operations project- kritika

INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT (2010)

APROJECT REPORT

ONON INVENTORY MANAGEMENT- PURCHASE AND

PROCUREMENT PROCEDURES AT

IOCL (BARAUNI REFINERY)

SUBMITTED TOSINHGAD INSTITUTE OF MANAGEMENT

IN PARTIAL FULFILLMENT OF TWO YEARS FULL TIMEPGDM COURSE (OPERATIONS)

SUBMITTED BYKRITIKA

(2009-2011)

UNDER THE GUIDANCE OFProf. SHAILENDRA KALE

SINHGAD INSTITUTE OF MANAGEMENTVADGAON(Bk),PUNE-4


DECLARATION

I KRITIKA ,a bonafide student of SINHGAD INSTITUTE OF MANAGEMENT,PGDM-Operations (4th Semester) hereby declare that the Final Project entitled “INVENTORY MANAGEMENT- PURCHASE AND PROCUREMENT PROCEDURES AT IOCL BARAUNI” is an original work and the same has not been submitted to any other institute for the award of any other degree.

Place: PUNE Date :

Signature of Student


ACKNOWLEDGEMENT

This project was a formidable task but from the active guidance

and help within and outside the organization and institution, the tasks was

performed by me.

Special thanks go to:

I am hearty thankful to Mrs. Piyali Chakarborty ( Head HR ) for

allowing me and giving me the opportunity to work and undergo the project

training at IOCL(Barauni Refinery).

I have the privilege to express my sincere indebtness and profound

sense of gratitude to my project guide Mr. A.K.Lal(Finance Manager), Mr.

Yadwendra Singh (Material Manager), and Mr. Mukesh Kumar (SACO),

who’s active association, constant encouragement, untiring labour and

generous efforts could enable me to layout the work of this project. This

project would have never taken this final shape without their parental care and

watchful help.

I shall ever remain grateful to my college project guide

Prof. Shailendra Kale & staff members of PGDM, SINHGAD INSTITUTE

OF MANAGEMENT, PUNE for their valuable support, motivation &

guidance in preparation of the project.

Last but not the least, I wish to remember with the deep sense of

gratitude the encouragement provided to me by my parents and colleagues for

their consistent encouragement, cooperation and inspiration bestowed on me,

which has been indispensable for my project.


TABLE OF CONTENT

S.NO. CONTENT PAGE NO.

1. EXECUTIVE SUMMARY 6-7

2. INTRODUCTION 8-11

3. PROFILE OF THE ORGANISATION 12-33

4. CONCEPTUAL BACKGROUND 34-72

5. RESEARCH DESIGN AND METHODOLOGY

73-77

6. DATA ANALYSIS 78-94

7. FINDINGS 95-97

8. SUGGESTIONS 98-99

9. CONCLUSION 100-101

10. BIBLIOGRAPHY 102-103


EXECUTIVE SUMMARY

Petroleum oil is the lifeline of modern civilization. It is needed equally for both domestic and industrial purposes. Its demand has increased multiple-folds and yet to increase on war scale due to rapid industrialization and fast urbanization. Both developed and developing countries are utilizing oil resources continuously for their progress and prosperity. In such a situation, oil products management becomes very important because oil resources are non renewable or conventional sources of energy. Oil companies employ many techniques to minimize purchase and inventory costs to enhance profits.

Inventory management is vital in an oil plant. This project “ INVENTORY MANAGEMENT-PURCHASE AND PROCUREMENT PROCEDURES AT IOCL BARAUNI” has been completed in IOCL, Barauni. It deals with proper purchase operation, handling of materials and oil management processes. Purchase procedures play a very important part in inventory management. Cost reduction measures can be taken right from the purchase process. Various methods involved in purchase procedures have been studied. Thousands of spares and parts are stored by material management department. Their proper upkeep and maintenance are important for the refinery. Here the materials are classified on the basis of ABC analysis based on monetary values. This method is applied because materials are quite large. They are more than 30,000 in number. Other basic concepts of inventory have also been studied and explained. The project is also related to oil management in the last chapter. Efficient purchase of crude oil and proper management of finished products can add to the profitability of the company. The company maintains the storage of several finished products for further distribution.

Indian Oil Corporation Ltd. (Indian Oil) is India's largest commercial enterprise, with a sales turnover of Rs. 2,47,479 crore (US $ 61.70 billion) and profits of Rs. 6,963 crore (US $ 1.74 billion) for the year 2007-08. Indian Oil is also the highest ranked Indian company in the prestigious Fortune 'Global 500' listing, having moved up 30 places to the 105th position in 2009. It is also the 18th largest petroleum company in the world. For the year 2007-08, the Indian Oil group sold 59.29 million tonnes of petroleum products, including 1.74 million tonnes of natural gas, and exported 3.33 million tonnes of petroleum products.

The Indian Oil Group of companies owns and operates 10 of India's 20 refineries with a combined refining capacity of 60.2 million metric tonnes per annum (MMTPA, .i.e. 1.2 million


barrels per day). These include two refineries of subsidiary Chennai Petroleum Corporation Ltd. (CPCL). The Corporation's cross-country network of crude oil and product pipelines, spanning more than 10,000 kms and the largest in the country, meets the vital energy needs of the consumers in an efficient, economical and environment-friendly manner. Indian Oil is investing Rs. 43,393 crore (US $10.8 billion) during the period 2007-12 in augmentation of refining and pipeline capacities, expansion of marketing infrastructure and product quality upgradation as well as in integration and diversification projects.

In financial parlance, Inventory is defined as the sum of the value of raw materials, fuels & lubricants, spare parts maintenance consumables, semi processed materials and finished goods at any given point of time. Operational definition of Inventory would be: "The amount required raw materials, fuels, lubricants, spare parts and semi-processed material, stocked for smooth running of the plant". Since these resources are idle when kept in stores, inventory is defined as an idle resource of any kind having an economic value.

The main reasons for holding inventory are:-

To maintain targeted flow of production in line with national demand. Protection against uncertainties of demand & supply which can not be predicted with

sufficient accuracy. To avoid stock out in the period of shortages In periods of rapid price rise, higher inventory levels may well have to be accepted.

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


1.1 CONCEPT AND CONTEXT OF THE STUDY

Inventory management is a core function of a production company. It is an important area in the day to day management of the firm. Inventory management is the functional area of the finance that covers the efficiency of the production of a manufacturing firm. It deals with the proper storage of materials and products. A suitable inventory management applying various cost cutting measures leads to overall cost reduction of the company. This project covers the purchase procedures, material inventory and oil management in IOCL, Barauni. Here materials are managed mainly on the basis of ABC analysis. But, other concepts have also been studied and dealt with. Oil products and oil management have also been studied. A proper inventory management is a boon for a manufacturing company like IOCL, the biggest oil company in India.

1.2 OBJECTIVES OF STUDY:-

1. Primary Objective To Study Purchase Procedure & Procurement Process of IOCL- Barauni

Refinery. 2. Secondary Objectives

To analyze the Inventory Related issues in IOCL- Barauni Refinery.

To study EOQ, ROP, WIP, JIT.

.


1.3 Scope of the Study

1. The study is confined to IOCL, Barauni.

2. All the information could not be made public by the organization due to confidentiality.

3. Secondary data was used in inventory management.

4. Report is based on the information made available by the company, consultation with guides and self studies (internet and books).

5. The report is related to materials and oil inventory management. It may not be not be applicable to other kind of inventories like clothes, books etc. where a few raw materials are required.


1.4 LIMITATIONS:-

1.Within the short span of time available and considering the large organization, it has

not been possible to make a complete and exhaustive study. Data was collected and

analyzed on the basis of consultation with guides and self studies (internet and books).

2.No secondary data and previous records based on studies made earlier related

to the subject were available at the time, which would have given a better

insight about the topic.

3.Many of the respondents who were willing to cooperate with us in our

research studies, were not able to find sufficient time as they seemed to be

quiet busy and overload with their work.


2.1 INDIAN OIL CORPORATION Ltd

Indian oil was formed, as a joint venture between Oil Company and

government of India but later become fully owned government undertaking, it

continues to be canalizing agency for important cure oil and major petroleum

products on behalf of oil industry in India.

A company, Indian refineries limited, was set-up in the year 1958 to refine

crude oil. Another company, namely Indian oil company limited, was

incorporated in the year 1959 to market the products. In 1964 both companies

were merged and Indian oil corporation limited (IOCL) was born. In 1981

Assam oil company, a private sector oil company was nationalized and merged

with IOCL.

Indian Oil Corporation ltd. Is currently India’s largest company by sales with a

turnover of Rs. 2, 85, 337 crore and profit of Rs. 2950 crore for the year 2008-

09 the highest –ever for an Indian company. Indian oil is also the highest

ranked Indian company in the prestigious fortune ‘global 500’ listing, having

moved up 20 places to the 105th position in the year 2009. It is also the 18th

largest petroleum company in the world and number one petroleum trading

company among the national oil companies in the Asia-pacific region.


The corporation is celebrating the year 2009 (30th June to 1st September) as its

golden jubilee year ISO (9002).

Indian oil and its subsidiaries account for 49% petroleum products market

share, 40.4% refining capacity and 69% downstream sector pipeline capacity

in India. The Indian oil group of companies owns and operates 10 of 19

refineries with a combined refining capacity of 60.2 million metric tons per

annum (mmtpa). Indian oil started its oil refining operation in 1962 from

Guwahati refinery. In its 50 years of refining, 10 refineries have come up , at

Barauni (1964), Gujarat (1965), Haldia (1974), Digboi (1981), Mathura

(1982), Panipat (1998) and subsidiary refineries – Bongaigaon refinery

(2.95mmtpa), Chennai petroleum ( mmtpa).

2.2 Corporate vision, mission and values:

2.2(a) Vision:

a major diversified, trans-national, integrated energy company, with national

leadership and a strong environment conscience, playing a national role in oil

security & public distribution.


2.2(b) Mission:

To achieve international standards of excellence in all aspects of energy and

diversified business with focus on customer delight through value of products

and services, and cost reduction.

To minimize creation of wealth, value and satisfaction for the stakeholders.

To attain leadership in developing, adopting and assimilating state of the art

technology for competitive advantage.

To provide technology and services through sustained research and

development.

To foster a culture of participation and innovation for employee growth and

contribution.

To cultivate high standards of business ethics and total quality management for

a strong corporate identify and brand quality.

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

balance and heritage through a strong environment conscience.


2.2(c)Values: values IOCL nurture

Care ( CSR comes under this concern of IOCL)

Concern

Empathy

Understanding

Co-operation

Empowerment

Innovation

Creativity

Ability to learn

Flexibility

Change

Passion

Commitment

Dedication

Pride

Inspiration

Ownership

Zeal & zest


Trust

Delivered promises

Reliability

Dependability

Integrity

Truthfulness

Transparency

2.3 Objectives of IOCL:

To ensure national interest in oil and related sectors in accordance and

consistent with government policies.

To ensure and maintain continuous and smooth supply of petroleum product

by way of crude refining, transportation and marketing to customer to use more

efficiently.

To earn reasonable rate of return on investments.


To create a strong r &d base in the field of oil refining, and stimulate the

development of new petroleum products formulation with a view to minimize/

eliminate their imports.

To works towards the achievement of the self-sufficiency in the field of

oil refining by setting adequate domestic capacity and to built up expertise for

pipe lining for crude/petroleum product.

To minimize the fuel consumption in refineries and stock losses in

marketing operation to affect energy conservation.

To further enhance distribution network for providing assures service to

customers throughout the company through expansion of reseller network as

per marketing plan/government approval.

2.5 Financial:-

To ensure adequate return on the capital employed and maintain a

reasonable annual dividend on its equity capital.

To ensure maximum economy in expenditure

To manage and operate the facilities in an efficient manner so as to

generate adequate internal resources to meet revenue cost and requirements for

project investment, without budgetary support.

To develop long term corporate plans to provide for adequate growth of

the activities of the corporation.

To endeavour to reduce the cost of production of the petroleum products

manufactured by means of systematic cost control measures.

To endeavour to complete all planned projects within the stipulated time

and cost estimates.


2.6 Organisational set-up:-

Indian oil corporation limited

Indian oil has its head office as well as corporate office at New Delhi. The

registered office of corporation is in Mumbai.

The corporation is managed by board of directors appointed by the president

of India. Besides the chairman, the board has the following whole time

directors:

Director (refineries)

Director (pipelines)

Director (marketing)

Director (finance)

Director (hr)

Director (r & d)

The working of corporation's five divisions, namely (i)refineries

division, (ii) marketing division iii) pipelines division iv) R&D centre and (iv)

Assam oil division are co-coordinated by a full-time chairman. These four

divisions are headed by director (refineries), director (marketing), director

(pipelines) and director (R&D) respectively. Director (refineries) is also the

director in charge of Assam oil division.

The corporation is broadly divided into five divisions namely, refineries,

pipelines, marketing division, research & development and Assam oil division.

It also has a wholly owned subsidiary i.e. Indian oil blending limited.

2.7 Branches of IOCL divisions & refineries:-


2.8 subsidiary refineries

The divisional objectives are focused towards fulfilling the objectives and

obligations of the corporation. The major factor contributing towards the


success story of Indian oil today is its integrated approach in keeping the

divisions together.

IBP merged with IOCL

IBP co. Limited, the stand-alone petroleum-marketing subsidiary of

Indian oil corporation limited (Indian oil) has been merged with the parent

company with effect from 2nd may 2007. The ministry of company affairs

gave its sanction to the scheme of amalgamation for merger by an order dated

30th April, 2007.

The chairman, Indian oil, has created a new IBP division, towards achieving

smooth and seamless integration of business activities. It shall be our

endeavour to integrate the various business segments of erstwhile ibp with

similar business segments of the respective divisions of Indian oil at the

earliest so as to achieve the objectives of synergy, consolidation and

optimization of resources, he added.

Director (hr), Indian oil, and managing director of IBP till now, shall hold

additional charge as director-in-charge of the division.

2.9 Products of IOCL :-


Refinerie

s

Products

Barauni Carbon black feedstock (cbfs), raw

petroleum coke (rpc), sulphur

Digboi Paraffin wax

Guhawati Raw petroleum coke (rpc)

Haldia Cbfs, jute batching oil (jbo), micro

crystalline wax (mcw), mineral

turpentine oil(mto), sulphur

Gujarat Mineral turpentine oil(mto), sulphur,

toluence

Mathura Propylene, sulphur

Panipat Benzene, mineral turpentine oil (mto),

pet coke,sulphur

2.10 Recent Achievement of IOCL :-

IOCL has become Maharatna now in which it has got financial

freedom upto 50 crores.


2.11 Barauni Refinery: An Overview:-


The industrial jewel of Bihar is the second public sector refinery in the chain of

seven operating refineries of Indian oil corporation limited (IOCL), located at

Barauni in Begusarai district of north Bihar. It is one of the biggest size oil

refinery owned and managed by IOCL. It is the first major industry established

in north Bihar which is predominantly an agricultural area.

The refinery was designed and constructed with the assistance of the

government of erstwhile USSR and limited participation of Romania with an

initial cost of 49.40 crores. The construction activity of the refinery

commenced in 1962 and it went on stream in the year 1964. Barauni refinery

was dedicated to the nation by prof. Humayun Kabir, the then union minister

of petroleum and chemicals, government of India on January 15, 1965.

Initially the refinery was set up with the refining capacity of 2.0 million metric

tonnes per annum (mmtpa) of Assam crude through the Naharkatiya-Barauni

pipeline with two crude distillation units of 1.0 mmtpa capacity each. These

units were commissioned in phase, the first in july 1964, and the second unit in

February 1966. After de-bottlenecking, revamping and expansion project, its

capacity today is 6 mmtpa.

Barauni refinery was initially designed to process low sulphur crude oil (sweet

crude) of Assam using the refining technology sourced from other countries


like, Russia, etc. After establishment of other refineries in the northeast, Assam

crude is unavailable for Barauni. Hence, sweet crude is being sourced from

African, south east Asian and middle east countries like Nigeria, Iraq &

Malaysia. The crude is brought up to Haldia by very large crude carriers

(vlccs) from where it is pumped through pipeline to Barauni. With various

revamps and expansion project at Barauni refinery, capability for processing

high -sulphur crude has been added — high-sulphur crude oil (sour crude) is

cheaper than low sulphur crudes — thereby increasing not only the capacity

but also the profitability of the refinery.

Other processing units of the refinery include two coking units, lpg recovery

unit (lru), catalytic reforming unit (cru), coke calcinations unit, phenol

extraction and solvent de-waxing unit, wax hydro finishing unit, etc. But now,

many of these units have been closed on the basis of economic consideration.

An lpg bottling plant has also been established which is able to fill 3500 to

4000 cylinders per day. A captive power plant has also been established to

meet the steam and power requirements of the refinery

February 16, 1999 was a red-letter day in the history of Barauni refinery. On

that day, the 498 km long Haldia-Barauni crude oil pipeline commenced its

crude supply to the refinery, which was earlier dependent on assam crude oil

only. Thus, the refinery now receives the imported crude oil from haldia port.

Barauni refinery is among the few refineries in the world to have gained the

prestigious iso-9002 certificate for its quality management system, iso-14001

for the environment management system, ohsas and ohsms-18001 for the

occupational health and safety system.


2.11(a) Location of Barauni Refinery :-

Barauni refinery is located near the northern bank of river Ganga at Barauni in

Begusarai district of north Bihar. The river Ganga flows around 8 km away

from the refinery. The refinery is strategically located on the crossroads of two

important national highways, nh-30 & nh-31, and the two important railways,

eastern railways & north eastern railways. The refinery is 125 kms from Patna

and about 8 kms from the Begusarai town and is surrounded by the villages

like, Bihat, Mahna, etc to name a few. This whole area is known just because

of the refinery.

2.11(b) Various departments and sections at Barauni refinery:-

The refinery consists of following important departments:

Technical departments

The technical departments are directly concerned with running of plant

and production activities. The technical departments are as follows:

Production department

Power and utility department

Maintenance department

Technical services department

Quality control department


Fire and safety department

Project department

Inspection department

Non – technical departments

These departments have been created with a view of discharging some

specialized functions so that the objectives of the corporation may be

accomplished efficiently. The non – technical departments are as follows:

Human resources department

Personnel and administration

Medical

Training

Hindi cell

Corporate communication

Canteen

Transport

Time office


Material department

Purchase

Central stores

Finance department

Internal audit department

Management information system (MIS) department

Vigilance department

Security

Each department is headed by the chief / senior manager who is assisted by the

officers in the various key positions in day-to-day operations of the

departments.

2.11(b) Schedule of duties of employee’s at Barauni refinery:-

Shift duty: 3 shifts (also known as rotating shift)

Morning shift : 6 am – 2 pm

Evening shift : 2 pm – 10 pm

Night shift : 10 pm – 6 am

General shift : 8 am – 5 pm (plant)

Office time : 9:15 am – 5 pm (for ministerial staffs)


2.11(c) Organizational set-up or hierarchy

At Barauni refinery, there are two cadres of employees – ‘officers’ and ‘non-

officers or non-executive’ cadre.

In the ‘officers’ category there are nine grades. Grade – ‘i’ is the senior most

whereas grade – ‘a’ is the junior most in this category.

Grade

Designation Strength Pay scale (rs.)

I h g f e d c b a

Executive director (ED)Generalmanager (GM) Dy.Generalmanager (DGM) chief manager senior manager manager deputy manager senior officer / sr. Engineer officers / engineer

01 02 05 13 43 42 65 80 139

23,750 – 28,500 20,500 – 26,500 19,500 – 25,600 19,000 – 24,750 18,500 – 23,900 17,500 – 22,300 16,000 – 20,800 13,750 – 18,750 12,000 – 17,500

Total 390


In ‘non-officers’ category grade – ‘1’ is the junior most and grade – ‘8’ is the

senior most. This category is also known as ‘staff’ category

Grade Designation Strength Pay scale (rs.)

8th

7th

6th

5th

4th 3rd 2nd 1st

Officer superintendent, office sec, accountantSenior assistant, p.a, head time-keeper, turbine boiler, technician-1 Office assistant, time-keeper, assistant accountantSenior typist, operator-c, technician-3, plumber Technician-4, operator-dOperator-e, samplerYardman, head jamadarMessenger, watchmen

179

239

255

212

316 32 33 43

7,400 – 14,750

6,700 – 13,700

6,300 – 13,000

5,800 – 11,800

5,400 – 10,800 5,000 – 9,800 4,800 – 8,900 4,000 – 8,400

Total 1309


2.11(d) Trade unions and associations at Barauni refinery:-

Barauni telshodhak majdoor union (registered union)

Shramik vikash parishad

Indian oil officer’s association (for officer’s interest)

2.11(e) Various committees at Barauni refinery

Joint management committee

Canteen management committee

House allotment committee

Workers committee

Cable t.v committee

School advisory committee

[the canteen management committee has 11 members apart from the chairman

Mr. B. K. Singh, and the convener Mr. K. Choudhary.]

2.11(f) Facilities for employees at Barauni refinery

The refinery offers a wide range of facilities and services to its employees,

both officers and non-officers. Some of the major services are mentioned

below:


Transportation

Townships and guest houses

Canteens

Medical services

Schools and scholarships for employee’s children

Sports and other recreational events & functions

Holiday homes for officers at Shimla & Manali, and for workmen at Manali,

Darjeeling, Goa, and Massoori

2.11(g) Performance during the fiscal year 2008 – 2009

The year 2008-2009 saw Barauni refinery achieve the highest ever – crude

throughput of 5.94 mmt, beating the previous best of 5.63 mmt, which was

achieved in 2007-08, along with sustaining the distillate yield of more than

85% (i.e., 85.7%) year after year.

Barauni refinery achieved the lowest ever 65.5 mbn of energy in the year

2008-09. It reduced its energy consumption by almost 10% over the previous

fiscal year of 2007-08. The Barauni refinery is striving harder to reduce its

energy consumption even further in the year 2009-10. Its dream mbn target is

58.

The refinery’s excellent safety record during the year 2008-09 is another

feather in its caps. In a recently concluded internal audit, Barauni refinery

coker unit was declared as a zero steam leak unit. In addition it has also

avoided any accidents in the unit during the year 2008-09. The oil India safety

directorate awarded Barauni refinery the 1st prize for ‘best safety performance’

in group – 1 (refineries).


The Barauni refinery was awarded the centre for high technology award for

furnace / boiler efficiency. This must be the first of many such awards.

Barauni refinery, the lifeline of Bihar not only meets the demand of vital

petroleum products of the state but also nourishes the growth of industries all

around. It has been acting as a great synthesizer of a traditionally agrarian

economy with industrial development ushering in prosperity. So, the refinery is

often called as luminous jewel, reflecting the development of Bihar.


3.1

INVENTORY MANAGEMENT


3.1.1MEANINGInventory management is concerned with keeping enough products on hand to avoid runningout while at the same time maintaining a small enough inventory balance to allow for areasonable return on investment. Excessive level of inventory results in large inventorycarrying cost . An efficient system of inventory management will determine :-A) What to purchase?B) How much to purchase?C) From where to purchase?D) Where to store?configured to ware house, retail or product line will help to create revenue for the company. Inventory management is the active control program which allows the management of sales,purchases and payments. Inventory management software helps create invoices, purchase orders, receiving lists, payment receipts and can print bar coded labels. An inventory management software systemThe petroleum refining industry has effectively embraced the software solutions to optimizethe business supply chain to maximize the profit margins and create order in the chaos ofnumerous opportunities and challenges. The supply chain of a typical petroleum refiningcompany involves a wide spectrum of activities, starting from crude purchase and crudetransportation to refineries, refining operations, product transportation and finally deliveringthe product to the end user.

3.1.2WHO SHOULD ATTENDFactory and inventory control professionals, manufacturing and production controlmanagers, industrial engineers, plant managers, material and purchasing managers,factory superintendents and customer/technical service managers who can benefit fromenhancing their inventory management techniques.

3.1.3WHAT WILL COVER The strategic role of inventory management techniques . Establish the optimal inventory level. Inventory planning and replenishment. Distribution center and warehousing operations. Inventory accuracy and audits. Inventory management, measurement and reporting. Inventory forecasting and demand management. Lead-time analysis and reduction.

3.1.4TYPES OF INVENTORY Raw Material : An inventory of raw material allows separation of production scheduling


from arrival of basic inputs to the production process. Work –In – Progress : An inventory of partially completed units allows the separation

of different phases of the production process. Finished Goods : An inventory of finished goods allows separation of production from

selling. Cash & Marketable Securities : Cash & Marketable Securities can be thought of as an

inventory of liquidity that allows separation of collection from disbursement.

3.1.5 OBTECTIVES OF INVENTORY MANAGEMENT

Inventory of finished goods should be maintained at sufficient high level so that thedemand of customers may be fully satisfied .Similarly , inventory of raw – materials shouldalso be sufficient so that manufacturing process can be run smoothly. In case ofinadequate inventory of finished goods , there is always risk of being out – of – stock andin case of inadequate inventory of raw materials , there is always a risk of manufacturingprocess being halted. Therefore the major responsibility of inventory management is todetermine the sufficient level of inventory required in business .Since inventory is a major asset and it involves a lot of funds ,inventory level should not beexcessive. Excessive inventory increases costs because extra funds are involved in it.Therefore , inventory management also tries to minimize the sufficient level of inventory.Thus , both inadequate & excessive quality of inventory is undesirable in the business.Inventory management should maintain the inventory at sufficient level so that it is neitherexcessive nor short of requirement.The Term inventory management includes two conflicting tasks :-1) To maintain a sufficient large size of inventory to meet the demand of finished goods& to meet the demand of raw material by production department. 2) To keep the investment in inventories at minimum level by efficiently organizing thepurchase & sales operations.

3.1.6 MAIN OBJECTIVES To ensure a continuous supply of raw material. To maintain sufficient inventory of raw materials in periods of short supply. To maintain sufficient inventory of finished goods so that the demand of the customers

are duly met. To minimize the carrying costs of inventory namely cost of godown , insurance

expenses, cost of funds involved in inventory etc. To arrange for sale of slow moving items. To control investment in inventory & keep it at an optimum level.

3.1.7RISKS & COSTS OF EXCESSIVE INVENTORY Excessive carrying cost. Risk of loss of liquidity.


Risk of price decline. Risk of deterioration of goods. Risk of obsolescence.

3.1.8RISKS OF INADEQUATE INVENTORY Risk of break – down in manufacturing process. Risk of not meeting demand of customers.

3.1.9COST OF INVENTORIES

Relevant inventory costs which change with the level of inventory are lister below :-

Ordering Cost :- The cost of ordering includes : Paper work costs , typing & dispatching Order inspection cost , checking & handling.

Carrying Cost :- Carrying cost involves : Capital Cost. Storage & handling cost. Insurance. Taxes. The cost of funds invested in inventory.

Stock out cost :- Stock out cost involves : Expenses of placing special orders. Expediting income orders. Cost of production delays.

3.1.10NEED OF INVENTORIES Transactive Motive Precautionary Motive Speculative Motive

3.1.11 ACCOUNTING OF STORES

3.1.11a GENERAL OUTLINES OF STORES FUNCTIONSThe Authority for receipt, storage and issue of all materials is centralized in theMaterials Department subject to exception permitted in certain cases. The user


Departments shall not be permitted to have any stock of materials with them in the formof sub-stores..Details procedure as prescribed in the Materials Management Manual is to be followedfor all functions of the stores section of the Materials . a general outline of the functionsis as under:

Receipt & Transportation. Custody & Issue. Inventory Control . Surplus Stores . Disposal of surplus, unserviceable assets & scrap materials.

3.1.11bFUNCTIONS OF FINANCE – STORES SECTIONThe section dealing with accounting of stores in the Finance. shall have followingfunctions:

PASSING AND ACCOUNTING OF TRANSPORTATION BILLS

All railway/streamer/air freight inward receipt and the road transport consignment notesshall be received in the stores Section of Materials. For taking the delivery of theconsignments. The Stores shall enter these documents in a Daily Receipt Register.Transport bills will be initially received by the Materials, and sent to Finance. dulyverified with reference to the purchase order and also linking the same with the GRNotes The certified bills of freight received from stores section shall be priced doingYMIROOTH transactions wherever the freight bill is directly linked to a Purchase order.The Finance will release payment only after due checking of bills with reference to thetransport contract and other relevant documents. In case the freight bill cannot belinked to Purchase order the same shall be charged to freight expenditure account. Forall freight bills, passed payment vouchers shall be prepared and signed by theauthorized officers after which the same shall be forwarded to the Cash Section forpreparation of cheque and payment to vendor.

ACCOUNT OF RECEIPTS, ISSUES, RETURN AND TRANSFER OF MATERIALSIn SAP the reservations are prepared through a Maintenance order in case ofmaintenance job (TCODE IW31). The same captures the total details of location,equipment, etc. For issue of chemicals and misc materials direct reservations arecreated (T-CODE MB21). In case of capital job reservations are created by givingNetwork No. which is attached to a Project No. (TCODE CN21).

NON-MOVING ITEMS AND DISPOSAL OF SURPLUS AND SCRAPMATERIALS

All items (except for non valuated stock items) which are not moving for two years shallbe classified into three categories as under:-


a) "Category I" shall contain all items with inventory value exceedingRs.10,00,000 andabove..b) "Category II" shall contain all items with inventory value above Rs.1,00,000 and uptoRs.10,00,000c) "Category III" shall contain all items with inventory value above Rs.50,000 and uptoRs.1,00,000d) “Category IV” shall contain items with inventory value upto Rs.50,000

FREQUENCY OF STORES VERIFICATIONStock verification should be so arranged that :a) All items, the stock value of which exceeds Rs.1,00,000/- are verified at least twice ayear.b) All items, the stock value of which exceeds Rs,25,000 and upto Rs.1 lacs are verifiedatleast once in two years, andc) All remaining items below Rs.25,000/- are verified once in five years. The AccountsOfficer will draw up annual and monthly schedules for the above verification inconsultation with the Stores Officer in accordance with the value given in annualinventory statements.The Accounts Officer will arrange to maintain proper records of the stock verificationsheets for the discrepancies prepared by stock verifiers.

3.1.12TECHNIQUES OF INVENTORY MANAGEMENT

1) Determination of stock Level :-(A) Minimum Level = Rerdering Level – ( Normal Consumption * Normal ReorderingPeriod )(B) Maximum level = Reordering Level + Reordering Quantity – ( Minimum Consumption *Minimum Reordering Period )(C) Danger Level = Consumption * Maximum Reorder Period

2) Inventory Turnover Ratio :-Inventory Turnover Ratio = Cost of good sold / Average inventory at cost

3) Economic Order Quantity :-Economic Order Quantity is the quantity where ordering cost is equal to non – orderingcost.EOQ is made up of two parts :

a)Ordering Cost – These costs are associated with the purchasing or ordering ofmaterials. This cost of ordering includes :

Paper work cost , typing & dispatching Order inspection cost , checking & handling.

b) Non - Ordering Cost - These are the costs for holding the inventories. This cost


involves: Capital Cost. Storage & handling cost.

Insurance. Taxes. The cost of funds invested in inventory.

4) A-B-C Analysis :-The materials are divided into three categories viz , A, B & CCategory – A :Under this almost 10% of the items contribute to 70% of value of consumption.Category – B :Under this category 20% of the items contribute about 20% of value of consumption.Category – C :Under this category 70% of the items contribute about 10% of value of consumption.

5) VED Analysis :-The VED Analysis is used generally for spare parts. The requirements & urgency of spareparts is different from that of materials. Spare parts are classified as:Vital (V) , Essential (E) , Desirable (D)Vital spare parts:These are most for running the concern smoothly.Essential spare parts:Necessary but stock kept at low figures.

Desirable spare parts:May be avoided at times.

6) HML Classification:

The HML( High, Medium, Low) Classification is similar to ABC Classification , but in thiscase instead of the assumption value of the item , the unit value of the item is considered.7) XYZ Classification:The XYZ Classification has the value of inventory stored as the basis of differentiation. Xitems are those whose inventory values are high while Z items are those whose value islow.

In Indian Oil Corporation Limited A-B-C Analysis technique is used for inventorymanagement.

3.1.13INVENTORY MANAGEMENT &VALUATION Average Cost Method:

For determining the valuation of inventories , consistency from year to year is of prime


importance & for this average cost method is appropriate. In this method , weightedaverage prices are taken with price of each type of material in stock are taken together.

First – In - First – Out Method:Under FIFO Method , items received first are assumed to be used first & therefore pricescharged are those paid for early purchase. Care has to be taken to ensure that eachquantity is issued at the correct price.

Base Stock Method:

Under this method , the base quantity is carried forward at the cost of the original stock. Ifa quantity of goods larger than the base stock is owned at the end of any period , theexcess will be carried at its identified cost or at the cost determined under FIFO Method.

Last – In- First – Out Method:Under LIFO , it is assumed that the stock sold or consumed in any period are those mostrecently acquired or made. The result at the LIFO Method is to charge current revenueswith amount approximating current replacement cost.

3.2


INVENTORY MANAGEMENT-

PURCHASE AND PROCUREMENT

PROCEDURES AT IOCL BARAUNI


3.2.1: PURCHASE PROCEDURE

Purchase Function, as we know the important function in all type of organizations.

Without purchase of materials which are required for producing goods, organization is

not able to meet the demands of goods. The material in the IOCL is divided into parts

i.e. hydrocarbon & non-hydrocarbon. The hydrocarbon like crude products etc & non-

hydrocarbon like furniture, tools, machinery, pipes etc. The transactions relating to

the procurement of materials from the indenting stage to the payment stage have been

divided in various parts whereby each part of the work is handled by an independent

agency till the transactions is completely closed. The division of work between

various agencies operates as a system of internal check and is a vital part of the

system as a whole. The procedure is as follows:-

1). In planning of the purchasing of the materials, an annual purchase budget

plays an important role.

2). Budget estimate for next year and revised budget for current financial year is

required to be made by each unit and have to be submitted to the head quarter by

September in prescribed Performa. Quarterly monitoring of the purchase budget

to be done at the unit level and the performance report has to be sent to the head

office. In respect of the inventory control items there should be strictly

controlled with reference to amount provided in the budgets. As the items under

inventory control are voluminous, initial control may be in respect of A and B

class items.


3). INDENTING:-

Inventory control items: -

For all repetitive items of stores the responsibility of raising

purchase indents, procurement, stocking and supply to the consuming

departments is entirely with the material department.

Re – order (ROL) to be constantly reviewed considering the procurement

lead time while raising purchase indents in order to minimize the inventory

levels.

Indents to be approved by the competent authority as per delegation of

powers.

To determine ROL for repetitive nature of items, the following formula may

be adopted, wherever applicable:-

R = CA (L-3) + Cmax

Where R = ROL

CA = average monthly consumption in last three years

Cmax = Maximum consumption in any quarter.

L = Lead time in months.


For each category of items, indent shall be prepared in SAP after due approval

of the competent authority, may be sent to the purchase section. The third copy

will be retained by inventory control section for record.

Non-inventory control items:-

Purchase indent shall be raised by user department in SAP.

Indents for hospital requirement including medicines shall be raised by the

medical department.

Indents for vehicles, office equipment, stationery and printing,furniture,

uniforms, canteen/welfare requirements shall be raised by the

administration departments.

Spare parts, piping material and consumable items etc. are required for one

time consumption and which are not covered by the inventory control section

shall be indented by technical service department. After conducting

necessary probabilistic survey relating to replacement need of individual

plant.

4). Preparation of indents:-

Indents shall be prepared separately for each category of stores in triplicate.

Indents pertaining to additional facilities and project materials against approved

capital budget and spare parts, piping material, consumables store etc. sought to

be procured under revenue budget, and shall be routed through inventory control

section who shall indicate present stock, pending orders, if any, as well as

availability of surplus materials at our various units either of the same

specification or alternate material of higher grade against each of the items

intended.


Wherever the material is not available from the surplus stock or alternative

specification from the existing stock, a certificate from the material manager is

to be obtained as under:-

“The items intended are not available either from the regular stock or surplus

list of all our units.”

Indents should be completed in all respects and shall necessarily include the

information of previous source of supply (if known) and the rate and purchase

order reference against which the supply was received earlier.

5). Approving of indents:-

The indent can be approved by the following authority according to the financial

limits prescribed as per delegation of powers.

If indent of Rs. 50000, head of department will approve the indent.

If the indent is up to Rs. 500000, DGM (Deputy General Manager) will

approve the indent.

If indent is above Rs.500000, unit head is responsible to approve it .

In case of emergency requirements the indents will be approved by GM/ED.

6). Registration of indents:-

Indents are registered in SAP and indent is created.

7). Finance concurrence:-

No financial concurrence shall be required for indents against approved budget

for A.F. (additional facilities).


No finance concurrence is necessary in respect of purchase proposals for the

following:

a) Purchase up to Rs. 25000/- from the lowest tenders and up to Rs. 2000/-

from other than the lowest.

b) One repeat order within the prescribed limits at one time and value up to

Rs. 25000/-.

c) Purchase for proprietary items or DGS&D rate contract price unless the

value of the proposed individual order exceeds Rs. 25000/-.

All other purchase proposals up to Rs. 50000/- shall be scrutinized and

concurred by the finance department. Proposal above Rs. 50000/- shall be

reserved for consideration of the tender committee.

8). Tendering and acceptance of bid :-

After checking of approved indents by the concerned functional head of

purchase department, tenders are called except for canalized or control

commodities like cement, sulphur, steel etc. Generally the procurement of

material shall be made by any of the following modes of tendering:

Open tenders

Global open tenders

Press tenders

Limited tenders

Single tenders


Open tenders

These shall be invited through the press advertisement by short tender

notification in English and local newspaper approved by the personnel relation

department for high value items of equipment and materials valuing more than

Rs. 1000000. However, approval of head of material department is to be

obtained before issuing press notification.

Limited tenders

To ensure that the procurement of material of proper quality from reliable and

competent manufacturer is done, a list of selected vendors shall be maintained

for each category of equipment and material by each unit. Limited tenders

enquiries up to the value of Rs. 100000 should be sent by under certificate of

posting and above Rs. 100000 by registered post only. This was the earlier used

method.

Single tenders

Normally no procurement is done on single tender basis except in the

following circumstances:

Where the item has been identified and approved by the GM that the

nature of the item is proprietary of single manufacturer and no other

substitute material is acceptable for technical reasons such as spare parts,

chemicals, special tools etc.

In very exceptional cases, although there may be alternate source of

supply but they are not acceptable due to certain specific reasons to be

recorded with full justification and approval of GM obtained for the same,

it will be permissible to float single tender enquiry.


Cash purchases within the limit as prescribed from time to time is

permissible on single tender basis subject to ascertaining reasonability of

price at a level of deputy manager and above.

9). Methods of procurement of materials:-

Besides the above modes of tendering, the following methods of procurement of

materials for expeditious supply and to reduce procurement lead time are

followed:-

Repeat orders

Cash purchases

Emergency purchases

DGS&D rate/running contract

Repeat Orders

Where the same item has to be purchased identical in all respects, a repeat order

may be placed with the approval of the competent authority provided the

following conditions are satisfied:

That the original order against which repeat order is being considered was

not placed earlier than six months.

That the quantity proposed to be purchased is less than or equal to the

quantity originally ordered.

That there has been no reduction in the market rates of similar market ever

since the original ordered was placed.

That the order was placed as a result of regular tender enquiry and the order

was placed on technically lowest basis.


One repeat order up to the value of Rs. 25000/- against order would not

require any financial concurrence. However any subsequent repeat orders

within the above conditions shall be placed with financial concurrence only.

Cash purchase

For item of value below Rs.1000 in each case, a regular enquiry is not necessary

and such item can be procured on cash basis from the open market. However the

purchase officer shall ensure that the items are being purchased at competitive

prices prevailing in the market.

The cash purchase should be authorized by CMTM/SMTM.

The items should be purchased preferably from government owned stores.

Emergency purchase

Emergency purchases are permissible only in unforeseen circumstances. In all

cases of emergency purchases, the reason for such emergency shall be recorded

in writing and the procedure to be followed as under:-

The indents should be prepared by the HOD and forwarded to CMTM/SMTM

after being approved by GM/ED.

In case of items costing Rs. 10000or less, an officer from material department

along with the representative of user department shall be deputed to collect

quotation by hand from minimum of three firms. A decision on the offers so

collected may be taken on the spot and delivery obtained immediately.

In case of items costing between 10000 to 50000 the head of the material

department would constitute a committee of DMTM/MTM and an officer each

from accounts department and the user department at appropriate level, with


authority to visit the nearest market and to collect minimum of three quotations.

The committee so constituted is empowered to take decision on the spot.

In case of items costing more than 50000, a committee consisting of

representative from accounts, material and user department would be constituted

by GM/ED and the committee would follow the same procedure.

Purchase against DGS&D rate/running contract

Where the item is to be purchased under running contract concluded by

Directorate General of Supply and Disposal, purchase of such item should be

based on DGS & DRS prices only directly from vendors. This mode of

purchasing eliminates calling of tenders, saving of time and give advantage of

most competitive price resulting in saving of avoidable extra payments.

For obtaining the copies of the rate contract, regional officers in

Mumbai/Chennai/Calcutta or directorate of DGS & D at New Delhi may be

contracted by the various units of R&P divisions.

10). Preparation of Tender Documents:-

In order to facilitate all divisions to follow uniform mode of tendering, the

following system may be followed on the rational basis:-

A) Single bid system procedure:-

Notice inviting tenders

Tender documents

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

indicated).

2) Issue of letter of tender documents (name of party to whom it is issued,

price of documents etc. shall be indicated).


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

4) General instructions to the tenderer.

5) General condition of the contract.

6) Special condition of the contract.

7) Technical specification and price part.

8) Time schedule for execution

B) Two bid system:-

In case of all other purchases where foreign exchange is involved and/or where

value of purchase is estimated to Rs. 50 lakhs or more, two-bid system of

tendering shall be followed.

3.2.2 INVENTORY CONTROL PROCEDURES FOR STORES, SPARES & CHEMICALS

3.2.2.a Introduction

Materials, fuels & lubricants, spare parts maintenance consumables, semi processed materials and finished goods at any given point of time. In financial parlance, Inventory is defined as the sum of the value of raw materials.

Operational definition of Inventory would be: "The amount of required raw materials, fuels, lubricants, spare parts and semi-processed material, stocked for smooth running of the plant". Since these resources are idle when kept in stores, inventory is defined as an idle resource of any kind having an economic value.

3.2.2.b Reasons for holding Inventory

The main reasons for holding inventory are:-

To maintain targeted flow of production in line with national demand.


Protection against uncertainties of demand & supply which can not be predicted with sufficient accuracy.

To avoid stock out in the period of shortages

In periods of rapid price rise, higher inventory levels may well have to be accepted.

Long Delivery period

3.2.2.c ABC Analysis

Inventory management becomes very difficult if there are a large number of items to be stocked e.g. in case of IOCL where each refinery is having a stock of more than 30,000 items. ABC is basic analytical management tool which enables the management to exercise selective control and place the efforts where the results would be greatest. ABC analysis is based on the concept of "Vital Few" "Trivial Many".

ABC classification shall be based on their annual consumption as given:-

A: Rs 5 lacs and above

B: Rs 1 lac to Rs. 5 lacs

C: less than Rs 1 lac

In order to achieve selective control, the various items are first classified as A or B or C class items. The classification is done by taking into account the annual consumption value of each item. These values are usually obtained by looking into last years consumption value of the items in inventory. The steps involved in classifying items as A or B or C category are as follows:-

(i) Calculate annual issues (in Rs.) for each item in inventory by multiplying the unit cost of the item by the number of units issued in a year.

(ii) Sort all items by rupee annual issues in descending sequence

(iii) Prepare a list from the ranked items showing item no., unit cost, annual units issued and annual rupee value of units issued.


(iv) Starting at the top of the list, compute a running total item-by-item issue value and the rupees consumption value.

(vi) Compute and list for each item the cumulative percentage for the item count and cumulative annual issues value.

(vii) Classify the top 10-15 percent of the items as "A" items while the bottom 60 to 70 percent of the items are classified as "C" items. However, the `balance items between these 2 limits shall be classified as "B" items.

3.2.2.d Periodic Review System

As per this system supply to be arranged at fixed intervals of time of 3 months. This system can be followed for process chemicals as the consumption pattern is known. Order to be placed for yearly requirement for supply in 4 installments, after every 3 months. Review to be done at the end of the quarter & supply for the next quarter regulated as per requirement

3.2.2.e Re-order Point SystemIn case of regular consumption items whose consumption pattern fluctuates re-order point system to be followed. Keeping the lead time in view re-order point an order for fixed quantity to be processed. The quantity to be ordered is fixed and only frequency of ordering varies.

3.2.2.f Spares Spares may be divided into following groups:

a) Spares purchase with capital goods imported from abroad or in India

including insurance spares.

b) Imported spare parts.

c) Fast moving and moderate moving spare parts of regular consumption

which fall within category ‘C’ or ‘B’ or ‘A’.

d) Slow moving spare parts and spare parts with erratic consumption, for

particulars machines or equipment's.


3.2.2.g Other classifications of Items in Inventory

In addition to ABC and VED analysis, the other type of selective analysis that may be used are:

FSN - Fast moving, slow moving, non-moving.

NON MOVING - Items against which there is no issue for last three years or above would be treated as non-moving.

XYZ - Based on inventory values of items. A `X’ category items has very high inventory value whereas a `Z’ category item has very slow inventory value.

XYZ would be categorised as under:-

X - Items having stock value > Rs.5,00,000.00

Y - Items having stock value > Rs.1,00,000/- to Rs 5,00,000.00

Z - Items having stock value < Rs.1,00,000.00

HML – High unit price (> Rs 1.00 lac), medium unit price Rs 50,000.00 to Rs100,000.00), low unit price (up to Rs 50,000.00) of the items.

SDE – Scare, difficult and easy to procure items. Items under this category will be Refinery unit specific.

The classifications can be effectively utilized for proper selective inventory control.

List of selected Class A items:-

Material Amount(Value) Quantity

2-ETHYL-HEXYL-NITRATE 158,668,140.00 1,614.37 TO

FRESH FCC CATALYST 29,572,183.13 192.871 TO


ROTOR,DYN BALANCED,W/CPLG HUB 17,686,323.00 1 EA

PLATINUM IN SPENT CATALYST 16,105,348.00 14,607.00

KG

ROTOR ASSY 14,756,045.00 1 EA

RANDOM PACKING FOR COLUMN 9,121,340.00 1

M3

BUCKET,TURBINE STAGE 1 KIT,P/N:35306090 8,887,997.00 1 EA

DHDT CATALYST ACT 961 7,796,626.00 9,000.00KG

PIPE,SS,EFW,A358TP321,CL1,BE,10IN,160,H2 7,663,400.91 114 M

PLATE,CS,IS 2062,A,6300x1500x8mm 4,519,704.05 96.749 TO

PIPE,AS,EFW,A691,GR9CR,CL42,BE,26IN,9.53 4,335,897.89 45 EA

DHDT CATALYST ACT 645 4,250,873.00 4,000.00KG


SODIUM HYDROXIDE,CAUSTIC SODA LYE,NaOH 4,028,713.81 198.612 TO

BEND,90,XLR,BW,AS,A387,P12,20IN,30 3,913,414.89 15 EA

DIMETHYL DISULPHIDE(DMDS) 3,683,208.60 24 TO


FUEL NOZZLE F/GAS TURBINE,MS 5001 3,641,467.00 10 EA

TEE,EQ,BW,AS,A387,P12,10IN,40 3,630,011.50 52 EA

DRUM,MILD STEEL,GAL,GAUGE:5 3,611,685.00 2,356 EA

VLV,GT,WEDGE,A217C5,A217C5,FLG,300,2IN 3,472,725.30 362 EA

PIPE,AS,SMLS,A335,GR.P9,BE,24IN,160 3,457,028.00 6.2 M

SERVO LID - 190 KG DRM 3,335,816.88 264

DRM

PIPE,AS,SMLS,A335,GRP9,BE,10IN,XXS 3,298,185.56 103.89 M

PIPE,CS,EFW,A672,GRB60,CL.12,BE,16IN,20 3,244,197.00 537.42 M

PUMP,COMPLETE UNIT,HDA 80/10,KSB 3,221,553.00 1 EA


NOZZLE,SPRAY,T/F,75 KVA 3,068,079.00 42 EA

COMP.SEAL,FSL,PC-100CART 3,021,964.54 7 EA

POLYTHENE LAMINATED JUTE BAGS 2,965,873.97 199,810 EA

CABLE,AL,3Cx240 sq.mm,XLPE,ARM 2,941,731.13 3,099 M

SYSTEM OF HAIL LPG TTL UPGRADATION 2,927,111.00 1 EA


PIPE,CS,EFW,A672,GRB60,CL.12,BE,16IN,STD 2,764,286.32 392.25 M

CABLE,AL3.1/2x300s.mm,PVC INS,ARM 2,761,966.30 3,534 M

COMBUSTOR LINER F/GAS TURBINE,MS 5001 2,708,459.00 10 EA

CABLE,T/C,CU,20P,UDEY 2,707,632.69 11,680 EA

ADDITIVE,FCC CATALYST,ZSM-5 2,667,993.94 7.361 TO

K4SDR-16, THL TDC 3000,P/N;5143519-160 2,613,307.12 3 EA

FL,WN,RTJ,AS,A182,F12,10'',300,40 2,543,455.36 105 EA

CABLE,AL3.1/2x185s.mm,PVC INS,ARM 2,523,370.00 5,038 M

PIPE,CS,SMLS,A106,GRB,BE,4IN,40 2,521,237.16 3,098.24 M

PIPE,AS,EFW,A691,1.25CR,CL42,BE,26IN,10T 2,472,162.58 63.5 M

SMM CARD FOR UCN INTERFACE OF THL DCS 2,342,155.00 2 EA

TUBE,AS,SMLS,A335,P9,BE,101.6x8.33x8597 2,333,290.82 51 EA

PIPE,AS,SMLS,A335,GR.P9,BE,20IN,160 2,301,311.00 6.15 M

CHANNEL,CS,IS 2062,A,400x100mm 2,301,017.00 31.32 TO


List of selected Class B items

Material Amount Quantity

T/M,D/P,ELECY,0-2500 MM WC 498,761.44 23 EA

BARRIER,INTER PHASE,CT,F/6.6kVJYOTI VCB 498,420.00 30 EA

ROTATING ASSY ( P200 ),P/N10 498,000.00 1 EA

FABRIC ELT ASSY,MULTILAYER COMPOSITE 496,771.00 30

M2

TR,DP,SMART,0-5000MMWC 496,705.00 23 EA

SEPARATOR FILT ELMNT,WD-873,EST-423-02 494,879.00 52 EA

TURNSTILE,3/4HEIGHT,90D-STOP,4WAY,BDR 494,410.00 3 EA

POSITIONER F/C/V,MIL FISHER 493,453.33 20 EA

LINE CHOKE& TERMINATOR F/COK-A EOT CRAN 493,262.00 2 EA

DETECTOR,FLAME(28FD) 492,668.00 2 EA

VLV,CHK,LIFT,A217 C5,A217 C5,FLG,300,8IN 492,649.18 10 EA

PIPE,AS,SMLS,A335,GRP5,BE,3IN,40 491,768.51 716.89 M

FUEL OIL BYPASS VLV ASSY 491,676.35 1 EA

ACCUMULATOR F/COMP.2MCL,456,BHEL 491,400.00 6 EA


CABLE TRAY,MS,200mmx20mmx2.5m 489,896.04 470 EA

MS-BS II -AKI-84(88RON-0.05% SUL) 489,522.77 39,486.16 KL

COOLER,COMP,2MCL357,BHEL 487,813.00 1 EA

FAN ASSY,C/TOWER,85454-14V-05,PCT 487,680.00 1 EA

VLV,GLB,ANGLE,BRASS,THD,125,8IN 486,340.32 8 EA

T/NATION,AI,16CH,TM117-AI12,AUG,099-0070 485,692.59 2 EA

PISTON HALF,P/N-2734.3361.000 392,190.40 1 EA

IMPELLER , 6 MQX,P/N 6073442 387,000.00 1 EA

HLAI PROCESSOR, 16 PT.MU-PAIH03, HAIL 385,552.80 3 EA

PIPE,MS,ERW,IS3589,GR330,BE,28IN,7.92TH 384,710.00 49.58 M

CABLE,AL,3Cx150sq.mm,PVC INS,SHTD,ARM 384,421.25 283 M

PIPE,CS,SMLS,API5L,GRB,BE,8IN,40 384,404.06 150.7 M

FRAME PROOF F/MOTOR,PMP,400 TS3,JYOTI 382,620.00 1 EA

TB DIGITAL RELAY/CARD NO. DS200DTBCG1AAA 382,080.00 1 EA

PIPE,MS,ERW,IS1239,BLACK,BE,18IN,9.53TH 381,161.42 260.399 M

DREWTREAT 738 380,698.63 4,906.00 K


G

FLAT,CS,IS 2062,25x3mm 380,051.34 7.539 TO

VLV,GLB,A216WCB,A216WCB,FLG,150,3IN 378,949.09 33 EA

EJECTOR COMPLETE UNIT 378,800.00 2 EA

VLV,GLB,A216WCB,A216WCB,FLG,300,10IN 378,340.66 6 EA

SEAL ASSYCOMP,J.CR,1648 SEAL CART,2.5000 377,143.00 1 EA

PUMP, VERTICAL TURBINE 376,367.00 1 EA

PSV-001 & 002, 6" X 8", RF 375,900.00 2 EA

T/M,STD924,THL 375,350.04 13 EA

SUPPORT CABLE ASSY,LOWER,P-101-P-105 311,931.00 3 EA

VLV,ON/OFF,BAL,DIAP,A216,WCB,FL,300,2IN 311,917.00 4 EA

PIPE,AS,EFW,A672,GRB70,28,12THK 311,220.00 11.97 M

BARRIER,ANALOG O/P,MTL 3045 311,143.39 53 EA

PUMP,COMPLETE UNIT,SHD 200/32 N,KBL 311,111.00 2 EA

JACK, HYDRAULIC 100 TON 310,641.00 1 EA

PROBE, SPEED DYNALCO M180 310,138.21 9 EA


List of selected Class C items

Material Amount Quantity

CT,200/1-1A,1.5VA 52,563.79 3 EA

SECONDARY SEAL,RPH-ECM-25-180,KSB 52,560.00 2 EA

ELBOW,90DEG,LR,ASTM A 815,8IN,S20 52,526.00 1 EA

PKG,ROTARYHD,FSL,PBSCART 52,517.96 6 EA

GASKET,GRAFOIL,P/NO 152.1 52,508.00 5 EA

RTV SEALANT (0000B ),P/N 110 52,500.00 2 EA

PIPE,MS,EFW,IS3589,410,BE,28IN,10MM THK 52,437.00 10 M

VIRGO VLV ACTUATOR FAIL SAFE OPEN 100M 52,428.00 2 EA

LAMP,LED IND,10W,22.5MM,24VDC,LVGP 52,401.51 328 EA

FL,SP.BL,FF,CS,A105,300,4IN 52,387.17 36 EA

CPLG,HALF,TH,CS,A105,3000,1/2IN,IBR 52,380.34 1,790 EA

BOX,JUNCTION,12ways,FLAMEPROOF 52,378.67 14 EA

T/F,VOLTAGE,6.6kV,100/50VA,JY

52,335.00 3 EA


OTH

GSKT,SPWD,CS,SS304,CAF,8IN,150lbs 52,332.34 498 EA

STUD,AS,A193,B7,NUTS,A194,2H,M36x275 mm 52,308.75 150 EA

O RING,P/N;10( KALREZ), EPIL,KXWKC 52,305.60 2 EA

PUMP,COMPLETE UNIT,MOVI-32/8,KSB 52,251.65 1 EA

AIR FLTR REGULATOR,P/N-450352 52,239.00 3 EA

CABLE JOINT KIT,3X70sq.mm,3X150sq.mm 51,474.06 49 EA

SWITCH,PR,DIAPH,10-60bar 51,442.73 13 EA

DIAPHRAGM, 1052(70), FISHER 51,434.00 3 EA

STUD,AS,A193,B7,NUTS,A194,2H,M14x120 mm 51,423.23 2,430 EA

BRICK,ALUMINA,SP-11 51,386.46 800 EA

BRG,6.6KV,BHEL 51,351.00 2 EA

MECH.SEAL COMP, P04D28 (SPL) 51,349.96 1 EA

STUD,AS,A193,B7,NUTS,A194,2H,M12x85mm 51,331.49 4,050 EA

ROTARY HD ASSY,IB,EPIL,Y15D38-DBL 51,312.71 1 EA

TEE,EQ,BW,CS,IS 3589,410,8IN,20 51,304.00 1 EA


OIL TIP 51,243.00 2 EA

TONER CRTDG,LASER PRINTER,HP-5000 51,240.00 6 EA

CLUSTER ASSY. FOR M40, 4000A, PGA0100168 51,221.01 10 EA

HOSE TELE BOOM,P/N-2307125 50,216.00 1 EA

SLEEVE GASKET, P/N. 19 50,208.00 5 EA

FL,SP.BL,FF,CS,A105,150,16IN 50,187.00 4 EA

PIPE,CS,SMLS,API5L,GRB,BE,10IN,30 50,153.86 18.06 M

GASKET,GRAFOIL,P/NO 152 50,134.00 5 EA

FL,SP.BL,RTJ,SS,A182, F321,600,4IN 50,109.60 9 EA

MECH.SEAL,EPIL,P03D36/P03D32 50,103.50 1 EA

RELAY 180 300 MN12 SS 94139 L T 50,062.00 10 EA

HEX NUT M 12, P/N 9 49,000.00 40 EA

BEND,90,XLR,BW,AS,A234,WP5,12IN,60 48,974.00 2 EA

WRENCH ,IMPACT ,W – 2109,CLECO 48,960.00 1 EA

CABLE EARTHING,TRUCK,6.6KV,VCB 48,916.00 2 EA

FL,WN,RTJ,AS,A182,F11,300,20'',10 48,863.70 4 EA


PIPE,AS,SMLS,A335,GRP1,BE,8IN,40,IBR 48,858.00 13.03 M

BRACKET,BRG,PMP,SMU 3x4x11-2 STG,BPCL 48,853.55 1 EA

3.2.3IMPORTANT CONCEPTS IN IVENTORY MANAGEMENT

3.2.3.a JUST IN TIME (JIT) PRODUCTION

Just-in-time (JIT) is defined in the APICS dictionary as “a philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity”. It also has been described as an approach with the objective of producing the right part in the right place at the right time (in other words, “just in time”). Waste results from any activity that adds cost without adding value, such as the unnecessary moving of materials, the accumulation of excess inventory, or the use of faulty production methods that create products requiring subsequent rework. JIT (also known as lean production or stockless production) should improve profits and return on investment by reducing inventory levels (increasing the inventory turnover rate), reducing variability, improving product quality, reducing production and delivery lead times, and reducing other costs (such as those associated with machine setup and equipment breakdown). In a JIT system, underutilized (excess) capacity is used instead of buffer inventories to hedge against problems that may arise.

JIT applies primarily to repetitive manufacturing processes in which the same products and components are produced over and over again. The general idea is to establish flow processes (even when the facility uses a jobbing or batch process layout) by linking work centers so that there is an even, balanced flow of materials throughout the entire production process, similar to that found in an assembly line. To accomplish this, an attempt is made to reach the goals of driving all inventory buffers toward zero and achieving the ideal lot size of one unit.

The basic elements of JIT were developed by Toyota in the 1950's, and became known as the Toyota Production System (TPS). JIT was well-established in many Japanese factories by the early 1970's. JIT began to be adopted in the U.S. in the 1980's (General Electric was an early adopter), and the JIT/lean concepts are now widely accepted and used.


Some Key Elements of JIT

1. Stabilize and level the MPS with uniform plant loading .

2. Reduce or eliminate setup times

3. Reduce lot sizes (manufacturing and purchase )

4. Reduce lead times (production and delivery)

5. Preventive maintenance

6. Flexible work force.

7. Require supplier quality assurance and implement a zero defects quality program

8. Small - lot (single unit) conveyance

3.2.3.b KANBAN PRODUCTION CONTROL SYSTEM

A kanban or “pull” production control system uses simple, visual signals to control the movement of materials between work centres as well as the production of new materials to replenish those sent downstream to the next work center. Originally, the name kanban (translated as “signboard” or “visible record”) referred to a Japanese shop sign that communicated the type of product sold at the shop through the visual image on the sign (for example, using circles of various colors to indicate a shop that sells paint). As implemented in the Toyota Production System, a kanban is a card that is attached to a storage and transport container. It identifies the part number and container capacity, along with other information, and is used to provide an easily understood, visual signal that a specific activity is required.

In Toyota’s dual-card kanban system, there are two main types of kanban:

1. Production Kanban

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


Dual-card Kanban Rules:

1. No parts are made unless there is a production kanban to authorize production. If no production kanban are in the “in box” at a work center, the process remains idle, and workers perform other assigned activities. This rule enforces the “pull” nature of the process control.

2. There is exactly one kanban per container. 3. Containers for each specific part are standardized, and they are always filled with the

same (ideally, small) quantity. (Think of an egg carton, always filled with exactly one dozen eggs.)

3.2.3.c REORDER POINT

In the EOQ model, the lead-time for procuring material is zero. Consequently, the reorder point for replenishment of stock occurs when the level of inventory drops down to zero. In view of instantaneous replenishment of stock the level of inventory jumps to the original level from zero level. In real life situations one never encounters a zero lead-time. There is always a time lag from the date of placing an order for material and the date on which materials are received. As a result the reorder level is always at a level higher than zero, and if the firm places the order when the inventory reaches the reorder point, the new goods will arrive before the firm runs out of goods to sell. The decision on how much stock to hold is generally referred to as the order point problem, that is, how low should the inventory be depleted before it is reordered.

The two factors that determine the appropriate order point are the procurement or delivery time stock which is the Inventory needed during the lead time (i.e., the difference between the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is held as a protection against shortages.

Reorder Point = Normal consumption during lead-time + Safety Stock.

Several factors determine how much delivery time stock and safety stock should be held. In summary, the efficiency of a replenishment system affects how much delivery time is needed. Since the delivery time stock is the expected inventory usage between ordering and receiving inventory, efficient replenishment of inventory would reduce the need for delivery time stock. And the determination of level of safety stock involves a basic trade-off between the risk of stock-out, resulting in possible customer dissatisfaction and lost sales, and the increased costs associated with carrying additional inventory.

Another method of calculating reorder level involves the calculation of usage rate per day, lead time which is the amount of time between placing an order and receiving the goods and the safety stock level expressed in terms of several days' sales.


Reorder level = Average daily usage rate x lead-time in days.

From the above formula it can be easily deduced that an order for replenishment of materials be made when the level of inventory is just adequate to meet the needs of production during lead-time.

If the average daily usage rate of a material is 50 units and the lead-time is seven days, then Reorder level =Average daily usage rate x Lead time in days = 50 units x 7 days = 350 units

When the inventory level reaches 350 units an order should be placed for material. By the time the inventory level reaches zero towards the end of the seventh day from placing the order materials will reach and there is no cause for concern.

3.2.3.d ECONOMIC ORDER QUANTUTY (EOQ)

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


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

When above conditions are satisfied, EOQ can be calculated using the following formula:

EOQ = (2AS/I) ^ (1/2) where

A = Annual demand or consumption

S = setup or ordering costs

I = inventory carrying cost per unit

3.2.3.e SAFETY STOCK

Safety or buffer stock is held in excess of cycle stock because of uncertainty in demand or lead time. The notion is that a portion of average inventory should be devoted to cover short range


variations in demand and lead time. It is used to prevent stock out. Inventory analysts, when controlling stock set the minimum stock level at the lowest stock level that an organization is prepared to tolerate, this is usually set at greater than zero in order to counter delivery delays or spikes in demand. If safety stock is not present, stock outs could occur which could be drastic to production runs or even worse risk delays to end customer. Safety stock then is a necessary evil because it assumes that demand cannot accurately be forecasted and/or suppliers fail to deliver on time (both common business scenarios). The level of safety stock varies from one organization to another but typically balances the cost of stock holding on one hand against the cost of stock outs on the other.

Calculation of safety stock:

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

3.2.3.f AVERAGE INVENTORY

Average inventory is one of the important tools of inventory management. It tells how much stock is being used in the organization. Average inventory includes the work in progress goods and also the safety stock. Generally average inventory is calculated using the following formula:

Average inventory = ((monthly consumption/frequency schedule)/2) + WIP + safety stock

The WIP is calculated as follows:

WIP = throughput time / cycle time

Throughput time refers to the time taken by the part to enter into the assembly and come out as a finished good. Cycle time refers to the time taken to manufacture a machine per day.

AVERAGE INVENTORY PERIOD

It is one of the techniques of inventory management. It tells stock with the organization can be used for how many days. So the organization can place an order with the help of this and can also know whether the stock in hand when put in use will sustain till the receipt of the order.


Average inventory period is calculated using the formula:

Average inventory period = (average inventory * 365) / (total monthly consumption * 12)

3.2.3.g FACTORS INFLUENCING INVENTORY MANAGEMENT AND CONTROL

Several factors influence inventory management and control. The principal effects of these are reflected most strongly on the levels of inventory and degree of control, planned in the inventory control system. These factors are as follows:

Product type

Manufacture type

Volume

Other Factors

The objective of the company as it relates to the inventories and the level of service to be provided to the customers.

The qualification of the staff personnel who will design and coordinate the implementation of the system.

The capabilities of the personnel who will be responsible for managing the system on a continuous basis.

The nature and size of the inventories and their relationship to other functions in the company, such as manufacturing, finance and marketing.

The capacity of the present and future data processing equipment. The potential savings that may be anticipated from improved control inventories. The current or potential, availability of data, which can be used in controlling

inventories.


4.1 RESEARCH METHODOLOGY

Solving a research problem by using various research methods in a systematic manner isresearch methodology. It may be understood as a science of studying how research isdone scientifically. Researcher not only need to know how to develop certain indices ortests, how to calculate the mean, mode, or standard deviation or chi – square, how toapply particular research techniques, but they also need to know which of these methodsor techniques are relevant and which are not, and what would they mean and indicate andwhy. Researcher also need to understand the assumptions underlying various techniquesand they need to know the criteria by which they can decide that certain techniques andprocedures will be applicable to certain problems and others will not. All this means that it. is necessary for the researcher to design this methodology for his problem as the samemay differ from problem to problem.It certainty offers an opportunity to researcher to justified his choice by comparing it isrelative advantage and disadvantage with those alternatives, which have been rejected.This part is divided into four sections:-1. Research design.2. sample design.3. Data collection method4. Analysis pattern.

4.2 OBJECTIVE OF THE STUDY

Main ObjectiveThe objective of the study is to assess and analyze the inventory management -purchase and procurement procedure - in Barauni refinery.

Sub Objectives

1) To study how sufficient large size of inventory is maintained in the Barauni Refinery


to meet the demand of finished goods & to meet the demand of raw material.2) To study about the investment in inventories.3) To study the continuous supply of raw material.4) To know how the funds are utilized.5) To extend the knowledge.

However the main objective of this study is to fill the gap between different aspectof theoretical and practical knowledge of financial management and to develop therequired skill to take decision on sight for the best use of my theoretical knowledge.

4.3 RESEARCH DESIGN

Meaning of research“Research in common parlance refers to a search for knowledge”. Research can beexplained as a movement, a movement from known to unknown. It is actually a voyage ofdiscovery.

Research always starts with a question or problem.

Its purpose is to find answers to questions through the application to the scientific method.

It is a systematic and intensive study directed towards a more complete knowledgeof the subject studied.So Research is scientific and systematic search for gaining information and knowledge ona specific topic or phenomena.

Research Design

“Research Design is the plan and structure of investigation so conceived as toobtain answers to research questions.”

Nature of Research

Descriptive Research design is used for study.Descriptive research as the name suggests is designed to describe something – forexample the characteristics of users of a given product ; the degree to which product usevaries with income, age, sex or other characteristics; or the number who saw a specifictelevision commercial.To be of maximum benefit, a descriptive study must only collect data for a definite purpose.Your objective and understanding should be clear and specific. It is a kind of surveymethod.This project study is related with the inventory management so the data is collected in thisregard only.


I did intensive research during this project to find out the necessary information

regarding both purchase and inventory activities carried out in Barauni Refinery

and the various projects that are being implemented to optimize profit and

product yield. While working in the organization, I got much of the information

during the practical work.

4.4 METHODS OF DATA COLLECTION

TYPES OF DATA:-

PRIMARY DATA AND SECONDARY DATAThis project is mainly based on the secondary data and information beside this primarydata is also used.1) Primary data:- primary data are to be collected by the researcher , they are notpresent in reports or journals etc. and can be collected through a number of methodwhich can be classified as follow

Personal interview of sample. Telephonic interview. E- Mails. Observations. Questionnaires. Interviews.

Primary data for my project : The project is related to purchase procedures and various methods involved in inventory and oil management. There is very less or no scope of primary data in this project. The project is basically based on secondary data made available by the company and other sources for more information. However the primary data for my research is the dispatch registers maintained by the company to know the purchase and stock of inventory in the organization.

2)Secondary data:- Secondary data are the data collected for some purpose other thanthe research situations; such data are available from the sources such as books, companyreports, journals, rating organization, census department etc.. The secondary data arereadily available and therefore they are less costly and less time consuming. Sources of


secondary data are:- Internets. Book and journals. Company reports. Census department. Research work of others.

Secondary data for my project: Mainly the used in this project is secondary data. I collected information dealing with inventory management from materials department. Purchase & sales and production data were obtained from the finance department. These data and information were studied and analyzed properly to present the report in this form.

During the internship period, I went through Material Management Manual, Oil Management Manual, Brochures, Financial Appraisal and Annual Operation Report provided by IOCL, Barauni. Documents, books and last but not the least websites were also referred to get enough information for the completion of the project

4.5 PROJECT PERIOD

Survey period is 45 days from June 1st , 2010 to July 31st , 2010. It is not enough periods for the study to get the accurate and specific result of the study.


5.1 IN CONTEXT TO BARAUNI REFINERY (IOCL)

The Indian Oil Corporation (Barauni Refinery unit) needs to hold inventories for the purpose of transactions motive and precautionary motive. In this unit production is a continuous process. For the smooth production, the company needs to maintain or keep an adequate level of raw material inventory to avoid any shut down position. For every production unit the inventory of raw material plays a lead role.

5.1.1 INVENTORY TURNOVER RATIO For Two Years 2008-09 And 2007-08

For the year 2008-09

Inventory Turnover Ratio = Cost of Good Sold Average Stock

Since: Cost of Good Sold = Sales – Profit =156,489,733,981 – 7,448,693,896

=156,489,733,981 – 7,448,693,896 =149,041,040,085

Average Stock = Opening Stock + Closing Stock 2 = 15,513,826,950 +14,845,162,456 2

= 15,513,826,950 +14,845,162,456


2 = 15,179,512,703

Therefore:

Inventory Turnover Ratio = 149,041,040,085 15,179,512,703

= 10 times

For the year 2007-08

Since:Cost of Good Sold= Sales – Profit

=138,253,078,313 – 773,326,289 = 138,253,078,313 – 773,326,289 = 137,479,752,024

Average Stock = Opening Stock + Closing Stock 2

= 14,420,017,552 + 15,513,862,950 2 =14,966,940,251Therefore:

Inventory Turnover Ratio = 137,479,752,024 14,966,940,251 =9.18 times

This Ratio shows that the year 2008-09 is better because the year 2008-09 shows rapid turnover of stock and consequently shorter holding period as compared to its previous year.


The Indian Oil Corporation (Barauni Refinery unit) maintains all these sort of inventories. This unit maintains adequate stock of inventories of raw material for the smooth functioning of the process of production. The company also maintains an adequate level of inventories for work-in-process as per the requirement. Till the completion of the production cycle, the work-in-process inventories are maintained and some part of it is also used as fuel in the unit. Stock of finished goods also has to be maintained by the Barauni Refinery unit. This unit does not have authority to sell the finished product in the market directly. It has to be sent to the Marketing division for further sale. As per the instruction of the Head Office they have to keep an adequate level of finished goods for compensating any loss of production during the period of election (governmental hazards), production break down and other contingencies. It also sells finished goods like LPG, Petrol, Diesel, etc. on behalf of the Marketing division. That’s why a stock of finished goods also needs to be maintained.

5.1.2 System of identification of needs

There are mainly three types of inventories maintained by Barauni Refinery Unit (IOCL) such as:

Crude Oil Inventories

Inventories for chemicals

Inventories for stores and spares

Identify the need for Crude Oil Inventories and system of placing the order

The Barauni Refinery Unit (IOCL) identifies the need for inventories for crude oil through Revenue Budget that is prepared on yearly basis. in the Revenue Budget, the estimate for the consumption of Crude Oil inventories for the next year is estimated on the part experience basis. Here a brief introduction about Revenue Budget of Barauni Refinery Unit (IOCL) is given.

The Revenue Budget is basically a budget of income and expenditure. The objective of preparing the Revenue Budget is to fix a target in respect of physical parameters such as, throughput, product pattern, fuel and loss and also that of operating expenses which become the basis for monitoring and control and to estimate, based on targeted physical parameters of operating expenses, the likely profit or internal sources for income, which helps in the fund management.


The Barauni Refinery Unit (IOCL) prepares Revenue Budget every year in mid September. In the month of September, the Budgeted Estimates (BE) for the next year and Revised Estimates (RE) for the current year are prepared for which the Budgeted Estimates (BE) is prepared in the previous year.

For example:- In the financial year 2007-08 in the month of September, the Budgeted Estimates (BE) for the financial year 2008-09 the Revised Estimates (RE) for the next six months 2007-08 were prepared.

Budgeted Estimates (BE): Budgeted Estimates is that which is prepared for the next month in which all the items (inflow and outflow) are included on full estimation.

Revised Estimates (RE): Revised Estimates is prepared after six months of applications of budget estimates. The purpose of preparing Revised Estimates is to know that during the present six months what are the actual expenses or income exits and on what basis they have been prepared. They collect this information, about expenses or incomes from the concerned officers or employees. They also provider information regarding what will be the expenses and incomes for the basis they next six months. On this basis they estimate for the next six months.

There is no system for placing order for crude oil in the Barauni Refinery Unit (IOCL). Because they do not deal or purchase crude oil directly. The hear office handles determination of crude oil and its supply to the Refinery unit. Head office provides crude oil to the Refinery as and when required as per the estimation. There is continuous supply of crude oil through pipelines and tankers to the Refinery.

5.1.3 Identify the need for chemicals and spares:

Identification for need for chemicals basically depends on the quantity and types of crude oil processed. The quantity for chem8icals is decided in the ratio of quantity and types of crude oil processed. Orders regarding the purchase of chemicals and spares are made on past experiences. Inventory is maintained on approximation. The user department sends the need for the item_ to the Material department along with the consumption pattern. The reorder point is fixed in certain cases and then the order goes to the Purchase department. Two kinds of indent is raised:

Inventory control items, which are fixed where the reorder point or indent, is raised and the consumption pattern is studied.

Where consumption pattern is not known, preventive maintenance processes are undertaken on cash basis.


When an indent is raised and if it is universally available quotations or order is placed and the best is selected amongst all. As in case of wholesale items order is placed to the authorized dealer who manufactures the items as per the requirement.

5.1.4 Issue system of inventory for Barauni Refinery Unit

Firstly it is needed to explain how many types of issue system for Inventories are there, and then which system is opted by the Barauni Refinery Unit, will be explained.

First in First Out Method (FIFO) : In this method or issue system inventories, are issued for the production process or for sales which are purchased first or which enter in the stores first. And in the determination of cost of product, cost of that issued material is considered. In this case most recent purchase is as closing stock in the stores.

Last In First Out Method (LIFO): This method is absolutely different from FIFO method. This method or issue system inventories are issued for the production process or for the sale, which are purchased or enter in the stores recently. The purpose for doing so is that issued price is valued at the recent market price. This method is mostly used when price of inventories are continuously in the position of rising.

Highest In First Out Method (HIFO):- In this method or issue system inventories are issued for the production process or for the sale whose cost is high The purpose for doing so is that the company wants to sell or utilize that material at its fullest and that there should be no opportunity loss. This method is not mostly in use because; stock is valued at lowest price.

Barauni Refinery Unit (IOCL): issues inventories for the production process and for the sale to the Marketing Division on First in First Out (FIFO) basis. Here there is a continuous flow of crude oil. Every day crude oil is supplied to Refinery and also there is a continuous supply of finished product to the Marketing Division. Every day crude oil is processed or converted in to finished product and everyday it is sent to the stores and thereafter it is sent to the Marketing Division. Crude oil enters in the tank and it is sent for the process and after processing it is sent to the stores. All this happens automatically. This means that the crude oil, which enters the tank, first, is sent for the processing first and after processing it is sent to the sores. From the stores it is sent to the Marketing Division and then the crude oil is sent for the process and so on. This is a continuous process and it works on FIFO basis.


5.1.5 Store Management

There is a separate department in Barauni Refinery Unit (IOCL) Oil Storage and Movement Department, which manages and maintains the movement of crude oil, intermediate products and finished goods. Actual job of this department is to receive the raw material, intermediate products and finished goods and dispatch all this, such as raw material for processing, intermediate products for further processing and some of the intermediate products to the Marketing Division for sale and finished products to the marketing department for the same purpose. This department receives raw material as crude oil and issues for the further processing at First in First Out basis. After processing finished products are issued and dispatched to the Marketing Division for Sale. They receive more than one type of finished products for which there is different maintenance cost. The maintenance cost for LPG is more than the other products. There should be certain temperature, which has to be maintained. And for other products like Petrol, Diesel, Etc., which is stored in tanks, should not be filled up to the brim. A certain portion of the tank is kept empty.

5.1.6 Valuation of Inventory:

Generally the valuation of closing stock is done on the basis of market price or cost price whichever is less. But here we will see how Indian Oil Corporation (Barauni Refinery Unit) evaluates its stock, what rules and regulations are followed by them etc. At first we will see how many types of closing stock they maintain: -

5.1.7 Types of Closing Stock in Indian Oil Corporation Ltd.:

Crude Oil

Crude Oil Stock in Transit. Crude Oil Stock in Pipeline Crude Oil Stock in Refinery Tanks.

Intermediate Stock or Work-in-Process

Finished Goods

There are many types of crude oil such as, indigenous crude oil and


Imported crude oil. There are two types of indigenous Crude Oil (1) off-shore crude oil and (2) on shore crude oil and imported Crude Oil separately for (1) High Sulphur and (2) Low Sulphur.

5.1.8 Valuation of Crude Oil Stock

Crude Oil Stock to be valued at “Cost” or Replacement Cost”

For valuation at replacement cost following conditions should be satisfied:

There should be fall in the price of Crude Oil after the date of closing (31 st March). The expected realization from products to be produced out of crude oil inventory results in realization lower than cost of crude oil.

For the purpose of valuation of crude oil following three elements are required: -1) Cost of Crude Oil.

2) Expected realization from products produced from crude oil.

3) Replacement of cost of crude oil.

Cost of Imported Crude Oil (High Sulpher & Low Sulpher)

All elements which are a part of imported crude oil are to be considered in the cost of stock at Refinery such as FOB, marine freight, marine insurance, and other landing charges, custom duty, pipeline cost, entry tax (if applicable).

1. All the above elements to be considered are booked in the purchase cost of crude oil

2. For crude oil in transit FOB and other elements are booked in purchase cost.3. The above elements are to be considered for the purpose of valuation of crude

oil stock at cost.4. All elements as considered for Refinery stock to be taken on notional basis for

crude oil stock in transit and in pipeline e.g. Custom duty, entry tax etc.

5. Operating cost as per budget estimated of the next year should be included for comparison with realization.


5.1.9 Valuation of Crude Oil Stock on Expected realization value

1. If the crude oil quantity is processed during April, the realization of the products is at the price applicable for the month of April.

2. For balance crude oil quantity (if any), the expected product realization for the month of May will be considered based on Inventory Logistic Plan (ILP)

3. Specific customer price and excise duty benefit to be considered for above

Replacement cost of crude oil stock: -

The elements for replacement cost will be same as considered for cost of crude oil, however, following are to be taken additionally: -

1. FOB as intimated by HO based on actual price during April

2. Other element to be considered by the unit based on the estimated actual cost.

3. Customs duty as based on percentage; the same should be revised taking revised FOB value.

Valuation of Intermediate StockThe valuation will be lower than the cost of intermediate products or realization of the products,

to be produced out of the intermediate stock, whichever is lower.

Cost (Including conversion cost)

The cost of intermediate stock will be based on cost of crude oil as for Refinery stock and 50% of operating cost as considered for product valuation and 50% of fuel and loss for the month.


Expected realizable value

The realizable value will be similar to crude oil stock valuation, however, the balance operating cost & fuel & loss (50%) adjustment has to be done while comparing with the cost of intermediate products.

Valuation of crude Oil

Pipeline Cost, crude oil valuation

For pipeline cost, the operating cost to be considered as fixed & variable

Fixed cost to be allocated based in installed capacity if the capacity utilization is below installed capacity.

Variable cost will be allocated based on the pumped quantity by pipeline during the year.

Valuation of finished products

Finished stock to be valued at cost or realization value whichever is lower.

Finished products to be divided into two categories.

Straight run products

Especially products for which there is a separate production plant such as benzene, toluene, FGH, propylene, lubes etc.

5.2 FUNCTIONS OF FINANCE - STORES SECTION

The section dealing with accounting of stores in the Finance shall have following function:

(i) Passing and accounting of transportation bills / demurrage bills of railways/ shipping etc.


(ii) Stock verification (iii) Accounting for sale of surplus and scrap materials(iv) Dealing with stock transfer cases

5.2.1 PASSING AND ACOUNTING OF TRANSPORTATION BILLS

1. All railways/streamer/air freight inward receipt and the road transport consignment notes shall be received in the stores section of materials for taking the delivery of the consignment. the store shall enter these documents in a Daily Receipt Register.

2. Transport bill will be initially received by the Materials and sent to Finance duly verified with reference to the purchase order and also linking the same with the GR Notes. The certified bills of freight received from stores section shall be priced doing YMIROOTH transactions wherever the freight bill is directly linked to a purchase order. The Finance will release payment only after due checking of bills with reference to the transport calls and other relevant documents. In case the freight bill cannot be linked to the purchase order the same shall be charged to freight expenditure amount.

3. Road transport contracts involving large amounts shall be finalized after obtaining competitive quotations in accordance with the prescribed tendering procedure. Prior occurrence of Finance and approval of competent authority shall be taken.

4. Payment of transport bills of small values may be permitted through impest account held by the Materials. The limit in this regard shall be fixed at the unit level. Materials while rendering the impest account, for payment of the transport bills shall indicate GR Notes particulars against which the materials have been taken on charge. However, payments exceeding Rs. 20,000/- in each case shall be made only by crossed account payee cheque/ demand draft.

5. For all freight bills, passed payment vouchers shall be prepared and signed by the authorized officers after which the same shall be forwarded to the Cash Section for preparation of cheque and payment to vendors.


6. The freight charges shall be accounted in SAP depending upon the purchase order condition. Based on actual on invoice a MIRO transaction is done which will automatically adjust the cost of inventory based on the status of the material. The same is true for all other cost incurred for procurement of materials. The section should review on periodical basis the freight clearing account for necessary action.

7. The section shall also be responsible for passing petty bills on account of loading, unloading and handling of materials on the basis of certification by the Materials Department, Stores and as per the contract, if any.

STORES and SPARES

PARTICULARS 2006-2007

Rs. LAKHS

2007-2008

Rs.LAKHS

2008-2009

Rs. LAKHS

AT REFINERY 21980 31823 47994

IN

TRANSIT

4693 3037 2471

TOTAL 26673 34860 50465

Analysis


Barauni refinery is a big processing plant which requires the materials, tools and other required items on time because delay in availability of these materials may cause a big loss to the company so by the year their manufacturing capacity is increasing their demand is also increasing so they increase their capacity of materials in stores and also give orders to their vendors so they also available the goods on time. Because vendors also need time to manufacture the goods according to the need and order by the company and supply to their place.

PROCESS CHEMICALS

PARTICULARS 2007-08 2008-09

AT REFINERY4172 16139

IN TRANSIT NIL NIL

TOTAL4172 16139

Analysis

As while refining and manufacturing of petroleum from crude oil there is need of some

chemicals which are highly acidic handle with great care and caution so this type of

chemicals refinery manufacture themselves so have their storage at refinery itself, there

is no amount in transit. They have sufficient capacity to produce and store at their

place itself.


INVENTORY TARGET vs. ACTUAL

FOR THE YEAR 2008-09

PARTICULARS

TARGET ACTUAL

CHEMICALS 12651 16139

STORES & SPARES 30200 31854

TOTAL 42851 47993

Analysis

Due to increasing manufacturing capacity of plant, company set the target amount of

chemicals and stores & spares for the year 2007-2008 with a high amount of chemicals


out of which company used the actual amount of 4172.43 means company’sprocessing

is going on in a better direction they have sufficient amount to use further if they

required.

But in stores and spares company required material above the settled target because

stores & spares have no limitation they can be fail by using, breakdown while working,

or may get free or obsolete, so many reasons may cause their demand high of stores &

spares.

INVENTORY TURNOVER RATIO

It is computed by dividing the cost of goods sold by the average inventory. Thus,

Inventory Turnover Ratio=Cost of Goods Sold/Avg. Inventory.

PARTICULARS

2006-07(Rs

in lakhs)

2007-08(Rs

in lakhs)

2008-09(Rs

in lakhs)

SALES 2146123 3318902 4065554

Av.

INVENTORY

226842 363536 350792

INVENTORY

TURNOVER

9.46 9.12 11.58


RATIO

Analysis

As inventory turnover ratio indicates how fats inventory is sold. A high ratio is good fromthe view point of the liquidity and vice versa. A low inventory turnover ratio signifies thatinventory does not sell fast and stays on the shelf or warehouse for a long time.As the refinery having a high turnover ratio which signifies that inventory is not stayingin a shelf or warehouse for a long time they can be easily sold after manufacturing so itmeans company have a good sales in comparison to the average inventory of the refinery.

ABC ANALYSIS

2007-

08

2008-

09

PAR

TIC

U

LAR

S

MATE

RIAL

S

VA

LU

ES

MATE

RIAL

S

V

A

L

U

E

INVE

NTOR

Y

VALU

E

A

SEG

ME

NT

2077 4.4

2%

949 1.

88

%

70%

B 6147 13. 5300 10 20%


SEG

ME

NT

07

%

.5

%

C

SEG

ME

NT

38792 82.

51

%

44216 87

.6

2

%

10%

Analysis

A B C system is an inventory management technique that divides inventory into threecategories of descending importance based on the rupee investment in each. Theitems included in group A involve the largest investment. The group C consists of itemsof inventory which involve relatively small investment although the number of items ishigh. The B group stands in midway.Same process is followed in the refinery, as they have nearly 51000 items in their inventory list so out of all the items they categories the items on the basis of their number and investment in the A B C category because while using they required very quickly without any delay in time so by dividing such category it helps in easy finding and accounting of these materials.


FINDINGS:-

1. Inventory management is mainly based on ABC analysis in IOCL( Barauni Refinery).

2. Inventory turnover ratio for the year 2008-09 is 10 times in IOCL (Barauni Refinery).

3. Inventory turnover ratio for the year 2007-08 is 9.8 times in IOCL (Barauni Refinery).

4. These ratios shows that the year 2008-09 is better because the year 2008-09 shows rapid turnover of stock and consequently shorter holding period as compared to its previous year.

5. The company also maintains an adequate level of inventories for work-in-process as per the requirement. Till the completion of the production cycle, the work-in-process inventories are maintained and some part of it is also used as fuel in the unit.


6. Stock of finished goods also has to be maintained by the Barauni Refinery unit. This unit does not have authority to sell the finished product in the market directly. It has to be sent to the Marketing division for further sale.

7. There are mainly three types of inventories maintained by Barauni Refinery Unit (IOCL) such as:

Crude Oil Inventories Inventories for chemicals Inventories for stores and spares

8. Issue system of inventory for Barauni Refinery Unit:-

FIFO LIFO HIFO

9. Barauni refinery is a big processing plant which requires the materials, tools and other required items on time because delay in availability of these materials may cause a big loss to the company so by the year their manufacturing capacity is increasing their demand is also increasing so they increase their capacity of materials in stores and also give orders to their vendors so they also available the goods on time.

10. As while refining and manufacturing of petroleum from crude oil there is need of some chemicals which are highly acidic handle with great care and caution so this type of chemicals refinery manufacture themselves so have their storage at refinery itself, there is no amount in transit. They have sufficient capacity to produce and store at their place itself.


Suggestions

1. Continuous supply of materials and finished goods should be maintained so that production process does not suffer and customers demands are met.

2. EOQ and ROP should be maintained and monitored continuously.

3. Both overstocking and understocking of inventory are disadvantageous. Both should be avoided.

4. Material costs should be under control so as to reduce overall costs of production.

5. Centralizing purchases eliminate duplication in ordering or replenishing stocks.


6. Losses should be minimized through deterioration, pilferage, wastes and damages.

7. Suitable organization should be designed for inventory management. Transparent accountability should be present at various levels of organization.

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

9. Proper quality standards ensure proper quality of stocks. The price analysis will lead to payment of proper prices.

10. Appropriate planning and control of inventory is required for fulfilling short and long term objectives.


Conclusion

1. IOCL, Barauni is a major contributor in oil production in India. At present its production capacity is 6 MMTPA, producing a wide range of petroleum products.

2. Repairs and Maintenance cost of the Refinery is decreasing per MT. It has decreased from Rs. 130 in 2000-01 to Rs. 85 in 2004-05 but from 2005-06 there is an increment in repairs and maintenance cost. It has increased since 2005-06 from Rs. 85 to Rs. 177 in 2007-08.

3. Inventory management is mainly based on ABC analysis. It is better compared to other oil producing companies.


4. As the company may increase its production the imported items would be costly with the depreciation of INR.

5. The company should maintain its standards of inventory and production because it has a cut throat competition from its competitors like BPCL, HPCL and Reliance Petroleum.

6. It should reduce its lead time to have an effective inventory maintenance. Supply chain management has to be given its due importance.

7. As it is a joint venture, it can explore new areas and suppliers to increase its profitability. Mergers and acquisitions are expected.


BIBLIOGRAPHY: -

Bhargava, Aseem ; Goel, Pankaj, “ Valuation of Oil Sector- Significance and Review” CA journal, Volume 54, No 07, January 2006


Manuals Provided By IOCL Cost Control Manual IOC Accounting Manual Material Management Manual Annual Operation Report Financial Appraisal Report

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