(Type The Document Title) : IIPM Bangalore

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CONTENTS
Chapter Page No.
Executive Summary 2
Industry Analysis 3
Introduction to the Company 10
Research Methodology 14
The Literature 16
The Analysis – Findings, 21
Recommendations and Suggestions
Conclusion 34
IIPM Bangalore Page 1

Executive Summary
In today’s dynamic world every organization is striving hard to achieve best global practices
to win over competitors and customers with utmost satisfaction. They are leaving no stones
unturned for the same. Inventory is one such aspect of manufacturing concerns which require
sophisticated tools and techniques, which will fulfill the goals and objectives of the firm.
Inventory not only reduces the cost but also equip the business with an added advantage. It
gives the firm an edge which serves as competitive advantage in contrast to the competitors.
At Larsen and Toubro Komatsu Limited, inventory management is given one of the top
priority’s which makes L&T Komatsu one of the leading player in its segment with high
customer satisfaction.
This project explores further aspects of inventory management and control at L&T Komatsu
which will enhance the inventory management leading to operational excellence.

INDUSTRY ANALYSIS
India’s Construction Equipment Industry – Highlights
Exports growing at 30% -

expected to be US$ 100-200
million by 2010
Fig. 1
Size - about US$

2.4 – 2.64 billion for
India’s Construction
The Industry spans a range of products and services
• Products and spare parts constitute the bulk of the industry

• Services segment is still nascent and presents good opportunities for growth
• The unorganized sector contributes about 15% by value, though the majority of players
belong here

7%
8%
Earth moving equipment

14% Material preparation
Services
Exports
6% 66% Imported used equipment
Fig. 2
The key segments that constitute the Construction Equipment industries in India are
Road Construction
Equipment
Fig. 3

And there are a range of products in each segment
Earth Concrete Material Material Road Construction Tunneling

moving equipment handling preparation construction vehicles & Drilling
Equipment equipment equipment
Backhoe Concrete Telescopic Crushing Compaction Dumpers Rotary/
Loaders Breaker Handlers Plants Equip • Articulated DTH
• Excavators • Paver • Crawler • Jaw • Vibratory Haulers Drilling
• Loaders Finisher Cranes Crushers Rollers • Hammer
• Bulldozers • Concrete • Mobile • Pavers Track Drill
• Skid-Steer Batching Cranes • Boring
Loaders Plants • Truck Equipment
• Wheeled • Concrete Cranes •
Loading Pumps • Forklifts Demolition
• Shovels • Concrete • Pick & Equipment
• Wheel Mixers Carry
Loaders • Hot mix Cranes
• Motor plants • Slew
Graders Cranes
• Motor • Tower
Scrappers Cranes
• Dump •
Trucks Conveyors
• Wheel
Dozers
• Draglines
Earthmoving Equipments constitute the biggest segment and Excavators, the largest product
line within the segment.

Construction Equipment Industry Structure
13%
6% Earth Moving Equipment

Material Perparation
Tunnelling & Drilling for
7% Mining
Road Construction
57% Equipment
12% concrete equipment
material handling
5%
Fig. 4
Source: KPMG Analysis, Primary Research; CII-KPMG Report on Indian Infrastructure
Earthmoving Equipment Segment
9%
15%
Excavators
Backhoes
6% Loaders
Others
70%
Fig. 5
Source: KPMG Analysis, Primary Research; CII-KPMG Report on Indian Infrastructure

Michael Porter’s five force analysis of construction equipment business in India
Substitutes
Complete substitution may not happen in near future
Product replacement or enhancement is possible
Fig. 6

Growth in the industry is expected to be driven by 3 key drivers
New facilities
• Upgradation of existing facilities – demand
for material handling equipment
Fig. 7

Industry players would need to address the following key success factors
Post-Sales Support
• Service and Training Infrastructure
• Maintenance
• Spare Parts & Distribution Network
R&D and Innovation

• Appropriate technology and pricing
• Product customization
• Product reliability and ease of use
End-To-End Services
• Equipment selection
• Financing/leasing/rental
• Maintenance and training
• Repair and refurbishing
Key Players in India
 L&T Case, L&T Komatsu

 Telco Construction Equipment Company Ltd. (Telcon)
 Volvo
 Kobialko
 Daewoo
Future of ECE
India's earthmoving and construction equipment industry (ECE) is at a watershed in its

evolution and will experience strong growth spurred by the nation's economic development,
according to a study by McKinsey & Co.
The Indian ECE industry has the potential to grow fivefold from its current size of U.S. $2.3
billion to approximately U.S. $12 - 13 billion by 2015, growing at 24% compound.
The McKinsey report states that the industry's revenue and volume have recorded 40%
growth year-on-year between 2004 and 2006 reaching U.S. $2.3 billion today and uncovers a
$40 billion opportunity for the industry between now and 2015.
The ECE industry has a critical role in making India one of the world’s top five economies by
2025. Construction equipment players have a unique opportunity to help realize the potential
of this sector and, in doing so, garner their share of the US$12-13billion revenue potential.

Company Analysis
Introduction:
Larsen & Toubro (L&T), headquartered in Mumbai (Maharashtra) is a technology-driven

engineering and construction organization and one of the largest companies in India’s private
sector. It has further interests in manufacturing, services and Information technology. The
evolution of the company into the country’s largest engineering and construction
organizations is among the more remarkable success stories in Indian industry. It was
founded in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro
- both of whom were strongly committed to developing India’s engineering talent and
enabling it to meet the demands of industry. Today, the company sets engineering
benchmarks in terms of scale and complexity.
Company Products Established Founder Global Production

preference plants
Larsen & Construction, 1938 H.H. Larsen Over 30 11 factories
Toubro Engineering, S.K. Toubro countries in India, 4
Electrical & globally factories to
Electronics, come up
machinery & abroad
Industrial
Products, IT
A strong, customer-focused approach and the constant quest for top-class quality have
enabled the company to attain and sustain leadership in its major lines of business. It has
established an international presence, with a global spread of offices. A thrust on
international business across the last few years has seen overseas earnings growing to 18 per
cent of total revenue. With factories and offices located around the country, further
supplemented by a comprehensive marketing and distribution network, L&T enjoys an image
and equity in virtually every district of India. Its signature of excellence is evident on several
projects:
• World's largest coal gasify made in India and exported to China

• India’s first indigenous hydrocracker reactor
• Oil and gas platform projects executed to global benchmarks
• World’s largest Continuous Catalyst Regeneration reactor
• Simultaneous execution of clean fuel projects at eight refineries around India
• World’s biggest Fluid Catalytic Cracking regenerator
• World’s longest product splitter
• Asia’s highest viaduct – built for the Konkan Railway
 World’s longest gas pipeline
 World’s longest coal conveyor
 Building an international class football stadium in 260 days.

Larsen & Toubro Komatsu Limited
Having Registered office at Mumbai, India, focusing on construction equipment and mining
equipment, L&T-Komatsu Limited is a joint venture of Larsen and Toubro and Komatsu Asia
Pacific Pvt Limited, Singapore, a wholly owned subsidiary of Komatsu Limited, Japan which
is the world’s largest manufacturer of hydraulic excavators and has manufacturing and
marketing facilities worldwide. The plant was started in the year 1975 by L&T to
manufacture Hydraulic Excavators for the first time in India. Later it became a joint venture.
L&T-Komatsu Limited's manufacturing facility – the Bangalore Works – comprises the
Machinery Works and Hydraulics Works divisions. Machinery Works has a manufacturing
facility with ISO 9001:2000 accreditation for design, manufacture and servicing of
earthmoving equipment. Hydraulics Works, with a precision machine shop, manufactures the
complete range of high pressure hydraulic components and systems, as well as design,
development, manufacturing and servicing of hydraulic pumps, motors, cylinders, turning
joints, hose assemblies, valve blocks, hydraulic systems, power drives and allied gear boxes.
Products and brands
The company’s business can be divided into the following segments:
Engineering & Construction – Projects (EPC):

L&T’s engineering and construction track record consists of successful implementation of
turnkey projects in major core and infrastructure sectors of the Indian industry.
Heavy Engineering: L&T is acknowledged as one of the top five fabrication companies in the
world, with engineering and manufacturing capabilities that are among the most sought after
in industry.
Information Technology: Larsen & Toubro InfoTech Limited, a 100 per cent subsidiary of
L&T, offers comprehensive, end-to-end software solutions and services with a focus on
manufacturing, BFSI and Communications & Embedded Systems.
Machinery & Industrial Products: L&T manufactures markets and provides service support
for critical construction and mining machinery – surface miners, hydraulic excavators,
aggregate crushers, loader backhoes and vibratory compactors.
Shipbuilding: Shipbuilding represents a new thrust for L&T in the high technology
manufacturing space and is in line with its strategic growth objectives. L&T is developing a
shipyard capable of constructing vessels of up to 150 meters in length and displacement of
20000 tones at its heavy engineering complex at Hazira near Surat on India’s west coast. The
focus will be on construction of commercial vessels, warships for the navy and the coast
guard.
Construction: The Engineering Construction & Contracts (ECC) division of L&T is India’s
largest construction organization. Its leading edge capabilities cover every discipline of
construction – civil, mechanical, and electrical and instrumentation. L&T has also expanded
its focus to the Middle East, South East Asia, Russia, CIS, Mauritius, African and SAARC
countries. It also has keen interest in the markets of Indian Ocean rim countries, Africa and
Latin America.
Electrical & Electronics: L&T is a major international manufacturer of a wide range of

electrical and electronic products and systems.
Financial Analysis
 The company’s shareholding is fairly diverse. The largest stake of 37.14 per cent is
held by the domestic banks, financial institutions, mutual funds and insurance
companies.
 The foreign institutional investors hold a stake of 18.05 per cent while 3.62 percent of
the shares are held by custodians, against which Depository Receipts have been
issued.
 Corporate bodies hold a 3 per cent stake; L&T Employees Welfare Foundation holds
13.37 percent and the individual public shareholding amounts to 24.82 per cent.
 The company has been exhibiting strong performance year after year.
 Gross sales have witnessed a CAGR of more than 14% between 2001 and 2005, while
net profits have increased at a CAGR of 33 per cent.
 Exports, which were roughly USD 610 million in 2005, witnessed a CAGR of 40 per
cent during this period.
 Operating margin has seen a marginal fall mainly because of the increase in the input
costs and in 2005 was at 8.3 per cent.
 The decreased dependency on long term debt has lead to an improvement in the net
margin. Net margin has grown from 3.42 per cent in 2001 to 5.16% in 2005.
 Reduced financial expenses have resulted in substantial increase in the return on net
worth as well as capital employed.
 L&T has a goal to become an Indian multinational and its aggressive global strategy
is keeping in line with this. Its revenues from exports now amount to 18 per cent of its
total revenues, which is a testimonial of its ever-increasing global footprint.

Future Plans
 L&T continues to surge ahead in its quest for becoming a global player.
 It has set itself a target of earning 25 per cent of its revenues from its international
operations by 2009-10.
 It is also actively pursuing business opportunities in China, Middle East and Africa as
it sees immense potential in these regions.
 It seeks to utilize China as a hub for the sourcing of cost-effective components and
materials.
 Towards this regard, it has opened up offices in Beijing and Shanghai. It also sees the
Middle East as a region that offers a number of opportunities, given the fact that oil
prices continue to rise and consequently, the investment of these countries in
infrastructure, power, hydrocarbons etc.
 It already has several subsidiaries and joint ventures in this region and is planning to
establish an engineering centre here.
 The company is also investing in its manpower resources and is seeking to attract,
retain and develop the skills of the same.
 It has initiated steps to identify and groom global managers who would be well
trained and better equipped to deal with the global challenges.

Research Methodology
RESEARCH STATEMENT
Since the economic reforms in India and with fast pace of Globalization, every sector
witnessed a phenomenal change in the way they to the Business. However, some of the core
aspects never changes, like inventory management, corporate finance, operations and so on.
In this research, we extensively focused on Inventory management and controls (with the aid
of computers) for effective management of inventories and to put an efficient tool for
controlling the same.
OBJECTIVES OF THE STUDY
Study of the Inventory Management and Control is important because inventory directly
block the capital which in turn means more holding cost, opportunity cost and Interest
expenditure. This will hurt the profitability of an organization resulting into decrease in
shareholders wealth and returns. Therefore in today’s challenging and cut throat competitive
environment every management spends a great deal of time to improve operational efficiency
to again a competitive advantage over the rivals.
1. To study the Inventory management of Larsen and Toubro Komatsu Ltd (L&T Komatsu).
2. To understand the various model and concepts applied by L&T Komatsu.
3. To find more effective and efficient means of Inventory management and control.
RESEARCH DESIGN
1) Primary data
By interviewing and interacting with management and employees working with L&T
Komatsu
2) Secondary data
By use of companies official website and data reports generated from the computerized records
maintained and related to L&T Komatsu with the help of authorized person.

SCOPE & LIMITATIONS OF THE STUDY
Scope of the study
The scope of the study is identified after and during the study is conducted. The study of
Inventory management and control is based on tools like trend Analysis, Ratio Analysis,
operating cycle, demand forecast, previous consumption pattern, etc. Further the study is
based on two sets of data of Inventory of L&T Komatsu Ltd. And even factors like
competitor’s analysis were not considered while preparing this project.
Limitations of the study
Following limitations were encountered while preparing this project:
1) Limited data:-
Due to confidentiality and sensitiveness of Inventory data, we need to restrict to few
dimensions.
2) Limited period:-
This project is based on six months inventory. Conclusions and recommendations are based
on such limited data. The trend of six months may or may not reflect the real position of the
company.
3) Limited area:-
Also it was difficult to collect the data regarding the competitors and their Inventories.
Industry figures were also difficult to get.

The Literature
Definition of Inventory:
Inventory is the stock of any item or resource used in an organization. An inventory system is
the set of policies and controls that monitor levels of inventory and determine what levels
should be maintained, when stock is replenished, and how large orders should be.
Nature of Inventory:
 Quality - inventory can be a “buffer” against poor quality; conversely, low inventory
levels may force high quality
 Speed - location of inventory has gigantic effect on speed
 Flexibility - location, level of anticipatory inventory both have effects
 Cost - direct: purchasing, delivery, manufacturing indirect: holding, stock out.
Purpose of Inventory:
1. To maintain independence of operations.

2. To meet variation in product demand.
3. To allow flexibility in production scheduling.
4. To provide a safeguard for variation in raw material delivery time.
5. To take advantage of economic purchase order size.
Objectives of Inventory:
 Maximize the level of customer service by avoiding under stocking.

 Promote efficiency in production and purchasing by minimizing the cost of providing
an adequate level of customer service.

Types of Inventory Management and Control Systems:
ABC Model:
 Classifies items based on the annual usage value (AUV)

 Identify a small percentage of items which account for most of the total inventory
value.
ABC Classification (Pareto Principle 80/20 rule)
 A Items: very tight control, complete and accurate records, frequent review
 B Items: less tightly controlled, good records, regular review
 C Items: simplest controls possible, minimal records, large inventories, periodic
review and reorder.
Steps in Making an ABC Analysis

1. Determine the annual usage for each item
2. Calculate the AUV of each item
3. List the items according to their AUV (descending order)
4. Calculate the cumulative AUV and the cumulative percentage of items
5. Examine the annual usage distribution and group the items into A, B, C based on
percentage of AUV.
XYZ Analysis
Based on the value of inventory undertaken during the closing of annual accounts
X – High value; Y – Medium value; Z – Low value
Movement Analysis (FSN Analysis)
Check stock rotations and identifies the obsolescence of items. This is particularly useful for
spare parts
Fast-, Slow- and Non-moving Analysis
AX Analysis
Inventory plays an important role for any organization as it blocks the working capital which
otherwise would have earned the organization some money. While the need for having
inventory can't be denied for any running plant / machinery, its availability in controlled
measures too is highly desirable. Control techniques such as ABC and XYZ analyses though
done in different ways, try at the same time, to get maximum control with little commitment
of resources.
One of the ways to have still better (tight) control over the inventory with still less
commitment of resources is by determining the AX category of items in a given inventory.
Once ABC and XYZ analysis have been done and lists of A and X classes are drawn then AX
category is a combination of the two categories. Going by the definition of A and X
separately. AX category of items, normally displays in high consumption (A) as well as high

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including their being costly.
stock value(X). Essentially, these items are high value in terms of overall procurement cost
Obviously, the measures that need to be taken to keep AX inventory under control is similar
to that of A and X items, viz, stock less number at any given time, have tight consumption
control, more sources so that supply doesn’t become a constraint when needed etc.
Inventory Turnover Ratio (ITR)
An important ratio for Inventory management is Inventory Turnover Ratio. It is a ratio

showing how many times a company's inventory is sold and replaced over a period. Higher
ratio indicates a better Inventory management and efficiency and vice versa.
ITR is calculated by diving Cost of goods sold by average inventory. Where average
inventory is (opening inventory + closing inventory)/2.
Days of Inventory (DOI)
It represents the number of days an item is held as inventory before it is sold. It is calculated
by dividing 365 days by ITR. As per International practices we can consider 360 days instead
of 365.
Every manufacturing industry (Fig.8) goes through these three basic stages. Raw material
serves as an input for the manufacturing process. Operation research is very crucial in all
these three stages. We need to follow sophisticated tools and methods to acquire raw
Fig. 8
materials at best prices from the most reliable sources. Operation research helps significantly
in achieving high productivity and quality standards during manufacturing process. It also

helps for effective management of Inventories of all the three types, raw materials, work in
progress and finished goods. The above process is like a pipeline starting with raw inputs
ending with desired finished products.
Inventory is broadly classified into three groups, namely
Finished Goods
Fig. 9
Raw Materials come into the picture once we acquire all the essential ingredients to
manufacture a desired product. Every business runs on an assumption of going concern
concept. Therefore any given point of time there will be semi finished goods in the
manufacturing process. This gives rise to work in progress Inventory. Once the raw material
goes through all the processes it turns into finished goods (desired product). As all the
finished goods are not sold immediately, this leads to Inventory of finished goods.

Marketing services
Fig. 10
Fig.10 represents a snapshot of Operations division at L&T Komatsu.
*S&OP – Sales and Operations
*MRP and MPS – Material Resource Planning and Manufacturing Process Scheduling
*Marketing Services – Spare Parts
The input for operations division comes from the marketing division of L&T. The forecast
and estimates of marketing division create a basis for L&T Komatsu manufacturing unit for
how much to manufacture. This in return serves as an input for MRP and MPS to begin the
schedule. Based on various factors like demand forecast, lead time, safety stock, budgets and
quantity in hand, requests are placed for acquiring new stocks and materials.

Based on the type of order, the materials are grouped into four different types of purchase
category
Imports
Fig. 11
1 Make: The entire required material is made in house, i.e.in the L&T Komatsu
premises.
2 Bought Out: The required material is completely bought from the third party.
3 Sub-Contracted: A part of work or material is outsourced to third party vendor.
4 Imports: Few materials which are not available in India are sourced from abroad.
Once the order is placed, the materials are received by the Stores department of L&T
Komatsu. Based on the material received and the purchase type, these stocks are classified as:
Imports
Fig. 12
1. Raw Material: Which is a direct material required to manufacture the finished goods.
2. Components: They are consumed directly but don’t require any fabrication.
3. Consumables: Are indirect material, essential for manufacturing like, oil, grease etc.
4. Imports: Consumed directly but it is acquired from outside India (host country).
The Analysis
We took two different sets or data for our analysis.

First set of the data’s are pertaining to L&T Komatsu B class Items of Inventory. In this
particular data set we studied 479 rows and 50 columns. While the rows represented the
number of items, columns had details like, part number, item description, six months closing
inventories in units, six months consumption in unit, stock receipt for six months in units,
average price and so on.
B Class Inventory summary
60.00
50.00
40.00
Actual receipt
30.00
Opening Stock
20.00 Consumption
10.00
0.00
Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07
Fig. 13
Fig.13 is the graphical representation of the data of class B, derived from ABC analysis on
L&T Komatsu’s inventories.
While the actual receipts show a steady trend, a slight decrease in consumption leads to an
increased closing inventories.

Class B Summary (Assembly)

35.00
30.00
25.00 In Rs Million
20.00 Actual receipt

Opening Stock
15.00
Consumption
10.00
5.00
0.00
Fig. 14
Fig.14 is the graphical representation of class B data, derived from ABC analysis on L&T
Komatsu, sub categorized as Assembly inventories.
Assembly data shows the same trend as the entire data.

Class B Summary (Fabrication)
30.00
25.00 In Rs Million
20.00
15.00 Actual receipt

Opening Stock
10.00 Consumption
5.00
0.00
Fig. 15
Fig.15 is the graphical representation of class B data, derived from ABC analysis on L&T
Komatsu, sub categorized as Fabrication inventories.
Unlike entire data’s average and Assembly, Fabrication data are indicating a steep fall in
consumption comparative to actual receipt, which in turns resulted in higher closing
inventories as compared to overall and Assembly average.

Fig.16 is the break up chart of Days of Inventories for 479 items.
11 4 3 13
52
35
Not
Moving
1 to 60
61-120
95 121-180
181-240
241-300
301-360
>360
266
Fig. 16
Average Days of Inventory (for class B) = 107 days
Inventory Turnover Ratio = 3.4 times
Taking L&T Komatsu’s ratio as benchmark for internal control and analysis, below are the
results
L&T KOMATSU
No. Value (In Rs Mn) %age
Above Average 355 35 71%
Below Average 72 11 22%
Not Moving 52 3 7%
Total 479 49 100%

From the fig.16 and above table, while 71% of item’s days of inventory are well within the
average, remaining 30% of items are below L&T Komatsu’s average, whose worth is Rs 14
million.
Findings
 The closing inventories were rising constantly (Fig.13,14&15)

 Closing inventories were approximately double than consumption level because in a
manufacturing concern there will be a considerable amount of work-in-progress at
any given point of time (Going concern concern principle) plus there will be a certain
required level of safety stock as per the company policy. Therefore in spite of low
consumption against available inventories, new stocks were acquired. (Fig.13,14&15)
fig. 17
In fig.17 Z is the amount of new stocks acquired. (x+y+z) represents the total value of
inventories held.
 Rs. 14 million per month (average taken from 6 months) are slow or not moving
Inventories. More detailed inspection needs to be carried out on those 124 items
(Fig.16)
 On an average of six months total value of inventory is Rs.47 million per month
(Fig.13).
 Out of which Assembly constitute of Rs. 26 million (for 364 items). Fig.14
 Fabrication constitute of Rs. 21 million (for 87 items). Fabrication unit should be paid
more attention as they have low number of items which are of very high value.
(Fig.15)

 As per International practices, A and B class items are further sub categorized to have
an effective management control.
 Therefore, to have better control, the B class items should be further divided into two
or three categories (Fabrication and assembly can be an ideal one).
 Also the consumption and the closing Inventories patterns are not same; AX control
of inventory should be implemented which will take less time and effort, for closer
monitoring.
 AX model: A – high consumption value, X – high stock value. In short AX model is a
matrix of ABC and XYZ analysis.
 We simulated the last six months data for a dry run of AX inventory control method.
Ratio’s for ABC and XYZ were the same, i.e.,70:20:10 (In MS Excel)
 Following were the results: (six months average used)
 Out of 451 items, 77 items were identified as AX category. Fabrication 31 items and
Assembly 46.
 Total consumption value of these items were Rs. 5 million
 This represents 30% of total consumption. (Total consumption is Rs 18 million)
 Total Inventory value of these items were Rs. 27 million
 This represents 58% of total inventory. (Total Inventory is Rs. 47 million)
 The above simulation gives us a very significant result and an alternative to narrow
down on particular number of inventories which should be monitored closely with
high priority. The Ms Excel tool gives us the exact item part number and description
to be monitored.
 Tracking all the 479 items is not viable. As per AX control we need to concentrate
only on 77 items, making it more realistic. AX control gives a medium for early
control of high value items.
 In class B item data, there are 15 items with high value and slow moving rate (of avg.
349 days).
 A periodic review and control report, industry average of monthly, is highly desirable.

The Analysis
Second set of data:
Second set of data is pertaining to L&T Komatsu inventories irrespective of any class, i.e. it
represents the entire inventory. In this particular data set we studied 1959 rows and 14
columns. While the rows represented the number of items, columns had details like, part
number, item description, status, on hand quantity, unit cost and so on.
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
-
6 months to 1 year 1 year to 2 years More than 2 years Total
Fig. 18
Fig.18 is the graphical presentation of data classified as per FSN Model, by their values.
We have categorized the data of 1959 items (worth of Rs 60 million) into three categories of
6 months to 1 year, 1 year to 2 years and 2 years & above based on the last transaction date of
the respective item.
F – Fast moving: 6 months to 1 year, however the report ran by us started with the period 6
months and above. Ideally it’s not the right grouping, but we can use the FSN model for our
further ease of analysis, by assuming 6 months to 1 year as “F” and so on.
S – Slow Moving: 1 year to 2 years
N – Not Moving: 2 years and above
The above data is also classified as per XYZ analysis to create a matrix of XYZ and FSN
analysis.

Below are the charts of XYZ analysis which is further sub-divided as per the three categories
of 6 months to 1 year (F), 1 year to 2 years (S) and 2 years& above (N).
Value X category
45,000,000
40,000,000
35,000,000
30,000,000
Value
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
-
Fig. 19
Fig.19 is a graphical presentation of X category data by their values, grouped by FSN

analysis.
No. Items X category
180
160
140
120 No. Items
100
80
60
40
20
0
Fig. 20
Fig.20 is a graphical presentation of X category data by their item counts, grouped by FSN
analysis.
9% of total items fall under X category, worth of Rs 42 million representing 70% of the total
value.

Value Y category
14,000,000
12,000,000
10,000,000
Value
8,000,000
6,000,000
4,000,000
2,000,000
-
Fig. 21
Fig.21 is a graphical presentation of Y category data by their values, grouped by FSN

analysis.
No. Items Y category
350
300
250
No. Items
200
150
100
50
0
Fig. 22
Fig.22 is a graphical presentation of Y category data by their item counts, grouped by FSN
analysis.
17% of total items fall under Y category, worth of Rs 12 million representing 20% of the total
value.

Value Z category
7,000,000
6,000,000
5,000,000
Value
4,000,000
3,000,000
2,000,000
1,000,000
-
Fig. 23
Fig.23 is a graphical presentation of Z category data by their values, grouped by FSN

analysis.
No. Items Z category
1600 1450
1400
1200
1000 No. Items
800 641
493
600
316
400
200
0
Fig. 24
Fig.24 is a graphical presentation of Z category data by their item counts, grouped by FSN
analysis.
70% of total items fall under Z category, worth of Rs 6 million representing 10% of the total
value.

 XYZ analysis had been carried out using 70:20:10 ratio.

 Items not moving from 1 year and above should be paid more attention. In X category
115 (77 +38) such items are there worth Rs 27 million (17+10). (Fig.19,20)
 A report of items between one to two years should be run, and the same items can be
verified for any physical damage, loss or obsolescence and for further demand. This
will act as a check for these items from moving them to more than 2 years+ category.
 Number of Items not moving from 1 year and above in Z category are 1134
(493+641), such items are there worth Rs 4.5 million (2+2.5). (Fig.23,24)
 For Z category, alternative usage should be checked. If possible, then can be utilized
in that manner.
 Also item more than 2 years, if no usage should be checked for scrap value. And same
can be disposed off to realize as much as value possible and to unlock the store space.
Action Priority Matrix to control Inventories as Per XYZ and FSN analysis
 XF – As these items are of very high value, an actual sales analysis should be carried
out, every quarter to check the sales and consumption pattern, as these items are
acquired based on demand forecast, there is every possibility that there will be small
ups and downs in the demand forecast. This will help in ensuring that these items
don’t move on to XS category, creating more burdens on the firm’s financial.
(Fig.19,20)
 XS – These are high value slow moving (1 to 2 years) items. They should be verified
for any physical damage or loss or obsolescence. An alternative usage is highly
desirable for obsolete items, while physically damaged items should be considered for
sale at scrap value in order to realize as much as value possible and to cut on storage
cost as well as to increase storage capacity. (Fig.19,20)
 XN – These items are the most profit squeezing ones. They should be taken at higher
priority. Alternative usage and scrap value should be considered for these items. If
they are no longer required for production, they need to be disposed off as early as
possible in most value realizing way. (Fig.19,20)
 YF – These are the items less costly than X but more than Y. Early check on these
items is possible by checking the consumption pattern for relevant preceding period,
every half yearly. (Fig.21,22)
 YS - These are slow moving (1 to 2 years) items. They should be verified for any
physical damage or loss or obsolescence. An alternative usage is highly desirable for
obsolete items, while physically damaged items should be considered for sale at scrap
value in order to realize as much as value possible and to cut on storage cost as well
as to increase storage capacity. (Fig.21,22)
 YN - Alternative usage and scrap value should be considered for these items. If they
are no longer required for production, they need to be disposed off as early as possible
in most value realizing way. (Fig.21,22)
 ZF – These are the least contributing items in terms of value. ZF category items
should be put on hold that is no action is required at this stage. (Fig.23,24)

 ZS – In spite of low value, these items do occupy a significant amount of space in

warehouses. They should be considered for alternative usage at this stage to cut cost
and to increase the efficiency of stores. (Fig.23,24)
 ZN – At this stage, these items should be considered for sale at scrap value.
(Fig.23,24)
Check for Obsolescence,

damages, loss
Conclusion
While computers make the job easier, still there are pitfalls which we cannot ignore or easily
capture in the computer aided software. For instance, demand forecasting is a very tricky
situation. It’s tough to always forecast the demand accurately due to various external
uncontrollable factors like the Market scenario, Wars, Natural calamities, fluctuations in
demand and the likes which will affect the entire process of material acquisition and disposal.
In every manufacturing concern Suppliers play a key role. And they are again external
uncontrollable factors. Any outrage in the supplier’s side will directly affect our value chain.
Apart from these external factors, there are also some internal factors leading to Material
management dilemma, like dead inventories. No organization can isolate that same. Every
product has its own life cycle and shelves life, which adds to dead inventories after a certain
period of time, if not consumed. Adequate ways have to be adopted to dispose them in most
profitable manner. No firm wants to write off the losses arising out of dead inventories at
once, as they will reduce the profit drastically leading an outcry from stakeholders. Also there
will be certain questions like who will certify the dead inventories. However, legal
requirement says that dead inventories representing 1% and above of the total inventory value
have to be presented separately in Profit and Loss account and should be mentioned in the
statutory report. Also they should be certified by a qualified Chartered Accountant. A Cost
Accountant should also certify the same on demand.
Other things which need to be considered are like inventory ratios. By the inherent formulae
itself, sometimes they are misleading. For examples, the cost of goods sold (COGS) can
increase due to total sales or because of increased rework or scrap value. In other words, the
same number of sales occurs but the cost associated with producing the products sold
increases due to waste (defects, scrap, and spoilage). When finished products are discarded
because defects are discovered, the cost associated with that waste is captured in COGS.
Consequently, the numerator of the Inventory Turnover ratio increases. Since the defective
products are not in inventory, this waste also decreases the average cost of inventory, the
denominator of the Turnover ratio. As the numerator increases and the denominator
decreases, the ratio goes higher. It looks like we are operating more Lean— yet, we are
actually operating less Lean.
We have to borne in mind all the above mentioned factors, situation and pitfalls before
proceeding to the action implementation phase
In practice, L&T Komatsu follows a very high global standard of operations and
manufacturing excellence. However there is always a scope to move one step above and beat
everyone’s expectations while enriching the stake holders’ value with highest level of
customer satisfaction.
Bibliography
Books
 Operations Management for Competitive Advantage – By Chase, Jacobs & Aquilano
 Cost Accounting – By R.S.N Pillai and V.Bagvathi
Website

 www.larsentoubro.com
 www.materialsmanagement.info
 Various other articles – searched through www.google.com

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Chapter Page No.

IIPM Bangalore Page 1

IIPM Bangalore Page 2

India’s Construction Equipment Industry – Highlights

Exports growing at 30% -

Size - about US$

The Industry spans a range of products and services

• Products and spare parts constitute the bulk of the industry

IIPM Bangalore Page 3

Earth moving equipment

IIPM Bangalore Page 4

And there are a range of products in each segment

Earth Concrete Material Material Road Construction Tunneling

IIPM Bangalore Page 5

Construction Equipment Industry Structure

6% Earth Moving Equipment

Source: KPMG Analysis, Primary Research; CII-KPMG Report on Indian Infrastructure

Earthmoving Equipment Segment

Source: KPMG Analysis, Primary Research; CII-KPMG Report on Indian Infrastructure

IIPM Bangalore Page 6

Michael Porter’s five force analysis of construction equipment business in India

IIPM Bangalore Page 7

Growth in the industry is expected to be driven by 3 key drivers

IIPM Bangalore Page 8

R&D and Innovation

Key Players in India

 L&T Case, L&T Komatsu

India's earthmoving and construction equipment industry (ECE) is at a watershed in its

IIPM Bangalore Page 9

Larsen & Toubro (L&T), headquartered in Mumbai (Maharashtra) is a technology-driven

Company Products Established Founder Global Production

• World's largest coal gasify made in India and exported to China

IIPM Bangalore Page 10

Larsen & Toubro Komatsu Limited

Products and brands

The company’s business can be divided into the following segments:

Engineering & Construction – Projects (EPC):

Electrical & Electronics: L&T is a major international manufacturer of a wide range of

IIPM Bangalore Page 12

IIPM Bangalore Page 13

OBJECTIVES OF THE STUDY

IIPM Bangalore Page 14

SCOPE & LIMITATIONS OF THE STUDY

Scope of the study

Limitations of the study

Following limitations were encountered while preparing this project:

IIPM Bangalore Page 15

 Speed - location of inventory has gigantic effect on speed

 Flexibility - location, level of anticipatory inventory both have effects

 Cost - direct: purchasing, delivery, manufacturing indirect: holding, stock out.

1. To maintain independence of operations.

 Maximize the level of customer service by avoiding under stocking.

IIPM Bangalore Page 16

Types of Inventory Management and Control Systems:

 Classifies items based on the annual usage value (AUV)

ABC Classification (Pareto Principle 80/20 rule)

Steps in Making an ABC Analysis

Movement Analysis (FSN Analysis)

IIPM Bangalore Page 17

Inventory Turnover Ratio (ITR)

An important ratio for Inventory management is Inventory Turnover Ratio. It is a ratio