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(JIT, Kanban, EOQ, ROP, Safety stock etc.) 52-63




Inventory management is vital in an oil plant. This project “ INVENTORY
LIMITED, 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.
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 .

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. To study the purchase procedures of materials.
2. To study and classify various spares and materials in the
store department (ABC analysis).
3. To analyse and understand the methods involved in the
inventory of materials.
4. Also to study related concepts in inventory management.
5. To study and explain EOQ, ROP, WIP, JIT etc.
6. To go through procurement and accounting procedures of
crude oil.
7. To study several oil products in the refinery.
8. Proper inventory management leads to cost reduction


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 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).
5. 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.


Intensive research has been done 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. The
methodology applied to gather the necessary information is discussed as

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.

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.



Indian Oil Corporation Limited (Indian Oil) is the country's largest
commercial enterprise, with a sales turnover of Rs.1, 50,677 crores
and profits of Rs.4,891crores for fiscal 2004.

Indian Oil is India’s No.1 Company in Fortune's prestigious listing of

the world's 500 largest corporations, ranked 189 for the year 2004
based on fiscal 2003 performance. It is also the 19th largest
petroleum company in the world. The company has also been
adjudged No.1 in petroleum trading among the national oil companies
in the Asia-Pacific region.

Indian Refineries Ltd. was formed in 1958 with Mr Feroze Gandhi as


Indian Oil Company Ltd. was established on 30th June 1959 with Mr
S. Nijalingappa as the first Chairman.
Beginning in 1959 as Indian Oil Company Ltd., Indian Oil Corporation Ltd.
was formed in 1964 with the merger of Indian Refineries Ltd. (Estd. 1958).

Indian refinery ltd.

Refining company Indian Oil Company
Incorporated Merger
Marketing company
1958 Incorporated

Indian Oil

As India's flagship national oil company, Indian Oil accounts for 56%
petroleum products market share among PSU companies, 42%
national refining capacity and 69% downstream pipeline throughput

Indian Oil controls 10 of India's 18

refineries - at Digboi, Guwahati,
Barauni, Koyali, Haldia, Mathura,
Panipat, Chennai, Narimanam and
Bongaigaon - with a current combined
rated capacity of 54.20 million metric
tonnes per annum (MMTPA) or one
million barrels per day (bpd).

< IndianOil accounts for 42% of

India's total refining capacity .

Subsidiary companies of IOCL

 Indian Oil Blending Ltd.

 Indian Oil Mauritius Ltd.
 Lanka IOC (P.) Ltd.
 Chennai Petroleum Corporation Ltd.
 Bongaigaon Refinery and Petrochemicals Ltd.
 IBP Co. Limited

Vision of the Corporation

A major diversified, transnational, integrated
energy Company, with national leadership and a
strong environment conscience, playing a national
role in oil security& public distribution.

Mission of the Corporation

 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

 To maximise creation of wealth, value and satisfaction for the


 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 identity and brand equity.

 To help enrich the quality of life of the community and preserve

ecological balance and heritage through a strong environment.


 To serve the national interests in the oil and related sectors in
accordance and consistent with Government policies.

 To ensure and maintain continuous and smooth supplies of

petroleum products by way of crude refining, transportation and
marketing activities and to provide appropriate assistance to the
consumer to conserve and use petroleum products efficiently.

 To earn a reasonable rate of interest on investment.

 To work towards the achievement of self-sufficiency in the field of

oil refining by setting up adequate capacity and to build up
expertise in laying of crude and petroleum product pipelines.

 To create a strong research and development base in the field of oil

refining and stimulate the development of new product
formulations with a view to minimise/eliminate their imports and
to have next generation products.

 To maximise utilisation of the existing facilities in order to

improve efficiency and increase productivity.

 To optimise utilisation of its refining capacity and maximise

distillate yield from refining of crude to minimise foreign
exchange outgo.

 To minimise fuel consumption in refineries and stock losses in

marketing operations to effect energy conservation.

 To further enhance distribution network for providing assured
service to customers throughout the country through expansion of
reseller network as per Marketing Plan/Government approval.

 To avail of all viable opportunities, both national and global,

arising out of the liberalisation policies being pursued by the
Government of India.

 To achieve higher growth through integration, mergers,

acquisitions and diversification by harnessing new business
opportunities like petrochemicals, power, lube business,
consultancy abroad and exploration & production.


 Towards customers and dealers

To provide prompt, courteous and efficient service and quality
products at fair and reasonable prices.
 Towards suppliers

To ensure prompt dealings with integrity, impartiality and
courtesy and promote ancillary industries.

 Towards employees

• Develop their capability and advancement through appropriate

training and career planning.
• Expeditious redressal of grievances.
• Fair dealings with recognised representatives of employees in
pursuance of healthy trade union practice and sound personnel

 Towards community

• To develop techno-economically viable and environment-

friendly products for the benefit of the people.
• To encourage progressive indigenous manufacture of products
and materials so as to substitute imports.
• To ensure safety in operations and highest standards of
environment protection in its manufacturing plants and
townships by taking suitable and effective measures.

 Towards Defence Services

To maintain adequate supplies to Defence Services during normal

and emergency situations as per their requirement at different

Five Divisions of Indian Oil corporation


Refineries division
 Pipelines division
 Marketing division
 Assam oil division
 Research and development centre

Units under refineries division


Guwahati 1962

Barauni 1964

Gujarat 1965

Haldia 1975

Mathura 1982

Panipat 1998

Besides the above 6 refineries, Digboi refinery in Assam oil division, a

private sector oil company which was nationalised and merged with Indian
oil corporation limited in the year 1981.

Organogram of divisions of IOCL


Organogram of Finance Department


IOCL has managed to significantly cut its borrowing cost due to high share
of foreign exchange debt. Its share of foreign exchange borrowings is
increasing with foreign exchange loans crossing 50% of its total debt
compared to 42% at the end of the last financial year.


As India's flagship national oil company, Indian Oil accounts for 56%
petroleum products market share, 42% national refining capacity and 67%
downstream pipeline throughput capacity


Indian Oil is one of the leaders in providing engineering, construction and

consultancy services to the pipeline industry. Highly qualified professionals
with vast experience execute pipeline projects from concept to
commissioning and provide services for construction supervision and project


Indian Oil is strengthening its existing overseas marketing ventures and

simultaneously scouting new opportunities for marketing and export of
petroleum products in foreign markets. Two wholly owned subsidiaries are
already operational in Sri Lanka and Mauritius, and regional offices at Dubai
and Kuala Lumpur are coordinating expansion of business activities in
Middle East and South East Asia regions. The Corporation has launched
eleven joint ventures (listed separately) in partnership with some of the most
respected corporate from India and abroad.



The decisions relating to administration are taken at the corporate level. Even
minor proposals are to be referred to the top management. This leads to a
delay in decision-making.


Among the public sector oil companies, Indian Oil Corporation is the only
one to follow a weak marketing strategy. It in only in the recent years that
the company has started to market its products. However, still the efforts
seem to be weak when compared with the competitors like BPCL and HPCL


Most of the public sector companies seem to suffer from these lacunae. The
employees are promoted mainly on the basis of experience and not on the
efforts and initiatives displayed by the employee in his work. This results in
de motivation and lack of interest for their work on the part of the
hardworking employees, who then tend to shift jobs to satisfy their need for


The policy of selection of the lowest bidder tends to affect the quality of the
products/services on some occasions. A more simplistic procedure is also
likely to generate some savings for the company, since tendering process
leads to expenses on account of advertisement.


Exploration and Production

Indian Oil is metamorphosing from a pure sectoral company with dominance

in downstream in India to a vertically integrated, transnational energy
behemoth. The Corporation is making investments in E&P and
import/marketing ventures for oil and gas in India and abroad, and is
implementing a master plan to emerge as a major player in petrochemicals
by integrating its core refining business with petrochemical activities.


Entry of Big Private players

The opening up of the oil sector for private players poses a threat even for
this well established company. With Indian players like Reliance and Essar
and foreign player like Shell planning their entry into the Indian scenario, the
road seems to be tough for Indian Oil.

Barauni Refinery was built in collaboration with Russia and Romania.
Situated 125 kilometres from Patna, it was built with an initial cost of Rs
49.40 crore. Barauni Refinery was commissioned in 1964 with a refining
capacity of 1 Million Metric Tonnes per Annum (MMTPA) and it was
dedicated to the Nation by the then Union Minister for Petroleum, Prof.
Humayun Kabir in January 1965. After de-bottlenecking, revamping and
expansion project, its capacity today is 6 MMTPA. Matching secondary
processing facilities such Resid Fluidised Catalytic Cracker (RFCC), Diesel
Hydrotreating (DHDT), Sulphur Recovery Unit (SRU) have been added.
Theses state of the art eco-friendly technologies have enabled the refinery to
produce environment- friendly green fuels complying with international
Barauni Refinery was initially designed to process low sulphur crude oil
(sweet crude) of Assam. 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 high-sulphur
crude oil (sour crude) is cheaper than low sulphur crudes thereby increasing
not only the capacity but also the profitability of the refinery.
Barauni Refinery has an elaborate Safety Management System. Refinery is
following stringent Oil Industry Safety Directorate (OISD) standards and
other Rules/ Acts as applicable. Periodic Safety Audit of the facilities and
system is carried out. Each recommendation’s status is thoroughly discussed
in the monthly Health & Safety Committee Meeting chaired by the top most
official of the company. No efforts are spared to fulfill recommendations
arising during Safety Audit, in shortest possible time.

The crude oil for Barauni refinery was initially sourced exclusively from oil
fields of Assam through Oil India Pipeline. But due to utilization of available
crude in North-East itself after commissioning of Numaligarh Refineries,
Barauni Refinery has been fully sourced by imported crude from 2001-2002.
To make this feasible, a new Pipeline namely Haldia Barauni Crude Pipeline
(HBCPL) was constructed and for economic viability of fresh investment the

old refinery management has roughly invested Rs. 2000 cr. in expanding the
refinery to 6 MMTPA in
The crude movement take place in very large crude carriers (VLCC)
up to the Bay of Bengal but due to the poor sea condition can’t reach Haldia
port directly. This necessitates transhipment of crude in high sea to smaller
vessels which in turn bring the crude up to the port where it is unloaded in
custom bonded tanks before being pumped through HBCPL. This particular
movement of transhipment involves additional costs in the nature of

1. Freight of daughter vessels

2. Demurrage of VLCC

3. Additional wharfage

To this additional cost is putting Barauni Refinery into a sort of

disadvantage in comparison to other west coast Refineries. Considering the
scene management is implementing a new pipeline project to connect
HBCPL with Paradip port to which place VLCC’s will be directly wharfed
and above additional expenditures can be avoided. There is another
additional expenditure which is specific to Barauni Refinery and doesn’t
apply to many Refineries of India is “Entry Tax”. This has been contested
by the management in the Court of Law on Constitutional grounds and stay
off 50% has been obtained from High Court, decision of which is pending in
Supreme Court.


D y.Ge neral M an ger(F )

S .C . B H A N S A LI S .B A N IK A .B A S U
S r.Fin ance M an ager S r.F inance M anager S r.F inance M anager


F inance M an ag er F inance M an ager F inan ce M anager

Go pa l S h arm a, S A C O U .A .P at el,S A C O S .K u ma r,D FM

P ur ch ase/V at P ay & PF ,C-ordin
o atio n
C on cu rren ce(P ur)
A .K .S in ha ,S A C O M .K u ma r,SA C O
R .Ag arw al,S A C O M is cellaneo us P rod uction
P roject/C oncu rren ce (W ork s,A F )
R .N .Pars ad ,AC O
L.P.S h arm a,A C O Cas h V.K .Ja isw al,A C O
Ex cis e /C en vat/ O il
P roject A .K .K alita,A C O , A ccoun ts
Sh a lin d ar,A C O TA /LTC

W o rks A .K u m ar,A C O U .S.S aras w at ,A C O

M ain A cco unts /S tores , Oil A ccou nts /Cen vat
S .S an tra,A C O
A ll A ud it r eply/A F /
M ed ical/P R M S B ud get& I ns uran ce

Functions of the Finance Department

 Management of financial resources for meeting the
corporation’s programmes of operations and capital expenditure
including investment of surplus fund, if any.

 Ensuring uniform financial and accounting policies and

procedures, to the extent possible, in the division.

 Establish and maintain a system of financial scrutiny and

internal checks and render advice on financial matter including
examination of feasibility studies and detailed projects reports.

 Establishment and maintain an appropriate system of budgetary

control and management information system for different levels of
the management.

 Carry out periodical/special studies with a view to control costs,

reduce expenditure, economy in administrative expenditure,
improve efficiency to maximise profitability of the corporation.

 Maintain the financial accounts, cost accounts and other

relevant books and records in accordance with the various
statutory and other requirements.

 Advise on corporate cash planning, credit policy and pricing

policies of the corporation.
 Ensuring that the corporation acts in all financial and
accounting matters as per approved policies of the corporation
within the framework of government policy for public enterprises.

 To provide high quality financial staff support for decision-
making and control to all levels of management – corporate,
divisional, unit and location to enable the achievement of overall
corporate objectives and goals.

 To play a lead role in scanning the domestic and international

financial environment, the formulation and implementation of all
financial policies and plans for different time spans consistent with
and conducive to the business plans for expansion, diversification,
productivity etc.

 To interact pro-actively with the relevant Government agencies

on pricing and investment and with financial institutions,
depositors and creditors, with sensitivity and promptness, for
mobilization and provision of funds for uninterrupted operations
and project execution at optimal costs.

 To maintain, review and update all relevant accounting records,

systems and procedures for discharging the fiduciary
responsibilities and enabling compliance with statutory

 To inculcate financial awareness, cost benefit attitudes and

system orientation in the entire organization.

 To develop the human resources, systems and techniques of finance

for continuing innovation and contribution towards IOC corporate


 To ensure adequate return on capital employed and maintain a
reasonable annual dividend on its equity capital.

 To ensure maximum economy in expenditure.

 To generate sufficient internal resources for financing partly /

wholly expenditure on new capital projects.

 To develop long term corporate plans to provide adequate growth

of the activities of the Corporation.

 To continue to make an effort in bringing reduction in the cost of

production of petroleum products by means of systematic cost
control measures.

 The endeavor to complete all plans projects within stipulated time

and within stipulated cost estimates.

Financial Goals
 To inculcate cost consciousness in user departments.

 Development of standard refinery costs at each unit level.

 Proper implementation of budgetary control and submission of

MIS in time.

 To keep the level of inventories below the level fixed by the

board and outstanding debts, loans & advances and claims at bare

 Ensure payment on due date to various agencies.

 Monitor capital expenditure to ensure completion within

stipulated time and cost.

 Optimise utilisation of working capital.

 Efficient management of funds.


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 planning of the purchasing of the materials, an annual

purchase budget plays an important role.

2). Budget estimate for next year and revised budget for current
financial year is required to be made by each unit and have to be
submitted to the head quarter by September in prescribed
Performa. Quarterly monitoring of the purchase budget to be done
at the unit level and the performance report has to be sent to the
head office. In respect of the inventory control items there should
be strictly controlled with reference to amount provided in the
budgets. As the items under inventory control are voluminous,
initial control may be in respect of A and B class items.


 Inventory control items: -

• For all repetitive items of stores the responsibility of
raising purchase indents, procurement, stocking and
supply to the consuming departments is entirely with the
material department.
• Re – order (ROL) to be constantly reviewed considering the
procurement lead time while raising purchase indents in order
to minimize the inventory levels.
• Indents to be approved by the competent authority as per
delegation of powers.
• To determine ROL for repetitive nature of items, the
following formula may be adopted, wherever applicable:-

R = CA (L-3) + Cmax

Where R = ROL
CA = average monthly consumption in last three years
Cmax = Maximum consumption in any quarter.
L = Lead time in months.
For each category of items, indent shall be prepared in SAP after
due approval of the competent authority, may be sent to the
purchase section. The third copy will be retained by inventory
control section for record.

 Non-inventory control items:-

• Purchase indent shall be raised by user department in SAP.

• Indents for hospital requirement including medicines shall
be raised by the medical department.
• Indents for vehicles, office equipment, stationery and
printing, furniture, uniforms, canteen/welfare requirements
shall be raised by the administration departments.
• Spare parts, piping material and consumable items etc. are
required for one time consumption and which are not
covered by the inventory control section shall be indented
by technical service department. After conducting necessary
probabilistic survey relating to replacement need of
individual plant.

4). Preparation of indents

Indents shall be prepared separately for each category of stores in

Indents pertaining to additional facilities and project materials
against approved capital budget and spare parts, piping material,
consumables store etc. sought to be procured under revenue
budget, and shall be routed through inventory control section who
shall indicate present stock, pending orders, if any, as well as
availability of surplus materials at our various units either of the
same specification or alternate material of higher grade against
each of the items intended.
Wherever the material is not available from the surplus stock or
alternative specification from the existing stock, a certificate
from the material manager is to be obtained as under:-
“The items intended are not available either from the regular
stock or surplus list of all our units.”

Indents should be completed in all respects and shall necessarily
include the information of previous source of supply (if known)
and the rate and purchase order reference against which the
supply was received earlier.

5). Approving of indents

The indent can be approved by the following authority according

to the financial limits prescribed as per delegation of powers.
• If indent of Rs. 50000, head of department will approve the
• If the indent is up to Rs. 500000, DGM (Deputy General
Manager) will approve the indent.
• If indent is above Rs.500000, unit head is responsible to
approve it.
In case of emergency requirements the indents will be approved
by GM/ED.

6). Registration of indents

Indents are registered in SAP and indent is created.

7). Finance concurrence

No financial concurrence shall be required for indents against

approved budget for A.F. (additional facilities).
No finance concurrence is necessary in respect of purchase
proposals for the following:
a) Purchase up to Rs. 25000/- from the lowest tenderer and up to
Rs. 2000/- from other than the lowest.

b) One repeat order within the prescribed limits at one time
and value up to Rs. 25000/-.
c) Purchase for proprietary items or DGS&D rate contract price
unless the value of the proposed individual order exceeds
Rs. 25000/-.
All other purchase proposals up to Rs. 50000/- shall be
scrutinized and concurred by the finance department. Proposal
above Rs. 50000/- shall be reserved for consideration of the
tender committee.

8). Tendering and acceptance of bid

After checking of approved indents by the concerned functional

head of purchase department, tenders are called except for
canalized or control commodities like cement, sulphur, steel etc.
Generally the procurement of material shall be made by any of
the following modes of tendering:

 Open tenders
• Global open tenders
• Press tenders
 Limited tenders
 Single tenders

Open tenders

These shall be invited through the press advertisement by short

tender notification in English and local newspaper approved by
the personnel relation department for high value items of
equipment and materials valuing more than Rs. 1000000.

However, approval of head of material department is to be
obtained before issuing press notification.
For items of regular consumption nature where source of supply
have already been established and where list of approved vendors
is maintained and duly updated from time to time, press tenders
need not be invited for such items valuing more than Rs.
1000000. However, approval of GM/ED shall be taken for wavier
of issuing press tenders in such cases.

Limited tenders

To ensure that the procurement of material of proper quality from

reliable and competent manufacturer is done, a list of selected
vendors shall be maintained for each category of equipment and
material by each unit. Limited tenders enquiries up to the value
of Rs. 100000 should be sent by under certificate of posting and
above Rs. 100000 by registered post only. This was the earlier
used method. Now however, all the enquiries should be sent by
courier only. Issue of enquiries by hand is avoided unless the
procurement is critical. Such enquiries issued by hand should
have prior approval of CMTM.

Single tenders

 Normally no procurement is done on single tender basis

except in the following circumstances:
 Where the item has been identified and approved by the GM
that the nature of the item is proprietary of single
manufacturer and no other substitute material is acceptable

for technical reasons such as spare parts, chemicals, special
tools etc.
 In very exceptional cases, although there may be alternate
source of supply but they are not acceptable due to certain
specific reasons to be recorded with full justification and
approval of GM obtained for the same, it will be permissible to
float single tender enquiry.
 Cash purchases within the limit as prescribed from time to
time is permissible on single tender basis subject to
ascertaining reasonability of price at a level of deputy manager
and above.

9). Methods of procurement of materials

Besides the above modes of tendering, the following methods of

procurement of materials for expeditious supply and to reduce
procurement lead time are followed:-
Repeat orders
• Cash purchases
• Emergency purchases
• DGS&D rate/running contract

Repeat Orders
Where the same item has to be purchased identical in all respects,
a repeat order may be placed with the approval of the competent
authority provided the following conditions are satisfied:
 That the original order against which repeat order is being
considered was not placed earlier than six months.
 That the quantity proposed to be purchased is less than or
equal to the quantity originally ordered.

 That there has been no reduction in the market rates of
similar market ever since the original ordered was placed.
 That the order was placed as a result of regular tender
enquiry and the order was placed on technically lowest basis.
 One repeat order up to the value of Rs. 25000/- against
order would not require any financial concurrence. However
any subsequent repeat orders within the above conditions shall
be placed with financial concurrence only.

Cash purchase
For item of value below Rs.1000 in each case, a regular enquiry
is not necessary and such item can be procured on cash basis from
the open market. However the purchase officer shall ensure that
the items are being purchased at competitive prices prevailing in
the market.
The cash purchase should be authorized by CMTM/SMTM.
The items should be purchased preferably from government
owned stores.

Emergency purchase
Emergency purchases are permissible only in unforeseen
circumstances. In all cases of emergency purchases, the reason
for such emergency shall be recorded in writing and the
procedure to be followed as under:-
The indents should be prepared by the HOD and forwarded to
CMTM/SMTM after being approved by GM/ED.
In case of items costing Rs. 10000or less, an officer from
material department along with the representative of user
department shall be deputed to collect quotation by hand from

minimum of three firms. A decision on the offers so collected
may be taken on the spot and delivery obtained immediately.
In case of items costing between 10000 to 50000 the head of the
material department would constitute a committee of
DMTM/MTM and an officer each from accounts department and
the user department at appropriate level, with authority to visit
the nearest market and to collect minimum of three quotations.
The committee so constituted is empowered to take decision on
the spot.
In case of items costing more than 50000, a committee consisting
of representative from accounts, material and user department
would be constituted by GM/ED and the committee would follow
the same procedure.

Purchase against DGS&D rate/running contract

Where the item is to be purchased under running contract
concluded by Directorate General of Supply and Disposal,
purchase of such item should be based on DGS & DRS prices
only directly from vendors. This mode of purchasing eliminates
calling of tenders, saving of time and give advantage of most
competitive price resulting in saving of avoidable extra payments.
For obtaining the copies of the rate contract, regional officers in
Mumbai/Chennai/Calcutta or directorate of DGS & D at New
Delhi may be contracted by the various units of R&P divisions.

10). Preparation of Tender Documents

In order to facilitate all divisions to follow uniform mode of
tendering, the following system may be followed on the basis-
A) Single bid system procedure:-

 Notice inviting tenders

Format of notice inviting opened tenders is attached at annexure-

 Tender documents

1) Table of contents (total no. of pages in each section shall

be indicated).

2) Issue of letter of tender documents (name of party to whom

it is issued, price of documents etc. shall be indicated).

3) Notice inviting tenders (copy of NIT as issued to press or on

the website).

4) General instructions to the tenderer.

5) General condition of the contract.

6) Special condition of the contract.

7) Technical specification and price part.

8) Time schedule for execution

B) Two bid system:-

In case of all other purchases where foreign exchange is involved
and/or where value of purchase is estimated to Rs. 50 lakhs or
more, two-bid system of tendering shall be followed.

Two bid system procedure:-

 Notice inviting tenders

In two-bid system, there is no other format for inviting tenders

only ANNEXURE-A is attached along with the single-bid format
which includes number of enquiry documents.

 Tender document

A set of documents for two bid system should consist of all

papers as attached to single bid system. However complete
instruction shall be given under special condition of tender about
the manner of submission of tender of two bid system which
should be as follows:-
Part 1-technical and commercial part
Part 2-price part
Tender document part 2 containing the prices should not be
opened until evaluation of technical and commercial part is


(Ref. Material Management Manual, IOCL)

1. 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
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. Reasons for holding Inventory

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

3. Selective Inventory Control Techniques

3.1 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 30,000 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 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

3.2 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.
(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.

4. Objective of ABC Analysis

The Purpose of carrying out ABC analysis is to develop policy guidelines for
selective control.

4.1 ‘A’ Items

Tighter and accurate procedures are essential for "A" category items relating
to (i) forecasting, (ii) material planning, (iii) value analysis, (iv) lead time
analysis, (v) market research, source selection, source development and
follow-up (vi) safety stock determination, (vii) materials consumption
control,(viii) physical stock verification, (x) stores, and (xi) accounting and

4.2 ‘B' Items

The stocking policy for 'B' items need not be highly sophisticated. For the

Items which are available ex-stock or of the shelf or in the near proximity,
the Re-order level shall be fixed at 3 1/2 - 4 months stock.
Periodic review system & re-order point system to be followed for these

4.3 'C' or low value items

Procurement for these items shall be made in one or two lots per annum i.e.
Procurement for 6 months or 12 months at a time as far as practicable. Items
which are perishable or bulky shall be omitted from this arrangement.'C'
items shall be reviewed once a year according to a phased time table or when
reorder level is reached if that is earlier.

5. 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 instalments, after every 3 months. Review to be done at the end
of the quarter & supply for the next quarter regulated as per requirement

6. 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.

7. Spares

7.1 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 ‘C’ or ‘B’ or ‘A’.
d) Slow moving spare parts and spare parts with erratic consumption, for
7.2 The stocking policy shall be as follows

i) Spare purchase with capital goods imported from abroad should as far as
possible be initially fast moving spares and medium moving spares. The
slow moving spares and the insurance spares shall normally be obtained after
gaining actual experience in the working of the machines for a few months to
avoid danger of importing items in excess which may not be required.
Similar arrangements may be followed for indigenous machinery spares.
ii) Imported spare parts
For these the stocking policy shall be in line with the import policy and ad-
hoc imports shall be made in consultation with the using departments
according to the availability of import licence and the general policy stated
iii) Fast moving and medium spare parts of regular consumption and of
category 'C' and 'B' or 'A'. The stocking policy shall be the same as for any
other 'C' items, and repetitive regular 'B' and 'A' items
iv) Slow moving spares parts and spare parts with erratic consumption.
Probabilistic studies shall be made for such items to determine probability or
usage and dangers of stock-out over a period of years together with cost of
carrying inventory versus loss due to stock-out.

8. 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 - Items against which there is no issue for last three years
or above would be treated as non-moving.
XYZ - Based on inventory values of items. A `X’ category items has very
high inventory value whereas a `Z’ category item has very slow inventory
XYZ would be categorised as under:-
X - Items having stock value > Rs.5,00,000.00
Y - Items having stock value > Rs.1,00,000/- to Rs 5,00,000.00
Z - Items having stock value < Rs.1,00,000.00
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.

List of selected Class A items

Material Amount(Value) Quantity
2-ETHYL-HEXYL-NITRATE 158,668,140.00 INR 1,614.37 TO
FRESH FCC CATALYST 29,572,183.13 INR 192.871 TO
PLATINUM IN SPENT CATALYST 16,105,348.00 INR 14,607.00 KG
ROTOR ASSY 14,756,045.00 INR 1 EA
BUCKET,TURBINE STAGE 1 KIT,P/N:35306090 8,887,997.00 INR 1 EA
DHDT CATALYST ACT 961 7,796,626.00 INR 9,000.00 KG
PIPE,SS,EFW,A358TP321,CL1,BE,10IN,160,H2 7,663,400.91 INR 114 M
PLATE,CS,IS 2062,A,6300x1500x8mm 4,519,704.05 INR 96.749 TO
PIPE,AS,EFW,A691,GR9CR,CL42,BE,26IN,9.53 4,335,897.89 INR 45 EA
DHDT CATALYST ACT 645 4,250,873.00 INR 4,000.00 KG
PLATE,CS,IS 2062,A,6300x1500x6mm 4,178,605.45 INR 113.237 TO
BEND,90,XLR,BW,AS,A387,P12,20IN,30 3,913,414.89 INR 15 EA
FUEL NOZZLE F/GAS TURBINE,MS 5001 3,641,467.00 INR 10 EA
TEE,EQ,BW,AS,A387,P12,10IN,40 3,630,011.50 INR 52 EA

List of selected Class B items

Material Amount Quantity
T/M,D/P,ELECY,0-2500 MM WC 498,761.44 INR 23 EA
ROTATING ASSY ( P200 ),P/N10 498,000.00 INR 1 EA
TR,DP,SMART,0-5000MMWC 496,705.00 INR 23 EA
SEPARATOR FILT ELMNT,WD-873,EST-423-02 494,879.00 INR 52 EA
CRAN 493,262.00 INR 2 EA
DETECTOR,FLAME(28FD) 492,668.00 INR 2 EA
VLV,CHK,LIFT,A217 C5,A217 C5,FLG,300,8IN 492,649.18 INR 10 EA
PIPE,AS,SMLS,A335,GRP5,BE,3IN,40 491,768.51 INR 716.89 M

List of selected Class C items

Material Amount Quantity
CT,200/1-1A,1.5VA 52,563.79 INR 3 EA
ELBOW,90DEG,LR,ASTM A 815,8IN,S20 52,526.00 INR 1 EA
GASKET,GRAFOIL,P/NO 152.1 52,508.00 INR 5 EA
RTV SEALANT (0000B ),P/N 110 52,500.00 INR 2 EA
PIPE,MS,EFW,IS3589,410,BE,28IN,10MM THK 52,437.00 INR 10 M
100M 52,428.00 INR 2 EA
LAMP,LED IND,10W,22.5MM,24VDC,LVGP 52,401.51 INR 328 EA
FL,SP.BL,FF,CS,A105,300,4IN 52,387.17 INR 36 EA



Just-in-time (JIT):- is defined in the APICS dictionary as “a philosophy of

manufacturing based on planned elimination of all waste and on continuous
improvement of productivity”. 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 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 repetitive manufacturing processes in which the

same products and components are produced over and over again. 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

Some Key Elements of JIT

1. Stabilize and level the MPS with uniform plant loading (heijunka in
Japanese):- create a uniform load on all work centers through constant daily
production (establish freeze windows to prevent changes in the production
plan for some period of time) and mixed model assembly Meet demand
fluctuations through end-item inventory rather than through fluctuations in
production level. Use of a stable production schedule also permits the use of
back flushing to manage inventory: an end item’s bill of materials is
periodically exploded to calculate the usage quantities of the various

components that were used to make the item, eliminating the need to collect
detailed usage information on the shop floor.

2. Reduce or eliminate setup times:- aim for single digit setup times (less
than 10 minutes) or "one-touch" setup -- this can be done through better
planning, process redesign, and product redesign. A good example of the
potential for improved setup times can be found in auto racing, where a
NASCAR pit crew can change all four tires and put gas in the tank in under
20 seconds. (How long would it take you to change just one tire on your
car?) The pit crew’s efficiency is the result of a team effort using specialized
equipment and a coordinated, well-rehearsed process.

3. Reduce lot sizes (manufacturing and purchase):- reducing setup times

allows economical production of smaller lots; close cooperation with
suppliers is necessary to achieve reductions in order lot sizes for purchased
items, since this will require more frequent deliveries.

4. Reduce lead times (production and delivery):- production lead times

can be reduced by moving work stations closer together, applying group
technology and cellular manufacturing concepts, reducing queue length
(reducing the number of jobs waiting to be processed at a given machine),
and improving the coordination and cooperation between successive
processes; delivery lead times can be reduced through close cooperation with
suppliers, possibly by inducing suppliers to locate closer to the factory.

5. Preventive maintenance: use machine and worker idle time to maintain

equipment and prevent breakdowns.

6. Flexible work force:- workers should be trained to operate several

machines, to perform maintenance tasks, and to perform quality inspections.
In general, JIT requires teams of competent, empowered employees who
have more responsibility for their own work. The Toyota Production System
concept of “respect for people” contributes to a good relationship between
workers and management.

7. Require supplier quality assurance and implement a zero defects

quality program:- errors leading to defective items must be eliminated,
since there are no buffers of excess parts. A quality at the source (jidoka)
program must be implemented to give workers the personal responsibility for
the quality of the work they do, and the authority to stop production when
something goes wrong. Techniques such as "JIT lights" (to indicate line

slowdowns or stoppages) and "tally boards" (to record and analyze causes of
production stoppages and slowdowns to facilitate correcting them later) may
be used.

8. Small-lot (single unit) conveyance:- use a control system such as a

kanban (card) system (or other signaling system) to convey parts between
work stations in small quantities (ideally, one unit at a time). In its largest
sense, JIT is not the same thing as a kanban system, and a kanban system is
not required to implement JIT (some companies have instituted a JIT
program along with a MRP system), although JIT is required to implement a
kanban system and the two concepts are frequently equated with one another.


A kanban or “pull” 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 kanban (translated as “signboard” or
“visible record”) As implemented in the Toyota Production System, a
kanban 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. Production Kanban:- signals the need to produce more parts

2. Withdrawal Kanban:- (also called a "move" or a "conveyance” kanban):

signals the need to withdraw parts from one work center and deliver them to
the next work center.

In some pull systems, other signalling approaches are used in place of

kanban cards. For example, an empty container alone (with appropriate
identification on the container) could serve as a signal for replenishment.
Similarly, a labelled, pallet-sized square painted on the shop floor, if
uncovered and visible, could indicate the need to go get another pallet of
materials from its point of production and move it on top of the empty square
at its point of use.

A kanban system is referred to as a pull-system, because the kanban is used
to pull parts to the next production stage only when they are needed. In
contrast, an MRP system (or any schedule-based system) is a push system, in
which a detailed production schedule for each part is used to push parts to
the next production stage when scheduled.

Dual-card Kanban Rules:

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

production. The process remains idle, and workers perform other
assigned activities. This rule enforces the “pull” nature of the process
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.)

Decisions regarding the number of kanban (and containers) at each stage of

the process are carefully considered, work-in-process inventory at that stage.
For example, if 10 containers holding 12 units each are used to move
materials between two work centers, the maximum inventory possible is 120
units, occurring only when all 10 containers are full. At this point, all
kanban will be attached to full containers,

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.

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. 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

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.

Inventory Model Under

reorder Qm

safety stock



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

1. The supply of goods is satisfactory. Goods can be purchased whenever
2. Quantity to be purchased is known and certain.
3. Prices of the goods are stable resulting into stabilization of carrying

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

I = inventory carrying cost per unit

Marginal Analysis

Total costs




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

Calculation of safety stock:

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

in days)


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.


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)



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:

1. Product type:

Among the factors which influence inventory management and

control, the type of the product is the fundamental one. If the materials
used in the manufacture of the product have a high unit value when
purchased, a much closer control is in order. If the materials used in the
product is in short supply or is rationed by the government, this may
influence the purchase of these materials and their stock maintained. The
manufacture of the standard products, as compared to custom made items,
will influence the inventories.

2. Manufacture type:

Besides the type of product, the type of manufacture also influences

the inventory management and control. Where continuous manufacturing
is employed, the rate of production is a key factor. Here, inventory control

is of a major importance and in reality controls the production of the
product. The economic advantage of this type of manufacture is the
uninterrupted operations of the machines and assembly lines in the plant.
It is a major offence on the part of inventory personnel to have a plant
shut down for the lack of material; intermittent manufacture, on the other
hand, permits greater flexibility in the control of the material.

3. Volume:

The volume of product to be made as represented by the rate of

production may have a little effect on the complexity of the inventory
problem. Literally, millions of brass bases for light bulbs are
manufactured each month involving control of only two principal items of
raw material inventory. On the other hand, the manufacture of large
locomotives involves the planning and control of the thousands of items
of inventory. Both the inventory problem and difficulty of controlling
production increase in difficulty with number of component parts of the
product and not with the quality of the products to be made.

The other factors are:

• The objective of the company as it relates to the inventories and the

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




Crude oil is imported by IOC for requirement of IOC, CPCL & BRPL. The
crude oil is sourced mainly from Gulf countries, West African Countries,
Malaysia, Brunei etc. crude is transported through Tankers vessels and

discharged at Vadinar / Mandra for Western coast refineries and at
Kakinada / Vizag / Sandheads for Eastern coast refineries.

Following are the major elements of payments for crude oil imports:

- Freight
- Charter Hire
- Demurrage
- Insurance
- Survey Fees
- Port Charges
- NMA / OTD Charges
- Lighterage Charges & Port Dues
- Other Related Charges

Payments like FOB, Freight, Survey Fees, Demurrage etc. are made US
Dollar for beneficiaries. In case of Indian Vessel owner the payment for
Freight / Demurrage etc. are made in equivalent INR by suitable currency
exchange rates agreed in charter Party / COA. Insurance premium for each
cargo is paid in INR to the Indian Insurance Co. with whom Marine Transit
policy is taken.

Crude oil procurement and payment:

1. Tender for crude oil procurement is finalized by International Trade on the

following basis:

a. Term Contract (Mainly annual contract with fixed term)

b. Spot contract (Monthly / Quarterly Contract)

2. Shipping finalizes with the supplier and line up vessel for loading. A
Loadport Surveyor is appointed for executing loading function on behalf of
buyer at load port.

Letters of Credit for Crude Imports:

Letters of Credits are opened by Finance as per request of Shipping for the
proposed crude oil loadings from concerned Supplier. The LCs are opened
through empanelled Bankers in line with the guidelines issued from time to

time by Corporate Office. LCs are opened as per terms and conditions of the
import contracts entered into by IOCL with the supplier.

Shipping Department advises requisite details of the Loading and the LC

values to Finance. Finance after following the tendering process, opens the
LC as per the format prescribed in the Import Contract.

After establishment of the LC , a copy of the same is forwarded to

Shipping for loading operations.

Currently LCs are opened for imports from:

- Saudi Aramco : Irrevocable, Standby letter of Credit to be confirmed by

Saudi Banks (if LC opening banks are Indian Banks) / to be advised by JP
Morgan Chase, London if LC Banks are any International Banks approved
by S Aramco.

- SOMO: Irrevocable, regular Letter of Credit for each loading separately, to

be opened through approved banks and to be confirmed and advised to
SOMO by Central Bank of Iraq, Baghdad.

-NIOC, Iran: Irrevocable, regular Letter of Credit for each loading

separately, to be opened through approved Banks and to be confirmed and
advised to NIOC by Bank Markhazi Jhomhouri Islami (BMJI), Tehran.

Crude Oil FOB Payment Cycle:

1. Invoices from the supplier are received by Shipping department.

Shipping prepares US Dollar cash flow containing the daywise details
of FOB payments. Details include Supplier, Tanker name, Tanker flag,
quantity, unit price, FOB value, date of payment and disport location.
2. Based on the cash flow a daily fund requirement statement is advised
to CO (treasury) and receipt from OMC for their share of import is
3. Treasury based on the fund position decides on the mode of payment
i.e.; through currency purchase or through availment of loan and
advises the same to RD (Finance) for execution.
4. Based on the above advice from treasury, the remittance is executed
by Refinery Finance.

Flow of documents:

1. Shipping department receives the following documents:

a. Invoice
b. Bill of entry
c. Certificate of quality and quantity
d. Certificate of origin
e. Letter of indemnity, where b, c , d above are not available.

After calculating the FOB value based upon the pricing formula and
contract, shipping Finance certifies the payments and forwards the
same to finance for payment.

2. After receipt of complete set of documents from shipping, Finance

cross checks the complete particulars of payments including
calculations, based on contract terms, and advises corporate Office
(Treasury) final value for FOB payment. Necessary debit notes are
raised on CPCL / BRPL.

3. Based on the plan advised by CO (T), the FOB payments are effected
to the beneficiary either through Loan Availments or Currency

Demurrage payment Cycle:

1. Shipping department negotiates the demurrage claim with the

party and finalizes the demurrage claim payable to the
vessel owner.
2. The demurrage claim is examined, concurred and approved by
the competent authority in shipping department as per
delegation of authority.

3. After approval shipping forwards the payment papers to Finance
for remittance of the same.
4. Payment of demurrage less than USD 1 million is made through
SBI-CAG, Mumbai directly. Payments more than USD 1
million would be effected through currency purchases from CO
5. Finance executes necessary documentation to effect the

Flow of documents:

1. Shipping collects the following documents and forwards to Finance for


a. Invoice
b. Fixture note / charter party copy
c. Calculation of demurrage payable
d. Approval note

After receipt of complete set of documents from shipping, Finance

verifies same for amount validation. Approval for payments as per DOA
and payment instructions validation as per Charter party / Fixture note,
and arranges for remittance.

2. From gross demurrage deductions for Brokerage and Address

commission are effected and net amount is paid to the Vessel Owner /
Beneficiary. Address commission is an income to IOCL; hence
demurrage cost is accordingly reduced. Brokerage is separately paid to
the shipping agents on receipt of their brokerage. Invoice in INR at the
same exchange rate at which demurrage amount was paid to the vessel

Accounting entries:

Based upon the bank advice, demurrage value in INR is computed for
each cargo and accounting entry is passed based on B/L holder and
sharing for each OMC.

Difference in INR between the liability created and the actual payment to
the vendor is debited / credited to the Exchange Fluctuation a/c.


Freight is the charge payable to the Tanker vessel for the crude oil
transported from the various load ports to the disports of IOC at Vadinar /
Mundra (on the West Coast) and at Haldia / Sandheads / Kakinada (on the
East Coast). The charges for freight are enumerated in the Agreement
with Vessel Owners called Charter Party Fixture Note along with other
conditions of the transportations.


The process of hiring or fixing a ship for transportation of crude oil is

called Chartering and the hirer (IOCL) is called “Charterer”. The three
parties involved in the process of chartering are as follows:

1. The Charterer (IOCL)

2. The Vessel Owners
3. The Broker(through whom the Vessel is fixed)

Types of chartering:

The chartering is done on the following basis:

1. Voyage Chartering

a. Consecutive Voyage (CV)

b. Contract of Affreightment (COA)

2. Time Chartering


Crude oil to Haldia fed refineries is supplied through daughter vessels after
lighterages of Mother Vessel at Kakinada / Sandhead / Vizag based on the
sea conditions during the year. IOCL has entered into contract with M/s
Kakinada Seaport Ltd (KSPL) for carrying ship to ship transfer operation at
Kakinada. As per present agreement mother Vessel port dues are paid @

USD 0.03/GRT, Daughter Vessel port dues @ Rs 6 / MT for port services
and @ Rs 12 / MT for mooring / bunkering and water charges.

The following charges are accounted for through T code YMIROOTH,

Invoice Verification process. A separate line item is created in purchase
order for booking this cost.

NMA / OTD Charges:

In case of import of Nigerian crude, charges are paid to Nigerian Maritime

Authority (NMA) and Nigerian Port Authority (NPA). NMA charges are
levied at the rate of 0.36 cents on gross metric tons quality; whereas NPA
charges are levied at the rate of 0.03 cents on net barrels quantity.

Vessel owner and Charterer depending on the terms agreed upon in charter
party share the above charges. These charges are paid by vessel owner
directly, and later reimbursed by IOCL. These charges are also accounted for
as freight by running T-code YMIROOTH.

Port Charges:

Port charges at load port / disport are borne by IOCL depending on the
agreement between the vessel owner and the charterer i.e. as per the clause of
Charter party. Vessel owner prima facie pays port charges to the Port
Authority and claims reimbursement From IOCL for the same, if the port
charges of disport are not included in the World Scale rate applicable for the
voyage. Reimbursement is effected to the vessel owner based on Invoice
raised by the vessel owner for the same duly certified by shipping for
payment, and forwarded to Finance along with necessary supporting
documents like Port Trust Invoices, remittance account details , payment
proof etc. the amount to be paid in USD / INR is certified by Shipping
department . Finance department releases the payment after verifying its
admissibility as per charter party and port tariff rates.

This cost is also accounted for by using T-code YMIROOTH by giving

subsequent debit in freight line item.

Survey Fees:

Load port survey is conducted by approved surveyors. Approval for

surveyors and survey fee is taken by Shipping department on monthly basis.

Invoices in USD are raised by the surveyors periodically. These invoices are
certified by Shipping department and sent to Finance for payment. Survey
fee as per Bank advice is booked in books by T-code YMIROOTH i.e.
invoice verification process in respective Purchase orders.


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


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.

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.

Road transport consignment received is of two types:

(i) Where freight cost is included in the suppliers invoice. Suppliers
of the goods should indicate the freight amount and the service tax
in the supply invoice to IOCL so that CENVAT credit can be taken
on the service tax portion of the freight amount.

(ii) In other cases, consignments are received on freight to

pay basis where freight bills are raised by the transporter for

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
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.



1. MIGO Goods movement (receipts & issues)

2. MIRO Invoice verification for customs & related
3. YMIROOTH For passing transportation bills in relation
to Purchase Order
4. FB60 Passing other Transportation bills
5. MCYG For extracting slow moving & non-
moving inventory
6. YMR160 Stock Verification Report
7. MC9 Inventory Status
8. MMBE Current Stock
9. MB5L Stock in relation to General Ledger code
(used for value reconciliation)
10. MB1B Transfer Posting
11. MBBS Project Stock
12. YMR146 PSL Report
13. MB5B Stock as on Posting Date
14. J1IS Creation of Cenvat Invoice for inter unit


Light Distillate %
Middle Distillate %
Total Distillate %

Products from Refinery

The Refinery is capable of producing about 8 lakh tonnes of petrol, 3
lakh tonnes of jet fuel, 12 lakh tonnes of Kerosene & 26 lakh tonnes
of Diesel annually. Other products include Naphtha, Mineral
Turpentine Oil, Bitumen, Sulphur etc. Besides, about 2.4 lakh tonnes
of cooking gas is presently made available to the people.







Historically IOC was the sole canalizing agency of crude oil for this nation
having increasing demand of petroleum products posed by rapid forecasted

growth in industrial as well as consumer sector. Lately from April-01 1998
with the opening of the industry from the closely held government sector to
the globally competitive private sector, the scenario of crude of crude oil
exploration within the country and import there of also underwent change
considering the dynamics of the changes in price per barrel of crude oil in
the international market. The government allowed import of crude to all
refining companies independently.
In Indian Oil, crude oil was centrally procured based on the planned
production at all refineries through its specific cell at the marketing division
office Mumbai, which was also responsible to procure petroleum products
from international market to fill the gap between the national demand and
indigenous production. From 2003 onwards the procurement of crude oil
segregated by making a specific cell namely “Shipping Department” located
at Refineries Headquarter Delhi and since then this department is
exclusively handling the procurement of crude oil both from India as well as
international market to meet the production requirement various refineries
and its subsidiaries.
The crude oil for Barauni refinery was initially sourced exclusively from
oil fields of Assam through Oil India Pipeline. But due to utilization of
available crude in North-East itself after commissioning of Numaligarh
Refineries, Barauni Refinery has been fully sourced by imported crude from
2001-2002. To make this feasible, a new Pipeline namely Haldia Barauni
Crude Pipeline (HBCPL) was constructed and for economic viability of
fresh investment the old refinery management has roughly invested Rs. 2000
cr. in expanding the refinery to 6 MMTPA in 2002-2003.
The crude movement take place in very large crude carriers (VLCC)
up to the Bay of Bengal but due to the poor sea condition can’t reach Haldia

port directly. This necessitates transhipment of crude in high sea to smaller
vessels which in turn bring the crude up to the port where it is unloaded in
custom bonded tanks before being pumped through HBCPL. This particular
movement of transhipment involves additional costs in the nature of
4. Freight of daughter vessels
5. Demurrage of VLCC
6. Additional wharfage
To this additional cost is putting Barauni Refinery into a sort of
disadvantage in comparison to other west coast Refineries. Considering the
scene management is implementing a new pipeline project to connect
HBCPL with Paradip port to which place VLCC’s will be directly wharfed
and above additional expenditures can be avoided. There is another
additional expenditure which is specific to Barauni Refinery and doesn’t
apply to many Refineries of India is “Entry Tax”. This has been contested
by the management in the Court of Law on Constitutional grounds and stay
off 50% has been obtained from High Court, decision of which is pending in
Supreme Court.
Normally the cost constituents of Imported Crude is as under
1. Basic Costs
2. Marine Freight
3. Marine Insurance
4. Custom Duty
5. Port Expenses
6. Cost of Inland Transportation
There are three stages where costs can be reduced. These are
1. While procurement of crude
2. During process stage

3. Transportation inward as well as outward.
1. While procuring crude oil we can use certain buying methods
such as forward buying, hedging etc. These techniques certainly help in
reducing the overall cost of crude. Apart from this we can also reduce the
cost of crude by selecting the right crude mix.
2. During process stage we can reduce cost by cutting the
operating costs such as Power & Fuel, Chemicals, Catalysts & Consumables,
Repairs and maintenance, Administrative overheads, Depreciation. Apart
from this we can check the Fuel & Loss.
3. We can also reduce the transportation costs of crude oil and also the
finished products. To reduce the transportation cost of the crude oil Indian
Oil is implementing a new project namely Paradip-Haldia Crude Pipeline
Project. This is a very important project as it will reduce the transportation
cost substantially.

2003- 2004-
PARTICULAR 2004 2005 2005-2006 2006-2007 2007-2008 2008-2009
(TMTs) 2993.4 4303.5 5082.545 5553.165 5469.111 5634
( Rs. Lakh) 400555 565773 887370 1234873 1386166 1568810
Lakh) 4752 1500 -84 0 0 0
(NET):1+2 405307 567273 887286 1234873 1386166 1568810
Lakh) 767 7266 15702 3583 6668 1330
Lakh) 406074 574539 902988 1231290 1392834 1570140
6. (a) CST OF RAW
Lakh) 353549 497344 799102 1147209 1335133 1449061
CRUDE (Rs. Lakh) 895 1325 4807 3822 8312 6302
(Rs. Lakh) 354444 498669 803909 1151031 1343445 1455363
( 5 - 6 ) (Rs. Lakh) 51630 75870 99079 80259 49389 114777

Fig: - Throughput / Annum







2004-2005 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009



2002-2003 4.2 MMT 2.880 68.6

2003-2004 4.2 MMT 2.994 71.3
2004-2005 6.0 MMT 4.304 71.7
2005-2006 6.0 MMT 5.083 84.7
2006-2007 6.0 MMT 5.554 92.5
2007-2008 6.0 MMT 5.469 91.2
2008-2009 6.0 MMT 5.634 93.8
% capacity utilisation










2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009




83.18 92.52

84.9 91.16

84.6 88.09

85.6 88.68

85.5 89.86

86.2 89.94

85.8 89.74

86.2 91.26

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 effective inventory maintenance.

Supply chain management has to be given its due importance.

7. As it is a P.S.U, it can explore new areas and suppliers to increase its

profitability. Mergers and acquisitions are expected.

1. Continuous supply of materials and finished goods should be
maintained so that production process does not suffer and customer’s
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


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

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


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 objective.


1. Material management Manual, IOCL

2. Oil Accounting Manual, IOCL

3. Financial Report of IOCL, Years 2007-08, 2008-09

4. www.iocl .com


6. Indian Oil News


8. Financial Management : Ravi. M. Kishore