A

PROJECT ON

INVENTORY MANAGEMENT

AT

BHARAT HEAVY ELECTRICALS LIMITED (BHEL)

HYDERABAD

Submitted by

(C S V KEERTHI)

(HT. No 1407-18-672-076)

Project submitted in partial fulfillment for the award of the Degree of

MASTERS OF BUSINESS ADMINISTRATION

Department of Business Administration

David Memorial Institute of Management (MBA)

Tarnaka, Hyderabad, Telangana.

(Affiliated to Osmania University)

2018-20
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INDEX
LIST OF CONTENTS:
S.NO CONTENTS PAGE NO.
1 ABSTRACT 3
2 INTRODUCTION 4
3 INVENTORY MANAGEMENT 5-23
4 NEED OF THE STUDY 24
5 IMPORTANCE OF THE STUDY 24
6 OBJECTIVES 24
7 LITERATURE REVIEW 25
8 COMPANY PROFILE 26-40
9 RESEARCH METHODOLOGY 41
10 DATA ANALYSIS & INTERPRETATION 42-65
11 FINDINGS 66
12 LIMITATIONS 67
13 SCOPE 67
14 SUGGESTIONS 68
15 CONCLUSIONS 69
16 BIBLIOGRAPHY 69
17 ANNEXURE

LIST OF TABLES:
S.NO. CONTENTS PAGE NO
1 STATEMENT SHOWING MATERIAL TURNOVER 44
2 STATEMENT SHOWING MATERIAL HOLDING PERIOD 45
3 STATEMENT SHOWING WORK-IN-PROGRESS TURNOVER 46
4 STATEMENT SHOWING FINISHED GOODS TURNOVER 47
5 STATEMENT SHOWING INVENTORY TURNOVER 48
6 CALCULATION OF ECONOMIC ORDER QUANTITY 56
7 STATEMENT SHOWING LEAD TIME CONSUMPTION 57
8 STATEMENT SHOWING REORDER LEVEL 58
9 STATEMENT SHOWING MAXIMUM STOCK LEVEL 59
10 ABC ANALYSIS 2012-13 61
11 ABC ANALYSIS 2013-14 62
12 ABC ANALYSIS 2014-15 63
13 ABC ANALYSIS 2015-16 64
14 ABC ANALYSIS 2016-17 65
15 ABC ANALYSIS 2017-18 66
16 ABC ANALYSIS 2018-19 67

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LIST OF GRAPHS:
S.NO. CONTENTS PAGE NO.
1 GRAPH SHOWING MAXIMUM STOCK LEVEL 60
2 ABC ANALYSIS 2012-13 61
3 ABC ANALYSIS 2013-14 62
4 ABC ANALYSIS 2014-15 63
5 ABC ANALYSIS 2015-16 64
6 ABC ANALYSIS 2016-17 65
7 ABC ANALYSIS 2017-18 66
8 ABC ANALYSIS 2018-19 67

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 ABSTRACT
A business can run smoothly its operating activities only when appropriate amount of inventory is
maintained. Inventory affects all operating activities like manufacturing, warehousing, sales etc.
The amount of opening inventory and closing inventory should be sufficient enough so that the other
business activities are not adversely affected. Thus, inventory plays an important role in operations
management.
The inventory may be classified into three categories:

 Raw material and supplies: It refers to the unfinished items which go in the production
process.
 Work in Progress: It refers to the semi-finished goods which are not 100% complete but
some work has been done on them.
 Finished goods: It refers to the goods on which 100% work has been done and which are
ready for sale.
Inventory Management simply means the methods we use to organise, store & replace inventory to
keep an adequate supply of goods while minimising costs. Each location where goods are kept will
require different methods of Inventory Management. Inventory management is the practice
overseeing and controlling of the ordering, storage and use of components that a company uses in the
production of the items it sells. A component of supply chain management, inventory management
supervises the flow of goods from manufacturers to warehouses and from these facilities to point of
sale.
Inventory control means efficient management of capital invested in raw materials and supplies,
work- in – progress and finished goods. Inventory control refers to a process of ensuring that
appropriate amount of stock is maintained by a business, so as to be able to meet customer demand
without delay while keeping the costs associated with holding stock to a minimum. Inventory control
signifies a planned approach of finding when to shift, what to shift, how much to shift and how much
to stock so that costs in buying and storing are optimally minimum without interrupting production or
affecting sales. To solve the problems of inventory management various techniques are to used:
 ABC Analysis
 Inventory turnover ratio
 Economic Order Quantity
 Just In Time

Purpose:
To avoid stock outs
To satisfy periods of high seasonal demands
To provide a safeguard for variation in raw material delivery time
To take advantage of economic quantity discounts & protect against price rise
To maintain Independence of Operations
To satisfy expected customers demand

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 INTRODUCTION OF INVENTORY MANAGEMENT

Inventory is an expensive and important asset to many companies. Inventory is any stored resource
used to satisfy a current or future need. Common examples are raw materials, work-in-process, &
finished goods. Most of companies try to balance high & low inventory levels with cost minimisation
as a goal. Lower inventory levels can reduce costs. Low inventory levels may result in stockouts &
dissatisfied customers. All organisations have some type of inventory system. Inventory planning
helps determine what goods or services need to be produced. Inventory planning helps determine
whether the organisation produces goods or services or whether they are purchased from another
organisation. Inventory planning also involves demand forecasting.
Inventory is used as a buffer between stages in manufacturing process. This reduces delays &
improves efficiency. Seasonal products may be stored to satisfy off-season demand. Labour can be
stored as a component of partially completed subassemblies. Demand & supply may not be constant
over time. Inventory can be used to buffer the variability. Lower prices may be available for larger
orders. Extra costs associated with holding more inventory must be balanced against lower purchase
price.

Inventory cost factors: Ordering costs are generally independent of order quantity. Many
involve personnel time. The amount of work is the same no matter the size of the order. Carrying
costs generally varies with the amount of inventory, or the order size. The labour, space & other costs
increase as the order size increases. The actual cost of items purchased can vary if there are quantity
discounts available.

Economic Order Quantity (EOQ): The economic quantity model is one of the oldest &most
commonly known inventory control techniques. It is easy to use but has a number of important
assumptions. Objective is to minimise total cost of inventory with the following assumptions:
 Demand & Lead time is known & constant.
 Purchase cost per unit is constant throughout the year.
 Orders are so that shortages or stockouts are completely avoided.
 The only variable cost are the cost of placing an order, ordering cost & cost of holding or storing
inventory overtime, holding or carrying cost, & these are constant throughout the year.
Maximum stock level is termed as Quantity of inventory above which should not be
allowed to be kept. This quantity is fixed keeping in view the disadvantages of overstocking.
Minimum stock level is termed as Quantity below which stocks should not be allowed to fall. The
level is fixed for all items of stores by considering Lead time & Rate of consumption of material
during lead time. Re-Order Level is the point at which if stock of material in store approaches, the
store keeper should initiate the purchase requisition for fresh supply of material.

ABC analysis is based upon segregation of materials for selection control. It measures the
money i.e; cost of significance of each material item in relation to total cost & Material value. The
study of each item of stock in terms of its usage, lead time, technical or other problems & its relative
money value in total investment in inventories.

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 INVENTORY MANAGEMENT
Meaning and Definition of Inventory:
The term “Inventory” is originated from the French word “Inventaire” and the Latin
“Inventarium”, which implies a list of things found. The term inventory has been defined by
the American Institute of Accountants as the aggregate of those items of tangible personal
property which
(a) are held for sale in the ordinary course of business,
(b) are in the process of production for such sales, or
(c) are to be currently consumed in the production of goods or services to be available for
sale.
The term inventory refers to the stockpile of the products a firm is offering for sales and the
components that make up the product. Inventories are the stocks of the product of a company,
manufacturing for sale and the components that make up the product. The various forms in
which inventories exist in a manufacturing company are
(i) raw materials,
(ii) work-in-process,
(iii) finished goods, and
(iv) stores & spares.
However, in commercial parlance, inventory usually includes stores, raw materials, work-in-
process and finished goods. The term inventory includes materials – raw materials in process,
finished packaging, spares and others stocked in order to meet an unexpected demand or
distribution in the future.
Inventory management occupies the most significant position in the structure of working
capital. Management of inventory may be defined as the sum of the total of those activities
necessary for the acquisition, storage, disposal or use of materials. It is one of the important
components of current assets. Inventory management is an important area of working capital
management, which plays a crucial role in the economic operation of the firm. Maintenance
of large size of inventories by a firm required a considerable amount of funds to be invested
in them. Efficient and effective inventory management is necessary in order to avoid
unnecessary investment and inadequate investment.
A considerable amount of funds is required to be committed in inventories. It is absolutely
imperative to manage inventories efficiently and effectively in order to optimise investment
in them. Prudent inventory management is one of the challenging tasks of the financial
manager. Efficient management of inventory reduces the cost of production and consequently
increases the profitability of the enterprise by minimising the different types of costs
associated with holding inventory. The reduction in inventories carries a favourable impact
on the company’s profitability. The efficiency of inventory management in any firm depends
on the inventory management practices adopted by it.

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Components of Inventory:
From the above definitions, we can draw the inventory components. The various forms in
which inventories exist in a manufacturing firm are, raw materials, work-in-process, finished
goods, and stores & spares.
The following are Inventory components:
1. Raw Materials: Raw materials are those inputs that are converted into finished goods
through a manufacturing or conversion process. These form a major input for
manufacturing a product. In other words, they are very much needed for uninterrupted
production.
2. Work-in-Process: Work-in-process is a stage of stocks between raw materials and finished
goods. Work-in-process inventories are semi-finished products. They represent products
that need to undergo some other process to become finished goods.
3. Finished Products: Finished products are those products, which are completely
manufactured and ready for sale. The stock of finished goods provides a buffer between
production and market.
4. Stores and Spares: Stores and spares inventory (include office and plant cleaning materials
like soap, brooms, oil, fuel, light, bulbs etc.) are purchased and stored for the purpose of
maintenance of machinery.

Need for Balanced Investment in Inventory

Management of optimum level of inventory investment is the prime objective of inventory
management. Inadequate or excess investment in inventories is not healthy by for any firm. In
other words, a firm should avoid inadequately (under) investment or excess (over) investment
in inventory. The optimum level of investment in inventories lies between excess investment
and inadequate investment.

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 1. Dangers of Excessive (over) Investment in Inventory: The following are the dangers of
excessive investment in inventory:
a) The excessive level of inventories consumes funds of the company, they cannot be used
for any purpose since they have locked in inventory, and they involve opportunity
costs.
b) The excessive investment in inventory increases carrying a cost, that include the cost of
storage, capital cost (interest on capital in inventories, insurance, handling, recording,
inspection, obsolescence cost, and taxes. this cost will reduce the firm’s profits).
c) Carrying excessive inventory over a long period leads to the loss of liquidity. It may not
be possible to sell the inventories in time without loss.
d) Another danger of carrying excessive inventory is the physical deterioration of
inventories while in storage. In the case of certain goods or raw materials deterioration
occurs with the passage of time or it may be due to mishandling and improper storage
facilities.
e) Excess purchases or storage leads to theft, waste and mishandling of inventories.

2. Dangers of Inadequate Investment in Inventories: Underinvestment in inventory may lead to:

a) Inadequate raw materials and work-in-progress inventories will disturb production.
b) When the firm is not able to produce goods without interruption that leads the
inadequate storage of finished goods. If finished goods are not sufficient to meet
customer demand, the customers may shift to the competitors, which will lead to loss of
customers permanently.

Inventory Management Motives:

Managing inventories involve lack of funds and inventory holding costs. Maintenance of
inventory is expensive, then why should firms hold inventories? There are three general
Inventory Management Motives for holding inventories:
1. Transaction Inventory Management Motives : Transaction motive includes the production
of goods and sale of goods. Transaction motive facilitates uninterrupted production and
delivery of an order at a given time (right time).
2. Precautionary Inventory Management Motives: This motive necessitates the holding of
inventories for unexpected changes in demand and supply factors.
3. Speculative Inventory Management Motives: This compels to hold some inventories to
take the advantage of changes in prices and getting quantity discounts.

Need for Balanced Investment in Inventory

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 Inventory Management – Objectives:
The inventory management objectives may be viewed in two ways and they are operational
and financial.
The operational Inventory Management Objective is to maintain sufficient inventory, to meet
the demand for the product by efficiently organising the firm’s production and sales
operations, and the financial Inventory Management Objective view is to minimise inefficient
inventory and reduce inventory-carrying costs.
The firm should maintain investments in inventory which implies that maintaining an
inventory involves cost, such that smaller the inventory the lower the carrying cost and vice
versa. But inventory facilitates (benefits) the smooth functioning of the production.
An effective inventory management should:
1. Ensure a continuous supply of raw materials and supplies to facilitate uninterrupted
production.
2. Maintain sufficient stocks of raw materials in periods of short supply and anticipate price
changes.
3. Maintain sufficient finished goods inventory for smooth sales operation, and efficient
customer service
4. Minimise the carrying costs and time.
5. Control investment in inventories and keep it at an optimum level.

Others: Apart from the above, the following are also objects of inventory management.
Control of materials costs, elimination of duplication in ordering by centralization of
purchasers, the supply of right quality of goods of reasonable prices, provide data for short-
term and long-term for planning and control of inventories. Therefore, management of
inventory needs careful and accurate planning so as to avoid both excess and inadequate
inventory in relation to the operational requirement of a firm. To achieve higher operational
efficiency and profitability of a firm, it is very essential to reduce the amount of capital locked
up in inventories. This will not only help in achieving a higher return on investment by
minimising tied-up working capital but will also improve the liquidity position of the
enterprise.

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Risks of Holding Inventory:
The holding of inventories involves above-said cost, they also expose the firm to take some
risks. The risk in inventory management refers to the chance that inventories cannot be turned
over into cash through normal sales without loss.
Risks associated with inventory management are as follows:
1. Price Decline: Price decline is the result of more supply and less demand. In other words,
it may be the result due to the introduction of the competitive product.
2. Generally, prices are not controllable in the short-run by the individual firm. Controlling
inventory is the only way that a firm can counteract with these risks.
3. On the demand side, a decrease in the general market demand when supply remains the
same way also cause prices to decrease. This is also a long run management problem,
because, a decrease in demand may be due to change in consumer buying habits, tastes
and incomes.
4. Product Deterioration: Holding of finished goods for a long period or storage under
improper conditions of light, heat, humidity and pressure lead to product deterioration.
5. Product Obsolescence: Product may become obsolete due to improved products, changes
in customer tastes, particularly in high style merchandise, changes in requirements etc.

This risk may prove very costly for the firms whose resources are limited and tied up in slow
moving inventories. Obsolescence cost risk is least controllable except by reduction in
inventory investment. Thus, inventories are risk assets to manage in an effective way by
minimising risks.

Costs of Holding Inventories:

Minimising cost is one of the operating objectives of inventory management. The costs
(excluding merchandise cost), there are three costs involved in the management of
inventories.
1. Ordering Costs: Ordering costs are those costs that are associated with the acquisition of
raw materials. In other words, the costs that are spent from placing an order to raw materials
to the receipt of raw materials. They include the following:

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(a)The cost of requisitioning the items (raw materials).
(b) The cost of preparation of purchase order (i.e., drafting typing, dispatch, postage etc.).
(c) The cost of sending reminders to get the dispatch of the items expedited.
(d) The cost of transportation of goods (items).
(e) The cost of receiving and verifying the goods.
(f) The cost of in unloading of the (items) of goods.
(g)Storage and stocking charges.

However, in the case of items manufactured in the house the ordering costs would comprise
the following costs:
(a)Requisitioning cost,
(b) Set-up cost,
(c) Cost of receiving and verifying the items,
(d) The cost of placing and arranging/stacking of the items in the store etc.
Ordering costs are fixed as per order placed, irrespective of the amount of the order but
ordering costs increases in proportion to the number of orders placed. If the firm maintains
small inventory levels, then the number of orders will increase, thereby ordering cost will
increase and vice versa. [Cost of Holding Inventories]
2. Inventory Carrying Costs: 
Inventory carrying costs are those costs, which are associated with carrying or
maintaining inventory. The following are the carrying costs of inventory:
(a) Capital cost [interest on capital locked in the inventories]
(b) Storage cost [insurance, maintenance on building, utilities serving costs]
(c) Insurance [on inventory – against fire and theft insurance]
(d) Obsolescence cost and deterioration
(e) Taxes
Carrying costs usually constitute to around 25 per cent of the value of inventories held. [Cost

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 of Holding Inventories]
3. Shortages Costs [Costs of stock out]: Shortage costs are those costs that arise due to
stock out, either shortage of raw materials or finished goods.
(a) Shortage of inventories of raw materials affects the firm in one or more of the following
ways:
(i) The firm may have to pay some higher prices, connected with immediate (cash)
procurements.
(ii) The firm may have to compulsorily resort to some different production schedules, which
may not be as efficient and economical.
(b) The stock of finished goods – may result in the dissatisfaction of the customers and the
resultant lead, to loss of rules.
Thus, with a view to keeping inventory costs of a minimum level, we may have to arrive at the
optional level of inventory cost, its total order’s cost plus carrying costs are minimum.
In other words, we have to determine Economic Order Quantity (EOQ), at that level in which
the total inventory [ordering plus carrying less] cost is minimum. [Cost of Holding Inventories]
EFFICIENCY RATIOS
By assessing a company's use of credit, inventory, and assets, efficiency ratios can help small
business owners and managers conduct business better. These ratios can show how quickly the
company is collecting money for its credit sales or how many times inventory turns over in a
given time period. This information can help management decide whether the company's credit
terms are appropriate and whether its purchasing efforts are handled in an efficient manner.
The following are some of the main indicators of efficiency:
Annual inventory turnover: 
Cost of Goods Sold for the Year/Average Inventory—shows how efficiently the company is
managing its production, warehousing, and distribution of product, considering its volume of
sales. Higher ratios—over six or seven times per year—are generally thought to be better,
although extremely high inventory turnover may indicate a narrow selection and possibly lost
sales. A low inventory turnover rate, on the other hand, means that the company is paying to
keep a large inventory, and may be overstocking or carrying obsolete items.
Inventory holding period: 
365/Annual Inventory Turnover—calculates the number of days, on average, that elapse
between finished goods production and sale of product.
Inventory to assets ratio Inventory/Total Assets—shows the portion of assets tied up in
inventory. Generally, a lower ratio is considered better.
Accounts receivable turnover Net (credit) Sales/Average Accounts Receivable—gives a
measure of how quickly credit sales are turned into cash. Alternatively, the reciprocal of this
ratio indicates the portion of a year's credit sales that are outstanding at a particular point in time.

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Collection period 365/Accounts Receivable Turnover—measures the average number of days
the company's receivables are outstanding, between the date of credit sale and collection of cash.

Costs involved in inventory:

Every firm maintains inventory depending upon requirements and other features of firm for
holding such inventory some cost will be incurred which are as follows:
Carrying Cost:

Total carrying cost= (Carrying cost per unit) * (Average inventory)

This is the cost incurred in keeping or maintaining an inventory of one unit of raw materials,
work-in-process or finished goods. Here there are two basic cost involved.
Cost of Storage:
It includes cost of storing one unit of raw material by the firm. This cost may be for the
storage of materials, like rent of spaces occupied by stock, security for stock, cost of
infrastructure, cost of insurance, and cost of pilferage, warehousing costs, handling cost etc.
Cost of Financing:
This cost includes the cost of funds invested in the inventories. It includes the required rate
return on the investments in inventory in addition to storage cost etc. The carrying cost
include therefore both real cost and opportunity cost associated with the funds invested in the
inventories. The total carrying cost is entirely variable and rise in directly proportion to the
level of inventories carried.
Cost of ordering:
The cost of ordering includes the cost of acquisitions of inventories. It is the cost of
preparation and execution of an order including cost of paper work and communicating with
the supplier. The total ordering cost is inversely proportion to annual inventory of firm. The
ordering cost may have a fixed component, which is not affected by the order size, and a
variable component, which changes with the order size.

Total Ordering Cost= (No. Of orders) * (Cost per order)

Cost of Stock Out:

It is also called as Hidden cost. The stock out is the situation when the firm is not having
units of an item in stores but there is a demand for that item either for the customers or the
production department. The stock out refers to zero level inventories. So there is a cost of
stock out in the sense that the firms face a situation of lost sales or back orders. The stock
outs are quite often expensive.

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Even the good will of firm also be effected due to customers dissatisfaction and may lose
business in case of finished goods, whereas in raw materials or work in process can cause the
production process to stop and it is expensive because employees will be paid for the time not
spend in producing goods.
The carrying cost and the ordering cost are opposite forces and collectively they determine
the level of inventors in a firm.

Total Cost= (Cost of items Purchased) + (Total Carrying and Ordering Cost)

VALUVATION OF INVENTORY:
The methods of valuing inventory are combination of the actual cost and replacement cost
plans. The chief advantage of the cost or net realizable value rule is that it is conservative.
Hence the methods of valuation of inventory are quite independent of system of mincing.
In balance sheet closing stock is shown under current assets and is also credited to
manufacturing or trading accounts. The inventories are valued on the basis as follows.
Cost of raw materials in stock may include freight charges and carrying cost. But such cost
should not exceed market price. Work-in-process is generally valued at cost, which includes
cost of materials, labour. And the proportionate factory overhead, as it is reasonable
according to degree of completion. Cost of finished goods wound normally to be total or full
cost it includes prime costplus appropriate amount of the overhead. Selling and distribution
cost is deducted on the other hand work in progress may be valued at work in progress may
be valued at work cost, marginal cost, prime cost or, even at direct materials.
PURCHASE & STORES PROCEDURE
In inventory management the purchase department, stores department plays a major role. To
have effective inventory management there must be co-operation among various departments
such as designs, purchase, quality, inspection, stores, production and stock control
departments.
The main functions of each department are as follows:
Purchase Department:
It is responsible for procurement of all necessary goods with best quality, in time delivery and
at optimum cost, without interruption to supply the finished goods.
 It receives purchase requisitions.
 Releases tenders and Invites quotations from suppliers with desired quality.
 Issue purchase orders to the selected supplier.
 Certify the quality and quantity of order received in specified time.

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 Approve purchase invoice for payment after checking invoice for paying after prices and
appropriate extensions, if any.

Material Cost:
Material cost of a job or cost of a unit can be ascertained by multiplying the quantity
consumed for the job or cost unit by the price of the materials. For ascertaining the quantity
consumed for each job or cost unit we have devised material requisition which will indicate
the quantity required for the job and the job number against which the material cost will
change directly.
For indirect material issued the material requisition will not indicate the job number but the
cost center number will be indicated for charging to relevant cost center as indirect materials.

Thus in order to ascertain material cost:

 Make valuation of purchase.

 Make use of proper Valuation of material issue and closing stock following different
method such as, FIFO, LIFO, and WEIGHTED AVG etc.
The purchase price of material is directly obtained from the supplies received and have to be
issued to production before the invoice of materials is received.
The rate per unit, total price of the item as shown in the purchase order plus sundry charges
such as delivery and forwarding charges sales tax, duty etc., may be borne by suppliers,
Governments controlled prices by notification, suppliers, catalogues and circulars may be
valuable guides for obtaining rates of materials. Delivery charges may be estimated with
reference to the kind of transport with charges incurred. The price may also include sales tax,
excise duty, fright etc., so the total cost and rate per unit can be computed and entered in the
stores received registered and posted to stores ledger for the issue of material to production.
In some cases material needs adjustment for any discount allowed: charges for transport cont
Discounts may be trade discounts, quantity discount, cash discounts etc. Transportation and
storage costs may not include the cost of air, sea on land transport and other stores costs,
where the purchaser has to bear the costs. Cost of containers may not make separate charges
because of non-returnable in nature and also sales tax, excise duty, insurance etc., all the
items are added to purchase price.
Receiving and Inspection Department:
 Receiving all raw materials and other supplies from various suppliers.
 Verify items by count, weight etc., and report any shortage.
 Inspect material and supplied as to quality by analyzing them suitably.
 Inform the purchasing department and accounts department all facts that may require
adjustment with vendor.
 Analyze and give them the code depending up on the type of materials.

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Stores Keeping Department :
 Check and accept all materials from the received department.
 Identity each material received with the stock list, check the code number and place in the
respective bins.
 Issue materials and supplies for use, upon presentation of authorized documents.
 Record quantities received and issued on bin lards or stock ledger cards consisting the
perpetual inventory records.

Production Department :
Make out materials requirement note i.e. requisition of requisite quantity and quality of
materials at the right moment so that, all materials may be available without delay on
production.
 Check and verify that the materials of requisite quantity and quality have been received
and charged to production.
 Keep proper records of materials received and their progress through different operations.
 Prepare materials return note for excess materials.
 Prepare materials transfer note to cover any transfer of materials,
 Prepare report on scrap for reporting to management.
Inventory Control Department:
It may be a subdivision of the cost accounting department, although in many concerns, it is
part of the stores keeping department.

 It keeps perpetual inventory records.

 Adjust the stock on receipt of the properly authorized adjustment notes
 Prepare weekly or monthly, statements of receipts, issue, balance and average
consumption of materials both in terms of quantity and value.

RECEIPT AND ISSUE OF INVENTORIES

Receipt of Inventories in to Stores:
After incoming materials have been examined and approved they are passed on to the
appropriate stores together with the goods received note. Articles are inspected and passed
and on the stores in the usual way. In order to keep the accounting procedure uniform, it is
desirable that a goods received note be prepared for these articles also: The store keeper then

16
places the inventory in appropriate bin or shelf and makes necessary entries in the receipt
column of the Bin Card.
A location code for materials helps in proper store-keeping with greater efficiency, because
stores can be easily identified. It is a part and parcel of stock control procedure. Location
codes help in mechanized accounting and safeguard against omission in counting as
verification.
1. VALUATION OF MATERIALS ISSUES:
The fixation of the price at which the materials are issued are to be charged to production is
an important one from the point of view to inventory management. These are numerous
factors to be taken into amount in pricing the material they are:
a. The nature of the business and type of production. The frequency of purchasing price
fluctuation and issues of materials.
b. Range of price fluctuation and value of material issued and size of bath of materials
issued.
c. Requirement that purchasing efficiency should be revealed or not.
d. The accuracy with which issues can be computed.
e. The durability of stock i.e. whether it evaporates, absorbs moisture or deteriorates quickly.
f. The length of inventory turnover period and quantity of material to be handled with the
necessity for maintaining uniformity within an industry.

ISSUE PRICING METHODS:

There are three categories:
COST PRICES:
FIFO (First in First out)
LIFO (Last in First out)
Specific price
Base stock price
HIFO (Highest in First out)
DERIVED FROM COST PRICES:
Simple average price
Weighted average price
Periodic simple average price
Periodic weighted average price
Moving simple average price
Moving weighted average price

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NATIONAL PRICE:
Standard price
Inflated price
Re-use price
Replacement price
FIRST IN FIRST OUT (FIFO)
This is the price paid for the material first taken into stock from which the material to be
priced could have been drawn.
Under this method stocks of materials may not be used up in chronological order but
for pricing purpose it is assumed that items longest in stock are used up first. The method is
most suitable for use where in material is slow-moving and comparatively high unit cost.

ADVANTAGES:

 Price is based on actual cost and not on basis of approximations such as no profits or
losses arises by reasons of adopting this method.
 The resulting stock balance generally represents fair commercial valuation of stock.
 It is based on traditional principles.

DISADVANTAGES:
 The number of calculations in the stores ledger involved tends to be complicated with
increase in clerical error.
 The cost of consecutive similar jobs will differ if the price changes suddenly.
 In times of rising prices, the charge to production is unduly low as the cost of replacing the
material will be higher.

LAST IN FIRST OUT (LIFO)

This is the price paid for the material last taken into stock from which the materials to be
priced could have been drawn. This method also ensure material being issued at the actual
cost. Its use is based on the principle that costs should be as closely as possible related to
current price level. Under this method production cost is calculated on basis on replacement
cost.
ADVANTAGES:

18
 Production is charged at the most recent prices so that it is based on the principle that cost
should be related to current price levels.
 It obviates the necessity for continuously ascertaining the replacement price.
 Neither profit nor loss is usually made by using this method.
 In the times of rising prices there is no wind fall profit as would have been obtained under
FIFO method.

DISADVANTAGES:
 Needs more clerical work.
 Compassion among similar jobs is very difficult
 Stock valves relating to prices of the oldest cost on hand may be entirely out of the current
replacement prices.

WEIGHTED AVERAGE PRICE:

This is the price which is calculated by dividing the total cost of material in the stock from
which the material to be priced have been drawn, by the total quantity of material in the
stock. This method differs from all other methods because here issue prices are calculated on
receipt of materials and not on issue of materials. Thus as soon as new lot is received a new
price is calculated and issues are then taken.
ADVANTAGES:
 This method is advantageous where the price varies widely as its use even out the effect
of these wide variations.
 The basis of price calculations is a simple one involving only the division of total amount
of material in stock by quantity in stock.
 Calculation of new prices arises only when receipt of stocks are received.
 Stock records under this method give a fair indication of the stock values, which can be
used in financial analysis.

DISADVANTAGES:
 This method is complicated than simple average because it takes into consideration the
total quantities and total costs in stock.
 Profit or loss may be incurred as in simple average price.
 As LIFO or FIFO this method calls for many calculations.
 In order to calculate the accurate value of issues the average price must normally be
calculated to four to five decimal places.

STANDARD PRICE

19
It is the predetermination of fixed price on basis of a specification of all factors affecting
price like the quantity of materials in hand and to be normally purchased and rate of discount
compared with existing price including or excluding freight and ware housing expense.
A standard price for each material is set and the actual price paid is compared with standard.
It is paid exceeds the standard a loss will be realized if not profit will be obtained.

ADVANTAGES:
 This method is easy to operate.
 Comparing the actual prices with the standard price will determine the efficiency of
purchase department.
 The effect of price variations is eliminated from job costs.
 It reduces classical costs by eliminating detailed cost records.
 In times of inflation or price fluctuations is very difficult to fix a standard price.
 This method also incurs a profit or loss on issues and closing stock

INFLATED PRICE:
This is the price, which includes a charges designed to cover the cost of contingencies or
related costs.
This price includes not only the cost involved in bringing the material to the purchases
premises but also the loss due to evaporation and breakage etc. as well as carrying costs.
TECHNIQUES OF INVENTORY MANAGEMENT:
Main problems in inventory management are to answer.
1. Are all items of inventory important?? if not what are items to be given more Importance?
2. What should be the size of the order for replenishment to be placed?
3. What should be the over level?
To answer the above, the following techniques are used.
 ABC Analysis
 Inventory turnover ratio
 HML Analysis
 VED Analysis
 Just In Time
 S – D – E Analysis

20
 S – OS Analysis
 F – S – N Analysis
 FNSD Analysis
 X – Y – Z Analysis
 GOLF Analysis
 Economic Order Quantity
ABC ANALYSIS:
 It is based on proposition and efforts are scare and limited
 Managerial items and efforts are scare and limited.
 Some items of inventory are more important than others.
ABC analysis classifies various inventories into three sets or groups of priority and allocates
managerial efforts in proportion of the priority the most important item are classified into
“class-A” those of intermediate importance are classified as “class-B” and remaining items
are classified into “class-C”.
The financial manager has to monitor the items belonging to different groups in that order of
priority and depending upon the consumptions.
The items with the highest value is given top priority and soon and are more controlled then
low value item. The re-rational limits are as follows.
Category % of Items % of Total Materials
A 5-10 70-85
B 10-20 10-20
C 70-85 5-1
PROCEDURE:
Items with the highest value are given top priority and so on. There after cumulative totals of
annual value of consumption are expressed as percentage of total value of consumptions.
Then these percentage values are divided into three categories.
ABC analysis helps in allocating managerial efforts in proportion to importance of various
items of inventory.
INVENTORY TURNOVER RATIO
What it is
This ratio how often a firm’s inventory turns over during the course of the year. Because
inventories are the least liquid form of asset, a high inventory turnover ratio is generally
positive. On the other hand, an unusually high ratio compared to the average for the industry
could mean a business is losing sales because of inadequate stock on hand.

21
When to use it:
If a firm’s business has significant assets tied up in inventory, tracking its turnover is critical
to successful financial planning. If inventory is turning too slowly, it could indicate that it
may be hampering the firm’s cash flow. Because this ratio judge’s annual inventory turns, it
is usually conducted once a year.
Small businesses, both manufacturers and retailers, now have the opportunity to reduce
inventory-related costs significantly through the use of various inventory techniques
implemented on a micro- or mini-computer. Inventory techniques are divided into two
categories:
Those for independent demand items (finished goods) and
Those for dependent demand items (manufacturing-in-process items and raw material).
Several techniques offer potential for savings with independent demand items. Independent
demand item techniques are subdivided into continuous review models, periodic review
models, and mixed models
HML Analysis
Items are classified according to the unit value as high, medium, and low. It is used to control
the purchase value of items.

VED CLASSIFICATION
While in ABC ,classification inventories are classified basis on their consumption value and
in HML analysis the unit value is the basis, and criticality of inventories is the basis of VED
classification.
The VED analysis is to determine the criticality of an item and its effect on production and
other services.it is specially used for classification of spare parts.
VED CLASSIFICATION ---- V is for vital, E is essential and D is desirable.
If a part is vital, it is given V classification, if it is Essential then given E classification, and if
it is not so essential ,then the part is given D classification.
For V items a large stock of inventory is generally maintained, whereas for D items minimum
stock is enough.
So Stock control is a critical aspect of successful management of all the inventory control
systems ABC and VED matrix is most suitable for medical stores.
Just –In-Time Inventory:
Just-In-Time philosophy, which aims at eliminating waste from every aspect of
manufacturing and its related activities, was first developed in Japan. The term JIT refers to a
management tool that helps to produce only the needed quantities at the needed time. The
major focus of JIT approach is to purchase or produce in response to the need rather than as
per the plans and forecasts

22
SDE Analysis
S- Scarce items (items in short supply)
D-Difficult items (items cannot be procured easily)
E- Easily available items (items available in local market)
S-OS Analysis
S - Seasonal items
OS - Off-seasonal items
Movement Analysis (FSN Analysis)
Check stock rotations and identifies the obsolescence of items. This is particularly
useful for spare parts
Fast-, Slow- and Non-moving Analysis

FNSD Analysis
F- Fast moving items
N- Normal moving items
S- Slow moving items
D- Dead stock
The ‘F’ items are those which are consumed over a short span of time.
The ‘N’ items are those which are consumed over a year.
The ‘S’ items are those which are used 2 years or so.
The ‘D’ items for which no further demand can be foreseen.
Dead stock represents money spent that cannot be realised and occupies useful space. If there
is no alternative used for such items, they should be disposed.
XYZ Analysis
Based on the value of inventory undertaken during the closing of annual accounts
X – High value; Y – Medium value; Z – Low value
GOLF Analysis
GO- Government controlled quota
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L- Locally available items
F- Items available in Foreign market
ECONOMIC ORDER QUANTITY (EOQ)
The economic order quantity is that inventory level, which minimizes the total of ordering
costs and carrying costs.
It is the question, how much quantity to be ordered when inventory is to be
replenished. If the firm is buying the raw materials, the question is to purchase the quantity of
each replenishment and if it has to plan for production run, it is how much production to
schedule. This aspect may be solved through EOQ.
The EOQ involves two types of costs:
1. Carrying Cost
2. Ordering Cost
EOQ for an item is arrived by the following formula; the following assumptions are made in
the standard Wilson lot size formula to obtain EOQ:
a. Demand is continuous at a constant rate
b. The process continues infinity.
c. No constraints are imposed on quantities ordered, storage capacity, budget etc.
d. Replenishment is instantaneous.
e. All costs are time invariant
f. No shortages are allowed
g. Quantity discounts are not available.

EOQ for an item is arrived by the following formula;

2 × AC ×CO
EOQ = √ CC

Where
EOQ = Economic Order Quantity
AC = Annual consumption of an item
CO = Ordering Cost of unit/year
CC = Carrying Cost of unit/year

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 NEED & IMPORTANCE OF INVENTORY MANAGEMENT

NEED:
 It is essential to keep down production costs, to balance these costs with costs of holding
stock.
 To avoid stockouts some level of safety stock must be held to accommodate variations in
demand.
 For calculation of buying costs EOQ is used.
 To take advantage of quantity discounts.
 To account for seasonal fluctuations.
 To allow for price fluctuations/speculations.
 To provide customers with immediate service.
 To minimise production delays due to lack of spare parts.
 To help production & distribution operations run more smoothly.

IMPORTANCE:
 Ascertains present & future requirements for all types of inventory to avoid over-stocking
or under-stocking.
 Keeps costs at the minimum by variety reduction, economic lot sizes and analysis of
costs incurred in obtaining and keeping inventories.
 Provides upstream and downstream inventory visibility or service in the supply chain.
 Inventory takes up space.
 Firms need to hire people to take care of inventory.

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 OBJECTIVES OF INVENTORY MANAGEMENT
 To analyse the change in inventory that whether it has been increased or decreased.
 To compare the given inventory from 2012 -2019.
 To interpret the reasons for changes inventory.

LITERATURE REVIEW OF INVENTORY MANAGEMENT

S. Singh (2006): Analysed the inventory control practices of single fertilizer company named
IFFCO. He statistically examined the inventory system with consumption, sales and other
variables along with growth of these variables and inventory patterns. He concluded that an
increase in components of inventory lead to an increase in the proportion of inventory in current
assets. A special focus was made on stores and spares in order to calculate excess purchases
resulting in loss of profit.

Capkun, Hameri and Weiss (2009): Statistically analysed the relationship between
inventory performance and financial performance in manufacturing companies using the
financial information of a large sample of US-based manufacturing firms over a 26-year period,
that is, 1980 to 2005. They inferred that a significant relationship existed between inventory
performance along with the performance of its components and profitability. Raw material
inventory performance was highly correlated to gross profit and operating profit. Work in
progress inventory was highly correlated to gross profit measures while finished goods inventory
performance was more correlated with operating profit measures.

Sahari, Tinggi and Kadri (2012): Empirically analysed the relationship between
inventory management and firm performance along with capital intensity. For the purpose they
took a sample of 82 construction firms in Malaysia for the period 2006–2010. Using the
regression and correlation analysis methods, they deduced that inventory management is
positively correlated with firm performance. In addition, the results indicate that there is a
positive link between inventory management and capital intensity.

26
Panigrahi (2013): Undertook an in-depth study of inventory management practices followed
by Indian cement companies and its affect on working capital efficiency. The study also
investigated the relationship between profitability and inventory conversion days. The study,
using a sample of the top five cement companies of India over a period of 10 years from 2001 to
2010, concluded that a considerable inverse linear relationship existed between inventory
conversion period and profitability.

Srinivas Rao Kasisomayajula(2014): An analytical study was conducted on” Inventory

Management in Commercial Vehicle Industry In India”. A sample of five companies’ was
selected for study. The study concluded that all the units in the commercial vehicle industry have
significant relationship between Inventory and Sales. Proper management of inventory is
important to maintain and improve the health of an organization. Efficient management of
inventories will improve the profitability of the organization.

INDUSTRY PROFILE
Heavy Electrical Industry covers power generation, transmission, and distribution and
utilization equipment’s. These include turbo generators, boilers, various types of turbines,
transformers, switchgears and other allied items. Majority of the products manufactured by
heavy electrical industry in the country, which includes items like transformers, switchgears
etc., are used by all sectors of the Indian economy. Some major areas where these are used
are the multi core projects for power generation including nuclear power stations,
petrochemical complexes, chemical plants, integrated steel plants, non-ferrous metal units
etc.
The industry has been upgrading the existing technology and is now capable of
taking up turnkey contracts also for export markets. The industry has been de-licensed.
Foreign collaborations are allowed with100 percent FDI. The country is planning to add
150,000 MW power generation capacities in the next 10 years. This will generate substantial
demand for heavy electrical equipment’s.
Heavy electrical equipment industry is the important manufacturing sectors that cater
the need of energy and other industries. The equipment’s manufactured under this sector are,

 Steam generators
 Turbo generators
 Turbines
 Transformers
 Switch gear and relays
 Other related accessories.
The industry is headed by “THE DEPARTMENT OF HEAVY INDUSTRY”,

27
Shri. Arjun Ram Meghwal Shri. Arvind
Sawant
Honourable Minister of (HI &PE) Honourable Minister of (HI & PE)

Vision:
“To have modern, healthy and robust auto, heavy engineering, heavy electrical and capital
goods sectors and self-reliant and growth oriented public sector undertakings under the
department”.

Mission:
 The Department of Heavy Industry (DHI) strives to bolster profit making PSE as well
as restructure and revive seeks and loss making PSE under its administrative control.

 The DHI seeks to achieve its vision of global automotive excellence through creation
of state-of-the-art research and testing infrastructure through the National Automotive
Testing and R&D Infrastructure Project (NATRIP).

 The DHI seeks to achieve its vision by providing necessary support to the Auto,
Heavy Engineering, Heavy Electrical and Capital Goods.

QUALITY POLICY:
“To have a globally competitive, growth oriented and profitable heavy industries and self-
reliant and growth oriented CPSES under the department and enhance satisfaction of the
clients or users and continually improve the department performance, as per the mandate of
the Department of Heavy Industry, Ministry of heavy industries and public enterprises”.
The company under the industry are,

1. ENGINEERING ENTERPRISES:
28
  Andrew Yule & Co Ltd.(AYCL)
 Bharat Heavy Electrical Limited.(BHEL)
 Bharat Heavy Plate and Vessels Ltd.(Subsidiary of BHEL)
 Bharat Pumps and Compressors Ltd.(BPCL)
 HMT Ltd.(Holding company with Tractor division)
 HMT (Bearing)Ltd.(Subsidiary of HMT)
 HMT Watches (Subsidiary of HMT)
 HMT Chinar Watches (Subsidiary of HMT)
 HMT Machines Tools (Subsidiary of HMT0
 Hindustan Cables Ltd (HCL)
 Instrumentation Ltd. Kota (IL)
 Rajasthan Electronics and Instruments Ltd (Subsidiary of ILK)
 Richardson and Cruddas’s (1972) Ltd.(R & C)
 Scooters India Ltd. (SIL)
 Triveni Structural Ltd (TSL)
 Tungabhadra Steel Products Ltd. (TSPL)

2. NON-ENGINEERING ENTERPRISE:
 Cement Corporation of India Ltd.(CCI)
 Hindustan Paper Corporation Ltd.(HPC)
 Hindustan Newsprint Ltd.(Subsidiary of HPC)
 Hindustan Salts Ltd.(HSL)
 Sāmbhar Salts Ltd.(SSL) (Subsidiary of HSL)
 Hindustan Photo Films Manufacturing Co. Ltd.(HPF)
 Nepa Ltd.(NEPA)
 Nagaland Pulp and Paper Company Ltd.(NPPCL)
 Tyre Corporation of India Ltd.(TCIL)

3. CONSULTANCY/SERVICE ENTERPRISES:
 Bharat Bhari Udyog Nigam Ltd.(BBUNL)
 Braithwaite Burn and Jessop (BBJ) Construction Ltd.(Subsidiary of BBUNL)
 Bridge and Roof Company (India) Ltd.
 Engineering and Projects (India) Ltd.(EPI)
 HMT (International) Ltd.(Subsidiary of HMT)
 Hooghly Printing Company Ltd. (Subsidiary of AYCL)

4. AUTONOMOUS BODIES:
 Fluid Control Research Institute (FCRI)
 The Automotive Research Association of India (ARAI),ARAI Forging
Industry Division(ARAI-FID)

29
  NATRIP Implementation Society (NATIS) for the implementation of National
Automotive Testing and Research and Development Infrastructure project.
(NATRIP)
Industrial sector allotted to the Department are,
 Heavy Engineering Equipment and Machine Tool Industry.
 Heavy Electrical Engineering Industry.
 Automotive Sector including Tractors and Earth Moving Equipment.

COMPANY PROFILE OF BHEL

BHEL is an integrated power plant equipment manufacturer and one of the largest
engineering and manufacturing companies of its kind. It offers over 180 products to meet the
core sectors like power, transmission, industry, transportation, renewable, energy, oil & gas,
water and defence.
BHEL has been the bedrock of India’s heavy electrical equipment industry since its
incorporation in 1964. BHEL has been achieving self-sufficiency in indigenous
manufacturing of heavy electrical equipment. Out of 35,000 MW per annum capacity in the
country BHEL alone consists of 20,000 MW per annum capacity. It has a wide spread
network of,
 17 manufacturing divisions
 2 repair units
 4 regional offices
 8 service centres
 6 joint ventures
 15 regional marketing centres and 150+ projects around and India and abroad.

Vision:
A global engineering enterprise providing solutions for a better tomorrow.

Mission:
Providing sustainable business solutions in the field of energy, industry and infrastructu

Values:
 Governances
 Respect
 Excellence
 Loyalty
 Integrity
 Commitment
 Innovation
 Team work
BHEL achieving the capacity addition of 45,274 MW during the 12 th 5year plan period
(2012-2017) which is 9% for the target of 41,661 MW.

30
In the financial year 2017-2018 the company commissioned or synchronized 4,149 MW of
power generation equipment due to which the company’s global installed power generation
capacity has gone up to 183+GW. During the year at the company built thermal power
generation sets generated an all time high 549 billion units of electricity which was 58.2% of
the total thermal power generated in the country.
During the year the company said a new record by supplying 450+MW of solar PV modules,
making a significant contribution to nation’s green initiatives. The high level of quality and
reliability on the products of BHEL is to the compliance of international standards and use of
the best technologies around the world and from its own R&D centers.

CONTRIBUTIONS OF DIFFERENT SECTORS

Power Generation:
Power generation sector comprises of thermal, gas, hydro and nuclear power plant business.
BHEL has proven turnkey capabilities for executing power project from concept to
commissioning. It possesses the technology and capability to produce thermal sets with super
critical parameters up to 100 MW units rating and gas turbine generator set of up to 250 MW
units rating. Co-generating and combined – cycle plants have been introduced to achieve
higher plant efficiencies. To make efficient use of high – ash – content coal available in
India.

Industries:
BHEL manufactures and supplies major capital equipment and systems like captive power
plants, centrifugal compressors, drive turbines, industrial boilers and auxiliaries, waste heat
recovery boilers gas turbines, pumps, heat exchangers, electric machines, valves, heavy
casting and forgings etc. to a number of controls and instruments systems, especially
distributed digital control systems for various power plants and industries.

Transportation:
BHEL’s equipment serves most of the trains in Indian Railways, whether electric or diesel
powered. The system supplied is both with conventional DC drives and state of the art AC
drives. India’s first underground metro at Kolkata runs on drives and controls supplied by
BHEL
SWOT ANALYSIS OF BHEL
The Strength, Weakness, Opportunities and Threats which are being experienced by BHEL as
a growing concern have been summarized up in the following lines.

Strengths:
 Vast pool of trained Man Power.
 Excellent state of art facilities.
 Good working atmosphere.
 Rapport between Management and Union.
 Product manufactured to International Quality
 Low labour cost and low manufacturing cost

31
Weaknesses:
 Excess Man Power.
 Slippage in delivery commitments.
 System implementation inadequate.
 No Financial package.
 Inadequate compensation package to employees.

Opportunities:
 Growing Power Sector Machinery.
 Liberalization has opened up the market.
 Navratna company status.
 Dominant player in Domestic Market.
 Expert potential growing.

Threats:
 Liberalization- Entry of MNC’s or Private sector- more competition
 MNC’s taking away good employees with attractive packages.
 Government taxation policy- against manufacturing sector.

OBJECTIVES:
1. Growth: To ensure a steady growth by enhancing the competitive edge of BHEL in
existing business, new areas and international operational operation so as to full-fill
national expectations from BHEL.
2. Profitability: To provide a reasonable and adequate return on capital employed,
primarily through improvements in operational efficiency utilization and productivity
and generate adequate internal resources to finance the company’s growth. Confidence
on providing increased value for this money through international standards of product,
quality, performance and superior customer services.
3. Technology: To achieve technology excellence in operations by development of
indigenous technology to and efficient absorption of imported technologies to suit
business needs and priorities and provide a competitive advantage of the company.
4. Image: To full-fill the expectations which stock holders like govt. as own employees,
customers, and the country at large have from BHEL.
CORPORATE SOCIAL RESPONSIBILITY

32
Inclusive India:
BHEL has actively supported the cause of developing skills for people from different
demographics to make them employability. BHEL has given training and also donated the
equipment for imparting skill-sets of varied nature. It has imparted training to develop skilled
workforce for the nation through the support to ITIs. BHEL’s world-class welding institute
has trained welders from across the country. This has helped the trained people to generate
income to support their families and in-turn also contributes to overall GDP of India.

Projects have been undertaken in the following areas:

 Vocational Training
 Environmental Awareness Programs
 Awareness on curbing Child Labour
 Providing technical education in Rural Areas
 Imparting training to the ITIs
 Training on computer

Healthy India:
In the field of Health, BHEL has contributed widely by addressing issues like healthcare
availability and accessibility, providing specialized treatments and/or medications, etc. Our
initiatives in partnership with specialized agencies, have benefitted people from different
backgrounds who previously had no access to healthcare or specialized treatments for their
ailments

Projects have been undertaken in the following areas:

 Mobile Health Care Units
 Up-gradation of Medical Equipment
 Palliative Therapy
 Construction of Hospitals

33
  Blood Donation Camps
 Promoting Sports
 Cancer Treatment

Clean India:
BHEL has aligned itself to the nation’s call of “Swachh Bharat Abhiyan” to undertake
initiatives ranging from construction of toilets to providing the villages with safe drinking
water. It has been the spirit of the organization to work in a sustainable manner and
maintaining clean and green surroundings.

Projects have been undertaken in the following areas:

 Construction of RO plants in villages
 Renovation of existing toilets
 Working for the Clean Ganga Campaign
 Contributing to Swachh Bharat Abhiyan

Educated India:
BHEL has been running schools near its manufacturing plants to deliver quality education to
students of all strata of society (more than 75% being wards of Non-BHEL workers). Various
other initiatives like scholarships to deserving-needy, computer education/equipment to
identified schools, innovative teaching methods at govt. schools, etc. have been supported by
BHEL.

Projects have been undertaken in the following areas:

 Scholarships to students of minority communities
 Running full-fledged schools near establishments
 Separate schools for differently-abled children
 Scholarships to Disabled students
 Self Empowerment for girl child
 Assisting in coaching for Entrance Exams

Vision to All - BHEL’s Call:

BHEL has helped society in many ways and one such initiative is Eye Donation. “Vision to
all, BHEL’s Call” is an initiative by BHEL for eradication of corneal blindness by pledging
one’s eyes. More than 92,000 eye donation pledges from BHEL employees and their family
members have been given to eye banks to eradicate blindness from society. This is a unique
attempt where such a large number of pledges have been given by an organization. BHEL
also supports the cause of organ donation. It is heartening to note that through this initiative,
numerous individuals have been provided eyesight which has opened for them a bright and
beautiful window to the wonderful world that our Mother Nature has bestowed on us. Eye
donation is considered as supreme form of charity as it helps a visually impaired person to
see the world through the donor’s eyes.
Responsible India:
BHEL has actively supported the cause of developing skills for people from different
demographics to make them employability. BHEL has given training and also donated the
equipment for imparting skill-sets of varied nature. It has imparted training to develop skilled

34
workforce for the nation through the support to ITIs. BHEL’s world-class welding institute
has trained welders from across the country. This has helped the trained people to generate
income to support their families and in-turn also contributes to overall GDP of India.

Projects have been undertaken in the following areas:

 Care & Support to Old-Age homes, Orphanages, etc.
 Promoting Education in Slum areas
 Promoting Community Development programmes
 Relief operations for Disaster/Calamity affected areas
 Women Empowerment
 Support to Leprosy Homes

Heritage India:
It has been the culture at BHEL to support the Indian way of life by promoting the Arts and
Culture amongst the children and society in general. BHEL encourages the inculcation of folk
dance forms, use of musical instruments, etc. for the children so that they are connected to the
roots of Indian culture.
Projects have been undertaken in the following areas:
 Supporting Arts and Culture Events
 Beautification/Renovation at sites of historic importance
 Refurbishment of Swatantrata Sang ram Sangrahlaya at Red Fort, Delhi
 Distribution of Musical instruments to schools
 Support to construction of auditorium

Green India:
BHEL has stood for protecting the environment and conserving energy since its inception
using cutting-edge and efficient technologies. BHEL has actively planted trees, harvested
rain-water and undertaken many such initiatives in vicinity of its manufacturing plants &
project sites. These initiatives have been a regular practice even when CSR guidelines did not
exist.

Projects have been undertaken in the following areas:

 Solar Lighting
 Tree Plantation
 Conservation of Water Resources
 Sewage Treatment Plant
 Landscaping
 Biogas Plant

PRODUCTS

GAS TURBINES:
BHEL, the largest Gas turbine manufacture in India, with the state of art facilities in all areas
of gas Turbines manufacture provide complete engineering in house for meeting specific

35
customer requirements. With over 100 machines and cumulative fired hours of over four
million hours, BHEL has supplied gas turbines for variety of applications in India and aboard.
BHEL also has the world’s largest experience of firing highly voltaic naphtha fuel on heavy
duty gas turbines.

STEAM TURBINE:
BHEL has the capability to design, manufacture and commission steam turbines of up to
1000MW rating for steam parameters ranging from 30 bars pressure and initial and reheat
temperatures up to 600c. Steam Turbines are manufactured under technical collaboration with
Siemens, Germany covering the whole range of requirements for drive, Cogeneration,
Captive power, utility and combined cycle applications. BHEL today, is fully equipped to
provide comprehensive service to clients covering system engineering, equipment design, and
turnkey erection and commissioning.

COMPRESSOR:
BHEL manufactures a complete range of centrifugal compressors for all major compression
applications. They are used in oil & gas production, gas transportation, refinery and
petrochemical industries, fuel gas boosting and other similar processes.
Our licensor GE holds the record for centrifugal compressor applications having designed
and manufactured the first high pressure compressor for ammonia and urea plants, the most
powerful compressors for offshore applications (over 30,000 HP) and re-injection
compressors with delivery pressures as high as 10,000 psi(700 bar).

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HEAT EXCHANGERS:
BHEL Hyderabad has supplied a variety of Heat Exchangers in large numbers for
diversified applications. Among them are Steam Surface Condensers, Air Evacuation System,
Feed Water Heaters, Deaerators Inter-Stage Gas Coolers, Process Heat Exchangers, Air
cooled Heat Exchangers, L.P.G Bullets. These are rendering good service in a number of
Power Plants, Fertilizer, petroleum, Petrochemical, Steel and other Industrial Plants.

TURBO-GENERATORS:
Electrical Machines group in BHEL Hyderabad manufactures Turbo Generators of 3 MW to
270 MW Utility and Industrial sets for Gas, Coal and Nuclear based Power Plants. These
turbo-generators along with excitation systems are supplied matching to steam / gas turbines
which are mostly used in Paper, Sugar, Steel, Metallurgical, Mining, Cement, Refineries &
Petrochemicals, Fertilizers, Textile industries etc. Turbo generators are designed and
manufactured according to the applicable national & international standard stipulations and
customer requirements with best manufacturing practices. The turbo generators are based on
the proven design know how backed by over five decades of experience gained by BHEL.

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PUMPS:
BHEL Ramachandrapuram Unit has acquired considerable experience in the design and
manufacture of various important types of pumps required for the thermal power plants like
the Boiler Feed Pump, Boiler Feed Booster Pump, Condensate Extraction Pump and Cooling
Water Pump.
Starting its manufacturing activities in mid sixties, the pumps were designed and
manufactured for 60 MW, 110 MW and 210 MW under technical collaboration

PULVERIZERS:
Pulverisers are employed to pulverize the pre-crushed raw coal to the required fitness before
it is admitted into the boiler furnace for combustion. BHEL manufactures mainly two types
of pulverisers:
1. Bowl mill
2. Ball tube mill
Currently, BHEL has licensing arrangement with M/s Alstom USA for large capacity High
Performance (HP). Bowl mills suitable for 660 MW & above size power plants.
The largest capacity HP 1203 Bowl mill supplied by BHEL. BHEL has supplied more than
3200 pulverisers of different types and sizes and these pulverisers are performing excellently
to the satisfaction of various customers

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OIL RIGS:
BHEL started manufactured oil field equipment with M/s US Steel Engineers and
Consultants USA (National Oil Well), M/s Sky top Brewster USA, M/s Branham Industries
USA, M/s IRI international, USA, after successful absorption of technology, BHEL now has
the capacity to manufacture conventional deep drilling rigs up to a depth of 9000 meters,
mobile rigs to a depth of 3000 meters and a well servicing rigs to a well depth of 6100
meters. BHEL offers services for refurbishments and modernization of the rigs and
equipment’s.

SWITCHGEARS:
BHEL is involved in the design, commissioning and service of a wide range of switch gears
catering to various applications like power station auxiliaries, power distribution, process
industries, rural electrification, open cast mines, electric traction and other special
application. BHEL started manufacturing circuit breakers in 1965 in collaboration with
ASEA, Sweden and to keep pace with technology advancement and to meet customer
requirements, SF6 technology was introduced in 1981 in collaboration with Siemens,
Germany for manufacture of 145 KV to 420 KV and the present range also include the
indigenously developed and successfully tested “Gas Insulated Switch Gear” for 36KV range.

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SOLAR WATER HEATING SYSTEMS:
BHEL, a pioneer in the Field of design manufacture and installation of a Solar Water Heating
Systems (SWHS) in the country till date have installed systems covering more than 74000 m2
of observer area capacity over 37lakhs litre’s per day. The largest over SWHS of 40000 LPD
for space heating is in use at Dr. Willmar Schwa be India pvt.

BHEL HYDERABAD UNIT

Heavy Power Equipment Plant (HPEP), Hyderabad is one of the major manufacturing units
of BHEL. It was established in1965 with an objective to design manufacture and supply
small size (12 MW – 110 MW) steam turbine generator sets. It satisfies the diversified
customer needs with product mix of gas turbines, steam turbines, compressors, generators, oil
field equipment and other power plant equipment such as pumps, pulverisers and heat
exchangers, etc.
In the year 2011-2012, a separate units “Project Engineering and Systems Divisions” was
formed at Hyderabad to provide end-to-end solutions to customers at national and
international level. The manufacturing facilities at BHEL are best in the world with 120 CNC
machining centres, 125 ton vacuum balancing tunnel, Cerro-bond technology, 5 axes milling
for 3D impellers, etc.
BHEL Hyderabad has also established CIM (Computer Integrated Machining), to smoothen
the information flow and also implemented ERP/SAP system. BHEL is also certified with,
 ISO 9001
 ISO 14001
 OHSAS 18001

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  ASME U&U2 stamp
 API certification for oil rigs
BHEL always strives to meet the expectations of the customers. Most of the products are
customized to suit to the specific requirements of customers, hence the unit has developed
sophisticated engineering capabilities and facilities with a network of high end engineering
work stations.
The customer profile includes leading Indian Power Sector companies such as NTPC, state
Electricity Board, Jindal Power, TISCO, GVK, Indraprastha Gas, etc and Industry leaders
such as RIL, Tata Steel, ACC, NALCO, IISCO, Bhushan Steels etc. Although BHEL is
focused to deliver to the needs of domestic customers, with its sophisticated technology and
advanced manufacturing capabilities it also forayed into international markets. BHEL’s
international customers include Giants like PDO Oman, ARCELOR MITTAL, BPDB,
Bangladesh, ORC-Oman, Tabriz-Iran, Grand Parros-France, Saudi Arabia, Sri Lanka etc.

Bharat Heavy Electricals Limited Major Events of the

Corporation

Year Event
1964 The company was incorporated as “Bharat Heavy Electricals Limited” on 13 th
November 1964
1966 Company acquired the assets from Heavy Electricals India Limited, Bhopal

1971 Company bagged its first export order for export of boilers (2x60 MW) for
Tuanku Jafar Thermal Power Station in Malaysia
1974 HEIL was amalgamated with the company pursuant to the order of the company
Law Board with appointed date 1st January
1976 Collaboration with M/S Seimens Germany for Steam Turbines and Generators.

Company acquired the entire shareholding of REMCO and MPL.

1980 Company commissioned its first complete 120 MW BTG and sub-station unit on
turnkey basis outside India located at Tripoli West Power Station of Electricity
Corporation, Libya.
1991 Company awarded the contract for the complete design, manufacture, erection,
testing and commissioning of two +/-500KV between Rihand and Delhi (Dadri)
convertor terminals for Rihand-Delhi (Dadri) link.

Products Manufactured under BHEL Hyderabad unit:

 Steam turbines
 Compressors
 Electrical machine
 Switch gear
 Bowl mills
 Heat exchange

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 Oil Rigs
 Gas turbines
 Pump

Organization Structure at BHEL, Hyderabad

EXECUTIVE DIRECTOR

GENERAL MANAGER

ASSISTANT GENERAL MANAGER

SR.DEPUTY GENERAL MANAGER

DEPUTY GENERAL MANAGER

SR.MANAGER

MANAGER

DEPUTY MANAGER

SR.OFFICER/ENGINEER

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 OFFICER

RESEARCH METHODOLOGY

The study basically depends on:

 Primary data
 Secondary data

DATA COLLECTION METHOD

SECONDARY DATA COLLECTION:

The data of BHEL for the years 2012-2019 is used in this study have been taken from
secondary sources i.e. published annual reports of the company. Editing, classifying, and
Tabulation of the financial data, which are collected from the above sources, have been as per
the requirement of the study.

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Statement Showing Materials Turnover ratio:
Materials turnover ratio = Cost of Goods sold / Average Stock

Turnover(Cost of goods
Average Stock Material
Year sold)
In numbers turnover ratio
In Lakhs Rs.
2012-13 649175 186996 3.47
2013-14 522080 148233 3.52
2014-15 330445 156576 2.11
2015-16 245759 159901 1.54
2016-17 289089 126458 2.28
2017-18 213564.04 96230.54 2.21
2018-19 218128.280 99971.25 2.18

Interpretation:
By observing the above data we can say the year 2013-2014 the material turnover ratio was
high when compared to that of previous year 2012-2013 i.e., it has increased 3.47 to 3.52
which reported 0.05 increase from the previous year. In the year 2013-2014the stocks are
converted in to goods faster than the others years i.e., 3.52 ratio, after which the successful
year was 2012-2013, where the material turnover ratio was 3.47. The least material turnover
ratio is 1.54 in the year 2015-2016. As per the information available from the sources the
reason for lowest material turnover ratio is attributed to various factors, like environmental
factors and hold on projects by customers.

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Statement Showing Materials Holding period:
Materials holding period = Average Stock/ Cost of Goods sold *365
Holding period
Year Average Stock in numbers Turnover in Lakhs
in days
2012-13 186996 649175 105
2013-14 148233 522080 104
2014-15 156576 330445 173
2015-16 159901 245759 237
2016-17 126458 289089 159
2017-18 96231 213564 164
2018-19 99971 218128 167

Interpretation:
By observing the above data we can say the year 2013-2014 & 2012-2013 material holding
period was less which means that, the stock is being converted into goods when compared to
those of other years. The holding period is increased to 173 days in 2014-2015 and then to
237 days in 2015-2016. which reported 64 days increase from the previous years. As per the
information available from the sources the reason for increase in the material holding period
is attributed to various factors, like environmental factors and hold on projects by customers.

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 Statement Showing Work-In-Progress Turnover ratio
Work-in-progress turnover ratio = Turnover / Work in progress
T/O Value: In Rs. Lakhs

Year Turnover Work in progress WIP Turnover ratio

2012-13 649175 81151.9 8.00
2013-14 522080 50714.6 10.29
2014-15 330445 62836.4 5.36
2015-16 245759 73309.6 3.35
2016-17 289089 61977 4.66
2017-18 213564 49763.02 4.29
2018-19 218128 47644.90 4.57

Interpretation and inferences drawn:

By observing the above data, it is noticed that, the Turn over work-in- progress ratio is
gradually increasing from the year 2011-12 to 2013-14 which is a healthy sign during those
periods.
The greater the Turn over work-in- progress ratio is better indication of health of the
organization. The work-in-progress has been converted to turnover very fast during the above
period, which means that, the produce is converted to cash very fast.
Thereafter, in the years 2014-15 and 2015-16 the Turn over work-in- progress ratio gradually
came down and it is the lowest in the year 2015-16. The reason for this is the turnover came
down and also the work-in- progress gone up. During the analysis it has been observed that,
the reasons attributed for this are:
a) Government started encouraging super critical power plants, for which the organization
started gearing up by finding technology partner.
b) Environmental clearances and issues related to the same.
c) Hold on projects due various reasons.
d) Government policies to some extent.
e) Financial closures for the year by customers.

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 Statement Showing Finished Goods Turnover ratio:

Finished goods Turnover ratio = Turnover / Finished goods

T/O Value: In Rs. Lakhs

Finished Goods Turnover

Year Turnover Finished Goods
ratio
2012-13 649175 4164.7 155.88
2013-14 522080 8780.17 59.46
2014-15 330445 10799.3 30.60
2015-16 245759 7402.2 33.20
2016-17 289089 3830 75.48
2017-18 213564 483.33 63.68
2018-19 218128 390.25 52.20

Interpretation and inferences drawn:

By observing the above data, it is noticed that, the Finished goods Turnover ratio is gradually
increasing from the year 2010-11 to 2012-13 which is a healthy sign during those periods.
The greater the Finished goods Turnover ratio is better indication of health of the
organization. The finished goods are dispatched and have been converted to turnover very
fast during the above period, which means that, the produce is converted to cash very quickly.
But, in the years 2013-14 to 2015-16 the Turn over to FG ratio drastically came down,
whereas in the year 2016-17 the same is increased showing good signs of healthiness of the
organization.
By analysis, it has been observed that, the percentage of finished goods wrt turnover are
1.87% in 2010-11; 0.7% in 2011-12; 0.64 in 2012-13; 1.6% in the year 2013-14; 3.3% in
2014-15; and 3.01% in the year 2015-16.

Finished goods Turnover ratio:

On further analysis, it has been observed that, the highest percentage of finished goods in the
years 2014-15, 2015-16 are attributed to:
a) Non-availability of site clearance to dispatch the goods.
b) Delay in Environmental clearances and issues to projects by concern authorities.
c) Due to some unforeseen circumstances.

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For heavy industries like BHEL, it is quite normal to have 50 to 100 Crores finished goods in
place. Also, it has been observed that, BHEL produces goods based on customer orders only
as the products are specifically designed and manufactured to suit to the project requirements.
Hence, the Finished goods are goods are consumed against the customer order concerned.

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 Statement Showing Inventory Turnover ratio
ABC ANALYSIS for the year 2014-15

A) Material Inventory Turnover ratio

CUMULATIV
ANNUAL CUMULATIV
Material inventory turnover RAN
ratio = Cost of Goods sold E E
ITEM CONSUMPTIO
K PERCENTAG
N USAGE
Material inventory E OF USAGE

RAW MATL & COMP. 1 64369.3 64369.3

Value: In Rs. Lakhs 41.11
WORK IN PROGRESS 2 62836.4 127205.7 81.24
Material
FINISHED GOODS 3 Material
10799.3 138005 88.14
Year Turnover Inventory
TRANSFER IN TRANSIT 4 Inventory
6959.63 144964.63 92.58
Turnover ratio
MATERIALS IN TRANSIT 5 4712.58 149677.21 95.59
2012-13 649175 101679.62 6.38
INDIRECT MATERIALS 6 3069.21 152746.42 97.55
2013-14 522080 88738.2 5.88
MATERIALS WITH FABRICATORS 7 2477.75 155224.17 99.14
2014-15
SCRAP & OTHERS
330445 8
82940
1351.54
3.98
156575.71 100.00
2015-16
A occupies 245759 values i.e.,79189.6
70% of annual consumption 70% of 156575.71= 1096033.10
2016-1790% of annual 289089
A+B occupies 55639
consumption values i.e., 5.19
90% of 156575.71 = 140918.14
2017-18 213564.04 101698.77 2.09
2018-19 218128.280
A = 127205.7/156575.71*100 = 81.24 105131.49 2.07
B = (10799.3+6959.63) /156575.71*100 = 11.34
C = (4712.58+3069.21+2477.75+1351.54) /156575.71*100 = 7.42

ECONOMIC ORDER QUANTITY

The Economic order quantity is represented by the formula:

2 × AC ×CO
EOQ=
√ CC
Where AC= Annual Consumption 49
CO= Ordering Cost
CC= Carrying Cost
 LIMITATIONS OF INVENTORY MANAGEMENT

o The study is confined to a period of last seven years.

o As most of the data is from secondary sources, hence the accuracy cannot be assured.

SCOPE OF INVENTORY MANAGEMENT IN BHEL

The scope and period of the study is restricted to the following :

o The scope is limited to the operations of the BHEL .

o The information obtained from the secondary data was limited to BHEL.
o The key information performances indicated were taken from 2012-2019.

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 Suggestions :
1. Company shall try for technical and commercial rate –contracts for majority of regular use
items/equipment so that, the ordering costs will reduce.
2. Non-moving and slow moving items shall be regularly monitored and put those items into
use by design modifications and production modifications wherever possible.
3. Spare parts of each and every product shall be manufactured based on VED analysis
(Vital, Essential, Desirable) and educate customers for better use of them, like when to
replace, when to overhaul etc. so that, the business can be improved further in spares area.
4. Physical checking of the inventory shall be carried out at reasonably regular intervals for
important and critical items, so that the difference in records can be cross checked.
5. Stores personnel shall be updated with the product knowledge of the vital and critical
items stored, so that they can handle them better.
6. RCA ( Root Cause Analysis ) shall be carried out for non-moving and slow moving items,
excess and obsolete stock to avoid further procurement.
7. Purchase orders shall be released on vendors according to the lead –time and as per
Production and supply plan.
8. Experienced personnel, who are leaving the organization for various reasons, like
superannuation, shall transfer their acquired skills and knowledge to next generation/ sub –
ordinates.
9. It is suggested to form CFTs (Cross Functional Teams) to generate various possible
solutions to improve debtors.

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Conclusions:
Inventory management is a vital function that helps and ensures the success of
manufacturing companies. Modern inventory management processes utilize new and more
refined techniques that provide for dynamic optimization of inventories to maximize customer
service with decreased inventory and lower cost. The goal of good inventory management is
not perfection but improvement. These improvements should not be viewed as a short term
efforts but should continue on a permanent basis. The ROI of inventory management will be
seen in the forms of increased revenue and profits, positive employee atmosphere and an
overall increase of customer satisfaction. A truly effective inventory management system will
minimize the complexities involved in planning, executing and controlling a supply chain
network which is critical to business success.

The goal of the wealth maximization is affected by the efficiency with which Inventory is
managed.

1. Inventories constitute about 60% of current assets of companies in India.

2. The manufacturing companies hold inventories in the form of raw material.
3. Work-in-progress and finished goods inventories facilitate smooth production and sales
operation. (Transaction Motive)
4. The inventory shall be managed to guard against the risk of unpredictable change in the
usage rate and delivery time (Precautionary Motive)
5. To take the advantage of price fluctuations due to unforeseen situations (Speculative
Motive)
6. As the organization is manufacturing many products and related spares and procuring
many types of materials, it is good to use the techniques like FSN ( Fast, Slow and Non-
moving), HML ( High, Medium, Low cost) and VED (Vital, Essential and Desirable)
analysis apart from ABC analysis which the company is using at present.
7. Inventory management of BHEL reveals that, most of the stock is in the form of the
finished goods, which means that the raw materials are converted into finished goods in a
systematic manner.
8. The debtors are increasing compared to the inventory in the period between 2010-11 to
2016-17 which is not a healthy sign.

BIBLIOGRAPHY
 I.M.PANDEY,(1994).Management Accounting 3, Vikas publishing house Pvt ltd,
Banglore.
 M.Y.Khan, P.K.Jain, Management and Cost Accounting.TATA McGraw Hill
publishing company limited, New Delhi.
 Financial management,Module 2 ,2015,Institute of Charted Accountants of India.
www.bhel.com

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