Inventorty Management

A
STUDY ON
“INVENTORY MANAGEMENT”
With special reference to
“BHARAT HEAVY ELECTRICALS LIMITED” VISAKHAPATNAM.
A project report submitted to ANDHRA UNIVERSITY,VISAKHAPATNAM for the approval
Of project proposal in the partial fulfillment for the award of the degree of
MASTER OF BUSINESS ADMINISTATION
Submitted by
Mr. PALIPANA CHINNARAO
Regd No:116225602062
Under the guidance of

Dr K. SATYANARAYANA M.com, MBA, PHD
Associate Professor
DEPARMENT OF MANAGEMENT STUDIES

NOBLE INSTITUTE OF SCINCE AND TECHNOLOGY
(Affiliated to ANDHRA UNIVERSITY )
MANTRIPALEM, LANKELAPALEM JUNCTION
VISAKHAPATNAM-531021.
(2016-2018)
DECLARATION
I PALIPANA CHINNARAO a bonafied student of Department NOBLE INSTITUTE OF SCIENCE
AND TECHNOLOGY, hereby declare that the project “INVENTORY MANAGEMENT” with
reference to BHARAT HEAVY ELECTRICALS LIMITED, Visakhapatnam submitted in partial
fulfillment for the award of MBA Degree to Andhra University is an original work
of mine. It has been submitted to any University or institute before.
P. CHINNARAO
Regd No: 116225602062

Noble Institute of Science & Technology
Affiliated to Andhra University,
Lankelapalem, Visakhapatnam
CERTIFICATE
This is to certify that the project work entitled “INVENTORY MANAGEMENT” With
special reference to“BHARAT HEAVY ELECTRICALS LIMITED” VISAKHAPATNAM
Is being submitted by P. CHINNARAO to the Noble Institute Of Science And Technology
in partial fulfillment for the Award of Degree of Master of Business Administration. This work
has been carried out under my guidance and supervision.
Mrs.G.V.S.Sailaja.,
M.B.A., M.Phil.,(Ph.D) Dr K. SATYANARAYANA
Associate Professor Associate professor
(Head Of Department) (Project guide)

ACKNOWLEDGEMENT
I am truly privileged that I got the opportunity to do my project in a reputed organization like BHARAT
HEAVY ELECTRICALS LIMITED VISAKHAPATNAM ”.
The report titled “INVENTORY MANAGEMENT “ a study in” BHARAT HEAVY ELECTRICALS LIMITED
VISAKHAPATNAM ”.
” represents the guidance and cooperation of few individuals, to whom I would like to express my deep
sense of gratitude.
I whole heartedly thank Mrs.G.V.S SAILAJA (H.O.D) Dept of management studies MBA. M Phil, (PhD)
and Dr .K. SATYANARAYANA , Assistant Professor for guiding me in my work and providing me with
valuable information and suggestions.
I am grateful to the executives of different departments who have been a great help and showed their
support as and when required. The study reinforced the theoretical and practical knowledge acquired in
terms of applications.
CONTENTS
 CHAPTER – I
 INTODUCTION
 Need for the study
 Objectives of the study
 METHODOLOGY
 Limitations
 Chapterization
 CHAPTER-II:
 Industry Profile
 Company Profile
 CHAPTER-III:
THEORETICAL FRAME WORK
 CHAPTER- IV:
DATA ANALYSIS &INTERPRITATION
 CHAPTER-V:
 Summary
 Findings
 Suggestions
 Annexure
 Bibliography
CHAPTER – I
 INTRODUTION
 Need for the study

 Objectives of the study
 METHODOLOGY
 Limitations
 Chapterization.
1.1 INTRODUCTION
BHEL-HPVP PLANT
HEAVY PLATES & VESSELS PLANT is a unit of BHARAT HEAVY

ELECTRICALS LIMITED, a Maharatna Central Public Sector Enterprise. Earlier this
plant was a separate company namely, BHARAT HEAVY PLATE & VESSELS
LIMITED (BHPV).
A B OUT B H PV
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. Also, BHPV is highly
reputed for the Quality and reliability of its products and possesses several National &
International Quality accreditations besides ISO 9001:2000 certification.
BHPV’s beginning was humble; it had a turnover of just Rs 1.95 cr in 1971-72 when
commercial production first commenced. Since then, BHPV has come a long way and
exceeded a turnover of Rs 300 crores expanding its product line to include high
technology equipment and systems like Multi-layer Vessels, Turn Key Cryogenics
Plants, Storage and Distribution Systems, Industrial Boilers, Waste Heat Recovery
Systems, Oil and Gas Processing Systems etc.
This is one company which houses excellent engineering skills, uncompromising quality
control, dedicated erection & commissioning team under one roof, a combination
resulting in India’s self-reliance. BHPV acquired various National and International
quality accreditations such as ASME, National Board etc.
Today, after merging with BHEL, BHEL-HPVP stands with vast manufacturing
capability and can manufacture process equipment of almost any size.
BHPV is the largest fabricator of process equipment in India for the petroleum, fertilizer,
chemical and allied industries. It is a subsidiary of a navaratna Central Public Sector
Enterprise – Bharat Heavy Electricals Limited and is managed by an autonomous
separate board of directors. Situated in the city of destiny of Visakhapatnam on the
Western sea coast of the Deccan Plateau, BHPV is accessible by road, rail, sea and is
well connected to all metropolitan cities by air.
HPVP, a manufacturing unit of BHEL has been selected for the study. The topic selected
is “Analysis of Inventory Management” with reference to BHEL-HPVP.
1.2 NEED FOR THE STUDY
In the early 2000s, the financial performance of the industry went under great strain, due
to a combination of adverse factors, which got bunched year by year. Since 2001 steep
rise in exorbitant interest costs, increased inflation, global competition, Government
policy etc further aggravated the situation.
However, from the year 2008, the company started showing positive signs in the
operations and stared earning profits. The main reason for this development is the
decision of the Government to delink the company from BYNL, Allahabad and make it
part of Heavy Electrical Equipment Conglomerate BHEL. The year 2008 can be said as
RE-BIRTH year for BHEL-HPVP.
BHEL, from the date of taking over BHPV in 2008, started to look after key areas like
utilization of plant capacity to the fullest extent, attention on financial discipline, HR
related problems, Capex etc. From the year 2008 the company re-started its business with
new look, strategies, diversification and once again started gaining customer confidence,
thereby earning positive financial figures and on the way of regaining past glory.
The importance of the study, Inventory Management in BHEL-HPVP, Visakhapatnam

presupposes that one very important reasons for which Public sector Enterprises in India
have suffered financial strains in the late 80s and in 90s or earned low Level of profit
may relate to the misconstruing of the financial aspects. Had these Enterprises managed
the overall finance operations in an efficient manner, they would have generated
resources for its growth as well as economic growth.
1.3 OBJECTIVES OF THE STUDY
This study of ‘INVENTORY MANAGEMENT’ has been undertaken to evaluate the

financial efficiency of the organization by establishing the following objectives:
 To evaluate the inventory management practices in BHARAT HEAVY

ELECTRICALS LIMITED
 To understand about the study intends to gain the real time manufacturing of the
material in an enterprice through inventory management
 To study the inner intricacies involed in managing the material flow right from
the organization need for stroring material to supplying the material for
production.
 To indentify the factor responsible for the excess or shortage of inventory of the
company.
 To offer suggestions for the effective management in BHARAT HEAVY

ELECTRICALS LIMITED.
1.4 METHODOLOGY
The analysis of the project was based on the available information. Any information
about the topic is called the data. The data was gathered from various sources i.e.,
Primary and Secondary sources.
Primary Data: Any information that is collected afresh and for the first time is called
Primary data .The primary data happen to be original in character. The
Information is gathered from concerned employees. The employees and manager of the
financial department have provided the information needed for the study.
Secondary Data: Information which has already been collected by somebody else or
some other agency with definite purpose and which has already been processed is called
secondary data. The secondary data for the study have been gathered from the balance
sheets, profit and loss accounts annual reports and other books and manuals of the
BHEL-HPVP LTD.
1.5 LIMITATIONS OF THE STUDY
Every study is conducted under certain limitations. The study relates only to Inventory
and hence, other areas are not taken into consideration. The study is carried out only for
a period of 10 weeks. It was not possible to get cent percent correct information. The
research was made according to the information available from related departments and
through annual reports published. The sent study covers only for a period of five years
from 2011 to 2016. So the analysis will be made on this basis. Below are the financial
years considered for the study.
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
1.6 CHAPTERISATION
Chapter-1:
The first deals with introduction to the concept of inventory management.
Chapter-2:
The second chapter contains the profile of BHEL Industry with a special focus of
inventory management.
Chapter-3:
The third chapter deals the Theoretical Frame Work of inventory management
with a specialfocus on inventory management practices BHEL industry.
Chapter-4:
The fourth chapter deals the data analysis and interpretation of the opinion of
respondents on inventory managementin BHEL industry.
Chapter-5:
The fifth chapter Summarizes with summary, Findings, Suggestions.

CHAPTER – II
INDUSTRY PROFILE
&
COMPANY PROFILE
INDUSTRY PROFILE
INDIAN POWER SEGEMENT
Power is a necessary fuel for a growing economy. The Indian economy is on a rising
path targeting GDP growth rate of 8-9%. To achieve this growth, it is imperative that
proper power infrastructure is in place. India has the fifth-largest generation capacity in
the world with an installed capacity of over 211 GW, as on 31st January, 2013 and is
also the sixthlargest electricity consumer, accounting for 3.4% of total global
consumption. India’s per capita consumption of electricity was 879 kWh in 2011-12. The
industrial sector, due to increasing capacity additions, has the highest demand for
electricity across all sectors and is expected to remain high. The domestic and
commercial sectors are likely to experience a steady increase in demand for electricity,
but the share of agriculture is expected to see a decline in the coming years
FUTURE TREND
Global Electricity Market:
The global EE industry consists of the following two segments:
a. The global heavy electrical equipment market including boilers, turbines, generators
(BTG1), wind turbines, solar power systems, etc.,
b. The global T&D2 equipment market, including electric power cables, transformers,
electrical switchgear, transmission line towers, conductors, control equipment, meters,
etc.
The demand for electricity worldwide is projected to grow at an annual rate of 2.4% for
the period 2009–2035, driven by economic and population growth. Over 80% of the
growth between 2009 and 2035 is expected to be in non-OECD countries.
1BTG – Boiler, Turbine, Generator

2 T&D – Transmission and Distribution
Indian Power Sector:
The demand for electrical equipment in India is expected to witness a significant

expansion on the back of the growth of the power sector. The government is likely to add
around 88.5 GW and 93 GW, respectively, under its 12th and 13th Five Year Plans.
Based on investment estimates and capacity addition targets, it is expected that the
domestic demand for BTG will be in the range of 125,000-150,000 crore (US$ 25-30
billion) by 2022, while that of the T&D equipment industry will be 350,000– 375,000
crore (US$ 70-75 billion)
INDIAN ELECTRICAL EQUIPMENT INDUSTRY – A SWOT
ANALYSIS
Strengths Weaknesses
›› Diversified, mature and strong ›› Upward volatility in raw material and
manufacturingbase, with robust supply other metalprices.
chain, fully equipped tomeet domestic
demand / capacity addition. ›› High cost, poor quality and shortage of
rawmaterials and other inputs.
›› Rugged performance design of
domestic electricalequipment to meet ›› Dependence of some sub-sectors on
tough network demand. import ofcritical inputs.
›› Good mix of large private and public ›› Low investment in R&D and no
sectorenterprises, multinational structured longtermapproach for basic
companies and smalland medium research.
companies.
›› Looming shortage of skilled technical
›› Domestic presence of major foreign manpowerand low productivity.
players,either directly or through
technical collaborationswith domestic ›› Inadequate and costly domestic testing
manufacturers. andcalibrating facilities for electrical
equipment.
›› State-of-art technology in most sub-
sectors at parwith global standards. ›› Lack of standardisation of product
specifications,design parameters and ratings
›› Domestic availability of low-cost for generation &distribution equipment
skilledmanpower. across different utilities.
›› Emerging global reputation of Indian ›› Bunching of orders by utilities, because

electricalequipment for sourcing offactors beyond their control such as
products and componentsand also of governmentapprovals, release of funds, etc.,
Indian transmission and other EPC resulting insub-optimal utilisation of
contractors. available domesticmanufacturing capacity.
›› Badly designed and diverse procurement
policiesand qualifying criteria of utilities.
›› Outdated tendering procedures and

contractawarding based on L1 bidder by
utilities.
Opportunities Threats
›› Domestic demand: to sustain the ›› Problems of fuel linkages, land
envisaged annualGDP growth rate of acquisition,environmental clearances, etc.
around 8-9% over the next 20years, it are impedinggrowth in the country’s power
has been estimated that India will sector which maylead to less than
requireto increase its electricity anticipated growth in demand for
generation capacity byaround five times electrical equipment.
by 2032.
›› Absence of a level playing field for the
›› Rapid growth in metros, airports and domesticindustry to compete with
otherinfrastructure projects is expected to escalating imports ofelectrical equipment.
generatehuge demand for matching BTG
and T&Dequipment. ›› Poor financial health of DISCOMs and
very highAT&C losses may have a
›› External demand: Currently, share of cascading effect on thegrowth of BTG as
India’sexports in the global market is well T&D equipment industry.
less than 1 percent. With the electricity
sector being a sunrisesector across the ›› Rising global concerns on the trade-offs
entire developing world, thereexists a between economic growth, energy security
significant export potential for andenvironmental sustainability.
thedomestic industry.
TECHNOLOGY INTAKE OF BHEL-HPVP FROM POWER SEGMENT
Experienced in design of columns, multi layer vessels, heat exchangers, liquid oxygen &
nitrogen unit, evaporation plants, digesters, mounded vessels, sulphur recovery unit, gas
dehydration, desalters, heater treaters, crude stabilizations unit, storage vessels etc.,
backed by Technology absorption & adoption from the world leaders.
1. Skoda Exssport , Czechoslovakia.
2. L’Air liquid, France.
3. KAMYR - AB Sweden
4. ARAMCO
5. NRDC, India
6. Hahn & Clay, USA.ETC.,
Boilers
BHEL-HPVP absorbed technology from BHEL for industrial boilers Design,

Engineering, Manufacture, Erection, Testing & Commissioning of Boilers with
horizontal transfer of technical know – how from BHEL. Capacities up to 200 TPH in
low , medium and high pressure ranges with superheat up to 540 degree centigrade
equipped with all modern features like.
1. FSSS (Furnace Safeguard Supervisory System)
2. Oil storage, pumping & heating units.
3. Fire fighting system.
4. Erection & Commissioning of STGs.
5. Dynamic simulation of power plant.
Fired Heaters
Technology absorption from ABB Lummus heat transfer (LHT) for design and
manufacture, Erection & Commissioning of Fired Heaters in the following type
1. Crude and Vacuum Heaters

2. Coker Heaters
3. Hot Oil Heaters
4. Charge Heaters
5. Recycle Heaters
MARKET PROFILE
This covers the product range of customer profile and competitor’s profile.
C US T O M E R P R O FI L E
BHEL-HPVP’S clientele includes-
 Public
 Private
 Co-operative
Sector organizations in almost all the core sector of economy such as:
 32 fertilizer plants
 22petrolium refineries
 12 petro chemical complexes.
 All major integrated steel plants in India
 Oil and gas
 Nuclear and defense etc.
Other major customers are from paper, power, non ferrous, chemicals, pharmaceuticals,
synthetic fibers, coal, dairy, space sectors.
 IOCL - all units

 FACT - Cochin
 GAIL - AURAIYA
 IFFCO – all units
 RCF – all units
 DCI – Visakhapatnam
C OMPETITOR PRO FILE
Competitors in Process Plants
 L&T
 GR Engg
 Lloyds steel
 ISGEC
 Godrej & Boyce
Competitors in Cryogenic Plants

 ICCP
 Sanghai Oxygen, China
 L&T
 Linde process systems, Germany
 BOC, UK
 Air products,UK
 Kobe, Japan
 Hitachi
 HOPM, China
Competitors in Boilers / Combustion Systems

 ISGEC
 Babcock
 Ignifluid boilers
S UPPLIERS
 SAIL
 RINL
 JSPL
ANALYSIS OF INVENTORY MANAGEMENT
2.1 COMPANY PROFILE
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 2015-16 : 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.
 Maximum Rolling capacity is 60mm in cold condition and 170mm in hot condition.
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
Diversification
● Originally established for fabrication of process equipment.
● As a step towards diversification signed collaboration agreement with M/s L’ Air

Liquide of France in 1971 for manufacture of –
○ Air & Gas separation plants

○ Cryogenic storage systems
● Further diversified into the area of industrial boilers in the range of 50 – 200 TPH
in collaboration with M/s BHEL in 1981 based on the recommendation of the
working group constituted by DHI.
● Entered into the area of oil & Gas Processing systems in 1990 in collaboration
with M/s B.S & B Engg. Co., USA.
Collaboration And Absorption Of Technologies
Some of the significant collaborations of BHEL-HPVP entered include:
● M/s BSL, France in respect of Field erected Cryogenic Storage Tanks.

● M/s Delas, France in respect of Deaerators.
● M/s ABB Lummus, Netherlands for Heat Transfer Systems.
Case – to – case tie ups, BHEL-HPVP entered into include:
● Evaporators from M/s Ecodyne Corporation, USA
● Paper & plus digesters from M/s Kamyr AB, Sweden
● Primary reformer from M/s HalderTopse, demark
● Waste heat boiler from Borsig, Germany
● Feed water heater from delas, France.
● Argon recovery unit from M/s L’AirLiquide, France etc.
● Ammonia storage system from M/s KTI, Germany etc.
By absorbing know-how from various world renowned collaborators, BHEL-HPVP

upgraded its status from a mere fabricator of process equipment to that of an engineering
company of international repute.
PROJECTS OF NATIONAL IMPORTANCE EXECUTED/UNDER

EXECUTIONS
S.NO. CUSTOMER PROJECT/EQUIPMENT
1. IOCL, Panipat Hydro cracker reactors-3 No.
2. IOCL, Panipat Reactor, Regenerator & Office Chamber
3. IOCL, Panipat Reformer WHR Package
4. IOCL, Mumbai 150 MT Capacity LPC bullets
5. IOCL, Chennai Sphere
6. BOKARD STEEL PLANT, Argon Recovery unit

Bokaro
7. NRL, Numaligarh Air Fin collers/SS Clad Vessels, Spheres etc.
8. HPCL, Visakhapatnam CDU Heater with APH System/VDU Heater
9. HPCL, VREP – II Visakhapatnam Clad/CS Columns/CS heat Exchangers etc
10. HPCL, Visakhapatnam Co-boiler
11. HPCL, Visakhapatnam Revamping of 50TPH oil & gas fired boiler
12. HPCL, Mumbai 50 TPH Boiler
13. BPCL, Mumbai Nitrogen Plant
14. BHEL Thirichy Boilers
15. Hyundai Heavy Industries, New Cryo Nitrogen plant

Delhi
16. Space application centre, 505m Dia thermal vacuums system
Ahmedabad
17. Technimont ICB LTD. Mumbai Nitrogen plant
18. Oswal chemical fertilizer ltd – Waste Heat LP boilers

Paradeep
19. IFFCO, Kandla 15,000mt ATM ammonia storage tank
20. NALCO, Damanjodi Modification of Evaporator Batteries
Product Diversification
The company has undertaken several EPC contracts on EPC/LSTK basis at various
locations in India and abroad. The Company R&D Department has developed
technology for manufacture of compact Heat Exchanger for the light Combat Aircraft
(LCA) under the funding by Aeronautical Development Agency (ADA). BHEL-HPVP
now with the technology acquired from BHEL (Holding Company), diversified into
power plant equipment, namely HRSG Boilers, Dearators etc.
Major Customers
● Fertilizer industry
● Petroleum refineries
● Petrochemical complexes
● Steel plants
● Chemical industries
● Power sector
● Nuclear, Defense & space sectors
Major Competitors
● Larsen & Turbo

● GR Engg
● Lloyd steel
● I.O.L
● INOX
● L&T
● Linda, Germany
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”.
LLOYDS REGISTER OF INDUSTRIAL CLASS-1
Certificate for fusion welded pressure vessels:
Asme U & U2 stamps on pressure vessels
Asme ‘S’ stamp for industrial boilers
National board of bolier& pressure vessels ‘R’ stamp for repays of coded vessels
inspectors, U.S.A
Stami carbon Urea reactors
Haldortopsoe Ammonia reactors and high pressure heat exchangers
Arbian American oil company Process plants

RESEARCH & DEVELOPMENT
Research & Development department was established in 1975 and is well

equipped with high tech equipment to cater to Applies Research and Product
Development. R&D has developed 136 Projects so far. Some of the products
commercialized include:
1. Titaning Anodes
2. Titanium Air Bottles
3. Cryo Vats
4. Individual Quick Freezing Unit
5. Super Insulated Piping
6. Super Insulated Crow Storage tanks
7. D.M. Water Plants
A prestigious order for Development of Heat Exchangers for Light Combat

Aircraft (LCA) Phase-II has been received from Aeronautical Development Agency,
Bangalore.
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.
CONSTRAINTS
 Dependence on imports even for common materials like Boiler Quality Plates.
 Port congestion adding to the delays in importing of materials.
 Big burden of high internet rates on working capital while competing with
International suppliers who have the facility of very low interest rates.
 Shortage of Man Power due to V R Scheme several times.
 Replacement/updating of machinery.
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.
Due to the impressive performance of the company during the years 2011-12, 2012-13
amd 2013-14, the holding company has proposed merger of BHPV as its 17th
manufacturing unit and the same was cleared by the Government of India.
AN OVERVIEW OF TOP MANAGEMENT
At Corporate level the company’s affairs are managed by the Board consist of full time
Managing Director and CMD, BHEL as the chairman of the board. In addition, 1 Ex
officio Director from DHI (administrative ministry) & 2 functional Directors also
constitute the Board.
SYNERGY OF BUSINESS AFTER MERGER

The merger of BHEL-HPVPhas the following advantages:
 Managerial and marketing support from BHEL.
 Diversification into High Pressure Power Boilers.
 Technological Support for new products.
 Financial Support for up – gradation of manufacturing facilities, Capex and

Working Capital Requirements.
 Ensured flow of new orders.
 Synergy between the two organizations in view of similarity of

products/technologies.
 Business advantage due to excellent Brand Image of BHEL.

CHAPTER-III
THEORETICALFRAMEWOR
THEORETICAL FRAMEWORK
FINANCIAL MANAGEMENT
Financial management is managerial activity which is concerned with the planning and
controlling of firm’s financial resources. It was a branch of economics till 1980 and as
a separate discipline it was of recent origin. Still it has no unique body of knowledge of
its own and draws heavily from economics for its theoretical concepts even today.
Theory of financial management provides conceptual and analytical insights to make
decisions relating to the financial aspects of organization skillfully.
Definitions of financial management: “Financial management is concerned with the

efficient use of an important resource namely, capital funds”. –EZRA SOLOMAN
“Financial management is concerned with the managerial decisions that result in

the acquisition and financing of long-term and short-term credits for the firm”. –
PHILLIPPATUS.
“Financial management is that business activity which is concerned with the

acquisition and conservation of capital funds in meeting financial needs and
overall objectives of a business enterprise”. – WHEELER
These definitions we can understand the functions of the financial management. Those
are procurement of funds and effective utilization and part of these functions use
different techniques.
OBJECTIVES OF FINANCIAL MANAGEMENT
Quite obviously, the objective of the firm should be the maximization of its value of the
shareholders. The price of shares in the market indicates the value of the firm. Factors
like investment, financing and dividend exercise an influence on the market price of the
shares. The main objectives of financial management can be said as:
1. Profit Maximization
The objective of every organization is profit maximization. Profit Maximization means

maximizing the rupee income of firms. Profit is considered as the most appropriate
measure of a firm’s performance.
2. Wealth Maximization
It is a long - term objective. Wealth maximization is nothing but increasing the wealth of
the shareholders by way of contributing to the net worth of the shareholders.
For attaining these above said objectives financial manager makes crucial decisions
relating to investment in different projects, dividend decisions , debt equity mix
decisions, source of finance, analysis of ratios and working capital management.d
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
Objectives Of Inventory
The main objective is to maintain overall investment in inventory at the lowest level
consistent with operating requirements.
1. To supply the product, raw material, sub assemblies, semi-finished goods etc., to the
users as per their requirements at right time and at right price
2. To reduce waste, surplus, scrap and obsolete items at the right price
3. To minimize holding, replacement and shortage costs of inventories and maximize the
efficiency in production and distribution.
4. To treat inventory as investment which is risky investment may lead higher returns
and for others less returns
Functions of Inventory
It is understood, inventory is a necessary evil and necessary because it aims at absorbing

the uncertainties of demand and supply by decoupling the demand and supply sub
systems. Thus and organization may be carrying inventory for the following reasons.
The uncertainties in demand and lead time necessitate building of safety stock so as to
enable various sub systems to operate somewhat in a decoupled manner. It is obvious
that the larger the uncertainty of demand and supply, the larger will have to be the
amount of buffer stock to be carried for a prescribed service level.
Time lag in deliveries also necessitates building of inventories. If the replenishment lead
times are positive then stocks are needed for system operation.
Cycle stocks may be maintained to get the economies of scale so that total systems cost
due to ordering, carrying inventory and backlogging are minimized. Technical
requirements also build up cycle stock.
Stocks may build up as pipeline inventory or work in process inventory due to finiteness
of production and transportation rates. This includes materials actually being worked on
or moving between work centers or being in transit to distribution centers and customers.
When the demand is essential, it may become economical to build inventory during
periods of low demand to ease the strain of peak period demandInventory may also be
built up for other reasons such as quantity discounts being offered by suppliers, discount
sales, anticipated increase in material price, possibility of future non availability etc.
Importance of Inventory Management
In the process of converting raw material into finished products, we need various items
from market / suppliers but the uncertainty over availability and correct arrival of goods
when they required is the fundamental reason for carrying inventories. The scope of
inventory management is:
Determining EOQ
Determination of stock out
Determination of safety stock
Determining lead time
Determination of inventory status
Minimizing handling and storing cost
Effective running of stores
Defining policies to guide the inventory control programmes
Determining the most appropriate store organization structure

Inventory Classification
The inventory classification is based on the following aspects.
1. Manufacturing aspect
2. Service aspect
3. Control aspect
1. Based on Manufacturing aspect
Raw Materials and supplies Inventories: These consists of raw materials, parts,
subassemblies and supplies, which the companypurchase from outside sources, namely
suppliers, dealers or manufacturers.
Production Inventories: Raw materials, parts and components, which become part
of the product during the production process, are called production inventories.
M.R.O Inventories: Maintenance, repair and operation supplies (M.R.O) inventories,

which are assumed in the production process but do not become part of the product. For
example, oil, spare parts.
In- Process Inventories: These are processed or semi-finished products

manufactured at various stages during the production cycle. In a bicycle factory frames,
pedals, rims, axles etc. are called in-process inventories or work- in progress inventories.
Finished Product Inventories: Finished goods or stocks are completed products

ready to be sent away to the market or customers. These products have been fabricated or
manufactured or assembled from production and in-process inventories, i.e. a complete
bicycle in case of a cycle manufacturing factory or a car in case of a car in case of a car
manufacturing factory.
Material in Transit Inventories: These are raw materials and supplies

inventories which are in transit and have already been paid for. These have not so far
been received at the factory.
2. Based on Service aspect
Lot size:
This means purchase in lots.
This is resorted to Obtain quantity discounts
Reduce transportation and purchase costs
Minimize handling and receiving costs
(it would be uneconomical for a textile unit to buy cotton everyday rather than in bulk
during the cotton season.)
Anticipation Stocks: These are kept to meet predictable changes in demand or in

availability of raw materials. The purchase of potatoes in the potato season for sale of
roots preservation products throughout the year is an example of this kind.
Fluctuation Stocks: These are carried to ensure ready supplies to consumers or

customers in the face of irregular fluctuations in their demands.
Risk Stocks:These are the items needed to ensure that there is no risk of complete
breakdown of production. These are items with ling lead time for supply but are vital and
critical for production.
3. Control Of Inventory(ABC Classification):

A good start in examining an inventory control system is to make ABC classification. It
is known as ABC analysis which means the ‘Control’ will be ‘Always Better’ if we
startwith ABC of inventory. This concept divides inventories into three groupings in
terms of percentage of number of items and percentage of total value as given in
A. items group constitutes 10% of the total number of items and 70% of the total money
value for all items.
B. items group constitutes 20% of the total number of items and 20% of the total money
value for all items.
C. Items group is just opposite of A –items group. It constitutes 70% of the total number of
items and 10% of the total value.
This classification provides clear cut indications for fixing priorities of control to the
items. A class items must receive the attention first in every respect of the control i.e.
tight control, sound operating doctrine, attention to security etc.
INVENTORY MODELS
Inventory Models are used to reduce costs like overstocking costs and under stocking
costs. The following are some models of Inventory.
EOQ : Economic Order Quantity
FOIS : Fixed Order Interval System
FOQS : Fixed Order Quantity System
ORS : Operational Replenishment System

1. ECONOMIC ORDER QUANTITY
EOQ is essentially an accounting formula that determines the point at which the
combination or order costs and inventory carrying costs are the least. The result is the
most cost effective quantity to order. EOQ may not applicable to every inventory
situation; most organizations will find it beneficial in some aspects of their operations.
EOQ is generally practical when repetitive purchasing or planning of an item and
multiple orders or release dates for the same item is done.
EOQ is generally recommended in operations where demand is relatively steady; items

with demand variability such as seasonality can still use the model by going to shorter
time periods for the EOQ calculations.
EOQ = 2 (Annual usage in units) x (order cost)

(Annual carrying cost per unit)
Annual Usage: The forecasted annual usage and is expressed in units
Order Cost: Total number of orders for the year multiplied by the cost of makingone
Order. Annual number of orders is annual demand divided by the quantity per orderi.e.
D/Q As the size of order increases, number of orders decreases and cost of ordering
decreases. If S= the cost of placing an order, then total annual ordering cost would be
(D/Q)*S. Ordering cost is also known as the purchase cost or the set up cost. These costs
are not associated with the quantity ordered but primarily with physical activities
required to process the order.
Carrying or Holding Costs: Average amount of inventory on hand multiplied by cost to

carry one unit for the year. Average inventory is ½ of the order quantity, for any period,
If we start out with Q and end up with 0 at the end of the period then ( Q+0)/2 = Q/2 If
H = average annual carrying cost per unit, total annual carrying cost would be( Q/2)*H.
Assumptions of EOQ Model:

Only one product is involved
Annual demand requirements known
Demand is even throughout the year
Lead tune doest not vary
Each order is received in a single delivery

There are no quantity discounts
2. FIXED ORDER INTERVAL SYSTEM
In this method, the inventory is reviewed regularly such as once a month and based on
the review how much to be ordered is assessed. After our review, we order an amount
equal to the difference between the maximum level and the amount on hand. We must
order an amount to satisfy demand over one order cycle and one lead time.
Due to technological improvements this method does not prove to be advantage and
diminishing its use.
3. FIXED ORDER QUANTITY SYSTEM

In this method the order quantity is fixed and order or re-order is placed whenever the
inventory touches a certain level, known as the order or reorder point. FOQ defined as
ROP (Reorder point) = Mean Lead time consumption
INVENTORY COUNTING SYSTEMS
Inventory needs to be properly accounted for as it is the form of money. There are two
principal ways of accounting for inventories.
Perpetual Inventory system
Periodic Inventory system
Perpetual Inventory System: is a system of records maintained by the controlling

department, which reflects the physical movement of stocks and their current balance.
Perpetual inventory means the system of records, whereas continuous stocktaking,
physical checking of those records with actual stocks.Shortages can be avoided and
management can determine the optimal order quantity to use for every order.
Advantages:
The stocktaking task, which is long and costly, is avoided under this method
Management will have daily information of inventory on hand.
The investment in materials and supplies may be kept at the lowest point in
conformity with operating requirements.
Disadvantages:
It includes added costs of record keeping, checking etc.
Periodic Inventory System: is also called P-system. This system has a fixed
ordering interval but the size of the order quantity may vary with changes in
demand. In this method the inventory is checked at prefixed intervals (weekly,
monthly, quarterly etc)
Advantages &Disadvantages; Many items can be ordered at the same time

resulting in economies in processing and shipping. Possibility of stock outs
between reviews and the time and cost of a physical count.
Inventory Measurement/ Counting System:
Two- bin system: This system operates on reorder level (ROL) system and it physically
segregates the stock of entire items into two bins. In this method two containers of
inventory will be kept.
The second bin contains quantity equal to ROL i.e. (m+LC) where m= safety stock, L =
lead time, C= consumption rate and Q = recorder quantity.
FACTORS AFFECTING INVENTORY
Various factors both internal and external which have influence on inventory are:
 Lead time
 Relevant costs
 Ordering costs
 Inventory carrying costs
 Under stocking costs
 Over stocking costs
 Service level
 Obsolete inventory
 Scrap
1. Lead time: It is defined as the period that elapses between the recognition of a need
and its fulfillment. It has to follow the following broad pattern before ordering an item
and making it available which includes in the total ordering cycle. Once the item is made
available then the need that item is over till a further need of same item raises. The whole
cycle classified into 4 Lead time categories:
Internal lead time (or) Administrative lead time: It starts from identifying the need for
an item till and order is placed for that item. Requirement for an item has to be first
identified before it is ordered. Need for an item could be a requisition by the users
department or can be arrived against a pre-determined forecast. It may take a long time
before an actual need is finished.
External lead time: Once an order is placed or supplied, a purchaser has to entirely wait
till the supplier delivers the goods. It includes a regular follow up to ensure a timely
supplier within the stipulated period is very important. Lead time of a manufacturer
depends on his business and time taken to manufacture and dispatch a product.
Transportation lead time: It is the period from the time a manufacturer dispatches the
goods to the time of actual receipt of the goods at stores of the purchaser. Lead time
transportation is very high when the distance of the source of materials is very large,
especially in imports. In such situations are has to keep adequate stocks not only to meet
the production demand but also to take care of transportation time.
Inspection lead time: Every material which comes to the store has to be subjected for
inspection to evaluate its quality. Specification, as per the requirement of the indent or
specified in the order.
Internal and inspection lead time are well within the purchases control. Even
transportation lead time could be brought under control by choosing the right mode of
transport and better planning. Manufacturers lead time which is acts big hurdles are acts
big hurdles for every purchase and requires constant follow up to get the materials on
time.
2. Relevant Costs: The inventory problem is one of the balancing various cost so that
the total cost is minimized.
Either for want of materials, production is lost or if keeping of inventories more than
adequate requirements, unnecessary expenditure of paying interest on the blocked funds.
Stocked inventory is useless incurring still higher cost, each ordering itself is costing
money.
3. Ordering Cost(Co): It is also termed as procurement/Acquisition cost. Each order

that is placed on supplier costs money, ordering cost is the sum resultant of costs of
fulfilling various activities that go in finalizing an order. Ordering costs include:
Stationary
Typing
Dispatching of orders and remainders
Salaries and wages of the entire purchase, inventory control section, receiving and
inspection sections
Follow up costs
Receiving and inspection costs

Rent and depreciation on the space utilized by purchase department
Cost of source development
Cost of entertaining the supplier
Advertisement, tender form cost and tender apprising cost etc.
Total cost included on above heads
Cost per purchase order = -------------------------------------------------
Total numbers of orders
4.Inventory Carrying Cost (Cc): All materials that are ordered have to be stored in
stores. This requires space, and other infrastructure arrangement. Inventories are stored
strictly storing company’s money, which attracts huge interest rate.
Inventory carrying costs are calculated as a percentage of the average inventory carried.
Average inventory calculated by adding up inventories of all the twelve months and then
dividing by 12 to get an average.
5. Under stocking cost (Ku): Under stocking or out of stock is due to “non stocking of
inventory”. This is measured in terms of opportunity cost due to loss of production by
the idling cost of a line. If the stock out results in an expedited order, then the extra
charges incurred have to be added to this cost.
6.Overstocking cost (Ko): An opportunity is therefore lost, of utilizing company’s

valuable funds, overstocking cost is therefore a cost basically arise due to opportunity
lost due to the investment in inventory for a longer period than necessary. In situations,
when items are ultimately used this can be equated to Carrying cost. In situations where
item cannot be used this cost is the difference between the costs of carrying till that time.
7.Service level: Under stocking cost and overstocking cost can be related to each other
through the concept of service level. The management can decide on a policy that 99
cases out of 100, the demand must be satisfied. This means that the service level is 99%.
Only in one case out of 100 can there be a stock out. This fixation of level of service
depends on the management’s perception of the importance of particular item.
Ku stock out cost
Service level = --------------- = ---------------------------------
Ku + K stock out cost + overstocking cost
INTFERENCE: If the under stock cost is very high then the management strive for a
higher service level to achieve level of 100%, very large stocks are needed.
8. ObsoleteInventory: Inventory that is purchased and stored and stored and which is of
no importance for the organization is termed as obsolete inventory. Items which are held
physically intact, but cannot be used due to lack of need are termed as obsolete items.
The obsolesce of items is due to the following reasons:
 Technological changes
 Changes in product line
 Changes in the machines
 Changes in the design and layouts
 Over buying and thereby making inventory idle and excess
 Process of cannibalization i.e. removing a part from one machine and fitting it to
other thereby making the earlier machine obsolete
 For reasons of buying extra spares with original equipment there by causing them
useless in the situation where it is not required
 Wrong preservation method
 Wrong machine handling and storage
9. Scrap: Any manufacturing process will generate scrap, because we do not have a
100% efficient system which can convert all the input into output salvaging of scrap is an
art. By applying scientific methods scrap is to be minimized to a great extent. Scraps are
classified as turning, borings, sheet cuttings, and pieces of rods oil soaked waste etc.
Hence, it is advantageous to segregate scrap so that the best price may be obtained. It is
not very difficult to achieve this because scraps are generated at different points and a
coordinated collection in classified bins will solve the problem.
EFFECTS OF INVENTORY ON A BUSINESS
Control of inventories is difficult and our Indian organizations are not performing good
inventory management. We aware that bad inventory planning is one of the major causes
of almost every business failure. The major reason is inability to forecast accurately. In
many cases the need comes later than anticipated and sometimes it never materializes at
all. The result is excessive inventory or if demand comes sooner or is stronger than
anticipated the inventory is inadequate.
EFFECTS OF LOW STOCK HOLDING OR LOW INVENTORY LEVELS
If low level inventory is maintained than the actual requirement of production then it
result in the following
 Increased production costs may result

 Increased replenishment costs may arise
EFFECTS OF HIGH STOCK HOLDING OR HIGH INVENTORY LEVEL
It could result in to
 The capacity need to be increased subsequently larger amount of financial

expenditure.
 Infrastructural facilities need to be provided like capital investment
 Increased risk due to possible obsolesce
 Increased chances of wastage.
 Factors effecting the determination of stock levels:
 Finance resources
 Rate of consumption
 Lead time for deliveries
 Storage cost
 Price fluctuations
 EOQ
 Insurance costs
 Any statutory requirements
The Maximum Stock Level
This is the level of stock above which the stock should not be allowed to increase. The
criterion of this level is to curb excess investment. In fixing the maximum, the main
consideration is usually financial, and the figure is arranged so that the value of stock
will not become excessive at any time. Other points affecting this level are the possibility
of items becoming obsolete and the danger of deterioration in perishable commodities.
Maximum Level = Minimum Level EOQ
= ROL-minimum level*minimum lead time reorder quantity.
TRENDS IN INVENTORY MANAGEMENT
NEW
1. JUST IN TIME (JIT)
JIT isa Japanese management philosophy, which has been applied in practice since the
early 1970s in many Japanese manufacturing organizations. It was first developed and
perfected within the Toyota manufacturing plants by Taiichiohno as a means of meeting
consumer demands with minimum delay.
Toyota was able to meet the increasing challenges for survival through an approach that
focused on people plants and systems. Toyota realized that JIT would only be successful
every individual within the organization was involved and committed to it, if the plant
and processes were arranged for maximum output and efficiency, and if quality and
production and programs were scheduled to meet demands exactly.
Workers are highly motivated to seek constant improvement up on that which already
exists. Companies should focus on group effort, which involves the combining of talents
and sharing knowledge, problem-solving skills, ideas and the achievement of a common
goal.Work it self takes precedence over leisure it is not unusual for a Japanese employee
to work 14-hour a day.
Employees tend to remain with one company through out the course of there carrier
span. These benefits manifest them self in employee loyalty, low turn over cost and
fulfillment of company goals.
It has now come to mean producing with minimum waste. Waste is taking in its most
general sense and includes time and resources as well as materials. There are seven types
of waste namely:
 waste from over production
 waste of waiting time
 transportation waste
 processing waste
 inventory waste
 waste of motion
 Waste from product defects.
Elements Of JIT System
Successful JIT system is logical out growth of the combination of the following
practices:
continuous improvement
attacking fundamental problems –anything that does not add value to the product
devising systems to identify problems
striving for simplicity-simpler systems may be easier to understand, easier to manage and
less likely to go wronga product-oriented layout-produces less time spent in moving of
materials and parts quality control at source-each worker is responsible for the quantity
of their own outputgood housing keeping-work place cleanliness and organization.
Benefits Of JIT Systems
JIT system has a number of benefits, few major or mentioned below:
 reduced levels of in-process inventories, purchased goods, and finished goods
 reduced space requirement
 increased product quality and reduced scrap and rework
 reduced manufacturing lead times
 greater flexibility in changing the production mix
 smoother production flow with fewer disruptions
 Worker participation in problem solving.
 Pressure to build good relationships with vendors
 Increased productivity levels and utilization of equipment.
2. VENDOR MANAGED INVENTORY (VMI)
VMI is defined as a streamlined approach to inventory and order fulfillment. With it, the
supplier and not the retailer, is responsible for managing and replenishing inventory
using an integral part of VMI, i.e. EDI, by electronic transfer of data over a net work. It
can also be seen as a mechanism where the supplier creates the purchase orders based on
the demand information exchanged by the retailer/customer.
VMI Business Model
In fulfillment process using VMI, typically the activities of forecasting and creating the
purchase orders are performed by the vendor/supplier and not bye the retailer. Electronic
data interchange (EDI) is an integral part of VMI process and takes a vital role in the
process of data communication. The retailer sends the sales and inventory data to the
vendor via EDI or other B2B collaboration facilities and the supplier creates the purchase
order based on the established inventory levels and fill rates.
In VMI the vendor tracks the number of products shipped to distributors and retail
outlets. Tracking tells the vendors whether or not the distributor needs more supplies.
Products are automatically replenished when supplies run low, and goods aren’t sent
unless there are needed, consequently lowering inventory at the distribution center or
retail store.
Benefits OfVMI
 Data entry errors are reduced due to computer-to-computer communications.

Speed of the processing is also improved.
 Both parties are interested in giving better service to the end customer. Having
the correct item in stock when the end customer needs it, benefits all parties
involved.
 A true partnership is formed between the manufacturer and the distributor. They
work closer together and strengthen their ties.
On a whole, vendor managed inventory reduces transaction cost such as:
 Purchasing
 Speeds transactions
 Streamlines communication between customers and supplier
 Eliminates paper-to-computer data entry
 Improves data accuracy
 Free up staff to work on more productive activities
INVENTORY MANAGEMENT
Delivery as needed cuts storage
Helps reduce inventory levels
Reduces inventory obsolescence
Improves inventory turns
Improves fill rates
Decreases lost sales
3. CONCEPT OF ZERO INVENTORY
The concept of zero inventory or stockless production is a theoretical approach and never
attainable in reality, however, the concept of an ultimate level of excellence is bound to
stimulate constant improvement through imaginative attentions and creative and

innovative methods aimed to reduce inventories to this theoretical target.
The aim of stockless production is to find different ways to come as close as to this
concept to reach this theoretical target.
The concept envisages the following:
Manufacture products only which the customer wants
Manufacture products only at the rate customers want them
Quality has to be perfect all the time
Manufacture goods instantly i.e. necessary lead time should be zero
Manufacturing with out wastages
Therefore, the concept of zero inventory is not a set of established techniques. Rather, it
is a fundamental way of thinking to transform overall manufacturing to the simplest way
possible and generate new and original techniques for doing so.
ROLE OF MATERIALS MANAGEMENT
Materials management is the planning, direction, controlling and co-coordinating of all

those activities concerned with materials and inventory requirements from the points of
their inception to their introduction into the manufacturing processes. The raw materials
used in the manufacturing process to be transformed into finished product. In other
words, the raw materials of which the finished product is made may be known as
materials. The importance of material in a manufacturing concern needs no explanation
because in its absence. Production is not possible and moreover it affects the efficiency
of all men, machines, money, and marketing divisions of an industry. So, the
management of materials is the grave concern of executives at all levels. There are so
many problems attached with the management of materials such as investment in
materials, idle funds, storage and obsolescence problems, wastage of materials in
handling etc, which require immediate attention of management so that the cost of
production may be reduced to the minimum and the quality of the product may be
maintained. The concept of materials management is being widely accepted by
industrially advanced courtiers for more effective coordination and control over
materials because materials costs (including investment in raw-materials, handling cost,
transportation and storage costs, insurance, wastage and obsolescence costs etc,)
constitute a major part of the total cost of the finished product. So, the control over
materials is essential to arrest the increasing cost of finished product because it is one of
the major constituents of costs. Materials management covers all aspects of materials and
material supply necessary for converting raw materials and ancillary into the desired
finished products.
The Functions Of Materials Management Can Be Summarized As Follows:
A. Materials planning and programming
B. Purchasing of raw materials and capital goods
C. Inventory control
D. Receiving, storekeeping and warehousing
E. Value engineering and value analysis
F. Transportation – internal and external
G. Materials handling
H. Disposable of scrap and surplus
The Main Objectives Of Material Management Are:
 To maintain the flow of production: By making the raw materials available in

time according to production schedule.
 Contribution towards higher productivity: By arranging the better quality of raw

material at the lowest possible cost through effective purchasing system.
 Reducing the inventory cost: By purchasing the economic costs requiring the
minimum investment and the maximum utilization value.
 To eliminate extra materials: through product design
 To contribute towards competitiveness: of the product by conducting the market

research and bringing the product according to the demand by the consumers.
 Increasing the profits; of the concern by producing the best quality products using
quality material at the lowest possible cost.
 To buy further best ultimate value, not necessarily the lowest initial price.
 To perform the wide range of functions and fulfill the objectives of utmost
contributive role the material management division in organization has the
following departments.
M ATE R IA L AN D I NV E NT O R Y CO N TRO L D E PAR TM E N T
Purchase department: This includes the purchase of the material needed.
Stores department: This includes storage of materials, accountability of materials.
Quality control department: This includes inspection of quality and testing the quality.
From the national point of view material management plays a pivotal role for the success
of national plans because efficient materials management can exploit the national
resources material efficiency and according to the plans. It also plays an important role in
the industrial economy both in public and private sector.
Advantage Of Material Management
1. Effective material management causes the reduction in total cost of production and
thus sales price of the commodity can be fixed at reasonable price.
2. Controls the movement of the indirect cost and cost of materials.
3. Inventory losses are minimized.
4. Adequate utilization of equipment is ensured.
5. Loss of time of direct labor minimized.
6. Late deliveries of goods are prevented due to availability of continuous flow of

raw material in right time.
7. Length of manufacturing cycle is reduced.
8. Congestion of materials is avoided.
9. Facilities perpetual inventory system.
10. Cost records of materials are made feasible.

5 Principles Of Purchasing: It is always the responsibility of the purchasing department

that
 The right quality of materials in

 The right quantity must be procured at
 The right price from
 The right source (supplier) and at
 The right time
These play a significant role in inventory control management.
Purchase department is basically a service department and caters the requirements of the
various departments by making purchases of materials, equipments etc., which they
need.
The stores (or ware house) are responsible for stocking materials and when the stocks
reach a particular predetermined level, they raise an indent for purchase through the
purchase requisition or indent.
Purchase Plan: Purchase department must prepare a plan for carrying out its purchasing
activities.
Vendor Selection: Coordination with indenter department by providing relevant

information regarding the indented materials and the procurement action done through
5R principle.
 Placing the order as per 5R principle.
 Follow – up for ordered materials to effect supply.
 Receiving and inspection of material.
 Checking and payment of supplier’s bills.
Storekeeping
The main objective of store keeping is to receive to store and to issue the raw materials
or goods at the minimum cost.
 Receiving, handling and issuing goods economically and efficiently.
 Using the storage available space and labor effectively.

 Protection of goods in stores against all losses; fire, theft and obsolesce.
 Facilitating inventory taking from time to time i.e.; (value analysis)
 Minimizing the investment on inventories.
 Quality control: main objectives of this are
 To assess the quality
 To see whether the product conforms to the predetermined standards
 To locate the reason for deviations and to take necessary remedial steps
 To suggest suitable improvements
 To develop quality consciousness
 To reduce the wastage of raw materials
PRACTICAL APPROACH OF INVENTORY MANAGEMENT

IN BHEL-HPVP
BHEL-HPVP undertakes manufacturing of process plant, boiler, cryogenicequipments

for various customers and the execution of jobs are based on orders received time to time
from esteemed customers.
The type of products is dealt in
 Heat Exchangers
 Distillation columns
 Vacuum columns
 Pressure vessels
 Boilers
 Reformers
 Waste heat recovery modules
 Cryogenic equipments
 Oxygen plants
 Air separation plants
There are two types of stock items which are based on their consumption
1. Stock Items / Fast moving items: These are the items which are required to be stored
and these have high demand. The respective consumer groups and departments require
these items very frequently. So these fast moving items are replenished frequently.
2. Non Stock items/ slow moving items: These items which are not required to be
stored but procured as and when an indent is received from the user department. These
items have demand but they are not so frequently required.
COMPONENTS OF INVENTORY
Raw Materials: The raw materials which are consumed in BHEL-HPVP are as under
Mild Steel Plates &Structural’s to IS: 2062
Stainless Steel Plates to SA 240 TP 304,310,316 etc
BQ Plates to SA 515,516 Gr. 60/70
LAS Plates to SA 338
Mild Steel & Stainless Steel Pipes SA 336
Heat Exchanger Tubes
Boiler Tubes
Fasteners
Spares
Welding consumables
Apart from the above, the items which are in transit (MIT), work in progress & finished
goods also added to inventories.All the items are being manufactured in BHEL-HPVP as
a tailor made items, most of the inventories like raw materials, work in progress and
materials in transit are blocked.
VALUATION OF INVENTORY
A. Raw materials including off-cuts bought out components, stores and spares, loose
tools, goods; under inspection and in transit are valued by using weighted average
method.
B. Valuation of Work in Process inventory: Work in process inventory is valuation is

done either byCost of material + Percentage of fabrication completed or Sale
valueWhichever is less.
C. Provision for redundancy to wardsnon moving inventory and off-cut plates will be
made.
D. Stationary and medicines are valued at cost.
E. Expenditure of miscellaneous equipment and tools manufactures for internal use is

charged to P&L a/c.
F. Valuation of finished goods: All the products, viz., boilers, cryogenic plants, are
divided into identified despicable sub-assemblies or components and contracted
prices are determined. As and when such sub-assemblies/ components are
dispatched, credits are taken for 98% of the contracted price so determined. The
balance of 2% is reckoned as income during the year in which the total supplies of
such specified products are completed. Finished sub-assemblies/ components of
awaiting dispatch at works isvalued at cost or 96% of contracted price of such sub-
assemblies/ components which ever is lower.
G. Valuation of scrap: Scrap valuation is done based ob MSTC rates (Metal Scrap
Trading Corporation) or National scrap rates.
INVENTORY MANAGEMENT IN BHEL
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 to its value
of production and cost of production.
Also, the cycle time of BHEL-HPVP is 18 months which means the time taken to deliver
the order from the time of order placement by the customer is 18 months. The number
shows that the inventory levels are very high and are maintained through the year.
In view of inventory, the total inventory level its usage in the manufacturing process and
the amount of inventory retained as socks 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.
SCRAP MANAGEMENT:
Scrap is managed in BHPV through various processes. Units of scrap are collected and it
is given to a company called MSTC. They gather the collected scrap and let it to auctions
in the form of tenders through online or manually.
HISTORICAL BACKGROUND OF MSTC:
MSTC Limited is a Mini Ratna Category-I PSU under the administrative control of the
Ministry of Steel, Government of India. The company was set up in 9th September 1964
to act as a regulating authority for export of ferrous scrap with an investment of Rs
6lakhs. Government of India, Members of Steel Arc Furnace Association and members
of ISSAI had made with the investment. MSTC became a subsidiary of SAIL in 1974. In
1982, it got delinked from SAIL and became an independent company under Ministry of
Steel. It was a canalizing agency for import of ferrous scrap till 1992.
ACTIVITIES:
MSTC has two major portfolios of business. One is known as the Marketing Division
which looks after the procurement of industrial raw materials in bulk for its Principals.
The sourcing is done either from foreign manufacturers / traders or from domestic
producers. The items that are procured include HMS, HR Coil, Billets, Wire Rods, LAM
Coke, Coking coal, Naphtha etc which are mainly consumed by the steel industry in the
country.
The second portfolio provides a virtual marketplace for domestic sellers and buyers to do
business in metal scrap (ferrous/non-ferrous), surplus stores, machineries, obsolete
spares, vehicles, Plants etc. The methodology adopted includes open tender, public
auction and e-auction.
Of late, MSTC has emerged as a major player in the country for promoting e-commerce.
Its auction portals namely, www.mstcecommerce.com/auctionhome and
www.mstcecommerce.com have become popular tools for transacting business over the
internet in a transparent manner. MSTC has developed a procurement portal and is ready
with its procurement services.
CHAPTER – IV
DATA ANALYSIS
&
INTERPRETATION
CHAPTER 4
INTERPRETATION&ANALYSIS
Analysis and interpretation of financial statements is the most important step in
accounting to have a very clear understanding of the probability and financial position of
a company, the financial statements have to be analyzed and interpreted analysis refers to
the methodical classification of the given financial statements. For Example the amount
of capital employed is not directly available in the balance sheet. The figures have to
rearrange to calculate the amount.
Inventory plays a major role in working capital management. The inventory

management is one of the significant tool to determine adequate working capital. The
inventory management covers a large number of issues including fixation of minimum
and maximum levels; detrmining the size of the inventory to be carried; deciding about
the issue price policy; setting up receipts and inspection procedures; Determining the
economic order quality; providing proper storage facilities,keeping check on obsolence
and setting up effective information system with regard to the inventories and also helps
to making control liquidity and financial soundness of the business.
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 2015-16 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
2015-16 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 2015-16, 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
2015-16 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
2015-16 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
2015-16 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
2015-16 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
2015-16 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 capex3 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
2015-16 775.28 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
3
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
2015-16 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
2015-16 619.20 987.78 825.56 781.42
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.
CHAPTER-V
SUMMARY, FINDINGS
&
SUGGESTION
Summary
Finance is an integral part of modern life occupies an important place in all
economics actives finance is science of money and life blood of an enterprise.The
basis objective of financial managementis to maximize the shareholders
wealth.Fiancialmanagementis that activity whichis concerned with the palnning
and controllingof the form financial resourecs.
Working capital is the amount of funds necessary to convert the cost of operating
the enterprise no business concern can survive without working capital
management placea vital role in the profitability of the company and smooth
running of the business.Working capital is the never center of business.Cash flows
over and extent period of time I,e 5 to 15 years short team financial typically
involved cash operating cycle of the company.
Company is having more number of sales on credit basis which will be in the
form of cash like collection cost,capitalcost.So the company should make revision
on its credit standards and policies to reduce the debtors in order to increase the
efficiency in collection performance.
FINDINGS
 The present study is done with the view to analyze the working of the
materials and inventory control section and suggest ways to reduce
inventory holding of a heavy engineering and fabricating unit like BHPV.
 Reduction in inventory holding will not happen over night as it takes time
and efforts in establish a system and it may turn an additional work to start
it.
 However, with the passage of time it will be seen that this will be easy to
continue and once the system is fully understood and established, the real
benefit will be visible and will yield dividends on a continuous basis.
 It is identifying the unwanted material and disposing them by periodical

public auctions. But still it has not reached and target set by it.
 Safety margins considered in material indenting section as safeguard

against possible shortage while indenting for materials for a project,
additional quantities.
 Errors in estimating material requirements based on past consumption. This

happens usually in case of stock items like spares, tools, accessories etc.
 Which are stocked in anticipation of future requirements, quantities remain

as surplus materials if such contingencies do not occur.
 Materials procured but not utilized due to subsequent design changes.
 Long production cycle for certain items, which led to high work – in
progress inventory. Completed jobs waiting for a few minor requirements.
 This performance is attributed to the overall poor performance of power

industry segment. It has causedserious reduction in sales turnover of
BHEL-HPVP.
SUGGESTIONS
The industry is facing stiff competition in todays globalized environment. Moreover the
industry is characterized by long cycle times and as the overheads is soaring steadily. To
withstand competition, orders have to be delivered much with in the time than the
competitors.
 BHEL-HPVP has to maintain some stocks of production items i.e. raw materials
unlike the present practice of procuring the material after receipt of order from
the customers
 Team work and inter departmental co ordination must be elevated to finish the
jobs with in the stipulated time by leaving personal fancies.
 It is the responsibility to maintain good and reliable relationship with vendors to

develop reliability and worthiness on the organization to honor our material
procurement orders within the specified time.
 Procedure limitations are to be minimized and allocate responsibilities by

observing the key factors.
 Unnecessary overhead costs are minimized by planning the activities in a proper

manner by using the scientific methods of principles of management like
operations research, project evaluation and management, MIS, and security
analysis and portfolio management.
 The cushion provided by the indenting departs is proving as excess inventory.

Indenting departments should take more care while calculating the quantity
required by them.
 The procurement lead-time should be kept in mind by the materials control

section before giving their approval.
 It should be seen that the spares of a particular machine are disposed off along
with it, if the company is going to install machinery of a new design or
technology.
.
APPENDIX
RAW MATERIAL PURCHASES
RAW MATERIAL
31.03.2016 31.03.15 31.03.14 31.03.13 31.03.12
PURCHASES (In lakhs)
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
TOTAL INVENTORY LEVELS
(Rs in lakhs)
INVENTORY 2015-16 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 redundancy -1268.02 -1181.5 -1068.25 -1054.29 -930.06
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
PROFIT & LOSS ACCOUNT
PROFIT AND LOSS ACCOUNT In Lakhs

Description 2015-16 2014-15 2013-14 2012-13 2011-12
I Income
Turnover 7047.96 15591.58 24026.84 15580.08 13697.54
Accretion/ Decretion
432.09 -105.78
(FG/WIP) 1263.51 1049.16 -574.32
Less : Excise Duty 772.63 1182.66 2432.71 1398.37 950.92
GTO (Net of Excise
Duty) 7538.84 15458.08 21019.81 14613.80 12640.84
II Direct Expenditure
Raw Material & Sub-
7115.22 6252.17
Cont. 3632.96 7611.51 9297.06
Erection Expenditure 167.25 299.91 170.97 309.39 209.37
Power & Fuel 447.42 534.03 470.08 364.67 342.43
Total II 4247.63 8445.45 9938.11 7789.28 6803.97
III Value Added ( I- II) 3291.21 7012.63 11081.70 6824.52 5836.87
IV Indirect Expenditure
Employee Remuneration 10052.28 10919.51 5160.59 4787.30 4661.20
Manufacturing Expenses 207.8 2405.06 690.53 401.55 417.97
Other Expenditure 2385.91 613.80 629.17 612.92
Exchange rate variation -42.94
Provisions 8.89 12824.82 1657.49 282.04 236.05
Less: Other Revenues 646.48 721.43 319.97 546.13 444.28
Total IV 11965.46 25427.96 7802.44 5553.93 5483.86
GROSS MARGIN
V (PBDIT) -8674.25 -18415.33 3279.26 1270.59 353.01
VII DEPRECIATION 629.91 141.89 93.11 102.35 109.92
GROSS PROFIT
(PBIT) -9304.16 -18557.22 3186.15 1168.24 243.09
VI Interest -62.3 96.75 96.53 140.31 140.14
VIII DRE 0.00 0.00 0.00

IX Prior period Adjustments 0 -1.21 0.00 0.00 0.00
X PROFIT (+) / LOSS (-) -9241.86 -18655.18 3089.62 1027.93 102.95

XI Interest / Others Waived
Extra Ordinary items 0 414.35 16.24 774.77
Net Profit / Loss before
XII Tax (PBT) -9241.86 -18655.18 3503.97 1044.17 877.72
XIII Income Tax 0 0.20 0.00 0.16
Net Profit / Loss after
XIV Tax (PAT) -9241.86 -18655.18 3503.77 1044.17 877.56
BALANCE SHEET
Rs. in Lakhs
BALANCE SHEET
Description 2015-16 2014-15 2013-14 2012-13 2011-12
Sources of Funds
Share Holders Funds 0 0 3379.78 3379.78 3379.78
Share Application Money 0 0 3400.00 3400.00 3400.00
Reserves & Surplus 2.01 2.01 2.01 2.01 2.01
Inter Unit Balances 49979.58 33807.78
Secured Loans 0.00 0.00 0.00
Un-Secured Loans 681.53 24062.26 22895.96 22648.40
Deferred Credits 10.22
Total 49991.81 34491.32 30844.05 29677.75 29430.19
Fixed Assets 17698.52 9739.13 8303.86 8264.41 8153.47

Accumulated Depreciation 8645.34 7973.27 7908.03 7814.92 7712.57
Net Fixed Assets 9053.18 1765.86 395.83 449.49 440.90
Capital WIP 3263.21 8191.41 919.68
Investments 0.10 0.10 1.31 1.31 1.31
Current Assets
Inventory 8200.56 6211.15 5717.84 6699.86 5257.09
Debtors 18577.07 19569.83 18921.70 13834.62 9559.62
Cash 271.53 290.63 2793.24 1069.14 720.99
Loans 4062.92 3373.89 4501.34 4884.59 8100.04
Current Assets 31112.08 29445.50 31934.12 26488.21 23637.74

Less: Current Liabilities
&Prov
Sundry Creditors 7799.31 11415.24 5223.71 4510.19 2845.31
Deposits 1013.38 956.82 863.15
Advance from Customers 2953.31 3132.76 4401.66 5301.82 5676.07
Other Liabilities 3285.87 3438.04 10401.21 8935.89 8910.68
Provisions 29151.36 27390.5 3176.71 2870.09 2712.28
Current Liabilities 43189.85 45376.54 24216.67 22574.81 21007.49
Working Capital (CA-CL) -12077.77 -15931.04 7717.45 3913.40 2630.25
Accumulated Loss 49753.09 40464.99 21809.78 25313.55 26357.73

Total 49991.81 34491.32 30844.05 29677.75 29430.19
ANNEXURE
STORES ISSUE VOUCHER
MATERIAL INDENT
STORES RECEIPT VOUCHER

PHYSICAL VERIFICATION INVENTORY OF DAILY

VERIFICATION REPORT
RECEIPT OF MATERIAL INSPECTION REPORT

REQUISITION FOR PROVISIONAL RELEASE OF MATERIAL

MATERIAL RECIEPT REGISTER

BIBLIOGRAPHY
1.Richard A brealey, Stewart C Mayers, Franklen Allen &PitabasMohanty. (2012

edition). Principles of Corporate Finance. India: The McGraw-Hill Companies Inc
2.Investopedia US. (2016). “Financial Dictionary”. Investopedia.com. Retrieved April

12, 2016 from http://www.investopedia.com/dictionary/
3.A.K.Chitale, R.C. Gupta. (3rd edition). Materials Management – A supply chain

perspective: PHI learning pvt Ltd
4.Purchase Manuals. BHEL-HPVP Ltd
5.Annual reports. (2012, 2013, 2014, 2015, 2016). BHEL-HPVP Ltd
6.The Journal of Supply Chain Management. Business Times

Inventorty Management

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A

“BHARAT HEAVY ELECTRICALS LIMITED” VISAKHAPATNAM.

A project report submitted to ANDHRA UNIVERSITY,VISAKHAPATNAM for the approval

MASTER OF BUSINESS ADMINISTATION

Under the guidance of

DEPARMENT OF MANAGEMENT STUDIES

I PALIPANA CHINNARAO a bonafied student of Department NOBLE INSTITUTE OF SCIENCE

reference to BHARAT HEAVY ELECTRICALS LIMITED, Visakhapatnam submitted in partial

of mine. It has been submitted to any University or institute before.

Regd No: 116225602062

special reference to“BHARAT HEAVY ELECTRICALS LIMITED” VISAKHAPATNAM

Is being submitted by P. CHINNARAO to the Noble Institute Of Science And Technology

has been carried out under my guidance and supervision.

(Head Of Department) (Project guide)

HEAVY ELECTRICALS LIMITED VISAKHAPATNAM ”.

valuable information and suggestions.

 Need for the study

HEAVY PLATES & VESSELS PLANT is a unit of BHARAT HEAVY

The importance of the study, Inventory Management in BHEL-HPVP, Visakhapatnam

This study of ‘INVENTORY MANAGEMENT’ has been undertaken to evaluate the

 To evaluate the inventory management practices in BHARAT HEAVY

 To offer suggestions for the effective management in BHARAT HEAVY

The first deals with introduction to the concept of inventory management.

The fifth chapter Summarizes with summary, Findings, Suggestions.

INDIAN POWER SEGEMENT

Global Electricity Market:

The global EE industry consists of the following two segments:

1BTG – Boiler, Turbine, Generator

The demand for electrical equipment in India is expected to witness a significant

›› Emerging global reputation of Indian ›› Bunching of orders by utilities, because

›› Outdated tendering procedures and

1. Skoda Exssport , Czechoslovakia.

2. L’Air liquid, France.

6. Hahn & Clay, USA.ETC.,

BHEL-HPVP absorbed technology from BHEL for industrial boilers Design,

1. FSSS (Furnace Safeguard Supervisory System)

2. Oil storage, pumping & heating units.

3. Fire fighting system.

4. Erection & Commissioning of STGs.

5. Dynamic simulation of power plant.

1. Crude and Vacuum Heaters

3. Hot Oil Heaters

BHEL-HPVP’S clientele includes-

 12 petro chemical complexes.

 All major integrated steel plants in India

 Oil and gas

 Nuclear and defense etc.

 IOCL - all units

Competitors in Process Plants

Competitors in Cryogenic Plants

Competitors in Boilers / Combustion Systems

2.1 COMPANY PROFILE

Incorporation of the Company : 1966

Primary Objective : To manufacture custom built Capital

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

Installed Capacity : 23, 210 M.T.

Turnover for the year 2015-16 : Rs. 83Crores