INVENTORY MANAGEMENT IN MALABAR CEMENTS

LIMITED

by

MAHIMA VV

(2016-31-012)

MAJOR PROJECT REPORT

Submitted in partial fulfilment of the

requirements for the Post Graduate Degree of

MBA IN AGRIBUSINESS MANAGEMENT

^ Faculty of Agriculture

Kerala Agricultural University

COLLEGE OF CO-OPERATION,BANKING AND MANAGEMENT

VELLANIKKARA,THRISSUR- 680656

KERALA,INDIA

2018
DECLARATION
DECLARATION

I hereby declare that this project report entitled Inventory Management in Malabar
Cements limited is a bonafide record of work done by me during the course of project work and
that it has not previously formed the basis for the award to me for any degree/diploma,
associateship, fellowship or other similar title of any other University or Society.

IMoil——
Place: Vellanikara MAHIMA V V

Date: (2016-31-012)
%-
CERTIFICATE
CERTIFICATE

Certified that this project report entitled "INVENTORY MANAGEMENT IN

MALABAR CEMENTS LIMITED" is a record of project work done by MAHIMA V V

(2016-31-012) under my guidance and supervision and that it has not previously formed the

basis for the award of any degree, fellowship, or associateship to her.

Vellanikkara, PROF. M. MOHANAN

Date: Associate Professor (Retd.)
Dept. of Rural Marketing Management
College of Co-operation Banking and Management
Kerala Agricultural University
Vellanikkara, Thrissur
A CKNO WLEDGEMENT
ACKNOWLEDGEMENT

T This report could not have been in its presentform without the timely advice, guidance, help and
prayers of an ample lot of well-wishers. To them, who had remained with us as a constant
inspiration, we place our advent resolution.

I would like to record our gratitude to my guide PROF .M. MOHANAN, Associate Professor
(Retd.), Dept. ofRural Marketing Management,for his advice and guidance in every stage of this
work, even in the midst of his busy schedules. Without his constant support and invaluable
advice, this work could not have reached the stage ofsuccessful completion.

I would like to place record of my heartfelt thanks to Dr. P. SHAHEENA, Associate

Dean, CCBM and Dr. E.G. RANJIT KUMAR, Director, MBA(ABM),Kerala Agricultural
University,for their constant inspiration and motivation.
express our heartfelt thanks to Mr. K.P. SATHIAN, Librarian, and other library staffs of CCBM
for all their help and support.

>
/ thank all the teachers of College of Co-operation, Banking and Management, for giving
us necessary suggestions. Word of thanks to all the office staff for all the help given by
them. In addition. I like to thank all the staffofcentral library who have extended a hand ofhelp.

I take this opportunity to thank my family, friends including classmates, seniors and juniors for
their unforgettable affection and support extended to us.

Above all, i bow my head before the Almighty, without whose invisible hands above our head, this
report would not have been possible.

Finally, i would like to thank everybody who was important to the successful realization of this
report, as well as expressing my apology that we could not mention personally one by one.

For any errors or inadequacies that may remain in this work, of course the responsibility
is entirely my own.

Mahima V V
CONTENTS

8
Table of contents
Chapter No. Title Page.No.
1 Design of the study 1-6

2 Review of literature 7-22

3 A conceptual frame work- 23-32

inventory management

4 Industry and company profile 33-46

5 Data analysis and Interpretation 47-67

6 Summary of Findings, Suggestions and 68-71
Conclusion

Bibliography 72-76

Appendix
LIST OF TABLES

\o
LIST OF TABLES

Table No. Title Page No.

4.1 Cement Plants in India 30

5.1 Percentage of Consumption Value and Stock 43

Keeping Units for "ABC" Classification

5.2 Holding Period of Aggregate Inventory 45

5.3 Holding Period of Aggregate Inventory - A 46

Comparison with Tandon Committee Norms

5.4 Raw material & spares holding period 47

5.5 Holding Period of Raw materials and Spares -A 48

Comparison with Tandon Committee Norms

5.6 Work in process conversion period 49

5.1 Holding Period of Work-in-Progress - Comparison 50

with Tandon Committee Norms

5.8 Finished goods holding period 51

5.9 Holding Period of Finished Goods - A Comparison 52

with Tandon Committee Norms

5.10 Operating Cycle 53

Table. No Title Page.no

55

5.12 Composition of inventory

5.13 Current ratio 56

5.14 Quick Ratio 58

5.15 Return on Investment of Malabar Cements 59

Limited

5.16 Net Profit Ratio 60

1*

List offigures

13
List offigures
Figure No. Title Page No,

4.1 Production of cement 31

4.2 Domestic cement 31

consumption
4.3 Capacity utilization and 32

demand
Chapter 1
DESIGN OF THE STUDY
Chapter I
DESIGN OF THE STUDY

1.1 Introduction

The control and maintenance of inventory is a problem common to all

organizations in any sector of the economy. Inventories are common to agriculture,
manufacturers, wholesalers, retailers, hospitals, churches, prisons, zoos, universities,
and national, state, and local Governments. Indeed, inventories are also relevant to the
family unit in relation to food, clothing, medicines, toiletries, and so forth. On an
aggregate national basis, the total investment in inventory represents a sizable portion
of the Gross National Product. The term "inventory" implies the aggregate of tangible
assets which are finished goods (saleable), work-in-progress (convertible), and
materials and supplies (consumables). Since inventories reflect the investment of a
firm's funds, it is necessary to have an efficient management of inventory. A firm, in
order to survive, should have requisite level of inventories i.e. neither inadequate nor
excessive. Therefore, with the help of an efficient inventory management, a proper
balance between these two extreme situations should be maintained for the smooth

operation of business.

At the enterprise level, inventory holding assumes greater importance, as

inventories constitute a large proportion of the total assets of many concerns. It
requires a substantial investment of capital besides involving costs of storage and
handling as well as risk of damage, loss and obsolescence. In order to minimize costs
and also to ensure that the capital is not unnecessarily locked up, inventories must be
efficiently managed. Errors in inventory management cannot be easily rectified, as it
is the least liquid among all the current assets. The major problem of inventory
control is to maximize profitability by balancing investment cost of materials against
what is required to sustain smooth operations.

Proper control over inventories provides the management with flexibility in

making purchases systematically rather than buying strictly according to the
production schedule and hand to mouth supplies. It also permits flexibility in
production management. Though the production need not be geared to the immediate
sales, this does not warrant increasing the level of inventories indiscriminately.

|b
Efficient management aims at increasing the level of inventories as long as the
resulting economies and benefits exceed the total cost of holding such inventories.

It is also noted that there is not much appreciation of the need for effective
inventory management in the Indian context, possibly due to a sheltered market, a
shortage situation and hence a fear of stock-outs which would go against "production
at any cost". Therefore, investment in inventories should be subjected to rigorous
control that every rupee of investment in inventory has contributed to increased
profitability. Inventory enables the firm to achieve better working results and
reduction in working capital.

Inventory management broadly comprises developing, implementing and

reviewing inventory policies relating to procurement, storage, use, sale and disposal
of inventories to achieve the requisite service level while keeping the investment in
inventories within the financial constraints set by the top management. Inventory
management is not just a concern during the monitoring stage in which production is
taking place.

1.2 Statement of the problem

Infrastructure development has remarkably grown in the world over the years.
Cement is one of the most preferred inputs for the infrastructure development. The
global demand for this vital input of infrastructure has been growing every year. India
is the world's second largest producer of cement after China with industry capacity of
over 200 million tonnes. With the boost given by the Government to various
infrastructure projects like road network and housing facilities, growth in the cement
consumption is anticipated in the coming years. In order to meet the expanding
demand, cement companies are fast developing new plants. India's total cement
production capacity is nearly 455 million tonnes, as of 2017-18. The boom in housing,
focused investment in infrastructure and the rise in retail malls will augur well for the
cement industry in the near future.

The cement industry is going through its boom period with full capacity
utilization. Powered by the annual Gross Domestic Product(GDP)growth of about 8
per cent, the annual demand for cement in the country continues to grow at 8-10
percent. In the earlier years, inventory management was treated as a cost centre, since
purchasing department is spending money on materials while stores holding huge

|1
inventory of materials, blocking money and space. Progressive management has since
reorganized that inventory management can provide opportunities to reduce
manufacturing costs and can be treated as profit centre.

Inventory is one of the key determinants of the productivity of cement

industry. The operating efficiency of the cement industry is judged by its capacity
utilization and economical use of major inputs such as limestone, coal, gypsum, stores
and spares, and power consumption per tonne of cement production. Inventory
management plays an important role in the cement industry both in production of new
assets and operational maintenance of existing assets. Therefore, the continuous
availability is a prime requirement for the uninterrupted working and better capacity
utilization.

Cement industry occupies an important position in the industrial map of

Kerala. It is a matter of concern that, the cement industry in Kerala is not making use
of their full capacity utilization. Malabar Cements Ltd is a fully owned Government
of Kerala undertaking contributes to the developmental activities of the State by
supplying the basic construction material. The MCL in Palakkad is very much
concerned about the ever-increasing input cost, which are adversely affecting the
operating margin and output. With the reconstruction activity expected to place on
large scale followed by the bailout packages announced by the Government to
encounter the global meltdown, the demand for the cement in the state is expected to
be high. As a Government undertaking MCL must improve their production to meet
the increased demand. This brings the importance of inventory management in MCL.
Hence, A Study on Inventory Management in Malabar Cements Ltd, Walayar,
Palakkad is imdertaken.

1.3 Objectives

1. To study the inventory management system in Malabar Cements Ltd,

Walayar, Palakkad.
2. To analyse the efficiency of the inventory management system followed
by Malabar Cements Ltd, Walayar, Palakkad.

/S
1.4. Methodology

1.4.1 Organization ofstudy

The study was conducted in Malabar Cements Ltd, Walayar, Palakkad.

1.4.2 Data Source

The study was based on both primary and secondary data.

1.4.3. Period of study

The study was conducted using secondary data from 2006-16.

1.4.4. Data Collection

The primary data are collected from the inventory management authorities of
the company through interview schedules and direct observation.

Secondary data were collected from the annual reports published by Malabar
Cements Ltd, Walayar, Palakkad for the last 10 years, data regarding industrial
average were collected from CMIE websites, data regarding Tandon committee
standard norms were collected from RBI website and Cement industry details were
collected from Cement Manufacturing Association (CMA) annual report. The
secondary data were also collected from the standard text books relating to the topics,
leading journals, and newspapers.

1.4.5 Data Analysis

The study on the existing inventory management practices was done by using the
records of the organisation as well as by interviewing the concerned officials of
Malabar Cements Limited. Efficiency of inventory management is studied by using
statistical and accounting tools like ratios, percentage and average annual growth rate.
And efficiency of inventory management is also studied by comparing industry
average and Tandon Committee standard norms.

1.5 Variables Under the Study

The procurement planning, preparation of materials budget, fixation of stock

levels, inventory control techniques, method of purchasing and related aspects have
been studied as part of the first objective of the study. The efficiency of the inventory
management system of Malabar Cements Limited is analysed through computation of
4

1^=1
ratios and comparing with the industry averages and Tandon Committee Standard
Norms.

1.6. Scope of The Study

Inventory management has often meant too much inventory and too little
management or too little inventory and too much management. Proper management
and control of inventory not only solve the problem of liquidity but also increase the
profitability. Inventory establishes a link between the production and sales. It should
be available in proper quantity at all times neither more nor less then what is required.
The basic objective of inventory management is to optimize the size of the inventory
in a firm so that smooth performance of production and sales functions may be
possible at the minimum cost. Therefore, investment in inventories should be
subjected to rigorous control to ensure that every rupee of investment in inventory has
to be contributed for increased productivity and profitability.

Against this backdrop, a modest attempt has been made in this research work
to analyse the Size, Composition, Circulation, and Growth of inventory in the
Malabar Cements Ltd in Palakkad during the 10-year period commencing from 2006-
07 to 2015-16. The study also focuses on whether an efficient use of inventory
investment has been made by the company with reference to production. The
techniques employed by Malabar Cements Ltd in Palakkad to control of inventory is
also brought under the scope of the study.

1.7 Limitations

Published accounts are not always correct indicators of the company

performance. This is so, because a balance sheet may fail to reflect the average or
typical situation, since it is prepared as on a particular date. Further, companies may
often have recourse to window dressing, which may mislead the outsider and affect
the validity of comparisons.
Physical verification of inventories stocked in Malabar Cements Limited has
not been carried out.

This study is confined to the period of 10 years from 2006-16 onwards. The
full details regarding the variations of inventory in study period were not available.
1.8 Chapterisation of the study

The study is presented in six chapters. The first chapter Design of the
Study covers introduction, statement of the problem, research objectives,
methodology, scope, limitation and scheme of the study. The second chapter Review
of Literature examines the research gap. The Conceptual framework of the study is
presented in chapter in three. The fourth chapter presents the industry profile and
company profile-Malabar Cements Limited. The inventory management system and
the efficiency of inventory management is covered in fourth chapter. The last chapter
concludes with the summary of findings, conclusions and suggestions.
Chapter 2
REVIEW OF LITERA TURE
Chapter II

f Review of literature

A review of previous studies on inventory management is essential to understand the

nature and importance of inventory management and also to identify the areas already
investigated so that new areas hitherto unexplored may be studied in depth.

"Inter-firm Comparison in the Indian Cement Industry" is a research work conducted by

Charaborthy and Malla Reddy in the year 1976. The main purpose of this study is to
show the position of each firms in relation to the other firms within the industry. The
profitability ratios, proprietary ratios, liquidity ratios and other miscellaneous group ratios
are calculated and compared with the selected cement companies in India.

lyengar (1980) in his research work entitled, "An Empirical Study on Inventory
Management Practices in Indian Industry" mainly deals with the responsibility of
^ company management for better inventory management. The study highlights the fact
that the inventory management in India warrants a higher degree of sophistications in
approach and fiirther sharpening of the tools and techniques, rather than a sense of
resignation and disillusionment. The study concludes that, in the crucial areas of
forecasting materials requirements, classification and codification, standardization and
establishment of operating norms of inventories, a large ground still remains to be
explored, in most of the organizations.

Grablowsky (1984) in his article "Financial Management of Inventory" states that the
modem inventory management methods have not, until recently, been widely used by
small businesses, even though the concepts are not difficult to understand or apply.

In the year 1985, Bhawmik and Jain in their research article entitled "Practical Inventory
Control Models" deal with development and implementation of inventory control models
which have been successfully in paper mills. According to the authors inventory
W
management is a part of the overall management system. Hence its effectiveness depends
to a large extent on the working of the total management system. Various sub-systems of
the organization have to be matched with the inventory control system for the desired
results. Also, the inventory control system should be designed by taking into account the
peculiarities of different sub-systems of the organization.

In this article "Inventory Management in Iron and Steel", Harbans Lai Verma, (1989)
evaluated the practices and performance in inventory management in Iron and Steel
Industry in India. The study is divided into two sections, in the first section, an attempt
has been made to analyse the size, composition, circulation and the growth of the
inventory in the selected units during the period under study and in the second section
inventory control techniques adopted in the selected units. The study concludes with the
findings that almost all the selected units during the period of investigation have had
overstocking with serious repercussions on liquidity and profitability ofthe company.
Sharma and Appa Rao in their article published in the year 1990 titled "Indian Cement
Industry - A Regional Analysis", analyses the growth and performance of cement
industry in India and in the selected states namely, Andhra Pradesh, Bihar, Madhya
Pradesh, and Tamil Nadu. The study comprises two segments. The first segment analyses
the regional variations in the growth of cement industry by selecting certain indicators.
The second segment analyses the productivity trend in the cement industry, by taking into
account certain indicators like labour productivity, capital productivity, and total factors
productivity, etc.

Duclos (1993) in his article entitled "Hospital Inventory Management for Emergency
Demand" stated the role of the materials manager in the hospital system. A simulation
model of a hospital inventory system is developed to determine the relative significance
of several inventory system variations and their ability to operate successfully under
normal and emergency demand conditions. A typical hospital inventory management
operation system is described, and also the background and methodology to the model is
explained. The study challenges several common assumptions and reveals the importance
of review frequency.

Nirjhar Sarkar (1993) published an article titled "Fluctuation in Inventory and Its Impact
on Profitability". According to the author, the profit and loss statement drawn under the
conventional method of accounting are apt and err in reflecting the actual production
department on the ground that fluctuating inventory levels always tend to create or

'3'h
liquidate the hidden profits as the case may be. The statement, therefore, should be such
that the periodic production performance could be disclosed in financial terms. The
author feels that the principle of inventory valuation at cost or market value whichever is
lower may be considered as the main issue.

Man Steven (1994) conducted a research on "A Comparative Study on Indian Airlines
Limited and Air India Corporation Limited". In the study, he analyses the size of
inventory by progressive growth percentage. He measures the overall effectiveness of
inventory policies by calculating the turnover of inventory. He also evaluates the
relationship between inventory to current assets, inventory to total assets, inventory to
working capital, and inventory to capital employed. He concludes the study by saying
that the concept of optimum inventory is never followed in both the study units. He also
finds out that, the effort of these two companies to optimize the size of inventory do not
lay full emphasis on the absolute reduction of inventory volume itself. He also suggests
that some ratio tests which provide good insight into the extent of overstocking or under
stocking shall be frequently applied to determine the value of inventory.

Nagen N. Nagarur, Tai-san Hu and Nirmal K. Baid,(1994) in their article "A Computer
Based Inventory Management System for Spare Parts" deals with inventory management
practices for spare parts in a service branch of an office automation company. Inventory
management of the spare parts is a very important part of the activities of the company. If
the parts are under stocked, then the defective computers cannot be serviced, resulting in
customer dissatisfaction. On the other hand, if the parts are overstocked, the holding costs
are high. The study mainly deals with the maintenance of optimal stock of inventory in
the industry.

Structural Analysis of Cement Industry" a separate study by Chandrasekaran (1994)

gives an insight into various interdependencies that exit among the firms operating in the
cement industry. The author absorbs the changes in size and technological adjustments by
way of expansion and modernization. He concludes the study by saying that the mini and
tiny cement plants which came into existence in 1980's could not thrive in competitive
environment.

'25
Knutton (1995) in his article "Inventory Management in Kid's Stuff at MB Ireland"
points out the new inventory management system, which contributes to major advantages
of lead time reductions, stock accuracy, maintenance of a two-hour stock delivery time
from warehouse to shop floor, easy identification of bottlenecks and the automatic
instruction of warehouse operators on inventory requirements.

Jawaid Ghani (1996) in his study "Current Practices in Retail Inventory Management"
analysed the procedures to be employed by the different retail establishments for the
effective inventory management. He recommended for the computer-based systems for
tracking purchases and sales, and for supporting reordering decisions and overall
inventory control. A key benefit is more relevant, timely, and accurate information
resulting in improved customer service levels.

Jason T. Barber and Frank J. Dooley (1996) in their study "Inventory Practices of Flour
Milling Firms" analyse the inventory management practices in flour mills in Kamataka.
The study specifically deals with the inventory carrying cost in the industry. The ways
and means of measuring the inventory costs is the focus ofthe study.

Chandrabose (1997) in his Doctoral thesis entitled "Inventory Management in Public

Sector Electrical Industry in Kerala" analysed the inventory management policy of the
public sector electrical industrial units in Kerala. The scope of the study is limited to the
assessment of saving in inventories of electrical products due to inventory management.
According to him, the inventory management policy of the Public Sector Electrical
Industry in Kerala has the direct influence on its profitability and risk. The liquidity on
the electrical units can be strengthened by increasing the level of investment in inventory.
But increased liquidity through increased levels of inventory decreases its returns because
more funds will be tied up in current assets that are absolutely not necessary. To raise the
rate of return the liquidity will have to be sacrificed by reducing the levels of investment
in inventories. The major findings ofthe study are that the modem techniques ofselective
inventory control, just-in-time inventory, computers, and inventory audit will help to
reduce the inventory levels. The reduction ofthe level of inventory and timely disposal of
surplus of absolute items will help to increase turnover ratio as well.

10
In the year 1997, a study in "Inventory Management in Chemical Industry" was
undertaken by Rajeswar Rao and Natarajan. The study examines the component wise
impact on inventory management in the sample units selected from the small-scale
sectors. For this purpose, ratio of raw materials to current assets, work-in-progress to
current assets, finished goods to current assets are examined. The study exposes the poor
performance of sales and material utilization. From the analysis, the researcher makes it
clear that the sample units under the study are not in consistent in raising their inventory
to productivity,

Omprakash Kajipet and Krishnama Chary (1997) did an extensive research on "Inventory
Management in Selected Paper Mills of Andhra Pradesh- Some Reflections". The research
work broadly covers the various aspects of inventory management in the context of paper
mills in Andhra Pradesh, such as size and level of investment in inventories, justification
and the extent of use of such investment techniques used in the control and management
of inventory and the implications for future expansion and growth of paper mills in
Andhra Pradesh. The major findings of the study are that the amount of investment in
inventory is relatively larger in the study units with lower inventory turnover. The study
also noticed the absence of effective inventory control and management in the study area.
It concludes with a categorical statement that there is a wide scope for further
improvement in the area of inventory management so that the paper mills can expand and
growth in future.

In the year 1998, a study was conducted on the "Inventory Behaviour in Cement Industry
of Andhra Pradesh". It examines the input and output ratio and the trend in a sample of 15
cement companies for the period 1980-97. It also examines the influence of both financial
and non-financial variables on the inventory holdings. The emphasis of the study is on the
total inventory rather than on raw material inventory because in the cement industry this
input is not affected by business cyclical factors and its share in the total inventory is very
marginal.

Tiwari (1998) in his article entitled "Cost Reduction in Cement Industry" evaluates the
performance of Indian cement industry. He analyses the consumption pattern of spares and
stores in cement units. He also evaluates the consumption of power and coal during the

11
production of cement. The author strongly recommends for avoiding the emergency
purchases which are generally quite expensive. Proper material planning and intending
procedure should be followed. The author also identifies procurement and storage of raw
materials is another area where an effective balance has to be maintained between heavy
stocks and stock outs. Items like coal, gypsum, brickbats and limestone are very important
and may cause stoppage of production, if exhausted. At the same time excessive stocks of
raw materials procured from outside causes increase in working capital and consequently
increase in the interest burden. The author strongly recommends for the introduction of
regular cost audit and energy audit for better inventory management and smooth
production.

Gangadhar Darbha (1999) in his article entitled "Financial Factors, Inventory Investment
and Economic Activity -some Empirical Evidence for India", attempts to make a model
for the lead-lag relations between the corporate sales, output, inventories, borrowings and
savings, with a view to analyse the extent to which the changes in inventory holdings
account changes in economic activity, and the relative responsiveness of inventory
holdings to the changes in real and financial variables.

Navin Chandra Joshi (1999) in his article entitled "Inventory Management Re-defined"
emphasizes the importance of maintaining a fair degree of control on the levels of
inventory. The size of the inventory should be based on some sound management
practices and principles. As per his view, an inventory manager should concentrate
equally on procuring, issuing and maintaining the inventory.

Khairy A.H. Kobbacy, and Yansong Liang (1999) in their article "Towards the
Development of an Intelligent Inventory Management System" propose a system to
achieve an intelligent inventory management system by providing automatic demand and
lead time pattern identification and the model selection facilities. The process of demand
pattern identification together with the statistical tests is discussed.

Hari Shreeram Abhyankar (1999) in his study titled "Inventory Control for High
Technology Capital Equipment Firms" recommends for the single product inventory
model subject to non- stationary demand. This research also provides some insight into the

12

2.^
viability of a model that should be implemented to assess the role of intermediate-
decoupling inventories in non-stationary demand environments. This model could also
serve as a decision support tool in configuring finished goods inventories as well as
intermediate-decoupling inventories in practice.

Brigadier R. Sarin (2000) looks at the spring -offs and advantages which can be derived
by applying technology to automatic tracking and reporting of stocks in organizations.
Based on the considerations like criticality, availability and sensitivity of an inventory,
weightage can be assigned while working out the inventory size. The study highlights an
important fact that the chasm between conventional materials support system and a true
result oriented technologically supported system is not easy to cross. The organization
should want to be on the other side to make the leap successfully. For this to happen one
has to be organizationally adaptive and forward thinking.

In his article, titled, "Effect of Setup Cost Inventory and Service Level", Guptha (2000)
analyses the cost reduction model in batch manufacturing situations. In a batch
manufacturing situation, a reduction in set up cost results in higher marginal reduction in
working stock, total variable cost, and safety stock. It also increases the average annual
service level. It makes strong economic sense to reduce setup cost from the existing level
to the minimum possible level, as each successive reduction brings in higher savings.
When setup cost approaches zero, there is a marked reduction in inventory and total
variable cost. He concludes the article by saying that the reduction in setup cost is
essential in reducing inventories, and total variable cost associated with inventories
including that ofthe safety stocks.

In the year 2001, a research work was undertaken by Garhwal for his Doctoral degree on
the topic "Purchase Management in Transport Undertakings". The study covers the
purchase management practices in Rajasthan State Road Transport Corporation. It
evaluates the various factors of purchase functions and reviews the inventory control and
the management ofthe transport undertakings. It covers a period of 10 years from 1980-81
to 1989-90. It also highlights the relationship between the total inventory surplus and
absolute inventory. The major finding of the study is that the investment in inventory can
be minimized by keeping cost of purchase and inventory carrying cost at an economic

13
level. According to the author, computerized data processing techniques should be used
for the purposeful and effective inventory control system. The scrap and absolute
^ materials should be disposed to maintain optimum level ofinventory.
Fred Hanssman (2001) conducted a survey on "Inventory Theory from the Operations
Research View Point". It reveals the methodology for fixing optimum level of inventory
by using operation research techniques. In his study, he says that "an inventory
management is idle resource of any kind, provided that such resource has economic
value." As such inventory management is basically concerned with the determination of
optimum level of such an idle resource to maintain continuous flow of production as well
as sales without resulting in either stock outs or pile-of-stocks.

In his book "Materials Management: A Study of Power Sector", Sansarsingh Katoch

(2002) makes an in-depth analysis regarding the purchase planning to ascertain the
materials forecasting and purchase policies. He also analyses the inventory control system
regarding the quantity to be stocked, ordering, and reordering points, routine procedure for
^ operating materials and inventory classification techniques. In the work, the author
proposes a semi centralized purchasing system. Centralized purchasing of all regular
project items has been proposed. At the same time, the field functionaries should have the
authority to procure small value items essential for restoring power or any other important
items up to a specified value in the event of stock out. In order to strengthen the stores
organization, he recommends for the two divisions namely, inventory control division and
stores division under the overall charge of an executive. He also works out a dual
inventory classification model which is an amalgamation of ABC and FSN classification.
He calls the proposed dual inventory classification model as SIC2 (Selected Inventory
Control Model Two Dimension Approach).

Nand Kishore Sharma (2002) has used some important tools and techniques for the
appraisal of financial position of Cement Industry in India. He suggests that the
^ management of cement companies should try to adopt cost reduction techniques in their
organizations. To increase the profitability position, he also suggests that inventories of
cement industry should be reduced to a minimum. Norms of inventory control both for
consumption and stock should be laid down on a scientific basis and in no case should

14

2^
they be violated in practice. The author also recommends that the sales department of
cement industry should be made more active to reduce the overstock of finished goods.

Neelamegam and Manickavel (2002) in their article "Inventory Management of Small-

Scale Industrial Units of Tamilnadu" try to ascertain the important aspects of inventory
control techniques adopted by the small-scale units in Tamilnadu. The study estimates, to
what extent the small-scale industrial units have achieved proper balance between
inventory overages and inventory shortages. It was conducted on the basis of type of
industry or the products manufactured. It ends with the conclusion that a palpable number
of small-scale units have achieved a proper balance between inventory excesses and
inventory shortages, i.e., they have maintained optimum stocking. But regarding the
adoption of inventory methods, it has been below the expectations.

In the year 2002, research work was undertaken on the "Management of Inventory in the
Cotton Textile Industry in India". The report analyses all those activities which are
involved in acquisition, storage and use of raw materials. The study also develops a
technique for controlling the purchase, use, and transformation of materials in an optimal
manner. The evaluation of inventory management is done taking into account the size,
composition, circulation, and growth of inventory. The study also makes a comparative
remark regarding the inventory holding ofthe company and Tandon Committee norms. To
conclude, in all the study units the inventories constitute the largest part of the total
current assets, and the size of inventory has the high positive correlation with output and
sales. The study also highlights, that there is overstocking of raw materials because of the
absence of a rational policy of purchase ofinventories.

Govinda Rao and Mohana Rao (2004) conducted a research work on "Impact of Working
Capital on Profitability in Cement Industry- A Correlation analysis". The prime objective
of the study is to analyse the impact of profitability on working capital in cement
industrial units in India. In the study, ten variables on working capital ratios have a close
interaction with profitability measures viz. current ratio, quick ratio, cash position ratio,
working capital turnover ratio, inventory turnover ratio, debtors' turnover ratio, cash
turnover ratio, working capital to total assets ratio, and current assets turnover ratio. The
behaviour of these variables including profitability is selected for analysis by computing
15

3"
index numbers of the relevant data for 9 years. Profit before Interest and Tax (PBIT) is
analysed for studying and understanding the impact of profitability ratio in various
variables and vice versa. The study suggests the management to take very much care and
prudence. It needs revision of reviews, and right monitoring is also essential for the better
performance.

"Inventory Control System - A Summary" is an article written by Aravanan (2004). In this

article, he points out the various inventory management system and their merits and
drawbacks. Control and maintenance of inventory is a problem common to all
organizations. The author feels that different types of organization have the different
inventory management problems. He suggests that the organization should be classified as
retail, wholesale/distribution and manufacturing, so that the inventory problem can be
generally delineated. The crux of article is to concentrate on the various inventory control
system on the basis of different organizations. In the conclusion part, he points out that a
good inventory control system minimizes the possibilities of delays in production. It
estimates duplication in ordering and encourages a better utilization of available materials.
It is also essential for an efficient accounting system. This is especially true for the
materials aspects of cost accounting. It also stimulates respect for the material and
minimizes losses caused by damages in careless handling.

Anitha (2004) in her article titled "Working Capital Management - An Appraisal of

Inventories" explains the role of inventory management for the effective management of
working capital. She lists out the various techniques available for effective inventory
management. She absorbs that the working capital management policies have a great
effect on firms' profitability, liquidity and its structural health. Hence, a financial manager
should chalk out appropriate working capital management policies in respect of each of
components of working capital including inventories.

Sudharsan (2004) conducted a research work on "Inventory Holding in Chemical and

Pharmaceutical Central Public Enterprises". The study attempts to test the optimality of
inventory holdings in these enterprises in relation to cost of sales by applying simple
regression model. The major finding of the study is that the inventory holdings of the
chemical and pharmaceutical enterprises do not move in the constant proportion to sales.

16

31
The study also highlights that the inventory holdings of the sample enterprises do not
move in square root relationship to sales and the enterprises did not enjoy economics of
scale in respect of inventory holding in relation to sales. The study ends with logical
conclusion that the chemicals and pharmaceutical central public enterprises should reduce
the inventory holding in terms of cost of production and cost of sales.

Govinda Rao (2004) wrote an article entitled, "Working Capital Management through
Fund Flow Statement - An Analysis of Cement Industry". The objective of the article is to
analyse the working capital through the fund flow statement. It covers only that company
who manufactures cement and allied product. It covers the period of4 years commencing
from 1990-91 to 1993-94. The study is based on published annual reports and account of
the sample company. It concludes by giving a categorical statement that the working
capital management including the management of inventory is a vital force for any
undertaking.

In the year 2005 "A Performance Appraisal through Inventory Management(A case study
of Stewarts and Lloyds of India Ltd.)" was carried out by Sudipta Ghosh to evaluate the
performance of Stewarts and Lloyds of India Ltd (Subsidiary to TISCO Limited) through
the techniques of inventory management. For this study, the inventory size of the company
was taken into consideration. Apart from this, inventory to current assets ratio, inventory
turnover ratio, and inventory holding ratio are also calculated and studied. Statistical
techniques have been used to assess the behaviour of the ratio. The study ends with the
conclusion that the company is efficient in the management of inventory during the period
under study and the company should maintain this level of efficiency in the years to come
also.

According to Graman (2006), argued that today, the cost of holding inventory, extensive
product proliferation and the risk of obsolescence, especially in rapidly changing
markets, make the expense of holding large inventories of finished goods excessive and
that high demand items naturally have safety stock assigned to them but in many
organizations there are so many very-low demand items that keeping any stock of these
items is unreasonably expensive, so they argue that companies must now provide good

17
service while maintaining minimal inventories. Therefore, inventory management
approaches are essential aspects of any organization.

According to Shah and Shin (2007), investigate the relationship among IT investment,
inventory, and financial performance with industry sector level data of 1960 to 1999.
They find that lower inventory levels lead to higher financial performance in
manufacturing sector. Their conclusion is that there exists indirect effect on financial
performance through inventory management from IT investment.

According to Tersine et.al (2008), traditionally, inventories caused conflicts between

functional units within a company or between the companies. For example, within a
company, purchasing, production, and marketing people want to build a high level of
inventory for raw material cost reduction, efficient production run, and customer service
level, while warehousing and finance people want to reduce the inventory level for
storage space and economic reasons. As global competition between suppliers in the open
markets has increased, power has been shifted from suppliers to customers. Therefore,
the customer's need to reduce the inventory based on fi-equent small lot orders has
resulted in their partners holding the inventory.

According to Capkun et al. (2009), found a significant positive correlation between

inventory performance and measures of financial performance in manufacturing
companies over 26-year period from 1980 to 2005.Profitability is a concept that a lot of
executives and shareholders put emphasis on. This shows them that their company is
operating at a level to where more money is coming in than leaving the company.

According to Adeyemi and Salami (2010), they conducted a study of Coca-Cola Bottling
Company, lorin plant, Nigeria, for evaluating the inventory management system. The
study revealed that inventory problems of too great or too small quantities on hand can
cause business failures. If a manufacture experiences stock-out of a critical inventory
item, production halts could result. Moreover, a shopper expects the retailer to carry the
item wanted. If an item is not stocked when the customer thinks it should be, the retailer
loses a customer not only on that item but also on many other items in the future. The
conclusion to a company's profit as well as increases its return on total assets.

18
According to Rajeev (2011), he analysed Inventory management in small & medium
enterprises and mentioned that there was a positive relationship between inventory and
sales and between inventory and production cost. This does not imply that inventory
automatically determines production costs or sales and vice-versa. However, it does show
that inventory levels can be a useful indication of what level of sales to expect. It is thus
recommended that the sales and marketing department of the company should pay closer
attention to the growth pattern of inventory usage and incorporate it in sales forecasting
technique.

According to James(2016) describes Inventory represents an important decision variable

at all stages of product manufacturing, distribution and sales, in addition to being a major
portion of current assets of many organizations. Too much and too low inventories bring
down the level of profitability of an organization. The study wanted to determine the
effects of inventory control on profitability of industrial and allied firms in Kenya. It was
explained by economic order quantity model (EOQ) which is based on minimization of
costs between stock holding and stock ordering. Co relational research design was
adopted. Two types of data were collected. Primary data was collected through the use of
a questionnaire and secondary data through the use of a record survey sheet. A sample of
71 industrial and allied companies was determined using stratified random sampling
technique from a target population of 399 industrial and allied firms in Nairobi City and
her environs. Data collected was analysed at two levels; descriptive and inferential data
analysis.

Conclusion

The above-mentioned review clearly states about the relevance of inventory

management. Proper management and control of inventory not only solve the problems
of liquidity but also increases the profitability. But so far, no other studies have been
conducted on the topic "Inventory management in Malabar Cements Limited". So, this
study focused the inventory management practices followed by Malabar Cements
Limited and the efficiency of inventory management system, particularly significant to
Malabar Cements Limited.

19
References

Charaborthy.S.K. and Maila Reddy.K, 1976, Inter-firm Comparison in the Indian Cement
Industry, Topics in Accounting andfinance, Oxford University Press, New Delhi.

lyengar, A.V.K, 1980, An Empirical Study on Inventory Management Practices in Indian

Industry, VORA Publisher's Private Limited, Bombay.

Grablowsky, B.J., 1984,"Financial Management of Inventory", Journal ofSmall

Business Management, Vol. 22, No.4.

Bhawmik, B and S.C.Jain., 1985, Practical Inventory Control Models, Productivity,

VoLXXVI, No.l.

HarBans Lai Verma, 1989, Inventory Management in Iron and Steel Industry,
Management of Working Capital, Deep & Deep Publications, New Delhi.

Sharma P.V. and Appa Rao. Y.V., 1990, Indian Cement Industry - A Regional Analysis,
Indian Journal ofRegional Science, Vol.XXII, No.2.

Duclos, L.K., 1993, Hospital Inventory Management for Emergency Demand,

International Journalfor Purchase and Materials Management, Vol. 29, No.4.

Nirjhar Sarkar, 1993,"Fluctuation in Inventory and its Impact on Profitability", The

Chartered Accountant, Vol.54, No. 5, August.

Man Steven, C., 1994, A Comparative Study an Indian Airlines Limited and Air India
Corporation Limited, The Management Accountant, Vol. XIV, No.6, January.

Nagen N. Nagarur, Tai-san Hu and Nirmal K. Baid, 1994, A Computer Based Inventory
Management System for Spareparts, Industrial Management and Data Systems, Vol. 94,
No.9.

Chandrasekaran, N., 1994, Structural Analysis of Cement Industry, MDI Management

Journal, Vol.7, No.l, January.

Knutton P, 1995, Inventory Management is Kid's Stuff at MB Ireland, Works Manager,

Vol. 48, No.3, March.

Jawaid Ghani 1996, Current Practices in Retail Inventory Management, Ph.D, thesis,
Lahore University of Management Sciences, October.

Jason T. Barber and Frank J. Dooley, 1996,Inventory Practices ofFlour Milling Firms,
Ph.D. thesis, the University Fargo, North Dakota, June.

20
Chandrabose.D, 1997, Inventory Management in Public Sector Electrical Industry in
Kerala, Ph.D. thesis. Cochin University of Science Technology, Cochin, March.

Rajeshwar Rao, O.K., R. Natarajan, and K.Venkat Janadhan Rao, 1997, Inventory
Management in Chemical Industry- A Study, Readings in Financial Management, RBSA
Pubilishers, Jaipur.

Omprakash Kajipet and Krishnama Chery.P., 1997, Inventory Management in Selected

Paper Mills of Andra Prathesh- Some Reflections, Research Bulletin, Vol. XIV,July
1996- June 1997.

Tiwari, R.S. 1998, Cost reduction in Cement Industry, The Management Accountant^
Vol.XII, No.7, November.

Gangadhar Darbha, 1999, Financial Factors, Inventory Investment and Economic

Activities Some Empirical Evidence for India, Journal ofQuantitative Economics,
Voi.l5,No.2, July.

Navin Chandra Joshi, 1999, Inventory Management Re-defined, Indian Management,

Vol.XX, No.3,May.

Khairy, A.M. Kobbacy, and Yansong Liang 1999, Towards the Development of an
Intelligent Inventory Management System,Integrated Manufacturing Systems, Vol.10,
No. 6.

Hari Shreeram Abhyankar 1999, Inventory Controlfor High Technology Capital

Equipment Firms, Ph.D. thesis, Sloan School of Management, Mumbai.

Brigvadier R.Sarin, 2000, Automating and Spare Parts Inventory Management,Indian

Management, Vol.23, No.3, February.

Garhwal, H.C., 2001,Purchase Management in Transport Undertakings, ABSA

Publishers, Jaipur.

Fred Hanssman, 1961, A Survey on Inventory Theory from the Operations Research,
Operations Research, New York, Vol.16, No.4, December.

Sansarsingh Katoch, 2002, Materials Management: A Study ofPower Sector, Anmol

Publications Private Limited, New Delhi.

Nand Kishore Sharma 2002, Financial Appraisal of Cement Industry in India, The
Management Accountant, Vol.XXV, No.3, August.

Neelamegam, R. and Manickavel S. 2002,, Inventory Management of Small Scale

Industrial Units of Tamilnadu, Abhigyan, Vol.XV, No.3, June.

21

36
Govinda Rao, D., 2004, Working Capital Management through Fund Flow Statement -
An Analysis of Cement Industry, Working Capital Management, Deep & Deep
Publications Pvt. Limited, New Delhi.

Aravanan.S., Inventory Control System - A Summary, Working Capital Management,

Deep & Deep Publications Pvt. Limited, New Delhi,2004.

Anitha, H.S., Working Capital Management - An Appraisal of Inventories, Working

Capital Management, Deep & Deep Publications Pvt. Limited, New Delhi, 2004.

Sudharsan, R,2004, Analysis of Inventory Behaviour - An Application Model Chemical

and Pharmaceutical Enterprises, The Management Accountant, Vol.XX, No.3,
November.

Govinda Rao, D., 2004, Working Capital Management through Fund Flow Statement -
An Analysis of Cement Industry, Working Capital Management, Deep & Deep
Publications Pvt. Limited, New Delhi.

Sudipta Ghosh, Performance Appraisal through Inventory Management(A case study of

Stewarts and Lloyds of India Ltd.), The Management Accountant, Vol. XXIV, No.3 July
2005.

22

31
Chapter 3
CONCEPTUAL FRAMEWORK - INVENTORY

MANAGEMENT

3^
Chapter 3

Inventory management - A Conceptual Frame Work

The dictionary meaning of inventory is stock of inventory. In accounting

language, it may mean stock of finished goods only. In a manufacturing concern it
may include raw materials, work in process, stores, etc. Inventory includes the
following things:

(a) Raw material

(b) Work-in-progress
(c) Consumables
(d) Finished goods
(e) Spares

3.1 Purpose/Benefits of Holding Inventories

There are three main purposes of motives of holding inventories:

(i) The Transaction Motive which facilitates continuous production and

timely execution of sales orders.
(ii) The Precautionary Motive which necessitates the holding of inventories
for meeting the unpredictable changes in demand and supplies of materials.
(Hi) The Speculative Motive which induces to keep inventories for taking
advantage of price fluctuations, saving in re-ordering costs and quantity
discounts, etc.
The investment in inventory is very high in most ofthe undertakings engaged in
manufacturing, whole-sale and retail trade. The amount of investment is sometimes
more in inventory than in other assets. About 90 per cent part of working capital is
invested in inventories. It is necessary for every management to give proper attention to
inventory management. A proper planning of purchasing, handling, storing and
accounting should form a part of inventory management. An efficient system of
inventory management will determine (a) what to purchase (b) how much to
purchase(c)from where to purchase(d) where to store, etc.

23

31
The purpose of inventory management is to keep the stocks in such a way
that neither there is over-stocking nor under-stocking. The over-stocking will mean
reduction of liquidity and starving of other production processes; under-stocking, on
the other hand, will result in stoppage of work. The investments in inventory should
keep in reasonable limits.

3.2 Objectives of Inventory Management

The main objectives of inventory management are operational and financial.

The operational objectives mean that the materials and spares should be available in
sufficient quantity so that work is not disrupted for want of inventory. The financial
objective means that investments in inventories should not remain idle and
minimum working capital should be locked in it. The following are the objectives
of inventory management:

(1) To ensure continuous supply of materials, spares and finished goods so that
production should not suffer at any time and the customers demand should
also be met.

(2) To avoid both over-stocking and under-stocking of inventory.

(3) To maintain investments in inventories at the optimum level as required by the

operational and sales activities.

(4) To keep material cost under control so that they contribute in reducing cost of
production and overall costs.

(5) To eliminate duplication in ordering or replenishing stocks. This is possible with

the help ofcentralizing purchases.
(6) To minimize losses through deterioration, pilferage, wastages and damages.
(7) To design proper organization for inventory management. A clear-cut
accountability should be fixed at various levels of the organization.
(8) To ensure perpetual inventory control so that materials shown in stock
ledgers should be actually lying in the stores.

24

liO
(9) To ensure right quality goods at reasonable prices. Suitable quality
standards will ensure proper quality of stocks. The price-analysis, the cost-
analysis and value-analysis will ensure payment of proper prices.
(10) To facilitate furnishing of data for short-term and long-term planning and
control of inventory.

3.3 Risk Associated with Inventory

The risk in inventory management signifies the chance that inventories

cannot be turned over into cash through normal sale without a loss. These risks are
due to following three factors:

1. Price decline: It may result from an increase in the market supply of products,
introduction of a new competitive product and price reduction by competitors.

2. Product deterioration: It may result due to holding a product too long or it may
occur when inventories are held under improper conditions of light, heat, humidity
and pressure.

3. Obsolescence: It is due to changes in customer taste, improvement changes in

customer taste, new production techniques, improvement in the product design,
specifications etc.

3.4 Costs Associated with Inventory

The followings are the costs which are associated with inventory:

1. Material Cost

2. Ordering Cost

3. Inventory Carrying Costs

4. Stock-out or Shortage costs

25
3.5 Tools and Techniques of Inventory Management

Effective inventory management requires an effective control system for

inventories. A proper inventory control not only helps in solving the acute
problem of liquidity but also increases profits and causes substantial reduction in
the working capital of the concern. The following are the important tools and
techniques of inventory management and control:

(1)Determination of Stock Levels

(2)Determination ofsafety stocks

(3)Selecting a proper System of Ordering for Inventory

(4)Determination ofEconomic Order Qty

(5)A-B-C Analysis

(6) VED Analysis

(7)JIT Analysis

(8)Inventory Turnover Ratio

(9)Ageing Schedule of Inventories

(10)Perpetual Inventory System

3.5.1 Determination of Stock Levels, Safety Stocks & EOQ

i. Determination of Stock Levels:

Carrying of too much and too little of inventories is detrimental to the firm. If the
inventory level is too little, the firm will face frequent stock-outs involving heavy
ordering cost and if the inventory level is high it will be unnecessary tie up of capital.
Therefore, an efficient inventory management requires that a firm should maintain an
optimum, level of inventory where inventory costs are the minimum and at the same

26
time there is no stock-out which may result in loss of sale or stoppage of production.
Various stock levels are discussed as such.

(a) Minimum Level: This represents the quantity of stock that should be held at all time,
stock level is normally not allowed falling below this level. This level of stock is a
buffer stock for use during emergencies. Fall in stock level below minimum level will
indicate potential danger to the business. Thus, extra efforts have to be taken to
expedite the supply.
Minimum Stock Level = Re-order Level -(Normal Consumption x Normal re
order Period)
The following factors are to be considered in fixing the minimum level:
(i) Nature of items of materials.
(ii) Minimum time required for delivery.
(iii) Rate ofconsumption of materials.
(iv) Stock-out costs which include loss of contribution margin, loss of
Goodwill etc.

(b)Re-ordering Level: When the quantity of materials reaches a certain figure then
fresh order is sent to get materials again. The order is sent before the materials reach
minimum stock level. The rate of ordering level is fixed between minimum level and
maximum level. The rate ofconsumption, number of days required replenishing the
stocks, and maximum quantities of materials required on any day are taken into account
while fixing re-ordering level. Re-ordering level is fixed with the following formula:

Re-ordering Level ^ Maximum Consumption x Maximum Re-order period

(c) Maximum Level: It is the quantity of materials beyond which a firm should not
exceed its stocks. If the quantity exceeds maximum level limit then it will be
overstocking. A firm should avoid overstocking because it will result in high material
costs. Overstocking will mean blocking of more working capital, more space for storing
the materials, more wastage of materials and more chances of losses from obsolescence.
Maximum stock level will depend upon the following factors:

(1)The availability of capital for the purchase of materials.

27
(2)The maximum requirements of materials at any point oftime.

(3)The availability of space for storing the materials.

(4)The rate ofconsumption of materials during lead time.

(5)The cost of maintaining the stores.

(6)The possibility of fluctuations in prices.

(7)The nature of materials; If the materials are perishable in nature, then they cannot be
stored for long.

(8) Availability of materials.

(9)Restrictions imposed by the Government

(10)The possibility ofchange in fashions will also affect the maximum level.

^ The following formula may be used for calculating maximum stock level:
Maximum stock level ^ Re-ordering v Level + Re-ordering Quantity-(Minimum
Consumption x Minimum Re-ordering period)

(a) Danger Level: It is the level beyond which materials should not fall in any case. If
danger level arises then immediate steps should be taken to replenish the stocks
even if more cost 15 incurred m arranging the materials. If materials are not
arranged immediately there is a possibility of stoppage of work. Danger level is
determined with the following formula:
Danger Level = Average Consumption x Maximum re-ordering period for
emergency purchases
(b) Average Stock Level: The average slock level is calculated as such;
Average Stock Level = Minimum Stock Level + 1/2 of re-ordering quantity
5r OR

Average Stock Level = Minimum Stock Level + Maximum Stock Level

28
3.5.2 Determination of Safety Stocks
Safety stock is a buffer to meet some unanticipated increase in usage. The
usage of inventory cannot be perfectly forecast. It fluctuates over a period of time.
The demand for materials may fluctuate and delivery of inventory may also be
delayed and in such a situation the firm can face a problem of stock-out. The stock
out can prove costly by affecting the smooth working of the concern. In order to
protect against the stock out arising out of usage fluctuations, firms usually maintain
some margin of safety stocks. The basic problem is to determine the level of quantity
of safety stocks. Two costs are involved in the determination of this stock i.e.
opportunity cost of stock-outs and the carrying costs. The stock-outs of raw materials
cause production disruption resulting in higher cost of production. Similarly, the
stock-outs of finished goods result in the failure ofthe firm in competition as the firm
cannot provide proper customer service. If a firm maintains low level of safety,
frequent stock-outs will occur resulting in the larger opportunity costs. On the other
hand, the target quantities of safety stocks involve higher carrying costs.

3.5.3 Ordering Systems of Inventory

The basic problem of inventory is to decide the re-order point. This point
indicates when an order should be placed. The order point is determined with the help
of these things:

(a) Average consumption rate,

(b)Duration of lead time,

(c) Economic order quantity

When the inventory is depleted to lead time consumption, the order should be
placed. There are three prevalent systems of ordering and a concern can choose any
one these:

(a)Fixed order quantity system generally known as economic order quantity

(EOQ)system;

29
(b)Fixed period order system or period re-ordering system or periodic review
system;

(c) Single order and scheduled part delivery system.

3.5.4 Economic Order Quantity(EOQ)

EOQ is an important factor in controlling the inventory. It is a quantity of

inventory which Can reasonably be ordered economically at a time. It is also
known as 'Standard Order Quantity', 'Economic Lot Size,' or 'Economical
Ordering Quantity'. In determining this point ordering costs and carrying costs are
taken into consideration. Ordering costs are basically the cost of getting an item of
inventory and it includes cost of placing an order. Carrying cost includes costs of
storage facilities, property insurance, loss of value through physical deterioration,
cost of obsolescence. Either of these two costs affects the profits of the firm
adversely and management tries to balance these two costs. The balancing or
reconciliation point is known as economic order quantity. The quantity may be
V
calculated with the help of the following formula:

EOQ

Where,

R = Annual quantity used (in units)

O = ordering cost per order/ Cost of placing an order

C = /Inventory carrying cost of one unit / carrying cost of one unit per year

Assumptions of EOQ:

While calculating EOQ the following assumptions are made:

1. The supply of goods is satisfactory. The goods are purchased whenever these are
needed.

2. The quantity to be purchased by the concern is certain

30

^6
3. The prices of goods are stable. It helps to stabilize carrying costs.

3.5.5 Just-in-Time(JIT)System

Japanese firms popularized the just-in-time (JIT) system in the world. In a

JIT system material or the manufactured components and parts arrive to the
manufacturing sites or stores just few hours before they are put to use. JIT system
eliminates the necessity of carrying large inventories and thus, saves carrying and
other related costs to the manufacturer. The system requires perfect understanding
and coordination between the manufacturer and suppliers in terms of the timing of
delivery and quality of the material. The success of the system depends on how
well a company manages its suppliers. The system puts tremendous pressure on
suppliers.

3.5.6 ABC Inventory Control System

Large numbers of firms have to maintain several types of inventories. It is

Y not desirable to keep the same degree of control on all the items. The firm should
pay maximum attention to those items whose value is the highest. The firm
should, therefore, classify inventories to identify which item should receive the
most effort in controlling. This analytical approach is called the ABC analysis.
The high value items are classified as 'A items' and would be under the highest
control. 'C items' represent relatively least value and would be under simple
control. 'B items' fall in between these two categories and requires reasonable
attention of management. The ABC analysis concentrates on important items and
is also known as control by importance and exception (CIE). This approach is also
known as proportionate value analysis(PVA).

3.5.7 VED Analysis

The VED analysis is used generally for spare parts. Spare parts are
classified as vital essential (E) and desirable (D). The vital spares are must for
running the concern smoothly and these must be stored adequately. The E types of
spares are also necessary but their stocks may be kept at low figures. The stocking

31

H1
of D type of spare may be avoided at times, if the lead time of these spares is less,
then stocking of these spares can be avoided.

3.5.8 Inventory Turnover Ratio

It indicates whether inventories have been used efficiently or not. The

purpose is to ensure the blocking of only required minimum funds in inventory.
Inventory conversion period may also be calculated to find the average time taken
for clearing the stocks.

T ^ r% Cost of goods sold (sales)

inventory Turnover Ratio =
Average stock

3.5.9 Ageing of Inventories

According to this method, an inventory is to be classified according to the

dates of their purchase or manufacture. Thus, schedule of inventories can be
prepared on the basis of the age of different items of inventories. Efforts should
be made to clear off the old inventories at the earliest.

3.5.10 Perpetual Inventory System

Perpetual inventory system implies maintenance of up-to-date stock

records. According to Weldon, it may be defined as "a method of recording stores
balances after every receipt and issue to facilitate regular checking and to obviate
closing down for stock-taking". The basic object of this system is to make
available details about the quantity and value of stock ofeach item at all time.

32
Chapter 4
INDUSTRY AND COMPANYPROFILE
Chapter IV

Industry and Company Profile

4.1 Cement Manufacturing Industry

The Indian cement industry, particularly cement industry in south India plays a
significant role in the country's economic development which generates substantial
revenue for the central and state Government through sales taxes and excise duties.
Cement is one of the key infrastructure industries. India, the world's second largest
producer of cement, the recent boom in infrastructure and the housing market has only
boosted its cement industry. Add to that an increasing global demand and a flurry of
activity in infrastructure projects - highways roads, bridges, ports and houses - has
sparked off a spate of mergers and acquisitions in the sector.

4.2 The Growth of Indian Cement Industry

India is one of the fastest growing economies in the world with one of the
Business to Business (B2B) market position by escalating India's share is apparent.
Accounting for 11 per cent of India's total gross domestic product side, the cement
industry is an important contribution in this category.

It is one of the main industries that plays a pivotal role in the growth and
expansion of a nation. This industry is one of the main beneficiaries of the infrastructure
boom in the country. The Indian cement industry is huge, and it has great production
capacity. Currently, the total capacity of cement industry is about 165 million tones,
which is the second largest in the world.

Cement is one of the vital constituents that is required for every construction
purpose, such as industrial, housing, and also for construction of infrastructures, such as
roads, ports, bridges, power plants, and so on. Thus, the cement industry is a significant
contributor to the revenue collection of the government. In India, the cement industry in
the initial stages grew very slowly and the supply struggled to meet the demands.
However, the scenario changed drastically after the liberalization period. The cement

33
industry began to grow and since then the supply of cement has always managed to keep
pace with its demand.

Today, the cement industry in India is one of the most advanced and pioneering
sectors in the country, and the cement industry has a huge potential for growth and
attracting new investments. The cement industry in India uses the most modem and
world-class technology. Also, because India has a high quantity and quality of limestone
deposits throughout the country, the cement industry promises huge potential for growth.

The govemment of India has set ambitious plans to increase the production of
cement in the country, and to attain the target the govemment has made huge investments
in the sector. The Department of Industrial Policy and Promotion, which falls under the
central Ministry of Commerce and Industry, is the agency that is responsible for the
development of the cement industry in the country. The agency is actively involved in
keeping track of the performance of cement companies in the country and provides
assistance and suitable incentives when required by the company. The department is also
involved in framing and administering the industrial policy for foreign direct investments
in the sector. Apart from formulating policies, the department also promotes the industry
to attract new foreign investments in the sector.

The Department of Industrial policy and promotion plays an active role in

promoting foreign investment in India in the cement industry by providing useful
information to the investors about the investment climate and opportunities in India. The
department also provides advice to prospective investors on various policies and
investment procedures.

In order to promote investment in the sector, this department has greatly

emphasized the development of good transportation facilities to ensure smooth
transportation of bulk cement. It also aims to support the investors by providing them
with R&D facilities and technological assistance. The cement industry in India has been
^ attracting several top-notch cement companies worldwide, which reflects the fact that this
industry holds huge potential for investment. Also, due to the boom in the housing sector
world-wide and the increased activity of the development of infrastructure, the demand

34
for cement is set to increase globally. Thus, the investors having nothing to lose and are
all set to benefit from investing in India's cement industry.

4.3 Indian Cement Market

India is the second biggest producer as well as consumer of cement in the world
and the total cement production in the country stood 283.50 million tonnes in 2016.
Domestic cement consumption grew 15.7 per cent CAGR during FYll-17 beating the
cement production in India, says a recent note by IBEF. Further cement the cement
industry is expected to grow at 6-7% in the current 2017-2018 fiscal year, which run s
from 1 April 2017 to 31 March 2018.

India is producing different varieties of cement like Ordinary Portland Cement

(OPC), Portland Pozzolana Cement(PPC), Portland Blast Furnace Slag Cement(PBFS),
Oil Well Cement, White Cement etc. TTiese varieties of cement are produced as per the
BIS (Bureau of India Standard) specifications and its quality is comparable with the best
in the world.

India has a lot of potential for development in the infrastructure and construction
sector and the cement sector is expected to largely benefit from it. Some of the recent
major government initiatives such as development of 100 and more smart cities are
expected to provide a major boost to the sector. Further as India's per capita consumption
of cement (190 kg as of March 2015) is much lesser than the developed & other
developing economies; there is a significant business opportunity to cater to the unmet &
rising demand. In order to meet the growing demand, cement companies are expected to
end up production by around 56 M T in the next 3 years, till 2019.It is also expected that
by 2025, cement production will reach to 550 million tonnes to meet the growing
domestic and export demand to other countries.

India's cement industry is a vital part of its economy, providing employment to

more than a million people, directly or indirectly. The price and distribution control of
cement was removed in 1989 and the cement industry was de-licensed in 1991 under the
Industrial (Development & Regulation) Act, 1951. Since then the Cement Industry has
progressed well both in capacity/ production and as well as in process technology.

35

<51-
Expecting such developments in the country and aided by suitable government
foreign policies, several foreign players such as Lafarge-Holcim, Heidelberg Cement, and
Vicat have invested in the country in the recent past. Availability ofraw material such as
limestone and coal are also some of the significant factors which aids the growth of this
sector. The Indian cement industry is also globally competitive with lowest energy
consumption and CO2 emissions. A part from fulfilling domestic cement requirements,
the industry also exports cement and clinker to around 30 countries across the globe.

4.4 Cement plants in India

There are around 146 function registered cement companies in India and out of
which 109 companies, main product is either cement or cement clinker. Of the total
capacity, 98 percent lies with the private sector and the rest with public sector, with the
top 20 companies accounting for around 70 per cent of the total production(CMIE)As of
2016, India has 209 large cement plants across states which together account for 97
percent of the total installed capacity, while 365 small plants account for the rest as
shown in below table. Of these total 209 large cement plants in India, 77 are located in
the states of Andhra Pradesh, Rajasthan and Tamil Nadu. Andhra Pradesh is the leading
state with 40 large cement plants, followed by Tamil Nadu and Rajasthan having 21 and
21 plants, respectively Major cement clusters include - Satna (Madhya Pradesh),
Gulbarga (Kamataka), Yerranguntla (Andhra Pradesh), Nalgonda (Andhra Pradesh) and
Chandoria (Rajasthan). Geographical distribution of cement plants in India with installed
capacity is also presented in Figure 5 where south is the key market for cement industry
with total installed capacity of 132.7 mtpa followed by north with total installed capacity
85.6 mtpa.

Table 4.1

Cement Plants in India

CEMENT INDUSTRY 2017

Large Cement Plants Mini Sl White Cement Plants
Cement Plants: 209 Cement Plants: 365
Installed Capacity: 378.3 mtpa Installed Capacity: 11.7 mtpa
Cement Production: 246.34 mt Cement Production: 33.66 mt
Source: IBEF, 2018

Notes: mtpa - Million Tonnes Per Annum

36
4.4.1 Production

Cement production in India has increased at a CAGR o f 6.44 per cent to 282.46
million tonnes over FY07-16 while in FY07 - 15 it was increased at a CAGR of 6.7 per
cent to 270.04 million tonnes which shows a slight decrease as compared to 2015. Further
as per the 12'^ Five Year Plan, cement production is expected to reach 407 million tonnes
by year 2017. In the past five years, the cement production in India grew from 207
million metric tonnes in 2010 up to 282.46 million in 2016, making it the second largest
cement producer globally. With construction expenditures of around 427 billion U.S.
dollars, India is fourth largest construction market worldwide.

Availability of fly-ash from thermal power plants and use of advance technology
has increased production of blended cement. The environment-friendly blended cement is
more cost-efficient to produce, as it requires lesser input of clinker and energy.

Figure 4.1
Production of cement (million tonnes)
407e

230 49 248.23 255.83 270.04 282.46

iei.3
61.3 174.3 186.9 . ■ I

1 1 1 1 1 1
FY07 FY08 FY09 FYIO FYll FY12 FY13 FY14 FY15 FY16 FY17

Source: Department of Industrial Policy & Promotion, Office of the Economic

Advisor, TechSci Research
Notes: E -Estimated

4.4.2 Domestic cement consumption

The country's per capita consumption is around 190 kg as of 2015 as compared to

/t
the world average of over 350 kg per capita, which shows great potential for growth in
Indian cement industry. Further domestic cement consumption has reached 324 million
tonnes in 2015 from 165.63 million tonnes in 2011. The consumption is further expected
to increase at a CAGR of 15.7 per cent during FYl 1-17 and reach 398 million tonnes as

37
shown in figure below. With the situation coming back to normal after demonetisation,
construction activities were seen to be picking up in January 2017. On the back of this,
demand for cement is expected to see gradual improvement in the coming months. The
below statistic displays India's cement consumption from 2011 through 2015 with
estimates for 2016 and 2017.

Figure 4.2
Domestic cement consumption
(million tonnes)

398
359
324

249
224 236

I I I I
FYll FY12 FY13 FY14 FY15 FY16 FY17

Source: IBEF 2017

4.4.3 Cement capacity utilisation and Demand

Despite limited capacity addition, capacity utilization of cement industry is likely
to remain stagnant in fiscal year 2017 as demand growth is expected to be weak, rating
agency ICRA said in a report. In the first seven months of FY17, demand grow thin the
cement sector was already modest at 4.8% and after the note ban (Demonetisation in
November 2016), is likely to be affected negatively by disruption to the real estate sector.
The cement sector is one of the worst h it by demonetization; volumes have been hurt
severely and a pick-up in consumption may not happen anytime soon. Hence, the outlook
for the second half of FY17 is unlikely to be as bright as anticipated earlier by many
analysts Cement capacity utilisation rate is expected to touch around 67 percent in FY16
from 77 percent in FYl 1.

38

5S-
Figure 4.3
Capacity utilization and demand

441

349.6
336.1

30.49
15.98

2011 2012 2013 2014 2015 2016

■ Capacity ■ Production

Source: IBEF 2017

4.2 COMPANY PROFILE(MALABAR CEMENTS LIMITED)

Malabar Cements Ltd., a fully owned Govt. of Kerala Undertaking, is

synonymous with superior quality cements, vouched by customers spread across the state
of Kerala. The Company was incorporated in April 1978 and commenced production in
April 1984 at its Walayar plant. At Malabar Cements, product improvement is not just a
one-time strategy for boosting sales, rather a quest of excellence. Perfecting the product
quality is everybody's concern here. Our distinction begins with scientifically selecting
the best raw materials for clinker. Stringent quality control is exercised right from pre-
blending raw materials, clinkerisation, clinker grinding, and finally to cement packing.

Malabar Cements contributes to the developmental activities of the State by

supplying the basic construction material. Only Malabar Cements can supply its cement,
'factory fresh', without any deterioration in the original strength either due to moisture or
humidity, within 12 hrs anywhere in Kerala. With a production capacity of 6.6 lakh tons
of cement per annum, the unit at Walayar is the largest. As part of expansion programme,
it has commissioned a 2.0 lakh tons clinker-grinding unit at Cherthala in Alappuzha
district in August 2003. Thus, the total installed capacity of MCL is 8.6 lakh tons. MCL
is the first public sector company to receive ISO Certification & to win the National

39
Award for best achievement in Energy Conservation. Till date, MCL has experienced no
loss of production due to labour unrest. In just over 15 years of commissioning, Malabar
Cements has been able to meet about 10% of total cement consumption in Kerala. With
the expansion plans in progress, the figures are sure to rise further.

The Geological Survey of India had identified a cement grade limestone deposit
in the Walayar reserve forest way back in 1961-62. The Mineral Exploration Corporation
Limited confirmed its efficacy.

Malabar Cements Ltd., fully by the Government of Kerala, is the only Portland
cement manufacturer in Kerala. The company was incorporated in April 1978 and
commenced commercial production in 1984 with capital outlay of Rs. 680 million and
paid up equity capital of Rs. 260 million. The 1200 TPD plant at Walayar has
continuously registered profit year after year. The company has upgraded the plant with
state-of-the-art technologies through the years. After the inception and in line with
technological developments, company has carried out lot of modifications in the system
for minimizing energy consumption. Pollution control measures, process modifications
etc. Some of the salient features ofthe plants are listed below:

• Limestone reserve of about 10 million tons.

• Modem 110 TPH Closed Circuit Cement Mill.

• Strict Quality Control system to ensure quality of the product.

• Most modem Instrumentation & Control system for efficient process
engineering.
• Modem dry process manufacturing technology with four-stage suspension pre-
heater system.
• Elaborate pollution control system to meet pollution control standards.

4.2.1 History

Cement is a necessary constituent of infrastructure development and a key raw

material for the construction industry. As late as the 70's, the State of Kerala was
virtually starving for cement. The state lacked a portland cement factory in either private
or govemment Sector. In 1961-62, the Geological Survey of India located a limestone

40

bt
deposit in the Pandarethu valley of the Walayar region on the northern side of the
Palakkad gap. Located in dense forest area, the hilly terrain was required heavy
investment to mine. The State Govt. ventured to put up a Cement factory in the region.

The feasibility study conducted revealed that the construction of a 1200 tpd dry
process cement plant using the Pandarethu limestone is feasible. KSIDC obtained an
Industrial License for the manufacture of cement in November 1976 and decided to go
ahead with the project and formed "Malabar Cements Limited" to set up, own and
operate the proposed cement plant. The plant was successfully commissioned in 1984 and
the commercial cement production started on 1984.

Now, The Company is all equipped to set precedence among public sector units in
the state. The launch of two Superior quality products under the brand name 'Malabar
Super' and 'Malabar Classic', in the year 1994-95 gave a boost to the market presence.
Various modifications carried out since 1995 have improved production and productivity
of Malabar Cements. A 2.5 MW multi-fuel power plant was commissioned in June 1998
to complement 25% of the total power requirement for the Walayar plant operations. As
part of expansion, the company has commissioned a 600 tpd Grinding Unit at Cherthala
in August 2003. The modernization of Cement Mill, completed in December 2004,
helped to increase the cement production.

The company has upgraded the plant with state-of-the-art technology; Belt bucket
elevators, Kiln automation, modification of cement mill internals etc, are few to mention.
The 0.42 million tonnes capacity is less than 10% of the cement consumption in Kerala
and expansion will allow the company to harness the markets beyond its core segment.

4.2.2 Objective

Manufacture and sell best quality cement at affordable price to general public of
the state to be an important part in the socio-economic development of the state.

4.2.3 Quality policy

The employee of MCL commits to comply with all requirements to continually

improve the effectiveness of the quality management system and arrives.

41
1. To identify various groups of customers served by him
2. To understand their respective needs and desires either stated or implied
3. To ensure best possible quality in products and services
4. To meet and exceed their expectations

4.2.4 Vision

To help in building a better habitable Kerala by providing best solution in the

field of constructions.

4.2.5 Mission

To provide quality products and services to the public through effective

intervention in the market.

4.2.6 MCL product range

Malabar Cements uses the state of the art, dry process technology for the
manufacturing of super quality cement and the quality is much above the national
standards. For Various applications, the company has three brands viz, "Malabar Super",
"Malabar Aiswarya" &" Malabar Classic"

4.2.6.1 Malabar Super

A fabulous product in every sense: Super in strength, Wonderfiil in workability.

Incredible in aging, Implausible in durability, and Fantastic in strength gain. An
AMAZING performer! Tests carried out by Bureau of Indian Standards have established
unshakeable credentials of Malabar Super. Super strength accelerates setting time and
fine finish. Malabar super is superior in strength to ordinary '43' grade cement. It attains
the 28 days' strength required as per IS in just 7 days' time. Not only that, the strength
attained in 28 days' time is about 50 percent more than the IS specification. The amazing
strength of Malabar Super arises from its unequalled particle fineness, 33 percent more
than the IS specification and consistency in composition, made so by computerized
process control system.

42
4.2.6.2 Malabar Classic

Superior in its class of cements, it offers better setting properties delayed initial
set and early final set offering more working time and reduced observation
time. Structures achieve excellent dimensional stability with the heat resistant properties
of MALABAR CLASSIC. It also reduces heat generation during hydration, making it a
better workable finished product absolutely reliable. The extra fineness welded into it
allows MALABAR CLASSIC better coverage and finish in wall and roof plastering. This
in turn, reduces paint consumption.

4.2.6.3 Malabar Aiswarya

It brings prosperity in many ways. It increases the life of your structures by

safeguarding against sulphate attack. Aiswarya offers high quality at reduced price.
Aiswarya generates less heat of hydration, reduces the formation of getting cracks. This
product is best studied for constructions in soil and water with excess alkali metals,
sulphates, alumina, iron and acidic waters. To obtain the best quality cement, only glassy
granulated slag is used for product manufacturing. With very low magnesium oxide
content this provides shape stability for concrete structures.

4.2.7 Certifications & Achievements

ISO Certification

• "IS/ISO 9002: 1994" certification obtained in November 1996. First PSU to

secure this certification.

• Switched over to the revised standard ISO 9001: 2000 in Aug'2003.

• Switched over to Quality Certification ISO: 9001 :2008 in 2010
Awards

• Kerala State Pollution Control Board Award - 1990-91

• Secured first State award for Energy conservation — 1992

• VSSC Rolling Trophy for safety measures - 1994 & 1995
• NCBM National Award for the Best improvisation in energy - 1998
• Kerala State Energy Conservation Award - 1998

43

bo
• Govt. of Kerala awarded for outstanding achievement in Pollution abatement-
2007

• Introduced ERP system for integrated operation of all functional areas. ~ 2007
• Kerala Trade Award of Kerala Government - 2010

4,2.8 The Making of Cement

MCL manufactures cement through the most modem dry process method based on
world-renowned German technology. The major raw materials for cement manufacture
are limestone and laterite, which are natural minerals obtained within the state. These raw
materials provide all necessary ingredients of cement like lime, silica, alumina and iron
oxide. The entire manufacturing process is computer controlled from a central control
room and stringent quality control measures are applied at all stages of production. We
are in the process of installing X - Ray Analyzer for better quality control. The state-of-
the-art pollution control measures like bag filters are also being installed. The process
generally involves three stages of production.

4.2.8.1 Raw meal production.

The limestone obtained from captive mines is enriched with higher quality limestone
procured from nearby states as and when required. The raw mix normally contains 95%
limestone and 5% laterite. The raw materials are crushed to around 20-25 mm size and
the proportioned raw materials are ground in a ball mill in dry condition to a very fine
powder. The resultant product is called raw meal and is stored in concrete silos where it
is pneumatically homogenized to get a uniform product.

4.2.8.2 Clinker production

Clinker is produced in a rotary kiln, which is a cylindrical steel shell of 65m length
and diameter 4.2m, lined with refractory bricks. The kiln is inclined at 3% and set
rotating at a speed of 2 — 2.2 rpm. It is provided with a 4-stage multi cyclone pre-heater
system through which the homogenized raw meal is fed to the kiln inlet by means of belt
bucket elevators. The Kiln is fired with pulverized coal and maintained at a temperature
of about 1450^0. In the pre-heater and kiln, the raw meal undergoes a series of physical
44

hi
as well as chemical changes giving rise to the cement minerals. The resultant product in
nodular form obtained from the kiln is called clinker. Clinker is immediately quenched in
the clinker cooler to stabilize its properties and stored in the clinker stockpile.

4.2.8.3 Cement production

Cement is produced by grinding clinker with 3-5% gypsum in a closed-circuit ball

mill to required fineness. Gypsum is added to control the setting properties of cement.
Grinding clinker and gypsum produces ordinary Portland cement(OPC). Fly ash / Slag at
required proportion is ground along with clinker and gypsum to produce Portland
pozzolana cement (PPC)/ Portland slag cement (PSC). The ground cement is stored in
concrete silos and packed in 50 Kg bags using electronic packing machines.

4.2.8.4 Major Milestones

Feasibility study for a cement plant at Walayar - 1975

Industrial License for the manufacture of Cement- 1976

Date of Incorporation of Malabar Cements - 1978

Commencement of mining activities - 1981
Commissioning of Walayar Plant - 1984
Commencement of clinker production - 1984
Commercial Cement Production started - 1984

43-grade OPC cement-'Malabar Super' launched - 1994

New product; 'Malabar Classic' launched - 1994
Obtained ISO: 9002 certification, first PSU in Kerala to secure this certification -
1996

Installation of 2.5 MW multi-friel power gen. set - 1998

Introduction of'Malabar Aiswarya' brand - 2003
Commissioned of 600 tpd cement grinding unit at Cherthala -2003
Modernization of Cement Mill to close circuiting - 2005
Introduced ERP system for integrated operation of all functional areas.- 2007
Switched over to Quality Certification ISO: 9001 :2008-2010

45

U
Chapter 5
DA TA ANAL YSIS AND INTERPRETA TION
Chapter V

Efficiency of Inventory Management Practices of Malabar Cements Limited

5.1 Introduction

The efficiency of any manufacturing organization depends on the availability of

raw materials and component parts in the proper quantity, quality, price range, and time.
Failure in any of these areas increases cost and decreases profit as certainty as outmoded
production methods or ineffective selling techniques. Inventory management presents the
sum total of the activities required for acquisition, storage, sale, disposal or use of
materials. The objective of inventory management is to maintain inventory at appropriate
level to avoid excess or deficit inventory. A firm neglecting the management of
inventories will be denting its long-term profitability and may fail ultimately. The
objective of this study was to analyze the inventory management system in Malabar
Cements Ltd and to analyze the efficiency of the inventory management system of the
company.

5.2 Inventory management system of Malabar Cements Limited

Inventory management is a process that identifies inventory requirements, set

target, and report actual and projected inventory status. It covers all functions related to
tracking and management of materials. The primary objective of inventory management
is to determine and control stock levels within the physical distribution function to
balance the need for product availability against the need for minimizing stock holding
costs. An effort is made in this section to analyze the efficiency of inventory management
and control techniques adopted by Malabar Cements Limited as part of the objective of
the study.

5.2.1 Procurement Planning

Regarding the planning for procurement of raw materials, Malabar Cements

Limited follows mainly two techniques namely. Past Consumption Analysis (PCA) and
Materials Requirements Planning(MRP). Under the Past Consumption Analysis, the past
consumption data of raw materials is analyzed and the projection for the future is made,

47

bif
taking into account the past and future production into account. The guidelines are
worked out for each component of raw materials based on the average or mean
consumption and the standard deviation.

Materials Requirement Planning (MRP) is a revolutionary concept in material

planning. It is also known as time-based requirement planning. Malabar Cements adopted
this procurement planning in the year 2015.It is a computer based raw materials planning
system through which it keeps the inventory level at a minimum, while assuring that the
required materials are available when needed. It ensures the availability of materials,
components and products for planned production and customer delivery and maintains
the lowest possible level of inventory. But both this procurement planning is highly
influenced by Government Policy.

5.2.3 Preparation of Materials Budget

Once the material requirements are worked out, the materials budget is normally
prepared. Materials budget shows the estimated quantity as well as the cost of each type
of materials required for the production. First, quantities of different types of materials
are estimated. Thereafter, the price of each kind of material and component is found out
to obtain the cost of different types of materials and components consumed in production.
The purchase budget takes into account the inventory on hand and orders on hand.
Besides, the budget itself may be formulated to attain certain targeted inventory levels. It
is the usual practice to formulate budget both in terms of quantity of materials and
money. The preparation of detailed annual materials budget is therefore very practical for
the cement companies, whose consumption can be forecasted reasonably accurately. The
material budget should also take into account cyclical fluctuation in demand. This can be
done by applying statistical tools like time series analysis.

In Malabar Cements Limited, the executives follow a practice of preparing the

operating budget. This budget is also called as expenditure budget. The basic purpose of
preparing this budget is to get annual grant from the Government to meet the expenses
including the procuring cost of raw materials. This is a statutory requirement for the
Government owned company.

48

(>!?
5.2.4 Fixation of Stock Levels

One of the primary tasks in the inventory management is to determine the stock
level. The general levels of stock should be related to the sales and production policies of
the firm. Control should be therefore directed and exercised in a prudent manner for
better inventory management.

The following are the types of stock levels used in inventory control in Malabar Cements
Limited, namely, minimum stock level, re-order level, maximum stock level, danger
level, and safety stock level.
They decide minimum or maximum level of particular raw material like lime
stone or coal and finished goods on a dynamic basis keeping in mind the factors
prevailing then. While deciding minimum level for an inventory item, consumption
during the lead time and safety margin are basically taken into consideration. For
decision regarding the maximum levels for inventory items, carrying cost, space
availability in stores, supply conditions and future production plans are the factors which
plays dominant role.

5.2.5 Inventory Control Techniques

Control over inventory is usually exercised by adopting certain techniques, known

as "inventory control techniques" which help to reduce the investment in this asset
without adversely affecting smooth functioning of business. Popular among such
techniques are selective control techniques, perpetual inventory system, classification and
codification, and standardization and simplification. An attempt has been made to
ascertain to what extent these techniques have been adopted in the Malabar Cements
Limited.

Selective control technique is based on "ABC" analysis or such other techniques.

The "ABC" analysis is a rational approach for determining the degree of control that
should be exercised on each item in an inventory; by segregating the items that contribute
most to consumption in terms of total value, it gives a clear cost perspective to
management."ABC" analysis is done on the basis of consumption value of inventories.
The consumption value is calculated by multiplying the average annual consumption

49
(normally average for 2-3 years) for each stock-keeping unit to its unit value, and is
represented by 'Dv', where, D denotes annual demand/consumption and v denotes unit
value. The consumption values are arranged in descending order. Cumulative
consumption values and the number of stock keeping units are calculated, which are then
converted into cumulative percentages respectively. The inventories are then divided into
three classes called. A, B, and C. The break points to divide inventories into three classes
are not clearly defined in theory. A wide range was observed for classifying in
inventories.

The small numbers of high consumption value items are called "A" items, the
medium-consumption-value items are "B" items, and while the large number of items
whose annual consumption value is very low are "C" items. It must be clearly understood
that "ABC" analysis does not depend on the unit cost of an item, but only on its total
annual consumption. Again, it does not depend on the importance of the item. All items
are necessary and, therefore, important.

Normally in an "ABC" analysis, "A" class items represent about 10 percent of

total number of items but account for 70 percent or more of the total value of
consumption during a year; "B" class items generally cover 20 percent of the total value
of annual consumption, whereas "C" class items reflect 70 percent of the total number of
items, but account for only 10 percent or less ofthe total value of annual consumption.

The range of percentages of consumption value and stock keeping units as

suggested by the All India Cement Manufacturers' Association Manual, as well as the
observations made by the researcher during the interview with the executives, are
presented in the following table.

Table 5,1

Range of Percentage of Consumption Value and Stock Keeping Units for "ABC
Classification
Class of items Range of Percentage of Range of Percentage of STOCK
CONSUMPTION VALUE for KEEPING UNITS for

"ABC" Classification "ABC" Classification

50

67
Suggested by Malabar Suggested by Malabar

CMA Cements CMA Cements

A 70-80 70-90 10-15 20-30

B 20-30 35-45 20-25 40-50

C 10-20 20-30 70-75 40-60

Source: l.CMA manual. Cement Manufacturers' Association, Mumbai and Interview

Schedule

In the discussion with the executives of the Malabar Cements Limited, it is stated that
all the units in the company has put "A" items under the charge of production and
planning department and the system of monthly reporting of these items from storekeeper
is being followed. "B" and "C" items are looked after by junior executives in stores or
materials departments in different units. The executives also disclosed that this technique
helps the fixation of maximum and minimum levels for various store items.

5.2.6 Methods of Purchasing

On an enquiry regarding the methods of purchasing inventory, it is found that
Malabar Cements Limited follows tender method and open purchase method very rarely
in case of scarcity.

5.3 Efficiency of Inventory Management of Malabar Cements Limited

Circulation of inventory directly affects profitability of a firm. Other things
remaining the same, the faster the circulation, the larger is the profits. Each turnover adds
to the volume of profits. A high inventory turnover means that the firm has conducted
more business with less amount of inventory. There is no single measure that can be used
to test the overall effectiveness with which inventory is being managed. One of the
measures of evaluating inventory management is the inventory holding ratio. This ratio
indicates the length of time required for conversion of investment in inventories to cash
of a firm. Lower the ratio, better is the inventory management and vice-versa. The
inventory holding ratio indicates in general whether the firm's inventory relative to sales
is too high or too low (measured in days). When the inventory holding ratio is high, the
cause may be that there may be obsolete or at least slow-movii^^^ck,^n hand. An

51 sf .««, If
id
unusually low holding of inventory may reveal inefficiencies. In a manufacturing
concern, for instance, efforts to maintain especially low holding of inventory may result
in periodic interruptions in the production process because of stock outs. It should be
emphasized that current inventory holding figures are significant only when compared
with some target rate established within the firm through past experience and short-range
planning.

In order to judge the velocity with which inventory and its components have
circulated in the MCL during the period under study, the ratio of holding period of
aggregate inventory, holding period ofraw materials, spares and stores, holding period of
work-in-progress and the holding period of finished goods are calculated.

5.3.1 Inventory conversion period

The holding period of aggregate inventory in MCL is calculated in terms of days

by dividing the number of days in a year by the inventory turnover ratio. The holding
period of aggregate inventory is exhibited in the following table.

Cost ofgoods sold

Inventory turnover ratio =
Average stock
Opening stock + Closing stock
Average stock =

Table 5.2

Holding Period of Aggregate Inventory

Year No: of days Inventory Inventory conversion period Deviations

turnover ratio Malabar Industry

Cements Average
2006-07 365 3.75 97 93 _4*

2007-08 365 4.10 89 78 -11*

2008-09 365 3.92 93 89 -4*

2009-10 365 3.30 110 93 -17*

2010-11 365 4.12 88 91 3

52

61
2011-12 365 3.65 99 86 -13*

2012-13 365 3.50 102 84 -18*

2013-14 365 3.06 119 88 -31*

2014-15 365 3.14 116 86 -30*

2015-16 365 3.70 97 101 4

*negative value indicates unfavorable

Source: Annual report of Malabar Cements Ltd
CMIE financial aggregate and ratios
When compared with industry average during the year 2010-11 and 2015-16
MCL inventory holding period is less than industry holding period. During the remaining
eight years the MCL also maintains a high holding period than industry average.

Table 5.3

Holding Period of Aggregate Inventory - A Comparison

with Tandon Committee Norms

Year Inventory Tandon Deviations

Committee
conversion period
Norms

2006-07 97 90 -7*

2007-08 89 90 1

2008-09 93 90 -3*

2009-10 110 90 -20*

2010-11 88 90 2

2011-12 99 90 _9*

2012-13 102 90 -12*

2013-14 119 90 -29*

2014-15 116 90 -26*

2015-16 97 90 -7*

^negative value indicates unfavorable

Source: 1. Annual report of Malabar Cements Ltd

53

^^0
2. Tandon Committee's Recommendation, 1975, Reserve Bank of India, Report
ofthe Study Group to Frame Guidelines for Follow Up of Bank Credit, Mumbai,
p.47

The Tandon Committee has suggested 90 days as the standard holding period for
aggi"egate inventory for cement industry at the National level. Malabar Cements Limited,
fails to maintain the Tandon Committee norms regarding the inventory holding ratio.

5.3.2 Computation of Inventory turnover for individual components

A further analysis is made regarding the holding periods for all the individual
inventory components.

5.3.2.1 Raw material & spares holding period

In order to find out the extent of overstocking in raw materials & spares: raw
material turnover & spares ratio is calculated. The ratio reflects the way in which raw
materials& spares have been used in the business as compared with average raw material
inventory during the study period. It indicates the rate of utilization of raw materials and
spares. A high ratio indicates its better utilization. But too high a ratio may indicate that
T.
proportionately fewer raw materials and spares were held in order to carry out the
production which may be quite risky.

Raw material & spares turnover ratio

_ Cost of raw material & spares consumed
Average stock of raw material & spares

Table 5.4

Raw material & spares holding period

Year Raw No. of days Days of raw Industry Deviations

material & material Average
spares &spares
turnover holding
Ratio
2006-07 2.68 365 135 146 11

2007-08 2.72 365 134 138 14

54

II
2008-09 2.86 365 127 130 3

2009-10 2.80 365 130 133 3

2010-11 2.42 365 146 135 -11*

2011-12 2.61 365 139 151 12

2012-13 2.48 365 147 148 1

2013-14 2.50 365 145 145 0

2014-15 2.34 365 156 143 -13*

2015-16 2.32 365 157 141 -16*

2. CMIE financial aggregate and ratios

From the table it is understand that from 2006-14 raw material and spares holding
period is favorable when compared with industry average. But in the year 2014-16
holding period of raw material and spares is higher than industry.

Table 5.5

Holding Period of Raw materials and Spares - A Comparison 00

*
with Tandon Committee Norms

Year Inventory conversion period Tandon Deviations

Committee
Norms
2006-07 135 60 -75*
2007-08 134 60 -74*
2008-09 127 60 -67*
2009-10 130 60 -70*
2010-11 146 60 -86*
2011-12 139 60 -79*
2012-13 147 60
2013-14 145 60 -85*
2014-15 156 60 -96*
2015-16 157 60 _97*
*negative value indicates unfavorable

55

72-
Source:1. Annual report of Malabar Cements Ltd
2. Tandon Committee's Recommendation, 1975, Reserve Bank of India, Report
of the Study Group to Frame Guidelines for Follow Up of Bank Credit,
Mumbai, p.47
The Tandon Committee recommends 60 days as the average holding period for
raw materials and spares of cement industry in India. The study reveals that the period for
which raw materials and stores have, on an average, remained in the stores of Malabar
Cements Limited is quite high.

5.3.2.2 Work in process conversion period

Work in progress inventory turnover ratio shows a relationship between value of

goods produced and the value of average work in process. The longer the production
cycle, the greater will be the value of work in progress.

Cost of goods manufactured

WIP inventory turnover ratio =
Average WIP inventory

t
Cost of goods manufactured includes raw material expenses, power & fuel, 70%
of wages and salaries, other operating expenses, repairs to plant and machinery, changes
in stock and depreciation. A high turnover ratio indicates lower accumulation of work-in-
progress and lesser investment in working capital. A fall in turnover means that
management has not controlled the production process efficiently or some external
factors have retarded the production movement.
Table 5.6

Work in process conversion period

Year Ratio No. of days Days of WIP Industry Deviations

holding Average
2006-07 18.60 365 20 17 -3*
2007-08 21.14 365 17 18 1
2008-09 19.41 365 19 24 5
2009-10 21.55 365 17 20 3
2010-11 17.94 365 20 16 -4*
2011-12 23.54 365 15 16 1
2012-13 17.59 365 21 14 -7*

56

73
2013-14 20.86 365 17 14 -3*
2014-15 18.20 365 20 13 -7*
2015-16 20.43 365 18 13 -5*

Source: Annual report of Malabar Cements Ltd

CMIE financial aggregate and ratios

During the study period work in process holding period is high when compared to
industry average. So, the management of MCL has to analyze the production process.

Table 5.7

Holding Period of Work-in-Progress - A Comparison with

Tandon Committee Norms

Year Work-in-progress Tandon Deviations

holding ratio Committee
Norms
2006-07 20 15 -5*
2007-08 17 15 -2*
t 2008-09 19 15 -4*
2009-10 17 15 -2*
2010-11 20 15 -5*
2011-12 15 15 0
2012-13 21 15 -6*
2013-14 17 15 -2*
2014-15 20 15 -5*
2015-16 18 15 -3*
^negative value indicates unfavorable
Source: 1. Annual report of Malabar Cements Ltd
2.Tandon Committee's Recommendation, 1975, Reserve Bank of India, Report of
the Study Group to Frame Guidelines for Follow Up of Bank Credit, Mumbai,
p.47

The Tandon Committee recommends 15 days as the holding period for the work-
in-progress of the cement industry in India. Malabar Cements Limited fails to satisfy the
Tandon committee norms in the study period.

57

7+
5.2.2.3 Finished goods holding period

7b
Finished goods represent goods-in stock for sale. Companies will have to keep the
finished goods with them for some time before they are dispatched. This appears in the
accounts as the stock of finished goods. Finished goods are kept in stock due to the gap
between the timing of production and consumption.

The measurement of average finished goods inventory in terms of net sales will
reveal whether the firm is carrying excess or optimum stock of finished goods. It is
generally accepted that the enterprise may maintain finished goods inventory to a
maximum of one month's value of sales.

Net sales
Finished goods inventory turnover ratio =
Average finished goods

Table 5.8

Finished goods holding period

Year Ratio No. of days Storage Industry Deviations

Period Average
2006-07 28.05 365 13 14 1
2007-08 32.54 365 11 14 3
2008-09 28.18 365 13 13 0
2009-10 27.64 365 13 13 0
2010-11 29.82 365 12 13 1
2011-12 28.74 365 13 11 -2*
2012-13 22.22 365 16 12 -4*
2013-14 20.74 365 17 12 -5*
2014-15 34.01 365 10 11 1
2015-16 23.82 365 15 13 -2*
Source: Annual report of Malabar Cements Ltd
CMIE financial aggregate and ratios

There is no definite trend can be seen from the finished goods storage period,
even though there is no high difference can be seen from the industry average and
company finished goods holding period.

58
Table 5.9

Holding Period of Finished Goods - A Comparison with Tandon

Committee Norms

(in
days)

Year Finished goods Tandon Deviations

holding ratio Committee
Norms
2006-07 13 30 17

2007-08 11 30 19

2008-09 13 30 17

2009-10 13 30 17

2010-11 12 30 18

2011-12 13 30 17

2012-13 16 30 14

2013-14 17 30 13

2014-15 10 30 20

2015-16 15 30 15

2. Tandon Committee's Recommendation, 1975, Reserve Bank of India, Report

of the Study Group to Frame Guidelines for Follow Up of Bank Credit,
Mumbai, p.47

The Tandon Committee recommends a maximum of30 days as the holding period
of finished goods for the cement industry in India. Malabar cements limited have been
able to reduce the holding period of finished goods to a marked extent.

5.3 Operating cycle

Operating cycle is the number of days a company takes in realizing its inventories
to cash. I t is called operating cycle because this process of producing/purchasing
inventories, selling them recovering cash from customers, using that cash to

59

76
purchase/produce inventories and so on is repeated as long as the company is in
operations. Operating cycle is a measure of the operating efficiency and working capital
management of a company. A short operating cycle is good as it implies that the
company's cash is tied up for a shorter period.

Operating cycle = Raw material holding period + WIP conversion period +

Finished goods storage period.

Table 5.10

Operating Cycle

(in days)

Year Raw material & WIP conversion Finished goods Operating Cycle (in
spares holding period storage period days)
period

2006-07 135 20 13 168

2007-08 134 17 11 162

2008-09 127 19 13 159

2009-10 130 17 13 160

2010-11 146 20 12 178

2011-12 139 15 13 167

2012-13 147 21 16 184

2013-14 145 17 17 179

2014-15 156 20 10 186

2015-16 157 18 15 190

Source: Annual report of Malabar Cements Ltd

60

17
From the table it is understand that the days required to covert the raw material to
finished goods is slightly increasing. Increasing the number of operating cycles implies
that the company's cash is tied up for a longer period.

5.4 Growth Trends in Inventory and Sales

The sales of a concern directly affect its profits and the holding of inventory
involves cost. Every increase in inventory is expected to be accompanied by adequate
increase in sales, so that the increased cost of inventory may be recovered from the
increased profits. In an industry like cement which is already over-stocked, it is expected
that the growth in sales during a period must be at a faster rate than the inventory growth
so that profits are favorably affected. For the purpose of comparing the growth in sales
with the growth in inventory during the period under review, progressive base year
growth rate has been computed.

Table 5.11

Size and growth of inventory and sales

Year Inventory % increase/ Sales % increase/

decrease decrease

2006-07 3218.82 -
23969.71 -

2007-08 3707.39 15.17 25348.60 5.75

2008-09 3510.67 9.06 27877.08 10.54

2009-10 5485.48 70.41 18941.39 (37.27)

2010-11 5811.05 80.53 27770.45 36.83

2011-12 4231.63 31.46 23159.38 (19.23)

2012-13 6547.65 103.41 22208.41 (3.96)
2013-14 8124.65 152.41 20311.98 (7.91)
2014-15 8407.48 161.19 30592.17 42.88

2015-16 9305.87 189.10 39269.65 63.83

Source: Annual report of Ma abar Cements Ltd

61
Table reveals that the growth of inventory is considerably high than the growth of
sales. In the study period sales sometimes shows a decreasing trend but throughout the
study period inventory growth rate shows a considerably increasing trend.

5.5 Composition of inventory

The major components of inventory in the Malabar Cements are raw materials,
work-in-process, stores and spares and finished goods.

The structure of inventory and the percentage share of each component appear in
Table. This will throw light on the segment where the inventory is concentrated.

Table 5.12

Composition of inventory
Year Raw Stores & Work-in- Finished Total

material spares progress goods

2006-07 342.37 1880.99 806.66 188.73 3218.82

(10.63) (58.43) (25.06) (5.86) (100)

292.36 1915.31 608.17 591.62 3707.39

2007-08 (7.88) (51.66) (16.40) (15.95) (100)

2008-09 414.00 1869.64 591.92 635.11 3510.67

(11.79) (53.25) (16.86) (18.09) (100)

2009-10 2551.36 826.39 1372.53 735.2 5485.48

(46.51) (15.06) (25.02) (13.40) (100)

2010-11 3143.69 1200.62 1291.62 175.12 5811.05

(54.09) (20.66) (22.22) (3.01) (100)

2011-12 682.65 1927.53 809.5 811.95 4231.63

(16.13) (45.55) (19.12) (19.18) (100)

2012-13 1746.51 1919.13 1695.05 1186.96 6547.65

(26.67) (29.31) (25.88) (18.12) (100)

2013-14 1358.15 2583.55 2780.88 1402.07 8124.65

(16.71) (31.79) (34.22) (17.25) (100)

62

7^
2014-15 2266.69 2841.54 1779.71 1519.54 8407.48

(26.96) (33.79) (21.16) (18.07) (100)

2015-16 2280.31 2591.80 2457.06 1776.7 9305.87

(24.50) (27.85) (26.40) (19.09) (100)

Source: Annual report of Ma abar Cements Ltd
Note: Percentage to total in brackets

It may be noted that there are wide variations among the company regarding the
composition of inventory. No definite trend is visible in the pattern of composition of
inventory. On the whole aggregate inventory shows an increasing trend.

5.6 LIQUIDITY AND PROFITABILITY IMPLICATIONS

After having examined the size, composition, circulation, and the growth of
inventory, it is more appropriate to look into the liquidity and profitability implications of
inventory management in Malabar Cements Limited.

5.6.1 CURRENT RATIO

The current ratio, a very popular financial ratio, measures the ability of the firm to
meet its current obligations. As a measure of short-term financial liquidity, it indicates
the rupees of current assets available for each rupee of current liability. The higher the
ratio, the larger will be the number of rupees available per rupee of current liability, the
more the firm's ability to meet current obligations and the greater the safety of funds of
short-term creditors. Thus, this ratio is a measure of safety to creditors. A current ratio of
2:1 has been considered generally satisfactory.

Table 5.13

Current ratio
Year Current Asset Current Current Ratio Industry
Liability Average
2006-07 6876.76 2367.00 2.90 1.71

2007-08 9565.92 2677.20 3.57 1.79

2008-09 12511.55 2559.45 4.88 1.60

63
2009-10 14374.21 2368.30 6.06 1.35

2010-11 24081.84 3067.12 7.85 1.58

2011-12 14258.30 5476.11 2.60 1.82

2012-13 19656.54 7492.25 2.62 1.74

2013-14 17482.02 4843.90 3.60 1.68

2014-15 18225.11 5668.12 3.21 1.58

2015-16 19985.65 141451.68 0.14 1.46

The maximum ratio in Malabar Cements Limited is recorded at 7.85 in the year
2010-11 and the minimum at 0.14 in the year 2015-16. In all the period current ratio of
Malabar Cements limited is more than the industry average except the year 2015-16. So
that the company is well-positioned to cover its current or short-term liability.
5.6.2 ACID-TEST RATIO/QUICK RATIO
Acid-test ratio may be defined as the relationship between quick assets (or liquid
assets) and current liabilities. An asset is said to be quick if it can be converted into cash
within a short period without loss of value. In that case, cash in hand, cash at bank,
marketable securities, bills of exchange, short-term investments, and sundry debtors can
be included in this category. Acid-test ratio can be calculated by dividing the total of
quick assets by total of current liabilities. Quick ratio comprises of two components, viz.
quick assets and current liabilities minus bank over draft. Usually, a high quick ratio is an
indication that the concern is liquid. The concern has the ability to meet its current
liabilities in time. Contrary is in case of low quick ratio. As a conversion, a quick ratio is
very much suitable for measuring the liquidity position. The conventional ratio of 1:1 is
considered satisfactory. It is the more rigorous test of liquidity. The quick ratio is very
useful in measuring the liquidity position of a concern. Quick ratio measures the
concern's capability to pay off current obligations immediately.

64

91
Table 5.14

Quick Ratio

Year Quick Assets Current Liability Quick Ratio Industry Average

2006-07 3657.94 2367.00 1.54 0.47

2007-08 5858.53 2677.20 2.18 0.45

2008-09 9000.88 2559.45 3.51 0.45

2009-10 8888.73 2368.30 3.75 0.50

2010-11 18270.79 3067.12 5.95 0.55

2011-12 10026.67 5476.11 1.83 0.81

2012-13 13108.89 7492.25 1.74 0.77

2013-14 9357.37 4843.90 1.93 0.77

2014-15 9817.63 5668.12 1.73 0.77

2015-16 10679.78 141451.68 0.07 0.84

Source: Annua report of Malabar Cements Ltd

The maximum quick ratio in Malabar Cements Limited is recorded at 5.95 in the
year 2010-11 and the minimum at 0.07 in the year 2015-16, which is below when
compared to industry average and conventional standard quick ratio. Malabar Cements
Limited has the ability to meet its current liability in time during the study period except
2015-16.

5.6.3 RETURN ON INVESTMENT

The return on investment generally indicates the percentage of return on the total
capital employed in the business. It is calculated as a percentage of net profit before
interest and tax on the total assets of the company. It is a prime ratio and is the prime test
for the overall efficiency of the business. It evaluates the performance of various
departments. The owners (i.e. shareholders) are interested in knowing the profitability of
the business in relation to amounts invested in it. A higher percentage of return on
investment will satisfy the owners that their money is profitably used.

65

n
Table 5.15

Return on Investment of Malabar Cements Limited

Year Net profit Total Assets ROI Industry Average

2006-07 2704.83 13398.6 20.18 20.30

2007-08 3994.27 15882.35 25.14 17.80

2008-09 4785.86 8484.84 15.07 14.96

2009-10 3031.70 19821.5 15.29 11.46

2010-11 4428.30 26314.29 16.82 9.61

2011-12 5080.66 29997.91 16.93 10.23

2012-13 3171.46 32909.28 9.63 10.47

2013-14 240.97 29914.09 0.80 8.09

2014-15 1579.46 30610.07 5.15 5.81

2015-16 3905.78 38475.91 10.15 6.23

Source: Annual report of Malabar Cements Ltd

Compared with industry average, Malabar Cements Limited Return on investment
is quite satisfactory. Money invested in MCL is efficiently used for profit making.

5.6.4 Net Profit Margin

The ratio of the net profit margin tells the relative efficiency of the firm after
taking into account all expenses and income tax, but not extra-ordinary charges. This
ratio reveals the profit of the firm relative to the sales.

66

^3
Table 5.16

Net Profit Ratio

(in lakhs)
Year Net profit Net sales Net profit Ratio Industry Average
2006-07 2704.83 23969.71 11.28 9.32

2007-08 3994.27 25348.60 15.75 12.21

2008-09 4785.86 27877.08 9.99 6.31

2009-10 3031.70 18941.39 16.00 15.93

2010-11 4428.30 27770.45 15.94 14.81

2011-12 5080.66 23159.38 21.93 18.39

2012-13 3171.46 22208.41 14.28 10.27

2013-14 240.97 20311.98 1.18 3.71

2014-15 1579.46 30592.17 5.16 6.19

T
2015-16 3905.78 39269.65 9.94 7.62

Source; Annual report of Malabar Cements Ltd

The company shows the maximum net profit to sales ratio of 21.93 percent in the
year 2011-12 and the minimum rate of 1.18 percent is noted in the year 2013-14. From
2006-13 Malabar Cements Limited Net profit ratio is high compared to industry average
and from 2013-16 the ratio is less than industry.

67
Chapter 6
^ SUMMAR Y OF FINDINGS,SUGGESTIONS
AND CONCLUSION
Chapter 6

Summary of findings, suggestions and conclusion

Introduction

The control and maintenance of inventory is a problem common to all

organizations in any sector of the economy. Inventory management is basically
concerned with the determination of optimum level of such an idle resource to maintain
continuous flow of production as well as sales without resulting in either stock outs or
pile up of stocks. It is one of the most important operations management responsibilities
as inventory involves a great deal of capital and the delivery of goods to consumers. It
has an impact on all business function, particularly operations, marketing, accounting,
and finance. Inventory is one of the key determinants of the productivity of cement
industry. It plays an important role in the cement industry both in production of new
assets and operational maintenance of existing assets. The cement industry must improve
their production to meet the increased demand. Scientific inventory management needs to
be the order of the day in the existing cement manufacturing units to enhance production.
Hence, A Study on Inventory Management in Malabar Cements limited is undertaken.
The important findings recorded at various quarters in the preceding chapters of the
present research report with the suitable suggestions, incorporated in this chapter, are
placed as follows.

6,1 SUMMARY OF FINDINGS

Inventory management system of Malabar Cements Limited

1. Malabar Cements Limited follows mainly two techniques namely, Past Consumption
Analysis(PCA)and Materials Requirements Planning (MRP). But both this procurement
planning is highly influenced by Government Policy.
2. Malabar Cements Limited, the executives follow a practice of preparing the operating
budget.
3. The types of stock levels used in inventory control in Malabar Cements Limited,
includes, minimum stock level, re-order level, maximum stock level, danger level, and
safety stock level.

68 ,
4. On an enquiry regarding the methods of purchasing inventory, it is found that Malabar
Cements Limited follows tender method and open purchase method very rarely in case of
scarcity

EFFICIENCY OF INVENTORY MANAGEMENT OF MALABAR CEMENTS

LIMITED

1. When compared with industry average during the year 2010-11 and 2015-16 MCL
inventory holding period is less than industry holding period. During the remaining eight
years the MCL also maintains a high holding period than industry average.

2. The Tandon Committee has suggested 90 days as the standard holding period for
aggregate inventory for cement industry at the National level. Malabar Cements Limited,
fails to maintain the Tandon Committee norms regarding the inventory holding ratio.
3. It is understood that from 2006-14 raw material and spares holding period is favorable
when compared with industry average. But in the year 2014-16 holding period of raw
material and spares is higher than industry
T 4. The Tandon Committee recommends 60 days as the average holding period for raw
materials and spares of cement industry in India. The study reveals that the period for
which raw materials and stores have, on an average, remained in the stores of Malabar
Cements Limited is quite high
5. During the study period work in process holding period is high when compared to
industry average. So, the management of MCL has to analyze the production process.
6. The Tandon Committee recommends 15 days as the holding period for the work-in-
progress of the cement industry in India. Malabar Cements Limited fails to satisfy the
Tandon committee norms in the study period.
7. There is no definite trend can be seen from the finished goods storage period, even
though there is no high difference can be seen from the industry average and company
finished goods holding period.
8. The Tandon Committee recommends a maximum of 30 days as the holding period of
.jr
finished goods for the cement industry in India. Malabar cements limited have been able
to reduce the holding period of finished goods to a marked extent.

69
9. It is understood that the days required to covert the raw material to finished goods is
slightly increasing. Increasing the number of operating cycles implies that the company's
cash is tied up for a longer period
10. The growth of inventory is considerably high than the growth of sales. In the study
period sales sometimes shows a decreasing trend but throughout the study period
inventory gro\vth rate shows a considerably increasing trend.
11. It may be noted that there are wide variations among the company regarding the
composition of inventory. No definite trend is visible in the pattern of composition of
inventory. On the whole aggregate inventory shows an increasing trend.

LIQUIDITY AND PROFITABILITY IMPLICATIONS

1. The maximum ratio in Malabar Cements Limited is recorded at 7.85 in the year 2010-
11 and the minimum at 0.14 in the year 2015-16. In all the period current ratio of
Malabar Cements limited is more than the industry average except the year 2015-16. So
that the company is well-positioned to cover its current or short-term liability.
2. The maximum quick ratio in Malabar Cements Limited is recorded at 5.95 in the year
2010-11 and the minimum at 0.07 in the year 2015-16, which is below when compared to
industry average and conventional standard quick ratio. Malabar Cements Limited has the
ability to meet its current liability in time during the study period except 2015-16.
3. Compared with industry average, Malabar Cements Limited Return on investment is
quite satisfactory. Money invested in MCL is efficiently used for profit making.
4. The company shows the maximum net profit to sales ratio of 21.93 percent in the year
2011-12 and the minimum rate of 1.18 percent is noted in the year 2013-14. From 2006-
13 Malabar Cements Limited Net profit ratio is high compared to industry average and
from 2013-16 the ratio is less than industry

6.2 SUGGESTIONS

1. The raw materials required for the manufacture of cement are bulky in nature and
any excess holding involve heavy expenditure. Quite often coal, gypsum, bricks
bats and limestone are unloaded at such places from where re-shifting has to be

70
done later on. This can be avoided to a large extent with proper planning and
supervised execution.
* 2. It is observed during the study that the spares and stores are not only over stocked
in the Malabar Cements Limited and many of them also have become obsolete.
The obsolete items should be disposed to reduce the overstocking of inventories.
The obsolete items may be sold either by following tender system or by auction to
scrap dealers after adhering to central excise and sales tax formalities.
3. Government of Kerala can include Malabar cements in their infrastructure

projects. Thereby the company can increase the sales without much cost.
4. It is observed that there is no separate inventory management department in
Malabar Cements. By introducing as a separate department will gain more
attention to the inventories.

5. Government of Kerala can liberalize the ftmctioning of Malabar Cements

Limited. So that they can take decision without further delay.

T 6.3 CONCLUSION
The sad fact is that inventory is still a poorly managed component of working
capital. Inventory management is a vital face of financial of an undertaking to the fact
that it plays a pivotal role in keeping the wheels of the concern running. Management of
inventory and its control is not a one-time job of the manager of a concern. It needs
continuous offer, revisions and reviews, very much care and prudentice.
The management of inventory in Malabar Cements Limited in the study area is far
from satisfactory norms of tendon committee and industry average and the company has
still to do a lot for improvement in their inventory management, so that a lot of funds
invested in inventory can be spared and used for some other productive purposes.
Improvement in inventory management can convert this company into more profit
making and can compete with other major players in the industry.

71
Ob
AHdvuDonaia
X
T
BIBLIOGRAPY

1. BOOKS

Aniths Shula, 2002, Management of Inventory in the Cotton Textile Industry in

India, Working Capital Management, RBSA Publishers, Jaipur.

Chadda, R.S. 1974,Inventory Management in India, 2nd edition. Allied Publishers

Private Limited, New Delhi.

Charaborthy.S.K. and Malla Reddy.K, 1976, Inter-firm Comparison in the Indian

Cement Industry, Topics in Accounting and finance, Oxford University Press,
New Delhi.

Chakravarty, S.M., 1989, Indian Cement Industry - From Control to Decontrol,

Wadhera Publications, Bombay.

Chakravarty, S.M. 1993, Growth Prospects for Cement Industry in India,

Aashish Publications, New Delhi.

Donald W. Dobler, 1985, Purchasing and Materials Management, Tata

McGreaw-Hill, New Delhi.

Encyclopedia Britannica, 1978, A Society of Gentlemen in Scotland,

Encylopaedia Britannica, William Benton Publishers, Volume 5.

Fabrycky, W.J. 1967, Procurement and Inventory Systems: Theory and Analysis,
Reinhold Publishing Corporation, New York.
Garhwal, H.C., 2001, Purchase Management in Transport Undertakings, ABSA

Publishers, Jaipur.

George W. Plossel, 1986, Production and Inventory Control, Prentice Hall of

72
India, New Delhi.

Hadley, G and Whitin. T.M 1983, Analysis ofInventory Control Systems, Prentice-

Hall, Englewood Cliffs, New Delhi.

Hal Mather 1984, How to Really Manage Inventories, Mc-Grow Hill Book
Company, New York.

Howard, L.R, 1971, Working Capital- Its Management and Control, Mac.Denald

and Yens Limited, London.

Rajeshwar Rao, D.K., R. Natarajan, and K.Venkat Janadhan Rao, 1997, Inventory

Management in Chemical Industry- A Study, Readings in Financial

Management, RBSA Pubilishers, Jaipur

Richard J. Tersine, 1994, Principles of Inventory and Materials Management, PTR

Prentice Hall, New Jersey.

Robert G. Blezard, The History of calcareous Cements' p.l Lea's Chemistry of

Cement and concreate. Fourth edition. Edited by Peter C Hawlett, frcs, first Mat.

Finest Concrete Technology,

Sansarsingh Katoch, 2002, Materials Management: A Study of Power Sector,

Anmol Publications Private Limited, New Delhi.

II. JOURNALS

Aravanan.S., Inventory Control System - A Summary, Working Capital

Management, Deep & Deep Publications Pvt. Limited, New Delhi,2004.

73
Boyce, J 1986, Kinked Exponential Models for Growth Rate Estimation, Oxford

Bulletin of Economics and Statistics, Department of Economics,

University of Oxford, Vol. 48, No. 4.

Brigvadier R.Sarin, 2000, Automating and Spare Parts Inventory

Management,Indian Management, Vol.23, No.3, February.

Beamon, B.M and Kotleba, S.A. 2006, Inventory Management Support Systems
for Emergency Humanitarian Relief Operations in South Sudan, The
International Journal of Logistics Management, Vol. 17, No.2.

Bhanu,V., 1998, Inventory Behaviour in Cement Industry of Andhra Pradesh, The

Indian Economic Journal, vol.43, No.2.

Indian Cement Faces Some Challenges, But Potential for Growth Still
Massive,International Cement Review, Vol.XIV, No.I, January

Jannies and Mattsson, S.A 2006, A Longitudinal Study of Material Planning

Applications In Manufacturing Companies. International Journal of
Operations and Productions Management, Vol.26, No.9.

Langley, C.J., 1976, Determination of the Economic Order Quantity under

the Condition of Uncertainty, Transportation Journal, Vol. 16, No.L

Larson, P.D., 1989, The Integration of Inventory and Quality Decisions in

Logistics: An Analytical Approach, Journal of Business Logistics, Vol. 10, No.2.

Grablowsky, B.J., 1984,"Financial Management of \x\\Qr\Xoxy''\ Journal ofSmall

Business Management, Vol. 22, No.4.

Gupta, G.S., 1973, Production Function and Factor Productivity in Indian Cement
Industry,Indian Journal ofIndustrial Relations, Vol. 8, No.3.

Khairy, A.M. Kobbacy, and Yansong Liang 1999, Towards the Development of
an Intelligent Inventory Management System, Integrated Manufacturing
Systems, Vol.10, No. 6.

Khouja, M. 2003, 'Optimizing Inventory Decisions in a Multi-Stage and

Multi- Customer Supply Chain', Transportation Research Part E, Vol. 39.

74

AJ.-" -'crTi. •
Jonsson, P. and Mattsson, S.-A., 2003, The Implication of Fit Between Planning
Environments and Manufacturing Planning and Control Methods,
^ International Journal Operations Productions Management, Vol.23,No.8.

Knutton P, 1995, Inventory Management is Kid's Stuff at MB Ireland,

Works Manager, Vol. 48, No.3, March.

Nagen N. Nagarur, Tai-san Hu and Nirmal K. Baid, 1994, A Computer

Based Inventory Management System for Spareparts, Industrial Management and
Data Systems, Vol. 94, No. 9.

Nand Kishore Sharma 2002, Financial Appraisal of Cement Industry in India, The
Management Accountant, VoLXXV, No.3, August.

III.REPORTS,SEMINARS, AND CIRCULARS

Basic Data ofIndian Cement Industry 2008, Cement Manufacturers

Association, New Delhi.

Burange, E.G. 2003,Industry: Changing Structure, Composition and Slackening

g[' Growth, Ed. Bhalchandra Mungekar in the Economy of Maharashtra- Changing
Structure and Emerging Issues, Dr. Ambedkar Institute of Social and Economic
Change, Mumbai.

Burange, E.G. and Shruti Yamini 2008, Competitiveness ofFirms in Indian

Automobile Industry, Paper presented in International Conference on
Transportation System Studies, Department of Economics, University of
Mumbai, Mumbai.

CARE 2007, Cement Industry: Better Fortunes Ahead..., Cement Industry

CARE Ratings, Mumbai.

Cement Association of Canada 2006, A History ofCement, Ottawa.

http://www.cement.ca/cement.nsf/e/E5422FE72FC 1740A852568C5004ED
B3? Open Document.

Cement Manufacturers' Association 1964, 50 Years- The Cement Industry in

India I9I4 -1964, New Delhi.

•' Cement Manufacturers' Association 2007, Indian Cement Industry- At a Glance

(Various Years), New Delhi.

Cement Statisticsfor the period 1999-2008, Cement Manufacturers'

Association, Mumbai.

75
Centre for Science and Environment 2005, Concrete Plans: The life cycle ofthe
Indian Cement Industry^ Green Rating Project, New Delhi.

CMIE-2016, Center for Monitoring Indian Economy(CMIE), Mumbai.

Committee on Accounting Procedure 1953, Restatement and Review of

Accountings Research Bulletin, No.42, American Institute of Accountants,
New York, June.

Cimenterie Nationale 2007, History of Cement, retrieved on 11 th November,

2007 from http://www.cimnat.com.lb/Historv/Historv.asp.

Department of Trade and Industry (1994), Competitiveness, White Paper, Cm

2563, London, HMSO.

76
^5"
X

APPENDIX
KERALA AGRICULTURAL UNIVERSITY

COLLEGE OF CO-OPERATION, BANKING AND MANAGEMENT

INVENTORY MANAGEMENT IN MALABAR CEMENTS LIMITED

Interview Schedule

1. Profile of the Company

1.1. Name of the Company :

1.2. Address :

1.3. Year of Establishment :

1.4. Head office at

1.5. Total No. of Plants

1.6. No. of Plants in Kerala alone

1.7. Method ofProcess followed for production

a) WET Process [ ]

b) Dry Process [ ]

c) Both [ ]

1.8. Specify the no. of varieties produced

1.9. State the type ofcement manufactured by you

a) Blended cement(Portland pazzalana Cement) [ ]

b) Export quality(PSIO) [ ]

c) Quick setting cement [ ]

d) Under water cement [ I

e) White cement [ I
f) Any other (Please specify)

2.1 INVENTORY MANAGEMENT

PRACTICES

2.1. State the method ofthe planning for procurement ofraw materials is used.

(a)Post Consumption Analysis [ ]

(b) Materials Requirement Planning [ ]

(c) Any other method (Please specify)

2.2. Mention the type of materials budget prepared for the estimation of materials
requirement.

(a) Materials Budget [ ] (b)Operating budget [ ]

2.3. State the periodicity of budget

(a) Monthly [ ] (c) Half yearly [ ]

(b)Quarterly [ ] (d) Yearly [ ]

2.4. State the type of stock level determine for inventory control

(a) Minimum Level Yes[ ] No[

(b) Maximum Level Yes[ ] No[

(c) Re-order Level Yes[ ] No[

(d) Danger Level Yes[ ] No[

(e) Safety stock Level Yes[ ] No[

2.5. How is the inventory levels fixed?

2.6. Are selective control techniques being used in the cement units?
Yes[ ] No[ ]

2.7. Do you follow ABC analysis as selective control techniques?

2.8. If yes, mention the authority and department, who is the in charge for the different

Class of inventory Department Designation

2.9. Mention the range of percentage of consumption value and stock keeping units for
ABC classification
Class ofinventory Range of percentage of Range of percentage
consumption value of stock keeping units
A

2.10. State the method of purchasing followed

(a) Tender method [ ]

(b)Open piirchase method [ ]

2.11. Method followed for the fixation of size of order for different class of inventory.

Class of inventory Method followed for determining the size of order

2.12. What other inventory control techniques have been adopted by the units?

(a) Classification

(b)Codification

(c) Standardization

(d) Simplification

(e) Perpectual inventory system

2.13. What system is being followed for re-ordering inventory?

2.14 What have been the basic reasons for overstocking /under stocking?

2.15. How can inventory management be further improved?

2.16. Specify the problems in adoption of inventory control techniques

'sf

%r-J