INVENTORY CONTROL MANAGEMENT & SPARE PART INVENTORY CONTROL FOR RAILWAYS

INDUSTRIAL MANAGEMENTDEPARTMENT OF MANUFACTURING PROCESSES AND AUTOMATION ENGINEERINGNETAJI SUBHAS INSTITUTE OF TECHNOLOGY (NSIT)UNIVERSITY OF DELHI23rd April, 2015

BY661/MP/13 SHUBHAM GUPTA662/MP/13 SHUBHAM KUCHHAL663/MP/13 SHUBHAM SHARMA664/MP/13 SUBHASH665/MP/13 TANVI RAI666/MP/13 VAIBHAV CHOUDHRY668/MP/13 VANSH MENDIRETTA669/MP/13 VARUN KUMAR670/MP/13 VERNICA AHUJA

CONTENTS

SECTION - I

INTRODUCTION5REASONS BEHIND INVENTORY CONTROL6INVENTORY CONTROL MODELS8MANUFACTURING MODEL8PURCHASE MODEL9ECONOMIC ORDER QUANTITY (EOQ)10TECHNIQUES OF INVENTORY CONTROL12JUST IN TIME (JIT)13LEAD TIME (LT)14SPARE PARTS INVENORY MANAGEMENT15

SECTION - II

SPARE PARTS INVENTORY CONTROL OF INDIAN RAILWAYS17INVENTORY TECHNIQUE17

STORE MANAGEMENT18PROVISION FOR BUFFER STOCK19OVER STOCKS20SURPLUS STORES OF INDIAN RAILWAYS20MOVABLE SURPLUS21DEAD SURPLUS21SCRAP AND SCRAP DISPOSAL22DISPOSAL OF SURPLUS STOCKS22INVENTORY CONTROL23OUT OF STOCK POSITION23STORES ACCOUNTING24STOCK TAKING24STOCK VERIFICATION24COMPUTERIZATION25CONCLUSION26

SECTION - I

INTRODUCTIONInventory Control is the supervision of supply, storage and accessibility of items in order to ensurean adequate supply without excessive oversupply. Stock control is defined as "the activity of checkinga shops stock".

It can also be referred as internal control - an accounting procedure or system designed to promoteefficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc.

Inventory control may refer to:

In economics, the inventory control problem, which aims to reduce overhead cost without hurting salesIn the field of loss prevention, systems designed to introduce technical barriers to shopliftingIt answers the 3 basic questions of any supply chain:

1. When?

2. Where?

3. How much?

Reasons for Inventory Control:

1.Maximizing Space

As a small business owner, you probably have limited storage space in your business location. According to SCORE, inventory control allows you to maximize your space by identifying the faster and slower sellers in your product mix. As a result, you can provide for space for better sellers while weeding out slow-moving items.

2. Room For new merchandise

In a competitive business environment, being the first to carry the newest products on the market givesyou an edge over your competitors. By effectively managing and controlling your inventory, you'recontinuously eliminating the outdated and obsolete products in your mix, which means you;ll always haveroom for the newest, latest thing. Customers will look to your business first when searching for newitems.

3.proper inventory control ensures increased speed in turning over your stock. This reduces the costsassociated with carrying excess inventory and keeps merchandise moving through your operation insteadof collecting dust in your stockroom. As a result, you will run a leaner, more efficient operation,which can lead to higher profits.

4. Lower Production Costs

Production costs are lower when products are produced on a mass scale, so most companies try to buy andproduce in bulk. However, if they produce too much, the costs of production and storage could outweighthe potential savings of bulk-production. An inventory control system lets the company know how manyproducts it should order or produce when restocking its inventory.

5. Prevent Theft

A strong inventory control, in which every item is cataloged and given a bar code for scanning duringtransactions, will allow owners to track any unaccounted-for items that could be the result of theft.By looking for patterns, a company can then create a better plan to prevent theft by employees orcustomers.

6. Perishable Reasons

When dealing with perishable products, it is important for businesses to maintain the correct amount ofinventory. If they keep too few items in their inventory they are forfeiting profits because customerswill not be able to purchase the items they want and go to a different store. However, if they producetoo many items, they will have to discard them after they perish and lose the money it cost to producethe inventory.MODELS OF INVENTORY CONTROL:1. MANUFACTURING MODEL2. PURCHASE MODEL MANUFACTURING MODELThe manufacturing model can be divided into:1. Manufacturing model with no shortages.2. Manufacturing model with shortages. Manufacturing model with no shortages. In this model the following assumptions are made:1. Demand is at a constant rate. 2. All cost coefficients are constants.3. There is no shortage cost.4. The replacement rate is finite and greater then the demand rate. This is also called replenishment rate or manufacturing rate.

Schematically this model is illustrated as follows:

Here, r : annual demand in units.k: production rate of the items.t : time when we consume and build up.(+)

Manufacturing model with shortages.

The assumptions made in this model are the same as the above model. There are four components of inventory cost:1. Item cost 2. Setup or order cost 3. Items holding cost 4.shortage

Schematically it can be represented as follows:

PURCHASE MODEL The model which describes the theoretical customer journey from the moment of first contact with the brand to the ultimate goal of purchase. This can help with the following: Planning marketing campaigns. Highlighting areas in order to improve conversion rate. Evolving the sales process. Designing customer relationship management (CRM) system. ABC Analysis (Selective Inventory Control )ABC analysis helps segregating the items from one another and tells how much valued the items is and controlling it to what extent is the interest of the organization.ABC divides an inventory into three categories :- A items: Very tight control and accurate records. B items : With less tightly controlled and good records. C items : With the simplest controls possible & minimum records. Procedural Steps 1. Identify all the items used in an industry.2. List all the items as per their value.3. Count the number of high valued, medium valued and low valued items.4. Find the percentage of high, medium & low valued items.5. A graph can be plotted between percent of items (on X-axis) and percent of total inventory cost(on Y-axis) as shown in fig.

Economic order quantity:

Economic order quantity(EOQ) is the order quantity that minimizes total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models. The framework used to determine this order quantity is also known asWilson EOQ ModelorWilson Formula. The model was developed by Ford W. Harris in 1913,[1]but R. H. Wilson, a consultant who applied it extensively, is given credit for his in-depth analysis.EOQ applies only when demand for a product is constant over the year and each new order is delivered in full when inventory reaches zero. There is a fixed cost for each order placed, regardless of the number of units ordered. There is also a cost for each unit held in storage, commonly known asholding cost, sometimes expressed as a percentage of the purchase cost of the item.

We want to determine the optimal number of units to order so that we minimize the total cost associated with the purchase, delivery and storage of the product.

The required parameters to the solution are the total demand for the year, the purchase cost for each item, the fixed cost to place the order and the storage cost for each item per year. Note that the number of times an order is placed will also affect the total cost, though this number can be determined from the other parameters.

The typical ordering quantity versus cost graph is given below:x-axis = order quantity ; y-axis = cost

The optimum quantity line shown in the graph is the quantity of order for which the total inventory cost comes out to be minimum, therefore that is the ECONOMIC ORDER QUANTITY (EOQ).

Techniques of inventory control:To understand the various inventory management techniques it is crucial to know why it is important. First, a mismanaged inventory can lead to an unnecessary increase in the working capital. The excess funds could have been fruitfully directed to fuel the companys growth initiatives or research and development efforts. Second, effective inventory management would lead to low storage costs, which will in turn lead to an increase in the companys profits. Storage space is expensive; if you are able to manage your inventory well and able to reduce the amount of goods that you need to store, then you will require less space, which will in turn lead to low warehouse rental costs. Third, it can help you satisfy your customers by providing them with the products they need in the swiftest manner. Poor inventory management leads to lower availability of goods and higher delivery time. Hence, if you want to gain those service satisfaction stars, you need to manage your inventory well. Fourth, goods stored in inventory over a long period may spoil. This leads to unnecessary overheads in operating a business. Hence, proper inventory management can help you reduce those costs greatly. Fifth, if you have inventories scattered in various locations, you need a proper system to manage those inventories on the basis of demand and supply. Inventory management techniques can help you go a long way in managing multiple inventories.Various businesses have employed the basic inventory management techniques or inventory control methods to keep their inventory costs in check. Inventory management has become an intrinsic part of supply chain management. There are various methods that an organization may use to manage its inventory.

Just in Time (JIT)As the name suggests, the JIT inventory management technique says that the item will be ordered only if it is needed for shipping or manufacturing. The item may be ordered a few days back depending on the delivery time promised by the supplier. A mandatory requirement of this approach is the proper identification of each item before the manufacturer or reseller requires it. Since, there can be many goods required by supplier or manufacturer at any time, each and every future requirement should be properly identified and timely ordered.Another crucial requirement for this technique is the timely delivery of the order by the supplier. Since the item is ordered just before it is needed, any delay in the arrival of the item may delay the whole production process; this may be treated as a drawback in the approach. The JIT inventory management technique helps reduce the size of the inventory and leads to low storage costs. Although, early identification and order of all items required in the future should always be there to make this approach effective. Early identification of risks is also a prime concern in managing a business properly. Ideally, JIT is the best inventory technique with almost zero blocked capital.JIT is quite a virtual impossibility, therefore we need different techniques for inventory control. Effective inventory management requires understandingand knowledge of the nature of inventories and, to gain this understanding, some analysis and classification of inventory are required. They are:

1. A.B.C. Analysis2. H.M.L. Analysis 3. X.Y.Z. Analysis4. V.E.D. Analysis5. F.S.N. Analysis6. S.D.E. Analysis7. G.O.L.F. Analysis8. S.O.S. Analysis.

LEAD TIME(LT)It is the span of time required to perform an activity. In our logistics context, it is the time between recognition of a need for a product or service and its receipt. Individual elements of lead time include - order preparation time, order transmittal time, queue time, manufacturing time, transportation time, receiving and inspection time. In other words, purchasing, manufacturing, transportation, receiving, and inspection are individual lead time activities.SPARE PARTS INVENTORY MANAGEMENT:

1. INSURANCE INVESTING/SPARES:An essential spare in less quantity (just sufficient) is kept as insurance, just in case the production line fails. For example, in a power station having 5 generators, the shaft is quite a costly item while is relatively vulnerable to be damaged as compared to other parts, though gets damaged quite less. Now one shaft is kept as insurance, if any shaft fails, it is replaced while a new one is ordered which takes its own time to manufacture.

2. RUNNING SPARES:The spares are utility spares which will be needed in order to finish a certain task/target by the organization or person in a certain long duration of continuous work. Example for a long drive, people tend to stock petrol, spark plugs, engine oils, etc.

3. PROPRIETARY PARTS:Any item manufactured by the Original Equipment Manufacturer (OEM) , purchased by the company, if encounters any fault, the spare part becomes very critical. Now the spares might not be available for a long period of time, or the OEM might charge extra, or the spare part produced by a third party manufacturer may not be suitable for the product or the OEM and services are denied. In order to take care of that, the user issues a Proprietary Article Certificate (PAC), which allows the user to buy spares from the OEM or any other manufacturer approved by the OEM.

SECTION - II

Spare parts Inventory Control of Indian RailwaysThe Indian Railways is one of the biggest institutions in the world. It has the 2ndlargest employee base in the world after Wal-Mart. It caters to the needs of nearly 8 to 9 million people per day, the largest passenger base in the world. A very effective and sound management system is required to run this humongous project. INVENTORY TECHNIQUE:Railways need to have a good spare parts inventory technique for both running and maintenance therefore choice of proper spare part inventory technique is crucial.(i). The railways must have INSURANCE SPARES for its power generation facility for lines and sheds. All the generators must be well equipped and functioning while stand by generators and parts must be kept. Also an active availability of railway line spares must be available at each station so as to facilitate proper maintenance of the line as it becomes extremely critical as human lives depend upon it or the least if line is left damaged for a longer time, the railway transient system comes to a halt over that line that causes a lot of trouble.(ii). RUNNING SPARES which are required for smooth functioning of the locomotive should be installed in each locomotive running on tracks, since many long stretches of railway lines exist, it becomes extremely critical for a locomotive to work smoothly throughout. All sorts of essential spares like spare fuel, lube oil, fuses, toolbox and maintenance kits must be installed on the loco. For such an application, where such time tight needs exist a proper inventory management system needs to exist. Proper storage of all spares is essential followed by their maintenance, verification, checking, disposal and new orders. Proper care is a pre requisite for most of the spares and timely inspection is crucial.STORE MANAGEMENT:The Indian Railways uses ABC method for its spare parts management and control.The Indian Railways have 220 stocking depots spread over zonal railways and production units for uninterrupted supply of materials. These stocking depots stock over 2.8 lakh spare units.The components procured by the Indian railways is divided into two parts1. Indigenous components which are developed within the country.2. Imported components which are imported from the other countries.The indigenous material has a percentage of more than 96% of the total material procured by the railways annually. The imported material comprises mainly of the high end technological equipment which are not readily available in the country.To have an effective control, the Railway Board should classify the Stores and fixed ceilings as under:-A1 category:It includes the spare parts having an annual usage value of more than 5 lakh per annum, some special bearings, accurate fits, engine blocks, fall under this category.A2 category:It includes all the items which have an annual usage of value between 50 thousand and 5 lakh. The stock in such cases shall not exceed the requirement for 3 months.B1 category:It includes all the items which have an annual usage value of more than 25 thousand but less than 50 thousand. Stocks in such a case shall not exceed the requirements for 6 months.B2 category:It includes all the items having an annual usage value of more than 10 thousand but less than 25 thousand. Stocks in such cases shall not exceed the requirement for 3 months.C category:All the items which have an annual usage value of less than 10 thousand fall under this category. The stocks shall not exceed the requirement for 3 months.D category:This category includes all the items which have not moved on for more than 2 years.By scrutiny of Stores Balances, it is possible to disposes Surplus Stores which are not required and unnecessary blocking capital. The disposal of surplus stores and scrap shall be made as per extant policy of railways.Provision of Buffer Stock:Board has fixed the Buffer Stock Limit of 3months for indigenous items and 6 months for imported items.Board has decided that buffer stock limit for other items may be decided by the COS in consultation with finance. However, it should be ensured that vital and safety items should be available at the level of one month stock requirement all the time and at the same time inventory balances should remain within the laid down targets.Over stocksOverstocks are generally the quantities in excess of 50 per cent of the total last years issues of a particular item. The formula for computation of overstock on Zonal Railway: For A and B category - Stock of over 12 months requirements For C category - Stock of over 24 months requirementsThe Railway wise and production units wise position of over stock items during 1996-97 to 2000-2001, revealed that:i. On Northern Railway, the number of over stock items increased from 304 in 1996-97 to 8324 in 2000-2001 (increased by 26 times),ii. On Northeast Frontier Railway, the number of non-moving items increased from 946 in 1996-97 to 1397 in 2000-2001 (increased by 48 per cent),iii. In South Central Railway, the number of over stock items increased from 245 in 1996-97 to 895 in 2000-2001 (increased by 265 per cent).Hence overstock needs to be monitored and the next inventory should be carried out keeping the overstock in mind and also the shelf life of the overstock should be monitored.Surplus Stores of Indian RailwaysThe stores which have not been issued for long time only can be considered Surplus to the requirements of the Railway. Even amongst such items there may be some it is known could be utilized for the purpose of the Railway in the near future. Purely temporary excesses over immediate or estimated requirements are not really surpluses so long as they can be issued over a comparatively short period of time.The Surplus Stores could be due to the following reasons:(a) Stocks which have not been issued for a long time.(b) Stocks not required by the Railways due to change in design of Plants, Equipments and Rolling Stock.(c) Introduction of new Standards and Design.(d) Spares become obsolete due to scrapping the main machinery such as Rolling Stock and Plants.(e) Accumulation of non-standard items.(f) Materials no longer required by the Railways.An essential prerequisite condition to declare any items of stores as Surplus stock on Railway is that such items have not been issued for railways consumption for a period of two years. Such Surplus stock should be classified under two heads, viz.(a) Movable surplus(b) Dead surplusMovable Surplus: Movable surplus stores comprise items of stores which have not been issued for a period of 24 months, it is anticipated, will be issued in the near future. Such items should be marked in the price list.Dead Surplus:Dead Surplus Stores comprises items of stores which have not been issued for 24 months and which, it is considered, are not likely to be utilized on any railways maintenance programme within next two years. No item may, however may be classified as dead surplus unless it has been duly inspected by a Survey Committee and declared as such. Such items should be marked in the Price List.

Scrap and scrap disposal:

The stores items of different kinds which are no longer useful for the purpose for which they were obtained by the consuming departments on Railways are called "Scrap Items". Scrap materials are held at nominal value in the books. Regular sale of scrap material is a must not only to fetch the best price possible but also to avoid unnecessary accumulation, theft and pilferage.Scrap can be divided into ordinary scrap and surplus scrap. Ordinary scrap are materials which can ordinarily be used in the Railway Workshop or for other Railway purposes. Surplus scrap is normally referred as dead surplus, which should be sold off to fetch the best price possible.

Disposal of Surplus StockThe Stores Department of every Railway is equipped with Surplus Stock Section which deals effectively with the disposal of Surplus Stock, either by issue, or transfer to other Railways or by sale.For issue, the consuming departments should be asked whether the item could be utilized in the next two years or by converting into another standard item or against another standard item.For transfer, other Railways and other Government departments should be asked whether the item could be utilized.By sale, it could be done either sale by tender or auction sale after the recommendation of the Survey Committee. The Surplus Stock Section should scrutinize every public call for tender, stores, bulletins and Home indents issued by other Railways, the Directorate General of Supplies and Disposals or any other Government department or public body, and in addition examine advertisements in papers, such as the Indian Trade Journal in order to discover suitable opportunities of effecting the sales of surplus stock and over-stocks.

Inventory ControlFor the purpose of effective inventory control, stores are maintained in ABC system. 'A' value items are closely monitored at the highest level at frequent intervals. Their stock levels, consumption forecast etc., should be monitored every month. 'B' value items should be monitored every quarter or every six months.To achieve better turnover ratio, average stock of 3 months, 6 months & 12 months of 'A', 'B' & 'C' value items respectively should be kept in the Stores Depots.There should be an inventory control cell consisting of Stores & Accounts officers to affect a systematic inventory control. This cell also attends to the clearance of suspense accounts and takes prompt action to liquidate the accumulation of scrap. Stores budget is also compiled by this section.Out of Stock PositionIn the ideal Inventory Management system, there should be no Out of Stock position. Out of Stock Statement is prepared for the items having stock position less than 5 per cent of required in case of A category items. The out of stock target needs to be fixed by Railway Board for both Purchase and Workshop manufactured items.It should lie around 5 per cent of the total stock items under Category 'A'

Stores AccountingThe materials are purchased from trade or manufactured in the workshop or returned from Division/Works. Similarly, the materials are issued to various indentors in the Divisions chargeable to revenue/works and issued to workshops for repairs & maintenance or for manufacturing activities or surplus stores, scrap are sold to outsiders. To enable correct and timely accounting of stores received and issued, efficient accounting procedure is required to be employed of payments for materials received, credits to workshops/ works etc. and also debits against the Divisions.

Stock TakingStock verification is an important managerial exercise to ensure proper and safe store keeping. In Railways, the authorities must certify the Annual Statement of Stores Transactions that the value balances truly reflect the ground balances.There should be actual physical verification, quantitative and qualitative verification of vouchers, store accounts, comments on the state of storage, deterioration of stock due to bad storage etc.The Economic Order Quantity (EOQ) should also be found out for the stocks and orders must be placed accordingly for economical efficiency. It is of key importance that such measures are taken and surplus capital is not blocked.

Stock VerificationThe programme as per the frequency contemplated for verification to be used is as follows:

'A' value ItemsOnce in six months

'B' value ItemsOnce in a year

'C' value ItemsOnce in two years

Items that have no issue for 12 months and overOnce in a year

All Tools & Plant ItemsOnce in 36 months

All Imprest StoresOnce in 24 months

Machinery and plantOnce in 3 years

Computerization:All railway data for inventory needs to be computerized, better inventory managing softwares need to be used. In January 1984, a comprehensive Material Management Information System (MMIS) for better Inventory Control and Stores Purchase was designed by the System Development Group (SDG), Central Railway. Such models need to be implemented everywhere in railways. Use of new techniques to monitor the criticality of the stock kept, the shelf life, the storage conditions and all type of data must be stored in the database so that any inventory, before storing can easily be directed to the concerned store without any problems and properly kept.

CONCLUSIONInventory, inventory control and its importance were studied in detail. Various methods and techniques were discussed. All critical and non critical aspects of inventory control were seen. Inventory plays a very crucial role in any organization as it marks the availability of the work in any production site while that of spares in any running site otherwise the work could come to a grinding halt. Stores play an important role in Railway's operations, maintenance and in-house production activities. Effective stores management ensures timely availability of essential items for efficient operations of the Railways with minimum blocking of capital by timely ascertaining the needs of stores and arranging such materials in the most efficient, economical and expeditious manner. Stores Management encompasses the entire range of functions which affect the flow, conservation, utilisation, quality and cost of materials. These activities include materials planning, programming, purchasing, inventory control, receiving and warehousing, transportation, materials handling and disposal of scrap.

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