CHAPTER - 7

INVENTORY MANAGEMENT IN
STEEL AUTHORITY OF INDIA LTD.
 COITERTS

IRVERTORT IR SAIL

Page No.

1. Introduction 170

2. The Size of Inventory 173

3. Adequacy of Aggregate Inventory 173

4. Adequacy of Coaponents of Inventory 176

5. Some Logicl Inferences 177

6. A Comparative Study of Inventory 180

Management in SAIL & TISCO

7. Analysis of SAIL's Inventory Categorywise 185

8. Ran Materials Inventories 185

9. Inventory of Stores and Spares 187

10. The Generalised Control Model 187

11. Inventory Control System 188

12. Standardisation 189

13. Risk Insurance Spares 192

14. Other issues and Stores and Spares 194

15. Inventory of Hork-in Progress 200

16. Inventory of Semi-Finished and Finised sotres 200

17. Factors Affecting Finished Inventories 201

18. Infrastructural Inadequacies Leading 203

to High Inventory

19. Shift Road Movement 203

20. Movement through Coastal Routes 203

. & Hater Hays.

21. Mixing Yards 204

22. Creation of Second and Third Tier 204

Distribution

23. Reference 206

 CHAPTER- 7

IIVEHTGKY HAIAGEHEIT II SAIL

7.1.0 Introduction

7.1.1 Inventories in Steel Authority of India (SAIL)/Hindustan

Steel Company CHSL) as a problea is recognised quite late.The

first consciousness cane about the high inventory in 1967 and as

a result the then Deputy Chairman of HSL constituted a committee

on 6th January 1968(1) to examine the entire question of

spares,to classify the existing spares according to their usage,

to lay down stock limits and reorder levels of fast moving and

slow moving spares and to suggest, ways and means for disposal of

surplus items. The Committee was headed by D.S Kakra and all the

plants were represented in the Committee. In the summary of

recommendations,the Committee brought out catalogueing,

standardisation and tried to reassess the requirement of spares.

The plants tried to implement these recommendations, but the

results achieved were not satisfactory and as a result there was

rising trend in the inventory.

7.1.2 The Committee of Public Undertakings,in its first

report on H.SL in 1971-72, pointed out that while wellknown

techniques of inventory management are being inreasingly applied

in .the different plants, inventories continue to build up in

stores and spares, rolls and refractories (2). As a result, a

task force meeting was held on 25th and 26th April 1972 where

Secretary, Ministry of Steel expressed great concern about this.

170
Bi.th a view to focus attention on this urgent problem, a two-day

seminar was conducted at Management Training Institute, Ranchi,on

5th and 6th June 1972. Study groups had been formed to make an

indepth study of this huge build up of inventories in HSL plants

in 1970-71. The report was submitted in September 1972 and a team

of HSL Officers visited Tata Iron & Steel Company (TISCO) to

study the steps taken by them for inventory control. The report

was also submitted towards the end of 1972.

7.1.3 A similar endeavour was continued by Hanagment Training

Institute, a seminar on Inventory Control'in Steel Industry was

organised on November 5-6,1975 (3) and subsquently a followup

seminar on Inventory control was conducted on December 16-

17,1976. (4) The problem of inventory in spares/stores and other

consumables had been discussed in these seminars at great length,

but no appreciable reduction in inventory was visible later in

the steel plants. In between,different committees were also

formed to study and to develop guidlines. Interplant

standardisations were started, and thus certain directions were

given to the process of inventory reduction. Later on the system

of reviewing the inventory position at the offices of the

Chairman and Secretary, Ministry of Steel every month was

started. As a result of this total endeavour right from the top,

the inventory showed a downward trend. The inventory figures over

the years are given in table 7.1 (5)

7.1.4 In this chapter we have analysed the trends in

inventory level and calculated the excess inventory holding in

absolute term. In order to make the analysis meaningful and

171
 IClosing Stock in
Consumption

Mi 11 ion)l (Months)

to

11,75

12.54
12,94

10.50
Months

16.14
34,82
CD a-H
g t- CD K
CO t- If? G
CO co CO

Source: Coapiled from Public Enterprises’Surveys for different years.

!

!
!

!
!

1
Consuaption IClosing

ar
17075,2

16495.0

11245.9 19838.7
Million) ICRs.in

CD G t GO a-H
spares

Stock

♦
o O H CM G t- GO
CO lO a—* U> G CM O
a-H a-H co r- CD CM CM
CO r- (0 CD CO CO
1

1
i

1
'
¥«ar wise Inventory of SAIL

4
,

to t*** tO
%

2196.7

CM r4
6800.0 aH

to <0 to
Stores

CD CM CD
O t-
CRs. In

CM CO a-4 CM t-
to CO CO o O 00 o
CM CM CM UD CD c*- o
a-H
!

!
I

1
1 *H
c
! j c
1 O
1 oC
i1 -u o
W .rf 1# ~
I a? x m
to o h-
1-42
1*24

1 t® Q.+J X t- CO M" CM
i C m c to t-~ cO to CM aH
1 “i o c
i wm s o a-H a-H H a-H a-H a-H a-H
IOC X
M | —• O C
-'too*-1
1

!
!

:
Raw natria

Consuaption Closing stockl

to
mill ion

2174.9

CM ** lO G co CD, a-H |
a i
CRs. In

CM c-H CM CD CD Oi as CM |
CO t- r- CO a-H cO a CO |
CO o H CM to CD <0 CD |
a-4 a-H a—H a-H a-H aH CM |
!
1

1
i
million

I17038.fi
1985-861113757,9

1986-871115822.7

G CM J
CRs. In

CO CD CM CD # a |
» G a-H •M- j
•

to a-H G G a-H 1/5 |

CD CO a- CO CO |
CD CO CD <D CM |
ID CD G ar-H CM CM j
!
}

*
l
*

l
i
t

to
---------------------- !

a-H CM cO <■ 00 CD O 1
CD to CO GO CO O0 <D as i
i t 1 1 1 1 i i
Year

O a-» CM tO •Hf t> CD as i

CO CO cO CO CD 00 CD G |
0) CD CD CD CD Ck 0) as i
a-H a—i a-H a-H a-H aH a-H j
authentic, comparisons have been Bade with suggested norms of

various Committees.Lastly, a comparison has also been made with

the performances related to inventory management of Tata Iron &

Steel Company (TISCO),which is an integrated giant steel plant in

the private sector." He have extensive informal discussion with

people at different .levels and have tried to pinpoint several

areas of improvement, which if achieved will help in reducing the

inventory level and thus increasing the profitability of SAIL,

other factors remaining constant.

7.2.0 The size of Inventory

7.2.1 The agreegate and componentwise inventory of SAIL has

been given in Table 7.2

7,3*° Of aggregate Inventory

7.3.1 Inorder to determine the adequacy of aggregate

inventory, Table 7.3 has been constructed.The value of total

inventory has been analysed as percentage of cost of sales and

the total inventories have been calculated in terms of number of

days of cost of sales.The turnover ratios have also been

calculated yearwise. From the table it may be concluded that the

inventory was pretty high towards the early eightys, but from

1983-84 onward when even Chairman and Secretary, Ministry of

Steel started reviewing the inventory leve.l every month, the

position started improving and in 1988-89, it was by far the best

having 129 days inventory and the turnover ratio of 2.8

7.3.2 It may be observed also that in absolute terms,the

volume of inventory was showing an increasing trend. ■<

173
 Aggregate & Componentwise inventory of SAIL

Year Cost of Consumption o f! In v en tories

S a les R /fl,S to rs &

s
re
BZ
i
spares IStores ! T otal ! M
IP .'Finished ! Total

O
4-4
OS
! 1

2?
1 !
M ateria ! Goods
! sto r e s &
! spares !

CO
CD
o
00

v-4
4
CO
H
05
CM
I
CO
05
CO
CM
CM

CD
en
CM
CD
20407.

e'­
5663.8 1476.6 4340.

o.
12312.6

CM
•Mh
CD
co
CM
vH
•M*
05
CM
r-

ro
CD
^r
in
1981-82!

CO
CD
CO
oo
O
1679.4 1071. 9222. 16102/7

1
05
00

oo
CM
CO
CO
o
CD

o
O
C'-
CM
05
CO
CD
*M*
r-
oo
CM
CO
o
CO
17496. 6376.4 1412. 9574. 18297.7

*-4
CO
CD
CO
CO
CO
*<*
CO
CM
CM
132147.

CO
o

in
CD
6442.3 632.9 1179. 8254. 7235. 15490.1

'M*
05
T—4
05
o
CO
CM
in
1984-85! 136425.

o
00
CO
CD
CD
o
CO

5997.8 754.6 1287. 6901. 14941.5

.... 1
1. ..

i
co
-r-4
in
05
oo
v—4
co

CO
05
in
V~l
’M*
in
o

in
in

20417. 5751.6 743.4 1516. 8011. 7714. 157 26.0

O
CM
O
4
CO
CM
O
CD
CD
O
•M-
0*969

co
CO
CM
05
1986-87! 41331.

OO
CM
o
*M*

1639. 8996. 17662.7

1

o
03
co
03
o
w—1
CD

CD
05
05
'M-
O
05
CD

in
o

1987-88! 22382. 7429.8 798.0 9927. 19222.4

.
..
.. . .. ... 1

CD
CO
CD
r4
05
o
00
o
oo
CM
CM
r-
03
o

*^
in

1988-89! 28958. 10383. 11554. 21937.5

OO
05
05
o
C-~
CD
*■«**

05
O
GD
o

"M*
vH
CO
o
o

32746. 9838.7 2932. 12770. 12463. 27837.8

Source : C oapiled from P u b lic E n te r p r ise s ’ Surveyes of d iffe r e n t y ea rs.

 Table 7.3

Analysis of aggregate inventory of SAIL

Year ! Rs.in aillion iInventories!No of days ITurnover

; ------------------ ;as % 0f cos! inventories [Ratio
! Cost of ! Volun of !of sales !(in terns of I
! sales ! inventories! !days of cost!
! ! ! !of sa1es.)!

1980-81 20407.8 12312.6 60.33 220 1.7

1981-82 24198.Z 16102.7 66.55 243 1.5

1982-83 30006.7 18297.7 60.98 223 1.6

1983-84 32147.8 15490.1 48.18 176 2.1

1984-85 36425.4 14941.5 41.02 150 2.4

1985-86 41815.9 15726.0 37.61 137 2.7

1986-87 41331.0 17662.7 42.73 156 2.3

1987-88 49089.0 19222.4 39.16 143 2.6

1988-89 61869.1 21937.5 35.46 129 2.8

1989-90 70976.4 27837.8 39.22 143 2.5

175
Simultaneously if we look at the cost of sales figures those are

also on the continuous rise, barring 1986-87.Turnover being the

ratio and since the consumption cost and value of inventory both

were rising high it is difficult to conclude that inventory

management was improved towards late eighties.

7.4.0 Adequacy of components of inventory

7.4.1 Inorder to specify the areas of inadequacy the volume

of inventories are broken down in 2 parts.

* Inventory of Rawmaterial,Stores & Spares and

* Inventory of finished and semifinished goods.

Turnover ratio in terms of number of days are calculated in table

7.4 in the following two categories

* Inventory of Raw materials, stores and spares as

the number of days consumption of Raw-materials,

- stores & spares.

* Inventory of finished and semifinished goods as

the number of days cost of sales.

It is obvious from the figures that the inventory levels in

"Stores" and Stock yards" were high during early eighties,but

some amount of improvement was visible in turnover ratios.But the

genuineness of these improvements may be doubted because cost of

sales had steadily increased barring the year 1986-87. Similarly

consumption of raw materials,stores and spares also increased

over steadily the years excepting the year 1983-84.Since the cost

of sales and the consumption of raw materials,stores and spares

figures are used in the denominator for determining the turnover

ratios,with steady increase in denominator in comparison with the

the numerator, the turnover ratios may appear improved.

175
 Table 7.4

Analysis of Components of Inventories

Year 8s.in Billion Turnover Ratio in tens

of number of days
Cost of Consumption 1 Inventories of 1
sales of R/H stores ll .. .
and spares !R/H Stores! Finished!R/H Stores &! Finished goods
!& Spares ! goods !spares to !Inventories to
l1 11 Iconsumption •Icost of sales
tl 11 ! (4:3)x365 !(5:2)x365

1980-81 20407.8 11923.9 7972.6 4340.0 244 78

1981-82 24198.2 14924.9 9222.3 6880.4 226 104

1982-83 30006.7 17496.2 8723.4 9574.3 182 116

1983-84 32147.8 14622.7 8254.5 7235.6 206 82

1984-85 36425.4 19903.2 8039.9 6901.6 147 69

1985-86 41815.9 20417.4 8011.5 7714.5 143 67

1986-87 41331.0 20413.2 8666.3 8996.4 155 79

1987-88 49089.0 22382.1 10167.8 9054.6 166 67

1988-89 61869.1 28958.4 10383.0 11554.5 131 68

1989-90 70976.4 32746.4 12770.8 12463.0 142 64

Source: Compiled from Public Enterprises’Surveys of different years.

7.5.0 So«e Logical Inferences

7.5.1 One logical inference may be reached that the turnover

ratios do not help us in drawing conclusions about the adequacy

or otherwise of the inventory level. Bith the passage of time

there will be deterioration of machine conditions. As a result,

consumption of raw materials,stores and spares obviously

increases. Again with the inflationary trend'of our economy,even

with same physical consumption,va1ue may be increased. The

turnover ratio, to some extent, takes care of the growth in

177
value,but we cannot conclude that the inventory level is

adequate. If we can determine the optimum inventory level, then

only we may conclude confidently how far we are away from the

ideal inventory level.

7.5.2 The determination of ideal inventory nay help us in one

more area also. If we calculate the consuaption budget, the

inventory at the end of the year nay also be forcasted and

effective control measures can be established,since the targets

are then known in absolute terms.

7.5.3 The methodology for determining the ideal inventory has

already been explained in chapter 6. Be have calculated the

excess inventory holding by the same method and the figures for

the period 1980-61 to 1989-90 have been given in Table 7.5

Table 7.5

Excess Inventory Holding _Rs.in million

lActual Inventory of {Calculated Inventory of{Excess Inventory Holding

i .. 1 ... ... .. . . . . . . . . . . l
i

Year 1R/H,Stores IFinished {R/H,Stores IFinished !R/fl, Stores ■Finished

!8t Spares Igoods !& Spares 'goods {& Spares ! goods

1980-81 7972.6 4340.0 6698.7 4340.0 1273. 9 -

1981-82 9222.3 6880.4 7502.5 4730.6 1719. 8 2149.6

1982-83 8723.4 9574.3 8105.4 5251.4 618. 0 4322.9

1983-84 8254.5 7235.6 7435.6 5468.4 818. 9 1767.2

1984-85 8039.9 6901.6 8641,3 5772.2 (->601. 4 1129.4

1985-86 8011.5 7714.5 8775.3 6206.2 (-)763. 8 1508.3

1986-87 8666.3 8996.4 8775.3 6162.8 (-)109. 0 2833.6

1987-88 10167.8 9054.6 9177.2 6770.4 990. 0 2284.2

1988-89 10383.0 11554.5 10383.0 7595.0 - 3959.5

1989-90 12770.8 12463.0 11186.8 8072.4 1583.97 4390.6

1-78
 The excess inventory holding for the finished goods have been

calculated - taking base inventory at the year 1980-81 which we

presuaed to be achievable minimum. While calculating the excess

inventory holding for the component raw materials,stores and

spares we found that in terms of consumption figures, the

inventory holding was for 244 days’consumption. Since the figure

is very high, the year 1988-89, where the inventory holding was

for 131 days, has been taken an achievable minimum. Taking the

factor of growth over 8 years,the corresponding inventory for the

year 1980-81 has- been calculated as 6698.7. Now with this figure

the calculated inventory for raw materials,stores and spares for

all other years have also been calculated. While calculating the

excess inventory holding for raw materials,stores and spares the

negative figures are indicated in a number of placets.This

indicates that the achievable minimum what we had presuaed was

still higher and there was possibility for further reduction of

the same. In 1985-86 values are considerd as achievable minimum,

the calculated inventories could have been further reduced. Of

course, it cannot be said that the calculated inventories are

optimum inventories, but these are achievable inventories, So, if

we take calculated inventories as our target inventories, lot of

savings might have been achieved. Knowing the total consumption

budget and calculating the closing inventory, we may calculate

the purchase budget as:

"Calculated Closing Inventory + Consuap.Budget - Opening Inventory”

Similarly the production plan may be drawn as:

"Calculated Closing Inventory + Sales Plan-Opening Inventory"(FG).

Now the aggregate purchase plan and production plan may then be

179
judicously broken down into departmental plans or periodic

plans.At the control stage also, since real time controls are

possible now with computers,inventory levels can be maintained at

desired levels. At the item level OR models may be used in

determining reorder level or economic order quantities.

7.6.0 A comparative study of Inventory

management in SAIL I. TISCO.

7.6.1 In order- to have a meaningful comparision of the

inventory management of SAIL and TISCO, the aggregate inventory

of TISCO (6) has been compiled in Table 7.6 in the same form as

has been compiled for SAIL in Table 7.3.

Table 7.6

Analysis of Aggregate Inventory of TISCO

Rs.in mill ion

Year Cost of IVolum of !Invento­ !No of days i.e ITunover

Sa-les 1invento- ries as ! inventories !Ratio
l
! ries jXage of ! in terms of 1
l
l ! Cost of ! days cost 1
1
t i
1 ! Sales of sales 1

1980-81 4361.7 1690.3 38.75 141 2.6

1981-82 5936.4 2298.9 38.73 141 2.6

1982-83 6364.2 2188.3 34.38 125 2.9

1983-84 7864.8 2325.4 29.57 108 3.4

1984-85 8885.0 -2415.9 27.19 99 3.7

1985-86 10368.5 3461.5 33.39 122 3.0

1986-87 12146.7 3740.5 30.79 112 3.2

1987-88 12913.1 3976.4 30.79 112 3.2

1988-89 11979.3 4239.1 35.39 129 2.8

1989-90 13695.1 5207.5 38.02 139 2.6

Figures compiled from the Annual reports of TISCO

180
The yearwise comparative figures for SAIL and TJSCO have been

given in Table 7.7

Table 7.7

Year wise comparative figures of SAIL & TISCO

SAIL i T1SC0
Year i

Inventory Inventory as ! Turnover 1 Inventory 1Inventory Turnover

as X of no,of days ! Ratio las %age of las no. of Ratio
cost of cost of sales icost of Idays of
i
sales 1sa1es Icost of
i i
1sa1es

1960-61 60.33 . 220 1.7 38.75 141 2.6

1981-92 66.55 243 1.5 38.73 141 2.6

1982-83 60.98 223 1.6 34.38 125 2.9

1983-84 48.18 176 2.1 29.57 108 3.4

1984-85 41.02 150 2.4 27.19 99 3.7

1985-86 37.61 137 2.7 33.39 122 3.0

1986-87 42.73 156 2.3 30.79 112 3.2

1987-88 39.16 143 2.6 30.79 112 3.2

1988-89 35.46 129 2.8 35.39 129 2.8

1989-90 39.22 143 2.5 38.02 139 2.6

Figures compiled from Tables 7.3 and 7.6

IS

ini.

rat rat

Igjii
—t- ■ 3f 44g
7.6.2 The figures in Table 7.7 suggest that inventory

management of T1SC0 is better than that of SAIL. But TISCO

enjoys certain advantages which Bight have a favourable iapact on

inventory management.For example, in the Raw material area TISCO

has got its captive col 1ieries,which SAIL does not have, barring

only a few for IISCO. Again TISCO’s growth shop at Adityapur

gives a good support for manufacturing spares and SAIL's growth

shop has not yet come to that level. Obviously, these will have

impact on the differences in the levels of inventory. So let us

conpare TISCO’s inventory for finished and semi-finished goods

with that of SAIL,which also is an important component in the

total Inventory. The year-wise comparative figures for SAIL and

TISCO have been given in Table 7.8.

182
 Comparative study of excess Inventory Bolding in finished
and semifinished inventory of SAIL and TISCO

I !
00SI1
SAIL
!
t !

Year ICost of IFinished and 1

IFinished and Excess IFinished and 1
IFinished and Excess
'Sajes

O tQ
o m
ISemifinished

IQ —
-P CD
o IQ
ISemifInished !Inventory ISemifinished 'Semifinished !Inventory
IGoods Inven­ IGoods Inven­ IHolding ■Goods Inven­ ■Goods Inven­ IHolding
«
tory Actual tory Actual 1
tory Actual tory Actual l

i
1
1

CO
o
o
’■**
1980-81 20407.8 4340.0 4361.7 678.6

1981-82
1

24198.2 6880.4 4730.6 2149.6 5936.4 • 1127.5 1127.5

(45.5)

CO
o
o
o
r-•
<0
1982-83 9574.3 5251.4

o
CO
4322.9 6364.2 1167.9 (- ) 37.5
(82.3) (3.21)

1983-84 32147.8 7235.6 5468.4 1767.2 7864.8 1111.6 1296.6 (- ) 189

(32.3) (14.9)
9*1069
1984-85 36425.4 5772.2
CO
CO
r-

1129.4
to
•

8885.0 1156.8 1692.5 (-

co
.-■
•
CO

(19.6)
lo

1985-86

v-4
o
CO
co
41815.9

<o
7714.5 in
CO
CO
00

6206.2 1508.3 1491.1 277.7

(24.3) (18.62)

1986-87 91331.0 8996.4 6162.8 2833.6 12146.7 1828.9 1616.5 212.4

(46.0) (13.14)

1987-88 49089.0 9054.6 6770.4 2284.2 12913.1 1929.7 1670.4 259.3

(33.7) ' (15.52)
1988-89 61869.1 11554.5 7595;0 3959.5 11979.3 2032.9
CO

1599.1
(52.1)
*
co• co
co r-
•<!- CNl
-r-4

1989-90 70976.4 12463.0 8072.4 4390.6 13695.1 2513.3 1711.6 801.7

(54.4X) (46.8)

Figures compiled from Tables 7.4, 7.5, 7.6, b 7.7 and calculated the
.figures within parenthesis indicate the excess inventory in percentage.
7.6.3 In Table 7.8,the excess inventory holding has also been

calculated in the sane nay as given in chapter 6. While

calculating the figures for TISCO the achievable niniHum

invenventory has been taken for the year 1981-82, because the

finished and semifinished goods inventory for the year 1980-81

appeared to be very low. The excess inventory holding figures

given within parenthesis indicate that TISCO’s finished goods

inventory management is better than that of SAIL.

7.6.4 The excess inventory holding figures expresed in

percentage in 1989-90 for SAIL shows 54.4X and for TISCO shows

46.8* . Similarly for 1988-89 for SAIL it shows 52.1* and for

TISCO it is 27.13X . In the case of SAIL the achievable minimum

inventory (Ij) was assumed for the year 1980-81. It has been

found that for the calculation of terminal inventory (In),is high

the from the year 1988-89 the error is quite high. From 1988-89

onward in TISCO,there might have been some structural changes or

there had been some policy changes in inventory, which might have

led to this high inventory The same thing might have happened

for SAIL also from the year 1988-89. So, for calculating the

ideal inventory from 1988-89 onwards, the base year should be

changed to 1988-89. The error will then reveal the realistic

excess inventory holding due to structural changes.

7.6.5 Thus ‘in*i.e. terminal inventory may be calculated on

the basis of*I,' i.e. corresponding to the reference year where

achievable minimum is low. The reference year should be

changed,if there is any structural changes or policy changes

which might have impact on inventory. For all future * In ^

calculation,that year becomes the base yearihc«w^twr.

184
 7.7.0 ‘ Analysis of SAIL’s Inventory categorywise

7.7.1 Now let us make an indepth analysis of SAIL’s inventory

component-wise. The quantum of inventory holdings for each

category as on 31.3.1990 are given in Table 7.9

Table 7.9

SAIL's inventory holdings category wise as on 31.3.1990

Category Inventory in Hi 11 ion rupees X of Total

a. Raw materials 4773.28 17.15

b. Stores & Spares 10422.91 37.44

c. Finished & Semifinished goods 12530.74 45.00

d. Others 110.83 0.40

27837.76 100.00

As would be seen from the abovefbulk of the inventory is in the

finished/simi-finished goods,followed by stores & spares. The

pattern is pore or less similar in other years also. So

considerable capital could be released for more productive

investments,if the above two areas can be effectively controlled.

7.7.2 The control over the above inventories is exercised in

the plants by different agencies. While,Raw materials stores and

spares are controlled by operation/ maintenance/purchase, the

finished and semi-finished goods are controlled by marketing and

also to certain extent by operations.

7.8.0 Raw waterials Inventories

7.8.1 The basic raw aaterilas required to produce Iron and

Steel in an integrated steel plant comprise of iron ore,

fluxes(lime stone and dolomite),Coal <Coke).rtanganise ore.

Smaller quantities of ferro alloys, and sulphur also form

185
 important inputs. To produce one million tonne of hot

metal.approximately four million tonne of raw materials are

required.

7.8.2 With such large quantities involved,steel plants at

different points and raw materials available in certain areas,

planning and procurement of raw materials and movement of the

same assume great importance and need co-ordination at national

level so that-

* Quantity and quality requirments of each plant are net.

* Minimum haulage is involved to reduce freight charges.

* Rail movements are rational and properly utilised. Type

of wagons available would suit to the unloading

facilities available at different Steel Plants.

SAIL has captive mines for iron ore, lime stone, dolomite and a

few mines for’- coal, which meet only a part of their total

requirements. Therefore,a large quantities of coal are to be

procured from other agencies.

7.8.3 Raw materials generally constitute more than half the

total cost of steel. With the increas in production,the raw

materials movement will be in bulk quantities. This means

tremendous effort,close coordination and monitoring in the areas

like fixing of suitable 1 inkages,savings in freight cost and

transit losses,improved utilisation of railways rolling stock,

quality control etc. Fortunately, raw materials inventory has

never posed any serious problem in the form of high inventory

holding mainly due to the reason that number of wagons

available from the railways has always been in short supply.

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7.9.0 Inventory of stores & spares

7.9.1 As is evident from table 7.1, the inventory levels for

stores and spares have come down considerably, both in terms of

value and days consumption. Though the inventory holdings nay be

further lowered, still the reduction of inventory levels is

satisfactory despite the rising prices of inputs. Inorder to

establish an effective control let us see to what extent the

traditional inventory control models can help in establishing

effective control on inventory. Few other issue concerning stores

& spares would also be discussed.

7.10.0 The Generalised control model

7.10.1 The generalised control model may be represented as

follows: (7)

—Norms
Reactor Comparator ^—Stand­
ards

Information
channel

Input -- — Process -Output

The "Inputs" are converted into the desired "Output" through the

"Process". In order to establish cntrol the output information is

channelised through the sensing point suitably chosen at the

output end. The output information thus obtained is compared with

the standards or norms and deviations are reported to the

"Reactor". The "Reactor" in turn controls the "Input" or "Process"

to get the desired "Output". This gereralised control model may

187
 be applied in nost of the control functions in any organisation.

"Production Control" "Quality Control","Budgetary Control etc,

but not in "Inventory Control".

7.11.0 Inventory Control system

7.11.1 In the materials management system, materials are

flowing from suppliers to the stores and from stores to the shops

as demanded by them from time to time.There is a continuous

interaction of the inflow and outflow of materials at the

"Process" i.e at the pool of materials. Inventory control is

nothing but controlling the level of the pool.

7.11.2 The generalised control models are thus "Output Models"

and the inventory control is "Process Control Model". The usual

inventory control models for "Automatic Procurement" (AP) items

are basically developed on output control basis. The mean and

standard deviation of the shop demands are calculated

♦
statistically. Thereafter considering the lead time variability,

the orders are controlled by "P" system or "Q" system. These

control systemsare effective so long there is no change in the

mean and standard deviation of the consumption values or lead

time.

7.11.3 Since inventory control is nothing but a process

control, we must have some control, both at the input and also at

the output stage. The system is very similar to a cistern having

one# inlet and one outlet valve,and we want to control the level

of water in the cistern. The control of level is only possible,

whenever we have control on both the inlet and outlet valves. So

unless there is any "Indent control" and "consumption control"by

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 the user groups "Inventory control" by materials management

department can never be effective

7.11.4 Generally, by inventory management it is mentioned that

it involves two decisions:

* When to order and

* How much to order ?

i.e the whole emphasis is on input control. But along with the

above two decisions the following questions should also be asked

for any effective inventory control system:

* What is the actual consumption of input corresponding to

the output achieved?

* What should have been the consumption of input as per

norms for the output achieved ?

* What are the reasons for deviation ?

* Considering the existing stock,is this indent justified

for the forcasted output requirement ?

So the emphasis should be changed from traditional "Input

Control" to the "Process Control",i.e.,on consumption control and

indent control.

7.11.5 Again in the context of inventory management, the

•output variables, i.e shop demands,are within the domain of the

organisation whereas the input variables are outside the

organisational control. So, rationally, output control is easier

than input control.

7.12.0 Standardisation

7.12.1 In the context of stores and spares, standardisation

plays a very vital role for inventory management. The following

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 areas of standardisation are very useful for inventory control of

stock items:-

* Specification

* Variety reduction

7.12.2 From the informal discussion the researcher had with

different people, it has come to the light that due to ambiguity

in specification,wrong materials are procured which unnecessarily

leads to increase of non moving items. Problems in specification

may be divided into 3 groups:

* Faulty specification

* Over specification

* under specification

It is obvious that faulty specification may lead to wrong

material procurement,but "Over specification" usually increase

the cost of^material and hence the value of inventory. Say if

"steel casting" is given as specification, where "Cast-Iron" can

serve the purpose without sacrificing performance, then it is

unnecessary addition of material cost. Similarly,under­

specification or vague specifications may create problems in

procurement.

7.12.3 Variety reduction can help in reducing inventory for

both spares and general stores. One illustration may clarify the

point. From the informal discussion it came out that in one plant

the identical "Brasses" for crane had been stocked under

different stock numbers because some manufacturer gave drawings

conforming to "inch" dimensions and some with "Hetric"dimensions.

On scrutiny it was found that these •were only "Dimensional

conversion" Similarly there may be different stocks for little

190
variation in the metallurgical specification. Gear boxes, motor

couplings, conveyors, pulleys are some of the examples where

standardisation can be effectively applied. Needless to mention

SAIL Plants have been making endeavour in that line.

7.12.4 An another area, where standardisation may help in

reducing inventory is by converting the manufacturer part number

to proper specification. One illustration has been cited for

"Hoses for earth moving equpment". Usually these hoses are

procured on the basis of part number. However, if the hoses have

proper specification and also the "end fittings" are specified

separately, not only the cost of hoses will be reduced but also

their availability may be improved.

7.12.5 In our country steel plants started with IISCO and

TISCO. These plants were set up in collaboration with British

and American experts. Public sectors in fifties and sixties,

however imported British, German, Russian and East European

technologies and equipments. Thus we have installed plant and

equipments of large variety, type, size, make and capacity, tie

built up inventories of spares needed for these equipments and

some system to replenish stocks by iapor.'.ting them as needed by

each plants. Accordingly,with the age of the plants,the

requirements of spares and replacement items have escalated. But

due to economic condition,the Government has to impose drastic

cut in import- .'s. The absence of proper indigenous manufacturer

and lack of commonality between various steel plants gave birth

to the idea of inter-plant standardisation in steel industry. The

work has been broadly divided into two groups,under the guidance

of the following to approval committees: (8)

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 (a) Approval committee on consumable stores,general

eqipment IPSS-1 &

(b) Approval committee on Design parameter IPSS-2

All steel plants, heavy engineering and heavy electrical

manufacturing organisations as well as design and consultancy

bureau have been represented on these two committees. IS I provides

technical and secretarial assistance. SAIL provides financial

support. Since its inception in August 1973,a number of "Inter

Plant Standards" have been developed and more are to be coverd.

It is a time consuming process to derive complete benefits, but

some benefits are sure to come.

7.13.0 Bisk Insurance spares

7.13.1 It is very often heard that in steel plants a good

number of non-moving items,known as are "Risk Insurance spares"

are being kept at the plant right from installation. This was one

of the reasons for carrying high inventory. It is true that in a

continuously running plant a number of vital spares have to be

kept in stock. It may not be possible to predict when such spare

parts would be consumed,or whether these would be consumed at all

during the life time of the equipment. But, such parts are

stocked to prevent the break down of equipments. Otherwise, in

absence of the ready availability of these spares it may take

long time to procure these spares after the breakdown has

actually taken place. It may be too costly to keep the operations

suspended till the spare is procured. Moreover,the required spare

may not be available in the market at the time of breakdown,due

to obsolesence. Since it is not known when such spares will be

utilised or whether these would be utilised at all, the

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 investment in these spares is like primium paid for a policy to

insure against the eventuality of costly breakdown at a future date.

7.13.2 There is no general agreement on the definition of

"Risk lnsurance-Spares".Difinition in vogue in Steel Plants is: (9)

"Items which do not normally wear out,but breakdown of

which is likely to jeopardise the working of the plant

seriously, or items having long lead time and generally

of high unit value are risk insurance spares".

To determine the number of risk insurance spares which are

required to be stocked probabilistic studies are required to be

«
carried out. Total loss likely to be incurred due to non

availability of risk insurance spare is to be weighed against the

loss to be incurred if the spares were not used and inventory

carrying cost is incurred. Normally, the user departments find it

difficult’ to determine the stock out cost as well as probabilily

of failure. Engineering knowledge and experience should be

carefully applied along with statistical data to assess the

requirements of risk insurance spares.

7.13.3 At the initial stage of operation as well as for

expansions, the risk insurance items should be orderd

judiciously, other wise some vital spares may have to be procured

later at a prohibitive cost or it may be that the company is

burdened with useless spares pushed by the suppliers.

7.13.4 In providing for risk insurance spares, repair

capaciity of the plant, as well as the time requird for repairs,

should be kept in view.

7.13.5 There may be some confusion in identifying risk

insurance spares, non moving and slow moving ' spares. In

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 order to declare surplus Bhilai steel plant has assumed the

following definition (10)

a) Risk Insurance Item

Items which do not normally wear out, but breakdown of

which is likely to jeopardise the working of the plant,

seriously having long lead time and generally of high

unit value, are termed as Risk Insurance Items.

b) Non Moving Items (Indigenous)

An item which had no issue for 24 months from the date of

receipt will be treated as non-moving item.

c) Slow Moving Items (Indigenous)

An item which has issue during the year but which has

closing stock of more than 24 months consumption at

the end of the year will be treated as slow moving item.

d) Non-Moving Item (Imported)

An item which has no issue for 60 months from the date

of receipt will be treated as a non-moving item.

e) Slow moving items (Imported?

An item which has issue during the year but which

has closing stock of more than 60 months consumption at

the end of the year will be treated as a slow moving item.

7.14.0 Other issues on stores St spares

7.14.1 It may be observed from table 7.1 that there has been a

steady increase in the consumption of stores and spares over the

years. Since the amount involved constitute around 15X of the

total cost of production, it is important that adequate attention

is paid to this area both in terms of planning and ensuring that

the actual expenditure is within the budgeted levels. It has

194
been expressed by many people informally that certain consumable

stores and spares like refractories, lubricants etc, the

consumption norms may be reduced.

(A) Lubricants: The consumption is mainly based on working hours

of the equipment since the working hours of equipments have

relationship with production per tonne of product manufactured.it

may form the basis for the consumption of lubricants. Every steel

plant may evolve its own norm by analysing the past 5 years

actual consumption,which they may then try to improve.

(B) Spare parts:

# The consumption of spare parts has a deFinite

relationship with the investment value of electrical

and mechanical equipments. This percentage, varies from

area to area depending upon the duty

conditions of the equipment.

* During 1972 Rourkela Steel Plant made a study of the

consumption norms of their spare parts and developed

the consumption norms (11) given in Table 7.10

•3

Table 7.10

Consumption norms as percesntage of investment value

Item Annual consumption as

X of Investeaent value

1. Coke oven machinary 3.0% Hech.

2. By-Product Machinery 2.0%

3. Iron & Steel Machinery 2.5%

4. Hot Rolling Hills H/c 3.5%

KO
CO

5. Cold Rolling Hills H/c

6. Spl.process Hills H/c 2.0%

195
 7. Turbo-machinery 3. OX

8. Mobile Equipment 6.OX

9. Workshop b/c tools 5. OX

10. Electrical machinery 2.OX

11. EOT Cranes 2.5X (Mech,& Elect.)

# They concluded that total amount of consumption as

percentage of investment purchase value of Mechanical &

Electrical Equipments should be within 3X annually.

# They also concluded that F.O.B component of spare

parts consumption is to be limited to maximum 2*

of input component of investment. This component

is to be gradually reduced by instituting

sucessful import substitution efforts.

# Every steel plant may evolve its own norms by

analysing the past 5 years actuals for each of

the machine groups.

(C) Inventory norms: In ideal situation,there should have been

no inventory,but it is practically impossible to operate without

some back up stock to take care of contingencies. How much this

back up stock should be is a matter of debate,since each

enterprise has its own argument about holding a particular

inventory. However,certain monitoring and control agencies of

Government have tried to fix up "norms’’. Bureau of Industrial

costs & pricing fixed the norms for SAIL as follows:

1) ' Raw material: One month’s consumption.

2) Stores & Spares: Eighteen months’ consumption.

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The norms fixed for the broad categories of inventory

holdings by BPE are as follows: (12)

Consumable

1. Lubricants 12 months’ stock imported grades

9 months’ stock indigenous grades

2. Refractory 18 months’ stock imported

9 months’ stock indegenous

3. Rolls 24 months' stock

4. General stores 6 months’ stock

Spare parts

Imported spares: 24 months’ stock

Indigenous spare:12 months’ stock.

Norms are interim targets under certain conditions. After

attaining the norms,these consumption norms are further reduced.

Items where the consumption norms can be reduced should be

identified and revised norms should be set, perhaps with the help

of techno-economists.

7.14.2 Through informal discussions it came to the light that

considerable savings can be achieved by controlling the drawal of

stores and spares to avoid a build up on the shop floor,

especially during the second half of the year. In fact, items

already drawn and held in the shops need to be utilised first to

ensure a reduction in the overall inventory holding.

7.14.3 Attention need to be paid towards reclamation of the

worn out parts through specialised processes that are available.

This will reduce the pressure of demand for spares on the one

hand and will effect economy on the other.

7.14.4 SAIL plants have captive facilities for

manufacturing/reconditioning of spares. These facilities should

197
 be effectively utilised to bring a reduction in outside

procureaent and thus lowering of inventory levels.

7.14.5 Standardisation and salvaging in the field of

refractories,lubricating oils etc are important considering

the high value involved in their annual consumption.

7.14.6 As mentioned earlier,SAIL plants had collaborations

with different countries while installing the plants. As a

result,the codification system of different plants are different.

Efforts are to be taken to have comion codification for all the

plants for commonly used items (eg.earth moving equipments,cranes

etc) to facilitate inter plant transfers. Again the spare parts

commonly used items may be rate contracted to bring down the lead

time and inventory. Commonly used items should have central

procurement and transferability. This is also followed for some

items presently. The out moded system of calling tender enquiries

every year for the same item has to be dispensed with, Vendor

evaluation and rating has to be given importance in this context.

7.14.7 Inorder to avoid inventory build up any further, the

responsibility for holding inventory within the norm in respect

of different items of stores and spares may be fixed as under:

a) For items of spare parts-DGH (Maintenance)

b) For items of general stores and automatic procurement

items -GH (Material)

c) For rolls-DGM (Rolling Hills)

d) For refractories - DGH (Iron & Steel)

7.14.8 It has been revealed through informal discussions that

a major cause of the huge inventory build up can be traced back

to over indenting by field engineers who normally like to have

198
 tod much of safety or assurance and they ignore the inventory

control objectives. Hence for effective inventory management, the

items of regular use should be brought urder stock control and by

this process the indenting function should be shifted from field

executives to the stock controller and thus the divided

responsibility may be eliminated, tilth tha assitance of computer

the decision making would be quicker by one agency also.

7.14.9 It is seen that most of the tima, materials management

is to be carried out with people available who may be qualified,

or unqualified,they may have proper attitude or otherwise for

material management. This situation may be alright for

maintaining the statusquo, but if real brwak through in inventory

management is to be achieved serious thimking and prompt action

is called for in the selection,recruitment and training of the

persons responsible for this function.

7.14.10 Inventory management requires the cooperation,

.involvement and participation of several departments like

production, maintenance, sales, design,purchase,stores,inspection,

traffic,finance and accounts etc. Without unreserved backing and

support of the top managenent and withoiit suitable status and

recognition for inventory management function, the required

active cooperation, involvement and participation do not easily

be forthcoming from all the departments. Added to this,from the

informal discussion it appears that thera is a misconception

amongst plant- people that inventory management will starve the

plant of the supplies and hence there is a general apathy towards

inventory management. So inventory management requires

199
 involvement at the highest level which may help in driving the

apprehensions away.

7.15.0 Inventory of Bork in Progress

7.15.1 The work in progress inventory depends greatly on the

manufacturing processes, the technology involved and the variety

of products being manufactured. In the context of materials

management activity of the steel plants, the philosophy of work-

in-progress is applied to those items which are manufactured

within the plant with the available facilities from the

engineering shops (13). The raw materials required for

manufacture of items in these shops is held by stores as

inventory in the form of steel rolled products or sections. The

volume of inventory holding for these plant-made items in terms

of total inventory holding is, however, less than 1 percent.

7.16.0 Inventory of semi-finished and finished stores

7.16.1 In SAIL nearly 70X of the steel materials are being

distributed through the stockyard and the balance 30X directly to

the customers. The network presently consists of 45 branches and

stockyards, located at the important steel consuming centres in

the country. For administrative purpose, the branches are grouped

under 10 zones and 4 regions. The balance 30* of the steel

material are despatched directly to the customers,eg.rails to

Railways, pig iron to Foundries, HR coils and skelps to Tube

makers, CR coils to Oil Industries etc (14).Reduction of finished

stock really means aggressive marketing and improved distribution

systems.Let us study in depth the factors . those affect the

finished goods inventories.

200
7.17.0 Factors Affecting Finished Inventories

7.17.1 The factors which, affect the finished goods

inventories can be grouped under three main heads (15):

* Demand characteristics

* Production characteristics,and

* Transportation characteristics

(A) Demand characteristics

These include the following:

(i) The size and frequency of orders

(ii) Uniformity or periodicity of demand

(iii) The distribution pattern -

the more the stages in the distribution line,

the more inventories would be required in

the total system.

(iv) Accuracy, frequency & details of demand

forecast.

(v) Service requirements or allowable delay in

fulflling the orders. Presently there are two

scheaes (16)

# Tine bound supplies scheme (TBS)

* Demand Registration scheme (DRS)

(B) Production characteristics:

Included in this groups are:

(i) Form of production organisation.

• (ii) Number of manufacturing stages.

(iii) Degree of specialisation of product at specific

stages.

(iv) Processing tine required at each stage.

201
 (C) Transportation characteristics

This say include:

(i) By road.

(ii) By rail

The factors which will necessarily lead to a minimum level

of stocks at the plants can be generally identified as:

(i) Rolling constraints

(ii) Route structure

{i i i) Daily wagon supplies

<iv) Materials under process.

Again to maintain the flow of material from the stockyards

certain minimum inventories are to be maintained at the

stockyards. The compelling factors to be considerd are

(i) Economic lot size production

(ii) The normal time-lag between production and

despatches at the plant.

(iii) The railway transit time

(iv) Handling time at the stockyards, i.e.,

unloading, proper stacking and ultimatly loading

to the customer's lorries.

Thus, a time lag of about a month exists between the actual

production and those are received at the stockyard and deliverd

to the customer. In other words, the normal inventory at the

stockyad should be one months sales’ from the stockyards. Besides,

some" extra stocks of structuraIs,rounds and other materials

which may not be rolled in every month, but the demand for which

is however uniform and regular, will also have to be carried by

the stockyards. So adding all such stocks the "Base stock" may be

202
 arrived and then only it will be possible for the stockyard to

oeet all customers requirements on "off the shelf" basis.

7.18.0 Infrastructural Inadequacies leading to high inventory

7.18.1 The Railways insist on rake movements and availability

of loose wagons being limited, theoretically a section when

rolled can only go to 3 or 4 branches.(17) Insistence on rake

movement, therefore, causes serious regional imbalances in

availabi1ity.

7.18.2 Parties are entitled to take direct supplies from

plants generally in rake loads. Rake load suplies inevitably mean

higher inventory levels leading to higher input cost. Host of the

present stockyards have limitation in space and suffer from

inadequacies in handling. Since supplies are erratic,mainly due

to movement problem.parties who have material from stockyard have

to build up'inventories in their stores.

7.19.0 Shift to Road Hovement

7.19.1 A railway movement pattern under which the trailing

loads would go upto 4,000 tonnes and more per rake, may further

add to the anomalies of distribution. Improvement of national

high ways, extension of road network, availability of relatively

cheaper road transport,higher capacity road vechicles, coupled

with insistence of customers for supplies in exact sizes in small

quantities will lead to a greater accent on road movement.There

is also a need for having facilities like siitting,cutting and

packing for distribution.

7.20.0 Hovement through coastal routes & Hater ways

7.21.1 Bhile road movement is likely to increase, the

economies in movement of material through inland water ways and

203
 coastal routes need to be studied, specially in the context of

Vizag Steel Plant, being a port based steel plant. If found

economical, action would be required for development of

infrastructure facilities.

7.21.0 (fixing Yards

7.21.1 It may be desirable to continue to the maximum extent

possible, rake movement and loose wagons transportation, balance

iron and steel should be moved to mixing yards to be created

adjacent to all steel plants. These mixing yards should have

ficilities to unload materials from departmental wagons and

should be operated in closed loops. Mixed product rakes would

then be loaded for various destination. There should be adequate

ficilities for road transportation also from mixing yards.

7.22.0 Creation of second and third tier distribution

7.22.1 Installing a stockyard means a capital cost of around

Rs.10 Crores. Obviously the stockyard can only be opened when an

off-take of about 5,000 tonnes per month is assured. So instead

of opening a new stockyard,the network of distribution could

still be extended by two tiers.

a) The State Small Industries Corporations have a network of

raw-material depots spread all over the country. These depots may

be asked to be used as a second tier of distribution outlet.

b) It is also necessary to introduce a third tier of

distribution in the form of dealer network. These dealers will

not only meet small demands but also in due course will

supply matching section to the industry. These dealers may be

attached to the nearest Branch for supplies. The maximum price

may be fixed considering the stockyard price freight, handling

charges, a resonable cost of carrying inventory to be maintaind

by the dealer and a reasonable commission. The third-tier will

thus ensure a free flow of Material to the entire length and

breadth of the country. Dealers could be encouraged to set up

slitting and other facilities to cater to the need of the

industry.

7.22.2 Some of the above ideas have already been tried while

some are yet to be tried. SAIL’S market share is around 60% of

the total sales of iron and steel. This huge quantity is to be

distributed and reached in the hands of customers living at the

different corners of this vast country. It is a national problem

apart from the problem of inventory.

205
 REFERERICES

1. Narka Committee Report on spare parts submitted

on 26.6.68 to HSL.

2. Report of study Group 1 on organisation for

Inveni lory control and Functions of spare parts
Deptt.and.stock control section in Hindustan Steel
Limited September 1972, Page-2

3. A report on the seminar on inventory control in

steel industry (Nov.5,6,1975)

4. Follow up.seminar on inventory control in steel

industry - A Report December,16-17,1976.

5. Public Enterprises Survey different years.

6. ’ Annual Reports of Tata Iron & Steel company different

years.

7. Dutta 0 N, Facts, figures, observation & Analysis

Growth Vol.14 No.3,October 1986

8. Iyer S S, Materials Management role of the Indian

Standard specification. Inter plant standards
(unpublished article)

9. Procedure for indentification and disposal of non­

moving/slow moving sotres and spares GfTs order
No.GH/ADHN/8/76 dt.8/15.3.76

10. GH’s order No. GH/ADHN/8/76, dt.8/15.3.76

11. Report of study group I on Organisation for Inventory

Control & Functions of Spare Parts Dept. Page 56

12. Report of Study Group I on Organistion for Inventory

Control it Functions of Spare Part Dept. Page 57.

13. Induction Training flannual 1990-Steel Authority of

India Ltd. P.171

14. Induction Training Mannual 1990- Steel Authority of

India Ltd. P-200

15. Rao, B G Guraraja, General Sales Manager,CS0- An

Approach to the handling of finished goods
inventores(unpublished article)

16. Induction Training Mannual 1990-Steel Authority of

India Ltd. P-201

206
17. Ahluwalia S K: Marketing, Distribution and canalisation
of iiports & exports-policy Framework upto 2000 AD-
presented in "Round Table on Steel Industry for the
next Decade" ,18th & 19th February,1987 New Delhi.

207