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” The basic financial aim of an enterprise is maximization of its value. At the same time, a large both theoretical and practical meaning has the research for determinants increasing the firm value. Most financial literature contains information about numerous factors influencing the value. Among those factors is the net working capital and elements creating it, such as the level of cash tied in accounts receivable, inventories and operational cash balances. A large majority of classic financial models proposals, relating to the optimum current assets management, were constructed with net profit maximization in view. In order to make these models more suitable for firms, which want to maximize their value, some of them must be reconstructed. In the sphere of inventory management, the estimation of the influence of changes in a firm‟s decisions is a compromise between limiting risk by having greater inventory and limiting the costs of inventory. It is the essential problem of the corporate financial management. The basic financial inventory management aim is holding the inventory to a minimally acceptable level in relation to its costs. Holding inventory means using capital to finance inventory and links with inventory storage, insurance, transport, obsolescence, wasting and spoilage costs. However, maintaining a low inventory level can, in turn, lead to other problems with regard to meeting supply demands. The inventory management policy decisions, create the new inventory level in a firm. It has the influence on the firm value. It is the result of opportunity costs of money tied in with inventory and generally of costs of inventory managing. Both the first and the second involve modification of future free cash flows, and in consequence the firm value changes. Inventory changes (resulting from changes in inventory management policy of the firm) affect the net working capital level and the level of operating costs of inventory management in a firm as well. These operating costs are result of storage, insurance, transport, obsolescence, wasting and spoilage of inventory. Maximization of the owners‟ wealth is the basic financial goal in enterprise management. Inventory management techniques must contribute to this goal. The modifications
higher inventory stock helps increase income from sales because customers have greater flexibility in making purchasing decisions and the firm decrease risk of unplanned break of production. It is possible for fore a company to reduce its levels of inventories to a considerable degree e. Inventory is unconsumed or unsold goods purchased or manufactured. we conclude that value-based modifications implied by these two models will help managers make better value-creating decisions in inventory management. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. a considerable amount of feuds is required to be committed to them. Inventory management decisions are complex. absolutely imperative to ménage inventories efficiently and efficiently in order to avoid unnecessary investment. NATURE OF INVENTORIES :- . Although problems connected with optimal economic order quantity and production order quantity remain. it may includes raw materials. Excess cash tied up in inventory burdens the enterprise with high costs of inventory service and opportunity costs. It is therefore. by using simple inventory planning and control techniques. On an average. The reduction in excessive inventory carries a favourable impact on a company‟s profitability. In accounting language it may mean stock of finished goods only. In the form of materials or supplies to be consumed in the production process or in the rendering of services. work-in-progress and stores etc. INTRODUCTION OF INVENTORY Inventories constitute the most significant part of current assets of a large majority of companies in India.g. 10 to 20 percent. In a manufacturing concern. without any adverse effect on production and sales. Because of the large size of inventories maintained by firms. By contrast. In brief.to both the value-based EOQ model and value-based POQ model may be seen in this article. MEANING OF INVENTORY:Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. inventories are approximately 60% of current assets in public limited companies in India.
inventories of a consumer product company will not be large. Raw materials inventories are those units which have been purchased and stored for future productions. Stock of raw materials and work in progress facilitate production. inventories serve as a link between the production and consumption of goods. Within manufacturing firms. Large heavy engineering companies produce long production cycle products.e. coller.liver. box etc. INVENTORY MANAGEMENT . The various forms in which inventory exist in a manufacturing company are raw materials. cap of the bottle. While stock of finished goods is required for smooth marketing operation. while a retail or wholesale firm will have a very high and no raw material and work in progress inventories. Thus. there will be differences. therefore they carry large inventories.Inventories are stock of the product a company is manufacturing for sale and components that make up the product. On the other hand. WORK IN PROGRESS:These inventories are semi manufactured products. RAW MATERIALS:Raw materials are those inputs that are converted into finished product though the manufacturing process. A manufacturing firm will have substantially high levels of all three kinds of inventories. because of short production cycle and fast turn over. pump. PACKAGING MATERIAL:Packaging material includes those items which are used for packaging of perfumery product i. The levels of four kinds of inventories for a firm depend on the nature of its business. They represent products that need more work before they become finished products for sales. FINISHED GOODS:Finished goods inventories are those completely manufactured products which are ready for sale. work in progress and finished goods.
Inventory management simply means the methods you use to organize. most customers prefer to have it now. many small businesses cannot absorb the types of losses arising from poor inventory management. goods in process and finished goods all represent various forms of inventory. Likewise. inventory refers to stocks of anything necessary to do business. merchandise stocks in a retail store contribute to profits only when their sale puts money into the cash register. rather than wait for something to be ordered from a distributor. or stock of goods. inefficient and costly. is a necessity in retail. Unless inventories are controlled.As the cost of logistics increases the manufacturers are looking to inventory management as a way to control costs. in the backroom or in a warehouse mile away from the point of sale. Each location where goods are kept will require different methods of inventory management. Customers often prefer to physically touch what they are considering purchasing. "Inventory" to many small business owners is one of the more visible and tangible aspects of doing business. store and replace inventory. Raw materials. Each type represents money tied up until the inventory leaves the company as purchased products. In addition. Every minute that is spent down because the supply of raw materials was interrupted costs the company unplanned expenses DEFINITIONS OF INVENTORY MANAGEMENT . In a literal sense. Inventory is a term used to describe unsold goods held for sale or raw materials awaiting manufacture. so you must have items on hand. Keeping an inventory. In the case of manufacturing. Any goods needed to keep things running beyond the next few hours are considered inventory. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact. These items may be on the shelves of a store. they are unreliable. to keep an adequate supply of goods while minimizing costs. they are typically kept at the factory.
2. provide replenishment techniques and report actual and projected inventory status. set targets. Many companies take an inventory of their supplies on a regular basis in order to avoid running out of popular items. subsequent earnings for the company's shareholders/owners. The word 'inventory' can refer to both the total amount of goods and the act of counting them. procedure and techniques employed in maintaining the optimum number or amount of each inventory item. “Inventory is the stock of idle resources which has economic value and is maintained to fulfill the present and future needs of an organization” 3. Shortages or overages after an inventory can indicate a problem with theft or inaccurate accounting practices. glucose bottles. IMPORTANCE OF INVENTORY Inventory represents one of the most important assets that most businesses possess. Also may include ABC analysis. forms. Handles all functions related to the tracking and management of material.1. cycle counting support etc. In Service Organization : Inventory of any Bank can be broachers. 3. Policies. spare parts. Systems and processes that identify inventory requirements. medicines etc. Others take an inventory to insure the number of items ordered matches the actual number of items counted physically. . pamphlets and also can be currency notes and coins. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. because the turnover of inventory represents one of the primary sources of revenue generation and materials. Hospitals can have inventory as syringes. Inventory”: goods that businesses intend to sell to their customers or raw materials or inprocess items that will be converted into salable goods 2. lot tracking. In Manufacturing Organization : Inventory can be as raw components and finished goods etc… 4. DEFINITIONS OF INVENTORY 1.
(4) Avoidance of Out of Stock Danger: Information about availability of materials should be made continuously available to the management so that they can do planning for procurement of raw material. (2) Avoidance of Abnormal Wastage: There should be minimum possible wastage of materials while these are being stored in the godowns or used in the factory by the workers. OBJECTIVES OF INVENTORY MANAGEMENT The basic managerial objectives of inventory control are two-fold. the avoidance over-investment or under-investment in inventories. their manufacturing efficiency is also increased. Their motivation level rises and morale is improved. It also avoids the out of stock danger. first. obsolescence and spoilage costs. to provide the right quantity of standard raw material to the production department at the right time. However. bust should be avoided. possessing too little inventory isn't good either. Leakage. It maintains the inventories at the optimum level keeping in view the operational requirements. theft. . and second. (3) Promotion of Manufacturing Efficiency: If the right type of raw material is available to the manufacturing departments at the right time. the objectives of inventory control may be summarized as follows: A. A minimum quantity of each material should be held in store to permit production to move on schedule. because the business runs the risk of losing out on potential sales and potential market share as well.Possessing a high amount of inventory for long periods of time is not usually good for a business because of inventory storage. strict control over the inventory should be exercised. embezzlements of raw material and spoilage of material due to rust. To avoid any abnormal wastage. Wastage should be allowed up to a certain level known as normal wastage. Operating Objectives: (1) Ensuring Availability of Materials: There should be a continuous availability of all types of raw materials in the factory so that the production may not be help up wants of any material. In brief.
Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets. CONTROLLING SUPPLY AND DEMAND . COUNTING CURRENT STOCK All businesses must know what they have on hand and evaluate stock levels with respect to current and forecasted demands. The material purchased should be of the quality alone which is needed. (6)Highlighting slow moving and obsolete items of materials. (7) Designing poorer organization for inventory management: Clear cut accountability should be fixed at various levels of organization. Investment in inventories must not tie up funds that could be used in other activities. Financial Objectives: (1) Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. etc. Counting is also important because it is the only way you will know if there is a problem with theft occurring at some point in the supply chain. When you become aware of such problems you can take steps to eliminate them. B. (2) Reasonable Price: While purchasing materials. IMPORTANCE OF INVENTORY MANAGEMENT 1. The determination of maximum and minimum level of stock attempt in this direction. (3) Optimum Investing and Efficient Use of capital: The basic aim of inventory control from the financial point of view is the optimum level of investment in inventories. There should be no excessive investment in stock. You must know what you have in stock to ensure you can meet the demands of customers and production and to be sure you are ordering enough stock in the future. 2. Quality is not to be sacrificed at the cost of lower price.(5) Better Service to Customers: Sufficient stock of finished goods must be maintained to match reasonable demand of the customers for prompt execution of their orders. it is to be seen that right quality of material is purchased at reasonably low price.
Inventory leaving your warehouse must be counted to prevent loss between the warehouse and the point of sale. to ensure that an order placed actually results in a sale. Incentive programs can help employees keep this in perspective. You can also keep a list of goods that can easily be sold to another party. In this way. should a customer cancel. This ensures that you are maximizing any volume discounts available through your vendors and preventing overordering of stock. It is also important to require pre-approval on goods with a high carrying cost. 3. accurate paperwork should be kept. this is when you will find breakage or loss on the goods you ordered. Warehouse employees should be educated on the costs of improper inventory management. they are more likely to take precautions to prevent shrinkage. Approval procedures should be arranged around several factors. When this is not possible. Records should be processed quickly. making the salesperson responsible for the goods until they are returned to the storage facility. 4. you ensure that the items you order will not take space in your inventory for long. . Reward systems should be set in place that encourage high levels of customer service and return on investment for the product lines the buyer manages. you may be able to share responsibility for the cost of carrying goods with the salesperson. Such goods can be ordered without prior approval. the more sales must be generated to make up for the lost goods. Even samples should be recorded.Whenever possible. When inventory arrives. at least in the same day that the withdrawal of stock occurred. Be sure they understand that the lower your profit margin. obtain a commitment from a customer for a purchase. You should set minimum and maximum quantities which your buyers can order without prior approval. KEEPING ACCURATE RECORDS Any time items arrive at or leave a warehouse. itemizing the goods. When they see a difference in their paychecks from poor inventory management. MANAGING EMPLOYEES Buyers are the employees who make stock purchases for your company.
businesses are looking for ways to leverage this trend as part of the “big picture”. which include not only direct costs of storage. This can mean re-evaluating your supply chain and choosing products that are environmentally sound. Obtaining lower prices by making volume purchases -.but not ending up with slowmoving inventory.but not sacrificing the service level. Increasing inventory turnover -. The degree of success in addressing these concerns is easier to gauge for some than for others. insurance and taxes. As the business climate evolves towards a green economy. Inventory management should be a part of your overall strategic business plan. and Having an adequate inventory on hand -. computing ABOUT INVENTORY CONTROL Inventory consists of the goods and materials that a retail business holds for sale or a manufacturer keeps in raw materials for production. Inventory control is a means for maintaining . it becomes a way to promote your business. but also the cost of money tied up in inventory. It can also mean putting in place recycling procedures for packaging or other materials.but not sacrificing service or performance. This fine line between keeping too much inventory and not enough is not the manager's only concern. Others include: Maintaining a wide assortment of stock -. inventory management is more than a means to control costs. In this way. Many small business owners fail to appreciate fully the true costs of carrying inventory.but not spreading the rapidly moving ones too thin. SUCCESSFUL INVENTORY MANAGEMENT Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Keeping stock low -. For example. Find the best suppliers and storage location for each and record this information in official procedures that can easily be accessed by your employees.Each stock item in your warehouse or back room should have its own procedures for replenishing the supply.but not getting caught with obsolete items.
Ordering and setup costs come into play as well. SAFETY STOCK . There are the costs to carry standard inventories and safety stock. (6)Ordering cost can be reduced if a firm places a few large orders in place of numerous small orders. and cost of inventory. (5) Efficient and optimum use of physical as well as financial resources. To manage inventory effectively. (4) Improvement in production and sales. (2) Proper and efficient use of raw materials. there are shortfall costs. (7)Maintenance of adequate inventories reduces the set-up cost associated with each production Run. INVENTORY COSTS There are three main types of cost in inventory. ADVANTAGES OF INVENTORY CONTROL: (1) Reduction in investment in inventory. a business must have a firm understanding of demand. Proper inventory control will balance the customer‟s need to secure products quickly with the business need to control warehousing costs.the right level of supply and reducing loss to goods or materials before they become a finished product or are sold to the consumer. Inventory control is one of the greatest factors in a company‟s success or failure. Finally. This part of the supply chain has a great impact on the company‟s ability to manufacture goods for sale or to deliver customer satisfaction on orders of finished products. A good inventory control system will balance carrying costs against shortfall costs. (3)No bottleneck in production.
receiving and stowage. often . CYCLICAL COUNTING Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted. Sales departments prefer these numbers be kept low so that an ample stock will always be kept. a business would have to shut down while counts were taken. Transportation and invoice processing are also included. Customer satisfaction must always be considered ahead of storage costs. ORDERING COSTS Ordering costs have to do with placing orders.Safety stock is comprised of the goods needed to be kept on hand to satisfy consumer demand. Shortfall costs are avoided by keeping an ample safety stock on hand. Because demand is constantly in flux. Information technology has proven itself useful in reducing these costs in many industries. Cyclical counting is preferred because it allows for operations to continue while inventory is taken. then to production setup costs are considered instead. it is much more cost effective. this must be balanced with the cost to carry goods. Logistics managers prefer to err on the side of caution to reduce warehousing costs. The best way to manage stockout is to determine the acceptable level of customer service for the business. THE COST OF SHORTFALLS Stock out or shortfall costs represent lost sales due to lack of supply for consumers. This practice also increases customer satisfaction. However. rather than counting all inventory at once. Companies can use statistical calculations to determine probabilities in demand. While this method may be less accurate than counting the whole. This means that a particular section of the warehouse or plant is counted physically at particular times. optimizing the Safety Stock levels is a challenge. If not for this practice. demand fluctuations do not wholly dictate a company‟s ability to keep the right supply on hand most of the time. One can then balance the need for high satisfaction with the need to reduce inventory costs. If the business is in manufacturing. However.
the sale of 300 units on Wednesday would create a cost of goods sold of Rs. Three methods are widely used to value such costs. They are First-In.1. Last-In First-Out (LIFO) and Average Cost.75 each. An example of this in action can be made when we assume that a widget seller acquires 200 units on Monday for Rs.75 per unit.275. FIFO FIFO operates under the assumption that the first product that is put into inventory is also the first sold. That is. Inventory can be calculated based on the lesser of cost or market value. each category or on a total basis. COMMON INVENTORY VALUATION METHODS The methods a company uses to value the costs of inventory have a direct effect on the business balance sheets. When valuing inventory under the FIFO method. It can be applied to each item. income statements and cash flows. The next day. In this way. First-Out (FIFO). Items are categorized based on three levels: A Category: Top valued 20 percent of goods. but there are other variations of this method that can be used. The “A” category is counted on a regular basis while “B” and “C” categories are counted only once a month or once a quarter. Therefore.00 each and 100 units at Rs.00 per unit. The ABC rule specifies that tracking 20 percent of inventory will control 80 percent of the cost to store the goods. the first 200 units on the income statement were .requiring the hire of a third party or use of overtime employees. rarely in demand Warehouse staff can now schedule counting of inventories based on these categories. whether by economic or demand value B Category: Midrange value items C Category: Cheaper items. businesses concentrate more on the top 20 percent and counter other goods less frequently. he spots a good deal and gets 500 more for Rs. Cyclical counting usually utilizes the ABC rule. 200 units at Rs1.
The remaining 400 widgets would be valued at Rs. but important method to valuation is called specific identification. It takes an average cost for all units available for sale during the accounting period and uses that as a basis for the cost of goods sold.75 each on the balance sheet in ending inventory. In some cases. but less value is realized from this accounting method is such cases. This accounting method is now using 10-year-old information to value its assets. The ending inventory on the balance sheet would be valued at Rs. the income statement and balance sheet would instead show a cost of goods sold of Rs.75)]/700.225 for the 300 units sold.821 each.1) + (500 x Rs. INFLATIONARY EFFECTS ON VALUATION . This method is used for high-end items that are more easily tracked. or Rs. WEIGHTED AVERAGE Average Cost works out a weighted average for the cost of goods sold.350 in assets. Using the same example. The remaining 400 units would also be valued at this rate on the balance sheet in ending inventory. When this method is used on older inventories. LIFO LIFO assumes instead that the last unit to reach inventory is the first sold. we would calculate the cost of goods sold at [(200 x Rs. Consider the company that carries a large quantity of merchandise over a period of 10 years. SPECIFIC IDENTIFICATION A less commonly used. this method can be used for more common items. This is because powerful and detailed tracking software is required to employ specific identification on large numbers of goods. the company‟s balance sheet can be greatly skewed. To site our example again.valued higher.
market conditions change causing inflationary changes. .575. Older inventory is being used to determine the cost of goods sold and newer inventory is being used to report assets.No matter how you look at it. you are still coming up with 700 widgets that cost you a total of Rs. However. This would all be well and good if the value of money remained static. LIFO decreases the value on the income statement. It is essential that inventory should be properly safeguarded and correctly accounted. The affects cash flow when businesses seek credit to pay for ongoing operations. but can reduce the level of depreciation you are able to take on assets. storage. consumption and accounting. NEED OF THE STUDY:- Inventories are equivalent to cash and they make up an important of the total cost. The method is rarely used in defences. The success of a business concern largely depends upon efficient purchasing. This is good for taxes but bad for borrowing. thereby increasing tax liabilities but also improving credit scores and the ability to borrow cash for ongoing operations. using FIFO will show a greater value on the balance sheet. Industries most likely to adopt LIFO are department stores and food retailers. your accounting method can have a strong impact on how healthy the business looks on income statements and balance sheets. Proper control of inventory can make a substantial contribution to the efficiency of a bussiness. RISING PRICES When prices are rising. When this happens.
The different techniques of inventory control may be summarized as follows: (1) Inventory level Technique The main objective of stock control is to determine and maintain the optimum level of stock so that there is neither shortage of any material nor unnecessary investment in inventory. It is fixed after taking into consideration the following factors: . it becomes necessary to be conversant with the different techniques of inventory control. the firm should determine the optimum level of investment in inventory.INVENTORY MANAGEMENT TECHNIQUES In managing inventories. RE-ORDERING LEVEL (ORDERING LEVEL) It is the point at which if the stock of the material in stores reaches. This level is fixed somewhere between maximum and minimum level is such a way that the difference of quantity of the material between the reordering level and the minimum level will be sufficient to meet requirements of production up to the time of fresh supply of the material. the firm‟s objective should be in consonance with the wealth maximization principle. To deal with the problems of inventory management effectively. The main object of fixing this limit is to ensure that unnecessary working capital is not blocked in stores. For this purpose. (2) Maximum stock Limit: This represents the quantity of inventory above which it should not be allowed to be kept. The quantity is fixed keeping in view the disadvantages of overstocking. determination of maximum and minimum limits of inventory and ordering level is necessary. To achieve this. Although the concepts involved in inventory management are production-oriented and are not strictly financial it is important that the financial manager understand them since they have certain built-in financial costs. the storekeeper should initiate the purchase requisition for fresh supply of material.
It is necessary for an effective ABC analysis that all the items should be included for the Classification. The following facts need to be noted with regard to ABC Analysis: 1. For example an items may be of small value but may be critical in the sense that its non-availability hampers the production process and its supply is irregular. This technique. has universal applications in many areas of managing the inventory. 2. Through usually the inventory items are classified into three categories viz AB andC only. The technique tries to analyze the distribution of any characteristic by money value of importance in order to determine its priority. it needs supplementing with detailed knowledge . Thus the ABC analysis not the ultimate exercise in inventory management. popularly known as always better control or the alphabetical approach. The management has to be extra careful about its inventory. even though the items figures in the category C.ABC ANALYSIS: ABC Analysis is a basic analytical management tool which enables top management to place the effort where the result will be greatest. The items that lie between the top and bottom are called the „B‟ category item. 3. The annual consumption analysis of any organization would indicate that a handful of top high value items less than 10% of total number will account for a substantial portion of about 75% of the total consumption value and these few vital item are called A class items which need careful attention of the materials manager. Similarly a large number of bottom items over 70% of total number called the trival many account only for about 10% of the consumption value and are known as the „C‟ class. but nothing prohihibits a firm to undertake the analysis on the basis of a larger catagorisization.Through according to ABC Analysis category C gets only a simple attention. the management should nevertheless have to be vigilant in its approach.
If the firm is planning a production run. The vital spares are a must for running the concern smoothly and these must be stored adequately. Determining an optimum inventory level involves two type of costs: (a) ordering costs and (b) carrying costs: The economic order quantity is that inventory level that minimize the total of ordering and carrying costs. The non-availability of vital spares will cause havoc in the concern. These problems are called order quantity problems. EOQ = 2(annual usage in unit)(order cost) Annual carrying cost per unit VED ANALYSIS: The VED analysis is used generally for spare parts. 4. Spare parts are classified as: Vital (V). It is rather the usage value of the items which must be used for the purpose of classification. it has to decide lost in which it has to be purchased on replenishment. The demand for spares depends upon the performance of the plant and machinery. A-B-C analysis may not be properly used for spare parts. and the task of the firm is to determine the optimum or economic order quantity (or economic lot size). If the firm is buying raw materials. The E types of spares are also necessary but their stocks may be kept at .and monitoring. the issue is how much production to schedule (or how much to make). Essential (E) and Desirable (D). ECONOMIC ORDER QUANTITY TECHNIQUE One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. The requirement and urgency of spare parts is different from that of materials.Price of the items and their physical quantities shouldn‟t be made the basis of ABC analysis.
stock turns. The classification of spares under three categories is an important decision. and stock turnover. The success of the system depends on how well a company manages its suppliers. The system requires perfect understanding and coordination between the manufacturer and supplier in terms of the timing of delivery and quality of the material. The classification of spares should be left to the technical staff because they know the need. The system puts tremendous pressure on suppliers. A wrong classification of any spare will create difficulties for production department. ITR = Cost of goods sold Average inventory . saves carrying and other related costs of manufacturer. Inventory turnover is also known as inventory turns. The stocking of D types of spares may be avoided at times. The delivery of material is synchronized with the manufacturing cycle and speed. The JIT inventory system complements the total quality management (TQM). They will have to develop adequate system and procedures to satisfactory meet the needs of manufacturers INVENTORY TURNOVER RATIO: (ITR) In accounting. stock turn. If the lead time of these spares is less. In a JIT system material or the manufactured components and part arrive to the manufacturing sites or stores just few hours before they are put to use. the Inventory turnover is an equation that measures the number of times inventory is sold or used over in a period such as a year. turns. The equation equals the cost of goods sold divided by the average inventory. JIT system eliminates the necessity of carrying large inventories.low figures. then stocking of these spares can be avoided. urgency and use of these spares. Poor quality material or complements could halt the production. JUST-IN-TIME (JIT) SYSTEM: Japanese firms popularized the just-in-time (JIT) system in the world. and thus.
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