INVENTORY MANAGEMENT IN HINDUSTAN SHIPYARD LIMITED VISAKHAPATNAM
Project work
1. A STUDY ON
“INVENTORY CONTROL MANAGEMENT”
IN
BHARAT HEAVY PLATE & VESSELS LTD, VISAKHAPATNAM
A project report
Submitted to the S.V.PG. COLLEGE, ELURU, WEST GODAVARI.
in partial fulfillment for the award of the Degree of
“MASTER OF BUSINESS ADMINISTRATION”
BY
Mr. S.SURESH
Under the guidance of
P.S.R MURTHY
Dy. MANAGER(MP-P&T)
DEPT. OF BUSINESS & MANAGEMENT STUDIES
S.V.P.G. COLLEGE
ELURU
WEST GODVARI
2009-2010
2. CERTIFICATE
This is to certify that this project work entitled “A STUDY ON INVENTORY
CONTROL MANAGEMENT” in BHARAT HEAVY PLATE & VESSELS LTD is a
bonafide work carried out by Mr. S.SURESH under our guidance to Department of
S.V.P.G. College Eluru, West Godavari for the award of Master of Business
Administration ( MBA).
Name & Address of the Guide. Signature of the Guide
P.S.R MURTHY P.S.R MURTHY
Dy. MANAGER(MP-P&T)
3. ACKNOWLEDMENT
It is of immense pleasure for me to thank those who have extended their help and
co-operation for the successful completion of my project work.
Firstly, we would like to thank Prof., director of PG courses for having granted me
the permission and provided me the support and motivation during the study of my MBA
degree course and project work.
We would like to thank head of MBA department Sir. K.P. RAJU also for having
provided with their guidance and co-operation throughout my study.
We express my sincere thanks to Mr. P.S.R. MURTHY BHPV Ltd, for providing
me with helpful information, guidance and co-operation and also thankful to Mr. K.Appa
Rao, Manager (Training Centre) Mr. Bhaskar Reddy (Store Manager) & Mr. K.Ramana
Murthy, Manager (Finance) for giving me an opportunity to undertake this study in this
esteemed organization and providing me with the assistance at all time to conduct the
study.
S.SURESH
4. DECLARATION
I hereby declare that this project report entitled “A STUDY ON INVENTORY
CONTROL MANAGEMENT IN BHARAT HEAVY PLATE AND VESSELS LTD,
VISAKHAPATNAM” submitted by me under the esteemed guidance of Mr. S.SURESH
S.V.P.G COLLEGE is my own and has not been submitted to any other University or
Institute or published earlier.
Date: Signature of the Student
S.SURESH
5. PREFACE
The project brought out is “A study on Inventory management with
respect to BHPVL, Visakhapatnam.”
The first chapter deals with introduction to financial management and BHPV Ltd.
The second chapter deals with company profile.
The third chapter deals with industry profile.
The fourth chapter deals with theoretical framework of Inventory capital
management.
The fifth chapter deals with analysis and interpretation.
The sixth chapter deals with findings, suggestions and conclusions.
6. CONTENTS
INTRODUCTION
COMPANY PROFILE
INDUSTRY PROFILE
THEORITICAL FRAMEWORK
INTERPERTATION AND ANALYSIS
EXHIBITS
FINDINGS AND SUGGESSIONS
BIBILIOGRAPHY
8. NATURE OF FINANCIAL MANAGEMENT
Financial management is that managerial activity which is concerned with the planning
and controlling of the firm’s financial resources. It was a branch of economics till 1890 and
as a separate discipline it is of recent origin. Still it has no unique body of knowledge of its
own and draws heavily from economics for its theoretical concepts even today.
Financial management is managerial activity, which is concerned with planning and
controlling of a firm’s financial resources. Theory of financial management provides
conceptual and analytical insights to make decisions relating to the financial aspects of
organization skillfully.
Definitions of financial management
• According to Soloman “Financial management is concerned with the efficient usage of
an important economic resource namely capital funds”.
• According to S.C Kuchhal “Financial management deals with procurement of funds
and their effective utilization in the business”.
• According to Phillippatus “Financial management is concerned with the managerial
decisions that result in the acquisition and financing of short term and long term credits
for the firm”.
With these definitions we can understand the functions of the financial management.
Those are procurement of funds and effective utilization and part of these functions use
different techniques.
9. OBJECTIVES OF FINANCIAL MANAGEMENT
The main objective of financial management can be said as:-
1. PROFIT MAXIMISATION:- The objective of every organization will be profit
maximization.The Financial management also has the objective of profit maximization.
2. WEALTH MAXIMISATION:- It is a long-term objective. Wealth maximization is
nothing but increasing the wealth of shareholders by way of contributing to the net worth
of share holders.
For attaining these above said objectives financial manager makes crucial decisions
relating to investment in different projects, dividend decisions ,debt equity mix decisions,
source of finance, analysis of ratios and working capital management.
10. OBJECTIVE OF THE STUDY
This study of Inventory control and management in BHPV LTD has been undertaken to
view to analyse the working of the materials and inventory control section and suggest
ways to reduce inventory holding of a heavy engineering and fabricating unit like BHV.
SCOPE OF THE STUDY
The scope of the study is connected to one of the key areas of finance i.e. Inventory
control and management. The study appraises the company's meeting the requirements for
the process industries in the core sector such as fertilizer, oil refineries, chemicals etc.
PERIOD OF THE STUDY
The duration of the study covers very short period of time i.e. one month.
DATA COLLECTION
PRIMARY DATA SOURCES: - Direct interaction with finance department and other
departments such as production, HR department and administration departments.
SECONDARY DATA SOURCES: - Information collected from the annual reports of
BHPV LTD PUBLISHED FROM 2006-2009 and other books and manuals of BHPV LTD.
11. LIMITATIONS OF THE STUDY
Every study is conducted under certain limitations.
• The whole study was conducted within a short span of eight weeks. I was sincere
in my efforts in gathering the maximum possible information and utilizing it for
study.
• It was not possible to get hundred percent correct information. The research was
made according to the information available from related departments and through
annual reports published.
• BHPV LTD being a job order industry cannot be compared to other manufacturing
concerns of the heavy engineering industry.
14. INDUSTRY PROFILE
In the liberalized economy of India and in the era of globalization a company must
rethink its business mission and all functional strategies. In these days companies find
themselves competing in a race where the road signs and rules keep on changing where
there is no finish line, or no “permanent win”. In these days when it is very competitive
companies can succeed only by having innovative ideas combined with by effective
financial management.
Therefore, it is not surprising that today’s winning companies are those which foresee
the future and manage the finance effectively .One can manage finance effectively by
managing working capital, capital structure and taking decision on capital budgeting
Ultimately, finance is at its best about value adding, developing new products and raising
the worlds standards of living. The heavy engineering industry is a major strength of any
economy. These heavy engineering industries, which produce capital goods, are the most
modern of the entire industrial group.
15. In India these heavy engineering industries occupy a crucial role in its economic
development in view of the huge investment as well as the critical importance to nation.
These industries are mostly confined to the public sector only.
B.H.P.V. ltd is the largest fabricator of process equipment in India for the petroleum,
chemical and allied industries. It is fully owned by the government of India and is managed
by an autonomous board of directors. Situated in the city of destiny of visakhapatnam on
the Eastern see coast of the deccan plateau, B.H.P.V. Ltd is accessible by road, rail, sea and
is well connected to all metropolitan cities by air.
COMPANY PROFILE
HEAD OFFICE:- Visakhapatnam, Andhra Pradesh.
BRANCH OFFICE:- Mumbai,Calcutta,Chennai,Hyderabad,New Delhi and Vadodara.
Bharat Heavy Plates and Vessels Ltd. It is a public limited company. It is a job order/
shop production industry. According to customer specifications and requirements it
produces various products.
Foreseeing the country’s need for fabricating equipment of an exclusive factory with
the main object of reducing dependence on foreign suppliers and become self sufficient
ourselves BHPV LTD was established in the year 1966 to meet the demands of process
equipment for core industry like fertilizers, petrochemicals, petroleum and other chemical
industries initially.
BHPV LTD using different types of materials manufactured and supplied several built
equipments such as pressure vessels, heat exchangers, columns, internal trays etc. After
executing some important orders, BHPV LTD gained full confidence of customers which
cleared the way to enter the line of cryogenic field, pulp cooking plant, evaporation plant
16. and industrial boilers on a total turnkey basis which of later years helped in augmenting
turnover of the company and increasing profitability.
INTRODUCTION TO BHPV
Bharat Heavy plates & Vessels Ltd., started off in 1966 as fully owned government
company for Design, Manufacture & Supply of capital equipment required for process
industries in the core sector such as Fertilizers, oil refineries & Petrochemicals etc.
The foundation stone was laid by Sri D.Sanjeevayya, the then Minister of Industry on 8 th
Jan 1967 in Visakhapatnam. It comes under the purview of the Department of Heavy
Industry, Ministry of Industry. With the technical collaboration of M/s. SKODA Export
Company of Czechoslovakia in the year 1968, it got expertise and guidance for establishing
the project and for the design & manufacture of various process equipments. BHPV
became a fully owned subsidiary of Bharat Yantra Nigam Ltd., in the year 1987.
Licensed installed capacity is 23210MT. The initial capital outlay being Rs.17.5 crores.
The product mix included heat exchangers, columns, and pressure vessels. Storage vessels,
piping etc. During the year of it commercial production i.e. 1971-1972 the turnover was
just Rs 5 lakhs. Now BHPV has crossed the turnover of 200 crores.
Past ten years turnovers are give here: In 1996-97 it has recorded on turnover of Rs
29998 lakhs i.e. all time high. But due to lack of orders in 2003-2004 .BHPV has a made
turnover is 5956 lakhs only. Fast 10 years turnover are as follows.
YEAR TURNOVER (Rs in lakhs)
1996-1997 Rs.29998/-
1997-1998 Rs.29160/-
17. 1998-1999 Rs.21457/-
1999.2000 Rs.12553/-
2000-2001 Rs.25670/-
2001-2002 Rs.23410/-
2002.2003 Rs.14750/-
2003-2004 Rs.5956/-
2004.2005 Rs.10943/-
2005-2006 Rs.12205/-
2006-2007 Rs.17960/-
HISTORY OF BHPV
Licensed to start construction of plant at Visakhapatnam in 1966. BHPV confronted
many obstacles such as water problems, frequent power cuts both at initial stage as well as
at the time when construction was going on . In spite of all those obstacles the civil and
structural work was completed to a major extent by the end of 31 st March, 1967.The
licensed and installed capacity is 23210MT.The initial capital outlay being Rs. 17.5 crores.
18. PROFITEERING YEARS FOR BHPV:-
After a series of continuous loss years, BHPV for the first fine in its history in 1979-80
has witnessed several significant events both on financial as well as production fronts.
BHPV for the first time in its years of commercial production attained a break-even level
with a marginal profit of Rs.33.09 lakhs as against a net loss of Rs.129 lakhs projected at
the beginning of the year. During 1980-81 the company for the second consecutive year,
earned a net profit(after tax) Rs.48.21 lakhs from its operations. This year BHPV Ltd
operations included manufacturing of very critical and sophisticated equipment to core
industries.
Again in 1981-82 the company operations resulted in a net profit of Rs 60.19 lakhs as
against a budgeted loss of Rs.20/- lakhs. Major pending interest on loan from GOI was
cleared in this year. During 1982-83 BHPV reached 100% target production and resulted
in a net profit of Rs.03.71 lakhs as against the budgeted loss of Rs.95 lakhs. With
prestigious work orders from Visakhapatanam steel plant for supply of air and gas
separation plants BHPV crossed a target production and its operations resulted in a net
profit of Rs.575 lakhs.The year 1986-87 is treated to be the dark year for BHPV. Since its
entrance into threshold of profit arena.
It could not achieve its set motto of beyond billion barriers. Sinking of a ship carrying
bulk of raw material and components slackening demand for process equipment etc,
resulted in a short fall in production and hence company suffered a loss of Rs 170 lakhs
again in 1987-88 BHPV’s projects were successfully fabricated and its profits took an
upward trend and its operations resulted in PAT of Rs 290 lakhs.
19. It was expected to emerge an increasing trend in the profits of BHPV for the year
1988-89. After 1987-88 profits are in decreasing trend. It got a loss of Rs 590 lakhs during
1995-96. Amidst tight liquidity conditions the company has made a net profit of Rs 1.31
crores(before tax) and Rs 1 crore after tax during 1997-98, Rs 1.23 crores PBT. Details of
turnover, profitability for the period from 1996-97 to 2005-06 are as follows
YEAR TURNOVER PROFITABILITY(before int)(Rs in lakhs)
1996-1997 29998 2411
1997-1998 29160 2825
1998-1999 21465 1968
1999-2000 12558 476
2000-2001 25670 2301
2001-2002 23409 2678
2002-2003 14750 14512
2003-2004 5956 10694
2004-2005 10943 3281
2005-2006 12202 -2321
2006 – 2007 17960
BHPV LTD AN OVERVIEW
INTRODUCTION :-
Incorporation of the company :-1966
Primary objective :- To manufacture custom built capital equipment for the process
industries such as fertilizers, petrochemicals, petroleum refineries , chemicals etc.
Technical collaboration provided by : M/S SKODA EXPORT Czechoslovakia.
Commencement of construction : 1968
Completion of construction : 1971
20. Commencement of production : 1971
Initial project cost : Rs 17.5 crores.
Initial product mix : Heat exchangers, columns pressure
vessels, piping etc
Installed capacity : 23210 MT
Turnover for the year 2005- 2006 : Rs 109.42 crores.
turnover for the year 2006-2007 : Rs. 179.60 Crores
RESOURCES:-
Production Facilities:-
Factory Area : 197 Acres
Total covered area : 90000 sq Meters.
Covered area of production shops : 56000 sq Meters.
Power Requirement : 3000 K.M from APSEB
No of Ancillary units : 11 Units
Important Machinary:-
The factory is provided with comprehensive and modern manufacturing testing
facilities and suitable material handling equipment.
The maximum crane lifting capacity is 120 tonnes but loads up to 250 tonnes can
be lifted with improvisation.
Maximum rolling capacity is 60 mm in cold condition and 170 mm in hot
condition.
21. BHPV Ltd has the largest heat treatment furnace in India the size being 5.5
meters width 5.5 meters height and 36.5 meters long . One more furnace of 200
ton capacity and 15 mtr’s bogie length has been added.
Other critical equipment available with BHPV Ltd are.
Deep drawing Hydraulic press of 1600 T capacity.
A number of welding motors of capacity up to 250 tonnes.
Welding equipments such as manual arc, sub merged arc , TIG , MIG , plasma
including the latest high productive welding equipment such as twin head
submerged arc welding and Bi-cathode TIG welding.
Tube fining machine.
A number of vertical and horizontal boring machines, with a maximum capacity
of 5 meters dia and 200 MM spindle dia respectively.
Different types of non destruction testing equipment.
Well equipped physical and chemical laboratories.
Metrology section etc.
HCL super- mini computer to mini computers.
56 CAD machines and 118 personal computers.
MAN POWER:-
As on 31.03.2007
Workmen / staff : 1054
Supervisors : 164
Executives : 294
Total employees : 1512
Employee welfare amenities: -
Town ship area - 151 acres
No of quarters - 1192
22. 20 bed hospital
protected water supply
Underground drainage system
English medium school with AP state syllabus
Telugu medium school with AP state syllabus
Special school for mentally handicapped children
Vocational training center for mentally handicapped
Community center for cultural activities and sports
Open theatre facility
Kalyana mandapam
23. DIVERSIFICATION:-
Originally established for fabrication of process equipment, as a step towards
diversification the Company signed an collaboration agreement with M/s. L AIR LIQUID
of France in 1971 for manufacture of
• Air and gas separation plants
• Cryogenic storage systems.
Further diversified into the area of industrial boiles in the range of 50-200 TPH in
collaboration with M/s. BHEL in 1981 based on the recommendation of the working
group constituted by DHI.
Entered into the area of oil and gas processing systems in 1990 in collaboration with M/
s. BS and B Engg .co.USA.
COLLABORATION AND ABSORPTION OF TECHNOLOGIES:-
Some of the significant collaborations BHPV Ltd entered include:
M/s. BSL, France in respect of field erected cryogenic storage tanks.
M/s. Delas, France in respect of
M/s. ABB LUMMUS, Netherlands for Heat Transfer systems
Case-to-Case tie ups, BHPV entered into includes:-
Evaporators from M/s. Ecodyne Corporation ,USA.
Paper and plus digesters from M/S KAMYR AB ,Sweden.
Gas collection modules from M/S KTO Corporation,USA
Large space simulation chamber from M/S HVEC,USA
Primary reformer from M/S Halder Topos,Denmark
24. Waste heat boiler from borgig,Germany
Feed waster heater from deals, France
Argon recovery unit from M/S L AIR LIQUIDE,France
Hydrocracker reactors from M/S Korting Hannover,Germany
LPG handling and storage system from M/S NOELL LGA Germany
Ammonia storage system from M/S KTI,Germany etc.
By obtaining know-how from various world renowned collaborators, BHPV upgraded
its status from a mere fabricators of process equipment to that of an engineering company
of international repute.
PROJECTS OF NATIONAL IMPORTANCE EXECUTED:-
S.NO CUSTOMER PROJECT/ EQUIPMENT
1. IOCL, painpat Hydro crakar reactors-3 Nos
2. IOCL,painpat Reactor genarator and office
chamber
3. IOCL,painpat Reactor and WHR package
4. IOCL,mumbai 150 MT capacity LPC bullets
5. IOCL,Chennai Sphare
6. BOKARO STEEL PLANT,
BOKARO Argon Recovery Unit
7. NRL NUMALIGARH Air Fin collers/SS clad
Vessels spheres etc
8. HPCL,Visakhapatnam CDV Heater with APH
System/VDU Heater
25. 9. HPCL, VREP-II
Visakhapatnam Clad/CS columns/CS heat
Exchangers etc
10. HPCL,Visakhapatnam Co boiler
11. HPCL,Visakhapatnam Revamping of 50 TPH
Oil &gas fired boiler
12. HPCL,Mumbai 50 TPH boiler
13. HPCL,Mumbai Nitrogen plant
14. Hyundai Heavy Iindustries, New Delhi Cryo Notrogen plant
15. Space application center,Ahmadabad 505 M Dia Thermal
vacuum system
16. TECHNIMONT ICB LTD Mumbai Nitrogen plant
17. OSWAL CHEMI FERTILIZER LTD Waste Heat LP boiler
PARADEEP
18. IFFCO ,KANOLA 15000 MT A TM Ammonia
storage tank.
QUALITY:-
BHPVL is reputed for quality and workmanship of its products. BHPVL has
received a number of international accreditations such as
LLOYDS REGISTER OF INDUSTRIAL CLASS I certificate for fusion welded
pressure vessels.
ASME -U &U2 STAMPS on pressure vessels.
ASME - ‘S’ stamp for industrial boilers.
National Board of Boiler and pressure inspectors USA – ‘R’ stamp for repairs of
coded vessels.
26. STAMI CARBON -UREA REACTORS
HOLDOR TOPSOE – AMMONIA REACTORS AND HIGH PRESSURE HEAT
EXCHANGERS
ARBIAN AMERICAN OIL COMPANY –PRECESS Plants.ssss
As a part of total quality management programme BHPV has acquired ISO 9001
certification during the year 1993-94 particularly to boost up its export and to be
competitive in the international market.
Recertification of ISO 9001 has been obtained in September 96. In recognition of high
standards of our quality confederation at India industry (CII) southern region, AP presented
the quality award.
RESEARCH AND DEVELOPMENT:-
Research and development department was established in 1975 and is well equipped
with high-tech equipment to cater to applied research and product development .R&D has
developed 136 projects so far some of the products commercialized include: -
1. Titanium anodes.
2. Titanium air bottles.
3. Cryogenic Vats.
4. Individual quick freezing unit.
5. Super insulated piping.
6. Super insulated cryogenic storage tanks.
7. D.M water plants.
A prestigious order for development of heat exchangers for Light combat
Aircraft(LCA) phase II has been received from Aeronautical development Agency, ,
Bangalore.
27. Some of the awards received for excellence in R&D include:-
CIS award for R&D achievement in 1992-93.
“The chelikani Atchuta rao memorial award” from FAPCCI for individual achievement in
R& D effort in 1996 (MR BSV Prasad).
PRESENT STRENGTHS:-
Excellent design and Engineering capabilities.
State of the art manufacturing facilities.
Accomplished image as a supplier of quality products in domestic and
international market.
High degree of customer confidence.
Technological Tie up arrangements.
Well-trained and qualified work force and engineers.
Sound work culture and harmonious industrial relations.
Extensive computerization.
Capacity to supply projects and systems on turnkey basis.
Project management skills.
28. PLANS AND STRATEGIES:-
To grow as an engineering, procurement and construction company.
To enlarge export business.
To resort to extensive computerization and automation for reduction of cycle
time, improvement of quality and reducing costs.
To forge strategic business alliances with international companies to derive
technological and marketing advantages.
To strive for continuous updating of technologies to be on par with
international companies.
To focus on human resource development.
To change the work culture to be compatible with market demands.
CONSTRAINTS:-
Dependence on imports even for common materials like Boiler quality
plates.
Port congestion adding to the delays in importing materials.
Big burden of high interest makes on working capital while competing
with international suppliers who have the facility of very low interest rates.
Abnormal increase in bank charges such as commission on bank
guarantees, refinement of documents etc.
29. Restrictions in shipping imported materials (FOB contracts Vs C&F
contracts) resulting in delays.
Shortage of man power due to VR scheme several times.
Replacement /updating of machinery.
31. INDUSTRY PROFILE
BHPV is a subsidiary of BYNL(Bharat Yantra Nigam Ltd).
The major group subsidiaries of BYNL are:-
Bharat heavy plates and vessels Ltd - Visakhapatnam
Bridge and roof company(India)Ltd- Howrah.
Triveni structurals Ltd - Naini,Allahabad.
Bharat pumps and compressorts Ltd-Allahabad.
Ricuardson & Cruddas (1972)Ltd- Mumbai.
Tungabhadra steel product Ltd- Hospet, Karnataka.
MARKET PROFILE:-
This covers the product range of customer profile and competitors profile.
CUSTOMER PROFILE:-
BHPV’S clientele includes:-
Public
Private
Co-operative
Sector organizations in almost all the core sector of economy such as all the
32 fertilizer plants
22 petroleum refineries
12 petrochemical complexes.
All major integrated steel plants in India
Oil and gas
Nuclear and defense etc.
32. Other major customers are from paper, power, non ferrous, chemicals, pharmaceuticals,
synthetic fiber, coal, dairy, space sectors.
IOCL (PANIPAT)
FACT (UDYOGAMANDAL)
GAIL (AURAIYA)
IOCL (KANDZA)
ASSE (SINGAPORE)
IEEEO (PHULPHUR)
COMPETITOR PROFILE:-
In the area of process plant:-
L&t -Walchand Nager Industries
Grengg - Bhilai engineering,Ahmedabad
Lioyds steel - Tessmaco,Calcutta
BHEL - ISGEC John Thomson, Yamuna nager
Godrej - Reliance Heat transfor ,Mumbai.
In the area of cryogenics:-
INDIAN:
IOCL - Calcutta
ICCP - Kanpur
INOX - Baroda
Sanghai oxygen - Mumbai
L&T - Mumbai
Lindi process systems - Baroda
33. VJU - Mumbai
Essar - Gujarat
FOREIGN:-
LINDE - Germany
BOC - UK
Air products - US &UK
Kobe - Japan
Hitachi - Japan
HOPM - China
Pracair - US
In the area of combustion system : -
ISGEC - John Thompson,Yanmuna nager
Babcock Thermax - Pune
Walchand Nager industries -
Ignifluid boilers - Chennai
BHEl - Trichy
ABL - Durgapur
L&T - Mumbai
VINASSE FIRED BOILERS :-
KTI - New Delhi
Thermax - Pune
34. FIRED HEATERS:-
EIL - New Delhi
KTL - New Delhi
Thermax - Pune
Kavcri L&T - Mumbai
WASTE HEAT SYSTEM GENARATORS:-
BIIKI
L&T
Babcock Thermax
IN THE AREA OF SYSTEMS:-
INDIAN:
L&T
Babcock Tliarmax - Kanari
GIMMCO - SPIC
ICD - Gajraj
BHEL - Triheni
FOREIGN:
HHI - Korea
RTZ - Northerlands
Technical - Italy
36. INTRODUCTION
Inventory is the physical stock of items that a business or production organization
keeps in hand for efficient running of affairs or its production. It is very essential that
material of
the correct quantity and quality is made available as and when required. With due regard to
economy in storage and ordering cost, purchase and working capital.
Inventory management means maintenance, up keep and assurance of adequate supply
of goods in order to meet an expect pattern of distribution of demand for a given financial
investment.
Meaning of Inventory:-
Inventory may be defined as “usable but idle resource” in other words literally the
inventory means that stock of goods or physical assets having economic value. If resource
is physical or tangible object such as materials, it is generally termed as stock. Inventory
may be regarded as those goods which are procured, stored and used for day-to day
functioning of the organization. Inventories viewed as a large potential risk rather than as a
measure of wealth due to the fast developments and changes in product life.
Inventory plays a vital role on business, lesser inventory will have a positive reflection
on balance sheet. In any organization capital investment is divided between fixed assets
and Current Assets. Fixed assets consist of plant and machinery, land and buildings that are
used in the conversion process. Gross current assets are those, which are required to
operate day-to day requirements, and used as inputs in the process of conversion. These are
converted into output, which, on being sold, brings in money/ finance to the organization.
Hence, the productivity is measured by the ratio of outputs to inputs, which means
economic activity where raw materials are converted into value.
Inventory management is one of the indicators of the management effectiveness on the
materials management front. The input resources of business activity are men, machines,
37. money and materials. The time is another resource, which is part of all these four resources.
The out puts are goods and services. Management task is to reduce the cost incurred on
materials to the minimum which in turn results in earning more profits or to make
company’s products more competitive.
Objectives of Inventory:-
The main objective is to maintain overall investment in inventory at the lowest level
consistent with operating requirements.
To supply the product, raw material, sub assemblies, semi-finished goods etc., to the
users as per their requirements at right time and at right price
To reduce waste, surplus, scrap and obsolete items at the right price
To minimize holding, replacement and shortage costs of inventories and maximize the
efficiency in production and distribution.
To treat inventory as investment which is risky investment may lead higher returns and
for others less returns
Functions of Inventory:-
It is understood, inventory is a necessary evil and necessary because it aims at
absorbing the uncertainties of demand and supply by decoupling the demand and supply
sub systems. Thus and organization may be carrying inventory for the following reasons.
The uncertainties in demand and lead time necessitate building of safety stock so as to
enable various sub systems to operate somewhat in a decoupled manner. It is obvious that
the larger the uncertainty of demand and supply, the larger will have to be the amount of
buffer stock to be carried for a prescribed service level.
Time lag in deliveries also necessitates building of inventories. If the replenishment lead
times are positive then stocks are needed for system operation.
38. Cycle stocks may be maintained t get the economies of scale so that total systems cost
due to ordering, carrying inventory and backlogging are minimized. Technical
requirements also build up cycle stock.
Stocks may build up as pipeline inventory or work in process inventory due to finiteness
of production and transportation rates. This includes materials actually being worked on or
moving between work centers or being in transit to distribution centers and customers.
When the demand is essential, it may become economical to build inventory during periods
of low demand to ease the strain of peak period demand.
Inventory may also be built up for other reasons such as quantity discounts being
offered by suppliers, discount sales, anticipated increase in material price, possibility of
future non availability etc.
Importance of Inventory management :-
In the process of converting raw material into finished products, we need various items
from market / suppliers but the uncertainty over availability and correct arrival of goods
when they required is the fundamental reason for carrying inventories. The scope of
inventory management is
Determining EOQ
Determination of stock out
Determination of safety stock
Determining lead time
Determination of inventory status
Minimizing handling and storing cost
Effective running of stores
Defining policies to guide the inventory control programmes
Determining the most appropriate store organization structure
Inventory could be classified as:-
The inventory classification is based on the following aspects.
Manufacturing aspect
Service aspect
39. Control aspect
Manufacturing aspect :-
Raw Materials and supplies Inventories: These consists of raw materials, parts,
subassemblies and supplies, which the company
purchase from outside sources, namely suppliers, dealers or manufacturers.
Production Inventories: Raw materials, parts and components, which become
part of the product during the production process are called production inventories.
M.R.O Inventories: Maintenance, repair and operation supplies (M.R.O)
inventories, which are assumed in the production process but do not become part of
the product. For example, oil, spare parts.
In- Process Inventories : These are processed or semi-finished products
manufactured at various stages during the production cycle. In a bicycle factory
frames, pedals, rims, axles etc. are called in-process inventories or work- in
progress inventories.
Finished Product Inventories: Finished goods or stocks are completed products
ready to be sent away to the market or customers. These products have been
fabricated or manufactured or assembled from production and in-process
inventories, i.e. a complete bicycle in case of a cycle manufacturing factory or a car
in case of a car in case of a car manufacturing factory.
Material in Transit Inventories: These are raw materials and supplies
inventories which are in transit and have already been paid for. These have not so
far been received at the factory.
Service aspect : -
40. a) Lot size
This means purchase in lots. This is resorted to
i) Obtain quantity discounts
ii) Reduce transportation and purchase costs
iii) Minimize handling and receiving costs
It would be uneconomical for a textile unit to buy cotton everyday rather than in bulk
during the cotton season.
b) Anticipation Stocks
These are kept to meet predictable changes in demand or in availability of raw
materials. The purchase of potatoes in the potato season for sale of roots
preservation products throughout the year is an example of this kind.
c) Fluctuation Stocks
These are carried to ensure ready supplies to consumers or customers in the face
of irregular fluctuations in their demands.
d) Risk Stocks
These are the items needed to ensure that there is no risk of complete
breakdown of production. These are items with ling lead time for supply but are
vital and critical for production.
Control of Inventory (ABC classification):-
A good start in examining an inventory control system is to make ABC classification. It
is known as ABC analysis which means the ‘Control’ will be ‘Always Better’ if westart
with ABC of inventory. This concept divides inventories into three groupings in terms of
percentage of number of items and percentage of total value as given in
41. A- items group constitutes 10% of the total number of items and 70% of the total
money value for all items
B- items group consititues 20% of the total number of items and 20% of the total
money value for all items.
C- Items group is just opposite of A –items group. It consititutes 70% of the total
number of items and 10% of the total value.
This classification provides clear cut indications for fixing priorities of control to the
items. A class items must receive the attention first in every respect of the control i.e tight
control, sound operating doctrine, attention to security etc.
Inventory Models:-
Inventory Models are used to reduce costs like overstocking costs and under stocking
costs. The following are some models of Inventory.
EOQ : Economic Order Quantity
FOIS : Fixed Order Interval System
FOQS : Fixed Order Quantity System
ORS : Operational Replenishment System
42. ECONOMIC ORDER QUANTITY:-
EOQ is essentially an accounting formula that determines the point at which the
combination or order costs and inventory carrying costs are the least. The result is the most
cost effective quantity to order.
EOQ may not applicable to every inventory situation, most organizations will find it
beneficial in some aspects of their operations. EOQ is generally practical when repetitive
purchasing or planning of an item and multiple orders or release dates for the same item is
done.
EOQ is generally recommended in operations where demand is relatively steady, items
with demand variability such as seasonality can still use the model by going to shorter time
periods for the EOQ calcualation.
EOQ = 2 ( Annual usage in units) x ( order cost)
------------------------------------------------
( Annual carrying cost per unit)
Annual Usage : The forecasted annual usage and expressed in units
Order Cost : Total number of orders for the year multiplied by the cost of
making one Order Annual number of orders is annual demand
divided by the quantity per order i.e D/Q As the size of order
increases, number of orders decreases and cost of
ordering decreases. If S= the cost of placing an order, then total
annual ordering cost would be ( D/Q)*S.
Ordering cost is also known as the purchase cost or the set up cost. These costs are not
associated with the quantity ordered but primarily with physical activities required to
process the order.
43. Carrying or Holding Costs:- Average amount of inventory on hand multiplied by
cost to carry one unit for the year.
Average inventory is ½ of the order quantity, for any
period, If we start out with Q and end up with 0 at the
end of the period then ( Q+0)/2 = Q/2
If H = average annual carrying cost per unit, total
annual carrying cost would be( Q/2)*H.
Assumptions of EOQ Model:-
Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead tune doest not vary
Each order is received in a single delivery
There are no quantity discounts
FIXED ORDER INTERVAL SYSTEM:-
In this method, the inventory is reviewed regularly such as once a month and based on
the review how much to be ordered is assessed . After our review, we order an amount
equal to the difference between the maximum level and the amount on hand. We must
order an amount to satisfy demand over one order cycle and one lead time.
Due to technological improvements this method does not prove to be advantage and
diminishing its use.
FIXED ORDER QUANTITY SYSTEM:-
In this method the order quantity is fixed and order or re-order is placed whenever the
inventory touches a certain level, known as the order or reorder point. FOQ defined as
ROP ( Reorder point) = Mean Lead time consumption.
44. OPERATIONAL REPLENISHMENT SYSTEM:-
In this method inventory is reviewed at periodical intervals and if there has been any
depletion in the inventory, an order or reorder is placed. The amount ordered is equal to the
amount by which a fixed replenishment level exceeds the actual inventory at the time of
review.
INVENTORY COUNTING SYSTEMS:-
Inventory needs to be properly accounted for as it is the form of money. There are two
principal ways of accounting for inventories:-
Perpetual Inventory system
Periodic Inventory system
Perpetual Inventory System:- It is a system of records maintained by the controlling
department, which reflects the physical movement of stocks and their current balance.
Perpetual inventory means the system of records, whereas continuous stocktaking, physical
checking of those records with actual stocks.
Advantages :-
Shortages can be avoided and management can determine the optimal order
quantity to use for every order.
The stocktaking task, which is long and costly, is avoided under this method
Management will have daily information of inventory on hand.
The investment in materials and supplies may be kept at the lowest point in
conformity with operating requirements.
45. Disadvantages: -
It includes added costs of record keeping, checking etc.
Periodic Inventory System:- It is also called P-system. This system has a fixed
ordering interval but the size of the order quantity may vary with changes in demand. In
this method the inventory is checked at prefixed intervals ( weekly, monthly, quarterly etc )
Advantages & Disadvantages ; Many items can be ordered at the same time resulting in
economies in processing and shipping. Possibility of stock outs between reviews and the
time and cost of a physical count.
Inventory Measurement/ Counting System:-
Two- bin system:- This system operates on reorder level ( ROL)system and it physically
segregates the stock of entire items into two bins. In this method two containers of
inventory will be kept. The second bin contains quantity equal to ROL i.e ( m+LC) where
m= safety stock, L = lead time, C= consumption rate and Q = recorder quantity.
Factors Affecting Inventory:-
Various factors both internal and external which have influence on inventory are:
Lead time
Relevant costs
Ordering costs
Inventory carrying costs
Under stocking costs
Over stocking costs
Service level
Obsolete inventory
Lead time:- It is defined as the period that elapses between the recognition of a need and
its fulfillment. It has to follow the following broad pattern before ordering an item and
making it available which includes in the total ordering cycle. Once the item is made
46. available then the need that item is over till a further need of same item raises. The whole
cycle classified into 4 Lead time categories:
Internal lead time (or) Administrative lead time:- It starts from identifying the need for
an item till and order is placed for that item. Requirement for an item has to be first
identified before it is ordered. Need for an item could be a requisition by the users
department or can be arrived against a pre-determined forecast. It may take a long time
before an actual need is finished.
External lead time:- Once an order is placed or supplied, a purchaser has to entirely wait
till the supplier delivers the goods. It includes a regular follow up to ensure a timely
supplier within the stipulated period is very important. Lead time of a manufacturer
depends on his business and time taken to manufacture and dispatch a product.
Transportation lead time:- It is the period from the time a manufacturer dispatches the
goods to the time of actual receipt of the goods at stores of the purchaser. Lead time
transportation is very high when the distance of the source of materials is very large,
especially in imports. In such situations are has to keep adequate stocks not only to meet
the production demand but also to take care of transportation time.
Inspection lead time:- Every material which comes to the store has to be subjected for
inspection to evaluate its quality. Specification, as per the requirement of the indent or
specified in the order.
Internal and inspection lead time are well within the purchases control. Even
transportation lead time could be brought under control by choosing the right mode of
transport and better planning. Manufacturers lead time which is acts big hurdles are acts
big hurdles for every purchase and requires constant follow up to get the materials on time.
47. 2. Relevant costs: - The inventory problem is one of the balancing various cost so that the
total cost is minimized.
Either for want of materials, production is lost or if keeping of inventories more than
adequate requirements, unnecessary expenditure of paying interest on the blocked funds.
Stocked inventory is useless incurring still higher cost, each ordering itself is costing
money.
Ordering cost(Co):- It is also termed as procurement/Acquisition cost. Each order that is
placed on supplier costs money, ordering cost is the sum resultant of costs of fulfilling
various activities that go in finalizing an order. Ordering costs include:-
Stationary
Typing
Dispatching of orders and remainders
48. Salaries and wages of the entire purchase, inventory control section, receiving and
inspection sections
Follow up costs
Receiving and inspection costs
Rent and depreciation on the space utilized by purchase department
Cost of source development
Cost of entertaining the supplier
Advertisement, tender form cost and tender apprising cost etc.
Total cost included on above heads
Cost per purchase order = -------------------------------------------------
Total numbers of orders
Inventory carrying cost (Cc):- All materials that are ordered have to be stored in stores.
This requires space, and other infrastructure arrangement. Inventories are stored strictly
storing company’s money, which attracts huge interest rate.
Inventory carrying costs are calculated as a percentage of the average inventory carried.
Average inventory calculated by adding up inventories of all the twelve months and then
dividing by 12 to get an average.
Under stocking cost (Ku):- Under stocking or out of stock is due to “non stocking of
inventory”. Which is measured in terms of opportunity cost due to loss of production by the
idling cost of a line? If the stock out results in an expedited order, then the extra charges
incurred have to be added to this cost.
49. Overstocking cost (Ko):- An opportunity is therefore lost, of utilizing company’s
valuable funds, overstocking cost is therefore a cost basically arise due to opportunity lost
due to the investment in inventory for a longer period than necessary. In situations, when
items are ultimately used this can be equated to
carrying cost. In situations where item cannot be used this cost is the difference between
the costs of carrying till that time.
Service level:- Under stocking cost and overstocking cost can be related to each other
through the concept of service level. The management can decide on a policy that 99 cases
out of 100, the demand must be satisfied. This means that the service level is 99%. Only in
one case out of 100 can there be a stock out. This fixation of level of service depends on
the management’s perception of the importance of particular item.
Service level = --------------- = ---------------------------------
Ku + K stock out cost + overstocking cost
INTFERENCE: If the under stock cost is very high then the management strive for a
higher service level to achieve level of 100%, very large stocks are needed.
4. Obsolete inventory:- Inventory that is purchased and stored and stored and which is of
no importance for the organization is termed as obsolete inventory.
Items which are held physically intact, but cannot be used due to lack of need are termed as
obsolete items.
The obsolesce of items is due to the following reasons:-
Technological changes.
Changes in product line.
Changes in the machines.
Changes in the design and layouts.
Over buying and thereby making inventory idle and excess.
50. Process of cannibalization i.e. removing a part from one machine and fitting it to
other thereby making the earlier machine obsolete.
For reasons of buying extra spares with original equipment there by causing them.
useless in the situation where it is not required.
Wrong preservation method.
Wrong machine handling and storage.
5. Scrap:- Any manufacturing process will generate scrap, because we do not have a
100% efficient system which can convert all the input into output salvaging of scrap is an
art. By applying scientific methods scrap is to be minimized to a great extent. Scraps are
classified as turning, borings, sheet cuttings, and pieces of rods oil soaked waste etc.
Hence, it is advantageous to segregate scrap so that the best price may be obtained. It is not
very difficult to achieve this because scraps are generated at different points and a
coordinated collection in classified bins will solve the problem.
Effects of inventory on a business:-
Control of inventories are difficult and our Indian organizations are not performing good
inventory management. We aware that bad inventory planning is one of the major causes
of almost every business failure. The major reason is inability to forecast accurately. In
many cases the need comes later than anticipated and sometimes it never materializes at all.
The result is excessive inventory or if demand comes sooner or is stronger than anticipated
the inventory is inadequate.
Effects of low stock holding or low inventory levels:-
If low level inventory is maintained than the actual requirement of production then it result
in the following:-
Increased production costs may result
Increased replenishment costs may arise
51. Effects of high stock holding or high inventory level: -
It could result into
• The capacity need to be increased subsequently larger amount of financial
expenditure.
• Infrastructural facilities need to be provided like capital investment
• Increased risk due to possible obsolesce
• Increased chances of wastage.
Factors effecting the determination of stock levels:-
• Finance resources
• Rate of consumption
• Lead time for deliveries
• Storage cost
• Price fluctuations
• EOQ
• Insurance costs
• Any statutory requirements
The Maximum stock Level:-
This is the level of stock above which the stock should not be allowed to increase. The
criteria of this level is to curb excess investment. In fixing the maximum, the main
consideration is usually financial, and the figure is arranged so that the value of stock will
not become excessive at any
time. Other points affecting this level are the possibility of items becoming obsolete and
the danger of deterioration in perishable commodities.
Maximum Level = Minimum Level EOQ
= ROL-minimum level*minimum lead time reorder quantity.
52. New Trends in Inventory Management:-
JUST IN TIME (JIT):-
JIT is a Japanese management philosophy, which has been applied in practice since
the early 1970s in many japanese manufacturing organizations. It was first developed and
perfected within the Toyota manufacturing plants by taiichi ohno as a means of meeting
consumer demands with minimum delays
Toyota was able to meet the increasing challenges for survival through an approach that
focused on people plants and systems. Toyota realized that JIT would only be successful
every individual within the organization was involved and committed to it, if the plant and
processes were arranged for maximum output and efficiency, and if quality and production
and programs were scheduled to meet demands exactly.
• workers are highly motivated to seek constant improvement up on that which
already exists.
• Companies should focus on group effort, which involves the combining of
talents and sharing knowledge, problem-solving skills, ideas and the
achievement of a common goal.
• Work it self takes precedence over leisure it is not unusual for a Japanese
employee to work 14-hour a day.
• Employees tend to remain with one company through out the course of there
carrier span.
53. • These benefits manifest them self in employee loyalty, low turn over cost and
fulfillment of company goals.
It has now come to mean producing with minimum waste. Waste is taking in its most
general sense and includes time and resources as well as materials. There are seven types of
waste namely:-
• waste from over production
• waste of waiting time
• transportation waste
• processing waste
• inventory waste
• waste of motion
• waste from product defects.
ELEMENTS OF JIT SYSTEM :-
Successful JIT system is logical out growth of the combination of the following practices:
• continuous improvement
• attacking fundamental problems –anything that does not add value to the
product
• devising systems to identify problems
• striving for simplicity-simpler systems may be easier to understand, easier to
manage and less likely to go wrong
• a product-oriented layout-produces less time spent in moving of materials and
parts
• good housing keeping-work place cleanliness and organization
54. BENFITS OF JIT SYSTEMS:-
JIT system has a number of benefits, few major or mentioned below:-
• reduced levels of in-process inventories, purchased goods, and finished
goods
• reduced space requirement
• increased product quality and reduced scrap and rework
• reduced manufacturing lead times
• greater flexibility in changing the production mix
• smoother production flow with fewer disruptions
• worker participation in problem solving.
• Pressure to build good relationships with vendors
• Increased productivity levels and utilization of equipment.
VENDOR MANAGED INVENTORY (VMI):-
VMI can be defined as:-
It is a streamlined approach to inventory and order fulfillment. With it, the supplier and
not the retailer, is responsible for managing and replenishing inventory using an integral
part of VMI, i.e. EDI, by electronic transfer of data over a net work. It can also be seen as
a mechanism where the supplier creates the purchase orders based on the demand
information exchanged by the retailer/customer.
VMI BUSINESS MODEL:-
In fulfillment process using VMI, typically the activities of forecasting and creating the
purchase orders are performed by the vendor/supplier and not bye the retailer. Electronic
data interchange (EDI) is an integral part of VMI process and takes a vital role in the
process of data communication. The retailer sends the sales and inventory data to the
55. vendor via EDI or other B2B collaboration facilities and the supplier creates the purchase
order based on the established inventory levels and fill rates.
In VMI the vendor tracks the number of products shipped to distributors and retail
outlets. Tracking tells the vendors whether or not the distributor needs more supplies.
Products are automatically replenished when supplies run low, and goods aten’t sent unless
there are needed, consequently lowering inventory at at the distribution center or retail
store.
BENEFITS OF VMI:-
Dual benefits:-
1. data entry errors are reduced due to computer-to-computer communications. Speed
of the processing is also improved.
2. both parties are interested in giving better service to the end customer. Having the
correct item in stock when the end customer needs it, benefits all parties involved.
3. a true partnership is formed between the manufacturer and the distributor. They
work closer together and strengthen their ties.
On a whole, vendor managed inventory reduces transaction cost such as:-
• Purchasing
• speeds transactions
• streamlines communication between customers and supplier
• Eliminates paper-to-computer data entry
• Improves data accuracy
• Free up staff to work on more productive activities
INVENTORY MANAGEMENT :-
• Delivery as needed cuts storage
• Helps you reduce inventory levels
56. • Reduces inventory obsolescence
• Improves inventory turns
• Improves fill rates
• Decreases lost sales
Concept of Zero Inventory:-
The concept of zero inventory or stockless production is a theoretical approach and
never attainable in reality, however, the concept of an ultimate level of excellence is bound
to stimulate constant improvement through imaginative attentions and creative and
innovative methods aimed to reduce inventories to this theoretical target.
The aim of stockless production is to find different ways to come as close as to this
concept to reach this theoretical target.
The concept envisages the following:-
Manufacture products only which the customer wants
Manufacture products only at the rate customers want them
Quality has to be perfect all the time
Manufacture goods instantly i.e necessary lead time should be zero
Manufacturing with out wastages
Therefore, the concept of zero inventory is not a set of established techniques. Rather, it
is a fundamental way of thinking to transform overall manufacturing to the simplest way
possible and generate new and original techniques for doing so.
Practical approach of Inventory Management in BHPV:-
BHPV undertakes manufacturing of process plant equipments for various customers and
the execution of jobs are based on orders received time to time from esteemed customers.
The type of products is dealt in:-
Heat Exchangers
57. Distillation columns
Pressure vessels
Boilers
Reformers
Waste heat recovery modules
Cryogenic equipments
Oxygen plants
Air separation plants
Vacuum columns
There are two types of stock items which are based on their consumption Stock Items /
Fast moving items:- These are the items which are required to be stored and these have
high demand. The respective consumer groups and departments require these items very
frequently. So these fast moving items are replenished frequently.
Non Stock items/ slow moving items:- These items which are not required to be stored
but procured as and when an indent is received from the user department. These items have
demand but they are not so frequently required.
Components of inventory:-
Raw Materials: The raw materials which are consumed in BHPV are as under
Mild Steel Plates & Structurals to IS: 2062
Stainless Steel Plates to SA 240 TP 304,310,316 etc
BQ Plates to SA 515,516 Gr. 60/70
LAS Plates to SA 338
Mild Steel & Stainless Steel Pipes SA 336
Heat Exchanger Tubes
Boiler Tubes
Fasteners
58. Spares
Welding consumables
Apart from the above, the items which are in transit ( MIT), work in progress & finished
goods also added to inventories.
All the items are being manufactured in BHPV as a tailor made items, most of the
inventories like raw materials, work in progress and materials in transit are blocked
Valuation of inventory:-
1. Raw materials including off-cuts bought out components, stores and spares, loose
tools, goods; under inspection and in transit are valued at cost.
2. Provision for redundancy to wards non moving inventory and off-cut plates is
made as under:
a. In respect of non-moving raw material, a provision of 25% on the value of
these items not moved for 3 years and above is made.
b. In respect of off-cut plates having sizes up to 1000 mm width, provision is
made towards the difference between realizable value and bin prices.
c. In respect of off-cut plates having sizes up to 1000 mm width, provision of
25% on the value of such inventory is made.
d. In respect of components, stores and spares, loose tools, a provision of 25%
on the value the items not moved for 3 years and above but below 4 years
are made.
e. In respect of components, stores and spares, loose tools a provision of 75%
on the value of the items not moved for four years and above is made.
3. Stationary and medicines are charged off to revenue at the time of receipt.
4. Expenditure of miscellaneous equipment and tools manufactures for internal use
is charged to P&L a/c.
59. 5. Valuation of finished goods:
a. In the case of specified products, viz., boilers, cryogenic plants (excluding
small plants), the total products are divided into identified despicable sub-
assemblies or components and contracted prices are determined. As and
when such h sub-assemblies/ components are dispatched, credits are taken
for 98% of the contracted price so determined. The balance of 2% is
reckoned as income during the year in which the total supplies of such
specified products are completed. Finished sub-assemblies/ components of
awaiting dispatch at works is valued at cost or 96% of contracted price of
such sub-assemblies/ components which ever is lower.
b. In respect of all other products such as heat exchangers etc., which are
complete by themselves, credits are taken for 100% of the contracted price
on dispatch, if such products await dispatch at works, they are valued at cost
or 98% of the contracted price, which ever is lower.
c. Finished goods in respect of stock orders are valued at cost or 98% of the
estimated realizable value, which ever is lower.
Computation of inventory turnover ratio:-
Inventory turnover:-
The efficiency of the company in converting the inventory into sales turnover. The
higher the inventory turnover ratio, the higher is the efficiency of the company in
converting the inventory into sales.
In BHPV it is impractical to follow the concept of EOQ or safety stock for production
items as it is a tailor made or customer order oriented engineering unit. The efficiency of
the company totally lies in maintenance and control of inventory levels, hence, it is
60. important for the company to see the total material consumption to its value of production
and cost of production.
In view of inventory, the total inventory level its usage in the manufacturing process and
the amount of inventory retained as socks are essential. The efficiency of the position is
estimated by determining the inventory to number days of production, average holding
period of inventory, turnover of inventory and the inventory turnover ratio.
ROLE OF MATERIALS MANAGEMENT:-
Materials management is the planning, direction, controlling and co-coordinating of all
those activities concerned with materials and inventory requirements from the points of
their inception to their introduction into the manufacturing processes.
The raw materials used in the manufacturing process to be transformed into finished
product. In other words, the raw materials of which the finished product is made may be
known as materials. The importance of material in a manufacturing concern needs no
explanation because in its absence.
Production is not possible and moreover it affects the efficiency of all men, machines,
money, and marketing divisions of an industry. So, the management of materials is the
grave concern of executives at all levels. There are so many problems attached with the
management of materials such as investment in materials, idle funds, storage and
obsolescence problems, wastage of materials in handling etc, which require immediate
attention of management so that the cost of production may be reduced to the minimum
and the quality of the product may be maintained.
The concept of materials management is being widely accepted by industrially advanced
courtiers for more effective coordination and control over materials because materials costs
(including investment in raw-materials, handling cost, transportation and storage costs,
insurance, wastage and obsolescence costs etc,) constitute a major part of the total cost of
61. the finished product. So, the control over materials is essential to arrest the increasing cost
of finished product because it is one of the major constituents of costs.
Materials management covers all aspects of materials and material supply necessary for
converting raw materials and ancillary into the desired finished products.
The functions of materials management can be summarized as follows:-
• Materials planning and programming
• Purchasing of raw materials and capital goods
• Inventory control
• Receiving, storekeeping and warehousing
• Value engineering and value analysis
• Transportation – internal and external
• Materials handling
• Disposable of scrap and surplus
The main objectives of material management are:-
To maintain the flow of production: By making the raw materials available in time
according to production schedule.
Contribution towards higher productivity: By arranging the better quality of raw
material at the lowest possible cost through effective purchasing system.
Reducing the inventory cost: By purchasing the economic costs requiring the
minimum investment and the maximum utilization value.
To eliminate extra materials: through product design
To contribute towards competitiveness: of the product by conducting the market
research and bringing the product according to the demand by the consumers.
Increasing the profits; of the concern by producing the best quality products using
quality material at the lowest possible cost.
To buy further best ultimate value, not necessarily the lowest initial price.
62. To perform the wide range of functions and fulfill the objectives of utmost
contributive role the material management division in organization has the
following departments.
Material and inventory control department, Purchase department.
Stores department :- This includes storage of materials, accountability of materials.
Quality control department: This includes inspection of quality and testing the quality.
From the national point of view material management plays a pivotal role for the success of
national plans because efficient materials management can exploit the national resources
material efficiency and according to the plans. It also plays an important role in the
industrial economy both in public and private sector.
Advantages of material management:-
• Effective material management causes the reduction in total cost of
production and thus sales price of the commodity can be fixed at reasonable
price.
• Controls the movement of the indirect cost and cost of materials.
• Inventory losses are minimized.
• Adequate utilization of equipment is ensured.
• Loss of time of direct labor minimized.
• Late deliveries of goods are prevented due to availability of continuous flow
of raw material in right time.
• Length of manufacturing cycle is reduced.
• Congestion of materials is avoided.
• Facilities perpetual inventory system.
• Cost records of materials are made feasible.
63. 5R principles of purchasing :- It is always the responsibility of the purchasing
department that
• The right quality of materials in
• The right quantity must be procured at
• The right price from
• The right source (supplier) and at
• The right time
These play a significant role in inventory control management. Purchase department is
basically a service department and caters the requirements of the various departments by
making purchases of materials, equipments etc., which they need.
The stores (or ware house) are responsible for stocking materials and when the stocks
reach a particular predetermined level, they raise an indent for purchase through the
purchase requisition or indent:-
• Purchase plan: purchase department must prepare a plan for carrying out its
purchasing activities.
• Vendor selection.
• Coordination with indentor department by providing relevant information
regarding the indented materials and the procurement action done through 5R
principle. Placing the order as per 5R principle.
• Follow – up for ordered materials to effect supply.
• Receiving and inspection of material.
• Checking and payment of suppliers bills.
Storekeeping :-
64. The main objective of store keeping is to receive to store and to issue the raw materials
or goods at the minimum cost.
• Receiving, handling and issuing goods economically and efficiently.
• Using the storage available space and labor effectively.
• Protection of goods in stores against all losses; fire, theft and obsolesce.
• Facilitating inventory taking from time to time i.e.; (value analysis)
• Minimizing the investment on inventories.
Quality control :- main objectives of this are:-
• To assess the quality
• To see whether the product conforms to the predetermined standards
• To locate the reason for deviations and to take necessary remedial steps
• To suggest suitable improvements
• To develop quality consciousness
• To reduce the wastage of raw materials
67. Total Inventory Levels:-
6000
5000
4000
Series1
3000
Series2
2000
1000
0
year 2005-06 2006-07 2007-08
Computation of Inventory Turnover Ratio:-
Inventory Turnover:-
The efficiency of the company in converting the inventory into sales turnover. The higher
the inventory turnover ratio, the higher is the efficiency of the company in converting the
inventory into sales.
In BHPV it is impractical to follow the concept of EOQ or safety stock for production
items as it is a tailor made or customer order oriented engineering unit. The efficiency of
the company totally lies in maintenance and control of inventory levels; hence, it is
important for the company o see the total material consumption and percentage of total
material consumption to its value of production and cost of production.
In view of inventory, the total inventory level its usage in the manufacturing process
and the amount of inventory retained as stocks are essential. The efficiency of the position
68. is estimated by determining the inventory to number days of production, average holding
period of inventory, turnover of inventory and the inventory turnover ratio.
69. INVENTORY TURNOVER RATIO:-
Computation formula = Cost of goods sold/Average inventory.
Year Cost of goods sold Average inventory Ratio
2005-06 11724 6264 1.87
2006-07 15272 5041 3.03
2007-08 12747 3130 4.07
A ratio of 6or7 times is considered satisfactory. But there is “no rule of thumb”. A high
inventory turnover is an indication of good inventory management. A low ratio indicates
excessive inventory including slow moving and obsolete items resulting in blocking of
funds. A too high inventory turnover may be the result of low inventory level including
frequent stock-outs. This situation should be avoided.
According to the above explanation the organization maintained high inventory turnover
in 1998-1999 comparatively other four years (i, e.from 1996-2001)
Year
4.5
4
3.5
3
2.5
Year
2
1.5
1
0.5
0
2005-06 2006-07 200-08
70. Inventory Conversion period:-
Computation formula = Number of days / Inventory turnover ratio.
Year Inventory turnover Number of days Conversion peiod
ratio
2005-06 1.87 365 195
2006-07 3.03 365 120
2007-08 4.07 365 90
Interpretation: The inventory Conversion period is deemed to reflect the efficiency of
inventory manage4ment. The higher the ratio and lesser the conversion period show the
more efficient in the management of inventories. Hence, from table in 1998-99 the
inventory turnover ratio high and the conversion period are lesser than other two years.
250
200
150 Series1
100 Series2
50
0
Year 2005- 2006- 2007-
06 07 08
71. Finished Goods Turnover Ratio:- Cost of sales/Average inventory of finished
goods.
Finished goods is the final outcome of a production cycle. Hence, the ratio showing its
turnover indicates the efficiency with which the finished goods are formed at the final stage
of the production cycle.
There fore the finished goods turnover ratio shows the efficiency of the manufacturing
system in converting the work in process to finished goods these ratios finally add to the
inventory turnover ratio, which influences the entire sales turnover of the company.
Year Sales Average inventory Ratio
of Finished Goods
2005-06 11724 1491 7.86
2006-07 15272 623 24.51
2007-08 16462 319 51.60
60
50
40
2005-06
30 2006-07
20 2007-08
10
0
Year Ratio
Interpretation: - In the case of BHPV the finished goods turnover ratio has been
increasing over the years.
72. Work In progress Inventory Turnover Ratio:- Cost of Manufacture/Average
work In Process Inventory at Cost.
Work in progress as an another turnover ratio indicates towards the efficiency with
which it gets converted during the production cycle.
Work in progress ratio enables the company in establishing the time gap between
different stages in a production cycle, and the efficiency with which the production cycle
gets completed.
Year Cost of Manufacture Avg Work in Ratio
Progress
2005-06 10894.72 1538.27 7.082
2006-07 13907.51 1259.77 11.039
2007-08 16411.95 867.77 18.912
20
18
16
14
12 2005-06
10 2006-07
8 2007-08
6
4
2
0
Ratio
Interpretation: - In the case of BHPV the work in progress inventory turnover ratio has
been increasing over the years.
73. Raw Material Inventory Turnover Ratio:-Annual Consumption of Raw Material/
Average Raw Material Inventory.
Raw material inventory turnover ratios the efficiency of the company is conversion of
its raw material inventory into the production process. The turnover ratio always show
direct proportionality to efficiency. Hence, when the turnover ratios are more the efficiency
said to be high.
Year Annual Avg R.M Inventory Ratio
Consumption of
R.M
2005-06 4114.00 2721.69 1.51
2006-07 6423.13 3189.42 2.01
2007-08 10277.48 3130.17 3.28
3.5
3
2.5
2 2005-06
2006-07
1.5 2007-08
1
0.5
0
Ratio
Interpretation: - In the case of BHPV the raw material inventory turnover ratio has
been increasing over the years.
74. Net Sales to Inventory Ratio:- Net Sales / Inventory.
For the purpose of monitering the effectiveness of inventory management, it is helpful
to calculating the following ratio and index raw material inventory turnover ratio.
It shows the efficiency of the company in conversion of its raw material inventory into
the production process.
The turnover ratios always show direct proportionality to efficiency. Hence, when the
turnover ratios are more, the efficiency is said to be high.
Year Sales Inventory Ratio
2005-06 11724 5531.49 2.11
2006-07 15272 4550.01 3.35
2007-08 16462 2801.60 5.87
Net Sales to Inventory Ratio
7
6
5
4
Ratio
3
2
1
0
Year
Interpretation: - In the case of BHPV the net sales to inventory ratio has been
increasing over the years.
86. FINDINGS
The present study is done with the view to analyze the working of the materials and
inventory control section and suggest ways to reduce inventory holding of a heavy
engineering and fabricating unit like BHPV.
Reduction in inventory holding will not happen over night as it takes time and efforts in
establish a system and it may turn an additional work to start it. However, with the passage
of time it will be seen that this will be easy to continue and once the system is fully
understood and established, the real benefit will be visible and will yield dividends on a
continuous basis.
BHPV used to maintain huge inventories during 1970’s was successful in bringing
down its inventory levels to meet the bureau of public enterprises norms by
following planned and systematic actions. If is identifying the unwanted material
and disposing them by periodical public auctions. But still it has not reached and
target set by it.
Safety margins considered in material indenting section as safeguard against
possible shortage while indenting for materials for a project, additional quantities
over and above the actual requirement, losses or failures during manufacture etc.
these excess quantities remain as surplus materials. If such contingencies do not
occur.
Errors in estimating material requirements based on past consumption this happens
usually in case of stock items like spares, tools, accessories etc. which are stocked
in anticipation of future requirements, quantities remain as surplus materials if such
contingencies do not occur.
Excess procurement due to minimum order quantities insisted by suppliers. In some
cases, suppliers insist on a minimum order quantity against the minimum order
quantity against the actual requirement, which is usually uneconomic for supplier to
manufacture.
Materials procured but not utilized due to subsequent design changes. This happens
mostly in the area of piping wheel the actual piping layout is finalized at later stages
of a project, which leaves little time for procurement of materials. Hence, these
87. materials are procured at the initial stages of piping design to take case of
procurement cycle time.
Work – in- progress inventory:-
Long production cycle for certain items, which led to high work – in progress
inventory.
Completed jobs waiting for a few minor requirements, which result in increased work–
in – progress inventory. In jobbing industry it is a common practice for the customers to
supply certain critical materials as free issues. However in case of delay in supply of
such critical items, there is temporary set back in the over all consumption of raw
material and components till the customer material is received. Such delays obviously
result in higher stock levels or inflated work in progress temporarily.
Finished goods inventory:-
At present BHPV Ltd., faces a serious set back of working capital, which in turn the
material procurement action was done on, needy and emergency based to perform the
jobs.
Delay in final payment by the customer and delay in customer clearance led to high
finished gods inventory.
88. SUGGESTIONS
After the liberalization and globalization the industry is facing stiff competition.
Moreover the industry is characterized by long cycle times and as the overheads are
soaring steadily. To withstand competition, order have to be delivered much with in the
time than the competitors. In order to overcome this.
BHPV has to maintain some stocks of production items i.e. raw materials unlike
the present practice of procuring the material after receipt of order from the
customers
Team work and inter departmental co ordination must be elevated to finish the
jobs with in the stipulated time by leaving personal fancies.
It is the responsibility to maintain good and reliable relationship with vendors to
develop reliability and worthiness on the organization to honor our material
procurement orders within the specified time.
Procedure limitations are to be minimized and allocate responsibilities by
observing the key factors.
The management and employees should trust on each other to overcome this
crisis situation by performing the entrusted jobs properly.
Unnecessary overhead costs are minimized by planning the activities in a proper
manner by using the scientific methods of principles of management like
operations research, project evaluation and management, MIS, and security
analysis and portfolio management.
The cushion provided by the indenting departs is proving as excess inventory.
Indenting departments should take more care while calculating the quantity
required by them.
The procurement lead-time should be kept in mind by the materials control
section before giving their approval.
89. It should be seen that the spares of a particular machine are disposed off along
with it, if the company is going to install machinery of a new design or
technology.
Economic order quantity should be calculated / reviewed for the fast moving
item periodically. The minimum and maximum levels of all the stock items
should also be checked according to the consumption pattern.
The basis of fixing maximum and minimum inventory of raw material should
always be on scientific methods as basis.
The inventory levels should be periodically reviewed. So as to ascertain stock
positions in order to avoid the cost of stock outs.
The company must strive for continuous upgradation of technology to be at far
with the international competitors.
After having analyzed the financial position of BHPV I suggest the following:-
It is apparent that BHPV should strive to improve its performance on delivery,
project management, financial management, price etc.,
The largest domestic competitor, L&T, is beating BHPV on delivery, project
management and on financial strength. It appears to be even with BHPV on
technical capability, quality and price. Another important competitor BHEL, is
rated highly by clients on technical capability, quality, it beats BHPV on
delivery. So the company should see benchmarks with competitors both
domestic and global and use their ideas to improve its managerial capacity.
The company must strive for continuous up gradations of technology to be at
par with international competitors.
90. It must change its work culture to be compatible with market demands. There
must be better coordination among purchase, production, commercial and
finance department. This will help in achieving greater efficiency not only in
inventory management but overall performance of the Company.
The company should develop long-term relationships with the vendors, which
would help in improving quality and delivery.
ABC classification must be revised and reviewed periodically.
The company must resort to extensive computerization not only for the
accounting purposes but also for improving decision making, quality, for
reducing costs etc., The online computerization of all departments will be an
added advantage to the performance of the Company.
It must adopt accounting of responsibility at each level. The person proved to be
defaulter in execution of his job should be punished severely.
It must take is credit collection policy less deliberately.
The financial position of the organization is not in a position to fulfill its short-
term obligations. The reason may be its deviation from the conventional norms
such as the proposition of current ratio should be 2:1 and the cash ratio should
be 0.5:1. So it must try hard to overcome these problems.
91. BIBLIOGRAPHY
BOOKS AND JOURNALS:-
Supply Chain Management : The Basis and Beyond by Copacino, William.
Annual Reports of BHPV.
Inventory Control Simulation by P.N.Ramachandran.
Financial management by I.M.Pandey.
