Senthil (icfai Tirchy) Financial Management Project

[email protected] www.rady.ucsd.edu/recruiting

A STUDY ON THE INVENTORY CONTROL TECHNIQUE EMPLOYED BY E.I.D PARRY www.rady.ucsd.edu/mba

INTRODUCTION The main objective inventory control is to achieve maximum efficiency in production and sales with the minimum investment inventory. Inventory comprises of stock of materials, components, work in progress, and finished product and stores and spares. Inventory management involves the control of assets being produced for the purpose of sale of the normal course of the company’s inventory,

operations. work

in

Inventories

process

include

inventory

and

raw

materials

finished

goods

inventory. The goal of effective inventory management is to minimize the total costs (direct and indirect) that are associated with holding inventories. The total ordering costs can be decrease by increasing the size of order, the carrying costs increase with the increase in order size indicating the need for a proper balancing of these of costs behaving in opposite directions with change in order size. If a company wants to avert stock-out costs it may have to maintain larger inventories of materials and finished goods which will results in higher carrying costs. Here also proper balancing of 1

the

costs

becomes

important.

a

system

for

inventory

management involves three subsystems namely economic order quantity, reorder point and stock level. The most important objective or inventory control is to determine and maintain an optimum level of investment in the inventory. Most companies have now successfully installed one or the other system of inventory planning and control. The inventory control models range

from

very

simple

methods

to

highly

sophisticated

mathematical inventory models

Company Profile E.I.D. Parry is a diversified company. It has also been a pioneer in many fields, including setting up of India's first chemical fertilizer plant (in Ennore), sugar plant (in Pettavaithalai, Nellikuppam) and sanitaryware plant (in Ranipet). Over the last few years, E.I.D. Parry has been sharpening its focus and narrowing its business spread. It also exited the seeds business (now a JV with Monsanto), tiles business (in Karaikal) and the electronics business. In this continuous process of redesigning E.I.D. The restructuring exercise has enabled the Company to have greater focus on its Sugar, Parryware and Bio-Product businesses and will facilitate growth in future. It will continue to benefit from the investment in the fertilizer business (CFL having acquired 45% net in Godavari Fertilizer & Chemicals Ltd.) without having to invest new capital. It has reduced debt and has simplified the corporate financial structure. E.I.D Parry also totally renovated its office complex consisting of three adjacent buildings in the' eponymous Parrys Corner, a landmark in Chennai. This 2

modern facility now houses all the major companies of the Murugappa Group and provides a steady cash flow to the Company by way of rent. Sale of surplus assets has also released cash. The turnover of the Company for the year ended 31st March 2004 was Rs. 641 crore. The current year's results are therefore not comparable with the previous year's. E.I.D. Parry derives majority of its income from its sugar operations, viz., sugar, molasses, alcohol and co-generation of power. All the four sugar factories of the Company are located in Tamil Nadu, viz., at Nellikuppam, Pugalur, Pettavaittalai and Pudukottai with a combined cane crushing capacity of 14000 tonnes/day. The Nellikuppam unit, an integrated sugar complex, comprises of a distillery unit (capacity 135 lakh lines), a 24.5 MW co-generation power plant and an organic manure plant. The company's application for producing ethanol (capacity 90 lakh litres) is awaiting regulatory clearances. The Company is setting up a facility for producing high grade sugar. At Pugalur, the Company is setting up a 22 MW co-generation power plant, which will be partly funded by Tamil Nadu Newsprint Limited (TNPL). The power plant is expected to be commissioned in the third quarter of next year. The company has R & D facility in all its units with a central facility at Bangalore engaged in breeding, entomology, soil testing, tricho production etc. The company's tissue culture lab, with a capacity to produce 3 million plantlets, provides disease-free seedlings to cane growers. The R& D wing also develops and propagates the best agricultural practices to cane growers to maximise the per acre yield. • All 4 sugar factories are strategically located in Tamil Nadu • Cane crushing capacity of almost 14000 TCD, one of the largest capacities in the industry

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• Nellikuppam integrated sugar complex; first of its kind in this part of the country • A dedicated R&D centre for the sugar division •

New varieties for improving cane yield

OBJECTIVE To find out the inventory control technique used in E.I.D PARRY. 2.To find out efficient are performance of inventory control in E.I.D PARRY. 1.

METHODOLOGY Collection of data inventory control ➢ Face to face interviews ➢ Analysis & interpretation ➢ Finding & suggestion ➢

Collection of data: Techniques of inventory control: 1. Setting of various stock level 2. Establishment of system of budgets 3. Use of perpetual inventory and continuous stock verification. 4. Economic order quantity. 4

5. Review of slow and non moving items.

Setting of various stock levels Minimum level In the level indicates the lowest figure of inventory balance, witch must be maintained in hand at all times, so that there is no stoppage of production due to non availability of inventory. Minimum

level=ROL-

average

rate

of

consumption×average re order period Maximum level It indicates the maximum figure of inventory held in stock at any time. Maximum

level=Reorder

level

+Reorder

quantity-

(minimum rate con.× Minimum reorder period. Reordering level =maximum usage per period × maximum reorder period

Establishment of system of budgets

5

To control investment in the inventories it is necessary to know in advance about the inventory requirement during a specific period usually a year.

Use of perpetual inventory and continuous stock verification Bin cards In the card maintain a quantitative record of receipts, issue and closing balance each item of store. Separate bin card maintain in each items. Stores ledger Is maintains to record all receipts and issue transactions in respect of materials. It is filled up with the help of goods received note and materials issue requisitions’.

Economic order quantity Purchase deportment in manufacturing concerns is usually faced with the problem of deciding the quantity of various items which they should purchase. If the purchases of material are made in bulk then inventory carrying cost will be high. On the other hand if order size is small each time, then the ordering cost will be high. In the order to minimize ordering and carrying costs is necessary to determine the order quantity which minimizes these two costs. The size of the order for which both ordering and carrying cost are minimum is know is economic order quantity. 6

MATREIAL COST These are the costs of purchasing the goods including transportations and handling costs. ORDRING COST Any manufacturing organization has to purchase materials. In that event the ordering costs refer to the cost associated with the preparation of purchase requisitions by the user deportment, preparation of purchase order and follow up measure taken by the purchase deportment, transportations of materials ordered for, inspection and handling at the warehouse for storing. CARRYING COST These are the expenses of storing good. Once the goods have been accepted, they become part of the firm inventories. These cost include in insurance, rent, warehouse depreciation, salaries of storekeeper only small portion of total carrying cost.

Review of slow and non moving items Due to high value of slow moving and non moving raw material, it appears that the concern has blocked huge sum of money unnecessarily in raw materials. To overcome this problem, it is necessary to dispose off early as possible, the non moving items or make arrangement for their exchange with the inventories required by the concern.

Face to face interview

7

I asked for the duration of techniques they are using. They said that the above the techniques were installed at from to time to time. They have been faced the lot of problems while installing the system. But the difficulties were overcome by them using the work of internal audit staff. The techniques are very benifitable to them in all aspect as it reduces the cost of the inventory considerably. The company has appointed the Internal Auditor for verifying the stock physically on a yearly basis. The management has insisted the stores department to verify the materials for every quarter. The stock record has to be submitted to the management

for

every

review

meeting.

Reasons

for

any

deviations in the verification made should be explained by the concerned person. The company has installed the Enterprise Resource Planning (ERP) for accounting the stock movements. In ERP the company is using the SAP package. EID Parry (India) Ltd., requires various components for producing the sugar. From that I have selected the following four components for analysis of the control technique employed: ➢ Bearings, ➢

Shaft

➢ Nuts and bolts The company Annual demand for bearing and shaft and nuts and bolts 4000, 2500and 6000.ordering cost per order, Rs. 120, 100 and 130. Carrying cost per unit 10%, 20% and 8%.

Analysis & interpretation 8

Table: 1 cost of per unit

Annual require ment

orderi ng cost per order

Carryi ng cost %

carryi ng cost per unit

EOQ

1

Bearings (In Units)

300

4000

120

10

30

179

2

shaft(In units)

1000

2500

100

20

200

50

3

Nuts and bolts (In Units)

200

6000

130

8

16

312

S.n o

Component

Chart: 1

9

Calculation of EOQ:

EOQ

= 2AF/C

Where: A-annual demand F-ordering cost per order C-carrying cost (cost per unit *carrying cost %)

EOQ of Bearing: A=4000, F=120, C=300*10/100 EOQ=

2AF/C 10

=2×4000×120÷30 =32000 =178 units EOQ of shaft: A=2500, F=100, C=1000*20/100 EOQ=

2AF/C

=2×2500×100÷200 =2500 =50 units EOQ of Nuts and bolts: A=6000, F=130, C=200*8/100 EOQ=

2AF/C

=2×6000×130÷16 =97500 =312 units

EOQ of Annual requirement of inventory control in E.I.D parry s.no

Compound

Annual requirement

11

inventory 1

Nuts and bolts

312 units

2

shaft

50 units

3

Bearing

178 units

Setting of various stock levels Details of lead time Average 10 days maximum 15 days, minimum 6 days, for emergency purchases 4 days. Rate of consumption Average 15 units per day, maximum 20 units per day

Calculations of stock level Reordering level =maximum usage per period × maximum reorder period = 20 × 15 = 300 units

Maximum level

12

= Reorder level +Reorder quantity-(minimum rate con.×Minimum reorder period = 300 units + 200 units – (10 unit per day × 6 day) = 440 units Minimum level = Reorder level- average rate of consumption×average re order period = 300 units – (15 units per day × 10 days) = 150 units. Danger level = average consumption × lead time for emergency = 15 units per day × 4 days. = 60 units.

Finding & suggestion 13

1. 2. 3.

ERP system installed in the company is very useful for controlling the inventory movements. The staffs are well trained in using the system. Inventory control techniques employed by the company are very benifitable to the company.

Conclusion The company may also employ some other techniques like ABC analysis and Two Bin system etc., so as to improve the efficiency of controlling the inventory.

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