Description
This is a presentation describes Ratio Analysis Of Ranbaxy Sun Pharma and compares their inventory management by ABC method, EPQ Method, order point safety point, JIT.
INVENTORY MANAGEMENT
FINANCIAL ACCOUNTING AND ANALYSIS
AGENDA
Ratio Analysis Of Ranbaxy Sun Pharma
Introduction On Inventory Management ABC Method EOQ Model Order Point Safety Stock Just-In-Time Inventory Management In Ranbaxy Sun Pharma Inventory Ratio Analysis Of Ranbaxy And Sun Pharma Conclusion
RATIO ANALYSIS
Ratios (2008) Current ratio Quick Ratio Debt Equity Ratio Debtors Turnover Ratio Total Assets Turnover Ratio Ranbaxy 1.4 0.99 1.04 5.77 0.63 Sun Pharma 6.3 5.12 0.02 2.47 0.58
Operating Cycle
Interest Coverage Inventory Turnover Ratio Gross Profit Margin Net Profit Margin
167
(12.13) 3.5 (3.6) (13)
240
206.27 3.9 46.2 44.3
Return On Asset
Return on Equity
(8.7)
(27.48)
18.71
21.97
INVENTORY MANAGEMENT
• Inventories- a link between the production and sale of a product.
Types of Inventory
Work-InProgress
In Transit
Finished Good
Raw Material
• Raw material inventory gives the firm flexibility in its purchasing • Finished-goods- inventory allows the firm flexibility in its production scheduling and in its marketing. • Advantage 1.Large inventories allow efficient servicing of customer demands. • Disadvantages 1.Total cost of holding the inventory. 2.Danger of obsolescence
Types of Cost
Ordering Cost • related to purchased items • requisitioning, set-up, and receiving and placing in storage Carrying Cost • interest on capital locked up in inventory, storage, insurance, obsolescence, and taxes. • 20 percent of the value of inventories held. Shortage costs • arises when inventories are short of requirement for meeting the needs of the production or the demand of customers
• What to ABC METHOD Control? •How much EOQ MODEL to order?
ABC METHOD
Different types of inventory exist for a typical manufacturing firm, raw materials, work-in-progress, in-transit, and finished goods inventories. It is a method that controls expensive inventory items more closely than less expensive items. Classification done on dollar value of the firm’s investment.
Classification of items
Category A : 15-25 % of inventory items, 60-75 % of inventory items. Category B : 20-30 % of inventory items, 20-30 % of inventory items. Category C : 40-60 % of inventory items, 10-15 % of inventory items.
EOQ MODEL
? What should be the size of the order? ? At what level should the order be placed? Assumptions of the basic EOQ model • Only one product is involved. • Annual demand requirements are known. • Demand is spread evenly throughout the year so that the demand rate is reasonable constant. • There are two distinguishable costs associated with inventories :Cost of ordering and Cost of carrying. • Each order is received in a single delivery. • There are no quantity discounts
EOQ MODEL
• The quantity of an inventory item to order so that total costs are minimized over a firms planning period. • The optimal order quantity for a particular item of inventory, given its forecast usage, ordering costs, and carrying cost • Ordering costs per order, O, are constant regardless of the size of the order. • Carrying costs per unit, C, represents the cost of inventory storage, handling, and insurance, together with required return on investment in inventory over the period.
EOQ FORMULA
• Symbols used : U : annual usage/demand Q : quantity ordered F : cost per order C : percent carrying cost P : price per unit T : total costs of ordering and carrying
T = U/Q x F + Q/2 x P x C
EOQ MODEL CONTINUED…..
Carrying costs varies directly with the order size. Ordering Costs varies inversely with the order size. Thus, higher the order quantity Q, the higher the total carrying costs but lower the total ordering costs. Hence it becomes important to trade off between the economies of increased order size and the added cost of carrying additional inventory.
OPTIMAL ORDER QUANTITY
• It is the quantity that minimizes total inventory costs over the firms planning period.
Q = ?2 FU/PC
ORDER POINT
• The reorder point (ROP) occurs when the quantity on hand drops to a predetermined amount. Four determinants of the reorder point quantity: • The rate of demand (usually based on a forecast) • The lead time • The extent of demand and/or lead time variability • The degree of stockout risk acceptable to manager • d = demand rate (units per day or week) LT = lead time in days or weeks
SAFETY STOCK
• The usage of raw materials inventory and in-transit inventory depends on the production scheduling. • The lead time required to receive delivery of inventory once an order is placed is usually subject to some variation • Expected inventory to fall to zero before a new order is placed – NOT FEASIBLE • Therefore, when uncertainty in demand for inventory and lead time is allowed, a SAFETY STOCK is necessary • Order Point [OP] = Avg. lead time x Avg. daily usage + Safety Stock
SAFETY STOCK CONTINUED…
AMOUNT OF SAFETY STOCK • Uncertainty in DEMAND • Uncertainty in LEAD TIME • Cost of running out of inventory • Cost of carrying ADDITIONAL INVENTORY
Additional Points Considered
• • • • • Anticipated scarcity Expected price change Obsolescence Risk Government Restrictions Market considerations
PRICING OF RAW MATERIALS
• FIFO Method • Weighted Average Cost Method
Valuation of Stocks • Direct Costing • Absorption Costing
JUST IN TIME
• Inventories are acquired and inserted in production at the exact times they are needed. • “AS NEEDED” basis REQUIREMENTS • Accurate productions • Inventory information system • Highly efficient purchasing • Reliable suppliers • Efficient inventory handling system
JUST IN TIME CONTINUED….
EOQ in a JIT world A JIT system in which inventories would be reduced to a bare minimum and the EOQ for a particular item might approach one unit – would be in direct conflict with our EOQ model • Small sized delivery trucks • Reducing (or eliminating) inspection costs • Modifications
JIT INVENTORY CONTROL, SUPPLY CHAIN MANAGEMENT AND THE INTERNET
• Associated with moving goods from the raw material stage through to the end user or customer (Supply Chain management) • A number of exchanges have developed for business-to-business (B2B) types of transaction • Cost Effectiveness
WHAT IS NEEDED TO MAKE A “JUST-IN-TIME” SYSTEM WORK
• • • • • • • •
Geographic concentration. Dependable quality. Manageable Supplier network. Controlled transportation system. Manufacturing flexibility. Small lot sizes. Efficient receiving and material handling. Strong Management commitment.
Inventory Management of Ranbaxy
Inventories Stores and spares Rs. Million (2008) 181.49
Raw materials
Packaging materials
6,689.18
795.20
Finished goods
Work in progress Total inventories
8788.35
3188.92 19643.14
FIFO method
INVENTORY CONTROL
ERP Implementation
Just In Time
Inventory Management of Sun Pharma
Inventories Consumable stores Raw materials Packaging materials Finished goods Work in progress Total inventories Rs. Million (2008) 148.3 4229.7 307.3 881.4 2161.0 7,727.7
FIFO method
INVENTORY TURNOVER RATIO (2008)
4
3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.39 3.2 3.1 Avg of top 25* Ranbaxy Sun Pharma 3.9
Inventory Turnover Ratio
3.5
INVENTORY TURNOVER IN DAYS (2008)
110
105
D A Y S
100
108 95 104
Inventory Turnover in Days
90 93
85 Avg of top 25* Ranbaxy Sun Pharma
Judging An Inventory System
Comprehensibility
• Should be understood by all parties. • Purpose, logic and rational should be clear
Adaptability • Flexible + Versatile Timeliness
• Inventories may suffer loss in value: • Obsolescence, Physical Deterioration or Price Fluctuation
Areas of improvement
• • • • • Effective computerization Review of the system Improved coordination Development of long term relationship Adoption of challenging norms
CONCLUSION
• Inventories represent the second largest asset category for manufacturing companies, next to plant and equipment. • Inventories to Total Assets – 15% - 30% • Role of FINANCE MANAGER
– Capital allocation. – Uncertain demand. (Reduce average lead time.) – Trade-off between the added cost in reducing the lead time and the opportunity cost of funds tied up in inventory.
doc_799941940.pptx
This is a presentation describes Ratio Analysis Of Ranbaxy Sun Pharma and compares their inventory management by ABC method, EPQ Method, order point safety point, JIT.
INVENTORY MANAGEMENT
FINANCIAL ACCOUNTING AND ANALYSIS
AGENDA
Ratio Analysis Of Ranbaxy Sun Pharma
Introduction On Inventory Management ABC Method EOQ Model Order Point Safety Stock Just-In-Time Inventory Management In Ranbaxy Sun Pharma Inventory Ratio Analysis Of Ranbaxy And Sun Pharma Conclusion
RATIO ANALYSIS
Ratios (2008) Current ratio Quick Ratio Debt Equity Ratio Debtors Turnover Ratio Total Assets Turnover Ratio Ranbaxy 1.4 0.99 1.04 5.77 0.63 Sun Pharma 6.3 5.12 0.02 2.47 0.58
Operating Cycle
Interest Coverage Inventory Turnover Ratio Gross Profit Margin Net Profit Margin
167
(12.13) 3.5 (3.6) (13)
240
206.27 3.9 46.2 44.3
Return On Asset
Return on Equity
(8.7)
(27.48)
18.71
21.97
INVENTORY MANAGEMENT
• Inventories- a link between the production and sale of a product.
Types of Inventory
Work-InProgress
In Transit
Finished Good
Raw Material
• Raw material inventory gives the firm flexibility in its purchasing • Finished-goods- inventory allows the firm flexibility in its production scheduling and in its marketing. • Advantage 1.Large inventories allow efficient servicing of customer demands. • Disadvantages 1.Total cost of holding the inventory. 2.Danger of obsolescence
Types of Cost
Ordering Cost • related to purchased items • requisitioning, set-up, and receiving and placing in storage Carrying Cost • interest on capital locked up in inventory, storage, insurance, obsolescence, and taxes. • 20 percent of the value of inventories held. Shortage costs • arises when inventories are short of requirement for meeting the needs of the production or the demand of customers
• What to ABC METHOD Control? •How much EOQ MODEL to order?
ABC METHOD
Different types of inventory exist for a typical manufacturing firm, raw materials, work-in-progress, in-transit, and finished goods inventories. It is a method that controls expensive inventory items more closely than less expensive items. Classification done on dollar value of the firm’s investment.
Classification of items
Category A : 15-25 % of inventory items, 60-75 % of inventory items. Category B : 20-30 % of inventory items, 20-30 % of inventory items. Category C : 40-60 % of inventory items, 10-15 % of inventory items.
EOQ MODEL
? What should be the size of the order? ? At what level should the order be placed? Assumptions of the basic EOQ model • Only one product is involved. • Annual demand requirements are known. • Demand is spread evenly throughout the year so that the demand rate is reasonable constant. • There are two distinguishable costs associated with inventories :Cost of ordering and Cost of carrying. • Each order is received in a single delivery. • There are no quantity discounts
EOQ MODEL
• The quantity of an inventory item to order so that total costs are minimized over a firms planning period. • The optimal order quantity for a particular item of inventory, given its forecast usage, ordering costs, and carrying cost • Ordering costs per order, O, are constant regardless of the size of the order. • Carrying costs per unit, C, represents the cost of inventory storage, handling, and insurance, together with required return on investment in inventory over the period.
EOQ FORMULA
• Symbols used : U : annual usage/demand Q : quantity ordered F : cost per order C : percent carrying cost P : price per unit T : total costs of ordering and carrying
T = U/Q x F + Q/2 x P x C
EOQ MODEL CONTINUED…..
Carrying costs varies directly with the order size. Ordering Costs varies inversely with the order size. Thus, higher the order quantity Q, the higher the total carrying costs but lower the total ordering costs. Hence it becomes important to trade off between the economies of increased order size and the added cost of carrying additional inventory.
OPTIMAL ORDER QUANTITY
• It is the quantity that minimizes total inventory costs over the firms planning period.
Q = ?2 FU/PC
ORDER POINT
• The reorder point (ROP) occurs when the quantity on hand drops to a predetermined amount. Four determinants of the reorder point quantity: • The rate of demand (usually based on a forecast) • The lead time • The extent of demand and/or lead time variability • The degree of stockout risk acceptable to manager • d = demand rate (units per day or week) LT = lead time in days or weeks
SAFETY STOCK
• The usage of raw materials inventory and in-transit inventory depends on the production scheduling. • The lead time required to receive delivery of inventory once an order is placed is usually subject to some variation • Expected inventory to fall to zero before a new order is placed – NOT FEASIBLE • Therefore, when uncertainty in demand for inventory and lead time is allowed, a SAFETY STOCK is necessary • Order Point [OP] = Avg. lead time x Avg. daily usage + Safety Stock
SAFETY STOCK CONTINUED…
AMOUNT OF SAFETY STOCK • Uncertainty in DEMAND • Uncertainty in LEAD TIME • Cost of running out of inventory • Cost of carrying ADDITIONAL INVENTORY
Additional Points Considered
• • • • • Anticipated scarcity Expected price change Obsolescence Risk Government Restrictions Market considerations
PRICING OF RAW MATERIALS
• FIFO Method • Weighted Average Cost Method
Valuation of Stocks • Direct Costing • Absorption Costing
JUST IN TIME
• Inventories are acquired and inserted in production at the exact times they are needed. • “AS NEEDED” basis REQUIREMENTS • Accurate productions • Inventory information system • Highly efficient purchasing • Reliable suppliers • Efficient inventory handling system
JUST IN TIME CONTINUED….
EOQ in a JIT world A JIT system in which inventories would be reduced to a bare minimum and the EOQ for a particular item might approach one unit – would be in direct conflict with our EOQ model • Small sized delivery trucks • Reducing (or eliminating) inspection costs • Modifications
JIT INVENTORY CONTROL, SUPPLY CHAIN MANAGEMENT AND THE INTERNET
• Associated with moving goods from the raw material stage through to the end user or customer (Supply Chain management) • A number of exchanges have developed for business-to-business (B2B) types of transaction • Cost Effectiveness
WHAT IS NEEDED TO MAKE A “JUST-IN-TIME” SYSTEM WORK
• • • • • • • •
Geographic concentration. Dependable quality. Manageable Supplier network. Controlled transportation system. Manufacturing flexibility. Small lot sizes. Efficient receiving and material handling. Strong Management commitment.
Inventory Management of Ranbaxy
Inventories Stores and spares Rs. Million (2008) 181.49
Raw materials
Packaging materials
6,689.18
795.20
Finished goods
Work in progress Total inventories
8788.35
3188.92 19643.14
FIFO method
INVENTORY CONTROL
ERP Implementation
Just In Time
Inventory Management of Sun Pharma
Inventories Consumable stores Raw materials Packaging materials Finished goods Work in progress Total inventories Rs. Million (2008) 148.3 4229.7 307.3 881.4 2161.0 7,727.7
FIFO method
INVENTORY TURNOVER RATIO (2008)
4
3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.39 3.2 3.1 Avg of top 25* Ranbaxy Sun Pharma 3.9
Inventory Turnover Ratio
3.5
INVENTORY TURNOVER IN DAYS (2008)
110
105
D A Y S
100
108 95 104
Inventory Turnover in Days
90 93
85 Avg of top 25* Ranbaxy Sun Pharma
Judging An Inventory System
Comprehensibility
• Should be understood by all parties. • Purpose, logic and rational should be clear
Adaptability • Flexible + Versatile Timeliness
• Inventories may suffer loss in value: • Obsolescence, Physical Deterioration or Price Fluctuation
Areas of improvement
• • • • • Effective computerization Review of the system Improved coordination Development of long term relationship Adoption of challenging norms
CONCLUSION
• Inventories represent the second largest asset category for manufacturing companies, next to plant and equipment. • Inventories to Total Assets – 15% - 30% • Role of FINANCE MANAGER
– Capital allocation. – Uncertain demand. (Reduce average lead time.) – Trade-off between the added cost in reducing the lead time and the opportunity cost of funds tied up in inventory.
doc_799941940.pptx