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STUDY OF MATERIALS MANANGEMENT

A PROJECT REPORT

Submitted by

SUNNY KINIBatch 2010-12

in partial fulfillment for the award of the degree

of

POST GRADUATE DIPLOMA IN MANAGEMENT

Under the Guidance of

Prof. Suhas Prabhu

THAKUR INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

KANDIVILI

MUMBAI

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CERTIFICATE

This is to certify that this project report on STUDY OF MATERIALS

MANAGEMENT is a bonafide work of SUNNY KINI in part completion of the

POST GRADUATE DIPLOMA IN MANAGEMENT has been done under my

guidance.

The project is in nature of original work that has not so far been submitted for any

degree of this university.

References of work and relative sources of information have been given at the end of

the project.

Signature of the candidate

(Sunny Kini)

Forwarded through the research guide.

Signature of the guide

Name of Guide: Prof. Suhas Prabhu

Designation: HOD Operations

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ACKNOWLEDGEMENT

Many individual have contributed to this preparation of this project. This

project is the result of competence, sincerity, and devotion of the individual who have

been involved in this project.

It brings great inexplicable mirth to me while expressing my gratitude towards

those who have helped me in completion of the project work entitled.

Study of Materials Management

To the satisfactory completion of the project, express my deepest sense of

indebtedness to my guides Mr. N.Vibhooshna Raj, Sr. Manager, Warehouse

(HPCL) and Mr. Siddharth K Patil, Manager, Materials (HPCL) for their esteem

guidance, valuable suggestion and supervision with utmost care and zeal through the

course of this project work.

I would like to extend my sincere thanks to my internal guide Prof. Suhas

Prabhu who gave me continuous source of encouragement and cooperation

throughout.

Last but not the least; I am thankful to Mr.V.K.Sinha and the entire training

department for giving me this self-obligating opportunity.

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ABSTRACT

Materials Management is the operation of continuously arranging the ordering,

purchase, receipts & issues so that stock balances are adequate to support the current

rate consumption with due regards to economy. It is the mean by which material of

the correct quantity & quality is made to be available as & when required in storage &

ordering costs, purchase price & work in economy.

It is imperative to manage inventory efficiently & effectively in order to avoid

unnecessary investments in them. The study pattern used in this study is face-to-face

interaction. Experts of different departments have been consulted. Most of the data

has been gathered from Main Warehouse and Purchase department of the company.

The various aspects covered during the interaction phase were need & features of

inventory control, MAXIMO system, Purchase process etc.

An attempt is made to cover each & every macros of functioning of Materials

department.

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Executive Summary

This report documents the work done during the summer internship at Hindustan

Petroleum Corporation Ltd.

This project was undertaken with the objective of understanding the Materials

Department at HPCL. The study involved a thorough understanding of the process

being followed at the Main Warehouse and the Purchase Department.

The study involved understanding the warehouse functions of Ordering, Receiving,

Binning and Issuing. Also it provided an insight into the purchase functions such as

Tendering, Vendor Selection and Order Placement along with the process of E-

procurement, Reverse Auction and Scrap Disposal

I have tried my best to keep report simple yet technically correct. I hope to succeed inmy attempt.

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TABLE OF CONTENT

S.NO.

Description Page no.

1. ACKNOWLEDGEMENT. 32. ABSTRACT. 43. EXECUTIVE SUMMARY 54. COMPANY PROFILE. 8-95. OBJECTIVES OF THE PROJECT. 106. INTRODUCTION. 11 -127. MATERIALS DEPARTMENT. 13-158. IMPORTANT CONCEPTS. 16 -20

a. Nature of Contracts. 16b. Stock Item. 16

c. Present Item Classifications. 17 -18d. Criteria for Present Stocking Norms. 19-20e. Just-In-Time. 20f. ABC Analysis. 20

9. MAIN WAREHOUSE. 2110. ORDERING SECTION. 22 -24

a. Addition. 22b. Deletion. 23c. Ordering Cell. 23d. Follow Up Cell. 24

11. INVENTORY SECTION. 25-27a. Physical Inventory Verification. 25b. Day to Day Inventory. 26c. Inventory Turnover Ratio. 26-27

12. RECEIVING SECTION 2813. INSPECTION SECTION 29-3014. ISSUE SECTION. 31-3215. PURCHASE DEPARTMENT 33-3416. PURCHASE POLICIES 3517. PURCHASE PROCEDURE 36-39

a. Tendering 36-39

b. Technical Review 3918. E-PROCUREMENT 40-4119. REVERSE AUCTION 42-4319. FORIEGN PURCHASE 44-46

a) Responsibility 44b) Letter of credit 45c) Types of Documents. 45-46

20. VENDOR MANAGEMENT 4721. PROCEDURE OF SCRAP DISPOSAL 48

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22. GRAPHICAL REPRESENTATION 49-5023. RECOMMENDATION 5124. CONCLUSION. 5225. BIBLIOGRAPHY. 53

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COMPANY PROFILE

HPCL, a Fortune 500 company, is one of the major integrated oil refining and

marketing companies in India. It is a Mega Public Sector Undertaking (PSU) with

Navaratna status.

HPCL accounts for about 20% of the market share and about 10% of the nation's

refining capacity with two coastal refineries, one at Mumbai (West Coast) having a

capacity of 6.5 Million Metric Tonnes Per Annum (MMTPA) and the other in

Vishakhapatnam (East Coast) with a capacity of 8.3 MMTPA. HPCL also holds anequity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited (MRPL), a

state-of-the-art refinery at Mangalore with a capacity of 9 MMTPA.

HPCL owns the country's largest Lube Refinery with a capacity of 335,000 Metric

Tonnes which amounts to 40% of the national capacity of Lube Oil production.

Timeline:8

Particular Details

Company Name Hindustan Petroleum Corporation Limited

Establishment year 1974

Address of Registered Office Hindustan Petroleum Corporation

Limited,

Petroleum House,

17, Jamshedji Tata Road,

Mumbai 400020

Maharastra, India

Address of company HPCL-Mumbai Refinery

Bhikaji Damaji Patil Marg, Old Corridor

Road, Mahul, Mumbai - 400074

Maharashtra.

Telephone No 022-25076000

E-mail [email protected]

Turnover of the company Rs 1,40,000.310 crores ( Audited

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1952: The Company was incorporated in the name of Standard Vacuum

Refining Company of India Limited on July 5, 1952.

1962: On 31st March, 1962 the name was changed to ESSO Standard

Refining Company of India Limited.

1974: Hindustan Petroleum Corporation Limited comes into being after the

takeover and merger of erstwhile Esso Standard and Lube India Limited.

1976: Caltex Oil Refining (India) Ltd. - CORIL is taken over by the

Government of India with an Ordinance in 1976, subsequently ratified by an

Actin 1977 and merged with HPCL in 1978.

1979: Kosan Gas Company, the concessionaries of HPCL in the domestic

LPG market, are taken over and mergedwith HPCL.

HPCL's vast marketing network consists of 13 Zonal offices in major cities and 101

Regional Offices facilitated by a Supply & Distribution infrastructure comprising

Terminals, Pipeline networks, Aviation Service Stations, LPG Bottling Plants, Inland

Relay Depots & Retail Outlets, Lube and LPG Distributorships. HPCL, over the

years, has moved from strength to strength on all fronts. The refining capacity steadily

increased from 5.5 MMTPA in 1984/85 to 14.8 MMTPA presently. On the financial

front, the turnover grew from Rs. 2687 Crores in 1984-85 to an impressive

Rs 1, 40,000.3 Crores in FY 2010-11.

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OBJECTIVES OF THE PROJECT

To get practical industrial exposure.

To understand the Materials Management System of Hindustan Petroleum

Corporation Ltd.

TO understand MAXIMO system of managing the Inventory.

To understand the process of Materials Procurement.

TO analyze the current procedure of Vendor Development & Rating.

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INTRODUCTION

The term Materials Management is derived from the evolution of the purchasingfunctions to meet the growing complexity of the industrial structure.

Materials Management is an enterprise for the acquisition and use of materials

employed in the production of goods. It is used for the group of activities concerned

with purchase of materials and services to the point where they are economically useful.

Thus Materials Management can be defined as the concept of operation commencing

which systematically integrates horizontally related materials functions, commencing

with determination of materials needs and culminating in the delivery of finishedproducts.

Materials Management has a wide scope and broadly covers fairly well dispersed

functions of management which are as follows:1. Material planning and programming.

2. Purchasing and outsourcing.

3. Inventory control.

4. Storekeeping and warehousing.

5. Codification.

6. Standardization and evaluation of all products.

7. Transportation and material handling.

8. Inspection and quality control.

9. Cost reduction through value analysis.

10. Disposal of surplus / obsolete material.

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11.Distribution.

The objectives of materials management are interrelated in many concerns. Thesedecisions are taken by different functional specialists. They are as follows:

Primary Objective of materials management

1. Low prices- to be lowest - includes transportation: enhances profit.

2. High inventory Turnover- value of inventories to be low in relation to

sales. Reduces storage costs.

3. Low cost acquisition and possession- reduced handling and storage costs.

4. Continuity of supply- alternative sources, captive suppliers, flexible suppliers.5. Low payroll costs- Low operating costs of material management personnel.

6. Favorable supplier relations- supplier development.

Secondary objectives of Materials management-

1. New materials and products- working closely with Design and research

departments for development of new materials and products.

2. Economic make-buy- Coordinating and assisting other departments in Make-Buy decisions.

3. Standardization- coordinating with Design departments in reducing no. of

items.

4. Product improvement- Contribution towards product improvement by giving

appropriate inputs and assisting Design department.

5. Interdepartmental Harmony- Success of materials management department

depends on the success of other departments. hence relations are to be

harmonious

Scope of Material Management:-

The scope of material management includes decision on purchasing raw material,

management & control of work in progress items, Warehouse and the shipping and

distribution of finished products. The materials flow is divided in to three different

overlapping functions Production control, inventory control & the material handling

function.

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MATERIALS DEPARTMENT

The materials department at HPCL has two main sections:

1. Main Warehouse.

2. Purchase.

Warehouse

A warehouse is as storehouse specially designed for receipt, storage and

handling of goods. Warehouses are also called as distribution centres or

logistics centres.

Different types of Warehouses

1. General Warehouse: Warehouse with a variety of goods.

2. Specific Warehouse: Warehouse having a limited line of goods like

Cloths and Chemicals.

3. Bonded Warehouse: Warehouse authorized by customs officials for

storing goods without payment of excise taxes or duties till they are

removed. Government laws regulate these warehouse

4. Bulk Storage Warehouse: Warehouses that handles liquid goods such as

petroleum, fuel oil etc.

5. Refrigerated Warehouse: Warehouse where perishable goods are stored.

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6. Field Warehouse: Warehouse hired by an organization in another

organization premises.

Different activities carried out in warehouse

1. Maintaining the Item Catalogue.

2. Reordering the stock items.

3. Following up with vendors for materials after PO placements.

4. Materials receipt- In-warding of the materials.

5. Materials Inspection- Offering the materials for inspection, coordination

with the inspecting groups.

6. MRR preparation of received materials.

7. Material binning.

8. Issue of Materials to user groups.

9. Receiving the excess materials from the user groups.

10. Physical verification of the inventory.14


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Purchase

The term purchasing describes the process of buying, learning of the needs and

following up to ensure quick delivery.

Elements of purchasing

1. Price: It is an important element of purchasing function. The supplier

tries to secure maximum price for the products whereas purchase tries to

secure the same at the most economical rates.

2. Quality: Quality determines the price of goods. It involves consideration

as materials, goods workmanship, sizes, designs, colour and patterns.

3. Quantity : Quantity to be purchase depends upon anticipated sales.

4. Sources of Supply : It becomes easier to locate desirable sources of

supply by means of purchasing records.

5. Time of Delivery: It is necessary that all materials for a job arrive in time

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Purchase Cycle

1. Identification of Requirements.

2. Selection of Proper source of supply.

3. Deciding on Quantity and Quality.

4. Finalizing Delivery Schedule and Price.

5. Placing a purchase order.

6. Arranging the transportation.

7. Receiving the material in the stores.

8. Bill settlement.

Important concepts

Nature of contracts is as follows :

1. Standing Order

2. One Time Order

Standing Order:

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Standing Orders are generally applicable for service contracts. These contracts

are developed for attending various routine nature jobs as and when required on

daily. Such contracts are usually valid for a period of six months to one year.

Turnaround & Development Department develops all regular Standing Orders

for normal as well as turnaround maintenance jobs. However, each

Maintenance Section also develops certain contracts of this nature on needbasis.

One Time Order:

These orders cover all one-time requirements for service as well as non-stock

material supplies. The contracts are developed to attend all start-to-finish type

of job requirement with specific delivery schedule. User sections of

Maintenance Department develop these contracts basis recommendations

received from Operations, Technical & Inspection Department.

Stock Items:

Stock item can defined as an item having a proper identification code

with proper reordering norms. Stock Items are procured by warehouse

personnel on the basis of reordering norms and is stored in warehouse after

receipts.

Present Item Classifications

Presently all the warehouse stock items are broadly classified into four

categories i.e.

Essential

Regular

Temporary

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Obsolete

The present criteria for defining the item categories are as follows:

1. Essential:

Item will be treated as Essential only if it shall meet all the criteria given as

follows

I. Item should be an Equipment Spare.

II. Annual Consumption should be less than Four Sets.

III. Non Availability of Spare will lead to production stoppage or major

safety hazard or both.

IV. Item will not be treated as Essential if it meets any of the three criteria

as given below

a. Shop Spare is available.

b. Item is Substitutable.

c. Life can be predicted

2. Regular:

Item will be treated as Regular if it meets any of the following criteria

I. Item is equipment Spare & Annual consumption is more than orequal to Four sets.

II. Item is Consumable & required to be used in more than 4 Months

in a year.

3. Temporary:18


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Item will be treated as Temporary if it meets any of the following criteria

I. For Equipment Spares

a) Annual Consumption should be less than Four Sets.

b) Non Availability of Spare should not lead either productionstoppage or major safety hazard.

c) Item meets any of the three criteria as given below

Shop Spare is available.

Item is Substitutable.

Life can be predicted.

II. For Consumable

a) Item will be required to use in less than 4 Months in a Year

4. Obsolete:

Items are treated as Obsolete if it is not required due to the following reasons

I. Equipment is replaced with an upgraded version and hence out of service

& old equipment is not relocated elsewhere.

II. Equipment is no longer in use hence out of service.

III. Useful Shelf Life of the item expired and hence cannot be used.

Criteria for Present Stocking Norms

At Mumbai Refinery following terminology is being used in the system for

Stocking Norms:

Reorder Point

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Essentiality Level

Economic Order Quantity

Safety Stock

Lead Time

Reorder Point

Reorder point is the item inventory level at which new procurement action

needs to be started. This term is generally used for Regular Items & at HPCL MR it is

being calculated on the following criteria

RP= Monthly Consumption x Lead Time in months + Safety Stock

Essentiality Level

It is the Reorder Point for Essential Items & at MR It is being calculated as

follows:

EL = Monthly Consumption x Lead Time in months + 1

Safety Stock

Safety Stock is the terms used in the context of Regular Items. Safety stock is required

to take care in the event of delay in the delivery beyond the delivery schedules. It is

calculated as follows:

Safety Stock = 0.5 x (Monthly Consumption x lead time in months)

Lead Time

This is an average cycle time between PR date & Material Receipt date (MRR

approval date).

Just -in-Time

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Just-in-Time is a philosophy developed in Japan which is aimed at preventing all

kinds of wastes whatever their nature and wherever they may occur. The basic idea

behind just-in-time purchasing is to establish agreements with vendors to deliver small

quantities of materials just in time for production. This can mean daily, twice-daily,

and sometimes hourly delivery of purchased items. The critical elements of JIT

purchasing are:

1. Reduced lot sizes

2. Frequent and reliable deliveries

3. Reduced and highly reliable lead times

4. Consistently high quality levels for purchased materials

ABC Analysis:

ABC analysis is one of the techniques to control inventory. Under ABC

analysis the inventory items are categorized as A Class Items, B Class Itemsand C Class Items. The A Class Items tend to be either high volume or high unit

cost items which constitute a relatively small percentage of the number of items

in stock but a small percentage of the consumption value. The B Class Items are

somewhere in between.

Under ABC analysis, the following is usually considered as the representative

distribution of inventor items and value.

Category No of Items Consumption ValueA 10-15% 70-75%

B 15-20% 15-20%

C 70-75% 10-15%

Main Warehouse

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Main Warehouse is the place where the materials are received, stored and

supplied to the user for general maintenance of the working plant or unit in

HPCL, Mumbai Refinery.

The 4 sections in the Main Warehouse are as follows:

1. Ordering Section.

2. Inventory Section.

3. Receiving Section.

4. Issue Section.

The various activities that are performed are as follows :

1. New Stock Setup.

2. Deletion of Obsolete Items.

3. Ordering of items.

4. Follow Up.

5. Receiving of items.

6. Physical Inventory Verification.

7. Issue of Items.

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ORDERING SECTION

ADDITION

1. Upon receiving of MAXIMO for making New Stock Set Up From user

Department following jobs to be done by Addition/Deletion Cell Clerks at MainWarehouse.

2. Before the creation of new stock item i.e. entering this data we have to check

whether any similar item exists in MAXIMO, to avoid duplication of any item.

3. Check whether estimate and supply class of item is properly filled.

4. Create new item number in the MAXIMO and feed item description, Maxima,

Minima, Re-order level, Safety Stock, Approximate Procurement cost, Lead

time of procurement, Item category and Vendor Code if the item is proprietary.

5. Attach these items to the four storerooms i.e. Central, Turnaround, Surplus and

Inventory Adjustment in the inventory module according to their Maxima and

Minima and also assign Issue and Receipt Unit e.g. Each, Meter, MT , feet etc.

Process

1. Login into the MAXIMO.

2. Go to the Inventory Tab and select Item Master.

3. In Item Tab, Enter the no given in the proposal for ERTO stock setup.

4. Enter Item Category.

5. Enter Item unit and order unit and save info.23


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6. Now enter specification and save it.

7. Now in item description, we will give description of the item.

DELETION

1. Similar activity is to be done upon receipt of Deletion Memo from user for

unwanted spares which are not to be used or ordered in future i.e. they are to be

made OBSOLETE.

2. We have to enter Stock Category as Obsolete in MAXIMO in all the four

storerooms so that mistakenly also they should not be ordered by chance.

3. Also take out these items from the bins and to kept separately with their

respective Tag of item no, Description and Obsolete Tag for disposal in future.

Ordering Cell

1. Items and needs are ordered only after intimation from user via Email received

from user or only after they are reserved in the Work Order of any specific job.

2. We have to physically verify their current balance and the order the shortfall

without any delay.

3. For about 40% of the total no. of the items we are operating Standing Orders i.e.

Blanket PO for a period of 1to 3 years for which we have to make Standing Order

Purchase Requisition in HS Category in which we have to mention that PR

quantity. These standing orders are to be reviewed at regular intervals.

4. After the finalization of PO for Blanket POs we have to check for current balanceof all the items covered in such POs and also to create release POs for the same

and after approval of the same by our officer we have to either e-mail or fax copy

of Release PO to vendor for early expedition of delivery of these materials.

Few of the PRs we do mention that the quotations received from the vendors to

be reviewed either by the user department or warehouse for technical queries/

specification review.

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Follow up Cell

1. To follow up with vendors for early expedition of material on or before due

date of PO for making the material available for issue in time.

2. This job include Telephonic follow up , by sending Fax through TELEFAX or

E-mail or to visit personally at the vendors Office for early expedition of the

same.

3. To collect the original invoices/Lorry Receipt copies from Finance Department

and send intimation letters to authorised transporters.

4. After making necessary entries in the material clearance register handover the

papers to the authorized transporters for material clearance.

5. Keep follow up with the transporters for early clearance of material.

6. Follow up with Octroi agents for making arrangement for making octroi

payments.

7. Follow up with the inter departments for clearance / delivery of the materials.Xeroxing the original papers and filing the same.

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INVENTORY SECTION

Physical inventory verification

1. Every year take 100% inventory of all the stock items of Main

Warehouse class wise in presence of a finance representative and note

manually quantity available in Bin against each item in the Physical

Inventory Sheet.

2. Thereafter immediately punch in MAXIMO, physical count of each item

counted on that day.

3. Transfer the shortages/overages in Inventory Adjustment Storeroom for

explanation purpose.

4. Review shortages/ overages in MAXIMO in Inventory and try to find out

one by one case wise for explanation of these variations and adjust the

current balance in respective storeroom.

5. Process

i. Login into MAXIMO.

ii. Go to the inventory tab in the MAXIMO.

iii. Generate Input sheet for physical verification.

iv. Enter the code of the class to be verified.

v. Now, the report contains the average cost, storeroom where the items

are kept, Bin number, current balance, Issue unit, Physical count,Category, last date of issue and last count date.

vi. Now, the physical verification of the stock items in the bins is done.

Here the verification is done by the inventory representative in the

presence of the finance representative.

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vii. The inventory is checked for overages and shortages by comparing

the physical count and the current balance in the MAXIMO.

viii. Then the report is finally signed by both the representatives.

Day to Day Inventory

On Daily basis take physical count of all materials issued on previous day so as

to find out if any shortage/ overage are created mistakenly & if found to correct

the same immediately without any further delay by giving necessary

justification.

The major difference between Physical Inventory and Day-to-Day Inventory is

that day-to-day inventory deals with the transactions taking place daily

irrespective of the class whereas inventory keeps track of all the bins in the

inventory class wise throughout the year going class by class.

INVENTORY TURN OVER RATIO

Inventory turnover ratio may be defined as a ratio of Annual consumption (issue)

in Rs. divide by the average inventory in Rs.

Annual Consumption

ITOR = x 100

Average Inventory

This ratio is called Efficiency Indicator.

AN INTRODUCTION TO INVENTORY TURNS OVER RATIO:

Inventory turnover ratio is defined as the ratio of annual consumption value divided

by average inventory holdings. This ratio is also called efficiency indicator. Hence,

higher the inventory turnover ratio the better is financial outlook and system is

considered more efficient. There is considerable scope for improvement in this sphere.

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Inventory turnover ratio= Annual issues in Rupees. / Average inventory in Rs.

Express as percentage the ratio is to be multiplied by hundred.

This ratio is called efficiency indicator.

How to improve the inventory turnover ratio.

A. Efficient reduction of inventories.

B. Discourage flabby inventory due to poor maintenance.

C. Discourage profit-making inventory held with speculative.

D. Reduction in critical & non-critical items lying in stock since long period.

E. Identification of obsolete/surplus items and their disposal/utilization.

Calculation on inventory turnover ratio

ITOR in most of industries in India is around = 1.5

Most efficient one in India is around=3

ITOR in abroad-developed countries is between 6 and 8

28

Year Consumption

Rs.in crores

Average inventory

Rs.in crores

Inventory

turnover ratio

2009-2010 55.13 41.85083 55.13/41.85=

1.32

2010-2011 54.22 36.1 1.57


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RECEIVING SECTION

1. On receipt of material from the vendor, first check in the MAXIMO whether

this particular PO material is pertaining to Material warehouse or not.

2. Thereafter we also have to see whether necessary MODVAT Invoice is

submitted or not if applicable.

3. Once this is done, we have to acknowledge the receipt of material along with

HPCL stamp and the receiving clerk has to sign on the receipt of material.

4. Physically count the material and tally with Delivery Challan for shortfall or

Excess.

5. Inward all the details giving date of receipt, initials of receiving clerk, material

description, quantity received, Challan number and date, MODVAT received or

not, Material Test Certificate received or not.

6. Keep the material for Inspection. On the arrival of representative of the

inspection department offer the material for inspection.

7. Upon endorsement of Inspection officers remarks get the approval of receiving

manager and generate Material Receipt Report.

8. Now bin all the OK material in the respective bin.

9. In case of rejection, generate Report of Rejection Memo after necessary

rejection approval.

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10. Rejected materials are to be kept separately in Rejected Material Bin area with

Rejected Tags so that the materials can be shown to vendor when he comes for

replacement.

INSPECTION OF MATERIALS

1. After the material is received at the receipt section, the material is sent for theapproval of the inspection department.

2. Now, the receipt section sends an email to the respective inspection department

for inspection of the relevant material.

3. At the time of inspection the representative signs on the copy of the email and

verifies whether Test certificate exists.

4. At the inspection department ,the following parameters are checked:

In case of rotating equipment

a. Dimension.

b. Material testing.

c. Surface finish.

d. Hardness testing.

e. Genuineness of spares by checking the related certificates.

In case of electrical equipment

a. Checking of Test Certificates.

b. Checking specifications with respect to the catalogue.30


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c. General visual inspection.

d. Checking of operating mechanism.

5. After the reports of inspection are received the inspection manager enters his

comments in the MAXIMO and sends the reports for the approval of the

inspection manager.

6. On the basis of this report the material is either accepted or rejected.

7. This report is then sent to the receipt department which then takes necessary

action on the basis of the reply of the inspection department.

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ISSUE SECTION

Generate a consolidated report for total material issued/credited for the previousday and attach all the MIRs and MITs in the ascending order of Work Order no.

to be bound to store room for future record purpose.

Upon receipt Of Material Issue Request (MIR) from the user representative,

issuing clerk to verify approving authoritys signature endorsed.

Then go to the respective bin for withdrawing the material form respective bins

for issue purpose.

Accumulate all the issued material at one place on the issue counter for issue

counter for cross verification of material to be issued.

Process in MAXIMO:

1. Login into MAXIMO.

2. Go to the issue and transfers tab.

3. Default Store is Central. Unless we have to enter the type of storeroom.

4. Go to the issue tab after that.

5. Select the reserved items tab.

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6. Select the filter tab.

7. Enter the work order and copy it.

8. Select filter tab.

9. Select the items in the MAXIMO corresponding to the items in the MIR.

10.Finally save the report and copy the work order no.

11.In the report select Material Issue Ticket and paste the work order

number in the space given below and click on submit.

12.The Material Issue Ticket is then generated.

Now three prints of the MIT, one copy is to be retained along with the MIR for

Warehouse record, second copy is submitted to CISF In-charge and the third

copy is to be given to the user department after endorsing issue clerks signature

on all the 3 copies.

Maintain delivery record register of Chemicals/Catalysts &Gas cylinders to be

issued on daily basis and keep track of MIRs received for delivery of the same

and post it in the MAXIMO after they are delivered to the respective

locations/plants.

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Purchase Department

The Purchase department is concerned with the process of buying, learning of

the needs and following up to ensure quick delivery.

The Purchase department outlines policies and procedures governing the

following functions :

1. Purchase of materials and supplies and award of construction/ service contracts.

2. Disposal of obsolete, surplus, unserviceable and slow moving materials and

equipment well as scrap.

Process

1. When a requirement of material is generated at the user department, the

user sends a Purchase Requisition (PR) to the purchase department.

2. The PR is then sent to approval of the purchase manager.

3. After the approval of the purchase manager is received, then the tenders

are floated.

4. Now in case of tenders of value more than Rs. 5lakhs the tender enquiryshould be sent to min. of six vendors and for less 5 lakhs the tender

enquiry should be sent to a min. of three vendors.

5. Now depending upon the value of the following tender are generated:

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a. If the value of the tender is less than Rs. 300 lakhs then limited

tenders are generated.

b. If the value of the tender is more than Rs. 300 lakhs then public

advertisement is generated.

c. In case of Proprietary items single tenders are generated.

6. When strict technical specifications are to be adhered to the quotations

received from the vendors are sent to the user department for technical

review.

7. After the technical review is sent by user department, the price bids of the

selected vendors are opened and the vendor with the lowest quote is

selected.

8. After this, according to the value of the tender the approval of either the

finance department/Head of department/Bids Review committee/Contract

Review committee is taken.

9. After the approval of the relevant committee is taken, then Purchase

Order is placed with the vendor.

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PURCHASE POLICIES

1. Purchasing Authority handles all the purchases and is responsible for all

commitments made to suppliers for equipment, materials, spares, supplies and

services.

2. Securing of price quotations for materials, equipment spares, supplies and services,

will be the responsibility of the Purchasing Authority.

3. The selection of vendors is the responsibility of the Purchasing Authority. If

preference is given to certain vendors, appropriate reasons should be given for the

same.

4. All tenders shall be opened in the presence of intending bidders irrespective of

value or whether such tenders are limited, public, and single tender or otherwise.

5. Items purchased for personal use of an employee shall not be made.

6. Purchase/services shall not be made or availed from employees and their

dependents.

7. Negotiations should be carried out in exceptional cases depending upon

circumstances and market trend.

8. Two Bid system should be resorted to when strict technical standards are to beadhered to.

9. Single supplier will be considered in case of proprietary items.

10. Public Tender will be resorted to in cases of all tenders having a value of Rs. 300

lakhs (high value) and above.

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11. Lowest tender means the lowest of the technically acceptable tenders.

12. The purchase order for MODVAT able locations should clearly mention the basic

price and the MODVAT component separately.

13. e-Procurement including reverse auction will be an acceptable method for

procurement of materials, services and works contract.

PURCHASE PROCEDURE

TENDERING

TYPES OF TENDERS

1. Limited Tenders:

Tenders of value less than Rs. 300 lakhs shall be through a limited tender

except:

a. Where global tenders are considered necessary.

b. When the sources of supply are not known.

In cases of high value purchases (over Rs. 300 Lakhs) limited tender may be

resorted to after approval of the Contracts Committee in:

a. A case of established urgency.

b. A case where sources of supply are definitely known and possibility of fresh

sources being tapped is remote.

In the case of tenders of estimated value of Rs 5 lakhs and above, enquiry

should be sent to a minimum of six parties and for tenders of less Rs. 5 lakhsenquiry should be sent to a minimum of three parties.

2. Single Tenders :

"Single tender means tender floated to one party".

Single tender enquiry would generally arise in the case of:

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i. Proprietary Items

Proprietary items are spares and component parts of a particular brand of

existing machinery/equipment which need replacement and which can be

obtained only from a single manufacturer/authorized agent, or special

formulations available from a single source.

ii. When the Services are of a specialized or critical nature which can be

rendered only by a single supplier.

iii. Where particulars cost cannot be obtained in advance of awarding the job, like

repairs to/ overhauling of equipment.

3. Public Tender:

Tenders should be invited by public advertisement in the press (leading

newspaper by circulation) in the following circumstances:

i. Any tender of a value either equal to or above Rs. 300 lakhs (high value) for all

contracts or supplies

ii. Where global tenders are considered necessary.

iii. When the sources of supply are not known.

For Public Tender apart from inviting public tenders through advertisement in

the press as mentioned above it shall be necessary to publish such notice on theCorporations Web Site also.

PRICED AND UNPRICED TENDERS

For inviting tenders requiring strict technical standards, the following procedure

should be adhered to:

1. Tenders are invited in two parts i.e.

a. Priced Tenders

b. Unpriced Tenders.

2. First the Unpriced bids are opened and sent for technical evaluation.

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3. While sending these tenders for technical evaluation, Purchase Department will

specify the number of days by which the technical evaluation is to be completed.

4. After Technical Evaluation in case of minor changes in techno-commercial scope,

terms and conditions, price implication may be sought.

5. In the event of major changes after Technical evaluation discussion on account of

bidder/owner, revised priced bids may be sought from all

the technically qualified/acceptable bidders.

6. After establishing technical and commercial suitability of the offers, the

corresponding "Priced" tenders should be opened and evaluated within

reasonable time from the opening of technical.

7. If three techno commercial acceptable parties are available, evaluation shall be

conducted by rejecting any and for all the parties seeking deviations, price bids

should be returned unopened.

NEGOTIATION

Negotiations can be carried out with bidders only for reduction in price offered by

them and not for clarifications or change in specifications, delivery terms etc.

For the negotiations, if carried out it must be intimated in advance to the bidder to

ensure that there is no increase in price offered by the bidder consequent to

negotiation.

RATIONALIZATION

Wherever the lowest bidder has been selected for award of contract and a need is felt

for amendment in any terms, including prices quoted by him, the awarding authority

may use his discretion to authorize:

- The Purchasing Authority

- The Finance Representative

- User/Quality Control Department

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to approach the selected vendor for such amendments. This is called Rationalization.

As this does not amount to negotiations, the need for appointment of Negotiating

Team does not arise. Rationalization need not be resorted to, if the LPR estimate is

below Rs1 lakh.

MATCHING THROUGH COUNTER OFFERS

If the lowest acceptable offer is more than 20% of the estimated cost as per purchase

requisition, counter offers for matching with rates as per cost estimate may be made to

the lowest tenderer.

The decision on acceptance of counter offer shall be taken by the Purchasing

Authority with Finance Concurrence.

After this evaluation of the bids is done .Here according to the value of the tender the

approval of Head of Department/ Bids review Committee/Contracts Review

Committee is taken.

TECHNICAL REVIEW

1. The user department generates the PR of the materials that are required. The

PR includes attachments i.e. the notes to purchase and the notes to vendor.

2. Now after receiving the PR, the purchase department floats the tender for the

same and sends it to the vendor (No. of vendors depending on value of the

value of tender).

3. Now for the materials where the technical specifications have a clear

significance, tenders are invited in parts i.e. technical and price.

4. First the technical bids are opened and sent for technical review.

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5. The TR department analyses the technical bids to see whether the vendor is

technically competent enough to deliver the materials of the required

standards, whether the vendor is going to provide the materials with a

deviation from the standards.

6. On the basis of these parameters the technical bid is either accepted orrejected by the technical department.

E-PROCUREMENT

1. E-procurement is another method of procurement. The steps to be carried out on e-

procurement portal will generally be as follows:

a. Floating tender and receiving bids in soft form.

b. Opening of unpriced bids electronically by designated officers, in system in

secured mode.

c. Electronic opening of priced bids or use of reverse auction methodology to

establish prices, with techno commercially acceptable bidders.

d. System generated bid analysis.

2. In case of e-procurement the following clauses read in conjunction with other

provisions will apply :

a. All communication done with vendors in soft form will be acceptable and

considered valid. No hard copy confirmation will be required for the same,

provided the same is properly authenticated by suitable means like digital

certification etc.

b. Since there will not be any hard copy of the tenders received, the opening of

the bids on due date and time will be in the system with access passwords to thedesignated officers. Tender opening can be witnessed by participating bidders

through remote logins to the system.

c. Tenderers shall submit bids either electronically or normally. Some vendors on

manual and others on electronic mode for the same tender shall not be

acceptable.

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d. e -tendering and reverse auction can be operated as mutually independent

events for the same tender meaning it will be acceptable to go for :

i. reverse auction on e-procurement portal for a bid which is called in

manual mode provided price bids are not already opened or

ii. to go for face-to-face negotiations with L1 bidder for and

electronically called bid subject to CVC guidelines.

e. Till the time, e procurement is made mandatory for all the tenders, decision to

follow manual or e tendering mode will rest with individual purchasing

authorities.

f. Audit trails and system logs to be maintained for all transactions on the e-

procurement portals/software during complete tendering process.

g. Historical records for required number of years to be maintained in soft form

with adequate data backup, recovery and archival.

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REVERSE AUCTION PROCESS

Reverse Auction is a procurement process used to secure competitive price by

on-line multi bidding among techno commercially qualified bidders.

In reverse auction process, the qualified bidders get an opportunity to compete on-line

in a transparent and fair manner based on the evaluation methodology stipulated in the

tender without the identity of bidder getting disclosed to other participating bidders,

service provider or HPCL. The entire process is designed to bring complete

transparency in the bidding process.

Reverse auction procedure as well as the business rules with process related terms &

conditions of the reverse auction shall be described in the tender document and also

placed in HPCL website portal. The process business terms & conditions andmodalities unique to reverse auction shall be accepted by each bidder in writing,

before participating in the reverse auction.

Some Important Features of Reverse Auction in this on line process:

1. Reverse Auction shall be visible to Bidder/HPCL only with user log in and

password.

2. Identity of bidders never gets disclosed during/post reverse auction process.

3. In reverse auction, start bid price of each tenderer is expected to be same

as in manual sealed priced bid.

4. Bidders cannot increase their bid once the event has opened up, with submission of

start bids.

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5. Bidder must quote for the complete quantity of each item as per the sample

calculation sheet provided in the Bid document.

6. Bidders viewing the PORTAL can see only their BID and the prevailing lowest bid.

7. Bidder can reduce his bid repeatedly during the auction period.

8. Reverse auction shall be held for a period of not less than 60 minutes and shall be

automatically extended by a further period of 5 minutes in case of receipt of any

bid during the last 5 minutes of the auction period. This process shall continue until

no bids are received in the last 5 minutes of the auction. Thereafter reverse auction

shall get automatically closed. This process is automated and system controlled.

9. The time duration and extensions thereof depend on decision in relation to factors

such as size of the contract, complexities of the contract, number of bidders in fray,

etc.

10.In the event of problems in connectivity during the extended time, the bids could

be secured in a dedicated FAX NO with communication to all bidders to this

effect. The room/box needs to be opened in line with procedure for opening of

tender.

11.Any time extensions due to connectivity problems shall be granted at the sole

discretion of HPCL.

12. Order shall be placed on the lowest bidder, basis item-wise lowest delivered cost

or overall lowest delivered cost.

13. HPCL reserves the right to further negotiate the prices with lowest bidder for

reducing the price/cancel the reverse auction process/tender at any time before

ordering without assigning any reason.

14.On successful completion of the reverse auction, the priced bids received in

manual mode shall be returned to the respective bidders, in as received condition.

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FOREIGN PURCHASES

RESPONSIBILITY

The Materials Department, Mumbai Refinery is responsible for obtaining importlicenses and to make all foreign purchases based on Purchase Requisitions received

from user Departments/Units.

Foreign purchases of individual SBUs i.e. Strategic Business Unit will be handled by

respective Purchasing Authorities of the SBUs.

Foreign purchases, if any, pertaining to Zones will be handled by the respective SBUs

at HQO in their area of operation.

For instance, foreign purchases of items pertaining to LPG-Zone will be handled by

the Purchasing Authority of LPG SBU.

The following points will also have to be considered by the Purchase Departments of

the respective SBUs and Corporate Office:

1. Maintaining and updating the vendor data base shall be done by the Individual

SBU.

2. A six monthly review and updating of the foreign vendor list shall be madewhich will be approved by the respective Contracts Committee of the individual

SBU's.

3. The respective Contracts Committee of the individual SBU's shall certify that

the list of foreign vendors for any item which is proposed to be procured is

adequate and exhaustive; otherwise the tender shall be floated on a global basis.

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4. Opening of L.C. and payment thereof based on Purchase Order/Sales

Agreement from SBU shall be done up to R 4 crores by the respective

authorities.

LETTER OF CREDIT

Commercial letter of credit (LC) is a document issued mostly by a financial

institution, used primarily in trade finance.

Letters of credit are used primarily in international trade transactions of

significant value, for deals between a supplier in one country and a customer

in another.

Letters of credit (LC) deal in documents, not goods.

An LC can be irrevocable or revocable.

An irrevocable LC cannot be changed unless both buyer and seller agree.

With a revocable LC, changes can be made without the consent of the

beneficiary.

TYPES OF DOCUMENTS

Negotiable Documents: Documents/financial instruments which are

received by through banks are known as Negotiable Documents.

e.g. Promissory Note, bill of exchange and cheque.

Non Negotiable Documents: Document of title (such as an air waybill) or

a financial instrument (such as a crossed cheque) that may not be

transferred from the holder or named party to another.

TENDERING

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Tender should be invited directly from manufacturers either through Limited

Tender or through Global Tender.

In respect of purchases of materials including plant, machinery, equipment,

steel plates, etc., from foreign suppliers, tender enquiries/documents, including

notice, whether through Limited Tender or Global Tender, should clearly

indicate that the foreign suppliers should forward their quotations directly tothe specified officer named in the Tender Notice.

In case of urgency, the quotations may be conveyed over the telex/fax to the specified

officer on or before the stipulated date. The same shall be followed by a confirmatory

letter from the party.

In the liberalized economic environment, foreign suppliers are operating through

Indian representative(s) either under joint venture arrangements or on commission

basis.

It will be necessary for the foreign bidder to identify and disclose along with copy of

the agreement, the Indian representative, while responding to the tender. Information

on such arrangement should be submitted to the C&MD. At a later stage, before

entering into the contract, the Indian representative can be allowed with the approval

of C&MD.

Tender conditions for imported items should contain a standard stipulation that tender

should be submitted directly and not through the Indian representative.

Suitable clause should be incorporated to provide in the contract, that in the event of

any breach or default on the part of the supplier to disclose the agency arrangements

in India, there would be a penalty of banning business dealings and also payment of

specified sum.

PROCESS AFTER TENDERING

1. After placing the order, the purchase department or supplier can arrange the

freight forwarder.2. After this role of the purchase department is to oversee the expedition of the

cargo by the freight forwarder.

3. After the delivery of materials by the freight forwarder within the boundaries of

India, the clearing agent submits the following documents for clearance from

the authorities. These include :

a. Bill of Lading.

b. Packing List

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c. Cargo Arrival Notice.

d. Freight Bill.

e. Foreign Purchase Order Copy.

f. Insurance Certificate.

4. After these documents are received clearing agent assesses the Bill of Entry.

5. Finally after all payments have been made and all documents submitted, thecargo is cleared and is transported to the refinery

Vendor management

Vendor Management Committee (VMC) maintains approved vendors list. It includes

the representatives of the Technical, Purchase and Finance department.

Vendor Management Officer (VMO) exclusively handles/coordinates VMC activities.

This officer will report to Head Purchase of respective SBU.

Administration of the Vendor Management System:

1. All vendors will be required to register Online on a web based system.

2. All inputs will also be required to be submitted online. A hard copy print out of

the information entered online in predetermined format will be submitted byvendor to VMO along with necessary registration fee amounting R 5,000.

3. VMO will scrutinize the application, seek additional details if required and put

up the proposal for the consideration of appropriate VMC basis system

generated reports. VMC will approve /reject or seek clarifications which will

again be managed by VMO. Decision taken in respect of approval of

registration or rejection, shall be recorded and will be available in the vendor

database.

4. Updation / revision of any information, vendor profile etc., shall also be doneonline and on a continuous basis. All the data entered shall be available in the

system and can be retrieved with predetermined report formats or query based

information.

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5. Periodical system generated exception reports for location wise pending

applications, new vendors approved; rejected and existing registration cancelled

shall be forwarded to respective CC on quarterly basis.

PROCEDURE OF SCRAP DISPOSAL

DISPOSAL PROCESS - STEPS INVOLVED

1. Identification and Segregation of items for disposal & Preparation of Request

for Disposal (RFD).

2. Location/Department will :

a. Identify and keep items for disposal separately.

b.Prepare list of surplus items in Refinery and take suitable action..

3. Prepare `Request for Disposal' format for sale of items, and get this cleared by

Disposal committee/Team and then forward to Controlling Office/Dept.Head

for approval of RFD.

4. Actual disposal

The respective authorities for opening of will -

a. Invite tenders for disposal.

b. Evaluate tenders received and obtain approval of appropriate approving

authorities.

c. Place sale or disposal order/s on selected party/parties.

d. Communicate same to the concerned location.

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5. Delivery and documentation

Location/Refinery will:

a. Prepare relevant documents such as invoice/debit note, Cash receipt.b. Make delivery of items as specified in Disposal Order/Letter.

GRAPHICAL REPRESENTATION

Month wise Inventory Trend

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Class wise Inventory - Central Storeroom (as of 31-03-2011)

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Recommendations

1. E-Procurement and ERP (J.D.Edwards) system are 2 different platforms. First

tenders are floated in the E-procurement portal. The quotations are received in

E-procurement portal and then the data is fed into the ERP system. This processcauses an increase in the lead time of procurement. Hence an integration of the

two platforms can help to reduce the lead time.

2. Reverse auction is currently used only for service contracts. However this can

also be implemented for supplies in the future as well, thus reducing the cost

further.

3. Currently in HPCL the ratio of rate contracts to one time is of 60:40. By

reducing the number of one time orders and making the ratio of 70:30 the

inventory cost can be reduced further.

4. Currently internet is widely used in most companies .Companies maintainEmail address. This can be used for the purpose of E-mail tendering .This

ultimately reduces the lead time of tendering process as compared to sending it

through the post. Also this can be used for competitive bidding.

5. Inventory turnover Ratio can be increased by analyzing the movement of spares

and maintaining required levels of inventory so as to improve the ratio beyond

1.5 to match Inventory Standards.

6. Feedback from the user about quantity of spares wasted due to obsolescence.

This will help the warehouse department to forecast future requirements and

focus on minimum possible wastage.

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CONCLUSION

Inventories constitute the most significant part of current assets of a large

majority of companies in India.

On an average inventories are approximately 30% of current assets in privatelimited companies in India. It is possible for a company to reduce its level of

inventories to a considerable degree e.g. 10 to 20% without any adverse effect

on production and sales.

The HPCL Mumbai Refinery offers India a change to leap frog from above

depression to area of global competitiveness and prosperity and regain Indias

commercial value. In the light of these facts the warehouse of HPCL-MR is

maintaining inventory of above 35,000 items.

The Warehouse has been done remarkable job so far relating to inventory

control function but with the changing scenarios the importance of inventory

management has acquired enormous dimensions.

Given the fact that inventory management system being followed in the

company has strong structure, it has gained from increased use of automation

and sophisticated techniques.

In near future due to the expansion & other stringent measures of quality

programme like TQM, and ISO the company shall have to adopt latesttechniques of InventoryControl.

Also it worth mentioning the role played by the purchase department.

The Purchase also has embraced the automation era by including in its working

modern ERP system (J D Edwards).

Also it has introduced a modern method of Vendor management. It has begun

introducing the procedure of E-Procurement and Reverse auction show as to

bring a higher level of transparency to the entire procurement process.

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BIBLIOGRAPHY

WEBSITES

1. www.mattscorner.net

2. www.mattscorne.in

3. www.google.com

4. www.wikipedia.com.

5. www.hpcl.co.in.

BOOKS

Production and Operations Management By K.Aswathappa & K.

Shridhar Bhat.

Purchasing and Supply Management by Donald. Wobbler & David Burt