A B OUT B HPV

BHPV was established in 1966 at Visakhapatnam, Andhra Pradesh. It got merged with
BHARAT HEAVY ELECTRICALS LIMITED (BHEL) in August’2013 by virtue of an order of
Board for Industrial and Reconstruction (BIFR). BHEL named the unit as HEAVY PLATES &
VESSELS PLANT (BHEL-HPVP). It is 17th manufacturing unit of BHEL and incidentally this
is only unit of BHEL situated at port.

BHPV was established in the year 1966 at Visakhapatnam, Andhra Pradesh as a Public Sector
Undertaking under the Department of Heavy industry (DHI) to manufacture and supply custom
built process plant equipments for Core Sector Industries like Fertilizers, Oil Refineries,
Petrochemicals, Steel Plants, Nuclear, Space, Defence and Power Sectors with the technical
collaboration of SKODA Export, Czechoslovakia. The Company is located on NH-5 near to
Airport, Railway Station and Sea Port in Visakhapatnam, Andhra Pradesh. The Company is
spread over a total area of 386 Acres.

BHPV is a premier Organization specializing in design, fabrication, supply and erection of Heat
Exchangers, Columns, Storage Spheres, Reactors and Strippers, Multilayer Vessels Reactor
Regenerator Package, Air Separation Plants, Purge Gas Recovery Units, Oxygen Plants,
Nitrogen Plants, Hydrogen Plants, Sulphur Recovery Units, Crude Stabilization Units, Mounded
Storage Systems, Compact Heat Exchangers, On Board Oxygen generating system etc., to Oil
Refineries, Fertilizer Plants, Steel Plants, Defence sector etc., and has been contributing to the
Nation building during the past four decades. The Company has good potential to cater to the
growing needs envisaged in Power, Oil and Gas, Nuclear, Defence and other strategic sectors in
future.
 OVERVIEW

Incorporation of the Company : 1966

Primary Objective : To manufacture custom built Capital Equipment for

the Process industries such as Fertilizers,
petrochemicals, Petroleum refineries, chemicals etc

Technical Collaboration provided by : M/s SKODA EXPORT, Czechoslovakia.

Commencement of Construction : 1968

Completion of Construction : 1971

Commencement of Production : 1971

Initial Project Cost : Rs. 17.5 crores

Initial Product Mix : Heat Exchangers, columns, pressure Vessels,

Technological Structures, piping etc

Installed Capacity : 23, 210 M.T.

Turnover for the year 2016-17 : Rs. 83Crores

Production Facilities

Factory Area : 197 Acres

Total Covered Area : 90,000 sq. Meters

Covered area of Production Shops : 56,000 sq. Meters

Power Requirement : 3,000 KW from APSEB

No. of Ancillary Units : 11 Units

Important Machinery

 The factory is provided with comprehensive and modern manufacturing and testing facilities
and suitable material handling equipment.

 The maximum crane lifting capacity is 120 tones, but loads up to 250 tones can be lifted with
improvised..
Other Critical Equipment

 Deep Drawing Haulic Press of 1600T capacity.

A number of Welding Rotators of capacity up to 250 Tones.

 Tube Fining Machine.

 Different types of Non-destruction Testing Equipment.

 Well equipped Physical and Chemical Laboratories.

Metrology Section
● HCL Super-Mini Computer, Two Mini computers

● 56 CAD Machines and 550 Personal computers.

Man Power (As On 30th April, 2016)

1. Workmen / Staff : 725

2. Supervisors : 87

3. Executives : 240

Total 1052

4. Temporary Employees : 23

5. Trainees : 168

6. Contract Labour : 326

Grand Total 1718

Employee Welfare Amenities

● Township Area - 151 Acres

● No. of Quarters - 1192

● 20 bed Hospital

● Protected Water Supply

● Underground drainage system
 ● English medium school with CBSE Syllabus
● Telugu medium school with AP State Syllabus
● Special school for mentally handicapped children.
● Vocational training centre for mentally handicapped

QUALITY

● BHEL is reputed for quality and workmanship of its products.

QUALITY POLICY

“IN ITS QUEST TO BE GLOBAL ENGINEERING ENTERPRISE, BHEL PURSUES CONTINUAL

IMPROVEMENT IN THE QUALITY OF ITS PRODUCTS, SERVICES AND PERFORMANCE
LEADING TO CUSTOMER DELIGHT THROUGH COMMITMENT, INNOVATION AND TEAM
WORK OF ALL EMPLOYEES”.

AWARDS & ACHIEVEMENTS

Some of the Awards received for excellence in R&D include:

 CIS Award for R&D achievement in 1992-93.

 “The ChelikaniAtchutaRao Memorial Award” from FAPCCI for individual Achievement

in R&D effort in 1996 (Mr BSV Prasad).

PRESENT STRENGTHS

 Excellent Design & Engineering capabilities.

 State –of –the – Art Manufacturing facilities.

 Accomplished image as a supplier of Quality Products in the domestic and

international markets.

 High degree of customer confidence.

 Technological tie-up arrangements.

  Well trained and qualified work force and Engineers.

PLANS & STRATEGIES

a. To grow as an Engineering, Procurement and Construction Company.

b. To enlarge Export Business.

c. To strive for continuous updating of technologies to be on par with International

Companies.

d. To change the work culture to be compatible with market demands.

THE BHEL-BHPV MERGER

The Company was helping in building many projects of national importance in the core sector.
Its revival and continued existence will be helpful in controlling the cost of the end users
projects on the one hand and ensure the welfare of those directly involved in the company’s
stake on the other.

BHEL has established its tool prints in all the six continents of the world spanning to countries
& its technical competence has earned world wide acclaim.

As the first order step towards revival of BHPV, BHEL has placed the first commercial order
on BHPV following take over of the company in May 2008.

As setting up another manufacturing plant needs massive green field investments entry like
BHPV makes better achieved by enhancing capacity with brown field investments

BHPV has been developed as a dedicated centre for industrial boilers. With the cost structure of
BHPV is similar to BHEL, costs came down due to factors like increased volume and better
financial capability leading to lower working capital borrowing costs with a capital of Rs.236
crores spread over three years.
INVENTORY MANAGEMENT

Inventory is the physical stock of items that a business or production organization keeps in hand
for efficient running of affairs or its production. It is very essential that material of the correct
quantity and quality is made available as and when required. With due regard to economy in
storage and ordering cost, purchase and working capital.

Inventory management means maintenance, up keep and assurance of adequate supply of goods
in order to meet an expect pattern of distribution of demand for a given financial investment.

Meaning of Inventory

Inventory may be defined as “usable but idle resource” in other words literally the inventory
means that stock of goods or physical assets having economic value. If resource is physical or
tangible object such as materials, it is generally termed as stock. Inventory may be regarded as
those goods which are procured, stored and used for day-to day functioning of the organization.
Inventories viewed as a large potential risk rather than as a measure of wealth due to the fast
developments and changes in product life.

Inventory plays a vital role on business; lesser inventory will have a positive reflection on
balance sheet. In any organization capital investment is divided between fixed assets and Current
Assets. Fixed assets consist of plant and machinery, land and buildings that are used in the
conversion process. Gross current assets are those, which are required to operate day-to day
requirements, and used as inputs in the process of conversion. These are converted into output,
which, on being sold, brings in money/ finance to the organization. Hence, the productivity is
measured by the ratio of outputs to inputs, which means economic activity where raw materials
are converted into value. Inventory management is one of the indicators of the management
effectiveness on the materials management front. The input resources of business activity are
men, machines, money and materials. The time is another resource, which is part of all these four
resources. The outputs are goods and services. Management task is to reduce the cost incurred on
materials to the minimum which in turn results in earning more profits or to make company’s
products more competitive
 PROBLEM OF THE CASE
ANALYSIS OF THE CASE
There are various techniques to analyze the financial performance of an organization, of
which ratio analysis is considered in this project. Some of the ratios that are used in this study to
evaluate the efficiency of inventory management are:

 Inventory Turnover ratio

 Inventory Conversion period

 Finished goods turn over ratio

 Work in progress turn over ration

 Raw material to inventory turnover ratio

 Net sales to inventory turn over ratio

 Stores and spares to inventory turnover ratio

 Scrap disposal Index

 Cash Conversion cycle

4.1 INVENTORY LEVELS

The total inventory level maintained by BHEL-HPVP in the past 5 years, showing the both the
comparative study and as well as the break up of total inventory into different types are as shown
in the followingtable

(Rs in lakhs)
INVENTORY 2016-17 2014-15 2013-14 2012-13 2011-12
Raw Material & BOCs 4623.57 4100.5 4033.47 4665.26 3655.06
Stores and spares 775.28 450.61 749.17 665.18 509.03
Loose tools 22.68 4.34 22.21 21.47 21.51
Less: provisions for
-1268.02 -1181.5 -1068.25 -1054.29 -930.06
redundancy
Raw Material etc after
4153.51 3373.95 3736.60 4297.62 3255.54
provision
Materials–in-transit 18.70 13.69 162.56 51.21 111.70
Scrap 288.4 340.8 379.11 337.14 308.05
Finished goods 1566.67 1049.68 110.57 18.59 11.35
Work in progress 2173.28 1433.03 1329.00 1995.30 1570.45
TOTAL INVENTORY 8200.56 6211.15 5717.84 6699.86 5257.09

Below are the details of raw material purchases that outline the opening,closing and the
purchased rawmaterials inventory

Rs in Lakhs
RAW MATERIAL
31.03.2016 31.03.15 31.03.14 31.03.13 31.03.12
PURCHASES
Raw Material OB 4100.5 4033.47 4665.26 3655.06 2836.05
Add: Purchases 5622.37 5314.98 6632.33 7506.00 6231.151
Total 9722.87 9348.45 11297.59 11161.06 9067.20
Less: Issues / Consumed 5099.30 5247.95 7264.12 6495.80 5412.14
Stock as on closing date 4623.57 4100.50 4033.47 4665.26 3655.06

4.2 INVENTORY TURNOVER RATIO

Computation formula = Direct expenses/Average inventory.

Inventory turnover is the ratio of cost of goods sold by a business to its average inventory during
a given accounting period. It is an activity ratio measuring the number of times per period, a
business sells and replaces its entire batch of inventory again.

In BHEL-HPVP it is impractical to follow the concept of EOQ or safety stock for production
items as it is a tailor made or customer order oriented engineering unit. The efficiency of the
company totally lies in maintenance and control of inventory levels; hence, it is important for the
company to see the total material consumption and percentage of total material consumption to
its value of production and cost of production. In view of inventory, the total inventory level its
usage in the manufacturing process and the amount of inventory retained as stocks are essential.
The efficiency of the position is estimated by determining the inventory to number days of
production, average holding period of inventory, turnover of inventory and the inventory
turnover ratio.

INVENTORY TURNOVER RATIO

In lakhs In lakhs
Cost of goods Average Inventory Turnover
Year sold Inventory Ratio
2016-17 4247.63 7205.86 0.59
2014-15 8445.45 5964.50 1.42
2013-14 9938.11 6208.85 1.60
2012-13 7789.28 5978.47 1.30
2011-12 6803.97 4913.08 1.38

Inventory Turnover Ratio

1.8
1.6
1.4
1.2
1
0.8 Inventory Turnover Ratio
0.6
0.4
0.2
0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

As the production was low in the year 2016-17, the cost of goods sold was less compared to
previous years due to which the inventory turnover ratio is low. From 2012 to 2015, the company
maintained consistent cost of goods sold to average inventory i.e., the number of times the
inventory is replaced by new batch of inventory was more or less even except in the year 2014.
In 2014, the cost of goods sold is high because the company has got high amount of orders when
compared to previous years. Hence, the ratio in the year 2014 is high.

4.2 INVENTORY CONVERSION PERIOD

Computation formula = Days in year / Inventory turnover ratio

Inventory conversion period reports us about the average time to convert our total inventory into
sales. It is relationship between total days in year and inventory turnover ratio. In other words, it
measures the length of time on average between the acquisition and sale of merchandise.

In lakhs In lakhs
Inventory Turnover Inventory
Year Ratio Number of days Conversion period
2016-17 0.86 365 424.69
2014-15 2.51 365 145.40
2013-14 4.20 365 86.86
2012-13 2.33 365 156.96
2011-12 2.61 365 140.09

Inventory Conversion period

450
400
350
300
250
Inventory Conversion
200
period
150
100
50
0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:
In the year 2016, the inventory has been disposed off or sold on an average in 425 days. It
means, it took more than a year to convert inventory into sales. Considering the less number of
job orders and the cycle time of 18 monts, this number looks convincing and shows that this
variation from previous year is mainly due to less sales. In 2014, the number of days to convert
inventory to sales is very good than the remaining years which is attributed to the justification
given to the inventory turnover ratio in 2014.

4.3 FINISHED GOODS TURNOVER RATIO

Computation formula: Cost of sales/Average inventory of finished goods.

Finished goods are the final outcome of a production cycle. Hence, the ratio showing its turnover
indicates the efficiency with which the finished goods are formed at the final stage of the
production cycle.

There fore the finished goods turnover ratio shows the efficiency of the manufacturing system in
converting the work in process to finished goods these ratios finally add to the inventory
turnover ratio, which influences the entire sales turnover of the company.

In Lakhs In Lakhs
Average Finished Finished Goods
Year Sales/Turnover Goods Turnover Ratio
2016-17 7047.96 1308.18 5.39
2014-15 15591.58 580.13 26.88
2013-14 24026.84 64.58 372.05
2012-13 15580.08 14.97 1040.75
2011-12 13697.54 30.37 451.10
 Finished Goods Turnover Ratio
1200

1000

800

600 Finished Goods Turnover

Ratio
400

200

0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

In the year 2016, the finished goods turnover ratio is low which is not acceptable. That means the
rate at which the finished goods are converted to the sales is very low. Because, the sales are
very less during 2016 when compared to previous years.In 2013, the average finished goods are
low and sales are high. That means, the company has got other income such as scrap, reselling
e.t.c., in 2013. Hence the finished goods turnover is showing a high number.

4.4 WORK IN PROGRESS INVENTORY TURNOVER RATIO

Computation formula: Cost of Production/Average work In Progress

Work in progress as an another turnover ratio indicates towards the efficiency with which it gets
converted during the production cycle.

Work in progress ratio enables the company in establishing the time gap between different stages
in a production cycle, and the efficiency with which the production cycle gets completed.

In lakhs In lakhs
 Year Cost of Production Average W.I.P WIP Turnover Ratio
2016-17 16843.00 1803.16 9.34
2014-15 34015.30 1381.02 24.63
2013-14 17833.66 1662.15 10.73
2012-13 13445.56 1782.88 7.54
2011-12 12397.75 1604.33 7.73

WIP Turnover Ratio

30

25

20

15
WIP Turnover Ratio
10

0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

WIP turnover ratio has shown a consistent trend since 2011 except in 2015. In 2015, the cost of
production is very high thereby causing high WIP turnover ratio. It shows that the direct and
indirect expenses have far exceeded the value of work in process inventory which was not
desirable. But the situation became normal in 2016 by decreasing the cost of production and
improving the work in process.

4.5 RAW MATERIAL INVENTORY TURNOVER RATIO

Computation formula: Annual Consumption of Raw Material/Average Raw Material Inventory.

Raw material inventory turnover ratios the efficiency of the company is conversion of its raw
material inventory into the production process. The turnover ratio always shows direct
proportionality to efficiency. Hence, when the turnover ratios are more the efficiency said to be
high.

In lakhs In lakhs
Annual Consumption Average Raw Raw Material Turnover
Year of Raw material material Ratio
2016-17 5099.3 4623.57 1.10
2014-15 5247.95 4100.50 1.28
2013-14 7264.12 4033.47 1.80
2012-13 6495.80 4665.26 1.39
2011-12 5412.14 3655.06 1.48

Raw Material Turnover Ratio

2

1.5

1 Raw Material Turnover

Ratio
0.5

0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

Through out the years, the efficiency of the company in converting raw material into production
process is good. The purchases and the opening balances of the raw materials are effectively
used while maintaining acceptable level of safety stock. When compared to remaining years, the
efficiency of the company in converting the raw material inventory is quite good in 2014.

4.6 NET SALES TO INVENTORY RATIO

Computation formula: Net Sales / Inventory.

For the purpose of monitoring the effectiveness of inventory management, it is helpful to
calculating the following ratio and index raw material inventory turnover ratio. It shows the
efficiency of the company in conversion of its raw material inventory into the production
process. The turnover ratios always show direct proportionality to efficiency. Hence, when the
turnover ratios are more, the efficiency is said to be high.

In lakhs In lakhs
Year Net sales Inventory Netsales to Inventory ratio
2016-17 6275.33 8200.56 0.77
2014-15 14408.92 6211.15 2.32
2013-14 21594.13 5717.84 3.78
2012-13 14181.71 6699.86 2.12
2011-12 12746.62 5257.09 2.42

Netsales to Inventory ratio

4
3.5
3
2.5
2 Netsales to Inventory
1.5 ratio
1
0.5
0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

The efficiency of the company in converting inventory to sales is very low in the year 2016
because the net sales are poor. There is 56% drop in netsalesin 2016when compared to previous
year. The poor sales are attributed to the overall performance of industrial segment. The power
segment has been plagued by lack of capex1 from companies due to the economic slowdown.

4.7 SPARE PARTS TURNOVER RATIO

Computation formula: Spare parts Investment /Value of Capital goods.

Spare parts inventory turnover ratio shows the efficiency of the company inmaintaining the spare
part inventory. Spare parts are used to the replace the parts of the capital goods which do not
function due to technical issues. Hence, the effiency should always be determined by considering
the total value of capital goods in the company such as equipment, machinery e.t.c that are used
to process the raw materials. The turnover ratio always shows direct proportionality to
efficiency. Hence, when the turnover ratios are more the efficiency said to be high.

In lakhs In lakhs
Spare parts Value of capital Spare parts turnover
Year investment goods ratio
2016-17 775.28 17698.52 0.04
2014-15 450.61 9739.13 0.05
2013-14 749.17 8303.86 0.09
2012-13 665.18 8264.41 0.08
2011-12 509.03 8153.47 0.06

1
Capital expenditures (CAPEX or capex) are expenditures altering the future of the business. A capital expenditure
is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset
with a useful life extending beyond the taxable year.
 Spare parts turnover ratio
0.1
0.09
0.08
0.07
0.06
0.05
Spare parts turnover ratio
0.04
0.03
0.02
0.01
0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

The company has maintained spare parts investment at an average of6% of total value of capital
goodsthrough out the 5 years. In the year 2016, the value of capital goods increased by nearly
50% when compared to previous years. But the company has maintained spare parts amount to
only 4% of total value of capital goods. The efficiency of the company in keeping the spare parts
is quite good in the year 2014.

4.8 SCRAP DISPOSAL INDEX

Computation formula: Value of Scrap disposed / Total Value of scrap

Scrap disposal index shows how effective is the company to dispose its scrap. Scrap
management is an important aspect of a manufacturing company because there are high amounts
of scrap produced while converting raw materials to finished goods. Apart from that, obsolete
inventory is also considered scrap. Anything that is of no value to the customer and is not the
part of the product portfolio becomes scrap. Scrap disposal index is determined by examining the
value of scrap disposed out of total value of scrap
 In lakhs In lakhs
Total value of
Year Value of Scrap disposed scrap Scrap disposal index
2016-17 70.39 288.4 0.24
2014-15 87.44 340.8 0.26
2013-14 45.38 379.11 0.12
2012-13 212.12 337.14 0.63
2011-12 78.46 308.05 0.25

Scrap disposal index

0.7
0.6
0.5
0.4
0.3 Scrap disposal index

0.2
0.1
0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

Out of the previous 5 years, the company has shown efficient scrap management in the year 2013
as the company has disposed nearly 63% of its scrap. Company’s scrap management is mainly
driven by MSTC. It depends upon the quoted prices and bidding prices in various tenders and
auctions conducted by MSTC to sell the scrap of BHEL-HPVP. In 2016, the value of scrap
disposed is lower and hence the scrap disposal efficieny was not good.

4.8 VCASH CONVERSION CYCLE

Computation Formula CCC = DIO + DSO – DPO

CCC  Cash Conversion Cycle

DIO Days Inventory Outstanding

DSO Days Sales Outstanding

DPO  Days Payable Outstanding

The cash conversion cycle (CCC) is one of several measures of management effectiveness. It
measures how fast a company can convert cash on hand into even more cash on hand. The CCC
does this by following the cash as it is first converted into inventory and accounts payable (AP),
through sales and accounts receivable (AR), and then back into cash. Generally, the lower this
number is, the better for the company.

Let's look at each component and how it relates to the business activities discussed above.

DIO = Average inventory/COGS per day

Average Inventory = (beginning inventory + ending inventory)/2

Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and
involves AR. While cash-onlysales have a DSO of zero, people do use credit extended by the
company, so this number will be positive. Again, smaller is better.

DSO = Average AR / Revenue per day

Average AR = (beginning AR + ending AR)/2

Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP.
If this can be maximized, thecompany holds onto cash longer, maximizing its investment
potential; therefore, a longer DPO is better.

DPO = Average AP/COGS per day

Average AP = (beginning AP + ending AP)/2

Days Inventory Days Sales Days Payable Cash Conversion

Year Outstanding Outstanding Outstanding Cycle
2016-17 619.20 987.78 825.56 781.42
2014-15 257.78 450.54 359.56 348.77
2013-14 228.03 248.81 178.75 298.09
 2012-13 280.15 274.03 172.34 381.84
2011-12 263.56 251.56 161.72 353.40

Cash Conversion Cycle

900
800
700
600
500
400 Cash Conversion Cycle
300
200
100
0
2015-16 2014-15 2013-14 2012-13 2011-12

Interpretation:

In 2016, the cash conversion cycle is 781 days which is not a satisfactory period. That means the
company has not converted to cash for more than 2 years. It is a fact that the company’s cycle
time is 18 months. So, in an general situation, the customer pays the company only after 18
months which is 1 and a half year. In all the remaining years the cash conversion cycle is nearly
one year which is a better figure considering the cycle time. But, the period in 2016 shows that it
took along time to convert liquidresources to readymoney.