CHAPTER – 1

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INVENTORY MANAGEMENT

INTRODUCTION:

Every enterprise needs inventory for smooth running of it’s activities.

It serves as a link between production and distribution process. There is,

generally, a time lag between the recognition of a need and its fulfillment. The

greater the time lag, the higher requirements for inventory. It also provides a

cushion for future price fluctuations.

In a complex industry like Kesoram Industries Limited it studied

clearly of how the thing are being performed and what is the real impact of

these on industry and how effectively the inventory is utilized is interested to

be known by researcher because of its great significance in the research.

IMPORTANCE OF THE STUDY:

Decisions Relating to Inventories are taken primarily by executives in

productions, purchasing, and marketing departments. Usually, raw material

policies are shaped by purchasing and production executives, work-in-process

inventory is influenced by the decisions of production executives, and finished

goods inventory policy is evolved by production and marketing executives.

Yet, as inventory management has important financial implications, the

financial manager has the responsibility to ensure that inventories are properly

monitored and controlled. He has to emphasize the financial point of view and

initiate programmes with the participation and involvement of others for

effective management of inventories.

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NEED OF THE STUDY:

Every industry on average spends 70% on raw materials (inventory).

Therefore there is a need to know the raw material cost and also there is great

importance to understand the inventory management system of this industry.

The study helps a log to various departments to take steps to control

the inventory process.

OBJECTIVES OF THE STUDY:

1. To examine the organization structure of inventory management in

the stores of HERITAGE FOODS.

2. To discuss pattern, levels and trends of inventories in HERITAGE

FOODS.

3. To understand the various inventory control techniques followed

by studies in HERITAGE FOODS.

4. To access the performance of inventory management of the

HERITAGE FOODS by selected accounting ratios.

5. To know the inventory control techniques of HERITAGE FOODS.

SCOPE OF THE DATA

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The overall inventory management includes design and inventory control

organization with proper accountability establishing procedure for inventory

handling disposal of scrap, simplification, standardization.

1. The report will not provide exact Budgetary System status and position

in HERITAGE FOODS it may vary from time to time and situation to

situation.

2. The study is limited unto the date and information provided by

HERITAGE FOODS and its annual reports

METHODOLOGY OF THE STUDY:

The study is based on both primary and secondary data.

The primary data has been collected through structured questionnaire

reflecting inventory management practices of HERITAGE FOODS. The

collected data is tabulated and suitable interpretation had been made by

considering the data collection through secondary data like annual reports

purchase registers, storage records of the organization.

LIMITATIONS OF THE STUDY:

The study has the following limitations:

1. The study is limited only for a period of 5 years i.e., from 2007 –

08 to 2012-13.

2. The limitations of ratio analysis can be applicable of the study.

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3. There may be approximation in calculating ratios and taking the

figures from the annual reports.

CHAPTER-2

5

REVIEW OF LITERATURE

The investment in inventories constitutes the most significant part of

current assets / working capital in most of the undertakings. Thus, it is very

essential to have proper control and management of inventories.

The purpose of inventory management is to ensure availability of

materials in sufficient quantity as and when required and also to minimize

investment in inventories.

Meaning and Nature of Inventory:

In accounting language, inventory may mean the stock of finished

goods only. In a manufacturing concern, it may include raw materials, work-

in – progress and stores etc.

Inventory includes the following things:

a) Raw Material: Raw material from a major input into the organization.

They are required to carry out production activities uninterruptedly.

The quantity of raw materials required will be determined by the

rate of consumption and the time required for replenishing the

supplies. The factors like the availability of raw materials and

Government regulations etc., too affect the stock of raw materials.

b) Work in progress: The work in progress is that stage of stocks which

are in between raw materials and finished goods. The quantum of

work in progress depends upon the time taken in the manufacturing

process. The quantum of work in progress depends upon the time

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taken in the manufacturing process. The greater the time taken in

manufacturing, the more will be the amount of work in progress.

c) Consumables: These are the materials which are needed to smoother

the process of production but they act as catalysts. Consumables

may be classified according to their consumption add critically.

Generally, consumable stores doe not create any supply problem

and firm a small part of production cost. There can be instances

where these materials may account for much value than the raw

materials. The fuel oil may form a substantial part of cost.

d) Finished goods: These are the goods, which are ready for the

consumers. The stock of finished goods provides a buffer between

production and market, the purpose of maintaining inventory is to

ensure proper supply of goods to customers.

e) Spares: The stock policies of spares fifer from industry to industry.

Some industries like transport will require more spares than the

other concerns. The costly spare parts like engines, maintenance

spares etc., are not discarded after use, rather they are kept in ready

position for further use.

All decisions about spares are based on the financial cost of inventory

on such spares and the costs that may arise due to their non – availability.

BENEFITS OF HOLDING INVENTORIES

Although holding inventories involves blocking of a firm’s and the

costs of storage and handling, every business enterprise has to be maintain

certain level of inventories of facilitate un – interrupted production and

smooth running of business. In the absence of inventories a firm will have to

make purchases as soon as it receives orders. It will mean loss of time and

delays in execution of orders which sometimes may cause loss of customers

and business.

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A firm also needs to maintain inventories to reduce ordering cost and

avail quantity discounts etc.

There are three main purpose of holding inventories.

1. The transaction motive: This facilitates continuous production and

timely execution of sales order.

2. The precautionary motive: Which necessitates the holding of

inventories for meeting the unpredictable changes in demand and

supplies of materials

3. The speculative motive: Which induces to keep inventories for taking

advantage of price fluctuations, saving in re–ordering costs and

quantity discounts

RISK AND COSTS OF HOLDING INVENTORIES

The holding of inventories involves blocking of firms funds and

incurrence of capital and other costs.

The various costs and risks involved in holding inventories are:

Capital costs: Maintaining of inventories results in blocking of the

firms financial resources. The firm has therefore to arrange for additional

funds to meet the cost of inventories.

The funds may be arranged from own resources or from outsiders. But

in both the cased, the firm incurs a cost. In the former case, there is an

opportunity cost of investment while in the later case; the firm has to pay

interest to t he outsiders.

1. Storage and Handling Costs: Holding of inventories also involves

costs on storage as well as handing of materials. The storage of costs

include the rental of the godown, insurance charges etc.

2. Risk of Price decline: There is always a risk of reduction in the prices

of inventories by the supplies, competition or general depression in the

market.

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3. Risk of Obsolescence: The inventories may become absolute due to

improved technology, changes in requirements, change in customer

tastes etc.

4. Risk Determination in quality: The quality of materials may also

deteriorate while the inventories are kept.

Objects of Inventory Management

Definition of Inventory Management: Inventory Management is

concerned with the determination of optimum level of investment for each

components of inventory and the operation of an effective control and review

of mechanism.

The main objectives of inventory management are operational and

financial.

The operational objective mean that the materials and spares should be

available in sufficient quantity so that work is not disrupted for want of

inventory.

The financial objective means that inventory should not remain idle

and minimum working capital should be locked in it.

The following are the objectives of inventory management:

1. To ensure continuous supply of materials, spares and finished goods so

that production should not suffer at any time and the customers

demand should also be met.

2. To avoid both over – stocking and under – stocking of inventory.

3. To maintain investment in inventories at the optimum level as required

by the operational and sales activities.

4. To keep material cost under control so that they contribute in reducing

the cost of production and overall costs.

5. To eliminate duplication in ordering or replenishing stocks. This is

possible with the help of centralizing purchases.

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6. To minimize loses through deterioration, pilferages, wastages and

damages.

7. To ensure perpetual inventory control so that materials shown in stock

ledgers should be actually lying in the stores.

8. To ensure right quality goods at reasonable prices. Suitable quality

standards will ensure proper quality of stocks. The price – analysis, the

cost analysis and value – analysis will ensure payment of proper prices.

9. To facilitate furnishing of data for short – term and long – term

planning and control of inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANAGEMENT

A proper inventory control not only helps in solving the acute problem

of liquidity but also increases profit and causes substantial reduction in the

working capital of the concern.

The following are the important tools and techniques of inventory

management and control.

1. Determination of stock levels:

Carrying of too much and too little of inventory is detrimental to the

firm. If the inventory level is too little, the firm will face frequent stock outs

involving heavy ordering cost and if the inventory level is too high it will be

unnecessary tie up of capital.

An efficient inventory management requires that a firm should

maintain an optimum level of inventory where inventory costs are the

minimum and at the same time there is no stock out which may result in loss

or sale or shortage of production.

a) Minimum stock level:

It represents the quantity below its stock of any item should not be

allowed to fall.

Lead time: A purchasing firm requires sometime to process the order

and time is also required by the supplying firm to execute the order.

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The time in processing the order and then executing it is know as lead

time.

Rate of Consumption: It is the average consumption of materials in

the factory. The rate of consumption will be decided on the basis of past

experience and production plans.

Nature of materials: The nature of material also affects the minimum

level. If a material is required only against the special orders of the customer

then minimum stock will not be required for such material.

Minimum stock level can be calculated with the help of following

formula.

Minimum stock level – Re – ordering level – (Normal consumption x

Normal re – order period)

b) Re – ordering Level:

When the quantity of materials reaches at a certain figure then fresh

order is sent to get materials again. The order is sent before the materials reach

minimum stock level.

Re – ordering level is fixed between minimum level maximum level.

c) Maximum Level:

It is the quantity of materials beyond which a firm should not exceeds

its stocks. If the quantity exceeds maximum level limit then it will be over –

stocking.

Overstocking will mean blocking of more working capital, more space

for storing the materials, more wastage of materials and more chances of

losses from obsolescence.

Maximum stock level – Reordering Level + Reorder Quantity –

(Maximum Consumption x Minimum reorder period)

d) Danger Stock Level:

It is fixed below minimum stock level. The danger stock level indicates

emergency of stock position and urgency of obtaining fresh supply at any cost.

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Danger Stock level = Average rate of consumption x emergency delivery

time.

e) Average Stock Level:

This stock level indicates the average stock held by the concern.

Average stock level = Minimum stock level + ½ x reorder quantity.

2) Determination of Safety Stocks:

Safety stock is a buffer to meet some unanticipated increase in usage.

The demand for materials may fluctuate and delivery of inventory may also be

delayed in such a situation the firm can be face a problem of stock out.

In order to protect against the stock out arising out of usage

fluctuations, firms usually maintain some margin of safety stocks.

Two costs are involved in the determination of this stock that is

opportunity cost of stock outs and the carrying costs.

If a firm maintains low level of safety frequent stock outs will occur

resulting into the larger opportunity costs. On the other hand, the larger

quantity of safety stocks involves carrying costs.

3) Economic Order Quantity (EOQ):

The quantity of material to be ordered at one time is known as

economic ordering quantity.

This quantity is fixed in such a manner as to minimize the cost of

ordering and carrying costs.

Total cost material = Acquisition Cost + Cost + Carrying Costs +

Ordering Cost.

Carrying Cost:

It is the cost of holding the materials in the store.

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Ordering Cost:

It is the cost of placing orders for the purchase of materials.

EOQ can be calculated with the help of the following formula

EOQ = 2CO / I

Where C = Consumption of the material in units during the year

O = Ordering Cost

I = Carrying Cost or Interest payment on the capital.

4) A – B – C – Analysis: (Always better control analysis):

Under A – B – C Analysis. The materials are divided into 3 categories

viz., A, B and C.

Almost 10% of the items contribute to 70% of value of consumption

and this category is called ‘A’ category.

About 20% of the items contribute about 20% of value of category ‘C’

covers about 70% of items of materials which contribute only 10% of value of

consumption.

5) VED Analysis: (Vitally Essential Desire)

The VED analysis is used generally for spare parts. Spare parts

classified as Vital (V), Essential (E) and Desirable (D).

The vital spares are a must for running the concern smoothly and these

must be stored adequately. The ‘E’ type of spares is also necessary but their

stocks may be kept at low figures. The stocking of ‘D’ type spares may be

avoided at times. If the lead time of these spares is less, then stocking of these

spares can be avoided.

6) Inventory Turnover ratio:

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Inventory turnover ratios are calculated to indicate whether inventories

have been used efficiently or not.

The inventory turnover ration also known as stock velocity is normally

calculated as sales / average inventory of cost of goods sold / average

inventory.

Inventory conversion period may also be calculated to find the average

time taken for clearing the stocks. Symbolically.

Inventory Turnover Ratio = Cost of goods sold

__________________________

Average inventory at cost

(Or)

Net sales

= ________________________

(Average) Inventory

And,

Inventory conversion period = Days in a year

______________________

Inventory Turnover ratio

7) Classification and Codification of Inventories:

The inventories should first be classified can then code numbers should

be assigned for their identification. The identification of short names are

useful for inventory management not only for large concerns but also for small

concerns. Lack of proper classification may also lead to reduction in

production.

Generally, materials are classified accordingly to their nature such as

construction materials, consumable stocks, spares, lubricants etc. After

classification the materials are given code numbers. The coding may be done

alphabetically or numerically. The later method is generally used for coding.

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The class of materials is assigned two digits and then two or three

digits are assigned to the categories of items divided into 15 groups. Two

numbers will be category of materials in that class.

The third distinction is needed for the quality of goods and decimals

are used to note this factor.

8) Valuation of inventories – Method of valuation:

FIFO method

LIFO method

Base Stock method

Weighted average price method

CRITERIA FOR JUDGING THE INVENTORY SYSTEM

While the overall objective of the inventory system is to minimize the

cost to the firm at the risk level acceptable to management, the more

proximate criteria for judging the inventory system are:

Comprehensibility

Adaptability

Timeliness

Area of improvement:

Inventory management in India can be improved in various ways.

Improvements could be affected through.

Effective Computerization: Computers should not be used merely for

accounting purpose but also for improving decision making.

Review of Classification: ABC and FSN classification must be periodically

reviewed.

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Improved Coordination: Better coordination among purchase, production,

marketing and finance departments will be help in achieving greater efficiency

in inventory management.

Development of long term relationship:

Companies should develop long term relationship with vendors. This

would help in improving quality and delivery.

Disposal of obsolete / surplus inventories:

Procedures for disposing obsolete / surplus inventories must be

simplified.

Adoption of challenging norms:

Companies should set benchmarks with global competitors and use

ideals like JIT to improve inventory management.

Inventory cost – an overall view:

Introduction:

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

the raw materials, fuels and lubricants spare parts maintenance consumable

semi – processed materials and finished goods stock at any giving point of

time. The operational definition of inventory would be amount of raw

materials, fuel and lubricants, spare parts and semi – processed materials to be

stock for the smooth running of the plant / industry.

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Need of Inventory:

Inventories are maintained basically for the operational smoothness

which they can be affected by uncoupling successive stages of production,

whereas the monetary value of the inventory serves as a guide to indicate the

size of the investment made to achieve this operational convenience. The

materials management departments’ primary function is to provide this

operational convenience with a minimum possible investment in inventories.

Materials department is accused of both stock outs as well a large investment

in inventories. The solution lies in exercise a selective inventory control and

application of inventory control techniques. Inventories build to act as a

cushion between supply and demand. It is sufficient to take care of the

requirements of demand till the next supply arrives. It is sufficient to take care

of probable delays in supply as well as probable variations in demand.

The size of the inventory depends upon the factors such as size of

industry internal lead time for purchase, supplier’s lead time, vendor relations

availability of the materials, annual consumption of the materials. Inventory

coat can be controlled by applying Modern Techniques viz., ABC analysis,

SDE, ESN, HMC, VED etc. These techniques can be used effectively with the

help of computerization.

What is meant by inventory cost :

A. The total value of stores and spares and capital spares.

B. Stores in transit and under inspection and

C. Stock of finished products.

Normally, there are certain problems in maintaining optimum level of

inventory. Problems of inventory can be resolved by the cost implications.

Costs which are relevant for consideration are discussed in the following lines;

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Basically there are four costs for consideration in developing and inventory

model.

1. The cost of placing a replenishment order.

2. The cost of carrying inventory.

3. The cost of under stocking and

4. The cost of over stocking.

The cost of ordering and inventory carrying cost are viewed as the

supply side costs and help in the determination of the quantity to be ordered

for each replenishment.

The under stocking and over stocking costs are viewed as the demand

side costs and help in the determination of the amount of variations in demand

and the delay in supplies which the inventory should withstand.

Whenever an order placed for stock replenishment, certain costs are

involved, and, for most practical purpose it can be assumed that the cost per

order is constant. The ordering cost may vary depending upon the type of

items, for example raw material like steel against production component like

castings in steel plants, support materials in the case of coal industry.

The cost ordering includes:

1) Paper work costs, typing and dispatching an order.

2) Follow up costs the follow up, the telephones, telex and postal bills

etc.,

3) Costs involved in receiving of the order, inspection, checking and

handling in the stores.

4) Any set up cost of machines charged by the supplier, either directly

indicated in quotations or assessed through quotations of various

quantities.

5) The salaries and wages of the purchase department.

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Cost of Inventory carrying:

This cost in measured as of the unit cost of the item. This measure

gives basis for estimating what is actually costs a company to carry stock.

This cost includes:

1) Interest on capital.

2) Insurance and tax charges.

3) Storage costs – labor costs, provision of storage area and facilities

like bins, racks etc.,

4) Transport bills and hamali charges.

5) Allowance for deterioration or spoilages.

6) Salaries of stores staff.

7) Obsolescence.

The inventory carrying cost varies and a major portion of this is

Accounted for by the interest on capital.

Under stocking cost:

This cost is the cost incurred when an item is out of stock. It includes

cost of lost production during the period of stock out and the extra cost per

unit which might have to be paid for an emergency purchase.

Over stocking cost:

This cost is the inventory carrying cost (which is calculated per year)

for a specific period of time. The time varies in different contexts – it could be

the lead time of procurement of entire life time of machine. In the case of one

time purchases, over cost would be = Purchase Price – Scrap Price.

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INVENTORY VALUATION AND COST FLOWS:

What is the cost of inventory?

One can readily visualize the determination of inventory quantities by

physical count or by use of perpetual inventory records. When this quantity is

determined, it must be multiplied by a unity cost in order to determine the

inventory value that is used on financial statements.

Trade and quantity discount are to be excluded from unit cost since

these discount exist for the purpose of defining the true invoice cost of

merchandise. Cash discounts, on the other hand, have been considered as a

reward for early payment and as a penalty for late payment. The “reward” has

often been interpreted as a loss rather than as a part of unit cost. Thus it would

not be difficult to find difference of opinion as to whether invoice cost

includes or excludes cash discount.

When the “current replacement cost” of material on hand at the close

of a year is less than the actual cost, the inventory value is reduced to

replacement cost (current market price). Thus the acceptable basis inventory

valuation is the “lower of cost or market” or more properly the “lower of

actual cost or replacement cost”.

The determination of inventory values is very important from the point

of view of the balance sheet and the income statement since costs not included

in the inventory (the balance sheet) are considered to be expensive and are

thus included in the income statement.

Valuation of inventories – methods of determination:

Although the prime consideration in the valuation of inventories is

cost, there are a number of generally accepted methods of determining the cost

of inventories at the close of an accounting period. The most commonly used

methods are first – in first out (FIFO) average, and last – in first – out (LIFO).

The selection of the method for determining cost for inventory valuation is

important for it has a direct bearing on the cost of goods sold and consequently

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on profit. When a method is selected, it must be used consequently and cannot

be changed for year to year in order to secure the most favorable profit for

each year.

THE FIFO METHOD (FIRST – IN FIRST – OUT METHOD)

Under this method it is assumed that the materials or goods first

received are the first to be issued or sold. Thus, according to this method, the

inventory on a particular date is presumed to be composed of the items which

were acquired most recently.

The value inventory would remain the same even if the “perpetual

inventory system” is followed.

Advantage:- The FIFO method has the following advantages.

1) It values stock nearer to current market prices since stock is

presumed to be consisting of

2) The most recent purchases.

3) It is based on cost and, therefore, no unrealized profit enters into

the financial accounts of the company.

4) The method is realistic since it takes into account the normal

procedure of utilizing or selling those materials or goods which

have been longer longest in stock.

Disadvantages:- The method suffers from the following disadvantages.

1) It involves complicated calculations and hence increases the

possibility of clerical errors.

2) Comparison between different jobs using the same type of material

becomes sometimes difficult. A job commenced a few minutes

after another job may have to bear an entirely different charge for

materials because the first job completely exhausted the supply of

materials of the particular lot.

The FIFO method of valuation of inventories is particularly suitable in

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The following circumstances.

I. The materials or goods are of a perishable nature.

II. The frequency of purchases is not large.

III. There are only moderate fluctuations in the prices of materials or

goods purchased.

IV. Materials are easily identifiable as belonging to a particular

purchase lot.

The LIFO method (Last – in – First – Out method)

This method is based on the assumption that last item of materials or

goods purchased are the first to be issued or sold. Thus, according to this

method, inventory consists of items purchased at the earliest cost.

Advantages: - This method has the following advantages:

1) It takes into account the current market conditions while valuing

materials issued to different jobs or calculating the cost of goods

sold.

2) The method is base on cost and, therefore, no unrealized profit or

loss is made on account of use of this method.

The method is most suitable for materials which are of bulky and non –

Perishable type.

Base Stock Method:

This method is based on the contention that each enterprise maintains

at all times a minimum quantity of materials or finished goods in its stock.

This quantity is termed as base stock. The base stock is always valued at this

price and it’s carried forward as a fixed asset. Any quantity over and above the

base stock is valued in accordance with any other appropriate method. As this

method aims at matching current costs to current sales, the LIFO method will

be most suitable for valuing stock of materials or finished goods other than the

base stock. The base stock method has advantage of charging out material /

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goods at actual cost. Its other merits or demerits will depend on the method

which is used for valuing materials other than the base stock.

Weighted average price method:

This method is based on the presumption that once the materials are

put into a common bin, they lose their identity. Hence, the inventory consists

of no specific batch of goods. The inventory is thus priced on the basis of

average priced on the quantity purchased at each price.

Weighted average price method is very popular on account of its being

based on the total quantity and value of materials purchased besides reducing

number of calculations. As a matter of fact the new average price is to be

calculated only when a fresh purchase of materials is made in place of

calculating it every now and then as is the case with FIFO, LIFO methods.

However, in case of this method different prices of materials are charged from

production particularly when the frequency of purchases and issues/sales in

quite large and the concern is following perpetual inventory system.

Valuation of inventories – impact on the flow of costs:

As should be quite evident, the different methods of calculating

inventory values will all have their impact on the flow of costs through the

balance sheet into the income statement. The dollars that are paid to acquire

inventory are always divided between the balance sheet (inventories) and the

income statement (cost of goods sold), there is not other place to put them.

Thus if the different methods of calculating inventory produce differing

inventory values, they will also produce differing cost of goods sold figures,

and the differing cost of goods sold figures will naturally produce differing

profit figures.

In order show the impact of inventory valuation on cost flows, the

preceding exhibits are summarized. Each method produces a different figure

for the transfer of raw materials to work in process. These differences appear

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small, but the only reason for this is that the dollar amounts have been kept

small to make the illustration workable.

With the transfer of materials to work in process, the cost flow or

transfer with have its impact on the work in process inventory and the transfer

of completed merchandise to finished gods. Ultimately when goods are sold;

the varying methods of valuing inventories will have their impact on cost of

goods sold and these profits. The effects of the cost flows on cost of gods sold

and profits can be accentuated further it the differing methods of valuing

inventories are applies to work in process and finished goods.

Evaluation of methods – What causes the differences?

The differences in inventory values and flows for each of the method

illustrated result from only one factor, that it, changing purchases prices or

unit costs. If purchase prices had remained stable or unchanged, each method

would have produced the same inventory value and cost flow.

Cost flows and inventory are exactly the some under stable prices.

With a falling price level, the LIFO method produces the highest cost flow and

the lowest inventory. With a falling price level, the LIFO method produces the

lowest cost flow and highest inventory. The cost flow under LIFO follows the

price level, LIFO produces larger cost flows when prices are rising and

smaller cost flows when prices are falling. A final item to consider is that the

average method produces results which fall between the extremes of LIFO and

FIFO.

Evaluation of methods – can we justify the differences?

The best method of inventory valuation might be “specific

identification”, that is, the units in inventory should be identified with the

specific invoices and thus specific unit costs to which they apply.

Fortunately, the FIFO method constitutes a very useful approximation

to the specific identification method if on can reasonably assume that the

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actual flow of materials is first-in first-out. This assumption is not

unreasonable and thus we have stated the main argument for the FIFO

inventory scheme, that is, the physical flow of materials would match the flow

of costs under the first – in first – out method.

When the units in inventory are identical, interchangeable and do not

follow any specific pattern of physical flow, the average cost system would

seen to appropriate.

The primary difference between the FIFO and average methods is

centered on the physical flow since both methods could involve identical and

interchangeable units. The FIFO method fits a first-in first-out physical flow.

The average method fits a system which has no specific pattern of physical

flow. Finding a situation where there is no specific pattern of physical flow

should be quite difficult because of the fact that most inventory items are

subject to deterioration by instituting a person would attempt to reduce such

deterioration and any reasonable person would attempt to reduce such

deterioration by instituting a physical flow approximating first-in-first-out.

The major reason for the use of the average method is something other than

the lack of specific physical flow.

Ordinarily the LIFO method cannot be justified on the basis of the

physical flow of materials. Under conditions of changing prices, the advocate

of LIFO says that the only method which matches costs and revenues is the

LIFO method. The LIFO method assumes that the latest item is the first item

out, and thus the current costs of materials are matched with the other hand,

assumes that the first item in is the first item out, and thus the non-current

costs of matching current costs with current revenues is the essence of the

argument for the LIFO method.

As can be seen by the above comments, there is no one best method of

valuing inventories. The method chosen should fit the situation. A physical

flow pattern comparable to FIFO would force one to consider the FIFO

method. The lack of a discernible physical flow pattern would force one to

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consider the average method. Concentration on cost flows, as distinct from

physical flows, would force to consider the LIFO method especially where

there appears to be a discernible trend towards rising prices (or falling prices)

as has been the case in our economy during recent years.

Inventories valued at standard cost:

A very useful method of valuing inventories is at a standard cost. With

a standard cost system is no need of spending a great deal of time and money

tracing unit cost through perpetual inventory record.

PERPETUAL INVENTORY CARD UNDER A STANDARD COST

SYSTEM

Perpetual inventory Plant: …………………… Standard cost:……………………

Location:……………………………………… Order Quantity:………..………...

Order Point: …………………..…

Date Description On order Received IssuedAvailable

On order On hand

As shown above, there is need only for physical quantities since the

inventory values is the physical quantity multiplied by the standard cost. With

the cost and value columns disposed off, a perpetual inventory card can

include additional data such as quantities on order, quantities reserved, and

quantities available. These additional data are very useful for inventory and

production control purpose. On the basis of a few calculations concerning into

inventories on a FIFO, a LIFO, or an average cost basis.

26

Inventory of Obsolescence:

Absolvent inventories cannot be used or disposed off at values carried

on the books. Frequent reviews should be made of all inventories, and when

obsolescence is indicated a request for revaluation should be prepared for

approval by management. The difference between original and obsolete value

should be recorded by a change to operating account. Inventory obsolescence,

and a credit to inventory. If the material is scrapped, this will be for the full

inventory value or used in areas where it will be work less than its

Original value, the entry would be only for the amount of write down. Some

companies carry a selvage inventory and transfer to it materials which may be

sold or used at reduced values. Where this is done, the entry would be:

Dr. Salvage inventory

Dr. Inventory Obsolescence. Cr. Raw Material inventory or Supplies

inventory.

Inventory cost in relation HERITAGE FOODS shall to classifieds follows:

Inventory can be classified as capital and revenue certain items through

titled as capital in nature. Hence, due care is to be take whole drawing the

material.

Materials which are to be imported from other countries have to be

planned well in advance nearly about 24 months are to initiate the proposals

for procurement.

Similarly some of the items do not require any lead time some they are

available in the local market.

Cement is highly energy intensive industry, the inputs like power and

coal are the major part of the variable cost since Government controls the coal

& fuel sector, and increase is rates adversely effects the cement industry.

27

Kesoram cement has it own power plant and through which it saves

energy consumption. By this the cost since Government controls the coal &

fuel sector, any increase rates adversely effects the cement industry.

Inventory cost of any organization also adversely affects by retaining

obsolete / scraps and inventory costs can be reduced by management with an

advance planning of procurement of materials, periodical reviews of existing

spares with reference to the fast consumption, ascertaining the information

regarding the availability of spares in other areas. Holding of extra inventory

will be an additional financial burden to the company due to payment of

interest charges on the materials purchased, diminishing value of materials

purchased, diminishing value of materials by keeping them in stores for a log

time, handling charges, spare rent etc.,

The inventory of Kesoram cement mainly includes Limestone,

Bauxite, Gypsum, Fly ash.

Inventory in Kesoram Cement during 2008-09 to 2012-13 are as

follows: (Units in m.t)

Years 2008-09 2009-10 2010-11 2011-12 2012-13

Limestone 1042230 974490 956940 968730 1239443

Bauxite 49637 44256 41872 431151 64961

Gypsum 23243 20703 21747 23091 38765

Fly ash 5752 10301 18101 33695 159344

The value of the above raw materials for the year 2006-10 are as follows:

(Value in Rs.)

28

Inventory in Kesoram Cement during 2008-09 to 2012-13.

Years 2008-09 2009-10 2010-11 2011-12 2012-13

Limestone 122161492 13853482 13853482 157130922 243412189

Bauxite 32294775 27971993 27971993 23488745 38552277

Gypsum 19613001 17100574 17100574 19699583 49061196

Fly ash 28203 644473 644473 2546948 20223404

Value of imported and indigenous raw materials, stores, spare

parts and components consumed during the year:

29

Imported

Years 2008-09 2009-10 2010-11 2011-12 2012-13

Raw Materials 95354856 593002633 666190014 491339625 1454235982

Stores spare

parts and

components

522588043 522588043 75345209 131624912 42279637

30

(Imported Raw materials and Stores spare parts and components)

Indigenous

Years 2008-09 2009-10 2010-11 2011-12 2012-13

Raw Materials 1104787879 3995869418 3558875426 4117405138 7906341716

Stores spare

parts and

components

611204564 981990949 189149420 1365664385 3868715827

31

Indigenous

Raw Materials Stores spare parts and components.

CEMENT FACTORY RUNS WITH VARIOUS EQUIPMENTS:

I. TECHNICAL DEPARTMENT

1. MINES

2. MECHANICAL

3. ELETRICAL

4. CIVIL

II. COMMERCIAL DEPARTMENTS

1. STORES

2. PURCHASE

3. ACCOUNTS

TO RUN THE PLANT AND MAINTAIN EQUIPMENTS DEPARTMENTS

REQUIRE SPARES. FOR SUCH REQUIREMENT OF SPARES

32

DEPARTMENTS RAISE INDENTS AND SEND THE INDENTS TO

PURCHSE DEPARTMENT THROUGH STORES.

INDENTS:

1) ANNUAL INDENTS FOR CONSUMABLE ITEMS (STORES

ITEMS).

2) REGULAR INDENTS RAISED BY CONSUMING DEPARTMENTS.

3) ANNUAL REQUIREMENT OF RAW MATERIALS PROMOP & QC.

ENQUIRIES:

1) ENQUIRES WILL BE SENT APPROVED SUN CONTRACTORS.

ORDER PROCESSING FORM:

1) RECEIVING QUOTATIONS FROM SUB – CONTRACTORS.

2) ENTER THE PRICE DETAILS OF ENQUIRY SENT IN THE

ORDER PROCESSING FORM.

3) SELECTION OF PARTY ON MERIT BASIS.

PURCHASE ORDER:

1) PREPARE PURCHSE ORDER ON SELECTED PARTY.

2) SEND PURCHASE ORDER COPIES TO PARTY, STORES AND

DEPARTMENTS.

GOODS RECEIPT NOTE:

1) RECEIVING GOODS RECEIPT NOTE FROM STORES.

33

PURCHASE DEPARTMENT:

ACTIVITY RECEIVING INDENTS:

FLOW CHART:

Receipt of annual indents for consumable items / stores items from

stores department.

Checking of indent number an authority of item, delivery time

consumption period.

In case of any deficiency, send the information to concerned

department for clarification.

Segregation of indents for attending at C.P.D. and Hyderabad

Office.

Sent the Hyderabad indents to Hyderabad Office.

Enter the indents details in indent register.

34

PURCHASE DEPARTMENT

PURCHASE ENQUIRY

Ms.

Sl.

No.Material Code Department Quantity Unit

When

Required

ACTIVITY: FLOATING ENQUIRIES:

FLOW CHART:

Checking indented items and equipment name.

Taking previous supplier’s information form previous supply. If

new equipment / item, information to be taken from concerned

department or from competitors / journals / yellow pages.

Prepare enquiry to approved sub – contractors through enquiry

format.

If emergency requirement, send the enquiries through fax / e-mail.

Enter the details of enquiries sent in order processing form.

35

PURCHASE DEPARTMENT

ORDER PROCESSING FORM

Sl.

No.

Indent

Ref

Material

Code

No.

Description Size Qty 1 2 3 4 5 6 Remarks

ACTIVITY: PREPARATION OF ORDER PROCESSING FROM

FLOW CHART:

Receiving quotation against enquiries sent.

Enter price and other of the quotation received from sub –

contractors in the order processing from.

Mention the earlier purchase details of indented items against each

item in the order processing form if available.

Put up the processing from with enquiry and quotations to head

(purchase).

Examine order processing from with decide the sub – contractor to

whom purchase order to be placed.

PURCHASE DEPARTMENT

36

PURCHASE ORDER

Sl.

No.

Indent

No.

Item

CodeDescription Qty Rate Unit Amount

ACTIVITY: PREPARATION OF PURCHASE ORDER

FLOW CHART:

Prepare purchase order after finalization of price and other

technical terms mentioning the following details.

1. Material code

2. Indent number

3. Material specification & part number

4. Quantity

5. Rate

6. Payment and other terms & conditions

Stipulation of terms of test certificate / ibr / manufacture’s

certificate where applicable.

Fill in and attach the purchase order review proforma to purchase

order.

Send the prepared purchase order to head (purchase) and

competent authority for approval.

Send the purchase order to identified approved sub – contractor.

Send the purchase order copies to store and concerned departments.

Enter the details of purchase order in purchase order register.

PURCHASE DEPARTMENT

AMENDMENT / CANCELLATION OF ORDER

37

Material Code MaterialPrice / Quantity

as per Order

Amended Price /

Quantity

ACTIVITY: ORDER AMENDMENT, ORDER FOLLOW UP AND

INFORM THE SUPPLIER FOR THE REJECTIONS / DAMAGES /

SHORTAGES:

FLOW CHART:

Issue of amendments in case of modification to purchase order.

Review the pending order and follow up the pending order for

breakdown requirement.

Send regular reminders to suppliers against pending purchase order

every month.

Receive shortage / excess / damages report from stores for the

material received.

Information the supplier for the rejections / damage / excess /

shortage.

PURCHASE DEPARTMENT

ACTIVITY: IMPORTS:

38

FLOW CHART:

Receipt of indents for import items from stores department.

Taking previous / item, information to be taken from concerned

department or from competitors / journals / Yellow pages.

Send enquiry to overseas supplier.

Receiving quotations against enquiries sent.

Enter price and other terms of the quotations received from

overseas supplier in the order processing form.

Examine order processing form and decide the sub – contractor to

whom purchase order to be placed.

Prepare purchase order after finalization of price and other

technical terms mentioning the following details.

1) Material code

2) Indent number

3) Material specification & part number

4) Quantity

5) Rate

6) Payment

7) Insurance and other terms and conditions.

Send the prepared purchase order to head (purchase) and

competent authority for approval.

Send the purchase order to overseas supplier.

39

Send the purchase order copies to stores and concerned

departments.

Prepare IC documents and submit to bank for onward transmission

to overseas supplier.

Receive shipping documents from overseas supplier and send same

to clearing agents for collection of the material.

STORES DEPARTMENT

ACTIVITY: RECEIPTS AND UNLOADING MATERIAL

Receiving of Goods through Trunk / Personnel Delivery.

40

Entry of vehicle at Gate Office.

Stamping on Dispatch Advise / Delivery challan by Gate Office.

Checking of challans / Dispatch Advise with purchase order.

Unloading of Goods at allotted place or in case of urgency direct at

works site.

All safety precautions are taken while unloading of material like

workers should wear safety shoes, helmets, leather head gloves,

noise respirator, nose mask.

Training is given to workers for unloading Heavy & Bulky material

by using chain pulley Blocks, Wire Rope Ceilings, Fork Lift. After

UIL receipt acknowledgement given to driver maintaining Lorry

receipts register.

STORES DEPARTMENT

ACTIVITY: PREPARATION OF RECEIPT AND APPROVAL BOOK

FOR GENERAL MATERIAL / D.C. ENTER OF BLOCK, REPAIR

AND STATIONARY MATERIAL MANUALLY IN REGISTER

41

Sorting of Delivery challans as below:

a) General

b) Stationery

c) Repairs

d) Block

Checking with P.O. and mentioning Material Code, Party Code,

Indent No. Department Name on each & every challans.

Creation of D.C. entry in system for general materials.

Preparation of identification tags for General Materials through

system.

Preparation of Receipt & Approval Book for General materials.

Manual entry of block, stationery, repairs materials.

Preparation of intimations for block, stationery, repairs materials.

STORES DEPARTMENT

ACTIVITY: PHYSICAL VERIFCATION OF GOODS:

42

All D.C. handed over to stores assistant physical verification like

measuring, counting and tallying with D.C.’s Quantity /

Description of the materials by the Stores Assistant.

Identification tags to be attached to the verified material. Shortage /

Excess / Damages if any found to be noted on challans and inform

to section incharge.

Preparation of Shortage / Excess / Reports if any sending to parties

under copy to purchase / bills sections.

STORES DEPARTMENT

ACTIVITY: APPROVAL OF MATERIAL AND PREPARATION OF

GOODS RECEIPT NOTES:

Intimation is be sent to all the concerned departments. Showing

materials to concern person.

43

Taking approval of the material in receipt & approval book.

Preparation general material in receipt & approval book.

Preparation general material GRN’s through system and

stationery / block / repairs GRNs manually.

Forwarding true copy to issue section of GRN for general material

forwarding true copy to issue section of GRN for General material

forwarding true copy of block / Repair / Stationery GRN to issue

section and copy to purchase department.

STORES DEPARTMENT

ACTIVITY: REJECTED MATERIALS

Rejected materials kept in allotted area of rejected materials.

Packing of rejected materials.

Preparation of gate passes for rejected materials.

Sending back to suppliers through our Hyderabad Office.

Sending consignee copy to party vides Register Letter for booking

of Register goods to party’s other than.

STORES DEPARTMENT

ACTIVITY: EXCISE GATE PASSES

Sending duplicate for transport copy of excise invoice from

suppliers delivery challans.

Mentioning A.B. Sl. No. and named of concerned department.

44

Duplicate for transport copy of excise invoice over to bills section

for sending the same to Excise Department.

Corresponding with supplier. If the Excise Invoice is not found

with delivery challans.

STORES DEPARTMENT

ACTIVITY: RECEIPTS OF MEDICINES

Physical verification of Medicines as per Invoices.

Verification of expiry date on medicines.

Verification of MRP.

Sending shortage / excess note if any found.

Taking approval of Medical Officer.

Sending Rejection notes if any medicine is rejected.

Issuing to dispensary.

Bills forwarding to Account Department vide IOM for making the

payment.

CHAPTER – 3

45

3.1 Industry Profile

History of Indian Foods Industry

Retailing is one of the pillars of the economy in India and accounts for 35% of

GDP. The retail industry is divided into organized and unorganized sectors.

Over 12 million outlets operate in the country and only 4% of them being

46

larger than 500 sq ft (46 m2) in size. Organized retailing refers to trading

activities undertaken by licensed retailers, that is, those who are registered for

sales tax, income tax, etc. These include the corporate-backed hypermarkets

and retail chains, and also the privately owned large retail businesses.

Unorganized retailing, on the other hand, refers to the traditional formats of

low-cost retailing, for example, the local kirana shops, owner manned general

stores, paan/beedi shops, convenience stores, hand cart and pavement vendors,

etc.

Most Indian shopping takes place in open markets and millions of independent

grocery shops called kirana. Organized retail such supermarkets accounts for

just 4% of the market as of 2008. Regulations prevent most foreign investment

in retailing. Moreover, over thirty regulations such as "signboard licenses" and

"anti-hoarding measures" may have to be complied before a store can open

doors. There are taxes for moving goods to states, from states, and even within

states.

3.1.1 Growth

An increasing number of people in India are turning to the services sector for

employment due to the relative low compensation offered by the traditional

agriculture and manufacturing sectors. The organized retail market is growing

at 35 percent annually while growth of unorganized retail sector is pegged at 6

percent. An investment to The Retail Business in India is currently at the point

of inflection. Rapid change with the tune of US $ 25 billion is being planned

by several Indian and multinational companies in the next 5 years. It is a huge

industry in terms of size and according to management consulting firm

Technopak Advisors Pvt. Ltd., it is valued at about US $ 350 billion.

Organized retail is expected to garner about 16-18 percent of the total retail

market (US $ 65-75 billion) in the next 5 years.

47

India has topped the A.T. Kearney’s annual Global Retail Development Index

(GRDI) for the third consecutive year, maintaining its position as the most

attractive market for retail investment. The Indian economy has registered a

growth of 8% for 2007. The predictions for 2008 are 7.9%. The enormous

growth of the retail industry has created a huge demand for real estate.

Property developers are creating retail real estate at an aggressive pace and by

2010, 300 malls are estimated to be operational in the country.

With over 1,000 hypermarkets and 3,000 supermarkets projected to come up

by 2011, India will need additional retail space of 700,000,000 sq ft

(65,000,000 m2) as compared to today. Current projections on construction

point to a supply of just 200,000,000 sq ft (19,000,000 m2), leaving a gap of

500,000,000 sq ft (46,000,000 m2) that needs to be filled, at a cost of US$15–

18 billion.

According to the Icier report, the retail business in India is estimated to grow

at 13% from $322 billion in 2006-07 to $590 billion in 2011-12. The

unorganized retail sector is expected to grow at about 10% per annum with

sales expected to rise from $ 309 billion in 2006-07 to $ 496 billion in 2011-

12.

3.1.2 The Indian Retail Market

Indian market has high complexities in terms of a wide geographic spread and

distinct consumer preferences varying by each region necessitating a need for

localization even within the geographic zones. India has highest number of

outlets per person (7 per thousand) Indian retail space per capita at 2 sq ft

(0.19 m2)/ person is lowest in the world Indian retail density of 6 percent is

highest in the world. 1.8 million Households in India have an annual income

of over 45 lakh.

48

Delving further into consumer buying habits, purchase decisions can be

separated into two categories: status-oriented and indulgence-oriented.

CTVs/LCDs, refrigerators, washing machines, dishwashers, microwave ovens

and DVD players fall in the status category. Indulgence-oriented products

include plasma TVs, state-of-the-art home theatre systems, iPods, high-end

digital cameras, camcorders, and gaming consoles. Consumers in the status

category buy because they need to maintain a position in their social group.

Indulgence-oriented buying happens with those who want to enjoy life better

with products that meet their requirements. When it comes to the festival

shopping season, status-oriented segment that contributes largely to the

retailer’s cash register.

While India presents a large market opportunity given the number and

increasing purchasing power of consumers, there are significant challenges as

well given that over 90% of trade is conducted through independent local

stores. Challenges include: Geographically dispersed population, small ticket

sizes, complex distribution network, little use of IT systems, limitations of

mass media and existence of counterfeit goods.

3.1.3 Major Indian Retailers

Indian apparel retailers are increasing their brand presence overseas,

particularly in developed markets. While most have identified a gap in

countries in West Asia and Africa, some majors are also looking at the US and

Europe. Arvind Brands, Madura Garments, Spykar Lifestyle and Royal

Classic Polo are busy chalking out foreign expansion plans through the

distribution route and standalone stores as well. Another denim wear brand,

Spykar, which is now moving towards becoming a casualwear lifestyle brand,

has launched its store in Melbourne recently. It plans to open three stores in

London by 2008-end.

49

The low-intensity entry of the diversified Mahindra Group into retail is unique

because it plans to focus on lifestyle products. The Mahindra Group is the

fourth large Indian business group to enter the business of retail after Reliance

Industries Ltd, the Aditya Birla Group, and Bharti Enterprises Ltd. The other

three groups are focusing either on perishables and groceries, or a range of

products, or both.

PGC Retail -T-Mart India Switcher , Respect India , Grand India

Bazaar ,etc.,

REI AGRO LTD Retail-Formats:6TEN Hyper & 6TEN Super

RPG Retail-Formats: Music World, Books & Beyond, Spencer’s

Hyper, Spencer’s Super, Daily & Fresh

Pantaloon Retail-Formats: Big Bazaar, Food Bazaar, Pantaloons,

Central, Fashion Station, Brand Factory, Depot, aLL, E-Zone etc.

The Tata Group-Formats: Westside, Star India Bazaar, Steel junction,

Landmark, Titan Industries with World of Titans showrooms, Tarnish

outlets, Chromes.

K Raheja Corp Group-Formats: Shoppers Stop, Crossword, Hyper

City, In orbit

Lifestyle International-Lifestyle, Home Centre, Max, Fun City and

International Franchise brand stores.

Pyramid Retail-Formats: Pyramid Megastore, TruMart

Nilgiri’s-Formats: Nilgiris’ supermarket chain

Subhiksha-Formats: Subhiksha supermarket pharmacy and telecom

discount chain.

Trinethra- Formats: Fabmall supermarket chain and Fabcity

hypermarket chain

Vishal Retail Group-Formats: Vishal Mega Mart

BPCL-Formats: In & Out

Reliance Retail-Formats: Reliance Fresh

50

Reliance ADAG Retail-Format: Reliance World

German Metro Cash & Carry

Shoprite Holdings-Formats: Shoprite Hyper

Paritala stores bazar: honey shine stores

Aditya Birla Group - more Outlets

Kapas- Cotton garment outlets

51

3.2 Company profile

3.2.1 Heritage at a Glance:

The Heritage Group, founded in 1992 by Sri Nara Chandra Babu Naidu, is one

of the fastest growing Private Sector Enterprises in India, with four-business

division’s viz., Dairy, Retail, Agri, and Bakery under its flagship Company

Heritage Foods (India) Limited (HFIL). The annual turnover of Heritage

Foods crossed Rs.1096 corers in 2010-11.

Presently Heritage’s milk products have market presence in Andhra Pradesh,

Karnataka, Kerala, Tamil Nadu and Maharashtra and its retail stores across

Bangalore, Chennai and Hyderabad. Integrated agri operations are in Chittoor

and Medak Districts and these are backbone to retail operations.

52

In the year 1994, HFIL went to Public Issue to raise resources,

which was oversubscribed 54 times and its shares are listed under B1 Category

on BSE (Stock Code: 519552) and NSE (Stock Code: HERITGFOOD)

3.2.2 About Founder

Sri Chandra Babu Naidu is one of the greatest Dynamic,

Pragmatic, Progressive and Visionary Leaders of the 21st Century. With an

objective of bringing prosperity in to the rural families through co-operative

efforts, he along with his relatives, friends and associates promoted Heritage

Foods in the year 1992 taking opportunity from the Industrial Policy, 1991 of

the Government of India and he has been successful in his endeavor.

At present, Heritage has market presence in all the states of

South India. More than three thousand villages and five lakh farmers are being

benefited in these states. On the other side, Heritage is serving more than 6

lakh customers needs, employing more than 700 employees and generating

indirectly employment opportunity to more than 5000 people. Beginning with

a humble annual turnover of just Rs.4.38 crores in 1993-94, the sales turnover

has reached close to Rs.300 crores during the financial year 2005-2006.

Sri Naidu held various coveted and honorable positions

including Chief Minister of Andhra Pradesh, Minister for Finance & Revenue,

Minister for Archives & Cinematography, Member of the A.P. Legislative

Assembly, Director of A.P. Small Industries Development Corporation, and

Chairman of Karshaka Parishad.

Sri Naidu has won numerous awards including " Member of the

World Economic Forum's Dream Cabinet" (Time Asia ), "South Asian of the

53

Year " (Time Asia ), " Business Person of the Year " (Economic Times), and "

IT Indian of the Millennium " ( India Today).

Sri Naidu was chosen as one of 50 leaders at the forefront of

change in the year 2000 by the Business Week magazine for being an

unflinching proponent of technology and for his drive to transform the State of

Andhra Pradesh.

3.2.3 Forward looking statement:

We have grown, and intended to grow, focusing on harnessing our willingness

to experiment and innovate our ability to transform our drive towards

excellence in quality, our people first attitude and our strategic direction.

3.2.4 Mission

Bringing prosperity into rural families of India through co-operative efforts

and providing customers with hygienic, affordable and convenient supply of

“Fresh and Healthy " food products.

3.2.5 Vision

To be a progressive billion dollar organization with a pan India foot print

by2015.

To achieve this by delighting customers with "Fresh and Healthy" food

54

products those are a benchmark for quality in the industry.

We are committed to enhanced prosperity and the empowerment of the

farming community through our unique "Relationship Farming" Model.

To be a preferred employer by nurturing entrepreneurship, managing

career aspirations and providing innovative avenues for enhanced

employee prosperity.

Heritage Slogan:

o When you are healthy, we are healthy

o When you are happy, we are happy

o We live for your "HEALTH & HAPPINESS"

Quality policy of HFIL:

We are committed to achieve customer satisfaction through

hygienically processed and packed Milk and Milk Products. We strive to

continually improve the quality of our products and services through up

gradation of technologies and systems.

Heritage's soul has always been imbibed with an unwritten perpetual

commitment to itself, to always produce and provide quality products with

continuous efforts to improve the process and environment.

Adhering to its moral commitment and its continuous drive to achieve

excellence in quality of Milk, Milk products & Systems, Heritage has always

been laying emphasis on not only reviewing & re-defining quality standards,

but also in implementing them successfully. All activities of Processing,

55

Quality control, Purchase, Stores, Marketing and Training have been

documented with detailed quality plans in each of the departments.

Today Heritage feels that the ISO certificate is not only an

epitome of achieved targets, but also a scale to identify & reckon, what is yet

to be achieved on a continuous basis. Though, it is a beginning, Heritage has

initiated the process of standardizing and adopting similar quality systems at

most of its other plants.

3.2.9 Commitments:

Milk Producers:

Change in life styles of rural families in terms of:

Regular high income through co-operative efforts.

Women participation in income generation.

Saved from price exploitation by un-organized sector.

Remunerative prices for milk.

Increase of milk productivity through input and extension activities

Shift from risky agriculture to dairy farming

Heritage

Financial support for purchase of cattle; insuring cattle

Establishment of Cattle Health Care Centers

Supplying high quality Cattle feed

Organizing "Rythu Sadasu" and Video programmers for educating the

farmers in dairy farming

56

3.2.10 Customers:

Timely Supply of Quality & Healthy Products

Supply high quality milk and milk products at affordable prices

Focused on Nutritional Foods

More than 4 lakh happy customers

High customer satisfaction

24 hours help lines ( <10 complaints a day)

3.2.11 Employees:

Enhancing the Technical and Managerial skills of Employees through

continuous training and development

Best appraisal systems to motivate employees

Incentive, bonus and reward systems to encourage employees

Heritage forges ahead with a motto "add value to everything you do"

3.2.12 Service:

Highest impotence to investor service; no notice from any regulatory

authority since 2001 in respect of investor service

Very transparent disclosures

3.2.13 Suppliers:

57

Doehlar: technical collaboration in Milk drinks, yogurts drinks and

fruit flavoured drinks Alfa-Laval: supplier of high-end machinery and

technical support Focusing on Tetra pack association for products package.

3.2.14 Society:

Potential Employment Generation

More than 3500 employees are working with heritage

More than 9500 procurement agents got self employment in rural

areas

More than 5000 sales agents associated with the company

Employment for the youth by providing financial and animal

husbandry support for establishing MINI DAIRIES

Producing highly health conscious products for the society

3.2.15 Qualities of management principles:

1. Customer focus to understand and meet the changing needs and

expectations of customers.

2. People involvement to promote team work and tap the potential of

people.

3. Leadership to set constancy of purpose and promote quality culture

trough out the organization.

4. Process approach to assess the efficiency and effectiveness of each

process.

58

5. Systems approach to understand the sequence and interaction of

process.

6. Factual approach to decision making to ensure its accuracy.

7. Continual improvement processes for improved business results.

8. Development of suppliers to get right product and services in right

time at right place.

3.2.16 Product/Market wise performance:

The total turnover is Rs 341 Crores during the financial year

2010-11 against the turnover of 292.02 Crores in 2009-10. Today Heritage

distributes quality milk & milk products in the states of A.P, Karnataka, and

Kerala & Tamil nadu.

During the year 2006-07 liquid milk sales was Rs.28329.79

lakhs against Rs.24525.23 lakhs in the previous year. The sales of miik

products including bulk sales of cream, ghee and butter were recorded Rs

5781.59 lakhs against Rs 4677.21 lakhs.

3.2.17 Milk sales:

23% growth was recorded in AP 2.38 lakhs litres per day (LLPD) in

2010-11 against 1.93 LLPD in 2009-10. 13% growth was recorded in

Tamilnadu-1.53 LLPD in 2010-11against 1.35 LLPD in 2009-10. Overall

growth of 6% was recorded- 5.49 LLPD in 2010-11against 5.16 LLPD.

Flavoured milk sales recorded a growth rate of 77% over 2009-10. Butter milk

sales have gone up by 45% over 2009-10.

3.2.18 Outlook:

Considering the growth potential in the liquid milk market, the

company has drawn plans to increase its market share in the existing markets

59

and to enter into new markets there by doubling revenues in dairy business in

the next 3 years. To achieve this object, company is undertaking major

expansion in dairy business by inverting over Rs 20 crores during 2010-11 and

over Rs 10 crores during the current year to strengthen the milk procurement.

3.3 Intellectual Property Policy

All Members have utmost obligation to identify and protect the

intellectual properties, trade secrets and confidential information owned by the

Company and its clients or associates as it is critical to the success of the

company. "Intellectual Property Rights" (IPR) means generally patented or

potentially patentable inventions, trademarks, copyrightable subject matters

and trade secrets.

CORPORTE OPPORTUNITIES

Members owe a duty to the Company to advance its legitimate

interests when the opportunity to do so arises and are expressly

prohibited from improper use of information / property or taking

improper advantage of their position. PREVENTION OF INSIDER

TRADING Insider trading is prohibited both by the Law as well as by

the company policy. Insider trading generally involves the act of

subscribing to or buying

or selling of the Company's securities, when in possession of any Unpu

blished Price Sensitive Information about the company.

"Price sensitive information” is such information, which relates

directly or indirectly to the company and which if published is likely to

materially affect the price of securities of the Company. It is important

to note that both positive and negative information could be price &

sensitive.

60

Members shall not derive benefit or assist others to derive benefit or

assist them to derive benefit on their behalf by giving investment

advice from the available access to and possession of information

about the Company, which is not in public domain and thus

constituting insider information. Members shall comply with the

prevention of insider trading guidelines as issued by Securities

Exchange Board of India (SEBI). SECURITIES MARKET POLICY

The Company is committed to comply with securities laws in all the markets

in which the Company's securities are listed. The company prohibits

fraudulent and unfair trade practices with regard to the securities of the

Company by all Members.

CONFIDENTIALITY OF INFORMATION POLICY

The Company's confidential information is a valuable asset.

Members shall understand that protection of all confidential information is

essential. Members should undertake and be committed to protecting business

and personal information of confidential nature obtained from

clients, associates and employees.

Any information concerning the Company's business, its customers, suppliers

etc which is not in the public domain and to which the Members have access

or possesses such information, shall be considered confidential and held in

confidence, unless authorized to disclose or such disclosure is required as a

matter of law. Members shall not provide any information either formally or

informally, to the press or any other publicity media, unless specially

authorized to do so. COMPLIANCE WITH LAWS, RULES AND

REGULATIONS

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Members should comply with all applicable laws, rules, and regulations, both

in letter and spirit. In order to assist the Company in promoting the lawful and

ethical behavior, Members have to report any possible violation of law, rules,

regulations or the code of conduct to the Company Secretary.

3.3.1 Protection and proper use of company’s assets

All Members have the responsibility to protect the assets of the

company, ensure optimal utilization of assets and to report and record all

transactions. Members shall protect the Company's assets from loss, damages,

misuse or theft and assets may only be used for business purposes and other

purposes specifically approved by management and must never be used for

any personal or illegal purposes.

3.3.2 Competition policy

The Company shall compete only in an ethical and legitimate

manner. It prohibits all actions that are anti- competitive or otherwise contrary

to laws that govern competitive practices in the market place. Members shall

uphold the same.

3.3.3 Selecting suppliers

The Company's suppliers make significant contribution to its

success. The Company's policy is to purchase / avail supplies based on need,

quality, service, price and other commercial terms and conditions. Suppliers

should be selected based on merit, price, quality and performances. The

Company's policy is to select significant suppliers through a competitive bid

62

process wherever possible. Under no circumstance should the Company or its

employee, agent or contractor attempt to coerce suppliers in any way.

3.3.4 Environment, health and safety policy

Members shall take environmental consciousness a step further as

a company and contribute to preserving nature as well as safety measures in

own respective work areas. All Members are responsible for conducting safe

and environmentally sound operations; this is in the interest of our own well-

being and the quality of life of others. Members shall abide by this policy.

3.3.5 Elimination of child labour

It is the Company's policy not to support child labour. The

Company is committed to implement the provisions of the Child Labour

(Prohibition and Regulation) Act, 1986. To, promote this the Company

encourages its suppliers also to work towards a no child labour policy in their

industries. Members shall strictly observe that no child labour is employed in

the company.

3.3.6 Abolition of forced labour

The Company strictly prohibits forced or compulsory labour.

The Company is committed to ensuring that employees enter into employment

and stay on in the Company of their own free will. Members shall uphold this

policy.

3.3.7 Gifts & donations

No Member shall receive or offer, directly or indirectly, any gifts,

donations, remuneration, hospitality, illegal payments and comparable benefits

63

which are intended or perceived to be intended to obtain business (or

uncompetitive) favours or decision for the conduct of the business. Normal

gifts of commemorative nature for special events may be accepted and

reported to the Board.

3.3.8 Other directorships

The Company feels that serving on the Board of directors of

other companies may raise substantial concerns about potential conflict of

interest. Therefore all Directors shall report / disclose such relationships to the

Board on an annual basis. It is felt that service on the Board of a direct

competitor is not in the interest of the Company. Hence all the Directors are

barred in accepting such position without the concurrence of the Board.

3.3.9 Accountability

The Board of Directors (BOD) shall oversee the Company's

adherence to ethical and legal standards. All employees and members of the

BOD shall undertake to stop or prevent actions that could harm customers or

reputation of the Company and to report such actions as soon as they occur to

take corrective steps and see that such actions are not repeated.

3.3.10 Compliance with code of conduct

Each Director and senior management personnel shall

adhere to this code of conduct and affirm compliance with the code on an

annual basis as per the Annexure to the Code. Violation of this Code will lead

to appropriate disciplinary action.

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3.3.11Waiver of the code

Any waiver of the applicability of the Code or waiver of

application of any provision of the Code to any Member shall be approved by

the Board of Directors and disclosed as required by Law or SEBI / Stock

Exchange regulations.

3.3.12 Branches of HFIL:

HFIL has 3 wings. They are

1. Dairy:

It is the major wing among all. The dairy products manufactured by

HFIL are

Milk, curd, butter, ghee, flavoured milk, paneer, doodhpeda, ice cream.

2. Retail:

In the retail sector HFIL has outlets namely “Fresh@”. In those stores

the products sold are vegetables, milk& milk products, grocery, pulses, fruits

etc.

In Hyderabad 19 retail shops are there. In Bangalore& Chennai, 3&4

respectively are there. Totally there are 26 retail shops are there.

Fresh@ is a unique chain of retail stores, designed to meet the

needs of the modern Indian consumer. The store rediscovers the taste of nature

every day making grocery shopping a never before experience.

The unique& distinctive feature of Fresh@ is that it offers the

widest range of fresh fruits and vegetables which are directly handpicked from

65

the farms. Freshness lies in their merchandise and the customers are always

welcomed with fresh fruits and vegetables no matter what time they walk in.

3. Agri Business:

In this business HFIL employees will go to farmers and have a

deal with them. Those farmers will sell their goods like vegetables, pulses to

HFIL only. And HFIL will transport the goods to retail outlets.

The agricultural professors will examine which area is suitable

to import vegetables from and also examine the vegetables, pulses and fruits in

the lab. And finally they report to the Head-Agribusiness. Representatives as

per the instructions given by the agri professors will approach the farmers

directly and make a deal with them. It is the process of registering the farmers.

Heritage Finlease Heritage Finlease Limited was incorporated under the companies Act 1956 on 23rd of February 1996 and commenced business from 2nd day of April 1996. The Registered office is located at 6-3-541/c Punjagutta, Hyderabad-500082.

The following are the directors of the company:Sri D.SeetharamaiahSmt. N. BhuvaneswariSri M. Sivarama VaraprasadSri R.S.Bakkannavar

The Company was registered as Non Banking Financial Institution on 5th Day of December 1998 by Reserve Bank of India as a Deposit Taking Company under the category Hire Purchase Company.

At Present the company is allowing Dairy Loans to Small Farmers under Tie up arrangement with Heritage Foods (India) Limited. The Company has been earning profits from inception and functioning in conformity with the rules and directions of Reserve Bank of India.

66

CHAPTER-4

67

RATIO ANALYSIS

The investment on raw materials over a period of 5 years from 2005 to

2011 is presented in the following table.

1. Investment on Raw Materials:

Year Investment on Raw Material

(in crores)

2005-06 13386.80

2008-09 11690.67

2009-10 49950.88

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2010-11 42950.66

2011-12 46087.45

2012-13 93605.78

Interpretation:

1) From the above table it can be understood that the inventory of

Kesoram Cement was recorded at 13,386.80 during the year 2005-06

and it is increased to 93605.78 during the year 2012-13.

2) It shows that there is on increase in the inventory to the more extent of

80218.98.

3) The average inventory of Kesoram Cement was recorded at

Rs.42945.41.

4) The highest investment in inventory was recorded in the years 2012-13

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2. Trend Analysis:

Trend analysis technique is applied to know the growth rate in

investment of raw material of Kesoram Cement over the review period which

is shown in the following table.

Trend Analysis:

YearRaw Material

(in Lacks)Trend %

2005-06 13386.80 100%

2008-09 11690.67 87%

2009-10 49950.88 373%

2010-11 42950.66 315%

2011-12 46087.45 344%

2012-13 93605.78 699%

Trend analysis technique is applied to know the growth rate in

investment of raw material of Kesoram Cement. (From2005-06 to 2012-13)

70

Interpretation:

1) The investment on investment has increased in the year 2012-13. And

the lost year investment has declared continuously. The percentage in

2010-11 was 315% as compared to years 2005-06 to 2012-13.

2) The trends in inventories show that inventory have been more in the

year 2012-13 and then it has shown a downward trend and again it

increased to some extent.

3) The investment in inventories has shown fluctuating trend is initial

years and then it raised to 699% and again showing fluctuating trend.

3. Inventory Turnover Ratio:

This ratio indicates the number of times the stock has been turned over

during the period & evaluates the efficiency with which a firm is able to

71

manage its inventory. This ration is calculated by applying the following

formula.

Cost of goods sold

Inventor turn over ration = _________________

Average inventory

Inventory turn over ration:

YearCost of goods

soldAvg. Inventory Ratio

2005-06 60150.35 7402.31 8.13

2008-09 59021.41 37975.30 1.55

2009-10 121551.71 95065.28 12.79

2010-11 127533.58 12390.06 10.29

2011-12 130392.68 1333.8.01 9.78

2012-13 311636.92 160035.93 1.32

Interpretation:

1. From the above table 2005 it can be observed that (1) inventory turn

over ratio is 8.13 during 2005 – 2006 and it gradually decreased to

1.55 during 2006 – 2007.

2. In the year 2012-13 it is clear that the ratio is very less i.e., he stock

is not turned into sales quickly.

3. As compared to all the years the ratio is very less in 2012-13.

4. The average inventory turn over ratio was recorded at 7.3 times during

the review period.

4. Inventory conversion period:

72

It may also be of interest to see average time taken for clearing the

stocks. This can be possible by calculating inventory conversion period. This

period is calculated by dividing the number of the days by inventory turn over.

This formula may be as:

Days in a year (360 days)

Inventory conversion period = _____________________

Inventory turnover ratio

Inventory conversion period: (in crores)

YearCost of

goods sold

Avg.

inventoryRatio ICP (Days)

2005-06 60150.35 7402.31 8.13 44

2008-09 59021.41 37975.30 1.55 232

2009-10 121551.71 95065.28 12.79 28

2010-11 127533.58 12390.06 10.29 34

2011-12 130392.68 1333.8.01 9.78 36

2012-13 311636.92 160035.93 1.32 272

Interpretation:

From the above table it can be identified the following observations:

1) The inventory conversion period was 232 days during the year 2008-09

but it declined to 36 during 2011-12, which indicates that the stock has

been very quickly converted into sales which mean the company is

managing the inventory efficiently.

2) The lowest inventory conversion period was recorded at 28 days in the

year 2009-10 and the highest inventory conversion was recorded at 272

days in the year 2012-13.

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3) The average inventory conversion period was recorded at 107 days

during the review period.

5. Percentage of Inventory over current assets:

In order to know the percentage of inventory over current assets the

Ratio of inventory to current assets is calculated and which is presented in the

following table.

InventoryInventory over current assets ratio = __________ X 100

Current assets

Percentage of Inventory Over current assets:

Year Inventory Current Assets Ratio (%)

2005-06 13386.80 24172.33 55%

2008-09 11690.67 28770.78 40%

2009-10 49950.88 53063.75 94%

2010-11 42950.66 45598.02 92%

2011-12 46087.45 49713.32 92%

2012-13 93605.78 86811.49 107%

Interpretation:

74

1) From the above table it can be understand that the % of inventory over

current assets ratio was showing a declining trend for two years 2005 -

2006.

2) However from the year2012-13 it is showing an increasing trend.

3) The lowest inventory over current assets ratio was recorded at 40%

during the year 2008-09 and the highest inventory over current assets

ratio we recorded at 107% during 2012-13.

4) The average inventory over current assets ratio was recorded at 80%.

6. Percent of Inventory Over total current assets & fixed assets:

Inventory / Current + Fixed assets

Year Inventory Current Assets Ratio (%)

2005-06 13386.80 87168.64 15.35%

2008-09 11690.67 87468.76 13.36%

2009-10 49950.88 117985.89 42.33%

2010-11 42950.66 112647.26 37.50%

2011-12 46087.45 112637.07 40.91%

2012-13 93605.78 197330.50 47.43%

Interpretation:

1) During the year 2005-06 the ratio was 15.35% on it declined to

13.36% in the year 2008-09

2) From the year 2009-10 it is showing fluctuating trend but as compared

to above 2 years it is increasing.

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3) The lowest inventory over total assets ratio was recorded at 13.36%

during the year 2008-09 and the highest inventory ratio was recorded

at 47.43% during the year 2012-13.

4) The average inventory to total assets ration was recorded at 32.81%

during the review period

7. Percentage of Inventory over current liabilities:

In order to know the percentage of inventory over current liabilities the

ration of inventory to current liabilities is calculated and which is presented in

the following table.

Inventory

Inventory over current liabilities ratio = __________________ X 100

Current liabilities

Percentage of Inventory Over current liabilities:

Year InventoryCurrent

liabilitiesRatio (%)

2005-06 13386.80 7862.11 17%

2008-09 11690.67 8042.62 145%

2009-10 49950.88 16204.14 308%

2010-11 42950.66 16204.14 284%

2011-12 46087.45 17728.22 259%

2012-13 93605.78 36253.41 258%

Interpretation:

1) From the above table it can be understand that the % inventory over

current liabilities ratio was showing a declining trend for two years

2005-06.

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2) During the year 2008-09 the ratio was it gradually increased to 145 and

there is a net increase to the extent of 128.

3) The lowest inventory over total amounts ratio was recorded at 17

during the year 2005-06.

4) The highest inventory to current liabilities ratio was recorded at 308

during the year 2009-10

5) The average inventory to current liabilities ratio was recorded at 211

during the review period.

8. Current Ratio:

In order to know the current ratio the percentage of current assets to

current liabilities is calculated and which is presented in the following table.

Current assets

Current Ratio = _____________________

Current liabilities

Calculation of Current Ratio’s:

Year InventoryCurrent

liabilitiesRatio (%)

2005-06 24172.33 7862.11 3.07%

2008-09 28770.78 8042.62 3.57%

2009-10 53063.75 16204.14 3.27%

2010-11 45598.02 16204.14 3.06%

2011-12 49713.32 17728.22 2.80%

2012-13 86811.49 36253.41 2.39%

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Interpretation:

1) From the above table it can be interpreted that the % of current

assets over current liabilities ratio i.e., current ratio was showing a

decreasing trend from year 2012-13..

2) In the year 2005 – 05 the ratio was 3.07% and has increased to

3.57% in the year 2008-09.

3) The lowest current ratio was recorded at 2012-13 which is 2.39%

and the highest current ratio was recorded at 3.57% during the year

2008-09.

4) The average current ratio was recorded at 3.02% during the review

period.

9. Quick Ratio:

The quick ratio is the relationship between quick to current liabilities

quick assets is more rigorous test of liability position of a firm it is computed

by applying the following formula.

Quick ratio = Quick assets / Current Liabilities

Where Quick assets = Current Assets – Inventory

Year InventoryCurrent

liabilitiesRatio (%)

2005-06 10785 7862.11 1.37%

2008-09 17080 8042.62 2.12%

2009-10 3112 16204.14 0.002%

2010-11 3347 16204.14 0.22%

2011-12 3625 17728.22 0.20%

2012-13 3207 36253.41 0.08%

Interpretation:

78

1) From the above table it can be understand as that the % of quick

assets to current liabilities i.e., the quick ratio was 0.002% in 2009-

10 and from that year it is showing increasing trend.

2) The highest quick ratio was recorded at 2.12% during the year

2008-09 and the lowest quick ratio was recorded at 0.002% during

the year 2009-10.

3) The average quick ratio was recorded at 0.66 during the review

period.

CHAPTER-5

79

CONCLUSIONS

1) Over all the inventory of HERITAGE FOODS is up to the mark.

80

2) The production of clinker and cement during 2003 – 2004 was

7,47,436 and 7,77,092 respectively which is higher as compared to

2006 – 2007 which is 6,87,373 and 7,27,447.

3) Investment on raw material is 93605.78 lakhs which very high as

compared to 2011-12 which is only 460870.45 lakhs.

4) The inventory turn over ratio shows that the stock has been

converted into sales is only 1.32 times.

5) In the year 2009-10 the stock was cleared within 28 days whereas it

took 232 days in the year 2009-10 which took more days for

clearing stock.

6) Year 2012-13 is not showing sample profits. This is because of

cement prices have been continuously under pressure due to

persistent mismatch between supply and demand.

7) The quantity of limestone in the year 2011-12 is 9,53,940 and its

value is 13,85,34,812 but whereas in the year 2012-13 the quantity

was 9,74,490 and the value is 12,21,61,492.

8) In purchase department for want of any item it should go through

several process. This may include receiving indents, floating

enquiries, preparation of order processing form, preparation of

purchase order and order follow up inform the supplier. Most of the

time was spent in accounts payable.

9) In this type of process, it requires more number of employees and

supplier should also wait for until the accounts are matched.

10) This process takes an input, adds value to it and provides an output

to an internal or external customer.

SUGGESTIONS

1) Though the production is higher is the year 2009-10 and the sales

were very high i.e., as per inventory conversion period it took 272

days. This shows that there is demand for cement and the funds

81

unnecessarily tied up. So, proper demand forecasting should be

done and according to that it may be manufactured.

2) The investment on raw material should be made as per the

requirement. Unnecessary investment may block up the funds.

3) Neither too high nor too low inventory turnover ratios may reduce

profit and liquidity position of the industry. So, proper balance

should be made to increase profits and to ensure liquidity.

4) The raw material should be acquired from the right source at right

quality and at right cost.

5) The process that was being used by HERITAGE FOODS with the

purchasing department should undergo changes, so that, it seeks

enhance the celerity of the delivery of a product without

compromising its quality by improving the utilization of materials,

labour and equipment.

6) To reduce the work, the purchasing department may enter the

purchasing order into database and did not send a copy to any one.

When the merchandise arrived, the receiving clerk would enter the

database and determine whether the order agreed with the

electronic purchase order.

If it did, payment was authorized to be made at the appropriate

time. If it didn’t match, the order would be returned until if it is agreed by the

Kesoram Cement.

If it institutes “Invoice less purchasing” where the supplier did not

need to send an invoice to be paid.

This generally simplifies the process for all concerned. As a result, it

would able to reduce the work of its accounts payable department.

CHAPTER-6

82

BIBLIOGRAPHY

1. Financial Management - By IM Pandey

2. Financial Management - By Prasanna Chandra

3. Total Quality Management - By K. Shridhara Bai

4. Management Accounting - R.K.Sharma &S.KGuptha

5. Company’s Stores Manual -

6. Company’s Annual Reports -

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