1 This project report is prepared during the vocational training undertaken at “KRIBHCO” SURAT, on partial fulfillment of the degree in “Master of Business Administration” It is true that the experience makes the man perfect. Experience is always concerned with the work. Theory of any subject is important but without its practical knowledge it becomes unless particularly for the Management Students. As a student of the Business Administration, we have studied many theories in the classroom, but only after taking up this project work we have experienced & understood these Management theories & practices in its fullest sense, which plays a very vital role in business field today. The knowledge of management is incomplete without knowing the practical application of the theories studied. Hence, this report is designed with the objective to gain practical knowledge & is undertaken on a Fertilizer Manufacturing Industry – its working and its Finance Department. During the preparation of this report a sincere efforts has been made to analyze and evaluate the functioning of the inventory management. PREFACE
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Transcript
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This project report is prepared during the vocational training undertaken at“KRIBHCO” SURAT, on partial fulfillment of the degree in “Master ofBusiness Administration”
It is true that the experience makes the man perfect. Experience is alwaysconcerned with the work. Theory of any subject is important but without itspractical knowledge it becomes unless particularly for the ManagementStudents. As a student of the Business Administration, we have studiedmany theories in the classroom, but only after taking up this project workwe have experienced & understood these Management theories & practicesin its fullest sense, which plays a very vital role in business field today. Theknowledge of management is incomplete without knowing the practicalapplication of the theories studied.
Hence, this report is designed with the objective to gain practical knowledge& is undertaken on a Fertilizer Manufacturing Industry – its working and itsFinance Department.
During the preparation of this report a sincere efforts has been made toanalyze and evaluate the functioning of the inventory management.
PREFACE
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Objective of Project :
A.PRIMARY OBJECTIVE:
The primary objective of the present study is to understand the existing
techniques of the inventory management used in this concern with a view to
find out the extent to which the concepts of scientific inventory control are
being applied and suggest new scientific and practical inventory
management techniques, if needed.
B.OTHER OBJECTIVES:
To supplement the Inventory control techniques in theorganization for effective Inventory Management.
To provide necessary guidelines for determining economic orderquantity, re-ordering levels and classifications of items usingappropriate basis.
To minimize idle time caused by storage of raw materials, storesor spare parts.
Help to keep capital investment low in inventories, and keep downInventory carrying cost and obsoletes losses.
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Limitations of Project :
During the project work, I have experienced the following limitations.
As KRIBHCO is a chemical manufacturing society, it has vast
varieties of inventories of inventory items, about 6000. Thus it was
very difficult for me to calculate different levels like:
EOQ level, ROL level, Maximum level, Minimum level etc.
I was not able to collect some data during the project work due to the
audit was running during training period.
Since they are not willing to reveal some confidential data and setups,
I have limited vision regarding the KRIBHCO inventory.
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Methodology :
Taking the perspective of student from the finance point of view themethodology used for study was to answer three questions covering broadarea of Inventory Management are as follows:
1) What is Inventory Management?2) Why Inventory Management?3) How the Inventory Management is done?
To obtain answers to the first two questions, the discussions were carriedout with various personnel of M/s. KRIBHCO and the books were referred.
However, to obtain the answer to the third question (i.e. how the InventoryManagement is done?) the existing Inventory control techniques werestudied, a relationship or link was sought between theory & practice and itwas found that many aspects from Theory can be and are being used inpractice and necessary suggestions were made to promote existing InventoryManagement at various level.
Thus the different methods and techniques were used at different stages ofthe project like interviews, discussions, observation, and secondary data likeannual reports, manuals and other reports and files, so as to meet therequirement of the situation.
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Profile of
“A fertilizer is any material, organic, inorganic, natural or systematic, thatis placed on or incorporated into the soil to supply plants with one or moreof the chemicals elements necessary for normal growth.
Fertilizer is the material, which supplies the chemicals elements required forplant growth. Primary nutrients like nitrogen, phosphates and potassium aresupplied through chemical fertilizer. Fertilizer response studies have provedthat 1kg of fertilizer can increase the food grain production by 8-10 kg.Fertilizer production is of permanent importance for this country becauseFertilizer increases agriculture productivity.
Krishak Bharati Co-operative Limited (KRIBHCO), a premier Co-operativeSociety for manufacture of fertilizer, registered under Multi-StateCooperative Societies Act – 1985, was promoted by the Govt. of India,IFFCO, NCDC and other agricultural cooperative societies spread all overthe country.
Oil & Gas findings in Bombay High and South Basin triggered off the birthof eight new generations fertilizer plants to fulfill ever-growing food needsof the country. KRIBHCO was amongst the first two Projects in the firstphase.
KRIBHCO has setup a Fertilizer Complex to manufacture Urea, Ammonia& Bio-fertilizers at Hazira in the State of Gujarat, on the bank of river Tapti,near Kawas village, 15 Kms from Surat city and 20 Kms from SuratRailway Station on Surat – Hazira State Highway.
Late Smt. Indira Gandhi, former Prime Minister of India laid the FoundationStone on February 5, 1982.
The trial production of Urea commenced from November 26, 1985 andwithin a very short time of 3 months, the commercial productioncommenced from March 01, 1986. Since then, it has excelled inperformance in all areas of its operations.
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The total Project cost was Rs. 890 crores as against the estimated cost of Rs.957 crores. This shows a saving of Rs. 67 cr (approximately 7%) in CapitalCost of the Project, which is a rare feature in the history of a Public SectorUnit.
Subsequently, a Bio-fertilizer plant of 100 MT per year capacity wascommissioned at Hazira on August 15, 1995. KRIBHCO has alsocompleted the installation of an expansion of the Bio-Fertilizer plant with anadditional capacity of 150 MT and the same was commissioned inDecember 1, 1998.
HISTORY AND DEVELOPMENT
PROJECT ZERO DATE 31 st MARCH, 1981
FOUNDATION STONE LAID BY Late Smt. Indira Gandhi then the
Prime Minister Of India on 5th Februa ry 1982
PROJECT COMPLETION 31 st MAY 1985
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PLANT CAPACITY & CONSULTANTS
PLANT CAPACITY CONSULTANTS
DAILY ANUUAL
AMMONIA 2 X 1350
MT
8.9 LAKH
MT
M.W.kellogg, USA
FEDO, INDIA
UREA 4 X 1100
MT
14.52 LAKH
MT
SNAMPROGETTI, ITALY
PDIL, INDIA SENIOR
THERMAL ENGG.U.K
POWER 2 X 15
MWH
THERMAL ENGG.U.K.
HAEVY
WATER
2 X 55 MT
PER YEAR
PDIL
HTAS, DENMARK
BIO -
FERTILIZER
250 MT PER
YEAR
DAE
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OBJECTIVES OF KRIBHCO
MAIN
To increase the urea installed capacity, maintaining its market share.
To ensure optimum utilization of existing plant and machinery, through
proper maintenance.
To diversify into other core sector like power, LNG terminal/port,
chemicals etc.
OTHERS
to enlarge product mix through product development
to continue and intensify efforts towards rural development &Co-
operative movements
BIO-FERTILISER
KRIBHCO diversified into bio-fertilizers in 1995 in order to provide
supplementary Nutrients at low cost through its Hazria plant with a
production capacity of 100 MT PA. The plant capacity was enhanced to 250
MT PA in DECEMBER 1998. During the year 2002-03 the production of
Bio-fertilizer s was 296 MT, with a capacity utilization of 118% and sale
was 351 MT of Bio-fertilizer. Implementation of two more plants of 100
MAPA a capacity each is in progress at Varanasi (up) and Lanja
(Maharashtra)
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SOURCE OF FINANCE
EQUITY: KRIBHCO SHARE HOLDING PATTERN (as on 31-03-2007)
STAKE HOLDER Rs. (in Crore)
Govt. of India 324.71
IFFCO 97.00
Other Society 70.00
Govt. ofIndia66%
IFFCO20%
OtherSociety
14%
Source of Finance
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PRODUCT
KRIBHCO is manufacturing Nitrogenous Fertilizers and Allied Products
viz.: Urea, Ammonia Liquid, and Bio-fertilizer. Besides, it’s also has a 30
MW Power Plant of its own for generation of Power to meet its
requirement. KRIBHCO has also been assigned the job of Operation &
Maintenance of “Heavy Water Plant” of Department Of Atomic Energy.
MISSION
The mission of KRIBHCO is to act as a catalyst to Agricultural and Rural
Development by Selecting, Financing and managing such Projects which
are both, socially desirable & commercially profitable.
VISION
KRIBHCO will become one of the leading fertilizer producers in the world
funding growth through:
Efficient Production
Efficient Distribution
Efficient diversification
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Inventory Management
( Concept) :
Inventory Management is a big part of profit planning for manufacturingand merchandizing companied. Material costs often accounts for more than40% of total costs of manufacturing companies and more than 70% of totalcosts in merchandizing companies. Inventory management is the planningand coordinating and controlling activities related to the flow of inventoriesinto through and out of an organization.
Inventory constitutes the most significant part of current assts of a largemajority of companies in India. On an average inventories areapproximately 60% of current assts in public limited companies in India.Because of the large size of inventories are maintained by firms aconsiderable amount of funds is required be committed to them. It is,therefore absolutely imperative to manage efficiently and effectively inorder to avoid unnecessary investment.
Inventory is stock of the product a company is manufacturing for sale andcomponents that make up the product. There are main three type ofinventory: Raw Material, Work-in-process, and Finished Goods.
Raw Materials are those basic inputs that are converted into finishedproducts through the manufacturing process. Raw materialsinventories are those units, which have been purchased and stored forfuture productions.
Work-in-Process inventories are semi-manufactured products. Theyrepresent products that need more work before they become finishedproducts for sale.
Finished Goods inventories are those completely manufacturedproducts, which are ready for sale.
Stock of raw materials and work-in-process facilitates production whilestock of finished goods is required for smooth marketing operations. Thusinventories serve as a link between the production and sale of a product.
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Firms also maintain a fourth kind of inventory, supplies or stores andspares. Supplies include office and plant cleaning materials like soap,brooms, oil, fuels, light bulbs etc. These materials do not directly enterproduction, but are necessary for production process. Usually these suppliesare small parts of the total inventories and do not involve significantinvestment.
The levels of three kinds of inventory for a firm depends n the nature of itsbusiness. A manufacturing firm will have substantially high levels of allthree kinds of inventories, while a retail or wholesale firm will have a veryhigh level of finished goods and no raw materials and work-in-processinventories.
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Need to Hold Inventory :
Maintaining inventories involves tying up of the company’s funds and
incurrence of storage and handling costs. There are three general motives
for holding inventories.
1. Transactional motive:
It emphasizes the need to maintain inventories to facilitate smooth
production and sales operations.
2. Precautionary motive:
It necessitates holding of inventories to guard against the risk of
unpredictable changes in demand and supply forces and other factors.
3. Speculative motive:
It influences the decision to increase or decrease inventory levels to take
advantage of price fluctuations.
It is not possible for the company procure raw materials whenever it is
needed. A time lag exists between demands for material and its supply. Also
there exists uncertainty in procuring raw materials in time on many
occasions. The procurement of materials may be delayed because of such
factors as strike, transport disruption or short supply. Therefore, the firm
should maintain sufficient stock of raw material at a given time to
streamline production. Other factors, which may necessitate purchasing and
holding of raw materials are quantity discounts and anticipated price
increase. The firm may purchase large quantities of raw materials than
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needed for the desired production and sales levels to obtain quantity
discounts of bulk purchasing. At times, the firm would like to accumulate
raw materials in anticipation of price rise.
Work-in-process inventory builds up because of the production-cycle.
Production-cycle is the time span between introduction of raw material in to
production and emergence of finished goods at the completion of
production-cycle. Till production-cycle completes stock of work-in-process
has to be maintained.
Stock of finished goods has to be held because production and sales are not
instantaneous. A firm cannot produce immediately when the customer
demand goods on a regular basis, their stock has to be maintained. Stock of
finished goods has to be maintained for sudden demand from customers. In
case the firm’s sales are seasonal in nature, substantial finished goods
inventories should be kept to meet the peak demand. The level of finished
goods inventories would depend upon the coordination between sales and
production as well as on production time.
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Cost Associated with Inventory
Managing inventories to increase net income requires effectively managing
costs that fall into the following five categories:
1. Purchasing Costs:
The cost of goods acquired from suppliers, including incoming freight or
transportation costs. These costs usually make up the largest cost
category of inventories
2. Ordering Costs:
The cost of preparing and issuing purchase orders, receiving and
inspecting the items included in th4e orders and matching invoices
received, purchase orders and delivery records to make payments.
Ordering costs include the coast of obtaining purchase approvals, as well
as other special processing costs.
3. Carrying Costs:
These are the costs that arise, while holding inventory. Carrying costs
include the opportunity cost of the investment tied up in inventory and
the cost associated with storage; such as space rental, insurance,
obsolescence and spoilage.
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4. Stock Out Costs:
These are costs that result when a company runs out of a particular item for
which there is customer demand. A company may respond to a stock out by
expediting an order from a supplier. Expediting costs of a stock out
include4e the additional ordering costs plus any associated transportation
coasts. Ort the company may lose sales due to the stock out. In this case, the
opportunity cost of the stock out includes the lost contribution margin on
sales not make due to the items not being in the stock, plus any contribution
margin lost on future sales due to customer ill will caused by the stock out.
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Objective of Inventory Management:
In the context of inventory management the firm is faced with the problem
of meeting two conflicting needs.
To maintain a large size of inventories of raw material and work-in-
process for efficient and smooth production and of finished goods for
uninterrupted sales operations.
To maintain a minimum level of investment in inventories to
maximize profitability.
The objective of inventory management should be to determine and
maintain optimum level of inventory investment. Te optimum level of
inventory will lie between the two danger points of excessive and
inadequate inventories. The firm should always avoid a situation of over
investment or under investment in inventories.
The major dangers of over investment are:
a) Unnecessary tie up of the firm’s funds and loss of profit and
opportunity costs.
b) Excessive carrying costs, and
c) Risk of liquidity.
The consequences of under investment in inventories are:
a) Production hold ups, and
b) Failure to meet delivery commitments.
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Thus, efforts should be made to place an order at right time with the right
source to acquire the right quantity at the right price and quantity. An
effective inventory management should
Ensure a continuous supply of raw material to facilitate uninterrupted
production,
Maintain sufficient stocks of raw materials in periods of short supply
and anticipated price changes,
Maintain sufficient finished goods inventory for smooth sales
operations and efficient customer services,
Minimize the carrying costs and time, and
Control investment in inventories and keep it at an optimum level.
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Inventory Management Techniques :
There are two basic questions relating to inventory management.
What should be the size of the order?
At what level should the order be placed?
The first question relates to the problem of ordering economic order
quantity (EOQ) and is answered with an analysis of costs of maintaining
certain level of inventories. The second question arises because of
uncertainty and is a problem of determining the reorder point.
The ordering costs increase with the number of orders, thus the more
frequently inventory is acquired; the higher the firm’s ordering costs. On the
other hand if the firm maintains large inventory laves, there will be few
orders placed and ordering costs will be relatively small but the carrying
costs of inventories increases heavily. The economic size of inventory
would thus depend on trade-off between carrying costs and ordering costs.
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EOQ Model :
The basic assumptions of EOQ model are following:
1 ) The forecast usage/demand for a given period usually one year, is
known.
2 ) The usage/demand is even throughout the period.
3 ) Inventory orders can be replenished immediately, there is no delay in
placing and receiving orders
4 ) There are only two distinguishable costs associated with inventory
costs, ordering costs and carrying costs.
5 ) The cost per order is constant regardless of the size of the order
placed.
6 ) The cost of carrying inventory is fixed percentage of the average
value of inventory.
Given these assumptions, EOQ model ignores purchasing costs and stock
out costs. For determining the EOQ formula we shall use the following
symbols:
A = annual demand/usage,
Q = quantity ordered,
O = cost per order,
C = carrying costs per unit,
Given the above assumptions and symbols, the total costs of ordering and
carrying inventories are equal to
TC =QC
+AO
2 Q
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In the equation, the first term on the right hand side is the carrying cost,obtained as the product of average value of inventory holding and thecarrying cost per unit. The second term on the right hand side is the orderingcosts, obtained as the product of the number of orders and the cost per order.The total cost of ordering and carrying is minimized when
The formula may be illustrated with the help of the following data relating
to Ace Company.
A = annual demand/usage/sales = 20,000 units
O = ordering cost per order = Rs. 2,000
C = carrying costs per unit = 25% of inventory value
P = purchase price/unit = Rs. 12
Here carrying cost/unit in is = Rs. 12 X 25% = Rs. 3
= 5,164 units
Graphical Approach of EOQ Model
The economic order quantity can also be found graphically. Figure
illustrates the EOQ function. In figure costs –carrying costs and ordering
costs and total costs – are plotted on vertical axis and horizontal axis is used
to represent the order size. We note that total carrying cost increases as the
order size increases, because on an average a larger inventory level will be
Q =2AO
C
EOQ =2AO
C = 2 X 20,000 X 2,000
3
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maintained and ordering costs decline with increase in order size because
larger order size means a less number of orders. The behavior of total costs
line is noticeable since it is a sum of the two types of costs, which behave
differently with order size. The total costs decline in first instance, but they
start rising when the decrease in average ordering cost is more than offset by
the increase in carrying costs.
The EOQ occurs at the point Q* where the total cost is minimum. Thus the
firm’s operating profit is maximized at point Q*
Total Cost
COST
Carrying Costs
Ordering Cost
Q* Ordering Size
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It should be noted that the total costs of inventory are fairly intensive to
moderate changes in order size. It may be appropriate to say, therefore, that
there is an economic order range, not a point. To determine this range, the
order size may be changed by some percentage and the impact on total costs
may be studied. If the total costs do not change very significantly, the firm
can change EOQ within the range without any loss.
Quantity Discount & Order Quantity
Many suppliers encourage their customers to place large orders by offering
them quantity discount. With quantity discount, the firm will save on the per
unit purchase price. However, the firm will have to increase its order size
more than the EOQ level to avail the quantity discount. This will reduce the
number of orders and increase the average inventory holdings. Thus, in
addition to discount savings, the firm will save on ordering costs, but will
incur additional carrying costs. The net return is the difference between the
resultant savings and additional carrying costs. If the net rerun is positive,
the firm’s order size should equal the quantity necessary to avail the
discount; if negative its order size would be equal to EOQ level.
Let’s assume the following data for a firm:
A = estimated annual demand 1200 units
P = purchasing cost per unit Rs. 50
O = ordering cost per order Rs. 37.50
C = carrying cost per unit Rs. 1
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The firm is offered 0.5% (0.0005) or Rs. 0.05 per unit quantity discount on
order of 400 units or more.
First we will calculate EOQ, assuming that the quantity discount does not
exist
= 300 units
Now, the net return should be calculated for deciding whether the order size