“working capital management and stores inventory analysis”

1

“Working Capital Management

and Stores Inventory Analysis” At HINDALCO Industries

Hirakud Smelter

In partial fulfillment of the requirements for

the Post Graduate Diploma in Business Management.

INDIAN BUSINESS ACADEMY

Submitted by:

ARUN KUMAR SWAMI

FP 57/ 025

2

Hindalco Industries Limited

Hirakud Smelter

3

CERTIFICATE

This is to certify, that Mr. Arun Kumar Swami is a bonafide student of

Indian Business Academy, Bangalore and is presently pursuing a Post

Gradua te Diploma in Business Management.

Under my guidance, he has submitted his project report titled “Working

Capital Management and Stores Inventory Management at HINDALCO

INDUSTRIES LTD. Hirakud, Smelter” in partial fulfillment of the

requirement for the summer internship project during the Post Graduate

Diploma in Business Management.

This report has not been previously submitted as part of another degree or

diploma of another Business School or University.

Mr. Manish Jain, CEO ,


Lakshmipura, Thataguni Post

Kanakpura Main Road,

Bangalore – 560 062

INDIA

Tel: +91-80-28435931/34

Fax: +91-80-28435935

4

CERTIFICATE



Graduate Diploma in Business Management.

Under my guidance, he has submitted his project report “Working Capital

Management and Stores Inventory Management at HINDALCO






Prof. Subhas Sharma, Dean,





INDIA

Tel: +91-80-28435931/34

Fax: +91-80-28435935

5

CERTIFICATE



Graduate Diploma in Business Management.

Under my guidance, he has submitted his project report “Working Capital

Management and Stores Inventory Management at HINDALCO






Prof. K Subramaian, Professor,





INDIA

Tel: +91-80-28435931/34

Fax: +91-80-28435935

6

DECLARATION BY THE STUDENT

I, Arun Kumar Swami, hereby declare that this project report titled

“Working Capital Management and Stores Inventory Analysis”,

submitted in the partial fulfillment of Post Graduate Diploma In Business

Management course at Indian Business Academy is an original work carried

out by me at Hindalco Industries Limite d, Hirakud Smelter and has not

been submitted to any other University / Institute for a degree / diploma

course as a project earlier.

Arun Kumar Swami FP 57/025

Indian Business Academy, Bangalore.

7

ACKNOWLEDGEMENT

I would like to thank Indian Business Academy and Hindalco Industries

Limited for providing me such a great opportunity, which has been a good

learning experience of how corporate world functions.

I am thankful to Mr. Abhijit Pati, Vice President, Hindalco Industries Limited,

Hirakud Smelter, for considering me capable of doing this project.

I thank Mr. Sailesh Pati, Manager Accounts and Mr. Anil Agarwal, Manager

Materials, my project guides, for their continuous guidance and support

throughout the duration of this project.

Last but not the least; I am grateful to Prof. Asha Nadig my mentor at IBA for

her inspiration and continual support.

Arun Kumar Swami FP57/025

Indian Business Academy, Bangalore.

8

Table of Contents Title Page No.

1. Executive Summary 1

2. Aluminium Outlook 4

2.1 Aluminium Global Outlook 4

2.2 Aluminium Sector Domestic Outlook 5

3. Hindalco An Industry Leader 7

3.1. Hindalco’s Vision 8

3.2. Hindalco’s Mission 8

3.3. Hindalco’s Values 8

3.4. Some Recent Milestones 9

3.4.1 Mergers and Acquisition 9

3.4.2 Joint Ventures 9

3.4.3 MOUs 10

4. Management and Business Organization 11

5. Hindalco’s Aluminium Business 13

6. Financial Highlights 2005-06 15

7. Smelter at Hirakud 17

7.1. Products 17

7.2. Different Sections of Smelter 17

8. Cost Structure 20

9

Title Page No.

9. Working Capital Management At Hirakud Smelter 22

9.1. What Is Working Capital? 22

9.2 Concepts of Working Capital 23

9.3. Working Capital Requirements 24

9.4 Working Capital Management 25

9.5. Approaches to Working Capital Management 26

9.5.1 Approach 1 26

9.5.2. Approach 2 28

10. Store s Inventory Analysis At Hirakud Smelter 32

10.1. Music 3D System 32

10.2. Inventory Classification 32

10.3. Parameters of Classification 34

10.4. Phase 1 37

10.4.1. Findings and Suggestions 38

10.5. Phase 2 41

10.5.1. Findings and Suggestions 42

11. Exhibits 47

12. Bibliography 64

10

1. Executive Summary

Aluminium Outlook:

The global aluminium industry witnessed a healthy growth backed by strong demand

from China, US and other Asian economies. In 2005, the world aluminium metal

prices increased by 6%. The domestic market has been growing at a rate in excess of

10%. The sustained strong growth in the sector could be attributed to the robust

performance of the Indian economy. The key consumer industries for aluminium are

electrical (power), transportation, consumer durables, packaging and construction.

Domestic aluminium companies have a significant exposure to the exports market.

Indian companies have the competitive advantage of being the lowest cost producers

of aluminium. To cater to the opportunities in the global market major aluminium

producers increasing their capacities through mergers, joint ventures and Greenfield

projects.

Hindalco:

The business of Hindalco Industries Limited is structured into two strategic

businesses — aluminium and copper — and is an industry leader in both these

segments. The company has a significant market share in all the segments in which it

operates.

Indian Aluminium Company Limited became a part of the Aditya Birla Group in June

2000, besides this Hindalco acquired a controlling stake in India Foils ltd. In April

2005, the company entered into MOUs with the Orissa and Jharkhand governments

for setting up a Greenfield alumina facility and aluminium facility in the states.

Financial High lights:

In the financial year 2006, Hindalco recorded highest ever turnover of Rs.11396.5

crore this is 20% more than last years. The aluminum segment contributed 53% and

copper segment contributed nearly 47 % to total net sales and revenue of Hindalco.

The net profits rose by 25% to Rs.1655.5 crore as compared to Rs. 1329.4 crore in FY

05. However the gross profit margin and the net profit margin are showing a declining

trend they have reduced from 49% and 30% in 2000-01 to 23% and 15% in 2005-06.

11

The company has posted its highest ever quarterly revenues and profits during the

fourth quarter ended 31 March 2006; the performance in the last quarter is a result of

steep increase in the aluminium prices world over.

Hirakud smelter:

The project was undertaken at Hindalco’s Hirakud Smelter. Hirakud smelter was

established in the year 1958 by Indal (now merged with Hindalco). It produces

aluminum metal by electrolytic process by reducing the alumina adopting the

Soderberg HSS Technology. The smelter plant has extended its capacity from

65,000tpa to 146000 tpa. In the last financial year the smelter operated at more than

100% capacity.

The products of Hirakud smelter can be classified into two major categories viz, Hot

Metal and Anode Paste. The hot metal products are transferred to sister concerns at

Belur, Alpuram and Taloja. The anode paste is produced for captive consumption and

some percentage is also sold to third parties.

Alumina is the major raw material and cos t component. It is procured from sister

concerns at Muri (70%) and Belgaum (30%). Nearly 2 tonnes of alumina is required

for producing 1 tonne of aluminium metal.

Power is the second most important input in smeltering. Hirakud smelter has its own

captive power plants to meet the power requirement. The capacity of the power plants

is being increased to 317.5 MW from 100 MW.

Working capital management:

Three months, namely August 05, December 05 and March 06, were selected on a

random basis for this analysis . The working capital fluctuates with fluctuations in the

operating level. The current assets and current liabilities were analyzed. The

organization does not have significant direct sales and the major raw materials are

also not procured from third partie s, hence, there are no significant trade debtors or

trade creditors.

The current ratio for the three months were satisfactory at 1.7 for Aug’ 05, 3.5for

Dec’05 and 2.5 for March’ 06. The quick ratio was also satisfactory at 0.59 in Aug,

1.28 in Dec and 0.85 in March. The organization should try and keep the current ratio

close to 2 and quick ratio close to 1.

12

The major portion of investment in current assets is in Inventory. The inventory

consists of Raw materials, process stock, finished goods (Sales paste) and stores.

Around 63-66% of investment is in inventory. The organization should reduce this

investment by better material purchasing, handling and controlling. The raw

materials, process stock and finished goods directly depend on the production level.

But stores, that constitute 12-16 % of the total inventory, have no direct relation with

the production hence it should be kept as low as possible.

Stores inventory analysis:

The investment in stores at Hirakud smelter stood at Rs. 3.71 crores with close to

9000 items. Hindalco has SOP for its Purchasing and Stores department. Based on

this SOP the analysis was carried out using the MUSIC 3D system. Various inventory

techniques like ABC analysis, VED analysis, Lead time analysis etc. were used in this

ana lysis.

The analysis aimed at identifying those items in stores which are unnecessarily

blocking the capital, categorizing the stores and identifying the degree of control to be

imposed on each category of items. The analysis was carried on at two different

phases.

In the 1st phase of the analysis it was found that nearly 72% of the stores items

constituting 45% of the investment were non moving items. The items that should be

disposed off have been listed. This would bring down the inventory by 24% i.e. Rs

87.5 Lakhs. The 2nd phase categorized the items into 8 groups and suggested the

degree of control for each category. The report suggests the various strategies to be

followed to reduce the inventory level of the various categories of the items based on

the findings of the analysis.

13

2. Aluminium Outlook

2.1 Aluminium Global Outlook:

The global aluminium industry witnessed a healthy growth of nearly 10% in 2005.

According to CRU, global aluminium consumption grew at 5.9 per cent during 2005.

The strong demand trend is continuing with the primary consumption increasing by

6.2 per cent during the January-March quarter. Looking ahead, the demand is forecast

to grow at 6.2 per cent in 2006.

Strong demand for the metal from China and simultaneous improvement in

economies like the US and other Asian economies led to the strength in global

aluminium prices. China has been the largest contributor to this consumption increase,

with its investment-led growth model. There is also a significant demand in North

Amer ica, led by heavy truck and trailer production, aerospace, railcar and beverage

can segments. In addition, demand from the Middle East, Asia (excluding China,

Middle East and Japan), CIS and Eastern Europe continues to be healthy growing at

12 per cent dur ing the quarter.

The reported primary aluminium inventory data indicates stock consumption ratio at

6.7 weeks, which is close to historical lows. Inventories have declined considerably in

March as consumers have re-entered the market after a period of de-stocking.

Continued demand growth and low inventory levels make a case for aluminium prices

to remain strong.

This trend has continued well into the current fiscal with average international

aluminium prices for FY 06 (April-September) being higher by 8%.

In 2005, the world aluminium production increased by about 6.6%. Internationally,

the pattern of consumption is in favour of transportation, primarily due to large -scale

aluminium consumption by the aviation industry.

The per capita consumption of aluminium in India is abysmally low at less than 1 kg

as against nearly 25-30 kg in the US and Europe, 15 kg in Japan, 10 kg in Taiwan and

3 kg in China.

14

2.2. Aluminium Sector Domestic Outlook:

The Indian aluminium sector is characterized by large integrated players like

Hindalco and National Aluminium Company (Nalco). The other producers of primary

aluminium include Indian Aluminium (Indal), now merged with Hindalco. Bharat

Aluminium (Balco) and Madras Aluminium (Malco), the erstwhile PSUs, have been

acquired by Sterlite Industries. Consequently, there are only three main primary metal

producers in the sector namely Hindalco, Nalco and Sterlite. Hindalco has a market

share of around 47% (after merger of Indal) and Nalco’s share is 34% where as

Sterlite and others have a market share of 19%.

The domestic sector remains impressive, both in the immediate and the long term.

The market has been growing at a rate in excess of 10% and production of aluminium

has also increased by 6%. The market is expected to grow at a healthy rate in future as

well. The sustained strong growth in the sector could be attributed to the robust

performance of the Indian economy, which provided a boost to the aluminium user

industries like transportation, construction and electrical segments.

The key consumer industries in India for aluminium are electrical (power),

transportation, consumer durables, packaging and construction. The electrical (power)

sector has been the largest consumer of aluminium accounting for 44% of total

aluminium consumption. The demand from this sector is expected to increase on the

back of reforms in the sector. Government has taken various initiatives to create an

environment for increasing investments in this sector.

The automotive sector is the second largest user of aluminium. It consumes around

17% of total aluminium consumption. This sector has been growing at a pace of 16%

in last year and is expected to grow at a similar pace in future. India is fast becoming

a global hub of automobiles this will fuel the demand for aluminium further. Building

and construction and machinery sector constitute other users of aluminium.

15

Automotive sector17%

Power sector44%

Construction and others

39%

Figure 1

Domestic aluminium companies have a significant exposure to the exports market.

Thus on hopes of the sustenance of the current recovery in world economies and the

bright prospects on the domestic front, major aluminium producers have been

increasing their capacities since the last couple of years.

Entry barriers to the industry are high mainly because of the large capital costs of an

integrated plant. Also, the industry is very power- and technology-intensive.

Production costs and product mix are the basis of competition in the industry.

Companies that have highly integrated production facilities including captive mines

and power plants as well as a product mix that leans towards value-added and semi-

fabricated products have an advantage over other manufacturers. In fact, integrated

aluminium manufacturers who use aluminium ingots produced in-house to

manufacture value-added products derive the maximum benefit from forward

integration since they can then take advantage of variations in aluminium prices.

High levels of operating efficiencies and capacity utilisation coupled with captive

power sources are the key determinants of profitability. Access to captive power,

cheap labour and proximity to abundant supply of raw material - bauxite have helped

make India one of the lowest cost aluminium producers in the world.

16

3. HINDALCO AN INDUSTRY LEADER

Hinda lco Industries Limited, a flagship company of the Aditya Birla Group, is

structured into two strategic businesses — aluminium and copper — and is an

industry leader in both these segments. A non-ferrous metals powerhouse, close to

global scale, it ranks among India's top 10 companies in terms of market

capitalizations.

Hindalco commenced its operations in 1962 with an aluminium facility at Renukoot

in the eastern part of Uttar Pradesh. Over the years, it has grown into the largest

integrated aluminium manufacturer in the country.

The company has a significant market share in all the segments in which it operates. It

enjoys a domestic market share of 47 per cent in primary aluminium, 63 per cent in

rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in

wheels. The company enjoys around 90% market share in alumina chemicals i.e.

specialty alumina and hydrated alumina products.

The company exports about 17 per cent of its total sales volume of aluminium and

alumina chemicals to over 30 countries covering North America, Western Europe and

the Asian region.

Birla Copper, Hindalco's copper division at Dahej in Gujarat, also enjoys a leadership

position in India. Within three years of its commissioning it has a domestic market

share of over 40 per cent. It has also been successful in the export markets of the

Middle East, Southeast Asia, China, Korea and Taiwan.

17

3.1.

Hindalco’s Vision

To be a premium metals major, global in size and reach, with a passion for excellence.

3.2.

Hindalco’s Mission

To relentlessly pursue the creation of superior shareholder value by exceeding

customer expectations profitably, unleashing employee potential and being a

responsible corporate citizen adhering to our values.

3.3.

Hindalco’s Values

Integrity

Honesty in every action.

Commitment

On the foundation of integrity, doing whatever it takes to deliver, as promised.

Passion

Missionary zeal arising out of an emotional engagement with work.

Seamlessness

Thinking and working together across functional silos, hierarchy levels,

businesses and geographies.

Speed

Responding to stakeholders with a sense of urgency.

18

3.4. Some recent milestones:

3.4.1. Mergers and Acquisitions:

• A pioneer among the country's aluminium manufacturers, Indian Aluminium

Company Limited (Indal) became a part of the Aditya Birla Group in June

2000 as a subsidiary of Hindalco Industries Limited.

Hindalco paid Indal’s parent, Alcan of Canada, Rs 738 crore for its 54.6 per

cent stake in Indal @ Rs 190 per share, which is at a premium of Rs 70 over

Indal’s market price on 23 March 2000. It also made a public offer for a

further 20 per cent stake, which will take the total price to Rs 1,008 crore. That

makes it the biggest all-cash takeover deal in corporate India so far.

As per the scheme of arrangement announced by the board of directors of

Hindalco and Indal on 23 August 2004, all the business undertakings of Indal

other than the aluminium foil business at Kollur in Andhra Pradesh were to be

transferred to Hindalco Industries Limited by way of a demerger. The de -

merged units of Indal came under the corporate identity of Hindalco Industries

Limited. With this acquisition, Hindalco's market share in primary aluminium

production increased to 47 per cent.

• Hindalco also acquired a controlling stake in India Foils, which belonged to

the Khaitan Group. This acquisition was aimed at deepening its penetration in

the downstream segment.

• In FY 2002, Hindalco acquired the copper business of Indo Gulf Corporation

Limited, a Group company. Over the last two years, with a strategic intent to

achieve vertical integration, the copper business of Hindalco has acquired two

captive copper mines in Australia — Nifty and Mt. Gordon.

3.4.2. Joint Ventures:

Utkal Alumina International Ltd: The joint venture company is a subsidiary where

55 per cent equity is held by Hindalco while the balance is held by Alcan Inc. of

Canada. The company has proposed to set up an alumina refinery in Doragurha in

the Rayagada district of Orissa, to produce 1-1.5 million tonnes per annum (tpa)

of alumina, sourcing bauxite from the rich reserves at Baphlimali in Rayagada.

19

3.4.3. MOUs:

In April 2005, the company entered into MOUs with the Orissa and Jharkhand

governments for setting up a Greenfield alumina facility and aluminium facility

respectively, in the states. These include:

• In the state of Orissa the company has proposed to set up an integrated

Greenfield aluminium project with a capacity to produce a million tonnes per

annum of alumina and 260000 metric tpa of aluminum. This will be supported

by a 650 MW dedicated power plant backed by dedicated coal mines. The

MOU with Government of Orissa for land, water, bauxite, coal mines and

other necessary approvals has been entered.

• In the state of Jharkhand the company is considering establishment of a

smelter with a capacity of 325000 tpa backed by 750 MW power plant.

These recent milestones achieved by Hindalco will help it in increasing its market

share in Indian domestic market as well as in the global market. Acquiring Indal has

increased Hindalco’s market share by 7% from 40% to 47%. Similarly MOUs with

the government of Orissa and the government Jharkhand aims at achieving cost

efficiency through optimum utilization of vast resources in these states. These

strategic steps have been taken in accordance to Hindalco’s vision to be a metal major

and a global player.

Besides these milestones Hindalco is also expanding its production capacities. These

expansion plans cover almost all existing plants of Hindalco’s aluminium as well as

copper business divisions. To name a few the Renukoot integrated aluminium plant is

set to increase its smelter capacity by 1 lakh tpa to 3.42 lakh tpa, the alumina refining

capacity by 2.10 lakh tpa to 6.60 lakh tpa, and a matching increase in captive power

generation facilities by 150 MW to 769 MW , Muri plant is increasing alumina

capacity to 5 lakh tonnes per annum, similar expansion is going on at Hirakud

Smelter.

20

4. Management and business organization

The chairman of the company’s board of directors is Mr. Kumar Mangalam Birla. Mr.

Debu Bhattacharya is the Managing Director of the company. The other members of

board of directors are: Mrs. Rajashree Birla, Mr. A. K. Agarwala, Mr. C. M. Maniar,

Mr. E. B. Desai, Mr. S. S. Kothari, Mr. M. M. Bha gat, Mr. K. N. Bhandari.

Mr S. Talukdar is the Group Executive President and Chief Financial Officer.

Company Secretary of Hindalco Ind. Ltd is Mr. Anil Malik.

The Aluminium and power segment of Hindalco’s business has following persons

holding important positions

• Mr Ratan K Shah, Chief Operating Officer (COO), aluminium and power,

Renukoot

• Mr S. M. Bhatia, COO, Indal units

• Mr. S. K. Maudgal, Chief Marketing Officer, primary metal, rolled products

and extrusions

• Mr Sumit Banerjee, Business Head, foil and alloy wheels

• Mr Shankar Ray, Business Head, chemicals

Mr. G. S. Khurana, Executive President, Renusagar power plant.

Hindalco’s organization is structured with autonomous business division. Each

division is responsible for its own production, development and marketing. Other

important functions are centralized viz. corporate finance, human resource

development, corporate planning, engineering projects and material management legal

and investor’s services, infector and corporate affairs.

The head of this business and function along with the managing director operation

constitute the management committee headed by the president and CEO. The

Hindalco management committee formulates strategic plans and polices. The

committee monitors and reviews the implementation of the company’s annual plan.

21

Figure 2

The shareholding pattern of Hindalco is shown in figure 2. The company

being a public limited company majority of the shares is under the control of

individuals. This constitutes around 31% of the total share capital of the company.

The promoters of the company hold nearly 26% of the total shares of the company.

Out of the remaining 44%, banks and financial institution have control on 17% equity,

foreign institutional investors have 21% and other private corporate bodies hold

nearly 5 % of the total equity shares.

Shareholding pattern

Individuals31%FII

21%

Promoters26%

Private corporate bodies

5%

Banks and financial

institutions17%

22

5. HINDALCO’S ALUMINIUM BUSINESS:

Hindalco is one of Asia's largest producers of primary aluminium and one of the most

cost-efficient producers globally. In India, Hindalco enjoys a leadership position in

specialty alumina, primary aluminium and downstream products. Hindalco’s

aluminium segment is vertically integrated through all stages of the business- form

bauxite, mining, alumina refining, power generation, and smeltering to semi-

fabricated products of sheets foil and extrusions as well as aluminum scrap recycling.

Hindalco units are spread all over the country.

All Hindalco units are ISO 9001:2000 and 14001 certified, and several have attained

the OHSAS 18001 — the occupational health and safety certification. On the export

front, the company has been accorded a Trading House status by the Indian

government.

Alumina Refineries

Smelters

Extrusions

Sheet Plant

Foil plantWheel Plant

Captive Power Plant

Coal Mine

Bauxite Mine

AluminiumBusiness

Figure 3

23

Hindalco aluminium business is broadly divided into off stream chemical

including, mining, and metals, power and down steam sheets, foils and packaging and

extrusions.

5.1. Production capacities

Division Capacity Location

685,000 tpa (Renukoot)

110,000 tpa (Muri)

Alumina chemicals 114,5000 tpa

350,000 tpa (Belgaum)


65,000 tpa (Hirakud)

Primary aluminium 424,000 tpa

14,000 tpa (Alupuram)

13,700 tpa (Renukoot) Extrusions 21,700 tpa



45,000 tpa (Belur)

Rolled products 170,000 tpa

45,000 tpa (Taloja)

40,000 tpa (Renukoot) Wire rods 50,000 tpa


5,000 tpa (Silvassa) Aluminium foil 11,000 tpa

6,000 tpa (Kalwa)

Aluminium wheels

300,000 wpa Silvassa

24

6. Financial Highlights 2005 -2006

In the financial year 2006, Hindalco recorded a turnover of Rs.11396.5 crore, (Exhibit

1) which is 20% more than last years, which was Rs 9523.1 crore. This is highest ever

turnover recorded in the history of Hindalco. The net profits rose by 25 per cent to

Rs.1655.5 crore as compared to Rs.1329.4 crore in FY 05.

The net sales and operating revenue of Hindalco has been on an increasing trend. The

net sales and operating revenue has increased from Rs.2275.4 in 2000-01 to

Rs.11396.5 in 2005-06. (Exhibit 2 and 3)

The profits have grown in line with the increase in sales. However the gross profit

margin and the net profit margin are showing a decreasing trend. (Exhibit 4 and 5).

The profit margins were very high during 2000-01 and 2001-02; gross profit margin

and net profit margin were nearly 49% and 30% in both these years. In the financial

year ended 31/3/2005, the Gross profit margin has decreased to 23.02% in FY 05-06

from 24.96% in FY 04-05. The net profit margin has improved to 14.53% in FY 05-

06 as compared to 13.96 in the FY 04-05. But it is still very low as compared to the

previous 5 yrs.

Net sales and operating revenue Hindalco in the last four quarters has shown an

increasing trend (exhibit 2). It stood at Rs. 22,078 crore in the first quarter ended 30th

June 2005 which was 7% more as compared to the same period in FY 05. The net

sales and operating revenue were Rs. 26,608 crore and Rs. 28,737 crore in second and

third quarter respectively which were 6% and 15% less than last year. (Exhibit 6 and

7)

The company has posted its highest ever quarterly revenues and profits during the

fourth quarter ended 31 March 2006, net sales and operating revenues for the quarter

grew to Rs.3,657.4 crore from Rs.2,515.6 crore last year. Net profit for the period

moved in line reflecting an increase of 40 per cent from Rs.448.5 crore to Rs.626.3

crore. The performance in the last quarter is a result of steep increase in the

aluminium prices world over.

25

Aluminium business revenues in the last quarter rose to Rs.1726.3 crore up by 18.5

per cent. The segment profit registered a growth of 61.2 per cent to Rs.713.1 crore as

compared to Rs.442.4 crore in the corresponding period of previous year.

Copper business revenues increased significantly from Rs.1059.2 crore to Rs.1,931.7

crore, up 82.4 per cent. The segment profit improved to Rs.120.1 crore as compared

to Rs.64.6 crore a year earlier, aided by the incentives available under the Target Plus

scheme for impressive export performance. (Exhibit 11 and 12)

The contribution of aluminium segment in the total revenue of Hindalc o is 53% and

that of copper segment is 47%. Last year nearly 55% of the total revenue came from

Aluminium segment and remaining 45% was from copper segment. This shows that

there has been an improvement in the performance of the copper segment.

26

7. Smelter at Hirakud

Hirakud smelter was established in the year 1958 by Indal (now merged with

Hindalco). It produces aluminum metal by electrolytic process by reducing the

alumina adopting the horizontal stud, Soderberg (HSS Technology). The smelter plant

has extended its capacity from 30,000tpa to 65,000tpa and it is further being increased

to 146000 tpa to compete in the aluminum market by reducing the cost of production.

In the last financial year the smelter operated at more than 100% capac ity.

7.1. Products:

The products of Hirakud smelter can be classified into two major categories viz, Hot

Metal and Anode Paste.

• Hot metal is casted into different forms such as rolling ingots, commercial

grade ingots and cast coils rolling Ingots. These products are sent to the sister

plants for further processing into consumer products. Like to Belur for rolling

into different sheet product, Alpuram extrusion for extruded products and

Taloja for foil and packaging.

• Anode Paste is produced mainly for captive use in the smelting of alumina

into aluminium. Still some percentage is produced for sales to third parties.

7.2. Different sections of Smelter:

The smelter at Hirakud operates in a synchrony of the following sections:

7.2.1. Carbon Plant:

Carbon plant produces anode paste for the electrolytic cell (pots), for captive

consumption and a nominal quantity of sales paste also. Raw materials are Calcined

petroleum coke, Coal tar pitch and the final product of the plant is Carbon paste. This

paste is also known as Soderberg paste.

Carbon paste is used as anode in the electrolytic cells (pots) for the extraction of

aluminum. This paste is sent to the pot rooms directly in the hot condition for captive

consumption. The paste produced for sales is casted into shapes like cylindrical or

cubical according to the customer’s requirement. The customers for carbon paste are

Ferro Alloy manufacturing companies.

27

Caster Plant

Carbon Plant

Services section

Other Engineering mechanical

Human resources

Pot room

Rectifier Station

Casting Plant

HIRAKUDSMELTER

Figure 4

7.2.2. Pot room:

In pot room alumina is electrolytically processed to produce molten aluminum. Its

raw materials are Alumina, Aluminium Fluoride, Cryolite, Calcium Fluoride and

Power.

Pot is a steel cell having a carbon cathode and anode, which is made up of carbon

paste. The alumina is processed using Soderberg (HSS Technology). The average

life of pot is 1500 days. The temperature of the pot is around 960oC. 54.4 KA and 4.5

V are maintained in a pot. All the raw materials are fed into the cell. The molten

metal produced is collected. A pot has a capacity to produces around 380 Kg/day.

7.2.3. Casting Plant:

Hot molten metal from pot rooms is brought in crucibles to the casting plant to cast

into pigs or ingots. The molten metal from the pot room are poured into two different

stationary furnaces having 20 metric ton capacity with oil fired burners. According to

28

the requirement alloying is done with different elements, like iron, copper, silicon

etc.Its’ products are Rolling ingot – 3500 Kg, 1-20 K ingot - 20 Kg and sow ingots.

There could be 1-20K ingot casting sometimes depending upon the requirement of the

customers

7.2.4. Caster Plant:

Hot Molten Aluminum from pot room is cast into thick coil of 5-6 mm in the caster

plant. Its main raw materials are hot molten Aluminum and alloying metals are Fe,

Cu, Si, and Mn etc. This department produces the 5-6 mm thick cast coil.

7.2.5. Rectifier Station:

In rectifier section Alternating Current (AC) is converted into Direct Current (DC)

because D.C is used for electrolysis of alumina to extract aluminum. For operation of

216 pots the voltage required is around 930 volts. The smelter for its functioning take

two 132 KV supply from Burla power House and it has its own power plant which

uses coal as fuel. The input current passes through 4 power transformers, which step

down the voltage to 11 KV.

7.2.6. Human Resources:

There are nearly 1000 employees working at Hirakud smelter. Out of these 200 are

staff employees and 786 are other employees. The Human resources department deals

with the all the affairs related to the employees.

7.2.7. Other services section includes the administration, accounts, traffic, purchases

and materials department.

29

8. Cost Structure

The total cost of operating of Hirakud smelter is composed of following costs: Total

Raw Material cost, Total Period Cash Cost, Non Cash Cost, Cost of Alumina and

Power Cost.

Nearly 40% of the total cost is the cost of Alumina. 32% of the total cost is

contributed by Power. Raw materials and cash cost contribute 13% and 11%

respectively. (Exhibit13)

8.1. Alumina:

Hirakud uses the most commercially mined aluminium ore bauxite (alumina), as it has

the highest content of the base metal. India has the fifth largest bauxite reserves with

deposits of about 3 bn tonnes or 5% of world deposits. Production of 1 tonne of

a luminium requires 2 tonnes of alumina while production of 1 tonne of alumina

requires 2 to 3 tonnes of bauxite. Hirakud sources nearly 70% of its annual alumina

requirement from its sister refinery plant located Muri and 30% from Belgaum

refinery. The distance from the source is the main reason behind this pattern. Muri

plant is nearer as compared to the Belgaum Plant. Acquiring maximum amount of

Alumina from Muri Plant will save transportation cost. (Exhibit 14)

Since Alumina is the largest cost component any increase or decrease in the cost of

Alumina will have a significant impact on the cost of Hirakud Smelter’s operations.

8.2. Power:

Power is amongst the largest cost component in manufacturing of the non-ferrous

metal, as the production process - smelting - involves electrolysis. Consequently,

manufacturers are located near cheap and abundant sources of electricity such as

hydroelectric power plants. Hirakud smelter has been set up in vicinity of Hirakud

Dam for this reason. Hirakud smelter also has a captive thermal power plant of 67.5

MW capacity which was set up in 1993-94. Currently the power plant is enhancing its

capacity to 317.5 MW to cater the needs of electricity for expanded capacity of

smelter plant. Hirakud power plant is first power plant in India to use clean coal

combustion technology using a circulating fluidized bed. This is considered most

environment friendly in the field of coal fired power generation. (Exhibit 15)

30

Nearly 99% of the total power demand is now being met by the Hindalc o’s own

Captive Power plants. The remaining 1% is sourced from the WESCO. The cost of

producing power in the captive power plants is less than Rs.1 per unit whereas the

cost of power taken from WESCO is more than Rs. 3 per unit. By using captive power

plants Hirakud is saving Rs. 2 per unit. Thus utilizing more and more power from

cative sources is advisable.

8.3. Other Raw Materials:

The other raw materials are: Anode Paste, Calcined petroleum coke, Coal tar pitch,

Aluminium Fluoride, Cryolite, Calcium Fluoride and alloying metals like iron,

copper, silicon and magnesium. These all together constitute nearly 13% of the cost of

production.

While Anode paste is produced in house, materials like Cryolite have to be imported

from USA and Switzerland. The remaining materials are purchased from suppliers

from nearby states like West Bengal, Andhra Pradesh, Jharkhand.

8.4. Cash cost includes all day-to-day expenses like payment of salaries and wages,

payment to third parties for raw materials, transportation charges and other petty

expenditures. Non-cash cost includes depreciation, normal loss in the production

process, etc.

31

9. Working Capital Management at Hindalco Industries Hirakud Smelter

For the purpose of analysis three months were selected randomly. The months were

March ’06, December ’05 and August ’05. Before going into details of the project one

should know what is working capital? What are the concepts of working capital?

9.1 What is working capital?

Working capital is the amount of funds necessary to cover the cost of operating the

enterprise. Funds are needed for short-term purposes for the purchase of raw material,

payment of wages and salaries, and other day-to-day expenses. It is that part of firm’s

capital, which is required for financing current assets such as cash, marketable

securities, debtors, and inventories. Funds thus invested in current assets keep moving

fast and are being constantly converted into cash and these cash flows again get

converted into other current assets. Hence it is also known as revolving or circulating

capital.

Working capital is lifeblood of a firm. It is very essential to maintain the smooth

running of the business. The benefits of maintaining adequate working capital are:

• Helps the firm to maintain its solvency

• Ensures smooth flow of various business activities

• Exploit favorable market conditions

• Enables the firm to face business crisis like depression in the market

• Helps in creating and maintaining goodwill of the firm

• Enables the firm to arrange loans and other short term credits from banks on

easy and favorable terms

• Helps the firm gain confidence of the investors and creates favorable

conditions to raise funds in future

The investment in current assets should be sufficient to meet the needs of the firm.

Any form of excessive investment should be avoided because it reduces the

profitability, as idle investments earn nothing to the firm. Such a situation arises when

there is accumulation of inventory or the credit policy of the firm is not appropriate.

On the other hand inadequate amount of working capital can threaten the solvency of

32

the firm due to its inability to meet the daily obligation. The flow of business

activities is disturbed resulting in overall inefficiency of the firm.

9.2. Concepts of working capital

There are two concepts of working capital viz.

i. Gross working capital

ii. Net working capital

i. The Gross working capital represents the total amount of funds invested in current

assets. Current assets are those assets which in ordinary course of business can be

converted into cash within a short period of normally one accounting year. The

constituents of current assets are shown in part A of exhibit 16.

Gross Working Capital= Total Current Assets

The gross working capital concept takes into consideration the fact that every

increase in the funds of the firm will increase its working capital. Management is

interested in the gross concept of working capital as it is more useful in

determining the rate of return on investments in the working capital.

The gross working capital at Hindalco for the three months under review was

Rs.479751398, Rs. 565853633 and Rs. 505773890 in March, December and

August respectively. (Exhibit 17)

ii. Net working capital represents the excess of current assets over the current

liabilities. Current liabilities are those which are intended to be paid in ordinary

course of business within a short period of normally one accounting year out of

the current assets or income of the business. The constituents of current liabilities

are shown in part B of exhibit 16.

Net Working Capital= Current Assets - Current Liabilities

The net working capital concept is a qualitative concept that indicates the firm’s

ability to meet its operating expenses and short-term liabilities. It also indicates

the margin of protection available to the short-term creditors.

The net working capital for the three months was Rs. 28.80crores in March, Rs.

40.38 crores in December and Rs. 20.83 crores in August. (Exhibit 17)

33

9.3. Working capital requirements:

Working capital requirement differs from organization to organization. In case of an

organization engaged in manufacturing like Hirakud smelter the working capital

requirement depends on factors like nature and size of business, scale of operation,

length of production cycle, rate of stock turnover, seasonal fluctuations, market

conditions, business cycle, rate of growth of the business, socio-economic conditions,

etc.

The amount of funds tied up in working capital would not typically be a constant

figure throughout the year. Only in the most unusual of businesses would there be a

constant need for working capital funding. For most businesses there would be

weekly fluctuations. Many businesses operate in industries that have seasonal changes

in demand. As in case of Hirakud smelter the working capital does differ from one

month to other.

In principle, the working capital need can be separated into two parts:

1. A fixed part, and

2. A fluctuating part

The fixed part is probably defined in amount as the minimum working capital

requirement for the period. It is widely advocated that the firm should be funded in

the way shown in the figure 5.

The more permanent needs (fixed assets and the fixed element of working capital)

should be financed from fairly permanent sources (e.g. equity and loan stocks); the

fluctuating element should be financed from a short-term source (e.g. a bank

overdraft), which can be drawn on and repaid easily and at short notice.

34

Figure 5

9.4. Working capital management

Working capital management entails short term decisions - generally, relating to the

next one year period - which is "reversible". The working capital management refers

the management of current assets and short term liabilities. It is concerned with short

term financial decision making involving cash flows within the operating cycle of the

firm. The goal of Working capital management is to ensure that the firm is able to

continue its operations and that it has sufficient cash flow to satisfy both maturing

short-term debt and upcoming operational expenses.

The need for working capital management arises from two considerations;

• First, the investment in current assets represents a substantial portion of total

investment. Therefore the investment in current assets and the current

liabilities have to be geared quickly to changes in sales.

• The firm’s fixed assets can be used at an optimum level only if supported by

sufficient working capital.

In working capital management, a financial manager has to make decisions involving

some of the considerations as follows: -

35

• What should be the total investment in working capital of the firm?

• What should be the optimum level of individual current assets?

• Wha t should be the relative proportion of different sources to finance the

working capital requirements?

• Should the firm have a conservative working capital policy or a restrictive

working capital policy?

• What should be the credit policy of the firm?

The importance of working capital management is reflected from the fact that

financial managers spend a great deal of time in arranging short term funds,

controlling the movements of cash, administering accounts receivables, investing

short term surplus of funds. Hirakud Smelter is concerned about the first four

considerations only, because there are no major debtors.

9.5. Approaches to Working Capital Management

Working capital management can take two approaches:

1. Monitor overall trends in working capital and identify areas requiring closer

management.

2. Analyze the individual components of working capital.

9.5.1. Approach 1:

The first approach, i.e. monitoring overall trends in working capital and identifying

areas that require closer management, involves study of the relationship of various

current assets and current liabilities with each other and other items like sales, cost of

production, etc. the tool used is Ratio Analysis :

Financial ratio analysis calculates and compares various ratios of amounts and

balances taken from the financial statements. The main purposes of working capital

ratio analysis are:

• To indicate working capital management performance; and

• To assist in identifying areas requiring closer management.

36

Financial ratio analysis is valuable because it raises questions and indicates directions

for more detailed investigation.

Since most of the production is transferred to sister concerns and raw materials are

also transferred from sister concerns it neither has debtors nor creditors. The

following ratios are of interest for managing working capital at Hirakud Smelter.:

• Current ratio

• Quick assets ratio

• Cash ratio

Current ratio:

Current Assets divided by Current Liabilities

The current ratio (or working capital ratio) attempts to measure the le vel of liquidity,

that is, the level of safety provided by the excess of current assets over current

liabilities. This ratio comes out to 1.7 for Aug’ 05, 3.5for Dec’ 05 and 2.5 for March’

06.

The higher the current ratio the better is the solvency position of the firm. However in

interpreting the current ratio the composition of the assets and the production level

should be kept under consideration. As a rule of thumb 2:1 ratio is considered

satisfactory. (Exhibit 20 and 21). The current ratio during this month was the lowest

only due the fact that the production level during the month was the high using most

of the current assets. The liquidity position of Hirakud smelter is satisfactory.

March' 06 December '05 August '05

Current Ratio 2.50 3.49 1.69

Quick Ratio 0.85 1.28 0.58

Cash Ratio 0.06 0.07 0.03

Quick ratio:

The "quick ratio" a derivative, excludes inventories from the current assets,

considering only those assets most swiftly realizable. The ratio is calculated as:

37

Quick assets/ current liability.

Quick assets are defined as current assets excluding the inventories. Inventories are

excluded from this ratio because inventories are deemed to be the least liquid assets.

This ratio is also known as Acid test ratio. During Aug’ 05 this ratio comes out to be

0.59, for Dec it was 1.28 and for March it was 0.85. As a rule of thumb 1:1 ratio is

considered to be satisfactory. The organization should try and keep the quick ratio

closer to 1.

Cash ratio:

Since cash is the most liquid asset it is very impor tant to monitor study the cash ratio.

Cash ratio is the most stringent tests of a firm’s liquidity. It is calculated as:

Cash at bank + Cash in hand/ Current liabilities.

The cash ratios for the last three months are 0.06, 0.07 and 0.03 for March, December

and August respectively. The cash ratio of Hirakud smelter is satisfactory.

9.5.2. Approach 2:

Management should use a combination of policies and techniques for the management

of working capital. These require managing the current assets - generally cash and

cash equivalents, inventories and debtors. There are also a variety of short-term

financing options which are considered.

• Cash management - identify the cash balance which allows for the business

to meet day to day expenses, but reduces cash holding costs.

Hirakud Smelter has done well to keep the cash holding less than the planned

Rs.1 lakhs. In the three months under review the cash in hand amounted to Rs.

52 thousand, Rs. 74 thousand and Rs. 52 thousand in March, December and

August respectively. Cash at bank during the three months has been

significantly higher than the planned amount of Rs.4 lakhs. In December it

was Rs. 9113307, in August it was Rs. 12291631 and in March it was Rs.

13034141.

38

A weekly forecast of the cash requirements is done and this is sent to the

Hindalco head office in Mumbai for the sanction of the cash. For control

purposes various cash reports are prepared on daily basis and weekly basis.

Hirakud smelter has its bank accounts in Punjab National Bank, State Bank Of

India, United Commercial Bank and Grind lays Bank PLC.

• Invento ry management - identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials and

hence increases cash flow. The stock of raw materials is more than the planned

stock. The stock in process is higher which shows that the smelter is operating

at a higher capacity as planned. The stock of metal in all forms is less than the

planned stock.

It is seen that the majority of the investment is in form of Inventory. Since the

quick assets are only 34 % of total current assets the remaining 66% is

contributed by the inventory in the month of March. (Exhibit 23). Similarly the

% of inventory in the current assets is 63 and 65 for the months of December

and August respectively.

The inventory at Hirakud consists of raw materials, process stock, finished

goods and others. In the month of August the raw materials constituted nearly

11 % of the total inventory, similarly in December and March the % of raw

materials in the inventory was 9% and 9% respectively.

The processed stock constitutes nearly 40%, 36% and 70% in the March,

December and August respectively. The process stock in the month of August

is high because of high production level.

The finished goods i.e. sales paste constituted nearly 2% of total inventory in

March, 1% in December and 1% in August.

The remaining portion of the inventory constituted of other items like stores

and spares, scrap etc. the stores and spares constitutes nearly 12% -16% of the

total investment in inventory. (Exhibit 23)

A major part of the inventory i.e. raw material and process stock is in the form

of stock in transit. In the month of Aug the materials in transit amounted to

nearly 60% of the total raw materials. In December the stock in transit

39

amounted to 40% and in Mach it amounted to 45% of the total stock. The

organization should look forward to reduce the inventory in transit.

This shows that if the investment in the inventory could be reduced then the

total investment in the working capital could be reduced to a significant le vel.

The Raw materials, finished goods and process stock level is directly related

to the level of production. The organization follows various inventory control

techniques like EOQ, ABC analysis, VED for controlling and managing the

inventory properly. Stores and spares that also contribute heavily to the

investment in current assets. It is generally seen that organizations do not put

much emphasis on the inventory of spares, as it has no direct relation to the

production. Hirakud smelter being a manufacturing unit pays a considerable

amount of attention on keeping the investment in stores and spares as

minimum as possible.

• Short term financing - inventory is ideally financed by credit granted by the

supplier; dependent on the cash conversion cycle, it may be necessary to

utilize a bank loan (or overdraft).

The Hindalco head office at Mumbai supports the short term funds

requirement of Hirakud smelter. Weekly forecast of funds required is done at

Hirakud smelter which is then sent to head office. After receiving the

requisition the funds requested is made available to Hirakud smelter. The

forecasts need to be very accurate, as all the expenses and the payments

depend on the funds received from the Head office.

The sales paste production is based on advances received from the customers.

This is also done at the HO; the party concerned has to contact the HO for this

purpose. Similarly the third party suppliers of raw materials are paid by the

HO.

The organization also has bank overdraft facility with various banks like State

Bank of India, Punjab National Bank, United Commercial Bank, etc. Bank

overdraft for the three months were Rs.3.97crores in March, Rs.1.61 crores in

February and Rs.1.11 crores in the month of January. The interest charged on

bank overheads was Rs. 141190 in March, Rs. 42665 in February and Rs.

12674 in January.

40

The general tendency in the case of manufacturing concern is that during

certain period in a year the need for current asset will be much higher than in

other period. Arrangement should be made quickly, taking into account the

cost benefit trade off.

So it is clear that working capital management encompasses the management of

current assets and means of financing them. The objective of working capital

management balance the liquidity and profitability criteria while taking into

consideration the attitude of management trend risk and the constraint imposed by the

banking sector while providing sort term credit in the form of cash credit/ bank

overdraft. There is a minimum amount of net working capital, which is; permanent

hence a part of working capital should be financed with permanent source of fund.

41

10. STORES INVENTORY ANALYSIS AT HIRAKUD SMELTER

The investment in stores and inventory at Hirakud is nearly Rs. 3.71 crores. Hindalco

Ind. Ltd. has its own standard operating system for Purchases and Stores

management. In developing this SOP all Hindalco units have been consulted and the

best practices of the various units have been compiled. The SOP aims at bringing

uniformity and standardization in procedures to ensure effective planning, execution

and control.

The standard operating system for stores management applicable to all Hindalco units

is called the MUSIC 3D system.

10.1. MUSIC 3D system

MUSIC 3D system is used for inventory control; it stands for Multi unit selective

inventory control system. It is a 3 dimensional concept that integrates Consumption

Value, Criticality and lead-time giving eight different parameters that are easily

controllable.

The following table shows the MUSIC 3D system matrix:

High Consumption Value Low Consumption Value

Long lead time Short lead time Long lead time Short lead time

Critical 1 2 3 4

Non- Critical 5 6 7 8

Figure 6 Spares classification under MUSIC 3D

The above MUSIC 3D dimensions are used for defining 8 different varieties of

inventories as expressed as above. The words like HIGH/ LOW/ LONG/ CRITICAL/

NONCRITICAL may have different cut off points for different Units.

For the purpose of stores control the various items have to be classified into various

categories.

42

10.2. Inventory Classification:

For the application of this system it requires a proper classification of the various

items. As such the Stores inventory (consumables and spares) at Hirakud smelter

consists of three categories of items:

v Insurance items

v Auto indented i.e. regular items

v User specified i.e. department indented items

Insurance Spares:

The items under this category are spares of vital equipments/ machinery, which are

normally not required for routine maintenance, but may be required for unforeseen

breakdown causing stoppage production or cause unsafe working conditions or

significant energy losses directly or indirectly.

Normally such items have high degree of reliability, having same life as the

equipment itself and are of high value and long lead-time.

Auto indented items:

These are the items whose indent is generated automatically by the inventory

management software- Ramco Marshal MMS system version 3.0, it operates on a

SQL platform. As and when the inventory approaches the reorder level the software

automatically decides the inventory replenishment quantity and intimates the purchase

department to issue a purchase order. The items falling under this category are

regularly used items and are a part of regular maintenance.

The software to operate needs various inventory levels to be fixed. Minimum,

maximum and reorder level for all stores items is fixed and then fed to the system.

These levels are fixed on the basis of:

• Lead-time history i.e. minimum lead time, normal lead time and maximum

lead time

• Demand i.e. average consumption, minimum consumption and maximum

consumption.

• Economic order quantity, EOQ Model is a model that defines the optimal

quantity to order that minimizes total variable costs required t o order and hold

inventory. It attempts to reduce the overall cost of the inventory.

43

• Inter process cost

• Cost per unit of the item

User specified items:

These include those stores and spares, which have been purchased based on specific,

requisition from the user department and are specific and unique to the equipment and

the processes. In this category there are two sub headings:

• Consumables stores and spares: these are the items that are to be replaced after

a fixed life and the respective consuming departments are placing the indents

for future consumption.

• Specific spares: these are those spares where the need for consuming that

particular spare is immediate. The ideal stock for such items is ‘0’.

MUSIC 3D cannot be applied to insurance spares. Inventory of insurance spares

depends on the risk taking ability of the unit management. So for the purpose of

MUSIC 3D only Auto indented and user specified items have to be further classified

into sub groups.

10.3. Parameters of classification:

This classification is based on the following parameters:

v Consumption pattern in terms of both quantity and value

v Lead time whether high lead time or low lead time

v Criticality of application whether critical or not

v Movement of the items i.e. number of issues during last 3 years

• Classification of items based Consumption pattern results into three categories of

items viz. A B and C. this also known as ABC analysis:

An analysis of consumption cost shows that a smaller % of items in the stores

contribute to a larger % of the va lue of consumption and on the other hand a larger %

of items in the stores contribute to a smaller % of the value of consumption. Between

these two extremes fall those items the % number of which is more or less equal to

there value of consumption.

The items that fall under 1st category are treated as A, items that fall under the second

Category are treated as B and the third category items are treated as C items. This

44

technique is also referred to as Always Better Control or the Proportional Parts Value

analysis.

The significance of this analysis is that a very close control is exercised over the items

of A group because they account for high % of value while stringent control is

adequate for the category B items and little control is sufficient for category C items.

The features of ABC technique are shown in the following table.

Name Category A Category B Category C

1. Extent of

Control

Very strict

control

Moderate control Loose control

2. Frequency of

order

Frequent ordering Once in a 3 months Once in a 6

months or once in

a year

3. Lead time Maximum efforts

to reduce lead

time

Moderate efforts to

reduce lead time

Minimum efforts

to reduce lead time

4. Level of

Management

intervention

Must be taken

care of by the

senior officers

Can be supervised by

the middle

management

Can be supervised

by the clerical staff

5. Period of review Review after a

month or 15 days

of waste, obsolete

and surplus items

Review within a

period of 2-3 moths

Annual review

6. Source of

supplies

As many sources

as possible

More than three

reliable sources

Three reliable

sources

7. Follow up Maximum follow

up

Periodic follow up Minimum follow

up

8. Safety stocks Very Low safety

stock

Low safety stock High safety stock

The SOP of Hindalco suggests application of 80- 20 rule, i.e. the High and low

consumption value is determined based on 80-20 concept. Top 20% of items

accounting for nearly 80% of the consumption value are deemed as high value items

and balance 80% of items that contribute nearly 20% of the consumption value are

45

deemed as low consumption value items. Although 80- 20 are suggested norms these

are not sacrosanct and in actual practice it may range from 85-75% and 25-15%.

At Hirakud smelter the top 5% items that have maximum value are grouped A, next

10% items are B and remaining 85% are grouped as C items. The items under

category A and B are grouped together to form high consumption value items.

Another classification based on the above method is to be done for current stock value

of all the items and categorize them, as X, Y and Z. this analysis is known as XYZ

analysis. The items whose current stock value is among top 5 % are classified as X

items, next 15-20% are grouped as Y and remaining as Z items. It is quite similar to

the ABC analysis the only difference being the classification is based on the current

stock value and not the consumption value.

• Based on Lead-time the items in the stores are classified as high lead time items or

low lead time items. Lead-time is the amount of time required for an item to be

available for use from the time it is ordered. Lead-time includes purchase order

processing time, vendor -processing time, in transit time, receiving, inspection, and

any prepack times.

Items having lead-time greater than three months for imported items and 45days for

domestic items are classified as high lead-time items and those having lead-time less

than high lead time periods are classified as short lead-time items.

• Based on criticality auto indented and user specified are again classified into sub

heading

v Critical items

v Non critical items

This classification is done to facilitate CONTROL purpose, MIS and to a certain

extent accounting requirement also. The classification of items into critical and non-

critical is based on the VED analysis. Under this classification the items are first

classified as Vital, Essential and Desirable. The user department identifies the

criticality by keeping in view the following definitions as per the SOP:

Critical items are those spares of vital equipment having reliability lower than

insurance items non availability of which will cause stoppage of plant or reduce

46

production level or cause unsafe working conditions or significant energy losses

directly or indirectly. These include vital spares and essential spares. A spare of

equipment having a standby will also come under this category as standby is supposed

to come into operation instantaneously in the event of stoppage of the main

equipment. Such an item has high consequential loss.

Non critical items are those spares required for normal maintainance but do not fall

in critical category, i.e. non availability would not cause stoppage of plant or reduce

the production level or cause unsafe working conditions or significant energy losses

directly or indirectly. It ha s low consequential loses and has normally short lead-time.

• Based on movement of the items in the inventory are classified as fast moving (F),

slow moving (S) and non moving items (N).

Regular or fast moving items are those items that have consumption predictability.

They are issued more than 9 times in last three years. For auto-indented items the

period under review is reduced to one year.

Slow moving items are those, which have been issued at least once and up to 9 times

in last three years. For auto-indented items the period under review is reduced to one

year.

Non-moving items are those, which have not been issued even once in the last three

years. For auto-indented items the period under review is reduced to one year.

The activities involved in MUSIC 3D system inventory control system are divided

into two phases. Phase 1 provides a broad classification and analysis of the items and

facilitates the analysis in the second phase:

47

10.4. Phase 1

Step 1: All the items are classified on the basis of the criticality, movement and

current stock value into 18 following categories:

i. Critical, Fast moving, High value items

ii. Non critical, Fast moving, High value items

iii. Critical, fast moving, medium value items

iv. Non critical, fast moving, medium value items

v. Critical, fast moving, Low value items

vi. Non critical, fast moving, Low value items

vii. Critical, slow moving, High value items

viii. Non critical, slow moving, High value items

ix. Critical, slow moving, medium value items

x. Non critical, Slow moving, medium Value items

xi. Critical, Slow moving, Low Value items

xii. Non critical, Slow moving, Low Value items

xiii. Critical, Non moving, High value items

xiv. Non critical, Non moving, High value items

xv. Critical, Non moving, medium value items

xvi. Non critical, Non moving, medium value items

xvii. Critic al, Non moving, Low value items

xviii. Non critical, Non moving, Low value items

Step 2: the above items are represented in a diagrammatic form with number of items

in each category and current stock value. Fig.7

Step 3: the groups under non-moving category are to be analyzed separately and will

have separate treatment as well. The remaining groups are also to be analyzed for

abnormalities.

10.4.1. Analysis after phase 1

In this analysis the main importance is given to the non-moving items. These are

those items, which have not moved even once in last 3 yrs, there are many such items

which have not been issued since last 6- 8 yrs. There is a possibility that many items

may have got damaged or may have become obsolete. The items are judged on the

basis of there crit icality, value and numbers. The items in the exhibits are a part of the

classified items that require immediate attention.

48

Figure 7. Spares Classification On The Basis Of Criticality, Degree of Movement and Value (Rs. Lakhs)

No. of items: 8431

Value

Rs.518.98

Critical

No. of items:

311

Non critical

No. of

items:8120

Fast No. of items:

107 Value: Rs.103.95

Slow No. of items:

121 Value: Rs. 36.96

None moving No. of items: 83 Value: Rs. 6.86

Fast No. of items:

677 Value: Rs.74.59

Slow No. of items:

1685 Value: Rs136.46

None moving No. of items:

5758 Value:

Rs.160.08

X No. of items:

21 Value: Rs

Y No. of items: 35 Value: Rs 6.78

Z No. of items: 51 Value: Rs 1.51

X No. of items:

17 Value: Rs


Z No. of items : 85 Value: Rs 2.13

X No. of items: 3 Value: Rs 1.96


Z No. of items: 66 Value: Rs 1.27

X No. of items: 30 Value: Rs

Y No. of items: 91 Value: Rs

Z No. of items556 Value:


Y No. of items184 Value: Rs

Z No. of items:

1456 Value:


Y No. of items230 Value:

Z No. of items

5473 Value:

49

Findings and suggestions after analysis in Phase 1:

i. A major portion of the stores inventory has been classified as Non moving

items. The total current stock value of these items is Rs. 1.66 crores, in terms

of percentage of total stores value it is nearly 45%.

This shows that most of the items in the stores are non-moving items. If the

organization could reduce the inventory of these items it is possible to save a

significant amount of investment and reduce the overhead cost associated with these

items. Losses due to obsolescence and damage could also be reduced

ii. The items in Exhibit 24 list1

3 items constitutes Rs.1.96 lakhs

Features:

• Critical in nature

• High stock value

• Eligible for immediate attention

• Decision should be taken to qualify

them as insurance spares.

• If they do not qualify as Insurance

spare they may be sold.

• The condition of the items should be

physically examined and verified

before taking the decision.

• Minimize the working capital

investment

Should be Procured on Just in Time basis

iii. Items worth Rs. 3.63 lakhs fall

under this category. Out of these items,

a few are listed in exhibit 25 list 2

Features:


• Medium value items.

• Should be verified and decision to

be taken to declare them as

insurance spares.

• The remaining items could be sold

immediately.

• This step will reduce the inventory

by Rs. 190000

• Minimum control on these items is

sufficient

The remaining items of this category should be sold and minimum control should be

directed towards these items.

iv. There are nearly 84 various items

falling under this category. The

items in exhibit 26 list 3 have:

• Minimum possible inventory should

be maintained

• These items should be sold.

50

Features:

• Low value

• Large numbers

• Non critical

• By there sales the stores could

reduce the inventory by Rs. 55000

• It will reduce the time spent in

monitoring and controlling a large

number of items

• Save inventory storage space

There are nearly 7 other items that are in

very less numbers but have higher values

exhibit 27 list.4

• Inventory as low as possible should

be maintained.

• These items should also be sold.

• This would reduce the inventory by

Rs.44000

v. Items in Exhibit 28 list 5 are

• Non critical in nature

• Have high stock value

• Minimum inventory should be

maintained

• If possible should be sold to reduce

the investment in the stores by Rs.4.65

lakh.

vi. Items in exhibit 29 list 6

• Non critical

• No significant stock value.

• Should be sold immediately

• The sales of these items will reduce

the investment in inventory by Rs

230000

• Save stores space as the number units

will be reduced.

vii. Items that have been classified

under this category amount to Rs. 3.37

lakhs in value.

• Non critical

• Nonmoving

• Low value items

• Should be sold to reduce the

inventory by Rs. 3374458.

• Save the inventory space

• Reduce the efforts in controlling these

items

After this analysis it was found that it is possible to reduce the inventory of stores and

spares by Rs. 87.5 Lakhs i.e. from Rs. 3.71 crores to 2.83 crores. In other words it

is possible to reduce the investment in stores by 24%. Before taking any action the

51

management should undertake physical verification of the stores items. Utmost care

should be taken in declaring the critical, non-moving items as Insurance spares. The

cooperation of various other departments should be taken in this process. This will not

only reduce the working capital investment but will also reduce the chances of loss

due to obsolete inventory, save the stores space and reduce the indirect costs

associated with the stores.

10.5. Phase 2

Step 1: the items classified as fast moving and slow moving items are again classified

on the basis of criticality, consumption value and lead time. This classification would

result into 8 groups of items:

i. Critical, Long lead time, High consumption value

ii. Non critical, Long lead time, High consumption value

iii. Critical, Short lead time, High consumption value

iv. Non critical, Short lead time, High consumption value

v. Critical, Long lead time, Low consumption value

vi. Non critical, Long lead time, Low consumption value

vii. Critical, Short lead time, Low consumption value

viii. Non critical, Short lead time, Low consumption value

Step 2: the items classified as above are shown diagrammatically as in fig. 8. This

will lead to the actual MUSIC 3D classification and analyzing eight groups becomes

easier.

Step 3: Each group is then analyzed for abnormality.

10.5.2. Analysis after the Phase 2:

This analysis is aimed at identifying those items, which need stringent control, and

those items, which can be disposed to reduce the inventory size.

52

Figure 8. Spares Classification under MUSIC 3 D

HIGH CONSUMTION VALUE Consumption Value

Rs. 1223.34 lakhs

No. Of Items 370

LOW CONSUMTION VALUE Consumption Value

Rs.7.90 lakhs

No. Of Items 2222

LONG LEAD TIME

SHORT LEAD

TIME

LONG LEAD TIME

SHORT LEAD

TIME

CRITICAL Consumption Value

Rs. 375.55

No. Of Items 36

Consumption Value

Rs. 516.03

No. Of Items 58

Consumption Value

Rs. 1.95

No. Of Items 37

Consumption Value

Rs.6.41

No. Of Items 97

NON CRITICAL Consumption Value

Rs. 123.42

No. Of Items 87

Consumption Value

Rs. 208.32

No. Of Items 189

Consumption Value

Rs. 21.20

No. Of Items 516

Consumption Value

Rs. 49.46

No. Of Items 1572 • Items having movement i.e. category F and S items only were selected for the purpose of this classification.

• Criticality c lassification is based on VED analysis. Items falling under V and E grouped as critical.

• Consumption value based on ABC analysis items in category A and B grouped as High consumption and category C items taken as Low

consumption value items.

• Long lead time = 45 days or more.

53

Findings and suggestions:

i. The consumption value of the items analyzed in this phase is Rs. 13.02 crores

ii. No. Of Items 36

Consumption Value of Rs.3.75 crores

Features:


• High consumption value

• Long lead time

• Adequate stock should be

maintained.

• Strict control should be imposed on

these items

• Efforts should be made in the

direction of maintaining proper

stock, reducing the lead-time and

the cost per unit.

• The organization must look for

multiple sources of the items.

• Stock outs should be avoided.

• The working capital investment

should be as low as possible.

iii. No. Of Items 58

Consumption value Rs. 5.16 crores

Features:

• Critical


• Short lead time

• Stock value of less than the above

category items is suggested.

• Strict control should be imposed on

these items

• Efforts should be made in the direction

of maintaining proper stock and the

cost per unit.

• The organization must look for

multiple sources of the items.


• The working capital investment should

be as low as possible.

54

iv. No. Of Items 37

Consumption value Rs. 1.95 lakhs

• Critical

• Low consumption value

• Long lead time

• Maximum inventory should be

maintained

• The orders placed should be of large

quantities even annual orde rs could be

placed for 2 yrs consumption

• Adequate level of inventory could be

maintained.


v. Consumption value Rs.6.41

crores

Features:

• Critical


• Short lead time

• Stock level lower than the above

mentioned items

• Orders should be placed in large

quantities.

• The ordered quantity may be for 4- 6

months requirement

• No stock outs

vi. No. Of Items 87

Consumption value1.23 crores

• Non Critical


• Long lead time

• Just in time inventory system should be

used

• Attempts to be made to reduce the costs

• Low inventory level should be

maintained.

• Surplus inventory should be avoided.

• Moderate degree of control

• Physical verification of the inventory is

recommended.

vii. No of items 189

Consumption value Rs. 2.08 cro res

• Non Critical


• Short lead time

• Very low inventory should be

maintained if possible ‘0’ inventory is

suggested

• Attempts to be made to reduce the

costs.

55

• Surplus inventory should be avoided.

• Moderate degree of control

• The items could be sold

viii. No. of items 516

Consumption value Rs. 21.20 lakhs

• Non Critical


• Long lead time

• Moderate inventory level should be

maintained

• Stock out is possible

• Low degree of control is sufficient

• Reduce the inventory level by selling

the surplus items.

ix. No. of items 1572

Consumption value Rs. 4946802

• Non Critical


• Short lead time

• Very low inventory level should be

maintained

• Stock out is possible

• Low degree of control is sufficient

• Verify the physical condition of the

items and sale the obsolete inventory.

The analysis distinguishes items that should be under highest degree of control from

those items, which do not require much monitoring. This would save the time and

money spent in controlling the inventory. Focusing on controlling the critical items

that have high consumption value will help in controlling major portion of the

investment in the stores inventory. Besides the above recommendations the following

should also be followed:

1. Increase Demand Forecasting Accuracy. The demand for the items in store

should be accurately forecasted. If demand were accurately known then this

would help in reducing the unnecessary items in the inventory. The demand for

the items that are fast moving and regularly consumed could be easily predicted.

2. Increase Supply Chain Turns. Using EOQ model is suggested for but the non-

critical items may be purchased on Just in time basis, as minimum inventory has

to be maintained. This may increase acquisition costs and unit costs because of

56

smaller order quantities. But will be beneficial in increasing cash flow and

reducing carrying cost of the inventory (warehousing, material handling, taxes,

insurance, depreciation, interest and obsolescence). The organization should

make sure that it has reliable sources of supply for the items that are critical for

its operations as well as for those items which have high lead time.

3. Reduction in safety stock . Safety stock is really just a buffer for forecasting

variance and supplier delivery time. It is possible to reduce the Safety stock

levels through improvements in demand forecasting, increasing accuracy in

forecasting, manufacturing cycle efficiency, supply chain turns, reliable

suppliers. The safety stock for non critical items and non moving items should be

as low as possible

4. Reduce purchasing errors . This can reduce overstocking and more importantly,

minimize stock outs that result in expensive expedited purchases. Sell excess and

obsolete inventory or return it to your vendor.

5. Eliminate delivery variance. Do not allow vendors to deliver early or late and

make sure the delivered quantity does not vary from the order quantity. Delivery

errors may lead to overstocking of the items in the inventory.

6. Train purchasing personnel. Provide your purchasing and material

management personnel with formal training. This will arm them with better

negotiating skills that will result in better prices and terms.

7. Physical verification should be an integral part: There should be a regular

inspection of critical items it could be done on a weekly basis. Non-critical items

having high consumption value should also be physically inspected. This would

reduce the chances of loss due to obsolescence, damage, mishandling, etc.

8. Proper reporting: Reports on the consumption pattern and current stock value

should be prepared on a monthly basis. Any abnormalities in the stores should be

brought to the notice of the management as soon as possible.

57

9. The inventory analysis using the MUSIC 3D system and other tools should be

done on a regular basis. The SOP of Hindalco recommends this analysis to be

done once a year. The recommendations of SOP should be followed.

58

11. Exhibits

Exhibit no 1

Financial results for the Year ended 31-3-2006 and Year ended 31-3-2005

Particulars Year ended 31-3-2006

Year ended 31-3-2005

Net Sales & Operating Revenues 113,965 95,231 Other Income 2,439 2,700 87,914 72,456 Total Expenditure (a). (Increase)/Decrease in Stock in Trade -10,338 -2,557 (b). Consumption of Raw Materials 66,034 46,396 (c). Staff Cost 4,627 4,116 (d). Manufacturing and Operating Expenses 23,223 20,112 (e). Other Expenditure 4,368 4,398 Interest & Finance Charges 2,252 1,700 Gross Profit 26,238 23,766 Depreciation 5,211 4,633 Profit before Tax & Extra Ordinary Expenses 21,027 19,133 Extra Ordinary Expenses -30 91 21,057 19,042 Profit before Tax Provision for Tax 4,502 6,464 (a). Provision for Current Tax 3,241 5,705 (b). Provision for Deferred Tax 1,160 759 (c). Provision for Fringe Benefits Tax - 101 Net Profit for the period 16,555 13,294 Paid-up Equity Share Capital (Face Value : Rs.10/- per Share) 986 928

95,077 75,738 Basic & Diluted EPS (Rs.) 16.8 14

59

Exhibit 2

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Net sales and operating

revenue 22754 23314 49856 62084 95233 113,965

Profits before tax and

extraordinary items 9801 10050 10627 12456 19133 21,027

Net profit 6781 6860 5821 8389 13294 16,555

Exhibit 3

Net sales and Revenue and Net Profits

0

20000

40000

60000

80000

100000

120000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Rs.

in M

illio

ns

Net sales and operatingrevenue

Net profit

60

Exhibit 4

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Gross Margin % 49.33 49.73 26.62 25.18 24.96 23.02

Net Margin % 29.8 29.42 11.68 13.51 13.96 14.53

Exhibit.5

Gross profit Margin and Net profit Margin

0

10

20

30

40

50

60

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Gross Margin % Net Margin %

61

Exhibit 6

Quarterly results for the financial Year 2005-2006

Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Net sales and operating revenue 22078 26,068 28,737 36,574

Gross profit 5,919 5,267 5,635 9,417

Profit before tax and extraordinary items 4,750 3,982 4,321 7,974

Net profits 6,263 2,765 3,006 6,263

Exhibit 7

Particulars % change in 1st Quarter

% change in 2nd Quarter

% change in 3rd Quarter

% change in 4th Quarter

Net sales and operating revenue 7.0 6.14 15.40 45.38 Gross profit

26.33 -12.68 -11.8705 41.50 Profit before tax and extraordinary items 30.92 -19.50 -18.45 51.62 Net profits

165.83 -7.21 -13.44 39.64

62

Exhibit 8

Net Sales and Operating Revenue In Rs. millions

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Net Sales and OperatingRevenue For FY 2005

Net sales and OperatingRevenue For FY 2004

Exhibit. 9

Profit Before tax and extraordinary items in Rs. In millions

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Profit Before Tax and Extraordinaryitems for FY 2005

Profit Before Tax and Extraordinaryitems

63

Exhibit 10

Net Profits In Rs. in millions

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Net Profits for FY 2005

Net Profits for FY 2004

Exhibit 11

Quarterly Segment revenue for the Financial Year 2005-2006

Particulars 1st Quarter ended 30/06/05

2nd Quarter ended 30/09/05

3rd Quarter ended 31/12/05

4th Quarter ended 31/3/06

1. Segment Revenue

(a). Aluminium 1 3,406 14,141 15,644 17,263

(b). Copper 8 ,677 12,464 13,084 19,317

2. Segment Results (Profit/Loss before Tax and interest from each Segment)

(a). Aluminium 4,384 4,345 5,421 7,131

(b). Copper 529 -692 -845 1,201

64

Exhibit 12

Segment performance for the Financial Year ended 31-3-06 and Year ended 31-3-05

Particulars Year ended 31-3-06

Year ended 31-3-05

% Contribution

% Contribution

1. Segment Revenue

(a). Aluminium 60,423 52,129 53.02 54.74

(b). Copper 53,542 42,712 46.98 44.85

113,965 95,231

Net Sales & Operating Revenues 2. Segment Results (Profit/Loss before Tax and interest from each Segment)

113,965

95,231

(a). Aluminium 21,281 15,927

(b). Copper 193 253.8

Exhibit 13

cost structure

Total Raw Materials13%

Total Period Cash Cost:11%

Depreciation4%

Alumina40%

Power A/C - Kwh/T32%

Total Raw Materials

Total Period Cash Cost:

Depreciation

Alumina

Power A/C - Kwh/T

65

Exhibit 14

Alumina MixBelgaum Plant

30%

Muri Plant70%

Exhibit 15

Power Mix

Hirakud Power Line I46%

Hirakud Power Line II50%

WESCO4%

66

Exhibit 16

Part A

Current Assets

Part B

Current Liability

Cash in hand

Cash at bank

Loans and Advances

Trade debtors

Inventories:

Raw material and Components

Work in process

Finished Goods

Others

Sundry creditors

Trade advances

Borrowings:

Short term borrowings

Bank overdraft

Provisions

Exhibit 17


Total Current Assets 479751398 565853633 505773890

Net Working Capital 288014103 403783942 208242403

Planned Working

Capital 326650000 326650000 326650000

Quick Assets 164593188.5 207648265.5 175367845.8

Non Quick Assets 315158209 358205368 330406044

% Quick Assets 34 37 35

% Non Quick Assets

(Inventory) 66 63 65

67

Exhibit 18

Exhibit 19

Current Assets and Quick Assets

0

100000000

200000000

300000000

400000000

500000000

600000000


Total current assets Quick assets

Net working capital for last three months

0 50000000

100000000 150000000 200000000 250000000

300000000 350000000 400000000 450000000


Net working capital

Planned working Capital

68

Exhibit 20

March' 06 February '06 January '06

Current Ratio 2.502128757 3.491421678 1.69990039

Quick Ratio 0.858430746 1.281228241 0.589409369

Cash Ratio 0.068251309 0.07629911 0.030804569

Exhibit 21

Ratios

0 0.5

1 1.5

2 2.5

3 3.5

4


Current ratio Quick ratio Cash ratio

69

Exhibit 22

Current Assets Mar’06 Dec’06 Aug’06

Bank 13,034,141 12,291,631 9,113,307

Cash 52,180 74,142 52,022

Raw Materials 29,015,239 32,959,647 35,312,862

Process Stock 125,507,097 128,670,904 232,203,154

Finished Goods 6,657,204 3,864,099 1,959,831

Stores And Inventory 50,045,118 41,454,727 41,724,965

Metal In All Form 103,933,551 151,255,991 19,205,232

Deposits 51,905,689 71,272,524 115,305,267

Prepaid 4,137,200 1,807,898 7,004,594

Loans To Employees 11,990,916 11,942,663 12,402,260

Advances 41,262,353 16,001,203 2,042,439

Claims 14,671,986 23,631,939 11,971,986

Misc. Receivables 12,107,590 22,306,049 9,186,586

Mod Vat Claims 15,431,133 48,320,216 8,289,386

Others 0.00 0.00 0

Total Current Assets 479,751,398 565,853,633 505,773,890

Quick Assets 164,593,189 207,648,266 175,367,846

Current Liability Mar’06 De c’06 Aug’06

Electricity Bill 11,509,562 15,077,563 157,418,895

MRR Liability 49,252,461 57,153,725 43,839,465

Misc. Creditors 49,280,864 36,255,961 36,160,131

Sal/ Wages Payable 12,417,409 17,318,699 24,013,195

Freight Payable 29,082,065 19,518,534 24,460,217

Sales Tax Payable 449,518 592,284 530,924

Octroi Payable

Bank Overdraft 39,745,415 16,152,926 11,108,660

Total Current Liability 191737294 162069691 297531487

70

Exhibit 23 March % Dec % Aug %

Raw Materials 29015239 9 32959647 9 35312862 11

Process Stock 125507097 40 128670904 36 232203154 70

Finished Goods 6657204 2 3864099 1 1959831 1

Others 153978669 49 192710718 54 60930197 18

Total 315158209 358205368 330406044

0

50000000

100000000

150000000

200000000

250000000

March December August

Raw Materials

Process Stock

Finished Goods

others

71

Exhibit 24 List 1 Stock number

Description Current stock

Current stock value

RSS026O068 RELAY COMPARATOR MODULE 6 DC 3002 -1CC,T NOS 5 76468

PPS051O030 PITCH DELIVERY PUMP COMPLETE NOS 2 52735

PPS002O008 2" DIAMETER DEWRANCE BRONZE PARALLELL SL NOS 4 67408

Total 196611 Exhibit 25 List 2 Stock number


Current stock value

PPS108O008 SEQUENCE CONTROLLER MA-810, NOS 3 40435

CHS011E002 SPARE KIT, FOR LT. LK. TRIPLE POLE CONT SET 6 35424

BRB030O006 DODGE TIMKEN BRG.UNIT FLANGE UNIT TYPE E NOS 2 33072

Total 108931

72

Exhibit 26 List 3 Stock number Description Current

stock

Current

stock

value

IJP000O204

MAGNESIA COMPOUND 1ST QUALITY85% IN 25

K KG 375 2340

EWR000O036 TRS CIRCULAR FLEXIBLE CABLE 660/1100 VOL MTR 175 5032

GLP000O017 WHITING POWDER G.I.BBS GRADE IS-63-1978. KG 174 1176

PRS001M003

DUMMY BUSH OUTER HEAT TREATEDAND

GROUND NOS 107 5234

EWR000O053

SINGLE CORE PVC INSULATED COPPER (KDK

MA MTR 85 1184

CLS030O002 ALUMINIUM WIRE BRAIDED TAPE TO FIT SILIC NOS 50 1950

EWR000O040

4Cx6sq.mm ANNEALED TINNED COPPER

CONDUCT MTR 41 4946

AUS002M017 FUSIBLE PLUG (WORKSHOP FABRICATED). NOS 35 1225

ETR000O155 ELECTROLYTIC GRADE BARE COPPER WIRE, KG 32 4729

HWM004O020 GALVANISED IRON WIRE ROPE GRIP WITH NUT NOS 30 722

MES051O007 ACETYLENE HOSE. MTR 29.5 846

EMS000O102 SIEMENS MAKE HRC FUSE 100 AMPS , TYPE- 3 NOS 29 8713

HWM004O021 G.I.WIRE ROPE GRIP AS PER IS-2361 WITH G NOS 28 612

MES048O005 DOUBLE WIRE BRAIDED HOSE 1/2"I.D AS PER MTR 27.5 4271

IJP000O116 RELIABLE FELT PACKING, MTR 22.9 393

IJP000O082

WHITE DRY ASBESTOS ROPE PLAINCOVER IN

RO KG 21 5142

EMS000O103 SIEMENS L-T HIGH RUPTURING CAPACITY FUSE NOS 20 6421

Total 54936

73



Current stock value

PPS106O003 IGNITION TRANS NOS 3 9185

EMS000O139

SIEMENS BIMETALLIC RELAY 12-24

AMPS. NOS 4 6776

PRS001M141 C.I.FOOT OPERATED PEDAL VALVE, NOS 3 6725

BRB013M001

DOUBLE ROW SPHERICAL ROLLER

BEARING (SKF NOS 2 6530

BRB010O012

CYLINDRICAL ROLLER BEARING [

SKF CRL 18 NOS 2 5200

PPS004O009

BURNER ROD ASSEMBLY WITH

NOZZLE. NOS 2 5153

FBS001O052

AIR FLEXIBLE HOSE PIPE FOR ENCON

BURNER, PCS 3 4604

Total 44173

74



Current stock value

PPS071O148 SPLIT RING GEAR:SPLIT RING GEAR SET 1 603200

CLS034O010 XQM3 CARD:XQM3 CARD NOS 1 397788

FBS005O041 PLC 540 CONTROL NET:PLC 540 CONTROL NET NOS 1 369200

CST013E040

DC SPEED CONT 140AMP:DC SPEED CONT

140AM NOS 1 273490

FBS005O021 SIGNAL CONVERTER:SIGNAL CONVERTER NOS 1 238867

CLS034O009 XGT BOARD:XGT BOARD NOS 1 178496

PPS004O034 COIL FOR TP-06 NOS 1 163568

CST011O027

ACTUATOR FOR DAMPER:ACTUATOR FOR

DAMPER NOS 1 156412

BRB014O010 ANTIFRICTION B EARING, SKF-29440 NOS 1 123531

FBS005O042

CONTROL NET BACK-UP:CONTROL NET BACK-

UP NOS 1 122120

PRS026O003 BOARD HV UNIT:BOARD HV UNIT NOS 2 249600

RSS006O005 DRY TYPE L.V.BUSHING NOS 3.001 329726

PRS026O001

DC VOLTMETERP M M C.DC VOLTMETERP M M

C. NOS 89 50038

CST001O024 LUBORGAN:LUBORGAN LTR 160.003 460498

PRS015O007 FIRE BRICK NOS 361 54241

PRS015O047 REPAIRING OF POT SID:REPAIRING OF POT SI NOS 447 574688

MNF101O040 ALUMUNIUM ANGLE KG 580 63313


MNF000O108 AL.FLAT BUS BAR KG 1912.4 172605

Total 4648871

75



Current stock value

MTF008O014 M.S. ROD KG 1050 18585

MTF008O016 M.S. ROD KG 670 12127

MTF004O013 MS CHANNEL 300x90 KG 626 18029

MTF008O018 M.S. ROUND, KG 610 10797

OLL000O014 ANTI-MOSQUITO OIL. LTR 400 10855

CST013O160

CHOCK END COVER GASK:CHOCK

END COVER GAS NOS 400 10816


MNF101O016 ALUMUNIUM ANGLES KG 270 29486

PRS015O200 "O" RING:"O" RING NOS 259 13080

ETR000O151

HARD DRAWN BARE CONDUCTOR

COPPER WIRE, KG 209 21918

PPF002O001

M.S.PIPE CLASS`C' CONFIRMING TO

ISS-1239 MTR 205 11877

FBS001O011

DOOR ARCH BRICKS,AS PER ITEM NO-

4,OF OUR NOS 200 25689

GLC000O062 SCALEKOL ACID & SOLUTION KG 160 10816

Total

76

12. Bibliography:

Financial Statements:

1. Annual Reports Hindalco Ind. Ltd.

2. Trial balances Hirakud Smelter for the month of March’06, December’05 and

August’05

3. Stores Items Master

Reference books:

1. Financial Management- Theory And Practice- Prasanna Chandra

2. Management Accounting- R.K. Sharma and Sashi. K. Gupta

3. Cost Accounting- S.P. Jain And K.L. Narang

Internet

1. www.Hindalco.com

2. www.domainb.com

3. www.iif.edu

4. www.hinduonnet.com

5. http://contents.icicidirect.com/research/aluminium.asp

6. www.planware.com

7. www.investoapedia.com

“working capital management and stores inventory analysis”

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