A PROJECT REPORT ON

INVENTORY MANAGEMENT

Undertaken At
RIL-VMD

Submitted By

NAUTIYAL ANIMESH CHANDRAPRAKASH

IN PARTIAL FULFILLMENT OF
MASTER OF BUSINESS ADMINISTRATION PROGRAMME
At
G. H. PATEL P.G. INSTITUTE OF BUSINESS MANAGEMENT
SPU
VVNAGA
 DECLARATION

I, Animesh C Nautiyal, hereby declare that the report on “Summer Training” entitled
“Inventory Management” is a result of my own work and my indebtedness to other work
publications, if any, have been duly acknowledged.

Place: V.V. Nagar

Date: 19/6/2010 Animesh Nautiyal
 PREFACE

The G.H. Patel P.G. Institute of Business Management, V.V.Nagar gives the students an
Opportunity to have an insight of any large scale unit so that we get the exposure to an
actual managerial environment of company. I am lucky to have summer training in a
company like RIL which is considered to be one of the “largest establishments” in India.

During this period, I had overview of the finance department within which I could make a
detail study of all the section comes under the roof of finance in RIL. This training will help
me to correlate theoretical knowledge and its practical applications. It was a thrilling
experience while studying working of RIL and understanding it. This program has led me to
realize the contribution of RIL to the Petroleum Industry of India.

I am grateful to the senior executives of RIL for their cooperation and interest in my project
without which it could not have been possible to go ahead with my assignment.

With great pleasure, I present this project which consists of a brief study of inventory
management in RIL.

Animesh Nautiyal

i
 ACKNOWLEDGEMENT
It is almost a ritual to begin the project report with an “ACKNOWLEDGEMENT” and our
heartfelt to all those who directly or indirectly made our project a great learning experience,
indicating me the values and importing the skills and hard work required for project.

Many have contributed to the successful preparation of this report. We would like to place
on record our grateful thanks to each one of them. We have great pleasure in submitting
this report on “Inventory management” as part of our 2nd semester project work.

I take this opportunity to Dr. (Prof.) H.J. Jani Director of GHPIBM for allowing me to carry
training and project.

I am thankful to A.K. Rastogi for his invaluable guidance given to me before and during our
project work and for their keen interest untiring effort, unfailing courtesy encouragement
and efficient guidance in completing the project in such and elegant form. I am also thankful
to all faculty members of GHPIBM as they provide true support and courage.

I would like to express my humble thanks to Mr. SAWANT (Training Officer) without
whom my training at RIL, Vadodara Complex would not have been possible at all.

I would also like to thank Mr. Amit Gupta, Mr. Amar Petiwale, Mr. Kushal Parikh, Miss
Chitra Shah, Mr. Yashwant Rathod who have given me time from their busy schedule to
provide me with information

At last but not the least, I take an opportunity to appeal my profound gratitude to my
adorable and beloved parents for their everlasting love, strong moral support,
encouragement and personal sacrifice without which I was unable to reach the present
status of education…

Animesh Nautiyal

ii
Table of Contents
DECLARATION......................................................................................................................iii
PREFACE.................................................................................................................................i
ACKNOWLEDGEMENT..........................................................................................................ii
Table of Contents....................................................................................................................iii
List of Tables...........................................................................................................................iii
List of Figures.........................................................................................................................iv
EXECUTIVE SUMMARY.........................................................................................................v
Chapter 1 Company Profile.....................................................................................................1
Chapter 2 Introduction of the subject....................................................................................10
Chapter 3 Material Planning.................................................................................................14
Chapter 4 Purchase and Stores Department........................................................................17
Chapter 6 Inventory Management.........................................................................................25
SWOT MATRIX.....................................................................................................................41
Results and Findings..............................................................................................................vi
BIBLOGRAPHY.....................................................................................................................vii

iii
List of Tables
Table 1.1 Milestones..............................................................................................................3
Figure 1.1 Organizational Hierarchy.......................................................................................5
Figure 1.2 VMD Layout...........................................................................................................5
Table 1.2 Plants and Their Capacity.......................................................................................6
Table 1.3 Products..................................................................................................................7
Table 1.4 Application of Products...........................................................................................8
Table 1.5 Competitors.............................................................................................................9
Figure 4.1 Purchase Procedure ..........................................................................................18
Figure 4.2 Purchase Procedure (Liquid) .............................................................................19
Figure 4.3 Process Flow ......................................................23
Table 6.1 Material Classification...........................................................................................26
Figure 6.1 Inventory Structure...............................................................................................28
Figure 6.2 Inventory Component............................................................................29

Table 6.1 Item Classification by ABC....................................................................................30

Figure 6.3 ABC Analysis (in percentage) .............................................................................30
Figure 6.4 ABC Analysis (in Amount)....................................................................................31
Table 6.1 Item in ABC...........................................................................................................31
Table 6.2 Item Classification by FSN....................................................................................32
Figure 6.5 FSN Analysis (in percentage) .............................................................................32
Table 6.4 Distribution of Non Moving....................................................................................33
Figure 6.6 FSN Distribution Analysis (in percentage) ..........................................................33
Table 6.5 Provision for Non Moving......................................................................................34
Figure 6.7 Provision for Non Moving Inventories (in percentage)........................................34
Table 6.6 Example of Categorization of AX, BY and CZ Items............................................36
Figure 6.8 Inventory Turnover Ratio.....................................................................................38
Figure 6.9 Material Cost Component....................................................................................38
Figure 6.10 NWC to Sales....................................................................................................39
Figure 6.11 Average Receivable Period...............................................................................39
Figure 6.12 Inventory Conversion Ratio...............................................................................40
Figure 6.13 Operating Cycle.................................................................................................40

iii
List of Figures
Table 1.1 Milestones..............................................................................................................3
Figure 1.1 Organizational Hierarchy.......................................................................................5
Figure 1.2 VMD Layout...........................................................................................................5
Table 1.2 Plants and Their Capacity.......................................................................................6
Table 1.3 Products..................................................................................................................7
Table 1.4 Application of Products...........................................................................................8
Table 1.5 Competitors.............................................................................................................9
Figure 4.1 Purchase Procedure ..........................................................................................18
Figure 4.2 Purchase Procedure (Liquid) .............................................................................19
Figure 4.3 Process Flow ......................................................23
Table 6.1 Material Classification...........................................................................................26
Figure 6.1 Inventory Structure...............................................................................................28
Figure 6.2 Inventory Component............................................................................29

Table 6.1 Item Classification by ABC....................................................................................30

Figure 6.3 ABC Analysis (in percentage) .............................................................................30
Figure 6.4 ABC Analysis (in Amount)....................................................................................31
Table 6.1 Item in ABC...........................................................................................................31
Table 6.2 Item Classification by FSN....................................................................................32
Figure 6.5 FSN Analysis (in percentage) .............................................................................32
Table 6.4 Distribution of Non Moving....................................................................................33
Figure 6.6 FSN Distribution Analysis (in percentage) ..........................................................33
Table 6.5 Provision for Non Moving......................................................................................34
Figure 6.7 Provision for Non Moving Inventories (in percentage)........................................34
Table 6.6 Example of Categorization of AX, BY and CZ Items............................................36
Figure 6.8 Inventory Turnover Ratio.....................................................................................38
Figure 6.9 Material Cost Component....................................................................................38
Figure 6.10 NWC to Sales....................................................................................................39
Figure 6.11 Average Receivable Period...............................................................................39
Figure 6.12 Inventory Conversion Ratio...............................................................................40
Figure 6.13 Operating Cycle.................................................................................................40

iv
 EXECUTIVE SUMMARY
I have completed my training at material (finance) department. My area of work was on
Inventory Management .I undertook a unique, step-by-step methodology for preparation of
the report. Reference books, RIL internal portal, website, and the data available at central
stores really help me to make this report valuable.

In this report first I have given the general information regarding the company. It includes
the history of company; its disinvestments, milestones, board of directors, quality policy,
financial position of the company, and the products.

Then I have focused on my core project regarding the procedure followed for the inventory
management at RIL. It covers how the material requirement is generate followed by the
purchase procedure then and the report deals with the handling of the inventory. In the end,
the findings and the bibliography are given. The report depends on the secondary data
from annual reports and some interviews with various managers. It may be possible that
the data from which the report is made may not appear in the report because some data is
confidential for the company.

v
 Chapter 1 Company Profile
1.1 Introduction

Indian Petrochemicals Corporation Limited (IPCL) is a pioneering petrochemicals company

in India. It was established on March 22, 1969, with a view to promote and encourage the
use of plastics in India.

Its business comprises of polymers, synthetic fiber, fiber intermediaries, solvents,

surfactants, industrial chemicals, catalysts, adsorbents and polyesters. The Company
operates three petrochemical complexes, a naphtha-based complex at Vadodara and gas-
based complex each at Nagothane near Mumbai and at Dahej on Narmada estuary in bay
of Khambhat. The Company also operates a catalyst manufacturing facility at Vadodara.
From a small 66,000 tonnes cracker the Company has come a long way and produces over
one million tones of merchant products. Backed by strong Research Centre, Product
Application Centres, Technology Management Centres and Customer Relation Centres the
Company is continuously innovating its processes and products.

In June 2002, the Government of India as a part of its disinvestment programme divested
26% of its equity shares in favour of Reliance Petro investments Limited (RPIL), a Reliance
Group Company, and India’s fastest growing and most admired private sector group
founded by visionary entrepreneur Shri Dhirubhai H. Ambani. RPIL acquired an additional
20% equity shares through a cash offer in terms of SEBI (Takeover Regulations) and
currently holds 46% of Company's equity shares.

The company was managed by a board nominated by government of India till June 4,
2002. The government of India as a part of its divestment programme divested 26% of
company’s equity shares in favour of reliance Petro-investments ltd. through an open,
transparent and competitive bidding process.

The company is now a new entrant to reliance family, India’s fastest growing and most
admire private sector group founded by a visionary entrepreneur late Mr. Dhirubhai H.
Ambani. Reliance has acquired additional 20% of equity shares from public through public
offer and now holds 46% of company’s equity shares. The new board has six members
nominated by reliance, two nominated by government of India and four independent
members.

1
1.2 Milestones since Inception

DATE EVENT
Mar 22, 1969 IPCL incorporated.
Mar 26, 1969 First logo (seal) of the company adopted in the first board meeting.
May 7, 1970 First technology transfer agreement was signed by IPCL Chairman cum
Managing Director with Lummus Company, UK for Gujarat Olefins Project
(Naphtha Cracker)
First export of IPCL product. State Trading Corporation of India Ltd. (STC)
Dec 14, 1973 exported IPCL's orthoxylene through Kandla Port.
Mar 28, 1978 Gujarat Olefins Project (Naphtha Cracker) Commissioned
Mar 15, 1979 All plants of Vadodara Petrochemicals Complex Commissioned
Aug 17, 1984 Government of India approved the setting up of a petrochemicals complex
at Nagothane, (Maharashtra)
Jan 8, 1986 The foundation stone of Nagothane complex laid by Mr. Narian Dutt Tiwari,
the then Minister of Industry, Government of India
Oct 24, 1986 First Bond issue totalling INR 400 million offered to public in India on
October 9, 1986. New company logo came in force. Issue closed on
earliest closing day, October 24, 1986. Received INR 960 million.
Oct 6, 1989 Mr. Rajiv Gandhi, Prime Minister of India laid the foundation stone for the
petrochemicals and Chlor-Alkali complex at Dahej in Gujarat
Jun 3, 1991 IPCL enters into a joint venture with General Electric Plastic, BV
Netherlands, making it the first time a multinational ties up with a Public
Sector unit from India, with equal equity holdings
Mar 23, 1992 The first lot of shares sold by government of India was transferred. Unit
Trust of India with others became the first set non-government
shareholders in IPCL.
Nov 14, 1996 RIL received the prestigious Economic Times – Harvard Business School
Association of India award for outstanding overall performance for the year
1995-96 in the public sector
Nov 1996 RIL received the Sword of Honour from the British Safety Council for its
commitment to adopting high standards of safety in all its units.
Feb 25, 1997 The company offered FCCB's worth US $ 175 million; Conversion price is
US $ 13 per GDS. The first issue from Asia to pierce Sovereign rating.
Mar 26, 1999 RIL became the largest producer of polyethylene with widest range on
commissioning of 160,000 MTA High Density Polyethylene plant at
Gandhar.
May 18, 1999 Advertisement for inviting Expression of Interest in divestment of 25 %
equity of RIL by GOI.
Feb 10, 2000 The 300, 000 MTA ethylene cracker is commissioned at Gandhar
Nov 12, 2000 Government of India decided not to pursue sale of Vadodara Complex to
IOC and decided to divest 26% equity to a strategic partner with a
commitment to divesting at least further 25%
Nov 18, 2000 The Govt of India decided to bifurcate RIL by selling Vadodara Complex to
IOCL.
May 28, 2002 Government of India accepted bid by Reliance Petro-investment Ltd., as it
2
 was the best bid received by the Government.
June4, 2002 Reliance Petro-investment Ltd. paid Rs. 1491 corers to GOI; Mr. Mukesh
D. Ambani was nominated as Chairman of the RIL by the winning bidder.
Sep 27, 2002 Mr. Mukesh D. Ambani, Chairman seeks approval for investments worth
INR 70 billion from shareholders at 33rd Annual General Meeting.
Amendment Agreement between the Government and the Strategic
2004
Partner, Reliance Petro-investments Limited, a Reliance group company
2004 Government of India disinvested its balance shareholding
Government of India withdrew its nominee directors from the Board of
2005
Directors of Indian Petrochemicals Corporation Limited
Amalgamation of six polyester companies i.e. Apollo Fibers Limited,
Central India Polyesters Limited, India PolyFibers Limited, Orissa
2006
PolyFibers Limited, Recron Synthetics Limited and Silvassa Industries
Private Limited with Indian Petrochemicals Corporation Limited.
April 18, 2007 Merger of IPCL into Reliance of Group of Industry
Sep 21, 2008 Reliance Industries Commences Production in KG-D6 Block.
2008 During the year, Reliance Retail Limited (RRL) continued its rollout of
stores across various verticals and formats. Reliance Retail today operates
over 590 stores in 57 cities, spanning 13 states, with over 3.5 million
square feet of trading space.

Table 1.1 Milestones

1.3 Vision, Mission, Values and Quality Policy

VISION: Be a globally preferred business associate with responsible concern for ecology,
society and stakeholders’ value.

MISSION: Continuously innovate to remain partner in human progress by harnessing

science and technology in the petrochemicals domain.

VALUES: Integrity, Respect for people, Unity of Purpose, Outside-in Focus, Agility and
Innovation

QUALITY POLICY: We at RIL are committed to meet customers' requirements through

continual improvement of our quality management systems. We shall sustain organizational
excellence through visionary leadership and innovative efforts.

3
1.4 Present Profile

Founder chairman Reliance group

1932-2002

Board of Directors of Reliance Industries Limited

Shri Mukesh D. Ambani (Chairman and Managing Director)

Shri Nikhil R. Meshwani (Executive Director)
Shri Hital R. Meshwani (Executive Director)
Shri PMS Prasad (Executive Director)
Shri P.K. Kapil (Executive Director)
Shri Ramniklal H. Ambani
Shri Mansingh L. Bhakta
Shri Yogendra P. Trivedi
Dr. D.V. Kapur
Shri M.P. Modi
Prof. Ashok Misra
Dr. Dipak C Jain
Dr Raghunath Anant Mashelkar

Achievements

Best Petrochemicals Company World-wide: 1990 (Cl , London)

ICMA award for Forward technology development: 1981, 1985, and 1991.
DGTD award for Bio-technology Process 1994.
Corporate Performance Award ET HBSAI: 1994-95
Sword of Honour from British safety council.

4
1.5 Organizational Hierarchy of Finance of RIL (VMD)

Figure 1.1 Organizational Hierarchy

1.6 PLANT LAY OUT OF BARODA MANUFACTURING DIVISION

5
PROP
GREEN ACN ACR OSED VCM /
BELT PIB PVC
RIL ( BC )
LAY-OUT P
Wate P P L Cent.
r DS A B P C
D Store
Supp AF F R R P
Flare P
ly
E P
T Railway
Area for IOP Siding
GT Safety D
New
project PP ESD

PBR Carbon OCG

EG & LAB Cent.
II Fibre LAB N2O2 W/S
tank
Fire GA
area E GO
P FP P
Techno Q P
Unit
Mat P logy PAC
. IV R&D PMDI
Dep CSD
t
Figure 1.2 VMD Layout

5
1.7 Product Portfolio

The Vadodara Complex houses 21 plants on over nearly 500 hectares of land and
produces large variety of products consisting of Linear Alkyl Benzene, Acrylic Fibers,
Acrylic Esters, Ethylene Glycol, Polyvinyl chloride, Polyethylene, polypropylene, Butadiene
rubber, etc. The company's registered office is located in Vadodara Complex and that was
the first manufacturing facility setup by the company.

NAME OF PLANTS CAPACITY (MT)

Naphtha cracker (ethylene) 130000
LDPE plant 110000
Ethylene glycol 20000
VCM plant 57300
PVC plant 60000
PPCP plant 25000
PP4 plant 75000
Acrylonitrite plant 30000
Acrylates plant 10000
Butadiene extraction plant 54000
Poly butadiene rubber plant -| 20000
Poly butadiene rubber plant - || 30000
Table 1.2 Plants and Their Capacity

Products at a Glance: The products manufactured and marketed by the Corporation could
be classified into the following 3 major groups:

Polymers: Polymers that include plastic and rubber is a major product-line, not only by
virtue of the quantity and multiplicity of grades but also because of the very number of
small-scale customers spread all over India. Polypropylene and Polybutadiene rubber are
new to Indian market. These have been produced for the first time in India by IPCL.

Fibers and Fibre Intermediates: Some quantities of Acrylic fibre being imported earlier were
mainly for hand knitting yarn. Due to the developmental activities undertaken by IPCL,
unprecedented applications have been possible for acrylic fibre namely range of
suiting/dress materials/hosiery/carpets/blankets/upholstery, thus making Indacryl (brand
name for Acrylic Fibre) the fibre for all seasons. Having developed a wide range of
applications, to meet the growing demand for acrylic fibre, IPCL decided to expand the
acrylic fibre manufacturing capacity to 24,000 MTA. The expansion is with the technical
know-how from EI Du Pont Nemours, USA.

Chemicals: At present, about 31, different chemical products are being marketed, and the
growth in the product line has been possible mainly due to the development of value added
products from the return streams. Chemical intermediaries find wide and diverse
applications in various industries.

6
Commodity Chemicals: Acetonitrile
Benzene
Butyl Acrylate
Caustic Soda Lye
Ethylene
2-Ethylhexyl Acrylate
Orthoxylene
Propylene (Polymer Grade)
Ammonium Sulphate
Butadiene
Caustic Soda Flakes
Carbon Black Feedstock
Ethyl Acrylate
Methyl Acrylate
Propylene (Chemical Grade)
Solvents:
CIXON
HEPTON
Solvent CIX
Surfactants:
Ethylene Oxide
Linear Alkyl Benzene
Commodity Plastics:
Indothene
Indothene LL
Indothene HD
Koylene
Koylene CP
Koylene ADL and Koylene ADL - CP
Indovin
Rubber and Hydrocarbon Resin:
Cisamer 01
Cisamer 1220
Petrez
Catalysts and Adsorbents:
Catal
Catsiv
Speciality Catalyst
Fibers and Intermediates:
Acrylonitrile
Ethylene Glycol
Demethyl Terephthalate
Table 1.3 Products

7
Application of Products

Product Uses
Solid Products: Polymers
Consumer packaging/film, extrusion wires, cable coatings,
LDPE/LLDPE
heavy-duty bags, garbage bags, milk & shopping bags.

Fertilizers/household packaging, woven sacks, cartons,

HDPE
crates, luggage, pipes, paints, storage bins etc.
PP Cement packaging, monofilament yarn, ropes, fishing nets.
Water pipes, electrical conduit/wires, cables, sheets,
PVC
footwear, flexible films
PBR Automobile tires & tubes, conveyor belts, footwear.
Solid Products: Fibre & fibre intermediates
AF/DSF Textiles, knitting yarns, sweeter.
MEG Polyesters, Anti freeze.
ACN Acrylic fibre, Acrylates, engineering polymers.
DMT Polyester staple Fibers, polyester filament yarns, polyester.
Liquid Products: Chemicals
LAB Raw material for household, industrial detergents, personal
care products.
EO/BENEZENE/TOLUENE Phenol, dyestuff, pharmaceuticals, paints, industrial uses,
caprolactum
Caustic Soda Alumina/paper.
Table 1.4 Application of Products

8
Major Competitors

Product group Domestic Foreign

NIL Sanghai petro,
PBR Goodyear
Bridgstone
HPL Exxon mobil
GAIL Basell
Finolex Dow chemical
Supreme petrochemical Autofina
Polymers NOCIL BP-Amoco
Chemplast Equistar
DCM Shriram Philips-Chevron
Vardhaman Acrylic ltd. Sabic, Borealis
GAIL, HPL Exxon mobil
BPCL, HPCL Dow chemical
IOC Basell
Chemicals SAIL Sabic
Tamil Nadu Petroproducts
Ltd.
Nirma Chemical
Table 1.5 Competitors

9
 Chapter 2 Introduction of the subject
2.1 Introduction to Inventory Management

Managing inventory is a juggling act. Inventory represents the second largest

assets for manufacturing companies next only to plant and equipments. The
Average proportion of inventories to total assets, in manufacturing firm,
generally varies between 20 to 30 percent. Inventories are the stock of the
product made for sale by the company or semi finished goods or raw
materials. Inventory of finished goods which are ready for sale is required to
maintain smooth marketing operation. The inventory of raw material and work
in progress is required in order to maintain an unobstructed flow of material in
the production line. These inventories serve as a link between the production
and consumption of goods.
The aspect of management of inventory is especially important in respect to
the fact that in country like India, the capital block in terms of inventory is
about 70% of the current assets. It is therefore, absolutely imperative to
manage efficiently and effectively in order to avoid unnecessary investment in
them. Although to maintain low inventories may prove to be profitable but to
maintain very low inventories may prove risky on the contrary.
This aspect of management if tackled in a proper way may prove to be a boon its effective
and efficient management would result in the maintaining of optimum level of inventories.
At this level the profitability of the organization will not be jeopardized at the cost of
inventory.

Now from the above stated facts it is clear that maintaining of optimum level of inventory
involves huge cost, so why should keep the inventories at all. Basically there are three
main reasons for which inventories are stocked and they are:-
1. Transaction Motive: This motive lays emphasis on maintaining of inventories in
order to maintain a smooth and unobstructed supply of materials for the sales
and production operations.

2. Precautionary Motive: This motive emphasizes on the stocking goods in order to

guard against the uncertainties of future i.e. unpredictable changes in the forces
of demand, supply and other forces.

3. Speculative Motive: This motive influences the decisions regarding the increase or
decrease in the level of inventory in order to take advantage of price fluctuations.

A company should maintain adequate stock of materials for a continuous supply to the
factory for an uninterrupted production. It is not possible for a company to procure raw
material instantaneously whenever needed. A time lag exists between demand and supply
of material. Also, there exists an uncertainty in procuring raw material in time at many
occasions. The procurement of materials may be delayed because of factors beyond

10
company’s control e.g. transport disruption, strike etc. Therefore, the firm should keep a
sufficient stock of raw material at a time to have streamline Other factors which may incite
us to keep stock of inventories is the quantity discounts, expected rise is price.
The work in process inventory builds up because of the production cycle. Production cycle
is the time span between the introduction of raw material in to the production and the
emergence of finished goods at the completion of production cycle. Till the production cycle
completes, the stock of work in process has to be maintained. Efficient firms constantly try
to make the production cycle smaller by improving their production techniques.

The inventory of a manufacturing concern usually includes:

• Raw material
• Work-in-Progress
• Finished goods
The stock of finished goods has to be held because production and sales are not
instantaneous. A firm cannot produce immediately when goods are demanded by
customers. Therefore to supply finished goods on regular basis, their stock has to maintain
for sudden demand of customers, in case the firm sales are seasonal in nature, substantial
finished goods inventory should be kept to meet the peak demand. Failure to supply
products to customer, when demanded, would mean loss of the firm’s sales to the
competitors.

The basic objective in holding raw material inventory is separate purchase and production
activities and in holding finished goods inventory is to separate production and sales
activities. If raw material inventory is not held, purchase would have to be made regularly at
the time of usage. This would mean production interruptions and high cost of ordering.

A sufficiently large inventory has to be maintained of finished goods so as to meet the

fluctuating demands. If a close link is maintained between the sales and the production
department then an organization can do with a small inventory also. In the process,
inventory is also necessary because production cannot be instantaneous. But it should be
seen that the size of production cycle should be small.

2.2 Objectives of the Project

 To study the Inventory Management at RIL

 To study the Purchase Procedure at RIL

2.3 Importance of the Study

Inventory management is an important part of a business because inventories are usually

the largest expense incurred from business operations. Most companies will use an
inventory management system that will track and maintain the inventory required to meet

11
customer demand. Most systems used by companies are linked to the management or
accounting information system, increasing the effectiveness of their operations.

Inventory management is primarily about specifying the size and placement of stocked
goods. Inventory management is required at different locations within a facility or within
multiple locations of a supply network to protect the regular and planned course of
production against the random disturbance of running out of materials or goods. The scope
of inventory management also concerns the fine lines between replenishment lead time,
carrying costs of inventory, asset management, inventory forecasting, inventory valuation,
inventory visibility, future inventory price forecasting, physical inventory, available physical
space for inventory, quality management, replenishment, returns and defective goods and
demand forecasting. Balancing these competing requirements leads to optimal inventory
levels, which is an on-going process as the business needs shift and react to the wider
environment.

Involves a retailer seeking to acquire and maintain a proper merchandise assortment while
ordering, shipping, handling, and related costs are kept in check.
Systems and processes that identify inventory requirements, set targets, provide
replenishment techniques and report actual and projected inventory status.
Handles all functions related to the tracking and management of material. This would
include the monitoring of material moved into and out of stockroom locations and the
reconciling of the inventory balances. Also may include ABC analysis, lot tracking, XYZ
analysis etc.
Management of the inventories, with the primary objective of determining/controlling stock
levels within the physical distribution function to balance the need for product availability
against the need for minimizing stock holding and handling costs

2.4 Methodology

Research/Study in common parlance refers to a search for knowledge. Research study

may be defined as “ manipulation of things, concepts or symbols for the purpose of
generalizing to extent, correct or verify knowledge, whether that knowledge aids in
construction of theory or in the practice of an art”.

Methods of Data Collection

There are mainly two methods of collecting data
• Primary data Collection
• Secondary data Collection
In this project I have used both the methods of data Collection, which helped me in
understanding the working of Reliance Industries.
12
Primary data: For obtaining the appropriate data interview was the one of the most feasible
method to collect the information. As I meet employees of different designation and working
in different section questionnaire would have been an inappropriate tool to collect the
information. Also interview gave me an opportunity to understand their working in a better
way and any doubt was resolved at that very instance. During this project I visited different
entities associated in inventory management. I also visited central store, chemical store,
engineering department, and Materials Bhavan.

Secondary data: As I was dealing with financial data most of the information that is being
used in this information is from the annual reports that are available for used of everyone.
But still most of the figures that are in the report are more related to RIL-VMD than whole of
RIL.

13
 Chapter 3 Material Planning

3.1 Annual Material Planning

Annual Material Planning is one of the most critical exercises in the overall material
management framework, it deals with the overall estimation of the material demand which
forms the basis for procurement planning and inventory management. It forms the linkage
between material consumption and procurement.

The objective of the process is to estimate the material demand for the next financial year.

• Planned material demand for a site constitutes known demand, deterministic in

nature that can be planned and procured well in time to meet the demand. This
includes major maintenance jobs such as planned shutdowns, major overhauls,
refurbishments, rebuilding, statutory inspection, post shut down recommendation
jobs and approved Capex jobs. Planned material demand is generated in the system
through the Annual Maintenance Plan which is created for next year and entered in
the SAP system by creating and saving (but not releasing) work orders along with
material requirement for these jobs.
• Unplanned material requirement for a site constitutes the demand that cannot be
planned. This includes unplanned breakdowns, maintenance activities based on
conditional monitoring, maintenance events not forecasted at the beginning of the
year, post shut down recommendation jobs, etc. Projection of the unplanned
demand for the next year is created by analyzing and extrapolating the unplanned
portion of the historical demand.
• There may be exception viz. one time unplanned requirement (e.g., direct charged
items) during a year which are not considered in unplanned material requirement at
beginning of the year.
• Obsolete & surplus inventory is excluded from the exercise.
• The annual material planning process places greater emphasis on 'planned'
inventory management to optimize inventory levels while maintaining the required
service levels

Planned Component of Annual Material Plan: This is the consolidated site based estimate
of next year's planned material demand at item level. The demand is estimated by
consolidating the material requirement associated with each maintenance job, shutdown
job and Capex job scheduled in SAP PM at the start of the year as part of annual
maintenance plan. In the system, planned material demand comes out of planned work
orders such as PM02/PM03/Shut down orders. Further, this planned demand is updated
during the year as and when new maintenance jobs are scheduled enough in advance to
procure the material required for those jobs directly from vendor. For instance, if in May
during the year a new job was scheduled for December such that lead time to procure
material for that job is smaller than 7 months, then demand for that material 1 also termed
as planned demand.

14
3.2 Material Requirement Planning Run

The objective of the process is to manage site inventory at regular basis by using inventory
levels (safety stock level. reorder level and reorder quantity) based replenishment approach
for unplanned requirement and reservation based replenishment based approach for
planned requirement of each SKU inventory levels are determined scientifically by
modelling systematically historical demand data for unplanned demand and required
service levels, and incorporated into SAP. Then SAP’s MRP Run generates PRs so that
the required service levels can be met

The MRP run is conducted at least once a month to conduct material planning. The MRP is
triggered when current inventory hits a reorder level after considering pipeline inventory as
well as open reservations falling within the planning horizon.

The MRP run is conducted by the inventory controller tor the site. An inventory modelling
process I tool is used to determine the optimal inventory levels which are incorporated into
SAP. Material requisitioning is done by inventory controller at the site bases on either an
inventory levels based replenishment (if the levels for the item was modelled by the
inventory modelling process /tool) or a user based reservation in a work order (items that
are not under the scope of the Inventory modelling process/ tool)

Planned Order is a system generated draft material requisitioning order that needs
inventory controller's approval for quantity and specifications before being converted by the
system to a Purchase Requisition (PR)

Planned Material Demand is any demand where the requirement of the material is known
beyond the lead time horizon (defined as sum of MRP run time, internal lead time and
external lead time) e.g. demand of SKU with lead-time of two months known before two
months is a planned demand

Unplanned Material Demand: Any demand where the requirement are not known beyond
the lead time horizon. E g demand of SKU with lead-time of two months known before
1month of requirement is an unplanned demand.

3.3 Storage/ Binning Of Materials

The objective of this process is to bin incoming material at correct location for tacking
subsequent movement of material. Binning process leverages the warehouse module of
SAP to generate bin location and track material’s current bin location. Here expiry date is
captured while the receipt of material is done, but it is applicable only for few items.

Binning location refers to the location where the item is binned as defined in the system.
There is also transfer order generated to transfer the stock to respective bin from inspection
or receipt area.

This process includes following steps:

15
 • Generating binning report of materials for which usage decision is posted on
previous day and for items received through MRN/STN.
• Shift material from receipt area to corresponding storage area.
• Check initial preservation requirement of items under binning and execute
preservation.
• Affix tag / label on material received through STN / MRN.
• Allocate bin location for new material in system.
• Post Transfer Order in Warehouse Management module of SAP system.
• Bin material at corresponding suggested location.

The process will be started daily in the morning after the usage decision of incoming
materials has been posted on previous day. The total process will be completed in the span
of a day. Exceptions to the procedure is whenever discrepancy is observed between the
item lying in existing stock and the new item received for binning same need to be
resolved.

3.4 Cycle Counting

The objective of the process is to create a standard system driven cycle counting process
across all sites that leverages the benefits of cycle counting to indentify discrepancies in
the inventory count early.

Item segmentation for frequency of count is on the basis of consumption and value. All
items m A and X category should be counted once a year. Items in B and Y category
should be counted once in two years and items in С and 2 categories should be counted
once in three years.
Root Cause Analyse (RCA) of all discrepancies should be done. If RCA does not yield any
plausible reason, the discrepancy should be written off in the system after due approval of
the site president and the finance department.
Apart from perpetual counting as per the counting schedule cycle counting will also be
done at the time of binning the item. Physical count and court date will be updated in the
system

3.5 Preservation

Objective of the process is to create a standardized preservation process across sites that
are driven by system for scheduling and task listing

Periodic preservation is scheduled through the system. General preservation activities for
items are recorded in the system. This allows inter- site sharing of preservation activities
and will help in auto generating preservation task list for new items of similar type being
binned. Preservation task list is entered into the system by site inventory controller based
on the recommendations given to them by CES site maintenance and site stores.
Preservation of insurance items should be given special attention including periodical
physical inspection by user and taking suggested corrective action.

16
 Chapter 4 Purchase and Stores Department

4.1 Purchase Flow

Purchase Requisition Note

(When plant require material)

Request Quotation
(Company ask for quotation from vendor)

Quotations comes

Selection of vendor
(On basis of terms and conditions expected by the company)

Put Purchase Order

Material comes

Material goes to the excise section

(Capture the invoices)

Material goes to security keeper

17
 (They check the material are as per unit mention in invoices or not)

Material goes in stores Receipt Ward

(Here the material check against P.O. and labelling is done)

Material goes to the Inspection Ward

(They do quality check and prepare Inspection Report)

On the basis of the Inspection Report they prepare Goods Receipt Note and also check
Test Certificate send by vendor and then
Inspected Material

Go to Issue Ward Go to vendor

(If goods accepted) (If goods rejected)

Figure 4.1 Purchase Procedure

Before sending goods to the Issue Ward goods are insured.

And for rejected goods they prepare Goods Rejection Note and also prepare O.G.P. (Out
Goods Note) and sent to the vendor.
For the liquid chemicals used as raw material storing process are as follows

18
 Liquid chemical comes in tanker at gate

Tanker goes to excise section

(Capture the invoices)

Tanker goes to store

(Weight of the tanker with liquid and quality check of the chemical is done)

Unloading
(Tanker is unloaded to respective plant)

Tanker again comes to the store after unloading

(Again weight of the tanker is done without liquid)

Figure 4.2 Purchase Procedure (Liquid)

Difference between weight of tanker before and after unloading the chemical is the actual
quantity comes from the vendor.
This is the whole procedure for storing to issuing of the raw material. Thus stores
department works with the materials.

4.2 Purchase order terms

• Packing forwarding charges: extra 2%

• Excise duty (as applicable)
19
 • CST: Extra as applicable presently at 4% against form”c”.
• Freight charges extra, kindly arrange to dispatch the goods through our authorized
transporter.
• Insurance by RIL as same as the goods are dispatched.
• Please inform dispatch details to our material manager.
• Manufacturer test certificate, guarantee certificate submitted along with the supply.

4.3 Payments terms

1) Our standard payment terms is 100% payment within the 30 days of receipt subject
to acceptance of materials at RIL stores Vadodra by: E-payment only
As under: -

We have a mission to convert all vendors into e-payment route; in this connection
we have issued service of communication to all vendors.

2) WE have e-payment (direct electronic credit to vendor’s a/c) facilities with three
banks, they are HDFC, ICICI, CITI Bank, The major requirement here is that you
have to open a/c with this banks. However e-payment through this route is free of
cost.

3) As the designated banks do not have branches at all the places across India and so
many vendors are to open a/c. So we explore the bank neutral, RBI operated
electronic payment system (RTGS) Real Time Gross Settlement to SEFT Special
electronic Fund Transfer where the vendor can have a/c in the any bank but its
branch should RTGS / SEFT enabled. The bank will charge vendor a fee for
receiving RTGS / SEFT facility.

4) Liquidated or Damages will be charged weekly 11% subject to maximum of 5% of

order value will be levied in case of delayed supply.

4.4 General Terms of QUOTATIONS

1) Packing and forwarding as applicable will be charged extra

2) All transaction will be negotiated through bank only unless otherwise agreed upon

3) Complaint if any of the goods supplied should be informed within 7 days of your
receipt

4) Deliveries : we are at liberty to supply goods sold by us in one lot or in separate

lot .The delivery time is subject to the usual FERCE MAJEURE clause which
includes strike, breakdowns , riots and other causes of delay beyond our control

20
 5) Place of delivery : Delivery is made always in our ex-workshop MUMBAI in case we
deliver goods for Mumbai or to any other place it is understood that we are
making such delivery for and behalf of the buyer

6) Confirmation of order: All the orders placed with our salesman ,agents, and others
are subject to our confirmation

7) Claims: Claims will be made be entertained only if brought to our notice in writing
within 7 days after receipt of goods and are in their original condition in that case
we admit our liability for reason of defective materials or defective workmanship
the buyer is only entitled for replacement which shall be made free of cost .We
are not liable for any other compensation whatsoever
8) Jurisdiction: All suits or disputes arising out of contract of negotiations will be
instituted in court of competent jurisdiction in Mumbai and in no other court.

9) Advance: A sum of rupees equivalent to 25% of the value of the order should be
forwarded with the order

4.5 Purchasing Groups

 Feed Stock
 Chemicals & Catalysts
 Packaging
 Administration
 Consumables
 Electrical
 Instrumentation
 Pumps and Spares
 Heavy Equipment

4.6 PR Creation

 Account Assignment
 Delivery Date
 Plant
 Purchasing Group
 Requisitioned
 Code
 Quantity
 Value
 MRP Control
 Valuation
 Fund Centre

21
4.7 PO CREATION

• Pr no.
• Vendor code
• Purchase organization
• Purchasing group
• Delivery date
• Plant
• Rate
• Inco terms
• Tax code
• Fund centre

4.8 Process Flow

PR
Release

RFQ’s

Tender
Opening

Rate
Comparison

Purchase
Finalization

PO
Execution

22
 Gate Entry

Receipt
&
Inspection

Acceptance
Or
Rejection

Storage

Issue

Figure 4.3 Process Flow

4.9 Purchase Procedure

23
Chapter 5 Material Handling

5.1 Material Delivery, Issue and Return

Material Issue delivery & return deals with the issue & delivery of material against work
order reservation & silent hour requirement. It also deals with the return of excess material
after a maintenance job completion.
Material Issue, delivery & return process compromise following activities.
• Material issue & delivery: issue & delivery By the stores of reserved material through
work order by plant within a specified time

• Material issue during silent hour: i.e. in non working hours.

• Material return: return from plant to stores.

Some key policies that they have are as follows:-

• Material issue shall take place against reservation

• Monthly report of open reservation more than 30 days old must be sent to HOD.

• Door delivery plan with respect to “MATERIAL DROP POINT” at various plants.

• Counter issue from stores against plants’ request to meet urgent maintenance work.

The process is executed twice a day and will cover all reservations entered on previous
day. Delivery process completed on the same day.

Material issue during silent hour must be recorded in system while issue posting.

5.2 Project overage material transfer

Here the objective is to transfer of project overage with complete specification of individual
SKU to warehouse.

• Project overage is transferred to steady state only after reconciliation and approval
of concerned project engineering discipline head.

• Materials of individual SKU identified as project overage shall take place through
Spare part interchangeable records (SPIR) provided by OEM to buyer.

• Unit rate of material being transfer is be given by procurement.

• Transfer material must have reference of project receipt and project code.

• Material transfer takes place with test certificate wherever applicable.

22
The process shall be initiated immediately upon complete of project activities. Material
transfer should not take place more than 15 days after generation of MTN in system.

5.3 STOCK OUT HANDLING:

Stock out handling is critical for handling the actual and potential stock out situation for
material required for the maintenance of plant machinery on urgent basis.
Objective is to streamline the stock out handling process that lays clearly the order of
methods to minimize the adverse impact of potential and actual stock outs.

• Potential stock out handling process that lays clearly the order of methods to
minimize the adverse impact of potential and actual stock outs.

• Inventory controller will drive the stock out handling process. Controller has to look
for opportunities to re-schedule work order, identify alternative material availability,
and inter site stock transfer and emergency ways of handling stock out.

Stock out handling process will take not more than 5 working days.

5.4 Obsolete and Surplus Management

Over a period of time, equipment spares and other materials becomes surplus/obsolete
and hence unserviceable due to various reasons like long usage design change /
redundancy uneconomical operation / stock in excess than requirement etc.
Obsolete & surplus spares identification is one of the most important functions of materials
management organization for early disposal actions of such spares.

Obsolete Identification includes following stages:-

 Enter details of equipment/spares decommissioning in the system
 Review of decommissioned equipment / spares list for items which can be used
elsewhere in site
 Sending of potential obsolete items list to CES Head for approval
 Flagging of approved items as obsolete in system
 Intimation of discontinued items
 Review and initiation of approval process for discontinued items

23
Surplus Identification: The objective is to create a surplus identification process that
focuses on early identification of excess materials for utilization of surplus stocks
and Reliance group.

Disposal: The following process take place for disposal of surplus and obsolete materials

Review the disposable list and segregate into equipment sparer consumables and bulk
earns
 Segregate equipment spares into various categories (linked to equipments EPCG,
Merit local, etc)
 Disposal of equipment spares
 Segregation into consumables and bulk items into unusable and usable
 Disposal of consumables and bulk items

24
 Chapter 6 Inventory Management
“Inventory is a very expensive asset that can be replaced with a less expensive asset
called ‘information’. In order to do this, the information must be timely, accurate, reliable,
and consistent. When this happens, you carry less inventory, reduce cost and get products
to customers faster.”
-J. David Viale
RIL vadodara complex is the only unit in whole Asia, which is having 22 plants in a single
complex. RIL has various department like finance, marketing, human resource, material
procurement, research and development and safety and security etc.

The basic work of inventory management is to procure the material to the required
department and to maintain the stock. The materials that are purchased are both
indigenous and imported. The inventory can be classified in to various categories.
• Raw material, chemical and catalysts.
• Fuel and lubricants.
• Instrumentation items.
• Mechanical consumables.
• Safety and fire items.
• Steel and cement.
• Packaging items.
• Scrap.

6.1 Stores Cycle

 Receipt of material at Material Gate
 Excise Capturing
 Verification by RGHS
 Weighing
 GRN preparation by Receiving Section
 Offering material for inspection
 User Decision
 Stocking of material in respective wards
 Issue of material to users

6.2 Various Classification

A) OF MATERIALS In SAP materials are classified into following category.

CODE MATERIALS

SPAR SPARES

25
 CHEMICALA&
CACH
CATALYSTS

PACKAGING
PAMA
MATERIAL
FINISHED
FTRM TRADABLE RAW
MATERIALS
LABC LAB CHEMICALS

Table 6.1 Material Classification

B) OF STORES

 Central stores
 Chemical stores
 Bulk chemicals
 Gap stores
 Scrap Yard
C) Classification of inventory
 Inventory can be classified in to different types
 Raw material
 Work in progress
 Finished goods
 Scrap
 Spares
 Tools
 Consumables.

6.3 Tools for inventory control

 Codification
 Receipt
 Inspection
 Storage and preservation
 Issue
 Scrap and disposal.

Codification:
The code is been given of 10 numbers the first 2 digits are the main code, next 2 digit is for
the model number of the inventory, next 2 number is for the company code, and then next 3
26
digit is for the serial number of the product, and net single digit is for the imported and
indigenous product. If the product is imported then the code will be 1 and if it is indigenous
then the code will be 3.

Receipts: After the order has been placed, the goods are been received. First of all the gate
security will check the truck number and they will provide them the TPN number after taking
that number the truck will go for the excise clearing where it will get the excise ID from
there. The excise person will make a entry of excise, after that the MMN entry is done and
then they will sent the goods to the stores department where the GRN (Goods Receipt
Note) will be made. Stores department will send the goods for the inspection and on that
base the inspection note is to be prepared of acceptance or rejection of the goods. That is
also known as user decision and the goods will be consider as the RIL’s property and if the
goods are rejected then they will make the MMX exit entry

6.4 Costs oriented with inventory management

 Ordering cost
Whenever the order is placed for the stock there is cost occurs, the cost will differ as per
the nature of inventory
 Inventory carrying cost
Inventory carrying cost is always proportional to the investment in inventory and it is,
therefore expressed as a percentage of average investment in inventory. Various costs are
follows
 Capital cost
This is the largest component of the carrying cost and it represents the cost of capital
invested which includes the cost of borrowing capital which is the borrowing rate or the
bank lending rate.

 Storage cost

The chief elements of storage cost are the cost of space, maintenance and repairs,
lighting, wages of personnel, handling charges and other.

 Obsolescence cost
The value of an item gets progressively reduced, as the life of inventory goes on.
Obsolescence is done due to life span of inventory, technology changes, and loss due to
handling.

 Insurance
This cost occurs because for every item there is insurance which is associated with it and if
fire or other damage occurs then there is cost associated with it.

 Stock out cost

This is the cost of not carrying the inventory, it is an opportunity cost and it is because of
loss of production.
 Overstocking cost

27
This is due to blocking of capital in inventory

6.5 Inventory at RIL

THE INVENTORY STRUCTURE

29,000.00 Finished Goods / Traded
Goods
24,000.00
Amount in Cr.

Stock-in-Process
19,000.00
Raw Materials
14,000.00
Stores,Chemicals&Packa
9,000.00 ging Materials

4,000.00

-1,000.00
2010 2009 2008 2007 2006

Year

Figure 6.1 Inventory Structure

This figure shows the proportion of each type of inventory in the total inventory. This shows
that major part of inventory is in the form of “Raw material”. Except it the inventory is not
access, this show that company try to maintain minimum inventory so that the amount not
blocked in the inventory. Further the total inventory reduces over a period of time. This is
due to good management techniques as well as efficient management RIL.

28
 Total Inventory as on 31.03.2010
(as per valuation class)

Packing material Elec. Items

Others & Consumes.
0.85% Cat-Chem. 3.90%
13.72% 10.05%
Inst. Items
11.14%
//

Lubes. & Greases

0.50%
Mech. Items
59.84%

Figure 6.2 Inventory Component

6.6 Inventory categorization

Velocity is the primary basis of categorization. Velocity is number of issues in a period of

time. Items are first segregated into fast moving, rarely moving and non moving items
based on monthly aggregated consumption. Fast moving items are always consider stock
items, while further categorization is done for rarely moving and non moving items before
the stock/non stock decision is made.

After the velocity categorization a value based categorization is done. To optimized

engineer effort, the high value items are subject to further analysis and validation and the
lower value items are considered as stock items.

Finally, for high value items, a stock/non-stock decision is taken based on the critically,
predictability of demand and the probability of demand of the item. This may be done by
29
answering a detailed questionnaire or having a quick look, depending on the nature of the
item.

 ABC ANALYSIS

PARTICULARS AMT (IN CRORE)

ITEM A 157.5
ITEM B 45
ITEM C 22.5
TOAL 225.0

Table 6.1 Item Classification by ABC

ABC ANALYSIS

10%
20%

70%

ITEM A ITEM B ITEM C

Figure 6.3 ABC Analysis (in percentage)

30
 ABC Analysis

200
Rs. in crores

150 157.5

100
50 45
22.5
0
ITEM A ITEM B ITEM C

Figure 6.4 ABC Analysis (in Amount)

ITEM A ITEM B ITEM C

Mechanical Catalyst
126.0 24.7 Electrical 12.73
Items Chemicals
Lubes and
Inst. Items 26.05 .89
Grease
Other and Packing
32.67 1.89
Consumer Material

Table 6.1 Item in ABC

31
  FSN ANALYSIS

PARTICULARS AMT IN CRORE.

MOVING MATERIAL 159.75
NON-MOVING MATERIAL 065.25
TOTAL 225.00
Table 6.2 Item Classification by FSN

FSN ANALYSIS

29%

71%

MOVING MATERIAL NON-MOVING MATERIAL

Figure 6.5 FSN Analysis (in percentage)

Above chart mention that out of total non-moving stock near about 29% of the total stock.
BASIS OF DECIDING FSN
The general practice to decide the block of material at RIL is
Fast Moving: 2-4 years
Slow moving: 4-6 years
Non-moving: More than 8 year

32
DISTRIBUTION OF NON MOVING MATERIAL

NON-MOVING INVENT. Rs. IN

ITEMS
CRORE
FUEL & LUBRICANT 00.82
ADM/SAFTY 03.28
RM/CHE/CAT. 01.60
ELECTRIC STORES 01.43
PACKAGING 05.4
INSTRUMENTS 01.99
MECH. CONSUME 50.7
STEEL/CEMENT 00.03
TOTAL 65.25
Table 6.4 Distribution of Non Moving

NON-MOVING INVENTORY
0%
2%
1%
2%
5%
8%
3%

79%
FUEL& LUBRICANT ADM/SAFTY RM/CHE./CAT.
ELECTRIC STORES PACKAGING INSTUMENTATION
MECH.CONSUME STEEL/CEMENT

Figure 6.6 FSN Distribution Analysis (in percentage)

From the above chart we can conclude that a large share of 79% of mechanical consume
remains in non moving material. This is a fairly large amount. Non-moving material is
having I ideal time of maximum of 17 to 20 years.
33
  PERCENTAGE PROVISION OF NON-MOING MATERIAL

ITEMS PROVISIONS PERCENTAGE

FUEL & LUBRICANT 0.12%
ADM/SAFTY 11.63%
RM/CHE/CAT. 00.14%
ELECTRIC STORES 40.39%
PACKAGING 00.00%
INSTUMENTATION 21.51%
MECH.CONSUME 27.95%
STEEL/CEMENT 06.85%
Table 6.5 Provision for Non Moving

On the above chart we see that company can able to write off 40% value of electrical stores
and 28% value of mechanical stores, but company cannot write off any value of packaging
stores. Very important matter is that purchase value of RM/CHE/CAT is very high but
company writes off its value only 0.143% it is very low compare to other materials. There
for company should take certain steps against RM/CHE/CAT stores.

PROVISIONS

6% 0% 11%
0%

26%

37%

20%
0%

FUEL& LUBRICANT ADM/SAFTY RM/CHE./CAT. ELECTRIC STORES

PACKAGING INSTUMENTATION MECH.CONSUME STEEL/CEMENT

Figure 6.7 Provision for Non Moving Inventories (in percentage)

34
Because of the non moving nature of items mentioned in previous chart it is mandatory to
create provisions as above.

6.7 ABC and XYZ Analysis

Mixture of ABC and XYZ analysis (A Combination developed by the company)

Physical verification of stock on perpetual basis at different stores is done through
perpetual inventory.
Perpetual inventory is the process of concurrent physical stock check to be carried out on
daily basis.
 ABC Analysis
ABC is based on consumption value.
A class items- 60% consumption value of inventory
B class items- 30% consumption value of inventory
C class items- 10% consumption value of inventory
 XYZ Analysis
XYZ is based on inventory value.
X class items- 60% of inventory value
Y class items- 30% of inventory value
Z class items- 10% of inventory value
Frequency of different groups of items to be covered under physical stock check is as
under:-
• Items falling under A and X category- 3 times in a year
• Items falling under B and Y category- 2 times in a year
• Items falling under C and Z category- 1 time in a year
Overlapping of items between ABC and XYZ categories would be unified to avoid
duplication.
The following are the examples of few of the items falling in the various categories:-
A & X CATEGORY ITEMS
SAP Code Item Amount (Rs.)

2000013246 Impeller 767806

2000013815 Shaft 250217
35
2000551833 Gear 485000
2000561829 Chain Drive 847254

B & Y CATEGORY ITEMS

SAP Code Item Amount (Rs.)

2000661678 Valve 54971
2000572977 Bearing 10000

C & Z CATEGORY ITEMS

SAP Code Item Amount (Rs.)

2000397295 Connecting rod 20976
2000368049 Gasket 331
2000537103 Ring retainer 1139
2000546778 Ring Piston 4101
Table 6.6 Example of Categorization of AX, BY and CZ Items

36
6.8 Comparison of Inventory Costing Methods

Items of inventories are measured at lower of cost and net realisable value after providing
for obsolescence, if any. Cost of inventories comprises of cost of purchase, cost of
conversion and other costs incurred in bringing them to their respective present location
and condition. Cost of raw materials, process chemicals, stores and spares, packing
materials, trading and other products are determined on weighted average basis. By-
products are valued at net realisable value. Cost of work-in-progress and finished stock is
determined on absorption costing method.
Weighted average method give the average cost of goods i.e. the value falls in-between the
cost value abstract from FIFO and LIFO. In increasing prices FIFO method gives the
highest value of sock, and the value abstract from LIFO is the lowest, as compare to these
three methods. Similarly the profit derived from the LIFO method is highest and profit from
the FIFO is lowest, as shown in the example.

Particulars Per barrel No. of LIFO WAM FIFO

price Barrels
Goods Available for sale 400 3500 1400000 1400000 1400000

Less: Ending inventory 385/400/412 305 117425 122000 125660

Cost of goods sold 1282575 1278000 1274340

SALES 900 3195 2875500 2875500 2875500

Less: Cost of Goods sold 1282575 1278000 1274340

Gross Profit 1592925 1597500 1601160

• LIFO gives the lowest gross profit, therefore the lowest tax on profit.
• In General when the purchase price of inventory is going down, choose FIFO.
• When the purchase price of inventory is going up, choose LIFO.
• When it goes up and down, choose weighted average.

37
6.9 Inventory Related Ratio

Inventory Turnover Ratio

9
7.9 8.07
7.77
8
6.77
7 6.22
6
5
1 2 3 4 5
Years

Figure 6.8 Inventory Turnover Ratio

The inventory turnover ratio shows how much the inventory with compare to sales. From
the chart we can say that the company has decrease its inventory compared to past years.

Material Cost Component

10 7.77 7.9 8.07

8 6.77 6.22
6
4
2
0
2005-06 2006-07 2007-08 2008-09 2009-10
Years

Figure 6.9 Material Cost Component

The material cost component shows the Material cost with respect to earning. From the last
past five-year trend, we can see that the cost of material is fluctuating. But this year the
material cost is quite high if we see the last five-year data.

38
 Networking Capital to Sales

10 8.41
8 6.88 6.37
5.39
6 4.48
4
2
0
2005-06 2006-07 2007-08 2008-09 2009-10

Figure 6.10 NWC to Sales

This ratio indicates the proportion of working capital in total sales. Lower the ratio better for
the company. From the past trend it shows that company has tried to decrease the
inventory and due to this the overall working capital is decrease with respect to total sales.

Avg receivable Period

25 21.21
20 15.3 15.59 15.94 16.77
15
10
5
0
2005-06 2006-07 2006-07 2008-09 2009-10
Years

Figure 6.11 Average Receivable Period

Average receivable period decreases as compare to last few years. It increases nominal in
last two years. The main reason is the recession. Recession affect the rill but they recover
very speedy and the average receivable period help in recovery as they receive payment in
good time.

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 Inventory Conversion ratio(days)

40 33.01 34.09 34.08

30 26.08 23.45
20
C
10
0
2005-06 2006-07 2006-07 2008-09 2009-10
Years

Figure 6.12 Inventory Conversion Ratio

Inventory conversion periods indicate the time in which the money invested in inventory
convert into cash. In 2006 the company has lowest conversion cycle, which indicates the
good operating cycle.

Operating Cycle

60 50
47.29 48.31 49.59
50 40.22
40
30
20
10
0
2005-06 2006-07 2007-08 2008-09 2009-10

Figure 6.13 Operating Cycle

Operating cycle start with the material purchases and ends with the money received after
sales. The company has a fast operating cycle it completes in 40days, which is considered
good in such industries.

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 SWOT MATRIX

RIL-VMD Strengths
o Manpower with rich experience in managerial, technical and
Commercial fields.
o Plants located on the west coast, where the downstream industry
is concentrated.
o Both liquid and gas fired crackers.
o Diverse product range.
o Global sized plants at Gandhar and Nagothane complex.
o Extensive sales network and infrastructure facilities.
o Noteworthy safety & Environment records.

RIL-VMD Weaknesses
o Aged and smaller sized plants at Vadodara.
o Higher Manpower (Vadodara) compared to peer group.
o Feedback supply constraints at Gandhar & Nagothane.
o Dependence on the sole suppliers for Natural gas & C2/C3.
o Commodity Business- subject to cyclicity.
o Dependence on the external sources for feed stocks.

RIL-VMD Opportunities
o Huge growth potential in the Indian Polymer market.
o Excellent Research & Development facilities.
o Scope for expansion especially at Gandhar complex.
o Revamp of the old plants located at Baroda.

RIL-VMD Threats
o Universities on natural gas pricing.
o Competition from “low cost” Middle East producers.
o High rate of technological obsolescence.
o Environmental concerns on plastics.

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 RESULTS AND FINDINGS

• It is observed that in RIL, VMD a lot of importance is given to safety.

• They are following Six Sigma Technology which helps them to render optimal
requirements in every functional area.
• All the work is coordinated through SAP System.
• Inventory level is maintained on reorder level.
• Most of the inventory level maintained comprises of mechanical items.
• Most of the mechanical inventory is non-moving in nature.

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 BIBLOGRAPHY

Web-Sites:-

www.ril.co.in
http://www.moneycontrol.com/stocks/company_info/company_history.php?sc_did=IPC
http://www.indianexpress.com/news/ipcl-to-merge-with-reliance-industries/25015/

Books:-
Annual Reports of RIL
Reliance Material Master Control System

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