A PROJECT REPORTON

INVENTORY MANAGEMENTIN

RASHTRIYA ISPAT NIGAM LIMITEDVISAKHAPATNAM STEEL PLANT

A Project Report submitted in Partial Fulfilments for the award of the degree

“MASTER OF COMMERCE”

Submitted

ByCH.SATYAM NAIDURegd.No.111250406007

Under the guidance ofSri DSR Murty, B.Sc., AICWA

Asst. Manager (F&A)

Facilitated by HR Dept of RINL Visakhapatnam 2011-2013

O.R.M.Rao M.L.S.VARMA A.G.M (HR) Asst.Mgr (HR)

DECLARATION

I, CH.SATYAM NAIDU declare that this project report entitled “A STUDY ON INVENTORY MANAGEMENT IN VISAKHAPATNAM STEEL PLANT” has been prepared by me during the period of 2 weeks from 04-06-2012 to 16-06-2012 under the guidance of Sri DSR Murty, B.Sc., AICWA, Asst. Manager (F&A) is the result of my own work and has not been submitted to any other institute or university earlier.

Place: Visakhapatnam (CH.SATYAM NAIDU) Date:

CERTIFICATE

This is to certify that Mr.CH.SATYAM NAIDU(M.com) student of “MAHA RAJAH P.G COLLEGE” has completed the project report entitled “A STUDY ON INVENTORY MANAGEMENT IN RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPTNAM STEEL PLANT” in Finance & Accounts Department from 04-06-2012 to 16-06-2012 under my guidance.

(DSR Murty)Asst. Manager (F&A)

Place: Visakhaptnam Date:

ACKNOWLEDGEMENT

I am very thankful to Sri DSR Murty, Asst. Manager(F&A), Rashtriya Ispat Nigam Limited, Visakhapatnam steel Plant for providing his guidance and sparing his valuable time as my project guide in completing my project successfully in time. I also express my sincere thanks to O.R.M.Rao AND M.L.S.Varma HRD, RINL/VSP & Student Coordinator for accepting my request for doing the project work in their esteemed organisation. Finally, I would like to thank my parents for their encouragement and support.

CH.SATYAM NAIDU

I N D E X

Chapter-I: INTRODUCTION

Introduction Meaning of Inventory Nature of Inventory Inventory Management Objectives of inventory management Methodology Objectives of the study Significance/Need/Importance of the study Limitations

Chapter-II: INDUSTRY PROFILE IN THE COMPANY

Introduction Pre-Independence Post-Independence Major Steel Industries in India Global Scenario Market Scenario Production Scenario Demand- Availability Projection Pricing &Distribution

Chapter-III: COMPANY PROFILE

Introduction Background Mission Vision ISO Policy Objectives Core values Quality Policy Environmental policy Energy policy OSHAS policy HR policy Customer policy

IT policy VSP Technology : state of the Art Major Departments Functions of various departments of RINL \ VSP Inputs and Basic Infrastructure Corporate Strategic Management(CSM) Achievements & Awards

Chapter- IV: Inventory Management of Stores and spares in Visakhapatnam

Inventory of Stores and Spares Accounting of Stores and spares

Chapter-V: THEORITICAL ASPECTS OF INVENTORY MANAGEMET AND INVENTORY CONTROL

Introduction Inventory Management And Inventory control Essentials of Good Inventory Management

Chapter –VI: Practical Study Analysis and Interpretation

Inventory management in vsp steel plant Comparative Analysis Ratio Analysis of Stores and Spares Value Analysis Interpretation

Chapter-VII: SUMMARY, FINDINGS AND SUGGESTIONS

Findings Suggestions

CHAPTER – IIntroduction

Introduction

Steel comprises one of the most important inputs in all sectors of economy. Economy of

any country depends on the strong base of the iron and steel industry. Steel is a versatile

material with multitude of useful properties, making it indispensable for furthering and

achieving continual growth of the economy- be it construction, manufacturing,

infrastructure or consumables. The level of steel consumption’s has long been regarded as

an index of industrialization and economic maturity attained by country. Keeping in view

the importance of steel, the integrated steel plants with foreign collaborations were set up

in the public sector in the post-independence era.

In the words of Mahatma Gandhi, the customer is god to the organization. The organization

is required to identify and fulfill his requirement to the extent possible. His satisfaction is

goal and objective of organization.. Now-a-days many organizations recognized this fact and

adopting customer oriented policies and methods in achieving his satisfaction. In order to

fulfill his requirement, the organization is required to make available right product in right

time at right place. In production and marketing front, organization has been successfully

adopting latest technologies and methods to attract the customers. However, many

organizations are yet to establish their command in procuring right quality materials in right

quantities in right time. The reason is the concept of inventory management is not

completely reached the practicing managers. Also, many methods of inventory

management or control are practically not possible to implement. In this light of

experience, an attempt made to study the concept of inventory management and inventory

controls keeping in view the concepts and methods of inventory management followed at

Visakhapatnam Steel Plant.

1.2 MEANING OF INVENTORY

The Institute of Chartered Accountants of India defined Inventory as “tangible property

held (I) for sale in the ordinary course of business or (II) in the process of production for

sale or (III) for consumption in the production of goods or service for sale including

maintenance supplies and consumables other than machinery spares”.

The American Production and Inventory Control Society states that “Inventories are stock

keeping items which are held in a stock point and which serve to decouple successive

operations in the process of manufacturing a product and getting it to the consumer”.

The basic decoupling function of Inventories has two aspects:

(a) Inventories are necessary because it takes time to complete an operation and to move

the product from one stage to another – in process and movement of inventories;

(b) Inventories employed for organizational reasons, such as to let one unit schedule its

operations more or less independently of another.

Thus, Inventory is detailed list of those moveable items, which are necessary to

manufacture a product and to maintain the equipment and machinery in good working

order. The quantities as well as the value of the every item are also mentioned in the list.

1.3 NATURE OF INVENTORY

The major current asset is inventory. The term ‘inventory’ refers to stocks of the products of

a company in manufacturing for sale and components that make up the product. The store

inventory is anticipation of raw materials, work in progress and finished goods.

Raw materials are those basic inputs that are converted into finished products through the

manufacturing process. Work in process inventory consists of items currently being used in

the production process. Finished goods represent final or completed products, which are

available for sale.

Inventory as a current assert differs from other current asset the views of concerning the

appropriate level of inventory would differ among the different functional areas. The job of

finance manager is to reconcile the conflicting viewpoints of the various functional areas

regarding the appropriate inventory levels in order to fulfill the overall objectives of

maximizing the owner’s wealth. Inventory management is related to overall objective of the

firm.

1.4 INVENTORY MANAGEMENT

Inventories constitute the most significant part of the current assets of any organization. On

average inventories are approximately 60 percent of current assets in public limited

companies in India. Because of the large size of inventories maintained by ferrous,

considerably amount of funds is required to be committed in them. It is therefore,

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

unnecessary investments in them.

Purchase, production and marketing functions are mainly concerned with the management

of inventories. These functions try to have large stocks of inventories to facilitate

production or marketing of the products. It requires large investment in the inventories and

may increase the cost of product by way of interest on such investment. It is the prime

responsibility of Finance function to have a proper management and control over the

investment in inventories, so that it should not be a loss for the business. For this purpose,

the Finance function has to take care of maximum and minimum levels of stock of

inventories in the business to have continuity in production process.

The Inventory Management includes the following areas of management as:

To decide about the size of Inventory, i.e., maximum and minimum levels of

Inventory

To establish timing schedules, procedures and reordering sizes while procuring the

inventories,

To decide the minimum safety levels of inventory,

To coordinate the sales, production and inventory policies,

To provide proper storage facilities,

To arrange for the procurement, receipt and issue of materials and developing the

forms for recording these transactions,

To assign responsibilities for carrying out inventory control functions and

To supervise and reporting of overall activity of inventory management/control.

Thus, Inventory Management ensures proper coordination of activities and policies

regarding procurement, production and marketing of materials/products in order to achieve

better inventory control. Hence, Inventory management includes inventory control, but

inventory control does not mean inventory management.

In large organizations, inventory management is kept under the direct control of manager

materials engineering. The basic duties of the person in change of inventory management

are listed below :

1. Advising the production manager, in establishing production and material control

2. Establishing policies and programs for purchasing, receiving and storing material

3. Preparing budgets to accomplish objectives.

4. Introducing control through comparison of performance against standards

5. Keeping effect with trends, which are likely to affect long-range stocking and purchasing

policies

6. Arranging for purchasing of materials, equipments etc

7. Consulting with engineers about current &proposed product design

1.5 OBJECTIVES OF INVENTORY MANAGEMENTInventory Management has become very significant process of management in the present

day of manufacturing industry. The basic managerial objectives of inventory management

are

To avoid over investment or under investment in inventories and

To provide right quantity of materials in right quality at proper time and at proper value.

1.6 METHODOLOGY

The information for the study is obtained from two sources namely.

1. Primary Sources

2. Secondary Sources

Primary Sources :

It is the information collected directly without any references. It is mainly through

interactions with concerned officers & staff, either individually or collectively; some of the

information has been verified or supplemented with personal observation. These sources

include.

Thorough interactions with the various department Managers of VSP.

Guidelines given by the Project Guide, Sri DSR Murty, Asst. Manager (F&A) of Stores

Accounts Section, RINL/VSP.

Store Keepers

Secondary Sources:

This data is from the number of books and records of the company, the annual reports

published by the company and other magazines. The secondary data is obtained from the

following :

a) Stores Ledger

b) Bin Cards

c) Stores Accounts Records

d) Other books and Journals and

e) Annual Reports of the company

1.7 Objectives of the study

1. To conduct a study on existing practices of Inventory Mgt at VSP.

2. To determine the inventory status of VSP and analyse them.

3. To determine the monetary value of various issues involved in Inventory Mgt.

4. To suggest various control systems of inventory.

5. To determine an effective inventory control system.

1.8 Significance / Need / Importance of Study

The scope of Inventory management is very wide that various techniques of inventory

control management like EOQ (Economic Order Quantity) Model, ABC Analysis, XYZ Analysis,

FSN Analysis, HML Analysis, SDE Analysis, VED Analysis, etc., which helps to reduce cost and

to maintain the inventory effectively.

1.9 Limitations of Study

a) The project covers the area of stores and spares under inventory management system of

the company. It does not deal with other inventories like raw materials, finished goods

and work in progress.

b) The project deals with ABC Analysis of consumption, XYZ Analysis of inventory, FSN

Analysis of inventory and other important concepts of Inventory Management at VSP.

c) As the details of Inventory are maintained confidentially, the project deals with fewer

areas of Inventory.

d) As the time spent is only two months, it is not possible to go into detail of item wise

study in depth.

e) The collection of information is mainly through secondary data.

CHAPTER-II

INDUSTRY PROFILE IN INDIA

Introduction

Steel is an alloy of iron usually containing less than 1% carbon is a versatile material with

multitude of useful properties used most frequently in the automotive and construction

industries. Steel can be cast into bars strips, sheets, nails, spikes, wire, rods or pipes as

needed by the intended user. The consumption of steel is regarded as the index of

industrialization and the economic maturity any country has attained.

The development of steel industry in India should be viewed in conjunction with the

type and system of government that had been ruling the country. The production of steel in

significant quantity started after 1990. The growth of steel industry can be conveniently

started by dividing the period in to pre and post independence era. In the period of pre

independence, steel production was 1.5 million tones per year, which was raised to 9 million

tones of target. This is the result of the bold steps taken by the government to develop this

sector.

Growth of Steel Industry:

2.2 Pre-independence

1830 - Josiah, Marshall Health constructed the first manufacturing plant at port Move in Madras presidency.

- James Erskin founded the Bengal iron works.- Jamshedji Tata initiated the scheme for an integrated steel plant.- Formation of TISCO.- Tata iron & steel company started production.

1916 - TISICO was founded.

2.3 Post-independence

1951-56 - First Five Year Plan.- No new steel plant came up .The Hindustan steel Ltd. was born on 19 th

January, 1954 with the decision of setting up three steel plants each with

one million tone input steel per year in at Rourkela, Bhilai and Durgapur;

TISCO stated its expansion program.

Second Five Year Plan- A bold decision was taken up to increase the ingot steel output India to 6

Million tons per year & production at Rourkela, Bhilai and Durgapur steel

plant started.

Third Five Year Plan- During the third five year plan the three steel plants under HSL; TISCO &

HSCO were expanded as show. In January 1964 Bokaro steel plant came

into existence.

Recession Period- The entire expansion program was actively executed during this period.

1969-74 - Fourth Five Year Plan - Licenses were given for setting up of many mini steel plants and re-rolling

mills.

- Govt. of India accepted setting up two more steel plants in south. One

each at Visakhapatnam and Hospet (Karnataka).

- SAIL was formed during this period on 24th January, 1973. The total

installed capacity from 6 integrated plants was 106 Mt.

1979 - Annual Plan - The erstwhile Soviet Union agreed to help in setting up the

Visakhapatnam steel plant.

Sixth Five Year Plan - Work on Visakhapatnam steel plant was started with a big bang and top

priority was accorded to start the plant.

- Scheme for modernization of Bhilai Steel Plant, Rourkela, Durgapur,

TISCO were initiated.

1985-91 - Seventh Five Year Plan

- Expansion work of Bhilai and Bokaro Steel Plants completed.

- Progress on Visakhapatnam steel plant picked up and rationalized

concept has been introduced to commission the plant with 3.0Mt liquid

steel capacity by 1990.

1991-96 - Eight Five Year plan- Vishakhapatnam steel plant started its production modernization of other

steel plants is also duly envisaged.

1997-02 - Ninth Five Year Plan - Visakhapatnam steel plant had foreseen a 7% growth during the entire

plan period.

2002-07 - Tenth Five Year Plan- Steel industry registers the growth of 9.9 % Visakhapatnam steel plant

high regime targets achieved the best of them.

2007-12 - Eleventh Five Year PlanCost of schemes/project original approved by Government of India is

Rs.9,569.18 crores

2.4 The major steel and related companies in India1. Bharat Refectories Ltd.

2. Hindustan Steel Works Construction Ltd.

3. Jindal Steel and Power Ltd.

4. Tata Iron Steel Company Metal Scrap Trade Corporation Ltd.

5. Metallurgical and Engineering Consultants India Ltd.

6. National Mineral Development Corporation Ltd.

7. Rashtriya Ispat Nigam Ltd.

8. Sponge Iron India Ltd.

9. Steel Authority of India ltd.

The global steel industry has witnessed several revolutionary changes during the last

century. The changes have been in the realms of both technology & business strategy. The

ultimate object of all these changes is to remain competitive and open global market.

The Indian steel industry is growing very rigorously with the major producers like SAIL, RINL,

TISCO, JVL and many others. Our steel industry has amply demonstrated its ability of adopt

to the changing scenario and to survive in the global market that is becoming increasingly

competitive. This has been possible to a large extent due to the adoption of innovative

operating practices and modern technologies.

Industrial Development in India has reached a high degree of self-reliance, and the steel

industry occupies a primary place in the strategy for future development. At present the

production of steel industry country is 34Mt. the public sector steel industry has been

restructured to meet challenges and a separate fund has been established for

modernization and future development of the industry. It is now being proposed that Indian

steel industry should Gear up to achieve a production level of about 100 Mt by the

year2000.

2.5 Global scenarios

As per IISI In March’ 2005 world Crude steel output was 928Mt when compared to

march 2004 (872Mt), The change in percentage was 6.5%.∙ China remained the world largest crude steel producer in 2005 also (275Mt)

followed by Japan (96Mt) and USA (81Mt). India occupied 8th position (42Mt).

USA remained the largest importer of semi finished and finished products in

2002 followed by China and Germany.

Japan remained the largest exporter of semi finished and finished steel

products in 2002 followed by Russia and Ukraine.

Other significant recent developments in the global steel scenario have been:

Under the auspices of the OECD (Organization for Economic Co-operation &

Development) the negotiations among the major steel producing countries

for a steel subsidy agreement (SSA) held in 2003 with the objective to agree

on a complete negotiating test for the SSA by the Middle of 2004. It also set

subsidies for the steel industry of a ceiling of 0.5% of the value of production

to be used exclusively for Research & Development

2.6 Market scenarios

The year 2004-05 was a remarkable one for the steel industry with the world crude steel

production crossing the one billion mark for the first time in the history of the steel industry.

The world GDP growth about 4% lends supports to the expectations the steel market is all

set for strong revival after prolonged period of depression .The Indian economy also

become robust with annual growth rates of 7-8 % this will provide a major boost the steel

industry. With the nations focus on infrastructure development coupled with the growth in

the manufacturing sector, the Indian steel industry all set for north ward movement. The

draft national steel police envisage production of 60 Mt by 2012 and 110Mt by2020, and

annual growth rate of 6-7%. All this should therefore augur well for the Indian steel

industry.

2.7 Production scenarios:- Steel industry was de-licensed and decontrolled in 1991&1992 respectively.

India is the 8th largest producer of steel in the world.

In 2003-04 finished steel production was 36.193Mt.

Pig iron production in 2003-04 was 5.221Mt.

Sponge iron production was 80.85 Mt during the year 2003-04

The annual growth rate of crude steel production in 2002-03was 8% and in 2003-04 was

6%.

The last five year production performance is as under:-

(In Million tons)

YEAR PIGIRON SPONGEIRON FINISHEDSTEEL

2000-01 3.39 5.44 29.27

2001-02 4.08 5.44 30.63

2002-03 5.28 6.44 33.67

2003-04 3.76 8.09 39.12

2004-05 3.18 9.93 41.15

2005-06 4.39 0.00 30.84

2006-07 3.52 0.00 31.40

2007-08 4.95 0.00 29.74

2008-09 5.08 0.00 39.95

2.8 DEMAND-AVAILABILITY PROJECTION Demand-Availability of iron and steel in the country is projected by ministry of steel

annually.

Gaps in availability are met mostly through imports.

Interface with consumers by way of Steel Consumer Council exists, which is conducted

on regular basis.

Interface helps in redressing availability problems, complaints related to quality.

2.9 PRICING & DISTRIBUTION Price regulation of iron & steel was abolished on 16-01-1992.

Distribution controls on iron& steel removed except 5 priority sectors, viz. Defense,

Railways, Small Scale Industries Corporations, Exporters of Engineering Goods and

North Eastern region.

Allocation to priority sectors is made by Ministry of steel.

Government has no control over prices of iron & steel.

Open market prices are generally on rise.

Price increases of late have taken place mostly in long products than flat products.

CHAPTER –III

COMPANY PROFILE

Introduction:-Steel comprises one of the most important resources of the economy. History shows that,

the strongest of civilizations have evolved quickly in the course of time, because of the

proper use of the iron and steel reserves they had. The huge iron pillars at the entrance of

New Delhi suggest that the history of iron and steel industry in India is well over 2000 years

old.

Steel comprises one of the most important inputs to all sectors of the economy. Steel

Industry is both a basic and a core Industry. The economy of any nation depends on a

strong base of Iron and Steel Industry in that nation. History has shown that the countries

having a strong potential for Iron and Steel Industry have played a prominent role in the

advancement in the civilization in the world. Steel is such a versatile commodity that every

object we see in our day-to-day life had use, such as small items as nails, pins, needles etc.,

to surgical instruments, agricultural implements, boilers, ships, railway materials,

automobile parts. The great investments that has gone into the fundamental research in

Iron and Steel Technology has helped both directly and indirectly many modern fields of

today’s science and technology. Steel is versatile and indispensable item. The versatility of

steel can be traced mainly of three reasons.

1. It is only metallic item, which can be conveniently and economically produced in

tonnage quality.

2. It has got very good strength coupled with malleability.

3. Its properties can be changed over a wide range. Its properties can be manipulated

to any extent by proper heat treatment techniques.

Iron and Steel making as a craft has been known to India for a long time. However, its

production is significant quantities only after 1900.

VSP by successfully installing & operating efficiently Rs. 460 cores worth of Pollution Control

and Environment Control Equipments and converting the barren landscape by planting

more than 3 million plants has made the Steel Plant, Steel Township and surrounding areas

into a heaven of lush greenery. This has made Steel Township a greener, cleaner and cooler

place, which can boast of 3 to 4° C lesser temperature even in the peak summer compared

to Visakhapatnam City.

VSP exports Quality Pig Iron & Steel products' to Sri Lanka, Myanmar, Nepal, Middle East,

USA, China and South East Asia. RINL-VSP was awarded "Star Trading House" status during

1997-2000. Having established a fairly dependable export market, VSP plans to make a

continuous presence in the export market.

The govt. of India has recognized the importance of steel in Indian industry and established

the following steel plants, before it actually set up VSP/RINL. The details of those are

tabulated below.

Sl. No. STEEL PLANT COLLABORATED BY

1 Durgapur steel plant Britain

2 Bhilai steel plant Erstwhile USSR

3 Bokaro steel plant Erstwhile USSR

4 Rourkela steel plant Germany

Visakhapatnam Steel Plant profile:-

To meet the growing domestic needs of steel, Government of India decided to set up an

integrated Steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR in

1979 for cooperation in setting up 3.4 million tones integrated Steel Plant at

Visakhapatnam. The foundation was laid by the then Prime Minister Mrs. Indira Gandhi on

20th January 1971.

The Project was estimated to cost Rs.3, 897.28 cores based on prices as on 4th Quarter of

1981. However, on completion of Construction of the whole Plant in 1992, the cost

escalated to around 8500 Cr. Unlike other integrated Steel Plants in India, Visakhapatnam

Steel Plant is one of the most modern Steel Plants in the country. The plant was dedicated

to the nation on 1st August 1992 by the then Prime Minister, P.V.Narasimha Rao.

New Technology, large-scale computerization and automation etc., are incorporated in the

Plant. To operate the plant at international levels and attain such lab our productivity, the

organizational manpower has been rationalized. The plant has a capacity of producing 3.0

MT of liquid steel and 2,656Mt of saleable steel.

Visakhapatnam steel plant technology: State-of-the-art:-

7m tall Coke Oven Batteries with coke dry quenching.

Biggest Blast Furnaces in the country.

Bell less top changing system in Blast Furnace.

100% slag granulation at the Blast Furnace cast house.

Suppressed combustion—LD gas recovery system.

100% continuous casting of liquid steel.

‘Tempcore’ and ‘Stelmor’ cooling process in LMMM & WRM.

Extensive waste heat recovery systems.

Comprehensive pollution control measure.

Major sources of raw materials

Raw Materials SourceIron Ore Lumps & Fines Bacheli, Chattisgarh/Gua, JharkandBF Lime Stone Jaggayyapeta, APSMS Lime Stone UAEBF Dolomite Madharam, APSMS Dolomite Madharam, APManganese Ore Chipurupalli, APBoiler Coal Talcher, OrissaCoking Coal AustraliaMedium Coking Coal (MCC) Gidi/Swang/Rajarappa/Kargali

Water supply

Operational water requirement of 36 Mgd is being met from the Yeleru Water Supply

Scheme.

Power supply

Operational Power requirement of 180 to 200 MW is being met through captive Power

Plant. The capacity of the power plant is 286.5 MW. Visakhapatnam Steel Plant is exporting

60MW power to Andhra Pradesh State Electricity Board.

Major Units

DepartmentAnnual

Capacity(‘000 T)

Units (3.0 MT Stage)

Coke Ovens 2,261 4 Batteries of 67 Ovens & 7 Meters. Height Sinter Plant 5,256 2 Sinter Machines of 312 Sq. Meters. grate area each Blast Furnace 3,400 2 Furnaces of 3200 Cu. Meters. volume each Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.

Volume and Six 4 strand bloom casters LMMM 710 4 Strand finishing Mill

WRM 850 4 Strand high speed continuous mill with no twist finishing blocks

MMSM 850 6 STAND FINISHING MILL

Main Products of VSP

Steel Products By-ProductsBlooms Nut Coke Granulated SlagBillets Coke Dust Lime FinesChannels, Angles Coal Tar Ammonium SulphateBeams Anthracene OilSquares HPNaphthaleneFlats BenzeneRounds TolueneRe-bars ZyleneWire Rods Wash Oil

Vision To be a continuously growing world class company

We shall

Harness our growth potential and sustain profitable growth. Deliver high quality and cost competitive products and be the first choice of

customers. Create an inspiring work environment to unleash the creative energy of people. Achieve excellence in enterprise management. Be a respected corporate citizen, ensure clean and green environment and develop

vibrant communities around us.

Mission

To attain 16 Mt liquid steel capacity through technological up-gradation, operational

efficiency and expansion; augmentation of assured supply of raw materials; to produce steel

at international Standards of Cost & Quality; and to meet the aspirations of stakeholders.

Objectives

● Expand plant capacity to 6.3 million ton by 2011-12 with the Mission to expand

further in subsequent phases as per the corporate plan. Revamping existing Blast

Furnaces to make them energy efficient to contemporary levels and in the process

increase their capacity by 1 Mt, thus total hot metal capacity to 7.5 Mt

● Be amongst top five lowest cost steel producers in world by 2009-10.

● Achieve higher levels of customer satisfaction.

● Vibrant work culture in the organization.

● Be proactive in conserving environment, maintaining high levels of safety and

addressing social concerns.

Core values Commitment.

Customer Satisfaction.

Continuous Improvement.

Concern for Environment.

Creativity & Innovation

Quality Policy

Visakhapatnam Steel Plant Employees are committed to meet the needs and expectations of

our customers and other interested parties. To accomplish this, they will

Supply quality goods and services to customers delight.

Achieve quality of the products by following systematic approach through

planning, documented procedure and timely review of quality objectives.

Continuously improve the quality of all materials, processes and products.

Maintain an enabling environment, which encourages teamwork and active

involvement of all employees with their involvement.

Environment Policy

Visakhapatnam Steel Plant carrying out its operations without harming to the environment.

To accomplish this, they will

Document, implement, maintain and continuously review the environmental

management system.

Comply with all the relevant environmental legislations, regulations and other

requirements.

Ensure continual improvement in the environmental performance and

prevention of pollution by minimizing the emissions and discharges.

Maintain a high level of environmental consciousness amongst employees.

Energy Policy

Visakhapatnam Steel Plant is committed to optimally utilize various forms of energy in a

cost-effective manner to effect conservation of energy resources.

To accomplish this, they will:

Monitor closely and control the consumption of various forms of energy through

an effective Energy Management System.

Adopt appropriate energy conservation technologies.

Maximize the use of cheaper and easily available forms of energy.

OSHAS Policy

Visakhapatnam Steel Plant is committed to occupational health and safety of employees and

contract workers. To accomplish this, the will,

Document, implement, maintain and periodically review the occupational health

and safety management system including the policy.

Comply with the relevant occupational health and safety legislations, regulations

and other requirements.

Ensure continual improvement in the environment performance and prevention

of pollution by minimizing the emissions and discharges.

Maintain a high level of environmental consciousness amongst employees.

Review the environmental objectives and targets on a continuous basis.

Human Resource Policy

Visakhapatnam Steel Plant is committed to create an organizational culture, which nurtures

employee’s potential for the prosperity of the organization. To accomplish this, they will,

Identify development needs of the employees on a regular basis, provide the

necessary training and continually evaluate and monitor the effectiveness of the

training so that the quality of the training also gets updated.

Provide inputs to the employees for developing their attitude towards work and

for matching their competencies with organizational requirements.

Create an environment of learning and knowledge sharing by providing the

means and facilities and also access to the relevant information and literature.

Facilitate the employees for continuous development of their knowledge base,

skills, efficiency, innovativeness, self-expression and behavior so that they

contribute positively with commitment for the growth and prosperity of the

organization while maintaining a high level of motivation and satisfaction.

Prepare employees through appropriate development programs for taking up

higher responsibilities in the organization.

Customer Policy

VSP will endeavor to adopt a customer-focused approach at all times with

transparency.

VSP will strive to meet more than the customer needs and expectations

pertaining to products, quality, and value for money and satisfaction.

VSP greatly values its relationship with customers and would make efforts at

strengthening these relations for mutual benefit.

I.T. Policy

RINL/VSP is committed to leverage Information Technology as the vital enabler in

improving the customer-satisfaction, organizational efficiency, productivity,

decision-making, transparency and cost-effectiveness, and thus adding value to

the business of steel making. Towards this, RINL shall:

Follow best practices in process Automation & Business Processes through IT by

in-house efforts / outsourcing and collaborative efforts with other organization /

expert groups / institutions of higher learning, etc., thus ensuring the quality of

product and services at least cost.

Install, maintain and upgrade suitable cost-effective IT hardware, software and

other IT infrastructure and ensure high levels of data and information security

Major Departments

Raw Material Handling Plant

VSP annually requires quality raw materials viz. Iron Ore fluxes (Lime stone, Dolomite);

coking and non coking coals etc. to the tune of 12-13 Million Tones for producing 3 Million

Tones of Liquid Steel. To handle such a large volume of incoming raw materials received

from different sources and to ensure timely supply of consistent quality of feed materials to

different VSP consumers, Raw Material Handling Plant serves a vital function. This unit is

provided with elaborate unloading, blending, stacking & reclaiming facilities viz. Wagon

Tipplers, Ground & Track Hoppers, Stock yards Crushing plants, Vibrating screens, Single/

twin boom stickers, wheel on boom and Blender reclaimers. In VSP peripheral unloading has

been adopted for the first time in the country.

The Raw Material Handling Plant (RMHP) Department procures the different raw materials

from various sources. The following are the important raw material handled by the RMHP

Department.

Coke Oven Department

The main function of this department is to convert the coal in to coke, which is received

from RMHP Department.

Coke is a hard porous mass obtained by functional distillation of coal in absence of air at a

temperature above 125oC for a period of 16-18 hours. It is used as a fuel and reducing

agent for reduction of iron ore in blast furnace. The following are the parameters of Coke

Ovens:

Number of batteries 4

Number of ovens in batteries 67

Coal handling capacity of ovens 31.6 tones

Dimensions of oven 16m length x 7m height

Besides coke production, a number of coal chemicals are being extracted in coal chemical

plants. The coal chemicals are tar, benzyl and ammonia based products. The coal is not

consumed directly because coke helps in reducing the pollution.

Sinter Plant Department

Sinter is a hard and porous lump obtained by agglomeration of lines of iron ore, coke,

limestone and metallurgical waster. This department by not wasting the powder and small

pieces of iron ore coal manganese, dolomite and limestone makes Sinter Cakes and put it

for reuse. This increases the productivity of Blast Furnace, improves the quality of pig iron

and decreases the consumption of coke rate.

Blast Furnace

Pig iron/hot metal is produced in blast furnace. The furnace is named as blast furnace as it

is running with blast at high pressure with a temperature of 1150oC.

Raw materials required for iron making are iron ore, sinter coke and limestone. For one

tone of hot metal production, 310Kgs. iron ore, 1390Kgs. sinter and 627Kgs. of coke with

some other additives.

For production of pig iron/hot metal there are two blast furnaces named Godavari and

Krishna. They are of the largest and most modern furnaces in the country.

Steel Melt Shop

Hot metal produced in blast furnace contains impurities like carbon, sulphur, phosphorus,

silicon, etc.; these impurities will be removed in steel making by oxidation process.

There are three LD converters to convert hot metal in to steel, after the conversion of hot

metal in to steel, the steel is subjected to homogenization treatment and cast in to blooms

in continuous casting machines.

Rolling Mills:-

Blooms cannot be used as they are in daily life. These blooms have to reduce in size and

properly shaped to fit for various jobs. Rolling is one of the mechanical processes to reduce

larger size sections in to smaller cones. The cast blooms are heated and rolled in to various

long products of different specifications at three high capacity sophisticated high-speed

rolling mills.

Wire Rod Mill:-

WRM is a stand mill and is fully automated with computers. The mill consists of 2.5 stands

and a capacity of 850,000 tonnes per annum. The mill product mix includes rounds and

ribbed wire in the sizes of 5.5 mm to 12.7 mm dia. wire rods are made in coil having

maximum weight of 1200 Kgs. Liquid Steel produced in LD Converters is solidified in the

form of blooms in continuous Bloom Casters. However, to homogenize the steel and to raise

its temperature, if needed, steel is first routed through, Argon rinsing station, IRUT

(Injection Refining & Up temperature) / ladle Furnaces.         

Wire Rod Mill is fully automated & sophisticated mill. The billets are rolled in 4 strand, high-

speed continuous mill having a capacity of 8, 50,000 Tonnes of Wire Rod Coils. The mill

produces rounds in 5.5 - 14 mm range and rebars in 8, 10 & 12 mm sizes. The mill is

equipped with standard and Retarded Stelmore controlled cooling lines for producing high

quality Wire rods in Low, Medium & High carbon grade meeting the stringent National &

International standards viz. BIS, DIN, JIS, BS etc. and having high ductility, uniform grain size,

excellent surface finish.

    

Medium Merchant & Structural Mill (MMSM):

This mill is a high capacity continuous mill. The feed material to the mill is 250 x 250 mm size

bloom, which is heated to rolling temperatures of 1200 °C in two walking beam furnaces.

The mill is designed to produce 8,50,000 tons per annum of various products such as

rounds, squares, flats, angles (equal & unequal), T bars, channels, IPE beams I HE beams

(Universal beams)

AUXILIARY FACILITIES

Power Generation & Distribution:

The average power demands at all units of VSP when operating the full capacity will be 221

MW. The captive generation capacity of 270 MW is sufficient to meet all the plant needs in

normal operation time. In case of partial outage of captive generation capacity due to break

down, shutdown or other reasons. The short fall of power is availed from APSEB grid. The

agreement with APSEB provides for exporting of surplus power to APSEB. The captive

generating capacity comprises of

-  TPP -247.5 MW (3x60 MW + 1 X 67.5 MW)

- Back pressure Turbines (C&CCD)* - 2 x 7.5 MW

- Gas Expansion Turbines (BF / ces)* - 2x12 MW

(*Power availability from BPT & GET is around 22MW)

Power plant also meets the Air Blast requirements of Blast Furnaces thro' 3 Turbo blowers

each of 6067 NM 3 / hr capacity.

Power from APSEB is received at Main Receiving Station thro' 220KV overhead distribution

lines. The entire plant is configured as 5 electrical load blocks (LBSS 1 to 5) and step-down

substations are provided in each block with 220 KV transformers to step down to 33/11/6.6

KV for further distribution.

Traffic Department:-

A steel plant of the size of VSP has to handle around 60 to 65 MT traffic comprising of

incoming traffic in the form of raw materials and outgoing traffic in the form of finished or

saleable steel, and also the in process traffic such as cast pig iron, mill scrap, hot metal.

Of this 50% is transported by belt conveyors, 45% by Rail Transport and 5% by Road. VSP has

the distinction of having peripheral unloading system for the 1st time in Steel Industry.

Engineering shops & Foundry (ES & F)

Engineering Shops are set up to meet the requirements of Ferrous & Non Ferrous spares of

different departments. This complex is divided into

1. Forge Shop

2. Structural shop

3. Foundry

4. Central machine shop

5. Wood Working Shop and

6. Utility Equipment Repair Shop (UERS).

The Forge shop is designed for production of shafts, coupling flanges etc. and also of forge

shapes such as crusher hammer heads, special bolts, nuts etc. In the Structural shops the

fabricated structural of about 4500 Tonnes are produced annually and the input consisting

of sheets, plates, channels, angles beams etc. In Foundry Iron castings up to a weight of 5

tons and non-ferrous casting up to a weight of 1 ton are produced. 2600 Tonnes of iron

castings and 200 tones of non-ferrous castings are produced annually. In steel foundry, steel

casting up to maximum piece weight of 10T is produced. Steel ingots up to 1.3 Tonnes for

forging are also produced.

In the Central Machine Shop, various spares are made. The machining section has over 100

major machine tools including lathes, milling, boring, planning, slotting, shaping, grinding

and other machines. The Wood working Shop manufactures patterns for foundries. The

shop will require 300 Cu.m. Per year of wooden patterns.

Central Maintenance Electrical:-

Maintenance of all H.T motors, L.T motors and DC motors of above 200KW. There are 810

such large rotating electrical machines spread throughout the plant including 3 Nos. of 60

MW Turbo-Generators, 1 No of 67.5M TG in TPP, 2 no's of Back Pressure Turbo Generators

of 7.5 MW each and 2 Nos. of Gas Expansion Turbo- Generator of 12 MW each. The services

provided are as mentioned below.

a) Repairs, Maintenance and condition monitoring of all rotating Electrical machines of

the plant. The job includes transportation, Overhauling and re-erection with

precision alignment.

b) Maintenance of Electrics of all streetlights, Tower lights and Weigh Bridges

throughout the plant.

Electro Technical Laboratory

1) Repairs all the defective electronic PCB’s, which are taken out from the equipment

during their functioning.

2) Procures and arranges spare PCB’s for the equipment of PLC’s and drive controls for

motors in the plant and also for UPS systems.

3) Involves in the plant modernization activities and up gradation of equipment.

Electrical Repair Shop (ERS):

ERS is a central repair shop to carry out repair activities like overhauling, rewinding, testing

etc., of various types of AC Motors, DC Motors, HT Motors, Submersible pumps, Distribution

transformers, Welding Machines, Control Transformers, Lifting magnets, Coils etc., of the

plant.

The Main Functions of ERS are:

a) Overhauling of motors

b) Rewinding of motors, magnets, transformers, pumps, coils etc.

c) Testing of Electrical equipment

d) Emergency Site Repairs

e) Performance assessment of electrical motors

  Utilities Department:-

Utilities dept. Consists of

1. Air Separation Plant

2. Compressor Houses

3. Chilled water plants and Acetylene plants.

The ASP is designed to meet the maximum daily demand of gaseous oxygen, gaseous

nitrogen and gaseous argon. Compressor Houses produce Compressed Air required for the

operation of pneumatic devices, for instruments and controls, pneumatic tools and for

general purpose in the various production units of Steel Plants. Chilled Water plants (2 No's)

produce chilled water required for use in the ventilation and air conditioning system in areas

such as office rooms, electrical control room etc.

Acetylene plant produces Acetylene gas required for general purpose cutting and welding.

Quality Assurance and Technological Development (QA &TD)

The QA & TD dept. has been set up to take care of activities pertaining to Quality Control of

Raw Materials, Semi finished products and finished products. The QA & TD labs are provided

at major department like CO&CCP, SP, BF, SMS, and Rolling Mills etc., in addition to Central

Laboratory. The department monitors the process parameters for production of quality

products. QA & TD carries out analysis, testing and final inspection including spark testing of

finished products and assigns grades to them.

Calcining & Refractory Material Plant:

CRMP consists of two units - Calcining Plant & Brick Plant. In Calcining plant limestone &

dolomite are calcined for producing lime & calcined dolomite, which are used for refining of

steel in the converters.

Roll shop & Repair shop:

Roll shop & Repair shop is in the complex of Rolling Mills catering to the needs of mills in

respect of roll assemblies, guides few Maintenance spares and roll pass design.

Geographically this dept. is in three areas as roll shop-1, Roll shop-II and Area Repair Shop.

The main activities of this shop is Roll pass Design, grooving of rolls, assembly of rolls with

bearings, preparation of guides and their service and manufacture / repair of mill

maintenance spares.

For the first time in the country, VSP has adopted CNC technology for grooving of steel

rolling mill rolls. High constant respective accuracy, higher productivity, use of standard tool

for any groove turning, elimination of the use of different templates, easier to incorporate

groove modification etc., are some of the advantages of CNC lathes over the conventional

one.

Plant Design

Major functions of this unit are :

1. Development of detailed Manufacturing Drawing and Replacement Specification

drawings

2. Suggesting New Designs and detailing by doing elaborate engineering study and

Analysis

3. Standardization

Works Contracts Department

Obtaining administrative approval on receipt of proposal from indenting

departments, tendering and awarding of work

Converting tender committee meetings and preparing recommendations forwarding

work.

Preparing COM/Board Note for decisions at those forum Participating in claims and

arbitration proceedings and legal cases pertaining to contracts

Registration of agencies under various categories & classes of works periodically.

FUNCTIONS OF VARIOUS DEPARTMENTS OF RINL/VSP:

Directorate of Operations Production Planning and Control:

Formulation of long term production plans and infrastructure support.

Formulation of Annual and Monthly production plan. This involves detailed planning for

product mix and value added steel along with Marketing Dept.

Analyzing Plant performance against targets on a periodic basis and taking necessary

corrective actions.

Techno-economic and Quality:-

Formulation of techno-economic norms and energy management parameters and reviewing

the same against targets periodically.

Inputs and Basic Infrastructure:- Long term and short term planning for procurement of raw materials like Imported

Coking Coal (ICC), Medium Coking Coal (MCC), Boiler Coal, Iron Ore Fines and Iron Ore

Lumps etc.,

Formulation of Annual Inward and Outward traffic movement plan for raw materials and

finished products in consultation with Marketing and Material Management Depts.

  Repairs and Maintenance Planning: Planning of major Capital Repairs, Shutdowns, Spares requirement and ensuring

preparedness before taking up the repairs.

Mines planning:- Formulation of annual and monthly production plans for BF limestone, BF grade

dolomite, Mn Ore and Sand at VSP Captive Mines.

Monitoring of production and dispatch of Limestone, Dolomite, Mn Ore and Sand from

Captive Mines.

Projects planning:- Long and short term planning for all developmental schemes of capital nature

comprising modernization and technology up-gradation.

Planning and implementation of Additions, Modifications and Replacement (AMR)

schemes.

Expansion of Plant Capacity from 3.0 Mt liquid steel to 6.3Mt.

Research and Development:- Identification of Technological Improvement scopes for various processes and plan for

adoption of them by acquiring design and know-how capability.

Indigenous development of technology involving laboratory investigation.

Development of new grades and products in coordination with marketing dept.

  Information Technology:-

Formulation of Organizational IT-Policy, IT-Security Policy and IT-Vision.

Identification of IT enabled projects for various processes and implements them.

  Budget plan and control:- Identification of Budget requirement under various heads.

Control of the Budget and Spares, Consumables & Raw Materials Inventory.

Systems and Procedures:-

Streamlining the contract management system to ensure consistency of approach and

adoption of sound principles of contract management.

Ensuring the implementation and maintenance of quality management system

requirements for ISO 9001:2000 Certificate.

Monitoring pollution control activities of the Plant and interaction with the State and

Central Pollution Control Board.

Project Division Design & Engineering Department

Liaisoning with Consultants and Government Authorities in connection with designs,

specifications, approval of drawings and Liaisoning work for various types of

clearances.

Preparation of drawings, design and specification for AMR and Non-AMR jobs.

Assisting indenting departments in technical discussion with parties and preparation of

technical recommendation.

Layout clearances of various facilities coming in the Plant and Township.

Operation of Consultancy contracts.

Construction Department Exercising supervision of work at sites both for quality and quantity checks.

Preparation of contractor’s bills, processing of extra items and closure of contracts.

Liaisoning with suppliers, MM department, Design & Engineering Department and Stores

in connection with progress of work at site.

Arranging PAT/FAT will all concerned departments like works, design, consultants and

suppliers in terms of contract and handing over the unit to works department for

operation.

Contracts Department: Awarding of contract from the point on receipt of administrative approval from

indenting departments.

Conducting commercial discussions with parties.

Arranging Tender Committee meetings and preparing recommendations for awarding

work.

Preparing COM/Board Note for decisions at those forms.

Participating in claims and arbitration proceedings.

Project Monitoring Department:- To monitor the physical and financial progress of all the works executed by Construction

department.

To monitor the progress of works executed by D&E as well as Contracts department.

Preparation of various types of reports for information of Government and different

levels of Management.

Interaction with departments and consultant for updating the schedules and networks

for Project Monitoring.

Directorate of Finance & Accounts Making arrangement for long-term fund requirements.

Accounting of all minority transactions and preparation of financial statement of the

company and getting the same audited as required under law.

Maintaining records with regard to the cost of products produced by the company.

Release of payments to suppliers/providers of goods and services.

Release of salaries to the employees.

According concurrence to proposals for investments & expenditure as per the policies,

procedures and the Delegation of Powers.

Conduct Internal Audits, Stock Verification and Statutory compliance.

Making working capital arrangements.

Submission of periodical reports to banks as per their sanctioned terms.

Organizing for payment of Central Excise, Sales Tax, Income Tax and other statutory

payments.

Directorate of Personnel

Personnel Department Manpower Planning,

Employees’ induction,

Service matters, policy & rules

Industrial relations,

Employees’ welfare

Corporate Social Responsibility (CSR),

Replies to parliamentary questions,

Official Language implementation

Legal Affairs Legal Affairs deals with all legal matters including arbitration, coordination with Standing

Councils, Legal Advices etc.

Management Services Quality Circle,

Suggestion Scheme,

Incentive Scheme,

Reward Scheme,

Procedural Orders etc.

Training & HRD Leadership Training,

Training on Motivation and Attitude,

Team Building

Skill Training.

Induction and Orientation,

Plant Practice Lectures,

Basic Engineering Lectures,

Plant Specialized Training,

Management Development.

Corporate Strategic Management (CSM)

CSM is a “think tank” of the organization. The Department is engaged in formulation of

VMO (Vision, Mission & Objectives) of the organization and developing the strategy to

achieve VMO. It has various wings which inter-alia includes Knowledge Management Cell

(KM Cell). It has also developed the Corporate Plan of RINL. It takes up strategic tasks of

the organization.

CHAPTER – IV

INVENTORY MANAGEMENT OF STORES AND SPARES

INVISAKHAPATNAM STEEL

PLANT

Procedure for Procurement, Receipt, Handling and Accounting of Inventory of Stores and Spares in VISAKHAPATNAM STEEL PLANT

The inventories in Visakhapatnam Steel Plant are consisting of finished goods, stock of raw

materials, stock of stores and spares and working progress. The finished goods produced at

various by production department are sold by marketing departments and accounted by

Sales Accounting Section of Finance Department. As regarding raw materials concerned, the

Raw Material Department procure the materials through Materials Management

Department (here after referred as MM Dept) for use by production departments and are

accounted by Raw Material Accounts Section of Finance Department. As the present study

is restricted to inventory of stores and spares, the procedure for procurement, receipt,

handling and accounting of stores and spares is detailed below:

Procurement Automatic Recoupment Cell (AR Cell) of Stores Department prepares indents in respect of

materials, which are of meant for common use by various user departments of company.

The various user departments prepare the indents for procurement of materials, which are

not procured by AR Cell considering their usage, stock position, budgetary position, etc. The

indents in respect production departments are scrutinised by Spare Part Cell of Works

Department as to their technical requirements, stock position, budgetary requirement, etc.

The indents so prepared needs to be approved by competent authority. On approval, the

indents are forwarded to MM Dept for initiating procurement action. MM Dept invites

tenders from various suppliers as per laid down procedure and finalizes the lowest supplier.

An order indicating rate, terms and conditions (hereafter referred as AT, i.e., acceptance of

tender) placed on the on such supplier. The copy of order is sent to user department,

Central Stores Department (CSD), Finance Department and other concerned sections.

Receipt and handling of Stores and Spares The materials in respect of stores and spares, minor raw materials, etc are received by CSD

from suppliers. CSD stores them and issues for consumption. CSD also identifies the surplus

and scrap materials and disposes them. For these activities, CSD follows detailed procedure

through its sections consisting of Collection cell, Receipt Stores, Discrepancy Receipt Stores,

Claims cell, Dispatch Cell, Custody Stores, AR or Stock cell, Inventory Control Cell, Disposal

Stores etc. The various functions and procedure followed by CSD is given hereunder:

Collection cell

Collection cell receives the advance documents, like Lorry Receipts (LR), Railway Receipts

(RR), etc indicating ownership of materials and other dispatch particulars from suppliers and

scrutinizes whether such documents are in accordance with terms of AT terms. Collection

Cell advices the transporters to deliver the consignments to the premises of CSD as per

terms of supply/transport terms in respect of full wagon/truckloads on the door delivery

basis. In case of small consignments, it assigns the collection agencies for collection of

consignments from transporters’ go-downs normally within three days after receiving the

documents and within one day for emergency consignments. Collection cell receives daily

reports from collection agency in respect of materials delivered to the CSD or its sub-stores

by collection agency and from various Receipt Stores in respect of materials delivered on full

wagon/truck load basis. Collection Cell negotiates with the transporters for reduction of

demurrage charges. It obtains open delivery/shortage certificate for damaged condition.

Collection cell surrenders RRs to Railways based on unloading reports from Receipt Stores

and collect due slips for wagons not received in the same RR. Collection Cell receives details

of demurrage charges from Traffic Department, arranges for recovery from handling

contractors, where demurrages are attributable to CSD and informs Traffic Department with

due remarks, where demurrage is not attributable to stores. Collection Cell makes payments

from imprest in respect of payments made by it towards freight, demurrages, etc.

Collection Cell receives bills from unauthorized transporters for carrying consignments

forwards to Purchase Department for scrutiny and payment. Collection Cell receives the

Cheques for making payment in respect of Lubricants and oils and arranges for their

collection on handing over of such Cheques to the suppliers. After collecting the lubricants

and oils, the same will be delivered to major users directly through sub-stores after

receiving Stores Issue Note for raising regularizing GARN. Collection cell also arranges

dispatch of material on the dispatch advice received from dispatch cell.

Receipt Stores

Receipt Stores receives the copies of ATs along with amendments, if any from Purchase

Department and verifies catalogue number, accounting unit in AT with reference to details

available in Catalogue Master. It verifies delivery schedule and plans the space for bulk

goods. Receipt Stores receive the consignment through wagons, trucks, collection agency,

etc.

In respect of consignments booked in full wagon loads, railways hands over the wagons to

Traffic Department. At the time of taking wagons from Railway, Traffic Department verifies

condition of seals/lashes of the wagons and reports the damaged/ tampered/duplicate

seals/lashes. After receiving intimation from Traffic Department, Receipt Stores ascertains

the ownership of wagons and acknowledges the placement of wagons. Receipt Stores

assigns unloading to handling contractor. After unloading is completed, receipt stores shall

inform to Traffic Department for drawing out the wagons. Receipt Stores indicates details

of materials received along with discrepancies, if any by signing the delivery book

maintained with Railways and passes the Discrepancy Delivery Message to all the

concerned.

Discrepancy Receipt Stores (DRS)

On rejection of materials by inspection agency, Receipt Stores prepares a rejected GARN

and hands over the material to DRS in respect of breakages/damages at the time of receipt,

wrong supply, incomplete supply and quality problems. DRS receives the GARN along with

AT copy, Delivery Challan / Invoice Copy and Inspection Report. DRS also receive the

material from custody stores under dispatch note for the materials rejected subsequent to

GARN at Custody Stores. DRS receive and tally the material with GARN. In case of bulk

materials, the materials are stored in the respective Custody locations. DRS deal with the

cases of Receipts Stores for general items and spares. In case of other items, the respective

Custody Stores deal with the DR cases.

DRS categorizes the rejected material into (a) breakages/damage, which can be covered

with insurance and (b) all other DR cases and initiate the actions for clearing the DR stores.

In case of breakages/damages, DRS take up with the supplier for replacement/rectification.

DRS advise Finance Department for recovery/withholding the payment. In case of

emergency requirement of plant, DRS shall issue the materials against SIN.

DRS send a list of rejected cases to the members of the MRB in advance. MRB meets at

regular intervals and reviews every DR case within 45 days from the date of rejection and

decides whether (a) the deviation is marginal and material can be used with marginally

reduced efficiency, (b) rectifications required to be carried out to put the material in use and

(c) materials is to be rejected altogether and also the action to be taken against the supplier

for suspension of future business relations, etc. Based the decision of MRB, DRS takes the

approval of competent authority for accepting the material and prepares the accepted

GARN.

DRS issues materials to various user departments out of the rejected materials for

emergency needs after obtaining suitability certificate and approval from competent

authority. Whenever materials are issued to department out of rejected lot due to urgency,

receipt are regularized immediately by raising GARNS under a separate identified series with

remarks that these GARNS are not meant for release of payment to the supplier in order to

enable accounting of both issues and receipts. Subsequently after settling the issue of

rejection by way of rebate etc, DRS sends a communication to the bill passing section for

release of payment appropriately clearly liking reference of GARN and also MRB decision.

Valuation of both receipt and issue would be done as per the usual practice.

Claims Cell

Collection Cell/Receipt Stores send a non-receipt report for all road consignments to Claims

Cell indicating the insurance clause as per terms of AT. Receipt stores shall send discrepancy

report in respect of shortages, etc for claiming damages immediately after completion of

inspection along with documents like, Invoice/Delivery Challan, Inspection Note for

damages, Shortage/Open Delivery/Assessment Delivery Certificate, etc to Claims Cell.

However, Discrepancy Report for damages or repair charges valuing less than Rs.500, where

the insurance is to be borne by company is not forwarded to Claim Cell.

Where insurance is responsibility of supplier, Claims Cell lodges the claims in respect of non-

receipt/shortage/transit damages with the suppliers and follows up for

repair/replacement/reimbursement. Where insurance is responsibility, Claims Cell lodges

the claims along with necessary documents required with Insurance Company through

Finance Insurance Claims Section and follows up for their settlement. The claims are

withdrawn on (a) settlement of claim by Insurance Company, (b) rectification/replacement

by supplier and clearance by Inspection, (c) deduction of payment in the supplier’s bill and

(d) settlement through MRB.

Dispatch Cell

Dispatch Cell receives the materials from DRS for dispatching the rejected material to

suppliers, from Receipt Stores for returning excess supplies/samples for testing to suppliers,

from Custody Stores for reconditioning of materials or returning of materials against quality

complains to suppliers and from user departments for reconditioning, rectification or

modification on placement of ATs for such jobs and for returning empty gas cylinders along

with a dispatch note. Dispatch Cell certifies the condition of materials, arranges for packing

the material, informs to Insurance Company through Finance Insurance Section for coverage

of transit risk and hands over the materials to Collection Cell. Collection Cell hands over the

material to transporter receives LR/RR from transporter and sends the LR/RR to Dispatch

Cell for their action. Dispatch Cell forwards original LR/RR to the supplier along with a copy

of dispatch note.

Custody StoresCustody stores receives accepted material against GARN and gives acknowledgement to

Receipt Stores after checking a) catalogue number, b) description, c) unit code, d) quantity

for shortage/excess, and e) quantity for damage shall tag the material. Custody Stores

arranges the material in racks, note down the location on the GARN copy, updates the

received quantity in Bin Card. If Bin Card does not exist, Custody Stores Executive shall

authorize opening of a new Bin Card and ensures no duplicate card. Whenever a

continuation card is to be opened after completion 40 lines, Custody Stores Executive will

tally the balance at line number 40.

Custody Stores transfers these materials along with balance stock to the supplier received

under same GARN to DRS for taking suitable action by DRS. For adjustment of stock

balances, Custody Stores raises Stock Adjustment Voucher (SAV), where physical balance

does not match with bin card balance, for rectifying the error/discrepancy in ground balance

with respective bin card balance for the following reasons.

1 Physical discrepancies (a) Storage losses

(b) Pilferage loss

(c) Loss on account of Fire, etc

(d) Excess/storage on stock verification

2 Existence of Duplicate Bin Card

3 Rectification of Errors in Catalogue Number

(a) Error in posting transaction quantity

(b) Posting in wrong bin card

(c) Wrong issue

Primarily the Custody Stores groups of respective Storehouse are responsible for accounting

and custody of material. Custody Stores offers the stocks for verification to the stock

verifier. Custody Stores verifies the items at the time of each transaction and in case of

discrepancy, the same is brought to the notice of Custody Stores Executive.

Stock verification shall be carried out by (1) Stock Verification Section of Finance and (2)

Internal Stock Verification of Stores Department. Custody Stores is required to get verified

its stocks of materials by Stock Verification Section of Finance Department. Custody Stores

associates with stock verifier and got verifies the material and certifies the physical stock on

a Joint Stock Verification Report. Before acknowledging the discrepancies during stock

verification, Custody Stores verifies the discrepancies and gives the reasons within 5 days of

completion of stock verification.

Stock Cell

Stock Control or Automatic Recoupment (AR) Cell procures general consumables with

standard specification and items generally required by more than one unit of a plant, which

are included in AR list as decided by AR committee. AR committee is a standing committee

constituted with the approval management. AR Cell ensures availability of all vital items all

the time. AR items are grouped as (a) vital items, which directly affect the production and

(b) other items AR items. AR items are categorized as per value into (Class A) annual

consumption value more than Rs.1,00,000/-, (Class B) annual consumption value less than

Rs.1,00,000 to 50,000/- and (Class C) annual consumption value less than Rs.50,000/-

Custody Stores informs stock position of AR items to AR Cell twice a week. Most of the AR

items shall be covered under rate contracts. AR Cell places AT for these items directly on the

under rate contracts with copies to (a) Finance (b) Receipt stores and (c) Inspection agency.

Supplier under rate contract is required to keep enough stock of AR items. Deliveries shall

be staggered monthly/quarterly based on the projected annual requirement and actual

consumption. Vital items and Class A items are reviewed monthly and suppliers are advised

with modified delivery schedule. Delivery corrections in respect of Class B items are under

taken once in a quarter.

Inventory Control CellInventory Control Cell prepares inventory status and circulates to all user departments at

least once in quarter. It also carries out X Y Z analysis and circulates list of X and Y items half

yearly to user departments.

X Items contributing to 70% value of stock.

Y Items contributing to 20% value of stock.

Z Items contributing to 10% value of stock.

Inventory Control Cell identifies the slow-moving and non-moving materials. General items

which have not been issued even once during the last 5 (five) years shall be considered as

non-moving items. The position of the item at the beginning of financial year shall be

considered for analysis. Non-moving inventory should not include Insurance inventory. An

item shall be removed from non-moving list only when existing stock becomes nil and it is

not declared as surplus item. Items which had at least one issue per year in the last 3

(three) years are considered as Fast Moving items. Slow moving items are items other than

insurance items which do not fall under the category of non-moving or fast moving items.

Inventory Control Cell scrutinizes general stores indents and rationalized spares and advice

for suitable procurement action. It also identifies the general stores items, which can be

standardized in consultation with SPC. It carries out ABC analysis of general stores items and

monitor consumption pattern on a quarterly basis and furnishes report to user department

and Purchase Department.

AR Cell All General Stores items

Spare Part Cell All rationalized Mechanical and Electrical spares

Refractory Engineering Dept Refractory items

RS&RS Rolls and Roll Guides

First three digits Class of Material

Next two digits Sub Class of Material

Next four digits Serial Number of item

Next one digit Source Code

Last digit Check Digit

Source Code Source of Supply of Material

0 Indigenous

1 Imported (other than

Russian)

2 Reconditioned

3 Russian

5 Insurance item-indigenous

6 Insurance item-imported

7 Insurance item-reconditioned

Check digit is calculated with the principle that each digit in the catalogue number is

multiplied by its positional value starting from the source code, the sum of these products is

divided by 11 and the remainder is designated as ‘Check Digit’. However the remainder is 10

the check digit shall be 0.

Different unit codes like, 01 for numbers, 02 for pair, 03 for dozen, 17 for metric ton, etc are

used for accounting of items in stores. Storehouses are identified with Department Codes

for easy identification of spares meant for particular department.

Disposal StoresDisposal stores receive all scrap and surplus material through Store Return Note (SRN).

Disposal Stores verifies thoroughly material received, weights, unloads in an earmarked lot,

and ensures that one type/lot of materials is unloaded at only one location. A lot is normally

formed of the same type/quality of material. The SRN is entered in the Day Book, Lot

Register and in Bin Card.

Disposal action is normally taken in respect of items like, (a) scrap/cut pieces of steel items

generated during fabrication and returned to CSD, (b) construction equipment and other

materials like steel, pipes, refractories, etc declared as surplus, (c) spares procured and

available in stock in respect of equipments, which are replaced, (d) non-moving items which

are declared as surplus, (e) turnings and borings generated from workshops, wood and

other packing materials, old automobiles and electrical/electronic materials, which are

declared as surplus/unserviceable, etc. The concerned Department takes action for

declaring the above items as surplus/obsolete by obtaining approval of competent authority

as per approved delegation of powers and after taking recommendations from

departmental committee constituted to declare such items as surplus/obsolete. After

obtaining approval, the concerned Department sends the material along with SRN to

Disposal Stores for disposal.

The intending customers deposit the tender in the separate tender boxes kept in the CSD.

CSD ensures all tenders received by post are dropped in the relevant box before closing

time. The tender box sealed immediately after the time specified for receipt of tenders in

the invitation to tender. Thereafter, two officers, one from Finance Department and

another from CSD open the tenders. All the tenders are opened in the presence of

authorised representative of customers. If a tender is received without indication of tender

number and opened in normal course in office, the same is put in a cover and sealed by an

Executive who receives such tender in the first instance duly super scribing the tender

number, date, the name of the customer and the same shall be dropped in the specific

tender box thereafter.

Accounting of stores and spares

CSD decides an issue control series for raising documents like GARN for receipt of materials,

SIN or DN for issue or despatch of materials, SAV for adjustment of balance of stock, SRN for

returning the materials and STV for transferring materials at the beginning of the year and

circulates to the concerned operating persons including SAS. CSD raises the documents like

GARNS, SIN/DNS, SRNS, STVS, and SAVS in accordance with stores procedure order and

posts them in the Bin Cards or Bin Master in on line.

In addition to the above Bin Master data extracted by System Department, at the end of

each month SAS provides data in respect of adjustments made to the quantity, value and

account codes of documents processed in the earlier months for processing as given below:

S.No. Document type

Card Code adopted for raising documents / adjustments by

CSD SAS1 GARN 31 322 SAV 33 343 SRN 35 344 STV 36 345 SIN/DN 38 37

SAS makes value or quantity adjustments for various jobs like (a) Preparation of material

issues to contractors, (b) Review of odd balances in priced stores ledger (c) Capitalization

of issues, (d) Insurance spares accounting, (e) Reconciliation of provisional labiality for

suppliers, (f) Material sent for repairs/replacement/rectification/ on loan basis, (g) Review

of SAVs rose for shortage/excess, (h) Reconciliation of priced stores ledger and bin cards/

master and (i) Scrutinizing and accounting of documents and (j) for making any accounting

adjustments. After carrying out above jobs, stores account section passes various

adjustments for incorporation in monthly data. The adjustments are based on input like PSL

extracts, workings for capitalization of materials, correspondence from CSD, copies of bin-

cards in case of reconciliation of Bin Master and PSL. These adjustments are entered in

adjustment data registered on daily basis and incorporated in the monthly transaction

data. Normally, SAS will not make any quantity adjustments except for adjustment of

mismatches in PSL–Bin Master Quantities.

The transactions are rejected because of (a) Non-pricing of GARNS (b) Non-availability of

catalogues in PSL and (c) the value of any transaction is zero for any reason (d) wrong

account code, wrong responsibility code, wrong unit code, etc. After receipt of the rejected

edit in soft copy from System Department, SAS obtains the value of GARN’S for non-priced

GARN’S from purchase bills section and works out the rates for each item to dbase package

and updates in system. System rejects the new catalogues operated by central stores

department through SIN/DNS/SAVS which do not exist in PSL. Wherever the transaction

value is zero or in case of wrong account code/ responsibility code/unit code, etc, SAS

verifies the reasons and assigns the correct value/account code/responsibility code/unit

code, etc for that transaction to clear rejected transaction edit.

After processing the data, System Department informs the monthly consumption value to

stores account section checks for abnormalities before giving clearance for generation and

to forward the following reports to SAS for preparation of Monthly or Cumulative Inventory

cum Consumption Report and other following reports.

1 Monthly or Cumulative Inventory cum Consumption Report

2 Priced Stores Ledger

3 Monthly Transactions Data in a soft copy

4 Voucher-wise Statement

5 Account Code Summary report

6 Material Group wise Statement

7 Journal Voucher Detailed Report

8 Journal Voucher Summary Report

9 Reports required for Costing Section

10 Variance Report

SAS transfers the Journal Voucher Data to Financial Package by a merging program, so that

all the transactions reflected in Priced Stores Ledger are carried to Section Ledger directly at

the end of each month. Based on the Cumulative/Monthly Inventory cum Consumption

Statement, SAS prepares and circulates a Cumulative/ Monthly Inventory cum Consumption

Statement for information of Heads of Departments, to Budget Section for preparing

working results and to Cash Section for furnishing information to Banks on moving stocks,

based on which cash credit/loan is utilized. The various jobs for accounting of

inventories/consumption done by SAS are listed below:

Calculation of Stores Overheads percentage

SOH means freight inward, insurance and other like amounts incurred by the company,

where these amounts may not be recognised against each receipt of materials. The

respective bill passing sections debits amounts to the SOH account on their payment and

SAS credits the amount charged to consumption to SOH account. SAS calculates the Stores

Overheads (SOH) percentage based on the total SOH value balance lying at the year

beginning and total opening stock of stores and spares. This SOH percentage is informed to

System Department for applying consistently on all issues of materials while charging to

consumption from July to June of each year.

Review of Odd Balances

SAS arrives at the monthly inventory balances based on the transaction data furnished by

System Department and reviews the odd balances in the inventory at the end of each

month. Odd balances are such balances where (a) quantity is ‘zero’ and value is ‘non zero’,

(b) quantity is ‘non zero’ and value is ‘zero’, (c) quantity is ‘negative’ and value is ‘negative’,

(d) quantity is ‘negative’ and value is ‘positive’, and (e) quantity is ‘positive’ and value is

‘negative’. SAS verifies for the reasons and passes appropriate adjustments, if necessary for

rectification of odd balances.

Insurance Spares AccountingSAS obtains list of transactions in respect of GARNS, SINS/DNS, SAVS, STVS, SRNS and other

adjustments passed by SAS in respect of insurance items from System Department on

monthly basis. The receipt value along with SOH of materials is capitalised. SAS values the

issues and stock adjustments on FIFO basis and identities the difference in value based on

FIFO and PSL value (monthly weighted average). Necessary Journal Voucher for accounting

of insurance spares and adjustments for adjustment total value of insurance spares shown

in PSL and value shown in Section Ledger, if any are passed.

Verification of Material Issued for Repair, Replacement or Rectification and their subsequent receipt

CSD issues various materials for Repair, Replacement or Rectification and receives back

them subsequently. For identification of these issues and receipts, a separate control

number series of SIN/DN and GARNS are used. Based on the control number series, the

issues and receipts are accounted to ‘Material Issues on Loan Account’ by System. SAS

reconciles the above account on monthly basis, identifies difference in value of issue and

receipt and passes adjustments for such differences. SAS clears the differences in SOH by

way of Journal Voucher. SAS informs to CSD the store house wise and catalogue wise

dispatch notes raised for material issued for repair, replacement and rectification but not

received back and GARNS for the material received, for which material is not dispatched for

further reconciling and for taking obtain for recovery of material in respect of material

issued and for sending the material in respect of GARNS.

Documents Review by Stores Account Section CSD sends documents in respect of GARNs with control number above 8000, all SAVs, SRNs,

STVs and SINs/DNs with control number above 50,000 to SAS on day-to-day basis from

various individual stores. Stores account section files all the above documents in the order

of the month/card code/stores house/serial number wise. After receipt of the IOM

indicating first and last control number of documents, SAS verifies whether all the

documents are received or not as per the first and last control numbers.

SAS verifies the GARNS whether all are priced correctly or not. In respect of GARNS, which

are not correctly priced, appropriate adjustments are passed and entered in the adjustment

data register. SAS identifies the GARNs in respect of materials received under

works/operation contracts and transfers the amount to Works/Operation Bills sections

through Inter Section Adjustment Account.

SAS verifies whether quantities mentioned in the SRN are correctly posted in the ledger or

not. SAS verifies whether quantities mentioned in the SIV is correctly posted in the ledger.

SAS verifies whether for each positive STV, another negative STV raised or not, in case of

transfer from one storehouse to other storehouse within the plant. Where STV is raised for

transfer of material from one group to another group, a Journal Voucher is to be passed for

adjustment of balances of the material groups in Sectional Ledger. SAS verifies whether

quantities mentioned in the SIN/DN are correctly posted in the ledger or not. During the

verification of the documents, in case of any discrepancy is found, on adjustment is passed

to rectify the discrepancy and entered in the adjustment data register.

Wherever, the adjustments are passed by SAS, the same are entered in an Adjustment Data

Register and the same were fed in Materials Package in System and transmits the data to

System for incorporation in the monthly transaction data. The Journal Vouchers prepared

by SAS are fed in Finance Package for processing of Section Ledger Data.

Accounting of Scrap SalesDisposal Stores, on receipt of demand draft (DDS)/ Bankers Cheques from customers

towards sale of scrap, surplus or obsolete items, forward them along with on IOM indicating

the details of advance received, delivery order to SAS for depositing them with bank. SAS

ensures all DDs are received in respect of each delivery order issued by Disposal Stores. In

case of new customer, details are updated in Customer Master Data Base in System. SAS

prepares and sends the receipt voucher along with demand drafts to cash section for

realisation. On receipt of full amount in respect of each lot auctioned/ tendered from

customer, Disposal Stores issues Delivery Order (DO) to the customer. On delivery of

materials, CSD raises a Dispatch Note (DN) for accounting of issue of materials in Bin Card

and Delivery Challan cum Invoice evidencing the delivery of materials to customer. On

completion of deliveries in respect of each delivery order, Disposal Stores raises a Delivery

Completion Report (DCR) received from customer invoice value, recoveries in respect of

late payment charges, ground rent, etc the balance if any refundable.

Disposal Stores sends the copies of DO, DN, DC cum Invoice and DCR to SAS. Disposal Stores

makes available monthly invoice data at the end of month to Stores Accounts Section. On

receipt of monthly invoice data, SAS verifies for any missing numbers and whether sales tax

is correctly charged as per destination indicated in invoice and generates a journal

accounting voucher for accounting of sales in the System. From the monthly invoice data,

Stores Accounts Section prepares and forwards monthly sales tax returns to sales tax

section of F&A department. Disposal Stores Collects the C/G forms from the customers in

respect of CST sales. The duly filled-in “C/G” Forms shall be forwarded to Sales Tax Section

of F&A Department on quarterly basis based on the monthly invoice data and monthly sales

tax returns which in turn submits the same to Sales Tax Authorities. Wherever C/G forms

are yet to be received, the same will be followed up with customers by Disposal Stores. On

receipt of DCR from Disposal Stores, Stores Accounts Section will refund the available

balance amount against a particular DO after affecting the recoveries like ground rent, late

payment charges, etc. by making a Payment Voucher and forward to Cash Section for

making refund by way of Cheque to the Customer directly. At the end of each month sub

ledger is generated in respect of transactions pertaining to scrap sales.

Annual Accounting Jobs

As a part of annual accounts closing, SAS calls for certain information from CSD, Works

Department and System Department. SAS completes all the routine monthly jobs like,

documents review, reconciliation of PLS Account, capitalisation, insurance spares

accounting, review of SAVs raised for shortage/excess, review of materials issued on loan,

reconciliation of PSL–Bin Master, etc. SAS reviews all odd balances and ensures that PSL

contains only positive quantities and values in respect of all items of stocks of stores and

spares. SAS ensures all items including insurance spares are capitalised and necessary

entries/ adjustments are passed for effecting capitalisation. SAS furnishes the details of

capitalisation and insurance spares to Corporate Accounts Section for providing

depreciation. Based on the information furnished by Works Department, SAS works out

value of the inventory with shop floor and passes necessary entry for reversing consumption

and increasing the stock value. SAS creates provision for the values of SAVs raised in respect

of shortage/excess, where approval is pending and shown in material under investigation.

Based on the information furnished by System Department, SAS reconciles the PSL-Bin

Master, works out the value of PSL-Bin Master cases and creates a provision. Based on the

information furnished by CSD, SAS creates provision for the value of SAVs not raised in

respect of shortages/excess where the same are reflected in the Stock Verification Report.

Based on the information furnished by CSD, SAS creates a provision for the 100% value of

surplus/ obsolete materials. Based on the information furnished by System Department/

CSD, SAS creates a provision for 20% value of non-moving items of stock of stores and

spares. All the above provisions are created by charging to revenue in case they are in

excess of earlier provisions made; otherwise, the difference will be transferred to provisions

no longer required account. SAS prepares schedules for various accounts and notes to

accounts and get them audited.

Thus the stores and spares are procured, received and accounted in the company in a

systematic manner with lot of internal controls built-in in the system, which are

commensurate with the scale of production.

CHAPTER- V

THEORITICAL ASPECTS OF

INVENTORY MANAGEMENT &

INVENTORY CONTROL

5.2 WHY ORGANIZATION IS TO CARRY INVENTORY

The need and importance of inventory varies in direct proportion to the idle time cost of

men and machinery and urgency of requirement. If men and machinery in the factory

could, wait and so could customers, materials would not lie in wait for then and no

inventories need to be carried. But it is highly uneconomical to keep men and machinery

waiting and the requirements of modern life are so urgent that they cannot wait for

materials to arrive after the need for them has arisen. Hence, the organization needs to

carry the inventories. There are three general motives for holding inventories.

The transaction motives which emphasis the need to maintain inventories to facilitate

smooth production and sale operations.

The precautionary motive, which necessitates holding of inventories to guard against the

risk of unpredictable changes in demand and supply forces and other factors.

The speculative motive which influences the decision to increase or reduce inventory

levels to take advantages of price fluctuations.

Inventory helps in smooth and efficient running of business.

Inventory provides service to the customers immediately or at short notice.

Due to absence of stock, the company may have to pay high prices because of piece–

wise purchasing. Maintaining of inventory may earn price discount because of bulk

purchase.

Inventory also acts as a buffer stock when raw materials are received late and so many

sale-orders are likely to be rejected.

Inventory also reduces product costs because there is an additional advantage of

batching and doing long smooth runny production run.

Inventory helps in maintaining the economy by absorbing some of the fluctuations

when the demand for a items fluctuates or is erratic.

Pipeline stocks (also called process and movement inventories) are also necessary where

the significant amount of time is consumed in the transshipment of items from one

location to another.

5.3 Inventory Management and inventory controlThe concepts of Inventory Management and Inventory Control are different. Inventory

Management ensures proper coordination of activities and policies regarding procurement,

production and marketing of materials/products in order to achieve better inventory

control. Hence, Inventory management includes inventory control, but inventory control

does not mean inventory management. Before understanding these concepts, the

objectives of Inventory Management are to be understand, which are discussed under two

heads, i.e.

(A) Operating Objectives

(1) Availability of materialsThe first and the foremost objective of inventory management is to make all types of

materials available at all times when ever they needed by the production departments so

that the production may not be held up for want of materials. It is therefore advisable to

maintain a minimum quantity of all types of materials to move on production on schedule.

(2) Minimizing the wastageInventory management has to minimize the wastage at all levels i.e., during its storage in

the go-downs or at work in the factory. Normal wastage, in other words uncontrollable

wastage, should only be permitted. Any abnormal but controllable wastage should strictly

be controlled. Wastage of materials by leakage, theft, embezzlement and spoilage due to

rust, dust or dirt should be avoided.

(3) Promotion of manufacturing efficiencyThe manufacturing efficiency of the enterprise increases if right types of raw material are

made available to production department at the right time. It reduces wastage and cost of

production and improves the morale of workers.

(4) Better Service to Customers

In order to meet the demand of the customers, it is the responsibility of inventory

management to produce sufficient stock of finished goods to execute the orders received

from customers. An uninterrupted flow of production is to be maintained.

(5) Control of Production LevelInventory Management have to decide to increase or decrease production level in right time

so that inventory is controlled accordingly. But in odd times, when raw materials are in

short supply, proper control of inventory helps in creating and maintaining buffer stock to

meet any eventuality. Production variations can be avoided through proper control of

inventory.

(6) Optimum Level of InventoriesProper control of inventories helps management to procure materials in right time in order

to run the plant efficiently. Maintaining the optimum level of inventories keeping in view

the operational requirements avoids the out of stock danger.

(B) Financial Objectives

(1) Economy in PurchasingProper inventory management system brings certain advantages and economies in

purchasing the raw materials. Management makes every attempt to purchase raw materials

in bulk quantity and to take advantage of favourable market conditions.

(2) Optimum Investment and Efficient Use of CapitalThe primary objective of Inventory Management, from financial point of view, is to have an

optimum level of investment in inventories. Inventory Management has to ensure neither

any deficiency of stock of materials nor any excessive investment in inventories so as to

block the capital, which could be used in an efficient manner. Inventory Management has

to set up minimum and maximum levels of inventories to avoid deficiency or surplus stocks.

(3) Reasonable Prices

Inventory Management has to ensure the supply of raw materials at a reasonably low price,

but without sacrificing the quality. It helps to reduction of cost of production and

improvement in quality of finished goods in order to maximize the profits of organization.

(4) Minimizing CostsMinimizing inventory costs such as handling, ordering and carrying costs, etc is one of the

main objective of Inventory Management. It helps reduction of inventory costs in a way

that reduces the cost per unit of inventory and thereby reduction of total cost of

production.

5.4 INVENTORY CONTROLInventory control is a primary part of Inventory Management. It is concerned with achieving

an optimum balance between two competing objectives.

The objectives are

- To minimize investment in inventory

- To maximize service levels to the forms customers and its own operating

departments.

In achieving the control over inventories, the organization adopts various methods of

inventory control.

These includes (1) Min-max plan, (2) Two Bin System, (3) Order Cycling System, (4) ABC

Analysis, (5) Fixation of Various Levels, (6) Use of Perpetual Inventory System and

Continuous Verifications, (7) Use of Control Ratios, (8) Review of Slow and Non-Moving

Items.

(1) Min-Max Plan

It is one of the oldest methods of inventory control. Under this plan, a maximum and

minimum for each stock item are specified keeping in view its usage, requirements and

margin of safety required to minimize risks of stock outs. The minimum level establishes the

reorder point and order is placed for the quantity of material, which will bring it to the

maximum level.

The method is very simple and based upon the premise that minimum and maximum

quantity limits for different items can fairly well defined and established. Considerations like

economic order quantity and identification of high value critical items of stock for special

management attention or not cared for under this plan.

(2) Two - Bin System

Under this system, two piles, bundles, or bins are maintained for each item of stock. The

first bin stocks the quantity of inventory, which is sufficient to meet its usage during the

period between receipt of an order and placing of the next order. The second bin contains

the safety stock and the normal quantity used from order date to delivery date. The

moment stock contained in the first bin is exhausted and the second bin is tapped, a

requisition for new supply is prepared and submitted to the purchasing department. Since

no bin- tag (quantity record of materials) card is maintained, there is absence of perpetual

inventory record under this bin.

(3) Order Cycling System

In the order cycling system, quantities in hand of each item or class of stock are reviewed

periodically say, 30, 60 or 90 days. In the course of a schedule periodic review, if it is

observed that the stock level of a given item will not be sufficient till the next scheduled

review keeping in view its probable rate of depletion, an order is placed to replenish for its

supply. The review period will vary from firm to firm and among different material in the

same firm. Critical items of stock usually require a short review cycle. Order for replenishing

a given stock item is placed to bring it to some desired level, which is often expressed in

relation to number of days or weeks supply.

The schedule periodic review plan does not consider the differences in rate of usage for

different items of stock. As a result, items whose usage has declined will have surplus stock,

whereas some items whose rate of depletion has increased are exhausted much before the

next review date. Moreover, the system tends to make procurement and purchasing

activities reach their peak around the review dates.

(4) ABC Analysis

With the numerous parts and materials that enter into each and every industrial products

and inventory control lends itself, first and foremost, to a problem of analyze. Such

analytical approach is popularly known as ABC analysis (Always Better Control), which is

believed to have originated in the general electric company of America and based on

Pareto’s law. The ABC analysis is based upon segregation of material for selection control.

It measures the money value, i.e., cost significance of each material item in relation to total

cost and inventory value. The logic behind this kind of analysis is that the management

should study each item of stock in terms of its usage, lead time, technical or other problem

and its relative money values in the total investment in inventories.

Critical, i.e., high value items desire very close attention, and low value items need to be

devoted minimum expense and efforts in the task of controlling inventories. Under ABC

analysis, the different items of stock are classified into three categories in the order of their

average inventory investment or based on their annual rupee usage.

Category “A” items: - more costly and valuable items are classified as such items have

large investment.

Category “B” items: - The items having average consumption value are classified as B

items.

Category “C” items: - The items having low consumption value are put as C category.

The important steps involved in segregating material or inventory control are as follows:

(a) Find out future use of each item of stock in terms of physical quantities for the

review forecast period.

(b) Determined the price per unit each item.

(c) Determined the total project cost of each item multiplying its expected units to be

use by the price for per unit of such item.

(d) Beginning with the item with the highest total cost, arrange different items in order

of their total cost as computed under step (iii) above.

(e) Express the units of each item as a percentage of total costs of all items.

(f) Compute the total cost of each item as a percentage of total costs of all items.

Important points for ABC analysis:

- Whenever the items can be substituted for each other, they should be substituted for

each other, they should preferably be considered as one item.

- More emphasis should be given to the value of consumption and not the cost per unit.

- While classifying, all items consumed by the organization should be considered together.

- If it is convenient different items may be classified into only three categories and labeled

as A, B, and C respectively depending upon whether they are high value items, average

value items or low value items. If it needs, percentage of different items may be plotted

on chart for better representation.

(5) Fixation of Various Levels

Certain stock levels are fixed up for every item of stores so that stocks and purchases can be

efficient controlled. These are

a) Maximum level: The represents the minimum quantity above which stock should not

be held any time

b) Minimum level: The represents the minimum quantity of stock that should held all

items

c) Danger level: Normal issues of stock or usually stopped at this level and made only

under specific instructions.

d) Ordering level: It is the level at which indents should be placed for replenishing

stocks.

e) Ordering quantity: The quantity, which is to be ordered.

(A) Maximum Level

It is normally a matter of policy. The various factors that should be taken into consideration

are:

Capital outlay: investment to be made in stores, raw materials and other bulk items is an

important consideration.

Storage space available.

Storage and insurance cost.

Certain materials deteriorate if stored over a long period. This limits the quantity of

maximum stock kept.

If certain goods are subject to obsolescence, the spare parts and components etc. of

such products stocked should be limited.

Consumption per annum.

The lead-time.

Certain goods are seasonal in nature and can be purchased only during specific period.

Hence, maximum level will be fixed for each season.

Price advantage arising out of bulk purchases should be availed.

The economic order quantity.

Formula: Maximum stock level = Re- order level +Re-ordering quantity – (Minimum

Consumption *Minimum Reorder Period)

(B) Minimum Level

The minimum level is also a matter of policy and is based on

Consumption per annum.

Lead Time.

Production Requirement.

Minimum quantity that could be advantageously purchased.

If an item is made to order then no minimum level is necessary.

Formula: Minimum level = Re-Order level – (Normal Consumption * Normal Re-Order

Period)

(C) Danger or Safety Level

Some times in practical situation, it happens that neither the consumption rate, nor the

lead-time is constant through the year. So in order to face such under taking in meet in out

the demands, an extra stock is maintained. The extra stock is called buffer stock. Material

consumption varies from day to day; week-to-week and hence accurate forecasting is not

possible. A safety or reserve stock is kept to avoid stock out. The desirable safety stock level

is that amount which minimizes stock out costs and carrying costs.

Formula: Buffer or Safety stock level

= Ordering Level – (Average Rate of Consumption * Re-Ordering Point)

(D) Ordering Level:

The annual consumption of an item in addition to the time lag between ordering and

receiving can be collected from past records. Based on these facts and policies, the ordering

level and ordering quantity can be calculated. The order point is to be calculated keeping in

mind, the worst conditions so that minimum a stock is always maintained. The ordering

level should be so fixed that when an indent is placed at the ordering level, the stock

reaches the minimum level when the replenishments received. The ordering level is

calculated from the following factors:

The expected usage

The minimum level

The lead time

Formula: Ordering Level = Minimum Level + Consumption during lag period

(E) Reordering Quantity or Economic Order Quantity (EOQ):

One of the major inventory management problems to be resolved is how much inventory

should be added and when inventory should be added. When inventory is to be replenished

and if the firm is purchasing materials, it has to decide number of lots in which it has to be

purchased on each of replenishment. If the firm is planning a production run, the issue is

how much production to schedule. The problems are called order quantity problems and

the task of the firm is to determine the optimum Economic Order Quantity.

Determining an optimum Economic Order Quantity involves three types of costs. (a)

Ordering cost (b) carrying cost (c) Raw material cost. The economic order quantity is the

quantity, which minimizes the total of ordering and carrying costs.

(a) Ordering Cost

These include the fixed cost associated with obtaining goods through placing of an order or

purchasing or manufacturing or setting up machinery before starting production. They

include cost of purchase, requisition, follow up, receiving goods, quality control etc.

Formula: Ordering cost = (Annual Requirement (A) *Ordering Cost per order

(O))/Quantity to be ordered (Q)

(b) Carrying Cost

The cost associated with carrying or holding goods in stock is known as holding or carrying

cost. Holding cost assumed very difficulty with size of inventory as well as time is held in

stock.

Formula: Carrying cost = (Carrying Cost per unit (CH)*Quantity to be ordered (Q))/2

(c) Raw Material Cost

The cost associated with purchasing of raw materials is called raw material cost.

Formula: Raw Material Cost = Annual Requirement (A)*Price per unit (P)

EOQ Assumptions

The forecast/demand for given period, usually for one year is known.

The usage/demand is even through the period.

Inventory orders can be replenished immediately.

There are two distinguishable costs associated with inventories.

Cost per order is constant regardless of the size of the order.

Cost of carrying cost is fixed percentage of the average value of the inventory.

Formula: EOQ = 2AO/CH

(6) Use of perpetual Inventory system and Continuous verification

The perpetual inventory system records changes in raw materials, work in progress and

finished goods on daily base. Hence, managerial control and preparation of interim financial

statements is easier. Perpetual inventory derived its name because it indicates the amount

of stock on hand at all time. It facilities verification of stocks at any time and authenticates

the correctness of stock records.

The two main functions of perpetual inventory are:

- It records the quantity and value of stock in hand.

- There is continuous verification of physical stock.

Chartered Institute of Management Accountants, London defines Perpetual Inventory

System as “The recording as they occur of receipts, issues and the resulting balances of

individual items of stock in either quantity or value”.

A perpetual inventory usually checked by a Programme of continuous stocktaking and the

two terms are sometimes loosely considered synonymous. Perpetual inventory means the

system of records, whereas continuous stocktaking means the physical checking of those

records with actual stocks.

The perpetual inventory method has the following advantages:

The inventory of various items can be easily ascertained. Hence, profit and loss account and

balance sheet can be easily prepared.

Information regarding material on hand eliminates delays and stoppage in production

The investment in stock can reduced to the minimum keeping in view the operational

requirements.

Because of internal check, the activities of various departments are checked. Hence, stores

records are reliable.

Production need not be stopped when stock taking is carried out.

These records give the cost of materials. Hence, management can exercise control over cost.

Discrepancies and errors are promptly discovered and remedial action can be taken to

prevent their reoccurrence in the future.

This method has a moral effect on the staff, makes them disciplined and careful and acts as

check against dishonest actions.

Loss of interest on capital invested in stock, loss through deterioration, obsolescence can be

avoided.

Stock figures are available insurance purposes.

It reveals the existence of surplus, dormant, obsolete and slow moving material and hence

remedial action can be taken

Limitations:

The bin card and stores ledger may not be up to date and hence cannot be effectively

controlled. Hence, Continuous stocktaking is hampered.

Perpetual inventory system is comprised of

Bin card,

Priced Stores ledger and

Continuous stocktaking.

Bin Card

A bin card is a quantitative record of receipts, issues and closing balance of items of stores.

A separate bin card accompanies each item. The bin card is posted as and when a

transaction takes place. Only after the transaction is recorded, the items are received /

issued. On receipt of materials, the quantity is entered in the bin card from the Goods

Received Note in the receipt column and issues to various departments in the issues

column.

Priced Stores Ledger

The stores ledger is maintained to record all receipt and issues transactions in respect of

materials the quantities and the values are entered in the receipts issues and balance

columns. Additional information regarding quantity on order and quantity reserved may also

be recorded. Separate sheets for each item or continuous may be maintained. The sheets

should be serially numbered to obviate the risk of removal or loss.

Continuous Stocktaking

The stores accounts reveal what the balance should be and a physical verification reveals

the actual position. Under this system of verification, the total number of man-days

available for verification is calculated. The items to be verified per man-day are selected by

classifying the various items into groups depending upon time required. The stock

verification staffs planed the program and divide the work among themselves. The plan is

such that all items are verified in the year. Items are small value may be verified twice or

more in a year. Bulky items are usually verified when stocks are comparatively low.

(7) Use of Control Ratios

Inventory turnover ratio helps management to avoid capital being locked up unnecessarily.

This ratio reveals the efficiency of stock keeping. This ratio will be indicated in the number

of days.

Inventory Turnover Ratio = Cost of material consumed * Days during the period / ((Cost of

opening stock+ cost of closing stock)/2)

(8) Review of Slow & Non-Moving Items

The money locked up in inventory is the money loss to the business. If more money is locked

up, lesser is the amount available for working capital and cost of carrying inventory is

increase.

Inventory Turnover Ratio should be as high as possible. Lose due to obsolescence should be

eliminated or these items are used in some profitable work. Slow moving stock should be

identified and speedily disposed off. The speed of moving should be increased. The

turnover of different items of stock can be analysed to find out the slow moving stocks. The

percentage of slow moving stores is given by value of slow moving stores divided by value of

total inventory.

Materials become useless or obsolete due to changes in products, process or method of

design or method of production, slow moving stocks have a low turnover ratio. Capital is

locked up and cost carrying have to be incurred. Hence, management is take effective steps

in minimize losses.

5.5 ESSENTIALS OF A GOOD INVENTORY MANAGEMENT SYSTEM

An efficient and successful inventory management system possesses the following

essentials:

(1) Classification and Identification of Inventories

The inventory include raw materials, semi finished goods and finished goods and

components of several descriptions. In order to facilitate prompt recording, locating and

dealing, each item of inventory has to be assigned a particular code for proper identification

and has to be divided and sub divided into groups. ABC analysis of inventory is useful in

classification and identification of inventories.

Assignment of definite name to each item of stores is necessary for the identification

of materials. After analysis of all stores items and considering the peculiar nature of each

item, an appropriate name has been assigned to each item these are divided first into larger

and smaller groups. The following are range of items to be held in stock:

Materials, which are regularly required.

Materials, which may be required at, short notice when there, are breakdowns of

plants.

Stores, which are not in frequent demand, should not be maintained in huge

quantity provided they are readily available.

Materials are general stores, which are not operationally vital and are used at

irregular intervals need not be maintained in huge quantity

(2) Standardization and Simplification of Inventories

In a proper Inventory Management System, standardization of materials is necessary.

Standardization refers to the fixation of standards of materials for the use in the production

of finished goods and set the specification of components and tools to be used in order to

control the quality of goods manufactured. Simplification of inventories refers to the

elimination of excess types and sizes of items, which leads to reduction in inventories and its

carrying costs. The following are advantages of standardizing material: It requires lower

holding of materials and lower volume of storage place saves through reduced expenditure

on storing handling of materials. It provides more efficient purchasing by establishing

equivalents between various suppliers. If this practice is adopted there would be a lesser

chance of materials being obsolete. It reduces paper work for recording transactions.

(3) Adequate Storage Facilities

Adequate storage facilities are necessary to have the proper management of inventory. It

reduces the wastage due to leakage, wear and tear, rust and dust and reduces the wastage

of materials due to mishandling. Stores and spares may be deteriorated through dampness,

dryness, heat, cold, dust and dirt, care less handling immethodical stocking etc. Proper

preventive measures should be taken to avoid such deterioration.

(4) Setting Minimum & Maximum Limits, Reorder Points for each item of Inventory

In order to avoid over and under investments in inventories, minimum and maximum limits

for each item of inventories are to be fixed. It ensures the availability of materials during

production process, while fixing the minimum and maximum points, re-order points are to

also be fixed before –hand.

(5) Fixing Economic Order Quantity

It is a basic consideration in Inventory Management as how much quantity of a particular

item is to be ordered at a time. In determining the EOQ, the two opposing costs are

balanced i.e., ordering cost and carrying costs.

(6) Adequate Inventory Records and Reports

An efficient Inventory Management system requires proper inventory records and the

reports because various inventory records contain information to meet the needs of

purchasing, production, sales etc. Any particular information regarding any particular item

of inventory may be had from such records. Such information may be about quantity in

hand, in transit and on plants, unit cost, EOQ, reordering points, safety level etc, for each

item of inventory. Reports and statements should be designed to keep the clerical cost of

maintaining these records at a minimum.

(7) Intelligent and Experienced Personnel

Mere maintenance of records and procedure would not give the desired results unless the

appointment of intelligent and experienced personnel in purchase, production, and sales

department is not made as because that is no substitute for efficient, sincere and devoted

personnel. Hence the whole Inventory Management System should be manned with

trained, qualified, experienced and devoted employees.

5.6 FACTORS DETERMINING OPTIMUM LEVEL OF INVENTORY

The inventory includes stock of raw materials, stock of work in progress and the stock of

finished good and other accessories. In Inventory Management, the control over

investment in inventory is also an important factor. The main objective of the inventory

management on one hand is to maintain the adequate stock of goods of proper quantity to

meet the requirements of production and sales and on the other hand, to keep the

investment in them at the minimum.

Factor influencing the decision of investment in inventories can be divided in two parts - (a)

general factors and (b) specific factors.

(A) General Factors

These factors include considerations common to thee management of all types of assets-

fixed or current. Such factors are type and nature of business, anticipated volume of sales,

operation level, price level variations, availability of funds and the attitude of management.

(B) Specific Factors

Such factors those, which influence the decision of investment of inventories and includes

the following:

(1) Seasonal Nature of Raw Material and Demand of Finished Goods

If certain raw material is available during a particular season, but its consumption continues

throughout the year in the firm, the investment in such raw material shall naturally be

heavier to store the stock in order to streamline the production throughout the year. This is

true in agro-based industries like sugar etc. Similarly seasonal industries purchase raw

material in the season and there fore, there investment in raw material increases in that

particulars season. Conversely, where demand for goods is uneven, small or seasonal, the

management has to store the finished goods inventory till the demand season approaches

for timely execution of orders and therefore has to follow longer production runs more even

and efficient production scheduling. It requires higher investment inventories in off-season.

(2) Length and Technical Nature of the Production Process

If production process is such that takes much time in its completion, the investment in

inventories is larger, such as, ship building industry. More over if production process is of

technical nature, even then it requires heavy investment in inventories.

(3) Style Factor in the End Product

The style factor of end product or nature of finished goods determines the size of

investment in inventories. The durability and perishable of the finished product are such

important factors.

(4) Terms of Purchase.

If supply of raw material is available on favourable terms that is long credit, conditions of

supply, concession or rebate available etc. The management may have larger investment in

inventories in order to avail of the opportunity of favourable terms. But, here, the

management must consider the cost and benefit effect of ordering raw material in bulk. If

on the other hand, raw material is available only on cost terms, the management will dare

not invest heavy amount in inventories.

(5) Supply Conditions

Certainty and regularity in supply of raw material are also important factors in determining

the size of investment from the viewpoint of operating continuity. Suppose, if the source of

material is out side of the country and a ban on imports is feared or supply may be

disturbed due to weather, a great stock of inventory is needed to avoid the risk of being out

of stock. If, on the other hand, the company relies up on the supplier for regular and speedy

supply of raw material, it may carry very small stock of raw material.

(6) Time Factors

Time is also an important factor in determining the size of inventory and affects the

inventory management in a number of ways

Bad time i.e., time lag between indenting and availability of raw material,

Time lag between purchase of raw material and the commencement of process,

Time required in production process, and

Average time required for sale of product.

All these exercise their impact on investment in inventories. The longer the time, the

investment in inventories is larger to maintain the flow of the production.

(7) Price Level Variation

If a price increase expected in the near future, the investment in raw material is greater in a

bid to keep the cost of product minimum. On the other hand, if price level is expected to go

down, there is a tendency to purchase the goods in the open market as and when it is

needed.

(8) Loan Facilities

Generally, raw materials are purchased on credit. More over banks advances credit to the

firms against their stock of inventories. If the cost of carrying stock and the cost of

availability of funds is cheaper than the interest payable to the bank, the investment in

inventories is higher.

(9) Management Policies

The management policies have significant influence on the investment in work in progress

inventories mainly in process goods industry.

(10) Other Factors

Other factors like industry wide strike threats, proposed control of raw materials, rationing

or revision of excise duty rates, price control of finished stock etc. also effects the

investment decisions in inventories.

CHAPTER VI

PRACTICAL STUDY ANALYSISAND

INTERPRETATION

INVENTORY MANAGEMENT AND CONTROL

IN VISAKHAPATNAM STEEL PLANT In this chapter, an attempt is made to study the data made available by the officers of

Rashtriya Ispat Nigam Limited, Visakhapatnam Steel Plant, Visakhapatnam (herein after

referred as ‘the company’ and to interpret the same. The following are basic facts about

inventory of the company:

1. The materials are stored in different locations identified with storehouses, which are

codified with storehouse number ranging from 01 to 89. The major locations/

storehouses are (a) General Stores, (b) Refractories, (c) Spares identified with

production units/storehouse, (d) Petrol and Diesel, (e) Lubricants and Oils, (f) Rolls

and Guides, (g) Conveyor Belts, (h) Steel and Pipe yard, (i) Cement, (j) Equipments,

(k) Ferro Alloys and other Raw Materials, (l) Scrap and Surplus items, etc.

2. Priced Stores Ledger/Bin Master contains more than 265000 items having standard

specification along with 11 digit Catalogue Numbers.

3. The issues are priced at monthly weighted average rate.

4. As at the end of year on 31/03/2008, the company is having inventory balance in

59888 catalogue numbers and the value of such catalogues is Rs.779 Crores. This

inventory includes expansion and Coke Oven Battery IV construction stores of Rs.423

Crores, insurance spares of Rs.46 Crores, and Ferro Alloys and other minor raw

materials of Rs.39 Crores and excludes inventory at mines, medical department,

stock in transit/under inspection, materials with contractors, unabsorbed stores

overheads and provisions amounting Rs.55 Cores.

5. Machinery Spares in respect of 904 items amounting Rs.46 Crores as on 31/03/2008

were capitalised under the head ‘Risk Insurance Spares’ in accordance with

Accounting Policy framed in accordance with Accounting Standards 02 and 10 issued

by Institute of Chartered Accountants of India.

6. The levels of inventory in respect of each item/catalogue, like minimum, maximum,

reordering level, etc are not fixed. The EOQ concept as explained in Chapter I for

determining the reordering quantity is not adopted. The reordering quantity is

determined based on the annual consumption pattern, present stock and supplies

yet to be received, etc.

7. The company adopted the perpetual inventory control system comprising Bin Card,

Priced Stores Ledger and Continuous Stock Verification. Bin Master and Priced

Stores Ledger are completely reconciled from time to time. The difference between

physical stock and Bin stock are identified during physical verification are

appropriately adjusted in the books with the approval of competent authority.

8. Stock Adjustment Vouchers (SAVs) raised on physical verification in respect of

shortages amounting Rs.0.26 lakhs, where approval of competent authority is

pending and shortages identified, but SAVs are not raised on physical verification

pending for want verification of records, etc amounting Rs.0.26 Lakhs is provided in

the books as on 31/03/2008.

9. The company is made an attempt to use ABC Analysis, but with a different name i.e.,

XYZ analysis for classifying the inventory based on value. Items comprising 70% of

value of total inventory are categories as ‘X’, items comprising 20% of value of total

inventory are categories as ‘Y’ and items comprising 10% of value of total inventory

are categories as ‘Z’.

10. The company has also made FSN analysis for identifying fast moving, slow moving

and non-moving inventories in line with procedure Explained at Para 3.2.8. Non-

moving inventories are reviewed on annual basis in a systematic manner and

appropriate provisions were made. The company has made a provision in the books

to the tune of Rs. 34.39 Cores in respect of Non Moving items at 90% of their cost in

line with accounting policy as on 31/03/2008.

COMPARATIVE ANALYSIS OF INVENTORY OF STORES AND SPARES WITH OTHER FINANCIALS

(Rupees in Crores)Year Net Worth Curren

tAssets

Working

Capital

Sales TotalInventorie

s

Inventory ofStores & Spares

Consumption

2000-01 2839 1794 491 3435 1207 440 2792001-02 2744 1713 493 4080 1111 384 291

2002-03 3286 1863 633 5058 858 365 323

2003-04 4851 2726 1491 6169 706 336 348

2004-05 6878 6047 4623 8181 1255 321 313

2005-06 8173 8252 6664 8482 1216 312 339

2006-07 10445 10448 8344 9150 1208 317 3592007-08 11481 11805 8613 10433 1761 326 3642008-09 12395 11859 7678 10411 3215 353 501

2009-10 12885 9551 5243 10635 2451 327 4662010-11 13229 7625 3018 11517 3254 328 471

Analysis of inventory of Stores and Spares

0

2000

4000

6000

8000

10000

12000

14000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

net worth

current assets

working capital

sales

total inventories

inventory of storesand space

consumption

STATEMENT SHOWING NUMBER OF ITEMS AND VALUE OFFAST MOVING, SLOW MOVING AND NON – MOVING INVENTORY OF

STORES AND SPARES(Rupees in Crores)

YearFast Moving Slow Moving Non Moving Insurance Total Stores and

SparesItems

Value

Items Value Items Value Items Value Items Value

2001-02 8208 83 166900 152 55144 109 1200 39 231452 383

2002-03 8128 89 178752 158 50264 85 1280 45 234424 377

2003-04 8302 87 191770 138 45846 71 1346 47 247264 343

2004-05 8300 108 107705 139 138144 63 1537 58 255686 368

2005-06 8084 108 100519 149 152964 58 1129 56 262698 371

2006-07 7746 115 99473 248 159050 43 1129 52 267398 458

2007-08 7729 139 95990 553 166015 40 1134 47 270868 779

2008-09 7669 443 90186 463 176066 37 1134 46 275055 989

2009-10 5089 383 27692 262 19177 23 849 54 52807 722

2010-11 4968 287 26208 170 18352 28 848 74 50376 559

2011-12 5028 275 27675 232 16989 22 838 82 50530 611

FSN ANALYSIS OF STORES AND SPARES(NO OF ITEMS)

0

50000

100000

150000

200000

250000

YEAR

ITEM

S Fast Moving

Slow Moving

Non Moving

Insurancespares

FSN ANALYSIS OF STORES AND SPARES(VALUES)

0100200300400500600

YEAR

VALU

ES

Fast Moving

Slow Moving

Non Moving

Insurance spares

Statement showing Percentage of Composition of Stores & Spares

(Fast Moving, Slow Moving, Non Moving & Insurance Spares)

YearFast Moving Slow Moving Non-Moving Insurance

SparesTotal

Items Value

Items Value

Items Value Items Value Items Value

2001-02 3.55 21.67 72.11 39.6

9 23.83 28.46 0.52 10.18 100 100

2002-03 3.41 23.61 74.97 41.9

1 21.08 22.55 0.54 11.93 100 100

2003-04 3.36 25.36 77.56 40.2

3 18.54 20.70 0.54 13.70 100 100

2004-05 3.25 29.35 42.12 37.7

7 54.03 16.03 0.60 15.76 100 100

2005-06 3.07 29.38 38.26 40.1

6 58.25 15.63 0.42 15.10 100 100

2006-07 2.89 25.10 37.20 54.1

5 59.49 9.39 0.42 11.35 100 100

2007-08 2.85 17.84 35.44 70.9

9 61.29 5.14 0.42 6.03 100 100

2008-09 9.60 53.00 52.40 36.2

0 36.30 3.18 1.60 7.40 100 100

2009-10 9.80 53.05 52.00 36.2

9 36.40 3.18 1.60 7.48 100 100

2010-11 9.86 51.34 52.03 30.4

1 36.43 5.01 1.68 13.24 100 100

2011-12 9.95 45.01 54.77 37.9

7 33.62 3.60 1.66 13.42 100 100

PERCENTAGE OF COMPOSITION OF ITEMS OF FSN ANALYSIS

0

20

40

60

80

100

1 3 5 7 9 11

YEAR

PERC

ENTA

GE

Fast

SlowNon

Insurance

PERCENTAGE OF COMPOSITION OF VALUES OF FSN ANALYSIS

01020304050607080

YEAR

PERC

ENTA

GE

Fast

SlowNonInsurance

XYZ Analysis of Inventory of Stores & Spares

YearCategory X (70% of

Value)Category Y (20% of

Value)Category Z (10% of

Value) Total

Item Percent Value Item Percen

tValu

e Item Percent

Value Items Value

2002-03 3583 3.89 264 11050 12.00 75 7742

9 84.11 38 92062 377

2003-04 3234 3.82 241 10417 12.32 69 7093

2 83.86 34 84583 344

2004-05 2374 3.10 258 8630 11.25 74 65680 85.65 37 7668

4 368

2005-06 4918 7.25 262 10465 15.44 72 5239

3 77.30 36 67776 371

2006-07 943 1.50 321 5247 8.35 91 56635 90.15 46 6282

5 458

2007-08 247 0.41 545 2617 4.37 156 57024 95.22 78 5988

8 779

2008-09 163 0.29 623 1983 2.86 198 54223 96.85 99 5598

9 989

2009-10 275 0.52 508 2466 4.65 145 50331 94.83 73 5307

2 726

2010-11 439 0.87 383 3104 6.15 112 46957 92.98 56 5050

0 551

2011-12 484 0.96 428 3078 6.08 122 47080 92.96 61 5064

2 611

XYZ Analysis of Stores & Spares

ABC ANALYSIS OF ITEMS OF STORES AND SPARES(VALUE IN CRORES)

0100200300400500600700800

1 2 3 4 5 6 7 8 9 10

YEAR

VALU

E(Rs

.IN C

RORE

S)

categoryA

categoryBcategoryC

ABC ANALYSIS OF STORES AND SPARES(PERCENTAGE OF ITEMS)

020406080

100120

YEAR

PERC

ENTA

GE

OF

ITEM

S categoryA

categoryBcategoryC

XYZ ANALYSIS OF STORES AND SPARES(NO OF ITEMS)

02000400060008000

1000012000

1 3 5 7 9 11YEAR

NO

OF

ITEM

S

CATEGORY XCATEGORY YCATEGORY Z

Interpretation

1. A comparative analysis of the data in respect of inventory of stores and spares and

other financials based on annual financial statements is made and the following are

the observations:

a) The inventory is more than Rs.300 Crores in all the years and gradually reducing

in each year from Rs.440 Crores to 353 Crores over a period of 9 years, which a

remarkable improvement in inventory management.

b) The consumption pattern has shown an increase except in the year 2004-05,

where the consumption decreased by Rs.35 Crores. There was a sudden jump in

consumption during 2008-09 from Rs.364 Crores to 501 Crores.

c) The ratio of consumption stores and spares to sales has shown a decline from 8%

to 3.5% over the period of eight years upto 2007-08 and increased to 4.81%

during 2008-09.

d) The inventory turnover ratio is showing a reduction from 150 to 70 percent of

consumption, but still appears to be on higher side.

e) The other financials like net worth, current assets, working capital and sales has

shown tremendous increase over the period of six years because of turnaround

in the performance of company. As a result, there is signification reduction in

the proportion of inventory of stores and stores to net worth from 15 to 3

percent, current assets from 24 to 3 percent, working capital from 90 to 5

percent and sales from 13 to 3 percent.

f) The proportion of inventory of stores and spares to total inventories is also

reduced from 36 to 11 percent.

2. A comparative study of composition of materials like fast moving, slow moving, non

moving materials and insurance spares is made based on data available in Priced

Stores Ledger for seven years from 2001-02 to 2008-09. The details are given under:

a) The fast moving items are very less in number ranging from 8128 to 7669

during the above eight years. The value of fast moving items increased from

Rs.83 Crores to Rs.443 Crores.

b) The slow moving items are reduced from 166900 to 90186 items during

above seven years. The value of slow moving items increased from Rs.152

Crores to Rs.463 Crores due to classification of capital items and new

catalogues as slow moving items. If these are not considered the value is

reduced to Rs.133 Crores.

c) The non-moving items are reduced from 55144 to 45846 items during first

three years, but it was increased to 138144 items abnormally during the year

i.e., 2004-05 and to 176066 during the year 2008-09. Perhaps the reason

may be more slowly moving items might have turned into non-moving items

during those four years. The value of non-moving items was reduced from

Rs.109 Crores to Rs.37 Crores during the above eight years.

d) The insurance spares were reduced from 1200 to 1134 items and the value

increased from Rs.39 Crores to Rs.46 Crores.

e) The percentage of fast moving items comprises 2.79 percent of total

inventory items. The slow moving and non-moving items comprises 97

percent of total inventory items, which is not a good sign. The percentage of

insurance spares was shown a reduction from 0.52 to 0.41 percent during the

above seven years.

f) The percentage of value of fast moving items was reduced from 22 to 18

percent in the total inventory value during the first seven years, but suddenly

increased to 45 percent during 2008-09. The value of slow moving and non-

moving items was increased from 68 to 97 percent and the value of insurance

spares reduced from 10 to 5 percent during the above eight years.

g) Out of 1134 items of insurance spares, only 836 items are having balance

stock and other items showing nil stock.

h) Out of total value Rs.500 Crores of slow moving and non-moving spares, a

provision of Rs.40 Crores was made towards surplus, obsolete and non-

moving spares.

3. The XYZ analysis of inventory for last five years from 2002-03 to 2008-09 was made

based on data available in Priced Stores Ledger. The details are given below:

a) The category X items comprises 70% value of total inventory, category Yitems

comprises 20% of total inventory and category Z comprises 10% of total

inventory.

b) The category X items decreases from 3583 to 163 during the above seven

years period. The value is increased from Rs.264 Crores to Rs.692 Crores.

c) The category Y items decreases from 11050 to 1603 and the value increased

from Rs.75 Crores to Rs.198 Crores.

d) The category Z items decreases from 77429 to 54223 and the value increased

from Rs.38 Crores to Rs.99 Crores.

e) The percentage of category X items is 0.29 percent, percentage of category Y

items is 2.86 percent and percentage of category Z items is 96.85 percent.

From the above analysis, it can be concluded that a small number or percentage of high

value items are fallen under category of slow moving or non-moving items. Further, the

provision made against these items was one percent.

CHAPTER – VI

SUMMARY, FINIDINGS & SUGGESTIONS

SUMMARY, FINDINGS AND SUGGESTIONS:

For any organisation, inventory plays crucial role in its profitability. If inventories are slow

moving or non-moving, they are idle inventory of no use. Further, they reduce the

profitability of the organisation. As per analysis made in the previous chapter, a small

number or percentage of high value items are non-moving or slow moving in the inventory

of the company. Keeping this, the following few suggestions were made by this study.

1. As the return on investment is increasing from excellent performance of company and

when investment is blocked in the inventory of stores and spares in the form of slow

moving and non-moving items, Rs198 Crores of inventory would definitely affect the

profitability of company. Hence, immediate steps are to be taken for overall reduction

of inventory of stores and spares.

2. The company is required to fix minimum, maximum, reordering level in a scientific

manner to control the further growth of slow moving or non-moving inventories.

3. The company is required to use EOQ to determine reordering quantities for each item.

It helps the company in saving of carrying costs and ordering costs in maximised

manner.

4. As the slow and non moving inventory comprises 54 percent of total inventory, steps

are to be taken review the item wise inventory and where items are not required, they

are to be declared as surplus or obsolete inventory and appropriate disposal action is

to be taken in a quick manner.

5. Pending action for disposal, appropriate action is to be taken for making provision in

the books of accounts on a systematic manner for write off slow and non moving

inventories over a period of 5 to 8 years of their arise.

6. Insurance spares are very important items from its definition itself, where the balance

of stock is to be maintained at any point of time. However, in case of 230 items, there

is no stock. If production is stopped due to the requirement of any such item, it may a

loss to the company. Hence, a minimum stock is to be fixed for such insurance items

and is to be maintained always.

7. At present, certain inventories like scrap and surplus, insurance spares, etc., are not

considered while fixing the level of inventory for control purpose. It is suggested to

consider the total inventory of stores and spares for control purpose.

8. The company shall adopt latest techniques like just in time concept for supply of

materials in the time of need, supply cum application contracts, where materials are

to be procured by the contractor for fixation, etc for procuring the materials. This

saves a lot investment in the inventory of stores and spares and avoids further stock

out situations.

9. Screen Based Computerisation for accounting of inventory of stores and spares is not

achieved in many areas, particularly reconciliation of Priced Stores Ledger and Bin

Master, Reconciliation of Provisional Liability to Suppliers Account, Accounting of

Insurance Spares, etc. A suitable ERP Package, if not developed as in-house package,

is to be used for accounting of stores and spares.

10. Inventory Reduction Committees should be formed and headed by maintenance.

Though the inventory of stores and spares is showing a lower proportion in the total current

assets or net worth of the company, it is not a small figure. It amounts to Rs.300 Crores.

The company has to exercise a lot of proper control and proper system of inventory

management to manage such inventories in a profitable way. For this purpose, the

company may consider the above suggestions for management and reduction of

inventories.

The provision of right goods or services in right time at right place to the customer improves

his satisfaction to a maximum extent. A proper inventory management system helps

definitely to achieve this objective of the company and for its continuous improvement.

BIBLOGRAPHY

Book Author

Financial Management IM Pandey

Statistics for Iron & Steel Industry in India 1988, 1990, 1992, 1994, 1996 Steel Authority of India

Indian Steel Perspectives 2025 RK Sinha, SC Suri