Project

Report
Performance Appraisal through Inventory
Management with reference to Dankuni Coal
Complex

SUMITTED BY:

RUDRANIL BAG
Roll No. A-08-38
Graduate School of Business &
Administration
Greater Noida
National Capital Region
 ACKNOWLEDGEMENT

I wish to express my gratitude to all those individuals with

whom, I interacted and gained knowledge, insight and thoughts
while preparing this project report. First of all, I am grateful to
the Chief General Manager, DCC, for granting me permission to
do this project in the organization. At the same time I would like
to thank Shri N.P.Sarkar, S.E. (E&M)/I/C, Training and Shri
Bhaskar Chakraborty, Dy. Chief F.M., DCC for their co-operation
during the training period. I would also extend my thanks to
Shri K.C.Saha, F.M, DCC for his able guidance and
encouragement while working on this project.

I also take this opportunity to thank the senior managers of all

the divisions of finance department for their co-operation while
I visited their respective divisions.

I also owe a lot to my father Shri K.N.Bag, Practising Cost

Accountant, who has always been a source of guidance and
inspiration while making this project and without the help of
whom, doing this project was almost impossible.

Last but not the least, I would like to thank my internal project
guide Prof. Rashid Khan, Graduate School of Business And
Administration for his help as and when required.

RUDRANIL BAG

(Roll No.A-08-38)

CONTENTS

TOPICS

EXECUTIVE SUMMARY
OBJECTIVE OF THE STUDY

METHODOLOGY
 COAL INDUSTRY IN INDIA -A RETROSPECT
 COAL INDIA LTD.-A PROFILE OF THE PARENT

 SOUTH EASTERN COALFIELDS LTD.-A PROFILE

OF THE SUBSIDIARY

DANKUNI COAL COMPLEX-A PROFILE OF THE

UNIT OF SECL

INVENTORY MANAGEMENT-AN OVERVIEW

ANALYSIS OF INVENTORY OF DANKUNI COAL

COMPLEX

CONCLUSION

RECOMMENDATIONS

BIBLIOGRAPHY
 EXECUTIVE SUMMARY
LPG or Liberalization, Privatization and Globalization as it is referred in short
today have changed the scenario of corporate world and management of
enterprises in our country. It has now become more important to not just
manage an organization but to achieve corporate excellence simultaneously as
the future belongs to learning and performing organizations.
As every business concern irrespective of its size, nature, and age needs an
adequate level of inventory to carry out business operations and survive,
inventory becomes an important and integral part of business. Inadequate
inventories means interruption of production and sales operation whereas
excessive inventories means accumulation of idle funds and increase in carrying
cost. Therefore, to manage inventories in any sector is a challenging job.
The project report titled “Performance appraisal through Inventory
Management with reference to Dankuni Coal Complex” deals with this
matter and is based on the in-house industrial training at Dankuni Coal
Complex, pertaining to the requirement for the Diploma of PGDM from
“Graduate School of Business And Administration.”
Unless organization learn to manage its inventory, success, will be elusive.
Thus, the effectiveness of an organization depends much on the strength of its
inventory management which is an important part of the whole system. In the
context of India’s Coal Industry inventory management holds a greater
significance because coal which is one of the major source of fuel for any
industry, in recent years has become more crucial for achieving rapid economic
growth of our country.
Keeping this background in view, an attempt is made to examine the
performance of inventory management in SECL with special reference to
Dankuni Coal Complex. The project contains the procedures for the analysis of
inventory, ratios being used to define the efficiency of inventory management
and the impact of shortcomings in the management of it. All this had been done
to get a clear view of the techniques of inventory management in Dankuni Coal
Complex.

OBJECTIVE OF THE STUDY

 To find out the efficiency of Inventory management in Dankuni Coal
Complex, a unit of South Eastern Coalfields Ltd. (SECL).

 To have a first hand experience of the functioning of a coal carbonization

plant.

 To have a practical experience of the functioning of the Finance

Department of a coal gas producing company.

 To study how inventory management practices plays an important role in

supporting other activities of an organization.

 To gain familiarity with the various methods and techniques followed by

Dankuni Coal Complex (DCC) in maintaining their inventory.

 To judge the success of the management in balancing the production with

the demand.

 To gain an in-depth knowledge of the tricks of faster conversion of

inventories into cash in Dankuni Coal Complex.

 To find out the difference between the theoretical and practical aspect of
inventory management.

 To study and come out with any solution for improvement of inventory
management in Dankuni Coal Complex.

METHODOLOGY
The data which I have collected for making this project is combination of both
primary and secondary data.

PRIMARY DATA:
This data had been collected through meetings and interviews with various
managers and employees of the finance department of Dankuni Coal Complex.
At the same time I had visited various other departments for collection of data.
The departments that had been visited are as follows:-
♣ Main Cash Department
♣ Billing and Operation Department
♣ Excise Department.
♣ Sales Department

SECONDARY DATA:
Apart from the primary data certain secondary data were required for this
project. Following are the sources of secondary data:-
♣ Annual Reports
♣ Inventory Reports
♣ Cash Report
♣ Raw Materials Report
♣ Production Reports
♣ Sales Reports
♣ Financial Year Book.

The initial step of the project was studying about the company and the industry.
For the study, the inventory size of the company has been been taken into
consideration. Apart from it, three important ratios were calculated and studied
during the period of study. These are: (a) Inventory Turnover Ratio, (b)
Inventory Holding Ratio and (c) Inventory to Total Assets Ratio.

Further some statistical techniques such as Chi-Square Test and Least Square
method have also been employed in the study to assess the behavior of the ratio.

COAL INDUSTRY IN INDIA-A RETROSPECT

Coal has traditionally been a vital input to the heritage of India. Commercial
coal mining in India with coal as an article of trade started in the late 18th
century, at the instance of Warren Hastings for the benefit of the East India
Company for the manufacture of arms and ammunitions. This was in the
Raniganj Coalfield in the eastern part of India along the bank of river Damodar.

The post-independence thrust for industrial development in India necessitated

greater coal production and led to the State taking over the coal sector in early
seventies. And Coal India Ltd. was incorporated as the holding company for
bringing in integrated development of coal. Much water has flown down the
Ganges ever since then. The level of coal production in the country has become
three times than that was prevalent at the time of nationalization in the early
seventies. Coal India contributes 85% of the coal produced and consumed in the
country.

But the story of coal is not merely the story of the unrelented struggle against
odds to produce and supply coal throughout the country. It is also the story of
the heart beats of 4.25 lakhs employees and their families working and staying,
at times, in remote areas in 8 states of our country and constituting a mini India.
Their achievements, social roots, cultural moorings have become a part of ethos
of the region in which the coalfields are situated.

Historical records in India indicate that mining and the use of some metals and
their alloys, including iron took place in the ancient of civilization. Ruins of old
smith furnaces and slag heaps close to coal deposit regions in Eastern India
indicate that coal industry remained nebulous until the middle of the eighteenth
century.

In their memoir of 1774, Summer and Heatly of the East India Company
recorded the receipt of the proposal by the council of Revenue ‘for working coal
mines and selling coal in Bengal’. M/S Summer and Heatly were granted
permission to mine coal in six mines and actually started operations in one of
them. Following that, industrial coal mining operations in India continued in
low key, principally as a result of indifference and neglect. This state of affairs
persisted until 1813, when the government deputed an experienced mining
engineer to make an appraisal of the prospects of coal mining in India. By the

mid-nineteenth century, coal mining was well established and production was
about 90000 T/yr by 1850.The level of coal production in India reached 6.12
MT/yr by 1900 and the same reached 18 MT/yr by 1920. A number of
committees and commissions at that time recommended conservation and
scientific exploration of coal, improvement of working conditions in mines and
the safety of the mines. Coal production during this period was mostly by
manual means, only a few coal cutting machines being employed in some of the
mines which were electrified. By 1946, the year before India gained
independence, coal production reached 30 MT/yr.

With the advent of independence, the country embarked upon Five-Year

National Development Plans to improve the economic status of the people. Coal
being the most important and proven energy form available, the need was felt in
the First Five Year Plan for greater and more efficient production of coal. A
production of 39 MT/yr was envisaged by the terminal year (1955/56) of the
first five year plan. The Second Five-Year Plan set a more ambitious coal
production target of 60 MT/yr by the terminal year (1960/61) of the plan
terminal period. During this period, it was considered that the private sector
would not be able to achieve the target of coal production. As a result, the
National Coal Development Corporation Ltd. (NCDC), a Government of India
undertaking, was established in 1945 with the collieries owned by the railways
as its nucleus. Alongwith Singareni collieries Co ltd. (SCCL), already in
operation in Southern India from 1945, the country thus had two state-owned
coal companies. With the government’s national energy policy, the near total
national control of coal mines in India took place in two stages. The coking coal
mines were taken over in 1971 and nationalized in 1972 and the non-coking
coal mines were taken over and nationalized in 1973. In 1975, the holding
company Coal India Limited was formed. Singareni collieries Co. Ltd. (SCCL)
continued to maintain its separate identity, while a few of captive mines
belonging to steel plants such as Tata Iron and Steel Company Ltd. (TISCO)
and the Steel Authority of India Limited (SAIL-IISCO) and power agency,
Damodar Valley Corporation (DVC) were kept out the purview of coal
nationalization.
 COAL INDIA LTD. - A PROFILE OF THE PARENT
The Government of India had re-organized the whole management structure of
the Coal Industry in the Central Public Sector vide, Minister of Energy,
Department of coal, letter no. 38011/1/74/CAF dated 27th September, 1975. This
was with a view to integrate and streamline the structural setup in such a
manner as would be conductive to more efficient administration and facilitates
the attainment of objectives laid down. In this re-organization:-

♣ The CMAL (Coal Mines Authority Limited) was converted into a holding
company and named Coal India Limited (CIL).

♣ The erstwhile divisions of CMAL were converted into registered

subsidiary companies of CIL.

♣ The Bharat Coking Coal Limited (BCCL) and National Coal

Development Corporation Limited (NCDC) became the subsidiaries of
CIL.

On 21st October 1975, CIL, was formed as a holding

company with its registered office at 10 Netaji
Subhas Road, Kolkata-700001 and BCCL and
NCDC were transferred to it. Coal India Ltd.,
presently contributes 85% of the total coal
production in the country. It operates through eight
subsidiaries: seven production companies namely
Eastern Coalfields Ltd. (ECL), Bharat Coking Coal
Ltd. (BCCL), Central Coalfields Ltd. (CCL),
Northern Coalfields Ltd. (NCL), Western Coalfields Ltd. (WCL), Mahanadi
Coalfields Ltd. (MCL), and one R & D company namely CMPDIL (Central
Mine Planning & Design Institute Ltd.) for mine planning, design and
engineering consultancy services. Three units viz. North Eastern Coalfields Ltd.
(NEC), Magherita (Assam), Dankuni Coal Complex (DCC), Dankuni (W.B.),
Indian Institute of Coal Management (IICM), Ranchi (Jharkhand) are directly
under CIL. The Dankuni Coal Complex is however currently under lease to
SECL on rental charges from 1.4.95.Coal India Ltd. Spread over 8 states, has
478 mines, 82 areas, 16 washeries and has over 200 administrative
establishments like workshop, hospitals and captive power plants. Not only this,
CIL owned 140771 hectares of land surface mining sights out of the total
3287263 sq. km. landmass of India. CIL, which employs more than 4.25 lakh
people, is also the largest corporate employer of India and the second largest in
the world after General Motors, U.S.A. According to Business World Survey of
top 500 companies in 2003, CIL ranked 21st in overall category listing. In terms
of industry wise ranking, it ranked 1st among other mining sector companies. By
assets it stood 10th among 50 others with an asset base of whopping 16533.1
crores. By profits, it reached 23rd with a net profit of 516.8 crores in 2002-03.
And lastly, in terms of coal production at global level, CIL is the largest coal
producing company in the world.

MISSION OF CIL

The mission of Coal India Ltd. is to produce planned quality of coal efficiently
and economically with due attention to safety, conservation and quality.

BROAD FUNCTIONS OF CIL

♣ Laying down policies.

♣ Formulating long and short term strategies.
♣ Monitoring the functions of the subsidiary companies
♣ Laying down system and procedures.
♣ Assisting the subsidiary companies to achieve their objectives.
♣ Coordinating with ministry of coal, ministry of railways, planning
commission and other ministries.

SPECIFIC FUNCTIONS OF CIL

♣ Pricing and distribution of coal

♣ Coal supply agreements
♣ Consumer services through regional offices
♣ Negotiations of wages
♣ Executive cadre control – recruitment, promotion/postings,
pay/perks etc.
♣ Manpower planning – HRD
♣ Foreign collaboration
♣ Introduction of new technology
 ♣ R&D activities
♣ Mobilization of resources – long term and short term
♣ Accounting policies.

PRODUCTS AND SERVICES OF CIL

Coking Coal, Semi Coking Coal, NLW Coking Coal, Non Coking Coal, Hard
Coal, Washed and Beneficiated Coal, Middling, Rejects, CIL-Coke/LTC Coke,
Coal Fines/Coke Fines, Tar/Heavy Oil/Light Oil/Soft Pitch, Gradation of Coal,
and Suitability of Coal.

ORGANIZATION STRUCTURE OF COAL INDIA LTD.

COAL INDIA
1975

478MINES

NEC
ECL (MARGHERI
(SANCTORIA TA) 1975,
) 1975, 7MINES
112MINES

BCCL CCL
(DHANBAD) (RANCHI)
1973, 1975,
80MINES 63MINES

WCL NCL CMPDIL SECL MCL

(NAGPUR) (SINGRAULI) (RANCHI) (BILASPUR) (SAMBALPU
1975, 1986, 1975 for 1986, R) 1992,
80MINES 16MINES R&D 97MINES 23MINES

SOUTH EASTERN COALFIELDS LTD.-A PROFILE OF

THE SUBSIDIARY
 South Eastern Coalfields Limited is the largest
coal producing company in the country. It is one
of the eight subsidiaries of Coal India Limited (A
Govt. of India Undertaking) under the Ministry
of Coal. The company was adjudged the best
PSU in the country for 97-98 and was awarded
Jawaharlal Nehru Memorial National Award for
pollution control and energy conservation in the
year 2003 and Excellence award in 2004 and
2006. SECL has been awarded “Mini Ratna"
Status by Government of India in 2007. In year
2007-08 the total coal production by SECL was 93.79 million tonnes from open
cast and underground mines which is highest among all subsidiaries of Coal
India Ltd and among all coal producing companies in India. In the year 2007-08
out of total coal production of 379.49 million tonnes produced by Coal India
Ltd., total coal production by SECL was 93.79 million tonnes. SECL has been
making profits since its inception.

PRODUCTION AND PRODUCTIVITY

A Mini Ratna Company -South Eastern Coalfields

Limited has made a record in the year 2007-08 in
Production and set an all time highest record in
Overall Performance in respect of off-
take/despatches, production, wagon loading, quality
improvements and optimization of overall consumers’
satisfaction in terms of meeting their coal
requirement.Total Production in the year 2007-08 was
93.79 Million Tonnes against the target of 91.5
Million Tonnes which is 5.98 % more than in the year
2006-07. SECL has also set a historical all time high
record of despatch by despatching 95.00 Million
Tonnes to its various Consumers during the year
2007-08.This is an all time high record by any subsidiary of Coal India Limited.

AREA OF SECL

The coal deposits of SECL occur in five districts i.e. Bilaspur, Korba,
Raigarh ,Surguja &Korea in Chhattisgarh and three districts Shahdol, Umaria,
Anuppur district in Madhya Pradesh. This occurs in the great Son Mahanadi
master basin.

SECL has 93 Mines. Total UG Mines are 72 and Total OC mines are 20.There
is 1 mixed mines.

There are 40 UG Mines, 12 OC Mines, 1 Mixed Mines in Chhattisgarh and 32

UG Mines, 8 OC Mines in Madhya Pradesh.

These mines are divided into 13 Administrative areas -

1. Johilla area 2.Sohagpur area 3.Jamuna & kotma area 4.Hasdeo

area

5. Chirimiri area 6.Baikunthpur area 7.Bisrampur area 8.Bhatgaon Area

9. Korba area 10.Gevra area 11.Kusmunda area 12.Raigarh area 13.Dipka

area.

The corporate office is at Bilaspur (C.G.).

As on 31/03/2007 SECL has geological coal reserve of 46452.02 million tonnes.

As on 31/03/2007 SECL has mining right over 973.58 sq.km and all rights over
264.66 sq km.

TECHNOLOGY AT SECL

SECL is in it’s strive for higher production from underground mines has already
successfully introduced thick seam extraction with cable bolting, depillaring of
contiguous seams with floor pinning and Powered Support Longwall
Technology with chinese collaboration at Balrampur and Rajendra Under
ground mines, Mass production technology with continuous miners in
collaboration with UK and other developed countries, Hydro-fracturing and
long hole blasting at goaf from underground for hard roof management at
Churcha West Mines, Indigenously developed Cutter Loader to avoid blasting
in gassy mine etc.Upgradation of technology is continous process to be
competitive. Modern generation of shovel and dumpers having capacity 10 m
cube and 120 tonne dumper are being used on Open Cast mines. With use of
such HEMM SECL has the distinction of operating biggest opencast mine in the
country. SECL has planned to use shovel up to 40 m cube and Dumper up to
240 T capacity in Gevra Coal field.

DANKUNI COAL COMPLEX-A PROFILE OF THE UNIT

OF SECL
 The Fuel Policy Committee of Govt.
of India in its report in 1974
recommended the setting up of a
number of Low Temperature
Carbonization Plant in India for
replacement of petroleum based fuel
oil in the wake of sudden rise in
petroleum prices during the middle of
1970’s. In pursuance of this decision,
Govt. of India decided that such a
Plant would be operated by Coal India
Ltd. Accordingly a Carbonization
Plant at Dankuni was set up. The
foundation stone was laid by Former Prime Minister Shri Indra Ghandi in
1981and the plant started operation in the early 1990’s.

The Prime Objectives of this project is to produce:

♣ About 800 tonnes per day of solid Smokeless Fuel, branded as

CILCOKE.
♣ About 18 million cft of Coal gas per day for supply in and around
Calcutta and Howrah
♣ About 70 to 75 tonnes of Tar Chemicals per day.
♣ Both solid and gaseous fuels, being very clean in nature, would
subsequently contribute to the reduction of pollution level of Calcutta and
Howrah.

Dankuni Coal Complex Plant has been leased out by Coal India Ltd. to SECL

PRODUCTS OF DANKUNI COAL COMPLEX, DANKUNI

(WEST BENGAL)

The products of DCC are CILCoke, Cokefines, Coal gas, Light

Oil, Neutral Oil, Heavy Oil, Soft Pitch, Phenol, Ortho-cresol and
Metapara-cresol, Xylenol, High Boiling Tar Acid, Ammonium
Sulphate, Sulphur, Calcium Carbonate and Dehydrated Tar.

A BRIEF EXPLANATION ABOUT THE MAJOR PRODUCTS

Coke- Manufactured from low ash, low phosphorous, low sulphur coal source.

Available in (+) 35 (-) 70 mm, (+) 6 (-) 35 mm and 0-6 mm size range.

Fixed Carbon content: 62-67%, V.M: 3-5%, Phosphorous- 0.03-0.04%,

Calorific Value: 5000-5500 K. Calorie/Kg.

Usage: (+) 6 mm Coke used as smokeless domestic fuel, Industrial Reductant

for mfg. of Bulk Ferro-Alloys. (-) 6 mm coke used for Briquettes, Cement

Plants, Smelting/ Rosting.

Coal Fines: Size of 0-25 mm, Ash- 18-22%, Calorific Value- 5400 to 5800
K.Cal/Kg

Usage- (i) Sweetener for improving PLF in Power Plants.

(ii) In cement plants for better quality products.

(iii) Due to long flame character, suitable for Boiler and furnace, Brick
and lime kilns.

CoaL Tar: Destructive distillation of high V.M. Coal in Retorts liberates

Coal-Tar.

Specific Gravity 1.02-1.05, Moisture- 1-2%. GCV above 10000 K.Cal/Kg.,

Kinematic Viscosity 184.

Usage: Effective substitute of Furnace Oil, Preparation for Boat Paint, Tar-felt
etc. Can be distilled to yield wide spectrum value added chemicals such as
phenol, Ortho-Cresol, Meta-para-Cresol, Xylenol, HBTA.
 INVENTORY MANAGEMENT-AN OVERVIEW
INTRODUCTION

In financial parlance, inventory is defined as the sum of the value of raw

materials, fuels and lubricants, spare parts, maintenance consumables, semi-
processed materials and finished goods stock at any given point of time. The
operational definition of inventory would be: the amount of raw materials, fuel
and lubricants, spare parts and semi-processed material to be stocked for the
smooth running of the plant. Since these resources are idle when kept in stores,
inventory is defined as an idle resource of any kind having an economic value.

Inventories are maintained basically for the operational smoothness, which they
can affect by uncoupling successive stages of production, whereas the monetary
value of inventory serves as a guide to indicate the size of the investment made
to achieve this operational convenience. The materials management department
is expected to provide this operational convenience with a minimum possible
investment in inventories. The objectives of inventory, operational and
financial, needless to say, are conflicting. The materials department is accused
of both stock-outs as well as large investment in inventories. The solution lies in
exercising a selective inventory control and application of inventory control
techniques.

INVENTORY TERMINOLOGY

Inventory or stock is referred to in a variety of ways:

A Stock-keeping unit (SKU) is a separately identifiable class of item, which is

complete in the sense that a customer in that form can utilize it.

Manufacturing, wholesale and retail inventory depends on the type of firm

holding the inventory. These could be held in different forms for the same
material. For example, wholesale in bulk form, and retail in packaged form.

During manufacturing, input inventory is raw material; an inventory in-between

processing stage is referred to as work-in-process; and after the completion of
manufacturing is called as finished goods inventory.
Transit or in-transit or pipeline inventory is inventory that either waiting or in
the process of transportation. The speed of transportation and the point of time
of ownership transfer of pipeline inventory determines the time of holding, and
hence the cost of holding this inventory.

Seasonal stock refers to the material, which is purchased or manufactured in

anticipation of seasonal demand.

Promotional stock is the additional stock kept ready for the increase in demand
due to market promotions of products.

Speculative stock is the additional stock purchased as a hedge against the

possibility of future increase in price of the material.

Dead stock is unused and / or obsolete stock, which cannot be sold.

DEFINATIONS

In order to understand the concept of inventory terms are used for managing
inventory at a logistical facility, let us first view the definitions:

Inventory level is the actual inventory quantity held at a logistical facility at a

particular point of time.

Cycle inventory or base stock refers to the inventory quantity held in stock due
to the replenishment time required in the ordering process.

Replenishment time or lead-time is the time elapsed between order placement

and order receipt for an inventory item. In case inventory is to be replenished by
manufacturing, this id the time elapsed between the work order issue for
manufacturing and the completion of manufacturing.

Safety stock or buffer stock inventory is the inventory held due the differences
in demand and supply rate of material at each stage in-between supplier,
purchase, manufacture, distribution, and customer to avoid stock outs at each
stage.
Average inventory is the calculated average of the inventory quantity held at a
logistical facility over a period of time.
Reorder point is the pre-decided inventory level, which is reached by a falling
inventory level during utilization of inventory, at which point an order is placed
for replenishing the inventory in order to avoid a stock out.

Order quantity is the inventory quantity, which is ordered for replenishing

depleting inventory.

FUNCTIONS OF INVENTORY

The necessity of holding inventory is due to the following functions of

inventory:

Specialization:
A firm can either produce all the required variety products at a plant at one
location, or, produce different products at separate plant locations. Locating
separately will enable the firm to select the location of each different product
manufacturing plant based on the particular requirements of that product, thus
achieving specialization efficiencies like geographical facilities and economies
of scale. This specialization approach creates inventory at diverse locations.
Also, pipeline inventories are created due to transport linkages required between
different manufacturing plants and with distribution warehouses.

Balancing supply and demand:

Demand depends upon the requirements of customers relating to time and
quantity of products, and is not in the control of the producer. Supply, on the
other hand is under the producer’s control, but has to be economized and also
paced with the time and quantity requirements of customer demand. In order to
ensure that customers are not dissatisfied when they demand the required
quantity of products, it is necessary to have adequate inventory of products
available at all times. This is the balancing inventory required due to the
different rates of manufacturing and consumption. In case of seasonal products
when production has to take place for a longer period of time in advance of the
season, production throughout the year ensures lower investments in production
capacities while increasing inventory. An example is the production of rainwear
throughout the year for the sales which will occur only during the rainy season.
Another example of balancing is seasonal production during raw material
availability and year-round consumption, which also requires inventory. The
example of this is seasonal availability of mango fruit and year-round
consumption of mango –based products.
Economies of scale:
Economies of scale are obtained by holding large inventories a) While
purchasing, ordering in large quantities provides cost economies and discounts;
(b) transportation economies are obtained by transporting in larger quantities;
and, (c) during manufacturing, producing in economic batch quantities lower
costs.

Overcoming uncertainty:
Safety stock of inventory is required to overcome uncertainty of customer
demand on the one hand; and, purchasing, receiving, manufacturing, and order
processing delays on the other. Either of these may result in shortages of
products at the time of customer requirements if adequate safety stock of
material is not provided for. If such material stock outs are not frequent
occurrences, the customer may look elsewhere leading to a last order at the very
least, or a lost customer. This uncertainty results in buffer stocks being created
between (a) supplier and purchasing, (b) purchasing and production, (c)
production and marketing, (d) marketing and distribution, (e) distribution and
intermediary, (f) intermediary and customer, in order to avoid stock outs.

CLASSIFICATION OF INVENTORIES

Production inventories:

They represent raw materials, parts and components that are used in the process
of production. Production inventories include

♣ Standard industrial items purchased from outside (also called bought

outs)
♣ Non-standard items (purchased items)

♣ Special items manufactured in the factory itself (also called works made
parts or piece parts.

MRO inventories:

They refer to the maintenance; repairs and operation supplies, which are
consumed during process of, manufacture but do not become a part of the
product.

In-process inventories:
They represent items in the semi-finished condition (i.e. items in the partially
completed stage)

Goods-In-Transit:

They represent such materials, which have been paid for but have not yet been
received by the stores.

RISK OF HOLDING INVENTORY

The holding of inventory creates the following risks for a firm:

♣ The investments committed to a particular inventory combination are not

available for alternative uses for the benefit of the firm. The risks in these
case is due to the interest cost incurred on this inventory until the
investment is recovered, as also the opportunity cost of profit which
might have been made in alternative investment.

♣ The inventory may be pilfered or lost.

♣ The inventory may become absolute and/ or useless.

♣ Determination of inventory is another risk for holding inventory.

INVENTORY COST

In operating an inventory system manager should consider only those costs that
vary directly with the operating doctrine in deciding when and how much to
recorder; cost independent of the operating doctrine are irrelevant. Basically,
there are five types of relevant costs.

♣ Cost of the item.

♣ Cost of procuring the item.

♣ Cost of carrying the item in inventory.

♣ Cost associated with being out of stock when units are demanded but are
unavailable (stock outs).

♣ Cost associated with data gathering and control procedures for the
inventory system.

Often these five costs are combined in one way or another, but let’s discuss
them separately before we consider combinations.
Cost of Item:

The cost, or value, of the item is usually its purchase price: the amount paid to
the supplier for the item. In some instances, however, transportation, receiving,
or inspection costs, for example, may be included as part of the cost of the item.
If the cost of the item per unit is constant for all quantities ordered, the total cost
of items purchased during the planning horizon is irrelevant to the operating
doctrine. If the unit cost varies with the quantity ordered, a price reduction
called a quantity discount, this cost is relevant.

If the facility manufactures the item, the cost of the item is its direct
manufacturing cost. Again, constant unit cost mean total costs are irrelevant.

Procurement Costs:

Procurement costs are the placing a purchase order or the setup costs if the item
is manufactured at the facility. These costs vary directly with each purchase
order placed. Procurement costs include costs of postage, telephone calls to the
vendor, labor costs in purchasing and accounting, receiving costs, computer
time for record keeping, and purchase order supplies.

Carrying Costs:

Carrying or holding casts are the costs of maintaining the inventory warehouse
and protecting the inventoried items. Typical costs are insurance, security,
warehouse rental, heat, lights taxes, and losses due to pilferage spoilage, or
breakage. The cost of typing up capital inventory is also considered a carrying
cost.

Stock-out Cost:

Stock out cost, associated with demand when stocks have been, takes the form
of lost sales or backorder costs. When sales are lost because of stock-outs, the
firm loses both the profit margin on unmade sale and its customer’s good will.
If customers take their business elsewhere, future profit margins may also be
lost. When customers agree to come back after inventories have been
replenished, they make backorders. Backorder costs include loss of good will
and money paid to reorder goods and notify customers when goods arrive. As
the next example shows, stock-outs can and do occur in the service industries.

Cost of operating the information processing system:

Whether by hand or by computer, someone must update records as stock levels
change, for system in which inventory levels are not recorded daily, the cost is
primarily incurred in obtaining accurate physical counts of inventories.
Frequently, these operating costs are more fixed than variable over a wide
quantity range. Therefore since fixed costs are not relevant to the operating
doctrine, we will not consider them further.

Cost tradeoffs:

Our objective in the inventory control is to find the minimum cost operating
doctrine over some planning horizon; these costs can be expressed in a general
cost equation.

TECHNIQUES OF INVENTORY MANAGEMENT

Economic Order quantity:

The order quantity depends upon the cost of the inventory items, the rate and
nature of demand (whether constant or fluctuating), the replenishment time, and
the inventory carrying costs and ordering costs for the inventory items.

The EOQ can be calculated with the help of a mathematical formula. Following
assumptions are implied in the calculation:

Constant or uniform demand- although the EOQ model assumes constant

demand, demand may vary from day to day. If demand is not known in
advance- the model must be modified through the inclusion of safe stock.

Constant unit price- the EOQ model assumes that the purchase price per unit of
material will remain unaltered irrespective of the order offered by the suppliers
to include variable costs resulting from quantity discounts, the total costs in the
EOQ model could be redefined.

Constant carrying costs- unit carrying costs may very substantially as the size
of the inventory rises, perhaps decreasing because of economies of scale or
storage efficiency or increasing as storage space runs out and new warehouses
have to be rented.

Constant ordering cost- this assumption is generally valid. However any

violation in this respect can be accommodated by modifying the EOQ model in
a manner similar to the one used for variable unit price.
Instantaneous delivery- if delivery is not instantaneous, which is generally the
case; the original EOQ model must be modified through the inclusion of a safe
stock.

Independent orders- if multiple orders result in cost saving by reducing paper

work and the transportation cost, the original EOQ model must be further
modified. While this modification is somewhat complicated, special EOQ
models have been developed to deal with it.

These assumptions have been pointed out to illustrate the limitations of the
basic EOQ model and the ways in which it can be easily modified to
compensate for them.

Just In Time:

The time-based approach to inventory management came into focus when

Toyota Motors Company came out with the concept of kanban in 1950. This
lead to the dramatic reduction in WIP quantities tying the inventory closely to
the demand from subsequent process or internal customer. Kanban is
conceptually a two-bin system, a signal being raised to warrant replenishment.

JIT approach became a modern production system seeking to implant concept

of stockless production. JIT embraced a variety of manufacturing concepts like
reduced lot sizes, quick switch over [SMED], load leveling [response to tact
time], group technology, statistical process control [control charts], preventive
maintenance and quality circles.

ABC Analysis:

ABC analysis underlines a very important principle “Vital few: trivial many”.
Statistics reveal that just a handful of items account for bulk of the annual
expenditure on materials. These few items, called ‘A’ items, therefore, hold the
key to business. The other items, known as ‘B’ and ‘C’ items, are numerous in
number but their contribution is less significant. ABC analysis thus tends to
segregate all items into three categories: A, B, and C on the basis of their annual
usage. The categorization so made enables one to pay the right amount of
attention as merited by the items.

A-items: it is usually found the hardly 5-10% of the total items account for 70-
75% of the total money spent on the materials. These items require detailed and
rigid control and need to be stocked in smaller quantities. These items should be
procured frequently, the quantity per occasion being small.
B-items: these items are generally 10-15% of the total items and represent 10-
15% of the total expenditure on the materials. These are intermediate items. The
control on these items need not be as detailed and as rigid as applied to C items.

C-items: these items are generally 70-80% of the total items and represent 5-
10% of the total expenditure on the materials. The procurement policy of these
items is exactly the reverse of A items. C items should be procured infrequently
and in sufficient quantities. This enables the buyers to avail price discounts and
reduce work load of the concerned departments.

Policies of Control for A, B and C Categories:

Any sound stock control system should ensure that the each item gets the right
amount of attention at the right time. ABC analysis makes this possible with
considerably less effort due to its selective approach there are number of ways
in which ABC classification can be made use of:

Degree of Control:

Some one at the senior level should be made responsible for regular reviewing
of these items. Up-to-date and accurate records should be maintain for these
items. “B” items should be brought under normal control made possible by
goods record keeping and periodic attention. Little control is required for “C”
items.

Ordering Procedure:

A items should be subject to frequent review to reduce unwarranted stockouts

and possibilities of overstocking. A reasonable good analysis for order points is
required for “B” items but the stocks may be reviewed less frequently. No such
computations are necessary for “C” items. These should be bought in bulk.

Staggering of delivery schedules:

Staggering of delivery schedules is one of the best strategies to reduce the

inventory investment and ensure un-interrupted inflow of materials. Staggered
deliveries tend to reduce cost of order writing but increase the cost of inspection
and receiving. Annual contract with scheduled deliveries are desirable for “A”
and “B” class of items. “C” class of items, however, should be purchased in
bulk on single-order-basis.

Stock records:
Details records of goods ordered, received, issued and goods on hand should be
maintained for “A” category of items. No such detailed records are necessary
for “C” items. Any routine method that ensures goods and accurate records is
enough for “B” category of items.

Priority treatment:

VIP treatment may be accorded to A items in all activities such a processing of

purchases orders, receiving, inspection movement on the shop floor, etc., with
an object to reduce lead time and average inventory. No such treatment is
necessary for “B” items. No priority is assigned to “C” items.

Safety Stock:

All items of consumption are equally important from production point of view.
Safety stock should be less for “A” items. The possibility of stockouts can
considerably be cut down by closer forecasting, frequent reviewing and more
progressing. “C” items, on the contrary, should have sufficient safety stock to
eliminate progressing and to reduce the probability of stockouts. A moderate
policy is required for “B” items, safety stock being neither too high nor too low.

Value Analysis:

To secure maximum benefits, it is essential to select those items for value

analysis which offer the highest scope for cost reduction. The usage
classification is a useful step in this direction. Only “A” and “B” items are
selected for detailed value analysis and the former is given priority over the
latter. “C” items should not be value analyzed

HML Analysis:

H-M-L analysis is similar to ABC analysis except for the difference that instead
of “usage value”, “price” criterion is used. The items under this analysis are
classified into three groups that are called “high”, “medium” and “low”. To
classify, the items are listed in the descending order of their unit price. The
management for deciding three categories then fixes the cut-off-lines. For
example, the management may decide that all items of unit price above Rs.
1000/-will of ‘H’ category, those with unit price between Rs. 100/- to Rs.1000/-
will be of ‘M’ category and those having unit price below Rs. 100/- will be of
‘L’ category.

HML analysis helps to -

 ♣ Assess storage and security requirements.

♣ To keep control over consumption at the departmental head level.

♣ Determine the frequency of stock verification.

♣ To evolve buying policies to control purchase.

♣ To delegate authorities to different buyers to make petty cash purchase

VED Analysis:

‘V’ stands for vital, ‘E’ for essential, ‘D’ for desirable. This classification is
usually applied for spare parts to be stocked for maintenance of machines and
equipments based on the criticality of the spare parts. The stocking policy is
based on the criticality of the items. The vital spare parts are known as capital or
insurance spares. The inventory policy is to keep at least one number of the vital
spare irrespective of the long lead-time required for procurement. Essential
spare parts are those whose non-availability may not adversely affect
production. Such spare parts may be available from many sources within the
country and the procurement lead time many not be long. Hence, a low
inventory of essential spare parts is held. The desirable spare parts are those,
which, if not available, can be manufactured by the maintenance department or
may be procured from local suppliers and hence no stock is held usually.

S-D-E Analysis:

S-D-E analysis is based on the problems of procurement namely:

♣ Non-availability

♣ Scarcity

♣ Longer lead time

♣ Geographical location of suppliers, and

♣ Reliability of suppliers, etc.

S-D-E analysis classifies the items into three groups called “scarce”, “difficult”
and “easy”. The information so developed is then used to decide purchasing
strategies.

“Scare” classification comprise of items, which are in short supply, imported or

canalized through government agencies. Such items are best to procure limited
number of times a year in lieu of effort and expenditure involved in the
procedure for import.

“Difficult” classification includes those items, which are available indigenously

but are not easy to procure. Also items, which come from long distance and for
which reliable sources do not exist, fall into this category. Even the items,
which are difficult to manufacture and only one or two manufacturers are
available belong to this group. Suppliers of such items require several weeks of
advance notice.

“Easy” classification covers those items, which are readily available. Items
produced to commercial standards, items where supply exceeds demand and
others, which are locally available, fall into this group.

The purchase department employs S-D-E analysis:

♣ To decide on the method of buying

♣ To fix responsibility of buyers

S-OS Analysis:

S-OS analysis is based on seasonality of the items and it classifies the items into
two groups S (seasonal) and OS (off seasonal). The analysis identifies items
which are:

Seasonal and are available only for a limited period. For example agriculture
produce like raw mangoes, raw materials for cigarette and paper industries, etc.
are available for a limited time and therefore such items procured to last the full
year.

Seasonal but are available throughout the year. Their prices, however, are lower
during the harvest time. The quantity of such items requires to be fixed after
comparing the cost savings due to lower prices if purchased during season
against higher cost of carrying inventories if purchased throughout the year.

Non-seasonal items whose quantity is decided on different considerations.

M-N-G Analysis:

M-N-G analysis based on stock turn over rate and it classifies the items into M
(moving items), N (non-moving items) and G (ghost items).
M (moving items) is those items, which are consumed from time to time. N
(non-moving items) are those items, which are not consumed in the last one
year. G (ghost items) is those items that had nil balance, both in the beginning
and at the end of the last financial year and there were no transactions (receipt
or issues) during the year.

Analysis mainly helps to identify non-existing items for which the store keeps
bin-cards or waste computer memory or waste computer stationary while
preparing stores ledger. Stores department even might have even ear-marked
space for these non-existent items.

All pending/ open purchase orders (if any) of such items should be canceled.

F-S-N Analysis:

F-S-N analysis is based on the consumption figures of the items. The items
under this analysis are classified into three groups: F (fast moving), S (slow
moving) and N (non-moving).

To conduct the analysis, the last date of receipt or the last date of issue
whichever is later is taken into account and the period, usually in terms of
number of months, that has elapsed since the last movement is recorded.

Such an analysis helps to identify:

Active items which require to be reviewed regularly

Surplus items whose stocks are higher than their rate of consumption; and

Non-moving items which are not being consumed

X-Y-Z Analysis:

X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory

investment). Items whose inventory values are high are called as X items while
those inventory values are low are called Z items. And Y items are those which
have moderate inventory stocks.

Usually X-Y-Z analysis is used in conjunction with either ABC analysis or

HML analysis.

XYZ analysis helps to identify a few items, which account for large amount of
money in stock and take steps for their liquidation/retention.
XYZ when combined with FSN analysis helps to classify non-moving items
into XN, YN, and ZN group and thereby identify a handful of non-moving
items, which account for bulk of non-moving stock. These can be studied
individually in details to take decision on their disposal or retention.

ANALYSIS OF INVENTORY OF DANKUNI COAL

COMPLEX

POSITION OF SALES AND INVENTORY IN DANKUNI COAL

COMPLEX

Following are the figures of sales and inventory in Dankuni Coal Complex for
the last five years with effect from the financial year 2003-04 to 2007-08.

Rs in Crores
YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 AVERAGE

Sales 58.30 67.38 78.56 87.72 121.83 82.78

Inventory 20.91 25.30 33.67 31.10 32.41 28.68

The inventory figures in Dankuni Coal Complex are composed of items:-

♣ Stock of chemicals, Pol, stores and spares after making adjustment of

obsolesces and shortages thereof.
♣ Stock of coal
♣ Manufactured items produced in the workshop.

INFERENCE

The above table indicates that the quantum of inventories in Dankuni Coal
Complex showed an increasing trend during the first three years i.e. in FY
2003-04, FY 2004-05 and FY 2005-06. During the above three years the
inventory level increased from 20.91 crores to 33.67 crores. It indicated a
positive growth rate of 61%. But in the FY 2006-07 inventory level decreased to
31.10 crores which was about 96% of the inventory value as maintained in the
FY 2005-06. The last two years i.e. FY 2006-07 and 2007-08 indicates a
positive growth rate of 49% and 55% respectively. This analysis suggests that
the company invested more funds in inventories during the first three years of
study period.
However, the above analysis is not sufficient to evaluate the qualitative
efficiency of inventory management. This is a shortcoming of the above
analysis. In order to avoid this bottleneck the following ratios are computed and
studied during the study period.

♣ Inventory Turnover

♣ Inventory Holding and

♣ Inventory to Total Current Asset.

INVENTORY TURNOVER RATIO

This ratio indicates the number of times the inventory is replaced during the
financial year. It reflects the degree of liquidity of the firm and it shows how
effectively the executive in charge of maintaining the inventory level performs
the task. Generally, a high inventory turnover ratio is indicative of good
inventory management, whereas a low inventory turnover ratio signifies over
investment in inventory or excessive inventory levels warranted by production
and sales activities, or slow moving or obsolete inventory.
A high level of sluggish inventory amounts to unnecessary tie-up of funds,
impairment of profits, and increased costs. If the obsolete inventories have to be
written off, this will adversely affect the working capital position and the
liquidity of the firm. Again, a relatively high turnover should be carefully
analyzed. A too high inventory turnover may be the result of a very low level of
inventory which results in frequent stock-outs. The turnover will also be high if
the firm replenishes its inventory in too many small lot sizes. The situation of
frequent stock-outs and too many small inventory replacements are costly for
the firm. Thus, too high and too low inventory turnover ratios should be
investigated further. The computation of inventory turnovers for individual
components of inventory may help to detect the imbalanced investments in the
various inventory components.
Since the cost of goods and average inventory figures are not available in the
annual accounts, the figures of sales and inventory as on 31march of each year
has been taken for calculation of Inventory Turnover Ratio.
Inventory Turnover Ratio= Sales/Inventory

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 AVERAGE

Inventory 2.79 2.66 2.33 2.82 3.76 2.87

Turnover
Ratio
(times)

INFERENCE

According to the table given in the previous page, it is observed that there had
been a decreasing trend till the FY 2005-06 after which the Inventory Turnover
Ratio increased in each of the following year. Overall, the Inventory Turnover
Ratio increased from 2.79 times to 3.76 times with an average of 2.87 times
which can be considered as a satisfactory position.

INVENTORY HOLDING RATIO

This ratio indicates the length of time required for the conversation of
investment in inventories to cash of a firm. Lower the ratio, better the inventory
management and vice-versa. High ratio indicates that the management is taking
more time in making the funds idle and it involves more carrying cost for
holding such inventories.
Inventory Holding Ratio (in days) = 365/Inventory Turnover Ratio

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 AVERAGE

Inventory 2.79 2.66 2.33 2.82 3.76 2.87

Turnover
Ratio
(times)
Inventory 131 137 157 129 97 130
Holding
Ratio
(days)

INFERENCE

The analysis of the above table shows that there has been an
uneven trend in Inventory Holding Ratio. There has been an
increasing trend till 2005-06 after which it decreased
significantly in the following year 2006-07. The Inventory
Holding Ratio which had been reduced by 25% to 97days in
2007-08 is the lowest and it indicates the reduction of carrying
cost which proves the effectiveness of a good system of
inventory management. The management of the company
needs to continue with the same policy in future which it had
followed in 2007-08.

MEASUREMENT OF TREND-METHOD OF LEAST SQUARES

To avoid stock out associated with a high ratio as well as cost of carrying
excessive inventory associated with a low ratio, a firm should have neither too
high nor too low Inventory Turnover Ratio. So, to judge the reasonableness of
this ratio during the period under study, it is compared on the basis of trend
analysis during the study period.

For this purpose, let Y=a + bX be the equation of the straight with origin at the
year 2005-06, where X is independent variable relating to time period under (X
unit is 1 year) and Y is dependent variable in Rs. to be predicted. By the method
of least squares, the normal equations for finding the values of a and b are:

∑Y = Na + b∑X
 And ∑XY = a∑X + b∑X2

The above two equations are reduced and we get,

a =∑Y/N and b =∑XY/ ∑X2

Here N=number of years=5

Calculation for finding the equation of best fitted

straight line in case of Sales is given below:-

YEAR Sales (Rs in Crores) Y X X2 XY

2003-04 58.30 -2 4 -116.60

2004-05 67.38 -1 1 -67.38
2005-06 78.56 0 0 0
2006-07 87.72 1 1 87.72
2007-08 121.83 2 4 243.66
TOTAL 413.79=∑Y 0=∑X 10=∑X2 147.40=∑XY

Y= a + bX and a= ∑Y/N and b= ∑XY/∑X2

a= 413.79/5 = 82.76 and b= 147.40/10 = 14.74

Equation is Y= 82.76 + 14.74X

YEAR X Trend Values

2003-04 -2 82.76+14.74×-2=53.28

2004-05 -1 82.76+14.74×-1=68.02

2005-06 0 82.76+14.74× 0 =82.76

2006-07 1 82.76+14.74× 1 =97.50

2007-08 2 82.76+14.74× 2 =112.24

Calculation for finding the equation of best fitted
straight line in case of Inventory is given below:-

YEAR Inventory (Rs in Crores) Y X X2 XY

2003-04 20.91 -2 4 -83.64

2004-05 25.30 -1 1 -25.30
2005-06 33.67 0 0 0
2006-07 31.10 1 1 124.40
2007-08 32.41 2 4 32.41
TOTAL 143.39=∑Y 0=∑X 10=∑X2 47.87=∑XY

Y= a + bX

a= ∑Y/N and b= ∑XY/∑X2

a= 143.39/5 = 28.68

And b= 47.87/10 = 4.79

Equation is Y= 28.68 + 4.79X

YEAR X Trend Values

2003-04 -2 28.68+4.79×-2=19.10

2004-05 -1 28.68+4.79×-1=23.89

2005-06 0 28.68+4.79× 0 =28.68

2006-07 1 28.68+4.79× 1 =33.47

2007-08 2 28.68+4.79× 2 =38.26

Computation of Inventory Turnover Ratio on basis of

trend values:- Inventory Turnover Ratio on the basis of the
calculated trend values of Sales and Inventory is given in the
following table. The same formula of Sales/Inventory has been
used to compute the trend Inventory Turnover Ratio. The table
also shows the Inventory Turnover Ratio on the basis of the
original data.

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

Sales (crores) 53.28 68.02 82.76 97.50 112.24

Inventory 19.10 23.89 28.68 33.47 38.26
(crores)
Inventory 2.79 2.85 2.89 2.91 2.93
Turnover Ratio-
Trend (times)

Inventory 2.79 2.66 2.33 2.82 3.76

Turnover Ratio-
Original (times)

Analysis through Chart:-

A comparison of the above figures of trend and original Inventory Turnover

Ratio has been done through a chart given in the following page. This line chart
shows the difference between the figures of actual Inventory Turnover Ratio
and the figures of trend Inventory Turnover Ratio and helps the management to
identify the steps required to reduce the differences.

TREND LINE ORIGINALLINE

5
4.5
4
3.76
3.5
3
2.79 2.66 2.82
2.5 2.33
2
1.5
1
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Inference

From the above line chart drawn it is observed that the actual Inventory
Turnover Ratio is at par with the trend line of Inventory Turnover Ration in
2003-04. But the original line of actual Inventory Turnover Ratio fluctuated as
compared to the trend line in 2004-05, 2005-06 and 2006-07 probably due to
accumulation of stock. Thereafter, the original line of actual Inventory Turnover
Ratio crossed over the trend line which indicated the improvement made by the
management in Inventory Turnover Ratio in 2007-08 by proper supervision and
control.

Computation of Inventory Holding Ratio on the basis of

trend Values:

The Inventory Holding Ratio has been computed on basis of trend Inventory
Turnover Ratio. The same formula of 365/Inventory Turnover Ratio has been
used to find out the trend Inventory Holding Ratio. The Table also shows the
Original Inventory Holding Ratio.

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

Inventory 2.79 2.85 2.89 2.91 2.93

Turnover Ratio-
Trend (times)

Inventory 131 128 126 125 125

Holding Ratio-
trend(days)
Inventory 131 137 157 129 97
Holding Ratio-
Original (days)

Analysis through Chart:-

A comparison of the above figures of trend and original Inventory Holding

Ratio has been done through a chart given below. This line chart shows the
difference between the figures of actual Inventory Turnover Ratio and the
figures of trend Inventory Holding Ratio and helps the management to identify
the steps required to reduce the differences.
 TREND LINE ORIGINALLINE

160 157
150
140 137
130 131 129
120
110
100
97
90
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Inference

It is observed from the above line chart that the actual time duration required for
conversion of investment in inventories into cash through sales is always on the
higher side compared to the trend line in 2004-05, 2005-06 and 2006-07. This
represents the span of time taken is more for these years which had probably
resulted in the increase of carrying cost of holding the inventory. The reduction
in holding period of inventory in 2007-08 indicates that it may have been
achieved by suitable actions taken by the management.

REGRESSION ANALYSIS OF SALES AND APPLICATION OF

CHI-SQUARE TEST

To assess the association between sales and inventory of the company,

Regression Equation of Sales on inventory was used and in order to test the
statistical significance at 5% level between these two variables, Chi- Square was
applied. The Regression Equation of sales(Y) on Inventory(X) is computed
below:

Calculation of Regression Equation:-

The Regression Equation of sales(Y) on inventory(X) is computed as per

equation Y- Y¯=bYX (X-X¯)

X=Inventory Y=Sales x=X-X¯ y=Y-Y¯ x2 y2 xy

20.91 58.30 -7.77 -24.46 60.37 598.29 190.05

25.30 67.38 -3.38 -15.38 11.42 236.54 51.98
33.67 78.56 4.99 -4.20 24.90 17.64 -20.96
31.10 87.72 2.42 4.96 5.86 24.60 12.00
32.41 121.83 3.73 39.07 13.91 1526.46 145.73
143.39=∑X 413.79=∑Y 0=∑x 0=∑y 116.46= 2403.53 378.80
∑ x2 =∑ y 2 =∑ x y

X¯=∑X/n = 143.39/5=28.68 and Y¯=∑Y/n=413.79/5=82.76

bYX =∑ x y/∑ x 2 = 378.80/116.46=3.25

Thus the Regression Equation is y-82.76= 3.25x -93.21

y = 3.25x-10.45

By applying the above equation we get the figures of expected sales as 57.50
crores for 2003-04, 71.78 crores for 2004-05, 98.98 crores for 2005-06, 90.63
crores for 2006-07 and 94.88 crores for 2007-08.

Chi-Square Test:-

Let the null hypothesis be H0 such that there is no significant relation between
sales and inventory. Then, the alternative HA implies that a significant relation
between sales and inventory exists. The value of χ2 is calculated as follows:

YEAR Oi=Actual Ei=Expected Oi – E i (Oi – Ei)2 (Oi – Ei)2/Ei

Sales Sales
2003-04 58.30 57.50 0.80 0.64 0.01
2004-05 67.38 71.78 -4.40 19.36 0.27
2005-06 78.56 98.98 -20.42 416.98 4.21
2006-07 87.72 90.63 -2.91 8.47 0.09
2007-08 121.83 94.88 26.95 726.30 7.65
Total ∑(Oi –
 Ei)2 /Ei=12.23

Assuming that the value of H0 is true, we have

χ2 =∑(Oi –Ei)2 /Ei=12.23

Degree of freedom is n-1=5-1=4

Tabulated value of Chi-Square at 5% level of significance with degree of

freedom (d.f =4) is 9.49

Since the calculated value of Chi-Square or χ2 > the tabulated value of χ2 at 5%

level with d.f.=4, we reject the null hypothesis.

Hence, the alternative hypothesis is accepted and a significant relation between

sales and inventory exists. It shows that the performance in respect of inventory
management of the company during the period under study is good.

INVENTORY TO TOTAL CURRENT ASSETS RATIO

This ratio indicates the proportion of inventories invested out of total current
assets of the company. Since the inventory is less liquid compared to other
current assets of a company, a high ratio indicates less liquidity position of the
company and vice-versa.

Inventory to Total Current Assets= Inventory/Total Current Assets

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 AVERAGE

Inventory 0.70 0.73 0.76 0.67 0.62 0.70

To Total
Current
Assets
Ratio
(times)

INFERENCE

From the above table it can be said that this Inventory to Total Current Assets
Ratio has been decreased to 0.62 in 2007-08. It represents that 62% of the total
current assets is required for maintaining the inventory. This ratio was 0.70 in
2003-04 and so a lower ratio in 2007-08 shows a better control of the inventory
by the management of Dankuni Coal Complex.
 CONCLUSION

 The overall performance in respect to utilization of inventories is

satisfactory during the study period.

 The Chi-Square Test by rejecting the null hypothesis reflects a relation

between sales and inventory. In addition it supports the fact that the
performance of inventory management is satisfactory.

 The inventory level may also be reduced to the possible level in order to
release idle funds absorbed in inventories.

 The efficiency of the company in turning the inventories into cash is fair
as reflected by its Inventory Turnover Ratio.

 The analysis of Inventory Holding Ratio of the company shows that it

had been successful in reducing the holding period of the inventory.

 The proportion of inventory out of total current assets had been

efficiently reduced by the management thereby reflecting a better
inventory management.
  There had been significant differences between actual Inventory Turnover
Ratio and trend Inventory Turnover ratio. At the same time there had
been significant difference between actual Inventory Holding Ratio and
trend Inventory Holding Ratio.

 The Chi-Square Test also exhibits the difference between actual sales and
expected sales.

 On the whole it can be said that Dankuni Coal Complex which is a unit of
South Eastern Coalfields Ltd. follows some of the best techniques of
inventory management.

RECOMMENDATIONS
 Dankuni Coal Complex should concentrate on JIT (Just-in-time)
technique of manufacturing. This will help in minimizing the blockage of funds
in inventories.

 The Inventory Turnover Ratio may be improved if the management takes

actions to investigate the causes of differences/ shortages of Stores and
spares and thus remove the losses from the accounts, if any.

 The management of the plant should incorporate TQM (Total quality

management), particularly in all departments of production to ensure better
sales and reduce the inventory of finished products.

 The computation of Inventory Turnover Ratio for individual components

of inventories may help the management of DCC to detect the
imbalanced investments in various inventory components.

 The company needs to have a standard in respect of minimum and

maximum level of inventory. This will help the company in having a
better inventory control and continuous flow of production.

 Proper storage facilities are recommended to prevent loss of inventory

due to the lack of it or faulty methods of storage.
  The company must look for more buyers of its products to enable quick
conversion of inventory into cash.

 The management of the plant should try to maintain the reduced

Inventory to Total Current Assets Ratio in the future course of
production.

 The management must try to find out the causes of differences between
actual sales and expected sales as shown by Chi-Square Test.

BIBLIOGRAPHY

 Annual Report of Dankuni Coal Complex( 2003-04, 2004-05, 2005-06,

2006-07 and 2007-08)

 CIL & You, an in-house publication by CIL.

 Financial Management by M.Y.Khan and P.K.Jain

 Financial Management by S.Kr.Paul

 Financial Management by I.M.Pandey

 The Management Accountant, Volume 40, published by The Institute of

Cost And Works Accountants of India.

 Mathematics and Statistics by Suranjan Saha.

 www.CoalIndia.nic.in

 www.SECL.nic.in

 www.Managementparadise.com