Inventory Management-summer Training

Project 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 I wish to express my gratitude to all those individuals with whom, I interacted and gained knowledge, insight and thoughts while preparing this project report. First of all, I am grateful to the Chief General Manager, DCC, for granting me permission to do this project in the organization. At the same time I would like to thank Shri N.P.Sarkar, S.E. (E&M)/I/C, Training and Shri Bhaskar Chakraborty, Dy. Chief F.M., DCC for their co-operation during the training period. I would also extend my thanks to Shri K.C.Saha, F.M, DCC for his able guidance and encouragement while working on this project. I also take this opportunity to thank the senior managers of all the divisions of finance department for their co-operation while I visited their respective divisions. I also owe a lot to my father Shri K.N.Bag, Practising Cost Accountant, who has always been a source of guidance and inspiration while making this project and without the help of whom, doing this project was almost impossible. 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



SOUTH EASTERN COALFIELDS LTD.-A PROFILE OF THE SUBSIDIARY

DANKUNI COAL COMPLEX-A PROFILE OF THE UNIT OF SECL INVENTORY MANAGEMENT-AN OVERVIEW ANALYSIS OF INVENTORY OF DANKUNI COAL COMPLEX 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.

OBJECTIVE OF THE STUDY



To find out the efficiency of Inventory management in Dankuni Coal Complex, a unit of South Eastern Coalfields Ltd. (SECL).



To have a first hand experience of the functioning of a coal carbonization plant.

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To have a practical experience of the functioning of the Finance Department of a coal gas producing company.

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To study how inventory management practices plays an important role in supporting other activities of an organization.

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To gain familiarity with the various methods and techniques followed by Dankuni Coal Complex (DCC) in maintaining their inventory.

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To judge the success of the management in balancing the production with the demand.

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To gain an in-depth knowledge of the tricks of faster conversion of inventories into cash in Dankuni Coal Complex.

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To find out the difference between the theoretical and practical aspect of inventory management.

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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.

COAL INDUSTRY IN INDIA-A RETROSPECT

Coal has traditionally been a vital input to the heritage of India. Commercial coal mining in India with coal as an article of trade started in the late 18th century, at the instance of Warren Hastings for the benefit of the East India Company for the manufacture of arms and ammunitions. This was in the Raniganj Coalfield in the eastern part of India along the bank of river Damodar. The post-independence thrust for industrial development in India necessitated greater coal production and led to the State taking over the coal sector in early seventies. And Coal India Ltd. was incorporated as the holding company for bringing in integrated development of coal. Much water has flown down the Ganges ever since then. The level of coal production in the country has become three times than that was prevalent at the time of nationalization in the early seventies. Coal India contributes 85% of the coal produced and consumed in the country. 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. With the advent of independence, the country embarked upon Five-Year National Development Plans to improve the economic status of the people. Coal being the most important and proven energy form available, the need was felt in the First Five Year Plan for greater and more efficient production of coal. A production of 39 MT/yr was envisaged by the terminal year (1955/56) of the first five year plan. The Second Five-Year Plan set a more ambitious coal production target of 60 MT/yr by the terminal year (1960/61) of the plan terminal period. During this period, it was considered that the private sector would not be able to achieve the target of coal production. As a result, the National Coal Development Corporation Ltd. (NCDC), a Government of India undertaking, was established in 1945 with the collieries owned by the railways as its nucleus. Alongwith Singareni collieries Co ltd. (SCCL), already in operation in Southern India from 1945, the country thus had two state-owned coal companies. With the government’s national energy policy, the near total national control of coal mines in India took place in two stages. The coking coal mines were taken over in 1971 and nationalized in 1972 and the non-coking coal mines were taken over and nationalized in 1973. In 1975, the holding company Coal India Limited was formed. Singareni collieries Co. Ltd. (SCCL) continued to maintain its separate identity, while a few of captive mines belonging to steel plants such as Tata Iron and Steel Company Ltd. (TISCO) and the Steel Authority of India Limited (SAIL-IISCO) and power agency, Damodar Valley Corporation (DVC) were kept out the purview of coal nationalization.

COAL INDIA LTD. - A PROFILE OF THE PARENT The Government of India had re-organized the whole management structure of the Coal Industry in the Central Public Sector vide, Minister of Energy, Department of coal, letter no. 38011/1/74/CAF dated 27th September, 1975. This was with a view to integrate and streamline the structural setup in such a manner as would be conductive to more efficient administration and facilitates the attainment of objectives laid down. In this re-organization:♣ The CMAL (Coal Mines Authority Limited) was converted into a holding company and named Coal India Limited (CIL). ♣ The erstwhile divisions of CMAL were converted into registered subsidiary companies of CIL. ♣

The Bharat Coking Coal Limited (BCCL) and National Coal Development Corporation Limited (NCDC) became the subsidiaries of CIL.

On 21st October 1975, CIL, was formed as a holding company with its registered office at 10 Netaji Subhas Road, Kolkata-700001 and BCCL and NCDC were transferred to it. Coal India Ltd., presently contributes 85% of the total coal production in the country. It operates through eight subsidiaries: seven production companies namely Eastern Coalfields Ltd. (ECL), Bharat Coking Coal Ltd. (BCCL), Central Coalfields Ltd. (CCL), Northern Coalfields Ltd. (NCL), Western Coalfields Ltd. (WCL), Mahanadi Coalfields Ltd. (MCL), and one R & D company namely CMPDIL (Central Mine Planning & Design Institute Ltd.) for mine planning, design and engineering consultancy services. Three units viz. North Eastern Coalfields Ltd. (NEC), Magherita (Assam), Dankuni Coal Complex (DCC), Dankuni (W.B.), Indian Institute of Coal Management (IICM), Ranchi (Jharkhand) are directly under CIL. The Dankuni Coal Complex is however currently under lease to SECL on rental charges from 1.4.95.Coal India Ltd. Spread over 8 states, has 478 mines, 82 areas, 16 washeries and has over 200 administrative establishments like workshop, hospitals and captive power plants. Not only this, CIL owned 140771 hectares of land surface mining sights out of the total 3287263 sq. km. landmass of India. CIL, which employs more than 4.25 lakh

people, is also the largest corporate employer of India and the second largest in the world after General Motors, U.S.A. According to Business World Survey of top 500 companies in 2003, CIL ranked 21st in overall category listing. In terms of industry wise ranking, it ranked 1st among other mining sector companies. By assets it stood 10th among 50 others with an asset base of whopping 16533.1 crores. By profits, it reached 23rd with a net profit of 516.8 crores in 2002-03. And lastly, in terms of coal production at global level, CIL is the largest coal producing company in the world. 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. BROAD FUNCTIONS OF CIL ♣

Laying down policies.

♣ Formulating long and short term strategies. ♣ Monitoring the functions of the subsidiary companies ♣ Laying down system and procedures. ♣ Assisting the subsidiary companies to achieve their objectives. ♣ Coordinating with ministry of coal, ministry of railways, planning commission and other ministries. SPECIFIC FUNCTIONS OF CIL ♣ Pricing and distribution of coal ♣ Coal supply agreements ♣ Consumer services through regional offices ♣ Negotiations of wages ♣ Executive cadre control – recruitment, promotion/postings, pay/perks etc. ♣ Manpower planning – HRD ♣ Foreign collaboration ♣ Introduction of new technology

♣ R&D activities ♣ Mobilization of resources – long term and short term ♣ Accounting policies. PRODUCTS AND SERVICES OF CIL 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. ORGANIZATION STRUCTURE OF COAL INDIA LTD. COAL INDIA 1975 478MINES

ECL (SANCTORIA ) 1975, 112MINES

BCCL (DHANBAD) 1973, 80MINES

WCL (NAGPUR) 1975, 80MINES

NCL (SINGRAULI) 1986, 16MINES

NEC (MARGHERI TA) 1975, 7MINES

CCL (RANCHI) 1975, 63MINES

CMPDIL (RANCHI) 1975 for R&D

SECL (BILASPUR) 1986, 97MINES

MCL (SAMBALPU R) 1992, 23MINES

SOUTH EASTERN COALFIELDS LTD.-A PROFILE OF THE SUBSIDIARY

South Eastern Coalfields Limited is the largest coal producing company in the country. It is one of the eight subsidiaries of Coal India Limited (A Govt. of India Undertaking) under the Ministry of Coal. The company was adjudged the best PSU in the country for 97-98 and was awarded Jawaharlal Nehru Memorial National Award for pollution control and energy conservation in the year 2003 and Excellence award in 2004 and 2006. SECL has been awarded “Mini Ratna" Status by Government of India in 2007. In year 2007-08 the total coal production by SECL was 93.79 million tonnes from open cast and underground mines which is highest among all subsidiaries of Coal India Ltd and among all coal producing companies in India. In the year 2007-08 out of total coal production of 379.49 million tonnes produced by Coal India Ltd., total coal production by SECL was 93.79 million tonnes. SECL has been making profits since its inception. PRODUCTION AND PRODUCTIVITY A Mini Ratna Company -South Eastern Coalfields Limited has made a record in the year 2007-08 in Production and set an all time highest record in Overall Performance in respect of offtake/despatches, production, wagon loading, quality improvements and optimization of overall consumers’ satisfaction in terms of meeting their coal requirement.Total Production in the year 2007-08 was 93.79 Million Tonnes against the target of 91.5 Million Tonnes which is 5.98 % more than in the year 2006-07. SECL has also set a historical all time high record of despatch by despatching 95.00 Million Tonnes to its various Consumers during the year 2007-08.This is an all time high record by any subsidiary of Coal India Limited.

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. There are 40 UG Mines, 12 OC Mines, 1 Mixed Mines in Chhattisgarh and 32 UG Mines, 8 OC Mines in Madhya Pradesh. These mines are divided into 13 Administrative areas 1. Johilla area area

2.Sohagpur area

5. Chirimiri area

6.Baikunthpur area

9. Korba area 10.Gevra area area.

3.Jamuna & kotma area

4.Hasdeo

7.Bisrampur area 8.Bhatgaon Area

11.Kusmunda area 12.Raigarh area 13.Dipka

The corporate office is at Bilaspur (C.G.). As on 31/03/2007 SECL has geological coal reserve of 46452.02 million tonnes. As on 31/03/2007 SECL has mining right over 973.58 sq.km and all rights over 264.66 sq km. 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-A PROFILE OF THE UNIT OF SECL

The Fuel Policy Committee of Govt. of India in its report in 1974 recommended the setting up of a number of Low Temperature Carbonization Plant in India for replacement of petroleum based fuel oil in the wake of sudden rise in petroleum prices during the middle of 1970’s. In pursuance of this decision, Govt. of India decided that such a Plant would be operated by Coal India Ltd. Accordingly a Carbonization Plant at Dankuni was set up. The foundation stone was laid by Former Prime Minister Shri Indra Ghandi in 1981and the plant started operation in the early 1990’s. The Prime Objectives of this project is to produce: ♣ About 800 tonnes per day of solid Smokeless Fuel, branded as CILCOKE. ♣ About 18 million cft of Coal gas per day for supply in and around Calcutta and Howrah ♣ About 70 to 75 tonnes of Tar Chemicals per day. ♣ Both solid and gaseous fuels, being very clean in nature, would subsequently contribute to the reduction of pollution level of Calcutta and Howrah. Dankuni Coal Complex Plant has been leased out by Coal India Ltd. to SECL PRODUCTS OF DANKUNI (WEST BENGAL)

COAL

COMPLEX,

DANKUNI

The products of DCC are CILCoke, Cokefines, Coal gas, Light Oil, Neutral Oil, Heavy Oil, Soft Pitch, Phenol, Ortho-cresol and Metapara-cresol, Xylenol, High Boiling Tar Acid, Ammonium Sulphate, Sulphur, Calcium Carbonate and Dehydrated Tar. A BRIEF EXPLANATION ABOUT THE MAJOR PRODUCTS 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. Fixed Carbon content: 62-67%, V.M: 3-5%, Phosphorous- 0.03-0.04%,

Calorific Value: 5000-5500 K. Calorie/Kg. Usage: (+) 6 mm Coke used as smokeless domestic fuel, Industrial Reductant for mfg. of Bulk Ferro-Alloys. (-) 6 mm coke used for Briquettes, Cement Plants, Smelting/ Rosting. Coal Fines: Size of 0-25 mm, Ash- 18-22%, Calorific Value- 5400 to 5800 K.Cal/Kg Usage- (i) Sweetener for improving PLF in Power Plants. (ii) In cement plants for better quality products. (iii) Due to long flame character, suitable for Boiler and furnace, Brick and lime kilns. CoaL Tar: Destructive distillation of high V.M. Coal in Retorts liberates Coal-Tar. Specific Gravity 1.02-1.05, Moisture- 1-2%. GCV above 10000 K.Cal/Kg., Kinematic Viscosity 184. 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 In financial parlance, inventory is defined as the sum of the value of raw materials, fuels and lubricants, spare parts, maintenance consumables, semiprocessed materials and finished goods stock at any given point of time. The operational definition of inventory would be: the amount of raw materials, fuel and lubricants, spare parts and semi-processed material to be stocked for the smooth running of the plant. Since these resources are idle when kept in stores, inventory is defined as an idle resource of any kind having an economic value. 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 Inventory or stock is referred to in a variety of ways: A Stock-keeping unit (SKU) is a separately identifiable class of item, which is complete in the sense that a customer in that form can utilize it. Manufacturing, wholesale and retail inventory depends on the type of firm holding the inventory. These could be held in different forms for the same material. For example, wholesale in bulk form, and retail in packaged form. During manufacturing, input inventory is raw material; an inventory in-between processing stage is referred to as work-in-process; and after the completion of manufacturing is called as finished goods inventory. Transit or in-transit or pipeline inventory is inventory that either waiting or in the process of transportation. The speed of transportation and the point of time

of ownership transfer of pipeline inventory determines the time of holding, and hence the cost of holding this inventory. Seasonal stock refers to the material, which is purchased or manufactured in anticipation of seasonal demand. Promotional stock is the additional stock kept ready for the increase in demand due to market promotions of products. Speculative stock is the additional stock purchased as a hedge against the possibility of future increase in price of the material. Dead stock is unused and / or obsolete stock, which cannot be sold. 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: Inventory level is the actual inventory quantity held at a logistical facility at a particular point of time. Cycle inventory or base stock refers to the inventory quantity held in stock due to the replenishment time required in the ordering process. Replenishment time or lead-time is the time elapsed between order placement and order receipt for an inventory item. In case inventory is to be replenished by manufacturing, this id the time elapsed between the work order issue for manufacturing and the completion of manufacturing. 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. Order quantity is the inventory quantity, which is ordered for replenishing depleting inventory. FUNCTIONS OF INVENTORY The necessity of holding inventory is due to the following 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. Balancing supply and demand: Demand depends upon the requirements of customers relating to time and quantity of products, and is not in the control of the producer. Supply, on the other hand is under the producer’s control, but has to be economized and also paced with the time and quantity requirements of customer demand. In order to ensure that customers are not dissatisfied when they demand the required quantity of products, it is necessary to have adequate inventory of products available at all times. This is the balancing inventory required due to the different rates of manufacturing and consumption. In case of seasonal products when production has to take place for a longer period of time in advance of the season, production throughout the year ensures lower investments in production capacities while increasing inventory. An example is the production of rainwear throughout the year for the sales which will occur only during the rainy season. Another example of balancing is seasonal production during raw material availability and year-round consumption, which also requires inventory. The example of this is seasonal availability of mango fruit and year-round consumption of mango –based products.

Economies of scale: Economies of scale are obtained by holding large inventories a) While purchasing, ordering in large quantities provides cost economies and discounts; (b) transportation economies are obtained by transporting in larger quantities; and, (c) during manufacturing, producing in economic batch quantities lower costs. 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 ♣ Standard industrial items purchased from outside (also called bought outs) ♣ Non-standard items (purchased items) ♣ 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. RISK OF HOLDING INVENTORY The holding of inventory creates the following risks for a firm: ♣

The investments committed to a particular inventory combination are not available for alternative uses for the benefit of the firm. The risks in these case is due to the interest cost incurred on this inventory until the investment is recovered, as also the opportunity cost of profit which might have been made in alternative investment.

♣

The inventory may be pilfered or lost.

♣

The inventory may become absolute and/ or useless.

♣ Determination of inventory is another risk for holding inventory. 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 of the item. ♣ Cost of procuring the item. ♣ Cost of carrying the item in inventory. ♣ 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 of operating the information processing system:

Whether by hand or by computer, someone must update records as stock levels change, for system in which inventory levels are not recorded daily, the cost is primarily incurred in obtaining accurate physical counts of inventories. Frequently, these operating costs are more fixed than variable over a wide quantity range. Therefore since fixed costs are not relevant to the operating doctrine, we will not consider them further. 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. TECHNIQUES OF INVENTORY MANAGEMENT Economic Order quantity: 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 or uniform demand- although the EOQ model assumes constant demand, demand may vary from day to day. If demand is not known in advance- the model must be modified through the inclusion of safe stock. 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. Constant ordering cost- this assumption is generally valid. However any violation in this respect can be accommodated by modifying the EOQ model in a manner similar to the one used for variable unit price.

Instantaneous delivery- if delivery is not instantaneous, which is generally the case; the original EOQ model must be modified through the inclusion of a safe stock. Independent orders- if multiple orders result in cost saving by reducing paper work and the transportation cost, the original EOQ model must be further modified. While this modification is somewhat complicated, special EOQ models have been developed to deal with it. 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: The time-based approach to inventory management came into focus when Toyota Motors Company came out with the concept of kanban in 1950. This lead to the dramatic reduction in WIP quantities tying the inventory closely to the demand from subsequent process or internal customer. Kanban is conceptually a two-bin system, a signal being raised to warrant replenishment. JIT approach became a modern production system seeking to implant concept of stockless production. JIT embraced a variety of manufacturing concepts like reduced lot sizes, quick switch over [SMED], load leveling [response to tact time], group technology, statistical process control [control charts], preventive maintenance and quality circles. 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 7075% 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 1015% 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 510% 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. Policies of Control for A, B and C Categories: 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: A items should be subject to frequent review to reduce unwarranted stockouts and possibilities of overstocking. A reasonable good analysis for order points is required for “B” items but the stocks may be reviewed less frequently. No such computations are necessary for “C” items. These should be bought in bulk. Staggering of delivery schedules: Staggering of delivery schedules is one of the best strategies to reduce the inventory investment and ensure un-interrupted inflow of materials. Staggered deliveries tend to reduce cost of order writing but increase the cost of inspection and receiving. Annual contract with scheduled deliveries are desirable for “A” and “B” class of items. “C” class of items, however, should be purchased in bulk on single-order-basis. 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: VIP treatment may be accorded to A items in all activities such a processing of purchases orders, receiving, inspection movement on the shop floor, etc., with an object to reduce lead time and average inventory. No such treatment is necessary for “B” items. No priority is assigned to “C” items. 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: To secure maximum benefits, it is essential to select those items for value analysis which offer the highest scope for cost reduction. The usage classification is a useful step in this direction. Only “A” and “B” items are selected for detailed value analysis and the former is given priority over the latter. “C” items should not be value analyzed 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. HML analysis helps to -

♣

Assess storage and security requirements.

♣

To keep control over consumption at the departmental head level.

♣

Determine the frequency of stock verification.

♣

To evolve buying policies to control purchase.

♣ To delegate authorities to different buyers to make petty cash purchase 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: S-D-E analysis is based on the problems of procurement namely: ♣ Non-availability ♣ Scarcity ♣ Longer lead time ♣ Geographical location of suppliers, and ♣ Reliability of suppliers, etc. 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. “Scare” classification comprise of items, which are in short supply, imported or canalized through government agencies. Such items are best to procure limited

number of times a year in lieu of effort and expenditure involved in the procedure for import. “Difficult” classification includes those items, which are available indigenously but are not easy to procure. Also items, which come from long distance and for which reliable sources do not exist, fall into this category. Even the items, which are difficult to manufacture and only one or two manufacturers are available belong to this group. Suppliers of such items require several weeks of advance notice. “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. The purchase department employs S-D-E analysis: ♣ To decide on the method of buying ♣

To fix responsibility of buyers

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. Non-seasonal items whose quantity is decided on different considerations. 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. Such an analysis helps to identify: Active items which require to be reviewed regularly Surplus items whose stocks are higher than their rate of consumption; and Non-moving items which are not being consumed X-Y-Z Analysis: X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory investment). Items whose inventory values are high are called as X items while those inventory values are low are called Z items. And Y items are those which have moderate inventory stocks. Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML 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.

ANALYSIS OF INVENTORY OF DANKUNI COAL COMPLEX POSITION OF SALES AND INVENTORY IN DANKUNI COAL COMPLEX 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

Sales

58.30

67.38

78.56

87.72

121.83

82.78

Inventory

20.91

25.30

33.67

31.10

32.41

28.68

The inventory figures in Dankuni Coal Complex are composed of items:♣ Stock of chemicals, Pol, stores and spares after making adjustment of obsolesces and shortages thereof. ♣ Stock of coal ♣ Manufactured items produced in the workshop. 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 ♣ Inventory Holding and ♣ Inventory to Total Current Asset. INVENTORY TURNOVER RATIO 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 YEAR

2003-04

Inventory 2.79 Turnover Ratio (times)

2004-05

2005-06

2006-07

2007-08

AVERAGE

2.66

2.33

2.82

3.76

2.87

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. INVENTORY HOLDING RATIO 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 YEAR

2003-04

Inventory 2.79 Turnover Ratio (times) Inventory 131 Holding Ratio (days)

2004-05

2005-06

2006-07

2007-08

AVERAGE

2.66

2.33

2.82

3.76

2.87

137

157

129

97

130

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.

MEASUREMENT OF TREND-METHOD OF LEAST SQUARES 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

The above two equations are reduced and we get, a =∑Y/N and b =∑XY/ ∑X2 Here N=number of years=5 Calculation for finding the equation of best fitted straight line in case of Sales is given below:YEAR

Sales (Rs in Crores) Y

X

X2

XY

2003-04

58.30

-2

4

-116.60

2004-05

67.38

-1

1

-67.38

2005-06

78.56

0

0

0

2006-07

87.72

1

1

87.72

2007-08

121.83

2

4

243.66

TOTAL

413.79=∑Y

0=∑X

10=∑X2

147.40=∑XY

Y= a + bX and a= ∑Y/N and b= ∑XY/∑X2 a= 413.79/5 = 82.76 and b= 147.40/10 = 14.74 Equation is Y= 82.76 + 14.74X YEAR

X

Trend Values

2003-04

-2

82.76+14.74×-2=53.28

2004-05

-1

82.76+14.74×-1=68.02

2005-06

0

82.76+14.74× 0 =82.76

2006-07

1

82.76+14.74× 1 =97.50

2007-08

2

82.76+14.74× 2 =112.24

Calculation for finding the equation of best fitted straight line in case of Inventory is given below:YEAR

Inventory (Rs in Crores) Y

X

X2

XY

2003-04

20.91

-2

4

-83.64

2004-05

25.30

-1

1

-25.30

2005-06

33.67

0

0

0

2006-07

31.10

1

1

124.40

2007-08

32.41

2

4

32.41

TOTAL

143.39=∑Y

0=∑X

10=∑X2

47.87=∑XY

Y= a + bX a= ∑Y/N and b= ∑XY/∑X2 a= 143.39/5 = 28.68 And b= 47.87/10 = 4.79 Equation is Y= 28.68 + 4.79X YEAR

X

Trend Values

2003-04

-2

28.68+4.79×-2=19.10

2004-05

-1

28.68+4.79×-1=23.89

2005-06

0

28.68+4.79× 0 =28.68

2006-07

1

28.68+4.79× 1 =33.47

2007-08

2

28.68+4.79× 2 =38.26

Computation of Inventory Turnover Ratio on basis of trend values:- Inventory Turnover Ratio on the basis of the calculated trend values of Sales and Inventory is given in the following table. The same formula of Sales/Inventory has been used to compute the trend Inventory Turnover Ratio. The table

also shows the Inventory Turnover Ratio on the basis of the original data. YEAR

2003-04

2004-05

2005-06

2006-07

2007-08

Sales (crores)

53.28

68.02

82.76

97.50

112.24

Inventory (crores)

19.10

23.89

28.68

33.47

38.26

Inventory Turnover RatioTrend (times)

2.79

2.85

2.89

2.91

2.93

Inventory Turnover RatioOriginal (times)

2.79

2.66

2.33

2.82

3.76

Analysis through Chart:A comparison of the above figures of trend and original Inventory Turnover Ratio has been done through a chart given in the following page. This line chart shows the difference between the figures of actual Inventory Turnover Ratio and the figures of trend Inventory Turnover Ratio and helps the management to identify the steps required to reduce the differences.

TREND LINE 5 4.5 4 3.5 3 2.5 2 1.5 1

ORIGINALLINE

3.76 2.79

2.66

2.82 2.33

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. Computation of Inventory Holding Ratio on the basis of trend Values: 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. YEAR

2003-04

2004-05

2005-06

2006-07

2007-08

Inventory Turnover RatioTrend (times)

2.79

2.85

2.89

2.91

2.93

Inventory Holding Ratiotrend(days)

131

128

126

125

125

Inventory Holding RatioOriginal (days)

131

137

157

129

97

Analysis through Chart:A comparison of the above figures of trend and original Inventory Holding Ratio has been done through a chart given below. This line chart shows the difference between the figures of actual Inventory Turnover Ratio and the figures of trend Inventory Holding Ratio and helps the management to identify the steps required to reduce the differences.

TREND LINE 160

ORIGINALLINE 157

150 140 131

130

137 129

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. REGRESSION ANALYSIS OF SALES AND APPLICATION OF CHI-SQUARE TEST To assess the association between sales and inventory of the company, Regression Equation of Sales on inventory was used and in order to test the statistical significance at 5% level between these two variables, Chi- Square was applied. The Regression Equation of sales(Y) on Inventory(X) is computed below: Calculation of Regression Equation:The Regression Equation of sales(Y) on inventory(X) is computed as per equation Y- Y¯=bYX (X-X¯) X=Inventory Y=Sales

x=X-X¯

y=Y-Y¯

x2

y2

xy

20.91

-7.77

-24.46

60.37

598.29

190.05

58.30

25.30

67.38

-3.38

-15.38

11.42

236.54

51.98

33.67

78.56

4.99

-4.20

24.90

17.64

-20.96

31.10

87.72

2.42

4.96

5.86

24.60

12.00

32.41

121.83

3.73

39.07

13.91

1526.46 145.73

143.39=∑X

413.79=∑Y

0=∑x

0=∑y

116.46= ∑ x2

2403.53 378.80 =∑ y 2 =∑ x y

X¯=∑X/n = 143.39/5=28.68 and Y¯=∑Y/n=413.79/5=82.76 bYX =∑ x y/∑ x 2 = 378.80/116.46=3.25 Thus the Regression Equation is y-82.76= 3.25x -93.21 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: YEAR

Oi=Actual Sales

Ei=Expected Sales

Oi – E i

(Oi – Ei)2

(Oi – Ei)2/Ei

2003-04

58.30

57.50

0.80

0.64

0.01

2004-05

67.38

71.78

-4.40

19.36

0.27

2005-06

78.56

98.98

-20.42

416.98

4.21

2006-07

87.72

90.63

-2.91

8.47

0.09

2007-08

121.83

94.88

26.95

726.30

7.65

Total

∑(Oi –

Ei)2 /Ei=12.23

Assuming that the value of H0 is true, we have χ2 =∑(Oi –Ei)2 /Ei=12.23 Degree of freedom is n-1=5-1=4 Tabulated value of Chi-Square at 5% level of significance with degree of freedom (d.f =4) is 9.49 Since the calculated value of Chi-Square or χ2 > the tabulated value of χ2 at 5% level with d.f.=4, we reject the null hypothesis. Hence, the alternative hypothesis is accepted and a significant relation between sales and inventory exists. It shows that the performance in respect of inventory management of the company during the period under study is good. INVENTORY TO TOTAL CURRENT ASSETS RATIO 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. Inventory to Total Current Assets= Inventory/Total Current Assets YEAR

2003-04

Inventory 0.70 To Total Current Assets Ratio (times)

2004-05

2005-06

2006-07

2007-08

AVERAGE

0.73

0.76

0.67

0.62

0.70

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 overall performance in respect to utilization of inventories is satisfactory during the study period. 

The Chi-Square Test by rejecting the null hypothesis reflects a relation between sales and inventory. In addition it supports the fact that the performance of inventory management is satisfactory.



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 analysis of Inventory Holding Ratio of the company shows that it had been successful in reducing the holding period of the inventory. 

The proportion of inventory out of total current assets had been efficiently reduced by the management thereby reflecting a better inventory management.



There had been significant differences between actual Inventory Turnover Ratio and trend Inventory Turnover ratio. At the same time there had been significant difference between actual Inventory Holding Ratio and trend Inventory Holding 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 Inventory Turnover Ratio may be improved if the management takes actions to investigate the causes of differences/ shortages of Stores and spares and thus remove the losses from the accounts, if any.

The management of the plant should incorporate TQM (Total quality management), particularly in all departments of production to ensure better sales and reduce the inventory of finished products. 

 The computation of Inventory Turnover Ratio for individual components of inventories may help the management of DCC to detect the imbalanced investments in various inventory components.  The company needs to have a standard in respect of minimum and maximum level of inventory. This will help the company in having a better inventory control and continuous flow of production. 

Proper storage facilities are recommended to prevent loss of inventory due to the lack of it or faulty methods of storage.

 The company must look for more buyers of its products to enable quick conversion of inventory into cash. 

The management of the plant should try to maintain the reduced Inventory to Total Current Assets Ratio in the future course of production.



The management must try to find out the causes of differences between actual sales and expected sales as shown by Chi-Square Test.

BIBLIOGRAPHY



Annual Report of Dankuni Coal Complex( 2003-04, 2004-05, 2005-06, 2006-07 and 2007-08)



CIL & You, an in-house publication by CIL.



Financial Management by M.Y.Khan and P.K.Jain



Financial Management by S.Kr.Paul



Financial Management by I.M.Pandey



The Management Accountant, Volume 40, published by The Institute of Cost And Works Accountants of India.



Mathematics and Statistics by Suranjan Saha.



www.CoalIndia.nic.in



www.SECL.nic.in



www.Managementparadise.com