Mihir Inventory Mgt

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A

SUMMER PROJECT REPORT

ON

INVENTORY MANAGEMENT

AT

KRISHAK BHARTI CO-OPERATIVE LTD.,

HAZIRA

2010-2011

SUBMITED IN PARTIAL FULLFILMENT OF

THE REQUIREMENT FOR THE

DEGREE OF

MASTER OF BUSINESS

ADMINISTRATION

SUBMITED BY

PATEL MIHIR MAHENDRAKUMAR

GUIDED BY

PADMALOCHAN BISYOI

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PREFACE

This project report is prepared during the vocational trainingundertaken at KRIBHCO SURAT, on partial fulfillment of the

degree in Master of Business Administration.

Theory of any subject is important but without its practical

knowledge it becomes useless 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 theseManagement 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

applications of the theories studied. This training provides golden

opportunity for all students, especially when the Management

student does not have perfect understanding of the working of a

unit.

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.

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Acknowledgement

I am glad to express my profound sentiments of gratitude to all who

rendered their valuable help for the successful completion of this project

report titled, Inventory Management. And to know the functions ofFINANCE AND ACCOUNTS DEPARTMENT .

I record my deep sense of gratitude to Mr. Thomas T. S. (Sr.private

secratery-F & A) who had given me a chance to do a project under this roof

of KRIBHCO and given opportunity to know the functions of FINANCE AND

ACCOUNTS DEPARTMENT.

I would me missing the opportunity if I do not show my gratitude to Mr.

P.G. Soni dept. Manager(Account) who gave me information and guidancewhenever required.

Im also thankful and would like to show our special gratitude to, K.

Ashokan (manager-Materials), Mr.V Satyanesan(Sr manager-material, Mr.M.

N. Patel Pvt. Secy (HRD), Mr. Rajesh Smapat(Materials) who supervised my

entire project. I would like to thank sincerely from the deep of my heart as

they were the persons who constantly guided me and gave me the practical

knowledge of the subject.

As books were the source of our knowledge and data I would also liketo thank Mr. P.T. Solanki Asst. Mgr. (Library head) and Shri Thomas TS, Pvt.

Secretary, who helped me whenever required.

My genuine sense of gratitude goes to the respective universities that

gave me a chance to brighten my academic qualification that provided me

this opportunity to have a practical knowledge of relevant fields.

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CONTENTSCertificate 1

Preface 2Acknowledgement 3

Sr.

No.

Chapter Page

no.1 OBJECTIVE OF THE PROJECT 52 METHODOLOGY 63 INTODUCTION TO FERTILIZER

INDUSTRY

7

4 PROFILE OF KRIBHCO 135 INTRO DUCTION TO INVENTORY

MANAGEMENT

22

6 INVENTORY MANAGEMENT IN

KRIBHCO

33

7 IMPORTANCE OF LEAD TIME IN

INVENTORY CONTROL

85

8 SUGGESTION 909 SUMMARY AND RECOMMENDATION 9110 ANNEXURE-1 93

11 ANNEXURE-2 9712 BIBLIOGRAPHY 101

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OBJECTIVE OF THE PROJECT

A. PRIMARY OBJECTIVE:

The primary objective of the present study is to understand the

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 to them and introduce new scientific and

practical Inventory Management techniques, if needed.

OTHER OBJECTIVES:

To supplement the Inventory control techniques in the

organization for effective Inventory Management.

To provide necessary guidelines for determining economic order

quantity, re-ordering levels and classifications of items using

appropriate basis.

To minimize idle time caused by storage of raw materials, stores

or spare parts.

To keep capital investment low in inventories, and keep down

Inventory carrying cost and obsoletes losses.

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METHODOLOGY

The project was carried out under two heads, namely:

1) STUDY OF INVENTORY MANAGEMENT

2) EVALUATION OF INVENTORY MANAGEMENT

Taking the perspective of student from the finance point of view the

methodology used for study was to answer three questions covering

broad area 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

carried out with various personnel of M/s. KRIBHCO.

However, to obtain the answer to the third question (i.e. how the

Inventory Management is done?) the existing Inventory control

techniques were studied, a relationship and link was sought betweentheory & practice and it was found that many aspects from Theory can

be and are being used in practice and necessary suggestions were

made to promote existing Inventory Management at various level.

Finally at the evaluation store beside the Inventory Interview

technique, secondary data was collected from trial balance etc. which

were rearranged, regrouped so as to meet the requirement of

situation.

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FERTILIZER INDUSTRY SCENARIO IN

INDIAIn India, first of all in 1906, a single super phosphate (SSP)

manufacturing unit was set up at RANIPAT near CHANNI (MADRAS) withannual capacity of 6400tones per annum.

1. PUBLIC SECTOR

THE FERTILIZER AND CHEMICALS TRAVANCORE LTD. (FACT)

HINDUSTAN FERTILIZER CORPORATION LTD. (HFC)

MADRAS FERTILIZER LTD. (MFL)

HINDUSTAN COPPER LTD. (HCL)

NAIVELY LIGNITE CORPORATION LTD. (NLC)

PYRITES, PHOSPHATES AND CHEMICALS LTD. (PPCL)

PRADEEP PHOSPHATES LTD. (PPL)

RASHTRIYA CHEMICALS AND FERTILIZERS LTD. (RCFL)

NATIONAL FERTILIZER LTD. (NFL)

2. CO-OPERATIVE SECTOR

Those are only two fertilizer manufacturing societies in co-operative sector

INDIAN FARMERS FERTILIZERS CO-OPERATIVE LTD. (IFFCO)

KRISHAK BHARTI CO-OPERATIVE LTD. (KRIBHCO)

3. PRIVATE SECTOR

THERE ARE 17 COMPANIES IN PRIVATES SECTOR, which are producing

FERTILIZER

1. Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)

2. Hindustan Lever Ltd.(HLL)3. Hari Fertilizer

4. ICI India Ltd.

5. Indo Gulf Fertilizers & Chemicals Corporation Ltd.

6. Mangalore Chemicals & Fertilizer Ltd. (MCFL)

7. Southern Petro Chemicals Industries Corporations Ltd.

8. Nagarjuna Fertilizer & Chemical Ltd. (NFCL)

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9. Shri Ram Fertilizer & Chemicals

10. Tuticorian Alkali Chemicals & Fertilizer Ltd.

11. Zuari Agro Chemicals Ltd.

12. Bindali Agro Chemicals Ltd.

13. Chambal Fertilizer & Chemicals Ltd.

14. Coromandal Fertilizer Ltd. (CFL)

15. Deepak Fertilizer & Petrochemicals Corporations Ltd. (DEPCL)

16. E.D.I. Passy (India) Ltd.

17. Gujarat State Fertilizer Company (GSFC)

The Role Of The FERTILIZER In The National Economy

AGRICULTURE INDUSTRY SERVICES ENVIRONMENT

As critical input in crop

production

Fertilizer use promotes.

It promoters agriculture

growth food security &

rural

Fertilizer industry

promotes

Use of gas, sulfur etc.

Foreign Exchange

saving

Distribution network

promotes domestic

world trade, credit

Banking, services,

research, transport

and storage services.

The proper use

Fertilizers can help in

1-maintainance of so

structure

2-prevention of so

erosion and degradation.

3-control of deforestation

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PROFILE OF KRIBHCO

In pursuance of the provisions of the Multi State Co-operative Societies Act,

1942, KRIBHCO was registered in April-1980 as a Multi State Co-

operative Society under the Delhi Co-operative Societies Act, 1972with registered office in the union territory of Delhi.

HISTORY AND DEVELOPMENT

PROJECT ZERO DATE 31st MARCH, 1981FOUNDATION STONE LAID BY Late Smt. Indira Gandhi then the Prime

Minister Of India on 5th February 1982PROJECT COMPLETION 31 st MAY 1985

TRIAL PRODUCTION PHASE Ist PHASE IIndAMMONIA 14th NOV1985 30th NOV. 1985UREA(STREAM 11/31) 26th NOV. 1985 1st DEC.1985UREA (STREAM 21/41) 3rd DEC. 1985 1st DEC. 1995

FIRST RAKES DISPATCHED 1st FEB. 1986

COMMERCIAL PRODUCTION 1st MARCH 1986

PLANT CAPACITY & CONSULTANTS

PLANT CAPACITY CONSULTANTSDAILY ANUUAL

AMMONIA 2 X 1350 MT 8.9 LAKH MT * M.W.kellogg, USA

*-FEDO, INDIAUREA 4 X 1100 MT 14.52 LAKH MT *SNAMPROGETTI, ITALY

*PDIL, INDIA SENIOR THERMAL

ENGG.U.K

POWER 2 X 15 MWH SENIOR THERMAL ENGG.U.K.

2 X 55 MT PER *PDIL

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KRISHAK BHARTI SEVA KENDRA

In order to provide all essential agro-inputs i.e. Fertilizers, seeds,

pesticides, micronutrients, soil testing tips, agriculture implements and

technology information order one roof. KRIBHCO has been continuing its

operation of service center known as Krishak Bharti Seva Kendra, whichcovers 64 states.

GRAMIN VIKAS TRUST

By virtue of its occupations with the Manufacturing, distribution

and marketing of fertilizer seeds for benefit of farmers, the society has

promoted a separate legal entity. GVT, to look after overall development of

the deprived sections of Tribal community in different states of the country

RESEARCH & DEVELOPMNENT

The society has taken up a Research & Development project

covering priority areas like fertilizers, bio-fertilizers, treatment of wastes-

generated by fertilizers industry seeds & fertilizers marketing. Liquid based

bio-fertilizers are being developed in place of carrier-based bio-fertilizer.

BIO-FERTILIZERS:

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. The types of BIO-FERTILIZERS manufactured by

KRIBHCO are Rhizobium, Azotobacter & PSM (Phosphate Solubilisig

Microorganism) KRIBHCO is implementing two more bio-fertilizer plants of

300 MTPA capacity each.

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PRODUCTION &SALES OF KRIBHCO BIO-FERTILIZERS (Qty. in MT)

The following are the year wise details of Production and Sales of

Bio-Fertilizer:

YEAR PRODUCTION

(MT)

SALES (MT)

2001-2002 389 373

2002-2003 296 351

2003-2004 603 516

2004-2005 560 611

2005-2006 775 714

SOURCE OF FINANCE:

EQUITY:

Government Of India : Rs. 450.00 Crores

Iffco : Rs. 97.00 Crores

Other Societies : Rs. 38.70 Crores

The following is the graphical representation of Sources of Finance.

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(Source: Annual Report of KRIBHCO-2000-01)

PRODUCT:

KRIBHCO is manufacturing Nitrogenous Fertilizers and Allied

Products viz.: Urea, Ammonia Liquid, Bio-fertilizer. Besides, its 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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450

9738.7

GOI

Iffco

Other Societies


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Efficient Utilisation of Resources

FINANCIAL ACHIEVMENT FROM BEGINING (RS.IN CRORES)NET PROFIT

YEAR Before

tax

Prov. for

Income tax

After tax

1986- 45.06 - 45.06

1987- 126.80 - 126.80

1988- 85.75 - 85.75

1989- 91.51 - 91.51

1990- 94.65 - 94.65

1991- 158.04 60.00 98.041992- 227.78 82.20 145.58

1993- 183.86 72.00 111.86

1994- 292.89 95.50 197.39

1995- 286.95 85.00 201.95

1996- 328.48 99.50 229.38

1997- 447.96 148.35 299.61

1998- 390.40 129.27 261.13

1999- 79.85 24.00 55.85

2000- 210.10 77.00 138.102001- 248.33 61.00 187.33

2002- 40.01 06.00 34.01

2003- 219.51 66.81 152.70

2004- 185.83 45.24 140.59

2005- 280.20 87.75 192.45

2006- 231.53 38.29 193.24

2007- 272.14 82.94 209.20

2008- 269.34 19.21 250.13

2009- 252.77 24.60 228.17

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-DIVIDEND PAID TO SHARE-HOLDERS (Govt. India, IFFCO, Other

Society)

YEAR Amount(Rs. in

Crores)

Dividend %

1986-87 13.84 3

1987-88 26.86 6

1988-89 26.77 6

1989-90 26.81 6

1990-91 26.83 6

1991-92 35.82 8

1992-93 36.13 8

1993-94 36.29 81994-95 36.48 8

1995-96 50.39 11

1996-97 59.78 13

1997-98 83.36 18

1998-99 85.31 18

1999-00 57.87 12

2000-01 58.56 12

2001-02 97.92 20

2002-03 34.39 7

2003-04 88.43 18

2004-05 73.50 20

2005-06 78.47 20

2006-2007 88.33 20

2007-2008 74.50 15

2008-2009 72.46 14

2009-2010 78.86 20

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CHAPTER-1 INTRODUCTION

The dictionary meaning of the word Inventory means stock of goods.

In the financial terms, Inventory means the value of raw materials,

consumables spares, work in process, finished goods, and scrap in which

company funds have been invests.

It can also be identified that Inventory are those goods which are

placed, stored and used for day to day functioning of the organization.

Thus Inventory can be defined an ideal resource of any kind having

an economic value.

TYPES OF INVENTORIES :

Inventories are classified according to uses and point of entry in the

alteration is as follows:

1. Raw Material

2. Stores, Spares and Consumables

3. Work in Process Goods and

4. Finished Goods

NEED TO HOLD THE INVENTORIES :

There are the three major reason for holding inventories.

1. TRANSACTION PURPOSE

2. SAFETY PURPOSE

3. SPECULATIVE PUROSE

WHY INVENTORY MANAGEMENT? THE NEED

SIZE OF BUSINESS

I. WIDE VARIETY AND COMPLEXITY

II. URGENCY IN MATERIAL REQUIREMENT

III. NEED FOR LIQUIDTY

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FACTORS INFLUENCING INVENTORY DECISIONS

Following factors influence the Inventory decisions of an

organization.

[1] LEAD TIME

ADMINISTRATIVE LEAD-TIME. MANUFACTORING/PROCUREMENT LEAD TIME, TRANSPORTING LEAD TIME AND INSPECTION LEAD-TIME.

[2] RELEVANT COSTS

1. COST OF ORDERING

2. COST OF CARRYNG INVENTORY

3. COST OF UNDER STOCKING

4. OVER STOCKING COST SERVICE LEVEL

OBJECTIVE OF THE STUDY

The primary objective of the present study is to understand the techniques

of the Inventory Management used in this concern, with a view to find outthe extent to which the concepts of scientific Inventory control are being

applied to them and introduce new scientific and practical Inventory

Management techniques, if needed.

To supplement the Inventory control techniques in the organization for

effective Inventory Management.

To provide necessary guidelines for determining economic order

quantity, re-ordering levels and classifications of items using

appropriate basis.

To minimize idle time caused by storage of raw materials, stores or

spare parts.

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To keep capital investment low in inventories, and keep down

Inventory carrying cost and obsoletes losses.

PROFITS OF INVENTORY MANAGEMENT:

Inventory control ensures an adequate supply of materials; stores,

spares, etc. minimize stock outs and shortage and avoids costly

interruption in operation.

It lowers down investment in inventories. Inventory carrying cost and

observances losses.

It facilities purchasing economics through the measurements ofrequirements on the basis of recorded experiences.

It eliminates duplications in ordering or in replacing stock by

centralizing the source from which purchase requisitions emanate.

It permits a better utilization of avoidable stocks by facilitating inter

department transfer within a company.

It facilities cost accounting activities by providing a means forallocating material costs to products, departments or other operating

accounts.

It provides a check against the loss of materials through carelessness.

It enables Management to make cost and consumption comparison

between operations and periods.

It services as a means for locations and disposition of inactive andisolate items of stores.

Perpetual Inventory values provide a consistent and reliable basis for

preparing financial statements.

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PURCHASE DEPARTMENT.

The prime responsibility of Purchase Department is to arrange supply

of various raw materials, consumables, spare parts etc. to the plant for the

production purpose and to the other departments for maintenance and

operation purpose. The materials should be procure at the right prices from

right source of supply.

* Purchase Procedure

The following are some of the essential steps in this regard.

* Responsibility for Purchases - Functions

All purchase functions shall be the responsibility of the Materials

Manager posted in the plant. The purchase functions in other offices shall be

handled by one single office nominated/designated for the purpose. Theindentors from various departments should refrain from issuing inquiries,

inviting bids entering into correspondence or negotiation with

vendors/contractors. All requisitions for purchase duly processed in

accordance with the procedure laid down, hereinafter should be forwarded to

Materials Manager/Designated officer for necessary action.

* Registration of Vendors

The purchase department is responsible for developing a list of

approved vendors for various types of materials, services. An advertisement

is issued in all the leading newspapers inviting applications in the prescribed

proforma for registration of suppliers and contracts listing out various types

of purchases and services that are likely to be made during the next three to

five years. The applications received is scrutinized by a Committee

consisting of a representative from Technical, Finance and Purchase

Department (nominated by the General Manager) and to ascertain the

resources. Capacity and quality of workmanship of vendor. The Committee

can also call the vendor and contractors for personal discussions and seek

clarifications on the applications and obtain such other information as may

be considered necessary by the Committee.The list of approved vendors and contractors should be updated atleast

every five years by issuing a press advertisement.

* Requisition to Purchase/Work

The indentors from the various departments will raise a requisition

called the Material Purchase Requisition for purchase in the prescribed

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proforma. It should be ensured that the requisition for purchase should be

completed in all respects with regard to:

A) Description of the material/equipment/scope of work.

B) Material of construction/specification

C) Temperature/Pressure/Standard if anywhere applicable.

D) Quantity and unit of measurement.

E) Date when delivery of material/services is required.

F) Name of vendor in case of the item is of proprietary nature.

G) Estimated value and budget head.

H) Whether item is a stock item/non-stock item.

The requisition for purchase of materials which have been declared as

stock-item will be raised by the stores Department after the quantity in

stock has reached the Re-order level as determined for the respective

items.

Such requisition amongst other particulars should also indicate the

minimum, maximum and re-order level the date on which last supply

was received and the average consumption per month since last purchase.

The requisition for purchase of non-stock items will be invariably

rooted through the Stores Department which will endorse on the requisition,

the availability/non-availability. In case the item is available, the quantity

there of be indicated on the purchase requisition so that the quantity to be

purchased can be adjusted by the Materials Manager in consultation with the

indentor.

The requisition for purchase of capital items award of Civil Work,

erection contracts, contracts for repairs to plant and machinery and

equipment handling and transportation of materials, repair/servicing of

equipment hiring of casual labours. Selection of contractors for

repair/maintenance of township and plant buildings, mechanical, electrical,

isolation, provision of other services and painting jobs on schedule of rate

valid for one year will be sent directly to the Materials Manager after the

same are approved by the competent authority.

All requisitions for purchase of materials or for award of work as

described above will be raised by the respective departments. The

Department Manager would ensure that the purchase requisitions must

indicates:

A) The budget provision. (This will be checked by F&A)

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B) The amount utilized upto the previous requisition.

C) The estimated value of the present requisition and

D) The balance available under the budget head after booking the present

requisition.

* Record and Numbering of Requisitions

All purchase requisitions received in the purchase department shall be

entered departmentwise in a register maintained for the purpose. The

Indenting deparatment shall allot a number to each requisition and endorse

the same on all copies of the requisition. The numbering procedure should

be such that the requisition can be identified deparatment-wise. The

Purchase Department will issue a report by the 15th of the following month

listing out the requisitions received during the previous month and their

current status and mail the same to the respective Identing Departments. A

copy of these report will be put to the General Manager for his information. The Identing Departments will review the report from the Purchase

Department and shall ensure that the missing requisitions are traced and are

handed over to the Purchase Department promptly.

* Enquiries/Invittion to Bid

On receipt of the requisitions from the various departments, enquireis

is issued by the Purchase Department as per the procedure detailed below:

A) Enquiries to be issued in the prescribed proforma.

B) Enquiry document is suitably modified to conform to the

material/services proposed to be procured.

C) Enquiry document describes in detail the description of the

material/services the technical specifications etc.

D) The delivery time and the various general and special terms and

conditions governing the purchase/work. The enquiry document

stipulates that:

i) KRIBHCO reserves the right to accept or reject any/all bids without

assigning any reason.ii) KRIBHCO shall have the right to placed the order/award the work to

one or more vendor/contractor.

E) Enquiry floated for obtaining bids for a Civil work oir for cleaning,

handling, loading and transportation of materials or provision of

services a draft of the contract proposed to be entered into is sent

along with.

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Enquiries is issued as per the following guidelines:

Estimated value of

purchase order/work

order/contract

Minimum No. of

vendors to whom

enquiry to be issued

Minimum No. Of bids

to be obtained

1) Upto Rs.1,00,000/- 5 3

2) ExceedingRs.1,00,000/- and

upto Rs.3,00,000/-

All suppliers on theapproved list

3

3) Exceeding

Rs.3,00,000/-

Press tender

The idea in prescribing the minimum number of vendors to whom

enquiries to be issued and bids to be obtained is to create a healthy

competition amongst the bidders, so that society is able to procure materials

and services at the most economical price.

Open tenders through advertisement in the press is invited in case of

all purchase the estimated value of which exceeds Rs.3 lakh if no approved

vendor list is available for a particular item, press tender, shall also be

invited for purchases exceeding Rs.1 lakh.

Open tenders are invited for selecting contractors for performing

maintenance work, relating to civil, mechanical electrical and

instrumentation work against a rate contract (SOR) which will be renewableevery year. Press tenders for selecting such contractors will be advertised in

one of local English and another in local language paper which has a good

circulation: where fabrication oif equipment or major repairs to plant and

machinery are involved, the enquiry floated to all the major fabrication/repair

shops for determining the number and/or mode of enquiry to be issued the

requisition is evaluated on the basis of last purchase order or the present

estimated market value of the material/equipment which ever is more.

The competent authority in his discretion may allow floating of limited

enquiry in respect of purchases not exceeding Rs.3 lakhs and

works/contracts for a value not exceeding Rs.5 lakhs in each case.

Notwithstanding the forgoing, invitation of bids by press tender will not

be necessary in respect of:

1) Purchase of proprietory items

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2) Items, the prices of which are fixed by the Government.

3) Items, the import of purchase of which is chanalised through a

Government Deparatment or public sector undertaking and

4) Items, standardised for particular brand/make.

5) However, all purchases of proprietory items and such other items the

prices of which are fixed by the Government will require prior approval

of the Managing Director/Executive Committee/Board of Director if the

value of such purchase exceeds the delegated authority of the General

Manager/Group Manager.

A) For purchases exceeding Rs.3 lakhs and upto Rs.10 lakhs, one

insertion may be given in the following news papers.

1) Times of India, Bombay/Ahmedabad/Delhi.

2) Indian Express, Ahmedabad (now also Baroda0

3) The Hindu, Madras

4) The Statesman, Calculta5) Gujarat Mitra, Surat

6) National Herald, Delhi

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B) For purchases exceeding Rs.10 lakhs, one insertion may be given in

the following news papers.

1) Times of India, Bombay/Ahmedabad/Delhi.

2) The Statesman, Calculta

3) The Hindu, Madras

4) The Indian Exress, Ahmedabad

5) Gujarat Mitra, Surat

6) National Herald, Delhi

The competent authroity, if he is satisfied may waive the

advertisement of tenders for such purchases, the value of which does not

exceed the power delegated to him for making purchases. The General

Manager/Group Managers will obtain prior approval of E.D./Managing

Director for waiving advertisement of tenders where the purchase exceedshis delegated authority. The General Manager/Group Managers may however

waive advertisement of tenders in excess of their delegated authority of the

purchase is required to be made to meet an emergency in the plant. In such

cases post facto approval of the Managing Director may be obtained later.

Normally, such waivers may be resorted to in the case of purchase of

proprietory items or to cater to an emergency in the plant whenever the

competent authority waives advertisement in the press for inviting bids,

reasons are recorded in writing. A monthly report on such waivers is

submitted to the Managing Director for his information by 15th of the

following month. NIL report should also be submitted in case there was no

waiver during the preceeding month.

If the tender proposal to be advertised is for a work which involves

design and engineering amongst other things. It would be preferable if the

bids are invited in two parts viz. (a) Technical and commercial unpriced bid

and (b) Priced bid. The date of opening the priced bid is fixed later than

unpriced bid.

* Time Allowed for Submission of BidsNormally 2 weeks time is given to the vendors for submitting their

bids. In case of enquiries for engineering civil and fabrication work where

calculation are involve and it is not feasible to obtain the bids early. The time

limit for submission of bids may be increased to four weeks.

Bidders are advise to indicate on the envelopes containing the bid, the

enquiry number, the date and time of opening the bid. The bids shall be

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addressed to Materials Manager or such other officer nominated to perform

purchase functions.

Extension in due date may be done in consultation with indenting

department, if inadequate/no response to enquiry.

* Validity of Bids

The bidders are advise to submit bids valied for 45 to 60 days. It is

ensures by the Purchase Department that the orders are placed on the

successful bidder within the validity period of the bid. If after opening of the

bids, it is inevitable to charge the specification of material/work, the revised

specifications are circulated to all the bidders who responded against the

original enquiry and bids will be obtained a fresh from all the bidders.However occasions for changing specifications and asking bidders to quote a

fresh are rare and in all such cases prior approval of the General

Manager/Group Manager must be obtained.

The enquiry documents stipulates that no bidder would be allowed to

revise/alter his bid after opening of the bids and within the validity period. In

case any bidder revises/alters his bid, the same shall be rejected even

through the revise bid may conform to specification and be the lowest.

* Opening of Bids

The bids received against the open tender are opened on the date and

the time stipulated in the tender document as under:

A) All advertised bids to be opened publicly.

B) Bids not advertised (published) but where estimated value is more

than Rs.1 lakh bids should also be opened publicly.

C) For bids where value is less than Rs.1 lakh, public opening is not a

must but if representative of some bidder wish to be present, Kribhco

has no objection.

All bids received are opened by the Purchase Department in the

presence of the representatives from the Indenting Department and Finance

Department. The bids opened are initiated and dated on all pages by all the

persons who attend the bid opening. In case there is any cutting or

alterations in the rates quoted or to the prescribed terms and conditions, the

same will also be attested by all the persons attending the bid opening.

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A record is kept of the names of representative who attended the bids

opening from Kribhcos side and the vendor representatives who attend the

bid opening. All the persons including the bidders should sign against their

name in token of having atteneded the bid opening. Bids opened is read out

to the vendors who attend the bid opening. Ènquiry Response Sheet may

also be filled giving details of tender enquiry Number, Date, Due date,

Opening date, Number of bids received etc. And is signed by Kribhco

representative.

Where and priced bids have been invited in two parts, i.e. unpriced and

priced bids, the unpriced bids is opened first. Any clarifications/additional

information required by Tender Committee is sought in writing from the

bidders. The bidders will have all option to revise the price in the commercial

bid before the same is opened. In case any bidder wants to revise/alter thebid, he can do so and submit the changes in the price in a closed envelope

before the due date. The commercial bid alongwith any revision is opened on

the appointed day and time in the presence of bidders who wish to be

present.

* Late, Invalid and Unsolicited Bids

All bids received after the opening oif bids are treated as `Late-bids

and will be ignored. All late bids are returned to bidders un-opened. Bids

which are not accompanied by the prescribed earnest money deposit will be

treated as Ìnvalid Bids and will be endorsed as such. The tender documents

stipulates that earnest money can be deposited either in cash or by a Bank

Draft or in form of Bank Guarantee in the prescribed proforma attached to

the tender document. Ùnsolicited Bids are not considerd not be opened and

even though they may be the lowest will not be entertained.

* Quotation Comparison Statement (QCS)

After the tenders are opened a Quotation comparison statement (QCS)

is prepared by the Purchase Department. All the bids received are listed in

the QCS. In-valid bids are listed in a separate statement and attached to theQCS. The QCS is checked by an official of the Purchase Department (not

below grade `N) and both the persons who prepared and checked the QCS

will sign the same.

The bids conforming to the specifications and lowest in value will be

rated in the QCS, as lowest (L1). Second lowest (L2), third lowest (L3). After

the QCS has been checked and rated the Purchase Department Incharge

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forwards the same alongwith bids in original to the Identing Department for

the review of the bids and making recommendations for Purchase.

The review of QCS and selection of successful bidder is done through a

Tender Committee. The General Manager/Group Manager nominates a

Tender Committee consisting of a representative from Indentors

Deparatment, Purchase Department and Finance Department, Purchase

Department will forward the relevant papers/file prior to the meeting to the

members of the Tender Committee is so required by them for review. The

Tender Committee keeps a return record of their discussion on the QCS as

and when they meet. The Tender Committee may obtain any clarifications

from the bidders as may be necessary. All clarifications are sought through

Purchase Department only. The Indenting Department shall not entered into

direct correspondence with the bidders. All proposal for purchases detailed

below shall be referred to the Tender Committee (As may be appointed byGeneral Manager/Group Manager) for review and making recommendations:

A) All purchase order the value of which does not exceed Rs.50,000/- will

be finalised on recommendations of the Indentor and Purchase

Department with the concurrence of respective Manager (F&A) except

in the case of such purchase orders which are being finalised against a

single bid. All purchase order against single bid will be finalised as per

procedure prescribed here in after.

B) All proposals for selecting contractors to work on schedule of rates

(S.O.R.) valid for one year.

C) All proposals for cash purchases involving expenditure of Rs.25,000/-

or more.

* Selection of Successful Bidders

Normally the lowest bid which conforms to the specifications is

accepted. However, while the lowest bid even though conform to thespecifications is not accepted. Full justification for accepting other than

lowest bid shall be recorded in writing and approval of the competent

authority will be obtained.

* Single Tender

Where in response to enquiry only one bid is receieved and the

purchase order is proposed to be finalised on a single tender, approval of the

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competent authority is obtained as per the delegation of powers, while

according such approval the competent authority records the justification for

making the purchase on single tenders.

* Negotiation

Where the lowest acceptable bid received against the enquiry is

considered high or where there is scoipe for reduction in price in the opinion

of the Tender Committee (which may be recorded) and negotiations are

considered necessary. The following course of action may be taken:

A) Negotiation is conducted commencing with the technically acceptable

lowet four bidders. In conducting negotiations the parties are called

one after another starting with the lowest bidder. The original lowest

bidder can be given second change to offer further reduction if the

other bidders revises his price lower than the original bid of the lowest

bidder. The scope of negotiation can be enlarged beyond the lowest

four bidders in the following circumstances:1) If the work to be awarded is intended to be split and awarded to more

than one contractor.

2) If a ring is suspected and the negotiation with the initial four lowest

bidders do not yield satisfactory results.

3) If higher bids are in very close proximity of the two lowest bids and any

change in quantities can change the rating of the bidders.

If a single bid is received against the open enquiry. The same can be

accepted if the rates are considered reasonable. Otherwise, negotiations are

held with the bidder and a decision taken either to accept the single bid or to

resort to re-tender.

If a single bid is received against a limited enquiry normally it is

rejected and re-tendering resorted to. However, the competent authority, if

he is satisfied that it would be in the interest of Kribhco, to accept the single

bid received. He may do so and record reason in writing.. Such bid is

accepted on the recommendations of the Tender Committee and

concurrence of the Finance Department.

All negotiatins are conducted by the Tender Committee nominatd by

the General Manager/Group Manager. The Tender Committee keeps a written

record of their discussions with the bidders and amongst themselves on day-to-day basis and this record of discussions is signed by all the member of the

Tender Committee and the bidders.

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* Guaranters

The Purchase Department obtains from the vendors/contractors Bank

guarantees in the proforma prescribed.

A) Advance payment

B) Performance Bond

C) Free issue materials

The Bank Guarantee in respect of free issue materials may be waived

by the competent authority in such cases where he is satisfied that the

material isued to the vendor contractor will not be moved out of the

factorys/housing colonys secured work site.

* Amendment to Purchase Order

Any change/amendment to the purchase order/work order shall be

issued in writing after the same has been approved by the competentauthority. The amendment to purchase order shall be issued in the

prescribed proforma and shall be numbered serially. All change orders where

the terms and conditions are altered and/or which have financial implications

will be routed through finance department for concurrence before the same

is approved by the competent authority. The amendments to the purchase

orders will also be raised in the same number and will be distributed in the

same manner as the original purchase order.

* Repeat Orders

Repeat orders without calling for fresh bids may be placed against

previous orders within one year from the date of issue of original order. No

repeat order shall however, be placed against a purchase order which was

placed at higher prices in the interest of early delivery. The quantity and

value of the repeat order should not exceed the quantity and value

stipulated in the original order and should not be resorted to more than once

in any case. While placing the repeat order, it should be ensured that there

has been no down-ward trend in prices since the original order was placed.Repeat orders shall be placed with the concurrence of the finance

department and qapproval of the competent authority. The authority

competent to approve repeat orders will be the same which approved the

original order.

* Follow-Up of Purchase Orders

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The Purchase Department shall receive all the mail from the vendors

and shall reply to them in consultation with other deparatments whenever

necessary.

The purchase deparatment shall keep Identiting Department informed

of the status through periodical/monthly reports.

The Purchase Department shall be responsible for following up of the

purchase order/contract with vendors and transporters until the material is

received and accepted at the plant/stores.

* Inspection of Material

The Purchase Department shall Co-ordinate with other departments

and arrange inspection of materials at vendors shops prior to despatch

wherever stipulated in the purchase order.

Inspection of materials in other cases shall be carried out on receipt of

materials at plant site/stores only those materials cleared by the inspection

as conforming to purchase order specifications will only be taken on charge

in stores. The person inspecting the material will sign on the `Stores Receipt

Voucher in taken of having inspected and acepted the material.

* Damaged/Short/Rejected Materials

The Stores Department shall be responsible for sending suitable

intimations to the:

1) Vendor for materials rejected if the same do not conform to the

specifications mentioned in the purchase order.

2) Vendor and Insurance company for material received short or

damaged.

Where the delivery offered by the vendor was ex-works the intimation

for damaged/short receipt of materials will be sent only to the Insurance

company. The intimation to vendor and the Insurance company for material

received short or damaged or rejected should sent as early as possible afterthe material is inspected but in any case not later then a week from the date

of their receipt at plant/site. A copy of the intimation issued by the Store

Department will be endorsed to:

1) Finance and Accounts Departments for lodging the Insurance claim or

making suitable recovery from the vendor.

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2) Purchase Department for following up, the replacement supplies or

obtaining the non-delivered quantity.

The Purchase Department shall be responsible for following up with the

vendor, the replacement of materials rejected or short supplied by him. The

Purchase Department shall evolve a suitable system so that suitable

communication is issued to the vendor until the replacement supply is

received or quantity short delivered is made good by him.

* Insurance Claim

The Accounts Department on receipt of a copy of the letter issued by

Stores Department make and entry in a register maintained for the purpose

and shall lodge suitable insurance claims. The Accounts Department shall co-

ordinate with other departments wherever necessary and collect the details

of materials and other costs as may be required for preferring a claim.

* Cash PurchaseCash purchases or materials should be avoided as far as possible. Cash

purchases should be resorted to only meet the plants emergencies or where

it would not be economical to call for quotations owing to the small value of

purchases.

The General Manager/Group Manager may, however, consider keeping

a suitable amount not exceeding Rs.2000/- as Imprest fund with the

Purchase Department, Maintenance Department and Administration

Deparatment to enable them to make cash purchase of items to meet the

urgent day-to-day needs of the plant.

* Bank Guarantees

The Finnance and Accounts Department is responsible for safe custody

of Bank Guarantees received from vendors/contractors. The Finance and

Accounts Department maintains a separate register for keeping records in

the proforma enclosed for Bank Guarantee obtained against:

A) Advance payment

B) Performance guarantee

C) Free issue of materials

The Bank Guarantee register is reviewed every month to ensure that

all the guatantees obtained are valid. Such of the bank guarantees which arefound to be maturing/expiring will be reviewed with the respective

department to ascertain if any further revalidation would be required to

conform to the dates of completion of work/delivery of material.

Normally the validity of Bank Guarantee should be as under:

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a) Bank Guarantee for: From the date of payment until the advance is

luquidated.

b) Performance guarangee: From the date of payment of advance or

commencement of work whichever is earlier until expiry of

maintenance period.

c) Free issued material: From the date of issue of material until

settlement of quantitative account of material issued or delivery of

fabricated equipment whichever is later.

The Finance and Accounts Department is responsible for issuing

intructions to the vendor/contractor for obtaining the extension of the

existing Bank Guarantees before expiry of the claim period. A suitable

system should be introduced by the Finance and Accounts Department to

ensure that a regular follow-up is done with the respective

vendors/contractors until the extention to Bank Guarantees are received.Finance and Accounts Department also ensures that until extension to bank

guarantees are received from vendors/contractors on equipment amount is

with held from running/final payment due to the vendors/contractors. The

Bank Guarantee shall discharged in consultation with the respective

department after receiving the conformable from them that the maintenance

period under the purchase order/work contract has been completed and that

there is no claim against a vendor/contractor. The Bank Guarantee for

advance payment can be discharged by the Finance and Accounts

Department after ensuring that the advance paid have been

liquidated/recovered from running final payment where the

vendor/contractor does not communication issued for extending the validity

of the bank Finance and Accounts Department will invoke the bank

guarantee before expiry of the claim period after consulting the respective

department and obtaining the approval of the General Manager/Group

Manager.

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EVALUATION OF EXISTING PURCHASE SYSTEM OF KRIBHCO:

The existing purchase procedure gives fair chances of

competition to all the vendors. It leaves no room for malpractices or

favoritism of employees i.e. nobody oblige any one out of way. It is not

very rigid. In time of urgency of requirement, necessary deviations are

approved by competent authority so as to avoid stoppage of work. The

procedure is based on democratic way of working. Good suggestions to

improve efficiency are always considered. Various annual rate contract

running contracts are entered for regular consumable items, like oil

and lubricants, stationery, chemicals, medicines, printing job etc. This

is reducing the repetitive job times and money of company.

But there are shortcomings also, which are evaluated taking intoconsideration the five essentials of purchase functions are as follows:

(1)Purchase time,

(2)Purchase quantity,

(3)Purchase quality,

(4)Purchase price and

(5)Source of supply

PURCHASE TIME

The purchase time indicates the lead-time i.e. time taken to physically

receive the material from the date of its indent.

To find out the lead time five cases different items have been studied

randomly, and analyzed its fact which indicates that by following the existing

procedure, the administrative lead time is very long i.e. 5 to 7 months, while

suppliers lead time is about 2 to 3 months.

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SUGGESTIONS:

(1)Approved vendor list should be maintained so that wastage of time to get

vendor list approved every time could be avoided.

(2)Contract system should be followed to purchase stock items withapproved vendors so that the continuity of supply can be maintained

without following such long procedure and waste of time. It this case the

economic order quantity should determined for each item and a list of

order per year with specific time limit should be given to contractors in

advance, fixing the maximum, minimum Inventory levels

(3)For non-stock items, the limits for issuing inquiry should be fixed

maximum to seven days. Similarly time limit for recommendations and

concurrence by technical department and finance department also befixed. In case of delay beyond this time limit, competent authority should

be informed for necessary instruction.

PURCHASE QUANTITY AND QUALITY:

It has been observed that the quantity of material is being purchased

considering 6 to 12 months consumption that means no economic order

quantity has been fixed for different types of material. Due to the existing

system:

Company is incurring cost of carrying Inventory interest of capital rent

etc.

Company as also incurring loses due to the depreciation in quantity,

detoriation in quality and obsolesce of materials during storage.

Company is also incurring avoidable expenditure such as holding and up

keep of surplus material, financial losses due to fall in the price of

materials, extra expenditure on excess of materials required.

It is suggested that before taking final decision economic orderquantity should be determined for each item and order should be placed

accordingly.

The determination of economic order quantity techniques has been

discussed on succeeding pages.

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PURCHASE PRICE

The price of each item is being compared with suppliers quotations

considering the quality of material to be supplied.

Although, purchase department should keep itself informed of the

price trends, with the help of market reports, trade papers and journals,

report by purchase against and sales representative of the suppliers,

published catalogue and price list.

SOURCE OF SUPPLY

The selection of a particular supplier is made after inviting tenders

from possible source of supply. There are four types of tenders commonly

used, which are

(a)Single tender,

(b)Limited tender,

(c)Open tender and

(d)Global tender

The tender received are opened on the date and time stipulated

and compared to select a final vendors, considering quality, delivery after

sales services etc. which indicates that right source is selected, only thing

taken in to consideration is to maintain cordial relations with suppliers.

STORAGE CONTROL

The control of materials while in storage is affected through what

is known as the perpetual Inventory. Thus two main functions of the

perpetual Inventory system have been studied which are:

(i) Receipt and issue system, and

(ii) Maintenance of store records.

And also the use of Inventory control techniques have been

evaluated considering existing position of KRIBHCO.

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WAREHOUSE SYSTEM AND PROCEDURE

THE SCOPE:

The procedure comes in to operation immediately on receipt of

dispatched documents or dispatched intimation in the stores and

covers on the activities, i.e. clearance, delivery, inspection, stock

charging and preservation, issue and return of materials by the

consumer and ends after striking out balance from the stock card and

delivery of documents VIZ. SRV.SIV. to the account department.

RECEIPT SYSTEM

The system for receipt starts even before the time when thematerial actually reached the plant, when purchase order is planed a

copy is sent to the stores indicating quantity and approximate delivery

date. These are arranged in chronological order so that any time the

volume of receipt can be estimated. This also helps in planning labour

contracts when unloading activities exceed a particular limit. This is

the first step in the store system.

Suppliers, once they despatch the goods, normally send and

advice note, dispatch note to the stores. This provides information on

the date of dispatch, carrier details, description consignment and

value. This as sent in advance so that quick and easy clearance may

be done. On receipt of consignments, the store personnel check the

consignment and tally the material with suppliers delivery note /

challans along with relevant documents, the material is visually

checked for any apparent damage or discrepancy. Appropriate remarks

/ endorsement is made accordingly on the delivery notes / challans in

case of discrepancies on deviation being found in the suppliers

received. Material received against the delivery notes / challans will be

checked with the relevant purchase orders details mentioned in thechallans / delivery notes and packing notes received with the

consignment. Store receipt voucher is prepared in seven copies for

item found in an order.

The material is than paid up for inspection, items finally accepted

is physically handed over to the custody stores or project departments

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and their acknowledgement obtained in the appropriate columns of the

receipt notes.

INSPECTION

In exercising control on the quality of incoming materials

inspection plays an important role. Material purchased in India and

abroad are inspected according specifications, prescribed tests,

drawings, approved samples etc as stipulated in the purchase order.

To inspect different types of materials following inspection methods

are used.

(a)Inspection by third party :

Such agencies are EIL cloyed register, IBR; etc. acceptance

of material is based on the certificates and reports of theseagencies.

(b)Inspection by indenting departments :

At vendors premises during manufacture of materials or

before dispatch of the same the concerned officers of

indenters carry out such inspection.

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(c)Materials test certificates :

The material may be inspected and accepted based on

the manufactures test certificates.

(d)Materials are inspected and accepted by carrying out

chemical, electrical or mechanical test either of the project

site or through the recognized lab as stipulated in the

purchase order.

(e)Some materials like shop, cotton, waste, phenol etc are

accepted by visual inspection. Proprietary nature of materials

are accepted by either visual inspection or carrying necessary

tests whenever required.

(f) Materials are also accepted after ascertaining the quality

as per samples on stipulated in the order.

ISSUE SYSTEM:

The issue system relates to function of issue card and Inventory

control section of stores. It covers all material stocked by the KRIBHCO

stores and all bulk and raw materials directly stored by the users. It

begins with the preparation of issue voucher and ends with their

submission to accounts departments.

GENERAL AUTHORITY AND RESPONSIBILITY:

The authority for receipt and storage of all the materials is centralized

in the store department accepts medicines and stationary. Issue will be

made only on receipt or presentation of authorized requisition.

Stores department is responsible to provide material (through stores

issue voucher) to the authorized requisition on demand, all materialdeclared as stock items and contained in the store catalogue as the desired

and the quantities requested for immediate use by them.

QUANTITY OF ISSUE:

In respect of consumable stores and such other materials as are

required frequentor at odd hours, the issue is made in large quantities to

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reduce electrical work and to ensure ready availability of materials at sight

place when required. The quantity issued is for 15 days consumption. The

entire issued quantity is charred in full to the requisition cost center though

all of its not actually used or consumed immediately. In case an item

stocked as a set it is issued as a set not in parts.

PERPETUAL INVENTORY SYSTEM:

KRIBHCO has the following perpetual Inventory system, which

comprises:

(i) Cardex system

(ii) Stores ledger and

(iii) Physical stock verification

CARDEX SYSTEM

To maintain the quantitative records of receipt and issues and

closing balances of items of stock a cardex system is followed. Stores

department is doing all the quantitative accounting of materials.

STORES LEDGER

For the all quantitative accounting of materials stores

department is responsible. Where as for monitory accounts of

materials accounts department is responsible. One set of each

document for receipt issue and return of materials is sent to priced

store ledger section in the accounts department.

Based on these documents priced stores ledger are prepared for

each item of the stores. The price store ledger provides the volume of

each receipt issue and return along with the quantity accounts.

PHYSICAL VERIFICATION OF STOCK

The physical verification of stock is contemplated with a view to

ensuring that stores and materials held in stock tally with the quantity

and specification shown in the cardex. The actual balances agree with

the balances recorded in the cardex and discrepancies noticed if any

are investigated and adjusted for accounting purpose.

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It has been observed that time gap of verification is six months,

which should be reduced to be three months for non-stock items, and

for stock items verification should be done at the time of placing

orders. So that the determined Inventory level can be maintained even

of spoilage, damages and obsolescence takes place.

MATERIAL CONROL TECHNIQUES:

To know the practical use of various Inventory control techniques

in KRIBHCO. Following Inventory control techniques were studied and

evaluated are.

(i) Codification system.

(ii) Classification of Inventory.

(iii) Determination of E.O.Q. and

(iv) Determination of Inventory levels.

CODIFICATION SYSTEM:

Codification is the strategy to identify the various items of an

Inventory in an unambiguous manner.

The motivating factor in codifying inventories is to reduce the

verities in the materials / holdings of the organization by standardizing

supplies.

EXISTING CODIFICATION SYSTEM IN KRIBHCO:

KRIBHCO has adopted Kodak system of codification, which is based on

mine group codification system.

First two digits have been used to codify main group.

Remaining seven digits have been used to codify all the specifications in

that group.

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The main group have been sub-divided in the following four categories

for easy segregation of materials.

CATEGORY MAIN GROUP NO.

1. General stores 00 TO 492. Electrical equipments and spares 50 TO 633. Instrumentation equipments and spares 64 TO 804. Electrical equipments & spares 81 TO 99

BASIC STRUCTURES IS GENERALLY IN THE FOLLOWING BASIS

GENERAL STORES (00TO 49)DIGITS

I II III IV V VI VII VIII IX MAIN GROUP

SUB GROUP

SPECIFICATION/MATERIAL OF

CONSTRCTION/

THICKNESS

SIZE OF ITEMS

ELECTRICAL AND INSTRUMENTATION

EQUIPMENT & SPARES 50 TO 63 AND 84 TO 80DIGITS

I II III IV V VI VII VIII IX

MAIN GROUP

MAKE TYPE

SPECIFICATION

ITEMS

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ELECTRICAL EQUIPMENT & SPARED (81 TO 99]

I II III I

V

V V

I

VI

I

VIII I

X DIGITS

MAIN GROUP PLANT CODE

SPECIFICATION/EQUIPMENT/SIZE/RATING

SUB ASSM / CONSTRUCTION SPARE PARTS / S. NO.

The codification system has been introduced in KRIBHCO from 22nd

December 1984 only. The detailed catalogue against each main group is still

under preparation and is to be circulated on its operation. A list of primary

group (main group) is enclosed in Annexure-7.

The existing codification system has the following advantages.

Avoidance of supplication due to multiple names, long description of the

items and storing of the same items under different names is avoided.

Easy to identify.

Reduction in clerical work.

STANDARDISATION:

Standardization is one of the tools available to Management to

optimize on the number of items and reduce inventories. With

standardization the number of items to be procured / manufactured can be

reduced and for the same value of business the quantity can be increased.

Thus, it leads to economic scale and cost reduction.

A standard is a model or general agreement of a rule established by

authority concern or custom created and used by various level of interest.

The importance of standardization is interchangeability of parts. Once

an item has been standardized. The number of manufacture who can supply

the standard parts will increase and this will result in better availability lower

cost and continuity of supply. Company having stock of only standard items

and being assured of timely supply company will be able to reduce obsolesce

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and also reduce the inspection formalities and can be entered into contracts

for regularly supply.

It is suggested that KRIBHCO should follow the standardization

technique to gain above said benefits.

CLASSIFICATION OF INVENTORY:

The universal problem can be solved taking in to consideration its important

aspects. Similarly, in Inventory Management classification is meant for

solving the Inventory control problem from its important angle. The

inventories having huge amount of use in the organization has to be

controlled very strictly and low amount of use should be kept low control.

The importance can be due to the cost; its criticality, its availability and its

consumption.

EXISTING CLASSIFICATION SYSTEM:

The existing classification system is based on its use, i.e.

inventories classified as stock items and non-stock items.

The list and amounts of stock and non stock items is described in

Annexure-

The existing system keeps strict control on the item that are of

recurring nature. It takes in to consideration only the amount use of quantity

not in value. While for non-stock item low control is being kept. This system

has following shortcomings.

The classification gives importance to only those items, which

are of recurring natures. It excludes from the control point of view

the items that are high value in stock.

It considers the quantity used not the money value of thematerial used.

Control kept on stock items a give equal weightage to all

items, which neglects the benefit of selective control technique.

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Considering the practical use of classification techniques, two

important methods are suggested as follow.

(1) ABC classification and

(2) VED classification

ABC CLASSIFICATION:

ABC classification is a basic analytical Management tools which

enables top Management to direct their effort where the result will be

maximum. This technique properly knocks as ALWAYS BETTER CONTROL

has universal application in many areas of human endeavor. The techniquetries to analyze the distribution of any characteristic by money value of

importance in orders to determine its priority. In materials Management, this

technique has been applied in areas needing selective control. Such as

Inventory critically of items, obsolence. Stock purchases order, receipt of

materials, inspection, storekeeper and billing verification.

ADVANTAGES OF ABC CLASSIFICATION:

This approach helps the material manager to exercise selective

control and focus his attention only on a few items. When he is dealing

with lacs of store items. ABC analysis has to be reported to equal

extension to A, B and C items will not worth while and would be very

expensive. Concentrating on all items it is likely to have diffused effect

irrespective of the priorities.

It provides a sound basis on which to allocate funds and time of

personnel with respect to their importance of the individual items.

TECHNIQUES OF ABC CLASSIFICATION:

The techniques of classifying the items into A, B and C categories as

described in the following steps:

(1) Classify the items of inventories, determining the expected use in units

and the price per unit for each item.

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(2) Determining the total value of each item by multiplying the expected

units by its units price.

(3) Rank the items in accordance with the total value, giving first rank to the

item with highest total value and so on.

(4) Compute the ratios (percentage) of number of units of each item to total

units of all items and the ratio to total of each item to total value of all

items.

(5) Combine items on the basis of their relative value to form three

categories A, B and C.

PURPOSE OF ABC CLASSIFICATION

The object of carrying out ABC classification is to develop policyguidelines for selective control.

Normally, once A.B.C.classification has been done the following broad

policy guidelines can be established in respect of each category.

EXHIBIT 1.1

Sr.No

.

A-ITEMS B-ITEMS C-ITEMS

1. Very strict control Moderate control Low control

2. No safety stock Low safety stock High safety stock3. Frequent ordering or

weekly deliveries

Once in four months Bulk ordering once in

six months4. Weekly control

statements

Monthly reports Quarterly control

reports5. Maximum follow up

and expediting

Periodic follow up Follow up and

expediting exceptional

cases6. Strict value analysis Moderate value

analysis

Minimum value

analysis7. As many sources as

possible for each item Two or morereliable sources

Two reliable sourcesfor each items

8. Accounts forecast in

material planning

Estimate based on

past data on

present plan

Rough estimate for

planning

9. Minimization of waste

obsolete and

Quarterly control

over surplus and

Annual reviews over

surplus and obsolete

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surplus(review every

15 days)

obsolete items items

10. Individual posting Small group posting Group posting11. Central purchasing

and storage

Combination

purchasing

Decentralized

purchasing

12. Maximum efforts toreduce lead time

Moderate Minimum clericalefforts

13. Must be handled by

senior officers

Can be handled by

middle Management

Can be fully delegated

SUGGESTED SYSTEM:

The scientific method of ABC classification has been used in this study

about which a brief introduction has been given in the previous pages.

(Exhibit 1.1)

The main task here was to determine the demarcation line between

A.B.& C items. For this purpose first of all items were arranged by rupee

annual consumption in descending sequence, starting at the top of the list

running total of item by item rupee consumption value was computed, and

finally the cumulative percentage for the item count and cumulate annual

usage value were computed. All A, B, C types of item were listed out.

The sample of 29 items (material group wise) have been taken for the

A.B.C classificationsSR.

NO.

MATERIAL

GROUP NO

NO.OF

ITEMS

(UNITS)

DESCRIPTIONS VALUES

CONSUMPTION

(RS)1. 10 11 Abrasives 51000

2. 11 45 Tools and Ndt 25700

3. 27 1 Instruments General 2000

4. 35 2 Fire Fighting and Safety 63000

5. 29 45 Catalyst/Chemicals/Resins 1042000

6. 42 88 Stationary/Furniture 1542000

7. 09 31 Welding electrodes and 478000

8. 15 1 Pipe and pipe fittings I.B.R 35000

9. 20 4 Flanges non-I.B.R. 5000

10. 37 39 Civil constructions 198000

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11. 92 5 Mobile equipments and 202000

12 01 379 Bearings 4189000

13. 07 372 Gasket/packing/o-ring 3143998

14. 92 15 Mobile equipments & Rollin 63000

15. 25 07 Cable 286000

16. 13 59 Metals(ferrous0 4682000

17. 04 141 Fasteners 366000

18. 24 200 Electrical/General 1835000

19. 49 41 Misc.items 49 group 928000

20. 02 80 CP/NG/oil mech-seal,Ve-belt 179000

21. 31 15 Paints/oil/lube/gas 1008000

22. 21 11 Valves non I.B.R 45700023. 38 01 Bags/bagging & 357000

24 19 89 Pipe & pipe fittings 839000

25. 05 09 Hardware(others fasteners) 29000

26. 12 10 Elastomer/Plastic 357000

27. 25 11 Cable(powers & control) 33000

28 14 37 Metals (non ferrous) 301000

29. 30 30 Lab equipments 101000

23028998

Main Group

Item

Units % of total Cumulative Unit price in

Rs.13 59 3.32 79355.93

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01 379 21.30 11052.77

07 372 20.91 8451.61

24 200 11.24 - 65.09 9175.00

42 88 4.95 17522.73

29 45 2.53 23155.55

31 15 0.84 67200.00

49 41 2.30 22634.15

19 89 5.00 9426.97

09 31 1.74 15419.35

21 11 0.63 41545.45

04 141 7.93 - 20.29 85.38 2595.74

38 01 0.06 357000.0012 10 0.56 35700.00

14 37 2.08 8135.13

25 07 0.39 40857.14

11 45 2.53 5711.11

92 05 0.28 40400.00

37 39 2.19 5076.92

02 80 4.50 2237.50

30 30 1.69 3366.67

35 02 0.11 - 14.61 99.99 (100) 31500.00

92 15 0.84 42000.00

10 11 0.62 4636.36

15 01 0.06 35000.00

25 11 0.62 3000.00

05 09 0.50 3222.22

20 04 0.22 1250.00

27 01 0.06 2000.00

1779

Total cost % of Total Cumulative

4682000 20.33

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4189000 18.19

50


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3143000 7.97 75.73

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1542000 6.69

1042000 4.52

1008000 4.38

928000 4.03

839000 3.64

478000 2.07

457000 1.98

366000 1.59 17.72-B 93.45

357000 1.55

357000 1.55

301000 1.31

286000 1.24257000 1.11

202000 0.88

198000 0.86

179000 0.78

101000 0.44

63000 0.27 6.52-C 99.97(100)

63000 0.27

51000 0.22

35000 0.15

33000 0.14

29000 0.13

5000 0.02

2000 0.01

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Graphical Representation of ABC Analysis:

The tabular & graphic presentations indicate that item forms a minimum,

preparation 65.09 percent of total units of all items. But represents the

higher value 75.73 percent. On the other hand, item C represents 14.61

percent of the total units and only 6.52 percent of the total value item B

occupies 20.29 percent of the total units and 17.72 percent of the total

value. Items A and B jointly represent 85.38 percent of the total units and

93.45 percent of the investment. Item C representing merely 6.52 percent

of the investment. Thus a tightest control should be exercised on item A in

order in maximum profitability on its investment. In case of item B Mediumcontrol and in case of item C simple controls will be sufficient.

53

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Percentage

of Cost

Item - A Item - B

Item - C


54/77

VED CLASSIFICATION

The Ved classification is applicable largely to spare parts. Stocking

of spare parts will be based on strategies different from those for raw

materials, because their consumption pattern is different, while the

consumption of raw materials depends directly on the market demand

on production the demand for spare parts depends on the performance

of the plant and machinery. Therefore, the method of classification

designed for one type of Inventory will not be compatible for selective

control of another type of Inventory to over come this draw back the

VED classification is used.

Spares are classified as vital, essential desirable. This implies

that V classes of spares have to be stocked adequately to ensure theoperation of the pant, because by definition the non-availability of vital

spares can cause havoc and stop the wheels of the organization. Some

risk can be taken in the case of E class of spares. Stocking of

desirable spares can be even done if the lead-time for their

procurement is law. It is essential that this classification be done by

technical department or by those in charge of the maintenance of the

plant. This classification will be very useful to KRIBHCO if it is

implemented.

Moreover, ABC and VED classification can be a combined

advantage, in order to control the stocking of spare parts. The control

action for the class AV, BE, CD, etc are given in exhibit No. 2.1

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EXHIBIT NO 2.1

CLASSES V ITEM E ITEM D ITEMA Items Constant control

& regular follow

up

Moderate stock Nil stock

B Items Moderate stock Moderate stock Very low stockC Items High Stocks Moderate stock Low stock

ECONOMIC ORDER QUANTITY (E.O.Q)

Order quantity is defined as the quantity or its rupee equivalent for

which fresh order of an Inventory item is placed. The decision regarding

order quantity of various Inventory items is of vital importance in the

Management of the Inventory item for which total of two types of cost

opposing each other will be the minimum at this level, the sum of all cost of

one type is exactly equal to the sum of all the cost of the other type. Thus

quantity is often referred to as economic order quantity, for the purchase.

Purchase item and economic lot size for production item.

DETERMINATION OF EOQ:

The economic order quantity can be determined with the help of the

following formula.

____EOQ = 2AB

CI

Where,

A = Annual usage in units

B = Order (buying) cost per order

C = Unit cost of material

I = Inventory carrying cost.

DETERMINATION OF CARRYING COST:

a) Obsolescence - Nilb) Deterioration - Negligible

c) Taxes - Nil

d) Insurance - 1% average

e) Interest on capital - 18%

Total carrying cost 19%

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Average Inventory = Opening Stock + Closing Stock

2

= 1079.51 +13.886.44 2

= 24595.95 2

= 12297.97 lacs

Average carrying cost = 122297.97 x 19

100

= Rs. 2336.61 lacs per year

DETERMINATION OF ORDERING COST :

COMMUNICATION COST : Includes, telephone, telex and Telegram costand postage cost. Rs.9517195.28 year ended 31st March 2001.

TRAVELING COST : Rs.982134385.00 year ended 31st March 2001.

STATIONERY COST : Rs. 4316815.26 year ended 31st March 2001.

SALARY OF PURCHASE DEPARTMENT : Rs. 82892/- per month

Therefore 82892 x 12 = Rs. 994704 per year

Total ordering cost = 9517195.28

+ 982134385.00

+4316815.26

+994704.00

------------------------

= 996963099.40

------------------------

Average ordering cost per order

996963099.40

80000

= Rs. 12462.00

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ECONOMIC ORDER QUANTITY :

With taken into consideration the above EOQ formula, ordering

cost and carrying cost the table 3.1 and 3.2 represents the economic

order quantity for item A and itemB respectively.

ITEM A TABLE 3.1

Main

Group

Annual

usage

units

Unit

Price

Rs.

Total

cost

consumption

Rs.

Orderin

g cost

perorder

Carryin

g cost

perorder.

EOQ

Units

13 59 79355.93 4682000 12462 19% 9.8701 379 11052.77 4189000 12462 19% 67.8007 372 8451.61 3143998 12462 19% 75.9824 200 9175.00 1835000 12462 19% 53.4742 88 17522.73 1542000 12462 19% 25.6729 45 23155.55 1042000 12462 19% 15.9631 15 67200.00 1008000 12462 19% 5.41

ITEM B TABLE 3.2

Main

Grou

p

Annual

Usage

Units

Unit

Price Rs.

Total Cost

Consumpt

ion Rs.

Orderin

g Cost

Per

Order

Carrying

Cost Per

Order

EOQ

Units

49 41 22634.15 928000 12462 19% 15.41

19 89 9426.27 839000 12462 19% 35.19

09 31 15419.35 478000 12462 19% 16.2321 11 41545.45 457000 12462 19% 5.89

04 141 2595.74 366000 12462 19% 84.41

38 01 357000.0 357000 12462 19% 0.60

12 10 35700.00 357000 12462 19% 6.06

14 37 8135.13 301000 12462 19% 24.42

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DETERMINATION OF INVENTORY LEVELS:

The Inventory level concept considers store keeping as profit intensive

service to production. Store keeping should contribute directly to profitability

and be concerned with such matter as flow, lead time storage cost,

acquisition cost, material handling, preservation, packaging and dispatches.

In the same way that specification is related to technical needs, so,

general level of stock should be related to the sales and production policies

of the company.

There are various levels of stock, which are established by the KRIBHCO,

is as follows.

MINIMUM STOCK LEVEL :

This is the level at which any further demands upon the bill will

necessary withdrawals from the reserve stock. The minimum stock is

converted to meet exceptional conditions of demand.

Two months usage (consumption) of material (stocks) taken into

consideration by the KRIBHCO as a minimum stock level.

MAXIMUM LEVEL :

This is the level above which the stock should not be permitted to

raise. Eighteen months consumption of stocks (material) taken into

consideration by the KRIBHCO as a maximum stock level.

RE ORDER LEVEL :

The point of which the order has to be placed. The reorder level maynot always be numerically equal to the economic order quantity. It should be

regularly reviewed for paid moving items. For fast factors as change in

demand, delivery times or variation in trend.

Eight months consumption of stocks (material) taken into consideration

by the KRIBHCO as a reorder level.

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To justify these different kinds of level in December 1985 with the

codification system, KRIBHCO established Inventory cells. KRIBHCO also

appointed four export of the USAGE OF MATERIAL STOCK IN THE USER

DEPARTMENT. Based on their experience and consumption of material stock

within the four years, from the year 1989 these different types of stock levels

are established.

The table 4.1, 4.2, 4.3, represents the minimum, re-order and

maximum level for item A,B and C respectively.

ITEM A

TABLE 4.1

Main Group Usage of

stock in

Units

Annually

Minimum

level Units

Re-order

Level Units

Maximum

Level Units

13 59 9.84 39.33 88.4901 379 63.17 252.67 568.49

07 372 62.00 248.00 558.00

24 200 33.33 133.33 299.99

42 88 14.67 58.67 131.99

29 45 7.50 30.00 67.50

31 15 2.50 10.00 22.50

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ITEM B

TABLE-4.2

Main Group Usage of

stock in

Units

Annually

Minimum

Level Units

Re-order

Level Units

Maximum

Level Units

49 41 6.83 27.33 61.5019 89 14.83 59.33 133.4909 31 5.17 20.67 46.4921 11 1.83 7.33 16.4904 141 23.50 94.00 211.1538 01 0.17 0.67 1.4912 10 1.67 6.67 14.9914 37 6.17 24.67 55.49

ITEM C

TABLE 4.3

Main Group Usage of

Stock in

Units

Annually

Minimum

Level Units

Re-order

Level Units

Maximum

Level Units

25 07 1.17 4.67 10.49

11 45 7.5 30.00 67.50

92 05 0.83 3.33 7.49

37 39 6.50 26.00 58.5

02 80 13.33 53.33 119.99

30 30 5.00 20.00 45.00

35 02 0.33 1.33 2.99

92 15 2.50 10.00 22.50

10 11 1.83 7.33 16.4915 01 0.16 0.67 1.49

25 11 1.83 7.33 16.49

05 09 1.50 6.00 13.50

20 04 0.67 2.67 5.99

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27 01 0.17 0.67 1.49

COMPOSTION OF INVENTORY

(As on 25th dec.200)

Sr.No. Inventory In Percentage1. Inventory (Ammonia) 00.0382. Inventory General Stores 33.6203. Inventory tools 00.9504. Inventory empty beg 02.0655. Inventory Steel 04.4906. Inventory cement 01.6607. Inventory Spares 43.0008. Inventory finished foods 00.007339. Other (under inspection & Disposable

surplus)

14.170

Total 100.000

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Importance of Lead Time in Inventory

control

There is a direct relationship between the lead-time and Inventoryholding of the company. During the lead period cycle, there will be no

delivery of items and consuming department will have to be served from the

inventories held. The greater the period the greater will be the inventories

held. If the inventories pile-up, the precious funds of companies are blocked.

In order to control the Inventory it is imperative on part of Inventory

personnel to carry out the analysis of lead period of various items required in

the organization.

Lead time Analysis :

It is a systematic study of the time taken in each element of activity

involved in procurement of an item beginning from the need felt to the

receipt of material for use i.e. the time taken to get the MPR approved and

passed to Purchase department, time taken between the receipt of MPR in

Purchase to the date of placement of order, time taken by supplier to ship

after receipt of order, time taken in transportation and time taken in

receiving and inspection till it is finally available for use.

Like any other analysis, we have to collect the data for variousactivities. The data in lead-time analysis will be the various dates of

beginning and end of activities. This will reflect the time taken in each

activity. By ascertaining the time of each activity, we can thoroughly

examine the same and can analyze where the delay has taken place. The

reasons for the delay can be found out and suitable recommendations made

to the Management for taking appropriate corrective measures.

Lead Time/Lead Period :

In an organization, we normally experience that there is a time gapbetween the realization of demand (indenting) and the fulfillment i.e. supply

of materials. This finite time interval between the cycle of indenting and

actual procur

Mihir Inventory Mgt

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