CONTENTS

· Acknowledgment · Certificate CHAPTER 1 Introduction (Pg.-3) · An Introduction of Working Capital Management · Objectives of the project · Scope of the project CHAPTER 2 Research Methodology (Pg.-27) · Collection of data · Research Design · Limitations of the research

CHAPTER 3 Company Profile (Pg.-34) · Steel industry in India · Competitors in the market · SWOT analysis of the company

CHAPTER 4 Analysis and Discussion (Pg.-40) · Working Capital Analysis various departments of TATA Steel · Operating Cycle of TATA Steel · Inventory Management · Manufacturing Process · Receivables Management · Management of Accounts Payable · Comparative analysis of Working Capital through Ratios · EOQ Analysis CHAPTER 5 Conclusion & Summary (Pg.-76) ·Bibliography(Pg.-81)

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ACKNOWLEDGEMENT

An understanding of the study like this is never the outcome of the efforts of a single person; rather it bears the imprint of a number of persons who directly or indirectly helped me in completing the present study. I would be failing in my duty if I don’t say a word of thanks to all those whose sincere advice made my training period a real educative and pleasurable one.

I wish to acknowledge my whole hearted gratitude to Mr.Uttam Kumar Roy(Senior Finance Manager),who is my Training Faculty in TATA STEEL for providing help and guidance in the course. I am really very thankful to him for his encouragement given to me time to time and also for his help and guidance while programming.

I also express my immense gratitude to Mr.Vivek Kamra, Executive-In-Charge [Tubes], and Mr.Ashish Anupam (Chief Mktg & Sales, Tubes) for giving me opportunity for doing my project in TATA STEEL.

My sincere regards also continue for Mr. Vineet Saraf (Regional Sales Manager, Tubes) and Mr. Rajan Babu (Regional Finance Manager), for their valuable guidance and support all through my intern-ship.

I am also thankful to Mr. Shiva Kant Vishwakarma (Executive assistant to EIC, Tubes) who spent his valuable in coordinating to obtain approval from TATA STEEL management which allowed me to work upon my intern-ship project in TATA STEEL.My sincere thanks to my Faculty Guide, Mrs. Puja Agrawal (Senior Lecturer, Finance, Amity School of Business) who guided me through whole of my project and answered all of my queries without which it would have been difficult to complete the project in the correct manner.

1

An Introduction of

WORKING CAPITAL

MANAGEMENT

2

3

N ature of Working Capital

Management:

Working capital management is concerned with the problems that arise

in attempting to manage the current assets, the current liabilities and the

interrelationship that exists between them.

Current assets

It refers to those assets, which in the ordinary course of business can be,

or will be, converted into cash within one year without undergoing a

diminution in value and without disrupting the operations of the firm.

Example: Cash, marketable securities, accounts receivable and inventory

are the major current assets.

4

Current liabilities

These are those liabilities that 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.

Example: accounts payable, bills payable, bank overdraft and

outstanding expenses are the major current liabilities.

G OAL OF WORKING CAPITAL

MANAGEMENT:

The goal of WCM is to manage the firm’s current assets and liabilities in

such a way that a satisfactory level of working capital is maintained. This

is so because if the firm can’t maintain the satisfactory level of working

capital, it is likely to become insolvent & may even be forced into

bankruptcy. The current assets should be large enough to cover its

current liabilities in order to ensure a reasonable margin of safety. Each

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of the current assets must be managed efficiently in order to maintain

the liquidity of the firm while not keeping too high a level of anyone of

them. Each of the short sources of financing must be continuously

managed to ensure that they are obtained and used in the best possible

way. The interaction between current assets & current liabilities is,

therefore the main theme of the theory of working capital management.

T ASK OF FINANCIAL MANAGER:

The task of financial manager in managing working capital efficiently is to

ensure sufficient liquidity in the operations of the enterprise. The

liquidity of a business firm is measured by its ability to satisfy short-term

obligations as they become due. The three basic measures of a firm’s

overall liquidity are

1) The current ratio

2) The acid-test ratio and

3) the net working capital.

6

I NGREDIENTS OF WORKING CAPITAL

MANAGEMENT:

There are three ingredients of working capital working capital

management, which are as follows:

1) TRADE-OFF BETWEEN PROFITABILITY AND RISK

2) DETERMINING FINANCING MIX

There are 3 basic approaches to determine an appropriate financing mix:

(a) Hedging approach, also called the Matching approach;

(b) Conservative approach, and

(c) Trade-off between these two.

7

N EED FOR WORKING CAPITAL:

The need for working capital (gross) or current assets can’t be

overemphasized. Given the objective of financial decision making to

maximize the shareholder’s wealth, it is necessary to generate sufficient

profits. The extent to which profits can be earned will naturally depend

upon the magnitude of the sales. A successful sales program is necessary

for earning profits by any business enterprise. However, sales don’t

convert into cash instantly; there is invariably a time lag between the

sale of goods and the receipt of cash. There is, therefore, a need for

working capital in the form of current assets to deal with the problem

arising out of the lack of immediate realization of cash against goods

sold. Therefore, sufficient working capital is necessary to sustain sales

activity. Technically, this is referred to as the operating or cash cycle.

8

OPERATING CYCLE:

The operating cycle can be said to be at the heart of the need for

working capital.

The continuing flow from cash to suppliers, to inventory, to accounts

receivables and back into cash is what is called operating cycle. In other

words the term cash cycle refers to the length of time necessary to

complete the following cycle of events:

Conversion of cash into inventory;

Conversion of inventory into receivables;

Conversion of receivables into cash;

9

Operating cycle

Operating Cycle is calculated as R + W + F + D – C

Where,

R = Raw material storage period

W = WIP Holding Period

F = Finished Goods Storage Period

D = Debtors Collection period

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Cash

Receivables

InventoryPhase I

Phase III

Phase II

C = Credit period availed

C hanges in Working Capital

The changes in the level of working capital occur for the following three

basic reasons:

1. Changes in the level of sales and operating expenses.

2. Policy changes.

3. Changes in technology.

Changes in sales and operating expenses

The first factor causing a change in the working capital requirement is a

change in the sales and operating expenses. The changes in this factor

may be due to 3 reasons:

There may be a long run trend of change. For instance, the price of a raw

material may constantly rise, necessitating the holding of a large

11

inventory. The Secular trends would mainly affect the need for

permanent current assets.

In the second place, Cyclical changes in the economy leading to ups and

downs in business activity influence the level of working capital, both

permanent and temporary.

The third source of change is seasonality in sales activity. Seasonality-

peaks and troughs- can be said to be the main source of variation in the

level of working capital.

Policy changes

The second major cause of changes in the level of working capital is

because of policy changes initiated by the management. A firm following

a conservative policy in this respect having a very high level of current

assets in relation to sales may deliberately opt for a less conservative

policy and vice versa. These conscious managerial decisions certainly

have an impact on the level of working capital.

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Technological changes:

Finally, technological changes can cause significant changes in the level

of working capital. If a new process emerges as a result of technological

development, which shortens the operating cycles, it reduces the need

for working capital and vice versa.

13

D etermination of working capital

(I)Estimation of Current Asset:

Minimum desired cash & bank balances

Inventories

Raw material

Work-in-process

Finished Goods

Debtors

Total current assets

(II) Estimation of Current Liabilities:

Creditors

Wages

Overheads

Total Current Liabilities

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(III) Net Working Capital (I-II)

Add margin for contingency

(IV) Net Working Capital Required

15

OBJECTIVES OF THE

PROJECT

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UNDERSTANDING THE CONCEPT AND

IMPORTANCE OF WORKING CAPITAL

MANAGEMENT:

One of the major objectives of our project is to understand the concept

of WORKING CAPITAL MANAGEMENT.

Understanding the meaning of two terms i.e. gross working capital and

net working capital.

To know the two types of working capital i.e., permanent working

capital and temporary working capital. Working Capital Management

policies have a great effect on a firm’s profitability, liquidity and its

structural health. A finance manager should therefore, chalk out

appropriate working capital management policies in respect of each of

the components of working capital so as to ensure higher profitability,

proper liquidity and sound structural health of the organization.

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UNDERSTANDING VARIOUS STEPS OF

OPERATING CYCLE SO WHICH ARE

INVOLVED IN WORKING CAPITAL

MANAGEMENT.

Steps of operating cycle which are necessary for proper working capital

management. These steps include:

Management of cash -

It is the duty of the Finance Manager to provide adequate cash to all

segments of the organization. He has to ensure that no funds blocked in

idle cash since this will involve cost in terms of interest to the business. A

sound cash management scheme, therefore, maintains the balance

between the twin objectives of liquidity and cost.

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Management of Accounts Receivable and Payable -

Accounts receivables constitute a significant portion of the total

current assets of the business next after inventories. They are a

direct consequence of ‘trade credit’ which has become an essential

marketing tool in modern business.

Accounts payable constitute a significant portion of the total

current assets of the business. The objective in accounts payable is

to slow down the payments process as much as possible. Whereas

the underlying objective in accounts receivables is to maximize

acceleration of the collection process.

Management of inventories -

Inventories often constitute a major element of the total working

capital and hence it has been correctly observed, “Good inventory

management is good financial management”.

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UNDERSTANDING THE WORKING

CAPITAL MANAGEMENT OF TATA

STEEL [tubes division] Ltd.

Analyzing the data available with the help of various diagrams and

graphical tools of presentation like bar graphs, line graphs etc.

This would strengthen the theoretical knowledge that we have about

working capital management.

GETTING TO A CONCLUSION:

Getting to a conclusion regarding the appropriate and inappropriateness

of the working capital management strategies of Tata Steel ltd.

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GIVING SUGGETIONS AND

RECOMMENDATIONS

Giving suggestions and recommendations based on my theoretical

knowledge and practical analysis of data to make the working capital

management of TATA Steel ltd. better.

21

SCOPE OF THE PROJECT

22

This project report focuses on the working capital management of TATA

STEEL and its comparison with the industry and its competitors.

Chapter wise scope of the project is as follows-

Starting with the Company Profile which contains brief information

about the history, competitors, product range and the diverse fields in

which the company is operating. It creates an image of the company in

the reader’s mind which will further help the reader to understand the

project properly.

The next chapter is Research Methodology which indicates the various

sources of data used to make the project report and the type of research

design which is used to make it more meaningful.

The research methodology is followed by an overview of working capital

management which gives the theoretical knowledge of working capital

management which in turn would help building a strong base for the

research ahead. Theory is accompanied by graphs and diagrams which

would help the reader to understand the project and the subject

thoroughly.23

Next is Presentation and Analysis of data. Analyzing the data available

with the help of various diagrams and graphical tools of presentation like

bar graphs, line graphs etc. This would strengthen the theoretical

knowledge that we have about working capital management.

The last chapter is Conclusion & Recommendations. This chapter

contains the critical evaluation of the presentation and analysis of data.

Recommendations include what should be done to make the situation

better.

The aim of the project is to learn the importance of working capital

management for the efficient utilization of funds and proper financial

management of the company. The non-ideal production technology and

imperfect market and distribution systems are responsible for the

generation of current assets, which block the funds of an enterprise.

Working Capital is needed to release such blockage of funds. However

the consideration of the level of investment in current assets should

avoid two danger points- excessive and inadequate investments in

current assets.

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The concerned unit is a manufacturing unit so a good management of

working capital is indispensable for the company. The content of the

report has a clear sequence which defines the present background of the

company and TATA’s contribution to the market.

It discusses the method of comparison of financial statement of

companies like ratio analysis, working capital analysis and trend analysis

etc. Various ratios, which are required to be calculated, have been stated

in the report. The project deals with the study of working capital of the

company and to find method and solutions for achieving the most

efficient level. It will also look into the approach of risk return trade off in

terms of the cost of maintaining a particular level of current assets,

which are:

1) The cost of liquidity and

2) The cost of profitability.

The project deals with analyzing the operating cycle of the company and

discusses the technique used by the company for its management.

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RESEARCH

METHODOLOGY

COLLECTION OF DATA26

DATA SOURCES :

Having defined and formulated a research problem and having

determined the objectives of research, a researcher has to face the

problem of data collection. The information collected should be both

accurate and relevant, as per the requirements of the researcher, who

has to work out a suitable data collection method.

Data collection methods can be broadly classified into

Primary methods

Secondary methods

Data collected from Primary methods is known as Primary data and data

collected from Secondary methods is known as Secondary data.

27

In this project I have used Secondary data most of which

was obtained from internal records of the company.

Usage of Secondary data enjoys some advantages but it

suffers from some limitations too.

ADVANTAGES OF SECONDARY DATA:

- The major advantage of secondary data is economy.

As the data are already available, they can be obtained at a

relatively low cost.

- The secondary data can be obtained quickly.

The secondary data enable the researchers to identify the

deficiencies in the data.

They are useful in the case of exploratory researches as they

provide increased understanding of the problem.

- The secondary data can be easily compared.

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LIMITATIONS OF SECONDARY DATA :

- The available data may not suit the current purpose of research,

due to incompleteness, generalities and so on.

- Information may be outdated or obsolete.

- The methodology used in collecting the data such as the sample

size, date of the research, etc., may be unknown.

- All the findings of a research study may not be made public.

- Conflicting data may exist.

- It may be difficult to determine the accuracy of secondary data.

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RESEARCH DESIGN

Research design or model indicates a plan of action to be carried out in

connection with a proposed research work. It provides a guideline for

the researcher to enable him to keep track of his actions and to know

that he is moving in the right direction in order to achieve his goal.

The purpose of research is to provide information that will aid in

management decision making.

TYPES OF RESEARCH DESIGN:

On the basis of the objectives of the marketing research can be classified

into:-

Exploratory Research

Conclusive Research

30

The research design for exploratory research is best characterized by its

lack of structure and flexibility. It is generally used for the development

of hypothesis regarding potential opportunities and problems.

Exploratory research is further subdivided into

- Search of secondary data

- Case study

- Survey of experts

Conclusive research which is use to provide information for the

evaluation of the alternative courses of action can be sub-divided into

- Descriptive research.

- Causal or experimental research.

In this project Exploratory research design has been

used. Flexibility and creativity characterize exploratory

research study.31

L imitations of the research

As only the secondary data is used in this project, it was difficult to

determine the accuracy of the data.

Some amount of data was not updated and was not of much use.

A considerable amount of conflicting data was there which was difficult

to match with.

Because of the company’s policy of maintaining secrecy some amount of

data was not made available to me which could have helped me in

making my project report better.

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Company Profile:Established in 1907, Tata Steel is the world's 6th largest steel company with an existing annual crude steel capacity of 28 million tonnes. Asia's first integrated steel plant and India's largest integrated private sector steel company is now the world's second most geographically diversified steel producer, with operations in 24 countries and commercial presence in over 50 countries.

Tata Steel completed 100 glorious years of existence on August 26, 2007 following the ideals and philosophy laid down by its Founder, Jamsetji Nusserwanji Tata. The first private sector steel plant which started with a production capacity of 1,00,000 tonnes has transformed into a global giant .

Tata Steel plans to grow and globalise through organic and inorganic routes. Its 5 million tonnes per annum (MTPA) Jamshedpur Works plans to double its capacity by 2010. The Company also has three greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh and proposed steel making facilities in Vietnam and Bangladesh.

Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand) and NatSteel Asia, Singapore, the Tata Steel has created a manufacturing and marketing network in Europe, South East Asia and the Pacific-rim countries. Corus, which manufactured 18.3 MT of steel in 2006, has operations in the UK, the Netherlands, Germany, France, Norway and Belgium. Tata Steel (Thailand) is the largest producer of long steel products in Thailand, with a manufacturing capacity of 1.7 MT. NatSteel Asia produces about 2 MT of steel products annually across its regional operations in seven countries.

Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has also entered the steel building and construction applications market.

33

The iron ore mines and collieries in India give the Company a distinct advantage in raw material sourcing. Tata Steel is also striving towards raw materials security through joint ventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman.

Exploration of opportunities in titanium dioxide business in Tamil Nadu, high carbon ferro-chrome plant in South Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growth and Globalisation objective of Tata Steel.

Tata Steel's vision is to be the global steel industry benchmark for Value Creation and Corporate Citizenship.

Tata Steel is one of the few steel companies in the world that is Economic Value Added (EVA) positive. It was ranked the "World's Best Steel Maker", for the third time by World Steel Dynamics in its annual listing in February, 2006. Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times.

Products

Tata Steel is a global player with a balanced presence in developed European and fast growing Asian markets and with a strong position in the construction, automotive and packaging markets. Its Jamshedpur steel works produces hot and cold rolled coils and sheets, galvanised sheets, tubes,

wire rods, construction rebars, rings and bearings. In an attempt to 'decommoditise' steel, the Company has introduced several branded steel products, including Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (rebars), Tata Pipes, Tata Bearings, Tata Structura, Tata Agrico (hand tools and implements) and Tata Wiron (galvanised wire products). In the financial year 2006-07 revenue from the sale of these branded steel products was 26% of the company's sales revenues.

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Corus' main operating divisions comprise Strip Products, Long Products and Distribution & Building Systems Division. Combining international expertise with local customer service, the company supplies a range of long and strip products to demanding customers worldwide in markets including the construction, automotive, packaging and engineering sectors. The NatSteel group produces construction grade steel such as rebars, cut-and-bend, mesh, precage bore pile, PC wires and PC strand. Tata Steel Thailand produces round bars and deformed bars for the construction industry.

Corporate Sustainability

Regarded globally as a benchmark in corporate social responsibility, Tata Steel's commitment to the community remains the bedrock of its hundred years of sustainability. Its mammoth social outreach programme covers the company-managed city of Jamshedpur and over 800 villages in and around its manufacturing and raw materials operations through uplift initiatives in the areas of income generation, health and medical care, education, sports, and relief.

The Company, fully conscious of its responsibilities to the future generations, has always taken pro-active measures to ensure optimum utilization of natural resources. This is reflected in the ISO-14001 certification that all its operations have achieved for environment management. The SA 8000 certification for work conditions and improvements in the workplace at the steel works in Jamshedpur, along with its Ferro Alloys and Minerals Division, is a reiteration of its commitment towards the Company's employees. Tata Steel has pioneered numerous employee welfare measures such as the 8 hours working day and the three tier joint consultation system of management which have been the platform for nearly 80 years of industrial harmony in its Steel Works in Jamshedpur.

Global Compact, United Nations -

Founder member.

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Jamshedpur city has been chosen to participate in the UN Global Compact Cities Pilot Programme.

Awards and Recognition

World Steel Dynamics has ranked Tata Steel as the world's best steel maker (for two consecutive years) in its annual listing in February 2006.

Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times.

It has been awarded Asia's Most Admired Knowledge Enterprise award in 2003, 2004 and 2006.

Conferred the prestigious Global Business Coalition Award for Business Excellence in the Community in recognition of its pioneering work in the field of HIV/ AIDS awareness.

Tata Steel works has been conferred the prestigious social accountability (SA) 8000 certification by social. Accountability international (SAI), USA. It is the first steel company in the world to receive this certificate.

Corporate Sustainability Report of Tata Steel hailed by United Nation's Environment Programme (UNEP) and Standard and poor as strongest, submitted by any corporate house from emerging economies.

Best governed company Award 2006 for setting high standards in governance practices.

Tata Steel conferred Mother Teresa Award for Corporate Citizen. Tata Steel won "Award for Corporate Social Responsibility in Public

health" by US- Indian Business Council (USIBC), Population Services International (PSI) and the center for Strategic and International Studies (CSIS) in 2007.

36

SWOT Analysis of the Company:

Strength:

- 6th Largest Steel Manufacturer in world- Brown field expansion in Jamshedpur and

Greenfield project at Kalingangar to meet increasingdemand in future.

- TSL has formed a Global Minerals Group, in-orderto explore various opportunities to secure access toiron ore and coal in various geographies.

Weakness:

- TSL’s bottom line will be affected to increase in Interest cost, due to long term debt raised by the company for Corus acquisition.

Opportunities:

- The International Iron and Steel Institute forecast global steel consumption to grow at 6.1% in FY 08 driven by strong demand from Asia, Africa and South America.

- The amount allocated for development of infrastructure for 11th Five year plans amounts to USD 320 bn. As a result, the domestic steel consumption is expected to increase to 65 mn. Tones by FY 10 and over 125 mn tones by FY 15.

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Threats:

- Increase in imported raw material prices may affect the operating margins of the companies.

- Change in economic environment- Threat of increased production in China and its ability to export.- Assuming interest rate goes up by 50 bps (Corus funding), such

increase will impact the PAT margins by 23 bps.

38

ANALYSIS AND

DISCUSSION

39

PRESENTATION AND ANALYSIS OF DATA:

Working Capital Analysis of TATA STEEL Ltd.

Working capital is a financial metric which represents the amount of day-

by-day operating liquidity available to a business. Also known as

operating capital, it is calculated as current assets minus current

liabilities. A company can be endowed with assets and profitability, but

short of liquidity, if these assets cannot readily be converted into cash. It

is a two edged sword where excess of working capital implies blockage of

fund and low working capital gives a fear of falling into liquidity crunch

therefore it is rightly said that :

“Never cross the border, wisdom says, there is fire beyond

the border”

40

The working capital of the company is given below:

41

Working capital of the company showing by graph:

2002-03 2003-04 2004-05 2005-06 2006-070.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

5,000.00

Working Capital

Gross Working Capital Net Working Capital

The figures above shows that the company has managed to bring down

the working capital which is a positive sign. A detailed analysis of the

various constituents of the working capital has been done to learn the

intricacies which have been managed to get the result.

42

The figure above shows that Gross Working Capital has an increasing

trend whereas net working capital is going down and in the year 2006-07

it has decreased too much. But prima facie it suggests that investment in

current assets has increased much and the liabilities have also not been

fixed to a great extent. There may be several reasons which will be

discussed later in detail.

43

OPERATING CYCLE OF TATA STEEL:

Operating cycle of TATA STEEL showing below:

2002-03 2003-04 2004-05 2005-06 2006-070

10

20

30

40

50

60

70

OPERATING CYCLE OF TATA STEEL

44

Working capital statement of TATA STEEL till 2007 showing below:

The operating cycle shows an irregular trend. It was increasing all the

way but all of a sudden it went down in 2006-07. The main reason

behind this is that debtors’ collection period has decreased and

creditors’ payment period has increased a lot. The credit period granted

by customers is generally 90 days but since the company is running on

loss sometimes it cannot pay the amount in stipulated time, this has led

to the increase in credit period availed from customer and thus

decreased the operating cycle to such an extent.

45

INVENTORY MANAGEMENT

“In clarity and confusion, imagination and emotion Creation

Proceeds towards Perfection”

For a long time inventory management remained everybody’s concern

but nobody’s responsibility. Every organizational unit along the

productive distributive channel of an enterprise wants to have full

control over the inventory it deals in: the purchasing department for

materials inventory; production department for work in process, and

marketing department for finished goods inventory. Although the

distribution appears to be logical, inherent in it is the tendency to

maximize individual goals at the cost of organizational goals. Thus the

process of sub-optimization begins which leads to disastrous results for

the enterprise and put inventory management in disarray.

46

Worldwide the corporate failures during and after the Second World War

and lately during ‘70s, led the corporate thinkers to redefine the goals of

inventory management as a part of overall materials management of the

enterprise. Materials requirement planning (MRP) which emerged as a

new discipline, attempted to define inventory management as an

integral part of MRP whose broad goals are: (1) to minimize investment

in inventory: (2) to ensure smooth and efficient operation of the plant

and, (3) to maximize customer service and satisfaction.

The TATA STEEL Limited has varied product line.[which includes Long

tubes, Semis, Hot Rods, Cold rods, Galvanized Tubes]. A number of

materials small and big are used in the production process. Their efficient

management is very much required to use the resources profitably.

A manufacturer is required to hold almost all the three types of

inventories namely raw materials, work in process and finished goods.

Inventory problems are most complex here because of the complexity of

47

products (e.g. a project or finished goods), processes (e.g. continuous or

intermittent) and distribution (e.g. geographical locations).

Inventory Strategy:

Inventory strategies vary with the kind of focus strategy and the product

market. For a cost focus strategy, make to stock could be ideal. For

focused premium market segment the strategies could partly be make to

stock and partly assemble to order. Focused differentiation in custom

based products may follow inventory strategy of make to order or

engineer to order. In both the cases production would not start until an

order is received. The consultancy Element is greater in the latter than in

the former strategy, which requires designing and/or developing a

prototype according to customer requirement and then producing it.

Customer wait time is therefore, longer in engineer to order strategy

than in make to order strategy.

The TATA STEEL [tubes division] uses Just – In - Time Purchases system

for its inventory and TOC (theory of constraints). The company runs on

48

the system make to order. Production is made on the basis of order

received or expected orders to be received. The marketing department

makes an estimation of the order to be received and accordingly issues

directions to the shop floor for the production requirement. The shop

floor on the basis of above requisitions check out its materials in stock

and accordingly issues requisition for purchase of raw materials to

purchase department.

49

A close look on the figures and graphs showing in figure 1,2,3.

50

Table 1:

2002-03 2003-04 2004-05 2005-06 2006-07

0

2

4

6

8

10

12

14

16

18

20

Consumption of Raw Materials per Day

2002-03 2003-04 2004-05 2005-06 2006-07

0

5

10

15

20

25

30

Raw Materials Inventory In Days

Graph 11 Graph 12

A close look on the figures and graphs above indicates that in the last

four years though the sales remained same or has decreased but the

stock of raw materials has increased. Besides this the consumption has

also increased from 66% in 2002-03 to 66.18% in 2006-07. This was due

to the fact the company has so far been unable to recover the rise in 51

price of raw materials from its sales. The price of raw material has

increased a lot from 2002 to 2007 but due to stiff competition in the

market it cannot be recovered by increasing the sale price so that the

company should not lose its market share. The increase in inventory may

pertain to wrong estimation of executable orders based on which

purchases were made which added on to the stock.

Manufacturing Process (Production Phase)

It is the process by which raw material or semi finished goods are

converted into finished goods by doing some processing on them or

adding something to them. Given below is the five-year data. To

calculate its effect on working capital requirement work in progress in

operating days is calculated for the following five years.

52

PRODUCTION PHASE of the TATA STEEL showing in table 2.

Table 2 (above)

Work in Progress (Holding Period 2002 to 2007) showing in graph 3:

2002-03 2003-04 2004-05 2005-06 2006-070

2

4

6

8

10

12Work In Progress Holding Period

Graph 3

53

The data above shows that both cost of goods produced and work in

progress have increased during the period. Work in progress holding

period has also increased which should be taken care of. Since cost of

goods produced per day and average work in progress has increased WIP

holding period has increased.

54

RECEIVABLES MANAGEMENT:

Collection of Receivables from Debtors:

Accounts receivables of a firm are created on both sides of the

productive system. On one side of this system, the firm may make

advance payments to the suppliers of inventories (raw materials) to

ensure timely supply, particularly when the suppliers hold monopolistic

position in the market place, or when materials are in short supply, or

simply to develop a captive supply base. A firm may also be motivated to

make advance payments for pure short term financial and profitability

considerations. Any one or a combination of them will create accounts

receivable on the left side of the productive system which may replace

the box for supply creditors or hinge parallel to it.

On the other side of the productive system, a firm creates accounts

receivables when it sells its outputs on credit. These are popularly

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termed as sundry debtors by the English to distinguish it from other

forms of accounts receivables. Sundry Debtors constitute nearly 60

percent of accounts receivables of an enterprise. Many of the

considerations that weigh in the minds of a seller are similar to that of

making advance payment for supply of materials, though often on the

opposite direction. But there are more to it than this, which will be

discussed later.

Size of accounts receivable

Although accounts receivable does not find much place in economics

literature because of its non-existence in national accounting framework

and the assumption of perfect financial market, its enormity as a

financial variable cannot be ignored at the firm level when we find that

even in an advanced economy, like the United States, it constitutes more

than 20 % of the total assets of manufacturing firms. In India, it is about

26%.

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Trade Credit Marketing Finance Trade Off

Whatever way we look at it, accounts receivables imply trade credit, and

the decision to grant trade credit may either be part of marketing

strategy or pure finance strategy, but mostly it is a trade-off between

marketing and finance strategies of a business.

An important goal of marketing is matching of the demand of a market

segment with adequate and timely supplies. Choice of a correct

distribution system or channel is chosen is therefore, key to achieving

such a goal. The decision to pick up a particular channel has a long term

effect on the business. Once a channel is chose it is difficult to alter it in

short term because of commitments made to a large number of people

and to independent firms whose principal business is distribution. It

often takes years to develop a distribution channel which may remain

external to the enterprise, but gets integrated so much with it that it

takes up the character of a total business system. Any attempt to snap

even a small part of this chain may have the effect of ultimately blocking

the inventory flow through the system.

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Distribution Channels:

Choice of a particular distribution channel has a direct impact on

inventory holding and level of receivables. Even when an enterprise does

not desire to own the entire channel, working capital requirement does

not change except marginally. Such is the importance of correct choice of

a distribution channel. Direct marketing or owning a marketing channel

(which is also called zero level channel) is best from the point of view of

receivables management. As the manufacturer has direct control over

the distribution system, receivables are closely monitored resulting into

lower level of receivables holding. There is also less distortion in

marketing and credit information flow to the business. While marketing

research information enables the firm to understand quickly the

changing consumer needs and product behavior, the credit information

helps it understand credit behavior of customer, which forms the basic

input to decide whom to grant trade credit and the degree of monitoring

required for a particular customer or a group of customers owing to any

change in their creditworthiness.

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As more and more cash is received from the debtors the liquid funds

available for the working of the company increases. In TATA STEEL

debtors are given a credit period of 90 days. However to encourage an

early payment customers are being given a discount of 3 % on payment

within 15 days and 1 ½ % on payment within 30 days, with the condition

that they should not have any old outstanding account which is due for

more than 60 days. Given below is the data for receivables of the

company.

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2002-03

2003-04

2004-05

2005-06

2006-07

1750

1800

1850

1900

1950

2000

2050

Average Debtors

2002-03 2003-04 2004-05 2005-06 2006-07

0

20

40

60

80

100

120

Average Collection Period

Chart 14(Avg.Debtors/year) Chart 15(Avg.Collection Period/yr)

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Table 16 showing debtor from 2002 to 2007.

Conclusion: The debtor figures show a mix of ups and downs. Debtors

balance has increased and decreased although the sales have remained

almost at the same level. This shows that the company is trying to hold

the customers by giving relaxations in credit terms and sometimes

stringent credit terms were used to avoid liquidity crunch. A significant

decrease in average collection period can be seen from 97 days to 73

days which is a good sign and depicts efficient receivables management

by the company. A decrease in debtors means more funds release for

the company from working capital and hence no need to borrow funds

as working capital.

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Management of Accounts Payable:

Accounts payable includes trade credit and accrued expenses which

together provide finance to the operations of a business on an ongoing

basis. Accounts payable is the opposite face of accounts receivable. The

former exists because of the latter. The dominant part of accounts

payable is trade credit which is first offered by the seller of goods which,

when accepted by the buyer, creates accounts payable in the books of

accounts of the latter. TATA STEEL used to get a credit period of 0 to 90

days. However their average payment period stands at 100 days.

Table 17 showing creditors of the TATA STEEL from 2002-2007.

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Average Payment from creditors from 2002 to 2007 showing by Graph 8.

2002-03 2003-04 2004-05 2005-06 2006-070

20

40

60

80

100

120

140

Average Payment Period

Graph 8

Conclusion: The creditor figures have increased in the long during the

period. From 2004-05 to 2005-06 there have been an increase of almost

82%. This is due to fact that average payment period has increased from

73 days to 100 days. It means the company is utmost utilizing the credit

period given to it. However a careful look into the profit and loss account

of the company suggests that the company is running under loss and is

suffering from the liquidity crunch so that may have been the reason for

increase in average payment period.

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Comparative Analysis of Working Capital through

Ratios:

Various ratios of working capital has been discussed here and compared

with the competitors to analyze the working capital position of the

company.

CURRENT RATIO:

The liquidity of working capital is an important aspect to be analyzed by

the management for maintaining proper liquid resources to meet

operational needs.

Current Ratio indicates firm’s commitment to meet its short term

liabilities & is calculated by the formula:

Current Assets / Current Liabilities

Rationale: Higher the ratio, larger is the amount available per Rupee of

current liability, the more the firm’s ability to meet current obligations &

greater the safety of funds of short term creditors. Thus current ratio 64

measures margin of safety to creditors. Graph below compares current

ratio past five years with its competitors.

CURRENT RATIO

Chart 9 Showing current ratio of TATA STEEL.

2002-03 2003-04 2004-05 2005-06 2006-07

TATA 1.94 2.46 1.89 1.67 1.14

Jin-dal

1.62 1.39 1.47 1.17 1.04

Other 1.63 1.41 1.45 1.55 1.58

0.25

0.75

1.25

1.75

2.25

Chart 9 (above)

Interpretation:

Conventionally ideal current ratio is 2:1, but in practice ideal ratio varies

significantly from industry to industry & from company to company.

The current ratio of TATA STEEL Ltd varied from 2.46 to 1.14. It has been

fluctuating between the two. However the trend seems to be decreasing.

Thus it can be said that the margin of safety for creditors is decreasing

and company’s liquidity position is deteriorating. But when it is 65

compared to its competitors JINDAL and OTHERS Ltd., it has still

maintained a good position. Hence the decline may be an implication of

market forces because its competitors are also facing the same situation.

Only OTHERS Ltd. has managed to improve its current ratio. It means as

compared to the other two, Other Ltd. has a strong liquidity position

whereas the liquidity position of TATA STEEL and JINDAL are declining.

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QUICK RATIO:

This is most rigorous and absolute test of liquidity position of business

unit. It shows to what extent cash is available with the firm to meet its

current liabilities.

Quick ratio of the TATA STEEL showing in chart 10.

2002-03 2003-04 2004-05 2005-06 2006-070

0.20.40.60.8

11.21.41.61.8

1.5

1.79

1.31

1.05

0.720000000000001

1.3

1.171.23

0.960000000000001

0.81

1.32

1.1 1.09 1.12 1.16

TATA STEEL Jindal Others

Interpretation:

The quick ratio of TATA STEEL is showing a declining trend. From 1.5 in

2002 to 0.72 in 2007, it has dipped almost 50%. If we compare its quick

ratio to Jindal and OTHERS they are in a better position. OTHERS Ltd. has

the strongest quick ratio among the three of 1.16.

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This means that the liquidity position of TATA STEEL is not that good . It

is showing insufficiency of funds. Since the company is running into

losses it must have been affected the liquidity position. It is very

important for the company to have a good liquidity position because it

may suffer various bottlenecks.

From the ratios available for TATA STEEL Ltd., it is apparent that it is too

less than the std norm but seeking the kind of industry and its aggressive

policy for utilization of its current assets the ratio seems sufficient but if

we compare current ratio and acid test ratio, then it can be implied that

funds are blocked in slow moving inventory. Both the current and quick

ratios should be considered in relation to industry average to infer

whether the firm’s short term financial position is satisfactory or not.

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INVENTORY TURNOVER RATIO:

Chart 11 showing inventory turnover ratio of the TATA STEEL.

2002-03 2003-04 2004-05 2005-06 2006-070

5

10

15

20

10.1812.08

9.538.16

6.44

13.98

16.61 16.8

19.49

16.71

10.76 10.1 10.389.19 9.78

TATA STEEL Jindal Others

Chart 11 (above)

The inventory turnover ratio shows how rapidly the inventory is turning

into receivable through sales. Generally a high inventory turnover is

indicative of good inventory management. A low inventory turnover

implies excessive inventory levels than warranted by production and

sales activities, or a slow moving or obsolete inventory. We have seen

that the Sales of TATA STEEL is declining and the company is under

losses. Hence a decreasing inventory turnover ratio implies there is

unnecessary tie up of funds, reduced profit and increased costs. Among

the competitors Jindal has the highest inventory turnover ratio which

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means that it is efficiently managing its inventory to convert them into

sales.

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FIXED ASSETS TURNOVER RATIO:

Showing fixed assets turnover ratio of TATA STEEL in graph 12.

2002-03 2003-04 2004-05 2005-06 2006-07012345678

3.344.18

3.654.23

2.68

6.876.43 6.19

7.42

5.55

2.032.42 2.68

3.163.69

TATA STEEL Jindal Others

Chart 12 (above)

Fixed Asset Turnover ratio shows the firm’s ability in generating sales by

utilizing fixed assets. A look on the graph tells the whole story of fixed

assets turnover of TATA STEEL. It was doing well in 2002 but thereafter it

declined and though its position is somewhat manageable but comparing

to its competitors it is not good.

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EOQ[Economic Order Quantity] Analysis

The TATA STEEL Ltd. maintains its stock on Just In Time Purchases and

TOC. The company produces on make to order rather than make to

stock. In this preview the company should have low inventory but the

inventory level of the company is quite high and it has shown an

increasing trend over past few years. Moreover the inventory turnover

ratio has also gone down from 10.18 in 2001 to 6.44 in 2006, a fall of

almost 40%.

If we consider the storage period the raw material storage period has

increased from 22.38 days from 2001-02 to 26.94 in 2005-06, work in

progress storage period has increased from 5.02 days to 11.19 days for

the same period. It has almost doubled. And the finished goods storage

period has also doubled. It rose from 9.64 days to 20.57 days. Thus the

storage period of the entire inventory has increased. Storage of

unnecessary or idle stock costs a lot in terms of opportunity cost, and the

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cost of handling those items. An EOQ analysis can reduce these extra

costs associated with the stock. But the company does not follow EOQ

system.

EOQ system will decrease the ordering and holding cost to minimum

without having any stock out cost which will thus benefit the company

both in terms of total purchasing cost and providing liquidity and

efficient management of inventory.

I analyzed some of the company’s raw materials on EOQ basis to check

whether the current inventory technique is suitable for the company or

whether EOQ is more beneficial to it.

Since the company does not having any details regarding ordering cost

and holding cost per unit per annum the analysis is made to minimize

inventory level without increasing the purchasing workload.

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CONCLUSION AND

SUMMARY

74

CONCLUSION:

The success or failure of an organization primarily depends on its ability

to sustain its comparative advantage irrespective of the kind of strategy

it adopts – cost leadership, differentiation or focus.

After analyzing the financial statements and having a deep study of

working capital cycle of the company I came to the conclusion that

though the company is suffering huge losses and various ratios do not

speak in its favors, the reason could not be found as its inefficiency or

incapacity to succeed rather the reason being unavailability of market in

the present working scenario.

The companies have to have some new avenues which will explore new

markets and paths of success. Quality could be the key word for

company’s future prospects.

We can conclude from the above Working Capital Ratios that net

working capital is going down and in the year 2006-07 it has decreased

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too much. But prima facie it suggests that investment in current assets

has increased much and the liabilities have also not been fixed to a great

extent.

The operating cycle shows an irregular trend. It was increasing all the

way but all of a sudden it went down in 2006-07. The main reason

behind this is that debtors’ collection period has decreased and

creditors’ payment period has increased a lot.

The credit period granted by customers is generally 90 days but since the

company is running on loss and sometimes it cannot pay the amount in

stipulated time, this has led to the increase in credit period availed from

customer and thus decreased the operating cycle to such an extent.

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SUMMARY

Working capital management is the most complex thing to manage in a

company. Working capital is just not related to finance department.

Various departments affect its working and finance department has to

keep an eye of control over all of them. Its function starts right from

estimating demand by marketing department and before coming to

final destination of operating cycle in finance department it knocks the

door of purchasing, quality control, shop floor, stores and finally to

customers. All cost centers have their own style of working and it

becomes very difficult to control the time taken by other department.

Though control is being made but its not easy to maintain ideal norms

and sometimes it severs the relations of finance people with other

department people.

Irregular trend of operating cycle shows a very dangerous situation

because the delay in payment of accounts payable may result in saving

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of some interest costs but it can prove very costly to the firm in the

form of loss of credit in the market. This calls for a change in

companies policies to ensure that the payments to the creditors are

made at possible stipulated time periods after obtaining the best credit

terms possible.

With the economy in boom and various industries coming up, TATA

STEEL have to look over the quality aspect of its product and strive to

offer unmatchable quality at unbeatable price[over which they have

already worked upon] to regain its market share both in domestic

market as well as in foreign market.

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Bibliography

As my complete analysis was based on the secondary

data basis, I have mostly gone through various web-sites

on the internet and the annual reports of TATA STEEL

Ltd. The names of the web-sites are:

www.tatasteel.com

www.investmentz.co.in

www.zeebuz.com

Followed by many other searches from

www.google.com.

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