Nalco 1

INVENTORY MANAGEMENT

A STUDY ON INVENTORY MANAGEMENT IN SMELTER PLANT,

With reference to National Aluminium Company Ltd.
Angul, Orissa

by

BILIZA TOPPO
ROLL NO. – 8
PGDM(FINANCE)

A project report submitted in partial fulfillment of

the requirements for the degree of
Post Graduate Diploma in Management (PGDM)

XAVIER INSTITUTE OF SOCIAL SERVICE (XISS)

Purulia road
Ranchi - 843001
2008 - 10

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DECLARATION

I here by declare that this project report entitled “A study on inventory management in

Smelter Plant, with reference to National Aluminium Company Limited, Angul”

submitted by me under the guidance of Prof. B. P. Srivastava, Xavier Institute of Social

Service, Ranchi is my own and has not been submitted to any other university or institution or

published earlier.

Place: Biliza Toppo

Date: Roll No. -8
Finance - I

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ACKNOWLEDGEMENT

It is a great pleasure for me to acknowledge the assistance and contributions given by large
number of individuals to this effort.

First and foremost I wish to express my deepest gratitude to Fr. Beni Ekka, Director, Xavier
Institute of Social Service, Ranchi for giving me the opportunity to do this project work. I am
indebt to the Institute.

Secondly my deepest gratitude to Dr. Ratnesh Chaturvedi, Head of the Department

(Finance) and Prof. Bhaskar Bhowani, Summer Internship Coordinator, for the
encouragement and co-operation extended to me and for their help and useful suggestions for
this summer Internship.
I am deeply thankful to my guide, Prof. B.P.Srivastava, Professor, Xavier Institute of Social
Service, Ranchi who spared his valuable time and effort to guide me in the completion of the
project.

My sincere thanks to Shri. C. Padhiari, CM(Finance), Smelter Plant, Nalco, Angul Whose
indispensable guidance, valuable suggestions and immense encouragement during the training
period made me possible to make a project report of this magnitude

I would also like to express my thanks to Shri. M. A. Raju, CM(Materials), Smelter Plant,
Nalco, Angul who in spite of his busy schedule help me to get all data and information required
for my project report.

I am also equally obliged to express my gratitude to all the staffs of Finance and Stores
Department of Smelter plant, NALCO, Angul, Orissa, for offering their all kinds of help and
encouragement for completion of my Project Report.

Biliza Toppo
Roll No. – 8, Finance - I
XISS, Ranchi

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CERTIFICATE

This is to certify that the project entitled “A STUDY ON INVENTORY MANAGEMENT OF

SMELTER PLANT, NATIONAL ALUMINIUM COMPANY LIMITED, ANGUL”

completed during 20th April 2009 to 30th may 2009 is a bonafide work carried out by BILIZA

TOPPO, a student of Xavier Institute of Social Service, Ranchi under my guidance and has been

submitted in the partial fulfillment for the award of the Degree of Post Graduate Diploma in

Management (Finance).

Shri. C. Padhiari

Chief Manager (Finance)

Smelter Plant, Nalco

Angul, Orissa

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CONTENT

1. EXECUTIVE SUMMARY…………………………………………………………….pg…1

2. INTRODUCTION………………………………………………………………….......pg…4

2.1. INVENTORY CONTROL……………………………………...……………pg…4

2.2. INVENTORY CONTROL TECHNIQUES…………………………….……pg…7

3. COMPANY PROFILE……………………………………………………………......pg…20

3.1. ALUMINIUM INDUSTRY…………………………………………….…..pg…20

3.2. NALCO OVERVIEW……………………………………………………....pg…24

4. RESEARCH PROBLEM………………………………………………………….….pg…30

5. RESEARCH OBJECTIVES……………………………………………………….…pg…33

6. RESEARCH METHODOLOGY………………………………………………….….pg…34

6.1. TYPES OF RESEARCH DESIGN……………………………………....…pg…34

6.2. DATA COLLECTION TECHNIQUES……………………………...….….pg…35

7. ANALYSIS & INTREPRETATIONOFDATA……………………………..…….….pg…36

7.1. INVENTORY OF MATERIALS………………………………..…….……pg…36

7.2. SELECTIVE CONTROL TECHNIQUES……………………………….....pg…42

7.3. ECONOMIC ORDER QUANTITY OF RAW MATERIALS……………...pg…46

8. CONCLUSION & RECOMMENDATIONS………………………………………....pg…67

9. BIBLIOGRAPH
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Y……………………………………………………………………..

CHAPTER 1 : EXECUITVE SUMMARY

Inventory is the most excessive assets of a manufacturing company like Nalco and also the idle

resource. There are various inventory control techniques such as Economic order quantity,

Reorder point, safety stock, ABC analysis, XYZ analysis, FSN analysis, HML analysis, VED

analysis, Just in Time inventory control, perpetual inventory control and many more. Out of

all these, there are some techniques which are applied for inventory control in Nalco Smelter

Plant, Angul.

Aluminium industry market shows that CY 2007 was the phenomenal year with 37.8 million

tonnes aluminium consumption against 38.1 million tonnes production, with china leading the

market. But FY 2008 faced significant fluctuation in aluminium prices mainly due to

depreciating dollar and import duty reduction.

Aluminium industry consist of primary producers and secondary fabricators. The majority users

of aluminium are sectors such as electrical, transportation, building and construction and packing

industries.

Indian aluminium industry is dominated by only five companies. One public sector unit: Nalco

and two private groups: Aditya Birla Group – Hindalco and Sterlite Industries – Balco and

Malco. Hindalco is the largest producer of aluminium and Nalco is the low cost aluminium

producer. The strength of Indian aluminium industry is the vast bauxite reserves through out the

country. Though these industry are energy intensive, every Plant has each of its captive power

plant for continuous supply of power. Growing economy provides good and better opportunities

for these industries.

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Now coming to the overview of Nalco, it was incorporated in 1981 with technical collaboration

of aluminium Pechiney of France. It is the first Aluminium company to achieve ISI 9002

certification for all the four production units: mines, alumina refinery, smelter and power plant.

With Nalco joining the aluminium industry brigade, the country’s production has risen from a

level of 357347 tonnes aluminium in 1985 89 tonnes to 38.1 million MT in 2007 08.The

present capacity of its bauxite mines is 4800000 MT, of alumina plant is 1575000 MT, of

aluminium plant is 345000 MT and captive power plant is 960 MW.

Going through financial performance of the company it can be found that it is a constant profit

generating company. The company achieved a turnover of Rs 5576 crores against the turnover of

Rs 6354 crores during the previous year the profit after tax stands at Rs 1632 crore as against Rs

2381 crore in the previous year. The decline in sales realization and net profit during the year,

compared to previous year is mainly due to lower\sales realization from export of alumina,

substantial appreciation of rupee against US dollar.

Nalco has finished the first phase of expansion and is working for the 2 nd phase of expansion

after which the capacity of bauxite mines would be 6300000 MT, alumina Refinery would be

2100000 MT, aluminium smelter would be 460000 MT and captive power plant would be 1200

MW.

The research conducted in about the inventory control techniques applied in Nalco Smelter Plant,

Angul and its effectiveness. The inventory of this plant increased from Rs 111.32 crores in

FY:05 06 to Rs 121.82 crores in FY:06 07 and it further increased to Rs 138.51 crores in

FY:07 08. The increase in inventory is due to expansion projects, increase in production, bulk

purchase of raw materials and steel and cement, duplicate indent of AP Item, change in man

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power and increase due to spares. The research objective is to study and understand the inventory

of all materials, and analyzing the effectiveness of various techniques used in Nalco. Finally

recommending methods and strategies to control the inventory.

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CHAPTER 2: INTRODUCTION

2.1 INVENTORY CONTROL / INVENTORY MANAGEMENT

2.1.1 NEED FOR INVENTORY

Inventory is very vital to every Company is that without inventory no company would

survive. Inventory is meant for ‘protection’ and for‘ economy’ in cost. Keeping inventory of

sufficient stocks will help to face lead times component, demand and supply fluctuations and any

unforeseen circumstances in the procurement of materials. Though to have inventory is must,

inventory is such a thing that will pile up and creep into the area of profits to turn them as losses

and can put the company in red. It is therefore, necessary to have control over inventory to save

the company from piling up of inventories and to avoid losses. Better said than done is the world

that suits the inventory control.

2.1.2 DEFINITATIONS

Inventory control can be defined as “Determining and maintaining optimum investment in

inventory given the significance of benefits and cost association with holding inventory ”.

Inventory Control relates to “ a set of policies and procedure by which an industries

determines which materials it will hold in stock and the quality of each that it will

carry in stock “. Therefore inventory control is otherwise known as STOCK CONTROL.

2.1.3 OBJECTIVES OF INVENTORY CONTROL

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Inventories constitutes second largest category of all manufacturing operation exceeded

only by plant and equipment and followed by receivables. The objectives of inventory

control are:

a) To keep required stock of materials so that production and maintenance actitives do not suffer.

b) Minimum blockage of funds in inventory. Optimization can be achieved and efforts need to be

made to improve input output ratio of materials by scientific methods of determining.

2.1.4 TYPES OF INVENTORIES

Depending upon the types of business, generally the Inventories Varies. But in a

manufacturing industry the inventory can be classified into four broad categories:

1. Production Inventory: It contains materials purchased from market like raw

materials; Ready made parts, component, spares and also special parts and

components manufactured in their own industry and kept in stock for self

consumption for use in manufacture.

2. Maintenance, Repair & Operating Inventory: Contains materials purchased

from vendors to maintain the production process and these maintenance,

repair and operating inventory do not form part of the finished products.

3. Work in progress Inventory: This contains manufactured good kept in

stores, warehouse or retail outlets, Stock Yard for sales to consumers.

To put this into a diagram, the Constituent of Inventory is as follows:

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2.1.5 FACTORS INFLUENCING INVENTORY

“How much to buy at onetime” and “When to buy this quality “. These are two

fundamental things on which inventory control depends. Many factors govern these

fundamental things. The prime factors that govern these two fundamental things are:

1. Requirements

2. Quality in stock or on order

3. Lead time

4. Obsolesce.

2.1.6 CONTROL, MAINTENANCE AND MANAGEMENT

The essence of inventory control, broadly speaking consists of revolving the following

three factors:

1. Necessity for stocking an items

2. Time for reordering the items

3. Quality per order to be order.

Continuous and periodical review is required in the evaluation of inventory management

and treats it as a continuous process as costs, source of supply, availability of materials;

consumption will vary in the course of time making the previous assessment invalid.

This process also helps in standardization of materials for procurement by using near

equivalents and eliminating material, which are discontinued as a regulation, which will

remove obsolescence.

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2.2.INVENTORY CONTROL TECHNIQUES

Inventory is being maintained as a cushion in supply of materials for continuous

production without causing stock out situation. This cushion should not be suicidal to

any organization. The following scientific techniques and methods are being used in

control of inventory.

1. Inventory Management Techniques

2. Standardization

3. Selective Inventory Control

4. Just In Time

5. Perpetual inventory system

6. Inventory turnover ratio

2.1.7.1 INVENTORY MANAGEMENT TECHNIQUES

1. Economic Order Quantity

If the firm is buying raw materials, it has to decide lots in which it has to be

purchased on replenishment. If the firm is planning a production run, the issue is

how much production to schedule. These problems are called order quantity problems,

and the task of the firm is to determine the optimum or economic order quantity.

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(a) Ordering cost:

The term ordering cost is used in case of raw materials and includes

the entire costs of acquiring raw materials.

(b) Carrying cost:

Cost incurred for maintaining a given level of inventory is called

carrying cost.

Economic Order Quantity is given by the formula:

EOQ =

And the total cost of inventory is given by the formula:

Total cost of inventory = (A×P) + (A×O) + (EOQ×C)

EOQ 2

Where A = Annual consumption (in units)

O = Ordering cost per order (in Rs)

C = Carrying cost per unit (in Rs)

P = Price per unit (in Rs)

2. Reorder Point

The reorder point is that inventory level at which an order should be placed to

replenish the inventory. To determine reorder point:

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(a) Lead time is the time normally taken in replenishing inventory after the

order has been placed.

(b) Average usage

(c) Economic order quantity

3. Safety stock

The demand for material may fluctuate from day to day. The actual delivery time

may be different from the normal lead time. If the actual usage increases or the

delivery of inventory is delayed the firm can face problem of stock out, which can

be costly. So, in order to guard against the stock out the firm may maintain a safety

stock.

2.1.7.2 STANDARDIZATION

Standardization is very essential to control the inventory, as by standardization

reduction in variety of material is possible. And because of the reduction in variety the

advantages are low order cost, low inventory, less storage stocks, conservation of

materials, variety reduction, less paper work, easy follow up with suppliers, less number

of orders.

The importance of this field has been recognized since the days of F.W. Taylor,

who first drew attention to this fundamental need in any organization. Just as work

study is necessary preliminary to work simplification, and a basic technique for

production control, quality control, materials handling, estimated cost control, etc.,

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“Standardization “ are preliminary necessity to design a basic technique on build control

and standardization procedure.

2.1.7.3 SELECTIVE INVENTORY CONTROL MANAGEMENT

Any manufacturing organization consumes few thousand items of stores. A high

degree of control on inventories of each item would, therefore neither be practical

considering the work involved, nor worthwhile since all items are not of equal

importance. Hence, it is desirable to classify or group items to control, commensurate

with importance. This is the principle of selective control as applied to inventories and

the technique of grouping is termed as selective technique.

Selective inventory means variation in the methods of inventory control from

items to item and this differentiation should be on selective basis by classification. A

company has to stock thousands of items of raw materials, standard parts, stores and

spares, sub contract items, tools, stationery etc. To have better control over the

inventory/ stock on hand, selective inventory control technique should be used in

isolation/ or in conjunction.

Thus selective control means selecting the area of control so that required objective is

achieved as early as possible without any lost of time due to taking care of full area –

• Minimum lost of energy and efforts.

• At minimum cost without loss of time.

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There are following selective control techniques:

* ABC Analysis

* FSN Analysis

* XYZ Analysis

* VED Analysis

* HML Analysis

a) ABC ANALYSIS

ABC analysis is a selective control technique which is required to be applied when we

want to control value of consumption of the item in rupees obviously when we want to

control value of the consumption of the material we must select those materials where

consumption is very high.

In any company manufacturing, there are number of items which are consumed or traded

it may run into thousands. It is found after number of studies for different companies

that –

Value of consumption of No. Of items Grade

items (value in Rs).

70% of consumption 10% of no. Of items A
20% of consumption 15% of no. Of items B
10% of consumption 75% of no. Of items C

A items these are those items which are found hardly 5% 10% but their consumption

may amount 70% 75% of the total money spend on materials.

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B items these are those items which are generally 10% 15% of he total items and their

consumption amounts to 10% 15% of the money spend on the materials.

C items these are large number of items which are cheap and inexpensive and hence

insignificant. They are large in number s running into hardly 5% 10% of the total

money spends on materials.

'A' Class Items ‘B’ Class Items 'C Class Items

(High consumption value) (Moderate consumption (Low consumption value)
value)

1. Very strict control 1. Moderate control 1. Loose control.

2. No safety stocks or very 2. Low safety stocks. 2. High safety stocks

Low safety stocks.

3. Maximum follow up and 3. Periodic follow up 3. Follow up and expediting

Expediting in exceptional cases

4. Rigorous value analysis 4. Moderate value analysis 4. Minimum value analysis

5. Must be handled by senior 5. Can be handled by 5. Can be fully delegated

officers management

b) FSN ANALYSIS

This type of analysis is more concerned from the point of view of movement of the

item or issue of the item or issue of the item under this type of analysis.

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‘F’ items are those items, which are fast moving i.e. in a given period of

time, say a month or a year they have been issued up till number of items. Although

fast moving does not necessarily mean that these items are consumed in large quantities.

‘S’ items are those items which are slow moving in the sense that in the

given period of time they have been issued in a very limited number of time

‘N’ non moving items are those, which are not at all issued for a

considerable period of time.

Thus, stores department whose concerned with the moving of items would like to

know and classify that the items are storing in the categories FSN. So that they can

manage operate and plan stores activity accordingly.

For example, for efficient operations it would be necessary that fast moving items as

far as possible should be stored as near as possible to the point of issue. So that it can

be issued with minimum of handling. Also such items must be stored at the floor level

avoiding storing them at high heights.

Similarly, if the items are slow moving or issued once in a while in a given

period of time they can be stored in the interior of the stores and even at the higher

heights because handling of these items becomes very rare.

Further it is necessary for stores in charge to know about non moving items for

various reasons:

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1. They mean unnecessary blockage of money and affecting the rate of returns of

the company.

2. Further they also occupy valuable space in the stores without any usefulness and

therefore it becomes necessary to identify these items and go into details and find

reasons for their non moving and if justified to recommend to top management

for their speedy disposal so that company operations are performed efficiently.

Also inventory control to some extent can also be exercised on the basis of FSN

analysis.

For example, fast moving items can be controlled more severely, particularly when their

value is also high. Similarly, slow moving items may not be controlled and reviewed

very frequently since their consumption may not be frequent and their value may not be

high.

c) XYZ Analysis

This type of analysis is carried out from the point of view of value of balance stocks

lying in the stores from time to time and classifies all the items as given below.

‘X ‘items are those items whose value of balance stocks lying in the stock are very

high.

‘Y’ items are those items whose value of balance stock is moderate.

‘Z’ items are those items whose value of balance stock lying in the stocks is very low.

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After knowing this type of classifications and their items can be taken to control the

situation as shown below:

1] From security point of view high value items must be stored and kept under lock

and key or if not possible they should be kept in such a way that they are always

under supervision. Similarly arrangement can be made for y and z items accordingly.

2] From inventory control point of view we must know why there is high inventory for

‘X’ items. We should review inventory control procedure for each and every high item

because stock should be maintained to take care of lead time consumption and also to

provide safety stocks. For high value items lying in stores we should review the reasons

for long lead time as well as demand variations and see whether lead time consumption

and safety stocks can be reduced. Thus proper inventory control procedures can be

developed on the basis of XYZ analysis.

Thus proper selective control methods should be selected to control the materials and

prevent from facing loss, taking advantage and knowing what exactly is to be done.

d) VED ANALYSIS

VED analysis is carried out to control situation, which are critical. When applied to

material in VED analysis we try to identify material according to their criticality to the

production, which means the material, without which the production will come to stop

and so on from this point of view material classified into three categories.

V vital,

E essential,

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D desirable.

Vital categories of the items are those items for the want of which the production will

come to stop. For e.g. Power in the factory.

Essential group of items are those items because of non availability of which the stock

out cost is very high.

Desirable group of items are those items because of non availability of which there is

no immediate loss of production and stock cost is very less and it may cause minor

disruption in the production for a short time.

e) HML ANALYSIS

This analysis, analysis the material according to their prices and then classifies them as

H items or M items or L items.

H stands for high price,

L stands for low price and

M stands for medium price.

Since price is more concerned of purchase department mostly purchase department

people analyses the material according to HML analysis.

HML analysis must be carried out from any one of the following objectives or some of

the objective as the case may be.

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• When it is desire that purchasing responsibility should be delegated to right level

of people.

• When it is desired to evolve purchasing policies then also HML analysis is

carried out i.e. whether to purchase in exact quantities as required or to purchase

in EOQ or purchase only when absolutely necessary.

• When the objective is to keep control over consumption at the department level

then authorization to draw materials from the stores will be given to high level H

item, low level for L items and medium level for M item.

• When it is desired to decide frequency of stock taking then very frequently H

category, very rarely L category and averagely M category.

• When it is desired to arrange security arrangements for the items, then H item

under lock and key, L items keep open on the shop floor and under supervision

for M items

2.1.7.3 JUST IN TIME INVENTORY SYSTEM

Keeping in view the enormous carrying cost of inventory in the stores and go downs,

manufacturers and merchandisers are asking for more frequent deliveries with shorter

purchase order lead times from their suppliers. Now days organizations are becoming

more and more interested in getting potential gains from making smaller and more

frequent purchase orders. In other words, they are becoming interested in just in time

purchasing system. Just in time purchasing (JIT) purchasing is the purchase of material

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or goods in such a way that delivery of purchased items is assured before their use or

demand.

Just in time purchasing recognizes too much carrying costs associated with holding high

inventory levels. Therefore, it advocates developing good relations with suppliers and

making timely purchases from proven suppliers who can make ready delivery of goods

available as and when need arises. EOQ model assumes a constant order quantity

whereas JIT purchasing policy advocates a different quantity for each order if demand

fluctuates. EOQ lays emphasis on ordering and carrying costs but inventory management

extends beyond carrying and ordering costs to include purchase costs quality costs and

stock out. Just in time purchasing takes into consideration all these costs and move—

outside the assumptions of the EOQ model.

Advantages of JIT purchasing

1. Investment in inventory is reduced because more frequent purchase orders of small

quantities are made.

2. Carrying cost is reduced as a result of low investment in inventory.

3. A reduction in the number of suppliers to be dealt with is possible. Only proven

suppliers who can give quick delivery of quality goods are given purchase orders . As a

result of this reduction in negotiation time is possible. The use of long—run contracts

with some suppliers with minimal paper work involved is possible.

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4. Quality costs such as inspection cost of incoming materials or goods , scraps and

rework costs are reduced because JIT purchasing assures quick and frequent delivers of

small size orders which results in low level of inventories causing minimum possible

wastage. Therefore, JIT purchasing is frequently applied by organizations dealing in

perishable goods.

2.1.7.4 PERPETUAL INVENTORY SYSTEM

The Chartered Institute of Management Accountants, London, defines the perpetual

inventory as “a system of records maintained by the controlling department, which

reflects the physical movements of stocks and their current balance”. Bind cards and the

stores ledger help the movements of the stock on the receipts and in maintaining this

system as they make a record of to physical movements of the stocks on the receipts

and issues of the materials and also reflect the balance in the stores. Thus, it is a

system of ascertaining balance after every receipt and issue of materials through stock

record to facilitate regular checking and to avoid closing down the firm for stocktaking.

To ensure the accuracy of perpetual inventory records (i.e. Bin card and stores ledger),

physical verification of the stores is made by bin cards or stores ledger may differ from

the actual balance of stock as ascertained by physical verification. It may be done to the

following avoidable and unavoidable causes.

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CHAPTER 3: COMPANY PROFILE

3.1 ALUMINIUM INDUSTRY

In CY 2007, the world aluminium consumption stood at 37.8 Million tonnes against

production of 38.1 Million tonnes. The consumption was 10% higher than the preceding

year. This growth was primarily led by China, which grew at a phenomenal 37.7% in

CY2007, more than compensating for demand weakness in the US. India too, registered

a strong double digit growth in 2007 in line with buoyant economic growth. The strong

industrial growth, infrastructure initiatives and electrification drive resulted in good

demand for aluminium. Automobile and transportation sectors also supported the aluminium

demand.

Globally, Aluminium production increased in line with the consumption. The primary

aluminium production for the year was 38.1 Million tonnes. China again led the

production growth in 2007 with an increase of 34% over 2006 production. Higher

aluminium prices in the early part of the year also led to some capacity restarts which

further supported the production.

In FY08 LME aluminium prices fluctuated significantly between USD 2400 and USD

3100 per tonnes. The average LME aluminium price for the year was almost flat at FY

08 levels. The depreciating dollar resulted in a sharp fall in domestic aluminium

realizations as the prices are dollar denominated. Continuing with the stated policy of

import duty reduction, the government cut the customs duty on aluminium. The effective

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import duty for aluminium declined from 8.1% to 5.7%. As a result of these macro

economic factors, average aluminium realizations for FY08 declined sharply by11% as

compared with FY07 realizations. During FY08, crude prices also witnessed a sharp surge.

The rising crude prices resulted in higher prices for its derivatives. The soaring crude

also had a cascading effect in terms of higher transportation costs and higher prices of

alternate energy sources like coal. All these led to a significant cost push for the

aluminium industry.

In 2008, the global aluminium demand is expected to remain strong in spite of a

marginal slow down in the demand growth rate. The Chinese demand though expected to

remain strong; the growth rate is expected to decline marginally from CY07 levels. The

US demand weakness will continue. In India, the demand is expected to increase in line

with economic growth rate. Over medium term, thrust on power sector spending will

spur the aluminium demand. Aluminium production is expected to keep pace with

growing demand with new capacities coming up in Middle East and Asia. However,

globally, in the recent past, the aluminium industry is witnessing production cut downs

due to power shortages in various parts of the world. The cost push witnessed by the

industry in 2007 is expected to continue with crude prices still continuing with its

northward journey. Higher input costs such as bauxite, fuel oil, coal tar pitch and caustic

soda, rising freight, diminishing availability and rising costs of various fuels/power will

continue to push operating costs up. The rising costs and supply constrains will

determine the floor for the prices. A reasonably strong demand along with supply

constraints and rising cost is expected to keep the prices strong. Rupee exchange rate

will continue to have a significant bearing on domestic realizations.

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Aluminium industry can be broadly classified into different segments, namely Primary

Aluminium Producers who sale virgin Aluminium metal and Secondary Fabricators of

Aluminium who buy Aluminium metal in the form of ingot, slab, wire rod, etc. from

the primary producers. There are only few big players in primary Aluminium market

who dominate market and also have a considerable position in export market.

In the secondary Aluminium market there are many fabricators who buy

Aluminium from the primary Aluminium producers and fabricate into different

downstream products. In the downstream there are several companies in small and

medium scale. In the secondary fabrication units the product can be divided into three

main categories example (1) redrawn wire rods , (2) rolled products and (3) extrusion

products. Each category can again be sub divided into different segments.

The majority of aluminium produced in India is consumed in the electrical,

transportation, building and construction and packaging industries. Indian demand for

primary aluminium increased at a compound annual growth rate of 13.0% between CY

2002–2007 on the back of high demand from the electrical, construction and

transportation sector. Electrical applications continue to be the largest end use sector in

India, consuming approximately 36.0% of aluminium

Production in CY 2007 as a result of the continuing drive to provide electricity

throughout the country. Transport is also a major consumer, contributing approximately

22.0% of demand, although the average aluminium use in Indian made automobiles is

still approximately one third of that in western made automobiles. The demand in India

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is likely to be robust on the back of strong GDP growth and will grow at similar

levels.

Indian Aluminium Industry:

India’s share of global aluminum production is hovering around 3 per cent. The Indian

aluminum industry is highly concentrated with only five primary plants in the country

from three business groups.

• The Aditya Birla Group: Hindalco Industries Limited (Hindalco)

• Sterlite Industries: Bharat Aluminium Company Limited (Balco), Madras

Aluminium Company Limited (Malco)

• Public Sector Undertakings: National Aluminium Company Limited (Nalco).

SWOT ANALYSIS:

STRENGTH: WEAKNESSES:

• vast resources of bauxite • energy intensive industry.

• Bauxite resources are distributed • availability of power not satisfactory

throughout the country • copper better material of electricity

• Production matches with consumption • bauxite reserves in undeveloped

• production comparatively cheaper regions

OPPORTUNITIES: THREATS:

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• Indian railways one of the largest • Lack of caustic soda in future

consumer • Lack of Aluminium fluoride

• building industry another consumer

• 3000 odd applications in the world

3.2NALCO OVERVIEW

On January 7th 1981, was born, the Rs.2400 crores National Aluminium Company

Ltd. (NALCO) following technical collaboration agreement with Aluminium Pechiney of

France. The multi unit, multi location company, NALCO came up with 24lakhs tones

per year bauxite mines an alumina refinery to produce 8lakh tones of calcinated alumina

per year and 230000 tones smelter plant. Since assured an uninterrupted supply of power

is a must for production of aluminium, NALCO has also set up a 720MW captive

power plant close to its smelter plant.

In 1981, NALCO finalized the technical collaboration agreement with Aluminium

Pechiney of France. Signing of an agreement to avail commercial euro dollar term loan

of 980million US Dollars and start of project activities followed this. Starting from the

commissioning of mines in November 1985, all the units of the projects followed on

schedule, without any cost overrun.

PLANT CAPACITIES & TECHNOLOGY FEATURES:

SEGMENT / CAPACITY SPECIAL TECHNOLOGICAL FEATURES

BAUXITE MINE PANCHPATMALI , > Fully mechanized Open Cast Mines with
ORISSA computerized mine planning

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48,00,000 tpa > 370 million tones deposit estimated

> 14.6kms long single flight multi curve
> 1800 tph capacity computerized conveyor
system of transportation of ore
ALUMINA PLANT DAMANJODI, > Atmospheric pressure digestion process
ORISSA > Energy efficient fluidized Bed Calciners.
15,75,000 tpa > Co generation of 3*18.5 MW power by
back pressure turbines from process Steam
> Integrated facilities for manufacture
speciality alumina, hydrates and zeolite.
ALUMINIUM PLANT ANGUL , > Advanced 180KA cell technology.
ORISSA > Microprocessor based Pot Regulation
3,45,000 tpa System
> Fume treatment with dry scrubbing system
> Integrated anode making, aluminium casting
and rolling facilities.
CAPTIVE POWER PLANT ANGUL, >Micro processor based Burner Management
ORISSA > Automatic Turbine run up system
960MW > Specially designed High Pressure Boilers
> Advanced Electrostatic Precipitators

PORT FACILITIES VIZAG, AP > Mechanized storage facility of 3*25,000T

For Export of Alumina & Import of capacity
Caustic Soda Lye > Mechanized Mobile Ship Loader of 2200tph
capacity.
> Capacity to handle ships up to 35,000
DWT
nd
The work on 2 phase expansion programme at an estimated cost of Rs.5,003 crore (at march,

2007 price level) is in full swing. The annual capacities of the various project segments and those

after 2nd phase expansion are given below:

Project segment Unit Present capacity Capacityafter2ndphaseexpansion

Bauxite mines MT 4800000 6300000
Aluminium refinery MT 1575000 2100000
Aluminium smelter MT 345000 460000
Captive power plant MW 960 1200

The salient features of the financial performances are highlighted below:

• Constant profit generation since inception of the company.

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• Highest profit has been Rs. 614.55 crores in the year 1995 96 as the
aluminium prices remained buoyant.

• From 1992 93 to 1995 96 there has been growth in sales, profit book value,
earning per share and net worth. But in 1996 97 the profit was dipped due to

dip in international aluminium prices. Though the gross sales, profit and other

financial parameters have shown improvement in 1997 98, there has been

again dip in the production figure, sales, profit etc. in 1998 99 due to internal

problem again introduction of MAT has also affected the bottom line of the

company.

• The debt to equity ratio reduced over the years and the company became a
Zero Debt company in the year 1998 99 repaying all its debt. This has

prompted the company to appeal government of India for Capital restructuring.

• Form ratio analysis it can be ascertained that the return on capital employed
and return on net worth have been impressive.

• The company has achieved a turnover of Rs.5,576 crore, as against the turnover of

Rs.6,354 crore during the previous year and profit after tax stands at Rs.1632 crore as

against Rs.2,381 crore in the previous year. The decline in sales realization and net

profit during the year, compared to previous year, is mainly due to lower sales

realization from export of alumina, substaintial appreciation of rupee against US

dollar. The company has achieved an export earning of Rs.2,135 crore as against

Rs.2585 crore achieved during the previous year.

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• Zero debt status of the company has made the position of the company very
strong for any fresh borrowing from the market. Government of India has also

given green signal to NALCO’S proposal for equity restructuring. Hence

NALCO’s position in the financial market has become strong. All these have

enthused NALCO to invest further in downstream facilities to diversify and

spread its operation.

SWOT ANALYSIS OF NALCO

Before analyzing position of Nalco, it is pertinent to look at company’s internal

strength, weaknesses, external opportunities available and threats from environment.

SWOT analysis gives a fair picture about company’s performance. The SWOT analysis

has been done before analyzing the financial restructuring of NALCO.

The following assumptions have been made for SWOT analysis:

• Present economic policy of economic liberalization undertaken by government of India

will continue.

• Political scenario in and around India and Asia will remain stable.

• World Aluminium market will remain buoyant in the coming year.

• Company will continue to produce high quality Aluminium and Industrial Relation in
the company will remain healthy in the forthcoming years.

STRENGTHS

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• Sound technology base with latest state of the art technology for production of
Aluminium and Alumina.

• Consistent good financial performance.

• Star trading house and the prices are linked with LME.

• NALCO has got ISO 9000 certification for all its production units.

• Low cost of production and high quality products.

• Leader in domestic primary Aluminium market.

• Very high customer confidence.

• Familiar with export market.

• Huge reserves and surplus in a very short period of time.

• Experience built over the years in producing Aluminium.

WEAKNESS

• Does not experience marketing in the highly competitive downstream of aluminium.

• Large equity base of Rs. 1288 crores, hence low EPS. Being a public sector unit,
many a time policy making is influenced by government and bureaucrats.

• Poor distribution logistics. Being the leader in primary aluminium market, NALCO
has never felt the need for setting up channels of distribution which is now

absolutely for downstream products.

• Limited corporate autonomy due to interference of government.

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• Lack of promotional effort for marketing.

• Inadequate R&D.

• Cost overrun anticipated if there will be delay in implementation of expansion

project, which may adversely affect the company’s future.

• Poor logistic control and supply chain management.

OPPORTUNITIES

• Expanding global market for Aluminium in all segments.

• Scope for raising fund from external sources is bright for due to impressive bottom
line.

• There is scope for TV and direct selling to the consumers for the downstream value
added products.

• Scope for backward and forward integration.

THREATS

• Competitions from substitute materials.

• NALCO has always operated in suppliers’ market place. Being the leader in an
oligopolistic market, the company may find it difficult to market new products where

the existing small companies have already established themselves. As such there is

cut throat competition in the secondary value added product market.

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• Fluctuation in foreign exchange may adversely affect its expansion and diversification
plans.

• Proposed expansion by the competitors may affect the market position.

CHAPTER 4: RESEARCH PROBLEM

Inventory is defined as an idle resource which has an economic value. In an industry

inventory comprises of raw materials, process materials, general stores, consumables and

spares parts, and semi finished and finished goods. Inventory of input materials are

carried to support production and maintenance activities so that the same is available in

right quantity, at right point of time. Carrying excessive inventory not only results in

blocking up of working capital but also adds inventory carrying cost to it. Inventory

carrying cost consists of interest on locked working capital cost of storage, obsolescence

and detoriation. On and average it works out to 20% to 25% per annum of the value of

the locked up inventory.

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The objective of inventory control is to keep required stock of materials so that

production and maintenance activities do not suffer. Minimum blockage of funds in

inventory optimization can be achieved and efforts need to be improving input output

ratio of materials by scientific methods of determining.

Nalco smelter plant has the capacity of 345000 MT which is powered by captive power

plant of capacity 960 MW. Production in such plant is continuous and that is why

requires large amount of raw materials, steel and cement, general consumables, pot lining

and mechanical, electrical and instrumental spares are required.

On looking at the inventory status for last three years it can be seen that inventory is

increasing. Inventory in FY: 05 06 was Rs 111.32 crores which increased to Rs 121.82

crores in FY: 06 07. It further increased to Rs 138.51 in FY: 07 08.

Increase in inventory is due to following reasons

• Expansion projects

First phase expansion completed in 2006 has lead to increase in capacity of the Smelter

Plant to 345000 MT and Captive Power Plant to 960 MW. Thus this expansion has

lead to increase in production and in turn increase in materials supply and increase in

inventory.

The work on 2nd phase expansion programme at an estimated cost of Rs 5003 crores (at

March 2007) is in full swing. The annual capacity of aluminium smelter plant and

captive power plant is going to increase to 460000 MT and 1200 MW respectively.

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These expansion projects increase the capacity of production and requirement of materials

and thus increase inventory.

• Increase in production

As demand in the market for Aluminium strips, rods, billets, and our products from

automobile, electricity, packaging industry increases ,thus production also increase leading

to increase in materials and thus inventory.

• Bulk purchase of Raw materials and Steel and cement

Raw materials and steel and cement are continuously required for production process.

Therefore raw materials are ordered in bulk for 1 month, 2 months or 6 months

consumption. Thus the inventory increases t the time of reception of these materials.

• Duplicate indent

General consumable goods are generally order as Automatic procurement items that are

these items are commonly required by all the departments in the organization, so all

departments give their required quantity in a year to stores department. Stores department

taking sum of all the requirements order various items. All these items have a specific

code. Even the items with same usage such pen of different company have different

code. This can create a duplicate indent. If a particular item is indented by a department

with a specific code and item with this code is not available in the stores but store

have the items with same usage of different code. The stores order the item even though

it has item with same utility. Thus through duplicate indent the inventory increases.

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• Change In Man Power

Promotion or transfer of employees from one department to order or from one place to

other will require some time to or the employee to adjust with the working and

management of the department. This mismanagement can cause improper supply of

materials and thus can lead to increase in inventory.

• Increase in inventory due to spares

Requirement of spares is not certain as it is uncertain when the machine will breakdown.

Thus spares are ordered are kept as inventory and if it is not indented the number of

spare increases and thus inventory. Installing of new machine with better technology can

also cause increase in inventory as spares of old machines are left out as well as spares

of new machines are also ordered. Thus inventory is largely affected due to spares.

CHAPTER 5: RESEARCH OBJECTIVES

• To study and understand the financial position of the company.

• To study , understand and analyze the inventory of various raw materials, fuel,

intermediatary and finished goods.

• To study the various inventory control techniques that are followed in Nalco and

analyze it

• To analyze the selective control techniques such as ABC, XYZ and FSN analysis

applied in the company

• To calculate the EOQ of various raw materials and analyze it.

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• To evaluate the total cost of inventory for EOQ and analyze it..

• To recommend methods and strategies to control the inventory.

CHAPTER 6: RESEARCH METHODOLOGY

The research conducted in inventory control techniques in Nalco Smelter plant , Angul

followed a well defined methodology. The procedure followed is explained thoroughly in

next titles.

6.1 TYPES OF RESEARCH DESIGN

Types of research design used in this research of inventory control techniques are

descriptive as well as analytical. It follows a descriptive research design it is used to

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identify and classify the elements or characteristics of the subject. Quantitative techniques

are used to collect , analyze and summarize the data. In Nalco Smelter Plant, data and

information are collected to analyze the inventory control techniques.

Here analytical research is also used as descriptive approach is extended to suggest and

explain the causes of changes in inventory and factors effecting inventory and inventory

control techniques.

Applied research is also followed i.e. problem solving research is applied in this project.

The already known theories and knowledge of inventory control techniques are studied

and applied to practical situation like of Nalco’s inventory and understand the variation

in inventory level and finding out alternative methods and models for better inventory

control.

6.2 DATA COLLECTION TECHNIQUES

Various data and information are collected to fulfill the research objectives of the

research. The data collected are both primary and secondary data.

Data collection techniques used for collection of primary data is interviews conducted

with executives and staff of finance and stores department.

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Data collection techniques used for collection of secondary data are from stores record,

annual reports news report, news articles, journals, various web sties and professional

books as well as interview conducted with executives and staff of finance and stores

department.

CHAPTER 7: ANALYSIS & INTERPRETATION OF DATA

7.1 INVENTORY OF MATERIALS

a) STOCK OF RAW MATERIALS (RS IN CRORES)

Materials 31.03.06 31.03.07 31.03.08

C. P. Coke 180.11 240.49 183.83

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C. T. Pitch 47.67 24.15 24.90

C. T. Pitch (liquid) 13.87 7.95 17.10
Aluminium Fluoride 18.76 46.33 35.96

(indigenous)
Aluminium Fluoride 14.28 10.04

(imported)
Calcined Alumina 0.02 0.03 0.02
Pig Iron 3.04 3.17 3.29
Magnesium Metal 4.67 5.18 8.19
Ferro Silicon 0.08 0.67 3.11
Tiber Rod 3.32 3.17 3.29
Total 252.78 357.54 289.73

INTERPRETATION:

Inventory of raw materials has increased from Rs 252.78 crores in 31.03.06 to Rs

357.54 crores in 31.03.07. Production decreased from 358954 MT in 31.03.06 to 358734

MT in 31.03.07 which caused the raw materials to accumulate.

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Inventory of raw materials decreased from Rs 357.54 crores in 31.03.07 to Rs 289.73

crores. This is due to increase in production from 358734 MT in 31.03.07 to 360457

MT in 31.03.08 which leads to decrease in stock of raw materials. The decrease in

stock is also due to proper flow of raw materials from suppliers to stores and stores to

production houses. This shows improvement in planning of utilization of raw materials.

b) STOCK OF FUEL (RS IN CRORES)

Materials 31.03.06 31.03.07 31.03.08

H.F.O 17.92 16.27 30.12
L.D.O 2.73 1.73 0.91
Total 20.65 18 31.03

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INTERPRETATION:

Fuel is important material used for production process and it is very important to control

it otherwise it can lead to variation in inventory. Inventory of fuel decreased from Rs

20.65 crores in 31.03.06 to Rs 18 crores in 31.03.07. But inventory of fuel significantly

increased by almost 72.39% in 31.03.08. This increase is due increase in fuel prices and

also increase in production. But the increase is large and company should check on

utilization and storing of fuel.

c) STOCK OF STORES AND SPARES (RS IN CRORES)

Materials 31.03.06 31.03.07 31.03.08

Mechanical spares 44.15 45.00 48.29
Electrical spares 14.40 14.33 14.83
Instrumentation spares 3.91 4.65 5.6
Bearings 2.53 2.20 2.35
Gen. consumables 13.76 15.08 20.47
Pot lining 6.58 6.05 6.46
Steel and cement 4.14 4.35 3.86
Total 89.46 91.66 101.86

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INTERPRETATION:

The stock of stores and spares has been increasing from Rs 89.46 crores in 31.03.06 to

Rs 91.66 crores in 31.03.07 to Rs 101.86 crores in 31.03.08. The increase is mainly due

to increase in spares and general consumables. This shows lack of control of spares and

stores by the company.

d) STOCK OF FINISHED GOODS AND INTERMEDIATARY GOODS (RS IN

CRORES)

Materials 31.03.06 31.03.07 31.03.08

Calcined Alumina 46.98 43.93 46.51
Special Grade 1.02 0.11 1.44

Alumina
Aluminium Standard 19.00 8.82 9.92

and Sow ingots

Aluminium wire 2.29 2.33 1.05

rods
Aluminium billets 3.68 1.08 3.23
Aluminium strips 5.80 1.58 1.93
Rolled products 10.20 14.02 10.59
Anodes 55.58 71.03 73.46
Anode butts 2.12 1.46 2.05
Aluminium scraps 6.51 0.84 7.90
WIP 70.33 71.70 81.48
Total 223.51 216.9 239.56

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INTERPRETATION:

Inventory of finished and intermediatary goods has decreased from Rs 223.51 crores in

31.03.06 to Rs 216.90 in 31.03.07.This decrease is due to increase in sales in 2007

.Inventory increased from Rs 216.90 crores in 31.03.07 to Rs 239.56 crores in 31.03.08

because decrease in sales in FY: 07 08. The company should produce goods according to

demand and it should also decrease the cost of goods for greater sales.

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7.2 SELECTIVE INVENTORY CONTROL

• To identify items, which bring significant benefit by proper management from

among hundreds and thousands of items managed by an organization

• Determine the importance of items and thus allows different levels of control

based on the relative importance of items

a) ABC ANALYSIS

This selection is done on the basis of annual consumption value.

Nalco’s ABC classification for the year FY: 07 08 is tabulated below:

ABC Class Criteria No. of Materials Cumulative

Consumption Value
A 70%ofconsumptionvalue 219 75.25
B 20%ofconsumptionvalue 937 21.54
C 10%ofconsumptionvalue 9080 10.76
Total 10236 107.56

A class items having criteria 70% consumption value has 219 items with value Rs 75.25

crores. These items are required to be ordered frequently to reduce the capital locked up

in inventory. They also should have low safety stocks and follow strict control. These

items should be handled by senior officers.

B class items having criteria items with 20% 0f consumption value include 937 items

with value Rs 21.54 crores. These items require only periodic follow up and have

moderate safety stock. They need moderate control and can be handled by manager men.

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C class items having criteria 10% of consumption value and includes 9080 items with

value Rs 10.76 crores. These items require exceptional follow up and high safety stock

and require loose control thus can be handled by anyone.

b) XYZ ANALYSIS

XYZ classification is based on value of inventory kept in stores.

Nalco’s XYZ classification of inventory is tabulated below:

XYZ Class Criteria Total no. of Closing stock Cummulative

Materials value Consumption
value
X 70% of stock 1385 71.29 57.32
value
Y 20% of stock 3272 20.37 86.95
value
Z 10% of stock 38936 101.87 513.62
value
Total 43593 1018.60 1173.82

X class items having criteria 70% of the stock value consists of 1385 items with closing

stock value of Rs 71.29 crores and consumption value Rs 57.32 crores. These items are

high value items and should be taken special care.

Y class items having criteria 20% of the stock value consists of 3272 items with closing

stock value of Rs 20.37 Crores and consumption value Rs 86.95 crores. These items are

moderate value items and require moderate care.

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Z class items having criteria 10% of the stock value consists of 38936 items with

closing stock value of Rs 101.87 crores and consumption value Rs 513.62 crores. These

items are low value items and require low care.

c) FSN ANALYSIS

Fast moving, Slow moving and Non moving classification takes into account the pattern

of issue from stores. The classification is useful in identifying consumption patterns,

increased demand and obsolescence of materials. As the classification depends on

movement of materials as per consumption pattern, fixation of levels of inventory control

can be done in this classification.

Nalco’s FSN classification is tabulated below:

FSN Class No. of Materials Cummulative Consumption value

F 875 49.37
S 25512 89.02
N 11213 0.12
TOTAL 37600 138.51
Fast moving items issued at least once in a year consists of 875 items with consumption

value Rs 49.37 crores which includes mainly raw materials, fuel, general consumables

and steel and cement.

Slow moving items issued only once or twice in 3 years consist of 25512 items with Rs

89.02 crores which are some spares.

Non moving items are not issued in 5 years consists of 11213 items with consumption

value Rs 0.12 crores. These items are mainly mechanical and instrumentation spares.

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A B C AX

X AX BX CX F AXF

S AXS
Y AY BY CY

Z AZ BZ CZ N AXN

When all these selective analysis are taken together helps to take decision about all the

items in inventory. A class item that is with high consumption value and which is also

X class item that is high value and which is also non moving item is identified. Such

items are disposed off or sold as scrap immediately to decrease the inventory value.

7.3 ECONOMIC ORDER QUANTITY OFRAW MATERIALS AND FUEL

a) EOQ OF HFO

Annual consumption 29087 KL

Cost per unit Rs 20.14
Carrying cost per unit Rs 0.14
Ordering cost per order Rs 3500
Economic order quantity 1205.96 KL

Units ordered(in KL) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
500 35000 203609 586050789
600 42000 169674.1667 586023854.2
700 49000 145435 586006615

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800 56000 127255.625 585995435.6

900 63000 113116.1111 585988296.1
1000 70000 101804.5 585983984.5
1100 77000 92549.54545 585981729.5
1200 84000 84837.08333 585981017.1
1300 91000 78311.15385 585981491.2
1400 98000 72717.5 585982897.5
1500 105000 67869.66667 585985049.7

INTERPRETATION:

Economic order quantity of heavy fuel oil is calculated to be 1205.96 KL.

If we vary the quantity to be ordered the total cost of inventory is greater than total

cost of inventory if economic order quantity is ordered i.e. Rs 585981017.1

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b) EOQ OF C.P.COKE

Annual consumption 140968 MT

Cost per unit Rs 14.47
Carrying cost per unit Rs 0.43
Ordering cost per order Rs 3500
Economic order quantity 1514.87 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
1100 236500 448534.5455 2040491995
1200 258000 411156.6667 2040476117
1300 279500 379529.2308 2040465989
1400 301000 352420 2040460380
1500 322500 328925.3333 2040458385
1600 344000 308367.5 2040459328
1700 365500 290228.2353 2040462688
1800 387000 274104.4444 2040468064
1900 408500 259677.8947 2040475138
INTERPRETATION:

The economic order quantity of C.P.Coke is calculated to be 1514.87 MT.

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The total cost of inventory at economic order quantity is calculated to be Rs.

2040458385 which is much less compared to total cost calculated at different order

quantity.

c)EOQ OF C.T.PITCH (HARD)

Annual consumption 4258.436 MT

Cost per unit Rs 17.53
Carrying cost per unit Rs 1.42
Ordering cost per order Rs 3500
Economic order quantity 144.89 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
100 71000 149045.26 74870428.34
110 78100 135495.6909 74863978.77
120 85200 124204.3833 74859787.46
130 92300 114650.2 74857333.28
140 99400 106460.9 74856243.98
150 106500 99363.50667 74856246.59
160 113600 93153.2875 74857136.37
170 120700 87673.68235 74858756.76
180 127800 82802.92222 74860986
190 134900 78444.87368 74863727.95
200 142000 74522.63 74866905.71

INTERPRETATION:

The economic order quantity of C.T.Pitch (Hard) is calculated to be 144.89 MT.

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The total cost of inventory at economic order quantity is calculated to be Rs.

74856243.98 which is much less compared to total cost calculated at different order

quantity.

d)EOQ OF C.T.PITCH (LIQUID)

Annual consumption 31237.564 KL

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Cost per unit Rs 21.11

Carrying cost per unit Rs 0.06
Ordering cost per order Rs 3500
Economic order quantity 1909.026 KL

Units ordered(in KL) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
1500 45000 72887.64933 659542863.7
1600 48000 68332.17125 659541308.2
1700 51000 64312.63176 659540288.7
1800 54000 60739.70778 659539715.7
1900 57000 57542.88105 659539518.9
2000 60000 54665.737 659539641.8
2100 63000 52062.60667 659540038.6
2200 66000 49696.12455 659540672.2
2300 69000 47535.42348 659541511.5
2400 72000 45554.78083 659542530.8
2500 75000 43732.5896 659543708.6

INTERPRETATION:

The economic order quantity of C.T.Pitch (liquid) is calculated to be 1909.026 KL.

The total cost of inventory at economic order quantity is calculated to be Rs.

659539518.9 which is much less compared to total cost calculated at different order

quantity.

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e)EOQ OF ALUMINIUM FLUORIDE (INDIGENOUS)

Annual consumption 5978.1 MT

Cost per unit Rs 61.43
Carrying cost per unit Rs 1.94
Ordering cost per order Rs 3500
Economic order quantity 146.87 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
140 135800 149452.5 367519935.5
141 136770 148392.5532 367519845.6
142 137740 147347.5352 367519770.5
143 138710 146317.1329 367519710.1

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144 139680 145301.0417 367519664

145 140650 144298.9655 367519632
146 141620 143310.6164 367519613.6
147 142590 142335.7143 367519608.7
148 143560 141373.9865 367519617
149 144530 140425.1678 367519638.2
150 145500 139489 367519672

INTERPRETATION:

The economic order quantity of Aluminium fluoride (indigenous) is calculated to be

146.87 MT.

The total cost of inventory at economic order quantity is calculated to be Rs.

367519608.7 which is much less compared to total cost calculated at different order

quantity.

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f) EOQ OF ALUMINIUM FLUORIDE (IMPORTED)

Annual consumption 2696.5 MT

Cost per unit Rs 50.67
Carrying cost per unit Rs 1.32
Ordering cost per order Rs 3500
Economic order quantity 119.58 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
115 75900 82067.3913 136789622.4
116 76560 81359.91379 136789574.9
117 77220 80664.52991 136789539.5
118 77880 79980.9322 136789515.9
119 78540 79308.82353 136789503.8
120 79200 78647.91667 136789502.9
121 79860 77997.93388 136789512.9
122 80520 77358.60656 136789533.6
123 81180 76729.6748 136789564.7
124 81840 76110.8871 136789605.9
125 82500 75502 136789657

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INTERPRETATION:

The economic order quantity of aluminium fluoride (imported) is calculated to be 119.58

MT.

The total cost of inventory at economic order quantity is calculated to be Rs.

136789502.9 which is much less compared to total cost calculated at different order

quantity.

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g)EOQ OF LDO

Annual consumption 155.686 KL

Cost per unit Rs 30.34
Carrying cost per unit Rs 2.78
Ordering cost per order Rs 3500
Economic order quantity 19.80 KL

Units ordered(in KL) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
15 20850 36326.73333 4780689.973
16 22240 34056.3125 4779809.553
17 23630 32053 4779196.24
18 25020 30272.27778 4778805.518
19 26410 28679 4778602.24
20 27800 27245.05 4778558.29
21 29190 25947.66667 4778650.907
22 30580 24768.22727 4778861.467
23 31970 23691.34783 4779174.588
24 33360 22704.20833 4779577.448
25 34750 21796.04 4780059.28

INTERPRETATION:

The economic order quantity of light diesel oil is calculated to be 19.80 KL.

The total cost of inventory at economic order quantity is calculated to be Rs.

4778558.29 which is much less compared to total cost calculated at different order

quantity.

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g)EOQ OF PIG IRON

Annual consumption 926.11 MT

Cost per unit Rs 20.24
Carrying cost per unit Rs 0.74
Ordering cost per order Rs 3500
Economic order quantity 93.60 MT

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Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
90 33300 36015.38889 18813781.79
91 33670 35619.61538 18813756.02
92 34040 35232.44565 18813738.85
93 34410 34853.60215 18813730
94 34780 34482.81915 18813729.22
95 35150 34119.84211 18813736.24
96 35520 33764.42708 18813750.83
97 35890 33416.34021 18813772.74
98 36260 33075.35714 18813801.76
99 36630 32741.26263 18813837.66
100 37000 32413.85 18813880.25

INTERPRETATION:

The economic order quantity of Pig Iron is calculated to be 93.60 MT.

The total cost of inventory at economic order quantity is calculated to be Rs.

18813729.22 which is much less compared to total cost calculated at different order

quantity.

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h)EOQ OF MAGNESIUM METAL

Annual consumption 77.56 MT

Cost per unit Rs 105.6
Carrying cost per unit Rs 16.17
Ordering cost per order Rs 3500
Economic order quantity 5.7 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
1 8085 271460 8469881
2 16170 135730 8342236
3 24255 90486.66667 8305077.667
4 32340 67865 8290541
5 40425 54292 8285053
6 48510 45243.33333 8284089.333
7 56595 38780 8285711
8 64680 33932.5 8288948.5
9 72765 30162.22222 8293263.222
10 80850 27146 8298332

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INTERPRETATION:

The economic order quantity of Magnesium metal is calculated to be 5.7 MT.

The total cost of inventory at economic order quantity is calculated to be Rs.

8284089.33 which is much less compared to total cost calculated at different order

quantity.

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i)EOQ OF FERRO SILICON

Annual consumption 136.723 MT

Cost per unit Rs 29.27
Carrying cost per unit Rs 1.24
Ordering cost per order Rs 3500
Economic order quantity 27.78 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
25 15500 19141.22 4036523.43
26 16120 18405.01923 4036407.229
27 16740 17723.35185 4036345.562
28 17360 17090.375 4036332.585
29 17980 16501.05172 4036363.262
30 18600 15951.01667 4036433.227
30 18600 15951.01667 4036433.227
31 19220 15436.46774 4036538.678
32 19840 14954.07813 4036676.288
33 20460 14500.92424 4036843.134
34 21080 14074.42647 4037036.636

INTERPRETATION:

The economic order quantity of Ferro Silicon is calculated to be 27.78 MT.

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The total cost of inventory at economic order quantity is calculated to be Rs.

4036332.58 which is much less compared to total cost calculated at different order

quantity.

j)EOQ OF TIBER ROD

Annual consumption 68.483 MT

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Cost per unit Rs 201.23

Carrying cost per unit Rs 11.59
Ordering cost per order Rs 3500
Economic order quantity 6.43 MT

Units ordered(in MT) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in RS)
1 5795 239690.5 14026319.59
2 11590 119845.25 13912269.34
3 17385 79896.83333 13878115.92
4 23180 59922.625 13863936.72
5 28975 47938.1 13857747.19
6 34770 39948.41667 13855552.51
7 40565 34241.5 13855640.59
8 46360 29961.3125 13857155.4
9 52155 26632.27778 13859621.37
10 57950 23969.05 13862753.14

INTERPRETATION:

The economic order quantity of Tiber Rod is calculated to be 6.43 MT.

The total cost of inventory at economic order quantity is calculated to be Rs.

13857747.19 which is much less compared to total cost calculated at different order

quantity.

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CHAPTER 8: CONCLUSION & RECOMMENDATIONS

We can conclude from the detailed study of inventory control techniques conducted in Nalco

Smelter Plant, Angul, that a company which is one of the largest aluminium producers in India

have to maintain a large amount of inventory of raw materials, spares, general consumables as

well as intermediatary and finished goods should be we planned and controlled.

The FY:06 07 was a boom year and it gain high profits and had low inventory, but in FY:07 08,

there was depreciating dollar and import due reduction which resulted in decrease in sales and in

turn increase in inventory. The macro economic factors are reason for significant fluctuations in

inventory level and value in Nalco Smelter Plant.

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The inventory of raw materials increased in FY 07 by Rs 104.76 crores i.e. 41% and decreased in

FY:08 by RS 67.81 crores i.e. 18%.The inventory of fuel decreased little in FY:07 but increased

to Rs 31.03 Crores in FY:08.this was due to increase in fuel prices. The inventory of spares has

been increasing since 2006 from Rs 89.46 crores to Rs 101.86 crores o lack of in 2008.This is

due to lack of control in spares and stores. The inventory of finished goods has decreased

significantly in 07 due to high sales but it again increased in 08 due to low sales. Thus from the

analysis it can be drawn that the whole inventory of Nalco Smelter Plant increased in 08 due to

the macro economic factors and lack of control over some materials.

Selective inventory controls used in Nalco Smelter Plant are ABC analysis, XYZ analysis and

FSN analysis. ABC analysis showed that A class items are 219 having consumption value Rs

75.25 crores, B class items are 937 having consumption value Rs 21.54 crores and C class items

are 9080 having consumption value Rs 10.76 crores. This shows that it has less A class items

that have strict maintenance and more C class items have low maintenance which is almost ideal

for a company. The XYZ analysis showed that 1385 items come under X items with

consumption value Rs 57.32 and 3272 items come under Y items with consumption value Rs

86.95 crores and 38936 items come belong to Z items with consumption value Rs 513.62 crores.

It is good that X class have less items and Z class have more items. The last selective technique

i.e. FSN analysis showed that there are 875 fast moving items with consumption value Rs 49.37

crores and 25512 slow moving items with consumption value Rs 89.02 crores and 11213 non

moving items with consumption value Rs 0.12 crores. It is not a good sign for a company to keep

such a large number of slow moving and non moving items as slow moving items can become

non moving thus increasing the inventory. The stores department of the company combines the

whole selection analysis by selecting a A class items which is also a X class and is also Non

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moving, such items are discarded. This is a good techniques to reduce inventory developed by

non moving item.

As discussed earlier stores of Nalco for maintaining the inventory of raw materials, spares,

general consumables, fuel follow annual holding consumption norm where different are ordered

according to their annual holding norms and raw materials are ordered for 1 month consumption.

The EOQ model applied for raw materials showed that when EOQ of all the raw materials are

ordered, the total cost is minimum and if more or even less quantity is order than EOQ, the cost

of inventory is greater. Thus shows that EOQ model can be applied for procuring raw materials

with least cost.

Thus from studying the data and information collected from various sources (stock levels of raw

materials, fuel, stores and spares, finished and intermediatary goods) and analyzing various

inventory control techniques such as ABC, XYZ, FSN and EOQ model techniques it can be

concluded that inventory control techniques is important for a multi national company Nalco to

minimize inventory and maintain required stock of materials so that production do not suffer and

working capital is not block .Thus improving the performance of the company.

RECOMMENDATIONS

Looking at the present world scenario and economy these are some of the suggestions:

1. Planning committee

As the number of competitors are increasing and even produce aluminium with cost

lower than Nalco. So for maintaining its prominence in the aluminium world as industry

producing lowest cost aluminium a committee making proper planning and different

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strategies should be formed only for procurement of materials keeping in mind the

inventory.

2. Proper planning

From the study we learned that inventory in FY 08 has increased due to various macro

economic factors discussed earlier. Precise and better forecasting should be done not only

about the aluminium industry but also about the world economy. Thus maintaining low

inventory and supplying right amount of materials for production.

3. Making better use of Selective Techniques

We have seen that through selective control techniques stores can dispose the non

moving items which are increasing inventory but this process does not eliminate all non

moving items. So, selective control techniques should be better used so that most of the

non moving items are disposed off immediately. Other selective control techniques

such as VED can also be used.

4. Improving the inventory control techniques for spares

Spares such as mechanical, electrical, instrumentation spares are the materials which are

one of the reasons for high inventory as these are either slow moving or non moving

items. Thus, inventory control techniques should be used for spares and better planning

for procurement and storing should be made.

5. Revision of AP items

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Automatic procurement items are fast moving but duplicate indent may cause high

inventory. Thus, company should review the AP list from time to time and check the list

precisely for double indent.

6. Transfer of stock

There are some items which are required by different departments. If one department

finishes the items stock can be refilled by transfer from other department having surplus

items. Thus avoiding unnecessary procurement of those items.

7. Using EOQ model for procurement of raw materials

The company orders the raw materials every month. This can increase the total cost of

inventory. Thus company should use EOQ model for procurement of raw materials as

this provide right level of inventory with minimum cost.

8. Introducing SAP and ERP technology

SAP software and ERP technology provides better maintenance of data and records

through internal control. These technologies can provide easy accessibility to authorized

employee of the organization to go through the record of data, inventory etc to help

follow better inventory management.

CHAPTER 9: BIBLIOGRAPHY

BOOKS:

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JAIN, S.P. & NARANG, K.L(2004), Cost & Management Accounting, Material Control,

chapter-3, p - 50-75.

PANDEY, I.M., Financial Management, Inventory Management, chapter-29.

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0ABECF73576B/Global_Energy_Forum_NALCO.pdf

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companyID=13416&year=0http://www.energymanagertraining.com/aluminium/Aluminium.htm

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