials.
EOQ can be calculated with the help of the following formula
EOQ = 2CO / I
Where C = Consumption of the material in units during the year
O = Ordering Cost
I = Carrying Cost or Interest payment on the capital.
13
Inventory turnover ratios are calculated to indicate whether inventories
have been used efficiently or not.
The inventory turnover ration also known as stock velocity is normally
calculated as sales / average inventory of cost of goods sold / average
inventory.
Inventory conversion period may also be calculated to find the average
time taken for clearing the stocks. Symbolically.
Inventory Turnover Ratio = Cost of goods sold
__________________________
Average inventory at cost
(Or)
Net sales
= ________________________
(Average) Inventory
And,
Inventory conversion period = Days in a year
______________________
Inventory Turnover ratio
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The class of materials is assigned two digits and then two or three
digits are assigned to the categories of items divided into 15 groups. Two
numbers will be category of materials in that class.
The third distinction is needed for the quality of goods and decimals
are used to note this factor.
8) Valuation of inventories Method of valuation:
FIFO method
LIFO method
Base Stock method
Weighted average price method
Area of improvement:
Inventory management in India can be improved in various ways.
Improvements could be affected through.
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Improved Coordination: Better coordination among purchase, production,
marketing and finance departments will be help in achieving greater efficiency
in inventory management.
Introduction:
In financial parlance, inventory is defined as the sum of the value of
the raw materials, fuels and lubricants spare parts maintenance consumable
semi processed materials and finished goods stock at any giving point of
time. The operational definition of inventory would be amount of raw
materials, fuel and lubricants, spare parts and semi processed materials to be
stock for the smooth running of the plant / industry.
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Need of Inventory:
Inventories are maintained basically for the operational smoothness
which they can be affected by uncoupling successive stages of production,
whereas the monetary value of the inventory serves as a guide to indicate the
size of the investment made to achieve this operational convenience. The
materials management departments primary function is to provide this
operational convenience with a minimum possible investment in inventories.
Materials department is accused of both stock outs as well a large investment
in inventories. The solution lies in exercise a selective inventory control and
application of inventory control techniques. Inventories build to act as a
cushion between supply and demand. It is sufficient to take care of the
requirements of demand till the next supply arrives. It is sufficient to take care
of probable delays in supply as well as probable variations in demand.
The size of the inventory depends upon the factors such as size of
industry internal lead time for purchase, suppliers lead time, vendor relations
availability of the materials, annual consumption of the materials. Inventory
coat can be controlled by applying Modern Techniques viz., ABC analysis,
SDE, ESN, HMC, VED etc. These techniques can be used effectively with the
help of computerization.
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Basically there are four costs for consideration in developing and inventory
model.
1. The cost of placing a replenishment order.
2. The cost of carrying inventory.
3. The cost of under stocking and
4. The cost of over stocking.
The cost of ordering and inventory carrying cost are viewed as the
supply side costs and help in the determination of the quantity to be ordered
for each replenishment.
The under stocking and over stocking costs are viewed as the demand
side costs and help in the determination of the amount of variations in demand
and the delay in supplies which the inventory should withstand.
Whenever an order placed for stock replenishment, certain costs are
involved, and, for most practical purpose it can be assumed that the cost per
order is constant. The ordering cost may vary depending upon the type of
items, for example raw material like steel against production component like
castings in steel plants, support materials in the case of coal industry.
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Cost of Inventory carrying:
This cost in measured as of the unit cost of the item. This measure
gives basis for estimating what is actually costs a company to carry stock.
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INVENTORY VALUATION AND COST FLOWS:
What is the cost of inventory?
One can readily visualize the determination of inventory quantities by
physical count or by use of perpetual inventory records. When this quantity is
determined, it must be multiplied by a unity cost in order to determine the
inventory value that is used on financial statements.
Trade and quantity discount are to be excluded from unit cost since
these discount exist for the purpose of defining the true invoice cost of
merchandise. Cash discounts, on the other hand, have been considered as a
reward for early payment and as a penalty for late payment. The reward has
often been interpreted as a loss rather than as a part of unit cost. Thus it would
not be difficult to find difference of opinion as to whether invoice cost
includes or excludes cash discount.
When the current replacement cost of material on hand at the close
of a year is less than the actual cost, the inventory value is reduced to
replacement cost (current market price). Thus the acceptable basis inventory
valuation is the lower of cost or market or more properly the lower of
actual cost or replacement cost.
The determination of inventory values is very important from the point
of view of the balance sheet and the income statement since costs not included
in the inventory (the balance sheet) are considered to be expensive and are
thus included in the income statement.
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on profit. When a method is selected, it must be used consequently and cannot
be changed for year to year in order to secure the most favorable profit for
each year.
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The following circumstances.
I. The materials or goods are of a perishable nature.
II. The frequency of purchases is not large.
III. There are only moderate fluctuations in the prices of materials or
goods purchased.
IV. Materials are easily identifiable as belonging to a particular
purchase lot.
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goods at actual cost. Its other merits or demerits will depend on the method
which is used for valuing materials other than the base stock.
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small, but the only reason for this is that the dollar amounts have been kept
small to make the illustration workable.
With the transfer of materials to work in process, the cost flow or
transfer with have its impact on the work in process inventory and the transfer
of completed merchandise to finished gods. Ultimately when goods are sold;
the varying methods of valuing inventories will have their impact on cost of
goods sold and these profits. The effects of the cost flows on cost of gods sold
and profits can be accentuated further it the differing methods of valuing
inventories are applies to work in process and finished goods.
Cost flows and inventory are exactly the some under stable prices.
With a falling price level, the LIFO method produces the highest cost flow and
the lowest inventory. With a falling price level, the LIFO method produces the
lowest cost flow and highest inventory. The cost flow under LIFO follows the
price level, LIFO produces larger cost flows when prices are rising and
smaller cost flows when prices are falling. A final item to consider is that the
average method produces results which fall between the extremes of LIFO and
FIFO.
Evaluation of methods can we justify the differences?
The best method of inventory valuation might be specific
identification, that is, the units in inventory should be identified with the
specific invoices and thus specific unit costs to which they apply.
Fortunately, the FIFO method constitutes a very useful approximation
to the specific identification method if on can reasonably assume that the
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actual flow of materials is first-in first-out. This assumption is not
unreasonable and thus we have stated the main argument for the FIFO
inventory scheme, that is, the physical flow of materials would match the flow
of costs under the first in first out method.
When the units in inventory are identical, interchangeable and do not
follow any specific pattern of physical flow, the average cost system would
seen to appropriate.
The primary difference between the FIFO and average methods is
centered on the physical flow since both methods could involve identical and
interchangeable units. The FIFO method fits a first-in first-out physical flow.
The average method fits a system which has no specific pattern of physical
flow. Finding a situation where there is no specific pattern of physical flow
should be quite difficult because of the fact that most inventory items are
subject to deterioration by instituting a person would attempt to reduce such
deterioration and any reasonable person would attempt to reduce such
deterioration by instituting a physical flow approximating first-in-first-out.
The major reason for the use of the average method is something other than
the lack of specific physical flow.
Ordinarily the LIFO method cannot be justified on the basis of the
physical flow of materials. Under conditions of changing prices, the advocate
of LIFO says that the only method which matches costs and revenues is the
LIFO method. The LIFO method assumes that the latest item is the first item
out, and thus the current costs of materials are matched with the other hand,
assumes that the first item in is the first item out, and thus the non-current
costs of matching current costs with current revenues is the essence of the
argument for the LIFO method.
As can be seen by the above comments, there is no one best method of
valuing inventories. The method chosen should fit the situation. A physical
flow pattern comparable to FIFO would force one to consider the FIFO
method. The lack of a discernible physical flow pattern would force one to
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consider the average method. Concentration on cost flows, as distinct from
physical flows, would force to consider the LIFO method especially where
there appears to be a discernible trend towards rising prices (or falling prices)
as has been the case in our economy during recent years.
As shown above, there is need only for physical quantities since the
inventory values is the physical quantity multiplied by the standard cost. With
the cost and value columns disposed off, a perpetual inventory card can
include additional data such as quantities on order, quantities reserved, and
quantities available. These additional data are very useful for inventory and
production control purpose. On the basis of a few calculations concerning into
inventories on a FIFO, a LIFO, or an average cost basis.
Inventory of Obsolescence:
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Absolvent inventories cannot be used or disposed off at values carried
on the books. Frequent reviews should be made of all inventories, and when
obsolescence is indicated a request for revaluation should be prepared for
approval by management. The difference between original and obsolete value
should be recorded by a change to operating account. Inventory obsolescence,
and a credit to inventory. If the material is scrapped, this will be for the full
inventory value or used in areas where it will be work less than its
Original value, the entry would be only for the amount of write down. Some
companies carry a selvage inventory and transfer to it materials which may be
sold or used at reduced values. Where this is done, the entry would be:
Dr. Salvage inventory
Dr. Inventory Obsolescence. Cr. Raw Material inventory or Supplies
inventory.
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Kesoram cement has it own power plant and through which it saves
energy consumption. By this the cost since Government controls the coal &
fuel sector, any increase rates adversely effects the cement industry.
Inventory cost of any organization also adversely affects by retaining
obsolete / scraps and inventory costs can be reduced by management with an
advance planning of procurement of materials, periodical reviews of existing
spares with reference to the fast consumption, ascertaining the information
regarding the availability of spares in other areas. Holding of extra inventory
will be an additional financial burden to the company due to payment of
interest charges on the materials purchased, diminishing value of materials
purchased, diminishing value of materials by keeping them in stores for a log
time, handling charges, spare rent etc.,
The inventory of Kesoram cement mainly includes Limestone,
Bauxite, Gypsum, Fly ash.
Inventory in Kesoram Cement during 2008-09 to 2012-13 are as
follows: (Units in m.t)
The value of the above raw materials for the year 2006-10 are as follows:
(Value in Rs.)
28
Inventory in Kesoram Cement during 2008-09 to 2012-13.
29
Imported
30
(Imported Raw materials and Stores spare parts and components)
Indigenous
31
Indigenous
Raw Materials Stores spare parts and components.
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DEPARTMENTS RAISE INDENTS AND SEND THE INDENTS TO
PURCHSE DEPARTMENT THROUGH STORES.
INDENTS:
1) ANNUAL INDENTS FOR CONSUMABLE ITEMS (STORES
ITEMS).
2) REGULAR INDENTS RAISED BY CONSUMING DEPARTMENTS.
3) ANNUAL REQUIREMENT OF RAW MATERIALS PROMOP & QC.
ENQUIRIES:
1) ENQUIRES WILL BE SENT APPROVED SUN CONTRACTORS.
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PURCHASE DEPARTMENT:
FLOW CHART:
stores department.
consumption period.
Office.
34
PURCHASE DEPARTMENT
PURCHASE ENQUIRY
Ms.
Sl. When
Material Code Department Quantity Unit
No. Required
35
PURCHASE DEPARTMENT
ORDER PROCESSING FORM
Material
Sl. Indent
Code Description Size Qty 1 2 3 4 5 6 Remarks
No. Ref
No.
PURCHASE DEPARTMENT
36
PURCHASE ORDER
Sl. Indent Item
Description Qty Rate Unit Amount
No. No. Code
37
Price / Quantity Amended Price /
Material Code Material
as per Order Quantity
PURCHASE DEPARTMENT
ACTIVITY: IMPORTS:
38
FLOW CHART:
Receipt of indents for import items from stores department.
1) Material code
2) Indent number
4) Quantity
5) Rate
6) Payment
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Send the purchase order copies to stores and concerned
departments.
to overseas supplier.
STORES DEPARTMENT
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Receiving of Goods through Trunk / Personnel Delivery.
works site.
by using chain pulley Blocks, Wire Rope Ceilings, Fork Lift. After
receipts register.
STORES DEPARTMENT
41
ACTIVITY: PREPARATION OF RECEIPT AND APPROVAL BOOK
a) General
b) Stationery
c) Repairs
d) Block
system.
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STORES DEPARTMENT
to section incharge.
STORES DEPARTMENT
43
ACTIVITY: APPROVAL OF MATERIAL AND PREPARATION OF
STORES DEPARTMENT
STORES DEPARTMENT
44
ACTIVITY: EXCISE GATE PASSES
STORES DEPARTMENT
Verification of MRP.
Issuing to dispensary.
payment.
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CHAPTER 3
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3.1 Industry Profile
History of Indian Foods Industry
Retailing is one of the pillars of the economy in India and accounts for 35% of
GDP. The retail industry is divided into organized and unorganized sectors.
Over 12 million outlets operate in the country and only 4% of them being
larger than 500 sq ft (46 m2) in size. Organized retailing refers to trading
activities undertaken by licensed retailers, that is, those who are registered for
sales tax, income tax, etc. These include the corporate-backed hypermarkets
and retail chains, and also the privately owned large retail businesses.
Unorganized retailing, on the other hand, refers to the traditional formats of
low-cost retailing, for example, the local kirana shops, owner manned general
stores, paan/beedi shops, convenience stores, hand cart and pavement vendors,
etc.
Most Indian shopping takes place in open markets and millions of independent
grocery shops called kirana. Organized retail such supermarkets accounts for
just 4% of the market as of 2008. Regulations prevent most foreign investment
in retailing. Moreover, over thirty regulations such as "signboard licenses" and
"anti-hoarding measures" may have to be complied before a store can open
doors. There are taxes for moving goods to states, from states, and even within
states.
3.1.1 Growth
An increasing number of people in India are turning to the services sector for
employment due to the relative low compensation offered by the traditional
agriculture and manufacturing sectors. The organized retail market is growing
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at 35 percent annually while growth of unorganized retail sector is pegged at 6
percent. An investment to The Retail Business in India is currently at the point
of inflection. Rapid change with the tune of US $ 25 billion is being planned
by several Indian and multinational companies in the next 5 years. It is a huge
industry in terms of size and according to management consulting firm
Technopak Advisors Pvt. Ltd., it is valued at about US $ 350 billion.
Organized retail is expected to garner about 16-18 percent of the total retail
market (US $ 65-75 billion) in the next 5 years.
India has topped the A.T. Kearneys annual Global Retail Development Index
(GRDI) for the third consecutive year, maintaining its position as the most
attractive market for retail investment. The Indian economy has registered a
growth of 8% for 2007. The predictions for 2008 are 7.9%. The enormous
growth of the retail industry has created a huge demand for real estate.
Property developers are creating retail real estate at an aggressive pace and by
2010, 300 malls are estimated to be operational in the country.
According to the Icier report, the retail business in India is estimated to grow
at 13% from $322 billion in 2006-07 to $590 billion in 2011-12. The
unorganized retail sector is expected to grow at about 10% per annum with
sales expected to rise from $ 309 billion in 2006-07 to $ 496 billion in 2011-
12.
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Indian market has high complexities in terms of a wide geographic spread and
distinct consumer preferences varying by each region necessitating a need for
localization even within the geographic zones. India has highest number of
outlets per person (7 per thousand) Indian retail space per capita at 2 sq ft
(0.19 m2)/ person is lowest in the world Indian retail density of 6 percent is
highest in the world. 1.8 million Households in India have an annual income
of over 45 lakh.
While India presents a large market opportunity given the number and
increasing purchasing power of consumers, there are significant challenges as
well given that over 90% of trade is conducted through independent local
stores. Challenges include: Geographically dispersed population, small ticket
sizes, complex distribution network, little use of IT systems, limitations of
mass media and existence of counterfeit goods.
49
countries in West Asia and Africa, some majors are also looking at the US and
Europe. Arvind Brands, Madura Garments, Spykar Lifestyle and Royal Classic
Polo are busy chalking out foreign expansion plans through the distribution
route and standalone stores as well. Another denim wear brand, Spykar, which
is now moving towards becoming a casualwear lifestyle brand, has launched
its store in Melbourne recently. It plans to open three stores in London by
2008-end.
The low-intensity entry of the diversified Mahindra Group into retail is unique
because it plans to focus on lifestyle products. The Mahindra Group is the
fourth large Indian business group to enter the business of retail after Reliance
Industries Ltd, the Aditya Birla Group, and Bharti Enterprises Ltd. The other
three groups are focusing either on perishables and groceries, or a range of
products, or both.
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Nilgiris-Formats: Nilgiris supermarket chain
Subhiksha-Formats: Subhiksha supermarket pharmacy and telecom
discount chain.
Trinethra- Formats: Fabmall supermarket chain and Fabcity
hypermarket chain
Vishal Retail Group-Formats: Vishal Mega Mart
BPCL-Formats: In & Out
Reliance Retail-Formats: Reliance Fresh
Reliance ADAG Retail-Format: Reliance World
German Metro Cash & Carry
Shoprite Holdings-Formats: Shoprite Hyper
Paritala stores bazar: honey shine stores
Aditya Birla Group - more Outlets
Kapas- Cotton garment outlets
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52
3.2 Company profile
53
efforts, he along with his relatives, friends and associates promoted Heritage
Foods in the year 1992 taking opportunity from the Industrial Policy, 1991 of
the Government of India and he has been successful in his endeavor.
Sri Naidu has won numerous awards including " Member of the
World Economic Forum's Dream Cabinet" (Time Asia ), "South Asian of the
Year " (Time Asia ), " Business Person of the Year " (Economic Times), and "
IT Indian of the Millennium " ( India Today).
54
We have grown, and intended to grow, focusing on harnessing our willingness
to experiment and innovate our ability to transform our drive towards
excellence in quality, our people first attitude and our strategic direction.
3.2.4 Mission
3.2.5 Vision
Heritage Slogan:
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o When you are healthy, we are healthy
o When you are happy, we are happy
o We live for your "HEALTH & HAPPINESS"
3.2.9 Commitments:
Milk Producers:
56
Change in life styles of rural families in terms of:
3.2.10 Customers:
57
3.2.11 Employees:
3.2.12 Service:
3.2.13 Suppliers:
3.2.14 Society:
58
More than 3500 employees are working with heritage
59
distributes quality milk & milk products in the states of A.P, Karnataka, and
Kerala & Tamil nadu.
23% growth was recorded in AP 2.38 lakhs litres per day (LLPD) in
2010-11 against 1.93 LLPD in 2009-10. 13% growth was recorded in
Tamilnadu-1.53 LLPD in 2010-11against 1.35 LLPD in 2009-10. Overall
growth of 6% was recorded- 5.49 LLPD in 2010-11against 5.16 LLPD.
Flavoured milk sales recorded a growth rate of 77% over 2009-10. Butter milk
sales have gone up by 45% over 2009-10.
3.2.18 Outlook:
60
company. "Intellectual Property Rights" (IPR) means generally patented or
potentially patentable inventions, trademarks, copyrightable subject matters
and trade secrets.
CORPORTE OPPORTUNITIES
Members owe a duty to the Company to advance its legitimate
interests when the opportunity to do so arises and are expressly
prohibited from improper use of information / property or taking
improper advantage of their position. PREVENTION OF INSIDER
TRADING Insider trading is prohibited both by the Law as well as by
the company policy. Insider trading generally involves the act of
subscribing to or buying
or selling of the Company's securities, when in possession of any Unpu
blished Price Sensitive Information about the company.
The Company is committed to comply with securities laws in all the markets
in which the Company's securities are listed. The company prohibits
61
fraudulent and unfair trade practices with regard to the securities of the
Company by all Members.
Members should comply with all applicable laws, rules, and regulations, both
in letter and spirit. In order to assist the Company in promoting the lawful and
ethical behavior, Members have to report any possible violation of law, rules,
regulations or the code of conduct to the Company Secretary.
62
purposes specifically approved by management and must never be used for
any personal or illegal purposes.
63
3.3.5 Elimination of child labour
64
competitor is not in the interest of the Company. Hence all the Directors are
barred in accepting such position without the concurrence of the Board.
3.3.9 Accountability
1. Dairy:
65
It is the major wing among all. The dairy products manufactured by
HFIL are
Milk, curd, butter, ghee, flavoured milk, paneer, doodhpeda, ice cream.
2. Retail:
In the retail sector HFIL has outlets namely Fresh@. In those stores
the products sold are vegetables, milk& milk products, grocery, pulses, fruits
etc.
3. Agri Business:
66
the lab. And finally they report to the Head-Agribusiness. Representatives as
per the instructions given by the agri professors will approach the farmers
directly and make a deal with them. It is the process of registering the farmers.
The Company was registered as Non Banking Financial Institution on 5th Day
of December 1998 by Reserve Bank of India as a Deposit Taking Company
under the category Hire Purchase Company.
At Present the company is allowing Dairy Loans to Small Farmers under Tie
up arrangement with Heritage Foods (India) Limited. The Company has been
earning profits from inception and functioning in conformity with the rules
and directions of Reserve Bank of India.
67
CHAPTER-4
68
RATIO ANALYSIS
The investment on raw materials over a period of 5 years from 2005 to
2011 is presented in the following table.
1. Investment on Raw Materials:
Year Investment on Raw Material
(in crores)
2005-06 13386.80
2008-09 11690.67
2009-10 49950.88
2010-11 42950.66
2011-12 46087.45
2012-13 93605.78
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Interpretation:
1) From the above table it can be understood that the inventory of
Kesoram Cement was recorded at 13,386.80 during the year 2005-06
and it is increased to 93605.78 during the year 2012-13.
2) It shows that there is on increase in the inventory to the more extent of
80218.98.
3) The average inventory of Kesoram Cement was recorded at
Rs.42945.41.
4) The highest investment in inventory was recorded in the years 2012-13
2. Trend Analysis:
Trend analysis technique is applied to know the growth rate in
investment of raw material of Kesoram Cement over the review period which
is shown in the following table.
Trend Analysis:
70
Raw Material
Year Trend %
(in Lacks)
2005-06 13386.80 100%
Interpretation:
71
2) The trends in inventories show that inventory have been more in the
year 2012-13 and then it has shown a downward trend and again it
increased to some extent.
3) The investment in inventories has shown fluctuating trend is initial
years and then it raised to 699% and again showing fluctuating trend.
Cost of goods
Year Avg. Inventory Ratio
sold
2005-06 60150.35
7402.31 8.13
2008-09 59021.41
37975.30 1.55
2009-10 121551.71
95065.28 12.79
2010-11 127533.58
12390.06 10.29
72
2011-12 130392.68
1333.8.01 9.78
2012-13 311636.92
160035.93 1.32
Interpretation:
1. From the above table 2005 it can be observed that (1) inventory turn
over ratio is 8.13 during 2005 2006 and it gradually decreased to
1.55 during 2006 2007.
2. In the year 2012-13 it is clear that the ratio is very less i.e., he stock
is not turned into sales quickly.
3. As compared to all the years the ratio is very less in 2012-13.
4. The average inventory turn over ratio was recorded at 7.3 times during
the review period.
4. Inventory conversion period:
It may also be of interest to see average time taken for clearing the
stocks. This can be possible by calculating inventory conversion period. This
period is calculated by dividing the number of the days by inventory turn over.
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2011-12 130392.68
1333.8.01 9.78 36
2012-13 311636.92
160035.93 1.32 272
Interpretation:
From the above table it can be identified the following observations:
1) The inventory conversion period was 232 days during the year 2008-09
but it declined to 36 during 2011-12, which indicates that the stock has
been very quickly converted into sales which mean the company is
managing the inventory efficiently.
2) The lowest inventory conversion period was recorded at 28 days in the
year 2009-10 and the highest inventory conversion was recorded at 272
days in the year 2012-13.
3) The average inventory conversion period was recorded at 107 days
during the review period.
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2009-10 49950.88
53063.75 94%
2010-11 42950.66
45598.02 92%
2011-12 46087.45
49713.32 92%
2012-13 93605.78
86811.49 107%
Interpretation:
1) From the above table it can be understand that the % of inventory over
current assets ratio was showing a declining trend for two years 2005 -
2006.
2) However from the year2012-13 it is showing an increasing trend.
3) The lowest inventory over current assets ratio was recorded at 40%
during the year 2008-09 and the highest inventory over current assets
ratio we recorded at 107% during 2012-13.
4) The average inventory over current assets ratio was recorded at 80%.
2005-06 13386.80
87168.64 15.35%
2008-09 11690.67
87468.76 13.36%
2009-10 49950.88
117985.89 42.33%
75
2010-11 42950.66
112647.26 37.50%
2011-12 46087.45
112637.07 40.91%
2012-13 93605.78
197330.50 47.43%
Interpretation:
Inventory
Inventory over current liabilities ratio = __________________ X 100
Current liabilities
Percentage of Inventory Over current liabilities:
Current
Year Inventory Ratio (%)
liabilities
2005-06 13386.80
7862.11 17%
76
2008-09 11690.67
8042.62 145%
2009-10 49950.88
16204.14 308%
2010-11 42950.66
16204.14 284%
2011-12 46087.45
17728.22 259%
2012-13 93605.78
36253.41 258%
Interpretation:
1) From the above table it can be understand that the % inventory over
current liabilities ratio was showing a declining trend for two years
2005-06.
2) During the year 2008-09 the ratio was it gradually increased to 145 and
there is a net increase to the extent of 128.
3) The lowest inventory over total amounts ratio was recorded at 17
during the year 2005-06.
4) The highest inventory to current liabilities ratio was recorded at 308
during the year 2009-10
5) The average inventory to current liabilities ratio was recorded at 211
during the review period.
8. Current Ratio:
In order to know the current ratio the percentage of current assets to
current liabilities is calculated and which is presented in the following table.
Current assets
Current Ratio = _____________________
Current liabilities
Calculation of Current Ratios:
Current
Year Inventory Ratio (%)
liabilities
77
2005-06 24172.33
7862.11 3.07%
2008-09 28770.78
8042.62 3.57%
2009-10 53063.75
16204.14 3.27%
2010-11 45598.02
16204.14 3.06%
2011-12 49713.32
17728.22 2.80%
2012-13 86811.49
36253.41 2.39%
Interpretation:
78
Current
Year Inventory Ratio (%)
liabilities
2005-06 10785
7862.11 1.37%
2008-09 17080
8042.62 2.12%
2009-10 3112
16204.14 0.002%
2010-11 3347
16204.14 0.22%
2011-12 3625
17728.22 0.20%
2012-13 3207
36253.41 0.08%
Interpretation:
79
CHAPTER-5
80
CONCLUSIONS
81
purchase order and order follow up inform the supplier. Most of the
time was spent in accounts payable.
9) In this type of process, it requires more number of employees and
supplier should also wait for until the accounts are matched.
10) This process takes an input, adds value to it and provides an output
to an internal or external customer.
SUGGESTIONS
1) Though the production is higher is the year 2009-10 and the sales
were very high i.e., as per inventory conversion period it took 272
days. This shows that there is demand for cement and the funds
unnecessarily tied up. So, proper demand forecasting should be
done and according to that it may be manufactured.
2) The investment on raw material should be made as per the
requirement. Unnecessary investment may block up the funds.
3) Neither too high nor too low inventory turnover ratios may reduce
profit and liquidity position of the industry. So, proper balance
should be made to increase profits and to ensure liquidity.
4) The raw material should be acquired from the right source at right
quality and at right cost.
5) The process that was being used by HERITAGE FOODS with the
purchasing department should undergo changes, so that, it seeks
enhance the celerity of the delivery of a product without
compromising its quality by improving the utilization of materials,
labour and equipment.
6) To reduce the work, the purchasing department may enter the
purchasing order into database and did not send a copy to any one.
When the merchandise arrived, the receiving clerk would enter the
database and determine whether the order agreed with the
electronic purchase order.
82
If it did, payment was authorized to be made at the appropriate
time. If it didnt match, the order would be returned until if it is agreed by the
Kesoram Cement.
If it institutes Invoice less purchasing where the supplier did not
need to send an invoice to be paid.
This generally simplifies the process for all concerned. As a result, it
would able to reduce the work of its accounts payable department.
CHAPTER-6
83
BIBLIOGRAPHY
84