PREFACE

This project report is prepared during the vocational training undertaken at

“KRIBHCO” SURAT, on partial fulfillment of the degree in “Master of
Business Administration”

It is true that the experience makes the man perfect. Experience is always
concerned with the work. Theory of any subject is important but without its
practical knowledge it becomes unless particularly for the Management
Students. As a student of the Business Administration, we have studied
many theories in the classroom, but only after taking up this project work
we have experienced & understood these Management theories & practices
in its fullest sense, which plays a very vital role in business field today. The
knowledge of management is incomplete without knowing the practical
application of the theories studied.

Hence, this report is designed with the objective to gain practical knowledge
& is undertaken on a Fertilizer Manufacturing Industry – its working and its
Finance Department.

During the preparation of this report a sincere efforts has been made to
analyze and evaluate the functioning of the inventory management.

1
 Objective of Project :

A.PRIMARY OBJECTIVE:

The primary objective of the present study is to understand the existing

techniques of the inventory management used in this concern with a view to
find out the extent to which the concepts of scientific inventory control are
being applied and suggest new scientific and practical inventory
management techniques, if needed.

B.OTHER OBJECTIVES:

 To supplement the Inventory control techniques in the

organization for effective Inventory Management.

 To provide necessary guidelines for determining economic order

quantity, re-ordering levels and classifications of items using
appropriate basis.

 To minimize idle time caused by storage of raw materials, stores

or spare parts.

 Help to keep capital investment low in inventories, and keep down

Inventory carrying cost and obsoletes losses.

2
 Limitations of Project :

During the project work, I have experienced the following limitations.

 As KRIBHCO is a chemical manufacturing society, it has vast

varieties of inventories of inventory items, about 6000. Thus it was
very difficult for me to calculate different levels like:
EOQ level, ROL level, Maximum level, Minimum level etc.

 I was not able to collect some data during the project work due to the
audit was running during training period.

 Since they are not willing to reveal some confidential data and setups,
I have limited vision regarding the KRIBHCO inventory.

3
 Methodology :

Taking the perspective of student from the finance point of view the
methodology used for study was to answer three questions covering broad
area of Inventory Management are as follows:

1) What is Inventory Management?

2) Why Inventory Management?
3) How the Inventory Management is done?

To obtain answers to the first two questions, the discussions were carried
out with various personnel of M/s. KRIBHCO and the books were referred.

However, to obtain the answer to the third question (i.e. how the Inventory
Management is done?) the existing Inventory control techniques were
studied, a relationship or link was sought between theory & practice and it
was found that many aspects from Theory can be and are being used in
practice and necessary suggestions were made to promote existing Inventory
Management at various level.

Thus the different methods and techniques were used at different stages of
the project like interviews, discussions, observation, and secondary data like
annual reports, manuals and other reports and files, so as to meet the
requirement of the situation.

4
 Profile of

“A fertilizer is any material, organic, inorganic, natural or systematic, that

is placed on or incorporated into the soil to supply plants with one or more
of the chemicals elements necessary for normal growth.

Fertilizer is the material, which supplies the chemicals elements required for
plant growth. Primary nutrients like nitrogen, phosphates and potassium are
supplied through chemical fertilizer. Fertilizer response studies have proved
that 1kg of fertilizer can increase the food grain production by 8-10 kg.
Fertilizer production is of permanent importance for this country because
Fertilizer increases agriculture productivity.

Krishak Bharati Co-operative Limited (KRIBHCO), a premier Co-operative

Society for manufacture of fertilizer, registered under Multi-State
Cooperative Societies Act – 1985, was promoted by the Govt. of India,
IFFCO, NCDC and other agricultural cooperative societies spread all over
the country.

Oil & Gas findings in Bombay High and South Basin triggered off the birth
of eight new generations fertilizer plants to fulfill ever-growing food needs
of the country. KRIBHCO was amongst the first two Projects in the first
phase.

KRIBHCO has setup a Fertilizer Complex to manufacture Urea, Ammonia

& Bio-fertilizers at Hazira in the State of Gujarat, on the bank of river Tapti,
near Kawas village, 15 Kms from Surat city and 20 Kms from Surat
Railway Station on Surat – Hazira State Highway.

Late Smt. Indira Gandhi, former Prime Minister of India laid the Foundation
Stone on February 5, 1982.

The trial production of Urea commenced from November 26, 1985 and
within a very short time of 3 months, the commercial production
commenced from March 01, 1986. Since then, it has excelled in
performance in all areas of its operations.

5
The total Project cost was Rs. 890 crores as against the estimated cost of Rs.
957 crores. This shows a saving of Rs. 67 cr (approximately 7%) in Capital
Cost of the Project, which is a rare feature in the history of a Public Sector
Unit.

Subsequently, a Bio-fertilizer plant of 100 MT per year capacity was

commissioned at Hazira on August 15, 1995. KRIBHCO has also
completed the installation of an expansion of the Bio-Fertilizer plant with an
additional capacity of 150 MT and the same was commissioned in
December 1, 1998.

HISTORY AND DEVELOPMENT

PROJECT ZERO DATE 31 st MARCH, 1981

FOUNDATION STONE LAID BY Late Smt. Indira Gandhi then the

Prime Minister Of India on 5th Februa ry 1982

PROJECT COMPLETION 31 st MAY 1985

6
PLANT CAPACITY & CONSULTANTS

PLANT CAPACITY CONSULTANTS

DAILY ANUUAL

AMMONIA 2 X 1350 8.9 LAKH M.W.kellogg, USA

MT MT FEDO, INDIA

UREA 4 X 1100 14.52 LAKH SNAMPROGETTI, ITALY

MT MT PDIL, INDIA SENIOR

THERMAL ENGG.U.K

POWER 2 X 15 THERMAL ENGG.U.K.

MWH

HAEVY 2 X 55 MT PDIL

WATER PER YEAR HTAS, DENMARK

BIO - 250 MT PER DAE

FERTILIZER YEAR

7
OBJECTIVES OF KRIBHCO

MAIN

 To increase the urea installed capacity, maintaining its market share.

 To ensure optimum utilization of existing plant and machinery, through
proper maintenance.
 To diversify into other core sector like power, LNG terminal/port,
chemicals etc.

OTHERS
 to enlarge product mix through product development
 to continue and intensify efforts towards rural development &Co-
operative movements

BIO-FERTILISER

KRIBHCO diversified into bio-fertilizers in 1995 in order to provide

supplementary Nutrients at low cost through its Hazria plant with a
production capacity of 100 MT PA. The plant capacity was enhanced to 250
MT PA in DECEMBER 1998. During the year 2002-03 the production of
Bio-fertilizer s was 296 MT, with a capacity utilization of 118% and sale
was 351 MT of Bio-fertilizer. Implementation of two more plants of 100
MAPA a capacity each is in progress at Varanasi (up) and Lanja
(Maharashtra)

8
SOURCE OF FINANCE

EQUITY: KRIBHCO SHARE HOLDING PATTERN (as on 31-03-2007)

STAKE HOLDER Rs. (in Crore)

Govt. of India 324.71

IFFCO 97.00

Other Society 70.00

Source of Finance
Other
Society
14%

IFFCO
20%

Govt. of
India
66%

9
PRODUCT

KRIBHCO is manufacturing Nitrogenous Fertilizers and Allied Products

viz.: Urea, Ammonia Liquid, and Bio-fertilizer. Besides, it’s also has a 30
MW Power Plant of its own for generation of Power to meet its
requirement. KRIBHCO has also been assigned the job of Operation &
Maintenance of “Heavy Water Plant” of Department Of Atomic Energy.

MISSION

The mission of KRIBHCO is to act as a catalyst to Agricultural and Rural

Development by Selecting, Financing and managing such Projects which
are both, socially desirable & commercially profitable.

VISION

KRIBHCO will become one of the leading fertilizer producers in the world
funding growth through:
 Efficient Production
 Efficient Distribution
 Efficient diversification

10
 Inventory Management
( Concept) :

Inventory Management is a big part of profit planning for manufacturing

and merchandizing companied. Material costs often accounts for more than
40% of total costs of manufacturing companies and more than 70% of total
costs in merchandizing companies. Inventory management is the planning
and coordinating and controlling activities related to the flow of inventories
into through and out of an organization.

Inventory constitutes the most significant part of current assts of a large

majority of companies in India. On an average inventories are
approximately 60% of current assts in public limited companies in India.
Because of the large size of inventories are maintained by firms a
considerable amount of funds is required be committed to them. It is,
therefore absolutely imperative to manage efficiently and effectively in
order to avoid unnecessary investment.

Inventory is stock of the product a company is manufacturing for sale and

components that make up the product. There are main three type of
inventory: Raw Material, Work-in-process, and Finished Goods.

 Raw Materials are those basic inputs that are converted into finished
products through the manufacturing process. Raw materials
inventories are those units, which have been purchased and stored for
future productions.

 Work-in-Process inventories are semi-manufactured products. They

represent products that need more work before they become finished
products for sale.

 Finished Goods inventories are those completely manufactured

products, which are ready for sale.

Stock of raw materials and work-in-process facilitates production while

stock of finished goods is required for smooth marketing operations. Thus
inventories serve as a link between the production and sale of a product.

11
Firms also maintain a fourth kind of inventory, supplies or stores and
spares. Supplies include office and plant cleaning materials like soap,
brooms, oil, fuels, light bulbs etc. These materials do not directly enter
production, but are necessary for production process. Usually these supplies
are small parts of the total inventories and do not involve significant
investment.

The levels of three kinds of inventory for a firm depends n the nature of its
business. A manufacturing firm will have substantially high levels of all
three kinds of inventories, while a retail or wholesale firm will have a very
high level of finished goods and no raw materials and work-in-process
inventories.

12
 Need to Hold Inventory :

Maintaining inventories involves tying up of the company’s funds and

incurrence of storage and handling costs. There are three general motives
for holding inventories.

1. Transactional motive:
It emphasizes the need to maintain inventories to facilitate smooth
production and sales operations.

2. Precautionary motive:
It necessitates holding of inventories to guard against the risk of
unpredictable changes in demand and supply forces and other factors.

3. Speculative motive:
It influences the decision to increase or decrease inventory levels to take
advantage of price fluctuations.

It is not possible for the company procure raw materials whenever it is

needed. A time lag exists between demands for material and its supply. Also
there exists uncertainty in procuring raw materials in time on many
occasions. The procurement of materials may be delayed because of such
factors as strike, transport disruption or short supply. Therefore, the firm
should maintain sufficient stock of raw material at a given time to
streamline production. Other factors, which may necessitate purchasing and
holding of raw materials are quantity discounts and anticipated price
increase. The firm may purchase large quantities of raw materials than

13
needed for the desired production and sales levels to obtain quantity
discounts of bulk purchasing. At times, the firm would like to accumulate
raw materials in anticipation of price rise.

Work-in-process inventory builds up because of the production-cycle.

Production-cycle is the time span between introduction of raw material in to
production and emergence of finished goods at the completion of
production-cycle. Till production-cycle completes stock of work-in-process
has to be maintained.

Stock of finished goods has to be held because production and sales are not
instantaneous. A firm cannot produce immediately when the customer
demand goods on a regular basis, their stock has to be maintained. Stock of
finished goods has to be maintained for sudden demand from customers. In
case the firm’s sales are seasonal in nature, substantial finished goods
inventories should be kept to meet the peak demand. The level of finished
goods inventories would depend upon the coordination between sales and
production as well as on production time.

14
 Cost Associated with Inventory

Managing inventories to increase net income requires effectively managing

costs that fall into the following five categories:

1. Purchasing Costs:
The cost of goods acquired from suppliers, including incoming freight or
transportation costs. These costs usually make up the largest cost
category of inventories

2. Ordering Costs:
The cost of preparing and issuing purchase orders, receiving and
inspecting the items included in th4e orders and matching invoices
received, purchase orders and delivery records to make payments.
Ordering costs include the coast of obtaining purchase approvals, as well
as other special processing costs.

3. Carrying Costs:
These are the costs that arise, while holding inventory. Carrying costs
include the opportunity cost of the investment tied up in inventory and
the cost associated with storage; such as space rental, insurance,
obsolescence and spoilage.

15
4. Stock Out Costs:
These are costs that result when a company runs out of a particular item for
which there is customer demand. A company may respond to a stock out by
expediting an order from a supplier. Expediting costs of a stock out
include4e the additional ordering costs plus any associated transportation
coasts. Ort the company may lose sales due to the stock out. In this case, the
opportunity cost of the stock out includes the lost contribution margin on
sales not make due to the items not being in the stock, plus any contribution
margin lost on future sales due to customer ill will caused by the stock out.

16
 Objective of Inventory Management:

In the context of inventory management the firm is faced with the problem
of meeting two conflicting needs.

 To maintain a large size of inventories of raw material and work-in-

process for efficient and smooth production and of finished goods for
uninterrupted sales operations.
 To maintain a minimum level of investment in inventories to
maximize profitability.

The objective of inventory management should be to determine and

maintain optimum level of inventory investment. Te optimum level of
inventory will lie between the two danger points of excessive and
inadequate inventories. The firm should always avoid a situation of over
investment or under investment in inventories.

The major dangers of over investment are:

a) Unnecessary tie up of the firm’s funds and loss of profit and
opportunity costs.
b) Excessive carrying costs, and
c) Risk of liquidity.

The consequences of under investment in inventories are:

a) Production hold ups, and
b) Failure to meet delivery commitments.

17
Thus, efforts should be made to place an order at right time with the right
source to acquire the right quantity at the right price and quantity. An
effective inventory management should

 Ensure a continuous supply of raw material to facilitate uninterrupted

production,
 Maintain sufficient stocks of raw materials in periods of short supply
and anticipated price changes,
 Maintain sufficient finished goods inventory for smooth sales
operations and efficient customer services,
 Minimize the carrying costs and time, and
 Control investment in inventories and keep it at an optimum level.

18
 Inventory Management Techniques :

There are two basic questions relating to inventory management.

 What should be the size of the order?

 At what level should the order be placed?

The first question relates to the problem of ordering economic order

quantity (EOQ) and is answered with an analysis of costs of maintaining
certain level of inventories. The second question arises because of
uncertainty and is a problem of determining the reorder point.

The ordering costs increase with the number of orders, thus the more
frequently inventory is acquired; the higher the firm’s ordering costs. On the
other hand if the firm maintains large inventory laves, there will be few
orders placed and ordering costs will be relatively small but the carrying
costs of inventories increases heavily. The economic size of inventory
would thus depend on trade-off between carrying costs and ordering costs.

19
  EOQ Model :

The basic assumptions of EOQ model are following:

1 ) The forecast usage/demand for a given period usually one year, is
known.
2 ) The usage/demand is even throughout the period.
3 ) Inventory orders can be replenished immediately, there is no delay in
placing and receiving orders
4 ) There are only two distinguishable costs associated with inventory
costs, ordering costs and carrying costs.
5 ) The cost per order is constant regardless of the size of the order
placed.
6 ) The cost of carrying inventory is fixed percentage of the average
value of inventory.
Given these assumptions, EOQ model ignores purchasing costs and stock
out costs. For determining the EOQ formula we shall use the following
symbols:
A = annual demand/usage,
Q = quantity ordered,
O = cost per order,
C = carrying costs per unit,
Given the above assumptions and symbols, the total costs of ordering and
carrying inventories are equal to

QC AO
TC = +
2 Q

20
In the equation, the first term on the right hand side is the carrying cost,
obtained as the product of average value of inventory holding and the
carrying cost per unit. The second term on the right hand side is the ordering
costs, obtained as the product of the number of orders and the cost per order.
The total cost of ordering and carrying is minimized when

2AO
Q=
C

The formula may be illustrated with the help of the following data relating
to Ace Company.
A = annual demand/usage/sales = 20,000 units
O = ordering cost per order = Rs. 2,000
C = carrying costs per unit = 25% of inventory value
P = purchase price/unit = Rs. 12
Here carrying cost/unit in is = Rs. 12 X 25% = Rs. 3

2AO
EOQ = 2 X 20,000 X 2,000
C =
3
= 5,164 units

Graphical Approach of EOQ Model

The economic order quantity can also be found graphically. Figure

illustrates the EOQ function. In figure costs –carrying costs and ordering
costs and total costs – are plotted on vertical axis and horizontal axis is used
to represent the order size. We note that total carrying cost increases as the
order size increases, because on an average a larger inventory level will be

21
maintained and ordering costs decline with increase in order size because
larger order size means a less number of orders. The behavior of total costs
line is noticeable since it is a sum of the two types of costs, which behave
differently with order size. The total costs decline in first instance, but they
start rising when the decrease in average ordering cost is more than offset by
the increase in carrying costs.

Total Cost

C
O
S
T

Carrying Costs

Ordering Cost

Q* Ordering Size

The EOQ occurs at the point Q* where the total cost is minimum. Thus the
firm’s operating profit is maximized at point Q*

22
It should be noted that the total costs of inventory are fairly intensive to
moderate changes in order size. It may be appropriate to say, therefore, that
there is an economic order range, not a point. To determine this range, the
order size may be changed by some percentage and the impact on total costs
may be studied. If the total costs do not change very significantly, the firm
can change EOQ within the range without any loss.

 Quantity Discount & Order Quantity

Many suppliers encourage their customers to place large orders by offering

them quantity discount. With quantity discount, the firm will save on the per
unit purchase price. However, the firm will have to increase its order size
more than the EOQ level to avail the quantity discount. This will reduce the
number of orders and increase the average inventory holdings. Thus, in
addition to discount savings, the firm will save on ordering costs, but will
incur additional carrying costs. The net return is the difference between the
resultant savings and additional carrying costs. If the net rerun is positive,
the firm’s order size should equal the quantity necessary to avail the
discount; if negative its order size would be equal to EOQ level.

Let’s assume the following data for a firm:

A = estimated annual demand 1200 units

P = purchasing cost per unit Rs. 50

O = ordering cost per order Rs. 37.50

C = carrying cost per unit Rs. 1

23
The firm is offered 0.5% (0.0005) or Rs. 0.05 per unit quantity discount on
order of 400 units or more.

First we will calculate EOQ, assuming that the quantity discount does not
exist

2AO
Q* = 2 X 1,200 X 37.50
C
=
1

= 300 units

Now, the net return should be calculated for deciding whether the order size
should be increased from 300 to 400 units

The net return is given by the flowing equation:

= Discount savings + savings on ordering costs – additional carrying
costs
= [d X p X a] + O [A/Q* - A/Q’] – [C/2 (Q’ - Q*)]
= [0.005 X 50 X 1200] + 37.50[1200/300 – 1200/400] – [1/2 (400-300)]

= 300 + 37.50 – 50
= 287.50 Rs.
Since the net return is positive, the firm should have an order quantity
of 400 units.

24
 Reorder Point:

Yet the answer should be sought to the second question, when to order?
This is a problem of determining the reorder point. The reorder point is tat
inventory level at which an order should be placed to replenish the
inventory. To determine the reorder point under certainty, we should know:
a) Lead time
b) Average usage and
c) EOQ
Lead time is the time normally taken in replenishing inventory after the
order has been placed. By certainty, we mean that usage and lead time do
not fluctuaye. Under such a situation, reorder point is simply that inventorty
level which will be maintained for consumption during the lead time. That is
Reorder point= Lead time X Average usage

25
 Inventory Management in KRIBHCO :

The efficiency of any business activity depends upon having materials

supplies, and equipments available in proper quantity with the proper
quality, at the proper place and time at proper cost. Failure ay any of these
points adds to the costs and decreases the profit.

Being a chemical processing industry, the inventory pattern in KRIBHCO is

very vast and varied. It is therefore, the purpose to lay down the best
practices methods and strategies that are necessary to enable the materials
department to carry out established policies uniformly which will not only
help in reducing the material costs and working capital but also increase the
productivity of the corporation.

Functional Strategies/ Objectives:

a) Evolve and implement a scientific inventory control system to

achieve optimization of inventory levels.

b) Standardize and improve equipment design.

c) Create and sustain computer culture.

d) Bring more common items under centralized procurement system

to get better control.

e) Develop alternate source of supply of materials.

f) Identification and development of vendors.

g) Annual rate contract with the approved vendors for regular supply

of material to reduce the inventory levels of such consumables.

26
 h) Preservation of materials to avoid damages/ deterioration during

storage.
i) Improvement in purchase procedure for reduction in procurement
lead-time.

To study the inventory management the several of interview techniques

depending on the situations were followed. Discussions were carried out
with various personnel of the company to study the following 3 broad areas.

1. PURCHASE CONTROL
2. STORAGE CONTROL
3. ACCOUNTING CONTROL

A study in KRIBHCO was carried out taking into consideration the concept
of total material control, which significant that efficiency of any
organization is contingent upon having the right material of right quality or
right place in the right quantity at the right time and place.

27
 Purchase Control:

It involves creative functions such as development of new resources,

introducing new materials and sources in the undertaking etc. It needs
considerable expertise not only negotiating but also in the techniques of
competition and studying of economic trends in respect of materials to be
purchased in large quantity. Every rupee saved by the good purchasing goes
directly in to the profit for the simple reason is that it is not spent at all.
The scope of purchase in Kribhco includes below items.

a) Capital items – like plants and machinery, office equipment, furniture

and fixture, mobile equipment, electrical equipment, communication
equipment, vehicles etc.
b) Row materials and semi finished goods.
c) Consumables items required for the plant and office like tools,
catalysts chemicals and oil lubricant, office stationary and sanitary
items.
d) Spear parts
e) Items required for repairs and maintenance of buildings, plant and
machinery, office equipment.
f) Rate contract for procurement of laboratory glass ware chemicals.

EXISTING PURCHESH PROCEDURE

1. Registration of vendors
An advertisement should be assure in the leading news papers inviting
applications in the prescribed proforma for registration of supplier and
contractors listing out various types of purchase that are likely to be mad

28
during the next three years. The applications received should be
scrutinized by a committee consisting of a representative each from
technical, finance, and purchase department for ascertaining the resources,
capacity and quality of work man ship of the vendor.

The committee can also call the vendors for personal discussions and seek
clarification on the applications and obtain such other information.
Wherever, felt necessary committee can visit vendors work also. The list
of approved vendors sell is updated every three years by using a press
advertisement.

2. Requisition to purchase
The indenters from various departments will raise requisition called the
Material Purchase Request for purchase. It should be insured that the
requisition for purchase should be complete in all respects with regard to,
 Each item of purchase shall have a precise, complete and unambiguous
identification. Indenting department is responsible for identification of
items in its indents. Identification sell include the generic name of the
material as recognized commercially and physical dimensions (weight,
size, volume, chemical composition, capacity and other technical
specifications) and code number as relevant.
 Required date of delivery
 Estimated value and approved budget head
 Whether the item is a stock item/non-stock item/capital item
The stores section will raise the requisition for purchase of materials,
which have been declared as stock item, after the quantity in stock has
reached the ‘reorder level’ as determined for the respective items. Such
requisition amongst other particulars should also indicate the ‘maximum’,

29
 ’minimum’ and ‘re-order’ level, the date on which last supply was
received and the average consumption per month since last purchase.
The requisition for purchase non-stock items will be invariably routed
through the stores section that will endorse on the requisition the
availability/ non-availability. In case the item is available, the quantity
thereof is indicated on the purchase requisition so that the quantity to be
purchased can be adjusted by the head of the purchase dept. in
consultation with the indenters.
The finance & Account dept. would ensure that the purchase requisition
must indicate:
a) The budget provision
b) The amount utilized / committed unto the previous requisition
c) The estimated value of the present requisition (by departmental head),
and
d) The balance available under the budget head after booking the present
requisition.

3. Inquiries/ invitations to bid

On receipt of the requisition from the various indenting departments,
enquiries shall be issued by the purchase dept. as per the procedure detailed.
Inquiries shall be issued in the prescribed proforma(e). The enquiry
document should be suitably modified to conform to the equipments and
materials proposed to be procured. It is important that the inquiry
documents should describe in detail the description of the material, the
technical specifications, and preferred delivery time, various general and
special terms and conditions governing the purchase.
Normally, bids shall be asked in two envelops in cash of the single sage
bidding as below:

30
Envelop 1 Earnest Money Deposit
Envelop 2 Base Price Bid as per the Terms and Conditions of ITB and
alternate price bid, if any. Alternate Bids shall be based on the
alternative designs, materials, completion schedule, payment and
other terms and conditions. The alternate bid shall be
considered, if not accompanied with base bid.

Single stage bidding should be issued only when subsequent changes in the
specifications and terms and conditions are not expected.

However, in case of purchase is in which it may be undesirable or in

impracticable to prepare complete technical specifications in advance or
wherever it is deemed necessary, two stage bidding procedure shall be
followed i.e. first inviting technical and un-priced commercial proposal
along with priced bid. These shall be subject to clarifications and
adjustments to be followed by the submission of revised priced bids in the
second step, if required.

In this case bids shall be asked in three envelops as below:

Envelop 1 Earnest Money Deposit
Envelop 2 Technical and commercial un-priced bid
Envelop 3 Base Price Bid as per the Terms and Conditions of ITB
and alternate price bid, if any. Alternate Bids shall be
based on the alternative designs, materials, completion
schedule, payment and other terms and conditions a list of
deviations should be given separately. The alternate bid
shall be considered, if not accompanied with base bid.

31
Envelopes shall be opened in seriatim and if conditions of the preceding
envelop are not satisfied, then the succeeding envelope shall not be opened.

4. Time allowed for submission of bids and EMD to be deposited

Normally three weeks time should be given to the vendors for submitting
their bids however, the time limit for submission of bids may be increased
with due consideration of the particular circumstances with the approval of
the competent authority.

(i) For value of purchase up to Rs. 5 Nil

lakhs

(ii) For value o f purchase up to Rs. 10 Nil

lakhs for proprietary items

(iii) For value of purchase up to Rs. 5 1% of estimated value or Rs. 1

lakh (10 lakh`s for proprietary) & up to cror, which ever is less
Rs. 1 crore

(iv) For value of purchase above Rs.1 Minimum Rs. 1 lakh, 0.75% of
crore & up to Rs. 5 crore estimated value but limited to
maximum Rs.2 lakh

(v) For value of purchase exceeding Rs. 0.5%of estimated value of

5 crore purchase limited to Rs. 10 lakh

32
 5. Quotation Comparison Statement (QCS)
After the tender are opened a QCS of all the bids opened, shall be prepared
by the purchase department. the purpose of bid evaluation is to determine
the cost of each bid to the society in a manner that will permit a comparison
of bids on the basis of their evaluated cost factor, which may be taken into
consideration, include inter-alia the cost of transportation unto each unit
along with other expenditures incidental to the transportation, the payment
schedule, the delivery or time of completion, the operating cost, the
efficiency, the compatibility of equipment, the availability of spare parts.
The bids conforming to the specifications and lowest in value will be rated
in the QCS as lowest (L-1), second lowest (L-2), and third lowest (L-3) etc.

6. Tender Committee
All purchase orders whose individual value does not exceed Rs.10 lakhs,
will be finalized on the basis of the recommendations of the indentor and the
purchase dept. after obtaining the concurrence of the Finance Dept. by
circulation of file. However, in case of purchase order, whose individual
value does not exceed Rs.10 lakhs but are proposed to be procured
stipulated hereunder:
The reviews of QCS and selections of successful bidder in respect of all
purchase orders, whose individual value is above Rs.10 lakhs, will be done
by a tender committee specifically constituted for the purpose in each case.
The tender committee shall be constituted consisting members from
following departments:

33
 a) Indenting department – department from where the requirement
has come up and for which action is required to be taken.
b) Finance department
c) Purchase department

7. Selection of successful bidder

Normally, the lowest bid, which conforms, to the specifications will be
accepted. However, where the lowest bid even though it conforms to the
specifications is not accepted, full justification for accepting other than the
lowest bid shall be recorded in writing and approval of the competent
authority will be obtained.
While forwarding the recommendations for award of work, the
recommending authority/ tender committee, as the case may be, must ensure
the reasonability of the prices on which the order is proposed to be placed.
In case the bid of the successful bidder is far from the estimated cost, full
justification to be given in the recommendation. Particularly for case where
the prices offered are substantial lower than the estimated cost and no
proper reasons could be ascertained, the amount of the performance security
may be increased.

EVALUATION OF EXISTING PURCHASE SYSTEM OF KRIBHCO:

The existing purchase procedure gives fair chances of competition to all the
vendors. It leaves no room for malpractices or favoritism of employees i.e.
nobody oblige any one out of way. It is not very rigid. In time of urgency of
requirement, competent authority so as to avoid stoppage of work approves
necessary deviations. The procedure is based on democratic way of
working. Good suggestions to improve efficiency are always considered.

34
Various annual rate contract running contracts are entered for regular
consumable items, like oil and lubricants, stationery, chemicals, medicines,
printing job etc. This is reducing the repetitive job times and money of
company.
But there are shortcomings also, which are evaluated taking into
consideration the five essentials of purchase functions are as follows:
(1) Purchase time,
(2) Purchase quantity,
(3) Purchase quality,
(4) Purchase price and
(5) Source of supply

1. PURCHASE TIME
The purchase time indicates the lead-time i.e. time taken to physically
receive the material from the date of its indent.
To find out the lead-time five cases different items have been studied
randomly, and analyzed its fact, which indicates that by following the
existing procedure, the administrative lead-time is very long i.e. 5 to 7
months; while supplier’s lead-time is about 2 to 3 months.

SUGGESTIONS:
(1) Approved vendor list should be maintained so that wastage of time to get
vendor list approved every time could be avoided.
(2) Contract system should be followed to purchase stock items with
approved vendors so that the continuity of supply can be maintained
without following such long procedure and waste of time. It this case the
economic order quantity should determined for each item and a list of

35
 order per year with specific time limit should be given to contractors in
advance, fixing the maximum, minimum inventory levels.
(3) For non-stock items, the limits for issuing inquiry should be fixed
maximum to seven days. Similarly time limit for recommendations and
concurrence by technical department and finance department also is
fixed. In case of delay beyond this time limit, competent authority should
be informed for necessary instructions.

2. PURCHASE QUANTITY AND QUALITY:

It has been observed that the quantity of material is being purchased

considering 6 to 12 months consumption that means no economic order
quantity has been fixed for different types of material. Due to the existing
system:

 Company is incurring cost of carrying inventory interest of capital rent

etc.
 Company is also incurring loses due to the depreciation in quantity,
deteriorations in quality and obsolesce of materials during storage.
o Company is also incurring avoidable expenditure such as holding and
keeping of surplus material, financial losses due to fall in the price of
materials, extra expenditure on excess of materials required.
It is suggested that before taking final decision economic order quantity
should be determined for each item and order should be placed accordingly.
The determination of economic order quantity techniques has been
discussed on succeeding pages.

36
 3. PURCHASE PRICE
The price of each item is being compared with supplier’s quotations
considering the quality of material to be supplied. Although, purchase
department should keep itself informed of the price trends, with the help of
market reports, trade papers and journals, report by purchase against and
sales representative of the suppliers, published catalogue and price list.

4. SOURCE OF SUPPLY
The selection of a particular supplier is made after inviting tenders from
possible source of supply. There are four types of tenders commonly used,
which are
(a) Single tender,
(b) Limited tender,
(c) Open tender and
(d) Global tender
The tender received are opened on the date and time stipulated and
compared

SCHEDULE OF SUB-DELEGATION OF FINANCIAL POWERS

Nature of Indents Extend of Powers Remarks

(1) Approval of indents

1.1 Normal stores stock items

a) General Manager Full power
b) Departmental Manager Upto Rs. 2 lac in each case

37
1.2 Non stock or restricted
issue items
a) General Manager Full power
b) Departmental Manager Upto Rs. 50000/- in each cases.
1.3 Service Contracts
a) General Manager Full power Rs. 50000/- in each
b) Departmental Manager cases.
1.4 Capital Items
a) General Manager Full powers
2. Calling for tender
2.1 Open tender
a) General Manager Full powers
b) Material Manager Full power for item up to Rs. 2
lac in each cases.
2.2 Limited Tender
a) General Manager Full powers
b) Material manager Full power for items valuing up
to Rs. 1 lac
2.3 single Tender
a) General Manager Full power
b) Material Manager Upto Rs. 25000/- in each case
3. Acceptance of tender
3.1 Opening tender
a) General Manager Up to Rs. 10 Lac in each case
b) Material Manager Upto Rs. 50000/- in each case
3.2 Limited tender
a) General Manager Up to Rs. 10 lacs reasons to be
b) Materials Manager recorded for not calling tender
(i) Normal stock Up to Rs. 50000/- in each cases
items Upto Rs. 25000/- in each cases
(ii) Non-stock items Upto Rs.10000/- in each cases
c) Supdt. (Purchase)

38
 Purchase office
3.3 single tender
a. General Upto Rs. 2 lacs in each case
Manager Upto Rs.25000/- in each case
b. Material
Manager
3.4 Proprietary items
a) General Manager Upto Rs. 10 lacs in each case
b) Material Manager Upto Rs. 50000/- in each case
c) Suptd. (purchase) Upto Rs.10000/- in each case

4. Purchase control at
controlled rates and
analyzed through public
sector agencies
including purchase
against DGS & D.
a. General Up to Rs. 10 lack in each case
Manager Upto Rs.2 lack in each case
b. Material Upto Rs. 50000/- in each case
Manager Full power for purchase of
c. Suptd. Naphtha
(Purchase)
d. General
Manager
5. Emergency Purchase
through personal inquiry
a. General Manager Upto Rs. 1 lac in each case
6. Cash Purchase
a. General Rs.2500/- on each case.
Manager Total not to exceed 3:5 lacs per
year

39
 Rs. 500/- in each case
b. Dy. Manager
7. Repair to Staff
Cars/Jeeps/Buses/Ambul
ance/Truck etc.
a. Manager (Maintenance) Full power total not to exceed
Rs. 4000/- per year for vehicle.
8. Nature of power
a. Supdt. (Mech. Services) Rs. 500/- in each case.
9.Purchase Commitments
(in excess of provision in
the annual budget)
a. General Manager Excess up to 20% of budget All such cases to be
allotment for the individual reported to M.D.
items provided and approved
budget main head is not exceed
by more than 5%
10. In absences of
provision in the annual
budget For items of petty nature Rs.
a) General manager 1000/- in each case provided
total sanction in the year would
not exceed is 10000/-
11. Amendment to These are subject to
purchase order & the overall. Limits
Contract given in 3 above.
11.1 where price is effected Full power
a. General Full power
Manager
b. Material
Manager
12. Where price is effected + 10% original contact/purchase Increased in

40
 a. General order price or Rs. 1 lac purchases
Manager whichever is more. order/contract value
to be allowed
+5% of the original contract Only this will not
b. Material (Purchase order for Rs. 5000/- cause the approval
Manager whichever is more) budget main head to
exceed by 5%
13. Signing of Purchase
Orders/Contract
a. General Manager Full powers within his delegated
powers and above Rs. 1 lac with
the approval of M.D.

b. Materials Manager Upto Rs. 50000/- in each case.

supdt.
(Purchase)
purchase officer

41
 Storage Control :

The Store has about 64,663 numbers of items, out of which about 2400
items are ‘ Stock Items ‘. The procurement action of stock items is initiated
by store. The store is spread over in 2 lakhs sq.mtrs. of space, out of which
12000 sq.mtrs is covered area. Normally working hours of store is general
shift hours. However, in case of shut down, emergency service of stores is
made available as requested by user department.

OBJECTIVE OF STORES

To render materials, services to the organization by receiving issuing the

materials, preserving the materials in custody, disposing the scrap/ surplus
materials. The objective is achieved through following function. Stores
function is basically a service function. The main functions of the stores are:

1) To receive all types of (Stock and Non-Stock) materials, to

arrange inspection of materials.
2) To keep materials safe custody, issue of materials to user
departments.
3) To initiate action for procurement of stock items, to keep in
custody and issue to user department.
4) Disposal of Non-moving item, surplus item, and scraps item.
5) Implement stores related policies and functions.
6) Coordinating with different sections for preparation of
capital/revenue budget.
7) Coordinating with other departments for stores related activities.
8) Vendor registration and evaluation for disposal.
9) Identification of different training needs of stores personnel.

42
 10) To maintain records/ files of all stores activities, issue
vouchers/ internal stores issue vouchers (ISIV), internal stores
receipt vouchers (ISRV), stock adjustment vouchers (SAV),
material exception reports (MER), claims/ dispatch advice etc.

For convenience in working, the department is divided into three sections

A) Receipt and Inspection Section

B) Custody and Issue Section, and
C) Disposal Section

 RECEIPT AND INSPECTION SECTION:

The consignment booked to the society is normally delivered to Stores

‘Receipt Section’ and procedure is following:

1. The person delivering the material in receipt section should

present the copy of Delivery Challan / Invoice or the supply with
details of Purchase Order mention thereon.

At the time of receiving the Material, the concerned staff will

inspect the package for assessing the condition of package. If the
package is in sound condition, a clear receipt is given but in case
of any observation for damage in packing specific remarks are
endorsed on the Challan / Invoice or Lorry Receipt.

2. Such material are kept in the area marked as material awaiting

inspection
3. Such materials are kept in the area marked as material awaiting
inspection.

43
4. The packing is opened and verified for the quantity received. Any
deviation will be recorded for communicating the same to the
supplier and material is shifted to area earmarked as “PENDING
FOR INSPECTION”.
5. SRV is raised for internal accounting indicating reference of the
consignment, number of items and quantity delivered against the
order with respect to the supplies.
6. Receipt Section will inform over telephone to the concerned user
to inspect the material.

7. The material will be offered for inspection to the concern user

department for conforming the quantity and quality of items, as
per PO Inspection Remark /Observation are recorded by the
Inspection Authority on the SRV.
8. a) After inspection, if the material is found of acceptable quality,
the same is recorded in SRV as ‘ACCEPTED’ by the person
inspecting the material. Indenter takes one copy of SRV with him.

b) Accepted material is handed over to Custody Section for

storage along with one copy of SRV.

c) Balance copies of SRV are distributed to Finance and Purchase

Dept.

9. After inspection if the materials rejected in part or full Material

Exception Report (MER) is prepared and sent to supplier with
Indenter, Finance & Purchase Dept., for further action.
10. If the shortage or damage is noticed than MER is prepared giving
details of shortage and damages.

44
  If the material covered under KRIBHCO open policy,

Stores prepare provisional claim given details of shortage/

damages and approximate value of claim and sent it to finance for
submission to underwriter. Finance & Account Department
prepares monthly claim and submit to insurance company.

 If insurance was under the scope of supplier,

Stores sent MER copy to supplier giving reason of shortage /

damage and rejections to enable him to lodge claim with
underwriter.

After taking material into custody then staff of Store Dep., User Dep., and
Purchase Dep. inspecting the material.

In exercising control on the quality of incoming materials, inspection plays

an important role. Materials purchased in India and abroad are inspected
according to specifications, prescribed tests, drawings, approved samples etc
as stipulated in the purchase order. To inspect different types of materials
following inspection methods are used.

INSPECTION:

(a) Inspection by third party:

Such agencies are EIL cloyed register, IBR; etc. acceptance of
material is based on the certificates and reports of these agencies.

(b) Inspection by indenting departments:

45
 At vendors premises during manufacturing of materials or before the
dispatch of the same the concerned officers of indenters carry out
such inspection.

(c) Materials test certificates:

The material may be inspected and accepted based on the
manufactures test certificates.

(d) Materials are inspected and accepted by carrying out chemical,

electrical or mechanical test either of the project site or through the
recognized lab as stipulated in the purchase order.
(e) Some materials like shop, cotton, waste, phenol etc are accepted by
visual inspection. Proprietary nature of materials are accepted by
either visual inspection or carrying necessary tests whenever required.
(f) Materials are also accepted after ascertaining the quality as per
samples on stipulated in the order.

AUTHRITY AND RESPONSIBLITY:

The authority of Receipt and Storage of all type of materials is centralized in

the store department except medicines and stationary. Issue will be made
only on receipt or presentation of authorized requisition.

Stores department is responsible to provide material (through stores issue

voucher) to the authorized requisition on demand, all material declared as
stock items and contained in the store catalogue as the desired and the
quantities requested for immediate use by them.

46
 CUSTODY AND ISSUE SECTION:

Main function of custody section is to codify the material. This section is

looking after following functions:

1. Codify all items with 9+1 digit code structure.

2. Receiving and Posting of “Accepted Material” against SRV
and storing at proper location.
3. Preservation of material during storage period.
4. ‘Stock Verification’ reconciliation and updating of stock with
management approval.
5. Issue of material to the user department / contractors as and
when required.
6. Maintenances of accounting for records of each transaction
7. Verification of ‘Material Statement’ for the material issued
against various ‘Work Order’.
8. Reservation of stock for various schemes.
9. Preparation of MPRs for “ Stock Control Items”.
10.Review and Fixing of ‘Stock Level’ for “Stock Control Item”.
11.Direct receipt of bulk material like Steel, Oil, Cement and
Stock Items to avoid double handling.

Procedure for Material Issue:

The issue system relates to function of issue card and inventory control
section of stores. It covers all material stocked by the KRIBHCO stores and
all bulk and raw materials directly stored by the users. It begins with the

47
preparation of issue voucher and ends with their submission to accounts
departments.

1. Materials are issued against SIV, format signed by authorized

persons.
2. SIV and type of transaction will be checked.
3. Quantity on hand and location of the items will be noted on the
SIV for respective item.
4. Quantity to be issued is decided based on type of material
required.

(a) If required material is “Stock Item”, then quantity is issued is

depending on stock available.
(b) If required material is “Non-stock item”, it can be issued fully.
(c) If required material is of ”Reserved material category” then
entire reserved material can be issued to that particular
department.

Procedure for Receiving the Accepted Material in Custody

Section:

1. The materials are received in custody section through two sources

mainly:

- From Receipt Section through SRV and,

- From User Department through ISRV (Material once drawn from

Stores and not consumed or replaced and repaired can be
returned to custody till it is further required for consumption.)

48
 2. Quantity mentioned in SRV/ ISRV is checked with quantity
received.
3. The material is shifted to its location as per codes.

 DISPOSAL SECTION:

Function of Disposal Section:

1. Receive Surplus material, Scrape, Wastages etc.

2. Ensure that such materials are properly located and stored for
fetching good price.
3. Coordinating the activities of declaring items as surplus, obsolete,
fixing of reserve price for their disposal and obtaining
management’s approval for their final disposal.
4. Initiating appropriate disposal actions through tender, public
auction or through govt. agency hired for disposal on behalf of the
company.
5. Preparation of status report for surplus, scrape material.

Some Definitions:

Non-moving Items: No transaction for last five years

Surplus Items: Non-moving Items declared as not required in near

future.

Scrape: Material declared as not useable in plant. This may be

generated during various processes of plant.

Purpose is to describe the steps involved in disposing of the item so that the
money blocked in such type of item can be released as soon as possible.

49
Procedure for disposal of scrap and Surplus Item:

1 Disposable material will be received from following sources,

a) Surplus inventory from Custody Section.

b) Scrap / Wastage From various user departments.

2 The committee is constituted for review either for its alternative use
or suggesting the disposable action with appropriate reserve price.
3 Approval will be obtained from the competent authority for disposal.
4 Consolidated list of disposable item shall be prepared and forwarded
to MSTC (Material Scrape Trading Corp.), agency appointed for
disposal of material.
5 M/s. MSTC will invite the tender on our behalf as per their laid down
procedure. Our representative shall attend the tender opening. M/s.
MSTC will prepare the QCS and recommend the vender to whom
disposal to be made for KRIBHCO approval. KRIBHCO will study
the proposal and if everything is in order, will get necessary approval
from competent authority for disposal. It shall be communicated to
M/s. MSTC who will issue Sale Order/ Delivery Order as per their
procedure.
6 M/s. MSTC will forward a copy of SO / DO to KRIBHCO.
7 Remittance of sale proceeds will be done by M/s. MSTC only other
receipts of such remittent, physical delivery of material would be
made.

50
8 On execution or completion of SO, statement of Accounts will be
forwarded by Stores to Account Section for final settlement of
Vendor’s account.
9 In certain cases, selling the customers, having valid license/certificate
from Pollution Control Board, will make disposal of hazardous
wastes. For such type of disposal permission will be sought from
PCB. Such wastes are:

- Used/ spent oil from plants,

- Used/ spent catalysts from plants,
- Used/ spent automobile batteries from workshop,
- Used/ spent nickel and cadium batteries from plant.

51
 STORES FLOW DIMAGRAM

Receiving of materials Return of rejected materials to

from vendors, contractors vendor & dispatch of material
& other units. for repairing

Receipt
Section

Return of material
-Inspection of material. MPR for stock
through ISRV
-SRV item to purchase
-Accepted material.

Issue of material to
Custody
Section User Dept.

Handing over surplus

Scrap from
material for disposal to The preservation
plants
Disposal sec. of material

Disposal
Section

Delivery of material sold

to a successful bidder
through MSTC

52
  Accounting Control

Inventories are the assets of a company and such as their valuation get
reflected in the balance sheet and profit and loss account. These can be
valued at actual, at the last price paid, on the basis of an average price,
current market price, and so on. A company may adopt a particular method
of inventory valuation, but it is obligatory to follow it for a minimum period
of three years. Any changeover to a new method requires the approval of the
board.
Inventories measured by money value usually constitute the major element
in the working capital of manufacturing companies. Only proper stores
accounting procedure can successfully achieve control of inventory.
A good system of stores accounting is found to be necessary for certain
other purposes like:
a) Preparation of accurate cost accounts

b) Evaluation of purchase performance

c) Working out important management ratio like sales to inventory,

consumption to inventory, purchase to inventory, inventory turnover

etc.
d) Preparation of materials budget

When a material is purchased, received, inspected, and placed in the

stores, an entry is made about the purchase through a Goods Receipt
Voucher. The entry for the quantity received is simple, but the entry for
the value of a purchase is a vexed problem because the value is the sum
of a number of items like:
a) Invoice price

b) Sales tax/ octroi

53
 c) Excise duty/ custom duty

d) Insurance

e) Freight, carriage, handling charges etc.

The goods receipt voucher is priced from the appropriate invoice and the
material account is debited in the stores ledger.

 Valuation of the Material Issue

The method of valuation followed KRIBHCO is the weighted average
pricing mechanism. In this method the total quantities and total costs are
considered, unlike simple average method where only total costs are
considered. This pricing mechanism is quite advantageous as the price is
fixed for a particular period say for one month and the system takes care of
price fluctuations.
Material requirement planning and vendor rating performance are another
two important techniques used in inventory management and control.
Preparation of Bin Cards
Bin card is ca quantitative stock ledger. It shows the on-line stock position.
Whatever any basic document relating to movement of stores (SIV, SRV,
SAV etc) is punched into system, automatic-posting goes into Bin-Card.

Pricing of Receipts (SRV)

The custody section sends SRV to finance for purpose of pricing. Finance
prices the SRV on the basis of terms and conditions of the purchase order
and bill of vendor. SRV for which bills are not received from the vendor are
valued provisionally at the month end. Preparing a SR amendment voucher
does adjustments for variation in value.

54
 Pricing of Issues (SIV)
Issues are valued on monthly weighted average basis. The issue of material
or spare will be valued at monthly weighted average method.
Preparation of Price Store Ledger (PSL)
The PSL is an item wise stores ledger. It shows both quantity and value.

SIGNIFICANCT ACCOUNTING POLICY FOR INVENTORY

VALUATION IN KRIBHCO

A. Store, Spares and Packing materials value at cost. Spare, which are,
repaired either departmentally or through agencies are taken into
inventory at a nominal cost of Rs.1/- each. Items of stores and spares,
which are surplus, slow and Non-moving, are valued of cost or net
realizable value.
B. Stock-in-process at the close of the year is valued at lower of cost or
net realizable value.

C. Finish stocks are valued at lower of cost or net realizable

For the purpose of cost, all expanses but excluding,
- Interest received on deposits;
- Past period expanses/ incomes, if any
- Income and expenditure relating to Ammonia Tank Wagons
- Loss/Profit on sales of assets
- Selling and distribution expanses
- Transportation cost up to warehouse

55
 - Head office expanses are consider for valuating stocks at Plant and
Warehouse.
D. Stock of Seeds, Chemicals, DAP and damaged goods are valued at
lower cost or net realizable value.
E. Tools issued, except each valuing less than Rs.1000/- are written off
over a period of three years and are stated at depreciated cost. Tools
issued each valuing less than Rs. 1000/- are written off the year
issued.

 Inventory Control Techniques:

Inventory control is a term that refers to control of all factors that affecting
the materials. It starts with obtaining materials and ends with consumption.
Material control is a systematic check over procurement, storage and
consumption of materials so as to ensure minimum wastage, even flow of
materials and minimum investment in inventory.
To know the practical use of various inventory control techniques in
KRIBHCO. Following Inventory control techniques were studied and
evaluated are:

1. Codification system

2. Classification of Inventory

3. Standardization

56
 Codification system in KRIBHCO

After grouping all items of stores, it will be convenient and useful to codify
each item of stores and give those a distinctive stores code number.

 Advantages of a good Coding system:

The principal advantages of a good coding system are as given:
1. Avoids repeated use of long descriptive titles
2. Accurately identifies all items
3. Prevents duplication of items
4. Helps in standardization and reduction of varieties
5. Forms a convenient basis for the sorting and recording of
documents
6. Simplifies mechanical recording
7. Simplifies pricing and costing
8. Useful in locating particular item in store house

Methods of Codification

The different types of codification systems are the following:

1. Alphabetical System:
In this system, letters are chosen to represent particular classes. Where
relatively few classifications are involved, this method can be used. In this
system code are so assigned as to permit easy memorization. For example:

57
Code Items

MSC Machine Screw Copper

MSB Machine Screw Brass

EFLS Electric Fan Large

Switch

EFSB Electric Fan Small

Bearings

2. Simple Numeric Sequence System:

In this system, the serial number is maintained in sequence. Each time a new
type of material is requires the next higher number in the sequence.

Code Items
101 1/8” Machine Screw 1”
102 1/4"
LongMachine Screw 1”
103 1/2"
Long X 10’ Galvanized
pipe

3. The numeric system:

This system is also called group system. In this system the first or basic
numbers indicate specific classes while subsequent digits describe sub-
classification. For instance the basic digits for machine blot may be 36, the
next two digits may be used to designate the diameter. Additional numbers
can indicate the length.

58
Code Items

36181 Machine Bolt, 1/8” dia. 1” Long

363815 Machine Bolt, 3/8” dia. 1.1/2”

Long

If the user of the code can remember that the basic digit 36 designate
machine bolts, the remainder of the code numbers can be easily remembered
as they are dimensions.

4. Decimal System:
In the decimal system, the numbers are so assigned that each digit represents
a sub-group or sub-account of the previous digit. For example, an
automobile manufacturer may assign the number 16 to an assembled wheel.
I in this case the following code numbers may be used to designate
component parts:
Code Item

16.1 Tyres/Tubes

16.11 Valve Stem

16.111 Valve

16.112 Va lve Caps

16.2 Brake Drum

16.3 Nuts

16.4 Discs

59
The main advantage of a decimal system is its capacity for accommodating
new items. Its main advantage is that it becomes cumbersome when a basic
unit may have many major sub-assemblies consisting of many minor
assemblies, which in turn may consists of numerous sub-assemblies.

5. The Block System:

The blocks of numbers are reserved for specify classification. For examples
block numbers 7500 – 7549 may be reserved for basic raw materials, 7600 –
7999 may be reserved for components, parts etc. the assigned numbers are
provided to accommodate subsequent expansion. Many times it happens
that this system lacks the logic behind assigning a particular block numbers
of an item.

6. Combination system:
This system consists of various combinations of numerical or decimal
system. For instances, a manufacturer using various grades and thickness is
of plywood may use the following:

Code Items

PW 181 Plywood 1/8” thick 1 st

Grade

PW 142 Plywood 1/4” thick 2 nd

Grade

PW 383 Plywood 3/8” thick 3 rd

Grade

60
CODIFICATION SYSTEM IN KRIBHCO:

Kribhco is using the nine-digit numerical code system. The tenth digit of
code is being generated by their mainframe computer which a check digit to
prevent duplication of code for a single item.

Out of nine digit code, the first two digits are used to codify the main group
and remaining digit is used to codify other parameters / specifications in that
main group. This main group, for the purpose of codification has been
divided into 01 to 99 for the nine-digit codification system. The same has
been elaborated in details below.

MAIN GROUP
CATEGORY
NO.

1. General stores 01 to 49

2. Electrical equipments and spares 51 to 63

3. Instrumentation equipments and spares 64 to 80

4. Mechanic al equipments & spares 81 to 99

61
GENERAL STORES ITEMS (01 to 49)
DIGITS

I II III IV V VI VI VIII IX

 
Main Group

 
Type/Sub Group

  Specifications/Material of

Construction/Thickness/

Other Details

   Size of Items/Units

EQUIPMENT & SPARES (51 to

DIGITS
63)

II III IV V VI VII VIII IX

I

x  Main Group

 Make/Type

x Type of

Equipment/Voltage/Plant

x Service Voltage/KW/HP

x x x
Spares/Rating/KW/HP


Specific Spares/Spares/Spare

Parts

62
 INSTRUMENTATION SPARES
DIGITS
(64 to 80)

II III IV V VI VII VIII IX

I

x  Main Group

 Make

x Type of Instrument

x X Units/Sub Assembly/Parts

x x X
Size/ Sr. no.

MECHANICAL EQUIPMENT
DIGITS
(81 to 99)

I I III IV V VI VI VIII IX

I I

 Main Group


 Plant Code

  Specification/Equipment/Size/Ra

ting

 Sub Assembly/Construction

   Spareparts/Sr.no.

63
REPAIRED & RETURNED ITEMS
DIGITS
(50)

II III IV V VI VII VIII IX

I

x  Main Group

 Plant

x Returning Department

x X Original Main Group

X x X
Size/ Sr. no.

Examples of codification system:

(A). Code no. 111010040 micrometer range 400 – 500mm
11 – Primary group – Tools.
1 – Type – Measuring and marking tools.
01 – Specific tools / Machine / Equipment micrometer.
0040 – Size / range – 400 to 500 mm.
(B). Code no. 130101250 MS angle 40 x 40 x 5mm. IS226
13 – Primary group – metal Ferrous.
01 – Type of section – Angle Equal.
01 – Units of material – Std. IS226.
250 – Size – 40 x 40 (Thick 5mm)
(C). Code no. 8200109048 Gen. Rotor high speed shaft 101 J
82 – Primary group – Compressors.
0 – Plant – Ammonia
01 – Specific Equipment – 101 J Air Compressors
09 – Sub Assembly – General Unit between L.P & H.P. Case.
04 – sr. No. – Spare item Sr. No.

64
EXAMPLE OF CHECK DIGIT GENERATION:

Code no. 832167851

The computer shall multiply first each digit of above Code no. by 9 i.e.
8 x 9, 3 x 9, 2 x 9, 1 x 9, 6 x 9, 7 x 9, 8 x 9, 5 x 9, 1 x 9
And then sum of each digit shall be added i.e.
= 72 + 27 + 18 + 9 + 54 + 63 + 72 + 45 + 9
= 369
11 will divide the total i.e.
369/11 = 6 is remainder; hence 11-6 = 5 shall be check digit.

The number of digits allotted to the groups in Kribhco codification system is

flexible except in case of main group the utilizations of balance seven digits
may slightly vary depending upon the requirements of materials in a
particular main group. However, the sequence of the main group remains
unaltered. For example, in general sub group follows consumable items,
main group and sub group by specification of materials, materials of
construction and it is followed by size etc. In case of items, other than
general consumables, the main groups followed by make or type of
equipment on plant, then voltage, rating or unit, sub assembly parts
construction size etc. As can be seen the general layout of the digits are
modified according to the requirements to explain the various characteristics
of the items under each primary group in KRIBHCO system. This system is
basically designed for manual working but subsequently has been adapted
on computer by some modification such as check digit addition etc.

65
The existing codification system has the following advantages:

(a) Avoidance of duplication of a code due to multiple names, long

description of the items and storing of the items under different
name is avoided,
(b) Accurate and logical identification,
(c) Reduction in clerical work,
(d) Standardization of items,
(e) Efficient recording and accounting, and
(f) Assure correct and efficient inspection.

LIST OF PRIMARY GROUPS

Primary Group Designation

01 Bearing

02 Coupling and mechanical seal ( V Belt)

03

04 Fasteners

05 Hardware ( other tha n fasteners)

06

07 Gaskets and packing

08

09 Welding material and equipment

10 Abrasives

11 Tools / NDT equipment

66
12 Metallic / Non -metallic hoses & Non -metallic pipe

fittings

13 Metal (Ferrous)

14 Metal (Non ferrous)

15 Pipe and Pipe fittings

16 Flanges I.B.R.

17 Valv es (other than control , Relief )

18 Tubes IBR

19 Pipe and Pipe fitting

20 Flanges – IBR / non IBR

21 Valves (other than control , Relief )

22 Tubes non IBR

23

24 Electrical general stores (other than cable)

25 Cable (p ower and control)

26

27 Instrument Control stores

28 Mechanical items

29 Chemical, catalyst and water treatment resins

30 Lab equipments

31 Pa ints, oil, lubricants, fuel and gases

32 Round rolled bars

33 Insulation and refractory

34

35 Fire fig hting & safety Equipment

36

67
37 Civil construction materials

38 Bag , bagging materials & containers

39

40

41 Liveries & protective clothing

42 Furniture , furnishing , canteen horticulture &

stationary

43

44

45 Medicine/medical items

46 Proj ect/new scheme items

47

48 Stationary and Related Items

49 Consumable stores (other than those included

elsewhere)

50 D.C. equipment (other than motors)

51 Motor Operated Valves

52

53 Generator

54 Flame proof LGT &ACC

55 Battery charger , Ups

56 Motors

57 M.C.C

58 Heat ing Elements

59 Switch gear

60

68
61 Telephone exchange items

62 Transformer

63 DCS/PLC/PC/DATA/OGR

64 Analyzers

65 Pneumatic instruments

66 Control valve

67

68 Flow instruments

69 Temperature instruments

70 Pressure instruments

71 Level instruments

72 Vibration instruments

73 Elect. Weighing inst.

74 Receiving stations

75 Electronic instruments

76 Field Instruments

77

78 Instrument electronics

79 Calibrating / WS Instruments

80 Relief valve / Repture disc.

81

82 Compressors, turbines, fans & blowers

83 Conveyors & Elevators

84

85 Exchanger and Spares

86 Engines

69
87 Furnace & boilers

88

89 Gear box (other than compressor gears)

90

91 Material handling equipments (other than

conveyors & elevator)

92 Mobile equipments & roll stock

93

94 Pumps & ejectors

95 Surplus items of coal handling

96 Pressure Vessels / Columns / Tower / Tanks &

Spares

97

98

99 Special equipment

70
 EXISTING CLASSIFICATION SYSTEM

The existing classification system is based on its use, i.e. inventories

classified as stock items and non-stock items. The existing system keeps
strict control on the item that is of recurring nature. It takes in to
consideration only the amount use of quantity not in value. While for non-
stock item low control is being kept. This system has following
shortcomings.

 The classification gives importance to only those items, which are

of recurring natures. It excludes from the control point of view the
items that are high value in stock.
 It considers the quantity used not the money value of the material
used.
 Control kept on stock items a give equal weightage to all items,
which neglects the benefit of selective control technique.

Considering the practical use of classification techniques, two important

methods are suggested as follow.
(1) ABC classification and
(2) VED classification

71
 ABC Inventory Control System

It is not desirable to keep the same degree of control on all items. That is
why to pay maximum attention to those items where value is the highest.
The firm should; therefore, classify inventory to identify which items should
receive the most effort in controlling. The firm should be selective in its
approach to control investment in various type of inventory. This analytical
approach is called the ABC analysis and tends to measure the significant of
each item of inventory in terms of its value. The high items are classified as
‘A items’ and would be under the tightest control. ‘C items’ represent
relatively least value and would be under simple control. ‘B items’ fall in
between these two categories and require reasonable attention of
management. The ABC analysis concentrates on important items and is also
known as control by importance and exception. A the items are classified in
the importance of their relatively value, this approach is also known as
proportional value analysis.
The following steps are involved in implementing the ABC analysis.
 Classify the items of inventory, determining the expected use in units
and the price per units for each items,
 Determining the total value of each item by multiplying the expected
units by its units price,
 Rank the items in accordance with the total value, giving first rank to
the item with highest total value and so on,
 Compute the ratios (percentage) of number of units of each items to
total units of all items and the ratios of total value of each item to total
value of all items,
 Combine items on the basis of their relative value to form three
categories – A, B, and C.

72
 The following data in table and figure illustrates the ABC analysis.
The tabular presentation and graphical presentation indicate that ‘Item A’
forms a minimum proportion, 34 % of total units of all items but represents
the high value, 70 % on the other hand, Item C represents 51% of the total
units and only 10% of the total value. Item B occupies the middle place.
Item A and B jointly represents 90% of the investment more than half of the
total units are Item C, representing merely 10% of the investment. Thus, a
tight control should be exercised on Item A in order to maximizing
profitability on the investment. In case of Item C simple control will be
sufficient.

Item Number of % Of Total Cumulative Total Cost % Of Total Cumulative

Code Items Items % (Rs. in Lakh) Cost %
82 5523 7.74 7.7 226,309,020 27.11 27.1
29 647 0.91 8.6 100,267,828 12.01 39.1
94 5124 7.18 15.8 53,426,401 6.40 45.5
66 3080 4.32 20.1 44,882,084 5.38 50.9
99 4230 5.93 26.1 41,841,258 5.01 55.9
19 2697 3.78 29.9 34,913,172 4.18 60.1
87 775 1.09 30.9 33,675,623 4.03 64.1
21 1193 1.67 32.6 25,021,514 3.00 67.1
63 940 1.32 A 33.9 21,532,100 2.58 69.7
95 1106 1.55 35.5 16,977,732 2.03 71.7
85 721 1.01 36.5 16,839,903 2.02 73.8
80 567 0.79 37.3 15,766,583 1.89 75.6
13 343 0.48 37.8 13,278,019 1.59 77.2
24 3187 4.47 42.2 12,575,502 1.51 78.7
92 4901 6.87 49.1 10,689,130 1.28 80.0
64 1187 1.66 50.8 9,960,242 1.19 81.2
96 694 0.97 51.8 8,725,704 1.05 82.3
2 1111 1.56 53.3 7,642,759 0.92 83.2
25 199 0.28 53.6 7,638,657 0.92 84.1
78 742 1.04 54.6 7,138,137 0.86 84.9
56 865 1.21 55.8 6,554,928 0.79 85.7
1 743 1.04 56.9 6,437,389 0.77 86.5
72 165 0.23 57.1 6,064,561 0.73 87.2
97 254 0.36 57.5 5,635,064 0.68 87.9
76 561 0.79 58.3 5,389,911 0.65 88.5

73
17 155 0.22 58.5 5,373,150 0.64 89.2
15 620 0.87 B 59.3 5,338,504 0.64 89.8
83 383 0.54 59.9 4,833,741 0.58 90.4
7 1020 1.43 61.3 4,828,236 0.58 91.0
75 659 0.92 62.2 4,517,305 0.54 91.5
65 269 0.38 62.6 4,049,367 0.49 92.0
71 449 0.63 63.2 3,990,338 0.48 92.5
20 531 0.74 64.0 3,871,128 0.46 93.0
33 137 0.19 64.2 3,869,231 0.46 93.4
91 503 0.71 64.9 3,387,996 0.41 93.8
55 917 1.29 66.2 3,093,044 0.37 94.2
4 1178 1.65 67.8 3,042,784 0.36 94.6
59 415 0.58 68.4 2,866,525 0.34 94.9
70 464 0.65 69.1 2,713,524 0.33 95.2
27 1037 1.45 70.5 2,655,391 0.32 95.5
74 433 0.61 71.1 2,650,374 0.32 95.9
49 309 0.43 71.5 2,530,223 0.30 96.2
11 3346 4.69 76.2 2,485,270 0.30 96.5
35 610 0.86 77.1 2,330,417 0.28 96.7
37 259 0.36 77.5 2,190,003 0.26 97.0
51 124 0.17 77.6 2,105,142 0.25 97.3
89 234 0.33 78.0 2,023,913 0.24 97.5
57 673 0.94 78.9 1,987,059 0.24 97.7
9 274 0.38 79.3 1,983,241 0.24 98.0
86 323 0.45 79.7 1,982,734 0.24 98.2
31 266 0.37 80.1 1,906,940 0.23 98.4
69 388 0.54 80.7 1,810,356 0.22 98.7
68 238 0.33 81.0 1,639,936 0.20 98.9
53 132 0.19 81.2 1,592,086 0.19 99.0
42 1717 2.41 83.6 1,422,376 0.17 99.2
14 64 0.09 83.7 1,397,721 0.17 99.4
62 194 0.27 83.9 1,234,185 0.15 99.5
38 8 0.01 84.0 978,834 0.12 99.7
30 1147 1.61 85.6 762,424 0.09 99.7
79 123 0.17 85.7 527,992 0.06 99.8
16 110 0.15 85.9 450,855 0.05 99.9
12 77 0.11 86.0 373,832 0.04 99.9
58 27 0.04 86.0 255,524 0.03 99.9
98 61 0.09 86.1 148,988 0.02 100.0
10 62 0.09 86.2 98,556 0.01 100.0
5 34 0.05 86.3 73,945 0.01 100.0
73 41 0.06 86.3 71,639 0.01 100.0
88 192 0.27 86.6 50,024 0.01 100.0
54 50 0.07 86.7 44,886 0.01 100.0
47 614 0.86 87.5 39,105 0.00 100.0

74
 22 1 0.00 87.5 0 0.00 100.0
28 3 0.00 87.5 0 0.00 100.0
40 1 0.00 87.5 0 0.00 100.0
41 75 0.11 87.6 0 0.00 100.0
45 4825 6.76 94.4 0 0.00 100.0
46 3 0.00 94.4 0 0.00 100.0
48 3426 4.80 99.2 0 0.00 100.0
50 194 0.27 99.5 0 0.00 100.0
61 3 0.00 99.5 0 0.00 100.0
90 371 0.52 100.0 0 0.00 100.0
93 1 0.00 C 100.0 0 0.00 100.0
TOTAL 71325 100 834,762,064 100

ABC analysis
110.0

100.0
e 90.0
lu
a
V 80.0
l
a
t
o 70.0
T
f
o 60.0
%
e 50.0
v
it
a
l 40.0
u Cumulative %
m
u 30.0
C
20.0

10.0

0.0
0 10 20 30 40 50 60 70 80 90 100 110
Cumulative % of Total Items

75
 ADVANTAGE OF ABC CLASSIFICATION:

This approach helps the material manager to exercise selective control and
focus his attention only on a few items, when he is dealing with lakhs of
store items. Concentrating on all items it is likely to have diffused effect
irrespective of the priorities. It provides a sound basis on which to allocate
resources and time of personnel with respect to their importance of the
individual items.

For control purpose, in Kribhco the total inventory has been classified into
ABC classes. They exercise control over these classes as their relative value
proportion in ABC classes to avail the benefits of selective control. They
don’t have the exact classification as we have in analysis. But they know
which item should have maximum attention and which should minimum,
after experience and regular review of inventory.

 PURPOSE OF ABC CLASSIFICATION

The object of carrying out ABC classification is to develop policy

guidelines for selective control. Normally, once A.B.C. classification has
been done the following broad policy guidelines can be established in
respect of each category.

76
 Guideline to Control Inventory under ABC Classification

Sr.no. A-ITEMS B-ITEMS C-ITEMS

1. Very strict control Moderate control Least control

2. No safety stock or Low safety stock High safety stock

low safety stock

3. Purchase based Purchase based Purchase based on

on exact on exact exact estimation

requirement requirement

4. Close check on Reasonable Little check

physical stocks ch ecking

5. Develop as many Two or more Two reliable

sources as Reliable resources

possible resources

6. Maximum efforts Moderate efforts Minimum efforts to

to reduce lead - to reduce lead - reduce lead -time

time time

 VED Classification

The VED classification is applicable largely to spare parts. Stocking of

spare parts will be based on strategies different from those for raw materials,
because their consumption pattern is different; while the consumption of
raw materials depends directly on the market demand of production while
the demand for spare parts depends on the performance of the plant and
machinery. Therefore, the method of classification designed for one type of
inventory will not be compatible for selective control of another type of
inventory to over come this draw back the VED classification is used.

77
Spares are classified as vital, essential and desirable. This implies that V
(vital) classes of spares have to be stocked adequately to ensure the
operation of the pant, because by definition the non-availability of vital
spares can cause havoc and stop the wheels of the organization. Some risk
can be taken in the case of E (essential) class of spares. Stocking of D
(desirable) spares can be even done if the lead-time for their procurement is
law. It is essential that those in charge of the maintenance of the plant do by
technical department or this classification. This classification will be very
useful to KRIBHCO if it is implemented.
Moreover, ABC and VED classification can be a combined advantage, in
order to control the stocking of spare parts. The control action for the class
AV, BE, CD, etc are given in following table.

V Item E Item D Item

CLASSES

A Items Constant Moderate stock Nil stock

control &

regular follow

up

B Items M oderate stock Moderate stock Very low

stock

C Items High Stocks Moderate stock Low stock

78
 Composition of Total Inventory

Group Rs. Percentage

(%)
General Stores (01 to 49)
238,615,997.30 28.72
Loose Tools
2,485,269.93 0.30
Steel
14,675,739.14 1.77
General items (01 to 49)
255,777,006. 37 30.79
Electrical Spares (51 to
63) 19,703,379.19 2.37
Instrumentation Spares
(64 to 80) 116,935,866.30 14.07
Mechanical Spares (81 to
90) 438,361,542.64 52.76
Others
50,023.81 0.01
Insurance Spares (51 to
99) 575,050,811.94 69.21
Total Inventory
830,827,818.31 100.00

In v e n to ry C o m p o s itio n

o th e r s
0%
G e n e ra l
S to r e s (0 1 to
49)
29%

L o o s e T o o ls
M e c h a n ic a l 0%
S p a r e s (8 1 to
90)
53% S te e l
2%

E le c tr i c a l
S p a r e s (5 1 to
In s tr u m e n ta ti o 63)
n S p a r e s (6 4 2%
to 8 0 )
14%

79
 Analysis of Inventory Composition

As we can see from the chart Mechanical Spares form a large part of the
total inventory it is about 53% of total inventory. Thus it is a matter of great
concern for the management to reduce its level. It is also necessary for them
to manage this group very effectively and efficiently. The second largest
group is general stores. These items are major falls in B class

 Standardization

A standard is a norm or a model or a general agreement of a rule

established by authority, consensus or custom, created and used by various
levels of interest. The object of standard is to bring about uniformity in a
certain sphere to create a certain habit, pattern, system or rule.
Standardization is the process of defining as to what would be the norm.
One of the reasons for high inventory in a large number of organizations is
that they keep large number of items under stock having very little variation
in dimension, quality or functional effectiveness. It, therefore becomes
necessary for the organization to resort to standardization thereby reducing
varieties without much affecting the performance and thereby reduction in
inventory.

80
The process of standardization logically leads to simplification or variety
reduction which implies reducing unnecessary varieties and standardizing
the most economical sizes, shapes, colors, types and so on. Fewer the items
to be controlled, the simpler and more efficient is the materials management
process.

One of the main advantages that accrue from codifying materials in stock is
that once immediately notices a large variety of materials similar to one
other. Standard parts are those, which can be used, in different products.
Examples of standard parts are ball and roller bearings, bolts, nuts; screws
etc. as far as possible, standard parts should be used as they are more readily
available and are usually cheaper.

Example of Standardization

There are varieties of blue paints such as sky blue, azure blue, deep sea blue
and so on, but we have to standardize one shade for its purposes unless a
variation is really necessary.
It is suggested that KRIBHCO should follow the standardization technique
to gain above said benefits.

81
 SUGGESTIONS
Considering the entire situation discussed above following points should be
taken in to consideration for the effective Inventory Management.

 First taking into consideration the purchase control of KRIBHCO,

they should introduce Vender Performance Rating system for vendor
development and to spot out good reliable source of supply.
 As I have visited the dockyard, where the most of the scrape,
wastages, and obsolete items are being stored, it is necessary for them
to reduce the disposable items and should make cash out of it as soon
as possible.
 Their codification system is really good but as far as main group is
concerned. They should modify the system as such that it can
accommodate more main group, if the necessity arises. E.g. main
group101 for newly invented spare part.
 In addition to ABC classification, they should introduce other widely
used classification systems also so as to have greater control over
inventories like VED analysis and FSN analysis.
 The production planning should be done according to the demand so
that there should not be over stock during off-season and stock out
during the season.
 The investment in stores and spare parts Inventory should be kept as
law as possible, considering demand of stores and spare parts.
 Optimum planning should be maintained in transportation to reduce
storage of finished product (Urea), which reduces warehousing cost.
 Reduction in material handling as far as possible.

82
 Conclusion

The inventory of Kribhco is about 6-7% of the total assets. Hence it is

requires the due attention. As stated earlier the main inventory of
KRIBHCO is Mechanical Spares, which are proprietary type of items in
most of the cases. These items are costly and having one or two sources of
supply. The management is now more focused on reducing the level of
mechanical pares.

The inventory of stores and spares has more than 6000 items and are being
managed by material/purchase department. Because of the use of
codification and computerization the management of these inventories is
carried out very well. Codification helps in identification of an item and in
standardization, where as computerization assists in carrying out various
inventory related analysis and identifying non-moving items.
As they have already established standards of levels for some items and for
other items they have like a fluctuating level system supported by computer
technology, which updates levels whenever new price for a material is
entered into system. That is why it can be said that they have scientific ways
to manage inventory properly with the help of scientific inventory
management control system.

83
 Bibliography

 C.R. Kothari, Research Methodology, Wishwa Prakashan, 2nd Edi.

New Delhi.

 Other references:
o Pandey I. M., Fundamentals of Financial Management
o Prasnna Chandra, Financial Management

 Financial Reports of KRIBHCO, Year 2006-07, 2007-08

 Website: http:/www.kribhco.com
http:/www.kribhco.net
http:/www.kribhco.org

84