8/4/2019 Mihir Inventory Mgt
1/77
A
SUMMER PROJECT REPORT
ON
INVENTORY MANAGEMENT
AT
KRISHAK BHARTI CO-OPERATIVE LTD.,
HAZIRA
2010-2011
SUBMITED IN PARTIAL FULLFILMENT OF
THE REQUIREMENT FOR THE
DEGREE OF
MASTER OF BUSINESS
ADMINISTRATION
SUBMITED BY
PATEL MIHIR MAHENDRAKUMAR
GUIDED BY
PADMALOCHAN BISYOI
1
8/4/2019 Mihir Inventory Mgt
2/77
PREFACE
This project report is prepared during the vocational trainingundertaken at KRIBHCO SURAT, on partial fulfillment of the
degree in Master of Business Administration.
Theory of any subject is important but without its practical
knowledge it becomes useless particularly for the Management
students. As a student of the Business Administration, we have
studied many theories in the classroom, but only after taking up
this project work we have experienced & understood theseManagement theories & practices in its fullest sense, which plays
a very vital role in business field today. The knowledge of
Management is incomplete without knowing the practical
applications of the theories studied. This training provides golden
opportunity for all students, especially when the Management
student does not have perfect understanding of the working of a
unit.
Hence, this report is designed with the objective to gain
practical knowledge & is undertaken on a Fertilizer Manufacturing
Industry its working and its Finance Department.
2
8/4/2019 Mihir Inventory Mgt
3/77
Acknowledgement
I am glad to express my profound sentiments of gratitude to all who
rendered their valuable help for the successful completion of this project
report titled, Inventory Management. And to know the functions ofFINANCE AND ACCOUNTS DEPARTMENT .
I record my deep sense of gratitude to Mr. Thomas T. S. (Sr.private
secratery-F & A) who had given me a chance to do a project under this roof
of KRIBHCO and given opportunity to know the functions of FINANCE AND
ACCOUNTS DEPARTMENT.
I would me missing the opportunity if I do not show my gratitude to Mr.
P.G. Soni dept. Manager(Account) who gave me information and guidancewhenever required.
Im also thankful and would like to show our special gratitude to, K.
Ashokan (manager-Materials), Mr.V Satyanesan(Sr manager-material, Mr.M.
N. Patel Pvt. Secy (HRD), Mr. Rajesh Smapat(Materials) who supervised my
entire project. I would like to thank sincerely from the deep of my heart as
they were the persons who constantly guided me and gave me the practical
knowledge of the subject.
As books were the source of our knowledge and data I would also liketo thank Mr. P.T. Solanki Asst. Mgr. (Library head) and Shri Thomas TS, Pvt.
Secretary, who helped me whenever required.
My genuine sense of gratitude goes to the respective universities that
gave me a chance to brighten my academic qualification that provided me
this opportunity to have a practical knowledge of relevant fields.
3
8/4/2019 Mihir Inventory Mgt
4/77
CONTENTSCertificate 1
Preface 2Acknowledgement 3
Sr.
No.
Chapter Page
no.1 OBJECTIVE OF THE PROJECT 52 METHODOLOGY 63 INTODUCTION TO FERTILIZER
INDUSTRY
7
4 PROFILE OF KRIBHCO 135 INTRO DUCTION TO INVENTORY
MANAGEMENT
22
6 INVENTORY MANAGEMENT IN
KRIBHCO
33
7 IMPORTANCE OF LEAD TIME IN
INVENTORY CONTROL
85
8 SUGGESTION 909 SUMMARY AND RECOMMENDATION 9110 ANNEXURE-1 93
11 ANNEXURE-2 9712 BIBLIOGRAPHY 101
4
8/4/2019 Mihir Inventory Mgt
5/77
OBJECTIVE OF THE PROJECT
A. PRIMARY OBJECTIVE:
The primary objective of the present study is to understand the
techniques of the Inventory Management used in this concern, with a
view to find out the extent to which the concepts of scientific Inventory
control are being applied to them and introduce new scientific and
practical Inventory Management techniques, if needed.
OTHER OBJECTIVES:
To supplement the Inventory control techniques in the
organization for effective Inventory Management.
To provide necessary guidelines for determining economic order
quantity, re-ordering levels and classifications of items using
appropriate basis.
To minimize idle time caused by storage of raw materials, stores
or spare parts.
To keep capital investment low in inventories, and keep down
Inventory carrying cost and obsoletes losses.
5
8/4/2019 Mihir Inventory Mgt
6/77
METHODOLOGY
The project was carried out under two heads, namely:
1) STUDY OF INVENTORY MANAGEMENT
2) EVALUATION OF INVENTORY MANAGEMENT
Taking the perspective of student from the finance point of view the
methodology used for study was to answer three questions covering
broad area of Inventory Management are as follows:
1) What is Inventory Management?
2) Why Inventory Management?
3) How the Inventory Management is done?
To obtain answers to the first two questions, the discussions were
carried out with various personnel of M/s. KRIBHCO.
However, to obtain the answer to the third question (i.e. how the
Inventory Management is done?) the existing Inventory control
techniques were studied, a relationship and link was sought betweentheory & practice and it was found that many aspects from Theory can
be and are being used in practice and necessary suggestions were
made to promote existing Inventory Management at various level.
Finally at the evaluation store beside the Inventory Interview
technique, secondary data was collected from trial balance etc. which
were rearranged, regrouped so as to meet the requirement of
situation.
6
8/4/2019 Mihir Inventory Mgt
7/77
FERTILIZER INDUSTRY SCENARIO IN
INDIAIn India, first of all in 1906, a single super phosphate (SSP)
manufacturing unit was set up at RANIPAT near CHANNI (MADRAS) withannual capacity of 6400tones per annum.
1. PUBLIC SECTOR
THE FERTILIZER AND CHEMICALS TRAVANCORE LTD. (FACT)
HINDUSTAN FERTILIZER CORPORATION LTD. (HFC)
MADRAS FERTILIZER LTD. (MFL)
HINDUSTAN COPPER LTD. (HCL)
NAIVELY LIGNITE CORPORATION LTD. (NLC)
PYRITES, PHOSPHATES AND CHEMICALS LTD. (PPCL)
PRADEEP PHOSPHATES LTD. (PPL)
RASHTRIYA CHEMICALS AND FERTILIZERS LTD. (RCFL)
NATIONAL FERTILIZER LTD. (NFL)
2. CO-OPERATIVE SECTOR
Those are only two fertilizer manufacturing societies in co-operative sector
INDIAN FARMERS FERTILIZERS CO-OPERATIVE LTD. (IFFCO)
KRISHAK BHARTI CO-OPERATIVE LTD. (KRIBHCO)
3. PRIVATE SECTOR
THERE ARE 17 COMPANIES IN PRIVATES SECTOR, which are producing
FERTILIZER
1. Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)
2. Hindustan Lever Ltd.(HLL)3. Hari Fertilizer
4. ICI India Ltd.
5. Indo Gulf Fertilizers & Chemicals Corporation Ltd.
6. Mangalore Chemicals & Fertilizer Ltd. (MCFL)
7. Southern Petro Chemicals Industries Corporations Ltd.
8. Nagarjuna Fertilizer & Chemical Ltd. (NFCL)
7
8/4/2019 Mihir Inventory Mgt
8/77
9. Shri Ram Fertilizer & Chemicals
10. Tuticorian Alkali Chemicals & Fertilizer Ltd.
11. Zuari Agro Chemicals Ltd.
12. Bindali Agro Chemicals Ltd.
13. Chambal Fertilizer & Chemicals Ltd.
14. Coromandal Fertilizer Ltd. (CFL)
15. Deepak Fertilizer & Petrochemicals Corporations Ltd. (DEPCL)
16. E.D.I. Passy (India) Ltd.
17. Gujarat State Fertilizer Company (GSFC)
The Role Of The FERTILIZER In The National Economy
AGRICULTURE INDUSTRY SERVICES ENVIRONMENT
As critical input in crop
production
Fertilizer use promotes.
It promoters agriculture
growth food security &
rural
Fertilizer industry
promotes
Use of gas, sulfur etc.
Foreign Exchange
saving
Distribution network
promotes domestic
world trade, credit
Banking, services,
research, transport
and storage services.
The proper use
Fertilizers can help in
1-maintainance of so
structure
2-prevention of so
erosion and degradation.
3-control of deforestation
8
8/4/2019 Mihir Inventory Mgt
9/77
PROFILE OF KRIBHCO
In pursuance of the provisions of the Multi State Co-operative Societies Act,
1942, KRIBHCO was registered in April-1980 as a Multi State Co-
operative Society under the Delhi Co-operative Societies Act, 1972with registered office in the union territory of Delhi.
HISTORY AND DEVELOPMENT
PROJECT ZERO DATE 31st MARCH, 1981FOUNDATION STONE LAID BY Late Smt. Indira Gandhi then the Prime
Minister Of India on 5th February 1982PROJECT COMPLETION 31 st MAY 1985
TRIAL PRODUCTION PHASE Ist PHASE IIndAMMONIA 14th NOV1985 30th NOV. 1985UREA(STREAM 11/31) 26th NOV. 1985 1st DEC.1985UREA (STREAM 21/41) 3rd DEC. 1985 1st DEC. 1995
FIRST RAKES DISPATCHED 1st FEB. 1986
COMMERCIAL PRODUCTION 1st MARCH 1986
PLANT CAPACITY & CONSULTANTS
PLANT CAPACITY CONSULTANTSDAILY ANUUAL
AMMONIA 2 X 1350 MT 8.9 LAKH MT * M.W.kellogg, USA
*-FEDO, INDIAUREA 4 X 1100 MT 14.52 LAKH MT *SNAMPROGETTI, ITALY
*PDIL, INDIA SENIOR THERMAL
ENGG.U.K
POWER 2 X 15 MWH SENIOR THERMAL ENGG.U.K.
2 X 55 MT PER *PDIL
9
8/4/2019 Mihir Inventory Mgt
10/77
8/4/2019 Mihir Inventory Mgt
11/77
KRISHAK BHARTI SEVA KENDRA
In order to provide all essential agro-inputs i.e. Fertilizers, seeds,
pesticides, micronutrients, soil testing tips, agriculture implements and
technology information order one roof. KRIBHCO has been continuing its
operation of service center known as Krishak Bharti Seva Kendra, whichcovers 64 states.
GRAMIN VIKAS TRUST
By virtue of its occupations with the Manufacturing, distribution
and marketing of fertilizer seeds for benefit of farmers, the society has
promoted a separate legal entity. GVT, to look after overall development of
the deprived sections of Tribal community in different states of the country
RESEARCH & DEVELOPMNENT
The society has taken up a Research & Development project
covering priority areas like fertilizers, bio-fertilizers, treatment of wastes-
generated by fertilizers industry seeds & fertilizers marketing. Liquid based
bio-fertilizers are being developed in place of carrier-based bio-fertilizer.
BIO-FERTILIZERS:
KRIBHCO diversified into bio-fertilizers in 1995 in order to provide
supplementary Nutrients at low cost through its Hazria plant with a
production capacity of 100 MT PA. The plant capacity was enhanced to 250
MT PA in DECEMBER 1998. The types of BIO-FERTILIZERS manufactured by
KRIBHCO are Rhizobium, Azotobacter & PSM (Phosphate Solubilisig
Microorganism) KRIBHCO is implementing two more bio-fertilizer plants of
300 MTPA capacity each.
11
8/4/2019 Mihir Inventory Mgt
12/77
PRODUCTION &SALES OF KRIBHCO BIO-FERTILIZERS (Qty. in MT)
The following are the year wise details of Production and Sales of
Bio-Fertilizer:
YEAR PRODUCTION
(MT)
SALES (MT)
2001-2002 389 373
2002-2003 296 351
2003-2004 603 516
2004-2005 560 611
2005-2006 775 714
SOURCE OF FINANCE:
EQUITY:
Government Of India : Rs. 450.00 Crores
Iffco : Rs. 97.00 Crores
Other Societies : Rs. 38.70 Crores
The following is the graphical representation of Sources of Finance.
12
8/4/2019 Mihir Inventory Mgt
13/77
(Source: Annual Report of KRIBHCO-2000-01)
PRODUCT:
KRIBHCO is manufacturing Nitrogenous Fertilizers and Allied
Products viz.: Urea, Ammonia Liquid, Bio-fertilizer. Besides, its also has a 30
MW Power Plant of its own for generation of Power to meet its requirement.
KRIBHCO has also been assigned the job of Operation & Maintenance of
Heavy Water Plant of Department Of Atomic Energy.
MISSION:The mission of KRIBHCO is to act as a catalyst to Agricultural and
Rural Development by Selecting, Financing and Managing such Projects
which are both, socially desirable & commercially profitable.
VISION:
KRIBHCO will become one of the leading fertilizer producers in
the world funding growth through: Efficient Production
Efficient Distribution
Efficient diversification
13
450
9738.7
GOI
Iffco
Other Societies
8/4/2019 Mihir Inventory Mgt
14/77
Efficient Utilisation of Resources
FINANCIAL ACHIEVMENT FROM BEGINING (RS.IN CRORES)NET PROFIT
YEAR Before
tax
Prov. for
Income tax
After tax
1986- 45.06 - 45.06
1987- 126.80 - 126.80
1988- 85.75 - 85.75
1989- 91.51 - 91.51
1990- 94.65 - 94.65
1991- 158.04 60.00 98.041992- 227.78 82.20 145.58
1993- 183.86 72.00 111.86
1994- 292.89 95.50 197.39
1995- 286.95 85.00 201.95
1996- 328.48 99.50 229.38
1997- 447.96 148.35 299.61
1998- 390.40 129.27 261.13
1999- 79.85 24.00 55.85
2000- 210.10 77.00 138.102001- 248.33 61.00 187.33
2002- 40.01 06.00 34.01
2003- 219.51 66.81 152.70
2004- 185.83 45.24 140.59
2005- 280.20 87.75 192.45
2006- 231.53 38.29 193.24
2007- 272.14 82.94 209.20
2008- 269.34 19.21 250.13
2009- 252.77 24.60 228.17
14
8/4/2019 Mihir Inventory Mgt
15/77
-DIVIDEND PAID TO SHARE-HOLDERS (Govt. India, IFFCO, Other
Society)
YEAR Amount(Rs. in
Crores)
Dividend %
1986-87 13.84 3
1987-88 26.86 6
1988-89 26.77 6
1989-90 26.81 6
1990-91 26.83 6
1991-92 35.82 8
1992-93 36.13 8
1993-94 36.29 81994-95 36.48 8
1995-96 50.39 11
1996-97 59.78 13
1997-98 83.36 18
1998-99 85.31 18
1999-00 57.87 12
2000-01 58.56 12
2001-02 97.92 20
2002-03 34.39 7
2003-04 88.43 18
2004-05 73.50 20
2005-06 78.47 20
2006-2007 88.33 20
2007-2008 74.50 15
2008-2009 72.46 14
2009-2010 78.86 20
15
8/4/2019 Mihir Inventory Mgt
16/77
CHAPTER-1 INTRODUCTION
The dictionary meaning of the word Inventory means stock of goods.
In the financial terms, Inventory means the value of raw materials,
consumables spares, work in process, finished goods, and scrap in which
company funds have been invests.
It can also be identified that Inventory are those goods which are
placed, stored and used for day to day functioning of the organization.
Thus Inventory can be defined an ideal resource of any kind having
an economic value.
TYPES OF INVENTORIES :
Inventories are classified according to uses and point of entry in the
alteration is as follows:
1. Raw Material
2. Stores, Spares and Consumables
3. Work in Process Goods and
4. Finished Goods
NEED TO HOLD THE INVENTORIES :
There are the three major reason for holding inventories.
1. TRANSACTION PURPOSE
2. SAFETY PURPOSE
3. SPECULATIVE PUROSE
WHY INVENTORY MANAGEMENT? THE NEED
SIZE OF BUSINESS
I. WIDE VARIETY AND COMPLEXITY
II. URGENCY IN MATERIAL REQUIREMENT
III. NEED FOR LIQUIDTY
16
8/4/2019 Mihir Inventory Mgt
17/77
FACTORS INFLUENCING INVENTORY DECISIONS
Following factors influence the Inventory decisions of an
organization.
[1] LEAD TIME
ADMINISTRATIVE LEAD-TIME. MANUFACTORING/PROCUREMENT LEAD TIME, TRANSPORTING LEAD TIME AND INSPECTION LEAD-TIME.
[2] RELEVANT COSTS
1. COST OF ORDERING
2. COST OF CARRYNG INVENTORY
3. COST OF UNDER STOCKING
4. OVER STOCKING COST SERVICE LEVEL
OBJECTIVE OF THE STUDY
The primary objective of the present study is to understand the techniques
of the Inventory Management used in this concern, with a view to find outthe extent to which the concepts of scientific Inventory control are being
applied to them and introduce new scientific and practical Inventory
Management techniques, if needed.
To supplement the Inventory control techniques in the organization for
effective Inventory Management.
To provide necessary guidelines for determining economic order
quantity, re-ordering levels and classifications of items using
appropriate basis.
To minimize idle time caused by storage of raw materials, stores or
spare parts.
17
8/4/2019 Mihir Inventory Mgt
18/77
To keep capital investment low in inventories, and keep down
Inventory carrying cost and obsoletes losses.
PROFITS OF INVENTORY MANAGEMENT:
Inventory control ensures an adequate supply of materials; stores,
spares, etc. minimize stock outs and shortage and avoids costly
interruption in operation.
It lowers down investment in inventories. Inventory carrying cost and
observances losses.
It facilities purchasing economics through the measurements ofrequirements on the basis of recorded experiences.
It eliminates duplications in ordering or in replacing stock by
centralizing the source from which purchase requisitions emanate.
It permits a better utilization of avoidable stocks by facilitating inter
department transfer within a company.
It facilities cost accounting activities by providing a means forallocating material costs to products, departments or other operating
accounts.
It provides a check against the loss of materials through carelessness.
It enables Management to make cost and consumption comparison
between operations and periods.
It services as a means for locations and disposition of inactive andisolate items of stores.
Perpetual Inventory values provide a consistent and reliable basis for
preparing financial statements.
18
8/4/2019 Mihir Inventory Mgt
19/77
8/4/2019 Mihir Inventory Mgt
20/77
PURCHASE DEPARTMENT.
The prime responsibility of Purchase Department is to arrange supply
of various raw materials, consumables, spare parts etc. to the plant for the
production purpose and to the other departments for maintenance and
operation purpose. The materials should be procure at the right prices from
right source of supply.
* Purchase Procedure
The following are some of the essential steps in this regard.
* Responsibility for Purchases - Functions
All purchase functions shall be the responsibility of the Materials
Manager posted in the plant. The purchase functions in other offices shall be
handled by one single office nominated/designated for the purpose. Theindentors from various departments should refrain from issuing inquiries,
inviting bids entering into correspondence or negotiation with
vendors/contractors. All requisitions for purchase duly processed in
accordance with the procedure laid down, hereinafter should be forwarded to
Materials Manager/Designated officer for necessary action.
* Registration of Vendors
The purchase department is responsible for developing a list of
approved vendors for various types of materials, services. An advertisement
is issued in all the leading newspapers inviting applications in the prescribed
proforma for registration of suppliers and contracts listing out various types
of purchases and services that are likely to be made during the next three to
five years. The applications received is scrutinized by a Committee
consisting of a representative from Technical, Finance and Purchase
Department (nominated by the General Manager) and to ascertain the
resources. Capacity and quality of workmanship of vendor. The Committee
can also call the vendor and contractors for personal discussions and seek
clarifications on the applications and obtain such other information as may
be considered necessary by the Committee.The list of approved vendors and contractors should be updated atleast
every five years by issuing a press advertisement.
* Requisition to Purchase/Work
The indentors from the various departments will raise a requisition
called the Material Purchase Requisition for purchase in the prescribed
20
8/4/2019 Mihir Inventory Mgt
21/77
proforma. It should be ensured that the requisition for purchase should be
completed in all respects with regard to:
A) Description of the material/equipment/scope of work.
B) Material of construction/specification
C) Temperature/Pressure/Standard if anywhere applicable.
D) Quantity and unit of measurement.
E) Date when delivery of material/services is required.
F) Name of vendor in case of the item is of proprietary nature.
G) Estimated value and budget head.
H) Whether item is a stock item/non-stock item.
The requisition for purchase of materials which have been declared as
stock-item will be raised by the stores Department after the quantity in
stock has reached the Re-order level as determined for the respective
items.
Such requisition amongst other particulars should also indicate the
minimum, maximum and re-order level the date on which last supply
was received and the average consumption per month since last purchase.
The requisition for purchase of non-stock items will be invariably
rooted through the Stores Department which will endorse on the requisition,
the availability/non-availability. In case the item is available, the quantity
there of be indicated on the purchase requisition so that the quantity to be
purchased can be adjusted by the Materials Manager in consultation with the
indentor.
The requisition for purchase of capital items award of Civil Work,
erection contracts, contracts for repairs to plant and machinery and
equipment handling and transportation of materials, repair/servicing of
equipment hiring of casual labours. Selection of contractors for
repair/maintenance of township and plant buildings, mechanical, electrical,
isolation, provision of other services and painting jobs on schedule of rate
valid for one year will be sent directly to the Materials Manager after the
same are approved by the competent authority.
All requisitions for purchase of materials or for award of work as
described above will be raised by the respective departments. The
Department Manager would ensure that the purchase requisitions must
indicates:
A) The budget provision. (This will be checked by F&A)
21
8/4/2019 Mihir Inventory Mgt
22/77
B) The amount utilized upto the previous requisition.
C) The estimated value of the present requisition and
D) The balance available under the budget head after booking the present
requisition.
* Record and Numbering of Requisitions
All purchase requisitions received in the purchase department shall be
entered departmentwise in a register maintained for the purpose. The
Indenting deparatment shall allot a number to each requisition and endorse
the same on all copies of the requisition. The numbering procedure should
be such that the requisition can be identified deparatment-wise. The
Purchase Department will issue a report by the 15th of the following month
listing out the requisitions received during the previous month and their
current status and mail the same to the respective Identing Departments. A
copy of these report will be put to the General Manager for his information. The Identing Departments will review the report from the Purchase
Department and shall ensure that the missing requisitions are traced and are
handed over to the Purchase Department promptly.
* Enquiries/Invittion to Bid
On receipt of the requisitions from the various departments, enquireis
is issued by the Purchase Department as per the procedure detailed below:
A) Enquiries to be issued in the prescribed proforma.
B) Enquiry document is suitably modified to conform to the
material/services proposed to be procured.
C) Enquiry document describes in detail the description of the
material/services the technical specifications etc.
D) The delivery time and the various general and special terms and
conditions governing the purchase/work. The enquiry document
stipulates that:
i) KRIBHCO reserves the right to accept or reject any/all bids without
assigning any reason.ii) KRIBHCO shall have the right to placed the order/award the work to
one or more vendor/contractor.
E) Enquiry floated for obtaining bids for a Civil work oir for cleaning,
handling, loading and transportation of materials or provision of
services a draft of the contract proposed to be entered into is sent
along with.
22
8/4/2019 Mihir Inventory Mgt
23/77
Enquiries is issued as per the following guidelines:
Estimated value of
purchase order/work
order/contract
Minimum No. of
vendors to whom
enquiry to be issued
Minimum No. Of bids
to be obtained
1) Upto Rs.1,00,000/- 5 3
2) ExceedingRs.1,00,000/- and
upto Rs.3,00,000/-
All suppliers on theapproved list
3
3) Exceeding
Rs.3,00,000/-
Press tender
The idea in prescribing the minimum number of vendors to whom
enquiries to be issued and bids to be obtained is to create a healthy
competition amongst the bidders, so that society is able to procure materials
and services at the most economical price.
Open tenders through advertisement in the press is invited in case of
all purchase the estimated value of which exceeds Rs.3 lakh if no approved
vendor list is available for a particular item, press tender, shall also be
invited for purchases exceeding Rs.1 lakh.
Open tenders are invited for selecting contractors for performing
maintenance work, relating to civil, mechanical electrical and
instrumentation work against a rate contract (SOR) which will be renewableevery year. Press tenders for selecting such contractors will be advertised in
one of local English and another in local language paper which has a good
circulation: where fabrication oif equipment or major repairs to plant and
machinery are involved, the enquiry floated to all the major fabrication/repair
shops for determining the number and/or mode of enquiry to be issued the
requisition is evaluated on the basis of last purchase order or the present
estimated market value of the material/equipment which ever is more.
The competent authority in his discretion may allow floating of limited
enquiry in respect of purchases not exceeding Rs.3 lakhs and
works/contracts for a value not exceeding Rs.5 lakhs in each case.
Notwithstanding the forgoing, invitation of bids by press tender will not
be necessary in respect of:
1) Purchase of proprietory items
23
8/4/2019 Mihir Inventory Mgt
24/77
2) Items, the prices of which are fixed by the Government.
3) Items, the import of purchase of which is chanalised through a
Government Deparatment or public sector undertaking and
4) Items, standardised for particular brand/make.
5) However, all purchases of proprietory items and such other items the
prices of which are fixed by the Government will require prior approval
of the Managing Director/Executive Committee/Board of Director if the
value of such purchase exceeds the delegated authority of the General
Manager/Group Manager.
A) For purchases exceeding Rs.3 lakhs and upto Rs.10 lakhs, one
insertion may be given in the following news papers.
1) Times of India, Bombay/Ahmedabad/Delhi.
2) Indian Express, Ahmedabad (now also Baroda0
3) The Hindu, Madras
4) The Statesman, Calculta5) Gujarat Mitra, Surat
6) National Herald, Delhi
24
8/4/2019 Mihir Inventory Mgt
25/77
B) For purchases exceeding Rs.10 lakhs, one insertion may be given in
the following news papers.
1) Times of India, Bombay/Ahmedabad/Delhi.
2) The Statesman, Calculta
3) The Hindu, Madras
4) The Indian Exress, Ahmedabad
5) Gujarat Mitra, Surat
6) National Herald, Delhi
The competent authroity, if he is satisfied may waive the
advertisement of tenders for such purchases, the value of which does not
exceed the power delegated to him for making purchases. The General
Manager/Group Managers will obtain prior approval of E.D./Managing
Director for waiving advertisement of tenders where the purchase exceedshis delegated authority. The General Manager/Group Managers may however
waive advertisement of tenders in excess of their delegated authority of the
purchase is required to be made to meet an emergency in the plant. In such
cases post facto approval of the Managing Director may be obtained later.
Normally, such waivers may be resorted to in the case of purchase of
proprietory items or to cater to an emergency in the plant whenever the
competent authority waives advertisement in the press for inviting bids,
reasons are recorded in writing. A monthly report on such waivers is
submitted to the Managing Director for his information by 15th of the
following month. NIL report should also be submitted in case there was no
waiver during the preceeding month.
If the tender proposal to be advertised is for a work which involves
design and engineering amongst other things. It would be preferable if the
bids are invited in two parts viz. (a) Technical and commercial unpriced bid
and (b) Priced bid. The date of opening the priced bid is fixed later than
unpriced bid.
* Time Allowed for Submission of BidsNormally 2 weeks time is given to the vendors for submitting their
bids. In case of enquiries for engineering civil and fabrication work where
calculation are involve and it is not feasible to obtain the bids early. The time
limit for submission of bids may be increased to four weeks.
Bidders are advise to indicate on the envelopes containing the bid, the
enquiry number, the date and time of opening the bid. The bids shall be
25
8/4/2019 Mihir Inventory Mgt
26/77
addressed to Materials Manager or such other officer nominated to perform
purchase functions.
Extension in due date may be done in consultation with indenting
department, if inadequate/no response to enquiry.
* Validity of Bids
The bidders are advise to submit bids valied for 45 to 60 days. It is
ensures by the Purchase Department that the orders are placed on the
successful bidder within the validity period of the bid. If after opening of the
bids, it is inevitable to charge the specification of material/work, the revised
specifications are circulated to all the bidders who responded against the
original enquiry and bids will be obtained a fresh from all the bidders.However occasions for changing specifications and asking bidders to quote a
fresh are rare and in all such cases prior approval of the General
Manager/Group Manager must be obtained.
The enquiry documents stipulates that no bidder would be allowed to
revise/alter his bid after opening of the bids and within the validity period. In
case any bidder revises/alters his bid, the same shall be rejected even
through the revise bid may conform to specification and be the lowest.
* Opening of Bids
The bids received against the open tender are opened on the date and
the time stipulated in the tender document as under:
A) All advertised bids to be opened publicly.
B) Bids not advertised (published) but where estimated value is more
than Rs.1 lakh bids should also be opened publicly.
C) For bids where value is less than Rs.1 lakh, public opening is not a
must but if representative of some bidder wish to be present, Kribhco
has no objection.
All bids received are opened by the Purchase Department in the
presence of the representatives from the Indenting Department and Finance
Department. The bids opened are initiated and dated on all pages by all the
persons who attend the bid opening. In case there is any cutting or
alterations in the rates quoted or to the prescribed terms and conditions, the
same will also be attested by all the persons attending the bid opening.
26
8/4/2019 Mihir Inventory Mgt
27/77
A record is kept of the names of representative who attended the bids
opening from Kribhcos side and the vendor representatives who attend the
bid opening. All the persons including the bidders should sign against their
name in token of having atteneded the bid opening. Bids opened is read out
to the vendors who attend the bid opening. `Enquiry Response Sheet may
also be filled giving details of tender enquiry Number, Date, Due date,
Opening date, Number of bids received etc. And is signed by Kribhco
representative.
Where and priced bids have been invited in two parts, i.e. unpriced and
priced bids, the unpriced bids is opened first. Any clarifications/additional
information required by Tender Committee is sought in writing from the
bidders. The bidders will have all option to revise the price in the commercial
bid before the same is opened. In case any bidder wants to revise/alter thebid, he can do so and submit the changes in the price in a closed envelope
before the due date. The commercial bid alongwith any revision is opened on
the appointed day and time in the presence of bidders who wish to be
present.
* Late, Invalid and Unsolicited Bids
All bids received after the opening oif bids are treated as `Late-bids
and will be ignored. All late bids are returned to bidders un-opened. Bids
which are not accompanied by the prescribed earnest money deposit will be
treated as `Invalid Bids and will be endorsed as such. The tender documents
stipulates that earnest money can be deposited either in cash or by a Bank
Draft or in form of Bank Guarantee in the prescribed proforma attached to
the tender document. `Unsolicited Bids are not considerd not be opened and
even though they may be the lowest will not be entertained.
* Quotation Comparison Statement (QCS)
After the tenders are opened a Quotation comparison statement (QCS)
is prepared by the Purchase Department. All the bids received are listed in
the QCS. In-valid bids are listed in a separate statement and attached to theQCS. The QCS is checked by an official of the Purchase Department (not
below grade `N) and both the persons who prepared and checked the QCS
will sign the same.
The bids conforming to the specifications and lowest in value will be
rated in the QCS, as lowest (L1). Second lowest (L2), third lowest (L3). After
the QCS has been checked and rated the Purchase Department Incharge
27
8/4/2019 Mihir Inventory Mgt
28/77
forwards the same alongwith bids in original to the Identing Department for
the review of the bids and making recommendations for Purchase.
The review of QCS and selection of successful bidder is done through a
Tender Committee. The General Manager/Group Manager nominates a
Tender Committee consisting of a representative from Indentors
Deparatment, Purchase Department and Finance Department, Purchase
Department will forward the relevant papers/file prior to the meeting to the
members of the Tender Committee is so required by them for review. The
Tender Committee keeps a return record of their discussion on the QCS as
and when they meet. The Tender Committee may obtain any clarifications
from the bidders as may be necessary. All clarifications are sought through
Purchase Department only. The Indenting Department shall not entered into
direct correspondence with the bidders. All proposal for purchases detailed
below shall be referred to the Tender Committee (As may be appointed byGeneral Manager/Group Manager) for review and making recommendations:
A) All purchase order the value of which does not exceed Rs.50,000/- will
be finalised on recommendations of the Indentor and Purchase
Department with the concurrence of respective Manager (F&A) except
in the case of such purchase orders which are being finalised against a
single bid. All purchase order against single bid will be finalised as per
procedure prescribed here in after.
B) All proposals for selecting contractors to work on schedule of rates
(S.O.R.) valid for one year.
C) All proposals for cash purchases involving expenditure of Rs.25,000/-
or more.
* Selection of Successful Bidders
Normally the lowest bid which conforms to the specifications is
accepted. However, while the lowest bid even though conform to thespecifications is not accepted. Full justification for accepting other than
lowest bid shall be recorded in writing and approval of the competent
authority will be obtained.
* Single Tender
Where in response to enquiry only one bid is receieved and the
purchase order is proposed to be finalised on a single tender, approval of the
28
8/4/2019 Mihir Inventory Mgt
29/77
competent authority is obtained as per the delegation of powers, while
according such approval the competent authority records the justification for
making the purchase on single tenders.
* Negotiation
Where the lowest acceptable bid received against the enquiry is
considered high or where there is scoipe for reduction in price in the opinion
of the Tender Committee (which may be recorded) and negotiations are
considered necessary. The following course of action may be taken:
A) Negotiation is conducted commencing with the technically acceptable
lowet four bidders. In conducting negotiations the parties are called
one after another starting with the lowest bidder. The original lowest
bidder can be given second change to offer further reduction if the
other bidders revises his price lower than the original bid of the lowest
bidder. The scope of negotiation can be enlarged beyond the lowest
four bidders in the following circumstances:1) If the work to be awarded is intended to be split and awarded to more
than one contractor.
2) If a ring is suspected and the negotiation with the initial four lowest
bidders do not yield satisfactory results.
3) If higher bids are in very close proximity of the two lowest bids and any
change in quantities can change the rating of the bidders.
If a single bid is received against the open enquiry. The same can be
accepted if the rates are considered reasonable. Otherwise, negotiations are
held with the bidder and a decision taken either to accept the single bid or to
resort to re-tender.
If a single bid is received against a limited enquiry normally it is
rejected and re-tendering resorted to. However, the competent authority, if
he is satisfied that it would be in the interest of Kribhco, to accept the single
bid received. He may do so and record reason in writing.. Such bid is
accepted on the recommendations of the Tender Committee and
concurrence of the Finance Department.
All negotiatins are conducted by the Tender Committee nominatd by
the General Manager/Group Manager. The Tender Committee keeps a written
record of their discussions with the bidders and amongst themselves on day-to-day basis and this record of discussions is signed by all the member of the
Tender Committee and the bidders.
29
8/4/2019 Mihir Inventory Mgt
30/77
* Guaranters
The Purchase Department obtains from the vendors/contractors Bank
guarantees in the proforma prescribed.
A) Advance payment
B) Performance Bond
C) Free issue materials
The Bank Guarantee in respect of free issue materials may be waived
by the competent authority in such cases where he is satisfied that the
material isued to the vendor contractor will not be moved out of the
factorys/housing colonys secured work site.
* Amendment to Purchase Order
Any change/amendment to the purchase order/work order shall be
issued in writing after the same has been approved by the competentauthority. The amendment to purchase order shall be issued in the
prescribed proforma and shall be numbered serially. All change orders where
the terms and conditions are altered and/or which have financial implications
will be routed through finance department for concurrence before the same
is approved by the competent authority. The amendments to the purchase
orders will also be raised in the same number and will be distributed in the
same manner as the original purchase order.
* Repeat Orders
Repeat orders without calling for fresh bids may be placed against
previous orders within one year from the date of issue of original order. No
repeat order shall however, be placed against a purchase order which was
placed at higher prices in the interest of early delivery. The quantity and
value of the repeat order should not exceed the quantity and value
stipulated in the original order and should not be resorted to more than once
in any case. While placing the repeat order, it should be ensured that there
has been no down-ward trend in prices since the original order was placed.Repeat orders shall be placed with the concurrence of the finance
department and qapproval of the competent authority. The authority
competent to approve repeat orders will be the same which approved the
original order.
* Follow-Up of Purchase Orders
30
8/4/2019 Mihir Inventory Mgt
31/77
The Purchase Department shall receive all the mail from the vendors
and shall reply to them in consultation with other deparatments whenever
necessary.
The purchase deparatment shall keep Identiting Department informed
of the status through periodical/monthly reports.
The Purchase Department shall be responsible for following up of the
purchase order/contract with vendors and transporters until the material is
received and accepted at the plant/stores.
* Inspection of Material
The Purchase Department shall Co-ordinate with other departments
and arrange inspection of materials at vendors shops prior to despatch
wherever stipulated in the purchase order.
Inspection of materials in other cases shall be carried out on receipt of
materials at plant site/stores only those materials cleared by the inspection
as conforming to purchase order specifications will only be taken on charge
in stores. The person inspecting the material will sign on the `Stores Receipt
Voucher in taken of having inspected and acepted the material.
* Damaged/Short/Rejected Materials
The Stores Department shall be responsible for sending suitable
intimations to the:
1) Vendor for materials rejected if the same do not conform to the
specifications mentioned in the purchase order.
2) Vendor and Insurance company for material received short or
damaged.
Where the delivery offered by the vendor was ex-works the intimation
for damaged/short receipt of materials will be sent only to the Insurance
company. The intimation to vendor and the Insurance company for material
received short or damaged or rejected should sent as early as possible afterthe material is inspected but in any case not later then a week from the date
of their receipt at plant/site. A copy of the intimation issued by the Store
Department will be endorsed to:
1) Finance and Accounts Departments for lodging the Insurance claim or
making suitable recovery from the vendor.
31
8/4/2019 Mihir Inventory Mgt
32/77
2) Purchase Department for following up, the replacement supplies or
obtaining the non-delivered quantity.
The Purchase Department shall be responsible for following up with the
vendor, the replacement of materials rejected or short supplied by him. The
Purchase Department shall evolve a suitable system so that suitable
communication is issued to the vendor until the replacement supply is
received or quantity short delivered is made good by him.
* Insurance Claim
The Accounts Department on receipt of a copy of the letter issued by
Stores Department make and entry in a register maintained for the purpose
and shall lodge suitable insurance claims. The Accounts Department shall co-
ordinate with other departments wherever necessary and collect the details
of materials and other costs as may be required for preferring a claim.
* Cash PurchaseCash purchases or materials should be avoided as far as possible. Cash
purchases should be resorted to only meet the plants emergencies or where
it would not be economical to call for quotations owing to the small value of
purchases.
The General Manager/Group Manager may, however, consider keeping
a suitable amount not exceeding Rs.2000/- as Imprest fund with the
Purchase Department, Maintenance Department and Administration
Deparatment to enable them to make cash purchase of items to meet the
urgent day-to-day needs of the plant.
* Bank Guarantees
The Finnance and Accounts Department is responsible for safe custody
of Bank Guarantees received from vendors/contractors. The Finance and
Accounts Department maintains a separate register for keeping records in
the proforma enclosed for Bank Guarantee obtained against:
A) Advance payment
B) Performance guarantee
C) Free issue of materials
The Bank Guarantee register is reviewed every month to ensure that
all the guatantees obtained are valid. Such of the bank guarantees which arefound to be maturing/expiring will be reviewed with the respective
department to ascertain if any further revalidation would be required to
conform to the dates of completion of work/delivery of material.
Normally the validity of Bank Guarantee should be as under:
32
8/4/2019 Mihir Inventory Mgt
33/77
a) Bank Guarantee for: From the date of payment until the advance is
luquidated.
b) Performance guarangee: From the date of payment of advance or
commencement of work whichever is earlier until expiry of
maintenance period.
c) Free issued material: From the date of issue of material until
settlement of quantitative account of material issued or delivery of
fabricated equipment whichever is later.
The Finance and Accounts Department is responsible for issuing
intructions to the vendor/contractor for obtaining the extension of the
existing Bank Guarantees before expiry of the claim period. A suitable
system should be introduced by the Finance and Accounts Department to
ensure that a regular follow-up is done with the respective
vendors/contractors until the extention to Bank Guarantees are received.Finance and Accounts Department also ensures that until extension to bank
guarantees are received from vendors/contractors on equipment amount is
with held from running/final payment due to the vendors/contractors. The
Bank Guarantee shall discharged in consultation with the respective
department after receiving the conformable from them that the maintenance
period under the purchase order/work contract has been completed and that
there is no claim against a vendor/contractor. The Bank Guarantee for
advance payment can be discharged by the Finance and Accounts
Department after ensuring that the advance paid have been
liquidated/recovered from running final payment where the
vendor/contractor does not communication issued for extending the validity
of the bank Finance and Accounts Department will invoke the bank
guarantee before expiry of the claim period after consulting the respective
department and obtaining the approval of the General Manager/Group
Manager.
33
8/4/2019 Mihir Inventory Mgt
34/77
EVALUATION OF EXISTING PURCHASE SYSTEM OF KRIBHCO:
The existing purchase procedure gives fair chances of
competition to all the vendors. It leaves no room for malpractices or
favoritism of employees i.e. nobody oblige any one out of way. It is not
very rigid. In time of urgency of requirement, necessary deviations are
approved by competent authority so as to avoid stoppage of work. The
procedure is based on democratic way of working. Good suggestions to
improve efficiency are always considered. Various annual rate contract
running contracts are entered for regular consumable items, like oil
and lubricants, stationery, chemicals, medicines, printing job etc. This
is reducing the repetitive job times and money of company.
But there are shortcomings also, which are evaluated taking intoconsideration the five essentials of purchase functions are as follows:
(1)Purchase time,
(2)Purchase quantity,
(3)Purchase quality,
(4)Purchase price and
(5)Source of supply
PURCHASE TIME
The purchase time indicates the lead-time i.e. time taken to physically
receive the material from the date of its indent.
To find out the lead time five cases different items have been studied
randomly, and analyzed its fact which indicates that by following the existing
procedure, the administrative lead time is very long i.e. 5 to 7 months, while
suppliers lead time is about 2 to 3 months.
34
8/4/2019 Mihir Inventory Mgt
35/77
SUGGESTIONS:
(1)Approved vendor list should be maintained so that wastage of time to get
vendor list approved every time could be avoided.
(2)Contract system should be followed to purchase stock items withapproved vendors so that the continuity of supply can be maintained
without following such long procedure and waste of time. It this case the
economic order quantity should determined for each item and a list of
order per year with specific time limit should be given to contractors in
advance, fixing the maximum, minimum Inventory levels
(3)For non-stock items, the limits for issuing inquiry should be fixed
maximum to seven days. Similarly time limit for recommendations and
concurrence by technical department and finance department also befixed. In case of delay beyond this time limit, competent authority should
be informed for necessary instruction.
PURCHASE QUANTITY AND QUALITY:
It has been observed that the quantity of material is being purchased
considering 6 to 12 months consumption that means no economic order
quantity has been fixed for different types of material. Due to the existing
system:
Company is incurring cost of carrying Inventory interest of capital rent
etc.
Company as also incurring loses due to the depreciation in quantity,
detoriation in quality and obsolesce of materials during storage.
Company is also incurring avoidable expenditure such as holding and up
keep of surplus material, financial losses due to fall in the price of
materials, extra expenditure on excess of materials required.
It is suggested that before taking final decision economic orderquantity should be determined for each item and order should be placed
accordingly.
The determination of economic order quantity techniques has been
discussed on succeeding pages.
35
8/4/2019 Mihir Inventory Mgt
36/77
PURCHASE PRICE
The price of each item is being compared with suppliers quotations
considering the quality of material to be supplied.
Although, purchase department should keep itself informed of the
price trends, with the help of market reports, trade papers and journals,
report by purchase against and sales representative of the suppliers,
published catalogue and price list.
SOURCE OF SUPPLY
The selection of a particular supplier is made after inviting tenders
from possible source of supply. There are four types of tenders commonly
used, which are
(a)Single tender,
(b)Limited tender,
(c)Open tender and
(d)Global tender
The tender received are opened on the date and time stipulated
and compared to select a final vendors, considering quality, delivery after
sales services etc. which indicates that right source is selected, only thing
taken in to consideration is to maintain cordial relations with suppliers.
STORAGE CONTROL
The control of materials while in storage is affected through what
is known as the perpetual Inventory. Thus two main functions of the
perpetual Inventory system have been studied which are:
(i) Receipt and issue system, and
(ii) Maintenance of store records.
And also the use of Inventory control techniques have been
evaluated considering existing position of KRIBHCO.
36
8/4/2019 Mihir Inventory Mgt
37/77
WAREHOUSE SYSTEM AND PROCEDURE
THE SCOPE:
The procedure comes in to operation immediately on receipt of
dispatched documents or dispatched intimation in the stores and
covers on the activities, i.e. clearance, delivery, inspection, stock
charging and preservation, issue and return of materials by the
consumer and ends after striking out balance from the stock card and
delivery of documents VIZ. SRV.SIV. to the account department.
RECEIPT SYSTEM
The system for receipt starts even before the time when thematerial actually reached the plant, when purchase order is planed a
copy is sent to the stores indicating quantity and approximate delivery
date. These are arranged in chronological order so that any time the
volume of receipt can be estimated. This also helps in planning labour
contracts when unloading activities exceed a particular limit. This is
the first step in the store system.
Suppliers, once they despatch the goods, normally send and
advice note, dispatch note to the stores. This provides information on
the date of dispatch, carrier details, description consignment and
value. This as sent in advance so that quick and easy clearance may
be done. On receipt of consignments, the store personnel check the
consignment and tally the material with suppliers delivery note /
challans along with relevant documents, the material is visually
checked for any apparent damage or discrepancy. Appropriate remarks
/ endorsement is made accordingly on the delivery notes / challans in
case of discrepancies on deviation being found in the suppliers
received. Material received against the delivery notes / challans will be
checked with the relevant purchase orders details mentioned in thechallans / delivery notes and packing notes received with the
consignment. Store receipt voucher is prepared in seven copies for
item found in an order.
The material is than paid up for inspection, items finally accepted
is physically handed over to the custody stores or project departments
37
8/4/2019 Mihir Inventory Mgt
38/77
and their acknowledgement obtained in the appropriate columns of the
receipt notes.
INSPECTION
In exercising control on the quality of incoming materials
inspection plays an important role. Material purchased in India and
abroad are inspected according specifications, prescribed tests,
drawings, approved samples etc as stipulated in the purchase order.
To inspect different types of materials following inspection methods
are used.
(a)Inspection by third party :
Such agencies are EIL cloyed register, IBR; etc. acceptance
of material is based on the certificates and reports of theseagencies.
(b)Inspection by indenting departments :
At vendors premises during manufacture of materials or
before dispatch of the same the concerned officers of
indenters carry out such inspection.
38
8/4/2019 Mihir Inventory Mgt
39/77
(c)Materials test certificates :
The material may be inspected and accepted based on
the manufactures test certificates.
(d)Materials are inspected and accepted by carrying out
chemical, electrical or mechanical test either of the project
site or through the recognized lab as stipulated in the
purchase order.
(e)Some materials like shop, cotton, waste, phenol etc are
accepted by visual inspection. Proprietary nature of materials
are accepted by either visual inspection or carrying necessary
tests whenever required.
(f) Materials are also accepted after ascertaining the quality
as per samples on stipulated in the order.
ISSUE SYSTEM:
The issue system relates to function of issue card and Inventory
control section of stores. It covers all material stocked by the KRIBHCO
stores and all bulk and raw materials directly stored by the users. It
begins with the preparation of issue voucher and ends with their
submission to accounts departments.
GENERAL AUTHORITY AND RESPONSIBILITY:
The authority for receipt and storage of all the materials is centralized
in the store department accepts medicines and stationary. Issue will be
made only on receipt or presentation of authorized requisition.
Stores department is responsible to provide material (through stores
issue voucher) to the authorized requisition on demand, all materialdeclared as stock items and contained in the store catalogue as the desired
and the quantities requested for immediate use by them.
QUANTITY OF ISSUE:
In respect of consumable stores and such other materials as are
required frequentor at odd hours, the issue is made in large quantities to
39
8/4/2019 Mihir Inventory Mgt
40/77
reduce electrical work and to ensure ready availability of materials at sight
place when required. The quantity issued is for 15 days consumption. The
entire issued quantity is charred in full to the requisition cost center though
all of its not actually used or consumed immediately. In case an item
stocked as a set it is issued as a set not in parts.
PERPETUAL INVENTORY SYSTEM:
KRIBHCO has the following perpetual Inventory system, which
comprises:
(i) Cardex system
(ii) Stores ledger and
(iii) Physical stock verification
CARDEX SYSTEM
To maintain the quantitative records of receipt and issues and
closing balances of items of stock a cardex system is followed. Stores
department is doing all the quantitative accounting of materials.
STORES LEDGER
For the all quantitative accounting of materials stores
department is responsible. Where as for monitory accounts of
materials accounts department is responsible. One set of each
document for receipt issue and return of materials is sent to priced
store ledger section in the accounts department.
Based on these documents priced stores ledger are prepared for
each item of the stores. The price store ledger provides the volume of
each receipt issue and return along with the quantity accounts.
PHYSICAL VERIFICATION OF STOCK
The physical verification of stock is contemplated with a view to
ensuring that stores and materials held in stock tally with the quantity
and specification shown in the cardex. The actual balances agree with
the balances recorded in the cardex and discrepancies noticed if any
are investigated and adjusted for accounting purpose.
40
8/4/2019 Mihir Inventory Mgt
41/77
It has been observed that time gap of verification is six months,
which should be reduced to be three months for non-stock items, and
for stock items verification should be done at the time of placing
orders. So that the determined Inventory level can be maintained even
of spoilage, damages and obsolescence takes place.
MATERIAL CONROL TECHNIQUES:
To know the practical use of various Inventory control techniques
in KRIBHCO. Following Inventory control techniques were studied and
evaluated are.
(i) Codification system.
(ii) Classification of Inventory.
(iii) Determination of E.O.Q. and
(iv) Determination of Inventory levels.
CODIFICATION SYSTEM:
Codification is the strategy to identify the various items of an
Inventory in an unambiguous manner.
The motivating factor in codifying inventories is to reduce the
verities in the materials / holdings of the organization by standardizing
supplies.
EXISTING CODIFICATION SYSTEM IN KRIBHCO:
KRIBHCO has adopted Kodak system of codification, which is based on
mine group codification system.
First two digits have been used to codify main group.
Remaining seven digits have been used to codify all the specifications in
that group.
41
8/4/2019 Mihir Inventory Mgt
42/77
The main group have been sub-divided in the following four categories
for easy segregation of materials.
CATEGORY MAIN GROUP NO.
1. General stores 00 TO 492. Electrical equipments and spares 50 TO 633. Instrumentation equipments and spares 64 TO 804. Electrical equipments & spares 81 TO 99
BASIC STRUCTURES IS GENERALLY IN THE FOLLOWING BASIS
GENERAL STORES (00TO 49)DIGITS
I II III IV V VI VII VIII IX MAIN GROUP
SUB GROUP
SPECIFICATION/MATERIAL OF
CONSTRCTION/
THICKNESS
SIZE OF ITEMS
ELECTRICAL AND INSTRUMENTATION
EQUIPMENT & SPARES 50 TO 63 AND 84 TO 80DIGITS
I II III IV V VI VII VIII IX
MAIN GROUP
MAKE TYPE
SPECIFICATION
ITEMS
42
8/4/2019 Mihir Inventory Mgt
43/77
ELECTRICAL EQUIPMENT & SPARED (81 TO 99]
I II III I
V
V V
I
VI
I
VIII I
X DIGITS
MAIN GROUP PLANT CODE
SPECIFICATION/EQUIPMENT/SIZE/RATING
SUB ASSM / CONSTRUCTION SPARE PARTS / S. NO.
The codification system has been introduced in KRIBHCO from 22nd
December 1984 only. The detailed catalogue against each main group is still
under preparation and is to be circulated on its operation. A list of primary
group (main group) is enclosed in Annexure-7.
The existing codification system has the following advantages.
Avoidance of supplication due to multiple names, long description of the
items and storing of the same items under different names is avoided.
Easy to identify.
Reduction in clerical work.
STANDARDISATION:
Standardization is one of the tools available to Management to
optimize on the number of items and reduce inventories. With
standardization the number of items to be procured / manufactured can be
reduced and for the same value of business the quantity can be increased.
Thus, it leads to economic scale and cost reduction.
A standard is a model or general agreement of a rule established by
authority concern or custom created and used by various level of interest.
The importance of standardization is interchangeability of parts. Once
an item has been standardized. The number of manufacture who can supply
the standard parts will increase and this will result in better availability lower
cost and continuity of supply. Company having stock of only standard items
and being assured of timely supply company will be able to reduce obsolesce
43
8/4/2019 Mihir Inventory Mgt
44/77
and also reduce the inspection formalities and can be entered into contracts
for regularly supply.
It is suggested that KRIBHCO should follow the standardization
technique to gain above said benefits.
CLASSIFICATION OF INVENTORY:
The universal problem can be solved taking in to consideration its important
aspects. Similarly, in Inventory Management classification is meant for
solving the Inventory control problem from its important angle. The
inventories having huge amount of use in the organization has to be
controlled very strictly and low amount of use should be kept low control.
The importance can be due to the cost; its criticality, its availability and its
consumption.
EXISTING CLASSIFICATION SYSTEM:
The existing classification system is based on its use, i.e.
inventories classified as stock items and non-stock items.
The list and amounts of stock and non stock items is described in
Annexure-
The existing system keeps strict control on the item that are of
recurring nature. It takes in to consideration only the amount use of quantity
not in value. While for non-stock item low control is being kept. This system
has following shortcomings.
The classification gives importance to only those items, which
are of recurring natures. It excludes from the control point of view
the items that are high value in stock.
It considers the quantity used not the money value of thematerial used.
Control kept on stock items a give equal weightage to all
items, which neglects the benefit of selective control technique.
44
8/4/2019 Mihir Inventory Mgt
45/77
Considering the practical use of classification techniques, two
important methods are suggested as follow.
(1) ABC classification and
(2) VED classification
ABC CLASSIFICATION:
ABC classification is a basic analytical Management tools which
enables top Management to direct their effort where the result will be
maximum. This technique properly knocks as ALWAYS BETTER CONTROL
has universal application in many areas of human endeavor. The techniquetries to analyze the distribution of any characteristic by money value of
importance in orders to determine its priority. In materials Management, this
technique has been applied in areas needing selective control. Such as
Inventory critically of items, obsolence. Stock purchases order, receipt of
materials, inspection, storekeeper and billing verification.
ADVANTAGES OF ABC CLASSIFICATION:
This approach helps the material manager to exercise selective
control and focus his attention only on a few items. When he is dealing
with lacs of store items. ABC analysis has to be reported to equal
extension to A, B and C items will not worth while and would be very
expensive. Concentrating on all items it is likely to have diffused effect
irrespective of the priorities.
It provides a sound basis on which to allocate funds and time of
personnel with respect to their importance of the individual items.
TECHNIQUES OF ABC CLASSIFICATION:
The techniques of classifying the items into A, B and C categories as
described in the following steps:
(1) Classify the items of inventories, determining the expected use in units
and the price per unit for each item.
45
8/4/2019 Mihir Inventory Mgt
46/77
(2) Determining the total value of each item by multiplying the expected
units by its units price.
(3) Rank the items in accordance with the total value, giving first rank to the
item with highest total value and so on.
(4) Compute the ratios (percentage) of number of units of each item to total
units of all items and the ratio to total of each item to total value of all
items.
(5) Combine items on the basis of their relative value to form three
categories A, B and C.
PURPOSE OF ABC CLASSIFICATION
The object of carrying out ABC classification is to develop policyguidelines for selective control.
Normally, once A.B.C.classification has been done the following broad
policy guidelines can be established in respect of each category.
EXHIBIT 1.1
Sr.No
.
A-ITEMS B-ITEMS C-ITEMS
1. Very strict control Moderate control Low control
2. No safety stock Low safety stock High safety stock3. Frequent ordering or
weekly deliveries
Once in four months Bulk ordering once in
six months4. Weekly control
statements
Monthly reports Quarterly control
reports5. Maximum follow up
and expediting
Periodic follow up Follow up and
expediting exceptional
cases6. Strict value analysis Moderate value
analysis
Minimum value
analysis7. As many sources as
possible for each item Two or morereliable sources
Two reliable sourcesfor each items
8. Accounts forecast in
material planning
Estimate based on
past data on
present plan
Rough estimate for
planning
9. Minimization of waste
obsolete and
Quarterly control
over surplus and
Annual reviews over
surplus and obsolete
46
8/4/2019 Mihir Inventory Mgt
47/77
surplus(review every
15 days)
obsolete items items
10. Individual posting Small group posting Group posting11. Central purchasing
and storage
Combination
purchasing
Decentralized
purchasing
12. Maximum efforts toreduce lead time
Moderate Minimum clericalefforts
13. Must be handled by
senior officers
Can be handled by
middle Management
Can be fully delegated
SUGGESTED SYSTEM:
The scientific method of ABC classification has been used in this study
about which a brief introduction has been given in the previous pages.
(Exhibit 1.1)
The main task here was to determine the demarcation line between
A.B.& C items. For this purpose first of all items were arranged by rupee
annual consumption in descending sequence, starting at the top of the list
running total of item by item rupee consumption value was computed, and
finally the cumulative percentage for the item count and cumulate annual
usage value were computed. All A, B, C types of item were listed out.
The sample of 29 items (material group wise) have been taken for the
A.B.C classificationsSR.
NO.
MATERIAL
GROUP NO
NO.OF
ITEMS
(UNITS)
DESCRIPTIONS VALUES
CONSUMPTION
(RS)1. 10 11 Abrasives 51000
2. 11 45 Tools and Ndt 25700
3. 27 1 Instruments General 2000
4. 35 2 Fire Fighting and Safety 63000
5. 29 45 Catalyst/Chemicals/Resins 1042000
6. 42 88 Stationary/Furniture 1542000
7. 09 31 Welding electrodes and 478000
8. 15 1 Pipe and pipe fittings I.B.R 35000
9. 20 4 Flanges non-I.B.R. 5000
10. 37 39 Civil constructions 198000
47
8/4/2019 Mihir Inventory Mgt
48/77
11. 92 5 Mobile equipments and 202000
12 01 379 Bearings 4189000
13. 07 372 Gasket/packing/o-ring 3143998
14. 92 15 Mobile equipments & Rollin 63000
15. 25 07 Cable 286000
16. 13 59 Metals(ferrous0 4682000
17. 04 141 Fasteners 366000
18. 24 200 Electrical/General 1835000
19. 49 41 Misc.items 49 group 928000
20. 02 80 CP/NG/oil mech-seal,Ve-belt 179000
21. 31 15 Paints/oil/lube/gas 1008000
22. 21 11 Valves non I.B.R 45700023. 38 01 Bags/bagging & 357000
24 19 89 Pipe & pipe fittings 839000
25. 05 09 Hardware(others fasteners) 29000
26. 12 10 Elastomer/Plastic 357000
27. 25 11 Cable(powers & control) 33000
28 14 37 Metals (non ferrous) 301000
29. 30 30 Lab equipments 101000
23028998
Main Group
Item
Units % of total Cumulative Unit price in
Rs.13 59 3.32 79355.93
48
8/4/2019 Mihir Inventory Mgt
49/77
01 379 21.30 11052.77
07 372 20.91 8451.61
24 200 11.24 - 65.09 9175.00
42 88 4.95 17522.73
29 45 2.53 23155.55
31 15 0.84 67200.00
49 41 2.30 22634.15
19 89 5.00 9426.97
09 31 1.74 15419.35
21 11 0.63 41545.45
04 141 7.93 - 20.29 85.38 2595.74
38 01 0.06 357000.0012 10 0.56 35700.00
14 37 2.08 8135.13
25 07 0.39 40857.14
11 45 2.53 5711.11
92 05 0.28 40400.00
37 39 2.19 5076.92
02 80 4.50 2237.50
30 30 1.69 3366.67
35 02 0.11 - 14.61 99.99 (100) 31500.00
92 15 0.84 42000.00
10 11 0.62 4636.36
15 01 0.06 35000.00
25 11 0.62 3000.00
05 09 0.50 3222.22
20 04 0.22 1250.00
27 01 0.06 2000.00
1779
Total cost % of Total Cumulative
4682000 20.33
49
8/4/2019 Mihir Inventory Mgt
50/77
4189000 18.19
50
8/4/2019 Mihir Inventory Mgt
51/77
3143000 7.97 75.73
51
8/4/2019 Mihir Inventory Mgt
52/77
1542000 6.69
1042000 4.52
1008000 4.38
928000 4.03
839000 3.64
478000 2.07
457000 1.98
366000 1.59 17.72-B 93.45
357000 1.55
357000 1.55
301000 1.31
286000 1.24257000 1.11
202000 0.88
198000 0.86
179000 0.78
101000 0.44
63000 0.27 6.52-C 99.97(100)
63000 0.27
51000 0.22
35000 0.15
33000 0.14
29000 0.13
5000 0.02
2000 0.01
52
8/4/2019 Mihir Inventory Mgt
53/77
Graphical Representation of ABC Analysis:
The tabular & graphic presentations indicate that item forms a minimum,
preparation 65.09 percent of total units of all items. But represents the
higher value 75.73 percent. On the other hand, item C represents 14.61
percent of the total units and only 6.52 percent of the total value item B
occupies 20.29 percent of the total units and 17.72 percent of the total
value. Items A and B jointly represent 85.38 percent of the total units and
93.45 percent of the investment. Item C representing merely 6.52 percent
of the investment. Thus a tightest control should be exercised on item A in
order in maximum profitability on its investment. In case of item B Mediumcontrol and in case of item C simple controls will be sufficient.
53
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
Percentage
of Cost
Item - A Item - B
Item - C
8/4/2019 Mihir Inventory Mgt
54/77
VED CLASSIFICATION
The Ved classification is applicable largely to spare parts. Stocking
of spare parts will be based on strategies different from those for raw
materials, because their consumption pattern is different, while the
consumption of raw materials depends directly on the market demand
on production the demand for spare parts depends on the performance
of the plant and machinery. Therefore, the method of classification
designed for one type of Inventory will not be compatible for selective
control of another type of Inventory to over come this draw back the
VED classification is used.
Spares are classified as vital, essential desirable. This implies
that V classes of spares have to be stocked adequately to ensure theoperation of the pant, because by definition the non-availability of vital
spares can cause havoc and stop the wheels of the organization. Some
risk can be taken in the case of E class of spares. Stocking of
desirable spares can be even done if the lead-time for their
procurement is law. It is essential that this classification be done by
technical department or by those in charge of the maintenance of the
plant. This classification will be very useful to KRIBHCO if it is
implemented.
Moreover, ABC and VED classification can be a combined
advantage, in order to control the stocking of spare parts. The control
action for the class AV, BE, CD, etc are given in exhibit No. 2.1
54
8/4/2019 Mihir Inventory Mgt
55/77
EXHIBIT NO 2.1
CLASSES V ITEM E ITEM D ITEMA Items Constant control
& regular follow
up
Moderate stock Nil stock
B Items Moderate stock Moderate stock Very low stockC Items High Stocks Moderate stock Low stock
ECONOMIC ORDER QUANTITY (E.O.Q)
Order quantity is defined as the quantity or its rupee equivalent for
which fresh order of an Inventory item is placed. The decision regarding
order quantity of various Inventory items is of vital importance in the
Management of the Inventory item for which total of two types of cost
opposing each other will be the minimum at this level, the sum of all cost of
one type is exactly equal to the sum of all the cost of the other type. Thus
quantity is often referred to as economic order quantity, for the purchase.
Purchase item and economic lot size for production item.
DETERMINATION OF EOQ:
The economic order quantity can be determined with the help of the
following formula.
____EOQ = 2AB
CI
Where,
A = Annual usage in units
B = Order (buying) cost per order
C = Unit cost of material
I = Inventory carrying cost.
DETERMINATION OF CARRYING COST:
a) Obsolescence - Nilb) Deterioration - Negligible
c) Taxes - Nil
d) Insurance - 1% average
e) Interest on capital - 18%
Total carrying cost 19%
55
8/4/2019 Mihir Inventory Mgt
56/77
Average Inventory = Opening Stock + Closing Stock
2
= 1079.51 +13.886.44 2
= 24595.95 2
= 12297.97 lacs
Average carrying cost = 122297.97 x 19
100
= Rs. 2336.61 lacs per year
DETERMINATION OF ORDERING COST :
COMMUNICATION COST : Includes, telephone, telex and Telegram costand postage cost. Rs.9517195.28 year ended 31st March 2001.
TRAVELING COST : Rs.982134385.00 year ended 31st March 2001.
STATIONERY COST : Rs. 4316815.26 year ended 31st March 2001.
SALARY OF PURCHASE DEPARTMENT : Rs. 82892/- per month
Therefore 82892 x 12 = Rs. 994704 per year
Total ordering cost = 9517195.28
+ 982134385.00
+4316815.26
+994704.00
------------------------
= 996963099.40
------------------------
Average ordering cost per order
996963099.40
80000
= Rs. 12462.00
56
8/4/2019 Mihir Inventory Mgt
57/77
ECONOMIC ORDER QUANTITY :
With taken into consideration the above EOQ formula, ordering
cost and carrying cost the table 3.1 and 3.2 represents the economic
order quantity for item A and itemB respectively.
ITEM A TABLE 3.1
Main
Group
Annual
usage
units
Unit
Price
Rs.
Total
cost
consumption
Rs.
Orderin
g cost
perorder
Carryin
g cost
perorder.
EOQ
Units
13 59 79355.93 4682000 12462 19% 9.8701 379 11052.77 4189000 12462 19% 67.8007 372 8451.61 3143998 12462 19% 75.9824 200 9175.00 1835000 12462 19% 53.4742 88 17522.73 1542000 12462 19% 25.6729 45 23155.55 1042000 12462 19% 15.9631 15 67200.00 1008000 12462 19% 5.41
ITEM B TABLE 3.2
Main
Grou
p
Annual
Usage
Units
Unit
Price Rs.
Total Cost
Consumpt
ion Rs.
Orderin
g Cost
Per
Order
Carrying
Cost Per
Order
EOQ
Units
49 41 22634.15 928000 12462 19% 15.41
19 89 9426.27 839000 12462 19% 35.19
09 31 15419.35 478000 12462 19% 16.2321 11 41545.45 457000 12462 19% 5.89
04 141 2595.74 366000 12462 19% 84.41
38 01 357000.0 357000 12462 19% 0.60
12 10 35700.00 357000 12462 19% 6.06
14 37 8135.13 301000 12462 19% 24.42
57
8/4/2019 Mihir Inventory Mgt
58/77
58
8/4/2019 Mihir Inventory Mgt
59/77
DETERMINATION OF INVENTORY LEVELS:
The Inventory level concept considers store keeping as profit intensive
service to production. Store keeping should contribute directly to profitability
and be concerned with such matter as flow, lead time storage cost,
acquisition cost, material handling, preservation, packaging and dispatches.
In the same way that specification is related to technical needs, so,
general level of stock should be related to the sales and production policies
of the company.
There are various levels of stock, which are established by the KRIBHCO,
is as follows.
MINIMUM STOCK LEVEL :
This is the level at which any further demands upon the bill will
necessary withdrawals from the reserve stock. The minimum stock is
converted to meet exceptional conditions of demand.
Two months usage (consumption) of material (stocks) taken into
consideration by the KRIBHCO as a minimum stock level.
MAXIMUM LEVEL :
This is the level above which the stock should not be permitted to
raise. Eighteen months consumption of stocks (material) taken into
consideration by the KRIBHCO as a maximum stock level.
RE ORDER LEVEL :
The point of which the order has to be placed. The reorder level maynot always be numerically equal to the economic order quantity. It should be
regularly reviewed for paid moving items. For fast factors as change in
demand, delivery times or variation in trend.
Eight months consumption of stocks (material) taken into consideration
by the KRIBHCO as a reorder level.
59
8/4/2019 Mihir Inventory Mgt
60/77
To justify these different kinds of level in December 1985 with the
codification system, KRIBHCO established Inventory cells. KRIBHCO also
appointed four export of the USAGE OF MATERIAL STOCK IN THE USER
DEPARTMENT. Based on their experience and consumption of material stock
within the four years, from the year 1989 these different types of stock levels
are established.
The table 4.1, 4.2, 4.3, represents the minimum, re-order and
maximum level for item A,B and C respectively.
ITEM A
TABLE 4.1
Main Group Usage of
stock in
Units
Annually
Minimum
level Units
Re-order
Level Units
Maximum
Level Units
13 59 9.84 39.33 88.4901 379 63.17 252.67 568.49
07 372 62.00 248.00 558.00
24 200 33.33 133.33 299.99
42 88 14.67 58.67 131.99
29 45 7.50 30.00 67.50
31 15 2.50 10.00 22.50
60
8/4/2019 Mihir Inventory Mgt
61/77
ITEM B
TABLE-4.2
Main Group Usage of
stock in
Units
Annually
Minimum
Level Units
Re-order
Level Units
Maximum
Level Units
49 41 6.83 27.33 61.5019 89 14.83 59.33 133.4909 31 5.17 20.67 46.4921 11 1.83 7.33 16.4904 141 23.50 94.00 211.1538 01 0.17 0.67 1.4912 10 1.67 6.67 14.9914 37 6.17 24.67 55.49
ITEM C
TABLE 4.3
Main Group Usage of
Stock in
Units
Annually
Minimum
Level Units
Re-order
Level Units
Maximum
Level Units
25 07 1.17 4.67 10.49
11 45 7.5 30.00 67.50
92 05 0.83 3.33 7.49
37 39 6.50 26.00 58.5
02 80 13.33 53.33 119.99
30 30 5.00 20.00 45.00
35 02 0.33 1.33 2.99
92 15 2.50 10.00 22.50
10 11 1.83 7.33 16.4915 01 0.16 0.67 1.49
25 11 1.83 7.33 16.49
05 09 1.50 6.00 13.50
20 04 0.67 2.67 5.99
61
8/4/2019 Mihir Inventory Mgt
62/77
27 01 0.17 0.67 1.49
COMPOSTION OF INVENTORY
(As on 25th dec.200)
Sr.No. Inventory In Percentage1. Inventory (Ammonia) 00.0382. Inventory General Stores 33.6203. Inventory tools 00.9504. Inventory empty beg 02.0655. Inventory Steel 04.4906. Inventory cement 01.6607. Inventory Spares 43.0008. Inventory finished foods 00.007339. Other (under inspection & Disposable
surplus)
14.170
Total 100.000
62
8/4/2019 Mihir Inventory Mgt
63/77
Importance of Lead Time in Inventory
control
There is a direct relationship between the lead-time and Inventoryholding of the company. During the lead period cycle, there will be no
delivery of items and consuming department will have to be served from the
inventories held. The greater the period the greater will be the inventories
held. If the inventories pile-up, the precious funds of companies are blocked.
In order to control the Inventory it is imperative on part of Inventory
personnel to carry out the analysis of lead period of various items required in
the organization.
Lead time Analysis :
It is a systematic study of the time taken in each element of activity
involved in procurement of an item beginning from the need felt to the
receipt of material for use i.e. the time taken to get the MPR approved and
passed to Purchase department, time taken between the receipt of MPR in
Purchase to the date of placement of order, time taken by supplier to ship
after receipt of order, time taken in transportation and time taken in
receiving and inspection till it is finally available for use.
Like any other analysis, we have to collect the data for variousactivities. The data in lead-time analysis will be the various dates of
beginning and end of activities. This will reflect the time taken in each
activity. By ascertaining the time of each activity, we can thoroughly
examine the same and can analyze where the delay has taken place. The
reasons for the delay can be found out and suitable recommendations made
to the Management for taking appropriate corrective measures.
Lead Time/Lead Period :
In an organization, we normally experience that there is a time gapbetween the realization of demand (indenting) and the fulfillment i.e. supply
of materials. This finite time interval between the cycle of indenting and
actual procur