International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-2, Issue-11, Nov.

-2016

RAW MATERIAL INVENTORY MANAGEMENT OF AN

INTEGRATED IRON AND STEEL INDUSTRIES - A CASE STUDY
1
ALOK KUMAR SINGH, 2SANDEEP MONDAL
1,2
Department of Management Studies, Indian School of Mines, Dhanbad
E-mail: [email protected], [email protected]

Abstract— Supply Chain Inventory Management plays a very vital role in achieving operational excellence of any business
organization. It is very critical and challenging task for an integrated iron and Steel plant to match the requirement of Raw
Materials with fluctuating steel market demand. In this paper, we analyze the importance and criticality of Raw Materials
Inventory Management with respect to various production rates in a typical integrated iron and steel plant of India.
Furthermore, we analyze the various factors and functions, which affect the raw materials inventory management and
perform the value analysis of the Inventory. We have analyzed the present system, based on the SWOT analysis and
suggested the improvement by introducing proper cost effective material procurement and storage so as to minimize waste
and material holdup and successfully meet the supply and demand of raw materials.

Index Terms— Raw Material Inventory, Steel Industries, Cost Analysis.

I. INTRODUCTION cost, quality and product mixes, but also in terms of

global benchmarks of efficiency and productivity.
Every organization wishes to maximize its profit by This will require indigenous production of over 100
maximizing its production and minimizing the cost of million tons per annum by 2019-2020. This implies a
production. In Integrated iron and steel industries, compounded annual growth of 7.3% per annum. To
cost of raw materials contributes around 70% to 80% meet this goal iron and steel industries should have
of cost of production of Pig iron /Steel and the amount expanded and produce at maximum capacities. To
of money incurred on raw materials is higher than the achieve this each company has to give importance of
cumulative amount for Men, Machine and other raw material management system so that it can get
expenses. These industries have continuously running good quality of raw materials at the lowest cost and
units like coke oven, Blast Furnace, Sinter Plant, SMS with minimum blockage of working capital. So far the
etc. Therefore, raw materials availability should not company under study has achieved 80% of its
be interrupted at any cost because it not only capacity in hot metal production. But to meet the
adversely affects the production, but also malfunction demand, decrease the cost of production, companies
the equipments like refractory of Blast Furnace, Coke should reach its maximum capacity for that company
Oven, SMS Convertor. has to address the problem in their raw material
Now a day all steel manufacturers face challenges in inventory management system [4].
reducing production cost on the other hand cost of
Raw materials raised 4- 5 times in last 5 yrs. OBJECTIVE OF THE STUDY
Additionally, there is a continuous fluctuation in Steel i. Study the importance and criticality of Raw
market Demand, which increases the difficulty for the material inventory management and its
steel manufacturer to match the raw materials control with respect to various production
requirements in terms of right quantity, right time rates.
without compromising the quality at the cheapest ii. Study the various factors and functions
price. which affect the raw material inventory
Therefore, Raw material Inventory management is the management.
most feasible area that can offer opportunities for
reduction of production cost and improvement of II. STUDY OF RAW MATERIAL INVENTORY
profits by matching Supply and demand by the
feeding of raw materials into the production process Demand of Pig Iron /Steel
with minimum chemical and physical variation and Pig iron /Steel is a basic commodity for all industrial
with minimum capital cost [1-3]. To achieve this, an activities and quantum of its consumption is
organization must identify the fluctuation of demand considered as an index of industrial prosperity. Bold
and determine Inventory management system to steps of industrial reforms and liberalization were
respond such fluctuation of demand and improve co- initiated in 1991, which has acted as stimulating
ordination between supply chain activities. factors for the industrial and economic activity. With
The long term goal of the national steel policy is that continued growth in industrial and constructing
India should have a modern and efficient steel activity, pig iron/Steel consumption is expected to
industry of world standards, catering to diversify steel record growth rates of 18-20%. It is one of the very
demand. The focus of policy would therefore be to few industries that have assumed a global character,
achieve global competitiveness not only in term of with the development of one region affected the
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industry all most everywhere. Pig iron was largely a Iron Ore, it is one of the major importers of pig iron
localized industry till the mid of the 20th century. In from India and NINL has share it. NINL has a
1950, for the instant a mere 11% of world production positive edge as global transporter MMTC is taking
was travelling internationally. Currently international care of marketing strategy [16].
trade handles 40% of the global output, input. The Indian Scenario
growth has been most surprising the 2nd half of the The long-term goal of the national steel policy is that
1990. Countries like China, South Korea, and Brazil India should have a modern and efficient steel
invested heavily in steel. industry of world standards, catering to diversity steel
The plummeting global steel demand had their demand. The focus of policy would therefore be to
impact on the Domestic market, which affected by the achieve global competitiveness not only in term of
inflow of cheap imported product. Besides, the Indian cost; quality and product mixes, but also in terms of
Economy also has slowed down with negligible fresh global benchmarks of efficiency and productivity.
investments in the infrastructure sector. They coincide This will require indigenous production of over 100
with sizable new capacity added in early 1990’s result million tons per annum by 2019-20. This implies a
a misjudge protection of domestic demand; this had compounded annual growth of 7.3% per annum. To
lead to a vicious circle that affected the fortunes of the meet this goal, iron & steel industry in India should
industry severely [5-15]. expand and produce at maximum capacities. So far
The production as well as the per capita consumption NINL achieved 80% of its capacity in hot metal
of pig iron is linked to the scale of economic production. To meet the demand, decrease the cost of
development of any country. This was one of the production NINL should reach its maximum capacity.
fundamental factors for giving a big push to the
industry in India soon after the independence. The pig NINL’s requirement of raw material w.r.t
iron sector was expected to lead the primary stage of production capacity
economic growth. Pig iron was the primary source for Iron Making at NINL Plant
laying the infrastructure and dragging the secondary Blast Furnace is the classical and by far the most
and tertiary sector along the growth path. economical route for Pig Iron production. One Blast
Approximate quantities of ore, fuel and flux required Furnace of 1,915 m3 useful volumes has been
for producing one ton of Pig Iron and one ton of installed to produce about 1,100,000 t/yr of gross hot
Sinter under Indian Condition are given in Table 1 metal.
and 2 respectively. Steel Making at NINL
The Basic Oxygen Furnace (yet to be installed under
Table 1: Ore quantity for one ton Pig Iron project stage Phase – II) is the classical and by far the
most economical route to steel making from BF hot
metal. Two numbers of 80 t. Basic Oxygen Furnaces
are selected to produce 614,000t/yr. of billets. Out of
this 313,000 t/yr. will be rolled into wire rods balance
27,600 t/yr. will be sold as billets in the market.
Rolling Mills at NINL
Table 2: Ore quantity for one ton Sinter Annual Requirements of Raw Materials for typical
Iron and Steel Industries under study
In order to support hot metal production of 1.1 million
tons at 100% capacity utilization, the required
quantities of critical inputs such as Iron Ore Lumps
(CLO) , Iron Ore fines, Coal, Limestone, Dolomite etc
based on assumption of different ratios of iron ore
(CLO) to sinter is given in Table 3.
Demand and Supply of various Raw materials for
NINL Table 3: Quantity of Ore
World scenario
The steel production and consumption in the last four
to five years are mainly driven by its growth in China
and the Asian countries. Spectacular economic growth
has taken place in China since the beginning of 1990s.
The apparent steel consumption of the finished steel,
increased from 70 Mt in 1992 to 104 M in 1997 and
265 Mt in the year 2004. At present China is building
its infrastructure in a big way. The requirement of
Iron and steel is met from domestic production. As
China has no better grade of major Raw material like

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III. METHODOLOGY Step 8: Based on the stock balances and the changes,
if any, in the production plan, the PPC
Here, we present a Supply chain management informs the modification in the monthly
procedure of Raw materials at the company under requirement, if any, to RMD and RMD
study. The agencies involved in the company are accordingly informs the commercial
presented in Table 4. department/ MMTC the modification in the
delivery schedule, if required.
Table 4: Agency involved Step 9: If the requirement on the material in particular
month is less than that of the schedule given
in the agreement, the Commercial department/
MMTC issues an amendment in the delivery
schedule to the supplier with a copy to the
Raw material and Finance Department.
Step 10: The Supplier/Buyer/ MMTC appoints the
public analyst, if required as per the
agreement from the panel of approved public
Analyst of NINL.
Step 11: Supplier facilitates the pre-dispatch sampling
of analysis work by the approved public
Analyst appointed at the sources as per the
terms of the Agreement /Contract.
Step 12: Supplier loads the material in the presence of
NINL/MMTC respective and arranges to
send the rail receipts(RRs) and other relevant
documents like Weighment Statement
Following are the steps involved in supply chain (Weighment done in weighbridge/Public
management of raw material system: Analyst’s Assessment on volumetric Basis),
Step 1: Production Planning & Control department Analysis report in duplicate etc. through
prepare yearly projections of the requirement representative.
of the Raw Materials based of production Step 13: Information regarding the rakes dispatched,
demand and send to Raw material department. expected time of arrival collected by traffic
Step 2: Based on the projections of Production and on word communications is made
Planning & Control department and annual available to PPC, RMD, RMHS for
stock balances, Raw Materials department subsequent course of actions.
projects the yearly & monthly requirements Step 14: When Rake reaches at NINL gate, the
along with the specifications in consultation operator of in motion weighbridge arranges
with the consuming departments(Sinter Plant / for collection of all the papers related to
Blast Furnace / RMHS) and the same is commodity carrying the rake from the
forwarded to commercial department for railway staff with the rake and weighment of
initiating procurement action. the whole rake by ensuring accurate speed of
Step 3: Commercial department calls for tenders or train. In case of any error cropped up during
advise MMTC to go for tenders. After weighment or weighment of the full rake
receiving the quotations, MMTC Commercial could not be taken for any reason
department sends these quotations, to Raw whatsoever, reweighment must be taken and
Materials department for evaluation. no Rake shall be passed on without
Step 4: Raw Materials department sends back the weighment.
quotations along with the evaluations to the Step 15: After weighment of the rake Traffic
commercial department after consulting the department organizes in coordination with
user department, viz., Sinter Plant / Blast Railway carriage staff for placement of the
Furnace is required. rake for tippler.
Step 5: Commercial department put up the quotations Step 17: Before handing over the rake to RMHS for
along with the evaluations to Competent Authority for tippling, representative of RM/TRF
approval. department ensures the missing wagons,
Step 6: After the approval Commercial department / material other than specified statement etc. if
MMTC issues Agreement to the supplier and any and inform railway authorities, Sukhinda
send the copies of agreement to RMD, finance Station. All the formalities are made in the
and QCL. presence of C.G.S., Railways for missing
Step 7: The consuming department (Sinter Plant / wagons or any other abnormalities.
Blast Furnace / RMHS) gives monthly tock balance to Step 18: While handling over the rake to shift in
PPC, RMD and Finance. charge RMHS, the Traffic department gives in

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writing signifying all details of the rake  Increase in competition from upcoming projects
Commodity loaded. Total No. of wagons, in the area.
Missing wagons, empty wagons & sick  Global shortage of Raw Materials.
wagons (if any), Total No. of loaded wagons  Global Volatility of Steel Demand.
(commodity wise in case of mixed rakes)  Spiraling input cost.
timing for placement and drawn out etc.
SWOT (strengths, weaknesses, opportunities, and IV. COST ANALYSIS
threats) Analysis of Company
It is a structured planning process that evaluates the In this analysis we present the factors of the cost of
four elements of a project or company. A SWOT the production [16-17]. Fig. 1, presents the %age of
analysis can be carried out for a company, product, different factors to the unit cost of the product. From
place, industry, or person. It involves specifying the this figure we can see that the major factor is the raw
objective of the business venture or project and material of the product in production. Figs. 2&3,
identifying the internal and external factors that are present the %age of all type of the raw materials
favorable and unfavorable to achieve that objective. required in the integrated Iron and steel company.
Here, we present all the four elements of the company Fig 1: Expenditure Breakup
as follows:

Strength: Characteristics of the business or project

that give it an advantage over others
 Captive Sinter Plant, Power Plant, Coke Oven
Battery.
 Reasonably modern technology.
 Strategic location with proximity to Paradeep
port.
 Located mid east high consuming eastern
market for pig iron/ Steel.
 Low manpower and the average age of
employee stands below 35.
 MMTC’s strength in marketing and in Fig 1: Expenditure Breakup
international trade

Weakness: Characteristics that place the business or

project at a disadvantage relative to others
 Production shops with single units, which are
heavily dependent on each other.
 No captive sources of Raw Materials except
Iron ore which is yet not operational.
 Time over run in commission of present
facility.
 Comparative high debt cost vis-à-vis
competition.

Opportunities: Elements that the business or project Fig 2: Break up Hot Metal Works Cost
could exploit to its advantage
 Modern commissioned integrated iron making
facilities, a major attraction to strategic
investor.
 Surplus coke making facility, advantage in
current high coke price.
 Easy access to export market.
 Scope of enhancement of productivity of present
units by incorporating process/technology
changes.
 Captive mining of iron ore to reduce production
cost. The mines are just located 100 km away.

Threats: Elements in the environment that could

cause trouble for the business or project
Fig. 3: Breakup of Sinter Works Cost

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From the above cost analysis, it is clear that major

Raw materials for typical Integrated Steel Plants in
terms of quantity and cost percentage of working
capital is Iron Ore and Coal. Hence company should
make stiff policy for raw material inventory
management for these Raw Materials.

Receipt and Consumption pattern of Iron Ore

The receipt and consumption of major Raw materials
(Iron ore) by NINL for the last two years (2014-2016)
is given in Figures 4&5.

Fig 6: Inventory to working capital ratio-steel sector

Major Cause of High Inventory to Working

Capital Ratio
After investigating the system, we have found the
various major cause of high inventory to working
capital ratio which are briefly discussed as follows:

 Non Operational of Captive Iron Ore Mines

Fig. 4: receipt of Iron ore in 2014-2015 In the present scenario, all the leading Integrated Steel
Plants have their own captive mines for Iron
Ore/Limestone/Dolomite/Quartzite/Manganese etc.
Besides, except TATA Steel, no steel plants has any
captive source for coking coal reserve in India hence
under Coal India Ltd is not sufficient enough to cater
to the demand supply of Indian Steel plant as a result
almost all the steel plants have made long term
agreements with foreign companies mostly in
Australia & New Zealand for procurement of low ash
metallurgical coal and with China & other countries
for Lam coke.
In NINL, pending execution of mining lease for Iron
Ore Mines in district of Sundergarh, Keonjhar in
Orissa, Iron Ore is procured from mines within and
other state.The captive mine is yet to be executed due
to the clearances from Ministry of Environment,
Forest and other Govt. statutory authorities. Hence
Fig. 5: receipt of Iron ore in 2015-2016 company procure its Iron Ore requirement from other
sources which is non sustainable and non reliable.
V. VALUE ANALYSIS Company has not enter into long term agreement with
any mining companies till date. Hence apart from its
In Fig. 6, we present the analysis of the inventory to Inventory control mechanism, company has to
working capital ratio of different company in Steel procure its Iron Ore requirement based on the
Sector [18-21]. From this figure we have found that availability of iron ore at the time of procurement.
the companies in Steel Sector revealed that the
average inventory to working capital ratio is 0.48.
 Non Utilization of Indian Coal-:
Moreover, from this table it is evident that SAIL was
Company utilize 100 percent imported coal for coke
carrying inventory equal to 0.58 times and NINL was
production where as other Steel Plant in the country
carrying inventory 1.21 times of their working
utilize both imported as well as indigenous coking
capital, which was on the higher side in comparison
coal with due proportions. Indigenous Coking Coal is
with the average ratio of 0.48 times.
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high ash content compared to imported coal. But increasing demurrage cost if company will receipt
Imported coking coal is costlier compared to iron ore in monsoon season as per their requirement,
indigenous coking coal, iron and Steel Industries have company will benefited because of cost discount.
been preferred to utilize the blend concept of imported Therefore requirement of storage of raw material on
coal and indigenous coking coal. This has proved other season is decreased and company will decrease
lower cost economics in manufacturing the finished Inventory to working capital ratio. Most beneficial
products. Company has not adopted this concept. condition for the company is that its receipt and
Some of the Draw Backs in Utilizing only imported consumption figure for each month will as close as
coking coal could be-: possible. By satisfying these condition company will
1. Cost economics in higher side. have to maintain minimum inventory to working
2. Long term agreement with foreign capital ratio.
companies is difficult.
3. Long Lead Time Cause high Inventory.
4. Any problem in overseas will adversely  Absence of any Enterprises Resources
affect the Inventory. planning Software.
Presently, company does not have any ERP software.
 Inventory control Method. Presently, all the activities required for supply chain
Current Inventory control mechanism is based on management takes more time with less accuracy and
periodic review system in which level of inventory is with high cost. Company has to adopt any ERP
reviewed at the end of each month and based on that software for its supply chain Management and trained
and any changes in production schedule, requirement their employee on that so that all the activities should
of raw materials is projected and change the delivery take less time and also response to any changes very
schedule is made to meet the requirement. effectively.
EOQ {sqrt(2DS/H)} is a mathematical formula
designed to minimize the combination of annual CONCLUSION
holding cost and ordering costs. But in case of raw
material management in Steel company, the annual Optimum inventory is the goal of every organization.
holding cost is in lakhs where-as ordering cost is Over inventory and under inventory, both cause
nominal (thousand per order) therefore total Inventory financial impact and health of the business as well as
cost is due to annual carrying cost only. Hence it is effect business opportunities. The demand and supply
inevitable for the steel plant to purchase the raw of Raw Material are very uncertain in steel industries,
materials at regular interval as per the requirement by hence raw material inventory system should be
using just in time technique. designed over a range of probable values. Raw
But by analyzing the receipt and consumption pattern material Inventory Management should be an
of last two yrs. it is clear that there is a big mismatch integrated system and dependence of function models
between iron ore receipt and consumption fig. for for decision making, so that response to a problem is
each month, From October to May, The company is quick and appropriate. When this happens
purchase more than the requirement and in the month organization achieved optimum inventory level,
of June to September receipt is less than consumption. reduce stock outs, Lower unit cost of materials, etc.
The major reason of this mismatch from June to The mismatch between demand and supply of raw
September is due to facing difficulties in handling of material to different Indian Iron & Steel Industries
Iron Ore during monsoon season. Which cause in leads to price volatility. This adversely affects the iron
increase in demurrage cost per rake. Hence cost of manufacturing industries for integrated raw material
Iron ore per ton increase inventory control. Consistent raw material feed owing
Total Cost of Iron Ore/ ton = Unit Cost of Iron Ore / a captive source can be proved more beneficial.
ton+ Railway Freight/ton + Demurrage*cost. Contrary to above purchasing from non captive
sources economically if viable, can be adopted, but
*Demurrage is the penalty given to railway for cannot be trusted upon unforeseen hindrance and
detention of railway rake beyond 8 hrs. for unloading force measures.
of iron ore. At the threshold of steel boom in domestic market and
international market, procuring raw materials from
Avg. Demurrage per rake is increase around 80% in valued sources with cost competitiveness, the
monsoon season. But on the other hand railway company has to go a long way for its Inventory
freight decreased by 17%. Railway Freight is mainly Control Management for Iron Ore Fines and Blending
depend upon distance between source and the plant. of Indian Coal with Imported coal is to be practiced
Further the contribution of unit cost of iron ore is for not only cost control but also abundant
around 80% to the total cost of iron ore and railway availability. Constraints in the procurement and
freight contribution is around 15% -20% of total cost. handling are to be overcome as mentioned and
On the other hand demurrage cost contribution is Inventory cost can be decreased by adopting a
around 1% to the total cost. Hence apart from the selective inventory control mechanism.

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