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  2. 2. CERTIFICATE This is to certify that this project work entitled “A STUDY ON INVENTORYCONTROL MANAGEMENT” in BHARAT HEAVY PLATE & VESSELS LTD is abonafide work carried out by Mr. S.SURESH under our guidance to Department ofS.V.P.G. College Eluru, West Godavari for the award of Master of BusinessAdministration ( MBA).Name & Address of the Guide. Signature of the GuideP.S.R MURTHY P.S.R MURTHYDy. MANAGER(MP-P&T)
  3. 3. ACKNOWLEDMENT It is of immense pleasure for me to thank those who have extended their help andco-operation for the successful completion of my project work. Firstly, we would like to thank Prof., director of PG courses for having granted methe permission and provided me the support and motivation during the study of my MBAdegree course and project work. We would like to thank head of MBA department Sir. K.P. RAJU also for havingprovided with their guidance and co-operation throughout my study. We express my sincere thanks to Mr. P.S.R. MURTHY BHPV Ltd, for providingme with helpful information, guidance and co-operation and also thankful to Mr. K.AppaRao, Manager (Training Centre) Mr. Bhaskar Reddy (Store Manager) & Mr. K.RamanaMurthy, Manager (Finance) for giving me an opportunity to undertake this study in thisesteemed organization and providing me with the assistance at all time to conduct thestudy. S.SURESH
  4. 4. DECLARATION I hereby declare that this project report entitled “A STUDY ON INVENTORYCONTROL MANAGEMENT IN BHARAT HEAVY PLATE AND VESSELS LTD,VISAKHAPATNAM” submitted by me under the esteemed guidance of Mr. S.SURESHS.V.P.G COLLEGE is my own and has not been submitted to any other University orInstitute or published earlier.Date: Signature of the Student S.SURESH
  5. 5. PREFACE The project brought out is “A study on Inventory management withrespect 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.
  8. 8. NATURE OF FINANCIAL MANAGEMENT Financial management is that managerial activity which is concerned with the planningand controlling of the firm’s financial resources. It was a branch of economics till 1890 andas a separate discipline it is of recent origin. Still it has no unique body of knowledge of itsown and draws heavily from economics for its theoretical concepts even today. Financial management is managerial activity, which is concerned with planning andcontrolling of a firm’s financial resources. Theory of financial management providesconceptual and analytical insights to make decisions relating to the financial aspects oforganization 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 usedifferent techniques.
  9. 9. OBJECTIVES OF FINANCIAL MANAGEMENTThe main objective of financial management can be said as:-1. PROFIT MAXIMISATION:- The objective of every organization will be profitmaximization.The Financial management also has the objective of profit maximization.2. WEALTH MAXIMISATION:- It is a long-term objective. Wealth maximization isnothing but increasing the wealth of shareholders by way of contributing to the net worthof share holders. For attaining these above said objectives financial manager makes crucial decisionsrelating to investment in different projects, dividend decisions ,debt equity mix decisions,source of finance, analysis of ratios and working capital management.
  10. 10. OBJECTIVE OF THE STUDY This study of Inventory control and management in BHPV LTD has been undertaken toview to analyse the working of the materials and inventory control section and suggestways 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. Inventorycontrol and management. The study appraises the companys meeting the requirements forthe 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 COLLECTIONPRIMARY DATA SOURCES: - Direct interaction with finance department and otherdepartments such as production, HR department and administration departments.SECONDARY DATA SOURCES: - Information collected from the annual reports ofBHPV LTD PUBLISHED FROM 2006-2009 and other books and manuals of BHPV LTD.
  11. 11. LIMITATIONS OF THE STUDYEvery 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.
  13. 13. INDUSTRY PROFILE In the liberalized economy of India and in the era of globalization a company mustrethink its business mission and all functional strategies. In these days companies findthemselves competing in a race where the road signs and rules keep on changing wherethere is no finish line, or no “permanent win”. In these days when it is very competitivecompanies can succeed only by having innovative ideas combined with by effectivefinancial management. Therefore, it is not surprising that today’s winning companies are those which foreseethe future and manage the finance effectively .One can manage finance effectively bymanaging working capital, capital structure and taking decision on capital budgetingUltimately, finance is at its best about value adding, developing new products and raisingthe worlds standards of living. The heavy engineering industry is a major strength of anyeconomy. These heavy engineering industries, which produce capital goods, are the mostmodern of the entire industrial group.
  14. 14. In India these heavy engineering industries occupy a crucial role in its economicdevelopment 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 managedby an autonomous board of directors. Situated in the city of destiny of visakhapatnam onthe Eastern see coast of the deccan plateau, B.H.P.V. Ltd is accessible by road, rail, sea andis well connected to all metropolitan cities by air. COMPANY PROFILEHEAD 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 itproduces various products. Foreseeing the country’s need for fabricating equipment of an exclusive factory withthe main object of reducing dependence on foreign suppliers and become self sufficientourselves BHPV LTD was established in the year 1966 to meet the demands of processequipment for core industry like fertilizers, petrochemicals, petroleum and other chemicalindustries initially. BHPV LTD using different types of materials manufactured and supplied several builtequipments such as pressure vessels, heat exchangers, columns, internal trays etc. Afterexecuting some important orders, BHPV LTD gained full confidence of customers whichcleared the way to enter the line of cryogenic field, pulp cooking plant, evaporation plant
  15. 15. and industrial boilers on a total turnkey basis which of later years helped in augmentingturnover of the company and increasing profitability. INTRODUCTION TO BHPV Bharat Heavy plates & Vessels Ltd., started off in 1966 as fully owned governmentcompany for Design, Manufacture & Supply of capital equipment required for processindustries 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 thJan 1967 in Visakhapatnam. It comes under the purview of the Department of HeavyIndustry, Ministry of Industry. With the technical collaboration of M/s. SKODA ExportCompany of Czechoslovakia in the year 1968, it got expertise and guidance for establishingthe project and for the design & manufacture of various process equipments. BHPVbecame 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 wasjust 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 Rs29998 lakhs i.e. all time high. But due to lack of orders in 2003-2004 .BHPV has a madeturnover is 5956 lakhs only. Fast 10 years turnover are as follows. YEAR TURNOVER (Rs in lakhs) 1996-1997 Rs.29998/- 1997-1998 Rs.29160/-
  16. 16. 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 confrontedmany obstacles such as water problems, frequent power cuts both at initial stage as well asat the time when construction was going on . In spite of all those obstacles the civil andstructural work was completed to a major extent by the end of 31 st March, 1967.Thelicensed and installed capacity is 23210MT.The initial capital outlay being Rs. 17.5 crores.
  17. 17. PROFITEERING YEARS FOR BHPV:- After a series of continuous loss years, BHPV for the first fine in its history in 1979-80has 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 levelwith a marginal profit of Rs.33.09 lakhs as against a net loss of Rs.129 lakhs projected atthe 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 Ltdoperations included manufacturing of very critical and sophisticated equipment to coreindustries. Again in 1981-82 the company operations resulted in a net profit of Rs 60.19 lakhs asagainst a budgeted loss of Rs.20/- lakhs. Major pending interest on loan from GOI wascleared in this year. During 1982-83 BHPV reached 100% target production and resultedin a net profit of Rs.03.71 lakhs as against the budgeted loss of Rs.95 lakhs. Withprestigious work orders from Visakhapatanam steel plant for supply of air and gasseparation plants BHPV crossed a target production and its operations resulted in a netprofit of Rs.575 lakhs.The year 1986-87 is treated to be the dark year for BHPV. Since itsentrance into threshold of profit arena. It could not achieve its set motto of beyond billion barriers. Sinking of a ship carryingbulk 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 lakhsagain in 1987-88 BHPV’s projects were successfully fabricated and its profits took anupward trend and its operations resulted in PAT of Rs 290 lakhs.
  18. 18. It was expected to emerge an increasing trend in the profits of BHPV for the year1988-89. After 1987-88 profits are in decreasing trend. It got a loss of Rs 590 lakhs during1995-96. Amidst tight liquidity conditions the company has made a net profit of Rs 1.31crores(before tax) and Rs 1 crore after tax during 1997-98, Rs 1.23 crores PBT. Details ofturnover, profitability for the period from 1996-97 to 2005-06 are as followsYEAR 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 -23212006 – 2007 17960 BHPV LTD AN OVERVIEWINTRODUCTION :-Incorporation of the company :-1966Primary objective :- To manufacture custom built capital equipment for the processindustries such as fertilizers, petrochemicals, petroleum refineries , chemicals etc.Technical collaboration provided by : M/S SKODA EXPORT Czechoslovakia.Commencement of construction : 1968Completion of construction : 1971
  19. 19. Commencement of production : 1971Initial project cost : Rs 17.5 crores.Initial product mix : Heat exchangers, columns pressure vessels, piping etcInstalled capacity : 23210 MTTurnover for the year 2005- 2006 : Rs 109.42 crores.turnover for the year 2006-2007 : Rs. 179.60 CroresRESOURCES:- 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 UnitsImportant 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.
  20. 20.  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
  21. 21.  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
  22. 22. DIVERSIFICATION:- Originally established for fabrication of process equipment, as a step towardsdiversification the Company signed an collaboration agreement with M/s. L AIR LIQUIDof 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 incollaboration with M/s. BHEL in 1981 based on the recommendation of the workinggroup 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
  23. 23.  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 upgradedits status from a mere fabricators of process equipment to that of an engineering companyof 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
  24. 24. 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.
  25. 25. 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 9001certification during the year 1993-94 particularly to boost up its export and to becompetitive in the international market. Recertification of ISO 9001 has been obtained in September 96. In recognition of highstandards of our quality confederation at India industry (CII) southern region, AP presentedthe quality award.RESEARCH AND DEVELOPMENT:- Research and development department was established in 1975 and is well equippedwith high-tech equipment to cater to applied research and product development .R&D hasdeveloped 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 combatAircraft(LCA) phase II has been received from Aeronautical development Agency, ,Bangalore.
  26. 26. 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 inR& 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.
  27. 27. 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.
  28. 28.  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.
  30. 30. INDUSTRY PROFILEBHPV 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.
  31. 31. 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 - CalcuttaICCP - KanpurINOX - BarodaSanghai oxygen - MumbaiL&T - MumbaiLindi process systems - Baroda
  32. 32. VJU - Mumbai Essar - GujaratFOREIGN:- LINDE - Germany BOC - UK Air products - US &UK Kobe - Japan Hitachi - Japan HOPM - China Pracair - USIn 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 - MumbaiVINASSE FIRED BOILERS :-  KTI - New Delhi  Thermax - Pune
  33. 33. FIRED HEATERS:-  EIL - New Delhi  KTL - New Delhi  Thermax - Pune  Kavcri L&T - MumbaiWASTE HEAT SYSTEM GENARATORS:-  BIIKI  L&T  Babcock ThermaxIN THE AREA OF SYSTEMS:- INDIAN: L&T Babcock Tliarmax - Kanari GIMMCO - SPIC ICD - Gajraj BHEL - Triheni FOREIGN: HHI - Korea RTZ - Northerlands Technical - Italy
  35. 35. INTRODUCTION Inventory is the physical stock of items that a business or production organizationkeeps in hand for efficient running of affairs or its production. It is very essential thatmaterial ofthe correct quantity and quality is made available as and when required. With due regard toeconomy in storage and ordering cost, purchase and working capital. Inventory management means maintenance, up keep and assurance of adequate supplyof goods in order to meet an expect pattern of distribution of demand for a given financialinvestment.Meaning of Inventory:- Inventory may be defined as “usable but idle resource” in other words literally theinventory means that stock of goods or physical assets having economic value. If resourceis physical or tangible object such as materials, it is generally termed as stock. Inventorymay be regarded as those goods which are procured, stored and used for day-to dayfunctioning of the organization. Inventories viewed as a large potential risk rather than as ameasure 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 reflectionon balance sheet. In any organization capital investment is divided between fixed assetsand Current Assets. Fixed assets consist of plant and machinery, land and buildings that areused in the conversion process. Gross current assets are those, which are required tooperate day-to day requirements, and used as inputs in the process of conversion. These areconverted 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 meanseconomic activity where raw materials are converted into value. Inventory management is one of the indicators of the management effectiveness on thematerials management front. The input resources of business activity are men, machines,
  36. 36. 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 onmaterials to the minimum which in turn results in earning more profits or to makecompany’s products more competitive.Objectives of Inventory:- The main objective is to maintain overall investment in inventory at the lowest levelconsistent with operating requirements. To supply the product, raw material, sub assemblies, semi-finished goods etc., to theusers 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 theefficiency in production and distribution. To treat inventory as investment which is risky investment may lead higher returns andfor others less returnsFunctions of Inventory:- It is understood, inventory is a necessary evil and necessary because it aims atabsorbing the uncertainties of demand and supply by decoupling the demand and supplysub 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 toenable various sub systems to operate somewhat in a decoupled manner. It is obvious thatthe larger the uncertainty of demand and supply, the larger will have to be the amount ofbuffer stock to be carried for a prescribed service level. Time lag in deliveries also necessitates building of inventories. If the replenishment leadtimes are positive then stocks are needed for system operation.
  37. 37. Cycle stocks may be maintained t get the economies of scale so that total systems costdue to ordering, carrying inventory and backlogging are minimized. Technicalrequirements also build up cycle stock. Stocks may build up as pipeline inventory or work in process inventory due to finitenessof production and transportation rates. This includes materials actually being worked on ormoving 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 periodsof low demand to ease the strain of peak period demand. Inventory may also be built up for other reasons such as quantity discounts beingoffered by suppliers, discount sales, anticipated increase in material price, possibility offuture non availability etc.Importance of Inventory management :- In the process of converting raw material into finished products, we need various itemsfrom market / suppliers but the uncertainty over availability and correct arrival of goodswhen they required is the fundamental reason for carrying inventories. The scope ofinventory 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 structureInventory could be classified as:-The inventory classification is based on the following aspects.  Manufacturing aspect  Service aspect
  38. 38.  Control aspectManufacturing 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 : -
  39. 39. 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 costsIt would be uneconomical for a textile unit to buy cotton everyday rather than in bulkduring 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. Itis known as ABC analysis which means the ‘Control’ will be ‘Always Better’ if westartwith ABC of inventory. This concept divides inventories into three groupings in terms ofpercentage of number of items and percentage of total value as given in
  40. 40. 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 theitems. A class items must receive the attention first in every respect of the control i.e tightcontrol, sound operating doctrine, attention to security etc.Inventory Models:- Inventory Models are used to reduce costs like overstocking costs and under stockingcosts. The following are some models of Inventory.EOQ : Economic Order QuantityFOIS : Fixed Order Interval SystemFOQS : Fixed Order Quantity SystemORS : Operational Replenishment System
  41. 41. ECONOMIC ORDER QUANTITY:- EOQ is essentially an accounting formula that determines the point at which thecombination or order costs and inventory carrying costs are the least. The result is the mostcost effective quantity to order. EOQ may not applicable to every inventory situation, most organizations will find itbeneficial in some aspects of their operations. EOQ is generally practical when repetitivepurchasing or planning of an item and multiple orders or release dates for the same item isdone. EOQ is generally recommended in operations where demand is relatively steady, itemswith demand variability such as seasonality can still use the model by going to shorter timeperiods 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 notassociated with the quantity ordered but primarily with physical activities required toprocess the order.
  42. 42. 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 involvedAnnual demand requirements knownDemand is even throughout the yearLead tune doest not varyEach order is received in a single deliveryThere are no quantity discountsFIXED ORDER INTERVAL SYSTEM:- In this method, the inventory is reviewed regularly such as once a month and based onthe review how much to be ordered is assessed . After our review, we order an amountequal to the difference between the maximum level and the amount on hand. We mustorder 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 anddiminishing its use.FIXED ORDER QUANTITY SYSTEM:- In this method the order quantity is fixed and order or re-order is placed whenever theinventory touches a certain level, known as the order or reorder point. FOQ defined asROP ( Reorder point) = Mean Lead time consumption.
  43. 43. OPERATIONAL REPLENISHMENT SYSTEM:- In this method inventory is reviewed at periodical intervals and if there has been anydepletion in the inventory, an order or reorder is placed. The amount ordered is equal to theamount by which a fixed replenishment level exceeds the actual inventory at the time ofreview.INVENTORY COUNTING SYSTEMS:- Inventory needs to be properly accounted for as it is the form of money. There are twoprincipal ways of accounting for inventories:-Perpetual Inventory systemPeriodic Inventory systemPerpetual Inventory System:- It is a system of records maintained by the controllingdepartment, which reflects the physical movement of stocks and their current balance.Perpetual inventory means the system of records, whereas continuous stocktaking, physicalchecking 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.
  44. 44. Disadvantages: -  It includes added costs of record keeping, checking etc.Periodic Inventory System:- It is also called P-system. This system has a fixedordering interval but the size of the order quantity may vary with changes in demand. Inthis method the inventory is checked at prefixed intervals ( weekly, monthly, quarterly etc )Advantages & Disadvantages ; Many items can be ordered at the same time resulting ineconomies in processing and shipping. Possibility of stock outs between reviews and thetime and cost of a physical count.Inventory Measurement/ Counting System:-Two- bin system:- This system operates on reorder level ( ROL)system and it physicallysegregates the stock of entire items into two bins. In this method two containers ofinventory will be kept. The second bin contains quantity equal to ROL i.e ( m+LC) wherem= 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 inventoryLead time:- It is defined as the period that elapses between the recognition of a need andits fulfillment. It has to follow the following broad pattern before ordering an item andmaking it available which includes in the total ordering cycle. Once the item is made
  45. 45. available then the need that item is over till a further need of same item raises. The wholecycle classified into 4 Lead time categories:Internal lead time (or) Administrative lead time:- It starts from identifying the need foran item till and order is placed for that item. Requirement for an item has to be firstidentified before it is ordered. Need for an item could be a requisition by the usersdepartment or can be arrived against a pre-determined forecast. It may take a long timebefore an actual need is finished.External lead time:- Once an order is placed or supplied, a purchaser has to entirely waittill the supplier delivers the goods. It includes a regular follow up to ensure a timelysupplier within the stipulated period is very important. Lead time of a manufacturerdepends 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 thegoods to the time of actual receipt of the goods at stores of the purchaser. Lead timetransportation 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 meetthe production demand but also to take care of transportation time.Inspection lead time:- Every material which comes to the store has to be subjected forinspection to evaluate its quality. Specification, as per the requirement of the indent orspecified in the order. Internal and inspection lead time are well within the purchases control. Eventransportation lead time could be brought under control by choosing the right mode oftransport and better planning. Manufacturers lead time which is acts big hurdles are actsbig hurdles for every purchase and requires constant follow up to get the materials on time.
  46. 46. 2. Relevant costs: - The inventory problem is one of the balancing various cost so that thetotal cost is minimized. Either for want of materials, production is lost or if keeping of inventories more thanadequate requirements, unnecessary expenditure of paying interest on the blocked funds.Stocked inventory is useless incurring still higher cost, each ordering itself is costingmoney.Ordering cost(Co):- It is also termed as procurement/Acquisition cost. Each order that isplaced on supplier costs money, ordering cost is the sum resultant of costs of fulfillingvarious activities that go in finalizing an order. Ordering costs include:-  Stationary  Typing  Dispatching of orders and remainders
  47. 47.  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 headsCost per purchase order = ------------------------------------------------- Total numbers of ordersInventory carrying cost (Cc):- All materials that are ordered have to be stored in stores.This requires space, and other infrastructure arrangement. Inventories are stored strictlystoring 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 thendividing by 12 to get an average.Under stocking cost (Ku):- Under stocking or out of stock is due to “non stocking ofinventory”. Which is measured in terms of opportunity cost due to loss of production by theidling cost of a line? If the stock out results in an expedited order, then the extra chargesincurred have to be added to this cost.
  48. 48. Overstocking cost (Ko):- An opportunity is therefore lost, of utilizing company’svaluable funds, overstocking cost is therefore a cost basically arise due to opportunity lostdue to the investment in inventory for a longer period than necessary. In situations, whenitems are ultimately used this can be equated tocarrying cost. In situations where item cannot be used this cost is the difference betweenthe costs of carrying till that time.Service level:- Under stocking cost and overstocking cost can be related to each otherthrough the concept of service level. The management can decide on a policy that 99 casesout of 100, the demand must be satisfied. This means that the service level is 99%. Only inone case out of 100 can there be a stock out. This fixation of level of service depends onthe management’s perception of the importance of particular item.Service level = --------------- = --------------------------------- Ku + K stock out cost + overstocking costINTFERENCE: If the under stock cost is very high then the management strive for ahigher 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 ofno 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 asobsolete 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.
  49. 49.  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 a100% efficient system which can convert all the input into output salvaging of scrap is anart. By applying scientific methods scrap is to be minimized to a great extent. Scraps areclassified 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 notvery difficult to achieve this because scraps are generated at different points and acoordinated 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 goodinventory management. We aware that bad inventory planning is one of the major causesof almost every business failure. The major reason is inability to forecast accurately. Inmany 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 anticipatedthe 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 resultin the following:-Increased production costs may resultIncreased replenishment costs may arise
  50. 50. 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 requirementsThe Maximum stock Level:-This is the level of stock above which the stock should not be allowed to increase. Thecriteria of this level is to curb excess investment. In fixing the maximum, the mainconsideration is usually financial, and the figure is arranged so that the value of stock willnot become excessive at anytime. Other points affecting this level are the possibility of items becoming obsolete andthe danger of deterioration in perishable commodities.Maximum Level = Minimum Level EOQ = ROL-minimum level*minimum lead time reorder quantity.
  51. 51. New Trends in Inventory Management:-JUST IN TIME (JIT):- JIT is a Japanese management philosophy, which has been applied in practice sincethe early 1970s in many japanese manufacturing organizations. It was first developed andperfected within the Toyota manufacturing plants by taiichi ohno as a means of meetingconsumer demands with minimum delays Toyota was able to meet the increasing challenges for survival through an approach thatfocused on people plants and systems. Toyota realized that JIT would only be successfulevery individual within the organization was involved and committed to it, if the plant andprocesses were arranged for maximum output and efficiency, and if quality and productionand 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.
  52. 52. • 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 mostgeneral sense and includes time and resources as well as materials. There are seven types ofwaste 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
  53. 53. 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 andnot the retailer, is responsible for managing and replenishing inventory using an integralpart of VMI, i.e. EDI, by electronic transfer of data over a net work. It can also be seen asa mechanism where the supplier creates the purchase orders based on the demandinformation exchanged by the retailer/customer.VMI BUSINESS MODEL:- In fulfillment process using VMI, typically the activities of forecasting and creating thepurchase orders are performed by the vendor/supplier and not bye the retailer. Electronicdata interchange (EDI) is an integral part of VMI process and takes a vital role in theprocess of data communication. The retailer sends the sales and inventory data to the
  54. 54. vendor via EDI or other B2B collaboration facilities and the supplier creates the purchaseorder based on the established inventory levels and fill rates. In VMI the vendor tracks the number of products shipped to distributors and retailoutlets. 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 unlessthere are needed, consequently lowering inventory at at the distribution center or retailstore.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 activitiesINVENTORY MANAGEMENT :- • Delivery as needed cuts storage • Helps you reduce inventory levels
  55. 55. • Reduces inventory obsolescence • Improves inventory turns • Improves fill rates • Decreases lost salesConcept of Zero Inventory:- The concept of zero inventory or stockless production is a theoretical approach andnever attainable in reality, however, the concept of an ultimate level of excellence is boundto stimulate constant improvement through imaginative attentions and creative andinnovative 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 thisconcept 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, itis a fundamental way of thinking to transform overall manufacturing to the simplest waypossible 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 andthe execution of jobs are based on orders received time to time from esteemed customers.The type of products is dealt in:-  Heat Exchangers
  56. 56.  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 havehigh demand. The respective consumer groups and departments require these items veryfrequently. So these fast moving items are replenished frequently.Non Stock items/ slow moving items:- These items which are not required to be storedbut procured as and when an indent is received from the user department. These items havedemand but they are not so frequently required.Components of inventory:-Raw Materials: The raw materials which are consumed in BHPV are as underMild Steel Plates & Structurals to IS: 2062Stainless Steel Plates to SA 240 TP 304,310,316 etcBQ Plates to SA 515,516 Gr. 60/70LAS Plates to SA 338Mild Steel & Stainless Steel Pipes SA 336Heat Exchanger TubesBoiler TubesFasteners
  57. 57. SparesWelding consumablesApart from the above, the items which are in transit ( MIT), work in progress & finishedgoods also added to inventories.All the items are being manufactured in BHPV as a tailor made items, most of theinventories like raw materials, work in progress and materials in transit are blockedValuation 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.
  58. 58. 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. Thehigher the inventory turnover ratio, the higher is the efficiency of the company inconverting the inventory into sales. In BHPV it is impractical to follow the concept of EOQ or safety stock for productionitems as it is a tailor made or customer order oriented engineering unit. The efficiency ofthe company totally lies in maintenance and control of inventory levels, hence, it is
  59. 59. important for the company to see the total material consumption to its value of productionand cost of production. In view of inventory, the total inventory level its usage in the manufacturing process andthe amount of inventory retained as socks are essential. The efficiency of the position isestimated by determining the inventory to number days of production, average holdingperiod 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 allthose activities concerned with materials and inventory requirements from the points oftheir inception to their introduction into the manufacturing processes. The raw materials used in the manufacturing process to be transformed into finishedproduct. In other words, the raw materials of which the finished product is made may beknown as materials. The importance of material in a manufacturing concern needs noexplanation 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 thegrave concern of executives at all levels. There are so many problems attached with themanagement of materials such as investment in materials, idle funds, storage andobsolescence problems, wastage of materials in handling etc, which require immediateattention of management so that the cost of production may be reduced to the minimumand the quality of the product may be maintained. The concept of materials management is being widely accepted by industrially advancedcourtiers 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
  60. 60. the finished product. So, the control over materials is essential to arrest the increasing costof finished product because it is one of the major constituents of costs. Materials management covers all aspects of materials and material supply necessary forconverting 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 surplusThe 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.
  61. 61.  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 ofnational plans because efficient materials management can exploit the national resourcesmaterial efficiency and according to the plans. It also plays an important role in theindustrial 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.
  62. 62. 5R principles of purchasing :- It is always the responsibility of the purchasingdepartment 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 isbasically a service department and caters the requirements of the various departments bymaking purchases of materials, equipments etc., which they need. The stores (or ware house) are responsible for stocking materials and when the stocksreach a particular predetermined level, they raise an indent for purchase through thepurchase 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 :-
  63. 63. The main objective of store keeping is to receive to store and to issue the raw materialsor 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
  65. 65. Inventory levels:-The total inventory level maintained by BHPV in the past 5 years, showing the both thecomparative study and as well as the break up of total inventory into different types of are6. INVENTORY LEVELS The Inventory Levels at the end of three years ended 2007-08 are given below: 2005-06 2006-07 2007-08 (a) Raw Materials & Components (I) Imported 887.01 1503.17 2521.22 (ii) Indigeneous 1102.00 1305.13 0.00 (b) Stores, Spares, Tools etc. (I) Imported 120.77 130.10 471.02 (ii) Indigeneous 288.38 307.59 0.00 © Work-in-progress 1651.77 867.77 867.77 (d) Finished Goods 928.18 318.75 318.75 (e) Goods-in-Transit 128.72 277.04 -1359.47 572.5 601.0 601.0 (f) Scrap 6 6 6 5679.3 5310.6 3420.3 Total 9 1 5 853.1 1715.9 618.7 Provision for redundancy 3 8 5 and MODVAT not availed 4826.2 3594.6 2801.6 Total 6 3 0 The Stock of Raw Materials, Components, Stores, Spares and Goods-in-transit in 4.1 4.83 7 2.71as shown in the following table.
  66. 66. Total Inventory Levels:- 6000 5000 4000 Series1 3000 Series2 2000 1000 0 year 2005-06 2006-07 2007-08Computation of Inventory Turnover Ratio:-Inventory Turnover:-The efficiency of the company in converting the inventory into sales turnover. The higherthe inventory turnover ratio, the higher is the efficiency of the company in converting theinventory into sales. In BHPV it is impractical to follow the concept of EOQ or safety stock for productionitems as it is a tailor made or customer order oriented engineering unit. The efficiency ofthe company totally lies in maintenance and control of inventory levels; hence, it isimportant for the company o see the total material consumption and percentage of totalmaterial consumption to its value of production and cost of production. In view of inventory, the total inventory level its usage in the manufacturing processand the amount of inventory retained as stocks are essential. The efficiency of the position
  67. 67. is estimated by determining the inventory to number days of production, average holdingperiod of inventory, turnover of inventory and the inventory turnover ratio.
  68. 68. INVENTORY TURNOVER RATIO:-Computation formula = Cost of goods sold/Average inventory.Year Cost of goods sold Average inventory Ratio2005-06 11724 6264 1.872006-07 15272 5041 3.032007-08 12747 3130 4.07 A ratio of 6or7 times is considered satisfactory. But there is “no rule of thumb”. A highinventory turnover is an indication of good inventory management. A low ratio indicatesexcessive inventory including slow moving and obsolete items resulting in blocking offunds. A too high inventory turnover may be the result of low inventory level includingfrequent stock-outs. This situation should be avoided. According to the above explanation the organization maintained high inventory turnoverin 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
  69. 69. Inventory Conversion period:-Computation formula = Number of days / Inventory turnover ratio.Year Inventory turnover Number of days Conversion peiod ratio2005-06 1.87 365 1952006-07 3.03 365 1202007-08 4.07 365 90Interpretation: The inventory Conversion period is deemed to reflect the efficiency ofinventory manage4ment. The higher the ratio and lesser the conversion period show themore efficient in the management of inventories. Hence, from table in 1998-99 theinventory 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
  70. 70. Finished Goods Turnover Ratio:- Cost of sales/Average inventory of finishedgoods. Finished goods is the final outcome of a production cycle. Hence, the ratio showing itsturnover indicates the efficiency with which the finished goods are formed at the final stageof the production cycle. There fore the finished goods turnover ratio shows the efficiency of the manufacturingsystem in converting the work in process to finished goods these ratios finally add to theinventory turnover ratio, which influences the entire sales turnover of the company.Year Sales Average inventory Ratio of Finished Goods2005-06 11724 1491 7.862006-07 15272 623 24.512007-08 16462 319 51.60 60 50 40 2005-06 30 2006-07 20 2007-08 10 0 Year RatioInterpretation: - In the case of BHPV the finished goods turnover ratio has beenincreasing over the years.
  71. 71. Work In progress Inventory Turnover Ratio:- Cost of Manufacture/Averagework In Process Inventory at Cost. Work in progress as an another turnover ratio indicates towards the efficiency withwhich it gets converted during the production cycle. Work in progress ratio enables the company in establishing the time gap betweendifferent stages in a production cycle, and the efficiency with which the production cyclegets completed.Year Cost of Manufacture Avg Work in Ratio Progress2005-06 10894.72 1538.27 7.0822006-07 13907.51 1259.77 11.0392007-08 16411.95 867.77 18.912 20 18 16 14 12 2005-06 10 2006-07 8 2007-08 6 4 2 0 RatioInterpretation: - In the case of BHPV the work in progress inventory turnover ratio hasbeen increasing over the years.
  72. 72. 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 ofits raw material inventory into the production process. The turnover ratio always showdirect proportionality to efficiency. Hence, when the turnover ratios are more the efficiencysaid to be high.Year Annual Avg R.M Inventory Ratio Consumption of R.M2005-06 4114.00 2721.69 1.512006-07 6423.13 3189.42 2.012007-08 10277.48 3130.17 3.28 3.5 3 2.5 2 2005-06 2006-07 1.5 2007-08 1 0.5 0 RatioInterpretation: - In the case of BHPV the raw material inventory turnover ratio hasbeen increasing over the years.
  73. 73. Net Sales to Inventory Ratio:- Net Sales / Inventory. For the purpose of monitering the effectiveness of inventory management, it is helpfulto 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 intothe production process. The turnover ratios always show direct proportionality to efficiency. Hence, when theturnover ratios are more, the efficiency is said to be high.Year Sales Inventory Ratio2005-06 11724 5531.49 2.112006-07 15272 4550.01 3.352007-08 16462 2801.60 5.87 Net Sales to Inventory Ratio 7 6 5 4 Ratio 3 2 1 0 YearInterpretation: - In the case of BHPV the net sales to inventory ratio has beenincreasing over the years.
  74. 74. CHAPTER – 6 EXHIBITS
  76. 76. FINDINGS The present study is done with the view to analyze the working of the materials andinventory control section and suggest ways to reduce inventory holding of a heavyengineering and fabricating unit like BHPV. Reduction in inventory holding will not happen over night as it takes time and efforts inestablish a system and it may turn an additional work to start it. However, with the passageof time it will be seen that this will be easy to continue and once the system is fullyunderstood and established, the real benefit will be visible and will yield dividends on acontinuous 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
  77. 77. 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 progressinventory.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 tosupply certain critical materials as free issues. However in case of delay in supply ofsuch critical items, there is temporary set back in the over all consumption of rawmaterial and components till the customer material is received. Such delays obviouslyresult 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 thematerial procurement action was done on, needy and emergency based to perform thejobs.Delay in final payment by the customer and delay in customer clearance led to highfinished gods inventory.
  78. 78. 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 aresoaring steadily. To withstand competition, order have to be delivered much with in thetime 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.
  79. 79.  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.
  80. 80.  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.
  81. 81. BIBLIOGRAPHYBOOKS 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.