A study on

INVENTORY MANAGEMENT
With reference to
STEEL PLANT, VISAKHAPATNAM
A project report submitted to JNTUGV in partial fulfillment of the requirements

for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION
Submitted By
CHOWDARY YUKTHAMUKHI
Regd.no.23NT1E0059
Under the Guidance
Dr. S. KESHAVANAGU
M.com, MBA, PhD.
Associate Professor

DEPARTMENT OF MANAGEMENT STUDIES

VISAKHA INSTITUTE OF ENGINEERING & TECHNOLOGY
AUTONOMOUS
(Approved by AICTE, New Delhi and Affiliated to JNTUG, Vizianagaram)
Accredited by NAAC-A
57 DIVISION, NARAVA, VISAKHAPATNAM - 530027
th

2023-2025
 VISAKHA INSTITUTE OF ENGINEERING & TECHNOLOGY
AUTONOMOUS

CERTIFICATE

This is to certify that the Project report entitled INVENTORY MANAGEMENT

with reference to STEEL PLANT, VISAKHAPATNAM is a bonafide work done by

CHOWDARY YUKTHAMUKHI in partial fulfillment of the requirements for the award
of the degree of Master of Business Administration by JNTUG, Vizianagaram.

Signature of the HOD Signature of the Guide

K. DIVYA Dr. S. KESHAVANAGU

External Examiner
 DECLARATION

I, CHOWDARY YUKTHAMUKHI student of Visakha Institute Of Engineering & Technology,

hereby declare that this project report entitled “INVENTORY MANAGEMENT” with
reference to STEEL PLANT at Visakhapatnam is a bonafide record of work done by me
during the course of project work.

This project is in partial fulfillment of the requirement for the award of

degree of Master of Business Administration by Visakha Institute of Engineering &
Technology.

Place: Visakhapatnam
Date: (CHOWDARY YUKTHAMUKHI)
 ACKNOWLEDGEMENT

I express my sincere thanks to General Manager, Steel Plant for their kind co-operation
to complete my project work successfully.

I sincerely express my thanks to my faculty Dr. KESHAVANAGU, Assistant Professor for

her valuable guidance and intellectual suggestions during this project.

I would also like to expand my thanks to our head of the department Mrs. K. DIVYA, and
to all other faculty members who have helped me and supported me during the course of
my project.

I express my sincere thanks to our Principal Dr. G.V. PRADEEP VARMA, for his
continuous support and encouragement to avail me this project work.

I would be failing in my duty if I don’t express my profound gratitude to the entire

respondents who has spent their valuable time to answer the questionnaire.

Finally, I sincerely express my thanks to my Parents, all my friends and the other
members for their continuous support and love.

(Chowdary Yukthamukhi)
CONTENTS

Chapter-I: Introduction

• Introduction
• Meaning of Inventory
• Nature of Inventory
• Inventory Management
• Objectives of inventory management
• Methodology
• Objectives of the study
• Significance/Need/Importance of the study
• Limitations

Chapter-II: Industry Profile

• Introduction
• Pre-Independence
• Post-Independence
• Major Steel Industries in India
• Global Scenario
• Market Scenario
• Production Scenario
• Demand- Availability Projection
• Pricing &Distribution

Company Profile

• Introduction
• Background
• Mission
• Vision
• ISO Policy
• Objectives
5
 • Core values
• Quality Policy
• Environmental policy
• Energy policy
• OSHAS policy
• HR policy
• Customer policy
• IT policy
• VSP Technology: state of the Art
• Major Departments
• Functions of various departments of RINL \ VSP
• Inputs and Basic Infrastructure
• Corporate Strategic Management (CSM)

Chapter- III: Theoretical Frame Work

Inventory Management of Stores and spares

• Inventory of Stores and Spares

• Accounting of Stores and spares

Inventory Management and Inventory Control

• Introduction
• Inventory Management and Inventory control
• Essentials of Good Inventory Management

6
Chapter –IV: Data Analysis and Interpretation

• Inventory management in VSP Steel Plant

• Comparative Analysis
• Ratio Analysis of Stores and Spares
• Value Analysis
• Interpretation

Chapter-V: Summary and Suggestions

• Summary
• Suggestions

7
CHAPTER – I

8
 Introduction

Steel comprises one of the most important inputs in all sectors of economy. Economy of any
country depends on the strong base of the iron and steel industry. Steel is a versatile material
with multitude of useful properties, making indispensable for furthering and achieving
continual growth of the economy- be construction, manufacturing, infrastructure or
consumables. The level of steel consumptions has long been regarded as an index of
industrialization and economic maturity attained by country keeping in view the importance of
steel, the integrated steel plants with foreign collaborations were set up in the public sector in
the post-independence era.

In the words of Mahatma Gandhi, the customer is god to the organization. The organization is
required to identify and fulfill his requirement to the extent possible. His satisfaction is goal
and objective of organization. Now-a-days many organizations recognized this fact and
adopting customer-oriented policies and methods in achieving his satisfaction. In order to
fulfill his requirement, the organization is required to make available right product in right time
at right place. In production and marketing front, organization has been successfully adopting
latest technologies and methods to attract the customers. However, many organizations are yet
to establish their command in procuring right quality materials in right quantities in right time.
The reason is the concept of inventory management is not completely reached the practicing
managers. Also, many methods of inventory management or control are practically not possible
to implement. In this light of experience, an attempt made to study the concept of inventory
management and inventory controls keeping in view the concepts and methods of inventory
management followed at Visakhapatnam Steel Plant.

9
1.2 Meaning of the Inventory

The Institute of Chartered Accountants of India defined Inventory as “tangible property held
(I) for sale in the ordinary course of business or (II) in the process of production for sale or (III)
for consumption in the production of goods or service for sale including maintenance supplies
and consumables other than machinery spares”.

The American Production and Inventory Control Society states that “Inventories are stock
keeping items which are held in a stock point and which serve to decouple successive
operations in the process of manufacturing a product and getting it to the consumer”.

The basic decoupling function of Inventories has two aspects:

(a) Inventories are necessary because it takes time to complete an operation and to move the
product from one stage to another – in process and movement of inventories;

(b) Inventories employed for organizational reasons, such as to let one unit schedule its
operations more or less independently of another.

Thus, Inventory is detailed list of those moveable items, which are necessary to
manufacture a product and to maintain the equipment and machinery in good working order. The
quantities as well as the value of every item are also mentioned in the list.

10
1.3 Nature of Inventory

The major current asset is inventory. The term ‘inventory’ refers to stocks of the products of a
company in manufacturing for sale and components that make up the product. The store
inventory is anticipation of raw materials, work in progress and finished goods.

Raw materials are those basic inputs that are converted into finished products through the
manufacturing process. Work in process inventory consists of items currently being used in
the production process. Finished goods represent final or completed products, which are
available for sale.

Inventory as a current assert differs from other current asset the views of concerning the
appropriate level of inventory would differ among the different functional areas. The job
of finance manager is to reconcile the conflicting viewpoints of the various functional areas
regarding the appropriate inventory levels in order to fulfill the overall objectives of
maximizing the owner’s wealth. Inventory management is related to overall objective of the
firm.

11
1.4 Inventory Management

Inventories constitute the most significant part of the current assets of any organization. On
average inventories are approximately 60 percent of current assets in public limited companies
in India. Because of the large size of inventories maintained by ferrous, considerably amount
of funds is required to be committed in them. It is therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid unnecessary investments in them.

Purchase, production and marketing functions are mainly concerned with the management of
inventories. These functions try to have large stocks of inventories to facilitate production or
marketing of the products. It requires large investment in the inventories and may increase the
cost of product by way of interest on such investment. It is the prime responsibility of Finance
function to have a proper management and control over the investment in inventories, so that
it should not be a loss for the business. For this purpose, the Finance function has to take care
of maximum and minimum levels of stock of inventories in the business to have continuity in
production process.

The Inventory Management includes the following areas of management as:

• To decide about the size of Inventory, i.e., maximum and minimum levels of Inventory.
• To establish timing schedules, procedures and reordering sizes while procuring
the inventories.
• To decide the minimum safety levels of inventory.
• To co-ordinate the sales, production and inventory policies,
• To provide proper storage facilities,
• To arrange for the procurement, receipt and issue of materials and developing the
forms for recording these transactions,
• To assign responsibilities for carrying out inventory control functions and

• To supervise and reporting of overall activity of inventory management/control

12
Thus, Inventory Management ensures proper coordination of activities and policies regarding
procurement, production and marketing of materials/products in order to achieve better
inventory control. Hence, Inventory management includes inventory control, but inventory
control does not mean inventory management.

In large organizations, inventory management is kept under the direct control of manager
materials engineering. The basic duties of the person in change of inventory management are
listed below:

• Advising the production manager, in establishing production and material control.

• Establishing policies and programs for purchasing, receiving and storing material.

• Preparing budgets to accomplish objectives.

• Introducing control through comparison of performance against standards.

• Keeping effect with trends, which are likely to affect long-range stocking and
purchasing policies.
• Arranging for purchasing of materials, equipment’s etc.

• Consulting with engineers about current &proposed product design.

1.5 Objectives of Inventory Management

Inventory Management has become very significant process of management in the present day
of manufacturing industry. The basic managerial objectives of inventory management are

To avoid over investment or under investment in inventories and

To provide right quantity of materials in right quality at proper time and at proper value.

13
 1.6 Methodology

The information for the study is obtained from two sources namely.

1. Primary Sources

2. Secondary Sources

Primary Sources:

It is the information collected directly without any references. It is mainly through interactions
with concerned officers & staff, either individually or collectively; some of the information has
been verified or supplemented with personal observation. These sources include.

• Thorough interactions with the various department Managers of VSP.

• Guidelines given by the Project Guide, Sri DSR Murty, Asst. Manager (F&A) of
Stores Accounts Section, RINL/VSP.
• Store Keepers

Secondary Sources:

This data is from the number of books and records of the company, the annual reports published
by the company and other magazines. The secondary data is obtained from the following:

a) Stores Ledger

b) Bin Cards

c) Stores Accounts Records

d) Other books and Journals and

e) Annual Reports of the company

14
1.8 Significance / Need / Importance of Study

The scope of Inventory management is very wide that various techniques of inventory control
management like EOQ (Economic Order Quantity) Model, ABC Analysis, XYZ Analysis, FSN
Analysis, HML Analysis, SDE Analysis, VED Analysis, etc., which helps to reduce cost and
to maintain the inventory effectively.

15
 Objectives of the Study

• To conduct a study on existing practices of Inventory Management at VSP.

• To determine the inventory status of VSP and analyze them.

• To determine the monetary value of various issues involved in Inventory

Management.
• To suggest various control systems of inventory.

• To determine an effective inventory control system.

16
1.9 Limitations of Study

a) The project covers the area of stores and spares under inventory management system of the
company. It does not deal with other inventories like raw materials, finished goods and
work in progress.
b) The project deals with ABC Analysis of consumption, XYZ Analysis of inventory, FSN
Analysis of inventory and other important concepts of Inventory Management at VSP.
c) As the details of Inventory are maintained confidentially, the project deals with fewer areas
of Inventory.
d) As the time spent is only two months, it is not possible to go into detail of item wise study
in depth.
e) The collection of information is mainly through secondary data.

17
 CHAPTER -II

INDUSTRY PROFILE

18
 Introduction

Steel is an alloy of iron usually containing less than 1% carbon is a versatile material with
multitude useful properties used most frequently in the automotive and construction industries.
Steel can be cast into bars strips, sheets, nails, spikes, wire, rods or pipes as needed by the
intended user. The consumption of steel is regarded as the index of industrialization and the
economic maturity any country has attained.

The development of steel industry in India should be viewed in conjunction with the type and
system of government that had been ruling the country. The production of steel in significant
quantity started after 1990. The growth of steel industry can be conveniently started by dividing
the period in to pre- and post-independence era. In the period of pre independence, steel
production was 1.5 million tons per year, which was raised to 9 million tons of target. This is
the result of the bold steps taken by the government to develop this sector.

Growth of Steel Industry:

2.1 Pre-independence

1830 - Josiah, Marshall Health constructed the first manufacturing plant

atport Move in Madras presidency.
- James Erskin founded the Bengal iron works.
- Jamshedji Tata initiated the scheme for an integrated steel plant.
- Formation of TISCO.
- Tata iron & steel company started production.

1916 - TISCO was founded.

19
 2.2 Post-independence

1951-56 First Five Year Plan.

- No new steel plant came up. The Hindustan steel Ltd. Was born on 19th
January, 1954 with the decision of setting up three steel plants each with one
million tone input steel per year in at Rourkela, Bhilai and Durgapur; TISCO
stated its expansion program.

1956-61 Second Five Year Plan

- A bold decision was taken up to increase the ingot steel output India to 6
million tons per year & production at Rourkela, Bhilai and Durgapur steel
plant started.

1961-66 Third Five Year Plan

- During the third five year plan the three steel plants under HSL; TISCO &
HSCO were expanded as show. In January 1964 Bokaro steel plant came
into existence.
Recession Period

- The entire expansion program was actively executed during this period.

1969-74 Fourth Five Year Plan

- Licenses were given for setting up of many mini steel plants and re-
rolling mills.
- Govt. Of India accepted setting up two more steel plants in south. One
each at Visakhapatnam and Hospet (Karnataka).

- SAIL was formed during this period on 24thJanuary, 1973. The total
installed capacity from 6 integrated plants was 106 Mt.

20
1974-79 Fifth Five Year Plan

1978-80- Rolling Plant

- The erstwhile Soviet Union agreed to help in setting up the

Visakhapatnam steel plant.

1980-85 Sixth Five Year Plan

- Work on Visakhapatnam steel plant was started with a big bang and top
priority was accorded to start the plant.
Scheme for modernization of Bhilai Steel Plant, Rourkela, Durgapur, TISCO
were initiated.

1985-90- Seventh Five Year Plan

- Expansion work of Bhilai and Bokaro Steel Plants completed.

- Progress on Visakhapatnam steel plant picked up and rationalized concept

has been introduced to commission the plant with 3.0Mt liquid steel capacity
by 1990.

Annual Plans 1 9 9 0 -1992

1992-97- Eight Five Year plan

- Vishakhapatnam steel plant started its production modernization of other

steel plants is also duly envisaged.

1997-02 - Ninth Five Year Plan

- Visakhapatnam steel plant had foreseen a 7% growth during the entire plan
period.

2002-07 - Tenth Five Year Plan

- Steel industry registers the growth of 9.9 % Visakhapatnam steel plant high
regime targets achieved the best of them.

21
 2007-12 -Eleventh Five Year Plan

Cost of schemes/project original approved by Government of India is

Rs.9,569.18 crores

2.3 The major steel and related companies in India

➢ Bharat Refectories Ltd.

➢ Hindustan Steel Works Construction Ltd.

➢ Jindal Steel and Power Ltd.

➢ Tata Iron Steel Company Metal Scrap Trade Corporation Ltd.

➢ Metallurgical and Engineering Consultants India Ltd.

➢ National Mineral Development Corporation Ltd.

➢ Rashtriya Ispat Nigam Ltd.

➢ Sponge Iron India Ltd.

➢ Steel Authority of India ltd.

The global steel industry has witnessed several revolutionary changes during the last century.
The changes have been in the realms of both technology & business strategy. The ultimate object
of all these changes is to remain competitive and open global market.

The Indian steel industry is growing very rigorously with the major producers like SAIL, RINL,
TISCO, JVL and many others. Our steel industry has amply demonstrated its ability of adopt
to the changing scenario and to survive in the global market that is becoming increasingly
competitive. This has been possible to a large extent due to the adoption of innovative operating
practices and modern technologies.

22
Industrial Development in India has reached a high degree of self-reliance, and the steel
industry occupies a primary place in the strategy for future development. At present the
production of steel industry country is 34Mt. The public sector steel industry has been
restructured to meet challenges and a separate fund has been established for modernization and
future development of the industry. It is now being proposed that Indian steel industry should
Gear up to achieve a production level of about 100 Mt by the year 2000.

23
2.4 Global scenarios

As per IISI

• In March’ 2005 world Crude steel output was 928Mt when compared to march
2004 (872Mt), ∙The change in percentage was 6.5%.
• China remained the world largest crude steel producer in 2005 also (275Mt)
followed by Japan (96Mt) and USA (81Mt). India occupied 8th position (42Mt).
• USA remained the largest importer of semi-finished and finished products in
2002 followed by China and Germany.
• Japan remained the largest exporter of semi-finished and finished steel products
in 2002 followed by Russia and Ukraine.
• Other significant recent developments in the global steel scenario have been:
Under the auspices of the OECD (Organization for Economic Co- operation &
Development) the negotiations among the major steel producing countries for a
steel subsidy agreement (SSA) held in 2003 with the objective to agree on a
complete negotiating test for the SSA by the Middle of 2004. It also set subsidies
for the steel industry of a ceiling of 0.5% of the value of production to be used
exclusively for Research & Development

2.5 Market scenarios

The year 2004-05 was a remarkable one for the steel industry with the world crude steel
production crossing the one billion mark for the first time in the history of the steel industry.
The world GDP growth about 4% lends supports to the expectations the steel market is all set
for strong revival after prolonged period of depression. The Indian economy also become robust
with annual growth rates of 7-8 % this will provide a major boost the steel industry. With the
nations focus on infrastructure development coupled with the growth in the manufacturing
sector, the Indian steel industry all set for north ward movement. The draft national steel police
envisage production of 60 Mt by 2012

24
and 110Mt by2020, and annual growth rate of 6-7%. All this should therefore augur well for
the Indian steel industry.

2.6 Production scenarios: -

• Steel industry was de-licensed and decontrolled in 1991&1992 respectively.

• India is the 8th largest producer of steel in the world.

The last five-year production performance is as under: -

(In Million tons)
Year Pig Iron Sponge Iron Finished Steel
2000-01 3.39 5.44 29.27
2001-02 4.08 5.44 30.63
2002-03 5.28 6.44 33.67
2003-04 3.76 8.09 39.12
2004-05 3.18 9.93 41.15
2005-06 4.39 0.00 30.84
2006-07 3.52 0.00 31.40
2007-08 4.95 0.00 29.74
2008-09 5.08 0.00 39.95
2009-10 5.92 0.00 41.32
2010-11 6.00 0.00 44.49
2011-12 6.00 0.00 45.21
2012-13 6.01 0.00 46.01
2013.-14 6.15 0.00 46.35
2014-15 6.28 0.00 48.40
2015-16 6.32 0.00 47.50
2017-18 6.27 0.00 47.32
2018-19 6.31 0.00 45.28
2019-20 6.02 0.00 44.39
2020-21 6.35 0.00 43.89
2021-22 7.01 0.00 43.58

25
2.7 Demand – Availability Projection

• Demand-Availability of iron and steel in the country is projected by ministry of steel

annually.
• Gaps in availability are met mostly through imports.

• Interface with consumers by way of Steel Consumer Council exists, which is

conducted on regular basis.
• Interface helps in redressing availability problems, complaints related to quality.

2.8 Pricing & Distribution

• Price regulation of iron & steel was abolished on 16-01-1992.

• Distribution controls on iron& steel removed except 5 priority sectors, viz. Defense,
Railways, Small Scale Industries Corporations, Exporters of Engineering Goods and
North Eastern region.
• Allocation to priority sectors is made by Ministry of steel.

• Government has no control over prices of iron & steel.

• Open market prices are generally on rise.

• Price increases of late have taken place mostly in long products than flat products.

26
Company Profile

27
 Introduction

Steel comprises one of the most important resources of the economy. History shows that, the
strongest of civilizations have evolved quickly in the course of time, because of the proper use
of the iron and steel reserves they had. The huge iron pillars at the entrance of New Delhi
suggest that the history of iron and steel industry in India is well over 2000 years old.

Steel comprises one of the most important inputs to all sectors of the economy. Steel Industry
is both a basic and a core Industry. The economy of any nation depends on a strong base of
Iron and Steel Industry in that nation. History has shown that the countries having a strong
potential for Iron and Steel Industry have played a prominent role in the advancement in the
civilization in the world. Steel is such a versatile commodity that every object we see in our
day-to-day life had use, such as small items as nails, pins, needles etc., to surgical instruments,
agricultural implements, boilers, ships, railway materials, automobile parts. The great
investments that has gone into the fundamental research in Iron and Steel Technology has
helped both directly and indirectly many modern fields of today’s science and technology. Steel
is versatile and indispensable item. The versatility of steel can be traced mainly of three reasons.

• It is only metallic item, which can be conveniently and economically produced in tonnage
quality.

• It has got very good strength coupled with malleability.

• Its properties can be changed over a wide range. Its properties can be manipulated to any
extent by proper heat treatment techniques.

Iron and Steel making as a craft has been known to India for a long time. However, its
production is significant quantities only after 1900.

VSP by successfully installing & operating efficiently Rs. 460 cores worth of Pollution Control
and Environment Control Equipment’s and converting the barren landscape by planting more
than 3 million plants has made the Steel Plant, Steel Township and surrounding areas into a
heaven of lush greenery. This has made Steel Township a

28
greener, cleaner and cooler place, which can boast of 3 to 4° C lesser temperature even in the
peak summer compared to Visakhapatnam City.

VSP exports Quality Pig Iron & Steel products to Sri Lanka, Myanmar, Nepal, Middle East,
USA, China and South East Asia. RINL-VSP was awarded "Star Trading House" status during
1997-2000. Having established a fairly dependable export market, VSP plans to make a
continuous presence in the export market.

The govt. of India has recognized the importance of steel in Indian industry and established the
following steel plants, before it actually set up VSP/RINL. The details of those are tabulated
below.

Sl. No. Steel Plant Collaborated BY

1 Durgapur steel plant Britain
2 Bhilai steel plant Erstwhile USSR
3 Bokaro steel plant Erstwhile USSR
4 Rourkela steel plant Germany

Visakhapatnam Steel Plant profile: -

To meet the growing domestic needs of steel, Government of India decided to set up an
integrated Steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR in
1979 for cooperation in setting up 3.4 million tones integrated Steel Plant at Visakhapatnam.
The foundation was laid by the then Prime Minister Mrs. Indira Gandhi on 20th January 1971.

The Project was estimated to cost Rs.3, 897.28 cores based on prices as on 4th Quarter of 1981.
However, on completion of Construction of the whole Plant in 1992, the cost escalated to
around 8500 Cr. Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant is
one of the most modern Steel Plants in the country. The plant was dedicated to the nation on
1st August 1992 by the then Prime Minister, P.V. Narasimha Rao.
29
New Technology, large-scale computerization and automation etc., are incorporated in the
Plant. To operate the plant at international levels and attain such lab our productivity, the
organizational manpower has been rationalized. The plant has a capacity of producing 3.0 MT
of liquid steel and 2,656Mt of saleable steel.

Visakhapatnam steel plant technology: State-of-the-art: -

• 7m tall Coke Oven Batteries with coke dry quenching.

• Biggest Blast Furnaces in the country.

• Bell less top changing system in Blast Furnace.

• 100% slag granulation at the Blast Furnace cast house.

• Suppressed combustion—LD gas recovery system.

• 100% continuous casting of liquid steel.

• ‘Tempcore’ and ‘Stelmor’ cooling process in LMMM & WRM.

• Extensive waste heat recovery systems.

• Comprehensive pollution control measure.

30
Major sources of raw materials

Raw Materials Source

Iron Ore Lumps & Fines Bacheli, Chattisgarh/Gua, Jharkhand
BF Lime Stone Jaggayyapeta, AP
SMS Lime Stone UAE
BF Dolomite Madharam, AP
SMS Dolomite Madharam, AP
Manganese Ore Chipurupalli, AP
Boiler Coal Talcher, Orissa
Coking Coal Australia
Medium Coking Coal (MCC) Gidi/Swang/Rajarappa/Kargali

Water supply

Operational water requirement of 36 Mgd is being met from the Yeleru Water Supply
Scheme.

Power supply

Operational Power requirement of 180 to 200 MW is being met through captive Power Plant.
The capacity of the power plant is 286.5 MW. Visakhapatnam Steel Plant is exporting 60MW
power to AndhraPradesh State Electricity Board.

31
Major Units

Annual
Units (3.0 MT Stage)
Department Capacity
(‘000 T)
Coke Ovens 2,261 4 Batteries of 67 Ovens & 7 Meters. Height
2 Sinter Machines of 312 Sq. Meters. grate area each
Sinter Plant 5,256
Blast Furnace 3,400 2 Furnaces of 3200 Cu. Meters. volume each
Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.
Volume and Six 4 strand bloom casters
LMMM 710 Strand finishing Mill

WRM 850 44 Strand high speed continuous mill with no

twist finishing blocks
MMSM 850 6 STAND FINISHING MILL

Main Products of VSP

Steel Products By-Products

Blooms Nut Coke Granulated Slag
Billets Coke Dust Lime Fines
Ammonium Sulphate
Channels, Angles Coal Tar
Beams Anthracene Oil
Squares HPNaphthalene
Flats Benzene
Rounds Toluene
Re-bars Zylene
Wire Rods Wash Oil

32
Vision

To be a continuously growing world class company

We shall
• Harness our growth potential and sustain profitable growth.
• Deliver high quality and cost competitive products and be the first choice of
customers.
• Create an inspiring work environment to unleash the creative energy of people.
• Achieve excellence in enterprise management.
• Be a respected corporate citizen, ensure clean and green environment and develop
vibrant communities around us.

Mission

To attain 16 Mt liquid steel capacity through technological up-gradation, operational efficiency

and expansion; augmentation of assured supply of raw materials; to produce steel at
international Standards of Cost & Quality; and to meet the aspirations of stakeholders.

Objectives

Expand plant capacity to 6.3 million ton by 2011-12 with the Mission to expand further
in subsequent phases as per the corporate plan. Revamping existing Blast Furnaces to
make them energy efficient to contemporary levels and in the process increase their
capacity by 1 Mt, thus total hot metal capacity to 7.5 Mt.
● Be amongst top five lowest cost steel producers in world by 2009-10.
● Achieve higher levels of customer satisfaction.
● Vibrant work culture in the organization.
● Be proactive in conserving environment, maintaining high levels of safety and
addressing social concerns.

Core values
• Commitment.
• Customer Satisfaction.
• Continuous Improvement.
33
Quality Policy

Visakhapatnam Steel Plant Employees are committed to meet the needs and expectations of
our customers and other interested parties. To accomplish this, they will

• Supply quality goods and services to customers delight.

• Achieve quality of the products by following systematic approach through

planning, documented procedure and timely review of quality objectives.
• Continuously improve the quality of all materials, processes and products.

• Maintain an enabling environment, which encourages teamwork and active

involvement of all employees with their involvement.

Environment Policy

Visakhapatnam Steel Plant carrying out its operations without harming to the
environment. To accomplish this, they will

• Document, implement, maintain and continuously review the environmental

management system.
• Comply with all the relevant environmental legislations, regulations and other
requirements.
• Ensure continual improvement in the environmental performance and
prevention of pollution by minimizing the emissions and discharges.
• Maintain a high level of environmental consciousness amongst employees.

34
Energy Policy

Visakhapatnam Steel Plant is committed to optimally utilize various forms of energy in a

cost-effective manner to effect conservation of energy resources.
To accomplish this, they will:

• Monitor closely and control the consumption of various forms of energy

through effective Energy Management System.

• Adopt appropriate energy conservation technologies.

• Maximize the use of cheaper and easily available forms of energy.

OSHAS Policy

Visakhapatnam Steel Plant is committed to occupational health and safety of employees and
contract workers. To accomplish this, the will,

• Document, implement, maintain and periodically review the occupational

health and safety management system including the policy.
• Comply with the relevant occupational health and safety legislations,
regulations and other requirements.
• Ensure continual improvement in the environment performance and
prevention of pollution by minimizing the emissions and discharges.
• Maintain a high level of environmental consciousness amongst employees.

• Review the environmental objectives and targets on a continuous basis.

35
Human Resource Policy

Visakhapatnam Steel Plant is committed to create an organizational culture, which nurtures

employee’s potential for the prosperity of the organization. To accomplish this, they will,

• Identify development needs of the employees on a regular basis, provide the

necessary training and continually evaluate and monitor the effectiveness of the
training so that the quality of the training also gets updated.
• Provide inputs to the employees for developing their attitude towards work and for
matching their competencies with organizational requirements.
• Create an environment of learning and knowledge sharing by providing the means
and facilities and also access to the relevant information and literature.
• Facilitate the employees for continuous development of their knowledge base, skills,
efficiency, innovativeness, self-expression and behavior so that they

contribute positively with commitment for the growth and prosperity of the
organization while maintaining a high level of motivation and satisfaction.
• Prepare employees through appropriate development programs for taking up
higher responsibilities in the organization.

36
Customer Policy

• VSP will endeavor to adopt a customer-focused approach at all times with

transparency.
• VSP will strive to meet more than the customer needs and expectations
pertaining to products, quality, and value for money and satisfaction.
• VSP greatly values its relationship with customers and would make efforts at
strengthening these relations for mutual benefit.

I.T. Policy

• RINL/VSP is committed to leverage Information Technology as the vital enabler in

improving the customer-satisfaction, organizational efficiency, productivity,
decision-making, transparency and cost-effectiveness, and thus adding value to the
business of steel making. Towards this, RINL shall:
• Follow best practices in process Automation & Business Processes through IT by
in-house efforts / outsourcing and collaborative efforts with other organization /
expert groups / institutions of higher learning, etc., thus ensuring the quality of
product and services at least cost.
• Install, maintain and upgrade suitable cost-effective IT hardware, software and other
IT infrastructure and ensure high levels of data and information security

37
Major Departments

Raw Material Handling Plant

VSP annually requires quality raw materials viz. Iron Ore fluxes (Lime stone, Dolomite);
coking and non-coking coals etc. to the tune of 12-13 Million Tones for producing 3 Million.

Tones of Liquid Steel. To handle such a large volume of incoming raw materials received from
different sources and to ensure timely supply of consistent quality of feed materials to different
VSP consumers, Raw Material Handling Plant serves a vital function. This unit is provided with
elaborate unloading, blending, stacking & reclaiming facilities viz. Wagon Tipplers, Ground
& Track Hoppers, Stock yards crushing plants, Vibrating screens, Single/ twin boom stickers,
wheel on boom and Blender reclaimers. In VSP peripheral unloading has been adopted for the
first time in the country.

The Raw Material Handling Plant (RMHP) Department procures the different raw materials
from various sources. The following are the important raw material handled by the RMHP
Department.

38
Coke Oven Department

The main function of this department is to convert the coal in to coke, which is received from
RMHP Department.

Coke is a hard-porous mass obtained by functional distillation of coal in absence of air at a

temperature above 125oC for a period of 16-18 hours. It is used as a fuel and reducing agent
for reduction of iron ore in blast furnace. The following are the parameters of Coke Ovens:

Number of batteries 4
Number of ovens in batteries 67
Coal handling capacity of ovens 31.6 tones
Dimensions of oven 16m length x 7m height

Besides coke production, a number of coal chemicals are being extracted in coal chemical
plants. The coal chemicals are tar, benzyl and ammonia-based products. The coal is not
consumed directly because coke helps in reducing the pollution.

39
Sinter Plant Department

Sinter is a hard and porous lump obtained by agglomeration of lines of iron ore, coke, limestone
and metallurgical waster. This department by not wasting the powder and small pieces of iron
ore coal manganese, dolomite and limestone makes Sinter Cakes and put it for reuse. This
increases the productivity of Blast Furnace, improves the quality of pig iron and decreases the
consumption of coke rate.

40
Blast Furnace

Pig iron/hot metal is produced in blast furnace. The furnace is named as blast furnace as it is
running with blast at high pressure with a temperature of 1150oC.

Raw materials required for iron making are iron ore, sinter coke and limestone. For one tone
of hot metal production, 310Kgs. iron ore, 1390Kgs. sinter and 627Kgs. of coke with some other
additives.

For production of pig iron/hot metal there are two blast furnaces named Godavari and Krishna.
They are of the largest and most modern furnaces in the country.

41
Steel Melt Shop

Hot metal produced in blast furnace contains impurities like carbon, sulphur, phosphorus,
silicon, etc.; these impurities will be removed in steel making by oxidation process.

There are three LD converters to convert hot metal in to steel, after the conversion of hot metal
in to steel, the steel is subjected to homogenization treatment and cast in to blooms in continuous
casting machines.

42
Rolling Mills: -

Blooms cannot be used as they are in daily life. These blooms have to reduce in size and
properly shaped to fit for various jobs. Rolling is one of the mechanical processes to reduce
larger size sections in to smaller cones. The cast blooms are heated and rolled in to various
long products of different specifications at three high capacity sophisticated high-speed rolling
mills.

Wire Rod Mill: -

WRM is a stand mill and is fully automated with computers. The mill consists of 2.5 stands and
a capacity of 850,000 tons per annum. The mill product mix includes rounds and ribbed wire
in the sizes of 5.5 mm to 12.7 mm dia. wire rods are made in coil having maximum weight of
1200 Kgs. Liquid Steel produced in LD Converters is solidified in the form of blooms in
continuous Bloom Casters. However, to homogenize the steel and to raise its temperature, if
needed, steel is first routed through, Argon rinsing station, IRUT (Injection Refining & Up
temperature) / ladle Furnaces.

Wire Rod Mill is fully automated & sophisticated mill. The billets are rolled in 4 strand, high-
speed continuous mill having a capacity of 8, 50,000 Tons of Wire Rod Coils. The mill
produces rounds in 5.5 - 14 mm range and rebars in 8, 10 & 12 mm sizes. The mill is

43
equipped with standard and Retarded Stelmore controlled cooling lines for producing high
quality Wire rods in Low, Medium & High carbon grade meeting the stringent National &
International standards viz. BIS, DIN, JIS, BS etc. and having high ductility, uniform grain
size, excellent surface finish.

Medium Merchant & Structural Mill (MMSM):

This mill is a high capacity continuous mill. The feed material to the mill is 250 x 250 mm size
bloom, which is heated to rolling temperatures of 1200 °C in two walking beam furnaces. The
mill is designed to produce 8,50,000 tons per annum of various products such as rounds,
squares, flats, angles (equal & unequal), T bars, channels, IPE beams I HE beams (Universal
beams).

Auxiliary Facilities

Power Generation & Distribution:

The average power demands at all units of VSP when operating the full capacity will be 221
MW. The captive generation capacity of 270 MW is sufficient to meet all the plant needs in
normal operation time. In case of partial outage of captive generation capacity due to break
down, shutdown or other reasons. The short fall of power is availed from APSEB grid. The
agreement with APSEB provides for exporting of surplus power to APSEB. The captive
generating capacity comprises of
44
 - TPP -247.5 MW (3x60 MW + 1 X 67.5 MW)

- Back pressure Turbines (C&CCD)* - 2 x 7.5 MW

- Gas Expansion Turbines (BF / ces)* - 2x12 MW (*Power

availability from BPT & GET is around 22MW)

Power plant also meets the Air Blast requirements of Blast Furnaces thro' 3 Turbo blowers each
of 6067 NM 3 / hr capacity.

Power from APSEB is received at Main Receiving Station thro' 220KV overhead distribution
lines. The entire plant is configured as 5 electrical load blocks (LBSS 1 to 5) and step-down
substations are provided in each block with 220 KV transformers to step down to 33/11/6.6 KV
for further distribution.

Traffic Department: -

A steel plant of the size of VSP has to handle around 60 to 65 MT traffic comprising of
incoming traffic in the form of raw materials and outgoing traffic in the form of finished or
saleable steel, and also the in-process traffic such as cast pig iron, mill scrap, hot metal.
Of this 50% is transported by belt conveyors, 45% by Rail Transport and 5% by Road. VSP
has the distinction of having peripheral unloading system for the 1st time in Steel Industry.
Engineering shops & Foundry (ES & F)

Engineering Shops are set up to meet the requirements of Ferrous & Non-Ferrous spares of
different departments. This complex is divided into
1. Forge Shop

2. Structural shop

3. Foundry

4. Central machine shop

5. Wood Working Shop and

6. Utility Equipment Repair Shop (UERS).

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 The Forge shop is designed for production of shafts, coupling flanges etc. and also of forge shapes
such as crusher hammer heads, special bolts, nuts etc. In the Structural shops the fabricated
structural of about 4500 Tons are produced annually and the input consisting of sheets, plates,
channels, angles beams etc. In Foundry Iron castings up to a weight of 5 tons and non-ferrous
casting up to a weight of 1 ton are produced. 2600 Tons of iron castings and 200 tons of non-ferrous
castings are produced annually. In steel foundry, steel casting up to maximum piece weight of 10T
is produced. Steel ingots up to 1.3 Tons for forging are also produced.

In the Central Machine Shop, various spares are made. The machining section has over 100
major machine tools including lathes, milling, boring, planning, slotting, shaping, grinding and
other machines. The Wood working Shop manufactures patterns for foundries. The shop will
require 300 Cu.m. Per year of wooden patterns.

Central Maintenance Electrical: -

Maintenance of all H.T motors, L.T motors and DC motors of above 200KW. There are 810 such
large rotating electrical machines spread throughout the plant including 3 Nos. of 60 MW
Turbo-Generators, 1 No of 67.5M TG in TPP, 2 no's of Back Pressure Turbo Generators of 7.5
MW each and 2 Nos. of Gas Expansion Turbo- Generator of 12 MW each. The services provided
are as mentioned below.

a) Repairs, Maintenance and condition monitoring of all rotating Electrical machines of the
plant. The job includes transportation, Overhauling and re-erection with precision
alignment.
b) Maintenance of Electrics of all streetlights, Tower lights and Weigh Bridges throughout
the plant.

Electro Technical Laboratory

1) Repairs all the defective electronic PCB’s, which are taken out from the equipment
during their functioning.
2) Procures and arranges spare PCB’s for the equipment of PLC’s and drive controls for
motors in the plant and also for UPS systems.

46
Electrical Repair Shop (ERS):

ERS is a central repair shop to carry out repair activities like overhauling, rewinding, testing
etc., of various types of AC Motors, DC Motors, HT Motors, Submersible pumps, Distribution
transformers, Welding Machines, Control Transformers, Lifting magnets, Coils etc., of the
plant.

The Main Functions of ERS are:

a) Overhauling of motors

b) Rewinding of motors, magnets, transformers, pumps, coils etc.

c) Testing of Electrical equipment

d) Emergency Site Repairs

e) Performance assessment of electrical motors

Utilities Department: -

Utilities dept. Consists of

1. Air Separation Plant

2. Compressor Houses

3. Chilled water plants and Acetylene plants.

The ASP is designed to meet the maximum daily demand of gaseous oxygen, gaseous nitrogen
and gaseous argon. Compressor Houses produce Compressed Air required for the operation of
pneumatic devices, for instruments and controls, pneumatic tools and for general purpose in
the various production units of Steel Plants. Chilled Water plants (2 No's) produce chilled water
required for use in the ventilation and air conditioning system in areas such as office rooms,
electrical control room etc.

Acetylene plant produces Acetylene gas required for general purpose cutting and welding.

47
Quality Assurance and Technological Development (QA &TD)

The QA & TD dept. has been set up to take care of activities pertaining to Quality Control of
Raw Materials, Semi finished products and finished products. The QA & TD labs are provided
at major department like CO&CCP, SP, BF, SMS, and Rolling Mills etc., in addition to Central
Laboratory. The department monitors the process parameters for production of quality
products. QA & TD carries out analysis, testing and final inspection including spark testing of
finished products and assigns grades to them.

Calcining& Refractory Material Plant:

CRMP consists of two units - Calcining Plant & Brick Plant. In Calcining plant limestone &
dolomite are calcined for producing lime &calcined dolomite, which are used for refining of
steel in the converters.

Roll shop & Repair shop:

Roll shop & Repair shop is in the complex of Rolling Mills catering to the needs of mills in
respect of roll assemblies, guides few Maintenance spares and roll pass design. Geographically
this dept. is in three areas as roll shop-1, Roll shop-II and Area Repair Shop. The main activities
of this shop is Roll pass Design, grooving of rolls, assembly of rolls with bearings, preparation
of guides and their service and manufacture / repair of mill maintenance spares.

For the first time in the country, VSP has adopted CNC technology for grooving of steel rolling
mill rolls. High constant respective accuracy, higher productivity, use of standard tool for any
groove turning, elimination of the use of different templates, easier to incorporate groove
modification etc., are some of the advantages of CNC lathes over the conventional one.

48
Plant Design

Major functions of this unit are:

1. Development of detailed Manufacturing Drawing and Replacement Specification

drawings
2. Suggesting New Designs and detailing by doing elaborate engineering study and
Analysis
3. Standardization

Works Contracts Department

• Obtaining administrative approval on receipt of proposal from indenting

departments, tendering and awarding of work
• Converting tender committee meetings and preparing recommendations
forwarding work.
• Preparing COM/Board Note for decisions at those forums Participating in claims and
arbitration proceedings and legal cases pertaining to contracts
• Registration of agencies under various categories & classes of works periodically.

Functions of Various Department of RINL / VSP

Directorate of Operations

Production Planning and Control:

• Formulation of long-term production plans and infrastructure support.

• Formulation of Annual and Monthly production plan. This involves detailed

planning for product mix and value added steel along with Marketing Dept.
• Analyzing Plant performance against targets on a periodic basis and taking
necessary corrective actions.

49
Techno-economic and Quality: -

Formulation of techno-economic norms and energy management parameters and reviewing

the same against targets periodically.

Inputs and Basic Infrastructure: -

• Long term and short-term planning for procurement of raw materials like Imported Coking
Coal (ICC), Medium Coking Coal (MCC), Boiler Coal, Iron Ore Fines and Iron Ore
Lumps etc.,
• Formulation of Annual Inward and Outward traffic movement plan for raw materials and
finished products in consultation with Marketing and Material Management Depts.

Repairs and Maintenance Planning:

• Planning of major Capital Repairs, Shutdowns, Spares requirement and ensuring

preparedness before taking up the repairs.

Mines planning: -

• Formulation of annual and monthly production plans for BF limestone, BF grade

dolomite, Mn Ore and Sand at VSP Captive Mines.
• Monitoring of production and dispatch of Limestone, Dolomite, MnOre and Sand from
Captive Mines.

Projects planning: -

• Long and short term planning for all developmental schemes of capital nature
comprising modernization and technology up-gradation.
• Planning and implementation of Additions, Modifications and Replacement (AMR)
schemes.
• Expansion of Plant Capacity from 3.0 Mt liquid steel to 6.3Mt

50
Research and Development: -

• Identification of Technological Improvement scopes for various processes and plan for
adoption of them by acquiring design and know-how capability.
• Indigenous development of technology involving laboratory investigation.

• Development of new grades and products in coordination with marketing dept.

Information Technology: -

• Formulation of Organizational IT-Policy, IT-Security Policy and IT-Vision.

• Identification of IT enabled projects for various processes and implements them.

Budget plan and control: -

• Identification of Budget requirement under various heads.

• Control of the Budget and Spares, Consumables & Raw Materials Inventory.

• Systems and Procedures: -

• Streamlining the contract management system to ensure consistency of approach and

adoption of sound principles of contract management.
• Ensuring the implementation and maintenance of quality management system
requirements for ISO 9001:2000 Certificate.
• Monitoring pollution control activities of the Plant and interaction with the State and
Central Pollution Control Board.

51
 Project Division

Design & Engineering Department

• Liaoning with Consultants and Government Authorities in connection with designs,

specifications, approval of drawings and Liaisoning work for various types of clearances.
• Preparation of drawings, design and specification for AMR and Non-AMR jobs.

• Assisting indenting departments in technical discussion with parties and

preparation of technical recommendation.
• Layout clearances of various facilities coming in the Plant and Township.

• Operation of Consultancy contracts.

Construction Department

• Exercising supervision of work at sites both for quality and quantity checks.

• Preparation of contractor’s bills, processing of extra items and closure of contracts.

• Liaoning with suppliers, MM department, Design & Engineering Department and

Stores in connection with progress of work at site.

Arranging PAT/FAT will all concerned departments like works, design, consultants and suppliers in
terms of contract and handing over the unit to works department for operation

52
Contracts Department:

• Awarding of contract from the point on receipt of administrative approval from indenting
departments.
• Conducting commercial discussions with parties.

• Arranging Tender Committee meetings and preparing recommendations for

awarding work.
• Preparing COM/Board Note for decisions at those forms.

• Participating in claims and arbitration proceedings.

Project Monitoring Department: -

• To monitor the physical and financial progress of all the works executed by Construction
department.
• To monitor the progress of works executed by D&E as well as Contracts department.

• Preparation of various types of reports for information of Government and different levels
of Management.
• Interaction with departments and consultant for updating the schedules and networks for
Project Monitoring.

Directorate of Finance & Accounts

• Making arrangement for long-term fund requirements.

• Accounting of all minority transactions and preparation of financial statement of the

company and getting the same audited as required under law.
• Maintaining records with regard to the cost of products produced by the company.
Release of payments to suppliers/providers of goods and services &Release of salaries to
the employees.
• According concurrence to proposals for investments & expenditure as per the policies,
procedures and the Delegation of Powers.
• Conduct Internal Audits, Stock Verification and Statutory compliance.

• Making working capital arrangements.

• Submission of periodical reports to banks as per their sanctioned terms.

53
Directorate of Personnel
Department
• Manpower Planning,

• Employees’ induction,

• Service matters, policy & rules

• Industrial relations,

• Employees’ welfare

• Corporate Social Responsibility (CSR),

• Replies to parliamentary questions,

• Official Language implementation

Legal Affairs

• Legal Affairs deals with all legal matters including arbitration, coordination with
Standing Councils, Legal Advices etc.

Management Services

• Quality Circle,

• Suggestion Scheme,

• Incentive Scheme,

• Reward Scheme,

• Procedural Orders etc.

54
Training & HRD

• Leadership Training,

• Training on Motivation and Attitude,

• Team Building

• Skill Training.

• Induction and Orientation,

• Plant Practice Lectures,

• Basic Engineering Lectures,

• Plant Specialized Training,

• Management Development

55
Corporate Strategic Management (CSM)

CSM is a “think tank” of the organization. The Department is engaged in formulation of VMO
(Vision, Mission & Objectives) of the organization and developing the strategy to achieve
VMO. It has various wings which inter-alia includes Knowledge Management Cell (KM Cell).
It has also developed the Corporate Plan of RINL. It takes up strategic tasks of the organization.

56
 CHAPTER–III
THEORETICAL FRAME WORK

57
 THEORETICAL FRAME WORK

Procedure for Procurement, Receipt, Handling and Accounting of Inventory of Stores and
Spares in Visakhapatnam Steel Plant

The inventories in Visakhapatnam Steel Plant are consisting of finished goods, stock of raw
materials, stock of stores and spares and working progress. The finished goods produced at
various by production department are sold by marketing departments and accounted by Sales
Accounting Section of Finance Department. As regarding raw materials concerned, the Raw
Material Department procure the materials through Materials Management Department (here
after referred as MM Dept) for use by production departments and are accounted by Raw
Material Accounts Section of Finance Department. As the present study is restricted to
inventory of stores and spares, the procedure for procurement, receipt, handling and accounting
of stores and spares is detailed below:

• Procurement

Automatic Recoupment Cell (AR Cell) of Stores Department prepares indents in respect of
materials, which are of meant for common use by various user departments of company. The
various user departments prepare the indents for procurement of materials, which are not
procured by AR Cell considering their usage, stock position, budgetary position, etc. The
indents in respect production departments are scrutinised by Spare Part Cell of Works
Department as to their technical requirements, stock position, budgetary requirement, etc. The
indents so prepared needs to be approved by competent authority. On approval, the indents are
forwarded to MM Dept for initiating procurement action. MM Dept invites tenders from
various suppliers as per laid down procedure and finalizes the lowest supplier. An order
indicating rate, terms and conditions (hereafter referred as AT, i.e., acceptance of tender) placed
on the on such supplier. The copy of order is sent to user department, Central Stores
Department (CSD), Finance Department and other concerned sections.

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• Receipt and handling of Stores and Spares

The materials in respect of stores and spares, minor raw materials, etc. are received by CSD
from suppliers. CSD stores them and issues for consumption. CSD also identifies the surplus
and scrap materials and disposes them. For these activities, CSD follows detailed procedure
through its sections consisting of Collection cell, Receipt Stores, Discrepancy Receipt Stores,
Claims cell, Dispatch Cell, Custody Stores, AR or Stock cell, Inventory Control Cell, Disposal
Stores etc. The various functions and procedure followed by CSD is given hereunder:

• Collection cell

Collection cell receives the advance documents, like Lorry Receipts (LR), Railway Receipts
(RR), etc. indicating ownership of materials and other dispatch particulars from suppliers and
scrutinizes whether such documents are in accordance with terms of AT terms. Collection Cell
advices the transporters to deliver the consignments to the premises of CSD as per terms of
supply/transport terms in respect of full wagon/truckloads on the door delivery basis. In case
of small consignments, it assigns the collection agencies for collection of consignments from
transporters’ go-downs normally within three days after receiving the documents and within
one day for emergency consignments. Collection cell receives daily reports from collection
agency in respect of materials delivered to the CSD or its sub-stores by collection agency and
from various Receipt Stores in respect of materials delivered on full wagon/truck load basis.
Collection Cell negotiates with the transporters for reduction of demurrage charges. It obtains
open delivery/shortage certificate for damaged condition. Collection cell surrenders RRs to
Railways based on unloading reports from Receipt Stores and collect due slips for wagons not
received in the same RR. Collection Cell receives details of demurrage charges from Traffic
Department, arranges for recovery from handling contractors, where demurrages are
attributable to CSD and informs Traffic Department with due remarks, where demurrage is not
attributable to stores. Collection Cell makes payments from imprest in respect of payments
made by it towards freight, demurrages, etc. Collection Cell receives bills from unauthorized
transporters for carrying consignments forwards to Purchase Department for scrutiny and
payment. Collection Cell receives the Cheques for making payment in respect of Lubricants
and oils and arranges for their collection on handing over of such Cheques to the suppliers.
After

59
collecting the lubricants and oils, the same will be delivered to major users directly through
sub-stores after receiving Stores Issue Note for raising regularizing GARN. Collection cell also
arranges dispatch of material on the dispatch advice received from dispatch cell.

Receipt Stores

Receipt Stores receives the copies of ATs along with amendments, if any from Purchase
Department and verifies catalogue number, accounting unit in AT with reference to details
available in Catalogue Master. It verifies delivery schedule and plans the space for bulk goods.
Receipt Stores receive the consignment through wagons, trucks, collection agency, etc.

In respect of consignments booked in full wagon loads, railways hands over the wagons to
Traffic Department. At the time of taking wagons from Railway, Traffic Department verifies
condition of seals/lashes of the wagons and reports the damaged/ tampered/duplicate
seals/lashes. After receiving intimation from Traffic Department, Receipt Stores ascertains the
ownership of wagons and acknowledges the placement of wagons. Receipt Stores assigns
unloading to handling contractor. After unloading is completed, receipt stores shall inform to
Traffic Department for drawing out the wagons. Receipt Stores indicates details of materials
received along with discrepancies, if any by signing the delivery book maintained with
Railways and passes the Discrepancy Delivery Message to all the concerned.

Discrepancy Receipt Stores (DRS)

On rejection of materials by inspection agency, Receipt Stores prepares a rejected GARN and
hands over the material to DRS in respect of breakages/damages at the time of receipt, wrong
supply, incomplete supply and quality problems. DRS receives the GARN along with AT copy,
Delivery Challan / Invoice Copy and Inspection Report. DRS also receive the material from
custody stores under dispatch note for the materials rejected subsequent to GARN at Custody
Stores. DRS receive and tally the material with GARN. In case of bulk materials, the materials
are stored in the respective Custody locations. DRS deal with the cases of Receipts Stores for
general items and spares. In case of other items, the respective Custody Stores deal with the DR
cases.

60
DRS categorizes the rejected material into (a) breakages/damage, which can be covered with
insurance and (b) all other DR cases and initiate the actions for clearing the DR stores. In case
of breakages/damages, DRS take up with the supplier for replacement/rectification. DRS advise
Finance Department for recovery/withholding the payment. In case of emergency requirement
of plant, DRS shall issue the materials against SIN.

DRS send a list of rejected cases to the members of the MRB in advance. MRB meets at regular
intervals and reviews every DR case within 45 days from the date of rejection and decides
whether (a) the deviation is marginal and material can be used with marginally reduced
efficiency, (b) rectifications required to be carried out to put the material in use and (c) materials
is to be rejected altogether and also the action to be taken against the supplier for suspension
of future business relations, etc. Based the decision of MRB, DRS takes the approval of
competent authority for accepting the material and prepares the accepted GARN.

DRS issues materials to various user departments out of the rejected materials for emergency
needs after obtaining suitability certificate and approval from competent authority. Whenever
materials are issued to department out of rejected lot due to urgency, receipt are regularized
immediately by raising GARNS under a separate identified series with remarks that these
GARNS are not meant for release of payment to the supplier in order to enable accounting of
both issues and receipts. Subsequently after settling the issue of rejection by way of rebate etc.,
DRS sends a communication to the bill passing section for release of payment appropriately
clearly liking reference of GARN and also MRB decision. Valuation of both receipt and issue
would be done as per the usual practice.

Claims Cell

Collection Cell/Receipt Stores send a non-receipt report for all road consignments to Claims
Cell indicating the insurance clause as per terms of AT. Receipt stores shall send discrepancy
report in respect of shortages, etc. for claiming damages immediately after

61
completion of inspection along with documents like, Invoice/Delivery Challan, Inspection Note
for damages, Shortage/Open Delivery/Assessment Delivery Certificate, etc. to Claims Cell.
However, Discrepancy Report for damages or repair charges valuing less than Rs.500, where
the insurance is to be borne by company is not forwarded to Claim Cell.

Where insurance is responsibility of supplier, Claims Cell lodges the claims in respect of non-
receipt/shortage/transit damages with the suppliers and follows up for
repair/replacement/reimbursement. Where insurance is responsibility, Claims Cell lodges the
claims along with necessary documents required with Insurance Company through Finance
Insurance Claims Section and follows up for their settlement. The claims are withdrawn on (a)
settlement of claim by Insurance Company, (b) rectification/replacement by supplier and
clearance by Inspection, (c) deduction of payment in the supplier’s bill and (d) settlement
through MRB.

Dispatch Cell

Dispatch Cell receives the materials from DRS for dispatching the rejected material to
suppliers, from Receipt Stores for returning excess supplies/samples for testing to suppliers,
from Custody Stores for reconditioning of materials or returning of materials against quality
complains to suppliers and from user departments for reconditioning, rectification or
modification on placement of ATs for such jobs and for returning empty gas cylinders along
with a dispatch note. Dispatch Cell certifies the condition of materials, arranges for packing the
material, informs to Insurance Company through Finance Insurance Section for coverage of
transit risk and hands over the materials to Collection Cell. Collection Cell hands over the
material to transporter receives LR/RR from transporter and sends the LR/RR to Dispatch Cell
for their action. Dispatch Cell forwards original LR/RR to the supplier along with a copy of
dispatch note.

Custody Stores

Custody stores receives accepted material against GARN and gives acknowledgement to
Receipt Stores after checking a) catalogue number, b) description, c) unit code, d) quantity for
shortage/excess, and e) quantity for damage shall tag the material. Custody Stores arranges the
material in racks, note down the location on the GARN copy, updates the received quantity in
Bin Card. If Bin Card does not exist, Custody Stores Executive

62
shall authorize opening of a new Bin Card and ensures no duplicate card. Whenever a
continuation card is to be opened after completion 40 lines, Custody Stores Executive will tally
the balance at line number 40.

Custody Stores transfers these materials along with balance stock to the supplier received under
same GARN to DRS for taking suitable action by DRS. For adjustment of stock balances,
Custody Stores raises Stock Adjustment Voucher (SAV), where physical balance does not
match with bin card balance, for rectifying the error/discrepancy in ground balance with
respective bin card balance for the following reasons.

1 Physical discrepancies (a) Storage losses

(b) Pilferage loss
(c) Loss on account of Fire, etc
(d) Excess/storage on stock
verification
2 Existence of Duplicate Bin Card
3 Rectification of Errors in Catalogue Number
(a) Error in posting transaction
quantity
(b) Posting in wrong bin card
(c) Wrong issue

Primarily the Custody Stores groups of respective Storehouse are responsible for accounting
and custody of material. Custody Stores offers the stocks for verification to the stock verifier.
Custody Stores verifies the items at the time of each transaction and in case of discrepancy, the
same is brought to the notice of Custody Stores Executive.

Stock verification shall be carried out by (1) Stock Verification Section of Finance and (2)
Internal Stock Verification of Stores Department. Custody Stores is required to get verified its
stocks of materials by Stock Verification Section of Finance Department. Custody Stores
associates with stock verifier and got verifies the material and certifies the physical stock on
a Joint Stock Verification Report.

63
Stock Cell

Stock Control or Automatic Recoupment (AR) Cell procures general consumables with
standard specification and items generally required by more than one unit of a plant, which are
included in AR list as decided by AR committee. AR committee is a standing committee
constituted with the approval management. AR Cell ensures availability of all vital items all
the time. AR items are grouped as (a) vital items, which directly affect the production and (b)
other items AR items. AR items are categorized as per value into (Class A) annual consumption
value more than Rs.1,00,000/-, (Class B) annual consumption value less than Rs.1,00,000 to
50,000/- and (Class C) annual consumption value less than Rs.50,000/-

Custody Stores informs stock position of AR items to AR Cell twice a week. Most of the AR
items shall be covered under rate contracts. AR Cell places AT for these items directly on the
under-rate contracts with copies to (a) Finance (b) Receipt stores and (c) Inspection agency.
Supplier under rate contract is required to keep enough stock of AR items. Deliveries shall be
staggered monthly/quarterly based on the projected annual requirement and actual
consumption. Vital items and Class A items are reviewed monthly and suppliers are advised
with modified delivery schedule. Delivery corrections in respect of Class B items are under
taken once in a quarter.

Inventory Control Cell

Inventory Control Cell prepares inventory status and circulates to all user departments at least
once in quarter. It also carries out X Y Z analysis and circulates list of X and Y items half
yearly to user departments.

X Items contributing to 70% value of stock.

Y Items contributing to 20% value of stock.

Z Items contributing to 10% value of stock.

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Inventory Control Cell identifies the slow-moving and non-moving materials. General items
which have not been issued even once during the last 5 (five) years shall be considered as non-
moving items. The position of the item at the beginning of financial year shall be considered
for analysis. Non-moving inventory should not include Insurance inventory. An item shall be
removed from non-moving list only when existing stock becomes nil and it is not declared as
surplus item. Items which had at least one issue per year in the last 3 (three) years are
considered as Fast-Moving items. Slow moving items are items other than insurance items
which do not fall under the category of non-moving or fast-moving items.

Inventory Control Cell scrutinizes general stores indents and rationalized spares and advice for
suitable procurement action. It also identifies the general stores items, which can be
standardized in consultation with SPC. It carries out ABC analysis of general stores items and
monitor consumption pattern on a quarterly basis and furnishes report to user department and
Purchase Department.

AR Cell All General Stores items

Spare Part Cell All rationalized Mechanical and

Electrical spares
Refractory Engineering Dept Refractory items
RS&RS Rolls and Roll Guides

First three digits Class of Material

Next two digits Sub Class of Material
Next four digits Serial Number of items
Next one digit Source Code
Last digit Check Digit

Source Code Source of Supply of Material

0 Indigenous

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 1 Imported (other than Russian)

2 Reconditioned
3 Russian
5 Insurance item-indigenous
6 Insurance item-imported
7 Insurance item-reconditioned

Check digit is calculated with the principle that each digit in the catalogue number is multiplied
by its positional value starting from the source code, the sum of these products is divided by 11
and the remainder is designated as ‘Check Digit’. However, the remainder is 10 the check digit
shall be 0.

Different unit codes like, 01 for numbers, 02 for pair, 03 for dozen, 17 for metric ton, etc are
used for accounting of items in stores. Storehouses are identified with Department Codes for
easy identification of spares meant for particular department.

Disposal Stores

Disposal stores receive all scrap and surplus material through Store Return Note (SRN).
Disposal Stores verifies thoroughly material received, weights, unloads in an earmarked lot,
and ensures that one type/lot of materials is unloaded at only one location. A lot is normally
formed of the same type/quality of material. The SRN is entered in the Day Book, Lot Register
and in Bin Card.

Disposal action is normally taken in respect of items like, (a) scrap/cut pieces of steel items
generated during fabrication and returned to CSD, (b) construction equipment and other
materials like steel, pipes, refractories, etc. declared as surplus, (c) spares procured and available
in stock in respect of equipment’s, which are replaced, (d) non-moving items which are declared
as surplus, (e) turnings and borings generated from workshops, wood and other packing
materials, old automobiles and electrical/electronic materials, which are declared as
surplus/unserviceable, etc. The concerned Department takes action for declaring the above

66
items as surplus/obsolete by obtaining approval of competent authority as per approved
delegation of powers and after taking recommendations from departmental committee
constituted to declare such items as surplus/obsolete. After obtaining approval, the concerned
Department sends the material along with SRN to Disposal Stores for disposal.

The intending customers deposit the tender in the separate tender boxes kept in the CSD. CSD
ensures all tenders received by post are dropped in the relevant box before closing time. The
tender box sealed immediately after the time specified for receipt of tenders in the invitation to
tender. Thereafter, two officers, one from Finance Department and another from CSD open the
tenders. All the tenders are opened in the presence of authorized representative of customers.
If a tender is received without indication of tender number and opened in normal course in
office, the same is put in a cover and sealed by an Executive who receives such tender in the
first instance duly super scribing the tender number, date, the name of the customer and the
same shall be dropped in the specific tender box thereafter.

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Accounting of stores and spares

CSD decides an issue control series for raising documents like GARN for receipt of materials,
SIN or DN for issue or dispatch of materials, SAV for adjustment of balance of stock, SRN for
returning the materials and STV for transferring materials at the beginning of the year and
circulates to the concerned operating persons including SAS. CSD raises the documents like
GARNS, SIN/DNS, SRNS, STVS, and SAVS in accordance with stores procedure order and
posts them in the Bin Cards or Bin Master in on line.

In addition to the above Bin Master data extracted by System Department, at the end of each
month SAS provides data in respect of adjustments made to the quantity, value and account
codes of documents processed in the earlier months for processing as given below:

S.No. Document Card Code adopted for raising documents /

type adjustments by
CSD SAS
1 GARN 31 32
2 SAV 33 34
3 SRN 35 34
4 STV 36 34
5 SIN/DN 38 37

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SAS makes value or quantity adjustments for various jobs like (a) Preparation of material
issues to contractors, (b) Review of odd balances in priced stores ledger (c) Capitalization of
issues, (d) Insurance spares accounting, (e) Reconciliation of provisional labiality for suppliers,
(f) Material sent for repairs/replacement/rectification/ on loan basis, (g) Review of SAVs rose
for shortage/excess, (h) Reconciliation of priced stores ledger and bin cards/master and (i)
Scrutinizing and accounting of documents and (j) for making any accounting adjustments. After
carrying out above jobs, stores account section passes various adjustments for incorporation in
monthly data. The adjustments are based on input like PSL extracts, workings for capitalization
of materials, correspondence from CSD, copies of bin-cards in case of reconciliation of Bin
Master and PSL. These adjustments are entered in adjustment data registered on daily basis
and incorporated in the monthly transaction data. Normally, SAS will not make any quantity
adjustments except for adjustment of mismatches in PSL–Bin Master Quantities.

The transactions are rejected because of (a) Non-pricing of GARNS (b) Non-availability of
catalogues in PSL and (c) the value of any transaction is zero for any reason (d) wrong account
code, wrong responsibility code, wrong unit code, etc. After receipt of the rejected edit in soft
copy from System Department, SAS obtains the value of GARN’S for non-priced GARN’S
from purchase bills section and works out the rates for each item to dbase package and updates
in system. System rejects the new catalogues operated by central stores department through
SIN/DNS/SAVS which do not exist in PSL. Wherever the transaction value is zero or in case
of wrong account code/ responsibility code/unit code, etc., SAS verifies the reasons and assigns
the correct value/account code/responsibility code/unit code, etc. for that transaction to clear
rejected transaction edit.

1 Monthly or Cumulative Inventory cum Consumption Report

2 Priced Stores Ledger
3 Monthly Transactions Data in a soft copy
4 Voucher-wise Statement
5 Account Code Summary report
6 Material Group wise Statement

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 7 Journal Voucher Detailed Report
8 Journal Voucher Summary Report
9 Reports required for Costing Section
10 Variance Report

After processing the data, System Department informs the monthly consumption value to stores
account section checks for abnormalities before giving clearance for generation and to forward
the following reports to SAS for preparation of Monthly or Cumulative Inventory cum
Consumption Report and other following reports.

SAS transfers the Journal Voucher Data to Financial Package by a merging program, so that
all the transactions reflected in Priced Stores Ledger are carried to Section Ledger directly at
the end of each month. Based on the Cumulative/Monthly Inventory cum Consumption
Statement, SAS prepares and circulates a Cumulative/ Monthly Inventory cum Consumption
Statement for information of Heads of Departments, to Budget Section for preparing working
results and to Cash Section for furnishing information to Banks on moving stocks, based on
which cash credit/loan is utilized. The various jobs for accounting of inventories/consumption
done by SAS are listed below:

Calculation of Stores Overheads percentage

SOH means freight inward, insurance and other like amounts incurred by the company, where
these amounts may not be recognized against each receipt of materials. The respective bill
passing sections debits amounts to the SOH account on their payment and SAS credits the
amount charged to consumption to SOH account. SAS calculates the Stores Overheads (SOH)
percentage based on the total SOH value balance lying at the year beginning and total opening
stock of stores and spares. This SOH percentage is informed to System Department for applying
consistently on all issues of materials while charging to consumption from July to June of each
year.

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Review of Odd Balances

SAS arrives at the monthly inventory balances based on the transaction data furnished by
System Department and reviews the odd balances in the inventory at the end of each

month.

Odd balances are such balances where (a) quantity is ‘zero’ and value is ‘non-zero’, (b) quantity
is ‘non-zero’ and value is ‘zero’, (c) quantity is ‘negative’ and value is ‘negative’, (d) quantity
is ‘negative’ and value is ‘positive’, and (e) quantity is ‘positive’ and value is ‘negative’. SAS
verifies for the reasons and passes appropriate adjustments, if necessary for rectification of odd
balances.

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Insurance Spares Accounting

SAS obtains list of transactions in respect of GARNS, SINS/DNS, SAVS, STVS, SRNS and
other adjustments passed by SAS in respect of insurance items from System Department on
monthly basis. The receipt value along with SOH of materials is capitalized. SAS values the
issues and stock adjustments on FIFO basis and identities the difference in value based on FIFO
and PSL value (monthly weighted average). Necessary Journal Voucher for accounting of
insurance spares and adjustments for adjustment total value of insurance spares shown in PSL
and value shown in Section Ledger, if any are passed.

Verification of Material Issued for Repair, Replacement or Rectification and their

subsequent receipt

CSD issues various materials for Repair, Replacement or Rectification and receives back them
subsequently. For identification of these issues and receipts, a separate control number of series
of SIN/DN and GARNS are used. Based on the control number series, the issues and receipts
are accounted to ‘Material Issues on Loan Account’ by System. SAS reconciles the above
account on monthly basis, identifies difference in value of issue and receipt and passes
adjustments for such differences. SAS clears the differences in SOH by way of Journal
Voucher. SAS informs to CSD the store house wise and catalogue wise dispatch notes raised
for material issued for repair, replacement and rectification but not received back and GARNS
for the material received, for which material is not dispatched for further reconciling and for
taking obtain for recovery of material in respect of material issued and for sending the material
in respect of GARNS.

Documents Review by Stores Account Section

CSD sends documents in respect of GARNs with control number above 8000, all SAVs, SRNs,
STVs and SINs/DNs with control number above 50,000 to SAS on day-to-day basis

72
from various individual stores. Stores account section files all the above documents in the order
of the month/card code/stores house/serial number wise. After receipt of the IOM indicating
first and last control number of documents, SAS verifies whether all the documents are received
or not as per the first and last control numbers.

SAS verifies the GARNS whether all are priced correctly or not. In respect of GARNS, which
are not correctly priced, appropriate adjustments are passed and entered in the adjustment data
register. SAS identifies the GARNs in respect of materials received under works/operation
contracts and transfers the amount to Works/Operation Bills sections through Inter Section
Adjustment Account.

SAS verifies whether quantities mentioned in the SRN are correctly posted in the ledger or not.
SAS verifies whether quantities mentioned in the SIV is correctly posted in the ledger. SAS
verifies whether for each positive STV, another negative STV raised or not, in case of transfer
from one storehouse to other storehouse within the plant. Where STV is raised for transfer of
material from one group to another group, a Journal Voucher is to be passed for adjustment of
balances of the material groups in Sectional Ledger. SAS verifies whether quantities mentioned
in the SIN/DN are correctly posted in the ledger or not. During the verification of the
documents, in case of any discrepancy is found, on adjustment is passed to rectify the
discrepancy and entered in the adjustment data register.

Wherever, the adjustments are passed by SAS, the same are entered in an Adjustment Data
Register and the same were fed in Materials Package in System and transmits the data to System
for incorporation in the monthly transaction data. The Journal Vouchers prepared by SAS are
fed in Finance Package for processing of Section Ledger Data.

Accounting of Scrap Sales

Disposal Stores, on receipt of demand draft (DDS)/ Bankers Cheques from customers towards
sale of scrap, surplus or obsolete items, forward them along with on IOM indicating the details
of advance received, delivery order to SAS for depositing them with bank. SAS ensures all DDs
are received in respect of each delivery order issued by Disposal Stores. In case of new
customer, details are updated in Customer Master Data

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Base in System. SAS prepares and sends the receipt voucher along with demand drafts to cash
section for realization. On receipt of full amount in respect of each lot auctioned/ tendered from
customer, Disposal Stores issues Delivery Order (DO) to the customer. On delivery of
materials, CSD raises a Dispatch Note (DN) for accounting of issue of materials in Bin Card and
Delivery Challan cum Invoice evidencing the delivery of materials to customer. On completion
of deliveries in respect of each delivery order, Disposal Stores raises a Delivery Completion
Report (DCR) received from customer invoice value, recoveries in respect of late payment
charges, ground rent, etc. the balance if any refundable.

Disposal Stores sends the copies of DO, DN, DC cum Invoice and DCR to SAS. Disposal
Stores makes available monthly invoice data at the end of month to Stores Accounts Section.
On receipt of monthly invoice data, SAS verifies for any missing numbers and whether sales
tax is correctly charged as per destination indicated in invoice and generates a journal
accounting voucher for accounting of sales in the System. From the monthly invoice data,
Stores Accounts Section prepares and forwards monthly sales tax returns to sales tax section of
F&A department. Disposal Stores Collects the C/G forms from the customers in respect of
CST sales. The duly filled-in “C/G” Forms shall be forwarded to Sales Tax Section of F&A
Department on quarterly basis based on the monthly invoice data and monthly sales tax returns
which in turn submits the same to Sales Tax Authorities. Wherever C/G forms are yet to be
received, the same will be followed up with customers by Disposal Stores. On receipt of DCR
from Disposal Stores, Stores Accounts Section will refund the available balance amount against
a particular DO after affecting the recoveries like ground rent, late payment charges, etc. by
making a Payment Voucher and forward to Cash Section for making refund by way of Cheque
to the Customer directly. At the end of each month sub ledger is generated in respect of
transactions pertaining to scrap sales.

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Annual Accounting Jobs

As a part of annual accounts closing, SAS calls for certain information from CSD, Works
Department and System Department. SAS completes all the routine monthly jobs like,
documents review, reconciliation of PLS Account, capitalization, insurance spares

accounting, review of SAVs raised for shortage/excess, review of materials issued on loan,
reconciliation of PSL–Bin Master, etc. SAS reviews all odd balances and ensures that PSL
contains only positive quantities and values in respect of all items of stocks of stores and spares.
SAS ensures all items including insurance spares are capitalized and necessary entries/
adjustments are passed for effecting capitalization. SAS furnishes the details of capitalization
and insurance spares to Corporate Accounts Section for providing depreciation. Based on the
information furnished by Works Department, SAS works out value of the inventory with shop
floor and passes necessary entry for reversing consumption and increasing the stock value. SAS
creates provision for the values of SAVs raised in respect of shortage/excess, where approval is
pending and shown in material under investigation. Based on the information furnished by
System Department, SAS reconciles the PSL-Bin Master, works out the value of PSL-Bin
Master cases and creates a provision. Based on the information furnished by CSD, SAS creates
provision for the value of SAVs not raised in respect of shortages/excess where the same are
reflected in the Stock Verification Report. Based on the information furnished by CSD, SAS
creates a provision for the 100% value of surplus/ obsolete materials. Based on the information
furnished by System Department/ CSD, SAS creates a provision for 20% value of non- moving
items of stock of stores and spares. All the above provisions are created by charging to revenue
in case they are in excess of earlier provisions made; otherwise, the difference will be
transferred to provisions no longer required account. SAS prepares schedules for various
accounts and notes to accounts and get them audited.

Thus, the stores and spares are procured, received and accounted in the company in a systematic
manner with lot of internal controls built-in in the system, which are commensurate with the
scale of production.

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Why Organization is to Carry Inventory

The need and importance of inventory varies in direct proportion to the idle time cost of men
and machinery and urgency of requirement. If men and machinery in the factory could, wait
and so could customers, materials would not lie in wait for then and no inventories need to be
carried. But it is highly uneconomical to keep men and machinery waiting and the requirements
of modern life are so urgent that they cannot wait for materials to arrive after the need for them
has arisen. Hence, the organization needs to carry the inventories. There are three general
motives for holding inventories.

• The transaction motives which emphasis the need to maintain inventories to facilitate
smooth production and sale operations.
• The precautionary motive, which necessitates holding of inventories to guard against the
risk of unpredictable changes in demand and supply forces and other factors.
• The speculative motive which influences the decision to increase or reduce inventory
levels to take advantages of price fluctuations.
• Inventory helps in smooth and efficient running of business.

• Inventory provides service to the customers immediately or at short notice.

• Due to absence of stock, the company may have to pay high prices because of piece– wise
purchasing. Maintaining of inventory may earn price discount because of bulk purchase.
• Inventory also acts as a buffer stock when raw materials are received late and so many
sale-orders are likely to be rejected.
• Inventory also reduces product costs because there is an additional advantage of batching
and doing long smooth runny production run.
• Inventory helps in maintaining the economy by absorbing some of the fluctuations when
the demand for a items fluctuates or is erratic.
• Pipeline stocks (also called process and movement inventories) are also necessary where
the significant amount of time is consumed in the transshipment of items from one
location to another.

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Inventory Management and inventory control

The concepts of Inventory Management and Inventory Control are different. Inventory
Management ensures proper coordination of activities and policies regarding procurement,
production and marketing of materials/products in order to achieve better inventory control.
Hence, Inventory management includes inventory control, but inventory control does not mean
inventory management. Before understanding these concepts, the objectives of Inventory
Management are to be understand, which are discussed under two heads, i.e.

(A) Operating Objectives

(1) Availability of materials

The first and the foremost objective of inventory management is to make all types of materials
available at all times whenever they needed by the production departments so that the
production may not be held up for want of materials. It is therefore advisable to maintain a
minimum quantity of all types of materials to move on production on schedule.

(2) Minimizing the wastage

Inventory management has to minimize the wastage at all levels i.e., during its storage in the
go-downs or at work in the factory. Normal wastage, in other words uncontrollable wastage,
should only be permitted. Any abnormal but controllable wastage should strictly be controlled.
Wastage of materials by leakage, theft, embezzlement and spoilage due to rust, dust or dirt
should be avoided.

(3) Promotion of manufacturing efficiency

The manufacturing efficiency of the enterprise increases if right types of raw material are made
available to production department at the right time. It reduces wastage and cost of production
and improves the morale of workers.

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(4) Better Service to Customers

In order to meet the demand of the customers, it is the responsibility of inventory management
to produce sufficient stock of finished goods to execute the orders received from customers. An
uninterrupted flow of production is to be maintained.

(5) Control of Production Level

Inventory Management have to decide to increase or decrease production level in right time so
that inventory is controlled accordingly. But in odd times, when raw materials are in short
supply, proper control of inventory helps in creating and maintaining buffer stock to meet any
eventuality. Production variations can be avoided through proper control of inventory.

(6) Optimum Level of Inventories

Proper control of inventories helps management to procure materials in right time in order to
run the plant efficiently. Maintaining the optimum level of inventories keeping in view the
operational requirements avoid the out-of-stock danger.

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(B) Financial Objectives

(1) Economy in Purchasing

Proper inventory management system brings certain advantages and economies in purchasing
the raw materials. Management makes every attempt to purchase raw materials in bulk quantity
and to take advantage of favorable market conditions.

(2) Optimum Investment and Efficient Use of Capital

The primary objective of Inventory Management, from financial point of view, is to have an
optimum level of investment in inventories. Inventory Management has to ensure neither any
deficiency of stock of materials nor any excessive investment in inventories so as to block the
capital, which could be used in an efficient manner. Inventory Management has to set up
minimum and maximum levels of inventories to avoid deficiency or surplus stocks.

(3) Reasonable Prices

Inventory Management has to ensure the supply of raw materials at a reasonably low price, but
without sacrificing the quality. It helps to reduction of cost of production and improvement in
quality of finished goods in order to maximize the profits of organization.

(4) Minimizing Costs

Minimizing inventory costs such as handling, ordering and carrying costs, etc. is one of the main
objectives of Inventory Management. It helps reduction of inventory costs in a way that reduces
the cost per unit of inventory and thereby reduction of total cost of production.

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Inventory Control:

Inventory control is a primary part of Inventory Management. It is concerned with achieving

an optimum balance between two competing objectives.

The objectives are

- To minimize investment in inventory

- To maximize service levels to the form’s customers and its own operating
departments.

In achieving the control over inventories, the organization adopts various methods of inventory
control.

These includes (1) Min-max plan, (2) Two Bin System, (3) Order Cycling System, (4) ABC
Analysis, (5) Fixation of Various Levels, (6) Use of Perpetual Inventory System and
Continuous Verifications, (7) Use of Control Ratios, (8) Review of Slow and Non-Moving
Items.

(1) Min-Max Plan

It is one of the oldest methods of inventory control. Under this plan, a maximum and minimum
for each stock item are specified keeping in view its usage, requirements and margin of safety
required to minimize risks of stock outs. The minimum level establishes

the reorder point and order is placed for the quantity of material, which will bring it to the
maximum level.

The method is very simple and based upon the premise that minimum and maximum quantity limits for different
items can fairly well defined and established. Considerations like economic order quantity and identification of
high value critical items of stock for special management attention or not cared for under this plan.

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(2) Two- Bin System

Under this system, two piles, bundles, or bins are maintained for each item of stock. The first
bin stocks the quantity of inventory, which is sufficient to meet its usage during the period
between receipt of an order and placing of the next order. The second bin contains the safety
stock and the normal quantity used from order date to delivery date. The moment stock
contained in the first bin is exhausted and the second bin is tapped, a requisition for new supply
is prepared and submitted to the purchasing department. Since no bin- tag (quantity record of
materials) card is maintained, there is absence of perpetual inventory record under this bin.

(3) Order Cycling System

In the order cycling system, quantities in hand of each item or class of stock are reviewed
periodically say, 30, 60 or 90 days. In the course of a schedule periodic review, if it is observed
that the stock level of a given item will not be sufficient till the next scheduled review keeping
in view its probable rate of depletion, an order is placed to replenish for its supply. The review
period will vary from firm to firm and among different material in the same firm. Critical items
of stock usually require a short review cycle. Order for replenishing a given stock item is
placed to bring it to some desired level, which is often expressed in relation to number of days
or weeks supply.

The schedule periodic review plan does not consider the differences in rate of usage for
different items of stock. As a result, items whose usage has declined will have surplus stock,
whereas some items whose rate of depletion has increased are exhausted much

before the next review date. Moreover, the system tends to make procurement and purchasing
activities reach their peak around the review dates.

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(4) ABC Analysis

With the numerous parts and materials that enter into each and every industrial products and
inventory control lends itself, first and foremost, to a problem of analyze. Such analytical
approach is popularly known as ABC analysis (Always Better Control), which is believed to
have originated in the general electric company of America and based on Pareto’s law. The
ABC analysis is based upon segregation of material for selection control. It measures the
money value, i.e., cost significance of each material item in relation to total cost and inventory
value. The logic behind this kind of analysis is that the management should study each item of
stock in terms of its usage, lead time, technical or other problem and its relative money values
in the total investment in inventories.

Critical, i.e., high value items desire very close attention, and low value items need to be
devoted minimum expense and efforts in the task of controlling inventories. Under ABC
analysis, the different items of stock are classified into three categories in the order of their
average inventory investment or based on their annual rupee usage.

Category “A” items: - more costly and valuable items are classified as such items have large
investment.
Category “B” items: - The items having average consumption value are classified as B
items.
Category “C” items: - The items having low consumption value are put as C category.

The important steps involved in segregating material or inventory control are as follows:

(a) Find out future use of each item of stock in terms of physical quantities for the
review fore cost period.
(b) Determined the price per unit each item.

(c) Determined the total project cost of each item multiplying its expected units to be use
by the price for per unit of such item.
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(d) Beginning with the item with the highest total cost, arrange different items in
order of their total cost as computed under step (iii) above.
(e) Express the units of each item as a percentage of total costs of all items.

(f) Compute the total cost of each item as a % of total costs of all items.

Important points for ABC analysis:

- Whenever the items can be substituted for each other, they should be substituted for each
other, they should preferably be considered as one item.
- More emphasis should be given to the value of consumption and not the cost per unit.

- - While classifying, all items consumed by the organization should be considered together.
- If it is convenient different items may be classified into only three categories and labeled
as A, B, and C respectively depending upon whether they are high value items, average value
items or low value items. If it needs, percentage of different items may be plotted on chart
for better representation.

(5) Fixation of Various Levels

Certain stock levels are fixed up for every item of stores so that stocks and purchases can be
efficient controlled. These are
a) Maximum level: The represents the minimum quantity above which stock should not
be held any time
b) Minimum level: The represents the minimum quantity of stock that should held all
items
c) Danger level: Normal issues of stock or usually stopped at this level and made only
under specific instructions.
d) Ordering level: It is the level at which indents should be placed for replenishing
stocks.
e) Ordering quantity: The quantity, which is to be ordered.

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 (A) Maximum Level

(B) It is normally a matter of policy. The various factors that should be taken into
consideration are:

• Capital outlay: investment to be made in stores, raw materials and other bulk items is an
important consideration.
• Storage space available.

• Storage and insurance cost.

• Certain materials deteriorate if stored over a long period. This limits the quantity of
maximum stock kept.
• If certain goods are subject to obsolescence, the spare parts and components etc. of such
products stocked should be limited.
• Consumption per annum.

• The lead-time.

• Certain goods are seasonal in nature and can be purchased only during specific
period. Hence, maximum level will be fixed for each season.
• Price advantage arising out of bulk purchases should be availed.

• The economic order quantity.

• Formula: Maximum stock level = Re- order level +Re-ordering quantity – (Minimum
Consumption *Minimum Reorder Period)

(B) Minimum Level

The minimum level is also a matter of policy and is based on

• Consumption per annum.

• Lead Time.

• Production Requirement.

• Minimum quantity that could be advantageously purchased.

• If an item is made to order then no minimum level is necessary.

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 • Formula: Minimum level = Re-Order level – (Normal Consumption * Normal Re-
Order Period).

(C) Danger or Safety Level

Some times in practical situation, it happens that neither the consumption rate, nor the lead-
time is constant through the year. So in order to face such under taking in meet in out the
demands, an extra stock is maintained. The extra stock is called buffer stock. Material
consumption varies from day to day; week-to-week and hence accurate forecasting is not
possible. A safety or reserve stock is kept to avoid stock out. The desirable safety stock level
is that amount which minimizes stock out costs and carrying costs.

Formula: Buffer or Safety stock level

= Ordering Level – (Average Rate of Consumption * Re-Ordering Point).

(D) Ordering Level:

The annual consumption of an item in addition to the time lag between ordering and receiving
can be collected from past records. Based on these facts and policies, the ordering level and
ordering quantity can be calculated. The order point is to be calculated keeping in mind, the
worst conditions so that minimum a stock is always maintained. The ordering level should be
so fixed that when an indent is placed at the ordering level, the stock reaches the minimum
level when the replenishments received. The ordering level is calculated from the following
factors:

• The expected usage

• The minimum level

• The lead time

• Formula: Ordering Level = Minimum Level+ Consumption during lag period

85
(E) Reordering Quantity or Economic Order Quantity (EOQ):

One of the major inventory management problems to be resolved is how much inventory should
be added and when inventory should be added. When inventory is to be replenished and if the
firm is purchasing materials, it has to decide number of lots in which it has to be purchased on
each of replenishment. If the firm is planning a production run, the issue is how much
production to schedule. The problems are called order quantity problems and the task of the
firm is to determine the optimum Economic Order Quantity.

Determining an optimum Economic Order Quantity involves three types of costs. (a) Ordering
cost (b) carrying cost (c) Raw material cost. The economic order quantity is the quantity, which
minimizes the total of ordering and carrying costs.

(a) Ordering Cost

These include the fixed cost associated with obtaining goods through placing of an order or
purchasing or manufacturing or setting up machinery before starting production. They include
cost of purchase, requisition, follow up, receiving goods, quality control etc.

Formula: Ordering cost = (Annual Requirement (A) *Ordering Cost per order (O))/Quantity to
be ordered (Q).

(b) Carrying Cost

The cost associated with carrying or holding goods in stock is known as holding or carrying
cost. Holding cost assumed very difficulty with size of inventory as well as time is held in
stock.

Formula: Carrying cost = (Carrying Cost per unit (CH)*Quantity to be ordered (Q))/2.

86
(c) Raw Material Cost

The cost associated with purchasing of raw materials is called raw material cost.
Formula: Raw Material Cost = Annual Requirement (A)*Price per unit (P)

• EOQ Assumptions

The forecast/demand for given period, usually for one year is known. The
usage/demand is even through the period.
Inventory orders can be replenished immediately.

There are two distinguishable costs associated with inventories. Cost per
order is constant regardless of the size of the order.
Cost of carrying cost is fixed percentage of the average value of the inventory.

Formula: EOQ = 2AO/CH

(6) Use of perpetual Inventory system and Continuous verification

The perpetual inventory system records changes in raw materials, work in progress and finished
goods on daily base. Hence, managerial control and preparation of interim financial statements
is easier. Perpetual inventory derived its name because it indicates the amount of stock on hand
at all time. It facilities verification of stocks at any time and authenticates the correctness of
stock records.

87
The two main functions of perpetual inventory are:

- It records the quantity and value of stock in hand.

- There is continuous verification of physical stock.

Chartered Institute of Management Accountants, London defines Perpetual Inventory System

as “The recording as they occur of receipts, issues and the resulting balances of individual items
of stock in either quantity or value”.

A perpetual inventory usually checked by a Programme of continuous stocktaking and the two
terms are sometimes loosely considered synonymous. Perpetual inventory means the system of
records, whereas continuous stocktaking means the physical checking of those records with
actual stocks.

The perpetual inventory method has the following advantages:

The inventory of various items can be easily ascertained. Hence, profit and loss account and
balance sheet can be easily prepared.

Information regarding material on hand eliminates delays and stoppage In production

The investment in stock can reduced to the minimum keeping in view the operational
requirements.

88
Because of internal check, the activities of various departments are checked. Hence,
stores records are reliable.

Production need not be stopped when stock taking is carried out.

These records give the cost of materials. Hence, management can exercise control over cost.

Discrepancies and errors are promptly discovered and remedial action can be taken to prevent
their reoccurrence in the future.

This method has a moral effect on the staff, makes them disciplined and careful and acts as
check against dishonest actions.

Loss of interest on capital invested in stock, loss through deterioration, obsolescence can be
avoided.

Stock figures are available insurance purposes.

It reveals the existence of surplus, dormant, obsolete and slow-moving material and hence
remedial action can be taken

Limitations:

The bin card and stores ledger may not be up to date and hence cannot be effectively
controlled. Hence, Continuous stocktaking is hampered.

Perpetual inventory system is comprised of

• Bin card,

• Priced Stores ledger and

• Continuous stocktaking.

Bin Card

A bin card is a quantitative record of receipts, issues and closing balance of items of stores. A
separate bin card accompanies each item. The bin card is posted as and when a transaction takes
place. Only after the transaction is recorded, the items are received / issued. On receipt of
materials, the quantity is entered in the bin card from the Goods
89
Received Note in the receipt column and issues to various departments in the issue’s column.

Priced Stores Ledger

The stores ledger is maintained to record all receipt and issues transactions in respect of
materials the quantities and the values are entered in the receipt’s issues and balance columns.
Additional information regarding quantity on order and quantity reserved may also be recorded.
Separate sheets for each item or continuous may be maintained. The sheets should be serially
numbered to obviate the risk of removal or loss.

Continuous Stocktaking

The stores accounts reveal what the balance should be and a physical verification reveals the
actual position. Under this system of verification, the total number of man-days available for
verification is calculated. The items to be verified per man-day are selected by classifying the
various items into groups depending upon time required. The stock verification staffs planed
the program and divide the work among themselves. The plan is such that all items are verified
in the year. Items are small value may be verified twice or more in a year. Bulky items are
usually verified when stocks are comparatively low.

(7) Use of Control Ratios

Inventory turnover ratio helps management to avoid capital being locked up unnecessarily.
This ratio reveals the efficiency of stock keeping. This ratio will be indicated in the number
of days.

Inventory Turnover Ratio = Cost of material consumed * Days during the period / ((Cost

of opening stock+ cost of closing stock)/2)

(8) Review of Slow & Non-Moving Items

The money locked up in inventory is the money loss to the business. If more money is locked
up, lesser is the amount available for working capital and cost of carrying inventory is increase.
90
Inventory Turnover Ratio should be as high as possible. Lose due to obsolescence should be
eliminated or these items are used in some profitable work. Slow moving stock should be
identified and speedily disposed off. The speed of moving should be increased. The turnover
of different items of stock can be analyzed to find out the slow-moving stocks. The percentage
of slow-moving stores is given by value of slow-moving stores divided by value of total
inventory.

Materials become useless or obsolete due to changes in products, process or method of design
or method of production, slow moving stocks have a low turnover ratio. Capital is locked up
and cost carrying have to be incurred. Hence, management take effective steps in minimize
losses.

Essentials of a Good Inventory Management System

An efficient and successful inventory management system possesses the following essentials:

(1) Classification and Identification of Inventories

The inventory includes raw materials, semi-finished goods and finished goods and
components of several descriptions. In order to facilitate prompt recording, locating and
dealing, each item of inventory has to be assigned a particular code for proper identification
and has to be divided and sub divided into groups. ABC analysis of inventory is useful in
classification and identification of inventories.

Assignment of definite name to each item of stores is necessary for the identification of
materials. After analysis of all stores items and considering the peculiar nature of each item, an
appropriate name has been assigned to each item these are divided first into larger and smaller
groups. The following are range of items to be held in stock:

• Materials, which are regularly required.

• Materials, which may be required at, short notice when there, are breakdowns of
plants.

91
 • Stores, which are not in frequent demand, should not be maintained in huge
quantity provided they are readily available.

• Materials are general stores, which are not operationally vital and are used at
irregular intervals need not be maintained in huge quantity

(2) Standardization and Simplification of Inventories

In a proper Inventory Management System, standardization of materials is necessary.

Standardization refers to the fixation of standards of materials for the use in the production of
finished goods and set the specification of components and tools to be used in order to control
the quality of goods manufactured. Simplification of inventories refers to the elimination of
excess types and sizes of items, which leads to reduction in inventories and its carrying costs.
The following are advantages of standardizing material: It requires lower holding of materials
and lower volume of storage place saves through reduced expenditure on storing handling of
materials. It provides more efficient purchasing by establishing equivalents between various
suppliers. If this practice is adopted there would be a lesser chance of materials being obsolete.
It reduces paper work for recording transactions.

(3) Adequate Storage Facilities

Adequate storage facilities are necessary to have the proper management of inventory. It reduces
the wastage due to leakage, wear and tear, rust and dust and reduces the wastage of materials due
to mishandling. Stores and spares may be deteriorated through dampness, dryness, heat, cold,
dust and dirt, care less handling immethodical stocking etc. Proper preventive measures should
be taken to avoid such deterioration.

(4) Setting Minimum & Maximum Limits, Reorder Points for each item of Inventory

In order to avoid over and under investments in inventories, minimum and maximum limits for
each item of inventories are to be fixed. It ensures the availability of materials during
production process, while fixing the minimum and maximum points, re-order points are to also
be fixed before –hand.

92
(5) Fixing Economic Order Quantity

It is a basic consideration in Inventory Management as how much quantity of a particular item

is to be ordered at a time. In determining the EOQ, the two opposing costs are balanced i.e.,
ordering cost and carrying costs.

(6) Adequate Inventory Records and Reports

An efficient Inventory Management system requires proper inventory records and the reports
because various inventory records contain information to meet the needs of purchasing,
production, sales etc. Any particular information regarding any particular item of inventory
may be had from such records. Such information may be about quantity in hand, in transit and
on plants, unit cost, EOQ, reordering points, safety level etc, for each item of inventory.
Reports and statements should be designed to keep the clerical cost of maintaining these records
at a minimum.

(7) Intelligent and Experienced Personnel

Mere maintenance of records and procedure would not give the desired results unless the
appointment of intelligent and experienced personnel in purchase, production, and sales
department is not made as because that is no substitute for efficient, sincere and devoted
personnel. Hence the whole Inventory Management System should be manned with trained,
qualified, experienced and devoted employees.

Factors Determining Optimum Level of Inventory:

The inventory includes stock of raw materials, stock of work in progress and the stock of
finished good and other accessories. In Inventory Management, the control over investment in
inventory is also an important factor. The main objective of the inventory management on one
hand is to maintain the adequate stock of goods of proper quantity to meet the requirements of
production and sales and on the other hand, to keep the investment in them at the minimum.

Factor influencing the decision of investment in inventories can be divided in two parts -

(a) general factors and (b) specific factors.

93
(a) General Factors

These factors include considerations common to the management of all types of assets- fixed
or current. Such factors are type and nature of business, anticipated volume of sales, operation
level, price level variations, availability of funds and the attitude of management.

(b) Specific Factors

Such factors those, which influence the decision of investment of inventories and includes the
following:

(1) Seasonal Nature of Raw Material and Demand of Finished Goods

If certain raw material is available during a particular season, but its consumption continues
throughout the year in the firm, the investment in such raw material shall naturally be heavier
to store the stock in order to streamline the production throughout the year. This is true in agro-
based industries like sugar etc. Similarly, seasonal industries purchase raw material in the
season and therefore, there investment in raw material increases in that particulars season.
Conversely, where demand for goods is uneven, small or seasonal, the management has to store
the finished goods inventory till the demand season approaches for timely execution of orders
and therefore has to follow longer production runs more even and efficient production
scheduling. It requires higher investment inventories in off-season.

(2) Length and Technical Nature of the Production Process

If production process is such that takes much time in its completion, the investment in
inventories is larger, such as, ship building industry. More over if production process is of
technical nature, even then it requires heavy investment in inventories.

(3) Style Factor in the End Product

The style factor of end product or nature of finished goods determines the size of investment
in inventories. The durability and perishable of the finished products are such important factors.

94
(4) Terms of Purchase.

If supply of raw material is available on favorable terms that is long credit, conditions of supply,
concession or rebate available etc. The management may have larger investment in inventories
in order to avail of the opportunity of favorable terms. But, here, the management must consider
the cost and benefit effect of ordering raw material in bulk. If on the other hand, raw material
is available only on cost terms, the management will dare not invest heavy amount in
inventories.

(5) Supply Conditions

Certainty and regularity in supply of raw material are also important factors in determining the
size of investment from the viewpoint of operating continuity. Suppose, if the source of material
is outside of the country and a ban on imports is feared or supply may be disturbed due to
weather, a great stock of inventory is needed to avoid the risk of being out of stock. If, on the
other hand, the company relies up on the supplier for regular and speedy supply of raw material,
it may carry very small stock of raw material.

(6) Time Factors

Time is also an important factor in determining the size of inventory and affects the inventory
management in a number of ways

• Bad time i.e., time lag between indenting and availability of raw material,

• Time lag between purchase of raw material and the commencement of process,

• Time required in production process, and

• Average time required for sale of product.

All these exercises their impact on investment in inventories. The longer the time, the
investment in inventories is larger to maintain the flow of the production.
95
(7) Price Level Variation

If a price increase expected in the near future, the investment in raw material is greater in a bid
to keep the cost of product minimum. On the other hand, if price level is expected to go down,
there is a tendency to purchase the goods in the open market as and when it is needed.

(8) Loan Facilities

Generally, raw materials are purchased on credit. More over banks advances credit to the firms
against their stock of inventories. If the cost of carrying stock and the cost of availability of
funds is cheaper than the interest payable to the bank, the investment in inventories is higher.

(9) Management Policies

The management policies have significant influence on the investment in work in progress
inventories mainly in process goods industry.

(10) Other Factors

Other factors like industry wide strike threats, proposed control of raw materials, rationing or
revision of excise duty rates, price control of finished stock etc. also effects the investment
decisions in inventories.

96
 CHAPTER - IV

DATA ANALYSIS AND INTERPRETATION

97
Inventory Management & Control in Visakhapatnam Steel Plant

In this chapter, an attempt is made to study the data made available by the officers of Rashtriya
Ispat Nigam Limited, Visakhapatnam Steel Plant, Visakhapatnam (herein after referred as ‘the
company’ and to interpret the same. The following are basic facts about inventory of the
company:

• The materials are stored in different locations identified with storehouses, which are
codified with storehouse number ranging from 01 to 89. The major locations/ storehouses
are (a) General Stores, (b) Refractories, (c) Spares identified with production
units/storehouse, (d) Petrol and Diesel, (e) Lubricants and Oils, (f) Rolls and Guides, (g)
Conveyor Belts, (h) Steel and Pipe yard, (i) Cement, (j) Equipment’s, (k) Ferro Alloys
and other Raw Materials, (l) Scrap and Surplus items, etc.

• Priced Stores Ledger/Bin Master contains more than 265000 items having standard
specification along with 11-digit Catalogue Numbers.

• The issues are priced at monthly weighted average rate.

• As at the end of year on 31/03/2008, the company is having inventory balance in 59888
catalogue numbers and the value of such catalogues is Rs.779 Crores. This inventory
includes expansion and Coke Oven Battery IV construction stores of Rs.423 Crores,
insurance spares of Rs.46 Crores, and Ferro Alloys and other minor raw materials of Rs.39
Crores and excludes inventory at mines, medical department, stock in transit/under
inspection, materials with contractors, unabsorbed stores overheads and provisions
amounting Rs.55 Cores.

• Machinery Spares in respect of 904 items amounting Rs.46 Crores as on 31/03/2008 were
capitalized under the head ‘Risk Insurance Spares’ in accordance with Accounting Policy
framed in accordance with Accounting Standards 02 & 10 issued by Institute of Chartered
Accountants of India.

98
• The levels of inventory in respect of each item/catalogue, like minimum, maximum,
reordering level, etc. are not fixed. The EOQ concept as explained in Chapter I for
determining the reordering quantity is not adopted. The reordering quantity is determined
based on the annual consumption pattern, present stock and supplies yet to be received,
etc.

• The company adopted the perpetual inventory control system comprising Bin Card,
Priced Stores Ledger and Continuous Stock Verification. Bin Master and Priced Stores
Ledger are completely reconciled from time to time. The difference between physical
stock and Bin stock are identified during physical verification are appropriately adjusted
in the books with the approval of competent authority.

• Stock Adjustment Vouchers (SAVs) raised on physical verification in respect of

shortages amounting Rs.0.26 lakhs, where approval of competent authority is pending
and shortages identified, but SAVs are not raised on physical verification pending for
want verification of records, etc. amounting Rs.0.26 Lakhs is provided in the books as on
31/03/2008.

• The company is made an attempt to use ABC Analysis, but with a different name i.e.,
XYZ analysis for classifying the inventory based on value. Items comprising 70% of
value of total inventory are categories as ‘X’, items comprising 20% of value of total
inventory are categories as ‘Y’ and items comprising 10% of value of total inventory are
categories as ‘Z’.

• The company has also made FSN analysis for identifying fast moving, slow moving and
non-moving inventories in line with procedure Explained at Para
3.2.8. Non-moving inventories are reviewed on annual basis in a systematic manner and
appropriate provisions were made. The company has made a provision in the books to
the tune of Rs. 34.39 Cores in respect of Non-Moving items at 90% of their cost in line
with accounting policy as on 31/03/2008.

99
 Comparative Analysis of Inventory of Stores & Spares With Other
Financials

(Rupees in Crores)
Year Net Current Working Sales Total Inventory Consumption
Worth Assets Capital Inventories of
Stores &
Spares
2000-01 2839 1794 491 3435 1207 440 279
2001-02 2744 1713 493 4080 1111 384 291
2002-03 3286 1863 633 5058 858 365 323
2003-04 4851 2726 1491 6169 706 336 348
2004-05 6878 6047 4623 8181 1255 321 313
2005-06 8173 8252 6664 8482 1216 312 339
2006-07 10445 10448 8344 9150 1208 317 359
2007-08 11481 11805 8613 10433 1761 326 364
2008-09 12395 11859 7678 10411 3215 353 501
2009-10 12885 9551 5243 10635 2451 327 466
2010-11 12755 9480 6523 10755 2517 315 470
2011-12 13382 9582 6625 10955 2632 313 485
2012-13 13500 9653 6712 10801 2611 315 490
2013-14 13636 9685 6743 10853 2618 366 495
2014-15 13428 8995 6813 10859 2600 367 492
2015-16 13512 8954 6900 10800 2559 327 489
2016-17 12614 9853 6850 10890 2668 326 480
2017-18 13652 9953 6901 10900 2667 329 481
2018-19 13201 9855 6879 10800 2664 332 470
2019-20 13350 9901 6987 10746 2702 337 482
2020.21 13890 9908 6979 10754 2701 339 486
2021-22 13987 9910 6895 10854 2805 358 495

100
 STATEMENT SHOWING NUMBER OF ITEMS AND VALUE OF
FAST MOVING, SLOW MOVING AND NON – MOVING INVENTORY OF STORES
AND SPARES
(Rupees in Crores)

Fast Moving Slow Moving Non-Moving Insurance Total Stores

and Spares
Year
Value Value
Items Items Value Items Items Value Items Value

2001- 16690 5514 23145

8208 83 152 109 1200 39 383
02 0 4 2
2002- 17875 5026 23442
8128 89 158 85 1280 45 377
03 2 4 4
2003- 19177 4584 24726
8302 87 138 71 1346 47 343
04 0 6 4
2004- 10770 1381 25568
8300 108 139 63 1537 58 368
05 5 44 6
2005- 10051 1529 26269
8084 108 149 58 1129 56 371
06 9 64 8
2006- 1590 26739
7746 115 99473 248 43 1129 52 458
07 50 8
2007- 1660 27086
7729 139 95990 553 40 1134 47 779
08 15 8
2008- 1760 27505
7669 443 90186 463 37 1134 46 989
09 66 5
2009- 1917
5089 383 27692 262 23 849 54 52807 722
10 7
2010- 1835
4968 28 26208 170 28 74 50376 300
848
11 2
2011- 1935
5500 32 28300 185 29 853 75 54005 321
12 2

101
2012- 1835
5418 30 27352 176 31 862 76 51982 313
13 0
2013- 1735
5618 32 28534 180 30 873 78 52383 320
14 8

102
 Statement showing Percentage of Composition of Stores & Spares (Fast
Moving, Slow Moving, Non-Moving & Insurance Spares)

Fast Moving Slow Moving Non-Moving Insurance Total

Spares
Year
Items Value Items Value Items Value Items Value Items Value

21.6 39.6
2001-02 3.55 72.11 23.83 28.46 0.52 10.18 100 100
7 9
23.6 41.9
2002-03 3.41 74.97 21.08 22.55 0.54 11.93 100 100
1 1
25.3 40.2
2003-04 3.36 77.56 18.54 20.70 0.54 13.70 100 100
6 3
29.3 37.7
2004-05 3.25 42.12 54.03 16.03 0.60 15.76 100 100
5 7
29.3 40.1
2005-06 3.07 38.26 58.25 15.63 0.42 15.10 100 100
8 6
25.1 54.1
2006-07 2.89 37.20 59.49 9.39 0.42 11.35 100 100
0 5
17.8 70.9
2007-08 2.85 35.44 61.29 5.14 0.42 6.03 100 100
4 9
53.0 36.2
2008-09 9.60 52.40 36.30 3.18 1.60 7.40 100 100
0 0
9.30 56.6
2009-10 9.80 52.00 36.40 9.30 1.60 24.60 100 100
0 0
9.20
2010-11 9.25 54.00 57.8 39.45 9.38 165 24.90 100 100
5
8.95 23.8
2011-12 9.35 58.01 40.01 9.35 170 25.00 100 000
6 5
8.96 24.2
2013-14 8.32 58.05 39.02 9.65 380 26.33 100 100
5 2
8.95 25.2
2014-15 9.25 59.20 41.23 9.23 389 25.05 100 100
0 3
103
 26.3
2015-16 9.26 8.26 58.32 42.36 9.89 401 25.02 100 100
2
25.3
2016-17 9.35 8.56 60.02 43.25 9.90 390 26.08 100 100
9
26.4
2017-18 9.45 8.54 59.56 42.25 9.25 395 28.02 100 100
0
26.3
2018-19 9.48 8.53 58.23 41.25 9.28 368 29.01 100 100
2
27.2
2019-20 9.25 8.95 59.32 41.29 9.25 396 30.02 100 100
1
20.20- 27.3
9.37 8.62 58.25 42.02 9.36 397 38.03 100 100
21 9
28.0
2021-22 9.29 8.54 58.99 43.04 9.37 385 32.87 100 100
0

104
 ABC Analysis of Inventory of Stores & Spares

Category A (70% of Category B (20% of Category C (10% of

Total
Value) Value) Value)
Year
Value Percent Value Percent Value Item
Item Percent Item Item Value
s
2002- 110 7742 9206
3583 3.89 264 12.00 75 84.11 38 377
03 50 9 2
2003- 104 7093 8458
3234 3.82 241 12.32 69 83.86 34 344
04 17 2 3
2004- 863 6568 7668
2374 3.10 258 11.25 74 85.65 37 368
05 0 0 4
2005- 104 5239 6777
4918 7.25 262 15.44 72 77.30 36 371
06 65 3 6
2006- 524 5663 6282
943 1.50 321 8.35 91 90.15 46 458
07 7 5 5
2007- 261 5702 5988
247 0.41 545 4.37 156 95.22 78 779
08 7 4 8

2008- 5422 5598

163 0.29 623 198 2.86 198 96.85 99 989
09 3 9
3
2009- 246 5033 5307
275 0.52 508 4.65 145 94.83 73 726
10 6 1 2
2010- 310 4695 5050
439 0.87 383 6.15 112 92.98 56 551
11 4 7 0
2011- 0.88 325 4798 5168
450 396 6.50 114 93.12 79 589
12 0 0 0
2012- 0.89 340 4893 5279
463 412 6.82 119 94.01 81 612
13 0 0 3
2013- 325 4856 5132
487 0.90 413 6.54 125 98.02 85 654
14 7 0 4

105
 2014- 330 4856 5232
489 0.95 425 6.36 125 99.23 87 658
15 0 2 5
2015- 325 4857 5232
409 0.98 432 6.25 124 97.23 78 698
16 4 4 1
2017- 332 4655 5578
437 0.87 425 6.28 136 98.25 77 656
18 5 1 4
2018- 325 4854 5562
425 0.95 412 6.32 127 97.25 79 698
19 8 1 4
2019- 341 4854 5526
487 0.98 428 6.58 130 98.45 85 678
20 2 7 4
2020- 351 4812 5723
436 0.87 468 6.24 132 95.26 83 603
21 2 5 5
2021-
354 2587
448 0.95 0.95 6.48 125 98.77 89 5456 696
22
7 1

106
 ABC Analysis of Stores & Spares

Interpretation

1. A comparative analysis of the data in respect of inventory of stores and spares and other
financials based on annual financial statements is made and the following are the
observations:

a) The inventory is more than Rs.300 Crores in all the years and gradually reducing in
each year from Rs.440 Crores to 353 Crores over a period of 9 years, which a
remarkable improvement in inventory management.

b) The consumption pattern has shown an increase except in the year 2004-05, where
the consumption decreased by Rs.35 Crores. There was a sudden jump in
consumption during 2008-09 from Rs.364 Crores to 501 Crores.

c) The ratio of consumption stores and spares to sales has shown a decline from 8% to
3.5% over the period of eight years upto 2007-08 and increased to 4.81% during
2008-09.

d) The inventory turnover ratio is showing a reduction from 150 to 70 percent of

consumption, but still appears to be on higher side.

e) The other financials like net worth, current assets, working capital and sales has
shown tremendous increase over the period of six years because of turnaround in
the performance of company. As a result, there is signification reduction in the
proportion of inventory of stores and stores to net worth from 15 to 3 percent, current
assets from 24 to 3 percent, working capital from 90 to 5 percent and sales from 13
to 3 percent.

f) The proportion of inventory of stores and spares to total inventories is also reduced
from 36 to 11 percent.
A comparative study of composition of materials like fast moving, slow moving, non-

107
moving materials and insurance spares is made based on data available in

Priced Stores Ledger for seven years from 2001-02 to 2008-09. The details are given
under:

a) The fast-moving items are very less in number ranging from 8128 to 7669
during the above eight years. The value of fast-moving items increased from
Rs.83 Crores to Rs.443 Crores.

b) The slow-moving items are reduced from 166900 to 90186 items during above
seven years. The value of slow-moving items increased from Rs.152 Crores to
Rs.463 Crores due to classification of capital items and new catalogues as slow-
moving items. If these are not considered the value is reduced to Rs.133 Crores.

c) The non-moving items are reduced from 55144 to 45846 items during first three
years, but it was increased to 138144 items abnormally during the year i.e.,
2004-05 and to 176066 during the year 2008-09. Perhaps the reason may be
more slowly moving items might have turned into non- moving items during
those four years. The value of non-moving items was reduced from Rs.109
Crores to Rs.37 Crores during the above eight years.

d) The insurance spares were reduced from 1200 to 1134 items and the value
increased from Rs.39 Crores to Rs.46 Crores.

e) The percentage of fast-moving items comprises 2.79 percent of total inventory

items. The slow moving and non-moving items comprises 97 percent of total
inventory items, which is not a good sign. The percentage of insurance spares
was shown a reduction from 0.52 to 0.41 percent during the above seven years.

f) The percentage of value of fast-moving items was reduced from 22 to 18 percent

in the total inventory value during the first seven years, but suddenly increased
to 45 percent during 2008-09. The value of slow moving and non-moving items
was increased from 68 to 97 percent.

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 g) Out of 1134 items of insurance spares, only 836 items are having balance stock
and other items showing nil stock.

h) Out of total value Rs.500 Crores of slow moving and non-moving spares, a
provision of Rs.40 Crores was made towards surplus, obsolete and non- moving
spares.

2. The ABC analysis of inventory for last five years from 2002-03 to 2008-09 was made
based on data available in Priced Stores Ledger. The details are given below:

a) The category A items comprises 70% value of total inventory, category B items
comprises 20% of total inventory and category C comprises 10% of total
inventory.

b) The category A items decreases from 3583 to 163 during the above se

c) ven years period. The value is increased from Rs.264 Crores to Rs.692 Crores.

d) The category B items decreases from 11050 to 1603 and the value increased
from Rs.75 Crores to Rs.198 Crores.

e) The category C items decreases from 77429 to 54223 and the value increased
from Rs.38 Crores to Rs.99 Crores.

f) The percentage of category items is 0.29 percent, percentage of category B items

is 2.86 percent and percentage of category C items is 96.85 percent.

From the above analysis, it can be concluded that a small number or percentage of high value
items are fallen under category of slow moving or non-moving items. Further, the provision
made against these items was one percent.

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 CHAPTER - V
SUMMARY & SUGGESTIONS

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 Summary

For any organization, inventory plays crucial role in its profitability. If inventories are slow
moving or non-moving, they are idle inventory of no use. Further, they reduce the profitability
of the organization. As per analysis made in the previous chapter, a small number or percentage
of high value items are non-moving or slow moving in the inventory of the company.

Suggestions:

• As the return on investment is increasing from excellent performance of company and

when investment is blocked in the inventory of stores and spares in the form of slow
moving and non-moving items, Rs198 Crores of inventory would definitely affect the
profitability of company. Hence, immediate steps are to be taken for overall reduction of
inventory of stores and spares.

• The company is required to fix minimum, maximum, reordering level in a scientific

manner to control the further growth of slow moving or non-moving inventories.

• The company is required to use EOQ to determine reordering quantities for each item. It
helps the company in saving of carrying costs and ordering costs in maximized manner.

• As the slow and non-moving inventory comprises 54 percent of total inventory, steps are
to be taken review the item wise inventory and where items are not required, they are to
be declared as surplus or obsolete inventory and appropriate disposal action is to be taken
in a quick manner.

• Pending action for disposal, appropriate action is to be taken for making provision in the
books of accounts on a systematic manner for write off slow- and non-moving inventories
over a period of 5 to 8 years of their arise.

• Insurance spares are very important items from its definition itself, where the balance of

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 stock is to be maintained at any point of time. However, in case of 230. items, there is no
stock. If production is stopped due to the requirement of any such item, it may a loss to the
company. Hence, a minimum stock is to be fixed for such insurance items and is to be maintained
always.

• At present, certain inventories like scrap and surplus, insurance spares, etc., are not
considered while fixing the level of inventory for control purpose. It is suggested to
consider the total inventory of stores and spares for control purpose.

• The company shall adopt latest techniques like just in time concept for supply of materials
in the time of need, supply cum application contracts, where materials are to be procured
by the contractor for fixation, etc. for procuring the materials. This saves a lot investment
in the inventory of stores and spares and avoids further stock out situations.

• Screen Based Computerization for accounting of inventory of stores and spares is not
achieved in many areas, particularly reconciliation of Priced Stores Ledger and Bin
Master, Reconciliation of Provisional Liability to Suppliers Account, Accounting of
Insurance Spares, etc. A suitable ERP Package, if not developed as in-house package, is
to be used for accounting of stores and spares.

• Inventory Reduction Committees should be formed and headed by maintenance.

Though the inventory of stores and spares is showing a lower proportion in the total current
assets or net worth of the company, it is not a small figure. It amounts to Rs.300 Crores. The
company has to exercise a lot of proper control and proper system of inventory management to
manage such inventories in a profitable way. For this purpose, the company may consider the
above suggestions for management and reduction of inventories.

The provision of right goods or services in right time at right place to the customer improves
his satisfaction to a maximum extent. A proper inventory management system helps definitely
to achieve this objective of the company and for its continuous improvement.

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 Bibliography

Book Author

Financial Management IM Pandey

Statistics for Iron & Steel Industry in India Steel Authority of India
1988, 1990, 1992, 1994, 1996

Indian Steel Perspectives 2025 RK Sinha, SC Suri

Websites:

➢ http://planningcommission.gov.in

➢ www.vizagsteel.com

➢ en.wikipedia.org

➢ Google.com

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