A

PROJECT REPORT
On
INVENTORY CONTROL SYSTEM

Done at

NATIONAL FERTILIZERS LIMITED, NANGAL

For the partial fulfillment of the degree of

Masters of Business Administration
(FINANCE)
(2018-2019)

Under the guidance of

Mr. Sunil Gupta
Accounts Officer (Finance & Accounts)
National Fertilizers Limited, Nangal
 CERTIFICATE

This is to certify that the project report titled "INVENTORY CONTROL SYSTEM" Carried out
by MISS SAKSHI SHARMA D/O Sh.KEWAL KUMAR has been accomplished under my
guidance and supervision as a duly registered BBA student of the department of management,
GOVT.P.G.COLLEGE DHARAMSHALA (H.P). This project is being submitted by her in the
partial fulfillment of the award of the BBA from Govt. P.G. College Dharamshala .Her Project
represents her original work and is worthy of consideration for the award of degree of BBA.

Coordinator: Project guide

Mr. Dheeraj Katoch
BBA Department (Assistant professor)
BBA Department
 ACKNOWLEDGEMENT

This humble endeavor bears the imprint of many persons who are in one way or other
helpful in its completion. I am extremely thankful to Mr Sunil Gupta, Account officer (F&A),
NFL, Nangal for his excellent guidance, wholehearted co-operation and encouragement
throughout our summer training. My special thanks to Mr. Devinder Sharma, Sr. sup.
Accounts, NFL Nangal for completion of my Project.

I express my cordial thanks to Mr. P K Chouhan, C M (F&A), NATIONAL FERTILIZERS LTD,

NANGAL for giving me opportunity to work in finance department and all other members of
accounts department.

I am also highly indebted to all the staff of NFL, Nangal and My Parents for their continuous
support for carrying out this project
 DECLARATION

I, hereby declare that the final project report submitted to the college in partial fulfillment for the
degree of Masters of Business Administration on “INVENTORY CONTROL
SYSTEM” is an original work. I have not submitted this project report to any other university for
the award of any degree before.

Sakshi Sharma
INDEX
S. No. Particulars Page no.

1 Introduction to company

2 Introduction to topic

3 Review of Literature

4 Research Methodology

5 Data Analysis and Interpretation

6 Findings & Suggestions

7 Appendix

8 Bibliography
 ABSTRACT

The development of the fertilizers industry is of great importance to our National Company as; the
primary occupation of 70% of the Countrymen is agriculture and for a good yield, Fertilizer plays
an important role. The increase in the Fertilizer Industry shall lead to the development of
agriculture which will further lead to rise in per capita income of the people due to increased yield
and high quality. The efficiency of this industry would help the country to earn more of foreign
exchange by exporting more and high quality of grains and other agricultural products.
Fertilizer industry in our country has expanded significantly to fulfill Nation’s hopes and
aspirations for self-sufficiency in food grains by trotting path of planned industrialization. India
continues to be the third largest producer and consumer in the world. There are 45 large size
fertilizer units in the country, manufacturing a wide range of nitrogenous & phosphoric/complex
fertilizers.
National Fertilizers Ltd is the main Fertilizer producing company in India. This Company has its
four Units, situated at Nangal, Bathinda, Panipat, and Vijaipur. This company has 15.5% market
share of urea in the country.
Nangal unit, which was taken up for this study has made enormous contribution of the overall
agricultural development in the region. Since its inception the factory has had remarkable
performance with positive finance results and sustained high level of production.
As you cross the Sutlej barrage’s west end, you start breathing a different air - an air of hope. Your
eyes certainly can’t miss a prosperous township on the right and a gigantic fertilizer factory of
National Fertilizer Limited on the left, which are the sign of progress that India has achieved since
independence.
With coming up of Bhakra Dam and surplus power available from the project, it was decided by
the government of India to set up a fertilizer factory at Naya Nangal, which went into production
in 1961. The plant was envisaged to produce Calcium Ammonium Nitrate (CAN)-a nitrogenous
fertilizer with 20.50% Nitrogen with 164 MW power consumption. This product was subsequently
upgraded to 25% nitrogen. Initially production route was power intensive electrolysis process for
the generation of hydrogen followed by high-pressure ammonia synthesis. Subsequently in 1978,
went on stream, another Ammonia Plant based on fuel oil gasification, which added urea – a
nitrogenous fertilizer with 46% nitrogen to its range of production. In 1984, Methanol plant with
capacity of 50 MTPD was added, which was later on raised to 67MTPD. In 1990, Electrolysis
plant was replaced with Front-end Hydrogen plant (NMP-1) based upon reforming of Naphtha for
production of Hydrogen thus reducing the electrical power consumption.
On February 17, 1956 the proposed Nangal Factory was incorporated under the name of “Nangal
Fertilizers and Chemicals limited” (NFCL) with it registered at Nangal having and authorized of
31 Cores. The name of changed to “Hindustan Chemicals and Fertilizers Limited” (HFCL) with
effect from July 15, 1959.
The FCL Ltd. was incorporated on Jan. 1st 1961 by proclamation of the fertilizers and chemicals
companies’ amalgamation order 1960, having authorized capital of Rs. 75 crores. On 19 Jan., 1961
Nangal Unit becomes the constituents of “Fertilizers Corporation of India” with the re-
organization of fertilizers co-operation of India with effect from 1st April 1978. The Nangal Unit
becomes a constituent unit of the National Fertilizers Limited, which has already two units under
it, located at Bathinda (PUNJAB) & Panipat (HARYANA). 4th plant of National Fertilizers
Limited, at Vijaipur (M.P.) was commissioned in 1987.

MISSION STATEMENT
the company has a vision i.e. “to be a leading indian company in fertilizers and beyond with
commitment to all stakeholders” and a mission “to be a dynamic organization committed to
servethe farming community and other customers to their satisfaction through timely supply of
fertilizers and other products & services; continually striving to achieve the highest standards in
quality, safety, ethics, professionalism, energy conservation with a concern for ecology and
maximizing returns to stakeholders”.

HISTORY OF THE COMPANY

In 1954 the Govt. of India appointed a committee called “The fertilizer production Committee”
under the chairmanship of Sh. B.C MUKHRJEE (FCI Ex. Chairman & Managing Director) to
suggest ways for further expansion of fertilizer production in India. The Govt. however
simultaneously issued a directive to the committee that one of the proposed fertilizer units should
be located near the Bhakra Dam. The main consideration for setting up a plant in Nangal
(PUNJAB) was that there would not be enough demand of electricity from Bhakra Dam. Heavy
water a by-product in this process could be produced for the use in these atomic reactors as
moderator.
On February 17, 1956 the proposed Nangal factory was incorporated under the name of Nangal
Fertilizers & Chemical Ltd. (NFCL) with its registered at Nangal having an authorized capital of
Rs. 31 crores. In July 15, 1959, the name of (NFCL) was changed to “Hindustan Fertilizers &
Chemicals ltd.” (HFCL).
The FCL Ltd. was incorporated on Jan 1st, 1961 by proclamation of the fertilizers & chemicals
companies’ amalgamation order 1960, having a authorized capital of 75 crores. With the re-
organization fertilizers co-operation of India with effect from 1st April 1978, the Nangal unit of
Fertilizer Corporation of India came under the NFL fold. The company expanded its installed
capacity in 1984 by installing and commissioning of its Vijaipur gas based Plant in Madhya
Pradesh.
 NFL, Corporate Office, Noida

COMPANY PROFILE

National Fertilizers Limited (N.F.L.) is one of the largest producers of nitrogenous fertilizers in
the country today with an installed capacity of about 3.6 million tones material per year consisting
of Urea. At present N.F.L. is operating fertilizers at:
 Nangal (Punjab)
 Bhatinda (Punjab)
 Panipat (Haryana)
 Vijay Pur I & II (Madhya Pradesh)
The plants at Nangal, Bhatinda and Panipat are based on natural gas; whereas Vijay Pur unit is
based on natural gas as feed stock/raw material. All the plants are running at more than their
rated capacities. As per guidelines of GOI, in order to reduce subsidy burden & Carbon footprint,
NFL revamped the Nangal Unit on LSTK basis for changeover of Feedstock from LSHS/FO to
Natural Gas and commercial production on Gas was commenced during April 2013. Apart from
manufacturing business, the company is also expanding its business, in a consistent & phased
manner, by way of imports and trading of various agro-inputs like Non-Urea Fertilizers, certified
seeds, Agrochemicals, Bentonite Sulphur, City compost through its existing PAN India dealer’s
network under single window concept.
 ISO Certifications
NFL is known in the industry for its work culture; value added human resources, safety,
environment, concern for ecology and its commitment to social upliftment. All NFL plants have
been certified for ISO-9002 for conforming to international quality standards and international
environmental standard i.e. ISO-14001. With the certification of Corporate Office/Marketing
operations under ISO-9001: 2000, NFL has become the first Fertilizer Company in the country to
have its total business covered under ISO-9001 Certification.

ISO CERTIFICATIONS

PLANTS/OFFICE CERTIFICATION AWARDED SINCE

Vijaipur Plant ISO-9002/ISO-14001 1997-98/98-99

ISO 9001:2000 2003-04

Panipat Plant ISO-9002/ISO-14001 1999-00/2000-01

ISO 9001:2000 2003-04

OHSAS-18001 2004-05

Bathinda Plant ISO-9002/14001/18001 2000-01/2001-02/03-04

ISO 9001:2000 2003-04
OHSAS-18001 2003-04

Nangal Plant ISO 9001: 2000 2002-03

ISO-14001 2001-02
 INDUSTRIAL PRODUCTS
Industrial products are certain by products, which are produced during manufacturing of fertilizers.
NFL manufactures and markets the following industrial products:

Sr. Product Chemical Formula Used for/industry

No.
1 Nitric Acid Dilute Organic Synthesis, Photo engraving, Medicine,
(HNO3) Preparation of Nitro, Refining of Silver
2 Ammonium Nitrate Explosive, Pyrotechnics, Nitrous Oxide, Absorbent
(NH4NO3) for Nitrogen Oxides, Ingredient for freezing mixture,
Oxidiser in solid rocket properties, Nutrient for
Antibiotics, Catalyst
3 Sodium Nitrite Organic Synthesis, Rubber additives, Chemical
(NaNO2) reagent, Pharmaceuticals, Photographic reagent,
Pickling meat, Dyeing and printing of fabrics, Rust
proofing and medicines etc.
4 Sodium Nitrate Oxidizing agent, Oxidizer in solid rocket propellants,
(NaNO3) Fertilizers, Glass Manufacturing, Chemical reagent,
Dynamites/Matches, Military Explosives,
Refrigerant/Medicines
SALIENT FEATUFES OF THE COMPANY
 The company has an excellent track record and high profits, with highly motivated and
dedicated workers and officers – no industrial relation problem.
 N.F.L. was given the “Mini Ratna Category-I” by the Govt. of India in 1998 based on the
company’s overall performance during the preceding years.
 The company was ranked 27th in terms of sales according to Business India Super –100 in
1998.
 N.F.L. has been selected by a panel of judges for Economic Times-Harvard Business
School Association of India corporate Performance Award for 1994, among 213 Public
Sector Companies in the country.
 International Greenland Society, Hyderabad awarded NFL “Best Environment &
Ecological Implementation Award” for the year 1995-96.
 N.F.L. is the first Company in Public Sector to have both the certifications of ISO-9002
and ISO-14001.
 National Fertilizers Limited (NFL), a leading fertilizer PSU under Ministry of Chemicals
& Fertilizers received the Hindustan PSU Award 2018 under the category ‘Best
Turnaround Strategy’. The award is a recognition of company’s major turnaround which
has taken over in last two years. The company has taken several strategic initiatives in last
two years such as import of fertilizers on larger scale, commencement of Seeds
Multiplication Programme to produce & sale of certified seeds, trading of agrochemicals
of different molecules under company’s own brand, revival of Ammonium Nitrate plant at
Nangal Unit, commissioning of Bentonite Sulphur Plant at Panipat Unit etc.

INSTALLED CAPACITY OF UREA

Nangal 478500 MT
Bhatinda 511500 MT
Panipat 511500 MT
VijayPur 2066130 MT
BASIC OBJECTIVES
In terms of Memorandum of Association, NFL was set up to manufacture and market chemical
fertilizers, other chemicals and by products as well as to provide the allied services. In order to
achieve and maintain a leading position in the production and marketing of fertilizers, the
following Micro Objectives have been identified:

MICRO OBJECTIVES
I. Productivity
To achieve the best possible levels of production and economy in the use of inputs while
ensuring safety and proper maintenance of plant and machinery and pollution control. More
specifically (a) at strive to raise capacity utilization and (b) to improve upon consumption
norms consistently.

II. Research & Development

To carry out R&D activities for:
a) Increasing plant availability.
b) Saving use of energy in different forms.
c) Better recovery of saleable products.
d) Process improvement /development.
e) Increasing utilization efficiency on a sustained basis in the application of chemical fertilizers
in combination with other agricultural inputs.

III. Profitability
To maintain the assets, men and material in most effective and efficient manner ensuring

a) Reasonable return on investment commensurate with the principles laid down by the Govt.
from time to time, and

b) Generation of increasing internal resources.

IV. Marketing & Consumer Services
a) To provide to the farmers high quality products in right time and in adequate quantities and
with a package of modern agricultural practices, at the same time maintaining reputation for
fair business practices.
b) To further intensify promotional efforts for increased use of fertilizers and to maximize
distribution of Company’s products within the areas covered by the company, consistent
with Government Policy.

V. Organization
To develop and maintain an organizational environment for encouraging group initiative,
innovation and productivity and also sustain fair deal and human approach.

VI. Growth
To achieve reasonable and consistent growth in the business of manufacture and marketing
of fertilizers and compatible with needs of the market

VII. Obligation to Society

To conduct the business of NFL in accordance with ethical and legal standards and to
undertake socio economic activities, consistent with Govt. policies, in order to generate good
environment, in which Company operates.
 NANGAL UNIT
Nangal Fertilizers & Chemicals Private Limited” was incorporated on 17.02.1956. Its name was
changed to “Hindustan Chemical & Fertilizers Limited” on 15.07.1959. It became a unit of
“Fertilizers Corporation of India” on01.01.1961. With the reorganization FCI the Nangal unit
became the constituent of “National Fertilizers Limited” from 01.04.1978. The Nangal Unit is
situated on the right bank of the river Sutlej down stream of Bhakra Dam in The state of Punjab.
Besides the production of Urea , Nangal Unit is also engaged in the production and sale of
Industrial Products. These Are Sodium Nitrate, Sodium Nitrite, Ammonium Nitrate Lumps/Melt,
Ammonia and Nitric Acid etc.

ABOUT NANGAL PLANT

Consequent upon the reorganization of FCI group of plants, Nangal Plant was transferred to NFL
& subsequently expansion plant of Nangal Unit was commissioned with an installed capacity of
3.30 LMT. Further in order to sustain and enhance the company’s growth, NFL successfully
revamped Urea Plant of the Nangal Unit & Commercial Production was commissioned after
revamp w.e.f. 1st Feb 2001 thus enhances the Annual installed Capacity from 3.30 LMT to 4.785
LMT . As per guidelines of GOI, in order to reduce subsidy burden & Carbon footprint, NFL
revamped the Nangal Unit on LSTK basis for changeover of Feedstock from LSHS/FO to Natural
Gas and commercial production on Gas was commenced during April 2013.

Process
Ammonia: KBR SMR(Steam Methane Reforming) with Purifier Technology
Urea: Technimont Total Recycle Process
Raw material: Coal , LNG/ RLNG, Power, Water

POLLUTION CONTROL
On environment and pollution control, NFL has been taking adequate measures so as to control
the emission level within the standards prescribed by the State Governments and Minimal National
Standards (MINAS). Right from the beginning, special care has been taken by the Nangal Unit in
this connection. The Unit has the following Affluent Treatment Plants, the expenses of which is
directly are allocated to cost centers:
 - HCN Chromate Treatment Plant.
- NOX Abatement Plant.
- Urea Hydrolyser Plant.
- Electrostatic Precipitator Plant.
- Affluent Plants.
- Sulphur Recovery Plant.

The NOX emission from Nitric Acid Plant has been controlled by setting of a small NOX Plant
which is not only controlling the NOX emission to atmosphere but also providing Sodium
Nitrate/Nitrite products which are the valuable industrial products.

RECOGNITIONS AND AWARDS

NFL plants all along remained the recipient of several prestigious awards based on improvement
in productivity, safety, and environment. NFL is the first Company in Public Sector to have both
the certification of ISO-9002 and ISO-14001.

 Certificate of Merit of National Productivity Council Award presented by President of India

for the year 1997.
 Prime Minister’s Sharmvir Award for 1997-98. Award of Merit for Noteworthy Safety
Performance Given to the unit for 1992 by National Safety Council, U.S.A.
 Environment Pollution Control Award to the unit from Bharat Chamber of Commerce for
1989.
 Five employees of the Unit received Krit Vir Award from the State Labour Department for
1992 and one employee selected by Govt. of India for Vishwakarma Rashtriya Puraskar for
the year 1992.
 British Safety Council, U.K. Award for the longest accident free period in the year 1996.
 British Safety Council, U.K. has awarded Safety Award to the unit in recognition and
commendation of services rendered in the cause of safety for the year 1997.
 The unit was given Significant Improvement Award by National Safety Council, U.S.A. for
the year 1999.
 Unit was given Award for Excellence in safety by FAI for the year 1997-98.
 Nangal unit was awarded Krit Veer Award by the Punjab State Government during 1999-
2000.

CONCEPTUAL FRAME WORK OF INVENTORY MANAGEMENT AND

CONTROL SYSTEM
Inventory Management is a topic of considerable and wide interest. Inventory control keeps track
of inventories. Though it may not be treated as an exclusive function but it is one of the most
important functions in an enterprise. The decision regarding appropriate size of inventory is of
paramount significance. It should be based on some sound principles and techniques. Inventory
management and control system provides all this.

1. INVENTORY
Inventory means all the materials, parts, supplies, expense tools and in process or finished products
recorded in books by an organization and kept in its stocks or plant for some period of time.
Inventory is an essential part of an organization. Every business/manufacturing organization
however, big or small has to maintain some inventory. Some explainable aspects of inventory are
as under:

i. Inventories are the piles of raw materials and finished goods in warehouse.
ii. All the materials, parts and in process or finished products recorded on books by an
organization, and kept in its stores, warehouses and plants are known as inventories.
iii. Inventory is the list of names, quantities and monetary values of all or any group of items.
iv. Inventory is a detailed list of those moveable items, which are necessary to manufacture a
product and to maintain the equipment and machinery in good working order.
In financial parlance, inventory is defined as the sum of the values of raw materials, fuels and
lubricants, spare parts, maintenance consumables, semi-processed materials and finished stocks at
any given point of time. The operational definition of the Inventory would be the amount of raw
material fuel and lubricants, spare parts and semi-processed material to be stocked for smooth
running of the plants. Since these resources are ideal when kept in the stores, inventory is called
as ideal resource of any kind having an economic value. Definition of Inventory as per Accounting
Standard -2 as under-
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services

2. CLASSIFICATION OF INVENTORY
Inventories are maintained basically for the operational smoothness, which they can affect by
uncoupling successive stages of production, whereas the monetary value of inventory serves as a
guide to indicate the size of investment made to achieve this operational convenience.

Inventories can be classified in four broad categories:

1. Raw Material Inventory.

2. Production Components.
3. Work in Progress Inventory.
4. Finished Goods Inventory.

 RAW MATERIAL INVENTORY

Raw materials are the major input into an organization and from the bulk, which gets converted
into output. As any break in the supply of raw material will keep the production lines idle. Their
importance can be easily visualized. The function of raw material inventory is to act as buffer
between procurement and manufacturing. The size of inventory is dependent upon the factors
such as internal lead-time for purchases; supplier lead-time; vender relations; availability of the
materials; the consumption of the materials.

 PRODUCTION COMPONENTS

Similar to raw materials, production components are purchased from outside. Production
components are of two types:

a) Those purchased from the market like spare parts and components.
b) Special parts or components manufactured in one’s own company,
c) kept in stock for use.

 WORK-IN-PROGRESS INVENTORY
These are the semi-finished products usually found on the factory floor in various stage of
production. Work in Progress Inventory might exist merely because of production cycle time. The
raw material has to go through a combination of different operations, before they take shape as
saleable products. The rate of production of production at reach work section will depend upon
the technology, while the production executives try their best to balance the lines, a perfect balance
is almost impossible. In addition to this break down in certain work centers can starve others down
the line. To overcome these difficulties work in progress inventory stored at the work centre.

 FINISHED GOODS INVENTORY

The finished goods inventory is maintained to ensure a free flowing supply to the customers and
for this marketing department insists on substantial finished goods inventory. The size also
depends upon the ability of the marketing department to push the product, the company’s ability
to stick to the delivery schedule, the shelf life and the warehousing capacity.

Two factors which influence the inventory of all types are: the accuracy and details of the final
forecast- all the inventories are geared for future requirements and are therefore, sensitive to this
factor, the available storage space, the logical sequence to this factor is the self-life of the items
stores, a factor for consideration in the case of perishable goods.

5. INVENTORY MANAGEMENT
Inventory management is the planning, organizing and control activities focused on the flow of
inventory into through, and from the organization. Many decisions fall under the Inventory
Management umbrella:

1. When is the best time to purchase materials or merchandise?

2. How purchasing agreement should be structured?

3. Which is the best way to handle materials or merchandise inventories, once they are
received?

These questions are among the many that inventory management seeks to answer. It is the
management of inventories in such a way, which minimizes the idle time caused by shortage of
raw material, stores, or spares and keeps down capital investment in inventories.
4. OBJECTIVES OF INVENTORY MANAGEMENT
Objectives are the desired end results. The objectives of inventory management are: -

- To ensure continuous and uninterrupted production or operation by maintaining a steady

flow of materials.
- To achieve the above objectives in an effective and economical manner.
- To effect economies in the cost of material by purchasing materials of the right quality, in
the right quantity, at right time, from right source and at the right price.
- To affect economies in the costs incurred on material after they have been purchased,
through storage, processing and warehousing, till the finished goods ultimately reach the
customer.
- To reduce working capital requirements through proper and scientific inventory control.
- To be alive to the changes in the market in respect of new products.
- To improve the quality of manufactured goods by use of better raw materials of components
and thereby increase the competitiveness of such goods put on sale.
- To increase the competitiveness of manufactured goods by reducing their prices through cost
reduction and value analysis.
- To save foreign exchange through substitute and economizing on foreign purchases.
- To ensure cooperation among all the departments of the enterprise to meet inventory
management objectives, both at corporate and functional levels and to ensure proper
coordination in respect of such activities.
- To conserve material resources within the enterprise, thereby contributing to the
conservation of natural resources.

5. INVENTORY CONTROL LEVELS

Stock levels are to be maintained in such a way that there is no overstocking so that the chances
of loss through damages deterioration in quality, risk of obsolescence etc. are avoided alongwith
unnecessary blocking of capital or paying interest on borrowed funds. At the same time there shall
be no stock out situation leading to interruption of production and loss of sale and profit. The
production planning and control or material control department looks after this aspect of stores
management by fixing maximum level, minimum level, ordering level, danger level.

 MAXIMUM LEVEL
The maximum level indicates the maximum quantity of an item of the material that can be held in
stock at any time. The stock in hand in regulated in such a manner that normally, it does not
exceed this level. While fixing this level the following factors are to be taken into consideration:

a) Maximum requirement of the store for production purpose, at any point of time.
b) Rate of consumption and lead- time.
c) Nature and properties of the stores.
d) Cost of storage and insurance.
e) Economy in prices; for seasonal supplies purchased in bulk during the season, the maximum
level is generally high.
f) Rules framed by the government for import or procurement. If materials are difficult to
obtain and supplies are irregular, the maximum level should be high.
g) Financial consideration: availability of funds and prices of the stores are to be kept in mind.
For costly items, the maximum level should be as low as possible. Another point to be
considered is the future market trend. It prices are likely to rise, the concern may like to
resort to stock piling for keeping large stock in reverse for long term future use and in such
a case, the level is purchased up.

The following formula for calculating maximum stock level:

Maximum Stock Level = Reordering Level + Reordering Quantity – (Minimum
Consumption x Minimum Reordering period).

 MINIMUM LEVEL
The minimum level indicates the lowest quantitative balance of an item of material which must be
maintained in hand at all times so that there is no stoppage of production, due to material being
not available. In fixing the minimum level the following factors are to be taken care of:
 a) Nature of item: for special material purchased against customer’s specific orders, no
minimum level is necessary.
b) The maximum time required replenishing supply; this is known as lead-time. Longer the
lead-time, lower is the minimum level, the reordering point remaining constant.
c) Rate of normal minimum or maximum consumption of the material.

 ORDERING LEVEL
This level is fixed somewhere between minimum and maximum levels in such a manner that the
quantity of stores represented by the difference between the reordering level and the minimum
level will be sufficient to meet the demands of production till such time, as the order materializes
and supplies are delivered. When the stock is hand reaches the reordering level, it is indication
that the action for replenishment is necessary and proposals for purchases are to be initiated.

 DANGER LEVEL
This is a level fixed usually below the minimum level. When the stock reaches at this level very
urgent action for purchase is indicated. This presupposes that the minimum level contains a
cushion to cover up such contingencies. As the normal lead-time it cannot be afforded at this
stage. It is necessary to resort to unorthodox hasty purchases procedure resulting in higher
purchasing cost.

The practice in some firms is to fix danger level above the minimum level. It is seen that while
fixation of danger level below the minimum level is an indicator for taking corrective action,
danger level fixed above the minimum level is meant for preventive action. Danger level can be
determined with the following formula:

Danger Level = Average Consumption x Maximum reorder period for emergency purchases.

6. SCIENTIFIC INVENTORY MANAGEMENT

One of the major tasks of any management, today, is to control inventories. It is a massive task
yet it has to be done since the cost of inventories is totally “Non-value Producing” and is direct
charge on profits of any organization. Left uncontrolled, it can eat away all the profits of
organization and drag it into the sick bed.
There are three basic models, which may be used for controlling stock of goods held for the
purpose of future production or sales. These are:

1. Fixed Order Quantity System.

2. Replenishment System.
3. Modified Replenishment System.

Each of these may be described as follows, but it is quite advisable to understand these
equations/terms.

- Ordering Cost
- Carrying Cost
- Stock Out Cost
- Lead Time

ORDERING COST

Ordering cost consists of the cost of preparing and issuing a purchase order. Related to the number
of orders processed are special processing receiving, inspection costs and other miscellaneous cost
of purchasing. It includes the cost of stationery postage and telegraph charges. The ordering costs
are mostly fixed and partly variable so the ordering cost decreases with the increase of number of
orders.

CARRYING COST

It is the cost of holding the materials in the stores and includes:

i. Cost of storage space, which could have been utilized for some other purposes.
ii. Cost of bins and racks those have to be provided for storage of material.
iii. Cost of maintaining the material to avoid deterioration.
iv. Amount of interest payable on money blocked in the inventory, includes the opportunity cost
also.
v. Cost of spoilage in stores and handling.
 vi. Cost of obsolescence on account of some of materials becoming obsolete after some time of
storage either due to change in the process or product.
vii. Insurance costs.

After adding up this cost for a certain period, say one year, the inventory carrying cost is
ascertained as a percentage of average value of inventory carried. Carrying cost is mostly variable
and it increases with the increase in reordering quantity. Thus ordering cost and inventory carrying
cost move in opposite direction.

STOCK OUT COST

When a required material is not in stock, there is a stock out on that time. As a result of stock out,
certain consequences follow and certain cost associated with these consequences. Such a cost is
called Stock-out Cost. If, the consequences of stock out are serious, such as, stoppage of
production, resulting in idle time of machine and man, loss of production and profit, failure of
customer service or loss of goodwill, the cost of stock out tends to be substantial. On the other
hand, if stock out involves a little more effort in expediting delivery of supplies to the stores, the
cost can be reduced to negligible level. Stock Out Cost, unlike inventory carrying cost is however,
highly valuable from time to time and depends upon the both tangible and intangible factors.

LEAD TIME

This is the time gap between the placement of an order and the time of actual supply. It is not
necessarily identical to delivery time. It is composed of three components:

 Servicing Time: Time taken for placing an order.

 Delivery Time: Time taken by supplier to comply certain orders.
 Receiving Time: It includes time taken for uncrating goods, Inspection of goods and time
for movement goods to stores.
All these times never remain constant, so the determination of lead-time becomes a complicated
matter and should be minimized.

I. FIXED ORDER QUANTITY

In this system the re-order quantity i.e. economic order quantity is fixed and a re-order point is
placed for the quantity whenever the stock in hand drops to a particular level. The method for
calculating the economic order quantity and re-ordering point may be as under:

 ECONOMIC ORDER QUANTITY (E.O.Q.)

E.O.Q. is fixed at a point where total cost of ordering and cost of carrying the inventory will be
minimum. The quantity to be ordered should be such which minimizes the ordering and carrying
cost. The order for the material to be purchased should be large enough to earn more trade discount
and to take advantages of bulk transport, but at the same time it should not be too large to incur
too heavy payment on account of interest on capital blocked, storage and insurance costs.

If the price to be paid is stable, the E.O.Q. may be ascertained by this formula:

Q = 2CO/I

Where, Q: Economic order quantity

C: Consumption of the material consumed in units during the year

O: Cost of placing one order

I: Inventory carrying cost.

To sum up E.O.Q. is determined keeping in view the ordering cost and carrying cost. With the
interaction of these two cost, the economic order cost during a particular period are equal to
carrying cost during that period and the total cost to order and carry the inventory is lowest.

 RE-ORDER POINT
At re-order point, the level of stock is equal to the average expected consumption or sales of item
during lead-time. The idea being that till time the purchase order materializes, there is sufficient
stock to meet the demand. The actual consumption during the lead-time may, however, be
sometimes more and sometimes less than the average consumption. In the former case, therefore,
temporary stock outs occur and so while determining the re-order point, it is necessary to add a
buffer stock or safety stock to the expected average consumption during the lead-time. Thus:
 Reorder point = B + (C x L)

Where, B: Buffer Stock

C: Average consumption

L: Lead Time.

II. REPLENISHMENT SYSTEM

In the replenishment system of inventory management, there is no fixed ordering quantity but there
is a fixed ordering time. Thus, there is no consideration of inventory costs. A replenishment or
maximum level is fixed beyond which the stock is, at no time, expected to go. Stocks are reviewed
at fixed periodical intervals and orders are placed for a varying quantity, which is equal to the
maximum level minus the stock in hand on the date of review.

In deciding upon the reorder quantity, another factor to be considered is the time gap between the
lead-time and time interval of review. If the lead-time is greater than the time interval of review,
the quantity to be ordered is further reduced by the quantity already on order at the time of review.
Maximum level may be determined as:

M = B + C (L + R)

Where, M: Maximum Level

B: Buffer Stock

C: Average Consumption

L: Lead Time

R: Time interval between two reviews.

III. MODIFIED REPLENISHMENT SYSTEM

There is another system of inventory management called the modified replenishment system,
which is a modification of replenishment system. In this system also, the ordering quantity is
variable but a lower limit is placed on its size. Thus the system combines the main features if fixed
order quantity and the fixed order time system as much as there is a maximum level, a reorder
point, a variable quantity and the system of periodic review.

PERPETUAL & SELECTIVE INVENTORY CONTROL

In today’s cut throat competition it is very much essential that the resources of any organization
are properly utilized. Inventory constitutes the most significant part of current assets of a large
majority of companies in India. Materials in the form of raw material and semi-finished goods are
of greater significance for success of an enterprise. These can directly affect the efficiency of a
system. It is observed that irrespective the size of an enterprise, material is the most significant
element of cost and accounts for anywhere between 40% to 70% of the total cost of production. It
will be appropriate that the primary objective of material management, in general, and inventory
control, in particular, is to reduce costs.
In fact an inventory controller should always take care to see that the cost controlling should be
minimized and should not be more than that of the returns available from such an inventor control.
The answer to this problem may be sought through:
 Perpetual Inventory System
 Selective Inventory Control

1. PERPETUAL INVENTORY SYSYEM

Perpetual inventory system is defined by Institute of Cost And Management Accountants, London
as “A system of records maintained by the controlling department, which reflects physical
movement of stocks and their current balances.” In other words it is a technique of controlling
stocks by maintaining stock record, such as bin cards in stores and store ledger in accounts in such
a manner that the stock balance is available at any point of time i.e. perpetual. This facilitates
regular stock verification physically, which obviate the stoppage of work for stock taking.
The success of perpetual inventory system depends upon the following factors:
a. Maintenance of bin cards and store ledger up to date.
b. Reconciliation of quantity balance shown by bin card with that of store ledger.
c. Continuous verification of physical stock with bin card.
d. Reconciliation of discrepancies.
e. Remedial action to remove the cause of discrepancies.
f. Correction of stock records.
Perpetual Inventory System comprises:
 Bin Cards.
 Store Ledger.
 Continuous Stock Taking

Bin Card
Bin Card is also known as bin tag or stock card. A bin card is a quantitative record of receipts,
issues and closing balances of the items of stores. Separate Bin Cards are maintained for each
items and are placed in shelves or bins or are suitably hung up as convenient may be along with
material in godown. A specimen form of bin card used in N.F.L. Nangal Unit is given at Annexure
– I.
On the receipt of a consignment of material, suitable entry of quantity is made in the receipt column
of bin card from the goods receipts note. Similarly the issues of the material to the shops, the
departments, plants or to outside party are entered in the issue column. All these entries are
supported by receipt or issue documents, as the case may be. The various levels indicated in a bin
card enable the store keeper to keep a watch on the balance and to place requisition for the
replenishment as and when necessary. For each items of stores, maximum quantity, minimum
quantity and ordering quantity are stated in the card. By seeing the bin card, the storekeeper can
send the requisition for purchases of material in time.
Some firms adopt The Double Bin System for facilitating physical verification. In this system two
sets of Bin cards are maintained for each item of material. One set is kept as completely full from
which no issues are usually made. The other set constitutes the regular bin card from which the
issues are made. New supply is ordered as soon as the second set of bin is empty. This two bin
system facilitates physical review of stock by the storekeeper for the purpose of placing purchase
requisition.

Stores Ledger
Stores ledger is maintained to record all the receipts and issue transactions in respect of material
along with the quantities, the values, sometimes rate per unit are entered in the receipt, issue and
balance columns. Additional information as noted in bin cards regarding quantity in order and
quantity reserved, together with their values may also be recorded in the stores ledger.
Maintenance of bin cards along with stores ledgers is at a time considered to be duplication.
However, it is advantageous to retain both the sets of records for the following reasons:

 Bin cards are not accounting records. It is essential that these be located with the store in the
various godowns.
 Stores ledgers are maintained generally in the cost office from where the consolidated
information may be made available.
 Stores ledgers constitute a second check on the quantity recorded in bin card.
 Frequent overall review of store balances may be conveniently made with the help of stores
ledgers

 Reconciliation of Bin Card & Stores Ledger

After posting in bin cards the receipts and issue document are valued then passed on to the stores
clerk for entry in the ledger. Normally there should be no differences between the balances shown
in two sets of records. Any difference between the bin card and stores ledger defeat the purpose
for which two separate sets are maintained and renders physical stock – taking in effective as the
correct book balance for the purpose of comparison with the physical balance is not available. The
difference should, therefore, be reconciled and corrected at regular intervals.

Continuous Physical Stock Verification

The perpetual inventory system is not complete without a systematic procedure for physical
verification of stores. The bin card and the stores ledgers record the balances but their correctness
can be verified by means of physical verification only. The books indicate what the balances should
or should have been, whereas a physical check would reveal what the balances actually are.
The stock verification staff plans the program of stock taking in a systematic manner with proper
distribution of work among themselves about counting, weighing, measuring and listing the stock.
Different sections of stores should be taken up in rotation. The program should be so planned that
in the course of a year the entire range of item is covered. Some items may need verification at
intervals of a less than a year according to their according to the importance or the degree of control
desired. On the other hand bulky items of smaller value may be verified only once in a year.
The physical stock of an item in the godown is counted, weighted or measured as the case may be,
and the results of stock verification suitably recorded. Three methods of recording the results of
stock verification are described below:

a. Inventory tag
The tag consists of two portions. The upper portion is attached to the particular stores bin at the
location to indicate that the entire item has been verified. Any bin to which no inventory tag is
attached would indicate that the item is still to be verified. The lower portion of the tags are torn
off and kept together. These serve the purpose of records of stock verification which when valued
represent the balance of stores in hand.

b. Record in Bin Cards

Instead of maintaining separate inventory tags, the results of stock verification may be entered in
the bin cards. The balance found on physical verification is entered, preferably in red ink, in the
line next below the last entry in the balance columns of the cards. The physical count etc. made by
the verifier is taken to be authentic and is entered in the bin card even if it differs from the bin card
balance. The date of stock verification is also entered in the column provided for the purpose so
that a visual check of the records indicates whether any item has been left unverified.

c. Stock Verification Sheets

It is necessary to record the result of stock verification in a separate record or sheet. The sheets are
maintained date wise so that when arranged together they give a chronological list of the items
verified. The quantity actually found on stock verification is noted in the proper column by stock
verifier who also enters in verification sheet, the balance on date as shown in the bin card. The
sheet is then sent to the stores ledger clerk who enters the balance as recorded in the stores ledgers.
Thus, for each item of stores in the stock verification sheet, there are three sets of entries for the
quantity.

Periodic Stock Verification

Under this system, the entire stock is verified all at a time at periodic intervals, usually once in a
year. It is advantageous to have the verification at the close of the annual accounting period so as
to facilitate valuation of stores for exhibition in the final accounts. Stock may also be verified at
intervals of less than a year if so desired but such a course is expensive one.
Periodic verification is ,however ,necessary for stores that do not find a place in perpetual
inventory records, such as work in progress, consumables and components drawn from stores but
not fully utilized, capital assets, loose tools and spares lying in shops and measuring devices and
tools in the custody of inspection staff. Some management prefer to have annual stock taking for
selected items in addition to continuous stock verification as sort of double check .

3. Selective Inventory Control

Selective inventory control can be broadly classified into four different methods. These are:
 ABC Analysis
 VED Analysis
 SDE Analysis
 FSN Analysis

ABC Analysis
ABC Analysis, popularly known as “Always Better Control” is based on Pareto’s law, developed
by an Italian economist in 19th century. He observed that minority of population owned the
majority of country’s wealth. Same principal has been applied to stocks which show that majority
of inventory value will be represented by relatively few items.
ABC analysis is a technique of selective control of inventories by classifying all items of stores
into three categories i.e.
Category A: a few items accounting for substantial usage in term of total monetary value,
(10% items covering 75% value).
Category B: 20% items representing 15% value.
Category C: large number of items of small value i.e. 70% items covering 10% Value.
The main object of this analysis is to decide guidelines for selective control over inventories. It is
extremely difficult to control if there is large number of items in stock. This system ensures stricter
control over the few materials, which represents bulk of cost, so that the direction of control is
more cost effective. This system also saves time and investment by taking action on the three
categories of stores by using discretion. Generally, category A items deserved very strict control
with say weekly control report, maximum follow up, efforts to reduce lead time, etc. Category B
items shall require moderate control, while less expensive control may be applied to category C
items. However, care should be taken for critical items, which are in category B or C, but extremely
important from the view point of production process.
The procedure of preparing ABC analysis is as follows:

I. Determine the cost and usage of each material over a given period.
II. Multiply unit cost by estimated usage to obtain net value of each material.
III. List all items with quantity and value and arrange them in descending value.
IV. Accumulate value and add up number of items and calculate %age on total inventory in value
and in number.
V. Draw a curve of %age items and %age value.
VI. Mark off from the curve the rational limits A, B, C categories.

VED Analysis
Vital, Essential and Desirable (VED) Analysis is done mainly for control of spare parts keeping in
view the criticality to production. Vital spares are spares the stock out of which even for the short
term will stop production for quite some time. The stock out cost of vital items will stop production
for quite some time. The stock out cost of vital item is very high.
Essential spares are spares the absence of which cannot be tolerated for more than a few hours a
day and the cost of lost production is high. Such spares are essential for the production to continue.
The desirable spares are those which are needed but their absence for even a week or so will not
lead to stoppage of production. Some spares, though negligible in value, may be vital for the
production to continue and require constant attention. Such spares may not receive the attention
they deserve if they are maintained under ABC analysis method because their consumption value
is small.

SDE Analysis
These letters stand for Scarce, Difficult and Easy to obtain items. It is quite obvious that when an
item is scarce and it is an “A” item, we cannot apply same procedure or yardstick for its stocking.
A scarce item may an item which is not easily available in the market and might require source
development, or else it might be item which is very difficult to manufacture or there are only one
or two manufactures who has to give orders several months in advance, and so on.

1. FSN Analysis
Here the items are classified according to Fast Moving (F), Slow Moving (S) and Non Moving (N)
on the basis rate of consumption. The non-moving items are items not consumed for the long
period say 24 months such non-moving items block quite a lot of capital and as such they should
be disposed of as quickly as possible without further deteriorating. The classification of fast and
slow moving items is determined on the basis of stores turnover and it helps in arrangement of
stocks in stores and distribution and handling methods.

INVENTORY MANAGAMENT AND CONTROL SYSTEM:

PRESENT SCENARIO IN NFL, NANGAL UNIT
The success of any organization depends upon the factor that how efficiently and effectively the
resources are utilized. In this connection the inventory management and control system of any
organization have a vital role to play. As far as the N.F.L. is concerned a comprehensive procedure
is laid down in the Stores Manual of the Company For the purpose of inventory control and
management system in such a way that the resources of the organization are properly utilized.

The Material Department in Nangal unit is divided in two departments:

1. Purchase Department.
2. Stores Department.

PURCHASE DEPARTMENT
The principal objectives of a purchase department are summarized as the procurement of materials
or supplies of the right quality, in the right quantity, at the right time, from the right suppliers, for
the right price.
Basic guidelines for the total activities of the purchase department are explained in detail in
Purchase Manual of the Company. In NFL purchase department deals with all the purchases
except naphtha, high petroleum stock, furnace oil, coal, and bags. For these the long term contract
has been lined up by N.F.L. Corporate Office with the concerned suppliers. For jute/HDPE bags
purchase order are being issued by N.F.L. Corporate Office and necessary delivery of these bags,
delivery order are issued by N.F.L. Nangal Unit. As regarding the purchase of import items
procurement action is being taken by Nangal Unit, however, the L.C.s are being opened by the
Corporate Office.
Apart from the purchasing certain complementary activities are also completed by purchase
department in Nangal unit. These are:
 Market research for new material and development of new sources of supply.
 Follow up suppliers to ensure proper delivery.
 Quality assurance in respect of suppliers made by vendors.
 Inspections of material for quality with a view to ensure that specification are compiled with.
 Development of proper and streamline systems and procedures relating to purchasing
function to ensure that work is carried out efficiently and at lowest reasonable operating cost.
 Coordination with other functions within the department like, transportation, receiving, store
keeping, inventory control, accounting etc.
  Coordination with the production, maintenance and finance departments regarding alteration
in production schedule presenting breakdown or requirements of items etc. in right time.

STORES DEPARTMENT
In N.F.L. stores department deals with the receipt, inspection, storage and issue of all items except
some bulky items like jute/HDPE bags, sulphuric acid, naphtha, oil and coal which are being
handled directly by user department. Stores play a vital role in the operation of N.F.L. They are in
direct touch with the users departments in its day to day activities; the most important purpose
served by the stores is to provide the uninterrupted service to the manufacturing divisions. Further,
stores are often equated directly with money, as money is locked up in the stores. The functions
the stores department in Nangal Unit may classify as:
 To receive the raw material, components, tools, equipment and other items and account for
them.
 To provide adequate and proper storage and preservation to the various items.
 To meet the demands of consuming departments by proper issue and account for the
consumption.
 To minimize obsolesce, surplus and scrap through proper codification, preservation and
handling.
 To highlight stock accumulation discrepancies and abnormal consumption and effect control
measure.
 To ensure good housekeeping so that material handling, material preservation, stocking,
receipt and issue can be done adequately.
 To provide supporting information for effective purchase action.
Stores also have to keep liaisons with purchase department as well as finance department with
regards to stores accounting, physical stock verification, disposal of scrap and surplus material,
lodging of formal claims on the underwriter/carriers etc.

2. RECEIPTS AND INSPECTION

The receipts and inspection section is to insure that:
a. Only material passing the specification set out in the purchase order are accepted.
 b. All the stages involved in warehousing are speedily covered to insure that the inventory in
transit is kept to the barest minimum.
c. All claims etc. are speedily and efficiently handled so that financial interest of the company
is safe guarded.

To meet these objective, the head of the store department has to ensure that the residence time of
material in the receipt and inspection section should not exceed ten days, break up of which as
under :-

a) Un-packing and initial checking = 2 days

b) Inspection of material = 5 days
c) Preparation & Checking of SRV = 1 day
d) Handling over of material to Custody Section = 1 day
e) Sending SRV to Accounts = 1 day
10 days

Adherence to and fulfillment of above work norms, as already stated, is not only expected to result
in quick availability of material for consumption, reduction in inventory in transit and general
inventory level but at the same time would ensure quick and prompt payment thereby enhancing
the image of the company as well.

3. CODIFICATION OF STORES
To facilitate Computer processing and proper accounting all items of Stores shall be allotted a 7
digit Material Code. The seven digits are allocated in the following manner:

TYPE OF MATERIAL PRIMARY SECONDARY TERTIARY

1st & 2nd Digit 3rd & 4th Digit 5th, 6th & 7thDigit
---------------------------------------------------------------------------------------------------------------------
 General Main Category Sub category Detailed
Stores e.g. tools, Hardware etc. e.g. hand tools specifications

Plant Deptt/Plant of Major equipment Exact specification/

Spares section or Assembly parts

A control register is to be maintained for allotting code numbers to Stores and Spares. Considering
the importance of this function, new codes are allotted by a Competent Officer in the Materials
Department. It is ensured that same items with different nomenclatures are allotted the same code
which will help in variety reduction and standardization. For new receipts, 24 character
nomenclatures are fed to the Computer periodically.

4. STOCK CONTROL AND STOCK LEVELS

Head of the Materials Department as Chief Custodian of Stores, has not only regulate optimum
inventory levels but also take steps to ensure elimination of practices resulting in waste and misuse
of stores, e.g. issue against return of old stores wherever necessary, stamping of items prone to
misuse, limited drawls at one time and fixation of quotas based on estimated requirements, in
consultation with user or industrial engineering department etc. Material indent ( see Annexure -
III) used for the purpose of indenting is to inbuilt control elements, viz. past consumption, re-order
level, safety stock and re-order quantity. It is not only necessary to adhere to levels and the
supporting principles and concepts, but at the same time, it is of utmost importance to continuously
monitor the same for readjustment immediately after a change has been sensed. For example, any
change in lead time of demand during lead time cycle is immediately result in a corresponding
revision (upward or downward) of reorder points and re-order quantities. The stock levels are fixed
on the following basis:-

Reorder level (ROL): This represents the lead time consumption plus the safety stock.
Re-order quantity (ROQ): This represents the requirement during lead time.
Safety Stock (SS): Depending upon the criticality of Stores, unit value and emergency lead time,
the safety stock is to be determined for each item. However, for fast moving items with a steady
and predictable consumption pattern the safety stock represents about one month’s
consumption/consumption during emergency lead time.

In such stores the ROL, apart from representing the safety stock and lead time consumption, also
represents the highest stock points. Since the items have a steady movement, the next consignment
received by the time the stock reaches the taking into account the consumption value and source
of procurement. In case of petty items where the annual consumption is low, the demand for one
year can be covered against one order. For high value items the total yearly requirement can be
met either through the system of rate contracts with staggered deliveries or through 3-4 purchase
orders per year.
In cases where re-ordering points or reordering levels are fixed and have been fed into the
Computer, the Computer Center shall produce a list of items where the stock has touched the re-
ordering point or has gone below this point. This list is to be sent to the Stores/Indenters for taking
suitable replenishment action keeping in view the Material Indent already raised and pending
quantity, if any.

5. NORMS FOR INVENTORY HOLDING

The inventory levels are determined keeping the following norms of inventory holding in view or
as per management policy from time to time.

Category Norm
HPS/FO 20 Days
Lime Stone 30 Days
Coal 30 Days
Urea Bags 30 Days
CAN Bags 30 Days
Chemicals: Imported 9 Months
: Indigenous 2 Months
Catalyst: Imported One Charge
: Indigenous One Charge
Oil and Lubricants 3 Months
General Stores: Imported 15 Months
: Indigenous 6 Months

Insurance Spares 3% of Cost of plant and machinery

7. PERPETUAL INVENTORY SYSTEM AT NANGAL

The perpetual inventory system is being followed in Nangal Unit. In the system the bin card is
maintained at stores in store department and stores ledgers are maintained by the stores account
section of the Finance and Accounts department.
Physical verification of inventory and fixed assets is carried out on perpetual inventory system the
items to be verified are broadly categorized as under:
 a. Raw materials, packing material, stores and spares parts. Items under this category are
verified once in a year except the following fast consumable items which are verified every
quarter.
I. Fuel Oil
II. Coal
III. Packing Material
IV. Methanol
V. Sulphuric Acid
VI. Petrol, Oil, Lubricants
VII. Platinum Rhodium Gauges
VIII. Zinc Sulphate etc.

b. Finished and semi-finished goods

Items under this category include urea sulphur and ammonia. Physical verification of these
items is carried out at after every quarter.

c. Fixed Assets
The physical verification of all moveable fixed assets is carried out once in a year.

8. INVENTORY CONTROL
Stores wing of material department is take suitable steps for evolving methods and procedures
aimed at control of inventories. These include:
a. An effective control on indenting so as to avoid increase in inventory holdings.
b. Analysis of slow moving items and initiating steps to identify excess inventory and surplus
inventory.
c. Monitoring of levels and reducing the same wherever possible.
d. Identifying more and more items for the purpose of procurement through rate contracts with
staggered deliveries.
e. Increasing items on automatic replenishment system so that stocking policies become more
sensitive to changes in consumption pattern and improvements in lead time.
 f. Identifying items which can be held jointly by different units of N.F.L. to reduce the stock
being held. To start with this concept can be applied to high value stores and spares.
g. Continuous procurement planning to reduce the lead time holding by systematic scheduling
of supplies.
h. Segregating insurance spares and reflecting them separately for better appreciation of
inventory holding.
i. Standardization and variety reduction.

Since centralized computer facility are available to NANGAL Unit, maximum use of the computer
is made for generating output to be utilized for control purpose.
A.B.C. Analysis of store is carried out both on consumption basis as well as stock balance basis
with the help of computer so as to have selective control on procurement and inventory holding.
All “A” a category items are monitored by Material Manager and “B” category items by the Dy.
Manager. The stock cards are suitably marked with the category of the items and the selective
control which is required.
All the plants spare are classified as vital, essential or desirable, so that stocking and reordering
decision can be taken rationally. This classification is carried out by the maintenance department
and fed to the computer center through material department.

9. ABC ANALYSIS AT NANGAL UNIT

In N.F.L. Nangal Unit ABC Analysis of stores is done as follows:
‘A’ Items - Value above Rs. 100000
‘B’ Items - Value between Rs. 20000 & 100000
‘C’ Items - Value below Rs. 20000

CONCLUSION
Presently National Fertilizers Ltd. is the main Fertilizer production company in India. This
Company has its four Units situated at Bathinda, Panipat, Vijaipur & Nangal. The company has
16.5% market share of urea in the country.
Nangal Unit, which was taken up for this study has made enormous contribution to the overall
agricultural development in the region. Since its inception the factory has had remarkable
performance with positive finance results and sustained high level of production.
After analyzing the Financial Statement Analysis of NFL, Nangal Unit, some important
conclusions are drawn about the working of this unit. The short term financial & liquidity position
of the company is satisfactory.
The profitability of the unit as shown by the financial statements is not very high. This is due to
the reason that selling price of Urea is fixed by Fertilizers Industry Coordination Committee
(FICC) of Department of Fertilizers & Chemicals, Govt. of India. During the fixation of Retention
Price of Urea a limited %age of profit is allowed on Net Worth. Current ratio and Quick ratio are
above the prescribed parameters in the first two financial years which are due to non-settlement of
escalation claims of subsidy by the Ministry of Chemicals & Fertilizers. Subsidy is allowed on the
Urea sold not on dispatched to ware houses. Higher ware house stock at the end of the year
increases the currents assets, which reflects as increased current ratio.
The Memorandum of Understanding (MOU) for Production target of Urea has been signed
between NFL and Ministry of Chemical & Fertilizers in the beginning of financial year and
company cannot produce beyond the targeted quantity. If the company produces beyond the
targeted quantity then subsidy is not given by FICC on the quantity produced in excess to the
target. FICC calculates the Subsidy on excess quantity by considering Import Parity Price (IPP) in
place of Retention Price (RP) and IPP is generally much lower than RP.
The Inventory of the Unit is higher as compare to its sales. Major part of Inventory is of Stand-by
assemblies and Insurance Spares of imported nature. Unit is bound to maintain the sufficient level
of these spares to avoid production loss in the event of breakdown of specific imported spares
whose lead-time of procurement is longer. Another reason for higher Inventory is the closer of
some old plants whose spares are still a part of the Inventory.
Urea producing Units cannot sell its product on its own discretion in any area. The ministry of
chemicals & fertilizers also allocates the area for selling urea and the unit is bound to sell its
product in that particular area. The rate of freight subsidy is same for every destination whereas
freight charges vary from destination to destination which results into difference in freight subsidy
and actual freight charges.
The major inputs of the Unit are FO and HPS, which are petroleum products. Since indigenous
production of petroleum is not sufficient and the same has to be imported, its prices are controlled
by the international market and the rates of petroleum products are rising in the international
market at an alarming rates that is why the cost of the production of the Urea is very high and the
difference between the cost of production and the selling prices is covered by Ministry of
Fertilizers in the shape of Subsidy.
If the Govt. of India stops to provide subsidies to Urea manufacturing plants then they cannot be
viable for long.
Number of employees of the units is more as compare to other Urea manufacturing units. The
company also pays comparatively high salaries to its staff in addition to the many more facilities
like accommodation, hospital, schooling etc that results into heavy salary & wages expenses. Head
office of the company and Central Marketing Office is located at Noida, which controls four
manufacturing units in addition to Central Marketing Network. The company itself sells all the
production and marketing offices are located in almost every state of India manned by company’s
own employees. Such a big network is the reason for high marketing cost.
The book value of the net fixed assets of the company is very low. Major part of assets of the
company is of current nature this is due to the fact that plant is very old and has been depreciated
to nearly zero value with the passage of time.
The Plant of Nangal Unit was installed with the help of a foreign company and entire technology
was imported it is therefore of a high value. Since the plant is very old it therefore requires regular
maintenance. On many occasions old components are require replacement and results into heavy
repair & maintenance expenses.