CHAPTER-5 POROBLEMS AND SUGGESTIONS

Transcription

1 CHAPTER-5 POROBLEMS AND SUGGESTIONS Problems of Cement Industries in Nepal Suggestions 195

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3 CHAPTER-5 POROBLEMS AND SUGGESTIONS 5.1 Problems of Cement Industries in Nepal Nepal is one of the poorest countries in the world and was listed as the eleventh poorest among 121 countries in Various factors have contributed to the economic under-development of the country-including terrain, lack of resource endowment, landlocked position, lack of institutions for modernization, weak infrastructure and a lack of policies conducive to development. The lack of infrastructure made it hard to expand markets and pursue economic growth. Since 1951 Nepal has tried to improve its infrastructure, although the lack of significant progress was still evident in the early In Nepal manufacturing industries including cement are accepted to build the infrastructure to produce and supply important consumer goods and are also expected to generate revenue and contribution to the national treasury in order to carry out national development process but in this area Nepal is still in crawling stage due to different reasons. Cement industries in the context of developing country must be efficient in utilization of their resources. The annual production capacity is very far from the existing production volume and there is a high deviation in the amount of annual collection and consumption of store and spare parts inventory. The growing number of cement industries in Nepal is facing different problems of inventory management. Due to the lack of proper inventory policies, large amount of capital has been blocked up as a result most of the Nepalese cement industries are the victim of heavy loss. There is a tremendous shortage of cement in the country therefore; it is largely dependent upon imported cement. Heavy reliance on imported cement to satisfy consumption subjects the Nepali cement market sometimes to volatile. 197

4 Most of the private sector cement units in Nepal are dependent on clinker supplied by the large cement manufacturers of India. They are also the suppliers of cement to Nepali market. If the Indian clinker suppliers form a cartel and increase the price of the clinker or decide to stop clinker supply so as to remove the Nepali competitors, the Nepali cement companies may have to close down. Cement industry is generally perceived to be a major polluter of environment (which is quite strict in Nepal) is another possible threat to this industry. Cement manufacture causes environmental impacts at all stages of the process. These include emissions of airborne pollution in the form of dust, gases, noise and vibration when operating machinery and during blasting in quarries, and damage to countryside from quarrying. Most of the manufacturing and trading companies in Nepal have invested a huge amount of capital in the form of inventory and Cement industries are also not free from this problem. When huge amount of money is blocked in the form of inventory cost of carrying inventory will be higher as a result total cost of the company will increase and hence overall profitability will decrease. It means Nepalese cement industries are losing their profit by way of excessive holding of inventories. Beside these major problems the following problems are detected in this study. 1. The total market for cement in Nepal is 3,080 million tonne which is higher than the installed capacity of operating cement industries. Even if the cement industries are in the position to increase capacity utilization of existing plants to anywhere near their maximum potential, the shortfall in demand and domestic production is very wide that is 1,391,000 tonne. It shows that about 40% of expected consumption has to be fulfilled by the import mainly from India. Despite the fact that the number of domestic manufacturers has increased in recent years and they are gradually substituting imports, Indian cement is still occupying a 198

5 very important market share in Nepal - nearly 60 percent. The Indian brands of cement have good acceptance in the Nepali market. This makes it difficult for the Nepali manufacturers to compete with them. 2. The per capita consumption of cement in the country is around 80 kilogram (better than the some countries in the SARCE region like Bhutan, Bangladesh and Maldives) but still little less than the internationally accepted standard of nearly 100 kilogram. 3. Demand of the cement has a high correlation with a GDP. The coefficient of correlation between cement consumption and GDP in Nepal was reported 93 per cent. The average annual growth rate in GDP in Nepal was nearly 6% during the study period which indicates weakest aspect of cement market in Nepal. 4. Planning the service supply chain is very critical in achieving customer service at a low cost. Factors like consumer buying behavior, seasonal changes, consumer promotions and new product launches drive returns on inventory investment. While there are streamlined processes that define the forward logistics, manufacturers and service managers neglect the reverse logistics process as a result the return on inventory investment is affected in the Nepalese cement industries. 5. While taking permission for the establishment of cement industry from department of mine and geology, industries usually agree to start production within 3 to 4 years of registration. But it takes a lot of time due to technicalities like Environmental Impact Assessment (EIA) and infrastructure developments like access road, water supply and power source among others. 6. Price of cement in Nepal is highly correlated to that in India due to high dependency on Indian raw materials (clinker). Because of this reason Nepalese cement industries are compelled to fix the price of their 199

6 product as per Indian cement not according to their costs of production. Moreover, Nepali cement units are dependent for the main raw material - clinker and gypsum - on the same Indian companies that are selling cement in Nepal so it difficult to them to compete with Indian companies. 7. Cement consumption is dependent on the time of year and prevalent weather conditions. Nearly two-thirds of cement consumption in Nepal occurs in the six months between May and October. The seasonal nature of the industry can result in large swings in cement and clinker inventories at cement plants over the course of a year. Cement producers will typically build up inventories during the winter that tied up their investment for about six months of the year. 8 Another very serious problem in inventory management exists in poor demand forecasting due to the non-availability of correct and valid data. The inventory eventually grows to the point where the numbers are just too big to ignore. It is at this point that the excess inventory gets the attention of management. These scenarios often lead to increased operational cost and decreased efficiencies 9. An increase in the supply of cement due to new factories coming online and smuggling from India are other factors that have led to a decrease in the price of cement. The cost of production, however, has risen because of load-shedding and multiple taxes being imposed on the highways by different authorities and agencies. 10. Longer duration of inventory holding is the major problem of Nepalese cements industries. Days of inventory holding and inventory turnover ratios are interrelated. In general, inventory performance is measured in term of inventory turnover ratio. The inventory turnover ratio measures a company s efficiency in managing inventory investment and shows the 200

7 number of times the inventory is turned over during the year. Higher the ratio, the more efficiently an enterprise has managed inventory, other things remaining the same. In the Nepalese cement industries Inventory turnover times are very poor, in some years under the study period this ratio was found less than one. 11. Un-utilization of capacity available is another problem of Nepalese cement industries. The actual capacity utilization for public and private sector cement industries in Nepal during the study period were nearly 60%, due to non-availability of adequate raw materials in time, operational insufficiency, defects in management, over manning, political instability, defective industrial relations and power load shedding etc. 12. Inventory management is wide subject but no one paid serious attention in this field in Nepal. Cement industries spend huge amount of their investment on inventories, but there is lack of proper inventory management system. Many modern techniques to manage inventories have been realized in the western world, but in Nepal many manufacturing companies are still facing the problem of managing physical and financial dimensions of inventories. 13. Another important problem of the industry is that the product is perishable in nature and thus cannot be stored for long periods. Similarly, the other problem of the industry is caused by the volatile nature of the state-owned cement industries. They are frequently closing down and reopening, making it difficult for the other units to predict the market situation. 14. The concept of Economic order size, carrying cost, ordering cost and safety stocks are rarely used in the Nepalese cement industries. Proper attention is not given to the lead time and scientific techniques of 201

8 inventory control were not used as a result most of the cement industries in Nepal are facing the problem of high costs of production and low profitability. 15. Low domestic savings, a small domestic market, a severe shortage of skilled labor, chronically corrupt and inefficient public administrations, high transport and operating costs, the inadequacy of power resources and increasing political instability have also created a great problem in the field of manufacturing industries in Nepal. 16. High taxation is another problem faced by the Industry. The general sales tax on cement product is 15% in Nepal. The impact of this tax and duty structure resulted in almost 40% increase in the cost of a cement bag (50 Kg). In the budget of a duty cut of 20% was permitted to the cement sector with assurance from the cartel to pass on this benefit to the consumers. 5.2 Suggestions Among all methods and techniques of inventory management and control being practiced by various concerns, the sad fact is that inventory is still a poorly managed component of working capital. Inventory management is a vital face of financial management of an undertaking to the fact that it plays a pivotal role in keeping the wheels of the concern running. Management of inventory and its control is not a one time job of the manager of a concern. It needs continuous offer, revisions and reviews, very much care and prudent. The overall performance of the cement industry in Nepal is not satisfactory in terms of capacity utilization and efficient utilization of inventories during the period under study. The analysis made above lead to a conclusion that, the inventory management of HCIL is more balanced and successful in comparison of UCIL although on some counts UCIL is favorable. On the basis of the 202

9 analysis of data and result obtained the following suggestions have been forwarded. 1. Cement production is one of the world s most energy intensive industries that release carbon dioxide during calcinations and add burden to the environment. Equipment to reduce dust emissions during quarrying and manufacture of cement is advised to use and equipment to trap and separate exhaust gases are suggested to install. Environmental protection can also be done by re-integration of quarries into the countryside after they have been closed down and returning them to nature. In this way, cement industries are suggested to develop new applications for cement and concrete for reducing environmental impact, use state-of-the-art equipment for energy efficiency and formulate products to reduce manufacturing energy consumption and the use of natural resources. 2. Nepal falls in the list of lowest per capita consumption of cement with 89 kg. The reason behind this is the poor rural people who mostly live below poverty line and cannot afford to have this commodity. Despite the fact, the demand and supply of cement in Nepal has grown up in the recent years. In a developing economy like Nepal, there is always large possibility of expansion of cement industry. Therefore, the government should take initiation for enhancing the per capita consumption of cement and developing the access of the rural people in this commodity. 3. Cement industries should defined their goals and objectives of inventory holding clearly and should fixed inventories policies with regard to inputs and outputs separately in term of quantities, time periods and price etc. Similarly, the popular scientific inventory management techniques like EOQ, Re-order point, safety stock and lead time should be applied for purchasing raw materials so as to maintain optimum level of inventory 203

10 and to minimize the total inventory costs i.e. carrying cost and ordering cost. 4. Selective inventory control through ABC analysis should be applied to control the inventory in the store. Under ABC analysis inventories are segregated into different categories specially, into three classes i.e. A, B and C according to their usage value and maximum attention should be paid to the items whose value is highest (category A), items with least value (category C) would be under simple control and items under category B should be controlled reasonably. The firm should be selective in its approach to control investment in various types of inventories thus; this method is also called selective inventory control. This method emphasizes on important items so it is also known as control by importance and exception. 5. There is a lack of co-ordination among the various departments in purchasing and procuring inventories in cement industries therefore, purchase budget should be prepared with the proper co-operation and co-ordination among the procurement, purchase, store, marketing and sales department to avoid excessive investment on inventory. 6. In the aspect of inventory turnover ratios UCIL s situation is very poor and HCIL s situation is better than UCIL but not satisfactory. During the seven years period both companies were found with less than two times conversion of their inventories into cash or receivable through sales. So it is suggestive that these cement industries should pay maximum attention towards the increment of their inventory turnover ratio or shortening the days of inventory holding. 7. Continuous technological upgrading and assimilation of latest technology has been going on in the cement industry. Presently 93 per cent of the total capacity in the industry is based on modern and environment- 204

11 friendly dry process technology and only 7 per cent of the capacity is based on old wet and semi-dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially. 8. Both the cement industries have maintained near about 15% of their total assets in the form of inventory. The fund tied up in the inventory cannot yield direct profit. Therefore, they are suggested to lower this ratio and invest the freed fund in other assets so that the profitability of the industries will be enhanced. 9. Because cost of transportation and other facilities most of the cement industries are found to be concentrated in the Tarai region although more than 80% land area of Nepal is in hill and mountain region and more than 65% population live in this region. Therefore it is suggestive that these industries should be established in all regions so as to contribute in the balance development of the country. 10. The cement industries have employed considerably greater portion of spare parts and store in their inventories therefore, they should aware of the possible risk that may rise due to the slackness in the business activities. In this regard UCIL should adopt more precaution so as to check the risk factor. 11. How much working capital should be kept in the form of inventory? is an important question to be exercised by the manufacturing company. Generally, 45% of working capital in the form of inventories is considered as an ideal ratio. But unfortunately, during the study period we did not find such optimum ratio. So it should be better to improve the relationship of the inventory and working capital. 205

12 12. Material is an important item of inventory in the manufacturing organization. Proper material is not found in both cement industries. Study by experts in this field bought out it, if an organization can affect 5% saving in material cost it would be as increasing the production or sales by about 36%. Hence the industry is advised to enhance the material management practice through purchase requisitioning, order fixation & placement and proper monitoring of the materials in the store. 13. Materials budget should be prepared scientifically, at a schedule time and taking into account the stock of inventory and orders in transit. Flexibility must also be taken into consideration while preparing the budget. 14. The industries should give their due attention to FSN (Fast, Slow and Non-moving) methods of inventory classification. The fast, slow and non moving items of inventory should be analyzed and non moving surplus and obsolete inventory should be disposed immediately. The identification of fast moving and slow moving inventory and disposal of non moving inventory items in raw materials and store and spare parts helps to optimize the quantity of inventory. Such optimization will reduce inventory cost and hence, increases profitability of the firm. 15. The industry generally fixed the target of production 75% of the plant capacity, but the actual production of the industry was below 55% of its plant capacity throughout the study period, the industry is suggested to find out the causes behind low production and to take corrective measures for the improvement in their production. 16. The store and spare inventory should be reduced equivalent to six months consumption instead of holding for one year s consumption. 206