l&T- Wrkng Capital

A Project Report on

ANALYSIS OF WORKING CAPITAL MANAGEMENT

BY BHAWNA KALRA D.A.V.INSTITUTE OF MANAGEMENT FARIDABAD

Location: M/s. M/s. Larsen & Toubro Toubro Limited Limited Switchgear Factory, Faridabad

A SUMMER TRAINING REPORT ON ANALYSIS OF WORKING CAPITAL MANAGEMENT

CONDUCTED AT LARSEN & TOUBRO PVT. LTD.

IN PARTIAL FULFILMENT FOR THE DEGREE OF MASTERS OF BUSINESS ADMINISTRATION (M.B.A.) (SESSION 2006-2008)

SUBMITTED TO: Controller of Examination Maharishi Dayanand University, Rohtak

SUBMITTED BY: Bhawna Kalra MBA IIIrd Sem. Regn. No. 06-DAVM-302

DAV INSTITUTE OF MANAGEMENT Faridabad

CERTIFICATION

This is to certify that the Project Report title Analysis of Working Capital submitted in partial fulfil fulfillme lment nt for the award award of MBA Degree Degree of Univer Universit sity y School School of Manage Managemen mentt Studie Studies, s, Maharishi Maharishi Dayanand Dayanand University, University, was carried carried out by Bhawna Kalra under my guidance. This has has not not been been subm submit itte ted d to any any othe otherr Univ Univer ersi sity ty or Inst Instit itut utio ion n for for the the awar award d of any any degree/diploma/certificate.

Signature of the Guide

BRIEF HISTORY LARSEN & TOUBRO LIMITED was established in 1938, and a today India’s largest multidimensional engineering and construction company involved in manufacturing and supplying various types of industrial and household equipment. Two Danish young men,

Mr. HOLCK LARSEN & Mr. S. KRISTIAN

TOUBRO attended the same college and passed out as chemical and civil engineers respectively decided to work in the same company, F.L. Smith and Co, Copenhagen, Denmark. Mr. Toubro was sent to India in 1934 to help, erect & commission machinery supplied for a cement plant by F.L. Smith and Co. Fortunately Mr. Larsen was also sent to India in 1935 to assess the cement manufacturing capabilities of various manufacturing groups. In 1938, the two Danes decided to seek their fortunes in postwar India and so came together in that age of entrepreneur to set up Larsen & Toubro, as a partnership pa rtnership firm by setting up a small office in downtown Mumbai (then Bombay). Initially they began marketing Danish dairy equipment, which was a great success. A year later, when World War II broke out, the fledgling Company’s genius for innovation came to the fore. It began to make the products it used to import. In 1945, L&T was appointed dealers of Caterpillar, the American earthmoving machinery giant. In 1946, the firm became a limited company, and soon a nationwide network of offices was set up. L&T had set out a charter for itself: the company would meet the needs of India’s emerging core sector. ‘In Service Lies Success’ was enshrined as a corporate motto. Very soon L&T came to be known for its quality and thus began the creation of one of the largest Indian company. The firm  became a public limited company in 1950. L&T steadily climbed the list of the top 200 Indian companies - from 72 in 1966 to 25 in 1973. By then, it had developed a vast repertoire of skills and a reputation for high quality goods and services. Over the next decade, most of L&T’s activities had crystallized into products and services involving high technology and advanced  product development programmes. It has now come a long way from its little office in Mumbai of 1938. In India, they are a visible and vibrant presence. Some of India’s most sophisticated projects and most complex industrial equipment carry the L&T insignia of excellence.

Mr. TOUBRO passed away in 1982 &. Mr. HOLCK LARSEN the CHAIRMAN EMERITUS of company, passed away in 2003. He was awarded awarded with Padma Bhushan on 26th Jan 2002. Mr. A.M.NAIK , Chairman of the company

Company Profile Larsen Larsen & Toubro Toubro Limite Limited d (L&T) (L&T) is a techno technolog logy-d y-dri riven ven engine engineeri ering ng and constr construct uction ion organization, and one of the largest companies in India's private sector. It has additional interests in manufacturing, services and Information Technology. A strong, customer-focused approach and the constant quest for top-class quality have enabled the Company to attain and sustain leadership in its major lines of business across seven decades. L&T has an international presence, with a global spread of offices. A thrust on international  business over the last few years has seen overseas earnings growing to 18 per cent of total revenue. With factories and offices located around the country, further supplemented by a wide marketing and distribution network, L&T's image and equity extends to virtually every district of India.

Record of Achievements L&T's signature of excellence is evident on: • • •

India's first indigenous hydrocracker reactor  Oil and gas platform projects executed to global benchmarks The world's largest continuous catalyst regeneration reactor  The simultaneous execution of clean fuel projects at eight

•

• • • • • •

refineries around India The world's biggest fluid catalytic cracking regenerator  The world's longest product splitter  Asia's highest viaduct - built for the Konkan Railway The world's longest LPG pipeline The world's longest cross country conveyor  Building an international class football stadium in 260 days

MARKET CAPITALISATION OF L&T TILL DATE

EXCHANGE

BSE

OPEN HIGH LOW TRADED QUATITY CURRENT % CHANGE MARKET CAPITALISATION(in billions)

2600.00 2600.00 2438.00 228991 2450.45 -1.69 649.91

L&T has been ranked 5th among the Super Ten out of 20 Top admired Corporation in India. L&T ranks first in the Engineering Business

OPERATING DIVISIONS LARSEN & TOUBRO LIMITED has four main operating divisions along with Information Technology.

ENGINEERING & CONSTRUCTION: L&T’s Engineering & Construction i.e. EPC project business constitutes a critical part of  L&T’s engineering core. L&T has integrated its strengths in process technology, basic and detailed engineering, equipment fabrication, procurement, project management, erection and constructi construction, on, and commission commissioning ing to offer single-point single-point responsibil responsibility ity under stringent stringent delivery delivery

schedules. Strategic alliances with world leaders enable L&T to access technical know-how and execute process intensive large-scale turnkey projects to maintain its leadership position.

ELECTRICAL & ELECTRONICS: ELECTRONICS: Electrical & Electronics division (EBG) is organized into two sectors, Electrical & Electronics, comprising eight Strategic Business Units (SBUs). The Electrical business comprises Electrical Standard Products, Electrical Systems & Equipment & Petrol Dispensing Pumps & Systems. The Electronics business comprises Metering & Protection Systems, Control & Automation, Medical Equipment & Systems, Embedded Software & Systems and Enterprise Networking  business. L&T’s Electrical Sector has a comprehensive Quality, Environment and Safety management system. The quality management system for design, development, production, marketing and servicing has received ISO 9001 certification from BVQI, UK. The environment management system at its Works has been certified for conformity con formity to ISO 14001 by BVQI. The Division has implemented Enterprise Resource Planning solution of SAP AG, Germany and went live at 35 locations across the country simultaneously in the ‘Big Bang’ mode in 1999.

HEAVY ENGINEERING: L&T’s L&T’s Heavy Heavy Engine Engineeri ering ng busine business ss activi activitie tiess are organi organized zed under under self-r self-reli eliant ant Strate Strategic gic Business Units (SBUs), each specializing in different product lines. They meet the needs of  major industries: industries: chemical, petrochemical, petrochemical, refinery, refinery, fertilizer, fertilizer, oil & gas, man-made fiber, fiber,  power, iron & steel, paper & pulp, minerals & metals, cement, food & dairy, plastic & rubber. Plant and equipment are designed and manufactured to customer specifications and various stringent international codes as well as L&T’s own standards. Materials of construction: carbon steel, low alloy steel, stainless steel, duplex steel, clad steel, nickel, monel, inconel, cupronickel, copper, hastelloy, aluminium, titanium, zirconium, tantalum as well as composites .L&T has supplied equipment to almost all process industries in India, and has exported various critical equipment for the hydrocarbon industry abroad.

CONSTRUCTION: L&T offers turnkey construction services and engineered turnkey industrial and infrastructure   projects in civil, mechanical, electrical and instrumentation engineering through ECC – its Engineering, Construction and Contracts Division. The Headquarters of the Division is located at Chennai. ECC’s track record is built upon timely completion, safety, quality and reliability. Many of its Business Units, departments and facilities are accredited with ISO certificates. Well-structured quality assurance systems ensure quality, safety and reliability at every stage of constr construct uction ion.. Region Regional al office officess at Ahmeda Ahmedabad, bad, Bangal Bangalore ore,, Chennai Chennai,, Delhi, Delhi, Hydera Hyderabad, bad, Kolkata, and Mumbai carry out the execution of domestic projects. Area offices at Delhi, Kolkata, Mumbai and Chennai carry out execution of overseas projects.

INFORMATION TECHNOLOGY: TECHNOLOGY LARSEN & TOUBRO INFOTECH LIMITED (L&T Infotech) offers comprehensive, end-toend software solutions and services. Leveraging the heritage and domain expertise of the  parent company, its services encompass a broad technology spectrum.

SOLUTIONS & SERVICES • Domain Solutions: Financial services, Telecom, Utilities & Manufacturing. •

Enterpr Enterprise ise Applic Applicati ation on Systems: Systems: Enterp Enterpris risee Resour Resource ce Planni Planning ng (ERP) (ERP).. Custom Customer  er 

Relati Relations onship hip Manage Managemen mentt (CRM), (CRM), e-Proc e-Procure uremen mentt & Supply Supply Chain Chain Managem Management ent (SCM) (SCM),, Collaborative Product Commerce (CPC) and Enterprise Information Portals (EIP). •

Technology Solutions: Mobile Mobile computing, computing, Embedded Embedded software software and services; services; Enterprise Enterprise

Application Integration & Geographic Information Systems Solutions, Web

Electrical & Electronics Division (EBG) Electrical & Electronics Division (EBG) is one of the core businesses of Larsen & Toubro Limited (L&T) - India’s largest engineering and construction conglomerate. This division is

engaged in the business of low voltage Switchgear products, Electrical systems, Energy meters, Medical equipment, Petroleum dispensing pumps and Automation solutions. This division is the largest manufacturer of low voltage switchgear and controlgear in India and enjoys market leadership amidst competition from international players. A countrywide networ network k of Stocki Stockists sts take care care of product products’ s’ distri distribut bution ion along along with with a widesp widesprea read d servic servicee networ network. k. Office Officess of the L&T Group Group compan companies ies,, locate located d around around the world, world, suppor supportt the requirements from export market.

EBG Performance

(In Crores) 2005 2005-2 -200 006 6 2004 2004--2005 2005 2003 2003-2 -200 004 4

Gross Revenue

15 82

1220

1 019

EBITDA / Revenue %

15.5

12.7

12.9

Export Earnings

17 3

97

62

The division has a comprehensive Quality, Environment and Safety management system. The Qualit Quality y managem management ent system system for design design & develop developmen ment, t, produc productio tion, n, sales, sales, market marketing ing and servicing has received ISO 9001:2000 certification from BVQI. In addition, its manufacturing facili faciliti ties es have have been certif certified ied for confor conformit mity y to ISO 14001 14001 (Envir (Environm onment ental al Manage Managemen mentt System) & OHSAS 18001 (Occupational Health and Safety Management System) by BVQI. We have implemented Enterprise Resource Planning (ERP) solution of SAP AG, Germany and went live at 35 locations across the country simultaneously in the ‘Big Bang’ mode in 1999. ERP provides end-to-end integration across all business functions from suppliers to customers over Internet and it is India’s first installation upgrade to Version 4.6C.

Strategic Business Units

Strategic Business Units (SBUs) of the division have operations at five locations in India –  two in Mumbai and one each in Ahmednagar, Mysore and Faridabad. One of the SBU Of  EBG is operating in Faridabad Electrical Systems & Equipment (Operations at Faridabad) L&T Faridabad division manufactures custom-built switchboards with conventional as well as intelligent protection, control and communication to meet the power distribution and motor  control needs of key industries. L&T FSW continue to be the largest supplier of switchboard  panels in India and these switchboards have hav e been installed at many prestigious plants in India. The range of custom-built switchboards comprises fully drawout power control centres and motor control centres, distribution boards and control panels – all conforming to IEC 60439-1 and IS 8623. Its Power Control Centre (PCC) type TF is rated up to 6000A and houses L&Tmade ACBs to take care of power distribution. The L&T-made Motor Control Centre (MCC) type TQ is rated up to 5000A. L&T FSW offer fixed distribution boards, Intelligent Relays integrated with the PCCs and MCCs MCCs alon along g with with cust custom omiz ized ed Human Human Machi Machine ne Inte Interf rfac acee soft softwa ware re and and Powe Powerr Quali Quality ty Management Systems from the business associates. Also offered are allied equipment like  busducts, transformers, MV switchgear, industrial batteries and cables, and undertakes turnkey cont contra ract ctss

for for

comp compre rehe hens nsiv ivee

syst system em

engi engine neer erin ing, g,

supp supply ly,,

inst instal alla lati tion on,,

test testin ing g

and and

commis commissio sionin ning g of switch switchboar boards ds and allied allied equipme equipment. nt. L&T offers offers assist assistanc ancee in product product selection, selection, application application engineering engineering and detailed detailed engineering engineering,, installat installation ion & commissio commissioning, ning, retrofitting and upgradation of switchboards, after-sales service and training. L&T also designs and manufactures enclosures in flat pack systems for switchboard assemblers world-wide. Retrofitting solutions are offered for a wide range of LV & MV switchgear including IMCS.

ORGANIZATIONAL ORGANIZATIONAL SET-UP Of FARIDABAD UNIT DEPARTMENTAL STRUCTURE AT FSW 1. Marketing & Sales Department. 2. Design Department. 3. Production, Planning, Control & Materials Department 4. Production Department

Assembly

Fabrication

Paint Shop

Maintenance

5.

Swit Switch chge gear ar qua quali lity ty & rel relia iabi bili lity ty (SQ (SQR) R) Dep Depar artm tmen ent. t.

6.

Pers ersonne onnell, HR & Adm Admin iniistra strati tion on Dep Depar artm tmen entt

Personnel & HR

Reception & canteen

7.

Finance and account department

8.

IT Service

Security

Computer Communication facilities

FLOWCHART SHOWING THE CONNECTIVITY BETWEEN ALL THE DEPARTMENTS

CUSTOMER 

SALES & MARKETING

ENGINEERING & DESIGN

SHOP

PURCHASE SQR  PLANNING STORES

DISPATCH

ACKNOWLEDGEMENTS I would like to take this opportunity to thank all the people who helped me in completion of  my management training and in the compilation of this report. I would like to thank Mr. S. M. Saini (Deputy General Manager, L&T-Faridabad Switchgear  Works) for providing me with this unique opportunity of undergoing my training at L & T. I extend sincere thanks to Mr. J. P. Kedia (Manager- Finance and Accounts Department) for   providing me guidance at each and every step of the training. I would always be obliged to him  because he shared his real-life experiences with me. I am thankful to the other members of the finance department who explained me finance work, solving queries and being there to help me whenever required.

Table of Contents i. ii.

Abstract Introduction

1. Work Workin ing g Capit Capital al Mana Managem gemen entt 1.1 Introduction 1.2 The operating Cycle and Working Capital Needs 1.3 Operating Cycle of L&T 1.4 Factors Affecting Working Capital Requirement 1.5 Liquidity Vs. Profitability- A Risk Return Trade Off  1.6 Working Capital Policy

2. Receivables Management 2.1 Need of Receivables 2.2 Objective of Receivable Management 2.3 Cost of Receivables 2.4 Trade off on Receivables 2.5 Determinants of Receivables 2.5.1 Credit Policy 2.5.2 Credit Control 2.6 Channel Financing 3. Payable Management 3.1 Discounting of Bills 4. Inventory Management 4.1 Types of Inventory 4.2 Need for Inventory 4.3 Objectives of Inventory Management

4.4 Cost of holding Inventory 4.5 Techniques for Inventory Management 4.5.1 Perpetual Inventory Verification 4.5.2 ABC Analysis 4.5.3 Economic Order Quantity 4.5.4 Reorder Point 4.5.5 Safety Stock  4.5.6 Lean manufacturing a. Just Just In Time Time (JIT (JIT))  b.  b. Kanb Kanban an Syste ystem m c. Kaizen d. Sing Single le Pie Piece ce Flo Flow w Syst System em e. Gemb Gembaa Walki alking ng f. Virt Virtua uall Storag oragee 5. Cash management 5.1 Need of Cash 5.2 Objectives of Cash management 5.3 Cost of Holding Cash 5.5 Benefits of Cash management 5.6 Cash Budget 5.7 Techniques of managing Cash in L&T 6. Conclusion 7. Refrences

ABSTRACT The project titled analyzing analyzing the

‘Analysis Of Woking Capital Management’ aims at understanding and

Working Capital Structure of the the plant plant,, Faridabad Switchgear Works

Larsenn manufac actu turi ring ng unit unit of  Larse (FSW), a manuf

& Toubr Toubroo Limi Limited ted (L&T). Working Working capital capital

mana manage geme ment nt comp compri rise sess of four four majo majorr part partss –  Invent Inventory ory manage management ment,, Receiv Receivable abless managem management, ent, Payabl Payablee Manage Managemen mentt and Cash Cash manage managemen ment. t. There There are a number number of tools tools available for a proper working capital management. Most of them are studied as a part of the  project. As a part of  inventory

management, various various inventory inventory management techniques are studied. studied.

Most of these are being implemented in the plant (like PIV, ABC Analysis, JIT, Single Piece

Flow System etc). Even those tools, which are not practically implemented (like Reorder Point, Safety Stock etc) are studied. These methods, along with their working and importance, are studied in detail.

As far far as

receivables receivables management management is concer Credit Terms, Terms, Credit Credit Pol Policy icy,, and concerned, ned, Credit

Collection Policy and Procedure are understood, giving special focus on how they are being imple implement mented ed practi practical cally. ly. Also, Also, there there is an innovat innovative ive techni technique que being being used used by L&T for  managing its receivables efficiently. This technique, known as Channel Financing makes sure that the receivables are collected almost instantly. Just like any other firm, even L&T is trying to minimize its debtors, as far as possible. Collections are tried to be made as fast as they can, and all these tools are very much focused and effective in doing so.

Apart from this, I did

Discounting of Bills as a part of  Payable management technique. It’s

an easy way to check the savings a firm can make by paying its suppliers early. Anot Another her prom promin inent ent tool tool bein being g impl implem ement ented ed at L&T L&T is

Sweeping Sweeping Facility Facility for  Cash

Management . It makes sure that the cash is not lying idle, and is being used efficiently, and moreover, is invested wisely, in case opportunities are there.

INTRODUCTION PURPOSE:

The purpose of the report, ‘Analysis

of Working Capital Management’, is to understand and

analyze the working capital structure of the manufacturing unit of  L&T

Limited, that is,

Faridabad Switchgear Works (FSW). The objective was also to check the the real life situations in an industry as differing from theories. The project will throw a light on how to link theory with the business world. Working Capital Management is a part of Corporate Finance, and to understand it, one has to get involved with it. Working with professionals gives us a feeling o f how our future life would be, and how we are supposed to behave in the business world.

LIMITATIONS:

The report covers the practices followed at one plant of the company, so the study that is being carried, may be useful for just one factory, and not for others, as there may be difference in the   business module from one factory to another. Therefore, a generalization of this report, to  judge the efficiency of L&T Limited as a whole, cannot be done. In addition, the project -span of 9-weeks, was insufficient for understanding, and analyzing the working capital structure of a plant completely. Apart from this, the suggestions being made in this report may or may not be practically applicable in the all types of industries.

SCOPE:

The report comprises of various suggestions, regarding the proper management of the working capital, at each and every step of the processes that are taking place at the FSW factory. Suggestions for improving the overall efficiency of the plant, by improving the working capital structure of the plant, have been provided. This is be done by suggesting ideas to improve inventory management, receivables management and cash management processes; separately, as well as collectively.

METHODS OF COLLECTING DATA AND THEIR SOURCES:

In most of the cases, the data is collected on the spot from the persons involved in the different  processes. As far as possible, I have tried to collect data by myself. I also tried to get involved with people from various departments, right from Accounts & Finance Department to Planning & Purchase Department, Stores Department, Marketing Department, Fabrication Department and Personnel Department.

Apart from self-experimenting and observing, I constantly interacted with various employees of the Company and gathered useful information on related matters, which were used in the report as well as for my personal knowledge.

Various books and internet sites, including that of L&T itself, have also helped me a lot in collecting data and understanding concepts.

Working Capital Management

Every business needs investment to procure fixed assets, which remain in use for a longer   period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business also needs funds for short-term purposes to finance current operations. Investment in short term ter m ass assets ets li like ke cas cash, h, inv invent entori ories, es, deb debtor torss etc etc., ., is cal called led ‘Sh ‘Short ort-te -term rm Fun Funds’ ds’ or ‘Wo ‘Worki rking ng Capital’. The ‘Working Capital’ can be categorized, as funds needed for carrying out day-

to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment.

Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is likely to collapse, if it does not have; a) Adequat Adequatee supply supply of of raw raw material materialss for proces processing; sing;  b) Cash to pay for wages, power and other other costs; costs; c) Creating a stock of finished goods to feed the market demand regularly; and, d) The abilit ability y to grant credi creditt to its custom customers. ers.

Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital.

Working Capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the relationship that exists between them.

The current assets refers to those assets which in the ordinary course of business can be, or will  be converted into cash within one year without undergoing diminution in the value and without disrupting the operations of firm. The major current assets are:

Cash



Marketable Securities



Accounts Receivables



Inventory

The Current Liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of current assets or earnings of the concern. The basic current liabilities are:

Accounts Payable



Bills Payable



Bank Overdraft



Outstanding Expenses

The term Working Capital may be used in two different ways. 

Gross Working Capital (or total Working Capital): The gross working capital refers to the firm’s investment in all the current assets taken together. For example, if a firm has a cash balance of Rs. 50000, debtors of Rs. 70000 and inventory of raw material and finished goods has been assessed assessed at Rs. 100000, then the gross working working capital of  the firm is Rs. 220000.



Net Working Capital: The term net working capital may be defined as the excess of  total current assets over total current liabilities. The extent, to which these current liabilities are delayed, the firm gets availability of funds for that period.

Gross Working Capital= Sum Total of Current Assets = RM + WIP + FG + Debtors + Cash and Bank Balance

Net Working Capital= Difference between current assets and current

Liabilities RM + WIP + FG + Debtors + Cash and Bank Balance - Creditors Creditors – Direct wages - Overheads

The Operating Cycle and Working Capital Needs The working Capital requirement of firm depends, to a great extent upon the operating cycle of  the firm.

The operating cycle may be defined as the time duration starting from the

procurement of goods or raw materials and ending with the sales realization. The length and nature of the operating cycle may differ from one firm to another depending upon the size and nature of the firm.

In case of manufacturing concern, this series starts from procurement of raw materials and ending with the sales realization of finished goods. There is a time gap between happening of  the first event and happening of the last event. This time gap is called the operating cycle.

Thus, the operating cycle of a firm consists of the time required for the completion of the chronological sequence of some or all of the following:

i.

Proc Procur urem emen entt of of raw raw mat mater eria ials ls and and ser servi vice ces. s.

ii. ii.

Conv Conver ersi sion on of raw raw mat mater erial ialss into into wor workk-in in-p -pro rogr gres ess. s.

iii. iii.

Conv Conver ersi sion on of wor workk-in in-pr -progr ogres esss into into fini finish shed ed good goods. s.

iv. iv.

Sale Sale of of fin finis ishe hed d good goodss (ca (cash sh or or cred credit it). ).

v.

Conv Conver ersi sion on of rece receiv ivab able less int into o cas cash. h.

Cash

Debtors

Value Addition

Finished Goods

Creditors

Raw material

Working Expenses

Value Addition

Work in Process

Figure:1 – Working capital Cycle

Explanation of diagram Working capital cycle involves conversions and rotation of various constituents/components of  the working capital. Initially ‘cash’ is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in  process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus ‘cash’ assumes its original form again at the end of one such working capital cycle but in the course it passes through various other  forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result, they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital.

L&T’s Operating Cycle The operating cycle of L&T is as follows:

Procurement of raw material

The operating cycle for a company primarily begins with the purchase of raw materials, which are paid for after a delay representing the creditor's payable period. period. L&T is a capital goods manufacturer. Some raw materials are procured from outside, some manufactured by its own. Some Someti time mess it may may happ happen en that that comp compan any y need needss prod produc uctt in the the form form of raw raw mate materi rial al manufactured by its own SBU’s. In this case stock is transferred within the company but it won’t be considered as actual sale and no sale tax levied but it is liable to pay excise duty since excise duty is paid on production and a nd it is the liability of manufacturer. 

Conversion of Raw material into finished goods

These purchased raw materials are then converted by the production unit into finished goods and then sold. The time lag between the purchase of raw materials and the sale of  finished goods is known as the inventory period.

Labor Labor is vital for conversion of inputs into finished goods. There are three types of labour here

Skilled Labor Here a lob our hour rate is fixed and the number of hours required to perform that work  is determined and on the basis of this labor expenses are determined. This is treated as fixed overheads.

Casual labor This is not permanent labor. They are paid on daily basis to perform work of a nonrecurrent nature. They are sourced from the Co ntractors of the Company.

Vendoring

When there is a capacity capacity constraint constraint then a part of the work is done by vendors and the  parts manufactured by these vendors are assembled. This is also called job work 



Conversion of Work-in-progress into finished goods



Sale of Finished Goods Goods Goods are sold either on cash cash basis basis or credit basis. basis. Upon Upon sale sale of finished finished goods goods on credi creditt term terms, s, ther theree exis exists ts a time time lag lag betw between een the the sale sale of fini finish shed ed goods goods and and the the collection of cash on sale. This period is known as the accounts receivables period



Conversion of Receivables into Cash There are basically two ways available to vendo rs to pay their dues to L&T. These are:-

Cash Payment method In this a vendor is supposed to clear his dues within a limited amount of time and mode of payment must be highly liquid. The vendors can pay by demand drafts, pay orders, or cheques of party which are subject to realization.

Channel Financing Channel financing is used to receive fast money from debtors. Most of the firms generally sells goods or services on credit and it takes a little time to realize. Hence, receivables form an important part of working capital management.

Liquidity versus Profitability- A Risk-Return Trade off  Net Working Capital has bearing on Profitability as well as risk. The term Profitability used in this context

is measured by profits after expenses. The term Risk  is defined as the

probability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. It is said that greater the amount of working capital the less risk prone the firm is The decision on how much working capital be maintained involves a trade-off because having a large working capital may reduce the liquidity risk faced by the firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the value of the firm should be used to determine the optimal amount of working capital.

The goal of Working Capital Management is to manage current assets and liabilities in such a way that a satisfactory level of working Capital is maintained. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that workin wor king g cap capita itall has a ver very y clo close se rel relati ations onship hip wit with h day day-to -to-da -day y oper operati ations ons of a bus busine iness. ss.

Negligence in proper assessment of the working capital, therefore, can affect the day-today operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous.

CONSEQUENCES CONSEQUEN CES OF UNDER ASSESSMENT OF WORKING CAPITAL •

Growth Gro wth may be stu stunte nted. d. It may become dif diffi ficul cultt for the ent enterp erpris risee to unde underta rtake ke  profitable projects due to non-availability of working Capital.

•

Implementation of operating plans may become difficult and consequently the profit goals may not be achieved.

•

Cash crisis may emerge due to paucity of working funds.

•

Opti Op timu mum m ca capa paci city ty ut util ilis isat atio ion n of fi fixe xed d as asse sets ts ma may y no nott be ac achi hieve eved d due to no nonnavailability of the working capital.

•

The business may fail to honour its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure.

•

The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely.

•

 Non-availability of stocks due to non-availability of funds may result in production stoppage.

While underassessment underassessment of worki working ng capital has disastro disastrous us impli implications cations on busines business, s, over assessment of working capital also has its own dangers.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL •

Excess of working capital may result in unnecessary accumulation of  inventories.

•

It may lead to offer too liberal credit terms to bu yers and very poor  recovery system and cash management.

•

It may make management complacent leading to its inefficiency.

•

Over-investment in working capital makes capital less productive and may reduce return on investment.

Working Capital: Policy There There is an inevit inevitable able relation relationshi ship, p, betwee between n the sales sales and curren currentt assets assets.. The actual actual and forecasted sales have major impact on the amount of current assets which the firm must maintain. So, depending upon the sales forecast, the financial manager should also estimate the requirement of current assets. There are three types of working capital policies which a firm may adopt i.e. moderate working capital policy, conservative working capital policy, and aggressive working capital policy. These policies describe the relationship between sales level and the level of current assets.

Current assets Conservative Moderate

Aggresive

Sales level

Figure Figure 2 : Differe Different nt types types of working working Capital Capital Policies

In case of moderate working capital policy, the increase in sales level will be coupled with proportionate increase in level of current assets also e.g. if the sales increase or expected to increase by 10%, then the level of current assets will also be increased by 10%.

In case of conservative working capital policy, the firm does not like to take risk. For every increase in sales, the level of current assets will be increased more than proportionately. Such a policy tends to reduce the risk of shortage of working capital ca pital by increasing the safety component of  current assets. The conservative working capital policy also reduces the risk of non  payment to liabilities.

In case of aggressive working capital policy the increase in sales does not result in proportionate increase in current asset. For example, for 10% increase in sales the level of current asset is increased by 7% only. This aggressive policy has many implications•

The risk of insolvency of the firm increases as the firm maintains low liquidity.

•

The firm is exposed to greater risk as it may not be able to face unexpected change, in the market

•

Reduced investment in current assets will result in increase in profitability of the firm

L&T and its Working Capital policy L&T follows conservative working capital policy i.e. for every increase in sales level the level of current assets will be increased increased more than proportionately. proportionately. Such a  policy tends to reduce the risk of shortage of working capital by increasing the safety component of current assets.

liabilities.

This policy also reduces the risk of non payment of 

RECEIVABLES MANAGEMENT

The term Receivables is defined as debt owed to the firm by customers arising from the sale of  goods and services in the ordinary course of business. Receivables are a type of loan extended  by the seller to the buyer to facilitate purchase process. When companies sell their products they sometimes demand cash on delivery, but in most cases they sell goods on credit and allow a delay in payment. The customers’ promise to pay for their purchases constitutes valuable asse assets ts;; ther theref efor oree acco account untan ants ts enter enter thes thesee prom promis ises es in thei theirr bala balance nce shee sheett as accou account ntss receivables. Most of the businesses today sell goods and services on credit and it takes times for the receivables to realize. Hence Receivables management forms an important part of  working capital management.

Need of Receivables The sale of goods on credit is an essential part of working capital management. Credit sale are treated as marketing tool to aid sale of goods. As a marketing tool, they are intended to  promote sales and increase profits. Hence Receivables management assumes significance in the context of overall working capital management.

Objective of Receivables management In a competitive environment, sometimes the firms are compelled and sometimes the firms desire to adopt liberal credit policies for pushing up the sales. Higher credit sales at more liberal terms will no doubt increase the profits of the firm, but simultaneously also increases the risk of bad debts as well as result in more and more funds blocking in the receivables. Thus, the objective of receivables management is matching the cost of increasing sales with the

  ben benef efit itss aris arisin ing g out out of incr increa ease sess sale saless with with the the objec objecti tive ve of maxi maximi mizi zing ng the the retu return rn on investments of the firm.

Cost of Receivables i)

Cost of Financing: The credit sales delays the time of sales realization and therefore the

time gap between incurring the cost and the sales realization is extended. The firm on the other  hand, has to arrange funds to meet its own obligation towards payment to supplier, employees, etc. these funds are to be procured at some explicit or implicit cost. This is known as the cost of  financing the receivables. ii) Administrative Cost: A firm will be required to incur various costs in order to maintain the record of credit customers before the credit sales as well as after the credit sales. iii) Delinquency Cost: This is the cost incurred if there is any delay in payment by a customer.

iv)

Cost of default by Customers: If there is default by customers and the receivables

 becomes, partly or wholly unrealizable, then this amount, known as bad debt also becomes a cost to the firms.

Costs Total cost of  receivables Default cost

Cost of  financing

Delinquency costs

Credit period (days)

Administrative Costs Normal (20 days)

Default (40 days)

Trade off on receivables The trade off on receivables receivables can be applied to find out whether to liberalize liberalize credit terms or not. More liberal credit terms may be expected to generate higher sales revenue and higher   profits; but they increases the potential costs also as the chances of bad debts increases and there will be decrease in liquidity of firms. On the other hand a stringent credit policy reduces the profitability but may increase the liquidity of the firms. Thus, a firm should try to frame its credit policy in such a way as to attain the best possible combination of profitability and liquidity.

Figure 4 : Credit Policy, Profitability and Liquidity of  a firm

Determinants of Receivables In any firm the quantum of receivables is determined by several factors.

1. The The perc percen enta tage ge of cred credit it sales sales to total total sales sales.. High Higher er the sales sales high higher er will will be the receivables. But this is not under the control of financial manager. 2. The The term termss of sale sale i.e. i.e. the the cred credit it and and coll collec ecti tion on poli polici cies es.. Thes Thesee also also dete determ rmin inee the the quantum of receivables. These are under the control of financial manager.

So,

the receivable management must be attempted by adopting a systematic approach

and considering the following aspects of receivables management: •

The Credit Policy

•

The Credit Control

Credit Policy A firm makes significant investment by extending credit to its customers and thus requires a suitable and effective credit policy to control the level of total investment in the receivables. The basic decision to be made regarding receivables is to decide how much credit be extended to a customer and on what terms. This is what is known as credit policy. The credit policy may   be defined as set of parameters and principles that govern the extension of credit to its customers. This requires the determination of  i) Credit standard ii) Credit terms

The Credit Standards: when a firm sells on credit, it takes a risk about the paying capacity of  the customers. Therefore to be on safer side, it must set credit standards which should be applied in selecting customers for credit sales. The following points should be noted while setting the credit standard for a firm: •

Effect of particular standard on sales volume.

•

Effect of a particular standard on the total bad debts of the firm

•

Effect of a particular standard on the total collection cost.

Credit Terms: It refers to set of stipulations under which the credit is extended to the customers. The credit terms specify how the credit will be offered, including the length of 

the period for which the credit will be offered, the interest rate on the credit and the cost of  default.

Credit period: It refers to the length of time over which the customers are allowed to delay  payments. Lengthening the credit period increases the sales by attracting more and more customers,

whereas squeezing the credit period has the distracting effect. The firm must consider the cost involved in increasing the credit period which will result in increase in the investment in receivables.

Discount terms: The customers are generally offered cash discount to induce them to make   promp promptt paymen payments. ts. Differ Different ent discoun discountt rates rates may be offere offered d for differ different ent period periodss e.g. e.g. 3% discount if payment made within 10 days; 2% discount if payment made within 20 days. Both the discount rate and the period within which it is available are reflected in the credit terms e.g.

3/10, 2/10, net 30 means that a 3% cash discount if payment made within 10 days ; 2% discount if payment made within 20 days; otherwise full payment by the end of 30 days from the date of sale.

Practical Implementation

CREDIT TERMS: Credit Period- The credit period at L&T is not constant. For some vendors, it is 30 days, for others, it may be 45 days or 60 days. This depends entirely on company’s policies. It can be different for different vendors.

Cash discount- The cash discount offered by L&T is 2% to 1.75%, depending upon cash discount period.

Cash discount period- The cash discount period allowed by L&T is 1 to 3 days.

This can be summarized as follows:

Credit Discount Period (days)

Credit Discount (%)

1 3 30/45/60

2 1. 7 5 0

There are basically two ways available to vendors to pay their dues to L&T. These are: Cash: In cash payment method, a vendor v endor is supposed to clear his dues within a limited amount of time. And the mode of payment must be highly liquid (Cheque or o r Demand Draft). There are three options available with the vendors: i) Blank Cheque Arrangement: In Blank Cheque arrangement, the vendors provide L&T blank  Cheques drawn on the name of L&T. As soon as the material is received and invoice is generated, L&T is allowed to fill the relevant amount pertaining to the transaction that took   place between L&T and its vendor. This Cheque can be cleared on the same day the invoice is generated.

ii) Cheque Arrangement: In simple Cheque arrangement, on generation of invoice, a cheque is issued by the vendor drawn on the name of L&T.

iii) Demand Draft (D.D.): Here, a demand draft is drawn on the name of L&T, by the vendor, as soon as invoice is generated.

Control of Receivables

Once the credit has been extended to a customer as per credit policy, the next important step in the management of receivables is the control of receivables. The things to be taken into consideration are:1. The collection Procedure: The firm should have a built in system under which customer may  be reminded a few days in advance about the bill becoming due. The collection procedure of the firm should neither be too lenient nor too strict. A strict collection collection policy can affect the goodwill goodwill and damage the growth prospects of the sales. sales. If the firm has a lenient credit policy, the customers with a natural tendency towards slow payment may become even slower to settle his accounts. Thus, the objective of collection procedure and  policies should be to speed up the slow paying customers and reduce the incidents of bad debts.

2. Monitoring of Receivables:The financial mangers should keep a watch on the credit worthiness of all the individual customers as well as the total credit policy of the firm. •

A common method to monitor receivables is the collection Period or number of day’s outstanding receivables.

Average collection period= Average Receivables Credit sales per day Another technique for monitoring the Receivables is known as aging schedule. The quality of  the receivables of a firm can be measured by looking at the age of receivables. The older the receivables, the lower is the quality and greater the likelihood of a default. In the aging schedule, the total outstanding receivables on particular days are classified into different age groups together with percentage of total receivables that fall in each age group. For example, the receivables of a firm, having a normal credit period of 30 days may be classified as follows:

Age Group (Number of Days)

%of total outstanding Receivables

Less than 30 days 31-45 days 46-60 days 61 and above

60% 20% 10% 10%

Here the firm has a credit period of 30 days and 60% of the total receivables are less than 30 days old. 20% of the receivables are over due by 15 days, 10% of the receivables receivables are overdue  but 30 days and 10% are over due by more than 30 days. This type of aging schedule can provide a kind of an early warning suggesting i) Deterioration of receivables quality ii) Where to emphasize the appropriate corrective actions

3.

Lines of Credit: It is the maximum amount a particular customer may have as due to the

firm at any time. Different lines of credit may b e allowed to different customers. As long as the customer’s customer’s unpaid balance remains within this maximum maximum limit, the account may be routinely routinely handled. However if new order is going to increase the indebtedness of a customer beyond his line of credit, then the case must be taken for an approval for a temporary temporary increase increase in the line of credit. 4.Accounting Ratios: Two accounting ratios may be calculated in particular may be calculated to find out the changing pattern of receivables. These are i) Receivables Turnover Ratio ii) Average collection Period

Both the ratio should be calculated on a continuous basis to monitor the receivables. The ratios so calculated for the firm must then be compared with the standard for that industry or with  past ratios of the same firm.

Channel Financing

Channel Channel financ financing ing is differe different nt from from the conventi conventional onal lendin lendingg since, since, in convent convention ional al lending, the financing banks are generally not concerned as to how the suppliers of the firm

and dealers of the products of firm, are financing their activity. The weak financials of the supplier (leading to delay in supply and non-availability of market credit) or the dealers of the  products (delay in receipt in payment leading to higher book debts) could adversely impact the top-line(sales) as well as bottom-line(profits) of the financed firm. In the channel financing the financing financing bank may have to find ways and means as to how the suppliers suppliers and buyers buyers (dealers of the product) can be financed through various instruments/facilities. Hence, the channel financ nanciing adds adds val value to the the tran transa sact ctiion for for all all the par parties ties conc concer erne ned, d, be it the the manufacturer/trader, the supplier of the inputs or the dealer/buyer or the financing bank.

Through channel financing, the business firms can out-source a major part of their working capital needs thereby reducing their dependence on bank finance. For instance, it need not avail of credit from its bank to pay off the supplier if the supplier gets the finance in his own name from the bank for the raw materials supplied on credit in the form of say, drawee  bills financing. The bank can also allow loan to the dealer for the credit term that has been fixed between the firm and the dealer in the form of receivable finance or finance against book  debt debtss or fact factor orin ing g of the the rece receiv ivab able les. s. This This enabl enables es the the manu manufa fact ctur urin ing g firm firm to get get cash cash immediately for the finished goods supplied. . Thereafter,

the bank makes a due diligence

assessm assessment ent of the supplie suppliers’/ rs’/deal dealers’ ers’ standin standingg and credit credit worthi worthiness ness and decides decides to provide finance on merit.

A

simplified

channel

finance

solution

is

as

follows:-

Figure:-5 Step1:

Supply

Step2:

Advice

Step3: ep3:

Paym ayment ent

Step4:

of to

goods ABN

by ABN ABN

from AMRO

Corporate to

AMRO AMRO for for

make

to

payment

Channel for

the

good goodss pur purchas chased ed by Chan Channe nell

Partner. purchase. Part artner ner.

Repayment by Channel Partner to ABN AMRO Bank as per facility term.

Channel Finance Benefits to Corporate: •

Assured availability of finance to their Channel Partner's at lower than current cost.

•

Corporate can use this as a Marketing tool and strengthen their relationship / reward loyalty of the Channel Partners

•

Release of funds from the balance sheet resulting in improvement in financial ratios.

•

Conversion of balance sheet item to an off balance sheet liability.

•

Greater efficiencies in the Corporate's receivable management and cash management  process.

•

Ability to introduce payment discipline with their Channel Partners

Channel Finance Benefits to Channel Partners: •

Steady and cheaper source of working wo rking capital financing.

•

Channel Partners can increase sales through higher purchasing power.

•

Simplicity of documentation and approval procedures.

•

High service and delivery standards compared to current neighborhood banker.

•

Channel Partners may be able to increase profitability by availing of Cash discounts from Corporate.

Channel finance benefits to banks: •

Increased customer base

•

Since, the risk is diversified through finance to supplier, manufacturer and the dealers, the credit exposure norms are better observe

Practical Implementation The practice of channel financing is followed in L&T to a great extent and the company is benefiting a lot through this system of collection of debtors. The banks which provide Channel Financing facility to L&T are:

ICICI bank 



Deustche bank 

Payable Management As the firm sells goods on credit it may also procure/purchase raw material and finished goods on credit basis. The payment for these purchases may be postponed for the period of credit allowed by suppliers. So,

the supplier of the firm in fact provides working capital to the

firm for the credit period. For example, a firm makes a credit purchase of Rs. 60000 per month and the credit allowed by supplier is two month, then the working capital supplied by creditors is Rs. 120000 (i.e. Rs. 60000*2months). It means the firm would be getting the supplies without however, making the  payment for two months. The postponement of payment to the creditors makes the firm to utilize this money elsewhere or help the firm to sell on credit without blocking its own funds.

Since, Working Capital is the difference between current assets and current liabilities and and credi creditor torss form form an im impor portan tantt part part of curren currentt liabi liabili liti ties. es. So, a firm firm can save save a considerable amount if these creditors are managed. The extent, to which the payment to these current liabilities is delayed, the firm gets the availability of funds for that period. So, a  part of the funds required to maintain current assets is provided by current liabilities and the firm will be required to invest the funds in only those current assets which are not financed by current liabilities. So, the aim of the firms is to realize its debtors as fast as possible but too pay its creditors as late as possible. Creditors can be managed by discounting of bills.

Bill Discounting is a relatively new concept in India. When a firm buys goods on credit the supplier will state a final payment date . To encourage firm to pay before final payment date , the supplier will offer a cash discount for prompt settlement. Now it’s the decision of firm

whether to avail or not that discount facility provided by supplier. For that they should see whether it is profitable for them or not. By using discounting of bills technique huge sums of money can be saved, by just paying the discounted amount in time. Big firms, ( like L&T), which have huge cash reserves, generally, get into a contract with financial institutuions or banks( like ICICI bank or L&T finance Ltd.). These financial institutions pay the suppliers the requisite amount on behalf of these firms and they charge some interest on the amount paid by them to the suppliers from these firms.

Benefits of Discounting of Bills •

Discounting of Bills make it easy to decide whether the discount being allowed by the supplier is worth taking or not.

•

Also, it make possible to calculate savings being received on account of availing discount, in monetary terms

•

It also helps in improving relationship between vendors/suppliers.

•

It’s an indirect cash inflow , because the company is going to pay less than what it was supposed to pay initially

•

The cash thus saved can be invested elsewhere.

•

It’s a win-win situation for both-the company as well as suppliers as the suppliers will  be getting money much before the stipulated time and the company is able to enjoy the  benefits of discount offered by the suppliers.

PRACTICAL IMPLEMENTATION L&T uses bill discounting technique with all its major suppliers. For this L&T has arrangement with L&T finance, which pays its suppliers on behalf o f l&T within the time stipulated ( that is, the time period for which the discount is allowed) a llowed) Here, is the

cost benefit analysis ‘for discounting of bills’ done by Faridabad Switchgear

(FSW) with its various supplier. This is discounting for the bills whose due date was july 2007

Name of the party Sangeeta Industries M/S. U.K.Industries

Gross amt(Rs)

Tenor (days)

Rate of int. .

Int for 90 days

90

10.50% p.a.

14,211.22

90

10.50% p.a.

90

Discount amt 60/75 days

Interest for 60/75 da days

Savings

10081.71

9474.15

607.56

9,413.02

6519.15

6,275.35

243.8033

10.50% p.a.

2,120.26

1695.74

1,413.51

282.2307

90

10.50% p.a.

12,184.59

10916 .5 .59

10,158.82

757.77

90

10.50% p.a.

5,126.38

4089.59

3,417.59

672.0001

90

10.5 10.50% 0% p.a p.a.

2,96 2,967. 7.39 39

2365. 365.33 33

1,978.26

387.0715

14,916.55

1321.516

512.58

116.7654

15742 .6 .65

14,793.84

948.8118

555,066. 33 367,656. 75 82,81

Manju Plastics Ace Cable Industries Pvt. Ltd. M/s Dishant Impex Pvt. Ltd. M/s Rakesh Steels Sangeeta Industries

3.95 475,909. 53 200,227. 98 115,9 01.1 01.18 8 894,01 3.51

2 90

10.50% p.a.

2,374.83

90

10.50% p.a.

768.88

90

10.50% p.a.

22,190.76

16238.07

30,72 Manju Plastics Sangeeta Industries Sangeeta Industries Dhiman Industries Ace Cable Industries Pvt. Ltd. Dhiman Industries M/S. U.K.Industries Sangeeta Industries Dhiman Industries Ace Cable Industries Pvt. Ltd. Sangeeta Industries Sangeeta Industries M/S. U.K.Industries Sangeeta Industries Ace Cable Industries Pvt. Ltd. Sangeeta Industries Dhiman Industries Ace Cable Industries Pvt. Ltd. Dhiman Industries

1.41

629 .3 .35

866,733. 70 968,843 .17

2 90

10.50% p.a.

4,805.04

17592.36

16,536.69

1055.667

90

10.50% p.a.

8,174.42

6545.41

5,449.61

1095.799

90

10.50% p.a.

2,903.89

20492.24

19,086.57

1405.67

90

10.50% p.a.

8,082.57

6545.41

5,388.38

1157.03

90

10.50% p.a.

7,834.56

5418.49

5,223.04

195.4497

90

10.50% p.a.

14,493.53

10272.3

9,662.35

609.9484

90

10.50% p.a.

13,425.41

10735.5

8,950.27

1785.229

90

10.50% p.a.

10,347.51

9508.92

8,622.92

886

90

10.50% p.a.

17,125.40

12149 .0 .09

11,416.93

732.1579

319,278 .99 894,587. 45

2

319,278 .99 306,004. 77 566,092. 83 524,373 .81 418,254 .89 668,889. 28 1,447,99 9.81

3 90

10.50% p.a.

7,072.76

26264.94

24,715.17

1549.767

90

10.50% p.a.

2,466.39

1765.31

1,644.26

121.0499

90

10.5 10.50% 0% p.a p.a.

13,8 13,824 24..87

1014 10148. 8.69 69

9,216.58

932.1079

90

10.50% p.a.

8,806.02

8059.91

7,338.75

721.16

90

10.5 10.50% 0% p.a p.a.

18,1 18,156 56..65

1280 12809. 9.29 29

12,104.43

704.8593

90

10.50% p.a.

11,324.09

9157.84

7,549.40

1608.445

90

10.50% p.a.

8,143.88

7369.17

6,786.56

582.61

90

10.5 10.50% 0% p.a p.a.

21,1 21,160 60..69

1692 16920. 0.49 49

14,107.13

2813.363

99,69 3.51 558,812 .70 .70 351,855 .38 717,226 .82 .82 447,326 .18 321,70 1.05 826,501 .04 .04

Credit period 60 days 60 days 60 days 75 days 60 days 60 days 60 days 60 days 60 days 60 days 60 days 75 days 60 days 60 days 60 days 60 days 75 days 60 days 60 days 60 days 60 days 75 days 60 days 60 days 75 days 60 days

M/S. U.K.Industries Sangeeta Industries Sangeeta Industries M/s Dishant Impex Pvt. Ltd. Ace Cable Industries Pvt. Ltd. Ace Cable Industries Pvt. Ltd. Sangeeta Industries

347,748. 30

90

10.50% p.a.

9,083.28

20609.65

90

10.50% p.a.

1,450.77

1157.36

967.18

190.1783

60 days 60 days 60 days 60 days

90

10.50% p.a.

5,792.77

5182.81

4,827.30

355.51

75 days

90

10.50% p.a.

5,295.09

4902.81

4,412.58

490.23

90

10.50% p.a.

2,689.38

16637.54

15,126.25

1511.289

90. 90.00

10.5 10.50% 0% p.a p.a.

758. 758.53 53

505.69

121.9747

90

10.50% p.a.

8,903.31

90

10.50% p.a.

5,063.84

1,760,11 7.86

5,935.54

222.0805

32925.46

30,042.56

2882.9

19,388.85

1220.799

4

1,135,94 3.94

6157.62

2

56,664 .74 226,255. 76 214,03 1.75 917,12 3.21

2

30,660 Manju Plastics

.32 .32

627. 627.66 66

Net Savings

30288. 8

75 days 60 days 60 days

 Table:- Discounting of Bill We can see that discount be availed is more than interest being paid. Therefore, it is beneficial for the company to convert their suppliers through bill discounting route. This table is just a part of whole document which clearly signifies the importance of discounting of bills. We can observe that just for the bills whose due date is on july we can have a savings of Rs. 30288.8. A table depicting summary of savings which L&T was able to make, using bill discounting, for the year ended 31st March 2007 is given below:-

S.No. 1 2 3 4 5 6 7 8 9 10 Total

Drawer Ace cables Industries Ltd. Bestech Electricals Dhiman Industries Dishant Impex Pvt. Ltd Manju Plastic Rakesh steels Sangeeta Industries Trident Switchgears Pvt. Ltd. U.K. Industries Wheels Polymers Pvt. Ltd.

No. Of Bills 63 4 9 31 26 17 82 8 37 8 285

Table – Discounting of Bills – Overall Savings

Savings 73562.79 1993.93 -1063.32 -11882.60 1283.78 -28211.21 67963.59 2426.44 -12168.99 33685.33 127589.74

Inventory Management

In a wider sense, inventory can be defined as an idle resource which has an economic value. It is however, commonly used to indicate various items of stores kept in stock in order to meet future demands. The Dictionary meaning of Inventory is 'a list of goods'.

Inve Invent ntor ory y is asse assets ts to the the firm firm and and requ requir ires es inve invest stme ment nt and henc hencee invo involv lves es the the commitment of firm’s resources. The inventories need not be viewed as an idle asset rather these are an integral part of firm’s operations.

Inventory refers to stockpile of products that a firm is offering for sale and the component that makes up the product. We can also say that inventory is composed of  assets that will be sold in the future in the normal course of business. But the question arises how much inventory be maintained? If the inventories are too big, they become strain on the resources; however, if they are too small, the firm may loose sales.

In any organization, there may be following four types of inventory: (a) Raw materials & parts-- These may include all raw materials, components and assemblies used in the manufacture of a product; (b) Consumables & Spares -- These may include materials required for maintenance and day-to-day operation; (c) Work in progress -- These are items under various stages of  production not yet converted as finished goods; (d) Finished Products -- Finished goods not yet sold or put into use.

 Need For Inventory Every organization needs to maintain a minimum amount of inventory so as to fulfill its customer’s demands. Also, the organizations foresee future demand and they plan their  inventory levels accordingly. These reasons can be classified as:

Transactionary motive: to meet meet the day to day requirem requirement entss of sales, sales, productio production n  process, customer demand etc.

Precautionary motive: A firm should keep some inventory for unforeseen circumstances also.

Speculative Motive: The firm keep some inventory in order to capitalize opportunity to make profit.

Objectives of Inventory management a. To ensur ensuree a cont contin inuou uouss suppl supply y of raw raw mate materi rial alss to faci facili lita tate te unin uninte terr rrup upte ted d  production.   b. b. To main mainta tain in suff suffic icie ient nt stoc stock k of raw raw mate materi rial alss in peri period odss of short short supp supply ly and anticipate price changes. c. To control control inventor inventory y investme investment nt by mainta maintaining ining optimu optimum m Inventory Inventory.. d. To mini minimi mize ze inve invest stme ment nt in inve invent ntor ory y and and to ensu ensure re maxi maximu mum m turn turnov over er of  inventory in an accounting period. e. To ensure ensure stocking stocking of releva relevant nt materials materials in adequat adequatee quantities quantities and and to ensure ensure that unwanted or slow- moving items and/or non-moving items do not pile up. f. To minimize minimize invento inventory ry carryin carrying g costs in in businessbusiness- both both ordering ordering cost cost and carrying carrying cost. g. To eliminate eliminate waste waste and delays delays in the process process of manufac manufacturi turing ng at all stages stages so as to reduce inventory pile up. h. To ensure ensure adequat adequatee and timely timely supply supply of finishe finished d goods to the market market through through  proper distribution.

Cost of holding Inventory Every firm maintains some stock of raw materials, work-in-progress and finished goods depending upon the requirement and other features of the firm. It is benefited, by holding inventory but there is cost involved with it. had these cost not there, there would not have  been any problem of inventory management and every firm would have maintained higher higher and higher higher level level of invent inventori ories. es. The cost cost of holdin holding g invent inventory ory includes includes the following:-

•

Ordering Cost- The cost associated with the acquisition or ordering of inventory is known as ordering cost. Firms have to place order with suppliers to replenish inventory of raw materials. Such expenses involved are referred to as ordering cost. The ordering cost may have fixed component which is not affected by the order order size; size; and a variab variable le compone component nt which which changes changes with the order order size. size. It includes:

o

Carriage Inward

o

Insurance Inward

o

Communication cost

o

Stationary Cost

o

Demurrage Charges

Ordering Cost= (A*O)/Q where, A= Annual Requirement of o f a particular material in units or numbers or kgs. O= Ordering cost per order  Q= Lot size, in units

•

Carrying Cost:

The very fact that the items are required to be kept in stock means additional expenditure to the organization. The different elements of costs involved in holding inventory are as follows: (a) Interest on capital / cost of capital / opportunity costs (b) Obsolescence and depreciation (c) The cost of storage, handling and stock verification (d) Insurance Costs The average inventory carrying costs can, therefore, be as follows: Interest/costs of capital/opportunity cost Obsolescence and depreciation cost Storage, handling etc. Insurance costs Total

15 to 25% 2 to 5% 3 to 5% 1 to 2% 21 to 37%

Carrying Cost is calculated by:

Carrying Cost= ( C*O)/Q where, C is carrying cost

•

Stock-out Cost (A Hidden Cost):

A stock out is a situation when the firm is not having units of an item in store but there is demand for that either from the customers or production department. There is always a cost of stock out in the sense that the firm faces a situation of lost sales or back orders.

Some examples are: o

 Non availability/ small amount available with vendors

o

 Non availability of substitutes

o

Quality desired not matching with the supplied ones

o

Updated or improved product not available.

Total Cost The total cost associated with inventory is the sum of ordering and carrying cost i.e.

Total cost= Carrying Cost+ Ordering Cost = C*O/Q

+ A*O/Q

One Underlying principle should be kept in time that ordering cost and carrying cost are inversely related to each other. Suppose the ordering cost increases because more number  of times the order is repeated, a direct consequence would be reduction in inventory held and hence carrying cost would be less. Conversely, if the number of order is less, this means that average value of inventory held is higher with the consequence of higher  inventory carrying cost.

Techniques used for inventory management

The finance department of every organization aims at maintaining an optimum level of  inventory on the basis of the trade-off between cost and benefit to maximize the owners wealth. There are various tools for effective inventory management. The tool depends upon the type of inventory, namely materials, work-in-progress or finished goods. some of these tools have an impact not only on inventory but on whole structure of the organization. They help in reducing cost and improving the efficiency of organization as a whole.

Perpetual Inventory Verification This is done to check out actual inventory level and is done on a continuous basis. In PIV method, the amount of inventory is checked both in documents as well as stores. Here, some items are checked randomly and while checking those items issues and receipt of those items is stopped we can say that these items are brought to freezing state. The database which, ideally, should be refreshed simultaneously whenever there is a change in inventory and it should match with physical inventory level. Practically, these two numbers rarely match. This happens because of various reasons, which may or may not be under the control of management.

Some of the reasons for mismatch are: •

Delay in entering data

•

Technical Errors (intranet or SAP not working)

•

Documentation Error (document not submitted)

•

Posting Error 

•

Material issued but document not processed

•

Document processed but material not issued

•

Material send for job work but not received effectively

•

Pilferage

•

Material waiting for quality check 

Benefits Of Perpetual Inventory Verification

a. The exact exact amount amount of inventory inventory present present in the plant can be checked. checked.  b. Checking Checking it against against the the database database of the stores stores can can give us a fair idea about about how efficiently the system is working c. Any faults faults in in the system, system, regardi regarding ng the errors errors associ associated ated with with updating updating of  database of stores department can be traced.

Practical Implication At L&T also PIV is done on a continuous basis it may be monthly, quarterly or 6 monthly. Some items are picked randomly and the selection takes into consideration that an item item shou should ld be chec checked ked at leas leastt once once in a year year.. The The item item sele select cted ed are are coun counte ted d  physically and, is then, matched against the database of store’s department. In case of any discre discrepanc pancies ies the root root cause cause of mismat mismatch ch are explored, explored, and is minim minimized ized as far as  possible.

L&T maintains a list of ABC items. For PIV some items are randomly selected. In the picture below these 24 items are selected for PIV and the quantity for each item as it is in the database is shown.

Figure 6 – Selection of items for PIV

  Now Now the the list list of item itemss is sent sent to stor stores es depa depart rtme ment nt wher wheree they they check check the the data databas basee inventory with physical inventory. Then the stores department sends the list back after  verification and find out the difference it its there.

Recommendations •

PIV should be done as frequently as possible.

•

It should be made sure that data is updated from time to time that is as soon as material is issued or received, corresponding data should be updated on the plant database.

•

Unless or until data is entered no material should be issued or received.

ABC Analysis This is done to solve classification problem. The most important thing in inventory control management is classification of different types of inventories to determine the type and control required for each. The ABC analysis is based on the

assumption assumption that

same degree of control should not be exercised on all items of inventory . The ABC analysi analysiss classi classifi fies es variou variouss invent inventory ory items items into into three three sets sets of groups groups of priori priority ty and allocates managerial efforts in proportion of the priority. The The most important items are classified as class ‘A’ , those of intermediate importance are classified as class ‘B’ and the remaining items are classified as class ‘C’.

The financial Manager should monitor different items belonging to different groups in that order of priority.

Utmost attention is required for class ‘A’ items, followed by

items in class ‘B’ and then items in class ‘C’. This is done based on the experience That 10% of items in the inventory accounts for 70% of consumption in value so they are classified as ‘A’ class items 20% of items in the inventory account for 20% of consumption in value so they are classified as ‘B” class items 70% of the items in the inventory accounts for 10% of consumption in value so they are classified as ‘C’ class items.

Class A B C Total

No

Of   Inventory

Items (%)

Value (%)

10 20 70 100

70 20 10 100

Table :- ABC Analysis

Benefits Of ABC analysis •

It serves as a tool for classification for inventory.

•

Each item can be given appropriate attention as per classification.

Limitations of ABC analysis This system system suffer sufferss from from major major drawba drawback. ck. An item item of invent inventory ory may not be very very expensive, but may be very critical to production process and/ or may not be easily available; still it will be classified under group ‘C’. It would require serious attention but due to this classification, it will receive less attention. Similarly a not very important component may receive extra attention then it deserves . In either case it is detrimental to the growth of the company. This is a serious limitation of ABC analysis.

Practical Implementation ABC analysis is strictly followed in L&T. It keeps an eye ion those items which are more crucial for production process than others, such items are given due attention so that there is neither an excess nor deficit of such materials. materials. On the other hand there is not much to worry worry abou aboutt clas classs B and clas classs C item items. s. Ther Theree are are aroun around d 7000 7000 item itemss whic which h are are categorized as A, B, and C items.

Economic Order Quantity Model: This is to solve order quantity problem. After ABC analysis we get to know which item deserves how much attention. The next Problem is to determine the lot size in which a particular item of inventory will be required. The importance of effective inventory management is directly related to size of  the inventory. A firm should neither place too large or too small orders. The inventory management basically focuses on maintaining an optimum level of inventory in order to minimize the cost attached with different inventory levels. The optimu optimum m level level of invent inventory ory is known known as Econom Economic ic Order Order Quanti Quantity ty (EOQ) (EOQ) or  Economic lot size. This refers to that quantity per order, which ensures that total of  carrying and ordering cost is minimum. The approach to determine EOQ is based on the following assumptions:•

The total usage of particular item for a given period (usually a year) is known with certainty and the usage rate is even throughout the year.

•

There is no time gap between placing an order and getting its supply

•

The cost per order of an item is constant and the cost of carrying inventory is also fixed and is given as a percentage of average value of inventory.

•

There are only two costs associated with the inventory, and these are the cost of  ordering and the cost of carrying the inventory.

EOQ EOQ is genera generall lly y used used

to dete determ rmin inee the the orde orderr quant quantit itie iess of class class ‘C’ ‘C’ item itemss and and

sometimes for class ‘B’ items also. This method is rarely used for class ‘A’ items because class ‘A’ items are ordered only when requirement arises, there is no need to keep inventory of class ‘A’ items.

The formula for estimating EOQ is:

EOQ= √ (2A*O)/C

Where, A = annual requirement of a particular material in units or numbers Or Kgs O = Ordering cost per order  C = carrying cost per unit

Figure 7 :- Graphical Presentation Of EOQ Model

Explanation The figure shows that the total ordering cost for any particular particular item is decreasing decreasing as the size per order is increasing. This will happen because with the increase in the size of  order, the total number of order for a particular item will decrease resulting in decrease in the order cost. The total annual carrying cost is increasing with the increase in order size. This will happen because the firm would be keeping more and more items in the stores. However, the total cost of inventory (i.e. the total carrying cost + the total ordering cost) initially reduces with the increase in size of order. The trade-off of these two costs is attained at the level at which the total amount of cost is least. At this particular level the order size is designated as the economic order quantity. If the firm places the orders for 

that item of this economic order quantity, then the total annual cost of inventory of that item will be minimized.

Benefits of EOQ •

It makes sure that there is neither an excess ex cess nor deficit of inventory.

•

It saves cost as it saves carrying and ordering cost.

•

It also results in strong relationship with vendors.

•

It results in saving of time.

Practical Implication EOQ is a relatively old technique for assessing the lot size of the order. Moreover, it suffers from the disadvantage that the order cost is assumed to be uniform during a   partic particula ularr period period.. The main main point point of proble problem m in calcul calculati ating ng EOQ is regard regarding ing the estimation of ordering and carrying costs. Because there are no set rules to find exact storage cost, maintenance cost etc. Since the production unit of L&T is involved in manufacturi manufacturing ng of tailor-made tailor-made products, products, assessment assessment of EOQ is not very relevant relevant for this kind of business line. However, the general usage items like nuts, bolts, crimps, wires,  batons, nails, lubricants, gaskets etc. are common for all types of items. Hence, it may have restricted application in the FSW plant. EOQ is estimated on the basis of prior experience and future requirements. This happens so because it is very difficult to classify to calculate storage and maintenance costs. They have to be estimated because there are no provisions available to calculate them. To   prove the usefulness of this method, some arbitrary costs (ordering cost and carrying cost) are assumed. Accordingly, EOQ is calculated to show how this model works and how it can be useful u seful in maintaining proper inventory levels.

I

ITEM SL98354BOOOS

EOQ 219

CS94314KOOOS SL97299OMOOS SH97609OOKOS SH97608OOMOS

237 327 245 258

Table – Economic Order Quantity Quantity

RECOMMENDATIONS: •

Provisions to calculate EOQ must be made beca use a guess work may prove to be wrong.

•

At first, the total cost involved in ordering, transporting, procurement, storage and maintenance must be calculated. Than, a part of this (say 20%) should be taken as carrying c arrying cost and rest as ordering cost.

Reor Reorde derr poin pointt (und (under er cert certai aint ntyy cond condit itio ions ns): ): To solv solvee orde orderr poin pointt problem:

Reorder point is that level of inventory at which an order should be placed for replenishing the current stock of inventory. It may be defined as level of inventory when fresh order should should be placed placed for procuring procuring additio additional nal invent inventory ory equal to the economic order quantity. It is the inventory level which is equal to consumption during the lead time. Reorder point is calculated as:

Rρс = L*U Where,

L = Lead time (in days) U = Average daily usage of inventory

Benefits of reorder point

•

It makes sure that plant does not run out of stock in any given day.

•

It makes it easier to keep track of inventory and to know when exactly next lot of  material is needed.

PRACTICAL IMPLEMENTATION: Practically, reorder point is not calculated at L&T. Trends of requirements of various items are observed and accordingly order point is estimated for different items. Here the  problem is in estimating exact lead times and average daily usage of inventory. The difficulty in estimating lead time is that it is never fixed and also, it depends not only on the material, but also on the supplies and his geographical location. A material which can  be ordered from different suppliers may have different lead times. As far as average daily usage usage of invent inventory ory is concern concerned, ed, the fact fact is that that L&T follow followss enginee engineered red-to-to-ord order  er   business, i.e. it manufactures according to immediate demands. So, it becomes difficult to estimate average daily usage of inventory. The demands keep fluctuating day-by-day.

To emphasize on the importance of reorder point, a calculation based on assumed lead times and average daily usage of inventory is done. This can prove to be helpful in implementing reorder point at L&T.

ITEM

Rc

SL98354BOOOS CS94314KOOOS SL97299OMOOS SH97609OOKOS SH97608OOMOS

100 180 150 144 120

RECOMMENDATIONS: •

Reorder point is a useful tool and hence, should be implemented. It will make sure that the plant does not run short of inventory for even a single day.

•

Lead times should be estimated based on both – the type of material and the supplier.

Safety stock: To overcome unexpected situations The The EOQ EOQ and the the reor reorde derr point point have have some some assu assump mpti tions ons,, whic which h are are not poss possib ible le  practically. For instance, the demand for inventory is like to fluctuate from time to time. The demand may exceed the anticipated level.

Simil Similarl arly, y, the receip receiptt of invent inventory ory from from the suppli suppliers ers may be delaye delayed d beyond beyond the expected lead time. The delay may be due to strikes, floods, transportation, and other   bottlenecks. To avoid such undesirable situations safety stock is maintained.

Safety Stock may be defined as the minimum additional inventory to serve as a safety margin or buffer or cushion to meet an unexpected increase in usage resulting from an unusually high demand and/or an uncontrollable late receipt of incoming inventory.

Benefits of Safety Stock  •

It is useful as it makes sure that even after reorder point is passed, the plant is able to maintain its immediate demand.

•

It acts as a buffer.

•

It is an effective tool to minimize shortage cost.

PRACTICAL IMPLEMENTATION: IMPLEMENTATION: The determination of the optimum safety stock involves dealing with uncertain demand. The first step, therefore, is to estimate the probability of being out of stock as well as the size of stock-out in terms of the shortage of inventory at different levels of safety stock. To give an overview of the whole process, I calculated safety stock of a few items based on certain assumptions regarding the stock-out acceptance factor, average number of  units per order, average daily usage of inventory and lead time.

ITEM

Ss

SL98354BOOOS CS94314KOOOS SL97299OMOOS SH97609OOKOS SH97608OOMOS

156 256 213 187 209

Table – Safety Stock 

Lean Manufacturing There are many hidden wastes in any organisation . To get rid of these hidden wastes we need to first unhide them. The best way to do this is to have a

VISUAL FACTORY

where there is nothing hidden . Lean Manufacturing is a tool to enable us to achieve this objective

Fundamentals of Lean Manufacturing : 1. Smooth Smooth flow of Materia Materiall & Informati Information on to meet on demand demand service service to customers customers  but without having to hold high inventories . 2. Eliminati Elimination on of hidden wastes wastes .These .These wastes wastes fall fall into into seven basic basic categories categories :

a. Over Over Pro Produ duct ctiion b. Defe Defect cts/ s/Re Rewo work  rk  c. Motion d. Tran Transp spor orta tati tion on e. High High Inve Invent ntor oryy f. Over Over proc proces essi sing ng & g. Waiting 3. To achieve achieve waste elimina elimination tion , workplace workplace organiza organization tion using using the 5 S System System is necessary: a. Sort Sort ... ... Rem Remov ovee unnee unneede ded d item itemss  b. Set –in – order... order... A place place for everyth everything ing and everythi everything ng in its place place (PEEP) (PEEP) c. Shine Shine ... Clean Clean enoug enough h to inspec inspectt and expose expose any any defect defect . d. Standardiz Standardize.. e.. Create Create instructio instructions ns and Standard Standard Operat Operating ing procedure proceduress e. Sustain... Sustain... Maintain Maintain the the above above through through support support and encourage encouragement ment 4. Reducing Reducing Lead Time at every every stage stage of every every process process through through a. Visual Visual Contro Controls ls using using Kanb Kanban an card cardss  b. Receiv Receiving ing mater material ial just just in in time time (JIT). (JIT). c. Line Balanci Balancing ng to avoid avoid up piling piling up of material material at any stage. stage.

d. Studying Studying the the flow flow of material material or Value Stream Stream Mapping. Mapping. e. Total Productive Productive Maintenance Maintenance to to improve improve overall overall operat operation ion of the the equipment. f. Set up time reduction reduction using using SMED SMED (singl (singlee minute minute exchange exchange of dies ). ).

Lean manufacturing manufacturing is a management philosophy philosophy focuses on reduction of the seven wastes to improve improve overall customer value. Lean management (also known as Big JIT) is a philosophy of operations management that seeks to eliminate waste in all aspects of  aspects of firm’s production activities: human relations, vendor relations, technology and management of materials and inventory.

BY eliminating waste quality is improved, and automatically, production time and cost are reduced. To solve the problem of waste lean manufacturing has several tools at its disposal. All of these tools aim at reducing wastes, of one of several types, as far as  possible.

Some of the tools of lean manufacturing manufacturing which helps in inventory management management and control are:•

Just In time ( right amount in the right place at right time)

•

Kaizen ( continuous improvement process)

•

Kanban (pull production)

•

Single Piece Flow System

•

Gemba Walking

•

Virtual Storage

Lean Manufacturing can be achieved by implementing following tools:

Just in Time Concept: The basic philosophy behind JIT is that the firm should keep minimum level of inventory on hand relying on suppliers to furnish ‘stock’ ‘just in time’ as and when required. This is

in direct direct contras contrastt to the tradit tradition ional al invent inventory ory philos philosophy ophy which which emphas emphasize izess keeping keeping sufficient levels of safety stocks to ensure that production will not be interrupted. Thus JIT system benefits in two ways:•

By reducing the ordering cost. This is attempted by locating inventories supplies in convenient locations.

•

By reducing the safety stock . This is attempted by developing a strong relationship with suppliers and setting up restocking strategies that cut time.

Practical Implementation Just-in-time is implemented, nearly, at each and every stage of manufacturing/production in the plant. Stores Department and Fabrication Departments are the main users of this technique.

While manufacturing switchboards, earlier, for an order of say 1000 items in three months period, period, one part of the whole manufacturi manufacturing ng was done and than other steps took   place. So, inventory of material used to pile up. Also, the different parts used to lie scattered here and there. After After implem implement entati ation on of JIT, JIT, the process process is done such that that all the steps steps are taken simultaneously. So, material keeps moving. Moreover, provisions are made so that all the  parts of a product are kept together.

Procurement of packing cases is another good example of implementation of JIT concept in L&T. All the finished goods need to be packed in wooden packing cases (also known as crate packing cases). There are certain issues related to wooden packing cases: •

They are bulky and over-sized.

•

They have storing constraints.

•

Dryness of wood up to a specific point is allowed (if the wood gets drier, it  becomes very difficult to pierce nails in it).

So, in order to avoid all these problems, what best can be done is – as soon as the material is about to complete, the Final Assembly Department informs it to Packing and Purchase Purchase Department. Department. Now, packing and Purchase Department Department gets ready with their  wooden packing materials, just-in-time as the finished goods are received by them.

RECOMMENDATIONS: •

All the workers, especially those who are working in Fabrication Department, Stores Department and Purchase Department, must be given proper training regarding the practical implementation of JIT.

•

Any sort of delay between any two processes should be minimized as far as  possible. Any kind of idle time should not b e allowed.

•

Another point that must be kept in mind is that, right amount of material should  pass from one stage to the other. There is no need to pile-up materials, which are not going to be used immediately.

Kanban System The Japanese refer to Kanban as a simple parts-movement system that depends on cards and boxes/containers to take parts from one work station to another on a production line.

Kanban stands for Kan- card, Ban- signal. The essence of the Kanban concept is that a supplier or the warehouse should only deliver components to the production line as and when they are needed, so that there is no storage in the production area. Within this system system,, workst workstati ations ons locate located d along along product production ion lines lines only only produce produce/de /deliv liver er desire desired d components when they receive a card and an empty container, indicating that more parts

will be needed in production. In case of line interruptions, each work-station will only  produce enough components to fill the container and then stop. In addition, Kanban limits the amount of inventory in the process by acting as an authorization to produce more inventory. Since Kanban is a chain process in which orders flow from one process to another, the production or delivery of components are pulled to the production line. In contrast to the traditional forecast oriented method where p arts are pushed to the line. The Kanban method described here appears to be very simple. However, this is a "visual

record" procedure.

Figure 8 :- Kanban System Advantages of Kanban Process •

A simple and understandable process

•

Provides quick and precise information

•

Low costs associated with the transfer of information

•

Provides quick response to changes

•

Limit of over-capacity in processes

•

Avoids overproduction

•

Is minimizing waste

•

Control can be maintained

•

Delegates responsibility to line workers

"Kanban represents an efficient tool to continuously rationalize the production process and find the source of problems". Since the circulation of Kanban will stop if there is a   pro produ duct ctio ion n prob proble lem m on line line,, it is easy easy to both both spot spot and and corr correc ectt the the prob proble lem m instantaneously.

PRACTICAL IMPLEMENTATION: IMPLEMENTATION: Kanban is implemented in Stores Department at L&T Faridabad. For this, a Kanban card is attached with each and every item present in the Stores Department. Each Kanban carries all the relevant information about the item, which is useful in estimating its requirements. A typical Kanban card bears following information:

CAT NO.: .........................................................................................  ......................................................................................... DESCRIPTION: ..............................................................................  .............................................................................. INITIATOR: ....................................................................................  .................................................................................... BUYER: ...........................................................................................  ........................................................................................... CONSUMPTION: ...........................................................................  ........................................................................... MAXIMUM LEVEL: ......................................................................  ...................................................................... MINIMUM LEVEL: ........................................................................  ........................................................................ REORDER LEVEL: ........................................................................  ........................................................................

Figure 4 – Kanban Card

RECOMMENDATIONS: •

CAT numbers should be different, that is no two CAT numbers should be same.

•

To make it more effective, no one should be permitted to take material out of or to  put back the material in the bin unless and until he has updated the entries on the Kanban card.

•

The data mentioned on the card attached with each bin should be updated as soon as some material is issued from that bin.

•

Reorder level should always be kept in mind so that as soon as that point is reached, the bin should again be filled with the same material up to its optimum capacity.

KaiZen KAIZEN: For continuous improvement: Kaizen literally literally stands for  ‘Kai’-change and ‘Zen’-to become good. The Kaizen Kaizen   philos philosophy ophy lies lies behind behind many many Japane Japanese se manage management ment concept conceptss such such as Total Total Qualit Quality y Control, Quality Control Circles, small group activities, labor relations, etc. Kaizen is based on a Five-S framework: a. Seiri - Tidiness

 b. Seiton - Orderliness c. Seiso - Cleanliness d. Seiketsu - Standardized clean-up e. Shitsuke - Discipline

Key elements of Kaizen are: •

Quality - Quality circles

•

Effort - Suggestion for improvement

•

Teamwork - Involvement of all employees

•

Willingness - To change

•

Communication

•

Improved morale

•

Personal discipline

The Kaizen method of continuous incremental improvements is an originally Japanese management concept for incremental change. The Kaizen cycle has four steps: •

Establishing a plan to change whatever needs to be improved

•

Carrying out changes on a small scale

•

Observing the results

•

Evaluating both the results and the process and determining what has been learned

BENEFITS OF KAIZEN: a. It improves safety.  b. It improves efficiency of workers as well as the whole plant. c. It improves the dedication of the employees as it keeps them safe from any kind of  mishap. d. It makes the plant well-organized.

PRACTICAL IMPLEMENTATION: There is a

Gang Punching Machine in the fabrication department. Earlier, it had a

manu manual al syst system em for for movi moving ng the the shee sheet, t, to be punc punche hed, d, insi inside de the the mach machin inee and and simultaneously moving a knob. Once, a worker accidentally cut his fingers in the process of Gang Punching. To avoid any further mishaps, a wooden block was placed in the machine which could be  pushed to move sheets inside the machine and the need for pushing the sheet inside the machine by hand was avoided. This ensured the safety of the employees working at the machine. Apart from this, there are many big and small changes made, like inclusion of stools to help workers in cutting sheets,

pathways, separate parking bays for keeping keeping trolleys,

posters to provide information to employees regarding their safety, etc. RECOMMENDATIONS: •

It should be checked that all the Kaizen principles followed are being implemented properly.

•

Employees should be asked to implement Kaizen principle on their own and their valuable suggestions should be kept in mind, and as far as possible, should be implemented.

•

Another point that must be kept in mind is that Kaizen need not be a big change; it can be as small as keeping a chart of most frequentl frequently y used telephone telephone numbers numbers near your desk, desk, to big changes like replacin replacing g a number of old machines machines with a multi-tasking/many-in-one machine

Single piece flow system To beco become me lean, lean, comp compan anie iess have have to crea create te conti continu nuou ouss flow flow wher whereve everr appl applic icab able le..

Shortening the elapsed time from raw materials to finished goods leads to the best quality, lowest cost, and shortest delivery time. Creating flow exposes inefficiencies that demand immediate immediate solutions. solutions. Everyone Everyone concerned concerned is motivated to fix the problems problems and inefficiencies because the plant will shut down if they don't.

Flow means that a customer order triggers the process of obtaining the raw materials needed needed just just for that custom customer' er'ss order. order. The raw materi materials als then then flow flow immedi immediatel ately y to supplier supplier plants, plants, where workers immediately immediately fill the order with components, which flow immediately to a plant, where workers assemble the order, and then the completed order  flows immediatel immediately y to the customer. customer. The whole process should should take a few hours or days, rather than a few weeks or months.

There are, Various steps involved in production of any item at L&T FSW plant. Every second step acts as a customer to the previous step. Each step depends on its immediate  predecessor for performing its function. A problem/delay at any one or more of the steps will lead to a halt in the production  process. So, each and every employee involved at different stages of the production   process is thoroughly trained, and is held responsible for his part in the production  process. The production process starts with planning  with planning , where it is decided what is to be  produced  produced in the next one month or so. After this, a blue-print blue-print of the products is made in the  programming  stage. stage. A comput computeri erized zed design design is made made by using using variou variouss kinds kinds of   programming softwares available with the plant. Now, the  punching  process  punching  process on metal sheets and other items starts followed by bending  and drilling/tapping . To make the   product product attractiv attractivee and easy-to-us easy-to-use, e,   powder coating  coating  is done. done. After After that, that,  painting  of  differ different ent parts parts takes takes place. place. Finall Finally, y, differ different ent parts parts are assembled  toge togeth ther er to get get theproduct as desired by the customer. Thus, the layout of company should be such that all these processes should should be done in a continuous manner 

Advantages of single piece flow system Quality . It is much easier to build in quality in one-piece flow. Every operator is an

inspector and works to fix any problems in station before passing them on. But if defects do get missed missed and passed on, they will be detected detected very quickly and the problem problem can be immediately diagnosed and corrected.

 Higher Productivity Productivity . In a one-piece-flow cell, we can quickly see who is too busy and

who is idle. It is easy to calculate the value-added work and then figure out how many  people are needed to reach a certain production rate.

Gemba Walking Gemba means Actual Place. Instead of relying on reports to to run a plant or company, the manager should put on some walking shoes and "go and see" at the "actual place", whether its a factory or a store. This Practice is also followed in L&T.

Virtual Storage This is another technique of effective inventory management. Here the supplier is asked to open their stores stores or warehouses warehouses within within the premises premises of company and as and when the material is required an order is placed to the supplier and the suppliers of the godown deliver the goods to the company with the copy of invoice.

So, virtual storage helps to receive timely delivery of inventory as the goods are lying in the godown and are issued as and when required.

However, this practice is not followed in L&T.

CASH MANAGEMENT Cash is the most liquid current asset. It is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e. inventory and receivables get eventually converted into cash. This clearly underlines the significance and essence of 

cash management. Cash can be defined in many ways, it’s not only the money in hand or bank, it is much more than that.

Cash includes: •

Currency

•

Cheques

•

Drafts

•

Demand deposits

•

Marketable securities

•

Time deposits

NEED OF CASH: Cash, of all types, acts as a reserve pool of liquidity that provides cash quickly, as and when needed. They also provide a short-term investment outlet for excess cash and are also useful for meeting planned outflows of funds.

The major reasons of keeping cash are:

•

Transaction motive –  this refers to the holding of cash to meet routine cash requirements

•

Precautionary motive –  these refer to the cash balances held in reserve for  random and unforeseen fluctuations in cash flows

•

Speculative motive –  it refers to the desire of a firm to take advantage of  opportunities which present themselves at unexpected moments

•

Compen Compensati sating ng motive motive –  usuall usually y banks banks ask client clientss to mainta maintain in a minimu minimum m  balance of cash with them (bank). Since this balance can not be utilized by the firms for transaction purposes, the banks themselves can use the amount to earn a return. Such balances are compensating balances.

OBJECTIVES OF CASH MANAGEMENT: The basic objectives of cash management can be classified majorly in the following three types:

a.

To meet the cash disbursement disbursement needs (payment schedule) – these include payments

to vendors as well as salaries to employees etc.

 b.

To minimize funds committed to cash balances – this is important as cash which is

lying idle is of no use to the firm

c.

To synchronize inflows and outflows of cash – an excess of either inflow or outflow

may be detrimental to the growth of the company.

COST OF HOLDING CASH: Cash management has some costs associated with it.

No earning power - Irrespective of the form in which cash is held as an asset, it has no earning power. pow er. That is, cash does not earn any return.

Depreciation cost - Cash keeps lying idle, without earning anything; in fact it keeps depreciating with time.

BENEFITS OF CASH MANAGEMENT: Some of the major benefits of cash management are: a. To prevent insolvency or o r bankruptcy arising out of inability of a firm to meet its obligations.  b. The relationship with bank is not strained. c. It helps in fostering good relations with trade creditors and suppliers of  raw materials, as prompt payment may help their own cash management.

d. A cash discount can be availed if payment is made within the due date e. It leads to a strong credit rating f. To take advantage of favorable business opportunities that may be available periodically g. The firm can meet unanticipated cash expenditure within a minimum of  strain during emergencies (strikes, fire, new market strategy by competitor  etc.)

Cash is the most liquid current asset. It is of vital importance to the daily operations of   business.

While the proportion of assets held in the form of cash is very small, its

efficient efficient management is crucial crucial to the solvency solvency of the business. Therefore, planning cash and controlling its use are very important tasks. Cash budgeting is a useful device for this purpose.

Cash Budget Cash budget basically incorporates estimates of future inflows and outflows f cash over a projected short period of time which may usually be a year ,half or a quarter year. Effective cash management is facilitated if he if  he cash budget is further broken down into month, week or even on daily basis. daily basis.

There are two components of cash budget

(i) cash inflows and (ii) cash outflows. The main sources for these flows are given hereunder:

Cash Inflows (a) Cash sales (b) Cash received from debtors (c) Cash received from loans, deposits, etc (d) Cash receipt of other revenue income (e) Cash received from sale of investments or assets.

Cash Outflows (a) Cash purchases (b) Cash payment to creditors (c) Cash payment for other revenue expenditure (d) Cash payment for assets creation (e) Cash payment for withdrawals, taxes (f) Repayment of loans, etc.

A suggestive format for ‘Cash Budget’ is given below: Cash Budget of M/s… Particulars

Months January

March Estimated cash inflows

Feburary

----------------------

I. Total cash inflows

Estimated cash outflows ----------------------

II. Total cash outflows

III. Opening cash balance

IV. Add/Deduct surplus/Deficit during the month (I–II)

V. Closing cash balance (III–IV)

VI. Minimum level of cash Balance

VII. Estimated excesses or shortfall ofcash (V–VI)

How L&T Manages its cash? Managing cash is very essential for the business since it is crucial for solvency of  business. L&T uses various techniques to manage its cash operations.

Sweeping Facility

Rather than keeping cash at different different locations, locations, the collections collections and disbursals of all the loca locati tion onss are are reco record rded ed and and the the cash cash is kept kept at one centra centrall loca locati tion on as it is quite quite cumbersome for an organization to maintain records of collection and disbursals of cash of its different offices. It also involves a number of extra personnel, and is certainly a waste of work force, time and money. Also, the money lying scattered with various offices is of no use as such, because it is simply lying idle. A better option will be to deposit this cash into a bank, having central banking facility, where it can be invested to earn some profit. For this a suitable multi-locational bank is selected, preferably the one, which has branches in all the locations where the different offices of the company are located. Moreover, if all the money is kept at one place, it will definitely amount to a huge sum. This huge sum will make it easier for the company to negotiate with the bank regarding the interest rate which L&T is supposed to pay for availing such facility.

BENEFITS OF SWEEPING FACILITY: It’s a win-win situation for both – the company and the bank. Both of the parties are  benefited by this technique.

 Benefits for the company:

a. Gets a chance to negotiate with the bank over the interest rate which L&T is supposed to pay to the bank.  b. This huge sum can be invested in business also, which will again prove to  be profitable.

 Benefits for the bank:

a. Bank charges the company according to the services rendered by it.  b. Bank can use these funds for its daily business purposes.

PRACTICAL IMPLEMENTATION:

Sweeping Facility service is a prominent tool used for proper cash management at L&T. For this purpose L&T has selected Standard Chartered Bank because of its intensive reach in nearly each and every corner of the country, especially in Delhi, Mumbai, Powai and all other places where L&T offices are located and also because it has the facility of  Central Banking, which is a prerequisite for a bank to offer such service. What happens is – all the money is deposited in one account. Now, as and when a center  in any particular region requires some money, it withdraws the same with the bank . Later, the bank receives the same amount from the central account of L&T. All the financial decisions regarding the selection of bank, its location and interest rate etc are made at the Head Office of L&T – Treasury Department, L&T Mumbai. All the offices are allowed to make cash collection and disbursals through a common  bank account of L&T at Standard chartered Bank, Mumbai.

Day Light Limit Every Branch of L&T maintains maintains two accounts one having the sweeping facility facility and one not having. This day light limit is used where sweeping facility is not available. Here,  based on the past experience or on the basis of current business transactions daily cash flows are estimated i.e. how much cash inflow will be there and how much cash outflow will be there and based on this estimation that much amount is maintained in the account.

RECOMMENDATIONS:  Now-a-days most of the banks provide central banking facility, so the main criterion of selection of bank should be the interest rate it is charging for rendering such services (it should be as low as possible.

Conclusion The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximising

the interest earned. However, such cash may more appropriately be "invested" in other  assets or in reducing other liabilities. When considering these techniques and strategies of Working capital, departments need to recognise that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For  example, some departments have significant inventory levels; others have little if any inventory. Furthermore, working capital management is not an end in itself. It is an integral part of  the the depa depart rtme ment nt's 's over overal alll mana manage geme ment nt.. The The need needss of effi effici cien entt work workin ing g capi capita tall management must be considered in relation to other aspects of the department's financial and non-financial performance.

Refrences i.

Khan, Khan, M. M. Y., and Jain Jain P. K., K., ‘Fin ‘Financ ancial ial Manag Manageme ement’ nt’,, Tata Tata McGra McGraw w Hill, Hill, New Delhi, 2004.

ii.

Pandey Pandey I. I. M., ‘Finan ‘Financia ciall Manage Managemen ment’, t’, Vika Vikass Publi Publishi shing ng House House Pvt Pvt Ltd, Ltd, New New Delhi, 2005.

iii. iii.

Rustog Rustogi, i, R. P. P. , ‘Fina ‘Financi ncial al Manag Manageme ement’ nt’,, Galgot Galgotia ia Publi Publishi shing ng House House,, New Delhi,2006

iv. v.

www.l&t.com www.google.com