A STUDY ON

INVENTORY MANAGEMENTIN

BHARATH HEAVY ELICTRICALS LIMITED

Ramachandrapuram, Hyderabad.

A PROJECT REPORT

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

Submitted BY

HEMANTH KUMAR.OH.T.N: 08J11E0023(2008-2010)

Under the guidance of

Mr. P. V. ARUN KUMAR

Manager (finance)Department of management studies

HI-TECH COLLEGE OF ENGINEERIND AND TECHNOLOGY

(Affiliated to Jawaharlal Nehru Technological University)Himayat Nagar, Gandipet, Hyderabad.

ACKNOWLEDGEMENTI take this opportunity to express my gratitude to Mr. SRIKANTH HEAD OF THE DEPARTMENT of master of business Administration, for his valuable suggestions throughout this course of study.

I am also grateful to my external guide Mr. P.V. ARUN KUMAR, Manager Finance BHEL, Hyderabad for helping me despite his deadlines and preoccupations of his work.

I convey my thanks to all the respondents who helped me directly and indirectly by providing the needful information for completing the project.

I am beholden to my parents for their blessings and prayers and also sincere thanks to all my friends who helped me in this endeavour.

PLACE: HEMANTH KUMAR.O

DATE: (08J11E0023)

DECLARATIONI hereby declare that this project report entitled INVENTORY MAMAGEMENT carried out in BHARAT HEAVY ELECTRICALS LIMITED R. C. Puram, Hyderabad, been undertaken and presented by me during the year (2009-10) in partial fulfilment of the Master of Business Administration. I also declare that the project is an original work and contents of this are based on the information collected during the project work at BHEL.

PLACE:

DATE: HEMANTH KUMAR.O CONTENTS

CHAPTER-IPAGE NO

Introduction

Objectives of the study2

Need of the study3

Methodology4

Scope of the study5

Limitations of the study5

CHAPTER-2

6-9 Industry profile

CHAPTER-3

Company Profile10-27

CHAPTER-4

Theoretical Concepts28-56CHAPTER-5

Positioning in Bhel company Ltd.57-83CHAPTER-6

Findings84

Suggestions 85

Conclusion 86.Appendix87-89

Bibliography 90 INVENTORY MANAGEMENT

INTRODUCTION:

Inventory management is primarily about specifying the size and placement of stocked goods.

Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods.

The scope of inventory management also concerns the fine lines between replenishment lead time. carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.

Materials are approximately 60% of current assets in public limited companies in India.

A firm neglecting the management of material will be jeopardizing its long run profitability and many fail ultimately.

The reduction in "excessive" material carries favorable impact on a company's profitability.

Because of large size of materials maintained by firms considerable account of funds is required to be committed to them.

1

OBJECTIVES OF THE STUDY

To Calculate the Important of inventory management of the Organization as a part of the inventory management thereby to understand the changes and trends in the firm's financial position.

To Assess the performance of the B.H.E.L on the basis of Earnings and also to evaluate the solvency position of the company.

To identify the financial strengths and weakness of the Organization.

To give Appropriate Suggestion to the Investors. To help them to make more informed decisions.

2

NEED OF THE STUDY

Organization inventories are maintained to widen the latitude in planning and scheduling successive Operations. Raw material inventory enables a firm to decouple its purchasing and production activities to some extent. It provides flexibility in purchasing and production. The firm can wait for an opportunity buying movement without affecting its production schedule need not be influenced by immediate purchasing activity.

In process inventory provides flexibility in production scheduling so that an efficient schedule and high utilization of capacity may be attained. Without in process inventory, a bottleneck at any stage in the production process renders idle the machines and facilities at subsequent stages. This results in delay and idle facilities. Thus, inventory management control incorporates the determination of the optimum size of the inventory-how much to be order and when after taking into consideration the minimum inventory cost.

The overall inventory management includes design and inventory control organization With proper accountability establishing procedure for inventory handling disposal of scrap, simplification, standardization and codification of inventories, determining the size of inventory holdings, maintaining record points and safety stocks, economic order quantity, ABC analysis and VALUE analysis and finally framing an INVENTORY MANUAL.

3

METHODOLOGY

THE STUDY BASICALLY DEPENDS ON:

1. Primary data.

2. Secondary data.

1. PRIMARY DATA OLLECTION:

The information collected directly without any reference is primary data. in the study it is mainly though conservation with concerned officers or Staff members either Individually or collectively the data Includes:

I. Conducting Personal Interview with officers of the company.

2. Individual observation & interferences.

3.Form the people who are directly Involved with the transaction

of the firm.

2. SECONDARY DATA COLLECTION:

The secondary data famished in this report has been collected from the:

I .Magazines

2. News

3. Books

4. Manuals.Aimual report

5. Internet & newspapers etc.

4

SCOPE OF THE STUDY

The Scope and period of study is restricted to the followings: The scope is limited to the operations of BHEL.

The information obtained from the primary and secondary data was limited to BHEL.

The key Information performance Indicates were taken from 2002-2009.

The profit & loss. the Balance sheet was as on last seven years.

Comparison analysis was done in comparison of sister units.

Limitations of study

Financial matters are sensitive in nature, the same could not acquire easily. The serious limitations of the study are the time factor.

The study is confined to a period of last five years, as most of the data is from

secondary sources.

The accuracy is limited; any changes occurring in year are not annualized.

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INDUSTRY PROFILE

INTRODUCTION:

Heavy electrical industry covers units manufacturing, large plant and machinery required for power generation, transmission, distribution and utilization. These include turbo generators, boilers, and various types of turbines, transformers, motors switchgears and other such items.

Majority of products manufactured by heavy electrical industry in the country, which includes iteme like power generating units, electric motors, transformers, switch gears e.t.c, are used by all sectors of the Indian economy. Some major areas where these are used are the large projects for power generation including nuclear power stations, petrochemical complexes, chemical plants, integrated steel plants, on ferrous metal units e.t.c. The industry has been upgrading the existing technology. as a result today India is among a handful of nations to have a strong industrial base and can undertake complex projects on turnkey basis for export market also the industry is free to take up manufacture of any items.

The existing installed capacity in the industry is of the order of 4500MV of thermal, 1345 MW of hydro and about 25 MW of gas based power generating equipment for annum and manufacturing units depending upon need and their capacity are augmenting the capacity.

The industry has established a strong manufacturing base to the requirement of equipment for nuclear power plants in the country. The share of domestic equipment is about 66% in the country's generation capacity. The heavy electrical industry is capable of manufacturing transmission and distribution equipment up to 40kv AC and high voltage DC.

The domestic heavy electrical equipment manufacturers are making use of the development in the global market with respect to product designer and upgrading of manufacturing and testing facilities the industry has taken up work for development of

Flexible AC transmission FACTS and controlled shunt reactor(CSR).

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TURBINES AND GENERATORS SETS;

The capacity established for manufacture of various kinds of turbines such as steam &hydro turbines including industrial turbines is more than 7000MW power annum in the country Apart from BHEL the public sector unit that has the largest installed capacity of 6000MW p.a there are units in the private sectors also manufacturing range of BHEL including stream turbines up to 500MW units rating which they are planning to enchance up to 660MW .they have capacity to manufacture gas turbines upto 225MW ISO rating.Domestic manufactures are capable of manufacturing AC generator right from 0.5 KVA to 25, 000KVA and above with specified voltage rating.

BOILERS:

BHEL is the largest manufacturer of boilers in the country and has capacity to

Manufacture them from30to5001TTIN capacity using coal, lignite, oil, natural gas or

Combination of these super parameters up to I000MW units size. BHEL presently accounts for

Around 60% of total production boilers The domestic industry has capacity to meet the

Requirement/demand for boilers in dice.

TRANSFORMERS:

The domestic transformers industry is well established with ability to provide state-of-the art equipment. The industry has capacity to manufacture whole range of power and distribution transformers including the REC rating of 25,53,100 KVA and also the extra high voltage range of400KV,600MVA special type of transformers are required for earthling ,furnaces, rectifiers, electrostatic precipitators freight loco ete.,and series and shunt reactors as

Well as HVDC transmission up to 500kv are also being manufactured in the country in the country `s power sector development program me. The export opportunities have also improved for Indian industry. Many of the transformers manufacturers have now started exporting their products even to western countries and to the USA.

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SWITCH GEARS AND CONTROL:

In India the entire range of circuit breakers from bulk oil,minimum oil, air blast vaccum to sulphur hexafluoride(SF6) are manufactured specifications for the benefit of customers.the range of product produced covers the entire voltage range for 240 V to 800V .switch gears and control gear, miniature circuit breakers,air circuit breakers,switehes,rewvire cable fuses and high capture capacity fuses with their respective fuse bases,holders are starters and being produced to customers specialication as well as to standard specifications.

Major control center,distribution panels and elaborate control systems based on micro processor and computer control are also available for power stations load dispatch centers,major receiving centers and industrial complexes. The industrial complexex.the industry is competitive in the field of design and engineering as the skills set available in the country are relatively less expensive.

ELECTRICAL FURNACE:

There are two types of electrical fumances,i.e.,

1 . Induction furnaces,heating equipment and

2. Are fumaces,electrical furnaces are used in metallurgical and engineering industries

like forging and foundry machine tools,automobiles etc adequate capacity for

production of these products of these has been established.

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COMPANY PROFILE

BHARTH HEAVY ELECTRICAL LIMITED

BHEL is one of the pioneers in engineering industries in the world.The vital role played by the BHEL today in the country is the mark of its continuous efforts to improve the service in the nation by consultancy, manufacturing and offering services in power sector.

This success story of BHEL however goes back to 1956 when its first plant was set tip in BHOPAL. Three more major plants in HARDWAR, HYDERABAD and THRICHIRAPALLI followed this. These plants have been the core of BIEL's efforts to grow and diversify and become one of the most integrated power and industrial equipment manufacturers in the world.

The company now has 14 manufacturing units, 8 service centres and 4 power sector regional centres, besides project sites spread all over India and abroad.

BHEL manufactures over 180 products under 30 major product groups and meets the needs of core sector like power, industry, transmission, defence, telecommunications, oil business etc.

Its products have established an enviable reputation for high quality and reliability. This is due to the emphasis placed all along on design, engineering and manufacturing to international standards by acquiring and adopting some of the best technologies developed in its own R&D centres.

BHEL has acquired ISO 9000 certification for quality management and ISO 14001

certification for environment management. BHEL caters to the needs of different sectors by designing and manufacturing according to the need of its clientele in power sector.

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BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/ infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.

BHEL has acquired certifications to Quality Management Systems(ISO9001),

Environmental Management Systems(ISO14001) and Occupational Health & Safety

Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management.

BHEL has:

Installed equipment for over 90,000MW of power generation- for utilities, captive and industrial users.

Supplied over 2,25,000 MVA Transformer capacity and other equipment operating in Transmission & Distribution network up to 400 KV(AC & DC).

Supplied over 25,000 Motors with Drive Control System to Power projects,

Petrochemicals, Refineries, Steel, Aluminium, Fertilizer, Cement plants, etc.

Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway

network. Supplied over one million Valves to Power Plants and other Industries.

BHEL's operations are organised around three business sectors, namely Power, Industry -including Transmission, Transportation, Telecommunication & Renewable Energy - and

Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market.

BHEL's vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfill the expectations of the country to become a global player.

The greatest strength of BHEL is its highly skilled and committed 42,600 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management . all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness.

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SECTORS

POWER SECTOR:

Power is the sector of BHEL and companies of the thermal, nuclear, gas, diesel and hydro business. BHEL has taken India from a position of total dependence on overseas sources to complete self-reliance in power plant equipments. BHEL now has the capability to setup power plants from the concept to commissioning. Today BHEL cities account for nearly 65.2% of the total installed capacity in the country. BHEL manufactures boilers and auxiliaries, DG sets and associates control, piping and station E&I UP TO 500mw UNIT rating.

BHEL possesses two streams of gas turbine technology. It can manufacture gas turbine up to 20OMW rating and has access to technology for higher size gas turbines. To give a trust to the plant performance improvement of old fossil fuel plants and repair and service of GE designs gas turbines-two joint ventures companies have been floated with siemens AG and GE respectively

INDUSTRUAL SECTOR:

BREL contributes major capital equipment and systems like captive power plants centrifugal compressors, drive turbines, heavy castings and forging etc.

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TRASMISSION SECTOR:

Equipment for high voltage direct current systems is being supplied for economic transmission of bulk power over long distances.. series and shunts compensation system are also manufactured to minimize transmission losses..BHEL also produces high voltage transformer an SF6 switch gears up to 400KV,lndia's first. Indigenous 145KV gas insulted switch gear was developed and commercialized by BHEL

OIL SECTOR:

BHEL has been supplying onshore drilling rigs, X-MAS tree valves and wellheads up to a rating of 1000 PSI to ONGC and OIL India. It can also supply sub sea wellheads, super deep drilling rigs, desert rigs and Hebi rigs.

TRANSPORTATION SECTOR:

Most of the trains in the Indian railways are equipped with BHEL's traction and traction control equipment. India's first underground metro at Calcutta runs on drives and controls supplied by BHEL. The company also manufactures broad guage 3900HP AC locomotives, 5000/4600 14P AC/DC locomotives. BHEL has acquired the technology for 3 phase electrics for 6000HP AC loco.

TELECOMMUNICATION:

BHEL also manufactures MAX-XL systems based on C DOT technology an plans to make other ranges of telecommunication equipment as well.

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NECS:

Technologies have been developed and commercialized for exploiting non conventional and renewable sources of energy to serve remote and rural areas. These include photovoltaic cells, solar power based pumps, lighting and heating system. BHEL has also emerged as a major manufacturer of wind electric generators up to 250 KW.

INTERNATIONAL OPERATIONS:

BHEL has exported its equipment and services to over 50 countries. in Malaysia, BHEL has supplied 80% of the Boilers besides several hydro sets and gas turbines. BHEL equipments are in operation in Malta, Cyprus, Saudi Arabia, Oman, Egypt, Cyprus, Libya, Greece, Bangladesh, Sri Lanka, Iraq, and Australia etc. BHEL exports turnkey power projects of thermal, hydro, abd gas based types, substation projects, rehabilitation projects, besides a wide variety of products like insulators, transformers, valves... Motors, traction generators and services for renovation and modernization and operation power station.

RESEARCH AND DEVEL0PMENT'(R&D)

BHEL is one of the few companies worldwide involved in development of Integrated Gasification Combined Cycle (IGCC) technology, which would usher in clean coal technology. BHEL R&D efforts have produced several new products. Some of the recent successful R&D products are automated storage retrieval systems, automated guided vehicles for material transportation, automatic robotic welding systems.

HUMAN RESOURCES DEVELOPMENT (HRD}

The greatest strength of BHEL is its highly skilled and committed people. Every employee is given equal opportunity to develop himself and improve his position. Continuous training and retaining, a positive work culture and participative style of management have led to the development of a motivated work force and enhanced productivity and quality.

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PRODUCT PROFILE:

BHEL manufactures a wide range of power plant equipment and also caters to the industry sector.

Gas Turbine

Steam Turbine

Compressors

o Turbo Generators

Pumps

Pulverisers Switchgears

Solar Water Heating Systems Oil Rigs

Electrics for Urban Transportation System

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GAS TURBINES:

BHEL - the largest Gas Turbine manufacturer in India, with the state-of-art facilities in all areas of Gas Turbine marf-Lufacture provide complete engineering in-house for meeting specific customer requirement. With over 100 machines and cumulative fired hours of over four million hours, BHEL has supplied gas turbines for variety of applications in India and abroad. BHEL also has the world's largest experience of firing highly volatile naphtha fuel on heavy duty gas turbines.

BHEL is one of the few business associates of M/s. GE, USA and under its comprehensive Technical Collaboration Agreement from 1986, (license to manufacture rotors and hot gas path components) offers complete power plant engineering solutions.

BHEL also manufactures Gas Turbine under its ongoing Technical Collaboration Agreement with M/s Siemens, Germany. Some specific features:

1. Capability to fire a wide range of gaseous and liquid fuels and a mix of such fuels ranging from clean fuels like Natural Gas, Distillate Oil, Naphtha, LNG to heavy fuels like LSHS, crudes, blends, etc. Fuel economy over a wide range of ambient temperatures and loads. 2. Facilities like Black start, fast start and emergency start.

3. Suitable for power generation and mechanical drive application. Models below 100 IW suitable for 50 Hz and 60 Hz.

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4. All matching equipment like generators, compressors, etc. manufactured in-house.

Design of combustion systems as per international emission norms. Machines designed as per major international codes like API, etc.

5. Suitable for IGCC applications.

6. Suitable for indoor or outdoor locations.

7. Use of water or steam injection for abatement of NOX emissions and power augmentation.

BI-IEL equipped with precision and sophisticated machine - tools like CNC Broaching Machine, 5-Axis Milling Machine and over speed Vacuum Balancing Tunnel offers Conversion, Modification and Up-gradation services - through joint venture with GE for all existing Gas turbines. Services are also offered for all Field support, Retrofits and repairs, inspections. and Technical Consultancy on "Operation & Maintenance of Gas Turbine Based Power Plants".

STEAM TURBINE: BHEL, Rarnachandrapuram has been playing an active role for almost four decades in its promise of "bringing power to the people".

BHEL has responded to requirements of the nation with a comprehensive range of products. This has been achieved by superior technology Which is supported by an integrated workforce of skilled professionals and an accent on quality, excellence and efficiency.

At BHEL Hyderabad, the art of Steam Turbine Building has been perfected over a quarter of a

century by the absorption of leading Technologies and building up of experience for catering to

every possible application in the product range.

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COMPRESSORS

BHEL is manufacturing centrifugal compressor with technical Know-how from Nuevo Pignone, Italy. So far more than 260 compressors had been successfully manufactured tested & supplied to cater for various applications for several Petrochemical, Fertilizer & Refinery plants.

As compressors are critical equipments a high quality of testing is required. This is ensured by quality testing methods and practices and modem state of art test facilities.

TURBO GENERARTORS

BHEL presently has manufactured Turbo-Generators of ratings upto 560 M\V and is in the process of going up to 660 MW. It has also the capability to take up the manufacture of ratings upto 1000 MW suitable for thermal power generation, gas based and combined cycle power

generation as-well-as for diverse industrial applications like Paper, Sugar, Cement,

Petrochemical, Fertilizers, Rayon Industries, etc.

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Based on proven designs and know-how backed by over three decades of experience and

accreditation of ISO 9001, the Turbo-generator is a product of high-class workmanship and quality. Adherence to stringent quality-checks at each stage has helped BHEL to secure prestigious global orders in the recent past from Malaysia, Malta, Cyprus, Oman, Iraq, Bangladesh, Sri Lanka and Saudi Arabia.

The successful completion of the various export projects in a record time is a testimony of BHEL's performance.

PUMPS

BHEL started manufacture of Pumps during the mid-sixties under technical 'collaboration with M/s Sigma Lutin, Czechoslovakia, to meet the requirements of 60 MW, 110 MW and 210 MW thermal power stations, the scope of which was widened to meet the requirements of power plants upto 500 MW, with the help of another collaboration with M/s Weir Pumps,

U.I BHEL has also made some in-house product development to gain spin off benefits from the above collaboration as well as to develop new pumps to meet the requirements of

Combined Cycle Power plants.

BHEL has undertaken a design up-gradation and retrofit of the existing 200 KHI Boiler Feed pumps Inside Stators with energy efficient hydraulics and cartridge design internals under technical tie-up with M/s Sulzer Pumps, Germany; and recommended the upgraded 200 KHI-S Boiler Feed pump to all customers of 110 MW & 210 MW Power Stations operating with the earlier Czech design for increase of pump availability and reliability and also considerable reduction in operational costs. 19

COMPANY'S VISION, MISSION AND OBJECTIVES:

VISION: A world class, innovative, competitive and profitable engineering enterprise providing total business solutions.

MISSION: To be the leading engineering enterprise providing quality products

systems and services in the field of energy, transportation, industry, infrastructure and other potential areas.

VALUES:

Meeting commitments made to external & internal customers.

Foster learning, creativity & speed of response.

Respect for dignity & potential of individuals.

Loyalty and pride in the company.

Team playing.

Zeal to excel.

Integrity and fairness in all matters.

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OBJECTIVES:

GROWTH:

To ensure a steady growth by enhancing the competitive edge of BHEL in existing business, new areas and international operation so as to fulfill national expectations from BHEL

PROFITABILITY:

To provide a reasonable and adequate return on capital employed, primarily through

Improvements in operational efficiency, capacity utilization and productivity and generate adequate internal resources to finance the company's gro,vth.

Confidence by providing increased value for this money through international standards of product quality, performance and superior customer service.

TECHNOLOGY:

To achieve technology excellence in operations by development of indigenous technologies to and efficient absorption and adaptation of imported technologies to suit business needs and

priorities and provide a competitive advantage of the company.

IMAGE:

To fulfill the expectations which stockholders like government as owner, employees, customers and the country at large have from BHEL.

OBJECTIVES OF B.H.E.L:

To achieve and maintain a leading position as supplies of Quality Equipment, Systems and services to serve the National & International Markets in the field of Energy. The areas of interest would be Conversion, Transmission, and Utilization & Market Leadership.

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ABOUT B.H.E.L. RAMACHANDRAPURAM UNIT:

About 30km away from the city centre on the fringes of the historical city of the qutub shah kings lies the hub of the Ramachandrapuram unit of Bharat heavy electrical limited, Hyderabad made a beginning in 1965 with the idea of "Bringing power to the people".

The success story of B.H.E.L. Rarnachandrapuram has its roots in its

Commitments to the nation's economic growth, towards which it has set high standard for itself. Striving hard to part take in the building of a Strong and self reliant India.

B.H.E.L started its operation initially by manufacturing 12M\V, 60MW and

11 M W capacity steam turbines, generators and auxiliaries for the power

and the industry sector with collaboration of SKODA of CZECHOSLOVAKIA.

Realizing the need for diversification, B.H.E.L Hyderabad soon ventured in To other areas absorbing latest technologies from world leaders to meet Emerging challenges and the needs of the country .Steam turbines, Gas Turbines Turbo generators Compressors, Pumps, Swith Gear, Oil Field Equipment, pulverizing mills, Heat exchangers including a host of auxiliaries, on now form the profile of products at B.H.E.L, Hyderabad..

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ORGANISATION STRUCTURE

B.H.E.L a Public Sector Undertaking, is a company from of Organization

with Corporate Functions, Business Sectors and Operating Units under the

control of Chairman & Managing Director reporting to the Board of Directors. Directors individually deal with corporate functions with the help of Executives Directors/ General Manager's in-charge. Each unit is headed by an Executive Director/ General Managers in-charge.

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FINANCE DEPARTMENT IN BHEL HYDERABAD

Additional General Manager/Finance heads the Finance Department at B.H.E.L Hyderabad. It is segregated into different sub groups reporting toAdditional General Manager/Finance.

Finance Department is organized into Product Wing and Centralized Wing.Product Wing is divided into various products like TCG T, EM, HEF, PUMPS,SG, PULV, F&S, WORKS & MISC, ED&ST, BUDGET & MONITOR MGETC.

Each product Groups deals with all types of finance and accounting relating to that product wise concurrence to proposals for Procurement and incurring expenditure, material accounting, cost accounting, sales accounting, budget preparation, and other miscellaneous activities relating to that product.

Centralized Wing deal with all Establishment matters pertaining to all Employees of the unit, Cash Management dealing with total cash management of the unit, Books Section deal with preparation of Annual Accounts and Taxation matters, Export Incentive Section deal with all Export Incentive matters, Stock Verification and Productivity groups

related to those subjects.

In addition, there is an Internal Audit, which audits all the functions of the unit and directly reporting to Corporate Office. As it is a product form of Organization, Financial Accountiong system is desired to meet the requirement of operation. The flow of authority and responsibility has definite forms of hierarchy ranging from Additional General Manager to the Clerical Cadre.

BHEL today enjoys national and international presence and it is ranked among the top 12 companies in the world manufacturing power generation equipment.

The first plant of what is today known as BHEL was established nearly 40 years ago in 1956 at Bhopal and was the genesis of the Heavy electrical equipment industry in India. A country- wide network of 14 BHEL manufacturing units is spread across Bangalore,

Bhopal, Haridwar, Tiruehirappalli, Hyderabad, Ranipet, Jagishpur, Rurapur, Goindwal, Jhansi. Chennai, Varanasi and Gurgoan in addition to a number of service

division all over the country.

B.H.E.L's wide range of products Caters to the need of power generation for Thermal, Hydro and Nuclear Power Station, Transmission, Transportation,Industry, Oil and Gas and Non Conventional Energy.

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B.H.E.L's Collaboration with world leaders help in keeping it abreast of the Latest Technologies in the field, BHEL is well known for reaching power to the people. But the cornerstone of its philosophy is anchored on its endeavour to offer quality products through dedicated service. The BHEL has emerged as an Industrial empire that has carved a niche as a major power generating equipment manufacturer in India.

The operation of BHEL are organised around business sectors to provide a strong Market orientation. These business sectors are power, Industry and International operations. The company has been chosen as one of the "Navaratna" Public sector Enterprise, which is to be supported by the government in their endeavour.To become future global players. A strong work force of 53,000 dedicated personnel provide this assurance in ample

measure.

MANPOWER STRENGTH IN BHEL:

The highly trained and motivated manpower of BHEL is its biggest asset. The total number of regular employees working in BHEL, RC PURAM UNIT Is 6358 out of this, Executive's are 1587, Supervision are 1200 and the

Non-Supervisors are ?471 this work force is an unending reservoir of talent, which alone can transform the company in to a global player it wants to be. The vision Of BHEL becoming a truly Indian company deeply imbibed in our rich culture and heritage is neither dream nor too distant a reality.

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SWOT ANALYSIS:

The strengths, weakness, opportunities and threats, which are experienced

By BHEL as a growing concern, have been summed up in the following lines:

STRENGTHS:

Excellent state of art facilities.

Good working condition.

Rapport between management and Union.

Products manufactured to International quality. Low labor cost and low manufacturing cost. Vast pool of trained man power.

WEAKNESSES:

System implementation inadequate. No financial Package.

Inadequate compensation payable to employees.

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OPPORTUNITIES:

Growing power sector machinery.

Liberlization has opned up the market. Navaratna company status.

0Dominant player in domestic market.

export potential growing.

THREATS:

a Liberalization - Entry of NI ;C'S/ private sector- more Compensation.

AC'S weaning away good employees with good attractive salaries.

aGovt. Taxation policy - against manufacturing sectors.

Poor infrastructure. Dumping of goods.

6Attractive credit policy by FFI'S and MNC'S.

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CHAPTER-4

THEORETICAL CONCEPTS OF INVENTORY

MANAGMENT

INTRODUCTION:

Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods.

The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods

and demand forecasting.

Materials are approximately 60% of current assets in public limited companies in India.

TYPES OF INVENTORIES:Inventories play a major role in a businesses or company depending on nature of the business. The inventories may be classified as under.

RAW MATERIALS:

The raw materials include the materials, which are used in the production process, and every manufacturing firm has to carry certain stock of raw materials in stores. These units of raw materials are regularly issued or transferred to production department for production operations. Inventory of raw materials are held to ensure that the production process is not interrupted by storage of these materials.

Amount of raw materials to be kept by a firm depends upon number of factors, including the speed with which raw materials can be ordered and received. Its purpose is to uncouple the production function from the purchasing function i.e. to make these two functions independent

of each other so that delay in procurement of raw-materials do not cause production delays and the firm can satisfy its need for raw-materials out of the inventory lying in the stores.

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WORK-IN-PROGRESS/ PROCESS:

It refers to the raw materials engaged in various phases of production process. The degree of completion may be varying for different units some units may be 40% finished, or some other 90% completed.

The value of work in progress involves material costs, the direct wages and expenses already incurred and the overheads if any. So, work in progress inventory contains partially produced or completed goods.

The purpose of work-in-progress inventory is to uncouple the various operations in the production process, so that machine failures and stoppage in operations will not affected by one another.

FINISHED GOODS:

In trading firm purchase are made where as in the manufacturing firm produce or process the goods. However, it may be. These are goods that are either being purchased by the firm or are being produced or processed in the firm. These are just ready for sale to customers.

Inventory of finished goods arise because of the time involved in production process and to meet customer's demand promptly. If the firms do not maintain a sufficient finished goods inventory, they run the risk of losing sales due to customer dissatisfaction.

The purpose of finished goods inventory is to uncouple the production and sale can be made directly out of inventory.

STORES AND SPARES

They are related to machines which is use full for the inventory to change in to finished goods.

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Materials are equivalent to cash and they make up an important part of the total cost. It is essential that materials should be properly safeguarded and correctly accounted. Proper control of material can make a substantial contribution to the efficiency of a business.

The success of a business concern largely depends upon efficient purchasing, storage, consumption and accounting.

In a large firm the planning and routing department is responsible for arranging how and where the work is to be done and issue instructions. It sets definite time schedules so that necessary materials are delivered to the proper department in proper time not too long before hand neither lest it should interfere with other work nor after they are required as this result in idle time.

Business firm keep inventories for different purposes. Every firm big or small trading or manufacturing has to maintain some minimum level of inventories. Based on some motives the inventories are maintained.

Transaction motives:

Every firm has to maintain some level of inventory to meet the day-to-day requirements of sales, production process, customer demand etc. In this finished goods as well as raw material are kept as inventories for smooth production process of the firm.

Precautionary motive:

A firm should keep some inventory for unforeseen circumstances also like loss due to natural calamities in a particular area, strikes, lay outs etc so the firm must have some finished goods as well as raw-materials to meet circumstances.

Speculative motive:

The firm may be made to keep some inventory in order to capitalize an opportunity to make profit due to price fluctuations.

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REASONS AND BENEFITS OF INVENTORY:

The optimal level of maintaining inventory is a subjective matter and depends upon the features of a particular firm.

: Trading firm

In case of a trading firm there may be several reasons for holding inventories because of sales activities that should not be interrupted. More over it is not always possible to procure the goods whenever there is a sales opportunity as there is always a time gap required between purchase and sale of goods. Thus trading concern should have some stock of finished goods in order take sales activities independent of the procurement schedule.

Similarly, a fin-n may have several incentives being offered in terms of quantity discounts or lower price etc by the supplier of goods. There is trading concern inventory helps in a de-inking between sales activity and also to capitalize a profit of opportunity due to purchase made at a discount will result in lowering the total cost resulting in higher profits for the firm.

Manufacturing firm:

A manufacturing firm should have inventory of not only the finished goods, but also of raw

Materials and work-in-progress for following reasons.

Uninterrupted Production Schedule:

Every manufacturing firm must have sufficient stock of raw materials in order to have the

regular and uninterrupted production schedule. If there is stock out of raw materials in order to have the regular and uninterrupted production schedule. If there is stock out of raw material at any stage of production process then the whole production may come to a half.

This may result in custom dissatisfaction as the goods cannot be delivered in time more over the fixed cost will continue to be incurred even if there is no production. Further work-in-progress would let the production process run smooth. In most of manufacturing concerns the work in progress is a natural outcome of the production schedule and it also helps in fulfilling

r.N hen some sales orders, even if the supply of raw-materials have stopped.

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Independent sales activity:

Inventory of finished goods is required not only in trading concern but manufacturing firms should also have sufficient stock of finished goods. The cases goods cannot be produced just after receiving orders. Therefore, every firm has to maintain minimum level of finished goods in order to deliver the goods as soon as the order is received.

ESSENTIALS OF INVENTORY CONTROL:

The important requirements of inventory control are:

The proper co-ordination among the departments involved in buying, receiving,

inspecting, courage consuming and accounting.

s Centralization of purchasing under the control of competent buyer whenever possible.

Proper scheduling of material requirements.

Proper classification of materials with codes, material standardization and

simplification.

The operation of a system of internal check to ensure that all transactions involving

materials and equipment are checked by properly authorized and independent persons.

The storage of materials is well planned and kept in properly. Planned and kept in properly designated location, subject to adequate safeguard and supervision. The operation of a system of perpetual inventory so that it is possible to determine at any time, the amount and value of each kind of material in stock. A suitable method of valuation of materials is essential because it affects the cost of jobs and the value of closing stock of materials.

OBJECTIVIES OF INVENTORY CONTROL:

The main objectives of inventory control are:

To maintain a large size of inventory for efficient and smooth production and sales

operation.

g To maintain a minimum investment in inventories to maximize profitability.

To ensure a continuous supply of raw materials to facilitate uninterrupted production. * To maintain sufficient stocks of raw materials in periods of short supply and anticipate

price change.

Maintain sufficient finished goods inventory for smooth sales operation and efficient customer service.

a Minimize the carrying cost and time

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

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ADVANTAGES OF INVENTORY CONTROL:

The following are suggested advantage:

Eliminated wastage in use of material.

It reduces the risk of loss fi:orn fraud and theft.

It helps in keeping perpetual inventory and other records to facilitate the preparation of

accurate material reports to management.

To reduce the capital tied up in inventories.

It reduces cost of storage.

It furnished quickly and accurately the value of materials used in various department.

It prevents delays in production due to lack of materials by supplying, proper quantities

at the right time.

DISADVANTAGES OF INVENTORY CONTROL:

Every firm has to maintain optimal level of inventories. It not the following will be the results in form of losses.

Opportunity cost: Every firm has to maintain inventory for that some investment is

needed it is known as Opportunity cost and handle the investment in inventory are more the funds are blocks up with inventory.

Excessive inventories: It will lead to finn losses due to excessive carrying costs and the risk of liquidity. It is also referred as Danger level.

Inadequate Inventory: It is another danger which results is production hold-up and

failure to meet delivery commitments. In adequate raw materials and work-in-process inventors will results in frequent production interruptions. It finished goods are not sufficient customers may shifts to competitors.

Danger due to physical decoration: It is one of the reason with the inventories due to

maintaining stocks at high levels they will be deteriorated due to passage of time,

sometimes due to mishandling or improper storages facilities.

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Costs involved in inventory:

Every firms maintains inventory depending upon requirements and other features of firm for holding such inventory some cost will be incurred there are as follows:

Carrying Cost:

Total carrying cost= (carrying cost per unit) * (Average inventory)

This is the cost incurred in keeping or maintaining an inventory of one unit of raw materials, work-in-process or finished goods. Here there are two basic cost involved.

Cost of Storage:

It includes cost of storing one unit of raw materials by the firm. This cost may be for the

storage of materials. Like rent of spaces occupied by stock, stock for security, cost of

infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc.

Cost of Financing:

This cost includes the cost of funds invested in the inventories. It includes the required rate

return on the investments in inventory in addition to storage cost etc. The carrying cost include therefore both real cost and opportunity cost associated with the funds invested in the inventories. The total carrying cost is entirely variable and rise in directly proportion to the level of inventories carried.

Cost of ordering:

The cost of ordering includes the cost of acquisitions of inventories. It is the cost of preparation and execution of an order including cost of paper work and communicating with the supplier. The total ordering cost is inversely proportion to annual inventory of firm. The ordering cost may have a fixed component, which is not affected by the order size, and a variable component, which changes with the order size.

Total ordering cost= (No. Of orders) * (Cost Per Order)

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Cost of Stock Out:

It is also called as Hidden cost. The stock out is the situation when the firm is not having units of an item in stores but there is a demand for that item either for the customers or the production department. The stock out refers to zero level inventories. So there is a cost of stock out in the sense that the firms face a situation of lost sales or back orders. The stock outs are quite often expensive.

Even the good will of firm also be effected due to customers dissatisfaction and may lose

business in case of finished goods, where as in raw materials or work in process can cause the production process to stop and it is expensive because employees will be paid for the time not spend in producing goods.

The carrying cost and the ordering cost are opposite forces and collectively. They determine

the level of inventors in a firm

Total cost= (Cost of items purchased) + (Total Carrying and ordering)

VALUVATION OF INVENTORY:

The methods of valuing inventory are combination of the actual cost and replacement cost plans. The chief advantage of the cost or net realizable value rule is that it is conservative. Hence the methods of valuation of inventory are quite independent of system of mincing. In balance sheet closing stock is shown under current assets and is also credited to manufacturing or trading accounts. The inventories are valued on the basis as follows.

(a) Cost of raw materials in stock may include freight charges and carrying cost. But such

cost should not exceed market price.

(b) Work-in-process is generally valued at cost, which includes cost of materials, labour.

And the proportionate factory overhead, as it is reasonable according to degree of

completion.

(c) Cost of finished goods wound normally to be total or full cost it includes prime cost

plus appropriate amount of the overhead. Selling and distribution cost is deducted on

the other 'hand work in progress may be valued at work in progress may be valued at

work cost, marginal cost, prime cost or, even at direct materials.

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PURCHASE & STORES PROCEDURE

In inventory management the purchase department, stores department plays a major role to be the effective inventory there must be co-operation of various departments such as purchase, receiving and inspections, stores, production and stock control departments.

The main functions of each department are as follows:

Purchase Departments:

It is responsible for purchase of all necessary goods of proper quality to produces, without interruption to supply the finished goods.

It receives purchase requisitions.

Invites quotations or tenders from suppliers with desired quality. Issue purchase orders to the selected supplier.

Certify the quality and quantity of order received in specified time.

* Approve purchase invoice for payment after checking invoice for paying after

prices and extensions if any needed.

Material Cost:

Materials cost of a job or cost unit can be ascertained by multiplying the quantity consumed for the job or cost unit by the price of the materials. For ascertaining the quantity consumed for each job or cost unit we have devised material requisition which will indicate the quantity required for the job and the job number against which the material cost will be change directly.

For indirect material issued the material requisition will not indicate the job number but the cost centre number will be indicated for charging to relevant cost center as indirect materials.

Thus in order to ascertain material cost:

1.Make valuation of purchase.

2.Make use of proper Valuation of material issue and closing stock following

different method such as, FIFO, LIFO, and WEIGHTED AVG etc.

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The purchase price of material is directly obtained from the suppliers receives and have to be issued to production before the invoice of materials is received.

The rate per unit, total price of the item as shown in the purchase order plus sundry charges such as delivery and forwarding charges sales tax, duty etc, may be borne by suppliers, Governments controlled prices by notification, suppliers, catalogues and circulars may be valuable guides for obtaining rates of materials. Delivery charges may be estimated with reference to the kind of transport with charges incurred.

The price may also include sales tax, excise duty; fright etc, so the total cost and rate per unit can be computed and rate per unit can be computed and entered in the stores received registered and posted to stores ledger for the issue of material to production.

In some cases material needs adjustment for any discount allowed: charges for transport containers etc.

Discounts may be trade discounts quantity discount, cash discounts etc. Transportation and. storage costs may not include the cost of air, sea on land transport and other stores costs, where the purchaser has to bear the costs. Cost of containers with regard may not make a separate charges because of non refundable and also sales tax, excise duty, insurance etc., all the items are added to purchase price

(1) Receiving and Inspection Department:

Receiving all raw materials and other supplies from various suppliers.

Verify items by count, weight etc., and report any shortage.

Inspect material and supplied as to quality by analyzing them suitably.

Inform the purchasing department and accounts department all facts that may

require adjustment with vendor.

Analyze and give them the code depending up on the type of materials.

(2) Stores keeping Department:

Check and accept all materials from the received department.

Identity each material received with the stock list, check the code number and place

in the respective bins.

Issue materials and supplies for use upon presentation of authorized requirement.

Record quantities received and issued on bin lards or stock ledger cards consisting

the perpetual inventory records.

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(3) Production Departments:

Make out materials requirement note i.e. requisition of requisite quantity and quality of materials at the right moment so the all materials may be available without delay on production.

Check and verify that the materials of requisite quantity and quality have been

received and charged to production.

Keep proper records of materials received and their progress through different

operations or progress.

Prepare materials return note for excess materials.

Prepare materials transfer note to cover any transfer of materials,

Prepare report on scrap for reporting to management.

(4) Inventory Control Department:

it may be a subdivision of the cost accounting department, although in many concerns, it is part of the stores keeping department.

It keeps perpetual inventory records.

Adjust the stock on receipt of the properly authorized adjustment notes

Prepare weekly or monthly, statements of receipts, issue, balance and average consumption of materials both in terms of quantity and value.

RECEIPT AND ISSUE OF INVENTORIES

(1) Receipt of Inventories in to Stores:

After incoming materials have been examined and approved they are passed on to the appropriate stores together with the goods received note. Articles are inspected and passed and on the stores in the usual way. In order to keep the accounting procedure uniform, it is desirable that a goods received note be prepared for these articles also: The store keeper then places the inventory in appropriate bin or shelf and makes necessary entries in the receipt column of the Bin Card.

A location code for materials helps in proper store-keeping with greater efficiency, because stores can be easily identified. It is a part and parcel of stock control procedure. Location codes help in mechanized accounting and safeguard against omission in counting as verification.

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BIN CARD

DESCRIPTION:MAXIMUM LEVEL:

MATERIAL CODE:MINIMUM LEVEL:

LOCATION CODE:ORDERING LEVEL:

BIN NO:ORDERING QUANTIRY:

STORES LEDGER NO:UNITS:

BIN CARD

For each kind of materials or article a Bin Card is attached to the bin on which each individual's materials is stored. A bin card provides a running record of receipts, issues and stock in the simplest form. An entry will be made at the time of each receipt or issue and a new balance will be extended.

These cards should agree with the quantities entered in the relevant accounts in the stores ledger. The main advantage is to enable the stores keeper to ascertain at a glace the quantity of materials in stock and remind him to place purchase requisition for further suppliers the ordering level has been reached more over they provide on independent check on stores ledger and anciently a second perpetual inventory. If the Bin Card is from three years then the transactions are made in same card. If Bin Card does not exist new Bin Card to be opened.

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(2) ISSUE OF MATERIAL FROM STORES:

The storekeeper issue materials on receipt of proper authorized document usually called a materials requisition or a specification of material. Materials requisition is a document which authorities and records the issue of r materials for use. The materials requisition details the items required for use showing the quantity, description, code or past number and the cost centre of job to be charged. Requisition is normally prepared in triplicate; the department receiving the goods retains one copy and the other two copies are handed

Over to the two copies are handed over to the storekeeper. He keeps one along with him and enters on the issue sides of the appropriate bin cared Day-to-day transactions are noted in stores ledger.

STORES LEDGER:

The stores ledger which is usually a loose leaf or card type, contains an account for each class of materials their ledger is kept in the cost department and contains such information as well facilitate the ascertainment of all details relating to the materials in the minimum of time.

STORES LEDGER ACCOUNT

FORM NO:FOLIO:

MATERIALS:MAXIMUM LEVEL:

GRADE:MINIMUM LEVEL:

UNITS:ORDERING LEVEL:

CODE NO:LOCATION: 41

(3) MATERIALS RETURNED TO STORES:

Where materials are issued in excess of requirement the excess quantity is return to the stores together with materials Return note.

Since the materials return to store from a works order is a reduction in the amount recorded as issued, the preferable entry is to enter the number of units and the value column of the stores ledger account. These values are deducted from total issues, and amount returned by each department as shown by materials return note is deducted from the total amount charged to each department. In enterprises where return of materials to stores return of material to stores is major problem it is customary to use a materials and supplies journal for keeping records of

items.

MATERIAL RETURN NOTE

FROM:

NO:

DEPARTMENT:

DATE:

JOB NO:

ORDER NO:

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(4) TRANSFER OF MATERIALS:

Transfer of materials from one job to another is prohibited unless the detail is adequately recorded on the materials Transfer note. Such transfer is permissible only where an urgent order has to be made and work started on a less urgent order may be appropriates. Such a note shows are incessancy date for ordering and debiting the cost accounts affected. These note are passed direct to the cost office for the appropriate adjustment in the work-in-progress ledger.

All these four notes including stores ledger and Bin card are major for inventory management which are valued and checked for every Quarterly or Half yearly or Annually.

MATERIAL TRANSFER NOTE

NO:DATE:

FROM:TO:

DEPARTMENT:DEPARTMENT:

JOB NO:JOB NO:

ORDER NO 43 (3) NATIONAL PRICE:

(a) Standard price

(b) Inflated price

(c) Re-use price

(d) Replacement price

FIRST IN FIRST OUT (FIFO)

This is the price paid for the material first taken into stock from which the material to be priced could have been drawn.

Under this method stocks of materials may not be used up in chronological order but for pricing purpose it is assumed that items longest in stock are used up first. The method is most suitable for use where in material is slow-moving and comparatively high unit cost.

ADVANTAGES:

I.Price is based on actual cost and not on basis of approximations such as no profits

or losses arises by reasons of adopting this method.

II.The resulting stock balance generally represents fair commercial valuation of stock.

III.It is based on traditional principles.

DISADVANTAGES:

1.The number of calculations in the stores ledger involved tends to be complicated with

increase in clerical error.

11. The cost of consecutive similar jobs will differ if the price changes suddenly.

111. In times of rising prices, the charge to production is unduly low as the cost of replacing

the material will be higher.

LAST IN FIRST OUT LI,IFO)

This is the price paid for the material last taken into stock from which the materials to be priced could have been drawn. This method also ensure material being issued at the actual cost. Its use is based on the principle that costs should be as closely as possible related to current

price level. Under this method production cost is calculated on basis on replacement cost.

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ADVANTAGES:

I.Production is charged at the most recent prices so that it is based on the principle that

cost should be related to current price levels.

11. It obviates the necessity for continuously ascertaining the replacement price. Ill. Neither profit nor loss is usually made by using this method.

IV. In the times of rising prices there is no wind fall profit as would have been obtained

under FIFO method.

DISADVANTAGES:

#.Needs more clerical work.

It.Compassion among similar jobs is very difficult

Ill.Stock valves relating to prices of the oldest cost on hand may be entirely out of the

current replacement prices.

WEIGHTED AVERAGE PRICE:

This is the price which is calculated by dividing the total cost of material in the stock from 6 vhich the material to be priced have been drawn, by the total quantity of material in the stock. This method differs from all other methods because here issue prices are calculated on receipt of materials and not on issue of materials. Thus as soon as new lot is received a new price is calculated and issues are the taken.

ADVANTAGES:

1.This method is advantageous where the price varies widely as its use even out the

effect of these wide variations.

II.The basis of price calculations is a simple one involving only the division of total

amount of material in stock by quantity in stock.

lll.Calculation of new prices arises only when receipt of stocks are received.

IV.Stock records under this method give a fair indication of the stock values, which

can be used in financial analysis.

DISADVANTAGES:

I.This method is complicated than simple average because it takes into consideration

the total quantities and total costs in stock.

II.Profit or loss may be incurred as in simple average price.

III.As LIFO or FIFO this method calls for many calculations.

IV.In order to calculate the accurate value of issues the average price must

normally be calculated to four to five decimal places.

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STANDARD PRICE

It is the predetermination of fixed price on basis of a specification of all factors affecting price like the quantity of materials in hand and to be normally purchased and rate of discount compared with existing price including or excluding freight and ware housing expense.

A standard price for each material is set and the actual price paid is compared with standard. It is paid exceeds the standard a loss will be realized if not profit will be obtained.

ADVANTAGES:

. 1. This method is easy to operate.

. Comparing the actual prices with the standard price will determine the efficiency of

purchase department.

I1I. The effect of price variations is eliminated from job costs.

IV. It reduces classical costs by eliminating detailed cost records.

V. In times of inflation or price fluctuations is very difficult to fix a standard price. VI. This method also incurs a profit or loss on issues and closing stock

INFLATED PRICE:

This is the price, which includes a charges designed to cover the cost of contingencies or related costs.

This price includes not only the cost involved in bringing the material to the purchases premises but also the loss due to evaporation and breakage etc. as well as carrying costs.

TECHNIQUES OF INVENTORY MANAGEMENT:

Main problems in inventory management are to answer.

(a) Are all items of inventory important if not what are items to be given more Importance?

(b) What should be the size of the order for replenishment be placed?

(c) What should be the over level?

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To answer these following techniques are used.

ABC Analysis

Inventory turnover ratio IIML Analysis

VEIL Analysis

S - D - E Analysis

G - NG - LF Analysis S - OS Analysis

M - N - G Analysis

F - S - N Analysis X - Y - Z Analysis GOLF Analysis

Economic Order Quantity

ABC ANALYSIS:

It is based on proposition and efforts are scare and limited Managerial items and efforts are scare and limited. Some items of inventory are more important than others.

ABC analysis classifies various inventories into three sets or groups of priority and allocates managerial efforts in proportion of the priority the most important item are classified into "class-A" those of intermediate importance are classified as "class-B" and remaining items are classified into "class-C'".

The financial manager has to monitor the items belonging to monitor the items belonging to different groups in that order of priority and depending upon the consumptions. The items with the highest value is given top priority and soon and are more controlled then low value item. The re-rational limits are as follows.

Category% of Items% of Total Materials

A5-1070-85

B10-2010-20

C70-855-10

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PROCEDURE:

(a) Items with the highest value is given top priority and soon.

(b) There after cumulative totals of annual value of consumption are expressed as

percentage of total value of consumptions.

(c) Then these percentage values are divided into three categories.

ABC analysis helps in allocating managerial efforts in proportion to importance of various items of inventory.

INVENTORY TURNOVER RATIO What it is:

This ratio how often a firm's inventory turns over during the course of the year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for the industry could mean a business is losing sales because of inadequate stock on hand.

When to use it:

If a firm's business has significant assets tied up in inventory, tracking its turnover is critical to successful financial planning. If inventory is turning too slowly, it could indicate that it may be hampering the firm's cash flow. Because this ratio judge's annual inventory turns, it is usually conducted once a year.

Small businesses, both manufacturers and retailers, now have the opportunity to reduce inventory-related costs significantly through the use of various inventory techniques implemented on a micro- or = mini-computer. Inventory techniques are divided into two

categories-

Those for independent demand items (finished goods) and those for dependent demand items (manufacturing-in-process items and raw material).

Several techniques offer potential for savings with independent demand items. Independent demand item techniques are subdivided into continuous review models, periodic review models, and mixed models

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CONTINUOUS REVIEW MODEL.

The item under consideration is independent of all other items (no joint replenishment). Demand for the item varies (is random), but the average demand is constant over time. Lead time is known and constant.

Holding costs and replenishment costs are known and constant. The inventory position is maintained at all times.

Under these circumstances, a continuous review model calls for an order, of size Q, to be placed whenever the reorder point, s, is reached. The formulas for Q and s are as follows:

Q=2dr/h(I)

s=Dkv,(2)

where d = annual demand for the item, r = replenishment cost per occurrence, h = holding cost per item per year, D = average demand during lead time,

v = standard deviation of demand during lead time, and k = management detennined variable.

The formula for s includes an estimate of the demand during the item's lead time and safety stock to protect against stock out. The demand during lead time is calculated as the average demand per time period multiplied by the item lead time. For example, suppose an item demand averages five units per week and the lead time is three weeks, then the demand during lead time is fifteen units. The management factor for determining the level of safety stock, k, should be set at a value of 2 or 3. A k value of 2 will result in a small number of stock outs during approximately 2.4 percent of all replenishment cycles. A k factor of 3 eliminates stock outs almost entirely (less than I percent), but causes considerably more inventory to be held as safety stock at all times.

For small business, the continuous review model has one major drawback. An assumption of the model is that a replenishment order is placed when the reorder point is reached. Any delay in releasing the replenishment order will result in a higher than predicted rate of stock outs during the replenishment cycle. Thus, at a minimum, a perpetual inventory which is updated daily is needed, along with daily checks for items which have reached reorder points.

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PERIODIC REVIEW MODEL

In a periodic review system, a review of an item's inventory position is made periodically (every R time periods). A replenishment order is placed for an amount large enough to return the inventory level to S, the "order-up-to' level. The review period, R, is usually set arbitrarily. Common practice is to set R at once per month for A items (high dollar volume), once per quarter for B items (medium dollar volume), and once per year for C items (low dollar volume). Present a formula for the optimal period between reviews.

Since R = Q/d, the optimal time between replenishments is

R = 2r/dh, (3)

where all terms are as defined previously. Note that R is in years if annual demand and holding cost factors are used. Multiplying R by 52 will convert it to weeks. The "order-up-to' level, S, is found from

S=DI kvl,

DI = average demand during review period plus demand during lead time, vi = standard deviation of demand during review period plus lead time,

k is as previously noted

Given a manual inventory system, the periodic review model is almost certainly more profitable than the continuous review model, due to the expense of daily updates to the perpetual inventory record. However, reduction of the level of safety stock is often desirable.

MIXED MODEL

A mixed model combines the best features of the continuous review model and the periodic review model. In a mixed model the inventory position is examined once every R time periods. If the inventory position is found to be above the reorder point, s, no action is taken. However, if the inventory position is found to be equal to or below the reorder point,'an order for enough to replenish the inventory to S is placed.

The mixed model requires less safety stock than the periodic review model.. The reorder point,

s, is defined to be

s = D kv,

where

D = average demand during review period plus demand during lead time, and

v = standard deviation of demand during review period plus lead time

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For example, if a mixed model is run with a review period of one week, then for a C item (the previous example) with a two-week lead time, the mixed model requires safety stock for three weeks. The periodic review model requires saftey stock for 54 weeks.

The drawback of a mixed system is that the inventory position must be determined more frequently than in the periodic system. If all items must be counted each review period, then the periodic review method is probably less expensive. However, there are ways to make a mixed model feasible. For example, if the part is kept in a particular bin, one could paint a line on the bin to indicate when the reorder point is reached. Also, if the item is kept in standard containers, the reorder point could be set in terms of standard containers (e.g., ten cases or two pallets) to facilitate counting.

Two-Bin System

The ultimate extension of the mixed model is the two-bin system. Rather than painting a line on the bin, inventory is maintained in two physical bins, the larger bin containing operating stock and the smaller bin containing exactly the reorder point quantity, s. In the classic system, a replenishment order is'placed on the inside lid of the second bin, to be mailed when the bin is opened.

The two-bin system has often been described, but it is rarely pointed out that the two-bin system is functionally equivalent to the continuous review system, since one ,can detect precisely when the reorder point is reached.

VED CLASSIFICATION

While in ABC classification inventories are classified basis on their consumption value and in HML analysis the unit value is the basis, And criticality of inventories is the basis of VED classification.

The VED analysis is to determine the criticality of an item and its effect on production and

Other services. It is specially used for classification of spare parts.

VED CLASSIFICATION ---- V is for vital., E is essential and D is desirable.

If a part is vital, its given V classification, if it is Essential then given E classification, and if its not so essential then the part is given D classification.

For V items a large stock of inventory is generally maintained, where as for D items minimum stock is enough.

so Stock control is a critical aspect of successful management Of all the inventory control systems ABC and VED matrix is most suitable for medical stores.

XYZ Analysis

Based on the value of inventory undertaken during the closing of annual accounts X - High value; Y - Medium value; Z - Low value

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HML Analysis

Items are classified according to the unit value as high, medium, and low. It is used to control the purchase value of items.

Movement Analysis (FSN Analysis)

Check stock rotations and identifies the obsolescence of items. This is particularly useful for spare parts

Fast-, Slow- and Non-moving Analysis

FNSD Analysis

F- Fast moving items

N- Normal moving items S- Slow moving items D- Dead sock

The `F' items are those which are consumed over a short span of time. The `N' items are those which are consumed over a year. The `S' items are those which are used 2 years or so. The `D' items for which no further demand can be foreseen.

Dead stock represents money spent that cannot be realised and occupies useful space. If there is no alternative used for such items, they should be disposed.

S-OS Analysis

S- Seasonal items

OS-Off- seasonal items

GOLF Analysis

-GO- Government controlled quota L- Locally available items

F- Items available in Foreign market

SDE Analysis

S- Scarce items (items in short supply)

D-Difficult items (items cannot be procured easily)

E- Easily available items (items available in local market)

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ORDERING LEVAL:

Along with the compilation of the economic order of the economic order size, another

important problem of The material control relates to the timing of an order for replenishment of material The problem is concerned with arriving at the quantity level that automatically triggers a new order. this quantity level is as" ordering level" .

1. Determination of stock levels

Carrying or too much and tool little of inventories is detrimental to the firm.

If the inventory level is too little, the firrn will face frequent stock outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie-up of capital. Therefore an efficient inventory management requires that a firm should maintain an optimum level of inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock out which may result in loss of sale or stoppage of production. Various stock levels are discussed as such.

a. Minimum Level: this represents the quantity which must be maintained in hand at

all times. If stocks are less than the minimum level then the work will stop due to

shortage of material. Following factors are taken into account while fixing

minimum stock level:

Lead Time: A purchasing firm requires some time to process the order and time is also required to the supplying firm to execute the order. The time taken in processing the order and then executing it is known as lead time, it is essential to maintain some inventory during this period.

Rate of consumption: it is the average consumption of material in the factory. The rate of consumption will be decided on the basis of past experience and production plane.

Nature of Material: the nature of material also affects the minimum level. If a

material is required only against special orders of the customer then minimum stock will not be required for such materials. Minimum stock level can be calculated with the help of following formula:

Minimum stock level = Re - ordering level - (Normal consumption X Normal Re-order period)

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b. Re-ordering Level: When the quantity of materials reaches at a certain figure then

fresh order is sent to get materials again. The order is sent before the materials

reach minimum stock level. Re-ordering level or ordering level is fixed between

minimum level and maximum level. The rate of consumption, number of days

required on any day is taken into account while fixing re-ordering level.

Re- ordering level = Maximum consumption X Maximum Re-order period

c. Maximum Level: it is the quantity of material beyond -which a firm should not

exceed its stocks. If the quantity exceeds maximum level limit then it will be over

stocking. A firm should avoid overstocking because it will result in high material

costs. Overstocking will mean blocking of more working capital, more space for

storing the materials, more wastage of materials and more chances of losses from

obsolescence.

The following formula may be used for calculating maximum stock level:

Maximum Stock level = Re- ordering Level + Re-ordering quantity ( linimum consumption X Minimum Re-ordering Period).

d. Danger Level: it is the level beyond which materials should not fall in any case. If

danger level arises than immediate steps should be taken to replenish the stocks

even if more cost is incurred in arranging the materials. If materials are not arranged

immediately there is a possibility of stoppage of work. Danger level is determined

with the following formulae.

Danger Level = Average Consumption X Maximum Re-order period for emergency purchase.

e. Average stock Level

The average stock level is calculated as such:

Average Stock Level = Minimum stock Level + 1/2 of Re-order quantity.

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2. Determination of safety Stocks

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of

inventory cannot be perfectly forecasted. It fluctuates over a period of time. The demand for material may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out.

The stock-out can prove costly by affecting the smooth working of the concern. In order to protect against the stock-out arising out of usage fluctuations, firms usually maintain some margin of safety or safety stocks. The basic problem is to determine the level of quantity of safety stocks.

Two costs are involved in the determination of this stock i.e. opportunity cost of stock-outs and the carrying costs. The stock-outs of raw materials cause production disruption resulting into higher cost of production. Similarly, the stock-outs of finished goods result into the failure of the firm in egmpetition as the firm cannot provide proper customer service.

If a firm maintains low level of safety frequent stock-outs will occur resulting into the larger quantities of safety stocks involve higher carrying costs.

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CHTAPTER-5

POSITIONING IN BHEL

COMPANY LTD

Table-I

STATEMENT SHOWING MATERIAL TURNOVER RATIO

MATERIAL TURNOVER RATIO= COST OF GOODS SOLD/ AVERAGE STOCK

GRAPH

INTERPRETATION

In 2008-2009 the material turn over ratio was high when compared to the previous year 2007-2008 i.e., it has increased from 2.77 to 2.93. In the year 2006-2007 the stock are concerted in to goods more faster than the other years i.e., 3.55 ratio, after to this the very successful year was 2005-2006 ie., the material turnover ratio is 3.54.The least material turnover ratio is 2.72 in the year 2004-2005 which is less than the previous year 2003-2004

i.e., 2.73.

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TABLE-2

STATEMENT SHOWING HOLDING PERIOD

MATERIAL TURNOVER RATIO= COST OF GOODS SOLD/AVERAGESTOCK

HOLDING PERIOD= (AVERAGESTOCKICOST OF GOODS SOLD)*365

YEARTURNOVERINVENTORYHOLDING PERIOD

2003-200417749063698133

2004-200517466864254134

2005-200626721775493103

2006-200728949181476103

2007-2008310235111960132

2008-2009414816141500125

INTERPRETATION

In the year 2005-2006 and 2006-2007 the holding period was less that means the stock is being converted into goods . when compared to all the years. In the year 2004-2005 the inventory

conversion period has been decreased to 134 days than all the years from the above data . In the year 2008-2009 the holding period is less that is 125 days than compared to the previous year which is 132 days.