inventory management swathi

8/12/2019 Inventory Management SWATHI

1/96

1

INTRODUCTION TO FINANCIAL MANAGEMENT

Financial management refers to that part of management activity, which is

concerned with the planning and controlling of firms financial resources. It deals with

finding out various sources for raising funds for the firm. The sources must be

suitable and economical for the need of the business. In simple words, financial

management study about the procuring and judicious use of financial resources with a

view to maximize the value of a business enterprise there by the value to the owner is

maximized.

Financial management is very important to every type of organization. It

refers to that part of managerial activity concerned with the procurement and

utilization of funds for the business purposes.

Finance is an important function in any business, as money is required to

support its various activities. It has given birth to Financial management as a

separate subject. As a separate subject, Financial management is of recent origin and

has not acquired a body knowledge of its own. It draws heavily on Economics for

its theoretical concepts.

In the early half of the last century, the job of financial management waslargely confined to the acquisition of funds. But as business firms continued to

expand their markets and they became larger and more diversified, greater control of

financial operation became highly important. Thus now the scope of financial

management is very wide and it should not be considered to be merely restricted for

raising of capital. It also covers other aspects of financing such as assessing the needs

of budgeting, maintaining liquidity lending and borrowing policies, dividend policy

and so on.


2/96

2

DEFINITIONS:

Ezra Solomon has defined The financial management deals with the

ef ficient use of an important economic resource namely capital funds. Financial management is the activity concerned with the planning, raising,

controlling and administrating the funds used in the business.

- Guthman and Dougall.

Financial management is that managerial activity which is concerned with the

planning and controlling of the firm s financial resources.

-I.M.Panday.

Financial management is concerned with the efficient use of an important

economic resource namely capital funds.

-Ezra Soloman

Financial management is the operation activity of a business that is

responsible for obtaining and effectively utilizing the funds necessary for efficient

operations.

- Joseph and Massie.


3/96

3

SCOPE OF FINANCIAL MANAGEMENT

The approach to the scope and the functions of financial management is

divided for the purpose of expositions into two broad categories

Traditional Approach:Traditional approach to the finance function relates to the initial stages of its

evolution during 1920 s and 1930 s when term corporate finance was used to describe

in the academic world today as the financial management.

The approach was focused on procurement of long-term funds. In that issue

allocation of funds which is so important today is completely ignored. The utilization

of funds was considered beyond the pure view of finance function.

B) MODERN APPROACH

The Modern approach views finance function in broader sense. It includes

both rising of funds as well as this effective utilization under the preview of finance.

The cost of raising funds and the returns from their use should be compared. The

utilization of funds requires decision making.

Finance functions covers financial planning rising of funds, allocation of

funds, financial control etc. Modern approach is an analytical way of dealing withfinancial problems of firms.

In that approach considers there are three basic management decisions i.e.,

investment decisions, financing & dividend decisions within the scope of finance

functions.

OBJECTIVES OF FINANCIAL MANAGEMENT

The objectives of financial management are:

A) Profit Maximization:-

According to this approach actions that increase profits should be under taken

and those that decrease profits are to be avoided. In specific operational terms as

applicable to financial management, the profit maximization implies that the

investment financing and dividend policy decisions of affirm should be oriented to the

maximization of profits.


4/96

4

B) Wealth Maximization:-

This is also known as value maximization or net present wealth maximization.

In current academic literature value maximization is almost universally accepted andappropriate operational criterion for financial management divisions as it removes the

technical limitation criterion. It operational features satisfy all the three requirements

of a suitable operational objective of financial courses of actions namely exactness,

quality of the benefits and the time value of money

AN OVER VIEW OF FINANCIAL MANAGEMENT

Trade -off

The financial manager in a bid to maximize owner s wealth should strive to maximize

returns relation to given risk. To ensure maximum return funds flowing in and out of

the firm should be constantly monitored to assure that they are safe guarded and

properly utilized.

Financial Management

Maximization of share value

Financial decision

InvestmentDecision

FinancingDecision

DividendDecision

LiquidityDecision

Return Risk


5/96

5

FUNCTIONS OF FINANCIAL MANAGEMENT:

The financial functions can be divided into four broad categories:

1. Investment decisions.

2. Financing decisions

3. Dividend decisions.

4. Liquidity decisions.

1. Investment decision:

Investment decision or capital budgeting involves the decision of allocation of

capital or commitment of funds to long-term assets, which would yield, benefits in

future. It s one very significant aspect is the task of measuring the prospective

profitability of new investments. Future benefits are difficult to measure and cannot

be predicted with certainty.

2. Financing decision:

Financing decision is the second important function to be performed by the

financial manager. Broadly, he must decide when, where and how to acquire funds to

meet the firm s investment needs. The central issue before him is to determine the

proportion of equity and debt. The mix of debt and equity is known as the firm s

capital structure. The firm s capital structure is considered to be optimum when the

market value of shares is maximized.

3. Dividend decision:

Dividend decision is the third major financial decision. The financial manager

must decide whether the firm should distribute a portion and retain the balance. Like

the debt policy, the dividend policy should be determined in terms of impact on the

shareholder s value. The optimum dividend policy is one, which maximizes the

market value of the firm s shares.


6/96

6

4. Liquidity decision:

Current assets management, which affects a firm s liquidity, is an import ant

finance function. Current assets should be managed efficiently for safe guarding the

firm against the dangers of liquidity and insolvency. Investment in current assets

affects firm s profitability, liquidity and insolvency. Investment in current assets

affects firm s profitability, liquidity and risk. A conflict exists between profitability

and liquidity while managing current assets.

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm. It is done by establishing relationships between the items of

financial statements viz., balance sheet and profit and loss account. Financial analysiscan be undertaken by management of the firm or by parties outside the firm viz.,

owner s creditors, investors and others.


7/96

7

INTRODUCTION TO INVENTORY MANAGEMENT

The dictionary meaning of inventory is stock of goods or list of goods. In

accounting language it may mean stock of finished goods only. In a manufactured

concern it may include raw material, work in process stores.

Every enterprise needs inventory for smooth running of its activities. It serves

as link between production and distribution process. There is, generally it time lay, the

higher the requirement for inventory. The unforeseen fluctuations in demand and

supply of goods also necessitate the need for inventory. It also provides cushion for

future price fluctuations.

The investments in inventories constitute the most significant part of currents

assets and working capital most of the undertaking. Thus, it is very essential to have

proper control and management of inventories. The purpose of inventory management

is to ensure availability of materials in sufficient quantity and when required and also

to minimize investment in inventories.

Inventory management deals with purchasing stocking and issuing of

materials to various departments at right time, right quantity and at right quality.

MEANING OF INVENTORY

Every enterprise needs inventory for smooth running of its activities; it serves

as a link between the recognition of a need and its fulfillment the greater the time leg.

The higher the requirements of inventory, the unforeseen fluctuations in demand and

supply of goods also necessitate the need for inventory.

It also serves as a cushion for future prices fluctuations. The simple meaning

of inventory is stock of goods or list of goods the word inventory is understood

differently by various authors. In accounting language it means stock of finished

goods only, for a manufacturing concern it includes raw-materials, work-in-progress,

finished goods etc.


8/96

8

Inventories constitute the most significant part of current assets. Many companies

maintain 60% of current assets as inventories. Because of the large size of the

inventories maintained by the firms, a considerable amount of funds is required to be

committed to them. It is therefore absolutely imperative to manage inventories

efficiently in order to avoid unnecessary investment. A firm neglecting the

management of inventories will be failed in its long run profitability and may fail

ultimately. It is possible for a company to reduce its levels of inventories to a

considerable degree within the range of 10 to 20% without any adverse effect by

using simple inventory planning and control techniques. The reduction in excess

inventories has a favorable impact on the profitability of the firm.

DEFINITION OF INVENTORY MANAGEMENT:

Inventory is an idle stock of physical goods that contain economic value, and

are held in various forms by an organization in its custody awaiting packing,

processing, transformation, use or sale in a future point of time.

Any organization which is into production, trading, sale and service of a

product will necessarily hold stock of various physical resources to aid in future

consumption and sale. While inventory is a necessary evil of any such business, it

may be noted that the organizations hold inventories for various reasons, which

include speculative purposes, functional purposes, physical necessities etc.

Inventory management is mainly about identifying the amount and the

position of the goods that a firm has in their inventory. Inventory management is

imperative as it helps to defend the intended course of production against the chance

of running out of important materials or goods.

Inventory management also includes making essential connections between

the replenishment lead time of goods, asset management, the carrying costs of

inventory, future inventory price forecasting, physical inventory, available space for

inventory, demand forecasting and much more.


9/96

9

CONCEPT:

Inventories are the stock of the product a company is manufacturing for sale and

components that make up the product. The various forms in which inventories may

exist in a manufacturing company are:

Raw materials

Work-in-progress

Finished goods

Raw Materials:

Raw materials are those basic inputs that are converted into finished product

through the manufacturing process. Raw materials inventories are those units, which

have been purchased and stored for future productions. A company should maintain

adequate stock of a continuous supply to the factors for an uninterrupted production.

If it is not possible for a company to produce raw materials whenever needed,

a time lag exists between demand for materials and its supply also there will be some

uncertainty on procuring raw materials in time on many occasions.

The procurement of materials is delayed because of uncertain factors like

strike, transport, disruption or short supply. Therefore the firm should maintain

sufficient stock of raw materials at a given time to streamline production. Other

factors which may necessitate purchasing and holding raw materials are quantity

discounts and anticipated price increase. The firm may purchase large quantities of

raw materials than needed for the desired production and sales levels to obtainquantity discounts of bulk purchasing.

Work In Progress:

The inventories are semi-finished products. They represent products that need

more work before they become finished products for sale. Work in progress inventory

builds up because of production cycle. Production cycle is the time span between

introduction of raw-materials and emergence of finished products at the completion of


10/96

10

production cycle. Still, production cycle completes, stock of work in progress has to

be maintained. Efficient firms constantly try to make production cycles smaller by

improving their production techniques.

Finished Goods:

Finished goods are the completely manufactured products, which are for sale.

Stocks of raw materials and work in progress facilitate production, while stock of

finished goods is required for smooth marketing operations. Stock of finished goods

has to hold because production and sales are not instantaneous. A firm cannot produce

immediately when customers demand goods. Therefore to supply finished goods on a

regular basis, their stock has to be maintained for sudden demand from customers.

In case the firm sales are seasonal in nature, substantial finished goods should

be kept to meet the peak demand. Failure to supply products to customers would

mean loss to firm s sales to competitors. The level of finished goods inventories

would depend upon the co-ordination between sales and production as well as on

production time.

Inventory Decisions:

In an inventory control situation, there are three basic questions to be

answered. They are:

How much to order? That is to say, what is the optimal quantity of an item that

should be ordered whenever an order is placed?

When should the order be placed?

How much safety stock should be kept? Thus, what quantity of an item in

excess of the expected requirements should be held as buffer stock in

anticipation of the variations in its demand and/or the time involved in

acquiring fresh supplies.


11/96

11

Inventory Cost:

In determining optimal inventory policy, the criterion most often is the cost

function. The classical inventory analysis identifies four major cost components.

Depending on the structure of an inventory situation, some or all of these are included

in the objective function.

Purchase Cost:

This refers to nominal cost of inventory. It is the purchase price for the items

that are bought outside sources, and the production cost if the items are produced

within the organization. This may be constant per unit, or it may vary as the quantity

purchased/ produced increases or decreases.

Quite often, situation is found when it may be stipulated that, for example the

unit price is rest 20 for an order unto 100 units and rest 19.50 if the order is for more

than 100 units.

Ordering Costs/Set-Up Costs:

This category of costs is associated with the acquisition or ordering of

inventory. Firms have to place orders with suppliers to replenish inventory of raw

materials. It includes costs associated with the processing and chasing of the purchase

order, transformation, inspection for quality, expediting overdue orders and so on.

The parallel of the ordering cost when units are produced within the

organization and the cost of acquiring materials consists of clerical costs and costs of

stationery. It is therefore called a set-up cost. The ordering cost is likely and taken to

be independent of the order size.

Therefore the unit ordering/setup cost declines as the purchase order/

production run increases in size. Ordering costs are costs involved in:

1. Preparing a purchase order

2. Receiving, inspecting and recording the goods received to ensure both

quantity and quality.


12/96

12

Carrying Costs:

They are involved in maintaining or carrying the inventory. It represents the

cost that is associated with storing an item in inventory. Carrying costs are also

known as holding cost or the storage cost.

The main components of this category of carrying costs are :

1. Storage cost i.e. tax, depreciation and maintenance of the building, utilities etc.

2. Deterioration in inventory because of pilferage, fire, technical obsolescence,

style obsolescence etc.

VED Analysis:

In VED analysis, the items are classified on the basis of their criticality to the

production process or other service. In the VED classification of materials, V stands

for Vital items without which the production process would come to a standstill. E in

the system denotes Essential items whose stock out would adversely affect the

efficiency of the production system.

Although the system would not altogether stop for want of these items, yet

their non-availability might cause temporary losses in, or dislocation of production.

The D items are the Desirable items which are required but do not immediately cause

a loss to production. The VED analysis is done mainly in respect of spare parts.

HML Analysis:

This is similar to the ABC analysis except that, in this analysis, the items areclassified on the basis of unit value rather than usage value. The item are classified

accordingly as their cost per unit is H-high, M-medium and L-low. This type of

Analysis is useful for keeping control over materials consumption at their department

levels.

SDE Analysis:

This uses the criterion of the availability of the items. In this analysis S-standsfor scarce items which are short in supply, D-refers to the difficult items meaning the


13/96

13

items that might available in indigenous market but cannot procured easily, While E

represents easily available items even from local markets.

S-OS Analysis:

S-OS analysis is based on the nature of supplies, wherein S represents the

seasonal items and Os represents the off seasonal items. This classification of items is

done with the aim of determining proper procurement of strategies.

FSN Analysis:

Based on the consumption pattern of the items, the FSN classification calls for

classification of items, as F-Fast Moving, S-Slow Moving and N-Non Moving goods.

This speed classification helps in the arrangement of stocks in the stores and in

determining the distribution and handling patterns.

XYZ Analysis:

XYZ analysis is based on the closing inventory value of different items. Items,

whose inventory values are high, are classed as X-items while those with low

investment in them are termed as Z- items. Other items are the Y-items whose

inventory value is neither too high nor too low.

It can be easily visualized that the several types of analysis discussed are not

mutually exclusive. They can be, and often are, used jointly to ensure better control

over materials. For example ABC and XYZ analysis may be combined to classify and

control depending on whether the items are AX, BY, CZ, AY of and so on. Similarly

XYZ FSN combine classification exercise will help in timely prevention of

obsolesce.

Receiving and Inspection of Materials:

Receiving Materials:

Receiving is an important control point in the material control system. It is

sometimes considered that receiving is a routine clerical work where the materials

shipped by the supplies are received, unpacked, checked and compared with the


14/96

14

purchasing and material management, stated that, any problem or error in specific

purchase transaction should come to light during the receiving operation.

If the problem (shortage in quantity, damaged material, wrong item shipped

etc.) is the detected and corrected during the receiving operation, the cost of to correct

the mistake later is much higher. Many hours are frequently spent in determining what

really happened and rectifying the situation.

Hours are required to correct the error that could have been corrected at the

receiving station in minutes.

Receiving Procedure:

The receiving involves much of the paper work and it varies from firm to firm.

However the key issues involved in the receiving function are commodity described

in the following standard procedure.

The receiving division unloads the goods at the delivery bay and verifies the

condition of the consignment to satisfy that it is not received in a damaged condition.

The receiving clerk opens the consignment and verifies the contents with the packing

slip and the purchase order.

Inspection of Materials:

Inspection is the process of examining an object for identification or checking

it for verification of quality and quantity in any of its characteristics. It is an important

tool for ascertaining and controlling the quality of a product. In the words of Alford

and Beatty Inspection is the art of applying tests. Preferably by the aid of measuring

appliances to observe whether a given item or product is within the specified limits of

variabilit y or not. According to Sprigged and Ransburg Inspection is the process of

measuring the qualities of a product or services in terms of established standard. The

standards can be in terms of strength, hardness, shape etc.

The purpose of inspection is to items are produced within the specified items

of variability. Inspection in list broadest sense is the art of comparing materials,

product or performances with established standards.


15/96

15

By means of inspection one can take a decision to accept are reject certain

item. The items are accepted if these conform to the given specifications otherwise

rejected.

Functions of Inspection:

The following are some important functions of inspection: Maintenance of specified standards of the quality of products. Devising means for conducting inspection at lower cost. Segregating spoilt work, which may be salvaged by recuperation? Maintaining inspection equipment in good condition.

Detection of defects at source to reduce scraps and defective work.Store Management:

After inspection the purchased materials are taken to store for preservation, it

they are meant for stock. Non-stock items are directly taken to the assembly lines

from the inspection. Preservation or storage is another aspect of materials

management.

Nature of Stores:

Stores or storage is the function of receiving, storing and issuing materials. It

involves the supervision clearance of incoming supplies, to ensure that they are

maintained in good condition, safety and in readiness for use when required, while

they are in storage and issuing them against authorized requisition. In short, it is

connected with the physical handling and well- being of the stocks. It should be

mentioned that, stores is not meant for stocking purchased materials alone.

Importance:

Efficient storage of stores yields the following benefits: Ready accessibility of major materials permitting efficient service to users. Efficient space utilization and flexibility of arrangement. A reduced need for materials handling equipment. A minimization of materials deterioration and pilferage. Ease of physical counting. Protecting against waste deterioration, damage and pilferage.


16/96

16

Storage System:

Choosing the most suitable storage system means dealing with a number of

interacting and often conflicting factors. Inevitably, the degree of mechanization

affects layout while the scarcity of space affects the height to which racking is

erected. The need for rapid, intensive order packing means a need for rapid and easy

access to stock.

Fixed location means that, goods of a particular type have a position in the

store assigned to them exclusively. It means that while stock can be found

immediately without a complex system for recording its position there can be

considerable waster space, because when stocks of any one item are low, the spaceleft vacant cannot be filled. The assignment of fixed position to a particular type of

goods is made on any one of the following basis.

1. On the basis of the supplier

2. On the basis of similarity of items.

3. On the basis of the joint issue of the items.

4. On the basis of the size and frequency of use.

Methods of Valuation:

The government of India has given sufficient flexibility for companies to

introduce scientifically developed methods of valuation of their stocks. In order to

prevent malpractices, it has been stipulated that such methods must be studied and

approved by the Board of Directors, and must be followed for a minimum prior of

three years. The various methods of valuation available are given below.

First in first out [FIFO] Last-in first out [LIFO] Periodical Simple Average Method Normal cost/ Standard cost method Weighted average method Replacement price method


17/96

17

FIFO: (First in first out)

In this case it is assumed that the stores follow the principal that oldest stock

issued first so that stock left out is from the later arrivals. Hence all issues are

assumed to have come out from older stocks. These are valued at old price. The

cumulative value of stock out will give the net value of the existing stock.

LIFO: (Last-in first out)

Here stores are issued from the last stock. This means issues have taken place

from later arrivals. Hence all issued are valued as per the price of the latest arrivals to

compute value of stock left in stores.

Periodical Simple average

In this case after each receipt of material, adding the cost of materials in hand

with the cost of materials received and dividing the same by the total number of units

calculate the average cost. This process is repeated every time new items are received.

This average cost is used for computing the value of items issued and value of items

remaining in the stock.

Normal Cost /Standard Cost Method:

This method is mostly used for items manufactured in house. Here the average

cost of a certain lot is calculated and used as cost of items issued. Since this method is

used for items manufactured, one can use standard costing method also for valuation

of such stocks.

Weighted Average Method:

This method is used when the quantity and prices of items vary widely from

each purchase. In this case, the weighted average price is calculated for each item.

This price is used for computing the value of items and those remaining in stock.


18/96

18

Replacement Prices Method:

This is a modern method developed by George Tarboro. However without

application it is difficult to price each item. This has not yet become popular. FIFO,

LIFO and Weighted Average methods are popular and acceptable to the government

tax authorities.

Inventory control System:

Inventory control keeps track of inventories. It is observed that too much ,

too little or badly balanced inventories are all to be avoided because they cost too

much on many counts. Too much leads to undue carrying charges in the form of

taxes, insurance, storage, obsolescence and depreciation and undue proportion of total

working capital is invested in them. Too little implies of too frequent ordering, loss

of quantity di scounts and higher transportation charges. It may be too low in view of

likely shortages in future or future increases the prices or shortfall in output.

Again due to dynamic and unpredictable environmental situation Too little

at one. Time can be ver y quickly become Too much in a subsequent period.

Similarly inventory purchased at higher prices remaining unused in stock or uncancelable order represents loss to the organizations.

The balance between too much and too low can be done by means of

effective inventory control. Some of the definitions of inventory control are:

Inventory control is a system of ordering based on the maintenance of the

stock in store using reorder rule based on the stock level.

Inventory control is the technique of maintaining the size of the inventory at

some desired level keeping in view the best economic interests of an

organization.

Inventory control is concerned with various items stocked at predetermined

level or within some safe limits.


19/96

19

Objectives of Inventory Control:

Though inventory control may not be treated as an executive function but it is

one of the most important functions in an enterprise. The following are the main

objectives of inventory control:

The demand foreseen of any product can never be exact or accurate. There is

likely to become difference that too of varying magnitude, in predicted demand and

actual demand of the product. If sufficient items are available in the inventory, then

the fluctuations in demand can be easily adjusted and the organizations can protect it

from unforeseen economic losses.

Better use of men machines and materials:

In manufacturing system producing for stock the production planning can be

done with an object to have optimum use of resources namely men, machines and

materials. Here the resources can remain engaged during slack period of demand and

there will be no need of generating additional resources in the boom periods as then

the inventory enlarged in slack period can utilize. This will lead to uniform and proper

utilization of resources available with the enterprise.

Protection against fluctuations in output:

Another important function of inventory is to reduce the gap between actual

and scheduled production. In practice, production scheduled cannot be adhered due to

a number of reasons e.g. sudden breakdown in supply of raw-materials, machines,

labor strikes etc.

Control of stock volume:

Inventory control is concerned with the size and the value of goods present in

stock. It is responsible to forecast the value of the stocks on a regular intervals, so that

Capital invested in inventories does not exceed the funds available for the

purpose.

The amount invested in inventory is correctly recorded in account books.


20/96

20

Protection against theft is ensured.

1. Control of stock volume : Stock analysis is done to be sure that it is in balance

and that obsolescence and depreciation are determines the appropriate size of

the inventory keeping in view the interest of

2. The production department as well as of the outside customer and side by side

holds down the costs.\Inventory is maintained due to the following reasons .

To carry reserves in order to prevent stock outs or cost sales.

1. Never having much of anything on hand.

2. To gain economies in purchases by buying items beyond the desired amount.

3. To maintain reserves in stocks for the period of replenishment

Thus a well formulated inventory policy of an enterprise in likely to ensure

smooth and efficient running of production operation providing optimum Utilization

of man, machine and material. The decision regarding the appropriate size of the

inventory is of paramount significance

Limitations of Inventory Control:

The control of inventories is complex because of the many functions it

performs. It should be viewed as a shared responsibility.

The objectives of better sales through improved service to customer, reduction

in inventories to reduce size of investment and reducing cost of production by

smoother production operations are conflicting with each other.

Methods of Inventory Control:

The fundamental purpose of inventory analysis is to keep the stock of items at

such level that there is a balance between the costs which increase or decrease with

the size of the inventory. This needs determination of

i)quantities should be ordered each time and ii) the time at which this ordershould be placed so that both inventory carrying costs and the losses arising out of


21/96

21

stock-outs are kept at the minimum. These objectives are accomplished by

determining.

1) Economic lot size

2) Re-order level

Economic Lot Size:

The amount of material procured or quantity produced during one production

run by any enterprise is known as lot size. The quantity to be ordered, whether from

inside sources or from out agencies depends on a number of factors. The size of

inventory depends on lot size. Due to increase in inventory size expenditure onstorage, deterioration etc., is likely to increase whereas expenditure on setting up

plant, procurement of materials etc., will increase.

Thus with lot size, there are two sets of factors having opposite contribution

towards the expenditure i.e. one encourages the lot size and other discourage. The

total cost associated with particular lot size is a combination of expenditures on all

these factors.

These opposing forces exhibit an interesting behavior towards total cost. It is

observed that the factors whose costs decrease with lot size has a tendency at a faster

rate than the rate of increase in cost of those factors whose costs increase with

inventory size.

Safety or Buffer stock:

The demand and supply rates can never be assessed exactly. There is bound to be discrepancy between actual and estimated demand and supply quantities with fair

degree of uncertainty. The organization with a policy of safeguarding interest. Against

these uncertainties maintain the level of inventory at some desired minimum level.

This minimum level of inventory to cover some unforeseen and uncalled for situations

is known as safety or Buffer stock available in inventory when fresh supply arrives. It

is presumed that this stock will be able to, cope with the emergency if and when

experienced. Generally, buffer stock is maintained at the desired level bydiscontinuous replenishments at varying intervals of time.


22/96

22

Factors effecting choice of Buffer stocks are:

1. Uncertainty in demand.

2.

Degree of insurance for any item.

3. Uncertainty in lead time

Re-order Level/Point:

The concept of re-order point is basically related with lead time demand. The

problem is that demand can never be accurately projected over the lead-time. Once we

know the demand in lead time, re-order level can be easily determined mathematically

Re-order Level=Lead Time demand + Safety Stock.

Organization for Inventory Management:

In a fairly large size production unit we might be holding stocks worth cores

of rupees and their proper accounting, prevention, security and safety is of paramount

importance. An effective and efficient stores management shall help in improving

service level. Higher inventory is another area of

concern to management because it affects the working capital. Stores department in

order to discharge its functions effectively, it has to have close interaction and co-

ordination with various departments of the organization. The stores department

mainly should have good communication between purchase and production

departments.

Without active integration and cooperation of each of the other departments, it

is very difficult to ensure smooth and efficient functioning of the stores department.

But a stores department is dependent on each of them for its day to day operation. The

smooth functioning of either stores department or the main production units is just not

possible without interactive relations. This need has been merely identified by the

Krishna District Milk Union stores department and a lot of negotiations have been

taken by stores to have a better working relationship with of these departments.


23/96

23

The inventory refers to stockpile of the products of the firm offering for sale

and various components that make up these products. The inventory consists of raw-

materials, work-in-progress, finished goods.


24/96

24

OBJECTIVES OF THE STUDY To analyze inventory classifications, its managements and control.

To examine the methods and techniques of inventory control in ML group

To determine and maintain optimum level of inventory managements.

To study and analyze the various categories of inventory items and its

management and control.

To find out the method of stocking of inventory.

To know the technique of reducing cost.

To know the monitoring and control of stores and spares inventory

classifying.


25/96

25

NEED FOR THE STUDY

This project report entitled A CRITICAL STUDY ON INVENTORY

MANAGEMENT , starts with the necessity of realization of definition, concepts and

importance of inventory. Inventory may be defined as usual, but idle resource. If

resource may be tangible and physical such as materials then it is termed as inventory.

Inventory Management has acquired a great significance and sound position in recent

years with an objective of profitability and liquidity. The success or failure of a

business enterprise largely depends upon the management of inventory management.

No firm can be maintained without inventory management, but the

requirement of inventory differs from firm to firm. Inventory management is needed

to every business enterprise because it indicates liquidity position of the firm. The

problem of inventory management is one of the maintenance, with in a financial

investment, an adequate supply of goods to meet an expected supply of demand

pattern. This could be raw-materials, work in progress (semi-finished goods) and

finished foods. Moreover inventory can be one of the indicators of the management

effectiveness on the material management front. Inventory management deals with

determinants if optimal policies and procedure for Procuring of commodities.

Inventories constitute, in every business concern, the most significant part of working

capital or current assets.


26/96

26

SCOPE OF THE STUDY

The current study focuses on inventory management of ML group Ltd. The

study covers the composition of Raw materials, Work-in-Process, Finished Goods in

total inventory and also concentrates on various inventory management techniques

uses in the company. The scope of the study includes the ABC analysis for four

financial years.

The study provides insight to the management of high value items and also

brings attention of management towards procurement, purchasing, strong supply of

A class items over period of four years. The current study also analyzes the

investment in inventory during the study period. At the end an in depth analysis will

be made on the inventory control system of the company.

The current study focuses on inventory management of ML group Ltd. The

study covers the composition of Raw materials, Work-in-Process, Finished Goods in

total inventory and also concentrates on various inventory management techniques

uses in the company. The scope of the study includes the ABC analysis for four

financial years.


27/96

27

LIMITATIONS OF THE STUDY

Any study is having of its own advantages and certain disadvantages.

Among such few of the limitations are expressed below such as,

The reliability of the study depends upon the information furnished by the

officials.

Due to time constraint it is difficult to go into details of the organization.

This study is entirely based on the given information by the stores department,

purchase department, production department and sales department. The reliability of the study depends upon the information furnished by the

officials.

The study is entirely based on the given by the stores department, purchase

department, production department and sales departments of Swathi Cottons

Pvt.Ltd.

The study is limited for a period of 6 weeks.


28/96

28

RESEARCH METHODOLOGY

Methodology is a systematic procedure of collecting information in order to

analyze and verify a phenomenon. The collection is done through two principle

sources.

Primary Data:

The primary data, which is collected, is entirely based on the details given by

the purchase, stores, production and sales department

Secondary Data:

The secondary data is entirely based on the data obtained for the officers,

Managers and staff of ML group ltd Managers and supervisors of the organization

have also been interviewed to elicit necessary information on the basis of non-

structured schedules. And secondary was collected from the company s manu als and

office records pertaining to production, marketing, personal and financial position.

when compare the Swathi Cottons Pvt.Ltd data analysis with the ABC and VED

technical used.

Chapter 1:I learn about introduction about the Swathi Cottons Pvt.Ltd

objectives and need scope and methodology of the inventory management.


29/96

29

INDUSTRY PROFILE

Cotton:

Cotton is a soft, staple fiber that grows around the seeds of the cotton plant. It is a natural fiberharvested from the cotton plant. The fiber most often is spun into yarn or thread and used to make a

soft, breathable textile, which is the most widely, used natural-fiber cloth in clothing today.

Processing of Cotton in India:

In India the raw cotton, also called as Kapas is processed in a multi-stage process described as

below. The Products of processing are

I. Yarn.

II. Cottonseed Oil.

III. Cottonseed Meal.

I. Production of Yarn:

1) Kapas to Lint

2) Lint to Bale

3)

Bale to lap4) Lap to Carding

5) Sliver to Roving

6) Roving to Yarn (Spinning)

Kapas to Lint:

Kapas (also known as raw cotton or seed cotton) is unginned cotton or the

white fibrous substance covering the seed that is obtained from the cotton

plant. The first step in the process is, the cotton is vacuumed into tubes that

carry it to a dryer to reduce moisture and improve the fiber quality. Then it

runs through cleaning equipment to remove leaf trash, sticks and other foreign

matter. In ginning a roller gin is used to grab the fiber. The raw fiber, now

called lint.


30/96

30

Lint to Bale: The lint makes its way through another series of pipes to a press where

it is compressed into bales (lint packaged for market). After baling, the cotton

lint is hauled to either storage yards, textile mills, or shipped to foreigncountries.

Note:The cotton seed is delivered to a seed storage area from where it is

loaded into trucks and transported to a cottonseed oil mill.

Bale to Lap:

Here the bales are broken down and a worker feeds the cotton into amachine called a "breaker" which gets rid of some of the dirt.

From here the cotton goes to a "scutcher". (Operated by a worker also

called a scutcher). This machine cleans the cotton of any remaining dirt and

separates the fibers. The cotton emerges in the form of thin "blanket" called

the "lap".

Lap to Carding: Carding is the process of pulling the fibers into parallel alignment to

form a thin web. High speed electronic equipment with wire toothed rollers

performs this task. The web of fibers is eventually condensed into a

continuous, untwisted, rope-like strand called a sliver.

Sliver to Roving :The sliver is then sent to combing machine. Here, the fibers shorter

than half-inch and impurities are removed from the cotton. The sliver is drawn

out to a thinner strand and given a slight twist to improve strength, and then

wound on bobbins. This process is called Roving.

Roving To Yarn (Spinning) :

Spinning is the last process in yarn manufacturing. Spinning draws out

the short fibers from the mass of cotton and twists them together into a long.

Spinning machines have a metal spike called a spindle which the thread winds

around.


31/96

31

II. Production of Cotton Seed Oil:

Processing of cottonseed in modern mills involves a number of steps. They are

as follows:

The first step is its entry into the shaker room where, through a number of screens and air

equipment, twigs, leaves and other trash are removed.

The cleaned seed is then sent to gin stands where the linters are removed from the seed

(delinted). The linters of the highest grade, referred to as first-cut linters are used in

manufacturing non-chemical products, such as medical supplies, twine, and candle wicks.

The second-cut linters removed in further delinting steps, are incorporated in chemical

products, found in various foods, toiletries, film, and paper.

The delinted seeds now go to the huller. The huller removes the tough seed coat with a seriesof knives and shakers. The knives cut the hulls (tough outer shell of the seed) to loosen them

from the kernels (the inside meat of the seed, rich in oil) and shakers separate the hulls and

kernels.

The kernels are now ready for oil extraction. They pass through flaking rollers made of heavy

cast iron, spinning at high speeds. This presses the meats into thin flakes. These flakes then

travel to a cooker where they are cooked at 170 F to reduce their moisture levels. The

prepared meats are conveyed to the extractor and washed with hexane (organic solvent that

dissolves out the oil) removing up to 98% of the oil.

Crude cottonseed oil requires further processing before it may be used for food. The first step

in this process is refining. With the scientific use of heat, sodium hydroxide and a centrifuge

(equipment used to separate substances through spinning action), the dark colored crude oil is

transformed into a transparent, yellow oil. This clear oil may then be bleached with special

bleaching clay to produce transparent, amber colored oil.

The refined cotton seed oil has several advantages other than edible oils. It

contains mere advantage over other edible oils. It contains a large percentage of Poly

Unsaturated Fatty Acids (PUFA) which maintain cholesterol in the blood at a healthy

level.

The quality of cotton oil depends on the weather prevailing during the time

that cotton stands in the fields after coming to maturity.

Hence quality of oil varies from place to place and season to season. The

quality of oil is high in dry seasons and low when the seed is exposed to wet weather

in the fields or handled or stored with high moisture. Further cotton seed cooking oil

has a long span of life due to the presence of vitamin E.


32/96

32

III. Production of Cottonseed Meal/Cake/Kapaskhalli:

Kapaskhalli (cottonseed extraction/meal) is a byproduct of the cottonseed industry. Cottonseed is a by-product of the cotton plant, which is primarily grown for its fiber.

Although cotton has been grown for its fiber for several thousand years, the use of cottonseedon a commercial scale is of relatively recent origin.

Cottonseed was a raw agricultural product, which was once largely wasted. Now it is being

converted into food for people; feed for livestock; fertilizer and mulch for plants; fiber for

furniture padding; and cellulose for a wide range of products from explosives to computer

chip boards.

Diagram 3.1


33/96

33

The figure showing the products obtained from processing the raw

cotton.

Source: The Cotton Corporation of India Ltd.:

Cotton Varieties in India:

Bengal Deshi mainly produced in the states of Punjab, Haryana, and Rajasthan. Jayadhar mainly produced in the state of Karnataka. Bunny (or) Brahma is mainly produced in the states of Maharashtra, Madhya Pradesh,

Andhra Pradesh, and Karnataka.

Suvin is another variety produced in the state of Tamil Nadu. H-4 (or) MECH1 is mainly produced in the states of Maharashtra, Madhya Pradesh, and

Andhra Pradesh.

Role of Cotton Industry in Indian Economy:Over the years, country has achieved significant quantitative increase in cotton production.

Till 1970s, country used to import massive quantities of cotton in the range of 8.00 to 9.00 lakh bales

per annum. However, after Government launched special schemes like intensive cotton production

programmes through successive five-year plans, that cotton production received the necessary impetus

through increase in area and sowing of Hybrid varieties around mid 70s.

Since then country has become self-sufficient in cotton production barring few years in the

late 90s and early 20s when large quantities of cotton had to be imported due to lower crop production

and increasing cotton requirements of the domestic textile industry.


34/96

34

Cotton Production Areas in India:India is an important grower of cotton on a global scale. It ranks third in global cotton

production after the United States and China; with 9.50 million hectares grown each year, India

accounts for approximately 21% of the world's total cotton area and 13% of global cotton production.

The Cotton producing areas in India are spread throughout the country. But the major cotton

producing states which account for more than 95% of the area under and output are:

Punjab. Haryana. Rajasthan. Maharastra. Gujarat.

Madhya Pradesh. Andhra Pradesh. Tamil Nadu. Karnataka.

Of the nine cotton producing States in India, average yields are highest in Punjab where most

of the cotton area is irrigated.

But the yields of cotton in India are low, with an average yield of 503 kg/ha compared to the

world average of 734 kg/ha. The problem is also compounded by higher production costs and poor

quality in terms of varietals purity and trash content.

However the Cotton plays an important role in the National economy providing large

employment in the farm, marketing and processing sectors. Cotton textiles along with other textiles

also contribute about 1/3rd of the Indian exports.

Contribution of Cotton Industry for Textile Industry:Cotton is the most important raw material for India's Rs. 1, 50,000 crores textile industry,

which accounts for nearly 20% of the total national industrial production.

The cotton Industry is the backbone of our textile industry, accounting for 70% of total fiber

consumption in textile sector. It also accounts for more than 30% of exports, making it India's largest

net foreign exchange industry. India earns foreign exchange to the tune of $10-12 billion annually from

exports of cotton yarn, thread, fabrics, apparel and made-ups.

The cotton Industry provides employment to over 15 million people. And the area undercotton cultivation in India (9.5 million ha) is the highest in the world, i.e., 25% of the world area.


35/96

35

Steps Taken by the Cotton Producers in India:

Now-a-days the Indian Cotton producers are continuously working to up-grade the quality and

increase the cotton production to cope up with the increased global demand for cotton textiles and to

meet the needs of the 39 million spindles capacity of the domestic textile industry which presently

consumes about 12-14 million bales annually.

In India, cotton yields increased significantly in the 1980 s and through the first half of 1980 s

but since 1996 there is no increase in yield. In the past, the increase in cost of production of cotton was

partially offset by increase in yield but now with stagnant yield the cost of production is raising.

Besides low yield, Indian cotton also suffers from inconsistent quality in terms of length, micronaire

and strength.

Policy of Government of India towards Cotton Industry:

The Cotton production policies in India historically have been oriented toward promoting and

supporting the textile industry. The Government of India announces a minimum support price for each

variety of seed cotton (kapas) based on recommendations from the Commission for Agricultural Costs

and Prices.

The Government of India is also providing subsidies to the production inputs of the cotton in

the areas of fertilizer, power, etc.

Markets for Indian Cotton:

The three major groups in the cotton market are

Private traders, State-level cooperatives, The Cotton Corporation of India Limited.

Of these three groups, private traders handle more than 70 percent of cottonseed and lint,

followed by cooperatives and the CCI.

The Cotton Corporation of India Ltd. for the year 2009-10 had purchased 60.30 lakh quintals

of kapas equivalent to 11.77 lakh bales valuing Rs.1218.70 cores in Andhra Pradesh, Maharashtra,

Madhya Pradesh, Orissa and Karnataka.

Beside these the Corporation had also carried out commercial operations and purchased 2.71

lakh bales valuing Rs.285.82 cores in the year 2009-10 as compared to around 1.00 lakh bales valuing

Rs.108.81 cores during the previous year (i.e. for the year 2009-10).


36/96

36

Exports of Cotton:The main market for Indian cotton export is China. The other markets also include Taiwan,

Thailand and Turkey. In July 2001, the union government removed all curbs on cotton exports. As a

result of these, now the exporters are not required to obtain any certificate from the Textile

Commissioner on the registration, allocation, quality and quantity of export. India exported around 25

per cent cotton during 2009-10 and it is estimated nearly 62 per cent exported to China.

During the year 2009-10 the prices of Indian cotton in early part of the season being lower

than the international prices, had been attractive to foreign buyers and there was good demand for

Indian cotton, especially S-6, H-4 and Bunny, which had resulted in sustained cotton exports, which are

estimated at 55.00 lakh bales

The Cotton Advisory Board estimated an 18-20 percent increase in cotton exports to 65 lakh

bales for Oct 2009- Sep 2010, as against its Aug 2008 estimate of 58 lakh bales.

Imports of Cotton:Despite good domestic crops, India is importing cotton because of quality problems or low

world prices particularly for processing into exportable products like yarns and fabrics.

India imported just 721,000 bales of cotton in 2006-07. The imports rose to 1,217,000 lakh

bales in 2007-08, 4,700,000 lakh bales in 2008-09 and the anticipated imports for the year 2009-10 are

550,000 lakh bales.

For the year 2009-10 the cotton imports into the country had once again remained limited

mainly to Extra Long staple cottons, like as previous year, which were in short supply at around 6 lakh

bales inclusive of import of around 2 lakh bales of long staple varieties contracted by mills during

April-May 2010.

Role of Cotton Seed Oil in Indian Economy:

The global production of cottonseed oil in the recent years has been at around 4-4.5 million

tons. Around 2 lakh tons are traded globally every year. The major seed producers, viz., China, India,

United States, and Pakistan are the major producers of oil. United States (60000 tons) is the major

exporter of cottonseed oil, while Canada is the major importer.

Cottonseed is a traditional oilseed of India. In India the average production of cotton oil is

around 4 lakh tons a year. It is estimated that, if scientific processing is carried out the oil production

can be increased by another 4 lakh tons.


37/96

37

In India, the oil recovery from cottonseed is around 11%. Gujarat is the major consumer of

cottonseed oil in the country. It is also used for the manufacture of vanaspati. The price of cottonseed

oil is generally dependent on the price behavior of other domestically produced oils, more particularly

groundnut oil.

India used to import around 30000 tons of crude cottonseed oil, before palm and soyoil

became the only imports of the country. Currently, the country does not import cottonseed oil.

Role of Cottonseed Meal in Indian Economy:India produces around 2 million tons of cottonseed meal a year. However, in India mainly

under corticated meal is largely produced. Several associations are promoting the production of

decorticated cake in India and the production of this is expected to increase in the country.

India used to be a major exporter of cottonseed extraction around two decades ago. However,

the demand for other oil meals like soy meal, has lowered the cottonseed demand globally. In addition,

the low availability of decorticated meal in India has also been a major reason for the fall in exports.

The major importers of Indian cottonseed meal (under corticated) used to be Thailand. India in

2002-03 exported only 50 tons of decorticated cottonseed meal. In 2003-04, too there have been no

significant exports. India does not import cottonseed meal.

The Organizations Dealing With the Promotion of Cotton Industry in

India:The organizations that try to promote the quantity and quality of Cotton in India are:

The Cotton Corporation of India Ltd. Cotton Advisory Board. Cotton Association of India. Central Institute of Cotton Research.

I. The Cotton Corporation of India Limited:

The Cotton Corporation of India Ltd. was established on 31st July 1970 as a Government

Company registered under the Companies Act 1956.

In the initial period of setting up, as an Agency in Public Sector, Corporation was charged

with the responsibility of equitable distribution of cotton among the different constituents of the

industry and to serve as a vehicle for the canalisation of imports of cotton.

With the changing cotton scenario, the role and functions of the Corporation were also

reviewed and revised from time to time. As per the Policy directives from the Ministry of Textiles,


38/96

38

Government of India in 1985, the Corporation is nominated as the Nodal Agency of Government of

India, for undertaking Price Support Operations, whenever the prices of kapas (seed cotton) touch the

support level.

The Cotton Corporation of India Ltd. Operations covers all the cotton growing states in thecountry comprising of:

Punjab, Haryana and Rajasthan in Northern Zone. Gujarat, Maharashtra and Madhya Pradesh in Central Zone. Andhra Pradesh, Karnataka & Tamil Nadu in Southern Zone.

II. Cotton Advisory Board:

The Cotton Advisory Board is a representative body of Government/ Growers/ Industries/

Traders. It advises the Government generally on matters pertaining to production, consumption and

marketing of cotton, and also provides a forum for liaison among the cotton textile mill industry, the

cotton growers, the cotton trade and the Government.

It functions under the Chairmanship of Textile Commissioner with Deputy Textile

Commissioner as a Member Secretary.

III. The Cotton Association of India :

The Cotton Association of India also called as the East India Cotton Association (EICA) was

declared as the statutory body by the Bombay Cotton Contract Act on 28th December, 1922.

Provide and maintain suitable buildings or rooms or a Cotton Exchange in the city of Bombay or elsewhere in India. Provide forms of contracts and regulate the marketing, etc. of the contracts.

Fix and adopt standards or classifications of cotton. Adjust by arbitration or otherwise controversies between persons engaged in the cotton trade. Acquire, preserve or disseminate useful information connected with the cotton interests.

IV. Central Institute of Cotton Research:With a view to develop a Centre of excellence for carrying out long term research on

fundamental problems limiting cotton production the Indian Council of Agricultural Research has

established the Central Institute for Cotton Research at Nagpur in April, 1976. CICR was

simultaneously established at Coimbatore to cater to the needs of southern cotton zone.


39/96

39

CICR was established at Sirsa in the year 1985, to cater to the needs of northern irrigated

cotton zone. All the three research farms are well equipped with tractors and other farm implements

and efforts are underway to initiate further developmental work in all the farms. The Vision of the

CICR is to improve production and quality of Indian Cotton with reduced cost to make cotton

production cost effective and competitive in the national and global market.The Mission of CICR is to develop economically viable and eco-friendly production and

protection technologies for enhancing quality cotton production by 2-3% every year on a sustainable

basis for the next twelve years (till 2020).

The Current Scenario of Cotton Industry (2009- 10):

The cotton production in the country has been increasing continuously since last three years

and the same has further gone up by around 12.5% during cotton season 2009-10 at a record level of315 lakh bales as against 280 lakh bales during 2008-09. Gujarat has turned into a largest cotton

producing State with a record production-level of 93 lakh bales constituting around 34% of the

country s total production.

The area under cotton cultivation during 2009-10 has also gone up by around 4.5% at 95.55

lakh hectares as against 91.44 lakh hectares during 2008-09. With wide usage of hybrid seeds

throughout the country as well as changed mindset of cotton farmers for adoption of better and

improved farm practices, the average productivity of cotton has crossed 591 kgs per hectare as against

560 kgs during the previous year.

The prices of Indian cotton in early part of the season being lower than the international prices

had been attractive to foreign buyers and there was good demand for Indian cotton. Due to expectation

of bumper crop, the mill demand in the beginning of the season was subdued which put pressure on the

cotton prices right from the beginning of the season and has resulted into fall in cotton prices between

October 2009 & January 2010. Cotton prices reached its peak level by end-March 2010 and there was

some correction in cotton prices in April and May 2010.

Future of Cotton Industry in India:The Cotton Advisory Board (CAB) has estimated the cotton crop at 322 lakh bales for the

current season 2008-09. This is a historic high and represents a 2.22% jump over last year's crop

estimate of 315 lakh bales. The increase in cotton production area is also expected to increase to 92.60

lakh hectares for the season 2008-09 against 91.55 lakh hectares for the season 2007-08.

Cotton Advisory Board expects exports to be higher at 85 lakh bales as against 65 lakh bales

in 2007-08. Imports in 2008-09 are projected at 6.50 lakh bales as compared to 5.50 lakh bales in 2007-

08, because mills have to rely on foreign growths to spin some finer counts of yarn.


40/96

40

Future Challenges for the Indian Cotton Industry:The challenges that are going to face by the cotton producers in India for the season 2009-10

are:

Rupee Appreciation:The increase in the value of the rupee gives only smaller import orders to the cotton

producers.

Cheaper Imports: The appreciated rupee value makes the cotton imports cheaper when compared to past. So this

aspect is also required to consider by the cotton producers.

Low Quality:The Quality of cotton is also far from satisfactory considering the presence of a large number

of contaminants. So the cotton producers are also required to take care in this aspect.


41/96

41

COMPANY PROFILE

About The Swathi Cotton Pvt.Ltd

Swathi Cotton Pvt.Ltd with its diverse interests in core areas is surging ahead

with drive and determination. with all the companies superbly integrated in one

single campus, the group harnesses an entrepreneurial spirit, state-of-art technology

and financial strengths to emerge as an industrial force to reckon with.

Swathi Cotton Pvt.Ltd is driven by a passion be the best in all the areas it

operates. Backed by a high density of advanced technology and sophisticated

manufacturing facilities, it s only natural that the group is leaf fogging for an

outstanding future. The total group turnover is around 300 crores per annum.

About The Company:

The founder of Swathi Cotton Pvt.Ltd who has drawn its future planned

growth. A Man whose spirit of Dynamism has helped the group to achieve manifold

growth. Thanks to his pioneering vision, the group s operation grew and market

extended . Today Swathi Cottons is a multi-activity group with a Rs.300croresturnover, comprising 6 divisions with diverse interest in..

Cotton

Oil

Spinning

Power &Textile

AAbb oouu tt SSww aa tthh ii CC oott tt oonn ss PP rr iivvaa tt ee LL iimm iitt eedd

Swathi Cottons Private Limited was registered on 03 April, 1998. Swathi Cottons

Private Limited's Corporate Identification Number (CIN) is

U17100AP1998PTC029188, Registeration Number is 029188.

Their registered address on file is 6-179, G T Road,g.t.roadganapavarm-522 619,,

Guntur Dist. - 522619, Andhra Pradesh, India.
http://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limitedhttp://corporatedir.com/company/swathi-cottons-private-limited


42/96


43/96

43

The Birth of a Dream:

Prathipati Pullarao set up a cotton ginning mill in 1998. The operations grew

rapidly to lay solid foundations for giant surging ahead in diverse environments. To

the group, the future is rich in possibilities. A future where the best of minds and men

will work. And will have the most resources to draw upon. It s vision of the future

where change will be embraced as the very basis of opportunity and endeavor.

The managing Director of Swathi Cottons Private Limited. Relentless pursuit

of perfection is the hallmark of this young and dynamic. His rich and professionals

experience in the spinning line enabled Swathi Cottons to scale new heights.

His enterprising zeal and cautious planning have been the pivotal points in

driving the group towards trailblazing progress. Mr. Boggavarapu Ankamma rao is

committed to labour welfare and his visionary leadership has earned him a wealth of

respect among the employees of Swathi Cottons. An astute professional by habit, he is

forever aiming higher.

He is widely acknowledged as the man who has fostered a can do culturewhich starts at top and filters down to every employee at Swathi Cottons. He is

powered by just one belief ..

Success is a matter of excellence, and not chance .

Social service has always been a matter of prime concern to him. Which is

why he perennially strives to provide the best education and undertake multi-

pronged schemes towards the betterment of the community.

While nurturing a corporate culture that encourages individual growth, he is

committed to a vision that encompasses everybody s up liftmen.


44/96

44

Cotton Division:

The COTTON GINNING & PRESSING UNIT was started in 1998. The

Division maintains 54 Gins and 1 Hydraulic press with an annualized turnover of

Rs.40crores. The company firmly believes that unmatched capabilities plus an in-

depth knowledge of various cotton growing areas alone can put it on the path to

speedy growth.

This Division also processes India s best long staple cotton DCH -32 at

Dharwad Branch, Karnataka. The division is poised to excel and is confidently geared

to post an impressive growth rate. This Division has stayed big thinking big and

keeping an eye on the details that sustain quality.

Manufacture of Cotton I.E. By Ginning& Pressing Activities:

LICENSED : Licensed under Industries (D&R) Act, 1951

PROCESSING : 12000 MTs of cotton seed

INSTALLED CAPACITY : 392 MTs of seed per day of 24 hours working

RAW MATERIAL : Cotton kapas

FINISHED PRODUCTS : Cotton lint

Cotton Lint will be supplied to Spinning Mills and Cotton Seed to Oil Mills.

Oil Division:

A totally Integrated Agro Industry extensively engaged in extracting both Crude

Oil and Edible Oil from high quality Cotton Seed Oil is a popular cooking medium

thanks to its low tat and nutritional content. On the other hand., Crude oil finds an

immediate industrial application. Besides these two core oil extractions, the Division

has also extensively diversified into high quality extractions from a variety of other

seeds and beans. Capability on its competence and knowledge of agro industry, the

Division was set up in 1998.


45/96


46/96

46

The environmental protection commitment of the company firmly believes

that when we use the bounties of mother earth, we have to give back an environment

that is conductive to healthy living.

Count Range:

We are running from 50 to 100 counts in single s well as double (TFO) yarns.

We are running compact yarn with 12000 spindles (suessen). We will achieve 25000

spindles compact yarn shortly.

Statement of Accounting Policies:

General Fixed Assets Investments Depreciation Inventories Excise Duty Sales

Taxes On Income Segment Reporting Retirement Benefits Proposed dividend Foreign Currency Transactions Impairment of Assets Contingent Liabilities Foreign Exchange Earnings and Out Go

General:

The accountings are prepared on historical cost convention and in accordance

with normally accepted Accounting Principles.


47/96

47

Fixed Assets:

Fixed assets are stated at cost less accumulated depreciation. Cost of

acquisition of fixed assets is inclusive of directly attributable cost of bringing the

assets to their working condition for the intended use and interest on borrowings tillthe date of commissioning of the assets, CENVAT/VAT credit availed, if any, on

fixed assets is not included in the cost of such fixed assets capitalized.

Investments:

Long-Term investments are valued at cost price less provision for diminution

on account other than temporary decline in the valve of investment.

Depreciation:Depreciation is a written off in accordance with the provisions of schedule

XIV of the companies Act 1956 as follows:

Under straights Line Method in respect of the assets of Spinning, Power and

Textile Divisions.

Under written down valve method on the assets of all other divisions of the

company.

Inventories: Valuation of inventories is made as follows:

Raw-Material and Finished goods at cost or net realizable valve whichever is

lower.

Work-in-Progress at cost inclusive of direct production overheads. Stores and spares at cost. Electronic power at net releasable valve .

Excise Duty:

Liability on finished goods is accounted for as and when goods are cleared

from factory and there is no liability on closing stock of finished goods at the year

end.

Sales:

Sales are exclusive of sales tax collections due to implementation of AP VAT

Act 2005.


48/96

48

Taxes on Income:

Current taxes are determined as per the provisions of income Tax Act 1961 in

respect of taxable income for the year ended 31st march, 2010.

Deferred tax liability is recognized, subject to the consideration of timing

differences, being the difference between the taxable income and accounting income

the originate in one period and are capable of reversal in one or more subsequent

periods. In case of power division which eligible for tax Holiday. Deferred Tax

Asset/ liabilities for timing differences which reverse after the Tax Holiday period

are recognized.

Segment Reporting:The accounting policies adopted for segment reporting are in line with the

accounting policies of the company with the following additional policies for segment

reporting. Inter-segment revenue has been accounted for based on the market related

prices.

Revenue and Expenses other than interest have been identified to segments on

the basis of their relationship to the operating activities of the segment. Revenue and

expense which related to the enterprise as a whole and are not allocable to segments

on a reasonable basis have been included under Unallocated head.

Retirement Benefits:

The Company makes regular monthly contribution to provident fund which

are deposited with the Government and Group term Insurance is routed through L.I.C,

and are charged against the revenue.

The company has taken Group Gradually (Cash Accumulation) scheme with

Life Insurance Corporation of India. The premium on policy and the difference

between the amounts of gratuity paid on retirement and recovered from the Life

Insurance Corporation of India debited to profit and Loss Account. Leave encashment

is accounted as and when the employees claimed and paid.


49/96

49

Proposed Dividend:

Provision is made in the account for the dividend payable (including of all tax

thereon) by the company as recommended by the Board of Directors, Pending

approval of the shareholders at the annual General Meeting.Foreign Currency Transactions:

Import of material /capital Equipment is accounted at the rates at which actual

payments are effected.

The profit/ Loss arising out of foreign Exchange transactions on sale of goods

are accounted on actual realization basis. Foreign Currency loans covered by forward contracts are stated at the forward

contracts rates while those not covered are calculated at year end rate.

Impairment of Assets:

At the date of each balance sheet the company evaluates internally, indications

of the impairment if any, to carrying amount of its fixed and other assets. No

impairment loss has been recognized.

Contingent Liabilities:

Contingent Liabilities are not recognized in the accounts, but are disclosed

after a careful evaluation of the concerned facts and legal issues involved.

Foreign Exchange Earnings and Out Go: The company has earned foreign exchange of Rs.725.72 lakhs of its finished

goods and Rs.1493.16 lakhs by export through merchant /trade house of its finished

goods. The company has spent Rs.58.95 lakhs of foreign exchange towards import of

raw-material, Rs.4.18 lakhs towards import of components & spare parts, Rs.1166.37

lakhs towards import of capital goods including advance paid, Rs.5.02 lakhs towards

interest on foreign currency loan and Rs.11.90 lakhs towards freight, commission &

traveling.


50/96

50

Board of Directors : Sri. Parthipati Pullarao. B.E. - Chairman & MD.

Sri. Boggavarapu Satyanarayana. Director.

Man Power in Swathi Cotton Pvt.Ltd:

Table 3.1:

Oil Division 300

Spinning Division 250

Textile Division 100

Future Outlook:

Operations on consolidated basis continue to pose healthy trends. However,

changes in the industrial trends are bound to influence spinning operations.

Company has acquired 48 looms under first phase of project implementation

for textile division. Textile operations have come out of teething problem but have to

reach estimated levels in operations and profits. This shall take some more time in

view of dip in dollar valuation and decline in exports.

Thus, company has to grapple with an industrial scenario that calls for alert

and caution.

Oil division is showing immense potential to reach higher levels in all spheres

of operations.

Power division shall perform well in the current year also. In view of this, we are hopeful of improved performance in 2007-08 despite

the difficulties posed.


51/96

51

Analysis on Capital Budgeting In Swathi Cotton Pvt.Ltd:

Importance of Investment Decision:

Investment decisions require special attention because of the following

reasons.

They influence the firm s growth in the long term.

They affect the risk of the firm.

They involve commitment of large amount of funds.

They are irreversible, or reversible at substantial loss.

They are among the most difficult decisions to make.

Investment Evaluation Criteria:

Three steps are involved in the evaluation of investment.

Estimation of cash flows

Estimation of the required rate of return (the opportunity cost of capital)

Application of a decision rule for making the choice.

EVALUTION OF INVESTMENT PROPOSAL:

At each point of time a business firm has a number of proposals regarding

various projects in which it can invest funds. But the funds available with the firm are

always limited and it is not possible to invest funds in all the proposals at a time.

Hence, it is very essential to select from amongst the various competing proposals,

those which give the highest benefits. The crux of the capital budgeting is the

allocation of available non economic, which influence the capital budgeting

decision is the profitability of the prospective investment. Yet the risk involved in the

proposal cannot be ignored because profitability and risk are directly related, i.e.,

higher profitability, the risk vice versa.


52/96

52


53/96

53

DATA ANALYSIS AND INTERPRETAION

Inventories are the stock of the product a company is manufacturing for sale

and components that make up the product. The various forms in which inventories

may exist in a manufacturing company are ABC Analysis is basic tool, which helps

the management to place their efforts where the results would be useful to the greatest

possible extent. The first important step in inventory management is to have a

selective approach to fix-up inventory levels and the extent to which the control can

be exercised in Swathi Cottons Pvt.Ltd.

Raw materials

Work-in-progress Finished goods

Table No:1.1

Raw material

Items 2009-10 2010-11 2011-12 2012-13 2013-14

raw materials 818

inventory management swathi

Documents