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CONTENT
1. INTRODUCTION.......pg2
1.1. INVENTORY CONTROL...pg3
1.2. INVENTORY CONTROL TECHNIQUES.pg5
2. COMPANY PROFILE.
2.1. ALUMINIUM INDUSTRY...pg19
2.2. NALCO OVERVIEW....pg22
3. RESEARCH PROBLEM..pg28
4. RESEARCH OBJECTIVES.pg31
5. RESEARCH METHODOLOGY.
4.1. TYPES OF RESEARCH DESIGN....pg32
5.2. DATA COLLECTION TECHNIQUES.....pg33
6. ANALYSIS & INTREPRETATIONOFDATA...
6.1. INVENTORY OF MATERIALS...pg34
6.2. SELECTIVE CONTROL TECHNIQUES.....pg38
6.3. ECONOMIC ORDER QUANTITY OF RAW MATERIALS...pg44
8. CONCLUSION & RECOMMENDATIONS....pg47
9. BIBLIOGRAPH pg51

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INTRODUCTION
1 INVENTORY CONTROL / INVENTORY MANAGEMENT
1.1.1 NEED FOR INVENTORY
Inventory is very vital to every Company is that without inventory no company would
survive. Inventory is meant for protection and for economy in cost. Keeping inventory of
sufficient stocks will help to face lead times component, demand and supply fluctuations and any
unforeseen circumstances in the procurement of materials. Though to have inventory is must,
inventory is such a thing that will pile up and creep into the area of profits to turn them as losses
and can put the company in red. It is therefore, necessary to have control over inventory to save
the company from piling up of inventories and to avoid losses. Better said than done is the world
that suits the inventory control.

.1.2 DEFINITATIONS
Inventory control can be defined as Determining and maintaining optimum investment in
inventory given the significance of benefits and cost association with holding inventory .
Inventory Control relates to a set of policies and procedure by which an industries
determines which materials it will hold in stock and the quality of each that it will
carry in stock . Therefore inventory control is otherwise known as STOCK CONTROL.

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.1.3 OBJECTIVES OF INVENTORY CONTROL

Inventories constitutes second largest category of all manufacturing operation exceeded
only by plant and equipment and followed by receivables. The objectives of inventory
control are:
a) To keep required stock of materials so that production and maintenance actitives do not suffer.
b) Minimum blockage of funds in inventory. Optimization can be achieved and efforts need to be
made to improve input

output ratio of materials by scientific methods of determining.

.1.4 TYPES OF INVENTORIES

Depending upon the types of business, generally the Inventories Varies. But in a
manufacturing industry the inventory can be classified into four broad categories:
1.

Production Inventory: It contains materials purchased from market like raw

materials; Ready made parts, component, spares and also special parts and
components manufactured in their own industry and kept in stock for self
consumption for use in manufacture.

2.

Maintenance, Repair & Operating Inventory: Contains materials purchased

from vendors to maintain the production process and these maintenance,
repair and operating inventory do not form part of the finished products.

3.

Work in progress Inventory: This contains manufactured good kept in

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

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

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.1.5 FACTORS INFLUENCING INVENTORY

How much to buy at onetime and When to buy this quality . These are two
fundamental things on which inventory control depends. Many factors govern these
fundamental things. The prime factors that govern these two fundamental things are:
1.

Requirements

2.

Quality in stock or on order

3.

Lead time

4.

Obsolesce.

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2.1.6 CONTROL, MAINTENANCE AND MANAGEMENT

The essence of inventory control, broadly speaking consists of revolving the following
three factors:
1.

Necessity for stocking an items

2.

Time for reordering the items

3.

Quality per order to be order.

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

and treats it as a continuous process as costs, source of supply, availability of materials;
consumption will vary in the course of time making the previous assessment invalid.
This process also helps in standardization of materials for procurement by using near
equivalents and eliminating material, which are discontinued as a regulation, which will
remove obsolescence.

.2.INVENTORY CONTROL TECHNIQUES

Inventory is being maintained as a cushion in supply of materials for continuous
production without causing stock out situation. This cushion should not be suicidal to
any organization. The following scientific techniques and methods are being used in
control of inventory.
1.

Inventory Management Techniques

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2.

Standardization

3.

Selective Inventory Control

4.

Just In Time

5.

Perpetual inventory system

6.

Inventory turnover ratio

1.7.1 INVENTORY MANAGEMENT TECHNIQUES

1.

Economic Order Quantity

If the firm is buying raw materials, it has to decide lots in which it has to be
purchased on replenishment. If the firm is planning a production run, the issue is
how much production to schedule. These problems are called order quantity problems,
and the task of the firm is to determine the optimum or economic order quantity.
(a)

Ordering cost:
The term ordering cost is used in case of raw materials and includes
the entire costs of acquiring raw materials.

(b)

Carrying cost:
Cost incurred for maintaining a given level of inventory is called
carrying cost.

Economic Order Quantity is given by the formula:

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EOQ =

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

Total cost of inventory = (AP) + (AO) + (EOQC)
EOQ
2

Where A = Annual consumption (in units)

O = Ordering cost per order (in Rs)
C = Carrying cost per unit (in Rs)
P = Price per unit (in Rs)
2.

Reorder Point
The reorder point is that inventory level at which an order should be placed to
replenish the inventory. To determine reorder point:
(a)

Lead time is the time normally taken in replenishing inventory after the
order has been placed.

3.

(b)

Average usage

(c)

Economic order quantity

Safety stock
The demand for material may fluctuate from day to day. The actual delivery time
may be different from the normal lead time. If the actual usage increases or the

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delivery of inventory is delayed the firm can face problem of stock out, which can
be costly. So, in order to guard against the stock out the firm may maintain a safety
stock.

2.1.7.2 STANDARDIZATION
Standardization is very essential to control the inventory, as by standardization
reduction in variety of material is possible. And because of the reduction in variety the
advantages are low order cost, low inventory, less storage stocks, conservation of
materials, variety reduction, less paper work, easy follow up with suppliers, less number
of orders.
The importance of this field has been recognized since the days of F.W. Taylor,
who first drew attention to this fundamental need in any organization. Just as work
study is necessary preliminary to work simplification, and a basic technique for
production control, quality control, materials handling, estimated cost control, etc.,
Standardization are preliminary necessity to design a basic technique on build control
and standardization procedure.

2.1.7.3 SELECTIVE INVENTORY CONTROL MANAGEMENT

Any manufacturing organization consumes few thousand items of stores. A high
degree of control on inventories of each item would, therefore neither be practical
considering the work involved, nor worthwhile since all items are not of equal
importance. Hence, it is desirable to classify or group items to control, commensurate
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with importance. This is the principle of selective control as applied to inventories and
the technique of grouping is termed as selective technique.
Selective inventory means variation in the methods of inventory control from
items to item and this differentiation should be on selective basis by classification. A
company has to stock thousands of items of raw materials, standard parts, stores and
spares, sub contract items, tools, stationery etc. To have better control over the inventory/
stock on hand, selective inventory control technique should be used in isolation/ or in
conjunction.
Thus selective control means selecting the area of control so that required objective is
achieved as early as possible without any lost of time due to taking care of full area

Minimum lost of energy and efforts.

At minimum cost without loss of time.

There are following selective control techniques:

*

ABC Analysis

FSN Analysis

XYZ Analysis

VED Analysis

HML Analysis

a) ABC ANALYSIS

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

want to control value of consumption of the item in rupees obviously when we want to
control value of the consumption of the material we must select those materials where
consumption is very high.
In any company manufacturing, there are number of items which are consumed or traded
it may run into thousands. It is found after number of studies for different companies
that
Value of consumption of No. Of items

Grade

items (value in Rs).

70% of consumption
20% of consumption
10% of consumption

A
B
C

10% of no. Of items

15% of no. Of items
75% of no. Of items

A items these are those items which are found hardly 5% 10% but their consumption
may amount 70% 75% of the total money spend on materials.
B items these are those items which are generally 10% 15% of he total items and their
consumption amounts to 10% 15% of the money spend on the materials.
C items these are large number of items which are cheap and inexpensive and hence
insignificant. They are large in number s running into hardly 5%

10% of the total

money spends on materials.

'A' Class Items
(High consumption value)

B Class Items
(Moderate consumption
value)

'C Class Items

(Low consumption value)

1. Very strict control

1. Moderate control

1. Loose control.

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2. No safety stocks or very

Low safety stocks.

2. Low safety stocks.

2. High safety stocks

3. Maximum follow
Expediting

3. Periodic follow

3. Follow up and expediting

in exceptional cases

up and

up

4. Rigorous value analysis

4. Moderate value analysis

4. Minimum value analysis

5. Must be handled by senior

officers

5. Can be handled by
management

5. Can be fully delegated

b) FSN ANALYSIS
This type of analysis is more concerned from the point of view of movement of the
item or issue of the item or issue of the item under this type of analysis.
F items are those items, which are fast moving i.e. in a given period of
time, say a month or a year they have been issued up till number of items. Although
fast moving does not necessarily mean that these items are consumed in large quantities.
S items are those items which are slow moving in the sense that in the
given period of time they have been issued in a very limited number of time
N non moving items are those, which are not at all issued for a considerable
period of time.
Thus, stores department whose concerned with the moving of items would like to
know and classify that the items are storing in the categories FSN. So that they can
manage operate and plan stores activity accordingly.

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For example, for efficient operations it would be necessary that fast moving items as
far as possible should be stored as near as possible to the point of issue. So that it can
be issued with minimum of handling. Also such items must be stored at the floor level
avoiding storing them at high heights.
Similarly, if the items are slow moving or issued once in a while in a given
period of time they can be stored in the interior of the stores and even at the higher
heights because handling of these items becomes very rare.
Further it is necessary for stores in charge to know about non moving items for
various reasons:
1. They mean unnecessary blockage of money and affecting the rate of returns of

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

therefore it becomes necessary to identify these items and go into details and find
reasons for their non moving and if justified to recommend to top management
for their speedy disposal so that company operations are performed efficiently.
Also inventory control to some extent can also be exercised on the basis of FSN
analysis.
For example, fast moving items can be controlled more severely, particularly when their
value is also high. Similarly, slow moving items may not be controlled and reviewed
very frequently since their consumption may not be frequent and their value may not be
high.
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c) XYZ Analysis
This type of analysis is carried out from the point of view of value of balance stocks
lying in the stores from time to time and classifies all the items as given below.
X items are those items whose value of balance stocks lying in the stock are very
high.
Y items are those items whose value of balance stock is moderate.
Z items are those items whose value of balance stock lying in the stocks is very low.
After knowing this type of classifications and their items can be taken to control the
situation as shown below:
1] From security point of view high value items must be stored and kept under lock
and key or if not possible they should be kept in such a way that they are always
under supervision. Similarly arrangement can be made for y and z items accordingly.
2] From inventory control point of view we must know why there is high inventory for
X items. We should review inventory control procedure for each and every high item
because stock should be maintained to take care of lead time consumption and also to
provide safety stocks. For high value items lying in stores we should review the reasons
for long lead time as well as demand variations and see whether lead time consumption
and safety stocks can be reduced. Thus proper inventory control procedures can be
developed on the basis of XYZ analysis.

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Thus proper selective control methods should be selected to control the materials and
prevent from facing loss, taking advantage and knowing what exactly is to be done.
d) VED ANALYSIS
VED analysis is carried out to control situation, which are critical. When applied to
material in VED analysis we try to identify material according to their criticality to the
production, which means the material, without which the production will come to stop
and so on from this point of view material classified into three categories.
V vital,
E essential,
D desirable.
Vital categories of the items are those items for the want of which the production will
come to stop. For e.g. Power in the factory.
Essential group of items are those items because of non availability of which the stock
out cost is very high.
Desirable group of items are those items because of non availability of which there is
no immediate loss of production and stock cost is very less and it may cause minor
disruption in the production for a short time.
E) HML ANALYSIS
This analysis, analysis the material according to their prices and then classifies them as
H items or M items or L items.
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H stands for high price,

L stands for low price and
M stands for medium price.
Since price is more concerned of purchase department mostly purchase department
people analyses the material according to HML analysis.
HML analysis must be carried out from any one of the following objectives or some of
the objective as the case may be.

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

of people.
When it is desired to evolve purchasing policies then also HML analysis is
carried out i.e. whether to purchase in exact quantities as required or to purchase

in EOQ or purchase only when absolutely necessary.

When the objective is to keep control over consumption at the department level
then authorization to draw materials from the stores will be given to high level H

item, low level for L items and medium level for M item.
When it is desired to decide frequency of stock taking then very frequently H

category, very rarely L category and averagely M category.

When it is desired to arrange security arrangements for the items, then H item
under lock and key, L items keep open on the shop floor and under supervision
for M items

2.1.7.3 JUST IN TIME INVENTORY SYSTEM

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Keeping in view the enormous carrying cost of inventory in the stores and go downs,
manufacturers and merchandisers are asking for more frequent deliveries with shorter
purchase order lead times from their suppliers. Now days organizations are becoming
more and more interested in getting potential gains from making smaller and more
frequent purchase orders. In other words, they are becoming interested in just in time
purchasing system. Just in time purchasing (JIT) purchasing is the purchase of material
or goods in such a way that delivery of purchased items is assured before their use or
demand.
Just in time purchasing recognizes too much carrying costs associated with holding high
inventory levels. Therefore, it advocates developing good relations with suppliers and
making timely purchases from proven suppliers who can make ready delivery of goods
available as and when need arises. EOQ model assumes a constant order quantity
whereas JIT purchasing policy advocates a different quantity for each order if demand
fluctuates. EOQ lays emphasis on ordering and carrying costs but inventory management
extends beyond carrying and ordering costs to include purchase costs quality costs and
stock out. Just in time purchasing takes into consideration all these costs and move
outside the assumptions of the EOQ model.
Advantages of JIT purchasing
1. Investment in inventory is reduced because more frequent purchase orders of small
quantities are made.
2. Carrying cost is reduced as a result of low investment in inventory.

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

suppliers who can give quick delivery of quality goods are given purchase orders . As a
result of this reduction in negotiation time is possible. The use of longrun contracts
with some suppliers with minimal paper work involved is possible.
4. Quality costs such as inspection cost of incoming materials or goods , scraps and
rework costs are reduced because JIT purchasing assures quick and frequent delivers of
small size orders which results in low level of inventories causing minimum possible
wastage. Therefore, JIT purchasing is frequently applied by organizations dealing in
perishable goods.

2.1.7.4 PERPETUAL INVENTORY SYSTEM

The Chartered Institute of Management Accountants, London, defines the perpetual
inventory as a system of records maintained by the controlling department, which
reflects the physical movements of stocks and their current balance. Bind cards and the
stores ledger help the movements of the stock on the receipts and in maintaining this
system as they make a record of to physical movements of the stocks on the receipts
and issues of the materials and also reflect the balance in the stores. Thus, it is a
system of ascertaining balance after every receipt and issue of materials through stock
record to facilitate regular checking and to avoid closing down the firm for stocktaking.
To ensure the accuracy of perpetual inventory records (i.e. Bin card and stores ledger),
physical verification of the stores is made by bin cards or stores ledger may differ from

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the actual balance of stock as ascertained by physical verification. It may be done to the
following avoidable and unavoidable causes.

COMPANY PROFILE
3.1 ALUMINIUM INDUSTRY
In CY 2007, the world aluminium consumption stood at 37.8 Million tonnes against
production of 38.1 Million tonnes. The consumption was 10% higher than the preceding
year. This growth was primarily led by China, which grew at a phenomenal 37.7% in
CY2007, more than compensating for demand weakness in the US. India too, registered
a strong double digit growth in 2007 in line with buoyant economic growth. The strong
industrial growth, infrastructure initiatives and electrification drive resulted in good
demand for aluminium. Automobile and transportation sectors also supported the aluminium
demand.

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Globally, Aluminium production increased in line with the consumption.

The

primary

aluminium production for the year was 38.1 Million tonnes. China again led the
production growth in 2007 with an increase of 34% over 2006 production. Higher
aluminium prices in the early part of the year also led to some capacity restarts which
further supported the production.
In FY08 LME aluminium prices fluctuated significantly between USD 2400 and USD
3100 per tonnes. The average LME aluminium price for the year was almost flat at FY
08 levels. The depreciating dollar resulted in a sharp fall in domestic aluminium
realizations as the prices are dollar denominated. Continuing with the stated policy of
import duty reduction, the government cut the customs duty on aluminium. The effective
import duty for aluminium declined from 8.1% to 5.7%. As a result of these macro
economic factors, average aluminium realizations for FY08 declined sharply by11% as
compared with FY07 realizations. During FY08, crude prices also witnessed a sharp surge.
The rising crude prices resulted in higher prices for its derivatives. The soaring crude
also had a cascading effect in terms of higher transportation costs and higher prices of
alternate energy sources like coal. All these led to a significant cost push for the
aluminium industry.
In 2008, the global aluminium demand is expected to remain strong in spite of a
marginal slow down in the demand growth rate. The Chinese demand though expected to
remain strong; the growth rate is expected to decline marginally from CY07 levels. The
US demand weakness will continue. In India, the demand is expected to increase in line
with economic growth rate. Over medium term, thrust on power sector spending will
spur the aluminium demand. Aluminium production is expected to keep pace with

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growing demand with new capacities coming up in Middle East and Asia. However,
globally, in the recent past, the aluminium industry is witnessing production cut downs
due to power shortages in various parts of the world. The cost push witnessed by the
industry in 2007 is expected to continue with crude prices still continuing with its
northward journey. Higher input costs such as bauxite, fuel oil, coal tar pitch and caustic
soda, rising freight, diminishing availability and rising costs of various fuels/power will
continue to push operating costs up. The rising costs and supply constrains will
determine the floor for the prices. A reasonably strong demand along with supply
constraints and rising cost is expected to keep the prices strong. Rupee exchange rate
will continue to have a significant bearing on domestic realizations.
Aluminium industry can be broadly classified into different segments, namely Primary
Aluminium Producers who sale virgin Aluminium metal and Secondary Fabricators of
Aluminium who buy Aluminium metal in the form of ingot, slab, wire rod, etc. from the
primary producers. There are only few big players in primary Aluminium market who
dominate market and also have a considerable position in export market.

Indian Aluminium Industry:

Indias share of global aluminum production is hovering around 3 per cent. The Indian
aluminum industry is highly concentrated with only five primary plants in the country
from three business groups.

The Aditya Birla Group: Hindalco Industries Limited (Hindalco)

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Sterlite

Industries:

Bharat

Aluminium

Company

Limited

(Balco),

Madras

Aluminium Company Limited (Malco)

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

SWOT ANALYSIS:
STRENGTH:

vast resources of bauxite

Bauxite resources are distributed

throughout the country

Production matches with consumption
production comparatively cheaper
OPPORTUNITIES:

Indian railways one of the largest

consumer
building industry another consumer
3000 odd applications in the world

WEAKNESSES:

energy intensive industry.

availability of power not satisfactory
copper better material of electricity
bauxite reserves in undeveloped

regions
THREATS:

Lack of caustic soda in future

Lack of Aluminium fluoride

.2NALCO OVERVIEW
On January 7th 1981, was born, the Rs.2400 crores National Aluminium Company
Ltd. (NALCO) following technical collaboration agreement with Aluminium Pechiney of
France. The multi unit, multi location company, NALCO came up with 24lakhs tones per
year bauxite mines an alumina refinery to produce 8lakh tones of calcinated alumina per
year and 230000 tones smelter plant. Since assured an uninterrupted supply of power is
a must for production of aluminium, NALCO has also set up a 720MW captive power
plant close to its smelter plant.

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In 1981, NALCO finalized the technical collaboration agreement with Aluminium

Pechiney of France. Signing of an agreement to avail commercial euro dollar term loan
of 980million US Dollars and start of project activities followed this. Starting from the
commissioning of mines in November 1985, all the units of the projects followed on
schedule, without any cost overrun.

PLANT CAPACITIES & TECHNOLOGY FEATURES:

SEGMENT / CAPACITY

SPECIAL TECHNOLOGICAL FEATURES

BAUXITE MINE PANCHPATMALI ,

ORISSA
48,00,000 tpa

> Fully mechanized Open Cast Mines with

computerized mine planning
> 370 million tones deposit estimated
> 14.6kms long single flight multi curve
> 1800 tph capacity computerized conveyor
system of transportation of ore
ALUMINA PLANT DAMANJODI,
> Atmospheric pressure digestion process
ORISSA
> Energy efficient fluidized Bed Calciners.
15,75,000 tpa
> Co generation of 3*18.5 MW power by
back pressure turbines from process Steam
> Integrated facilities for manufacture
speciality alumina, hydrates and zeolite.
ALUMINIUM
PLANT
ANGUL
, > Advanced 180KA cell technology.
ORISSA
> Microprocessor based Pot Regulation
3,45,000 tpa
System
> Fume treatment with dry scrubbing system
> Integrated anode making, aluminium casting
and rolling facilities.
CAPTIVE POWER PLANT ANGUL, >Micro processor based Burner Management
ORISSA
> Automatic Turbine run up system
960MW
> Specially designed High Pressure Boilers
> Advanced Electrostatic Precipitators
PORT FACILITIES VIZAG, AP
> Mechanized storage facility of 3*25,000T
For Export of Alumina & Import of capacity
Caustic Soda Lye
> Mechanized Mobile Ship Loader of 2200tph
capacity.
> Capacity to handle ships up to 35,000
DWT
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The work on 2nd phase expansion programme at an estimated cost of Rs.5,003 crore (at march,
2007 price level) is in full swing. The annual capacities of the various project segments and those
after 2nd phase expansion are given below:
Project segment
Bauxite mines
Aluminium refinery
Aluminium smelter
Captive power plant

Unit
MT
MT
MT
MW

Present capacity
4800000
1575000
345000
960

Capacityafter2ndphaseexpansion
6300000
2100000
460000
1200

The salient features of the financial performances are highlighted below:

Constant profit generation since inception of the company.

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

From 1992 93 to 1995 96 there has been growth in sales, profit book value,
earning per share and net worth. But in 1996 97 the profit was dipped due to
dip in international aluminium prices. Though the gross sales, profit and other
financial parameters have shown improvement in 1997 98, there has been
again dip in the production figure, sales, profit etc. in 1998 99 due to internal
problem again introduction of MAT has also affected the bottom line of the
company.

The debt to equity ratio reduced over the years and the company became a
Zero Debt company in the year 1998 99 repaying all its debt. This has
prompted the company to appeal government of India for Capital restructuring.

Form ratio analysis it can be ascertained that the return on capital employed
and return on net worth have been impressive.
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The company has achieved a turnover of Rs.5,576 crore, as against the turnover of
Rs.6,354 crore during the previous year and profit after tax stands at Rs.1632 crore as
against Rs.2,381 crore in the previous year. The decline in sales realization and net
profit during the year, compared to previous year, is mainly due to lower sales
realization from export of alumina, substaintial appreciation of rupee against US
dollar. The company has achieved an export earning of Rs.2,135 crore as against
Rs.2585 crore achieved during the previous year.

Zero debt status of the company has made the position of the company very
strong for any fresh borrowing from the market. Government of India has also
given green signal to NALCOS proposal for equity restructuring. Hence
NALCOs position in the financial market has become strong. All these have
enthused NALCO to invest further in downstream facilities to diversify and
spread its operation.

SWOT ANALYSIS OF NALCO

Before analyzing position of Nalco, it is pertinent to look at companys internal
strength, weaknesses, external opportunities available and threats from environment.
SWOT analysis gives a fair picture about companys performance. The SWOT analysis
has been done before analyzing the financial restructuring of NALCO.
The following assumptions have been made for SWOT analysis:

Present economic policy of economic liberalization undertaken by government of India

will continue.

Political scenario in and around India and Asia will remain stable.
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World Aluminium market will remain buoyant in the coming year.

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

STRENGTHS

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

Consistent good financial performance.

Star trading house and the prices are linked with LME.

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

Low cost of production and high quality products.

Leader in domestic primary Aluminium market.

Very high customer confidence.

Familiar with export market.

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

Experience built over the years in producing Aluminium.

WEAKNESS

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

Large equity base of Rs. 1288 crores, hence low EPS. Being a public sector unit,
many a time policy making is influenced by government and bureaucrats.
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Poor distribution logistics. Being the leader in primary aluminium market, NALCO
has never felt the need for setting up channels of distribution which is now
absolutely for downstream products.

Limited corporate autonomy due to interference of government.

Lack of promotional effort for marketing.

Inadequate R&D.

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

project, which may adversely affect the companys future.

Poor logistic control and supply chain management.

OPPORTUNITIES

Expanding global market for Aluminium in all segments.

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

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

Scope for backward and forward integration.

THREATS

Competitions from substitute materials.

NALCO has always operated in suppliers market place. Being the leader in an
oligopolistic market, the company may find it difficult to market new products where
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the existing small companies have already established themselves. As such there is
cut throat competition in the secondary value added product market.

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

Proposed expansion by the competitors may affect the market position.

RESEARCH PROBLEM
Inventory is defined as an idle resource which has an economic value. In an industry
inventory comprises of raw materials, process materials, general stores, consumables and
spares parts, and semi finished and finished goods. Inventory of input materials are
carried to support production and maintenance activities so that the same is available in
right quantity, at right point of time. Carrying excessive inventory not only results in
blocking up of working capital but also adds inventory carrying cost to it. Inventory
carrying cost consists of interest on locked working capital cost of storage, obsolescence
and detoriation. On and average it works out to 20% to 25% per annum of the value of
the locked up inventory.
The objective of inventory control is to keep required stock of materials so that
production and maintenance activities do not suffer. Minimum blockage of funds in

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inventory optimization can be achieved and efforts need to be improving input output
ratio of materials by scientific methods of determining.
Nalco smelter plant has the capacity of 345000 MT which is powered by captive power
plant of capacity 960 MW. Production in such plant is continuous and that is why
requires large amount of raw materials, steel and cement, general consumables, pot lining
and mechanical, electrical and instrumental spares are required.
On looking at the inventory status for last three years it can be seen that inventory is
increasing. Inventory in FY: 05 06 was Rs 111.32 crores which increased to Rs 121.82
crores in FY: 06 07. It further increased to Rs 138.51 in FY: 07 08.

Increase in inventory is due to following reasons

Expansion projects

First phase expansion completed in 2006 has lead to increase in capacity of the Smelter
Plant to 345000 MT and Captive Power Plant to 960 MW. Thus this expansion has
lead to increase in production and in turn increase in materials supply and increase in
inventory.
The work on 2nd phase expansion programme at an estimated cost of Rs 5003 crores (at
March 2007) is in full swing. The annual capacity of aluminium smelter plant and
captive power plant is going to increase to 460000 MT and 1200 MW respectively.

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These expansion projects increase the capacity of production and requirement of materials
and thus increase inventory.

Increase in production

As demand in the market for Aluminium strips, rods, billets, and our products from
automobile, electricity, packaging industry increases ,thus production also increase leading
to increase in materials and thus inventory.

Bulk purchase of Raw materials and Steel and cement

Raw materials and steel and cement are continuously required for production process.
Therefore raw materials are ordered in bulk for 1 month, 2 months or 6 months
consumption. Thus the inventory increases t the time of reception of these materials.

Duplicate indent

General consumable goods are generally order as Automatic procurement items that are
these items are commonly required by all the departments in the organization, so all
departments give their required quantity in a year to stores department. Stores department
taking sum of all the requirements order various items. All these items have a specific
code. Even the items with same usage such

pen of different company have different

code. This can create a duplicate indent. If a particular item is indented by a department
with a specific code and item with this code is not available in the stores but store
have the items with same usage of different code. The stores order the item even though
it has item with same utility. Thus through duplicate indent the inventory increases.
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Change In Man Power

Promotion or transfer of employees from one department to order or from one place to
other will require some time to or the employee to adjust with the working and
management of the department. This mismanagement can cause improper supply of
materials and thus can lead to increase in inventory.

Increase in inventory due to spares

Requirement of spares is not certain as it is uncertain when the machine will breakdown.
Thus spares are ordered are kept as inventory and if it is not indented the number of
spare increases and thus inventory

RESEARCH OBJECTIVES

To study and understand the financial position of the company.

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

intermediatary and finished goods.

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

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

applied in the company

To calculate the EOQ of various raw materials and analyze it.
To evaluate the total cost of inventory for EOQ and analyze it..
To recommend methods and strategies to control the inventory.
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RESEARCH METHODOLOGY
The research conducted in inventory control techniques in Nalco Smelter plant , Angul
followed a well defined methodology. The procedure followed is explained thoroughly in
next titles.
.1 TYPES OF RESEARCH DESIGN
Types of research design used in this research of inventory control techniques are
descriptive as well as analytical. It follows a descriptive research design it is used to
identify and classify the elements or characteristics of the subject. Quantitative techniques
are used to collect , analyze and summarize the data. In Nalco Smelter Plant, data and
information are collected to analyze the inventory control techniques.

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Here analytical research is also used as descriptive approach is extended to suggest and
explain the causes of changes in inventory and factors effecting inventory and inventory
control techniques.
Applied research is also followed i.e. problem solving research is applied in this project.
The already known theories and knowledge of inventory control techniques are studied
and applied to practical situation like of Nalcos inventory and understand the variation
in inventory level and finding out alternative methods and models for better inventory
control.

6.2 DATA COLLECTION TECHNIQUES

Various data and information are collected to fulfill the research objectives of the
research. The data collected are both primary and secondary data.
Data collection techniques used for collection of primary data is interviews conducted
with executives and staff of finance and stores department.
Data collection techniques used for collection of secondary data are from stores record,
annual reports news report, news articles, journals, various web sties and professional
books as well as interview conducted with executives and staff of finance and stores
department.

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ANALYSIS & INTERPRETATION OF DATA

7.1 INVENTORY OF MATERIALS
a) STOCK OF RAW MATERIALS (RS IN CRORES)
Materials
C. P. Coke
C. T. Pitch
C. T. Pitch (liquid)
Aluminium Fluoride

31.03.06
180.11
47.67
13.87
18.76

(indigenous)
Aluminium Fluoride
(imported)
Calcined Alumina

0.02

31.03.07
240.49
24.15
7.95
46.33

31.03.08
183.83
24.90
17.10
35.96

14.28

10.04

0.03

0.02
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Pig Iron
Magnesium Metal
Ferro Silicon
Tiber Rod
Total

3.04
4.67
0.08
3.32
252.78

3.17
5.18
0.67
3.17
357.54

3.29
8.19
3.11
3.29
289.73

INTERPRETATION:
Inventory of raw materials has increased from Rs 252.78 crores in 31.03.06 to Rs
357.54 crores in 31.03.07. Production decreased from 358954 MT in 31.03.06 to 358734
MT in 31.03.07 which caused the raw materials to accumulate.
Inventory of raw materials decreased from Rs 357.54 crores in 31.03.07 to Rs 289.73
crores. This is due to increase in production from 358734 MT in 31.03.07 to 360457
MT in 31.03.08 which leads to decrease in stock of raw materials. The decrease in stock
is also due to proper flow of raw materials from suppliers to stores and stores to
production houses. This shows improvement in planning of utilization of raw materials.

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b) STOCK OF FUEL (RS IN CRORES)

Materials
H.F.O
L.D.O
Total

31.03.06
17.92
2.73
20.65

31.03.07
16.27
1.73
18

31.03.08
30.12
0.91
31.03

INTERPRETATION:
Fuel is important material used for production process and it is very important to control
it otherwise it can lead to variation in inventory. Inventory of fuel decreased from Rs
20.65 crores in 31.03.06 to Rs 18 crores in 31.03.07. But inventory of fuel significantly
increased by almost 72.39% in 31.03.08. This increase is due increase in fuel prices and
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also increase in production. But the increase is large and company should check on
utilization and storing of fuel.
c) STOCK OF STORES AND SPARES (RS IN CRORES)
Materials
Mechanical spares
Electrical spares
Instrumentation spares
Bearings
Gen. consumables
Pot lining
Steel and cement
Total

31.03.06
44.15
14.40
3.91
2.53
13.76
6.58
4.14
89.46

31.03.07
45.00
14.33
4.65
2.20
15.08
6.05
4.35
91.66

31.03.08
48.29
14.83
5.6
2.35
20.47
6.46
3.86
101.86

INTERPRETATION:
The stock of stores and spares has been increasing from Rs 89.46 crores in 31.03.06 to
Rs 91.66 crores in 31.03.07 to Rs 101.86 crores in 31.03.08. The increase is mainly due
to increase in spares and general consumables. This shows lack of control of spares and
stores by the company.

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

CRORES)
Materials
31.03.06
Calcined Alumina
46.98
Special
Grade 1.02

31.03.07
43.93
0.11

31.03.08
46.51
1.44

Alumina
Aluminium Standard 19.00

8.82

9.92

and Sow ingots

Aluminium
wire 2.29

2.33

1.05

rods
Aluminium billets
Aluminium strips
Rolled products
Anodes
Anode butts
Aluminium scraps
WIP
Total

1.08
1.58
14.02
71.03
1.46
0.84
71.70
216.9

3.23
1.93
10.59
73.46
2.05
7.90
81.48
239.56

3.68
5.80
10.20
55.58
2.12
6.51
70.33
223.51

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INTERPRETATION:
Inventory of finished and intermediatary goods has decreased from Rs 223.51 crores in
31.03.06 to Rs 216.90 in 31.03.07.This decrease is due to increase in sales in 2007
.Inventory increased from Rs 216.90 crores in 31.03.07 to Rs 239.56 crores in 31.03.08
because decrease in sales in FY: 07 08. The company should produce goods according to
demand and it should also decrease the cost of goods for greater sales.

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7.2 SELECTIVE INVENTORY CONTROL

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

among hundreds and thousands of items managed by an organization

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

based on the relative importance of items

a) ABC ANALYSIS
This selection is done on the basis of annual consumption value.
Nalcos ABC classification for the year FY: 07 08 is tabulated below:
ABC Class
A
B
C
Total

Criteria

No. of Materials

70%ofconsumptionvalue 219
20%ofconsumptionvalue 937
10%ofconsumptionvalue 9080
10236

Cumulative
Consumption Value
75.25
21.54
10.76
107.56

A class items having criteria 70% consumption value has 219 items with value Rs 75.25
crores. These items are required to be ordered frequently to reduce the capital locked up
in inventory. They also should have low safety stocks and follow strict control. These
items should be handled by senior officers.
B class items having criteria items with 20% 0f consumption value include 937 items
with value Rs 21.54 crores. These items require only periodic follow up and have
moderate safety stock. They need moderate control and can be handled by manager men.
C class items having criteria 10% of consumption value and includes 9080 items with
value Rs 10.76 crores. These items require exceptional follow up and high safety stock
and require loose control thus can be handled by anyone.
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b) XYZ ANALYSIS
XYZ classification is based on value of inventory kept in stores.
Nalcos XYZ classification of inventory is tabulated below:
XYZ Class

Criteria

Total no. of

Closing stock

Cummulative

Materials

value

Consumption

70%

of

stock 1385

71.29

value
57.32

value
20%

of

stock 3272

20.37

86.95

value
10%

of

stock 38936

101.87

513.62

1018.60

1173.82

value
Total

43593

X class items having criteria 70% of the stock value consists of 1385 items with closing
stock value of Rs 71.29 crores and consumption value Rs 57.32 crores. These items are
high value items and should be taken special care.
Y class items having criteria 20% of the stock value consists of 3272 items with closing
stock value of Rs 20.37 Crores and consumption value Rs 86.95 crores. These items are
moderate value items and require moderate care.
Z class items having criteria 10% of the stock value consists of 38936 items with
closing stock value of Rs 101.87 crores and consumption value Rs 513.62 crores. These
items are low value items and require low care.
c) FSN ANALYSIS

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Fast moving, Slow moving and Non moving classification takes into account the pattern
of issue from stores. The classification is useful in identifying consumption patterns,
increased demand and obsolescence of materials. As the classification depends on
movement of materials as per consumption pattern, fixation of levels of inventory control
can be done in this classification.
Nalcos FSN classification is tabulated below:
FSN Class
No. of Materials
Cummulative Consumption value
F
875
49.37
S
25512
89.02
N
11213
0.12
TOTAL
37600
138.51
Fast moving items issued at least once in a year consists of 875 items with consumption
value Rs 49.37 crores which includes mainly raw materials, fuel, general consumables
and steel and cement.
Slow moving items issued only once or twice in 3 years consist of 25512 items with Rs
89.02 crores which are some spares.
Non moving items are not issued in 5 years consists of 11213 items with consumption
value Rs 0.12 crores. These items are mainly mechanical and instrumentation spares.

AX

AXF

AXS
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AXN

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When all these selective analysis are taken together helps to take decision about all the
items in inventory. A class item that is with high consumption value and which is also X
class item that is high value and which is also non moving item is identified. Such
items are disposed off or sold as scrap immediately to decrease the inventory value.

.3 ECONOMIC ORDER QUANTITY OFRAW MATERIALS AND FUEL

a) EOQ OF HFO
Annual consumption
Cost per unit
Carrying cost per unit
Ordering cost per order
Economic order quantity

29087 KL
Rs 20.14
Rs 0.14
Rs 3500
1205.96 KL

Units ordered(in KL) Carrying cost(in Rs) Ordering cost(in Rs) Total cost(in Rs)
500
35000
203609
586050789
600
42000
169674.1667
586023854.2
700
49000
145435
586006615
800
56000
127255.625
585995435.6
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900
1000
1100
1200
1300
1400
1500

63000
70000
77000
84000
91000
98000
105000

113116.1111
101804.5
92549.54545
84837.08333
78311.15385
72717.5
67869.66667

585988296.1
585983984.5
585981729.5
585981017.1
585981491.2
585982897.5
585985049.7

INTERPRETATION:
Economic order quantity of heavy fuel oil is calculated to be 1205.96 KL.
If we vary the quantity to be ordered the total cost of inventory is greater than total
cost of inventory if economic order quantity is ordered i.e. Rs 585981017.1

b) EOQ OF C.P.COKE
Annual consumption
Cost per unit
Carrying cost per unit
Ordering cost per order
Economic order quantity

Units ordered(in MT)

1100
1200
1300
1400
1500
1600
1700
1800

140968 MT
Rs 14.47
Rs 0.43
Rs 3500
1514.87 MT

Carrying cost(in Rs) Ordering cost(in Rs)

236500
448534.5455
258000
411156.6667
279500
379529.2308
301000
352420
322500
328925.3333
344000
308367.5
365500
290228.2353
387000
274104.4444

Total cost(in Rs)

2040491995
2040476117
2040465989
2040460380
2040458385
2040459328
2040462688
2040468064
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1900

408500

259677.8947

2040475138

CONCLUSION & RECOMMENDATIONS

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We can conclude from the detailed study of inventory control techniques conducted in Nalco
Smelter Plant, Angul, that a company which is one of the largest aluminium producers in India
have to maintain a large amount of inventory of raw materials, spares, general consumables as
well as intermediatary and finished goods should be we planned and controlled.
The FY:06 07 was a boom year and it gain high profits and had low inventory, but in FY:07 08,
there was depreciating dollar and import due reduction which resulted in decrease in sales and in
turn increase in inventory. The macro economic factors are reason for significant fluctuations in
inventory level and value in Nalco Smelter Plant.
The inventory of raw materials increased in FY 07 by Rs 104.76 crores i.e. 41% and decreased in
FY:08 by RS 67.81 crores i.e. 18%.The inventory of fuel decreased little in FY:07 but increased
to Rs 31.03 Crores in FY:08.this was due to increase in fuel prices. The inventory of spares has
been increasing since 2006 from Rs 89.46 crores to Rs 101.86 crores o lack of in 2008.This is
due to lack of control in spares and stores. The inventory of finished goods has decreased
significantly in 07 due to high sales but it again increased in 08 due to low sales. Thus from the
analysis it can be drawn that the whole inventory of Nalco Smelter Plant increased in 08 due to
the macro economic factors and lack of control over some materials.
Selective inventory controls used in Nalco Smelter Plant are ABC analysis, XYZ analysis and
FSN analysis. ABC analysis showed that A class items are 219 having consumption value Rs
75.25 crores, B class items are 937 having consumption value Rs 21.54 crores and C class items
are 9080 having consumption value Rs 10.76 crores. This shows that it has less A class items that
have strict maintenance and more C class items have low maintenance which is almost ideal for a
company. The XYZ analysis showed that 1385 items come under X items with consumption

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value Rs 57.32 and 3272 items come under Y items with consumption value Rs 86.95 crores and
38936 items come belong to Z items with consumption value Rs 513.62 crores. It is good that X
class have less items and Z class have more items. The last selective technique i.e. FSN analysis
showed that there are 875 fast moving items with consumption value Rs 49.37 crores and 25512
slow moving items with consumption value Rs 89.02 crores and 11213 non

moving items with

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

such a large

number of slow moving and non moving items as slow moving items can become non

moving

thus increasing the inventory. The stores department of the company combines the whole
selection analysis by selecting a A class items which is also a X class and is also Non

moving,

such items are discarded. This is a good techniques to reduce inventory developed by non
moving item.
As discussed earlier stores of Nalco for maintaining the inventory of raw materials, spares,
general consumables, fuel follow annual holding consumption norm where different are ordered
according to their annual holding norms and raw materials are ordered for 1 month consumption.
The EOQ model applied for raw materials showed that when EOQ of all the raw materials are
ordered, the total cost is minimum and if more or even less quantity is order than EOQ, the cost
of inventory is greater. Thus shows that EOQ model can be applied for procuring raw materials
with least cost.
Thus from studying the data and information collected from various sources (stock levels of raw
materials, fuel, stores and spares, finished and intermediatary goods) and analyzing various
inventory control techniques such as ABC, XYZ, FSN and EOQ model techniques it can be
concluded that inventory control techniques is important for a multi

national company Nalco to

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minimize inventory and maintain required stock of materials so that production do not suffer and
working capital is not block .Thus improving the performance of the company.
RECOMMENDATIONS
Looking at the present world scenario and economy these are some of the suggestions:
1. Planning committee
As the number of competitors are increasing and even produce aluminium with cost
lower than Nalco. So for maintaining its prominence in the aluminium world as industry
producing lowest cost aluminium a committee making proper planning and different
strategies should be formed only for procurement of materials keeping in mind the
inventory.
2. Proper planning
From the study we learned that inventory in FY 08 has increased due to various macro
economic factors discussed earlier. Precise and better forecasting should be done not only
about the aluminium industry but also about the world economy. Thus maintaining low
inventory and supplying right amount of materials for production.
3. Making better use of Selective Techniques

We have seen that through selective control techniques stores can dispose the non
moving items which are increasing inventory but this process does not eliminate all non
moving items. So, selective control techniques should be better used so that most of the
non

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

as VED can also be used.

4. Improving the inventory control techniques for spares

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Spares such as mechanical, electrical, instrumentation spares are the materials which are
one of the reasons for high inventory as these are either slow moving or non

moving

items. Thus, inventory control techniques should be used for spares and better planning
for procurement and storing should be made.
5. Revision of AP items
Automatic procurement items are fast moving but duplicate indent may cause high
inventory. Thus, company should review the AP list from time to time and check the list
precisely for double indent.
6. Transfer of stock
There are some items which are required by different departments. If one department
finishes the items stock can be refilled by transfer from other department having surplus
items. Thus avoiding unnecessary procurement of those items.
7. Using EOQ model for procurement of raw materials
The company orders the raw materials every month. This can increase the total cost of
inventory. Thus company should use EOQ model for procurement of raw materials as this
provide right level of inventory with minimum cost.
8. Introducing SAP and ERP technology
SAP software and ERP technology provides better maintenance of data and records
through internal control. These technologies can provide easy accessibility to authorized
employee of the organization to go through the record of data, inventory etc to help
follow better inventory management.

BIBLIOGRAPHY
WEBSITES:
www.google.com
www.scribd .com

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www.wikipidia.com

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