Project work

A STUDY ON

“INVENTORY CONTROL MANAGEMENT”

IN

BHARAT HEAVY PLATE & VESSELS LTD, VISAKHAPATNAM

A project report

Submitted to the S.V.PG. COLLEGE, ELURU, WEST GODAVARI.

in partial fulfillment for the award of the Degree of

“MASTER OF BUSINESS ADMINISTRATION”

BY

Mr. S.SURESH

Under the guidance of

P.S.R MURTHY

Dy. MANAGER(MP-P&T)

DEPT. OF BUSINESS & MANAGEMENT STUDIES

S.V.P.G. COLLEGE

ELURU

WEST GODVARI

2009-2010

CERTIFICATE

This is to certify that this project work entitled “A STUDY ON INVENTORY

CONTROL MANAGEMENT” in BHARAT HEAVY PLATE & VESSELS LTD is a

bonafide work carried out by Mr. S.SURESH under our guidance to Department of

S.V.P.G. College Eluru, West Godavari for the award of Master of Business

Administration ( MBA).

Name & Address of the Guide. Signature of the Guide

P.S.R MURTHY P.S.R MURTHY

Dy. MANAGER(MP-P&T)

ACKNOWLEDMENT

It is of immense pleasure for me to thank those who have extended their help and

co-operation for the successful completion of my project work.

Firstly, we would like to thank Prof., director of PG courses for having granted me

the permission and provided me the support and motivation during the study of my MBA

degree course and project work.

We would like to thank head of MBA department Sir. K.P. RAJU also for having

provided with their guidance and co-operation throughout my study.

We express my sincere thanks to Mr. P.S.R. MURTHY BHPV Ltd, for providing

me with helpful information, guidance and co-operation and also thankful to Mr. K.Appa

Rao, Manager (Training Centre) Mr. Bhaskar Reddy (Store Manager) & Mr. K.Ramana

Murthy, Manager (Finance) for giving me an opportunity to undertake this study in this

esteemed organization and providing me with the assistance at all time to conduct the

study.

S.SURESH

DECLARATION

I hereby declare that this project report entitled “A STUDY ON INVENTORY

CONTROL MANAGEMENT IN BHARAT HEAVY PLATE AND VESSELS LTD,

VISAKHAPATNAM” submitted by me under the esteemed guidance of Mr. S.SURESH

S.V.P.G COLLEGE is my own and has not been submitted to any other University or

Institute or published earlier.

Date: Signature of the Student

S.SURESH

PREFACE

The project brought out is “A study on Inventory management with

respect to BHPVL, Visakhapatnam.”

The first chapter deals with introduction to financial management and BHPV Ltd.

The second chapter deals with company profile.

The third chapter deals with industry profile.

The fourth chapter deals with theoretical framework of Inventory capital

management.

The fifth chapter deals with analysis and interpretation.

The sixth chapter deals with findings, suggestions and conclusions.

CONTENTS

INTRODUCTION

COMPANY PROFILE

INDUSTRY PROFILE

THEORITICAL FRAMEWORK

INTERPERTATION AND ANALYSIS

EXHIBITS

FINDINGS AND SUGGESSIONS

BIBILIOGRAPHY

CHAPTER – 1

INTRODUCTION

NATURE OF FINANCIAL MANAGEMENT

Financial management is that managerial activity which is concerned with the planning

and controlling of the firm’s financial resources. It was a branch of economics till 1890 and

as a separate discipline it is of recent origin. Still it has no unique body of knowledge of its

own and draws heavily from economics for its theoretical concepts even today.

Financial management is managerial activity, which is concerned with planning and

controlling of a firm’s financial resources. Theory of financial management provides

conceptual and analytical insights to make decisions relating to the financial aspects of

organization skillfully.

Definitions of financial management

According to Soloman “Financial management is concerned with the efficient usage of

an important economic resource namely capital funds”.

According to S.C Kuchhal “Financial management deals with procurement of funds

and their effective utilization in the business”.

According to Phillippatus “Financial management is concerned with the managerial

decisions that result in the acquisition and financing of short term and long term credits

for the firm”.

With these definitions we can understand the functions of the financial management.

Those are procurement of funds and effective utilization and part of these functions use

different techniques.

OBJECTIVES OF FINANCIAL MANAGEMENT

The main objective of financial management can be said as:-

1. PROFIT MAXIMISATION:- The objective of every organization will be profit

maximization.The Financial management also has the objective of profit maximization.

2. WEALTH MAXIMISATION:- It is a long-term objective. Wealth maximization is

nothing but increasing the wealth of shareholders by way of contributing to the net worth

of share holders.

For attaining these above said objectives financial manager makes crucial decisions

relating to investment in different projects, dividend decisions ,debt equity mix decisions,

source of finance, analysis of ratios and working capital management.

OBJECTIVE OF THE STUDY

This study of Inventory control and management in BHPV LTD has been undertaken to

view to analyse the working of the materials and inventory control section and suggest

ways to reduce inventory holding of a heavy engineering and fabricating unit like BHV.

SCOPE OF THE STUDY

The scope of the study is connected to one of the key areas of finance i.e. Inventory

control and management. The study appraises the company's meeting the requirements for

the process industries in the core sector such as fertilizer, oil refineries, chemicals etc.

PERIOD OF THE STUDY

The duration of the study covers very short period of time i.e. one month.

DATA COLLECTION

PRIMARY DATA SOURCES: - Direct interaction with finance department and other

departments such as production, HR department and administration departments.

SECONDARY DATA SOURCES: - Information collected from the annual reports of

BHPV LTD PUBLISHED FROM 2006-2009 and other books and manuals of BHPV LTD.

LIMITATIONS OF THE STUDY

Every study is conducted under certain limitations.

The whole study was conducted within a short span of eight weeks. I was sincere

in my efforts in gathering the maximum possible information and utilizing it for

study.

It was not possible to get hundred percent correct information. The research was

made according to the information available from related departments and through

annual reports published.

BHPV LTD being a job order industry cannot be compared to other manufacturing

concerns of the heavy engineering industry.

CHAPTER - 2

INDUSTRY PROFILE

INDUSTRY PROFILE

In the liberalized economy of India and in the era of globalization a company must

rethink its business mission and all functional strategies. In these days companies find

themselves competing in a race where the road signs and rules keep on changing where

there is no finish line, or no “permanent win”. In these days when it is very competitive

companies can succeed only by having innovative ideas combined with by effective

financial management.

Therefore, it is not surprising that today’s winning companies are those which foresee

the future and manage the finance effectively .One can manage finance effectively by

managing working capital, capital structure and taking decision on capital budgeting

Ultimately, finance is at its best about value adding, developing new products and raising

the worlds standards of living. The heavy engineering industry is a major strength of any

economy. These heavy engineering industries, which produce capital goods, are the most

modern of the entire industrial group.

In India these heavy engineering industries occupy a crucial role in its economic

development in view of the huge investment as well as the critical importance to nation.

These industries are mostly confined to the public sector only.

B.H.P.V. ltd is the largest fabricator of process equipment in India for the petroleum,

chemical and allied industries. It is fully owned by the government of India and is managed

by an autonomous board of directors. Situated in the city of destiny of visakhapatnam on

the Eastern see coast of the deccan plateau, B.H.P.V. Ltd is accessible by road, rail, sea and

is well connected to all metropolitan cities by air.

COMPANY PROFILE

HEAD OFFICE:- Visakhapatnam, Andhra Pradesh.

BRANCH OFFICE:- Mumbai,Calcutta,Chennai,Hyderabad,New Delhi and Vadodara.

Bharat Heavy Plates and Vessels Ltd. It is a public limited company. It is a job order/

shop production industry. According to customer specifications and requirements it

produces various products.

Foreseeing the country’s need for fabricating equipment of an exclusive factory with

the main object of reducing dependence on foreign suppliers and become self sufficient

ourselves BHPV LTD was established in the year 1966 to meet the demands of process

equipment for core industry like fertilizers, petrochemicals, petroleum and other chemical

industries initially.

BHPV LTD using different types of materials manufactured and supplied several built

equipments such as pressure vessels, heat exchangers, columns, internal trays etc. After

executing some important orders, BHPV LTD gained full confidence of customers which

cleared the way to enter the line of cryogenic field, pulp cooking plant, evaporation plant

and industrial boilers on a total turnkey basis which of later years helped in augmenting

turnover of the company and increasing profitability.

INTRODUCTION TO BHPV

Bharat Heavy plates & Vessels Ltd., started off in 1966 as fully owned government

company for Design, Manufacture & Supply of capital equipment required for process

industries in the core sector such as Fertilizers, oil refineries & Petrochemicals etc.

The foundation stone was laid by Sri D.Sanjeevayya, the then Minister of Industry on 8 th

Jan 1967 in Visakhapatnam. It comes under the purview of the Department of Heavy

Industry, Ministry of Industry. With the technical collaboration of M/s. SKODA Export

Company of Czechoslovakia in the year 1968, it got expertise and guidance for establishing

the project and for the design & manufacture of various process equipments. BHPV

became a fully owned subsidiary of Bharat Yantra Nigam Ltd., in the year 1987.

Licensed installed capacity is 23210MT. The initial capital outlay being Rs.17.5 crores.

The product mix included heat exchangers, columns, and pressure vessels. Storage vessels,

piping etc. During the year of it commercial production i.e. 1971-1972 the turnover was

just Rs 5 lakhs. Now BHPV has crossed the turnover of 200 crores.

Past ten years turnovers are give here: In 1996-97 it has recorded on turnover of Rs

29998 lakhs i.e. all time high. But due to lack of orders in 2003-2004 .BHPV has a made

turnover is 5956 lakhs only. Fast 10 years turnover are as follows.

YEAR TURNOVER (Rs in lakhs)

1996-1997 Rs.29998/-

1997-1998 Rs.29160/-

1998-1999 Rs.21457/-

1999-2000 Rs.12553/-

2000-2001 Rs.25670/-

2001-2002 Rs.23410/-

2002-2003 Rs.14750/-

2003-2004 Rs.5956/-

2004-2005 Rs.10943/-

2005-2006 Rs.12205/-

2006-2007 Rs.17960/-

HISTORY OF BHPV

Licensed to start construction of plant at Visakhapatnam in 1966. BHPV confronted

many obstacles such as water problems, frequent power cuts both at initial stage as well as

at the time when construction was going on . In spite of all those obstacles the civil and

structural work was completed to a major extent by the end of 31 st March, 1967.The

licensed and installed capacity is 23210MT.The initial capital outlay being Rs. 17.5 crores.

PROFITEERING YEARS FOR BHPV:-

After a series of continuous loss years, BHPV for the first fine in its history in 1979-80

has witnessed several significant events both on financial as well as production fronts.

BHPV for the first time in its years of commercial production attained a break-even level

with a marginal profit of Rs.33.09 lakhs as against a net loss of Rs.129 lakhs projected at

the beginning of the year. During 1980-81 the company for the second consecutive year,

earned a net profit(after tax) Rs.48.21 lakhs from its operations. This year BHPV Ltd

operations included manufacturing of very critical and sophisticated equipment to core

industries.

Again in 1981-82 the company operations resulted in a net profit of Rs 60.19 lakhs as

against a budgeted loss of Rs.20/- lakhs. Major pending interest on loan from GOI was

cleared in this year. During 1982-83 BHPV reached 100% target production and resulted

in a net profit of Rs.03.71 lakhs as against the budgeted loss of Rs.95 lakhs. With

prestigious work orders from Visakhapatanam steel plant for supply of air and gas

separation plants BHPV crossed a target production and its operations resulted in a net

profit of Rs.575 lakhs.The year 1986-87 is treated to be the dark year for BHPV. Since its

entrance into threshold of profit arena.

It could not achieve its set motto of beyond billion barriers. Sinking of a ship carrying

bulk of raw material and components slackening demand for process equipment etc,

resulted in a short fall in production and hence company suffered a loss of Rs 170 lakhs

again in 1987-88 BHPV’s projects were successfully fabricated and its profits took an

upward trend and its operations resulted in PAT of Rs 290 lakhs.

It was expected to emerge an increasing trend in the profits of BHPV for the year 1988-

89. After 1987-88 profits are in decreasing trend. It got a loss of Rs 590 lakhs during 1995-

96. Amidst tight liquidity conditions the company has made a net profit of Rs 1.31

crores(before tax) and Rs 1 crore after tax during 1997-98, Rs 1.23 crores PBT. Details of

turnover, profitability for the period from 1996-97 to 2005-06 are as follows

YEAR TURNOVER PROFITABILITY(before int)(Rs in lakhs)

1996-1997 29998 2411

1997-1998 29160 2825

1998-1999 21465 1968

1999-2000 12558 476

2000-2001 25670 2301

2001-2002 23409 2678

2002-2003 14750 14512

2003-2004 5956 10694

2004-2005 10943 3281

2005-2006 12202 -2321

2006 – 2007 17960

BHPV LTD AN OVERVIEW

INTRODUCTION :-

Incorporation of the company :-1966

Primary objective :- To manufacture custom built capital equipment for the process

industries such as fertilizers, petrochemicals, petroleum refineries , chemicals etc.

Technical collaboration provided by : M/S SKODA EXPORT Czechoslovakia.

Commencement of construction : 1968

Completion of construction : 1971

Commencement of production : 1971

Initial project cost : Rs 17.5 crores.

Initial product mix : Heat exchangers, columns pressure

vessels, piping etc

Installed capacity : 23210 MT

Turnover for the year 2005- 2006 : Rs 109.42 crores.

turnover for the year 2006-2007 : Rs. 179.60 Crores

RESOURCES:-

Production Facilities:-

Factory Area : 197 Acres

Total covered area : 90000 sq Meters.

Covered area of production shops : 56000 sq Meters.

Power Requirement : 3000 K.M from APSEB

No of Ancillary units : 11 Units

Important Machinary:-

The factory is provided with comprehensive and modern manufacturing testing

facilities and suitable material handling equipment.

The maximum crane lifting capacity is 120 tonnes but loads up to 250 tonnes can

be lifted with improvisation.

Maximum rolling capacity is 60 mm in cold condition and 170 mm in hot

condition.

BHPV Ltd has the largest heat treatment furnace in India the size being 5.5

meters width 5.5 meters height and 36.5 meters long . One more furnace of 200

ton capacity and 15 mtr’s bogie length has been added.

Other critical equipment available with BHPV Ltd are.

Deep drawing Hydraulic press of 1600 T capacity.

A number of welding motors of capacity up to 250 tonnes.

Welding equipments such as manual arc, sub merged arc , TIG , MIG , plasma

including the latest high productive welding equipment such as twin head

submerged arc welding and Bi-cathode TIG welding.

Tube fining machine.

A number of vertical and horizontal boring machines, with a maximum capacity

of 5 meters dia and 200 MM spindle dia respectively.

Different types of non destruction testing equipment.

Well equipped physical and chemical laboratories.

Metrology section etc.

HCL super- mini computer to mini computers.

56 CAD machines and 118 personal computers.

MAN POWER:-

As on 31.03.2007

Workmen / staff : 1054

Supervisors : 164

Executives : 294

Total employees : 1512

Employee welfare amenities: -

Town ship area - 151 acres

No of quarters - 1192

20 bed hospital

protected water supply

Underground drainage system

English medium school with AP state syllabus

Telugu medium school with AP state syllabus

Special school for mentally handicapped children

Vocational training center for mentally handicapped

Community center for cultural activities and sports

Open theatre facility

Kalyana mandapam

DIVERSIFICATION:-

Originally established for fabrication of process equipment, as a step towards

diversification the Company signed an collaboration agreement with M/s. L AIR LIQUID

of France in 1971 for manufacture of

Air and gas separation plants

Cryogenic storage systems.

Further diversified into the area of industrial boiles in the range of 50-200 TPH in

collaboration with M/s. BHEL in 1981 based on the recommendation of the working

group constituted by DHI.

Entered into the area of oil and gas processing systems in 1990 in collaboration with

M/s. BS and B Engg .co.USA.

COLLABORATION AND ABSORPTION OF TECHNOLOGIES:-

Some of the significant collaborations BHPV Ltd entered include:

M/s. BSL, France in respect of field erected cryogenic storage tanks.

M/s. Delas, France in respect of

M/s. ABB LUMMUS, Netherlands for Heat Transfer systems

Case-to-Case tie ups, BHPV entered into includes:-

Evaporators from M/s. Ecodyne Corporation ,USA.

Paper and plus digesters from M/S KAMYR AB ,Sweden.

Gas collection modules from M/S KTO Corporation,USA

Large space simulation chamber from M/S HVEC,USA

Primary reformer from M/S Halder Topos,Denmark

Waste heat boiler from borgig,Germany

Feed waster heater from deals, France

Argon recovery unit from M/S L AIR LIQUIDE,France

Hydrocracker reactors from M/S Korting Hannover,Germany

LPG handling and storage system from M/S NOELL LGA Germany

Ammonia storage system from M/S KTI,Germany etc.

By obtaining know-how from various world renowned collaborators, BHPV upgraded

its status from a mere fabricators of process equipment to that of an engineering company

of international repute.

PROJECTS OF NATIONAL IMPORTANCE EXECUTED:-

S.NO CUSTOMER PROJECT/ EQUIPMENT

1. IOCL, painpat Hydro crakar reactors-3 Nos

2. IOCL,painpat Reactor genarator and office

chamber

3. IOCL,painpat Reactor and WHR package

4. IOCL,mumbai 150 MT capacity LPC bullets

5. IOCL,Chennai Sphare

6. BOKARO STEEL PLANT,

BOKARO Argon Recovery Unit

7. NRL NUMALIGARH Air Fin collers/SS clad

Vessels spheres etc

8. HPCL,Visakhapatnam CDV Heater with APH

System/VDU Heater

9. HPCL, VREP-II

Visakhapatnam Clad/CS columns/CS heat

Exchangers etc

10. HPCL,Visakhapatnam Co boiler

11. HPCL,Visakhapatnam Revamping of 50 TPH

Oil &gas fired boiler

12. HPCL,Mumbai 50 TPH boiler

13. HPCL,Mumbai Nitrogen plant

14. Hyundai Heavy Iindustries, New Delhi Cryo Notrogen plant

15. Space application center,Ahmadabad 505 M Dia Thermal

vacuum system

16. TECHNIMONT ICB LTD Mumbai Nitrogen plant

17. OSWAL CHEMI FERTILIZER LTD Waste Heat LP boiler

PARADEEP

18. IFFCO ,KANOLA 15000 MT A TM Ammonia

storage tank.

QUALITY:-

BHPVL is reputed for quality and workmanship of its products. BHPVL has

received a number of international accreditations such as

LLOYDS REGISTER OF INDUSTRIAL CLASS I certificate for fusion welded

pressure vessels.

ASME -U &U2 STAMPS on pressure vessels.

ASME - ‘S’ stamp for industrial boilers.

National Board of Boiler and pressure inspectors USA – ‘R’ stamp for repairs of

coded vessels.

STAMI CARBON -UREA REACTORS

HOLDOR TOPSOE – AMMONIA REACTORS AND HIGH PRESSURE HEAT

EXCHANGERS

ARBIAN AMERICAN OIL COMPANY –PRECESS Plants.ssss

As a part of total quality management programme BHPV has acquired ISO 9001

certification during the year 1993-94 particularly to boost up its export and to be

competitive in the international market.

Recertification of ISO 9001 has been obtained in September 96. In recognition of high

standards of our quality confederation at India industry (CII) southern region, AP presented

the quality award.

RESEARCH AND DEVELOPMENT:-

Research and development department was established in 1975 and is well equipped

with high-tech equipment to cater to applied research and product development .R&D has

developed 136 projects so far some of the products commercialized include: -

1. Titanium anodes.

2. Titanium air bottles.

3. Cryogenic Vats.

4. Individual quick freezing unit.

5. Super insulated piping.

6. Super insulated cryogenic storage tanks.

7. D.M water plants.

A prestigious order for development of heat exchangers for Light combat

Aircraft(LCA) phase II has been received from Aeronautical development Agency, ,

Bangalore.

Some of the awards received for excellence in R&D include:-

CIS award for R&D achievement in 1992-93.

“The chelikani Atchuta rao memorial award” from FAPCCI for individual achievement in

R& D effort in 1996 (MR BSV Prasad).

PRESENT STRENGTHS:-

Excellent design and Engineering capabilities.

State of the art manufacturing facilities.

Accomplished image as a supplier of quality products in domestic and

international market.

High degree of customer confidence.

Technological Tie up arrangements.

Well-trained and qualified work force and engineers.

Sound work culture and harmonious industrial relations.

Extensive computerization.

Capacity to supply projects and systems on turnkey basis.

Project management skills.

PLANS AND STRATEGIES:-

To grow as an engineering, procurement and construction company.

To enlarge export business.

To resort to extensive computerization and automation for reduction of cycle

time, improvement of quality and reducing costs.

To forge strategic business alliances with international companies to derive

technological and marketing advantages.

To strive for continuous updating of technologies to be on par with

international companies.

To focus on human resource development.

To change the work culture to be compatible with market demands.

CONSTRAINTS:-

Dependence on imports even for common materials like Boiler quality

plates.

Port congestion adding to the delays in importing materials.

Big burden of high interest makes on working capital while competing

with international suppliers who have the facility of very low interest rates.

Abnormal increase in bank charges such as commission on bank

guarantees, refinement of documents etc.

Restrictions in shipping imported materials (FOB contracts Vs C&F

contracts) resulting in delays.

Shortage of man power due to VR scheme several times.

Replacement /updating of machinery.

CHAPTER – 3

INDUSTRY PROFILE

INDUSTRY PROFILE

BHPV is a subsidiary of BYNL(Bharat Yantra Nigam Ltd).

The major group subsidiaries of BYNL are:-

Bharat heavy plates and vessels Ltd - Visakhapatnam

Bridge and roof company(India)Ltd- Howrah.

Triveni structurals Ltd - Naini,Allahabad.

Bharat pumps and compressorts Ltd-Allahabad.

Ricuardson & Cruddas (1972)Ltd- Mumbai.

Tungabhadra steel product Ltd- Hospet, Karnataka.

MARKET PROFILE:-

This covers the product range of customer profile and competitors profile.

CUSTOMER PROFILE:-

BHPV’S clientele includes:-

Public

Private

Co-operative

Sector organizations in almost all the core sector of economy such as all the

32 fertilizer plants

22 petroleum refineries

12 petrochemical complexes.

All major integrated steel plants in India

Oil and gas

Nuclear and defense etc.

Other major customers are from paper, power, non ferrous, chemicals, pharmaceuticals,

synthetic fiber, coal, dairy, space sectors.

IOCL (PANIPAT)

FACT (UDYOGAMANDAL)

GAIL (AURAIYA)

IOCL (KANDZA)

ASSE (SINGAPORE)

IEEEO (PHULPHUR)

COMPETITOR PROFILE:-

In the area of process plant:-

L&t -Walchand Nager Industries

Grengg - Bhilai engineering,Ahmedabad

Lioyds steel - Tessmaco,Calcutta

BHEL - ISGEC John Thomson, Yamuna nager

Godrej - Reliance Heat transfor ,Mumbai.

In the area of cryogenics:-

INDIAN:

IOCL - Calcutta

ICCP - Kanpur

INOX - Baroda

Sanghai oxygen - Mumbai

L&T - Mumbai

Lindi process systems - Baroda

VJU - Mumbai

Essar - Gujarat

FOREIGN:-

LINDE - Germany

BOC - UK

Air products - US &UK

Kobe - Japan

Hitachi - Japan

HOPM - China

Pracair - US

In the area of combustion system : -

ISGEC - John Thompson,Yanmuna nager

Babcock Thermax - Pune

Walchand Nager industries -

Ignifluid boilers - Chennai

BHEl - Trichy

ABL - Durgapur

L&T - Mumbai

VINASSE FIRED BOILERS :-

KTI - New Delhi

Thermax - Pune

FIRED HEATERS:-

EIL - New Delhi

KTL - New Delhi

Thermax - Pune

Kavcri L&T - Mumbai

WASTE HEAT SYSTEM GENARATORS:-

BIIKI

L&T

Babcock Thermax

IN THE AREA OF SYSTEMS:-

INDIAN:

L&T

Babcock Tliarmax - Kanari

GIMMCO - SPIC

ICD - Gajraj

BHEL - Triheni

FOREIGN:

HHI - Korea

RTZ - Northerlands

Technical - Italy

CHAPTER – 4

THEORITICAL FRAMEWORK

INTRODUCTION

Inventory is the physical stock of items that a business or production organization

keeps in hand for efficient running of affairs or its production. It is very essential that

material of

the correct quantity and quality is made available as and when required. With due regard to

economy in storage and ordering cost, purchase and working capital.

Inventory management means maintenance, up keep and assurance of adequate supply

of goods in order to meet an expect pattern of distribution of demand for a given financial

investment.

Meaning of Inventory:-

Inventory may be defined as “usable but idle resource” in other words literally the

inventory means that stock of goods or physical assets having economic value. If resource

is physical or tangible object such as materials, it is generally termed as stock. Inventory

may be regarded as those goods which are procured, stored and used for day-to day

functioning of the organization. Inventories viewed as a large potential risk rather than as a

measure of wealth due to the fast developments and changes in product life.

Inventory plays a vital role on business, lesser inventory will have a positive reflection

on balance sheet. In any organization capital investment is divided between fixed assets

and Current Assets. Fixed assets consist of plant and machinery, land and buildings that are

used in the conversion process. Gross current assets are those, which are required to

operate day-to day requirements, and used as inputs in the process of conversion. These are

converted into output, which, on being sold, brings in money/ finance to the organization.

Hence, the productivity is measured by the ratio of outputs to inputs, which means

economic activity where raw materials are converted into value.

Inventory management is one of the indicators of the management effectiveness on the

materials management front. The input resources of business activity are men, machines,

money and materials. The time is another resource, which is part of all these four resources.

The out puts are goods and services. Management task is to reduce the cost incurred on

materials to the minimum which in turn results in earning more profits or to make

company’s products more competitive.

Objectives of Inventory:-

The main objective is to maintain overall investment in inventory at the lowest level

consistent with operating requirements.

To supply the product, raw material, sub assemblies, semi-finished goods etc., to the

users as per their requirements at right time and at right price

To reduce waste, surplus, scrap and obsolete items at the right price

To minimize holding, replacement and shortage costs of inventories and maximize the

efficiency in production and distribution.

To treat inventory as investment which is risky investment may lead higher returns and

for others less returns

Functions of Inventory:-

It is understood, inventory is a necessary evil and necessary because it aims at

absorbing the uncertainties of demand and supply by decoupling the demand and supply

sub systems. Thus and organization may be carrying inventory for the following reasons.

The uncertainties in demand and lead time necessitate building of safety stock so as to

enable various sub systems to operate somewhat in a decoupled manner. It is obvious that

the larger the uncertainty of demand and supply, the larger will have to be the amount of

buffer stock to be carried for a prescribed service level.

Time lag in deliveries also necessitates building of inventories. If the replenishment lead

times are positive then stocks are needed for system operation.

Cycle stocks may be maintained t get the economies of scale so that total systems cost

due to ordering, carrying inventory and backlogging are minimized. Technical

requirements also build up cycle stock.

Stocks may build up as pipeline inventory or work in process inventory due to finiteness

of production and transportation rates. This includes materials actually being worked on or

moving between work centers or being in transit to distribution centers and customers.

When the demand is essential, it may become economical to build inventory during periods

of low demand to ease the strain of peak period demand.

Inventory may also be built up for other reasons such as quantity discounts being

offered by suppliers, discount sales, anticipated increase in material price, possibility of

future non availability etc.

Importance of Inventory management :-

In the process of converting raw material into finished products, we need various items

from market / suppliers but the uncertainty over availability and correct arrival of goods

when they required is the fundamental reason for carrying inventories. The scope of

inventory management is

Determining EOQ

Determination of stock out

Determination of safety stock

Determining lead time

Determination of inventory status

Minimizing handling and storing cost

Effective running of stores

Defining policies to guide the inventory control programmes

Determining the most appropriate store organization structure

Inventory could be classified as:-

The inventory classification is based on the following aspects.

Manufacturing aspect

Service aspect

Control aspect

Manufacturing aspect :-

Raw Materials and supplies Inventories: These consists of raw materials, parts,

subassemblies and supplies, which the company

purchase from outside sources, namely suppliers, dealers or manufacturers.

Production Inventories: Raw materials, parts and components, which become

part of the product during the production process are called production inventories.

M.R.O Inventories: Maintenance, repair and operation supplies (M.R.O)

inventories, which are assumed in the production process but do not become part of

the product. For example, oil, spare parts.

In- Process Inventories : These are processed or semi-finished products

manufactured at various stages during the production cycle. In a bicycle factory

frames, pedals, rims, axles etc. are called in-process inventories or work- in

progress inventories.

Finished Product Inventories: Finished goods or stocks are completed products

ready to be sent away to the market or customers. These products have been

fabricated or manufactured or assembled from production and in-process

inventories, i.e. a complete bicycle in case of a cycle manufacturing factory or a car

in case of a car in case of a car manufacturing factory.

Material in Transit Inventories: These are raw materials and supplies

inventories which are in transit and have already been paid for. These have not so

far been received at the factory.

Service aspect : -

a) Lot size

This means purchase in lots. This is resorted to

i) Obtain quantity discounts

ii) Reduce transportation and purchase costs

iii) Minimize handling and receiving costs

It would be uneconomical for a textile unit to buy cotton everyday rather than in bulk

during the cotton season.

b) Anticipation Stocks

These are kept to meet predictable changes in demand or in availability of raw

materials. The purchase of potatoes in the potato season for sale of roots

preservation products throughout the year is an example of this kind.

c) Fluctuation Stocks

These are carried to ensure ready supplies to consumers or customers in the face

of irregular fluctuations in their demands.

d) Risk Stocks

These are the items needed to ensure that there is no risk of complete

breakdown of production. These are items with ling lead time for supply but are

vital and critical for production.

Control of Inventory (ABC classification):-

A good start in examining an inventory control system is to make ABC classification. It

is known as ABC analysis which means the ‘Control’ will be ‘Always Better’ if westart

with ABC of inventory. This concept divides inventories into three groupings in terms of

percentage of number of items and percentage of total value as given in

A- items group constitutes 10% of the total number of items and 70% of the total

money value for all items

B- items group consititues 20% of the total number of items and 20% of the total

money value for all items.

C- Items group is just opposite of A –items group. It consititutes 70% of the total

number of items and 10% of the total value.

This classification provides clear cut indications for fixing priorities of control to the

items. A class items must receive the attention first in every respect of the control i.e tight

control, sound operating doctrine, attention to security etc.

Inventory Models:-

Inventory Models are used to reduce costs like overstocking costs and under stocking

costs. The following are some models of Inventory.

EOQ : Economic Order Quantity

FOIS : Fixed Order Interval System

FOQS : Fixed Order Quantity System

ORS : Operational Replenishment SystemECONOMIC ORDER QUANTITY:-

EOQ is essentially an accounting formula that determines the point at which the

combination or order costs and inventory carrying costs are the least. The result is the most

cost effective quantity to order.

EOQ may not applicable to every inventory situation, most organizations will find it

beneficial in some aspects of their operations. EOQ is generally practical when repetitive

purchasing or planning of an item and multiple orders or release dates for the same item is

done.

EOQ is generally recommended in operations where demand is relatively steady, items

with demand variability such as seasonality can still use the model by going to shorter time

periods for the EOQ calcualation.

EOQ = 2 ( Annual usage in units) x ( order cost)

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

( Annual carrying cost per unit)

Annual Usage : The forecasted annual usage and expressed in units

Order Cost : Total number of orders for the year multiplied by the cost of

making one Order Annual number of orders is annual demand

divided by the quantity per order i.e D/Q As the size of order

increases, number of orders decreases and cost of

ordering decreases. If S= the cost of placing an order, then total

annual ordering cost would be ( D/Q)*S.

Ordering cost is also known as the purchase cost or the set up cost. These costs are not

associated with the quantity ordered but primarily with physical activities required to

process the order.

Carrying or Holding Costs:- Average amount of inventory on hand multiplied by

cost to carry one unit for the year.

Average inventory is ½ of the order quantity, for any

period, If we start out with Q and end up with 0 at the

end of the period then ( Q+0)/2 = Q/2

If H = average annual carrying cost per unit, total

annual carrying cost would be( Q/2)*H.

Assumptions of EOQ Model:-

Only one product is involved

Annual demand requirements known

Demand is even throughout the year

Lead tune doest not vary

Each order is received in a single delivery

There are no quantity discounts

FIXED ORDER INTERVAL SYSTEM:-

In this method, the inventory is reviewed regularly such as once a month and based on

the review how much to be ordered is assessed . After our review, we order an amount

equal to the difference between the maximum level and the amount on hand. We must

order an amount to satisfy demand over one order cycle and one lead time.

Due to technological improvements this method does not prove to be advantage and

diminishing its use.

FIXED ORDER QUANTITY SYSTEM:-

In this method the order quantity is fixed and order or re-order is placed whenever the

inventory touches a certain level, known as the order or reorder point. FOQ defined as

ROP ( Reorder point) = Mean Lead time consumption.

OPERATIONAL REPLENISHMENT SYSTEM:-

In this method inventory is reviewed at periodical intervals and if there has been any

depletion in the inventory, an order or reorder is placed. The amount ordered is equal to the

amount by which a fixed replenishment level exceeds the actual inventory at the time of

review.

INVENTORY COUNTING SYSTEMS:-

Inventory needs to be properly accounted for as it is the form of money. There are two

principal ways of accounting for inventories:-

Perpetual Inventory system

Periodic Inventory system

Perpetual Inventory System:- It is a system of records maintained by the controlling

department, which reflects the physical movement of stocks and their current balance.

Perpetual inventory means the system of records, whereas continuous stocktaking, physical

checking of those records with actual stocks.

Advantages :-

Shortages can be avoided and management can determine the optimal order

quantity to use for every order.

The stocktaking task, which is long and costly, is avoided under this method

Management will have daily information of inventory on hand.

The investment in materials and supplies may be kept at the lowest point in

conformity with operating requirements.

Disadvantages: -

It includes added costs of record keeping, checking etc.

Periodic Inventory System:- It is also called P-system. This system has a fixed

ordering interval but the size of the order quantity may vary with changes in demand. In

this method the inventory is checked at prefixed intervals ( weekly, monthly, quarterly etc )

Advantages & Disadvantages ; Many items can be ordered at the same time resulting in

economies in processing and shipping. Possibility of stock outs between reviews and the

time and cost of a physical count.

Inventory Measurement/ Counting System:-

Two- bin system:- This system operates on reorder level ( ROL)system and it physically

segregates the stock of entire items into two bins. In this method two containers of

inventory will be kept. The second bin contains quantity equal to ROL i.e ( m+LC) where

m= safety stock, L = lead time, C= consumption rate and Q = recorder quantity.

Factors Affecting Inventory:-

Various factors both internal and external which have influence on inventory are:

Lead time

Relevant costs

Ordering costs

Inventory carrying costs

Under stocking costs

Over stocking costs

Service level

Obsolete inventory

Lead time:- It is defined as the period that elapses between the recognition of a need and

its fulfillment. It has to follow the following broad pattern before ordering an item and

making it available which includes in the total ordering cycle. Once the item is made

available then the need that item is over till a further need of same item raises. The whole

cycle classified into 4 Lead time categories:

Internal lead time (or) Administrative lead time:- It starts from identifying the need for

an item till and order is placed for that item. Requirement for an item has to be first

identified before it is ordered. Need for an item could be a requisition by the users

department or can be arrived against a pre-determined forecast. It may take a long time

before an actual need is finished.

External lead time:- Once an order is placed or supplied, a purchaser has to entirely wait

till the supplier delivers the goods. It includes a regular follow up to ensure a timely

supplier within the stipulated period is very important. Lead time of a manufacturer

depends on his business and time taken to manufacture and dispatch a product.

Transportation lead time:- It is the period from the time a manufacturer dispatches the

goods to the time of actual receipt of the goods at stores of the purchaser. Lead time

transportation is very high when the distance of the source of materials is very large,

especially in imports. In such situations are has to keep adequate stocks not only to meet

the production demand but also to take care of transportation time.

Inspection lead time:- Every material which comes to the store has to be subjected for

inspection to evaluate its quality. Specification, as per the requirement of the indent or

specified in the order.

Internal and inspection lead time are well within the purchases control. Even

transportation lead time could be brought under control by choosing the right mode of

transport and better planning. Manufacturers lead time which is acts big hurdles are acts big

hurdles for every purchase and requires constant follow up to get the materials on time.

2. Relevant costs: - The inventory problem is one of the balancing various cost so that the

total cost is minimized.

Either for want of materials, production is lost or if keeping of inventories more than

adequate requirements, unnecessary expenditure of paying interest on the blocked funds.

Stocked inventory is useless incurring still higher cost, each ordering itself is costing

money.

Ordering cost(Co):- It is also termed as procurement/Acquisition cost. Each order that is

placed on supplier costs money, ordering cost is the sum resultant of costs of fulfilling

various activities that go in finalizing an order. Ordering costs include:-

Stationary

Typing

Dispatching of orders and remainders

Salaries and wages of the entire purchase, inventory control section, receiving and

inspection sections

Follow up costs

Receiving and inspection costs

Rent and depreciation on the space utilized by purchase department

Cost of source development

Cost of entertaining the supplier

Advertisement, tender form cost and tender apprising cost etc.

Total cost included on above heads

Cost per purchase order = -------------------------------------------------

Total numbers of orders

Inventory carrying cost (Cc):- All materials that are ordered have to be stored in stores.

This requires space, and other infrastructure arrangement. Inventories are stored strictly

storing company’s money, which attracts huge interest rate.

Inventory carrying costs are calculated as a percentage of the average inventory carried.

Average inventory calculated by adding up inventories of all the twelve months and then

dividing by 12 to get an average.

Under stocking cost (Ku):- Under stocking or out of stock is due to “non stocking of

inventory”. Which is measured in terms of opportunity cost due to loss of production by the

idling cost of a line? If the stock out results in an expedited order, then the extra charges

incurred have to be added to this cost.

Overstocking cost (Ko):- An opportunity is therefore lost, of utilizing company’s

valuable funds, overstocking cost is therefore a cost basically arise due to opportunity lost

due to the investment in inventory for a longer period than necessary. In situations, when

items are ultimately used this can be equated to

carrying cost. In situations where item cannot be used this cost is the difference between

the costs of carrying till that time.

Service level:- Under stocking cost and overstocking cost can be related to each other

through the concept of service level. The management can decide on a policy that 99 cases

out of 100, the demand must be satisfied. This means that the service level is 99%. Only in

one case out of 100 can there be a stock out. This fixation of level of service depends on

the management’s perception of the importance of particular item.

Service level = --------------- = ---------------------------------

Ku + K stock out cost + overstocking cost

INTFERENCE: If the under stock cost is very high then the management strive for a

higher service level to achieve level of 100%, very large stocks are needed.

4. Obsolete inventory:- Inventory that is purchased and stored and stored and which is of

no importance for the organization is termed as obsolete inventory.

Items which are held physically intact, but cannot be used due to lack of need are termed as

obsolete items.

The obsolesce of items is due to the following reasons:-

Technological changes.

Changes in product line.

Changes in the machines.

Changes in the design and layouts.

Over buying and thereby making inventory idle and excess.

Process of cannibalization i.e. removing a part from one machine and fitting it to

other thereby making the earlier machine obsolete.

For reasons of buying extra spares with original equipment there by causing them.

useless in the situation where it is not required.

Wrong preservation method.

Wrong machine handling and storage.

5. Scrap:- Any manufacturing process will generate scrap, because we do not have a

100% efficient system which can convert all the input into output salvaging of scrap is an

art. By applying scientific methods scrap is to be minimized to a great extent. Scraps are

classified as turning, borings, sheet cuttings, and pieces of rods oil soaked waste etc.

Hence, it is advantageous to segregate scrap so that the best price may be obtained. It is not

very difficult to achieve this because scraps are generated at different points and a

coordinated collection in classified bins will solve the problem.

Effects of inventory on a business:-

Control of inventories are difficult and our Indian organizations are not performing good

inventory management. We aware that bad inventory planning is one of the major causes

of almost every business failure. The major reason is inability to forecast accurately. In

many cases the need comes later than anticipated and sometimes it never materializes at all.

The result is excessive inventory or if demand comes sooner or is stronger than anticipated

the inventory is inadequate.

Effects of low stock holding or low inventory levels:-

If low level inventory is maintained than the actual requirement of production then it result

in the following:-

Increased production costs may result

Increased replenishment costs may arise

Effects of high stock holding or high inventory level: -

It could result into

The capacity need to be increased subsequently larger amount of financial

expenditure.

Infrastructural facilities need to be provided like capital investment

Increased risk due to possible obsolesce

Increased chances of wastage.

Factors effecting the determination of stock levels:-

Finance resources

Rate of consumption

Lead time for deliveries

Storage cost

Price fluctuations

EOQ

Insurance costs

Any statutory requirements

The Maximum stock Level:-

This is the level of stock above which the stock should not be allowed to increase. The

criteria of this level is to curb excess investment. In fixing the maximum, the main

consideration is usually financial, and the figure is arranged so that the value of stock will

not become excessive at any

time. Other points affecting this level are the possibility of items becoming obsolete and

the danger of deterioration in perishable commodities.

Maximum Level = Minimum Level EOQ

= ROL-minimum level*minimum lead time reorder quantity.

New Trends in Inventory Management:-

JUST IN TIME (JIT):-

JIT is a Japanese management philosophy, which has been applied in practice since

the early 1970s in many japanese manufacturing organizations. It was first developed and

perfected within the Toyota manufacturing plants by taiichi ohno as a means of meeting

consumer demands with minimum delays

Toyota was able to meet the increasing challenges for survival through an approach that

focused on people plants and systems. Toyota realized that JIT would only be successful

every individual within the organization was involved and committed to it, if the plant and

processes were arranged for maximum output and efficiency, and if quality and production

and programs were scheduled to meet demands exactly.

workers are highly motivated to seek constant improvement up on that which

already exists.

Companies should focus on group effort, which involves the combining of

talents and sharing knowledge, problem-solving skills, ideas and the

achievement of a common goal.

Work it self takes precedence over leisure it is not unusual for a Japanese

employee to work 14-hour a day.

Employees tend to remain with one company through out the course of there

carrier span.

These benefits manifest them self in employee loyalty, low turn over cost and

fulfillment of company goals.

It has now come to mean producing with minimum waste. Waste is taking in its most

general sense and includes time and resources as well as materials. There are seven types of

waste namely:-

waste from over production

waste of waiting time

transportation waste

processing waste

inventory waste

waste of motion

waste from product defects.

ELEMENTS OF JIT SYSTEM :- Successful JIT system is logical out growth of the combination of the following practices:

continuous improvement

attacking fundamental problems –anything that does not add value to the

product

devising systems to identify problems

striving for simplicity-simpler systems may be easier to understand, easier to

manage and less likely to go wrong

a product-oriented layout-produces less time spent in moving of materials and

parts

good housing keeping-work place cleanliness and organization

BENFITS OF JIT SYSTEMS:-

JIT system has a number of benefits, few major or mentioned below:-

reduced levels of in-process inventories, purchased goods, and finished

goods

reduced space requirement

increased product quality and reduced scrap and rework

reduced manufacturing lead times

greater flexibility in changing the production mix

smoother production flow with fewer disruptions

worker participation in problem solving.

Pressure to build good relationships with vendors

Increased productivity levels and utilization of equipment.

VENDOR MANAGED INVENTORY (VMI):-

VMI can be defined as:-

It is a streamlined approach to inventory and order fulfillment. With it, the supplier and

not the retailer, is responsible for managing and replenishing inventory using an integral

part of VMI, i.e. EDI, by electronic transfer of data over a net work. It can also be seen as

a mechanism where the supplier creates the purchase orders based on the demand

information exchanged by the retailer/customer.

VMI BUSINESS MODEL:-

In fulfillment process using VMI, typically the activities of forecasting and creating the

purchase orders are performed by the vendor/supplier and not bye the retailer. Electronic

data interchange (EDI) is an integral part of VMI process and takes a vital role in the

process of data communication. The retailer sends the sales and inventory data to the

vendor via EDI or other B2B collaboration facilities and the supplier creates the purchase

order based on the established inventory levels and fill rates.

In VMI the vendor tracks the number of products shipped to distributors and retail

outlets. Tracking tells the vendors whether or not the distributor needs more supplies.

Products are automatically replenished when supplies run low, and goods aten’t sent unless

there are needed, consequently lowering inventory at at the distribution center or retail

store.

BENEFITS OF VMI:-

Dual benefits:-

1. data entry errors are reduced due to computer-to-computer communications. Speed

of the processing is also improved.

2. both parties are interested in giving better service to the end customer. Having the

correct item in stock when the end customer needs it, benefits all parties involved.

3. a true partnership is formed between the manufacturer and the distributor. They

work closer together and strengthen their ties.

On a whole, vendor managed inventory reduces transaction cost such as:-

Purchasing

speeds transactions

streamlines communication between customers and supplier

Eliminates paper-to-computer data entry

Improves data accuracy

Free up staff to work on more productive activities

INVENTORY MANAGEMENT :-

Delivery as needed cuts storage

Helps you reduce inventory levels

Reduces inventory obsolescence

Improves inventory turns

Improves fill rates

Decreases lost sales

Concept of Zero Inventory:-

The concept of zero inventory or stockless production is a theoretical approach and

never attainable in reality, however, the concept of an ultimate level of excellence is bound

to stimulate constant improvement through imaginative attentions and creative and

innovative methods aimed to reduce inventories to this theoretical target.

The aim of stockless production is to find different ways to come as close as to this

concept to reach this theoretical target.

The concept envisages the following:-

Manufacture products only which the customer wants

Manufacture products only at the rate customers want them

Quality has to be perfect all the time

Manufacture goods instantly i.e necessary lead time should be zero

Manufacturing with out wastages

Therefore, the concept of zero inventory is not a set of established techniques. Rather, it

is a fundamental way of thinking to transform overall manufacturing to the simplest way

possible and generate new and original techniques for doing so.

Practical approach of Inventory Management in BHPV:-

BHPV undertakes manufacturing of process plant equipments for various customers and

the execution of jobs are based on orders received time to time from esteemed customers.

The type of products is dealt in:-

Heat Exchangers

Distillation columns

Pressure vessels

Boilers

Reformers

Waste heat recovery modules

Cryogenic equipments

Oxygen plants

Air separation plants

Vacuum columns

There are two types of stock items which are based on their consumption Stock Items /

Fast moving items:- These are the items which are required to be stored and these have

high demand. The respective consumer groups and departments require these items very

frequently. So these fast moving items are replenished frequently.

Non Stock items/ slow moving items:- These items which are not required to be stored

but procured as and when an indent is received from the user department. These items have

demand but they are not so frequently required.

Components of inventory:-

Raw Materials: The raw materials which are consumed in BHPV are as under

Mild Steel Plates & Structurals to IS: 2062

Stainless Steel Plates to SA 240 TP 304,310,316 etc

BQ Plates to SA 515,516 Gr. 60/70

LAS Plates to SA 338

Mild Steel & Stainless Steel Pipes SA 336

Heat Exchanger Tubes

Boiler Tubes

Fasteners

Spares

Welding consumables

Apart from the above, the items which are in transit ( MIT), work in progress & finished

goods also added to inventories.

All the items are being manufactured in BHPV as a tailor made items, most of the

inventories like raw materials, work in progress and materials in transit are blocked

Valuation of inventory:-

1. Raw materials including off-cuts bought out components, stores and spares,

loose tools, goods; under inspection and in transit are valued at cost.

2. Provision for redundancy to wards non moving inventory and off-cut plates is

made as under:

a. In respect of non-moving raw material, a provision of 25% on the value of

these items not moved for 3 years and above is made.

b. In respect of off-cut plates having sizes up to 1000 mm width, provision is

made towards the difference between realizable value and bin prices.

c. In respect of off-cut plates having sizes up to 1000 mm width, provision of

25% on the value of such inventory is made.

d. In respect of components, stores and spares, loose tools, a provision of 25%

on the value the items not moved for 3 years and above but below 4 years

are made.

e. In respect of components, stores and spares, loose tools a provision of 75%

on the value of the items not moved for four years and above is made.

3. Stationary and medicines are charged off to revenue at the time of receipt.

4. Expenditure of miscellaneous equipment and tools manufactures for internal use

is charged to P&L a/c.

5. Valuation of finished goods:

a. In the case of specified products, viz., boilers, cryogenic plants (excluding

small plants), the total products are divided into identified despicable sub-

assemblies or components and contracted prices are determined. As and

when such h sub-assemblies/ components are dispatched, credits are taken

for 98% of the contracted price so determined. The balance of 2% is

reckoned as income during the year in which the total supplies of such

specified products are completed. Finished sub-assemblies/ components of

awaiting dispatch at works is valued at cost or 96% of contracted price of

such sub-assemblies/ components which ever is lower.

b. In respect of all other products such as heat exchangers etc., which are

complete by themselves, credits are taken for 100% of the contracted price

on dispatch, if such products await dispatch at works, they are valued at cost

or 98% of the contracted price, which ever is lower.

c. Finished goods in respect of stock orders are valued at cost or 98% of the

estimated realizable value, which ever is lower.

Computation of inventory turnover ratio:-

Inventory turnover:-

The efficiency of the company in converting the inventory into sales turnover. The

higher the inventory turnover ratio, the higher is the efficiency of the company in

converting the inventory into sales.

In BHPV it is impractical to follow the concept of EOQ or safety stock for production

items as it is a tailor made or customer order oriented engineering unit. The efficiency of

the company totally lies in maintenance and control of inventory levels, hence, it is

important for the company to see the total material consumption to its value of production

and cost of production.

In view of inventory, the total inventory level its usage in the manufacturing process and

the amount of inventory retained as socks are essential. The efficiency of the position is

estimated by determining the inventory to number days of production, average holding

period of inventory, turnover of inventory and the inventory turnover ratio.

ROLE OF MATERIALS MANAGEMENT:-

Materials management is the planning, direction, controlling and co-coordinating of all

those activities concerned with materials and inventory requirements from the points of

their inception to their introduction into the manufacturing processes.

The raw materials used in the manufacturing process to be transformed into finished

product. In other words, the raw materials of which the finished product is made may be

known as materials. The importance of material in a manufacturing concern needs no

explanation because in its absence.

Production is not possible and moreover it affects the efficiency of all men, machines,

money, and marketing divisions of an industry. So, the management of materials is the

grave concern of executives at all levels. There are so many problems attached with the

management of materials such as investment in materials, idle funds, storage and

obsolescence problems, wastage of materials in handling etc, which require immediate

attention of management so that the cost of production may be reduced to the minimum

and the quality of the product may be maintained.

The concept of materials management is being widely accepted by industrially advanced

courtiers for more effective coordination and control over materials because materials costs

(including investment in raw-materials, handling cost, transportation and storage costs,

insurance, wastage and obsolescence costs etc,) constitute a major part of the total cost of

the finished product. So, the control over materials is essential to arrest the increasing cost

of finished product because it is one of the major constituents of costs.

Materials management covers all aspects of materials and material supply necessary for

converting raw materials and ancillary into the desired finished products.

The functions of materials management can be summarized as follows:-

Materials planning and programming

Purchasing of raw materials and capital goods

Inventory control

Receiving, storekeeping and warehousing

Value engineering and value analysis

Transportation – internal and external

Materials handling

Disposable of scrap and surplus

The main objectives of material management are:-

To maintain the flow of production: By making the raw materials available in time

according to production schedule.

Contribution towards higher productivity: By arranging the better quality of raw

material at the lowest possible cost through effective purchasing system.

Reducing the inventory cost: By purchasing the economic costs requiring the

minimum investment and the maximum utilization value.

To eliminate extra materials: through product design

To contribute towards competitiveness: of the product by conducting the market

research and bringing the product according to the demand by the consumers.

Increasing the profits; of the concern by producing the best quality products using

quality material at the lowest possible cost.

To buy further best ultimate value, not necessarily the lowest initial price.

To perform the wide range of functions and fulfill the objectives of utmost

contributive role the material management division in organization has the

following departments.

Material and inventory control department, Purchase department.

Stores department :- This includes storage of materials, accountability of materials.

Quality control department: This includes inspection of quality and testing the quality.

From the national point of view material management plays a pivotal role for the success of

national plans because efficient materials management can exploit the national resources

material efficiency and according to the plans. It also plays an important role in the

industrial economy both in public and private sector.

Advantages of material management:-

Effective material management causes the reduction in total cost of

production and thus sales price of the commodity can be fixed at reasonable

price.

Controls the movement of the indirect cost and cost of materials.

Inventory losses are minimized.

Adequate utilization of equipment is ensured.

Loss of time of direct labor minimized.

Late deliveries of goods are prevented due to availability of continuous flow

of raw material in right time.

Length of manufacturing cycle is reduced.

Congestion of materials is avoided.

Facilities perpetual inventory system.

Cost records of materials are made feasible.

5R principles of purchasing :- It is always the responsibility of the purchasing

department that

The right quality of materials in

The right quantity must be procured at

The right price from

The right source (supplier) and at

The right time

These play a significant role in inventory control management. Purchase department is

basically a service department and caters the requirements of the various departments by

making purchases of materials, equipments etc., which they need.

The stores (or ware house) are responsible for stocking materials and when the stocks

reach a particular predetermined level, they raise an indent for purchase through the

purchase requisition or indent:-

Purchase plan: purchase department must prepare a plan for carrying out its

purchasing activities.

Vendor selection.

Coordination with indentor department by providing relevant information

regarding the indented materials and the procurement action done through 5R

principle. Placing the order as per 5R principle.

Follow – up for ordered materials to effect supply.

Receiving and inspection of material.

Checking and payment of suppliers bills.

Storekeeping :-

The main objective of store keeping is to receive to store and to issue the raw materials

or goods at the minimum cost.

Receiving, handling and issuing goods economically and efficiently.

Using the storage available space and labor effectively.

Protection of goods in stores against all losses; fire, theft and obsolesce.

Facilitating inventory taking from time to time i.e.; (value analysis)

Minimizing the investment on inventories.

Quality control :- main objectives of this are:-

To assess the quality

To see whether the product conforms to the predetermined standards

To locate the reason for deviations and to take necessary remedial steps

To suggest suitable improvements

To develop quality consciousness

To reduce the wastage of raw materials

CHAPTER – 5

INTERPRETATION & ANALYSIS

Inventory levels:-

6. INVENTORY LEVELS

The Inventory Levels at the end of three years ended 2007-08 are given below:

2005-06 2006-07 2007-08 (a) Raw Materials & Components (I) Imported 887.01 1503.17 2521.22 (ii) Indigeneous 1102.00 1305.13 0.00

(b) Stores, Spares, Tools etc. (I) Imported 120.77 130.10 471.02 (ii) Indigeneous 288.38 307.59 0.00

© Work-in-progress 1651.77 867.77 867.77

(d) Finished Goods 928.18 318.75 318.75

(e) Goods-in-Transit 128.72 277.04 -1359.47

(f) Scrap 572.56

601.06

601.06

Total 5679.39

5310.61

3420.35

Provision for redundancy 853.13

1715.98

618.75

and MODVAT not availed

Total 4826.26

3594.63

2801.60

The Stock of Raw Materials, Components, Stores, Spares and Goods-in-transit in

4.83 4.17 2.71

The total inventory level maintained by BHPV in the past 5 years, showing the both the

comparative study and as well as the break up of total inventory into different types of are

as shown in the following table.

Total Inventory Levels:-

0

1000

2000

3000

4000

5000

6000

year 2005-06 2006-07 2007-08

Series1

Series2

Computation of Inventory Turnover Ratio:-

Inventory Turnover:-

The efficiency of the company in converting the inventory into sales turnover. The higher

the inventory turnover ratio, the higher is the efficiency of the company in converting the

inventory into sales.

In BHPV it is impractical to follow the concept of EOQ or safety stock for production

items as it is a tailor made or customer order oriented engineering unit. The efficiency of

the company totally lies in maintenance and control of inventory levels; hence, it is

important for the company o see the total material consumption and percentage of total

material consumption to its value of production and cost of production.

In view of inventory, the total inventory level its usage in the manufacturing process

and the amount of inventory retained as stocks are essential. The efficiency of the position

is estimated by determining the inventory to number days of production, average holding

period of inventory, turnover of inventory and the inventory turnover ratio.

INVENTORY TURNOVER RATIO:-

Computation formula = Cost of goods sold/Average inventory.

Year Cost of goods sold Average inventory Ratio2005-06 11724 6264 1.872006-07 15272 5041 3.032007-08 12747 3130 4.07

A ratio of 6or7 times is considered satisfactory. But there is “no rule of thumb”. A high

inventory turnover is an indication of good inventory management. A low ratio indicates

excessive inventory including slow moving and obsolete items resulting in blocking of

funds. A too high inventory turnover may be the result of low inventory level including

frequent stock-outs. This situation should be avoided.

According to the above explanation the organization maintained high inventory turnover

in 1998-1999 comparatively other four years (i, e.from 1996-2001)

Year

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2005-06 2006-07 200-08

Year

Inventory Conversion period:-

Computation formula = Number of days / Inventory turnover ratio.

Year Inventory turnover ratio

Number of days Conversion peiod

2005-06 1.87 365 1952006-07 3.03 365 1202007-08 4.07 365 90

Interpretation: The inventory Conversion period is deemed to reflect the efficiency of

inventory manage4ment. The higher the ratio and lesser the conversion period show the

more efficient in the management of inventories. Hence, from table in 1998-99 the

inventory turnover ratio high and the conversion period are lesser than other two years.

0

50

100

150

200

250

Year 2005-06

2006-07

2007-08

Series1

Series2

Finished Goods Turnover Ratio:- Cost of sales/Average inventory of finished

goods.

Finished goods is the final outcome of a production cycle. Hence, the ratio showing its

turnover indicates the efficiency with which the finished goods are formed at the final stage

of the production cycle.

There fore the finished goods turnover ratio shows the efficiency of the manufacturing

system in converting the work in process to finished goods these ratios finally add to the

inventory turnover ratio, which influences the entire sales turnover of the company.

Year Sales Average inventory of Finished Goods

Ratio

2005-06 11724 1491 7.862006-07 15272 623 24.512007-08 16462 319 51.60

Interpretation: - In the case of BHPV the finished goods turnover ratio has been increasing over the years.

Work In progress Inventory Turnover Ratio:- Cost of Manufacture/Average work In Process Inventory at Cost.

Work in progress as an another turnover ratio indicates towards the efficiency with

which it gets converted during the production cycle.

Work in progress ratio enables the company in establishing the time gap between

different stages in a production cycle, and the efficiency with which the production cycle

gets completed.

Year Cost of Manufacture Avg Work in Progress

Ratio

2005-06 10894.72 1538.27 7.0822006-07 13907.51 1259.77 11.0392007-08 16411.95 867.77 18.912

Interpretation: - In the case of BHPV the work in progress inventory turnover ratio has

been increasing over the years.

Raw Material Inventory Turnover Ratio:-Annual Consumption of Raw

Material/Average Raw Material Inventory.

Raw material inventory turnover ratios the efficiency of the company is conversion of

its raw material inventory into the production process. The turnover ratio always show

direct proportionality to efficiency. Hence, when the turnover ratios are more the efficiency

said to be high.

Year Annual Consumption of R.M

Avg R.M Inventory Ratio

2005-06 4114.00 2721.69 1.512006-07 6423.13 3189.42 2.012007-08 10277.48 3130.17 3.28

Interpretation: - In the case of BHPV the raw material inventory turnover ratio has

been increasing over the years.

Net Sales to Inventory Ratio:- Net Sales / Inventory.

For the purpose of monitering the effectiveness of inventory management, it is helpful

to calculating the following ratio and index raw material inventory turnover ratio.

It shows the efficiency of the company in conversion of its raw material inventory into

the production process.

The turnover ratios always show direct proportionality to efficiency. Hence, when the

turnover ratios are more, the efficiency is said to be high.

Year Sales Inventory Ratio2005-06 11724 5531.49 2.112006-07 15272 4550.01 3.352007-08 16462 2801.60 5.87

Interpretation: - In the case of BHPV the net sales to inventory ratio has been increasing over the years.

CHAPTER – 6

EXHIBITS

CHAPTER 7

FINDINGS & SUGGESTIONS

FINDINGS

The present study is done with the view to analyze the working of the materials and

inventory control section and suggest ways to reduce inventory holding of a heavy

engineering and fabricating unit like BHPV.

Reduction in inventory holding will not happen over night as it takes time and efforts in

establish a system and it may turn an additional work to start it. However, with the passage

of time it will be seen that this will be easy to continue and once the system is fully

understood and established, the real benefit will be visible and will yield dividends on a

continuous basis.

BHPV used to maintain huge inventories during 1970’s was successful in bringing

down its inventory levels to meet the bureau of public enterprises norms by

following planned and systematic actions. If is identifying the unwanted material

and disposing them by periodical public auctions. But still it has not reached and

target set by it.

Safety margins considered in material indenting section as safeguard against

possible shortage while indenting for materials for a project, additional quantities

over and above the actual requirement, losses or failures during manufacture etc.

these excess quantities remain as surplus materials. If such contingencies do not

occur.

Errors in estimating material requirements based on past consumption this happens

usually in case of stock items like spares, tools, accessories etc. which are stocked

in anticipation of future requirements, quantities remain as surplus materials if such

contingencies do not occur.

Excess procurement due to minimum order quantities insisted by suppliers. In some

cases, suppliers insist on a minimum order quantity against the minimum order

quantity against the actual requirement, which is usually uneconomic for supplier to

manufacture.

Materials procured but not utilized due to subsequent design changes. This happens

mostly in the area of piping wheel the actual piping layout is finalized at later stages

of a project, which leaves little time for procurement of materials. Hence, these

materials are procured at the initial stages of piping design to take case of

procurement cycle time.

Work – in- progress inventory:-

Long production cycle for certain items, which led to high work – in progress

inventory.

Completed jobs waiting for a few minor requirements, which result in increased work–

in – progress inventory. In jobbing industry it is a common practice for the customers to

supply certain critical materials as free issues. However in case of delay in supply of

such critical items, there is temporary set back in the over all consumption of raw

material and components till the customer material is received. Such delays obviously

result in higher stock levels or inflated work in progress temporarily.

Finished goods inventory:-

At present BHPV Ltd., faces a serious set back of working capital, which in turn the

material procurement action was done on, needy and emergency based to perform the

jobs.

Delay in final payment by the customer and delay in customer clearance led to high

finished gods inventory.

SUGGESTIONS

After the liberalization and globalization the industry is facing stiff competition.

Moreover the industry is characterized by long cycle times and as the overheads are

soaring steadily. To withstand competition, order have to be delivered much with in the

time than the competitors. In order to overcome this.

BHPV has to maintain some stocks of production items i.e. raw materials unlike

the present practice of procuring the material after receipt of order from the

customers

Team work and inter departmental co ordination must be elevated to finish the

jobs with in the stipulated time by leaving personal fancies.

It is the responsibility to maintain good and reliable relationship with vendors to

develop reliability and worthiness on the organization to honor our material

procurement orders within the specified time.

Procedure limitations are to be minimized and allocate responsibilities by

observing the key factors.

The management and employees should trust on each other to overcome this

crisis situation by performing the entrusted jobs properly.

Unnecessary overhead costs are minimized by planning the activities in a proper

manner by using the scientific methods of principles of management like

operations research, project evaluation and management, MIS, and security

analysis and portfolio management.

The cushion provided by the indenting departs is proving as excess inventory.

Indenting departments should take more care while calculating the quantity

required by them.

The procurement lead-time should be kept in mind by the materials control

section before giving their approval.

It should be seen that the spares of a particular machine are disposed off along

with it, if the company is going to install machinery of a new design or

technology.

Economic order quantity should be calculated / reviewed for the fast moving

item periodically. The minimum and maximum levels of all the stock items

should also be checked according to the consumption pattern.

The basis of fixing maximum and minimum inventory of raw material should

always be on scientific methods as basis.

The inventory levels should be periodically reviewed. So as to ascertain stock

positions in order to avoid the cost of stock outs.

The company must strive for continuous upgradation of technology to be at far

with the international competitors.

After having analyzed the financial position of BHPV I suggest the following:-

It is apparent that BHPV should strive to improve its performance on delivery,

project management, financial management, price etc.,

The largest domestic competitor, L&T, is beating BHPV on delivery, project

management and on financial strength. It appears to be even with BHPV on

technical capability, quality and price. Another important competitor BHEL, is

rated highly by clients on technical capability, quality, it beats BHPV on

delivery. So the company should see benchmarks with competitors both

domestic and global and use their ideas to improve its managerial capacity.

The company must strive for continuous up gradations of technology to be at

par with international competitors.

It must change its work culture to be compatible with market demands. There

must be better coordination among purchase, production, commercial and

finance department. This will help in achieving greater efficiency not only in

inventory management but overall performance of the Company.

The company should develop long-term relationships with the vendors, which

would help in improving quality and delivery.

ABC classification must be revised and reviewed periodically.

The company must resort to extensive computerization not only for the

accounting purposes but also for improving decision making, quality, for

reducing costs etc., The online computerization of all departments will be an

added advantage to the performance of the Company.

It must adopt accounting of responsibility at each level. The person proved to be

defaulter in execution of his job should be punished severely.

It must take is credit collection policy less deliberately.

The financial position of the organization is not in a position to fulfill its short-

term obligations. The reason may be its deviation from the conventional norms

such as the proposition of current ratio should be 2:1 and the cash ratio should

be 0.5:1. So it must try hard to overcome these problems.

BIBLIOGRAPHY

BOOKS AND JOURNALS:-

Supply Chain Management : The Basis and Beyond by Copacino, William.

Annual Reports of BHPV.

Inventory Control Simulation by P.N.Ramachandran.

Financial management by I.M.Pandey.