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A
PROJECT REPORT
ON
INVENTORY MANAGEMENT- PURCHASE AND
PROCUREMENT PROCEDURES
AT
IOCL (BARAUNI REFINERY)

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SUBMITTED TO
SINHGAD INSTITUTE OF MANAGEMENT

IN PARTIAL FULFILLMENT OF TWO YEARS FULL TIME

PGDM COURSE (OPERATIONS)

SUBMITTED BY
KRITIKA
(2009-2011)

UNDER THE GUIDANCE OF

Prof. SHAILENDRA KALE

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SINHGAD INSTITUTE OF MANAGEMENT
VADGAON(Bk),PUNE-4

 
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DECLARATION

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?PURCHASE AND PROCUREMENT PROCEDURES AT IOCL
BARAUNIr?
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Place: PUNE Date :

Signature of Student

 
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ACKNOWLEDGEMENT

This project was a formidable task but from the active guidance
and help within and outside the organization and institution, the tasks was
performed by me.

Special thanks go to:

I am hearty thankful to Mrs. Piyali Chakarborty ( Head HR ) for

allowing me and giving me the opportunity to work and undergo the project
training at IOCL(Barauni Refinery).

I have the privilege to express my sincere indebtness and profound

sense of gratitude to my project guide Mr. A.K.Lal(Finance Manager), Mr.
Yadwendra Singh (Material Manager), and Mr. Mukesh Kumar (SACO),
who¶s active association, constant encouragement, untiring labour and
generous efforts could enable me to layout the work of this project. This
project would have never taken this final shape without their parental care and
watchful help.

I shall ever remain grateful to my college project guide

Prof. Shailendra Kale & staff members of PGDM, SINHGAD INSTITUTE
OF MANAGEMENT, PUNE for their valuable support, motivation &
guidance in preparation of the project.

Last but not the least, I wish to remember with the deep sense of
gratitude the encouragement provided to me by my parents and colleagues for
their consistent encouragement, cooperation and inspiration bestowed on me,
which has been indispensable for my project.

 
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TABLE OF CONTENT

S.NO. CONTENT PAGE

NO.

1.? EXECUTIVE SUMMARY 6-7

2.? INTRODUCTION 8-11

·.? PROFILE OF THE ORGANISATION 12-33

4.? CONCEPTUAL BACKGROUND 34-72

A.? RESEARCH DESIGN AND 73-77

METHODOLOGY

o.? DATA ANALYSIS 78-94

7. FINDINGS 95-97

.? SUGGESTIONS 98-99

9.? CONCLUSION 100-101

10.? BIBLIOGRAPHY 102-103

 
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EXECUTIVE SUMMARY
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Petroleum oil is the lifeline of modern civilization. It is needed equally for both domestic and
industrial purposes. Its demand has increased multiple-folds and yet to increase on war scale due
to rapid industrialization and fast urbanization. Both developed and developing countries are
utilizing oil resources continuously for their progress and prosperity. In such a situation, oil
products management becomes very important because oil resources are non renewable or
conventional sources of energy. Oil companies employ many techniques to minimize purchase
and inventory costs to enhance profits.

Inventory management is vital in an oil plant. This project [ INVENTORY MANAGEMENT-

PURCHASE AND PROCUREMENT PROCEDURES AT IOCL BARAUNI´ has been
completed in IOCL, Barauni. It deals with proper purchase operation, handling of materials and
oil management processes. Purchase procedures play a very important part in inventory
management. Cost reduction measures can be taken right from the purchase process. Various
methods involved in purchase procedures have been studied. Thousands of spares and parts are
stored by material management department. Their proper upkeep and maintenance are important
for the refinery. Here the materials are classified on the basis of ABC analysis based on
monetary values. This method is applied because materials are quite large. They are more than
30,000 in number. Other basic concepts of inventory have also been studied and explained. The
project is also related to oil management in the last chapter. Efficient purchase of crude oil and
proper management of finished products can add to the profitability of the company. The
company maintains the storage of several finished products for further distribution.

Indian Oil Corporation Ltd. (Indian Oil) is India's largest commercial enterprise, with a sales
turnover of Rs. 2,47,479 crore (US $ 61.70 billion) and profits of Rs. 6,963 crore (US $ 1.74
billion) for the year 2007-08. Indian Oil is also the highest ranked Indian company in the
prestigious Fortune 'Global 500' listing, having moved up 30 places to the 105th position in
2009. It is also the 18th largest petroleum company in the world. For the year 2007-08, the
Indian Oil group sold 59.29 million tonnes of petroleum products, including 1.74 million tonnes
of natural gas, and exported 3.33 million tonnes of petroleum products.

The Indian Oil Group of companies owns and operates 10 of India's 20 refineries with a
combined refining capacity of 60.2 million metric tonnes per annum (MMTPA, .i.e. 1.2 million
barrels per day). These include two refineries of subsidiary Chennai Petroleum Corporation Ltd.
 
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(CPCL). The Corporation's cross-country network of crude oil and product pipelines, spanning
more than 10,000 kms and the largest in the country, meets the vital energy needs of the
consumers in an efficient, economical and environment-friendly manner. Indian Oil is investing
Rs. 43,393 crore (US $10.8 billion) during the period 2007-12 in augmentation of refining and
pipeline capacities, expansion of marketing infrastructure and product quality upgradation as
well as in integration and diversification projects.

In financial parlance, Inventory is defined as the sum of the value of raw materials, fuels &
lubricants, spare parts maintenance consumables, semi processed materials and finished goods at
any given point of time. Operational definition of Inventory would be: "The amount required raw
materials, fuels, lubricants, spare parts and semi-processed material, stocked for smooth running
of the plant". Since these resources are idle when kept in stores, inventory is defined as an idle
resource of any kind having an economic value.

The main reasons for holding inventory are:-

' To maintain targeted flow of production in line with national demand.

' Protection against uncertainties of demand & supply which can not be predicted with
sufficient accuracy.
' To avoid stock out in the period of shortages
' In periods of rapid price rise, higher inventory levels may well have to be accepted.

In a nut shell, Inventory control, therefore deals with determination of optimal procedure for
maintaining stocks to ensure continued availability of required materials but avoids storage of
excessive and obsolete stocks.

 
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1.1 CONCEPT AND CONTEXT OF THE STUDY

Inventory management is a core function of a production company. It is an

important area in the day to day management of the firm. Inventory management is
the functional area of the finance that covers the efficiency of the production of a
manufacturing firm. It deals with the proper storage of materials and products. A
suitable inventory management applying various cost cutting measures leads to
overall cost reduction of the company. This project covers the purchase
procedures, material inventory and oil management in IOCL, Barauni. Here
materials are managed mainly on the basis of ABC analysis. But, other concepts
have also been studied and dealt with. Oil products and oil management have also
been studied. A proper inventory management is a boon for a manufacturing
company like IOCL, the biggest oil company in India.

1.2 OBJECTIVES OF STUDY:-

1. Primary Objective
ÿ To Study Purchase Procedure & Procurement Process of IOCL- Barauni
Refinery.

2. Secondary Objectives

ÿ To analyze the Inventory Related issues in IOCL- Barauni Refinery.

ÿ To study EOQ, ROP, WIP, JIT.

  
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1.· Scope of the Study

1. The study is confined to IOCL, Barauni.

2. All the information could not be made public by the organization due to confidentiality.

3. Secondary data was used in inventory management.

4. Report is based on the information made available by the company, consultation with
guides and self studies (internet and books).

A.? The report is related to materials and oil inventory management. It may not be not be
applicable to other kind of inventories like clothes, books etc. where a few raw materials
are required.

 
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1.4 LIMITATIONS:-

1.Within the short span of time available and considering the large organization, it has

not been possible to make a complete and exhaustive study. Data was collected and

analyzed on the basis of consultation with guides and self studies (internet and books).

2.No secondary data and previous records based on studies made earlier related
to the subject were available at the time, which would have given a better
insight about the topic.

3.Many of the respondents who were willing to cooperate with us in our

research studies, were not able to find sufficient time as they seemed to be
quiet busy and overload with their work.

 
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2.1 INDIAN OIL CORPORATION Ltd

Indian oil was formed, as a joint venture between Oil Company and
government of India but later become fully owned government undertaking, it
continues to be canalizing agency for important cure oil and major petroleum
products on behalf of oil industry in India.

A company, Indian refineries limited, was set-up in the year 1958 to refine
crude oil. Another company, namely Indian oil company limited, was
incorporated in the year 1959 to market the products. In 1964 both companies
were merged and Indian oil corporation limited (IOCL) was born. In 1981
Assam oil company, a private sector oil company was nationalized and merged
with IOCL.

Indian Oil Corporation ltd. Is currently India¶s largest company by sales with a
turnover of Rs. 2, 85, 337 crore and profit of Rs. 2950 crore for the year 2008-
09 the highest ±ever for an Indian company. Indian oil is also the highest
ranked Indian company in the prestigious fortune µglobal 500¶ listing, having
moved up 20 places to the 105th position in the year 2009. It is also the 18th
largest petroleum company in the world and number one petroleum trading
company among the national oil companies in the Asia-pacific region.

 
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The corporation is celebrating the year 2009 (30th June to 1st September) as its
golden jubilee year ISO (9002).

Indian oil and its subsidiaries account for 49% petroleum products market
share, 40.4% refining capacity and 69% downstream sector pipeline capacity
in India. The Indian oil group of companies owns and operates 10 of 19
refineries with a combined refining capacity of 60.2 million metric tons per
annum (mmtpa). Indian oil started its oil refining operation in 1962 from
Guwahati refinery. In its 50 years of refining, 10 refineries have come up , at
Barauni (1964), Gujarat (1965), Haldia (1974), Digboi (1981), Mathura
(1982), Panipat (1998) and subsidiary refineries ± Bongaigaon refinery
(2.95mmtpa), Chennai petroleum ( mmtpa).

2.2 Corporate vision, mission and values:

2.2(a) Vision:

a major diversified, trans-national, integrated energy company, with national

leadership and a strong environment conscience, playing a national role in oil
security & public distribution.

 
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2.2(b) Mission:

To achieve international standards of excellence in all aspects of energy and

diversified business with focus on customer delight through value of products
and services, and cost reduction.

To minimize creation of wealth, value and satisfaction for the stakeholders.

To attain leadership in developing, adopting and assimilating state of the art

technology for competitive advantage.

To provide technology and services through sustained research and

development.

To foster a culture of participation and innovation for employee growth and

contribution.

To cultivate high standards of business ethics and total quality management for
a strong corporate identify and brand quality.

To help enrich the quality of life of the community and preserve ecological
balance and heritage through a strong environment conscience.

 
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2.2(c)Values: values IOCL nurture

ÿ Care ( CSR comes under this concern of IOCL)?

ÿ Concern

ÿ Empathy

ÿ Understanding
ÿ Co-operation

ÿ Empowerment

ÿ Innovation
ÿ Creativity

ÿ Ability to learn

ÿ Flexibility

ÿ Change

ÿ Passion
ÿ Commitment
ÿ Dedication

ÿ Pride

ÿ Inspiration

ÿ Ownership

ÿ weal & zest

 
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ÿ Trust

ÿ Delivered promises

ÿ Reliability

ÿ Dependability

ÿ Integrity

ÿ Truthfulness

ÿ Transparency

2.· Objectives of IOCL:

ÿ To ensure national interest in oil and related sectors in accordance and

consistent with government policies.

ÿ To ensure and maintain continuous and smooth supply of petroleum product

by way of crude refining, transportation and marketing to customer to use more
efficiently.

ÿ To earn reasonable rate of return on investments.

 
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ÿ To create a strong r &d base in the field of oil refining, and stimulate the
development of new petroleum products formulation with a view to minimize/
eliminate their imports.
ÿ To works towards the achievement of the self-sufficiency in the field of
oil refining by setting adequate domestic capacity and to built up expertise for
pipe lining for crude/petroleum product.
ÿ To minimize the fuel consumption in refineries and stock losses in
marketing operation to affect energy conservation.
ÿ To further enhance distribution network for providing assures service to
customers throughout the company through expansion of reseller network as
per marketing plan/government approval.

2.A Financial:-
ÿ To ensure adequate return on the capital employed and maintain a
reasonable annual dividend on its equity capital.
ÿ To ensure maximum economy in expenditure

ÿ To manage and operate the facilities in an efficient manner so as to

generate adequate internal resources to meet revenue cost and requirements for
project investment, without budgetary support.
ÿ To develop long term corporate plans to provide for adequate growth of
the activities of the corporation.
ÿ To endeavour to reduce the cost of production of the petroleum products
manufactured by means of systematic cost control measures.
ÿ To endeavour to complete all planned projects within the stipulated time
and cost estimates.

 
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2.o Organisational set-up:-

ÿ Indian oil corporation limited

ÿ Indian oil has its head office as well as corporate office at New Delhi. The
registered office of corporation is in Mumbai.

ÿ The corporation is managed by board of directors appointed by the

president of India. Besides the chairman, the board has the following whole
time directors:
ÿ Director (refineries)

ÿ Director (pipelines)

ÿ Director (marketing)
ÿ Director (finance)

ÿ Director (hr)

ÿ Director (r & d)
The working of corporation's five divisions, namely (i)refineries
division, (ii) marketing division iii) pipelines division iv) R&D centre and (iv)
Assam oil division are co-coordinated by a full-time chairman. These four
divisions are headed by director (refineries), director (marketing), director
(pipelines) and director (R&D) respectively. Director (refineries) is also the
director in charge of Assam oil division.
The corporation is broadly divided into five divisions namely, refineries,
pipelines, marketing division, research & development and Assam oil division.
It also has a wholly owned subsidiary i.e. Indian oil blending limited.

  
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2.7 Branches of IOCL divisions & refineries:-

2.8 subsidiary refineries

 
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The divisional objectives are focused towards fulfilling the objectives and
obligations of the corporation. The major factor contributing towards the
success story of Indian oil today is its integrated approach in keeping the
divisions together.

IBP merged with IOCL

IBP co. Limited, the stand-alone petroleum-marketing subsidiary of

Indian oil corporation limited (Indian oil) has been merged with the parent
company with effect from 2nd may 2007. The ministry of company affairs
gave its sanction to the scheme of amalgamation for merger by an order dated
30th April, 2007.

The chairman, Indian oil, has created a new IBP division, towards achieving
smooth and seamless integration of business activities. It shall be our
endeavour to integrate the various business segments of erstwhile ibp with
similar business segments of the respective divisions of Indian oil at the
earliest so as to achieve the objectives of synergy, consolidation and
optimization of resources, he added.

Director (hr), Indian oil, and managing director of IBP till now, shall hold
additional charge as director-in-charge of the division.

 
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2.9 Products of IOCL:-

Refineries Products

Barauni Carbon black feedstock (cbfs), raw

petroleum coke (rpc), sulphur

Digboi Paraffin wax

Guhawati Raw petroleum coke (rpc)

Haldia Cbfs, jute batching oil (jbo), micro

crystalline wax (mcw), mineral
turpentine oil(mto), sulphur

Gujarat Mineral turpentine oil(mto), sulphur,

toluence

Mathura Propylene, sulphur

Panipat Benzene, mineral turpentine oil (mto),

pet coke,sulphur

2.10 Recent Achievement of IOCL:-

IOCL has become Maharatna now in which it has got financial

freedom upto 50 crores.

 
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2.11 Barauni Refinery: An Overview:-

 
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The industrial jewel of Bihar is the second public sector refinery in the chain of
seven operating refineries of Indian oil corporation limited (IOCL), located at
Barauni in Begusarai district of north Bihar. It is one of the biggest size oil
refinery owned and managed by IOCL. It is the first major industry established
in north Bihar which is predominantly an agricultural area.

The refinery was designed and constructed with the assistance of the
government of erstwhile USSR and limited participation of Romania with an
initial cost of 49.40 crores. The construction activity of the refinery
commenced in 1962 and it went on stream in the year 1964. Barauni refinery
was dedicated to the nation by prof. Humayun Kabir, the then union minister
of petroleum and chemicals, government of India on January 15, 1965.

Initially the refinery was set up with the refining capacity of 2.0 million metric
tonnes per annum (mmtpa) of Assam crude through the Naharkatiya-Barauni
pipeline with two crude distillation units of 1.0 mmtpa capacity each. These
units were commissioned in phase, the first in july 1964, and the second unit in
February 1966. After de-bottlenecking, revamping and expansion project, its
capacity today is 6 mmtpa.

Barauni refinery was initially designed to process low sulphur crude oil (sweet
crude) of Assam using the refining technology sourced from other countries

 
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like, Russia, etc. After establishment of other refineries in the northeast, Assam
crude is unavailable for Barauni. Hence, sweet crude is being sourced from
African, south east Asian and middle east countries like Nigeria, Iraq &
Malaysia. The crude is brought up to Haldia by very large crude carriers
(vlccs) from where it is pumped through pipeline to Barauni. With various
revamps and expansion project at Barauni refinery, capability for processing
high -sulphur crude has been added ² high-sulphur crude oil (sour crude) is
cheaper than low sulphur crudes ² thereby increasing not only the capacity
but also the profitability of the refinery.

Other processing units of the refinery include two coking units, lpg recovery
unit (lru), catalytic reforming unit (cru), coke calcinations unit, phenol
extraction and solvent de-waxing unit, wax hydro finishing unit, etc. But now,
many of these units have been closed on the basis of economic consideration.
An lpg bottling plant has also been established which is able to fill 3500 to
4000 cylinders per day. A captive power plant has also been established to
meet the steam and power requirements of the refinery

February 16, 1999 was a red-letter day in the history of Barauni refinery. On
that day, the 498 km long Haldia-Barauni crude oil pipeline commenced its
crude supply to the refinery, which was earlier dependent on assam crude oil
only. Thus, the refinery now receives the imported crude oil from haldia port.

Barauni refinery is among the few refineries in the world to have gained the
prestigious iso-9002 certificate for its quality management system, iso-14001
for the environment management system, ohsas and ohsms-18001 for the
occupational health and safety system.

 
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2.11(a) Location of Barauni Refinery :-

Barauni refinery is located near the northern bank of river Ganga at Barauni in
Begusarai district of north Bihar. The river Ganga flows around 8 km away
from the refinery. The refinery is strategically located on the crossroads of two
important national highways, nh-30 & nh-31, and the two important railways,
eastern railways & north eastern railways. The refinery is 125 kms from Patna
and about 8 kms from the Begusarai town and is surrounded by the villages
like, Bihat, Mahna, etc to name a few. This whole area is known just because
of the refinery.

2.11(b) Various departments and sections at Barauni refinery:-

The refinery consists of following important departments:

' Technical departments

ÿ The technical departments are directly concerned with running of plant

and production activities. The technical departments are as follows:

ÿ Production department

ÿ Power and utility department

ÿ Maintenance department

ÿ Technical services department

ÿ Quality control department

 
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ÿ Fire and safety department

ÿ Project department

ÿ Inspection department
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' Non ± technical departments

These departments have been created with a view of discharging some

specialized functions so that the objectives of the corporation may be
accomplished efficiently. The non ± technical departments are as follows:

' Human resources department

Personnel and administration

Medical
Training
Hindi cell
Corporate communication
Canteen
Transport
Time office

 
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' Material department

Purchase

Central stores

Finance department

Internal audit department

Management information system (MIS) department

Vigilance department

Security

Each department is headed by the chief / senior manager who is assisted by the
officers in the various key positions in day-to-day operations of the
departments.

2.11(b) Schedule of duties of employee¶s at Barauni refinery:-

Shift duty: 3 shifts (also known as rotating shift)

Morning shift : 6 am ± 2 pm

Evening shift : 2 pm ± 10 pm

Night shift : 10 pm ± 6 am

General shift : 8 am ± 5 pm (plant)

Office time : 9:15 am ± 5 pm (for ministerial staffs)

 
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2.11(c) Organizational set-up or hierarchy

At Barauni refinery, there are two cadres of employees ± µofficers¶ and µnon-
officers or non-executive¶ cadre.

In the 

 category there are nine grades. Grade ± µi¶ is the senior most
whereas grade ± µa¶ is the junior most in this category.

Grade Designation Strength Pay scale (rs.)

I Executive director (ED) 23,750 ±
h Generalmanager (GM) Dy.Generalmanager 01 28,500
g (DGM) 20,500 ±
f chief manager 02 26,500
e senior manager 19,500 ±
d manager 05 25,600
c deputy manager 19,000 ±
b senior officer / sr. Engineer 13 24,750
a officers / engineer 18,500 ±
43 23,900
17,500 ±
42 22,300
16,000 ±
65 20,800
13,750 ±
80 18,750
12,000 ±
139 17,500
Total
390

  
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In  

 category grade ± µ1¶ is the junior most and grade ± µ8¶ is the
senior most. This category is also known as µstaff¶ category

Grade Designation Strength Pay

scale
(rs.)

8th Officer superintendent, office sec, accountant 7,400

Senior assistant, p.a, head time-keeper, turbine boiler, 179 ±
7th technician-1 14,750
Office assistant, time-keeper, assistant accountant
Senior typist, operator-c, technician-3, plumber 239 6,700
6th Technician-4, operator-d ±
Operator-e, sampler 13,700
5th Yardman, head jamadar
Messenger, watchmen 255
4th 6,300
3rd ±
212 13,000
2nd
1st 5,800
316 ±
11,800
32
5,400
33 ±
10,800
43 5,000
±
9,800
4,800
±
8,900
4,000
±
8,400
Total 1309

 
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2.11(d) Trade unions and associations at Barauni refinery:-

Barauni telshodhak majdoor union (registered union)

Shramik vikash parishad
Indian oil officer¶s association (for officer¶s interest)

2.11(e) Various committees at Barauni refinery

Joint management committee

Canteen management committee
House allotment committee
Workers committee
Cable t.v committee
School advisory committee

[the canteen management committee has 11 members apart from the chairman
Mr. B. K. Singh, and the convener Mr. K. Choudhary.]

2.11(f) Facilities for employees at Barauni refinery

The refinery offers a wide range of facilities and services to its employees,
both officers and non-officers. Some of the major services are mentioned
below:

 
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Transportation
Townships and guest houses
Canteens
Medical services
Schools and scholarships for employee¶s children
Sports and other recreational events & functions
Holiday homes for officers at Shimla & Manali, and for workmen at Manali,
Darjeeling, Goa, and Massoori

2.11(g) Performance during the fiscal year 200 ± 2009

The year 2008-2009 saw Barauni refinery achieve the highest ever ± crude
throughput of 5.94 mmt, beating the previous best of 5.63 mmt, which was
achieved in 2007-08, along with sustaining the distillate yield of more than
85% (i.e., 85.7%) year after year.
Barauni refinery achieved the lowest ever 65.5 mbn of energy in the year
2008-09. It reduced its energy consumption by almost 10% over the previous
fiscal year of 2007-08. The Barauni refinery is striving harder to reduce its
energy consumption even further in the year 2009-10. Its dream mbn target is
58.
The refinery¶s excellent safety record during the year 2008-09 is another
feather in its caps. In a recently concluded internal audit, Barauni refinery
coker unit was declared as a zero steam leak unit. In addition it has also
avoided any accidents in the unit during the year 2008-09. The oil India safety
directorate awarded Barauni refinery the 1st prize for µbest safety performance¶
in group ± 1 (refineries).

 
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The Barauni refinery was awarded the centre for high technology award for
furnace / boiler efficiency. This must be the first of many such awards.

Barauni refinery, the lifeline of Bihar not only meets the demand of vital
petroleum products of the state but also nourishes the growth of industries all
around. It has been acting as a great synthesizer of a traditionally agrarian
economy with industrial development ushering in prosperity. So, the refinery is
often called as luminous jewel, reflecting the development of Bihar.

 
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3.1

INVENTORY MANAGEMENT

 
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·.1.1MEANING
Inventory management is concerned with keeping enough products on hand to avoid running
out while at the same time maintaining a small enough inventory balance to allow for a
reasonable return on investment. Excessive level of inventory results in large inventory
carrying cost . An efficient system of inventory management will determine :-
A) What to purchase?
B) How much to purchase?
C) From where to purchase?
D) Where to store?
configured to ware house, retail or product line will help to create revenue for the company.
Inventory management is the active control program which allows the management of sales,
purchases and payments. Inventory management software helps create invoices, purchase orders,
receiving lists, payment receipts and can print bar coded labels. An inventory management
software system
The petroleum refining industry has effectively embraced the software solutions to optimize
the business supply chain to maximize the profit margins and create order in the chaos of
numerous opportunities and challenges. The supply chain of a typical petroleum refining
company involves a wide spectrum of activities, starting from crude purchase and crude
transportation to refineries, refining operations, product transportation and finally delivering
the product to the end user.

·.1.2WHO SHOULD ATTEND

Factory and inventory control professionals, manufacturing and production control
managers, industrial engineers, plant managers, material and purchasing managers,
factory superintendents and customer/technical service managers who can benefit from
enhancing their inventory management techniques.

·.1.·WHAT WILL COVER

ÿ The strategic role of inventory management techniques .
ÿ Establish the optimal inventory level.
ÿ Inventory planning and replenishment.
ÿ Distribution center and warehousing operations.
ÿ Inventory accuracy and audits.
ÿ Inventory management, measurement and reporting.
ÿ Inventory forecasting and demand management.
ÿ Lead-time analysis and reduction.

 
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·.1.4TYPES OF INVENTORY
ÿ Raw Material : An inventory of raw material allows separation of production scheduling
from arrival of basic inputs to the production process.
ÿ Work ±In ± Progress : An inventory of partially completed units allows the separation
of different phases of the production process.
ÿ Finished Goods : An inventory of finished goods allows separation of production from
selling.
ÿ Cash & Marketable Securities : Cash & Marketable Securities can be thought of as an
inventory of liquidity that allows separation of collection from disbursement.

·.1.A OBTECTIVES OF INVENTORY MANAGEMENT

Inventory of finished goods should be maintained at sufficient high level so that the
demand of customers may be fully satisfied .Similarly , inventory of raw ± materials should
also be sufficient so that manufacturing process can be run smoothly. In case of
inadequate inventory of finished goods , there is always risk of being out ± of ± stock and
in case of inadequate inventory of raw materials , there is always a risk of manufacturing
process being halted. Therefore the major responsibility of inventory management is to
determine the sufficient level of inventory required in business .
Since inventory is a major asset and it involves a lot of funds ,inventory level should not be
excessive. Excessive inventory increases costs because extra funds are involved in it
.Therefore , inventory management also tries to minimize the sufficient level of inventory.
Thus , both inadequate & excessive quality of inventory is undesirable in the business.
Inventory management should maintain the inventory at sufficient level so that it is neither
excessive nor short of requirement.
The Term inventory management includes two conflicting tasks :-
1) To maintain a sufficient large size of inventory to meet the demand of finished goods
& to meet the demand of raw material by production department. 2) To keep the investment in
inventories at minimum level by efficiently organizing the
purchase & sales operations.

·.1.o MAIN OBJECTIVES

ÿ To ensure a continuous supply of raw material.
ÿ To maintain sufficient inventory of raw materials in periods of short supply.
ÿ To maintain sufficient inventory of finished goods so that the demand of the customers
are duly met.
ÿ To minimize the carrying costs of inventory namely cost of godown , insurance
expenses, cost of funds involved in inventory etc.
ÿ To arrange for sale of slow moving items.
ÿ To control investment in inventory & keep it at an optimum level.

 
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·.1.7RISKS & COSTS OF EXCESSIVE INVENTORY

ÿ Excessive carrying cost.
ÿ Risk of loss of liquidity.
ÿ Risk of price decline.
ÿ Risk of deterioration of goods.
ÿ Risk of obsolescence.

·.1.RISKS OF INADEQUATE INVENTORY

ÿ Risk of break ± down in manufacturing process.
ÿ Risk of not meeting demand of customers.

·.1.9COST OF INVENTORIES

Relevant inventory costs which change with the level of inventory are lister below :-

Ordering Cost :- The cost of ordering includes :

ÿ Paper work costs , typing & dispatching
ÿ Order inspection cost , checking & handling.

Carrying Cost :- Carrying cost involves :

ÿ Capital Cost.
ÿ Storage & handling cost.
ÿ Insurance.
ÿ Taxes.
ÿ The cost of funds invested in inventory.

Stock out cost :- Stock out cost involves :

ÿ Expenses of placing special orders.
ÿ Expediting income orders.
ÿ Cost of production delays.

·.1.10NEED OF INVENTORIES
ÿ Transactive Motive
ÿ Precautionary Motive
ÿ Speculative Motive

 
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·.1.11 ACCOUNTING OF STORES

·.1.11a GENERAL OUTLINES OF STORES FUNCTIONS
The Authority for receipt, storage and issue of all materials is centralized in the
Materials Department subject to exception permitted in certain cases. The user
Departments shall not be permitted to have any stock of materials with them in the form
of sub-stores..
Details procedure as prescribed in the Materials Management Manual is to be followed
for all functions of the stores section of the Materials . a general outline of the functions
is as under:
ÿ Receipt & Transportation.
ÿ Custody & Issue.
ÿ Inventory Control .
ÿ Surplus Stores .
ÿ Disposal of surplus, unserviceable assets & scrap materials.

·.1.11bFUNCTIONS OF FINANCE ± STORES SECTION

The section dealing with accounting of stores in the Finance. shall have following
functions:
ÿ PASSING AND ACCOUNTING OF TRANSPORTATION BILLS
All railway/streamer/air freight inward receipt and the road transport consignment notes
shall be received in the stores Section of Materials. For taking the delivery of the
consignments. The Stores shall enter these documents in a Daily Receipt Register.
Transport bills will be initially received by the Materials, and sent to Finance. duly
verified with reference to the purchase order and also linking the same with the GR
Notes The certified bills of freight received from stores section shall be priced doing
YMIROOTH transactions wherever the freight bill is directly linked to a Purchase order.
The Finance will release payment only after due checking of bills with reference to the
transport contract and other relevant documents. In case the freight bill cannot be
linked to Purchase order the same shall be charged to freight expenditure account. For
all freight bills, passed payment vouchers shall be prepared and signed by the
authorized officers after which the same shall be forwarded to the Cash Section for
preparation of cheque and payment to vendor.

ÿ ACCOUNT OF RECEIPTS, ISSUES, RETURN AND TRANSFER OF

MATERIALS
In SAP the reservations are prepared through a Maintenance order in case of
maintenance job (TCODE IW31). The same captures the total details of location,
equipment, etc. For issue of chemicals and misc materials direct reservations are
created (T-CODE MB21). In case of capital job reservations are created by giving
Network No. which is attached to a Project No. (TCODE CN21).

  
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ÿ NON-MOVING ITEMS AND DISPOSAL OF SURPLUS AND SCRAP

MATERIALS
All items (except for non valuated stock items) which are not moving for two years shall
be classified into three categories as under:-
a) "Category I" shall contain all items with inventory value exceedingRs.10,00,000 and
above..
b) "Category II" shall contain all items with inventory value above Rs.1,00,000 and upto
Rs.10,00,000
c) "Category III" shall contain all items with inventory value above Rs.50,000 and upto
Rs.1,00,000
d) ³Category IV´ shall contain items with inventory value upto Rs.50,000

ÿ FREQUENCY OF STORES VERIFICATION

Stock verification should be so arranged that :
a) All items, the stock value of which exceeds Rs.1,00,000/- are verified at least twice a
year.
b) All items, the stock value of which exceeds Rs,25,000 and upto Rs.1 lacs are verified
atleast once in two years, and
c) All remaining items below Rs.25,000/- are verified once in five years. The Accounts
Officer will draw up annual and monthly schedules for the above verification in
consultation with the Stores Officer in accordance with the value given in annual
inventory statements.
The Accounts Officer will arrange to maintain proper records of the stock verification
sheets for the discrepancies prepared by stock verifiers.

·.1.12TECHNIQUES OF INVENTORY MANAGEMENT

1) Determination of stock Level :-
(A) Minimum Level = Rerdering Level ± ( Normal Consumption * Normal Reordering
Period )
(B) Maximum level = Reordering Level + Reordering Quantity ± ( Minimum Consumption *
Minimum Reordering Period )
(C) Danger Level = Consumption * Maximum Reorder Period

2) Inventory Turnover Ratio :-

Inventory Turnover Ratio = Cost of good sold / Average inventory at cost

·) Economic Order Quantity :-

Economic Order Quantity is the quantity where ordering cost is equal to non ± ordering
cost.
EOQ is made up of two parts :

 
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a)Ordering Cost ± These costs are associated with the purchasing or ordering of
materials. This cost of ordering includes :
ÿ Paper work cost , typing & dispatching
ÿ Order inspection cost , checking & handling.
b) Non - Ordering Cost - These are the costs for holding the inventories. This cost
involves:
ÿ Capital Cost.
ÿ Storage & handling cost.
ÿ Insurance.
ÿ Taxes.
ÿ The cost of funds invested in inventory.

4) A-B-C Analysis :-
The materials are divided into three categories viz , A, B & C
Category ± A :
Under this almost 10% of the items contribute to 70% of value of consumption.
Category ± B :
Under this category 20% of the items contribute about 20% of value of consumption.
Category ± C :
Under this category 70% of the items contribute about 10% of value of consumption.

A) VED Analysis :-
The VED Analysis is used generally for spare parts. The requirements & urgency of spare
parts is different from that of materials. Spare parts are classified as:
Vital (V) , Essential (E) , Desirable (D)
Vital spare parts:
These are most for running the concern smoothly.
Essential spare parts:
Necessary but stock kept at low figures.

Desirable spare parts:

May be avoided at times.

o) HML Classification:
The HML( High, Medium, Low) Classification is similar to ABC Classification , but in this
case instead of the assumption value of the item , the unit value of the item is considered.
7) XYZ Classification:
The XYw Classification has the value of inventory stored as the basis of differentiation. X
items are those whose inventory values are high while w items are those whose value is
low.

 
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ß In Indian Oil Corporation Limited A-B-C Analysis technique is used for inventory
management.

·.1.1·INVENTORY MANAGEMENT &VALUATION

ÿ Average Cost Method:
For determining the valuation of inventories , consistency from year to year is of prime
importance & for this average cost method is appropriate. In this method , weighted
average prices are taken with price of each type of material in stock are taken together.
ÿ First ± In - First ± Out Method:
Under FIFO Method , items received first are assumed to be used first & therefore prices
charged are those paid for early purchase. Care has to be taken to ensure that each
quantity is issued at the correct price.
ÿ Base Stock Method:
Under this method , the base quantity is carried forward at the cost of the original stock. If
a quantity of goods larger than the base stock is owned at the end of any period , the
excess will be carried at its identified cost or at the cost determined under FIFO Method.

ÿ Last ± In- First ± Out Method:

Under LIFO , it is assumed that the stock sold or consumed in any period are those most
recently acquired or made. The result at the LIFO Method is to charge current revenues
with amount approximating current replacement cost.

 
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·.2

INVENTORY MANAGEMENT-
PURCHASE AND PROCUREMENT
PROCEDURES AT IOCL BARAUNI

 
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·.2.1: PURCHASE PROCEDURE

Purchase Function, as we know the important function in all type of organizations.
Without purchase of materials which are required for producing goods, organization is
not able to meet the demands of goods. The material in the IOCL is divided into parts
i.e. hydrocarbon & non-hydrocarbon. The hydrocarbon like crude products etc & non-
hydrocarbon like furniture, tools, machinery, pipes etc. The transactions relating to
the procurement of materials from the indenting stage to the payment stage have been
divided in various parts whereby each part of the work is handled by an independent
agency till the transactions is completely closed. The division of work between
various agencies operates as a system of internal check and is a vital part of the
system as a whole. The procedure is as follows:-

1). In p lanning o f t he purchasing o f t he mat er ials, an annual purchase bu dget

p lays an import ant role.

2). Budget est imat e for next year and revised budget for current financial year is
requ ir ed t o be made by each unit and have to be submit t ed t o t he head quart er b y
Sept ember in prescr ibed Per for ma. Quart er ly mo nit or ing o f t he pur chase budg et
to be do ne at t he unit level and t he per formance report has t o be sent to t he head
o ffice. In respect of t he invent ory cont rol it ems t here should be st r ict ly
co nt ro lled wit h reference t o amount provided in t he budget s. As t he it ems u nder
invent o r y cont ro l are vo luminous, init ial cont rol may be in respect of A and B
class it ems.

 
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·). INDENTING:-

' Inventory cont rol items: -

ÿ Fo r all repet it ive it ems o f st ores t he responsibilit y o f raising

purchase indent s, procurement , stocking and supply t o t he consu ming
depart ment s is ent irely wit h t he mat er ial depart ment .
ÿ Re ± o rder (ROL) to be const ant ly reviewed cons ider ing t he procurement
lead t ime while r aising purchase indent s in order to minimize t he invent o ry
levels.
ÿ Indent s t o be approved by t he co mpet ent aut horit y as per delegat io n o f
po wers.
ÿ To det ermine ROL for repet it ive nat ure of it ems, t he fo llowing for mula may
be ado pt ed, wherever applicable:-

R = CA (L-·) + Cmax

Where R = ROL

CA = aver age mo nt hly consumpt ion in last t hree years

Cmax = Maximum co nsumpt io n in any quart er.

L = Lead t ime in mo nt hs.

 
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Fo r each cat egor y o f it ems, indent shall be prepar ed in S AP aft er due appro val
o f t he co mpet ent aut horit y, ma y be sent to t he purchase sect io n. The t hir d co p y
will be ret ained by invent ory co nt rol sect ion for record.

' Non-inventory cont rol items:-

ÿ Purchase indent shall be raised by user depart ment in SAP.

ÿ Indent s for hospit al require ment including medic ines shall be raised by t he
med ical d epart ment .
ÿ Indent s for vehicles, office equipment , st at ioner y and pr int ing, fur nit ure,
unifo r ms, cant een/welfare requir ement s shall be raised by t he
ad min ist rat ion depart ment s.
ÿ Spare part s, piping mat er ial and consumable it ems et c. are requir ed for o ne
t ime co nsumpt ion and which are not covered by t he invent ory cont rol sect io n
shall be indent ed by t echnical ser vice depart ment . Aft er conduct ing
necessar y probabilist ic sur vey relat ing t o replace ment need o f individual
p lant .
4). Preparat io n of indent s:-

Indent s shall be prepared separ at ely for each cat egor y of st ores in t r iplicat e.

Indent s pert aining to addit io nal facilit ies and project mat er ials against appro ved
cap it al budget and spare part s, piping mat er ial, consumables st ore et c. sought to
be pro cured under revenue budget , and shall be rout ed t hrough invent ory co nt ro l
sect io n who shall indicat e present st ock, pending orders, if any, as well as
availab ilit y o f surplus mat er ials at our var ious unit s eit her of t he same
spec ificat io n or alt ernat e mat er ial o f higher grade against each o f t he it ems
int ended.

 
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Wherever t he mat er ial is not available fro m t he surplus st ock or alt er nat ive
spec ificat io n fro m t he exist ing st ock, a cert ificate fro m t he mat er ial manager is
to be o bt ained as under:-

³T he it ems int ended are not available eit her fro m the regular st ock or surp lu s
list o f a ll our unit s.´

Indent s should be co mplet ed in all respect s and shall necessar ily inc lude t he
in fo r mat io n of previous source of supply (if known) and t he rat e and purchase
o rder reference against which t he supp ly was received ear lier.

A). Appro ving o f indent s:-

The ind ent can be appro ved by t he fo llo wing aut hor it y according t o t he financial
limit s prescr ibed as per delegat io n of powers.

ÿ I f indent of Rs. 50000, head o f depart ment will appro ve t he indent .

ÿ I f t he indent is up t o Rs. 500000, DGM (Deput y General Manager) will

appro ve t he indent .
ÿ I f indent is above Rs.500000, unit head is responsible t o approve it .
In case o f emergency requir ement s t he indent s will be approved by GM/ED.

o). Reg ist rat io n of indent s:-

Indent s ar e regist ered in S AP and indent is creat ed.

7). Finance concurrence:-

No financial concurrence shall be required for indent s against approved budget

fo r A.F. (addit io nal facilit ies).

 
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No finance concurrence is necessar y in respect of purchase proposals for t he

fo llo wing:

a) Purchase up t o Rs. 25000/- fro m t he lowest t enders and up to Rs. 2000/-

fro m o t her t han t he lowest .
b) One repeat order wit hin t he prescr ibed limit s at one t ime and value up t o
Rs. 25000/-.
c) Purchase for propriet ar y it ems or DGS&D rat e cont ract pr ice unless t he
value o f t he proposed individual order exceeds Rs. 25000/-.
All o t her purchase proposals up t o Rs. 50000/- shall be scrut inized and
co ncurred by t he finance depart ment . Proposal above Rs. 50000/- shall be
reser ved for considerat ion o f t he t ender commit t ee.

). Tender ing and accept ance o f bid:-

Aft er checking o f approved indent s by t he concer ned funct ional head o f

purchase depart ment , t ender s are called except for canalized or cont ro l
co mmo d it ies like cement , sulphur, st eel et c. Generally t he procurement o f
mat er ial shall be made by any o f t he fo llo wing modes of t ender ing:

' Open t enders

ÿ Glo bal open t ender s
ÿ Press t ender s
' Limit ed t ender s
' S ing le t enders

 
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Open tenders

These shall be invit ed t hrough t he press advert isement by short t ender

no t ificat ion in E nglish and local newspaper approved by t he personnel relat io n
depart ment for high value it ems of equip ment and mat er ials valu ing more t han
Rs. 1000 000. However, appro val o f head o f mat er ial depart ment is t o be
o bt ained before issuing press not ificat io n.

Limit ed tenders

To ensure t hat t he procurement o f mat er ial o f proper qualit y fro m reliable and
co mpet ent manufact urer is done, a list of select ed vendors shall be maint ained
fo r each cat egor y of equipment and mat er ial by each unit . Limit ed t ender s
enqu ir ies up t o t he value o f Rs. 100000 should be sent by under cert ificat e o f
po st ing and above Rs. 100000 by regist er ed post only. T his was t he ear lier u sed
met ho d.

Single tenders

' No rmally no procurement is done on single t ender basis except in t he

fo llo wing circumst ances:
ÿ Where t he it em has been ident ified and approved by t he GM t hat t he
nat ure of t he it em is propr iet ar y o f single manufact urer and no o t her
su bst it ut e mat er ial is accept able for t echnical reasons such as spare p art s,
chemicals, specia l t ools et c.
ÿ In ver y except ional cases, alt hough t here ma y be alt er nat e source o f
supply but t hey are not accept able due t o cert ain specific reasons to be
recorded wit h full just ificat io n and approval o f GM obt ained for t he same,
it will be per miss ible t o float single t ender enquir y.

  
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ÿ Cash purchases wit hin t he limit as pr escr ibed fro m t ime t o t ime is
per miss ible o n sing le t ender basis subject to ascert aining reasonabilit y o f
pr ice at a level o f deput y manager and above.

9). Met hods of procurement of mat er ials:-

Bes ides t he abo ve modes o f t ender ing, t he fo llo wing met hods o f procurement o f
mat er ials for expedit ious supply and t o reduce procurement lead t ime ar e
fo llo wed:-

ÿ Repeat orders
ÿ Cash purchases
ÿ E mergency purchases
ÿ DGS &D rat e/running cont ract

Repeat O rders

Where t he same it em has t o be purchased ident ical in all respect s, a repeat order
ma y be placed wit h t he approval o f t he co mpet ent aut hor it y provided t he
fo llo wing condit io ns are sat isfied:

' That t he origina l order against which repeat order is being co nsidered was
no t placed ear lier t han six mo nt hs.
' That t he quant it y proposed to be purchased is less t han or equal t o t he
quant it y or igina lly ordered.
' That t here has been no reduct io n in t he market rat es of similar market ever
since t he original ordered was placed.
' That t he order was placed as a result of regular t ender enquir y and t he o rder
was p laced on t echnically lowest basis.

 
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' One repeat order up to t he value of Rs. 25000/- against order would no t
requ ir e any financia l concurrence. However any subsequent repeat orders
wit hin t he abo ve condit io ns shall be placed wit h financial co ncurrence only.

Cash pu rchase

Fo r it em o f value below Rs.1000 in each case, a regular enqu ir y is not necessar y

and su ch it em can be procured on cash basis fro m t he open market . However t he
purchase o fficer shall ensure t hat t he it ems are being purchased at co mpet it ive
pr ices prevailing in t he mar ket .

The cash pur chase should be aut hor ized by CMTM/S MTM.

The it ems should be purchased preferably fro m gover nment owned st ores.

Emerg ency pu rchase

E mergency purchases are per missible only in unforeseen cir cumst ances. In all
cases o f emergenc y purchases, t he reaso n for such emergency shall be reco rded
in wr it ing and t he procedure t o be fo llowed as under:-

The ind ent s should be prepared by t he HOD and forwarded t o CMTM/SMTM

aft er being approved by GM/ED.

In case o f it ems cost ing Rs. 10000or less, an o fficer fro m mat er ial depart ment
alo ng wit h t he represent at ive o f user depart ment shall be deput ed t o co llect
quo t at io n by hand fro m minimum o f t hr ee fir ms. A decis io n on t he offer s so
co llect ed may be t aken on t he spot and deliver y o btained immediat ely.

In case of it ems cost ing bet ween 10000 t o 50000 t he head of t he mat er ial
depart ment would const it ut e a commit t ee of DMTM/ MTM and an o fficer each
fro m account s depart ment and t he user depart ment at appropr iat e level, wit h

 
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aut ho r it y t o visit t he near est market and t o collect minimum o f t hree quot at io ns.
The co mmit t ee so const it ut ed is empowered to t ake decisio n on t he spot .

In case o f it ems cost ing more t han 50000, a co mmit tee consist ing o f
represent at ive fro m account s, mat er ial and user depart ment would be const it ut ed
by GM/ED and t he co mmit t ee would fo llo w t he same procedur e.

Pu rch ase against DGS&D rate/ running cont ract

Where t he it em is t o be purchased under running cont ract concluded by

Direct o rat e General o f Supply and Disposal, purchase of such it em should be
based o n DGS & DRS pr ices only direct ly fro m vendors. T his mo de o f
purchasing eliminat es calling o f t enders, saving o f t ime and give advant age o f
mo st co mpet it ive pr ice result ing in saving of avo idable ext ra payment s.

Fo r o bt aining t he copies of t he r at e cont ract , regional o fficer s in

Mu mbai/ Chennai/ Calcut t a or direct orat e of DGS & D at New Delhi may be
co nt ract ed by t he var ious unit s of R&P divis io ns.

10). Preparat io n of Tender Document s:-

In o rder to facilit at e all divis io ns to follo w unifor m mode of t ender ing, t he

fo llo wing syst em ma y be fo llowed on t he rat io nal basis:-

A) Single bid system p rocedu re:-

' Not ice invit ing t enders

' Tend er document s
1) Table o f co nt ent s (t ot al no. of pages in each sect ion shall be
ind icat ed).
2) Issu e of let t er of t ender document s (name of part y t o who m it is issu ed,
pr ice o f document s et c. shall be indicat ed).

 
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3) Not ice invit ing t enders (copy o f NIT as issued t o press or on t he websit e).
4) General inst ruct io ns t o t he t enderer.
5) General co ndit io n o f t he co nt ract .

6) Special co ndit io n o f t he co nt ract .

7) Technical specificat io n and pr ice part .
8) T ime schedule for execut io n
B) Two bid system:-

In case o f all ot her purchases where foreign exchange is invo lved and/or wher e
value o f purchase is est imat ed to Rs. 50 lakhs or more, t wo-bid s yst em o f
t ender ing shall be fo llo wed.

·.2.2 INVENTORY CONTROL PROCEDURES FOR STORES, SPARES &

CHEMICALS

·.2.2.a Introduction

Materials, fuels & lubricants, spare parts maintenance consumables, semi processed materials
and finished goods at any given point of time. In financial parlance, Inventory is defined as the
sum of the value of raw materials.

Operational definition of Inventory would be: "The amount of required raw materials, fuels,
lubricants, spare parts and semi-processed material, stocked for smooth running of the plant".
Since these resources are idle when kept in stores, inventory is defined as an idle resource of any
kind having an economic value.

·.2.2.b Reasons for holding Inventory

The main reasons for holding inventory are:-

' To maintain targeted flow of production in line with national demand.

 
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' Protection against uncertainties of demand & supply which can not be predicted with
sufficient accuracy.

' To avoid stock out in the period of shortages

' In periods of rapid price rise, higher inventory levels may well have to be accepted.

' Long Delivery period

·.2.2.c ABC Analysis

Inventory management becomes very difficult if there are a large number of items to be stocked
e.g. in case of IOCL where each refinery is having a stock of more than ·
?items. ABC is
basic analytical management tool which enables the management to exercise selective control
and place the efforts where the results would be greatest. ABC analysis is based on the concept
of "Vital Few" "Trivial Many".

ABC classification shall be based on their annual consumption as given:-

A: Rs 5 lacs and above

B: Rs 1 lac to Rs. 5 lacs

C: less than Rs 1 lac

In order to achieve selective control, the various items are first classified as A or B or C class
items. The classification is done by taking into account the annual consumption value of each
item. These values are usually obtained by looking into last years consumption value of the items
in inventory. The steps involved in classifying items as A or B or C category are as follows:-

(i) Calculate annual issues (in Rs.) for each item in inventory by multiplying the unit cost of the
item by the number of units issued in a year.

(ii) Sort all items by rupee annual issues in descending sequence

(iii) Prepare a list from the ranked items showing item no., unit cost, annual units issued and
annual rupee value of units issued.

 
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(iv) Starting at the top of the list, compute a running total item-by-item issue value and the
rupees consumption value.

(vi) Compute and list for each item the cumulative percentage for the item count and cumulative
annual issues value.

(vii) Classify the top 10-15 percent of the items as "A" items while the bottom 60 to 70 percent
of the items are classified as "C" items. However, the `balance items between these 2 limits shall
be classified as "B" items.

·.2.2.d Periodic Review System

As per this system supply to be arranged at fixed intervals of time of 3 months. This system can
be followed for process chemicals as the consumption pattern is known. Order to be placed for
yearly requirement for supply in 4 installments, after every 3 months. Review to be done at the
end of the quarter & supply for the next quarter regulated as per requirement

·.2.2.e Re-order Point System

In case of regular consumption items whose consumption pattern fluctuates re-order point system
to be followed. Keeping the lead time in view re-order point an order for fixed quantity to be
processed. The quantity to be ordered is fixed and only frequency of ordering varies.

·.2.2.f Spares
Spares may be divided into following groups:

a) Spares purchase with capital goods imported from abroad or in India

including insurance spares.

b) Imported spare parts.

c) Fast moving and moderate moving spare parts of regular consumption

which fall within category µC¶ or µB¶ or µA¶.

d) Slow moving spare parts and spare parts with erratic consumption, for

particulars machines or equipment's.

 
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·.2.2.g Other classifications of Items in Inventory

In addition to ABC and VED analysis, the other type of selective analysis that may be used are:

FSN - Fast moving, slow moving, non-moving.

NON MOVING - c 
? ? ? ?? ??
? ? ?? ? ? ??
 ?? 
?

XYw - Based on inventory values of items. A `X¶ category items has very high inventory value
whereas a `w¶ category item has very slow inventory value.

XYw would be categorised as under:-

? ?c 
?? ???

 ?

? ?c 
?? ????

 ? ??

 ?

? ?c 
?? ???

 ?

HML ± High unit price (> Rs 1.00 lac), medium unit price Rs 50,000.00 to Rs100,000.00), low
unit price (up to Rs 50,000.00) of the items.

SDE ± Scare, difficult and easy to procure items. Items under this category will be Refinery unit
specific.

The classifications can be effectively utilized for proper selective inventory control.

List of selected Class A items:-

Material Amount(Value) Quantity

2-ETHYL-HEXYL-NITRATE 158,668,140.00 1,614.37 TO

FRESH FCC CATALYST 29,572,183.13 192.871 TO

 
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ROTOR,DYN
BALANCED,W/CPLG HUB 17,686,323.00 1 EA

PLATINUM IN SPENT K
CATALYST 16,105,348.00 14,607.00 G

ROTOR ASSY 14,756,045.00 1 EA

RANDOM PACKING FOR M

COLUMN 9,121,340.00 1 3

BUCKET,TURBINE STAGE 1
KIT,P/N:35306090 8,887,997.00 1 EA

K
DHDT CATALYST ACT 961 7,796,626.00 9,000.00 G

PIPE,SS,EFW,A358TP321,CL1,BE
,10IN,160,H2 7,663,400.91 114 M

PLATE,CS,IS
2062,A,6300x1500x8mm 4,519,704.05 96.749 TO

PIPE,AS,EFW,A691,GR9CR,CL42,
BE,26IN,9.53 4,335,897.89 45 EA

K
DHDT CATALYST ACT 645 4,250,873.00 4,000.00 G

PLATE,CS,IS
2062,A,6300x1500x6mm 4,178,605.45 113.237 TO

SODIUM HYDROXIDE,CAUSTIC
SODA LYE,NaOH 4,028,713.81 198.612 TO

BEND,90,XLR,BW,AS,A387,P12,2
0IN,30 3,913,414.89 15 EA

DIMETHYL
DISULPHIDE(DMDS) 3,683,208.60 24 TO

3,641,467.00 10 EA
FUEL NOwwLE F/GAS

 
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TURBINE,MS 5001

TEE,EQ,BW,AS,A387,P12,10IN,40 3,630,011.50 52 EA

DRUM,MILD
STEEL,GAL,GAUGE:5 3,611,685.00 2,356 EA

VLV,GT,WEDGE,A217C5,A217C
5,FLG,300,2IN 3,472,725.30 362 EA

PIPE,AS,SMLS,A335,GR.P9,BE,24
IN,160 3,457,028.00 6.2 M

D
R
SERVO LID - 190 KG DRM 3,335,816.88 264 M

PIPE,AS,SMLS,A335,GRP9,BE,10
IN,XXS 3,298,185.56 103.89 M

PIPE,CS,EFW,A672,GRB60,CL.12,
BE,16IN,20 3,244,197.00 537.42 M

PUMP,COMPLETE UNIT,HDA
80/10,KSB 3,221,553.00 1 EA

PLATE,CS,IS
2062,A,6300x1500x5mm 3,121,415.84 80.97 TO

NOwwLE,SPRAY,T/F,75 KVA 3,068,079.00 42 EA

COMP.SEAL,FSL,PC-100CART 3,021,964.54 7 EA

POLYTHENE LAMINATED JUTE

BAGS 2,965,873.97 199,810 EA

CABLE,AL,3Cx240
sq.mm,XLPE,ARM 2,941,731.13 3,099 M

SYSTEM OF HAIL LPG TTL

UPGRADATION 2,927,111.00 1 EA

2,764,286.32 392.25 M
PIPE,CS,EFW,A672,GRB60,CL.12,
 
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BE,16IN,STD

CABLE,AL3.1/2x300s.mm,PVC
INS,ARM 2,761,966.30 3,534 M

COMBUSTOR LINER F/GAS

TURBINE,MS 5001 2,708,459.00 10 EA

CABLE,T/C,CU,20P,UDEY 2,707,632.69 11,680 EA

ADDITIVE,FCC
CATALYST,wSM-5 2,667,993.94 7.361 TO

K4SDR-16, THL TDC

3000,P/N;5143519-160 2,613,307.12 3 EA

FL,WN,RTJ,AS,A182,F12,10'',300,
40 2,543,455.36 105 EA

CABLE,AL3.1/2x185s.mm,PVC
INS,ARM 2,523,370.00 5,038 M

PIPE,CS,SMLS,A106,GRB,BE,4IN
,40 2,521,237.16 3,098.24 M

PIPE,AS,EFW,A691,1.25CR,CL42,
BE,26IN,10T 2,472,162.58 63.5 M

SMM CARD FOR UCN

INTERFACE OF THL DCS 2,342,155.00 2 EA

TUBE,AS,SMLS,A335,P9,BE,101.
6x8.33x8597 2,333,290.82 51 EA

PIPE,AS,SMLS,A335,GR.P9,BE,20
IN,160 2,301,311.00 6.15 M

CHANNEL,CS,IS
2062,A,400x100mm 2,301,017.00 31.32 TO

  
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List of selected Class B items

Material Amount Quantity

T/M,D/P,ELECY,0-2500 MM WC 498,761.44 23 EA

BARRIER,INTER
PHASE,CT,F/6.6kVJYOTI VCB 498,420.00 30 EA

ROTATING ASSY ( P200 ),P/N10 498,000.00 1 EA

FABRIC ELT
ASSY,MULTILAYER M
COMPOSITE 496,771.00 30 2

TR,DP,SMART,0-5000MMWC 496,705.00 23 EA

SEPARATOR FILT ELMNT,WD-

873,EST-423-02 494,879.00 52 EA

TURNSTILE,3/4HEIGHT,90D-
STOP,4WAY,BDR 494,410.00 3 EA

POSITIONER F/C/V,MIL FISHER 493,453.33 20 EA

LINE CHOKE& TERMINATOR

F/COK-A EOT CRAN 493,262.00 2 EA

DETECTOR,FLAME(28FD) 492,668.00 2 EA

VLV,CHK,LIFT,A217 C5,A217
C5,FLG,300,8IN 492,649.18 10 EA

PIPE,AS,SMLS,A335,GRP5,BE,3I
N,40 491,768.51 716.89 M

FUEL OIL BYPASS VLV ASSY 491,676.35 1 EA

ACCUMULATOR
F/COMP.2MCL,456,BHEL 491,400.00 6 EA

 
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CABLE
TRAY,MS,200mmx20mmx2.5m 489,896.04 470 EA

MS-BS II -AKI-84(88RON-0.05%
SUL) 489,522.77 39,486.16 KL

COOLER,COMP,2MCL357,BHEL 487,813.00 1 EA

FAN ASSY,C/TOWER,85454-14V-
05,PCT 487,680.00 1 EA

VLV,GLB,ANGLE,BRASS,THD,12
5,8IN 486,340.32 8 EA

T/NATION,AI,16CH,TM117-
AI12,AUG,099-0070 485,692.59 2 EA

PISTON HALF,P/N-2734.3361.000 392,190.40 1 EA

IMPELLER , 6 MQX,P/N 6073442 387,000.00 1 EA

HLAI PROCESSOR, 16 PT.MU-

PAIH03, HAIL 385,552.80 3 EA

PIPE,MS,ERW,IS3589,GR330,BE,2
8IN,7.92TH 384,710.00 49.58 M

CABLE,AL,3Cx150sq.mm,PVC
INS,SHTD,ARM 384,421.25 283 M

PIPE,CS,SMLS,API5L,GRB,BE,8I
N,40 384,404.06 150.7 M

FRAME PROOF
F/MOTOR,PMP,400 TS3,JYOTI 382,620.00 1 EA

TB DIGITAL RELAY/CARD NO.

DS200DTBCG1AAA 382,080.00 1 EA

PIPE,MS,ERW,IS1239,BLACK,BE,
18IN,9.53TH 381,161.42 260.399 M

DREWTREAT 738 380,698.63 4,906.00

K
 
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FLAT,CS,IS 2062,25x3mm 380,051.34 7.539 TO

VLV,GLB,A216WCB,A216WCB,F
LG,150,3IN 378,949.09 33 EA

EJECTOR COMPLETE UNIT 378,800.00 2 EA

VLV,GLB,A216WCB,A216WCB,F
LG,300,10IN 378,340.66 6 EA

SEAL ASSYCOMP,J.CR,1648
SEAL CART,2.5000 377,143.00 1 EA

PUMP, VERTICAL TURBINE 376,367.00 1 EA

PSV-001 & 002, 6" X 8", RF 375,900.00 2 EA

T/M,STD924,THL 375,350.04 13 EA

SUPPORT CABLE
ASSY,LOWER,P-101-P-105 311,931.00 3 EA

VLV,ON/OFF,BAL,DIAP,A216,W
CB,FL,300,2IN 311,917.00 4 EA

PIPE,AS,EFW,A672,GRB70,28,12T
HK 311,220.00 11.97 M

BARRIER,ANALOG O/P,MTL
3045 311,143.39 53 EA

PUMP,COMPLETE UNIT,SHD
200/32 N,KBL 311,111.00 2 EA

JACK, HYDRAULIC 100 TON 310,641.00 1 EA

PROBE, SPEED DYNALCO M180 310,138.21 9 EA

 
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List of selected Class C items

Material Amount Quantity

CT,200/1-1A,1.5VA 52,563.79 3 EA

SECONDARY SEAL,RPH-ECM-
25-180,KSB 52,560.00 2 EA

ELBOW,90DEG,LR,ASTM A
815,8IN,S20 52,526.00 1 EA

PKG,ROTARYHD,FSL,PBSCART 52,517.96 6 EA

GASKET,GRAFOIL,P/NO 152.1 52,508.00 5 EA

RTV SEALANT (0000B ),P/N 110 52,500.00 2 EA

PIPE,MS,EFW,IS3589,410,BE,28I
N,10MM THK 52,437.00 10 M

VIRGO VLV ACTUATOR FAIL

SAFE OPEN 100M 52,428.00 2 EA

LAMP,LED
IND,10W,22.5MM,24VDC,LVGP 52,401.51 328 EA

FL,SP.BL,FF,CS,A105,300,4IN 52,387.17 36 EA

CPLG,HALF,TH,CS,A105,3000,1/
2IN,IBR 52,380.34 1,790 EA

BOX,JUNCTION,12ways,FLAME
PROOF 52,378.67 14 EA

T/F,VOLTAGE,6.6kV,100/50VA,J
YOTH 52,335.00 3 EA

 
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GSKT,SPWD,CS,SS304,CAF,8IN,
150lbs 52,332.34 498 EA

STUD,AS,A193,B7,NUTS,A194,2
H,M36x275 mm 52,308.75 150 EA

O RING,P/N;10( KALREw),
EPIL,KXWKC 52,305.60 2 EA

PUMP,COMPLETE UNIT,MOVI-
32/8,KSB 52,251.65 1 EA

AIR FLTR REGULATOR,P/N-

450352 52,239.00 3 EA

CABLE JOINT
KIT,3X70sq.mm,3X150sq.mm 51,474.06 49 EA

SWITCH,PR,DIAPH,10-60bar 51,442.73 13 EA

DIAPHRAGM, 1052(70), FISHER 51,434.00 3 EA

STUD,AS,A193,B7,NUTS,A194,2
H,M14x120 mm 51,423.23 2,430 EA

BRICK,ALUMINA,SP-11 51,386.46 800 EA

BRG,6.6KV,BHEL 51,351.00 2 EA

MECH.SEAL COMP, P04D28

(SPL) 51,349.96 1 EA

STUD,AS,A193,B7,NUTS,A194,2
H,M12x85mm 51,331.49 4,050 EA

ROTARY HD
ASSY,IB,EPIL,Y15D38-DBL 51,312.71 1 EA

TEE,EQ,BW,CS,IS
3589,410,8IN,20 51,304.00 1 EA

OIL TIP 51,243.00 2 EA

 
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TONER CRTDG,LASER
PRINTER,HP-5000 51,240.00 6 EA

CLUSTER ASSY. FOR M40,

4000A, PGA0100168 51,221.01 10 EA

HOSE TELE BOOM,P/N-2307125 50,216.00 1 EA

SLEEVE GASKET, P/N. 19 50,208.00 5 EA

FL,SP.BL,FF,CS,A105,150,16IN 50,187.00 4 EA

PIPE,CS,SMLS,API5L,GRB,BE,10
IN,30 50,153.86 18.06 M

GASKET,GRAFOIL,P/NO 152 50,134.00 5 EA

FL,SP.BL,RTJ,SS,A182,
F321,600,4IN 50,109.60 9 EA

MECH.SEAL,EPIL,P03D36/P03D3
2 50,103.50 1 EA

RELAY 180 300 MN12 SS 94139

LT 50,062.00 10 EA

HEX NUT M 12, P/N 9 49,000.00 40 EA

BEND,90,XLR,BW,AS,A234,WP5,
12IN,60 48,974.00 2 EA

WRENCH ,IMPACT ,W ±
2109,CLECO 48,960.00 1 EA

CABLE
EARTHING,TRUCK,6.6KV,VCB 48,916.00 2 EA

FL,WN,RTJ,AS,A182,F11,300,20'',
10 48,863.70 4 EA

PIPE,AS,SMLS,A335,GRP1,BE,8I
N,40,IBR 48,858.00 13.03 M

 
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BRACKET,BRG,PMP,SMU
3x4x11-2 STG,BPCL 48,853.55 1 EA

·.2.·IMPORTANT CONCEPTS IN IVENTORY MANAGEMENT

·.2.·.a JUST IN TIME (JIT) PRODUCTION

’
?’
 is defined in the APICS dictionary as ³a philosophy of manufacturing based
on planned elimination of all waste and on continuous improvement of productivity´. It also has
been described as an approach with the objective of producing the right part in the right place at
the right time (in other words, ³just in time´). Waste results from any activity that adds cost
without adding value, such as the unnecessary moving of materials, the accumulation of excess
inventory, or the use of faulty production methods that create products requiring subsequent
rework. JIT (also known as ?     or  ?    ) should improve profits and
return on investment by reducing inventory levels (increasing the inventory turnover rate),
reducing variability, improving product quality, reducing production and delivery lead times, and
reducing other costs (such as those associated with machine setup and equipment
breakdown). In a JIT system, underutilized (excess) capacity is used instead of buffer
inventories to hedge against problems that may arise.

JIT applies primarily to    ?


  processes in which the same products and
components are produced over and over again. The general idea is to establish flow processes
(even when the facility uses a jobbing or batch process layout) by linking work centers so that
there is an even, balanced flow of materials throughout the entire production process, similar to
that found in an assembly line. To accomplish this, an attempt is made to reach the goals of
driving all inventory buffers toward zero and achieving the ideal lot size of one unit.

The basic elements of JIT were developed by Toyota in the 1950's, and became known as the
Toyota Production System (TPS). JIT was well-established in many Japanese factories by the
early 1970's. JIT began to be adopted in the U.S. in the 1980's (General Electric was an early
adopter), and the JIT/lean concepts are now widely accepted and used.

Some Key Elements of JIT

1. Stabilize and level the MPS with uniform plant loading .

2. Reduce or eliminate setup times

 
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3. Reduce lot sizes (manufacturing and purchase )

4. Reduce lead times (production and delivery)

5. Preventive maintenance

6. Flexible work force.

7. Require supplier quality assurance and implement a zero defects quality program

8. Small -lot (single unit) conveyance

·.2.·.b KANBAN PRODUCTION CONTROL SYSTEM

A kanban or ³pull´ production control system uses simple, visual signals to control the
movement of materials between work centres as well as the production of new materials to
replenish those sent downstream to the next work center. Originally, the name ¦  
(translated as ³signboard´ or ³visible record´) referred to a Japanese shop sign that
communicated the type of product sold at the shop through the visual image on the sign (for
example, using circles of various colors to indicate a shop that sells paint). As implemented
in the Toyota Production System, a ¦   is a card that is attached to a storage and transport
container. It identifies the part number and container capacity, along with other information,
and is used to provide an easily understood, visual signal that a specific activity is required.

In Toyota¶s dual-card kanban system, there are two main types of kanban:

1.  ?  ?

2. 
?   (also called a "move" or a "conveyance´ kanban

Dual-card Kanban Rules:

1. No parts are made unless there is a production kanban to authorize production. If no

production kanban are in the ³in box´ at a work center, the process remains idle, and
workers perform other assigned activities. This rule enforces the ³pull´ nature of the
process control.
2. There is exactly one kanban per container.
3. Containers for each specific part are standardized, and they are always filled with the
same (ideally, small) quantity. (Think of an egg carton, always filled with exactly one
dozen eggs.)

 
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·.2.·.c REORDER POINT

In the EOQ model, the lead-time for procuring material is zero. Consequently, the reorder point
for replenishment of stock occurs when the level of inventory drops down to zero. In view of
instantaneous replenishment of stock the level of inventory jumps to the original level from zero
level. In real life situations one never encounters a zero lead-time. There is always a time lag
from the date of placing an order for material and the date on which materials are received. As a
result the reorder level is always at a level higher than zero, and if the firm places the order when
the inventory reaches the reorder point, the new goods will arrive before the firm runs out of
goods to sell. The decision on how much stock to hold is generally referred to as the order point
problem, that is, how low should the inventory be depleted before it is reordered.

The two factors that determine the appropriate order point are the procurement or delivery time
stock which is the Inventory needed during the lead time (i.e., the difference between the order
date and the receipt of the inventory ordered) and the safety stock which is the minimum level of
inventory that is held as a protection against shortages.

Reorder Point = Normal consumption during lead-time + Safety Stock.

Several factors determine how much delivery time stock and safety stock should be held. In
summary, the efficiency of a replenishment system affects how much delivery time is needed.
Since the delivery time stock is the expected inventory usage between ordering and receiving
inventory, efficient replenishment of inventory would reduce the need for delivery time stock.
And the determination of level of safety stock involves a basic trade-off between the risk of
stock-out, resulting in possible customer dissatisfaction and lost sales, and the increased costs
associated with carrying additional inventory.

Another method of calculating reorder level involves the calculation of usage rate per day, lead
time which is the amount of time between placing an order and receiving the goods and the
safety stock level expressed in terms of several days' sales.

Reorder level = Average daily usage rate x lead-time in days.

From the above formula it can be easily deduced that an order for replenishment of materials be
made when the level of inventory is just adequate to meet the needs of production during lead-
time.

If the average daily usage rate of a material is 50 units and the lead-time is seven days, then
Reorder level =Average daily usage rate x Lead time in days = 50 units x 7 days = 350 units

 
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When the inventory level reaches 350 units an order should be placed for material. By the time
the inventory level reaches zero towards the end of the seventh day from placing the order
materials will reach and there is no cause for concern.

c
  
 
   

  
 

 


·.2.·.d ECONOMIC ORDER QUANTUTY (EOQ)

It minimizes the sum of holding and setup costs. Assumptions of EOQ are as follows:

1. The supply of goods is satisfactory. Goods can be purchased whenever required.

2. Quantity to be purchased is known and certain.
3. Prices of the goods are stable resulting into stabilization of carrying costs.

When above conditions are satisfied, EOQ can be calculated using the following formula:

EOQ = (2AS/I) ^ (1/2) where

A = Annual demand or consumption

S = setup or ordering costs

  
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I = inventory carrying cost per unit

V   $  

%   

 


  


 

·.2.·.e SAFETY STOCK

Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead
time. The notion is that a portion of average inventory should be devoted to cover short range
variations in demand and lead time. It is used to prevent stock out. Inventory analysts, when
controlling stock set the minimum stock level at the lowest stock level that an organization is
prepared to tolerate, this is usually set at greater than zero in order to counter delivery delays or
spikes in demand. If safety stock is not present, stock outs could occur which could be drastic to
production runs or even worse risk delays to end customer. Safety stock then is a necessary evil
because it assumes that demand cannot accurately be forecasted and/or suppliers fail to deliver
on time (both common business scenarios). The level of safety stock varies from one
organization to another but typically balances the cost of stock holding on one hand against the
cost of stock outs on the other.

 
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Calculation of safety stock:

Safety stock = demand variation + ((monthly demand/25)*supplier delay in days)

·.2.·.f AVERAGE INVENTORY

Average inventory is one of the important tools of inventory management. It tells how much
stock is being used in the organization. Average inventory includes the work in progress goods
and also the safety stock. Generally average inventory is calculated using the following formula:

Average inventory = ((monthly consumption/frequency schedule)/2) + WIP + safety stock

The WIP is calculated as follows:

WIP = throughput time / cycle time

Throughput time refers to the time taken by the part to enter into the assembly and come out
as a finished good. Cycle time refers to the time taken to manufacture a machine per day.

AVERAGE INVENTORY PERIOD

It is one of the techniques of inventory management. It tells stock with the organization can be
used for how many days. So the organization can place an order with the help of this and can
also know whether the stock in hand when put in use will sustain till the receipt of the order.

Average inventory period is calculated using the formula:

Average inventory period = (average inventory * 365) / (total monthly consumption * 12)

·.2.·.g FACTORS INFLUENCING INVENTORY MANAGEMENT AND

CONTROL

Several factors influence inventory management and control. The principal effects of these are
reflected most strongly on the levels of inventory and degree of control, planned in the inventory
control system. These factors are as follows:

 
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Product type

Manufacture type

Volume

Other Factors

ÿ The objective of the company as it relates to the inventories and the level of service to
be provided to the customers.
ÿ The qualification of the staff personnel who will design and coordinate the
implementation of the system.
ÿ The capabilities of the personnel who will be responsible for managing the system on
a continuous basis.
ÿ The nature and size of the inventories and their relationship to other functions in the
company, such as manufacturing, finance and marketing.
ÿ The capacity of the present and future data processing equipment.
ÿ The potential savings that may be anticipated from improved control inventories.
ÿ The current or potential, availability of data, which can be used in controlling
inventories.

 
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4.1 RESEARCH METHODOLOGY

Solving a research problem by using various research methods in a systematic manner is
research methodology. It may be understood as a science of studying how research is
done scientifically. Researcher not only need to know how to develop certain indices or
tests, how to calculate the mean, mode, or standard deviation or chi ± square, how to
apply particular research techniques, but they also need to know which of these methods
or techniques are relevant and which are not, and what would they mean and indicate and
why. Researcher also need to understand the assumptions underlying various techniques
and they need to know the criteria by which they can decide that certain techniques and
procedures will be applicable to certain problems and others will not. All this means that it. is
necessary for the researcher to design this methodology for his problem as the same
may differ from problem to problem.
It certainty offers an opportunity to researcher to justified his choice by comparing it is
relative advantage and disadvantage with those alternatives, which have been rejected.
This part is divided into four sections:-
1. Research design.
2. sample design.
3. Data collection method
4. Analysis pattern.

4.2 OBJECTIVE OF THE STUDY

Main Objective
The objective of the study is to assess and analyze the inventory management -purchase and
procurement procedure - in Barauni refinery.

Sub Objectives

1) To study how sufficient large size of inventory is maintained in the Barauni Refinery
to meet the demand of finished goods & to meet the demand of raw material.
2) To study about the investment in inventories.
3) To study the continuous supply of raw material.
4) To know how the funds are utilized.
5) To extend the knowledge.

However the main objective of this study is to fill the gap between different aspect
of theoretical and practical knowledge of financial management and to develop the
required skill to take decision on sight for the best use of my theoretical knowledge.

 
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4.· RESEARCH DESIGN

Meaning of research
³Research in common parlance refers to a search for knowledge´. Research can be
explained as a movement, a movement from known to unknown. It is actually a voyage of
discovery.
ÿ Research always starts with a question or problem.
ÿ Its purpose is to find answers to questions through the application to the scientific
method.
ÿ It is a systematic and intensive study directed towards a more complete knowledge
of the subject studied.
So Research is scientific and systematic search for gaining information and knowledge on
a specific topic or phenomena.

Research Design

[Research Design is the plan and structure of investigation so conceived as to

obtain answers to research questions.´

Nature of Research

Descriptive Research design is used for study.

Descriptive research as the name suggests is designed to describe something ± for
example the characteristics of users of a given product ; the degree to which product use
varies with income, age, sex or other characteristics; or the number who saw a specific
television commercial.
To be of maximum benefit, a descriptive study must only collect data for a definite purpose.
Your objective and understanding should be clear and specific. It is a kind of survey
method.
This project study is related with the inventory management so the data is collected in this
regard only.
ß I did intensive research during this project to find out the necessary information
regarding both purchase and inventory activities carried out in Barauni Refinery
and the various projects that are being implemented to optimize profit and
product yield. While working in the organization, I got much of the information
during the practical work.

 
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4.4 METHODS OF DATA COLLECTION

TYPES OF DATA:-

PRIMARY DATA AND SECONDARY DATA

This project is mainly based on the secondary data and information beside this primary
data is also used.
1) Primary data:- primary data are to be collected by the researcher , they are not
present in reports or journals etc. and can be collected through a number of method
which can be classified as follow
ÿ Personal interview of sample.
ÿ Telephonic interview.
ÿ E- Mails.
ÿ Observations.
ÿ Questionnaires.
ÿ Interviews#
Primary data for my project : The project is related to purchase procedures and various
methods involved in inventory and oil management. There is very less or no scope of primary
data in this project. The project is basically based on secondary data made available by the
company and other sources for more information. However the primary data for my research is
the dispatch registers maintained by the company to know the purchase and stock of inventory in
the organization.

2)Secondary data:- Secondary data are the data collected for some purpose other than
the research situations; such data are available from the sources such as books, company
reports, journals, rating organization, census department etc.. The secondary data are
readily available and therefore they are less costly and less time consuming. Sources of
secondary data are:-
ÿ Internets.
ÿ Book and journals.
ÿ Company reports.
ÿ Census department.
ÿ Research work of others.

 
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Secondary data for my project: Mainly the used in this project is secondary data. I collected
information dealing with inventory management from materials department. Purchase & sales
and production data were obtained from the finance department. These data and information
were studied and analyzed properly to present the report in this form.

During the internship period, I went through Material Management Manual, Oil Management
Manual, Brochures, Financial Appraisal and Annual Operation Report provided by IOCL,
Barauni. Documents, books and last but not the least websites were also referred to get enough
information for the completion of the project

4.A PROJECT PERIOD

Survey period is 45 days from June 1st , 2010 to July 31st , 2010. It is not enough periods for the
study to get the accurate and specific result of the study.

 
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A.1 IN CONTEXT TO BARAUNI REFINERY (IOCL)

The Indian Oil Corporation (Barauni Refinery unit) needs to hold inventories for the purpose
of transactions motive and precautionary motive. In this unit production is a continuous process.
For the smooth production, the company needs to maintain or keep an adequate level of raw
material inventory to avoid any shut down position. For every production unit the inventory of
raw material plays a lead role.

A.1.1 INVENTORY TURNOVER RATIO For Two Years 200-09 And 2007-0

For the year 2008-09

Inventory Turnover Ratio = Cost of Good Sold

Average Stock

Since:
Cost of Good Sold = Sales ± Profit
=156,489,733,981 ± 7,448,693,896
=
=149,041,040,085

Average Stock = Opening Stock + Closing Stock

2

= 15,513,826,950 +14,845,162,456
2

= 15,513,826,950 +14,845,162,456
2
= 15,179,512,703

Therefore:

Inventory Turnover Ratio = 149,041,040,085

15,179,512,703

= 10 times

  
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For the year 2007-08

Since:
Cost of Good Sold= Sales ± Profit
=138,253,078,313 ± 773,326,289
= 138,253,078,313 ± 773,326,289

= 137,479,752,024

Average Stock = Opening Stock + Closing Stock

2

= 14,420,017,552 + 15,513,862,950
2

=14,966,940,251
Therefore:

Inventory Turnover Ratio = 137,479,752,024

14,966,940,251

=9.18 times

This Ratio shows that the year 2008-09 is better because the year 2008-09 shows rapid turnover
of stock and consequently shorter holding period as compared to its previous year.

The Indian Oil Corporation (Barauni Refinery unit) maintains all these sort of inventories.
This unit maintains adequate stock of inventories of raw material for the smooth functioning of
the process of production. The company also maintains an adequate level of inventories for
work-in-process as per the requirement. Till the completion of the production cycle, the work-in-
process inventories are maintained and some part of it is also used as fuel in the unit. Stock of
finished goods also has to be maintained by the Barauni Refinery unit. This unit does not have
authority to sell the finished product in the market directly. It has to be sent to the Marketing
division for further sale. As per the instruction of the Head Office they have to keep an adequate
level of finished goods for compensating any loss of production during the period of election
(governmental hazards), production break down and other contingencies. It also sells finished
goods like LPG, Petrol, Diesel, etc. on behalf of the Marketing division. That¶s why a stock of
finished goods also needs to be maintained.

 
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A.1.2 System of identification of needs

There are mainly three types of inventories maintained by Barauni Refinery Unit (IOCL) such
as:

' Crude Oil Inventories

' Inventories for chemicals

' Inventories for stores and spares

Identify the need for Crude Oil Inventories and system of placing the order

The Barauni Refinery Unit (IOCL) identifies the need for inventories for crude oil
through Revenue Budget that is prepared on yearly basis. in the Revenue Budget, the estimate
for the consumption of Crude Oil inventories for the next year is estimated on the part experience
basis. Here a brief introduction about Revenue Budget of Barauni Refinery Unit (IOCL) is given.

The Revenue Budget is basically a budget of income and expenditure. The objective of
preparing the Revenue Budget is to fix a target in respect of physical parameters such as,
throughput, product pattern, fuel and loss and also that of operating expenses which become the
basis for monitoring and control and to estimate, based on targeted physical parameters of
operating expenses, the likely profit or internal sources for income, which helps in the fund
management.

The Barauni Refinery Unit (IOCL) prepares Revenue Budget every year in mid
September. In the month of September, the Budgeted Estimates (BE) for the next year and
Revised Estimates (RE) for the current year are prepared for which the Budgeted Estimates (BE)
is prepared in the previous year.

For example:- In the financial year 2007-08 in the month of September, the Budgeted
Estimates (BE) for the financial year 2008-09 the Revised Estimates (RE) for the next six
months 2007-08 were prepared.

Budgeted Estimates (BE): Budgeted Estimates is that which is prepared for the next month in
which all the items (inflow and outflow) are included on full estimation.

Revised Estimates (RE): Revised Estimates is prepared after six months of applications of
budget estimates. The purpose of preparing Revised Estimates is to know that during the present
six months what are the actual expenses or income exits and on what basis they have been
prepared. They collect this information, about expenses or incomes from the concerned officers
or employees. They also provider information regarding what will be the expenses and incomes
for the basis they next six months. On this basis they estimate for the next six months.

 
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There is no system for placing order for crude oil in the Barauni Refinery Unit (IOCL). Because
they do not deal or purchase crude oil directly. The hear office handles determination of crude oil
and its supply to the Refinery unit. Head office provides crude oil to the Refinery as and when
required as per the estimation. There is continuous supply of crude oil through pipelines and
tankers to the Refinery.

A.1.· Identify the need for chemicals and spares:

Identification for need for chemicals basically depends on the quantity and types of crude
oil processed. The quantity for chem8icals is decided in the ratio of quantity and types of crude
oil processed. Orders regarding the purchase of chemicals and spares are made on past
experiences. Inventory is maintained on approximation. The user department sends the need for
the item_ to the Material department along with the consumption pattern. The reorder point is
fixed in certain cases and then the order goes to the Purchase department. Two kinds of indent is
raised:

' Inventory control items, which are fixed where the reorder point or indent, is
raised and the consumption pattern is studied.

' Where consumption pattern is not known, preventive maintenance processes are
undertaken on cash basis.

When an indent is raised and if it is universally available quotations or order is placed and the
best is selected amongst all. As in case of wholesale items order is placed to the authorized
dealer who manufactures the items as per the requirement.

A.1.4 Issue system of inventory for Barauni Refinery Unit

Firstly it is needed to explain how many types of issue system for

Inventories are there, and then which system is opted by the Barauni Refinery Unit, will be
explained.

First in First Out Method (FIFO) : In this method or issue system inventories, are issued for
the production process or for sales which are purchased first or which enter in the stores first.
And in the determination of cost of product, cost of that issued material is considered. In this
case most recent purchase is as closing stock in the stores.

 
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Last In First Out Method (LIFO): This method is absolutely different from FIFO method. This
method or issue system inventories are issued for the production process or for the sale, which
are purchased or enter in the stores recently. The purpose for doing so is that issued price is
valued at the recent market price. This method is mostly used when price of inventories are
continuously in the position of rising.

Highest In First Out Method (HIFO):- In this method or issue system inventories are issued
for the production process or for the sale whose cost is high The purpose for doing so is that the
company wants to sell or utilize that material at its fullest and that there should be no opportunity
loss. This method is not mostly in use because; stock is valued at lowest price.

Barauni Refinery Unit (IOCL): issues inventories for the production process and for the sale to
the Marketing Division on First in First Out (FIFO) basis. Here there is a continuous flow of
crude oil. Every day crude oil is supplied to Refinery and also there is a continuous supply of
finished product to the Marketing Division. Every day crude oil is processed or converted in to
finished product and everyday it is sent to the stores and thereafter it is sent to the Marketing
Division. Crude oil enters in the tank and it is sent for the process and after processing it is sent
to the stores. All this happens automatically. This means that the crude oil, which enters the tank,
first, is sent for the processing first and after processing it is sent to the sores. From the stores it
is sent to the Marketing Division and then the crude oil is sent for the process and so on. This is a
continuous process and it works on FIFO basis.

A.1.A Store Management

There is a separate department in Barauni Refinery Unit (IOCL) Oil Storage and Movement
Department, which manages and maintains the movement of crude oil, intermediate products and
finished goods. Actual job of this department is to receive the raw material, intermediate
products and finished goods and dispatch all this, such as raw material for processing,
intermediate products for further processing and some of the intermediate products to the
Marketing Division for sale and finished products to the marketing department for the same
purpose. This department receives raw material as crude oil and issues for the further processing
at First in First Out basis. After processing finished products are issued and dispatched to the
Marketing Division for Sale. They receive more than one type of finished products for which
there is different maintenance cost. The maintenance cost for LPG is more than the other
products. There should be certain temperature, which has to be maintained. And for other
products like Petrol, Diesel, Etc., which is stored in tanks, should not be filled up to the brim. A
certain portion of the tank is kept empty.

 
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A.1.o Valuation of Inventory:

Generally the valuation of closing stock is done on the basis of market price or cost price
whichever is less. But here we will see how Indian Oil Corporation (Barauni Refinery Unit)
evaluates its stock, what rules and regulations are followed by them etc. At first we will see how
many types of closing stock they maintain: -

A.1.7 Types of Closing Stock in Indian Oil Corporation Ltd.:

' Crude Oil

Crude Oil Stock in Transit.

Crude Oil Stock in Pipeline
Crude Oil Stock in Refinery Tanks.

' Intermediate Stock or Work-in-Process

' Finished Goods

There are many types of crude oil such as, indigenous crude oil and
Imported crude oil. There are two types of indigenous Crude Oil (1) off-shore crude oil and (2)
on shore crude oil and imported Crude Oil separately for (1) High Sulphur and (2) Low Sulphur.

A.1. Valuation of Crude Oil Stock

Crude Oil Stock to be valued at [Cost´ or Replacement Cost´

For valuation at replacement cost following conditions should be satisfied:

There should be fall in the price of Crude Oil after the date of closing (31st March). The expected
realization from products to be produced out of crude oil inventory results in realization lower
than cost of crude oil.

For the purpose of valuation of crude oil following three elements are required: -
1) Cost of Crude Oil.

 
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2) Expected realization from products produced from crude oil.

3) Replacement of cost of crude oil.

Cost of Imported Crude Oil (High Sulpher & Low Sulpher)

All elements which are a part of imported crude oil are to be considered in the cost of stock at
Refinery such as FOB, marine freight, marine insurance, and other landing charges, custom duty,
pipeline cost, entry tax (if applicable).

1. All the above elements to be considered are booked in the purchase cost of
crude oil

2. For crude oil in transit FOB and other elements are booked in purchase cost.
3. The above elements are to be considered for the purpose of valuation of crude
oil stock at cost.
4. All elements as considered for Refinery stock to be taken on notional basis for
crude oil stock in transit and in pipeline e.g. Custom duty, entry tax etc.

5. Operating cost as per budget estimated of the next year should be included for
comparison with realization.

A.1.9 Valuation of Crude Oil Stock on Expected realization value

1. If the crude oil quantity is processed during April, the realization of the products is at
the price applicable for the month of April.

2. For balance crude oil quantity (if any), the expected product realization for the month
of May will be considered based on Inventory Logistic Plan (ILP)

3. Specific customer price and excise duty benefit to be considered for above

 
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Replacement cost of crude oil stock: -

The elements for replacement cost will be same as considered for cost of crude oil, however,
following are to be taken additionally: -

1. FOB as intimated by HO based on actual price during April

2. Other element to be considered by the unit based on the estimated actual cost.

3. Customs duty as based on percentage; the same should be revised taking revised FOB
value.

Valuation of Intermediate Stock

The valuation will be lower than the cost of intermediate products or realization of the products,
to be produced out of the intermediate stock, whichever is lower.

Cost (Including conversion cost)

The cost of intermediate stock will be based on cost of crude oil as for Refinery stock and 50%
of operating cost as considered for product valuation and 50% of fuel and loss for the month.

Expected realizable value

The realizable value will be similar to crude oil stock valuation, however, the balance operating
cost & fuel & loss (50%) adjustment has to be done while comparing with the cost of
intermediate products.

Valuation of crude Oil

Pipeline Cost, crude oil valuation

' For pipeline cost, the operating cost to be considered as fixed & variable

' Fixed cost to be allocated based in installed capacity if the capacity utilization is
below installed capacity.

' Variable cost will be allocated based on the pumped quantity by pipeline during
the year.

 
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Valuation of finished products

Finished stock to be valued at cost or realization value whichever is lower.

Finished products to be divided into two categories.

' Straight run products

' Especially products for which there is a separate production plant such as
benzene, toluene, FGH, propylene, lubes etc.

A.2 FUNCTIONS OF FINANCE - STORES SECTION

The section dealing with accounting of stores in the Finance shall have following function:

(i) Passing and accounting of transportation bills / demurrage bills of

railways/ shipping etc.
(ii) Stock verification
(iii) Accounting for sale of surplus and scrap materials
(iv) Dealing with stock transfer cases

A.2.1 PASSING AND ACOUNTING OF TRANSPORTATION BILLS

1. All railways/streamer/air freight inward receipt and the road transport consignment notes
shall be received in the stores section of materials for taking the delivery of the
consignment. the store shall enter these documents in a Daily Receipt Register.

2. Transport bill will be initially received by the Materials and sent to Finance duly verified
with reference to the purchase order and also linking the same with the GR Notes. The
certified bills of freight received from stores section shall be priced doing YMIROOTH
transactions wherever the freight bill is directly linked to a purchase order. The Finance
will release payment only after due checking of bills with reference to the transport calls
and other relevant documents. In case the freight bill cannot be linked to the purchase
order the same shall be charged to freight expenditure amount.
 
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3. Road transport contracts involving large amounts shall be finalized after obtaining
competitive quotations in accordance with the prescribed tendering procedure. Prior
occurrence of Finance and approval of competent authority shall be taken.

4. Payment of transport bills of small values may be permitted through impest account held
by the Materials. The limit in this regard shall be fixed at the unit level. Materials while
rendering the impest account, for payment of the transport bills shall indicate GR Notes
particulars against which the materials have been taken on charge. However, payments
exceeding Rs. 20,000/- in each case shall be made only by crossed account payee cheque/
demand draft.

5. For all freight bills, passed payment vouchers shall be prepared and signed by the
authorized officers after which the same shall be forwarded to the Cash Section for
preparation of cheque and payment to vendors.

6. The freight charges shall be accounted in SAP depending upon the purchase order
condition. Based on actual on invoice a MIRO transaction is done which will
automatically adjust the cost of inventory based on the status of the material. The same is
true for all other cost incurred for procurement of materials. The section should review on
periodical basis the freight clearing account for necessary action.

7. The section shall also be responsible for passing petty bills on account of loading,
unloading and handling of materials on the basis of certification by the Materials
Department, Stores and as per the contract, if any.

 
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STORES and SPARES

PARTICULARS 2006-2007 2007-2008 2008-2009

Rs. LAKHS Rs.LAKHS Rs. LAKHS

AT REFINERY 21980 31823 47994

IN 4693 3037 2471

TRANSIT

TOTAL 26673 34860 50465

Analysis

Barauni refinery is a big processing plant which requires the materials, tools
and other required items on time because delay in availability of these
materials may cause a big loss to the company so by the year their
manufacturing capacity is increasing their demand is also increasing so they
increase their capacity of materials in stores and also give orders to their
vendors so they also available the goods on time. Because vendors also need
time to manufacture the goods according to the need and order by the
company and supply to their place.

  
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PROCESS CHEMICALS
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PARTICULARS O
 ? O  ?


O? ?
AT REFINERY
IN TRANSIT
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TOTAL
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Analysis
As while refining and manufacturing of petroleum from crude oil there is need of some

chemicals which are highly acidic handle with great care and caution so this type of

chemicals refinery manufacture themselves so have their storage at refinery itself, there

is no amount in transit. They have sufficient capacity to produce and store at their

place itself.

  
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INVENTORY TARGET vs. ACTUAL

FOR THE YEAR 200-09

TARGET ACTUAL
PARTICULARS

CHEMICALS 12651 16139

STORES & SPARES 30200 31854

TOTAL 42851 47993

Analysis
Due to increasing manufacturing capacity of plant, company set the target amount of
chemicals and stores & spares for the year 2007-2008 with a high amount of chemicals
out of which company used the actual amount of 4172.43 means company¶sprocessing
is going on in a better direction they have sufficient amount to use further if they
required.
But in stores and spares company required material above the settled target because
stores & spares have no limitation they can be fail by using, breakdown while working,
or may get free or obsolete, so many reasons may cause their demand high of stores &
spares.

  
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INVENTORY TURNOVER RATIO

It is computed by dividing the cost of goods sold by the average inventory. Thus,
Inventory Turnover Ratio=Cost of Goods Sold/Avg. Inventory.

2006-07(Rs 2007-08(Rs 2008-09(Rs

PARTICULARS in lakhs) in lakhs) in lakhs)

SALES 2146123 3318902 4065554

Av. 226842 363536 350792

INVENTORY

9.46 9.12 11.58

INVENTORY
TURNOVER
RATIO

Analysis

As inventory turnover ratio indicates how fats inventory is sold. A high ratio is good from
the view point of the liquidity and vice versa. A low inventory turnover ratio signifies that
inventory does not sell fast and stays on the shelf or warehouse for a long time.
As the refinery having a high turnover ratio which signifies that inventory is not staying
in a shelf or warehouse for a long time they can be easily sold after manufacturing so it
means company have a good sales in comparison to the average inventory of the refinery.

  
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ABC ANALYSIS

2007- 2008-
08 09

PAR MATE VA MATE V INVE

TIC RIAL LU RIAL A NTOR
U S ES S L Y
LAR U VALU
S E E

A 2077 4.4 949 1. 70%

SEG 2% 88
ME %
NT

B 6147 13. 5300 10 20%

SEG 07 .5
ME % %
NT

C 38792 82. 44216 87 10%

SEG 51 .6
ME % 2
NT %

  
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Analysis

A B C system is an inventory management technique that divides inventory into three

categories of descending importance based on the rupee investment in each. The
items included in group A involve the largest investment. The group C consists of items
of inventory which involve relatively small investment although the number of items is
high. The B group stands in midway.
Same process is followed in the refinery, as they have nearly 51000 items in their inventory list
so out of all the items they categories the items on the basis of their number and investment in
the A B C category because while using they required very quickly without any delay in time so
by dividing such category it helps in easy finding and accounting of these materials.

  
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FINDINGS:-

1. Inventory management is mainly based on ABC analysis in IOCL( Barauni

Refinery).

2. Inventory turnover ratio for the year 2008-09 is 10 times in IOCL (Barauni
Refinery).

3. Inventory turnover ratio for the year 2007-08 is 9.8 times in IOCL (Barauni
Refinery).

4. These ratios shows that the year 2008-09 is better because the year 2008-09
shows rapid turnover of stock and consequently shorter holding period as
compared to its previous year.

5. The company also maintains an adequate level of inventories for work-in-process

as per the requirement. Till the completion of the production cycle, the work-in-
process inventories are maintained and some part of it is also used as fuel in the
unit.

6. Stock of finished goods also has to be maintained by the Barauni Refinery unit.
This unit does not have authority to sell the finished product in the market
directly. It has to be sent to the Marketing division for further sale.

7. There are mainly three types of inventories maintained by Barauni Refinery Unit
(IOCL) such as:
ÿ Crude Oil Inventories
ÿ Inventories for chemicals
ÿ Inventories for stores and spares

8. Issue system of inventory for Barauni Refinery Unit:-

ÿ FIFO
ÿ LIFO
ÿ HIFO

  
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9. Barauni refinery is a big processing plant which requires the materials, tools and other
required items on time because delay in availability of these materials may cause a big
loss to the company so by the year their manufacturing capacity is increasing their
demand is also increasing so they increase their capacity of materials in stores and also
give orders to their vendors so they also available the goods on time.

10. As while refining and manufacturing of petroleum from crude oil there is need of
some chemicals which are highly acidic handle with great care and caution so this
type of chemicals refinery manufacture themselves so have their storage at
refinery itself, there is no amount in transit. They have sufficient capacity to
produce and store at their place itself.

  
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Suggestions
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1. Continuous supply of materials and finished goods should be maintained so that

production process does not suffer and customers demands are met.

2. EOQ and ROP should be maintained and monitored continuously.

3. Both overstocking and understocking of inventory are disadvantageous. Both should be

avoided.

4. Material costs should be under control so as to reduce overall costs of production.

5. Centralizing purchases eliminate duplication in ordering or replenishing stocks.

6. Losses should be minimized through deterioration, pilferage, wastes and damages.

7. Suitable organization should be designed for inventory management. Transparent

accountability should be present at various levels of organization.

8. Materials shown in the stock ledgers should be actually lying in the stores.

9. Proper quality standards ensure proper quality of stocks. The price analysis will lead to
payment of proper prices.

10. Appropriate planning and control of inventory is required for fulfilling short and long
term objectives.

  
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Conclusion
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1. IOCL, Barauni is a major contributor in oil production in India. At present its production
capacity is 6 MMTPA, producing a wide range of petroleum products.

2. Repairs and Maintenance cost of the Refinery is decreasing per MT. It has decreased from
Rs. 130 in 2000-01 to Rs. 85 in 2004-05 but from 2005-06 there is an increment in repairs
and maintenance cost. It has increased since 2005-06 from Rs. 85 to Rs. 177 in 2007-08.

3. Inventory management is mainly based on ABC analysis. It is better compared to other oil
producing companies.

4. As the company may increase its production the imported items would be costly with the
depreciation of INR.

5. The company should maintain its standards of inventory and production because it has a
cut throat competition from its competitors like BPCL, HPCL and Reliance Petroleum.

6. It should reduce its lead time to have an effective inventory maintenance. Supply chain
management has to be given its due importance.

7. As it is a joint venture, it can explore new areas and suppliers to increase its profitability.
Mergers and acquisitions are expected.

 
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BIBLIOGRAPHY:-

' Bhargava, Aseem ; Goel, Pankaj, ³ Valuation of Oil Sector- Significance and
Review´ CA journal, Volume 54, No 07, January 2006

' Manuals Provided By IOCL

ÿ Cost Control Manual
ÿ IOC Accounting Manual
ÿ Material Management Manual
ÿ Annual Operation Report
ÿ Financial Appraisal Report

' WEB:-
ÿ www.iocl.com
ÿ www.google.com
ÿ www. iocltenderexpress.com

 
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