C H A P T E R – I: C H A P T E R – I:

EXECUTIVE SUMMARYEXECUTIVE SUMMARY

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The Indian Fertilizer industry had a very humble beginning in 1906, when the first

manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai

with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd.

(FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in

Bihar were the first large sized fertilizer plants set up in the forties and fifties with a view

to establish an industrial base to achieve self-sufficiency in food grains. Subsequently,

green revolution in the late sixties gave an impact us to the growth of fertilizer industry in

India. The seventies and eighties then witnessed a significant addition to the fertilizer

production capacity.

I am obliged in presenting the project report on “Inventory Management” in

KRIBHCO.

The concept of total Inventory control is the main consideration of this study. The

inventories constitute major portion of finished product and any reduction in Inventory

cost each stage like, purchase, storage and issue etc. contributes direct to the profit of the

company.

To contribute and improve the existing system of Inventory Management, Various

areas of Inventory Management were studied, analyzed and evaluated taking into

consideration the scientific approach. The areas of study were:

(a) Purchase system.

(b) store control and

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(c) Use of various Inventory control techniques etc.

WHAT DO YOU MEAN BY CO-OPERATIVE?

A cooperative is an autonomous association of persons united voluntarily to meet

their common social and cultural needs and aspirations through jointly owned and

democratically controlled enterprises. Cooperatives are based on the values of self-help,

self-responsibility, democracy, equality and solidarity.

What is Fertilizer?

Fertilizer: A fertilizer is any material, organic, inorganic, natural or synthetic, that

is placed on or incorporated into the soil to supply plants with one or more of the chemicals

elements necessary for normal growth. Fertilizer is the material, which supplies the

chemicals elements required for plant growth. Primary nutrients like nitrogen, phosphates

and potassium (required for fertilizer land) are supplied through chemical fertilizer.

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C H A P T E R - II: C H A P T E R - II:

COMPANY PROFILECOMPANY PROFILE

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HHISTORYISTORY OFOF THETHE ORGANIZATIONORGANIZATION:-:-

“A fertilizer is any material, organic, inorganic, natural or systematic, that is placed

on or incorporated into the soil to supply plants with one or more of the chemicals elements

necessary for normal growth. Fertilizer is the material, which supplies the chemicals

elements required for plant growth. Primary nutrients like nitrogen, phosphates and

potassium are supplied through chemical fertilizer. Fertilizer response studies have proved

that 1 kg. Of fertilizer can increase the food grain production by 8-10 kg. Fertilizer

production is of permanent importance for this country because Fertilizer increases

agriculture productivity.

Krishak Bharati Co-operative Limited (KRIBHCO), a premier Co-operative

Society for manufacture of fertilizer, registered under Multi-State Cooperative Societies

Act – 1985, was promoted by the Govt. of India, IFFCO, NCDC and other agricultural

cooperative societies spread all over the country.

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Oil & Gas findings in Bombay High and South Basin triggered off the birth of eight

new generations fertilizer plants to fulfill ever-growing food needs of the country.

KRIBHCO was amongst the first two projects in the first phase.

KRIBHCO has setup a Fertilizer Complex to manufacture Urea, Ammonia & Bio-

fertilizers at Hazira, in the State of Gujarat, on the bank of river Tapti, near Kawas village,

15 Kms from Surat city and 20 Kms from Surat Railway Station on Surat – Hazira State

Highway.

Late Smt. Indira Gandhi, former Prime Minister of India laid the Foundation Stone

on February 5, 1982.

The trial production of Urea commenced from November 26, 1985 and within a very

short time of 3 months, the commercial production commenced from March 01, 1986.

Since then, it has excelled in performance in all areas of its operations.

The total Project cost was Rs. 890 crores as against the estimated cost of Rs. 957

crores. This shows a saving of Rs. 67 crores (approximately 7%) in Capital Cost of the

Project, which is a rare feature in the history of a Public Sector Unit.

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Subsequently, a Bio-fertilizer plant of 100 MT per year capacity was commissioned

at Hazira on August 15, 1995. KRIBHCO has also completed the installation of an

expansion of the Bio-Fertilizer plant with an additional capacity of 150 MT and the same

was commissioned in December 1, 1998. KRIBHCO multiunit co-operative societies were

promoted jointly by IFFCO and the agricultural co-operative all over the country.

HISTORY AND DEVELOPMENT:-

PROJECT ZERO DATE 31st MARCH, 1981

FOUNDATION STONE LAID BY Late Smt. Indira Gandhi then the Prime

Minister Of India on 5th February, 1982

PROJECT COMPLETION 31st MAY, 1985

Promoters:-

GRAMIN VIKAS TRUSTGRAMIN VIKAS TRUST

Gramin Vikas Trust (GVT) is a separate legal entity promoted by KRIBHCO. The project

is now being implemented by GVT with the assistance of Department for International

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Development, U.K. KRIBHCO has promoted Gramin Vikas Trust as a non-profit, rural

development trust. GVT is an independent legal entity implementing various Rural

Development Projects in Rainfed, poorest of the poor areas of western and eastern India.

The trust is operating in Madhya Pradesh, Rajasthan, and Gujarat in the Western India

and Orissa, Jharkhand, Chhattisgarh and West Bengal in Eastern India.

VVISIONISION:-:-

KRIBHCO will become one of the leading fertilizer producers in the world funding

growth through:

Efficient Production

Efficient Distribution

Efficient diversification

Efficient Utilization of Resources

We  want  to be a  world  class  organization  that represents the farmer community

and maximizes returns to them  through specialization  in  agricultural  inputs   and 

products  and  other  diversified   businesses   that   maximize  stakeholder  value.

MMISSIONISSION:-:-

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To act as a catalyst to agricultural and rural development by selecting, financing and

managing commercially profitable.

QQUALITYUALITY P POLICYOLICY:-:-

Management of KRIBHCO, Hazira Plant is committed to operate and maintain its

Fertilizer manufacturing complex through quality assurance, environmental, protection

and go to the satisfaction of customers.

KRIBHCO – Hazira Plant shall achieve this Quality Policy through following

Objectives:-

1. Continually upgrading technology to improve plant efficiency and reliability.

2. Maintaining and improving the safety and environmental performance.

3. Improving the skills and knowledge of personnel.

4. Continuously improving the Quality management system.

PPRODUCTSRODUCTS:-:-

KRIBHCO is manufacturing Nitrogenous Fertilizers and Allied Products viz.: Urea,

Ammonia Liquid, and Bio-fertilizer. Besides, it’s also has a 30 Mega Watt 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.

CCOMPETITORSOMPETITORS:-:-

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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:-

There are only two fertilizer manufacturing societies in Co-

operative sector.

Indian Farmers Fertilizers Co-Operative Ltd. (IFFCO)

Krishak Bharati Co-Operative Ltd. (KRIBHCO)

3. Private Sector:-

There are 17 companies in private sector, which are producing

fertilizer.

Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)

Hindustan Lever Ltd. (HLL)

Hari Fertilize

ICI India Ltd.

Indo Gulf Fertilizers & Chemicals Corporation Ltd.

Mangalore Chemicals & Fertilizers Ltd. (MCFL)

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Southern Petro Chemicals Industries Corporations Ltd.

Nagarjuna Fertilizer & Chemical Ltd. (NFCL)

Shri Ram Fertilizer & Chemicals Ltd.

Tuticorian Alkali Chemicals & Fertilizer Ltd.

Zuari Agro Chemicals Ltd.

Bindal Agro Chemicals Ltd. Or Oswan Ltd.

Chambal Fertilizer & Petrochemical Corporations Ltd.

Gujarat State Fertilizer Company (GSFC)

BOARD OF DIRECTORS

CHAIRMAN

Shri Vaghjibhai.R. Patel

VICE- CHAIRMAN

Dr. Chandra Pal Singh

MANAGING DIRECTOR

Shri B.D.Sinha

FINANCE DIRECTOR

Shri R.Kamra

MARKETING DIRECTOR

Dr. SAMBHA SHIVA RAO

OPERATION DIRECTOR

Shri SALAN JAGGIA

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DIRECTORS

Shri V.Sudhakar Chowdary

Shri Mathew C Kunnumkal

Shri Deepak Singhal

Shri SHIV Narayan Prasad Mishra

Shri S.S. Jamgod

Shri Ponnam Prabhakar

OORGANIZATIONRGANIZATION C CHARTHART OFOF KRIBHCO:- KRIBHCO:-

GOVERNMENT OF INDIAGOVERNMENT OF INDIA

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MINISTRY OF AGRICULTUREMINISTRY OF AGRICULTURE

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DEPT. OF FERTILIZER & CHEMICALDEPT. OF FERTILIZER & CHEMICAL

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CHAIRMANCHAIRMAN

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BOARD OF DIRECTORBOARD OF DIRECTOR

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MANAGING DIRECTORMANAGING DIRECTOR

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OPERATIONAL DIRECTOROPERATIONAL DIRECTOR

SSALESALES::

Sales are accounted for on the basis of Released orders issued to customers.

Sales in the state of Gujarat are accounted for on dispatch basis and sales through

Krishak Bharti Sewa Kendra’s are accounted for on cash and carry basis.

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TTURNOVERURNOVER:-:-

The turnover of the KRIBHCO is round about 2300 crores.

MMARKETARKET S SHAREHARE:-:-

The market share of the KRIBHCO is decided by the Co-operative Society. So the

20% share is their own and the 80% share is decided by the Government of India.

Joint Ventures:

KRIBHCO has various JV’s with many of the well renowned companies of India as well as

of the world. Its JV’s are stated as under:

Oman India Fertilizers Company (OMIFCO):

KRIBHCO is one of the sponsors of Oman India Fertilizer Company (OMIFCO)

with equity investment of USD $ 69.5 Million representing 25% of paid up

equity capital of OMIFCO.

OMIFCO has a capacity of 1.65 Million MTPA of granular Urea & 1.19 Million

MTPA of Ammonia. A highly skilled workforce from KRIBHCO is participating

directly in operation & maintenance of the project under a “Personnel Supply

Agreement”.

OMIFCO has produced 2.01 Million MT Urea, at a capacity utilization of 122%

during the financial year 2008-2009. KRIBHCO is handling& Marketing 50% of

the Urea produced by OMIFCO.

KRIBHCO Shyam Fertilizers Limited (KSFL):

Shahjahanpur Fertilizer Complex acquired by KRIBHCO through its Joint Venture

Company “KRIBHCO Shyam Fertilizers Ltd.” In 2006, has an annual production

capacity of 0.86 Million MT of KRIBHCO branded Urea.

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KRIBHCO has 85% equity with entire management control of the company &

Marketing rights of entire produce. During the year 2008-2009, 0.89 Million MT of

KSFL Urea was sold by the society. The company achieved the data of zero

Inventories & zero dues as on 31-03-2009, a unique achievement in Fertilizer sector.

Gujarat State Energy Generation Limited (GSEG):

Gujarat State Energy Generation Limited (GSEG) is a Joint Venture company with

Gujarat State Petroleum Corporation Limited (GSPCL), other Gujarat Government

Companies, and KRIBHCO & GAIL (India) Ltd.

The society has invested Rs. 807 Million towards equity of GSEG. GSEG is

operating a 156 MW Natural Gas based combined cycle power plant at Mora, District

Surat, Gujarat.

GSEG is implementing 350 MW expansion project at a cost of Rs. 1160 Crore. The

Society Holds 27.48% of Share Capital in GSEG.

Nagarjuna Fertilizers and Chemicals Ltd (NFCL)

The Society has an equity participation of Rs.10.00 crore in NFCL, which is

2.15% of NFCL’s paid up share capital of Rs.465.16 crore.

Hazira Phase-II:

Society is in the process of setting up a state of the art mega size ammonia plant of

capacity of 1850 MTDP and urea plant of capacity of 3250 MTDP at existing fertilizer

complex at Hazira. Existing infrastructure facilities will be utilized resulting in saving of

cost. Plant will be based on natural gas and we have energy consumption.

AAWARDSWARDS W WONON:-:-

The excellence performance of the society has brought a number of laurels form

various organization. The awards received during year were as follows:

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KRIBHCO receives Gold star award of Excellence from Institute of Economic

Studies for its overall excellent performance.

KRIBHCO receives Gold star award of Excellence from Institute of Economic

Studies for its overall excellent performance.

KRIBHCO receives the Rajbhasha Award from Honb'le Minister of Chemical and

Fertilizers for 2002-03, 2003-04, and 2004-05.

KRIBHCO was awarded First prize for Production, Promotion, and marketing of

Bio-fertilizers for the year 2004-05 on 1st of December '05 by FAI.

KRIBHCO has won INDIRA GANDHI RAJBHASHA PURUSKAR (2nd) for 2003-

04.

FAI best performance award for performance of Bio-Fertilizer plant from fertilizer

Association of India for the year 2002 for the third time.

“Star Industry of Surat-2008” conferred jointly by leading newspaper ‘Gujarat

Mitra’ and ‘Consumer forum’.

Won “Sarvottam Stall” prize in Pusa Krishi Vigyan Mela at New Delhi

Certificate of merit Gujarat safety council for relining 30 lakh accident free man-

hours.

“Excellence in Improving Productivity” conferred by South Gujarat Chamber of

Commerce & Industry for the year 2007-2008 on 25th January, 2009

DEPARTMENTS:-

Departments No. of

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Employees

Finance and Accounting 62

Personnel and Administration 82

HRD 09

Security 101

Material 55

Medical 32

Mechanical 210

Transportation 29

Fire and safety 45

Purchase and store 56

Instrumentation 90

Electrical/Civil 101

MS System 13

Laboratory 54

Production (HAEP Plant) Phase-I and Phase-II 440

Total 1374

Contract Labours 1600

Total Manpower 2974

PERFORMANCE HIGHLIGHTS :

Highest Total Fertilizer Sales 40.51 Lakh MT(Urea-38.47 LAKH MT, DAP-1.14 LAKH MT, and MOP-0.90 LAKH MT)

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(Previous best was 37.76 LAKH MT of Urea during 2008-09)

Highest Imported Fertilizer Handled 12.12 Lakh MT(Previous best was 10.45 LAKH MT during 2006-07)

Highest Seed Sale 2.22 Lakh QTLS(Previous best sales was 1.96 Lakh QTLS during 2008-09)

Highest KBSKs Turnover Rs.74.97 Crore(Previous best was Rs. 63.14 Crore during 2008-09)

Highest Operational Profit Of Traded Products 43.31 Crore(Previous best was Rs. 3.80 Crore during 2008-09)

Highest Daily Urea Production on 13/11/09 5638 MT(Previous best was 5564 on 28/10/09)

Highest Daily Ammonia Production on 28/12/09 3452 MT(Previous best was 3433 MT on 25/10/09)

Highest Monthly Ammonia Production in December, 2009 104740 MT(Previous best was 104444 MT in October, 2009)

Highest Monthly Urea Production in December, 2009 167901 MT(Previous best was 166960 MT in October, 2009)

SOURCE OF FINANCE:

EQUITY:

Government Of India : Rs. 450.00 Crores

IFFCO : Rs. 97.00 Crores

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Other Societies : Rs. 38.70 Crores

The following is the graphical representation of Sources of Finance.

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

C H A P T E R- III: C H A P T E R- III:

OBJECTIVE OF THE STUDYOBJECTIVE OF THE STUDY

A.A. PRIMARY OBJECTIVE:PRIMARY OBJECTIVE:

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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.

B.B. OTHER OBJECTIVES:OTHER OBJECTIVES:

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.

C H A P T E R – IV: C H A P T E R – IV:

RESEARCH METHODOLOGYRESEARCH METHODOLOGY

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MMETHODOLOGYETHODOLOGY OFOF THETHE PROJECTPROJECT::

The methodology used for study was to answer three questions covering broad areas

of Inventory Management are as follows:

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1. What is Inventory Management?

2. Why Inventory Management?

3. How the Inventory Management is done?

Collection of data

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 between theory & 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.

Thus the different methods and techniques were used at different stages of the

project like interviews, discussions, observation, and secondary data like annual reports,

manuals and other reports and files, so as to meet the requirement of the situation.

PPRIMARYRIMARY D DATAATA:-:-

To study Inventory procedure, finance, observation and day-to-day work is used for

study. For finding Expert’s opinion & their problem, and discussion has been done for

the data collection.

SSECONDARYECONDARY D DATAATA:-:-

For secondary data, some books, journals from library and websites are referred.

TTIMEIME F FRAMERAME:-:-

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Total 60 days study has been conducted at KRIBHCO for completion of this.

LIMITATIONS OF THE PROJECT:LIMITATIONS OF THE PROJECT:

During the project work, I have experienced the following limitations:

As KRIBHCO is a chemical manufacturing society, it has vast varieties of

inventories items, about 66,000. Thus it was very difficult to calculate

different levels like:

EOQ level, ROL level, Maximum level, Minimum level etc.

The researcher is not willing to reveal some confidential data and setup and

limited vision regarding the KRIBHCO inventory.

C H A P T E R – V: TITLE OF THE PROJECTC H A P T E R – V: TITLE OF THE PROJECT

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INVENTORY MANAGEMENTINVENTORY MANAGEMENT

IINTRODUCTIONNTRODUCTION OFOF I INVENTORYNVENTORY M MANAGEMENTANAGEMENT:-:-

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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.”

Inventory Management is a big part of profit planning for manufacturing and

merchandizing companied. Material costs often accounts for more than 40% of total costs

of manufacturing companies and more than 70% of total costs in merchandizing

companies. Inventory management is the planning and coordinating and controlling

activities related to the flow of inventories into through and out of an organization.

Inventory constitutes the most significant part of current assts of a large majority of

companies in India. On an average inventories are approximately 60% of current assts in

public limited companies in India. Because of the large size of inventories are maintained

by firms a considerable amount of funds is required be committed to them. It is, therefore

absolutely imperative to manage efficiently and effectively in order to avoid unnecessary

investment. Inventory is stock of the product a company is manufacturing for sale and

components that make up the product.

OOBJECTIVESBJECTIVES OFOF I INVENTORYNVENTORY M MANAGEMENTANAGEMENT:-:-

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In the context of inventory management the firm is faced with the problem of

meeting two conflicting needs.

To maintain a large size of inventories of raw material and work-in-process for

efficient and smooth production and of finished goods for uninterrupted sales

operations.

To maintain a minimum level of investment in inventories to maximize profitability.

The objective of inventory management should be to determine and maintain

optimum level of inventory investment. Te optimum level of inventory will lie between the

two danger points of excessive and inadequate inventories. The firm should always avoid a

situation of over investment or under investment in inventories.

The major dangers of over investment are:

a) Unnecessary tie up of the firm’s funds and loss of profit and opportunity costs.

b) Excessive carrying costs, and

c) Risk of liquidity.

The consequences of under investment in inventories are:

a) Production hold ups, and

b) Failure to meet delivery commitments.

Thus, efforts should be made to place an order at right time with the right source to

acquire the right quantity at the right price and quantity. An effective inventory

management should

Ensure a continuous supply of raw material to facilitate uninterrupted production,

Maintain sufficient stocks of raw materials in periods of short supply and

anticipated price changes,

Maintain sufficient finished goods inventory for smooth sales operations and

efficient customer services,

Minimize the carrying costs and time, and

Control investment in inventories and keep it at an optimum level.

NNEEDEED TOTO H HOLDOLD I INVENTORIESNVENTORIES:-:-

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Maintaining inventories involves tying up of the company’s funds and incurrence of

storage and handling costs. There are three general motives for holding inventories.

1. Transactional motive:

It emphasizes the need to maintain inventories to facilitate smooth production and

sales operations, which is for the day-to-day use?

2. Precautionary motive:(Safety Motive)

It necessitates holding of inventories to guard against the risk of unpredictable

changes in demand and supply forces and other factors.

3. Speculative motive:

It influences the decision to increase or decrease inventory levels to take advantage

of price fluctuations.

TYPES OF INVENTORIES :

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Inventories can be classified in terms of its different uses, which will enable one to

appreciate the peculiarities and problems in its uses. Secondly the differentiation based on

uses of inventories will enable one to adopt control techniques to suit the needs.

Here are the 4 main types of the Inventories:-

1. Raw Material

2. Stores, Spares and Consumables

3. Work – in – process

4. Finished Goods

1. Raw Materials:-

Raw Materials are those basic inputs that are converted into finished products

through the manufacturing process. Raw materials inventories are those units, which have

been purchased and stored for future productions. There are two important factors, which

determine the size of raw materials Inventory.

a) Consumption rate and

b) Importance of item.

Under the head of the raw material maintained in fertilizer company KRIBHCO

are Carbon Di Oxide, Ammonia, etc.

MAIN RAW MATERIAL IN THE KRIBHCO:-

NATURAL GAS

NAPHTHA

WATER

ELECTRICITY

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2. STORES and Consumables:-

A. Consumables:-

These are the materials which work as catalysis in the production process and are

not directly found in the output. This enables the production process to function smoothly.

Fuel, oil etc are the example consumables.

B. Spares:-

Spares form an importance class of inventories by themselves. Then consumption

pattern defers from that of raw materials, consumables and finished goods, consequently

the stocking polices are different necessitating special methods for solving their peculiar

Inventory problems. Spares parts can be classified as routable spares, insurance spares,

capital spares, maintenance spares and over handling spares etc.

3. Work – in – Process:-

Work-in-Process inventories are semi-manufactured products. They represent

products that need more work before they become finished products for sale. Work in

process goods acts as a buffers within the manufacturing sub-system, which may consist of

group of machines and assembly lines, i.e. work centers. The raw material passes through

the work centers for final production. The greater the period of process, there will be more

amounts of manufacturing activities.

4. Finished goods:-

These inventories are those completely manufactured products which are ready for

sale. Stocks of raw materials and work-in-process facilitate production, while stock

of finished goods is required for smooth marketing operations. Thus, inventories

serve as a link between the production and consumption of goods. . Normally These

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Inventories Are Controlled By the Marketing Dept. Urea Is The Final Product of

KRIBHCO.

WHY INVENTORY MANAGEMENT? THE NEED

Since the advent of modern industrialism, wealth has become more and more

identified with Money. An increased emphasis on liquidity has led businessman to hold

cash and securities in performance to inventories. Inventories are now often referred to

as the grace yard of business. The surplus of stocks has been a principal guide of

business failure. Thus led manager to change their view regarding holding of

inventories and adopt scientific way of Inventory holding. Following are the factors for

adopting view of scientific Inventory control.

I. SIZE OF BUSINESS :

The increasing size of business establishment has helped an important role.

Modern large-scale enterprises often operate with small profit margin, which can be

easily eliminated by scientific Inventory control methods. Further the size itself,

makes possibilities of substantial saving through improvement in Inventory control

system.

II. WIDE VARIETY AND COMPLEXITY:

The wide variety and complexity of modern requirements are also necessities

conscious Inventory Management. The larger the range of requirements, the greater

the number of problem of Inventory i.e. the problem of investment, procurement,

storage, holding, accounting, shortages and stocks outs, deterioration, obsolesce etc.

these purpose the need for careful competition of requirements timely initiation of

procurement action, scientific determination of economic order quantities and

optima safety stock levels, a purposeful reporting system to highlights areas

requiring special attention and for a variety of other control measures.

III. URGENCY IN MATERIAL REQUIREMENTS:

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The need and important of inventories varies in direct production to the

ideal time, cost of men and machinery and urgency of requirements. But it is highly

uneconomical to keep man machine waiting and the requirements of modern life are

so urgent that they cannot wait for materials to arrive after the need for them has

arisen.

Since time is money and waiting is costly inventories have to be maintained. At the time it

is also necessary to control them the reason being is that the inventories not only tie up lot

of funds but also a deal to carry those controlled inventories is industries concern.

IV. NEED FOR LIQUIDTY :

The need for liquidity is much greater than in trade. The reason is that

manufacturing is the process of continual conversion of raw materials in to finished

product, involving expenditures on labor, machines etc. an industrial establishment

has, therefore, to find cash not only for inventories but also for wages, maintenance,

stores and power bills. The only way to prevent as to secure a rapid capital turnover

of capital and the most effective means of achieving these objectives is to control

stores.

PROS OF INVENTORY MANAGEMENT:-PROS OF INVENTORY MANAGEMENT:-

1) Inventory control ensures an adequate supply of materials; stores, spares, etc. minimize

stock outs and shortage and avoids costly interruption in operation.

2) It lowers down investment in inventories. Inventory carrying cost and observances

losses.

3) It facilities purchasing economics through the measurements of requirements on the

basis of recorded experiences.

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4) It eliminates duplications in ordering or in replacing stock by centralizing the source

from which purchase requisitions emanate.

5) It permits a better utilization of avoidable stocks by facilitating inter department

transfer within a company.

6) It facilities cost accounting activities by providing a means for allocating material costs

to products, departments or other operating accounts.

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

8) It enables Management to make cost and consumption comparison between operations

and periods.

9) It services as a means for locations and disposition of inactive and isolate items of

stores.

10) Perpetual Inventory values provide a consistent and reliable basis for preparing

financial statements.

FACTORS INFLUENCING INVENTORY DECISIONS:-FACTORS INFLUENCING INVENTORY DECISIONS:-

There are both external and internal factors, which influence decision-making,

Inventory in an organization. The external factor arises from market conditions, Credit

availability and govt. regulations, the external factors are not controllable easily, while

internal factors are controlled with effective Inventory Management.

Following factors influence the Inventory decisions of an organization:-

[1] LEAD TIME

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[2] RELEVANT COSTS

[1] LEAD TIME:-

Lead-time can be defined as the periods that elapse between the reorganizations of a

need and its fulfillment. In other words, lead-time is the time taken to physically receive the

materials from the date of its indent. There is direct relationship between lead-time and

Inventories. Evidently during lead-time there will be no delivery of materials and the

consuming department will have to be served from the Inventories held. Both lead time and

consumption can increased without notice and the Inventories will have to be geared up

from this contingency. Inventories have to take care of normal consumption during the

lead-time. Therefore, as lead-time increases the Inventories will have to increase

correspondingly.

The lead-time can be classified as:

ADMINISTRATIVE LEAD-TIME.

MANUFACTURING/PROCUREMENT LEAD TIME,

TRANSPORTING LEAD TIME AND

INSPECTION LEAD-TIME.

The time spent each of these four stage will vary from item to item. It is clear that

out of 4 components of lead-time administrative and inspection lead times are under the

control of purchaser. Any strategy to reduce the lead-time should be directed, FIRST

towards these two components. A cost trade off but not below a threshold can reduce the

transportation cost. Procurement or manufacturing lead-time is the largest time. This

should be taken care of while negotiating the order and supply details.

[2] RELEVANT COSTS:-

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The Inventory problem is one of the balancing various costs, so that the total cost is

minimized. Their costs are –

1. COST OF ORDERING

2. COST OF CARRYING INVENTORY

3. COST OF UNDER STOCKING

4. OVER STOCKING COST SERVICE LEVEL

1. COST OF ORDERING:-

The activities that are carried out for fulfilling the need for materials, which

consume executive and non- executive time, stationary and communication charges, there

are the cost of ordering.

The cost of ordering includes cost due to:

(a) Stationery, typing and dispatching are orders, formalities etc.

(b) Follow up costs, which include travelling costs, telephone cost, telegram and postal

bills.

(c) Cost incurred by the goods receiving pay, inspection and handling.

(d) Rent and depreciation on the space and equipment utilizes by the concerned

purchasing personnel.

(e) Salary and statutory payments to the purchasing personnel.

(f) Cost of source development.

The total cost incurred on the all these heads during a year divided by number of

orders in that year will give average cost per order.

The major components of ordering costs are salaries paid to the purchase

department. To control the ordering cost the no. Of men in purchasing should be kept as

low as possible. Hence, any jump in total salary paid should not be allowed unless there is a

corresponding increase in no. of orders. It will be worthwhile to use over-time when there

is a marginal increase in the no. of orders.

33

2. COST OF CARRYING INVENTORY:-

The motivating factor to control Inventory is the cost incurred by holding it. This

cost is expressed as a percentage of the average investment in Inventory. This includes-

1) Cost of capital due to the money invested in Inventory. For calculating cost of

capital, the weighted average cost of capital or bank rate can be used and also

opportunity criteria can be used.

2) Cost of storage job to rent and depreciation charges incurred on the spare stores

and other equipment used to store the item.

3) Cost of detoriation of item, like due to spoilage must be taken into account.

4) Salaries and stationery payments to stores personnel.

5) Obsolescence cost, due to technological charges, the material become useless.

6) Losses due to pilferage, wastages and breakages and while unloading.

7) Insurance costs incurred to protect against fire and related risk.

3. UNDER STOCKING COST:-

Under stocking or stock out cost is due to non-stocking of Inventory. This is usually

measured in terms of opportunity cost due to loss of production by the indenting cost of a

line. If a stock out results in an expedited order, than the extra charges are also included in

the cost. In a production, in addition to the loss of the production there are intangible loses

such as losses of morale and increased business of workers. This competition of this cost

quite tricky.

4. OVER STOCKING COST:-

This cost is basically the opportunity cost due to the investment in Inventory for a

longer period than necessary. In the case of items which will ultimately be used, this cost be

used after a certain period. This cost is equal to carrying cost. The items, which are not

used after a certain period of time, the difference between the cost of items and its salvaged

value should be considered while computing the overstocking cost.

34

5. SERVICE LEVEL:-

Under stocking and overstocking cost are related to each other through the concept

of service level. The Management has to decide the policy serve level for example if a policy

is to satisfy the demand of 99 cases out of 100, these means that the service level is 99%

only 1 case out of 100 there will be stock out.

The relations between service level, stock out cost and overstocking cost are as

follows-

SERVICE LEVEL = STOCK OUT COST

STOCK OUT COST + OVER STOCKING COST

The estimation overstocking cost is fairly simple, and with the Management decision

on service level, the imputed value of stock out can be found out. It can be concluded that if

the stock out cost is very high than Management should fix a higher service level.

IINVENTORYNVENTORY M MANAGEMENTANAGEMENT T TECHNIQUESECHNIQUES:-:-

There are two basic questions relating to Inventory Management:

What should be the size of the order?

35

At what level should the order be placed?

The first question relates to the problem of ordering Economic Order Quantity

(EOQ) and is answered with an analysis of costs of maintaining certain level of inventories.

The second question arises because of uncertainty and is a problem of determining the

reorder point.

The ordering costs increase with the number of orders, thus the more frequently

inventory is acquired; the higher the firm’s ordering costs. On the other hand if the firm

maintains large inventory laves, there will be few orders placed and ordering costs will be

relatively small but the carrying costs of inventories increases heavily. The economic size of

inventory would thus depend on trade-off between carrying costs and ordering costs.

EECONOMICCONOMIC O ORDERRDER Q QUANTITYUANTITY (EOQ) M (EOQ) MODELODEL:-:-

The basic Assumptions of EOQ model are:

1 ) The forecast usage/demand for a given period usually one year, is known.

2 ) The usage/demand is even throughout the period.

3 ) Inventory orders can be replenished immediately, there is no delay in placing and

receiving orders

4 ) There are only two distinguishable costs associated with inventory costs, ordering

costs and carrying costs.

5 ) The cost per order is constant regardless of the size of the order placed.

6 ) The cost of carrying inventory is fixed percentage of the average value of inventory.

36

Given these assumptions, EOQ model ignores purchasing costs and stock out costs.

For determining the EOQ formula we shall use the following symbols:

A = annual demand/usage,

Q = quantity ordered,

O = cost per order,

C = carrying costs per unit,

Given the above assumptions and symbols, the total costs of ordering and carrying

inventories are equal to,

In the equation, the first term on the right hand side is the carrying cost, obtained as

the product of average value of inventory holding and the carrying cost per unit. The

second term on the right hand side is the ordering costs, obtained as the product of the

number of orders and the cost per order. The total cost of ordering and carrying is

minimized when,

Q = 2AO

C

37

TC = QC

+ AO

2 Q

The formula may be illustrated with the help of the following data relating to Ace

Company.

A = annual demand/usage/sales = 20,000 units

O = ordering cost per order = Rs. 2,000

C = carrying costs per unit = 25% of inventory value

P = purchase price/unit = Rs. 12

Here carrying cost/unit in is = Rs. 12 X 25% = Rs. 3

EOQ = 2AO

C

= 5,164 units

GGRAPHICALRAPHICAL A APPROACHPPROACH OFOF EOQ M EOQ MODELODEL:-:-

The Economic Order Quantity can also be found graphically. Figure illustrates the

EOQ function. In figure costs –carrying costs and ordering costs and total costs – are

plotted on vertical axis and horizontal axis is used to represent the order size. We note that

total carrying cost increases as the order size increases, because on an average a larger

inventory level will be maintained and ordering costs decline with increase in order size

38

= 2 X 20,000 X 2,000

3

because larger order size means a less number of orders. The behavior of total costs line is

noticeable since it is a sum of the two types of costs, which behave differently with order

size. The total costs decline in first instance, but they start rising when the decrease in

average ordering cost is more than offset by the increase in carrying costs.

Total Cost

Carrying Costs

Ordering Cost

Q* Ordering Size

The EOQ occurs at the point Q* where the total cost is minimum. Thus the firm’s

operating profit is maximized at point Q*

It should be noted that the total costs of inventory are fairly intensive to moderate

changes in order size. It may be appropriate to say, therefore, that there is an economic

order range, not a point. To determine this range, the order size may be changed by some

percentage and the impact on total costs may be studied. If the total costs do not change

very significantly, the firm can change EOQ within the range without any loss.

39

C

O

S

T

QQUANTITYUANTITY D DISCOUNTISCOUNT & O & ORDERRDER Q QUANTITYUANTITY:-:-

Many suppliers encourage their customers to place large orders by offering them

quantity discount. With quantity discount, the firm will save on the per unit purchase

price. However, the firm will have to increase its order size more than the EOQ level to

avail the quantity discount. This will reduce the number of orders and increase the average

inventory holdings. Thus, in addition to discount savings, the firm will save on ordering

costs, but will incur additional carrying costs. The net return is the difference between the

resultant savings and additional carrying costs. If the net rerun is positive, the firm’s order

size should equal the quantity necessary to avail the discount; if negative its order size

would be equal to EOQ level.

Let’s assume the following data for a firm:

A = estimated annual demand 1200 units

P = purchasing cost per unit Rs. 50

O = ordering cost per order Rs. 37.50

C = carrying cost per unit Rs. 1

The firm is offered 0.5% (0.0005) or Rs. 0.05 per unit quantity discount on

order of 400 units or more.

First we will calculate EOQ, assuming that the quantity discount does not

exist,

Q* = 2AO

C

= 300 units

40

= 2 X 1,200 X 37.50

1

Now, the net return should be calculated for deciding whether the order size should

be increased from 300 to 400 units

The net return is given by the following equation:

= Discount savings + savings on ordering costs – additional carrying costs

= [d X p X a] + O [A/Q* - A/Q’] – [C/2 (Q’ - Q*)]

= [0.005 X 50 X 1200] + 37.50[1200/300 – 1200/400] – [1/2 (400-300)]

= 300 + 37.50 – 50

= 287.50 Rs.

Since the net return is positive, the firm should have an order quantity of 400 units.

RREORDEREORDER P POINTOINT:-:-

Yet the answer should be sought to the second question, when to order? This is a

problem of determining the reorder point. The reorder point is tat inventory level at which

an order should be placed to replenish the inventory. To determine the reorder point under

certainty, we should know:

a) Lead time

b) Average usage and

c) EOQ

Lead time is the time normally taken in replenishing inventory after the order has

been placed. By certainty, we mean that usage and lead time do not fluctuate. Under such a

situation, reorder point is simply that inventory level which will be maintained for

consumption during the lead time. i.e.

Reorder point= Lead time X Average usage

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IINVENTORYNVENTORY M MANAGEMENTANAGEMENT ININ KRIBHCO:- KRIBHCO:-

The efficiency of any business activity depends upon having materials supplies, and

equipments available in proper quantity with the proper quality, at the proper place and

time at proper cost. Failure ay any of these points adds to the costs and decreases the

profit.

Being a chemical processing industry, the inventory pattern in KRIBHCO is very

vast and varied. It is therefore, the purpose to lay down the best practices methods and

strategies that are necessary to enable the materials department to carry out established

policies uniformly which will not only help in reducing the material costs and working

capital but also increase the productivity of the corporation.

FFUNCTIONALUNCTIONAL S STRATEGIESTRATEGIES/ O/ OBJECTIVESBJECTIVES:- :-

a) Evolve and implement a scientific inventory control system to achieve

optimization of inventory levels.

b) Standardize and improve equipment design.

c) Create and sustain computer culture.

d) Bring more common items under centralized procurement system to get better

control.

e) Develop alternate source of supply of materials.

f) Identification and development of vendors.

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g) Annual rate contract with the approved vendors for regular supply of material to

reduce the inventory levels of such consumables.

h) Preservation of materials to avoid damages/ deterioration during storage.

i) Improvement in purchase procedure for reduction in procurement lead-time.

To study the inventory management the several of interview techniques depending on

the situations were followed. Discussions were carried out with various personnel of

the company to study the following 3 broad areas:

1. PURCHASE CONTROL

2. STORAGE CONTROL

3. WAREHOUSE ACCOUNTING

A study in KRIBHCO was carried out taking into consideration the concept of total

material control, which significant that efficiency of any organization is contingent upon

having the right material of right quality or right place in the right quantity at the right

time and place.

1. PURCHASE CONTROL:-

Purchasing is one of the basic functions of Inventory Management and forms a

major part of it. What to buy, when to buy, where it buy, how much to buy, how much to

pay and how much to stock are the fundamental of the Inventory control. It also involves

creative functions such as development of new resources, introducing new materials and

sources in the undertaking etc. It needs considerable expertise not only negotiating but also

in the techniques of competition and studying of economic trends in respect of materials to

be purchased in large quantity. Every rupee saved by the good purchasing goes directly in

to the profit for the simple reason is that it is not spent at all.

OBJECTIVES OF PURCHASING:-OBJECTIVES OF PURCHASING:-

The objective of Inventory purchasing can be enumerated as follows.

To Maintain Continuity of production.

To contribute to the competitiveness of the end product.

43

To contribute towards higher productivity.

To buy for the best ultimate value not necessarily at the lowest initial price.

To contribute towards standardization, variety reduction and value analysis programs.

To increase profits

EXISTING PURCHASE PROCEDURE IN KRIBHCO:-EXISTING PURCHASE PROCEDURE IN KRIBHCO:-

To study the existing purchase system, the purchase procedure followed by the

purchase department have been analyzed and evaluated on the basis of observation and

discussions with concerned personnel of KRIBHCO is as follows:

SCOPE:SCOPE:

The scope of purchase in KRIBHCO includes the following:

Capital items, like plant and machinery, office equipment, furniture and fixtures etc.

Raw materials and semi finished goods.

Consumable items like tools, oils and lubricants, office stationery etc.

Spare parts.

Items for repairing and maintaining the capital items.

Contract / agreement for clearing, handling, loading and transportation of incoming/

outgoing materials.

Rate contractors for procurement of casual labors and for maintenance of plant and

township buildings.

Contract for construction of civil, structural. Mechanical, electrical, instrumentation,

insulation and painting etc.

Contracts for hiring of vehicles.

44

Contract for running of canteen / guesthouse.

Rate contracts for procurement of laboratory, glass wares/ chemicals etc.

RESPONSIBILITY FOR PURCHASE FUNCTIONS:-RESPONSIBILITY FOR PURCHASE FUNCTIONS:-

The purchase department issues the material manager (purchase all purchase

orders/ contracts after the approval of the competent authority i.e. the material manager

(purchase). The purchase function in other offices (like head office at NEW DELHI and its

various branch offices) is headed by the single officer nominated / designated for that

purpose. The indenters from various departments are issuing inquiries, inviting bids,

entering into correspondence or negotiation with vendors/ contractors. All requisition for

purpose is duly processed in accordance with procedure laid down, which is forwarded to

purchase department for necessary action.

1. . REGISTRATION / SELECTION OF SUITABLE VENDOR/S:

Purchase department is responsible for developing a list approved vendors for

various type of materials and service as per procedures, and advertisement is issued in all

the leading newspapers inviting applications in the prescribed Performa for registration

suppliers and contractors listing out of various types of purchase and service that are likely

to be made during the next 3 to 5 years. The application received scrutinizes by a

committee consisting of a representative from technical, finance and purchase departments

(nominated by General Manager) and ascertained the resources, capacity and quality of

workmanship of the vendor. The committee also calls the vendor and contractors for

personnel discussions and clarifies the applications and obtains such other information as

may be considered necessary by the committee. The list of approved vendors and

contractors as to be updated at least every five years by issuing a press advertisement.

2. REQUISITION TO PURCHASE / WORK:

45

The indenters from various departments are raising a requisition called the

Material / Purchase Requisition for purchase n the prescribed Performa. It is ensured that

the requisition for purchase is completed in all respect with regard to:

a) Descriptions of the material / equipments / scope of work.

b) Material of construction / specification.

c) Temperature / pressure/ standard if anywhere applicable.

d) Quality and chit of measurements.

e) Date when delivery of material / services required.

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

g) Estimated value and budget head.

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

The stores departments raise the requisition for purpose of stock items after the

quality in stock has reached the recorder level as determined for the respective items. Such

requisitions amongst other particular also indicates the minimum, maximum, and reorder

level, the date on which last supply was received and average consummations per months

since last purchases.

The requisition for purchase of non-stock items is invariably routed through the

stores departments, which indorses on the requisition the availability/non availability. In

case item is available the quantity thereof is indicated on the purchase requisition and

quality to be purchased is adjusted by the materials manager in consultation with the

indenture.

46

The requisition for purchase of capital items, award of civil works, erection

contracts and repair to plant and machinery and equipment, handling and transportation

of materials, repairs/service of equipments hiring of causal labors, selection of contractors

for repair, maintenance, electrical instrumentation provision of after service and painting

jobs on schedule of rate valid for one year, is sent directly to the materials after same are

approved by the authority.

All requisition for purpose of materials or for award of work as described above is

raised by respective departments. The department’s manager ensures the following

particulars in the purchase requisitions.

1) Budget provisions.

2) The amount utilized up to the previous requisition.

3) The estimated value of the present requisitions, and

4) The balance available under the budgeted head after booking the present

requisition.

The requisition is submitted to the competent authority for approval of

purchase/work after filling the above information. After the approval of requisition, the

same is passed on to the purchase departments for inviting bids.

3. Inquiries/ Invitations to Bid:

On receipt of the requisition from the various indenting departments, enquiries

shall be issued by the purchase dept. as per the procedure detailed.

Inquiries shall be issued in the prescribed proforma (e). The enquiry document should be

suitably modified to conform to the equipments and materials proposed to be procured. It

is important that the inquiry documents should describe in detail the description of the

material, the technical specifications, and preferred delivery time, various general and

special terms and conditions governing the purchase.

Normally, bids shall be asked in two envelops in cash of the single sage bidding as below:

Envelop 1 Earnest Money Deposit

Envelop 2 Base Price Bid as per the Terms and Conditions of ITB and

47

alternate price bid, if any. Alternate Bids shall be based on the

alternative designs, materials, completion schedule, payment and

other terms and conditions. The alternate bid shall be considered,

if not accompanied with base bid.

Single stage bidding should be issued only when subsequent changes in the

specifications and terms and conditions are not expected.

However, in case of purchase is in which it may be undesirable or in impracticable

to prepare complete technical specifications in advance or wherever it is deemed necessary,

two stage bidding procedure shall be followed i.e. first inviting technical and un-priced

commercial proposal along with priced bid. These shall be subject to clarifications and

adjustments to be followed by the submission of revised priced bids in the second step, if

required.

In this case bids shall be asked in three envelops as below:

Envelop 1 Earnest Money Deposit

Envelop 2 Technical and commercial un-priced bid

Envelop 3 Base Price Bid as per the Terms and Conditions of ITB and alternate

price bid, if any. Alternate Bids shall be based on the alternative

designs, materials, completion schedule, payment and other terms

and conditions a list of deviations should be given separately. The

alternate bid shall be considered, if not accompanied with base bid.

4. Time allowed for submission of bids and EMD to be Deposited:

48

Normally three weeks time should be given to the vendors for submitting their bids

however, the time limit for submission of bids may be increased with due consideration of

the particular circumstances with the approval of the competent authority.

(i) For value of purchase up to Rs. 5 lakhs Nil

(ii) For value o f purchase up to Rs. 10 lakhs

for proprietary items

Nil

(iii) For value of purchase up to Rs. 5 lakh

(10 lakh`s for proprietary) & up to Rs. 1

crores

1% of estimated value or Rs. 1 crore,

which ever is less

(iv) For value of purchase above Rs.1 crore

& up to Rs. 5 crore

Minimum Rs. 1 lakh, 0.75% of

estimated value but limited to

maximum Rs.2 lakh

(v) For value of purchase exceeding Rs. 5

crore

0.5% of estimated value of purchase

limited to Rs. 10 lakh

5. Quotation Comparison Statement (QCS):

After the tender are opened a QCS of all the bids opened, shall be prepared by the

purchase department. the purpose of bid evaluation is to determine the cost of each bid to

the society in a manner that will permit a comparison of bids on the basis of their evaluated

cost factor, which may be taken into consideration, include inter-alia the cost of

transportation unto each unit along with other expenditures incidental to the

49

transportation, the payment schedule, the delivery or time of completion, the operating

cost, the efficiency, the compatibility of equipment, the availability of spare parts.

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

QCS as lowest (L-1), second lowest (L-2), and third lowest (L-3) etc.

6. Tender Committee:

All purchase orders whose individual value does not exceed Rs.10 lakhs, will be

finalized on the basis of the recommendations of the indenter and the purchase dept. after

obtaining the concurrence of the Finance Dept. by circulation of file. However, in case of

purchase order, whose individual value does not exceed Rs.10 lakhs but are proposed to be

procured stipulated hereunder:

The reviews of QCS and selections of successful bidder in respect of all purchase

orders, whose individual value is above Rs.10 lakhs, will be done by a tender committee

specifically constituted for the purpose in each case. The tender committee shall be

constituted consisting members from following departments:

a) Indenting department – department from where the requirement has come up and

for which action is required to be taken.

b) Finance department

c) Purchase department

7. Selection of Successful Bidder:

Normally, the lowest bid, which conforms, to the specifications will be accepted.

However, where the lowest bid even though it conforms to the specifications is not

accepted, full justification for accepting other than the lowest bid shall be recorded in

writing and approval of the competent authority will be obtained.

While forwarding the recommendations for award of work, the recommending

authority/ tender committee, as the case may be, must ensure the reasonability of the prices

on which the order is proposed to be placed. In case the bid of the successful bidder is far

50

from the estimated cost, full justification to be given in the recommendation. Particularly

for case where the prices offered are substantial lower than the estimated cost and no

proper reasons could be ascertained, the amount of the performance security may be

increased.

EVALUATION OF EXISTING PURCHASE SYSTEM OFEVALUATION OF EXISTING PURCHASE SYSTEM OF

KRIBHCO: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 into consideration the

five essentials of purchase functions are as follows:

1. Purchase Time

2. Purchase Quantity

3. Purchase Quality

4. Purchase Price

5. Source of Supply

1. 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

51

administrative lead time is very long i.e. 5 to 7 months, while suppliers lead time is about 2

to 3 months.

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 with approved 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 is fixed. In case of delay beyond this time

limit, competent authority should be informed for necessary instructions.

2. 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 is also incurring loses due to the depreciation in quantity, deteriorations in

quality and obsolesce of materials during storage.

Company is also incurring avoidable expenditure such as holding and keeping 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 order quantity 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.

52

3. PURCHASE PRICE:

The price of each item is being compared with supplier’s 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.

4. 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

(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 Store has about 64,663 numbers of items, out of which about 2400 items are

‘Stock Items’. The procurement action of stock items is initiated by store. The store is

spread over in 2 lakhs sq.mtrs. Of space, out of which 12000 sq.mtrs is covered area.

53

Normally working hours of store is general shift hours. However, in case of shut down,

emergency service of stores is made available as requested by user department.

Objectives of the Stores:

To render materials, services to the organization by receiving and issuing the

materials, preserving the materials in custody, disposing the scrap/ surplus materials. The

objective is achieved through following function. Stores function is basically a service

function. The main functions of the stores are:

1) To receive all types (Stock and Non-Stock) materials, to arrange

inspection of materials.

2) To keep materials safe custody, issue of materials to user departments.

3) To initiate action for procurement of stock items, to keep in custody and issue to

user department.

4) Disposal of Non-moving item, surplus item, and scraps item.

5) Implement stores related policies and functions.

6) Coordinating with different sections for preparation of capital/revenue budget.

7) Coordinating with other departments for stores related activities.

8) Vendor registration and evaluation for disposal.

9) Identification of different training needs of stores personnel.

10) To maintain records/ files of all stores activities, Issue Vouchers/ Internal Stores

Issue Vouchers (ISIV), Internal Stores Receipt Vouchers (ISRV), Stock

54

Adjustment Vouchers (SAV), Material Exception Reports (MER), claims/

dispatch advice etc.

For convenience in working, the department is divided into three sections:

A) Custody and Issue Section

B) Receipt and Inspection Section

C) Disposal Section

A. CUSTODY AND ISSUE SECTION:

Main function of custody section is to codify the material. This section is looking after

following functions:

1. Codify all items with 9 + 1 digit code structure.

2. Receiving and posting of “Accepted material against SRV and storing at proper

location.

3. Preservation of material during storage period.

4. ‘Stock Verification’ reconciliation and updating of stock with management

approval.

5. Issue of material to the user department /contractor as and when required.

6. Maintenances of accounting for records of each transaction.

7. Verification of “Material Statement” for the material issued against various “Work

order”.

55

8. Reservation of stock for various schemes.

9. Preparation of MPRS for “Stock Control Items”.

10. Review and Fixing of “Stock level” for “Stock Control Item”.

11. Direct receipt of bulk material like Steel, Oil, Cement and Stock items to avoid

double handling.

Procedure for Material Issue:

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.

1. Materials are issued against SIV, format signed by authorized persons.

2. SIV and type of transaction will be checked.

3. Quantity on hand and location of the items will be noted on the SIV for

respective item.

4. Quantity to be issued is decided based on type of material required.

(a) If required material is “Stock Item”, then quantity is issued is depending on

stock available.

(b) If required material is “Non-stock item”, it can be issued fully.

(c) If required material is of “Reserved material category” then entire reserved

material can be issued to that particular department.

PPROCEDUREROCEDURE FORFOR R RECEIVINGECEIVING THETHE A ACCEPTEDCCEPTED M MATERIALATERIAL ININ

CCUSTODYUSTODY S SECTIONECTION: :

56

1. The materials are received in custody section through two sources mainly:

- From Receipt Section through SRV and,

- From User Department through ISRV (Material once drawn from Stores and

not consumed or replaced and repaired can be returned to custody till it is

further required for consumption.)

2. Quantity mentioned in SRV/ ISRV is checked with quantity received.

3. The material is shifted to its location as per codes.

B. RECEIPT AND INSPECTION SECTION:

The consignment booked to the society is normally delivered to Stores ‘Receipt

Section’ and procedure is following:

1. The person delivering the material in receipt section should present the copy of

Delivery Challan / Invoice or the supply with details of Purchase Order

mention thereon.

At the time of receiving the Material, the concerned staff will inspect the

package for assessing the condition of package. If the package is in sound

57

condition, a clear receipt is given but in case of any observation for damage in

packing specific remarks is endorsed on the Challan / Invoice or Lorry Receipt.

2. Such material is kept in the area marked as material awaiting inspection.

3. The packing is opened and verified for the quantity received. Any deviation will

be recorded for communicating the same to the supplier and material is shifted

to area earmarked as “PENDING FOR INSPECTION”.

4. SRV is raised for internal accounting indicating reference of the consignment,

number of items and quantity delivered against the order with respect to the

supplies.

5. Receipt Section will inform over telephone to the concerned user to inspect the

material

6. The material will be offered for inspection to the concern user department for

conform the quantity and quality of items, as per PO Inspection Remark

/Observation is recorded by the Inspection Authority on the SRV.

7. a) After inspection, if the material is found of acceptable quality, the same is

recorded in SRV as ‘ACCEPTED’ by the person inspecting the material.

Indenter takes one copy of SRV with him.

b) Accepted material is handed over to Custody Section for storage along with

one copy of SRV.

c) Balance copies of SRV are distributed to finance and purchase Dept.

8. After inspection if the materials rejected in part or full, Material Exception

Report (MER) is prepared and sent to supplier with Indenter, Finance &

Purchase Dept., for further action.

9. If the shortage or damage is noticed than MER is prepared giving details of

shortage and damages.

a) If the material covered under KRIBHCO open policy,

58

Stores prepare provisional claim. Given details of shortage/ damages

and approximate value of claim and sent it to finance for submission to

underwriter. Finance & Account Department prepares monthly claim and

submit to insurance company.

b) If insurance was under the scope of supplier,

Stores sent MER copy to supplier giving reason of shortage / damage and

rejections to enable him to lodge claim with underwriter.

After taking material into custody, the staff of Store Dept., User Dept., and

Purchase Dept. inspects the material. In exercising control on the quality of incoming

materials, inspection plays an important role. Materials purchased in India and abroad are

inspected according to specifications, prescribed tests, drawings, approved samples etc as

stipulated in the purchase order. To inspect different types of materials following

inspection methods are used.

IINSPECTIONNSPECTION::

(a) Inspection by third party:

Such agencies are EIL cloyed register, IBR; etc. Acceptance of material is based on

the certificates and reports of these agencies.

(b) Inspection by indenting departments:

At vendors premises during manufacturing of materials or before the dispatch of

the same the concerned officers of indenters carry out such inspection.

(c) Materials test certificates:

59

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.

C. DISPOSAL SECTION:

Function of Disposal SECTION:

1. Receive Surplus material, Scrape, Wastages etc.

2. Ensure that such materials are properly located and stored for fetching good

price.

3. Coordinating the activities of declaring items as surplus, obsolete, fixing of

reserve price for their disposal and obtaining management’s approval for their

final disposal.

4. Initiating appropriate disposal actions through tender, public auction or

through govt. agency hired for disposal on behalf of the company.

5. Preparation of status report for surplus, scrape material.

Definitions:

Non-moving Items: No transaction for last five years

60

Surplus Items: Non-moving Items declared as not required in near

future.

Scrape: Material declared as not useable in plant. This may be generated

during various processes of plant.

Procedure for disposal of scrap and Surplus Item:

1 Disposable material will be received from following sources,

a) Surplus inventory from Custody Section.

b) Scrap / Wastage From various user departments.

2 The committee is constituted for review either for its alternative use or suggesting

the disposable action with appropriate reserve price.

3 Approval will be obtained from the competent authority for disposal.

4 Consolidated list of disposable item shall be prepared and forwarded to MSTC

(Material Scrape Trading Corp.), agency appointed for disposal of material.

5 M/s. MSTC will invite the tender on our behalf as per their laid down procedure.

Our representative shall attend the tender opening. M/s. MSTC will prepare the

QCS and recommend the vender to whom disposal to be made for KRIBHCO

approval. KRIBHCO will study the proposal and if everything is in order will get

necessary approval from competent authority for disposal. It shall be communicated

to M/s. MSTC who will issue Sale Order/ Delivery Order as per their procedure.

6 M/s. MSTC will forward a copy of SO / DO to KRIBHCO.

7 Remittance of sale proceeds will be done by M/s. MSTC only other receipts of such

remittent, physical delivery of material would be made.

8 On execution or completion of SO, statement of Accounts will be forwarded by

Stores to Account Section for final settlement of Vendor’s account.

9 In certain cases, selling the customers, having valid license/certificate from Pollution

Control Board, will make disposal of hazardous wastes. For such type of disposal

permission will be sought from PCB. Such wastes are:

61

- Used/ spent oil from plants,

- Used/ spent catalysts from plants,

- Used/ spent automobile batteries from workshop,

- Used/ spent nickel and cadmium batteries from plan

STORES FLOW DIAGRAM

Receipt Section

62

Receiving of materials

from vendors, contractors

& other units

Return of rejected materials

to vendor & dispatch of

material for repairing

Custody Section

Disposal Section

WAREHOUSE AND ACCOUNTING CONTROL:

Inventories are the assets of a company and such as their valuation get reflected in

the balance sheet and profit and loss account. These can be valued at actual, at the last

price paid, on the basis of an average price, current market price, and so on. A company

may adopt a particular method of inventory valuation, but it is obligatory to follow it for a

minimum period of three years. Any changeover to a new method requires the approval of

the board.

Inventories measured by money value usually constitute the major element in the

working capital of manufacturing companies. Only proper stores accounting procedure

can successfully achieve control of inventory.

63

Return of material

through ISRV

-Inspection of material

-SRV

-Accepted material

MPR for stock

item to purchase

Issue of material to

User Department

The preservation

of materialScrap from

plants

Handing over surplus

material for disposal

to Disposal section

Delivery of material sold

to a successful bidder

through MSTC

A good system of stores accounting is found to be necessary for certain other

purposes like:

a) Preparation of accurate cost accounts

b) Evaluation of purchase performance

c) Working out important management ratio like sales to inventory, consumption to

inventory, purchase to inventory, inventory turnover etc.

d) Preparation of materials budget

When a material is purchased, received, inspected, and placed in the stores, an entry

is made about the purchase through a Goods Receipt Voucher. The entry for the quantity

received is simple, but the entry for the value of a purchase is a problem because the value

is the sum of a number of items like:

a) Invoice price

b) Sales tax/ octroi

c) Excise duty/ custom duty

d) Insurance

e) Freight, carriage, handling charges etc.

The goods receipt voucher is priced from the appropriate invoice and the material

account is debited in the stores ledger.

INVENTORY CONTROL TECHNIQUES IN INVENTORY CONTROL TECHNIQUES IN

KRIBHCO:KRIBHCO:

Inventory control is a term that refers to control of all factors that affecting the

materials. It starts with obtaining materials and ends with consumption. Material control is

a systematic check over procurement, storage and consumption of materials so as to ensure

minimum wastage, even flow of materials and minimum investment in inventory.

To know the practical use of various inventory control techniques in KRIBHCO.

Following Inventory control techniques were studied and evaluated are:

1. Codification system

64

2. Classification of Inventory

3. Determination of EOQ and

4. Determination of Inventory levels.

1. CODIFICATION SYSTEM:

KRIBHCO is using the nine-digit numerical code system. The tenth digit of code is

being generated by their mainframe computer which a check digit to prevent duplication of

code for a single item.

Out of nine digit code, the first two digits are used to codify the main group and

remaining digit is used to codify other parameters / specifications in that main group. This

main group, for the purpose of codification has been divided into 01 to 99 for the nine-digit

codification system. The same has been elaborated in details below:

CATEGORYMAIN GROUP NO.

1. General stores 01 to 49

2. Electrical equipments and spares 50 to 63

3. Instrumentation equipments and spares 64 to 80

4. Mechanical equipments & spares 81 to 99

EXAMPLE OF CHECK DIGIT GENERATION:

Code no. 832167851

The computer shall multiply first each digit of above Code no. by 9 i.e.

8 x 9, 3 x 9, 2 x 9, 1 x 9, 6 x 9, 7 x 9, 8 x 9, 5 x 9, 1 x 9

And then sum of each digit shall be added i.e.

= 72 + 27 + 18 + 9 + 54 + 63 + 72 + 45 + 9

= 369

11 will divide the total i.e.

369/11 = 6 is remainder; hence 11-6 = 5 shall be check digit.

65

The number of digits allotted to the groups in KRIBHCO codification system is

flexible except in case of main group the utilizations of balance seven digits may slightly

vary depending upon the requirements of materials in a particular main group. However,

the sequence of the main group remains unaltered. For example, in general sub group

follows consumable items, main group and sub group by specification of materials,

materials of construction and it is followed by size etc. In case of items, other than general

consumables, the main groups followed by make or type of equipment on plant, then

voltage, rating or unit, sub assembly parts construction size etc. As can be seen the general

layout of the digits are modified according to the requirements to explain the various

characteristics of the items under each primary group in KRIBHCO system. This system is

basically designed for manual working but subsequently has been adapted on computer by

some modification such as check digit addition etc.

The existing Codification System has the following Advantages:

(a) Avoidance of duplication of a code due to multiple names, long description of

the items and storing of the items under different name is avoided,

(b) Accurate and logical identification,

(c) Reduction in clerical work,

(d) Standardization of items,

(e) Efficient recording and accounting, and

(f) Assure correct and efficient inspection.

2. CLASSIFICATION OF INVENTORY:

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

stock items and non-stock items. The existing system keeps strict control on the item that is

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.

66

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 the material used.

Control kept on stock items a give equal weightage to all items, which neglects

the benefit of selective control technique.

Considering the practical use of classification techniques, two important methods

are suggested as follow:

(1) ABC classification

(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 technique tries 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, obsolesce. Stock purchases order, receipt of materials,

inspection, storekeeper and billing verification.

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.

67

(2) Determining the total value of each item by multiplying the expected units by its unit’s

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.

ADVANTAGE 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 lakhs of store items. Concentrating

on all items it is likely to have diffused effect irrespective of the priorities. It provides a

sound basis on which to allocate resources and time of personnel with respect to their

importance of the individual items.

For control purpose, in Kribhco the total inventory has been classified into ABC

classes. They exercise control over these classes as their relative value proportion in ABC

classes to avail the benefits of selective control. They don’t have the exact classification as

we have in analysis. But they know which item should have maximum attention and which

should minimum, after experience and regular review of inventory.

PURPOSE OF ABC CLASSIFICATION:

The object of carrying out ABC classification is to develop policy guidelines 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

68

69

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 stock

3. Frequent ordering or

weekly deliveries

Once in four months Bulk ordering once in six

months

4. Weekly control

statement

Monthly reports Quarterly control reports

5. Maximum follow up and

expediting

Periodic follow up Follow up and expediting

exceptional cases

6. Strict value analysis Moderate value

analysis

Minimum value analysis

7. As many sources as

possible for each item

Two or more reliable

sources

Two reliable sources for

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 surplus

(review every 15 days)

Quarterly control over

surplus and obsolete

items

Annual reviews over

surplus and obsolete items

10. Individual posting Small group posting Group posting

11. Central purchasing and

storage

Combination

purchasing

Decentralized purchasing

12. Maximum efforts to

reduce lead time

Moderate Minimum clerical efforts

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 classifications

The figures are as per April 2010.

SR.

NO.

MATERIAL

GROUP NO

NO.OF

ITEMS

(UNITS)

DESCRIPTIONS VALUES

CONSUMPTION

(RS)

1. 10 62 Abrasives 78,949.40

2. 11 3713 Tools and NDT Equipments 1726,661.17

70

3. 27 1124 Instruments General 2,902,642.27

4. 35 688 Fire Fighting and Safety 2,665,949.61

5. 29 678 Catalyst/Chemicals/Resins 90,869,797.98

6. 42 1854 Stationary/Furniture 1231,508.79

7. 09 286 Welding electrodes and spares 1,417,000.90

8. 15 623 Pipe and pipe fittings I.B.R 4,571,100.75

9. 20 553 Flanges non-I.B.R. 3,443,825

10. 37 277 Civil constructions 6,545,878.27

11. 92 5036 Mobile equipments and Rollin 10,838,494.81

12 01 778 Bearings 7,927,620.02

13. 07 1077 Gasket/packing/o-ring 5,857,780.23

14. 94 5379 Pumps & Ejectors 58,414,027.36

15. 25 230 Cable 9,668,642.37

16. 13 361 Metals(ferrous0 24,846,750.68

17. 04 1202 Fasteners 2,678,795.10

18. 24 3498 Electrical/General 16,122,687.05

19. 49 327 Misc.items 49 group 3,304,394.92

20. 02 1196 CP/NG/oil mech-seal,Ve-belt 9,615,598.04

21. 31 300 Paints/oil/lube/gas 4,285,708.09

22. 21 1254 Valves non I.B.R 24,761,864.36

23. 38 277 Bags/bagging & containers/cot 1,461,363.68

24 19 2895 Pipe & pipe fittings 35,520,268.94

25. 05 37 Hardware(others fasteners) 190,383.10

26. 12 86 Elastomer/Plastic 327,524.66

27. 26 230 Cable(powers & control) 9,668,061.74

28 14 75 Metals (non ferrous) 1,387,437.10

29. 30 1321 Lab equipments 1,336,222.83

TOTAL 35417 343,666,939.22

Main Group

Item Units

% of Total Value

Cumulative

71

20 553 1.00

92 5036 3.15

01 778 2.31

94 5379 17.00

13 361 7.23

24 3498 4.69

02 1196 2.80

21 1254 7.21

19 2895 10.34

33 230 2.81 – 58.54 58.54 – A

29 678 26.44

38 277 0.43

12 86 0.095

14 75 0.40

30 1321 0.39 - 27.76 86.30 – B

10 62 0.02

11 3713 0.50

27 1124 0.85

35 688 0.78

42 1854 0.36

09 286 0.41

15 623 1.33

37 277 1.91

07 1077 1.70

25 230 2.81

04 1202 0.78

49 327 0.96

31 300 1.25

05 37 0.06 – 13.7 100 – C

72

Main Group No

Units

Units % of Quantity Cumulative

20 553 0.08

92 5036 0.47

01 778 0.1

94 5379 0.46

13 361 2.56

24 3498 2.77

02 1196 0.17

21 1254 0.17

19 2895 1.16

33 230 0.98 – 8.92 8.92 – A

29 678 20.02

38 277 0.32

12 86 0.06

14 75 0.20

30 1321 0.34 – 20.94 29.86 – B

10 62 0.13

11 3713 0.16

27 1124 0.96

35 688 0.48

42 1854 12.25

09 286 0.55

15 623 0.23

37 277 0.29

07 1077 4.09

25 230 2.99

04 1202 2.63

49 327 43.89

73

31 300 1.08

05 37 0.5 – 70.14 100 - C

Graphical Representation of ABC Analysis:

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

preparation 8.92 percent of total units of all items but represents the higher value 58.54

percent. On the other hand, item ‘C’ represents 70.14 percent of the total units and 13.7

percent of the total value item ‘B’ occupies 20.94 percent of the total units and 27.76

percent of the total value. Items ‘A’ and ‘B’ jointly represent 29.86 percent of the total

units and 86.30 percent of the investment Item ‘C’ representing merely 13.7 percent of the

investment.

VED CLASSIFICATION:

74

Item

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 of production while 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 overcome this draw back the VED classification is used.

Spares are classified as vital, essential and desirable. This implies that V (Vital)

classes of spares have to be stocked adequately to ensure the operation 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 (Essential) class of spares. Stocking of

D (Desirable) spares can be even done if the lead-time for their procurement is law. It is

essential that those in charge of the maintenance of the plant do by technical department or

this classification. 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 this table:

CLASSESV Item E Item D Item

A Items Constant control &

regular follow up

Moderate stock Nil stock

B Items Moderate stock Moderate stock Very low stock

C Items High Stocks Moderate stock Low stock

75

1. VITAL : LED TIME: FEW MONTHS

Item of proprietary Nature. Only single manufacture. Its substitute is not

available.

Probability of high consequential looses.Usually, high cost of item.

If the materials not available, than total production stopped at the time.

2. ESSENTIAL: LED TIME: FEW DAYS

Item of regular production and easily available with manufacturer.

Chemicals, general bearings, fasteners, valve, pipe fittings, welding materials,

paints, refectories etc..

If the materials not available than same may be production affected in future.

3. DESIRABLE: LED TIME: FEW HOURS

76

For the sales available from ready stock. Ready available in local market.

Continues/ frequent requirement consumables, expendables.

Small nuts bolt, emery papers, GI fittings, lubes, lab ware, general stationeries,

hand gloves, marketing cloths etc..

If the materials not available, than same may production affected in future

after long time.

Just-In-Time Inventory:

JIT, Just-In-Time is a term usually thought of as describing inventory arriving or

being produced just in time for the shipment or next process. JIT is a process for

optimizing manufacturing processes by eliminating all process waste including wasted

steps, wasted material, and excess inventory. The term also describes lean manufacturing

that is dependent upon JIT inventory systems (Term=JIT). The term is commonly referred

to the concepts of Taiichi Ohno from the Toyota Motor Company in Japan regarding

production. Just-In-Time inventory systems depend upon logistics that include:

transportation, warehousing and several strategies for handling the potential supply chain

uncertainties. Just-in-time is easy to grasp conceptually, everything happens just-in-time.

Conceptually there is no problem about this; however achieving it in practice is likely to be

difficult.

DETERMINATION OF EOQ:

77

What is Economic Order Quantity?

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.

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

formula:

Q = 2AO

C

Where,

A = Annual usage in units

O = Order (buying) cost per order

C = Carrying cost per unit

Determination of EOQ:

As per the above formula, we will calculate the determination of EOQ:

DETERMINATION OF CARRYING COST:

78

a) Obsolescence - Nil

b) Deterioration - Negligible

c) Taxes - Nil

d) Insurance - 1% average

e) Interest on capital - 18%

Total carrying cost 19%

DETERMINATION OF ORDERING COST:

COMMUNICATION COST: Includes, telephone, telex and Telegram cost and

postage cost. Rs.60574945690.40 year ended 31st March 2010.

TRAVELING COST: Rs.7104674588000 year ended 31st March 2001.

STATIONERY COST: Rs. 497563468000.90 year ended 31st March 2001.

SALARY OF PURCHASE DEPARTMENT: Rs. 15,525,450/- per month

Therefore 15,525,450 x 12 = Rs. 186305400 per year

Total ordering cost = (60574945690.40+7104674588000+497563468000.90+186305400)

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

= 7662999307091.3

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

Average ordering cost per order:

79

766299930709

673535838.7

= Rs. 11377.00

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, 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 :

80

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

months usage (consumption) of material (stocks) taken into consideration by the

KRIBHCO as a maximum stock level.

RE – ORDER LEVEL :

The point at which the order has to be placed. The reorder level may not always be

numerically equal to the economic order quantity. It should be regularly reviewed for paid

moving items. For fast factors such as change in demand, delivery times or variation are in

trend.

Eight months usage (consumption) of material (stocks) taken into consideration by the

KRIBHCO as a Reorder level.

LEAD TIME:

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.

The average time taken to convert an indent into an order is about 3-4 months for

regular items and for new items it may vary from 4-5 months.

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.

81

METHODS OF EVALUATION:-METHODS OF EVALUATION:-

How Do We Value Inventory?

The accounting method that a company decides to use to determine the costs of

inventory can directly impact the balance sheet, income statement and statement of cash

flow. There are three inventory-costing methods that are widely used by both public and

private companies:

First-In First-Out   (FIFO) - This method assumes that the first unit making its

way into inventory is the first sold. For example, let's say that a bakery produces

200 loaves of bread on Monday at a cost of $1 each, and 200 more on Tuesday at

$1.25 each. FIFO states that if the bakery sold 200 loaves on Wednesday, the COGS

are $1 per loaf (recorded on the income statement) because that was the cost of each

of the first loaves in inventory. The $1.25 loaves would be allocated to ending

inventory (appears on the balance sheet).

Last-In First-Out   (LIFO) - This method assumes that the last unit making its

way into inventory is sold first. The older inventory, therefore, is left over at the end

of the accounting period. For the 200 loaves sold on Wednesday, the same bakery

would assign $1.25 per loaf to COGS while the remaining $1 loaves would be used to

calculate the value of inventory at the end of the period.

Average Cost   - This method is quite straight forward; it takes the weighted

average of all units available for sale during the accounting period and then uses

that average cost to determine the value of COGS and ending inventory. In our

bakery example, the average cost for inventory would be $1.125 per unit, calculated

as [(200 x $1) + (200 x $1.25)]/400.

82

C H A P T E R – VI:C H A P T E R – VI:

SUGGESTIONS AND CONCLUSIONSSUGGESTIONS AND CONCLUSIONS

SSUGGESTIONSUGGESTIONS

83

Considering the entire situation discussed above following points should be taken in

to consideration for the effective Inventory Management.

First taking into consideration the purchase control of KRIBHCO, they

should introduce Vender Performance Rating System for vendor

development and to spot out good reliable source of supply.

As I have visited the dockyard, where the most of the scrape, wastages, and

obsolete items are being stored, it is necessary for them to reduce the

disposable items and should make cash out of it as soon as possible.

Their codification system is really good but as far as main group is

concerned. They should modify the system as such that it can accommodate

more main group, if the necessity arises. E.g. main group for newly invented

spare part.

In addition to ABC classification, they should introduce other widely used

classification systems also so as to have greater control over inventories like

VED analysis and FSN analysis.

The production planning should be done according to the demand so that

there should not be over stock during off-season and stock out during the

season.

The investment in stores and spare parts Inventory should be kept as law as

possible, considering demand of stores and spare parts.

Optimum planning should be maintained in transportation to reduce storage

of finished product (Urea), which reduces warehousing cost.

Reduction in material handling as far as possible.

I found the extra staff in purchase department. They have to reduce this to

minimize the ordering cost.

CCONCLUSIONSONCLUSIONS

84

The inventory of Kribhco is about 6-7% of the total assets. Hence it is requires the

due attention. As stated earlier the main inventory of KRIBHCO is Mechanical Spares,

which are proprietary type of items in most of the cases. These items are costly and having

one or two sources of supply. The management is now more focused on reducing the level

of mechanical pares.

The inventory of stores and spares has more than 6000 items and are being

managed by material/purchase department. Because of the use of codification and

computerization the management of these inventories is carried out very well. Codification

helps in identification of an item and in standardization, where as computerization assists

in carrying out various inventory related analysis and identifying non-moving items.

As they have already established standards of levels for some items and for other

items they have like a fluctuating level system supported by computer technology, which

updates levels whenever new price for a material is entered into system. That is why it can

be said that they have scientific ways to manage inventory properly with the help of

scientific inventory management control system.

85

C H A P T E R – VII:C H A P T E R – VII:

BIBLIOGRAPHYBIBLIOGRAPHY

86

BBIBLIOGRAPHYIBLIOGRAPHY

WEBSITES:-

www.kribhcosurat.com

www.kribhco.net

www.Google.com

BOOKS:-

Financial Management, Ninth Edition, I. M. Pandey, Vikash Publishing

House

Project Guidelines:-

FINANCIAL Reports of KRIBHCO, Year 2007-2008, 2008 – 2009.

Knowledge and guidance of Mr.P.G.Soni

87

Annexure

88

ANNEXURES

ANNEXURE –1

SCHEDULE OF SUB-DELEGATION OF FINANCIAL POWERS:

Nature of Indents Extend of Powers Remarks

(1) Approval of indents

1.1 Normal stores stock items

a) General Manager

b) Departmental Manager

Full power

Upto Rs. 2 lacs in each case

1.2 Non stock or restricted issue

items

a) General Manager

b) Departmental Manager

Full power

Upto Rs. 50000/- in each cases.

1.3 Service Contracts

a) General Manager

b) Departmental Manager

Full power Rs. 50000/- in each cases.

1.4 Capital Items

a) General Manager Full powers

2. Calling for tender

2.1 Open tender

a) General Manager

b) Material Manager

Full powers

Full power for item up to Rs. 2 lac in

each case.

2.2 Limited Tender

a) General Manager

b) Material manager

Full powers

Full power for items valuing up to Rs.

1 lac

2.3 single Tender

89

a) General Manager

b) Material Manager

Full power

Upto Rs. 25000/- in each case

3.Acceptance of tender

3.1 Opening tender

a) General Manager

b) Material Manager

Up to Rs. 10 Lac in each case

Upto Rs. 50000/- in each case

3.2 Limited tender

a) General Manager

b) Materials Manager

(i) Normal stock items

(ii) Non-stock items

c) Supdt. (Purchase)

Purchase office

Up to Rs. 10 lacs reasons to be

recorded for not calling tender

Up to Rs. 50000/- in each cases

Upto Rs. 25000/- in each cases

Upto Rs.10000/- in each cases

3.3 single tender

a. General Manager

b. Material Manager

Upto Rs. 2 lacs in each case

Upto Rs.25000/- in each case

3.4Proprietary items

a) General Manager

b) Material Manager

c) Suptd. (purchase)

Upto Rs. 10 lacs in each case

Upto Rs. 50000/- in each case

Upto Rs.10000/- in each case

4. Purchase control at

controlled rates and

analyzed through public

sector agencies including

purchase against DGS & D.

a. General Manager

b. Material Manager

c. Suptd. (Purchase)

d. General Manager

Up to Rs. 10 lack in each case

Upto Rs.2 lack in each case

Upto Rs. 50000/- in each case

Full power for purchase of Naphtha

90

5. Emergency Purchase

through personal inquiry

a. General Manager Upto Rs. 1 lac in each case

6. Cash Purchase

a. General Manager

b. Dy. Manager

Rs.2500/- on each case.

Total not to exceed 3:5 lacs per year

Rs. 500/- in each case

7. Repair to Staff

Cars/Jeeps/Buses/Ambulanc

e/Truck etc.

a. Manager (Maintenance) Full power total not to exceed Rs.

4000/- per year for vehicle.

8. Nature of power

a. Supdt. (Mech. Services) Rs. 500/- in each case.

9. Purchase Commitments

(in excess of provision in the

annual budget)

a. General Manager Excess up to 20% of budget allotment

for the individual items provided and

approved budget main head is not

exceed by more than 5%

All such cases to

be reported to

M.D.

10. In absences of provision in

the annual budget

a) General manager For items of petty nature Rs. 1000/- in

each case provided total sanction in

the year would not exceed is 10000/-

11. Amendment to purchase

order & Contract

11.1 where price is effected

a. General Manager Full power

These are

subject to the

overall. Limits

given in 3 above.

91

b. Material Manager Full power

12. Where price is effected

a. General Manager

b. Material Manager

+ 10% original contact/purchase

order price or Rs. 1 lac whichever is

more.

+5% of the original contract

(Purchase order for Rs. 5000/-

whichever is more)

Increased in

purchases

order/contract

value to be

allowed

Only this will

not cause the

approval budget

main head to

exceed by 5%

13. Signing of Purchase

Orders/Contract

a. General Manager

b. Materials Manager

Supdt.

(Purchase) purchase

officer

Full powers within his delegated

powers and above Rs. 1 lac with the

approval of M.D.

Upto Rs. 50000/- in each case.

92

ANNEXURE – 2

KRISHAK BHARTI CO-OPERATIVE LIMITED, HAZIRA PROJECT SURAT

LIST OF PRIMARY GROUPS

(I & II DIGIT)

Primary Group Description

01 Bearing

02 Coupling and mechanical seal ( V Belt)

03 Test

04 Fasteners

05 Hardware (other Fastners)

06 Testing Group For Closing Purpose

07 Gaskets and packing

08 -

09 Welding material and equipment

10 Abrasives

11 Tools & NDT Equipments

12 Elastomer/Plastic (inc. house)

13 Metal (Ferrous)

14 Metal (Non ferrous)

15 Pipe and Pipe fittings I.B.R.

16 Flanges I.B.R.

17 Values (other than control solenoid/relief) IBR

18 Tubes IBR

19 Pipe and Pipe fitting non IBR

20 Flanges non IBR

21 Valves (other than control solenoid) non IBR

22 Tubes non IBR

23 -

24 Electrical general stores (other than cable)

25 Cable (power and control)

26 -

93

27 Instrument General stores

28 Mechanical items

29 Chemical, catalyst and water treatment resins

30 Lab equipments

31 Pints, oil, lubricants, fuel and gases

32 Round rolled bars

33 Insulation and refractory

34 -

35 Fire fighting & safety

36 Flood Materials

37 Civil construction materials

38 Bag , bagging materials & containers

39 Thread

40 -

41 Liveries & protective clothing

42 Furniture furnishing canteen horticulture & stationary

43 -

44 -

45 Medicine/medical items

46 Project/new scheme items

47 -

48 Regularized items

49 Consumable stores(other than those included elsewhere)

50 D.C. equipment (other than motors)

51 Electrical instruments & relays

52 Motor Operated Value

53 Generator

54 Flame proof LGT &ACC

55 Battery charges , Ups

56 Motors

57 M.C.C

58 Industrial Heaters

59 Switch gear

60 -

61 Telephone exchange items

62 Transformer

94

63 DCS/PLC/PC/DATA/OGR

64 Analyzers

65 Pneumatic instruments

66 Control valve

67 -

68 Flow instruments

69 Temperature instruments

70 Pressure instruments

71 Level instruments

72 Vibration instruments

73 Elect. Weighing inst.

74 Receiving stations

75 Electronic instruments

76 Transmitters

77 Field Instruments

78 Instrument electronics

79 Testing equipment

80 Relief value / require disc.

81 -

82 Compressors, turbines, fans & blowers

83 Conveyors & evaluation

84 -

85 Exchangers

86 Engines

87 Furnace & boilers

88 Bio – Fertilizers Equipments & PIPE

89 Gear box (other than compressor gears)

90 Capital Items

91 Material handling equipments (other than conveyors & elevator)

92 Mobile equipments & rolling stock

93 -

94 Pumps & ejectors

95 Surplus items of coal handling

96 Vessels & tanks

97 VLVS & Pipe Fittings

98 Coal Mill Surplus

95

99 Special equipment

96