A PROJECT REPORT

ON

INVENTORY MANAGEMENT
IN
RASHTRIYA ISPAT NIGAM LIMITED
VISAKHAPATNAM STEEL PLANT
A Project Report submitted in Partial Fulfilments for the
award of the degree

MASTER OF COMMERCE
Submitted
By

CH.SATYAM NAIDU
Regd.No.111250406007
Under the guidance of

Sri DSR Murty,

B.Sc., AICWA

Asst. Manager (F&A)

Facilitated by HR Dept of RINL

Visakhapatnam
2011-2013
O.R.M.Rao

M.L.S.VARMA

A.G.M (HR)

Asst.Mgr (HR)

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

Place: Visakhapatnam
(CH.SATYAM
NAIDU)
Date:

CERTIFICATE

This is to certify that Mr.CH.SATYAM NAIDU(M.com) student of

MAHA RAJAH P.G COLLEGE has completed the project report
entitled

STUDY

ON

INVENTORY

MANAGEMENT

IN

RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPTNAM STEEL

PLANT in Finance & Accounts Department from 04-06-2012 to 1606-2012 under my guidance.

(DSR Murty)
Asst. Manager (F&A)
Place: Visakhaptnam
Date:

ACKNOWLEDGEMENT

I am very thankful to Sri DSR Murty, Asst. Manager(F&A), Rashtriya Ispat

Nigam Limited, Visakhapatnam steel Plant for providing his guidance and
sparing his valuable time as my project guide in completing my project
successfully in time.
I also express my sincere thanks to O.R.M.Rao AND M.L.S.Varma HRD,
RINL/VSP & Student Coordinator for accepting my request for doing the
project work in their esteemed organisation.

Finally, I would like to thank my parents for their encouragement and support.

CH.SATYAM
NAIDU

INDEX
Chapter-I: INTRODUCTION

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

Chapter-II: INDUSTRY PROFILE IN THE COMPANY

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

Chapter-III: COMPANY PROFILE

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

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

Chapter- IV:

Inventory Management of Stores and spares

in
Visakhapatnam

Inventory of Stores and Spares

Accounting of Stores and spares
Chapter-V:

THEORITICAL ASPECTS OF INVENTORY

MANAGEMET AND INVENTORY CONTROL

Introduction
Inventory Management And Inventory control
Essentials of Good Inventory Management

Chapter VI: Practical Study Analysis and Interpretation

Inventory management in vsp steel plant

Comparative Analysis
Ratio Analysis of Stores and Spares
Value Analysis
Interpretation

Chapter-VII: SUMMARY, FINDINGS AND SUGGESTIONS

Findings
Suggestions

CHAPTER I

Introduction

Introduction
Steel comprises one of the most important inputs in all sectors of
economy. Economy of any country depends on the strong base of the iron
and steel industry. Steel is a versatile material with multitude of useful
properties, making it indispensable for furthering and achieving continual
growth of the economy- be it construction, manufacturing, infrastructure
or consumables. The level of steel consumptions has long been regarded
as an index of industrialization and economic maturity attained by
country.

Keeping in view the importance of steel, the integrated steel

plants with foreign collaborations were set up in the public sector in the
post-independence era.

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

The organization is required to identify and fulfill his requirement to the
extent possible.

His satisfaction is goal and objective of organization..

Now-a-days many organizations recognized this fact and adopting

customer oriented policies and methods in achieving his satisfaction. In
order to fulfill his requirement, the organization is required to make
available right product in right time at right place.

In production and

marketing front, organization has been successfully adopting latest

technologies and methods to attract the customers.

However, many

organizations are yet to establish their command in procuring right quality

materials in right quantities in right time. The reason is the concept of
inventory

management

is

not

completely

reached

the

practicing

managers. Also, many methods of inventory management or control are

practically not possible to implement.

In this light of experience, an

attempt made to study the concept of inventory management and

inventory controls keeping in view the concepts and methods of inventory
management followed at Visakhapatnam Steel Plant.

1.2 MEANING OF INVENTORY

The Institute of Chartered Accountants of India defined Inventory
as tangible property held (I) for sale in the ordinary course of
business or (II) in the process of production for sale or (III) for
consumption in the production of goods or service for sale
including maintenance supplies and consumables other than
machinery spares.
The American Production and Inventory Control Society states
that Inventories are stock keeping items which are held in a
stock point and which serve to decouple successive operations in
the process of manufacturing a product and getting it to the
consumer.
The basic decoupling function of Inventories has two aspects:
(a) Inventories are necessary because it takes time to complete an
operation and to move the product from one stage to another in
process and movement of inventories;
(b)Inventories employed for organizational reasons, such as to let one unit
schedule its operations more or less independently of another.
Thus, Inventory is detailed list of those moveable items, which are
necessary to manufacture a product and to maintain the equipment and
machinery in good working order. The quantities as well as the value of
the every item are also mentioned in the list.

1.3 NATURE OF INVENTORY

The major current asset is inventory. The term inventory refers to stocks
of the products of a company in manufacturing for sale and components
that make up the product. The store inventory is anticipation of raw
materials, work in progress and finished goods.
Raw materials are those basic inputs that are converted into finished
products through the manufacturing process. Work in process inventory
consists of items currently being used in the production process. Finished
goods represent final or completed products, which are available for sale.
Inventory as a current assert differs from other current asset the views of
concerning the appropriate level of inventory would differ among the
different functional areas. The job of finance manager is to reconcile the
conflicting viewpoints of the various functional areas regarding the
appropriate inventory levels in order to fulfill the overall objectives of
maximizing the owners wealth. Inventory management is related to
overall objective of the firm.

1.4 INVENTORY MANAGEMENT

Inventories constitute the most significant part of the current assets of
any organization. On average inventories are approximately 60 percent of
current assets in public limited companies in India. Because of the large
size of inventories maintained by ferrous, considerably amount of funds is
required to be committed in them. It is therefore, absolutely imperative to
manage

inventories

efficiently

and

effectively

in

order

to

avoid

unnecessary investments in them.

Purchase, production and marketing functions are mainly concerned with
the management of inventories. These functions try to have large stocks

of inventories to facilitate production or marketing of the products.

It

requires large investment in the inventories and may increase the cost of
product by way of interest on such investment.

It is the prime

responsibility of Finance function to have a proper management and

control over the investment in inventories, so that it should not be a loss
for the business. For this purpose, the Finance function has to take care of
maximum and minimum levels of stock of inventories in the business to
have continuity in production process.
The Inventory Management includes the following areas of management
as:

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

levels of Inventory

To establish timing schedules, procedures and reordering sizes while

procuring the inventories,

To decide the minimum safety levels of inventory,

To coordinate the sales, production and inventory policies,

To provide proper storage facilities,

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

developing the forms for recording these transactions,

To assign responsibilities for carrying out inventory control functions

and

To

supervise

and

reporting

of

overall

activity

of

inventory

management/control.

Thus, Inventory Management ensures proper coordination of activities and

policies

regarding

procurement,

production

and

marketing

materials/products in order to achieve better inventory control.

of

Hence,

Inventory management includes inventory control, but inventory control

does not mean inventory management.
In large organizations, inventory management is kept under the direct
control of manager materials engineering. The basic duties of the person
in change of inventory management are listed below :
1. Advising the production manager, in establishing production and
material control
2. Establishing policies and programs for purchasing, receiving and
storing material
3. Preparing budgets to accomplish objectives.
4. Introducing control through comparison of performance against
standards
5. Keeping effect with trends, which are likely to affect long-range
stocking and purchasing policies
6. Arranging for purchasing of materials, equipments etc
7. Consulting with engineers about current &proposed product design

1.5 OBJECTIVES OF INVENTORY MANAGEMENT

Inventory

Management

has

become

very

significant

management in the present day of manufacturing industry.

process

of

The basic

managerial objectives of inventory management are

To avoid over investment or under investment in inventories and

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

at proper value.

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

1. Primary Sources
2. Secondary Sources

Primary Sources :
It is the information collected directly without any references. It is mainly
through interactions with concerned officers & staff, either individually or
collectively; some of the information has been verified or supplemented
with personal observation. These sources include.

Thorough interactions with the various department Managers of VSP.

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

Store Keepers

Secondary Sources:

This data is from the number of books and records of the company, the
annual reports published by the company and other magazines.
secondary data is obtained from the following :
a) Stores Ledger
b) Bin Cards
c) Stores Accounts Records
d) Other books and Journals and
e) Annual Reports of the company

1.7 Objectives of the study

The

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

2. To determine the inventory status of VSP and analyse them.
3. To determine the monetary value of various issues involved in
Inventory Mgt.
4. To suggest various control systems of inventory.
5. To determine an effective inventory control system.

1.8

Significance / Need / Importance of Study

The scope of Inventory management is very wide that various techniques

of inventory control management like EOQ (Economic Order Quantity)
Model, ABC Analysis, XYZ Analysis, FSN Analysis, HML Analysis, SDE
Analysis, VED Analysis, etc., which helps to reduce cost and to maintain
the inventory effectively.

1.9 Limitations of Study

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

It does not deal with other

inventories like raw materials, finished goods and work in progress.

b) The project deals with ABC Analysis of consumption, XYZ Analysis of
inventory, FSN Analysis of inventory and other important concepts of
Inventory Management at VSP.
c) As the details of Inventory are maintained confidentially, the project
deals with fewer areas of Inventory.
d) As the time spent is only two months, it is not possible to go into detail
of item wise study in depth.
e) The collection of information is mainly through secondary data.

CHAPTER-II
INDUSTRY PROFILE
IN INDIA

Introduction
Steel is an alloy of iron usually containing less than 1% carbon is a
versatile material with multitude of useful properties used most frequently
in the automotive and construction industries. Steel can be cast into bars
strips, sheets, nails, spikes, wire, rods or pipes as needed by the intended
user. The consumption of steel is regarded as the index of industrialization
and the economic maturity any country has attained.
The development of steel industry in India should be viewed in
conjunction with the type and system of government that had been ruling
the country. The production of steel in significant quantity started after
1990.

The growth of steel industry can be conveniently started by

dividing the period in to pre and post independence era. In the period of
pre independence, steel production was 1.5 million tones per year, which
was raised to 9 million tones of target. This is the result of the bold steps
taken by the government to develop this sector.

Growth of Steel Industry:

2.2 Pre-independence
1830

Josiah, Marshall Health constructed the first

manufacturing plant at port Move in Madras presidency.
James Erskin founded the Bengal iron works.
Jamshedji Tata initiated the scheme for an integrated
steel plant.
Formation of TISCO.
Tata iron & steel company started production.

TISICO was founded.

1916

2.3 Post-independence
1951-56

- First Five Year Plan.

-

No new steel plant came up .The Hindustan steel Ltd. was

born on 19th January, 1954 with the decision of setting up
three steel plants each with one million tone input steel per
year in at Rourkela, Bhilai and Durgapur; TISCO stated its
expansion program.

Second Five Year Plan

-

A bold decision was taken up to increase the ingot steel

output India to 6 Million tons per year & production at
Rourkela, Bhilai and Durgapur steel plant started.

Third Five Year Plan

-

During the third five year plan the three steel plants under
HSL; TISCO & HSCO were expanded as show. In January
1964 Bokaro steel plant came into existence.

Recession Period
-

The entire expansion program was actively executed during

this period.

1969-74 - Fourth Five Year Plan

-

Licenses were given for setting up of many mini steel

plants and re-rolling mills.

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

south.

One

(Karnataka).

each

at

Visakhapatnam

and

Hospet

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

The total installed capacity from 6 integrated plants was
106 Mt.

1979

Annual Plan
-

The erstwhile Soviet Union agreed to help in setting up the

Visakhapatnam steel plant.

Sixth Five Year Plan

-

Work on Visakhapatnam steel plant was started with a big

bang and top priority was accorded to start the plant.

Scheme for modernization of Bhilai Steel Plant, Rourkela,

Durgapur, TISCO were initiated.

1985-91 - Seventh Five Year Plan

-

Expansion

work

of

Bhilai

and

Bokaro

Steel

Plants

completed.
-

Progress on Visakhapatnam steel plant picked up and

rationalized concept has been introduced to commission
the plant with 3.0Mt liquid steel capacity by 1990.

1991-96 - Eight Five Year plan

-

Vishakhapatnam

steel

plant

started

its

production

modernization of other steel plants is also duly envisaged.

1997-02 - Ninth Five Year Plan
-

Visakhapatnam steel plant had foreseen a 7% growth

during the entire plan period.

2002-07 - Tenth Five Year Plan

-

Steel industry registers the growth of 9.9 % Visakhapatnam

steel plant high regime targets achieved the best of them.

2007-12 - Eleventh Five Year Plan

Cost of schemes/project original approved by Government of
India is Rs.9,569.18 crores

2.4 The major steel and related companies in India

1.

Bharat Refectories Ltd.

2.

Hindustan Steel Works Construction Ltd.

3.

Jindal Steel and Power Ltd.

4.

Tata Iron Steel Company Metal Scrap Trade Corporation Ltd.

5.

Metallurgical and Engineering Consultants India Ltd.

6.

National Mineral Development Corporation Ltd.

7.

Rashtriya Ispat Nigam Ltd.

8.

Sponge Iron India Ltd.

9.

Steel Authority of India ltd.

The global steel industry has witnessed several revolutionary changes

during the last century. The changes have been in the realms of both
technology & business strategy. The ultimate object of all these changes is
to remain competitive and open global market.
The Indian steel industry is growing very rigorously with the major
producers like SAIL, RINL, TISCO, JVL and many others. Our steel industry
has amply demonstrated its ability of adopt to the changing scenario and
to survive in the global market that is becoming increasingly competitive.
This has been possible to a large extent due to the adoption of innovative
operating practices and modern technologies.
Industrial Development in India has reached a high degree of self-reliance,
and the steel industry occupies a primary place in the strategy for future
development. At present the production of steel industry country is 34Mt.
the public sector steel industry has been restructured to meet challenges
and a separate fund has been established for modernization and future
development of the industry. It is now being proposed that Indian steel

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

the year2000.

2.5 Global scenarios

As per IISI

In March 2005 world Crude steel output was 928Mt when

compared to march 2004 (872Mt), The change in percentage
was 6.5%.

China remained the world largest crude steel producer in 2005

also (275Mt) followed by Japan (96Mt) and USA (81Mt). India
occupied 8th position (42Mt).

USA remained the largest importer of semi finished and

finished products in 2002 followed by China and Germany.

Japan remained the largest exporter of semi finished and

finished steel products in 2002 followed by Russia and
Ukraine.

Other significant recent developments in the global steel

scenario have been: Under the auspices of the OECD
(Organization for Economic Co-operation & Development) the
negotiations among the major steel producing countries for a
steel subsidy agreement (SSA) held in 2003 with the objective
to agree on a complete negotiating test for the SSA by the
Middle of 2004. It also set subsidies for the steel industry of a
ceiling of 0.5% of the value of production to be used
exclusively for Research & Development

2.6 Market scenarios

The year 2004-05 was a remarkable one for the steel industry with the
world crude steel production crossing the one billion mark for the first

time in the history of the steel industry. The world GDP growth about 4%
lends supports to the expectations the steel market is all set for strong
revival after prolonged period of depression .The Indian economy also
become robust with annual growth rates of 7-8 % this will provide a major
boost the steel industry. With the nations focus on infrastructure
development coupled with the growth in the manufacturing sector, the
Indian steel industry all set for north ward movement. The draft national
steel police envisage production of 60 Mt by 2012 and 110Mt by2020, and
annual growth rate of 6-7%. All this should therefore augur well for the
Indian steel industry.

2.7 Production scenarios:

Steel industry was de-licensed and decontrolled in 1991&1992

respectively.

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

In 2003-04 finished steel production was 36.193Mt.

Pig iron production in 2003-04 was 5.221Mt.

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

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

and in 2003-04 was 6%.

The last five year production performance is as under:(In Million tons)

YEAR

2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07

PIGIRON

3.39
4.08
5.28
3.76
3.18
4.39
3.52

SPONGEIR
ON

5.44
5.44
6.44
8.09
9.93
0.00
0.00

FINISHEDSTEE
L

29.27
30.63
33.67
39.12
41.15
30.84
31.40

2007-08
2008-09

4.95
5.08

0.00
0.00

29.74
39.95

2.8 DEMAND-AVAILABILITY PROJECTION

Demand-Availability of iron and steel in the country is projected by

ministry of steel annually.

Gaps in availability are met mostly through imports.

Interface with consumers by way of Steel Consumer Council exists,

which is conducted on regular basis.

Interface helps in redressing availability problems, complaints related

to quality.

2.9 PRICING & DISTRIBUTION

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

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

viz.

Defense, Railways, Small Scale Industries Corporations,

Exporters of Engineering Goods and North Eastern region.

Allocation to priority sectors is made by Ministry of steel.

Government has no control over prices of iron & steel.

Open market prices are generally on rise.

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

CHAPTER III

COMPANY PROFILE

Introduction:Steel comprises one of the most important resources of the economy.

History shows that, the strongest of civilizations have evolved quickly in
the course of time, because of the proper use of the iron and steel
reserves they had. The huge iron pillars at the entrance of New Delhi
suggest that the history of iron and steel industry in India is well over
2000 years old.

Steel comprises one of the most important inputs to all sectors of the
economy. Steel Industry is both a basic and a core Industry. The economy
of any nation depends on a strong base of Iron and Steel Industry in that
nation. History has shown that the countries having a strong potential for
Iron and Steel Industry have played a prominent role in the advancement
in the civilization in the world. Steel is such a versatile commodity that
every object we see in our day-to-day life had use, such as small items as
nails, pins, needles etc., to surgical instruments, agricultural implements,
boilers, ships, railway materials, automobile parts. The great investments
that has gone into the fundamental research in Iron and Steel Technology
has helped both directly and indirectly many modern fields of todays
science and technology. Steel is versatile and indispensable item. The
versatility of steel can be traced mainly of three reasons.

1.

It is only metallic item, which can be conveniently and economically

produced in tonnage quality.

2.

It has got very good strength coupled with malleability.

3.

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

manipulated to any extent by proper heat treatment

techniques.

Iron and Steel making as a craft has been known to India for a long time.
However, its production is significant quantities only after 1900.

VSP by successfully installing & operating efficiently Rs. 460 cores worth
of Pollution Control and Environment Control Equipments and converting
the barren landscape by planting more than 3 million plants has made the
Steel Plant, Steel Township and surrounding areas into a heaven of lush
greenery. This has made Steel Township a greener, cleaner and cooler
place, which can boast of 3 to 4 C lesser temperature even in the peak
summer compared to Visakhapatnam City.

VSP exports Quality Pig Iron & Steel products' to Sri Lanka, Myanmar,
Nepal, Middle East, USA, China and South East Asia. RINL-VSP was
awarded

"Star

Trading

House"

status

during

1997-2000.

Having

established a fairly dependable export market, VSP plans to make a

continuous presence in the export market.

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

industry and established the following steel plants, before it actually set
up VSP/RINL. The details of those are tabulated below.

Sl.
No.
1
2
3
4

STEEL PLANT

COLLABORATED BY

Durgapur steel plant

Bhilai steel plant
Bokaro steel plant
Rourkela steel plant

Britain
Erstwhile USSR
Erstwhile USSR
Germany

Visakhapatnam Steel Plant profile:-

To meet the growing domestic needs of steel, Government of India

decided to set up an integrated Steel plant at Visakhapatnam.

An

agreement was signed with erstwhile USSR in 1979 for cooperation in

setting up 3.4 million tones integrated Steel Plant at Visakhapatnam. The
foundation was laid by the then Prime Minister Mrs. Indira Gandhi on 20th
January 1971.

The Project was estimated to cost Rs.3, 897.28 cores based on prices as
on 4th Quarter of 1981. However, on completion of Construction of the
whole Plant in 1992, the cost escalated to around 8500 Cr. Unlike other
integrated Steel Plants in India, Visakhapatnam Steel Plant is one of the
most modern Steel Plants in the country. The plant was dedicated to the
nation on 1st August 1992 by the then Prime Minister, P.V.Narasimha Rao.

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

incorporated in the Plant. To operate the plant at international levels and
attain such lab our productivity, the organizational manpower has been
rationalized. The plant has a capacity of producing 3.0 MT of liquid steel
and 2,656Mt of saleable steel.

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

7m tall Coke Oven Batteries with coke dry quenching.

Biggest Blast Furnaces in the country.

Bell less top changing system in Blast Furnace.

100% slag granulation at the Blast Furnace cast house.

Suppressed combustionLD gas recovery system.

100% continuous casting of liquid steel.

Tempcore and Stelmor cooling process in LMMM & WRM.

Extensive waste heat recovery systems.

Comprehensive pollution control measure.

Major sources of raw materials

Raw Materials
Iron Ore Lumps & Fines
BF Lime Stone
SMS Lime Stone
BF Dolomite
SMS Dolomite
Manganese Ore
Boiler Coal
Coking Coal
Medium Coking Coal (MCC)

Source
Bacheli, Chattisgarh/Gua,
Jharkand
Jaggayyapeta, AP
UAE
Madharam, AP
Madharam, AP
Chipurupalli, AP
Talcher, Orissa
Australia
Gidi/Swang/Rajarappa/Kargali

Water supply

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

Water Supply Scheme.

Power supply

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

captive Power Plant.

The capacity of the power plant is 286.5 MW.

Visakhapatnam Steel Plant is exporting 60MW power to Andhra Pradesh

State Electricity Board.

Major Units
Annual
Capaci
ty
Units (3.0 MT Stage)
Department
(000
T)
Coke Ovens
2,261 4 Batteries of 67 Ovens & 7 Meters. Height
2 Sinter Machines of 312 Sq. Meters. grate
Sinter Plant
5,256
area each
Blast Furnace
3,400 2 Furnaces of 3200 Cu. Meters. volume each
Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.
Volume and Six 4 strand bloom casters
LMMM
710
4
Strand finishing Mill
4 Strand high speed continuous mill with no
WRM
850
twist finishing blocks
MMSM
850
6 STAND FINISHING MILL

Main Products of VSP

Steel Products
Blooms
Billets
Channels, Angles
Beams
Squares
Flats
Rounds
Re-bars
Wire Rods

By-Products
Nut Coke
Granulated Slag
Coke Dust
Lime Fines
Ammonium
Coal Tar
Sulphate
Anthracene
Oil
HPNaphthale
ne
Benzene
Toluene
Zylene
Wash Oil

Vision
To be a continuously growing world class company
We shall

Harness our growth potential and sustain profitable growth.

Deliver high quality and cost competitive products and be the first
choice of customers.

Create an inspiring work environment to unleash the creative

energy of people.
Achieve excellence in enterprise management.
Be a respected corporate citizen, ensure clean and green
environment and develop vibrant communities around us.

Mission
To attain 16 Mt liquid steel capacity through technological up-gradation,
operational efficiency and expansion; augmentation of assured supply of
raw materials; to produce steel at international Standards of Cost &
Quality; and to meet the aspirations of stakeholders.

Objectives

Expand plant capacity to 6.3 million ton by 2011-12 with the Mission
to expand further in subsequent phases as per the corporate plan.
Revamping existing Blast Furnaces to make them energy efficient to
contemporary levels and in the process increase their capacity by 1
Mt, thus total hot metal capacity to 7.5 Mt
Be amongst top five lowest cost steel producers in world by 200910.
Achieve higher levels of customer satisfaction.
Vibrant work culture in the organization.
Be proactive in conserving environment, maintaining high levels of
safety

Core values

and addressing social concerns.

Commitment.

Customer Satisfaction.

Continuous Improvement.

Concern for Environment.

Creativity & Innovation

Quality Policy
Visakhapatnam Steel Plant Employees are committed to meet the needs
and expectations of our customers and other interested parties.

To

accomplish this, they will

Supply quality goods and services to customers delight.

Achieve quality of the products by following systematic approach

through planning, documented procedure and timely review of
quality objectives.

Continuously improve the quality of all materials, processes and

products.

Maintain an enabling environment, which encourages teamwork

and active involvement of all employees with their involvement.

Environment Policy

Visakhapatnam Steel Plant carrying out its operations without harming to

the environment. To accomplish this, they will

Document, implement, maintain and continuously review the

environmental management system.

Comply

with

all

the

relevant

regulations and other requirements.

environmental

legislations,

Ensure continual improvement in the environmental performance

and prevention of pollution by minimizing the emissions and
discharges.

Maintain a high level of environmental consciousness amongst

employees.

Energy Policy

Visakhapatnam Steel Plant is committed to optimally utilize various forms

of energy in a cost-effective manner to effect conservation of energy
resources.
To accomplish this, they will:

Monitor closely and control the consumption of various forms of

energy through

an effective Energy Management System.

Adopt appropriate energy conservation technologies.

Maximize the use of cheaper and easily available forms of

energy.

OSHAS Policy
Visakhapatnam Steel Plant is committed to occupational health and safety
of employees and contract workers. To accomplish this, the will,

Document, implement, maintain and periodically review the

occupational health and safety management system including
the policy.

Comply with the relevant occupational health and safety

legislations, regulations and other requirements.

Ensure continual improvement in the environment performance

and prevention of pollution by minimizing the emissions and
discharges.

Maintain a high level of environmental consciousness amongst

employees.

Review the environmental objectives and targets on a continuous

basis.

Human Resource Policy

Visakhapatnam Steel Plant is committed to create an organizational

culture, which nurtures employees potential for the prosperity of the
organization. To accomplish this, they will,

Identify development needs of the employees on a regular basis,

provide the necessary training and continually evaluate and
monitor the effectiveness of the training so that the quality of the
training also gets updated.

Provide inputs to the employees for developing their attitude

towards

work

and

for

matching

their

competencies

with

organizational requirements.

Create an environment of learning and knowledge sharing by

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

Facilitate the employees for continuous development of their

knowledge base, skills, efficiency, innovativeness, self-expression
and behavior so that they contribute positively with commitment
for

the

growth

and

prosperity

of

the

organization

while

maintaining a high level of motivation and satisfaction.

Prepare employees through appropriate development programs

for taking up higher responsibilities in the organization.

Customer Policy

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

times with transparency.

VSP will strive to meet more than the customer needs and
expectations pertaining to products, quality, and

value for

money and satisfaction.

VSP greatly values its relationship with customers and would

make efforts at strengthening these relations for mutual benefit.

I.T. Policy

RINL/VSP is committed to leverage Information Technology as the

vital

enabler

organizational

in

improving

efficiency,

the

customer-satisfaction,

productivity,

decision-making,

transparency and cost-effectiveness, and thus adding value to

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

Follow best practices in process Automation & Business Processes

through IT by in-house efforts / outsourcing and collaborative
efforts with other organization / expert groups / institutions of
higher learning, etc., thus ensuring the quality of product and
services at least cost.

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

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

Major Departments

Raw Material Handling Plant

VSP annually requires quality raw materials viz. Iron Ore fluxes (Lime
stone, Dolomite); coking and non coking coals etc. to the tune of 12-13
Million Tones for producing 3 Million Tones of Liquid Steel. To handle such a
large volume of incoming raw materials received from different sources
and to ensure timely supply of consistent quality of feed materials to
different VSP consumers, Raw Material Handling Plant serves a vital
function. This unit is provided with elaborate unloading, blending, stacking
& reclaiming facilities viz. Wagon Tipplers, Ground & Track Hoppers, Stock
yards Crushing plants, Vibrating screens, Single/ twin boom stickers,
wheel on boom and Blender reclaimers. In VSP peripheral unloading has
been adopted for the first time in the country.

The Raw Material Handling Plant (RMHP) Department procures the

different raw materials from various sources.

The following are the

important raw material handled by the RMHP Department.

Coke Oven Department

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

which is received from RMHP Department.

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

absence of air at a temperature above 125oC for a period of 16-18 hours.
It is used as a fuel and reducing agent for reduction of iron ore in blast
furnace. The following are the parameters of Coke Ovens:

Number of batteries

Number of ovens in batteries

Coal handling capacity of

67

ovens
Dimensions of oven

31.6 tones
16m length x 7m

height

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

in coal chemical plants. The coal chemicals are tar, benzyl and ammonia
based products. The coal is not consumed directly because coke helps in
reducing the pollution.

Sinter Plant Department

Sinter is a hard and porous lump obtained by agglomeration of lines of

iron ore, coke, limestone and metallurgical waster.

This department by

not wasting the powder and small pieces of iron ore coal manganese,
dolomite and limestone makes Sinter Cakes and put it for reuse.

This

increases the productivity of Blast Furnace, improves the quality of pig

iron and decreases the consumption of coke rate.

Blast Furnace

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

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

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

For one tone of hot metal production, 310Kgs. iron ore,

1390Kgs. sinter and 627Kgs. of coke with some other additives.

For production of pig iron/hot metal there are two blast furnaces named
Godavari and Krishna. They are of the largest and most modern furnaces
in the country.

Steel Melt Shop

Hot metal produced in blast furnace contains impurities like carbon,

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

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

of

hot

metal

in

to

steel,

the

steel

is

subjected

to

homogenization treatment and cast in to blooms in continuous casting

machines.

Rolling Mills:-

Blooms cannot be used as they are in daily life. These blooms have to
reduce in size and properly shaped to fit for various jobs. Rolling is one of
the mechanical processes to reduce larger size sections in to smaller
cones. The cast blooms are heated and rolled in to various long products
of different specifications at three high capacity sophisticated high-speed
rolling mills.

Wire Rod Mill:-

WRM is a stand mill and is fully automated with computers.

The mill

consists of 2.5 stands and a capacity of 850,000 tonnes per annum. The
mill product mix includes rounds and ribbed wire in the sizes of 5.5 mm to
12.7 mm dia. wire rods are made in coil having maximum weight of 1200
Kgs. Liquid Steel produced in LD Converters is solidified in the form of
blooms in continuous Bloom Casters. However, to homogenize the steel
and to raise its temperature, if needed, steel is first routed through, Argon
rinsing station, IRUT

(Injection Refining & Up temperature) / ladle

Furnaces.
Wire Rod Mill is fully automated & sophisticated mill. The billets are rolled
in 4 strand, high-speed continuous mill having a capacity of 8, 50,000
Tonnes of Wire Rod Coils. The mill produces rounds in 5.5 - 14 mm range
and rebars in 8, 10 & 12 mm sizes. The mill is equipped with standard and
Retarded Stelmore controlled cooling lines for producing high quality Wire
rods in Low, Medium & High carbon grade meeting the stringent National
& International standards viz. BIS, DIN, JIS, BS etc. and having high
ductility, uniform grain size, excellent surface finish.

Medium Merchant & Structural Mill (MMSM):

This mill is a high capacity continuous mill. The feed material to the mill is
250 x 250 mm size bloom, which is heated to rolling temperatures of 1200
C in two walking beam furnaces. The mill is designed to produce
8,50,000 tons per annum of various products such as rounds, squares,
flats, angles (equal & unequal), T bars, channels, IPE beams I HE beams
(Universal beams)

AUXILIARY FACILITIES

Power Generation & Distribution:

The average power demands at all units of VSP when operating the full
capacity will be 221 MW. The captive generation capacity of 270 MW is
sufficient to meet all the plant needs in normal operation time. In case of
partial outage of captive generation capacity due to break down,
shutdown or other reasons. The short fall of power is availed from APSEB
grid. The agreement with APSEB provides for exporting of surplus power to
APSEB. The captive generating capacity comprises of
- TPP -247.5 MW (3x60 MW + 1 X 67.5 MW)

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

- Gas Expansion Turbines (BF / ces)* - 2x12 MW
(*Power availability from BPT & GET is around 22MW)
Power plant also meets the Air Blast requirements of Blast Furnaces thro' 3
Turbo blowers each of 6067 NM 3 / hr capacity.
Power from APSEB is received at Main Receiving Station thro' 220KV
overhead distribution lines. The entire plant is configured as 5 electrical
load blocks (LBSS 1 to 5) and step-down substations are provided in each
block with 220 KV transformers to step down to 33/11/6.6 KV for further
distribution.
Traffic Department:A steel plant of the size of VSP has to handle around 60 to 65 MT traffic
comprising of incoming traffic in the form of raw materials and outgoing
traffic in the form of finished or saleable steel, and also the in process
traffic such as cast pig iron, mill scrap, hot metal.

Of this 50% is transported by belt conveyors, 45% by Rail Transport and

5% by Road. VSP has the distinction of having peripheral unloading
system for the 1st time in Steel Industry.

Engineering shops & Foundry (ES & F)

Engineering Shops are set up to meet the requirements of Ferrous & Non
Ferrous spares of different departments. This complex is divided into
1. Forge Shop
2. Structural shop
3. Foundry
4. Central machine shop
5. Wood Working Shop and
6. Utility Equipment Repair Shop (UERS).
The Forge shop is designed for production of shafts, coupling flanges etc.
and also of forge shapes such as crusher hammer heads, special bolts,
nuts etc. In the Structural shops the fabricated structural of about 4500
Tonnes are produced annually and the input consisting of sheets, plates,
channels, angles beams etc. In Foundry Iron castings up to a weight of 5
tons and non-ferrous casting up to a weight of 1 ton are produced. 2600
Tonnes of iron castings and 200 tones of non-ferrous castings are
produced annually. In steel foundry, steel casting up to maximum piece
weight of 10T is produced. Steel ingots up to 1.3 Tonnes for forging are
also produced.
In the Central Machine Shop, various spares are made. The machining
section has over 100 major machine tools including lathes, milling, boring,
planning, slotting, shaping, grinding and other machines. The Wood
working Shop manufactures patterns for foundries. The shop will require
300 Cu.m. Per year of wooden patterns.

Central Maintenance Electrical:Maintenance of all H.T motors, L.T motors and DC motors of above 200KW.
There are 810 such large rotating electrical machines spread throughout
the plant including 3 Nos. of 60 MW Turbo-Generators, 1 No of 67.5M TG in
TPP, 2 no's of Back Pressure Turbo Generators of 7.5 MW each and 2 Nos.
of Gas Expansion Turbo- Generator of 12 MW each. The services provided
are as mentioned below.
a)

Repairs, Maintenance and condition monitoring of all rotating

Electrical machines of the plant. The job includes transportation,
Overhauling and re-erection with precision alignment.

b)

Maintenance of Electrics of all streetlights, Tower lights and Weigh

Bridges throughout the plant.

Electro Technical Laboratory

1)

Repairs all the defective electronic PCBs, which are taken out from
the equipment during their functioning.

2)

Procures and arranges spare PCBs for the equipment of PLCs and
drive controls for motors in the plant and also for UPS systems.

3)

Involves in the plant modernization activities and up gradation of

equipment.

Electrical Repair Shop (ERS):

ERS is a central repair shop to carry out repair activities like overhauling,
rewinding, testing etc., of various types of AC Motors, DC Motors, HT
Motors, Submersible pumps, Distribution transformers, Welding Machines,
Control Transformers, Lifting magnets, Coils etc., of the plant.

The Main Functions of ERS are:

a)

Overhauling of motors

b)

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

c)

Testing of Electrical equipment

d)

Emergency Site Repairs

e)

Performance assessment of electrical motors

Utilities Department:Utilities dept. Consists of

1.

Air Separation Plant

2.

Compressor Houses

3.

Chilled water plants and Acetylene plants.

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

oxygen, gaseous nitrogen and gaseous argon. Compressor Houses
produce Compressed Air required for the operation of pneumatic devices,
for instruments and controls, pneumatic tools and for general purpose in
the various production units of Steel Plants. Chilled Water plants (2 No's)
produce chilled water required for use in the ventilation and air
conditioning system in areas such as office rooms, electrical control room
etc.
Acetylene plant produces Acetylene gas required for general purpose
cutting and welding.
Quality Assurance and Technological Development (QA &TD)

The QA & TD dept. has been set up to take care of activities pertaining to
Quality Control of Raw Materials, Semi finished products and finished
products. The QA & TD labs are provided at major department like
CO&CCP, SP, BF, SMS, and Rolling Mills etc., in addition to Central

Laboratory.

The

department

monitors

the

process

parameters

for

production of quality products. QA & TD carries out analysis, testing and

final inspection including spark testing of finished products and assigns
grades to them.
Calcining & Refractory Material Plant:
CRMP consists of two units - Calcining Plant & Brick Plant. In Calcining
plant limestone & dolomite are calcined for producing lime & calcined
dolomite, which are used for refining of steel in the converters.
Roll shop & Repair shop:
Roll shop & Repair shop is in the complex of Rolling Mills catering to the
needs of mills in respect of roll assemblies, guides few Maintenance
spares and roll pass design. Geographically this dept. is in three areas as
roll shop-1, Roll shop-II and Area Repair Shop. The main activities of this
shop is Roll pass Design, grooving of rolls, assembly of rolls with bearings,
preparation of guides and their service and manufacture / repair of mill
maintenance spares.
For the first time in the country, VSP has adopted CNC technology for
grooving of steel rolling mill rolls. High constant respective accuracy,
higher productivity, use of standard tool for any groove turning,
elimination of the use of different templates, easier to incorporate groove
modification etc., are some of the advantages of CNC lathes over the
conventional one.
Plant Design
Major functions of this unit are :
1. Development of detailed Manufacturing Drawing and Replacement
Specification drawings

2. Suggesting

New

Designs

and

engineering study and Analysis

3. Standardization

detailing

by

doing

elaborate

Works Contracts Department

Obtaining administrative approval on receipt of proposal from

indenting departments, tendering and awarding of work

Converting

tender

committee

meetings

and

preparing

recommendations forwarding work.

Preparing COM/Board Note for decisions at those forum Participating

in claims and arbitration proceedings and legal cases pertaining to
contracts

Registration of agencies under various categories & classes of works

periodically.

FUNCTIONS OF VARIOUS DEPARTMENTS OF RINL/VSP:

Directorate of Operations
Production Planning and Control:
Formulation of long term production plans and infrastructure support.
Formulation of Annual and Monthly production plan. This involves
detailed planning for product mix and value added steel along with
Marketing Dept.
Analyzing Plant performance against targets on a periodic basis and
taking necessary corrective actions.
Techno-economic and Quality:Formulation of techno-economic norms and energy management
parameters and reviewing the same against targets periodically.
Inputs and Basic Infrastructure:-

 Long term and short term planning for procurement of raw materials
like Imported Coking Coal (ICC), Medium Coking Coal (MCC), Boiler
Coal, Iron Ore Fines and Iron Ore Lumps etc.,
Formulation of Annual Inward and Outward traffic movement plan for
raw materials and finished products in consultation with Marketing
and Material Management Depts.

Repairs and Maintenance Planning:

Planning of major Capital Repairs, Shutdowns, Spares requirement and
ensuring preparedness before taking up the repairs.
Mines planning: Formulation of annual and monthly production plans for BF limestone,
BF grade dolomite, Mn Ore and Sand at VSP Captive Mines.
Monitoring of production and dispatch of Limestone, Dolomite, Mn Ore
and Sand from Captive Mines.
Projects planning: Long and short term planning for all developmental schemes of capital
nature comprising modernization and technology up-gradation.
Planning

and

implementation

of

Additions,

Modifications

and

Replacement (AMR) schemes.

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

Research and Development: Identification

of

Technological

Improvement

scopes

for

various

processes and plan for adoption of them by acquiring design and

know-how capability.

Indigenous

development

of

technology

involving

laboratory

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

Information Technology: Formulation of Organizational IT-Policy, IT-Security Policy and IT-Vision.

Identification of IT enabled projects for various processes and
implements them.
Budget plan and control: Identification of Budget requirement under various heads.
Control of the Budget and Spares, Consumables & Raw Materials
Inventory.
Systems and Procedures: Streamlining the contract management system to ensure consistency
of

approach

and

adoption

of

sound

principles

of

contract

management.
Ensuring the implementation and maintenance of quality management
system requirements for ISO 9001:2000 Certificate.
Monitoring pollution control activities of the Plant and interaction with
the State and Central Pollution Control Board.

Project Division
Design & Engineering Department
Liaisoning with Consultants and Government Authorities in connection
with designs, specifications, approval of drawings and Liaisoning work
for various types of clearances.
Preparation of drawings, design and specification for AMR and Non-AMR
jobs.
Assisting indenting departments in technical discussion with parties
and preparation of technical recommendation.
Layout clearances of various facilities coming in the Plant and
Township.
Operation of Consultancy contracts.

Construction Department
Exercising supervision of work at sites both for quality and quantity
checks.
Preparation of contractors bills, processing of extra items and closure
of contracts.
Liaisoning with suppliers, MM department, Design & Engineering
Department and Stores in connection with progress of work at site.
Arranging PAT/FAT will all concerned departments like works, design,
consultants and suppliers in terms of contract and handing over the
unit to works department for operation.

Contracts Department:
Awarding of contract from the point on receipt of administrative
approval from indenting departments.
Conducting commercial discussions with parties.
Arranging

Tender

Committee

meetings

and

preparing

recommendations for awarding work.

Preparing COM/Board Note for decisions at those forms.
Participating in claims and arbitration proceedings.

Project Monitoring Department: To monitor the physical and financial progress of all the works executed
by Construction department.
To monitor the progress of works executed by D&E as well as Contracts
department.
Preparation of various types of reports for information of Government
and different levels of Management.
Interaction

with

departments

and

consultant

for

updating

the

schedules and networks for Project Monitoring.

Directorate of Finance & Accounts

Making arrangement for long-term fund requirements.
Accounting of all minority transactions and preparation of financial
statement of the company and getting the same audited as required
under law.
Maintaining records with regard to the cost of products produced by the
company.
Release of payments to suppliers/providers of goods and services.
Release of salaries to the employees.

 According concurrence to proposals for investments & expenditure as

per the policies, procedures and the Delegation of Powers.
Conduct Internal Audits, Stock Verification and Statutory compliance.
Making working capital arrangements.
Submission of periodical reports to banks as per their sanctioned
terms.
Organizing for payment of Central Excise, Sales Tax, Income Tax and
other statutory payments.

Directorate of Personnel

Personnel Department
Manpower Planning,
Employees induction,
Service matters, policy & rules
Industrial relations,
Employees welfare
Corporate Social Responsibility (CSR),
Replies to parliamentary questions,
Official Language implementation

Legal Affairs
Legal Affairs deals with all legal matters including arbitration,
coordination with Standing Councils, Legal Advices etc.

Management Services
Quality Circle,
Suggestion Scheme,
Incentive Scheme,

 Reward Scheme,
Procedural Orders etc.

Training & HRD

Leadership Training,
Training on Motivation and Attitude,
Team Building
Skill Training.
Induction and Orientation,
Plant Practice Lectures,
Basic Engineering Lectures,
Plant Specialized Training,
Management Development.

Corporate Strategic Management (CSM)

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

formulation of VMO (Vision, Mission & Objectives) of the organization and
developing the strategy to achieve VMO. It has various wings which interalia includes Knowledge Management Cell (KM Cell). It has also developed
the Corporate Plan of RINL. It takes up strategic tasks of the organization.

CHAPTER IV
INVENTORY MANAGEMENT
OF STORES AND SPARES
IN
VISAKHAPATNAM STEEL PLANT

Procedure for Procurement, Receipt, Handling and Accounting of

Inventory of Stores and Spares in VISAKHAPATNAM STEEL PLANT
The inventories in Visakhapatnam Steel Plant are consisting of finished
goods, stock of raw materials, stock of stores and spares and working
progress.

The finished goods produced at various by production

department are sold by marketing departments and accounted by Sales

Accounting Section of Finance Department.

As regarding raw materials

concerned, the Raw Material Department procure the materials through

Materials Management Department (here after referred as MM Dept) for
use by production departments and are accounted by Raw Material
Accounts Section of Finance Department.
restricted

to

inventory

of

stores

and

As the present study is

spares,

the

procedure

for

procurement, receipt, handling and accounting of stores and spares is

detailed below:

Procurement
Automatic Recoupment Cell (AR Cell) of Stores Department prepares
indents in respect of materials, which are of meant for common use by
various user departments of company.

The various user departments

prepare the indents for procurement of materials, which are not procured
by AR Cell considering their usage, stock position, budgetary position, etc.

The indents in respect production departments are scrutinised by Spare

Part Cell of Works Department as to their technical requirements, stock
position, budgetary requirement, etc. The indents so prepared needs to
be approved by competent authority.

On approval, the indents are

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

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

An order indicating rate, terms and conditions

(hereafter referred as AT, i.e., acceptance of tender) placed on the on such

supplier.

The copy of order is sent to user department, Central Stores

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

Receipt and handling of Stores and Spares

The materials in respect of stores and spares, minor raw materials, etc are
received by CSD from suppliers.
consumption.

CSD also identifies the surplus and scrap materials and

disposes them.
through

its

CSD stores them and issues for

For these activities, CSD follows detailed procedure

sections

consisting

of

Collection

cell,

Receipt

Stores,

Discrepancy Receipt Stores, Claims cell, Dispatch Cell, Custody Stores, AR

or Stock cell, Inventory Control Cell, Disposal Stores etc.

The various

functions and procedure followed by CSD is given hereunder:

Collection cell
Collection cell receives the advance documents, like Lorry Receipts (LR),
Railway Receipts (RR), etc indicating ownership of materials and other
dispatch

particulars

from

suppliers

and

scrutinizes

documents are in accordance with terms of AT terms.

whether

such

Collection Cell

advices the transporters to deliver the consignments to the premises of

CSD

as

per

terms

wagon/truckloads

on

of
the

supply/transport
door

delivery

terms

in

respect

basis.

In

case

of

of

full

small

consignments, it assigns the collection agencies for collection of

consignments from transporters go-downs normally within three days

after receiving the documents and within one day for emergency
consignments. Collection cell receives daily reports from collection agency
in respect of materials delivered to the CSD or its sub-stores by collection
agency and from various Receipt Stores in respect of materials delivered
on full wagon/truck load basis. Collection Cell negotiates with the
transporters for reduction of demurrage charges. It obtains open
delivery/shortage

certificate

for

damaged

condition.

Collection

cell

surrenders RRs to Railways based on unloading reports from Receipt

Stores and collect due slips for wagons not received in the same RR.
Collection Cell receives details of demurrage charges from Traffic
Department, arranges for recovery from handling contractors, where
demurrages are attributable to CSD and informs Traffic Department with
due remarks, where demurrage is not attributable to stores. Collection Cell
makes payments from imprest in respect of payments made by it towards
freight, demurrages, etc. Collection Cell receives bills from unauthorized
transporters for carrying consignments forwards to Purchase Department
for scrutiny and payment. Collection Cell receives the Cheques for making
payment in respect of Lubricants and oils and arranges for their collection
on handing over of such Cheques to the suppliers.

After collecting the

lubricants and oils, the same will be delivered to major users directly
through

sub-stores

after

receiving

Stores

Issue

Note

for

raising

regularizing GARN. Collection cell also arranges dispatch of material on

the dispatch advice received from dispatch cell.

Receipt Stores
Receipt Stores receives the copies of ATs along with amendments, if any
from Purchase Department and verifies catalogue number, accounting
unit in AT with reference to details available in Catalogue Master. It
verifies delivery schedule and plans the space for bulk goods. Receipt

Stores receive the consignment through wagons, trucks, collection

agency, etc.
In respect of consignments booked in full wagon loads, railways hands
over the wagons to Traffic Department. At the time of taking wagons from
Railway, Traffic Department verifies condition of seals/lashes of the
wagons and reports the damaged/ tampered/duplicate seals/lashes. After
receiving intimation from Traffic Department, Receipt Stores ascertains the
ownership of wagons and acknowledges the placement of wagons. Receipt
Stores assigns unloading to handling contractor. After unloading is
completed, receipt stores shall inform to Traffic Department for drawing
out the wagons.

Receipt Stores indicates details of materials received

along with discrepancies, if any by signing the delivery book maintained

with Railways and passes the Discrepancy Delivery Message to all the
concerned.

Discrepancy Receipt Stores (DRS)

On rejection of materials by inspection agency, Receipt Stores prepares a
rejected GARN and hands over the material to DRS in respect of
breakages/damages at the time of receipt, wrong supply, incomplete
supply and quality problems. DRS receives the GARN along with AT copy,
Delivery Challan / Invoice Copy and Inspection Report. DRS also receive
the material from custody stores under dispatch note for the materials
rejected subsequent to GARN at Custody Stores. DRS receive and tally the
material with GARN. In case of bulk materials, the materials are stored in
the respective Custody locations.

DRS deal with the cases of Receipts

Stores for general items and spares. In case of other items, the respective
Custody Stores deal with the DR cases.
DRS categorizes the rejected material into (a) breakages/damage, which
can be covered with insurance and (b) all other DR cases and initiate the

actions for clearing the DR stores. In case of breakages/damages, DRS

take up with the supplier for replacement/rectification. DRS advise Finance
Department for recovery/withholding the payment. In case of emergency
requirement of plant, DRS shall issue the materials against SIN.

DRS send a list of rejected cases to the members of the MRB in advance.
MRB meets at regular intervals and reviews every DR case within 45 days
from the date of rejection and decides whether (a) the deviation is
marginal and material can be used with marginally reduced efficiency, (b)
rectifications required to be carried out to put the material in use and (c)
materials is to be rejected altogether and also the action to be taken
against the supplier for suspension of future business relations, etc.
Based the decision of MRB, DRS takes the approval of competent authority
for accepting the material and prepares the accepted GARN.

DRS issues materials to various user departments out of the rejected

materials for emergency needs after obtaining suitability certificate and
approval from competent authority. Whenever materials are issued to
department out of rejected lot due to urgency, receipt are regularized
immediately by raising GARNS under a separate identified series with
remarks that these GARNS are not meant for release of payment to the
supplier in order to enable accounting of both issues and receipts.
Subsequently after settling the issue of rejection by way of rebate etc,
DRS sends a communication to the bill passing section for release of
payment appropriately clearly liking reference of GARN and also MRB
decision. Valuation of both receipt and issue would be done as per the
usual practice.

Claims Cell
Collection Cell/Receipt Stores send a non-receipt report for all road
consignments to Claims Cell indicating the insurance clause as per terms

of AT. Receipt stores shall send discrepancy report in respect of shortages,

etc for claiming damages immediately after completion of inspection
along with documents like, Invoice/Delivery Challan, Inspection Note for
damages, Shortage/Open Delivery/Assessment Delivery Certificate, etc to
Claims Cell. However, Discrepancy Report for damages or repair charges
valuing less than Rs.500, where the insurance is to be borne by company
is not forwarded to Claim Cell.
Where insurance is responsibility of supplier, Claims Cell lodges the claims
in respect of non-receipt/shortage/transit damages with the suppliers and
follows up for repair/replacement/reimbursement.

Where insurance is

responsibility, Claims Cell lodges the claims along with necessary

documents required with Insurance Company through Finance Insurance
Claims Section and follows up for their settlement.

The claims are

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

rectification/replacement by supplier and clearance by Inspection, (c)
deduction of payment in the suppliers bill and (d) settlement through
MRB.

Dispatch Cell

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

to

suppliers,

from

Receipt

Stores

for

returning

excess

supplies/samples for testing to suppliers, from Custody Stores for

reconditioning of materials or returning of materials against quality
complains to suppliers and from user departments for reconditioning,
rectification or modification on placement of ATs for such jobs and for
returning empty gas cylinders along with a dispatch note. Dispatch Cell
certifies the condition of materials, arranges for packing the material,
informs to Insurance Company through Finance Insurance Section for
coverage of transit risk and hands over the materials to Collection Cell.
Collection Cell hands over the material to transporter receives LR/RR from

transporter and sends the LR/RR to Dispatch Cell for their action.
Dispatch Cell forwards original LR/RR to the supplier along with a copy of
dispatch note.

Custody Stores
Custody stores receives accepted material against GARN and gives
acknowledgement to Receipt Stores after checking a) catalogue number,
b) description, c) unit code, d) quantity for shortage/excess, and e)
quantity for damage shall tag the material. Custody Stores arranges the
material in racks, note down the location on the GARN copy, updates the
received quantity in Bin Card. If Bin Card does not exist, Custody Stores
Executive shall authorize opening of a new Bin Card and ensures no
duplicate card. Whenever a continuation card is to be opened after
completion 40 lines, Custody Stores Executive will tally the balance at line
number 40.

Custody Stores transfers these materials along with balance stock to the
supplier received under same GARN to DRS for taking suitable action by
DRS. For adjustment of stock balances, Custody Stores raises Stock
Adjustment Voucher (SAV), where physical balance does not match with
bin card balance, for rectifying the error/discrepancy in ground balance
with respective bin card balance for the following reasons.

Physical
discrepancies

(a) Storage losses

(b) Pilferage loss
(c) Loss on account of Fire, etc
(d) Excess/storage
verification

Existence of Duplicate Bin Card

Rectification of Errors in Catalogue Number

on

stock

(a) Error in posting transaction

quantity
(b) Posting in wrong bin card

(c) Wrong issue

Primarily the Custody Stores groups of respective Storehouse are

responsible for accounting and custody of material. Custody Stores offers
the stocks for verification to the stock verifier. Custody Stores verifies the
items at the time of each transaction and in case of discrepancy, the same
is brought to the notice of Custody Stores Executive.

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

Finance and (2) Internal Stock Verification of Stores Department. Custody
Stores is required to get verified its stocks of materials by Stock
Verification Section of Finance Department.

Custody Stores associates

with stock verifier and got verifies the material and certifies the physical
stock on a Joint Stock Verification Report. Before acknowledging the
discrepancies during stock verification, Custody Stores verifies the
discrepancies and gives the reasons within 5 days of completion of stock
verification.

Stock Cell

Stock Control or Automatic Recoupment (AR) Cell procures general

consumables with standard specification and items generally required by
more than one unit of a plant, which are included in AR list as decided by
AR committee. AR committee is a standing committee constituted with
the approval management. AR Cell ensures availability of all vital items
all the time. AR items are grouped as (a) vital items, which directly affect
the production and (b) other items AR items. AR items are categorized as
per

value

into

(Class

A)

annual

consumption

value

more

than

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

to 50,000/- and (Class C) annual consumption value less than Rs.50,000/Custody Stores informs stock position of AR items to AR Cell twice a week.
Most of the AR items shall be covered under rate contracts. AR Cell places
AT for these items directly on the under rate contracts with copies to (a)

Finance (b) Receipt stores and (c) Inspection agency. Supplier under rate
contract is required to keep enough stock of AR items. Deliveries shall be
staggered monthly/quarterly based on the projected annual requirement
and actual consumption. Vital items and Class A items are reviewed
monthly and suppliers are advised with modified delivery schedule.
Delivery corrections in respect of Class B items are under taken once in a
quarter.

Inventory Control Cell

Inventory Control Cell prepares inventory status and circulates to all user
departments at least once in quarter. It also carries out X Y Z analysis and
circulates list of X and Y items half yearly to user departments.

X
Y
Z

Inventory

Control

Items contributing to 70% value of

stock.
Items contributing to 20% value of
stock.
Items contributing to 10% value of
stock.
Cell identifies

the slow-moving and non-moving

materials. General items which have not been issued even once during
the last 5 (five) years shall be considered as non-moving items.

The

position of the item at the beginning of financial year shall be considered

for analysis.
inventory.

Non-moving inventory should not include Insurance

An item shall be removed from non-moving list only when

existing stock becomes nil and it is not declared as surplus item. Items
which had at least one issue per year in the last 3 (three) years are
considered as Fast Moving items. Slow moving items are items other than
insurance items which do not fall under the category of non-moving or
fast moving items.

Inventory Control Cell scrutinizes general stores indents and rationalized

spares and advice for suitable procurement action. It also identifies the

general stores items, which can be standardized in consultation with SPC.

It carries out ABC analysis of general stores items and monitor
consumption pattern on a quarterly basis and furnishes report to user
department and Purchase Department.
AR Cell
Spare Part Cell

All General Stores items

All rationalized Mechanical and

Refractory Engineering

Electrical spares
Refractory items

Dept
RS&RS

Rolls and Roll Guides

First three

Class of Material

digits
Next two

Sub Class of

digits
Next four

Material
Serial Number of

digits
Next one digit
Last digit

item
Source Code
Check Digit

Source Code

Source of Supply of

0
1

Material
Indigenous
Imported (other than

2
3
5

Russian)
Reconditioned
Russian
Insurance item-

indigenous
Insurance item-

imported
Insurance itemreconditioned

Check digit is calculated with the principle that each digit in the catalogue
number is multiplied by its positional value starting from the source code,

the sum of these products is divided by 11 and the remainder is

designated as Check Digit. However the remainder is 10 the check digit
shall be 0.

Different unit codes like, 01 for numbers, 02 for pair, 03 for dozen, 17 for
metric ton, etc are used for accounting of items in stores. Storehouses are
identified with Department Codes for easy identification of spares meant
for particular department.

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

Disposal Stores verifies thoroughly material received,

weights, unloads in an earmarked lot, and ensures that one type/lot of

materials is unloaded at only one location. A lot is normally formed of the
same type/quality of material. The SRN is entered in the Day Book, Lot
Register and in Bin Card.

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

pieces of steel items generated during fabrication and returned to CSD,
(b) construction equipment and other materials like steel, pipes,
refractories, etc declared as surplus, (c) spares procured and available in
stock in respect of equipments, which are replaced, (d) non-moving items
which are declared as surplus, (e) turnings and borings generated from
workshops, wood and other packing materials, old automobiles and
electrical/electronic

materials,

surplus/unserviceable, etc.

which

are

declared

as

The concerned Department takes action for

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

competent authority as per approved delegation of powers and after
taking recommendations from departmental committee constituted to
declare such items as surplus/obsolete.

After obtaining approval, the

concerned Department sends the material along with SRN to Disposal

Stores for disposal.
The intending customers deposit the tender in the separate tender boxes
kept in the CSD. CSD ensures all tenders received by post are dropped in
the relevant box before closing time. The tender box sealed immediately
after the time specified for receipt of tenders in the invitation to tender.
Thereafter, two officers, one from Finance Department and another from
CSD open the tenders.

All the tenders are opened in the presence of

authorised representative of customers. If a tender is received without

indication of tender number and opened in normal course in office, the
same is put in a cover and sealed by an Executive who receives such
tender in the first instance duly super scribing the tender number, date,
the name of the customer and the same shall be dropped in the specific
tender box thereafter.

Accounting of stores and spares

CSD decides an issue control series for raising documents like GARN for
receipt of materials, SIN or DN for issue or despatch of materials, SAV for
adjustment of balance of stock, SRN for returning the materials and STV
for transferring materials at the beginning of the year and circulates to the
concerned operating persons including SAS. CSD raises the documents
like GARNS, SIN/DNS, SRNS, STVS, and SAVS in accordance with stores
procedure order and posts them in the Bin Cards or Bin Master in on line.

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

at the end of each month SAS provides data in respect of adjustments
made to the quantity, value and account codes of documents processed in
the earlier months for processing as given below:

S.No.

Docume
nt type

1
2
3
4
5

GARN
SAV
SRN
STV
SIN/DN

Card Code adopted for raising

documents / adjustments by
CSD
SAS
31
32
33
34
35
34
36
34
38
37

SAS makes value or quantity adjustments for various jobs like

Preparation

of material

issues

to contractors, (b) Review

(a)

of odd

balances in priced stores ledger (c) Capitalization of issues, (d) Insurance

spares accounting, (e) Reconciliation of provisional labiality for suppliers,
(f) Material sent for repairs/replacement/rectification/ on loan basis, (g)
Review of SAVs rose for shortage/excess, (h) Reconciliation

of priced

stores ledger and bin cards/ master and (i) Scrutinizing and accounting of
documents and (j) for making any accounting adjustments.
carrying

out

above

jobs,

stores

account

section

passes

After
various

adjustments for incorporation in monthly data. The adjustments are based

on input like PSL extracts, workings for capitalization of materials,

correspondence from CSD, copies of bin-cards in case of reconciliation of
Bin Master and PSL. These adjustments are entered in adjustment data
registered on daily

basis and incorporated in the monthly transaction

data. Normally, SAS will not make any quantity adjustments except for
adjustment of mismatches in PSLBin Master Quantities.
The transactions are rejected because of (a) Non-pricing of GARNS (b)
Non-availability of catalogues in PSL and (c) the value of any transaction is
zero for any reason (d) wrong account code, wrong responsibility code,
wrong unit code, etc. After receipt of the rejected edit in soft copy from
System Department, SAS obtains the value of GARNS for non-priced
GARNS from purchase bills section and works out the rates for each item
to dbase package and updates in system.

System rejects the new

catalogues operated by central stores department through SIN/DNS/SAVS

which do not exist in PSL. Wherever the transaction value is zero or in
case of wrong account code/ responsibility code/unit code, etc, SAS
verifies

the

reasons

and

assigns

the

correct

value/account

code/responsibility code/unit code, etc for that transaction to clear

rejected transaction edit.
After processing the data, System Department informs the monthly
consumption value to stores account section checks for abnormalities
before giving clearance for generation and to forward the following reports
to SAS for preparation of Monthly or Cumulative Inventory cum
Consumption Report and other following reports.
1

Monthly or Cumulative Inventory cum Consumption

2
3
4
5
6
7
8

Report
Priced Stores Ledger
Monthly Transactions Data in a soft copy
Voucher-wise Statement
Account Code Summary report
Material Group wise Statement
Journal Voucher Detailed Report
Journal Voucher Summary Report

9
1

Reports required for Costing Section

Variance Report

SAS transfers the Journal Voucher Data to Financial Package by a merging

program, so that all the transactions reflected in Priced Stores Ledger are
carried to Section Ledger directly at the end of each month. Based on the
Cumulative/Monthly Inventory cum Consumption Statement, SAS prepares
and circulates a Cumulative/ Monthly Inventory cum Consumption
Statement for information of Heads of Departments, to Budget Section for
preparing working results and to Cash Section for furnishing information to
Banks on moving stocks, based on which cash credit/loan is utilized. The
various jobs for accounting of inventories/consumption done by SAS are
listed below:

Calculation of Stores Overheads percentage

SOH means freight inward, insurance and other like amounts incurred by
the company, where these amounts may not be recognised against each
receipt of materials. The respective bill passing sections debits amounts
to the SOH account on their payment and SAS credits the amount charged
to consumption to SOH account.

SAS calculates the Stores Overheads

(SOH) percentage based on the total SOH value balance lying at the year
beginning and total opening stock of stores and spares.

This SOH

percentage is informed to System Department for applying consistently on

all issues of materials while charging to consumption from July to June of
each year.

Review of Odd Balances

SAS arrives at the monthly inventory balances based on the transaction
data furnished by System Department and reviews the odd balances in
the inventory at the end of each month. Odd balances are such balances
where (a) quantity is zero and value is non zero, (b) quantity is non

zero and value is zero, (c) quantity is negative and value is negative,
(d) quantity is negative and value is positive, and (e) quantity is
positive and value is negative. SAS verifies for the reasons and passes
appropriate adjustments, if necessary for rectification of odd balances.

Insurance Spares Accounting

SAS obtains list of transactions in respect of GARNS, SINS/DNS, SAVS,
STVS, SRNS and other adjustments passed by SAS in respect of insurance
items from System Department on monthly basis.
along with SOH of materials is capitalised.

The receipt value

SAS values the issues and

stock adjustments on FIFO basis and identities the difference in value

based on FIFO and PSL value (monthly weighted average).

Necessary

Journal Voucher for accounting of insurance spares and adjustments for

adjustment total value of insurance spares shown in PSL and value shown
in Section Ledger, if any are passed.

Verification of Material Issued for Repair, Replacement or

Rectification and their subsequent receipt
CSD issues various materials for Repair, Replacement or Rectification and
receives back them subsequently. For identification of these issues and
receipts, a separate control number series of SIN/DN and GARNS are used.
Based on the control number series, the issues and receipts are accounted
to Material Issues on Loan Account by System. SAS reconciles the above
account on monthly basis, identifies difference in value of issue and
receipt and passes adjustments for such differences.
differences in SOH by way of Journal Voucher.

SAS clears the

SAS informs to CSD the

store house wise and catalogue wise dispatch notes raised for material
issued for repair, replacement and rectification but not received back and
GARNS for the material received, for which material is not dispatched for
further reconciling and for taking obtain for recovery of material in respect
of material issued and for sending the material in respect of GARNS.

Documents Review by Stores Account Section

CSD sends documents in respect of GARNs with control number above
8000, all SAVs, SRNs, STVs and SINs/DNs with control number above
50,000 to SAS on day-to-day basis from various individual stores. Stores
account section files all the above documents in the order of the
month/card code/stores house/serial number wise.

After receipt of the

IOM indicating first and last control number of documents, SAS verifies
whether all the documents are received or not as per the first and last
control numbers.
SAS verifies the GARNS whether all are priced correctly or not. In respect
of GARNS, which are not correctly priced, appropriate adjustments are
passed and entered in the adjustment data register.

SAS identifies the

GARNs in respect of materials received under works/operation contracts

and transfers the amount to Works/Operation Bills sections through Inter
Section Adjustment Account.
SAS verifies whether quantities mentioned in the SRN are correctly posted
in the ledger or not. SAS verifies whether quantities mentioned in the SIV
is correctly posted in the ledger. SAS verifies whether for each positive
STV, another negative STV raised or not, in case of transfer from one
storehouse to other storehouse within the plant. Where STV is raised for
transfer of material from one group to another group, a Journal Voucher is
to be passed for adjustment of balances of the material groups in
Sectional Ledger.

SAS verifies whether quantities mentioned in the

SIN/DN are correctly posted in the ledger or not. During the verification of
the documents, in case of any discrepancy is found, on adjustment is
passed to rectify the discrepancy and entered in the adjustment data
register.
Wherever, the adjustments are passed by SAS, the same are entered in an
Adjustment Data Register and the same were fed in Materials Package in

System and transmits the data to System for incorporation in the monthly
transaction data.

The Journal Vouchers prepared by SAS are fed in

Finance Package for processing of Section Ledger Data.

Accounting of Scrap Sales

Disposal Stores, on receipt of demand draft (DDS)/ Bankers Cheques from
customers towards sale of scrap, surplus or obsolete items, forward them
along with on IOM indicating the details of advance received, delivery
order to SAS for depositing them with bank. SAS ensures all DDs are
received in respect of each delivery order issued by Disposal Stores. In
case of new customer, details are updated in Customer Master Data Base
in System.

SAS prepares and sends the receipt voucher along with

demand drafts to cash section for realisation. On receipt of full amount in

respect of each lot auctioned/ tendered from customer, Disposal Stores
issues Delivery Order (DO) to the customer. On delivery of materials, CSD
raises a Dispatch Note (DN) for accounting of issue of materials in Bin
Card and Delivery Challan cum Invoice evidencing the delivery of
materials to customer.

On completion of deliveries in respect of each

delivery order, Disposal Stores raises a Delivery Completion Report (DCR)

received from customer invoice value, recoveries in respect of late
payment charges, ground rent, etc the balance if any refundable.
Disposal Stores sends the copies of DO, DN, DC cum Invoice and DCR to
SAS. Disposal Stores makes available monthly invoice data at the end of
month to Stores Accounts Section. On receipt of monthly invoice data,
SAS verifies for any missing numbers and whether sales tax is correctly
charged as per destination indicated in invoice and generates a journal
accounting voucher for accounting of sales in the System.

From the

monthly invoice data, Stores Accounts Section prepares and forwards

monthly sales tax returns to sales tax section of F&A department.
Disposal Stores Collects the C/G forms from the customers in respect of
CST sales. The duly filled-in C/G Forms shall be forwarded to Sales Tax
Section of F&A Department on quarterly basis based on the monthly

invoice data and monthly sales tax returns which in turn submits the same
to Sales Tax Authorities. Wherever C/G forms are yet to be received, the
same will be followed up with customers by Disposal Stores. On receipt of
DCR from Disposal Stores, Stores Accounts Section will refund the
available balance amount against a particular DO after affecting the
recoveries like ground rent, late payment charges, etc. by making a
Payment Voucher and forward to Cash Section for making refund by way
of Cheque to the Customer directly. At the end of each month sub ledger
is generated in respect of transactions pertaining to scrap sales.

Annual Accounting Jobs

As a part of annual accounts closing, SAS calls for certain information from
CSD, Works Department and System Department. SAS completes all the
routine monthly jobs like, documents review, reconciliation of PLS
Account, capitalisation, insurance spares accounting, review of SAVs
raised

for

shortage/excess,

review

of

materials

issued

on

loan,

reconciliation of PSLBin Master, etc. SAS reviews all odd balances and
ensures that PSL contains only positive quantities and values in respect of
all items of stocks of stores and spares. SAS ensures all items including
insurance spares are capitalised and necessary entries/ adjustments are
passed for effecting capitalisation.

SAS furnishes the details of

capitalisation and insurance spares to Corporate Accounts Section for

providing depreciation.

Based on the information furnished by Works

Department, SAS works out value of the inventory with shop floor and
passes necessary entry for reversing consumption and increasing the
stock value. SAS creates provision for the values of SAVs raised in respect
of shortage/excess, where approval is pending and shown in material
under investigation. Based on the information furnished by System
Department, SAS reconciles the PSL-Bin Master, works out the value of
PSL-Bin Master cases and creates a provision. Based on the information
furnished by CSD, SAS creates provision for the value of SAVs not raised in
respect of shortages/excess where the same are reflected in the Stock

Verification Report.

Based on the information furnished by CSD, SAS

creates a provision for the 100% value of surplus/ obsolete materials.

Based on the information furnished by System Department/ CSD, SAS
creates a provision for 20% value of non-moving items of stock of stores
and spares. All the above provisions are created by charging to revenue in
case they are in excess of earlier provisions made; otherwise, the
difference will be transferred to provisions no longer required account.
SAS prepares schedules for various accounts and notes to accounts and
get them audited.
Thus the stores and spares are procured, received and accounted in the
company in a systematic manner with lot of internal controls built-in in the
system, which are commensurate with the scale of production.

CHAPTER- V
THEORITICAL ASPECTS
OF
INVENTORY MANAGEMENT &
INVENTORY CONTROL

5.2 WHY ORGANIZATION IS TO CARRY INVENTORY

The need and importance of inventory varies in direct proportion to the
idle time cost of men and machinery and urgency of requirement. If men
and machinery in the factory could, wait and so could customers,
materials would not lie in wait for then and no inventories need to be
carried. But it is highly uneconomical to keep men and machinery waiting
and the requirements of modern life are so urgent that they cannot wait
for materials to arrive after the need for them has arisen.

Hence, the

organization needs to carry the inventories. There are three general

motives for holding inventories.
The transaction motives which emphasis the need to maintain
inventories to facilitate smooth production and sale operations.
The precautionary motive, which necessitates holding of inventories to
guard against the risk of unpredictable changes in demand and
supply forces and other factors.
The speculative motive which influences the decision to increase or
reduce inventory levels to take advantages of price fluctuations.
Inventory helps in smooth and efficient running of business.
Inventory provides service to the customers immediately or at short
notice.
Due to absence of stock, the company may have to pay high prices
because of piecewise purchasing. Maintaining of inventory may earn
price discount because of bulk purchase.
Inventory also acts as a buffer stock when raw materials are received
late and so many sale-orders are likely to be rejected.
Inventory also reduces product costs because there is an additional
advantage of batching and doing long smooth runny production run.
Inventory helps in maintaining the economy by absorbing some of the
fluctuations when the demand for a items fluctuates or is erratic.

 Pipeline stocks (also called process and movement inventories) are also
necessary where the significant amount of time is consumed in the
transshipment of items from one location to another.

5.3 Inventory Management and inventory control

The concepts of Inventory Management and Inventory Control are
different. Inventory Management ensures proper coordination of activities
and

policies

regarding

procurement,

production

and

marketing

materials/products in order to achieve better inventory control.

of

Hence,

Inventory management includes inventory control, but inventory control

does not mean inventory management.

Before understanding these

concepts, the objectives of Inventory Management are to be understand,

which are discussed under two heads, i.e.

(A) Operating Objectives

(1) Availability of materials
The first and the foremost objective of inventory management is to make
all types of materials available at all times when ever they needed by the
production departments so that the production may not be held up for
want of materials. It is therefore advisable to maintain a minimum
quantity of all types of materials to move on production on schedule.

(2) Minimizing the wastage

Inventory management has to minimize the wastage at all levels i.e.,
during its storage in the go-downs or at work in the factory. Normal
wastage, in other words uncontrollable wastage, should only be permitted.
Any abnormal but controllable wastage should strictly be controlled.
Wastage of materials by leakage, theft, embezzlement and spoilage due
to rust, dust or dirt should be avoided.

(3) Promotion of manufacturing efficiency

The manufacturing efficiency of the enterprise increases if right types of
raw material are made available to production department at the right
time. It reduces wastage and cost of production and improves the morale
of workers.

(4) Better Service to Customers

In order to meet the demand of the customers, it is the responsibility of
inventory management to produce sufficient stock of finished goods to
execute the orders received from customers.

An uninterrupted flow of

production is to be maintained.

(5) Control of Production Level

Inventory Management have to decide to increase or decrease production
level in right time so that inventory is controlled accordingly. But in odd
times, when raw materials are in short supply, proper control of inventory
helps in creating and maintaining buffer stock to meet any eventuality.
Production variations can be avoided through proper control of inventory.

(6) Optimum Level of Inventories

Proper control of inventories helps management to procure materials in
right time in order to run the plant efficiently. Maintaining the optimum
level of inventories keeping in view the operational requirements avoids
the out of stock danger.

(B) Financial Objectives

(1) Economy in Purchasing
Proper inventory management system brings certain advantages and
economies in purchasing the raw materials.

Management makes every

attempt to purchase raw materials in bulk quantity and to take advantage

of favourable market conditions.

(2) Optimum Investment and Efficient Use of Capital

The primary objective of Inventory Management, from financial point of
view, is to have an optimum level of investment in inventories. Inventory
Management has to ensure neither any deficiency of stock of materials
nor any excessive investment in inventories so as to block the capital,
which could be used in an efficient manner. Inventory Management has to
set up minimum and maximum levels of inventories to avoid deficiency or
surplus stocks.

(3) Reasonable Prices

Inventory Management has to ensure the supply of raw materials at a
reasonably low price, but without sacrificing the quality.

It helps to

reduction of cost of production and improvement in quality of finished

goods in order to maximize the profits of organization.

(4) Minimizing Costs

Minimizing inventory costs such as handling, ordering and carrying costs,
etc is one of the main objective of Inventory Management.

It helps

reduction of inventory costs in a way that reduces the cost per unit of
inventory and thereby reduction of total cost of production.

5.4 INVENTORY CONTROL

Inventory control is a primary part of Inventory Management. It is
concerned with achieving an optimum balance between two competing
objectives.
The objectives are
-

To minimize investment in inventory

To maximize service levels to the forms customers and its own

operating departments.

In achieving the control over inventories, the organization adopts various

methods of inventory control.
These includes (1) Min-max plan, (2) Two Bin System, (3) Order Cycling
System, (4) ABC Analysis, (5) Fixation of Various Levels, (6) Use of
Perpetual Inventory System and Continuous Verifications, (7) Use of
Control Ratios, (8) Review of Slow and Non-Moving Items.
(1) Min-Max Plan
It is one of the oldest methods of inventory control. Under this plan, a
maximum and minimum for each stock item are specified keeping in view
its usage, requirements and margin of safety required to minimize risks of
stock outs. The minimum level establishes the reorder point and order is
placed for the quantity of material, which will bring it to the maximum
level.
The method is very simple and based upon the premise that minimum and
maximum quantity limits for different items can fairly well defined and
established. Considerations like economic order quantity and identification
of high value critical items of stock for special management attention or
not cared for under this plan.
(2) Two - Bin System
Under this system, two piles, bundles, or bins are maintained for each
item of stock. The first bin stocks the quantity of inventory, which is
sufficient to meet its usage during the period between receipt of an order
and placing of the next order. The second bin contains the safety stock
and the normal quantity used from order date to delivery date. The
moment stock contained in the first bin is exhausted and the second bin is

tapped, a requisition for new supply is prepared and submitted to the

purchasing department. Since no bin- tag (quantity record of materials)
card is maintained, there is absence of perpetual inventory record under
this bin.
(3) Order Cycling System
In the order cycling system, quantities in hand of each item or class of
stock are reviewed periodically say, 30, 60 or 90 days. In the course of a
schedule periodic review, if it is observed that the stock level of a given
item will not be sufficient till the next scheduled review keeping in view its
probable rate of depletion, an order is placed to replenish for its supply.
The review period will vary from firm to firm and among different material
in the same firm. Critical items of stock usually require a short review
cycle. Order for replenishing a given stock item is placed to bring it to
some desired level, which is often expressed in relation to number of days
or weeks supply.
The schedule periodic review plan does not consider the differences in
rate of usage for different items of stock. As a result, items whose usage
has declined will have surplus stock, whereas some items whose rate of
depletion has increased are exhausted much before the next review date.
Moreover, the system tends to make procurement and purchasing
activities reach their peak around the review dates.
(4) ABC Analysis
With the numerous parts and materials that enter into each and every
industrial products and inventory control lends itself, first and foremost, to
a problem of analyze.

Such analytical approach is popularly known as

ABC analysis (Always Better Control), which is believed to have originated

in the general electric company of America and based on Paretos law.
The ABC analysis is based upon segregation of material for selection
control.

It measures the money value, i.e., cost significance of each

material item in relation to total cost and inventory value. The logic
behind this kind of analysis is that the management should study each
item of stock in terms of its usage, lead time, technical or other problem
and its relative money values in the total investment in inventories.
Critical, i.e., high value items desire very close attention, and low value
items need to be devoted minimum expense and efforts in the task of
controlling inventories. Under ABC analysis, the different items of stock
are classified into three categories in the order of their average inventory
investment or based on their annual rupee usage.
Category A items: - more costly and valuable items are classified as such
items have large investment.
Category B items: - The items having average consumption value are
classified as B items.
Category C items: - The items having low consumption value are put as C
category.

The important steps involved in segregating material or inventory control

are as follows:
(a)

Find out future use of each item of stock in terms of physical

quantities for the review forecast period.

(b)

Determined the price per unit each item.

(c)

Determined the total project cost of each item multiplying its

expected units to be use by the price for per unit of such item.

(d)

Beginning with the item with the highest total cost, arrange different
items in order of their total cost as computed under step (iii) above.

(e)

Express the units of each item as a percentage of total costs of all

items.
(f)

Compute the total cost of each item as a percentage of total costs of

all items.

Important points for ABC analysis:

-

Whenever the items can be substituted for each other, they should be
substituted for each other, they should preferably be considered as one
item.

More emphasis should be given to the value of consumption and not

the cost per unit.

While classifying, all items consumed by the organization should be

considered together.

If it is convenient different items may be classified into only three

categories and labeled as A, B, and C respectively depending upon
whether they are high value items, average value items or low value
items. If it needs, percentage of different items may be plotted on chart
for better representation.

(5) Fixation of Various Levels

Certain stock levels are fixed up for every item of stores so that stocks
and purchases can be efficient controlled. These are
a) Maximum level: The represents the minimum quantity above which
stock should not be held any time
b) Minimum level: The represents the minimum quantity of stock that
should held all items
c) Danger level: Normal issues of stock or usually stopped at this level
and made only under specific instructions.
d) Ordering level: It is the level at which indents should be placed for
replenishing stocks.
e) Ordering quantity: The quantity, which is to be ordered.

(A) Maximum Level

It is normally a matter of policy. The various factors that should be taken
into consideration are:

 Capital outlay: investment to be made in stores, raw materials and

other bulk items is an important consideration.
Storage space available.
Storage and insurance cost.
Certain materials deteriorate if stored over a long period. This limits
the quantity of maximum stock kept.
If certain goods are subject to obsolescence, the spare parts and
components etc. of such products stocked should be limited.
Consumption per annum.
The lead-time.
Certain goods are seasonal in nature and can be purchased only during
specific period. Hence, maximum level will be fixed for each season.
Price advantage arising out of bulk purchases should be availed.
The economic order quantity.
Formula: Maximum stock level = Re- order level +Re-ordering quantity
(Minimum Consumption *Minimum Reorder Period)
(B) Minimum Level
The minimum level is also a matter of policy and is based on
Consumption per annum.
Lead Time.
Production Requirement.
Minimum quantity that could be advantageously purchased.
If an item is made to order then no minimum level is necessary.
Formula: Minimum level = Re-Order level (Normal Consumption *
Normal Re-Order Period)

(C) Danger or Safety Level

Some times in practical situation, it happens that neither the consumption
rate, nor the lead-time is constant through the year. So in order to face

such under taking in meet in out the demands, an extra stock is

maintained. The extra stock is called buffer stock. Material consumption
varies from day to day; week-to-week and hence accurate forecasting is
not possible. A safety or reserve stock is kept to avoid stock out.

The

desirable safety stock level is that amount which minimizes stock out
costs and carrying costs.
Formula: Buffer or Safety stock level
= Ordering Level (Average Rate of Consumption * Re-Ordering
Point)
(D) Ordering Level:
The annual consumption of an item in addition to the time lag between
ordering and receiving can be collected from past records. Based on these
facts and policies, the ordering level and ordering quantity can be
calculated. The order point is to be calculated keeping in mind, the worst
conditions so that minimum a stock is always maintained.

The ordering

level should be so fixed that when an indent is placed at the ordering

level, the stock reaches the minimum level when the replenishments
received. The ordering level is calculated from the following factors:
The expected usage
The minimum level
The lead time
Formula: Ordering Level = Minimum Level + Consumption during lag
period
(E) Reordering Quantity or Economic Order Quantity (EOQ):
One of the major inventory management problems to be resolved is how
much inventory should be added and when inventory should be added.
When inventory is to be replenished and if the firm is purchasing
materials, it has to decide number of lots in which it has to be purchased

on each of replenishment. If the firm is planning a production run, the

issue is how much production to schedule. The problems are called order
quantity problems and the task of the firm is to determine the optimum
Economic Order Quantity.
Determining an optimum Economic Order Quantity involves three types of
costs. (a) Ordering cost (b) carrying cost (c) Raw material cost. The
economic order quantity is the quantity, which minimizes the total of
ordering and carrying costs.
(a) Ordering Cost
These include the fixed cost associated with obtaining goods through
placing of an order or purchasing or manufacturing or setting up
machinery before starting production. They include cost of purchase,
requisition, follow up, receiving goods, quality control etc.
Formula: Ordering cost = (Annual Requirement (A) *Ordering Cost per
order (O))/Quantity to be ordered (Q)
(b) Carrying Cost
The cost associated with carrying or holding goods in stock is known as
holding or carrying cost. Holding cost assumed very difficulty with size of
inventory as well as time is held in stock.
Formula:

Carrying cost = (Carrying Cost per unit (CH)*Quantity to be

ordered (Q))/2
(c) Raw Material Cost
The cost associated with purchasing of raw materials is called raw
material cost.
Formula:

Raw Material Cost = Annual Requirement (A)*Price per unit (P)

EOQ Assumptions

The forecast/demand for given period, usually for one year is known.
The usage/demand is even through the period.
Inventory orders can be replenished immediately.
There are two distinguishable costs associated with inventories.
Cost per order is constant regardless of the size of the order.
Cost of carrying cost is fixed percentage of the average value of the
inventory.
Formula:

EOQ = 2AO/CH

(6) Use of perpetual Inventory system and Continuous verification

The perpetual inventory system records changes in raw materials, work in
progress and finished goods on daily base. Hence, managerial control and
preparation of interim financial statements is easier. Perpetual inventory
derived its name because it indicates the amount of stock on hand at all
time. It facilities verification of stocks at any time and authenticates the
correctness of stock records.
The two main functions of perpetual inventory are:
-

It records the quantity and value of stock in hand.

There is continuous verification of physical stock.

Chartered Institute of Management Accountants, London defines Perpetual

Inventory System as The recording as they occur of receipts, issues and
the resulting balances of individual items of stock in either quantity or
value.
A perpetual inventory usually checked by a Programme of continuous
stocktaking and the two terms are sometimes loosely considered
synonymous. Perpetual inventory means the system of records, whereas
continuous stocktaking means the physical checking of those records with
actual stocks.

The perpetual inventory method has the following advantages:

The inventory of various items can be easily ascertained. Hence, profit
and loss account and balance sheet can be easily prepared.
Information regarding material on hand eliminates delays and stoppage in
production
The investment in stock can reduced to the minimum keeping in view the
operational requirements.
Because of internal check, the activities of various departments are
checked. Hence, stores records are reliable.
Production need not be stopped when stock taking is carried out.
These records give the cost of materials. Hence, management can
exercise control over cost.
Discrepancies and errors are promptly discovered and remedial action can
be taken to prevent their reoccurrence in the future.
This method has a moral effect on the staff, makes them disciplined and
careful and acts as check against dishonest actions.
Loss of interest on capital invested in stock, loss through deterioration,
obsolescence can be avoided.
Stock figures are available insurance purposes.
It reveals the existence of surplus, dormant, obsolete and slow moving
material and hence remedial action can be taken
Limitations:
The bin card and stores ledger may not be up to date and hence cannot
be effectively controlled. Hence, Continuous stocktaking is hampered.
Perpetual inventory system is comprised of

Bin card,

Priced Stores ledger and

Continuous stocktaking.

Bin Card
A bin card is a quantitative record of receipts, issues and closing balance
of items of stores. A separate bin card accompanies each item. The bin
card is posted as and when a transaction takes place. Only after the
transaction is recorded, the items are received / issued. On receipt of
materials, the quantity is entered in the bin card from the Goods Received
Note in the receipt column and issues to various departments in the
issues column.

Priced Stores Ledger

The stores ledger is maintained to record all receipt and issues
transactions in respect of materials the quantities and the values are
entered in the receipts issues and balance columns. Additional information
regarding quantity on order and quantity reserved may also be recorded.
Separate sheets for each item or continuous may be maintained. The
sheets should be serially numbered to obviate the risk of removal or loss.

Continuous Stocktaking
The stores accounts reveal what the balance should be and a physical
verification reveals the actual position. Under this system of verification,
the total number of man-days available for verification is calculated. The
items to be verified per man-day are selected by classifying the various
items into groups depending upon time required. The stock verification
staffs planed the program and divide the work among themselves. The
plan is such that all items are verified in the year. Items are small value
may be verified twice or more in a year. Bulky items are usually verified
when stocks are comparatively low.

(7) Use of Control Ratios

Inventory turnover ratio helps management to avoid capital being locked

up unnecessarily. This ratio reveals the efficiency of stock keeping.

This

ratio will be indicated in the number of days.

Inventory Turnover Ratio = Cost of material consumed * Days during the
period / ((Cost of opening stock+ cost of closing
stock)/2)

(8) Review of Slow & Non-Moving Items

The money locked up in inventory is the money loss to the business. If
more money is locked up, lesser is the amount available for working
capital and cost of carrying inventory is increase.

Inventory Turnover Ratio should be as high as possible. Lose due to

obsolescence should be eliminated or these items are used in some
profitable work. Slow moving stock should be identified and speedily
disposed off. The speed of moving should be increased. The turnover of
different items of stock can be analysed to find out the slow moving
stocks. The percentage of slow moving stores is given by value of slow
moving stores divided by value of total inventory.

Materials become useless or obsolete due to changes in products, process

or method of design or method of production, slow moving stocks have a
low turnover ratio.

Capital is locked up and cost carrying have to be

incurred. Hence, management is take effective steps in minimize losses.

5.5 ESSENTIALS OF A GOOD INVENTORY MANAGEMENT SYSTEM

An efficient and successful inventory management system possesses the
following essentials:
(1) Classification and Identification of Inventories

The inventory include raw materials, semi finished goods and

finished goods and components of several descriptions.

In order to

facilitate prompt recording, locating and dealing, each item of inventory

has to be assigned a particular code for proper identification and has to be
divided and sub divided into groups. ABC analysis of inventory is useful in
classification and identification of inventories.
Assignment of definite name to each item of stores is necessary
for the identification of materials. After analysis of all stores items and
considering the peculiar nature of each item, an appropriate name has
been assigned to each item these are divided first into larger and smaller
groups. The following are range of items to be held in stock:

Materials, which are regularly required.

Materials, which may be required at, short notice when there, are
breakdowns of plants.

Stores, which are not in frequent demand, should not be maintained

in huge quantity provided they are readily available.

Materials are general stores, which are not operationally vital and
are used at irregular intervals need not be maintained in huge
quantity

(2) Standardization and Simplification of Inventories

In a proper Inventory Management System, standardization of materials is
necessary. Standardization refers to the fixation of standards of materials
for the use in the production of finished goods and set the specification of
components and tools to be used in order to control the quality of goods
manufactured.

Simplification of inventories refers to the elimination of

excess types and sizes of items, which leads to reduction in inventories

and its carrying costs.

The following are advantages of standardizing

material: It requires lower holding of materials and lower volume of

storage place saves through reduced expenditure on storing handling of

materials.

It

provides

more

efficient

purchasing

by

establishing

equivalents between various suppliers. If this practice is adopted there

would be a lesser chance of materials being obsolete. It reduces paper
work for recording transactions.

(3) Adequate Storage Facilities

Adequate storage facilities are necessary to have the proper management
of inventory. It reduces the wastage due to leakage, wear and tear, rust
and dust and reduces the wastage of materials due to mishandling.
Stores and spares may be deteriorated through dampness, dryness, heat,
cold, dust and dirt, care less handling immethodical stocking etc.

Proper

preventive measures should be taken to avoid such deterioration.

(4) Setting Minimum & Maximum Limits, Reorder Points for each item of Inventory
In order to avoid over and under investments in inventories, minimum and
maximum limits for each item of inventories are to be fixed. It ensures the
availability of materials during production process, while fixing the
minimum and maximum points, re-order points are to also be fixed before
hand.
(5) Fixing Economic Order Quantity
It is a basic consideration in Inventory Management as how much quantity
of a particular item is to be ordered at a time. In determining the EOQ,
the two opposing costs are balanced i.e., ordering cost and carrying costs.

(6) Adequate Inventory Records and Reports

An efficient Inventory Management system requires proper inventory
records and the reports because various inventory records contain
information to meet the needs of purchasing, production, sales etc. Any
particular information regarding any particular item of inventory may be
had from such records. Such information may be about quantity in hand,

in transit and on plants, unit cost, EOQ, reordering points, safety level etc,
for each item of inventory. Reports and statements should be designed to
keep the clerical cost of maintaining these records at a minimum.

(7) Intelligent and Experienced Personnel

Mere maintenance of records and procedure would not give the desired
results unless the appointment of intelligent and experienced personnel in
purchase, production, and sales department is not made as because that
is no substitute for efficient, sincere and devoted personnel. Hence the
whole Inventory Management System should be manned with trained,
qualified, experienced and devoted employees.

5.6 FACTORS DETERMINING OPTIMUM LEVEL OF INVENTORY

The inventory includes stock of raw materials, stock of work in progress
and the stock of finished good and other accessories.

In Inventory

Management, the control over investment in inventory is also an

important factor.

The main objective of the inventory management on

one hand is to maintain the adequate stock of goods of proper quantity to

meet the requirements of production and sales and on the other hand, to
keep the investment in them at the minimum.
Factor influencing the decision of investment in inventories can be divided
in two parts - (a) general factors and (b) specific factors.
(A) General Factors
These factors include considerations common to thee management of all
types of assets-fixed or current. Such factors are type and nature of
business, anticipated volume of sales, operation level, price level
variations, availability of funds and the attitude of management.

(B) Specific Factors

Such factors those, which influence the decision of investment of

inventories and includes the following:
(1) Seasonal Nature of Raw Material and Demand of Finished Goods
If certain raw material is available during a particular season, but its
consumption continues throughout the year in the firm, the investment in
such raw material shall naturally be heavier to store the stock in order to
streamline the production throughout the year. This is true in agro-based
industries like sugar etc.

Similarly seasonal industries purchase raw

material in the season and there fore, there investment in raw material
increases in that particulars season. Conversely, where demand for goods
is uneven, small or seasonal, the management has to store the finished
goods inventory till the demand season approaches for timely execution of
orders and therefore has to follow longer production runs more even and
efficient production scheduling. It requires higher investment inventories
in off-season.

(2) Length and Technical Nature of the Production Process

If production process is such that takes much time in its completion, the
investment in inventories is larger, such as, ship building industry. More
over if production process is of technical nature, even then it requires
heavy investment in inventories.

(3) Style Factor in the End Product

The style factor of end product or nature of finished goods determines the
size of investment in inventories. The durability and perishable of the
finished product are such important factors.

(4) Terms of Purchase.

If supply of raw material is available on favourable terms that is long

credit, conditions of supply, concession or rebate available etc. The
management may have larger investment in inventories in order to avail
of the opportunity of favourable terms. But, here, the management must
consider the cost and benefit effect of ordering raw material in bulk. If on
the other hand, raw material is available only on cost terms, the
management will dare not invest heavy amount in inventories.

(5) Supply Conditions

Certainty and regularity in supply of raw material are also important
factors in determining the size of investment from the viewpoint of
operating continuity. Suppose, if the source of material is out side of the
country and a ban on imports is feared or supply may be disturbed due to
weather, a great stock of inventory is needed to avoid the risk of being
out of stock. If, on the other hand, the company relies up on the supplier
for regular and speedy supply of raw material, it may carry very small
stock of raw material.

(6) Time Factors

Time is also an important factor in determining the size of inventory and
affects the inventory management in a number of ways

Bad time i.e., time lag between indenting and availability of raw
material,

Time lag between purchase of raw material and the commencement

of process,

Time required in production process, and

Average time required for sale of product.

All these exercise their impact on investment in inventories. The longer

the time, the investment in inventories is larger to maintain the flow of the
production.

(7) Price Level Variation

If a price increase expected in the near future, the investment in raw
material is greater in a bid to keep the cost of product minimum. On the
other hand, if price level is expected to go down, there is a tendency to
purchase the goods in the open market as and when it is needed.

(8) Loan Facilities

Generally, raw materials are purchased on credit.

More over banks

advances credit to the firms against their stock of inventories. If the cost
of carrying stock and the cost of availability of funds is cheaper than the
interest payable to the bank, the investment in inventories is higher.

(9) Management Policies

The management policies have significant influence on the investment in
work in progress inventories mainly in process goods industry.

(10) Other Factors

Other factors like industry wide strike threats, proposed control of raw
materials, rationing or revision of excise duty rates, price control of
finished stock etc. also effects the investment decisions in inventories.

CHAPTER VI

PRACTICAL STUDY ANALYSIS

AND
INTERPRETATION

INVENTORY MANAGEMENT AND CONTROL

IN VISAKHAPATNAM STEEL PLANT
In this chapter, an attempt is made to study the data made available by
the officers of Rashtriya Ispat Nigam Limited, Visakhapatnam Steel Plant,
Visakhapatnam (herein after referred as the company and to interpret
the same. The following are basic facts about inventory of the company:

1.

The materials are stored in different locations identified with

storehouses, which are codified with storehouse number ranging
from 01 to 89.

The major locations/ storehouses are (a) General

Stores, (b) Refractories, (c) Spares identified with production

units/storehouse, (d) Petrol and Diesel, (e) Lubricants and Oils, (f)
Rolls and Guides, (g) Conveyor Belts, (h) Steel and Pipe yard, (i)
Cement, (j) Equipments, (k) Ferro Alloys and other Raw Materials, (l)
Scrap and Surplus items, etc.

2.

Priced Stores Ledger/Bin Master contains more than 265000 items

having

standard

specification

along

with 11

digit

Catalogue

Numbers.

3.

The issues are priced at monthly weighted average rate.

4.

As at the end of year on 31/03/2008, the company is having

inventory balance in 59888 catalogue numbers and the value of
such catalogues is Rs.779 Crores. This inventory includes expansion
and Coke Oven Battery IV construction stores of Rs.423 Crores,
insurance spares of Rs.46 Crores, and Ferro Alloys and other minor

raw materials of Rs.39 Crores and excludes inventory at mines,

medical department, stock in transit/under inspection, materials
with contractors, unabsorbed stores overheads and provisions
amounting Rs.55 Cores.
5.

Machinery Spares in respect of 904 items amounting Rs.46 Crores

as on 31/03/2008 were capitalised under the head Risk Insurance
Spares in

accordance with Accounting Policy framed in accordance

with Accounting Standards 02 and 10 issued by Institute of

Chartered Accountants of India.
6.

The levels of inventory in respect of each item/catalogue, like

minimum, maximum, reordering level, etc are not fixed. The EOQ
concept as explained in Chapter I for determining the reordering
quantity is not adopted.

The reordering quantity is determined

based on the annual consumption pattern, present stock and

supplies yet to be received, etc.

7.

The company adopted the perpetual inventory control system

comprising Bin Card, Priced Stores Ledger and Continuous Stock
Verification.

Bin Master and Priced Stores Ledger are completely

reconciled from time to time. The difference between physical stock

and Bin stock are identified during physical verification are
appropriately adjusted in the books with the approval of competent
authority.

8.

Stock Adjustment Vouchers (SAVs) raised on physical verification in

respect of shortages amounting Rs.0.26 lakhs, where approval of
competent authority is pending and shortages identified, but SAVs
are not raised on physical verification pending for want verification
of records, etc amounting Rs.0.26 Lakhs is provided in the books as
on 31/03/2008.

9.

The company is made an attempt to use ABC Analysis, but with a

different name i.e., XYZ analysis for classifying the inventory based
on value.

Items comprising 70% of value of total inventory are

categories as X, items comprising 20% of value of total inventory

are categories as Y and items comprising 10% of value of total
inventory are categories as Z.

10.

The company has also made FSN analysis for identifying fast
moving, slow

moving and non-moving inventories in line with

procedure Explained at Para 3.2.8. Non-moving inventories are

reviewed on annual basis in a systematic manner and appropriate
provisions were made. The company has made a provision in the
books to the tune

of Rs. 34.39 Cores in respect of Non Moving

items at 90% of their cost in line with accounting policy as on

31/03/2008.

COMPARATIVE ANALYSIS OF INVENTORY OF

STORES AND SPARES WITH OTHER FINANCIALS

(Rupees in Crores)
Year

Net Worth

Current
Assets

Working
Capital

Sales

Total
Inventories

Inventory of
Stores &
Spares

Consumption

200001
200102
200203
200304
200405
200506
200607
200708
200809
200910
201011

2839

1794

491

3435

1207

440

279

2744

1713

493

4080

1111

384

291

3286

1863

633

5058

858

365

323

4851

2726

1491

6169

706

336

348

6878

6047

4623

8181

1255

321

313

8173

8252

6664

8482

1216

312

339

10445

8344

9150

1208

317

359

8613

326

364

3215

353

501

2451

327

466

13229

7625

3018

1043
3
1041
1
1063
5
1151
7

1761

12885

1044
8
1180
5
1185
9
9551

3254

328

471

11481
12395

7678
5243

Analysis of inventory of Stores and Spares

14000

12000

net worth

10000

current assets

8000

working capital

6000

sales

4000

total inventories

2000

inventory of stores
and space

consumption
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

STATEMENT SHOWING NUMBER OF ITEMS AND VALUE OF

FAST MOVING, SLOW MOVING AND NON MOVING INVENTORY OF
STORES AND SPARES
(Rupees in Crores)
Year

Fast Moving
Items

Value

Slow Moving
Items

Value

Non Moving
Items

Value

Insurance
Items

Value

Total Stores and

Spares
Items
Value

200102

8208

83

166900

152

55144

109

1200

39

23145
2

383

200203

8128

89

178752

158

50264

85

1280

45

23442
4

377

200304

8302

87

191770

138

45846

71

1346

47

24726
4

343

200405

8300

108

107705

139

13814
4

63

1537

58

25568
6

368

200506

8084

108

100519

149

15296
4

58

1129

56

26269
8

371

200607

7746

115

99473

248

15905
0

43

1129

52

26739
8

458

200708

7729

139

95990

553

16601
5

40

1134

47

27086
8

779

200809

7669

443

90186

463

17606
6

37

1134

46

27505
5

989

200910

5089

383

27692

262

19177

23

84
9

54

52807

722

201011

4968

287

26208

170

18352

28

84
8

74

50376

559

201112

5028

275

27675

232

16989

22

838

82

50530

611

Statement showing Percentage of Composition of Stores & Spares

(Fast Moving, Slow Moving, Non Moving & Insurance Spares)
Fast Moving
Year

Items

Value

Slow Moving
Items

Value

Non-Moving
Items

Value

Insurance
Spares
Items
Value

Total
Items

Value

2001-02

3.55

21.67

72.11

39.69

23.83

28.46

0.52

10.18

100

100

2002-03

3.41

23.61

74.97

41.91

21.08

22.55

0.54

11.93

100

100

2003-04

3.36

25.36

77.56

40.23

18.54

20.70

0.54

13.70

100

100

2004-05

3.25

29.35

42.12

37.77

54.03

16.03

0.60

15.76

100

100

2005-06

3.07

29.38

38.26

40.16

58.25

15.63

0.42

15.10

100

100

2006-07

2.89

25.10

37.20

54.15

59.49

9.39

0.42

11.35

100

100

2007-08

2.85

17.84

35.44

70.99

61.29

5.14

0.42

6.03

100

100

2008-09

9.60

53.00

52.40

36.20

36.30

3.18

1.60

7.40

100

100

2009-10

9.80

53.05

52.00

36.29

36.40

3.18

1.60

7.48

100

100

2010-11

9.86

51.34

52.03

30.41

36.43

5.01

1.68

13.24

100

100

2011-12

9.95

45.01

54.77

37.97

33.62

3.60

1.66

13.42

100

100

XYZ Analysis of Inventory of Stores & Spares

Year

Category X (70% of Value)

Item

Percent

Value

Category Y (20% of
Value)
Item

Category Z (10% of
Value)

Percent

Value

Item

Total

Percent

Value

Items

Value

2002-03

3583

3.89

264

11050

12.00

75

77429

84.11

38

92062

377

2003-04

3234

3.82

241

10417

12.32

69

70932

83.86

34

84583

344

2004-05

2374

3.10

258

8630

11.25

74

65680

85.65

37

76684

368

2005-06

4918

7.25

262

10465

15.44

72

52393

77.30

36

67776

371

2006-07

943

1.50

321

5247

8.35

91

56635

90.15

46

62825

458

2007-08

247

0.41

545

2617

4.37

156

57024

95.22

78

59888

779

2008-09

163

0.29

623

1983

2.86

198

54223

96.85

99

55989

989

2009-10

275

0.52

508

2466

4.65

145

50331

94.83

73

53072

726

0.87

383

3104

6.15

112

46957

92.98

56

50500

551

0.96

428

3078

6.08

122

47080

92.96

61

50642

611

2010-11
2011-12

439
484

NO OF ITEMS

XYZ Analysis of Stores & Spares

XYZ ANALYSIS OF STORES AND

SPARES(NO OF ITEMS)
12000
10000
8000
6000
4000
2000
0

CATEGORY X
CATEGORY Y
CATEGORY Z

7
YEAR

11

Interpretation
1. A comparative analysis of the data in respect of inventory of stores
and

spares

and

other

financials

based

on

annual

financial

statements is made and the following are the observations:

a) The inventory is more than Rs.300 Crores in all the years and
gradually reducing in each year from Rs.440 Crores to 353 Crores
over a period of 9 years, which a remarkable improvement in
inventory management.
b) The consumption pattern has shown an increase except in the
year 2004-05, where the consumption decreased by Rs.35
Crores. There was a sudden jump in consumption during 200809 from Rs.364 Crores to 501 Crores.
c) The ratio of consumption stores and spares to sales has shown a
decline from 8% to 3.5% over the period of eight years upto
2007-08 and increased to 4.81% during 2008-09.
d) The inventory turnover ratio is showing a reduction from 150 to
70 percent of

consumption, but still appears to be on higher

side.
e) The other financials like net worth, current assets, working
capital and sales has shown tremendous increase over the period
of six years because of turnaround in the performance of
company.

As a result, there is signification reduction in the

proportion of inventory of stores and stores to net worth from 15

to 3 percent, current assets from 24 to 3 percent, working capital
from 90 to 5 percent and sales from 13 to 3 percent.

f) The proportion of inventory of stores and spares to total

inventories is also reduced from 36 to 11 percent.

2. A comparative study of composition of materials like fast moving,

slow moving, non moving materials and insurance spares is made
based on data available in Priced Stores Ledger for seven years from
2001-02 to 2008-09. The details are given under:
a) The fast moving items are very less in number ranging from
8128 to 7669 during the above eight years. The value of fast
moving items increased from Rs.83 Crores to Rs.443 Crores.
b) The slow moving items are reduced from 166900 to 90186
items during above seven years. The value of slow moving
items increased from Rs.152 Crores to Rs.463 Crores due to
classification of capital items and new catalogues as slow
moving items.

If these are not considered the value is

reduced to Rs.133 Crores.

c) The non-moving items are reduced from 55144 to 45846
items during first three years, but it was increased to 138144
items abnormally during the year i.e., 2004-05 and to 176066
during the year 2008-09. Perhaps the reason may be more
slowly moving items might have turned into non-moving items
during those four years. The value of non-moving items was
reduced from Rs.109 Crores to Rs.37 Crores during the above
eight years.
d) The insurance spares were reduced from 1200 to 1134 items
and the value increased from Rs.39 Crores to Rs.46 Crores.
e) The percentage of fast moving items comprises 2.79 percent
of total inventory items.

The slow moving and non-moving

items comprises 97 percent of total inventory items, which is

not a good sign.

The percentage of insurance spares was

shown a reduction from 0.52 to 0.41 percent during the above

seven years.
f) The percentage of value of fast moving items was reduced
from 22 to 18 percent in the total inventory value during the
first seven years, but suddenly increased to 45 percent during
2008-09.

The value of slow moving and non-moving items

was increased from 68 to 97 percent and the value of

insurance spares reduced from 10 to 5 percent during the
above eight years.
g) Out of 1134 items of insurance spares, only 836 items are
having balance stock and other items showing nil stock.
h) Out of total value Rs.500 Crores of slow moving and nonmoving spares, a provision of Rs.40 Crores was made towards
surplus, obsolete and non-moving spares.
3. The XYZ analysis of inventory for last five years from 2002-03 to
2008-09 was made based on data available in Priced Stores Ledger.
The details are given below:
a) The category X items comprises 70% value of total inventory,
category Yitems comprises 20% of total inventory and
category Z comprises 10% of total inventory.
b) The category X items decreases from 3583 to 163 during the
above seven years period. The value is increased from Rs.264
Crores to Rs.692 Crores.
c) The category Y items decreases from 11050 to 1603 and the
value increased from Rs.75 Crores to Rs.198 Crores.

d) The category Z items decreases from 77429 to 54223 and the

value increased from Rs.38 Crores to Rs.99 Crores.
e) The

percentage of

percentage

of

category

category

items

items

is

is

0.29

2.86

percent,

percent

and

percentage of category Z items is 96.85 percent.

From the above analysis, it can be concluded that a small number or

percentage of high value items are fallen under category of slow moving
or non-moving items.
was one percent.

Further, the provision made against these items

CHAPTER VI
SUMMARY, FINIDINGS &
SUGGESTIONS

SUMMARY, FINDINGS AND SUGGESTIONS:

For any organisation, inventory plays crucial role in its profitability.

If

inventories are slow moving or non-moving, they are idle inventory of no

use.

Further, they reduce the profitability of the organisation. As per

analysis made in the previous chapter, a small number or percentage of

high value items are non-moving or slow moving in the inventory of the
company. Keeping this, the following few suggestions were made by this
study.
1.

As the return on investment is increasing from excellent performance

of company and when investment is blocked in the inventory of
stores and spares in the form of slow moving and non-moving items,
Rs198 Crores of inventory would definitely affect the profitability of
company.

Hence, immediate steps are to be taken for overall

reduction of inventory of stores and spares.

2.

The company is required to fix minimum, maximum, reordering level

in a scientific manner to control the further growth of slow moving or
non-moving inventories.

3.

The company is required to use EOQ to determine reordering

quantities for each item. It helps the company in saving of carrying
costs and ordering costs in maximised manner.

4.

As the slow and non moving inventory comprises 54 percent of total

inventory, steps are to be taken review the item wise inventory and
where items are not required, they are to be declared as surplus or
obsolete inventory and appropriate disposal action is to be taken in a
quick manner.

5.

Pending action for disposal, appropriate action is to be taken for

making provision in the books of accounts on a systematic manner

for write off slow and non moving inventories over a period of 5 to 8
years of their arise.
6.

Insurance spares are very important items from its definition itself,
where the balance of stock is to be maintained at any point of time.
However, in case of 230 items, there is no stock.

If production is

stopped due to the requirement of any such item, it may a loss to the
company. Hence, a minimum stock is to be fixed for such insurance
items and is to be maintained always.
7.

At present, certain inventories like scrap and surplus, insurance

spares, etc., are not considered while fixing the level of inventory for
control purpose.

It is suggested to consider the total inventory of

stores and spares for control purpose.

8.

The company shall adopt latest techniques like just in time concept
for supply of materials in the time of need, supply cum application
contracts, where materials are to be procured by the contractor for
fixation, etc for procuring the materials. This saves a lot investment
in the inventory of stores and spares and avoids further stock out
situations.

9.

Screen Based Computerisation for accounting of inventory of stores

and spares is not achieved in many areas, particularly reconciliation
of Priced Stores Ledger and Bin Master, Reconciliation of Provisional
Liability to Suppliers Account, Accounting of Insurance Spares, etc. A
suitable ERP Package, if not developed as in-house package, is to be
used for accounting of stores and spares.

10. Inventory Reduction Committees should be formed and headed by

maintenance.
Though the inventory of stores and spares is showing a lower proportion in
the total current assets or net worth of the company, it is not a small
figure. It amounts to Rs.300 Crores. The company has to exercise a lot of

proper control and proper system of inventory management to manage

such inventories in a profitable way. For this purpose, the company may
consider the above suggestions for management and reduction of
inventories.
The provision of right goods or services in right time at right place to the
customer improves his satisfaction to a maximum extent.

A proper

inventory management system helps definitely to achieve this objective of

the company and for its continuous improvement.

BIBLOGRAPHY

Book
Financial Management
Statistics for Iron & Steel Industry in
India
1988, 1990, 1992, 1994, 1996
Indian Steel Perspectives 2025

Author
IM Pandey
Steel Authority of
India
RK Sinha, SC Suri