1

This project report is prepared during the vocational training undertaken at“KRIBHCO” SURAT, on partial fulfillment of the degree in “Master ofBusiness Administration”

It is true that the experience makes the man perfect. Experience is alwaysconcerned with the work. Theory of any subject is important but without itspractical knowledge it becomes unless particularly for the ManagementStudents. As a student of the Business Administration, we have studiedmany theories in the classroom, but only after taking up this project workwe have experienced & understood these Management theories & practicesin its fullest sense, which plays a very vital role in business field today. Theknowledge of management is incomplete without knowing the practicalapplication of the theories studied.

Hence, this report is designed with the objective to gain practical knowledge& is undertaken on a Fertilizer Manufacturing Industry – its working and itsFinance Department.

During the preparation of this report a sincere efforts has been made toanalyze and evaluate the functioning of the inventory management.

PREFACE

2

Objective of Project :

A.PRIMARY OBJECTIVE:

The primary objective of the present study is to understand the existing

techniques of the inventory management used in this concern with a view to

find out the extent to which the concepts of scientific inventory control are

being applied and suggest new scientific and practical inventory

management techniques, if needed.

B.OTHER OBJECTIVES:

To supplement the Inventory control techniques in theorganization for effective Inventory Management.

To provide necessary guidelines for determining economic orderquantity, re-ordering levels and classifications of items usingappropriate basis.

To minimize idle time caused by storage of raw materials, storesor spare parts.

Help to keep capital investment low in inventories, and keep downInventory carrying cost and obsoletes losses.

3

Limitations of Project :

During the project work, I have experienced the following limitations.

As KRIBHCO is a chemical manufacturing society, it has vast

varieties of inventories of inventory items, about 6000. Thus it was

very difficult for me to calculate different levels like:

EOQ level, ROL level, Maximum level, Minimum level etc.

I was not able to collect some data during the project work due to the

audit was running during training period.

Since they are not willing to reveal some confidential data and setups,

I have limited vision regarding the KRIBHCO inventory.

4

Methodology :

Taking the perspective of student from the finance point of view themethodology used for study was to answer three questions covering broadarea of Inventory Management are as follows:

1) What is Inventory Management?2) Why Inventory Management?3) How the Inventory Management is done?

To obtain answers to the first two questions, the discussions were carriedout with various personnel of M/s. KRIBHCO and the books were referred.

However, to obtain the answer to the third question (i.e. how the InventoryManagement is done?) the existing Inventory control techniques werestudied, a relationship or link was sought between theory & practice and itwas found that many aspects from Theory can be and are being used inpractice and necessary suggestions were made to promote existing InventoryManagement at various level.

Thus the different methods and techniques were used at different stages ofthe project like interviews, discussions, observation, and secondary data likeannual reports, manuals and other reports and files, so as to meet therequirement of the situation.

5

Profile of

“A fertilizer is any material, organic, inorganic, natural or systematic, thatis placed on or incorporated into the soil to supply plants with one or moreof the chemicals elements necessary for normal growth.

Fertilizer is the material, which supplies the chemicals elements required forplant growth. Primary nutrients like nitrogen, phosphates and potassium aresupplied through chemical fertilizer. Fertilizer response studies have provedthat 1kg of fertilizer can increase the food grain production by 8-10 kg.Fertilizer production is of permanent importance for this country becauseFertilizer increases agriculture productivity.

Krishak Bharati Co-operative Limited (KRIBHCO), a premier Co-operativeSociety for manufacture of fertilizer, registered under Multi-StateCooperative Societies Act – 1985, was promoted by the Govt. of India,IFFCO, NCDC and other agricultural cooperative societies spread all overthe country.

Oil & Gas findings in Bombay High and South Basin triggered off the birthof eight new generations fertilizer plants to fulfill ever-growing food needsof the country. KRIBHCO was amongst the first two Projects in the firstphase.

KRIBHCO has setup a Fertilizer Complex to manufacture Urea, Ammonia& Bio-fertilizers at Hazira in the State of Gujarat, on the bank of river Tapti,near Kawas village, 15 Kms from Surat city and 20 Kms from SuratRailway Station on Surat – Hazira State Highway.

Late Smt. Indira Gandhi, former Prime Minister of India laid the FoundationStone on February 5, 1982.

The trial production of Urea commenced from November 26, 1985 andwithin a very short time of 3 months, the commercial productioncommenced from March 01, 1986. Since then, it has excelled inperformance in all areas of its operations.

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The total Project cost was Rs. 890 crores as against the estimated cost of Rs.957 crores. This shows a saving of Rs. 67 cr (approximately 7%) in CapitalCost of the Project, which is a rare feature in the history of a Public SectorUnit.

Subsequently, a Bio-fertilizer plant of 100 MT per year capacity wascommissioned at Hazira on August 15, 1995. KRIBHCO has alsocompleted the installation of an expansion of the Bio-Fertilizer plant with anadditional capacity of 150 MT and the same was commissioned inDecember 1, 1998.

HISTORY AND DEVELOPMENT

PROJECT ZERO DATE 31 st MARCH, 1981

FOUNDATION STONE LAID BY Late Smt. Indira Gandhi then the

Prime Minister Of India on 5th Februa ry 1982

PROJECT COMPLETION 31 st MAY 1985

7

PLANT CAPACITY & CONSULTANTS

PLANT CAPACITY CONSULTANTS

DAILY ANUUAL

AMMONIA 2 X 1350

MT

8.9 LAKH

MT

M.W.kellogg, USA

FEDO, INDIA

UREA 4 X 1100

MT

14.52 LAKH

MT

SNAMPROGETTI, ITALY

PDIL, INDIA SENIOR

THERMAL ENGG.U.K

POWER 2 X 15

MWH

THERMAL ENGG.U.K.

HAEVY

WATER

2 X 55 MT

PER YEAR

PDIL

HTAS, DENMARK

BIO -

FERTILIZER

250 MT PER

YEAR

DAE

8

OBJECTIVES OF KRIBHCO

MAIN

To increase the urea installed capacity, maintaining its market share.

To ensure optimum utilization of existing plant and machinery, through

proper maintenance.

To diversify into other core sector like power, LNG terminal/port,

chemicals etc.

OTHERS

to enlarge product mix through product development

to continue and intensify efforts towards rural development &Co-

operative movements

BIO-FERTILISER

KRIBHCO diversified into bio-fertilizers in 1995 in order to provide

supplementary Nutrients at low cost through its Hazria plant with a

production capacity of 100 MT PA. The plant capacity was enhanced to 250

MT PA in DECEMBER 1998. During the year 2002-03 the production of

Bio-fertilizer s was 296 MT, with a capacity utilization of 118% and sale

was 351 MT of Bio-fertilizer. Implementation of two more plants of 100

MAPA a capacity each is in progress at Varanasi (up) and Lanja

(Maharashtra)

9

SOURCE OF FINANCE

EQUITY: KRIBHCO SHARE HOLDING PATTERN (as on 31-03-2007)

STAKE HOLDER Rs. (in Crore)

Govt. of India 324.71

IFFCO 97.00

Other Society 70.00

Govt. ofIndia66%

IFFCO20%

OtherSociety

14%

Source of Finance

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PRODUCT

KRIBHCO is manufacturing Nitrogenous Fertilizers and Allied Products

viz.: Urea, Ammonia Liquid, and Bio-fertilizer. Besides, it’s also has a 30

MW Power Plant of its own for generation of Power to meet its

requirement. KRIBHCO has also been assigned the job of Operation &

Maintenance of “Heavy Water Plant” of Department Of Atomic Energy.

MISSION

The mission of KRIBHCO is to act as a catalyst to Agricultural and Rural

Development by Selecting, Financing and managing such Projects which

are both, socially desirable & commercially profitable.

VISION

KRIBHCO will become one of the leading fertilizer producers in the world

funding growth through:

Efficient Production

Efficient Distribution

Efficient diversification

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Inventory Management

( Concept) :

Inventory Management is a big part of profit planning for manufacturingand merchandizing companied. Material costs often accounts for more than40% of total costs of manufacturing companies and more than 70% of totalcosts in merchandizing companies. Inventory management is the planningand coordinating and controlling activities related to the flow of inventoriesinto through and out of an organization.

Inventory constitutes the most significant part of current assts of a largemajority of companies in India. On an average inventories areapproximately 60% of current assts in public limited companies in India.Because of the large size of inventories are maintained by firms aconsiderable amount of funds is required be committed to them. It is,therefore absolutely imperative to manage efficiently and effectively inorder to avoid unnecessary investment.

Inventory is stock of the product a company is manufacturing for sale andcomponents that make up the product. There are main three type ofinventory: Raw Material, Work-in-process, and Finished Goods.

Raw Materials are those basic inputs that are converted into finishedproducts through the manufacturing process. Raw materialsinventories are those units, which have been purchased and stored forfuture productions.

Work-in-Process inventories are semi-manufactured products. Theyrepresent products that need more work before they become finishedproducts for sale.

Finished Goods inventories are those completely manufacturedproducts, which are ready for sale.

Stock of raw materials and work-in-process facilitates production whilestock of finished goods is required for smooth marketing operations. Thusinventories serve as a link between the production and sale of a product.

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Firms also maintain a fourth kind of inventory, supplies or stores andspares. Supplies include office and plant cleaning materials like soap,brooms, oil, fuels, light bulbs etc. These materials do not directly enterproduction, but are necessary for production process. Usually these suppliesare small parts of the total inventories and do not involve significantinvestment.

The levels of three kinds of inventory for a firm depends n the nature of itsbusiness. A manufacturing firm will have substantially high levels of allthree kinds of inventories, while a retail or wholesale firm will have a veryhigh level of finished goods and no raw materials and work-in-processinventories.

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Need to Hold Inventory :

Maintaining inventories involves tying up of the company’s funds and

incurrence of storage and handling costs. There are three general motives

for holding inventories.

1. Transactional motive:

It emphasizes the need to maintain inventories to facilitate smooth

production and sales operations.

2. Precautionary motive:

It necessitates holding of inventories to guard against the risk of

unpredictable changes in demand and supply forces and other factors.

3. Speculative motive:

It influences the decision to increase or decrease inventory levels to take

advantage of price fluctuations.

It is not possible for the company procure raw materials whenever it is

needed. A time lag exists between demands for material and its supply. Also

there exists uncertainty in procuring raw materials in time on many

occasions. The procurement of materials may be delayed because of such

factors as strike, transport disruption or short supply. Therefore, the firm

should maintain sufficient stock of raw material at a given time to

streamline production. Other factors, which may necessitate purchasing and

holding of raw materials are quantity discounts and anticipated price

increase. The firm may purchase large quantities of raw materials than

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needed for the desired production and sales levels to obtain quantity

discounts of bulk purchasing. At times, the firm would like to accumulate

raw materials in anticipation of price rise.

Work-in-process inventory builds up because of the production-cycle.

Production-cycle is the time span between introduction of raw material in to

production and emergence of finished goods at the completion of

production-cycle. Till production-cycle completes stock of work-in-process

has to be maintained.

Stock of finished goods has to be held because production and sales are not

instantaneous. A firm cannot produce immediately when the customer

demand goods on a regular basis, their stock has to be maintained. Stock of

finished goods has to be maintained for sudden demand from customers. In

case the firm’s sales are seasonal in nature, substantial finished goods

inventories should be kept to meet the peak demand. The level of finished

goods inventories would depend upon the coordination between sales and

production as well as on production time.

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Cost Associated with Inventory

Managing inventories to increase net income requires effectively managing

costs that fall into the following five categories:

1. Purchasing Costs:

The cost of goods acquired from suppliers, including incoming freight or

transportation costs. These costs usually make up the largest cost

category of inventories

2. Ordering Costs:

The cost of preparing and issuing purchase orders, receiving and

inspecting the items included in th4e orders and matching invoices

received, purchase orders and delivery records to make payments.

Ordering costs include the coast of obtaining purchase approvals, as well

as other special processing costs.

3. Carrying Costs:

These are the costs that arise, while holding inventory. Carrying costs

include the opportunity cost of the investment tied up in inventory and

the cost associated with storage; such as space rental, insurance,

obsolescence and spoilage.

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4. Stock Out Costs:

These are costs that result when a company runs out of a particular item for

which there is customer demand. A company may respond to a stock out by

expediting an order from a supplier. Expediting costs of a stock out

include4e the additional ordering costs plus any associated transportation

coasts. Ort the company may lose sales due to the stock out. In this case, the

opportunity cost of the stock out includes the lost contribution margin on

sales not make due to the items not being in the stock, plus any contribution

margin lost on future sales due to customer ill will caused by the stock out.

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Objective of Inventory Management:

In the context of inventory management the firm is faced with the problem

of meeting two conflicting needs.

To maintain a large size of inventories of raw material and work-in-

process for efficient and smooth production and of finished goods for

uninterrupted sales operations.

To maintain a minimum level of investment in inventories to

maximize profitability.

The objective of inventory management should be to determine and

maintain optimum level of inventory investment. Te optimum level of

inventory will lie between the two danger points of excessive and

inadequate inventories. The firm should always avoid a situation of over

investment or under investment in inventories.

The major dangers of over investment are:

a) Unnecessary tie up of the firm’s funds and loss of profit and

opportunity costs.

b) Excessive carrying costs, and

c) Risk of liquidity.

The consequences of under investment in inventories are:

a) Production hold ups, and

b) Failure to meet delivery commitments.

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Thus, efforts should be made to place an order at right time with the right

source to acquire the right quantity at the right price and quantity. An

effective inventory management should

Ensure a continuous supply of raw material to facilitate uninterrupted

production,

Maintain sufficient stocks of raw materials in periods of short supply

and anticipated price changes,

Maintain sufficient finished goods inventory for smooth sales

operations and efficient customer services,

Minimize the carrying costs and time, and

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

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Inventory Management Techniques :

There are two basic questions relating to inventory management.

What should be the size of the order?

At what level should the order be placed?

The first question relates to the problem of ordering economic order

quantity (EOQ) and is answered with an analysis of costs of maintaining

certain level of inventories. The second question arises because of

uncertainty and is a problem of determining the reorder point.

The ordering costs increase with the number of orders, thus the more

frequently inventory is acquired; the higher the firm’s ordering costs. On the

other hand if the firm maintains large inventory laves, there will be few

orders placed and ordering costs will be relatively small but the carrying

costs of inventories increases heavily. The economic size of inventory

would thus depend on trade-off between carrying costs and ordering costs.

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EOQ Model :

The basic assumptions of EOQ model are following:

1 ) The forecast usage/demand for a given period usually one year, is

known.

2 ) The usage/demand is even throughout the period.

3 ) Inventory orders can be replenished immediately, there is no delay in

placing and receiving orders

4 ) There are only two distinguishable costs associated with inventory

costs, ordering costs and carrying costs.

5 ) The cost per order is constant regardless of the size of the order

placed.

6 ) The cost of carrying inventory is fixed percentage of the average

value of inventory.

Given these assumptions, EOQ model ignores purchasing costs and stock

out costs. For determining the EOQ formula we shall use the following

symbols:

A = annual demand/usage,

Q = quantity ordered,

O = cost per order,

C = carrying costs per unit,

Given the above assumptions and symbols, the total costs of ordering and

carrying inventories are equal to

TC =QC

+AO

2 Q

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In the equation, the first term on the right hand side is the carrying cost,obtained as the product of average value of inventory holding and thecarrying cost per unit. The second term on the right hand side is the orderingcosts, obtained as the product of the number of orders and the cost per order.The total cost of ordering and carrying is minimized when

The formula may be illustrated with the help of the following data relating

to Ace Company.

A = annual demand/usage/sales = 20,000 units

O = ordering cost per order = Rs. 2,000

C = carrying costs per unit = 25% of inventory value

P = purchase price/unit = Rs. 12

Here carrying cost/unit in is = Rs. 12 X 25% = Rs. 3

= 5,164 units

Graphical Approach of EOQ Model

The economic order quantity can also be found graphically. Figure

illustrates the EOQ function. In figure costs –carrying costs and ordering

costs and total costs – are plotted on vertical axis and horizontal axis is used

to represent the order size. We note that total carrying cost increases as the

order size increases, because on an average a larger inventory level will be

Q =2AO

C

EOQ =2AO

C = 2 X 20,000 X 2,000

3

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maintained and ordering costs decline with increase in order size because

larger order size means a less number of orders. The behavior of total costs

line is noticeable since it is a sum of the two types of costs, which behave

differently with order size. The total costs decline in first instance, but they

start rising when the decrease in average ordering cost is more than offset by

the increase in carrying costs.

The EOQ occurs at the point Q* where the total cost is minimum. Thus the

firm’s operating profit is maximized at point Q*

Total Cost

COST

Carrying Costs

Ordering Cost

Q* Ordering Size

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It should be noted that the total costs of inventory are fairly intensive to

moderate changes in order size. It may be appropriate to say, therefore, that

there is an economic order range, not a point. To determine this range, the

order size may be changed by some percentage and the impact on total costs

may be studied. If the total costs do not change very significantly, the firm

can change EOQ within the range without any loss.

Quantity Discount & Order Quantity

Many suppliers encourage their customers to place large orders by offering

them quantity discount. With quantity discount, the firm will save on the per

unit purchase price. However, the firm will have to increase its order size

more than the EOQ level to avail the quantity discount. This will reduce the

number of orders and increase the average inventory holdings. Thus, in

addition to discount savings, the firm will save on ordering costs, but will

incur additional carrying costs. The net return is the difference between the

resultant savings and additional carrying costs. If the net rerun is positive,

the firm’s order size should equal the quantity necessary to avail the

discount; if negative its order size would be equal to EOQ level.

Let’s assume the following data for a firm:

A = estimated annual demand 1200 units

P = purchasing cost per unit Rs. 50

O = ordering cost per order Rs. 37.50

C = carrying cost per unit Rs. 1

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The firm is offered 0.5% (0.0005) or Rs. 0.05 per unit quantity discount on

order of 400 units or more.

First we will calculate EOQ, assuming that the quantity discount does not

exist

= 300 units

Now, the net return should be calculated for deciding whether the order size

should be increased from 300 to 400 units

The net return is given by the flowing equation:

= Discount savings + savings on ordering costs – additional carrying

costs

= [d X p X a] + O [A/Q* - A/Q’] – [C/2 (Q’ - Q*)]

= [0.005 X 50 X 1200] + 37.50[1200/300 – 1200/400] – [1/2 (400-300)]

= 300 + 37.50 – 50

= 287.50 Rs.

Since the net return is positive, the firm should have an order quantity

of 400 units.

Q* =2AO

C = 2 X 1,200 X 37.50

1

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Reorder Point:

Yet the answer should be sought to the second question, when to order?

This is a problem of determining the reorder point. The reorder point is tat

inventory level at which an order should be placed to replenish the

inventory. To determine the reorder point under certainty, we should know:

a) Lead time

b) Average usage and

c) EOQ

Lead time is the time normally taken in replenishing inventory after the

order has been placed. By certainty, we mean that usage and lead time do

not fluctuaye. Under such a situation, reorder point is simply that inventorty

level which will be maintained for consumption during the lead time. That is

Reorder point= Lead time X Average usage

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Inventory Management in KRIBHCO :

The efficiency of any business activity depends upon having materials

supplies, and equipments available in proper quantity with the proper

quality, at the proper place and time at proper cost. Failure ay any of these

points adds to the costs and decreases the profit.

Being a chemical processing industry, the inventory pattern in KRIBHCO is

very vast and varied. It is therefore, the purpose to lay down the best

practices methods and strategies that are necessary to enable the materials

department to carry out established policies uniformly which will not only

help in reducing the material costs and working capital but also increase the

productivity of the corporation.

Functional Strategies/ Objectives:

a) Evolve and implement a scientific inventory control system to

achieve optimization of inventory levels.

b) Standardize and improve equipment design.

c) Create and sustain computer culture.

d) Bring more common items under centralized procurement system

to get better control.

e) Develop alternate source of supply of materials.

f) Identification and development of vendors.

g) Annual rate contract with the approved vendors for regular supply

of material to reduce the inventory levels of such consumables.

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h) Preservation of materials to avoid damages/ deterioration during

storage.

i) Improvement in purchase procedure for reduction in procurement

lead-time.

To study the inventory management the several of interview techniques

depending on the situations were followed. Discussions were carried out

with various personnel of the company to study the following 3 broad areas.

1. PURCHASE CONTROL

2. STORAGE CONTROL

3. ACCOUNTING CONTROL

A study in KRIBHCO was carried out taking into consideration the concept

of total material control, which significant that efficiency of any

organization is contingent upon having the right material of right quality or

right place in the right quantity at the right time and place.

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Purchase Control:

It involves creative functions such as development of new resources,

introducing new materials and sources in the undertaking etc. It needs

considerable expertise not only negotiating but also in the techniques of

competition and studying of economic trends in respect of materials to be

purchased in large quantity. Every rupee saved by the good purchasing goes

directly in to the profit for the simple reason is that it is not spent at all.

The scope of purchase in Kribhco includes below items.

a) Capital items – like plants and machinery, office equipment, furniture

and fixture, mobile equipment, electrical equipment, communication

equipment, vehicles etc.

b) Row materials and semi finished goods.

c) Consumables items required for the plant and office like tools,

catalysts chemicals and oil lubricant, office stationary and sanitary

items.

d) Spear parts

e) Items required for repairs and maintenance of buildings, plant and

machinery, office equipment.

f) Rate contract for procurement of laboratory glass ware chemicals.

EXISTING PURCHESH PROCEDURE

1. Registration of vendors

An advertisement should be assure in the leading news papers inviting

applications in the prescribed proforma for registration of supplier and

contractors listing out various types of purchase that are likely to be mad

29

during the next three years. The applications received should be

scrutinized by a committee consisting of a representative each from

technical, finance, and purchase department for ascertaining the resources,

capacity and quality of work man ship of the vendor.

The committee can also call the vendors for personal discussions and seek

clarification on the applications and obtain such other information.

Wherever, felt necessary committee can visit vendors work also. The list

of approved vendors sell is updated every three years by using a press

advertisement.

2. Requisition to purchase

The indenters from various departments will raise requisition called the

Material Purchase Request for purchase. It should be insured that the

requisition for purchase should be complete in all respects with regard to,

Each item of purchase shall have a precise, complete and unambiguous

identification. Indenting department is responsible for identification of

items in its indents. Identification sell include the generic name of the

material as recognized commercially and physical dimensions (weight,

size, volume, chemical composition, capacity and other technical

specifications) and code number as relevant.

Required date of delivery

Estimated value and approved budget head

Whether the item is a stock item/non-stock item/capital item

The stores section will raise the requisition for purchase of materials,

which have been declared as stock item, after the quantity in stock has

reached the ‘reorder level’ as determined for the respective items. Such

requisition amongst other particulars should also indicate the ‘maximum’,

30

’minimum’ and ‘re-order’ level, the date on which last supply was

received and the average consumption per month since last purchase.

The requisition for purchase non-stock items will be invariably routed

through the stores section that will endorse on the requisition the

availability/ non-availability. In case the item is available, the quantity

thereof is indicated on the purchase requisition so that the quantity to be

purchased can be adjusted by the head of the purchase dept. in

consultation with the indenters.

The finance & Account dept. would ensure that the purchase requisition

must indicate:

a) The budget provision

b) The amount utilized / committed unto the previous requisition

c) The estimated value of the present requisition (by departmental head),

and

d) The balance available under the budget head after booking the present

requisition.

3. Inquiries/ invitations to bid

On receipt of the requisition from the various indenting departments,

enquiries shall be issued by the purchase dept. as per the procedure detailed.

Inquiries shall be issued in the prescribed proforma(e). The enquiry

document should be suitably modified to conform to the equipments and

materials proposed to be procured. It is important that the inquiry

documents should describe in detail the description of the material, the

technical specifications, and preferred delivery time, various general and

special terms and conditions governing the purchase.

Normally, bids shall be asked in two envelops in cash of the single sage

bidding as below:

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Envelop 1 Earnest Money Deposit

Envelop 2 Base Price Bid as per the Terms and Conditions of ITB and

alternate price bid, if any. Alternate Bids shall be based on the

alternative designs, materials, completion schedule, payment and

other terms and conditions. The alternate bid shall be

considered, if not accompanied with base bid.

Single stage bidding should be issued only when subsequent changes in the

specifications and terms and conditions are not expected.

However, in case of purchase is in which it may be undesirable or in

impracticable to prepare complete technical specifications in advance or

wherever it is deemed necessary, two stage bidding procedure shall be

followed i.e. first inviting technical and un-priced commercial proposal

along with priced bid. These shall be subject to clarifications and

adjustments to be followed by the submission of revised priced bids in the

second step, if required.

In this case bids shall be asked in three envelops as below:

Envelop 1 Earnest Money Deposit

Envelop 2 Technical and commercial un-priced bid

Envelop 3 Base Price Bid as per the Terms and Conditions of ITB

and alternate price bid, if any. Alternate Bids shall be

based on the alternative designs, materials, completion

schedule, payment and other terms and conditions a list of

deviations should be given separately. The alternate bid

shall be considered, if not accompanied with base bid.

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Envelopes shall be opened in seriatim and if conditions of the preceding

envelop are not satisfied, then the succeeding envelope shall not be opened.

4. Time allowed for submission of bids and EMD to be deposited

Normally three weeks time should be given to the vendors for submitting

their bids however, the time limit for submission of bids may be increased

with due consideration of the particular circumstances with the approval of

the competent authority.

(i) For value of purchase up to Rs. 5

lakhs

Nil

(ii) For value o f purchase up to Rs. 10

lakhs for proprietary items

Nil

(iii) For value of purchase up to Rs. 5

lakh (10 lakh`s for proprietary) & up to

Rs. 1 crore

1% of estimated value or Rs. 1

cror, which ever is less

(iv) For value of purchase above Rs.1

crore & up to Rs. 5 crore

Minimum Rs. 1 lakh, 0.75% of

estimated value but limited to

maximum Rs.2 lakh

(v) For value of purchase exceeding Rs.

5 crore

0.5%of estimated value of

purchase limited to Rs. 10 lakh

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5. Quotation Comparison Statement (QCS)

After the tender are opened a QCS of all the bids opened, shall be prepared

by the purchase department. the purpose of bid evaluation is to determine

the cost of each bid to the society in a manner that will permit a comparison

of bids on the basis of their evaluated cost factor, which may be taken into

consideration, include inter-alia the cost of transportation unto each unit

along with other expenditures incidental to the transportation, the payment

schedule, the delivery or time of completion, the operating cost, the

efficiency, the compatibility of equipment, the availability of spare parts.

The bids conforming to the specifications and lowest in value will be rated

in the QCS as lowest (L-1), second lowest (L-2), and third lowest (L-3) etc.

6. Tender Committee

All purchase orders whose individual value does not exceed Rs.10 lakhs,

will be finalized on the basis of the recommendations of the indentor and the

purchase dept. after obtaining the concurrence of the Finance Dept. by

circulation of file. However, in case of purchase order, whose individual

value does not exceed Rs.10 lakhs but are proposed to be procured

stipulated hereunder:

The reviews of QCS and selections of successful bidder in respect of all

purchase orders, whose individual value is above Rs.10 lakhs, will be done

by a tender committee specifically constituted for the purpose in each case.

The tender committee shall be constituted consisting members from

following departments:

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a) Indenting department – department from where the requirement

has come up and for which action is required to be taken.

b) Finance department

c) Purchase department

7. Selection of successful bidder

Normally, the lowest bid, which conforms, to the specifications will be

accepted. However, where the lowest bid even though it conforms to the

specifications is not accepted, full justification for accepting other than the

lowest bid shall be recorded in writing and approval of the competent

authority will be obtained.

While forwarding the recommendations for award of work, the

recommending authority/ tender committee, as the case may be, must ensure

the reasonability of the prices on which the order is proposed to be placed.

In case the bid of the successful bidder is far from the estimated cost, full

justification to be given in the recommendation. Particularly for case where

the prices offered are substantial lower than the estimated cost and no

proper reasons could be ascertained, the amount of the performance security

may be increased.

EVALUATION OF EXISTING PURCHASE SYSTEM OF KRIBHCO:

The existing purchase procedure gives fair chances of competition to all the

vendors. It leaves no room for malpractices or favoritism of employees i.e.

nobody oblige any one out of way. It is not very rigid. In time of urgency of

requirement, competent authority so as to avoid stoppage of work approves

necessary deviations. The procedure is based on democratic way of

working. Good suggestions to improve efficiency are always considered.

35

Various annual rate contract running contracts are entered for regular

consumable items, like oil and lubricants, stationery, chemicals, medicines,

printing job etc. This is reducing the repetitive job times and money of

company.

But there are shortcomings also, which are evaluated taking into

consideration the five essentials of purchase functions are as follows:

(1)Purchase time,

(2)Purchase quantity,

(3)Purchase quality,

(4)Purchase price and

(5)Source of supply

1. PURCHASE TIME

The purchase time indicates the lead-time i.e. time taken to physically

receive the material from the date of its indent.

To find out the lead-time five cases different items have been studied

randomly, and analyzed its fact, which indicates that by following the

existing procedure, the administrative lead-time is very long i.e. 5 to 7

months; while supplier’s lead-time is about 2 to 3 months.

SUGGESTIONS:

(1)Approved vendor list should be maintained so that wastage of time to get

vendor list approved every time could be avoided.

(2)Contract system should be followed to purchase stock items with

approved vendors so that the continuity of supply can be maintained

without following such long procedure and waste of time. It this case the

economic order quantity should determined for each item and a list of

36

order per year with specific time limit should be given to contractors in

advance, fixing the maximum, minimum inventory levels.

(3)For non-stock items, the limits for issuing inquiry should be fixed

maximum to seven days. Similarly time limit for recommendations and

concurrence by technical department and finance department also is

fixed. In case of delay beyond this time limit, competent authority should

be informed for necessary instructions.

2. PURCHASE QUANTITY AND QUALITY:

It has been observed that the quantity of material is being purchased

considering 6 to 12 months consumption that means no economic order

quantity has been fixed for different types of material. Due to the existing

system:

Company is incurring cost of carrying inventory interest of capital rent

etc.

Company is also incurring loses due to the depreciation in quantity,

deteriorations in quality and obsolesce of materials during storage.

o Company is also incurring avoidable expenditure such as holding and

keeping of surplus material, financial losses due to fall in the price of

materials, extra expenditure on excess of materials required.

It is suggested that before taking final decision economic order quantity

should be determined for each item and order should be placed accordingly.

The determination of economic order quantity techniques has been

discussed on succeeding pages.

37

3. PURCHASE PRICE

The price of each item is being compared with supplier’s quotations

considering the quality of material to be supplied. Although, purchase

department should keep itself informed of the price trends, with the help of

market reports, trade papers and journals, report by purchase against and

sales representative of the suppliers, published catalogue and price list.

4. SOURCE OF SUPPLY

The selection of a particular supplier is made after inviting tenders from

possible source of supply. There are four types of tenders commonly used,

which are

(a) Single tender,

(b)Limited tender,

(c) Open tender and

(d)Global tender

The tender received are opened on the date and time stipulated and

compared

SCHEDULE OF SUB-DELEGATION OF FINANCIAL POWERS

Nature of Indents Extend of Powers Remarks

(1) Approval of indents

1.1 Normal stores stock items

a) General Manager

b) Departmental Manager

Full power

Upto Rs. 2 lac in each case

38

1.2 Non stock or restricted

issue items

a) General Manager

b) Departmental Manager

Full power

Upto Rs. 50000/- in each cases.

1.3 Service Contracts

a) General Manager

b) Departmental Manager

Full power Rs. 50000/- in each

cases.

1.4 Capital Items

a) General Manager Full powers

2. Calling for tender

2.1 Open tender

a) General Manager

b) Material Manager

Full powers

Full power for item up to Rs. 2

lac in each cases.

2.2 Limited Tender

a) General Manager

b) Material manager

Full powers

Full power for items valuing up

to Rs. 1 lac

2.3 single Tender

a) General Manager

b) Material Manager

Full power

Upto Rs. 25000/- in each case

3. Acceptance of tender

3.1 Opening tender

a) General Manager

b) Material Manager

Up to Rs. 10 Lac in each case

Upto Rs. 50000/- in each case

3.2 Limited tender

a) General Manager

b) Materials Manager

(i) Normal stock

items

(ii) Non-stock items

c) Supdt. (Purchase)

Up to Rs. 10 lacs reasons to be

recorded for not calling tender

Up to Rs. 50000/- in each cases

Upto Rs. 25000/- in each cases

Upto Rs.10000/- in each cases

39

Purchase office

3.3 single tender

a. General

Manager

b. Material

Manager

Upto Rs. 2 lacs in each case

Upto Rs.25000/- in each case

3.4 Proprietary items

a) General Manager

b) Material Manager

c) Suptd. (purchase)

Upto Rs. 10 lacs in each case

Upto Rs. 50000/- in each case

Upto Rs.10000/- in each case

4. Purchase control at

controlled rates and

analyzed through public

sector agencies

including purchase

against DGS & D.

a. General

Manager

b. Material

Manager

c. Suptd.

(Purchase)

d. General

Manager

Up to Rs. 10 lack in each case

Upto Rs.2 lack in each case

Upto Rs. 50000/- in each case

Full power for purchase of

Naphtha

5. Emergency Purchase

through personal inquiry

a. General Manager Upto Rs. 1 lac in each case

6. Cash Purchase

a. General

Manager

Rs.2500/- on each case.

Total not to exceed 3:5 lacs per

year

40

b. Dy. Manager

Rs. 500/- in each case

7. Repair to Staff

Cars/Jeeps/Buses/Ambul

ance/Truck etc.

a. Manager (Maintenance) Full power total not to exceed

Rs. 4000/- per year for vehicle.

8. Nature of power

a. Supdt. (Mech. Services) Rs. 500/- in each case.

9.Purchase Commitments

(in excess of provision in

the annual budget)

a. General Manager Excess up to 20% of budget

allotment for the individual

items provided and approved

budget main head is not exceed

by more than 5%

All such cases to be

reported to M.D.

10. In absences of

provision in the annual

budget

a) General manager

For items of petty nature Rs.

1000/- in each case provided

total sanction in the year would

not exceed is 10000/-

11. Amendment to

purchase order &

Contract

11.1 where price is effected

a. General

Manager

b. Material

Manager

Full power

Full power

These are subject to

the overall. Limits

given in 3 above.

12. Where price is effected + 10% original contact/purchase Increased in

41

a. General

Manager

b. Material

Manager

order price or Rs. 1 lac

whichever is more.

+5% of the original contract

(Purchase order for Rs. 5000/-

whichever is more)

purchases

order/contract value

to be allowed

Only this will not

cause the approval

budget main head to

exceed by 5%

13. Signing of Purchase

Orders/Contract

a. General Manager

b. Materials Manager

supdt.

(Purchase)

purchase officer

Full powers within his delegated

powers and above Rs. 1 lac with

the approval of M.D.

Upto Rs. 50000/- in each case.

42

Storage Control :

The Store has about 64,663 numbers of items, out of which about 2400

items are ‘ Stock Items ‘. The procurement action of stock items is initiated

by store. The store is spread over in 2 lakhs sq.mtrs. of space, out of which

12000 sq.mtrs is covered area. Normally working hours of store is general

shift hours. However, in case of shut down, emergency service of stores is

made available as requested by user department.

OBJECTIVE OF STORES

To render materials, services to the organization by receiving issuing the

materials, preserving the materials in custody, disposing the scrap/ surplus

materials. The objective is achieved through following function. Stores

function is basically a service function. The main functions of the stores are:

1) To receive all types of (Stock and Non-Stock) materials, to

arrange inspection of materials.

2) To keep materials safe custody, issue of materials to user

departments.

3) To initiate action for procurement of stock items, to keep in

custody and issue to user department.

4) Disposal of Non-moving item, surplus item, and scraps item.

5) Implement stores related policies and functions.

6) Coordinating with different sections for preparation of

capital/revenue budget.

7) Coordinating with other departments for stores related activities.

8) Vendor registration and evaluation for disposal.

9) Identification of different training needs of stores personnel.

43

10) To maintain records/ files of all stores activities, issue

vouchers/ internal stores issue vouchers (ISIV), internal stores

receipt vouchers (ISRV), stock adjustment vouchers (SAV),

material exception reports (MER), claims/ dispatch advice etc.

For convenience in working, the department is divided into three sections

A) Receipt and Inspection Section

B) Custody and Issue Section, and

C) Disposal Section

RECEIPT AND INSPECTION SECTION:

The consignment booked to the society is normally delivered to Stores

‘Receipt Section’ and procedure is following:

1. The person delivering the material in receipt section should

present the copy of Delivery Challan / Invoice or the supply with

details of Purchase Order mention thereon.

At the time of receiving the Material, the concerned staff will

inspect the package for assessing the condition of package. If the

package is in sound condition, a clear receipt is given but in case

of any observation for damage in packing specific remarks are

endorsed on the Challan / Invoice or Lorry Receipt.

2. Such material are kept in the area marked as material awaiting

inspection

3. Such materials are kept in the area marked as material awaiting

inspection.

44

4. The packing is opened and verified for the quantity received. Any

deviation will be recorded for communicating the same to the

supplier and material is shifted to area earmarked as “PENDING

FOR INSPECTION”.

5. SRV is raised for internal accounting indicating reference of the

consignment, number of items and quantity delivered against the

order with respect to the supplies.

6. Receipt Section will inform over telephone to the concerned user

to inspect the material.

7. The material will be offered for inspection to the concern user

department for conforming the quantity and quality of items, as

per PO Inspection Remark /Observation are recorded by the

Inspection Authority on the SRV.

8. a) After inspection, if the material is found of acceptable quality,

the same is recorded in SRV as ‘ACCEPTED’ by the person

inspecting the material. Indenter takes one copy of SRV with him.

b) Accepted material is handed over to Custody Section for

storage along with one copy of SRV.

c) Balance copies of SRV are distributed to Finance and Purchase

Dept.

9. After inspection if the materials rejected in part or full Material

Exception Report (MER) is prepared and sent to supplier with

Indenter, Finance & Purchase Dept., for further action.

10. If the shortage or damage is noticed than MER is prepared giving

details of shortage and damages.

45

If the material covered under KRIBHCO open policy,

Stores prepare provisional claim given details of shortage/

damages and approximate value of claim and sent it to finance for

submission to underwriter. Finance & Account Department

prepares monthly claim and submit to insurance company.

If insurance was under the scope of supplier,

Stores sent MER copy to supplier giving reason of shortage /

damage and rejections to enable him to lodge claim with

underwriter.

After taking material into custody then staff of Store Dep., User Dep., and

Purchase Dep. inspecting the material.

In exercising control on the quality of incoming materials, inspection plays

an important role. Materials purchased in India and abroad are inspected

according to specifications, prescribed tests, drawings, approved samples etc

as stipulated in the purchase order. To inspect different types of materials

following inspection methods are used.

INSPECTION:

(a) Inspection by third party:

Such agencies are EIL cloyed register, IBR; etc. acceptance of

material is based on the certificates and reports of these agencies.

(b) Inspection by indenting departments:

46

At vendors premises during manufacturing of materials or before the

dispatch of the same the concerned officers of indenters carry out

such inspection.

(c) Materials test certificates:

The material may be inspected and accepted based on the

manufactures test certificates.

(d) Materials are inspected and accepted by carrying out chemical,

electrical or mechanical test either of the project site or through the

recognized lab as stipulated in the purchase order.

(e) Some materials like shop, cotton, waste, phenol etc are accepted by

visual inspection. Proprietary nature of materials are accepted by

either visual inspection or carrying necessary tests whenever required.

(f) Materials are also accepted after ascertaining the quality as per

samples on stipulated in the order.

AUTHRITY AND RESPONSIBLITY:

The authority of Receipt and Storage of all type of materials is centralized in

the store department except medicines and stationary. Issue will be made

only on receipt or presentation of authorized requisition.

Stores department is responsible to provide material (through stores issue

voucher) to the authorized requisition on demand, all material declared as

stock items and contained in the store catalogue as the desired and the

quantities requested for immediate use by them.

47

CUSTODY AND ISSUE SECTION:

Main function of custody section is to codify the material. This section is

looking after following functions:

1. Codify all items with 9+1 digit code structure.

2. Receiving and Posting of “Accepted Material” against SRV

and storing at proper location.

3. Preservation of material during storage period.

4. ‘Stock Verification’ reconciliation and updating of stock with

management approval.

5. Issue of material to the user department / contractors as and

when required.

6. Maintenances of accounting for records of each transaction

7. Verification of ‘Material Statement’ for the material issued

against various ‘Work Order’.

8. Reservation of stock for various schemes.

9. Preparation of MPRs for “ Stock Control Items”.

10.Review and Fixing of ‘Stock Level’ for “Stock Control Item”.

11.Direct receipt of bulk material like Steel, Oil, Cement and

Stock Items to avoid double handling.

Procedure for Material Issue:

The issue system relates to function of issue card and inventory control

section of stores. It covers all material stocked by the KRIBHCO stores and

all bulk and raw materials directly stored by the users. It begins with the

48

preparation of issue voucher and ends with their submission to accounts

departments.

1. Materials are issued against SIV, format signed by authorized

persons.

2. SIV and type of transaction will be checked.

3. Quantity on hand and location of the items will be noted on the

SIV for respective item.

4. Quantity to be issued is decided based on type of material

required.

(a) If required material is “Stock Item”, then quantity is issued is

depending on stock available.

(b) If required material is “Non-stock item”, it can be issued fully.

(c) If required material is of ”Reserved material category” then

entire reserved material can be issued to that particular

department.

Procedure for Receiving the Accepted Material in Custody

Section:

1. The materials are received in custody section through two sources

mainly:

- From Receipt Section through SRV and,

- From User Department through ISRV (Material once drawn from

Stores and not consumed or replaced and repaired can be

returned to custody till it is further required for consumption.)

49

2. Quantity mentioned in SRV/ ISRV is checked with quantity

received.

3. The material is shifted to its location as per codes.

DISPOSAL SECTION:

Function of Disposal Section:

1. Receive Surplus material, Scrape, Wastages etc.

2. Ensure that such materials are properly located and stored for

fetching good price.

3. Coordinating the activities of declaring items as surplus, obsolete,

fixing of reserve price for their disposal and obtaining

management’s approval for their final disposal.

4. Initiating appropriate disposal actions through tender, public

auction or through govt. agency hired for disposal on behalf of the

company.

5. Preparation of status report for surplus, scrape material.

Some Definitions:

Non-moving Items: No transaction for last five years

Surplus Items: Non-moving Items declared as not required in nearfuture.

Scrape: Material declared as not useable in plant. This may begenerated during various processes of plant.

Purpose is to describe the steps involved in disposing of the item so that themoney blocked in such type of item can be released as soon as possible.

50

Procedure for disposal of scrap and Surplus Item:

1 Disposable material will be received from following sources,

a) Surplus inventory from Custody Section.

b) Scrap / Wastage From various user departments.

2 The committee is constituted for review either for its alternative use

or suggesting the disposable action with appropriate reserve price.

3 Approval will be obtained from the competent authority for disposal.

4 Consolidated list of disposable item shall be prepared and forwarded

to MSTC (Material Scrape Trading Corp.), agency appointed for

disposal of material.

5 M/s. MSTC will invite the tender on our behalf as per their laid down

procedure. Our representative shall attend the tender opening. M/s.

MSTC will prepare the QCS and recommend the vender to whom

disposal to be made for KRIBHCO approval. KRIBHCO will study

the proposal and if everything is in order, will get necessary approval

from competent authority for disposal. It shall be communicated to

M/s. MSTC who will issue Sale Order/ Delivery Order as per their

procedure.

6 M/s. MSTC will forward a copy of SO / DO to KRIBHCO.

7 Remittance of sale proceeds will be done by M/s. MSTC only other

receipts of such remittent, physical delivery of material would be

made.

51

8 On execution or completion of SO, statement of Accounts will be

forwarded by Stores to Account Section for final settlement of

Vendor’s account.

9 In certain cases, selling the customers, having valid license/certificate

from Pollution Control Board, will make disposal of hazardous

wastes. For such type of disposal permission will be sought from

PCB. Such wastes are:

- Used/ spent oil from plants,

- Used/ spent catalysts from plants,

- Used/ spent automobile batteries from workshop,

- Used/ spent nickel and cadium batteries from plant.

52

STORES FLOW DIMAGRAM

ReceiptSection

Receiving of materials

from vendors, contractors

& other units.

Return of rejected materials to

vendor & dispatch of material

for repairing

Return of material

through ISRV-Inspection of material.

-SRV

-Accepted material.

CustodySection

MPR for stock

item to purchase

Issue of material to

User Dept.

The preservation

of material

Scrap from

plants

Handing over surplus

material for disposal to

Disposal sec.

DisposalSection

Delivery of material sold

to a successful bidder

through MSTC

53

Accounting Control

Inventories are the assets of a company and such as their valuation get

reflected in the balance sheet and profit and loss account. These can be

valued at actual, at the last price paid, on the basis of an average price,

current market price, and so on. A company may adopt a particular method

of inventory valuation, but it is obligatory to follow it for a minimum period

of three years. Any changeover to a new method requires the approval of the

board.

Inventories measured by money value usually constitute the major element

in the working capital of manufacturing companies. Only proper stores

accounting procedure can successfully achieve control of inventory.

A good system of stores accounting is found to be necessary for certain

other purposes like:

a) Preparation of accurate cost accounts

b) Evaluation of purchase performance

c) Working out important management ratio like sales to inventory,

consumption to inventory, purchase to inventory, inventory turnover

etc.

d) Preparation of materials budget

When a material is purchased, received, inspected, and placed in the

stores, an entry is made about the purchase through a Goods Receipt

Voucher. The entry for the quantity received is simple, but the entry for

the value of a purchase is a vexed problem because the value is the sum

of a number of items like:

a) Invoice price

b) Sales tax/ octroi

54

c) Excise duty/ custom duty

d) Insurance

e) Freight, carriage, handling charges etc.

The goods receipt voucher is priced from the appropriate invoice and the

material account is debited in the stores ledger.

Valuation of the Material Issue

The method of valuation followed KRIBHCO is the weighted average

pricing mechanism. In this method the total quantities and total costs are

considered, unlike simple average method where only total costs are

considered. This pricing mechanism is quite advantageous as the price is

fixed for a particular period say for one month and the system takes care of

price fluctuations.

Material requirement planning and vendor rating performance are another

two important techniques used in inventory management and control.

Preparation of Bin Cards

Bin card is ca quantitative stock ledger. It shows the on-line stock position.

Whatever any basic document relating to movement of stores (SIV, SRV,

SAV etc) is punched into system, automatic-posting goes into Bin-Card.

Pricing of Receipts (SRV)

The custody section sends SRV to finance for purpose of pricing. Finance

prices the SRV on the basis of terms and conditions of the purchase order

and bill of vendor. SRV for which bills are not received from the vendor are

valued provisionally at the month end. Preparing a SR amendment voucher

does adjustments for variation in value.

55

Pricing of Issues (SIV)

Issues are valued on monthly weighted average basis. The issue of material

or spare will be valued at monthly weighted average method.

Preparation of Price Store Ledger (PSL)

The PSL is an item wise stores ledger. It shows both quantity and value.

SIGNIFICANCT ACCOUNTING POLICY FOR INVENTORYVALUATION IN KRIBHCO

A. Store, Spares and Packing materials value at cost. Spare, which are,

repaired either departmentally or through agencies are taken into

inventory at a nominal cost of Rs.1/- each. Items of stores and spares,

which are surplus, slow and Non-moving, are valued of cost or net

realizable value.

B. Stock-in-process at the close of the year is valued at lower of cost or

net realizable value.

C. Finish stocks are valued at lower of cost or net realizable

For the purpose of cost, all expanses but excluding,

- Interest received on deposits;

- Past period expanses/ incomes, if any

- Income and expenditure relating to Ammonia Tank Wagons

- Loss/Profit on sales of assets

- Selling and distribution expanses

- Transportation cost up to warehouse

56

- Head office expanses are consider for valuating stocks at Plant and

Warehouse.

D. Stock of Seeds, Chemicals, DAP and damaged goods are valued at

lower cost or net realizable value.

E. Tools issued, except each valuing less than Rs.1000/- are written off

over a period of three years and are stated at depreciated cost. Tools

issued each valuing less than Rs. 1000/- are written off the year

issued.

Inventory Control Techniques:

Inventory control is a term that refers to control of all factors that affecting

the materials. It starts with obtaining materials and ends with consumption.

Material control is a systematic check over procurement, storage and

consumption of materials so as to ensure minimum wastage, even flow of

materials and minimum investment in inventory.

To know the practical use of various inventory control techniques in

KRIBHCO. Following Inventory control techniques were studied and

evaluated are:

1. Codification system

2. Classification of Inventory

3. Standardization

57

Codification system in KRIBHCO

After grouping all items of stores, it will be convenient and useful to codify

each item of stores and give those a distinctive stores code number.

Advantages of a good Coding system:

The principal advantages of a good coding system are as given:

1. Avoids repeated use of long descriptive titles

2. Accurately identifies all items

3. Prevents duplication of items

4. Helps in standardization and reduction of varieties

5. Forms a convenient basis for the sorting and recording of

documents

6. Simplifies mechanical recording

7. Simplifies pricing and costing

8. Useful in locating particular item in store house

Methods of Codification

The different types of codification systems are the following:

1. Alphabetical System:

In this system, letters are chosen to represent particular classes. Where

relatively few classifications are involved, this method can be used. In this

system code are so assigned as to permit easy memorization. For example:

58

Code Items

MSC Machine Screw Copper

MSB Machine Screw Brass

EFLS Electric Fan Large

Switch

EFSB Electric Fan Small

Bearings

2. Simple Numeric Sequence System:

In this system, the serial number is maintained in sequence. Each time a new

type of material is requires the next higher number in the sequence.

Code Items101 1/8” Machine Screw 1”

Long102 1/4" Machine Screw 1”

Long103 1/2" X 10’ Galvanized

pipe

3. The numeric system:

This system is also called group system. In this system the first or basic

numbers indicate specific classes while subsequent digits describe sub-

classification. For instance the basic digits for machine blot may be 36, the

next two digits may be used to designate the diameter. Additional numbers

can indicate the length.

59

Code Items

36181 Machine Bolt, 1/8” dia. 1” Long

363815 Machine Bolt, 3/8” dia. 1.1/2”

Long

If the user of the code can remember that the basic digit 36 designate

machine bolts, the remainder of the code numbers can be easily remembered

as they are dimensions.

4. Decimal System:

In the decimal system, the numbers are so assigned that each digit represents

a sub-group or sub-account of the previous digit. For example, an

automobile manufacturer may assign the number 16 to an assembled wheel.

I in this case the following code numbers may be used to designate

component parts:

Code Item

16.1 Tyres/Tubes

16.11 Valve Stem

16.111 Valve

16.112 Va lve Caps

16.2 Brake Drum

16.3 Nuts

16.4 Discs

60

The main advantage of a decimal system is its capacity for accommodating

new items. Its main advantage is that it becomes cumbersome when a basic

unit may have many major sub-assemblies consisting of many minor

assemblies, which in turn may consists of numerous sub-assemblies.

5. The Block System:

The blocks of numbers are reserved for specify classification. For examples

block numbers 7500 – 7549 may be reserved for basic raw materials, 7600 –

7999 may be reserved for components, parts etc. the assigned numbers are

provided to accommodate subsequent expansion. Many times it happens

that this system lacks the logic behind assigning a particular block numbers

of an item.

6. Combination system:

This system consists of various combinations of numerical or decimal

system. For instances, a manufacturer using various grades and thickness is

of plywood may use the following:

Code Items

PW 181 Plywood 1/8” thick 1 st Grade

PW 142 Plywood 1/4” thick 2 nd Grade

PW 383 Plywood 3/8” thick 3 rd Grade

61

CODIFICATION SYSTEM IN KRIBHCO:

Kribhco is using the nine-digit numerical code system. The tenth digit of

code is being generated by their mainframe computer which a check digit to

prevent duplication of code for a single item.

Out of nine digit code, the first two digits are used to codify the main group

and remaining digit is used to codify other parameters / specifications in that

main group. This main group, for the purpose of codification has been

divided into 01 to 99 for the nine-digit codification system. The same has

been elaborated in details below.

CATEGORYMAIN GROUP

NO.

1. General stores 01 to 49

2. Electrical equipments and spares 51 to 63

3. Instrumentation equipments and spares 64 to 80

4. Mechanic al equipments & spares 81 to 99

62

GENERAL STORES ITEMS (01 to 49)DIGITS

I II III IV V VI VI

I

VIII IX

Main Group

Type/Sub Group

Specifications/Material of

Construction/Thickness/

Other Details

Size of Items/Units

EQUIPMENT & SPARES (51 to

63)DIGITS

III III IV V VI VII VIII IX

x Main Group

Make/Type

x Type of

Equipment/Voltage/Plant

x Service Voltage/KW/HP

x x xSpares/Rating/KW/HP

Specific Spares/Spares/Spare

Parts

63

INSTRUMENTATION SPARES

(64 to 80)DIGITS

III III IV V VI VII VIII IX

x Main Group

Make

x Type of Instrument

x X Units/Sub Assembly/Parts

x x XSize/ Sr. no.

MECHANICAL EQUIPMENT

(81 to 99)DIGITS

I I

I

III IV V VI VI

I

VIII IX

Main Group

Plant Code

Specification/Equipment/Size/Ra

ting

Sub Assembly/Construction

Spareparts/Sr.no.

64

REPAIRED & RETURNED ITEMS

(50)DIGITS

III III IV V VI VII VIII IX

x Main Group

Plant

x Returning Department

x X Original Main Group

X x XSize/ Sr. no.

Examples of codification system:

(A). Code no. 111010040 micrometer range 400 – 500mm

11 – Primary group – Tools.

1 – Type – Measuring and marking tools.

01 – Specific tools / Machine / Equipment micrometer.

0040 – Size / range – 400 to 500 mm.

(B). Code no. 130101250 MS angle 40 x 40 x 5mm. IS226

13 – Primary group – metal Ferrous.

01 – Type of section – Angle Equal.

01 – Units of material – Std. IS226.

250 – Size – 40 x 40 (Thick 5mm)

(C). Code no. 8200109048 Gen. Rotor high speed shaft 101 J

82 – Primary group – Compressors.

0 – Plant – Ammonia

01 – Specific Equipment – 101 J Air Compressors

09 – Sub Assembly – General Unit between L.P & H.P. Case.

04 – sr. No. – Spare item Sr. No.

65

EXAMPLE OF CHECK DIGIT GENERATION:

Code no. 832167851

The computer shall multiply first each digit of above Code no. by 9 i.e.

8 x 9, 3 x 9, 2 x 9, 1 x 9, 6 x 9, 7 x 9, 8 x 9, 5 x 9, 1 x 9

And then sum of each digit shall be added i.e.

= 72 + 27 + 18 + 9 + 54 + 63 + 72 + 45 + 9

= 369

11 will divide the total i.e.

369/11 = 6 is remainder; hence 11-6 = 5 shall be check digit.

The number of digits allotted to the groups in Kribhco codification system is

flexible except in case of main group the utilizations of balance seven digits

may slightly vary depending upon the requirements of materials in a

particular main group. However, the sequence of the main group remains

unaltered. For example, in general sub group follows consumable items,

main group and sub group by specification of materials, materials of

construction and it is followed by size etc. In case of items, other than

general consumables, the main groups followed by make or type of

equipment on plant, then voltage, rating or unit, sub assembly parts

construction size etc. As can be seen the general layout of the digits are

modified according to the requirements to explain the various characteristics

of the items under each primary group in KRIBHCO system. This system is

basically designed for manual working but subsequently has been adapted

on computer by some modification such as check digit addition etc.

66

The existing codification system has the following advantages:

(a) Avoidance of duplication of a code due to multiple names, long

description of the items and storing of the items under different

name is avoided,

(b)Accurate and logical identification,

(c) Reduction in clerical work,

(d)Standardization of items,

(e) Efficient recording and accounting, and

(f) Assure correct and efficient inspection.

LIST OF PRIMARY GROUPS

Primary Group Designation

01 Bearing

02 Coupling and mechanical seal ( V Belt)

03

04 Fasteners

05 Hardware ( other tha n fasteners)

06

07 Gaskets and packing

08

09 Welding material and equipment

10 Abrasives

11 Tools / NDT equipment

67

12 Metallic / Non -metallic hoses & Non -metallic pipe

fittings

13 Metal (Ferrous)

14 Metal (Non ferrous)

15 Pipe and Pipe fittings

16 Flanges I.B.R.

17 Valv es (other than control , Relief )

18 Tubes IBR

19 Pipe and Pipe fitting

20 Flanges – IBR / non IBR

21 Valves (other than control , Relief )

22 Tubes non IBR

23

24 Electrical general stores (other than cable)

25 Cable (p ower and control)

26

27 Instrument Control stores

28 Mechanical items

29 Chemical, catalyst and water treatment resins

30 Lab equipments

31 Paints, oil, lubricants, fuel and gases

32 Round rolled bars

33 Insulation and refractory

34

35 Fire fig hting & safety Equipment

36

68

37 Civil construction materials

38 Bag , bagging materials & containers

39

40

41 Liveries & protective clothing

42 Furniture , furnishing , canteen horticulture &

stationary

43

44

45 Medicine/medical items

46 Proj ect/new scheme items

47

48 Stationary and Related Items

49 Consumable stores (other than those included

elsewhere)

50 D.C. equipment (other than motors)

51 Motor Operated Valves

52

53 Generator

54 Flame proof LGT &ACC

55 Battery charger , Ups

56 Motors

57 M.C.C

58 Heat ing Elements

59 Switch gear

60

69

61 Telephone exchange items

62 Transformer

63 DCS/PLC/PC/DATA/OGR

64 Analyzers

65 Pneumatic instruments

66 Control valve

67

68 Flow instruments

69 Temperature instruments

70 Pressure instruments

71 Level instruments

72 Vibration instruments

73 Elect. Weighing inst.

74 Receiving stations

75 Electronic instruments

76 Field Instruments

77

78 Instrument electronics

79 Calibrating / WS Instruments

80 Relief valve / Repture disc.

81

82 Compressors, turbines, fans & blowers

83 Conveyors & Elevators

84

85 Exchanger and Spares

86 Engines

70

87 Furnace & boilers

88

89 Gear box (other than compressor gears)

90

91 Material handling equipments (other than

conveyors & elevator)

92 Mobile equipments & roll stock

93

94 Pumps & ejectors

95 Surplus items of coal handling

96 Pressure Vessels / Columns / Tower / Tanks &

Spares

97

98

99 Special equipment

71

EXISTING CLASSIFICATION SYSTEM

The existing classification system is based on its use, i.e. inventories

classified as stock items and non-stock items. The existing system keeps

strict control on the item that is of recurring nature. It takes in to

consideration only the amount use of quantity not in value. While for non-

stock item low control is being kept. This system has following

shortcomings.

The classification gives importance to only those items, which are

of recurring natures. It excludes from the control point of view the

items that are high value in stock.

It considers the quantity used not the money value of the material

used.

Control kept on stock items a give equal weightage to all items,

which neglects the benefit of selective control technique.

Considering the practical use of classification techniques, two important

methods are suggested as follow.

(1) ABC classification and

(2) VED classification

72

ABC Inventory Control System

It is not desirable to keep the same degree of control on all items. That is

why to pay maximum attention to those items where value is the highest.

The firm should; therefore, classify inventory to identify which items should

receive the most effort in controlling. The firm should be selective in its

approach to control investment in various type of inventory. This analytical

approach is called the ABC analysis and tends to measure the significant of

each item of inventory in terms of its value. The high items are classified as

‘A items’ and would be under the tightest control. ‘C items’ represent

relatively least value and would be under simple control. ‘B items’ fall in

between these two categories and require reasonable attention of

management. The ABC analysis concentrates on important items and is also

known as control by importance and exception. A the items are classified in

the importance of their relatively value, this approach is also known as

proportional value analysis.

The following steps are involved in implementing the ABC analysis.

Classify the items of inventory, determining the expected use in units

and the price per units for each items,

Determining the total value of each item by multiplying the expected

units by its units price,

Rank the items in accordance with the total value, giving first rank to

the item with highest total value and so on,

Compute the ratios (percentage) of number of units of each items to

total units of all items and the ratios of total value of each item to total

value of all items,

Combine items on the basis of their relative value to form three

categories – A, B, and C.

73

The following data in table and figure illustrates the ABC analysis.

The tabular presentation and graphical presentation indicate that ‘Item A’

forms a minimum proportion, 34 % of total units of all items but represents

the high value, 70 % on the other hand, Item C represents 51% of the total

units and only 10% of the total value. Item B occupies the middle place.

Item A and B jointly represents 90% of the investment more than half of the

total units are Item C, representing merely 10% of the investment. Thus, a

tight control should be exercised on Item A in order to maximizing

profitability on the investment. In case of Item C simple control will be

sufficient.

ItemCode

Number ofItems

% Of TotalItems

Cumulative%

Total Cost(Rs. in Lakh)

% Of TotalCost

Cumulative%

82 5523 7.74 7.7 226,309,020 27.11 27.129 647 0.91 8.6 100,267,828 12.01 39.194 5124 7.18 15.8 53,426,401 6.40 45.566 3080 4.32 20.1 44,882,084 5.38 50.999 4230 5.93 26.1 41,841,258 5.01 55.919 2697 3.78 29.9 34,913,172 4.18 60.187 775 1.09 30.9 33,675,623 4.03 64.121 1193 1.67 32.6 25,021,514 3.00 67.163 940 1.32 A 33.9 21,532,100 2.58 69.795 1106 1.55 35.5 16,977,732 2.03 71.785 721 1.01 36.5 16,839,903 2.02 73.880 567 0.79 37.3 15,766,583 1.89 75.613 343 0.48 37.8 13,278,019 1.59 77.224 3187 4.47 42.2 12,575,502 1.51 78.792 4901 6.87 49.1 10,689,130 1.28 80.064 1187 1.66 50.8 9,960,242 1.19 81.296 694 0.97 51.8 8,725,704 1.05 82.32 1111 1.56 53.3 7,642,759 0.92 83.2

25 199 0.28 53.6 7,638,657 0.92 84.178 742 1.04 54.6 7,138,137 0.86 84.956 865 1.21 55.8 6,554,928 0.79 85.71 743 1.04 56.9 6,437,389 0.77 86.5

72 165 0.23 57.1 6,064,561 0.73 87.297 254 0.36 57.5 5,635,064 0.68 87.976 561 0.79 58.3 5,389,911 0.65 88.5

74

17 155 0.22 58.5 5,373,150 0.64 89.215 620 0.87 B 59.3 5,338,504 0.64 89.883 383 0.54 59.9 4,833,741 0.58 90.47 1020 1.43 61.3 4,828,236 0.58 91.0

75 659 0.92 62.2 4,517,305 0.54 91.565 269 0.38 62.6 4,049,367 0.49 92.071 449 0.63 63.2 3,990,338 0.48 92.520 531 0.74 64.0 3,871,128 0.46 93.033 137 0.19 64.2 3,869,231 0.46 93.491 503 0.71 64.9 3,387,996 0.41 93.855 917 1.29 66.2 3,093,044 0.37 94.24 1178 1.65 67.8 3,042,784 0.36 94.6

59 415 0.58 68.4 2,866,525 0.34 94.970 464 0.65 69.1 2,713,524 0.33 95.227 1037 1.45 70.5 2,655,391 0.32 95.574 433 0.61 71.1 2,650,374 0.32 95.949 309 0.43 71.5 2,530,223 0.30 96.211 3346 4.69 76.2 2,485,270 0.30 96.535 610 0.86 77.1 2,330,417 0.28 96.737 259 0.36 77.5 2,190,003 0.26 97.051 124 0.17 77.6 2,105,142 0.25 97.389 234 0.33 78.0 2,023,913 0.24 97.557 673 0.94 78.9 1,987,059 0.24 97.79 274 0.38 79.3 1,983,241 0.24 98.0

86 323 0.45 79.7 1,982,734 0.24 98.231 266 0.37 80.1 1,906,940 0.23 98.469 388 0.54 80.7 1,810,356 0.22 98.768 238 0.33 81.0 1,639,936 0.20 98.953 132 0.19 81.2 1,592,086 0.19 99.042 1717 2.41 83.6 1,422,376 0.17 99.214 64 0.09 83.7 1,397,721 0.17 99.462 194 0.27 83.9 1,234,185 0.15 99.538 8 0.01 84.0 978,834 0.12 99.730 1147 1.61 85.6 762,424 0.09 99.779 123 0.17 85.7 527,992 0.06 99.816 110 0.15 85.9 450,855 0.05 99.912 77 0.11 86.0 373,832 0.04 99.958 27 0.04 86.0 255,524 0.03 99.998 61 0.09 86.1 148,988 0.02 100.010 62 0.09 86.2 98,556 0.01 100.05 34 0.05 86.3 73,945 0.01 100.0

73 41 0.06 86.3 71,639 0.01 100.088 192 0.27 86.6 50,024 0.01 100.054 50 0.07 86.7 44,886 0.01 100.047 614 0.86 87.5 39,105 0.00 100.0

75

22 1 0.00 87.5 0 0.00 100.028 3 0.00 87.5 0 0.00 100.040 1 0.00 87.5 0 0.00 100.041 75 0.11 87.6 0 0.00 100.045 4825 6.76 94.4 0 0.00 100.046 3 0.00 94.4 0 0.00 100.048 3426 4.80 99.2 0 0.00 100.050 194 0.27 99.5 0 0.00 100.061 3 0.00 99.5 0 0.00 100.090 371 0.52 100.0 0 0.00 100.093 1 0.00 C 100.0 0 0.00 100.0

TOTAL 71325 100 834,762,064 100

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

0 10 20 30 40 50 60 70 80 90 100 110

Cumulative%ofTotalValue

Cumulative % of Total Items

ABC analysis

Cumulative %

76

ADVANTAGE OF ABC CLASSIFICATION:

This approach helps the material manager to exercise selective control and

focus his attention only on a few items, when he is dealing with lakhs of

store items. Concentrating on all items it is likely to have diffused effect

irrespective of the priorities. It provides a sound basis on which to allocate

resources and time of personnel with respect to their importance of the

individual items.

For control purpose, in Kribhco the total inventory has been classified into

ABC classes. They exercise control over these classes as their relative value

proportion in ABC classes to avail the benefits of selective control. They

don’t have the exact classification as we have in analysis. But they know

which item should have maximum attention and which should minimum,

after experience and regular review of inventory.

PURPOSE OF ABC CLASSIFICATION

The object of carrying out ABC classification is to develop policy

guidelines for selective control. Normally, once A.B.C. classification has

been done the following broad policy guidelines can be established in

respect of each category.

77

Guideline to Control Inventory under ABC Classification

Sr.no. A-ITEMS B-ITEMS C-ITEMS

1. Very strict control Moderate control Least control

2. No safety stock or

low safety stock

Low safety stock High safety stock

3. Purchase based

on exact

requirement

Purchase based

on exact

requirement

Purchase based on

exact estimation

4. Close check on

physical stocks

Reasonable

ch ecking

Little check

5. Develop as many

sources as

possible

Two or more

Reliable

resources

Two reliable

resources

6. Maximum efforts

to reduce lead -

time

Moderate efforts

to reduce lead -

time

Minimum efforts to

reduce lead -time

VED Classification

The VED classification is applicable largely to spare parts. Stocking of

spare parts will be based on strategies different from those for raw materials,

because their consumption pattern is different; while the consumption of

raw materials depends directly on the market demand of production while

the demand for spare parts depends on the performance of the plant and

machinery. Therefore, the method of classification designed for one type of

inventory will not be compatible for selective control of another type of

inventory to over come this draw back the VED classification is used.

78

Spares are classified as vital, essential and desirable. This implies that V

(vital) classes of spares have to be stocked adequately to ensure the

operation of the pant, because by definition the non-availability of vital

spares can cause havoc and stop the wheels of the organization. Some risk

can be taken in the case of E (essential) class of spares. Stocking of D

(desirable) spares can be even done if the lead-time for their procurement is

law. It is essential that those in charge of the maintenance of the plant do by

technical department or this classification. This classification will be very

useful to KRIBHCO if it is implemented.

Moreover, ABC and VED classification can be a combined advantage, in

order to control the stocking of spare parts. The control action for the class

AV, BE, CD, etc are given in following table.

CLASSES

V Item E Item D Item

A Items Constant

control &

regular follow

up

Moderate stock Nil stock

B Items Moderate stock Moderate stock Very low

stock

C Items High Stocks Moderate stock Low stock

79

Composition of Total Inventory

I n v e n t o r y C o m p o s i t i o n

o th e r s0 %

S te e l2 %

In s t r u m e n ta t i on S p a r e s (6 4

to 8 0 )1 4 %

E le c t r i c a lS p a r e s (5 1 to

6 3 )2 %

L o o s e T o o ls0 %M e c h a n i c a l

S p a r e s (8 1 to9 0 )

5 3 %

G e n e r a lS to r e s (0 1 to

4 9 )2 9 %

Group Rs. Percentage(%)

General Stores (01 to 49)238,615,997.30 28.72

Loose Tools2,485,269.93 0.30

Steel14,675,739.14 1.77

General items (01 to 49)255,777,006. 37 30.79

Electrical Spares (51 to63) 19,703,379.19 2.37Instrumentation Spares(64 to 80) 116,935,866.30 14.07Mechanical Spares (81 to90) 438,361,542.64 52.76Others

50,023.81 0.01Insurance Spares (51 to99) 575,050,811.94 69.21Total Inventory

830,827,818.31 100.00

80

Analysis of Inventory Composition

As we can see from the chart Mechanical Spares form a large part of the

total inventory it is about 53% of total inventory. Thus it is a matter of great

concern for the management to reduce its level. It is also necessary for them

to manage this group very effectively and efficiently. The second largest

group is general stores. These items are major falls in B class

Standardization

A standard is a norm or a model or a general agreement of a rule

established by authority, consensus or custom, created and used by various

levels of interest. The object of standard is to bring about uniformity in a

certain sphere to create a certain habit, pattern, system or rule.

Standardization is the process of defining as to what would be the norm.

One of the reasons for high inventory in a large number of organizations is

that they keep large number of items under stock having very little variation

in dimension, quality or functional effectiveness. It, therefore becomes

necessary for the organization to resort to standardization thereby reducing

varieties without much affecting the performance and thereby reduction in

inventory.

81

The process of standardization logically leads to simplification or variety

reduction which implies reducing unnecessary varieties and standardizing

the most economical sizes, shapes, colors, types and so on. Fewer the items

to be controlled, the simpler and more efficient is the materials management

process.

One of the main advantages that accrue from codifying materials in stock is

that once immediately notices a large variety of materials similar to one

other. Standard parts are those, which can be used, in different products.

Examples of standard parts are ball and roller bearings, bolts, nuts; screws

etc. as far as possible, standard parts should be used as they are more readily

available and are usually cheaper.

Example of Standardization

There are varieties of blue paints such as sky blue, azure blue, deep sea blue

and so on, but we have to standardize one shade for its purposes unless a

variation is really necessary.

It is suggested that KRIBHCO should follow the standardization technique

to gain above said benefits.

82

SUGGESTIONS

Considering the entire situation discussed above following points should be

taken in to consideration for the effective Inventory Management.

First taking into consideration the purchase control of KRIBHCO,

they should introduce Vender Performance Rating system for vendor

development and to spot out good reliable source of supply.

As I have visited the dockyard, where the most of the scrape,

wastages, and obsolete items are being stored, it is necessary for them

to reduce the disposable items and should make cash out of it as soon

as possible.

Their codification system is really good but as far as main group is

concerned. They should modify the system as such that it can

accommodate more main group, if the necessity arises. E.g. main

group101 for newly invented spare part.

In addition to ABC classification, they should introduce other widely

used classification systems also so as to have greater control over

inventories like VED analysis and FSN analysis.

The production planning should be done according to the demand so

that there should not be over stock during off-season and stock out

during the season.

The investment in stores and spare parts Inventory should be kept as

law as possible, considering demand of stores and spare parts.

Optimum planning should be maintained in transportation to reduce

storage of finished product (Urea), which reduces warehousing cost.

Reduction in material handling as far as possible.

83

Conclusion

The inventory of Kribhco is about 6-7% of the total assets. Hence it is

requires the due attention. As stated earlier the main inventory of

KRIBHCO is Mechanical Spares, which are proprietary type of items in

most of the cases. These items are costly and having one or two sources of

supply. The management is now more focused on reducing the level of

mechanical pares.

The inventory of stores and spares has more than 6000 items and are being

managed by material/purchase department. Because of the use of

codification and computerization the management of these inventories is

carried out very well. Codification helps in identification of an item and in

standardization, where as computerization assists in carrying out various

inventory related analysis and identifying non-moving items.

As they have already established standards of levels for some items and for

other items they have like a fluctuating level system supported by computer

technology, which updates levels whenever new price for a material is

entered into system. That is why it can be said that they have scientific ways

to manage inventory properly with the help of scientific inventory

management control system.

84

Bibliography

C.R. Kothari, Research Methodology, Wishwa Prakashan, 2nd Edi.

New Delhi.

Other references:

o Pandey I. M., Fundamentals of Financial Management

o Prasnna Chandra, Financial Management

Financial Reports of KRIBHCO, Year 2006-07, 2007-08

Website: http:/www.kribhco.com

http:/www.kribhco.net

http:/www.kribhco.org