Inventory Management

INTRODUCTION
HISTORY OF FINANCE MANAGEMENT

Before the 1950’s Finance was chiefly concerned with the issue of various
types of securities, i.e., equities and different types of preference shares and debt
instruments Finance also considered capital structure and liquidity, but each of these
primarily from the view of an external analysis. Financial control consisted of various
rules of thumb in respect of financial analysis ratio like the gearing ratio or current
ratio.

In the 1950’s the methodology of investment appraisal received increased

attention, but the decade was especially marked by the publication of 2 important
articles. 1st was by Markowitz in 1950 and concerned the theory of portfolio selection
dealing with risky investment. This led to the later development of the capital Asset
Pricing Model that deals with the pricing of risky asset and the relationship between
risk and return.

The Second article was by Modigliani and Miller in 1958 and concerned firm
valuation and gearing. These articles were the start of the development of a coherent
theory of finance. The subject has also come to include dividends, efficient markets
and option valuation theories.

Finance is one of the major elements which activate the overall growth of the
economy.

A well-knit finance system directly contributes to the growth of the economy

an efficient financial system calls for the effective performance of financial
institution, financial instruments and financial markets.

Finance is the life blood of economic activity. Finance in a business is what

blood to human body. While in the human system, automatic regulation of quantity
and quality of blood is available no such automation is available for business. It is
therefore, essential to have adequate funds at the disposal of the business. Funds of
various types to carry out the business smoothly without fear of losing funds. Proper
composition of funds so the funds stream required is obtained. It also encompasses
the study of financial markets, institutions and activities of government, with stress on

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those aspects relating to financial decisions of individuals and companies. In fact,

finance is also indispensable, that it is rightly said that finance is the life-blood of an
enterprise. Finance is one the basic foundation of all kinds of economic activities.

In present day’s economy, finance is defined as the provision of money at the

time when it is required. Every enterprise, whether big or small or medium, needs to
finance to carry on its operation and to achieve its target.

Finance is one of the basic foundations for all kinds of economic activities.

Finance is regarded as the key or master key, which provides access to all
other sources employed in the manufacturing and merchandising activities. However,
it is true that money multiplies more money only when it is properly managed and this
can be achieved through proper planning and decision-making.

Finance is the management of the monetary affairs of a company. It includes

determining what is to be paid for raising the money on the best terms available and
utilizing available funds to the fullest extent.

BUSINESS FINANCE

The term business finance mainly involves in raising of funds and their
effective utilization, keeping in view, the overall objects of the firm. In a broader
sense, finance includes determining what has to be paid for rising money on the best
term available and devoting the available funds to the fullest extent.

DEFINITION:

According to Guthman and Dougall, “Business finance can be broadly defined

as the activity concerned with planning, raising, controlling, and administration of
funds used in the business”.

SCOPE AND FUNCTION OF FINANCIAL MANAGEMENT

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

for purpose of exposition, into two categories:

(a) Traditional Approach

(b) Modern Approach

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Traditional Approach:

The Traditional approach to the scope of financial management refers to its

subjects matter in the academic literature in the initial stages of its evaluation as a
separate branch of academic study. The term “Corporation Finance” was used to
describe what is now knows in the academic world as “Financial Management”. The
concern of Corporation finance was with the financing of corporate enterprises. In
other words, the scope of finance function was treated by the traditional approach in
the narrow sense of procurement of funds by corporate enterprises to meet their
financial needs.

Modern Approach:

The traditional approach was criticizes for its conceptual and analytical
grounds by the proponents of modern or contemporary approach since the former
neglects the process of allocation of capital to different assets and the problem of
optimum combination of financial management, according to the new approach is
concerned with the solution of problems relating to the financial operation of a firm,
the problems like, investment, financing and dividend decisions.

FUNCTION OF FINANCE

(a) Investment Decision: Investment decision relates to the selection of assets in

which funds will be invested by a firm.

(b) Capital Building: The long term investment decision is probable the most
crucial financial decision of a firm. It relates to the selection of an asset or
investment proposal or course of action whose benefits are likely to be
available in future over the lifetime of the project.

(c) Working Capital Management: Working capital management is concerned

with the management of the current assets. It is an important and integral part
of financial management as short term survival is a pre-requisite to long-term
success.

(d) Financing Decision: The financing decision of a firm relates to the choice of
the proportion of these sources to finance to finance the investment

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requirements. It is concerned with the financing mix or capital structure of

leverages.

MEANING OF INVENTORY

Inventories means Tangible Property held.

 For sale in the ordinary course of business

OR
 In the process of Production for such sale
OR
 For consumption in the Production of goods or services for sale
in including Maintenance supplies and consumable and other
than the Machinery spares.

MEANING OF INVENTORY MANAGEMENT

Inventory management deals with adequate supply of materials to meet the

expected demand pattern subject to budget consideration.

Inventory management usually is not the direct operating responsibility of the

finance manager, the investment of funds in inventory is an important aspect of
financial manager. Consequently, the finance manager must be familiar with ways to
control inventories effectively, so that the capital can be allocated efficiently.

DEFINITION OF INVENTORY MANAGEMENT

It may be defined as the systematic location storage and recording of goods in

such a way that desired degree of service can be made to operate at minimum ultimate
cost.

OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of inventory management are:

 Investment in inventory like any other current asset involves a trade-off. The
investment in inventory should strike a balanced between efficient and smooth
production or sales operation and profitability. This is so because both
excessive and inadequate inventories are not desirable.

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 Excessive investments in inventory would ensure that there are no shortages in

production or sales operation.

 To keep material cost under control so that they contribute in reducing cost of
production and overall cost.

 To avoid both over stocking and under stocking of inventory.

 To minimize losses through deterioration, wastages and demand.

 To maintain investment in inventory at the optimum level as required by

operational and sales activity.

 To facilitate of data for short term and long term planning and control of
inventory.
NEEDS OF INVENTORY
Inventory is needed to regulate the flow of raw materials and work in progress
for purchasing and finished goods for sale. Inventory does not earn interest, and is
expensive to store, insure, protect and stock out costs. Therefore, inventory should b
held so as to hold enough to operate but not too much. The inventories are needed for
the following reasons.

1. Avoiding Losses of Sales

If the firm is not having enough stock of finished goods it will result in the
loss of sales normally, unless the product is being made to order as per the specific
requirement of the customer. In most cases, however, firm must be in a position to
deliver goods on demand.

2. Gaining quantity Discounts

Suppliers of raw materials usually offer quality discounts if purchase are made
in bulk. These discounts will reduce the cost of goods increase the profit when it is
sales. Thus, the firm would like to purchase raw materials in quantities greater than
their requirements.

3. Reducing Ordering Cost

Each time a firm places an ordered; it incurs certain expenses, which are called
as ordering cost. Forms have to be filled, approvals have to be obtained, and goods

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that arrive must be accepted, inspected, and counted. Later, an invoice must be
processed and payment made. The greater the number of orders greater is the
ordering cost.

4. Achieving efficient Production Runs

Each time a firm organized works and machine to produce an item, startup
costs are incurred. These are then absorbed as production begins. Frequent setups
will result in high startup costs; larger runs involve lower costs.

5. Reducing risk of production shortages

Once the production process starts all the required raw materials, components
etc, should be made available to the production department without any delay.

TYPES OF INVENTORY

The inventory required by any firm would depend upon the nature of industry.
Usually there are types of investments

1. Raw material inventory

This consists of those basic materials that are converted into finished goods
through the manufacturing process. The purpose of maintaining raw material
inventory is to separate the production function from the purchasing function so that
delays in shipment of raw materials do not cause production delays.

2. Stores and spares

This category includes those products, which are accessories to the main
product for the purpose of sale. Examples of store and spares items are bolts, nuts
clamps, screws etc.

3. Work in process (WIP)Inventory

These are semi-finished products. The longer and more complex the
production process, the greater will be WIP inventory. It helps separating the various
operations process so that machine failures and work stoppages in one operation do
not affect other operations.

4. Finished goods inventory

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These are completely manufactured products awaiting sale. The purpose of

a finished goods inventory is to separate the production and sales function so that
sales can occur without any immediate dependence on production.

COMPANY PROFILE

BACKGROUND AND INCEPTION OF THE COMPANY

H.M.T. is one of the leading public sector companies, in India, HMT I & II
Bangalore plant was inaugurated in 1953 by PANDIT JAWAHARLAL NEHRU; it
has 16 manufacturing units spread over 10 states, 24 divisions and 29,000 employees
in 10 different states.

DR.S.M.Patil started HMT limited as a Hindustan Machine Tools Limited on

7th February 1953 in technical and financial collaboration with the DERLIKON
MACHINE TOOLS WORKS of Switzerland. The first product produced by HMT
was lathe on 6th October 1953.Then the government of India bought the shares held by
Derlikon thereby transforming HMT as a Government undertaking

INTRODUCTION OF MACHINE TOOLS LIMITED

HMT Limited, the pioneer in Machine Tools Industry in India and

manufacturers of a diversified range of products has incorporated “HMT
MACHINE TOOLS LIMITED” as its fully owned subsidiary on 9th August 1999.

 “HMT MACHINE TOOLS LIMITED” (HMT-MTL) is a Multi-unit, Multi

location, Multi technology Company manufacturing a wide variety of
“STATE-OF-THE-ART” Machine Tools.

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 Comprehensive Customer Support services including Application

Engineering, Customer Training and after sales service.

 The best of products in terms of technology, productivity and cost effectiveness

 All manufacturing units of HMT Machine Tools are ISO9001 certified.

NATURE OF BUSINESS CARRIED:

HMT limited, the pioneer in machine tools industry in India and

manufacturers of a diversified range of products has incorporated “HMT MACHINE
TOOLS LIMITED” as it’s fully owned subsidiary on 9th August 1999.

“HMT MACHINE TOOLS LIMITED” (HMT-MTL) is a multi-unit, multi-

location, multi Technology Company manufacturing a wide variety of “STATE-OF-
THE-ART” machine Tools. HMT-MTL has its manufacturing units at five locations
with each unit specialized in a particular family of Machines. The sales and service
network is spread across the length and breadth of the country. As leading
manufacturer of Machine Tools in India, HMT-MTL provides the best of products in
terms of technology, productivity and cost effectiveness.

VISION, MISSION AND QUALITY POLICY

Corporate Vision

 To be a leading GLOBAL ENGINEERING CONGLOMERATE Focused on

CUSTOMER DELIGHT in our fields of Endeavour.

Corporate Mission

 To establish ourselves as one of the world’s premier companies in the

engineering field having strong international competitiveness.

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 To achieve market leadership in India through ensuring customer satisfaction

by supplying internationally competitive products and services.

 To achieve sustained growth in the earnings of the group on behalf of

shareholders.

Quality Policy

 To maintain QUALITY LEADERSHIP in all our PRODUCTS &

SERVICES

 TOTAL CUSTOMER SATISFACTION through Quality Goods and

Services

 COMMITMENT of management to Quality

 To create a CULTURE amongst all Employees towards TOTAL QUALITY

CONCEPTS

 TOTAL QUALITY through PERFORMANCE LEADERSHIP

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PRODUCT PROFILE

Our Business Domain

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HMT PRODUCTS

TRACTORS

BEARINGS WATCHES

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HMT is synonymous with excellence in precision engineering in India. HMT

is built on a strong foundation of technical know – how acquitted from world leaders
in machine tools, such as ORELIKON, MANURCHIN,GILD MEISTER, LEE BEER,
RINO BERADI, FRITZ WEMER PEGARD. Today HMT Machine Tools expertise
has been developed to such an extent that HMT can design and develop any kind of
machines. From simple lathe to multi – station transfer lines, from stand –alone CNC
machine to flexible manufacturing systems (FMS) leading to factory automation
HMT’s broad range of machine tools covers.

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General – purpose machines and CNC machines are produced to meet the
application needs of every engineering industry.

1. Computer Networking Control (CNC) machines.

2. Turning machines.

3. Milling machines.

4. Drilling machines.

5. Grinding machines.

6. Boring machines.

7. Broaching machines.

8. Special purpose machines.

9. Other products:

 Metal forming.

 Die costing and plastic machinery.

 Printing machines.

 Food processing machines.

 Tractors.

 Quartz watches.

 Bearings.

 Précising ball screw.

 Recondition.

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ORGANIZATION STRUCTURE OF HMT

GM (MBX)

DGM JGM GM (P)

(CNC) (PSB) PRODUCTION

GM (F)
FINANCE
DESIGN QUALITY &
SALES DEVELOPME INSPECTION
ENGG. NT JGM (QI)
JGM(S) JGM (DD) FINANCE

HRM
SECURITY ENGG.
TRAINING SUBCONTRACT
CANTEEN COMP’R & MIS
JGM (HRM) JGM(E)

BALL
PLANT TRAIL &
SCREW (MFG) SERVICE
TOOL JGM SERVICING
ROOM DGM (PS) SPARES
DGM (TS)
ASSEMBLY FOUNDAR
PROGRESS Y JGM (F)
AGM (PR) JGM (AY)

HOSPITAL CMO MATERIAL &

STORES
JGM (M)

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ORGANIZATION STRUCTURE OF PRODUCTION DEPARTMENT

General Manager

Joint General Manager

Deputy General Manager

Assistant General Manager

Manager

Deputy Manager

Foremen

Supervisor

Junior Superior

Worker

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CUSTOMERS OF HMT

 HAL

 BHEL

 RAILWAYS

 SHIP BUILDING INDUSTRIES

 CEMENT INDUSTRIES

 GENERAL ENGINEERING INDUSTRIES

 BAJAJ AUTOS

 TVS

COMPETITORS OF HMT

 MICROMETRICS-TURNING CENTRE& GRINDING MACHINES.

 PERISHED- GHAZI BAD– GRINDING MACHINES.

 HEC (HEAVY ENGINEERING CORPORATION- HEAVY DUTY LATHE.

 ACE DESIGNERS AT BANGALORE - TURNING CENTER, MACHINING

CENTERS.

 LMW –TURNING AND DRILL TAP CENTERS.

 TAL –PUNE – SPAM.

 JYOTHI –TURNING CENTER& MACHINING CENTER.

 ASKAR MICRON- MYSORE –TURNING CENTERS.

 WIDIA- BANGALORE- SPAM.

 KIRLOSKAR - MYSORE.

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REVIEW OF LITERATURE
TECHNIQUES OF INVERTORY CONTROL:

Inventory control techniques are mainly followed by control organizations

within the frame work of one of the basic inventory models like

1. Fixed order quantity system or 'Q’ system

2. Fixed order period system ‘P’ system

These techniques represent the operational aspect of inventory management

and help realize the objectives of inventory control and inventory management.
Several techniques are there which is used according to convenience of the technique

What should be stressed however is the need to cover all the items of
inventory and all stages that means from the point of receipt from supplier to the point
of use

The techniques in inventory control are as following

1. ABC(always better control)classification

2. HML(High, Medium, Low)classification

3. VED (Vital, Essential, Desirable, Easy) technique.

4. SDE (Scarcsem, Desirable, Easy) technique.

5. FSN (fast, Medium, Non-moving) technique.

6. EOQ (Economic Order Quantity) analysis.

7. Maximum and Minimum system

8. Two-bin system.

9. JIT (just-in-time) technique

10. MRP (Materials Requirements Planning).

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ESSENTIAL REQUIREMENTS OF INVENTORY CONTROL

1. There should be proper cooperation and coordination between various

departments viz., purchasing inspection, storage costs department etc.

2. Purchasing of stocks or other materials should be centralized under the control of

a competent manager.

3. There must be adequate planning of materials requirements and also the

classification of materials with their appropriate codes.

4. There should be effective planning control on stock in terms of physical storage

through satisfaction control procedures.

5. The storing of materials and issuing also should be planned properly so that there
will be delivery of materials upon requisition to departments in the right time they
are needed.

6. Accurate records should be maintained so that the issues and utilization of stocks
in production can be controlled.

7. Maximum minimum and reorder levels of stocks should be fixed

8. There must be a system of regular reporting regarding purchasing of materials,

issuing and storage to the management.

9. The system of internal audit and internal check and maintenance must be very
effective and efficient.

The formula for computing maximum level is

Maximum level = reorder level + reorder quantity – (minimum consumption

* minimum reorder period)

Minimum level

In this system when the inventory items reaches to a predetermined minimum

level it is replenished by the fresh purchases up to the predetermined maximum level
the minimum level serves as a reordering point. The fresh order is placed for that
much quantity which shows deficiency in maximum level. This level is fixed by
considering the following factors.

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 Rate of consumption

 The time required under top priority conditions to acquire enough supplies to
avoid a stoppage in production.

The formula for computing minimum level is

Minimum level = reorder level – (normal consumption * normal reorder period)

Reorder level

The prescription of reorder level (ROL) is an important technique of inventory

management. It fundamentally deals with “when to order “ to replenish the
inventories reorder level is predetermined point and when the existing stock of
inventories reaches this point or falls below it the purchase action is initiated to
replenish them.

The reorder level is decided for each important item of inventory on the basis
of following considerations

 Lead time

 Average periodic consumption (daily consumption )

 Safety stock

Re-order level is decided as under

ROL = (lead time * average daily consumption) + safety stock

Economic order quantity

EOQ is an important technique of inventory management. EOQ prescribes the

order at which the ordering cost and the inventory carrying cost will be the minimum.
Reorder quantity is sometimes known as economic order quantity (EOQ) because it is
the quantity which is most economical to order. In other words, EOQ is the size of the
order.

This give maximum economy in purchase of any material and ultimately

contributes towards maintaining the materials at an optimum level and at the
minimum cost. It equates the cost of ordering with the cost of ordering with the cost
of storing materials.

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Ordering cost

It consists of the cost of paper work for placing an order like use of paper,
typing posting filling etc., the cost of the staff involved in this work in the costs
incidental to order like follow-up inspection etc., ordering costs includes

1. Cost of placing an order with a vendor of materials

 Preparing a purchase order

 Processing payments

 Start =-up scarp generated the material

2. Ordering from the plant

 Machine setup

 Start-up scarp generated from getting a production run started.

Ordering cost is ascertained as under

Annual requirement (R) *cost per order

O.C =
Order size

Carrying cost

Costs incurred for maintaining a given level of inventory are called carrying
cost. They include the cost of store keeping (stationery, salaries rent, material,
handling cost etc.,) interest on capital locked up in stores, the incidence of insurance
cost, risl of obsolescence, determined and wastage of materials, evaporation etc

 Interest cost due to locking up of funds

 Cost of storage space

Total carrying cost is ascertained as under

T.C.C = average inventory * per unit carrying cost

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Economic order quantity is ascertained as under

E.O.Q = 2 X Quantity required* ordering cost Carrying cost

INVENTORY CONTROL TECHNIQUES

Effective inventory management requires an effective control for inventories.

Excess inventory holding leads to excessive carrying cost on account of interest of
interest, storage and handling changes, insurance, record keeping, inspection and the
risk of deterioration in quality and thus adversely affects the profitability of the
organization. Even through the optimum level of inventory varies from industry to
industry, it is generally considered that the value of inventory as a percentage of
annual consumption may not exceed 33 percent and the value of finished goods to net
sales may be about one month’s sales. Managing inventory levels in an ongoing
balance between the costs of carrying extra inventory, versus the revenue losses
incurred by not having enough inventories available. A proper inventory control not
helps in solving the acute problem of liquidity but also increases profits and causes
substantial reduction in the working capital of the concern. The following are the
important tools and techniques of inventory management and control.

A.B.C. ANALYSIS :( Always better control)

An ABC analysis offers an important solution to be problem of a scientific

planning and control of inventories and is on important technique of inventory
management. It is based up on the value of different items constituting inventory. It
may be concerned with several items, raw materials, factory and office supplies,
machine tools and handling equipments. The idea underlying on ABC analysis is in
recognition of the principle that some items of inventory are more important than
other. The ABC techniques enables the enterprise to keep its investment low avoid
stock out of critical items. Its objective is to reduce the minimum stock as well as the
working stock. ABC analysis underlines a very important principal “Vital few trivial
many” statistics reveal that just a handful of times account for bulk of the annual
expenditure on materials. These few items called “A” items are numerous in numbers,
and their contribution is less significant. ABC analysis trends to segregate all items
into categories, A, B and C based on their annual usage. The categorization so made

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enable us to pay the right amount of attention and minimum of effort and
expenditures.

A.B.C CLASSIFICATION:

The following steps have been undertaken to implement ABC analysis.

 The price per unit for each purchased item is obtained.

 The total consumption value is determined by multiplying consumption

quantity by its unit price.

 The consumption value is arrived by the above calculations for each of the
items.

 The items are ranked in accordance with the total consumption value, giving
first rank to the item with highest total value. The items are arranged in the
order of decreasing annual consumption value.

 The ratio of total value of all items is determined.

 The list of value is divided into three groups, namely, A-high value, B-
medium value, and C-low value. In making that division, a graph with y-axis
as “cumulative percentage of value of inventory”, and x-axis as “percentage
of inventory items” can be used.

F.S.N CLASSIFICATION:

This classification is based on the pattern of issues from stores and is useful in
controlling obsolescence. To carry out FSN analysis, the data of receipt or the last
date of issue, whichever is later, is taken to determine the number of months, which
have lapsed since the last transaction, the items are usually grouped in period of 12
month. It is found that many companies maintain huge stocks of non-moving items.

 If the item is ordered in all 0-12 months, the item is classified as fast-moving.

 If the item is ordered in all 12-60 months, the item is classified as slow-
moving.

 If the item is ordered in all above 60 months, the item is classified as Non-
moving.

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In HMT Ltd, inventories that are lying in stores for more than 5 years are
considered as non-moving items. To verify the items, stock verification has to be done
by the stores department and result must be given to the inventory control department
for reconciliation.

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RESEARCH METHODOLOGY
METHODOLOGY OF DATA COLLECTION

The methodology involves collection of data from primary and secondary

sources. The data so collected id subjected to analysis using the necessary tools that
are relevant. Inference is drawn incorporating both quantitative and qualitative data
available at the research disposal. Based on inferences, conclusions are drawn and
recommendations are made to enhance the study on inventory management of HMT
machine Tools Limited, Bangalore complex. The relevant to the study was collected
through both primary and secondary data.

PRIMARY DATA

It is nothing but discussion with higher authorizes and various managers

regarding the procedures of receiving and issuing to stock and other functions
performed by them in the organization and personal visits to the stores department.
An interview schedule also helped in the collection of data.

SECONDARY DATA

Secondary data was collected from magazine, journals, HMT official website,
records of the company and annual reports.

REFERENCE PERIOD:

The reference period is for five years, i.e., 2005-06 to 2009-10. For clear and
detailed picture of the study, five-year information is necessary.

OBJECTIVE OF THE STUDY

 To know the overall effectiveness of inventory management in HMT Ltd.

 To study the methods of inventory control in HMT-MBX.

 To study the materials stored.

 To know how the procurement of material is done.

 To study the inventory valuation in HMT-MBX.

 To suggest a remedial measure for better decision making by the organization.

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NEED OF THE STUDY

Financial statements are prepared for the purpose of presenting a periodical
review of report by the management in business and result achieved during the period
under review. It reflects a combination of recorded facts accounting conventions and
personal judgments.

Financial analysis helps in assessing the financial position and profitability of

the concern.

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SCOPE OF THE STUDY

A study was conducted in “HMT-MBX Ltd” to analyze the above-mentioned
functions in brief and inventory control in detail. Maintaining optimum level of
inventory is the difficult task for the organization. Is to be maintained in such a way
that neither excessive nor in sufficient. Excessive investment on inventory leads to
blocking of funds, shortage of inventory effect production process this study
highlights problem in maintaining of optimum level of inventory.

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LIMITATIONS OF THE STUDY

 Inventory is more involved in the data financial performance of the company
however all relevance financial area could not be made available to the
researcher. This to some extent would limit the conclusions arrived at by the
research.

 Time was major constraint so research study could not be made in depth.

 The confidentially of some facts and figures.

 The constraints limit is the scope of the study.

 A detailed analysis of all items was not post

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DESIGN OF THE STUDY

TITLE OF THE STUDY

A study on “INVENTORY MANAGEMENT” with reference to “HMT

MACHINE TOOLS LIMITED, BANGALORE COMPLEX”

Statement of the problem

Investment can range from 20 to 35% of its total investment capital. Inventory
management must have as its aim the reduction and control of that investment in
inventory.

The company’s operating efficiency is well understood with effective

management of inventory. This is essential because never too much capital has to be
invested on idle stock of inventory and at the same time the organization should not
run with shortage of materials. Hence, the inventory management, which includes
right purchase of materials, storing, pricing, controlling, etc. is very significant. The
overall profitability position of the company is much dependent upon the inventory
management.

In this study an attempt is made to understand the inventory management of

HMT Machine Tools Limited, which is one of the market-leading participants in the
machine tools. An attempt is also made to ascertain drawbacks if any, in the inventory
management and to suggest suitable remedies for the same.

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DATA ANALYSIS AND INTERPRETATION

(1) INVENTORY TURNOVER RATIO:

Inventory turnover or stock turnover ratio is the indicates the number of times
the stock is turnover (i.e., sold) during the year. In other words, it is relation between
the stock and cost of goods sold. This ratio indicates whether investments in inventory
are efficiently used or not.

A high inventory turnover ratio indicates brisk sales. The ratio is a measure to
discover the possible trouble in form of over stocking or over valuation. A low
inventory turnover ratio results in blocking of funds in inventory, which may
ultimately result in losses due to inventory becoming absolute, or deteriorating in
quality.

The ratio is expressed as: = Annual sales /Average stock of Inventory

Annual sales Average stock of

Year ITR
(Rs) Inventory(Rs)

2008 711049820 331128862 2.15

2009 749145908 352167951 2.13

2010 480030182 341860689 1.4

2011 519415843 336205679 1.5

2012 517609558 249868315 2.1

Inference:

From the table it is clear that inventory ratio had increased in 2008, 2.15
respectively, but slightly decreased by 0.02 in 2009, 0.73 in 2010 and 1.25 in 2011
when compared to 2010(i.e.1.4 and 0.15 in the year 2010&11 respectively).

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2.5
2.15 2.13 2.1
2.05
2

1.5
1.5 1.4

0.5

0
2007 2008 2009 2010 2011 2012

Interpretation:

From the above graph, it is Cleary shows that the inventory turnover ratio
fluctuating year over year. Inventory turnover ratio has a declining trend from 2008
which indicates that inventory utilized efficiently without blocking of inventors in
stock and making them obsolete.

2. Raw Material turnover ratio:

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Raw Material turnover ratio shows the ratio of turnover of inventory based
raw material consumed and average inventory. Raw material is those basic inputs that
are converted into finished product through the production process. Raw material
inventories are those units which have been purchased are stored for future
productions. This ratio shows the number of times the raw materials were replaced
during a fiscal year.

The ratio is expressed as:

Annual consumption of raw materials / average raw materials

Material Average stock of raw

Year RMTR
consumed(Rs) material(Rs)

2008 202988988 54740677 3.7

2009 258354512 72275937 3.57

2010 232768231 91777764 2.53

2011 232793494 99709297 2.33

2012 201583439 88760886 2.27

Inference:

From the above table it is clear that raw material was lying in the inventory for
a long time when we see the ratio in the year 2006 to 2007.But it has slightly come
down 2008 i.e. 2.53, next year also it was low at 2.33 and 2010 also low at 2.27.

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Raw Material turnover ratio

3.7 3.57
4
RMTR

3.5 2.53
3 2.33 2.27
2.5
2
1.5
1
0.5
0
2006 2007 2008 2009 2010

Years

Interpretation:

From the above graph, raw material ratio has shown a decline in previous two
year giving a good sign of effective use of raw materials for the production process.

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3. Work in Progress turnover ratio

Work in progress goods are those which are in the process of production in the
manufacturing unit. They are also called as semi finished goods.

The ratio is expressed as:

Cost of completed works / average working progress

year Cost completed Average stock of WIP WIPTR

works (Rs) (Rs)

2008 459700000 159175871 2.88

2009 644100000 184395990 3.49

2010 629600000 178705152 3.52

2011 510300000 155556797 3.28

2012 472800000 3013832592 1.7

Inference:

From the above table, in the year 2006 the WIPTR was 2.888 but in the year
2007 and 2008 It has increased to 3.493 and 3.523 respectively. Previous year the
ratio 1.7.

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work in progress ratio

3.493 3.523 3.28
4
2.888
WIPR

3
1.7
2
1
0
2006 2007 2008 2009 2010

Years

Interpretation: From the above graph it is clear that work in progress ratio has
declined in previous year but it is high when compared to 2006.also this ratio was in
the year 2007 and 2008.

4. Finished goods turnover ratio:

Finished goods are those which are read for delivery to the customers, but
lying in the inventory due to some delay of sales. This ratio indicates the average
finished goods turnover in one fiscal year.

It is expressed as:

Cost of goods sold / average finished goods inventory.

year Cost of goods Average stock of FGTR

sold(Rs) finished goods
inventory(Rs)

2008 355433001 61743602 5.76

2009 217902752 86397708 2.52

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2010 510209350 103720829 4.92

2011 391747173 97118808 4.03

2012 475825957 951288185 0.50

Inference:

From the above table the FGTR is changing. In the year 2006 it was 2.73,
increased to 5.76 in 2007 and decreased tremendously to 2.63 in 2007 again FGTR
was increased to 5.73 in the year 2009 while in previous year it was low to 1.61.

Finished Goods Turnover Ratio

5.76
6 4.92
5 4.03
4
2.52
3
2
0.5
1
0
2006 2007 2008 2009 2010

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Interpretation:

From the above graph it shows that this ratio, throughout the period of study
showed fluctuating trend, which shows that finished goods are deign in the inventory
depending on sales.

5. Inventory to working capital ratio:

Inventory to working capital is the liquidity ratio, which helps to measure the
short term solvency of the company. This ratio indicates that the proposition of the
working capital tied up in the inventories. As we know that inventory is a current

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asset and component of working capital, this ratio shows the percentage of inventory
in working capital.

The ratio is expressed as:

Inventory / working capital

years Inventory(Rs) Working capital (Rs) I TO WCR

2008 255923194 118264769 2.16

2009 406334134 184880590 2.19

2010 298001371 102606769 2.9

2011 385720007 159119142 2.42

2012 286754600 87208510 3.29

Inference:

From the above table it is clear the inventory plays a vital role in WC. It is
increasing the year 2006 to 2010 respectively.

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Inventory to WC Ratio
3.28
2.91
3.5
2.42
3 2.16 2.19
ITWCR

2.5
2
1.5
1
0.5
0
2006 2007 2008 2009 2010

Years

Interpretation:

From the above graph it can be observed that inventory carries steep ratio in
last few years when compared to 2006 figures giving a positive indication of
inventory.

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6. Inventory holding period:

Inventory holding period should be minimum. Number a day for which

inventory is holding is calculated by the following formula.

Inventory holding period = inventory / annual sales * 365 days

year Inventory(Rs) Annual sales (Rs) IHP(Days)

2008 255923194 562190859 166

2009 406334134 711049820 208

2010 298001371 749145908 145

2011 385720007 480030182 293

2012 286754600 519415843 202

Inference:

From the above table it is clear that IHP was more in the year 2007, 2009,2010
i.e. 208, 293 and 202.but we see that in the year 2006 and 2008 IHP was less.

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Inventory holding period

293
300
250 208 202
200 166
IHP (InDays)

145
150
100
50
0
2006 2007 2008 2009 2010

Years

Interpretation:

As we know that IHP should be minimum. Here in the above graph it shows
that HMT Machine tools ltd is holding inventories for longer period in the previous

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year. This is due to decline in sales and other reason like change in design, order
being cancelled etc.

ABC ANALYSIS

CLASSIFICATION OF ITEMS:

ABC classification is based on value

 10% in number and 70% by value classified as CLASS A.

 10% in number and 20% by value classified as CLASS B.

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 80% in number and 10% by value classified as CLASS C.

In HMT Machine Tools Limited ABC classification of items is as follows:

A Class Items: Consumption value more than and above. Example, etc

B Class Items: Consumption value more than but less than. Example, etc

C Class Items: Consumption value less than Rs... Example, bolts, nuts, etc

Polices adopted by ‘A’ class items:

 ‘A’ class items account for bulk of the annual usage value, hence it is required
for at most attention of senior level in administration and is responsible for
regular reviewing of these items.

 The inventory control department maintains up-to-date and accurate records: It

will be sent more frequently to the top management.

 The inventory is at minimum level.

 The purchase department maintains better vendor relations confiding with

VRM (Vendor Relation Management).

 The concept of first in and first out is adopted.

Polices adopted by ‘B’ class items:

 The policies for these items are intermediate between ‘A’ and ‘C’ items.

 These items are ordered more frequently than ‘A’ class items.

 Stock and issue cards are maintained.

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Polices adopted by ‘C’ class items:

Since the items are too much value is less, the policies are aimed at reducing the
ordering and stock keeping work to an extent possible and ensuring the availability
at all times by stocking liberal quantities.

Liberal quantities are kept in stock, since it does not involve much capital tie up.

Bulk purchase is done to take advantage of quantity discounts.

For ordering these items, a combination of review period system and 2-bit system is
maintained.

ABC ANALYSIS

Type Quantity Rate Inventory Ranking Percentage Cumulative

Value (Rs)

1 95 8069 766562 51504825 0.4600 0.4600

2 8508 6054 51504825 23733679 0.2119 0.6719

3 1931 3683 7111949 13241796 0.1182 0.7901

4 98 2443 239433 8226838 0.0734 0.8635

5 173 7804 1350016 7111949 0.0635 0.9270

6 1791 13252 23733679 3135454 0.0280 0.9550

7 355 6525 2316198 2316198 0.0206 0.9756

8 361 34188 12341796 1350016 0.0120 0.9876

9 9 25820 232377 993269 0.0088 0.9964

10 128 24496 3135454 766562 0.0035 0.9999

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11 626 13142 8226838 239433 0.0021 1.0020

12 42 23649 993269 232377 0.0020 1.0040

111952397

INVENTORY MOVEMENT SUMMARY

In this analysis, the quantity and rates of consumption is to be analyzed

and is to classify the items fast moving (F), slow moving(S) and non moving (N)
items. Fast and slow moving classification held in arrangements of stock in the
stores and in deciding the distribution handling methods. It is found that many
companies maintain huge stocks of non-moving items.

FAST AND SLOW MOVING INVENTORY TABLE:

Inventory summary as on 31-mar-2010

Type Description Total-inventory 00-12- fast moving

Count Value Count Value

13 Accessories 626 8226838 127 1564821

12 Auxiliary materials 128 3135454 56 1823102

07 Electrical parts 1791 23733679 690 7826120

04 Electrical spares 98 239433 5 39757

14 Foundry materials 42 993269 39 964980

08 Non-ferrous castings 355 2316198 35 611030

09 Production steels 361 12341769 168 8962899

01 Shop stores 95 766562 50 548901

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02 Standard parts 8508 51504825 3067 20519372

10 Timber 9 232377 6 216687

03 Tools 1931 7111949 326 1731119

06 Mechanical spares 173 1350013 8 13725

Total 14117 111952397 4577 44822515

SLOW MOVING INVENTORY

Type Description 13-24 months 25-36 months

Count Value Count Value

13 Accessories 29 369927 35 770603

12 Auxiliary materials 20 618836 9 256529

07 Electrical parts 140 3749382 143 1317059

04 Electrical spares 1 91 2 418

14 Foundry materials 3 28289 0 0

08 Non-ferrous castings 23 476109 58 297605

09 Production steels 55 718185 32 305882

01 Shop stores 11 68785 6 40013

02 Standard parts 787 2972440 850 4544383

10 Timber 0 0 0 0

03 Tools 158 750188 183 774036

06 Mechanical spares 12 20268 5 6099

Total 1239 9772500 1323 8312629

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NON-MOVING SURPLUS ITEMS

Items, which have not moved for 5 years and more than the date of lost
issue, will be considered as “NON-MOVING ITEMS”, non-moving items list
will be prepared the end of the year and the material register for March is printed.
The surplus committee declares at last either the item to surplus / obsolete.

After the approval, the stock items will be transferred to salvage stores and
stock transfer will not be received in material account section to remove the value
from the respective inventory accounts to the obsolescence.

NON-MOVING INVENTORY

Type Description 37-60 months Above 60 months

(slow)

Count Value Coun Value

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13 Accessories 34 377321 401 5144066

12 Auxiliary materials 190 217828 24 219159

07 Electrical parts 170 1715183 648 9125934

04 Electrical spares 2 3017 88 196150

14 Foundry materials 0 0 0 0

08 Non-ferrous castings 93 549525 146 381929

09 Production steels 44 971166 62 1383664

01 Shop stores 11 12202 1 1144

02 Standard parts 947 4222857 2853 19226689

10 Timber 0 0 3 15690

03 Tools 255 1036833 1003 2656270

06 Mechanical spares 6 127783 142 1182141

Total 1581 9233713 5371 39532935

Table showing non-moving inventory value for last 4 years

Years Non-moving inventory value

2006-07 68640771

2007-08 69115099

2008-09 63904124

2009-10 54037536

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Non-moving inventory value

80000000
68640771 69115099
70000000 63904124
Value in Ru-
60000000 54037536
pees50000000
40000000
30000000
20000000
10000000
0
2006-07 2007-08 2008-09 2009-10

Years

Reason for Non-moving inventory

 Change in design of the equipment

 The sale order may be cancelled

 Change in the production pal

COMPONENTS OF INVENTORY

All efforts of the management to control inventories should aim at maintaining

various components of inventory at economic levels and in proper proportions.

In HMT Machine Tools Ltd, Inventory is divided into the following

categories.

 Raw material and components

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 Stores and maintenance spare parts

 Tools and Instruments

 Work in progress

 Stock in trade

 Material and components in transit

 Scrap

Table showing the % change in components of inventory from 2006 to 2007

Inventory 2006 2007

Value (Rs) % Value (Rs) %

Raw material and components 56259639 21.98% 88292234 21.73%

Stores and maintenance spare parts 43575373 17.03% 70424054 17.33%

Tools and Instruments 6784051 2.65% 11623924 2.86%

Work in progress 157983036 61.73% 210808944 51.88%

Stock in trade 44228574 17.28% 128566842 31.64%

Material and components in transit 13557863 5.29% 12199115 3.00%

Scrap 382055 0.15% 506206 0.12%

Less: provision for obsolescence 66847400 -23.11% 116086789 -28.56%

TOTAL 255923194 100% 406334530 100%

Components of Inventory 2006

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160000000 Raw material and components

140000000
Stores and maintenance spare parts
120000000
Tools and Instruments
100000000
Work in progress
80000000
60000000 Stock in trade
40000000 Material and components in transit
20000000 Scrap
0 Less: provision for obsolescence
-20000000

Components of Inventory 2007

Raw material and components

Stores and maintenance spare parts
250000000 Tools and Instruments
200000000 Work in progress
150000000 Stock in trade
100000000 Material and components in transit
50000000 Scrap
0
Less: provision for obsolescence
-50000000

Table showing the % change in components of inventory from 2008 to 2009 and
2010

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Inventory 2008 2009

Value (Rs) % Value (Rs) %

Raw material and components 95263294 31.97% 104155299 27.00%

Stores and maintenance spare parts 78708704 26.41% 61500000 15.94%

Tools and Instruments 9834637 3.30% 11958169 3.10%

Work in progress 146601361 49.19% 164512233 42.65%

Stock in trade 78874816 26.47% 115361800 29.91%

Material and components in transit 12199115 4.09% 0 0

Scrap 478992 0.16% 2000000 0.52%

Less: provision for obsolescence 123959548 -41.29% 73768494 -19.13%

TOTAL 298001371 100% 385720007 100%

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Inventory 2010

Value (Rs) %

Raw material and components 82258478 28.68%

Stores and maintenance spare parts 46217359 16.12%

Tools and Instruments 9310239 3.24%

Work in progress 15478123 53.98%

1

Stock in trade 74894837 26.19%

Material and components in transit 1120000 0.39%

Scrap 751000 0.26%

Less: provision for obsolescence 82578544 -28.80%

TOTAL 28675460 100%

0

Interpretation:

From the above, we can say that the components of inventory fluctuating
during the study period. If we study the composition of inventory in HMT
Machine tools ltd the major portion of its total inventory consist of work in
progress and components and stock in trade.

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Components of Inventory 2008

160000000
Raw material and components
140000000
120000000 Stores and maintenance spare parts
100000000 Tools and Instruments
80000000 Work in progress
60000000 Stock in trade
40000000 Material and components in transit
20000000
Scrap
0
Less: provision for obsolescence
-20000000

Components of Inventory 2009

18000000000.00% Raw material and components

16000000000.00%
Stores and maintenance spare parts
14000000000.00%
12000000000.00% Tools and Instruments
10000000000.00% Work in progress
8000000000.00%
Stock in trade
6000000000.00%
4000000000.00% Material and components in transit
2000000000.00% Scrap
0.00%
Less: provision for obsolescence
-2000000000.00%

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Components of Inventory 2010

16000000000.00%
Raw material and components
14000000000.00%
Stores and maintenance spare parts
12000000000.00%
10000000000.00% Tools and Instruments

8000000000.00% Work in progress

6000000000.00% Stock in trade
4000000000.00%
Material and components in transit
2000000000.00%
Scrap
0.00%
-2000000000.00% Less: provision for obsolescence

SIZE AND GROWTH OF INVENTORY

The size of inventory and growth shows of the company. The effective
regulation of inventory calls for the maintenance of inappropriate level of inventory.
All though

Inventory is necessary to run a plant efficiently the excess of inventory serves

no purpose and also affects the profitability of the firm.

Growth rate of inventory shows the ratio of current Asset as it is a part

of current Asset reflects on current ratio establishes relationship between the current
asset and current liabilities. The ability of a company to meet its short-term
commitment is normally assessed by comparing current asset whit current liabilities.

Table showing % Increase in inventory & Sales from 2006 to 2010

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Year Inventory (Rs) Sales (Rs) % Increase in % Increase in

inventory sales

2006 255923194 562190859

2007 406334134 711049820 58.77% 26.48%

2008 298001371 749145908 -26.66% 05.36%

2009 385720007 480030182 29.44% -35.92%

2010 286754600 519415843 25.65% -07.58%

SIZE AND GROWTH OF INVENTORY

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SIZE AND GROWTH OF INVENTORY

Year Inventory (Rs)

711049820
749145908 480030182
562190859 519415843

406334134 385720007
255923194 298001371 286754600

2006 2007 2008 2009 2010

Interpretation:

The graph it shows that inventory of the HMT Machine Tools Limited as
increased at high rate in the year for 2008 & 2010. The size of inventory Bares a
relation with the sales of an undertaking. The table shoes that inventory has increased
considerably when compared to increase in sales . Graph showing the growth of
inventory and net sales of HMT Machine in the changed market conditions the
organization needs to focus on the custemer satisfaction in reaching out this goal or
conclusion basis the management has toconstantly upgrade technology product
profile internal works process & Plant & machinery in the end ultimately it is the
employees who will change of the company .

During the short period of my study various departement I found HMT a well-
structured organization capable to maintain interpersonal relationships among
employees. Employees are very experienced & very dedicated where they feel
company a home.

FINDINGS
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The growing competition and technological developments in this sector are

having inevitable effects on the Indian machine tool industry as a whole. The HMT
machine tool limited is facing typical problems in the emerging globalization scenario
as under:

 HMT machine tool has a regular system for determining unserviceable or

damaged stores, raw materials and finished goods.

 The unit has maintained proper records showing full particulars including
quantitative details and situations of fixed assets.

 Materials are classified as ‘A’ ‘B’ and ‘C’ class items.

 The unit has maintained good relationship with the employer and employees.

 The unit has maintained up to date records and submitted to respective

authorities.

 Inventory has been physically verified during the year by the management.

 The technology is not advanced. This is one of the reasons for low
productivity.

 Most of the machines are obsolete. Thus production process is costly and time
consuming.

 Bin cards are used for maintenance of stores.

 Idle time is more; there is no proper time management in HMT.

 Overhead costs are high.

 Absenteeism and inefficiency are high in the company.

 The company has not been utilizing whole installed and licensed capacity of
its machine effectively, which has in turn resulted in production.

 Motivation of employees is less.

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SUGGESTIONS

 The company should make efforts in making the whole use of installed and
licensed capacity.

 The company should fix competitive prices for the productions in order to
compete in the global market.

 The company should adopt modern costing systems, balance scorecard

concept etc.

 The company inventory management is at moderate level. Hence effective

steps have to be taken to see that the inventory management is made more
efficient so that capital is blocked in inventory can be used for working capital
required.

 Major part of revenue earned is spent on payment of interest: therefore

measures should be taken to reduce the amount of credit.

 Since the company is incurring loss for the past few years, the management
should take measures to bring such a situation under control in order to
flourish in the near future.

 The material cost is high in the company, thus the company should make
efforts to buy the materials at reasonable price.

 The company should update its technology so that it can beat the competitor’s
price and also produce higher quality products.

 The company has to concentrate much on credit policy for speedy collections
of accounts receivable.

 Suitable measures should be taken for improving shorts term solvency

position, current ratio and working capital.
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 The company should reduce inefficiency, absenteeism and idle time.

 The company should make improvement with regard to productivity.

CONCLUSION

The study carried out as a part of curriculum of MBA Sri Venkateswara

University gave me a real exposure to the operational procedures of the company. It
helped me to explore the possibility of rejuvenating the health of a company.

HMT is a very popular name among every Indian, because of its innovation of
technology quality assurance durability affordability to its people or customer. HMT
has created the brand image that symbolizes machine tools to a manufacturer, tractors
to a farmer and watches to millions of people in India.

Today HMT’S machine tools expertise has been developed to such an extent
that HMT can design and develop any kind of machine from simple lathes to CNC
machines to flexible manufacturing system. Today HMT is multi technology multi
Product Company.

HMT commitment to the development of machine tool technology is clearly

reflected in the fact that HMT has as many as 9 exclusively machine tool until spread
across the country.

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In the changed market condition the organization needs to focus on the

customer satisfaction, in reaching out this goal are conclusion basis the management
has to constantly upgrade technology product profile internal work process and plant
and machinery in the end ultimately it is the employees who will change the
performance of the company. Therefore motivation must find priority.

BIBLIOGRAPHY

BOOKS

Financial Management I.M. Panday

Financial Management Prassannachandra

Financial Management M.Y. Khan & P.K.Jain

Management Accounting Dr. P.N. Reddy

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Advanced Accounting Jain and Narang

WEBSITES:

 www.hmtindia.com

 www.hmtmachinetools.com

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