Chapter – 1
INDUSTRY PROFILE
History
The global electrical and electronics industry centers around various adjunct
sectors. Few of them are Electronic Components, Computer & Office Equipments,
Telecommunications, Consumer Electronics as well as Industrial Electronics.
Electric meters are typically calibrated in billing units, the most common one being the
kilowatt hour. Periodic readings of electric meters establishes billing cycles and energy
used during a cycle.
Factors Governing the Growth of this Industry. Every industry thrives on some
supporting factors. In this connection, there are few factors governing the growth of
electrical and electronics industry:
The global medical industry is one of the world's fastest growing industries,
absorbing over 10% of gross domestic product of most developed nations. It constitutes
of broad services offered by various hospitals, physicians, nursing homes, diagnostic
laboratories, pharmacies and ably supported by drugs, pharmaceuticals, chemicals,
medical equipment, manufacturers and suppliers.
The medical and health care industry provides enormous employment opportunities to
choose from. Apart from using the services of medical professionals, this industry also
utilizes the expert services of public policy workers, medical writers, clinical research
lab workers, IT professionals, sales/marketing professionals and health insurance
providers.
HISTORY
The evolution of L&T into the country’s largest engineering and construction
organizations is among the more remarkable success stories in Indian industry.
L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers,
Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly
committed to developing India's engineering capabilities to meet the demands of
industry.
Beginning with the import of machinery from Europe, L&T rapidly took on
engineering and construction assignments of increasing sophistication. Today, the
company sets global engineering benchmarks in terms of scale, complexity and quality.
By 1964, L&T had widened its capabilities to include some of the best technologies in
the world. In the decade that followed, the company grew rapidly, and by 1973 had
become one of the Top-25 Indian companies. In 1976, Holck-Larsen was awarded the
Magsaysay Award for International Understanding in recognition of his contribution to
India's industrial development. He retired as Chairman in 1978. In the decades that
followed, the company grew into an engineering major under the guidance of leaders
like N. M. Desai, U. V. Rao, S. D. Kulkarni and A. M. Naik. Today, L&T is one of
India's biggest and best known industrial organisations with a reputation for
technological excellence, high quality of products and services, and strong customer
orientation. It is also taking steps to grow its international presence.
L&T believes that progress must be achieved in harmony with the environment. A
commitment to community welfare and environmental protection are an integral part of
the corporate vision.
Larsen & Toubro is a USD 8.5 billion technology, engineering and construction
group, with global operations. It is one of the largest and most respected companies in
India’s private sector.
A strong, customer-focused approach and the constant quest for top-class quality have
enabled L&T to attain and sustain leadership in its major lines of business over seven
decades.
Milestone
1938: Hemming Holck Larsen and Soren K. toubro set up partnership in a small office
in down town Mumbai. They marketed Danish Dairy equipments.
1939: When World War II broke out the Hedging Company genius for innovation
came to the fore. It began to make the products it used to import.
1945: L & T was appointed dealers of caterpillar the American earth moving
machinery giants.
1946: The firm became a limited company and soon a nation wide network of offices
was set up.
B) NATURE OF BUSINESS
Electrical and Electronics Division (EBG) is one of the divisions of Larsen &
Toubro Limited at Mysore. This division is engaged in the manufacturing of switchgear
products, metering and protection systems and medical equipments.
L&T follows best manufacturing practice and meet international regulatory and
safety requirements. Some of the good manufacturing practice being followed is six
sigma tools, lean manufacturing and value engineering.
Electrical & Electronics Division (EBG) is one of the core businesses of Larsen &
Toubro Limited (L&T) - India’s largest engineering and construction conglomerate.
The division has operations at different locations in India (two in Mumbai and
one each in Ahmednagar, Mysore and Coimbatore) and one unit for manufacturing
operations in China. Another manufacturing facility in Saudi Arabia.
L & T ites foster a culture of caring trust and continuous learning while meeting
expectations of employee’s state holders and society.
Mission
Mission statement of L & T is as follows “We shall be a world class company
dedicated to excellence and professionalism customers delight through total quality and
service shall be our guiding force. We shall foster a spirit of entrepreneurial leadership
and be a vibrant learning organisation.
L & T ites shall be an inspired team empowered by a culture of trust and caring
which serves all stakeholders. We shall be committed to community service and
environmental protection”.
Quality Policy
1 Deliver products and service meeting or exceeding customer requirements and
expectation while improving value of stakeholders.
Retain leadership position in domestic market and increase our global L&T
medical equipment with a turnover of Rs. 150 crores is deemed as the giant in the
domestic market posing a serious threat to the MNC’s, it command market share
ranging from 25% to 35% in diagnostic ultrasound, patient monitoring and surgical
diathermy product range.
EBG has a comprehensive quality, environment and safety management system. The
quality management system for design & development, production, sales, marketing
and servicing has received ISO 9001:2000 certification from BVQI. In addition, its
manufacturing facilities have been certified for conformity to ISO 14001
(Environmental Management System) and OHSAS 18001 (Occupational Health and
Safety Management System) by BVQI.
The division has implemented Enterprise Resource Planning (ERP) solution of SAP
AG, Germany and it went live at 35 locations across the country simultaneously in the
‘Big Bang’ mode in 1999.
Switchgear Products:
Larsen & Toubro Limited is among the major manufacturers of low voltage switchgear
in the World, with the scale, sophistication and range to meet global benchmarks. In
addition to its leadership position in the Indian market established over a decade, L&T
has a growing presence in international market.
L&T is India's leading manufacturer of high quality electronic energy meters and
protection relays. It is the market leader in electronic programmable Trivector Meters
that are critical for all industrial and power utilities. From the industrial segment, the
metering solutions extend to the domestic energy metering, with the availability of
static Single Phase and Three Phase energy meters.
L&T's manufacturing facility in Mysore has high class testing facilities with NABL
accreditation. L&T meters are high on quality, value for money products that meet the
needs of different customers like electrical utilities, industries and commercial
establishments including domestic consumers. These meters work in extreme climates.
In the international market, L&T meters have been exported to various countries across
South East Asia, Middle East and Africa. L&T is now making a foray into the European
market.
L&T offers total solutions for protection in all the three segments of power systems -
generation, transmission and distribution. Designed and developed by in-house R&D,
the range includes electronic trivector meters (TVM), single and three-phase energy
meters, ABT meters intelligent panel meters, demand controllers, smart card prepaid
meters & GSM Modem.
Relays
L&T launched the oil pre-mix dispensers in 1998 and a year later, introduced the multi-
product dispensers. Its yet another first in the country was the introduction of QUAD
dispensers and communication and printers in dispensers.
L&T continues to develop world-class products and has recently launched SPRINT
series of dispensing pumps with elegant appearance and in-built communication
features like printer, card reader, touch screen as well as electronic calibration and
hydraulics with better air separator for more accuracy
Information Technology:
Larsen & Toubro InfoTech Limited, a 100 per cent subsidiary of L&T, offers
comprehensive, end-to-end software solutions and services with a focus
on Manufacturing, BFSI and Communications & Embedded Systems. It provides a
cost cutting partnership in the realm of offshore outsourcing, application integration and
package implementation.
Leveraging the heritage and domain expertise of the parent company, its services
encompass a broad technology spectrum, catering to leading international companies
across the globe. It leverages the L&T parentage to also provide services in the
embedded intelligence and e-Engineering space.
L&T InfoTech
L&T InfoTech focuses on information technology and software services. Its clients
include industry leaders like Marsh & McLennan, Standard Life, Chevron, Free scale,
Hitachi, Sanyo , Lafarge , ABSA , Citi-Group, Barclays , e-CORPUS, Marathon and
Qualcomm among others. It offers services and solutions for the following industries:
banking and financial services, insurance, energy and petrochemicals, manufacturing,
and engineering services.
L&T EmSyS
EmSyS works in the domains of embedded systems and software. It offers services
related to hardware and software / firmware development in diverse verticals. EmSyS
Quality Management System has been benchmarked at CMMI - DEV + IPPD, Ver 1.2,
Maturity Level 5. It offers the services in following industries : automotive electronics,
consumer electronics, control automation, industrial systems, medical electronics,
avionics and railway signaling.
As of March 31, 2008, L&T Infrastructure Finance has approved financing of more
than a billion USD to select projects in the infrastructure sector.
L&T sells value-added flow control solutions to oil & gas, refining, petrochemical,
chemical and power industries. L&T is a leading global supplier of industrial valves
and customised solutions for major Refinery, LNG, GTL, Petrochemical and Power
projects.
L&T Valves Business Group has offices in the USA, India and China, and strategic
alliances with leading integrated valve distributors and agents in the major markets.
LTQ was set up in 2004 at Qatar to take advantage of opportunities in the construction
industry there. The Company offers turnkey solutions in specialized fields of buildings
& factories, roads, bridges, airport, transmission lines, industrial electrification,
petroleum & petrochemical projects, fertilizer plants, pipelines, water, sewerage and
drainage system.
TECHNOLOGY USED
The company has implemented various information technologies like SAP
(system application product) and EMSYS (embedded system software). SAP is a
technology, with the help of which the work burden of the employees is reduced up to
50%. The competition of the work becomes faster and more accurate. SAP is applied in
various departments like excise, financial and costing material management, and
production planning quality management and sales and distribution The Company has
got its own EMSYS where it develops its own hardware and software for its product
and its development. The Company provides different working environment for various
factors.
F) OWNERSHIP PATTERN
Shareholders are the owners of the company. The L & T group has around share
at Rs 2 per share. Number of shares held with public.
UTI 18.07
Promoter 6.98
Board of Directors
L & T Board of directors comprises a chairman and managing director, 6 whole
time directors and 8 independent external directors. The external directors are respected
professionals in the area of business strategy financial law and public policy.
The share held by directors is 1525714 and their percentage of paid up capital is
1.10. The share held with director’s relatives is 787.
L&T share are listed in both BSE (Bombay stock exchange) and NSE (national
stock exchange). The global depository receipts are listed on Luxembourg stock
exchange.
G) COMPETITORS INFORMATION
The Major competitors of L & T medical equipments are Siemens, GE, and
Philips.
Philips
Philips globally makes bulk for its medical equipment at Netherlands, Germany,
Finland, Isaac1 China and the U.S. the proposed facility in India will act as the hub for
the Indian sub continent.
The company claims a global Market Leader for patients monitoring system and
the worlds, second largest manufacturer’s medical diagnostic equipment Philips claims
to be the world’s second largest suppliers of PACSGE.
GE
GE health care is a 15 $ billion units of general electric company worldwide. GE
health’s care employees more than 43000 people committed to serving health care.
Medical Service
For emergencies the ambulance room are provided to employees who have the
entire medicine medical and a full time nurse in attendance.
Canteen Facilities
The company has a canteen functioning, from where the employees could have
break fast, lunch and dinner. Apart from these they can get coffee/ tea at a reasonable
price.
Sports Facility
The process of developing a sports complex, currently the company has a good
cricket ground, two badminton courts and four TT tables. Competitions are kept on
time-to-time basis. Well-equipped Gymnasium with state of the art equipments where
in people can work out and be relaxed.
Library
The company provides a lending library stocked with essential management and
other books. To avail the facility the employee has to become the member by filling the
membership form.
Transportation
Transportation is provided to and from major points throughout the city
for both day and night shifts. The details of the stop are provided to employees in the
intranet. The registration is done once the pay sheet number is allotted.
Conference Hall
Company provides three conference halls in the campus. The hall is equipped
with air conditioner with the timer fixed to it.
I) ACHIEVEMENT / AWARD
L&T is The Best Company to Work for in the Manufacturing Sector – Business
Today 2009-10
L&T Wins Business Standard ‘Company of the Year’ Award. 2009-10
L&T-Chiyoda bags ICWAI Award for Excellence in Cost Management
L&T Wins Golden Peacock Award for Corporate Social Responsibility
L&T bags Achievement Award from FinanceAsia
SGCCI Golden Jubilee Memorial Trust Award - for outstanding performance in
Export of Engineering Goods for 2004-05. This Award highlights L&T's export
of high-tech, custom-built equipment worldwide.
Greentech Safety Awards (2005) - by the New Delhi-based non-profit
organisation, Greentech Foundation, for the effort in industrial safety and
environmental management.
Manufacturing cycle
Demand Shortage
Procure
Marketing placing List
ment
Productio Quality
Demand
n Control
Final
Finished
KARAVALI INSTITUTE OF TECHNOLOGY
Assembly 24
stores Customers
K) Future growth and prospects
Unlike several of its peers, L&T is continuously developing new skill sets /
entering new segments and geographies. We believe that its entry into new areas like
power equipment, nuclear power plants, defense, shipbuilding, power development
projects, and forgings (thermal and nuclear), increased presence in the Middle East, and
its ability to take new PPP projects (due to strong balance sheet) will help L&T to
ensure long-term sustainability of order flow. Further, some of these business segments
could contribute meaningfully to consolidated revenues and profitability, going
forward.
Certain business segments like nuclear power plants, shipbuilding and defence have
witnessed strong support and initial action from the government. The first few orders
could be received over the next 12-18 months. In the nuclear segment, L&T has tied up
with global nuclear equipment suppliers to cater to India’s planned addition of 16GW
of nuclear power by 2020. This will entail investments of Rs1,600b over the next 8-10
years and the ordering of these projects is expected from FY11.
L&T has presence in financial services (L&T Finance/Infra Finance) and IT/ITES
(L&T Infotech). In the last 2-3 years, these businesses have attained critical scale. With
L&T’s plan to grow these businesses plus manufacturing to 40% of group revenues by
FY14, we see substantial organic and inorganic scaling up of these two verticals in 2-3
years.
L&T has also forayed into thermal and hydro power project development, and currently
has a portfolio of 1.32GW of thermal power and 728MW of hydro power under
development. The management has through various media articles stated its intent of
setting up ~5GW of power capacity as developer by 2015. Mr Ravi Uppal had in the
recent past been appointed as Managing Director and Chief Executive Officer of L&T
Systems Style
Staff
“Hard” elements are easier to define or identify and management can directly influence
them: These are strategy statements; organization charts and reporting lines; and formal
processes and IT systems.
“Soft” elements, on the other hand, can be more difficult to describe, and are less
tangible and more influenced by culture. However, these soft elements are as important
as the hard elements if the organization is going to be successful.
• Strategy: the plan devised to maintain and build competitive advantage over the
competition.
• Structure: the way the organization is structured and who reports to whom.
• Systems: the daily activities and procedures that staff members engage in to get
the job done.
• Shared Values: called “super ordinate goals” when the model was first
developed, these are the core values of the company that are evidenced in the
corporate culture and the general work ethic.
• Style: the style of leadership adopted.
• Staff: the employees and their general capabilities.
• Skills: the actual skills and competencies of the employees working for the
company.
SWOT Analysis refers to the analyzing the strength, weakness, opportunity and
threat of the organiasation (Company)
Larsen & Toubro - SWOT Analysis company profile is the essential source for
top-level company data and information. Larsen & Toubro - SWOT Analysis examines
the company’s key business structure and operations, history and products, and
provides summary analysis of its key revenue lines and strategy.
STRENGTHS
Leading Market Position
Integrated Operations
End Use Markets
Strong Order Book Position
Product development capabilities
Manufacturing Excellence
Customer knowledge Leading to user friendly products
Well-established marketing department
WEAKNESS
Increasing Expenses
Increase in attrition rate from past few years.
Very less penetration to the other medical manufacturing segments.
Low existence of market segment.
Poor transportation facility for the life saving equipments.
OPPORTUNITIES
Strategic Alliances
Strengthening International Presence
Rising Demand for Hydrocarbon Projects
Expanding new manufacturing facilities
Increasing exports in New technological area
Focus on strange thinning competitors required in upstream business.
Enhancing capacities through new design engineering centers
Continuing focus on Infrastructure sector in investment.
THREATS
Revenue Concentration
Intense Competition
Challenges To Order Execution
Government regulation.
Huge cost incurred in importing raw materials.
Delay in supply of raw materials.
Production depends on customer requirements and demand condition.
Ratios
Mar ' 09 Mar ' 08 Mar ' 07
Profitability ratios
Operating margin (%) 12.23 12.98 11.52
Gross profit margin (%) 11.39 12.19 10.61
Net profit margin (%) 10.06 8.54 7.74
Leverage ratios
Long term debt / Equity 0.43 0.27 0.24
Total debt/equity 0.52 0.37 0.36
Owners fund as % of total source 65.47 72.66 73.42
Fixed assets turnover ratio 6.23 6.09 6.21
Liquidity ratios
Current ratio 1.30 1.18 1.26
Quick ratio 0.96 0.86 0.93
Inventory turnover ratio 6.01 6.00 6.11
Payout ratios
Dividend payout ratio (net profit) 20.58 26.29 30.04
Dividend payout ratio (cash profit) 18.92 23.96 26.97
Earning retention ratio 72.84 71.72 69.85
Cash earnings retention ratio 75.66 74.40 72.95
Component ratios
Material cost component (% earnings) 27.51 33.09 30.15
Selling cost Component 0.92 1.28 1.13
Exports as percent of total sales 21.70 22.67 21.36
Import comp. in raw mat. Consumed 44.34 39.78 49.28
Long term assets / total Assets 0.35 0.38 0.30
Bonus component in equity capital (%) 76.77 53.71 55.44
Working capital
Working Capital to Sales 0.10 -- 0.10
Working Capital Days (days gross sales) 20.10 13.10 29.40
Receivables (days gross sales) 107.50 106.50 111.70
Creditors (days cost of sales) 85.40 95.00 92.30
FG Inventory (days cost of sales) 4.40 5.70 6.10
RM Inventory (days consumption) 21.00 19.30 18.80
Growth
Total Operating Income 35.44 41.05 19.38
EBITDA 27.79 60.79 69.30
EBIT 26.49 64.64 71.95
Net Profit 60.28 55.20 38.43
Total Assets 45.34 66.22 27.72
Chapter – 6
L&T is the largest and most Reputed company in Indian Private sector. L&T
with its diversified business has taken accounts ahead of competition in global Market.
L&T possesses a good competitive advantage with its high quality technology and a
wide spread marketing network.
L&T medical manufacturing unit has got nine departments, each department has
its own unique and specific work. The various departments are personal department,
service department, Quality assurance department, Training and documentation cell,
material department, plant engineering department, medical design marketing & FG
Stores.
The IT service departments develop its own software according to the equipments of
the customers which reduces the cost burden and secures the duplication of such
software by the competitors.
L&T believe in providing quality produce to the customer, as they are life saving
equipments. The quality is entitled as inspection is done at each stage of production.
Each material is kept according to the required atmosphere. Example IC chips needs to
be kept in A/c most free atmosphere. L&T’s employment policies and system radiate
from a single principle-belief in people “People are our Core Strength”. Employees gain
a level of
The stores department keeps the various raw materials in different condition according
to the requirements. The company procures raw material whenever required. The
company follows both FIFO and LIFO method for materials to production department.
In case the goods are of perishable in nature at that time they follow LIFO method and
for other materials they follow FIFO method.
Various departments process foreign purchase order. The purchase order is prepared on
selected vendor as per approved vendor. The material department release, foreign
purchase order. In case of amendment, the same shall be entered in the system
maintaining the basis.
Product design and development are carried out in 3D environment issuing state of the
out design and simulation software products are designed keeping in mind the
challenges that are faced tomorrow. The design team works on 3D design simulation
and analysis software to develop flow control products that are optimized and highly
reliable.
The term inventory includes raw materials, work in process finished products,
packing materials, spares and other stocks in order to meet an expected demand or
distribution in the future.
“Inventory are assets of the firms, and as such they represent an investment. Because
such investment requires a commitment of funds manager must ensure that the firm
maintains inventories at the current level. if they become too large, the firm losses the
opportunity to employ those funds more effectively. Similarly, if they are too small, the
firm may lose sales. Thus, there is an optimal level of inventories and there is an
economic order quantity model for determining the correct level of the inventory.”
Inventory is as old man. The primitive man’s inventory consisted of a few tools; as a
shepherd, man had to tend his flocks and herds; later, he had his granaries and
warehouses; today with industrialization, his inventories cover a very wide range. As
man has progressed and his needs and activities have multiplied, the range of inventory
has become larger and more diversified.
As of today, inventories include, among other, raw materials, part- finished goods,
finished goods and operating supplied. Each of these serves specific purposes. The raw
materials inventories are held for later conversion into semi- finished or finished goods.
Raw material inventories must exist because generally it is not always economically
feasible either to purchase or to schedule the delivery of raw material, as they are
needed in the production process.
Since manufacturing or processing always takes time, there is need for finished goods
inventory. In some industries, material must be processed in batches.
The nature of the product, the natures of the customer demand and the nature of the
manufacturing process determines, to a considerable extent, the need for finished goods
inventories. If the customer is willing to wait for the product to be manufactured, there
is need for finished goods inventories. Some times, the nature of the product prohibits
expensive finished goods inventories. Fresh fruits, vegetables and some other foods
have limited storage life, so the extensive inventories of these products are not
desirable. If the material must be processed in lots or batches. Finished goods
inventories will usually exist. Supplies inventories do not directly go into the product.
But they exist to facilitate smooth operation of the manufacturing process.
It is strategic in the sense that top management sets goals. These include deployment
strategies (Push versus Pull), control policies, the determination of the optimal levels of
order quantities and reorder points and setting safety stock levels. These levels are
critical, since they are primary determinants of customer service levels.
Keeping in view all concerns, the latest concept of Vendor Managed Inventory is used
to optimize the Inventory. We are entering into Vendor Managed Inventory, Annual
Rate Contracts with manufacturers or their authorized dealers, who maintain Inventory
on our behalf and supply the items as and when required.
VMI reduces stock-outs and optimize inventory in supply chain. Some features of VMI
include:
Shortening of Supply Chain
Centralized Forecasting
Frequent communication of inventory, stock-outs and planned promotions
Despite the many changes that companies go through, the basic principles of Inventory
Management and Inventory Control remain the same. Some of the new approaches and
techniques are wrapped in new terminology, but the underlying principles for
accomplishing good Inventory Management and Inventory activities have not changed.
The Inventory Management system and the Inventory Control Process provides
information to efficiently manage the flow of materials, effectively utilize people and
equipment, coordinate internal activities, and communicate with customers. Inventory
Management and the activities of Inventory Control do not make decisions or manage
operations; they provide the information to Managers who make more accurate and
timely decisions to manage their operations.
The basic building blocks for the Inventory Management system and Inventory Control
activities are:
The emphasis on each area will vary depending on the company and how it operates,
and what requirements are placed on it due to market demands. Each of the areas above
will need to be addressed in some form or another to have a successful program of
Inventory Management and Inventory Control.
Inventory control techniques are employed by the inventory control organization within
the frame work of one of the basic inventory model, viz., fixed order quantity system or
fixed order period system. Inventory control techniques represent the operational aspect
of inventory management and help realize the objective of inventory management
control.
Several techniques of inventory control are in use and it depends on the convenience of
the firm to adopt any of the techniques. What should be stressed, however, is the need
to cover all items of inventory and all stages, i.e., from the stage of receipt from
suppliers to the stage of their use. The techniques most commonly used are the
following.
INVENTORY CATALOGUE:-
Inventory catalogue is prepared after all inventory items have been described, classified
and coded. Properly maintained inventory directory pry two important dividends.
ABC ANALYSIS:-
One of the widely used techniques for control of inventories is the ABC (Always Better
Control) analysis. The objective of ABC control is to vary the expenses associated with
maintaining appropriate control according to potential savings associated with a proper
level of such control.
Once inventory is classified, we have a base for deciding where we will put our effort.
Logically, we except to maintain strong control over the ‘A’, items taking whatever
special action needed to maintain availability of these items and hold stocks at the
lowest possible levels consistent with meeting demands. At the other end of the scale,
we cannot afford the expense of rigid controls, frequent ordering and expediting
because of low amount in this area. Thus with the ‘C’ group, we may maintain
somewhat higher safety stocks, order more months of supply, expect lower levels of
The inspiration behind the ABC analysis has been drawn from vilfredo Pareto, an
Italian economist and sociologist who generated some highly debatable concept of
economics and sociology. One that is most interesting to a student of inventory
management is the concept of ‘Pareto’s laws’. Pareto arrived at the general conclusion
that income distribution patterns were basically in the different countries and in
different historical periods.
HML CLASSIFICATIONS:-
The High, Medium and Low (HML) classification follows the same procedure as is
adopted in ABC classification. Only difference is that in HML, the classification unit
value is the criterion and not the annual consumption value. The items of inventory
should be listed in the descending order of unit value and it is up to the management to
fix limits for three categories.
The HML analysis is useful for keeping control over consumption at departmental
levels for deciding the frequency of physical verification, and for controlling purchases.
VED Analysis:-
Vital, essential and desirable (VED) analysis is done mainly for control of spare parts
keeping in view the critically to production. Vital spare parts keeping in view the
critically to production. Vital spares are spares the stock-out of which even for a short
time will stop production for quite some time. The stock-out cost of vital items will stop
production for quite sometime. The stock-out cost of vital items is very high. Essential
spares are the absence of which cannot be tolerated for more than a few hours a day and
the cost of lost production is high. Such spares are essential for the production to
continue. The desirable spares are those, which are needed, but their absence for even a
week or so will not lead to stoppage of production. Some papers though, negligible in
value may be vital for the production to continue and require constant attention. Such
spares may
Not receive the attention they deserve if they are maintained under ABC analysis
method because their consumption value is small.
The SDE analysis is based on the availability of items and is very useful in the context
of scarcity of supply. In this analysis, ‘S’ refers to scarce items, generally imported and
those which are in short supply. ’D’ refers to difficulty items, which are available
indigenously but are different items to procure. Items which have to come from distant
places or for which reliable suppliers are difficult to cum by fall in to ‘D’ category. ‘E’
refers to items which are easy to acquire and which are available in local markets.
The SDE classification based on problems faced in procurement is vital to the lead time
analysis and in deciding on purchasing strategies.
FSN Analysis:-
FSN stands for Fast moving, slow moving and non moving, here classification is based
on the pattern of issues from stores and is useful controlling obsolescence.
To carry out FSN analysis, the date of receipt or the as date of issue, whichever is later,
is taken to determine the number of months, which have lapsed since the last
transaction. The items are usually grouped in period 12 months.
FSN analysis is helpful in identifying active items which need to be reviewed regularly
and surplus items which have to be examined further. Non-moving items may be
examined further and their disposal can be considered.
The first major decision in managing goods for sale is deciding how much of a given
product to order. The EOQ is a decision model that calculated the optimal quantity of
inventory to order under a restrictive set of assumption. The simplest version of this
model incorporates only ordering costs and carrying costs into the calculations. It
assumes the following…
3. Demand, ordering costs and carrying costs are known with certainty. The purchase-
order lead time- the time between placing an order and its delivery is also known
with certainty.
4. Purchasing cost per unit are unaffected by the quantity ordered, this assumption
makes purchasing cost irrelevant to determining EOQ, because purchasing costs of
all units acquired will be the same regardless of the order size in which the units are
ordered.
5. No stock outs occur. One justification for this assumption is that the costs of a stock
out can be prohibitively high. We assume that to avoid these potential costs,
manager always maintain adequate inventory so that no stock out cost can occur.
EOQ = 2AB/C
A = Annual consumption
C = Relevant carrying costs of one unit in stock for the time period used
In order to know when the purchase requisition should be sent different levels
for stock of each item are decided. These stock levels are.
Minimum level:-
It is the level below which stock of an item is never allowed to fall. If the actual
stock goes below this point, there is possibility of up setting of production schedules for
want materials. This level is determined by taking into account:
Average rate of consumption.
Head-time i.e. average time required fresh supply of materials.
Re ordering level.
Re-ordering level:-
When stock in hand reaches this level, it is an indication that replenishment is
necessary and proposals for purchase are to be initiated. This level is fixed some where
between the maximum and minimum levels. The quantity of material represent by the
difference between the re-ordering level and the minimum level will be sufficient to
meet the demand of production till such time as the other materializes and supplies are
delivered.
Maximum level:-
They can be valued on the basis of average price, last price paid or on the current
market price. Each of these values would be different for the same. Inventories
measured by money value usually constitute the major element in the working capital.
The need to control inventories apart from fulfilling other purposes such as:
Material Receipt Voucher (MRV) or the Goods Received Note (GRN) entry is
prepared after the material is purchased received inspected and booked in stores. Entry
for the value of purchase is not as simple as the receipt of goods i.e., quantity received.
The method adopted for inventory valuation affects the profits reflected in the
profit and loss account. Liquidity and profitability decisions of a company are
influenced by the method of inventory valuation:
The M.R.V. is priced for the appropriate invoice and the material account is
debited is the stores ledger.
ISSUE OF MATERIALS:-
Materials issued from stores should be valued at the rate they are carried n stock.
Materials are valued at cost and entry in the stores ledger is made with every receipt.
Different lot of materials may be received at different ices. Hence, when issues are
made from stock, it may happen that materials from more than one lot may have to be
issued. Which price will be application in such case? Actual cost or average price,
1. Specific price
2. First in First out(FIFO)
3. Last in last out(LIFO)
4. Highest in, first out(HIFO)
5. Base stock price
1. simple average
2. Weighted average
3. Periodic simple average
4. Periodic weighted average
5. Moving simple average
6. Moving weighted average
1. Standard price
2. Inflated price
3. Re-use price
Benefits:-
Simple to understand & easy to operate.
Logical method as material received first.
The method recovers the cost price of the materials.
This method is useful when prices are falling.
Closing stock wil be valued at the market price.
Limitations:-
Increase the possibility of clerical errors.
In case of fluctuations in prices of materials, comparison
between one job and the other job becomes difficult.
For pricing one requisition more than one price has often to be
taken, then prices rise the issue price does not reflect the market price as
materials are issued from the earliest consignment profits are inflated
creating income tax problems.
Application:-
It can be used for materials, which are subject to deterioration and obsolescence.
It is also useful when transactions are not too many and prices of materials are fairly
steady.
Materials are issued at actual cost and this is also suitable when a price
fluctuation is not high. This method is also known as “replacement cost” methods.
Here, goods are issued from those recently purchased at the cost of the last lot of
Benefits:-
Simple to operate and useful when transactions are not too many and the
prices are fairly steady.
This method recovers the cost from production because actual cost of
material is charged to production.
Current market prices of materials are reflected in the cost of sales
provided the materials are recently purchased.
It is suitable in times of rising prices.
Limitations:-
Results in clerical errors.
Comparison between one job and the other job will become
difficult.
For pricing a single requisition, more than one price has often to
be adopted.
The stock in hand is at price that does not reflect current market price. Hence,
closing stock will be understated or overstated in the balance sheet.
Application:-
It is used in times of rising prices because material will be issued from the latest
consignment at a price which is closely related to the current price levels.
Benefits:-
It is helpful in increasing the price of the contract or products.
Limitations:-
This method is not popular at it always under values the stock,
which amounts to creating a secret reserve.
Application:-
This is mainly used in case of cost plus contracts or monopoly products.
In this method the replacement value is taken into account materials are issued at
a price at which they can be replaced. There fore, cost of the materials is not
considered.
Benefits:-
It discloses whether the buying is efficient or in-efficient. These
will be efficiency is buying if the marketing price is higher than the cost
price.
Limitations:-
Cost price of the materials from production is not recovered
because are issued at the market price.
It makes stores ledger unnecessarily complicated by introducing
the element of profit or loss.
Materials are issued at cost while maintaining a base or the minimum stock at
original cost and are never touched except in emergency conditions. The base always
valued at the cost price of the first lot and is carried forward as a fixed asset.
This method works with some other method is generally used with FIFO or LIFO
method. Any quantity over and above the base is issued in accordance with the other
method, which is used in conjunction with this method.
The objective of this method of this method is to issue the material according to
the current prices. This will be achieved only when the LIFO method is used along with
the Base Stock Method.
There are two components in stock here- Base stock valued at base price and latest
purchased stock not yet issued to production valued at actual.
Benefits:-
Base stock maintained will help to meet any emergency situation like
stock-outs etc.,
Limitations:-
This method may lead to over-recovery or under-recovery of
cost of materials from production because quantity purchased in each lot
is ignored.
Similar to Similar Average Method, this method takes into account the total
quantities along with the total costs.
Benefits:-
It recovers the stock price of the materials from productions.
This method eliminates the necessary for adjustments in stock
valuation.
Issue prices are not calculated each time issues are made. They
are charged only when new lot of materials is received.
Limitations:-
Chances of clerical errors.
Closing stock is not valued at current cost.
Application:-
This method is mostly used by different organizations because it satisfies most
of the conditions of a good method of valuing material issues.
Though the corporate financial officer may not be directly connected with
inventory policies these have a direct and important bearing on the financial need, of
the firm. The financial officer can do a good job of anticipating change in the need for
funds if he thoroughly understands the implication of changing inventory policies
where financier are a limiting factor.
The greater the opportunity cost of fund invested in inventory the greater the
incentive to reduce the lead time required receiving inventory once an order is placed.
The greater the efficiency with which the firm manages its inventory, the lower the
required investment in inventory. Inventories should be under constant review.
The full safety against of inventory has a prohibitive cost. There should,
however reasonable procurement lead time assumption and safety block level.
There should be an efficient system to dispose of goods that are obsolete, surplus
or unusable for production.
Continuous efforts have to be made to shorten the production cycle. The longer
production run should be worth the cost and rich of the extra inventory
investment.
Special pricing policy may be required to move extremely slow moving finished
item.
The business firm which is chronic patients of shortage of funds may find to them
advantage that a serious look into their inventory accumulation proves highly
rewarding. Often one is inclined to agree with the observation that “when you need
money look at your inventories before you look, to your banks”. Even if there is no
shortage of funds in a business, the financial executive has a participate actively in the
Financial manager are concerned with any aspect of inventory management that is
controllable from the stand point of reducing inventory cost and risk.
“A study on inventory management.” With reference to Larsen & Toubro Ltd., is taken
by the researcher now a days inventory management is very important to improve the
business at the same time to improve the profits effectively and efficiently.
For the purpose of these studies specific objectives were identified and analyzed.
Inventory is the life blood of the company and both high as well as low blood
pressure are equally dangerous to the life and health of a person, likewise excessive
inventory or under inventory both are harmful to the economic life and health of the
1.4 METHODOLOGY
Data is the collection of necessary details to gain further information. The data is
classified into two types. They are:-
Primary data:
Primary data are the first hand information collected from original sources through
various methods such as observation, interview, etc. Primary data is collected by
interviewing certain executives who were chosen on the bases of their in–depth
knowledge and work experience in the company. The interview was informal in nature
in order to gain as much information as possible. A suitable interview schedule was
prepared to collect the primary data, which is enclosed in the annexure.
Secondary data:
Secondary data is the data, which is collected from sources, which contain data, which
have been collected and compiled for another purpose. The secondary sources in this
study consist of published records and reports. A research on this nature is by and large
The investigator has faced the following limitations during the course of study. As this
is the study undertaken to fulfill the academic requirement, it is bound have certain
limitations. Most prominent among them are.
1. It is not possible to make a comparative analysis due to inability in getting
information and data relating to other industries.
2. Time to submit the report is very short.
3. As the study is not empirical one as we do not have the experience it is just
an amateur one.
4. The study is purely of academic interest.
5. To study a subject like ratio analysis in detail, a time was too short.
For the purpose of this study, a researcher has adopted the following methodology.
AVERAGE TURNOVER
YEAR SALES
INVENTORY TIMES.
06-07 17,645.29 3,001.14 5.88
07-08 24,946.11 4,305.91 5.79
08-09 33,856.54 5,805.05 5.83
The table summarizes the growth of total inventory during 20076-09. The calculation is
done based on the following formula.
So based on the above formula in the year 2006-07 growth is 35.78%. But in the year
07-08 the growth is 43.47%. Again in the year 08-09 the growth is came down to 34.81%.
CURRENT
YEAR INVENTORY PERCENTAGE
ASSETS
2006-2007 3,001.14 9,499.46 31.59
2007-2008 4,305.91 12,450.78 34.58
2008-2009 5,805.05 16,553.70 35.07
In the year 2006-07 the percentage of inventory in current assets was 31.59% but in
07-08 the percentage of the inventory in current assets increased to 34.58% where as in the
year 08-09 the percentage of inventory in current assets is increased to 35.07%. The over all
position of the inventory in current assets is keep on increasing.
L & T inventories % with the total assets has come down from the 21.22 to 21.85 in the
year 2003. in the year 2004 it has come up 21.85 to 22.02
Graph-3
Formula
Sales
Raw material Turnover Ratio:-
Average Raw Material
Year R M (% ) ratio
2006-07 1.07
2007-08 1.51
2008-09 2.06
L&T, R M inventory percentage with total inventory has come up from 1.07 to
1.51 in the year 2008 & has come up to 2.06 in the year 2009.
Graph-4
Formula
365
Raw material holding Period : -
RM Turn Over Ratio
2007-08 119.65
2008-09 109.50
The Raw material holding period has increased from 99.07 to 119.65 in 2008
and decreased to 109.50 during the year 2009.
Graph-5
Graph Raw material holding Period.
Formula
Sales
WIP TO Ratio : -
WIP Inventory
2007-08 35.68
2008-09 32.52
The working in progress at L&T has decreased in 2008 from 37.44 to 35.68 again in
2009 it has decreased to 32.52.
Graph-6
2007-08 10.23
2008-09 11.22
The WIP holding period of L&T which is 9.75 in the year 2007 Which has
increased to 10.23 in 2008 later again it increased to 11.22 in the year 2009.
Graph-7
Formula
Sales
FG TO Ratio :-
FG Inventory
2007-08 12.00
2008-09 21.08
The Finished goods turnover ratio of L&T was 7.93 in 2007, which increased to
12.00 in 2008, in the year 2009 it increased to 21.08.
Graph-8
Formula
365
Finished Goods holding Period:
FG Turn Over Ratio
2007-08 30.41
2008-09 17.31
The finished goods holding period was 46.02 in the year 2007. which later In the
year 2008 decreased to 30.41, but drastically went down in the year 2009 to 17.31.
Graph-9
By using the formula which is given below we can calculate the total
turnover ratio.
Total assets turnover = Cost of goods sold / average total sales.
After calculating the total assets turnover, in the year 06-07 the ratio was 0.61
but in the year 2007-08 it increased to 0.84 later in the year 2008-09 it increased to
1.15. So it is clear that the part of the turnover in the total assets is slight increase. It is
showing positive effect to the company.
Fixed asset turnover = cost of goods sold / average total fixed assets.
After calculating the fixed asset turnover, in the year 06-07 the turnover ratio
was 0.42 but in the year 07-08 the turnover is increased to 0.59 later in the year 08-09 it
increased 0.81. So it is clear the part of the turnover in the total assets is increase. It is
positive effect to the company.
Technical audit should be made on raw material, spares to see that it is not over
stocked or under stocked. There should be coordination between production
process and inventory handling department for efficient outcome.
It should also undertake to use various scientific inventory controls such as just
in time.
To reduce the stocking in the finished goods of inventory, the sales department
should be activated. Some new sales techniques should be injected to increase
sales.
The company should follow EOQ to reduce over stocking of materials,
purchases at competitive prices, to reduce the cost of product.
Better co ordination among purchase, production, marketing and finance
department will help in achieving greater efficiency in inventory management.
Company should develop long term relationship with vendors. This would help
in improving quality and delivery.
The work procedures are being strictly followed. This is possible as SAP has many
inbuilt internal controls which have been highlighted throughout this project.
1. The purchase system of the company involves large hierarchy which should
be minimized so that it will reduce the lead time and inventory holdings, by
using some popular technique which are suitable for L&T i.e. ABC
Analysis, EOQ, JIT.
2. The company should increase distribution channels since the present system
is not sufficient. They have left out some state without distribution channels.
It is recommended to have a consignee type of distribution in the state where
distribution channels are not existing which will reduce the cost of
maintenance of depots, stock holdings of other depots and transportation
costs can be reduced
3. It is suggested for the company to go automation of the organization by
adapting e-commerce techniques like B2B, B2C, communication can be
improved dramatically, since cost and time involved are also reduced.
CONCLUSIONS:-
Inventory is one area where the organization have ample room to reduce the cost.
“INVENTORY MANGAGEMENT” started off with these motives and today has
enhanced leaps and bounds. There are immense like just-in-time (JIT) there should be a
constant watch on the quality and quantity of inventory that has to be maintained by an
organisation to help profit maximization.
While conducting project work I have learned how to collect data for there
research from various data sources. The research work has helped researchers to learn
managements of inventories.
During of my project study I have referred project related topics and I have taken
the concept from the following books and websites.
WEBSITES
• www.larsentoubro.com
• www.lntemsys.com
• http://www.lntecc.com/home.htm
• http://www.lntinfotech.com
• http://en.wikipedia.org/wiki/Larsen_&_Toubro
• http://info.shine.com/company/Larsen-Toubro-Limited/865.aspx
• http://investing.businessweek.com/research/stocks/financials/financials.asp?
ticker=874836
• http://money.rediff.com/companies/larsen-and-toubro-ltd/17010013/profit-and-loss
• http://www.moneycontrol.com/financials/larsentoubro/balance-sheet/LT