Chapter 1 INTRODUCTION Synopsis A. Backdrop: B. Integrated Inventory Management: a. Horizontal Integration. b. Vertical Integration. C. Research Objectives : D. Parameters : E. Limitations of the Study : F. Hypothesis: a. Central Hypothesis. b. Sub-hypothesis. G. Research Methodology: H. Chapterisation Scheme:
sj A. Backdrop: Chapter 1 INTRODUCTION Academicians, Businessmen and Researchers have been showing keen interest in the field of Inventory management as a prerequisite to effective working capital management. Scholars and financial experts have also been emphasizing the control of Inventories as inventories represents idle resource, if it is not effectively managed and controlled. Nonetheless no business can exist without Inventory in modern times. Therefore, it has been accepted as a necessary evil. Recognizing these, lot of efforts have been made by the scholars to control inventories. Besides these, emergence of relatively new concepts in the»/ field of Inventory Management and their applications in advanced countries like Japan, peculiar conditions of developing economy like ours viz., scarcity of funds and resources, use of computerised techniques etc. factors have also attracted the attention of experts and academicians. Inventory is an internal part of working capital. Therefore, most of the efforts have been directed towards control of inventories both in qualitative/ physical as well as financial and quantitative form. The CTMI, on the other hand is the oldest and biggest organised industry. It being a major provider of basic clothing needs and employment to the mankind, especially in India, has attracted the attention of Government. The industry has witnessed major ups and downs in the last few years./broadly it may be categoriesed into the following two sectors : (1) Organised sector including spinning, weaving and composite mills and (2) Decentralised sector including khadi, handloom and powerloom industries. One of the peculiarity of composite textile mill is longer and intermittent manufacturing process and consequently longer operating cycle time (throughout time). Operating cycle time or manufacturing lead time may be taken as time required right from entry of raw material into manufacturing process till manufacturing of finished goods ready for despatch. Besides this, the total lead time (i.e. Administrative lead time, Procurement lead time, Manufacturing lead time and Delivery lead time) is also very long. All these features necessitates holding of inventories at each subsequent stage to maintain continuity of
operation and to decouple each department. Thus, inventories are unavoidable, nonetheless, excessive Inventory represent idle investment of already scarce working capital funds. This has compelled the firms to strike a balance between the two. j However, generalised studies on working capital and specialised studies on Inventory control, hardly give an overall idea about the policies and practices to be followed for effective Inventory Management. In modem times, the concept of Logistics Inventory Management emphasizing on Integrated approach to Inventory management has gained more importance. B. Integrated Inventory Management: a. Horizontal Integration: Integration of Inventory Management with other functions of management viz., production and production control, purchasing, store-keeping, handling, sales and marketing, finance and accounting etc. b. Vertical Integration: 1. Integration of Inventory Management function itself viz., forecasting, planning, procurement, movement, control, reporting, budgeting, electronic data processing etc for inventory. 2. Integration of Inventory Management with the management of other constituents of working capital viz., cash management, receivables management etc. In fact, the concept of Integrated Inventory Management involves circular integration. It is very difficult to step in at a particular point in Inventory Management as a starting point i.e. it is a continuous process. C. Research Objectives : The present research was carried out with the following objectives : 1. To review the development of CTMI in brief, 2. To have a review of existing literature on the subject, 3. To assess Inventory situations in CTMI in Gujarat, 4. To probe into prevalent Inventory management policies, techniques, methods and operating procedures as practicised by CTMI in Gujarat, 5. To study disposals management functions of CTMI, 2
6. To examine relevance of scientific Inventory Management techniques and its applicability in CTMI, Gujarat, 7. To highlight the accounting aspect of Inventory control and 8. To evaluate Inventory management in CTMI in Gujarat to make suggestions and recommendations for the same. D. Parameters : The research study is presented in the form of Inventory management policies, methods, techniques, practicies, actual practicies, standard operating procedures followed formally and informally in CTMI in Gujarat into the following categories : 1. Ownership category: A. Private sector Profit Making Mills (PSPMM): Includes those mills which were making profit in any three consecutive years out of the five years period from 1989-90 to 1993-94. B. Private Sector Loss Making Mills (PSLMM) C. Gujarat State Textile Corporation Mills (GSTCM) 2. Size category: A. Upto 700 Installed Looms (B700ILM) B. Above 700 Installed Looms (A700ILM) 3. Location category : A. Mills Located In Ahmedabad (AHMDM) B. Mills Located In Rest of Gujarat i.e. mills other then those located in Ahmedabad (ROGM) Note : Annual balance sheets and profit and loss account for a period from 1989-90 to 1993-94 for all 22 mills selected for study and from 1994-95 to 1998-99 for EPSPMM* (Six mills) group have been. malysed, for comparing performance of CTMs for the first half and second half of the decade, understudy. * Indicates mills under PSPMM group existing during the second half of the decade understudy i.e. from 1994-95 to 1998-99. 3
Comparison of performance of PSPMM group and EPSPMM group have also been made because the rest of the mills were closed down after 1993-94. E. Limitations of the Study : The data available from annual reports of various CTMs have been analysed. The limitations of financial statements are well known. Despite their limitations they continue to be a major source of data. Again, financial sta:ements may not portray the true picture of mills financial position for the year concerned or there may be window dressing. Similarly, the executives were reluctant to fill in an exhaustive questionnaire for the fear of disclosing important matters and lack of time. Therefore, the researcher had to fill the questionnaire by asking questions except in case of few mills. Due to shortage of time, some executives handed over the work to subordinates who avoided specific questions and sometimes the answers given were vague. Even though, cross verification has been done to the extent possible, subsequent to the analysis. Similarly, data provided in specialised books and research reports etc. which may serve the specific needs of selected mills were not available in the required form. Such data contains only information without discussing the peculiarities of the mills concerned. A further point may be noted that in this study all the inventories have been classified into four major categories viz., 1. Raw materials 2. Semi Finished Goods / Work In Process 3. Finished goods 4. Others - coal, spares, scraps, waste etc. as these are covered in most of the annual reports. Information pertaining to policy matters and other information provided by Office Executives (orally) in case of GSTCM and top most executives in case of private sectors mills has been treated as more authentic as compared to information provided by operating personnel which differ from person to person in the same mill and sometimes in different mills of the same group. 4
In addition to this, one mill in PSPMM category, the information given by only two top level executives are relied upon as they were unwilling to hand it over to subordinates either due to reasons of maintenance of secrecy or lack of confidence in subordinates. Cotton Textiles Mills under the study refers to composite textile mills, which carry out processes like spinning, weaving, processing simultaneously,but some of the mills have closed either processing or weaving during the period of study. Even though, Inventory policies and practices of the mills for present operations have remained almost the same. Structurally, composite mills vary very widely in terms of their installed capacities, processing facilities, usage of basic raw materials, product mix, sales mix, equipment balancing, technical and marketing efficiency etc. such factors cause variations in inventories, particularly in terms of inventory policies, practices, levels, techniques etc. Group Averages are, therefore, calculated along with overall average in order to compare the performance of mills in each group and group mills in each category. The period covered under the study is from 1989-90 to 1998-99. The period was characterized by sudden fall in number of textile mills inspite of liberalization policy of the then Congress Government, in the year 1991-92.The Textile Commissioner also made recommendationsfor levels of raw materials Inventory t in view of the liberalization policy, for accommodating the import of raw materials and stores and spares (Appendix 1). With the help of this research, an effort is made to investigate the impact of Inventory Management policies, techniques and practices on the performance of selected CTMI units in Gujarat. Finally, suggestions have been made for effective Inventory Management on the basis of the study. F. Hypothesis: It is a guiding idea or tentative explanation or statement of probabilities which serves to initiate and guide observation and search for relevant data and other considerations to predict certain results or consequences. It is a proposition which can be put to test to determine its validity a. Central Hypothesis: Inventory Management practices followed by CTMI in Gujarat are more traditional, informal, uncoordinated and unscientific. 5
b. Sub-hypothesis: The following questions emerges from the above hypothesis to form the basis of present study. 1. Do the CTMs follow Inventory control and management practices in the right perspective? 2. Are the Inventory situations in CTMs satisfactory in terms of effective use of resources? 3. Have the CTMs followed proper Inventory management and control measures to attain organisational objectives? 4. Are the measures of Inventory control and management followed classical, traditional or scientific? 5. Is the perception of mill executives about Inventory management concept clear? 6. Do the CTMs have an integrated approach to Inventory management? 7. Is it necessary for CTMI to follow Inventory management and control measures methods and techniques etc. only formally? 8. Is it possible and economical to use Inventory management only informally? 9. Is there a scope for coordination between 7th to 8th (sub hypothesis) above? 10. Do the recommendations of different committees on textiles cut as a deterrent? 11. Have the CTMs been able to maintain various Inventory ratios as per established standards? 12. Do the Inventory valuation methods adopted by CTMs vary year wise and mill wise? 13. Have the CTMs been able to choose Inventory properly? 14. Do the CTMs face the problem of managing raw materials, semi finished goods and finished goods inventories? 15. Do the CTMs treat and manage the waste properly? G. Research Methodology : The present study is based on the following research methodology: 1. The data contained in the annual balance sheets and profit and loss account statements of CTMs, as obtained from respective mills have been analysed. 2. The detailed questionnaire was sent to selected mills and the responses received have been analysed. 6
3. Personal interviews and discussions with General Managers and the Executives of the mills at the time of collection of filled questionnaires and clarifications on specific issues were sought on subsequent to analyses of the data. 4. Financial data from specialised books, Research Reports, RBI Bulletins, BSE official Directory, EIS (Economic Intelligence Service) reports, ICMF handbooks, CMIE have been analysed. 5. Statistical techniques viz. Average, Compound Growth Rate, Quartiles, Trend analysis etc. have been used. An exhaustive questionnaire was mailed to CTMS in different parts of Gujarat. The sample size of 22 mills was selected as information was available from these mills. H. Chapterisation Scheme : The thesis is divided into seven chapters as under : Chapter 1. Introduction. Chapter 2. Evolution and Growth of CTMI in Gujarat. Chapter 3. Inventory Management : Concept, Practices, Techniques, Policies Actual Practices. Chapter 4. Inventory Situation in Textile Industry. Chapter 5. Inventory Control and Disposal Management. Chapter 6. Inventory Control Through Accounting and Scientific Techniques. Chapter 7. Observations, Suggestions and Conclusions. CHAPTER-2 : EVOLUTION AND GROWTH OF CTMI IN GUJARAT. In this chapter the evolution and growth of CTMI in Gujarat and India are discussed in detail. For this purpose the background of CTMI in Gujarat and India is provided with reference to progress, problems and planning for the development of the CTMs. In order to review the development, the whole chapter is divided into the following three topics : (A) Development before 1900s; (B) Development of CTMI during 1900-1947; (C) Development during plan period: Beginning from First plan period to Ninth plan period in terms of number of composite Textile Mills, number of spindles installed, number of looms installed etc. In addition to this data for the plan targets and achievements are also provided. 7
CHAPTER - 3 : INVENTORY MANAGEMENT : CONCEPT, PRACTICES, TECHNIQUES, POLICIES AND ACTUAL PRACTICES. The review of theoretical and research literature on various Inventory related terminologies are presented in this chapter. Inventory management concepts is presented as LOGISTIC Inventory management. Various Inventory policies for replenishment and levels of inventories have been discussed in detail. Inventory control measures beginning from planning to control have been dealt with in detail. Disposal management, Inventory control through accounting and scientific techniques are described along with the latest concepts. CHAPTER - 4 : INVENTORY SITUATION IN TEXTILE INDUSTRY. The size of Inventory along with the factors affecting it is elaborated with the help of research data in the field. Inventories in CTMI is described into three types viz.; (A) Raw Materials Inventory, (B) Work In Process Inventory and (C) Finished Goods Inventory Inventory situations for each of the above type of Inventory have been analysed in terms of percentage to Total Inventory, Days Consumption, Days Sales, Relative and Compounded Growth etc. group wise, year wise, and overall average is computed for each component and the same is compared with BSE and CMIE data. At the end of the chapter, overall Inventory situations have been presented in terms of days net sales, compound rate of growth and share of each component. CHAPTER-5 : INVENTORY CONTROL AND DISPOSAL MANAGEMENT. Various management operations beginning with planning to control is discussed and an effort is made to gain an insight into various forecasting and planning techniques followed by CTMI in Gujarat. Various purchasing and storekeeping policies and practices have been illumined along with various methods and techniques for Inventory analysis, classification and codification. Disposal of waste by classifying the waste on the basis of its origin have been dealt with at length, even in the absence of any comparable data. This is done by measuring the waste as a percentage of finished goods. The sale of waste is compared with sale of finished 8
goods, Waste Inventory, sale of waste per installed spindle and loom have been calculated rigorously. CHAPTER - 6 : INVENTORY CONTROL THROUGH ACCOUNTING AND SCIENTIFIC TECHNIQUES. The accounting standards are applicable for valuation of Inventory within the parameters of the standards various methods of valuation of Inventory have been analyzed component wise. Various accounting ratios have been computed namely raw materials, stores and spares, work in process and finished goods Inventory, Overall Inventory, have also been computed for further analysis. Various scientific techniques namely EOQ, Inventory levels, safety stocks, have been presented in terms of their implementation in cotton textile mills. Further efforts have also been made to study the extent to which latest techniques of Inventory Management have been practiced in CTMs. CHAPTER - 7 : OBSERVATIONS, SUGGESTIONS AND CONCLUSIONS. On the basis of the overall analysis of all the chapters, above observations are presented in this chapter as an overview. For this purpose the conclusions of various policies, techniques and practices of Inventory Management as followed in CTMI have been taken into account considering the observation of the previous chapters. Various conclusions have been drawn on the basis of the gap between theory and practice, using theoretical and research literature and also the latest development in the field of Inventory Management. 9