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Inventory management is usually not the direct operating responsibility of the

finance manager, the investment of funds in inventory is a very important aspect of
financial management. A proper planning of purchasing, handling, storing and
accounting should from a part of inventory management.
Efficient systems of inventory management will determine.
 What to purchase?
 How much to purchase?
 From where to purchase?
 Where to store? Etc…
The term inventory refers to the stock of the product a company is manufacturing for
sales and components that make up the product. In other words inventory is composed of
assets that will be showed in future in the normal course of business operations. The
various forms in which inventories exist in a manufacturing company are:
 Raw materials
 Work in progress(semi finished goods)
 Finished goods
The purpose of inventory management is to keep the stocks in such a way that neither
there is over-stocking, the over-stocking will mean a reduction of liquidity of other
production processes. Under-stocking will result in stoppage of work.

Primary objective:
 To study various inventory control measures.
Secondary objective:
 To study the store analysis between the years of 2003-2009
 To study the usage of coal, furnace oil, high speed oil in Dr.NTTPS.
 To study the reasons for the shortage of coal.
 To review the ABC analysis and understand the impact of business on

The sources of data collection will be -
 Primary source – The data has been gathered through interactions and

discussions with the executives working in the division. Some important

information has been gathered through couple of unstructured interviews of
 Secondary source – Referred standards texts and reference books for

collecting the information regarding the theoretical aspects, of the topic. And
annual reports and other magazines published by the company are used for
collecting the required information.
• The study covers a period of five years from 2003-04 to 2007-08.
• The study does not cover the all inventory control techiniques and
• The study based on primary and secondary information.
• The study related to Dr.NTTPS only which is a unit of APGENCO.

Schwartz (2008), Studies the business of NAILD distributor through this article. The
NAILD is an organisation supporting lighting distributors in the US with publications,
training, and conferences. According to him, recent changes and trends in the lighting
market provide new opportunities. The keys to taking advantage of the opportunities
is to understand the market, know where to get more information, provide
updates to your customers, and turn information into active marketing and
promotional efforts. The Energy Independence and Security Act of 2007 add to
the programs and efforts introduced in EPACT 2005. A key component of the
ENERGY STAR qualified light fixtures program is the Advanced Lighting Package
(ALP). As market trends and legislation move purchasers away from inefficient
technologies and towards energy-efficient products, NAILD distributors that
become ENERGY STAR Partners have an opportunity to increase sales and profits.

Sreekumar (2008) reviews the market-oriented power sector reforms initiated in India
in the early 1990s. It brings out a public interest oriented critique of the three phases
of the reforms—firstly, privatization of generation, secondly, state sector
restructuring and finally, the ongoing reforms since the passage of the Electricity
Act 2003. Reforms were taken up as a response to the crisis in the sector. The article
questions the success of the process in solving the crisis. While acknowledging
positive elements like increase in transparency and participation, it criticizes
the process for neglect of development issues like rural electrification and
energy efficiency. The article concludes with some thoughts on developing an
alternate reform approach.

Augustine (2007), tries to put forth a model pertaining to transportation because

India is facing a huge increase in power consumption. The model is done with an
aid of GAMS (General Algebraic Modelling System). The power sector is
represented in the model by production capacities, cost of production and

transmission, demand for power and the distances between power plants and
consumption centres. The author has considered major power generating areas of
the country like Ranchi, Bhopal, bhubwaneshwar, dhanbad, Vishakhapatnam
etc. The model described is very realistic, scalable and easy to implement, but has
only considered coal, hydroelectric and natural gas technologies. It can be expanded
to include other technologies and also can be made dynamic to provide solutions for
different time periods representing the maturing of the power generation plants during
the duration of the model.

Electricity is the most essential form of energy. Today it has become an absolute
necessary that life would come to virtual standstill in the absence of it. Electricity is a
virtual need for development of industry, agricultural and commerce. The extent to
which is has permitted a society is an indicator of the quality of life its people. Due to
industrial revolution all the developed countries achieved surplus power generation
and improved the quality of life. The development in usage of electricity is measured
in terms of per capital consumption of that country.
India is fastly emerging in the power generating sector. India has power generating
capacity of 99310MW, which is the 85% of the total generation in the south
asia.Hence India is in a good position in the power generating sector. The overall
generation has increased from 287 billion units in 1991-92 to 89,450MW in 2004-05.
In India, Electricity ratio was 3.06 in the plan peaked at5.11 during the third plan and
come down to 1.65 in eighties. For the nineties, a ratio of around 1.5 is projected.
Therefore, in order to support a rate of growth of GDP of around 7% per annum, the
rate of growth supply needs to be over 10% annually.

The power generation in India was mainly done by four types of different stations.
These four stations are given below. They are:
1. Thermal stations
2. Hydel stations

3. Nuclear stations
4. Wind stations

Coal is the major raw material for generating power by these thermal stations. As coal is
the main resource for generating power, 36% of annual energy is produced by coal. The
contribution of these thermal towards the overall generation is about 82% as per records
of 2007-08.Power generated by these stations was about 70,058.71MW out of 80,777.45

MW throughout India. So we can say these thermal stations are playing vital role in the
generation of power.

As our India is full of water resources, these were a number of hydel stations were
constructed throughout India. The percentage of contribution by these stations to that of
total generation was about 15% as per records of 2007-08.The power generated by these
stations was about 3678.86MW out of the country’s total generation of 30335.25MW in
the year 2007-08.

These wind stations have brought a revolutionary change in the power generating sector.
India is the third largest producer of wind energy in the world after only to Europe and
USA. The potential of installing these types of wind stations in India is about 45000MW.
In the next 20 years there is a possibility of getting 10,000MW, which is the 10% of total
generation in India.

These nuclear stations were not so much constructed as estimated earlier. Because these
may arise some environmental problems by constructing those stations. So our Indian
government decided to decrease these types of power plants. So finally I am going to
conclude that the power generation in India has bright future. India is currently
generating 89,450MW of power according to the estimates of central electricity. India
requires an additional 1,40,000 MW at an estimated to meet power requirement over next


Figure 0-1

State Government appoints the Chairman & Managing Director (CMD) and other
Directors for a period of three years. The CMD is the head of the organization. The
head quarter of APGENCO is situated at Hyderabad and CMD and other directors
will be situated from board employees only who will be normally retired Chief



Table 0-1


I 1 210 01-11-1979

DR NTTPS I 2 210 10-10-1980

VIJAYAWADA II 3 210 05-10-1989
II 4 210 23-08-1990

III 5 210 31-03-1994

III 6 210 24-02-1995

*Sources from the industry records


Table 0-2


I 1 210 31-03-1994

I 2 210 25-02-1995
II 3 210 25-01-2007
V.V.Reddy Nagar

*Sources from the industry records


Table 0-3


TOTAL 62.5
*Sources from the industry records


Table 0-4


A 1 60 08-07-1967

KTPS A 2 60 04-07-1966
A 3 60 27-11-1966
District-507115 A 4 60 27-05-1967

B 5 120 13-08-1974

B 6 120 19-12-1974

C 7 110 10-03-1977

C 8 110 10-01-1978

C 9 250 27-03-1997

C 10 250 28-02-1998

TOTAL 1200
*Sources from the industry records


Table 0-5

VTPS 1260
RTPP 630
KTPS 1200
RTSB 62.5
TOTAL 3152.5
*Sources from the company records



Figure 0-2

*Sources from the company records

The Andhra Pradesh state electricity board (APSEB) was set up in April, 1959 as a
statutory corporation with the objectives of promoting co-ordinate development of
generation, supply and distribution of electricity in an efficient & economic manner.
Exacting A.P.ELECTRICITY REFORM ACT 1948, as two corporations via structured
the APSEB.

1. Transmission Corporation of Andhra Pradesh ltd(APTRANSCO)

2. Power Generation Corporation of Andhra Pradesh ltd(APGENCO)

Under the provisions of companies act, 1956 and which came into existence from

APGENCO is the government organized power generating corporation in Andhra

Pradesh. This is the third largest power utility in the country. APGENCO is generating
power through three type of stations.

They are

1. Thermal stations

2. Hydel stations

3. Wind stations

APGENCO’s Hydel station installed capacity is the second highest in the country.



The model of the Five Competitive Forces was developed by Michael E. Porter in
his book „Competitive Strategy: Techniques for Analyzing Industries and Competitors“in
1980. Since that time it has become an important tool for analyzing an organizations
industry structure in strategic processes.

Porters model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment. Especially,
competitive strategy should base on and understanding of industry structures and the way
they change.

Porter has identified five competitive forces that shape every industry and every
market. These forces determine the intensity of competition and hence the profitability
and attractiveness of an industry. The objective of corporate strategy should be to modify
these competitive forces in a way that improves the position of the organization. Porters
model supports analysis of the driving forces in an industry. Based on the information
derived from the Five Forces Analysis, management can decide how to influence or to
exploit particular characteristics of their industry.

The Five Competitive Forces are typically described as follows:

Figure 0-3

1 Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to
provide goods or services.

Supplier bargaining power is likely to be high when:

 The market is dominated by a few large suppliers rather than a fragmented
source of supply

 There are no substitutes for the particular input

 The suppliers customers are fragmented, so their bargaining power is low

 The switching costs from one supplier to another are high

 There is the possibility of the supplier integrating forwards in order to obtain

higher prices and margins. This threat is especially high when buying industry
has a higher profitability than the supplying industry,

In such situations, the buying industry often faces a high pressure on margins from their
suppliers. The relationship to powerful suppliers can potentially reduce strategic options
for the organization.

2 Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much customers can
impose pressure on margins and volumes.

Customers bargaining power is likely to be high when

 They buy large volumes, there is a concentration of buyers

 The supplying industry comprises a large number of small operators

 The supplying industry operates with high fixed costs

 The product is undifferentiated and can be replaces by substitutes

 Switching to an alternative product is relatively simple and is not related to

high costs

 Customers have low margins and are price-sensitive

 Customers could produce the product themselves

 The product is not of strategically importance for the customer

 The customer knows about the production costs of the product

 There is the possibility for the customer integrating backwards.

3 Threat of New Entrants

The competition in an industry will be the higher, the easier it is for other
companies to enter this industry. In such a situation, new entrants could change major
determinants of the market environment (e.g. market shares, prices, customer loyalty) at
any time. There is always a latent pressure for reaction and adjustment for existing
players in this industry.

The threat of new entries will depend on the extent to which there are barriers to
entry. These are typically

 Economies of scale (minimum size requirements for profitable operations)

 High initial investments and fixed costs

 Cost advantages of existing players due to experience curve effects of

operation with fully depreciated assets

 Protected intellectual property like patents, licenses etc

 Scarcity of important resources, e.g. qualified expert staff

 Access to raw materials is controlled by existing players

 Distribution channels are controlled by existing players

 Existing players have close customer relations, e.g. from long-term service


 High switching costs for customers

 Legislation and government action

4 Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing
players. This category also relates to complementary products.

Similarly to the threat of new entrants, the threat of substitutes is determined by factors

 Brand loyalty of customers

 Close customer relationships

 Switching costs for customers

 The relative price for performance of substitutes

 Current trends.

5 Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players

(companies) in an industry. High competitive pressure results in pressure on prices,
margins, and hence, on profitability for every single company in the industry.

Competition between existing players is likely to be high when

 There are many players of about the same size

 Players have similar strategies

 There is not much differentiation between players and their products, hence,
there is much price competition

 Low market growth rates (growth of a particular company is possible only at

the expense of a competitor)

 Barriers for exit are high (e.g. expensive and highly specialized equipment).




The mission of Dr.NTTPS is generation of electrical energy at lowest possible rates by

utilizing available resources i.e., coal, furnace oil and water in optimum way.
Maintaining high plant load factor i.e., with minimum shutdowns low specific oil

consumption. Supply of electric power to its consumers with in the specified limits of
voltage and frequency without interruptions at cheaper rates.

 To spread ahead the accelerated power development by planning and

implementing new power projects.

 To generate adequate and reliable power most economically, efficiently and eco-

 To implement Renovation and Modernization of all existing units and enhance

their performance.


To be the best power utility in the country and one of the best in the world.


 Excellence in all aspects of the company

 Honesty, integrity and ethical business

 Peoples as the source of strength

 Respect for the individual and personal growth

 Tackling challenges and solving problems

 Continued self-improvement , never being satisfied


 To operate and maintain power station at high availability ensuring minimum cost
of generation

 To build leadership through professional excellence and quality

 To build a team based organization by sharing knowledge and empowering


 To treat everyone with personal attention , openness , honesty and respect they

 To break down all departmental barriers for working together

Dr.NTTPS is one of the powers generating station of “ANDHRA PRADESH POWER

GENERATING CORPORATION (APGENCO)” and is considered to be the best one in
the country’s thermal power generating stations.Dr.NTTPS is located on the left bank
river of “KRISHNA” with a distance of 2km and is in between Ibrahimpatnam and
kondapalli villages and 12km of the north side of Vijayawada city in Krishna Dist. The
site lies at an elevation of about 26.5 mts above the means of sea level.

Dr.NTTPS complex consists of 3 stages and the details are as follows:

Table 0-6


Stage-1 Unit-1 210 01-11-1979
Unit-2 210 10-10-1980
Stage-II Unit-3 210 05-10-1989
Unit-4 210 23-08-1990
Stage-III Unit-5 210 31-03-1994
Unit-6 210 24-02-1995
TOTAL 1260
As Dr.NTTPS needs regular water supply for the generation of thermal power, the
largest reservoir by Prakasam Barrage regularly supplies water in an efficient way for the
production of thermal power and also for other requirements for the plant. The
Dr.NTTPS organization had taken a very good decision regarding the construction of

cooling towers for recycling of water for producing power generation. These cooling
towers were constructed by taking the view that, there is possibility of decrease in the
water level at barrage at nearby further and thus they may not get generation of power
efficiently. The running cost in thermal power station is compared to other generating
systems. Hence the cost per unit generated plays an important role in state economy.
Originally the Dr.NTTPS is linked with Talcher fields in Orissa for the supply of coal.
The average distance of Talcher coal field by train is 950km but sometimes it will get
coal from Singareni collieries company ltd to meet the exigencies and to reach the
demand. The average distance of SCCL coal fields by train is about 250km. As such
Dr.NTTPS has been selected for study.The station has been turning out sterling
performance every year. It stood first in the country during 1994-95, 1995-96, 1996-97,
1997-98 and 2001-02 by achieving the highest plant load factor. The station has been the
recipient of many prestigious awards from various organizations including Meritorious
Awards instituted by the Government of India. The station has received meritorious
productivity award for twenty consecutive years and also got the incentive award for
eleven consecutive years. The station has bagged Gold Medal for 2002-03, 9th time in a
row since 1994-95.


The general layout of a thermal plant for generation of power will be as follows:

Figure 0-4

The generation of electric power is carried over in four major steps.

1. Receiving of coal at coal handling plant and sending it to mills.

2. Producing steam from water by burning coal in the boiler.

3. Passage of steam to the turbine thus converting heat energy to mechanical energy.

4. The mechanical energy gets converted into electrical energy with the help of

As coal is the major raw material, it is mostly supplied by trains. Nearly 3200 tons of
coal is required for producing of units per day. The coal obtained from the wagons is
tripled on to the conveyor belts. Powerful magnets are arranged on the both sides of these
belts to separate the iron particles if any in the coal. This coal is sent to coal bunkers and
a part of it is sent to the stockyard for future use. Coal is crushed to minimum size of 20-
25 mm. Next it is sent to the mills to pulverize it into fine powder. The fitness of the coal
thus obtained is 75% pure. This coal used in plants contains 60% ash. This pulverized
power is sent to the furnace by using primary air fans which supply hot air. Air from the
atmosphere is taken and is passed through air pre heater (APH). This air is sent to P.A
fans to pass the powder to the furnace. The coal bunkers and mills are located in between
the boiler house and the boiler. Thus turbine house is completely isolated from the mills
to ensure dust free atmosphere in the turbine house and also to ensure accessibility of
mills for maintenance.

In Dr.NTTPS each unit has 6 mills to supply powered coal to boiler. Mills here are
direct fixed tube mills, which can run for a very long time period without stopping. Coal
obtained from mills is held in suspension in the boiler. Oil is used for ignition and
stabilization of the flame. Next, coal is burnt in suspension and air necessary for
combustion is supplied by force draft fans. Air from these fans is preheated to minimize
heat transfer from the furnace to air.

Heat developed through by burning coal is absorbed by water, which is passing
through the water walls arranged on the outer surface of the boiler. In order to prevent the
flame from touching the walls of the boiler negative pressure is maintained inside the
boiler (nearly 10mm of water volume). This is achieved by absorbing air using I.D fans
and F.D fans.

During combustion of coal few gases and light ash particles move towards the top
of the furnace. Heavier ashes particles however settle at the bottom place called bottom
ash hopper and it is mixed with pressurized water and carefully disposed. The few gases
have very high temperature. So, they will be used to heat steam coming from the end of
HPT by using the economizers.

By absorbing heat water is converted into saturated steam which is mixture of

liquid and vapor. This is again passed back to drum located at a height of 56 mts to
separate water and steam. Thus the steam obtained is passed through super heated

Steam in super heated condition is sent to HPT by two horizontal pipes. There are
3 turbines which run on the same shaft. Circumferential arrangement of movable blades
is called a stage. Fixed blades are used to expand the steam and rotate the shaft. HPT is a
single flow turbine where as the other two are double flow turbines. Steam at 540
degrees, 130 kg/Cm2 pressure is passed to HPT and rotates to turbine thus converting
heat energy into mechanical energy. By the end of HPT steam is the parameter 340
degrees, 36 kg/cm2 pressure. This is sent back to boiler to raise temperature to 540
degrees which is achieved by heat transfer from the flue gases to incoming steam. This
system is passed through IPT & LPT and finally reaches condenser. To avoid the escape
of steam from the turbines steam from outside is supplied into the turbine in opposite
direction & is removed from other side. Steam is collected from secondary use is called “
Extraction steam by bleed steam”.


To send steam from LPT to condenser low pressure i.e., almost vacuum should be created
in condenser which is done with main air ejector (MAE) which condensate flows MAE
temperature of air is transferred to liquid to raise its temperatures slightly to say 46
degrees. After passing through several stages air to reaches LPH. Here the temperature of
the condensate is raised with the help of extraction steam. Finally this steam is condensed
to water is given back to condenser. Air which is absorbed by the condensate is removed
with the help of aerator by the time condensate reaches outlet of DA temperature will be
160 degrees and pressure is 7.6 kg/cm2.


The condensate at the outlet of dais fed to BFP to raise its pressure to 170 kg/cm2. Next it
is passed through MPH to raise its temperature. This is obtained by passing extraction
steam from HPT to LPT. At the outlet of economizer the temperature would be 280
degrees. This steam from outlet of director to the economizer is called feed water system.


There are 18-220KV outlet feeders from this plant. Power generated at 15KV is stepped
up to 220KV and is transmitted. Again it is stepped down to 11KV and is sent to
distribution transformer from where it its distributed. Dr.NTTPS from a grid with other
power stations like RTS, KTPS and srisailam and in case of emergency power is drawn
from any of these stations. All the out feeders can also function as drawing lines when we
want power from the other stations.


Keeping in mind the various functions carried plant is divided into 18 systems, which are
as follows

1. Coal handling system

2. Fuel oil handling system

3. Cooling water system

4. Water treatment system

5. Combustion air system

6. Air fuel gas system

7. Pulverization system

8. Ash handling system

9. Ash disposal system

10. Governor system

11. Lubricant oil system

12. Condensate system

13. Excitation system

14. Auto voltage regulating system

15. Seal oil system

16. Vacuum system

17. Generator cooling system

18. Transmission system


APGENCO developed safety and healthy standards based on Factories Act 1947,
Workmen compensation Act and other Health and safety Acts of UK and USA and safety
measures are being implemented.


APGENCO is in the process of being certified for ISO 14001 Environment Management
systems in a phased manner at Dr.Narla Tata Rao Thermal power Station.


Figure 0-5


C.E : Chief Engineer

S.E (Stage-I, II&III) : Superintending Engineer

S.E (Adm&MM) : Superintending Engineer (Administration Material Maintenance)

D.E (BM) : Divisional Engineer (Boiler Maintenance)

D.E(TM) : Divisional Engineer (Turbine Maintenance)

D.E (EM) : Divisional Engineer (Turbine Maintenance)

D.E (I&C) : Divisional Engineer (Turbine Maintenance)

D.E (CAM) : Divisional Engineer (Common Aux. Maintenance)

D.E (MM) : Divisional Engineer (Mechanical Maintenance)

D.E (Purchase) : Divisional Engineer (purchase)

E.E. : Executive Engineer

ADE : Asst. Divisional Engineer

AE : Assistant Engineer

Sub. Engineer : Sub Engineer

OFFICE ESST. : Office Establishment

SAO : Senior Accounts Officer

AO : Accounts Officer

JAO : Junior Accounts Officer

FM : Foreman

PA : Plant Attendant

JPA : Junior Plant Attendant


VTPS recognizes its importance in the State power Grid and is committed to operate and
maintain the power station at high plant availability factor with reliability ensuring
minimum cost of Generation by optimizing the resources in an environment friendly
manner. Dr.NTTPS is committed to Endeavor to continually improve the competence of
employees and quality management system and strive for safe working practices to
ensure minimum occupational health.


 To achieve status of one of the best power stations in India by 2006 on the basis of

 Continuously monitor the generating process to ensure compliance with the

specified requirement of gird efficiently and economically.

 Ensure safety dependability and reliability of the electricity generation process in

an environmentally sustained manner.

 Continuous improvement in process\system thought up gradation of Technology

and skills Knowledge of the employees by organizing regular training courses.

 To achieve Auxiliary Consumption of less than 9.0% by 2006-07.


Figure 0-6


 Well established and vast transmission and distribution network.

 Highly qualified engineering and technical personnel.

 Regulatory framework is further facilitated with enactment of Electricity Bill,


 The Electricity Bill, 2003 holds promises forth power sector and certainly for
the consumer by way of competition reliability and rationalized tariff structure.

 Emergence of strong and globally comparable central utilities (NTPC, POWER

 India has substantial non-conventional energy resource base and technologies

to meet growing power requirements by tapping this energy.


 Poor infrastructure has led to heavy T&D losses. Old and poor transmission
and distribution network has led to frequent power outages and poor quality of

 Lack of proper metering and theft has led to large scale losses. Only 51% of
the power generated is billed and only 41% is realized

 Moreover, Government provides power to agricultural sector at subsidized

rates and also free of cost in some states. All these factors have resulted in
financial disorder of the State Electricity Boards (SEBs).

 Restoration of SEBs financial health and improvement in their operating

performance continues to be a critical issue. The Government of India has

signed a Memorandum of Understanding (MOU) with various states reflecting
the joint commitment of centre and states to undertake reforms in a time bound

 Poor return to utilities, which affect their profitability and capacity to make

Further investments

 Non-availability of quality coal may hamper thermal plants’ efficiency in

power generation

 Inability of SEBs to raise funds, as most of the SEBs is on the verge of

bankruptcy due to poor operational performance. Adding to the problems,

SEBs need huge money to measure up competition from efficient private



Table 0-7



I 09-12-2005 05-08-2006 238

14-40hrs 1-24 hrs

II 18-02-1987 26-07-1987 157

13-44 hrs 01-52 hrs

III 14-12-2004 28-02-2006 441

18-58 hrs 22-24 hrs

IV 23-01-2002 27-07-2002 184

18-01 hrs 09-54 hrs

V 20-11-2006 30-06-2007 222

08-05 hrs 15-00 hrs

VI 24-01-2007 28-08-2007 216

00-27 hrs 01-09 hrs

*Sources from the company records


 Vijayawada Thermal Plant has won the Meritorious Productivity Award for
twenty-one consecutive years - In which it has won nine gold medals - and
Incentive Award for twelve consecutive years.



 Dr.NTTPS bagged an award from Indian Electrical and Electronics

Manufacturers Association (IEEMA) on NDTV Profit for excellence in Thermal
Power Generation

 Dr.NTTPS bags the INDIA POWER AWARD-2008 for overall utility

performance in Generation sector

Inventory Management is a big part of profit planning for manufacturing and
merchandizing companied. Material costs often accounts for more than 40% of total costs
of manufacturing companies and more than 70% of total costs in merchandizing
companies. Inventory management is the planning and coordinating and controlling
activities related to the flow of inventories into through and out of an organization.
Inventory constitutes the most significant part of current assets of a large majority of
companies in India. On an average inventories are approximately 60% of current assets in
public limited companies in India. Because of the large size of inventories are maintained
by firms a considerable amount of funds is required be committed to them. It is, therefore
absolutely imperative to manage efficiently and effectively in order to avoid unnecessary
investment. It also provides a cushion for future price fluctuations. The purpose of
inventory management is to ensure availability of materials in sufficient quantity as and
when required and also to minimize investment in inventories.

Inventory is stock of the product a company is manufacturing for sale and components
that make up the product. There are main three type of inventory:

 Raw Material

 Work-in-process

 Finished Goods.

 Raw Materials are those basic inputs that are converted into finished products

through the manufacturing process. Raw materials inventories are those units,
which have been purchased and stored for future productions. The quantity of raw
materials required will be determined by the rate of consumption and the time
required for replenishing the supplies. The factors like the availability of raw
materials and government regulations, etc. too affect the stock of raw materials.

 Work-in-Process inventories are semi-manufactured products. They represent

products that need more work before they become finished products for sale. The
work-in-progress is that stage of stocks which are in between raw materials and
finished goods. The greater the time taken in manufacturing, the more will be the
amount of work in progress.

 Finished Goods inventories are those completely manufactured products, which

are ready for sale. These are the goods which are ready for the consumers. The
stock of finished goods provides a buffer between production and market. The
purpose of maintaining inventory is to ensure proper supply of goods to
consumers. In some concerns the production is undertaken on order basis, in these
concerns there will not be a need for finished goods. The need for finished goods
inventory will be more when production is undertaken in general without waiting
for specific orders.

 Spares also form a part of inventory. Some industries like transport will require

more spares than the other concerns. The costly spare parts like engines,
maintenance spares etc. are not discarded after use, rather they are kept in ready
position for further use. All decision about spares is based on the financial cost of
inventory on such spares and the costs that may arise due to their non-availability.

Stock of raw materials and work-in-process facilitates production while stock of finished
goods is required for smooth marketing operations. Thus inventories serve as a link
between the production and sale of a product. Firms also maintain a fourth kind of

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

The levels of three kinds of inventory for a firm depends n the nature of its business. A
manufacturing firm will have substantially high levels of all three kinds of inventories,
while a retail or wholesale firm will have a very high level of finished goods and no raw
materials and work-in-process inventories. Although holding inventories involves
blocking of a firm’s funds and the cost of storage and handling, every business enterprise
has to maintain a certain level of inventories to facilitate uninterrupted production and
smooth running of business.


Maintaining inventories involves tying up of the company’s funds and incurrence of
storage and handling costs. There are three general motives for holding inventories.

1. Transactional motive:

It emphasizes the need to maintain inventories to facilitate smooth production and sales

2. Precautionary motive:

It necessitates holding of inventories to guard against the risk of unpredictable changes in

demand and supply forces and other factors.

3. Speculative motive:

It influences the decision to increase or decrease inventory levels to take advantage of

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

A time lag exists between demands for material and its supply. Also there exists
uncertainty in procuring raw materials in time on many occasions. The procurement of
materials may be delayed because of such factors as strike, transport disruption or short
supply. Therefore, the firm should maintain sufficient stock of raw material at a given
time to streamline production. Other factors, which may necessitate purchasing and
holding of raw materials are quantity discounts and anticipated price increase. The firm
may purchase large quantities of raw materials than14 needed for the desired production
and sales levels to obtain quantity discounts of bulk purchasing. At times, the firm would
like to accumulate raw materials in anticipation of price rise. Work-in-process inventory
builds up because of the production-cycle. Production-cycle is the time span between
introduction of raw material in to production and emergence of finished goods at the
completion of production-cycle. Till production-cycle completes stock of work-in-
process has to be maintained.

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


Managing inventories to increase net income requires effectively managing costs that fall
into the following five categories:

1. Purchasing Costs:

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

2. Ordering Costs:

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

3. Carrying Costs:

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

4. Stock out Costs:

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

5. Capital Costs: Maintaining of inventories results in blocking of the firm’s financial

resources. The funds may be arranged from own resources or from outsides. In the former
case, there is an opportunity cost of investment while in the later case; the firm has to pay
interest to the outsides.

6. Storage and Handling costs: The storage costs include the rental of the godown,
insurance charges, etc.

7. Risk of Price Decline: This may be due to increased market supplies, competition or
general depression in the market.

8. Risk of Obsolescence: The inventories may become obsolete due to improved
technology, changes in requirements, change in customer’s tastes, etc.

9. Risk Deterioration in Quality: The quality of the materials may also deteriorate while
the inventories are kept in store.


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

 To maintain a large size of inventories of raw material and work-in-process for

efficient and smooth production and of finished goods for uninterrupted sales

 To maintain a minimum level of investment in inventories to maximize


The objective of inventory management should be to determine and maintain optimum

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

The major dangers of over investment are:

a) Unnecessary tie up of the firm’s funds and loss of profit and opportunity costs.

b) Excessive carrying costs

c) Risk of liquidity.

The consequences of under investment in inventories are:

a) Production hold ups, and

b) Failure to meet delivery commitments.

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

 Ensure a continuous supply of raw material to facilitate uninterrupted production.

 Maintain sufficient stocks of raw materials in periods of short supply and

anticipated price changes.

 Maintain sufficient finished goods inventory for smooth sales operations and
efficient customer services.

 Minimize the carrying costs and time, and Control investment in inventories and

keep it at an optimum level.


The following are the important tools and technique of inventory management and

1. Determination of stock levels.

2. Determination of safety stocks.

3. Selecting a proper system of ordering for inventory.

4. Determination of economic order quantity.

5. A.B.C. Analysis.

6. V.E.D. Analysis.

7. Inventory turnover ratios.

8. Aging schedule of inventories

9. Classification and codification of inventories

10. Preparation of inventory reports.

Determination of stock levels: Carrying of too much and too little of inventories is
detrimental to the firm. If the inventory level is too little, the firm will face frequent
stock-outs involving heavy ordering cost and if the inventory level is too high it will be
unnecessary tie-up of capital. Therefore, an affective inventory management requires that
a firm should maintain an optimum level of inventory where inventory costs are the
minimum and at the same time there is no stock-out which may result in lost of sale or
stoppage of production. Various stock levels are discussed as such.

a. Minimum Level: This represents the quality which must be maintained in hand at

all times. If stocks are less than the minimum level then the work will stop due to
shortage of materials. Following factors are taken into account while fixing
minimum stock level:

 Lead Time: The time taken in processing the order and then executing it is

known as lead time. It is essential to maintain some inventory during the


 Rate of Consumption: It is the average consumption of material in the


 Nature of Material: If a material is required only against special orders of the

customer than minimum stock will not be required for such materials.
Minimum stock level can be calculated with the help of following formula:

Minimum stock level = Re-ordering level – (Normal consumption) ´ Normal

Re-order period)

b. Re-ordering Level: Re-ordering level or ordering level is fixed between

minimum level and maximum level. Re-ordering level is fixed with the following

Re-ordering Level = Maximum Consumption ´ Maximum Re-order period.

c. Maximum Level: It is the quantity of material beyond which a firm should not

exceed its stocks. If the quantity exceeds maximum level limit then it will be
overstocking. A firm should avoid overstocking because it will result in high
material costs. Overstocking will mean blocking of more working capital, more
space for storing the materials, more wastage of materials and more chances of
losses from obsolescence.

Maximum Stock Level = Re-ordering Level + Re-ordering Quantity –

(Minimum Consumption ´ Minimum Re-ordering period).

d. Danger Level: It is the level beyond which materials should not fall in any case. If

danger level arises then immediate steps should be taken to replenish the stocks
even if more cost is incurred in arranging the materials. If materials are not
arranged immediately there is a possibility of stoppage of work.
Danger Level = Average Consumption ´ Maximum re-order period for
emergency purchases.

e. Average Stocks Level: The average stock level is calculated as such:

Average Stock Level = Minimum Stock Level + ½ of re-order quantity.

3. Determination of Safety Stocks

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of
inventory cannot be perfectly forecasted. It fluctuates over a period of time. The
demand for materials may fluctuate and delivery of inventory may also be delayed
and in such a situation the firm can face a problem of stock-out. The stock-out can

prove costly by affecting the smooth working of the concern. In order to protect
against the stock out arising out of usage fluctuations, firms usually maintain some
margin of safety or safety stocks. The basic problem is to determine the level of
quantity of safety stocks. Two costs are involved in the determination of this stock i.e.
opportunity cost of stock-outs and the carrying costs. The stock outs of raw materials
cause production disruption resulting into higher cost of production. Similarly, the
stock-out of finished goods result into the failure of the firm in competition as the
firm cannot provide customer service. If a firm maintain low level of safety frequent
stock-outs will occur resulting into the large opportunity costs. On the other hand, the
larger quantity of safety stocks involves higher carrying costs.

4. Ordering systems of Inventory

The basic problem of inventory is to decide the re-order point. This point indicates
when an order should be placed. The re-order point is determined with the help of
these things: (a) average consumption rate, (b) duration of lead time, (c) economic
order quantity, when the inventory is depleted to lead time consumption, the order
should be placed. There are three prevalent system of ordering and a concern can
choose any one of these:

 Fixed order quantity system generally known as economic order quantity (EOQ)

 Fixed period order system or periodic re-ordering system or periodic review


 Single order and schedule part delivery system.

5. Economic Order Quantity (EOQ)

• Economic order quantity is the size of the lot to be purchased which is

economically viable. This is the quantity of materials which can be purchased at

minimum costs. Generally, economic order quantity is the point at which
inventory carrying costs are equal to order costs. In determining economic order
quantity it is assumed that cost of managing inventory is made up solely of two
parts i.e., ordering costs and carrying costs.

• Ordering costs: These are the costs which are associated with the purchasing or
ordering of materials. These costs include:

 Costs of staff posted for ordering of goods. A purchase order is processed and then
placed with suppliers. The labour spent on this process is included in ordering

 Expenses incurred on transportation of goods purchased.

 Inspection costs of incoming materials.

 Cost of stationery, typing, postage, telephone charges, etc.

 These costs are also known as buying costs and will arise only when some
purchases are made. When materials are manufactured in the concern then these
costs will be known as set-up costs. These costs will include costs of setting up
machinery for manufacturing materials, time taken up in setting, cost of tools, etc.

 The ordering costs are totaled up for the year and then divided by the number of

orders placed each year.

B. Carrying Costs: These are the costs of holding the inventories. These costs will

not be incurred if inventories are not carried. These costs include:

1. The cost of capital invested in inventories. An interest will be paid on the amount
of capital locked-up in inventories.

2. Cost of storage which could have been used for other purpose.

3. The lost of materials due to deterioration and obsolescence. The materials may

deteriorate with passage of time. The loss of obsolescence arises when the
materials in stock are not usable because of change in process or product.

4. Insurance cost.

5. Cost of spoilage in handling of materials.

6. The longer the materials kept in stocks, the costlier it becomes by 20 percent every
year. The ordering and carrying costs have a reverse relationship. The ordering
cost goes up with the increase in number of orders placed. On with the increase in
number of units, purchased and stored.

7. The ordering and carrying costs of materials being high, an effort should be made

to minimize these costs. The quantity to be ordered should be large so that

economy may be made in transport costs and discounts may also be earned. On the
other hand, storing facilities, capital to be locked up, insurance costs should also
be taken into account.

• Assumptions of EOQ: While calculating EOQ the following assumptions are


1. The supply of goods is satisfactory. The goods can be purchased whenever these
are needed.

2. The quantity to be purchased by the concern is certain.

3. The prices of goods are stable. It results in stabilising carrying costs.

4. When above-mentioned conditions are satisfied, economic order quantity can be

calculated with the help of the following formula:


Where A = Annual consumption in rupees.

S = Cost of placing an order.

I = Inventory carrying costs of one unit.

• EOQ and Quality Discount: Customer is offered some discount for bulk
purchase or if the size of a single order is large. Thus, the price per unit of an item
may decrease for buying larger quantities. The quantity discount affect inventory
cost in three ways:

 As the price per unit is reduced, the total price for the lot is reduced.

 The lot size is increased, the number of offers is reduced and as a result the total
ordering cost is reduced.

 The average inventory holding increase and as a result the storage cost will

 Thus, to decide whether to avail the quantity discount or not, first of all EOQ is

determined and then its total cost without quantity discount and with quantity
discount is determined. In case, the total cost is less due to quantity discount the
offer is accepted, otherwise it is rejected. The following example illustrates the

5. A-B.C Analysis

The materials are divided into a number of categories for adopting a selective
approach for material control. Under A-B-C analysis, the materials are divided into
three categories viz, A, B and C. Past experience has shown that almost 10 percent of
the items contribute to 70 percent of value of consumption and this category is called
‘A’ Category. About 20 percent of the items contribute about 20 percent of value of
consumption and this is known as category ‘B’ materials. Category ‘C’ covers about
70 percent of items of materials which contribute only 10 percent of value of
consumption. There may be some variation in different organizations and an
adjustment can be made in these percentages.

The information is shown in the following diagram:

Table 0-8

Class No. of Items % Value of Items %

A 10 70

B 20 20

C 70 10

*Sources from the literature

• A-B-C analysis helps to concentrate more efforts on category A since greatest

monetary advantage will come by controlling these items. An intention should be
paid in estimating requirements, purchasing, maintaining safety stocks and
properly storing of ‘A’ category materials. These items are kept under a constant
review so that a substantial material cost may be controlled. The control ‘C’ items
may be relaxed and these stocks may be purchased for the year. A little more
attention should be given towards ‘B’ category items and their purchase should be
undertaken at quarterly or half-yearly intervals.

6. VED Analysis

The VED analysis is used generally for spare parts. Spare parts are classified as Vital
(V), Essential (E) and Desirable (D). The vital spares are a must for running the
concern smoothly and these must be stored adequately. The non-availability of vital
spare will cause havoc in the concern. The E types of spares are also necessary but

their stocks may be kept at low figures. The stocking of D type of spares may be
avoided at times. If the lead time of these spares is less, then stocking of these spares
can be avoided. The classification of spares under three categories is an important
decision. The classification of spares should be left to the technical staff because they
know the need urgency and use of these spares.

7. Inventory Turnover Ratios

Inventory turnover ratios are calculated to indicate whether inventories have been
used efficiently or not. The purpose is to ensure the blocking of only required
minimum funds in inventory. The inventory turnover ratio also known as stock
velocity is normally calculated as sales/average inventory or cost of goods
sold/average inventory cost. Inventory conversion period may also be calculated to
find the average time taken for clearing the stocks.


Cost of Good Sold

Inventory Turnover Ratio =
Average Inventory at Cost

Net Sales
(Average ) Inventory

8. Aging Schedule of Inventories

Classification of inventories according to the period (age) of their holdings also helps in
identifying show moving inventories thereby helping in effective control and
management of inventories.

9. Classification and Codification of Inventories

The inventories of a manufacturing concern may consist of raw materials, work in

process, finished goods, spares, consumable stocks, etc. All these categories may have

their sub-divisions. The raw materials used may be of 3-4 types, finished goods may also
be of more than one type, spares may be of a number of types and so on. For a proper
recording and control of inventory, a proper classification of various types of items is
essential. The inventories should first be classified and then code numbers should be
assigned for their identification. The identification of short names are useful for inventory
management not only for large concerns but also for small concerns. Lack of proper
classification may also lead to reduction in production. Generally, materials are classified
according to their nature such as construction materials, consumable stocks, spares,
lubricants, etc. The coding class of materials is assigned two digits and then two or three
digits are assigned to the category of materials in that class. The third distinction is
needed for the quality of goods and decimals are used to note this factor.


• The term JIT refers to a management tool that helps to produce only the needed
quantities at the needed time. According to the official terminology of C.I.M.A.,
JIT is “a technique for the organization of workflows, to allow rapid, high quality,
flexible production whilst minimizing manufacturing work and stock level.” There
are broadly two aspects of JIT (i) just in time production, and (ii) just in time

• Just in time inventory control system involves the purchase of materials in such a
way that delivery of purchased material is assured just before their use or demand.
The philosophy of JIT control system implies that the firm should maintain a
minimum (zero level) of inventory and rely on suppliers to provide materials just
in time to meet the requirements. The traditional inventory control system, on the
other hand, requires maintaining a healthy level of safety stock to provide
protection against uncertainties of production and supplies.

Objective of JIT

• The ultimate goal of JIT is to reduce wastage and enhance productivity. The
important objectives of JIT include:

1. Minimum / zero inventory and its associated costs.

2. Elimination of non-value added activities and all wastes.

3. Minimum batch / lot size.

4. Zero breakdowns and continuous flow of production.

5. Ensure timely delivery schedules both inside and outside the firm.

6. Manufacturing the right product at right time.

Features of JIT

a. It emphasizes that firms following traditions inventory control system

overestimate ordering cost and underestimate carrying costs associated with
holding of inventories.

b. It advocates maintaining good relations with suppliers so as to enable purchase of

right quantity of material at right time.

c. It involves frequent production / order runs because of smaller batch/lot sizes.

d. It requires reduction in set up time as well as processing time.

e. Purchase of produce in response to need rather than as per the plans and forecasts.

Advantages of JIT Inventory Control System

i. The right quantities of materials are purchased or produced at the right time.

ii. Investment in inventory is reduces.

iii. Wastes are eliminated.

iv. Carrying or holding cost of inventory is also reduced because of reduced

v. Reduction in costs of quality such as inspection, costs of delayed delivery, early

delivery, processing documents etc. resulting into overall reduction in cost.

The impact of various inventory management techniques such as ABC analysis, perpetual
inventory, etc adopted in most of the industrial undertakings is not very clear. An analysis
of inventory ratio will clarify this point. These ratios provide guidelines for planning and
controlling of inventories of industrial units. They also provide relative or comparative
information about the performance of the inventory function.

The manufacturing firms generally have four kinds of inventories.

i. Stores and spars

ii. Raw materials

iii. Work-in-progress

iv. Finished goods


It is an important parameter used to evaluate the performance of the inventory function,

and ratios useful to inventory management are:

 Inventory turnover ratio

 Store and spares inventory holding period

 Conversion period of work in progress

 Inventory as per percentage of current asset

 Inventory as percentage of total asset

 Inventory in term of months of production

 Number in days stock in hand ratio

 Return per rupee invested ratio


It is an important parameter used to evaluate the performance of the inventory function,

and expressed as:

Cost of sales during the period


Average stock held during the period

Here the average stock indicates the yearly average (average of opening and closing
inventory), where the numerator of the ratio, i.e. the cost of sales means sale minus gross
profit. Since inventories are valued in term of their cost, the cost of sales rather than sales
has been used in computing the turnover ratio. The inventory turnover shows how
quickly the inventory is turning into receivable/cash through sale. This ratio indicates the
number of times the stock is turned over on the average and must inventories is reflected
in the number of time the firm’s average inventory is turned over during the year.

Inventory turnover has a direct relationship with the profit-earning capacity of the firm.
Generally, the higher the rate of inventory turnover, the larger the amount of profit, the
smaller the amount of work-in-capital tied up with inventory, and the more current the
stock of merchandise. Each turn over adds to the volume of profit. A low inventory
turnover implies excessive inventory levels compared to those warranted by production
and sales activities, or a slow moving, or obsolete inventory. A high level of sluggish
inventory amount to unnecessary tie-up of funds is impairment of profits and increased
cost. If the obsolete inventories have to be written off, this will adversely affect the

working capital. And liquidity position of the firm. Thus a higher turnover is better than a
lower turnover.

Ideally, the inventory should be 12 and 20 percent of the sales value. As such, inventory
turnover ratio should be within the range of 5.0-8.3, while it is also opined that the same
could be 9 as well. It is, therefore, recommended that the inventory turnover ratio should
be between 5 and 9.


Stores and spares is a term which commonly covers all kinds of supplies necessary to
keep the production equipments operating in order to turn out production to the desired
quantity and quality at the desire time. The lack of spares is often the one of the most
serious bottlenecks in on interrupted production.Stores and spares inventory constitute a
large number of items, some of them are most important and require longer period of
time to procure while most of them are not that important and require shorter periods of
time to procure. In discriminate stocking of each and every item of stores and spares is
not wise because a huge amount of funds may unnecessarily get locked up in the
component of stores and spares. Thus the stock of components of stores and spares
should be kept to a reasonable level.

Stores and spares inventory is the slowest moving among the four components of
inventory. A close watch on the movement of this component of inventory and its
affective control can pay rich dividends to a firm. In most of the firms, the stores and
spares inventory occupies, on an average, about two-third of the total inventory. Such
huge amount of investment in the stores and spares .inventory affects both liquidity and
profitability of firms.

Annual consumption of stores and spares

Stores and spares inventory turnover=______________________________________

Stores and spares inventory

The suggested norm for the stores and spares inventory holding period should be between
three and six months. But in most of the firms, the stores and spares holding period is
above the suggested norms. Thus the inference that can be drawn is that there is an over
investment in stores and spares on account of poor inventory management. Long lead
time’s procedural delays in procurement and uncertainty about availability, particularly
of imported items are the main reasons which compel the firm to have more stocks of
stores and spares. Moreover, heavy initial purchases at the time of procurement of new
machineries and subsequent purchases without proper assignment of the requirement are
also responsible for such huge investment in stores and spares.


Work-in-progress inventories represent product that need more work before they become
finished product for sale. They are semi manufactured products. The longer the
production cycles, the grater the volume of work-in-progress and vice-versa. It is
calculated by dividing the WPI inventory by the cost of production and then multiplying
the result by 365.The suggested norm is that the work-in-progress conversion period
should be less then 15 days. But this period is abnormally high in most of the firms. This
situation is the result of week inventory management and hence is liable to affect the
profitability of the firms.


The share of inventory in the current assets indicates how much liability of a firm is
locked up in inventory. Inventory is generally ness liquid then other current asset. As
such the inventory is the most non-liquid current asset.

Total inventory * 100

Inventory as a percentage of current=_________________________ asset

Total current cost

The quality and liquidity of current asset are largely dependent on the composition of
current asset. The lower the percentage of inventory to the current assets is the greater the
liquidity of current assets and vice-versa. Thus a low ratio is greater than high ratio asset.


Inventory is an important element in the asset structure of an industrial under taking. As

such, its share in the asset structure and the proportion if the funds invested in inventory
for operational activities of the undertaking should be examined.

Total inventory * 100

Inventory to total asset = _________________________

Total asset


The main yardstick used to measure the accuracy of the inventory is the month’s value of
the usage. For the purpose, the aggregate inventory is converted in to month’s value of
production, the stores and spares inventory to their month’s consumption and the worked-
in-progress is assessed in term month’s cost of production.

Investment in inventory in term of months’ value of production is ascertain as follows

value of inventory

__________________________________ *12

Cost of production excluding depreciation

Depreciation is excluded from the cost of production as depreciation does not involve
case outflows.


Number of days in stock-in-hand ratio =stock * 365


Cost of sales

The ratio measures the efficiency in selling the goods. The smaller the number of day’s
stock-in-hand, the higher the efficiency in inventory management.


Return per rupee invested ratio is Annual gross margin



The ratio shows efficiency in management of inventory in term of profitability. The

higher this ratio is the better the management.



Year wise Inventory levels from 2003 to 2004(in Crs) & graphical representation

Table 0-9

S.No Description Opening Receipts Issues Closing

Balance Balance
1 Coal 22.21 890.98 884.62 28.57
2 Furnace oil 3.45 3.44 4.15 2.74
3 HSD oil 0.90 1.00 1.15 0.75
4 Lubricants 0.44 1.63 1.62 0.45
5 Spares 98.25 33.65 40.98 90.92
6 Consumables 5.80 18.15 16.32 7.63
7 Chemicals 0.01 1.25 1.25 0.01
8 Others 0.56 3.26 3.42 0.40
TOTAL 131.62 953.36 953.51 131.47
*Sources from the company records

Figure 0-7

Year wise Inventory levels from 2004 to 2005(in Crs)

Table 0-10

S.No Description Opening Receipts Issues Closing

Balance Balance
1 Coal 28.57 926.79 921.48 33.38
2 Furnace oil 2.74 5.90 4.01 4.63
3 HSD oil 0.75 1.57 1.16 1.16
4 Lubricants 0.45 1.55 1.63 0.37
5 Spares 90.92 59.31 58.16 92.07
6 Consumables 7.63 12.95 11.91 8.67
7 Chemicals 0.01 1.38 1.38 0.01
8 Others 0.40 0.95 1.00 0.35
TOTAL 131.47 1010.40 1001.23 140.64
*Sources from the company records

Figure 0-2

Year wise Inventory levels from 2005 to 2006(in Crs)

Table 0-11

S.No Description Opening Receipts Issues Closing

Balance Balance
1 Coal 33.38 961.62 951.67 43.333
2 Furnace oil 4.63 2.90 4.61 2.92
3 HSD oil 1.16 0.80 1.29 0.67
4 Lubricants 0.37 1.85 1.82 0.40
5 Spares 92.07 29.42 22.36 99.13
6 Consumables 8.67 9.30 8.04 9.93
7 Chemicals 0.01 1.91 1.91 0.01
8 Others 0.35 0.43 0.46 0.32
TOTAL 140.64 1008.23 992.16 156.71
*Sources from the company records

Figure 0-3

Year wise Inventory levels from 2006 to 2007(in Crs)

Table 0-12

S.No Description Opening Receipts Issues Closing

Balance Balance
1 Coal 43.333 968.11 967.98 43.46
2 Furnace oil 2.92 5.37 4.95 3.34
3 HSD oil 0.67 1.49 1.28 0.88
4 Lubricants 0.40 2.36 1.89 0.87
5 Spares 99.13 35.15 22.59 48.55
6 Consumables 9.93 2.93 9.37 3.49
7 Chemicals 0.01 1.36 1.37 0.00
8 Others 0.32 7.46 4.13 3.65
TOTAL 156.71 1024.23 1013.56 167.38
*Sources from the company records

Figure 0-4

Year wise Inventory levels from 2007to 2008(in Crs)

Table 0-13

S.No Description Opening Receipts Issues Closing

Balance Balance
1 Coal 43.46 1016.85 1024.69 35.62
2 Furnace oil 3.34 6.01 5.06 4.29
3 HSD oil 0.88 0.99 1.35 0.52
4 Lubricants 0.87 2.27 2.31 0.83
5 Spares 48.55 40.94 49.84 102.79
6 Consumables 3.49 8.49 7.2 4.78
7 Chemicals 0.00 1.86 1.11 0.75
8 Others 3.65 5.15 5.79 3.01
TOTAL 167.38 1082.56 1097.35 152.59
*Sources from the company records

Figure 0-5


Cost of goods sold

Inventory turnover ratio=-------------------------------

Average inventory

Cost of goods sold(COGS)=opening stock+ purchases-closing stock

Opening stock + closing stock

Average inventory=----------------------------------------------------

Ratios of 2003-04

Coal inventory turnover ratio=884.62/25.39 = 34.84 times

Furnace oil inventory turnover ratio= 4.15/3.095= 1.34 times

High speed oil inventory turnover ratio= 1.15/0.825=1.39 times

Lubricants inventory turnover ratio=1.62/0.995=1.628 times

Spares inventory turnover ratio=40.98/94.585=0.43 times

Consumables inventory turnover ratio=16.32/6.715=2.43 times

Chemicals inventory turnover ratio=1.25/0.01=125 times

Other material inventory ratio=3.24/0.48=7.125 times

Ratios of 2004-05

Coal inventory turnover ratio=921.98/30.975 = 29.76times

Furnace oil inventory turnover ratio= 4.01/3.685= 1.088 times

High speed oil inventory turnover ratio= 1.16/0.955=1.215 times

Lubricants inventory turnover ratio=1.63/0.441=3.98 times

Spares inventory turnover ratio=58.16/91.495=0.643 times

Consumables inventory turnover ratio=11.91/8.15=1.46 times

Chemicals inventory turnover ratio=1.38/0.01=138 times

Other material inventory ratio=1.00/0.375=2.67 times

Ratios of 2005-06

Coal inventory turnover ratio=951.67/38.39 = 24.84 times

Furnace oil inventory turnover ratio= 4.61/3.775= 1.221 times

High speed oil inventory turnover ratio= 1.29/0.915=1.41 times

Lubricants inventory turnover ratio=1.82/0.385=4.73 times

Spares inventory turnover ratio=22.36/95.85=0.23 times

Consumables inventory turnover ratio=8.04/9.3=0.86 times

Chemicals inventory turnover ratio=1.91/0.01=191 times

Other material inventory ratio=0.46/0.335=1.37 times

Ratios of 2006-07

Coal inventory turnover ratio=967.98/43.395= 22.306times

Furnace oil inventory turnover ratio= 4.95/3.13= 1.58 times

High speed oil inventory turnover ratio= 1.28/0.775=1.65 times

Lubricants inventory turnover ratio=1.89/0.635=2.98 times

Spares inventory turnover ratio=22.59/105.41=0.214 times

Consumables inventory turnover ratio=9.37/6.715=1.40 times

Chemicals inventory turnover ratio=1.37/0.005=274 times

Other material inventory ratio=4.13/1.985=2.080 times

Ratios of 2007-08

Coal inventory turnover ratio=1024.69/39.54=22.306 times

Furnace oil inventory turnover ratio= 5.06/3.185= 1.326 times

High speed oil inventory turnover ratio= 1.35/0.7=1.98 times

Lubricants inventory turnover ratio=2.31/0.85=2.72 times

Spares inventory turnover ratio=49.84/107.24=0.46 times

Consumables inventory turnover ratio=7.2/4.135=1.74 times

Chemicals inventory turnover ratio=1.11/0.375=2.96 times

Other material inventory ratio=5.79/3.33=1.74 times

Power is one of the prime movers of economic development. The basic responsibility
of power supply industry is to provide adequate electricity at economic cost, while
ensuring reliability and quality of supply. Significant impetus by successive Governments
has resulted in increase in capacity from 1,300 MW during independence to more
than 100,000 MW today. Along with the growth in installed generation capacity,
there has also been a phenomenal increase in the transmission and distribution
capacity. However, despite the significant progress in capacity addition, the demand
for electricity continues to outstrip supply with the result that energy and peaking
shortages continue to plaque the economy. The India possesses a vast opportunity to
grow in the field of power generation, transmission, and distribution. The target of over
150,000 MW of Hydel power generation is yet to be achieved. By the year 2012, India
requires an additional 100,000 MW of generation capacity.A huge capital investment is
required to meet this target. This has welcomed numerous power generation,
transmission, and distribution companies across the globe to establish theiroperations in
the country under the famous PPP (public-private partnership) programmes. The power
sector is still experiencing a large demand-supply gap. This has called for aneffective

consideration of some of strategic initiatives. There are strong opportunities
intransmission network ventures -additional 60,000 circuit kilometres of transmission
networkis expected by 2012 with a total investment opportunity of about US$ 200 billion.

 Most of the SEBs though are supported by state government, are running under
loss. This is because of power theft, transmission losses, use of conventional
methods for power generation and transmission and out dated management

 Indian power sector has been witnessing a wide demand – supply gap.
Although electricity generation has increased substantially, it has not been able
to meet the demand.

 As per the information and explanation given to us the physical verification of

inventory has been conducted by the management at reasonable intervals.

 The producers of physical verification of inventories followed by the management

are reasonable and adequate in relation to the size of the company and nature of
the business.

 The company is maintaining proper records of inventory. As per the information

and explanations given to us, no material discrepancies were noticed on physical


 Presently company maintains adequate inventory turnover ratio as a company

exhibits good signs.

 In the year 2008-09 the company coal usage rate is higher than the other
years.Management of coal in Dr.NTTPS maintaining a 30 days of stock at
minimum level because it is a non pit station.

 There is no proper control over shrinkage, transit, and windage of coal.

Comparitively,the transit,shrinkage and windage is more in 2005-06 is Rs2917.50
lakhs which amounts to gradually it has been decreasing in the subsequent
years.The loss incurred in 2008-09 is Rs.2447.60 lakhs.

 In Dr.NTTPS, the inventory issues are being done on first in first out (FIFO) but
the pricing is done on the weighted average method.

 There is a higher loss in the shrinkage and wind age .Dr.NTTPS authorities may

try to control these losses.

 It is evident that transit loss can be reduced and reduction of transit loss will save

Dr.NTTPS funds to be extent.

 Dr.NTTPS is not maintaining stock levels so authorities may look into this fact
and try to adopt stock levels i.e., maximum level and minimum level and EOQ etc.

 In a bid to bring structural transformations, necessary reform programs should

be carried out in distribution and transmission process.

 Restoration of the financial health of the State Electricity Boards / State Utilities
was recognized as the most critical challenge facing the sector. In this context it
becomes clear that the distribution sector needed urgent attention if the
trend of deteriorating financial health had to be reversed. The reversal
would need a combination of the following key measures:-

• Control of theft of electricity

• Reduction in the cost of supply through reduction in technical losses.

• Better management and lowering the cost of generation

• Payment of user charge and Tariff rationalization

 Financial management by IM Pandey

 Management accounting by Shasi k.gupta.

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