materials mgt and inventory control mgt
Post on 24-Mar-2015
551 Views
Preview:
TRANSCRIPT
CONTENTS
CHAPTER No.
PATRICULARS PAGE No.
1 INTRODUCTION Introduction to the Topic 6 Organization profile 9 Statement of Problem 16 Objective of the study 17 Need and significance of the study 18 Scope of the study 19 Limitations of the study 20
2 REVIEW OF LITERATURE 22
3 RESEARCH METHODOLOGY Research Design 55 Data Collection Methods 56 Period of the study 57 Analysis Tools 57
4 DATA ANALAYSIS AND INTERPRETATION
60
5 SUMMARY OF FINDINGS 103 SUGGESTIONS AND
RECOMMENDATIONS104
6 CONCLUSION 106
APPENDIXES
BIBLIOGRAPHY
LIST OF TABLES
1
TABLE No. PARTICULARS PAGE
No.
1 Components of Inventory 60
2 Material Cost Index 62
3 Material Cost to Sales Index 64
4 Indigenous Material Cost Index 66
5 Import Material Cost 68
6 Manpower Strength Index 70
7 Manpower Cost 72
8 Comparison of Sales and Closing Inventory 74
9 Inventory Turnover Ratio 76
10 Nonmoving Inventory 78
11 Slow moving Inventory 80
12 Fast moving Inventory 82
13 Order Cost Index 84
14 Handling Cost Index 86
15 Purchase Efficiency 88
16 Sales/Purchase Index 90
17 Work-in-progress Index 92
18 Comparing Movements of Inventories 94
19 EOQ 96
20 ABC 98
21 XYZ 100
LIST OF GRAPHS
2
GRAPH No. PARTICULARS PAGE
No.
1 Components of Inventory 61
2 Comparison of Material and Production
Cost
Material Cost Index
63
3 Comparison of Material Cost and Sales
Value
Material Cost to Sales
65
4 Comparison of Material and Index Material
Cost
Indigenous Content Index
67
5 Comparison of Import and Material Cost
Imported Index
69
6 Manpower Strength Index 71
7 Manpower Index 73
8 Sales/Closing Inventory Index 75
9 Inventory Turnover Ratio 77
10 Nonmoving Inventory 79
11 Slow moving Inventory 81
12 Fast moving Inventory 83
13 Order Cost Index 85
14 Handling Cost Index 87
15 Purchase Efficiency 89
16 Sales/Purchase Index 91
17 Work-in-progress Index 93
3
18 Comparing of Inventory Movements 95
19 EOQ 97
20 ABC 99
21 XYZ 101
4
CHAPTER-1INTRODUCTION
1. a. INTRODUCTION TO THE TOPIC
Materials are any commodities used directly or indirectly in
production a product or service such as raw materials, component parts,
assemblies and supplies. In the manufacturing organizations, the important
inputs are referred to as 5 Ms. Viz., Men (Labour), Machines, Money,
Materials and Methods. The relative importance among these five Ms has
5
shifted from time to time. In the beginning of industrialization the focus was
on machines, men (labour) and methods, but in recent years (from 1970
onwards) the emphasis is on materials. Material is an important and
inevitable input of a production system since the cost of materials and cost
on materials (cost incurred in purchasing and storing the materials) put
together account for 50% to 85%of the production cost depending on the
nature of the product and the type of the production system.
The dictionary meaning of the word “Inventory” is stock of goods.
The classical definition of inventory is that it is an idle resource of any kind
having an economic value. From this it follows that we can identify
inventory as those material which are procured, stored and used for the day-
to-day functioning of the organization. The definition of any kind of idle
resource can be extended to input materials, semi-finished goods, finished
goods, capital equipment, floor space, manpower inventory, etc, in which the
top management is interested in optimizing the resource utilization.
To the financial executive, inventory connotes the value of raw
materials, consumables, spares, work-in-progress and finished goods in
which the company’s working capital funds have been invested. He is wary
of the term, because inventory represents to him an idle looking of capital,
without any immediate return. In contrast the production manager will react
violently when he hears of inventory and its lack has been the root cause of
his idle time. The marketing manager, who claims that the customer is the
king, will complain of the drying up of the distribution channel and lay the
blame on the shortage of finished goods inventories. Under these conditions,
the inventory manager has to do tight rope walking exercises. On the one
hand, he has to stock raw materials, components, consumables, spares,
6
packing material, work-in-progress and finished goods so that the production
and marketing lines are fed regularly. Simultaneously, on the other hand, he
has to reduce the idle capital invested in inventory to please the financial
manager and the top management.
Material expenditure in different manufacturing industries may differ.
But it does not minimize the importance of material management. It in fact
lies in effective savings in the materials expenditure. Even a small change in
the materials cost can lead to a substantial saving or avert a heavy loss or
push the enterprise towards a heavy loss or adversely affect the profitability
of the concern.
Factors:
1. The cost of holding the stock (based on the interest rate),
2. The cost of placing an order (for raw material stocks).
3. The cost of storage.
Methods:
1. Visual control enables the manager to examine the inventory visually
to determine if additional inventory is required.
2. Tickler control enables the manager to physically control a small
portion of the inventory each day on a regular basis.
7
3. Click sheet control enables the manager to record the item as it is
used on a sheet of paper.
4. Stub control (used by retailers) enables the manager to retain a portion
of the price ticket when the item is sold.
By doing so, we can effectively and efficiently manage the inventories
to execute the proper activities of the company.
1. b. ORGANISATION PROFILE
Bharat Heavy Electrical Ltd., (BHEL) is the largest engineering
and manufacturing enterprise of its kind in India and is one of the leading
international companies in the field of power equipment manufacture. The
first plant of BHEL was set up at Bhopal in 1956, which signaled the dawn
8
of the Heavy Electrical Industry in India. In the early sixties, three more
major plants were set up at Haridwar, Hyderabad and Tiruchirappalli, which
form the core of the diversified range, systems and service the BHEL offers
today.
BHEL range of services extends from project feasibility studies to
after-sales-service successfully meeting diverse needs through turnkey
capability. The company has 14 manufacturing units, 4 power sector
regional centers, 8 service centers and 18 regional offices besides project
sites spread all over India and abroad. The company has formed a Strategic
Business Unit for Ceramics at Bangalore. BHEL is today the largest
engineering and manufacturing enterprise of its kind in India, with a well
recognized track record of performance, making profits continuously since
1971 – 72 and paying dividends since 1976-77. BHEL manufactures over
180 products under 30 major product groups and caters to core sectors of the
Indian economy viz., Power Generation and Transmission Industry,
Transportation, Telecommunication, Renewable Energy, etc.
The quality & reliability of its products is due to the emphasis on
design, engineering and manufacturing to international standards by
acquiring and adapting some of the best technologies from leading
companies in the world, together with technologies developed in its own R
& D centers. BHEL has acquired certifications to both ISO 9000 & ISO
14000 standards for its operations and has also adopted the concepts of Total
Quality Management. BHEL has adopted Occupational health and safety
standards as per OHSAS 18001. Two of its divisions have acquired
certification to OHSAS 18001 standard and the other units are in the process
of acquiring the same.
9
VISION
BHEL’s vision is to make a world – class engineering enterprise
committed to enhancing share holder value.
MISSION
BHEL mission is to be an Indian multinational engineering enterprise
providing total business solutions through quality products, system and
service in the fields of energy, transport, infrastructure and other potential
areas.
VALUES
Zeal to excel and zest for change.
Integrity and fairness in all matters.
Respect for dignity and potential of individuals.
Strict adherence to commitments.
Ensure speed of response.
Foster learning, creativity and team work.
Loyalty and pride in the company.
NATURE OF THE BUSINESS
BHEL’s operations are organized around three business sectors,
namely power industry including Transmission, Transportation,
Telecommunication & Renewable Energy and International Operations. This
10
enables BHEL to have a strong customer orientation, to be sensitive to his
needs and respond quickly to the changes in the market.
BHEL has supplied
Equipment for over 90,000 MW of power generation – for utilities,
captive and industrial uses.
Over 25,000 Motors with Drive Control Systems to Power Projects,
Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement
Plants etc.
Over one million Valves to Power Plants and other industries.
BOARD OF DIRECTORS (LIST)
1. Ashok K. Puri, Chairman & Managing Director
2. A.K. Mathur, Director (IS&P)
3. K. Ravikumar, Director (Power)
4. C.P. Singh, Director (Finance)
5. N.K. Sinha, Company Secretary.
ORGANISATION CHART OF BHEL, BAP, RANIPET
11
BUSINESS OPERATIONS (LIST OF BRANCHES):
High Pressure Boiler plant - Trichy
Heavy Electrical Plant - Bhopal
Industrial Valves Plant - Govindaval
12
Heavy Electrical Equipment plant - Haridwar
Central Foundary Forge Plant - Haridwar
Heavy Equipment plant - Haridwar
Electronic Division - Bangalore
Industrial Insulted Plant - Jagdispur
Component Fabrication plant - Rudhrapur
Silicon Solar Cell Plant - Gurgon
Heavy Equipment repair Plant - Varanasi
PRODUCT PROFILE:
Electro Static Precipitator (ESP)
Air Pre Heater (APH)
FANS
Heat Exchangers
Desalination plant
Wind Electric Generators
Dampers for Louvers
Gates (Hot Air)
COMPETITORS:
ABB
SIEMNES
13
GEC
VOLTAS
MAJOR IMPORTS FROM ABROAD:
AB Sandirk, Sweden.
Hyundai, South Korea.
Reiner Brach, Germany.
Ferromex, Belgium.
Metal one, Japan.
Ducon technologies, USA.
MAJOR SUPPLIERS IN INDIA:
Steel Authority of India
The Indian Iron Steel Co. Ld
Tube Investment of India
Dynalog (India) Ltd
Controls & Switch Gear Co.
Delton Cables
Tata Iron & Steel Co. Ltd
Super Forgings & Steels Ltd
Bhushan Steel & Strips
Jindal Steel & Steels
Uttam Galva Steels Ltd
MAJOR CUSTOMERS:
14
State Electricity Board
Tata Iron & Steel Co. Ltd
Jindal Steel & Steels
Hindustan Zinc
Bhushan Steel & Strips
Saint Gobin
National Thermal Power Corporation
Walchand
1. c. STATEMENT OF PROBLEM
The topic is chosen because in today’s context most of the
organization faces problem due to improper materials and inventory control
management.
15
BHEL is the largest engineering and manufacturing industry, this
project will help them in order to know their current level inventory control.
In turn, it helps the company to implement new selective inventory control
techniques to improve their inventory efficiency and business results.
1. d. OBJECTIVES OF THE STUDY
1. To reduce working capital requirements through proper and scientific
inventory control.
2. To increase the competitiveness of manufactured goods by reducing
their prices through cost reduction and value analysis.
16
3. To improve the quality of manufactured goods by the use of better
raw materials or components.
4. To offer the suggestions to overcome the problems that have
experienced in the inventory management for better improvement.
5. To ensure an uninterrupted production or operation, by maintaining a
steady flow of material.
1. e. NEED AND SIGNIFICANCE OF THE STUDY
1. The importance of material management cannot be over-emphasized
in this complex industrial world.
2. It affects not only a particular industry but the entire economic
activity of a whole nation.
17
3. Reduction in the materials cost of about 5% is always possible
through an efficient management of materials. It saves 5% of the total
cost of the final product.
4. The materials forms the largest single expenditure item in the most of
the manufacturing organization from the inventories usually represent
60%-70% of the total cost of the final product.
5. Even a small change in the material costs can lead to a substantial
saving or push the enterprise towards a heavy loss or adversely affect
the profitability of the concern.
1. f. SCOPE OF THE STUDY
The main aim of the study is to control the inventory management
system and materials of the firm by implementing the control methods of
inventory and the suggestions that are given for the moderate level of
inventory turnover ratio will maximize the profit in future.
18
1. g. LIMITATIONS OF THE STUDY
1. The study covers only for a period of five years.
2. The study is based on secondary data which are already stored in the
database of the company.
19
3. The results may be different under new environment with the changes
in the management policy.
4. The results of the study will not be applicable to all public sector
organization.
5. Moreover the control on material management is not an easy task, it is
a complicated one.
20
CHAPTER-2
REVIEW OF
LITERATURE
INTRODUCTION TO MATERIALS MANAGEMENT
Material management is the important part in any organization. The
task of maintaining of materials is done by stock and inventory manager.
Material management should be done so that shortage of raw material should
be avoided in the organization. In various like manufacturing companies
21
most of the expenditure is incurred on material management. A separate
department is set up under the leadership of material management manager
who coordinates his subordinates for the proper maintenance of the material.
Materials management is one of the areas covered by the whole
process of management. For a balanced growth and effective running of the
enterprise, it is necessary that material cost, material supply and material
utilization are so controlled that they lead to
Maximization of production,
Reduction in the cost of production and distribution and
Maximization of the profit.
Materials management helps in reducing materials cost, preventing huge
amount of capital being locked up for a longer period, improving the capital
turnover ratio and achieving higher profitability.
Material management embraces all functions concerned with ordering,
storage and movement of material. It embraces all activities performed by
purchasing, production control, stores, traffic, and physical distribution.
MEANING
Materials in the form of raw materials and semi-finished goods are of
great significance for the success of an enterprise. These can directly affect
the efficiency of a system. It is observed that irrespective of the size of an
enterprise, the expenditure on materials is a major item of the budget. In
22
many cases material consumption varies from 25% to 75% of sales turnover.
The expenditure made on materials is money invested in inventories, cost of
storage, transportation costs, insurance, wastage etc. because of the
magnitude of expenditure required in acquiring and controlling materials and
their impact on profits, a great deal of attention is required towards the
management of operations associated with materials.
While managements have long been aware of the fact that
manufacturing and marketing are the two main activities of an enterprise but
of late there is a feeling for a third basic economic activity known as
materials management. Like manufacturing and marketing in material
management also, capital is employed and costs are incurred to produce
something of economic value.
DEFINITIONS
Bailey and Farmer define materials management as, “the
management of flow of materials into an organization to the point
where these materials are converted into the firm’s end product”.
23
Materials management is a term used to connote “controlling the kind,
amount, location, movement and timing of various commodities used
in production by industrial enterprise”.
Material management is the planning, directing, controlling and co-
ordinating those activities which are concerned with materials and
inventory requirements, from the point of their inception to their
introduction into the manufacturing process. It begins with the
determination of materials quality and quantity and ends with its
issuance to production to meet customer’s demand as per schedule
and at the lowest cost.
CLASSIFICATION OF MATERIALS
The materials manager is responsible for classifying the materials
before they are sent for inspection, entered into the stock ledger, and binned.
Therefore, broad classification of materials according to their nature, use and
service becomes essential before the job of identification is undertaken.
1. Raw materials
2. Purchased Components
3. Work-in-progress
4. Finished Goods
5. Spares
6. Consumables
7. Machinery and Equipment
8. Inflammables
9. Chemicals
10. Furniture
11. General Stores
24
12. Scrap Materials
13. Packing Materials
14. Fuel stock
COST REDUCTION TECHNIQUES FOR MATERIALS
The need for cost reduction of materials and inventories is too obvious
for any explanation, as material cost account for 60% of cash outflow and
inventory is the single largest asset in many companies. Cost does not
Occur, but is Incurred. Cost is a fact while price is an opinion depending
upon market situation, according to the fundamentals of financial
management. Cost control aims to establish norms and control the costs at
the desired norms, whereas cost reduction tries to reduce the established
norm itself by applying various cost reduction techniques. Needless to
emphasize, the cost of the cost reduction techniques should be
commensurate with the benefits.
There are both internal and external factors which influence inventory
decisions in any organization. The external factors arise from demand,
supply, price, availability, market conditions, credit availability,
import/export policies, fiscal/monetary/taxation policies, governmental
regulatory mechanism, etc. To combat the market conditions, we have to
adopt scientific forecasting and planning techniques.
The internal factors include cost, criticality, availability, usage,
forecasts, procedures, systems, delegation of powers, lead time, inspection
infrastructure facilities, inter-department relationships; corporate scenario,
technical know how, skill mix inventory department, motivation, morale of
25
staff follow-up mechanisms, computerization, ability to identity location of
the in transit material or location of stores material, external opportunities,
threats, etc.
OBJECTIVES OF MATERIAL MANAGEMENT
Material management contributes to survival and profits of an
enterprise by providing adequate supply of materials at the lowest possible
costs. The fundamental objectives of materials management activities can
be:
1. Material selection: A correct specification of material and
components is determined. Also the material requirements in
agreement with sales programme are assessed. This can be done by
analyzing the requisition order of the buying department. With this
standardization one may have lower cost and the task of
procurement, replacement etc. may be easier.
2. Low operating costs: it should endeavour to keep the operating
costs low and increase the profits without making any concessions
in quality.
3. Receiving and controlling material safely and in good condition.
4. Issue material upon receipt of appropriate authority.
5. Identification of surplus stocks and taking appropriate measures
to reduce it.
ADVANTAGES OF MATERIAL MANAGEMENT
Material management department plays a vital role in the success of
an enterprise. A significant portion (around 70%) of capital is invested in
materials and well-planned and well designed materials management
26
operations can lead to considerable saving in the capital expenditure. It is of
great importance to production, marketing, engineering and finance
departments of an enterprise. The advantage or benefits from effective
materials management operations can be outlined as:
1. Regular supply of the material is ensured, reducing the chances of
any interruption in production process.
2. Procurement costs and transportation costs associated with
materials are checked.
3. Efficient store and stock control minimizes waste of material.
4. Inspection of material at the time of procurement minimizes the
possibility of finished product being rejected by the consumer.
5. Timely supply of raw-material and other inputs can be assured.
6. Better utilization of labour, capital and equipment.
7. Congestion in stores and at different stages of production can be
avoided by an effective materials management system.
8. Length of manufacturing cycle is reducing to minimum.
9. Slight changes in material costs will exert a great impact on a
firm’s profit picture.
INTRODUCTION TO INVENTORY CONTROL
Inventory Control Management is designed to meet the dictates of
the marketplace and support the company's strategic plan. The many
changes in market demand, new opportunities due to worldwide marketing,
27
global sourcing of materials, and new manufacturing technology, means
many companies need to change their Inventory Management approach and
change the process for Inventory Control.
Despite the many changes that companies go through, the basic
principles of Inventory Control Management remain the same. Some of the
new approaches and techniques are wrapped in new terminology, but the
underlying principles for accomplishing good Inventory Management
and Inventory activities have not changed.
The Inventory Control Process provides information to efficiently
manage the flow of materials, effectively utilize people and equipment,
coordinate internal activities, and communicate with customers.
The basic building blocks for the Inventory Control activities are:
Sales Forecasting or Demand Management
Sales and Operations Planning
Production Planning
Material Requirements Planning
Inventory Reduction
The emphases on each area will vary depending on the company and
how it operates, and what requirements are placed on it due to market
demands. Each of the areas above will need to be addressed in some form
or another to have a successful program of Inventory Control
Management.
28
MEANING
The term inventory is more relevant in manufacturing and production
organizations where raw materials and other supplies are purchased and used
to manufacture finished products for sale. In such organizations, ‘Inventory’
includes raw materials, stores, supplies, spare parts, tools, components,
assemblies, partly finished goods(work-in-progress) and finished goods
ready for sale. It includes stocks of primary and secondary packing materials
also.
Inventories are stock of materials of any kind stored for future
use, mainly in the production process. Thus, today’s inventory is
tomorrow’s production. However, semi-finished goods awaiting use in the
next process or finished goods awaiting release for sale are also included in
the broad category of inventories, which are nothing but idle resources.
Therefore, inventories are materials or resources of any kind having some
economic value, either awaiting conversion or use in future.
Inventory control is a system which ensures the maintenance of
required quantity of inventories of the required quality at the required time
with minimum amount of investment. It aims at achieving maximum
possible inventory turnover.
INVENTORY MANAGEMENT CONCEPT
29
DEFINITIONS OF INVENTORY MANAGEMENT
Inventories are the piles of raw materials and finished goods in the
warehouse. All the materials, parts and in-process or finished
products recorded on the books by an organization and kept in its
stores, warehouses and plants are known as inventories.
30
According to Gordon B. Carson Inventory Management refers to
“The process whereby the investment in materials and parts carried
in stock is regulated within pre-determined limits set in accordance
with inventory policy established by the management”.
CLASSIFICATION OF INVENTORY
1. Classification of inventories according to functions:
1. Transit inventories
2. Cycle inventories
3. Buffer inventories
4. Decoupling inventories
2. Classification of inventories according to the nature of items stocked
namely
1. Raw materials
2. In-process inventories
3. Finished goods inventories and
4. Spare part inventories
WHY CONTROL INVENTORY?
A basic question arises as to why we should control inventory.
1. It is well-known that the most important aspect of any manager’s job
is the planning and controlling function. Hence the inventory
manager’s job is to control the inventory.
31
2. Materials account for the bulk, usually 60% of the cash outflow of
most organizations.
3. Inventory is the single largest asset in the balance sheet in many
manufacturing companies.
4. Inventory accounts for a substantial portion, usually 90% of the
working capital, in many companies.
5. We have the well-known slogan-Uncontrolled inventory is the
industry’s cancer.
6. Organizations incur about 30% as inventory carrying charges or to
service the inventories.
7. The finance manager would like to have a return commensurate with
the above cost.
8. The finance manager is always at difficulties to finance the working
capital lying in the form of inventories.
9. If the inventory is not properly controlled it results in obsolescence.
10.About one-third of the total banking deposits or public money is tied
up in the inventories of a few individual companies.
11.Inventory also has to be controlled in order to optimize the cost of
acquiring the item.
12.Increased competition aims at effective application of cost reduction
techniques and inventory control is a useful mechanism.
13.Due to technological advance, the number of items is likely to be
doubled in the next five years resulting in more inventories. Hence,
there is the need now to control the inventory to meet future
challenges.
14.Inventory control is the pacesetter for introduction of a cost conscious
scientific management culture in the company.
32
15.The most important and beneficial area of computer applications lies
in controlling the inventories.
NEED FOR VALUATION
Since inventory is the single largest asset in the balance sheet of most
organizations, the valuation of inventory becomes of utmost importance and
crucial to the financial executives. Materials also constitute the major input
in many industries. Further, many companies raise the working capital from
commercial banks by hypothecating the inventory. Hence the need for
proper valuation of stock. Inventory valuation enables an organization to
know and confirm its knowledge of financial strengths and weaknesses.
Inventory valuation converts physical quantities into monetary figures and
enters the balance sheet. Hence, inventory valuation becomes very crucial in
judging the performance of any industrial enterprise.
Materials enter an organization in many forms-raw materials,
components, consumables, capital goods, spares, furniture and
miscellaneous items. The effectiveness of the organization depends on how
well it is able to convert the raw materials into finished goods by adding
value and obtain a proper price for it. The price obtained for the sale of a
product and is split as the sum of:
Cost of materials,
Labour cost,
Overheads,
Interest charges, and
The profit or loss.
33
For a given set of conditions, capital employed, technology, plant,
machinery, staff, establishments, overheads etc. can be considered as fixed.
As compared to this, cost of materials can be considered as variable.
Hence, if due to market conditions, the price has to be held constant,
the profit will decrease as cost of material increases and vice versa. Thus, the
value entered against cost of materials will be determining factor of profit.
Conversely, while quoting for tenders, the main factor which decides the
price quoted is the cost of materials. The profit term and other fixed costs go
into the background especially when an organization is entered the market.
Therefore, as the accuracy of stock valuation increases, the organization can
evaluate its profits/performance more accurately and is better equipped for
decision-making in pricing.
ADVANTAGES OF INVENTORY
The importance of inventory to an organization can be listed as:
1. Provides and maintains good customer service.
2. Enables smooth flow of goods through the production process.
3. Provides protection against the uncertainties of demand and supply.
34
4. Various production operations can be performed economically and
independently. It can allow temporary variations in operating rates.
5. Ensures a reasonable utilization of equipment and labour.
6. With purchases in bulk discount can be availed.
7. Keeping required material of adequate quantity in order to avoid
disruption of production.
8. Optimizing investment in inventory and reducing carrying costs.
DISADVANTAGES OF INVENTORY
1. Efficient inventory control methods can reduce but can not eliminate
business risk.
2. The objectives of better sales through improved service to customer;
reduction in inventories to reduce size of investment and reducing cost
of production by smoother production operations are conflicting with
each other.
3. The control of inventories is complex because of the many functions it
performs. It should be viewed as a shared responsibility.
INVENTORY CONTROL TECHNIQUES
1. ECONOMIC ORDER QUANTITY (EOQ)
The economic order quantity refers to the quantity ordered to be
purchased at the lowest total cost. This is the most economical purchase
35
quantity which maintains a balance between two opposing costs of
procurement and carrying. The economic order quantity is also known as
economic lot size. So, the quantity to be ordered at a time is determined by
the cost of procurement and the cost of procurement and the cost of carrying
the inventories. The economic order quantity will be the one where the cost
of procurement and the cost of carrying are equal.
Let us consider the purchase of the material required for one year. If
they purchase and stock the entire quantity at a time, the inventory carrying
cost will be high. To avoid high inventory cost, they can purchase material
in small quantities.
But in this case they have to place a number of purchase orders. This
will increase the ordering cost. So they have to find out an ordering quantity
Unit Cost
Total CostB N T
A
I
QO
P
C
Quantity
Inventory procurement cost
Inventory carrying cost
36
Graphical Representation of EOQ
so that the total inventory cost (inventory carrying cost + ordering cost) is
minimum. This quantity is known as Economic Order Quantity.
Formula:
EOQ = -------
C* I
Where,
EOQ - Quantity per Order (No. of MTs)
A - Annual Requirement (No. of MTs)
S - Ordering Cost per Order in Rupees
C - Cost of Material per MT in Rupees
I - Inventory Carrying Cost (Expressed as Percentage)
Ordering Costs:
Ordering costs, usually, refers to the costs of requisitioning,
preparation of purchase order and placing order.
37
2AS
Here, the ordering cost also includes the costs of insurance incurred
while the goods are in transit. These costs are calculated on the basis of the
past data and an approximate figure is arrived.
In BHEL, Ranipet the Purchase Department, Material Planning
Department etc. affect these costs.
Carrying Costs:
In BHEL, Ranipet the carrying costs of materials includes the storage
costs alone. The insurance costs are not included in these because no
insurance is being paid on materials.
ADVANTAGES
1. Annual carrying costs per unit and costs per order can be accurately
estimated and are the only relevant costs. This really requires that all
38
cost information must be known with certainty, which is rarely
possible.
2. Annual demand can be estimated and is linearly consumed by
customers.
3. With demand linear and certain, there need not be any stock-out costs.
This basically prohibits the stocking out of inventory, as costs are
almost always associated with being unable to meet a customers
demand requirements. If stock-out is not possible, there will be no
stock-out costs.
4. There are no quantity discounts on large orders.
5. Lead time is known, fixed and independent of demand.
DISADVANTAGES
1. Often the inventory holding cost and the ordering cost cannot be
accurately calculated and sometimes cannot be identified properly.
2. The EOQ calculated is often an inconvenient number.
3. The use of EOQ usually leads to random orders so that suppliers
receive an irregular stream of orders.
4. EOQ applied without due regard to the possibility of falling
demand can lead to a high value of obsolescent inventory.
5. EOQ may not be applicable when the requirements are irregular, or
where there is an impending price rise.
2. ABC ANALYSIS
It is ‘Management by exception’ system of Inventory Control. In
this ABC technique of inventory control, the materials are classified and
39
controlled according to value of the materials involved. It is also called
proportional parts value analysis. It always controls the best, then better
anything which can be measured in monetary terms.
Actually, A items are high value items,
B items are medium valued items,
C items are low valued items.
In BHEL they are following,
A Items ------ More than Rs. 10 lakhs
B Items ------ More than Rs. 1 lakh and less then Rs.10 lakhs
C Items ------ Less than Rs. 1 lakh
ADVANTAGES
1. It becomes possible to concentrate all efforts in areas which need
genuine efforts.
2. This method produces rewarding results, at the same time it involves
minimum control.
3. It is the most effective and economical method as it is based on
selective approach.
4. It ensures closer control on costly items in which a large amount of
capital has been invested.
5. It helps in developing a scientific method of controlling inventories,
Clerical costs are reduced and stock is maintained at optimum level.
6. It helps in placing the orders, deciding the quantity of purchase, safety
stock etc, thus saving the enterprise from unnecessary stock-cuts or
surpluses and their resultant consequences.
40
7. It helps in achieving the main objective of inventory control at
minimum cost. The stock turnover rate can be maintained at
comparatively higher level through scientific control of inventories.
DISADVANTAGES
1. ABC analysis is a fundamental tool for exercising selective control
over numerous inventory items but in present form permit precise
consideration of all relevant problems of inventory management.
2. It is not one time exercise and items are to be reviewed and
recatagorised periodically.
3. ABC analysis can achieve its objectives only when there is a popular
standardization of materials being carried in the storehouse. A good
system of codification too is required for effectively carrying out the
ABC analysis.
4. It is based on grading the items according to the importance of
performance of an item, i.e., essential and desirable analysis. Some
items, though negligible in monetary value may be very vital for
running the plant, demanding constant attention.
5. The system analyses the items according to their value and not
according to their importance in the production process. It may,
therefore, sometimes create difficult problems.
3. XYZ ANALYSIS
The classification is based on the value of inventory of materials
actually held in stores at a given time (usually during stock checking
annually or half-yearly), X – Y – Z analysis helps to control average
41
inventory value by focusing efforts to reduce the inventory of ‘X’ items
which are usually 10% of the number of items stored, but accounting for
70% of the total inventory value. Similarly ‘Y’ items are 20% of the number
of items stored and account for 20% of the total inventory value. The
remaining 70% of the items accounting for 10% of the total inventory value
are ‘Z’ items. The X – Y – Z classification is done in the same way as ABC
analysis, the difference being the actual inventory value of item in stores
instead of their estimated annual consumption value.
ADVANTAGES
1. This analysis is used to review the inventories and their uses at
scheduled intervals.
2. This study is usually undertaken once a year during the annual stock-
taking exercise.
3. X items are those few items accounting for a major portion of the total
inventory value, whereas Z items are those items with low inventory
value. Obviously Y items fall in-between these two categories. This
classification helps in identifying the items which are extensively
stocked.
MATERIALS REQUIREMENT PLANNING (MRP)
Materials requirement planning is a scientific technique of planning
for ordering and usage of materials at various levels of production and for
monitoring inventories during these activities. MRP, therefore, is both an
42
inventory control and scheduling technique. It utilizes the master schedule
for the end products, product structure for determining requirements of sub-
assemblies, components and raw materials, procurement/manufacturing lead
times, inventory status of products, and by utilizing database, in a series of
steps, it draws up the timings of procurement/manufacture of all the sub-
assemblies, parts and raw materials required over the production horizon to
meet the given end production schedules.
MRP is a technique of working backward from the scheduled
quantities and needs dates for end items specified in a master production
schedule to determine the requirements for components needed to meet the
master production schedule. The technique determines what components are
needed, how many are needed, when they are needed and when they should
be ordered so that they are likely to be available when needed. The MRP
logic serves as the key component in an information system for planning and
controlling production operations and purchasing. The information provided
by MRP is highly useful in scheduling because it indicates the relative
priorities of shop orders and purchase orders.
“Materials Requirement Planning is a technique for determining
the quantity and timing for the acquisition of dependent demand items
needed to satisfy master production schedule requirements”.
MRP is one of the powerful tools, that when applied properly, helps
managers in achieving manufacturing control. It is based on the concept of
independent and dependent demand. The demand for the products is
considered independent since orders may not necessarily be related to others
in terms of customers and quantity, but once sales requirements are either
known or forecast, the quantity of raw materials and components required to
43
make up the products can be calculated depending upon the manufacturing
schedule. The dependent demand condition is served by MRP.
OBJECTIVES
Material Requirements Planning (MRP) is software based
production planning and inventory control system used to manage
manufacturing processes. Although it is not common nowadays, it is
possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:
Ensure materials and products are available for production and
delivery to customers.
Maintain the lowest possible level of inventory.
Plan manufacturing activities, delivery schedules and purchasing
activities.
MRP SYSTEM
44
ADVANTAGES OF USING AN MRP SYSTEM
1. It is a detailed means of controlling inventory items on a current
or almost current basis.
2. It improves production scheduling because the system sets
deadlines on material arrivals and production activities.
3. It reduces all types of inventory levels because the timing of
materials minimizes the need for safety and buffer stocks.
4. It aids in capacity planning.
5. It provides a way to examine different inventory ordering
policies by simulating their possible impact on the operations
management system.
DISADVANTAGES OF USING MRP SYSTEM
Master Production Schedule (MPS)
Inventory Status File
Materials Requirement Planning (MRP) processing logic
Bill of Materials
(BOM)
Order Release Requirements (Orders to be placed now)
Orders Rescheduling Planned Orders
(Future)
45
1. Planning and implementation time for MRP systems can and
take years.
2. Data entry requirements and file maintenance are very time
consuming and require substantial personnel training and
require substantial personnel training and education.
3. Dependence of the entire system on forecasts and estimated
lead times can make the informational values of the MRP
output questionable and can even mislead managers on the
actual capacity of the operations management system.
4. Although microcomputer systems exist to supports small OM
operations, in practice an MRP system requires the costly
computer time of a large-scale or a mainframe computer
system.
MANUFACTURING RESOURCE PALNNING (MRP II)
46
Manufacturing Resource Planning (MRP II) is an integrated
information system that synchronizes all aspects of the business. MRP II
system coordinates sales, purchasing, manufacturing, finance and
engineering by adopting a focal production plan and by using one unified
database to plan and update the activities in all systems.
A manufacturing resource planning can be divided into three parts:
Product planning functions which take place at the top management
level.
Operations planning handled by staff units.
Operations control functions conducted by manufacturing line and
staff supervisors.
MRP II systems can provide:
Better control of inventories
Improved scheduling
Productive relationships with suppliers
For Design / Engineering:
Improved design control
Better quality and quality control
For Financial and Costing:
47
Reduced working capital for inventory
Improved cash flow through quicker deliveries
Accurate inventory records
Timely and valid cost and profitability
information
INDUSTRY SPECIFICS
MRP II systems have been implemented in most manufacturing
industries. Some industries need specialized functions e.g. lot traceability in
regulated manufacturing such as pharmaceuticals or food. Other industries
can afford to disregard facilities required by others e.g. the tableware
industry has few starting materials – mainly clay – and does not need
complex materials planning. Capacity planning is the key to success in this
as in many industries, and it is in those that MRP II is less appropriate.
PURPOSE
MRP II integrates many areas of the manufacturing enterprise into a
single entity for planning and control purposes, from board level to operative
and from five-year plan to individual shop-floor operation. It builds on
closed-loop Material Requirements Planning (MRP) by adopting the
feedback principle but extending it to additional areas of the enterprise,
primarily manufacturing-related.
MRP II DIAGRAM
48
MRP II IN FINANCE
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning
Realistic?
Executive Capacity Plans
Executive Material Plans
Business Planning
No
Yes
49
Accounting, in the past, was primarily historical. It was a
“scorekeeping” function. “Keeping the books” to show management where
the company had been. Surely cost accounting did set standard costs for
control and there was some overall gross financial planning. But the detailed
planning and control in most companies left much to be desired. The
problem was fundamental: the numbers in the operating system that
manufacturing used were not valid and, consequently, the numbers that
accounting had to use were, to a great extent, invalid.
Inventory shrinkage is one of the greatest fears of the financial
executive. Taking the annual physical and finding that a few million dollars
that were supposed to be there aren’t can often get a company on the front
page of the Wall Street Journal as they re-project their earnings. Inventory
shrinkage comes right out of profits.
Why does inventory shrinkage occur? Ignoring cases of outright theft
which are really not the primary cause of inventory shrinkage in most
companies, the real cause can be pinned down to one thing: bad reporting of
information. Bad reporting is a natural by-product of maintaining two
different systems. The accounting system is driven from a set of transactions
that may or may not be the same as those that drive the operating system.
Even that doesn’t matter because:
The formal operating system isn’t the one that’s being used anyway.
50
The operating people rarely see the impact on the financial reporting
before a disaster like inventory shrinkage occurs because they simply
don’t use these numbers themselves.
Numbers are essential to running a business. But in a manufacturing
business, if the numbers in the formal system that manufacturing uses are
wrong (only the formal system generates numbers!), then accounting must
maintain a separate system and that’s a difficult and challenging job.
In the past, financial people often had to “reconstruct” numbers or
“back into” financial figures, like work-in-process, because they didn’t have
the actual numbers to work with. For example, the most effective way the
financial executive could defend himself against inventory against inventory
shrinkage were just a form of “institutionalized error”.
PROBLEMS WITH MRP SYSTEMS
The major problem with MRP systems is the integrity of the data. If
there are any errors in the inventory data, the bill of materials (commonly
51
referred to as 'BOM') data, or the master production schedule, then the
outputted data will also be incorrect. Most vendors of this type of system
recommend at least 99% data integrity for the system to give useful results.
Another major problem with MRP systems is the requirement that the user
specify how long it will take a factory to make a product from its component
parts (assuming they are all available). Additionally, the system design also
assumes that this "lead time" in manufacturing will be the same each time
the item is made, without regard to quantity being made, or other items
being made simultaneously in the factory.
A manufacturer may have factories in different cities or even
countries. It is no good for an MRP system to say that we do not need to
order some material because we have plenty thousands of miles away. The
overall ERP system needs to be able to organize inventory and needs by
individual factory, and intercommunicate needs in order to enable each
factory to redistribute components in order to serve the overall enterprise.
This means that other systems in the enterprise need to work properly
both before implementing an MRP system, and into the future. For example
systems like variety reduction and engineering which makes sure that
product comes out right first time (without defects) must be in place.
Production may be in progress for some part, whose design gets
changed, with customer orders in the system for both the old design, and the
new one, concurrently. The overall ERP system needs to have a system of
coding parts such that the MRP will correctly calculate needs and tracking
for both versions. Parts must be booked into and out of stores more regularly
than the MRP calculations take place. Note, these other systems can well be
manual systems, but must interface to the MRP. For example, a 'walk
52
around' stock take done just prior to the MRP calculations can be a practical
solution for a small inventory (especially if it is an "open store").
The other major drawback of MRP is that takes no account of
capacity in its calculations. This means it will give results that are
impossible to implement due to manpower or machine or suppler capacity
constraints. However this is largely dealt with by MRP II.
53
CHAPTER-3
RESEARCH
METHODOLOG
Y
3. a. RESEARCH METHODOLOGY
54
Research can be defined as an organized, systematic, database, critical
objective, scientific inquiry or investigation into a specific problem,
undertaken with the purpose of finding answers or solutions to it.
3. b. RESEARCH DESIGN
“Research design is the arrangement of conditions for collection and
analysis of data in a manner that aims to combine relevance to the research
purpose with economy in procedure’’.
Explanatory Research
In this study, historic research is used for the inventory analysis of
the company.
Explanatory Research is the study of an implication that existence of,
or a change in, one variable causes or leads to an effect on the other variable.
In proposing or interpreting causal relations the researcher uses analyzing
tools to interpret the cause effects.
4. c. DATA COLLECTION METHODS
55
There are two sources of data
1. Primary Data
2. Secondary Data
Primary Data
The primary data are those which are collected a fresh and for the first
time and thus happen to be original in character. The researcher for his study
has used only the secondary data.
Secondary Data
The secondary data, on the other hand, are those which have already
been collected by some one else and which has already been passed through
the statistical process.
The researcher for the purpose of the study has collected data which
was purely secondary in nature the information collected from journals,
abstract of inventory reports trial balances and balance sheet of the company
manuals, websites etc.,
4. d. PERIOD OF STUDY
56
The period of the study is restricted to one month. From May – June
2008. During the period, the following research activities were carried out
successfully.
The objectives of the study were set up.
Data were collected from the annual reports and abstract of inventory
reports issued by Bharath Heavy Electrical Ltd.,
Data were analyzed with the help of statistical tool like inventory
control techniques.
Data were interpreted with the help of tables, figure / charts, etc.,
Based on the analysis of data, findings, suggestions and conclusion
were drawn successfully.
Finally a report is generated.
3. e. ANALYSIS TOOLS
The following tools and techniques have been used for carrying out
the study.
1. EOQ analysis (Economic Order Quantity).
2. ABC analysis (Always Better Control).
3. XYZ analysis.
The statistical tools like ratio analysis related to materials such as
material cost index, material cost to sales index, indigenous material cost
index, import material cost, comparison of sales & inventory index,
57
manpower strength index, manpower cost and inventory turnover ratio, order
cost index, handling cost index, work in progress index, sales and purchase
index were used to analyze and interpret the data. The analyzed data has
been represented through charts in the form of bar diagrams, pie charts and
graphs to exhibit a pictorial presentation for an easy understanding of the
facts.
58
CHAPTER-4
DATA ANALYSIS &
INTERPRETATION
4.1. Components of Inventory
Generally, Inventory is divided into 3 different components. Starting from,
Procurement of raw materials,
Work-in-progress and
Finished goods.
The stock needs to be monitored as non-moving goods of these may lead to
investment cost.
Table No. : 1 Components of Inventory
59
(Rs. In Million)
Description 02-03 03-04 04-05 05-06 06-07Finished Goods 80.31 119.55 189.86 271.22 474.94Work-in-progress 16.00 45.89 430.70 479.02 743.59Stores & Spare parts
429.95 719.89 1068.69 1325.53 1645.34
Total 526.26 884.83 1689.25 2075.77 2863.87
Inference:
The table reveals that the,
Finished goods percentage varies year by year, according to the
number of orders received by the company.
Work-in-progress maintains in a minimum level up to 2 years and
then shows tremendous increase in the level.
Stores and spares parts are maintained in a high level.
Chart No. : 1
COMPONENTS OF INVENTORY
60
4.2. Material Cost Index
Material Cost Material Cost Index = ----------------------
Production Cost
Table No. : 2 Material Cost Index
(Rs. In Million)
Description 02-03 03-04 04-05 05-06 06-07Material Cost 1515 1931 3522 5082 6620
61
Production Cost 2276 2825 4576 6381 8267Material Cost Index 0.67 0.68 0.77 0.80 0.80
Inference:
In 2006-07, the index was found to be in the raising trend due
to increase in the steel price.
The above index is useful to know the percentage of material
cost to production cost from the year 2002-03 to 2006-07.
Chart No. : 2
COMPARISON OF MATERIAL AND PRODUCTION COST
62
MATERIAL COST INDEX
4.3. Material Cost to Sales Index
Material CostSales Index = ---------------------------
Sales Value
Table No. : 3 Material Cost to Sales Index
(Rs. In Million)
63
Description 02-03 03-04 04-05 05-06 06-07
Material Cost 1515 1931 3522 5082 6620
Production Cost 2823 3334 5121 7291 10095
Material Cost To Sales
0.54 0.58 0.69 0.70 0.66
Inference:
The above index is useful to know the material cost percentage
to sales value.
From 2002-03 to 2003-04, the index increased from
Rs.0.51million to Rs.0.58million.
The percentage increase is high in 2005-06.
This is mainly due to increase in the steel price.
Chart No. : 3
COMPARISON OF MATERIAL COST AND SALES VALUE
64
MATERIAL COST TO SALES
4.4. Indigenous Material Cost Index
Cost of Indigenous MaterialIndigenous Content Index = ---------------------------------------
Total Material Cost
Table No. : 4 Indigenous Material Cost Index
(Rs. In Million)
65
Description 02-03 03-04 04-05 05-06 06-07Cost of Indigenous Material
1066 1261 2536 3802 5342
Material Cost 1515 1931 3522 5082 6620Indigenous Content Index
0.70 0.65 0.72 0.75 0.81
Inference:
The above index is useful to know the percentage of indigenous
material cost to total material cost.
Almost it was in the decreasing trend due to increase in the price of
the indigenous material.
Due to change in the global economy, the indigenous costs in certain
products were more.
Chart No. : 4
COMPARISON OF MATERIAL AND INDIGENOUS MATERIAL
COST
66
Comparsion of Material and Indigenous Material Cost
01000200030004000500060007000
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
Years
Rs
in M
illi
on Cost of Indigenous
Material
Material Cost
INDIGENOUS CONTENT INDEX
4.5. Import Material Cost
Cost of Imported MaterialsImported Index = --------------------------------------
Total Material Cost
Table No. : 5 Import Material Cost
(Rs. in Million)
Description 02-03 03-04 04-05 05-06 06-07
67
Cost of Import 448 670 986 1280 1278Material Cost 1515 1931 3522 5082 6620Imported Index 0.30 0.35 0.28 0.25 0.19
Inference:
The above index is for the purpose of knowing the percentage of
imported material cost to total material cost.
This was in the increasing trend due to availability of certain input
materials in India.
The cost of imported material is cheaper than the indigenous
materials.
Chart No. : 5
COMPARISON OF IMPORT AND MATERIAL COST
68
IMPORTED INDEX
4.6. Manpower Strength Index
Total Staff in Purchase Department Manpower Strength Index = ------------------------------------------------ Total Company Staff
Table No. : 6 Manpower Strength Index
(Members in No.)
69
Description 02-03 03-04 04-05 05-06 06-07Total Staff in Purchase Department
51 48 47 51 52
Total Company Staff
2187 2120 2115 2205 2175
Manpower Strength
0.02 0.02 0.02 0.02 0.02
Inference:
To know the strength of manpower in the Purchase Department
compared to the total strength of the company.
It was found that the strength of man power in the purchase
department was stable.
Chart No. : 6
MAN POWER STRENGTH INDEX
70
4.7. Manpower Cost
Wage bill of Purchase Department Manpower Cost = ------------------------------------------------- Total wage bill of Company
Table No. : 7 Manpower Cost(Rs. in Millions)
Description 02-03 03-04 04-05 05-06 06-07
71
Wage bill of Purchase Department
14 18 23 25 25
Total Wage bill 631 695 728 800 997Manpower Cost 0.02 0.03 0.03 0.03 0.03
Inference:
The wage bill of the purchase department was found to be in the
increased trend due to wage revision in the year 2001.
Chart No. : 7
MAN POWER COST INDEX
72
4.8. Comparison of Sales and Closing Inventory
Sales Comparison of sales & closing inventory = ------------------------- Closing Inventory
Table No. : 8 Comparison of Sales and Closing Inventory
(Rs. in Millions)
73
Description 02-03 03-04 04-05 05-06 06-07Sales 2823 3334 5121 7291 10095Closing Inventory
525.54 884.84 1689.26 2075.77 2863.87
Sales / Closing Inventory
5.36 3.77 3.03 3.51 3.52
Inference:
From the past five years, the sales have increased from Rs.2497
million to Rs.5121 million.
Therefore the sales to inventory ratio is in good position.
Chart No. : 8
SALES / CLOSING INVENTORY INDEX
74
4.9. Inventory Turnover Ratio
Cost of Goods Sold Inventory Turnover Ratio = ----------------------------- Average Inventory
Table No. : 9 Inventory Turnover Ratio
(Rs. in Million)
75
Description 02-03 03-04 04-05 05-06 06-07Cost of goods sold
2619 3175 4907 6712 8829
Average inventory
4975.5 7051.5 12870.5 18825.5 24698.5
Inventory Turnover Ratio
0.53 0.45 0.38 0.36 0.36
Inference:
The inventory turnover shows how rapidly the inventory is
turning into receivable through sales.
The inventory turnover ratio during the year 2002-2003 was
found to be Rs.0.53million where as during the year 2006-07
was Rs.0.36million.
This shows that the efficiency in turning its inventories is
continuously maintained according to its production and selling
its products.
Chart No. : 9
INVENTORY TURNOVER RATIO
76
4.10. Nonmoving Inventory
Table No. : 10 Nonmoving Inventory
(Rs. in Million)
Description 02-03 03-04 04-05 05-06 06-07Nonmoving 27.9 26 34.6 32.7 17.4
77
Inference:
Non-moving stocks slowly reduced from Rs.27.9 millions (2002-
03) to Rs.17.4 millions in 2006-07.
The main reason for the nonmoving is the raw materials &
components would have been purchased and kept in the
inventory based on the order expected orders from the customer.
There after the orders would have been cancelled by the
customer. The nonmoving stocks will be diverted to other similar
orders.
Hence, it is concluded that the company takes necessary steps to
get other similar orders to get red of non moving stocks.
Chart No. : 10
NON-MOVING INVENTORY
78
4.11. Slow moving Inventory
Table No. : 11 Slow moving Inventory
(Rs. in Million)
Description 02-03 03-04 04-05 05-06 06-07Slow moving 41.5 39.8 124.0 74 28.8
Inference:
79
Slow moving stocks slowly reduced from Rs.41.50 millions 2002-03
to Rs.28.8 millions in 06-07.
The main reason for the slow moving is some specified materials
would have been purchased in bulk due to lower prices offered by
suppliers.
The slow moving stocks will be reduced if a product goes up.
Chart No. : 11
SLOW MOVING INVENTORY
80
4.12. Fast moving Inventory
Table No. : 12 Fast moving Inventory
(Rs. in million)
Description 02-03 03-04 04-05 05-06 06-07Fast moving 456 819 1530 1969 2818
Inference:
81
The above table shows the fast moving stock over the period of 5
years.
It is observed that the balanced investment in the inventory
component and the company’s utilization of inventories in generating
sales is found to be satisfactory.
Chart No. : 12
FAST MOVING INVENTORY
82
4.13. Order Cost Index
Total purchase dept in cost Order Cost Index = ---------------------------------- Total No. of orders placed
Table No. : 13 Order Cost Index
(Rs. in Lakhs)
Description 02-03 03-04 04-05 05-06 06-07Total purchase dept in cost
176.30 205.38 241.41 278.20 301.17
Total No. of 3652 3718 3721 3825 3950
83
orders placedOrder cost index
0.05 0.05 0.06 0.07 0.08
Inference:
The above table shows that the ordering cost increases in the number
of orders, which indicates inventories are more frequently acquired.
Thus the firm’s order cost is higher.
Chart No. : 13
ORDER COST INDEX
84
4.14. Handling Cost Index
Total handling costHandling Cost Index = ----------------------------------------------------- Total value of material received and issued
Table No. : 14 Handling Cost Index
(Rs. in Lakhs)
Description 02-03 03-04 04-05 05-06 06-07Total Handling cost
172.71 200.87 216.71 252.84 316.17
85
Total value of material received issued
2620.66 3799.62 7371.56 8813.3611231.16
Handling cost index
0.07 0.05 0.03 0.03 0.03
Inference:
The above table shows the handling cost index.
It includes the total handling cost to total value of material received
and issued.
The handling cost index during the year 2002-03 was Rs.0.07millions,
while during the year 2006-07 it was found to be Rs.0.03millions.
Hence, it is concluded that the handling cost index is maintained in
Rs.0.03millions during the past three years.
Chart No. : 14
HANDLING COST INDEX
86
4.15. Purchase Efficiency
Total purchase valuePurchase Efficiency = -------------------------------------------- Total expenses of purchasing dept
Table No. : 15 Purchase Efficiency
(Rs. in Lakhs)
Description 02-03 03-04 04-05 05-06 06-07Total purchase value
1571 2290 4730 5526 6942
87
Total expenses of purchasing dept
176.30 205.38 241.41 278.20 301.17
Purchase Efficiency
8.91 11.15 19.59 19.86 23.05
Inference:
The above table shows the purchase efficiency of the company. The
purchase efficiency was found to be in increasing trend.
Chart No. : 15
PURCHASE EFFICIENCY
88
4.16. Sales / Purchase Index
Total sales Sales / Purchase Index = --------------------- Total purchase
Table No. : 16 Sales / Purchase Index
(Rs. in Lakhs)
Description 02-03 03-04 04-05 05-06 06-07Total sales 2823 3334 5121 7291 10095Total purchase 1571 2290 4730 5526 6942
89
Sales / Purchase index
1.80 1.46 1.08 1.32 1.45
Inference:
The table indicates the sales / purchase index, which depends on the
number of orders in the year.
The trend of this index was found to be fluctuating.
It was dropped during the year 2004-05 and slowly increased during
the next two years.
Chart No. : 16
SALES / PURCHASE INDEX
90
4.17. Work-in-progress Index
Average work-in-progressWork-in-progress Index = --------------------------------------
Total production value annually
Table No. : 17 Work-in-progress Index
(Rs .in Lakhs)
Description 02-03 03-04 04-05 05-06 06-07Avg. Work-in-progress
163.92 306.98 2380.5 4548.61 6113.06
91
Total production value
2276 2825 4576 6381 8267
Work-in-progress index
0.07 0.11 0.52 0.71 0.74
Inference:
The table indicates the work-in-progress index, which shows an
increasing trend during the past five years.
Hence, it is concluded that the various components of inventories are
maintained adequately and balanced investment in inventories were
made.
Chart No. : 17
WORK – IN – PROGRESS INDEX
92
4.18. Comparing movements of inventories
Table No. : 18 Comparison of inventory movement
(Rs. in Lakhs)
Description2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
Nonmoving27.9 26 34.6 32.7 17.4
Slow moving 41.5 39.8 124 74 28.8Fast moving 456 819 1530 1969 2818
93
Inference:
Non-moving stocks slowly reduced from Rs.27.9 millions (2002-03)
to Rs.17.4 millions in 2006-07.
Slow moving stocks slowly reduced from Rs.41.50 millions (2002-03)
to Rs.28.8 millions in 2006-07.
Chart No. : 18
COMPARSION OF INVENTORY MOVEMENTS
94
4.19. ECONOMIC ORDER QUANTITY
This is an important item of inventory control to be decided. EOQ
depends on many factors like cost of purchasing and receiving, normal
consumption, interest on capital, availability of storage accommodation,
ordering and carrying costs. EOQ is the reorder quantity, which is the
quantity to be purchased each time an order is placed. It aims at minimizing
both carrying cost and cost of ordering.
Table No. : 19
95
EOQ Computation of 15 Items in BHEL, Ranipet
Sl. No.
Description of Materials A C S I (%) EOQ
1 Plate 5x2500x6000 ASTM 588
240 43640 13055 4.01 59.84
2 GP Sheet 0.63 Grade 275
44 34260 13055 4.01 28.92
3 Flat 50 x 6 GRA 197 26450 13055 4.01 69.64
4 Cheq plate 5 1373 28310 13055 4.01 177.70
5 HR Sheet 3.15 mm IS 5986 & E 330
370 28930 13055 4.01 91.26
6 HR Plate 20 mm is 2062 GR-AGC sheet LPRC/III -25x410x3000
1817 28497 13055 4.01 203.76
7 HR Sheet 2.0 mm is 2062 FE-330
1129 28936 13055 4.01 159.39
8 HR Plate 12 mm is 2062 GR-A
1803 28271 13055 4.01 203.78
9 HR Plate 32 mm is 2062 GR-B
1225 28772 13055 4.01 166.50
10 HR Plate 10 mm is 2062 GR-A
1438 30681 13055 4.01 174.69
11 HR Plate 5 mm is 2062 GR-B
2179 27179 13055 4.01 228.48
12 HR Plate 25 mm is 2062 GR-B
1347 29091 13055 4.01 173.63
13 HR Plate 5 mm is 2062 GR-A
2178 27160 13055 4.01 228.50
14 HR Plate 8 mm is 2062 GR-A
1387 27710 13055 4.01 181.85
15 HR Plate 16 mm is 2062 GR-A
1810 28510 13055 4.01 164.16
96
4.20. ALWAYS BETTER CONTROL (ABC)
ABC is ‘Management by exception’ system of Inventory Control. In
this ABC technique of inventory control, the materials are classified and
controlled according to value of the materials involved.
Table No. : 20 ABC Analysis
(Rs. In Millions)
Description 02-03 03-04 04-05 05-06 06-07A Items (> 10 lakhs) 1117.35 1520.84 3007.83 4341.82 566.17B Items (> 1 lakh < 10)
307.78 320.97 353.87 423.49 509.6
C Items (< 1 lakh) 90.27 89.99 98.93 115.32 137.10
Total 1515.4 1931.8 3460.63 4880.631212.87
Inference:
Table content shows the value of items increased year by year.
Comparing A items to B items in the year 2003-2004 and 2004-2005
it has shown a tremendous increase in usage.
Comparing to A items to C items in the year 2004-2005 and 2005-
2006 it shows that the value of the cost of material has increased.
97
Chart No. : 20
ABC ANALYSIS
98
4.21. XYZ ANALYSIS
XYZ analysis is based on the value of inventory stored. If the values
are high, special efforts should be made to reduce them. This exercise can be
done once a year. Items classified as ‘X’ denotes high inventory value. Items
classified as ‘Y’ and ‘Z’ denotes medium and low inventory values
respectively.
Table No. : 21 XYZ Analysis
(Rs. In Millions)
Description 02-03 03-04 04-05 05-06 06-07X Items (> 10 lakhs) 103.55 347.59 537.30 828.64 819.8Y Items (> 1 lakh <10)
152.78 183.95 237.93 280.77 277.0
Z Items (< 1 lakh) 76.67 75.46 84.11 97.29 91.4Total 333 607 859.34 1206.70 1882
Inference:
In the year 2004-2005 and 2005-2006 the usage of X items has
increased.
In the year 2005-2006 and 2006-2007 the usage of X items has
decreased.
99
Chart No. : 21
XYZ ANALYSIS
100
CHAPTER-5
FINDINGS &
SUGGESTIONS
SUMMARY OF FINDINDS
1. Components of inventory table reveal that,
101
Finished goods percentage varies year by year according to the
number of orders received by the company.
Work – in – progress maintained in level.
Stores and spares parts are maintained in a high level.
2. It is found that, in Material cost index table the increase in the
material cost is due to increase in steel price.
3. From the sales index table it is found that, the percentage of sales
index has gone down due to increase in the material cost.
4. It is found that due to the increase in the indigenous material cost,
purchase of material from the internal sources has come down.
5. The manpower strength index table shows the decreasing trend, which
is due to manpower reduction in the company as a whole which is due
to Voluntary Retirement Scheme offered by the Management.
6. It is found that the manpower cost table shows the increasing trend. In
the year 2000, the wage revision for employees had come into effect.
Due to this, man power cost had gone up.
7. From the inventory turnover table it is found that, due to increase in
sales the inventory cost in the absolute value has also increased.
8. From the past five years, the sales have increased from Rs.2497.6
millions to Rs.7291 millions.
9. The fast moving stock over the period was found to be increasing
trend.
10.The handling cost index was found to be maintained in
Rs.0.03millions for the past three years.
SUGGESTIONS AND RECOMMENDATIONS
102
1. Steps should be taken to increase the price quoted for the customers,
so that Sales Index will be improved.
2. Steps should be taken to improve the manpower strength for major
production of the firm.
3. Steps should be taken to find out substitute for the imported
materials.
4. Steps should be taken to capture more orders to improve the sales.
Hence for successful inventory control management system it
involves balancing the costs of inventory with the benefits of inventory
which includes,
Maintaining a wide assortment of stock.
Increasing inventory turnover.
Keeping stock low.
Obtaining low prices by making volume purchases.
Having an adequate inventory on hand.
103
CHAPTER-6
CONCLUSION
104
CONCLUSION
From the above, it is clear that materials management control system
in inventory management area as a whole works through exception principle.
When everything goes well as planned, there is no cause of worry and no
corrective actions are needed. But, when something goes wrong and things
don’t run as smoothly as planned, operational control gets loose.
BHEL Ranipet, achieved a quantum jump in physical turnover of
105904 MT and financial turnover of Rs.810crores for the year 2006-2007
and also the firm maintained somehow a good performance for the past five
years. In India due to economic and industrial growth the requirement of
power generation has increased in the past years.
At present, BHEL Ranipet is having an order book position for
Rs.2500 crores. In the year 2006-07 steel prices may not increase beyond
5%, so profitability is in the increasing trend.
The company is trying to create more sources (vendors) for supply of
materials and imports of materials only for the essential items. In the year
end, inventory will be determined by the company based on the budgeted
turnover of the next year.
It may be concluded from the above study that inventory management
in BHEL Ranipet, is satisfactory. Therefore to improve the performance at
higher task, the above said factors and methods of inventory control should
be taken into consideration. If the suggestions mentioned in the study are
implemented then the material management will be more efficient.
105
APPENDIXES
BHARAT HEAVY ELECTRICALS LIMITED
106
BOILER AUXILIARIES PLANT, RANIPET
Abstract from Profit and Loss and Balance Sheet – March 2002
(Rs. In Thousands)
PARTICULARS As at 31.03.2002
Sources of Funds 1063232
Capital
Fixed Assets
Gross Block 1052888
Less:
Depreciation to-date 708709
Net Block 344179
Capital Expenditure in Progress 7065
Current Assets, Loans & Advances:
Inventories 469578
Sundry Debtors 278317
Cash & Bank Balances 633 748528
Other Current Assets:
Loans & Advances 72811 821339
Current Liabilities and Provisions:
Liabilities 669289
Provisions 87355 756644
Net Current Assets 64695
Inventories: As Spare Parts 18991
Production 17116
Fuel Stores 380
Miscellaneous 1495
Contd…
Abstract from Profit and Loss and Balance Sheet – March 2002
107
(Rs.in Millions) (Rs. In Thousands)
Inventories: As Stores As at 31.03.2002
Raw Materials & Components 271965
Materials in Transit 45305
Materials with Fabricators 1581
Scraps 4740
Finished Goods 110210
Work-in-Progress 16786
Total Inventory 469578
Cost of Goods Sold 2481
Materials Cost 1412
Production Cost 2180
Sales Value 2763
Indigenous Materials Cost 974
Imports Materials Cost 438
Manpower in Purchase (Nos.) 53
Manpower in Total (Nos.) 2212
Wage Bill of Purchase Department 12
Total Wage Bill 578
Purchases 1456
BHARAT HEAVY ELECTRICALS LIMITED
108
BOILER AUXILIARIES PLANT, RANIPET
Abstract from Profit and Loss and Balance Sheet – March 2003
(Rs. In Thousands)
PARTICULARS As at 31.03.2003
Sources of Funds 1186692
Capital
Fixed Assets
Gross Block 1075139
Less:
Depreciation to-date 761288
Net Block 313851
Capital Expenditure in Progress 9991
Current Assets, Loans & Advances:
Inventories 526260
Sundry Debtors 287150
Cash & Bank Balances 7559 820244
Other Current Assets:
Loans & Advances 68967
Current Liabilities and Provisions:
Liabilities 671819
Provisions 57465
Net Current Assets 159927
Inventories: As Spare Parts 16226
Production 15018
Fuel Stores 99
Miscellaneous 1109
Contd…
Abstract from Profit and Loss and Balance Sheet – March 2003
109
(Rs. in Million) (Rs. In Thousands)
Inventories: As Stores As at 31.03.2005
Raw Materials & Components 408927
Materials in Transit
Materials with Fabricators 1675
Scraps 3122
Finished Goods 80308
Work-in-Progress 16002
Total 526260
Cost of Goods Sold 2619
Materials Cost 1515
Production Cost 2276
Sales Value 2823
Indigenous Materials Cost 1066
Imports Materials Cost 448
Manpower in Purchase 51 (Nos.)
Manpower in Total 2187 (Nos.)
Wage Bill of Purchase Department 14
Total Wage Bill 631
Purchases 1571
Purchase department cost 1763
Total no. of orders placed 3652
Total handling cost 1727
Total value of materials received and
issued
26206
BHARAT HEAVY ELECTRICALS LIMITED
110
BOILER AUXILIARIES PLANT, RANIPET
Abstract from Profit and Loss and Balance Sheet – March 2004
(Rs. In Thousands)
PARTICULARS As at 31.03.2004
Sources of Funds 1264003
Capital
Fixed Assets
Gross Block 1099327
Less:
Depreciation to-date 797146
Net Block 302181
Capital Expenditure in Progress 5709
Current Assets, Loans & Advances:
Inventories 884835
Sundry Debtors 302590
Cash & Bank Balances 18658 1206083
Other Current Assets:
Loans & Advances 67323
Current Liabilities and Provisions:
Liabilities 825016
Provisions 159557
Net Current Assets 288833
Inventories: As Spare Parts 13575
Production 12588
Fuel Stores 88
Miscellaneous 899
Contd…
Abstract from Profit and Loss and Balance Sheet – March 2004
111
(Rs. in Million) (Rs. In Thousands)
Inventories: As Stores As at 31.03.2004
Raw Materials & Components 315517
Materials in Transit 1966
Materials with Fabricators 3395
Scraps 6427
Finished Goods 119551
Work-in-Progress 45398
Total 884835
Cost of Goods Sold 3175
Materials Cost 1931
Production Cost 2825
Sales Value 3334
Indigenous Materials Cost 1261
Imports Materials Cost 670
Manpower in Purchase 48 (Nos.)
Manpower in Total 2120 (Nos.)
Wage Bill of Purchase Department 18
Total Wage Bill 695
Purchases 2290
Purchase department cost 2053
Total no. of orders placed 3718
Total handling cost 2008
Total value of materials received and
issued
3800
BHARAT HEAVY ELECTRICALS LIMITED
112
BOILER AUXILIARIES PLANT, RANIPET
Abstract from Profit and Loss and Balance Sheet – March 2005
(Rs. In Thousands)
PARTICULARS As at 31.03.2005
Sources of Funds 1321272
Capital
Fixed Assets
Gross Block 1115348
Less:
Depreciation to-date 839030
Net Block 276318
Capital Expenditure in Progress 3196
Current Assets, Loans & Advances:
Inventories 1689257
Sundry Debtors 287026
Cash & Bank Balances 13093 1989376
Other Current Assets:
Loans & Advances 101936
Current Liabilities and Provisions:
Liabilities 1288650
Provisions 163055
Net Current Assets 639607
Inventories: As Spare Parts 15408
Production 13898
Fuel Stores 139
Miscellaneous 1371
Contd…
Abstract from Profit and Loss and Balance Sheet – March 2005
113
(Rs. in Million) (Rs. In Thousands)
Inventories: As Stores As at 31.03.2005
Raw Materials & Components 830576
Materials in Transit 184654
Materials with Fabricators 26484
Scraps 11569
Finished Goods 189866
Work-in-Progress 430700
Total 1689257
Cost of Goods Sold 4907
Materials Cost 3522
Production Cost 4576
Sales Value 5121
Indigenous Materials Cost 2536
Imports Materials Cost 986
Manpower in Purchase 47 (Nos.)
Manpower in Total 2115 (Nos.)
Wage Bill of Purchase Department 23
Total Wage Bill 728
Purchases 4730
Purchase department cost 2414
Total no. of orders placed 3721
Total handling cost 21671
Total value of materials received and
issued
7372
BHARAT HEAVY ELECTRICALS LIMITED
114
BOILER AUXILIARIES PLANT, RANIPET
Abstract from Profit and Loss and Balance Sheet – March 2006
(Rs. In Thousands)
PARTICULARS As at 31.03.2006
(Rs. In Thousands)
Sources of Funds 1918931
Capital
Fixed Assets
Gross Block 1152010
Less:
Depreciation to-date 890250
Net Block 261760
Capital Expenditure in Progress 12691
Current Assets, Loans & Advances:
Inventories 2075770
Sundry Debtors 350783
Cash & Bank Balances 17582 2444135
Other Current Assets:
Loans & Advances 107340
Current Liabilities and Provisions:
Liabilities 2473959
Provisions 200383
Net Current Assets 122867
Inventories: As Spare Parts 31045
Production 29033
Fuel Stores 96
Miscellaneous 1916
Contd…
Abstract from Profit and Loss and Balance Sheet – March 2006
115
(Rs. in Million) (Rs. In Thousands)
Inventories: As Stores As at 31.03.2006
Raw Materials & Components 1138332
Materials in Transit 101780
Materials with Fabricators 36513
Scraps 17857
Finished Goods 271222
Work-in-Progress 479021
Total 2075770
Cost of Goods Sold 6712
Materials Cost 5082
Production Cost 6381
Sales Value 7291
Indigenous Materials Cost 3802
Imports Materials Cost 1280
Manpower in Purchase 51 (Nos.)
Manpower in Total 2205 (Nos.)
Wage Bill of Purchase Department 25
Total Wage Bill 800
Purchases 5526
Purchase department cost 2782
Total no. of orders placed 3825
Total handling cost 2528
Total value of materials received and
issued
8813
BHARAT HEAVY ELECTRICALS LIMITED
116
BOILER AUXILIARIES PLANT, RANIPET
Abstract from Profit and Loss and Balance Sheet – March 2007
(Rs. In Thousands)
PARTICULARS As at 31.03.2007
(Rs. In Thousands)
Sources of Funds 3005764
Capital
Fixed Assets
Gross Block 1196209
Less:
Depreciation to-date 936482
Net Block 259727
Capital Expenditure in Progress 38248
Current Assets, Loans & Advances: 5166150
Inventories 2863867
Sundry Debtors 2111388
Cash & Bank Balances 1071
Other Current Assets:
Loans & Advances 189824
Current Liabilities and Provisions:
Liabilities 5836989 6095920
Provisions 258931
Net Current Assets -929770
Inventories: As Spare Parts 36576
Production 33529
Fuel Stores 329
Miscellaneous 2718
Contd…
Abstract from Profit and Loss and Balance Sheet – March 2007
117
(Rs. In Thousands)
Inventories: As Stores As at 31.03.2007
Raw Materials & Components 1131293
Materials in Transit 395919
Materials with Fabricators 66215
Scraps 15335
Finished Goods 474938
Work-in-Progress 743591
Total 2881119
Cost of Goods Sold 8829
Materials Cost 6620
Production Cost 8267
Sales Value 10095
Indigenous Materials Cost 5342
Imports Materials Cost 1278
Manpower in Purchase 52
Manpower in Total 2175
Wage Bill of Purchase Department 25
Total Wage Bill 997
Purchases 6942
Purchase department cost 3012
Total no. of orders placed 3950
Total handling cost 3161
Total value of materials received and
issued
11231
ANNEXURE
118
The extra information related to BHEL that have been collected are,
1. According to BSE – Market Capital was Rs. 55700.03.
2. Ownership – Central Govt. - Commercial Enterprises.
3. Auditor – D.R.Mehta & Associates
4. Registrar – Karvy Computer share Pvt. Ltd.
5. Earnings per Share (EPS) – Rs. 77.13.
6. Shares outstanding – Rs. 24, 47, 60,000.
7. Average daily volume (30 days) – Rs. 31.57.
8. Share holding as per Sep 2006
Promoter owned – 67.72%
Public owned – 1.17%
FIIs owned – 21.91%
Others owned – 9.20%
119
BIBLIOGRAPHY
BIBLIOGRAPHY
“MATERIALS MANAGEMENT” - P. GopalaKrishnan and
M.Sunaresan, Prentice Hall of India publications 15th edition.
120
“INVENTORY MANAGEMENT” - L.C. Jhamb, and Everest
publications 3rd edition.
“RESEARCH METHODOLOGY” - Kothari. C.R (2001), Wishwa
publications.
P. Saravanavel and S. Sumathi, “PRODUCTION AND
MATERIALS MANAGEMENT” – Margham publications 2 nd
edition.
The introduction about the company was collected from the company
website, www.bhel.com
121
top related