CH 1 Steel Industry Profile

8/2/2019 CH 1 Steel Industry Profile

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CH 1 Steel Industry

Profile


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Introduction

Steel is crucial to the development of any modern economy and is considered to be

the back bone of human civilization. The level of per capital consumption of steel is treated

as an important index of the level of socio economic development and living standards of the

people in any country. It is a product of a large and technologically complex industry having

strong forward and backward linkages in terms of material flows and income generation. All

major industrial economies are characterised by the existence of a strong steel industry and

the growth of many of these economies has been largely shaped by the strength of their steel

industries in their initial stages of development.

Steel, the recycled material is one of the top production in the manufacturing sector of

the world. New innovations are also taking place in Steel Industry for cost minimization and

at the same time production maximization. Some of the cutting edge technologies that are

being implemented in this industry are thin-slab casting, making of steel through the use of

electric furnace, vacuum degassing, etc.

The liberalization of industrial policy and other initiatives taken by the government

have given a definite impetus for entry, participation and growth of the private sector in the

steel industry. While the existing units are being modernized/expanded, a large number of

new/Greenfield steel plants have also come up in different parts of the country based on

modern , cost effective, state of-the-art technologies. At prey of sent, total (crude)

steelmaking capacity is over 34 million tones and India, the 8th largest producer.

Steel is crucial to the development of any modern economy and is considered to be the

backbone of human civilization.

It is a product of a large and technologically complex industry having strong forward and

backward linkages in terms of material flows and income generation.


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then was in Rourkela in collaboration with West Germany and in Bokaro in collaboration

with Russia. These steel plants came under the purview of public sector enterprises.

- Post Liberalization

The post liberalization scenario in the Indian Steel industry has witnessed a

monumental shift. Some of the salient features are :

- The need for license for increasing capacity has been abolished.

- Steel industry has been removed from the list of Industries under the

control of state sector.

- Foreign equity investment in steel has gone up to 74%.

- In January 99 the price and distribution controls were removed.

- Policies like convertibility of rupee on trade account, freedom to mobilize resources

from overseas financial markets and restructuring of existing tax structure have

immensely benefited the industry.


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SWOT Analysis of Indian Steel Industry

STRENGTH WEAKNESS OPPORTUNITY THREAT

Low labour wage rates Labour productivity is still

very low

Growing domestic

and international

market

Entry of

multinational in

domestic market

Abundance of

Quality manpower

Steel production in India is

also hampered by power

shortages.

Product mix and

Product diversi-

fication

Stiff competition by

countries like iraq,

China, japan, etc,

Positive stimulation from

construction industry

India is deficient in raw

materials required by the

steel industry.

Becoming of sub-

contractor to large

units

Slow improvement

in quality

Mature production base Insufficient freight capacity

and transport

infrastructure

Abundant scope to

capture export

market

Inability to match

fast changing

customer needs


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Future Aspect of Indian Steel Industry

It has to be said that the global recession has affected the Indian steel industry

especially stainless steel, but the steel industry is trying to offset the negative effect

of the recession by focusing on transportation and construction projects which are

usually funded by the government.

India is the only country globally to record a positive overall growth in crude steel

production at .0 per cent for the period JanuaryMarch 2009.

It is estimated that India's steel consumption will grow at nearly 6% annually till2012

.

The National Steel Policy has forecasted the demand for steel would reach million

tons by 2009- 2020.

Milestone

The Indian steel industry has come a long way since its humble beginnings. The takeover ofthe British steel giant Corus steel by Tata Steel and the acquisition ofArcelor by MittalSteel herald a new beginning for the Indian steel industry. These events signify the fact thatthe Indian steel industry has acquired a global identity and are today extremely competitiveglobally.

Some of the prominent steel producers today are Posco, Tata Steel, Essar, Ispat, Sail andRinl.

Future trends

It has to be said that the global recession has affected the Indian steel industryespecially stainless steel, but the steel industry is trying to offset the negative effect ofthe recession by focusing on transportation and construction projects which areusually funded by the government.

India is the only country globally to record a positive overall growth in crude steelproduction at 1.01 per cent for the period January -March 2009.

It is estimated that India's steel consumption will grow at nearly 16% annually till2012.

The National Steel Policy has forecasted the demand for steel would reach 110

million tons by 2019-2020.


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SCENARIO OF PRESENT STEEL INDUSTRY IN INDIA

The Indian steel industry have entered into a new development stage from 2005-06, ridinghigh on the resurgent economy and rising demand for steel. Rapid rise in production hasresulted in India becoming the 5th largest producer of steel.

It has been estimated by certain major investment houses, such as Credit Suisse that, Indias

steel consumption will continue to grow at nearly 16% rate annually, till 2012, fuelled bydemand for construction projects worth US$ 1 trillion. The scope for raising the totalconsumption of steel is huge, given that per capita steel consumption is only 40 kg compared to 150 kg across the world and 250 kg in China.

The National Steel Policy has envisaged steel production to reach 110 million tonnes by2019-20. However, based on the assessment of the current ongoing projects, both inGreenfield and Brownfield, Ministry of Steel has projected that the steel capacity in thecounty is likely to be 124.06 million tonnes by 2011-12. Further, based on the status ofMOUs signed by the private producers with the various State Governments, it is expectedthat Indias steel capacity would be nearly 293 million tonne by 2020.

Production Steel industry was delicensed and decontrolled in 1991 & 1992 respectively. Today, India is the 7th largest crude steel producer of steel in the world. In 2010-09, production of Finished (Carbon) Steel was 59.02 million tonnes. Production of Pig Iron in 2010-09 was 5.299 Million Tonnes. Last 5 year's production of pig iron and finished (carbon) steel is given below:

(in million tonnes)

Category 2004-05 2005-06 2006-07 2007-08 2010-09

Pig Iron 3.228 4.695 4.993 5.314 5.289

Finished Carbon Steel 40.055 44.544 55.416 58.233 59.02

(Source: Joint Plant Committee)

Demand - Availability Projection DemandAvailability of iron and steel in the country is projected by Ministry of

Steel annually. Gaps in Availability are met mostly through imports. Interface with consumers by way of a Steel Consumer Council exists, which is

conducted on regular basis. Interface helps in redressing availability problems, complaints related to quality.


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Steel Prices Price regulation of iron & steel was abolished on 16.1.1992. Since then steel prices

are determined by the interplay of market forces. There has been an up-trend in the domestic steel prices since 2006-07 and the trend

accentuated since January this year. Rise in raw material prices, strong demand in the international and domestic market

and up-trend in the global steel prices have been some of the reasons cited by theindustry for increase in the steel prices in the domestic market.

The mismatch in demand and supply is considered to be the main reason on thedemand side for the rise in steel prices. Honorable Steel Minister has held discussionwith all major steel investors including Arcellor-Mittal, POSCO, Tata Steel, Essar,Ispat and also SAIL, RINL to explore the possibility of expediting the ongoing as wellas envisaged steel projects.

The Government also took various fiscal and other measures for stabilizing the steelprices like exempting pig iron, non alloy steel and steel making inputs like zinc, ferro-

alloys and met coke from customs duty; withdrawing DEPB benefits on export ofvarious categories of steel products and bringing back railway freight on iron ore fromclassification 180 to 170 for domestic steel producers.

In May 2010, the Government imposed 15% export duty on semi-finished products,and hot rolled coils/sheet, 10% export duty on cold rolled coils/sheets and pipes andtubes and 5% export duty on galvanized steel in coil/sheet form in order to furthercurtail rising prices and increase supply of steel in the domestic market.

Imports of Iron & Steel Iron & Steel are freely importable as per the extant policy.

Last five years import of Finished (Carbon) Steel is given below:-

Year Qty. (In Million Tonnes)

2004-2005 2.109

2005-2006 3.850

2006-2007

(Partly estimated)

4.436

2007-08 6.581

2010-2009(Partly estimated)

5149

(Source: Joint Plant Committee)


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Exports of Iron & Steel Iron & Steel are freely exportable. Advance Licensing Scheme allows duty free import of raw materials for exports.

Duty Entitlement Pass Book Scheme (DEPB) introduced to facilitate exports. Underthis scheme exporters on the basis of notified entitlement rates, are granted due creditswhich would entitle them to import duty free goods. The DEPB benefit on export ofvarious categories of steel items scheme has been temporarily withdrawn from 27thMarch 2010, to increase availability in the domestic market.

Exports of finished carbon steel and pig iron during the last five years and the currentyear is as :

Exports (Qty. in Million Tonnes)

Year Finished (Carbon) Steel Pig Iron

2004-2005 4.381 0.393

2005-2006 4.478 0.440

2006-2007(Prov.estimated)

4.750 0.350

2007-2010 4.627 0.560

2010-2009(Prov.estimated)

3.482 0.350


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Ch 3 Research

Methodology


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1)Problem IdentificationProblem identification contains the need for the research project. The problem

usually represented as a management question. It is followed by a more detailed set of

objectives.

Here in this project report, the problem is to analyze the inventory control system of

Steel manufacturing Company.

2)Objective Of Study To study the companys history in brief.

To study the procedure followed by store department that can help to manage the

inventories.

To study the technique of inventory control used in the company.

To study how company can better manage its inventory by any other techniques.

To study the policy of the company.

3)Assumption And Benefit Of StudyAssumptions:-

Followings are the main assumptions of the study:

Financial data given to the researcher is of recent and represent the current position of the

business.

As there are many numbers of items in the inventory, hence some costs like holding cost

is taken as an overall for all inventory rather than separate cost for separate inventory

item.

As Steel Plates are supplied directly by the head office of the company situated in

Mumbai, we cannot alter it, hence in the calculation of EOQ, steel plates have not

considered.

Benefits:-

Following are the main benefits of the study:

The main benefit is to know the companys environment practically.


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To get the practical knowledge about the companys inventory management system.

The other main benefit is to apply the bookish knowledge which has been learnt in the

preceding year.

4)Research DesignThe choice of the research design must appropriate to the purpose of the research.

Research design constitutes the blueprint for the collection, measurement and analysis of

the data.

There are basically two types of research design; exploratory research and conclusive

research. In conclusive research there are mainly two types of research design; descriptiveresearch and experimental research. In experimental research one variable is taken as

constant and the other variable changes to note the change. While in descriptive study, it

covers the rationale for using one alternative instead of the other.

Here, for preparing the project report researcher have chosen descriptive research

design.

5)Data CollectionThis part of the report specifies the method of data collection. There are basically two method

of data collection like; primary and secondary data collection method. Here researcher used

both the method.

PRIMARY DATA:

Primary data are those which are collected by the researcher for the first time and specifically

for the research work.

As in case of the daily life, if we want any information on any happening or on any event, we

either ask someone who knows it or we observe ourselves. Researcher has collected most of

the information required for the research work by asking questions to the manager of the

company.

SECONDARY DATA:

Secondary data are those data which is not collected by researcher but collected by someone

else and may be for other purpose, but now used by the researcher for his research work.


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Here in this research work also researcher has also collected secondary data from companys

records and books of accounts.

After collecting the primary and secondary data, the data were edited, analyzed before used

for the research.

6)Sampling UnitSampling Units includes 3 manufacturing Companies. Here are the names of selected Manufacturing

companies.

ESSAR Steel LTD.

TATA Steel LTD

Jindal Steel LTD.

Steel Authorities India LTD.

7)LimitationAt every stage of human life, there are limitations which become obstacles in the path for what he

wanted to do, act or think.

The availability of the time for the completion of the project work is very short; hence much

information cannot be taken.

The information collected by the secondary data and provided by the company might not be

correct.

The analysis, conclusions and suggestions made are as per the researchers limited

understanding about the research subject.

Some of the information, which is treated as confidential by the company was not disclosed,

which is the obstacle in the way of research work.

There are some data in which accurate data was not available; hence the approx amount is

taken for the research work.


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Ch3 Inventory

Management


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Meaning of inventory

The term inventory has been defined by different persons in a different way. Inventory is

nothing but the materials, work-in-process and finished goods, spares and others which are

stored to meet an unexpected demand.

DEFINITION AND CLASSIFICATION OF INVENTORIES

The American institute of Accountants has set forth a definition of inventories which has

been accepted both by accountants and finance executives. The definition is as follows:

The term inventory designate the aggregate of those items of tangible personal property

which

(1) Are held for sale in the course of business,

(2) Are in the process of production for sale, or

(3) Are to be currently consumed in the production of goods or services to be available for

sale.

The definition implies that there are four types of inventories; finished goods, work in

progress, raw material, and supplies which are consumed in the creation and distribution

goods and services.

Every business needs adequate liquid resources in order to maintain day-to-day cash flow. Itneeds enough cash to pay wages and salaries as they fall due and to pay creditors if it is tokeep its workforce and ensure its supplies.

Maintaining adequate working capital is not just important in the short-term. Sufficientliquidity must be maintained in order to ensure the survival of the business in the long-term

as well.

Even a profitable business may fail if it does not have adequate cash flow to meet itsliabilities as they fall due.

Therefore, when businesses make investment decisions they must not only consider thefinancial outlay involved with acquiring the new machine or the new building, etc, but mustalso take account of the additional current assets that are usually involved with any expansionof activity.

Increased production tends to engender a need to hold additional stocks of raw materials and

work in progress. Increased sales usually mean that the level of debtors will increase. A


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general increase in the firms scale of operations tends to imply a need for greater levels ofcash.

Then we should know, why should the managers of a business pay special attention to

working capital?

Management must ensure that a business has sufficient working capital. Too little will result

in cash flow problems highlighted by an organization exceeding its agreed overdraft limit,

failing to pay suppliers on time and being unable to claim discounts for prompt payment. In

the long run, a business with insufficient working capital will be unable to meet its current

obligations and will be forced to cease trading even if it remains profitable on paper.On the

other hand, if an organization ties up too much of its resources in working capital it will earn

a lower than expected rate of return on capital employed. Again this is not a desirable

situation.

The three components, which put affects on working capital, are as:

1) Inventory

2) Receivable

3) Cash

.

Operating cycle

cash

raw material

wip

finishedgoods

sales

debtors


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For a manufacturing company like; steel industry; cement industry and many othermanufacturing companies, Inventory management is the most crucial part for theorganization.

Inventories which may classified as:

1. Raw material2. Work-in-progress3. Finished goods

Whereas receivable and cash management can be done after sales but inventory managementmust be done before sale. It requires appropriate forecasting of production and sales. As it isbased on forecasting, so it becomes difficult task for any financial manager for anyorganization.

Inventory Managementmust be designed to meet the dictates of market place and support the

companys Strategic Plan. The many changes in the market demand, new opportunities due toworldwide marketing, global sourcing of materials and new manufacturing technology meansmany companies need to change their Inventory Management approach and change theprocess for Inventory Control.

Inventory Managementsystem provides information to efficiently manage the flow ofmaterials, effectively utilize people and equipment, coordinate internal activities andcommunicate with customers. Inventory Management does not make decisions or manageoperations; they provide the information to managers who make more accurate and timelydecisions to manage their operations.

The Inventory Management system and the Inventory Control Process provides informationto efficiently manage the flow of materials, effectively utilize people and equipment,coordinate internal activities, and communicate with customers. Inventory Management andthe activities of Inventory Control do not make decisions or manage operations; they providethe information to Managers who make more accurate and timely decisions to manage theiroperations.

The basic building blocks for the Inventory Management system and Inventory Control

activities are:

1) Sales Forecasting or Demand Management2) Sales and Operations Planning3)Production Planning4)Material Requirements Planning5)Inventory Reduction

If we see for TATA STEEL, company is maintaining more than 5% inventories in their hand.Also the company consuming raw material more than 20% of sale value in the last year. Soinventory management is one of the essential for the organization.


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MAJOR TYPES OF INVENTORY

Raw material

Raw materials are inventory items that are used in the manufacturer's conversion process to

produce components, subassemblies, or finished products. These inventory items may becommodities or extracted materials that the firm or its subsidiary has produced or extracted.They also may be objects or elements that the firm has purchased from outside theorganization. Even if the item is partially assembled or is considered a finished good to thesupplier, the purchaser may classify it as a raw material if his or her firm had no input into itsproduction. Typically, raw materials are commodities such as ore, grain, minerals, petroleum,chemicals, paper, wood, paint, steel, and food items. However, items such as nuts and bolts,ball bearings, key stock, casters, seats, wheels, and even engines may be regarded as rawmaterials if they are purchased from outside the firm.

Work-in-process

Work-in-process (WIP) is made up of all the materials, parts (components), assemblies, and

subassemblies that are being processed or are waiting to be processed within the system. This

generally includes all materialfrom raw material that has been released for initial

processing up to material that has been completely processed and is awaiting final inspection

and acceptance before inclusion in finished goods.

Any item that has a parent but is not a raw material is considered to be work-in-process. A

glance at the rolling cart product structure tree example reveals that work-in-process in this

situation consists of tops, leg assemblies, frames, legs, and casters. Actually, the leg assembly

and casters are labeled as subassemblies because the leg assembly consists of legs and castersand the casters are assembled from wheels, ball bearings, axles, and caster frames.

Finished goods

A finished good is a completed part that is ready for a customer order. Therefore, finished

goods inventory is the stock of completed products. These goods have been inspected and

have passed final inspection requirements so that they can be transferred out of work-in-

process and into finished goods inventory. From this point, finished goods can be sold

directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centers, or

held in anticipation of a customer order.

IMPORTANCE OF INVENTORYMANAGEMENT

One of the most important aspects of any business is inventory management. Those who

have never worked in the business sector may not understand the importance of efficient

inventory management.

But, the reality of it is if you don't have control of your inventory, you will be unable toascertain you will have enough inventory on hand to handle the needs of your customers.


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Even worse than that- you will not have enough supplies on hand to produce the products you

need to meet the needs of your customers.

While inventory management has always been important, it has become more important over

the past several decades. As the needs of companies increase, they must in turn increase

demands on their suppliers. In order for suppliers to have the goods their customers need, it is

necessary for them to maintain excellent and accurate inventory management.

Before you even have customers you will need to plan for the maintenance of proper

inventory levels. You will also need to maintain a system for increasing those levels as

business dictates, and this requires the implementation of efficient and effective inventory

management procedures.

OBJECTIVES OF INVENTORY MANAGEMNET:

The inventory management consists of achieving two conflicting objectives:

a) Maintenance of large size inventory to assure continuity of operation in the most efficient

manner.

b) Minimize the firms investment in inventory to maximize profitability.

Both over investment and under investment in inventories are undesirable, because costs

and benefits are associated with the levels of inventory. If the firm minimizes the

i n v e s t m e n t i n i n v e n t o r i e s t h e c o s t c a n b e r e d u c e d . S m a l l e r t h e

i n v e n t o r y , l o w e r t h e c o s t t o t h e f i r m s . B u t i n v e s t m e n t i n l a r g e

i n v e n t o r i e s .

M A I N T E N A N C E C O S T S :

There are mainly three types of cost in inventory. There are the costs to carry standard

inventory and safety stock level. Ordering costs and Setup costs comes into play in inventory.

Finally there are shortfall costs. A good inventory system will balance carrying costs against

shortfall costs.


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COST OF HOLDING INVENTORY:

The operating objective of inventory management is to minimize costs associated with

the inventory. Costs relating can be divided under two heads: ordering costs and

carrying costs. These costs are very important in deciding the optimum level of inventory.

ORDERING COSTS:

These costs are related to ordering of inventory. Ordering costs are payments for secretarial

services, written and other forms of communication, book-keeping. Thus ordering costs

consists of clerical and stationary costs. These costs are also called as set up costs. They are

generally fixed per order placed regardless of the number of units. The larger the

n u m b e r o f o r d e r p l a c e d , t h e h i g h e r a r e s u c h c o s t s . T h e o r d e r i n g c o s t s

ca n be min imi zed by pl aci ng fe wer orders for a larger amount. But purchase

of larger quanti ty of inventory would increase the carrying cost.

CARRYING COSTS:

Carrying costs are related to maintenance of inventory carrying costs include expenditure

for storage, handling of materials, extra heat, light, insurance and property tax. Carrying

costs also include the opportunity cost of funds i.e. interest on investment in

inventory. Large inventories cause diversion of funds from other profitable

ventures. This is the opportunity cost of funds. Carrying costs are nearly

proportionate to the value of inventory. If the level of inventory increases, the carrying costs

also increase and vice versa. Thus the total cost of inventory i.e. ordering and carrying costs

should be compared with the benefits arising from holding of inventory to determine the

optimum level of inventory.

BENEFITS OF HOLDING INVENTORIES:

Another important element in the determination pf optimum inventory level, relates to the

benefits of holding inventories. Inventories perform certain basic functions which are of very

much importance in firms production and marketing strategies. The basic function of

inventories to act as a buffer to decouple or uncouple the various activities of a firm so that

all do not have to be pursued at exactly the same rate.


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INVENTORY MANAGEMENT means :

However departments involve in inventory management process will define and look it

differently like

For finance, inventory is defined as the sum of the Value of raw-materials, fuels and

lubricants, spare-parts, maintenance consumables , semi-processed materials and finished

goods stock at any given point of time.

For operational aspect, definition of inventory would be the amount of raw materials,

fuel and lubricants, spare parts and semi-processed material to be stocked for the smooth

running of the plant.

For procurement aspect, inventory represents what business plans to buy and how much

inventory it intends to hold over a given time frame, is based on three factors:

- A business' desired ending inventory,

- Cost of goods sold, and

- Beginning inventory.

But it is not like that high level of inventory is also undesirable. Because high level of

inventory means high storage cost, high clerical and supervision cost, loss of disruption,

threat of theft or manipulation, etc. After all, a large amount of money has been blocked in it.

Now we cannot use that money in other productive purposes. Many a times it becomes threat

of the risk of liquidity also. Hence, large amount of inventory is also harmful. Inventory

should not high or low but it should just, optimum.

Inventory management System

Meaning:

Inventory management technique is in simple term is the technique employed by the firm to

manage its inventory and exert a proper control on it. It is the operational aspect of the

inventory management and help to realize the objective of the inventory management and

control.


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For a process operational company like port industry and many other operational companies, Inventory

management is the most crucial part for the organization.

Technique of Inventory system :

There are many techniques of inventory management in use. To choose which technique for

is depend on the convenience of the firm. What is important is to cover all items of inventory

and all stages means from the stage of the receipt from the supplier to the stage of its use. The

techniques most commonly used are as follow:

Always Better Control (ABC) classification

High, Medium and Low (HML) classification

Vital, Essential, Diffential (VED) classification

Fast moving, Slow moving and Non-moving (FSN) classification

Economic Order Quantity (EOQ)

Two-Bin System

Material Requirement Planning (MRP)

Just-In-Time (JIT)

Now, let us see each in detail.

ABC Analysis:

One of the widely used techniques for the inventory control is the Always Better Control

(ABC) analysis. It is based on the simple logic that each item of an inventory should not give

equal control, some items need much control while some items needs less control. Now, how

to decide which items need much control and which items need less control, ABC analysis

decides it on the basis of its value and its proportion of use. Items are classified in differentgroups like A, B and C.

Once items are classified in different categories then it is clear where we have to put our

efforts. Items having A category should give more consideration and requires tighter control

failure to do so may results in huge loss to the company. And the stock of such an item

should be maintained at the lowest possible level consistent with the demand. While on the

other hand the item having C category are in less value but its use in production is much more

hence to make tighter control on it is also not advisable, for this category item some amount


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of safety stock is also maintained to avoid stock out. While on the half way there is a B

category items which is given somewhat moderate attention and control.ABC analysis is

based on the value of the items only, hence it is also known as Control by Importance and

Exception (CIE).

The following steps are involved in developing the ABC analysis system:

- Classify the items of inventories, determining the expected use in units and the price per

unit for each item.

- Determining the total value of each item by multiplying units of item with its unit price.

- Rank the items in accordance with the total value, give first rank to the item having highest

value and so on.

- Find out the percentage (%) of number of units of each item to the total units of all items

and the percentage of value of each item to the value of total items.

- Combine the items on the basis of their relative value to form three categories- A, B, and C.

From the above figure, we can see that items having category-A constitutes only 15% of all

units, but forms the value around 70%. These items require the highest control. While on the

other extreme end there is a items having category-C which constitutes 55% of all units but

forms the value only around 10%. While in the middle way there are items having category-

B which constitutes around 30% of all units and constitutes 20%.

The below table can clearly represent it as:

Category % of Units % of Value

A 15% 70%

B 30% 20%

C 55% 10%


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HML Classification:

The High, Medium and Low follow the same procedure which is followed by the ABC

analysis. The difference lies in that in this system the unit value is considered and not its

annual consumption. The item first should be arranged in descending order, then it is up to

the management to fix the three categories on its basis. For example, management may

decide to fix like items having value of Rs.10,000 will be given High category. While items

having value between Rs. 5,000 to 10,000 will be given as Medium category, and the items

having less than Rs. 5,000 will be given as Low category.

VED Classification

While in ABC classification, inventories are classified on the basis of their consumption value, in HML

the unit value is the base of classification, but in VED, criticality of inventory is the base for the vital,

essential and desirable classification.VED analysis is done to determine the criticality of an item and

its effect on production and other services. It is specially used for classification of spare parts. If a

part is vital, it is given V classification, if it is essential, it is given E classification and if it is not so

essential, it is given D classification. For V items, a large stock of inventory is generally is

maintained, while for D items, minimum stock is enough.

FSN Analysis:

FSN stands for fast moving slow moving and non-moving. Here, classification is based on

the pattern of issues from stores and is useful in controlling obsolescence. To carry out an

FSN analysis, the date 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

generally grouped in the period of 12 months.

FSN analysis is helpful in identifying active items which need to be reviewed

regularly and surplus items which have to be examined further. Non-moving items may be

examined further and their disposal can be considered.

Economic Order Quantity (EOQ):

Economic order quantity is the technique which solves the problem of the material manager.

EOQ is the quantity at which the total cost comprising ordering cost and carrying cost is at its

least point.


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Basically one of the most important questions of material management-How much to

order? is answered by the EOQ model.

Order QuantityOrder Quantity

Annual CostAnnual Cost

Holding CostHolding Cost

Total Cost CurveTotal Cost Curve

Order (Setup) CostOrder (Setup) Cost

EOQ Model

We can see from above graph that order should be placed where quantity is QOPT, because it

is at this level that total cost is at its least level that can be seen by the total cost curve.

Holding cost curve is linear and positively related with the quantity level, the more you store

the more you have to spend for its storing. Ordering cost curve is falling because when youincrease your order size, now you will put the less orders and less order mean less ordering

cost.

The point at where the holding cost curve and ordering cost curve meet represents that total

cost is at least and at this level order should be placed.

Lets see how EOQ works with the help of the mathematical formula, but before that its

assumptions are necessary to describe first.

Assumptions:

Demand for the product is uniform and constant throughout the period.

Lead time (time from ordering to receipt) is constant.

Price per unit of product is constant.

Holding cost is based on an average inventory.

Ordering costs are constant.

All demand for the product will be satisfied (no back orders are allowed).


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Now lets see the mathematical representation of the EOQ model.

TC = DC + (D/Q)O + (Q/2)C

Where, TC = Total Cost

D = Annual Demand

C = Purchase cost per unit

Q = Quantity to be ordered

O = Ordering cost per order

C = Carrying cost per unit

The formula for the EOQ is:

EOQ = (2AO/C) ^ (1/2)

EOQ technique is very much popular and useful as long as it gives an answer to the question

of how much to order. EOQ applies to both to single item and to any group of stock items

with similar holding and procurement cost. Its use causes the sum of the two costs to be lower

than under any other system of replenishment.

Material Requirement Planning (MRP):-

Material Requirement Planning (MRP) has been developed in recent years and is gaining

popularity rapidly.MRP is a new solution to old problems: having stock of materials always

on hand when needed without carrying excess inventory. Highly dependent upon the

computer technology, MRP is most helpful to firms with finished goods or end products

which are made from a number of components and which are also subject to uneven or lumpy

demand.

The technique separates the various components and co-ordinates purchasing and delivery

with production. This results in materials arriving exactly when needed for production and, at

the same time, reduces the length of time when materials are held in stock. MRP plans and


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control goods on order and generates data for determining when and what specific materials

to meet previously planned production schedule.

Just In Time (JIT):-

Popularly known as JIT, is discussed as an efficient tool of materials management these days.

JIT is the outcome of the Japanese firms who have introduced the JIT in their firm and

achieved a great success. It is also known as Zero Inventory (ZIN), Material as Needed

(MAN) and Nick of Time (NOT).

As a concept, JIT means that virtually no inventories are held at any stage of production and

that the exact numbers of unit is brought to each successive stage of production at the right

time.

The JIT concept assumes certain conditions which should be needed to present for the

success of JIT system. There is a reason for the success of JIT in Japan, as the geographical

area of Japan is small and most of the suppliers of the company live in nearby, so it takes

very negligent to supply materials. While, in country like India, suppliers live far away hence

if the firms in India adopt JIT system, then supplier takes more time to supply the product and

because of that production process stops in absence of a material and which may cause huge

loss to the company. Hence, in India firms hold inventories and find the optimum levels of

inventory to reduce the cost. We are much behind in the way of applying JIT system.

Account Policy for Valuation of Inventory

Measurement of Inventories

Inventories should be valued at the lower of cost and net realizable value.

Cost of InventoriesThe cost of inventories should comprise all costs of purchase, costs of conversion and other

costs incurred in bringing the inventories to their present location and condition.

Costs of Purchase

The costs of purchase consist of the purchase price including duties and taxes (other than

those subsequently recoverable by the enterprise from the taxing authorities), freight inwards

and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty

drawbacks and

Other similar items are deducted in determining the costs of purchase.


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Costs of Conversion

The costs of conversion of inventories include costs directly related to the units of

production, such as direct labor. They also include a systematic allocation of fixed and

variable production overheads that are incurred in converting materials into finished goods.

Fixed production overheads are those indirect costs of production that remain relativelyconstant regardless of the volume of production, such as depreciation and maintenance of

factory buildings and the cost of factory management and administration. Variable production

overheads are those indirect costs of production that vary directly, or nearly directly, with the

volume of production, such as indirect materials and indirect labour.

The allocation of fixed production overheads for the purpose of their inclusion in the costs of

conversion is based on the normal capacity of the production facilities. Normal capacity is the

production expected to be achieved on an average over a number of periods or seasons under

normal circumstances, taking into account the loss of capacity resulting from planned

maintenance. The actual level of production may be used if it approximates normal capacity.

The amount of fixed production overheads allocated to each unit of production is not

increased as a consequence of low production or idle plant. Unallocated overheads are

recognized as an expense in the period in which they are incurred. In periods of abnormally

high production, the amount of fixed production overheads allocated to each unit of

production is decreased so that inventories are not measured above cost. Variable production

overheads are assigned to each unit of production on the basis of the actual use of the

production facilities.

A production process may result in more than one product being produced simultaneously.This is the case, for example, when joint products are produced or when there is a main

product and a by-product. When the costs of conversion of each product are not separately

identifiable, they are

allocated between the products on a rational and consistent basis. The allocation may be

based, for example, on the relative sales value of each product either at the stage in the

production process when the products become separately identifiable, or at the completion of

production. Most by-products as well as scrap or waste materials, by their nature, are

immaterial. When this is the case, they are often measured at net realizable value and this

value is deducted from the cost of the main product. As a result, the carrying amount of the

main product is not materially different from its cost.

Other Costs

Other costs are included in the cost of inventories only to the extent that they are incurred in

bringing the inventories to their present location and condition. For example, it may be

appropriate to include overheads other than production overheads or the costs of designing

products for specific customers in the cost of inventories.

Cost Formulas


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The cost of inventories of items that are not ordinarily interchangeable and goods or services

produced and segregated for specific projects should be assigned by specific identification of

their individual costs.

Specific identification of cost means that specific costs are attributed to identified items ofinventory. This is an appropriate treatment for items that are segregated for a specific project,

regardless of whether they have been purchased or produced. However, when there are large

numbers of items of inventory which are ordinarily interchangeable, specific identification of

Costs are inappropriate since, in such circumstances, an enterprise could obtain

predetermined effects on the net profit or loss for the period by selecting a particular method

of ascertaining the items that remain in inventories.

The cost of inventories, other than those dealt with in paragraph 14 of IAS-2, should be

assigned by using the first-in, first-out (FIFO), or weighted average cost formula. The

formula used should reflect the fairest possible approximation to the cost incurred in bringing

the items of inventory to their present location and condition.

A variety of cost formulas is used to determine the cost of inventories other than those for

which specific identification of individual costs is appropriate. The formula used in

determining the cost of an item of inventory needs to be selected with a view to providing the

fairest possible

approximation to the cost incurred in bringing the item to its present location and condition.

The FIFO formula assumes that the items of inventory which were purchased or produced

first are consumed or sold first, and consequently the items remaining in inventory at the endof the period are those most recently purchased or produced. Under the weighted average cost

formula,

The cost of each item is determined from the weighted average of the cost of similar items at

the beginning of a period and the cost of similar items purchased or produced during the

period. The average may be calculated on a periodic basis, or as each additional shipment is

received, depending upon the circumstances of the enterprise.

Techniques for the Measurement of Cost

Techniques for the measurement of the cost of inventories, such as the standard cost method

or the retail method, may be used for convenience if the results approximate the actual cost.

Standard costs take into account normal levels of consumption of materials and supplies,

labour, efficiency and capacity utilization. They are regularly reviewed and, if necessary,

revised in the light of current conditions.

The retail method is often used in the retail trade for measuring inventories of large numbers

of rapidly changing items that have similar margins and for which it is impracticable to use

other costing methods. The cost of the inventory is determined by reducing from the sales

value of the


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inventory the appropriate percentage gross margin. The percentage used takes into

consideration inventory which has been marked down to below its original selling price. An

average percentage for each retail department is often used.

Net Realizable Value

The cost of inventories may not be recoverable if those inventories are damaged, if they have

become wholly or partially obsolete, or if their selling prices have declined. The cost of

inventories may also not be recoverable if the estimated costs of completion or the estimated

costs necessary to make the sale have increased. The practice of writing down inventories

below cost to net realisable value is consistent with the view that assets should not be carried

in excess of amounts expected to be realised from their sale or use.

Inventories are usually written down to net realisable value on an item by item basis. In some

circumstances, however, it may be appropriate to group similar or related items. This may be

the case with items of inventory relating to the same product line that have similar purposes

or end uses and are produced and marketed in the same geographical area and cannot be

practicably evaluated separately from other items in that product line. It is not appropriate to

write down inventories based on a classification of inventory, for example, finished goods, or

all the inventories in a particular business segment.

Estimates of net realisable value are based on the most reliable evidence available at the time

the estimates are made as to the amount the inventories are expected to realise. These

estimates take into consideration fluctuations of price or cost directly relating to events

occurring after the balance sheet date to the extent that such events confirm the conditions

existing at the balance sheet date.

Estimates of net realisable value also take into consideration the purpose for which the

inventory is held. For example, the net realisable value of the quantity of inventory held to

satisfy firm sales or service contracts is based on the contract price. If the sales contracts are

for less than the inventory quantities held, the net realisable value of the excess inventory is

based on general selling prices. Contingent losses on firm sales contracts in excess of

inventory quantities held and contingent losses on firm purchase contracts are dealt with in

accordance with the principles enunciated in Accounting Standard (AS) 4, Contingencies and

Events Occurring after the Balance Sheet Date.

Materials and other supplies held for use in the production of inventories are not written

down below cost if the finished products in which they will be incorporated are expected to

be sold at or above cost. However, when there has been a decline in the price of materials and

it is estimated value, the materials are written down to net realisable value. In such

circumstances, the replacement cost of the materials may be the best available measure of

their net realisable value.

An assessment is made of net realisable value as at each balance sheet date.


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Disclosure

The financial statements should disclose:

(a) The accounting policies adopted in measuring inventories, including the cost formula

used; and,

(b) The total carrying amount of inventories and its classification appropriate to theenterprise.

Information about the carrying amounts held in different classifications of inventories and the

extent of the changes in these assets is useful to financial statement users. Common

classifications of inventories are raw materials and components, work in progress, finished

goods, stores and spares, and loose tools.

Transportation Cost

Employees at Essar Steel Algoma's heat treated plate facility were in for a treat on March 30,2011, when the Sault Ste. Marie Police Service unveiled its new armored truck at the facility.

The reason for this unique event was that the purchase of the Ballistic Armoured TacticalTransport (BATT) vehicle was made possible, in part, by a generous donation by Essar SteelAlgoma.

The company donated approximately 11 tonnes of armor plating that was used to constructthe vehicle; including transportation costs, Essar's donation amounted to about $30,000, saidSault's police chief Bob Davies.

BATT is an impressive addition to the local police service's response and rescue vehicles.Media Relations officer Sergeant Lisa Kenopic said that BATT can only be used by trainedtactical unit officers in high-risk situations. The armored truck was purchased from theArmoured Group LLC, a Fort Worth (Texas, USA) company that specializes in thedevelopment and marketing of armored vehicles.

Sault Ste. Marie police's Emergency Services Unit responds to approximately 90-100 high-risk incidents every year. The armored truck is intended to protect officers during such calls

including armed and barricaded persons inside buildings, high-risk vehicle stops, hostagesituations, gun calls, etc.

At the unveiling ceremony, employees and top management from Essar Steel Algoma, thetactical team of the Sault Ste. Marie police, and media were given a tour of the vehicle andthe plate mill. The police officers got to see how the armor plate is made; plant employeeshad the rare opportunity to examine the end use application of a product they made, and tomeet the officers whose lives would be protected by that steel. The plant produces a fullrange of high-quality heat treated products for high strength, abrasion resistant, ballistic andother speciality plate applications.

Chief operating officer of Essar Steel Algoma, Pramod Shukla, said that he was proud thatEssar has provided its product and support to Canada's first BATT, and hopes that Essar


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products will continue to be used in such vehicles. The police department thanked Essar fortheir generous donation and unstinting support in enhancing the safety of its officers.


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Ch4 Company Profile


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Company Profile

1)Essar Steel LTD.

Essar Steel is one of India's largest exporters of flat products, exportingto the highly demanding US and European markets, and to the growingmarkets of South East Asia and the Middle East.

A number of major client companies have approved our steel for theiruse, including Caterpillar, Hyundai, Swaraj Mazda, the KonkanRailway, and Maruti Suzuki. Essar Steel has acquired extensive quality

accreditations. Our lean team gives us one of the highest productivities and lowest manpowercosts among steel plants internationally.

Seamless integration

A major strategic advantage is our high level of forward and backward integration. We aretotally integrated - from raw material to finished products, adding value at every stage of themanufacturing process.

Bailadilla facility: Iron ore beneficiation

At Bailadilla, where some of the world's richest and finest ore is available, we have set up abeneficiation plant of 8 MTPA capacity, which ensures the highest quality iron ore. The ironore slurry is pumped through a 267 km pipeline (the second longest in the world) to the pelletplant, yielding advantages in quality, cost and real time inventory management.

Visakhapatnam facility: Pelletization

The slurry is received at our pellet plant at Visakhapatnam, which has a capacity of 8 MTPA,providing vital raw material for the steel plant at Hazira.

Hazira facility

Our steel complex at Hazira, Gujarat, houses a 5.0 MTPA sponge ironplant, the world's largest gas-based sponge iron plant in single location.The plant provides raw materials for our state-of-the-art 4.6 MTPA hotrolled coil (HRC) plant, the first and largest of India's new generationsteel mills. This plant is fed with inputs from four electric arc furnacesand three casters. The complex's sophisticated infrastructure includesindependent water supply and power, oxygen and lime plants, a

township and a captive port capable of handling up to 8 MTPA of cargowith modern handling equipment like barges and floating cranes.


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2) TATA Steel LTD.

Established in 1907, Tata Steel is among the top ten global steel companies with an annualcrude steel capacity of over 28 million tonnes per annum (mtpa). It is now one of the world'smost geographically-diversified steel producers, with operations in 26 countries and acommercial presence in over 50 countries.

The Tata Steel Group, with a turnover of US$ 22.8 billion in FY '10, has over 80,000employees across five continents and is a Fortune 500 company.

Tata Steels vision is to be the worlds steel industry benchmark through the excellence of its

people, its innovative approach and overall conduct. Underpinning this vision is aperformance culture committed to aspiration targets, safety and social responsibility,

continuous improvement, openness and transparency.

Tata Steels larger production facilities include those in India, the UK, the Netherlands,

Thailand, Singapore, China and Australia. Operating companies within the Group includeTata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel, and TataSteel Thailand (formerly Millennium Steel).

Tata Steel Today

The Tata Steel Group has always believed that mutual benefit of countries, corporations andcommunities is the most effective route to growth. Tata Steel has not limited its operationsand businesses within India but has built an imposing presence around the globe as well.With the acquisition of Corus (now Tata Steel Europe) in 2007 leading to commencement ofTata Steel's European operations, the Company today is one of the largest steel producers inthe world with employee strength of above 81,000 across five continents. During thefinancial year 2010-2011, the Group recorded deliveries of 23.6 million tonnes, which was atpar with the previous year (24 million tonnes). The Group recorded a turnover of Rs.1,18,753 Crores in 2010 - 2011. The Company has always had significant impact on theeconomic development in India and now seeks to strengthen its position of pre-eminence ininternational domain by continuing to lead by example of responsibility and trust.

Tata Steels overseas ventures and investments in global companies have helped the

Company create a manufacturing and marketing network in Europe, South East Asia and thePacific-rim countries. The Groups South East Asian operations comprise Tata SteelThailand, in which it has 67.1% equity and Nat Steel Holdings, which is one of the largeststeel producers in the Asia Pacific with presence across seven countries.


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3) Jindal Steel LTD

In the world of business, the Jindal Organization is a celebrity. Ranked sixth amongst the top

Indian Business Houses in terms of assets, the Group today is a US $10 Billion conglomerate.

Jindal Organization, set up in 1970 by the steel visionary Mr. O.P. Jindal, has grown from an

indigenous single-unit steel plant in Hisar, Haryana to the present multi-billion, multi-

locational and multiproduct steel conglomerate. The organization is still expanding,

integrating, amalgamating and growing. New directions, new objectives... but the Jindal

motto remains the same- "We are the Future of Steel ".

The group has been technology-driven and has a broad product portfolio. Yet, the focus at

Jindal has always been steel. From mining of iron-ore to the manufacturing of value added

steel products, Jindal has a pre-eminent position in the flat steel segment in India and is on its

way to be a major global player, with its overseas manufacturing facilities and strategic

manufacturing and marketing alliances with other world leaders.

Jindal Organization aims to be a global player. In pursuance of its objectives, it is committed

to maintain world-class quality standards, efficient delivery schedules, competitive price and

excellent after sales service.


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4) STEEL AUTHORITY OF INDIA

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is afully integrated iron and steel maker, producing both basic and special steels for domesticconstruction, engineering, power, railway, automotive and defense industries and for sale in

export markets.

Ranked amongst the top ten public sectorcompanies in India in terms of turnover, SAILmanufactures and sells a broad range of steelproducts, including hot and cold rolled sheetsand coils, galvanised sheets, electrical sheets,structural, railway products, plates, bars androds, stainless steel and other alloy steels. SAILproduces iron and steel at five integrated plants

and three special steel plants, located principallyin the eastern and central regions of India andsituated close to domestic sources of rawmaterials, including the Company's iron ore,limestone and dolomite mines. The company has the distinction of being Indias second

largest producer of iron ore and of having the countrys second largest mines network. Thisgives SAIL a competitive edge in terms of captive availability of iron ore, limestone, anddolomite which are inputs for steel making.

SAIL's wide range of long and flat steel products are much in demand in the domestic as wellas the international market. This vital responsibility is carried out by SAIL's own Central

Marketing Organisation (CMO) that transacts business through its network of 37 BranchSales Offices spread across the four regions, 25 Departmental Warehouses, 42 ConsignmentAgents and 27 Customer Contact Offices. CMOs domestic marketing effort is supplementedby its ever widening network of rural dealers who meet the demands of the smallestcustomers in the remotest corners of the country. With the total number of dealers over 2000 ,SAIL's wide marketing spread ensures availability of quality steel in virtually all the districtsof the country.

SAIL's International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unitof CMO, undertakes exports ofMild Steel products and Pig Iron from SAILs five integratedsteel plants.

With technical and managerial expertise and know-how in steel making gained over fourdecades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services andconsultancy to clients world-wide.

SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) atRanchi which helps to produce quality steel and develop new technologies for the steelindustry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET),Management Training Institute (MTI) and Safety Organization at Ranchi. Our captive minesare under the control of the Raw Materials Division in Kolkata. The Environment

Management Division and Growth Division of SAIL operate from their headquarters inKolkata. Almost all our plants and major units are ISO Certified.


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CH 5 Product Profile


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1)Product Profile of ESSARLONG PRODUCTS:

These include angles, channels, bars and I- beams where the % reduction of size is not much

and the products are big. The products are expected to have the properties of high strength,

hardness etc by addition of special alloys.

FLAT PRODUCTS:

These include sheets, plates where % reduction is very high and final product is very thin. The

products are required to be very soft, ductile so that it can be stretched to thin sheets with a good

surface finish. This steel has almost pure iron with very low micro alloying.

COLD ROLLED PRODUCTS:Essar Steels 24 carat Cold Rolled steel is a combination of high strength ductility, consistentmechanical properties, close dimensional tolerance and superior surface finish.

Application

In automotive body and components, white goods, pipes and tubes, drums and barrels.

Specification and Dimensions

Thickness: 0.4mm2.5mmWidth: 900mm1500mmLength: 2500mm


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HOT ROLLED PRODUCTS:

Essar Steel produces the finest quality of 24 carat Hot Rolled steel in India. Since its

introduction, Essars Hot Rolled steel continues to be a critical input for highly demanding

applications. Essars Hot Rolled Products are available in plates, sheets and coil form.

ApplicationIn General Engineering, automobiles, infrastructure, Oil and Gas pipelines, Line Pipes etc. Specification and Dimensions

Thickness:1.6mm20mmWidth: 1250mm2000mmLength: 2500mm8000mm

GALVANISED COILS AND SHEETS

Essar Steels 24 carat Galvanized Steel with a guaranteed zinc coating of 120 gsm offersbest resistance to corrosion. To suit a variety of applications, they are available in 3 differentsurface finishes.

Application

Air-conditioning and heating ducts, automotive under-body parts and muffers, water heatersand stoves, coolers and refrigerators.

Specification and Dimensions

Thickness: 0.25mm1mmWidth: 900mm1220mm

Length: 2500mm


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2)Product profile Of Tata SteelTata Steel produces a vast range of engineering steels in bar and billet form.

These range from national and international specifications through to customer specific and

proprietary grades.

Aerospace & remelted steels

Tata Steel produces high integrity specialist steels for use in major commercial and militaryaerospace projects around the world.

Automotive & mechanical engineering steels

Tata Steel is a key player in the production of material for many safety critical automotive

applications such as: front suspension assemblies, rear suspension assemblies, steeringcomponents, front wheel assemblies, drive line components, and engine and gearboxcomponents.

Energy & Process Industry Steels

Special engineering steels are used throughout the oil and gas extraction industry forcomponents where strength, toughness, resistance to fatigue and corrosion are paramount.

Machining steels

Solutions for optimising the machinability of steels vary with steel type and machiningapplication. Tata Steel offers a range of machining steels allowing the customer to achievemachinability benefits at minimum cost.

Hot rolled products

Primary products

Squares

Blooms: 211 - 457 mm sqBillets: 75211 mm sq

Rounds
http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/aerospace/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/automotive_and_mechanical_eng/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/energy/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/machining/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/machining/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/energy/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/automotive_and_mechanical_eng/http://www.tatasteeleurope.com/en/products/bar_and_billet/steel_types/aerospace/


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Rolled: 76381 mm dia (larger sizes by agreement)Turned: 70350 mm dia

Slabs Width Thickness

Round edge 250750 mm 50330 mm

Square edge 100250 mm 50150 mm

Lengths

Rolled: < 13.1 metresHeat treated products: < 10.4 metres

3) Product Profile of SAILHot Metal (35.6% of production by tonnage)

Hot metal is the liquid form of pig iron, which is then purified with crude steel to producesaleable steel. The company has been able to meet its own demand for hot metal, and thensome. In 2008 it produced 7% extra hot metal, after its expansion plan in 2009 and 2010 itintends to produce 13% extra hot metal, and by 2020, 20% extra hot metal.

Special Steel (1.2% of production by tonnage)

Special steel is difficult to make. As demand for any particular type of special steel is low,economies of scale are difficult to create. At the same time, there is less competition in thismarket. For that reason, from 2007 to 2008 the company increased special steel production by130%. An example of special steel are high grade plates, which have higher strength andtoughness than regular plates, and may be used to build a high traffic bridge.

Pig Iron (0.9% of production by tonnage)

Pig iron is the product of mixing iron ore with coke (a processed form of coal). The company

does not produce enough pig iron to satisfy the requirements of its hot metal segment. In2008 it had to purchase 33% of its pig iron. From 2010 to 2020, as interfirm demand risesfaster than supply, it estimates it will have to purchase approximately 40% of its pig iron.These deficits expose the company to the rises and falls in the price of iron ore prices,although the company has entered into some long-term contracts.

Revenue Streams

Of the steel that the company produces, it earns the majority of its revenues from hot rolledsteel coils and hot rolled steel plates, with the rest coming from semis, railway materials,

bars, and cold rolled coils. However, because the company is based in India and does nothave an ADR (and therefore does not file with the United States SEC), the calculation of
http://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=5http://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=6http://www.wikinvest.com/wiki/Iron_Ore_Priceshttp://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=7http://www.wikinvest.com/wiki/Iron_ore_priceshttp://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=8http://www.wikinvest.com/wiki/Securities_and_Exchange_Commission_%28SEC%29http://www.wikinvest.com/wiki/Securities_and_Exchange_Commission_%28SEC%29http://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=8http://www.wikinvest.com/wiki/Iron_ore_priceshttp://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=7http://www.wikinvest.com/wiki/Iron_Ore_Priceshttp://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=6http://www.wikinvest.com/stock/Steel_Authority_of_India_Limited_%28BOM:500113%29?action=edit&section=5


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product revenues was based on the following assumptions: the company's steel productionand sales were the same each month of the year, the company sold all of its steel at globalprices, and none of its steel was used internally.

Hot Rolled Steel Coils(40% of revenues): Steel coils are used in heaters, chemical processing

equipment, furnace parts, engines, oil burner parts, dryers, oven equipment, petroleum refiningequipment and gas turbine parts.

Hot Rolled Steel Plates(42% of revenues): Steel plates are used to construct bridges, steel

structures, ships, large diameter pipes, storage tanks, boilers, and pressure vess


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Comparison

Company Market

Cap(Rs.

In crore)

P/E P/BV EV/EBIDTA ROE D/E

Tata Steel 43680.17 6.38 0.92 6.64 16.4 0.64

SAIL 38599.80 9.27 1.04 7.95 19.9 0.52

JSW Steel 16448.41 6.24 1.01 6.09 15.0 0.87

Bhushan Steel 8460.02 8.62 1.45 12.31 20.5 2.83

Jindal Steel 4330.82 13.91 1.08 8.02 12.3 0.31

ESSAR Steel 5907.69 0.00 .67 0.00 -5.3 2.06

1) Profit Earning Ratio.

0

2

4

6

8

10

12

14

16

Tata Steel SAIL JSW Steel Bhushan

Steel

Jindal Steel ESSAR

Steel

P/E

P/E


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2) Profit Book value Ratio

3) ROI

00.2

0.4

0.6

0.8

1

1.2

1.4

1.6


Steel

Jindal Steel ESSAR

Steel

P/BV

P/BV

-10

-5

0

5

10

15

20

25

Tata Steel SAIL JSW Steel BhushanSteel

Jindal Steel ESSARSteel

ROE

ROE


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4) Dividend Earning Ratio

0

0.5

1

1.5

2

2.5

3


Steel

Jindal Steel ESSAR

Steel

D/E

D/E


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Here for comparison the best method is the comparison is ratio analysis of these company

and TATA Steel ltd.

Ratio analysis TATA JINDAL ESSAR SAIL

Raw material to current asset 14.26 17.3 5.72 8.83

Finished goods to current asset 13.55 17.02 12.28 33.45

Stock turnover ratio 7.72 7.77 5.48 5.08

Average age of stock 47.28 46.97 66.6 71.85

Inventory conversion period 39 53.49 67.38 85.61

Current ratio 1.12 0.61 1.68 2.01

Acid test ratio 0.79 0.34 0.89 1.42

Total inventories to total asset 5% 9.93% 17.44% 27.46%

Sales 24315.77 14001.25 11688.3 43150.08

Profit after tax 5201.74 4,498.95 1859.1 20,797.3

It will easy to understand when it will put into chart. So, all the necessary charts are given

below.

If we compare for TATA STEEL with other companies, then we can see that TATA

STEELs raw material to current assetis neither too high nor too low. It is maintaining a

required amount of raw material in hand. Where ESSAR STEEL is maintaining very low

amount of raw material in hand.

0

2

4

6

8

10

12

14

1618

20

TATA JINDAL ESSAR SAIL

Raw material to current asset

Raw material to current

asset


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Here we can see that SAIL is playing a defensive role in case of finished goods. But still

TATA steel has limited finished goods to sell. TATA STEEL never tried to block its capital.

Both TATA STEEL and JINDAL STEEL have the good stock turnover ratio. In this case

TATA STEEL is far ahead than ESSAR STEEL and SAIL.

0

5

10

15

20

25

30

35

40


Finished goods to current asset

Finished goods to current

asset

0

1

2

3

4

5

67

8

9


Stock turnover ratio



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As the stock turnover ratio is too high, so the average age of stock is less than 50 days.

Where SAIL and ESSAR age of stock is too high. Even SAIL age of stock is more than 70

days.

Inventory conversion periodis lowest than other company for TATA STEEL. So from herewe can conclude TATA STEEL is the fastest converter company for Inventory.

0

10

20

30

40

50

60

70

80


Average age of stock

Average age of stock

0

10

20

30

40

50

60

70

80

90


Inventory conversion period

Inventory conversion

period


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Current ratioof TATA STEEL is in standard position. Where JINDAL steels current ratio is

less than 1 and SAILs current ratio is more than 2. Where SAIL is blocking its working

capital there TATA STEEL is keeping appropriate coverage for current liability.

TATA STEEL maintained exact amount of highly liquid money in hand, where SAILmaintained huge amount of highly liquid money. So in this case TATA STEEL is good

enough to maintain the highly liquid money.

0

0.5

1

1.5

2

2.5


Current ratio

Current ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


Acid test ratio

Acid test ratio


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TATA STEEL has less inventories percentage to total asset than other companies. It is a good

sign for TATA STEEL. This company never tried to block its current money. From this chart

it is clearly shown that SAIL is always maintaining a defensive position.

Here it is clear that SAILs sale and profit is higher than other companies. But if we seeTATA STEEL and JINDAL steel, the percentage of profit against sale is high for JINDAL

Steel than TATA STEEL. But the sale price of TATA STEEL is less than JINDAL Steel. So,

that the sale is higher than JINDAL steel and ESSAR Steel. As SAIL is Government

undertaking organization, it is getting lot of subsidiaries and also other facilities from

Government. But still TATA STEEL is in second position.

0%

5%

10%

15%

20%

25%

30%


Total inventories to total asset

Total inventories to total

asset

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Ratio

analysis


Series1

Series2

Series3


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CH 6 Finding and

Interpretation


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1 Average inventory turnover ratio

It indicates the percentages of inventory with gross sales.

The formula is;

Average inventory x 100

Gross sales

Where average inventory = (Op. inventory+ Cl. Inventory)/2

Company

ParticularTATA STEEL ESSAR STEEL SAIL JINDAL STEEL

Opening Stock 2047.31 2157.52 6857.23 1209.96

Closing Stock 2868.28 2633.23 10121.45 1328.05

Avg. of Stock 2457.80 2395.38 8489.34 1269

Gross Sale 26843 12703.08 30805.32 10123.35

CompanyTATA STEEL ESSAR STEEL SAIL JINDAL STEEL

Avg inventoryTurnover ratio

9.16% 18.85% 27.56% 12.54%


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2 Stock Turn over Ratio

Every firm has to maintain a certain level of inventory of finished goods so as to be able to

meet the requirements of the business. But the level of inventory should neither be too high

nor too low.

The stock turnover ratiomeasures the number of times a company sells its inventory during

the year.

The formula for stock turnover ratio is;

Cost of goods sold

Average stock

Where average stock = (Op. inventory+ Cl. Inventory)/2

company

ParticularTATA STEEL ESSAR STEEL SAIL STEEL JINDAL STEEL

COGS 18974.22 18612.10 46521.58 6446.52

Avg. Inventory 2457.80 2395.38 8489.34 1269

Company TATA STEEL ESSAR STEEL SAIL STEEL JINDAL STEEL

Stock Turn Overratio

7.72 7.77 5.48 5.08


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3 Avg. Age of Stock

This ratio shows how many days stock are kept as inventory in the company before sales.

To find out the average age of stock is;

365


Company TATA STEEL ESSAR STEEL SAIL STEEL JINDAL STEEL

Stock Turn Overratio

7.72 7.77 5.48 5.08

Avg. Age Of

Stock47.27 46.98 66.61 72.71


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4. Inventory conversion period

This ratio shows in how many days inventories are converted into sales. It is major ratio

analysis for cash conversion period. Because it is the first component of the cash conversion

period.

The formula is;

Inventories(closing)

Sales/365

Company


Inventory 2868.28 2633.23 10121.45 1328.05Sales 24315.77 17968.39 54828.28 5662.17

Inventory

conversion

period

43.05 53.49 67.38 85.61


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5) Current ratio

This ratio is used to judge the short term solvency of a company and is worked out by

dividing the aggregate Current Assets by its aggregate Current Liabilities.

To find out the current ratio, the formula is;

Current asset

Current liabilities

company


Current Assets 10047.48 5,465.23 35,666.84 5,189.28

Current Liability 8974.05 3,885.22 19,609.72 4,111.64Current ratio 1.12 1.41 1.82 1.26


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6) Total inventories to total assets

This ratio shows the percentage level of inventories in compare to total asset.

The formula is;

Total Inventories(closing) x 100

Total assets

Company


Inventory 2868.28 2633.23 10121.45 1328.05Total Assets 57365.6 26517.93 58035.84 4830.31

Total inventoryTo total Assets 5% 9.93% 17.44% 27.46%


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CH 7 Suggestions


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CH 8 Conclusions


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CH 9 Bibliographies


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Websites

www.tatasteel.com

www.sail.co.in

www.jindalsteel.com

www.essarsteel.com

www.wikipedia.com

www.steel.nic.in

www.economywatch.com

Pandey I. M., FINANCIAL MANAGEMENT 9th Edition, Vikas Publishing House Pvt. Ltd., New Delhi,

Page No. 634

Cooper Donald R and Schindler Pamela S. BUSINESS RESEARCH METHODS 9th

Edition, Tata

McGraw - Hill Publishing Company Ltd., New Delhi, Page No. - 610 to 612
http://www.tatasteel.com/http://www.tatasteel.com/http://www.sail.co.in/http://www.jindalsteel.com/http://www.essarsteel.com/http://www.wikipedia.com/http://www.steel.nic.in/http://www.economywatch.com/http://www.economywatch.com/http://www.steel.nic.in/http://www.wikipedia.com/http://www.essarsteel.com/http://www.jindalsteel.com/http://www.sail.co.in/http://www.tatasteel.com/


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CH 10

ANNEXURE


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SAIL

Balance Sheet

Particulars31st MAR

09

31st MAR

08

31st MAR

07

31st MAR

06

31 st MAR

05

Sources of funds

Owner's fund

Equity share capital 4,130.40 4,130.40 4,130.40 4,130.40 4,130.40

Reserves & surplus 23,853.70 18,933.17 13,182.75 8,471.01 6,176.25

Loan funds

Secured loans 1,473.60 925.31 1,556.39 1,122.16 1,603.98

Unsecured loans 6,065.19 2,119.93 2,624.13 3,175.46 4,165.81

Total 35,522.89 26,108.81 21,493.67 16,899.03 16,076.44

Uses of funds

Fixed assets

Gross block 32,728.69 30,922.73 29,912.71 29,360.46 28,043.48

Less : accumulated depreciation 20,459.86 19,351.42 18,315.00 17,198.32 15,558.41

Net block 12,268.83 11,571.31 11,597.71 12,162.14 12,485.07

Capital work-in-progress 6,544.24 2,389.55 1,236.04 757.94 366.48

Investments 652.7 538.2 513.79 292 606.71

Net current assets

Current assets, loans & advances 35,666.84 27,309.01 21,673.75 18,788.80 15,521.37Less : current liabilities &

provisions 19,609.72 15,758.74 13,656.77 15,317.67 13,198.12

Total net current assets 16,057.12 11,550.27 8,016.98 3,471.13 2,323.25

Miscellaneous expenses not written - 59.48 129.15 215.82 294.93

Total 35,522.89 26,108.81 21,493.67 16,899.03 16,076.44


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Profit And Loss A/cParticulars 2010-09 2007-08 2006-07 2005-06 2004-05

Income

Operating income 43,798.58 39,958.67 34,328.77 28,200.48 28,714.30

Expenses

Material consumed 22,042.58 16,821.39 15,963.13 13,903.23 11,155.33

Manufacturing expenses 3,762.77 3,317.74 2,925.43 2,793.45 2,427.11

Personnel expenses 8,401.73 7,919.28 5,087.76 4,156.97 3,811.75

Selling expenses 935.68 1,143.90 1,066.73 1,108.12 971.78

Administrative expenses 1,644.78 1,321.44 1,064.29 1,035.99 780.67

Expenses capitalized -1,930.40 -1,832.22 -1,423.08 -1,352.05 -921.71

Cost of sales 34,857.14 28,691.53 24,684.26 21,645.71 18,224.93

Operating profit 8,941.44 11,267.14 9,644.51 6,554.77 10,489.37

Other recurring income 2,279.89 1,539.69 1,354.96 892.3 676.55

Adjusted PBDIT 11,221.33 12,806.83 10,999.47 7,447.07 11,165.92

Financial expenses 253.24 250.94 332.13 467.76 605.05

Depreciation 1,285.12 1,235.48 1,211.48 1,207.30 1,126.95

Other write offs 128.02 75.49 128.59 181.44 184.89

Adjusted PBT 9,554.95 11,244.92 9,327.27 5,590.57 9,249.03

Tax charges 3,284.28 3,934.65 3,253.80 1,694.36 2,592.37

Adjusted PAT 6,270.67 7,310.27 6,073.47 3,896.21 6,656.66

Nonrecurring items -277.12 161.9 53.75 45.64 -14.35

Other non cash adjustments 181.26 64.61 60.57 71.12 174.66

Reported net profit 6,174.81 7,536.78 6,187.79 4,012.97 6,816.97

Earnings beforeappropriation 22,052.47 18,348.43 12,886.63 7,861.47 6,839.66

Equity dividend 1,073.90 1,528.25 1,280.42 826.08 1,363.03

Dividend tax 181.26 258.91 197.98 115.86 185.24Profit carried to balancesheet 20,797.3 16,561.3 11,408.2 6,919.5 5,291.4


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ESSAR STEEL

BALANCE SHEET

Particulars31st MAR

09

31st MAR

08

31st MAR

07

31st MAR

06

31st MAR

05

Sources of funds

Owner's fund

Equity share capital 1,140.48 1,140.48 1,140.48 581.17 507.98

Preference share capital 43.6 43.6 246.52 2,204.12 530.27Reserves & surplus 3,554.28 3,447.25 3,080.95 1,246.18 686.54

Loan funds

Secured loans 6,317.62 5,383.11 6,533.32 7,355.20 4,126.32

Unsecured loans 993.77 733.47 409.92 650.46 684.27

Total 12,049.75 10,747.91 11,411.19 12,037.13 6,535.38

Uses of funds

Fixed assets

Gross block 15,367.85 14,688.87 13,554.19 10,447.54 6,940.24

Less : revaluation r

CH 1 Steel Industry Profile

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Transcript of CH 1 Steel Industry Profile