CHAPTER - 1

INTRODUCTION

1
1.1 MEANING OF INVENTORY
Inventories means Tangible Property held.

 For sale in the ordinary course of business

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

MEANING OF INVENTORY MANAGEMENT

Inventory management deals with an adequate supply of materials to meet the expected demand pattern
subject to budget consideration.

Inventory management usually is not the direct operating responsibility of the finance manager, the
investment of funds in inventory is an important aspect of financial manager. Consequently, the finance
manager must be familiar with ways to control inventories effectively, so that the capital can be allocated
efficiently.

DEFINITION OF INVENTORY MANAGEMENT

It may be defined as the systematic location storage and recording of goods in such a way that desired
degree of service can be made to operate at minimum ultimate cost.

OBJECTIVES OF INVENTORY MANAGEMENT

The main objectives of inventory management are:

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

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  Excessive investments in inventory would ensure that there are no shortages in
production or sales operation.

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

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

 To minimize losses through deterioration, wastages and demand.

 To maintain investment in inventory at the optimum level as required by operational and sales activity.

 To facilitate of data for short term and long term planning and control of inventory.

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

1. Avoiding Losses of Sales

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

2. Gaining quantity Discounts

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

3. Reducing Ordering Cost

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

3
counted. Later, an invoice must be processed and payment made. The greater the number of orders greater is
the ordering cost.

4. Achieving efficient Production Runs

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

5. Reducing risk of production shortages

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

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

1. Raw material inventory

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

2. Stores and spares

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

3. Work in process (WIP)Inventory

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

4. Finished goods inventory

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 These are completely manufactured products awaiting sale. The purpose of a finished goods
inventory is to separate the production and sales function so that sales can occur without any immediate
dependence on production.

Types of Inventory Management Techniques:

1. ABC ANALYSIS

ABC analysis may be seen to share similar ideas as the Pareto principle, which states that 80% of overall
consumption value comes from only 20% of items. Plainly, it means that 20% of your products will bring in
80% of your revenues. ABC analysis works by breaking it down in the following ways: A-items: 20% of all
goods contribute to 70-80% of the annual consumption value of the items B-items: 30% of all goods contribute
to 15-25% of the annual consumption value of the items C-items: 50% of all goods contribute only 5% of the
annual consumption value of the items. In order to calculate the annual consumption value of any item or
items: Annual consumption value = annual demand x item cost per unit That way, the manager can determine
which goods bring in the most value and separate those from the numerous goods that provide little profit.

2. JUST IN TIME (JIT) METHOD

The "just-in-time method" is an inventory strategy where materials are only ordered and received as they are
needed in the production process. The goal of this method is to reduce costs by saving money on overhead
inventory expenses. The company must be able to accurately forecast demand for goods and services for the
just-in-time method to be effective.

3. MATERIALS REQUIREMENTS PLANNING (MRP) METHOD

Material requirements planning (MRP) is a computer-based inventory management system designed to

improve productivity for businesses. Companies use material requirement planning systems to estimate
quantities of raw materials and schedule their deliveries.

4. ECONOMIC ORDERING QUANTITY (EOQ) MODEL

Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory
costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed
in 1913 by Ford W. Harris and has been refined over time. The formula assumes that demand, ordering, and
holding costs all remain constant.

5
 5. MINIMUM SAFETY STOCKS

Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk
of stock outs (shortfall in raw material or packaging) caused by uncertainties in supplyand demand. 6
Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is
held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against
stock outs.

6. VITAL, ESSENTIAL & DESIRABLE (VED) ANALYSIS

It attempts to classify the items used into three broad categories, namely Vital, Essential, and Desirable. The
analysis classifies items on the basis of their criticality for the industry or company. Vital: Vital category items
are those items without which the production activities or any otheractivity of the company, would come to a
halt, or at least be drastically affected. Essential: Essential items are those items whose stock – out cost is very
high for the company. Desirable: Desirable items are those items whose stock-out or shortage causes only a
minordisruption for a short duration in the production schedule. The cost incurred is very nominal.

7. FAST, SLOW & NON-MOVING (FSN) METHOD

FSN analysis is yet another acronym used in inventory management, however, rather than just being a
buzzword, it really does hold a lot of merit to the stock manager. It is one of several useful analyses of
inventory that facilitate accurate control and should be considered by anyone wantingto better understand the
delicate nature of their products and sales and how to optimize them to reduce inventory overheads and
increase the bottom line. This acronym stands for Fast-moving, Slow-moving and Non-moving inventory
items. The purpose of FSN analysis is to consider quantity, the rate of consumption of products and how often
they are issued or used and to use this information to guide decisions about placement in the warehouse
(considering picking and packing to reduce time and labour), frequency of reordering oreven phasing out of
certain items.

8. HML Analysis

The cost per item (per unit) is considered for the analysis and all items are classified as High Cost (H),
Medium Cost (M) and Low cost (L) items. This type of analysis is useful for keeping control over
consumption at departmental level and for deciding the frequency of physical verification.

9. SDE Analysis
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This analysis is based upon the availability position of an item. Especially, developing countries where certain
items are scarce, this analysis is very useful. S- Refers to scarce items, especially imported items and those
which are short in supply D- Refers to difficult items, which are available in indigenous market but cannot be
produced easily. For example, items which have to come from far off cities or for which reliable suppliers
aredifficult to find. E- Refers to items which are easily available.

Inventory Control:

It is the process of deciding what and how much of various items are to be kept in stock. It also determines the
time and quantity of various items to be procured. The basic objective of inventory control is to reduce
investment in inventories and ensuring the production process does not suffer atthe same time. To attain
various objectives inventory control must:

a. Determine items to be stocked

b. Determine when and how much to replenish

c. Keep suitable records

d. Weed out obsolete items

1.2 Statement of the Problem

Inventory management refers to the process of ordering, storing, and using a company's inventory. These
include the management of raw materials, components, and finished products, as well as warehousing and
processing such items and inventory management techniques are methods of keeping the right items in stock.
This study is based on the different inventory management techniques that are used to improve the
organizations efficiency.

1.3 Relevance and Scope of the Study

The study seeks to clarify the concept of inventory management and various inventory management techniques
that are used by machine tools manufacturing companies. The study describes the theory and techniques of
inventory management and how the companies can use these techniques to improve their organizational

7
efficiency. The study has been conducted to find out the different inventory management techniques that are
used by the HMT Machine Tools to improve their organizational efficiency and profitability.

CHAPTER – 2

REVIEW OF LITERATURE

8
TECHNIQUES OF INVERTORY CONTROL:
Inventory control techniques are mainly followed by control organizations within the frame work of
one of the basic inventory models like

1. Fixed order quantity system or 'Q’ system

2. Fixed order period system ‘P’ system

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

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

The techniques in inventory control are as following

1. ABC(always better control)classification

2. HML(High, Medium, Low)classification

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

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

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

6. EOQ (Economic Order Quantity) analysis.

7. Maximum and Minimum system

8. Two-bin system.

9. JIT (just-in-time) technique

10. MRP (Materials Requirements Planning).

ESSENTIAL REQUIREMENTS OF INVENTORY CONTROL

1. There should be proper cooperation and coordination between various departments viz., purchasing
inspection, storage costs department etc.

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

3. There must be adequate planning of materials requirements and also the classification of materials with
their appropriate codes.

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

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

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

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

8. There must be a system of regular reporting regarding purchasing of materials, issuing and storage to the
management.

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

The formula for computing maximum level is

Maximum level = reorder level + reorder quantity – (minimum consumption * minimum reorder
period)

Minimum level

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

 Rate of consumption

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

The formula for computing minimum level is

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

Reorder level

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

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

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

 Lead time

 Average periodic consumption (daily consumption )

 Safety stock

Re-order level is decided as under

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

Economic order quantity

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

This give maximum economy in purchase of any material and ultimately contributes towards
maintaining the materials at an optimum level and at the minimum cost. It equates the cost of ordering with the
cost of ordering with the cost of storing materials.

Ordering cost

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

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

 Preparing a purchase order

 Processing payments

 Start =-up scarp generated the material

2. Ordering from the plant

 Machine setup

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

Ordering cost is ascertained as under

Annual requirement (R) *cost per order

O.C =
Order size

Carrying cost

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

 Interest cost due to locking up of funds

 Cost of storage space

Total carrying cost is ascertained as under

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

Economic order quantity is ascertained as under

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

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INVENTORY CONTROL TECHNIQUES

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

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

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

A.B.C CLASSIFICATION:

The following steps have been undertaken to implement ABC analysis.

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

 The total consumption value is determined by multiplying consumption quantity by its unit price.

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

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

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

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

F.S.N CLASSIFICATION:

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

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

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

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

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

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 CHAPTER - 3

RESEARCH METHODOLOGY

15
METHODOLOGY OF DATA COLLECTION
The methodology involves collection of data from primary and secondary sources. The data so
collected id subjected to analysis using the necessary tools that are relevant. Inference is drawn incorporating
both quantitative and qualitative data available at the research disposal. Based on inferences, conclusions are
drawn and recommendations are made to enhance the study on inventory management of HMT machine Tools
Limited, Bangalore complex. The relevant to the study was collected through secondary data.

SECONDARY DATA

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

REFERENCE PERIOD:

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

OBJECTIVE OF THE STUDY

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

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

 To study the materials stored.

 To know how the procurement of material is done.

 To study the inventory valuation in HMT-MBX.

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

NEED OF THE STUDY

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

Financial analysis helps in assessing the financial position and profitability of the concern.

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

LIMITATIONS OF THE STUDY

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

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

 The confidentially of some facts and figures.

 The constraints limit is the scope of the study.

 A detailed analysis of all items was not post

DESIGN OF THE STUDY

TITLE OF THE STUDY

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

LIMITED, BANGALORE COMPLEX”

Statement of the problem

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

The company’s operating efficiency is well understood with effective management of inventory. This is
essential because never too much capital has to be invested on idle stock of inventory and at the same time the
organization should not run with shortage of materials. Hence, the inventory management, which includes

17
right purchase of materials, storing, pricing, controlling, etc. is very significant. The overall profitability
position of the company is much dependent upon the inventory management.

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

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 CHAPTER - 4

COMPANY PROFILE

19
BACKGROUND AND INCEPTION OF THE COMPANY
H.M.T. is one of the leading public sector companies, in India, HMT I & II Bangalore plant was
inaugurated in 1953 by PANDIT JAWAHARLAL NEHRU; it has 16 manufacturing units spread over 10
states, 24 divisions and 29,000 employees in 10 different states.

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

INTRODUCTION OF MACHINE TOOLS LIMITED

HMT Limited, the pioneer in Machine Tools Industry in India and manufacturers of a diversified
range of products has incorporated “HMT MACHINE TOOLS LIMITED” as its fully owned subsidiary on
9th August 1999.

 “HMT MACHINE TOOLS LIMITED” (HMT-MTL) is a Multi-unit, Multi location, Multi technology
Company manufacturing a wide variety of “STATE-OF-THE-ART” Machine Tools.

 Comprehensive Customer Support services including Application Engineering, Customer Training and
after sales service.

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

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

NATURE OF BUSINESS CARRIED:

HMT limited, the pioneer in machine tools industry in India and manufacturers of a diversified range of
products has incorporated “HMT MACHINE TOOLS LIMITED” as it’s fully owned subsidiary on 9 th August
1999.

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

Company manufacturing a wide variety of “STATE-OF-THE-ART” machine Tools. HMT-MTL has its
manufacturing units at five locations with each unit specialized in a particular family of Machines. The sales
and service network is spread across the length and breadth of the country. As leading manufacturer of

20
Machine Tools in India, HMT-MTL provides the best of products in terms of technology, productivity and cost
effectiveness.

VISION, MISSION AND QUALITY POLICY

Corporate Vision

 To be a leading GLOBAL ENGINEERING CONGLOMERATE Focused on CUSTOMER DELIGHT

in our fields of Endeavour.

Corporate Mission

 To establish ourselves as one of the world’s premier companies in the engineering field having strong
international competitiveness.

 To achieve market leadership in India through ensuring customer satisfaction by supplying

internationally competitive products and services.

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

HMT PRODUCTS

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

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

1. Computer Networking Control (CNC) machines.

2. Turning machines.

3. Milling machines.

4. Drilling machines.

5. Grinding machines.

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 6. Boring machines.

7. Broaching machines.

8. Special purpose machines.

9. Other products:

 Metal forming.

 Die costing and plastic machinery.

 Printing machines.

 Food processing machines.

 Tractors.

 Quartz watches.

 Bearings.

 Précising ball screw.

 Recondition.

CUSTOMERS OF HMT

 HAL

 BHEL

 RAILWAYS

 SHIP BUILDING INDUSTRIES

 CEMENT INDUSTRIES

 GENERAL ENGINEERING INDUSTRIES

 BAJAJ AUTOS

 TVS

COMPETITORS OF HMT

 MICROMETRICS-TURNING CENTRE& GRINDING MACHINES.

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 PERISHED- GHAZI BAD– GRINDING MACHINES.

 HEC (HEAVY ENGINEERING CORPORATION- HEAVY DUTY LATHE.

 ACE DESIGNERS AT BANGALORE - TURNING CENTER, MACHINING CENTERS.

 LMW –TURNING AND DRILL TAP CENTERS.

 TAL –PUNE – SPAM.

 JYOTHI –TURNING CENTER& MACHINING CENTER.

 ASKAR MICRON- MYSORE –TURNING CENTERS.

 WIDIA- BANGALORE- SPAM.

 KIRLOSKAR - MYSORE.

23
 CHAPTER - 5

DATA ANALYSIS AND FINDINGS

24
DATA ANALYSIS AND INTERPRETATION
(1) INVENTORY TURNOVER RATIO:

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

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

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

Average stock of
Year Annual sales (Rs) ITR
Inventory(Rs)

2008 711049820 331128862 2.15

2009 749145908 352167951 2.13

2010 480030182 341860689 1.4

2011 519415843 336205679 1.5

2012 517609558 249868315 2.1

Inference:

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

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 2.5
2.15 2.13 2.1
2.05
2

1.5
1.5 1.4

0.5

0
2007 2008 2009 2010 2011 2012

Interpretation:

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

2. Raw Material turnover ratio:

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

The ratio is expressed as:

Annual consumption of raw materials / average raw materials

Material Average stock of raw

Year RMTR
consumed(Rs) material(Rs)

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 2008 202988988 54740677 3.7

2009 258354512 72275937 3.57

2010 232768231 91777764 2.53

2011 232793494 99709297 2.33

2012 201583439 88760886 2.27

Inference:

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

Raw Material turnover ratio

3.7 3.57
4
RMTR

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

Interpretation:

27
 From the above graph, raw material ratio has shown a decline in previous two year giving a good sign
of effective use of raw materials for the production process

3. Work in Progress turnover ratio

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

The ratio is expressed as:

Cost of completed works / average working progress

year Cost completed Average stock of WIP WIPTR

works (Rs) (Rs)

2008 459700000 159175871 2.88

2009 644100000 184395990 3.49

2010 629600000 178705152 3.52

2011 510300000 155556797 3.28

2012 472800000 3013832592 1.7

Inference:

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

28
 work in progress ratio
3.493 3.523 3.28
4 2.888
WIPR

3
1.7
2
1
0
2006 2007 2008 2009 2010

Years

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

4. Finished goods turnover ratio:

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

It is expressed as:

Cost of goods sold / average finished goods inventory.

year Cost of goods Average stock of FGTR

sold(Rs) finished goods
inventory(Rs)

2008 355433001 61743602 5.76

29
 2009 217902752 86397708 2.52

2010 510209350 103720829 4.92

2011 391747173 97118808 4.03

2012 475825957 951288185 0.50

Inference:

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

Finished Goods Turnover Ratio

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

Interpretation:

30
 From the above graph it shows that this ratio, throughout the period of study showed fluctuating trend,
which shows that finished goods are deign in the inventory depending on sales.

5. Inventory to working capital ratio:

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

The ratio is expressed as:

Inventory / working capital

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

2008 255923194 118264769 2.16

2009 406334134 184880590 2.19

2010 298001371 102606769 2.9

2011 385720007 159119142 2.42

2012 286754600 87208510 3.29

31
Inference:

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

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

2.5
2
1.5
1
0.5
0
2006 2007 2008 2009 2010

Years

Interpretation:

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

6. Inventory holding period:

Inventory holding period should be minimum. Number a day for which inventory is holding is
calculated by the following formula.
32
 Inventory holding period = inventory / annual sales * 365 days

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

2008 255923194 562190859 166

2009 406334134 711049820 208

2010 298001371 749145908 145

2011 385720007 480030182 293

2012 286754600 519415843 202

Inference:

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

33
 Inventory holding period
293
300
250 208 202
200 166
IHP (InDays)

145
150
100
50
0
2006 2007 2008 2009 2010

Years

Interpretation:

As we know that IHP should be minimum. Here in the above graph it shows that HMT Machine tools
ltd is holding inventories for longer period in the previous year. This is due to decline in sales and other reason
like change in design, order being cancelled etc.

ABC ANALYSIS

CLASSIFICATION OF ITEMS:

ABC classification is based on value

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

34
  10% in number and 20% by value classified as CLASS B.

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

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

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

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

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

Polices adopted by ‘A’ class items:

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

 The inventory control department maintains up-to-date and accurate records: It will be sent more
frequently to the top management.

 The inventory is at minimum level.

 The purchase department maintains better vendor relations confiding with VRM (Vendor Relation
Management).

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

Polices adopted by ‘B’ class items:

35
  The policies for these items are intermediate between ‘A’ and ‘C’ items.

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

 Stock and issue cards are maintained.

Polices adopted by ‘C’ class items:

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

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

Bulk purchase is done to take advantage of quantity discounts.

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

ABC ANALYSIS

Type Quantity Rate Inventory Ranking Percentag Cumulative

e
Value (Rs)

1 95 8069 766562 51504825 0.4600 0.4600

2 8508 6054 51504825 23733679 0.2119 0.6719

3 1931 3683 7111949 13241796 0.1182 0.7901

4 98 2443 239433 8226838 0.0734 0.8635

5 173 7804 1350016 7111949 0.0635 0.9270

6 1791 13252 23733679 3135454 0.0280 0.9550

36
7 355 6525 2316198 2316198 0.0206 0.9756

8 361 34188 12341796 1350016 0.0120 0.9876

9 9 25820 232377 993269 0.0088 0.9964

10 128 24496 3135454 766562 0.0035 0.9999

11 626 13142 8226838 239433 0.0021 1.0020

12 42 23649 993269 232377 0.0020 1.0040

111952397

INVENTORY MOVEMENT SUMMARY

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

FAST AND SLOW MOVING INVENTORY TABLE:

Inventory summary as on 31-mar-2010

Type Description Total-inventory 00-12- fast

moving

Count Value Count Value

13 Accessories 626 8226838 127 1564821

37
12 Auxiliary materials 128 3135454 56 1823102

07 Electrical parts 1791 23733679 690 7826120

04 Electrical spares 98 239433 5 39757

14 Foundry materials 42 993269 39 964980

08 Non-ferrous castings 355 2316198 35 611030

09 Production steels 361 12341769 168 8962899

01 Shop stores 95 766562 50 548901

02 Standard parts 8508 51504825 3067 20519372

10 Timber 9 232377 6 216687

03 Tools 1931 7111949 326 1731119

06 Mechanical spares 173 1350013 8 13725

Total 14117 111952397 4577 44822515

SLOW MOVING INVENTORY

Type Description 13-24 months 25-36 months

Count Value Count Value

13 Accessories 29 369927 35 770603

12 Auxiliary materials 20 618836 9 256529

07 Electrical parts 140 3749382 143 1317059

38
04 Electrical spares 1 91 2 418

14 Foundry materials 3 28289 0 0

08 Non-ferrous castings 23 476109 58 297605

09 Production steels 55 718185 32 305882

01 Shop stores 11 68785 6 40013

02 Standard parts 787 2972440 850 4544383

10 Timber 0 0 0 0

03 Tools 158 750188 183 774036

06 Mechanical spares 12 20268 5 6099

Total 1239 9772500 1323 8312629

NON-MOVING SURPLUS ITEMS

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

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

NON-MOVING INVENTORY

Typ Description 37-60 months Above 60 months

39
e (slow)

Count Value Count Value

13 Accessories 34 377321 401 5144066

12 Auxiliary materials 190 217828 24 219159

07 Electrical parts 170 1715183 648 9125934

04 Electrical spares 2 3017 88 196150

14 Foundry materials 0 0 0 0

08 Non-ferrous castings 93 549525 146 381929

09 Production steels 44 971166 62 1383664

01 Shop stores 11 12202 1 1144

02 Standard parts 947 4222857 2853 19226689

10 Timber 0 0 3 15690

03 Tools 255 1036833 1003 2656270

06 Mechanical spares 6 127783 142 1182141

Total 1581 9233713 5371 39532935

Table showing non-moving inventory value for last 4 years

Years Non-moving inventory value

2006-07 68640771

2007-08 69115099

2008-09 63904124 40

2009-10 54037536
 Reason for Non-moving inventory

 Change in design of the equipment

 The sale order may be cancelled

 Change in the production pal

COMPONENTS OF INVENTORY

All efforts of the management to control inventories should aim at maintaining various components of
inventory at economic levels and in proper proportions.

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

 Raw material and components

 Stores and maintenance spare parts

 Tools and Instruments

 Work in progress

 Stock in trade

 Material and components in transit

 Scrap

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

41
Inventory 2006 2007

Value (Rs) % Value (Rs) %

Raw material and components 56259639 21.98% 88292234 21.73%

Stores and maintenance spare 43575373 17.03% 70424054 17.33%

parts

Tools and Instruments 6784051 2.65% 11623924 2.86%

Work in progress 157983036 61.73% 210808944 51.88%

Stock in trade 44228574 17.28% 128566842 31.64%

Material and components in 13557863 5.29% 12199115 3.00%

transit

Scrap 382055 0.15% 506206 0.12%

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

TOTAL 255923194 100% 406334530 100%

Components of Inventory 2006

160000000 Raw material and components

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

Components of Inventory 2007

42
 Raw material and components
Stores and maintenance spare parts
250000000 Tools and Instruments
200000000 Work in progress
150000000 Stock in trade
100000000 Material and components in transit
50000000 Scrap
0
Less: provision for obsolescence
-50000000

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

Inventory 2008 2009

Value (Rs) % Value %

(Rs)

Raw material and components 95263294 31.97% 10415529 27.00%

9

Stores and maintenance spare 78708704 26.41% 61500000 15.94%

parts

Tools and Instruments 9834637 3.30% 11958169 3.10%

Work in progress 14660136 49.19% 16451223 42.65%

1 3

Stock in trade 78874816 26.47% 11536180 29.91%

0

Material and components in 12199115 4.09% 0 0

transit

43
 Scrap 478992 0.16% 2000000 0.52%

Less: provision for obsolescence 12395954 -41.29% 73768494 -19.13%

8

TOTAL 29800137 100% 38572000 100%

1 7

Inventory 2010

Value (Rs) %

Raw material and components 82258478 28.68%

Stores and maintenance spare parts 46217359 16.12%

Interpretation:
Tools and Instruments 9310239 3.24%

Work in progress 154781231 53.98%

From the above, we
Stock in trade 74894837 26.19%
can say that the components
of inventory Material and components in transit 1120000 0.39% fluctuating
during the Scrap 751000 0.26% study period. If
we study the composition of
Less: provision for obsolescence 82578544 -28.80%
inventory in HMT Machine
tools ltd the TOTAL 286754600 100% major portion of
its total inventory consist
of work in progress and components and stock in trade.

Components of Inventory 2008

44
 160000000
Raw material and components
140000000
120000000 Stores and maintenance spare parts
100000000 Tools and Instruments
80000000 Work in progress
60000000 Stock in trade
40000000 Material and components in transit
20000000
Scrap
0
Less: provision for obsolescence
-20000000

Components of Inventory 2009

18000000000.00% Raw material and components

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

Components of Inventory 2010

16000000000.00% Raw material and components

14000000000.00% Stores and maintenance spare parts

12000000000.00% Tools and Instruments
10000000000.00%
Work in progress
8000000000.00%
Stock in trade
6000000000.00%
4000000000.00% Material and components in transit

2000000000.00% Scrap
0.00% Less: provision for obsolescence
-2000000000.00%

SIZE AND GROWTH OF INVENTORY

45
 The size of inventory and growth shows of the company. The effective regulation of inventory calls for
the maintenance of inappropriate level of inventory. All though

Inventory is necessary to run a plant efficiently the excess of inventory serves no purpose and also
affects the profitability of the firm.

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

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

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

inventory sales

2006 255923194 562190859

2007 406334134 711049820 58.77% 26.48%

2008 298001371 749145908 -26.66% 05.36%

2009 385720007 480030182 29.44% -35.92%

2010 286754600 519415843 25.65% -07.58%

SIZE AND GROWTH OF INVENTORY

46
 SIZE AND GROWTH OF
INVENTORY
Year Inventory (Rs)

711049820
749145908 480030182
562190859 519415843

406334134 385720007
255923194 298001371 286754600

2006 2007 2008 2009 2010

Interpretation:

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

FINDINGS

The growing competition and technological developments in this sector are having inevitable effects on
the Indian machine tool industry as a whole. The HMT machine tool limited is facing typical problems in the
emerging globalization scenario as under:

47
 HMT machine tool has a regular system for determining unserviceable or damaged stores, raw
materials and finished goods.

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

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

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

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

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

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

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

 Bin cards are used for maintenance of stores.

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

 Overhead costs are high.

 Absenteeism and inefficiency are high in the company.

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

 Motivation of employees is less.

48
CHAPTER - 6

CONCLUSION

49
SUGGESTIONS
 The company should make efforts in making the whole use of installed and licensed capacity.

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

 The company should adopt modern costing systems, balance scorecard concept etc.

 The company inventory management is at moderate level. Hence effective steps have to be taken to see that
the inventory management is made more efficient so that capital is blocked in inventory can be used for
working capital required.

 Major part of revenue earned is spent on payment of interest: therefore measures should be taken to reduce the
amount of credit.

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

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

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

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

 Suitable measures should be taken for improving shorts term solvency position, current ratio and working
capital.

 The company should reduce inefficiency, absenteeism and idle time.

 The company should make improvement with regard to productivity.

50
CONCLUSIONS
HMT is a very popular name among every Indian, because of its innovation of technology quality assurance durability
affordability to its people or customer. HMT has created the brand image that symbolizes machine tools to a
manufacturer, tractors to a farmer and watches to millions of people in India.

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

HMT commitment to the development of machine tool technology is clearly reflected in the fact that HMT
has as many as 9 exclusively machine tool until spread across the country.

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

51
 ANNEXURE

1. https://www.hmtindia.com/wp-content/uploads/2022/12/HMT_LIMITED_2011_12.pdf
2. www.hmtmachinetools.com
3. www.hmtindia.com
4. Annual report of HMT Machine Tools Ltd
5. Project reports
6. https://macfast.org/wp-content/uploads/2022/03/190031000689.pdf

52