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A PROJECT REPORT ON INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT PROCEDURES AT IOCL (BARAUNI REFINERY)
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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DECLARATION
I KRITIKA ,a bonafide student of SINHGAD INSTITUTE OF MANAGEMENT,PGDMOperations (4 Semester) hereby declare that the Final Project entitled INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT PROCEDURES AT IOCL BARAUNI is an original work and the same has not been submitted to any other institute for the award of any other degree.
th
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.
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. 6-7 8-11 12-33 34-72 AND 73-77 78-94 95-97 98-99 100-101 102-103
1. 2. 3. 4. 5. 6. 7. 8. 9.
EXECUTIVE SUMMARY INTRODUCTION PROFILE OF THE ORGANISATION CONCEPTUAL BACKGROUND RESEARCH METHODOLOGY DATA ANALYSIS FINDINGS SUGGESTIONS CONCLUSION DESIGN
10. BIBLIOGRAPHY
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EXECUTIVE SUMMARY
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 MANAGEMENTPURCHASE 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) (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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1.2 OBJECTIVES OF STUDY:1. Primary Objective y To Study Purchase Procedure & Procurement Process of IOCL- Barauni Refinery. 2. Secondary Objectives y y To analyze the Inventory Related issues in IOCL- Barauni Refinery. To study EOQ, ROP, WIP, JIT.
.
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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). 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.
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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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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 Indias largest company by sales with a turnover of Rs. 2, 85, 337 crore and profit of Rs. 2950 crore for the year 200809 the highest ever for an Indian company. Indian oil is also the highest ranked Indian company in the prestigious fortune global 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(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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Care ( CSR comes under this concern of IOCL) Concern Empathy Understanding Co-operation Empowerment
y y y y y
y y y y y
y y y y y y y
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y y y y y y y
y To ensure national interest in oil and related sectors in accordance and consistent with government policies. y 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. y To earn reasonable rate of return on investments.
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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. y 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. y To minimize the fuel consumption in refineries and stock losses in
marketing operation to affect energy conservation. y 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.
2.5 Financial:y To ensure adequate return on the capital employed and maintain a
reasonable annual dividend on its equity capital. y y To ensure maximum economy in expenditure 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. y To develop long term corporate plans to provide for adequate growth of
the activities of the corporation. y To endeavour to reduce the cost of production of the petroleum products
manufactured by means of systematic cost control measures. y To endeavour to complete all planned projects within the stipulated time
2.6 Organisational set-up:y Indian oil corporation limited y Indian oil has its head office as well as corporate office at New Delhi. The registered office of corporation is in Mumbai. y 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: y y y y y y Director (refineries) Director (pipelines) Director (marketing) Director (finance) Director (hr) 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 2.7 Branches of IOCL divisions & refineries:-
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 2.9 Products of IOCL:Refineries Barauni Products Carbon black feedstock (cbfs), raw petroleum coke (rpc), sulphur Digboi Guhawati Haldia Paraffin wax Raw petroleum coke (rpc) Cbfs, jute batching oil (jbo), micro crystalline wax (mcw), mineral
turpentine oil(mto), sulphur Gujarat Mineral turpentine oil(mto), sulphur, toluence Mathura Panipat Propylene, sulphur Benzene, mineral turpentine oil (mto), pet coke,sulphur
IOCL has become Maharatna now in which it has got financial freedom upto 50 crores.
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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 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. 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: y Technical departments The technical departments are directly concerned with running of plant
and production activities. The technical departments are as follows: y y y y y Production department Power and utility department Maintenance department Technical services department Quality control department
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y y y
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:
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 employees at Barauni refinery:Shift duty: 3 shifts (also known as rotating shift) Morning shift Evening shift Night shift General shift Office time : 6 am 2 pm : 2 pm 10 pm : 10 pm 6 am : 8 am 5 pm (plant) : 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 officers and nonofficers or non-executive cadre. In the officers category there are nine grades. Grade i is the senior most whereas grade a is the junior most in this category. Grade I h g f e d c b a Designation Executive director (ED) Generalmanager (GM) Dy.Generalmanager (DGM) chief manager senior manager manager deputy manager senior officer / sr. Engineer officers / engineer Strength Pay scale (rs.) 01 02 05 13 43 42 65 80 139 Total 390 23,750 28,500 20,500 26,500 19,500 25,600 19,000 24,750 18,500 23,900 17,500 22,300 16,000 20,800 13,750 18,750 12,000 17,500
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) In non-officers category grade 1 is the junior most and grade 8 is the senior most. This category is also known as staff category
Grade
Designation
8th 7th
Officer superintendent, office sec, accountant Senior assistant, p.a, head time-keeper, turbine boiler, 179 technician-1 Office assistant, time-keeper, assistant accountant Senior typist, operator-c, technician-3, plumber 239 Technician-4, operator-d Operator-e, sampler Yardman, head jamadar Messenger, watchmen 255
6,300 212 13,000 5,800 11,800 5,400 10,800 5,000 9,800 4,800 8,900 4,000 8,400 1309
Total
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Barauni telshodhak majdoor union (registered union) Shramik vikash parishad Indian oil officers association (for officers interest)
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.]
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 employees children Sports and other recreational events & functions Holiday homes for officers at Shimla & Manali, and for workmen at Manali, Darjeeling, Goa, and Massoori
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 refinerys 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 best 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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3.1.1MEANING
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.
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3.1.4TYPES OF INVENTORY
y y y y Raw Material : An inventory of raw material allows separation of production scheduling from arrival of basic inputs to the production process. Work In Progress : An inventory of partially completed units allows the separation of different phases of the production process. Finished Goods : An inventory of finished goods allows separation of production from selling. Cash & Marketable Securities : Cash & Marketable Securities can be thought of as an inventory of liquidity that allows separation of collection from disbursement.
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3.1.9COST OF INVENTORIES
Relevant inventory costs which change with the level of inventory are lister below :Ordering Cost :- The cost of ordering includes : y Paper work costs , typing & dispatching y Order inspection cost , checking & handling. Carrying Cost :- Carrying cost involves : y Capital Cost. y Storage & handling cost. y Insurance. y Taxes. y The cost of funds invested in inventory. Stock out cost :- Stock out cost involves : y Expenses of placing special orders. y Expediting income orders. y Cost of production delays.
3.1.10NEED OF INVENTORIES
y y y Transactive Motive Precautionary Motive Speculative Motive
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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). y
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y 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) Category IV shall contain items with inventory value upto Rs.50,000 y 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.
3.1.12TECHNIQUES 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
3) 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 : y Paper work cost , typing & dispatching y Order inspection cost , checking & handling. b) Non - Ordering Cost - These are the costs for holding the inventories. This cost involves: y Capital Cost. y Storage & handling cost. y y y Insurance. Taxes. 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.
5) 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.
6) 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 XYZ Classification has the value of inventory stored as the basis of differentiation. X items are those whose inventory values are high while Z items are those whose value is low.
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) In Indian Oil Corporation Limited A-B-C Analysis technique is used for inventory management.
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3.2
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3). INDENTING:-
Fo r all repet it ive it ems o f st ores t he responsibilit y o f purchase indent s, procurement , stocking and
mat er ial
procurement
po wers. y To det ermine ROL for repet it ive nat ure of it ems, t he fo llowing for mula may
R = CA (L-3) + 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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.
y y
SAP.
Indent s for hospit al require ment including medic ines shall be raised by t he
med ical d epart ment . y Indent s for vehicles, office equipment , st at ioner y and pr int ing, fur nit ure, requir ement s shall be raised by t he
Spare part s, piping mat er ial and consumable it ems et c. are requir ed
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 p lant . 4). Preparat io n of indent s:-
need o f individual
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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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:T 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. 5). 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. y I f indent of Rs. 50000, head o f depart ment will appro ve t he indent .
Manager)
will
In case o f emergency requir ement s t he indent s will be approved by GM/ED. 6). 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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 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 Rs. 25000/-. c) Purchase for propriet ar y it ems or DGS&D rat e cont ract value o f t he proposed individual order pr ice unless t he and value up t o and up to Rs. 2000/-
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. 8). 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:
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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: y Where t he it em has been ident ified and approved by t he nat ure of t he it em is propr iet ar y o f single manufact urer GM t hat t he 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. y 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) y 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:y y y y Repeat orders Cash purchases E mergency purchases 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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: 1) Not ice invit ing t enders Tend er document s 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 indicat ed). who m it is issu ed,
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 3) 4) 5) Not ice invit ing t enders (copy o f NIT as issued t o press General inst ruct io ns t o t he t enderer. General co ndit io n o f t he co nt ract . or on t he websit e).
6) 7) 8)
Special co ndit io n o f t he co nt ract . Technical specificat io n and pr ice part . 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.
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.
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
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) (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.
3.2.2.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 C or B or A. d) Slow moving spare parts and spare parts with erratic consumption, for particulars machines or equipment's.
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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:-
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) ROTOR,DYN BALANCED,W/CPLG HUB PLATINUM CATALYST ROTOR ASSY RANDOM COLUMN PACKING FOR 9,121,340.00 STAGE 1 8,887,997.00 1 EA K G 1 IN SPENT 16,105,348.00 14,756,045.00 14,607.00 1
17,686,323.00
EA K G EA M 3
BUCKET,TURBINE KIT,P/N:35306090
7,796,626.00
9,000.00
7,663,400.91
114
4,519,704.05
96.749
TO
45
EA K G
4,250,873.00
4,000.00
4,178,605.45
113.237
TO
SODIUM HYDROXIDE,CAUSTIC 4,028,713.81 SODA LYE,NaOH BEND,90,XLR,BW,AS,A387,P12,2 0IN,30 3,913,414.89 DIMETHYL DISULPHIDE(DMDS) FUEL NOZZLE F/GAS
198.612
TO
15
EA
3,683,208.60 3,641,467.00
24 10
TO EA
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) TURBINE,MS 5001 TEE,EQ,BW,AS,A387,P12,10IN,40 3,630,011.50 DRUM,MILD STEEL,GAL,GAUGE:5 VLV,GT,WEDGE,A217C5,A217C 5,FLG,300,2IN 52 EA
3,611,685.00
2,356
EA
3,472,725.30
362
EA
6.2
M D R M
3,335,816.88
264
3,298,185.56
103.89
537.42
EA
80.97 42 7
TO EA EA
199,810
EA
2,941,731.13
3,099
1 392.25
EA M
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) BE,16IN,STD CABLE,AL3.1/2x300s.mm,PVC INS,ARM COMBUSTOR LINER TURBINE,MS 5001 CABLE,T/C,CU,20P,UDEY ADDITIVE,FCC CATALYST,ZSM-5 K4SDR-16, THL 3000,P/N;5143519-160 TDC 2,613,307.12 3 EA F/GAS 2,708,459.00 2,707,632.69 10 11,680 EA EA
2,761,966.30
3,534
2,667,993.94
7.361
TO
FL,WN,RTJ,AS,A182,F12,10'',300, 40 CABLE,AL3.1/2x185s.mm,PVC INS,ARM PIPE,CS,SMLS,A106,GRB,BE,4IN ,40 PIPE,AS,EFW,A691,1.25CR,CL42, BE,26IN,10T SMM CARD FOR INTERFACE OF THL DCS UCN
2,543,455.36
105
EA
2,523,370.00
5,038
2,521,237.16
3,098.24
2,472,162.58
63.5
2,342,155.00
EA
TUBE,AS,SMLS,A335,P9,BE,101. 6x8.33x8597
2,333,290.82
51
EA
6.15
2,301,017.00
31.32
TO
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) List of selected Class B items
Material T/M,D/P,ELECY,0-2500 MM WC BARRIER,INTER PHASE,CT,F/6.6kVJYOTI VCB ROTATING ASSY ( P200 ),P/N10 FABRIC ASSY,MULTILAYER COMPOSITE TR,DP,SMART,0-5000MMWC ELT
Amount 498,761.44
Quantity 23 EA
498,420.00 498,000.00
30 1
EA EA
496,771.00 496,705.00
30 23
M 2 EA
52
EA
494,410.00 493,453.33
3 20
EA EA
LINE CHOKE& TERMINATOR F/COK-A EOT CRAN 493,262.00 DETECTOR,FLAME(28FD) VLV,CHK,LIFT,A217 C5,FLG,300,8IN C5,A217 492,649.18 492,668.00
2 2
EA EA
10
EA
491,768.51 491,676.35
716.89 1
M EA
491,400.00
EA
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489,896.04
470
EA
39,486.16 1
KL EA
FAN ASSY,C/TOWER,85454-14V05,PCT 487,680.00 VLV,GLB,ANGLE,BRASS,THD,12 5,8IN 486,340.32 T/NATION,AI,16CH,TM117AI12,AUG,099-0070 PISTON HALF,P/N-2734.3361.000 IMPELLER , 6 MQX,P/N 6073442
EA
EA
2 1 1
EA EA EA
HLAI PROCESSOR, 16 PT.MUPAIH03, HAIL 385,552.80 PIPE,MS,ERW,IS3589,GR330,BE,2 8IN,7.92TH CABLE,AL,3Cx150sq.mm,PVC INS,SHTD,ARM PIPE,CS,SMLS,API5L,GRB,BE,8I N,40
EA
384,710.00
49.58
384,421.25
283
384,404.06
150.7
FRAME PROOF F/MOTOR,PMP,400 TS3,JYOTI 382,620.00 TB DIGITAL RELAY/CARD NO. DS200DTBCG1AAA 382,080.00 PIPE,MS,ERW,IS1239,BLACK,BE, 18IN,9.53TH DREWTREAT 738
EA
EA
381,161.42 380,698.63
260.399 4,906.00
M K
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) G FLAT,CS,IS 2062,25x3mm VLV,GLB,A216WCB,A216WCB,F LG,150,3IN EJECTOR COMPLETE UNIT VLV,GLB,A216WCB,A216WCB,F LG,300,10IN 380,051.34 7.539 TO
378,949.09 378,800.00
33 2
EA EA
378,340.66
EA
SEAL ASSYCOMP,J.CR,1648 SEAL CART,2.5000 377,143.00 PUMP, VERTICAL TURBINE PSV-001 & 002, 6" X 8", RF T/M,STD924,THL 376,367.00 375,900.00 375,350.04
1 1 2 13
EA EA EA EA
SUPPORT CABLE 311,931.00 ASSY,LOWER,P-101-P-105 VLV,ON/OFF,BAL,DIAP,A216,W CB,FL,300,2IN PIPE,AS,EFW,A672,GRB70,28,12T HK BARRIER,ANALOG 3045 PUMP,COMPLETE 200/32 N,KBL O/P,MTL 311,143.39 UNIT,SHD 311,111.00 310,641.00 310,138.21
EA
311,917.00
EA
311,220.00
11.97
53
EA
2 1 9
EA EA EA
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Amount 52,563.79
Quantity 3 EA
EA
ELBOW,90DEG,LR,ASTM 815,8IN,S20
1 6 5 2
EA EA EA EA
PKG,ROTARYHD,FSL,PBSCART GASKET,GRAFOIL,P/NO 152.1 RTV SEALANT (0000B ),P/N 110 PIPE,MS,EFW,IS3589,410,BE,28I N,10MM THK
52,437.00
10
VIRGO VLV ACTUATOR FAIL SAFE OPEN 100M 52,428.00 LAMP,LED IND,10W,22.5MM,24VDC,LVGP FL,SP.BL,FF,CS,A105,300,4IN CPLG,HALF,TH,CS,A105,3000,1/ 2IN,IBR BOX,JUNCTION,12ways,FLAME PROOF T/F,VOLTAGE,6.6kV,100/50VA,J YOTH
EA
52,401.51 52,387.17
328 36
EA EA
52,380.34
1,790
EA
52,378.67
14
EA
52,335.00
EA
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) GSKT,SPWD,CS,SS304,CAF,8IN, 150lbs STUD,AS,A193,B7,NUTS,A194,2 H,M36x275 mm O RING,P/N;10( EPIL,KXWKC KALREZ), 52,305.60 2 EA
52,332.34
498
EA
52,308.75
150
EA
EA
EA
CABLE JOINT 51,474.06 KIT,3X70sq.mm,3X150sq.mm SWITCH,PR,DIAPH,10-60bar DIAPHRAGM, 1052(70), FISHER STUD,AS,A193,B7,NUTS,A194,2 H,M14x120 mm BRICK,ALUMINA,SP-11 BRG,6.6KV,BHEL MECH.SEAL (SPL) COMP, P04D28 51,349.96 51,442.73 51,434.00
49 13 3
EA EA EA
2,430 800 2
EA EA EA
EA
51,331.49
4,050
EA
51,312.71
EA
51,304.00 51,243.00
1 2
EA EA
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) TONER CRTDG,LASER PRINTER,HP-5000 51,240.00 CLUSTER ASSY. FOR 4000A, PGA0100168 M40, 51,221.01 50,216.00 50,208.00 50,187.00 10 1 5 4 EA EA EA EA
EA
HOSE TELE BOOM,P/N-2307125 SLEEVE GASKET, P/N. 19 FL,SP.BL,FF,CS,A105,150,16IN PIPE,CS,SMLS,API5L,GRB,BE,10 IN,30 GASKET,GRAFOIL,P/NO 152 FL,SP.BL,RTJ,SS,A182, F321,600,4IN
50,153.86 50,134.00
18.06 5
M EA
50,109.60
EA
MECH.SEAL,EPIL,P03D36/P03D3 50,103.50 2 RELAY 180 300 MN12 SS 94139 50,062.00 LT HEX NUT M 12, P/N 9 BEND,90,XLR,BW,AS,A234,WP5, 12IN,60 WRENCH ,IMPACT 2109,CLECO ,W 48,960.00 49,000.00
EA
10 40
EA EA
48,974.00
EA
EA
48,916.00
EA
48,863.70
EA
48,858.00
13.03
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48,853.55
EA
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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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
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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 leadtime. 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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 MANAGEMENT- PURCHASE AND PROCUREMENT (2010) I = inventory carrying cost per unit
Mar i al A al
T tal t
Holding Costs $
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) Calculation of safety stock: Safety stock = demand variation + ((monthly demand/25)*supplier delay in days)
INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) Product type Manufacture type Volume Other Factors y y y y y y y 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 marketing. The capacity of the present and future data processing equipment. The potential savings that may be anticipated from improved control inventories. The current or potential, availability of data, which can be used in controlling inventories.
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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
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5.1.1 INVENTORY TURNOVER RATIO For Two Years 2008-09 And 2007-08 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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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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-inprocess 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. Thats why a stock of finished goods also needs to be maintained.
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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.
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INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010) 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.
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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.
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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.
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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AT REFINERY
21980
31823
47994
IN TRANSIT
4693
3037
2471
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
PARTICULARS
2007-08 4172 2008-09 16139 NIL 16139
AT REFINERY IN TRANSIT
NIL 4172
TOTAL
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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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 companysprocessing 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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Av. INVENTORY
226842
363536
350792
9.12
11.58
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
A SEG ME NT
2077
4.4 2%
949
1. 88 %
70%
B SEG ME NT
6147
13. 07 %
5300
10 .5 %
20%
C SEG ME NT
38792
82. 51 %
44216
87 .6 2 %
10%
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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-inprocess 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: y Crude Oil Inventories y Inventories for chemicals y Inventories for stores and spares 8.
Issue system of inventory for Barauni Refinery Unit:y y y FIFO LIFO 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
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
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, Valuation of Oil Sector- Significance and Review CA journal, Volume 54, No 07, January 2006
Manuals Provided By IOCL y Cost Control Manual y IOC Accounting Manual y Material Management Manual y Annual Operation Report y Financial Appraisal Report
y y y
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