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CONTENTS CHAPTER No. PATRICULARS PAGE No. 1 INTRODUCTION Introduction to the Topic 6 Organization profile 9 Statement of Problem 16 Objective of the study 17 Need and significance of the study 18 Scope of the study 19 Limitations of the study 20 2 REVIEW OF LITERATURE 22 3 RESEARCH METHODOLOGY Research Design 55 Data Collection Methods 56 Period of the study 57 Analysis Tools 57 4 DATA ANALAYSIS AND INTERPRETATION 60 5 SUMMARY OF FINDINGS 103 SUGGESTIONS AND RECOMMENDATIONS 104 6 CONCLUSION 106 APPENDIXES 1
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Materials Mgt and Inventory Control Mgt

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Page 1: Materials Mgt and Inventory Control Mgt

CONTENTS

CHAPTER No.

PATRICULARS PAGE No.

1 INTRODUCTION Introduction to the Topic 6 Organization profile 9 Statement of Problem 16 Objective of the study 17 Need and significance of the study 18 Scope of the study 19 Limitations of the study 20

2 REVIEW OF LITERATURE 22

3 RESEARCH METHODOLOGY Research Design 55 Data Collection Methods 56 Period of the study 57 Analysis Tools 57

4 DATA ANALAYSIS AND INTERPRETATION

60

5 SUMMARY OF FINDINGS 103 SUGGESTIONS AND

RECOMMENDATIONS104

6 CONCLUSION 106

APPENDIXES

BIBLIOGRAPHY

LIST OF TABLES

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TABLE No. PARTICULARS PAGE

No.

1 Components of Inventory 60

2 Material Cost Index 62

3 Material Cost to Sales Index 64

4 Indigenous Material Cost Index 66

5 Import Material Cost 68

6 Manpower Strength Index 70

7 Manpower Cost 72

8 Comparison of Sales and Closing Inventory 74

9 Inventory Turnover Ratio 76

10 Nonmoving Inventory 78

11 Slow moving Inventory 80

12 Fast moving Inventory 82

13 Order Cost Index 84

14 Handling Cost Index 86

15 Purchase Efficiency 88

16 Sales/Purchase Index 90

17 Work-in-progress Index 92

18 Comparing Movements of Inventories 94

19 EOQ 96

20 ABC 98

21 XYZ 100

LIST OF GRAPHS

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GRAPH No. PARTICULARS PAGE

No.

1 Components of Inventory 61

2 Comparison of Material and Production

Cost

Material Cost Index

63

3 Comparison of Material Cost and Sales

Value

Material Cost to Sales

65

4 Comparison of Material and Index Material

Cost

Indigenous Content Index

67

5 Comparison of Import and Material Cost

Imported Index

69

6 Manpower Strength Index 71

7 Manpower Index 73

8 Sales/Closing Inventory Index 75

9 Inventory Turnover Ratio 77

10 Nonmoving Inventory 79

11 Slow moving Inventory 81

12 Fast moving Inventory 83

13 Order Cost Index 85

14 Handling Cost Index 87

15 Purchase Efficiency 89

16 Sales/Purchase Index 91

17 Work-in-progress Index 93

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18 Comparing of Inventory Movements 95

19 EOQ 97

20 ABC 99

21 XYZ 101

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CHAPTER-1INTRODUCTION

1. a. INTRODUCTION TO THE TOPIC

Materials are any commodities used directly or indirectly in

production a product or service such as raw materials, component parts,

assemblies and supplies. In the manufacturing organizations, the important

inputs are referred to as 5 Ms. Viz., Men (Labour), Machines, Money,

Materials and Methods. The relative importance among these five Ms has

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shifted from time to time. In the beginning of industrialization the focus was

on machines, men (labour) and methods, but in recent years (from 1970

onwards) the emphasis is on materials. Material is an important and

inevitable input of a production system since the cost of materials and cost

on materials (cost incurred in purchasing and storing the materials) put

together account for 50% to 85%of the production cost depending on the

nature of the product and the type of the production system.

The dictionary meaning of the word “Inventory” is stock of goods.

The classical definition of inventory is that it is an idle resource of any kind

having an economic value. From this it follows that we can identify

inventory as those material which are procured, stored and used for the day-

to-day functioning of the organization. The definition of any kind of idle

resource can be extended to input materials, semi-finished goods, finished

goods, capital equipment, floor space, manpower inventory, etc, in which the

top management is interested in optimizing the resource utilization.

To the financial executive, inventory connotes the value of raw

materials, consumables, spares, work-in-progress and finished goods in

which the company’s working capital funds have been invested. He is wary

of the term, because inventory represents to him an idle looking of capital,

without any immediate return. In contrast the production manager will react

violently when he hears of inventory and its lack has been the root cause of

his idle time. The marketing manager, who claims that the customer is the

king, will complain of the drying up of the distribution channel and lay the

blame on the shortage of finished goods inventories. Under these conditions,

the inventory manager has to do tight rope walking exercises. On the one

hand, he has to stock raw materials, components, consumables, spares,

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packing material, work-in-progress and finished goods so that the production

and marketing lines are fed regularly. Simultaneously, on the other hand, he

has to reduce the idle capital invested in inventory to please the financial

manager and the top management.

Material expenditure in different manufacturing industries may differ.

But it does not minimize the importance of material management. It in fact

lies in effective savings in the materials expenditure. Even a small change in

the materials cost can lead to a substantial saving or avert a heavy loss or

push the enterprise towards a heavy loss or adversely affect the profitability

of the concern.

Factors:

1. The cost of holding the stock (based on the interest rate),

2. The cost of placing an order (for raw material stocks).

3. The cost of storage.

Methods:

1. Visual control enables the manager to examine the inventory visually

to determine if additional inventory is required.

2. Tickler control enables the manager to physically control a small

portion of the inventory each day on a regular basis.

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3. Click sheet control enables the manager to record the item as it is

used on a sheet of paper.

4. Stub control (used by retailers) enables the manager to retain a portion

of the price ticket when the item is sold.

By doing so, we can effectively and efficiently manage the inventories

to execute the proper activities of the company.

1. b. ORGANISATION PROFILE

Bharat Heavy Electrical Ltd., (BHEL) is the largest engineering

and manufacturing enterprise of its kind in India and is one of the leading

international companies in the field of power equipment manufacture. The

first plant of BHEL was set up at Bhopal in 1956, which signaled the dawn

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of the Heavy Electrical Industry in India. In the early sixties, three more

major plants were set up at Haridwar, Hyderabad and Tiruchirappalli, which

form the core of the diversified range, systems and service the BHEL offers

today.

BHEL range of services extends from project feasibility studies to

after-sales-service successfully meeting diverse needs through turnkey

capability. The company has 14 manufacturing units, 4 power sector

regional centers, 8 service centers and 18 regional offices besides project

sites spread all over India and abroad. The company has formed a Strategic

Business Unit for Ceramics at Bangalore. BHEL is today the largest

engineering and manufacturing enterprise of its kind in India, with a well

recognized track record of performance, making profits continuously since

1971 – 72 and paying dividends since 1976-77. BHEL manufactures over

180 products under 30 major product groups and caters to core sectors of the

Indian economy viz., Power Generation and Transmission Industry,

Transportation, Telecommunication, Renewable Energy, etc.

The quality & reliability of its products is due to the emphasis on

design, engineering and manufacturing to international standards by

acquiring and adapting some of the best technologies from leading

companies in the world, together with technologies developed in its own R

& D centers. BHEL has acquired certifications to both ISO 9000 & ISO

14000 standards for its operations and has also adopted the concepts of Total

Quality Management. BHEL has adopted Occupational health and safety

standards as per OHSAS 18001. Two of its divisions have acquired

certification to OHSAS 18001 standard and the other units are in the process

of acquiring the same.

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VISION

BHEL’s vision is to make a world – class engineering enterprise

committed to enhancing share holder value.

MISSION

BHEL mission is to be an Indian multinational engineering enterprise

providing total business solutions through quality products, system and

service in the fields of energy, transport, infrastructure and other potential

areas.

VALUES

Zeal to excel and zest for change.

Integrity and fairness in all matters.

Respect for dignity and potential of individuals.

Strict adherence to commitments.

Ensure speed of response.

Foster learning, creativity and team work.

Loyalty and pride in the company.

NATURE OF THE BUSINESS

BHEL’s operations are organized around three business sectors,

namely power industry including Transmission, Transportation,

Telecommunication & Renewable Energy and International Operations. This

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enables BHEL to have a strong customer orientation, to be sensitive to his

needs and respond quickly to the changes in the market.

BHEL has supplied

Equipment for over 90,000 MW of power generation – for utilities,

captive and industrial uses.

Over 25,000 Motors with Drive Control Systems to Power Projects,

Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement

Plants etc.

Over one million Valves to Power Plants and other industries.

BOARD OF DIRECTORS (LIST)

1. Ashok K. Puri, Chairman & Managing Director

2. A.K. Mathur, Director (IS&P)

3. K. Ravikumar, Director (Power)

4. C.P. Singh, Director (Finance)

5. N.K. Sinha, Company Secretary.

ORGANISATION CHART OF BHEL, BAP, RANIPET

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BUSINESS OPERATIONS (LIST OF BRANCHES):

High Pressure Boiler plant - Trichy

Heavy Electrical Plant - Bhopal

Industrial Valves Plant - Govindaval

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Heavy Electrical Equipment plant - Haridwar

Central Foundary Forge Plant - Haridwar

Heavy Equipment plant - Haridwar

Electronic Division - Bangalore

Industrial Insulted Plant - Jagdispur

Component Fabrication plant - Rudhrapur

Silicon Solar Cell Plant - Gurgon

Heavy Equipment repair Plant - Varanasi

PRODUCT PROFILE:

Electro Static Precipitator (ESP)

Air Pre Heater (APH)

FANS

Heat Exchangers

Desalination plant

Wind Electric Generators

Dampers for Louvers

Gates (Hot Air)

COMPETITORS:

ABB

SIEMNES

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GEC

VOLTAS

MAJOR IMPORTS FROM ABROAD:

AB Sandirk, Sweden.

Hyundai, South Korea.

Reiner Brach, Germany.

Ferromex, Belgium.

Metal one, Japan.

Ducon technologies, USA.

MAJOR SUPPLIERS IN INDIA:

Steel Authority of India

The Indian Iron Steel Co. Ld

Tube Investment of India

Dynalog (India) Ltd

Controls & Switch Gear Co.

Delton Cables

Tata Iron & Steel Co. Ltd

Super Forgings & Steels Ltd

Bhushan Steel & Strips

Jindal Steel & Steels

Uttam Galva Steels Ltd

MAJOR CUSTOMERS:

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State Electricity Board

Tata Iron & Steel Co. Ltd

Jindal Steel & Steels

Hindustan Zinc

Bhushan Steel & Strips

Saint Gobin

National Thermal Power Corporation

Walchand

1. c. STATEMENT OF PROBLEM

The topic is chosen because in today’s context most of the

organization faces problem due to improper materials and inventory control

management.

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BHEL is the largest engineering and manufacturing industry, this

project will help them in order to know their current level inventory control.

In turn, it helps the company to implement new selective inventory control

techniques to improve their inventory efficiency and business results.

1. d. OBJECTIVES OF THE STUDY

1. To reduce working capital requirements through proper and scientific

inventory control.

2. To increase the competitiveness of manufactured goods by reducing

their prices through cost reduction and value analysis.

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3. To improve the quality of manufactured goods by the use of better

raw materials or components.

4. To offer the suggestions to overcome the problems that have

experienced in the inventory management for better improvement.

5. To ensure an uninterrupted production or operation, by maintaining a

steady flow of material.

1. e. NEED AND SIGNIFICANCE OF THE STUDY

1. The importance of material management cannot be over-emphasized

in this complex industrial world.

2. It affects not only a particular industry but the entire economic

activity of a whole nation.

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3. Reduction in the materials cost of about 5% is always possible

through an efficient management of materials. It saves 5% of the total

cost of the final product.

4. The materials forms the largest single expenditure item in the most of

the manufacturing organization from the inventories usually represent

60%-70% of the total cost of the final product.

5. Even a small change in the material costs can lead to a substantial

saving or push the enterprise towards a heavy loss or adversely affect

the profitability of the concern.

1. f. SCOPE OF THE STUDY

The main aim of the study is to control the inventory management

system and materials of the firm by implementing the control methods of

inventory and the suggestions that are given for the moderate level of

inventory turnover ratio will maximize the profit in future.

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1. g. LIMITATIONS OF THE STUDY

1. The study covers only for a period of five years.

2. The study is based on secondary data which are already stored in the

database of the company.

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3. The results may be different under new environment with the changes

in the management policy.

4. The results of the study will not be applicable to all public sector

organization.

5. Moreover the control on material management is not an easy task, it is

a complicated one.

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CHAPTER-2

REVIEW OF

LITERATURE

INTRODUCTION TO MATERIALS MANAGEMENT

Material management is the important part in any organization. The

task of maintaining of materials is done by stock and inventory manager.

Material management should be done so that shortage of raw material should

be avoided in the organization. In various like manufacturing companies

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most of the expenditure is incurred on material management. A separate

department is set up under the leadership of material management manager

who coordinates his subordinates for the proper maintenance of the material.

Materials management is one of the areas covered by the whole

process of management. For a balanced growth and effective running of the

enterprise, it is necessary that material cost, material supply and material

utilization are so controlled that they lead to

Maximization of production,

Reduction in the cost of production and distribution and

Maximization of the profit.

Materials management helps in reducing materials cost, preventing huge

amount of capital being locked up for a longer period, improving the capital

turnover ratio and achieving higher profitability.

Material management embraces all functions concerned with ordering,

storage and movement of material. It embraces all activities performed by

purchasing, production control, stores, traffic, and physical distribution.

MEANING

Materials in the form of raw materials and semi-finished goods are of

great significance for the success of an enterprise. These can directly affect

the efficiency of a system. It is observed that irrespective of the size of an

enterprise, the expenditure on materials is a major item of the budget. In

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many cases material consumption varies from 25% to 75% of sales turnover.

The expenditure made on materials is money invested in inventories, cost of

storage, transportation costs, insurance, wastage etc. because of the

magnitude of expenditure required in acquiring and controlling materials and

their impact on profits, a great deal of attention is required towards the

management of operations associated with materials.

While managements have long been aware of the fact that

manufacturing and marketing are the two main activities of an enterprise but

of late there is a feeling for a third basic economic activity known as

materials management. Like manufacturing and marketing in material

management also, capital is employed and costs are incurred to produce

something of economic value.

DEFINITIONS

Bailey and Farmer define materials management as, “the

management of flow of materials into an organization to the point

where these materials are converted into the firm’s end product”.

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Materials management is a term used to connote “controlling the kind,

amount, location, movement and timing of various commodities used

in production by industrial enterprise”.

Material management is the planning, directing, controlling and co-

ordinating those activities which are concerned with materials and

inventory requirements, from the point of their inception to their

introduction into the manufacturing process. It begins with the

determination of materials quality and quantity and ends with its

issuance to production to meet customer’s demand as per schedule

and at the lowest cost.

CLASSIFICATION OF MATERIALS

The materials manager is responsible for classifying the materials

before they are sent for inspection, entered into the stock ledger, and binned.

Therefore, broad classification of materials according to their nature, use and

service becomes essential before the job of identification is undertaken.

1. Raw materials

2. Purchased Components

3. Work-in-progress

4. Finished Goods

5. Spares

6. Consumables

7. Machinery and Equipment

8. Inflammables

9. Chemicals

10. Furniture

11. General Stores

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12. Scrap Materials

13. Packing Materials

14. Fuel stock

COST REDUCTION TECHNIQUES FOR MATERIALS

The need for cost reduction of materials and inventories is too obvious

for any explanation, as material cost account for 60% of cash outflow and

inventory is the single largest asset in many companies. Cost does not

Occur, but is Incurred. Cost is a fact while price is an opinion depending

upon market situation, according to the fundamentals of financial

management. Cost control aims to establish norms and control the costs at

the desired norms, whereas cost reduction tries to reduce the established

norm itself by applying various cost reduction techniques. Needless to

emphasize, the cost of the cost reduction techniques should be

commensurate with the benefits.

There are both internal and external factors which influence inventory

decisions in any organization. The external factors arise from demand,

supply, price, availability, market conditions, credit availability,

import/export policies, fiscal/monetary/taxation policies, governmental

regulatory mechanism, etc. To combat the market conditions, we have to

adopt scientific forecasting and planning techniques.

The internal factors include cost, criticality, availability, usage,

forecasts, procedures, systems, delegation of powers, lead time, inspection

infrastructure facilities, inter-department relationships; corporate scenario,

technical know how, skill mix inventory department, motivation, morale of

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staff follow-up mechanisms, computerization, ability to identity location of

the in transit material or location of stores material, external opportunities,

threats, etc.

OBJECTIVES OF MATERIAL MANAGEMENT

Material management contributes to survival and profits of an

enterprise by providing adequate supply of materials at the lowest possible

costs. The fundamental objectives of materials management activities can

be:

1. Material selection: A correct specification of material and

components is determined. Also the material requirements in

agreement with sales programme are assessed. This can be done by

analyzing the requisition order of the buying department. With this

standardization one may have lower cost and the task of

procurement, replacement etc. may be easier.

2. Low operating costs: it should endeavour to keep the operating

costs low and increase the profits without making any concessions

in quality.

3. Receiving and controlling material safely and in good condition.

4. Issue material upon receipt of appropriate authority.

5. Identification of surplus stocks and taking appropriate measures

to reduce it.

ADVANTAGES OF MATERIAL MANAGEMENT

Material management department plays a vital role in the success of

an enterprise. A significant portion (around 70%) of capital is invested in

materials and well-planned and well designed materials management

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operations can lead to considerable saving in the capital expenditure. It is of

great importance to production, marketing, engineering and finance

departments of an enterprise. The advantage or benefits from effective

materials management operations can be outlined as:

1. Regular supply of the material is ensured, reducing the chances of

any interruption in production process.

2. Procurement costs and transportation costs associated with

materials are checked.

3. Efficient store and stock control minimizes waste of material.

4. Inspection of material at the time of procurement minimizes the

possibility of finished product being rejected by the consumer.

5. Timely supply of raw-material and other inputs can be assured.

6. Better utilization of labour, capital and equipment.

7. Congestion in stores and at different stages of production can be

avoided by an effective materials management system.

8. Length of manufacturing cycle is reducing to minimum.

9. Slight changes in material costs will exert a great impact on a

firm’s profit picture.

INTRODUCTION TO INVENTORY CONTROL

Inventory Control Management is designed to meet the dictates of

the marketplace and support the company's strategic plan. The many

changes in market demand, new opportunities due to worldwide marketing,

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global sourcing of materials, and new manufacturing technology, means

many companies need to change their Inventory Management approach and

change the process for Inventory Control.

Despite the many changes that companies go through, the basic

principles of Inventory Control Management remain the same. Some of the

new approaches and techniques are wrapped in new terminology, but the

underlying principles for accomplishing good Inventory Management

and Inventory activities have not changed.

The Inventory Control Process provides information to efficiently

manage the flow of materials, effectively utilize people and equipment,

coordinate internal activities, and communicate with customers.

The basic building blocks for the Inventory Control activities are:

Sales Forecasting or Demand Management

Sales and Operations Planning   

Production Planning

Material Requirements Planning

Inventory Reduction

The emphases on each area will vary depending on the company and

how it operates, and what requirements are placed on it due to market

demands. Each of the areas above will need to be addressed in some form

or another to have a successful program of Inventory Control

Management.

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MEANING

The term inventory is more relevant in manufacturing and production

organizations where raw materials and other supplies are purchased and used

to manufacture finished products for sale. In such organizations, ‘Inventory’

includes raw materials, stores, supplies, spare parts, tools, components,

assemblies, partly finished goods(work-in-progress) and finished goods

ready for sale. It includes stocks of primary and secondary packing materials

also.

Inventories are stock of materials of any kind stored for future

use, mainly in the production process. Thus, today’s inventory is

tomorrow’s production. However, semi-finished goods awaiting use in the

next process or finished goods awaiting release for sale are also included in

the broad category of inventories, which are nothing but idle resources.

Therefore, inventories are materials or resources of any kind having some

economic value, either awaiting conversion or use in future.

Inventory control is a system which ensures the maintenance of

required quantity of inventories of the required quality at the required time

with minimum amount of investment. It aims at achieving maximum

possible inventory turnover.

INVENTORY MANAGEMENT CONCEPT

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DEFINITIONS OF INVENTORY MANAGEMENT

Inventories are the piles of raw materials and finished goods in the

warehouse. All the materials, parts and in-process or finished

products recorded on the books by an organization and kept in its

stores, warehouses and plants are known as inventories.

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According to Gordon B. Carson Inventory Management refers to

“The process whereby the investment in materials and parts carried

in stock is regulated within pre-determined limits set in accordance

with inventory policy established by the management”.

CLASSIFICATION OF INVENTORY

1. Classification of inventories according to functions:

1. Transit inventories

2. Cycle inventories

3. Buffer inventories

4. Decoupling inventories

2. Classification of inventories according to the nature of items stocked

namely

1. Raw materials

2. In-process inventories

3. Finished goods inventories and

4. Spare part inventories

WHY CONTROL INVENTORY?

A basic question arises as to why we should control inventory.

1. It is well-known that the most important aspect of any manager’s job

is the planning and controlling function. Hence the inventory

manager’s job is to control the inventory.

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2. Materials account for the bulk, usually 60% of the cash outflow of

most organizations.

3. Inventory is the single largest asset in the balance sheet in many

manufacturing companies.

4. Inventory accounts for a substantial portion, usually 90% of the

working capital, in many companies.

5. We have the well-known slogan-Uncontrolled inventory is the

industry’s cancer.

6. Organizations incur about 30% as inventory carrying charges or to

service the inventories.

7. The finance manager would like to have a return commensurate with

the above cost.

8. The finance manager is always at difficulties to finance the working

capital lying in the form of inventories.

9. If the inventory is not properly controlled it results in obsolescence.

10.About one-third of the total banking deposits or public money is tied

up in the inventories of a few individual companies.

11.Inventory also has to be controlled in order to optimize the cost of

acquiring the item.

12.Increased competition aims at effective application of cost reduction

techniques and inventory control is a useful mechanism.

13.Due to technological advance, the number of items is likely to be

doubled in the next five years resulting in more inventories. Hence,

there is the need now to control the inventory to meet future

challenges.

14.Inventory control is the pacesetter for introduction of a cost conscious

scientific management culture in the company.

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15.The most important and beneficial area of computer applications lies

in controlling the inventories.

NEED FOR VALUATION

Since inventory is the single largest asset in the balance sheet of most

organizations, the valuation of inventory becomes of utmost importance and

crucial to the financial executives. Materials also constitute the major input

in many industries. Further, many companies raise the working capital from

commercial banks by hypothecating the inventory. Hence the need for

proper valuation of stock. Inventory valuation enables an organization to

know and confirm its knowledge of financial strengths and weaknesses.

Inventory valuation converts physical quantities into monetary figures and

enters the balance sheet. Hence, inventory valuation becomes very crucial in

judging the performance of any industrial enterprise.

Materials enter an organization in many forms-raw materials,

components, consumables, capital goods, spares, furniture and

miscellaneous items. The effectiveness of the organization depends on how

well it is able to convert the raw materials into finished goods by adding

value and obtain a proper price for it. The price obtained for the sale of a

product and is split as the sum of:

Cost of materials,

Labour cost,

Overheads,

Interest charges, and

The profit or loss.

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For a given set of conditions, capital employed, technology, plant,

machinery, staff, establishments, overheads etc. can be considered as fixed.

As compared to this, cost of materials can be considered as variable.

Hence, if due to market conditions, the price has to be held constant,

the profit will decrease as cost of material increases and vice versa. Thus, the

value entered against cost of materials will be determining factor of profit.

Conversely, while quoting for tenders, the main factor which decides the

price quoted is the cost of materials. The profit term and other fixed costs go

into the background especially when an organization is entered the market.

Therefore, as the accuracy of stock valuation increases, the organization can

evaluate its profits/performance more accurately and is better equipped for

decision-making in pricing.

ADVANTAGES OF INVENTORY

The importance of inventory to an organization can be listed as:

1. Provides and maintains good customer service.

2. Enables smooth flow of goods through the production process.

3. Provides protection against the uncertainties of demand and supply.

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4. Various production operations can be performed economically and

independently. It can allow temporary variations in operating rates.

5. Ensures a reasonable utilization of equipment and labour.

6. With purchases in bulk discount can be availed.

7. Keeping required material of adequate quantity in order to avoid

disruption of production.

8. Optimizing investment in inventory and reducing carrying costs.

DISADVANTAGES OF INVENTORY

1. Efficient inventory control methods can reduce but can not eliminate

business risk.

2. The objectives of better sales through improved service to customer;

reduction in inventories to reduce size of investment and reducing cost

of production by smoother production operations are conflicting with

each other.

3. The control of inventories is complex because of the many functions it

performs. It should be viewed as a shared responsibility.

INVENTORY CONTROL TECHNIQUES

1. ECONOMIC ORDER QUANTITY (EOQ)

The economic order quantity refers to the quantity ordered to be

purchased at the lowest total cost. This is the most economical purchase

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quantity which maintains a balance between two opposing costs of

procurement and carrying. The economic order quantity is also known as

economic lot size. So, the quantity to be ordered at a time is determined by

the cost of procurement and the cost of procurement and the cost of carrying

the inventories. The economic order quantity will be the one where the cost

of procurement and the cost of carrying are equal.

Let us consider the purchase of the material required for one year. If

they purchase and stock the entire quantity at a time, the inventory carrying

cost will be high. To avoid high inventory cost, they can purchase material

in small quantities.

But in this case they have to place a number of purchase orders. This

will increase the ordering cost. So they have to find out an ordering quantity

Unit Cost

Total CostB N T

A

I

QO

P

C

Quantity

Inventory procurement cost

Inventory carrying cost

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Graphical Representation of EOQ

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so that the total inventory cost (inventory carrying cost + ordering cost) is

minimum. This quantity is known as Economic Order Quantity.

Formula:

EOQ = -------

C* I

Where,

EOQ - Quantity per Order (No. of MTs)

A - Annual Requirement (No. of MTs)

S - Ordering Cost per Order in Rupees

C - Cost of Material per MT in Rupees

I - Inventory Carrying Cost (Expressed as Percentage)

Ordering Costs:

Ordering costs, usually, refers to the costs of requisitioning,

preparation of purchase order and placing order.

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Here, the ordering cost also includes the costs of insurance incurred

while the goods are in transit. These costs are calculated on the basis of the

past data and an approximate figure is arrived.

In BHEL, Ranipet the Purchase Department, Material Planning

Department etc. affect these costs.

Carrying Costs:

In BHEL, Ranipet the carrying costs of materials includes the storage

costs alone. The insurance costs are not included in these because no

insurance is being paid on materials.

ADVANTAGES

1. Annual carrying costs per unit and costs per order can be accurately

estimated and are the only relevant costs. This really requires that all

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cost information must be known with certainty, which is rarely

possible.

2. Annual demand can be estimated and is linearly consumed by

customers.

3. With demand linear and certain, there need not be any stock-out costs.

This basically prohibits the stocking out of inventory, as costs are

almost always associated with being unable to meet a customers

demand requirements. If stock-out is not possible, there will be no

stock-out costs.

4. There are no quantity discounts on large orders.

5. Lead time is known, fixed and independent of demand.

DISADVANTAGES

1. Often the inventory holding cost and the ordering cost cannot be

accurately calculated and sometimes cannot be identified properly.

2. The EOQ calculated is often an inconvenient number.

3. The use of EOQ usually leads to random orders so that suppliers

receive an irregular stream of orders.

4. EOQ applied without due regard to the possibility of falling

demand can lead to a high value of obsolescent inventory.

5. EOQ may not be applicable when the requirements are irregular, or

where there is an impending price rise.

2. ABC ANALYSIS

It is ‘Management by exception’ system of Inventory Control. In

this ABC technique of inventory control, the materials are classified and

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controlled according to value of the materials involved. It is also called

proportional parts value analysis. It always controls the best, then better

anything which can be measured in monetary terms.

Actually, A items are high value items,

B items are medium valued items,

C items are low valued items.

In BHEL they are following,

A Items ------ More than Rs. 10 lakhs

B Items ------ More than Rs. 1 lakh and less then Rs.10 lakhs

C Items ------ Less than Rs. 1 lakh

ADVANTAGES

1. It becomes possible to concentrate all efforts in areas which need

genuine efforts.

2. This method produces rewarding results, at the same time it involves

minimum control.

3. It is the most effective and economical method as it is based on

selective approach.

4. It ensures closer control on costly items in which a large amount of

capital has been invested.

5. It helps in developing a scientific method of controlling inventories,

Clerical costs are reduced and stock is maintained at optimum level.

6. It helps in placing the orders, deciding the quantity of purchase, safety

stock etc, thus saving the enterprise from unnecessary stock-cuts or

surpluses and their resultant consequences.

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7. It helps in achieving the main objective of inventory control at

minimum cost. The stock turnover rate can be maintained at

comparatively higher level through scientific control of inventories.

DISADVANTAGES

1. ABC analysis is a fundamental tool for exercising selective control

over numerous inventory items but in present form permit precise

consideration of all relevant problems of inventory management.

2. It is not one time exercise and items are to be reviewed and

recatagorised periodically.

3. ABC analysis can achieve its objectives only when there is a popular

standardization of materials being carried in the storehouse. A good

system of codification too is required for effectively carrying out the

ABC analysis.

4. It is based on grading the items according to the importance of

performance of an item, i.e., essential and desirable analysis. Some

items, though negligible in monetary value may be very vital for

running the plant, demanding constant attention.

5. The system analyses the items according to their value and not

according to their importance in the production process. It may,

therefore, sometimes create difficult problems.

3. XYZ ANALYSIS

The classification is based on the value of inventory of materials

actually held in stores at a given time (usually during stock checking

annually or half-yearly), X – Y – Z analysis helps to control average

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inventory value by focusing efforts to reduce the inventory of ‘X’ items

which are usually 10% of the number of items stored, but accounting for

70% of the total inventory value. Similarly ‘Y’ items are 20% of the number

of items stored and account for 20% of the total inventory value. The

remaining 70% of the items accounting for 10% of the total inventory value

are ‘Z’ items. The X – Y – Z classification is done in the same way as ABC

analysis, the difference being the actual inventory value of item in stores

instead of their estimated annual consumption value.

ADVANTAGES

1. This analysis is used to review the inventories and their uses at

scheduled intervals.

2. This study is usually undertaken once a year during the annual stock-

taking exercise.

3. X items are those few items accounting for a major portion of the total

inventory value, whereas Z items are those items with low inventory

value. Obviously Y items fall in-between these two categories. This

classification helps in identifying the items which are extensively

stocked.

MATERIALS REQUIREMENT PLANNING (MRP)

Materials requirement planning is a scientific technique of planning

for ordering and usage of materials at various levels of production and for

monitoring inventories during these activities. MRP, therefore, is both an

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inventory control and scheduling technique. It utilizes the master schedule

for the end products, product structure for determining requirements of sub-

assemblies, components and raw materials, procurement/manufacturing lead

times, inventory status of products, and by utilizing database, in a series of

steps, it draws up the timings of procurement/manufacture of all the sub-

assemblies, parts and raw materials required over the production horizon to

meet the given end production schedules.

MRP is a technique of working backward from the scheduled

quantities and needs dates for end items specified in a master production

schedule to determine the requirements for components needed to meet the

master production schedule. The technique determines what components are

needed, how many are needed, when they are needed and when they should

be ordered so that they are likely to be available when needed. The MRP

logic serves as the key component in an information system for planning and

controlling production operations and purchasing. The information provided

by MRP is highly useful in scheduling because it indicates the relative

priorities of shop orders and purchase orders.

“Materials Requirement Planning is a technique for determining

the quantity and timing for the acquisition of dependent demand items

needed to satisfy master production schedule requirements”.

MRP is one of the powerful tools, that when applied properly, helps

managers in achieving manufacturing control. It is based on the concept of

independent and dependent demand. The demand for the products is

considered independent since orders may not necessarily be related to others

in terms of customers and quantity, but once sales requirements are either

known or forecast, the quantity of raw materials and components required to

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make up the products can be calculated depending upon the manufacturing

schedule. The dependent demand condition is served by MRP.

OBJECTIVES

Material Requirements Planning (MRP) is software based

production planning and inventory control system used to manage

manufacturing processes. Although it is not common nowadays, it is

possible to conduct MRP by hand as well.

An MRP system is intended to simultaneously meet three objectives:

Ensure materials and products are available for production and

delivery to customers.

Maintain the lowest possible level of inventory.

Plan manufacturing activities, delivery schedules and purchasing

activities.

MRP SYSTEM

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ADVANTAGES OF USING AN MRP SYSTEM

1. It is a detailed means of controlling inventory items on a current

or almost current basis.

2. It improves production scheduling because the system sets

deadlines on material arrivals and production activities.

3. It reduces all types of inventory levels because the timing of

materials minimizes the need for safety and buffer stocks.

4. It aids in capacity planning.

5. It provides a way to examine different inventory ordering

policies by simulating their possible impact on the operations

management system.

DISADVANTAGES OF USING MRP SYSTEM

Master Production Schedule (MPS)

Inventory Status File

Materials Requirement Planning (MRP) processing logic

Bill of Materials

(BOM)

Order Release Requirements (Orders to be placed now)

Orders Rescheduling Planned Orders

(Future)

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1. Planning and implementation time for MRP systems can and

take years.

2. Data entry requirements and file maintenance are very time

consuming and require substantial personnel training and

require substantial personnel training and education.

3. Dependence of the entire system on forecasts and estimated

lead times can make the informational values of the MRP

output questionable and can even mislead managers on the

actual capacity of the operations management system.

4. Although microcomputer systems exist to supports small OM

operations, in practice an MRP system requires the costly

computer time of a large-scale or a mainframe computer

system.

MANUFACTURING RESOURCE PALNNING (MRP II)

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Manufacturing Resource Planning (MRP II) is an integrated

information system that synchronizes all aspects of the business. MRP II

system coordinates sales, purchasing, manufacturing, finance and

engineering by adopting a focal production plan and by using one unified

database to plan and update the activities in all systems.

A manufacturing resource planning can be divided into three parts:

Product planning functions which take place at the top management

level.

Operations planning handled by staff units.

Operations control functions conducted by manufacturing line and

staff supervisors.

MRP II systems can provide:

Better control of inventories

Improved scheduling

Productive relationships with suppliers

For Design / Engineering:

Improved design control

Better quality and quality control

For Financial and Costing:

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Reduced working capital for inventory

Improved cash flow through quicker deliveries

Accurate inventory records

Timely and valid cost and profitability

information

INDUSTRY SPECIFICS

MRP II systems have been implemented in most manufacturing

industries. Some industries need specialized functions e.g. lot traceability in

regulated manufacturing such as pharmaceuticals or food. Other industries

can afford to disregard facilities required by others e.g. the tableware

industry has few starting materials – mainly clay – and does not need

complex materials planning. Capacity planning is the key to success in this

as in many industries, and it is in those that MRP II is less appropriate.

PURPOSE

MRP II integrates many areas of the manufacturing enterprise into a

single entity for planning and control purposes, from board level to operative

and from five-year plan to individual shop-floor operation. It builds on

closed-loop Material Requirements Planning (MRP) by adopting the

feedback principle but extending it to additional areas of the enterprise,

primarily manufacturing-related.

MRP II DIAGRAM

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MRP II IN FINANCE

Production Planning

Master Production Scheduling

Material Requirements Planning

Capacity Requirements Planning

Realistic?

Executive Capacity Plans

Executive Material Plans

Business Planning

No

Yes

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Accounting, in the past, was primarily historical. It was a

“scorekeeping” function. “Keeping the books” to show management where

the company had been. Surely cost accounting did set standard costs for

control and there was some overall gross financial planning. But the detailed

planning and control in most companies left much to be desired. The

problem was fundamental: the numbers in the operating system that

manufacturing used were not valid and, consequently, the numbers that

accounting had to use were, to a great extent, invalid.

Inventory shrinkage is one of the greatest fears of the financial

executive. Taking the annual physical and finding that a few million dollars

that were supposed to be there aren’t can often get a company on the front

page of the Wall Street Journal as they re-project their earnings. Inventory

shrinkage comes right out of profits.

Why does inventory shrinkage occur? Ignoring cases of outright theft

which are really not the primary cause of inventory shrinkage in most

companies, the real cause can be pinned down to one thing: bad reporting of

information. Bad reporting is a natural by-product of maintaining two

different systems. The accounting system is driven from a set of transactions

that may or may not be the same as those that drive the operating system.

Even that doesn’t matter because:

The formal operating system isn’t the one that’s being used anyway.

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The operating people rarely see the impact on the financial reporting

before a disaster like inventory shrinkage occurs because they simply

don’t use these numbers themselves.

Numbers are essential to running a business. But in a manufacturing

business, if the numbers in the formal system that manufacturing uses are

wrong (only the formal system generates numbers!), then accounting must

maintain a separate system and that’s a difficult and challenging job.

In the past, financial people often had to “reconstruct” numbers or

“back into” financial figures, like work-in-process, because they didn’t have

the actual numbers to work with. For example, the most effective way the

financial executive could defend himself against inventory against inventory

shrinkage were just a form of “institutionalized error”.

PROBLEMS WITH MRP SYSTEMS

The major problem with MRP systems is the integrity of the data. If

there are any errors in the inventory data, the bill of materials (commonly

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referred to as 'BOM') data, or the master production schedule, then the

outputted data will also be incorrect. Most vendors of this type of system

recommend at least 99% data integrity for the system to give useful results.

Another major problem with MRP systems is the requirement that the user

specify how long it will take a factory to make a product from its component

parts (assuming they are all available). Additionally, the system design also

assumes that this "lead time" in manufacturing will be the same each time

the item is made, without regard to quantity being made, or other items

being made simultaneously in the factory.

A manufacturer may have factories in different cities or even

countries. It is no good for an MRP system to say that we do not need to

order some material because we have plenty thousands of miles away. The

overall ERP system needs to be able to organize inventory and needs by

individual factory, and intercommunicate needs in order to enable each

factory to redistribute components in order to serve the overall enterprise.

This means that other systems in the enterprise need to work properly

both before implementing an MRP system, and into the future. For example

systems like variety reduction and engineering which makes sure that

product comes out right first time (without defects) must be in place.

Production may be in progress for some part, whose design gets

changed, with customer orders in the system for both the old design, and the

new one, concurrently. The overall ERP system needs to have a system of

coding parts such that the MRP will correctly calculate needs and tracking

for both versions. Parts must be booked into and out of stores more regularly

than the MRP calculations take place. Note, these other systems can well be

manual systems, but must interface to the MRP. For example, a 'walk

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around' stock take done just prior to the MRP calculations can be a practical

solution for a small inventory (especially if it is an "open store").

The other major drawback of MRP is that takes no account of

capacity in its calculations. This means it will give results that are

impossible to implement due to manpower or machine or suppler capacity

constraints. However this is largely dealt with by MRP II.

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CHAPTER-3

RESEARCH

METHODOLOG

Y

3. a. RESEARCH METHODOLOGY

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Research can be defined as an organized, systematic, database, critical

objective, scientific inquiry or investigation into a specific problem,

undertaken with the purpose of finding answers or solutions to it.

3. b. RESEARCH DESIGN

“Research design is the arrangement of conditions for collection and

analysis of data in a manner that aims to combine relevance to the research

purpose with economy in procedure’’.

Explanatory Research

In this study, historic research is used for the inventory analysis of

the company.

Explanatory Research is the study of an implication that existence of,

or a change in, one variable causes or leads to an effect on the other variable.

In proposing or interpreting causal relations the researcher uses analyzing

tools to interpret the cause effects.

4. c. DATA COLLECTION METHODS

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There are two sources of data

1. Primary Data

2. Secondary Data

Primary Data

The primary data are those which are collected a fresh and for the first

time and thus happen to be original in character. The researcher for his study

has used only the secondary data.

Secondary Data

The secondary data, on the other hand, are those which have already

been collected by some one else and which has already been passed through

the statistical process.

The researcher for the purpose of the study has collected data which

was purely secondary in nature the information collected from journals,

abstract of inventory reports trial balances and balance sheet of the company

manuals, websites etc.,

4. d. PERIOD OF STUDY

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The period of the study is restricted to one month. From May – June

2008. During the period, the following research activities were carried out

successfully.

The objectives of the study were set up.

Data were collected from the annual reports and abstract of inventory

reports issued by Bharath Heavy Electrical Ltd.,

Data were analyzed with the help of statistical tool like inventory

control techniques.

Data were interpreted with the help of tables, figure / charts, etc.,

Based on the analysis of data, findings, suggestions and conclusion

were drawn successfully.

Finally a report is generated.

3. e. ANALYSIS TOOLS

The following tools and techniques have been used for carrying out

the study.

1. EOQ analysis (Economic Order Quantity).

2. ABC analysis (Always Better Control).

3. XYZ analysis.

The statistical tools like ratio analysis related to materials such as

material cost index, material cost to sales index, indigenous material cost

index, import material cost, comparison of sales & inventory index,

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manpower strength index, manpower cost and inventory turnover ratio, order

cost index, handling cost index, work in progress index, sales and purchase

index were used to analyze and interpret the data. The analyzed data has

been represented through charts in the form of bar diagrams, pie charts and

graphs to exhibit a pictorial presentation for an easy understanding of the

facts.

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CHAPTER-4

DATA ANALYSIS &

INTERPRETATION

4.1. Components of Inventory

Generally, Inventory is divided into 3 different components. Starting from,

Procurement of raw materials,

Work-in-progress and

Finished goods.

The stock needs to be monitored as non-moving goods of these may lead to

investment cost.

Table No. : 1 Components of Inventory

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(Rs. In Million)

Description 02-03 03-04 04-05 05-06 06-07Finished Goods 80.31 119.55 189.86 271.22 474.94Work-in-progress 16.00 45.89 430.70 479.02 743.59Stores & Spare parts

429.95 719.89 1068.69 1325.53 1645.34

Total 526.26 884.83 1689.25 2075.77 2863.87

Inference:

The table reveals that the,

Finished goods percentage varies year by year, according to the

number of orders received by the company.

Work-in-progress maintains in a minimum level up to 2 years and

then shows tremendous increase in the level.

Stores and spares parts are maintained in a high level.

Chart No. : 1

COMPONENTS OF INVENTORY

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4.2. Material Cost Index

Material Cost Material Cost Index = ----------------------

Production Cost

Table No. : 2 Material Cost Index

(Rs. In Million)

Description 02-03 03-04 04-05 05-06 06-07Material Cost 1515 1931 3522 5082 6620

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Production Cost 2276 2825 4576 6381 8267Material Cost Index 0.67 0.68 0.77 0.80 0.80

Inference:

In 2006-07, the index was found to be in the raising trend due

to increase in the steel price.

The above index is useful to know the percentage of material

cost to production cost from the year 2002-03 to 2006-07.

Chart No. : 2

COMPARISON OF MATERIAL AND PRODUCTION COST

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MATERIAL COST INDEX

4.3. Material Cost to Sales Index

Material CostSales Index = ---------------------------

Sales Value

Table No. : 3 Material Cost to Sales Index

(Rs. In Million)

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Description 02-03 03-04 04-05 05-06 06-07

Material Cost 1515 1931 3522 5082 6620

Production Cost 2823 3334 5121 7291 10095

Material Cost To Sales

0.54 0.58 0.69 0.70 0.66

Inference:

The above index is useful to know the material cost percentage

to sales value.

From 2002-03 to 2003-04, the index increased from

Rs.0.51million to Rs.0.58million.

The percentage increase is high in 2005-06.

This is mainly due to increase in the steel price.

Chart No. : 3

COMPARISON OF MATERIAL COST AND SALES VALUE

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MATERIAL COST TO SALES

4.4. Indigenous Material Cost Index

Cost of Indigenous MaterialIndigenous Content Index = ---------------------------------------

Total Material Cost

Table No. : 4 Indigenous Material Cost Index

(Rs. In Million)

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Description 02-03 03-04 04-05 05-06 06-07Cost of Indigenous Material

1066 1261 2536 3802 5342

Material Cost 1515 1931 3522 5082 6620Indigenous Content Index

0.70 0.65 0.72 0.75 0.81

Inference:

The above index is useful to know the percentage of indigenous

material cost to total material cost.

Almost it was in the decreasing trend due to increase in the price of

the indigenous material.

Due to change in the global economy, the indigenous costs in certain

products were more.

Chart No. : 4

COMPARISON OF MATERIAL AND INDIGENOUS MATERIAL

COST

66

Comparsion of Material and Indigenous Material Cost

01000200030004000500060007000

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

Years

Rs

in M

illi

on Cost of Indigenous

Material

Material Cost

Page 67: Materials Mgt and Inventory Control Mgt

INDIGENOUS CONTENT INDEX

4.5. Import Material Cost

Cost of Imported MaterialsImported Index = --------------------------------------

Total Material Cost

Table No. : 5 Import Material Cost

(Rs. in Million)

Description 02-03 03-04 04-05 05-06 06-07

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Cost of Import 448 670 986 1280 1278Material Cost 1515 1931 3522 5082 6620Imported Index 0.30 0.35 0.28 0.25 0.19

Inference:

The above index is for the purpose of knowing the percentage of

imported material cost to total material cost.

This was in the increasing trend due to availability of certain input

materials in India.

The cost of imported material is cheaper than the indigenous

materials.

Chart No. : 5

COMPARISON OF IMPORT AND MATERIAL COST

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IMPORTED INDEX

4.6. Manpower Strength Index

Total Staff in Purchase Department Manpower Strength Index = ------------------------------------------------ Total Company Staff

Table No. : 6 Manpower Strength Index

(Members in No.)

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Description 02-03 03-04 04-05 05-06 06-07Total Staff in Purchase Department

51 48 47 51 52

Total Company Staff

2187 2120 2115 2205 2175

Manpower Strength

0.02 0.02 0.02 0.02 0.02

Inference:

To know the strength of manpower in the Purchase Department

compared to the total strength of the company.

It was found that the strength of man power in the purchase

department was stable.

Chart No. : 6

MAN POWER STRENGTH INDEX

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4.7. Manpower Cost

Wage bill of Purchase Department Manpower Cost = ------------------------------------------------- Total wage bill of Company

Table No. : 7 Manpower Cost(Rs. in Millions)

Description 02-03 03-04 04-05 05-06 06-07

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Wage bill of Purchase Department

14 18 23 25 25

Total Wage bill 631 695 728 800 997Manpower Cost 0.02 0.03 0.03 0.03 0.03

Inference:

The wage bill of the purchase department was found to be in the

increased trend due to wage revision in the year 2001.

Chart No. : 7

MAN POWER COST INDEX

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4.8. Comparison of Sales and Closing Inventory

Sales Comparison of sales & closing inventory = ------------------------- Closing Inventory

Table No. : 8 Comparison of Sales and Closing Inventory

(Rs. in Millions)

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Description 02-03 03-04 04-05 05-06 06-07Sales 2823 3334 5121 7291 10095Closing Inventory

525.54 884.84 1689.26 2075.77 2863.87

Sales / Closing Inventory

5.36 3.77 3.03 3.51 3.52

Inference:

From the past five years, the sales have increased from Rs.2497

million to Rs.5121 million.

Therefore the sales to inventory ratio is in good position.

Chart No. : 8

SALES / CLOSING INVENTORY INDEX

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4.9. Inventory Turnover Ratio

Cost of Goods Sold Inventory Turnover Ratio = ----------------------------- Average Inventory

Table No. : 9 Inventory Turnover Ratio

(Rs. in Million)

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Description 02-03 03-04 04-05 05-06 06-07Cost of goods sold

2619 3175 4907 6712 8829

Average inventory

4975.5 7051.5 12870.5 18825.5 24698.5

Inventory Turnover Ratio

0.53 0.45 0.38 0.36 0.36

Inference:

The inventory turnover shows how rapidly the inventory is

turning into receivable through sales.

The inventory turnover ratio during the year 2002-2003 was

found to be Rs.0.53million where as during the year 2006-07

was Rs.0.36million.

This shows that the efficiency in turning its inventories is

continuously maintained according to its production and selling

its products.

Chart No. : 9

INVENTORY TURNOVER RATIO

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4.10. Nonmoving Inventory

Table No. : 10 Nonmoving Inventory

(Rs. in Million)

Description 02-03 03-04 04-05 05-06 06-07Nonmoving 27.9 26 34.6 32.7 17.4

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Inference:

Non-moving stocks slowly reduced from Rs.27.9 millions (2002-

03) to Rs.17.4 millions in 2006-07.

The main reason for the nonmoving is the raw materials &

components would have been purchased and kept in the

inventory based on the order expected orders from the customer.

There after the orders would have been cancelled by the

customer. The nonmoving stocks will be diverted to other similar

orders.

Hence, it is concluded that the company takes necessary steps to

get other similar orders to get red of non moving stocks.

Chart No. : 10

NON-MOVING INVENTORY

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4.11. Slow moving Inventory

Table No. : 11 Slow moving Inventory

(Rs. in Million)

Description 02-03 03-04 04-05 05-06 06-07Slow moving 41.5 39.8 124.0 74 28.8

Inference:

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Slow moving stocks slowly reduced from Rs.41.50 millions 2002-03

to Rs.28.8 millions in 06-07.

The main reason for the slow moving is some specified materials

would have been purchased in bulk due to lower prices offered by

suppliers.

The slow moving stocks will be reduced if a product goes up.

Chart No. : 11

SLOW MOVING INVENTORY

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4.12. Fast moving Inventory

Table No. : 12 Fast moving Inventory

(Rs. in million)

Description 02-03 03-04 04-05 05-06 06-07Fast moving 456 819 1530 1969 2818

Inference:

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The above table shows the fast moving stock over the period of 5

years.

It is observed that the balanced investment in the inventory

component and the company’s utilization of inventories in generating

sales is found to be satisfactory.

Chart No. : 12

FAST MOVING INVENTORY

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4.13. Order Cost Index

Total purchase dept in cost Order Cost Index = ---------------------------------- Total No. of orders placed

Table No. : 13 Order Cost Index

(Rs. in Lakhs)

Description 02-03 03-04 04-05 05-06 06-07Total purchase dept in cost

176.30 205.38 241.41 278.20 301.17

Total No. of 3652 3718 3721 3825 3950

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orders placedOrder cost index

0.05 0.05 0.06 0.07 0.08

Inference:

The above table shows that the ordering cost increases in the number

of orders, which indicates inventories are more frequently acquired.

Thus the firm’s order cost is higher.

Chart No. : 13

ORDER COST INDEX

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4.14. Handling Cost Index

Total handling costHandling Cost Index = ----------------------------------------------------- Total value of material received and issued

Table No. : 14 Handling Cost Index

(Rs. in Lakhs)

Description 02-03 03-04 04-05 05-06 06-07Total Handling cost

172.71 200.87 216.71 252.84 316.17

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Total value of material received issued

2620.66 3799.62 7371.56 8813.3611231.16

Handling cost index

0.07 0.05 0.03 0.03 0.03

Inference:

The above table shows the handling cost index.

It includes the total handling cost to total value of material received

and issued.

The handling cost index during the year 2002-03 was Rs.0.07millions,

while during the year 2006-07 it was found to be Rs.0.03millions.

Hence, it is concluded that the handling cost index is maintained in

Rs.0.03millions during the past three years.

Chart No. : 14

HANDLING COST INDEX

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4.15. Purchase Efficiency

Total purchase valuePurchase Efficiency = -------------------------------------------- Total expenses of purchasing dept

Table No. : 15 Purchase Efficiency

(Rs. in Lakhs)

Description 02-03 03-04 04-05 05-06 06-07Total purchase value

1571 2290 4730 5526 6942

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Total expenses of purchasing dept

176.30 205.38 241.41 278.20 301.17

Purchase Efficiency

8.91 11.15 19.59 19.86 23.05

Inference:

The above table shows the purchase efficiency of the company. The

purchase efficiency was found to be in increasing trend.

Chart No. : 15

PURCHASE EFFICIENCY

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4.16. Sales / Purchase Index

Total sales Sales / Purchase Index = --------------------- Total purchase

Table No. : 16 Sales / Purchase Index

(Rs. in Lakhs)

Description 02-03 03-04 04-05 05-06 06-07Total sales 2823 3334 5121 7291 10095Total purchase 1571 2290 4730 5526 6942

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Sales / Purchase index

1.80 1.46 1.08 1.32 1.45

Inference:

The table indicates the sales / purchase index, which depends on the

number of orders in the year.

The trend of this index was found to be fluctuating.

It was dropped during the year 2004-05 and slowly increased during

the next two years.

Chart No. : 16

SALES / PURCHASE INDEX

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4.17. Work-in-progress Index

Average work-in-progressWork-in-progress Index = --------------------------------------

Total production value annually

Table No. : 17 Work-in-progress Index

(Rs .in Lakhs)

Description 02-03 03-04 04-05 05-06 06-07Avg. Work-in-progress

163.92 306.98 2380.5 4548.61 6113.06

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Total production value

2276 2825 4576 6381 8267

Work-in-progress index

0.07 0.11 0.52 0.71 0.74

Inference:

The table indicates the work-in-progress index, which shows an

increasing trend during the past five years.

Hence, it is concluded that the various components of inventories are

maintained adequately and balanced investment in inventories were

made.

Chart No. : 17

WORK – IN – PROGRESS INDEX

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4.18. Comparing movements of inventories

Table No. : 18 Comparison of inventory movement

(Rs. in Lakhs)

Description2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

Nonmoving27.9 26 34.6 32.7 17.4

Slow moving 41.5 39.8 124 74 28.8Fast moving 456 819 1530 1969 2818

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Inference:

Non-moving stocks slowly reduced from Rs.27.9 millions (2002-03)

to Rs.17.4 millions in 2006-07.

Slow moving stocks slowly reduced from Rs.41.50 millions (2002-03)

to Rs.28.8 millions in 2006-07.

Chart No. : 18

COMPARSION OF INVENTORY MOVEMENTS

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4.19. ECONOMIC ORDER QUANTITY

This is an important item of inventory control to be decided. EOQ

depends on many factors like cost of purchasing and receiving, normal

consumption, interest on capital, availability of storage accommodation,

ordering and carrying costs. EOQ is the reorder quantity, which is the

quantity to be purchased each time an order is placed. It aims at minimizing

both carrying cost and cost of ordering.

Table No. : 19

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EOQ Computation of 15 Items in BHEL, Ranipet

Sl. No.

Description of Materials A C S I (%) EOQ

1 Plate 5x2500x6000 ASTM 588

240 43640 13055 4.01 59.84

2 GP Sheet 0.63 Grade 275

44 34260 13055 4.01 28.92

3 Flat 50 x 6 GRA 197 26450 13055 4.01 69.64

4 Cheq plate 5 1373 28310 13055 4.01 177.70

5 HR Sheet 3.15 mm IS 5986 & E 330

370 28930 13055 4.01 91.26

6 HR Plate 20 mm is 2062 GR-AGC sheet LPRC/III -25x410x3000

1817 28497 13055 4.01 203.76

7 HR Sheet 2.0 mm is 2062 FE-330

1129 28936 13055 4.01 159.39

8 HR Plate 12 mm is 2062 GR-A

1803 28271 13055 4.01 203.78

9 HR Plate 32 mm is 2062 GR-B

1225 28772 13055 4.01 166.50

10 HR Plate 10 mm is 2062 GR-A

1438 30681 13055 4.01 174.69

11 HR Plate 5 mm is 2062 GR-B

2179 27179 13055 4.01 228.48

12 HR Plate 25 mm is 2062 GR-B

1347 29091 13055 4.01 173.63

13 HR Plate 5 mm is 2062 GR-A

2178 27160 13055 4.01 228.50

14 HR Plate 8 mm is 2062 GR-A

1387 27710 13055 4.01 181.85

15 HR Plate 16 mm is 2062 GR-A

1810 28510 13055 4.01 164.16

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4.20. ALWAYS BETTER CONTROL (ABC)

ABC is ‘Management by exception’ system of Inventory Control. In

this ABC technique of inventory control, the materials are classified and

controlled according to value of the materials involved.

Table No. : 20 ABC Analysis

(Rs. In Millions)

Description 02-03 03-04 04-05 05-06 06-07A Items (> 10 lakhs) 1117.35 1520.84 3007.83 4341.82 566.17B Items (> 1 lakh < 10)

307.78 320.97 353.87 423.49 509.6

C Items (< 1 lakh) 90.27 89.99 98.93 115.32 137.10

Total 1515.4 1931.8 3460.63 4880.631212.87

Inference:

Table content shows the value of items increased year by year.

Comparing A items to B items in the year 2003-2004 and 2004-2005

it has shown a tremendous increase in usage.

Comparing to A items to C items in the year 2004-2005 and 2005-

2006 it shows that the value of the cost of material has increased.

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Chart No. : 20

ABC ANALYSIS

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4.21. XYZ ANALYSIS

XYZ analysis is based on the value of inventory stored. If the values

are high, special efforts should be made to reduce them. This exercise can be

done once a year. Items classified as ‘X’ denotes high inventory value. Items

classified as ‘Y’ and ‘Z’ denotes medium and low inventory values

respectively.

Table No. : 21 XYZ Analysis

(Rs. In Millions)

Description 02-03 03-04 04-05 05-06 06-07X Items (> 10 lakhs) 103.55 347.59 537.30 828.64 819.8Y Items (> 1 lakh <10)

152.78 183.95 237.93 280.77 277.0

Z Items (< 1 lakh) 76.67 75.46 84.11 97.29 91.4Total 333 607 859.34 1206.70 1882

Inference:

In the year 2004-2005 and 2005-2006 the usage of X items has

increased.

In the year 2005-2006 and 2006-2007 the usage of X items has

decreased.

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Chart No. : 21

XYZ ANALYSIS

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CHAPTER-5

FINDINGS &

SUGGESTIONS

SUMMARY OF FINDINDS

1. Components of inventory table reveal that,

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Finished goods percentage varies year by year according to the

number of orders received by the company.

Work – in – progress maintained in level.

Stores and spares parts are maintained in a high level.

2. It is found that, in Material cost index table the increase in the

material cost is due to increase in steel price.

3. From the sales index table it is found that, the percentage of sales

index has gone down due to increase in the material cost.

4. It is found that due to the increase in the indigenous material cost,

purchase of material from the internal sources has come down.

5. The manpower strength index table shows the decreasing trend, which

is due to manpower reduction in the company as a whole which is due

to Voluntary Retirement Scheme offered by the Management.

6. It is found that the manpower cost table shows the increasing trend. In

the year 2000, the wage revision for employees had come into effect.

Due to this, man power cost had gone up.

7. From the inventory turnover table it is found that, due to increase in

sales the inventory cost in the absolute value has also increased.

8. From the past five years, the sales have increased from Rs.2497.6

millions to Rs.7291 millions.

9. The fast moving stock over the period was found to be increasing

trend.

10.The handling cost index was found to be maintained in

Rs.0.03millions for the past three years.

SUGGESTIONS AND RECOMMENDATIONS

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1. Steps should be taken to increase the price quoted for the customers,

so that Sales Index will be improved.

2. Steps should be taken to improve the manpower strength for major

production of the firm.

3. Steps should be taken to find out substitute for the imported

materials.

4. Steps should be taken to capture more orders to improve the sales.

Hence for successful inventory control management system it

involves balancing the costs of inventory with the benefits of inventory

which includes,

Maintaining a wide assortment of stock.

Increasing inventory turnover.

Keeping stock low.

Obtaining low prices by making volume purchases.

Having an adequate inventory on hand.

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CHAPTER-6

CONCLUSION

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CONCLUSION

From the above, it is clear that materials management control system

in inventory management area as a whole works through exception principle.

When everything goes well as planned, there is no cause of worry and no

corrective actions are needed. But, when something goes wrong and things

don’t run as smoothly as planned, operational control gets loose.

BHEL Ranipet, achieved a quantum jump in physical turnover of

105904 MT and financial turnover of Rs.810crores for the year 2006-2007

and also the firm maintained somehow a good performance for the past five

years. In India due to economic and industrial growth the requirement of

power generation has increased in the past years.

At present, BHEL Ranipet is having an order book position for

Rs.2500 crores. In the year 2006-07 steel prices may not increase beyond

5%, so profitability is in the increasing trend.

The company is trying to create more sources (vendors) for supply of

materials and imports of materials only for the essential items. In the year

end, inventory will be determined by the company based on the budgeted

turnover of the next year.

It may be concluded from the above study that inventory management

in BHEL Ranipet, is satisfactory. Therefore to improve the performance at

higher task, the above said factors and methods of inventory control should

be taken into consideration. If the suggestions mentioned in the study are

implemented then the material management will be more efficient.

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APPENDIXES

BHARAT HEAVY ELECTRICALS LIMITED

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BOILER AUXILIARIES PLANT, RANIPET

Abstract from Profit and Loss and Balance Sheet – March 2002

(Rs. In Thousands)

PARTICULARS As at 31.03.2002

Sources of Funds 1063232

Capital

Fixed Assets

Gross Block 1052888

Less:

Depreciation to-date 708709

Net Block 344179

Capital Expenditure in Progress 7065

Current Assets, Loans & Advances:

Inventories 469578

Sundry Debtors 278317

Cash & Bank Balances 633 748528

Other Current Assets:

Loans & Advances 72811 821339

Current Liabilities and Provisions:

Liabilities 669289

Provisions 87355 756644

Net Current Assets 64695

Inventories: As Spare Parts 18991

Production 17116

Fuel Stores 380

Miscellaneous 1495

Contd…

Abstract from Profit and Loss and Balance Sheet – March 2002

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(Rs.in Millions) (Rs. In Thousands)

Inventories: As Stores As at 31.03.2002

Raw Materials & Components 271965

Materials in Transit 45305

Materials with Fabricators 1581

Scraps 4740

Finished Goods 110210

Work-in-Progress 16786

Total Inventory 469578

Cost of Goods Sold 2481

Materials Cost 1412

Production Cost 2180

Sales Value 2763

Indigenous Materials Cost 974

Imports Materials Cost 438

Manpower in Purchase (Nos.) 53

Manpower in Total (Nos.) 2212

Wage Bill of Purchase Department 12

Total Wage Bill 578

Purchases 1456

BHARAT HEAVY ELECTRICALS LIMITED

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BOILER AUXILIARIES PLANT, RANIPET

Abstract from Profit and Loss and Balance Sheet – March 2003

(Rs. In Thousands)

PARTICULARS As at 31.03.2003

Sources of Funds 1186692

Capital

Fixed Assets

Gross Block 1075139

Less:

Depreciation to-date 761288

Net Block 313851

Capital Expenditure in Progress 9991

Current Assets, Loans & Advances:

Inventories 526260

Sundry Debtors 287150

Cash & Bank Balances 7559 820244

Other Current Assets:

Loans & Advances 68967

Current Liabilities and Provisions:

Liabilities 671819

Provisions 57465

Net Current Assets 159927

Inventories: As Spare Parts 16226

Production 15018

Fuel Stores 99

Miscellaneous 1109

Contd…

Abstract from Profit and Loss and Balance Sheet – March 2003

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(Rs. in Million) (Rs. In Thousands)

Inventories: As Stores As at 31.03.2005

Raw Materials & Components 408927

Materials in Transit

Materials with Fabricators 1675

Scraps 3122

Finished Goods 80308

Work-in-Progress 16002

Total 526260

Cost of Goods Sold 2619

Materials Cost 1515

Production Cost 2276

Sales Value 2823

Indigenous Materials Cost 1066

Imports Materials Cost 448

Manpower in Purchase 51 (Nos.)

Manpower in Total 2187 (Nos.)

Wage Bill of Purchase Department 14

Total Wage Bill 631

Purchases 1571

Purchase department cost 1763

Total no. of orders placed 3652

Total handling cost 1727

Total value of materials received and

issued

26206

BHARAT HEAVY ELECTRICALS LIMITED

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BOILER AUXILIARIES PLANT, RANIPET

Abstract from Profit and Loss and Balance Sheet – March 2004

(Rs. In Thousands)

PARTICULARS As at 31.03.2004

Sources of Funds 1264003

Capital

Fixed Assets

Gross Block 1099327

Less:

Depreciation to-date 797146

Net Block 302181

Capital Expenditure in Progress 5709

Current Assets, Loans & Advances:

Inventories 884835

Sundry Debtors 302590

Cash & Bank Balances 18658 1206083

Other Current Assets:

Loans & Advances 67323

Current Liabilities and Provisions:

Liabilities 825016

Provisions 159557

Net Current Assets 288833

Inventories: As Spare Parts 13575

Production 12588

Fuel Stores 88

Miscellaneous 899

Contd…

Abstract from Profit and Loss and Balance Sheet – March 2004

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(Rs. in Million) (Rs. In Thousands)

Inventories: As Stores As at 31.03.2004

Raw Materials & Components 315517

Materials in Transit 1966

Materials with Fabricators 3395

Scraps 6427

Finished Goods 119551

Work-in-Progress 45398

Total 884835

Cost of Goods Sold 3175

Materials Cost 1931

Production Cost 2825

Sales Value 3334

Indigenous Materials Cost 1261

Imports Materials Cost 670

Manpower in Purchase 48 (Nos.)

Manpower in Total 2120 (Nos.)

Wage Bill of Purchase Department 18

Total Wage Bill 695

Purchases 2290

Purchase department cost 2053

Total no. of orders placed 3718

Total handling cost 2008

Total value of materials received and

issued

3800

BHARAT HEAVY ELECTRICALS LIMITED

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BOILER AUXILIARIES PLANT, RANIPET

Abstract from Profit and Loss and Balance Sheet – March 2005

(Rs. In Thousands)

PARTICULARS As at 31.03.2005

Sources of Funds 1321272

Capital

Fixed Assets

Gross Block 1115348

Less:

Depreciation to-date 839030

Net Block 276318

Capital Expenditure in Progress 3196

Current Assets, Loans & Advances:

Inventories 1689257

Sundry Debtors 287026

Cash & Bank Balances 13093 1989376

Other Current Assets:

Loans & Advances 101936

Current Liabilities and Provisions:

Liabilities 1288650

Provisions 163055

Net Current Assets 639607

Inventories: As Spare Parts 15408

Production 13898

Fuel Stores 139

Miscellaneous 1371

Contd…

Abstract from Profit and Loss and Balance Sheet – March 2005

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(Rs. in Million) (Rs. In Thousands)

Inventories: As Stores As at 31.03.2005

Raw Materials & Components 830576

Materials in Transit 184654

Materials with Fabricators 26484

Scraps 11569

Finished Goods 189866

Work-in-Progress 430700

Total 1689257

Cost of Goods Sold 4907

Materials Cost 3522

Production Cost 4576

Sales Value 5121

Indigenous Materials Cost 2536

Imports Materials Cost 986

Manpower in Purchase 47 (Nos.)

Manpower in Total 2115 (Nos.)

Wage Bill of Purchase Department 23

Total Wage Bill 728

Purchases 4730

Purchase department cost 2414

Total no. of orders placed 3721

Total handling cost 21671

Total value of materials received and

issued

7372

BHARAT HEAVY ELECTRICALS LIMITED

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BOILER AUXILIARIES PLANT, RANIPET

Abstract from Profit and Loss and Balance Sheet – March 2006

(Rs. In Thousands)

PARTICULARS As at 31.03.2006

(Rs. In Thousands)

Sources of Funds 1918931

Capital

Fixed Assets

Gross Block 1152010

Less:

Depreciation to-date 890250

Net Block 261760

Capital Expenditure in Progress 12691

Current Assets, Loans & Advances:

Inventories 2075770

Sundry Debtors 350783

Cash & Bank Balances 17582 2444135

Other Current Assets:

Loans & Advances 107340

Current Liabilities and Provisions:

Liabilities 2473959

Provisions 200383

Net Current Assets 122867

Inventories: As Spare Parts 31045

Production 29033

Fuel Stores 96

Miscellaneous 1916

Contd…

Abstract from Profit and Loss and Balance Sheet – March 2006

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(Rs. in Million) (Rs. In Thousands)

Inventories: As Stores As at 31.03.2006

Raw Materials & Components 1138332

Materials in Transit 101780

Materials with Fabricators 36513

Scraps 17857

Finished Goods 271222

Work-in-Progress 479021

Total 2075770

Cost of Goods Sold 6712

Materials Cost 5082

Production Cost 6381

Sales Value 7291

Indigenous Materials Cost 3802

Imports Materials Cost 1280

Manpower in Purchase 51 (Nos.)

Manpower in Total 2205 (Nos.)

Wage Bill of Purchase Department 25

Total Wage Bill 800

Purchases 5526

Purchase department cost 2782

Total no. of orders placed 3825

Total handling cost 2528

Total value of materials received and

issued

8813

BHARAT HEAVY ELECTRICALS LIMITED

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BOILER AUXILIARIES PLANT, RANIPET

Abstract from Profit and Loss and Balance Sheet – March 2007

(Rs. In Thousands)

PARTICULARS As at 31.03.2007

(Rs. In Thousands)

Sources of Funds 3005764

Capital

Fixed Assets

Gross Block 1196209

Less:

Depreciation to-date 936482

Net Block 259727

Capital Expenditure in Progress 38248

Current Assets, Loans & Advances: 5166150

Inventories 2863867

Sundry Debtors 2111388

Cash & Bank Balances 1071

Other Current Assets:

Loans & Advances 189824

Current Liabilities and Provisions:

Liabilities 5836989 6095920

Provisions 258931

Net Current Assets -929770

Inventories: As Spare Parts 36576

Production 33529

Fuel Stores 329

Miscellaneous 2718

Contd…

Abstract from Profit and Loss and Balance Sheet – March 2007

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(Rs. In Thousands)

Inventories: As Stores As at 31.03.2007

Raw Materials & Components 1131293

Materials in Transit 395919

Materials with Fabricators 66215

Scraps 15335

Finished Goods 474938

Work-in-Progress 743591

Total 2881119

Cost of Goods Sold 8829

Materials Cost 6620

Production Cost 8267

Sales Value 10095

Indigenous Materials Cost 5342

Imports Materials Cost 1278

Manpower in Purchase 52

Manpower in Total 2175

Wage Bill of Purchase Department 25

Total Wage Bill 997

Purchases 6942

Purchase department cost 3012

Total no. of orders placed 3950

Total handling cost 3161

Total value of materials received and

issued

11231

ANNEXURE

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The extra information related to BHEL that have been collected are,

1. According to BSE – Market Capital was Rs. 55700.03.

2. Ownership – Central Govt. - Commercial Enterprises.

3. Auditor – D.R.Mehta & Associates

4. Registrar – Karvy Computer share Pvt. Ltd.

5. Earnings per Share (EPS) – Rs. 77.13.

6. Shares outstanding – Rs. 24, 47, 60,000.

7. Average daily volume (30 days) – Rs. 31.57.

8. Share holding as per Sep 2006

Promoter owned – 67.72%

Public owned – 1.17%

FIIs owned – 21.91%

Others owned – 9.20%

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BIBLIOGRAPHY

BIBLIOGRAPHY

“MATERIALS MANAGEMENT” - P. GopalaKrishnan and

M.Sunaresan, Prentice Hall of India publications 15th edition.

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“INVENTORY MANAGEMENT” - L.C. Jhamb, and Everest

publications 3rd edition.

“RESEARCH METHODOLOGY” - Kothari. C.R (2001), Wishwa

publications.

P. Saravanavel and S. Sumathi, “PRODUCTION AND

MATERIALS MANAGEMENT” – Margham publications 2 nd

edition.

The introduction about the company was collected from the company

website, www.bhel.com

121