CHAPTER-5

5. INVENTORY MANAGEMENT IN FLYJAC

Introduction:
The thrust areas of this Millennium for improving efficiency of any business activity are considered to be Service functions. Globalisation has resulted in high competition. Improving quality and reducing cost have become real needs for the success of any Organisation. High degree of competition has forced Organisations to look beyond the operational levels to reduce cost of production to withstand global competition. Need for higher productivity has percolated not only to the operational level but also to the product design and other managerial effectiveness resulting in introduction of higher level technologies and automation. In High-tech scenario, as Machine controlled elements are more dominant than the human elements, Management Service functions have become need of the hour, to reduce overall cost of production. Further, developments in information Technology and Internet facilities have helped to maximise resources utilisation and achieve higher service levels. Logistics /Materials Management is considered one of the vital service functions that helps in bringing down the working capital requirement and hence, the cost of production through reduction of interest burden. Also, it would help to make available capital for alternate productive purposes.

Materials Management Cycle:

Broadly, the Inventory Management System comprises of Material Planning Purchasing Formulating delivery schedules Receipts and inspection Storage & issues Re-allocation of available stocks among various stores/users Identification of Obsolete and unusable inventory Disposal of used items / scrap.

It is needless to say that judicious Planning, Organising, scheduling and monitoring of various activities is essential at every stage to ensure that inventories are maintained at optimal level and avoid stock out situations. In real time, the subject becomes complex, as it has got inter relationship with the production system, which is dynamic due to both internal and external factors. Thus, integration of Materials Management System with the production system and supply chain management is essential to achieve the desired results.

STORES ORGANISATION:
Organisation of Inventory Management functions in SCCL: In a traditional way, the Materials Management function in SCCL is organised as PURCHASE and STORES functions. While the Purchase function is looked after by the Purchase Department, the Stores functions viz Material Planning Formulating delivery schedules Receipts and inspection Storage & issues Re-allocation of available stocks among various stores/users Identification of Obsolete and unusable inventory Disposal of used items / scraper entrusted to the Stores Department. The Stores department is headed by CGM (Stores). Who functions under the control of Director (Operations). Separate stores are established for Machine Mining equipment / spares and Open cast equipment/spares to develop expertise in Spare Parts Management and to meet the local requirements of the projects. In all, there are 12 Stores located in various areas and each stores is under the administrative control of respective CGM/GM. out of 12 Stores, there are 5 Opencast Stores and 6 Area stores and there is a Central Stores located at Kothagudem to maintain and monitor high value items pertaining to Opencast Projects and Capital items of underground Mining to avoid duplication of stocks of high value items.

Codification and Standardisation:

As the stores activities are widely spread geographically across 350 Kmsfrom one end to the other end of the Company, proper classification and codification are the key factors not only for successful implementation of computerisation and also to have clear communication/interaction among the users, stores, suppliers and Purchase Department. If the codification is not unique, computerisation becomes waste and it creates chaos. In order to derive full benefit of computerisation, codification has beenStandardised to ensure that unique Code is maintained at all stores for any givenItem. Also, Items with alternate Part Nos. have been brought under unique itemCodes. Items maintained with wrong Part Nos. have been corrected for their Part nos at each store. Suitable programs were developed in this direction andContinuous efforts are put in to ensure that duplicate Items are avoided thisexercise has given favourable results to reduce the inventories considerably. In order to make sure that the items and Material Master are maintained with Correct Part nos. an exercise was undertaken to counter-check the Part Nos.maintained in Item/ Material Master with OEM Parts Catalogues. For the items for which, Part Nos. have not tallied with the Parts Catalogue, correct part nos. were identified from the purchase orders and the same are incorporated in the Item as well as Material Master. Wherever the equipment suppliers have supplied Parts Catalogue in a CD, this exercise could be done faster and more systematically. Suppliers were also requested to furnish the list of alternate part nos. using which; items with alternate part nos. have been codified with unique item code. This exercise has helped to obtain correct stock status for better decision-making before placing further orders. In case of imported equipment, this exercise could not be taken up as there is no response from the suppliers. However, all the Purchase Orders for the capital equipment are released with the condition that they must supply soft copy of the Parts Catalogue. By this exercise many of the items, which were lying as nonmoving are put to use, by correcting the Part Nos. and nomenclature. Also, another exercise was undertaken to identify to bought out items byOEM (such as bearings, electrical, Hydraulic components etc.), which are referred in the Parts Catalogue with their own part nos. In order to avoid multiple bin cards, some with

OEM part nos. and some with original manufacturers part nos. Such items have been brought under unique item code. This has helped to reduce the inventory in case of bearings, auto electrical, Hydraulic components.

STORES CATEGORISATION:
Central Stores (CS): The concept of CS was started to optimize inventories. High Value items common to more than one project required to be stocked as float is ordered on CS. The item is diverted to the needy project as and when needed. Similarly capital items and items where buffer stocks are required to be maintained are ordered on CS, which are diverted as and when required. As far as possible stocking of items physically at CS is avoided only diversion of Purchase Order is resorted to CS is under direct control of CGM (Stores). Area Stores: To cater the materials requirement of various Mines & Departments, Area Stores exist in each Area. Each Area Stores will be under the charge of DGM/SE/DySE who will be assisted by sufficient Executives, Stores Keepers, Clerical staff and Issue Mazdoors. While he will be functionally responsible to the CGM (Stores), he will be administratively under GM/CGM of the Area wherever the Stores is attached to the GM/CGM of that Area. The broad functions of Area Stores will be: Receipts RC suborder placing and supply the required material based on userrequirement Custody and stores keeping Issues to Mines & departments on STOs and Reservation Delivery schedules giving as per requirements(JIT) Claims, Insurance and other miscellaneous works Inventory control Material Requirement Planning(MRP)

Stock verification
The custodial responsibility for the material held in a stores will be transferred to the stores personal employed therein.

PIT/Departmental Stores: The Department Officer of Pit Stores will normally be the Pit Manager/Engineer or any other Officer nominated by the GM The stores set up in Workshops, Power Houses, Building Department etc., will be under the direct control of the head of the department concerned. The Mines and Departments will draw their requirements from the Area Stores for direct consumption on weekly or fortnightly basis. Each Mine/Department will have small stores for charge-off materials of daily consumption, drawn from the Area Stores. The Mine/Departmental Stores will keep the Receipt & Issue Records on a numerical ledger maintained at Pit/Departmental level.

The general Organisational pattern of stores is as under Director (operations) CGM (Stores) Central stores IMC Inspections Disposal Area stores OC Stores DGM (Stores) Inspection Store keeper Fitter/Electrician Sec.Clerks Issue.Mazdoor

STORE KEEPING: PRINCIPLES OF STORE KEEPING, STORAGE, CARE AND PRESERVATION OF MATERIAL

STORAGE: Every store dept., will be well laid-out and organised to allow smooth flow of receipts and issues, to ensure that no hidden stocks exists or stocks accumulate, to deviate stock verification discrepancies and above all to reduce the cost of inventory by better stores management. The principles of store keeping should be observed while organising a storehouse.

PRINCIPLES OF STORE KEEPING: The following principles of Store keeping will be observed by all personnel employed on Store Keeping functions. Separate Areas for different functions (Receipt, Storage & issue)

Un directional flow of material Optimum utilisation of spare Floor area and Vertical Space. Proper lay-out, providing gang-ways for working space, Fire line, use of material handling devices and ventilation. Proper system of location (Sequential order of codification as far as possible). Correct accounting. Security cage for attractive and costly items and restriction of entry to Store houses. Use of dumbage. Use of mechanical handling devices. Cleanliness. Room for expansion. Bulk stores go downs near receipt section, issue sections near issuebay. First in First out. Sacred trust store keeper, a trustee of stores.

STANDARDISATION, CLASSIFICATION & CODIFICATION OF INVENTORIES:

GENERAL: Inventories used in FLYJAC consist mainly of General Consumable stores and Spare parts for mining, excavation, drilling and miscellaneous equipment. Among the general consumable stores, engineering materials, mining supplies and general supplies are included.

STANDARDISATION: Standardisation is a process of systemization of stores,based on reduction of varieties to control minimum work, leading to economy and efficiency. In other words, standardization is rationalised store keeping and it has great importance in Inventory control, as it leads directly to lower holdings and

thereby secure a reduction in material cost, without a corresponding reduction in stock over.

PROCEDURE FOR STANDARDISATION: The implementation of a program as standardization involves a thorough Scrutiny of the complete listof commodities stocked, keeping in view the following essential requirements viz.

The ultimate use of each item. Items having similar characteristics and which can be used as substitutes. Range of sizes actually required, to determine sizes which can be eliminated. Detailed specifications of items required to be retained. Identification is the process of systematically defining and describing all items of stock and fixing their identity by allotment of Code numbers for uniform adoption by all concerned sections.

SPECIFICATION: The description of materials apart from laying down the Code number and description of every item also indicates the specifications wherever applicable and prescribed. A specification for an item is a correct description of the item, its dimensions, analysis, performance or other relevant characteristics in sufficient detail to ensure that it will be suitable for the purpose intended.

Dimensions are the sizes of the various parts of an article, including the extent of tolerance permitted in these sizes. The dimensions of a typical item can be shown as under: 2-6 long = 0.25 1-6 wide = 0.25 6 deep = 0.10 This means that the length can vary between 26.25 to 25.75 width can vary between 16.25 to 15.75 and the depth can be between 6.10 to 5.90. If any of the dimensions exceed the limits shown above, it should be rejected at inspection. Performance describes the physical ability of an article to withstand certain duties.

For example a Tyre should be capable of running 20,000 Miles under load of 2 tonnes and be able to sustain an internal pressure of 85 lbs. per square inch at a temperature of 150 F without bursting. Adherence to standard specifications will ensure consistency in quality of materials from the point of view of end use of the finished product, facilitate inspections and enable the purchaser to compare the offers of competitors against a standard yard-stick.

MECHANICAL RECORDING: For Computerized Stores accounting the allotment of Code Numbers for every stock item is an essential pre-requisite, as it is only Code numbers that all stock items can be introduced into the computer accounting system, together with abbreviated designations. Even manufacturers part Numbers exist, as in the case of Spare parts for equipment and since no uniformity exists in the part numbering system adopted by different manufacturers, Code Numbers will have to be allotted to every item in addition, so as to bring about uniformity in the recording system. However, the part numbers allotted to spare parts by different manufacturers should be shown additionally in the accounting records, so that procurement is arranged on the basis of manufacturers part numbers.

FLYJAC CODIFICATION:

Classification of materials into group of similar

items adoption of standard nomenclature and codification are essential for proper identification and orderly storage of materials. Scientific classification and codification of materials has the following advantages. Eliminates stocking of same items under different types,nomenclature or by function or end use. Enables proper storage and prompt issue of materials. Eliminates unnecessary varieties & sizes. Facilitates proper procurement & accounting. Facilitates introduction of modern inventory control techniques. Facilitates introduction of computerization for account and reporting.

Classification of materials is done taking into consideration the characteristics, end use etc., In the FLYJAC the equipments and materials are classified into 37 Main Classes. A 10 Digit Code has been evolved with the configuration shown below to cover all varieties of items.

CODE STRUCTURE: 1 2 3 4 5 6 7 8 9 10 xxxxxxxxxx --- --- --- ------ a) b) c) d) e) Main Class Sub-Class Detailed classification or Special features or Sub-assembly. Sequential Number Check Digit

INVENTORY ANALYSIS IN FLYJAC:

INVENTORY CONTROL PROCEDURE

INTRODUCTION: Although the broader concept of Materials Management includesInventory Control as a whole, it is usual for the Stores Department to be primarily concerned with stock control or stores inventory control of regular stock items. Inventory Control is the process of deciding what and how much of various items are to be kept in stock. The basic objective of Inventory Control is to reduce investment in the inventories while at the same time, ensuring that stock-outs do not occur and production will not suffer due to non-availability of any material. This involves classification of all items through ABC Analysis, based on consumption pattern, XYZ analysis based on stock value, FSN analysis based on movement of items and other relevant factors to determine the safety stock minimum / maximum levels and economic supply quantities.

The main reasons for keeping Inventory are:

a) Un-interrupted transactions of stores items.

b) To procure at an appropriate time at minimum price. c) As a precaution against any eventuality of procurement.

INVENTORY CARRYING COST: This is the hidden cost which normally does not appear in the documents but is accrued on acquisition and maintaining the inventory. The Principal elements of the Inventory carrying cost are detailed below:

a) Interest on the investment. b) Storage cost. c) Physical deterioration or its prevention

d) Obsolescence cost e) Insurance cost. f) Handling & distribution

INVENTORY LEVELS:
SAFETY STOCK LEVEL: A certain amount of stock is maintained to take any sudden fluctuation of demand of the item or supply of the item. This is known as Safety Stock Level. The Safety stock acts as a cushion or buffer for absorbing such eventualities. There are many sophisticated ways to calculate Safety Stock Level. In Coal Industry the Safety Stock may be taken as part of the totalconsumption depending upon the criticality / availability of items:

1) Imported items and Spares - 6 Months 2) Indigenous items and Spares - 3 Months 3) Explosives & POL of storage capacity

MINIMUM LEVEL: When the stock reaches this level action for procurement should be taken. The consumption during the lead-time of purchase for most of the items it is taken as the same as Safety Stock level but for some Insurance / Imported stores, t1he level may be higher than the Safety Stock Level.

MAXIMUM LEVEL: The maximum amount of allowable stock, which can be kept. This level c1an be determined as stock level and twice the lead time consumption. It should normally vary from 3 to 6 month's consumption depending upon the lead time and Safety Stock level.

RE-ORDER LEVEL or RE-ORDER POINT:-This is represented by Safety Stock and Lead time consumption. It is known as minimum level in stock holding.

LEAD TIME (L.T): It is the time that elapses between submission of requirements for anything and the time taken to satisfy the need by supplying the material.

LEAD TIME CONSUMPTION (L.T.C.): The average consumption of any item during the Lead Time is known as Lead Time consumption.

1) Lead Time Stock for Imported items - 6 to 16 Months 2) Lead Time Stock for Indigenous items - 3 to 6 Months

INVENTORY CONTROL: Inventory Control is the most important function of the Materials Management and it forms the nerve centre in any Materials Management Organisation. Inventory Control is the process of deciding what and how much of various items are to be kept in stock. It also determines the time and quality of various items to be procured. The basic objective of Inventory Control is to reduce investment in inventories and ensuring that production does not suffer at the same time.

Various tools available for Inventory control are: A B C Analysis V E D Analysis S D E Analysis H M L Analysis F S N Analysis

A B C ANALYSIS: The most important of all analysis is the ABC Analysis "Always Better Control: This involves analysing of the Annual Consumption value(Consumption in Numbers x Unit rate) goes after the principle "Vital Few Rival Many" and the criterion used here is the money spent and not the quantity consumed.

The general pattern of ABC Analysis will be as following:

% of Total Items A Items B Items C Items 10 20 70

% of Annual Consumption cost 70 20 10

" A" ITEMS:

a) Since these items account for over 70% of the total value, they should be ordered more frequently to reduce the capital locked up at a time in form of inventories. Usually 3-4 Orders should be placed in a year for such items or annual Rate contracts should be entered into. b) There would be some items for which the consumption varies Considerably from time to time during a year. For such items the expected future consumption should be estimated in advance and they should then procured on a planned basis, so that only the required quantities arrive a little before they required. c) Annual or 6-months contracts with scheduled deliveries with a Specific period of order are essential. As far as possible, two or more suppliers should be selected for each item so that the dependency on one supplier is avoided. Due to strike, fire, lockout or any other eventualities if one supplier fails to supply, the other supplier can be approached. Delivery schedules for such items should be planned in such a way that the Items are consumed within a month on its receipt.

"B" ITEMS: a) The policies for "B" Items in general are intermediate between "A" and "C" Items. b) Order quantities, re-order points and safety stocks should be fixed for B Items and revisions once in a year are adequate. c) Annual or 6-months contracts with scheduled deliveries can be used to an advantage for "B" Items.

"C" ITEMS: a) Since these items are too many and the value is less the policies are to be aimed to reducing the ordering and stock keeping to an extent possible and ensuring the availability at all times by stocking liberal quantities. b) Stocks to last for 6 months to over one year can be kept since these "C" Items do not involve much capital tie-up.

c) Annual orders should be placed to reduce paper work and also to take advantage of quantity discount for bulk purchases.

V E D ANALYSIS: This Analysis is done to consider the vitality of an item and its effect on production and other services. It is specially used for classification of maintenance spares denoting the essentiality of stocking. V - Stands for Vital items - when not readily available, production would come to a halt. E - is for Essential items - when not readily available, temporary loss of production or dislocation of production work occurs. D - denotes Desirable items - which are necessary but do not cause any immediate loss in production.

S D E ANALYSIS: This Analysis is based upon the availability position of an item. Especially in developing countries where certain items are scare, this analysis is very useful. S - refers to Scarce items - specially imported and those are in short supply D - refers to difficult items - which are available in indigenous market but cannot be procured easily. Items which are to come from far off places or where there is not much of competition in the market or reliable suppliers are difficult to find. E - refers to items, which are easily available.

H M L ANALYSIS: The cost per items (per unit) is considered for this Analysis and all items are classified as: H - High cost items M - Medium cost items L - Low cost items This type of Analysis is useful for keeping control over consumption at Department level and for deciding the Safety Stock in relation to the availability of the material (SDE Analysis).

F S N ANALYSIS: Here the quantity and rate of consumption are analysed to classify the items as F - Fast moving items S - Slow moving items N - Non-moving items

X Y Z ANALYSIS: XYZ Analysis is to stock what ABC Analysis is to consumption. It is the counterpart of ABC in stock. It focuses the attention of the Management on the materials which have been procured at a faster rate than their consumption and hence its procurement policy needs a review or have become obsolete and hence have to be disposed off.

"X" Items - Items whose inventory value is 70% of totalvalue "Y" Items Items whose inventory value is 20% of total value. "Z" Items Items whose inventory value is 10% of total inventory value.

STOCK-OUT COST: The loss incurred by way of production or other-wise due to non availability of items is known as stock-out cost. This may be NIL to anytime, depending upon the essentiality of the material. To counteract the stock outs, suitable value of Normal consumption is given while calculating the Safety Stock level as stated earlier.

Staggered Delivery Schedule: This forms one of the most important inventory control technique in the context of our organization. Generally in our system Purchase orders are released only once a year with annual requirement as the ordered quantity. Hence the only way to control inventory build up is to stagger the delivery of the supply of the items. Deliveries should be planned in such a way that the item when supplied can immediately put to use especially for A class items. For doing so the lead-time of supply (for first supply only) and actual requirement by the user is to be considered. For B-class items the supplies should be scheduled in such a way that a minimum of 4 schedules are planned for supply in a year or even more if it is other than BVitem. Items that have uniform consumption pattern throughout the year (Other than spares) monthly schedules should be planned.

SYSTEM OF INVENTORY CONTROL: The objectives of Inventory Control is a) Economy or provisioning at minimum investment and cost without jeopardizing essential production. b) Insurance against losses due to stock-out of materials.

PERIODIC REVIEW SYSTEM: Under this system, the items are periodically reviewed depending upon the essentiality of the items for stocks and the consumption pattern. Necessary action for procurement and delivery are taken after the review is done.

INVENTORY CONTROL MEASURES & PROVISIONING: It is desirable to periodically review the items where stocks have gone beyond the optimum levels to share the inventory of such items. Compiling statement of such items at regular intervals in the stores can do this.Over-stocked items list can be generated on the computer every quarter, and wherever SAP has been introduced once in a month. List of such over-stocked items are to be submitted to CGM(S) by all Area Stores. CGM(S) will circulate the list to all other stores for indicating the requirement of these items for their Area with particulars of Average Consumption per month, stock and pending orders. CGM(S) will arrange Inter-area transfers. Action would also be taken by the Purchase Department to stagger the deliveries appropriately and even cancel the purchase orders in the case of such items where over-stocking has been detected. In the case of under stocked-below order level items, action would be taken to replenish the stocks to prevent stock-outs. List of unmoved items should be compiled every six months / one year, in descending order of value. This statement should indicate the quantity on hand and its value, quantity on order and the date of last issue for items which have not moved for 1,2 or 3 years and above. After identifying such unmoved items, further procurement of such items should be stopped, after carrying out the reutilization check by circulating the items within the company.

INVENTORY CONTROL & PROVISIONING OF SPARE PARTS: This is a very important subject, in as much as, most part of the surpluses that accrue constitutes the Spare parts. Only indenting of first set of Spares for the equipment should be done on the basis of the manufacturers recommended lists of Spare Parts, duly trimmed and adjusted so as not to exceed 10% of the total value of the equipment. Here also it would be desirable to order smaller quantities in the initial stage and only after gaining experience by maintaining proper records of consumption for each type of equipment, larger quantities of Spares should be procured. The items covering the last set of Spares will be processed simultaneously along with the equipment in order to ensure availability of full backing of initial Spares for preventive maintenance when the new equipment is put into commission. The Second set of Spares will be provided to cover the maintenance requirements for the third and fourth year of operation of the equipment. The range of Spares required will be based on the manufacturer's recommendations suitably adjusted in the light of experience gained in the first two years of equipment operation and the maintenance scales developed by Engineers. It is very important to build up proper consumption data right from the stage of commissioning the equipment, which should form the basis for all further requirements. The provisioning of subsequent requirements of Spare parts will be done by the users based on the consumption pattern duly projected to cover the anticipated requirements and taking into consideration the actual working conditions and the maintenance scales.

ERP SYSTEM (MATERIAL MANAGEMENT MODULE) In FLYJAC, four modules of ERP (SAP) was implemented VIZ., 1. Material Management 2. FICO (Finance and Controlling) 3. Sales and Distribution 4. HR (Human Resource) Material Management module consists of Inventory Management (IM) and purchasing. The total stores transactions are being covered in IM of SAP-MM module. As this ERP SAP is an integrated application, the online time to time latest status will be available, which is useful for correct administrative decisions and also reduces time delays and repetitive data handling were avoided. The online material

stock, requisition, balances on order status are available throughout the company to review for procurement action. In FLYJAC, 12 store plants and 60 pit stores plants are configured. The following material types are mainly available, 1. Capital item (ZCAP) 2. Revenue items (ZSTK) 3. Stationery items (ZSTA) 4. Repaired item (ZCOR) 5. Coal item (ZFIN) 6. Medical item (ZMED) 7. MPN material items (ZMPN) 8. Scrap item (ZSCR) ZSTK materials are stock transferred from one store plant to another plant on STO (Stock Transport Order) and ZCAP, ZSTA,ZCOR materials are drawn on requisition which is on direct consumption account. The stores process like GR (Goods Receipt)/GI(Goods Issued) are made in MIGO transaction code in SAP. All material moment like issues, receipts are based on movement types in SAP. In GR process the stock is updated and value is updated for revenue items and material document, accounting document created. Based on accounting document payment to the vendor is made. The materials requirements are reviewed from time to time in MRP (Material Requirement Planning) and purchase requisition are given. Then PO (Purchase Order) are placed accordingly with staggered delivery schedules for optimizing inventory levels. For some of the regular equipment spares,there are Rate Contract(RC) available for which the sub order are placed by store plants. The lead time for these type of items will be generally low and stocking of such items is also less which is a better tool for optimum inventory. In addition to the above there are COLG (Customer Operated Located Godown) and depot agreement are also opted by SCCL.

COMPUTERISED STORE ACCOUNTING:

In a large undertaking having several units detached far away from each other and the headquarters, it becomes very difficult to get the Inventory position at any given time, if the store accounting is done manually. Moreover, timely preparation of control statements to assist proper Inventory control and other material management functions is not possible manually. Therefore, in order to introduce the latest techniques of Material Management in our organization, it is necessary to introduce computerised store accounting in a phased manner. The first step in computerized store accounting is proper codification and classification of stores.