110

MBA Programme

INTRODUCTION

Capital is essential for the setting up and smooth running of any

business. The capital required for a business may be classified into:

Fixed capital

Working capital

Fixed capital:-

Capital required for acquisition of long-term assets, which are

called “Fixed assets” is termed as “fixed capital”. The amounts invested in these

assets get blocked up for a long period. Examples are land, buildings, plant,

machinery, furniture etc. These assets are purchased to facilitate production and

sale. They are not expected to be converted into cash.

Working Capital:-

Working capital may be regarded as the lifeblood of a business. Its

effective provisions can do much ensure the success of a business. Its inefficient

management can lead to not only loss of profits but also to the downfall of a

business. A study of working capital is of major importance to internal and

external analysis because of its close relationship with the current day-to-day

operations of a business. Every to create production facilities through purchase

of fixed assets, such as plants, machinery’s, land, building etc, and investment in

these assets represents that part of firm’s capital which is blocked on a permanent

or fixed basis and is called fixed capital. Funds are also needed for short-term

purposes for the purchase of raw material, payment of wages, and other day-to-

day expenses etc. These funds are known as Working Capital.

ECE

110

MBA Programme

Working Capital refers so that part of firm’s capital, which is

required for financing short-term or current assets, such as cash, marketable

securities, debtors, Inventories, bills receivables etc. These assets of this type

are relatively temporary in nature. Unfortunately there is much disagreement

among financers, accounts, economics and businessman as to the exact meaning

of the term “Working Capital”, However, Working Capital is also known as

revolving of circulating capital of short-term capital.

Components of working capital:-

There are two components of working capital. They are

Gross Working Capital.

Net Working Capital.

Gross working capital:-

Gross working capital usually referred to as working capital, represents

investment in current assets such as marketable securities, inventories, and Bills

Receivables etc. Current Assets are those assets, which are normally converted

into cash with in one year.

Examples of current assets:

Cash and bank balances

Short term loans and balances

Bill receivables

Sundry Debtors

Inventory

Prepaid Expenses

Accrued Incomes

ECE

110

MBA Programme

Net working capital :-

Net working capital represents the difference between current

assets and current liabilities. Current Liabilities are those claims of outsiders,

which are expected to mature for payment within one year and include creditors,

bills payable, bank over draft and expenses out standing. The net working capital

may be positive or negative. When current assets exceed current liabilities the

net working capital becomes positive. When current liabilities exceed current

assets, the working capital becomes negative.

Examples of Current Liabilities:

Bills payable

Sundry creditors

Accounts payable

Short-term Borrowings

Dividends payable

Statutory Liabilities accrued or Outstanding expenses

Bank over draft &Provident Fund Dues

Any other payment due with in 12 months

NET WORKING CAPITAL=CURRENT ASSETS – CURRENT LIABILITIES

The Inventory Concept

ECE

110

MBA Programme

The dictionary meaning of the word inventory is “Stock of

goods”. The term ‘Inventory’ refers to the commodities supplied to an

undertaking for the purpose of consumption in the process of manufacture or of

rendering service or for transformation into products.

To the finance executive, ‘Inventory’ can be taken as the value of

raw materials, consumables, spares, work in progress and finished goods in

which the company’s working capital funds have been invested.

Classification of Inventories

The Inventories in an Industrial concern is generally classified as

following:

Raw material Inventory - This is used in manufacturing. When the

demand arises, they are drawn from stores and processed or use value is

added during the process and finally finished product comes out.

Semi finished goods - When the material being processed, it may have to

wait between two processes, such materials are known as semi finished

goods or semi finished material or Work in process inventory.

Components - The parts used in assembly of product, are known as

components. When these components are purchased from outside, it is

known as bought out components or bought out material.

Spare parts Inventory - When manufacturing or servicing facility

breakdown, it is to be repaired. In such case, the defective or worn-out

ECE

110

MBA Programme

parts of the machine are to be replaced by new one. These new parts of the

machine are known as spares or spare parts.

Obsolete Inventory - When any facility becomes unserviceable, and it is

to be replaced by a new one, after replacing, the old machine/facility is to

disposed. Such machines, which have become useless, are termed as

obsolete inventory.

Waste, Scrap and rejects - This type of inventory occurs in

manufacturing firms or in service organizations. While processing

material, chips are produced and it is of no use for the organization and it

is to be disposed. Similarly, defective components, which cannot be

reprocessed (rejects) and materials which cannot be used in any way in the

organization (waste), all these are to be disposed. They may not be having

any use value for the organization, but they may be reprocessed by some

other organizations to produce a useful product.

Motives for holding Inventories

Economists have established three motives for holding inventories.

–

1. Transaction motive.

2. Precautionary motive.

3. Speculative motive.

Transaction motive – Firms may require holding certain amount of finished

products perpetually in stock for display or demonstration purpose. They may

also hold inventories to meet a sudden demand, thus reducing the delivery tags.

ECE

110

MBA Programme

Precautionary motive – Firms may hold inventories for fear of stock outs and

losing its goodwill. Some of the precautionary motives give rise to ‘safety stock’

to deal with uncertainty in supply and demand.

Speculative motive – A firm may also hold both raw materials and finished

products when it expects a price in future, thereby realizing a stock profit.

Inventories held for speculative motive are termed as profit-making inventory.

Of the three motives, precautionary motive requires much

attention. Besides accumulation of inventory due to the three motives mentioned

above, inventories also get accumulated because of inefficient management of

working capital. This type of inventory is called, flabby inventory.

In addition, there may be a contractual reason for holding some

inventories.

Contractual Requirements – Occasionally it may be necessary to carry a

certain level of inventory to meet a contractual agreement. Some manufacturers

require dealers to maintain a specified level of inventory in order to be the sole

representative in a particular territory.

ECE

110

MBA Programme

Inventory Management

Inventories represent a substantial amount of firm’s current assets.

Proper management of Inventory is necessary so that this investment does not

become too large, as it would result in blocking capital which could be used in

productive aspect in some where else.

Inventory Management covers efficient management of inventories

in all its aspects including Inventory planning and programming, Purchasing,

Inventory Control, receiving, ware Housing and Store keeping, Inventories

handling and Disposal of scrap.

In this context of Inventory Management the firm is faced with the

problem of meeting two conflicting needs.

1. To maintain a large size of inventory for efficient and smooth production

and sales operations.

2. To maintain a minimum investment in inventories to maximize

profitability.

The aim of Inventory management, thus, is to avoid excessive and

inadequate levels of inventories and to maintain sufficient inventory for the

smooth production and sales operations.

An effective inventory management should

1. Ensure continuous supply of materials to facilitate uninterrupted

production.

ECE

110

MBA Programme

2. Maintain sufficient stocks of raw materials in periods of short supply and

anticipate price changes.

3. Maintain sufficient finished goods inventory for smooth sales operations,

and efficient customer services.

4. Minimize the earnings cost and time.

5. Control investment in inventories and keep it at an optimum level.

ECE

110

MBA Programme

OBJECTIVES OF INVENTORY MANAGEMENT

The objectives of the inventory management are discussed under two heads:

Operating objectives.

Financial objectives.

OPERATING OBJECTIVES

The Operating objectives of Inventory management is further

divided as follows -

Availability of materials

The first and the foremost of inventory management is make all types of

materials available at all times they needed by the production departments. So

that the production may not be held up for want of materials. It is therefore

advisable to maintain the minimum quantity of all types of materials to move on

production schedule.

Minimizing the wastage

Inventory management has to minimize the wastage at all levels that is

during its storage in the go downs or at work in the factory. Normal wastage, in

other words uncontrollable wastage, should only be permitted. Any abnormal but

controllable wastage should strictly be controlled. Wastage of materials by

leakage, theft and spoilage due to rust, dust or dirt should be avoided.

Promotion of manufacturing efficiency

The manufacturing efficiency of the enterprise increases if right types of

raw material are made available to production department at the right time. It

reduces wastage & cost of production & improves the moral of workers.

ECE

110

MBA Programme

Better service to customers

In order to meet to the demand of the customers, it is the responsibility of

inventory management to produce sufficient stock of finished goods to execute

the orders received from customers.

Optimum level of inventories

Proper control of inventories helps management to procure materials in

right time in order to run the plant efficiently. Maintaining the optimum level of

inventories keeping in view the operational requirements avoids the out of stock

danger.

FINANCIAL OBJECTIVES

The Operating objectives of Inventory management is further

divided as follows -

Economy in purchasing

Proper inventory management system brings certain advantages and

economies in purchasing the raw materials. Management makes every attempt to

purchase raw materials in bulk quantity and to take advantage of favorable

market conditions.

Optimum investment and efficient use of capital

The primary objective of inventory management, from financial point of

view, is to have an optimum level of investment in inventories. Inventory

management has to setup minimum and maximum levels of inventories to avoid

deficiency or surplus stocks.

Reasonable prices

ECE

110

MBA Programme

Inventory management has to ensure the supply of raw materials at a

reasonable low price, but without sacrificing the quality. It helps to reduction of

cost of production and improvement in the quality of finished goods in order to

maximize the profits of the organization.

Minimizing the costs

Minimizing inventory costs such as handling, ordering and carrying costs

etc is one of the main objective of inventory management. It helps in reduction of

inventory costs in a way that it reduces the costs per unit of inventory and there

by reduction of total cost of production.

Inventory Systems

For an effective inventory management, an efficient inventory

system should be maintained. Thus the importance of inventory systems cannot

be neglected in the Inventory Management. The two important types of inventory

systems available are

Periodic Inventory System.

Perpetual Inventory System.

Just-In-Time Inventory System.

Periodic Inventory System

In this system the quantity and value of inventory is found out only

at the end of the accounting period after having a physical verification of the

units in hand.

ECE

110

MBA Programme

The cost of materials used or goods sold is obtained by adding the

total of inventory purchased during the period to the value of the inventory in

hand in the beginning of the period and subtracting the value of inventory at the

end of the period.

In this system the inventory level is not monitored at all during the

time interval between the orders, so it has the advantage of little or no required

record keeping. The disadvantage is less control.

Perpetual Inventory system

It is a system of tracking and knowing the value of inventory and

quantity of merchandise on hand at any time by tracking sales, returns and

receipts with information systems.

A positive feature of a perpetual system is that inventory level is

continuously monitored, so management always knows the inventory status. This

is advantageous for critical parts or raw materials and supplies. However, it can

be costly.

The perpetual inventory system consists of:

1. Bin Cards.

2. Stores ledger.

3. Continuous Stock taking.

Bin cards – Bin cards are printed cards used for accounting the stock of material,

in stores. For every item of materials, separate bin cards are kept.

ECE

110

MBA Programme

The details regarding the material such as the name of the material,

the part number, the date of receipt and issue, the reference number, the name of

the supplier, the quantity received and issued, the value of the material, the rate,

the balance quantity, etc. are recorded in the bin cards.

Stores ledger – Like bin cards, a stores ledger is maintained to record all the

receipts and issues in respect of materials with the difference that along with the

quantities, the values are entered in the receipt, issue and balance columns.

Continuous stock taking – The perpetual inventory system is not complete

without a systematic procedure for physical verification of the stores. The bin

cards and the stores ledger record the balances, but their correctness can be

verified by means of physical verification only.

Just-In-Time Inventory System

Now-a-days organizations are becoming more and more interested

in getting potential gains from making smaller and more frequent purchase

orders. In other words, they are becoming interested in just-in-time purchasing

system.

In Just-In-Time system the materials arrive exactly when they are

needed in the production process. Inventory remaining in warehouse collects dust

and cost instead of revenue. Just-In-Time system avoids this cost.

ECE

110

MBA Programme

Costs for Holding Inventory

The three important costs considered in holding inventories are

Inventory Carrying Cost (or) Stock Holding Cost.

Procurement Cost or Setup Cost.

Shortage Cost or Stock-out Cost.

Inventory Carrying Costs or Stock Holding Costs

They arise on account of maintaining the stocks and the interest

paid on the capital tied up with the stocks. They vary directly with the size of the

inventory as well as the time the item is held in stock. Various components of the

stockholding cost are:

Cost of Storage Space – This consists of rent for the space occupied by

the inventory. Besides space expenses, this will also include heating,

lighting and other atmospheric control expenses.

Depreciation and deterioration – They are especially important for

fashion items or items undergoing chemical changes during storage.

Fragile items such as crockery which are liable to damage, breakage, etc.

Pilferage Cost – It depends upon the nature of the item. Valuable items

may be more tempting, while there is hardly any possibility of heavy

casting or forging being stolen.

Obsolescence Cost – It depends upon the nature of the item in stock.

Electronic and computer components are likely to be fast outdated.

Changes in design also led to obsolescence.

ECE

110

MBA Programme

Handling cost – These include all costs associated with movement of

stock, such as cost of labour, overhead cranes, gantries and other

machinery used for this purpose.

Procurement Cost or Setup Cost

They include the fixed and variable costs associated with placing of

an order. In case of purchase models it is known as Ordering cost. In case of

manufacturing model, it is known setup cost.

To place an order certain paper work is to be done. The cost of this

paper work is taken as cost of ordering. In case of manufacturing, before starting

production, the machine is to be set up. Only on setting of machine, the material

is loaded and the production is started. The ordering cost is distributed over the

items purchased in that order. Similarly, the setup cost is distributed equally over

the products manufactured in that setup. This cost is also known as

replenishment cost.

Shortage Cost or Stock-out Cost

These costs are associated with either a delay in meeting demands

or the inability to meet it at all. Therefore, shortage costs are usually interpreted

in two ways. In case the unfilled demand can be filled at a later stage (backlog

case), these costs are proportional to quantify that is short as well as the delay

time. They represent loss of goodwill and cost of idle equipment. In case the

unfilled demand is lost (no backlog case), these costs become proportional to

only the quantity that is short. These results in cancelled orders, lost sales, profit

and even the business itself.

TECHNIQUES OF INVENTORY MANAGEMENT

The following are the techniques of the inventory management

Economic order quantity.

ECE

110

MBA Programme

ABC analysis.

VED classification.

HML Classification.

SDE Classification.

FSN Analysis.

SOS classification.

XYZ Analysis.

Golf classification.

MNG Analysis.

Economic order quantity

A firm should not place either too large or too small orders. On the

basis of a trade-off between benefits derived from the availability of inventory

and the cost of carrying that level of inventory, the appropriate or optimum level

of the order to be placed should be determined. The optimum level of inventory

is popularly referred to as the economic order quantity (EOQ). It is also known as

economic lot size.

The economic order quantity may be defined as that level of

inventory order that minimizes the total cost associated with inventory

management. i.e. it refers to the level of inventory at which the total cost of

inventory comprising acquisition/ordering/set-up costs and carrying cost is

minimal.

ECE

110

MBA Programme

EOQ = √2AO/C

A = Total annual requirement

O = Ordering cost per order

C = Convey in cost per unit

ABC analysis

Usually a firm has to maintain several types of inventories. It is not

desirable to keep same degree of control on all the items. The firm should pay

maximum attention to those items whose value is highest. The firm should

therefore classify inventories to identify which items should receive the most

effort in controlling. This classification is done by the ABC analysis.

The ABC analysis technique is based is based on the assumption

that a firm should not exercise the same degree of control on all items of

inventory. It should rather keep a more rigorous control on items that are (i) the

most costly, and/or (ii) the slowest-turning, while items that are less expensive

should be given less control effort.

On the basis of the cost involved, the various inventory items are

categorized into three classes:

i. ‘A’ category.

ii. ‘B’ category.

iii. ‘C’ category.

Category ‘A’ items -- More costly and valuable consumption

items are classified as A items. But the

A category items are very less in volume

ECE

110

MBA Programme

(Generally 20%) when compared to the

total volume of inventory.

Category ‘B’ items -- The items having average consumption

Value items are classified as B items.

But the A category items are very avg in

Volume (generally 30%) when compared

to the total volume of inventory.

Category ‘C’ items -- The items having less consumption

Value items are classified as C items. But

the C category items are very high in

Volume (generally 50%) when compared

to the total volume of inventory.

VED Classification

VED – Vital, Essential and Desirable classification is applicable

largely to spare parts. Stocking of spare parts is based on strategies different from

those of raw materials because of there consumption pattern is different. Here the

spare parts are classified in to three categories.

Vital - The spares, the stock out of which even for a

Short time will stop the production.

Essential - The spares, the absence of which cannot be

Tolerated for more than a few hours or a day.

Desirable - The desirable spares are those spares which are

needed but this absence for even a week or so will

not stop the production.

ECE

110

MBA Programme

HML Classifications

The High, medium and Low (HML) classification follows the same

procedure as is adopted in ABC classification. Only difference is that in HML,

the classification unit value is the criterion and not the annual consumption value.

The items of inventory should be listed in the descending order of unit value and

it is up to the management to fix limits for three categories. For examples, the

management may decide that all units with unit value of Rs. 2000 and above will

be ‘H’ items, Rs. 1000 to 2000 ‘M’ items and less than Rs. 1000 ‘L’ items.

The HML analysis is useful for keeping control over consumption

at departmental levels, for deciding the frequency of physical verification, and

for controlling purchases.

SDE Classification

The SDE analysis is based upon the availability of items and is

very useful in the context of scarcity of supply. In this analysis, ‘S’ refers to

‘scarce’ items, generally imported, and those which are in short supply. ‘D’

refers to difficult items which are available indigenously but are difficult items to

procure. Items which have to come from distant places or for which reliable

suppliers are difficult to come by fall into ‘D’ category. ‘E’ refers to items which

are easy to acquire and which are available in the local markets.

The SDE classification, based on problems faced in procurement, is

vital to the lead time analysis and in deciding on purchasing strategies.

ECE

110

MBA Programme

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 usually grouped in periods 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.

SOS Classification

Raw materials, especially agricultural inputs are generally

classified by the seasonal, off-seasonal systems since the prices during the season

would generally be lower.

The seasonal items which are available only for a limited period

should be procured and stocked for meeting the needs of the full year. The prices

of the seasonal items which are available throughout the year are generally less

during the harvest season. The quantity required of such items should, therefore,

be determined after comparing the cost savings on account of lower prices, if

purchased during season, with the higher cost of carrying inventories if

purchased throughout the year.

ECE

110

MBA Programme

A Buying and stocking strategy for seasonal items depend on a

large number of factors and more and more sophistication is taken place in this

sphere and operational techniques are used to obtain optimum results.

XYZ Analysis

While the ABC analysis is based on the assumption on value, XYZ

analysis is based on the value of inventory undertaken during the closing of

annual accounts. X items are those having high value, Y items are those whose

inventory values are medium and Z items are those whose inventory values are

low.

The percentages are similar to ABC analysis. This analysis helps

find items with heavy stock.

Golf Classification

The letter stands for Government, Ordinary, Local and Foreign.

There are mainly imported items which are channelised through the State

Trading Corporation (STC) Minerals and Metals Trading Corporation, etc.

Indian Drugs and Pharmaceutical Ltd (IDPL), Mica trading corporation etc.

These are special procedures of inventory control which may not applicable to

ordinary items as they require special procedures.

MNG Analysis

The grouping of inventory items in this analysis takes place as:

M- Moving items – The items which are consumed from time to time are

normally referred to as moving items.

ECE

110

MBA Programme

N- Non moving items – These items which are not and consumed in last

one year are covered under this group.

G- Ghost items – This group refers to such items which neither have been

received nor issued during the year. The balance of such items shown in

stock registers of the organization will be nil, both at the beginning and at

the end of the previous financial year.

Advantages of Inventory Management

The advantages gained by the firm by managing the inventory

effectively are

Introduction of a proper inventory management system helps in keeping

the investment in the inventories as low as feasible.

Ensures availability of material by providing adequate protection against

uncertainties of supplies and consumption of materials.

Allows full advantage of economics of bulk purchases and transportation.

Leads to reduction in inventory levels.

Releases more of capital for other operations.

Adequate customer service.

Advantage of price discounts by bulk pricing.

Providing flexibility to allows change in production lines due to changes in

demands on any other reason.

Even out the work loads on the soaps in the face fluctuations demands.

ECE

110

MBA Programme

Causes of poor Inventory Management

There are certain instances, which leads to poor inventory

management. They are:

1. Over buying without regard to the forecast or proper estimate of demand

to take advantage of favorable market.

2. Over production or production of goods much before the customer

requires them.

3. Over stocking may also result from the desire to provide better service to

the customers. Bulk production or purchase to cut down production costs

also will result in large inventories.

4. Cancellation of orders and minimum quantity stipulations by the suppliers

may also give rise to large inventories.

Various stock levels in Inventory Management

The levels of inventory in any organization depend upon several

factors including social, political, economic, ethic, fiscal, governmental policies

at the global and national levels, which determine the demand and supply

parameters of an item. At the unit level, cost, criticality, availability, service

level, stock out, lead time, powers of delegation, consumption pattern, etc. affect

the levels.

The various stock levels fixed for effective management of

inventories are -

Minimum level.

Maximum level.

Ordering or Reordering level.

Danger level.

ECE

110

MBA Programme

These levels serve as indices for initiating action on time so that the

quantity of each item of material, i.e. the inventory holding is controlled or

managed. Stock levels are not fixed on a permanent basis but are liable to

revision in accordance with the changes in the factors determining the levels.

Minimum level – It indicates the lowest figure of inventory balance, which must

be maintained in hand at all times, so that there is no stoppage of production due

to non-availability of inventory.

The main considerations for the fixation of minimum level of

inventory are as follows:

1. Information about maximum consumption and maximum delivery period

in respect of each item to determine its reorder level.

2. Average rate of consumption for each inventory item.

3. Average delivery period for each item. This period can be calculated by

averaging the maximum and minimum period.

The formula used for its calculation is as follows:

Minimum level of Inventory = Reorder level – (Average rate

of consumption * Average time of

Inventory delivery).

ECE

110

MBA Programme

Maximum Level – It indicates the maximum figure of inventory quantity held in

stock at any time.

The important considerations which should govern the fixation of

maximum level for various inventory items are as follows:

1. The fixation of maximum level of an inventory item requires information

about its reorder level. The reorder level itself depends upon its maximum

rate of consumption and maximum delivery period. It in fact is the product

of maximum consumption of inventory item and its maximum delivery

period.

2. Knowledge about minimum consumption and minimum delivery period

for each inventory item should also be known.

3. The determination of maximum level also requires the figure of economic

order quantity.

4. Availability of funds, storage space, nature of items and their price per

unit are also important for the fixation of maximum level.

5. In the case of imported materials due to their irregular supply, the

maximum level should be high.

The formula used for its calculation is as follows:

Maximum level of Inventory = Reorder level+ Reorder quantity

(Minimum consumption *

Minimum reorder period)

ECE

110

MBA Programme

Reorder level – This level lies between minimum and maximum levels in such a

way that before the material ordered is received into the stores, there is sufficient

quantity on hand to cover both normal and abnormal consumption situations. In

other words, it is the level at which fresh order should be placed for

replenishment stock. The reorder level must be sufficient to cover the maximum

possible consumption of stock during lead time (reorder period).

It is set after consideration of the following factors.

1. Rate of consumption.

2. Minimum level.

3. Lead time, i.e. delivery time.

4. Variation in lead time.

The formula used for its calculation is as follows:

Reorder level = Maximum reorder period * Maximum Usage.

Danger level – It is the level at which normal issues of the raw material

inventory are stopped and emergency issues are only made.

Danger level = Avg consumption * Lead time for emergency purchases

ECE

110

MBA Programme

Objectives of Inventory Valuation

The objectives of inventory valuation are discussed here below as

follows

Determination of Income - The valuation of inventory is necessary for

determining the true income earned by business during a period.

Determination of Financial position - The inventory at the end of period

is to be shown as a current asset in the balance sheet of the business. In

case of the inventory is not properly valued the balance sheet will not

disclose the correct financial position of the business.

Methods of Inventory Valuation

Since Inventory is the single largest asset in the balance sheet of most

organizations, the valuation of inventory becomes of utmost importance and

crucial to the financial executives.

Methods of Valuation of Inventories

The different methods used for valuation of inventories may be

enumerated as follows –

Methods based on Actual cost

First-in-First-out method.

Last-in-First-out method.

ECE

110

MBA Programme

Highest-in-First-out method.

Specific identification price.

Base stock price.

Adjusted selling price.

Methods based on Average cost

Simple average price.

Weighted average price.

Methods based on Actual cost

The methods of actual cost are as follows -

First-in-First-out Method – The First-in-First-out Method of pricing

materials is based on the assumption that the materials which are purchases

first are issued first. The flow of cost of materials should also be in the

same order.

Last-in-First-out Method – This method is just reverse of FIFO. It

operates on the assumption that the latest received materials are issued first

for production and those received first issued last. The price of the last lot

of materials received is used for all the issues until all units from this lot

have been issued after which the price of the previous lot received

becomes the issue price.

Highest-in-First-out method – Under this method, the highest priced

materials are treated as being issued first. The closing inventory is kept at

the lowest possible price. It is undervalued in times of rising prices and

thus secret reserves are created.

ECE

110

MBA Programme

Specific identification price – The specific identification method may be

used for inventories of items that are not ordinarily inter-changeable, or for

goods manufactured for a specific purpose. This method is best suited for

job order industries which carry out individual jobs or contracts against

specific orders.

Base stock price – The base stock formula proceeds on the assumption

that a minimum quantity of inventory (base stock) must be held at all times

in order to carry on business. Inventories up to this quantity are stated at

the cost at which the cost at which the base stock was acquired.

Adjusted Selling price – Under this method which is adopted by retailers,

inventory is estimated at selling price and to value it at cost, the estimated

gross profit is deducted there from. The alternative approach is to deduct

current sales from the total goods available for sale at retail price. This

gives the value of Inventory.

ECE

110

MBA Programme

Methods based on Average cost

The methods of average cost are as follows -

Simple average price – Simple average price is the average of the prices

without any regard to quantities. Simple average price is calculated by

adding up different prices and then dividing by the number of different

prices.

Weighted average price method – Weighted average price is calculated

by dividing the total cost of material in stock by the total quantity of

material in hand. Under this method, prices are averaged after weighting

(i.e. multiplying) by their quantities. The average price at any time is

simply the balance value figure divided by the balance units figure.

ECE

110

MBA Programme

OBJECTIVES OF THE STUDY

To present the conceptual theoretical framework relating to inventory

management.

To conduct a study on existing practices of inventory management in the

company.

To determine the inventory status of the company and analyze them.

To study the Inventory valuation methods of company.

To make pertinent suggestions for the effective management of inventory

of Ramya Spinning mills Pvt. Ltd.

ECE

110

MBA Programme

NEED FOR THE STUDY

This study on inventory management is needed by the firms for

To avoid excessive and inadequate levels of inventories in the

company.

To gain the customer satisfaction through short time delivery.

To maintain sufficient inventory in the company for the smooth

production and sales operations.

For running the business operations of the company in smooth and

efficient manner.

ECE

110

MBA Programme

METHODOLOGY OF THE STUDY

The following is the methodology of the study. The collection of data

is done in two principle sources. They are as follows:

Primary data.

Secondary data.

PRIMARY DATA

The primary data needed for the study is gathered through

interview with concerned officers and staff, either individually or collectively.

Some of the information has been verified or supplemented with personal

observation conduct.

SECONDARY DATA

The secondary data needed for the study was collected from

published sources such as pamphlets of annual reports, returns and internal

records, reference from text book and journals of financial management.

ECE

110

MBA Programme

IMPORTANCE OF THE STUDY

The study is significant to the following groups.

To the organization :By this study the organization can get

benefits by adopting various methods

and techniques to various problems

that they are facing in inventory

management.

To the Government : The government can adopt special

policies and strategies for the further

development of such organizations

To me : This study is useful to me too, in

getting first hand experience of an

industrial concern.

ECE

110

MBA Programme

LIMITATIONS OF THE STUDY

As the details of inventory are maintained confidentially, the project

deals with fewer areas of inventory.

As the time spent on project is only 5 weeks, it is not possible to go in

to detail study of item wise.

The project covers the area of stores and spares under inventory

management system of the company. It does not deal with other

inventories like raw materials, finished goods and work in progress.

The collected information is mainly through secondary data.

ECE

110

MBA Programme

INTRODUCTION

Cotton

Cotton is a soft, staple fiber that grows around the seeds of the

cotton plant. It is a natural fiber harvested from the cotton plant. The fiber most

often is spun into yarn or thread and used to make a soft, breathable textile,

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

Processing of Cotton in India

In India the raw cotton, also called as Kapas is processed in a

multi-stage process described as below. The Products of processing are

I. Yarn.

II. Cottonseed Oil.

III. Cottonseed Meal.

I. Production of Yarn

KAPAS TO LINT: Kapas (also known as raw cotton or seed cotton) is

unginned cotton or the white fibrous substance covering the seed that is obtained

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

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

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

ECE

110

MBA Programme

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

now called lint.

ECE

110

MBA Programme

LINT TO BALE: The lint makes its way through another series of pipes to a

press where it is compressed into bales (lint packaged for market). After baling,

the cotton lint is hauled to either storage yards, textile mills, or shipped to foreign

countries. 

BALE TO LAP: Here the bales are broken down and a worker feeds the cotton

into a machine called a "breaker" which gets rid of some of the dirt. From here

the cotton goes to a "scutcher". (Operated by a worker also called a scutcher).

This machine cleans the cotton of any remaining dirt and separates the fibers.

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

LAP TO CARDING: Carding is the process of pulling the fibers into parallel

alignment to form a thin web. High speed electronic equipment with wire

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

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

SLIVER TO ROVING: The silver is then sent to combing machine. Here, the

fibers shorter than half-inch and impurities are removed from the cotton. The

sliver is drawn out to a thinner strand and given a slight twist to improve

strength, then wound on bobbins. This Process is called Roving.

ROVING TO YARN (SPINNING): Spinning is the last process in yarn

manufacturing. Spinning draws out the short fibers from the mass of cotton and

twists them together into a long. Spinning machines have a metal spike called a

spindle which the thread winds around.

ECE

110

MBA Programme

II. Production of Cotton Seed Oil

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

follows:

The first step is its entry into the shaker room where, through a number

of screens and air equipment, twigs, leaves and other trash are removed.

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

from the seed (delinted). The linters of the highest grade, referred to as

first-cut linters are used in manufacturing non-chemical products, such as

medical supplies, twine, and candle wicks. The second-cut linters

removed in further delinting steps, are incorporated in chemical products,

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

The delinted seeds now go to the huller. The huller removes the tough

seed coat with a series of knives and shakers. The knives cut the hulls

(tough outer shell of the seed) to loosen them from the kernels (the inside

meat of the seed, rich in oil) and shakers separate the hulls and kernels.

The kernels are now ready for oil extraction. They pass through flaking

rollers made of heavy cast iron, spinning at high speeds. This presses the

meats into thin flakes. These flakes then travel to a cooker where they are

cooked at 170 degrees F to reduce their moisture levels. The prepared

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

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

Crude cottonseed oil requires further processing before it may be used

for food. The first step in this process is refining. With the scientific use

ECE

110

MBA Programme

of heat, sodium hydroxide and a centrifuge (equipment used to separate

substances through spinning action), the dark colored crude oil is

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

bleached with a special bleaching clay to produce a transparent, amber

colored oil.

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

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

Poly Unsaturated Fatty Acids (PUFA) which maintain cholesterol in the blood

at a healthy level. The quality of cotton oil depends on the weather prevailing

during the time that cotton stands in the fields after coming to maturity. Hence

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

high in dry seasons and low when the seed is exposed to wet weather in the fields

or handled or stored with high moisture. Further cotton seed cooking oil has a

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

III. Production of Cottonseed Meal/Cake/Kapaskhalli

Kapaskhalli (cottonseed extraction/meal) is a byproduct of the cottonseed

industry.

Cottonseed is a by-product of the cotton plant, which is primarily grown

for its fiber. Although cotton has been grown for its fiber for several

thousand years, the use of cottonseed on a commercial scale is of

relatively recent origin.

Cottonseed was a raw agricultural product, which was once largely

wasted. Now it is being converted into food for people; feed for livestock;

fertilizer and mulch for plants; fiber for furniture padding; and cellulose

for a wide range of products from explosives to computer chip boards.

ECE

110

MBA Programme

Cotton Varieties in India

Bengal Deshi mainly produced in the states of Punjab, Haryana, and

Rajasthan.

Jayadhar mainly produced in the state of Karnataka.

Bunny (or) Brahma is mainly produced in the states of Maharashtra,

Madhya Pradesh, Andhra Pradesh, and Karnataka.

Suvin is another variety produced in the state of Tamil Nadu.

H-4 (or) MECH1 is mainly produced in the states of Maharashtra,

Madhya Pradesh, and Andhra Pradesh.

Role of Cotton Industry in Indian Economy

Over the years, country has achieved significant quantitative

increase in cotton production. Till 1970s, country used to import massive

quantities of cotton in the range of 8.00 to 9.00 lakh bales per annum. However,

after Government launched special schemes like intensive cotton production

programmers through successive five-year plans, that cotton production received

the necessary impetus through increase in area and sowing of Hybrid varieties

around mid 70s.

Since then country has become self-sufficient in cotton production

barring few years in the late 90s and early 20s when large quantities of cotton

had to be imported due to lower crop production and increasing cotton

requirements of the domestic textile industry.

ECE

110

MBA Programme

Cotton production Areas in India

India is an important grower of cotton on a global scale. It ranks

third in global cotton production after the United States and China; with 9.50

million hectares grown each year, India accounts for approximately 21% of the

world's total cotton area and 13% of global cotton production.

The Cotton producing areas in India are spread throughout the

country. But the major cotton producing states which account for more than 95%

of the area under and output are:

1. Punjab.

2. Haryana.

3. Rajasthan.

4. Maharastra.

5. Gujarat.

6. Madhya Pradesh.

7. Andhra Pradesh.

8. Tamil Nadu.

9. Karnataka. 

Of the nine cotton producing States in India, average yields are

highest in Punjab where most of the cotton area is irrigated.

But the yields of cotton in India are low, with an average yield of

503 kg/ha compared to the world average of 734 kg/ha. The problem is also

compounded by higher production costs and poor quality in terms of varietals

ECE

110

MBA Programme

purity and trash content. However the Cotton plays an important role in the

National economy providing large employment in the farm, marketing and

processing sectors. Cotton textiles along with other textiles also contribute about

1/3rd of the Indian exports.

Steps taken by the Cotton Producers in India

Now-a-days the Indian Cotton producers are continuously working

to up-grade the quality and increase the cotton production to cope up with the

increased global demand for cotton textiles and to meet the needs of the 39

million spindles capacity of the domestic textile industry which presently

consumes about 12-14 million bales annually.

In India, cotton yields increased significantly in the 1980’s and

through the first half of 1980’s but since 1996 there is no increase in yield. In the

past, the increase in cost of production of cotton was partially offset by increase

in yield but now with stagnant yield the cost of production is raising. Besides low

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

micron ire and strength.

Policy of Government of India towards Cotton Industry

The Cotton production policies in India historically have been

oriented toward promoting and supporting the textile industry. The Government

of India announces a minimum support price for each variety of seed cotton

(kapas) based on recommendations from the Commission for Agricultural Costs

and Prices. The Government of India is also providing subsidies to the

production inputs of the cotton in the areas of fertilizer, power, etc…

ECE

110

MBA Programme

Markets for Indian Cotton

The three major groups in the cotton market are

Private traders,

State-level cooperatives,

The Cotton Corporation of India Limited.

Of these three groups, private traders handle more than 70

percent of cottonseed and lint, followed by cooperatives and the CCI.

The Cotton Corporation of India Ltd. for the year 2007-08 had

purchased 60.30 lakh quintals of kappa’s equivalent to 11.77 lakh bales valuing

Rs.1218.70 crores in Andhra Pradesh, Maharashtra, Madhya Pradesh, Orissa and

Karnataka. Beside these the Corporation had also carried out commercial

operations and purchased 2.71 lakh bales valuing Rs.285.82 crores in the year

2006-07 as compared to around 1.00 lakh bales valuing Rs.108.81 crores during

the previous year (i.e. for the year 2006-07).

Exports of Cotton

The main market for Indian cotton export is China. The other

markets also include Taiwan, Thailand and Turkey. In July 2001, the union

government removed all curbs on cotton exports. As a result of these, now the

exporters are not required to obtain any certificate from the Textile

Commissioner on the registration, allocation, quality and quantity of export.

India exported around 25 per cent cotton during 2006-07 and it is estimated

nearly 62 per cent exported to China.

ECE

110

MBA Programme

During the year 2006-07 the prices of Indian cotton in early part of

the season being lower than the international prices, had been attractive to

foreign buyers and there was good demand for Indian cotton, especially S-6, H-4

and Bunny, which had resulted in sustained cotton exports, which are estimated

at 55.00 lakh bales

The Cotton Advisory Board estimated an 18-20 percent increase in

cotton exports to 65 lakh bales for Oct 2007- Sep 2008, as against its Aug 2007

estimate of 58 lakh bales.

Imports of Cotton

Despite good domestic crops, India is importing cotton because of

quality problems or low world prices particularly for processing into exportable

products like yarns and fabrics.

India imported just 721,000 bales of cotton in 2003-04. The

imports rose to 1,217,000 lakh bales in 2004-05, 4,700,000 lakh bales in 2005-06

and the anticipated imports for the year 2006-07 are 550,000 lakh bales.

For the year 2006-07 the cotton imports into the country had once

again remained limited mainly to Extra Long staple cottons, like as previous

year, which were in short supply at around 6 lakh bales inclusive of import of

around 2 lakh bales of long staple varieties contracted by mills during April-May

2007.

ECE

110

MBA Programme

Role of Cotton seed oil in Indian Economy

The global production of cottonseed oil in the recent years has been

at around 4-4.5 million tons. Around 2 lakh tons are traded globally every year.

The major seed producers, viz., China, India, United States, and Pakistan are the

major producers of oil. United States (60000 tons) is the major exporter of

cottonseed oil, while Canada is the major importer.

Cottonseed is a traditional oilseed of India. In India the average

production of cotton oil is around 4 lakh tons a year. It is estimated that, if

scientific processing is carried out the oil production can be increased by another

4 lakh tons.

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

the major consumer of cottonseed oil in the country. It is also used for the

manufacture of vanaspati. The price of cottonseed oil is generally dependent on

the price behavior of other domestically produced oils, more particularly

groundnut oil. India used to import around 30000 tons of crude cottonseed oil,

before palm and soy oil became the only imports of the country. Currently, the

country does not import cottonseed oil.

Role of cottonseed meal in Indian Economy

India produces around 2 million tons of cottonseed meal a year.

However, in India mainly undecorticated meal is largely produced. Several

associations are promoting the production of decorticated cake in India and the

production of this is expected to increase in the country.

ECE

110

MBA Programme

India used to be a major exporter of cottonseed extraction around

two decades ago. However, the demand for other oil meals like soy meal has

lowered the cottonseed demand globally. In addition, the low availability of

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

The major importers of Indian cottonseed meal (undecorticated)

used to be Thailand. India in 2002-03 exported only 50 tons of decorticated

cottonseed meal. In 2003-04, too there have been no significant exports. India

does not import cottonseed meal.

The Organizations dealing with the promotion of Cotton

Industry in India:

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

are

I. The Cotton corporation of India Ltd.,

II. Cotton Advisory boards,

III. Cotton Association of India.

IV. Central Institute of Cotton Research.

I. The Cotton Corporation of India Limited

The Cotton Corporation of India Ltd. was established on 31st July

1970 as a Government Company registered under the Companies Act 1956. In

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

charged with the responsibility of equitable distribution of cotton among the

ECE

110

MBA Programme

different constituents of the industry and to serve as a vehicle for the canalization

of imports of cotton.

With the changing cotton scenario, the role and functions of the

Corporation were also reviewed and revised from time to time. As per the Policy

directives from the Ministry of Textiles, Government of India in 1985, the

Corporation is nominated as the Nodal Agency of Government of India, for

undertaking Price Support Operations, whenever the prices of kappa’s (seed

cotton) touch the support level.

The Cotton Corporation of India Ltd. Operations covers all the

cotton growing states in the country comprising of:

Punjab, Haryana and Rajasthan in Northern Zone.

Gujarat, Maharashtra and Madhya Pradesh in Central Zone.

Andhra Pradesh, Karnataka & Tamil Nadu in Southern Zone.

II. Cotton Advisory Board

The Cotton Advisory Board is a representative body of

Government/ Growers/ Industries/ Traders. It advises the Government generally

on matters pertaining to production, consumption and marketing of cotton, and

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

cotton growers, the cotton trade and the Government. It functions under the

Chairmanship of Textile Commissioner with Deputy Textile Commissioner as a

Member Secretary.

ECE

110

MBA Programme

III. The Cotton Association of India

The Cotton Association of India also called as the East India

Cotton Association (EICA) was declared as the statutory body by the Bombay

Cotton Contract Act on 28th December, 1922. Its purpose is to

Provide and maintain suitable buildings or rooms or a

Cotton

Exchange in the city of Bombay or elsewhere in India.

Provide forms of contracts and regulate the marketing, etc.

of

the contracts.

Fix and adopt standards or classifications of cotton.

Adjust by arbitration or otherwise controversies between

Persons engaged in the cotton trade.

Acquire, preserve or disseminate useful information connected with the

cotton interests.

IV. Central Institute of Cotton Research

With a view to develop a Centre of excellence for carrying out long

term research on fundamental problems limiting cotton production the Indian

Council of Agricultural Research has established the Central Institute for Cotton

Research at Nagpur in April, 1976. CICR was simultaneously established at

Coimbatore to cater to the needs of southern cotton zone. CICR was established

at Sirsa in the year 1985, to cater to the needs of northern irrigated cotton zone.

All the three research farms are well equipped with tractors and other farm

implements and efforts are underway to initiate further developmental work in all

the farms.

ECE

110

MBA Programme

The Vision of the CICR is to improve production and quality of

Indian Cotton with reduced cost to make cotton production cost effective and

competitive in the national and global market. The Mission of CICR is to

develop economically viable and eco-friendly production and protection

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

sustainable basis for the next twelve years (till 2020).

The Current Scenario of Cotton Industry (2007-08)

The cotton production in the country has been increasing

continuously since last three years and the same has further gone up by around

11% during cotton season 2007-08 at a record level of 270 lakh bales as against

244 lakh bales during 2006-07. Gujarat has turned into a largest cotton producing

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

the country’s total production.

The area under cotton cultivation during 2007-08 has also gone up

by around 6% at 91.58 lakh hectares as against 86.77 lakh hectares during 2005-

06.

With wide usage of hybrid seeds throughout the country as well as

changed mindset of cotton farmers for adoption of better and improved farm

practices, the average productivity of cotton has crossed 503 kgs per hectare as

against 478 kgs during the previous year. The prices of Indian cotton in early part

of the season being lower than the international prices had been attractive to

foreign buyers and there was good demand for Indian cotton.

ECE

110

MBA Programme

Due to expectation of bumper crop, the mill demand in the

beginning of the season was subdued which put pressure on the cotton prices

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

between October 2006 & January 2007. Cotton prices reached its peak level by

end-March 2007 and there was some correction in cotton prices in April and May

2007. However, on the whole, cotton prices remained better by almost Rs.1000

per candy in almost all varieties as compared to previous year.

Future of Cotton Industry in India

The Cotton Advisory Board (CAB) has estimated the cotton crop at

310 lakh bales for the current season 2008-09. This is a historic high and

represents a 11% jump over last year's crop estimate of 280 lakh bales. The

increase in cotton production area is also expected to increase to 95.30 lakh

hectares for the season 2007-08 against 91.42 lakh hectares for the season 2006-

07.

Cotton Advisory Board expects exports to be higher at 65 lakh

bales as against 55 lakh bales in 2007-08. Imports in 2008-09 are projected at

6.50 lakh bales as compared to 5.50 lakh bales in 2007-08, because mills have to

rely on foreign growths to spin some finer counts of yarn.

It is also estimated that the cotton industry is going to provide 12

million new jobs mainly for the semi-skilled and unskilled labor.

Despite the progress enunciated above, cotton yield per hectare in

India is one of the lowest in the world. Reliance on rain, a week seed supply

system, small land holding, poor weed control and scanty use of integrated pest

management technologies are responsible for the low yield.

ECE

110

MBA Programme

COMPANY PROFILE

INTRODUCTION

Ramya spinning mills pvt ltd will produce high quality yarn to meet the

expectations of the Indian and International market. We aim to become a leading world

class integrated production house of fine yarn, quality fabric and related processed

goods. We believe in embracing newer technologies, working with state-of-the-art

processes and continuous research & development to improve the quality of our

products. We will develop long term relationships with our customers by providing

products exceeding industry standards and at competitive prices. We will provide our

staff with a healthy and rewarding work culture; our suppliers with a beneficial

association; and the society with a caring support.

Ramya spinning mills pvt ltd is a Public Limited Company established with an

objective of setting up of a fully integrated state of the art textile complex right in the

heart of the cotton hub of Andhra Pradesh at Timmapuram Village, Edlapadu Mandal,

Guntur District.

The Promoter and CEO of the company is a young and dynamic entrepreneur Sri

Ramya spinning Venkata Krishna Prasad. His dynamic leadership has received

accolades all across. His prudent approach with deep insight into all aspects of the

business, led the 'Ramya spinning Group' from a humble inception to a brand of great

reputation and good standing in the market. His experience spanning over a decade and

half in real estate and construction of premium residential colonies has well woven

itself into setting up of highest standards for the Company.

In its first phase of establishment, i.e. Cotton Spinning Mill, the Company has

completed the construction, installation of machinery and commenced its commercial

operations within a stipulated short time from 29th January 2007 onwards and has

achieved 100% Capacity installation of 26,400 Spindles and utilization from August

2007 onwards. Ever since, we are proud yet humble in surpassing the expectations of

ECE

110

MBA Programme

one and all and achieving the highest quality standards well below the Uster 5% in both

Weaving and Knitting with count ranges of 40’s, 50’s and 60’s – carded and koomed.

The Company’s successful operations have prompted the Management to enhance the

capacity by 25% i.e. by 6720 spindles. This addition brought the company’s total

spinning strength to 33120 spindles by April 2009. The Management further proposes

to enhance the capacity in the next few months with an average count pattern of 35’s.

The Company’s quality achievement is a result of the fine mixing of Customer Oriented

Management Policy, Sophisticated Manufacturing Methods, highly dedicated and self

motivated team, well planned and co-ordinated operations and stringent quality checks.

Exceeding the customer expectations in all parameters have been a motivating factor in

all our operations.

Our Yarn Conditioning Plant helps extracting better warping and loom shed efficiency.

The yarn is packed as per the customer requirement including that of Carton Packing (5

Ply with 150 gsm) and Pallet Packing. Our normal cone weight is 1.89 Kg and paper

cone is ‘Conitex with 5.57’ conacity’.

The Company will continue its strides in the textile industry with backward integration

i.e. Ginning and Forward integration i.e. Weaving and Processing along with lateral

expansion in spinning up to 1,00,000 spindles.

ECE

110

MBA Programme

BOARD OF DIRECTORS:

Ramya spinning mills pvt ltd is promoted by a highly motivated team of individuals,

who with their vast experience and exemplary vision have made it a leading brand.

Sri Ramya spinning Venkata Krishna Prasad, Managing Director

Sri Krishna Prasad, a young and dynamic entrepreneur, is the Promoter and CEO of the

Company. His leadership is the strength of the Company in all its business avenues,

expansions and explorations. With a vast, rich and multi dimensional experience

spanning a decade and half, he promises to lead this Company to great shores of

success.

Smt Ramya spinning Hymavathi, Executive Director

Smt Hymavathi is a motivational factor behind all the enterprises of the Company. Her

experience and insights in to various aspects of business and her directional guidance is

an added asset to the Company. She has an experience of more than a decade in real

estate and construction sectors.

Sri Parupalli Nageswara Rao, Director & COO

Sri Nageswara Rao has over three decades of experience in Cotton buying and trading

activities in and around Guntur. He has represented various spinning mills in the past as

an experienced and seasoned cotton buyer. His presence is an added advantage in raw

material purchases.

Sri Yalavarthi Ramesh, Director

Sri Ramesh is a well acknowledged and senior business man in Guntur with his interests

in Tobacco trading and occasional cotton ginning and trading. He has an experience of

more than two and half decades in tobacco business. He oversees the finance and

personnel departments.

ECE

110

MBA Programme

VISION

RAMYA SPINNING PVT LTD will produce high quality yarn to meet the

expectations of the Indian and International market. We aim to become a leading world

class integrated production house of fine yarn, quality fabric and related processed

goods.

We believe in embracing newer technologies, working with state-of-the-art processes

and continuous research & development to improve the quality of our products.

We will develop long term relationships with our customers by providing products

exceeding industry standards and at competitive prices. We will provide our staff with a

healthy and rewarding work culture; our suppliers with a beneficial association; and the

society with a caring support.

MISSION

To manufacture a high quality yarn thereby with standing competitiveness.

Developing a long team relationship with our customers and suppliers.

To use latest technological strategies during production there by for approach.

To provide a safe, fulfilling and rewarding work environment.

Servicing and supporting the comities in the us operate.

ECE

110

MBA Programme

FUNCTIONS OF HEAD OF DEPARTMENTS IN RAMYA SPINNING MILLS

PVT LTD:

The following are functions of the Heads of Departments that are mostly relevant to the

Project.

Functions of Finance Manager:

1. 1. He looks after day-to-day accounting and financial operations in the Accounts

Departments.

2. He is closely associated in completion of statutory audit of The Company under

Companies Act 1956 and also in connection with the annual Tax Audit under

Income-tax Act.

3. He is independently responsible for submitting working capital renewal

application to Banks and also furnishers required information under Quarterly

Information System.

4. Further, he provides information to Board Meeting relating to Profit and Loss

Account, Balance Sheet, Turnover particulars and Un-audited results etc., for

each quarter.

5. Apart from the above he looks after sales tax matters of the company and attends

before Sales Tax Departments for completion of Assessments.

Functions of Marketing Manager:

1 He coordinates with production department, quality control & dispatch section

for planning of the production, supply of right product and at the right time to

the customers.

2 He continuously explores new markets or customers.

3 In order to promote the producers of the organization regular customer contacts

are maintained.

4 In view of the limited growth of the industry, maintaining the market situation in

order to retain the customers.

5 He keeps an eye on the competitor’s strategies by analyzing the market situation

in order to retain the customers.

6 Monitoring the overall performance of sales organization is also one of the

functions.

ECE

110

MBA Programme

Functions of Production Manager:

1 He is in charge of the Production Department.

2 He prepares requirements of raw materials as per the indents given by the

Marketing Department.

3 He takes total responsibility from the stage of processing raw material to the

stage of packing of finished products.

4 His efforts include minimizing the labor cost, inventory, wastage in order to

achieve high productivity.

5 His responsibility includes advising the Management with respect to capacity

utilization and further requirements.

ACCOUNTING POLICIES OF RAMYA SPINNING MILLS PVT LTD:

General

To Prepare financial statements in accordance with applicable with applicable

accounting standards in India.

The financial statements have also been prepared in accordance with relevant

presentational requirements of the companies act, 1956.

Revenues

It is the corporate policy to state turnover, which represents invoiced value of

goods sold net of taxes, insurance and freights.

The company is following mercantile system of accounting i.e.,

revenues/expenses are recognized as and when they are earned/ incurred.

Inventories

In our opinion and to the best of our information and according to explanations

given to us, they said accounts read with the significant accounting policies, the

Inventories are valued as follows:

Raw materials, Stores & Spares and materials in transit have been valued at the

lower of cost or net realizable value.

Saleable Stock of scrap is valued at estimated net realizable value.

Cost of inventories is generally assigned by using the first in first out method.

ECE

110

MBA Programme

Fixed Assets

Fixed Assets are stated at cost / original value according to the accounting

standard-10.

Expenditure incurred for construction of new plant was capitalized.

Cost of fixed assets comprises of its purchase price and other costs directly attributable

to bringing the asset to its working condition for its intended use like site preparation,

initial delivery and handling charges, installation cost such as for special foundation and

professional fees paid to architects and engineers..

Depreciation

Depreciation on fixed assets is provided on SLM method at rates and in the

manner prescribed by the schedule XVI of the companies act, 1956 (as amended) and

according to the accounting standard –6 issued by ICA I

Prior period items

Insurance on plant and machinery and building was posted to building

accounting i.e. capitalized. The insurance expenditure Rs.204421/-. Wrongly capitalized

during the financial year 2007-08 was written back and claimed as revenue expenditure.

Taxes on Income

Current tax is determined as per the provisions of Income Tax Act, 1961 in

respect of taxable income for the year. Deferred tax liability is recognized. Subject to

the consideration of prudent on timing differences, being the difference between taxable

incomes and accounting income that originate in one period and is capable of reversal in

one of more subsequent periods.

Deferred tax assets arising on account of brought forward losses and unabsorbed

depreciation as per Income Tax laws are recognized only when there is virtual certainty

supported by convincing evidence that such assets will be realized.

Provision is made in the Accounts for the Dividends payable by the company as

recommended by the Board of Directors, pending approval of the Shareholders at the

Annual General Meeting, Tax on distributable Profits is provided for in the year to

which such distributable Profits relate.

ECE

110

MBA Programme

INFORMATION RELATED TO RAMYA SPINNING PVT LTD:

1 The company has maintained proper records showing full particulars, including

quantitative details & situation of fixed assets is performed by the management

in accordance with a rotational plan, which is intended.

2 The management has conducted physical verification of inventory at

reasonable intervals during the year; the procedures of physical verification

of inventory followed by the management are reasonable & adequate.

3 There are adequate internal control procedures commensurate with the size of the

company and the nature of its business, for the purchase of inventory & financial

accounts and for sale of goods.

4 The company has accepted 64 lakhs as deposits from the public.

5 The company has an internal audit system, commensurate with the size of the

company and the nature of the business.

6 The company has no accumulated losses at the end of financial year and it

has not incurred any cash losses in the current & immediately preceding

financial year.

7 The company is not a chit fund or a nidhi/mutual benefit fund/society. Therefore

the provisions of clause 4(xiii) of the companies (auditor’s report) order, 2003

are not applicable to the company.

8 The company is not dealing in or trading in shares, securities, debentures and

other investments. Accordingly the provisions of clause 4(xiv) of the companies

(auditor’s report) order, 2003 are not applicable to the company.

ECE

110

MBA Programme

9 The central government has not prescribed maintenance of cost records by the

company under section 209(1) (d) of the act.

10 According to the records of the company, the company is regular in depositing

undisputed statutory dues including withholding of taxes, provident fund,

employees state insurance, income tax, vat, wealth tax, custom duty, & other

statutory dues with the appropriate authorities.

11 The company has not given any guarantee for loans taken by others from bank

or financial institutions.

12 The term loans were applied for the purpose for which the loans were obtained -

no term loans for the company.

13 The company did not have any outstanding debentures during the year –

company is not having debentures.

PRODUCTION:

The Textiles Spinning Synthetic and blended industry is highly fragmented and in

addition to the established player there are many unorganized players that operate in the

industry. The capacities are interchangeable for spinning natural fiber and manmade

fiber, so definitive comparable information on competitors operating in natural fibers

and manmade fibers is not publicly available. Also PSM operates in a customer order

market segment and produces variety of yarn based on the requirement of customers

and the standardizations are strictly not comparable because of the unique nature of the

products, the counts and the fineness of the yarn and the machinery used.

MANUFACTURING PROCESS:

The present activities of the company involve processes that go into producing quality

yarn. The best quality raw cotton is processed in state-of-the-art machineries using the

latest technical know-how, to produce the finest quality yarn.

ECE

110

MBA Programme

Mixing

To get an uniform end product consistently from highly variable characteristics of input

fibres, mixing of different lots is done. Grading or segregation takes place before

mixing to remove unwanted contamination in cotton.

Blow Room

Blow room consists of a sequence of different machines that carry out Opening,

Cleaning, thorough Mixing and decreasing the tuft size smaller and smaller, to feed

material to Carding uniformly and continuously.

Carding

"Card is the heart of the spinning mill" and "Well carded is half spun" are two proverbs

of the experts. The purpose of Carding is to open tufts to individual fibres, neps

reduction, elimination of dust and orientation of fibres into sliver form.

Br. Drawing

The object of draw frame is to double and draft the slivers and thereby make even sliver

and parallelization of fibres i.e. hooks created at Carding are removed.

Lap Former

The object of Lap Former is preparation of Lap from slivers with optimum parallelized

fibres and feeding of trailing hooks from Carding as leading hooks at Comber to reduce

long fibre loss in the noil.

ECE

110

MBA Programme

Comber

Combing is the process which is used to upgrade the raw material and to produce an

improvement in yarn quality by elimination of short fibres, elimination of remaining

impurities and elimination of neps.

Fr. Drawing

The object of Fr. draw frame is to double and draft the slivers and thereby make even

sliver, parallelization of fibres and auto leveling of linear density variations in feeding

to get constant linear density of output sliver.

Simplex

The object of Simplex is to produce roving suitable to feed Ring frame by means

ofattenuation - drafting of sliver, twisting the drafted strand and winding the twisted

roving on a bobbin.

Spinning

Functions of Ring frame are to draft the roving until the required fineness is achieved,

to impart strength to the fibre, by inserting twist and to wind up the twisted strand

(yarn) in a form suitable for storage, transportation and further processing.

Auto Coner

The object of Autoconer is to eliminate the faults and contamination in yarn and joining

the ends with splice and winding of long and continuous yarn into conical shape to

facilitate at further processes.

ECE

110

MBA Programme

Reeling

The object of Reeling is to convert yarn in the form of hanks which are mostly suitable

for hand looms or dyeing purpose.

Packing

The object of packing is to check visual defects and pack the material suitable for

storage and transportation with necessary labels.

Exports 

Because of growing customer interest in products from around the world, Ramya

spinning mills pvt ltd has explored international markets and exports products to many

countries to meet those demands.

Russia

Peru

HongKong

Thailand

Netherlands

Bangladesh

Dubai

Bahrain

Korea

Brazil

Egypt

Italy

Turkey

Germany

Greece

ECE

110

MBA Programme

Poland

Iran

China

 Quality

Quality is the buzzword at RAMYA SPINNING PVT LTD. Quality control begins

from the raw cotton itself, which undergoes stringent checks. Each process is inspected

at all stages to ensure that it adheres to the standards that have been prescribed.

The company’s quality policy is emphasized and brought to the notice of each and

every employee. The quality policy’s ultimate motive is the supply of consistently high

quality goods on time, to all the consumers.

Strict quality standards coupled with the constant desire for innovation and

implementation of latest technology, have resulted in consistent progress.

The company has successfully implemented 5 'S' in the organization to achieve

excellence and perfection in all operations:

1S Seiri Sort (Clearing) 2S Seiton Set (Organising) 3S Seiso Shine (Cleaning) 4S Seiketsu Standard (Standardising) 5S Shitsuke Sustain (Training & Discipline)

 

ECE

110

MBA Programme

Welfare

We promise to 'Care while we Grow'. Social forestry, reducing pollution, conserving

energy, efficient waste management and many such practices are strictly followed at

RAMYA SPINNING PVT LTD. We will always work towards giving a better

tomorrow to the coming generations.

Taking care of our staff is a way of life at RAMYA SPINNING PVT LTD. We strive to

give our staff a healthy and rewarding work culture. Our care extends beyond the

factory premises, covering the employees and their family.

ECE

110

MBA Programme

SOCIAL FORESTRYWe are actively involved in social forestry and work towardsbettering the environment.

STAFF ACCOMODATIONThe staffs are provided with modern and well planned accommodation in a self contained atmosphere.

STAFF CAFETERIA

On duty staffs are given healthy and hygienic food in the cafeteria.

KIDS PLAY AREAThe employee township also has a children’s play area.

ECE

110

MBA Programme

Contact Us:

RAMYA SPINNING PVT LTD is located right in the heart of the cotton hub of Andhra

Pradesh at Ganapavaram Village, Nadendla Mandal, Guntur District. It is strategically

located on the National Highway offering easy and faster connectivity.

The coastal district of Guntur occupies a very strategic place in the Indian textile

industry as it is the biggest cotton market and has a well established manufacturing

base. Guntur is well connected by Air, Rail and Road. The city is also a major part of

the Golden Quadrilateral national transportation project. To cater to the export markets,

Guntur is well connected to the Chennai port.

Key Contact & Business Development:

Mr. Ramya spinning Venkata Krishna Prasad - Managing Director

Mobile: +91 - 9849981990

Email: md@ramya spinning spinners.com

Corporate Office:

Flat No. 302, Ramya spinning Classic Apartment,

Ramya spinning Emerald Gardens,

Madhapur, Hyderabad - 500081.

Phone: +91 - 40 - 23115997

Fax: +91 - 40 - 23115998

Factory:

RAMYA SPINNING PVT LTD

NH-5, Ganapavaram Village,

Nadendla Mandal, Guntur District - 522233.

Andhra Pradesh

Phone: +91 - 8647 - 276668 , 276669

Fax: +91 - 8647 - 276668

Email: info@ ramya spinning pvt ltd .com

ECE

110

MBA Programme

SWOT ANALYSIS:

Strengths:

Abundant Raw Material availability that helps industry to control costs and

reduces the lead-time across the operation.

Availability of Low Cost and Skilled Manpower provides competitive advantage

to industry.

Availability of large varieties of cotton fiber and has a fast growing synthetic

fiber industry.

India has great advantage in Spinning Sector and has a presence in all process of

operation and value chain.

Industry has large and diversified segments that provide wide variety of

products.

Industry has Manufacturing Flexibility that helps to increase the productivity.

Good brand equity.

Many persons are working here. This shows commitment of employees towards

of the organization.

Weaknesses:

Industry is highly dependent on Cotton.

Lower Productivity in various segments.

Lack of Technological Development that affect the productivity and other

activities in whole value chain.

Unfavorable labor Laws.

Lack of Trade Membership, which restrict to tap other potential market.

Lacking to generate Economies of Scale.

ECE

110

MBA Programme

Opportunities:

Growth rate of Domestic Textile Industry is 6-8% per annum.

Large, Potential Domestic and International Market.

Product development and Diversification to cater global needs.

Elimination of Quota Restriction leads to greater Market Development.

Market is gradually shifting towards Branded Readymade Garment.

Increased Disposable Income and Purchasing Power of Indian Customer open

New Market Development.

Emerging Retail Industry and Malls provide huge opportunities for the Apparel,

Handicraft and other segments of the industry.

Threats:

Continuous Quality Improvement is need of the hour as there are different

demand patterns all over the world.

Geographical Disadvantages.

To balance the demand and supply.

To make balance between price and quality.

Increase in minimum wage rates

ECE

110

MBA Programme

Analysis using ratios

Current Ratio

A liquidity ratio that measures a company's ability to pay short-

term obligations. The ratio is mainly used to give an idea of the company's ability

to pay back its short-term liabilities (debt and payables) with its short-term assets

(cash, inventory, receivables). If the current assets of a company are more than

twice the current liabilities, then that company is generally considered to have

good short-term financial strength. If current liabilities exceed current assets,

then the company may have problems meeting its short-term obligations. The

conventional current ratio is 2:1.

Current ratio = Current assets / Current liabilities.

Table 4.1

Year Current Assets Current Liabilities Ratio

2007-08 52,66,42,016/- 18,55,64,081/- 2.83:1

2008-09 46,60,76,935/- 9,01,97,262/- 5.16:1

2009-10 69,33,82,521/- 13,80,70,153/- 4.02:1

2010-11 57,46,56,641/- 10,68,33,433/- 5.37:1

2011-12 55,50,12,846/- 10,23,58,861/- 6.77:1

ECE

110

MBA Programme

Interpretation:

The current ratio of the Ramya Spinning mills pvt ltd in 2007-08 was

2.83; it has been increased to 5.16 in the year 2008-09 and further

decreased to 4.02 in the year 2009-10.

The current ratio had increased to 5.37 in the year 2010-11. At present the

current ratio of the company was 6.77 i.e. in the year 2011-2012.

It is maximum (6.77) in the year 2010-11, the reason for maximum

current ratio (in 2010-11) is due to decrease in current liabilities and

increase in current assets when compared to 2007-08.

It is minimum (2.83) in the year 2007-08, the reason for this is due to high

current liabilities and low current assets.

The overall trend of the current ratio is in increasing pattern and

percentage change in current ratio is 1.39 between the period 2007-08and

2011-12.

ECE

110

MBA Programme

ECE

110

MBA Programme

Quick Ratio

Quick ratio is an indicator of a company's short-term liquidity. The

quick ratio measures a company's ability to meet its short-term obligations with

its most liquid assets. The higher the quick ratio, the better the position of the

company. It is also known as the "acid-test ratio" or the "quick assets ratio". It is

obtained by subtracting inventories from current assets and then dividing by

current liabilities. The conventional quick ratio is 1:1.

Quick ratio = Current assets – Inventory

Current liabilities

(or)

= Quick assets / Current liabilities.

Table 4.2

Year Quick Assets Current Liabilities Ratio

2007-08 21,62,93,228/- 18,55,64,081/- 1.16:1

2008-09 15,96,92,453/- 9,01,97,262/- 1.77:1

2009-10 20,74,79,783/- 13,80,70,153/- 1.50:1

2010-11 21,66,06,426/- 10,68,33,433/- 2.02:1

2011-12 21,85,49,696/- 10,23,58,861/- 2.13:1

ECE

110

MBA Programme

Interpretation:

The quick ratio of the company in 2007-08 was 1.16; it has been slightly

increased to 1.77 in the year 2008-09 and further decreased to 1.50 in the

year 2009-10.

The quick ratio had increased to 2.02, in the year 2010-11. At present the

current ratio of the company was 2.13 i.e. in the year 2011-12.

It is maximum (2.13) in the year 2011-12, the reason for maximum quick

ratio (in 2008-09) is due to decrease in current liabilities when compared

to 2007-08.

It is minimum (1.16) in the year 2007-08, this is mainly due to higher

current liabilities.

The overall trend of the quick ratio is in increasing pattern and percentage

change in quick ratio is 0.83 between the period 2007-08 and 2011-12.

ECE

110

MBA Programme

ECE

110

MBA Programme

Inventory Turnover Ratio

Inventory turnover ratio indicates the efficiency of the firm in

producing and selling its product. It is calculated by dividing cost of goods sold

by average inventory. Average inventory consists of opening stock plus closing

stock divided by 2. A high inventory turnover ratio indicated that the product is

selling well. A low turnover ratio implies poor sales and, therefore, excess

inventory. The following formula is frequently used for calculation of ratio:

Inventory turnover ratio = Sales / Average inventory

Avg. Inventory = Opening Stock + Closing Stock

2

Table 4.3

Year Sales Avg. Inventory Ratio

2007-08 1,76,44,15,544/- 29,93,42,725/- 5.89:1

2008-09 1,42,17,41,107/- 30,83,66,635/- 4.61:1

2009-10 1,57,24,07,472/- 32,69,58,772/- 4.80:1

2010-11 1,75,47,60,942/- 35,47,91,639/- 4.94:1

2011-12 1,96,24,83,183/- 41,84,41,520/- 4.68:1

ECE

110

MBA Programme

Interpretation:

The Inventory turnover ratio of Ramya Spinning mills Pvt Ltd. in 2007-

08 was 5.89; it has been slightly decreased to 4.61 in the year 2008-09 and

then increased to 4.80 in the year 2009-10.

The Inventory turnover ratio then raised up to 4.94 in the year 2010-11. At

present the inventory turnover ratio of the company was 4.68 i.e. in the

year 2011-12.

It is maximum (5.89) in the year 2007-08 and the reason for maximum

inventory turnover ratio is due to high sales in 2007-08 when compared to

2006-07.

It is minimum (4.61) in the year 2008-09 and the reason for this fall in

turnover.

The overall trend of the inventory turnover ratio is in decreasing pattern

and percentage change in inventory turnover ratio is 0.28 between the

period 2007-08 and 2011-12.

ECE

110

MBA Programme

ECE

110

MBA Programme

Inventory to Current assets ratio

This ratio indicates the relationship between inventory to current

assets. Higher the ratio shows that inventory is properly utilized in the

organization. Inventory to current assets ratio is calculated as follows:

Inventory to current assets ratio = Inventory / Current assets.

Table 4.4

Year Inventory Current assets Ratio

2007-08 31,03,48,788/- 52,66,42,016/- 0.58:1

2008-09 30,63,84,482/- 46,60,76,935/- 0.65:1

2009-10 34,75,33,063/- 55,50,12,846/- 0.62:1

2010-11 36,20,50,215/- 57,86,56,641/- 0.62:1

2011-12 47,48,32,825/- 69,33,82,521/- 0.68:1

ECE

110

MBA Programme

Interpretation:

The Inventory to current assets ratio of the company in 2007-08 was 0.58;

it has been slightly increased to 0.65 in the year 2008-09 and then

decreased to 0.62 in the year 2009-10.

The Inventory to current ratio had raised up to 0.44 in the year 2010-11.

At present the current ratio of the company was 0.68 i.e. in the year 2011-

12.

It is maximum (0.68) in the year 2011-12 the reason for maximum

inventory to current assets ratio is due to increase in both inventory and

current assets when compared to 2007-08.

The ratio is minimum (0.58) in the year 2007-08 and the reason for this is

due to high in both current assets and current liabilities.

The overall trend of the inventory to current assets ratio is in increasing

pattern and percentage change in inventory to current assets ratio is 0.15

between the period 2007-08 and 2011-12.

ECE

110

MBA Programme

ECE

110

MBA Programme

Inventory to Total assets ratio

This ratio shows the relationship between inventory to total assets.

Inventory is a part of the current assets of the company. It shows the portion of

assets tied up in inventory. Generally, a lower ratio is considered better.

Inventory to total assets ratio = Inventory / Total assets.

Table 4.5

Year Inventory Total Assets Ratio

2007-08 31,03,48,788/- 80,64,50,832/- 0.38:1

2008-09 30,63,84,482/- 83,33,33,223/- 0.36:1

2009-10 34,75,33,063/- 10,18,81,15,43/- 0.34:1

2010-11 36,20,50,215/- 1,22,36,42,213/- 0.29:1

2011-12 47,48,32,825/- 1,55,05,29,465/- 0.30:1

ECE

110

MBA Programme

Interpretation:

The Inventory to total assets ratio of the company in 2007-08 was 0.38, it

has been slightly decreased to 0.36, in the year 2008-09 and then

decreased to 0.34, in the year 2009-10.

The ratio had then decreased to 0.29, in the year 2010-11. At present the

current ratio of the company was 0.30 i.e. in the year 2011-12.

It is minimum (0.29) in the year 2010-11. The reason for minimum

inventory to total assets ratio is due to increase in total assets when

compared to 2007-08.

The ratio is maximum (0.38) in the year 2007-08, the reason for this is

low inventory and total assets.

The overall trend of the inventory to total assets ratio is in decreasing

pattern and percentage change in inventory to total assets ratio is 0.31

between the period 2007-08 and 2009-10.

ECE

110

MBA Programme

ECE

110

MBA Programme

Inventory to Working Capital Ratio

The Inventory to Working Capital ratio measures how well the

company is able to generate cash using Working Capital at its current inventory

level. An increasing Inventory to Working Capital ratio is generally a negative

sign, showing the company may be having operational problems. If a company

has too much Working Capital invested in Inventory, they may have difficulty

having enough Working Capital to make payments on Short-Term Liabilities and

Accounts Payable. This is a great ratio to be used with several others to really

pick apart the inner workings of a company.

Inventory to working capital ratio = Inventory / Working capital.

(or)

Inventory / (current assets - current liabilities).

Table 4.6

Year Inventory Working Capital Ratio

2007-08 31,03,48,788/- 34,10,77,935/- 0.90:1

2008-09 30,63,84,482/- 37,58,79,673/- 0.81:1

2009-10 34,75,33,063/- 41,69,42,693/- 0.83:1

2010-11 36,20,50,215/- 47,18,23,208/- 0.76:1

2011-12 47,48,32,825/- 59,10,23,660/- 0.80:1

ECE

110

MBA Programme

Interpretation:

The Inventory to working capital ratio of the company in 2007-08 was

0.90. It has been slightly decreased to 0.81 in the year 2008-09 and then

increased to 0.83 in the year 2009-10.

The ratio had then falled down to 0.76 in the year 2010-11. At present the

current ratio of the company was 0.80 i.e. in the year 2011-12.

The ratio is minimum (0.76) in the year 2010-11. The reason for this is

due to increase in working capital when compared to 2007-08.

The ratio is maximum in the (0.90) in the year 2007-08 and the reason is

low working capital in all the analyzed five years.

The overall trend of the inventory to working capital ratio is in decreasing

pattern and percentage change in inventory to working capital ratio is 0.18

between the period 2007-08 and 2010-11.

ECE

110

MBA Programme

ECE

110

MBA Programme

Tools and Spares to Inventory Ratio

This ratio shows the relationship between spares to Inventory. The

tools and spares are one of the important elements. Inventory means not only raw

materials, work-in-progress and finished goods. Tools and spares are also to be

taken as Inventory of the company. The high ratio shows that there is more

useless inventory in the company as the spares are used only occasionally.

Spares to Inventory ratio = Spares / Inventory

Table 4.7

Year Tools and Spares Inventory Ratio

2007-08 2,60,11,666/- 31,03,48,788/- 0.08:1

2008-09 2,61,29,141/- 30,63,84,482/- 0.08:1

2009-10 3,31,89,196/- 34,75,33,063/- 0.09:1

2010-11 3,74,99,504/- 36,20,50,215/- 0.10:1

2011-12 5,19,08,109/- 47,48,32,825/- 0.10:1

ECE

110

MBA Programme

Interpretation:

The spares to inventory ratio of the company in 2007-08 was 0.08, it

remains same in the year 2008-09 also, and then increased to 0.09 in the

year 2009-10

The ratio then raised up to 0.10 in the year 2010-11. At present the current

ratio of the company was 0.10 i.e. in the year 2011-12.

It is maximum (0.10) in the years 2010-11 & 2011-12 and minimum

(0.08) in the year 2007-08 & 2008-09. The reason for maximum tools &

spares to inventory ratio is due to increase in both tools & spares and

inventory when compared to 2007-08 & 2008-09.

The overall trend of the tools & spares to inventory ratio is in increasing

pattern and percentage change in tools & spares to inventory ratio is 0.25

between the period 2007-08 and 2011-12.

ECE

110

MBA Programme

ECE

110

MBA Programme

ECE

110

MBA Programme

Interpretation:

There are three items in which comes under category A Ramya Spinning

mills Pvt. Ltd.. These items comprise 76% of total cost and 21% of total

volume which includes cotton lint, cotton yarn, cotton seed oil.

The B category inventory in Ramya Spinning mills Pvt. Ltd.comprises of

one item which occupy about 18% of total cost and 47% of total volume

which includes cotton seed extraction.

There are three items which comes under C category in Ramya Spinning

mills Pvt. Ltd.. These generally occupy 6% of total cost and 32% of total

volume which includes cotton seed, cotton seed hulls, linters.

ECE

110

MBA Programme

ECE

110

MBA Programme

ECE

110

MBA Programme

Interpretation:

There are three items in Ramya spinning mills Pvt. Ltd. which comes

under category A. These items comprise 75% of total cost and 21% of

total volume. These items include cotton lint, cotton yarn, cotton seed oil.

The B category inventory in Ramya Spinning mills Pvt. Ltd. comprises of

one item which occupy about 16% of total cost and 46% of total volume.

These items include cotton seed extraction.

There are three items which comes under C category in Ramya Spinning

mills Pvt. Ltd. These generally occupy 9% of total cost and 33% of total

volume which includes cotton seed, cotton seed hulls, and linters.

ECE

110

MBA Programme

ECE

110

MBA Programme

ECE

110

MBA Programme

Interpretation:

There are two items in Ramya Spinning mills Pvt. Ltd. which comes

under category A. These items comprise 70% of total cost and 16% of

total volume. These items include cotton yarn, cotton seed oil.

The B category inventory in Ramya Spinning mills Pvt. Ltd. comprises of

one item which occupy about 22% of total cost and 51% of total volume.

These items include cotton seed extraction.

There are two items which comes under C category in Ramya Spinning

mills Pvt. Ltd. These generally occupy 8% of total cost and 33% of total

volume which includes cotton seed hulls, linters.

ECE

110

MBA Programme

ECE

110

MBA Programme

ECE

110

MBA Programme

Interpretation:

There are two items in Ramya Spinning mills Pvt. Ltd. which comes

under category A. These items comprise 71% of total cost and 17% of

total volume. These items include cotton yarn, cotton seed oil.

The B category inventory in Ramya Spinning mills Pvt. Ltd. comprises of

one item which occupy about 20% of total cost and 50% of total volume.

These items include cotton seed extraction.

There are two items which comes under C category in Ramya Spinning

mills Pvt. Ltd. These generally occupy 9% of total cost and 33% of total

volume which includes cotton seed hulls, linters.

ECE

110

MBA Programme

ECE

110

MBA Programme

ECE

110

MBA Programme

Interpretation:

There are two items in Ramya Spinning mills Pvt. Ltd. which comes

under category A. These items comprise 67% of total cost and 21% of

total volume. These items include cotton yarn, cotton seed oil.

The B category inventory in Ramya Spinning mills Pvt. Ltd. comprises of

one item which occupy about 24% of total cost and 68% of total volume.

These items include cotton seed extraction.

There are two items which comes under C category in Ramya Spinning

mills Pvt. Ltd. These generally occupy 9% of total cost and 11% of total

volume which includes cotton seed hulls, linters.

ECE

110

MBA Programme

ECE

110

MBA Programme

Findings:

From the study it has been observed that the ABC analysis in the year

2007-08 indicates that the category ‘A’ items forms a proportion i.e. 21%

of total units of inventory, but represents highest ratio 76% of total value.

On the other hand category ‘C’ items represent 32% of total units and only

6% of total value. ‘B’ items occupies in between i.e. 47% of total units

and 18% of total value.

From the study it has been observed that the ABC analysis in the year

2008-09 indicates that the category ‘A’ items forms a proportion of 21%

of total units of inventory, but represents highest ratio 75% of total value.

On the other hand a ‘C’ item occupies 33% of total units and 9% of total

value. Category ‘B’ items represents 46% of total units and only 16% of

total value.

From the study it has been observed that the ABC analysis in the year

2009-10 indicates that the category ‘A’ items forms a proportion of 16%

of total units of inventory, but represents highest ratio 70% of total value.

On the other hand ‘B’ items occupies 51% of total units and 22% of total

value and category ‘C’ items represents 33% of total units and a nominal

value of 8% of total value.

From the study it has been observed that the ABC analysis in the year

2010-11 indicates that the category ‘A’ items forms a proportion i.e. 17%

of total units of inventory, but represents highest ratio 71% of total value.

On the other hand category ‘C’ items represent 33% of total units and only

9% of total value. ‘B’ items occupies in between i.e. 50% of total units

and 20% of total value.

ECE

110

MBA Programme

From the study it has been observed that the ABC analysis in the year

2011-12 indicates that the category ‘A’ items forms a proportion i.e. 21%

of total units of inventory, but represents highest ratio 67% of total value.

On the other hand category ‘C’ items represent 11% of total units and only

9% of total value. ‘B’ items occupies in between i.e. 68% of total units

and 24% of total value.

For the period of the study on an average ‘A’ category items of total

inventory comprises of 19% of total units and 71% of total value.

For the period of the study on average ‘B’ category items of total

inventory comprises of 49% of total units and 20% of total value.

For the period of the study on average ‘C’ category items of total

inventory comprises of 32% of total units and 9% of total value.

The overall trend of the current ratio at Ramya Sppining Mills Pvt Ltd., is

in increasing pattern & percentage change in current ratio is 4.85 which is

satisfied.

The overall trend of the quick ratio at Ramya Sppining Mills Pvt Ltd. is in

fluctuating & pattern and percentage change in quick ratio is 2.89 which is

satisfied.

The overall trend of the inventory Turnover ratio at Ramya Sppining Mills

Pvt Ltd is decreasing pattern & percentage change in inventory turnover

ratio is 53.56 which is satisfied.

The overall trend of the inventory to current assets ratio at Ramya

Sppining Mills Pvt Ltd, is increasing pattern and percentage changing is

0.38 which is unsatisfied.

The overall trend of the inventory to total assets ratio at Ramya Sppining

Mills Pvt Ltd, is increasing pattern and percentage change in inventory to

total assets ratio is 0.07 which is unsatisfied.

ECE

110

MBA Programme

Suggestions:

It is suggested that Ramya Spinning mills Pvt. Ltd. needs to have a strict

inventory control and better inventory management in relation to category

‘A’ which includes cotton lint, cotton yarn, cotton seed oil.

It has been recommended that Ramya Spinning mills Pvt. Ltd. needs to

give nominal importance and moderate control in relation to category ‘B’

which includes cotton seed extraction.

It is suggested that Ramya Spinning mills Pvt. Ltd. needs to give least

importance in relation to category ‘C’ which includes cotton seed, linters,

cotton seed hull.

It has been recommended that the company needs to maintain the

inventory turnover ratio at optimum level.

It is suggested that the inventory to current assets has to be maintained

optimum level.

It is suggested that the company has to maintain same level of inventory

and total assets as to retain the inventory to total assets ratio.

It has been recommended that the inventory to working capital ratio of

Ramya Spinning mills Pvt. Ltd. should be improved.

It is suggested that the tools & spares in the inventory of Ramya Spinning

mills Pvt. Ltd. should be reduced.

ECE

110

MBA Programme

The higher current ratio of company indicates inadequate of funds. It is

suggested that the company has better to invest the funds in different

investment alternatives.

The company has high quick ratio, so it is an indication that the firm is

liquid and has ability to meet its current or liquid liabilities in time. It is

suggested that the company has to maintain the same level.

ECE

110

MBA Programme

CONCLUSION:

The economic life of any company depends on some important

financial aspects like profits, expenses, turnover etc. A careful analysis of these

areas are very much essential for the success and survival of the company. For

this purpose Inventory management with help of technique like ABC analysis is

to be carried out. A study of this type is very much useful to any company to

keep in to the different financial aspects and to take some measures to improve.

In my view the inventory management of the company is supplying a vital

information about the inventory of the company in all aspects as per the ABC

analysis. The company as maintain optimum level of inventory as for the

requirements and reached their goals.

ECE

110

MBA Programme

BIBILOGRAPHY:-

FINANCIAL MANAGEMENT - I.M PANDEY

FINANCIAL MANAGEMENT – PRASANNA CHANRDRA

FINANCIAL MANAGEMENT – M.Y.KHAN & JAIN

FINANCIAL MANAGEMENT – V.K.BHALLA

WEBSITES:

www.ramya spinning mills.com

www.cci.com

www.cab.gov.in

www.aboutcotton.com

www.historyofcotton.com

ECE